<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].
For the fiscal year ended May 31, 1997
---------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
For the transition period from __________ to __________
Commission file number ________
CHOICE HOTELS INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1985619
- ---------------------------------------------------------- --------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
10750 Columbia Pike, Silver Spring, Maryland 20901
- ---------------------------------------------------------- --------------
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code (301) 979-5000
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, Par Value $.01 per share New York Stock Exchange
- -------------------------------------- -----------------------------------------
- -------------------------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
- --------------------------------------------------------------------------------
(Title of Class)
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed in Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months as for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock of Choice Hotels
International, Inc. held by non-affiliates was $689,453,032 as of August 5, 1997
based upon a closing price of $17.875 per share.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ____________ No ____________
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of Choice Hotels International, Inc.'s
Common Stock at May 31, 1997 was 60,164,947.
DOCUMENTS INCORPORATED BY REFERENCE.
PART I 1997 Annual Report to Stockholders
PART II 1997 Annual Report to Stockholders
Proxy Statement dated August 15, 1997
PART III Proxy Statement dated August 15, 1997
2
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PART I
Item 1. Business
Choice Hotels International, Inc., a Delaware corporation (the
"Company"), is a leading international hotel franchisor (the "Franchising
Business") and major owner and manager of hotel properties (the "Hotel
Business"). The Franchising Business and the Hotel Business are detailed below.
The Company's Board of Directors and management have determined to separate the
Franchising Business from the Hotel Business. The separation is subject to
shareholder approval and various other conditions. Choice Hotels Franchising,
Inc. ("Franchising"), a Delaware corporation and wholly owned subsidiary of
Choice Hotels International, Inc., will own all of the businesses and assets of,
and be responsible for all of the liabilities associated with the Franchising
Business and upon the affirmative vote of the stockholders of the Company,
Franchising's Common Stock will be distributed to stockholders of the Company on
a share-for-share basis.
Franchising Business
The Company, through its wholly-owned subsidiary Franchising, is one
of the world's largest franchisors of hotels with 3,344 properties open and
operating in 33 countries at May 31, 1997. These properties principally operate
under one of the Company's brand names: Comfort/(R)/, Quality/(R)/,
Clarion/(R)/, Sleep/(R)/, Rodeway/(R)/, Econo Lodge/(R)/ and MainStay
Suites/sm/. At May 31, 1997, another 820 franchise properties with a total of
72,093 rooms were under development. As a franchisor, the Company licenses
hotel operators to use the Company's brand names and provides to these hotel
operators products and services designed to increase their revenues and
profitability. Key products and services provided include nationally recognized
marketing and advertising programs, access to a reservation system that delivers
business to the franchisees' hotels, access to innovative products and services
developed by the Company and other support services such as training programs,
purchasing discounts, operating manuals, quality standards and inspections. In
return for the use of the Company's brand names and access to the Company's
products and services, franchisees pay to the Company fees that are generally
based on a percentage of the franchise hotels' gross room revenues. The
Company's franchise operations have experienced significant growth in revenues
and profitability over the last few years. The compound annual growth rate for
the Franchising Business from fiscal year 1993 to fiscal year 1997 was 17.5% for
revenues and 42.2% for net income.
The Lodging Industry
As of December 1996, there are approximately 3.4 million hotel rooms
in the United States in hotels/motels containing twenty or more rooms. Of those
rooms, approximately 1.2 million rooms are not affiliated with a national or
regional brand, while the remaining approximately 2.2 million rooms are
affiliated with a brand either through franchise or the ownership/management of
a national or regional chain.
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During the late 1980s, the industry added approximately 500,000 hotel
rooms to its inventory due largely to a favorable hotel lending environment, the
ability of hotel operators to regularly increase room rates and the
deductibility of passive tax losses, which encouraged hotel development. As a
result, the lodging industry saw an oversupply of rooms and a decrease in
industry performance.
The lodging industry in recent years has demonstrated a recovery,
based on year-to-year increases in room revenues, occupancy rates, revenue per
available room ("RevPAR"), and lodging industry profitability. RevPAR is
calculated by multiplying the percentage of occupied rooms by the average daily
room rate realized. Since 1993, the lodging industry has been able to increase
its average daily rate ("ADR") at a pace faster than the increase in the
Consumer Price Index ("CPI"), a common measure of inflation published by the US
Department of Labor. Smith Travel Research's estimates indicate that occupancy
rates in 1996 increased to 65.2% from 65.1% in 1995, in part because of
increases in room demand attributable to the 1996 Summer Olympics, the 1996
national political campaigns and conventions, and a continued improvement in the
national economy. The following chart demonstrates the recent trends:
The US Lodging Industry's Growth Trends Since 1991
<TABLE>
<CAPTION>
Increase in Average
Room Daily Increase Increase Revenue Per
Revenue (Room) in ADR in CPI Available New
Versus Occupancy Rates Versus Versus Room Profits Rooms
Year Prior Year Rates (ADR) Prior Year Prior Year (RevPAR) (in billions) Added
- ------ ------------ ---------- -------- ----------- ----------- ------------ ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992............ N/A 62.6% $58.91 1.4% 2.9% $36.87 break-even 36,000
1993............ 6.3% 63.5% $60.53 2.7% 2.7% $38.42 $ 2.4 40,000
1994............ 8.6% 64.7% $62.86 3.8% 2.7% $40.70 $ 5.5 45,000
1995............ 7.0% 65.1% $65.81 4.7% 2.9% $42.83 $ 8.5 64,000
1996............ N/A 65.2% $69.66 5.9% 2.9% $45.47 $11.5 91,000
</TABLE>
____________________
Source: Smith Travel Research
The Company believes the lodging industry can be divided into three
categories: luxury or upscale, middle-market and economy. The Company believes
the luxury category generally has room rates above $70 per night, the middle-
market category generally has room rates between $46 and $70 per night and the
economy category generally has room rates less than $46 per night.
Service is a distinguishing characteristic in the lodging industry.
Generally there are three levels of service: full-service hotels (which offer
food and beverage services, meeting rooms, room service and similar guest
services); limited-service hotels (which offer amenities such as swimming pools,
continental breakfast, or similar services); and all-suites hotels (which
usually have limited public areas, but offer guests two rooms or one room with
distinct areas, and which may or may not offer food and beverage services).
The Company's Econo Lodge, Rodeway and Sleep brands compete primarily
in the limited-service economy market; the Company's Comfort and Quality brands
compete primarily in the limited-service middle-market; the Company's Clarion
brand competes primarily
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in the full-service upscale market; and the Company's MainStay Suites brand
competes primarily in the all-suites middle-market.
New hotels opened in recent years typically have been limited service
hotels, as limited-service hotels are less costly to develop, enjoy higher gross
margins, and tend to have better access to financing. These hotels typically
operate in the economy and middle-market categories and are located in suburban
or highway locations. From 1991 to 1996, the average room count in new hotels
declined from 122 to 87, primarily because hotel developers found it difficult
to obtain financing of more than $3 million from their primary lending sources
(local banks and Small Business Administration guaranteed loan programs).
In recent years, operators of hotels not owned or managed by major
lodging companies have increasingly joined national hotel franchise chains as a
means of remaining competitive with hotels owned by or affiliated with national
lodging companies. Because hotels typically operate with high fixed costs,
increases in revenues generated by affiliation with a franchise lodging chain
can improve a hotel's financial performance. Of approximately 933 hotel
properties that changed their affiliation in 1995, 77% converted from
independent status to affiliation with a chain or converted from one chain to
another, while only 23% canceled or were required to cancel their chain
affiliation. The share of US hotel rooms affiliated with a chain was
approximately 63% in 1995.
The shift to chain membership has been most pronounced among hotels in
the same categories as the Company, i.e., the economy and middle-market
categories. In 1995, 53% of all conversions to a chain from independent status
or from another chain were in the economy category, 37% were in the middle-
market category, and 10% were in the upscale category. Often by affiliating with
a middle-market or economy brand, a hotel operator can reposition the hotel
property in the price category best suited to its market.
The large franchise chains, including the Company, provide a number of
services to hotel operators to improve the financial performance of their
properties, including national reservation systems, marketing and advertising
programs and direct sales programs. The Company believes that national franchise
chains with a larger number of hotels enjoy greater brand awareness among
potential guests than those with fewer numbers of hotels, and that greater brand
awareness can increase the desirability of a hotel to its potential guests.
The Company believes that hotel operators choose lodging franchisors
based primarily on the perceived value and quality of each franchisor's brand
and its services, and the extent to which affiliation with that franchisor may
increase the franchisee's reservations and profits.
Franchise Business
Economics of Franchise Business. The fee and cost structure of the
Company's franchise business provides significant opportunities for the Company
to increase profits by increasing the number of franchised properties. Hotel
franchisors such as the Company derive substantially all of their revenue from
franchise fees. Franchise fees are comprised of an initial
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fee and ongoing royalty and marketing and reservation fees charged by the
franchisor as a percentage of the franchisee's gross room revenues. The royalty
portion of the franchise fee is intended to cover the operating expenses of the
franchisor, such as expenses incurred in quality assurance, administrative
support and other franchise services and to provide the franchisor with
operating profits. The marketing and reservation portion of the franchise fee is
intended to reimburse the franchisor for the expenses associated with providing
such franchise services as the central reservation system and national marketing
and media advertising.
Much of the variable costs associated with the Company's activities
are reimbursed by the franchisees through the marketing and reservation fees.
The Company's existing base of franchises more than covers the fixed cost of the
business at its current level so that the variable costs of overhead--in such
areas as quality assurance, franchise development, franchise services and
administration, finance and legal--represent the bulk of incremental costs
associated with the addition of franchisees. Because the variable overhead
costs associated with incremental franchise system growth are substantially less
than the incremental royalty fees, the Company is able to capture a significant
portion of these incremental royalty fees as operating profit.
Strategy. The Company's strategy is based on creating an organization
that is focused on consumer and franchisee needs, optimizing the portfolio of
brands, strategically growing the franchise system, improving its and its
franchisees' margins, growing profitability internationally, and leveraging its
separation from Choice Hotels International, Inc. Key components of the
Company's strategy include:
. Organize for Success. The Company has created an organizational
structure to focus on consumers, serve franchisees and leverage the
franchise system.
Consumer Focus--Brand management, new product development and
traditional marketing and advertising are all combined under the
Company's Marketing Department to create consumer focus and to drive
demand for the Company's brand products. New product development will
be based on consumer needs determined through consumer research. The
Company believes that a consumer focus will lead to greater demand for
the Company products, which in turn will result in higher revenue from
the Company's franchise system.
Franchisee Service--Franchise service and sales are consolidated under
a regional structure made up of five regional operating teams. This
structure provides each licensee one primary contact who is
responsible for assessing and responding to each hotel's specialized
needs. The Company believes that its regional operating structure and
the services it provides to franchisees will allow it to attract new
hotels to the franchising system.
Leveraging the Franchise System--Strategic partnerships, purchasing
and other functions that leverage the scale of the franchise system
are combined under the Partner Services Group. The Company believes
there is significant opportunity to
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leverage its size by entering into joint marketing arrangements with
national and multi-national companies that want to gain exposure to
the millions of guests who patronize the Company's franchise hotels
each year. In the past, these arrangements have added to the Company's
and its franchisees' revenues and profits by attracting business to
its franchise hotels.
. Optimize the Brand Portfolio. The Company believes that each of its
brands has particular attributes and strengths. The Company's strategy is
to leverage the strengths of each brand for profit growth and for
identifying new niches into which the Company may expand.
. Increase Market Penetration on a Strategic Basis. The Company will take
advantage of its regional structure to analyze key markets in the U.S.
and, in conjunction with its franchisees, identify the best opportunities
for new development or conversion to one of the Company's brands.
. Improve Margins Through Increased Productivity. The Company addresses the
competitiveness of its own and its franchisees' profitability by
initiating revenue generating programs and improving cost productivity. A
key component of this strategy is the roll out of the Company's
proprietary property and yield management system "Profit Manager by
Choice," which the Company believes will improve the RevPAR of its
franchisees.
. Profitably Grow Internationally. During the ten fiscal years ended May
31, 1997, the number of properties in the Company's international
franchise system increased to 563 properties with 47,603 rooms, from 81
properties with 8,330 rooms. The Company's international franchise system
includes hotels in 32 international countries. The Company plans to
continue to profitably grow its brands internationally through a
strategic pursuit of joint ventures, master franchising agreements and
brand specific area development agreements.
Franchise System
The Company franchises hotels that principally operate under one of
the Company's brand names: Comfort, Quality, Clarion, Sleep, Rodeway, Econo
Lodge and MainStay Suites. The following table presents key statistics relative
to the Company's domestic franchise system over the four fiscal years ended May
31, 1997.
7
<PAGE>
Combined Domestic Franchise System
<TABLE>
<CAPTION>
As of and for the Year Ended May 31,
-------------------------------------------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of properties, end of period........ 2,283 2,311 2,495 2,781
Number of rooms, end of period............. 203,019 200,792 214,613 235,431
Average Royalty Rate....................... 3.1% 3.2% 3.3% 3.4%
Average occupancy percentage............... 62.2% 63.8% 63.8% 62.6%
Average daily room rate (ADR).............. $ 45.63 $ 47.13 $ 49.49 $ 51.92
RevPAR*.................................... $ 28.40 $ 30.08 $ 31.60 $ 32.52
Royalty fees ($000s)....................... $ 62,590 $ 71,665 $ 82,239 $ 91,724
</TABLE>
____________________
* The Company's RevPAR figure for each fiscal year is an average of the
RevPAR calculated for each month in the fiscal year. The Company calculates
RevPAR each month based on information actually reported by franchisees on a
timely basis to the Company.
No master franchisee or other franchisee accounted for 10% or more of
the total revenues of the Franchising Business or revenues related to franchise
operations during the last three fiscal years.
Brand Positioning
The Company's hotels are primarily limited-service hotels (offering
amenities such as swimming pools and continental breakfast) or limited-to-full
service (offering amenities such as food and beverage services, meeting rooms
and room service).
Comfort. Comfort Inns and Comfort Suites hotels offer rooms in the
limited-service, middle market category. Comfort Inns and Comfort Suites are
targeted to traditional business and leisure travelers. Principal competitor
brands include Days Inn, Fairfield Inn, Hampton Inn, Holiday Express and
LaQuinta. At May 31, 1997, there were 1,441 Comfort Inn properties and 120
Comfort Suite properties with a total of 113,729 and 9,935 rooms, respectively,
open and operating worldwide. An additional 193 Comfort Inn properties and 119
Comfort Suite properties with a total of 17,550 and 9,671 rooms, respectively,
were under development.
Comfort properties are located in the United States and in Australia,
the Bahamas, Belgium, Canada, France, Germany, India, Indonesia, Ireland, Italy,
Jamaica, Mexico, Norway, Portugal, Puerto Rico, Sweden, Switzerland, Thailand,
the United Kingdom and United Arab Emirates. The following chart summarizes the
Comfort system in the United States:
Comfort Domestic System
<TABLE>
<CAPTION>
As of and for the Year Ended May 31,
-------------------------------------------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of properties, end of period........ 935 1,015 1,129 1,255
Number of rooms, end of period............. 82,479 87,551 94,160 102,722
Royalty fees ($000s)....................... $31,187 $37,635 $44,657 $ 50,758
Average occupancy percentage............... 68.0% 69.5% 68.7% 67.2%
Average daily room rate (ADR).............. $ 46.46 $ 48.24 $ 51.13 $ 54.17
RevPAR..................................... $ 31.57 $ 33.54 $ 35.11 $ 36.39
</TABLE>
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Quality. Certain Quality Inns and Quality Suites hotels compete in the
limited service, middle market category while others compete in the full
service, middle market category. Quality Inns and Quality Suites are targeted to
traditional business and leisure travelers. Principal competitor brands include
Best Western, Holiday Inn, Howard Johnson, Ramada Inn and Days Inn. At May 31,
1997, there were 583 Quality Inn properties with a total of 67,995 rooms, and 36
Quality Suites properties with a total of 4,999 rooms open worldwide. An
additional 105 Quality Inn properties and 34 Quality Suites properties with a
total of 11,173 rooms and 3,315 rooms, respectively, were under development.
Quality properties are located in the United States and in Argentina,
Australia, Canada, Chile, Costa Rica, the Czech Republic, Denmark, France,
Germany, India, Indonesia, Ireland, Italy, Jamaica, Mexico, New Zealand, Norway,
Portugal, Russia, Spain, Thailand, the United Kingdom and the United Arab
Emirates.
The following chart summarizes the Quality system in the United
States:
Quality Domestic System
<TABLE>
<CAPTION>
As of and for the Year Ended May 31,
-------------------------------------------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of properties, end of period........ 358 341 362 409
Number of rooms, end of period............. 45,032 43,281 45,967 50,487
Royalty fees ($000s)....................... $14,890 $15,632 $16,606 $17,623
Average occupancy percentage............... 61.6% 63.1% 62.5% 61.3%
Average daily room rate (ADR).............. $ 50.07 $ 50.94 $ 52.90 $ 54.61
RevPAR..................................... $ 30.83 $ 32.16 $ 33.08 $ 33.46
</TABLE>
Econo Lodge. Econo Lodge hotels operate in the limited-service,
economy category of the lodging industry. Econo Lodges are targeted to the
senior travel market and rely to a large extent on strong roadside name
recognition. Principal competitor brands include Days Inn, Ho-Jo Inn, Motel 6,
Ramada Limited, Red Carpet Inn, Red Roof Inn, Super 8 and Travelodge.
At May 31, 1997, there were 704 Econo Lodge properties with a total of
45,718 rooms open and operating in the United States and Canada, and an
additional 116 properties with a total of 8,330 rooms under development in those
two countries. The following chart summarizes the Econo Lodge system in the
United States:
Econo Lodge Domestic System
<TABLE>
<CAPTION>
As of and for the Year Ended May 31,
-------------------------------------------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of properties, end of period........ 677 633 641 682
Number of rooms, end of period............. 46,570 42,801 42,726 44,636
Royalty fees ($000s)....................... $11,231 $12,021 $12,760 $13,288
Average occupancy percentage............... 56.7% 57.5% 58.0% 56.4%
Average daily room rate (ADR).............. $ 37.27 $ 38.31 $ 39.97 $ 41.33
RevPAR..................................... $ 21.14 $ 22.04 $ 23.17 $ 23.30
</TABLE>
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Clarion. Clarion Inns, Clarion Hotels, Clarion Resorts and Clarion
Suites hotels are full-service properties which operate in the upscale category.
Clarion hotels are targeted to traditional business and leisure travelers.
Principal competitor brands include Holiday Inn, Holiday Select, Crowne Plaza,
Four Points by Sheraton, Radisson, Courtyard by Marriott and Doubletree.
At May 31, 1997, there were 110 Clarion properties with a total of
17,249 rooms open and operating worldwide and an additional 32 properties with a
total of 5,022 rooms under development. The properties are located in the United
States, the Bahamas, Canada, France, Guatemala, Indonesia, Ireland, Japan,
Mexico, Norway, Russia, Thailand and Uruguay. The following chart summarizes the
Clarion system in the United States:
Clarion Domestic System
<TABLE>
<CAPTION>
As of and for the Year Ended May 31,
-------------------------------------------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of properties, end of period........ 65 63 75 92
Number of rooms, end of period............. 12,211 10,420 12,817 14,721
Royalty fees ($000s)....................... $ 2,735 $ 2,995 $ 3,602 $ 4,081
Average occupancy percentage............... 62.0% 63.7% 63.3% 63.3%
Average daily room rate (ADR).............. $ 62.47 $ 63.71 $ 64.36 $ 67.76
RevPAR..................................... $ 38.75 $ 40.58 $ 40.74 $ 42.86
</TABLE>
Rodeway. The Rodeway brand competes in the limited-service, economy
category and is targeted to the senior travel market. Principal competitor
brands include Ho-Jo Inn, Ramada Limited, Red Roof Inn, Budgetel, Shoney's Inn,
Super 8 and Motel 6. At May 31, 1997, there were 216 Rodeway Inn properties with
a total of 13,509 rooms, open and operating in the United States and Canada, and
an additional 50 properties with a total of 3,481 rooms under development in
those two countries. The following chart summarizes the Rodeway system in the
United States:
Rodeway Domestic System(1)
<TABLE>
<CAPTION>
As of and for the Year Ended May 31,
-------------------------------------------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of properties, end of period........ 214 208 201 216
Number of rooms, end of period............. 13,806 13,067 12,547 13,509
Royalty fees ($000s)....................... $ 1,941 $ 2,302 $ 2,506 $ 2,631
Average occupancy percentage............... 51.4% 50.5% 52.7% 52.7%
Average daily room rate (ADR).............. $ 36.89 $ 38.93 $ 40.66 $ 41.15
RevPAR..................................... $ 19.00 $ 19.64 $ 21.48 $ 21.68
</TABLE>
____________________
(1) Includes data pertaining to the Friendship Inn system, which is being
combined with the Rodeway Inn system.
Sleep Inn. Established in 1988, Sleep Inn is a new-construction hotel
brand in the limited-service, economy category. Sleep Inns are targeted to the
traditional business and leisure
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traveler. Principal competitor brands include Days Inn, Fairfield Inn, Holiday
Express, LaQuinta Inn, Ho-Jo Inn and Ramada Inn.
At May 31, 1997, there were 133 Sleep Inn properties with a total of
9,806 rooms open and operating worldwide. An additional 150 properties with a
total of 11,497 rooms were under development. The properties are located in the
United States, Canada and the Cayman Islands. The following chart summarizes the
Sleep system in the United States:
<TABLE>
<CAPTION>
Sleep Domestic System
As of and for the Year Ended May 31,
----------------------------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of properties, end of period............ 34 51 87 131
Number of rooms, end of period................. 2,921 3,672 6,396 9,635
Royalty fees ($000s)........................... $ 605 $1,080 $2,108 $3,343
Average occupancy percentage................... 64.6% 65.3% 65.5% 63.9%
Average daily room rate (ADR).................. $39.11 $41.89 $45.11 $48.11
RevPAR......................................... $25.28 $27.37 $29.56 $30.75
</TABLE>
MainStay Suites. MainStay Suites, the Company's newest hotel brand,
is a middle market, extended-stay lodging product targeted to travelers who book
hotel rooms for five or more consecutive nights. The first MainStay Suites
hotel, which the Company owns and manages, opened in Plano, Texas, in November
1996. An additional 21 properties with 2,054 rooms were under development as of
May 31, 1997.
The MainStay Suites brand is designed to fill the gap between existing
upscale and economy extended-stay lodging products. Principal competitors for
the brand include Candlewood hotels, TownPlace Suites, as well as competition
from all-suite hotel properties and traditional extended stay operators in both
the upscale market (Residence Inn, Homewood Suites, Hawthorne Suites and
Summerfield Suites) and the economy market (Extended Stay America, Studio Plus
and Oakwood).
International Franchise Operations
The Company's international franchise operations have traditionally
been operated as a division separate from its domestic franchise operations. In
some cases, international master franchisees are not required to separately
report royalty results by brand, making brand results on a worldwide basis
unavailable. In the past fiscal year, the Company entered into arrangements to
enter four new international markets. At May 31, 1997, Choice had 563 franchise
hotels open in 32 countries outside the United States. The following table
illustrates the growth of the Company's international franchise system over the
four fiscal years ended May 31, 1997. The Company does not track ADR, RevPAR or
occupancy rates for international properties.
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<TABLE>
<CAPTION>
Combined International Franchise System
As of and for the Year Ended May 31,
------------------------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of properties, end of period................. 430 524 557 563
Number of rooms, end of period...................... 36,725 44,877 46,843 47,603
Royalty fees ($000s)................................ $ 1,667 $ 1,998 $ 1,586 $ 1,672
</TABLE>
Europe. Choice is the second-largest international franchised hotel
chain in Europe, with 270 hotels open in 14 countries at May 31, 1997.
In a move to realign and streamline its European operations, in May
1996 the Company, through its subsidiary, Manor Care Hotels (France)
S.A., consummated a transaction with Friendly Hotels, PLC ("Friendly")
whereby the Company purchased an equity interest for approximately $17
million in Friendly to finance the development of ten new Comfort Inn
or Quality Inn hotels in the United Kingdom and Ireland. Additionally,
Friendly purchased from the Company a master franchise for the United
Kingdom and Ireland. The Company closed its London office as a result
of the transaction. The Company's French and German operations were
consolidated into the Company's Paris, France office, which directly
operates the Company's business in most of Europe. There is also a
master franchise arrangement in Scandinavia.
The Middle East. In August 1995, the Company, through its subsidiary,
signed a master franchise for Israel. The Company opened its first
franchised property in Dubai, United Arab Emirates, in December 1995.
At May 31, 1997, there were two properties open in this region.
Asia/Pacific. During fiscal year 1997, Company franchisees opened four
hotels in Australia, four in New Zealand, three in India, one in
Thailand and two in Indonesia, bringing the total number of properties
open in the Asia/Pacific region at May 31, 1997 to 61.
Caribbean. The Company's franchisees had 6 properties open in 4
Caribbean countries at May 31, 1997.
Central and South America. The Company, through its subsidiary,
recently signed master franchise agreements covering Brazil, Uruguay,
Paraguay and Argentina. The Company also has master franchisees
operating in Guatemala, Costa Rica, Chile and Mexico. In total there
were 19 open properties in this region at May 31, 1997.
Canada. Choice Hotels Canada (a joint venture with Journey's End
Corporation of Belleville, Ontario, Canada ("Journey's End")) is
Canada's largest lodging organization with 205 properties open at May
31, 1997. The joint venture, owned 50% by the Company and 50% by
Journey's End, was formed in 1993 when Journey's End converted
substantially all of its controlled hotels to the Company's brands and
the Company contributed its operations in Canada to form Choice Hotels
Canada.
12
<PAGE>
Domestic Franchise Sales
The Company, through its subsidiary, markets franchises principally
to: (i) developers of hotels, (ii) owners of independent hotels and motels,
(iii) owners of hotels affiliated with other franchisors' brands, (iv) its own
franchisees, who may own, buy or build other hotels which can be converted to
the Company's brands, and (iv) contractors who construct any of the foregoing.
In fiscal year 1996, existing franchisees accounted for approximately one-half
of the Company's new franchise agreements. In considering hotels for conversion
to one of the Company's brands, or sites for development of new hotels, the
Company seeks properties in locations which are in close proximity to major
highways, airports, tourist attractions and business centers that attract
travelers.
At May 31, 1997, the Company employed approximately 40 sales
directors, each of whom is responsible for a particular region or geographic
area. Sales directors contact potential franchisees directly and receive
compensation based on sales generated. Franchise sales efforts emphasize the
benefits of affiliating with one of the Company's well-known brand names, the
Company's commitment to improving RevPAR, the Company's "celebrity in a
suitcase" television advertising campaign (formerly used for the entire Choice
family of brands and now used principally for its three largest brands, Comfort,
Quality and Econo Lodge), the Company's reservation system, the Company's
training and support systems, and the Company's history of growth and
profitability. Because it offers brands covering a broad spectrum of the lodging
marketplace, the Company is able to offer each prospective franchisee a brand
that fits its needs, lessening the chances that the prospective franchisee would
need to consider a competing franchise system.
Because retention of existing franchisees is important to the
Company's growth strategy, existing franchisees are offered the right to object
to a same-brand property within 15 miles, and are protected from the opening of
a same-brand property within a specific distance, generally two to five miles,
depending upon the size of the property and the market size. The Company
believes that it is the only major franchise company to routinely offer such
territorial protection to its franchisees.
During the fiscal year ended May 31, 1997, the Company received 1,078
franchise applications, approved 874 applications, signed 715 franchise
agreements and placed 390 new properties into operation in the United States
under the Company's brands. Of those placed into operation, 203 were newly
constructed hotels. By comparison, during the fiscal year ended May 31, 1996,
the Company received 993 franchise applications, approved 862 applications,
signed 665 franchise agreements and had 284 new U.S. properties come on line.
Applications may not result in signed franchise agreements either because an
applicant is unable to obtain financing or because the Company and the applicant
are unable to agree on the financial terms of the franchise agreement.
Franchise Agreements
A franchise agreement grants a franchisee the right to non-exclusive
use of the Company's franchise system in the operation of a single hotel at a
specified location, typically
13
<PAGE>
for a period of 20 years, with certain rights to each of the franchisor and
franchisee to terminate before the twentieth year. When the responsibility for
development is sold to a master franchisee, that party has the responsibility to
sell to local franchisees the Company's brands and the master franchisee
generally must manage the delivery of necessary services (such as quality
assurance, reservations and marketing) to support the franchised hotels in the
master franchise area. The master franchisee collects the fees paid by the local
franchisee and remits an agreed share to the Company. Master franchise
agreements generally have a term of at least 10 years.
Franchise agreements, other than master franchise agreements, can be
terminated by either party prior to the conclusion of their term under certain
circumstances, such as at certain anniversaries of the agreement or if a
franchisee fails to bring properties into compliance with contractual quality
standards within specified periods of time. Early termination options give the
Company flexibility in eliminating or re-branding properties which become weak
performers for reasons other than contractual failure by the franchisee. Master
franchise agreements typically contain provisions permitting the Company to
terminate the agreement for failure to meet a specified development schedule.
Franchise fees vary among the Company's different brands, but
generally are competitive with the industry average within their market group.
Franchise fees usually have four components: an initial, one-time affiliation
fee; a royalty fee; a marketing fee; and a reservation fee. Proceeds from the
marketing fee and reservation fee are used exclusively to fund marketing
programs and the Company's central reservation system, respectively. Most
marketing fees support brand-specific marketing programs, although the Company
occasionally contributes a portion of such fees to marketing programs designed
to support all of the Company's brands. Royalty fees and affiliation fees are
the principal source of profits for the Company.
Under the terms of the standard franchise agreements, the Company's
franchisees are typically required to pay the following initial fees and on-
going fees as a percentage of gross room revenues:
<TABLE>
<CAPTION>
Quoted Fees by Brand
Initial Fee On-Going Fees as a Percentage of Gross Room Revenues
Per Room/ ---------------------------------------------------------
Brand Minimum Royalty Fees Marketing Fees Reservation Fees
----- ------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
Comfort Inn........................... $300/$45,000 5.25% 2.1% 1.75%
Comfort Suites........................ $300/$50,000 5.0% 2.1% 1.75%
Quality Inn........................... $300/$35,000 4.0% 2.1% 1.75%
Quality Suites........................ $300/$50,000 4.0% 2.1% 1.25%
Sleep Inn............................. $300/$40,000 4.5% 2.1% 1.75%
Clarion............................... $300/$40,000 2.75% 1.0% 1.25%
Econo Lodge........................... $250/$25,000 4.0% 3.5%(1) --
MainStay Suites....................... $300/$30,000 4.5% 2.5%(1) --
Rodeway...............................
Year 1.............................. $250/$25,000 3.5% 1.25% 1.25%
Year 2.............................. -- 3.0% 1.25% 1.25%
Year 3.............................. -- 3.0% 1.00% 1.00%
</TABLE>
- ---------
(1) Fee includes both Marketing and Reservations
14
<PAGE>
The Company has increased its actual royalty rate since fiscal year
1993, primarily by raising the royalty fee for Comfort franchisees to 5.25% of
annual gross room revenues ("GRR") from 4.0% of GRR in 1993, and by raising the
royalty rate for franchisees in the former Friendship franchise system to 3.0%
of GRR from 2.0% of GRR in 1991. For the fiscal year ended May 31, 1997, the
Company's average actual royalty rate was 3.4%. The Company believes that its
average actual royalty rate will continue to increase as older franchise
agreements expire, terminate or are amended.
At May 31, 1997, the Company had 2,781 franchise agreements in effect
in the United States and 563 franchise agreements in effect in other countries.
The average age of the franchise agreements was 4 years. One hundred nineteen of
the franchise agreements are scheduled to expire during the five year period
beginning May 31, 1997; however, franchise agreements generally contain early
termination provisions.
Franchise Operations
The Company's operations are designed to improve RevPAR for the
Company's franchisees, as this is the measure of performance that most directly
impacts franchisee profitability. It is the Company's belief that by helping
its franchisees to become more profitable it will enhance its ability to retain
its existing franchisees and attract new franchisees. The key aspects of the
Company's franchise operations are:
Central Reservation System. On average, approximately 22% of the room
nights booked at franchisees' properties are reserved through the toll-free
telephone reservation system operated by the Company. The Company's reservation
system consists of a computer reservation system known as CHOICE 2001, five
reservation centers in North America and several international reservation
centers run by the Company or its master franchisees. The CHOICE 2001 system is
designed to allow trained operators to match each caller with the Company-
branded hotel meeting the caller's needs. It provides an instant data link to
the Company's franchised properties as well as to the Amadeus, Galileo, SABRE
and Worldspan airline reservation systems thereby facilitating the reservation
process for travel agents.
To more sharply define the market and image for each of its brands,
the Company began advertising separate toll-free reservation numbers for all of
its brands in fiscal year 1995. The Company allows its reservation agents to
cross-sell the Company's hotel brands. If a room in the Choice hotel brand
requested by a customer is not available in the location or price range that the
customer desires, the agent may offer the customer a room in another Choice
brand hotel that meets the customer's needs. The Company believes that cross-
selling enables the Company and its franchisees to capture additional business.
On-line reports generated by the CHOICE 2001 system enable franchisees
to analyze their reservation patterns over time. In addition, the Company
provides and is currently improving a yield management product for its
franchisees to allow them to improve the management of their mix of rates and
occupancy based on current and forecasted demand on a property by property
basis. The Company also markets to its franchisees a property management
15
<PAGE>
product. Such products are designed to manage the financial and operations
information of an individual hotel and improve its efficiency.
Brand Name Marketing and Advertising. The Company's marketing and
advertising programs are designed to heighten consumer awareness of the
Company's brands. Marketing and advertising efforts are focused primarily in the
United States and include national television and radio advertising, print
advertising in consumer and trade media and promotional events, including joint
marketing promotions with vendors and corporate partners.
The Company is recognized for its "celebrity in a suitcase" television
advertisements. In fiscal year 1996, the Company began using brand-specific
marketing and largely discontinued the strategy of advertising its multiple
brands under the Choice umbrella, although it continues to use its "suitcase"
ads for its three largest brands, Comfort, Quality and Econo Lodge. The
marketing fees generated by these brands are used, in part, to fund a national
network television advertising campaign. The Company's smaller hotel brands
conduct advertising campaigns that also include cable television, radio and
print.
The Company conducts numerous marketing programs targeting specific
groups, including senior citizens, motorist club members, families, government
and military employees, and meeting planners. Other marketing efforts include
telemarketing and telesales campaigns, domestic and international trade show
programs, publication of group and tour rate directories, direct-mail programs,
discounts to holders of preferred credit cards, centralized commissions for
travel agents, fly-drive programs in conjunction with major airlines, and twice
yearly publication of a Travel and Vacation Directory.
Marketing and advertising programs are directed by the Company's
marketing department, which utilize the services of independent advertising
agencies. The Company also employs sales personnel at its Silver Spring,
Maryland, headquarters and in its Phoenix, Arizona, office. These sales
personnel use telemarketing to target specific customer groups, such as
potential corporate clients in areas where the Company's franchised hotels are
located, the motor coach market, and meeting planners. Most of these sales
personnel sell reservations and services for all of the Company's brands.
The Company's regional sales directors work with franchisees to
maximize RevPAR. These directors advise franchisees on topics such as how to
market their hotels and how to maximize the benefits offered by the Company's
reservations system.
Quality Assurance Programs. Consistent quality standards are critical
to the success of a hotel franchise. The Company has established quality
standards for all of its franchised brands which cover housekeeping,
maintenance, brand identification and level of services offered. The Company
inspects properties for compliance with its quality standards when application
is made for admission to the franchise system. The compliance of existing
franchisees with quality standards is monitored through scheduled and
unannounced Quality Assurance Reviews conducted at least once per year at each
property. Properties which fail to maintain a minimum score are reinspected on
a more frequent basis until deficiencies are cured, or until such properties are
terminated.
16
<PAGE>
To encourage compliance with quality standards, the Company offers
various brand-specific incentives to franchisees who maintain consistent quality
standards. Franchisees who fail to meet minimum quality standards may be
subject to consequences ranging from written warnings to termination of the
franchisee's franchise agreement. During fiscal year 1997, the Company
terminated forty-nine properties for failure to maintain minimum quality
assurance scores.
Training. The Company maintains a training department which conducts
mandatory training programs for all franchisees and their employees. The
Company also conducts regularly scheduled regional and national training
meetings for both property-level staff and managers. Training programs teach
franchisees how to take advantage of the Company's reservation system and
marketing programs, and fundamental hotel operations such as housekeeping,
maintenance, and inventory yield management.
Training is conducted by a variety of methods, including group
instruction seminars and video programs. The Company is developing an
interactive computer-based training system that will train hotel employees at
their own pace. Franchisees will be required to purchase hardware to operate the
training system, and will use software developed by the Company.
Research and Development. The Company seeks to enhance RevPAR by
providing to franchisees systems and products that will reduce costs and/or
improve their operations. Research and development activity resulted in the
launch of three new franchise products in fiscal year 1996, Choice Picks food
court, MainStay Suites hotels and K-Minus food service.
In January 1996, the Company introduced its MainStay Suites franchise
hotel brand, an extended-stay product targeted to travelers who book hotel rooms
for five or more consecutive nights. See "--MainStay Suites."
Purchasing. The Company's product services department negotiates
volume purchases of various products needed by franchisees to run their hotels,
including such items as furniture, fixtures, carpets and bathroom amenities.
The department also helps to ensure consistency in such products across its
exclusively new-construction brands, Sleep Inn and MainStay Suites.
Design and Construction. The Company maintains a design and
construction department to assist franchisees in refurbishing, renovating, or
constructing their properties prior to or after joining the system. Department
personnel assist franchisees in meeting the Company's brand specifications by
providing technical expertise and cost-savings suggestions.
Financial Assistance Programs. The Company has established programs
or helped franchisees obtain financing through (i) a wholly owned subsidiary;
(ii) strategic partnerships with hotel lenders and/or (iii) by referral to hotel
lenders for hotel refinancing, acquisition, renovation and development. Some of
the specific programs include:
17
<PAGE>
(a) Second mortgage financing for the development and construction of
Quality Inn, Quality Suites, Quality Inn & Suites, MainStays and Sleep Inns.
The terms of the financing will depend on each franchisees' credit worthiness,
the amount of the proposed loan and the current economic conditions. Generally
not more than 25% of the project will be financed. Total debt cannot exceed 75%
of the fair market value.
(b) The Econo Lodge exterior renovation program loans up to $17,500
per property which is given to qualified franchisees for standardized exterior
renovation. Franchisee participation requires, among other things, extension of
the franchise agreement. The loan is forgiven at the expiration of the extended
franchise agreement, assuming no defaults have occurred thereunder.
(c) Solomon Brothers in conjunction with Suburban Capital Markets Inc.
is offering a $100 million construction to permanent financing program to
qualified franchisees. All Choice brands are included in this program. The
construction loan will be issued for a term up to three years at a floating rate
of 355 basis points over the 30-day LIBOR. The loan amount will not exceed 75%
of the cost of the property. The franchisee will be responsible for the cost of
all third party reports and fees in the amount of 2.75% of the loan amount. A
stabilized debt service coverage ratio of at least 1.4:1 is required for the
permanent loans, which are issued for a 10 year term with amortization up to 25
years and a fixed interest rate of 260 basis points over the 10 year U.S.
Treasury interest rate on the day of closing. The permanent loan will require a
fee of 1% of the loan amount.
Competition
Competition among franchise lodging chains is intense, both in
attracting potential franchisees to the system and in generating reservations
for franchisees. In addition, hotel chains and independent hotels compete
intensely for guests and for meeting and banquet business.
The Company's principal competitor brands at the national and
international level in the economy category of the lodging industry are
LaQuinta, Ho-Jo Inn, Ramada Inn, Motel 6, Ramada Limited, Red Carpet Inn, Red
Roof Inn, Budgetel, Hampton Inn, Fairfield Inn, Holiday Express, Shoney's Inn,
Super 8, Days Inn, and Travelodge. The Company's principal competitor brands at
the national and international level in the middle market category of the
lodging industry are Days Inn, Fairfield Inn, Hampton Inn, Holiday Express,
LaQuinta, Holiday Inn, Best Western, Howard Johnson and Ramada Inns. The
Company's principal competitor brands at the national and international level in
the upscale category are Holiday Inn, Holiday Select, Crowne Plaza, Four Points
by Sheraton, Radisson, Courtyard by Marriott and Doubletree.
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. Hotel operators may also
select a franchisor in part based on the franchisor's reputation among other
franchisees, and the success of its existing franchisees.
18
<PAGE>
Choice is the second largest hotel franchisor in the world. The
largest, HFS, Inc., has over 4,600 franchised hotels. Holiday Inn Worldwide has
1,240, Promus Hotel Corp. has 597, Marriott International has 394 and Carlson
Hospitality Worldwide has 248.*
The Company's prospects for growth are largely dependent upon the
ability of its franchisees to compete in the lodging market, since the Company's
franchise system revenues are based on franchisees' gross room revenues (but not
directly on franchisees' profitability).
The ability of a hotel to compete may be affected by a number of
factors, including the location and quality of its property, the number and
quality of competing properties nearby, its affiliation with a recognized name
brand, and general regional and local economic conditions. The effect of
economic conditions on the Company's results is substantially reduced by the
geographic diversity of the Company's franchised properties, which are located
in all 50 states and in 33 countries, as well as its range of products and room
rates.
Service Marks and Other Intellectual Property
The service marks Quality Inn, Quality Suites, Comfort Inn, Comfort
Suites, Clarion Hotel, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites and
related logos are material to the Franchising Business. The Company, directly
and through its franchisees, actively uses these marks. All of the material
marks are registered with the United States Patent and Trademark Office, except
for MainStay Suites and K-Minus, which are the subject of pending applications.
In addition, the Company has registered certain of its marks with the
appropriate governmental agencies in over 100 countries where it is doing
business or anticipates doing business in the foreseeable future. The Company
seeks to protect its brands and marks throughout the world, although the
strength of legal protection available varies from country to country.
Seasonality
The Company's principal sources of revenues are franchise fees based
on the gross room revenues of its franchise properties and revenues generated by
its owned and managed hotels. The Company experiences seasonal revenue patterns
similar to those of the lodging industry in general. This seasonality can be
expected to cause quarterly fluctuations in the revenues, profit margins and net
income of the Company.
Regulation
The Company's franchisees are responsible for compliance with all laws
and government regulations applicable to the hotels they own or operate. The
lodging industry is subject to numerous federal, state and local government
regulations, including those relating to the preparation and sale of food and
beverage (such as health and liquor license laws), building
- -------------------------------
* The figures in this paragraph are with respect to U.S. hotel properties as
indicated in the August 1996 issue of Lodging Hospitality.
-------------------
19
<PAGE>
and zoning requirements and laws governing a hotel owner's relationship with
employees, including minimum wage requirements, overtime, working conditions and
work permit requirements. The failure to obtain or retain liquor licenses or an
increase in the minimum wage rate, employee benefit costs or other costs
associated with employees could adversely affect the Company's owned hotels.
Both at the federal and state level, there are proposals under consideration to
increase the minimum wage and introduce a system of mandated health insurance.
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. A determination that the Company is not in
compliance with the ADA could result in the imposition of fines or an award of
damages to private litigants. These and other initiatives could adversely affect
the Company as well as the lodging industry in general.
The Federal Trade Commission (the "FTC") and certain other
jurisdictions (including France, Province of Alberta, Canada, and Mexico and
various states) 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 require registration or disclosure in
connection with franchise offers and sales. In addition, several states 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
franchising operations have not been materially adversely affected by such
regulation, the Company cannot predict the effect of future regulation or
legislation.
Impact of Inflation and Other External Factors
The Company's principal sources of revenues are franchise fees.
Franchise fees and revenues from owned and managed hotels can be impacted by two
external factors: the supply of hotel rooms within the lodging industry relative
to the demand for rooms by travelers, and inflation.
Although industry-wide supply and demand for hotel rooms recently has
been fairly balanced, any excess in supply that might develop in the future
could have an unfavorable impact on room revenues at the Company's franchised
hotels either by reducing the number of rooms reserved at the Company's
properties or by restricting the rates hotel operators can charge for their
rooms. In addition, an excess supply of hotel rooms may discourage potential
franchisees from opening new hotels, unfavorably impacting the franchise fees
received by the Company.
Although the Company believes that increases in the rate of inflation
will generally result in comparable increases in hotel room rates, severe
inflation could contribute to a slowing of the national economy, which could
result in reduced travel by both business and leisure travelers. That could
lead to less demand for hotel rooms, which could result in a temporary reduction
in room rates and fewer room reservations, negatively impacting revenues
received by the Company. A weak economy could also reduce demand for new
hotels, negatively impacting the franchise fees received by the Company.
20
<PAGE>
Among the other unpredictable external factors which may affect the
Company's fee stream are wars, airline strikes, gas shortages and severe
weather.
Hotel Business
Domestic
The Company is a leading national hotel company with a portfolio of 71
domestic hotels containing 10,330 rooms located in 25 States as of May 31, 1997.
Each hotel is branded with one of the Choice franchise brands. The majority of
the Company's hotels have been acquired since 1992 at prices below their
replacement cost. All of these hotels have benefited from the investment of
capital to improve the renovated hotels. Since June 1992, the Company has spent
$260.4 million to buy and renovate 54 hotel properties. More recently, the
Company shifted its development efforts to the construction of Sleep Inn hotels
and MainStay Suite hotels.
The Company's strategy is to: (i) optimize the operating performance
and value of its existing portfolio of hotels through the consistent application
of high quality sales, marketing and operating programs; (ii) capitalize on the
under-served, high growth, mid-priced, extended-stay all-suite segment with the
development of 20 MainStay Suite hotels; (iii) develop other high quality,
consumer focused hotels such as Sleep Inns; and (iv) pursue the opportunistic
acquisition of existing hotels whereby substantial value can be created.
The Company's performance is a beneficiary of the operating leverage
inherent in the lodging industry and is further supported by the substantial
discount to replacement cost of its existing portfolio. The 54 hotels acquired
since 1992 have an investment basis of approximately 55.3% of current estimated
replacement cost. In addition to the initial renovation of acquired hotels, the
Company has spent approximately 5% of revenue for ongoing improvements to the
hotels, thereby maintaining the physical assets to optimize competitive
advantages in each local market.
The Company's strategy to build 20 MainStay Suites hotels is intended
to provide it with hotels positioned to benefit from the demand/supply imbalance
in the mid-priced, extended stay all-suite segment which should produce higher
than average return on investment.
The Company's historical existing hotel acquisition program and the
current MainStay Suite hotel development program are illustrative of
management's capabilities to timely ascertain market trends, conceive of
strategies and to implement those strategies.
21
<PAGE>
International
The Company, brought its wholly-owned subsidiary Quality Hotels Group,
Inc. and its affiliates over and operate ten hotels in France, three in Germany
and one in the United Kingdom.
Historical Acquisition Strategy
The primary focus of the Company from 1992 through 1995 was the
acquisition of existing hotels at prices below their replacement cost with the
intent to increase their value through (i) the investment of capital to improve
the hotels and (ii) the installation of professional management and marketing
teams to operate the renovated hotels. Since June 1992, the Company has spent
$260.4 million to buy and renovate 54 hotels containing 7,809 rooms. In fiscal
year 1997, the Company acquired two hotels and is in the process of renovating
them, one of which (located in Charlotte, NC) the Company is in the process of
converting to a Clarion Hotel from a senior assisted living facility.
In addition to the acquired hotels, the Company owns and operates 8
hotels developed or acquired prior to 1992, 7 Sleep Inn hotels and 1 MainStay
Suites hotel developed by the Company since 1994.
<TABLE>
<CAPTION>
The Company Existing Hotel Acquisitions
-----------------------------------------------
Fiscal Year
-----------------------------------------------
1993 1994 1995 1996 1997
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Total acquisitions................................................. 7 13 16 16 2
Total number of rooms acquired..................................... 1,276 1,933 2,336 1,940 324
Total cost of acquisitions (in millions) (including initial
improvements)..................................................... $ 30.9 $ 55.8 $ 83.3 $ 71.8 $ 17.9
Average cost per room.............................................. $24,216 $28,867 $35,659 $37,010 $55,246
</TABLE>
Operating income for the seven hotels purchased in fiscal year 1993
increased from $8.0 million in fiscal 1996 to $9.4 million in fiscal 1997, a 17%
improvement. For the 13 hotels purchased in fiscal year 1994, operating income
increased 14.4% to $11.5 million in fiscal year 1997 from $10.0 million in
fiscal year 1996. Operating income for the 16 hotels acquired in fiscal year
1995 was $12.8 million in fiscal year 1996, a 91% increase over the $6.7 million
achieved in fiscal year 1996. The following chart summarizes occupancy
improvements for original portfolio hotels, and fiscal 1993, 1994, 1995, 1996
and 1997 acquisitions. Occupancy rates for the year acquired reflect only the
period during which the properties were owned by the Company. Because many of
the recently acquired and developed hotels have not yet reached stabilized
levels of operating performance, the Company believes that revenues and gross
profit at these hotels will continue to grow.
22
<PAGE>
<TABLE>
<CAPTION>
The Company Hotels Occupancy
--------------------------------------
Fiscal Year
--------------------------------------
1993 1994 1995 1996 1997
--------------------------------------
<S> <C> <C> <C> <C> <C>
Original Domestic Portfolio.......... 62.27% 64.16% 67.19% 68.02% 71.63%
Fiscal 1993 Acquisitions............. 56.17 63.20 73.68 76.17 75.02
Fiscal 1994 Acquisitions............. -- 66.09 70.71 73.76 73.68
Fiscal 1995 Acquisitions............. -- -- 48.96 58.49 66.27
Fiscal 1996 Acquisitions............. -- -- -- 53.23 61.16
Fiscal 1997 Acquisitions............. -- -- -- -- 54.65
</TABLE>
The Hotel Properties
The Company's hotel properties serve three primary segments of the
lodging industry; all-suites, full service and limited service. Each hotel,
except for one hotel in Miami Beach which is under physical renovation, is
branded with one of the Choice franchise flags.
All-Suites Hotels. The Company has 6 hotels in the all-suite segment
open and 13 hotels under construction or in the development process. The
Company's all-suite hotel properties compete in the moderate and upscale price
segments. The table below identifies the Company's all-suite hotels by brand
and price segment.
<TABLE>
<CAPTION>
All-Suite Hotels
Number Number Price
Brand of Hotels of Rooms Segment
----- --------- -------- ---------
<S> <C> <C> <C>
Quality Suites.......................... 3 345 upscale
Comfort Suites.......................... 2 232 mid-price
MainStay Suites......................... 1 96 mid-price
</TABLE>
As of May 31, 1997, the Company had an additional 10 MainStay Suites
hotels under construction with 970 rooms.
Full-Service Hotels. The Company has 16 hotels in the full service
segment. The Company's full service hotels compete in the mid-price and upscale
price segments. The table below identifies the Company's full service hotels by
brand and price segment.
<TABLE>
<CAPTION>
Full Service Hotels
Number Number Price
Brand of Hotels of Rooms Segment
----- --------- -------- ---------
<S> <C> <C> <C>
Clarion Hotels & Inns................... 11 2,114 upscale
Quality Hotel & Inns.................... 5 1,327 mid-price
</TABLE>
Limited Service Hotels. The Company has 49 hotels in the limited
service segment open and six hotels under construction or in the development
process. The Company's limited service hotels properties compete in the mid-
price and economy price segments. The table below identifies the Company's
limited service hotels by brand and price segment.
23
<PAGE>
<TABLE>
<CAPTION>
Limited Service Hotels
Number Number Price
Brand of Hotels of Rooms Segment
----- --------- -------- ---------
<S> <C> <C> <C>
Comfort Inns............................ 31 4,074 mid-price
Quality Inns............................ 8 1,014 mid-price
Sleep Inns.............................. 7 757 mid-price
Econo Lodge............................. 1 120 economy
Rodeway Inns............................ 1 101 economy
Independent............................. 1 150 economy
</TABLE>
As of May 31, 1997, the Company had an additional 4 Sleep Inns under
construction with 453 rooms.
External Development
The Company's focus on external development is geared to (i)
capitalize on the under-served, high-growth, mid-priced extended stay all-suite
segment, and (ii) the development of other high-quality, consumer-focused
hotels.
To effect these strategies, the Company maintains a Real Estate
Development and Construction Department staff. This staff effects the
identification of target markets, specific site identification, negotiation, due
diligence, planning, zoning and other approval requirements, design and
construction of new hotels. The Real Estate Development staff have served in
the past as the focal point to effect the Company's historical acquisition
strategy. This dual capacity to acquire existing hotels or build new hotels
allows the Company to be responsive to changing market conditions.
The following is a list of the new hotels developed by the Company
since 1994 or currently under development:
<TABLE>
<CAPTION>
Calendar
Market Hotel Year of Opening
- ------ ----- ---------------
<S> <C> <C>
Dallas/Plano, TX.................... Sleep 1994
San Antonio, TX..................... Sleep 1995
Baton Rouge, LA..................... Sleep 1996
Houston/Airport, TX................. Sleep 1996
Austin/Round Rock, TX............... Sleep 1996
Dallas/Plano, TX.................... MainStay 1996
Raleigh, NC......................... Sleep 1997
Dallas/Arlington, TX................ Sleep 1997
Kansas City/Airport, MO(1).......... Sleep 1997
Charlotte, NC(1).................... Sleep 1997
Rockville, MD(1).................... Sleep 1997
Providence/Airport, RI(1)........... MainStay 1997
Cincinnati/Blue Ash, OH(1).......... MainStay 1997
Kansas City/Airport, MO(1).......... MainStay 1997
Indianapolis, IN(1)................. MainStay 1997
Louisville, KY(1)................... MainStay 1997
Denver/Tech Center, CO(1)........... MainStay 1998
Orlando/Lake Mary, FL(1)............ MainStay 1998
Jacksonville, FL(1)................. MainStay 1998
Greenville, SC(1)................... MainStay 1998
Nashville/Brentwood, TN(1).......... MainStay 1998
Miami/Airport, FL(2)................ MainStay 1998
Denver/Airport, CO(1)............... Sleep 1998
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Calendar
Market Hotel Year of Opening
- ------ ----- ---------------
<S> <C> <C>
Miami/Airport, FL(2)................. Sleep 1998
Ft. Lauderdale/Cypress Creek, FL(2).. Sleep 1998
Pittsburgh/Airport, PA(2)............ MainStay 1998
Fishkill/Poughkeepsie, NY(2)......... MainStay 1998
</TABLE>
- -------------------
(1) Hotel under construction.
(2) The Company has acquired the land and is in final planning stages prior to
start of construction.
The Company's focus on the development of MainStay Suites is based on
the sector-wide demand/supply imbalance as evidenced by numerous industry
studies. According to various industry studies, demand for extended stay
lodging far exceeds supply. Demand in the mid-price market is very high, yet
supply additions have been minimal. The extended stay, all-suite segment,
defined as stays of five or more nights, consists of 228 million room nights
annually, or 27% of total U.S. industry demand, according to industry sources.
Only 1.5% of total room supply is dedicated extended stay rooms. The Company
believes that it can utilize its real estate development expertise to locate
attractive markets for and build MainStay extended stay hotels. The Company
also believes that it can successfully operate these hotels based on its
experience operating other limited services hotels.
MainStay Suites has been created by the Company with a unique product
design and service package which enhances property level appeal, productivity
and profitability. Two of these unique features of the MainStay product are the
use of an automatic check-in kiosk (which allows guests to check in without
assistance) and optional daily light touch housekeeping with full housekeeping
every five days. These features allow a MainStay Suites hotel to operate with
fewer full time equivalent employees than a similar size limited service hotel
that has 24-hour front desk coverage and provides full housekeeping daily. The
Company believes that MainStay Suites projects will produce a stabilized
unleveraged pre-tax property level return on investment of 15% or higher. This
return is supported by the experiences at the first MainStay Suites opened by
the Company in Plano, Texas and by projections for the MainStay Suites under
development which are based on rate and occupancy generated internally by the
Company and by external feasibility consultants, internal operating guidelines,
land cost and projected construction cost. However, there can be no assurance
that the projected return will be achieved or that actual results will not
differ materially.
The Company's initial development of 20 MainStay Suites combined with
the Company's efforts to franchise MainStay Suites is intended to result in a
brand with national recognition.
The Company's MainStay Suites hotel properties will average
approximately 100 suites and be developed on 2.5 to 3.0 acres of land in
suburban office parks or locations proximate to major employers, restaurants and
retail amenities. MainStay Suites feature high quality, interior corridor
building construction with amenities and features demanded by consumers. All
suites feature a bedroom area, living room area with a pull-out couch or
recliner, private bathroom and fully furnished kitchen. The kitchen area
includes a full-size refrigerator,
25
<PAGE>
dishwasher, microwave, stove, coffee maker, toaster and all cooking and serving
utensils. Each suite features an over-sized counter serving as an eating or
working center, along with two ergonomic chairs. Suite alternatives include a
studio suite or one-bedroom suite. Each suite includes two direct dial phone
lines, voice mail and other automated phone services.
The Company has developed a state-of-the-art automated check-in/out
property management system which enables guests with reservations to obtain
their key from the kiosk unassisted. This feature allows transaction time to be
shortened and provides operating efficiencies while enhancing guest
satisfaction.
Based on experience from the first MainStay Suites opened by the
Company in Plano, Texas, guest satisfaction is very high. Financial results to-
date have met or exceeded the Company's expectations.
Operations
Each of the Company's owned and managed hotels operates under one of
the Choice brand names. The following table illustrates the growth of the
Company over the four fiscal years ended May 31, 1997.
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Number of properties, end of period 19 32 48 65 71
Number of rooms, end of period 3,686 5,605 7,941 9,713 10,330
Average occupancy percentage 61.36% 64.18% 67.10% 66.61% 68.70%
Average daily room rate (ADR) $ 49.53 $ 49.15 $ 51.28 $ 55.97 $ 59.62
RevPAR $ 30.39 $ 31.54 $ 34.40 $ 37.28 $ 40.96
</TABLE>
Operating Systems and Procedures. The Company's hotels take advantage
of the same systems and services available to franchisees with respect to a
particular brand. The hotels participate in the central reservation system,
marketing and advertising efforts and volume purchasing discounts and are
subject to the same quality assurance program. In addition, the Company has
instituted the following systems in each of the hotels it operates.
. Yield Management. An automated yield management program has been
installed at hotels which allows the local management to take
advantage of the supply and demand conditions in their marketplace.
The system is automated to the point that it performs calculations and
suggests pricing strategies to the local hotel management. The program
continues to update information based on the availability of room
supply and reservation volume within each hotel.
. Training. The Company has developed a training system for all guest
services representatives that teaches the basic sales techniques. A
computerized guest comment system was developed to solicit the
comments of guests and the experiences they had at the hotel while
providing management with immediate guest feedback.
26
<PAGE>
. Accounting Systems. Each of the Company-operated hotels has a
computerized front desk and accounting system. This system allows key
financial indicators (such as daily occupancy and revenue) to be
immediately gathered from each hotel and electronically transmitted to
the key operating officers and managers of the Company. This instant
access to information allows management to quickly spot trends and
make corrections and changes where necessary. The system is completely
computerized and allows for cost savings in the accounting and
bookkeeping departments of each hotel. In addition, control over
operational and capital expenditures is provided by a dedicated group
of financial controllers in the corporate office. This group works
with the hotel operations group to maintain expense standards as well
as established operating procedures.
. Time and Attendance System. Each hotel maintains an automated time
and attendance system that is tied into a central payroll system at
the corporate headquarters. This computerized method of tracking time
allows management to make quick decisions on controlling labor costs
and provides immediate information on projected costs.
. Food and Beverage. The food and beverage efforts are headed by a vice
president of food and beverage. The department is responsible for the
daily food and beverage activities of the various hotels, as well as
the development of new food concepts. This group was responsible for
the development, testing and implementation of the Choice Picks food
court concept. Recently, the Company opened a new food and beverage
concept called "Classic Sports Food, Drink and Memories" in its
Richardson, Texas hotel. A sports theme restaurant, this concept has
been developed jointly with the Classic Sports Network, a national
cable television service. This agreement allows for the use of certain
trademarks at the Company's locations. Additional "Classic Sports
Food, Drink and Memories" are planned for three other the Company
hotels.
. Annual Business Planning Process. Each hotel prepares a zero-based
annual business plan which incorporates historical performance and
market conditions. The plan which is reviewed and approved by senior
management, provides detailed strategies in the key operating areas of
marketing, guest services and food and beverage. The plan also
includes a comprehensive capital expenditures process which serves to
maintain the physical plant in optimal condition based on market
conditions and operating strategies. The annual plan serves as a
fundamental measurement of management's performance.
27
<PAGE>
Item 2. Properties
The following chart lists by market segment the Company's hotels at
May 31, 1997:
<TABLE>
<CAPTION>
Year
Constructed/
No. of Last Major
Hotel Market Rooms Renovation
----- ------ ----- ----------
All Suite
- ---------
Upscale
-------
<S> <C> <C> <C>
Quality Suites Deerfield Fort Lauderdale, Florida 107 1991/1995
Quality Suites Raleigh, North Carolina 114 1988/1994
Quality Suites Shady Grove Rockville, Maryland 124 1978/1996
Mid-Price
---------
Comfort Suites Haverhill Boston, Massachusetts 131 1989/1997
Comfort Suites Deerfield Fort Lauderdale, Florida 101 1991/1995
MainStay Suites Plano Dallas, Texas 96 1996
MainStay Suites Warwick(1) Providence, Rhode Island 94 1997
MainStay Suites Blue Ash(1) Cincinnati, Ohio 100 1997
MainStay Suites Airport(1) Kansas City, Missouri 88 1998
MainStay Suites Northwest(1) Indianapolis, Indiana 88 1997
MainStay Suites(1) Louisville, Kentucky 100 1998
MainStay Suites Tech Center(1) Denver, Colorado 100 1998
MainStay Suites Lake Mary(1) Orlando, Florida 100 1998
MainStay Suites South Pointe(1) Jacksonville, Florida 100 1998
MainStay Suites (1) Greenville, South Carolina 100 1998
MainStay Suites Brentwood (1) Nashville, Tennessee 100 1998
Full Service
- -----------------
Upscale
-------
Clarion Hotel Baltimore Baltimore, Maryland 103 1927/1996
Clarion Hotel Worthington Columbus, Ohio 232 1975/1996
Clarion Hotel Richardson Dallas, Texas 296 1982/1995
Clarion on the Lake Hot Springs, Arkansas 151 1965/1997
Clarion Hotel Miami Airport Miami, Florida 103 1970/1996
Clari on Hotel Hollywood Beach Miami-Ft. Lauderdale, Florida 309 1972/1996
Clarion Hotel Mobile, Alabama 250 1979/1994
Clarion Hotel Virginia Beach Norfolk-Virginia Beach, Virginia 149 1985/1995
Clarion Hotel Roanoke Roanoke, Virginia 148 1981/1997
Clarion Hotel Springfield Springfield, Missouri 199 1974/1997
Clarion Hotel (2) Charlotte, North Carolina 174 1974/1997
Mid-Price
---------
Quality Inn South Point Jacksonville, Florida 184 1988/1994
Quality Hotel Airport Los Angeles, California 278 1971/1994
Quality Hotel Maingate Anaheim (4) Los Angeles, California 284 1970/1995
Quality Inn & Suites Hampton Norfolk-Virginia Beach, Virginia 190 1972/1995
Quality Hotel Arlington Washington, DC 391 1962/1997
Limited Service
- -----------------
Mid-Price
---------
Comfort Inn Albuquerque Albuquerque, New Mexico 114 1985/1996
Quality Inn Anderson Anderson, South Carolina 121 1988/1995
Comfort Inn Norcross Atlanta, Georgia 110 1987/1996
Comfort Inn N.W. Pikesville(5) Baltimore, Maryland 186 1964/1994
Comfort Inn University Baton Rouge, Louisiana 150 1972/1994
Comfort Inn Danvers Boston, Massachusetts 136 1972/1997
Comfort Inn Brooklyn Brooklyn, New York 67 1926/1997
Comfort Inn Canton Canton, Ohio 124 1989/1994
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Year
Constructed/
No. of Last Major
Hotel Market Rooms Renovation
----- ------ ----- ----------
<S> <C> <C> <C>
Comfort Inn Airport Charleston, South Carolina 122 1986/1994
Comfort Inn Charlotte Charlotte, North Carolina 150 1985/1996
Quality Inn & Suites - Crown Point Charlotte, North Carolina 100 1988/1996
Comfort Inn Cincinnati, Ohio 117 1984/1996
Comfort Inn Middleburg Heights Cleveland, Ohio 136 1989
Comfort Inn College Station College Station, Texas 114 1984/1995
Comfort Inn Columbia Columbia, South Carolina 98 1987/1996
Comfort Inn DFW Airport Dallas-Fort Worth, Texas 152 1986/1995
Quality Inn Plymouth Detroit, Michigan 123 1989/1996
Comfort Inn Deerfield Beach Fort Lauderdale, Florida 69 1975/1997
Comfort Inn Hershey Hershey, Pennsylvania 125 1990/1997
Comfort Inn Hilton Head Hilton Head, South Carolina 150 1988/1996
Quality Inn & Suites Indianapolis Indianapolis, Indiana 116 1982/1996
Quality Inn Lincoln Lincoln, Nebraska 108 1969/1996
Quality Inn & Suites Lumberton Lumberton, North Carolina 120 1974/1996
Comfort Inn Collierville Memphis, Tennessee 94 1984/1996
Comfort Inn & Suites, Miami Springs Miami, Florida 165 1970/1996
Comfort Inn Miami Springs Miami, Florida 110 1986/1996
Miami Beach Hotel(3) Miami, Florida 150 1952/1997
Comfort Inn - Lee Road Orlando, Florida 145 1985/1994
Comfort Inn - Turf Paradise Phoenix, Arizona 155 1981/1995
Comfort Inn - North Phoenix, Arizona 153 1986/1997
Comfort Inn Portland Portland, Maine 126 1984/1996
Quality Inn Richmond Richmond, Virginia 194 1985/1997
Quality Inn Midvalley Salt Lake City, Utah 132 1972/1995
Comfort Inn by the Bay San Francisco, California 135 1971/1996
Comfort Inn Westport St. Louis, Missouri 170 1971/1995
Comfort Inn Sturgis Sturgis, Michigan 83 1965/1997
Comfort Inn Traverse City Traverse City, Michigan 96 1989/1996
Comfort Inn Tyson's Washington, D.C. 250 1982/1995
Comfort Inn West Palm Beach West Palm Beach, Florida 158 1974/1995
Comfort Inn Wichita Wichita, Kansas 114 1985/1997
Sleep Inn Round Rock Austin, Texas 107 1996
Sleep Inn Six Flags Dallas-Fort Worth, Texas 124 1997
Sleep Inn Baton Rouge Baton Rouge, Louisiana 101 1996
Sleep Inn Plano Dallas, Texas 104 1994
Sleep Inn Intercontinental Houston, Texas 107 1996
Econo Lodge Tolleson Phoenix, Arizona 120 1988/1997
Rodeway Inn Tempe Phoenix, Arizona 101 1989
Sleep Inn Raleigh Raleigh, North Carolina 107 1996
Sleep Inn San Antonio San Antonio, Texas 107 1995
Sleep Inn University (1) Charlotte, North Carolina 120 1997
Sleep Inn Airport (1) Denver, Colorado 119 1997
Sleep Inn Airport (1) Kansas City, Missouri 107 1998
Sleep Inn Rockville(1) Washington, D.C. 107 1997
</TABLE>
___________________
(1) Hotel under construction
(2) Hotel closed for renovation
(3) Hotel under renovation
(4) Leased property
(5) Hotel on leased land
29
<PAGE>
The following chart shows operating statistics for all of Sunburst's
owned and managed hotels presented by market segment for the five fiscal years
ended May 30, 1997.
<TABLE>
<CAPTION>
FY 1993 FY 1994 FY 1995
-------------------------- -------------------------- --------------------------
ADR Occupancy RevPAR ADR Occupancy RevPAR ADR Occupancy RevPAR
---- --------- ------ ---- --------- ------ ---- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
All Suite Hotels........ $ --% $ -- $60.62 71.58% $43.39 $58.74 61.34% $36.03
Full Service Hotels..... 54.06 61.42 33.20 54.37 60.74 33.02 54.04 65.43 35.36
Limited Service Hotels.. 44.59 61.30 27.34 45.09 66.71 30.08 48.39 69.15 33.46
All Hotels.............. 49.53 61.36 30.39 49.15 64.16 31.54 51.28 67.10 34.40
</TABLE>
<TABLE>
<CAPTION>
FY 1996 FY 1997
------------------------------------------------------
ADR Occupancy RevPAR ADR Occupancy RevPAR
--- --------- ------ --- --------- ------
<S> <C> <C> <C> <C> <C> <C>
All Suite Hotels................................... $64.70 69.00% $44.65 $69.48 72.73% $50.53
Full Service Hotels................................ 58.85 65.41 38.49 63.25 67.05 42.41
Limited Service Hotels............................. 53.36 67.11 35.81 56.38 69.25 39.04
All Hotels......................................... 55.97 66.61 37.28 59.60 68.70 40.94
</TABLE>
The principal executive offices of the Company are located at 10750
Columbia Pike, Silver Spring, Maryland 20901. These offices are leased from
Manor Care. The Company owns its reservation system offices in Phoenix, AZ and
Minot, ND. The Company leases two additional reservation system offices in Grand
Junction, CO, pursuant to leases that expire in 1999 and 2000, and occupies
additional space in Toronto, Canada, on a month-to-month basis. In addition, the
Company leases 12 sales offices across the United States. The Company's European
headquarters, which the Company leases pursuant to a lease that expires on
December 31, 1997, is located in Paris, France. The Company also leases one
international sales offices in France pursuant to a lease that terminates in
June 1998. Management believes that its executive, reservation systems and sales
offices are sufficient to meet its present needs and does not anticipate any
difficulty in securing additional or alternative space, as needed, on terms
acceptable to the Company.
Item 3. Legal Proceedings
The Company is not a party to any litigation, other than routine
litigation incidental to the Franchising Business or the Hotel Business. 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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended May 31, 1997.
30
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The shares of the Company's Common Stock are listed and traded on the
New York Stock Exchange. The following table sets forth information on the high
and low prices of the Company's Common Stock since November 1996.
<TABLE>
<CAPTION>
Market Price Per Share
Fiscal Year 1997 ----------------------
Quarters Ended: High Low
--------------- ---- ---
<S> <C> <C>
November 4 through
November 30, 1996....... 16 13 3/4
February 28, 1997....... 17 5/8 15
May 31, 1997............ 15 7/8 12 3/4
</TABLE>
As of August 5, 1997, there were 4,317 record holders of the Company's
Common Stock.
No dividends have been declared during the past two years with respect
to such Common Stock.
Item 6. Selected Financial Data.
The required information is included on page 19 of the Form 10/A-4
dated October 10, 1996 and pages 28-31 of the Annual Report and is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial Conditions and
Results of Operations.
The required information is included on pages 22-26 of the 1997
Annual Report and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The required information is included on pages 18-22 of the Proxy
Statement dated August 15, 1997 and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The required information is included on pages 28-31 of the 1997
Annual Report and is incorporated herein by reference. See Item 14 for the
Index to Financial Statements and Schedules.
31
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The required information is included on pages 51-60 and 78-80 of the
Proxy Statement dated August 15, 1997 and is incorporated herein by reference.
Item 11. Executive Compensation.
The required information is included on pages 53-55 of the Proxy
Statement dated August 15, 1997 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The required information is included on page 60 of the Proxy Statement
dated August 15, 1997 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The required information is included on pages 60-62 of the Proxy
Statement dated August 15, 1997 and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
1. Financial Statements
The following information is included on the corresponding pages of
the 1997 Annual Report:
Consolidated Statements of Income...................... p. 28
Consolidated Balance Sheets............................ p. 29
Consolidated Statements of Shareholders' Equity........ p. 31
Consolidated Statements of Cash Flows.................. p. 30
Report of Independent Public Accountants............... p. 27
Notes to Consolidated Financial Statements..........pp. 32-39
32
<PAGE>
2. Financial Statement Schedules
The following reports are filed herewith on the pages indicated:
Report of Independent Public Accountants on Schedule...........p. 36
Consent of Independent Public Accountants......................p. 37
All other schedules are not applicable.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.01 Form of Restated Certificate of Incorporation of the Registrant*
3.02 Form of By-laws of the Registrant*
4.01 Form of Common Stock certificate*
10.01 Form of Distribution Agreement, dated October 31, 1996, between Manor Care, Inc. and the Registrant*
10.02 Form of Corporate Services Agreement between Manor Care, Inc. and the Registrant*
10.03 Form of Employee Benefits and Other Employment Matters Allocation Agreement between Manor Care, Inc. and the
Registrant*
10.04 Form of Office Lease between Manor Care, Inc. and the Registrant*
10.05 Form of Office Lease between Manor Care, Inc. and the Registrant*
10.06 Form of Loan Agreement between MNR Finance Corp. and the Registrant*
10.07 Employment Agreement, dated September 1, 1995, between Manor Care, Inc. and Donald J. Landry*
10.08 Form of Assignment Agreement among Manor Care, Inc., the Registrant and Donald J. Landry*
10.09 Form of Employment Agreement between the Registrant and Stewart Bainum, Jr.*
10.10 Employment Agreement, dated September 30, 1996, among the Registrant, Choice Hotels International, Inc. and
William R. Floyd*
10.11 Form of Employment Agreement between the Registrant and James A. MacCutcheon*
10.12 Employment Agreement, dated February, 1997, between the Registrant and Thomas Mirgon**
10.13 Form of Choice Hotels International, Inc. Supplemental Executive Retirement Plan*
10.14 Form of Choice Hotels International, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock
Purchase Plan*
10.15 Form of Choice Hotels International, Inc. 1996 Non-Employee Director Stock Compensation Plan*
10.16 Form of Choice Hotels International, Inc. 1996 Long-Term Incentive Plan*
10.17 Form of Revolving Credit Facility Agreement between the Registrant and Chase Manhattan Bank*
10.18 Form of Pikesville Sublease between Manor Care, Inc. and the Registrant*
10.19 Promissory Note dated April 22, 1997 by First Choice Properties Corp. in favor of QI Capital Corp. in the
principal amount of $117,500,000
10.20 Loan Agreement dated as of April 22, 1997 by and between First Choice Properties Corp. and QI Capital Corp.
13.01 1997 Annual Report to Shareholders (information incorporated by reference)
21.01 Subsidiaries of the Registrant
27.01 Financial Data Schedule
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
99.01 Schedule II -- Valuation and Qualifying Accounts
99.02 Proxy Statement dated August 15, 1997 (information incorporated by reference)
</TABLE>
- ---------------------
* Incorporated by reference to the Company's Registration Statement on
Form 10, File No. 001-11915.
** Incorporated by reference to the Company's Form 10-Q for the quarter ended
February 28, 1997.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange 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.
By: /s/ Michael J. DeSantis
------------------------------
Michael J. DeSantis
Senior Vice President, General
Counsel and Secretary
Dated: August 15, 1997
35
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stewart Bainum, Jr. Chairman, Director August 15, 1997
- ----------------------------
Stewart Bainum, Jr.
/s/ William R. Floyd Vice Chairman, Director and August 15, 1997
- ---------------------------- Chief Executive Officer
William R. Floyd
/s/ Barbara Bainum Director August 15, 1997
- ----------------------------
Barbara Bainum
/s/ Stewart Bainum Director August 15, 1997
- ----------------------------
Stewart Bainum
/s/ Paul A. Gould Director August 15, 1997
- ----------------------------
Paul A. Gould
/s/ Robert C. Hazard Director August 15, 1997
- ----------------------------
Robert C. Hazard
/s/ Frederic V. Malek Director August 15, 1997
- ----------------------------
Frederic V. Malek
/s/ Gerald W. Petitt Director August 15, 1997
- ----------------------------
Gerald W. Petitt
/s/ Jerry E. Robertson Director August 15, 1997
- ----------------------------
Jerry E. Robertson
/s/ Joseph M. Squeri Vice President, August 15, 1997
- ---------------------------- Finance and Controller
Joseph M. Squeri
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Stockholders of Choice Hotels International, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Choice Hotels International,
Inc.'s annual report to shareholders incorporated by reference in this Form 10-
K, and have issued our opinion thereon dated June 24, 1997. Our audit was made
for the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. The schedule listed in the index above is presented
for the purpose of complying with the Securities and Exchange Commission's rules
and is not part of the basic consolidated financial statements. This schedule
has been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
June 24, 1997
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statements File No. 333-14203, No. 333-17577 and No. 333-17575.
Arthur Andersen LLP
Washington, D.C.
August 12, 1997
<PAGE>
Exhibit 10.19
PROMISSORY NOTE
$117,500,000.00 Dated as of April 22, 1997
For value received, FIRST CHOICE PROPERTIES CORP., a Delaware
corporation, having its principal place of business at 10750 Columbia Pike,
Silver Spring, Maryland 20901, Attention: President and General Counsel/Real
Estate (hereinafter referred to as "Maker"), promises to pay to the order of QI
CAPITAL CORP., a Delaware corporation (together with its successors and assigns
being hereinafter referred to as "Payee"), by wire transfer in accordance with
the instructions set forth in Section 15 hereof or at such place as the holder
hereof may from time to time designate in writing, the principal sum of One
Hundred Seventeen Million Five Hundred Thousand and no/100 Dollars
($117,500,000.00), in lawful money of the United States of America, together
with interest thereon to be computed and paid as specified in Section 1 below.
Except as otherwise defined or limited herein, capitalized terms used
herein shall have the meanings ascribed to them in that certain Loan Agreement
of even date herewith (the "Loan Agreement") by and between Maker and Payee.
This is the Promissory Note referred to in the Loan Agreement.
1. (a) For the purpose of computing interest payable from time to
time on the principal amount hereof, said principal balance shall be divided
into five (5) components (each a "Component" and collectively the "Components")
referred to as Component A-1, Component A-2, Component B, Component C and
Component D.
The Components initially shall have the principal amounts and shall
bear interest at the fixed rates per annum set forth for each Component below:
<TABLE>
<CAPTION>
Component Initial Component Component
Initial Amount Interest Rate
<S> <C> <C>
A-1 $38,200,000.00 7.413%
A-2 $31,000,000.00 7.747%
B $17,300,000.00 7.913%
C $21,625,000.00 8.106%
D $9,375,000.00 8.590%
</TABLE>
<PAGE>
Payments of interest shall be made on the fourth (4th) Business Day
preceding the next succeeding Distribution Date (hereinafter defined) (the "Due
Date") commencing on April 29, 1997 and continuing on each Due Date of each and
every month thereafter until such time as the Debt (hereinafter defined) has
been repaid in its entirety, and shall include interest for the period (each, an
"Interest Accrual Period") beginning on (and including) the 1st day of the
calendar month immediately preceding the calendar month in which the related
Distribution Date occurs, through and including the last day of such calendar
month (or, in the case of the first Interest Accrual Period, beginning on, and
including, the date hereof to but excluding May 1, 1997). Interest shall be
computed on the basis of a 360 day year composed of 12 months of 30 days each.
The principal amount hereof shall be payable (a) in one hundred
seventy nine (179) monthly payments due and payable on each Due Date commencing
May 30, 1997, each equal to the principal amounts set forth on Schedule A
----------
attached hereto for the applicable Due Date, plus accrued and unpaid interest on
the outstanding principal balance hereof for the Interest Accrual Period
immediately preceding the month in which the applicable Due Date occurs,
computed at a per annum rate of interest equal to the Weighted Average Interest
Rate as of the first day of such Interest Accrual Period, and (b) in a balloon
payment (the "Balloon Payment") due and payable on May 1, 2012 (the "Maturity
Date"), equal to the outstanding principal balance of the Loan, together with
accrued and unpaid interest thereon through April 30, 2012, computed at a per
annum rate of interest equal to the Weighted Average Interest Rate as of the
first day of the Interest Accrual Period of the calendar month immediately
preceding the date in which the Maturity Date occurs. "Weighted Average Interest
Rate" means, with respect to any Interest Accrual Period or the first day of an
Interest Accrual Period, a rate per annum equal to a fraction, expressed as a
percentage, the numerator of which is the sum of the products of (i) the
principal balance of each Component as of the first day of such Interest Accrual
Period multiplied by (ii) the interest rate applicable to such Component, and
the denominator of which is the aggregate principal balance of all Components,
taken together, outstanding as of such date.
Payments made at any time hereon (including payments from the proceeds
of any sale of any Property pursuant to the Loan Agreement, but not including
payment of any Yield Maintenance Payment or any Reimbursement Rate or Default
Rate interest), shall be applied in the following order of priority:
FIRST: to pay (a) all costs, if any, incurred by Payee in acting on
behalf of Maker as provided in the Loan Documents, and (b), if applicable,
all costs and expenses incurred by Payee in enforcing this Note and any of
the other Loan Documents, including, without limitation, all costs and
expenses of the foreclosure and/or sale of any Property or any part thereof
or any interest therein, and all costs and expenses of entering upon,
taking possession of, removing, holding, constructing improvements on, and
operating and managing any Property or any part thereof, and all costs and
expenses of repairs, renewals, replacements, additions, betterments, and
improvements to any Property, in each case in accordance with the Loan
Documents, and all reasonable attorneys' and accountants' fees and
disbursements, including
-2-
<PAGE>
appraisals required under the Trust and Servicing Agreement, incurred in
connection with any of the foregoing, together with any compensation
payable under Paragraph 21 of any Mortgage;
------------
SECOND: to pay interest hereon in the following order of priority:
first, to pay interest then due on Components A-1 and A-2, pro rata, based
--- ----
upon the amount available from the Maker for application to such Components
and the amount of interest currently due and payable on each such Component
until all such interest is paid in full, second to pay interest that is
past due and unpaid on Components A-1 and A-2, pro rata, based upon the
--- ----
amount available for application from the Maker to such Components and the
amount of interest currently due and payable on each such Component until
all such past due interest is paid in full, third to pay interest then due
on Component B based upon the amount available from the Maker for
application to such Component and the amount of interest currently due and
payable on such Component until all such interest is paid in full, fourth
to pay interest that is past due and unpaid on Component B based upon the
amount available for application from the Maker to such Component and the
amount of interest currently due and payable on such Component until all
such past due interest is paid in full, fifth to pay interest then due on
Component C based upon the amount available from the Maker for application
to such Component and the amount of interest currently due and payable on
such Component until all such interest is paid in full, sixth, to pay
interest that is past due and unpaid on Component C based upon the amount
available for application from the Maker to such Component and the amount
of interest currently due and payable on such Component until all such past
due interest is paid in full; seventh to pay interest then due on Component
D based upon the amount available from the Maker for application to such
Component and the amount of interest currently due and payable on such
Component until all such interest is paid in full, eighth, to pay interest
that is past due and unpaid on Component D based upon the amount available
for application from the Maker to such Component and the amount of interest
currently due and payable on such Component until all such past due
interest is paid in full; and
THIRD: (A) unless there exists a P&I Shortfall on the applicable
Distribution Date, to pay all amounts of principal due and payable on this
Note (whether at maturity, on a date fixed for any payment or prepayment
thereof, upon acceleration, or otherwise), as follows: first, to the
payment of all amounts of principal payable on Component A-1 until the
principal balance of such Component has been reduced to zero; second, to
the payment of all amounts of principal payable with respect to Component
A-2 until the principal balance of such Component has been reduced to zero;
third, to the payment of all amounts of principal payable with respect to
Component B until the principal balance of such Component has been reduced
to zero; fourth, to the payment of all amounts of principal payable with
respect to Component C until the principal balance of such Component has
been reduced to zero; and fifth, to the payment of all amounts of principal
payable with respect to Component D until the principal balance of such
Component has been reduced to zero; or (B) if there shall exist a P&I
Shortfall on the applicable Distribution Date, then payments to be applied
-3-
<PAGE>
under this paragraph "THIRD" shall be applied first, to the payment
of all amounts of principal due and payable on Components A-1 and A-
2, pro rata, based upon the relative principal balances of such
--- ----
Components on such date, to be applied to the installments of
principal payable with respect to such Components, until the
principal balance of each of such Components has been reduced to
zero. For purposes hereof (i) a "P&I Shortfall" will be deemed to
exist on any Distribution Date if a default in the payment of
principal or interest on this Note has occurred and is continuing on
any Due Date and such default is not cured by the Servicer and/or the
Trustee and (ii) the "Distribution Date" in any given calendar month
shall be the fifth (5th) day of each calendar month or, if such day
is not a Business Day, then the next succeeding Business Day,
commencing on May 5, 1997.
Any Yield Maintenance Payments or Reimbursement Rate or
Default Rate interest payments shall be paid to the Payee and shall be applied
in accordance with the Trust and Servicing Agreement, including Section
3.3(b)(i) thereof.
Assuming that (a) each scheduled payment of principal and
interest is made in full when due hereunder, (b) no principal prepayments are
made, and (c) all other payments that may become due to Payee are paid when due,
application of such payments in the order described above is expected to result
in the Components being repaid in full on the fourth (4th) Business Day
immediately preceding each of the following dates (each such fourth (4th)
Business Day preceding the date set forth below for the applicable Component
being its "Scheduled Component Maturity Date"):
<TABLE>
<CAPTION>
Component Scheduled Component
---------- Maturity Date
-------------
<S> <C>
A-1 August 6, 2007
A-2 May 7, 2012
B May 7, 2012
C May 7, 2012
D May 7, 2012
</TABLE>
(b) Provided that (a) no Event of Default (as that term is
defined in the Mortgages) shall have occurred and be continuing (except, any
Event of Default that will be cured concurrently with a prepayment hereunder by
Maker) and (b) all other amounts due and payable under this Note, the Mortgages
or any other Loan Documents on or before the Due Date on which a prepayment is
being made have been paid in full, Maker shall have the right on any Due Date to
prepay all or any part of the outstanding principal balance of the Loan upon
giving not less than 30 days prior written notice to Payee of its intention to
prepay,
-4-
<PAGE>
which notice shall set forth the date on which the prepayment is to occur (the
"Prepayment Date"); provided, however, that (i) the Payee shall not be required
-------- -------
to accept or apply any prepayment requiring payment of a Yield Maintenance
Payment, as provided in Section 1(c) hereof, unless such prepayment is
accompanied by the payment of such Yield Maintenance Payment, and (ii) if any
legal and other expenses are due and owing to Payee in connection with such
prepayment under the terms of any Loan Document, Payee shall not be required to
accept or apply any prepayment unless the prepayment also is accompanied by the
amount that is due and payable to Payee with respect to such expenses.
Notwithstanding the applications of prepayments of principal in the order of
priority described in paragraph "THIRD" of Section 1(a) hereof, upon any
prepayment of principal, any prepayment of principal shall be applied first, to
reduce the Balloon Payment, until the Balloon Payment has been reduced to zero,
and then, to reduce the scheduled installments of principal as set forth on
Schedule A in the inverse order of their scheduled maturities.
- ----------
(c) If all or any part of the principal amount of the Loan
is prepaid for any reason, whether voluntarily or involuntarily, or after
acceleration of the Loan following the occurrence of an Event of Default, Maker
shall (except in certain circumstances described in the Loan Agreement) be
required to pay a prepayment premium (the "Yield Maintenance Payment") on each
Component to which prepaid principal will be applied, as provided above, which
Yield Maintenance Payment in each case shall be in an amount equal to the
greater of (A) 1% of the amount of the principal prepayment that is to be
applied to the Loan and (B) the present value as of the end of the Interest
Accrual Period of the calendar month immediately preceding the month in which
the prepayment occurs, of a series of payments each equal to the Payment
Differential on each of the remaining Due Dates prior to and including the
Scheduled Component Maturity Date for such Component, after giving effect to the
regularly scheduled payment of principal that is to be made on the Prepayment
Date, discounted at the Reinvestment Yield provided that no Yield Maintenance
Payment shall be required in connection with (a) certain prepayments made in
connection with a release of a Mortgaged Property as contemplated by Section
2.2.3 of the Loan Agreement, (b) prepayments made in connection with a casualty
or condemnation loss pursuant to Paragraph 3 of a Mortgage, and (c) prepayments
-----------
made on or after the date that is six months prior to the Maturity Date.
Within 10 days of receipt of notice from Maker regarding a
proposed prepayment, Payee shall notify Maker of the amount and basis of
determination of each Yield Maintenance Payment promptly upon determining the
Treasury Rate, as contemplated below.
For purposes of this Section 1(c), the following terms
shall have the meanings ascribed to them below:
"Applicable Margin" means, for purposes of determining the
Reinvestment Yield, (a) 10 basis points (0.10%) for any prepayment
that is applied to reduce the principal balance of Component A-1,
Component A-2 or Component B, (b) 20 basis points (0.20%) for any
prepayment that is applied to reduce the principal balance of
Component C, and (c) 25 basis points (0.25%) for any prepayment that
is applied to reduce the principal balance of Component D.
-5-
<PAGE>
"Payment Differential" means, for any Component the
principal balance of which will be reduced by application of a
prepayment, an amount equal to (x) (i) the interest rate applicable
to such Component minus (ii) the Reinvestment Yield, divided by (y)
12, and multiplied by (z) the amount of the principal prepayment that
is to be applied to reduce the principal balance of such Component.
"Reinvestment Yield" for any Component is the Treasury Rate
plus the Applicable Margin, converted to a monthly compounded nominal
annual yield.
"Treasury Rate" is equal to the lesser of (A) the annual
yield on the United States Treasury issue (primary issue) with a
maturity date closest to the Scheduled Component Maturity Date for
the Component being repaid and (b) the yield on the United States
Treasury issue (primary issue) with a maturity equal to the remaining
weighted average life of the principal amount of the Component being
repaid, with each such yield being based on the bid price for such
issue as published in The Wall Street Journal on the date that is 14
-----------------------
days prior to (x) the applicable Prepayment Date set forth in the
notice of prepayment provided by the Maker or (y) the date of
acceleration of this Note by Payee (or, if such bid price is not
published on any such date, the next preceding date on which such bid
price is so published).
For purposes of calculating the Payment Differential, all regularly scheduled
payments of principal due on a Prepayment Date will be deemed to have been
applied to the Components in the order specified above before any prepayments of
principal are applied.
If any payment is due on a day that is not a Business Day,
the date for payment thereof shall be extended to the next Business Day, without
additional interest, except that, if the Maturity Date is not a Business Day,
the date for payment of the Balloon Payment shall be extended to the next
succeeding Business Day, and any interest payable thereon shall accrue and be
payable for such extension of time at the applicable rates specified above.
2. This Note is evidence of the Loan made by Payee to
Maker contemporaneously herewith. This Note is secured by (a) the Mortgages, (b)
the Loan Agreement, and (c) the other Loan Documents.
3. If any sum payable under this Note is not paid on or
before ten (10) days following the date on which it is due, Maker shall pay to
Payee upon demand an amount (the "Late Charge") equal to the lesser of three
percent (3%) of such unpaid sum or the maximum amount permitted by applicable
law in order to defray a portion of the expenses incurred by Payee in handling
and processing such delinquent payment and to compensate Payee for the loss of
the use of such delinquent payment.
4. The whole of the principal sum of this Note, together
with all interest accrued and unpaid thereon and all other sums due under the
Loan Documents (all such sums hereinafter collectively referred to as the
"Debt"), or any portion thereof, shall without notice become immediately due and
payable at the option of Payee if any payment required in this Note is not paid
on the date on which it is due or upon the happening of any other Event of
-6-
<PAGE>
Default. In the event that it should become necessary to employ counsel to
collect or enforce the Debt or to protect or foreclose the security therefor,
Maker also shall pay on demand all costs of collection incurred by Payee,
including attorneys' fees and costs reasonably incurred for the services of
counsel whether or not suit be brought.
5. Maker agrees that (a) if any amount payable under this
Note, the Mortgages, the Loan Agreement or any other Loan Document is not paid
when such payment is due, Maker shall pay interest with respect to such amount
at a rate (the "Reimbursement Rate") equal to the greater of (i) the "Prime
Rate" of interest, as published from time to time in the Money Rates section of
the Wall Street Journal (the "Prime Rate") plus one percent (1%), and (ii) the
Weighted Average Interest Rate in effect from time to time plus two percent
(2%), upon demand from time to time, to the extent permitted by applicable law,
from the date such amount was due until such amount has been paid by Maker, and
(b) upon the occurrence of any Event of Default and the earlier to occur of (i)
the date which is ninety (90) days following the occurrence of such Event of
Default, or (ii) the date on which Payee accelerates the whole of the principal
sum of this Note, together with all interest accrued and unpaid thereon and any
other amounts owing hereunder, Maker shall pay interest at a rate (the "Default
Rate") equal to the lesser of (a) the greater of (i) the Weighted Average
Interest Rate in effect from time to time plus four percent (4%), and (ii) the
Prime Rate plus one percent (1%) and (b) the maximum rate permitted by
applicable law with respect to the unpaid principal sum hereunder, upon demand
from time to time. Notwithstanding the foregoing, if the unpaid principal sum of
this Note or any other amount required to be paid on the Maturity Date or upon
acceleration of the Loan is not paid when due, then interest shall thereafter be
computed and paid at the Default Rate without notice to Maker. This charge shall
be added to the Debt and shall be secured by the Mortgages. This paragraph,
however, shall not be construed as an agreement or privilege to extend the date
of the payment of the Debt, nor as a waiver of any other right or remedy
accruing to Payee by reason of the occurrence of any Event of Default.
6. Maker shall cause all Rents (as defined in the
Mortgages) and other sums collected from, or arising with respect to, each
Mortgaged Property to be deposited in the deposit account (the "Deposit
Account") established pursuant to the Cash Management Agreement of even date
herewith by and between Maker, Payee and Servicer. Such Rents and other sums
shall be periodically disbursed by the Servicer in accordance with the terms and
provisions of the Cash Management Agreement.
7. It is expressly stipulated and agreed to be the intent
of Maker and Payee at all times to comply with applicable state law or
applicable United States federal law (to the extent that it permits Payee to
contract for, charge, take, reserve, or receive a greater amount of interest
than under state law) and that this paragraph shall control every other covenant
and agreement in this Note and the other Loan Documents. If the applicable law
(state or federal) is ever judicially interpreted so as to render usurious any
amount called for under this Note or under any of the other Loan Documents, or
contracted for, charged, taken, reserved, or received with respect to the Debt,
or if Payee's exercise of the option to accelerate the Maturity Date, or if any
prepayment by Maker results in Maker having paid any interest in
-7-
<PAGE>
excess of that permitted by applicable law, then it is Payee's express intent
that all excess amounts theretofore collected by Payee shall be credited on the
principal balance of the Components and all other Debt in the order specified
above and the provisions of this Note and the other Loan Documents immediately
be deemed reformed and the amounts thereafter collectible hereunder and
thereunder reduced, without the necessity of the execution of any new documents,
so as to comply with the applicable law, but so as to permit the recovery of the
fullest amount otherwise called for hereunder or thereunder. All sums paid or
agreed to be paid to Payee for the use, forbearance, or detention of the Debt
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated, and spread throughout the full stated term of the Debt until payment
in full so that the rate or amount of interest on account of the Debt does not
exceed the maximum lawful rate from time to time in effect and applicable to the
Debt for so long as the Debt is outstanding. Notwithstanding anything to the
contrary contained herein or in any of the other Loan Documents, it is not the
intention of Payee to accelerate the maturity of any interest that has not
accrued at the time of such acceleration or to collect unearned interest at the
time of such acceleration, it being agreed and acknowledged by the Maker that
the Yield Maintenance Payment is intended to compensate Payee for the loss of
the benefit of its bargain in respect of the agreed upon interest payments
relative to available reinvestment at the time of a voluntary or involuntary
prepayment hereunder.
8. This Note may not be modified, amended, waived,
extended, changed, discharged or terminated orally or by any act or failure to
act on the part of Maker or Payee, but only by an agreement in writing signed by
the party against whom enforcement of any modification, amendment, waiver,
extension, change, discharge or termination is sought. Whenever used, the
singular number shall include the plural, the plural the singular, and the words
"Payee" and "Maker" shall include their respective successors, assigns, heirs,
executors and administrators. If Maker consists of more than one person or
party, the obligations and liabilities of each such person or party shall be
joint and several.
9. Maker and all others who may become liable for the
payment of all or any part of the Debt do hereby severally waive presentment and
demand for payment, notice of dishonor, protest, notice of protest, notice of
nonpayment, notice of intent to accelerate the maturity hereof and of
acceleration. No release of any security for the Debt or any person liable for
payment of the Debt, no extension of time for payment of this Note or any
installment hereof, and no alteration, amendment or waiver of any provision of
the Loan Documents made by agreement between Payee and any other person or party
shall release, modify, amend, waive, extend, change, discharge, terminate or
affect the liability of Maker, and any other person or party who may become
liable under the Loan Documents for the payment of all or any part of the Debt.
10. Notwithstanding anything to the contrary contained
herein, any claim based on or in respect of any liability of Maker hereunder or
under the Mortgages or any other Loan Document shall be enforced only against
the Properties and any other collateral now or hereafter given to secure the
Loan and not against any other assets, properties or funds of Maker; provided,
--------
however, that the liability of Maker for loss, costs or damage arising out of
- -------
the following matters shall not be limited solely to the Properties and other
collateral now or
-8-
<PAGE>
hereafter given to secure this Note but shall include all of the assets,
properties and funds of Maker: (i) any intentional misrepresentation by Maker of
a fact or circumstance which would affect in any material manner the repayment
of this Note or the ability of Payee to collect on this Note or any fraud on the
part of Maker concerning any Property, this Note or any other matter relating to
the indebtedness evidenced by this Note; (ii) any failure by Maker to apply the
income, rents and profits of the Properties as required by this Note, the
Mortgages, the Loan Agreement or any other Loan Document; (iii) any
misapplication by Maker of insurance proceeds, condemnation awards, security
deposits or trust funds in violation of applicable law or the provisions of the
Mortgages, the Loan Agreement or any other Loan Document; and (iv) failure of
Maker to pay all real estate taxes and assessments prior to the date on which
such payments become delinquent. Nothing herein shall be deemed (a) to impair
the right of Payee to obtain a deficiency judgment in any action or proceeding
in order to preserve its rights and remedies, including, without limitation,
foreclosure, non-judicial foreclosure, or the exercise of a power of sale, under
any of the Mortgages; (b) to be a waiver of any right which Payee may have under
any bankruptcy law of the United States or the State in which the Mortgaged
Property is located to file a claim for the full amount of the Loan or to
require that all of the collateral securing the Loan shall continue to secure
all of the indebtedness due hereunder, under the Mortgages and the other Loan
Documents; (c) to impair the validity of the indebtedness secured by the
Mortgages; (d) to impair the right of Payee as beneficiary or secured party
under the Mortgages to commence an action to foreclose any lien or security
interest; or (e) to modify, diminish or discharge the liability of any guarantor
under any guaranty. Nothing herein shall be deemed to be a waiver of any right
which Payee may have under Section 506(a), 506(b), 1111(b) or any other
provisions of the U.S. Bankruptcy Code to file a claim for the full amount of
the indebtedness secured by the Mortgages or to require that all collateral
shall continue to secure all of the indebtedness owing to Payee in accordance
herewith and with the Loan Documents.
11. Maker (and the undersigned representative of Maker, if any)
represents that Maker has full power, authority and legal right to execute,
deliver and perform its obligations pursuant to this Note, the Mortgages and the
other Loan Documents and that this Note, the Mortgages and the other Loan
Documents constitute valid and binding obligations of Maker.
12. All notices or other communications required or permitted to be
given pursuant hereto shall be given in the manner specified in the Mortgages
directed to the parties at their respective addresses as provided therein.
13. MAKER HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE
TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE
EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THE LOAN
DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION
THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND
VOLUNTARILY BY MAKER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE
AND EACH ISSUE AS TO WHICH
-9-
<PAGE>
THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. PAYEE IS HEREBY AUTHORIZED
TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF
THIS WAIVER BY MAKER.
14. In the event of the loss, theft or destruction of this Note, upon
Maker's receipt of a reasonably satisfactory indemnification agreement executed
in favor of Maker by Payee or in the event of the mutilation of this Note, upon
the surrender of the mutilated Note by Payee to Maker, Maker shall execute and
deliver to Payee a new note in form and content identical to this Note in lieu
of the lost, stolen, destroyed or mutilated Note.
15. All payments under this Note shall be paid by wire transfer of
immediately available funds to such designated bank or place, or in such other
manner, as Payee may reasonably specify in writing from time to time.
16. This Note shall be governed by and construed in accordance with
the laws of the State of New York and the applicable laws of the United States
of America.
-10-
<PAGE>
Maker has duly executed this Note the day and year first above written.
MAKER:
FIRST CHOICE PROPERTIES CORP.,a
Delaware corporation
By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------
Pay to the order of LaSalle National Bank,
as Trustee in trust for Holders of QI Capital
Corp. Multiclass Mortgage Pass-Through
Certificates, Series 1997-1 without recourse.
QI CAPITAL CORP., a Delaware corporation
By:
---------------------------------------
Name:
---------------------------------
Title:
--------------------------------
As to Louisiana:
- ---------------
NE VARIETUR for identification with
an Act of Mortgage before me, Notary,
this ________ day of April, 1997
- ------------------------------------------
Notary Public
-11-
<PAGE>
Exhibit 10.20
LOAN AGREEMENT
Dated as of April 22, 1997
By and Between
FIRST CHOICE PROPERTIES CORP., a Delaware corporation
as Borrower
AND
QI CAPITAL CORP., a Delaware corporation
as Lender
<PAGE>
LOAN AGREEMENT
--------------
THIS LOAN AGREEMENT, dated as of April 22, 1997, by and between
QI CAPITAL CORP., a Delaware corporation, having an address at 10750 Columbia
Pike, Silver Spring, Maryland 20901, together with its successors and assigns,
including, without limitation, the Loan Purchaser (as hereinafter defined),
as lender ("Lender"), and FIRST CHOICE PROPERTIES CORP., a Delaware corporation
------
("Borrower"), having an address at 10750 Columbia Pike, Silver Spring,
--------
Maryland 20901.
All capitalized terms used herein shall have the respective meanings
set forth in Section 1 hereof.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Borrower desires to obtain the Loan from Lender;
WHEREAS, Lender is willing to make the Loan to Borrower, subject to
and in accordance with the terms of this Agreement and the other Loan Documents;
WHEREAS, the Loan will be secured by, inter alia, first priority
----- ----
security interests on the fee and/or leasehold estates in and to thirty six (36)
Properties;
WHEREAS, Lender's interest in the Loan may be purchased by the Loan
Purchaser on or after the Closing Date; and
WHEREAS, Borrower consents to the transfer described in the preceding
Recital.
NOW, THEREFORE, in consideration of the covenants, agreements,
representations and warranties set forth in this Agreement, and other good and
valuable consideration, the parties hereto hereby covenant, agree, represent and
warrant as follows:
I. DEFINITIONS; PRINCIPLES OF CONSTRUCTION
---------------------------------------
Section 1.1 Definitions.
----------- -----------
For all purposes of this Agreement, except as otherwise expressly
required or unless the context clearly indicates a contrary intent:
"Accounting Year" shall mean the most recent twelve (12) complete
---------------
months.
"Adjustment Date" shall mean the first day of each calendar year.
---------------
"Affected Property" shall have the meaning specified in Section 2.2.3
----------------- -------------
hereof.
<PAGE>
"Affiliate" shall mean, as to any Person, any other Person that,
---------
directly or indirectly, is in control of, is controlled by or is under common
control with such Person or is a director or officer of such Person or of an
Affiliate of such Person.
"Agreement" shall mean this Loan Agreement, as the same may be
---------
amended, restated, replaced, supplemented or otherwise modified from time to
time.
"Allocated Loan Amount" shall mean, with respect to each Property,
---------------------
that portion of the Principal Amount allocated by Lender to such Property, as
set forth on Schedule A annexed hereto. Following the Closing Date, the initial
----------
Allocated Loan Amount will be adjusted in connection with each reduction in the
principal balance of the Loan, whether as a result of scheduled amortization,
prepayment or otherwise (including in connection with any release, casualty or
condemnation), such that the Allocated Loan Amount for each remaining Property
after any such reduction shall equal the product of (x) a fraction the numerator
of which is the Allocated Loan Amount of such Property immediately before such
adjustment and the denominator of which is the aggregate Allocated Loan Amount
immediately before such adjustment for all of the Properties (other than any
being released concurrently with such reduction), multiplied by (y) the
outstanding principal balance of the Loan immediately after such reduction in
the principal balance of the Loan; provided, however, that any reduction in the
principal balance of the Loan resulting from a prepayment made in connection
with the release of or a casualty or condemnation relating to a specified
Property shall first reduce the Allocated Loan Amount for such Property until
the Allocated Loan Amount for the affected Property is reduced to zero, prior to
adjustment of the Allocated Loan Amount for all other Properties as described
above.
"Base Year Index" shall mean the CPI as it exists on the date hereof.
---------------
"Base Year Trade Payable Amount" shall have the meaning specified in
------------------------------
Section 3.1(ii)(d) hereof.
- ------------------
"Borrower" shall have the meaning specified in the first Paragraph
--------
hereof.
"Business Day" shall mean any day other than (i) a Saturday or a
------------
Sunday, or (ii) a day on which federally insured depository institutions in New
York City or the cities in which the principal servicing officer of the Servicer
or the corporate trust office of the Trustee are authorized or obligated by law,
governmental decree, or executive order to be closed.
"Cash Management Agreement" shall mean that certain Cash Management
-------------------------
Agreement of even date herewith, by and between Borrower and Lender.
"Certificate" or "Certificates" shall mean any certificate or
----------- ------------
certificates evidencing interests in the trust to be created pursuant to the
Trust and Servicing Agreement.
"Closing Date" shall mean the date of the closing of the Loan.
------------
"Collateral Security Documents" shall mean any right, document or
-----------------------------
instrument given as security for the Note, including, without limitation, the
Mortgages and the
2
<PAGE>
Assignments of Leases, as the same may be amended, restated, replaced,
supplemented or otherwise modified from time to time.
"CPI" shall mean the Consumer Price Index for the Metropolitan
---
Washington, D.C. Area now known as the United States Bureau of Labor Statistics,
Consumer Price Index, for Urban Wage Earners and Clerical Workers, all items
(1982-84 = 100).
"Debt Service" shall mean, for the applicable period, all payments of
------------
principal or interest made by Borrower to Lender in accordance with the terms of
the Note with respect to such period.
"Debt Service Coverage Ratio" shall mean, with respect to any DSCR
---------------------------
Determination Date, the ratio of (a) the aggregate Net Operating Income for all
of the Properties then remaining encumbered by a Mortgage determined on an
accrual basis for the applicable Accounting Year immediately preceding such DSCR
Determination Date to (b) the scheduled payments of principal and interest
(assuming no prepayments or Releases except with respect to the Property for
which Borrower is then seeking a Release) under the Note for the twelve (12)
calendar month period immediately following such DSCR Determination Date.
"Depositor" shall mean Lender, as depositor under the Trust and
---------
Servicing Agreement.
"DSCR Determination Date" shall mean the date which is forty five (45)
-----------------------
days prior to the date on which Borrower has requested that a Release of a
Property is to occur pursuant to Section 2.2.1 below.
-------------
"Engineering Reports" shall mean, as to all Properties, those certain
-------------------
reports on the structural, electrical, mechanical and engineering components of
each of the Properties delivered to, or obtained by, Lender in connection with
the making of the Loan.
"Environmental Indemnity" shall mean the certain Hazardous Materials
-----------------------
Indemnity Agreement of even date herewith, by Borrower in favor of Lender with
respect to environmental conditions on the Properties, as the same may be
amended, restated, replaced, supplemented or otherwise modified from time to
time.
"Environmental Reports" shall mean, as to all Properties, those
---------------------
certain Phase I and Phase II environmental site assessments of the Properties
previously delivered to, or obtained by, Lender, in connection with the making
of the Loan.
"Event of Default" shall have the meaning specified in Section 5.1
---------------- -----------
hereof.
"Excess" shall have the meaning specified in Section 2.2.2 hereof.
------ -------------
"Expenses" shall mean, with respect to each Property, all ordinary and
--------
customary expenses payable by the Tenant or Manager of such Property in the
ordinary course of operating such Property as a hotel, as determined on an
accrual basis in accordance with GAAP consistently applied, including, without
limitation, payments made into the applicable
3
<PAGE>
FF&E Reserve Fund (as that term is defined in the Mortgages), but excluding,
however, Debt Service, the portion of the Base Management Fee (as defined in the
Management Agreements) not subordinated to the payment of the Loan, capitalized
expenditures for capital improvements and non-cash items such as depreciation.
"Franchise Agreement" shall mean, with respect to each Property, that
-------------------
certain by and between Borrower and Choice Hotels
-------------------------
Franchising, Inc. ("Franchisor").
----------
"GAAP" shall mean generally accepted accounting principles in the
----
United States of America as of the date of the applicable financial report.
"Governmental Authority" shall mean any court, board, agency,
----------------------
commission, office or authority of any nature whatsoever for any governmental
unit (federal, state, county, district, municipal, city or otherwise) whether
now or hereafter in existence.
"Ground Lease" shall mean those certain ground leases more
------------
specifically identified on Schedule B annexed hereto.
----------
"Improvements" shall have the meaning specified in the Mortgages with
------------
respect to the Properties.
"Indebtedness" shall mean the indebtedness in the original principal
------------
amount set forth in, and evidenced by, the Note, together with all other
obligations and liabilities of Borrower due or to become due to Lender pursuant
to the Note, this Agreement or any other Loan Document, including, without
limitation, all interest thereon.
"Independent Director" shall have the meaning specified in Section
-------------------- -------
3.1(ii)(q) hereof.
- ----------
"Legal Requirements" shall mean all federal, state, county, municipal
------------------
and other governmental statutes, laws, rules, orders, regulations, ordinances,
judgments, decrees and injunctions of Governmental Authorities to which any
Property or any part thereof or the construction, use, alteration or operation
thereof, or any part thereof, is subject, including, without limitation, all
zoning, land use, building, and environmental statutes, laws, codes, resolutions
and ordinances, whether now or hereafter enacted and in force, and all permits,
licenses, variances and authorizations and regulations relating thereto, and all
covenants, agreements, restrictions and encumbrances contained in any
instruments, either of record or known to Borrower, at any time in force
affecting any Property or any part thereof, including, without limitation, any
which may (i) require repairs, modifications or alterations in or to any
Property or any part thereof or (ii) in any way limit the use and enjoyment
thereof.
"Lender" shall have the meaning specified in the first Paragraph
------
hereof.
"Lien" shall mean any mortgage, deed of trust, deed to secure debt or
----
other such security agreement affecting any Property or any portion thereof.
4
<PAGE>
"Loan" shall mean the $117,500,000.00 loan, evidenced by the Note,
----
and secured by the Mortgages and the other Collateral Security Documents, made
by Lender to Borrower pursuant hereto and to the Note.
"Loan Documents" shall mean, collectively, this Agreement, the Note,
--------------
the Mortgages, the Environmental Indemnity, the Cash Management Agreement and
the other Collateral Security Documents and any other document executed or
delivered by or on behalf of Borrower in connection with the Loan.
"Loan Purchaser" shall mean any purchaser of the Loan from
--------------
the Lender, such purchaser's designee, the respective successors and/or assigns
of such purchaser or designee and any subsequent holder of the Note.
"Management Agreements" shall mean, as to each Property, that certain
---------------------
Management Agreement dated of even date herewith by and between Borrower and
Manager.
"Management Fees" shall mean the fees paid to the Manager pursuant to
---------------
the terms of the Management Agreements.
"Manager" shall mean Beltway Management Company, a Delaware
-------
corporation.
"Material Adverse Effect" shall have the meaning specified in Section
----------------------- -------
3.1(i)(dd) hereof.
- ----------
"Maturity Date" shall have the meaning specified in the Note.
-------------
"Mortgages" shall mean those certain mortgages, deeds of trust or
---------
deeds to secure debt dated the date hereof, as the same may be amended,
restated, replaced, supplemented or otherwise modified from time to time, which
Mortgages have been executed by Borrower and, where applicable, Boulevard Motel
Corp. ("Boulevard"), Comfort California, Inc., or Bowling Green Inn-Brandywine,
---------
Inc., in favor of, or for the benefit of, Lender, each Mortgage encumbering the
fee and/or ground lessee's leasehold estate in the respective Property to which
it applies, as more specifically set forth therein.
"Net Operating Income" shall mean, with respect to each Property and
--------------------
any period, the (a) Total Hotel Sales for such period less (b) the Expenses for
the same period.
"Net Sales Proceeds" shall mean, with respect to a Property sold by
------------------
Borrower, the total compensation received by Borrower with respect to such sale
less reasonable and customary costs, fees and expenses incurred by Borrower in
- ----
connection with such sale.
"Note" shall mean that certain Promissory Note of even date herewith,
----
made by Borrower in favor of Lender or its assigns, as the same may be amended,
restated, replaced, supplemented or otherwise modified from time to time.
5
<PAGE>
"Officer's Certificate" shall mean a certificate delivered to Lender
---------------------
by Borrower which is signed by an officer who serves as Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, Treasurer, Controller,
President or Vice President of Borrower.
"Percentage of CPI Increase" shall mean, with respect to, and as
--------------------------
calculated effective as of, each Adjustment Date, the percentage, if any, by
which the CPI existing as of such Adjustment Date exceeds the Base Year Index.
"Permits" shall have the meaning specified in Section 3.1(i)(s)
------- -----------------
hereof.
"Permitted Exceptions" shall have the meaning specified in Section
-------------------- -------
3.1(i)(a) hereof.
- ---------
"Person" shall mean any individual, corporation, partnership, joint
------
venture, estate, trust, unincorporated association, any federal, state, county
or municipal government or any bureau, department or agency thereof and any
fiduciary acting in such capacity on behalf of any of the foregoing.
"Principal Amount" shall mean the outstanding principal balance of
----------------
the Loan.
"Private Placement Memorandum" shall mean that certain Private
----------------------------
Placement Memorandum dated April 16, 1997 prepared and issued in connection with
the issuance of the Certificates.
"Proceeds" shall have the meaning specified in Section 2.2.2 hereof.
-------- -------------
"Property" or "Properties" shall mean the parcel or parcels, as the
-------- ----------
case may be, of real property, and the Improvements thereon owned or ground
leased by Borrower and encumbered by the Mortgages pertaining to same, together
with all rights and property of Borrower pertaining to such real property and
Improvements, as more particularly described in the granting clauses of the
Mortgages and referred to therein as the "Mortgaged Property" or the "Trust
Property", as the case may be.
"Property Agreements" shall have the meaning specified in Section
------------------- -------
3.1(i)(y) hereof.
- ---------
"Qualified Manager" shall have the meaning specified in Section 4.2
----------------- -----------
hereof.
"Rating Agency" shall mean Standard & Poor's Ratings Services, a
-------------
division of the McGraw-Hill Companies, Inc.
"Release" shall have the meaning specified in Section 2.2.1 hereof.
------- -------------
"Release Payment" shall have the meaning specified in Section 2.2.1
--------------- -------------
hereof.
"Servicer" shall mean the entity described as such in the Trust and
--------
Servicing Agreement or its successor in interest, or if any successor servicer
is appointed pursuant to the Trust and Servicing Agreement, such successor
servicer.
6
<PAGE>
"State" shall mean, with respect to a given Property, the State or
-----
Commonwealth in which such Property or any part thereof is located.
"Substitute Management Agreement" shall have the meaning specified in
-------------------------------
Section 4.2 hereof.
- -----------
"Surveys" shall mean the ALTA surveys of the Properties certified and
-------
delivered to Lender in connection with the Loan.
"Title Policies" shall mean the title insurance policies issued, or
--------------
to be issued, to Lender by Commonwealth Land Title Insurance Company, insuring
the liens of the Mortgages.
"Total Hotel Sales" shall mean, with respect to each Property, any
-----------------
and all sums derived from the operation of the Property as a hotel, determined
on an accrual basis after deducting all allowances for rebates and adjustments,
whether cash or credit, derived directly or indirectly from any source
including, without limitation, (i) the amounts received as payment for the use
and occupancy of all meeting rooms, banquet function rooms, and public areas,
(ii) all revenues derived from the sale of food and other edibles in
restaurants, lounges, meeting rooms, banquet rooms, guest rooms and any other
locations at the Property, (iii) all revenues derived from the sale of liquor,
beverages, and other potables in restaurants, lounges, meeting rooms, banquet
rooms, guest rooms and any other locations at the Property, (iv) all revenues
derived from the use of telephones in guest rooms or in public areas and (v) all
revenues derived from leases, subleases, concessions, vending, valet services,
banquet extras, movies or income of a similar or related nature, but excluding
any proceeds received as a result of a casualty or condemnation loss.
"Transferee" shall have the meaning specified in Section 2.3 hereof.
---------- -----------
"Trust and Servicing Agreement" shall mean that certain Trust and
-----------------------------
Servicing Agreement dated as of the date hereof, pursuant to which the Loan is
being assigned to a trustee in trust and one or more classes of Certificates are
being issued representing beneficial ownership interests in such trust.
"Trustee" shall mean the entity described as such in the Trust and
-------
Servicing Agreement or its successor in interest, or if any successor trustee is
appointed pursuant to the Trust and Servicing Agreement, such successor trustee.
"Yield Maintenance Payment" shall have the meaning ascribed thereto
-------------------------
in the Note.
Section 1.2 Principles of Construction.
--------------------------------------
All references to sections, schedules and exhibits are to sections,
schedules and exhibits in or to this Agreement unless otherwise specified.
Unless otherwise specified, the words "hereof," "herein" and "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this
7
<PAGE>
Agreement. Unless otherwise specified, all meanings attributed to defined terms
herein shall be equally applicable to both the singular and plural forms of the
terms so defined. All accounting terms not specifically defined herein shall be
construed in accordance with GAAP, as modified herein.
II. GENERAL TERMS
-------------
Section 2.1 Loan Commitment; Disbursement to Borrower.
----------- -----------------------------------------
2.1.1 The Loan. Subject to and upon the terms and conditions set
--------
forth herein, Lender hereby agrees to make the Loan to Borrower on the Closing
Date, in the original principal amount set forth in the Note, which Loan shall
mature on the Maturity Date. Borrower hereby agrees to accept the Loan on the
Closing Date, subject to and upon the terms and conditions set forth herein.
2.1.2 Disbursement to Borrower. Borrower may request and receive only
------------------------
one borrowing in respect of the Loan and any amount borrowed and repaid in
respect of the Loan may not be reborrowed. Borrower shall, on the Closing Date,
receive the Loan, subject to the direction given by Borrower as to the
application of Loan proceeds.
2.1.3 The Note. The Loan shall be evidenced by the Note, in the
--------
original principal amount of the Loan. The Loan shall bear interest as provided
in the Note, and shall be subject to the payment of interest and the repayment
and prepayment of the Principal Amount as provided for in the Note. The Note
shall be entitled to the benefits of this Agreement and shall be secured by the
Mortgages and the other Collateral Security Documents.
Section 2.2 Releases.
----------- --------
2.2.1 Permitted Releases. Except as otherwise permitted by Section
------------------ -------
2.2.2 and Section 2.2.3 hereof, and notwithstanding anything to the contrary set
- ----- -------------
forth in the Mortgages, Borrower may obtain the release of any Property from the
lien of the Mortgage encumbering such Property (a "Release") upon the following
-------
terms and conditions:
(a) Borrower shall notify Lender in writing at least thirty (30)
days prior to the date on which Borrower would like to have the
Release take place, such notification to include an Officer's
Certificate stating that the Debt Service Coverage Ratio as of
the applicable DSCR Determination Date for the Properties
remaining after such Release is not less than the greater of
(i) the Debt Service Coverage Ratio as of the date hereof, and
(ii) the Debt Service Coverage Ratio as of the DSCR
Determination Date for all the Properties immediately prior to
such Release, such Officer's Certificate to have attached
thereto the unaudited operating statements for each Property
(including the Property to be Released) with respect to
8
<PAGE>
the Accounting Year immediately preceding the applicable DSCR
Determination Date;
(b) Lender shall have received from Borrower a payment in reduction
of the Principal Amount (a "Release Payment") equal to at least
---------------
one hundred and twenty five percent (125%) of the Allocated
Loan Amount for the applicable Property;
(c) Lender shall have received the Yield Maintenance Payment due
from Borrower with respect to the payment by Borrower to Lender
of the Release Payment;
(d) there shall exist, as of the applicable Release date, no Event
of Default under, and as that term is defined in, the
Mortgages;
(e) Lender shall have received in writing confirmation from the
Rating Agency to the effect that such Release will not result
in a downgrade, withdrawal or qualification of the rating then
in effect for the Certificates, together with such legal
opinions as may be reasonably requested by the Rating Agency;
(f) Lender shall have received written assurance from Borrower that
such Release will not adversely affect the classification of
the Trust REMIC (as defined in the Trust and Servicing
Agreement) as a REMIC, or the remaining portion of the Trust
Fund as a grantor trust which is not taxable as a mortgage
pool;
(g) at the time of the Release, Borrower shall transfer its
interest in the Property for which the Release has been
requested to an Affiliate of Borrower or other Person not a
party to the Loan Documents; and
(h) Lender shall have been reimbursed for all reasonable costs and
expenses (including without limitation reasonable legal fees
and Rating Agency fees) incurred by it in considering said
Release, said reasonable costs and expenses to be paid by
Borrower to Lender regardless of whether the Release takes
place.
2.2.2 Release of Property Following Casualty or Condemnation Loss.
-----------------------------------------------------------
With respect to any Property (i) which has had fifty percent (50%) or more of
the Improvements located thereon taken in condemnation or destroyed by a
casualty loss, and Borrower is unable to, or has elected not to, restore or
repair such applicable Property, or (ii) which has had less than fifty percent
(50%) of the Improvements located thereon taken in condemnation or destroyed in
a casualty loss, and Borrower, after exercising good faith, diligent efforts has
reasonably determined that it will be unable to comply with the requirements set
forth in Section 3(c)(i) of the applicable Mortgage, Borrower shall, as provided
---------------
for in Section 3(c)(ii) of the Mortgages, deliver to Lender all casualty loss
----------------
insurance proceeds or condemnation proceeds paid to or received by Borrower with
respect to such casualty loss or condemnation
9
<PAGE>
(the "Proceeds"). In connection therewith, Borrower may obtain a Release of such
--------
Property from the lien of the Mortgage encumbering such Property provided that
such Proceeds paid to Lender are (x) with respect to a Property suffering a
casualty or condemnation loss of the magnitude referenced in clause (i) of the
immediately preceding sentence, at least equal to the Allocated Loan Amount for
the applicable Property, and (y) with respect to Property suffering a casualty
or condemnation loss of the magnitude referenced in clause (ii) of the
immediately preceding sentence, at least equal to one hundred and twenty five
percent (125%) of the Allocated Loan Amount for the applicable Property, and
provided further, that at the time of such Release Borrower shall transfer its
interest in the Property for which the Release has been requested to an
Affiliate of Borrower or other Person not a party to the Loan Documents. To the
extent that the Proceeds delivered to Lender exceed the Allocated Loan Amount or
one hundred and twenty five percent (125%) of the Allocated Loan Amount, as
applicable, such excess portion (the "Excess") shall be applied by Lender in
------
reduction of the Indebtedness and the Allocated Loan Amounts of each of the
remaining Properties shall be decreased by an amount equal to, as to each
remaining Property, the product of (1) the Excess, multiplied by (2) a fraction,
the numerator of which is the Allocated Loan Amount for such Property and the
denominator of which is the aggregate of all Allocated Loan Amounts of all
Properties (except the Property being released pursuant hereto). In the event
that the Proceeds paid to Lender with respect to the applicable Property are
less than the Allocated Loan Amount or one hundred and twenty five percent
(125%) of the Allocated Loan Amount, as applicable, Borrower may obtain a
Release of such Property from the lien of the Mortgage encumbering such Property
if Lender shall have received from Borrower a payment (in addition to the
Proceeds) equal to the difference between (i) the Allocated Loan Amount or one
hundred twenty five percent (125%) of the Allocated Loan Amount, as applicable,
for the applicable Property less (ii) the Proceeds (net of expenses incurred by
Lender in collecting such proceeds) previously delivered to Lender. No Yield
Maintenance Premium shall be due in connection with any prepayments made
pursuant to this Section 2.2.2.
-------------
2.2.3 Releases Following Certain Events of Default. Notwithstanding
--------------------------------------------
anything to the contrary set forth in the Mortgages, Borrower may, following the
occurrence of an Event of Default which is attributable to an identifiable
Property (an "Affected Property") being in violation of an Environmental Law (as
-----------------
such term is defined in the Environmental Indemnity), obtain the Release of any
such Affected Property from the lien of the Mortgage encumbering such Affected
Property upon and subject to the following terms and conditions:
(a) Borrower shall notify Lender in writing at least thirty (30)
days prior to the date on which Borrower would like to have the
Release take place;
(b) the event or occurrence which resulted in the applicable
Property being in violation of an Environmental Law must not
have resulted from the actions or omissions subsequent to the
date hereof by Borrower or by an Affiliate Borrower;
(c) Lender shall have received from Borrower a Release Payment
equal to the greater of (i) the Allocated Loan Amount for the
applicable Affected Property, and (ii) the Net Sales Proceeds
received by Borrower from the
10
<PAGE>
sale of the Affected Property in the event that the Affected
Property is sold by Borrower at the time of the Release thereof
or at any time within six (6) months following such Release
(the "Release Sale Proceeds"); provided however, that if the
--------------------- ----------------
event or occurrence which resulted in the applicable Property
being in violation of an Environmental Law was known to
Borrower or any Affiliate thereof on or prior to the date
hereof, the Release price shall be the greater of (i) the
Release Sale Proceeds, and (ii) 125% of the Allocated Loan
Amount;
(d) Lender shall have received the Yield Maintenance Payment due
from Borrower with respect to the payment by Borrower to Lender
of the amount provided for in Section 2.2.3(c);
----------------
(e) Lender shall have been reimbursed for all reasonable costs and
expenses (including without limitation reasonable legal fees)
incurred by it in effecting said Release, said costs and
expenses to be paid by Borrower to Lender regardless of whether
the Release takes place;
(f) the maximum number of Affected Properties which Borrower shall
be entitled to have released under this Section 2.2.3 shall not
-------------
exceed (i) three (3), and (ii) such lesser number of Properties
which, in the aggregate, have Allocated Loan Amounts which do
not exceed five percent (5%) of the Principal Amount on the
date hereof; and
(g) at the time of the Release, Borrower shall have transferred its
interest in the Property for which the Release has been
requested to an Affiliate of Borrower or other Person not a
party to the Loan Documents.
Section 2.3 Assumption of the Loan.
----------- ----------------------
In connection with the sale by Borrower of all of its right, title
and interest in and to all of the Properties to a unrelated third-party
purchaser (the "Transferee"), Borrower shall have the right to request that
----------
Lender approve (on a one time only basis), a transfer, assignment to, and
assumption by, Transferee of Borrower's obligations under the Note, the
Mortgages and the Loan Documents. Lender's consent to such transfer and
assignment and assumption will not be unreasonably withheld after consideration
of all relevant factors, provided that:
(a) no Event of Default or event which with the giving of notice or
the passage of time would constitute an Event of Default shall
have occurred and remain uncured hereunder or under any of the
Loan Documents;
(b) the Transferee shall be a reputable Person of good character,
creditworthy, with sufficient financial worth considering the
obligations assumed and undertaken, as evidenced by financial
statements and other information reasonably requested by
Lender;
11
<PAGE>
(c) the Transferee shall have sufficient experience in the
ownership and management of properties similar to the
Properties, and Lender shall be provided with reasonable
evidence thereof;
(d) the Transferee must be in compliance with all applicable Rating
Agency requirements for special-purpose bankruptcy remote
entities and must comply with the covenants set forth in
Sections 3.1 (ii) (a) through (aa) below;
----------------------------------
(e) Lender shall have received in writing confirmation from the
Rating Agency to the effect that such transfer, assignment and
assumption will not result in a downgrade, withdrawal or
qualification of the ratings then in effect for the
Certificates, together with such legal opinions as may be
reasonably requested by the Rating Agency;
(f) the transfer shall have been approved in writing by the
Servicer;
(g) the Transferee shall have executed and delivered to Lender an
assumption agreement in form and substance reasonably
acceptable to Lender evidencing such Transferee's agreement to
abide and be bound by the terms of the Note, the Mortgages and
the other Loan Documents, together with such legal opinions and
title insurance endorsements as may be reasonably requested by
Lender;
(h) Lender shall have received evidence reasonably satisfactory to
Lender that all required approvals, if any, to such sale or
transfer shall have been obtained, including, without
limitation, any approvals required under any Ground Lease and
Franchise Agreement, if applicable; and
(i) Lender shall have been reimbursed for all reasonable costs and
expenses (including without limitation reasonable legal fees
and Rating Agency fees) incurred by it in considering,
evaluating and, if applicable, permitting said assignment and
assumption, said reasonable costs and expenses to be paid by
Borrower to Lender regardless of whether the assignment and
assumption takes place.
III. REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
Section 3.1 Borrower's Representations, Warranties and Covenants.
----------- ----------------------------------------------------
(i) Borrower hereby represents and warrants, as to itself and as to
its Properties, that:
(a) Lender has a first priority lien in the Properties subject only
to those matters expressly set forth in the Title Policies (the "Permitted
---------
Exceptions"), and except as to those Properties which are subject to Ground
- ----------
Leases, as described on Schedule B annexed
----------
12
<PAGE>
hereto, Borrower has fee simple title to the Properties, subject only to the
Permitted Exceptions, and has full power and lawful authority to grant, bargain,
sell, convey, assign, transfer and mortgage its interest in each of the
Properties in the manner and form provided for in the applicable Mortgages. As
to those Properties which are subject to Ground Leases, Borrower has good title
in and to the ground lessee's leasehold estate created by such Ground Leases,
subject only to the Permitted Exceptions set forth in the Title Policies, and
Borrower has full power and lawful authority to grant, bargain, sell, convey,
assign, transfer and mortgage its interest in each of such Properties in the
manner and form provided for in the applicable Mortgages. Borrower will preserve
its interest in and title to each of the Properties, subject to the Permitted
Exceptions. As to each Property, the Permitted Exceptions do not and will not
materially and adversely interfere with (i) the ability of Borrower to pay in
full the principal and interest on the Note in a timely manner, or (ii) the use
of the applicable Property for the use currently being made thereof, the
operation of the applicable Property as currently being operated or the value of
the applicable Property. The foregoing warranty of title is stated to survive
the foreclosure of the Mortgages and to inure to the benefit of and to be
enforceable by Lender in the event Lender acquires title to the applicable
Property pursuant to any foreclosure;
(b) Borrower is duly formed and validly existing as a corporation
in the State of Delaware, and is qualified to do business in each state in which
the Properties are located, and in any other jurisdiction in which such
qualification is required by law; all stock and/or shares or other interests in
and to Borrower are one hundred percent (100%) owned and held by Boulevard;
(c) the Private Placement Memorandum is true and correct in all
material respects as of the date thereof and the Private Placement Memorandum
does not omit to state any fact or circumstance necessary to make the statements
contained therein not misleading in any material respect as of the date hereof
or thereof;
(d) the execution, delivery and performance of this Agreement, the
Mortgages, the Note and all of the other Loan Documents have been duly
authorized by all necessary action to be, and are, binding and enforceable
against Borrower in accordance with the respective terms thereof (except as may
be limited by applicable bankruptcy, reorganization, insolvency, moratorium or
any other similar laws affecting generally the enforcement of creditor's rights
as from time to time are in effect) and do not contravene, result in a breach of
or constitute (with or without the giving of notice or the passage of time or
both) a default under the certificate of incorporation or other organizational
documents of Borrower or any contract or agreement of any nature to which
Borrower is a party or by which Borrower or any of its property may be bound and
do not violate or contravene any law, order, decree, rule or regulation to which
Borrower is subject;
(e) Borrower is not required to obtain any consent, approval or
authorization from or to file any declaration or statement with, any
Governmental Authority or agency in connection with or as a condition to the
execution, delivery or performance of this Agreement, the Mortgages, the Note or
the other Loan Documents which has not been so obtained or filed;
13
<PAGE>
(f) Borrower has obtained or made all necessary material (i)
consents, approvals and authorizations and registrations and filings of or with
all Governmental Authorities and (ii) consents, approvals, waivers and
notifications of partners, stockholders, creditors, lessors and other non-
governmental persons and/or entities, in each case, which are required to be
obtained or made by Borrower in connection with the execution and delivery of,
and the performance by Borrower of its obligations under, the Loan Documents and
the nonexistence of which would have a Material Adverse Effect;
(g) Borrower is not an "investment company", or company
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended;
(h) no part of the proceeds of the indebtedness secured hereby will
be used for the purpose of purchasing or acquiring any "margin stock" within the
meaning of Regulations G, T, U or X of the Board of Governors of the Federal
Reserve System or for any other purpose which would be inconsistent with such
Regulations G, T, U or X or any other Regulations of such Board of Governors, or
for any purpose prohibited by legal requirements or by the terms and conditions
of the Loan Documents;
(i) Borrower has filed all federal, state and local tax returns
required to be filed and, to the best of Borrower's knowledge, Borrower has paid
or made adequate provision for the payment of all federal, state and local
taxes, charges and assessments payable by Borrower. Borrower's tax returns
properly reflect the income and taxes of Borrower for the periods covered
thereby, subject only to reasonable adjustments required by the Internal Revenue
Service or other applicable tax authority upon audit;
(j) Borrower is not an "employee benefit plan", as defined in
section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), which is subject to Title I of ERISA and the assets of Borrower do
-----
not constitute "plan assets" of one or more such plans within the meaning of 29
C.F.R. Section 2510.3-101;
(k) there are no pending actions, suits or proceedings,
arbitrations or governmental investigations against any Property, an adverse
outcome of which would have a Material Adverse Effect;
(l) the Borrower (i) has not entered into the transaction evidenced
hereby or by any Loan Document with the actual intent to hinder, delay, or
defraud any creditor, and (ii) received reasonably equivalent value in exchange
for its obligations under the Loan Documents. Giving effect to the transactions
contemplated by the Loan Documents, the fair saleable value of the Borrower's
assets exceeds and will, immediately following the execution and delivery of the
Loan Documents, exceed the Borrower's total liabilities, including, without
limitation, subordinated, unliquidated, disputed or contingent liabilities. The
fair saleable value of the Borrower's assets is and will, immediately following
the execution and delivery of the Loan Documents, be greater than the Borrower's
probable liabilities, including the maximum amount of its contingent liabilities
or its debts as such debts become absolute and matured. The Borrower's assets do
not, and immediately following the execution and delivery of the Loan Documents
will not, constitute unreasonably small capital to carry out its business as
conducted
14
<PAGE>
or proposed to be conducted. The Borrower does not intend to, and does not
believe that it will, incur debts and liabilities (including, without
limitation, contingent liabilities and other commitments) beyond its ability to
pay such debts as they mature (taking into account the timing and amounts to be
payable on or in respect of obligations of the Borrower);
(m) the Properties and the current use thereof comply in all
material respects with all applicable restrictive covenants, zoning ordinances,
subdivision and building codes, flood disaster laws, applicable health and
environmental laws and regulations, applicable provisions of the Americans with
Disabilities Act and all other ordinances, orders or requirements issued by any
state, federal or municipal authorities having or claiming jurisdiction over the
Properties, other than failures to comply with the foregoing which would not
have a Material Adverse Effect. None of the Properties require any material
rights over, or restrictions against, other property in order to comply with any
of the aforesaid governmental ordinances, orders or requirements, except as
disclosed in the Title Policies and the Surveys;
(n) all utility services necessary and sufficient for the use,
occupancy, operation and disposition of each of the Properties for their
intended purposes are available to each of the Properties, including water,
storm sewer, sanitary sewer, gas, electric, cable and telephone facilities;
(o) except as disclosed in the Title Policies and the Surveys, all
streets, roads, highways, bridges and waterways necessary for access to and full
use, occupancy, operation and disposition of each of the Properties have been
completed;
(p) to the best of Borrower's knowledge, all curb cuts, driveways
and traffic signals shown on the Surveys are existing and have been fully
approved by the appropriate governmental authority;
(q) Borrower has received no written notice of any judicial,
administrative, mediation or arbitration actions, suits or proceedings pending
or, to the best of Borrower's knowledge, threatened against or affecting
Borrower or the Properties which, if adversely determined, would materially
impair either any of the Properties or Borrower's ability to perform the
covenants or obligations required to be performed under the Loan Documents;
(r) no condemnation, eminent domain or like proceeding is pending
or, to the best of Borrower's knowledge, threatened or contemplated;
(s) Borrower possesses all material licenses and permits
(collectively, the "Permits") required for the conduct of its business
substantially as now conducted, all fees due and payable in connection with the
Permits have been paid and Borrower's business with respect to each Property
complies with the Permits in all material respects;
(t) the Franchise Agreement is in full force and effect, all
franchise fees, reservation fees, royalties and other sums due thereunder have
been paid in full to date, and neither Borrower nor Franchisor is in default
thereunder.
15
<PAGE>
(u) except as indicated in the Surveys and Title Policies, to the
best of Borrower's knowledge, none of the Improvements lie outside the
boundaries and building restriction lines of the applicable Property. Except as
set forth in the Surveys and Title Policies, to the best of Borrower's
knowledge, no improvements on adjoining properties encroach upon any of the
Properties in any material respect;
(v) Borrower has not entered into any security agreements or
financing statements affecting any of the Properties other than the security
agreements and financing statements created in favor of Lender;
(w) except as otherwise specifically set forth in the Environmental
Reports, there are no actions, suits, proceedings or orders of record or of
which Borrower has notice, and, to the best of Borrower's knowledge, there are
no inquiries or investigations, pending or threatened, in any such case against,
involving or affecting any of the Properties, at law or in equity, or before or
by any federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, alleging the
violation of any federal, state or local law, statute, ordinance, rule or
regulation relating to Environmental Laws (as defined in the Environmental
Indemnity). Furthermore, Borrower has not received any claim or notice that the
ownership or operation of any of the Properties violates any federal, state or
local law, statute, ordinance, rule, regulation, decree, order, and/or permit
relating to Environmental Laws, and, except as otherwise specifically set forth
in the Environmental Reports, to the best of Borrower's knowledge, no valid
basis for any proceeding, action or claim of such nature exists;
(x) except as indicated in the Surveys, none of the Improvements are
located in a flood hazard area as defined by the Federal Insurance
Administration;
(y) except as disclosed in the Title Policies, no license or
occupancy agreement to which Borrower is a party and, to the best of Borrower's
knowledge, no easement, right-of-way, permit or declaration (collectively, the
"Property Agreements") provides any party with the right to obtain a lien or
-------------------
encumbrance upon any Property superior to the lien of the applicable Mortgage;
(z) no condition exists whereby Borrower or any future owner of any
Property may be required to purchase any other parcel of land which is subject
to any Property Agreement;
(aa) except as previously disclosed to Lender in writing, there are
no brokerage fees or commissions payable by Borrower with respect to the
Properties;
(bb) except as previously disclosed in writing by Borrower to Lender,
or as set forth in the Property Agreements, there are no outstanding options or
rights of first refusal to purchase all or any portion of any of the Properties
or Borrower's ownership thereof;
(cc) Borrower has delivered, or has directed Commonwealth Land Title
Insurance Company to deliver, to Lender true, correct and complete copies of all
Property Agreements and any and all amendments or modifications thereto;
16
<PAGE>
(dd) no default exists or, to the best of Borrower's knowledge, no
event has occurred with the passing of time or the giving of notice or both
would exist, under any Property Agreement which would, in the aggregate, have a
material adverse effect on (a) any of the Properties, (b) the business,
prospects, profits, operations or condition (financial or otherwise) of
Borrower, (c) the enforceability, validity, perfection or priority of the lien
of any Loan Document or (d) the ability of Borrower to perform any material
obligations under any Loan Document (a "Material Adverse Effect");
-----------------------
(ee) to the best of Borrower's knowledge, except as previously
disclosed in writing by Borrower to Lender, each of the Properties is taxed
separately without regard to any other real estate and, except as disclosed in
the Title Policies and Surveys, constitutes a legally subdivided lot under all
applicable legal requirements (or, if not subdivided, no subdivision or platting
of any of the Properties is required under applicable legal requirements), and
for all purposes may be mortgaged, conveyed or otherwise dealt with as an
independent parcel;
(ff) Borrower will not, without the prior written consent of Lender,
exercise any right it may have to terminate any Franchise Agreement prior to the
time that the Loan has been repaid in its entirety; and
(gg) the representations and warranties contained in this Agreement,
or the review and inquiry made on behalf of the Borrower therefor, have all been
made by persons having the requisite expertise and knowledge to give such
representations and warranties.
As used herein and in any other Loan Document, "to the best of
Borrower's knowledge" shall mean the actual knowledge as of the date hereof of
any of the elected officers of Choice Hotels International, Inc., provided
--------
however, that neither this Agreement nor any other Loan Document shall be
- -------
construed as giving rise to personal liability of any such elected officer as a
result of his/her personal knowledge of facts relating to representations or
covenants contained herein or therein.
(ii) Borrower hereby represents, warrants and covenants as of the date
hereof and until such time as the Loan is paid in full, that, as to itself and
its Properties, it:
(a) does not own and will not own any asset other than (i) its
interest in the Depositor and in First Choice Capital Corp., a Delaware
corporation, (ii) the Properties, and (iii) incidental personal property
necessary for the operation of, or associated with, the Properties;
(b) was organized solely for the purpose of owning, leasing and
operating the Properties and has not engaged in and will not engage in any
business other than the ownership, leasing and operation of the Properties;
(c) will not enter into any contract or agreement with any
shareholder or affiliate of Borrower except upon terms and conditions that are
intrinsically fair and substantially similar to those that would be available on
an arms-length basis with third parties other than an affiliate;
17
<PAGE>
(d) has not incurred and will not incur any debt, secured or
unsecured, direct or contingent (including guaranteeing any obligation), other
than (i) the Indebtedness, and (ii) trade payables or other current liabilities
(excluding any borrowings) incurred in the ordinary course of the business of
owning, leasing and operating the Properties and which are paid on customary
trade terms and otherwise within sixty (60) days of the date incurred, trade
payables or other current liabilities (excluding any borrowings), not to exceed
$2,125,000.00 outstanding at any given time (the "Base Year Trade Payable
-----------------------
Amount"), subject to an annual increase on each Adjustment Date by an amount
- ------
equal to (i) the Base Year Trade Payable Amount multiplied by (ii) the
applicable Percentage of CPI Increase, which are incurred in the ordinary course
of the business of owning, leasing and operating the Properties and which are
paid on customary trade terms and otherwise within sixty-one (61) to ninety (90)
days of the date incurred and trade payables or other current liabilities
(excluding any borrowings) being contested in good faith by Borrower.
(e) has not made and will not make any loans or loan advances to any
third party (including any Affiliate of Borrower);
(f) is and will remain solvent and pay its debts and liabilities
(including, without limitation, employment and overhead expenses) from its
assets as the same shall become due;
(g) has done or caused to be done and will do all things necessary
to observe corporate formalities and to preserve its existence, and will not,
nor will any shareholder thereof, amend, modify or otherwise change its
certificate of incorporation or by-laws in a manner which adversely affects the
Borrower's existence as a single purpose entity;
(h) will conduct and operate its business in its own name and as
presently conducted and operated;
(i) will maintain books and records and bank accounts separate from
those of its affiliates or any other Person;
(j) will be, and at all times will hold itself out to the public as,
a legal entity separate and distinct from any other entity (including any
Affiliate thereof) and not as a division or part of any other Person and shall
maintain and use separate stationery, invoices and checks;
(k) will maintain adequate capital for the normal obligations
reasonably foreseeable in a business of its size and character and in light of
its contemplated business operations;
(l) will not, nor shall any shareholder, partner or Affiliate, seek
the dissolution or winding up, in whole or in part, of the Borrower;
(m) will not enter into any transaction of merger or consolidation,
or acquire by purchase or otherwise all or substantially all of the business or
assets of, or any stock or beneficial ownership of, any entity;
18
<PAGE>
(n) will not commingle the funds and other assets of the Borrower
with those of any shareholder, any affiliate or any other person;
(o) has and will maintain its assets in such a manner that it is not
costly or difficult to segregate, ascertain or identify its individual assets
from those of any affiliate or any other person;
(p) does not and will not hold itself out to be responsible for the
debts or obligations of any other person;
(q) has caused, and at all times shall cause, there to be at least
one duly appointed member of the board of directors (an "Independent Director")
--------------------
of Borrower who has not been at the time of such individual's appointment, may
not have been at any time during the preceding five years, and will not be
during his or her service as Independent Director (A) a direct or indirect
stockholder of, or an officer, director (other than with respect to such
Independent Director's service as director of Borrower or the Depositor) or
employee, creditor, supplier, manager or contractor of, either Borrower or of
any Affiliate thereof, (B) a person or other entity controlling any such
stockholder, creditor, supplier, manager or contractor, or (C) a member of the
immediate family of any such stockholder, officer, employee, creditor, supplier,
manager or contractor. As used in this subsection (q), the term "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through ownership
of voting securities or other beneficial interests, by contract or otherwise;
(r) has not caused and shall not cause, the board of directors of
Borrower to take any action which, under the terms of any certificate of
incorporation, by-laws or any voting trust agreement with respect to Borrower's
common stock, requires the unanimous affirmative vote of one hundred percent
(100%) of the members of the board of directors, unless at the time of such
action there shall be at least one member who is an Independent Director;
(s) will not, without the unanimous consent of all of its directors,
file a bankruptcy or insolvency petition or otherwise institute insolvency
proceedings with respect to itself or to any other entity in which it has a
direct or indirect legal or beneficial ownership interest;
(t) has maintained and will maintain its books, records, resolutions
and agreements as official records;
(u) has not and will not acquire obligations or securities of its
shareholders;
(v) has allocated and will allocate fairly and reasonably any
overhead for shared office space;
(w) has not pledged and will not pledge its assets for the benefit
of any other person or entity other than the holders of the Loan Documents;
19
<PAGE>
(x) has not and will not identify its shareholders or any of its
affiliates as a division or part of such Borrower;
(y) has not failed and will not fail to correct any known
misunderstanding regarding its separate identity;
(z) shall comply with the provisions of its certificate of
incorporation; and
(aa) shall conduct itself and operate its business so that all of the
assumptions made in those certain legal opinions dated the date hereof by
Cadwalader, Wickersham & Taft with respect to nonconsolidation issues shall be
true at all times.
Section 3.2 Survival of Representations, Warranties and Covenants.
----------- -----------------------------------------------------
Borrower agrees that all of the representations, warranties and
covenants of Borrower set forth in Section 3.1 and elsewhere in this Agreement
-----------
and in the other Loan Documents shall survive for so long as any amount remains
owing to Lender under this Agreement or any of the other Loan Documents. All
representations, warranties, covenants and agreements made in this Agreement or
in the other Loan Documents by Borrower shall be deemed to have been relied upon
by Lender notwithstanding any investigation heretofore or hereafter made by
Lender or on its behalf.
IV. MANAGEMENT AGREEMENTS
---------------------
Section 4.1 Modification of the Management Agreements.
----------- -----------------------------------------
Borrower shall not alter, modify or change any of the terms or
provisions of any Management Agreement to the extent that (A) such alteration,
modification or change would negatively impact on Borrower's rights under such
Management Agreement with respect to (i) the Manager's right to receive fees for
its services thereunder, or (ii) the subordination of such fees to sums payable
by Borrower to Lender under the Note and the other Loan Documents, or (B) such
alteration, modification or change would result in a material increase in
Borrower's obligations, if any, under such Management Agreement or a material
reduction in the Manager's obligations under such Management Agreement, unless
Lender shall have received in writing confirmation from the Rating Agency that
such alteration, modification or change will not result in a downgrade,
withdrawal or qualification of the rating then in effect for the Certificates,
together with such legal opinions as may be requested by the Rating Agency.
Section 4.2 Substitute Management Agreements.
----------- --------------------------------
In the event that any Management Agreement is at any time and for any
reason terminated or canceled, Borrower shall use commercially reasonable
efforts to promptly enter into a replacement management agreement with respect
to the applicable Property (the "Substitute Management Agreement") with a
-------------------------------
nationally recognized hotel/motel franchise and management organization (a
"Qualified Manager") which Qualified Manager, in either case, as determined by
-----------------
the Rating Agency, will not cause a downgrade, withdrawal or qualification of
20
<PAGE>
the rating which was in effect for the Certificates immediately prior to the
termination or cancellation of the applicable Management Agreement. To the
extent that any fees to be paid by Borrower to any Qualified Manager under a
Substitute Management Agreement exceed four percent (4%) of Total Hotel Sales,
the Substitute Management Agreement shall specifically provide, in form and
substance reasonably acceptable to Lender, that Borrower's obligation to pay,
and the Qualified Manager's right to receive, any such excess amounts is subject
and subordinate to Borrower's obligation to pay, and Lender's right to receive,
all payments of principal and interest, Yield Maintenance Payments and payment
of any other sums owing by Borrower from time to time under the Note, the
Mortgages, this Loan Agreement and any other Loan Document.
V. DEFAULTS
--------
Section 5.1 Event of Default.
----------- ----------------
The occurrence of any Event of Default under, and as that term is
defined in, the Mortgages shall constitute an "Event of Default" hereunder.
----------------
Section 5.2 Remedies.
----------- --------
Upon the occurrence of an Event of Default, all or any one or more of
the rights, powers, privileges and other remedies available to Lender against
Borrower under this Agreement or any of the other Loan Documents or at law or in
equity may be exercised by Lender at any time and from time to time, whether or
not all or any of the Indebtedness shall be declared due and payable, and
whether or not Lender shall have commenced any foreclosure proceeding or other
action for the enforcement of its rights and remedies under any of the Loan
Documents with respect to the Property. Notwithstanding the fact that any
Mortgage may provide that it secures less than the entire Principal Amount, upon
the foreclosure by Lender of any such Mortgage, any foreclosure sale proceeds
which, pursuant to the terms of the applicable Mortgage, would be paid to the
applicable Borrower shall instead be paid to Lender and applied in reduction of
the Principal Amount of the Loan.
Section 5.3 Remedies Cumulative.
----------- -------------------
The rights, powers and remedies of Lender under this Agreement shall
be cumulative and not exclusive of any other right, power or remedy which Lender
may have against Borrower pursuant to this Agreement or the other Loan
Documents, or existing at law or in equity or otherwise. Lender's rights, powers
and remedies may be pursued singly, concurrently or otherwise, at such time and
in such order as Lender may determine in Lender's sole discretion. No delay or
omission to exercise any remedy, right or power accruing upon an Event of
Default shall impair any such remedy, right or power or shall be construed as a
waiver thereof, but any such remedy, right or power may be exercised from time
to time and as often as may be deemed expedient. A waiver of one default or
Event of Default with respect to Borrower shall not be construed to be a waiver
with respect to any subsequent default or Event of Default by Borrower, or to
impair any remedy, right or power consequent thereon.
21
<PAGE>
VI. MISCELLANEOUS
-------------
Section 6.1 Servicer and Trustee Fees.
----------- -------------------------
In addition to Borrower's obligation to make payments of Debt Service
to Lender in accordance with the terms of the Note, Borrower shall pay to Lender
when due (for disbursement to Servicer and Trustee pursuant to the Trust and
Servicing Agreement) all Servicer and Trustee fees, expenses, reimbursements and
other amounts for which Borrower is responsible in accordance with the terms and
provisions of the Trust and Servicing Agreement.
Section 6.2 Survival.
----------- --------
This Agreement and all covenants, agreements, representations and
warranties made herein and in the certificates delivered pursuant hereto shall
survive the making by Lender of the Loan and the execution and delivery to
Lender of the Note, and shall continue in full force and effect so long as all
or any of the Indebtedness of Borrower is outstanding and unpaid. Whenever in
this Agreement any of the parties hereto is referred to, such reference shall be
deemed to include the successors and assigns of such party. All covenants,
promises and agreements contained in this Agreement shall be binding upon, and
shall inure to the benefit of, Lender, together with its successors and assigns,
and Borrower, together with its permitted successors and assigns.
Section 6.3 Lender's Discretion.
----------- -------------------
Whenever pursuant to this Agreement, Lender exercises any right given
to it to approve or disapprove, or any arrangement or term is to be satisfactory
to Lender, the decision of Lender to approve or disapprove or to decide whether
arrangements or terms are satisfactory or not satisfactory shall (except as is
otherwise specifically herein provided) be in the sole but reasonable discretion
of Lender and shall be final and conclusive.
Section 6.4 Governing Law.
----------- -------------
(a) The proceeds of the Note delivered pursuant hereto shall be
disbursed from the State of New York, which State the parties agree has a
substantial relationship to the parties and to the underlying transaction
embodied hereby, and in all respects, including, without limiting the generality
of the foregoing, matters of construction, validity and performance, this
Agreement and the obligations arising hereunder shall be governed by, and
construed in accordance with, the laws of the State of New York applicable to
contracts made and performed in such State and any applicable law of the United
States of America, except that at all times the provisions for the creation,
perfection, and enforcement of the liens and security interests created pursuant
hereto and pursuant to the other Loan Documents shall be governed by and
construed according to the law of the State in which the applicable Property is
located, it being understood that, to the fullest extent permitted by the law of
such State, the law of the State of New York shall govern the validity and the
enforceability of all Loan Documents and all of the Indebtedness or obligations
arising hereunder or thereunder. To the fullest extent permitted by law,
Borrower hereby unconditionally and irrevocably waives any
22
<PAGE>
claim to assert that the law of any other jurisdiction governs this Agreement
and the Note, and this Agreement and the Note shall be governed by and construed
in accordance with the laws of the State of New York.
(b) BORROWER, TO THE FULL EXTENT PERMITTED BY LAW, HEREBY KNOWINGLY,
INTENTIONALLY AND VOLUNTARILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL,
(A) SUBMITS TO PERSONAL JURISDICTION IN THE STATE OF NEW YORK OVER ANY SUIT,
ACTION OR PROCEEDING BY ANY PERSON ARISING FROM OR RELATING TO THIS AGREEMENT,
(B) AGREES THAT ANY SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT IN ANY STATE
OR FEDERAL COURT OF COMPETENT JURISDICTION SITTING IN ANY COUNTY IN WHICH THE
APPLICABLE PROPERTY IS LOCATED, (C) SUBMITS TO THE JURISDICTION OF SUCH COURTS,
AND, (D) TO THE FULLEST EXTENT PERMITTED BY LAW, AGREES THAT IT WILL NOT BRING
ANY ACTION, SUIT OR PROCEEDING IN ANY OTHER FORUM (BUT NOTHING HEREIN SHALL
AFFECT THE RIGHT OF LENDER TO BRING ANY ACTION, SUIT OR PROCEEDING IN ANY OTHER
FORUM. BORROWER FURTHER CONSENTS AND AGREES TO SERVICE OF ANY SUMMONS, COMPLAINT
OR OTHER LEGAL PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY REGISTERED OR
CERTIFIED U.S. MAIL, POSTAGE PREPAID, TO THE BORROWER'S REGISTERED AGENT, AND
CONSENTS AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE IN EVERY RESPECT VALID
AND EFFECTIVE SERVICE (BUT NOTHING HEREIN SHALL AFFECT THE VALIDITY OR
EFFECTIVENESS OF PROCESS SERVED IN ANY OTHER MANNER PERMITTED BY LAW).
Section 6.5 Modification, Waiver in Writing.
----------- -------------------------------
No modification, amendment, extension, discharge, termination or
waiver of any provision of this Agreement, or of the Note, or of any other Loan
Document, nor consent to any departure by Borrower therefrom, shall in any event
be effective unless the same shall be in a writing signed by the party against
whom enforcement is sought, and then any such waiver or consent shall be
effective only in the specific instance, and for the purpose, for which given.
Except as otherwise expressly provided herein, no notice to, or demand on
Borrower, shall entitle Borrower to any other or future notice or demand in the
same, similar or other circumstances.
Section 6.6 Delay Not a Waiver.
----------- ------------------
Neither any failure nor any delay on the part of Lender in insisting
upon strict performance of any term, condition, covenant or agreement, or
exercising any right, power, remedy or privilege hereunder, under the Note or
under any other Loan Document, or any other instrument given as security
therefor, shall operate as or constitute a waiver thereof, nor shall a single or
partial exercise thereof preclude any other future exercise, or the exercise of
any other right, power, remedy or privilege. In particular, and not by way of
limitation, by accepting payment after the date on which the same is due of any
amount payable under this
23
<PAGE>
Agreement, the Note or any other Loan Document, Lender shall not be deemed to
have waived any right either to require prompt payment when due of all other
amounts due under this Agreement, the Note or the other Loan Documents, or to
declare a default for failure to effect prompt payment of any such other amount.
Section 6.7 Notices.
----------- -------
All notices, consents, approvals and requests required or permitted
hereunder shall be given in the manner specified in the Mortgages and directed
to the parties at their respective addresses as provided therein.
Section 6.8 Trial by Jury.
----------- -------------
BORROWER HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE
TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE
EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THIS
AGREEMENT OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION
THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND
VOLUNTARILY BY BORROWER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE
AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE.
LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING
AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY BORROWER.
Section 6.9 Headings.
----------- --------
The Article and/or Section headings and the Table of Contents in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
Section 6.10 Successors and Assigns; Assignment.
------------ ----------------------------------
This Agreement shall be binding upon and shall inure to the benefit
of each party hereto and their respective permitted successors and assigns.
Lender shall have the right to transfer, sell or assign this Agreement and any
of the other Loan Documents and the obligations hereunder to any Person who
purchases or otherwise acquires an interest in the Loan.
Section 6.11 Severability.
------------ ------------
Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
24
<PAGE>
Section 6.12 Preferences.
------------ -----------
Lender shall have the continuing and exclusive right to apply or
reverse and reapply any and all payments by Borrower to any portion of the
obligations of Borrower hereunder. To the extent Borrower makes a payment or
payments to Lender, which payment or proceeds or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
or required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then, to
the extent of such payment or proceeds received, the obligations hereunder or
part thereof intended to be satisfied shall be revived and continue in full
force and effect, as if such payment or proceeds had not been received by
Lender.
Section 6.13 Waiver of Notice.
------------ ----------------
Borrower shall not be entitled to any notices of any nature
whatsoever from Lender except with respect to matters for which (a) this
Agreement or the other Loan Documents specifically and expressly provide for the
giving of notice by Lender to Borrower and (b) Borrower is not, pursuant to
applicable law, permitted to waive the giving of notice. To the extent permitted
by applicable law, Borrower hereby expressly waives the right to receive any
notice from Lender with respect to any matter for which this Agreement or the
other Loan Documents do not specifically and expressly provide for the giving of
notice by Lender to Borrower.
Section 6.14 Expenses; Indemnity.
------------ -------------------
Borrower covenants and agrees to reimburse Lender upon receipt of
written notice from Lender for all reasonable costs and expenses (including
reasonable attorneys' fees and disbursements) incurred by Lender in connection
with (i) the negotiation, preparation, execution, delivery and administration of
any consents, amendments, waivers or other modifications to this Agreement and
the other Loan Documents and any other documents or matters requested by
Borrower; (ii) the filing and recording fees and expenses, title insurance and
other similar expenses incurred in creating and perfecting the liens in favor of
Lender pursuant to this Agreement and the other Loan Documents; (iii) enforcing
or preserving any rights, in response to third party claims or the prosecuting
or defending of any action or proceeding or other litigation, in each case
against, under or affecting Borrower, this Agreement, the other Loan Documents,
the Properties, or any other security given for the Loan; and (iv) enforcing any
obligations of or collecting any payments due from Borrower under this
Agreement, the other Loan Documents or with respect to the Property or in
connection with any refinancing or restructuring of the credit arrangement
provided under this Agreement in the nature of a "work-out" or of any insolvency
or bankruptcy proceedings; provided, however, that Borrower shall not be liable
-------- -------
for the payment of any such costs and expenses to the extent the same arise by
reason of the negligence, illegal acts, fraud or willful misconduct of any of
Lender.
25
<PAGE>
Section 6.15 Exhibits Incorporated.
------------ ---------------------
The Exhibits and Schedules annexed hereto are hereby incorporated
herein as a part of this Agreement with the same effect as if set forth in the
body hereof.
Section 6.16 Offsets, Counterclaims and Defenses.
------------ -----------------------------------
Any assignee of Lender's interest in and to this Agreement, the Note
and the other Loan Documents shall take the same free and clear of all offsets,
counterclaims or defenses which Borrower may have against any assignor of such
documents that are unrelated to the Loan, and no such unrelated counterclaim or
defense shall be interposed or asserted by Borrower in any action or proceeding
brought by any such assignee upon such documents and any such right to interpose
or assert any such unrelated offset, counterclaim or defense in any such action
or proceeding is hereby expressly waived by Borrower.
Section 6.17 No Joint Venture or Partnership.
------------ -------------------------------
Borrower and Lender intend that the relationships created hereunder
and under the other Loan Documents be solely that of borrower and lender.
Nothing herein or therein is intended to create a joint venture, partnership,
tenancy-in-common, or joint tenancy relationship between Borrower and Lender nor
to grant Lender any interest in the Property other than that of mortgagee or
lender.
Section 6.18 Conflict; Construction of Documents.
------------ -----------------------------------
In the event of any conflict between the provisions of this Agreement
and any of the other Loan Documents, the provisions of this Agreement shall
control. The parties hereto acknowledge that they were represented by counsel in
connection with the negotiation and drafting of the Loan Documents and that such
Loan Documents shall not be subject to the principle of construing their meaning
against the party which drafted same.
Section 6.19 Brokers and Financial Advisors.
------------ ------------------------------
Borrower hereby represents that it has dealt with no financial
advisors, brokers, underwriters, placement agents, agents or finders in
connection with the transactions contemplated by this Agreement other than
Lehman Brothers, which Borrower will pay pursuant to separate agreements.
Borrower and Lender hereby agree to indemnify and hold the other harmless from
and against any and all claims, liabilities, costs and expenses of any kind in
any way relating to or arising from a claim by any other Person that such Person
acted on behalf of the indemnifying party in connection with the transactions
contemplated herein. The provisions of this Section 6.19 shall survive the
expiration and termination of this Agreement and the repayment of the
Indebtedness.
26
<PAGE>
Section 6.20 Prior Agreements.
------------ ----------------
This Agreement and the other Loan Documents contain the entire
agreement of the parties hereto and thereto in respect of the transactions
contemplated hereby and thereby, and all prior agreements among or between such
parties, whether oral or written, including, without limitation, are superseded
with respect to the Loan by the terms of this Agreement and the other Loan
Documents.
Section 6.21 Nonrecourse.
------------ -----------
The provisions of Paragraph 10 of the Note are incorporated herein by
this reference to the fullest extent as if the text of such paragraph were set
forth in its entirety herein.
[Signature Page Follows]
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized
representatives, all as of the day and year first above written.
LENDER:
QI CAPITAL CORP., a Delaware corporation
By:
-----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
BORROWER:
FIRST CHOICE PROPERTIES CORP., a Delaware
corporation
By:
-----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
28
<PAGE>
Exhibit 13
[GRAPHICS OMITTED]
- --------------------------------------------------------------------------------
CHOICE HOTELS
INTERNATIONAL
- --------------------------------------------------------------------------------
1997 ANNUAL REPORT
<PAGE>
YEAR FIRSTS
This was a year of firsts for Choice Hotels International: the first year
as an independent company and the first year under independent management
following the spinoff from Manor Care Inc.
The Company introduced the most important technological initiative in its
history: Profit Manager by Choice Hotels, a computerized system created to help
franchisees maximize profitability and compete more effectively by managing
their rooms inventory, rates and reservations more efficiently.
Choice opened the first MainStay Suites hotel, the industry's first
franchised mid-market, extended stay lodging product featuring residential
amenities designed to serve professionals on extended assignments and innovative
technological systems including an automated front desk check-in-system.
Upholding its reputation as a technology innovator and leader, Choice
introduced the loading industry's first internet side devoted to travel agents,
securing its longstanding relationship with this critical source of third-party
bookings.
Choice became the first lodging franchisor in the nation to launch a
training and certification program for all line-level hotel employees designed
to improve guest satisfaction, increase productivity, and, in return, generate
higher profits for franchisees.
Choice welcomed more than 2,000 franchisee partners to the first Management
Development Conferences, two large educational meetings dedicated to helping
hotel owners improve their operations and profitability.
Finally, this is the first Choice Hotels International annual report
published for you, our stockholders.
<PAGE>
AT A GLANCE
A YEAR OF CONTINUED STRONG GROWTH
Continuing its strong rate of growth, the Choice worldwide system totaled
3,344 open hotels at fiscal year-end, a 9.6 percent increase over 1996, and 820
hotels under development.
U.S. developers continued to show their affinity for Choice's portfolio by
signing 495 franchise contracts, an increase of 14 percent. Half of these new
contracts were signed by existing franchisees.
Fifty-eight percent of hotels added in the United States were new
construction, and Comfort Inn, Comfort Suites and Sleep Inn ranked in the top 10
new-construction brands, according to Smith Travel Research.
QUALITY(R) INNS,
HOTELS & SUITES
Quality offers an established mid-priced lodging product with rooms
designed for today's business travelers.
. OPEN
619 hotels
72,994 rooms
. UNDER
DEVELOPMENT
139 hotels
14,488 rooms
. TOTAL
758 hotels
87,482 rooms
. FISCAL YEAR 1997 HIGHLIGHTS
. 100 percent satisfaction guarantee implemented
. The development of new Quality hotels accelerated to a five-year high, with
758 hotels open and under development at year's end, a 9.9 percent increase over
the 1996 fiscal year
. A new advertising campaign promoted the Quality Executive Room, featuring the
signature Quality Sleeper mattress by Serta, speakerphone with data port and
free daily newspaper
. Free local calls and Maxwell House in-room coffee program introduced
. Occupancy exceeded its competitive set, according to Smith Travel Research
COMFORT(R) INNS
& COMFORT
SUITES
Comfort is a leading limited-service brand, offering affordable rates,
exceptional rooms and suites and free deluxe continental breakfast, backed by a
100 percent satisfaction guarantee.
. OPEN
1,561 hotels
123,662 rooms
. UNDER
DEVELOPMENT
312 hotels
27,221 rooms
. TOTAL
1,873 hotels
150,883 rooms
. FISCAL YEAR 1997 HIGHLIGHTS
. Average daily rate, occupancy and revenue per available room, or RevPAR,
exceeded its competitive set, according to Smith Travel Research
. 71 percent of all Comfort hotels now are rated three diamonds, up from 66
percent a year ago
. Quality assurance scores improved in all categories
. 82 percent of all properties added to the system were new construction
CLARION(R) INNS,
HOTELS, SUITES
& RESORTS
Clarion features upscale full-service hotels at three-star prices that
provide outstanding value to corporate travelers and the mid-sized meeting
market.
. OPEN
110 hotels
17,249 rooms
. UNDER
DEVELOPMENT
32 hotels
5,022 rooms
. TOTAL
142 hotels
22,271 rooms
. FISCAL YEAR 1997 HIGHLIGHTS
. Renewed interest in first-class, full-service hotels, spurred by compelling
economics, drove Clarion system growth by 17 percent
. 100 percent satisfaction guarantee initiative announced
. Occupancy exceeded its competitive set, according to Smith Travel Research
SLEEP INN
Sleep Inn is an all-new construction, consistent, limited-service chain
<PAGE>
offering state-of-the-art room features and a 100 percent satisfaction
guarantee.
. OPEN
133 hotels
9,806 rooms
. UNDER
DEVELOPMENT
150 hotels
11,497 rooms
. TOTAL
283 hotels
21,303 rooms
. FISCAL YEAR 1997 HIGHLIGHTS
. Sleep Inn is ranked number one among hotel chains for satisfaction, service
and value, according to a study conducted over the last two years by D.K.
Shifflet & Associates. The brand's satisfaction rating was 88.8 percent, nearly
20 points higher than the next-highest rated competitor
. 45 new Sleep Inn hotels opened, the most ever in one year
. Occupancy exceeded its competitive set, according to Smith Travel Research
. Sleep Inn is the only 100 percent new-construction brand in its segment
ECONO
LODGE
Econo Lodge is among the best roadside names in its category, offering
clean, affordable economy lodging for travelers who want to "Spend a Night, Not
a Fortune."
. OPEN
704 hotels
45,718 rooms
. UNDER
DEVELOPMENT
116 hotels
8,330 rooms
. TOTAL
820 hotels
54,048 rooms
. FISCAL YEAR 1997 HIGHLIGHTS
. 153 hotels have completed the Signature Exterior Renovation Program, which
provides a fresh, clean, consistent and easily recognized appearance. The
program has improved RevPAR by 12.2 percent among the hotels that have
participated to date
. 100 percent satisfaction guarantee initiative announced
. The Econo PLUS Room, which targets business travelers with in-room coffee and
free local calls, was introduced systemwide to build on the success of the Econo
Lodge Senior Room, designed with senior-friendly amenities
RODEWAY INN
Rodeway Inn offers mid-priced assorted hotels with national consumer
exposure specializing in meeting the needs of the senior travel market.
. OPEN
202 hotels
13,001 rooms
. UNDER
DEVELOPMENT
50 hotels
3,481 rooms
. TOTAL
252 hotels
16,482 rooms
. FISCAL YEAR 1997 HIGHLIGHTS
. Free local phone calls and weekday newspapers were introduced, both designed
to build on guests' affinity for the value-added amenities provided in the
Rodeway Choice Room, which also include a coffee maker, large-button telephone
and television remote control, large-digit clock radio and lever-handle doors
and faucets
MAINSTAY SUITES
MainStay Suites is Choice's newest lodging concept: the industry's first
franchised mid-market, extended-stay hotel with residential amenities designed
to serve professionals on extended assignments.
. OPEN
1 hotel
96 rooms
. UNDER
DEVELOPMENT
21 hotels
2,054 rooms
. TOTAL
22 hotels
2,150 rooms
. FISCAL YEAR 1997 HIGHLIGHTS
. The first MainStay Suites hotel opened for business in Plano, Texas
. All performance indicators exceeded expectations, with length of stay
averaging 20 nights
. A survey of guests elicited comments including "home-like atmosphere exceeds
expectations," "great value" and "high sense of security"
<PAGE>
CHOICE PICKS
FOOD COURT
ChoicePicks Food Court is the industry's first modular food court system
featuring branded items including Pizzeria Uno, Nathan's Famous, Healthy Choice
Deli, Casa Ortega, Big Apple Bagels, I Can't Believe It's Yogurt, Nestle Toll
House Cookie Cafe, Sarks Gourmet Coffees and Coca-Cola.
. OPEN
18 food courts
124 modules
. UNDER
DEVELOPMENT
10 food courts
60 modules
. TOTAL
28 food courts
184 modules
. FISCAL YEAR 1997 HIGHLIGHTS
. Development sites were expanded during the year to include non-Choice hotels,
outlet malls, high-volume retail stores, contract management companies,
time-share resorts, hospitals, movie theaters and convenience stores
. The first Choice Picks Food Courts located outside a lodging venue opened this
year at shopping outlet centers in Georgia and Pennsylvania
<PAGE>
FINANCIAL HIGHLIGHTS
CHOICE HOTELS INTERNATIONAL INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
===============================================================================================
1997 1996 1995
=========== =========== ========
COMPANY RESULTS
<S> <C> <C> <C>
Franchise revenues (in millions) ..................... $ 244.2 $ 223.6 $ 188.0
Hotel operations revenues (in millions) .............. 185.8 154.6 114.5
Total revenues (in millions) ......................... 429.9 378.3 302.5
Recurring income from operations (in millions) ....... 97.9 75.0 52.1
Recurring net income (in millions) ................... 42.0 28.6 16.8
Net income (in millions) ............................. 40.9 8.5 16.8
Cash flow from operations (in millions) .............. 82.2 55.7 47.9
Earnings per share ................................... .65 .14 .27
Owned or leased hotels open .......................... 85 79 62
Owned hotels revenue per available room (RevPAR) ..... $ 40.96 $ 37.28 $ 34.40
SYSTEM RESULTS
Revenues (estimated in millions) ..................... $ 2,809 $ 2,452 $ 2,372
Total hotels open .................................... 3,344 3,052 2,821
Franchise under development .......................... 820 716 595
</TABLE>
[THE FOLLOWING CAPTIONS REPRESENT BAR GRAPHS WHICH HAVE BEEN OMITTED]
25 PERCENT
COMPOUNDED
ANNUAL GROWTH
43 PERCENT
COMPOUNDED
ANNUAL GROWTH
53 PERCENT
COMPOUNDED
ANNUAL GROWTH
<PAGE>
CHOICE97
[GRAPHIC CONTAINING PHOTO OF WILLIAM R. FLOYD]
William R. Floyd,
Vice Chairman &
Chief Executive Officer
LETTER TO OUR SHAREHOLDERS
The past year has been an exciting one for your Company. After many years of
partnership with Manor Care Inc., Choice enjoyed a successful spinoff and became
an independent publicly traded company in November 1996.
Financial performance for the fiscal year 1997 was strong. We signed a
total of 495 new franchise agreements, up 14 percent from fiscal year 1996. All
of our brands showed healthy growth and, importantly, we made great strides in
building for a successful future. Our success, of course, is shared success.
Thousands of franchisees around the world - serving more than 90 million guests
annually - are the heart and soul of Choice.
In less than a year with the Company, I've personally had the opportunity
to meet many of them. You won't find a more dedicated and hard-working group of
individuals anywhere. You will meet some of them in this report and - I hope
many more in person as you travel around the United States or in the 32 other
countries where we operate.
The key to our continued success is helping our franchisees become more
profitable so that, in turn, we can deliver superior value to you, our
shareholders.
. STRONG FINANCIAL PERFORMANCE
In fiscal 1997, we achieved all of our goals for system growth, revenue and
profits, contracts executed, reservation calls and franchisee satisfaction.
Total worldwide system revenue is estimated to be in excess of $2.8 billion
in fiscal 1997, an increase of almost 15 percent over the prior year. Company
revenues were up 14 percent to $430.9 million from $378.3 million in fiscal
1996.
Operating income was $98.9 million, up from $75.0 million reported in
fiscal year 1996 before a non-recurring charge of $33.3 million in 1996 related
to our spinoff from Manor Care and a provision for the impairment of certain
European assets.
Fiscal 1997 net income of $42.0 million, before a one-time charge of $1.1
million for the early retirement of high cost debt payable to Manor Care, was up
46.9 percent over fiscal year
2
<PAGE>
1996 net income of $28.6 million before non-recurring charges.
Earnings per share for fiscal 1997 were $0.65 after the one-time charge, up
from $0.14 per share after all charges for fiscal year 1996.
. PLATFORM FOR GROWTH
The economics of franchising are extremely attractive and fairly simple. As a
franchise company, we grow our revenues and profits as our franchisees realize
improved occupancies and room rates and as the overall system grows.
The more our franchisees grow, the stronger the stream of royalties and
reservations and marketing fees. And the higher the royalties and fees, the more
support we then can give to our franchisees in the way of brand advertising,
promotions and general business development assistance. This support, in turn,
drives franchisee demand for our brands, and so on.
Another factor driving franchisee demand for Choice's brands is that we are
concentrated primarily in the limited-service, mid-price lodging segment which,
according to Smith Travel Research, is the most profitable in the industry and
enjoying strong growth.
Choice is strongly positioned with its mature brands (Quality, Econo Lodge
and Rodeway Inn), a powerful presence in new-construction brands (Comfort Inn,
Comfort Suites and Sleep Inn) and a highly promising extended-stay brand
(MainStay Suites).
Choice also is capitalizing on the current popularity of upscale hotels
thanks to the strong economy - with our Clarion brand.
This diversity of our portfolio is extremely attractive to franchisees who
like to grow their businesses by owning and operating several different
franchises that appeal to different customer segments. Our price-point
segmentation also allows us to weather economic cycles better as consumers
choose more expensive hotels in good times and less expensive hotels in a softer
economy.
The MainStay Suites brand, launched in October 1996 and currently the only
franchised new-construction, mid-priced, extended-stay product in the
marketplace, is worth special note. The extended-stay segment is one of the
hottest areas of our industry, and it is an outgrowth of dramatic changes over
the last several years in the ways Americans work. Since the late 1980s and
early 1990s, downsizing, right-sizing and the persistence of the American
entrepreneurial spirit have fostered spectacular growth in the number of
consultant specialists who go on assignment for weeks at a time - too long for a
hotel stay and not long enough for an apartment.
Relocations and extended corporate training programs are another valuable
source of business for this segment.
Today, there are 22 MainStay Suites hotels open and under development
nationally, with an average length of stay of 20 nights. We expect this brand to
grow quickly.
. INCREASING PROFITS
One of our most significant accomplishments in the last year was the development
of a three-year strategic plan to enhance franchisee - and Choice profitability
by sharpening the company's focus on consumers, realigning corporate resources
and implementing new growth and service strategies. The plan's underlying
objectives are profitable franchisees and stockholders.
The first step in implementing our plan was creating five new U.S. regions.
Franchise sales and service functions will be consolidated in each region, which
will have bottom-line, profit-and-loss responsibilities. Each franchisee will be
assigned a service representative who will serve as their principal liaison with
Choice. This move alone will enable us to double the support we provide our
franchisees.
The pilot regional office opened its doors in Charlotte, N.C., in June. Four
other offices will open later this year in Silver Spring, Maryland;
3
<PAGE>
CHOICE97
[PHOTOGRAPH OF CHOICE HOTELS INTERNATIONAL SENIOR OFFICERS APPEARS HERE]
PICTURED:
. Choice Hotels International Senior Officers - Back row, from left, are
James R. Yoakum, Senior Vice President, Reservations & Information Systems;
Michael J. DeSantis, Senior Vice President, General Counsel & Secretary; Thomas
Mirgon, Senior Vice President, Human Resources; Joseph E. Lavin, Senior Vice
President, Partner Services Group; and James A. MacCutcheon, Executive Vice
President, Chief Financial Officer & Treasurer. Front row, from left, are Barry
L. Smith, Senior Vice President, Marketing; Rodney Sibley, Senior Vice
President, Franchise Operations; and Betsy Bromberg O'Rourke, Senior Vice
President, Marketing Services.
Indianapolis, Indiana; Denver, Colorado; and Orange County, California. With our
new regional structure, we will be able to better serve our franchisees' needs,
being closer to our customers than ever before.
In conjunction with our franchisees, we will identify the best
opportunities for new development or conversion to a Choice brand in 520 markets
throughout the country. This strategic approach to system growth will benefit
existing franchisees by providing them with an early view of additional
development opportunities within their communities and ensure we are optimizing
the addition of new hotels to the system.
Recently, we also introduced to franchisees a new state-of-the-art property
management system called Profit Manager by Choice Hotels. The system, which is
targeted to have 100 percent system utilization by the year 2000, will help
franchisees maximize revenue per available room and profitability by managing
inventory, rates and reservations more effectively.
In addition, to create more consumer focus and drive demand for Choice
brand products, we have combined brand management, new product development and
traditional consumer marketing into one department responsible for advertising,
marketing, sales, brand positioning and standards.
Integral to this sharpened consumer focus is our commitment to enforce
tougher standards and implement a new quality assurance program based in large
part on guest assessments of each hotel.
. INTERNATIONAL GROWTH AND PROFITABILITY
Our international operations offer significant long-term potential for growth
and profitability, and we anticipate placing near-term emphasis on further
development in Canada, Mexico, the Caribbean, Europe and Japan.
In fiscal 1997, we dramatically improved the financial performance of
Choice's overseas operations, and we intend to accelerate that progress with the
objective of delivering a significant profit contribution by the year 2000.
To accomplish that end, Choice will focus resources against select master
franchisers and joint ventures, prioritize regions and move to establish
brand-specific area development agreements with strong partners.
4
<PAGE>
. SEPARATING FRANCHISING FROM REAL ESTATE
Focus, in any business, helps to improve performance and returns to
stockholders. That's why we decided earlier this year to separate our
franchising from our real estate activities in a tax-free spinoff to
stockholders. We expect the spinoff will take place in the fall of 1997.
Don Landry, Choice's President and the person most responsible for the real
estate unit's tremendous success, will become Chief Executive Officer of the new
company, Sunburst Hospitality Corporation.
Our real estate division has been a remarkable success story, and we
believe Sunburst looks forward to a bright future.
Since 1993, the year after Choice began to take advantage of a down real
estate market by buying, renovating andrepositioning undervalued hotel assets,
the division's revenues have grown at a compounded annual rate of more than 43
percent.
The real estate division finished fiscal 1997 with 71 hotels in the United
States and $168 million in revenues. Gross profit margin in fiscal 1997 was more
than 36 percent.
As a separate, publicly traded company, Sunburst will continue to build on
the performance of its existing properties; develop MainStay Suites and Sleep
Inn hotels and other high-margin properties; and pursue opportunistic
acquisitions.
. LOOKING AHEAD
Our vision is to be a global leader in high-margin lodging brands and to expand
selectively into complementary businesses when attractive and sustainable
economic propositions are achievable. To date, we have done well, but we can do
better.
Among a host of initiatives planned for 1998 are value-added promotions to
improve market share in competitive markets and programs to create more
differentiation for each of our brands. We are also developing a program to
increase our penetration in major metropolitan areas where we are currently
underrepresented. Most important, we are launching a number of initiatives to
increase franchisee satisfaction across the whole spectrum of our brands.
In short, we have much to do, but I am excited about our opportunities and
the potential of this company.
[GRAPHIC PHOTO OF DONALD J. LANDRY,
PRESIDENT & CHIEF OPERATING OFFICER APPEARS HERE]
I'd like to add a personal note about Don Landry. Don has been President of
Choice for the last two and a half years. Since I joined the Company, he has
played a critical role in my transition - not just to Choice, but to the lodging
industry in general.
Don is a good friend and advisor, and everyone at Choice wishes him well in
his new role as Vice Chairman and CEO of Sunburst.
I am delighted that through a variety of strategic alliances and
initiatives, Choice and Sunburst will remain in close touch, and I look forward
to a continued productive working relationship with Don and his team.
Thank you for your support.
/s/ William R. Floyd
---------------------------------------
William R. Floyd
Vice Chairman & Chief Executive Officer
5
<PAGE>
[GRAPHIC PHOTO OMITTED - DEPICTING THE FOLLOWING:]
Russell Maring and his partner, Denis Olson, own and operate a portfolio of 20
hotels from Vancouver, Washington, to Plant City, Florida, under the Comfort
Inn, Comfort Suites, Sleep Inn and Quality Suites flags. Their Sonmar
Development Corporation built them all from the ground up during the last eight
years.
"We like Choice's simplified systems," said Denis. "We don't get overburdened
with a lot of unnecessary paperwork and rules and regulations. I hear horror
stories from my counterparts who franchise other brands."
"We decided to franchise with Choice because of brand recognition and
reservations referral, especially with Comfort Inns and Comfort Suites," said
Russ. "Equally important, there are an awful lot of nice people working at
Choice. It's a relationship."
[GRAPHIC IMAGES OMITTED]
6
<PAGE>
SIMPLIFIED SYSTEMS
brand recognition
[PHOTO APPEARS HERE]
Russell Maring, left,
and Denis Olson
Sonmar Development Corporation
Fargo, North Dakota
7
<PAGE>
FOCUSING ON THE FRANCHISEES
Choice continuously strives to deliver more value to its franchisees by
providing proven operational "success systems," professional staff support,
worldwide reservations and high-impact consumer marketing.
Fulfilling that commitment, in turn, positions Choice for continued
prosperity.
The Company's service philosophy is to provide premium franchise support,
from the first day the franchise contract is signed through the operating life
of every hotel.
. A STRATEGY FOR FUTURE PROFITS
This year Choice undertook a major self-examination to evaluate three key areas:
1) consumer perception of its products, 2) its performance versus the
competition and 3) the satisfaction of franchisees.
That effort culminated in the creation of a three-year strategic plan
designed to enhance franchisee profitability by sharpening the Company's focus
on consumers, realigning corporate resources and implementing new growth and
service strategies.
The plan is driven by six specific strategies:
I. Organize for success
II. Optimize the brand portfolio
III. Increase market penetration on a strategic versus an opportunistic basis
IV. Improve margins through increased productivity
V. Profitably grow international operations
VI. Leverage the spinoff of franchise operations from company-owned real
estate
. NEW ORGANIZATION EMPHASIZES SUPPORT
Choice began the implementation of the strategic plan with the establishment of
five regional service groups to bring its support staff even closer to domestic
franchisees.
Five regional offices are being established: Northeast, Southeast, North
Central, South Central and Pacific. Each will be managed as an independent
profit center under a vice president of franchise operations.
Field staff teams will provide expertise in sales and marketing, hotel
operations and development. Beginning with the new fiscal year, all field
personnel will address both sales and operational issues.
Newly designated franchise service directors will serve as single points of
contact for each operator, with the primary role of driving revenue to each
individual hotel.
By eliminating the assignment of multiple field staff representatives to
each hotel, there will be a ratio of one representative to approximately 45
hotels in comparison to the previous ratio of one to 90.
. REALIGNMENT TO IMPROVE CUSTOMER SATISFACTION
The Company's reorganization also is based on the belief that satisfying
consumers will make franchisees and Choice more profitable.
For that reason, Choice has combined brand management, new product
development and traditional marketing to create more consumer focus and drive
demand for Choice's existing and future products.
The Marketing department now is responsible for all consumer-driven
activities including setting strategic direction and standards for each Choice
brand.
8
<PAGE>
. MAKING QUALITY A CONSUMER ISSUE
In an effort to align standards for each brand with consumer expectations,
Choice is revising its quality assurance review process by emphasizing issues
important to guests as determined by periodic guest feedback in every hotel.
Working with the leadership of its franchisee organizations, Choice is
developing an entirely new model for evaluating quality and service from the
guest's perspective.
Field staff will mobilize to help hotels that demonstrate the need for
improvement. Owners will be counseled on the most effective tactics for
resolving deficiencies, whether through training or physical plant improvements.
At the same time, the Company will intensify standards enforcement to ensure
hotels meet consumer expectations. For example, a revised default process will
reduce significantly the length of time required to terminate properties that
fail basic standards.
The objective is to expedite the termination of hotels that do not fulfill
guest expectations by reducing from 180 days to 90 days the period between
initial default notification and termination from the system.
. YEAR-ROUND MARKETING DRIVES REVENUE
Choice again distinguished itself as one of the industry's most creative and
innovative marketers, rolling out a variety of award-winning advertising and
publicity campaigns designed to deliver the greatest impact for each franchisee
dollar invested.
Suitcase celebrity commercials featuring Ivana Trump, Deion Sanders, Dennis
Rodman, Ricardo Montalban, Jimmy Connors, Jonathan Winters, Ed Koch, Victor
Kiam, Chi Chi Rodriguez and Brett Favre spurred record increases in
reservations, call volume and sales.
Choice this year introduced a special educational advertising campaign
designed to help travel agents sell key markets and Choice brands. The year-long
program, called A Choice Education, included advertisements in travel agent
trade publications and seminars held nationwide.
OPTIMIZING THE BRAND PORTFOLIO
With fresh new-construction brands --Sleep Inn, Comfort Inn, Comfort Suites and
MainStay Suites -- and brands suited primarily for conversions -- Quality,
Clarion, Rodeway Inn and Econo Lodge -- Choice is well-positioned with the right
brand to suit any business strategy in any economic cycle.
The Company's strategic plan calls for leveraging the strengths of each
brand for the benefit of both the franchisees and stockholders.
The strategic plan is guided by the principle that Choice's business
portfolio includes a bundle of trademarks and brands that range from older,
mature assets to new and growing ones.
This plank addresses the need to allocate resources to accelerate the
growth of new brands as well as to renew mature brands. Key strategies for
implementing this plan are 1) building trademark equity and 2) becoming more
consumer-focused.
Aggressive initiatives will be undertaken to build Choice's portfolio of
new and renewed brands that lead the industry in consumer preference.
9
<PAGE>
[GRAPHIC PHOTO OMITTED]
Tourism is a family affair for the Colliers of Pigeon Forge, Tennessee. The
enterprise that Mindle and Irene Collier founded in 1968 has blossomed into six
hotels, a convention center, six restaurants, a campground, two wineries and an
amusement complex, all located in Pigeon Forge and nearby Sevierville.
Their daughter, Kay Collier-Pittman, today serves as vice president of Collier
Development Company's Hotel Division, overseeing marketing, reservations, sales
and operations for two independent and four franchised hotels that together
represent 672 rooms.
The family's 116-room Rodeway Inn hotel was their first franchise. The Colliers
chose the brand after "looking at the numbers and the way the chain was
growing," she said.
"It's been a very good experience. We enjoy the
support we get from Choice."
"Travelers are looking for brand names that they
know. They know what to expect at Rodeway."
10
<PAGE>
SUPPORT
VERY GOOD EXPERIENCE
[PHOTO]
Kay Collier-Pittman
Vice President,
Hotel Division
Collier Development Company Inc.
Pigeon Forge, Tennessee
11
<PAGE>
Specific initiatives by brand include:
. COMFORT INNS & COMFORT SUITES
For the 1998 fiscal year, Choice will research, develop and implement a
marketing plan to promote the Comfort trademark with a strong positioning as the
leader in the limited-service category.
. QUALITY INNS, HOTELS & SUITES
Choice is continuing to revitalize the Quality brand by emphasizing its
competitive advantages including the Quality Executive Room, free in-room
coffee, 100 percent satisfaction guarantee and Quality Sleeper mattress by
Serta. To grow the brand, Choice is promoting the Quality Inn & Suites
conversion package to owners of established, mid-priced properties.
. CLARION INNS, HOTELS, SUITES & RESORTS
Development efforts will be focused in smaller metropolitan areas where the
Clarion brand can compete most effectively. Choice will implement a 100 percent
satisfaction guarantee for the brand effective October 1997 and a consistent
guaranteed meetings program for participating Clarion hotels by Jan. 1, 1998.
. SLEEP INN
A marketing campaign for the coming year will promote the brand's number-one
ranking among all hotel chains for satisfaction, service and value, as rated by
D.K. Shifflet & Associates.
All development efforts will emphasize building more critical mass.
. ECONO LODGE
Choice is in the process of implementing a betterment image program for the
Econo Lodge brand that includes a 100 percent satisfaction guarantee for guests
beginning Jan. 1, 1998, and systemwide completion of the Signature Exterior
Renovation Program by June 1998.
The renovation program has been highly successful, improving RevPAR, or
revenue per available room, by 12.2 percent among the 153 hotels that have
participated to date.
. RODEWAY INN
The Rodeway Inn brand will continue to be positioned to consumers as "senior
friendly" and to independent operators as an outstanding franchise alternative.
. MAINSTAY SUITES
Plans to aggressively develop the MainStay Suites brand continue to be based on
the strong demand for mid-priced, high-quality, extended-stay lodging
nationwide.
. CHOICE PICKS FOOD COURT
Consumer demand for branded, convenient food items, coupled with operator demand
for efficient, labor-saving delivery systems, continue to drive development of
Choice Picks Food Court, a customized modular food court system.
Development sites were expanded during the year to include non-Choice
hotels, outlet malls, high-volume retail stores, contract management companies,
time-share resorts, hospitals, movie theaters and convenience stores.
The first Choice Picks Food Courts located outside a lodging venue opened
this year at shopping outlet centers in Georgia and Pennsylvania.
INCREASING MARKET PENETRATION ON A STRATEGIC BASIS
Choice's strategic plan empowers each new regional management team with
responsibility for maximizing Choice's revenues and profitability by developing
the right mix of brands and enhancing franchisee performance through the
effective delivery of services.
12
<PAGE>
There are three key components to this strategy: 1) establishing regional
profit-and-loss responsibility, 2) integrating geographic mapping and joint
planning with franchisees and 3) enforcing quality assurance standards.
By placing profit-and-loss responsibility in each region, Choice creates a
natural balance between the need to expand the number of properties and the need
to grow RevPAR for existing hotels.
The corporate staff will continue to establish growth plans and revenue
targets by brand. The regions will be responsible for implementing the plans and
maximizing their respective areas of profitability.
. A MARKET PLAN FOR DEVELOPMENT
By mapping the geographic location of existing hotels in a market and analyzing
that area's trends, Choice plans to select the best sites for future development
and the best brands to fit each site.
Choice will give current franchisees the opportunity to develop each new
site in their markets.
Franchise service directors will be given incentives to rapidly solve
quality assurance issues. Consumer input, physical inspections and complaints
all will be factored into each hotel's quality review.
. LOAN PROGRAM NURTURES EXISTING FRANCHISEES
The Company actively encourages Choice franchisees to develop more hotels. This
has proved very successful over the years, with more than 50 percent of all new
deals executed with existing franchisees.
To advance that trend, the Company this year introduced a $100 million loan
program financed by Salomon Brothers for multiple-unit franchisees who have
distinguished themselves as outstanding operators.
The program, offering loans of $1.5 to $6 million, enables developers to
secure both construction and long-term financing in one package, eliminating the
uncertainty associated with rolling construction financing into permanent
mortgages.
IMPROVING MARGINS THROUGH INCREASED PRODUCTIVITY
The strategic plan seeks to improve the Company's competitive position through
new revenue-generating and productivity programs and by providing franchisees
the tools necessary to improve their RevPAR performance.
Two key action plans for this plank include building immediately on the
Company's success with strategic vendor partnerships and implementing property
management systems in every Quality, Comfort, Clarion, Sleep Inn and MainStay
Suites hotel by the year 2000.
. THE POWER OF STRATEGIC PARTNERSHIPS
Choice's franchise system of 3,344 hotels worldwide and the more than 90 million
guests it serves annually provide a powerful attraction to other major consumer
organizations looking to work together for mutual benefit.
Choice enjoys partnerships with a wide spectrum of companies including
AT&T, Visa, American Express, Pizza Hut, Nortel, Lucent Technologies, H&R Block
and Kodak, among others.
Choice this year created a new department, the Partner Services Group,
charged with establishing high-yield partnerships with outside companies to
provide products and services to both Choice and its franchisees.
Operating under a philosophy dubbed "4-Win," the new department seeks to
develop alliances and partnerships that seek benefits for 1) franchisees, 2)
corporate partners, 3) Choice, and 4) guests at Choice-brand hotels.
The 4-Win approach is illustrated in a partnership negotiated this year
with
13
<PAGE>
[GRAPHIC OMITTED]
Dr. Bharat "Bart" Shah planted the seed of a small lodging empire when he
purchased his first hotel in 1979. Today he and his son, Mitesh "Mit" Shah, have
assembled a portfolio of 15 high-performing hotels throughout the Southeast.
Their first franchised hotel was an Econo Lodge hotel, which now is one of five
Choice properties they manage including a Comfort Inn, two Comfort Suites and a
Sleep Inn hotel.
Mit is bullish on Choice's new Profit Manager property management system, which
one of his hotels tested as a beta site. "This new system is going to be a
strong enhancement, a valuable tool for all Choice properties."
"We selected Choice for its wide
distribution and because it introduced
some of the very first high-quality,
limited-service brands. Also, Choice's
advertising campaigns have the greatest
distribution in the industry."
"The relationships we have forged with
Choice over the last decade have a lot
of bearing in terms of our franchise
decisions for our new hotels."
ENHANCEMENT
WIDE DISTRIBUTION
HIGH QUALITY
GREATEST
14
<PAGE>
[PHOTO OMITTED]
Mitesh Shah
Executive Vice President
Nobel Investment
Group Ltd.
Atlanta, Georgia
HIGH QUALITY
WIDE DISTRIBUTION
15
<PAGE>
Maxwell House. The deal locked in extremely competitive prices, protecting
franchisees from the explosion in coffee prices during the year.
At the same time, Maxwell House won access to thousands of franchisees as
potential new customers, hotel guests gained a trusted product and Choice
benefitted by association with a major national brand.
Similarly, Choice's partnership with AT&T for in-room long distance
telephone service, Visa for bank card services and Serta for the exclusive
Quality Sleeper mattress each have provided four-way wins.
. A MAJOR PARTNERSHIP WITH DISNEY
In the spring of 1997, Choice signed an unprecedented partnership with the Walt
Disney Company to promote the Comfort, Quality and Econo Lodge brands using
clips and characters from Disney's new animated feature film, Hercules.
Choice's partnership with Disney marks the first time the entertainment
giant has entered into an alliance with a hotel company and the first time it
has allowed its characters to perform in another company's commercials.
In another first, Choice entered into an agreement to cross-sell the Walt
Disney World theme park by transferring callers directly to park sales agents
from Choice reservations centers.
. A HOTEL-LEVEL INITIATIVE TO IMPROVE PROFITABILITY
Following months of intense research and development, the Company launched the
most far-reaching and important technological initiative in its history: a
proprietary property management system named Profit Manager by Choice Hotels.
The state-of-the-art system is designed to help franchisees maximize
profitability and compete more effectively by managing their rooms inventory,
rates and reservations.
Among its key benefits, the Profit Manager system synchronizes each hotel's
inventory with the CHOICE 2001 reservation system, giving Choice reservation
sales agents the ability to sell every last room at every hotel.
The system also provides Choice and its franchisees with a sophisticated
revenue management function that calculates and suggests optimum rates and
length of stays based on each hotel's past performance and projected occupancy.
. THE PROFIT MANAGER SYSTEM'S MULTIPLE BENEFITS
The Profit Manager system also captures important information about each guest,
which will speed registration of frequent travelers and enable Choice to compile
a systemwide database of guest histories and demographic information.
The resulting database will allow Choice and its franchisees to craft
highly targeted marketing campaigns designed to build repeat business. To
outside potential partners and vendors, it will enhance the value of a
partnership with Choice.
In addition to its property management functions, the Profit Manager system
includes an automated training component that will teach line-level employees
about every aspect of hotel operations and reduce the need for off-site
training.
It is expected that Profit Manager systems will be installed in every
Quality, Comfort, Clarion, Sleep Inn and MainStay Suites hotel by Jan. 1, 2000.
Because the Profit Manager system requires a full-time link with the CHOICE
2001 reservation system, Choice negotiated an agreement on behalf of its
franchisees to provide satellite communications for each hotel at a low monthly
cost.
In the long term, every franchisee is expected to reap significant savings
from the satellite
16
<PAGE>
system because it eliminates expensive conventional telephone costs for CHOICE
2001 connections and credit card transactions.
. CHOICE LAUNCHES NEW INTERNET SITE
Expanding on the successful operation of its consumer-oriented Internet site,
Choice introduced a new site specifically designed to encourage travel agents to
book more rooms and thereby drive more revenue to franchisees.
The site, named Travel Agent City, automatically calculates commission
payments, offers detailed information on special discounts and provides tips for
travel agents to improve their profitability.
As a measure of their importance to the Choice system, travel agents this
year contributed $358 million to Choice franchises worldwide, a 24 percent
increase over fiscal year 1996. Travel agents account for nearly 38 percent of
all bookings made through the CHOICE 2001 reservation system.
. INTERNET USAGE CLIMBS
Meanwhile, more Internet users than ever visited Choice's World Wide Web
consumer site -- www.choicehotels.com -- and used it to make on-line bookings.
The Internet site produced 24,346 room-night sales worth $1.5 million in gross
room revenue during the year.
Choice christened its home page "On the Road Online" during the year and
introduced lively new graphics featuring suitcase celebrities featured in the
Company's television commercials.
A planned enhancement will allow users to map trips from the front door of
their homes to the front doors of each hotel.
A PLAN TO GROW OVERSEAS OPERATIONS PROFITABLY
International expansion represents one of Choice's major growth opportunities.
Choice is focusing on growth in high-potential key countries that are receptive
to franchised lodging where brand equity can rapidly be established.
The strategy is to build a solid foundation of quality partnerships through
joint ventures with experienced owner-operators and master franchise agreements
in cases where the partner has an existing base of hotel operations to build
upon.
Implementation of this plan is moving forward with the development of a
comprehensive international marketing strategy and the establishment of an
effective international franchise service delivery system.
. DEVELOPING AN INTERNATIONAL MARKETING STRATEGY
International brand standards will be uniformly defined, and marketing programs
will be designed for maximum impact on a country-by-country basis.
Additionally, Choice will build sales through its recently launched global
sales strategy by working with tour operators and travel agents and by
leveraging existing resources such as the CHOICE 2001 reservation system and the
worldwide sales force.
. ESTABLISHING AN EFFECTIVE SERVICE
DELIVERY SYSTEM
The establishment of an effective international franchise service delivery
system is founded on the need to deliver franchising "know-how" to Choice's
overseas partners.
Choice will create an international structure parallel with its domestic
organization that will deliver personalized service to each of its international
franchises while enforcing standards and driving franchisee RevPAR performance.
17
<PAGE>
SATISFACTION
GUARANTEE
SUPPORT
BRAND AWARENESS
Franchising proved to be a winning growth strategy for Musselman & Musselman
Inc., which grew from two hotels to 14 in seven short years thanks to the power
of brands like Comfort Inn, Comfort Suites and Sleep Inn.
The Musselmans constructed their first Comfort Inn south of Louisville in 1993,
beginning a profitable relationship with Choice. Since that time they welcomed
Tom Musselman Jr. into the company and built another Comfort Inn, two Comfort
Suites and two Sleep Inn hotels.
For the future, the company plans to expand into Tennessee and Indiana and
develop more hotels including Sleep Inn, a brand that Chester says "fits nicely
in well-developed markets because it's a different concept."
"In order to obtain financing, you need a big company backing you and
good name awareness," said Chester Musselman, president and chief
executive officer, who joined his father, Tom Musselman Sr., in 1990
to jump-start the company's growth.
"We chose Comfort and Sleep for brand
awareness and the support provided by
the Choice system. We like the concept,
especially the 100 percent satisfaction
guarantee. It's worked great for us."
18
<PAGE>
[PHOTO OMITTED]
BRAND AWARENESS
SATISFACTION GUARANTEE
Chester Musselman
President and
Chief Executive Officer
Musselman &
Musselman Inc.
Louisville, Kentucky
19
<PAGE>
LEVERAGING THE SPINOFF OF FRANCHISE OPERATIONS FROM COMPANY-OWNED REAL ESTATE
A tax-free spinoff to shareholders expected to be completed in the fall of 1997
will separate the Company's franchising and real estate operations, creating two
separate publicly traded companies.
After the spinoff, the franchising company will retain the name Choice
Hotels International. It will focus exclusively on franchising and intends to
pursue potential acquisition opportunities both inside and outside of the
lodging industry.
A critical criterion for any acquisition opportunity is that it be a "good
fit" with Choice, either by complementing the Company's existing businesses or
by leveraging its core competencies in franchising.
The new real estate company will be named Sunburst Hospitality Corporation.
Following the spinoff, it will pursue a four-part strategy: 1) optimize the
operating performance and value of its existing portfolio through the consistent
application of high-quality sales, marketing and operating programs; 2)
capitalize on the under-served, high-growth, mid-priced, extended-stay all-suite
segment with the development of MainStay Suites hotels; 3) develop other
high-quality, consumer-focused products such as the Sleep Inn brand; and 4)
pursue the opportunistic acquisition of existing hotels where substantial value
can be created.
Through a strategic alliance, Sunburst also will continue to help Choice
create and test new products and success systems for the benefit of its
franchisees.
. A CINDERELLA STORY
The Company's real estate business truly is a Cinderella story.
It began in 1992 with just 12 hotels and $39.8 million in revenue and, by
capitalizing on the soft real estate market, grew to 71 hotels in the United
States with 10,330 rooms that generated $168 million in revenue this year.
The majority of the hotels were acquired by the Company since 1992 at
prices below their replacement cost. All have benefitted from the Company's
investment of capital that has been used to substantially renovate and upgrade
the properties.
Since 1993, real estate division revenues have grown at a compound annual
rate of 43.4 percent. At the same time, gross margins improved from 27.6 percent
in 1993 to 36.5 percent four years later.
The division this year constructed and opened four Sleep Inn hotels in
North Carolina and Texas as well as Choice's first MainStay Suites hotel in
Plano, Texas. In addition, the division acquired two hotels with a total of 324
rooms in Florida and North Carolina.
The division this year improved the RevPAR performance of its portfolio by
9.9 percent to an average $40.96 based on an average daily rate of $59.62.
All of the division's hotels are part of the Choice brand family. They
operate in one of the three principal segments of the lodging industry:
all-suite, full service and limited service.
[GRAPHIC OMMITTED]
PICTURED:
. Proposed Sunburst Hospitality Corporation Senior Officers - From left are
Kevin Hanley, Senior Vice President, Real Estate & Development; Antonio DiRico,
President & Chief Operating Officer; Donald J. Landry, Vice Chairman & Chief
Executive Officer; and Ed Kubis, Senior Vice President, General Counsel &
Secretary.
20
<PAGE>
Financial Information
TABLE OF CONTENTS
Management Discussion & Analysis.................. 22
Report of Independent Public Accountants......... 27
Consolidated Financial Statements................ 28
Notes to Consolidated Financial Statements....... 32
21
<PAGE>
MANAGEMENT DISCUSSION & ANALYSIS
Choice Hotels International Inc. and Subsidiaries
The Company is one of the largest hotel franchisors in the world with 3,344
hotels open and 820 under development representing 355,127 rooms in 33
countries. The Company franchises hotels under the Comfort, Quality, Econo
Lodge, Sleep Inn, Clarion, Rodeway Inn and MainStay Suites brand names. The
Company also owns and manages 85 hotels operated under the Company's franchised
brand names in the United States and Europe, with 20 additional hotels under
construction or development.
On Nov. 1, 1996, the Company became an independent corporation as a result of a
tax-free distribution from its Parent, Manor Care Inc.
COMPARISON OF FISCAL YEAR 1997 OPERATING RESULTS VS. FISCAL YEAR 1996 OPERATING
RESULTS The Company recorded net income of $40.9 million for the year ended May
31, 1997 ("fiscal year 1997"), an increase of $32.4 million, compared with net
income of $8.5 million for the year ended May 31, 1996 ("fiscal year 1996"). Net
income before extraordinary item for fiscal year 1997 was $42.0 million, an
increase of $13.4 million (or 46.9%) compared with net income of $28.6 million,
excluding the net effect of an asset impairment and restructuring charge for
fiscal year 1996. The increase in income for fiscal year 1997 was primarily
attributable to an increase in franchise and hotel operations revenue as a
direct result of the addition of new franchisees to the Company's franchise
system and new hotels added to the Company's portfolio of owned and operated
hotels.
Consolidated revenues increased $51.6 million or 13.6% to $429.9 million in
fiscal year 1997 from $378.3 million in fiscal year 1996. Franchise revenues
increased 9.2% to $244.2 million in 1997, an increase of $20.6 million over 1996
revenue of $223.6 million. Owned hotel revenue increased 20.2% in 1997, an
increase of $31.2 million over 1996 revenue of $154.6 million.
Franchising Operations
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. Management therefore
analyzes its franchise business based on revenues net of marketing and
reservation fees ("net franchise revenues") and expenses net of marketing and
reservation expenses.
Net franchise revenues include base royalty fees, initial 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 $121.9 million for fiscal year 1997
and $106.9 million for fiscal year 1996.
Total net franchise revenues are computed as follows:
(In millions) 1997 1996
------ ------
Total franchise revenues................ $244.2 $223.6
Less:marketing and reservation fees..... (99.5) (95.1)
product sales..................... (22.8) (21.6)
------ ------
Total net franchise revenues............ $121.9 $106.9
====== ======
Royalties increased $7.9 million to $90.4 million from $82.5 million in 1996, an
increase of 9.6%. The increase in royalties is attributable to a net increase of
292 franchisees during the period representing an additional 21,578 rooms added
to the system, an improvement in domestic RevPAR of 2.9% and an increase in the
effective royalty rate of the domestic hotel system to 3.43% from 3.34%. Initial
fee revenue generated from domestic franchise contracts signed increased 14.8%
to $14.0 million from $12.2 million in 1996. Total franchise agreements signed
in fiscal year 1997 were 495, up 14% from the total contracts signed in fiscal
year 1996 of 436. Revenues generated from strategic vendor relationships
increased to $6.1 million from $1.8 million in 1996. This revenue relates to
agreements that provide preferred vendors access to Company's franchisees.
22
<PAGE>
The cost to operate the franchising business is reflected in selling, general
and administrative costs. Of the total consolidated selling, general and
administrative expenses, $51.1 million relates directly to the franchise
business with the remainder of $4.0 million attributable to the Company's owned
and operated hotels. Total selling, general and administrative expenses of the
franchise business increased 13.1% over 1996 franchise costs of $45.2 million.
$4.8 million of the increase was directly attributable to additional costs of
operating as an independent company apart from Manor Care. These additional
costs are primarily additional staffing, incremental rental expenses and
consulting fees as the Company assumed certain administrative tasks previously
provided by Manor Care. The remaining increases in selling, general and
administrative expenses were primarily due to additional personnel to support
company growth and new company initiatives. As a percentage of total net
franchising revenues, total franchising selling, general and administrative
expenses were 41.9% in fiscal year 1997 and 42.3% in fiscal year 1996. Exclusive
of the $4.8 million increase resulting from the distribution, as a percentage of
net franchising revenues, selling, general and administrative expenses declined
to 37.9% in fiscal year 1997 from 42.3% in fiscal year 1996. The improvement in
the franchising margins primarily 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
increased $1.2 million to $22.8 million in fiscal year 1997 from $21.6 million
in fiscal year 1996. The group purchasing program consists of the Company's
utilization of bulk purchases to obtain favorable pricing from third-party
vendors for franchisees ordering similar products. The Company acts as a
clearinghouse between the franchisee and the vendor, and most orders are shipped
directly to the franchisee.
Product cost of sales increased $2.1 million or 9.9% in fiscal year 1997. The
product services margins decreased in fiscal year 1997 to 0.1% from 4.0% in
fiscal year 1996. This purchasing program is provided to the franchisees as a
service and is not designed to be a major component of the Company's
profitability.
HOTEL OPERATIONS
Hotel operations revenue consists principally of guest room revenue, meeting
room revenue and food-and-beverage revenue from owned and operated hotels. The
Company's hotel operations revenues were $185.8 million for fiscal year 1997, up
20.2% from $154.6 million for fiscal year 1996. The increases in revenue were
primarily the result of additional room capacity achieved through hotel
acquisitions and the construction of new hotels. Overall average daily room
rates increased 6.5% from fiscal year 1996 to fiscal year 1997, and occupancy
increased 3.2% over the corresponding period. Domestic RevPAR increased to
$40.96 from $37.28, an improvement of 9.9%. Increases in food-and-beverage sales
of $2.2 million in fiscal year 1997 also contributed to revenue growth.
Hotel operations expenses increased $11.1 million or 9.5% in fiscal year 1997
resulting primarily from the addition of six hotels during the year and to a
lesser extent a $1.3 million increase in food-and-beverage costs. Hotel
operating margins increased to 31.3% in fiscal year 1997 from 24.7% in fiscal
year 1996 primarily due to increased RevPAR.
OTHER EXPENSES
Depreciation and amortization increased $3.7 million or 14.3% to $29.8 million
in fiscal year 1997 from $26.1 million in fiscal year 1996. The increase was
primarily due to acquisitions and renovations of hotels.
In fiscal year 1996, the Company recorded a charge against earnings of $33.3
million relating to impairment of certain long-lived assets and restructuring
costs. The most significant components of the charge related to impairment of
assets associated with the Company's European operations and certain
restructuring costs, including severance and employee benefit plan restructuring
costs directly associated with the distribution.
23
<PAGE>
Interest expense increased $2.3 million or 9.6% as a result of increased
borrowings under the Company's revolving credit facility. These funds were
primarily used to support the stock repurchase program. Offsetting interest
expense was $943,000 of dividend income recognized from the Company's preferred
stock investment in Friendly Hotels PLC.
COMPARISON OF FISCAL YEAR 1996 OPERATING RESULTS VS. FISCAL YEAR 1995 OPERATING
RESULTS
Net income for fiscal year 1996 was $8.5 million compared with $16.8 million for
fiscal year 1995. Excluding the asset impairment and restructuring charge for
fiscal year 1996, net income was $28.6 million, an increase of $11.8 million or
70.2% compared with net income of $16.8 million for fiscal year 1995.
FRANCHISING OPERATIONS
The Company's net franchise revenues were $106.9 million for fiscal year 1996
and $92.4 million for fiscal year 1995.
Total net franchise revenues are computed as follows:
<TABLE>
<CAPTION>
(In millions) 1996 1995
------ ------
<S> <C> <C>
Total franchise revenues................ $223.6 $188.0
Less:marketing and reservation fees..... (95.1) (81.1
product sales..................... (21.6) (14.5)
------ ------
Total net franchise revenues............ $106.9 $ 92.4
====== ======
</TABLE>
Royalties increased $9.6 million to $82.5 million in 1996 from $72.9 million in
1995, an increase of 13.0%. The increase in royalties is attributable to a net
increase of 217 franchisees during the period representing an additional 15,787
rooms added to the system, an improvement in domestic RevPAR of 5.1% and an
increase in the effective royalty rate of the domestic hotel system to 3.34%
from 3.20%. Initial fee revenue generated from franchise contracts signed
increased 37.8% to $13.5 million in 1996 from $9.8 million in 1995. Total
franchise agreements signed in 1996 were 436, up 21.4% from the total contracts
signed in 1995 of 359.
The cost to operate the franchising business is reflected in selling, general
and administrative costs. Of the total consolidated selling, general and
administrative expenses in fiscal year 1996, $45.2 million relates directly to
the franchise business with the remainder of $2.3 million attributable to the
Company's operating hotels. This compares with fiscal year 1995 selling, general
and administrative expenses of $45.6 million for the franchise business. As a
percentage of total net franchising revenues, total franchising selling, general
and administrative expenses in fiscal year 1996 declined to 42.3% from 49.4% in
fiscal year 1995. The improvement in the franchising margins primarily relates
to the economies of scale generated from operating a larger franchise base.
PRODUCT SALES
Sales made to franchisees through the Company's group purchasing program
increased $7.1 million to $21.6 million in fiscal year 1996 from $14.5 million
in fiscal year 1995. The group purchasing program consists of the Company's
utilization of bulk purchases to obtain favorable pricing from third-party
vendors for franchisees ordering similar products. The Company acts as a
clearinghouse between the franchisee and the vendor, and most orders are shipped
directly to the franchisee.
Similarly, product cost of sales increased $6.8 million or 49.2% in fiscal year
1996. The product services margins remained stable in fiscal year 1996 at 4.0%.
This purchasing program is provided to the franchisees as a service and is not
designed to be a major component of the Company's profitability.
HOTEL OPERATIONS
Hotel operations revenue consists principally of room revenue, meeting room
revenue and food-and-beverage revenue from owned and operated hotels. The
Company's hotel operations revenues were $154.6 million for fiscal year 1996 and
$114.5 million for fiscal year 1995. Hotel operations revenue increased 35.0%
primarily as a result of additional room capacity achieved through hotel
acquisitions and the construction of new hotels. Overall average daily room
rates increased 8.0% from fiscal year 1995 to fiscal year 1996. Overall
occupancies were 64.8% in fiscal year 1996 compared with 64.1% in fiscal year
1995. Domestic RevPAR improved to $37.28 from $34.40, an increase of 8.4%. The
improved performance of the Company-owned hotels was a result of marketing
efforts in both new and existing markets as well as a general strengthening of
lodging industry fundamentals.
24
<PAGE>
Hotel operations expenses increased $26.9 million or 30.0% in fiscal year 1996
resulting primarily from the addition of 17 operating hotels during the year.
Hotel operating margins increased to 24.7% in fiscal year 1996 from 21.7% in
fiscal year 1995, primarily due to higher occupancies in the newly renovated and
repositioned acquired hotels.
OTHER EXPENSES
Depreciation and amortization increased $4.2 million or 19.3% to $26.1 million
in fiscal year 1996 from $21.8 million in fiscal year 1995. The increase was
primarily due to acquisitions and renovations of hotel properties.
In fiscal year 1996, the Company recorded a charge against earnings of $33.3
million relating to impairment of certain long-lived assets and restructuring
costs. The most significant components of the charge related to impairment of
assets associated with the Company's European operations and certain
restructuring costs, including severance and employee benefit plan restructuring
costs, directly associated with the Manor Care distribution.
The increase in interest expense results from increased borrowings from Manor
Care to support hotel development. See the Liquidity and Capital Resources
discussion below and the related Notes to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that cash flows from operations and third-party financing
sources are sufficient to support on-going operations, capital expenditures and
debt service requirements for the immediate future. Management is currently
considering options, including renegotiating its credit facility, to secure
long-term financing to meet the debt requirements in fiscal years 1998 and 2000
as well as working capital and business development needs.
Net cash provided by operating activities was $87.2 million for fiscal year
1997, an increase of $31.5 million or 56.6% from $55.7 million in fiscal year
1996. At May 31, 1997, the Company had $372.0 million of long-term debt
outstanding, of which $27.9 million and $215.9 million mature during fiscal
years 1998 and 2000, respectively.
On April 23, 1997, the Company, through its indirect subsidiary, First Choice
Properties, completed an offering of $117.5 million multi-class mortgage
pass-through certificates, which are non-recourse and collateralized by 36 hotel
properties owned by the Company. The certificates bear a 7.8% interest rate, and
have a final maturity of May 5, 2012. The Company used the proceeds to repay
$110.0 million of the $225.7 million 9% long-term note payable to Manor Care.
The Company incurred a prepayment penalty of $1.1 million, net of taxes, as a
result of this prepayment and has recognized that amount as an extraordinary
loss in the accompanying consolidated income statement.
On October 30, 1996, the Company entered into a $100.0 million competitive
advance and multi-currency revolving credit facility provided by a group of
seven banks. This facility provides that up to $75.0 million is available for
borrowings in foreign currencies. On May 5, 1997, the Company increased the size
of this facility from $100.0 million to $125.0 million. Borrowings under the
additional $25.0 million are due on Dec. 31, 1997, and accordingly $25 million
is classified as current on the consolidated balance sheet. The Company's
working capital ratio was .54 and .85 at May 31, 1997, and 1996, respectively.
The Company will utilize its revolving credit facility to meet seasonal
fluctuations in working capital requirements.
Total capital expenditures, including expenditures for the development of Sleep
Inn and MainStay Suites hotels, were $84.7 million in fiscal year 1997. The
Company plans capital expenditures for development of Sleep Inn and MainStay
Suites hotels of $69 million and $32 million in fiscal years 1998 and 1999,
respectively. These amounts include expected capital expenditures relating to
the construction of seven Sleep Inn hotels and 19 MainStay Suite hotels over the
next two fiscal years. Planned capital expenditures for routine maintenance and
renovation of existing properties are $13.5 million and $14.4 million for fiscal
years 1998 and 1999, respectively. Management will also pursue additional
acquisitions of significantly under-valued hotel properties.
25
<PAGE>
During fiscal year 1996, the Company invested approximately $17.1 million in the
capital stock of Friendly Hotels PLC.
During the 1997 fiscal year, the Company repurchased 3,684,100 shares of its
outstanding common stock at a total cost of $53.2 million. The Company's board
of directors has authorized the repurchase of up to six million shares of its
outstanding common stock. The Company expects to repurchase shares from time to
time in the open market, subject to market conditions and limitations within the
Company's credit facilities. The repurchased shares are held in treasury and may
be used by the Company for general corporate purposes, including future
acquisitions and the Company's stock-based employee and director benefit plans.
FORWARD-LOOKING STATEMENTS
The statements contained in this annual report 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.
These factors include, among other things: the Company's limited operating
history and uncertainty as to the Company's future profitability; the ability to
meet construction and development schedules and budgets; the uncertainty as to
the consumer demand for extended-stay lodging; increasing competition,
particularly in the extended-stay lodging market; the ability to integrate and
successfully operate acquired properties and the risks associated with such
properties; the ability to obtain financing on acceptable terms to finance the
Company's growth strategy; and general economic conditions as they may impact
the overall lodging industry.
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.
26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Choice Hotels International Inc.:
We have audited the accompanying consolidated balance sheets of Choice Hotels
International Inc. and subsidiaries (a Delaware corporation), as of May 31,
1997, and 1996, and the related consolidated statements of income and cash flows
for each of the three fiscal years in the period ended May 31, 1997, and
stockholders' equity for the seven months ended May 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Choice Hotels International,
Inc. as of May 31, 1997, and 1996, and the results of their operations and their
cash flows for each of the three fiscal years in the period ended May 31, 1997,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
/s/ Arthur Andersen
- -------------------
Washington, D.C.,
June 24, 1997
27
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED INCOME STATEMENTS
Choice Hotels International Inc. and Subsidiaries
Fiscal years ended May 31 (in thousands, except per share amounts) 1997 1996 1995
==== ==== ====
REVENUES
<S> <C> <C> <C>
Franchise.......................................................... $244,176 $223,634 $188,021
Hotel operations................................................... 185,753 154,625 114,514
--------------------------------------------
Total revenues..................................................... 429,929 378,259 302,535
============================================
OPERATING EXPENSES
Franchise marketing and reservation................................ 96,725 92,446 78,648
Hotel operations................................................... 127,599 116,481 89,608
Selling, general and administrative................................ 55,132 47,543 46,504
Product services cost of sales..................................... 22,766 20,709 13,875
Depreciation and amortization...................................... 29,797 26,062 21,841
Provision for asset impairment and restructuring................... -- 33,335 --
--------------------------------------------
Total operating expenses........................................... 332,019 336,576 250,476
--------------------------------------------
Income before other expenses and income taxes...................... 97,910 41,683 52,059
--------------------------------------------
OTHER EXPENSES
Interest expense, net.............................................. 25,686 24,293 19,904
Minority interest.................................................. -- 1,532 2,200
--------------------------------------------
Total other expenses............................................... 25,686 25,825 22,104
--------------------------------------------
Income before income taxes......................................... 72,224 15,858 29,955
Income taxes....................................................... 30,200 7,400 13,144
--------------------------------------------
Net income before extraordinary item............................... 42,024 8,458 16,811
--------------------------------------------
Extraordinary item-- loss from early
extinguishment of debt (net of $747 tax benefit)................... 1,144 -- --
--------------------------------------------
Net income......................................................... $40,880 $ 8,458 $ 16,811
============================================
Pro forma earnings per share before extraordinary item............. $ .67 $ .14 $ .27
Pro forma extraordinary item per share............................. (.02) -- --
-------------------------------------------
Pro forma earnings per share....................................... $ .65 $ .14 $ .27
-------------------------------------------
Pro forma weighted average shares outstanding...................... $62,680 62,628 62,480
===========================================
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Choice Hotels International Inc. and Subsidiaries
As of May 31 (in thousands) 1997 1996
---- ----
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents................................................ $ 10,825 $ 4,539
Receivables (net of allowance for doubtful accounts
of $6,744 and $4,824 respectively)....................................... 31,981 28,008
Inventories.............................................................. 1,350 757
Current deferred income tax benefit...................................... 1,069 1,266
Prepaid expenses......................................................... 934 3,005
Other.................................................................... 7,227 3,370
------------------------
Total current assets..................................................... 53,386 40,945
Property and equipment, at cost, net of accumulated depreciation........ 370,244 305,520
Goodwill, net of accumulated amortization................................ 69,938 65,377
Franchising rights, net of accumulated amortization...................... 50,504 53,138
Investment in Friendly Hotels PLC........................................ 17,161 17,069
Other assets............................................................. 11,883 9,255
------------------------
Total assets............................................................. $573,116 $491,304
========================
LIABILITIES AND EQUITY
Current liabilities
Current portion of mortgages and long-term debt.......................... $ 27,954 $ 669
Accounts payable......................................................... 42,489 22,328
Accrued expenses......................................................... 26,932 23,570
Income taxes payable..................................................... 2,099 1,810
------------------------
Total current liabilities................................................ 99,474 48,377
Mortgages and other long-term debt....................................... 228,326 68,469
Notes payable to Manor Care Inc.......................................... 115,723 225,723
Deferred income taxes ($4,192, and $0, respectively)
and other liabilities ................................................... 5,106 1,176
------------------------
Total liabilities........................................................ 448,629 343,745
Common stock............................................................. 639 --
Additional paid-in-capital............................................... 167,163 --
Cumulative translation adjustment........................................ (7,018) --
Retained earnings........................................................ 17,075 --
Investments and advances from Manor Care Inc............................. -- 147,559
------------------------
Total paid-in capital and retained earnings.............................. 177,859 147,559
------------------------
Less: treasury stock..................................................... (53,372) --
------------------------
Total stockholders' equity............................................... 124,487 147,559
------------------------
Total liabilities and stockholders' equity............................... $573,116 $491,304
========================
</TABLE>
29
<PAGE>
Consolidated Statement of Cash Flows
Choice Hotels International Inc. and Subsidiaries
<TABLE>
<CAPTION>
Fiscal years ended May 31 (in thousands) 1997 1996 1995
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income............................................................... $ 40,880 $ 8,458 $ 16,811
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization............................................ 29,797 26,062 21,841
Amortization of debt discount............................................ 29 34 171
Provision for bad debts, net............................................. 2,798 974 906
Increase (decrease) in deferred taxes.................................... 6,289 (12,885) 827
Loss on sale of operating hotel.......................................... 220 584 --
Provision for asset impairment........................................... -- 28,160 --
Change in assets and liabilities:
Change in receivables.................................................... (6,771) (7,036) (4,529)
Change in inventories and other current assets........................... (2,379) (3,204) 3,748
Change in current liabilities............................................ 17,845 10,922 5,691
Change in income taxes payable........................................... 289 1,176 634
Change in other liabilities.............................................. (1,831) 2,443 1,803
----------------------------------------
Net cash provided by operating activities................................ 87,166 55,688 47,903
----------------------------------------
Cash Flows From Investing Activities
Investment in property and equipment..................................... (84,748) (53,472) (34,889)
Acquisition of operating hotels.......................................... (5,550) (49,617) (59,766)
Proceeds from sale of operating hotels................................... 2,522 5,479 --
Purchase of minority interest............................................ (2,494) (55,269) --
Investment in Friendly Hotels PLC........................................ -- (17,069) --
Other items, net......................................................... (11,017) (248) 1,595
----------------------------------------
Net cash utilized by investing activities................................ (101,287) (170,196) (93,060)
----------------------------------------
Cash Flows From Financing Activities
Proceeds from mortgages and other long-term debt......................... 239,108 17,296 15,567
Principal payments of debt............................................... (51,995) (810) (16,382)
Principal payments on notes payable to Manor Care Inc.................... (110,000) -- --
Proceeds from notes payable to Manor Care Inc............................ -- 27,201 51,461
Proceeds from issuance of common stock................................... 3,410 -- --
Purchases of treasury stock.............................................. (53,150) -- --
Advances (to) from Manor Care Inc., net.................................. (6,966) 73,272 (6,190)
----------------------------------------
Net cash provided by financing activities................................ 20,407 116,959 44,456
----------------------------------------
Net change in cash and cash equivalents.................................. 6,286 2,451 (701)
Cash and cash equivalents at beginning of period......................... 4,539 2,088 2,789
----------------------------------------
Cash and cash equivalents at end of period............................... $ 10,825 $ 4,539 $ 2,088
========================================
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Choice Hotels International Inc. and Subsidiaries
(in thousands except share amounts) Common Stock Additional Translation Retained Treasury
Shares Amount Paid-in-Capital Adjustment Earnings Stock
------ ------ -------------------------- -------- -----
Distribution from
Manor Care Inc.,
<S> <C> <C> <C> <C> <C> <C>
Nov. 1, 1996............................. 63,081,129 $631 $162,512 $(1,750) $ -- $--
Net income............................... -- -- -- -- 40,880 --
Transfers to Manor Care Inc.............. -- -- -- -- (23,805) --
Exercise of stock options/
grants................................... 781,542 8 4,651 -- -- --
Translation adjustment................... -- -- -- (5,268) -- --
Treasury purchases....................... (3,697,724) -- -- -- -- (53,372)
-----------------------------------------------------------------------------
Balance, May 31, 1997.................... 60,164,947 $639 $167,163 $(7,018) $ 17,075 $(53,372)
=============================================================================
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Choice Hotels International Inc. and Subsidiaries
Summary of Significant
Accounting Policies
BASIS OF PRESENTATION
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 through a spinoff of its lodging business (the "Manor Care
distribution"). On Sept. 30, 1996, the board of directors of Manor Care declared
a special dividend to its stockholders of one share of common stock of Choice
Hotels International Inc. (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 Nov. 1, 1996, to holders of record of Manor Care's
common stock on Oct. 10, 1996.
The Manor Care distribution separated the lodging and health-care businesses of
Manor Care into two public corporations. The operations of Choice Hotels
International Inc. consist principally of the hotel franchise operations and the
owned and managed hotel operations formerly conducted by Manor Care directly or
through its subsidiaries. On Nov. 1, 1996, concurrent with the Manor Care
distribution, the Company changed its name from Choice Hotels Holdings Inc. to
Choice Hotels International Inc., and the Company's franchising subsidiary,
formerly named Choice Hotels International Inc., changed its name to Choice
Hotels Franchising Inc.
On April 29, 1997, Choice Hotels International Inc., announced its intention to
proceed with the separation of its domestic owned and operated hotels from its
franchising and European hotel business through a spinoff of its franchising
business (the "distribution"). The Company's board of directors voted to
approve, in principle, the distribution subject to receipt of other approvals
and consents and satisfactory implementation of the arrangements for the
distribution. The Company intends to consummate the distribution in the second
quarter of fiscal year 1998 through a special dividend to its stockholders of
one share of common stock of Choice Hotels Franchising Inc. ("Franchising") for
each share of Company common stock. The distribution is conditional upon certain
matters, including declaration of the special dividend by the Company's board of
directors, receipt of a ruling from the Internal Revenue Service that the
distribution will be tax-free and approval by the Company's stockholders of the
special dividend and of the proposed reverse stock split of the Company
post-distribution. It is anticipated that upon the distribution, the Company
will change its corporate name to Sunburst Hospitality Corporation and Choice
Hotels Franchising Inc. will change its name to Choice Hotels International Inc.
As of May 31, 1997, Franchising had franchise agreements with 3,344 hotels
operating in 33 countries under the following brand names: Comfort, Clarion,
Sleep Inn, Quality, Rodeway Inn, MainStay Suites and Econo Lodge. Franchising
also owns or manages 14 hotels in Germany, France and England. Following the
distribution, the operations of Franchising will consist principally of the
hotel franchise operations and the hotel operations in Europe. As of May 31,
1997, the Company owned and managed 71 hotels throughout the United States.
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 Manor Care for all periods presented. Manor Care's historical basis in
the assets and liabilities of the Company has been carried over to these
financial statements. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated. Changes in the
investments and advances from Manor Care represent the net income of the Company
plus the net change in cash transferred between the Company and Manor Care.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial statements
to conform with the current year presentation.
PRO FORMA EARNINGS PER SHARE (UNAUDITED)
The pro forma earnings per common share is computed by dividing net income by
the pro forma weighted average number of outstanding common shares. The pro
forma weighted average number of outstanding common shares is based on Manor
Care's weighted average number of outstanding common shares for each of the
periods prior to the Manor Care distribution and its own shares outstanding
subsequent to Nov. 1, 1996.
REVENUE RECOGNITION
The Company enters into numerous franchise agreements committing to provide
licensees with various marketing services, a centralized reservation system and
limited rights to utilize the Company's registered trade names. These agreements
are typically for a period of 20 years, with certain rights to the franchisee to
terminate after five, 10 or 15 years. Initial franchise fees are recognized upon
sale because the initial franchise fee is non-refundable, and the Company has no
continuing obligations related to the franchisee.
32
<PAGE>
Royalty fees, based on gross room revenues of each franchisee, are recorded when
earned. Reserves for uncollectible accounts are charged to bad debt expense and
included in selling, general and administrative expenses in the accompanying
consolidated income statements.
The Company assesses franchisees monthly fees related to marketing and
reservations that are expended for national advertising, marketing and selling
activities and the operation of a centralized reservation system.
Franchise revenue is composed of the following:
<TABLE>
<CAPTION>
May 31
(In thousands) 1997 1996 1995
=================================
<S> <C> <C> <C>
Royalties............. $ 90,355 $ 82,530 $ 72,982
Marketing and
reservation
revenue............... 99,521 95,133 81,083
Initial fees and other 31,502 24,401 19,495
Product sales......... 22,798 21,570 14,461
---------------------------------
Total................. $244,176 $223,634 $188,021
=================================
</TABLE>
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
May 31
(In thousands) 1997 1996
====================
<S> <C> <C>
Land............................... $ 56,945 $ 49,088
Building and improvements.......... 270,840 237,695
Furniture, fixtures and
equipment.......................... 79,407 63,893
Hotels under construction.......... 36,633 18,224
--------------------
................................... 443,825 368,900
Less: accumulated depreciation..... (73,581) (63,380)
--------------------
$370,244 $305,520
====================
</TABLE>
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows:
<TABLE>
<S> <C>
Building and improvements 10-40 years
Furniture, fixtures and equipment 3-20 years
</TABLE>
MINORITY INTEREST
Prior to May 31, 1996, certain former members of the Company's management had a
minority ownership interest in Choice Hotels Franchising Inc., a majority-owned
subsidiary. Amounts reflected as minority interest represent the minority
owners' share of income in Choice Hotels Franchising Inc. As of May 31, 1997,
the Company had repurchased all of the outstanding minority ownership interest.
GOODWILL
Goodwill primarily represents an allocation of the excess purchase price of the
stock of Choice Hotels Franchising Inc. over the recorded minority interest.
Goodwill is being amortized on a straight-line basis over 40 years. Such
amortization amounted to $1.9 million in the year ended May 31, 1997, $1.1
million in the year ended May 31, 1996, and $598,000 in the year ended May 31,
1995. Goodwill is net of accumulated amortization of $5.0 million and $3.1
million at May 31, 1997, and 1996, respectively.
33
<PAGE>
FRANCHISE RIGHTS
Franchise rights are an intangible asset and represent an allocation in purchase
accounting for the value of long-term franchise contracts. The majority of the
balance resulted from the Econo Lodge and Rodeway Inn acquisitions made in
fiscal year 1991. Franchise rights acquired are amortized over an average life
of 26 years. Amortization expense for the fiscal years ended May 31, 1997, 1996,
and 1995 amounted to $2.9 million, $2.6 million and $2.6 million, respectively.
Franchise rights are net of accumulated amortization of $14.0 million and $11.1
million at May 31, 1997, and 1996, respectively.
SELF-INSURANCE PROGRAM
The Company maintains its own self-insurance program for certain levels of
general and professional liability, automobile liability and workers'
compensation coverage. The estimated costs of these programs are accrued at
present values based on actuarial projections for known and anticipated claims.
Prior to the Manor Care distribution, the Company participated in Manor Care's
self-insurance program for certain levels of general and professional liability,
automobile liability and workers' compensation coverage. The estimated costs of
these programs were accrued at present values based on actuarial projections for
known and anticipated claims. All accrued self-insurance costs through Nov. 1,
1996, were assumed by Manor Care and have been treated as paid to Manor Care
and, as such, amounts paid to Manor Care up to Nov. 1, 1996, have been charged
directly to Investments and advances from Manor Care.
IMPAIRMENT POLICY
The Company evaluates the recoverability of long-lived assets, including
franchise rights and goodwill, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability is measured based on net, undiscounted expected cash flows.
Assets are considered to be impaired if the net, undiscounted expected cash
flows are less than the carrying amount of the assets. Impairment charges are
recorded based upon the difference between the carrying value of the asset and
the expected net cash flows, discounted at an appropriate interest rate.
CAPITALIZATION POLICIES
Major renovations and replacements are capitalized to appropriate property and
equipment accounts. Maintenance, repairs and minor replacements are charged to
expense.
FOREIGN OPERATIONS
Revenues generated by foreign operations for the fiscal years ended May 31,
1997, 1996 and 1995 were $27.5 million, $29.9 million and $29.2 million,
respectively. Losses were generated by foreign operations for the fiscal years
ended May 31, 1997, 1996 and 1995 of $1.8 million, $19.4 million and $5.7
million, respectively. Losses generated by foreign operations for fiscal year
1996 include a $15.0 million net charge relating to a provision for asset
impairment. The majority of the revenues and losses of foreign operations relate
to the Company's European business operations. Total net assets relating to
foreign operations were $48.8 million and $56.8 million at May 31, 1997, and
1996, respectively. Translation gains and losses are recorded in the cumulative
translation adjustment account and are included in Investments and advances from
Manor Care prior to Nov. 1, 1996, in the accompanying consolidated balance
sheets as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Balance, May 31, 1994............................ $ (31)
Net adjustments.................................. 740
------
Balance, May 31, 1995............................ 709
Net adjustments.................................. (2,459)
------
Balance, May 31, 1996............................ (1,750)
Net adjustments.................................. (5,268)
------
Balance, May 31, 1997............................ $(7,018
======
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
34
<PAGE>
INCOME TAXES
The Company was included in the consolidated federal income tax returns of Manor
Care prior to the Manor Care distribution. Subsequent to November 1, 1996, the
Company is a separate tax payor and files its own tax returns. The income tax
provision included in these consolidated financial statements reflects the
historical income tax provision and temporary differences attributable to the
operations of the Company on a separate return basis. Deferred taxes are
recorded for the tax effect of temporary differences between book and tax
income.
Income before income taxes for the fiscal years ended May 31, 1997, 1996 and
1995 were derived from the following:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
--------------------------
<S> <C> <C> <C>
Domestic operations.......... $75,290 $47,682 $39,329
Foreign operations........... (3,066) (31,824) (9,374)
--------------------------
Consolidated income
before income taxes.......... $72,224 $15,858 $29,955
==========================
</TABLE>
Income before income taxes for domestic operations and foreign operations for
fiscal year 1996 includes a provision of $33.3 million for asset impairment and
restructuring.
The provisions for income taxes follows for the fiscal years ended May 31:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
---------------------------
<S> <C> <C> <C>
Current tax (benefit) expense
Federal...................... $21,626 $19,978 $13,756
Federal (benefit) expense
of foreign operations........ (1,213) (2,792) (3,703)
State........................ 4,422 3,729 2,231
Deferred tax (benefit) expense
Federal...................... 4,504 (3,071) 745
Federal (benefit) expense
of foreign operations........ -- (9,778) --
State........................ 861 (666) 115
---------------------------
$30,200 $7,400 $13,144
===========================
</TABLE>
Deferred tax assets (liabilities) were composed of the following at May 31:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
===========================
<S> <C> <C> <C>
Depreciation and
amortization................. $ (5,809) $ (236)$(11,760)
Prepaid expenses............. (856) (1,550) (1,386)
Other........................ (3,587) (2,112) (2,202)
----------------------------
Gross deferred tax liabilities (10,252) (3,898) (15,348)
Foreign operations........... 2,271 1,931 1,086
Accrued expenses............. 3,807 3,757 1,393
Net operating loss........... 609 820 1,031
Other........................ 442 556 218
---------------------------
Gross deferred tax assets.... 7,129 7,064 3,728
---------------------------
Net deferred tax asset
(liability).................. $ (3,123) $ 3,166 $(11,620)
===========================
</TABLE>
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the accompanying consolidated statements of income follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------
(In thousands, except federal
income tax rate)
<S> <C> <C> <C>
Federal income tax rate...... 35% 35% 35%
Federal taxes at
statutory rate............... $25,280 $5,552 $10,484
State income taxes, net of
federal tax benefit.......... 3,434 1,991 1,525
Minority interest ........... -- 536 770
Other........................ 1,486 (679) 365
---------------------------
Income tax expense........... $30,200 $7,400 $13,144
===========================
</TABLE>
Cash paid for state income taxes was $2.1 million, $1.6 million and $571,000 for
the years ended May 31, 1997, 1996 and 1995, respectively. Federal income taxes
were paid by Manor Care for the fiscal years ended May 31, 1995; May 31, 1996;
and the period ending October 31, 1996. The Company paid federal income taxes of
$5.5 million for the period beginning November 1, 1996, and ending May 31, 1997.
35
<PAGE>
The Company and Manor Care entered into a tax-sharing agreement for purposes of
allocating pre-Manor Care distribution tax liabilities among the Company and
Manor Care and their respective subsidiaries. In general, Manor Care will be
responsible for (i) filing consolidated federal income tax returns that include
the Company and its subsidiaries and (ii) paying the taxes relating to such tax
returns to the applicable taxing authorities. The Company will reimburse Manor
Care for the portion of such taxes that relates to the Company and its
subsidiaries. In addition, the Company will assume liability for all taxes
payable by the Company or by Manor Care in the event the distribution is
determined not be tax-free for federal income tax purposes. Manor Care and
the Company have agreed to cooperate with each other and to share information in
preparing such tax returns and in dealing with other tax matters.
Prior to the Manor Care distribution, all current federal tax provision amounts
were treated as paid to or received from Manor Care in accordance with the
tax-sharing agreement. As such, there are no current federal provision amounts
due to Manor Care at May 31, 1996. The difference between amounts paid to or
received from Manor Care have been charged or credited directly to investments
and advances from Manor Care.
ACCRUED EXPENSES
Accrued expenses were as follows:
<TABLE>
<CAPTION>
May 31
(In thousands) 1997 1996
================
<S> <C> <C>
Payroll................................ $16,429 $10,572
Taxes, other than income............... 5,064 3,237
Other.................................. 5,439 9,761
----------------
$26,932 $23,570
================
</TABLE>
LONG-TERM DEBT AND NOTES PAYABLE
Debt consisted of the following:
<TABLE>
<CAPTION>
May 31
(In thousands) 1997 1996
=================
<S> <C> <C>
$250 million competitive advance
and multi-currency revolving
credit facility with an average
rate of 5.69% at May 31, 1996....... $ -- $ 50,557
$125 million competitive advance
and multi-currency revolving
credit facility with an average
rate of 6.28% at May 31, 1997....... 121,608 --
Multi-class mortgage pass-through
certificates with a blended
weighted average rate of 7.8%....... 117,294 --
Notes payable to Manor Care
with a rate of 9% at May 31,
1997, and 1996, respectively ....... 115,723 225,723
Capital lease obligations........... 15,553 16,474
Other notes with an average rate
of 5.94% and 6.33% at May 31,
1997, and 1996, respectively ....... 1,825 2,107
-------------------
Total indebtedness.................. $372,003 $294,861
===================
</TABLE>
Maturities of debt at May 31, 1997, were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
(In thousands)
<S> <C>
1998........................................... $ 27,954
1999........................................... 3,186
2000........................................... 215,894
2001........................................... 3,850
2002........................................... 4,271
Thereafter..................................... 116,848
---------
$372,003
=========
</TABLE>
During fiscal year 1996 and through Nov. 1, 1996, the Company was a co-guarantor
with Manor Care and other affiliates for a $250 million competitive advance and
multi-currency revolving credit facility. The facility provided that up to $75.0
million was available in foreign currency borrowings under the foreign currency
portion of the facility. The Company's borrowings under this facility amounted
to $50.6 million at May 31, 1996. The Company was charged interest for amounts
borrowed under the foreign currency portion of the facility at one of several
interest rates, including LIBOR plus 26.25 basis points. Subsequent to the Manor
Care distribution, the Company utilized its new credit facility, as described
below, to repay its borrowings under the facility, and the Company was released
from all liabilities and guarantees relating to the Manor Care credit facility.
36
<PAGE>
On Oct. 30, 1996, the Company entered into a $100.0 million competitive advance
and multi-currency revolving credit facility provided by a group of seven banks.
This facility provides that up to $75.0 million is available for borrowings in
foreign currencies. Borrowings under the facility are, at the option of the
borrower, at one of several rates including LIBOR plus 30 basis points. In
addition, the Company has the option to request participating banks to bid on
loan participation at lower rates than those contractually provided by the
facility. The facility presently requires the Company to pay annual fees of 2/10
of 1% of the total loan commitment. The facility will terminate on Oct. 30,
1999. On May 5, 1997, the Company increased the size of the facility from $100
million to $125 million through Dec. 31, 1997, at which time the incremental
difference of $25 million is due. In connection with the distribution, the
Company intends to secure financing to repay borrowings under the facility.
In connection with the Manor Care distribution, the Company entered into a loan
agreement governing the repayment of $225.7 million payable to Manor Care,
together with interest at 9% per year. The loan agreement contains a number of
covenants that, among other things, restrict the ability of the Company and its
subsidiaries to pay dividends, make certain investments, incur debt, dispose of
assets, create liens, sell receivables and otherwise restrict certain corporate
activities. In addition, the loan agreement contains various financial covenants
and matures on Nov. 1, 1999. Prepayments prior to Nov. 1, 1997, result in yield
maintenance payments to Manor Care. After Nov. 1, 1997, the loan is prepayable
in whole or in part without penalty. Interest expense on the Manor Care loan for
the years ended May 31, 1997, 1996 and 1995 was $18.6 million, $19.7 million and
$15.5 million, respectively.
On April 23, 1997, the Company, through its indirect subsidiary First Choice
Properties Corporation, completed an offering of $117.5 million multi-class
mortgage pass-through certificates (collectively, "the mortgage securities").
The mortgage securities are non-recourse and collateralized by 36 hotels owned
by the Company. The offering's net proceeds of $110 million have been used to
prepay a portion of the Manor Care loan. The prepayment resulted in an
extraordinary loss from early debt redemption of $1.1 million net of taxes. The
mortgage securities bear a blended weighted average interest rate of 7.8% and
have a final maturity of May 5, 2012.
The mortgage securities contain customary covenants with respect to, among other
things, limits on the incurrence of debt, liens, certain investments,
transactions with affiliates, asset sales, mergers and consolidations.
Cash paid for interest was $25.5 million, $24.2 million and $19.9 million for
fiscal years 1997, 1996 and 1995, respectively.
At May 31, 1997, owned property with a net book value of $146.7 million was
pledged or mortgaged as collateral.
LEASES
The Company operates certain property and equipment under leases that expire at
various dates through 2014. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
(In thousands) Operating Capitalized
Leases Leases
=======================
<S> <C> <C>
1998............................. $1,820 $ 1,420
1999............................. 236 1,400
2000............................. 174 1,498
2001............................. 160 1,498
2002............................. 140 1,613
Thereafter....................... 6,575 21,746
-----------------------
Total minimum lease payments..... $9,105 $29,175
=======================
Less: Interest................... (13,622)
=======================
Present Value of Lease Payment... $15,553
=======================
</TABLE>
Rental expense under non-cancellable operating leases was $5.0 million in 1997,
$563,000 in 1996, and $721,000 in 1995. Included in fiscal year 1997 was $4.5
million paid to Manor Care for office rent.
37
<PAGE>
ACQUISITIONS AND DIVESTITURES
On May 31, 1995, the Company repurchased one-half of the 11% interest in Choice
Hotels Franchising, Inc. held by its former management. Approximately $19.8
million was allocated to goodwill; the purchase cost of $27.4 million was paid
in June and July 1995. On May 31, 1996, Franchising repurchased the remaining
5.5% minority interest in Choice Hotels Franchising Inc. for $27.9 million.
Approximately $26.4 million was allocated to goodwill.
On May 31, 1996, the Company invested approximately $17 million in the capital
stock of Friendly Hotels PLC ("Friendly"). In exchange for the $17 million
investment, the Company received 750,000 shares of common stock and 10,000,000
newly issued immediately convertible preferred shares. In addition, the Company
granted to Friendly a master franchise agreement for the United Kingdom and
Ireland in exchange for 333,333 additional shares of common stock. At May 31,
1997, the Company owned approximately 5% of the outstanding shares of Friendly
which would increase to approximately 27% if the preferred stock were converted.
The preferred shares carry a 5.75% dividend payable in cash or in stock, at the
Company's option. The dividend accrues annually with the first dividend paid on
the earlier of the third anniversary of completion or on a conversion date. The
proceeds of the investment received by Friendly are to be used to support the
construction of 10 Quality or Comfort hotels. As a condition to the investment,
Choice has the right to appoint two directors to the board of Friendly. The
Company is accounting for the common stock investment under the equity method.
In fiscal year 1997, the Company recognized $943,000 of dividend income from its
preferred stock investment in Friendly.
During fiscal year 1997, the Company acquired two hotels containing 324 rooms
for $10.7 million. During fiscal year 1996, the Company purchased 16 hotels
containing more than 1,900 rooms for $49.6 million. During fiscal year 1995, the
Company purchased 16 hotels containing more than 2,300 rooms for $59.8 million.
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management, the ultimate outcome of such
litigation will not have a material adverse effect on the Company's business,
financial position or results of operations.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
Bonuses accrued for key executives of the Company under incentive compensation
plans were $1.6 million in 1997, $1.2 million in 1996 and $1.7 million in 1995.
Employees participate in retirement plans sponsored by the Company, and prior to
the Manor Care distribution, employees participated in retirement plans
sponsored by Manor Care. Costs allocated to the Company were based on the size
of its payroll relative to the sponsor's payroll. Costs allocated to the Company
were approximately $2.2 million in 1997, $1.4 million in 1996 and $1.2 million
in 1995.
CAPITAL STOCK
During fiscal year 1997, the Company repurchased 3,684,100 shares of its common
stock at a total cost of $53.2 million. Additionally, the Company granted a key
executive 85,470 restricted shares of common stock with a value of $1.25 million
on the grant date. The restricted stock vests over a three year period.
The Company has stock option plans for which it is authorized to grant options
to purchase up to 7.3 million shares of the Company's common stock. Stock
options may be granted to officers, key employees and non-employee directors
with an exercise price not less than the fair market value of the common stock
on the date of grant. In connection with the distribution, the outstanding
options held by current and former employees of the Company will be
redenominated in the stock of the newly separated companies and the number and
exercise prices of the options will be adjusted based on the relative trading
prices of the common stock of the two companies in order to retain the intrinsic
value of the options.
Option activity under the above plans is as follows:
<TABLE>
<CAPTION>
Number Weighted
of Shares Option Price
=========================
<S> <C> <C>
Outstanding at Nov. 1, 1996..... 5,920,648 $ 8.49
Granted......................... 397,693 14.79
Exercised....................... (1,110,164) 12.60
Cancelled....................... (259,145) 11.02
-------------------------
Outstanding at May 31, 1997..... 4,949,032 $ 9.05
=========================
</TABLE>
38
<PAGE>
At May 31, 1997, options with a weighted average remaining life of 3.4 years
covering 1,614,891 shares were exercisable at $2.70 to $12.52 per share with a
weighted average of $5.11 per share.
The Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," ("SFAS No. 123"), requires companies to provide additional
note disclosures about employee stock-based compensation plans based on a fair
value based method of accounting. SFAS No. 123 is effective for fiscal years
that begin after Dec. 15, 1995. As permitted by this accounting standard, the
Company continues to account for these plans under APB Opinion 25, under which
no compensation cost has been recognized.
Compensation cost for the Company's stock option plan was determined based on
the fair value at the grant dates for awards under those plans consistent with
the method of SFAS No. 123. The fair value of each option grant has been
estimated on the date of grant using an option-pricing model with the following
weighted average assumptions used for grants in 1997: risk-free interest rate of
6.4% and volatility of 30%, expected lives of 10 years and 0% dividend yield.
The weighted average fair value per option granted during fiscal year 1997 was
$8.35. If options had been reported as compensation expense based on their fair
value pro forma, net income would have been $40.3 million for 1997, and pro
forma earnings per share would have been $0.64.
Since this methodology has not been applied to options granted prior to the
Manor Care distribution date, the resulting pro forma compensation cost is not
likely to be representative of that to be expected in future years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the fair value of its financial instruments
in accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments." Fair values of material
balances were determined by using market rates currently available.
The balance sheet carrying amount of cash, cash equivalents and receivables
approximate fair value due to the short-term nature of these items. Mortgages
and other long term debt consist of bank loans and mortgages. Interest rates on
bank loans adjust frequently based on current market rates; accordingly, the
carrying amount of bank loans is equivalent to fair value. The carrying amounts
for mortgages and notes payable to Manor Care and the investment in Friendly
Hotels PLC approximate fair market values.
PROVISION FOR ASSET IMPAIRMENT AND RESTRUCTURING
During the fiscal year 1996, the Company began restructuring its European
operations. This restructuring effort included the purchase of an equity
interest in Friendly Hotels PLC and a re-evaluation of key geographic markets in
Europe. In connection with this restructuring, the Company performed a review of
its European operations and in May 1996 recognized a $17.0 million non-cash
charge (net of an $11.1 million income tax benefit) against earnings related
primarily to the impairment of assets associated with certain European hotel
operations.
In addition, the Company recognized a restructuring charge of $3.1 million (net
of a $2.1 million income tax benefit) in May 1996. Restructuring costs include
severance and employee benefit plan restructuring costs and other costs directly
associated with the distribution.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," during fiscal year 1997.
The adoption of SFAS No. 121 did not have a material impact on the Company's
financial statements.
The Company is required to adopt SFAS No. 128, "Earnings Per Share," and SFAS
No. 129, "Disclosure of Information about Capital Structure," no later than
fiscal year 1998. The adoption of these pronouncements will not materially
affect the Company's financial statements.
The Company is required to adopt SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," no later than fiscal year 1999. Management is still evaluating the
impact that these pronouncements will have on the Company's financial
statements.
39
<PAGE>
DIRECTORS AND OFFICERS
B0ARD OF DIRECTORS
STEWART BAINUM
Director: Manor Care Inc.
STEWART BAINUM JR.
Chairman of the Board &
Chief Executive Officer:
Manor Care Inc. and
Subsidiaries
Director: Vitalink
Pharmacy Services Inc.
BARBARA BAINUM
President, Secretary &
Director: Commonweal
Foundation
Secretary & Director:
Realty Investment
Company
WILLIAM R. FLOYD
Vice Chairman &
Chief Executive Offficer
Director: Friendly Hotels PLC
FREDERIC V. MALEK
Chairman: Thayer
Capital Partners
Co-Chairman: CB
Commercial Real Estate
Group Inc.
Director: American
Management Systems Inc.,
Automatic Data Processing
Corp., FPL Group Inc.,
Manor Care Inc.,
Northwest Airlines and
various Paine Webber
mutual funds
JERRY E. ROBERTSON, PH.D.
Retired Executive Vice
President, 3M Life
Sciences Sector and
Corporate Services
Director: Allianz Life
Insurance Company of
North America, Cardinal
Health Inc., Coherent Inc.,
Haemonetics Inc., Manor
Care Inc., Medwave Inc.,
Project Hope and Steris
Corp.
PAUL A. GOULD
Managing Director: Allen
& Company Incorporated
Director:
Telecommunications
International Inc.,
United Video Satellite
Group Inc. and National
Patent Development Corp.
Board of Trustees: The
New School, The Hackley
School and The
Holderness School
ROBERT C. HAZARD JR.
Chairman: Creative Hotel
Associates LLC
GERALD W. PETITT
President &
Chief Executive Officer:
Creative Hotel Associates
LLC
CORPORATE OFFICERS
STEWART BAINUM JR.
Chairman of the Board
WILLIAM R. FLOYD
Vice Chairman &
Chief Executive Officer
DONALD J. LANDRY
President &
Chief Operating Officer
JAMES A. MACCUTCHEON
Executive Vice President,
Chief Financial Officer &
Treasurer
EVERETT F. CASEY
Vice President, Deputy
General Counsel &
Assistant Secretary
MICHAEL J. DESANTIS
Senior Vice President,
General Counsel &
Secretary
ANTONIO DIRICO
Senior Vice President,
Hotel Operations
BRENDAN M. EBBS
Senior Vice President,
Franchise Operations,
Northeast Region
<PAGE>
GERALD F. HICKEY
Assistant Treasurer
WELDON HUMPHRIES
Senior Vice President, Real
Estate & Development
JOSEPH E. LAVIN
Senior Vice President,
Partner Services Group
THOMAS MIRGON
Senior Vice President,
Human Resources
BETSY BROMBERG O'ROURKE
Senior Vice President,
Marketing Services
RODNEY SIBLEY
Senior Vice President,
Franchise Operations
BARRY L. SMITH
Senior Vice President,
Marketing
JOSEPH M. SQUERI
Vice President, Finance
& Controller
CHARLES WARCZAK
Vice President, Hotel
Accounting
WILLIAM WEATHERFORD
Senior Vice President,
Franchise Operations,
Southeast Region
JAMES R. YOAKUM
Senior Vice President,
Reservations &
Information Systems
40
<PAGE>
CORPORATE INFORMATION
STOCK LISTING Choice Hotels International
common stock trades on the New York
Stock Exchange under the ticker
symbol CHH.
TRANSFER AGENT & REGISTRAR
ChaseMellon
Shareholder Services
450 W. 33rd St.
New York, NY 10001
INDEPENDENT AUDITORS
Arthur Andersen LLP
Washington, D.C.
ANNUAL MEETING DATE
Choice Hotels International
will hold its Annual
Meeting of Shareholders
on Tuesday, Sept. 16, 1997,
at 9 a.m. EST in
the auditorium at 11555
Darnestown Road, Gaithersburg,
Maryland.
FORM 10-K
A shareholder may receive
without charge a copy of
the Form 10-K Annual
Report filed with the
Securities and Exchange
Commission by written
request addressed to the
Corporate Secretary at the
corporate headquarters.
CORPORATE HEADQUARTERS
Choice Hotels International
10750 Columbia Pike
Silver Spring, MD 20901
General Inquiries:
(301) 979-5000
Franchise Sales:
(800) 547-0007
Investor Inquiries:
(301) 979-5026
(C)1997 Choice Hotels International
Quality, Comfort, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, Choice Picks and
K-Minus are trademarks of Choice Hotels International
MainStay Suites, Classic Sports-Food, Drinks & Memories and Profit Manager are
service marks of Choice Hotel International
<PAGE>
CHOICE HOTELS
INTERNATIONAL
-------------
10750 Columbia Pike
Silver Spring, MD 20901
<PAGE>
Exhibit 21.01
LODGING SUBSIDIARIES
BOULEVARD MOTEL CORP.
Bay Ridge Spirits Corp.
Biscayne Land Associates, Inc.
Biscayne Properties, Inc.
Bowling Green Inn - Brandywine, Inc.
Cardinal Beverage Corp.
Everglades Beverage Corp.
Fairways Beverage Corp.
Fairways, Inc.
K & A Corp.
MCH Baltimore Corp.
MCH Hot Springs Corp.
MCH Lincoln Corp.
MCH Management, Inc.
MCH Roanoke Corp.
MCH Shady Grove Corp.
MCH Springfield Corp.
MCH Sturgis Corp.
MCH Wichita Corp.
MCHD Cypress Creek Corp.
MCHD Ft. Lauderdale Corp.
MCHD Hampton Corp.
Raleigh Hotel Holdings, Inc.
West Montgomery Hotel Holdings, Inc.
CACTUS HOTEL CORP.
CHOICE HOTELS FRANCHISING, INC.
CH Europe, Inc. (d)
Choice Capital Corp.
Choice Hotels Australia Pty. Ltd. (90%)
Choice Hotels Canada Inc. (50%)
Choice Hotels (Cayman) Ltd. (10%)
Choice Hotels International Asia Pacific Pty. Ltd.
Choice Hotels International Pty. Ltd. (Formerly Quality Inn Pty. Ltd.) (d)
Choice Hotels (Ireland) Limited (d)
Choice Hotels Japan, Inc. (Formerly Quality Hotels Japan, Inc.)
Choice Hotels Limited
Choice Hotels of Brazil, Inc.
Choice Hotels Pacific Asia K.K. (Formerly Quality Hotels Pacific Asia,
Inc.) (d)
Choice Hotels Pty. Ltd. (Formerly Quality Hotels Pty. Ltd.) (d)
Choice Hotels Systems, Inc.
Choice Hotels Venezuela, C.A. (20%)
Clarion Hotel Pty. Ltd. (Formerly Royale Hotels Pty. Ltd.) (d)
Comfort Hotels Pty. Ltd. (d)
Comfort Inn Pty. Ltd. (d)
Comfort Inns New Zealand Limited (Formerly Quality Inns New Zealand
Limited) (d)
Hoteles Cono Sur S.A.
QI Capital Corp. (d)
Quality Hotels Europe, Inc.
Quality Hotels (Ireland) Limited (d)
Quality Hotels Limited (Formerly Quality Hotels (China) Limited)
<PAGE>
(50%; 50% Manor Care, Inc.) (d)
Quality Hotels and Resorts, Inc. (d)
Baltimore Hotel Management, Inc. (d)
Myrtle Beach Hotel Management, Inc. (d)
Quality Inns International, Inc. (Formerly Choice Hotels International,
Inc.)
Quality Inter-Americas, Inc. (d)
Sleep Inn Pty. Ltd. (d)
COMFORT CALIFORNIA, INC.
GULF HOTEL CORP.
HEFRU FOOD SERVICES, INC.
QCM BEVERAGES, INC. (49%; 51% Texas resident)
QCM CORPORATION (d)
QI ADVERTISING AGENCY, INC.
QUALITY ARIZONA, INC. (d)
QH Europe, Inc. (d)
QUALITY INNS WORLD MARKETING CORPORATION
QUALITY INSURANCE ASSOCIATES, INC. (d)
BEVERE GROUP, INC. (THE) (d)
SUNBURST HOTEL CORP.
THICKET, INC. (THE) (Non-Profit; owned by members)
- ---------------------
(d) Dormant subsidiary.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, THE CONSOLIDATED STATEMENTS OF INCOME AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 10,825
<SECURITIES> 0
<RECEIVABLES> 38,725
<ALLOWANCES> 6,744
<INVENTORY> 1,350
<CURRENT-ASSETS> 53,386
<PP&E> 443,825
<DEPRECIATION> 73,581
<TOTAL-ASSETS> 573,116
<CURRENT-LIABILITIES> 99,474
<BONDS> 344,049
0
0
<COMMON> 639
<OTHER-SE> 123,848
<TOTAL-LIABILITY-AND-EQUITY> 573,116
<SALES> 0
<TOTAL-REVENUES> 429,929
<CGS> 0
<TOTAL-COSTS> 329,192
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,798
<INTEREST-EXPENSE> 25,715
<INCOME-PRETAX> 72,224
<INCOME-TAX> 30,200
<INCOME-CONTINUING> 42,024
<DISCONTINUED> 0
<EXTRAORDINARY> 1,144
<CHANGES> 0
<NET-INCOME> 40,880
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99.01
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
<TABLE>
<CAPTION>
Balance at Charges to Balance at
Beginning of Profit End
Description Period and Loss Other Write-Offs of Period
----------- ------ -------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1997
Allowance for doubtful accounts $4,824 $2,798 $ -- $ (878) $6,744
====== ====== ===== ========= ======
Year ended May 31, 1996
Allowance for doubtful accounts $4,202 $ 974 $ -- $ (352) $4,824
====== ===== ===== ========= ======
Year ended May 31, 1995
Allowance for doubtful accounts $8,950 $ 906 $ -- $ (5,654) $4,202
====== ===== ===== ========= ======
</TABLE>
<PAGE>
Exhibit 99.02
[LOGO OF CHOICE HOTELS INTERNATIONAL APPEARS HERE]
August 15, 1997
Dear Stockholder:
You are cordially invited to attend the 1997 Annual Meeting of Stockholders
(the "Annual Meeting") of Choice Hotels International, Inc. ("Choice" or the
"Company") to be held on September 16, 1997 at 9:00 a.m. (E.S.T.) at the
Quality Suites Shady Grove, 3 Research Court, Rockville, Maryland. I urge you
to be present in person or represented by proxy at this important Annual
Meeting at which stockholders will be asked to ratify a major transaction that
will separate Choice into two publicly-traded companies.
You are being asked to consider and vote upon a group of related proposals
(the "Distribution Proposals") which will provide for the distribution (the
"Distribution") to stockholders, on a share-for-share basis, of all
outstanding shares of common stock of a wholly owned subsidiary of the
Company, Choice Hotels Franchising, Inc. ("Franchising"). The Distribution
will separate the Company's hotel franchising business from its hotel
ownership and management business. Upon the Distribution, the Company will
change its corporate name to Sunburst Hospitality Corporation (as renamed
after the Distribution, "Sunburst") and will continue to own and operate hotel
properties in the United States (the "Hotel Business"). Upon the Distribution,
Franchising will change its name to Choice Hotels International, Inc. and will
engage in the business of franchising hotels under the Clarion, Quality,
Comfort, Sleep Inn, Rodeway, Econo Lodge and MainStay brands and will own and
operate 14 hotel properties in France, Germany and the United Kingdom
(together, the "Franchising Business").
The Board of Directors believes that the proposed Distribution will reduce
or eliminate the substantial recurring conflicts between the Hotel Business
and the Franchising Business, which are impediments to the growth of the
Company's Hotel Business. The Distribution will also enable the Hotel Business
to attract, retain and effectively incentivize skilled real estate
professionals and will facilitate a better understanding by the investment
community of the Company's two distinct businesses.
Details of the Distribution Proposals and the other proposals to be
considered at the Annual Meeting, as well as important information relating to
the Distribution, including a description of the business, directors and
management of Sunburst and Franchising, are set forth in the accompanying
Proxy Statement and should be considered carefully.
I am excited about the future prospects for both Sunburst and Franchising as
separate public companies. The Board of Directors believes that the
Distribution is in the best interests of stockholders and unanimously
recommends that stockholders vote to approve the Distribution Proposals.
Whether or not you expect to attend the Annual Meeting, it is important that
your shares be represented. Please complete, sign and date the enclosed proxy
card and return it promptly in the accompanying envelope. If you attend the
Annual Meeting, you may vote in person if you wish even though you previously
have returned your proxy card.
Sincerely,
/s/ William R. Floyd
William R. Floyd
Vice Chairman and Chief Executive
Officer
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MARYLAND 20901
----------------
NOTICE OF ANNUAL MEETING
TO BE HELD SEPTEMBER 16, 1997
----------------
To the Stockholders of
CHOICE HOTELS INTERNATIONAL, INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Annual
Meeting") of Choice Hotels International, Inc., a Delaware corporation (the
"Company"), will be held at the Quality Suites Shady Grove, 3 Research Court,
Rockville, Maryland at 9:00 a.m. (E.S.T.) for the following purposes:
1. To consider and to vote upon four related proposals (collectively, the
"Distribution Proposals") described in the accompanying Proxy Statement,
which provide for:
(i) Proposal One: Ratification of a special dividend, consisting of
the distribution (the "Distribution") to the holders of the Company's
outstanding shares of common stock, par value $.01 per share ("Company
Common Stock"), on a share-for-share basis, of all outstanding shares
of common stock, par value $.01 per share ("Franchising Common Stock"),
of the Company's wholly owned subsidiary, Choice Hotels Franchising,
Inc., a Delaware corporation ("Franchising") and the related
arrangements between the Company and Franchising, and the policies to
be adopted by such companies, in connection therewith;
(ii) Proposal Two: Approval of the amendment of the Restated
Certificate of Incorporation of the Company to (a) change the name of
the Company to Sunburst Hospitality Corporation; (b) decrease the
number of authorized shares of Company Common Stock from 160,000,000 to
60,000,000; and (c) effect a one-for-three reverse stock split of
Company Common Stock whereby every three shares of Company Common Stock
would be aggregated into one share of Company Common Stock (the
"Reverse Stock Split") following the Distribution;
(iii) Proposal Three: Ratification of the election by the Company, as
sole stockholder of Franchising, of nine directors of Franchising
specified in the Proxy Statement, who will be divided into three
classes, the initial terms of which will expire in 1998, 1999 and 2000;
and
(iv) Proposal Four: Ratification of the adoption by Franchising of
the Choice Hotels Franchising, Inc. 1997 Long-Term Incentive Plan and
the Choice Hotels Franchising, Inc. Employee Stock Purchase Plan.
2. To consider and to vote upon the following additional proposals (the
"Additional Proposals") described in the accompanying Proxy Statement,
which provide for:
(i) Proposal Five: Election of three directors to hold office until
the 2000 Annual Meeting of Stockholders and until their successors are
elected and qualified;
(ii) Proposal Six: Ratification of the Choice Hotels International,
Inc. 1996 Long-Term Incentive Plan; and
(iii) Proposal Seven: Ratification of the Choice Hotels
International, Inc. Employee Stock Purchase Plan.
3. To transact such other business as may properly come before the Annual
Meeting.
<PAGE>
The Board of Directors of the Company has fixed the close of business on
August 5, 1997 as the record date (the "Record Date") for the determination of
stockholders entitled to notice of, and to vote at, the Annual Meeting or any
adjournment(s) or postponement(s) thereof. Only stockholders of record at the
close of business on the Record Date are entitled to notice of, and to vote
at, the Annual Meeting and any adjournment(s) or postponement(s) thereof. A
list of stockholders will be available for inspection at the office of the
Company located at the address above, at least 10 days prior to the Annual
Meeting.
By Order of the Board of Directors
CHOICE HOTELS INTERNATIONAL, INC.
LOGO
Michael J. DeSantis
Secretary
August 15, 1997
Silver Spring, Maryland
TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND
MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
SUMMARY OF MATTERS TO BE CONSIDERED....................................... 1
VOTING AT THE MEETING..................................................... 2
PROXY STATEMENT SUMMARY................................................... 4
PROPOSAL ONE: RATIFICATION OF THE DISTRIBUTION............................ 12
The Distribution........................................................ 12
Background and Reasons for the Distribution........................... 12
Solvency Opinion...................................................... 13
Manner of Effecting the Distribution.................................. 14
Federal Income Tax Aspects of the Distribution........................ 14
Listing and Trading of Franchising Common Stock....................... 15
Listing and Trading of Sunburst Common Stock.......................... 15
Conditions; Termination............................................... 16
Interest of Certain Persons in the Distribution....................... 16
Risk Factors............................................................ 18
Relationship Between the Company and Franchising after the Distribu-
tion................................................................... 23
Financing............................................................... 28
Accounting Treatment.................................................... 30
Post-distribution Dividend Policy....................................... 30
Certain Information Concerning Franchising.............................. 30
Pro Forma Financial Data.............................................. 30
Selected Historical Financial Data.................................... 32
Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations.................................................. 34
Business And Properties............................................... 37
Management............................................................ 53
Employee Agreements................................................... 58
Retirement Plans...................................................... 59
Certain Relationships and Related Transactions........................ 60
Security Ownership.................................................... 61
Description of Franchising Capital Stock.............................. 63
Purposes and Antitakeover Effects of Certain Provisions of the
Franchising Certificate and Bylaws................................... 64
Liability and Indemnification of Officers and Directors............... 67
Certain Information Concerning Sunburst................................. 69
Pro Forma Financial Data.............................................. 69
Management's Discussion and Analysis of Sunburst Pro Forma Financial
Condition
and Results of Operations............................................ 71
Business and Properties............................................... 73
Employees............................................................. 80
Management............................................................ 80
PROPOSAL TWO: AMENDMENTS TO THE RESTATED CERTIFICATE OF INCORPORATION OF
THE COMPANY.............................................................. 83
PROPOSAL THREE: RATIFICATION OF THE FRANCHISING BOARD OF DIRECTORS........ 85
PROPOSAL FOUR: RATIFICATION OF CERTAIN FRANCHISING BENEFIT PLANS.......... 85
PROPOSAL FIVE: ELECTION OF DIRECTORS...................................... 89
</TABLE>
i
<PAGE>
<TABLE>
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PAGE
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<S> <C>
PROPOSAL SIX: APPROVAL OF CHOICE HOTELS INTERNATIONAL, INC. 1996 LONG-
TERM INCENTIVE PLAN..................................................... 106
PROPOSAL SEVEN: APPROVAL OF CHOICE HOTELS INTERNATIONAL, INC. 1996
EMPLOYEE STOCK PURCHASE PLAN............................................ 109
</TABLE>
<TABLE>
<S> <C>
STOCKHOLDERS PROPOSALS FOR 1998........................................ 110
GENERAL................................................................ 110
INDEX TO FINANCIAL STATEMENTS.......................................... F-1
ANNEX A: FORM OF RESTATED CERTIFICATE OF INCORPORATION OF CHOICE HOTELS
FRANCHISING, INC............................................. A-1
ANNEX B: FORM OF AMENDED AND RESTATED BYLAWS OF CHOICE HOTELS
INTERNATIONAL, INC........................................... B-1
ANNEX C: CHOICE HOTELS FRANCHISING, INC. 1997 LONG-TERM INCENTIVE
PLAN.................................................................. C-I-1
CHOICE HOTELS FRANCHISING, INC. EMPLOYEE STOCK PURCHASE PLAN..... C-II-1
ANNEX D: AMENDMENTS TO CHOICE HOTELS INTERNATIONAL, INC. RESTATED
CERTIFICATE OF INCORPORATION................................. D-1
ANNEX E: CHOICE HOTELS INTERNATIONAL, INC. 1996 LONG TERM
INCENTIVE PLAN............................................... E-I-1
CHOICE HOTELS INTERNATIONAL, INC. EMPLOYEE STOCK PURCHASE PLAN... E-II-1
</TABLE>
ii
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MARYLAND 20901
----------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER 16, 1997
----------------
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Choice Hotels International, Inc. a
Delaware corporation (the "Company"), for use at the 1997 Annual Meeting of
Stockholders of the Company to be held at 9:00 a.m. (E.S.T.) on September 16,
1997, at the Quality Suites Shady Grove, 3 Research Court, Rockville, Maryland
and at any adjournment(s) or postponement(s) thereof (the "Annual Meeting").
It is anticipated that this Proxy Statement, together with the proxy and the
1997 Annual Report to Stockholders, will first be mailed to the Company's
stockholders on or about August 15, 1997.
SUMMARY OF MATTERS TO BE CONSIDERED
At the Annual Meeting, holders of the Company's outstanding common stock,
par value $.01 per share, will be asked to consider and to vote upon the
following related proposals, denominated Proposals One through Four
(collectively, the "Distribution Proposals"):
(i) Proposal One: Ratification of a special dividend, consisting of the
distribution (the "Distribution") to the holders of the Company's
outstanding shares of common stock, par value $.01 per share ("Company
Common Stock"), on a share-for-share basis, of all outstanding shares
of common stock, par value $.01 per share ("Franchising Common Stock"),
of the Company's wholly owned subsidiary, Choice Hotels Franchising,
Inc., a Delaware corporation ("Franchising") and the related
arrangements between the Company and Franchising, and the policies to
be adopted by such companies, in connection therewith;
(ii) Proposal Two: Approval of the amendment of the Restated Certificate of
Incorporation of the Company to (a) change the name of the Company to
Sunburst Hospitality Corporation; (b) decrease the number of
authorized shares of Company Common Stock from 160,000,000 to
60,000,000; and (c) effect a one-for-three reverse stock split of
Company Common Stock whereby every three shares of Company Common
Stock would be aggregated into one share of Company Common Stock (the
"Reverse Stock Split") following the Distribution;
(iii) Proposal Three: Ratification of the election by the Company, as sole
stockholder of Franchising, of nine directors of Franchising
specified in the Proxy Statement, who will be divided into three
classes, the initial terms of which will expire in 1998, 1999 and
2000; and
(iv) Proposal Four: Ratification of the adoption by Franchising of the
Choice Hotels Franchising, Inc. 1997 Long-Term Incentive Plan and the
Choice Hotels Franchising, Inc. Employee Stock Purchase Plan.
The effectiveness of each of the Distribution Proposals is conditioned upon
the approval of all of the Distribution Proposals. Accordingly, failure of the
stockholders to approve any one or more of the Distribution Proposals will
result in the ineffectiveness of all of the Distribution Proposals.
The Board of Directors unanimously recommends that the stockholders vote FOR
all of the Distribution Proposals.
Although the Company does not believe that stockholder approval of the
Distribution is required under applicable law, the Board of Directors has made
stockholder ratification of the Distribution (along with
1
<PAGE>
stockholder ratification or approval, as the case may be, of each of the other
Distribution Proposals, as set forth above) a condition to the Distribution
because of the importance of the Distribution to the Company and its
stockholders. For a description of the reasons for the Distribution, see
"Proposal One: Ratification of the Distribution--The Distribution." The Board
of Directors has retained discretion, even if stockholder approval of the
Distribution Proposals is obtained, to abandon, defer or modify the
Distribution or any other element contained in the Distribution Proposals. In
the event that, prior to the Annual Meeting, the Board of Directors makes any
material changes in the terms of the Distribution or the other elements of the
Distribution Proposals, the Company will so notify stockholders by means of a
supplement to the Proxy Statement. Following stockholder approval, the Board
of Directors will not make any changes in the terms of the Distribution or the
other elements of the Distribution Proposals unless the Board of Directors
determines that such changes would not be materially adverse to the Company's
stockholders.
In addition, holders of shares of Company Common Stock will also be asked to
consider and to vote upon the following proposals (the "Additional
Proposals"):
(i) Proposal Five: Election of three directors to hold office until the
2000 Annual Meeting of Stockholders and until their successors are
elected and qualified;
(ii) Proposal Six: Ratification of the Choice Hotels International, Inc.
1996 Long-Term Incentive Plan; and
(iii) Proposal Seven: Ratification of the Choice Hotels International, Inc.
Employee Stock Purchase Plan.
The effectiveness of the Additional Proposals is not conditioned on the
approval of any Distribution Proposal.
The Board of Directors unanimously recommends that the stockholders vote FOR
the Additional Proposals.
VOTING AT THE MEETING
The close of business on August 5, 1997 has been fixed as the record date
for determination of holders of Company Common Stock entitled to notice of and
to vote at the Annual Meeting. On that date, there were outstanding and
entitled to vote 60,200,784 shares of Company Common Stock. The presence,
either in person or by proxy, of persons entitled to cast a majority of such
votes constitutes a quorum for the transaction of business at the Annual
Meeting.
Stockholders are entitled to one vote per share on all matters submitted for
consideration at the Annual Meeting. With regard to the election of directors,
votes may be cast in favor of or withheld from nominees. Votes that are
withheld will be excluded entirely from the vote and will have no effect.
Abstentions may be specified on all proposals other than the election of
directors. Abstentions and broker non-votes on returned proxies are counted as
shares present in the determination of whether the shares of stock represented
at the Annual Meeting constitute a quorum. Each proposal is tabulated
separately. Abstentions are counted in tabulations of the votes cast on
proposals presented to the stockholders, whereas broker non-votes are not
counted for purposes of determining whether a proposal has been approved.
The affirmative vote of the holders of at least a majority of the
outstanding shares of Company Common Stock is required to approve each
Distribution Proposal. The affirmative vote of a plurality of shares of
Company Common Stock present in person or represented by proxy at the Annual
Meeting is required to elect the directors nominated pursuant to Proposal
Five. "Plurality" means that the individuals who receive the largest number of
votes cast are elected as directors up to the maximum number of directors to
be chosen at the meeting. A vote of at least a majority of the shares present
and voting at the Annual Meeting, in person or by proxy, is required to
approve Proposals Six and Seven.
Certain members of the Bainum family (including various trusts established
by members of the Bainum family) in the aggregate have the right to vote
approximately 34.43% of the number of outstanding shares of Company Common
Stock and have indicated an intention to vote in accordance with the
recommendations of
2
<PAGE>
the Board of Directors with respect to the Distribution Proposals and the
Additional Proposals. See "Proposal Five: Election of Directors--Security
Ownership of Principal Stockholders and Management."
All shares of Company Common Stock that are represented at the Annual
Meeting by properly executed proxies received prior to or at the Annual
Meeting, and not revoked, will be voted at the Annual Meeting in accordance
with the instructions indicated in such proxies. If no instructions are
indicated for a Distribution Proposal or Additional Proposal, such proxies
will be voted in accordance with the Board of Directors' recommendations as
set forth herein with respect to such proposal(s).
In the event that a quorum is not present at the time the Annual Meeting is
convened, or if, for any other reason (including for the purpose of allowing
additional time for the solicitation of proxies) the Company determines that
an adjournment is necessary or appropriate, the Company may adjourn the Annual
Meeting with or without a vote of the stockholders. If the Company proposes to
adjourn the Annual Meeting by a vote of the stockholders, the persons named in
the enclosed form of proxy will vote all shares of Company Common Stock for
which they have voting authority in favor of such adjournment; provided,
however, that if the purpose for such adjournment is to permit the Company to
continue soliciting votes in favor of the Distribution Proposals, proxies
voting against the Distribution Proposals will not be voted by such persons in
favor of adjournment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with ChaseMellon Shareholder Services, L.L.C. in its capacity as transfer
agent for the Company (the "Transfer Agent"), at or before the Annual Meeting,
a written notice of revocation bearing a later date than the proxy, (ii) duly
executing a subsequent proxy relating to the same shares of Company Common
Stock and delivering it to the Transfer Agent at or before the Annual Meeting,
or (iii) attending the Annual Meeting and voting in person (although
attendance at the Annual Meeting will not, in and of itself, constitute a
revocation of a proxy). Any written notice revoking a proxy should be sent to
ChaseMellon Shareholder Services, L.L.C., 450 W. 33rd Street, New York, New
York 10001.
The Company will bear the cost of the solicitation. In addition to
solicitation by mail, the Company will request banks, brokers and other
custodian nominees and fiduciaries to supply proxy material to the beneficial
owners of Company Common Stock of whom they have knowledge, and will reimburse
them for their expenses in so doing; and certain directors, officers and other
employees of the Company, not specially employed for the purpose, may solicit
proxies, without additional remuneration therefor, by personal interview,
mail, telephone or telegraph. In addition, the Company has retained
ChaseMellon Shareholder Services, L.L.C. to assist in the solicitation for a
fee of $7,500 plus expenses.
Stockholders of the Company will not be entitled to appraisal rights under
Delaware law in connection with the Distribution Proposals or the Additional
Proposals.
3
<PAGE>
PROXY STATEMENT SUMMARY
The following summarizes certain information contained elsewhere in this
Proxy Statement, including the appendices hereto (the "Proxy Statement").
Reference is made to, and this summary is qualified in its entirety by, the
more detailed information set forth in this Proxy Statement, which should be
read in its entirety. Unless the context otherwise requires, all references
herein to the Company and to Franchising shall include their respective
subsidiaries and all references herein to Franchising prior to the Distribution
Date shall refer to the Franchising Business (as defined herein) as operated by
the Company. Unless otherwise indicated, all statistical information and data
relating to the hotel industry in this Proxy Statement are derived from
information provided by Smith Travel Research. Smith Travel Research has not
consented to the use of the hotel industry data presented herein or provided
any form of consultation, advice, or counsel regarding any aspects of, and is
in no way whatsoever associated with, the proposed transaction.
THE ANNUAL MEETING
Date, Time and Place of The Annual Meeting of Stockholders (the "Annual
Annual Meeting............... Meeting") of Choice Hotels International, Inc.,
a Delaware corporation (the "Company") will be
held 9:00 a.m. (E.S.T.) at the Quality Suites
Shady Grove, 3 Research Court, Rockville,
Maryland on September 16, 1997.
Matters for Consideration at
the Annual Meeting...........
At the Annual Meeting, holders of shares of
Company Common Stock will be asked to consider
and to vote upon the following related
proposals, denominated Proposals One through
Four (collectively, the "Distribution
Proposals"): (i) Proposal One: Ratification of
a special dividend, consisting of the
distribution (the "Distribution") to the
holders of the Company's outstanding shares of
common stock, par value $.01 per share
("Company Common Stock"), on a share-for-share
basis, of all outstanding shares of common
stock, par value $.01 per share ("Franchising
Common Stock"), of the Company's wholly owned
subsidiary, Choice Hotels Franchising, Inc., a
Delaware corporation ("Franchising") and the
related arrangements between the Company and
Franchising, and the policies to be adopted by
such companies, in connection therewith; (ii)
Proposal Two: Approval of the amendment of the
Restated Certificate of Incorporation of the
Company to (a) change the name of the Company
to Sunburst Hospitality Corporation, (b)
decrease the number of authorized shares of
Company Common Stock from 160,000,000 to
60,000,000, and (c) effect a one-for-three
reverse stock split of Company Common Stock
whereby every three shares of Company Common
Stock would be aggregated into one share of
Company Common Stock (the "Reverse Stock
Split") following the Distribution; (iii)
Proposal Three: Ratification of the election by
the Company, as sole stockholder of
Franchising, of nine directors of Franchising
specified herein, who will be divided into
three classes, the initial terms of which will
expire in 1998, 1999 and 2000; and (iv)
Proposal Four: Ratification of adoption by
4
<PAGE>
Franchising of the Choice Hotels Franchising,
Inc. 1997 Long-Term Incentive Plan
("Franchising Incentive Plan") and the Choice
Hotels Franchising, Inc. Employee Stock
Purchase Plan ("Franchising Stock Purchase
Plan").
The effectiveness of each of the Distribution
Proposals is conditioned upon the approval of
all of the Distribution Proposals. Accordingly,
failure of the stockholders to approve any one
or more of the Distribution Proposals will
result in the ineffectiveness of all of the
Distribution Proposals.
The Board of Directors unanimously recommends
that the stockholders vote FOR all of the
Distribution Proposals. In addition, holders of
shares of Company Common Stock will also be
asked to consider and to vote upon the
following proposals (the "Additional
Proposals"): (i) Proposal Five: The election of
three directors to hold office until the 2000
Annual Meeting of Stockholders and until their
successors are elected and qualified; (ii)
Proposal Six: Ratification of the Choice Hotels
International, Inc. 1996 Long-Term Incentive
Plan ("1996 Incentive Plan"); and (iii)
Proposal Seven: Ratification of the Choice
Hotels International, Inc. Employee Stock
Purchase Plan.
The effectiveness of the Additional Proposals
is not conditioned on the approval of any
Distribution Proposal. The Board of Directors
unanimously recommends that stockholders vote
FOR Proposals Five through Seven.
Annual Meeting Record Date.... August 5, 1997 ("Annual Meeting Record Date").
Voting........................ Each stockholder of record as of the Annual
Meeting Record Date is entitled at the Annual
Meeting to one vote for each share held. The
affirmative vote of the holders of at least a
majority of the outstanding shares of Company
Common Stock is required to approve each of the
Distribution Proposals. The affirmative vote of
a plurality of shares of Company Common Stock
present in person or represented by proxy at
the Annual Meeting is required to elect the
directors nominated pursuant to Proposal Five.
The vote of at least a majority of the shares
of Company Common Stock present in person or
represented by proxy at the Annual Meeting is
required to approve Proposal Six and Proposal
Seven. As of the Annual Meeting Record Date,
there were 60,200,784 shares of Company Common
Stock outstanding and entitled to vote at the
Annual Meeting. Certain members of the Bainum
family (including various trusts established by
members of the Bainum family) in the aggregate
have the right to vote approximately 34.43% of
the number of outstanding shares of Company
Common Stock and have indicated an intention to
vote in accordance with the recommendations of
the Board of Directors with respect to the
Distribution Proposals and the Additional
Proposals.
5
<PAGE>
THE DISTRIBUTION
Distributed Company........... Choice Hotels Franchising, Inc.
("Franchising"), a Delaware corporation and a
wholly owned subsidiary of the Company, will,
on the Distribution Date, own all of the
business and assets of, and be responsible for
all of the liabilities associated with, the
business of franchising hotels under the
Clarion(R), Quality(R), Comfort(R), Sleep
Inn(R), Rodeway(R), Econo Lodge(R) and MainStay
SuitesSM brands currently conducted by
Franchising and certain of its subsidiaries as
well as all European real estate assets
currently held by the Company (the "Franchising
Business"). Upon the Distribution, Franchising
will change its corporate name to Choice Hotels
International, Inc.
Distributing Company.......... Choice Hotels International, Inc., a Delaware
corporation (the "Company"). Upon the
Distribution, the Company will continue to own
and operate hotel properties in the U.S. (the
"Hotel Business") and will change its corporate
name upon the Distribution to Sunburst
Hospitality Corporation (as renamed after the
Distribution, "Sunburst").
Securities to Be
Distributed.................. Approximately 60,200,784 shares of Franchising
Common Stock based on 60,200,784 shares of
Company Common outstanding as of the Annual
Meeting Record Date.
Reasons for the
Distribution................. The Company's Board of Directors and management
believe that the separation of the Company's
Franchising Business and Hotel Business into
two public companies via the Distribution will
reduce or eliminate substantial recurring
conflicts between the Hotel Business and the
Franchising Business which are impediments to
the growth of the Company's Hotel Business. The
Distribution will also enable the Hotel
Business to attract, retain and effectively
incentivize skilled real estate professionals
and will facilitate a better understanding by
the investment community of the Company's
distinct businesses. See "Proposal One:
Ratification of the Distribution--The
Distribution--Background and Reasons for the
Distribution."
Conditions to the
Distribution................. The Distribution is conditioned upon, among
other things, stockholder approval of the
Distribution Proposals at the Annual Meeting.
Even if all conditions are satisfied, the Board
of Directors has reserved the right to abandon,
defer or modify the Distribution or the other
elements of the Distribution Proposals at any
time prior to the Distribution Date. In the
event that, prior to the Annual Meeting, the
Board of Directors makes any material changes
in the terms of the Distribution or other
elements of the Distribution Proposals, the
Company will notify stockholders by means of a
supplement to the Proxy Statement. Following
stockholder approval, the Board of Directors
will not waive any of the conditions to the
Distribution or make any
6
<PAGE>
changes in the terms of the Distribution or the
other elements of the Distribution Proposals
unless the Board of Directors determines that
such changes would not be materially adverse to
the Company's stockholders. In determining
whether any such changes would be materially
adverse to the Company's stockholders, the
Board of Directors will consider, as
appropriate, advice from its outside advisors
as well as the recommendation of management as
to the potential impact of such changes on the
Company and the Company's Stockholders. See
"Proposal One: Ratification of the
Distribution--The Distribution--Conditions;
Termination."
Distribution Ratio............ One share of Franchising Common Stock for each
share of Company Common Stock.
Tax Consequences.............. The Company has conditioned the Distribution on
receipt of a ruling from the Internal Revenue
Service to the effect that, among other things,
for federal income tax purposes, receipt of
shares of Franchising Common Stock by the
Company stockholders will be tax free. However,
the Board of Directors has reserved the right
to waive the receipt of such ruling as a
condition to consummation of the Distribution
(which could occur in anticipation of a
negative outcome of such ruling). The Board of
Directors may not provide stockholders with
notice if receipt of the tax ruling is waived
as a condition to consummation of the
Distribution; however, (i) the Board of
Directors will waive such condition only if the
Board of Directors believes that the receipt of
the Franchising Shares will be tax free and an
opinion of counsel is received to that effect
and (ii) the Company will notify stockholders
if the Company either receives an unfavorable
ruling from the Internal Revenue Service, or
withdraws its request for such ruling prior to
the Annual Meeting. See "Proposal One:
Ratification of the Distribution--The
Distribution--Federal Income Tax Aspects of the
Distribution."
For a discussion of the effects on the Company
and Franchising if the Distribution were not to
qualify as tax free for federal income tax
purposes, see "Proposal One: Ratification of
the Distribution--Risk Factors--Certain Tax
Considerations."
Risk Factors.................. Stockholders should carefully consider all of
the information contained in this Proxy
Statement, including the matters described
under "Risk Factors."
Relationship between the
Company and Franchising
after the Distribution....... For purposes of governing the ongoing
relationships between the Company and
Franchising after the Distribution Date and in
order to provide for an orderly transfer of the
Franchising Business to Franchising and
facilitate the transition to two separate
publicly traded companies, the Company and
Franchising have entered into a Distribution
Agreement, a Strategic Alliance Agreement,
Franchising Agreements and
7
<PAGE>
various other agreements with respect to, among
other things, intercompany debt, tax matters,
employee benefits, risk management and
corporate and administrative services. See
"Proposal One: Ratification of the
Distribution--Relationship Between the Company
and Franchising After the Distribution." The
relationship between the Company and
Franchising may be subject to certain potential
conflicts of interest. See "Proposal One:
Ratification of the Distribution--Risk
Factors--Potential Conflicts."
Accounting Treatment.......... The historical combined financial statements of
Franchising present its financial position,
results of operations and cash flows as if it
were a separate entity for all periods
presented. The Company's historical basis in
the assets and liabilities of Franchising has
been carried over. See "Proposal One:
Ratification of the Distribution--Accounting
Treatment," and the combined financial
statements of Choice Hotels Franchising, Inc.,
contained elsewhere herein.
Listing and Trading Market.... There is currently no public market for
Franchising Common Stock. The Company intends
to list the Franchising Common Stock on the New
York Stock Exchange. However, there can be no
assurance that the Franchising Common Stock
will be accepted for listing on the New York
Stock Exchange or any other national stock
exchange or market. The Company expects that no
"when issued" trading market will exist prior
to the time that Franchising's Registration
Statement on Form 10 is declared effective by
the Commission. See "Proposal One: Ratification
of the Distribution--Risk Factors--No Current
Market for Franchising Common Stock; and --The
Distribution--Listing and Trading of
Franchising Common Stock."
Record Date................... The Board of Directors will set the record date
for the Distribution referred to herein as (the
"Distribution Record Date").
Distribution Date............. The Board of Directors will set the
Distribution Date. On the Distribution Date,
the Company will deliver all outstanding shares
of Franchising Common Stock to the Distribution
Agent. As soon as practicable thereafter, the
Distribution Agent will mail certificates
representing the appropriate number of shares
of Franchising Common Stock to the Company's
stockholders entitled thereto. See "Proposal
One: Ratification of the Distribution--The
Distribution--Manner of Effecting the
Distribution."
Distribution Agent............ ChaseMellon Shareholder Services, L.L.C., the
transfer agent for the Company.
Reverse Stock Split........... The Company shall effect a one-for-three
reverse stock split of the Company Common Stock
whereby every three shares of Company Common
Stock will be aggregated into one share of
Company Common Stock. See "Proposal Two:
Amendments to the Restated Certification of
Incorporation of the Company--Reverse Stock
Split."
8
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
Business...................... Franchising is presently a wholly owned
subsidiary of the Company. Following the
Distribution, Franchising will conduct the
Franchising Business as now conducted by
Franchising, the Company and certain other
subsidiaries of the Company. Franchising will
be one of the world's largest franchisors of
hotels with 3,344 properties open and operating
in 33 countries at May 31, 1997. As a
franchisor, Franchising will license hotel
operators to use Franchising's brand names:
Comfort(R), Quality(R), Clarion(R), Sleep(R),
Rodeway(R), Econo Lodge(R) and MainStay
Suites(SM) (collectively, the "Choice Brands"),
and will provide to these hotel operators
products and services designed to increase
their revenues and profitability. Following the
Distribution, Franchising will also conduct the
Company's European hotel operations, including
the Company's indirect investment in Friendly
Hotels, PLC.
Board of Directors............ Effective as of the Distribution Date, the
Board of Directors of Franchising is expected
to consist of nine persons: Stewart Bainum,
Jr., Stewart Bainum, Barbara Bainum, William R.
Floyd, James H. Rempe, Robert C. Hazard, Jr.,
Gerald W. Petitt, Jerry E. Robertson, Ph.D and
Frederic V. Malek.
Post-Distribution Dividend
Policy....................... The dividend policy of Franchising will be
determined by Franchising's Board of Directors
following the Distribution. It is expected that
the Franchising Credit Facility (as defined
below) will restrict Franchising's ability to
pay dividends. See "Proposal One: Ratification
of the Distribution--Financing."
Certain Restated Certificate
of Incorporation and Bylaw
Provisions................... The Restated Certificate of Incorporation (the
"Franchising Certificate") and the Bylaws (the
"Franchising Bylaws") of Franchising are
substantially identical to, and contain no
material differences from, the Company's
Restated Certificate of Incorporation and
Bylaws. Certain provisions of the Franchising
Certificate and the Franchising Bylaws have the
effect of delaying or making more difficult an
acquisition of control of Franchising in a
transaction not approved by its Board of
Directors. These provisions have been designed
to enable Franchising, especially in its
initial years, to develop its businesses and
foster its long-term growth without disruptions
caused by the threat of a takeover not deemed
by its Board of Directors to be in the best
interests of Franchising. Such provisions
could, however, deter an offer for Franchising
Common Stock at a substantial premium to the
then current market price or hinder a potential
transaction that may be attractive to
stockholders. See "Proposal One: Ratification
of the Distribution--Certain Information
Concerning Franchising--Purposes and Effects of
Certain Provisions of the Franchising
Certificate and Bylaws." The Franchising
Certificate would
9
<PAGE>
eliminate certain liabilities of directors in
connection with the performance of their
duties. See "Proposal One: Ratification of the
Distribution--Certain Information Concerning
Franchising--Liability and Indemnification of
Officers and Directors--Elimination of
Liability in Certain Circumstances."
Principal Office.............. 10750 Columbia Pike, Silver Spring, Maryland
20901. Its telephone number is (301) 979-5000.
SUNBURST HOSPITALITY CORPORATION
Business...................... Following the Distribution, Sunburst will
retain the Company's Hotel Business and will
own and manage 71 hotels in 25 states,
primarily under Franchising's brands, and will
be Franchising's largest franchisee.
Board of Directors............ Effective as of the Distribution Date, the
Board of Directors of Sunburst is expected to
consist of seven persons; Stewart Bainum, Jr.,
Stewart Bainum, Donald J. Landry, Frederic V.
Malek, Paul R. Gould, Carole Y. Prest and one
additional director to be selected by the
Company's Board of Directors prior to the
Distribution. The remaining vacancy will be
filled by a person who is not a Sunburst
employee or employee or director of
Franchising.
Post-Distribution Dividend
Policy....................... The dividend policy of Sunburst will be
determined by Sunburst's Board of Directors
following the Distribution. The Company
currently is prohibited from paying dividends
pursuant to the terms of its loan agreement
with MNR Finance Corp. It is expected that the
Sunburst Credit Facility will restrict
Sunburst's ability to pay dividends. See
"Proposal One: Ratification of the
Distribution--Financing."
Listing and Trading Market.... The Sunburst Common Stock (formerly Company
Common Stock) is expected to continue to be
listed on the New York Stock Exchange following
the Distribution. Following the Distribution,
Sunburst's financial results will no longer be
consolidated with those of the Company's
Franchising Business, and Sunburst's revenues,
income and other results of operations will be
substantially below those of the Company prior
to the Distribution. Accordingly, as a result
of the Distribution, the trading price range of
Sunburst Common Stock immediately after the
Distribution (prior to the effect of the
Reverse Stock Split) is expected to be
significantly lower than the trading range of
Company Common Stock. See "Proposal One:
Ratification of The Distribution--The
Distribution--Listing and Trading of Sunburst
Common Stock; and --Risk Factors--Changes in
Trading Prices of Sunburst Common Stock."
Principal Office.............. 10750 Columbia Pike, Silver Spring, Maryland
20901. Its telephone number is (301) 979-3800.
10
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
SUMMARY FINANCIAL INFORMATION
The following table summarizes certain selected historical financial data of
Franchising for the three fiscal years ended May 31, 1997. The information set
forth below should be read in conjunction with "Proposal One: Ratification of
the Distribution--Certain Information Concerning Franchising--Selected
Historical Financial Data; and --Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Combined Financial
Statements of Franchising contained elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Statement of Income Data
Revenues....................................... $272,255 $250,654 $212,672
Operating expense.............................. 201,893 216,271 170,706
Operating income............................... 70,362 34,383 41,966
Net income..................................... 34,730 11,664 16,228
Pro forma earnings per share(4)................ $ 0.55 $ 0.19 $ 0.26
Other Data
EBITDA(2)(3)................................... $ 80,800 $ 69,450 $ 51,534
Cash flows from operating activities........... 46,448 32,742 37,851
Cash flows from investing activities........... (17,871) (78,499) (7,733)
Cash flows from financing activities........... (28,222) 48,513 (31,261)
Number of franchised properties (unaudited).... 3,344 3,052 2,835
Number of rooms (unaudited).................... 335,127 261,456 245,669
Average royalty rate (unaudited)............... 3.4% 3.3% 3.2%
Balance Sheet Data
Working capital (unaudited).................... $ (1,359) $ (3,927) $(29,423)
Total assets................................... 221,473 212,803 189,087
Notes payable to Parent........................ 78,700 78,700 78,700
Total debt..................................... 125,163 145,315 128,205
Total investment and advances from (to)
Parent........................................ 57,193 30,532 (12,699)
</TABLE>
- --------
(1) 1996 includes a pre-tax charge of $24.8 million for impairment of certain
long lived assets associated with Franchising's European operations.
(2) EBITDA consists of the sum of net income (loss), interest expense, income
taxes, depreciation and amortization and non-cash asset writedowns. EBITDA
is presented because such data is used by certain investors to determine
Franchising's ability to meet debt service, fund capital expenditures and
expand its business. Franchising considers EBITDA to be an indicative
measure of operating performance particularly due to the large amount of
goodwill and franchise rights amortization. Such information should not be
considered an alternative to net income, operating income, cash flow from
operations or any other operating or liquidity performance measure
prescribed by GAAP. Cash expenditures (including nondiscretionary
expenditures) for various long-term assets, interest expense and income
taxes have been, and will be, incurred which are not reflected in the
EBITDA presentation and therefore EBITDA does not represent funds available
for management's discretionary use. EBITDA presented by Franchising may not
be comparable to EBITDA defined and presented by other companies.
(3) 1996 EBITDA excludes a pre-tax charge of $24.8 million for impairment of
certain long lived assets associated with Franchising's European
operations.
(4) Pro forma earnings per share has been calculated based on the weighted
average shares outstanding of its parent Manor Care, Inc. for fiscal year
1995 and fiscal year 1996 of 62,480,000 and 62,628,000, respectively, and
its parent Choice Hotels International, Inc. for fiscal year 1997 of
62,680,000.
11
<PAGE>
PROPOSAL ONE: RATIFICATION OF THE DISTRIBUTION
THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
The Company's Board of Directors and management have determined, for the
reasons set forth below, among others, to separate the Company's Franchising
Business from its Hotel Business. On April 28, 1997, the Company's Board of
Directors announced its intention to distribute to holders of Company Common
Stock all of the outstanding shares of Franchising Common Stock. On April 28,
1997, the high and low sales prices of Company Common Stock as reported on the
New York Stock Exchange Composite Tape were $12 3/4 and $12 1/4, respectively.
Following the Distribution, the Company will not own any shares of Franchising
Common Stock or other capital stock of Franchising, but will have certain
contractual relationships with Franchising. See "--Certain Information
Concerning Franchising--Relationship Between the Company and Franchising After
the Distribution."
Prior to November 1, 1996, the Company and Franchising were wholly owned
subsidiaries of Manor Care, Inc., a Delaware corporation ("Manor Care"). On
November 1, 1996, Manor Care contributed all of the stock of Franchising to
the Company and then distributed to Manor Care stockholders, on a pro rata
basis, all of the stock of the Company (the "Manor Care Spin-off"). Prior to
the Manor Care Spin-off, Manor Care was generally engaged, directly and
through subsidiaries, in the Franchising Business, the Hotel Business and the
health care business. Thus, the Manor Care Spin-off effected the separation of
Manor Care's Franchising Business and Hotel Business from its health care
business.
The Board of Directors believes that the proposed Distribution will reduce
or eliminate substantial recurring conflicts between the Hotel Business and
the Franchising Business which create impediments to the growth of the
Company's Hotel Business. The Company currently owns and operates hotels for
its account and also enters into franchise relationships with unrelated
franchisees who own and operate hotels for their account. As a result,
business conflicts between the Hotel Business and the Franchising Business are
inevitable, as are franchisee perceptions that the Hotel Business "competes"
with the Company's franchisees. Moreover, the potential for conflict is
exacerbated due to the large size of the Company's franchise system, and the
territorial protections provided by the Company to its franchisees. As a
result of these conflicts, the Hotel Business has been forced, on numerous
occasions, to relinquish attractive hotel acquisition and development
opportunities because of franchisee complaints to Company management that a
proposed site and brand posed a competitive threat. Numerous other
transactions have not been pursued by the Hotel Business because of concerns
raised by management of the Franchising Business regarding potential adverse
franchisee reaction. The Company believes that the Distribution will resolve
such conflicts.
The Distribution, by separating the Company's two distinct businesses--hotel
franchising and hotel ownership and management--should also facilitate better
understanding of these business by the investment community. The Company
believes that the consolidation of its service-oriented Franchise Business and
capital intensive, ownership-oriented Hotel Business has resulted in confusion
and misperception in the investor community about the nature and growth
opportunities of the Company's various operations.
Additionally, the Board of Directors believes that, as part of an
independent company with enhanced growth opportunities, the Hotel Business
will be better able to attract, retain and effectively motivate skilled
professionals in the real estate development area who are compensated in large
part based on successfully completing real estate development and acquisition
transactions. As an independent company freed of the conflicts which have
hindered its growth, the Hotel Business will be able to provide meaningful
incentive compensation arrangements to attract, motivate and retain key
personnel in the real estate development area.
These factors led the Board of Directors to initiate consideration in
November 1996, in connection with efforts to monetize the Company's owned real
estate, of a possible separation of the Franchising Business and the Hotel
Business. In developing its recommendation for separating the Hotel Business
from the Franchising
12
<PAGE>
Business, management considered and rejected certain alternatives such as
asset divestitures, sale leasebacks and joint ventures with third parties
because the low tax basis in the Company's hotel properties would cause
adverse tax consequences to the Company. Moreover, such alternatives (other
than a sale of all of the Company's hotel properties) did not fully accomplish
the Board of Directors' objective of fully separating the Hotel Business and
the Franchising Business. With regard to such alternatives, there were no
contacts or negotiations with the Board of Directors or management from or by
third parties. Based on these considerations, management concluded that the
Distribution was the only tax-free way to fully separate the Hotel Business
and the Franchising Business. In reaching its determination, neither the Board
of Directors nor management consulted with any financial advisors or conducted
financial analysis with respect to the various strategic alternatives. In
February 1997, the Board of Directors considered management's analysis,
including management's determination that the alternatives considered and
rejected by management would have adverse tax consequences to the Company and
would not completely satisfy the Board of Directors' objective of fully
separating the Hotel Business and the Franchising Business. Based on these
considerations, the Board of Directors directed management to prepare for its
consideration a recommendation concerning the possible separation of the
Franchising Business and the Hotel Business through a spin-off distribution to
the Company's stockholders. In April 1997, management presented to the Board
of Directors a recommendation to approve the Distribution and the Board of
Directors unanimously approved managements's recommendation to effect the
Distribution.
The Distribution Proposals are separately presented in accordance with
applicable Securities and Exchange Commission rules and regulations, however,
the Board of Directors regards the matters presented in Proposals Two through
Four as matters integrally related to the Distribution. As a result, the Board
of Directors has determined that the effectiveness of each Distribution
Proposal is conditional upon the approval of all of the Distribution
Proposals.
Based on the foregoing, the Company's Board of Directors unanimously
recommends that the stockholders vote for all of the Distribution Proposals.
Stockholders of the Company with inquiries relating to the Distribution
should contact the Company's Investor Relations Department at (301) 979-3800.
After the Distribution Date, stockholders of Franchising should contact the
Franchising Investor Relations Department at (301) 979-5000.
SOLVENCY OPINION
The Distribution is conditioned upon, among other things, the receipt by the
Board of Directors of an opinion of a reputable appraisal or financial
advisory firm, in a form satisfactory to the Board of Directors, to the effect
that, assuming the Distribution is consummated as proposed: (i) with respect
to each of the Company and Franchising, immediately after giving effect to the
Distribution (a) the fair value of such company's aggregate assets would
exceed such company's total liabilities (including contingent liabilities);
(b) the present fair saleable value of such company's aggregate assets would
be greater than such company's probable liabilities on its debts as such debts
become absolute and mature; (c) such company would be able to pay its debts
and other liabilities (including contingent liabilities) as they mature; and
(d) the capital remaining in such company after the Distribution would not be
unreasonably small for the business in which such company is engaged, as
management has indicated it is now conducted and is proposed to be conducted
following consummation of the Distribution; and (ii) the excess of the value
of the aggregate assets of the Company, before consummation of the
Distribution, over the total identified liabilities (including contingent
liabilities) of the Company would equal or exceed the value of the
Distribution to stockholders plus the stated capital of the Company (the
"Solvency Opinion"). See "--Conditions; Termination." The Board of Directors
has reserved the right to waive the receipt of the Solvency Opinion as a
condition to consummation of the Distribution. The Board of Directors may not
provide stockholders with notice if receipt of the Solvency Opinion is waived
as a condition to consummation of the Distribution; however, the Board of
Directors will waive such condition only if the Board of Directors is
satisfied as to the solvency of the Company and Franchising and as to the
permissibility of the Distribution under Section 170 of the DGCL. In the event
that the Board of Directors waives the receipt of the Solvency Opinion as a
condition to consummation of the Distribution, the Board of Directors will
obtain an opinion of counsel that, based on the Board of Directors'
determination as to the amount of the Company's surplus (as defined
13
<PAGE>
under the DGCL) and the value of the shares of Franchising Common Stock to be
distributed, the requirements of Section 170 of the DGCL have been satisfied
with respect to the Distribution.
The Company has engaged American Appraisal Associates, Inc., to provide such
an opinion and has agreed to pay American Appraisal a fee of $70,000 for its
services (which fee will not be contingent on consummation of the
Distribution).
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions of the Distribution will be set forth in a
Distribution Agreement (the "Distribution Agreement") to be entered into by
the Company and Franchising prior to the Distribution.
If the Company's stockholders approve the Distribution Proposals and all
other conditions thereto are satisfied (or waived by the Board of Directors),
the Distribution will be made on a date to be established by the Board of
Directors following the Annual Meeting (the "Distribution Date") to
stockholders of record of the Company as of the record date established by the
Board of Directors for the Distribution (such date, the "Distribution Record
Date"). The Distribution Record Date will be established by the Board of
Directors following the Annual Meeting. On the Distribution Date, the Shares
will be delivered by the Company to ChaseMellon Shareholder Services, L.L.C.,
as the distribution agent (the "Distribution Agent"). As soon thereafter as
practicable, account statements reflecting ownership of shares of Company
Common Stock and Franchising Common Stock will be mailed by the Distribution
Agent to holders of Company Common Stock as of the Distribution Record Date to
reflect the distribution of one share of Franchising Common Stock for every
share of Company Common Stock held on such date. All shares will be fully paid
and non-assessable and the holders thereof will not be entitled to preemptive
rights.
No holder of Company Common Stock will be required to pay any cash or other
consideration for the shares of Franchising Common Stock received in the
Distribution or to surrender or exchange shares of Company Common Stock in
order to receive Franchising Common Stock.
FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION
The Company has conditioned the Distribution on the receipt of a ruling from
the Internal Revenue Service to the effect that, among other things, for
federal income tax purposes, the Distribution will qualify as a tax-free spin-
off under Section 355 of the Internal Revenue Code of 1986 (the "Code"), as
amended, and that:
(1) No gain or loss will be recognized by (and no amount will be included
in the income of) holders of Company Common Stock upon the receipt of
shares of Franchising Common Stock in the Distribution;
(2) Provided that on the Distribution Date a holder of Company Common
Stock holds such stock as a capital asset, the holding period for the
shares of Franchising Common Stock to be received in the Distribution will
include the holding period of Company Common Stock with respect to which
the Distribution was made;
(3) A holder's basis in Company Common Stock held immediately before the
Distribution will be allocated, based upon relative fair market values at
the time of the Distribution, between such Company Common Stock and the
shares of Franchising Common Stock received by the stockholder in the
Distribution; and
(4) No gain or loss will be recognized by the Company or Franchising upon
the Distribution.
Application has been made to the Internal Revenue Service for a ruling to
the foregoing effect. As of the date hereof, the Internal Revenue Service has
not yet issued the ruling requested. The Company believes and has been advised
by its outside tax advisors that the positions asserted by the Company in
requesting the ruling are consistent with the Code and the rules and
regulations promulgated thereunder. However, there is no certainty that the
Internal Revenue Service will issue a favorable ruling. If such ruling is not
obtained, the Board of Directors' present intention is not to proceed with the
Distribution. However, the Board of Directors has reserved
14
<PAGE>
the right to waive the receipt of such a ruling as a condition to consummation
of the Distribution. The Board of Directors may not provide stockholders with
notice if receipt of the tax ruling is waived as a condition to consummation
of the Distribution; however, (i) the Board of Directors will waive such
condition only if the Board of Directors believes that the receipt of shares
of Franchising Common Stock will be tax free and an opinion of counsel is
received to that effect and (ii) the Company will notify stockholders if the
Company either receives an unfavorable ruling from the Internal Revenue
Service or withdraws its request for such ruling prior to the Annual Meeting.
See "--Conditions; Termination." For a description of the consequences to the
Company, Franchising and the stockholders if the Distribution were not to
qualify as tax free, see "--Risk Factors--Certain Tax Considerations."
The foregoing summary of material federal income tax consequences of the
Distribution does not purport to cover all federal income tax consequences
that may apply to all categories of stockholders. Each stockholder should
consult its own tax advisor as to the particular consequences of the
Distribution to such stockholder, including the application of state, local
and foreign tax laws, and the effect of possible changes in tax laws that may
affect the tax consequences described above.
LISTING AND TRADING OF FRANCHISING COMMON STOCK
Currently, there is no public market for Franchising Common Stock. It is the
Company's intention that no "when-issued" trading market for Franchising
Common Stock will exist prior to the time Franchising's Registration Statement
on Form 10 with respect to the Franchising Common Stock (the "Franchising Form
10") is declared effective by the Commission. Prices at which Franchising
Common Stock may trade prior to the Distribution (on a "when-issued" basis) or
after the Distribution cannot be predicted. Until the Franchising Common Stock
is fully distributed and an orderly market develops, the prices at which
trading in such stock occurs may fluctuate significantly. The prices at which
Franchising Common Stock trades will be determined by the marketplace and may
be influenced by many factors, including, among others, the depth and
liquidity of the market for Franchising Common Stock, investor perception of
Franchising and the industry in which Franchising participates, Franchising's
dividend policy and general economic and market conditions. Such prices may
also be affected by certain provisions of the Franchising Certificate and
Franchising Bylaws, as each will be in effect following the Distribution,
which may have an antitakeover effect. See "--Risk Factors--Dividend Policies;
and--Certain Information Concerning Franchising--Purposes and Antitakeover
Effects of Certain Provisions of the Franchising Certificate and Bylaws."
Franchising intends to list the Franchising Common Stock on the New York
Stock Exchange. However, there can be no assurance that the Franchising Common
Stock will be accepted for listing on the New York Stock Exchange or any other
national stock exchange or market. Franchising initially will have
approximately 4,550 stockholders of record based upon the number of
stockholders of record of the Company as of July 8, 1997. For certain
information regarding options to purchase Franchising Common Stock that will
be outstanding after the Distribution, see "--Relationship Between the Company
and Franchising After the Distribution--Employee Benefits Allocation
Agreement."
The distribution of the Franchising Common Stock need not be registered
under the Securities Act of 1933, as amended (the "Securities Act") and shares
of Franchising Common Stock distributed to the Company's stockholders in the
Distribution will be freely transferable, except for securities received by
persons who may be deemed to be "affiliates" of the Company within the meaning
of Rule 144 under the Securities Act. Persons who are affiliates of
Franchising within the meaning of Rule 144 may not publicly offer or sell the
Franchising Common Stock received in connection with the Distribution except
pursuant to a registration statement under the Securities Act or pursuant to
Rule 144.
LISTING AND TRADING OF SUNBURST COMMON STOCK
It is expected that the Sunburst Common Stock (formerly Company Common
Stock) will continue to be listed and traded on the New York Stock Exchange
after the Distribution. Following the Distribution, Sunburst's financial
results will no longer be consolidated with those of the Company's Franchising
Business, and
15
<PAGE>
Sunburst's revenues, income and other results of operations will be
substantially below those of the Company prior to the Distribution.
Accordingly, as a result of the Distribution, the trading price range of
Sunburst Common Stock immediately after the Distribution (prior to the effect
of the Reverse Stock Split) is expected to be significantly lower than the
trading price range of Company Common Stock, and the combined trading prices
of Sunburst Common Stock and Franchising Common Stock held by stockholders
after the Distribution may be less than, equal to or greater than the trading
price of Company Common Stock, prior to the Distribution. The prices at which
Sunburst Common Stock trades after the Distribution will be determined by the
marketplace and may be influenced by many factors, including, among others,
the continuing depth and liquidity of the market for Sunburst Common Stock,
investor perception of the Hotel Business, Sunburst's dividend policy and
general economic and market conditions.
CONDITIONS; TERMINATION
The Board of Directors has conditioned the Distribution upon, among other
things, (i) the Internal Revenue Service having issued a ruling in response to
the Company's request in form and substance satisfactory to the Board of
Directors; (ii) approval of each of the Distribution Proposals by the
Company's stockholders; (iii) the Franchising Common Stock having been
approved for listing on the New York Stock Exchange subject to official notice
of issuance; (iv) the taking of all actions with respect to the Distribution
required or advisable under the Securities Act and the Exchange Act and the
rules and regulations promulgated thereto, including the Franchising Form 10
having become effective under the Exchange Act; (v) any third-party consents
to the transactions contemplated by the Distribution Proposals having been
obtained, except for those the failure of which to obtain would not have a
material adverse effect on the Company or Franchising; and (vi) the Board of
Directors' receipt of the Solvency Opinion, dated as of the Declaration Date
(see "--Solvency Opinion"). Any of these conditions, except for approval of
the Distribution Proposals by the Company's stockholders, may be waived in the
discretion of the Board of Directors. Even if all the above conditions are
satisfied, the Board of Directors has reserved the right to abandon, defer or
modify the Distribution or the other elements of the Distribution Proposals at
any time prior to the Distribution Date. In the event that, prior to the
Annual Meeting, the Board of Directors makes any material changes in the terms
of the Distribution or other elements of the Distribution Proposals, the
Company will notify stockholders by means of a supplement to this Proxy
Statement. Following stockholder approval, the Board of Directors will not
waive any of the conditions to the Distribution or make any changes in the
terms of the Distribution or the other elements of the Distribution Proposals
unless the Board of Directors determines that such changes would not be
materially adverse to the Company's stockholders. In determining whether any
such changes would be materially adverse to the Company's stockholders, the
Board of Directors will consider, as appropriate, advice from its outside
advisors as well as the recommendation of management as to the potential
impact of such changes on the Company and the Company's stockholders. See "--
Relationship Between the Company and Franchising after the Distribution--
Distribution Agreement."
INTEREST OF CERTAIN PERSONS IN THE DISTRIBUTION
Franchising
It is anticipated that upon the Distribution, all of the current members of
the Company's Board of Directors except for Paul R. Gould will be appointed to
the Board of Directors of Franchising. Additionally, Stewart Bainum, Jr. will
serve as Chairman of the Boards of Directors of the Company and Franchising
and Stewart Bainum and Frederic V. Malek will be members of the Boards of
Directors of the Company and Franchising. Messrs. Bainum and Bainum, Jr., Ms.
Bainum and Messrs. Hazard, Jr., Malek, Petitt and Robertson will each receive
from Franchising compensation for serving as a director of Franchising that is
substantially the same as the compensation currently received by such persons
as directors of the Company. See "--Certain Information Concerning
Franchising--Management--Compensation of Directors; and Proposal Five--
Election of Directors--Compensation of Directors."
It is further anticipated that upon the Distribution, William R. Floyd will
become Vice Chairman and Chief Executive Officer of Franchising; James A.
MacCutcheon will become Executive Vice President, Chief Financial Officer and
Treasurer of Franchising; Thomas Mirgon will become Senior Vice President,
Human Resources of
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Franchising; Barry L. Smith will become Senior Vice President--Marketing of
Franchising; Michael J. DeSantis will become Senior Vice President, General
Counsel and Secretary of Franchising; and Joseph M. Squeri will become Vice
President--Finance and Controller of Franchising.
Effective upon the Distribution Date, Franchising is expected to enter into
a series of employment agreements with current members of the Company's
management as follows. It is expected that Franchising will enter into an
employment agreement with Stewart Bainum, Jr., providing for Mr. Bainum, Jr.'s
employment as Chairman of the Board of Franchising. Either Franchising or Mr.
Bainum may terminate the agreement upon 30 days' prior written notice on the
first and second anniversary dates of the agreement. The agreement will
provide that Mr. Bainum, Jr. will devote 12.5% of his professional time to the
affairs of Franchising, 12.5% of his professional time to the affairs of the
Company and the remaining 75% of his professional time to the affairs of Manor
Care. The agreement provides for a base salary of $82,044 per annum for
services to Franchising and a maximum bonus of 60% of Mr. Bainum, Jr.'s base
compensation based upon the performance of Franchising.
Effective upon the Distribution Date, Franchising is expected to assume
employment agreements between the Company and William R. Floyd, James A.
MacCutcheon and Thomas Mirgon, respectively. For additional discussion of
employment agreements between Franchising and its management, see "--Certain
Information Concerning Franchising--Employment Agreements."
Sunburst
Sunburst has entered into an employment agreement with Donald J. Landry,
which will become effective upon the Distribution Date, providing for Mr.
Landry's employment as Chief Executive Officer of Sunburst. For additional
discussion of the employment agreement between Sunburst and Mr. Landry, see
"Proposal Five: Election of Directors--Employment Agreements."
Outstanding Stock Options
In connection with the Distribution, directors and officers of the Company
will have the opportunity to receive options to purchase Franchising Common
Stock and/or to retain Company Common Stock as an adjustment to preserve the
financial value of their outstanding options to purchase Company Common Stock.
For a discussion of the treatment of outstanding options to purchase Company
Common Stock in connection with the Distribution, see "--Relationship Between
the Company and Franchising After the Distribution--Employee Benefits
Allocations Agreement."
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RISK FACTORS
CERTAIN FINANCIAL AND OPERATING CONDITIONS
While the Hotel Business and the Franchising Business have substantial
operating histories, Sunburst and Franchising do not have operating histories
as separate stand-alone companies. Prior to the Distribution, each of the two
businesses had access to the cash flow generated by the other and the
Company's credit, which was based on the combined assets of the Hotel Business
and the Franchising Business. Subsequent to the Distribution, Sunburst will
not have the benefit of either the cash flow generated by, or the assets of,
the Franchising Business, and Franchising will not have the benefit of either
the cash flow generated by, or the assets of, the Hotel Business.
Subsequent to the Distribution, each of Sunburst and Franchising will be a
smaller and less diversified company than the Company prior to the
Distribution. In addition, the division of the Company may result in some
temporary dislocation and inefficiencies to the business operations, as well
as the organization and personnel structure, of each company. Nevertheless,
the Company's Board of Directors believes that separation of the two companies
will also result in long-term operating efficiencies by allowing the companies
to focus on their respective businesses.
SUBSTANTIAL LEVERAGE AT SUNBURST
After the Distribution, Sunburst will be a highly leveraged corporation.
Assuming that the Distribution had been consummated on May 31, 1997, Sunburst
would have had, on a pro forma basis, total long-term indebtedness of
approximately $246.8 million (representing approximately 78.6% of its total
capitalization) and total stockholders' equity of $67.3 million, compared with
the Company's actual long-term indebtedness as of May 31, 1997, before
allocation of indebtedness to Franchising of $372.0 million (representing
approximately 74.9% of its total capitalization) and total stockholder's
equity of $124.5 million.
Sunburst's Hotel Business is a capital-intensive business and Sunburst will
continue to have significant capital requirements in the future. As a highly
leveraged corporation, any new financing and refinancing by Sunburst of its
existing indebtedness may be at higher interest rates and on less advantageous
terms than may have been the case had the Distribution not taken place. For a
discussion of the financing for Sunburst expected to be implemented in
connection with the Distribution, see "--Financing." This significant degree
of leverage could have a potential negative impact on the ability of Sunburst
to incur additional debt to fund future expansion. While Sunburst's operating
cash flow is expected to be sufficient to cover its expenses, including
interest costs, Sunburst may be required to supplement operating cash flow
with asset sales, refinancing proceeds, equity offerings or capital spending
reductions to meet principal repayment obligations in later years. There can
be no assurance that any refinancing or equity offering could be successfully
concluded. Any resort to alternative sources of funds may impair Sunburst's
competitive position and reduce its cash flow.
The ability of Sunburst to satisfy its obligations, to reduce its debt and
to increase equity will also be dependent upon its future performance, which
will be subject to prevailing economic conditions and to financial, business
and other factors, including factors beyond the control of Sunburst, affecting
the business operations of Sunburst.
CERTAIN TAX CONSIDERATIONS
The Company has conditioned the Distribution on the receipt of a favorable
ruling from the Internal Revenue Service (although the Board of Directors has
reserved the right to waive receipt of the ruling as a condition to
consummation of the Distribution). The Board of Directors may not provide
stockholders with notice if receipt of the tax ruling is waived as a condition
to consummation of the Distribution; however, (i) the Board of Directors will
waive such condition only if the Board of Directors believes that the receipt
of shares of Franchising Common Stock will be tax free and an opinion of
counsel is received to that effect, and (ii) the Company will notify
stockholders if the Company either receives an unfavorable ruling from the
Internal Revenue Service or withdraws its request for such ruling prior to the
Annual Meeting. See "--The Distribution--Federal Income Tax Aspects of the
Distribution." Such rulings, while generally binding upon the Internal
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Revenue Service, are subject to certain factual representations and
assumptions. If such factual representations and assumptions were incorrect in
a material respect, such ruling would be jeopardized. The Company is not aware
of any facts or circumstances which would cause such representations and
assumptions to be untrue. The Company and Franchising will agree to comply in
all material respects with each representation and statement made to a taxing
authority in connection with the Distribution to provide further assurances
that the Distribution will qualify as tax free. See "--Relationship Between
The Company and Franchising After the Distribution--Distribution Agreement."
If the Distribution were not to qualify under Section 355 of the Code, then
in general a corporate tax would be payable by the consolidated group of which
the Company is the common parent based upon the difference between (x) the
fair market value of the Franchising Common Stock and (y) the adjusted basis
of the Franchising Common Stock immediately prior to the Distribution. The
corporate level tax would be payable by the Company and could be substantial.
Under the consolidated return rules, each member of the consolidated group
(including Franchising) is severally liable for such tax liability.
Furthermore, each holder of Company Common Stock who receives shares of
Franchising Common Stock in the Distribution would be treated as if such
stockholder received a taxable distribution in an amount equal to the fair
market value of the Franchising Common Stock received, which would result in
(x) a dividend to the extent of such stockholder's pro rata share of the
Company's current and accumulated earnings and profits, (y) a reduction in
such stockholder's basis in Company Common Stock to the extent the amount
received exceeds such stockholder's share of earnings and profits and (z) gain
from the exchange of Company Common Stock to the extent the amount received
exceeds both such stockholder's share of earnings and profits and such
stockholder's basis in Company Common Stock.
NO CURRENT PUBLIC MARKET FOR FRANCHISING COMMON STOCK
Currently, there is no public market for Franchising Common Stock and there
can be no assurances as to the prices at which trading in Franchising Common
Stock will occur after the Distribution. Until Franchising Common Stock is
fully distributed and an orderly market develops, the prices at which trading
in such stock occurs may fluctuate significantly. The prices at which
Franchising Common Stock trades will be determined by the marketplace and may
be influenced by many factors, including, among others, the depth and
liquidity of the market for Franchising Common Stock, investor perception of
Franchising and the industry in which Franchising participates, Franchising's
dividend policy and general economic and market conditions. Franchising
intends to list the Franchising Common Stock on the New York Stock Exchange.
However, there can be no assurance that the Franchising Common Stock will be
accepted for listing on the New York Stock Exchange or any other national
stock exchange or market. See "--The Distribution--Listing and Trading of
Franchising Common Stock."
CHANGES IN TRADING PRICES OF SUNBURST COMMON STOCK
It is expected that Sunburst Common Stock (formerly Company Common Stock)
will continue to be listed and traded on the New York Stock Exchange after the
Distribution. Following the Distribution, Sunburst's financial results will no
longer be consolidated with those of the Company's Franchising Business, and
Sunburst's revenues, income and other results of operations will be
substantially below those of the Company prior to the Distribution.
Accordingly, as a result of the Distribution, the trading price range of
Sunburst Common Stock immediately after the Distribution (prior to giving
effect to the Reverse Stock Split) is expected to be significantly lower than
the trading price range of Company Common Stock. Additionally, the combined
trading prices of Sunburst Common Stock and Franchising Common Stock held by
stockholders after the Distribution may be less than, equal to or greater than
the trading price of Company Common Stock prior to the Distribution. See "--
The Distribution--Listing and Trading of Sunburst Common Stock."
For a description of the Reverse Stock Split to be undertaken by the Company
as part of the Distribution and its anticipated impact on the trading price
range of Sunburst Common Stock, see "Proposal Two: Amendments to the Restated
Certificate of Incorporation of the Company."
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CERTAIN ANTITAKEOVER FEATURES
If the Distribution Proposals are approved and the Distribution is
consummated, the Franchising Certificate and Franchising Bylaws will contain
several provisions, which are now in effect with respect to the Company and
will continue to be in effect with respect to Sunburst, that may make the
acquisition of control of Franchising difficult or expensive, or increase the
likelihood that incumbent management will retain their positions or hinder a
transaction that may be attractive to stockholders. See "--The Distribution--
Certain Information Concerning Franchising--Purposes and Antitakeover Effects
of Certain Provisions of the Franchising Certificate and Bylaws."
POTENTIAL CONFLICTS
Subsequent to the Distribution, the ongoing relationship between Sunburst
and Franchising may potentially give rise to conflicts of interests. In
connection with the Distribution, (i) Sunburst and Franchising will enter into
a Strategic Alliance Agreement pursuant to which Sunburst will grant to
Franchising a right of first refusal to franchise lodging properties developed
or acquired by Sunburst that Sunburst intends to operate under franchise;
Franchising will grant to Sunburst a conditional option to purchase the
MainStay Suites hotel system; each of the parties will continue to cooperate
with respect to matters of mutual interest, including new product and concept
testing for Franchising in hotels owned by Sunburst, and Sunburst will
authorize Franchising, in certain circumstances, to negotiate with third party
vendors on Sunburst's behalf; (ii) Sunburst and Franchising will be parties to
agreements pursuant to which Franchising will provide to Sunburst certain
administrative services after the Distribution and (iii) Sunburst, pursuant to
certain franchising agreements, will be the largest franchisee of Franchising.
See "--Relationship Between the Company and Franchising After the
Distribution." With respect to these matters, 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
mutually productive relationship. In addition, Stewart Bainum, Jr. will serve
as Chairman of the Board of Directors of both Sunburst and Franchising.
Stewart Bainum and Frederick V. Malek will each serve as a director of each of
Sunburst and Franchising. Messrs. Bainum, Jr., Bainum and Malek as well as
certain other officers and directors of Sunburst and Franchising will also own
shares (and/or options or other rights to acquire shares) in both companies
following the Distribution. Appropriate policies and procedures will be
followed by the boards of directors of each company 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 Sunburst or Franchising on certain matters which
present a conflict between the two companies.
FRAUDULENT TRANSFER CONSIDERATIONS; LEGAL DIVIDEND REQUIREMENTS
It is a condition to the consummation of the Distribution that the Board of
Directors of the Company shall have received a satisfactory opinion regarding
the solvency of the Company and the sufficiency under the requirements of
Section 170 of the Delaware General Corporation Law of the Company's net
assets following the Distribution. See "The Distribution--Solvency Opinion."
The solvency opinion will address certain factual matters relevant to an
assessment of the legality of the Distribution under Delaware law, but will
not constitute a legal opinion and will not be delivered by a firm qualified
to practice law in Delaware. In certain circumstances, the Board of Directors
will obtain a legal opinion as to the legality of the Distribution under
Delaware law. See "--The Distribution--Solvency Opinion." The Company's Board
of Directors does not intend to consummate the Distribution unless it is
satisfied regarding the solvency of the Company, Franchising and the
permissibility of the Distribution under Section 170 of the (DGCL). There is
no certainty, however, that a court would reach the same conclusion. If a
court (for example, in a lawsuit by an unpaid creditor or representatives of
creditors) were to find that, at the time the Company effected the
Distribution of Franchising, the Company or Franchising, as the case may be,
(i) was insolvent, (ii) was rendered insolvent by reason of the Distribution,
(iii) was engaged in a business or transaction for which the Company's or
Franchising's remaining assets, as the case may be, constituted unreasonably
small capital, or (iv) intended to incur, or believed it would incur, debts
beyond its ability to pay as such debts matured, such court may be asked to
void the Distribution (in whole or in part) as a fraudulent conveyance and
require that the stockholders return the special dividend (in whole or in
part) to the
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Company, or require the Company or Franchising, as the case may be, to fund
certain liabilities of the other company for the benefit of creditors. The
measure of insolvency for purposes of the foregoing will vary depending upon
the jurisdiction whose law is being applied. Generally, however, the Company,
Franchising, as the case may be, would be considered insolvent if the fair
value of their respective assets were less than the amount of their respective
liabilities or if they incurred debt beyond their ability to repay such debt
as it matures. In addition, under Section 170 of the DGCL (which is applicable
to the Company in the Distribution) a corporation generally may make
distributions to its stockholders only out of its surplus (net assets minus
capital) and not out of capital.
SIGNIFICANT BAINUM FAMILY INTEREST
Upon completion of the Distribution, certain members of the Bainum family
(including various trusts established by members of the Bainum family) in the
aggregate will have the right to vote approximately 34.43% of the outstanding
shares of Franchising Common Stock and Sunburst Common Stock. See "--Security
Ownership." In addition, Mr. Bainum and Mr. Bainum, Jr. each will be a
director of Sunburst and Mr. Bainum, Mr. Bainum, Jr. and Ms. Bainum each will
be a director of Franchising. As a result, the Bainum family may be in a
position to significantly influence the affairs of each of Sunburst and
Franchising, including the election of directors.
DIVIDEND POLICIES
The dividend policies of Sunburst and Franchising will be determined by
their respective Boards of Directors following the Distribution. The
declaration and payment of dividends by Sunburst will be at the discretion of
the Sunburst Board of Directors. The declaration and payment of dividends by
Franchising will be at the discretion of the Franchising Board of Directors.
The Sunburst Board of Directors and the Franchising Board of Directors intend
to re-evaluate their respective dividend policies from time to time in light
of their respective companies' results of operations, financial condition,
cash requirements, future prospects and other factors deemed relevant. There
can be no assurance that any dividends will be paid by either company in the
future. The Company currently is prohibited from paying dividends pursuant to
the terms of its loan agreement with MNR Finance Corp. It is expected that the
Franchising Credit Facility (defined below) and the Sunburst Credit Facility
(defined below) will restrict Franchising and Sunburst's ability to pay
dividends. See "Financing."
IMPACT OF INFLATION AND OTHER EXTERNAL FACTORS
Franchising's principal sources of revenues are franchise fees. Franchise
fees and revenues from owned and managed hotels can be impacted by two
external factors: the supply of hotel rooms within the lodging industry
relative to the demand for rooms by travelers, and inflation.
Although industry-wide supply and demand for hotel rooms recently has been
fairly balanced, any excess in supply that might develop in the future could
have an unfavorable impact on room revenues at Franchising's franchised hotels
either by reducing the number of rooms reserved at Franchising's properties or
by restricting the rates hotel operators can charge for their rooms. In
addition, an excess supply of hotel rooms may discourage potential franchisees
from opening new hotels, unfavorably impacting the franchise fees received by
Franchising.
Although Franchising believes that increases in the rate of inflation will
generally result in comparable increases in hotel room rates, severe inflation
could contribute to a slowing of the national economy, which could result in
reduced travel by both business and leisure travelers. That could lead to less
demand for hotel rooms, which could result in a temporary reduction in room
rates and fewer room reservations, negatively impacting revenues received by
Franchising. A weak economy could also reduce demand for new hotels,
negatively impacting the franchise fees received by Franchising.
Among the other unpredictable external factors which may affect
Franchising's fee revenue stream are wars, airline strikes and severe weather.
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FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements contained in this Proxy Statement under the captions
"Proxy Statement Summary; --Risks Factors;--Certain Information Concerning
Franchising--Management's Discussion and Analysis of Financial Condition and
Results of Operations; --Business and Properties; --Certain Information
Concerning Sunburst--Management's Discussion and Analysis of Sunburst Pro
Forma Financial Condition and Results of Operations; and --Business and
Properties" and elsewhere constitute estimates of future performance or other
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company or Franchising for
industry results to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
risks, uncertainties and other important factors include, among other things:
Sunburst's substantial leverage after the Distribution, and its plans to
realize cash proceeds through leveraging its remaining assets; Sunburst's
plans to make selected strategic investments and acquisitions and develop new
hotels; Franchising's plans to expand its international franchise operations;
Franchising's plans to market new brands and products; Sunburst's and
Franchising's success in implementing their respective business strategies,
including their success in arranging financing where required; competition;
government regulation; general economic and business conditions; and other
factors referenced in this Proxy Statement. These forward-looking statements
speak only as of the date of this Proxy Statement. The Company and Franchising
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein to reflect any
change in the Company's or Franchising's expectations with regard thereto or
any change in events, conditions or circumstances on which any such statement
is based.
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RELATIONSHIP BETWEEN THE COMPANY
AND FRANCHISING AFTER THE DISTRIBUTION
For purposes of governing the ongoing relationships between the Company and
Franchising after the Distribution Date, and in order to facilitate the
transition to two separate publicly-traded companies, the Company and
Franchising will enter into agreements setting forth the Company's and
Franchising's on-going responsibilities regarding the matters outlined below.
The material terms of such agreements are described below and the agreements
summarized in this section are included as exhibits to Franchising's
Registration Statement on Form 10.
DISTRIBUTION AGREEMENT
On or prior to the Distribution Date, the Company and Franchising will enter
into a Distribution Agreement which provides for, among other things, the
principal corporate transactions required to effect the Distribution, the
assumption by Franchising of all liabilities relating to the Franchising
Business and the allocation between the Company and Franchising of certain
other liabilities, certain indemnification obligations of the Company and
Franchising and certain other agreements governing the relationship between
the Company and Franchising with respect to or in consequence of the
Distribution. The Distribution Agreement provides that the Distribution is
subject to the prior satisfaction of certain conditions including, among other
things, the execution of all ancillary agreements to the Distribution
Agreement, certain of which are described below, and the declaration of the
Distribution by the Company Board of Directors.
Subject to certain exceptions, Franchising has agreed to indemnify the
Company and its subsidiaries against any loss, liability or expense incurred
or suffered by the Company or its subsidiaries arising out of or related to
the failure by Franchising to perform or otherwise discharge liabilities
allocated to and assumed by Franchising under the Distribution Agreement, and
the Company has agreed to indemnify Franchising against any loss, liability or
expense incurred or suffered by Franchising arising out of or related to the
failure by the Company to perform or otherwise discharge the liabilities
retained by the Company under the Distribution Agreement. The foregoing cross-
indemnities do not apply to indemnification for tax claims and liabilities,
which are addressed in the Tax Sharing Agreement described below. The
Distribution Agreement also includes procedures for notice and payment of
indemnification claims and provides that the indemnifying party may assume the
defense of a claim or suit brought by a third party.
To avoid adversely affecting the intended tax consequences of the
Distribution, the Distribution Agreement provides that each of the Company and
Franchising will agree to comply in all material respects with each
representation and statement made to any taxing authority in connection with
the IRS tax ruling or any other tax ruling obtained by the Company and
Franchising in connection with the Distribution.
The Distribution Agreement also provides that by the Distribution Date,
Franchising's Amended and Restated Certificate of Incorporation and Bylaws
shall be in the forms attached hereto as Annexes A and B, respectively, and
that Franchising and the Company will take all actions which may be required
to elect or otherwise appoint, as directors of Franchising, the nine persons
indicated herein. See "--Certain Information Concerning Franchising--
Description of Franchising Capital Stock; --Purposes and Antitakeover Effects
of Certain Provisions of the Franchising Certificate and Bylaws; and --
Management."
The Distribution Agreement also provides that each of the Company and
Franchising will be granted access to certain records and information in the
possession of the other, and requires the retention of such information in its
possession for specified periods and thereafter requires that each party give
the other prior notice of its intention to dispose of such information. In
addition, the Distribution Agreement provides for the allocation of shared
privileges with respect to certain information and requires each of the
Company and Franchising to obtain the consent of the other prior to waiving
any shared privilege.
The Distribution Agreement provides that except as otherwise specifically
provided, all costs and expenses incurred in connection with the preparation,
execution, delivery and implementation of the Distribution
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Agreement and with the consummation of the transactions contemplated by the
Distribution Agreement (including transfer taxes and the fees and expenses of
all counsel, accountants and other advisors) shall be paid by the party
incurring such cost or expense. Notwithstanding the foregoing, the Company
shall be obligated to pay the legal, filing, accounting, printing and other
out-of-pocket expenditures in connection with the preparation, printing and
filing of the Franchising Form 10 Registration Statement.
STRATEGIC ALLIANCE AGREEMENT
On or prior to the Distribution Date, the Company and Franchising will enter
into a Strategic Alliance Agreement pursuant to which: (i) the Company will
grant a right of first refusal to Franchising to franchise any lodging
property that Sunburst develops or acquires and intends to operate under
franchise; (ii) Sunburst will, barring a material change in market conditions,
continue to develop Sleep Inns and MainStay Suites hotels so that it will have
opened a total of 14 Sleep Inns and 15 MainStay Suites hotels within 48 months
of the Distribution Date; (iii) Franchising will grant to Sunburst an option,
exercisable under certain circumstances, to purchase the brand names, marks,
franchise agreements and other assets of the MainStay Suites hotel system;
(iv) Sunburst and Franchising will continue to cooperate with respect to
matters of mutual interest, including new product and concept testing for
Franchising in hotels owned by Sunburst; and (v) Sunburst will authorize
Franchising to negotiate with third party vendors on Sunburst's behalf for the
purchase of certain items. The Strategic Alliance Agreement extends for a term
of 20 years with rights of mutual termination on the fifth, tenth and
fifteenth anniversaries.
TAX SHARING AGREEMENT
The Company and Franchising will enter into the Tax Sharing Agreement for
purposes of allocating pre-Distribution tax liabilities among Sunburst and
Franchising and their respective subsidiaries. In general, Sunburst will be
responsible for (i) filing consolidated federal income tax returns for the
Sunburst affiliated group and combined or consolidated state tax returns for
any group that includes a member of the Sunburst affiliated group, including
in each case Franchising and its subsidiaries for the periods of time that
such companies were members of the applicable group and (ii) paying the taxes
relating to such tax returns to the applicable taxing authorities (including
any subsequent adjustments resulting from the redetermination of such tax
liabilities by the applicable taxing authorities). Franchising will reimburse
Sunburst for the portion of such taxes that relates to Franchising and its
subsidiaries, as determined based on their hypothetical separate company
income tax liabilities. Sunburst and Franchising have agreed to cooperate with
each other, and to share information, in preparing such tax returns and in
dealing with other tax matters.
EMPLOYEE BENEFITS ALLOCATION AGREEMENT
On or prior to the Distribution Date, the Company and Franchising will enter
into an Employee Benefits and Other Employment Matters Allocation Agreement
(the "Employee Benefits Allocation Agreement"). The Employee Benefits
Allocation Agreement provides for the allocation subsequent to the
Distribution of employee benefits, as they relate to employees who remain
employed by Sunburst or its subsidiaries ("Sunburst Employees") after the
Distribution and employees who are employed by Franchising or its subsidiaries
after the Distribution ("Franchising Employees"). During the period beginning
on the Distribution Date and ending on December 31, 1997, Franchising shall
pay to Sunburst, on a monthly basis, a payment equal to 1.9% of the payroll
for all Franchising Employees. In consideration thereof, during such period,
Sunburst will assume all responsibility for all funding obligations and
current plan year matching contributions attributable to certain retirement
and savings plans specified in the Employee Benefits Allocation Agreement.
During the same period, Franchising will also pay to Sunburst a monthly fee of
$216 for each Franchising Employee receiving services and benefits under a
Sunburst medical plan. Sunburst shall be responsible for all liabilities and
obligations related to claims incurred through December 31, 1997 in respect of
Sunburst Employees and Franchising Employees (whether such claims are assessed
before or after December 31, 1997) under any Sunburst welfare plan and, with
respect to pre-tax medical and dependent care programs, will retain any funds
remaining on January 1, 1998. Pursuant to the Employee Benefits Allocation
Agreement, Sunburst will continue sponsorship of the various
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Company profit sharing plans, stock plans and health and welfare plans with
respect to Sunburst Employees. Franchising will establish a number of plans
which will allow Franchising to provide to its employees substantially the
same benefits currently provided to them as employees of the Company. With
respect to each Company profit sharing and retirement plan, Sunburst shall
transfer to Franchising on or before January 1, 1998, an amount representing
the present value of the full accrued benefit of all Franchising Employees who
had earned a benefit under any such Company plan. The Employee Benefits
Allocation Agreement provides for cross-guarantees between Sunburst and
Franchising with respect to the payment of benefits under certain plans and
for cross-indemnification with respect to pre-Distribution employment-related
claims.
The Employee Benefits Allocation Agreement also provides for the adjustment
of outstanding options to purchase shares of Company Common Stock held by
Company Employees, Franchising Employees and employees of Manor Care who hold
such options as a result of the Manor Care Spin-off. On the Distribution Date,
each Company Employee and Franchising Employee holding an incentive stock
option to purchase Company Common Stock will receive, for each such option, a
conversion award consisting of an incentive stock option to purchase the
common stock of such employee's employer after the Distribution (i.e.,
Franchising Common Stock for Franchising Employees and Sunburst Common Stock
for Sunburst Employees), with the number of shares that may be acquired and
the option price adjusted pursuant to a formula designed to preserve the
financial value of the options. Each Sunburst Employee and Franchising
Employee holding a non-qualified option to purchase Company Common Stock that
has vested on or prior to the Distribution Date may make a one-time election
to choose a conversion award consisting of an option to acquire any percentage
combination of Sunburst Common Stock and Franchising Common Stock with the
number of shares and the exercise price adjusted so as to preserve the
financial value of the outstanding option. Each Sunburst Employee and
Franchising Employee holding a non-qualified option to purchase Company Common
Stock that has not vested on or prior to such date will receive a conversion
award of which one-half of the financial value of which will comprise an
option to acquire shares of common stock of such employee's employer after the
Distribution, and one-half of the financial value of which will comprise an
option to acquire a pro rata combination of shares of Sunburst Common Stock
and Franchising Common Stock.
On the Distribution Date, each employee of Manor Care holding vested
nonqualified options to purchase shares of Company Common Stock may make a
one-time election to choose a conversion award consisting of an option to
acquire any percentage combination of Sunburst Common Stock and Franchising
Common Stock with the number of shares and the exercise price adjusted so as
to preserve the financial value of the outstanding options. Manor Care
employees holding unvested non-qualified options to purchase shares of Company
Common Stock will receive a conversion award consisting of an option to
purchase shares of Sunburst Common Stock and an option to purchase shares of
Franchising Common Stock, with the number of shares that may be acquired
under, and the option price of, each option set pursuant to a formula designed
to allocate the financial value of the outstanding option based on the
relative stock values immediately following the Distribution.
LEASE AGREEMENTS
On or prior to the Distribution Date, the Company and Franchising will enter
into a agreement with Manor Care amending the terms of the Gaithersburg Lease
to add Franchising as a guarantor of Sunburst's obligations under the
Gaithersburg Lease. Also on or prior to the Distribution Date, the Company and
Franchising will enter into a sublease agreement with respect to the Silver
Spring Lease. It is currently expected that Franchising will sublease
approximately 54.3% of the office space available under the Silver Spring
Lease with financial terms approximately equal (on a square foot basis) to the
terms of the Silver Spring Lease.
TRANSITIONAL SERVICE AGREEMENTS
On or prior to the Distribution Date, the Company and Franchising will enter
into a number of agreements pursuant to which Franchising will provide certain
continuing services to Sunburst for a transitional period. Such services will
be provided on market terms and conditions. Subject to the termination
provisions of the specific agreements, Sunburst will be free to procure such
services from outside vendors or may develop an in-house
25
<PAGE>
capability in order to provide such services internally. Management believes
that these agreements are based on commercially reasonable terms including
pricing and payment terms. The primary transitional services agreements are
summarized below.
Pursuant to the Employee Benefits Administration Agreement, Franchising will
provide certain benefits, compensation and other services. Such other services
may include benefit plan administration and accounting, COBRA administration,
regulatory compliance and certain fiduciary services. Pursuant to the Tax
Administration Agreement, Franchising will provide certain sales, use,
occupancy, real and personal property tax return administration, audit and
appeals services for Sunburst. Pursuant to the Vehicle Lease Agreement,
Franchising will provide the use of certain vehicles to Sunburst.
AMENDMENT TO AGREEMENTS WITH MANOR CARE
Prior to November 1, 1996, the Company and Franchising were wholly owned
subsidiaries of Manor Care. On November 1, 1996, Manor Care effected the Manor
Care Spin-off. In connection with the Manor Care Spin-off the Company and
Manor Care entered into various agreements setting forth the Company's and
Manor Care's on-going responsibilities regarding various matters. See
"Proposal Five: Election of Directors--Certain Relationships and
Transactions." In connection with the Distribution, certain of these
agreements will be amended to allocate certain of the Company's rights and
responsibilities thereunder between Franchising and Sunburst.
FRANCHISE AGREEMENTS
The Clarion, Comfort, Econo Lodge, Sleep Inn, Quality, MainStay Suites and
Rodeway marks are each owned by Franchising. Each property currently owned by
the Company is subject to a franchise agreement between Franchising and the
Company, as franchisee (the "Franchise Agreements"). Such agreements (the
material terms of which are described below) will remain in place between
Sunburst and Franchising after the Distribution.
Term. Each Franchise Agreement has an initial term of 20 years, except the
agreement for Tempe, Arizona which is a year to year agreement. The Franchise
Agreements have varying original dates, from 1982 through 1996. Certain
Franchise Agreements allow for unilateral termination by either party on the
5th, 10th, or 15th anniversary of the Franchise Agreement.
Termination by Sunburst. Sunburst (except with respect to one property as
described below) may terminate a Franchise Agreement if Franchising defaults
on its material obligations under such Franchise Agreement and fails to cure
such defaults within 30 days following written notice. The Franchise Agreement
with respect to the Quality Hotel--Arlington (the "Non-Standard Franchise
Agreement") does not allow Sunburst to terminate such Franchise Agreement.
Termination by Franchising. Franchising (except with respect to the Non-
Standard Franchise Agreement) may suspend or terminate a Franchise Agreement
at any time, if, among other things, Sunburst (a) fails to submit reports when
due; (b) fails to pay amounts due under such Franchise Agreement; (c) fails to
pay its debts generally as they become due; or (d) receives two or more
notices of default for similar reasons for any 12 month period. Franchising
(except with respect to the Non-Standard Franchise Agreement) may terminate a
Franchise Agreement immediately upon notice to Sunburst if, among other
things, (a) certain bankruptcy events occur with respect to Sunburst; (b)
Sunburst loses possession or the right to possession of the Property; (c)
Sunburst breaches transfer restrictions in the related Franchise Agreement;
(d) any action is taken to dissolve or liquidate Sunburst; or (e) there is a
threat or danger to the public health and safety in the continued operation of
the Property. If a Franchise Agreement is terminated by Franchising for any of
the reasons discussed in the immediately preceding two sentences, Sunburst is
required to pay liquidated damages equal to the product of (i) the average
monthly gross room revenue for the preceding 12 months, multiplied by (ii) the
royalty fee
26
<PAGE>
percentage (more fully described below), multiplied by (iii) the number of
months unexpired under the term of the related Franchise Agreement (in no
event less than $21-$50 multiplied by the specified room count).
The Non-Standard Franchise Agreement has termination provisions similar to
those in the other Franchise Agreements. Franchising may terminate the Non-
Standard Franchise Agreement immediately upon notice to Sunburst if, among
other things, (a) certain bankruptcy events occur with respect to Sunburst;
(b) certain breaches of the related agreements are not remedied; (c) any
action is taken to dissolve or liquidate Sunburst; or (d) legal proceedings
against Sunburst are not dismissed within a certain period of time. Upon
termination, the Franchise Agreement for the Rodeway Inn-Phoenix (Tempe) calls
for liquidated damages of the greater of (i) $50,000 and (ii) the sum of the
previous two years of fees paid by the licensee.
Fees. The Franchise Agreements require the payment of certain fees and
charges, including the following: (a) a royalty fee of between 1.93% to 5.0%
of monthly gross room revenues; (b) a marketing fee of between 0.7% and 2.5%
plus $0.28 per day multiplied by the specified room count; and (c) a
reservation fee of 0.88% to 1.75% of monthly gross room revenues (or 1% of
monthly gross room revenues plus $1.00 per room confirmed through Choice's
reservation system). The marketing fee and the reservation fee are subject to
reasonable increases during the term of the franchise if Franchising raises
such fees uniformly among all its franchisees, generally. Late payments (i)
will be a breach of the Franchise Agreement and (ii) will accrue interest from
the date of delinquency at a rate of 1.5% per month or portion thereof.
Certain Covenants. The Franchise Agreements impose certain affirmative
obligations upon Franchising including: (a) to lend the Franchisor an
operations manual; (b) to utilize money collected from marketing and
reservation fees to promote those aspects of the franchise business; and (c)
to periodically inspect the Property. The Franchise Agreements also impose
affirmative obligations upon Sunburst including: (a) to participate in a
specified reservation system; (b) to keep and comply with the up-to-date
version of Franchising's rules and regulations for properly running the
specified franchise; (c) to prepare monthly financial and other records; (d)
to not interfere with the franchised mark(s) and Franchising's rights thereto;
and (e) to maintain certain specified insurance policies.
Assignments. Sunburst is prohibited from directly or indirectly selling,
assigning, transferring, conveying, pledging or mortgaging its interest in the
Franchise Agreement, or any equity interest in such franchise interests
without the consent of Franchising except that, among other things, certain
percentages of ownership interests in Sunburst may be transferred without
Franchising's consent. Franchising's consent to such transfers, will not be
given unless, among other things: (a) all monetary obligations due under the
Franchise Agreement are paid to Franchising; (b) no defaults under the
Franchise Agreement remain uncured; (c) the transferee agrees in writing to
upgrade the related Property to the then-current standards; and (d) the
transferee agrees to remain liable for all obligations under the Franchise
Agreement so transferred.
Franchising is permitted to assign all or any part of its rights or
obligations under the Franchise Agreements. However, the Franchise Agreements
(with the exception of the Non-Standard Franchise Agreement) do not permit
Franchising to absolve itself from the obligations that it transfers under the
Franchise Agreement. Upon the assignment of Franchising's obligations under
the Non-Standard Franchise Agreement, Franchising will no longer be liable
with respect to the obligations it so transfers.
NONCOMPETITION AGREEMENT
The Company and Franchising will enter into a noncompetition agreement that
defines the rights and obligations with respect to certain businesses to be
operated by Sunburst and Franchising. Under the noncompetition agreement, for
a period of five years from the Distribution, subject to the exceptions set
forth below, Sunburst will be prohibited from conducting any business that
competes with the Franchising Business. Sunburst will also be prohibited from
acquiring any entity conducting a business that competes with the Franchising
Business, with certain exceptions outlined below, unless, prior to such
acquisition, Sunburst offers to sell such competing business to Franchising on
substantially the same terms and conditions; provided,
27
<PAGE>
however, that Sunburst will not be required to make such an offer to
Franchising where the competing business is not readily divisible from other
businesses permitted to be held or acquired by Sunburst and the gross sales
from such competing business for the 12 months prior to such acquisition do
not exceed the greater of $1,000,000 (as adjusted for increases to the
Consumer Price Index during the term) or 5% of gross sales of the businesses
to be acquired. Subject to the foregoing, however, the noncompetition
agreement will not prohibit Sunburst from engaging in the following
activities: (i) the continued operation and development of any business
operated as of the Distribution Date by Choice; (ii) any activities otherwise
permitted under the Strategic Alliance Agreement; (iii) the ownership of up to
5% of the equity interests of a publicly-traded entity that competes with the
Franchising Business; and (iv) the ownership of equity interests of any entity
that competes with the Franchising Business, if (A) the competing business
does not comprise such entity's primary business, (B) the gross sales of such
entity for the prior 12 months attributable to such competing business does
not exceed 20% of such entity's consolidated gross sales, and (C) neither the
fair market value of, nor the value, if any, attributed by the acquisition
agreement to, the competing business is in excess of $5,000,000 (as adjusted
for increases to the Consumer Price Index during the term).
During the term of the noncompetition agreement, subject to the exceptions
set forth below, Franchising will be prohibited from conducting any business
that competes with the Hotel Business. Franchising will also be prohibited
from acquiring any entity conducting a business that competes with the Hotel
Business, with certain exceptions outlined below, unless, prior to such
acquisition, Franchising offers to sell such competing business to Sunburst on
substantially the same terms and conditions; provided, however, that
Franchising will not be required to make such an offer to Sunburst where the
competing business is not readily divisible from other business permitted to
be held or acquired by Franchising and the gross revenues from such competing
business for the 12 months prior to such acquisition do not exceed the greater
of $1,000,000 (as adjusted for increases to the Consumer Price Index during
the term) or 5% of gross sales of the businesses to be acquired. Subject to
the foregoing, however, the noncompetition agreement will not prohibit
Franchising from the following activities: (i) continued operation and
development of any business operated as of the Distribution Date by
Franchising, (ii) any activities otherwise permitted under the Strategic
Alliance Agreement, (iii) the ownership of up to 5% of the equity interests of
a publicly-traded entity that competes with the Hotel Business, (iv) the
ownership of equity interests of any entity that competes with the Hotel
Business, if (A) the competing business does not comprise such entity's
primary business, (B) the gross revenue of such entity for the prior 12 months
attributable to such competing business does not exceed 20% of such entity's
consolidated gross sales, and (C) neither the fair market value of, nor the
value, if any, attributed by the acquisition agreement to, the competing
business is in excess of $5,000,000 (as adjusted for increases to the Consumer
Price Index during the term).
FINANCING
SUNBURST
As part of the Distribution, it is estimated that Sunburst will be allocated
approximately $250.0 million of long-term indebtedness, including (i)
approximately $117.0 million of commercial mortgage backed securities, with
respect to which an affiliate of Sunburst is the obligor and (ii) a
Subordinated Term Note in the amount of $115.0 million to Franchising (the
"Term Note"). The Term Note will not have any prepayment penalties. It is also
expected that on or prior to the Distribution Date, Sunburst will enter into a
revolving credit facility (the "Sunburst Credit Facility").
Sunburst currently is negotiating a commitment from a bank lender pursuant
to which such lender, together with other financial institutions, will, from
and after the Distribution Date, provide Sunburst with a senior secured
revolving credit facility in an aggregate principal amount of up to $75.0
million with availability subject to a borrowing base formula. The Sunburst
Credit Facility will have a maturity of three years. Depending on the type of
loan requested by Sunburst and upon certain specified financial ratios,
interest on the loans will accrue at a rate based on LIBOR, certificate of
deposit rates, prime rates or federal funds rates. A portion of the Sunburst
Credit Facility not in excess of a specified percentage of the maximum
borrowing base shall be available for the
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<PAGE>
issuance of letters of credit. The Sunburst Credit Facility will be secured by
a first priority pledge of certain of the capital stock held by Sunburst
and/or any of its subsidiaries. Upon consummation of the Distribution,
approximately $18.0 million will be drawn by Sunburst under such facility, and
together with the $115.0 million of proceeds realized under the Term Note,
will be used to repay $96.0 millionin bank debt andthe $37.0 million of
Sunburst's allocable portion of the debt outstanding to an affiliate of Manor
Care (the "Manor Care Note"). The remaining availability under the Sunburst
Credit Facility will be used for working capital, including capital
expenditures and acquisitions.
The Sunburst Credit Facility is expected to contain customary covenants that
will, among other things, restrict the ability of Sunburst and its
subsidiaries to make certain investments, incur debt, change its line of
business, dispose of assets, create liens, enter into transactions with
affiliates and otherwise restrict certain corporate activities. In addition,
the Sunburst Credit Facility will contain, among other financial covenants,
requirements that Sunburst maintain specified financial ratios, including
minimum net worth, maximum leverage and minimum interest coverage. The
Sunburst Credit Facility is also expected to contain representations and
warranties of Sunburst and its subsidiaries and contain conditions to funding
customary in credit facilities of this type.
It is expected that the Term Note will have a maturity of five years, and
will accrue interest at a rate equal to 500 basis points above the interest
rate on a 5-year U.S. Treasury Note. The Term Note will contain restrictive
covenants substantially equivalent to those contained in the Sunburst Credit
Facility and will also contain subordination provisions.
FRANCHISING
As part of the Distribution, Franchising will be allocated $125.0 million of
the Company's long-term indebtedness, including approximately (i) $78.7
million of indebtedness under the Manor Care Note and (ii) $32.9 million
related to foreign borrowings and other bank debt. It is expected that
Franchising will repay this indebtedness, as of the Distribution, with
proceeds available under a credit facility which Franchising intends to enter
into on or prior to the Distribution Date (the "Franchising Credit Facility").
Franchising currently is negotiating a commitment from a bank lender
pursuant to which such lender, together with other financial institutions,
will, from and after the Distribution Date, provide Franchising with a senior
term loan and a senior competitive advance and multicurrency revolving credit
facility in an aggregate principal amount of up to $300.0 million. The
Franchising Credit Facility will have a maturity of five years. The term loan
portion of the Franchising Credit Facility will amortize on a quarterly basis
in specified annual amounts until maturity. Depending on the type of loan
requested by Franchising and on certain specified financial ratios, interest
on the loans will accrue at a rate based on LIBOR, certificate of deposit
rates, prime rates or federal fund rates. A portion of the revolving credit
facility not in excess of $10.0 million shall be available for the issuance of
letters of credit. Upon consummation of the Distribution, approximately $226.6
million will be drawn under the Franchising Credit Facility, representing
$115.0 million disbursed to Sunburst under the Term Note plus $111.6 million
to refinance obligations allocated to Franchising. The remaining availability
under the Credit Facility will be used for working capital and general
corporate purposes.
The Franchising Credit Facility is expected to contain customary covenants
that will, among other things, restrict the ability of Franchising and its
subsidiaries to make certain investments, incur debt, change its line of
business, dispose of assets, create liens, enter into transactions with
affiliates and otherwise restrict certain corporate activities. In addition,
the Franchising Credit Facility will contain, among other financial covenants,
requirements that Franchising maintain specified financial ratios, including
minimum net worth, maximum leverage and minimum interest coverage. The
Franchising Credit Facility is also expected to contain representations and
warranties of Franchising and its subsidiaries and contain conditions to
funding customary in credit facilities of this type.
29
<PAGE>
ACCOUNTING TREATMENT
The historical combined financial statements of Franchising present its
financial position, results of operations and cash flows as if it were a
separate entity owning and operating the Franchising Business for all periods
presented. The Company's historical basis in the assets and liabilities of
Franchising has been carried over.
POST-DISTRIBUTION DIVIDEND POLICY
The dividend policies of Sunburst and Franchising will be determined by
their respective Boards of Directors following the Distribution. The Company
currently is prohibited from paying dividends pursuant to the terms of its
loan agreement with MNR Finance Corp. It is expected that the Sunburst Credit
Facility and the Franchising Credit Facility will restrict the ability of
Sunburst and Franchising, respectively, to pay dividends. See "--Financing."
CERTAIN INFORMATION CONCERNING FRANCHISING
PRO FORMA FINANCIAL DATA
The following unaudited Pro Forma Combined Statement of Income of
Franchising gives effect to (i) the Manor Care Distribution and related
transactions and (ii) the Distribution and related transactions as if the
foregoing had occurred on June 1, 1996. The pro forma financial data is
provided for information purposes only and does not purport to be indicative
of the results that actually would have been obtained if the Manor Care
Distribution and related transactions and the Distribution and related
transactions had been effected on the date indicated or of those results that
may be obtained in the future. There were no adjustments required to the Pro
Forma Combined Statements as of May 31, 1997 as a result of the Distribution.
30
<PAGE>
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED MAY 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MANOR CARE
DISTRIBUTION
HISTORICAL ADJUSTMENTS(A) PRO FORMA
---------- -------------- ---------
<S> <C> <C> <C>
Revenues
Royalty fees.......................... $95,157 $95,157
Marketing and reservation fees........ 104,216 104,216
Product sales......................... 23,643 23,643
European hotel operations............. 17,737 17,737
Initial franchise fees................ 14,250 14,250
Other................................. 17,252 17,252
------- ------- -------
Total revenues...................... 272,255 272,255
------- ------- -------
Operating Expenses
Marketing and reservation............. 101,421 101,421
Selling, general and administrative... 51,102 51,102
Product cost of sales................. 22,766 22,766
European hotel operations............. 16,166 16,166
Depreciation and amortization......... 10,438 10,438
------- ------- -------
Total operating expenses............ 201,893 $ 3,400 (b) 205,293
------- ------- -------
Operating income.................... 70,362 (3,400) 66,962
------- ------- -------
OTHER
Interest on notes payable to Manor
Care................................. 7,083 7,083
Interest and other, net............... 3,704 3,704
------- ------- -------
Total other expenses................ 10,787 10,787
------- ------- -------
Income before income taxes............ 59,575 (3,400) 56,175
Income taxes.......................... (24,845) 1,343 (c) (23,502)
------- ------- -------
Net income............................ $34,730 $(2,057) $32,673
======= ======= =======
Net income per share.................. $ 0.52 (d)
=======
</TABLE>
- --------
(a) Reflects the effect of the Manor Care Distribution and related
transactions.
(b) Reflects the net additional costs associated with staffing of accounting,
finance, cash management, risk management, human resources and legal
personnel, incremental rental costs and the payment of certain consulting
fees to Manor Care.
(c) Represents the income tax impact of pro forma adjustments at statutory
rates.
(d) Pro forma income per share is computed by dividing pro forma net income by
the pro forma weighted average number of outstanding common shares,
aggregating 62.7 million in fiscal year 1997. The pro forma weighted
average number of outstanding common shares is based on Manor Care's
weighted average number of outstanding common shares for the period June
1, 1996 through October 31, 1996 and the Company's weighted average number
of shares for the period November 1, 1996 through May 31, 1997.
31
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical combined financial data of
Franchising for the five fiscal years ended May 31, 1997.
The combined financial statements of Franchising include the assets and
liabilities, revenues and expenses of the Franchising Business, including the
ownership and operation of 14 hotel properties in France, Germany and the
United Kingdom. The Franchising combined financial statements include certain
allocations of overhead expenses incurred by the Company, and prior to
November 1, 1996 incurred by Manor Care, that support the Franchising
Business. In management's opinion, these allocations were made on a reasonable
basis, however, such allocations may not be indicative of the level of
expenses which will be incurred by Franchising after the Distribution. The
expenses were generally allocated based upon specific identification and
estimates of the relative time devoted to supporting Franchising.
The combined income statement data for 1993 and the balance sheet data for
1993 and 1994 have been derived from unaudited combined financial statements
of Franchising which, in the opinion of management, include all material
adjustments necessary for those periods and were prepared as if Franchising
were a separate entity for all periods presented. The historical combined
financial data is not necessarily indicative of Franchising's future results
of operations or financial condition. The data set forth below should be read
in conjunction with the unaudited Pro Forma Financial Data and the notes
thereto of Franchising; the audited Combined Financial Statements of
Franchising and the notes thereto; and Management's Discussion and Analysis of
Financial Condition and Results of Operations of Franchising included
elsewhere in this Proxy Statement. For a discussion of the basis of
presentation of the Franchising Combined Financial Statements, see the "Basis
of Presentation" in the Notes to the Franchising Combined Financial
Statements.
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<PAGE>
CHOICE HOTELS FRANCHISING, INC.
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statement of Income Data
Revenues................ $272,255 $250,654 $212,672 $184,866 $143,054
Operating expenses:
Marketing and
reservation........... 101,421 96,246 81,545 74,149 57,631
Selling, general and
administrative........ 51,102 45,196 45,589 49,529 46,187
Product cost of sales.. 22,766 20,709 13,882 11,977 6,999
European hotel
operations............ 16,166 17,521 17,922 10,263 --
Depreciation and
amortization.......... 10,438 11,839 11,768 10,825 9,182
Provision for asset
impairment............ -- 24,760(1) -- -- --
-------- -------- -------- -------- --------
Total operating
expenses............. 201,893 216,271 170,706 156,743 119,999
-------- -------- -------- -------- --------
Operating income........ 70,362 34,383 41,966 28,123 23,055
-------- -------- -------- -------- --------
Other
Interest expense on
notes payable to Manor
Care................... 7,083 7,083 7,083 7,083 7,083
Minority interest
expense................ -- 1,532 2,200 1,476 900
Interest and other,
net.................... 3,704 4,791 3,672 3,591 145
-------- -------- -------- -------- --------
Total other expenses.. 10,787 13,406 12,955 12,150 8,128
-------- -------- -------- -------- --------
Income before income
taxes................... 59,575 20,977 29,011 15,973 14,927
Income taxes............. (24,845) (9,313) (12,783) (7,372) (6,422)
-------- -------- -------- -------- --------
Net Income............... $ 34,730 $ 11,664 $ 16,228 $ 8,601 $ 8,505
======== ======== ======== ======== ========
Pro forma earnings per
share................... $ 0.55 $ 0.19 $ 0.26 $ 0.14 $ 0.15
======== ======== ======== ======== ========
Balance Sheet Data
Total assets............ $221,473 $212,803 $189,087 $173,646 $170,815
Notes payable to Manor
Care................... $ 78,700 $ 78,700 $ 78,700 $ 78,700 $ 78,700
Total debt.............. $125,163 $145,315 $128,205 $126,294 $122,909
Total liabilities....... $164,280 $182,271 $201,786 $169,237 $144,982
Total investments and
advances from (to)
Parent................. $ 57,193 $ 30,532 $(12,699) $ 4,409 $ 25,833
</TABLE>
- --------
(1) In 1996 Franchising recorded a pre-tax charge of $24.8 million for
impairment of long lived assets associated with Franchising's European
operations.
(2) Pro forma earnings per share has been calculated based on the weighted
average shares outstanding of its parent Choice Hotels International, Inc.
for fiscal year 1997 of 62,680,000 and its parent Manor Care, Inc. for
fiscal years 1996, 1995, 1994 and 1993 of 62,628,000, 62,480,000,
60,524,000 and 57,316,000, respectively.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Franchising is one of the largest hotel franchisors in the world with 3,344
hotels open and 820 under development representing 355,127 rooms in 33
countries. Franchising franchises hotels under the Comfort, Quality, Econo
Lodge, Sleep, Clarion, Rodeway and MainStay Suites brand names.
The principal factors that affect Franchising's results are: growth in the
number of hotels under franchise; occupancies and room rates achieved by
Franchising's brands; the number and relative mix of franchised hotels; and
Franchising's ability to manage costs. The number of rooms at franchised
properties and occupancies and room rates at those properties significantly
affect Franchising's results because franchise royalty fees are based upon
room revenues at franchised hotels. Increases in franchise fee revenues have a
disproportionate impact on Franchising's operating margin due to the lower
incremental costs associated with these revenues.
Comparison of Fiscal Year 1997 Operating Results and Fiscal Year 1996
Operating Results
Franchising recorded net income of $34.7 million for the year ended May 31,
1997 ("fiscal 1997"), an increase of $23.0 million, compared to net income of
$11.7 million for the year ended May 31, 1996 ("fiscal 1996"). Fiscal 1996
results include a $24.8 million asset impairment charge related to
Franchising's European hotel operations. Exclusive of this charge, fiscal 1996
net income was $26.7 million. The increase in net income for fiscal 1997 was
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 $21.6 million (or 8.6%) to $272.3 million in
fiscal 1997 from $250.7 million in fiscal 1996.
Franchise Operating Revenues. In operating the franchise business,
Franchising collects marketing and reservation fees and assessments from its
franchisees. Franchising is contractually obligated to disburse these fees for
marketing and reservation activities to be provided on behalf of its
franchisees. Management, therefore, analyzes its franchise business based on
revenues net of marketing and reservation fees ("net franchise revenue") and
expenses net of marketing and reservation expenses ("net franchise expenses").
Net franchise revenues include base royalty fees, initial fees earned on
contracts signed and other revenues, including strategic vendor fees. Net
franchise revenues are dependent upon growth in the number of franchised
properties as well as the underlying performance of franchised hotels for
continued growth. The key industry standard for measuring hotel operating
performance is RevPAR, which is calculated by multiplying the percentage of
occupied rooms by the average daily room rate realized.
Net franchise revenues were $126.7 million for fiscal 1997 and $110.6
million for fiscal 1996. Royalties increased $9.0 million to $95.2 million
from $86.2 million in fiscal 1996, an increase of 10.4%. The increase in
royalties is attributable to a net increase of 292 franchisees during the
period representing an additional 21,578 rooms added to the system, an
improvement in domestic RevPAR of 2.9% and an increase in the effective
royalty rate of the domestic hotel system to 3.43% from 3.34%. Domestic
initial fee revenue generated from franchise contracts signed increased 14.8%
to $14.0 million from $12.2 million in fiscal 1996. Total franchise agreements
signed in fiscal 1997 were 495, up 13.5% from the total contracts signed in
fiscal 1996 of 436. Revenues generated from strategic vendor relationships
increased to $6.1 million from $1.8 million in fiscal 1996. This revenue
relates to agreements that provide preferred vendors access to Franchising's
licensees.
Franchise Operating Expenses. The cost to operate the franchising business
is reflected in selling, general and administrative expenses. Combined
selling, general and administrative expenses were $51.1 million in fiscal
1997, an increase of $5.9 million from the fiscal 1996 total of $45.2 million.
$4.8 million of the increase was directly attributable to additional costs of
operating as an independent company apart from Manor Care. These additional
costs are primarily additional staffing, incremental rental expenses, and
consulting fees as Franchising assumed certain administrative tasks previously
provided by Manor Care. The remaining increases in selling, general and
administrative expenses were primarily due to additional personnel to support
company growth and new company initiatives. Exclusive of the $4.8 million
increase resulting from the Manor Care Distribution, as a
34
<PAGE>
percentage of net franchise revenues, selling, general and administrative
expenses declined to 36.5% in fiscal 1997 from 40.9% in fiscal 1996. The
improvement in the franchising margins relates to the economies of scale
generated from operating a larger franchisee base and improvements in
franchised hotel performance.
Product Sales. Sales made to franchisees through Franchising's group
purchasing program increased $2.1 million to $23.6 million in fiscal 1997 from
$21.6 million in fiscal 1996. The group purchasing program utilizes bulk
purchases to obtain favorable pricing from third party vendors for franchisees
ordering similar products. Franchising 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 $2.1 million (or 9.9%) in fiscal
1997. The product services margins decreased in fiscal 1997 to 3.7% from 4.0%
in fiscal 1996. This purchasing program is provided to the franchisees as a
service and is not expected to be a major component of Franchising's
profitability.
European Hotel Operations. Franchising owns or operates 14 hotels in
Germany, France and Great Britain. Total revenues at Franchising's owned hotel
operations in Europe declined to $17.7 million in fiscal 1997 from $19.6
million in fiscal 1996. Operating margins at the hotels declined to 8.9% in
fiscal 1997 from 10.6% in fiscal 1996. The decline in revenue and operating
performance reflects the difficult economic and competitive climates in which
a number of the European hotels operate. Franchising is pursuing strategies
with the objective of improving the profitability of the hotels including,
among others, divestiture, strategic alliances and joint ventures.
Other Expenses. Depreciation and amortization decreased $1.4 million (or
11.9%) to $10.4 million in fiscal 1997 from $11.8 million in fiscal 1996. The
decrease was primarily due to an asset impairment charge against European
fixed assets which reduced the asset base upon which depreciation is
determined.
In fiscal 1996, Franchising recorded a charge against earnings of $24.8
million relating to impairment of certain long-lived assets related to
Franchising's European hotel operations.
In fiscal 1997, Franchising recognized $943,000 in dividend income from its
investment in Friendly Hotels, PLC.
Comparison of Fiscal Year 1996 Operating Results and Fiscal Year 1995
Operating Results
Net income for the fiscal year ended May 31, 1996 was $11.7 million, a
decrease of $4.5 million (or 27.8%) compared to net income of $16.2 million
for the fiscal year ended May 31, 1995 ("fiscal 1995"). Net income in fiscal
1996 includes a one time charge of $24.8 million relating to asset impairment.
Exclusive of the $24.8 million charge, net income increased to $26.7 million
in fiscal 1996, a 64.8% increase over fiscal 1995.
Combined revenues increased $38.0 million (or 17.9%) to $250.7 million in
fiscal 1996 from $212.7 million in fiscal 1995.
Franchise Operating Revenues. Net franchise revenues were $110.6 million for
fiscal 1996 and $95.9 million for fiscal 1995. Royalties increased $10.8
million to $86.2 million from $75.4 million in fiscal 1996, an increase of
14.3%. The increase in royalties is attributable to a net increase of 217
domestic franchisees during the period, representing an additional 15,787
rooms added to the system, an improvement in RevPAR of 5.1% and an increase in
the effective royalty rate of the domestic hotel system to 3.34% from 3.20%.
Initial fee revenue generated from franchising contracts signed increased
37.8% to $13.5 million from $9.8 million in fiscal 1996. Total franchise
agreements signed in fiscal 1996 were 436, up 21.4% from the total contracts
signed in fiscal 1995 of 359.
Franchise Operating Expenses. The cost to operate the franchising business
is reflected in selling, general and administrative expenses. Combined
selling, general and administrative costs declined to $45.2 million in fiscal
1996 from $45.6 million in fiscal 1995.
35
<PAGE>
Selling, general and administrative expenses as a percentage of net
franchise revenues declined to 40.9% in fiscal 1996 from 47.7% in fiscal 1995.
The improvement in the franchising margins relates to the economies of scale
generated from operating a larger franchisee base and improved operating
performance of the franchised hotels.
Product Sales. Sales made to franchisees through Franchising's group
purchasing program increased $7.1 million to $21.6 million in fiscal 1996 from
$14.5 million in fiscal 1995.
Similarly, product cost of sales increased $6.8 million (or 49.2%) in fiscal
1996. The product services margins were 4.0% in fiscal 1996 and fiscal 1995.
This purchasing program is provided to the franchisees as a service and is not
expected to be a major component of Franchising's profitability.
European Hotel Operations. Revenues from hotel operations increased 5.2% in
fiscal 1996. Operating margins increased to 10.6% in fiscal 1996 from 3.8% in
fiscal 1995. The increase in fiscal 1996 is primarily due to improved
performance of newly completed owned and managed hotels.
Other Expenses. In fiscal 1996, Franchising recorded a charge against
earnings of $24.8 million relating to impairment of certain long-lived assets
associated with Franchising's European hotel operations.
Liquidity and Capital Resources
Historically, cash received by Franchising has been deposited in or combined
with its parent's corporate funds as part of its parent's cash management
system. Subsequent to the Distribution, Franchising will maintain its own cash
balances and implement its own internal cash management system.
The Company had $225.7 million of indebtedness payable to Manor Care as of
May 31, 1996, assumed as part of the Manor Care Spin-off. The portion of this
indebtedness related to acquisitions made by Franchising has been pushed down
to Franchising. As of May 31, 1997 and May 31, 1996, notes payable to Manor
Care by Franchising totaling $78.7 million were outstanding. Interest on the
amount of the loan is payable quarterly at a rate of 9% per annum. The loan
will mature on November 1, 1999 and may be prepaid in whole or in part,
together with accrued interest, at Franchising's option. If the loan is repaid
prior to November, 1, 1997, Franchising will be required to reimburse Manor
Care on demand for any actual loss incurred or to be incurred by Manor Care
(for the period up to and including November 1, 1997) in the redeployment of
the funds released by any prepayment of the loan. The notes payable to Manor
Care are expected to be repaid from operating cash flow or from third party
financing.
During fiscal 1996 and through November 1, 1996, the Company was a co-
guarantor with Manor Care and other affiliates for a $250 million competitive
advance and multi-currency revolving credit facility. On October 30, 1996 the
Company entered into a $100.0 million competitive advance and multi-currency
revolving credit facility provided by a group of seven banks (the "Credit
Facility"). During November 1996 the Company repaid its portion of the Manor
Care multi-currency credit facility, $50.1 million, with an advance from the
Company's newly acquired Credit Facility. On May 5, 1997, the Company
increased the size of the Credit Facility to $125 million. As of May 31, 1997,
Franchising had $31.1 million in advances against the multi-currency portion
of the Credit Facility outstanding. Franchising expects to obtain a new
revolving credit facility prior to the Distribution to repay its portion of
borrowings under the Company's Credit Facility. See "--Financing."
Management believes cash flows from operations and third party financing
sources will be adequate to support on-going operations, capital expenditures
and meet debt service requirements for the foreseeable future. Franchising
expects to secure a revolving credit facility prior to the Distribution
sufficient to refinance its existing obligations, loan amounts to Sunburst
sufficient to support its refinancing requirements and meet working capital
and business development needs.
36
<PAGE>
Net cash provided by operating activities for the fiscal year ended May 31,
1997 was $46.4 million compared to $32.7 million for the same period of the
prior fiscal year. Improved cash flow resulted primarily from improved net
income.
Franchising's working capital ratio at May 31, 1997 and May 31, 1996 was .99
and .89, respectively. Franchising attempts to minimize its investments in net
current assets, utilizing the Credit Facility to meet seasonal fluctuations in
working capital requirements.
Cash used in investing activities was $17.9 million, $78.5 million, and $7.7
million in fiscal years 1997, 1996 and 1995, respectively. During fiscal 1995,
Franchising repurchased one-half of the 11% interest held by its management in
Choice Hotels Franchising, Inc. Approximately $19.8 million was allocated to
goodwill; the purchase cost of $27.4 million was paid in June and July 1995.
On May 31, 1996, Franchising repurchased the remaining 5.5% minority interest
in Choice Hotels Franchising, Inc. for $27.9 million. Approximately $26.4
million was allocated to goodwill. During fiscal 1996, Franchising purchased a
5% common stock interest and a preferred stock interest in Friendly Hotels,
PLC, a U.K. hotel company, for approximately $17 million.
Investment in property and equipment includes computer hardware as well as
new developments and enhancements of reservation and finance systems. During
the fiscal year ended May 31, 1997, capital expenditures totaled $10.6 million
and related primarily to the development of a new property management system
and the installation of new financial systems. Capital expenditures in prior
years include amounts for computer hardware, reservation systems and European
hotel capital improvements.
Impact of Recently Issued Accounting Standards
Franchising has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The adoption
of SFAS No. 121 did not have a material impact on Franchising's financial
statements.
Franchising plans to utilize the method under SFAS No. 123, "Accounting for
Stock-Based Compensation," which provides for disclosure of the impact of
stock-based compensation grants.
Franchising is required to adopt SFAS No. 128, "Earnings Per Share," and
SFAS No. 129, "Disclosure of Information about Capital Structure," no later
than fiscal year 1998. The adoption of these pronouncements will not
materially affect Franchising's financial statements.
Franchising is required to adopt SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," no later than fiscal 1999. Management is still
evaluating the impact that these pronouncements will have on Franchising's
financial statements.
BUSINESS AND PROPERTIES
General
Franchising is a wholly owned subsidiary of the Company and currently
conducts a significant portion of the Franchising Business. Immediately prior
to the Distribution, Franchising will succeed to that portion of the
Franchising Business currently conducted directly by the Company and certain
other subsidiaries of the Company. The following description summarizes the
current business of Franchising, as well as the business to be transferred to
Franchising prior to the Distribution.
Franchising is one of the world's largest franchisors of hotels with 3,344
properties open and operating in 33 countries at May 31, 1997. These
properties principally operate under one of Franchising's brand names:
Comfort(R), Quality(R), Clarion(R), Sleep(R), Rodeway(R), Econo Lodge(R) and
MainStay SuitesSM. At May 31, 1997, another 820 franchise properties with a
total of 72,093 rooms were under development. As a franchisor, Franchising
licenses hotel operators to use Franchising's brand names and provides to
these hotel operators
37
<PAGE>
products and services designed to increase their revenues and profitability.
Key products and services provided include nationally recognized marketing and
advertising programs, access to a reservation system that delivers business to
the franchisees' hotels, access to innovative products and services developed
by Franchising and other support services such as training programs,
purchasing discounts, operating manuals, quality standards and inspections. In
return for the use of Franchising's brand names and access to Franchising's
products and services, franchisees pay to Franchising fees that are generally
based on a percentage of the franchise hotels' gross room revenues.
Franchising's franchise operations have experienced significant growth in
revenues and profitability over the last few years. Franchising's compound
annual growth rate from fiscal year 1993 to fiscal year 1997 was 17.5% for
revenues and 42.2% for net income.
The Lodging Industry
As of December 1996, there were approximately 3.4 million hotel rooms in the
United States in hotels/motels containing twenty or more rooms. Of those
rooms, approximately 1.2 million rooms were not affiliated with a national or
regional brand, while the remaining approximately 2.2 million rooms were
affiliated with a brand either through franchise or the ownership/management
of a national or regional chain.
During the late 1980s, the industry added approximately 500,000 hotel rooms
to its inventory due largely to a favorable hotel lending environment, the
ability of hotel operators to regularly increase room rates and the
deductibility of passive tax losses, which encouraged hotel development. As a
result, the lodging industry saw an oversupply of rooms and a decrease in
industry performance.
The lodging industry in recent years has demonstrated a recovery, based on
year-to-year increases in room revenues, occupancy rates, revenue per
available room ("RevPAR"), and lodging industry profitability. RevPAR is
calculated by multiplying the percentage of occupied rooms by the average
daily room rate charged. Since 1993, the lodging industry has been able to
increase its average daily rate ("ADR") at a pace faster than the increase in
the Consumer Price Index ("CPI"), a common measure of inflation published by
the US Department of Labor. Smith Travel Research's estimates indicate that
occupancy rates in 1996 increased to 65.2% from 65.1% in 1995, in part because
of increases in room demand attributable to the 1996 Summer Olympics, the 1996
national political campaigns and conventions, and a continued improvement in
the national economy. The following chart demonstrates the recent trends:
THE US LODGING INDUSTRY'S GROWTH TRENDS SINCE 1991
<TABLE>
<CAPTION>
INCREASE IN AVERAGE
ROOM DAILY INCREASE INCREASE REVENUE PER
REVENUE (ROOM) IN ADR IN CPI AVAILABLE NEW
VERSUS OCCUPANCY RATES VERSUS VERSUS ROOM PROFITS ROOMS
YEAR PRIOR YEAR RATES (ADR) PRIOR YEAR PRIOR YEAR (REVPAR) (IN BILLIONS) ADDED
- ---- ----------- --------- ------- ---------- ---------- ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992.................... N/A 62.6% $58.91 1.4% 2.9% $36.87 break-even 36,000
1993.................... 6.3% 63.5% $60.53 2.7% 2.7% $38.42 $ 2.4 40,000
1994.................... 8.6% 64.7% $62.86 3.8% 2.7% $40.70 $ 5.5 45,000
1995.................... 7.0% 65.1% $65.81 4.7% 2.9% $42.83 $ 8.5 64,000
1996.................... N/A 65.2% $69.66 5.9% 2.9% $45.47 $11.5 91,000
</TABLE>
- --------
Source: Smith Travel Research
Franchising believes the lodging industry can be divided into three
categories: luxury or upscale, middle-market and economy. Franchising believes
the luxury category generally has room rates above $70 per night, the middle-
market category generally has room rates between $46 and $70 per night and the
economy category generally has room rates less than $46 per night.
Service is a distinguishing characteristic in the lodging industry.
Generally there are three levels of service: full-service hotels (which offer
food and beverage services, meeting rooms, room service and similar guest
services); limited-service hotels (which offer amenities such as swimming
pools, continental breakfast, or similar
38
<PAGE>
services); and all-suites hotels (which usually have limited public areas, but
offer guests two rooms or one room with distinct areas, and which may or may
not offer food and beverage services).
Franchising's Econo Lodge, Rodeway and Sleep brands compete primarily in the
limited-service economy market; Franchising's Comfort and Quality brands
compete primarily in the limited-service middle-market; Franchising's Clarion
brand competes primarily in the full-service upscale market; and Franchising's
MainStay Suites brand competes primarily in the all-suites middle-market.
New hotels opened in recent years typically have been limited service
hotels, as limited-service hotels are less costly to develop, enjoy higher
gross margins, and tend to have better access to financing. These hotels
typically operate in the economy and middle-market categories and are located
in suburban or highway locations. From 1991 to 1996, the average room count in
new hotels declined from 122 to 87, primarily because hotel developers found
it difficult to obtain financing of more than $3 million from their primary
lending sources (local banks and Small Business Administration guaranteed loan
programs).
In recent years, operators of hotels not owned or managed by major lodging
companies have increasingly joined national hotel franchise chains as a means
of remaining competitive with hotels owned by or affiliated with national
lodging companies. Because hotels typically operate with high fixed costs,
increases in revenues generated by affiliation with a franchise lodging chain
can improve a hotel's financial performance. Of approximately 933 hotel
properties that changed their affiliation in 1995, 77% converted from
independent status to affiliation with a chain or converted from one chain to
another, while only 23% canceled or were required to cancel their chain
affiliation. The share of US hotel rooms affiliated with a chain was
approximately 63% in 1995.
The shift to chain membership has been most pronounced among hotels in the
same categories as Franchising, i.e., the economy and middle-market
categories. In 1995, 53% of all conversions to a chain from independent status
or from another chain were in the economy category, 37% were in the middle-
market category, and 10% were in the upscale category. Often by affiliating
with a middle-market or economy brand, a hotel operator can reposition the
hotel property in the price category best suited to its market.
The large franchise chains, including Franchising, provide a number of
services to hotel operators to improve the financial performance of their
properties, including national reservation systems, marketing and advertising
programs and direct sales programs. Franchising believes that national
franchise chains with a larger number of hotels enjoy greater brand awareness
among potential guests than those with fewer numbers of hotels, and that
greater brand awareness can increase the desirability of a hotel to its
potential guests.
Franchising believes that hotel operators choose lodging franchisors based
primarily on the perceived value and quality of each franchisor's brand and
its services, and the extent to which affiliation with that franchisor may
increase the franchisee's reservations and profits.
Franchise Business
Economics of Franchise Business. The fee and cost structure of Franchising's
franchise business provides significant opportunities for Franchising to
increase profits by increasing the number of franchised properties. Hotel
franchisors such as Franchising derive substantially all of their revenue from
franchise fees. Franchise fees are comprised of an initial fee and ongoing
royalty and marketing and reservation fees charged by the franchisor as a
percentage of the franchisee's gross room revenues. The royalty portion of the
franchise fee is intended to cover the operating expenses of the franchisor,
such as expenses incurred in quality assurance, administrative support and
other franchise services and to provide the franchisor with operating profits.
The marketing and reservation portion of the franchise fee is intended to
reimburse the franchisor for the expenses associated with providing such
franchise services as the central reservation system and national marketing
and media advertising.
39
<PAGE>
Much of the variable costs associated with Franchising's activities are
reimbursed by the franchisees through the marketing and reservation fees.
Franchising's existing base of franchises more than covers the fixed cost of
the business at its current level so that the variable costs of overhead--in
such areas as quality assurance, franchise development, franchise services and
administration, finance and legal--represent the bulk of incremental costs
associated with the addition of franchisees. Because the variable overhead
costs associated with incremental franchise system growth are substantially
less than the incremental royalty fees, Franchising is able to capture a
significant portion of these incremental royalty fees as operating profit.
Strategy. Franchising's strategy is based on creating an organization that
is focused on consumer and franchisee needs, optimizing the portfolio of
brands, strategically growing the franchise system, improving its and its
franchisees' margins, growing profitability internationally, and leveraging
its separation from Choice. Key components of Franchising's strategy include:
. Organize for Success. Franchising has created an organizational
structure to focus on consumers, serve franchisees and leverage the
franchise system.
Consumer Focus--Brand management, new product development and
traditional marketing and advertising are all combined under
Franchising's Marketing Department to create consumer focus and to
drive demand for Franchising's brand products. New product development
will be based on consumer needs determined through consumer research.
Franchising believes that a consumer focus will lead to greater demand
for Franchising's products, which in turn will result in higher revenue
from Franchising's franchise system.
Franchisee Service--Franchise service and sales are consolidated under
a regional structure made up of five regional operating teams. This
structure provides each licensee one primary contact who is responsible
for assessing and responding to each hotel's specialized needs.
Franchising believes that its regional operating structure and the
services it provides to franchisees will allow it to attract new hotels
to the franchising system.
Leveraging the Franchise System--Strategic partnerships, purchasing and
other functions that leverage the scale of the franchise system are
combined under the Partner Services Group. Franchising believes there
is significant opportunity to leverage its size by entering into joint
marketing arrangements with national and multi-national companies that
want to gain exposure to the millions of guests who patronize
Franchising's franchise hotels each year. In the past, these
arrangements have added to Franchising's and its franchisees' revenues
and profits by attracting business to its franchise hotels.
. Optimize the Brand Portfolio. Franchising believes that each of its
brands has particular attributes and strengths. Franchising's strategy
is to leverage the strengths of each brand for profit growth and for
identifying new niches into which the company may expand.
. Increase Market Penetration on a Strategic Basis. Franchising will take
advantage of its regional structure to analyze key markets in the U.S.
and, in conjunction with its franchisees, identify the best
opportunities for new development or conversion to one of Franchising's
brands.
. Improve Margins Through Increased Productivity. Franchising addresses
the competitiveness of its own and its franchisees' profitability by
initiating revenue generating programs and improving cost productivity.
A key component of this strategy is the roll out of Franchising's
proprietary property and yield management system "Profit Manager by
Choice", which Franchising believes will improve the RevPAR of its
franchisees.
. Profitably Grow Internationally. During the ten fiscal years ended May
31, 1997, the number of properties in Franchising's international
franchise system increased to 563 properties with 47,603 rooms, from 81
properties with 8,330 rooms. Franchising's international franchise
system includes hotels in 32 countries outside the United States.
Franchising plans to continue to profitably grow its brands
internationally through a strategic pursuit of joint ventures, master
franchising agreements and brand specific area development agreements.
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<PAGE>
. Leverage Spin-Off From Sunburst. The separation of Franchising from
Sunburst will allow a pure focus on franchising, including the potential
pursuit of acquisition opportunities complementary to Franchising's core
business.
Franchise System
Franchising's franchise hotels principally operate under one of
Franchising's brand names: Comfort, Quality, Clarion, Sleep, Rodeway, Econo
Lodge and MainStay Suites. The following table presents key statistics
relative to Franchising's domestic franchise system over the four fiscal years
ended May 31, 1997.
COMBINED DOMESTIC FRANCHISE SYSTEM
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED MAY 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of
period........................... 2,283 2,311 2,495 2,781
Number of rooms, end of period.... 203,019 200,792 214,613 235,431
Average Royalty Rate.............. 3.1% 3.2% 3.3% 3.4%
Average occupancy percentage...... 62.2% 63.8% 63.8% 62.6%
Average daily room rate (ADR)..... $ 45.63 $ 47.13 $ 49.49 $ 51.92
RevPAR............................ *$ 28.40 $ 30.08 $ 31.60 $ 32.52
Royalty fees ($000s).............. $ 62,590 $ 71,665 $ 82,239 $ 91,724
</TABLE>
- --------
* Franchising's RevPAR figure for each fiscal year is an average of the
RevPAR calculated for each month in the fiscal year. Franchising calculates
RevPAR each month based on information actually reported by franchisees on
a timely basis to Franchising.
No master franchisee or other franchisee accounted for 10% or more of
Franchising's total revenues or revenues related to franchise operations
during the last three fiscal years. Following the Distribution, Sunburst will
be Franchising's largest franchisee.
Brand Positioning
Franchising's hotels are primarily limited-service hotels (offering
amenities such as swimming pools and continental breakfast) or limited-to-full
service (offering amenities such as food and beverage services, meeting rooms
and room service).
Comfort. Comfort Inns and Comfort Suites hotels offer rooms in the limited-
service, middle market category. Comfort Inns and Comfort Suites are targeted
to traditional business and leisure travelers. Principal competitor brands
include Days Inn, Fairfield Inn, Hampton Inn, Holiday Express and LaQuinta. At
May 31, 1997, there were 1,441 Comfort Inn properties and 120 Comfort Suite
properties with a total of 113,729 and 9,935 rooms, respectively, open and
operating worldwide. An additional 193 Comfort Inn properties and 119 Comfort
Suite properties with a total of 17,550 and 9,671 rooms, respectively, were
under development.
41
<PAGE>
Comfort properties are located in the United States and in Australia, the
Bahamas, Belgium, Canada, France, Germany, India, Indonesia, Ireland, Italy,
Jamaica, Mexico, Norway, Portugal, Puerto Rico, Sweden, Switzerland, Thailand,
the United Kingdom and the United Arab Emirates. The following chart
summarizes the Comfort system in the United States:
COMFORT DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED MAY 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of
period........................... 935 1,015 1,129 1,255
Number of rooms, end of period.... 82,479 87,551 94,160 102,722
Royalty fees ($000s).............. $ 31,187 $ 37,635 $ 44,657 $ 50,758
Average occupancy percentage...... 68.0% 69.5% 68.7% 67.2%
Average daily room rate (ADR)..... $ 46.46 $ 48.24 $ 51.13 $ 54.17
RevPAR............................ $ 31.57 $ 33.54 $ 35.11 $ 36.39
</TABLE>
Quality. Certain Quality Inns and Quality Suites hotels compete in the
limited service, middle market category while others compete in the full
service, middle market category. Quality Inns and Quality Suites are targeted
to traditional business and leisure travelers. Principal competitor brands
include Best Western, Holiday Inn, Howard Johnson, Ramada Inn and Days Inn. At
May 31, 1997, there were 583 Quality Inn properties with a total of 67,995
rooms, and 36 Quality Suites properties with a total of 4,999 rooms open
worldwide. An additional 105 Quality Inn properties and 34 Quality Suites
properties with a total of 11,173 rooms and 3,315 rooms, respectively, were
under development.
Quality properties are located in the United States and in Argentina,
Australia, Canada, Chile, Costa Rica, the Czech Republic, Denmark, France,
Germany, India, Indonesia, Ireland, Italy, Jamaica, Mexico, New Zealand,
Norway, Portugal, Russia, Spain, Thailand, the United Kingdom and the United
Arab Emirates.
The following chart summarizes the Quality system in the United States:
QUALITY DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED MAY 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of
period........................... 358 341 362 409
Number of rooms, end of period.... 45,032 43,281 45,967 50,487
Royalty fees ($000s).............. $ 14,890 $ 15,632 $ 16,606 $ 17,623
Average occupancy percentage...... 61.6% 63.1% 62.5% 61.3%
Average daily room rate (ADR)..... $ 50.07 $ 50.94 $ 52.90 $ 54.61
RevPAR............................ $ 30.83 $ 32.16 $ 33.08 $ 33.46
</TABLE>
Econo Lodge. Econo Lodge hotels operate in the limited-service, economy
category of the lodging industry. Econo Lodges are targeted to the senior
travel market and rely to a large extent on strong roadside name recognition.
Principal competitor brands include Days Inn, Ho-Jo Inn, Motel 6, Ramada
Limited, Red Carpet Inn, Red Roof Inn, Super 8 and Travelodge.
42
<PAGE>
At May 31, 1997, there were 704 Econo Lodge properties with a total of
45,718 rooms open and operating in the United States and Canada, and an
additional 116 properties with a total of 8,330 rooms under development in
those two countries. The following chart summarizes the Econo Lodge system in
the United States:
ECONO LODGE DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED MAY 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of
period........................... 677 633 641 682
Number of rooms, end of period.... 46,570 42,801 42,726 44,636
Royalty fees ($000s).............. $ 11,231 $ 12,021 $ 12,760 $ 13,288
Average occupancy percentage...... 56.7% 57.5% 58.0% 56.4%
Average daily room rate (ADR)..... $ 37.27 $ 38.31 $ 39.97 $ 41.33
RevPAR............................ $ 21.14 $ 22.04 $ 23.17 $ 23.30
</TABLE>
Clarion. Clarion Inns, Clarion Hotels, Clarion Resorts and Clarion Suites
hotels are full-service properties which operate in the upscale category.
Clarion hotels are targeted to traditional business and leisure travelers.
Principal competitor brands include Holiday Inn, Holiday Select, Crowne Plaza,
Four Points by Sheraton, Radisson, Courtyard by Marriott and Doubletree.
At May 31, 1997, there were 110 Clarion properties with a total of 17,249
rooms open and operating worldwide and an additional 32 properties with a
total of 5,022 rooms under development. The properties are located in the
United States, the Bahamas, Canada, France, Guatemala, Indonesia, Ireland,
Japan, Mexico, Norway, Russia, Thailand and Uruguay. The following chart
summarizes the Clarion system in the United States:
CLARION DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED MAY 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of
period........................... 65 63 75 92
Number of rooms, end of period.... 12,211 10,420 12,817 14,721
Royalty fees ($000s).............. $ 2,735 $ 2,995 $ 3,602 $ 4,081
Average occupancy percentage...... 62.0% 63.7% 63.3% 63.3%
Average daily room rate (ADR)..... $ 62.47 $ 63.71 $ 64.36 $ 67.76
RevPAR............................ $ 38.75 $ 40.58 $ 40.74 $ 42.86
</TABLE>
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<PAGE>
Rodeway. The Rodeway brand competes in the limited-service, economy category
and is targeted to the senior travel market. Principal competitor brands
include Ho-Jo Inn, Ramada Limited, Red Roof Inn, Budgetel, Shoney's Inn, Super
8 and Motel 6. At May 31, 1997, there were 216 Rodeway Inn properties with a
total of 13,509 rooms, open and operating in the United States and Canada, and
an additional 50 properties with a total of 3,481 rooms under development in
those two countries. The following chart summarizes the Rodeway system in the
United States:
RODEWAY DOMESTIC SYSTEM(1)
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED MAY 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of
period........................... 214 208 201 216
Number of rooms, end of period.... 13,806 13,067 12,547 13,509
Royalty fees ($000s).............. $ 1,941 $ 2,302 $ 2,506 $ 2,631
Average occupancy percentage...... 51.4% 50.5% 52.7% 52.7%
Average daily room rate (ADR)..... $ 36.89 $ 38.93 $ 40.66 $ 41.15
RevPAR............................ $ 19.00 $ 19.64 $ 21.48 $ 21.68
</TABLE>
- --------
(1) Includes data pertaining to the Friendship Inn system, which is being
combined with the Rodeway Inn system.
Sleep Inn. Established in 1988, Sleep Inn is a new-construction hotel brand
in the limited-service, economy category. Sleep Inns are targeted to the
traditional business and leisure traveler. Principal competitor brands include
Days Inn, Fairfield Inn, Holiday Express, LaQuinta Inn, Ho-Jo Inn and Ramada
Inn.
At May 31, 1997, there were 133 Sleep Inn properties with a total of 9,806
rooms open and operating worldwide. An additional 150 properties with a total
of 11,497 rooms were under development. The properties are located in the
United States, Canada and the Cayman Islands. The following chart summarizes
the Sleep system in the United States:
SLEEP DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED MAY 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of
period........................... 34 51 87 131
Number of rooms, end of period.... 2,921 3,672 6,396 9,635
Royalty fees ($000s).............. $ 605 $ 1,080 $ 2,108 $ 3,343
Average occupancy percentage...... 64.6% 65.3% 65.5% 63.9%
Average daily room rate (ADR)..... $ 39.11 $ 41.89 $ 45.11 $ 48.11
RevPAR............................ $ 25.28 $ 27.37 $ 29.56 $ 30.75
</TABLE>
MainStay Suites. MainStay Suites, Franchising's newest hotel brand, is a
middle market, extended-stay lodging product targeted to travelers who book
hotel rooms for five or more consecutive nights. The first MainStay Suites
hotel, which Sunburst owns and manages, opened in Plano, Texas, in November
1996. An additional 21 properties with 2,054 rooms were under development as
of May 31, 1997.
The MainStay Suites brand is designed to fill the gap between existing
upscale and economy extended-stay lodging products. Principal competitors for
the brand include Candlewood hotels, TownPlace Suites, as well as competition
from all-suite hotel properties and traditional extended stay operators in
both the upscale market (Residence Inn, Homewood Suites, Hawthorne Suites and
Summerfield Suites) and the economy market (Extended Stay America, Studio Plus
and Oakwood).
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<PAGE>
International Franchise Operations
Franchising's international franchise operations have traditionally been
operated as a division separate from its domestic franchise operations. In
some cases, international master franchisees are not required to separately
report royalty results by brand, making brand results on a worldwide basis
unavailable. In the past fiscal year, Franchising entered into arrangements to
enter four new international markets. At May 31, 1997, Choice had 563
franchise hotels open in 32 countries outside the United States. The following
table illustrates the growth of Franchising's international franchise system
over the four fiscal years ended May 31, 1997. The Company does not track ADR,
RevPAR or occupancy rates for international properties.
COMBINED INTERNATIONAL FRANCHISE SYSTEM
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED MAY 31,
---------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of period.... 430 524 557 563
Number of rooms, end of period......... 36,725 44,877 46,843 47,603
Royalty fees ($000s)................... $ 1,667 $ 1,998 $ 1,586 $ 1,672
</TABLE>
Europe. Choice is the second-largest international franchised hotel chain in
Europe, with 270 hotels open in 14 countries at May 31, 1997. In a move to
realign and streamline its European operations, in May 1996 Franchising,
through its subsidiary, Manor Care Hotels (France) S.A., consummated a
transaction with Friendly Hotels, PLC ("Friendly") whereby Franchising
purchased an equity interest for approximately $17 million in Friendly to
finance the development of ten new Comfort Inn or Quality Inn hotels in the
United Kingdom and Ireland. Additionally, Friendly purchased from Franchising
a master franchise for the United Kingdom and Ireland. Franchising closed its
London office as a result of the transaction. Franchising's French and German
operations were consolidated into Franchising's Paris, France office, which
directly operates Franchising's business in most of Europe. There is also a
master franchise arrangement in Scandinavia.
The Middle East. In August 1995, Franchising signed a master franchise for
Israel. Franchising opened its first franchised property in Dubai, United Arab
Emirates, in December 1995. At May 31, 1997, there were two properties open in
this region.
Asia/Pacific. During fiscal year 1997, Company franchisees opened four
hotels in Australia, four in New Zealand, three in India, one in Thailand and
two in Indonesia, bringing the total number of properties open in the
Asia/Pacific region at May 31, 1997 to 61.
Caribbean. Franchising's master franchisee had 6 properties open in 4
Caribbean countries at May 31, 1997.
Central and South America. Franchising recently signed master franchise
agreements covering Brazil, Uruguay, Paraguay and Argentina. Franchising also
has master franchisees operating in Guatemala, Costa Rica, Chile and Mexico.
In total there were 19 open properties in this region at May 31, 1997.
Canada. Choice Hotels Canada (a joint venture with Journey's End Corporation
of Belleville, Ontario, Canada ("Journey's End")) is Canada's largest lodging
organization with 205 properties open at May 31, 1997. The joint venture,
owned 50% by Franchising and 50% by Journey's End, was formed in 1993 when
Journey's End converted substantially all of its controlled hotels to
Franchising's brands and Franchising contributed its operations in Canada to
form Choice Hotels Canada.
Owned and Operated International Hotels
After the Distribution, Franchising, through its wholly-owned subsidiary,
Quality Hotels Europe, Inc. and its affiliates, will own and operate hotels in
the United Kingdom, France and Germany. These hotels are located
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<PAGE>
in: Kensington, England; Troisdorf, Peine and Jena, Germany; and Moulins,
Perpignan, Lormont, Montlucon, Paris, Ponte-a-Mousson, Vierzon, St. Catherine,
Reims and Cherbourg, France.
Franchise Sales
Franchising markets franchises principally to: (i) developers of hotels,
(ii) owners of independent hotels and motels, (iii) owners of hotels
affiliated with other franchisors' brands, (iv) its own franchisees, who may
own, buy or build other hotels which can be converted to Franchising's brands,
and (iv) contractors who construct any of the foregoing. In fiscal year 1996,
existing franchisees accounted for approximately one-half of Franchising's new
franchise agreements. In considering hotels for conversion to one of
Franchising's brands, or sites for development of new hotels, Franchising
seeks properties in locations which are in close proximity to major highways,
airports, tourist attractions and business centers that attract travelers.
At May 31, 1997, Franchising employed approximately 40 sales directors, each
of whom is responsible for a particular region or geographic area. Sales
directors contact potential franchisees directly and receive compensation
based on sales generated. Franchise sales efforts emphasize the benefits of
affiliating with one of Franchising's well-known brand names, Franchising's
commitment to improving RevPAR, Franchising's "celebrity in a suitcase"
television advertising campaign (formerly used for the entire Choice family of
brands and now used principally for its three largest brands, Comfort, Quality
and Econo Lodge), Franchising's reservation system, Franchising's training and
support systems, and Franchising's history of growth and profitability.
Because it offers brands covering a broad spectrum of the lodging marketplace,
Franchising is able to offer each prospective franchisee a brand that fits its
needs, lessening the chances that the prospective franchisee would need to
consider a competing franchise system.
Because retention of existing franchisees is important to Franchising's
growth strategy, existing franchisees are offered the right to object to a
same-brand property within 15 miles, and are protected from the opening of a
same-brand property within a specific distance, generally two to five miles,
depending upon the size of the property and the market size. Franchising
believes that it is the only major franchise company to routinely offer such
territorial protection to its franchisees.
During the fiscal year ended May 31, 1997, Franchising received 1,078
franchise applications, approved 874 applications, signed 715 franchise
agreements and placed 390 new properties into operation in the United States
under Franchising's brands. Of those placed into operation, 203 were newly
constructed hotels. By comparison, during the fiscal year ended May 31, 1996,
Franchising received 993 franchise applications, approved 862 applications,
signed 665 franchise agreements and had 284 new U.S. properties come on line.
Applications may not result in signed franchise agreements either because an
applicant is unable to obtain financing or because Franchising and the
applicant are unable to agree on the financial terms of the franchise
agreement.
Franchise Agreements
A franchise agreement grants a franchisee the right to non-exclusive use of
Franchising's franchise system in the operation of a single hotel at a
specified location, typically for a period of 20 years, with certain rights to
each of the franchisor and franchisee to terminate before the twentieth year.
When the responsibility for development is sold to a master franchisee, that
party has the responsibility to sell to local franchisees Franchising's brands
and the master franchisee generally must manage the delivery of necessary
services (such as quality assurance, reservations and marketing) to support
the franchised hotels in the master franchise area. The master franchisee
collects the fees paid by the local franchisee and remits an agreed share to
Franchising. Master franchise agreements generally have a term of at least 10
years.
Franchise agreements, other than master franchise agreements, can be
terminated by either party prior to the conclusion of their term under certain
circumstances, such as at certain anniversaries of the agreement or if a
franchisee fails to bring properties into compliance with contractual quality
standards within specified periods of
46
<PAGE>
time. Early termination options give Franchising flexibility in eliminating or
re-branding properties which become weak performers for reasons other than
contractual failure by the franchisee. Master franchise agreements typically
contain provisions permitting Franchising to terminate the agreement for
failure to meet a specified development schedule.
Franchise fees vary among Franchising's different brands, but generally are
competitive with the industry average within their market group. Franchise
fees usually have four components: an initial, one-time affiliation fee; a
royalty fee; a marketing fee; and a reservation fee. Proceeds from the
marketing fee and reservation fee are used exclusively to fund marketing
programs and Franchising's central reservation system, respectively. Most
marketing fees support brand-specific marketing programs, although Franchising
occasionally contributes a portion of such fees to marketing programs designed
to support all of Franchising's brands. Royalty fees and affiliation fees are
the principal source of profits for Franchising.
Under the terms of the standard franchise agreements, Franchising's
franchisees are typically required to pay the following initial fees and on-
going fees as a percentage of gross room revenues:
QUOTED FEES BY BRAND
<TABLE>
<CAPTION>
INITIAL FEE ON-GOING FEES AS A PERCENTAGE OF GROSS ROOM REVENUES
PER ROOM/ ---------------------------------------------------------------------
BRAND MINIMUM ROYALTY FEES MARKETING FEES RESERVATION FEES
----- ------------ ----------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Comfort Inn............. $300/$45,000 5.25% 2.1% 1.75%
Comfort Suites.......... $300/$50,000 5.0% 2.1% 1.75%
Quality Inn............. $300/$35,000 4.0% 2.1% 1.75%
Quality Suites.......... $300/$50,000 4.0% 2.1% 1.25%
Sleep Inn............... $300/$40,000 4.5% 2.1% 1.75%
Clarion................. $300/$40,000 2.75% 1.0% 1.25%
Econo Lodge............. $250/$25,000 4.0% 3.5%(1) --
MainStay Suites......... $300/$30,000 4.5% 2.5%(1) --
Rodeway.................
Year 1................ $250/$25,000 3.5% 1.25% 1.25%
Year 2................ -- 3.0% 1.25% 1.25%
Year 3................ -- 3.0% 1.00% 1.00%
</TABLE>
- --------
(1) Fee includes both Marketing and Reservations
For a description of the Franchising Agreements between the Company and
Franchising which will remain in effect after the Distribution between
Sunburst and Franchising, see "--Relationship Between the Company and
Franchising After the Distribution--Franchise Agreements."
Franchising has increased its actual royalty rate since FY 93, primarily by
raising the royalty fee for Comfort franchisees to 5.25% of annual gross room
revenues ("GRR") from 4.0% of GRR in 1993, and by raising the royalty rate for
franchisees in the former Friendship franchise system to 3.0% of GRR from 2.0%
of GRR in 1991. For the fiscal year ended May 31, 1997, Franchising's average
actual royalty rate was 3.4%. Franchising believes that its average actual
royalty rate will continue to increase as older franchise agreements expire,
terminate or are amended.
At May 31, 1997, Franchising had 2,781 franchise agreements in effect in the
United States and 563 franchise agreements in effect in other countries. The
average age of the franchise agreements was 4 years. One hundred nineteen of
the franchise agreements are scheduled to expire during the five year period
beginning May 31, 1997; however, franchise agreements generally contain early
termination provisions.
47
<PAGE>
Franchise Operations
Franchising's operations are designed to improve RevPAR for Franchising's
franchisees, as this is the measure of performance that most directly impacts
franchisee profitability. It is Franchising's belief that by helping its
franchisees to become more profitable it will enhance its ability to retain
its existing franchisees and attract new franchisees. The key aspects of
Franchising's franchise operations are:
Central Reservation System. On average, approximately 22% of the room nights
booked at franchisees' properties are reserved through the toll-free telephone
reservation system operated by Franchising. Franchising's reservation system
consists of a computer reservation system known as CHOICE 2001, five
reservation centers in North America and several international reservation
centers run by Franchising or its master franchisees. The CHOICE 2001 system
is designed to allow trained operators to match each caller with a the
Company-branded hotel meeting the caller's needs. It provides an instant data
link to Franchising's franchised properties as well as to the Amadeus,
Galileo, SABRE and Worldspan airline reservation systems thereby facilitating
the reservation process for travel agents.
To more sharply define the market and image for each of its brands,
Franchising began advertising separate toll-free reservation numbers for all
of its brands in fiscal year 1995. Franchising allows its reservation agents
to cross-sell Franchising's hotel brands. If a room in the Choice hotel brand
requested by a customer is not available in the location or price range that
the customer desires, the agent may offer the customer a room in another
Choice brand hotel that meets the customer's needs. Franchising believes that
cross-selling enables Franchising and its franchisees to capture additional
business.
On-line reports generated by the CHOICE 2001 system enable franchisees to
analyze their reservation patterns over time. In addition, Franchising
provides and is currently improving a yield management product for its
franchisees to allow them to improve the management of their mix of rates and
occupancy based on current and forecasted demand on a property by property
basis. Franchising also markets to its franchisees a property management
product. Such products are designed to manage the financial and operations
information of an individual hotel and improve its efficiency.
Brand Name Marketing and Advertising. Franchising's marketing and
advertising programs are designed to heighten consumer awareness of
Franchising's brands. Marketing and advertising efforts are focused primarily
in the United States and include national television and radio advertising,
print advertising in consumer and trade media and promotional events,
including joint marketing promotions with vendors and corporate partners.
Franchising is recognized for its "celebrity in a suitcase" television
advertisements. In fiscal year 1996, Franchising began using brand-specific
marketing and largely discontinued the strategy of advertising its multiple
brands under the Choice umbrella, although it continues to use its "suitcase"
ads for its three largest brands, Comfort, Quality and Econo Lodge. The
marketing fees generated by these brands are used, in part, to fund a national
network television advertising campaign. Franchising's smaller hotel brands
conduct advertising campaigns that also include cable television, radio and
print.
Franchising conducts numerous marketing programs targeting specific groups,
including senior citizens, motorist club members, families, government and
military employees, and meeting planners. Other marketing efforts include
telemarketing and telesales campaigns, domestic and international trade show
programs, publication of group and tour rate directories, direct-mail
programs, discounts to holders of preferred credit cards, centralized
commissions for travel agents, fly-drive programs in conjunction with major
airlines, and twice yearly publication of a Travel and Vacation Directory.
Marketing and advertising programs are directed by Franchising's Marketing
Department, which utilize the services of independent advertising agencies.
Franchising also employs sales personnel at its Silver Spring, Maryland,
headquarters and in its Phoenix, Arizona, office. These sales personnel use
telemarketing to target specific customer groups, such as potential corporate
clients in areas where Franchising's franchised hotels are
48
<PAGE>
located, the motor coach market, and meeting planners. Most of these sales
personnel sell reservations and services for all of Franchising's brands, but
four are responsible exclusively for the Clarion brand.
Franchising's regional sales directors work with franchisees to maximize
RevPAR. These directors advise franchisees on topics such as how to market
their hotels and how to maximize the benefits offered by Franchising's
reservations system.
Quality Assurance Programs. Consistent quality standards are critical to the
success of a hotel franchise. Franchising has established quality standards
for all of its franchised brands which cover housekeeping, maintenance, brand
identification and level of services offered. Franchising inspects properties
for compliance with its quality standards when application is made for
admission to the franchise system. The compliance of existing franchisees with
quality standards is monitored through scheduled and unannounced Quality
Assurance Reviews conducted at least once per year at each property.
Properties which fail to maintain a minimum score are reinspected on a more
frequent basis until deficiencies are cured, or until such properties are
terminated.
To encourage compliance with quality standards, Franchising offers various
brand-specific incentives to franchisees who maintain consistent quality
standards. Franchisees who fail to meet minimum quality standards may be
subject to consequences ranging from written warnings to termination of the
franchisee's franchise agreement. During fiscal year 1997, Franchising
terminated forty-nine properties for failure to maintain minimum quality
assurance scores.
Training. Franchising maintains a training department which conducts
mandatory training programs for all franchisees and their employees.
Franchising also conducts regularly scheduled regional and national training
meetings for both property-level staff and managers. Training programs teach
franchisees how to take advantage of Franchising's reservation system and
marketing programs, and fundamental hotel operations such as housekeeping,
maintenance, and inventory yield management.
Training is conducted by a variety of methods, including group instruction
seminars and video programs. Franchising is developing an interactive
computer-based training system that will train hotel employees at their own
pace. Franchisees will be required to purchase hardware to operate the
training system, and will use software developed by Franchising.
Research and Development. Franchising seeks to enhance RevPAR by providing
to franchisees systems and products that will reduce costs and/or improve
their operations. Research and development activity resulted in the launch of
three new franchise products in fiscal year 1996, Choice Picks food court,
MainStay Suites hotels and K-Minus food service.
In January 1996, Franchising introduced its MainStay Suites franchise hotel
brand, an extended-stay product targeted to travelers who book hotel rooms for
five or more consecutive nights. See "--MainStay Suites."
In November 1995, Franchising introduced Choice Picks food court, a
customized, modular food-service system tailored to the needs of middle-market
hotels. Choice Picks food courts offer hotel guests a "choice pick" of
nationally known branded food items, such as Nathan's Famous hot dogs,
sandwiches made with Healthy Choice(R) deli meats, Pizzeria Uno(R) pizza and
calzone, Nestle Toll House(R) cookies and muffins, I Can't Believe It's
Yogurt(R) desserts, and Coca-Cola(R) beverages. The typical Choice Picks food
court can be operated by as few as two employees, thus providing the
properties with lower operating costs than properties with conventional
restaurants. Franchisees pay Franchising a one-time affiliation fee and
monthly royalty fees equal to a percentage of gross revenues on Choice Picks
food court sales. Franchisees must buy equipment and food service modules
necessary to set up a Choice Picks food court. Franchising intends to market
Choice Picks food court to larger hotel operators and other potential
customers outside of Franchising's franchise system.
In November 1995, Franchising also began to offer to its franchisees the K-
Minus food service system, which eliminates expensive banquet kitchens by
outsourcing food preparation and limiting on-site work to
49
<PAGE>
assembly and rethermalization. Compared with a traditional banquet operation,
the K-Minus food service system saves labor costs and energy. Franchisees who
wish to implement the K-Minus system are given design and technical assistance
by Franchising. Franchising receives a one-time technical assistance fee for
the provision of these services based on the scope of the project.
Purchasing. Franchising's product services department negotiates volume
purchases of various products needed by franchisees to run their hotels,
including such items as furniture, fixtures, carpets and bathroom amenities.
The department also helps to ensure consistency in such products across its
exclusively new-construction brands, Sleep Inn and MainStay Suites brands.
Sales to franchisees by Franchising were $18.1 million during the nine months
ended February 28, 1997, up from $14.3 million for the same period the prior
year.
Design and Construction. Franchising maintains a design and construction
department to assist franchisees in refurbishing, renovating, or constructing
their properties prior to or after joining the system. Department personnel
assist franchisees in meeting Franchising's brand specifications by providing
technical expertise and cost-savings suggestions.
Financial Assistance Programs. Franchising has established programs or
helped franchisees obtain financing through (i) a wholly owned subsidiary;
(ii) strategic partnerships with hotel lenders and/or (iii) by referral to
hotel lenders for hotel refinancing, acquisition, renovation and development.
Some of the specific programs include:
(a) Second mortgage financing for the development and construction of
Quality Inn, Quality Suites, Quality Inn & Suites, MainStay Suites and
Sleep Inns. The terms of the financing will depend on each franchisee's
credit worthiness, the amount of the proposed loan and the current economic
conditions. Generally not more than 25% of the project will be financed.
Total debt cannot exceed 75% of the fair market value.
(b) Econo Lodge exterior renovation program. Loans up to an amount of
$17,500 per property are given to qualified franchisees for standardized
exterior renovation. Franchisee participation requires, among other things,
extension of the franchise agreement. The loan is forgiven at the
expiration of the extended franchise agreement, assuming no defaults have
occurred thereunder.
(c) Salomon Brothers in conjunction with Suburban Capital Markets Inc. is
offering a $100 million construction to permanent financing program to
qualified franchisees. All Choice brands are included in this program. The
construction loan will be issued for a term up to three years at a floating
rate of 355 basis points over the 30-day LIBOR. The loan amount will not
exceed 75% of cost. The franchisee will be responsible for cost of all
third party reports and fees in the amount of 2.75% of the loan amount. A
stabilized debt service coverage ratio of at least 1.4:1 is required for
the permanent loans, which are issued for a 10 year term with amortization
up to 25 years and a fixed interest rate of 260 basis points over the 10
year U.S. Treasury interest rate on the day of closing. The permanent loan
will require a fee of 1% of the loan amount.
Competition
Competition among franchise lodging chains is intense, both in attracting
potential franchisees to the system and in generating reservations for
franchisees. In addition, hotel chains and independent hotels compete
intensely for guests and for meeting and banquet business.
Franchising's principal competitor brands at the national and international
level in the economy category of the lodging industry are LaQuinta, Ho-Jo Inn,
Ramada Inn, Motel 6, Ramada Limited, Red Carpet Inn, Red Roof Inn, Budgetel,
Hampton Inn, Fairfield Inn, Holiday Express, Shoney's Inn, Super 8, Days Inn,
and Travelodge. Franchising's principal competitor brands at the national and
international level in the middle market category of the lodging industry are
Days Inn, Fairfield Inn, Hampton Inn, Holiday Express, LaQuinta, Holiday Inn,
Best Western, Howard Johnson and Ramada Inns. Franchising's principal
competitor brands at the national and
50
<PAGE>
international level in the upscale category are Holiday Inn, Holiday Select,
Crowne Plaza, Four Points by Sheraton, Radisson, Courtyard by Marriott and
Doubletree.
Franchising 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. Hotel operators may also
select a franchisor in part based on the franchisor's reputation among other
franchisees, and the success of its existing franchisees.
Choice is the second largest hotel franchiser in the world. The largest,
HFS, Inc., has over 4,600 franchised hotels. Holiday Inn Worldwide has 1,240,
Promus Hotel Corp. has 597, Marriott International has 394 and Carlson
Hospitality Worldwide has 248.*
Franchising's prospects for growth are largely dependent upon the ability of
its franchisees to compete in the lodging market, since Franchising's
franchise system revenues are based on franchisees' gross room revenues (but
not directly on franchisees' profitability).
The ability of a hotel to compete may be affected by a number of factors,
including the location and quality of its property, the number and quality of
competing properties nearby, its affiliation with a recognized name brand, and
general regional and local economic conditions. The effect of economic
conditions on Franchising's results is substantially reduced by the geographic
diversity of Franchising's franchised properties, which are located in all 50
states and in 33 countries, as well as its range of products and room rates.
Service Marks and Other Intellectual Property
The service marks Quality Inn, Quality Suites, Comfort Inn, Comfort Suites,
Clarion Hotel, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites and
related logos are material to the Franchising Business. Franchising, directly
and through its franchisees, actively uses these marks. All of the material
marks are registered with the United States Patent and Trademark Office,
except for MainStay Suites and K-Minus, which are the subject of pending
applications. In addition, Franchising has registered certain of its marks
with the appropriate governmental agencies in over 100 countries where it is
doing business or anticipates doing business in the foreseeable future.
Franchising seeks to protect its brands and marks throughout the world,
although the strength of legal protection available varies from country to
country.
Non-Hotel Properties
The principal executive offices of Franchising are located at 10750 Columbia
Pike, Silver Spring, Maryland, 20901. These offices are leased from Manor Care
pursuant to the Silver Spring Lease. For a description of the Silver Spring
Lease and the effect of the Distribution on the Silver Spring Lease, see "--
Relationship Between the Company of Franchising after the Distribution," and
"Proposal Five: Election of Directors--Certain Relationships and
Transactions." Franchising owns its reservation system offices in Phoenix, AZ
and Minot, ND. Franchising leases two additional reservation system offices in
Grand Junction, CO, pursuant to leases that expire in 1999 and 2000, and
occupies additional space in Toronto, Canada, on a month-to-month basis. In
addition, Franchising leases 12 sales offices across the United States.
Franchising's European headquarters, which Franchising leases pursuant to a
lease that expires on December 31, 1997, is located in Paris, France.
Franchising also leases one international sales offices in France pursuant to
a lease that terminates in June 1998. Management believes that its executive,
reservation systems and sales offices are sufficient to meet its present needs
and does not anticipate any difficulty in securing additional or alternative
space, as needed, on terms acceptable to Franchising.
- --------
* The figures in this paragraph are with respect to U.S. hotel properties as
indicated in the August 1996 issue of Lodging Hospitality.
51
<PAGE>
Seasonality
Franchising's principal sources of revenues are franchise fees based on the
gross room revenues of its franchise properties and revenues generated by its
owned and managed hotels. Franchising experiences seasonal revenue patterns
similar to those of the lodging industry in general. This seasonality can be
expected to cause quarterly fluctuations in the revenues, profit margins and
net income of Franchising.
Regulation
Franchising's franchisees are responsible for compliance with all laws and
government regulations applicable to the hotels they own or operate. The
lodging industry is subject to numerous federal, state and local government
regulations, including those relating to the preparation and sale of food and
beverage (such as health and liquor license laws), building and zoning
requirements and laws governing a hotel owner's relationship with employees,
including minimum wage requirements, overtime, working conditions and work
permit requirements. The failure to obtain or retain liquor licenses or an
increase in the minimum wage rate, employee benefit costs or other costs
associated with employees could adversely affect Franchising's owned hotels.
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. A determination that Franchising is not in
compliance with the ADA could result in the imposition of fines or an award of
damages to private litigants. These and other initiatives could adversely
affect Franchising as well as the lodging industry in general.
The Federal Trade Commission (the "FTC") and certain other jurisdictions
(including France, Province of Alberta, Canada, and Mexico and various states)
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 require registration or disclosure in
connection with franchise offers and sales. In addition, several states 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 Franchising's
franchising operations have not been materially adversely affected by such
regulation, Franchising cannot predict the effect of future regulation or
legislation.
Impact of Inflation and Other External Factors
Franchising's principal sources of revenues are franchise fees. Franchise
fees and revenues from owned and managed hotels can be impacted by two
external factors: the supply of hotel rooms within the lodging industry
relative to the demand for rooms by travelers, and inflation.
Although industry-wide supply and demand for hotel rooms recently has been
fairly balanced, any excess in supply that might develop in the future could
have an unfavorable impact on room revenues at Franchising's franchised hotels
either by reducing the number of rooms reserved at Franchising's properties or
by restricting the rates hotel operators can charge for their rooms. In
addition, an excess supply of hotel rooms may discourage potential franchisees
from opening new hotels, unfavorably impacting the franchise fees received by
Franchising.
Although Franchising believes that increases in the rate of inflation will
generally result in comparable increases in hotel room rates, severe inflation
could contribute to a slowing of the national economy, which could result in
reduced travel by both business and leisure travelers. That could lead to less
demand for hotel rooms, which could result in a temporary reduction in room
rates and fewer room reservations, negatively impacting revenues received by
Franchising. A weak economy could also reduce demand for new hotels,
negatively impacting the franchise fees received by Franchising.
Among the other unpredictable external factors which may affect
Franchising's fee stream are wars, airline strikes, gasoline shortages and
severe weather.
52
<PAGE>
Legal Proceedings
Neither the Company nor Franchising is a party to any litigation, other than
routine litigation incidental to the Franchising Business. 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
Franchising.
Employees
Franchising employed 2,070 people as of June 30, 1997. None of Franchising's
employees are represented by unions or covered by collective bargaining
agreements. Franchising considers its relations with its employees to be
satisfactory.
MANAGEMENT
Board of Directors
The current directors of Franchising are William R. Floyd, Donald J. Landry
and James A MacCutcheon. In connection with the Distribution, it is expected
that Messrs. Landry and MacCutcheon will resign as directors of Franchising
and that, prior to the Distribution Date, the Company, as sole stockholder of
Franchising, will expand the Franchising board of directors to a total of nine
persons and appoint seven persons to the resulting vacancies so that the
persons listed below will constitute the entire Franchising Board of Directors
effective as of the Distribution Date. From and after the Distribution Date,
Franchising's Board of Directors will be classified into three classes,
designated Class I, Class II and Class III, each class to be as nearly equal
in number of directors as possible. The term of the initial Class I directors
will terminate on the date of the 1998 annual meeting of Franchising's
stockholders; the term of the initial Class II directors will terminate on the
date of the 1999 annual meeting of Franchising's stockholders; and the term of
the initial Class III directors will terminate on the date of the 2000 annual
meeting of Franchising's stockholders. At each annual meeting of Franchising's
stockholders, successors to the class of directors whose term expires at that
annual meeting will be elected for a three-year term.
The name, age and proposed class of directorship upon consummation of the
Distribution of the nine persons who are expected to be the directors of
Franchising from and after the Distribution Date are set forth below.
<TABLE>
<CAPTION>
NAME AGE CLASS OF DIRECTOR
---- --- -----------------
<S> <C> <C>
Stewart Bainum, Jr. ................................... 51 Class II
Stewart Bainum......................................... 78 Class I
Barbara Bainum......................................... 53 Class III
William R. Floyd....................................... 52 Class II
James H. Rempe......................................... 67 Class II
Robert C. Hazard, Jr. ................................. 62 Class III
Frederic V. Malek...................................... 60 Class III
Gerald W. Petitt....................................... 51 Class I
Jerry E. Robertson, Ph.D............................... 64 Class I
</TABLE>
Background of Directors
James H. Rempe. Senior Vice President, General Counsel and Secretary of
Manor Care since August 1981 and of Franchising from February 1981 to November
1996. Director, In Home Health Inc. and Vitalink Pharmacy Services, Inc.
For biographical information with respect to the other persons listed above,
see "Proposal Five: Election of Directors."
53
<PAGE>
The Board of Directors and Committees of the Board
Upon consummation of the Distribution, the Franchising Board of Directors is
expected to consist of nine members. It is expected that the Board of
Directors will hold five meetings during the fiscal year and that the standing
committees of the Board of Directors will include the Audit Committee, the
Finance Committee, the Compensation/Key Executive Stock Option Plan Committee
and the Nominating Committee. The members of the committees are expected to be
the same members of the Company's current Committees. See "Proposal Five:
Election of Directors--Board of Directors and Committees of the Board."
The Compensation/Key Executive Stock Option Plan Committee will administer
the Franchising stock option plans and grant stock options thereunder, will
review compensation of officers and key management employees, will recommend
development programs for employees such as training, bonus and incentive
plans, pensions and retirement, and will review other employee fringe benefit
programs.
The Finance Committee will review the financial affairs of Franchising and
will recommend financial objectives, goals and programs to the Board of
Directors and to management.
The Audit Committee will review the scope and results of the annual audit,
will review and approve the services and related fees of Franchising's
independent public accountants, will review Franchising's internal accounting
controls and will review Franchising's Internal Audit Department and its
activities.
The Nominating Committee will recommend to the Board of Directors the
members to serve on the Board of Directors during the ensuing year. The
Committee will not consider nominees recommended by stockholders.
Compensation of Directors
Prior to the Distribution, it is expected that Franchising will adopt the
Choice Hotels Franchising, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan. Part A of the Plan will provide
that eligible non-employee directors will be granted options to purchase 5,000
shares of Franchise Common Stock on their first date of election and will be
granted options to purchase 1,000 shares on their date of election in
subsequent calendar years. Part B of the Plan will provide that eligible non-
employee directors may elect, prior to May 31 of each year, to defer a minimum
of 25% of committee fees earned during the ensuing fiscal year. The fees which
are so deferred will be used to purchase Franchise Common Stock on the open
market within 15 days after December 1, February 28 and May 31 of such fiscal
year. Pending such purchases, the funds will be credited to an Interest
Deferred Account, which will be interest bearing. Stock which is so purchased
will be deposited in a Stock Deferred Account pending distribution in
accordance with the Plan.
Directors who will be employees of Franchising will receive no separate
remuneration for their services as directors. Pursuant to the Non-Employee
Director Stock Compensation Plan to be adopted by Franchising prior to the
Distribution, eligible non-employee directors will receive annually, in lieu
of cash, restricted stock of Franchising, the fair market value of which at
the time of grant will be equal to $30,000, which will represent the Board of
Directors retainer and meeting fees. In addition, all non-employee directors
will receive $1,610 per diem for Committee meetings attended, except where the
Committee meeting is on the same day as a Board meeting, and will be
reimbursed for travel expenses and other out-of-pocket costs incurred in
attending meetings.
54
<PAGE>
Executive Officers
The name, age, proposed title upon consummation of the Distribution and
business background of each of the persons who are expected to become on the
Distribution Date the executive officers of Franchising are set forth below.
The business address of each prospective executive officer is 10750 Columbia
Pike, Silver Spring, Maryland 20901, unless otherwise indicated.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr...... 51 Chairman of the Board of Directors
William R. Floyd........ 52 Vice Chairman and Chief Executive Officer
James A. MacCutcheon.... 45 Executive Vice President, Chief Financial Officer and Treasurer
Thomas Mirgon........... 41 Senior Vice President, Human Resources
Barry L. Smith.......... 55 Senior Vice President, Marketing
Michael J. DeSantis..... 38 Senior Vice President, General Counsel and Secretary
Joseph M. Squeri........ 32 Vice President, Finance and Controller
Rodney Sibley........... 48 Senior Vice President, Franchise Operations
</TABLE>
Rodney Sibley. Senior Vice President, Franchise Operations of the Company
since June 1997; Senior Vice President, Development for the Company from June
1996 to June 1997; Regional Vice President of the Company from 1992 to June
1996.
For biographical information with respect to the other persons listed above,
see "Proposal Five: Election of Directors."
Compensation of Executive Officers
Summary Compensation. The following tables set forth certain information
concerning the annual and long term compensation of those persons who,
following the Distribution, will serve as the chairman of the board, the chief
executive officer and the four other most highly compensated executive
officers of Franchising (the "Franchising Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM COMPENSATION
COMPENSATION RESTRICTED
----------------- -----------------------
FISCAL STOCK STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER AWARDS($) SHARES(#)(1) COMPENSATION(2)
- --------------------------- ------ -------- -------- -------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(3).. 1997 $656,357 $388,520 (4) -- 60,000(5) --
Chairman 1996 625,102 337,555 (4) -- 60,000(5) $33,543
1995 572,308 343,385 (4) -- -- 9,000
William R. Floyd(6)..... 1997 270,373 146,001 $107,831(7) $1,250,000 307,693 --
Vice Chairman and 1996 -- -- -- -- -- --
Chief Executive Officer 1995 -- -- -- -- -- --
James A.
MacCutcheon(8)......... 1997 313,578 155,953 (4) -- 67,500(9) 18,682
Executive Vice
President, 1996 301,517 135,682 (4) -- 25,000(10) 13,176
Chief Financial Officer
and Treasurer 1995 273,199 136,600 (4) -- -- 13,176
Barry L. Smith.......... 1997 240,000 108,000 (4) -- 25,000(11) 11,086
Sr. Vice President,
Marketing 1996 233,640 116,820 (4) -- 5,000(12) 10,427
1995 221,668 104,561 (4) -- -- 6,750
Thomas Mirgon(13)....... 1997 58,477 26,315 (4) -- 40,000 --
Senior Vice President, 1996 -- -- -- -- --
Human Resources 1995 -- -- -- -- --
Rodney Sibley(14)....... 1997 309,123 139,105 (4) -- 30,000(15) 27,329
Senior Vice President, 1996 423,858 -- (4) -- -- 27,329
Franchise Operations 1995 478,355 -- (4) -- -- 21,349
</TABLE>
55
<PAGE>
- --------
(1) For Messrs. Bainum, Jr., MacCutcheon, Smith and Sibley, represents
options to purchase shares of Manor Care Common Stock granted in fiscal
years 1997, 1996 and 1995. In connection with the Manor Care Spin-off,
the options to purchase Manor Care Common Stock were converted, in some
cases 100%, to options to purchase Company Common Stock. In all cases,
however, the exercise prices were adjusted to maintain the same financial
value to the option holder before and after the Manor Care Spin-off.
(2) Represents amounts contributed by Manor Care for fiscal years 1996 and
1995 and the Company for fiscal year 1997 under their respective 401(k)
Plan and Non-Qualified Savings Plan, which provide retirement and other
benefits to eligible employees, including the Franchising Named Officers.
The value of the amounts contributed in stock by the Company during
fiscal year 1997 under the 401(k) Plan for the Franchising Named Offices
were as follows: Mr. MacCutcheon, $6,240; Mr. Smith, $3,696 and Mr.
Sibley, $9,000. The value of the amounts contributed in stock of the
Company during fiscal year 1997 under the Non-Qualified Saving Plan for
the Franchising Named Officers were as follows: Mr. MacCutcheon, $12,443;
Mr. Smith $7,390 and Mr. Sibley $18,329.
(3) For part of fiscal year 1997 and all of fiscal years 1996 and 1995, Mr.
Bainum, Jr. was the Chairman and Chief Executive Officer of Manor Care
and the Company. In November, 1996, he resigned as Chief Executive
Officer of the Company. The compensation reflected here is the total
compensation received for services rendered to both Manor Care and the
Company. For the period of fiscal year 1997 after the Manor Care Spin-
off, the amount of compensation paid solely by Company was $88,302 for
base salary and $47,683 for bonus.
(4) The value of perquisites and other compensation does not exceed the
lesser of $50,000 or 10% of the amount of annual salary and bonus paid as
to any of the Franchising Named Officers.
(5) In connection with the Manor Care Spin-off, these options were converted
on a pro rata basis into options to purchase Manor Care Common Stock and
options to purchase Company Common Stock.
(6) Mr. Floyd's employment as Chief Executive Officer of the Company
commenced October 16, 1996.
(7) Consists of relocation expenses.
(8) For fiscal years 1996 and 1995 and part of fiscal year 1997, Mr.
MacCutcheon was Senior Vice President, Chief Financial Officer and
Treasurer of Manor Care and the Company. On November 1, 1996,
Mr. MacCutcheon resigned from his position at Manor Care and assumed the
position of Executive Vice President and Chief Financial Officer of the
Company. The compensation reflected here is total compensation received
for services rendered to both Manor Care and the Company. For the period
of fiscal year 1997 after the Manor Care Spin-off, the amount of
compensation paid solely by the Company was $209,052 for base salary and
$103,690 for bonus.
(9) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 6,563 shares of Manor Care Common Stock at an
adjusted exercise price of $25.0505, 36,387 options and 136,326 options
to purchase Company Common Stock at adjusted exercise prices of $14.5095
and $13.8933, respectively.
(10) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 50,102 shares of Company Common Stock at an
adjusted exercise price of $11.1168 and 10,462 shares of Manor Care
Common Stock at an adjusted exercise price of $19.1932.
(11) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 68,182 shares of Company Common Stock at an
adjusted exercise price of $14.5095.
(12) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 13,633 shares of Company Common Stock at an
adjusted exercise price of $11.1168.
(13) Mr. Mirgon's employment with the Company commenced March 3, 1997.
(14) Prior to fiscal year 1997, Mr. Sibley's compensation was based on
commissions.
(15) In connection with the Manor Care Spin-off, such options were converted
into options to purchase 81,818 shares of Company Common Stock at an
adjusted exercise price of $14.5095.
Stock Options. The following tables set forth certain information at May 31,
1997 and for the fiscal year then ended concerning options to purchase Company
Common Stock granted to the Franchising Named Officers. All Common Stock
figures and exercise prices have been adjusted to reflect stock dividends and
stock splits effective in prior fiscal years. In connection with the Manor
Care Spin-off, existing Manor Care stock options were subject to certain
adjustments or conversion into options to purchase Company Common Stock.
56
<PAGE>
STOCK OPTION GRANTS IN FISCAL 1997
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
PERCENTAGE OF POTENTIAL REALIZABLE
TOTAL OPTIONS VALUE OF ASSUMED RATE OF
GRANTED TO ALL STOCK PRICE APPRECIATION
NUMBER OF EMPLOYEES IN EXERCISE BASE FOR OPTION TERM(2)
OPTIONS FISCAL YEAR PRICE EXPIRATION ------------------------
NAME COMPANY* GRANTED(1) 1997 PER SHARE DATE 5%(3) 10%(4)
---- -------- ---------- -------------- ------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(5)... CHI 60,000 (6) $14.5095 07/01/06 $ 547,494 $ 1,387,464
MNR 60,000 (6) $25.0505 07/01/06 945,246 2,395,440
------- ----------- ------------
Total 120,000 1,492,740 3,782,904
William R. Floyd(5)...... CHI 307,693 (6) $ 14.625 11/04/06 2,830,037 7,171,862
MNR 0 -- -- -- -- --
------- ----------- ------------
Total 307,693 2,830,087 7,171,862
James A. MacCutcheon(5).. CHI 36,387 (6) $14.5095 07/01/06 332,028 841,428
CHI 136,326 (6) $13.8933 09/30/06 1,191,135 3,018,571
MNR 6,563 (6) $25.0505 07/01/06 103,394 262,021
------- ----------- ------------
Total 179,276 1,626,557 4,122,020
Barry L. Smith(5)........ CHI 68,182 (6) $14.5095 07/01/06 622,154 1,576,668
MNR 0 -- -- -- -- --
------- ----------- ------------
Total 68,182 622,154 1,576,668
Thomas Mirgon(5)......... CHI 40,000 (6) $ 15.625 02/25/07 393,060 996,088
MNR 0 -- -- -- -- --
------- ----------- ------------
Total 40,000 393,060 996,088
Rodney Sibley(5)......... CHI 81,818 (6) $14.5095 07/01/06 746,581 1,891,992
MNR 0 -- -- -- -- --
------- ----------- ------------
Total 81,818 746,581 1,891,992
</TABLE>
- --------
* References to "CHI" are to the Company and "MNR" are to Manor Care.
(1) Options granted to Messrs. Bainum, Jr., MacCutcheon, Smith and Sibley were
granted prior to the Manor Care Spin-off and were thus granted as options
to purchase Manor Care Common Stock. In connection with the Manor Care
Spin-off, these options to purchase Manor Care Common Stock were
converted, in some cases 100%, and in some cases partially to options to
purchase Company Common Stock. In all cases, however, the exercise prices
were adjusted to maintain the same financial value to the option holder
before and after the Manor Care Spin-off. The number of options set forth
in the table represent the number of Company and Manor Care options and
the adjusted exercise prices after the conversion.
(2) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and
therefore are not intended to forecast future possible appreciation, if
any, of the stock price. Since options are granted at market price, a zero
percent gain in the stock price will result in no realizable value to the
optionees.
(3) A 5% per year appreciation in stock price from $13.8933 per share yields
$22.6307, from $14.5095 per share yields $23.6344, from $14.625 per share
yields $23.8226, from $25.0505 per share yields $40.8046, and from $15.625
per share yields $25.4515.
(4) A 10% per year appreciation in stock price from $13.8933 per share yields
$36.0356, from $14.5095 per share yields $37.6339, from $14.625 per share
yields $37.9335, from $25.0505 per share yields $64.9745, and from $15.625
per share yields $40.5272.
(5) The options granted to the officers vest at the rate of 20% per year on
the first through the fifth anniversaries of the date of the stock option
grant.
(6) Information with respect to the total options granted to all Manor Care
employees is unavailable. With respect to the Company, the only options
granted by the Company during the fiscal year were the grants to Messrs.
Floyd and Mirgon as identified in the table and grants aggregating 25,000
options to purchase Company Common Stock to two additional new employees.
All other options to purchase Company Common Stock issued to employees
were issued as a result of the conversion of Manor Care options in the
Manor Care Spin-off.
57
<PAGE>
AGGREGATE OPTION EXERCISES IN FISCAL 1997
AND YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AS MAY 31, 1997 OPTIONS AT MAY 31, 1997(2)
ACQUIRED ON VALUE ------------------------- -----------------------------
NAME COMPANY* EXERCISE# REALIZED$ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ----------- ---------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr...... CHI 465,000 $3,105,452 239,000 221,000 $2,758,324 $1,334,863
MNR 293,791 2,318,180 174,000 221,000 3,633,404 2,749,771
William R. Floyd........ CHI -- -- 0 307,693 -- 346,154
MNR -- -- 0 0 -- --
James A. MacCutcheon.... CHI -- -- 162,639 335,408 1,858,096 1,708,638
MNR -- -- 91,362 46,563 1,962,041 704,946
117,676 1,000,544
Barry L. Smith.......... CHI 39,537 156,324 9,815 166,336
MNR -- -- 0 0 -- --
Thomas Mirgon........... CHI -- -- 0 40,000 -- 5,000
MNR -- -- 0 0
Rodney Sibley........... CHI -- -- 13,633 81,818 108,466 101,495
MNR -- -- 0 0 -- --
</TABLE>
- --------
* References to "CHI" are to the Company and "MNR" are to Manor Care.
(1) Options granted to Messrs. Bainum, Jr., MacCutcheon, Smith and Sibley were
granted prior to the Manor Care Spin-off and were thus granted as options
to purchase Manor Care Common Stock. In connection with the Manor Care
Spin-off, these options to purchase Manor Care Common Stock, were
converted, in some cases 100%, to options to purchase Company Common
Stock. In all cases, however, the exercise prices were adjusted to
maintain the same financial value to the option holder before and after
the Manor Care Spin-off. The number of options set forth in the table
represent the number of Company and Manor Care options and the adjusted
exercise prices after the conversion.
(2) The closing prices of Company Common Stock and Manor Care Common Stock as
reported by the New York Stock Exchange on May 30, 1997 were $15.75, and
$28.625, respectively. The value is calculated on the basis of the
difference between the option exercise price and such closing price
multiplied by the number of shares of Company Common Stock or Manor Care
Common Stock underlying the option.
EMPLOYMENT AGREEMENTS
Effective upon the Distribution Date, Franchising is expected to enter into
an employment agreement with Stewart Bainum, Jr., providing for Mr. Bainum,
Jr.'s employment as Chairman of the Board of Franchising. The agreement will
have a term of three years. Either Franchising or Mr. Bainum may terminate the
agreement upon 30 days' prior written notice on the first and second
anniversary dates of the agreement. The agreement will provide that Mr.
Bainum, Jr. will devote 12.5% of his professional time to the affairs of
Franchising, 12.5% of his professional time to the affairs of the Company and
the remaining 75% of his professional time to the affairs of Manor Care. The
agreement provides for a base salary of $82,044 per annum for services to
Franchising and a maximum bonus of 60% of Mr. Bainum, Jr.'s base compensation
based upon the performance of Franchising.
Effective upon the Distribution Date, Franchising is expected to assume an
employment agreement between the Company and William R. Floyd. The agreement
has a term of five years from October 21, 1996 and provides for a base salary
of $425,000 per annum, subject to annual adjustments and an annual bonus of up
to 60% of his base compensation, based on performance (including a customer
satisfaction component). Pursuant to the employment agreement, the Company
granted to Mr. Floyd 85,470 shares of restricted Company Common Stock and
options to purchase 307,693 shares of Company Common Stock, of which 34,188 of
the options are incentive stock options granted under the Company 1997 Long
Term Incentive Plan. The remainder of the options are non-qualified stock
options. Upon assumption of the Employment Agreements by Franchising, such
restricted stock and options will be adjusted and converted into Franchising
Common Stock and options. See
58
<PAGE>
"--Relationship Between the Company and Franchising after the Distribution--
Employee Benefits Allocation Agreement." Mr. Floyd's employment agreement
further provides that, with respect to Mr. Floyd's participation in the Choice
Hotels International, Inc. Supplemental Executive Retirement Plan (the
"SERP"), (i) Mr. Floyd's normal retirement age will be 62 and (ii) no minimum
years of services for benefit eligibility will be applicable.
Effective upon the Distribution Date, Franchising is expected to assume an
employment agreement between the Company and Mr. MacCutcheon. The agreement
has a term of five years from November 1, 1996 and provides for a base salary
of $313,576 per annum, subject to annual adjustments and an annual bonus of up
to 55% of his base compensation, based on the Company's performance (including
a customer satisfaction component).
Effective upon the Distribution Date, Franchising is expected to assume an
employment agreement between the Company and Thomas Mirgon. The agreement has
a term of five years from March 3,1997 and provides for a base salary of
$230,000 per annum, subject to annual adjustments and an annual bonus of up to
50% of his base compensation, based on the Franchising's performance. The
agreement also provides for (i) a one-time cash payment of $50,000, payable in
two equal installments: the first within 30 days of March 3, 1997 and the
second within 30 days of March 3, 1998; and (ii) a grant of 30,000 non-
qualified options and 10,000 incentive stock options.
RETIREMENT PLANS
Franchising will adopt the SERP. Participants are selected by the Board of
Directors or any designated committee and must be at the level of Senior Vice
President or above.
Participants in the SERP receive a monthly benefit for life based upon final
average salary and years of service. Final average salary is the average of
the monthly base salary, excluding bonuses or commissions, earned in a 60
month period which produces the highest average out of the 120 months of
employment, prior to the first occurring of the early retirement date or the
normal retirement date. The normal retirement age is 65, and participants must
have a minimum of 15 years of service. Participants may retire at age 60 and
may elect to receive reduced benefits commencing prior to age 65, subject to
Board approval. All of the Named Officers who will be participants are age 55
or younger, so that none of their compensation reported above would be
included in the final average salary calculation. See "--Employment
Agreements" for a discussion of the terms applicable to Mr. Floyd's
participation in the SERP.
Assuming that the following officers continue to be employed by Franchising
until they reach age 65, their credited years of service would be as follows:
<TABLE>
<CAPTION>
CURRENT YEARS YEARS OF SERVICE
NAME OF INDIVIDUAL OF SERVICE AT AGE 65
------------------ ------------- ----------------
<S> <C> <C>
Stewart Bainum, Jr.,.......................... 22.5 38
James A. MacCutcheon.......................... 9 30
Thomas Mirgon................................. 0 24
Barry L. Smith................................ 7 18
</TABLE>
59
<PAGE>
The table below sets forth estimated annual benefits payable upon retirement
to persons in specified compensation and years of service classifications.
These benefits are straight life annuity amounts, although participants have
the option of selecting a joint and 50% survivor annuity or ten-year certain
payments. The benefits are not subject to offset for social security and other
amounts.
YEARS OF SERVICE/BENEFIT AS
PERCENTAGE OF FINAL AVERAGE SALARY
<TABLE>
<CAPTION>
25 OR
REMUNERATION 15/15% 20/22.5% MORE/30%
------------ ------- -------- --------
<S> <C> <C> <C>
$300,000........................................... $45,000 $ 67,500 $ 90,000
350,000........................................... 52,500 78,750 105,000
400,000........................................... 60,000 90,000 120,000
450,000........................................... 67,500 101,250 135,000
500,000........................................... 75,000 112,500 150,000
600,000........................................... 90,000 135,000 180,000
</TABLE>
It is expected that upon the Distribution, Franchising will establish the
Choice Hotels Franchising, Inc. Retirement Savings and Investment Plan (the
"Franchising 401(k) Plan"). The Franchising 401(k) Plan will be a defined
contribution retirement, savings and investment plan qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and will
include a cash or deferred arrangement under Section 401(k) of the Code. All
employees age 21 or over and who have worked for Franchising (or the Company)
for a twelve month period during which such employee completed at least 1,000
hours will be eligible to participate. Subject to certain non-discrimination
requirements, each employee will be able to contribute an amount to the
Franchising 401(k) Plan on a pre-tax basis up to 15% of the employee's salary,
but not more than the current federal limit of $9,500. Franchising will match
contributions made by its employees subject to certain limitations. The amount
of the match will be equal to a percentage of the amount of salary reduction
contribution made on behalf of a participant during the plan year based upon a
formula that involves the profits of Franchising (or, prior to the
Distribution, the Company) for the year and the number of years of service of
the participant. Amounts contributed by the Company pursuant to its 401(k)
Plan for the Franchising Named Officers are included in the Summary
Compensation Table under the column headed "All Other Compensation."
It is expected that upon the Distribution, Franchising will adopt the Choice
Hotels Franchising, Inc. Non-Qualified Retirement Savings and Investment Plan
("Franchising Non-Qualified Savings Plan"). Certain select highly compensated
members of management of Franchising will be eligible to participate in the
Franchising Non-Qualified Savings Plan. The Franchising Non-Qualified Savings
Plan is structured so as to provide the participants with a pre-tax savings
vehicle to the extent that pre-tax savings are limited under the 401(k) Plan
as a result of various governmental regulations, such as non-discrimination
testing. Amounts contributed by the Company under its Non-Qualified Savings
Plan for fiscal year 1997 for the Franchising Named Officers are included in
the Summary Compensation Table under the column headed "All Other
Compensation."
The Franchising match under the Franchising 401(k) Plan and the Franchising
Non-Qualified Savings Plan will be limited to a maximum aggregate of 6% of the
annual salary of a participant. Likewise, participant contributions under the
two plans will not exceed the aggregate of 15% of the annual salary of a
participant.
For a discussion of the Franchising Incentive Plan and Franchising Stock
Purchase Plans, see "Proposal Four: Ratification of Adoption by Franchising of
Certain Franchising Benefit Plans."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Upon consummation of the Distribution, certain management employees of
Franchising and of the Company will hold options to purchase shares of Company
Common Stock. See "--Relationship Between the Company and Franchising After
the Distribution--Employee Benefits Allocation Agreement."
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For a discussion of certain contracts to be executed between the Company and
Franchising as of the Distribution Date, see "--Relationship Between the
Company and Franchising After the Distribution." For a discussion of the
historical financial relationship between the Company and Franchising, see "--
Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
SECURITY OWNERSHIP
The following table sets forth the amount of Franchising Common Stock
expected to be beneficially owned by (i) each director and director nominee of
Franchising, (ii) the chief executive officer of Franchising and the other
Franchising Named Officers, (iii) all officers and directors of Franchising as
a group and (iv) all persons who are expected to own beneficially more than 5%
of Franchising Common Stock, based on Company Common Stock beneficially owned
by such persons on the Annual Meeting Record Date. Unless otherwise specified,
the address for each of them is 10750 Columbia Pike, Silver Spring, Maryland
20901. On the Distribution Date, the holders of Company Common Stock as of the
Distribution Record Date will be entitled to receive one share of Franchising
Common Stock for each share of Company Common Stock. For purposes of the
following table, it is assumed that all options to purchase shares of Company
Common Stock held by the persons specified will be converted into options to
purchase Franchising Common Stock. For a discussion of the treatment of
outstanding options to purchase Company Common Stock in connection with the
Distribution, see "--Relationship Between the Company and Franchising After
the Distribution--Employee Benefits Allocation Agreement."
<TABLE>
<CAPTION>
TOTAL SHARES OF PERCENT OF SHARES
COMPANY COMMON STOCK OUTSTANDING
EXPECTED TO BE EXPECTED TO BE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED (1)
------------------------ -------------------- ----------------------
<S> <C> <C>
Stewart Bainum, Jr............. 16,003,408(2) 26.58%
Stewart Bainum................. 10,325,997(3) 17.15%
Barbara Bainum................. 5,520,867(4) 9.17%
William R. Floyd............... 85,570(5) *
Robert C. Hazard, Jr........... 40,756(6) *
James A. MacCutcheon........... 181,910(7) *
Frederic V. Malek.............. 5,510(8) *
Thomas Mirgon.................. 0 *
Gerald W. Petitt............... 86,281(9) *
James H. Rempe................. 67,527(10) *
Jerry E. Robertson, Ph.D....... 20,824(11) *
Barry L. Smith................. 244,292(12) *
Rodney Sibley.................. 38,234(13) *
All Directors and Officers as a
Group (15 persons)............ 21,592,499(14) 35.87%
Bruce Bainum................... 5,512,302(15) 9.16%
Ronald Baron................... 15,790,713(16) 26.23%
</TABLE>
- --------
* Less than 1% of class.
(1) Percentages are based on 60,200,784 shares outstanding on the Annual
Meeting Record Date plus, for each person, the shares which would be
issued assuming that such person exercises all options it holds which are
exercisable on such date or become exercisable within 60 days thereafter.
(2) Includes 549,152 shares owned directly by the Stewart Bainum, Jr.
Declaration of Trust dated March 13, 1996, the sole trustee and
beneficiary of which is the reporting person. Also includes 5,417,761
shares owned by Bainum Associates Limited Partnership ("Bainum
Associates") and 4,415,250 shares owned by MC Investments Limited
Partnership ("MC Investments"), in both of which Mr. Bainum, Jr. is
managing general partner with the sole right to dispose of the shares;
3,567,869 shares held directly by Realty Investment Company, Inc.
("Realty"), a real estate management and investment company in which Mr.
Bainum, Jr. has shared voting authority; 1,779,628 shares owned by Mid
Pines Associates Limited Partnership ("Mid Pines"), in which Mr. Bainum,
Jr. is managing general partner and has shared voting
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authority and 10,600 shares owned by the Foundation for Maryland's Future,
in which Mr. Bainum, Jr. is the sole director. Also includes 263,000
shares which Mr. Bainum, Jr. has the right to acquire pursuant to stock
options which are presently exercisable or which become exercisable within
60 days after the Annual Meeting Record Date, and 148 shares which Mr.
Bainum, Jr. has the right to receive upon termination of his employment
with the Company pursuant to the terms of the Choice Hotels International,
Inc. Non-Qualified Retirement Savings and Investment Plan ("Non- Qualified
Savings Plan").
(3) Includes 3,906,278 shares held directly by the Stewart Bainum Declaration
of Trust, of which Mr. Bainum is the sole trustee and beneficiary, his
joint interest in 895,466 shares owned by Bainum Associates and 1,082,857
shares owned by MC Investments, each of which is a limited partnership in
which Mr. Bainum has joint ownership with his wife as a limited partner
and as such has the right to acquire at any time a number of shares equal
in value to the liquidation preference of their limited partnership
interests; 3,567,869 shares held directly by Realty, in which Mr. Bainum
and his wife have shared voting authority; and 70,305 shares held by the
Commonweal Foundation of which Mr. Bainum is Chairman of the Board of
Directors and has shared voting authority. Also includes 798,711 shares
held by the Jane L. Bainum Declaration of Trust, the sole trustee and
beneficiary of which is Mr. Bainum's wife, and 1,667 shares which Mr.
Bainum has the right to acquire pursuant to stock options which are
presently exercisable or which become exercisable within 60 days after
the Annual Meeting Record Date. Also includes 2,844 shares of restricted
stock granted by the issuer to Mr. Bainum which are not vested but which
Mr. Bainum has the right to vote.
(4) Includes 101,013 shares owned directly by Ms. Bainum. Also includes
1,779,628 shares owned by Mid Pines, in which Ms. Bainum's trust is a
general partner and has shared voting authority, 3,567,869 shares owned
by Realty, in which Ms. Bainum's trust has voting stock and shares voting
authority and 70,305 shares owned by the Commonweal Foundation, in which
Ms. Bainum is President and Director and has shared voting authority.
Also includes 2,052 shares of restricted stock issued to Ms. Bainum under
the Choice Hotels International, Inc. Non-Employee Director Stock
Compensation Plan (the "Non-Employee Director Stock Compensation Plan")
which shares are not vested, but which Ms. Bainum has the right to vote.
(5) Consists of restricted shares granted pursuant to Mr. Floyd's employment
agreement which are not yet vested, but which Mr. Floyd has the right to
vote.
(6) Includes 37,304 shares owned directly by Mr. Hazard; 2,844 restricted
shares granted under the Non-Employee Director Stock Compensation Plan,
which are not yet vested, but which Mr. Hazard has the right to vote, and
113 shares and 415 shares, respectively, which Mr. Hazard has the right
to receive upon termination of his employment pursuant to the terms of
the Choice Hotels International, Inc. Retirement Savings and Investment
Plan ("401(k) Plan") and Non-Qualified Savings Plan.
(7) Includes 180,311 shares which Mr. MacCutcheon has the right to acquire
pursuant to stock options which are presently exercisable or exercisable
within 60 days of the Annual Meeting Record Date and 664 and 935 shares,
respectively, which Mr. MacCutcheon has the right to receive upon
termination of his employment with the Company pursuant to the terms of
the 401(k) Plan and Non-Qualified Savings Plan.
(8) Includes 1,666 shares which Mr. Malek has the right to acquire pursuant
to stock options which are presently exercisable and 2,844 restricted
shares granted under the Non-Employer Director Stock Compensation Plan
which are not vested, but which Mr. Malek has the right to vote.
(9) Includes 74,776 shares held directly by Mr. Petitt and 8,661 shares held
in trust for minor children for which Mr. Petitt is trustee. Beneficial
ownership of such shares is disclaimed. Also includes 2,844 restricted
shares granted under the Non-Employee Director Stock Compensation Plan
which are not yet vested, but which Mr. Petitt has the right to vote.
(10) Includes 59,624 shares which Mr. Rempe has the right to acquire pursuant
to stock options which are presently exercisable or exercisable within 60
days of the Annual Meeting Record Date.
(11) Includes 15,500 shares owned by the JJ Robertson Limited Partnership, of
which Mr. Robertson and his wife are the general partners with shared
voting authority and 2,844 restricted shares granted under the Non-
Employee Director Stock Compensation Plan which are not yet vested, but
which Mr. Robertson has the right to vote. Also includes 1,666 shares
which Mr. Robertson has the right to acquire pursuant to stock options
which are presently exercisable and 814 shares acquired pursuant to the
Choice Hotels International, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan.
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(12) Includes 243,483 shares which Mr. Smith has the right to acquire pursuant
to stock options which are presently exercisable or exercisable within 60
days of the Annual Meeting Record Date and 254 shares and 555 shares,
respectively, which Mr. Smith has the right to receive upon termination
of his employment pursuant to the terms of the 401(k) Plan and the Non-
Qualified Savings Plan.
(13) Includes 5,800 shares held directly by Mr. Sibley, 29,996 shares which
Mr. Sibley has the right to acquire pursuant to stock options which are
presently exercisable or exercisable within 60 days of the Annual Meeting
Record Date, and 963 and 1,475 shares, respectively, which Mr. Sibley has
the right to receive upon termination of his employment pursuant to the
terms of the 401(k) Plan and Nonqualified Savings Plan.
(14) Includes a total of 721,789 shares which the officers and directors
included in the group have the right to acquire pursuant to stock options
which are presently exercisable, or exercisable within 60 days of the
Annual Meeting Record Date, and a total of 1,994 shares and 3,528 shares,
respectively, which such directors and officers have the right to receive
upon termination of their employment with the Company pursuant to the
terms of the 401(k) Plan and the Non-Qualified Savings Plan.
(15) Includes 94,500 shares owned directly by Mr. Bainum. Also includes
1,779,628 shares owned by Mid Pines, in which Mr. Bainum is a general
partner and has shared voting authority, 3,568,869 shares owned by Realty
in which Mr. Bainum's trust has voting stock and shares voting authority
and 70,305 shares owned by the Commonwealth Foundation, in which Mr.
Bainum is a Director and has shared voting authority. Mr. Bainum's
address is 8737 Colesville Road, Suite 800, Silver Spring, Maryland,
20910.
(16) As of July 31, 1997 based on a Schedule 13-D, as amended, filed by Mr.
Baron with the Securities and Exchange Commission (the "Commission"). Mr.
Baron's address is 450 Park Avenue, Suite 2800, New York, New York 10022.
DESCRIPTION OF FRANCHISING CAPITAL STOCK
Under the Restated Certificate of Incorporation of Franchising (the
"Franchising Certificate"), which is attached as Annex A to this Proxy
Statement, the total number of shares of capital stock that Franchising has
authority to issue is 165,000,000, consisting of 160,000,000 shares of common
stock, par value $.01 per share, and 5,000,000 shares of preferred stock (the
"Preferred Stock"), par value $.01 per share.
Based on the number of shares of Company Common Stock outstanding on the
Annual Meeting Record Date, it is expected that approximately 60,200,784
shares of Franchising Common Stock will be issued to stockholders of the
Company in the Distribution. All of the shares Franchising Common Stock to be
distributed to the Company stockholders in the Distribution will be fully paid
and non-assessable.
Common Stock
The Franchising Certificate authorizes common stock consisting of
160,000,000 shares. Holders of Franchising Common Stock are entitled to
receive, subject to preferences that may be applicable from time to time with
respect to any outstanding Preferred Stock, such dividends as are declared by
the Board of Directors of Franchising, one vote for each share at all meetings
of stockholders, and, subject to preferences that may be applicable from time
to time with respect to any outstanding Preferred Stock, the remaining assets
of Franchising upon liquidation, dissolution or winding up of Franchising.
Franchising may issue additional shares of common stock without further
stockholder approval, up to the maximum authorized number of shares, except as
may be otherwise required by applicable law or stock exchange regulations.
Shares of common stock may be issued from time to time in one or more
classes or series. With respect to the issuance of common shares of any class
or series, the Board of Directors of Franchising is authorized to determine,
without any further action by the holders of Franchising's Common Stock, among
other things, the dividend rights, dividend rate, conversion rights, voting
rights and rights and terms of redemption, as well as the number of shares
constituting such class or series. Should the Board of Directors of
Franchising elect to exercise its authority, the rights and privileges of
holders of Franchising's Common Stock could be made subject to rights
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and privileges of any such other series of common stock. The Company has no
present plans to issue any common stock of a class or series other than
Franchising's Common Stock.
See "--Post-Distribution Dividend Policy" for a description of the dividend
policy of Franchising after the Distribution.
Preferred Stock
Franchising's Board of Directors is authorized to issue up to 5,000,000
shares of Preferred Stock without further stockholder approval (except as may
be required by applicable law or stock exchange regulations) and to fix from
time to time, by resolution or resolutions, the relative powers, preferences
and rights and the qualifications, limitations or restrictions of any class or
series of Preferred Stock, as well as the number of shares constituting such
class or series and the designation thereof.
Preemptive Rights
Holders of shares of Company Common Stock have no preemptive rights.
PURPOSES AND ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE FRANCHISING
CERTIFICATE AND BYLAWS
Prior to the Distribution Date, the Franchising Certificate and the Bylaws
of Franchising (the "Franchising Bylaws") will be amended by the Company as
sole stockholder of Franchising to make the Franchising Certificate and the
Franchising Bylaws substantially similar to the Company Certificate and the
Company Bylaws as currently in effect. Such amendment to the Franchising
Certificate and Franchising Bylaws may have an antitakeover effect with
respect to Franchising, deter an offer with a substantial premium to the then-
current trading price of Franchising Common Stock or hinder a potential
transaction that may be attractive to stockholders.
Franchising Certificate and Bylaws
The Franchising Certificate contains several provisions that will make
difficult an acquisition of control of Franchising, by means of a tender
offer, open market purchase, a proxy fight or otherwise, that is not approved
by the Franchising Board of Directors. The Franchising Bylaws also contain
provisions that could have an antitakeover effect.
The purposes of the relevant provisions of the Franchising Certificate and
the Franchising Bylaws are to discourage certain types of transactions,
described below, which may involve an actual or threatened change of control
of Franchising and to encourage persons seeking to acquire control of
Franchising to consult first with the Board of Directors to negotiate the
terms of any proposed business combination or offer. The provisions are
designed to reduce the vulnerability of Franchising to an unsolicited proposal
for a takeover that does not contemplate the acquisition of all outstanding
shares or is otherwise unfair to stockholders of Franchising or an unsolicited
proposal for the restructuring or sale of all or part of Franchising. The
Company and Franchising believe that, as a general rule, such proposals would
not be in the best interests of Franchising and its stockholders.
There has been a history of the accumulation of substantial stock positions
in public companies by third parties as a prelude to proposing a takeover or a
restructuring or sale of all or part of the company or another similar
extraordinary corporate action. Such actions are often undertaken by the
third-party without advance notice to, or consultation with, the management or
board of directors of the target company. In many cases, the purchaser seeks
representation on the company's board of directors in order to increase the
likelihood that its proposal will be implemented by the target company. If the
company resists the efforts of the purchaser to obtain representation on the
company's board, the purchaser may commence a proxy contest to have its
nominees elected to the board in place of certain directors or the entire
board. In some cases, the purchaser may not truly
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be interested in taking over the company, but may use the threat of a proxy
fight and/or a bid to take over the company as a means of forcing the company
to repurchase its equity position at a substantial premium over market price.
The Company and Franchising believe that the imminent threat of removal of
Franchising's management or Board of Directors in such situations would
severely curtail the ability of management or the board of directors to
negotiate effectively with such purchasers. The management or the Franchising
Board of Directors would be deprived of the time and information necessary to
evaluate the takeover proposal, to study alternative proposals and to help
ensure that the best price is obtained in any transaction involving
Franchising which may ultimately be undertaken. If the real purpose of a
takeover bid were to force Franchising to repurchase an accumulated stock
interest at a premium price, management or the Board of Directors would face
the risk that, if it did not repurchase the purchaser's stock interest,
Franchising's business and Franchising's management would be disrupted,
perhaps irreparably.
Certain provisions of the Franchising Certificate and Bylaws, in the view of
the Company and Franchising, will help ensure that the Franchising Board of
Directors, if confronted by a surprise proposal from a third-party which has
acquired a block of stock, will have sufficient time to review the proposal
and appropriate alternatives to the proposal and to act in what it believes to
be the best interests of the stockholders. In addition, certain other
provisions of the Franchising Certificate are designed to prevent a purchaser
from utilizing two-tier pricing and similar inequitable tactics in the event
of an attempt to take over Franchising.
These provisions, individually and collectively, will make difficult and may
discourage a merger, tender offer or proxy fight, even if such transaction or
occurrence may be favorable to the interests of the stockholders, and may
delay or frustrate the assumption of control by a holder of a large block of
Franchising Common Stock and the removal of incumbent management, even if such
removal might be beneficial to the stockholders. Furthermore, these provisions
may deter or could be utilized to frustrate a future takeover attempt which is
not approved by the incumbent Board of Directors, but which the holders of a
majority of the Franchising Common Stock may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
stock over prevailing market prices of such stock. By discouraging takeover
attempts, these provisions may have the incidental effect of inhibiting
certain changes in management (some or all of the members of which might be
replaced in the course of a change of control) and also the temporary
fluctuations in the market price of the stock which often result from actual
or rumored takeover attempts.
Set forth below is a description of all such material provisions in the
Franchising Certificate and Bylaws. Such description is intended as a summary
only and is qualified in its entirety by reference to the Franchising
Certificate and Bylaws, the forms of which are attached to this Proxy
Statement as Annexes A and B, respectively.
Classified Board of Directors. The Franchising Certificate provides for the
Franchising Board of Directors to be divided into three classes serving
staggered terms so that directors' initial terms will expire either at the
1998, 1999 or 2000 annual meeting of stockholders. Starting with the 1998
annual meeting of Franchising stockholders, one class of directors will be
elected each year for three-year terms. See "--Management--Board of
Directors."
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Franchising Board
of Directors in a relatively short period of time. At least two annual
meetings of stockholders, instead of one, will generally be required to effect
a change in a majority of the Franchising Board of Directors. Such a delay may
help ensure that the Franchising Board of Directors, if confronted by a holder
attempting to force a stock repurchase at a premium above market prices, a
proxy contest or an extraordinary corporate transaction, will have sufficient
time to review the proposal and appropriate alternatives to the proposal and
to act in what it believes are the best interests of the stockholders.
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The classified board provision could have the effect of discouraging a
third-party from making a tender offer or otherwise attempting to obtain
control of Franchising, even though such an attempt might be beneficial to
Franchising and its stockholders. The classified board provision could thus
increase the likelihood that incumbent directors will retain their positions.
In addition, since the classified board provision is designed to discourage
accumulations of large blocks of Franchising stock by purchasers whose
objective is to have such stock repurchased by Franchising at a premium, the
classified board provision could tend to reduce the temporary fluctuations in
the market price of Franchising's stock that could be caused by accumulations
of large blocks of such stock. Accordingly, stockholders could be deprived of
certain opportunities to sell their stock at a temporarily higher market
price.
The Company and Franchising believe that a classified board of directors
will help to assure the continuity and stability of the Franchising Board of
Directors and Franchising's business strategies and policies as determined by
the Board of Directors, because generally a majority of the directors at any
given time will have had prior experience as directors of Franchising. The
classified board provision will also help assure that the Franchising Board of
Directors, if confronted with an unsolicited proposal from a third-party that
has acquired a block of the voting stock of Franchising, will have sufficient
time to review the proposal and appropriate alternatives and to seek the best
available result for all stockholders.
Removal; Filling Vacancies. The Franchising Certificate provides that only a
majority of the Board of Directors then in office shall have the authority to
fill any vacancies on the Board of Directors, including vacancies created by
an increase in the number of directors. In addition, the Franchising
Certificate provides that a new director elected to fill a vacancy on the
Board of Directors will serve for the remainder of the full term of his or her
class and that no decrease in the number of directors shall shorten the term
of an incumbent. These provisions relating to removal and filling of vacancies
on the Board of Directors will preclude stockholders from enlarging the Board
of Directors or removing incumbent directors and filling the vacancies with
their own nominees.
Limitations on Stockholder Action By Written Consent; Special Meetings. The
Franchising Certificate and Bylaws provide that stockholder action can be
taken only at an annual or special meeting of stockholders and prohibit
stockholder action by written consent in lieu of a meeting. The Franchising
Certificate and Bylaws provide that special meetings of stockholders can be
called only by the Chairman or Vice Chairman of Franchising's Board of
Directors or by the Secretary of Franchising within 10 calendar days after
receipt of the written request of a majority of the total number of directors
Franchising would have if there were no vacancies. Stockholders are not
permitted to call a special meeting or to require that the Board of Directors
call a special meeting of stockholders. Moreover, the business permitted to be
conducted at any special meeting of stockholders is limited to the business
brought before the meeting by or at the direction of the Board of Directors.
The provisions of the Franchising Certificate and Bylaws restricting
stockholder action by written consent may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting unless a
special meeting is called by a majority of the entire Board of Directors.
These provisions would also prevent the holders of a majority of the voting
power of the voting stock from using the written consent procedure to take
stockholder action and from taking action by consent without giving all the
stockholders of Franchising entitled to vote on a proposed action the
opportunity to participate in determining such proposed action. Moreover, a
stockholder could not force stockholder consideration of a proposal over the
opposition of the Franchising Board of Directors by calling a special meeting
of stockholders prior to the time the Board of Directors believed such
consideration to be appropriate.
The Company and Franchising believe that such limitations on stockholder
action will help to assure the continuity and stability of the Franchising
Board of Directors and Franchising's business strategies and policies as
determined by the Board of Directors, to the benefit of all of Franchising's
stockholders. If confronted with an unsolicited proposal from stockholders of
Franchising, the Board of Directors will have sufficient time to
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review such proposal and to seek the best available result for all
stockholders, before such proposal is approved by such stockholders by written
consent in lieu of a meeting or through a special meeting of stockholders.
Nominations of Directors and Stockholder Proposals. The Franchising Bylaws
establish an advance notice procedure with regard to the nomination other than
by or at the direction of the Board of Directors of candidates for election as
directors and with regard to stockholder proposals to be brought before an
annual meeting of stockholders. Specifically, Franchising's Bylaws require
that stockholders desiring to bring any business, including nominations for
directors, before an annual meeting of stockholders deliver advance written
notice thereof to the Secretary of Franchising. The Bylaws further require
that the notice by the stockholder set forth a description of the business to
be brought before the meeting and information concerning the stockholder
proposing such business and the beneficial owner, if any, on whose behalf the
proposal is made, including their names and addresses, the class and number of
shares of Franchising that are owned beneficially and of record by each of
them, and any material interest of either of them in the business proposed to
be brought before the meeting.
The purpose of the advance notice provision is to provide the Franchising
Board of Directors the opportunity to inform stockholders, prior to an annual
meeting of stockholders, of any business propose to be conducted at such
meeting (including any recommendation as to the Board's position with respect
to any action to be taken). In the case of the advance notice nomination
procedures, the Franchising Board of Directors is afforded a meaningful
opportunity to consider and inform directors and stockholders of the
qualifications of the proposed nominees.
Although the Franchising Bylaws do not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of directors
or any other proposal submitted by stockholders, the Franchising Bylaws may
have the effect of precluding a nomination for the election of directors or
precluding the conducting of business at a particular stockholder meeting if
the proper procedures are not followed, and may discourage or deter a third-
party from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of Franchising, even if
the conduct of such solicitation or such attempt might be beneficial to
Franchising and its stockholders.
Supermajority Vote for Business Combinations. The affirmative vote of
holders of shares representing not less than two-thirds of the voting power of
the Franchising is required for the approval of any proposal to merge or
consolidate with any other entity (other than an entity 90% owned by
Franchising) or sell, lease or exchange all or substantially all of
Franchising's assets. Likewise, the Franchising Certificate and Bylaws provide
that any change or repeal of this provision requires the same vote of shares
representing two-thirds of the voting power of Franchising. Although an
effective impediment to unwanted takeovers, these provisions may also make
desired alliances with other business more difficult and time consuming to
implement.
Issuance of Preferred Stock. The Franchising Board of Directors is
authorized to issue up to 5,000,000 shares of preferred stock without
stockholder approval and to fix by resolution the relative powers, preferences
and rights and the qualifications, limitations or restrictions of any class or
series of preferred stock. Such action by the Franchising Board of Directors
could effectively dilute the voting power of any potential suitor of
Franchising, making a takeover substantially more difficult.
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Elimination of Liability in Certain Circumstances. Pursuant to authority
conferred by Delaware General Corporation Law Section 102, the Franchising
Certificate provides that no director of Franchising shall be liable to
Franchising or its stockholders for monetary damages for breach of fiduciary
duty as a director except for breach of the director's duty of loyalty to
Franchising or the stockholders, for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, for
unlawful payment of dividends, unlawful stock redemptions or repurchases and
for any transaction from which the director derived an improper personal
benefit. This provision is intended to eliminate the risk that a director
might incur personal liability to
67
<PAGE>
Franchising or its stockholders for breach of the duty of care. The
Franchising Certificate also provides that if Delaware law is amended to
further limit the liability of directors, then the liability of a director of
the Company shall be further limited to the fullest extent permitted by
Delaware law as so amended.
Indemnification and Insurance. Delaware General Corporation Law Section 145
contains provisions permitting and, in some situations, requiring Delaware
corporations, such as Franchising, to provide indemnification to their
officers and directors for losses and litigation expense incurred in
connection with their service to the corporation in those capacities. The
Restated Certificate contains provisions requiring indemnification by
Franchising of its directors and officers to the fullest extent permitted by
law. Among other things, the Franchising Certificate provides indemnification
for officers and directors against liabilities for judgments in and
settlements of lawsuits and other proceedings and for the advancement and
payment of fees and expenses reasonably incurred by the director or officer in
defense of any such lawsuit or proceeding.
68
<PAGE>
CERTAIN INFORMATION CONCERNING SUNBURST
PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined statement of income illustrates
the estimated effects on Sunburst of the Distribution and related
transactions. The pro forma balance sheet is based on the May 31, 1997 balance
sheet of the Company and assumes that the Distribution was consummated on that
date. The pro forma income statement is based on the income statement of the
Company for the fiscal year ended May 31, 1997, and assumes that the
Distribution was consummated on June 1, 1996. The pro forma financial data are
provided for informational purposes only and do not purport to be indicative
of the results that actually would have been obtained if the Distribution and
related transactions had been effected on the dates indicated or of those
results that may be obtained in the future.
SUNBURST HOSPITALITY CORPORATION
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MAY 31, 1997
<TABLE>
<CAPTION>
CHOICE HOTELS DISTRIBUTION PRO FORMA
INTERNATIONAL, INC. ADJUSTMENTS(A) SUNBURST
------------------- -------------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents...... $ 10,825 $ (4,167) $ 6,658
Receivables (net of allowance
for doubtful accounts)........ 31,981 (24,472) 7,509
Deferred taxes receivable...... 1,219 -- 1,219
Other current assets........... 10,579 (5,676) 4,903
--------- ---------- ---------
Total current assets......... 54,604 (34,315) 20,289
Property and equipment, at cost,
net of accumulated
depreciation.................... 370,244 (43,377) 326,867
Lodging franchise rights, net of
accumulated amortization........ 50,503 (50,503) --
Goodwill, net of accumulated
amortization.................... 69,939 (69,939) --
Other long term assets......... 29,044 (23,339) 5,705
--------- ---------- ---------
$ 574,334 $ (221,473) $ 352,861
========= ========== =========
LIABILITIES AND EQUITY
Current liabilities
Current portion of mortgages
and long-term debt............ $ 27,955 $ (36) $ 27,919
Accounts payable............... 42,489 (20,412) 22,077
Accrued expenses............... 26,932 (10,965) 15,967
Income tax payable............. 3,318 (3,318) --
--------- ---------- ---------
Total current liabilities.... 100,694 (34,731) 65,963
--------- ---------- ---------
Mortgages and other long-term
debt............................ 228,325 (46,427) 181,898
Notes payable to Manor Care...... 115,723 (78,700) 37,023
Deferred income taxes and other
liabilities..................... 5,105 (4,422) 683
Equity........................... 124,487 (57,193) 67,294
--------- ---------- ---------
$ 574,334 $ (221,473) $ 352,861
========= ========== =========
</TABLE>
69
<PAGE>
SUNBURST HOSPITALITY CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED MAY 31, 1997
<TABLE>
<CAPTION>
CHOICE HOTELS DISTRIBUTION OTHER PRO FORMA
INTERNATIONAL, INC. ADJUSTMENTS(A) ADJUSTMENTS SUNBURST
------------------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES
Franchise............. $244,176 $(254,518) $ 10,342 (B) $ --
Hotel operations...... 185,753 (17,737) -- 168,016
-------- --------- -------- --------
Total revenues...... 429,929 (272,255) 10,342 168,016
-------- --------- -------- --------
OPERATING EXPENSES
Franchise............. 183,769 (183,769) -- --
Hotel operations...... 148,250 (18,124) 10,342 (B) 140,468
-- -- 3,955 (C) 3,955
-------- --------- -------- --------
Total operating
expenses........... 332,019 (201,893) 14,297 144,423
-------- --------- -------- --------
INCOME BEFORE OTHER
EXPENSES AND INCOME
TAXES.................. 97,910 (70,362) (3,955)(C) 23,593
OTHER EXPENSES
Interest expense on
Notes payable to
Manor Care........... 18,568 (7,083) (8,815)(D) 2,670
Other interest and
other expenses, net.. 7,118 (3,704) 8,309 (D) 11,723
-------- --------- -------- --------
Total other
expenses........... 25,686 (10,787) (506) 14,393
-------- --------- -------- --------
Income before income
taxes.................. 72,224 (59,575) (3,449) 9,200
-------- --------- -------- --------
Income taxes............ (30,200) 24,845 1,380 (E) (3,975)
-------- --------- -------- --------
Net income before
extraordinary item..... $ 42,024 $ (34,730) $ (2,069) $ 5,225
======== ========= ======== ========
Pro forma earnings per
share.................. .25(F)
========
</TABLE>
SUNBURST
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS
A. Represents adjustment to reflect the Distribution.
B. Represents the adjustment to record franchise fee revenue, franchise fee
expense, and intercompany product sales on Sunburst-owned hotels previously
eliminated in consolidation.
C. Represents the net additional costs associated with staffing of accounting,
finance, cash management, risk management, human resources and legal
personnel and directors' costs to operate Sunburst on a stand alone basis.
D. Represents incremental interest expense in deferred financing amortization
relating to Sunburst's refinancing of $110 million of notes payable to
Manor Care with $117.5 million of commercial backed mortgage securities in
April 1997.
E. Represents the income tax impact of pro forma adjustments at statutory
rates.
F. Represents pro forma earnings per share based on pro forma Sunburst Net
Income divided by the pro forma weighted average share of the Company of
62,680 adjusted for the proposed one-for-three stock split.
70
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUNBURST PRO FORMA FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Sunburst is a leading national hotel company with a portfolio of 71 hotels
containing 10,330 rooms located in 25 states as of May 31, 1997. Each hotel is
branded with one of the Choice franchise brands.
Sunburst's strategy is to (i) optimize the operating performance and value
of its existing portfolio of hotels through the consistent application of high
quality sales, marketing and operating programs; (ii) capitalize on the under-
served, high growth, mid-priced, extended-stay all-suite segment with the
development of 20 MainStay Suite hotels; (iii) develop other high quality,
consumer focused hotels such as Sleep Inns; and (iv) pursue the opportunistic
acquisition of existing hotels whereby substantial value can be created.
The following discussion should be read in conjunction with the preceding
Pro Forma Condensed Combined Balance Sheet and the Pro Forma Condensed
Combined Statement of Income.
Comparison of Fiscal Year 1997 Pro Forma Operating Results and Pro Forma
Fiscal Year 1996 Operating Results
Sunburst's hotel operations revenue consists principally of guest room
revenue, meeting room revenue and food-and-beverage revenue from owned and
operated hotels. The pro forma revenues for Sunburst are derived from the
Company's audited financial statements as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FISCAL YEAR 1996
---------------- ----------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C>
Company reported hotel operations
revenue................................. $185,753 $154,625
Less: European hotel operations revenue.. (17,737) (19,609)
-------- --------
Total Sunburst pro-forma hotel operations
revenue................................. $168,016 $135,016
======== ========
</TABLE>
Sunburst's revenues were $168.0 million for fiscal year 1997, up 24.4% from
$135.0 million for fiscal year 1996. The increases in revenue were primarily
the result of additional rooms achieved through hotel acquisitions and the
construction of new hotels. Overall average daily room rates increased 6.5%
from fiscal year 1996 to fiscal year 1997, and occupancy increased 3.2% over
the corresponding period. Revenue per available room, or RevPAR, increased to
$40.96 from $37.28, an improvement of 9.9%. Increases in food-and-beverage
sales of $2.2 million in fiscal year 1997 also contributed to revenue growth.
Sunburst's hotel operating expenses are derived from the Company's audited
financial statements as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FISCAL YEAR 1996
---------------- ----------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C>
Company reported hotel operations
expense................................. $127,599 $116,481
Less: European hotel operations expense.. (16,166) (17,521)
Add: Franchise fees paid to Franchising.. 10,342 7,500
Pro-forma "spin-off" costs............. 3,955 3,955
Allocable depreciation and
amortization.......................... 18,693 14,223
-------- --------
Total Sunburst pro-forma hotel operations
expense................................. $144,423 $124,638
======== ========
</TABLE>
Hotel operations expenses increased $19.8 million or 15.9% in fiscal year
1997 resulting primarily from the addition of six hotels during the year and
to a lesser extent a $1.3 million increase in food-and-beverage costs. Pro
forma fiscal year 1996 expense excludes an $8.6 million one time charge for
restructuring costs associated with the Manor Care Spin-off. The increase in
franchise fees paid to Franchising results from the increase in hotel
operations revenue. Franchise fees paid are determined based on total revenues
multiplied by franchise fee rates. These rates vary based on the type of hotel
franchised. Depreciation expense increased 31.4% in fiscal
71
<PAGE>
year 1997 as a result of the addition of new hotels and renovations of
existing hotel properties during fiscal years 1997 and 1996.
Hotel operating margins (before depreciation and amortization) increased to
25.2% in fiscal year 1997 from 18.2% in fiscal year 1996 due primarily to a
9.9% increase in RevPAR.
Other Expenses
Interest expense for the Company increased $2.3 million or 9.6% in fiscal
year 1997 as a result of increased borrowings to support the stock repurchase
program. Pro forma interest expense for Sunburst was $15.3 million in fiscal
year 1997, an increase of $2.9 million from pro forma interest expense of
$12.4 million in fiscal year 1996. The increase in interest expense relates to
additional borrowings under the Company's credit facility for stock
repurchases. Certain amounts related to the incremental borrowings incurred to
finance the stock repurchase program have been allocated to Sunburst. See "--
Liquidity and Capital Resources."
Liquidity and Capital Resources
Sunburst is currently considering options, including entering into a new
credit facility, to secure long-term financing to meet the debt requirements
in fiscal 1998 as well as working capital and business development needs. See
"--Financing." Management expects to have adequate financing secured prior to
the distribution date to finance the Company's near-term financing
requirements and development objectives.
On a pro-forma basis, Sunburst has $246.8 million of long-term debt, $27.9
million of which is payable in fiscal year 1998. Pro-forma earnings before
interest, taxes, depreciation and amortization and non-cash asset writedowns
("EBITDA") was $43.2 million in fiscal year 1997. This represents an increase
of 75.6% from the $24.6 million of pro-forma EBITDA in fiscal year 1996.
EBITDA, while not a term defined by generally accepted accounting principles,
is often used by investors and other users of financial statements, to
determine Sunburst's ability to meet debt service, fund capital expenditures
and expand its business. Cash expenditures (including nondiscretionary
expenditures) for various long-term assets, interest expense and income taxes
have been and will be incurred which are not reflected in EBITDA and therefore
EBITDA does not represent funds available for Sunburst's discretionary use.
On April 23, 1997, the Company, through its indirect subsidiary, First
Choice Properties, completed an offering of $117.5 million multi-class
mortgage pass-through certificates, which are non-recourse and collateralized
by 36 hotel properties with a net book value of $146.7 million owned by the
Company. The certificates bear a 7.8% interest rate, and have a final maturity
of May 5, 2012. The Company used the proceeds to repay $110.0 million of the
$225.7 million 9% long-term note payable to Manor Care. The mortgage pass-
through certificates have been allocated to Sunburst and are reflected on the
accompanying pro-forma balance sheet of Sunburst.
On October 30, 1996, the Company entered into a $100.0 million competitive
advance and multi-currency revolving credit facility provided by a group of
seven banks. This facility provides that up to $75.0 million is available for
borrowings in foreign currencies. On May 5, 1997, the Company increased the
size of this facility from $100.0 million to $125.0 million. Borrowings under
the additional $25.0 million are due on December 31, 1997, and accordingly $25
million is classified as current on the Company's consolidated balance sheet.
The Company has $121.6 million drawn at May 31, 1997 under the facility.
Sunburst has been allocated $90.5 million of this bank debt.
Total pro-forma capital expenditures for Sunburst were $79.7 million in
fiscal year 1997 versus $96.6 million in fiscal year 1996. The number of hotel
properties brought on-line in fiscal year 1997 was six versus 17 in fiscal
year 1996. The Company plans capital expenditures for development of Sleep Inn
and MainStay Suites hotels of $69.0 million and $32.0 million in fiscal years
1998 and 1999, respectively. These amounts include expected capital
expenditures relating to the construction of seven Sleep Inn hotels and 19
MainStay Suites hotels over the next two fiscal years. Planned capital
expenditures for routine maintenance and renovation of existing properties are
$13.5 million and $14.4 million for fiscal years 1998 and 1999, respectively.
Sunburst's management will also pursue additional acquisitions of
significantly under-valued hotel properties.
72
<PAGE>
BUSINESS AND PROPERTIES
Sunburst will operate the Hotel Business as previously operated by the
Company.
Sunburst will be a leading national hotel company with a portfolio of 71
hotels containing 10,330 rooms located in 25 States as of May 31, 1997. Each
hotel is branded with one of the Choice franchise brands and Sunburst will be
Franchising's largest franchisee. Sunburst's hotels operate in one of three
principal segments of the lodging industry: all-suite, full service and
limited service. The majority of Sunburst's hotels have been acquired by the
Company since 1992 at prices below their replacement cost. All of these hotels
have benefited from the investment of capital to improve the renovated hotels.
Since June 1992, the Company has spent $260.4 million to buy and renovate 54
hotel properties. More recently, the Company shifted its development efforts
to the construction of Sleep Inn hotels and MainStay Suite hotels.
Sunburst's strategy is to: (i) optimize the operating performance and value
of its existing portfolio of hotels through the consistent application of high
quality sales, marketing and operating programs; (ii) capitalize on the under-
served, high growth, mid-priced, extended-stay all-suite segment with the
development of 20 MainStay Suite hotels; (iii) develop other high quality,
consumer focused hotels such as Sleep Inns; and (iv) pursue the opportunistic
acquisition of existing hotels whereby substantial value can be created.
The Company's performance is a beneficiary of the operating leverage
inherent in the lodging industry and is further supported by the substantial
discount to replacement cost of its existing portfolio. The 54 hotels acquired
since 1992 have an investment basis of approximately 55.3% of current
estimated replacement cost. In addition to the initial renovation of acquired
hotels, Sunburst has spent approximately 5% of revenue for ongoing
improvements to the hotels, thereby maintaining the physical assets to
optimize competitive advantages in each local market.
Sunburst's strategy to build 20 MainStay Suites hotels is intended to
provide it with hotels positioned to benefit from the demand/supply imbalance
in the mid-priced, extended stay all-suite segment which should produce higher
than average return on investment.
Sunburst's historical existing hotel acquisition program and the current
MainStay Suite hotel development program are illustrative of management's
capabilities to timely ascertain market trends, conceive of strategies and to
implement those strategies.
Historical Acquisition Strategy
The primary focus of Sunburst from 1992 through 1995 was the acquisition of
existing hotels at prices below their replacement cost with the intent to
increase their value through (i) the investment of capital to improve the
hotels and (ii) the installation of professional management and marketing
teams to operate the renovated hotels. Since June 1992, Sunburst has spent
$260.4 million to buy and renovate 54 hotels containing 7,809 rooms. In fiscal
year 1997, Sunburst acquired two hotels and is in the process of renovating
them, one of which (located in Charlotte, NC) Sunburst is in the process of
converting to a Clarion Hotel from a senior assisted living facility.
In addition to the acquired hotels, Sunburst owns and operates 8 hotels
developed or acquired prior to 1992, 7 Sleep Inn hotels and 1 MainStay Suites
hotel developed by Sunburst since 1994.
<TABLE>
<CAPTION>
SUNBURST EXISTING HOTEL ACQUISITIONS
---------------------------------------
FISCAL YEAR
---------------------------------------
1993 1994 1995 1996 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total acquisitions.................... 7 13 16 16 2
Total number of rooms acquired........ 1,276 1,933 2,336 1,940 324
Total cost of acquisitions (in
millions) (including initial
improvements)........................ $ 30.9 $ 55.8 $ 83.3 $ 71.8 $ 17.9
Average cost per room................. $24,216 $28,867 $35,659 $37,010 $55,246
</TABLE>
73
<PAGE>
Net operating income for the seven hotels purchased in fiscal year 1993
increased from $8.0 million in fiscal 1996 to $9.4 million in fiscal 1997, a
17% improvement. For the 13 hotels purchased in fiscal year 1994, net
operating income increased 14.4% to $11.5 million in fiscal year 1997 from
$10.0 million in fiscal year 1996. Net operating income for the 16 hotels
acquired in fiscal year 1995 was $12.8 million in fiscal year 1996, a 91%
increase over the $6.7 million achieved in fiscal year 1996. The following
chart summarizes occupancy improvements for original portfolio hotels, and
fiscal 1993, 1994, 1995, 1996 and 1997 acquisitions. Occupancy rates for the
year acquired reflect only the period during which the properties were owned
by the Company. Because many of the recently acquired and developed hotels
have not yet reached stabilized levels of operating performance, the Company
believes that revenues and gross profit at these hotels will continue to grow.
<TABLE>
<CAPTION>
SUNBURST HOTELS OCCUPANCY
---------------------------------
FISCAL YEAR
---------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Original Domestic Portfolio.................. 62.27% 64.16% 67.19% 68.02% 71.63%
Fiscal 1993 Acquisitions..................... 56.17 63.20 73.68 76.17 75.02
Fiscal 1994 Acquisitions..................... -- 66.09 70.71 73.76 73.68
Fiscal 1995 Acquisitions..................... -- -- 48.96 58.49 66.27
Fiscal 1996 Acquisitions..................... -- -- -- 53.23 61.16
Fiscal 1997 Acquisitions..................... -- -- -- -- 54.65
</TABLE>
The Hotel Properties
Sunburst's hotel properties serve three primary segments of the lodging
industry; all-suites, full service and limited service. Each hotel, except for
one hotel in Miami Beach which is under physical renovation, is branded with
one of the Choice franchise flags.
All-Suites Hotels. Sunburst has 6 hotels in the all-suite segment open and
13 hotels under construction or in the development process. Sunburst's all-
suite hotel properties compete in the moderate and upscale price segments. The
table below identifies Sunburst's all-suite hotels by brand and price segment.
ALL-SUITE HOTELS
<TABLE>
<CAPTION>
NUMBER NUMBER PRICE
BRAND OF HOTELS OF ROOMS SEGMENT
- ----- --------- -------- ---------
<S> <C> <C> <C>
Quality Suites..................................... 3 345 upscale
Comfort Suites..................................... 2 232 mid-price
MainStay Suites.................................... 1 96 mid-price
</TABLE>
As of May 31, 1997, Sunburst had an additional 10 MainStay Suites hotels
under construction with 970 rooms.
Full-Service Hotels. Sunburst has 16 hotels in the full service segment.
Sunburst's full service hotels compete in the mid-price and upscale price
segments. The table below identifies Sunburst's full service hotels by brand
and price segment.
FULL SERVICE HOTELS
<TABLE>
<CAPTION>
NUMBER NUMBER PRICE
BRAND OF HOTELS OF ROOMS SEGMENT
----- --------- -------- ---------------
<S> <C> <C> <C>
Clarion Hotels & Inns........................ 11 2,114 upper mid-price
Quality Hotel & Inns......................... 5 1,327 mid-price
</TABLE>
74
<PAGE>
Limited Service Hotels. Sunburst has 49 hotels in the limited service
segment open and six hotels under construction or in the development process.
Sunburst's limited service hotel properties compete in the mid-price and
economy price segments. The table below identifies Sunburst's limited service
hotels by brand and price segment.
LIMITED SERVICE HOTELS
<TABLE>
<CAPTION>
NUMBER NUMBER PRICE
BRAND OF HOTELS OF ROOMS SEGMENT
----- --------- -------- ---------
<S> <C> <C> <C>
Comfort Inn........................................ 31 4,074 mid-price
Quality Inns....................................... 8 1,014 mid-price
Sleep Inns......................................... 7 757 mid-price
Econo Lodge........................................ 1 120 economy
Rodeway Inns....................................... 1 101 economy
Independent........................................ 1 150 economy
</TABLE>
As of May 31, 1997, Sunburst had an additional 4 Sleep Inns under
construction with 453 rooms.
External Development
Sunburst's focus on external development is geared to (i) capitalize on the
under-served, high-growth, mid-priced extended stay all-suite segment, and
(ii) the development of other high-quality, consumer-focused hotels.
To effect these strategies, Sunburst maintains a Real Estate Development and
Construction Department staff. This staff effects the identification of target
markets, specific site identification, negotiation, due diligence, planning,
zoning and other approval requirements, design and construction of new hotels.
The Real Estate Development staff have served in the past as the focal point
to effect Sunburst's historical acquisition strategy. This dual capacity to
acquire existing hotels or build new hotels allows Sunburst to be responsive
to changing market conditions.
The following is a list of the new hotels developed by Sunburst since 1994
or currently under development:
<TABLE>
<CAPTION>
CALENDAR
MARKET HOTEL YEAR OF OPENING
------ -------- ---------------
<S> <C> <C>
Dallas/Plano, TX....................................... Sleep 1994
San Antonio, TX........................................ Sleep 1995
Baton Rouge, LA........................................ Sleep 1996
Houston/Airport, TX.................................... Sleep 1996
Austin/Round Rock, TX.................................. Sleep 1996
Dallas/Plano, TX....................................... MainStay 1996
Raleigh, NC............................................ Sleep 1997
Dallas/Arlington, TX................................... Sleep 1997
Kansas City/Airport, MO(1)............................. Sleep 1997
Charlotte, NC(1)....................................... Sleep 1997
Rockville, MD(1)....................................... Sleep 1997
Providence/Airport, RI(1).............................. MainStay 1997
Cincinnati/Blue Ash, OH(1)............................. MainStay 1997
Kansas City/Airport, MO(1)............................. MainStay 1997
Indianapolis, IN(1).................................... MainStay 1997
Louisville, KY(1)...................................... MainStay 1997
Denver/Tech Center, CO(1).............................. MainStay 1998
Orlando/Lake Mary, FL(1)............................... MainStay 1998
Jacksonville, FL(1).................................... MainStay 1998
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
CALENDAR
MARKET HOTEL YEAR OF OPENING
------ -------- ---------------
<S> <C> <C>
Greenville, SC(1)...................................... MainStay 1998
Nashville/Brentwood, TN(1)............................. MainStay 1998
Miami/Airport, FL(2)................................... MainStay 1998
Denver/Airport, CO(1).................................. Sleep 1998
Miami/Airport, FL(2)................................... Sleep 1998
Ft. Lauderdale/Cypress Creek, FL(2).................... MainStay 1998
Pittsburgh/Airport, PA(2).............................. MainStay 1998
Fishkill/Poughkeepsie, NY(2)........................... MainStay 1998
</TABLE>
- --------
(1) Hotel under construction
(2) Sunburst has acquired the land and is in final planning stages prior to
start of construction.
Sunburst's focus on the development of MainStay Suites is based on the
sector-wide demand/supply imbalance as evidenced by numerous industry studies.
According to various industry studies, demand for extended stay lodging far
exceeds supply. Demand in the mid-price market is very high, yet supply
additions have been minimal. The extended stay, all-suite segment, defined as
stays of five or more nights, consists of 228 million room nights annually, or
27% of total U.S. industry demand, according to industry sources. Only 1.5% of
total room supply is dedicated extended stay rooms. Sunburst believes that it
can utilize its real estate development expertise to locate attractive markets
for and build MainStay extended stay hotels. Sunburst also believes that it
can successfully operate these hotels based on its experience operating other
limited services hotels.
MainStay Suites has been created by the Company with a unique product design
and service package which enhances property level appeal, productivity and
profitability. Two of these unique features of the MainStay product are the
use of an automatic check-in kiosk (which allows guests to check in without
assistance) and optional daily light touch housekeeping with full housekeeping
every five days. These features allow a MainStay Suites hotel to operate with
fewer full time equivalent employees than a similar size limited service hotel
that has 24-hour front desk coverage and provides full housekeeping daily.
Sunburst believes that MainStay Suites projects will produce a stabilized
unleveraged pre-tax property level return on investment of 15% or higher. This
return is supported by the experiences at the first MainStay Suites opened by
Sunburst in Plano, Texas and by projections for the MainStay Suites under
development which are based on rate and occupancy generated internally by
Sunburst and by external feasibility consultants, internal operating
guidelines, land cost and projected construction cost. However, there can be
no assurance that the projected return will be achieved or that actual results
will not differ materially. See "--Risk Factors--Forward Looking Information
is Subject to Risk and Uncertainty."
Sunburst's initial development of 20 MainStay Suites combined with
Franchising's efforts to franchise MainStay Suites is intended to result in a
brand with national recognition.
Sunburst's MainStay Suites hotel properties will average approximately 100
suites and be developed on 2.5 to 3.0 acres of land in suburban office parks
or locations proximate to major employers, restaurants and retail amenities.
MainStay Suites feature high quality, interior corridor building construction
with amenities and features demanded by consumers. All suites feature a
bedroom area, living room area with a pull-out couch or recliner, private
bathroom and fully furnished kitchen. The kitchen area includes a full-size
refrigerator, dishwasher, microwave, stove, coffee maker, toaster and all
cooking and serving utensils. Each suite features an over-sized counter
serving as an eating or working center, along with two ergonomic chairs. Suite
alternatives include a studio suite or one-bedroom suite. Each suite includes
two direct dial phone lines, voice mail and other automated phone services.
Sunburst and Franchising have developed a state-of-the-art automated check-
in/out property management system which enables guests with reservations to
obtain their key from the kiosk unassisted. This feature allows transaction
time to be shortened and provides operating efficiencies while enhancing guest
satisfaction.
76
<PAGE>
Based on experience from the first MainStay Suites opened by Sunburst in
Plano, Texas, guest satisfaction is very high. Financial results to-date have
met or exceeded Sunburst's expectations.
Operations
Each of Sunburst's owned and managed hotels operates under one of the Choice
brand names. The following table illustrates the growth of Sunburst over the
four fiscal years ended May 31, 1997.
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of properties, end of period.... 19 32 48 65 71
Number of rooms, end of period......... 3,686 5,605 7,941 9,713 10,330
Average occupancy percentage........... 61.36% 64.18% 67.10% 66.61% 68.70%
Average daily room rate (ADR).......... $49.53 $49.15 $51.28 $55.97 $59.62
RevPAR................................. $30.39 $31.54 $34.40 $37.28 $40.96
</TABLE>
Operating Systems and Procedures. Sunburst's hotels take advantage of the
same systems and services available to franchisees with respect to a
particular brand. The hotels participate in the central reservation system,
marketing and advertising efforts and volume purchasing discounts and are
subject to the same quality assurance program. In addition, Sunburst has
instituted the following systems in each of the hotels it operates.
. Yield Management. An automated yield management program has been
installed at hotels which allows the local management to take advantage
of the supply and demand conditions in their marketplace. The system is
automated to the point that it performs calculations and suggests
pricing strategies to the local hotel management. The program continues
to update information based on the availability of room supply and
reservation volume within each hotel.
. Training. Sunburst has developed a training system for all guest
services representatives that teaches the basic sales techniques. A
computerized guest comment system was developed to solicit the comments
of guests and the experiences they had at the hotel while providing
management with immediate guest feedback.
. Accounting Systems. Each of the Sunburst-operated hotels has a
computerized front desk and accounting system. This system allows key
financial indicators (such as daily occupancy and revenue) to be
immediately gathered from each hotel and electronically transmitted to
the key operating officers and managers of Sunburst. This instant access
to information allows management to quickly spot trends and make
corrections and changes where necessary. The system is completely
computerized and allows for cost savings in the accounting and
bookkeeping departments of each hotel. In addition, control over
operational and capital expenditures is provided by a dedicated group of
financial controllers in the corporate office. This group works with the
hotel operations group to maintain expense standards as well as
established operating procedures.
. Time and Attendance System. Each hotel maintains an automated time and
attendance system that is tied into a central payroll system at the
corporate headquarters. This computerized method of tracking time allows
management to make quick decisions on controlling labor costs and
provides immediate information on projected costs.
. Food and Beverage. The food and beverage efforts are headed by a vice
president of food and beverage. The department is responsible for the
daily food and beverage activities of the various hotels, as well as the
development of new food concepts. This group was responsible for the
development, testing and implementation of the Choice Picks food court
concept. Recently, Sunburst opened a new food and beverage concept
called "Classic Sports Food, Drink and Memories" in its Richardson,
Texas hotel. A sports theme restaurant, this concept has been developed
jointly with the Classic Sports Network, a national cable television
service. This agreement allows for the use of certain trademarks at
Sunburst's locations. Additional "Classic Sports Food, Drink and
Memories" are planned for three other Sunburst hotels.
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<PAGE>
. Annual Business Planning Process. Each hotel prepares a zero-based
annual business plan which incorporates historical performance and
market conditions. The plan, which is reviewed and approved by senior
management, provides detailed strategies in the key operating areas of
marketing, guest services and food and beverage. The plan also includes
a comprehensive capital expenditures process which serves to maintain
the physical plant in optimal condition based on market conditions and
operating strategies. The annual plan serves as a fundamental
measurement of management's performance.
Properties
The following chart lists by market segment Sunburst's hotels at May 31,
1997:
<TABLE>
<CAPTION>
YEAR
CONSTRUCTED/
NO. OF LAST MAJOR
HOTEL MARKET ROOMS RENOVATION
----- ------ ------ ------------
<S> <C> <C> <C>
ALL SUITE
Upscale
Quality Suites
Deerfield.............. Fort Lauderdale, Florida 107 1991/1995
Quality Suites.......... Raleigh, North Carolina 114 1988/1994
Quality Suites Shady
Grove.................. Rockville, Maryland 124 1978/1996
Mid-Price
Comfort Suites
Haverhill.............. Boston, Massachusetts 131 1989/1997
Comfort Suites
Deerfield.............. Fort Lauderdale, Florida 101 1991/1995
MainStay Suites
Plano(6)............... Dallas, Texas 96 1996
MainStay Suites
Warwick(1)............. Providence, Rhode Island 94 1997
MainStay Suites Blue
Ash(1)................. Cincinnati, Ohio 100 1997
MainStay Suites
Airport(1)............. Kansas City, Missouri 88 1998
MainStay Suites
Northwest(1)........... Indianapolis, Indiana 88 1997
MainStay Suites(1)...... Louisville, Kentucky 100 1998
MainStay Suites Tech
Center(1).............. Denver, Colorado 100 1998
MainStay Suites Lake
Mary(1)................ Orlando, Florida 100 1998
MainStay Suites South
Pointe(1).............. Jacksonville, Florida 100 1998
MainStay Suites(1)...... Greenville, South Carolina 100 1998
MainStay Suites
Brentwood(1)........... Nashville, Tennessee 100 1998
FULL SERVICE
Upscale
Clarion Hotel
Baltimore.............. Baltimore, Maryland 103 1927/1996
Clarion Hotel
Worthington............ Columbus, Ohio 232 1975/1996
Clarion Hotel
Richardson............. Dallas, Texas 296 1982/1995
Clarion on the Lake..... Hot Springs, Arkansas 151 1965/1997
Clarion Hotel Miami
Airport................ Miami, Florida 103 1970/1996
Clarion Hotel Hollywood
Beach.................. Miami-Ft. Lauderdale, Florida 309 1972/1996
Clarion Hotel........... Mobile, Alabama 250 1979/1994
Clarion Hotel Virginia
Beach.................. Norfolk-Virginia Beach, Virginia 149 1985/1995
Clarion Hotel Roanoke... Roanoke, Virginia 148 1981/1997
Clarion Hotel
Springfield............ Springfield, Missouri 199 1974/1997
Clarion Hotel(2)........ Charlotte, North Carolina 174 1974/1997
Mid-Price
Quality Inn South
Point.................. Jacksonville, Florida 184 1988/1994
Quality Hotel Airport... Los Angeles, California 278 1971/1994
Quality Hotel Maingate
Anaheim(4)............. Los Angeles, California 284 1970/1995
Quality Inn & Suites
Hampton................ Norfolk-Virginia Beach, Virginia 190 1972/1995
Quality Hotel
Arlington.............. Washington, DC 391 1962/1997
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
YEAR
CONSTRUCTED/
NO. OF LAST MAJOR
HOTEL MARKET ROOMS RENOVATION
----- ------ ------ ------------
<S> <C> <C> <C>
LIMITED SERVICE
Mid-Price
Comfort Inn Albuquerque...... Albuquerque, New Mexico 114 1985/1996
Quality Inn Anderson......... Anderson, South Carolina 121 1988/1995
Comfort Inn Norcross......... Atlanta, Georgia 110 1987/1996
Comfort Inn N.W.
Pikesville(5)............... Baltimore, Maryland 186 1964/1994
Comfort Inn University....... Baton Rouge, Louisiana 150 1972/1994
Comfort Inn Danvers(6)....... Boston, Massachusetts 136 1972/1997
Comfort Inn Brooklyn......... Brooklyn, New York 67 1926/1997
Comfort Inn Canton........... Canton, Ohio 124 1989/1994
Comfort Inn Airport.......... Charleston, South Carolina 122 1986/1994
Comfort Inn Charlotte(6)..... Charlotte, North Carolina 150 1985/1996
Quality Inn & Suites--Crown
Point....................... Charlotte, North Carolina 100 1988/1996
Comfort Inn.................. Cincinnati, Ohio 117 1984/1996
Comfort Inn Middleburg
Heights..................... Cleveland, Ohio 136 1989
Comfort Inn College Station.. College Station, Texas 114 1984/1995
Comfort Inn Columbia......... Columbia, South Carolina 98 1987/1996
Comfort Inn DFW Airport...... Dallas-Fort Worth, Texas 152 1986/1995
Quality Inn Plymouth......... Detroit, Michigan 123 1989/1996
Comfort Inn Deerfield Beach.. Fort Lauderdale, Florida 69 1975/1997
Comfort Inn Hershey.......... Hershey, Pennsylvania 125 1990/1997
Comfort Inn Hilton Head...... Hilton Head, South Carolina 150 1988/1996
Quality Inn & Suites
Indianapolis................ Indianapolis, Indiana 116 1982/1996
Quality Inn Lincoln.......... Lincoln, Nebraska 108 1969/1996
Quality Inn & Suites
Lumberton................... Lumberton, North Carolina 120 1974/1996
Comfort Inn Collierville..... Memphis, Tennessee 94 1984/1996
Comfort Inn & Suites, Miami
Springs..................... Miami, Florida 165 1970/1996
Comfort Inn Miami Springs.... Miami, Florida 110 1986/1996
Miami Beach Hotel(3)(6)...... Miami, Florida 150 1952/1997
Comfort Inn--Lee Road........ Orlando, Florida 145 1985/1994
Comfort Inn--Turf Paradise... Phoenix, Arizona 155 1981/1995
Comfort Inn--North........... Phoenix, Arizona 153 1986/1997
Comfort Inn Portland......... Portland, Maine 126 1984/1996
Quality Inn Richmond......... Richmond, Virginia 194 1985/1997
Quality Inn Midvalley........ Salt Lake City, Utah 132 1972/1995
Comfort Inn by the Bay....... San Francisco, California 135 1971/1996
Comfort Inn Westport......... St. Louis, Missouri 170 1971/1995
Comfort Inn Sturgis.......... Sturgis, Michigan 83 1965/1997
Comfort Inn Traverse City.... Traverse City, Michigan 96 1989/1996
Comfort Inn Tyson's.......... Washington, D.C 250 1982/1995
Comfort Inn West Palm Beach.. West Palm Beach, Florida 158 1974/1995
Comfort Inn Wichita.......... Wichita, Kansas 114 1985/1997
Sleep Inn Round Rock(6)...... Austin, Texas 107 1996
Sleep Inn Six Flags(6)....... Dallas-Fort Worth, Texas 124 1997
Sleep Inn Baton Rouge........ Baton Rouge, Louisiana 101 1996
Sleep Inn Plano.............. Dallas, Texas 104 1994
Sleep Inn Intercontinental... Houston, Texas 107 1996
Econo Lodge Tolleson......... Phoenix, Arizona 120 1988/1997
Rodeway Inn Tempe............ Phoenix, Arizona 101 1989
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
YEAR
CONSTRUCTED/
NO. OF LAST MAJOR
HOTEL MARKET ROOMS RENOVATION
----- ------ ------ ------------
<S> <C> <C> <C>
Sleep Inn Raleigh(6)............ Raleigh, North Carolina 107 1996
Sleep Inn San Antonio........... San Antonio, Texas 107 1995
Sleep Inn University(1)......... Charlotte, North Carolina 120 1997
Sleep Inn Airport(1)............ Denver, Colorado 119 1997
Sleep Inn Airport(1)............ Kansas City, Missouri 107 1998
Sleep Inn Rockville(1).......... Washington, D.C. 107 1997
</TABLE>
- --------
(1) Hotel under construction
(2) Hotel closed for renovation
(3) Hotel under renovation
(4) Leased property
(5) Hotel on leased land
(6) Partial year results only
The following chart shows operating statistics for all of Sunburst's owned
and managed hotels presented by market segment for the five fiscal years ended
May 30, 1997.
<TABLE>
<CAPTION>
FY 1993 FY 1994 FY 1995
----------------------- ----------------------- -----------------------
ADR OCCUPANCY REVPAR ADR OCCUPANCY REVPAR ADR OCCUPANCY REVPAR
------ --------- ------ ------ --------- ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
All Suite Hotels........ $ -- --% $ -- $60.62 71.58% $43.39 $58.74 61.34% $36.03
Full Service Hotels..... 54.06 61.42 33.20 54.37 60.74 33.02 54.04 65.43 35.36
Limited Service Hotels.. 44.59 61.30 27.34 45.09 66.71 30.08 48.39 69.15 33.46
All Hotels.............. 49.53 61.36 30.39 49.15 64.16 31.54 51.28 67.10 34.40
</TABLE>
<TABLE>
<CAPTION>
FY 1996 FY 1997
----------------------- -----------------------
ADR OCCUPANCY REVPAR ADR OCCUPANCY REVPAR
------ --------- ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
All Suite Hotels............... $64.70 69.00% $44.65 $69.48 72.73% $50.53
Full Service Hotels............ 58.85 65.41 38.49 63.25 67.05 42.41
Limited Service Hotels......... 53.36 67.11 35.81 56.38 69.25 39.04
All Hotels..................... 55.97 66.61 37.28 59.60 68.70 40.94
</TABLE>
EMPLOYEES
Assuming the Distribution had occurred on June 30, 1997, Sunburst employed
approximately 3,380 people full-time. Less than 5% of Sunburst's employees are
represented by unions. All of Sunburst's employees covered by collective
bargaining agreements are employed at Comfort Inn By the Bay, San Francisco,
California which has four collective bargaining agreements covering laundry
workers, front desk workers, housekeeping and food service and maintenance
workers. Such agreements expire between August 1997 and December 1997.
Sunburst considers its relations with its employee to be satisfactory.
MANAGEMENT
Board of Directors
Immediately prior to the Distribution, five of the nine current members of
the Company's Board of Directors will resign and Donald J. Landry, the Chief
Executive Officer of Sunburst, and Carole Y. Prest are expected to be
appointed to fill two vacancies on the Sunburst Board of Directors.
80
<PAGE>
At the time of the Distribution, the Sunburst Board of Directors will
consist of up to seven directors. The name, age and proposed class of six of
the persons who are expected to be directors of Sunburst as of the
Distribution Date are set forth below. The Company's Board of Directors will
select a candidate to fill the remaining vacancy on the Sunburst Board of
Directors. The remaining vacancy will be filled by a person who is not a
Sunburst employee or a director or employee of Franchising.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ---------
<S> <C> <C>
Stewart Bainum, Jr.......................................... 50 Class II
Stewart Bainum.............................................. 78 Class I
Donald J. Landry............................................ 48 Class III
Frederic V. Malek........................................... 60 Class III
Paul A. Gould............................................... 50 Class II
Carole Y. Prest............................................. 46 Class I
</TABLE>
Donald J. Landry. President of Choice since January 1995; President of Manor
Care Hotel Division ("MCHD") since March 1992; various executive positions
with Richfield Hotel Management, Inc. and its predecessors for more than 20
years, including President of MHM Corporation; Director, Friendly Hotels PLC,
since 1996.
Carole Y. Prest. Vice President, Corporate Strategic Planning of Manor Care
since September 1995; Vice President and General Manager and various other
positions at Gen Rad, Inc. from May 1985 to 1994.
For biographical information with respect to the other persons listed above,
see "Proposal Five: Election of Directors."
The Board of Directors and Committees of the Board
It is expected that the Sunburst Board of Directors will hold five meetings
during the fiscal year and will retain the standing committees of the
Company's Board of Directors which will include the Audit Committee, the
Finance Committee, the Compensation/Key Executive Stock Option Plan Committee
and the Nominating Committee.
The Compensation/Key Executive Stock Option Plan Committee administers
Sunburst's stock option plans and grants stock options thereunder, reviews
compensation of officers and key management employees, recommends development
programs for employees such as training, bonus and incentive plans, pensions
and retirement, and reviews other employee fringe benefit programs.
The Finance Committee reviews the financial affairs of Sunburst and
recommends financial objectives, goals and programs to the Board of Directors
and to management.
The Audit Committee reviews the scope and results of the annual audit, will
review and approve the services and related fees of Sunburst's independent
public accountants, review Sunburst's internal accounting controls and review
Sunburst's Internal Audit Department and its activities.
The Nominating Committee recommends to the Board of Directors the members to
serve on the Board of Directors during the ensuing year. The Committee does
not consider nominees recommended by stockholders.
Compensation of Directors
The Company has previously adopted the Choice Hotels International, Inc.
Non-Employee Director Stock Option and Deferred Compensation Stock Purchase
Plan. Part A of the Plan provides that eligible non-employee directors will be
granted options to purchase 5,000 shares of Sunburst Common Stock on their
first date of election and will be granted options to purchase 1,000 shares on
their date of election in subsequent calendar
81
<PAGE>
years. Part B of the Plan provides that eligible non-employee directors may
elect, prior to May 31 of each year, to defer a minimum of 25% of committee
fees earned during the ensuing fiscal year. The fees which are so deferred
will be used to purchase Sunburst Common Stock on the open market within 15
days after December 1, February 28 and May 31 of such fiscal year. Pending
such purchases, the funds will be credited to an Interest Deferred Account,
which will be interest bearing. Stock which is so purchased will be deposited
in a Stock Deferred Account pending distribution in accordance with the Plan.
Directors who will be employees of Sunburst will receive no separate
remuneration for their services as directors. Pursuant to the Non-Employee
Director Stock Compensation Plan to be adopted by Sunburst prior to the
Distribution, eligible non-employee directors will receive annually, in lieu
of cash, restricted stock of Sunburst, the fair market value of which at the
time of grant will be equal to $30,000, which will represent the Board of
Directors retainer and meeting fees. In addition, all non-employee directors
will receive $1,610 per diem for Committee meetings attended, except where the
Committee meeting is on the same day as a Board of Directors meeting, and will
be reimbursed for travel expenses and other out-of-pocket costs incurred in
attending meetings.
Executive Officers
The name, age, proposed title upon consummation of the Distribution and
business background of each of the persons who are expected on the
Distribution Date to be the executive officers of Sunburst are set forth
below. The Company is currently seeking candidates for the positions of Senior
Vice President, Chief Financial Officer and Treasurer and Vice President-
Finance and Controller. The business address of each prospective executive
officer is 10750 Columbia Pike, Silver Spring, Maryland 20901, unless
otherwise indicated.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr.... 51 Chairman of the Board of Directors
Donald J. Landry...... 48 Vice Chairman and Chief Executive Officer
Antonio DiRico........ 44 President and Chief Operating Officer
Kevin P. Hanley....... 39 Senior Vice President, Real Estate and Development
Edward A. Kubis....... 38 Senior Vice President, General Counsel and Secretary
</TABLE>
Kevin P. Hanley. Vice President, Real Estate and Development of the Company
since December 1994; Vice President, Real Estate and Development of MCHD from
December 1994 to November 1996; Executive Vice President of Hospitality
Investment Trust from September 1994 to November 1994; Senior Vice President,
Development and Acquisitions of Motel 6, L.P. from May 1992 to September 1994;
various other positions with Motel 6, L.P. since January 1987.
Edward A. Kubis. Senior Vice President and General Counsel of Choice
Management and Realty Services, a division of the Company, since June 1997;
Senior Vice President, General Counsel and Secretary of Choice from November
1996 to June 1997; Assistant General Counsel and Assistant Secretary, Manor
Care from December 1993 to November 1996; Senior Attorney, Real Estate, from
December 1990 to December 1993; Staff Attorney, Real Estate from June 1987 to
December 1990.
For biographical information with respect to the other persons listed above,
see "Proposal Five: Election of Directors."
82
<PAGE>
PROPOSAL TWO: AMENDMENTS TO THE RESTATED CERTIFICATE
OF INCORPORATION OF THE COMPANY
In connection with the Distribution, Company stockholders are being asked,
as part of the Distribution Proposals, and pursuant to the DGCL, to consider
and vote upon amendments to the Restated Certificate of Incorporation of the
Company to (i) change the name of the Company to Sunburst Hospitality
Corporation, (ii) decrease the number of authorized shares of Company Common
Stock from 160,000,000 to 60,000,000 and (iii) effect a one-for-three reverse
stock split of Company Common Stock whereby every three shares of Company
Common Stock would be aggregated into one share of Sunburst Common Stock.
Under the DGCL, the amendments to the Company's Restated Certificate of
Incorporation described herein require the approval of a majority of the
outstanding Company Common Stock.
Proposal Two is one of the Distribution Proposals and, therefore, the
effectiveness of Proposal Two is conditioned upon the approval of all of the
Distribution Proposals. Accordingly, failure of Company stockholders to
approve Proposal Two will result in the ineffectiveness of all the
Distribution Proposals.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
ALL OF THE DISTRIBUTION PROPOSALS.
NAME CHANGE
The purpose and principal effect of the proposed amendment to the Restated
Certificate of Incorporation of the Company to change the name of the Company
to Sunburst Hospitality Corporation is to permit Franchising to adopt the name
Choice Hotels International, Inc. after the Distribution, to minimize
confusion to the public and to investors and to reflect that the principal
business of the Company after the Distribution will emphasize the ownership of
hotels and other lodging-related properties. This amendment should not have
any adverse effect on the Company shareholders.
REVERSE STOCK SPLIT AND REDUCTION IN NUMBER OF AUTHORIZED SHARES
Purposes of the Reverse Stock Split. In order to enable Sunburst to maintain
an acceptable trading range for Sunburst Common Stock after the Distribution
while also retaining sufficient liquidity for Sunburst Common Stock, the
Company has proposed that, following the Distribution, the Company's Restated
Certificate of Incorporation be amended to effect a one-for-three reverse
stock split pursuant to which each three shares of Company Common Stock will
be exchanged for one share of Sunburst Common Stock (i.e. common stock of the
Company following the Distribution). As of the Annual Meeting Record Date, the
Company had outstanding 60,200,784 shares of Company Common Stock (not
including shares issuable upon exercise of options to purchase Company Common
Stock) and had reserved for issuance under the 1996 Incentive Plan 6,732,307
shares of Company Common Stock. After giving effect to the Reverse Stock
Split, such numbers would be 20,054,432 and 2,244,102 respectively.
Purposes of the Reverse Stock Split. The Board of Directors, after
considering the effects of the Distribution on the price per share of the
Company Common Stock, believes that the Reverse Stock Split is advisable and
in the best interests of the Company and its stockholders as a means of
enhancing the liquidity and marketability of Company Common Stock. The
reduction in the number of issued and outstanding shares of the Company Common
Stock as a result of the Reverse Stock Split is expected to increase the
market price of the Company Common Stock, thereby reducing any negative
attributes traditionally associated with a low per share market price.
A low per share market price often adversely effects the marketability of a
stock. Certain institutional investors have internal policies preventing the
purchase of low-priced stocks and many brokerage houses do not permit low-
priced stock to be used as collateral for margin accounts or to be purchased
on margin. Further, certain brokerage houses have adopted time-consuming
practices and procedures which act to discourage
83
<PAGE>
individual brokers from dealing in low-priced stocks because such practices
and procedures make the handling of low-priced stocks economically
unattractive. A low stock price also has the effect of increasing the amount
and percentage of transaction costs paid by individual investors. Because
brokers' commission on low-priced stocks generally represent a higher
percentage of the stock price than commissions on higher priced stocks, a low
stock price can result in individual stockholders paying transaction costs
(commissions, markups or markdowns) which are a higher percentage of their
total share value than would be the case with stock with a higher share price.
The Board of Directors believes that the expected increase in the share price
of the Company Common Stock resulting from the Reverse Stock Split should
reduce the effect of these negative attributes traditionally associated with a
low per share price, thereby enhancing the acceptability of the Company Common
Stock with the financial community and investing public and resulting in a
broader market for the Company Common Stock than currently exists.
There can be no assurance that the Reverse Stock Split will increase the
current market price per share, or that any increase in market price of the
Company Common Stock after the Reverse Stock Split will be maintained. The
Reverse Stock Split could result in an increase in the market price for
Company Common Stock which is proportionately less than the decease in the
number of shares outstanding. Additionally, there can be no assurances that
any of the effects described above will be achieved.
Certain Effects of the Reverse Stock Split. A holder of Company Common Stock
will be entitled to receive a whole number of shares plus a fraction of a
share if the number of shares of Company Common Stock held by him prior to the
Reverse Stock Split is not evenly divisable by three. However, no certificate
or scrip representing fractional shares of Company Common Stock will be
issued. In lieu of fractional shares, the Transfer Agent of the Common Stock
on behalf of all persons otherwise entitled to receive fractional shares
(including individual beneficial owners of shares held by a nominee holder)
will, promptly following the effective time of the Reverse Stock Split,
aggregate such fractional shares and sell the resulting whole shares of
Company Common Stock for the accounts of those persons in open market
transactions on the NYSE. Those persons will thereafter be entitled to receive
their allocable portion of the net proceeds of the sale thereof upon surrender
of their Company Common Stock certificates as described below.
If approved, the Reverse Stock Split may result in some stockholders owning
"odd-lots" of less than 100 shares of Company Common Stock. Brokerage
commissions and other costs of transactions in odd-lots are generally higher
than the costs of transactions in "round-lots" of even multiples of 100
shares.
Stockholders have no right under Delaware law or the Company's Amended and
Restated Certificate of Incorporation or By-Laws to dissent from the Reverse
Stock Split.
The Company Common Stock is currently registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and as a result, the
Company is subject to the periodic reporting and other requirements of the
Exchange Act. The proposed Reverse Stock Split will not affect the
registration of the Company Common Stock under the Exchange Act.
Exchange of Stock Certificates. If the Reverse Stock Split is approved as
part of the Distribution Proposals, the Company will, after consummation of
the Distribution, file an amendment to the Company's Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware. The
Company will notify holders of Company Common Stock of the effectiveness of
the Reverse Stock Split and will furnish the holders of record of shares of
Company Common Stock at the close of business on such effective date with a
letter of transmittal for use in exchanging certificates. The holders of
Company Common Stock will be required to promptly mail their certificates
representing shares of Company Common Stock to the transfer agent, in order
that new certificates giving effect to the Reverse Stock Split may be issued
and the proceeds of any fractional shares may be distributed. Commencing with
the effective date of the Reverse Stock Split, previously outstanding
certificates representing shares of Company Common Stock will be deemed for
all purposes to represent one-third of the number of shares previously
represented thereby.
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<PAGE>
Decreased Number of Authorized Shares. The Company has authorized
160,000,000 shares of Company Common Stock, of which approximately 60,200,784
are issued and outstanding as of the Annual Meeting Record Date. In connection
with the Reverse Stock Split, the outstanding shares of Company Common Stock
will be reduced to approximately 20,066,928. To reflect this reduction in the
number of shares outstanding, it is proposed to amend the Company's Restated
Certificate of Incorporation to decrease the total number of shares of Company
Common Stock authorized by the Company from 160,000,000 to 60,000,000.
PROPOSAL THREE: RATIFICATION OF THE FRANCHISING BOARD OF DIRECTORS
In connection with the Distribution, Company stockholders are being asked as
part of the Distribution Proposals to consider and vote upon the ratification
of the election by the Company, as sole stockholder of Franchising, of Stewart
Bainum, Jr., Stewart Bainum, Barbara Bainum, William R. Floyd, Robert C.
Hazard, Jr., Frederic V. Malek, Gerald W. Petitt, James H. Rempe and Jerry E.
Robertson, Ph.D (collectively the "Franchising Directors") as directors of
Franchising who will be divided into three classes, the initial terms of which
will expire in 1998, 1999 and 2000.
Certain information with respect to the Franchising Board of Directors and
the Franchisors Directors is set forth in "Proposal One: Ratification of the
Distribution--Certain Information Concerning Franchising--Management; and --
Certain Relationships and Related Transactions."
Each Franchising Director will be elected to the Franchising Board of
Directors by the Company prior to the Distribution and will hold office as a
director for the term indicated for such person in "Proposal One: Ratification
of the Distribution--Certain Information Concerning Franchising--Management."
Proposal Three is one of the Distribution Proposals and, therefore, the
effectiveness of Proposal Three is conditioned upon the approval of all of the
Distribution Proposals. Accordingly, failure of Company stockholders to
approve Proposal Three will result in the ineffectiveness of all of the
Distribution Proposals.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
ALL OF THE DISTRIBUTION PROPOSALS.
PROPOSAL FOUR: RATIFICATION OF CERTAIN FRANCHISING BENEFIT PLANS
In connection with the Distribution, Company stockholders are being asked,
as part of the Distribution Proposals, to ratify the adoption by Franchising
of the Choice Hotels Franchising, Inc. 1997 Long-Term Incentive Plan (the
"Franchising Incentive Plan") and the Choice Hotels Franchising, Inc. Employee
Stock Purchase Plan (the "Franchising Stock Purchase Plan").
Proposal Four is one of the Distribution Proposals and, therefore, the
effectiveness of Proposal Four is conditioned upon the approval of all of the
Distribution Proposals. Accordingly, failure of Company stockholders to
approve Proposal Four will result in the ineffectiveness of all of the
Distribution Proposals.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
ALL OF THE DISTRIBUTION PROPOSALS.
FRANCHISING INCENTIVE PLAN
General. The continuing growth and development and financial success of
Franchising and its subsidiaries are dependent upon ensuring the best possible
management. The Franchising Board of Directors believes the Franchising
Incentive Plan will be an important aid to Franchising in attracting and
retaining individuals of
85
<PAGE>
outstanding abilities and in rewarding them for the continued profitable
performance of Franchising and its subsidiaries.
The types of awards that may be granted under the Franchising Incentive Plan
are restricted shares, incentive stock options, nonqualified stock options,
stock appreciation rights and performance shares. The Franchising Incentive
Plan provides that over the next ten years restricted shares, incentive stock
options, nonqualified stock options, stock appreciation rights, and/or
performance shares involving up to six million shares (subject to adjustment
for stock splits and similar capital changes) of Franchising Common Stock may
be granted. Franchising Common Stock issued under the Franchising Incentive
Plan may be authorized and unissued stock, treasury stock or stock purchased
on the open market (including in private transactions). To the extent that an
award lapses or the rights of a participant to whom it was granted terminate,
any shares of Franchising Common Stock subject to the award will again be
available for awards under the Franchising Incentive Plan. The following
description of the Franchising Incentive Plan is qualified in its entirety by
reference to the Choice Hotels Franchising, Inc. Long-Term Incentive Plan, a
copy of which is attached as Exhibit D-1 to this Proxy Statement. The amount
of compensation that will accrue to the participants pursuant to the
Franchising Incentive Plan, if ratified by the stockholders at the Annual
Meeting, is not currently determinable.
Administration. The Franchising Incentive Plan provides that it will be
administered by one or more Key Executive Stock Option Plan Committee(s) of
the Board of Directors (the "Committee"), which establishes the conditions of
each grant made under the Franchising Incentive Plan and determines which key
employees will receive awards as well as the type and amount of each award.
Eligibility. Key employees of Franchising and its subsidiaries (including
employees who are members of the Franchising Board of Directors, but excluding
directors who are not employees) who, in the opinion of the Committee, are
mainly responsible for the continued growth and development and financial
success of the business of Franchising or one of its subsidiaries are eligible
to be granted awards under the Franchising Incentive Plan. Subject to the
provisions of the Franchising Incentive Plan, the Committee shall from time to
time select from such eligible persons those to whom awards shall be granted
and determine the number of shares to be granted. Because eligibility is
determined by these subjective criteria, it is not possible at this time to
determine either the number of employees eligible to participate in the
Franchising Incentive Plan or the amount of awards which will be made.
In connection with the Distribution, options to purchase Company Common
Stock held by Company employees will be converted into options to purchase
Franchising Common Stock and Sunburst Common Stock. Such converted options to
purchase Franchising Common Stock will be deemed to be governed by the
Franchising Incentive Plan but are not deemed to be issued under the
Franchising Incentive Plan. All of such awards will vest at the rate of twenty
percent per year for the first five years, and expire ten years after the date
of the award.
Restricted Shares. Restricted share awards are shares of Franchising Common
Stock bearing restrictive legends prohibiting their sale, transfer, pledge or
hypothecation until the expiration of a restriction period of not more than
ten years set at the time of grant. In addition or in lieu of a restriction
period, the Committee may establish a performance goal which must be achieved
as a condition to retention of the award. The recipient of an award is
entitled to receive dividends and vote the restricted shares, unless
forfeited.
Stock Options. Options granted under the Franchising Incentive Plan may be
either Incentive Stock Options, as defined in the Internal Revenue Code, as
amended, or options which do not so qualify ("nonqualified options"). At the
time an option is granted, the Committee determines the number of shares of
Franchising Common Stock subject to each stock option, the manner and time of
exercise, and the vesting schedule. No options granted under the Franchising
Incentive Plan may be exercised more than 10 years after date of grant;
however, Incentive Stock Options granted to a Ten Percent Shareholder (as
defined) may not be exercised more than 5 years after the date of grant. The
option price per share for stock options will be set in the grant, but will be
equal to or greater than the fair market value of a share of Franchising
Common Stock on the date of grant,
86
<PAGE>
except with respect to an Incentive Stock Option granted to a Ten Percent
Shareholder (as defined) shall be at least 110% of the fair market value on
the date of grant. The option exercise price may be paid with cash and/or
shares of Franchising Common Stock. Options will be evidenced by stock option
agreements in a form approved by the Committee and are not transferable except
by will or the laws of descent and distribution. Under the Franchising
Incentive Plan, no Covered Employee (as defined in Section 162(m)(3) of the
Internal Revenue Code) may be granted stock options for more than 100,000
shares during any calendar year. With respect to Incentive Stock Options
granted to any employee, the aggregate fair market value determined on the
date of grant with respect to which any Incentive Stock Option is first
exercisable shall not exceed $100,000.
The granting of an option does not entitle the participant to any dividends,
voting or other rights of a stockholder, unless and until the participant
receives stock upon exercise of the option. The Committee may limit an option
by restricting its exercise in whole or in part for specified periods.
Stock Appreciation Rights. An SAR is the right to receive payment for the
appreciation in value of one share of Franchising Common Stock over a
specified price. An SAR may be granted either in tandem with a stock option
award or independently. If the SAR is granted in tandem with a stock option
award, the payment is measured by the excess of the fair market value of
Franchising Common Stock at the time of exercise over the option price (which
cannot be less than the fair market value of the stock at the time of grant).
If the SAR is granted independent of a stock option, the Committee will
specify whether the award is a "regular" SAR or whether the award is a "book
value" SAR. If the award is a "regular" SAR, the payment is measured by the
excess of the fair market value of the stock at the time of exercise over the
fair market value at the time of grant. If the award is a "book value" SAR,
the payment is measured by the excess of the book value of Franchising Common
Stock at the time of exercise over the book value of Franchising Common Stock
at the time of grant.
Stock appreciation payments, at the election of the participant, may be made
in cash or Franchising Common Stock or a combination of both. The Committee
must approve any election to receive cash.
An SAR issued pursuant to an option cannot be exercised less than six months
after the grant; an SAR issued independently is subject to the terms and
conditions established on grant. SARs are deemed to be exercised on the last
day of the Exercise Period, if not previously exercised, which may not extend
more than ten years beyond the date of grant. The Committee may impose such
restrictions on transferability of SARs as it may determine.
The granting of an SAR does not entitle the participant to any dividend,
voting or other rights of a stockholder, unless and until the participant
receives stock upon the exercise of an SAR. SARs which are not exercisable
immediately upon being granted may be made immediately exercisable upon the
occurrence of retirement or disability, as determined by the Committee in its
sole discretion. Under the Franchising Incentive Plan, no Covered Employee (as
defined in Section 162(m)(3) of the Internal Revenue Code) may be granted more
than 100,000 SARs during any calendar year.
Performance Shares. A performance share award involves the grant of a right
to receive a specified number of shares of Franchising Common Stock upon
satisfaction of certain performance-related objectives specified in the
granting instrument. The performance-related objectives may relate to the
individual, Franchising, a department or a division of Franchising and/or a
group or class of participants. The measuring period used to establish the
performance criteria will be specified by the Committee at the time of grant
and may be subsequently waived or reduced, or the performance criteria may be
adjusted, upon the occurrence of events determined by the Committee in its
sole discretion to justify such waiver, reduction or adjustment. Under the
Franchising Incentive Plan, no Covered Employee (as defined in Section
162(m)(3) of the Internal Revenue Code) may be granted more than 100,000
Performance Shares during any calendar year.
Retirement or Disability. The Committee may, in its discretion, waive the
forfeiture, termination or lapse of an award in the event of retirement or
disability of the participant.
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<PAGE>
Income Tax Consequences. The Federal income tax consequences of an award
under the Franchising Incentive Plan depend on the type of award, as discussed
below. The grant of a restricted share award or a performance share award does
not immediately produce taxable income to a recipient or a tax deduction to
Franchising. However, at the time the restrictions expire or the performance
objectives have been achieved, as the case may be, a recipient will recognize
taxable ordinary income in an amount equal to the fair market value of the
stock on the date the restrictions expire or the performance criteria are
achieved and Franchising will be entitled to a corresponding income tax
deduction. In the case of a restricted share award, during the restriction
period, a recipient will be taxed on the dividends received from the
restricted shares as additional compensation, and Franchising will be entitled
to a corresponding compensation deduction.
Generally, a recipient of an incentive stock option will not recognize
taxable income at the time of grant or exercise and Franchising will not be
entitled to an income tax deduction. Provided the minimum holding periods are
satisfied, any gain on a disposition of stock acquired through an incentive
stock option will be taxable to a recipient as long-term capital gain. If the
minimum holding periods are not satisfied, a recipient will recognize ordinary
income in the amount of the excess of the fair market value of the stock on
the date the option is exercised over the option price, and Franchising will
be entitled to a corresponding income tax deduction.
The grant of a nonqualified stock option does not result in taxable income
to a recipient or a tax deduction for Franchising. Upon exercise, a recipient
will recognize taxable ordinary income in an amount equal to the excess of the
fair market value of the stock on the date of exercise over the option price,
and Franchising will be entitled to a corresponding income tax deduction.
A recipient of a stock appreciation right will not recognize taxable income
at the time the right is granted, and Franchising will not be entitled to a
tax deduction. However, ordinary taxable income will be recognized by a
recipient and a corresponding deduction will be taken by Franchising, at the
time of exercise, in an amount equal to the cash and the fair market value of
the stock received.
Amendment and Termination. The Franchising Board of Directors may at any
time and from time to time alter, amend, suspend or terminate the Franchising
Incentive Plan in whole or in part, except (i) any such action affecting
options granted or to be granted under the Franchising Incentive Plan which
are intended to qualify as Incentive Stock Options shall be subject to
stockholder approval to the extent such stockholder approval is required
pursuant to Section 422 of the Internal Revenue Code and (ii) without the
consent of the participant to whom any award has been granted, no such action
may be taken which adversely affects the rights of such participant concerning
such award, except as such termination or amendment of the Franchising
Incentive Plan is required by statute, or rules and regulations promulgated
thereunder.
The Franchising Incentive Plan terminates in October, 2007. Awards may be
granted under the Franchising Incentive Plan at any time and from time to time
prior to the termination of the Franchising Incentive Plan. Any award
outstanding at the time the Franchising Incentive Plan is terminated shall
remain in effect until said award is exercised or expires.
FRANCHISING STOCK PURCHASE PLAN
General. The purposes of the Franchising Stock Purchase Plan are to build a
proprietary interest among employees of Franchising and to assist Franchising
in its goal of recruiting and retaining highly qualified employees at all
levels of the organization.
The following description of the Franchising Stock Purchase Plan is
qualified in its entirety by reference to the Choice Hotels International,
Inc. 1997 Employee Stock Purchase Plan, a copy of which is attached as
Annex C-II to this Proxy Statement. The amount of compensation that will
accrue to the employees pursuant to the Franchising Stock Purchase Plan, if
approved by the stockholders, is not currently determinable.
The Franchising Stock Purchase Plan authorizes the purchase of a maximum of
1,000,000 shares (subject to adjustment for stock splits and similar capital
changes) of Franchising Common Stock by eligible employees.
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<PAGE>
Eligibility. Each employee of Franchising and its subsidiaries having at
least one year of continuous service on the first day of each January, April,
July and October (an "Offering Date"), beginning January 1, 1998, is eligible
to participate in the Franchising Stock Purchase Plan. All employees will be
eligible to participate after completing one year of employment. Any employee
who immediately after the grant of a right owns 5% or more of the Franchising
Common Stock, however, would not be eligible to participate.
Administration. The Franchising Stock Purchase Plan will be administered by
the Franchising Board of Directors.
Rights will be granted quarterly on each Offering Date, and are exercisable
effective on the succeeding last trading day of March, June, September and
December, respectively. Eligible employees may purchase shares of Franchising
Common Stock through accumulation of payroll deductions (of not less than 2%
nor more than 10% of compensation, as defined in the Franchising Stock
Purchase Plan). No Participant shall have the right to purchase shares of
Franchising Common Stock under the Plan at a rate of more than $25,000 in
value in any calendar year, such value to be based on the fair market value of
the Franchising Common Stock as of the Offering Date on which the Participant
becomes eligible to purchase Franchising Common Stock in such year under the
terms of the Plan. At the end of each three month Offering Period, Franchising
will contribute cash equal to one-ninth of the employee payroll deductions to
the Franchising Stock Purchase Plan, and the aggregate employee payroll
deductions and Franchising contribution will be used either by Franchising to
sell Franchising Common Stock to the participants or by Franchising's
designated agent to purchase Franchising Common Stock in the open market. The
agent will allocate the purchased Franchising Common Stock among the employee
accounts in proportion to their payroll deductions. Franchising will pay the
administrative expenses for the purchase of the Franchising Common Stock,
including broker's commissions, transfer fees and similar costs.
Amendment and Termination. The Franchising Board of Directors may at any
time amend or terminate the Franchising Stock Purchase Plan except that no
action may be made without the approval of stockholders to the extent such
approval is required pursuant to Section 423 of the Internal Revenue Code.
Federal Income Tax Consequences. Generally, a recipient of stock acquired
through the Franchising Stock Purchase Plan will not recognize taxable income
(and Franchising will not be entitled to an income tax deduction) until such
recipient disposes of the stock. Provided the minimum holding periods are
satisfied, upon disposition of stock acquired through the Franchising Stock
Purchase Plan, the lesser of (1) the excess of the fair market value of the
stock on the date of purchase over the price paid, or (2) the excess of the
fair market value of the stock at the time of disposition over the price paid,
will be taxable to a recipient as ordinary income (compensation), and
Franchising will not be entitled to a corresponding income tax deduction. Any
additional gain will be taxable to such recipient as long-term capital gain.
If the minimum holding periods are not satisfied, a recipient will recognize
ordinary income (compensation) in the amount of the excess of the fair market
value of the stock on the date of purchase over the price paid, and
Franchising will be entitled to a corresponding income tax deduction. Any
additional gain will be taxable to such recipient as long-term capital gain.
PROPOSAL FIVE: ELECTION OF DIRECTORS
Election of Directors at the Annual Meeting
At the Annual Meeting, stockholders will elect three directors to hold
office until the 2000 Annual Meeting of stockholders and until their
successors are elected and qualified.
The names of the nominees for election as directors at the Annual Meeting
and the present directors whose terms of office do not expire in 1997 are set
forth in the following table. The Company has no reason to believe that any
nominee for election will not be able to serve as a director. However, should
any nominee become unavailable to serve, the proxies solicited hereby may be
voted for election of such other person as may be nominated by the Board of
Directors.
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It is expected that in connection with the consummation of the Distribution,
Barbara Bainum, William R. Floyd, Robert C. Hazard, Jr., Gerald W. Petitt, and
Jerry E. Robertson, Ph.D. will each resign as director of the Company
effective as of the Distribution Date and become directors of Franchising. For
a discussion of the Board of Directors of the Company after the Distribution,
see "Proposal One: Ratification of the Distribution--The Distribution--Certain
Information Concerning Sunburst--Management." For a discussion of the Board of
Directors of Franchising after the Distribution, see "Proposal One:
Ratification of the Distribution--Certain Information Concerning Franchising--
Management."
PRESENT BOARD OF DIRECTORS INCLUDING NOMINEES FOR RE-ELECTION:
<TABLE>
<CAPTION>
TERM TO
NAME AGE POSITION EXPIRE
---- --- -------- -------
<S> <C> <C> <C>
Nominees for terms expiring in 2000:
Barbara Bainum*........................... 53 Director 2000
Robert C. Hazard, Jr...................... 62 Director 2000
Frederic V. Malek......................... 60 Director 2000
Directors whose terms expire after 1997 and
who are not currently nominees for re-
election:
Stewart Bainum*........................... 78 Director 1998
Gerald W. Petitt.......................... 51 Director 1998
Jerry E. Robertson, Ph.D.................. 64 Director 1998
Stewart Bainum, Jr.*...................... 51 Chairman of the Board 1999
and Director
William R. Floyd.......................... 52 Director 1999
Paul A. Gould............................. 50 Director 1999
</TABLE>
- --------
* Mr. Bainum is the father of Mr. Bainum, Jr. and Ms. Bainum, who are
siblings.
Stewart Bainum, Jr. Chairman of the Board of the Company since November
1996; Chairman of the Board of Choice Hotels from March 1987 to June 1990;
Chairman of the Board and Chief Executive Officer of Manor Care and Manor Care
Health Services, Inc. ("MCHS") since March 1987; Chief Executive Officer of
Manor Care since March 1987 and President since June 1989; Vice Chairman of
the Board of Vitalink Pharmacy Services, Inc. ("Vitalink") since December
1994; Vice Chairman of the Board of Manor Care and subsidiaries from June 1982
to March 1987; Director of Manor Care since August 1981, of Vitalink since
September 1991, of MCHS since 1976 and of Choice Hotels since 1977; Chief
Executive Officer of MCHS since June 1989 and President from May 1990 to May
1991; Chairman of the Board and Chief Executive Officer of Vitalink from
September 1991 to February 1995 and President and Chief Executive Officer from
March 1987 to September 1991.
Stewart Bainum. Vice Chairman of the Board of Manor Care and subsidiaries
since March 1987; Chairman of the Board of Manor Care from August 1981 to
March 1987, Chief Executive Officer from July 1985 to March 1987, President
from May 1982 to July 1985; Chairman of the Board of MCHS from 1968 to March
1987 and a Director since 1968; Director of Vitalink from September 1991 to
September 1994; Chairman of the Board of Choice Hotels from 1972 to March 1987
and a Director since 1963; Chairman of the Board of Realty Investment Company,
Inc. since 1965.
Barbara Bainum. President, Secretary and Director of the Commonweal
Foundation since December 1990, December 1984 and December 1994, respectively;
Secretary and Director of Realty Investment Company, Inc. since July 1989 and
March 1982, respectively; Family Services Agency, Gaithersburg, Maryland,
Clinical Social Work since September 1994; Department of Social Services,
Rockville, Maryland, Social Work Case Management from September 1992 to May
1993; member of the Boards of Trustees of Columbia Union College (September
1987 to May 1991) and Atlantic Union College (September 1985 to May 1987).
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William R. Floyd. Chief Executive Officer of the Company since October 1996;
Chief Operating Officer of Taco Bell Corp. (a subsidiary of PepsiCo) from July
1995 to October 1996, Chief Operating Officer of KFC (a subsidiary of PepsiCo)
from August 1994 to July 1995; National Vice President of Taco Bell Company
Operations from July 1992 to August 1994, Vice President of Taco Bell Eastern
Operations from December 1990 to January 1992; Director, Friendly Hotels PLC
since 1996.
Paul A. Gould. Managing Director of Allen & Company Incorporated (investment
banking firm) for more than five years and other positions at Allen & Company
Incorporated since 1973. Director: Telecommunications International, Inc.,
United Video Satellite Group, Inc. and National Patent Development
Corporation; Board of Trustees: The New School, The Hackley School and The
Holderness School.
Robert C. Hazard, Jr. Hotel Developer. Co-Chairman of Choice Hotels from
January 1995 to November 1996 and a Director since December 1980; Chairman
from June 1990 to January 1995 and Chief Executive Officer from December 1980
to January 1995; President from December 1980 to June 1990. Advisory Board
Outrigger Hotels.
Frederic V. Malek. Chairman of Thayer Capital Partners since March 1993; Co-
Chairman of CB Commercial Real Estate Group, Inc. from April 1989 to October
1996; Campaign Manager for Bush-Quayle '92 from January 1992 to November 1992;
Vice Chairman of NWA, Inc. (airlines), July 1990 to December 1991; Director:
Manor Care, Inc., American Management Systems, Inc., Automatic Data Processing
Corp., CB Commercial Real Estate Group, Inc., FPL Group, Inc. (an affiliate of
Florida Power and Light--power company), Northwest Airlines and various Paine
Webber mutual funds.
Gerald W. Petitt. Hotel Developer, Co-Chairman of Choice Hotels from January
1995 to November 1996 and a Director since December 1980; President from June
1990 to January 1995 and Chief Operating Officer from December 1980 to January
1995.
Jerry E. Robertson, Ph.D. Retired; Executive Vice President, 3M Life
Sciences Sector and Corporate Services from November 1986 to March 1994;
Director: Manor Care, Inc., Allianz Life Insurance Company of North America,
Cardinal, Inc., Coherent, Inc., Haemonetics Corporation, Medwave, Inc.,
Project Hope and Steris Corporation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ALL THE
NOMINEES NAMED HEREIN.
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Board of Directors and Committees of the Board
From November 1, 1996 (the date the Manor Care Spin-off was consummated),
the Board of Directors has consisted of nine directors, four whom were not
officers or employees of the Company. For the fiscal year ended May 31, 1997,
each of the directors attended at least 75% of the aggregate number of
meetings of the Board of Directors and all committees of the Board of
Directors on which such director served.
The standing committees of the Board of Directors include the Audit
Committee, the Finance Committee, the Compensation/Key Executive Stock Option
Plan Committee, the Compensation/Key Executive Stock Option Plan Committee No.
2, and the Nominating Committee, the current members of which are as follows:
Compensation/Key Executive Stock Finance Committee
Option Plan Committee Stewart Bainum, Chairman
Jerry E. Robertson, Chairman Stewart Bainum, Jr.
Stewart Bainum Paul A. Gould
Frederic V. Malek Frederic V. Malek
Barbara Bainum William R. Floyd
Compensation/Key Executive Stock Audit Committee
Option Plan Committee No. 2 Jerry E. Robertson, Chairman
Jerry E. Robertson, Chairman Paul A. Gould
Frederic V. Malek Gerald W. Pettit
Barbara Bainum
Nominating Committee
Gerald W. Pettit
Robert C. Hazard, Jr.
The Compensation/Key Executive Stock Option Plan Committees administer the
Company's stock option plans and grant stock options thereunder, reviews
compensation of officers and key management employees, recommends development
programs for employees such as training, bonus and incentive plans, pensions
and retirement, and reviews other employee fringe benefit programs.
The Finance Committee reviews the financial affairs of the Company and
recommends financial objectives, goals and programs to the Board of Directors
and to management.
The Audit Committee reviews the scope and results of the annual audit,
reviews and approves the services and related fees of the Company's
independent public accountants, reviews the Company's internal accounting
controls and reviews the Company's Internal Audit Department and its
activities.
The Nominating Committee recommends to the Board of Directors the members to
serve on the Board of Directors during the ensuing year. The Committee will
not consider nominees recommended by stockholders.
Compensation of Directors
In connection with the Manor Care Spin-off, the Company adopted the Choice
Hotels International, Inc. Non-Employee Director Stock Option and Deferred
Compensation Stock Purchase Plan. Part A of the Plan provides that eligible
non-employee directors will be granted options to purchase 5,000 shares of
Common Stock on their first date of election and will be granted options to
purchase 1,000 shares on their date of re-election in subsequent calendar
years. Part B of the Plan provides that eligible non-employee directors may
elect, prior to May 31 of each year, to defer a minimum of 25% of committee
fees earned during the ensuing fiscal year. The fees which are so deferred
will be used to purchase Common Stock on the open market within 15 days after
December 1, February 28 and May 31 of such fiscal year. Pending such
purchases, the funds will be credited to an Interest Deferred Account, which
will be interest bearing. Stock which is so purchased will be deposited in a
Stock Deferred Account pending distribution in accordance with the Plan.
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Directors who are employees of the Company will receive no separate
remuneration for their services as directors. Pursuant to the Non-Employee
Director Stock Compensation Plan, eligible non-employee directors will receive
annually, in lieu of cash, restricted stock of the Company, the fair market
value of which at the time of grant will be equal to $30,000, which will
represent the Board of Directors retainer and meeting fees. In addition, all
non-employee directors will receive $1,610 per diem for Committee meetings
attended, except where the Committee meeting is on the same day as a Board of
Directors meeting, and will be reimbursed for travel expenses and other out-
of-pocket costs incurred in attending meetings.
Executive Officers
The name, age, title and business background of each executive officer of
the Company are set forth below. The business address of each executive
officer of the Company is 10750 Columbia Pike, Silver Spring, Maryland 20901,
unless otherwise indicated.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr....... 51 Chairman of the Board of Directors
William R. Floyd......... 52 Vice Chairman and Chief Executive Officer
Donald J. Landry......... 48 President and Chief Operating Officer
James A. MacCutcheon..... 45 Executive Vice President, Chief Financial Officer
and Treasurer
Antonio DiRico........... 44 Senior Vice President--Hotel Operations
Thomas Mirgon............ 41 Senior Vice President, Human Resources
Barry L. Smith........... 55 Senior Vice President--Marketing
Michael J. DeSantis...... 38 Senior Vice President, General Counsel
and Secretary
Joseph M. Squeri......... 32 Vice President, Finance and Controller
</TABLE>
Donald J. Landry. President of Choice since January 1995; President of MCHD
since March 1992; various executive positions with Richfield Hotel Management,
Inc. and its predecessors for more than 20 years, including President of MHM
Corporation; Director, Friendly Hotels PLC, since 1996.
James A. MacCutcheon. Executive Vice President, Chief Financial Officer and
Treasurer of the Company since November 1996; Senior Vice President, Chief
Financial Officer and Treasurer of the Company's predecessor (together with
the Company, "Choice Hotels") since September 1993; Senior Vice President,
Chief Financial Officer and Treasurer of Manor Care from September 1993 to
November 1996; Senior Vice President--Finance and Treasurer of Manor Care from
October 1987 to September 1993; Treasurer of Vitalink from September 1992 to
January 1997 and a Director since September 1994.
Thomas Mirgon. Senior Vice President, Human Resources of the Company since
March 1997; Vice President, Administration of Interim Services from August
1993 to February 1997; employed by Taco Bell Corp. from January 1986 to August
1993, last serving as Senior Director, Field Human Resources from February
1992 to August 1993.
Antonio DiRico. Senior Vice President, Hotel Operations of the Company since
November 1996; Senior Vice President, Hotel Operations of MCHD from May 1992
to November 1996; Senior Vice President of Richfield Hotel Management, Inc.,
and its predecessor, MHM Corporation; Director, Friendly Hotels PLC, since
1996.
Barry L. Smith. Senior Vice President--Marketing of Choice Hotels since
February 1989.
Michael J. DeSantis. Senior Vice President, General Counsel and Secretary of
the Company since June 1997; Senior Attorney for the Company from November
1996 to June 1997; Senior Attorney for Manor Care
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<PAGE>
from January 1996 to October 1996; Vice President, Associate General Counsel
and Assistant Secretary for Caterair International Corporation from April 1994
to December 1995; Assistant General Counsel of Caterair International from May
1990 to March 1994.
Joseph M. Squeri. Vice President, Finance and Controller of the Company
since March 1997; Director of Investment Funds, The Carlyle Group, from
November 1994 to February 1997; various positions with Arthur Andersen LLP
from July 1987 to November 1994, most recently as Manager.
Compensation of Executive Officers
Summary Compensation. The following tables set forth certain information
concerning the annual and long term compensation of the chairman of the board
and the four other most highly compensated executive officers of the Company
(the "Named Officers") who were employed by the Company at May 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------- -----------------------
RESTRICTED
FISCAL STOCK STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER AWARDS($) SHARES(#)(1) COMPENSATION(2)
- --------------------------- ------ -------- -------- -------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(3).. 1997 $656,357 $388,520 (4) -- 60,000(5) --
Chairman 1996 625,102 337,555 (4) -- 60,000(5) $33,543
1995 572,308 343,385 (4) -- -- 9,000
William R. Floyd(6)..... 1997 270,373 146,001 $107,831(7) $1,250,000 307,693 --
Vice Chairman and 1996 -- -- -- -- -- --
Chief Executive Officer 1995 -- -- -- -- -- --
Donald J. Landry........ 1997 404,250 200,508 (4) -- 100,000(8) 6,035
President 1996 366,702 201,686 (4) -- -- 5,000
1995 311,635 171,399 (4) -- 40,000(9) 2,250
James A. MacCutcheon
(10)................... 1997 313,578 155,953 (4) -- 67,500(11) 18,682
Senior Vice President, 1996 301,517 135,682 (4) -- 25,000(12) 13,176
Chief Financial Officer 1995 273,199 136,600 (4) -- -- 13,176
and Treasurer
Barry L. Smith.......... 1997 240,000 108,000 (4) -- 25,000(13) 11,086
Sr. Vice President,
Marketing 1996 233,640 116,820 (4) -- 5,000(14) 10,427
1995 221,668 104,561 (4) -- -- 6,750
Antonio DiRico.......... 1997 196,200 86,524 (4) -- 25,000(13) 3,043
Senior Vice President 1996 179,904 71,961 (4) -- 8,000(14) 2,225
Hotel Operations 1995 133,719 50,813 (4) -- -- 2,163
</TABLE>
- --------
(1) For Messrs. Bainum, Jr., MacCutcheon, Smith, Landry and DiRico,
represents options to purchase shares of Manor Care Common Stock granted
in fiscal years 1997, 1996 and 1995. In connection with the Manor Care
Spin-off, the options to purchase Manor Care Common Stock were converted,
in some cases 100%, and in some cases partially, to options to purchase
Company Common Stock. In all cases, however, the exercise prices were
adjusted to maintain the same financial value to the option holder before
and after the Manor Care Spin-off.
(2) Represents amounts contributed by Manor Care for fiscal years 1996 and
1995 and the Company for fiscal year 1997 under their respective 401(k)
Plan and the Non-Qualified Savings Plan, which provide retirement and
other benefits to eligible employees, including the Named Officers. The
value of the amounts contributed in stock by the Company during fiscal
year 1997 under the 401(k) Plan for the Named Offices were as follows:
Mr. MacCutcheon, $6,240; Mr. Landry, $2,375; Mr. Smith, $3,696 and Mr.
DiRico, $966. The value of the amounts contributed in stock of the
Company during fiscal year 1997 under the Non-Qualified Saving Plan for
the Named Officers were as follows: Mr. MacCutcheon, $12,443; Mr. Landry,
$3,660; Mr. Smith $7,390 and Mr. DiRico, $2,077.
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(3) For part of fiscal year 1997 and all of fiscal years 1996 and 1995, Mr.
Bainum, Jr. was the Chairman and Chief Executive Officer of Manor Care
and the Company. In November, 1996, he resigned as Chief Executive
Officer of the Company. The compensation reflected here is the total
compensation received for services rendered to both Manor Care and the
Company. For the period of fiscal year 1997 after the Manor Care Spin-
off, the amount of compensation paid solely by Company was $88,302 for
base salary and $47,683 for bonus.
(4) The value of perquisites and other compensation does not exceed the
lesser of $50,000 or 10% of the amount of annual salary and bonus paid as
to any of the Named Officers.
(5) In connection with the Manor Care Spin-off, these options were converted
on a pro rata basis into options to purchase Manor Care Common Stock and
options to purchase Company Common Stock.
(6) Mr. Floyd's employment as Chief Executive Officer of the Company
commenced October 16, 1996.
(7) Consists of relocation expenses.
(8) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 272,727 shares of Company Common Stock at an
adjusted exercise price of $14.5095.
(9) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 109,061 shares of Company Common Stock at an
adjusted exercise price of $10.5007.
(10) For fiscal years 1996 and 1995 and part of fiscal year 1997, Mr.
MacCutcheon was Senior Vice President, Chief Financial Officer and
Treasurer of Manor Care and the Company. On November 1, 1996, Mr.
MacCutcheon resigned from his position at Manor Care and assumed the
position of Executive Vice President and Chief Financial Officer of the
Company. The compensation reflected here is total compensation received
for services rendered to both Manor Care and the Company. For the period
of fiscal year 1997 after the Manor Care Spin-off, the amount of
compensation paid solely by the Company was $209,052 for base salary and
$103,690 for bonus.
(11) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 6,563 shares of Manor Care Common Stock at an
adjusted exercise price of $25.0505, 36,387 options and 136,326 options
to purchase Company Common Stock at adjusted exercise prices of $14.5095
and $13.8933, respectively.
(12) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 50,102 shares of Company Common Stock at an
adjusted exercise price of $11.1168 and 10,462 shares of Manor Care
Common Stock at an adjusted exercise price of $19.1932.
(13) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 68,182 shares of Company Common stock at an
adjusted exercise price of $14.5095.
(14) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 13,633 shares of Company Common Stock at an
adjusted exercise price of $11.1168.
(15) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 68,182 shares of Company Common Stock at an
adjusted exercise price of $14.5095.
(16) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 21,811 shares of Company Common Stock at an
adjusted exercise price of $11.1168.
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Stock Options. The following tables set forth certain information at May 31,
1997 and for the fiscal year then ended concerning options to purchase Manor
Care Common Stock granted to the Named Officers. All Common Stock figures and
exercise prices have been adjusted to reflect stock dividends and stock splits
effective in prior fiscal years. In connection with the Manor Care Spin-off,
existing Manor Care stock options, which are shown here, were converted, in
some cases 100%, to options to purchase Company Common Stock.
STOCK OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE OF ASSUMED
RATE OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(2)
------------------------------------------------ ---------------------
PERCENTAGE OF
TOTAL OPTIONS
GRANTED TO ALL
NUMBER OF EMPLOYEES IN EXERCISE BASE
OPTIONS FISCAL YEAR PRICE EXPIRATION
NAME COMPANY* GRANTED(1) 1997 PER SHARE DATE 5%(3) 10%(4)
---- -------- ---------- -------------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(5).. CHI 60,000 (6) $14.5095 07/01/06 547,494 1,307,464
MNR 60,000 (6) $25.0505 07/01/06 945,246 2,395,440
------- ---------- ----------
Total 120,000 1,492,740 3,782,904
William R. Floyd(5)..... CHI 307,693 (6) $14.6250 11/04/06 2,830,037 7,171,862
MNR 0 -- -- -- -- --
------- -------- ---------- ----------
Total 307,693 2,830,037 7,171,862
Donald J. Landry(5)..... CHI 272,727 (6) $14.5095 07/01/06 2,488,607 6,306,648
MNR 0 -- -- -- -- --
------- -------- ---------- ----------
Total 272,727 2,488,607 6,306,648
James A.
MacCutcheon(5)......... CHI 36,387 (6) $14.5095 07/01/06 332,028 841,428
CHI 136,326 (6) $13.8933 09/30/06 1,191,135 3,018,571
MNR 6,563 (6) $25.0505 07/01/06 103,394 262,021
------- ---------- ----------
Total 179,276 1,626,557 4,122,020
Barry L. Smith(5)....... CHI 68,182 (6) $14.5095 07/01/06 622,154 1,576,668
MNR 0 -- -- -- -- --
------- ---------- ----------
Total 68,182 622,154 1,576,668
Antonio DiRico(5)....... CHI 68,182 (6) $14.5095 07/01/06 622,154 1,576,668
MNR 0 -- -- -- -- --
------- ---------- ----------
Total 68,182 622,154 1,576,688
</TABLE>
- --------
* References to "CHI" are to the Company and "MNR" are to Manor Care.
(1) Options granted to Messrs. Bainum, Jr., Landry, MacCutcheon, Smith, and
DiRico were granted prior to the Manor Care Spin-off and were thus granted
as options to purchase Manor Care Common Stock. In connection with the
Manor Care Spin-off, these options to purchase Manor Care Common Stock
were converted, in some cases 100%, and in some cases partially, to
options to purchase Company Common Stock. In all cases, however, the
exercise prices were adjusted to maintain the same financial value to the
option holder before and after the Manor Care Spin-off. The number of
options set forth in the table represent the number Company and Manor Care
options and the adjusted exercise prices after the conversion. In the
Distribution, the options will be further adjusted.
(2) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and
therefore are not intended to forecast future possible appreciation, if
any, of the stock price. Since options are granted at market price, a zero
percent gain in the stock price will result in no realizable value to the
optionees.
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<PAGE>
(3) A 5% per year appreciation in stock price from $13.8933 per share yields
$22.6307, from $14.5095 per share yields $23.6344, from $14.625 per share
yields $23.8226, from $25.0505 per share yields $40.8046, and from $15.625
per share yields $25.4515.
(4) A 10% per year appreciation in stock price from $13,8933 per share yields
$36.0356, from $14.5095 per share yields $37.6339, from $14.625 per share
yields $37.9335, from $25.0505 per share yields $64.9745, and from $15.625
per share yields $40.5272.
(5) The options granted to the officers vest at the rate of 20% per year on
the first through the fifth anniversaries of the date of the stock option
grant.
(6) Information with respect to the total options granted to all Manor Care
employees is unavailable. With respect to the Company, the only options
granted by the Company during the fiscal year were the grants to Messrs.
Floyd and Mirgon as identified in the table and grants aggregating 25,000
options to purchase Company Common Stock to two additional new employees.
All other options to purchase Company Common Stock issued to employees
were issued as a result of the conversion of Manor Care options in the
Manor Care Spin-off.
AGGREGATE OPTION EXERCISES IN FISCAL 1997
AND YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT MAY 31, 1997 OPTIONS AT MAY 31, 1997(2)
ACQUIRED ON VALUE ------------------------- ----------------------------
NAME COMPANY* EXERCISE# REALIZED$ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ----------- ---------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr...... CHI 465,000 $3,105,452 239,000 221,000 $ 2,758,324 $ 1,334,863
MNR 293,791 2,318,180 174,000 221,000 3,633,404 2,749,771
William R. Floyd........ CHI -- -- 0 307,693 -- 346,154
MNR -- -- 0 0 -- --
Donald J. Landry........ CHI -- -- 151,321 625,810 1,376,894 2,897,138
MNR -- -- 0 0 -- --
James A. MacCutcheon.... CHI -- -- 162,639 335,408 1,858,096 1,708,638
MNR -- -- 91,362 46,563 1,962,041 704,946
Barry L. Smith.......... CHI 39,537 156,324 9,815 166,336 117,676 1,000,544
MNR -- -- 0 0 -- --
Antonio DiRico.......... CHI -- -- 11,179 106,080 73,421 255,362
MNR -- -- 0 0 -- --
</TABLE>
- --------
(1) Options granted to Messrs. Bainum, Jr., Landry, MacCutcheon, Smith and
DiRico were granted prior to the Manor Care Spin-off and were thus granted
as options to purchase Manor Care Common Stock. In connection with the
Manor Care Spin-off, these options to purchase Manor Care Common Stock,
were converted, in some cases 100%, to options to purchase Company Common
Stock. In all cases, however, the exercise prices were adjusted to
maintain the same financial value to the option holder before and after
the Manor Care Spin-off. The number of options set forth in the table
represent the number Company and Manor Care options and the adjusted
exercise prices after the conversion. In the Distribution, the options
will be adjusted.
(2) The closing prices of Company Common Stock and Manor Care's Common Stock
as reported by the New York Stock Exchange on May 30, 1997 were $15.75 and
$28.625, respectively. The value is calculated on the basis of the
difference between the option exercise price and such closing price
multiplied by the number of shares of Company Common Stock or Manor Care
Common Stock underlying- the option.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Stewart Bainum,
Jr., effective November 1, 1996, providing for Mr. Bainum, Jr.'s employment as
Chairman of the Board of Directors of the Company. The agreement has a term of
three years. Either the Company or Mr. Bainum may terminate the agreement upon
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<PAGE>
thirty days' prior written notice on the first and second anniversary dates of
the agreement. The agreement provides that Mr. Bainum, Jr. will devote 25% of
his professional time to the affairs of the Company, and the remaining 75% of
his professional time to the affairs of Manor Care. The agreement provides for
a base salary of $164,088 per annum for services to the Company and a maximum
bonus of 60% of Mr. Bainum, Jr.'s base compensation based upon the performance
of the Company.
Under the terms of the current agreement for Mr. Landry, Mr. Landry's annual
salary is presently $424,462 with annual cost-of-living increases. The
agreement extends through November 30, 1999. The agreement provides for an
annual bonus of up to 55% of his base compensation based in part on the
performance of the Company. Effective upon the Distribution Date, a new
employment agreement between the Company and Mr. Landry will become effective.
The new agreement provides for his employment as Chief Executive Officer for a
term of three years, with automatic successive one-year renewals unless one
year prior written notice to terminate is given by either party. It also
provides for an annual base salary of $424,462, an annual bonus of up to 60%
of his base compensation and a grant of options to purchase shares of Company
Common Stock, of which options to purchase shares shall terminate if the
Distribution does not occur on or before May 31, 1998.
For a description of employment agreements for Messrs. Floyd, MacCutcheon
and Mirgon, see "Proposal One: Ratification of the Distribution--Certain
Information Concerning Franchising--Management--Employment Agreements."
CERTAIN RELATIONSHIPS AND TRANSACTIONS
In connection with the Manor Care Spin-off, the Company entered into certain
agreements with Manor Care, of which Mr. Bainum is a director and Mr. Bainum,
Jr. is Chairman of the Board and Chief Executive Officer and each beneficially
owns approximately 15.20% and 22.89% respectively, of the outstanding Manor
Care Common Stock.
Manor Care Lease Agreements
The Company and Manor Care entered into a lease agreement with respect to
the complex in Silver Spring, Maryland at which the Company's principal
executive offices are located (the "Silver Spring Lease"). Pursuant to the
Silver Spring Lease, the Company leases from Manor Care for a period of 30
months certain office space (approximately 30% of the complex initially, with
provisions to allow the Company to use additional square footage as needed) at
a monthly rental rate equal to one-twelfth of the operating expenses (as
defined therein) of the complex net of third party rental income paid to Manor
Care by other tenants of the complex, less a pro rata portion of the operating
expenses attributable to the space occupied by Manor Care (initially
approximately 29% of the complex). At the beginning of each fiscal year
following the November 1, 1996 (the date of the Manor Care Spin-off), Manor
Care's occupancy percentage is redetermined. Operating expenses include all of
the costs associated with operating and maintaining the complex including,
without limitation, supplies and materials used to maintain the complex, wages
and salaries of employees who operate the complex, insurance for the complex,
costs of repairs and capital improvements to the complex, the fees of the
property manager (which may be Manor Care), costs and expenses associated with
leasing space at the complex and renovating space rented to tenants, costs of
environmental inspection, testing or cleanup, principal and interest payable
on indebtedness secured by mortgages against the complex, or any portion
thereof, and charges for utilities, taxes and facilities services. The Company
and Manor Care also entered into (i) a sublease agreement with respect to
certain office space in Gaithersburg, Maryland (the "Gaithersburg Lease")
pursuant to which the Company is obligated to rent from Manor Care, on terms
similar to the Silver Spring Lease, certain additional space as such space
becomes available during the 30 month period following the date of the Manor
Care Spin-off and (ii) a sublease agreement with respect to the Comfort Inn
N.W., Pikesville, Maryland, pursuant to which the Company subleases the
property from Manor Care on the same terms and conditions that govern Manor
Care's rights and interests under the lease relating to such property.
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<PAGE>
For a description of the modifications to the Silver Spring Lease and the
Gaithersburg Lease contemplated in connection with the Distribution, see
"Proposal One: Ratification of the Distribution--Certain Information
Concerning Franchising--Management--Employment Agreements."
The Manor Care Loan Agreement
On November 1, 1996, the Company and a subsidiary of Manor Care entered into
a loan agreement (the "Loan Agreement"), governing the repayment by the
Company of an aggregate of $225.7 million previously advanced to the Company
by Manor Care. The Loan Agreement contains a number of covenants that, among
other things, restrict the ability of the Company and its subsidiaries to make
certain investments, incur debt, change its line of business, dispose of
assets, create liens and enter into transactions with affiliates, and which
otherwise restrict certain corporate activities. The Loan Agreement also
restricts the Company's ability to pay dividends. In addition, the Loan
Agreement contains, among other financial covenants, requirements that the
Company maintain specified financial ratios, including minimum net worth,
maximum leverage and minimum interest coverage. Interest on the amount of the
loan is payable semiannually at a rate of 9% per annum. The loan will mature
on November 1, 1999 and may be prepaid in whole or in part, together with
accrued interest, at the option of the Company. If prepayment is made on or
before November 1, 1997, the Company will pay a penalty equal to the
difference between the stated interest rate and the annualized interest rate
on a U.S. Treasury Note for a relevant period until November 1, 1997. If
prepayment is made after November 1, 1997, there is no penalty.
On April 23, 1997, the Company, through its wholly owned subsidiary First
Choice Properties, completed an offering of the Mortgage Securities. The net
proceeds of $110 million from the offering were used to prepay a portion of
the loan. A total yield maintenance payment of $1.9 million will be made to
Manor Care as a result of the prepayment.
At or prior to the Distribution, the Company will repay the remaining
portion of the loan with the proceeds from the Term Note and the Credit
Agreement.
Corporate Services Agreement
The Company and Manor Care entered into the Corporate Services Agreement
(the "Corporate Services Agreement") which provides for the provision, by
Manor Care, of certain corporate services, including administrative,
accounting, systems and, for a fixed annual fee of $1.0 million, certain
consulting services. The term of the Consulting Services Agreement is 30
months from November 1, 1996.
Time Sharing Agreement
On October 10, 1996, the Company entered into a Time Sharing Agreement with
Manor Care under which the Company has the right to lease from time to time a
Cessna Citation VI owned by Wilderness Investment Company, Inc., a corporation
which is solely owned by Stewart Bainum, at the rate of $1,150 per flight
hour. During the 1997 fiscal year, the Company incurred a total of $155,615
for aircraft usage pursuant to the Lease.
In the opinion of management, the foregoing transactions were on terms at
least as advantageous to the Company as could have been obtained from non-
affiliated persons.
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<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the amount of Company Common Stock
beneficially owned as of the Annual Meeting Record Date by (i) each director
of the Company, (ii) the chief executive officer of the Company and the Named
Officers, (iii) all officers and directors of the Company as a group and (iv)
all persons who own beneficially more than 5% of the Company Common Stock.
Unless otherwise specified, the address for each of them is 10750 Columbia
Pike, Silver Spring, Maryland 20901. On the Distribution Date, the holders of
Company Common Stock as of the Distribution Record Date will be entitled to
receive one share of Franchising Common Stock for each share of Company Common
Stock.
<TABLE>
<CAPTION>
TOTAL SHARES OF PERCENT OF SHARES
COMPANY COMMON STOCK OUTSTANDING
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
- ------------------------ -------------------- ------------------
<S> <C> <C>
Stewart Bainum, Jr. .................. 16,003,408(2) 26.58%
Stewart Bainum........................ 10,325,997(3) 17.15%
Barbara Bainum........................ 5,520,867(4) 9.17%
William R. Floyd...................... 85,570(5) *
Paul A. Gould......................... 2,844(6) *
Robert C. Hazard, Jr. ................ 40,756(7) *
Donald J. Landry...................... 208,752(8) *
James A. MacCutcheon.................. 181,910(9) *
Frederic V. Malek..................... 5,510(10) *
Gerald W. Petitt...................... 86,281(11) *
Jerry E. Robertson, Ph.D. ............ 20,824(12) *
Barry L. Smith........................ 244,292(13) *
Antonio DiRico........................ 33,519(14) *
All Directors and Officers as a Group
(17 persons)......................... 21,592,499(15) 35.46%
Bruce Bainum.......................... 5,512,302(16) 9.16%
Ronald Baron.......................... 15,790,713(17) 26.23%
</TABLE>
- --------
* Less than 1% of class.
(1) Percentages are based on 60,200,784 shares outstanding on the Annual
Meeting Record Date plus, for each person, the shares which would be
issued assuming that such person exercises all options it holds which are
exercisable on such date or become exercisable within 60 days thereafter.
(2) Includes 549,152 shares owned directly by the Stewart Bainum, Jr.
Declaration of Trust dated March 13, 1996, the sole trustee and
beneficiary of which is the reporting person. Also includes 5,417,761
shares owned by Bainum Associates Limited Partnership ("Bainum
Associates") and 4,415,250 shares owned by MC Investments Limited
Partnership ("MC Investments"), in both of which Mr. Bainum, Jr. is
managing general partner with the sole right to dispose of the shares;
3,567,869 shares held directly by Realty Investment Company, Inc.
("Realty"), a real estate management and investment company in which Mr.
Bainum, Jr. has shared voting authority; 1,779,628 shares owned by Mid
Pines Associates Limited Partnership ("Mid Pines"), in which Mr. Bainum,
Jr. is managing general partner and has shared voting authority and
10,600 shares owned by the Foundation for Maryland's Future, in which Mr.
Bainum, Jr. is the sole director. Also includes 263,000 shares which Mr.
Bainum, Jr. has the right to acquire pursuant to stock options which are
presently exercisable or which become exercisable within 60 days after
the Annual Meeting Record Date, and 148 shares which Mr. Bainum, Jr. has
the right to receive upon termination of his employment with the Company
pursuant to the terms of the Choice Hotels International, Inc. Non-
Qualified Retirement Savings and Investment Plan ("Non-Qualified Savings
Plan").
(3) Includes 3,906,278 shares held directly by the Stewart Bainum Declaration
of Trust, of which Mr. Bainum is the sole trustee and beneficiary, his
joint interest in 895,466 shares owned by Bainum Associates and 1,082,857
shares owned by MC Investments, each of which is a limited partnership in
which Mr. Bainum has joint ownership with his wife as a limited partner
and as such has the right to acquire at any time a number of shares equal
in value to the liquidation preference of their limited partnership
interests;
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<PAGE>
3,567,869 shares held directly by Realty, in which Mr. Bainum and his wife
have shared voting authority; and 70,305 shares held by the Commonweal
Foundation of which Mr. Bainum is Chairman of the Board of Directors and
has shared voting authority. Also includes 798,711 shares held by the Jane
L. Bainum Declaration of Trust, the sole trustee and beneficiary of which
is Mr. Bainum's wife, and 1,667 shares which Mr. Bainum has the right to
acquire pursuant to stock options which are presently exercisable or which
become exercisable within 60 days after the Annual Meeting Record Date.
Also includes 2,844 shares of restricted stock granted by the issuer to
Mr. Bainum which are not vested but which Mr. Bainum has the right to
vote.
(4) Includes 101,013 shares owned directly by Ms. Bainum. Also includes
1,779,628 shares owned by Mid Pines, in which Ms. Bainum's trust is a
general partner and has shared voting authority, 3,567,869 shares owned
by Realty, in which Ms. Bainum's trust has voting stock and shares voting
authority and 70,305 shares owned by the Commonweal Foundation, in which
Ms. Bainum is President and Director and has shared voting authority.
Also includes 2,052 shares of restricted stock issued to Ms. Bainum under
the Choice Hotels International, Inc. Non-Employee Director Stock
Compensation Plan ("Non-Employee Director Stock Compensation Plan") which
shares are not vested, but which Ms. Bainum has the right to vote.
(5) Consists of restricted shares granted pursuant to Mr. Floyd's employment
agreement which are not vested, but which Mr. Floyd has the right to
vote.
(6) Consists of restricted shares granted pursuant to the Non-Employee
Director Stock Compensation Plan, which are not yet vested, but which Mr.
Gould has the right to vote.
(7) Includes 37,304 shares owned directly by Mr. Hazard, 2,844 restricted
shares granted under the Company Non-Employee Director Stock Compensation
Plan which are not yet vested, but which Mr. Hazard has the right to
vote; and 113 shares and 415 shares, respectively, which Mr. Hazard has
the right to receive upon termination of his employment pursuant to the
terms of the Choice Hotels International, Inc. Retirement Savings and
Investment Plan ("401(k) Plan") and the Non-Qualified Savings Plan.
(8) Includes 1,612 shares owned directly by Mr. Landry, 205,866 shares which
Mr. Landry has the right to acquire pursuant to stock options which are
presently exercisable or become exercisable within 60 days of the Annual
Meeting Record Date and 264 shares and 1,010 shares, respectively, which
Mr. Landry has the right to receive upon termination of his employment
pursuant to the terms of the 401(k) Plan and the Non-Qualified Savings
Plan.
(9) Includes 180,311 shares which Mr. MacCutcheon has the right to acquire
pursuant to stock options which are presently exercisable or become
exercisable within 60 days of the Annual Meeting Record Date and 664 and
935 shares, respectively, which Mr. MacCutcheon has the right to receive
upon termination of his employment with the Company pursuant to the terms
of the 401(k) Plan and the Non-qualified Savings Plan.
(10) Includes 1,666 shares which Mr. Malek has the right to acquire pursuant
to stock options which are presently exercisable and 2,844 restricted
shares granted under the Non-Employee Director Stock Compensation Plan
which are not yet vested, but which Mr. Malek has the right to vote.
(11) Includes 74,776 shares held directly by Mr. Petitt and 8,661 shares held
in trust for minor children for which Mr. Petitt is trustee. Beneficial
ownership of such shares is disclaimed. Also includes 2,844 restricted
shares granted under the Non-Employee Director Stock Compensation Plan
which are not yet vested, but which Mr. Petitt has the right to vote.
(12) Includes 15,500 shares owned by the JJ Robertson Limited Partnership, of
which Mr. Robertson and his wife are general partners with shared voting
authority, 2,844 restricted shares granted under the Non-Employee
Director Stock Plan, 1,666 shares which Mr. Robertson has the right to
acquire pursuant to stock options which are presently exercisable and 814
shares acquired pursuant to the Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan.
(13) Includes 243,483 shares which Mr. Smith has the right to acquire pursuant
to stock options which are presently exercisable or become exercisable
within 60 days of the Annual Meeting Record Date and 254 shares and 555
shares, respectively, which Mr. Smith has the right to receive upon
termination of his employment with the Company pursuant to the terms of
the 401(k) Plan and the Non-Qualified Savings Plan.
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<PAGE>
(14) Includes 214 shares owned directly by Mr. DiRico, 29,227 shares which Mr.
DiRico has the right to acquire pursuant to stock options which are
presently exercisable or which become exercisable within 60 days of the
Annual Meeting Record Date, and 1,265 and 2,813 shares, respectively,
which Mr. DiRico has the right to receive upon termination of his
employment with the Company pursuant to the terms of the 401(k) Plan and
Nonqualified Savings Plan.
(15) Includes a total of 939,180 shares which the officers and directors
included in the group have the right to acquire pursuant to stock options
which are presently exercisable or which become exercisable within 60
days of July 8, 1997 and a total of 1,896 shares and 5,876 shares,
respectively, which such directors and officers have the right to receive
upon termination of their employment with the Company pursuant to the
terms of the 401(k) Plan and the Non-Qualified Savings Plan.
(16) Includes 94,500 shares owned directly by Mr. Bainum. Also includes
1,779,628 shares owned by Mid Pines, in which Mr. Bainum is a general
partner and has shared voting authority, 3,568,869 shares owned by Realty
in which Mr. Bainum's trust has voting stock and shares voting authority
and 70,305 shares owned by the Commonweal Foundation, in which Mr. Bainum
is a Director and has shared voting authority. Mr. Bainum's address is
8737 Colesville Road, Suite 800, Silver Spring, Maryland, 20910.
(17) As of July 31, 1997, based on a Schedule 13-D, as amended, filed by Mr.
Baron with the Securities and Exchange Commission (the "Commission"). Mr.
Baron's address is 450 Park Avenue, Suite 2800, New York, New York,
10022.
APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of Choice has appointed the firm of Arthur Andersen
LLP to serve as independent auditors of the Company for the Company's fiscal
year ending May 31, 1998. Arthur Andersen LLP is considered by the management
of the Company to be well qualified. Representatives of Arthur Andersen LLP
are expected to be present at the Annual Meeting and will have the
opportunity, if they so desire, to make a statement and will be available to
respond to questions.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and holders of more than 10% of the Company's Common Stock
to file with the Commission initial reports of ownership and reports of
changes in ownership of any equity securities of the Company. The Company
believes that during the year ended May 31, 1997, its executive officers and
directors and holders of more than 10% of the Company's Common Stock complied
with all Section 16(a) filing requirements.
THE FOLLOWING COMPENSATION COMMITTEE REPORT AND THE PERFORMANCE GRAPH THAT
APPEARS IMMEDIATELY AFTER SUCH REPORT SHALL NOT BE DEEMED TO BE SOLICITING
MATERIAL OR TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 OR INCORPORATED
BY REFERENCE IN ANY DOCUMENT SO FILED.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
There are currently two compensation committees for the Company, the
Compensation/Key Executive Stock Option Plan Committee and the
Compensation/Key Executive Stock Option Plan Committee No. 2 ("Committee No.
2") (collectively, the "Committee"). The role of Committee No. 2, which is
comprised of "outside directors" as defined in Section 162(m)(3) of the Code,
is to approve awards under the 1996 Incentive Plan to the Chief Executive
Officer and the Named Officers. The current members of the Committee, Messrs.
Robertson (Chairman), Bainum (not a member of Committee No. 2), Malek and Ms.
Bainum, were appointed effective November 25, 1996.
As a wholly-owned subsidiary of Manor Care prior to the Manor Care Spin-off,
most of the decisions and actions pertaining to the executive officers of the
Company for fiscal year 1997 were either approved by the Compensation
Committee of the board of Manor Care or by an executive officer of Manor Care.
However, the
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current members of the Company's Compensation Committee, except for Barbara
Bainum, were also members of Manor Care's Compensation Committee during fiscal
year 1997.
As a newly public company, the Committee recognizes that a transition period
is necessary to establish fully its long-range compensation philosophy and
objectives. Nevertheless, the following philosophy and principles have been
set forth as a framework within which the Committee will operate.
COMPENSATION COMMITTEE PHILOSOPHY AND GUIDING PRINCIPLES
. Attract and retain talented management;
. Closely align management's interests and actions with those of shareholders
through the establishment of appropriate award vehicles;
. Reward employees for enhancing shareholder value through sustained
improvement in earnings per share;
. Position base pay at market so that the Company can vary total compensation
costs with financial results by means of variable pay; and
. Recognize the concept that executive officers individually, and as a group,
should have a significant ownership stake in the Company.
EXECUTIVE COMPENSATION POLICIES
Compensation Levels
The Committee relates total compensation levels for the Company's executive
officers to the total compensation paid to similarly situated executives based
on various independently published compensation surveys, primarily conducted
and evaluated by independent consultants. Summary data on companies of similar
size in the service sector are used as the primary comparison and companies in
the hotel industry are used as a secondary comparison. Total compensation is
targeted to approximate the median of the competitive market data and
comparison companies. However, because of the performance-oriented nature of
the incentive programs, total compensation may exceed market norms when the
Company's targeted performance goals are exceeded. Similarly, total
compensation may lag the market when performance goals are not achieved. For
fiscal year 1997, compensation for the Vice Chairman and Chief Executive
Officer was slightly below the median while compensation for all of the other
executive officers, as a group, was at or above the median.
One of the comparison companies, Marriott International, Inc., was not
included as part of the Peer Group Index (defined below) for the performance
graph, see "--Performance Graph", because most of Marriott International's
hotel brands are not in the same market category as the Company's brands.
However, it was included as a comparison company for compensation purposes
because it is also located in the Washington, D.C. metropolitan area.
Policy with Respect to Qualifying Compensation for Deductibility
The Company's policy with respect to the deductibility limit of Section
162(m) of the Internal Revenue Code generally is to preserve the federal
income tax deductibility of compensation paid when it is appropriate and is in
the best interests of the Company and its stockholders. However, the Company
reserves the right to authorize the payment of nondeductible compensation if
it deems that is appropriate. In connection with William R. Floyd's employment
agreement, Mr. Floyd was granted 85,470 non-performance based restricted
shares of Company Common Stock which vest in three equal annual installments
beginning November 4, 1997. Additionally, the employment agreement provides
for options to purchase 207,693 shares of Company Common Stock which were
granted outside of the 1996 Incentive Plan and which vest in five equal
monthly installments beginning November 4, 1997. Upon the exercise of such
options by Mr. Floyd during any fiscal year, his gain (the difference between
the fair market value on the date of exercise and the exercise price) will be
included in calculating the compensation for that fiscal year for which the
federal income tax deduction is disallowed. The Committee intends to monitor
the Company's compensation programs with respect to such laws.
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Annual Compensation
With the exception of Messrs. Mirgon and Squeri, base salaries and annual
cash compensation for the executive officers in fiscal year 1997 were
established while the Company was a controlled subsidiary of Manor Care.
Accordingly, decisions were approved either by the Manor Care Compensation
Committee or an executive officer of Manor Care.
The base salary pay practice as previously adopted by the Manor Care
Compensation Committee was to pay at the 55th percentile of the market range
among the comparison groups for a particular position.
Awards under the annual cash bonus program for fiscal year 1997 were based
on certain performance measurements, which were based 60% on achieving
targeted gross operating profits, 20% on licensee/customer satisfaction goals
and 20% on RevPAR. For fiscal year 1997, actual performance exceeded the
measurement goals for each component. For fiscal year 1998, the Committee has
proposed revising the performance measurements to focus heavily on
management's responsibility to deliver earnings per share based on earnings
per share from continuing operations at established annual targets. For
executive officers other than the Chief Executive Officer, the proposal also
includes specific performance measurements directly accountable to the
executive officer. These performance measurements, where applicable, would
include licensee/customer satisfaction and RevPAR and would incorporate each
executive officer's accountability for the successful execution of key
initiatives tied to achievement of the Company's strategic plan.
Long-Term Incentives
The Company will award long-term incentives under the 1996 Incentive Plan.
The plan gives the Compensation Committee the latitude of awarding Incentive
Stock Options, non-qualified stock options, restricted stock, and other types
of long-term incentive awards. The recommended awards were developed by
analyzing peer group average market data and the Company's past practice. In
July 1996, the Manor Care Compensation Committee reviewed and approved a Stock
Option Guide Chart for both Manor Care and the Company's executives. The Stock
Option Guide Chart utilized a market based salary multiple to establish a
competitive range of stock options from which executive awards could be
determined.
In accordance with common competitive practice, many of the stock option
grants to Company executive officers in fiscal year 1997 by the Manor Care
Compensation Committee prior to the Manor Care Spin-off were larger than
competitive annual grants in contemplation of the spin-off.
Compensation of the Vice Chairman and Chief Executive Officer
The actions taken with respect to Mr. Floyd's fiscal year 1997 total
compensation and the employment agreement entered into with him were approved
by the Manor Care Board of Directors. The employment agreement provided that,
upon the Manor Care Spin-off, Mr. Floyd would receive a grant of restricted
stock, a significant grant of stock options and a one-time bonus. These grants
were intended in part to make Mr. Floyd whole for certain incentive and bonus
compensation which he forfeited from his previous employer when he commenced
employment at the Company as well as to significantly align him with
shareholder interests. The terms of the employment agreement are discussed in
more detail under the caption "The Distribution Proposals--Certain Information
Concerning Franchising--Management."
THE COMPENSATION COMMITTEE
JERRY E. ROBERTSON, CHAIRMAN
STEWART BAINUM (NOT A MEMBER OF COMMITTEE NO. 2)
FREDERIC V. MALEK
BARBARA BAINUM
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PERFORMANCE GRAPH
The following graph compares the performance of Choice Common Stock with the
performance of the New York Stock Exchange Composite Index ("NYSE Composite
Index") and a peer group index (the "Peer Group Index") by measuring the
changes in common stock prices from November 4, 1996, plus assumed reinvested
dividends. The Commission's rules require that Choice select a peer group in
good faith with which to compare its stock performance by selecting a group of
companies in lines of business similar to its own. Accordingly, Choice has
selected a peer group that includes companies which are actively traded on the
New York Stock Exchange and the NASDAQ Stock Market and which own and operate
hotels similar to those owned and operated by Choice. The common stock of the
following companies have been included in the Peer Group Index: Doubletree
Corporation, LaQuinta Hotel Corporation, Promus Hotel Corporation, Red Lion
Inns Limited Partnership and HFS, Inc.
The graph assumes that $100 was invested on November 4, 1996, in each of
Choice Common Stock, the NYSE Composite Index and the Peer Group Index, and
that all dividends were reinvested. In addition, the graph weighs the
constituent companies on the basis of their respective capitalization,
measured at the beginning of each relevant time period.
COMPANY, NYSE COMPOSITE INDEX, PEER GROUP INDEX
COMPARISON OF CUMULATIVE TOTAL RETURNS
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
CHOICE PEER NYSE
COMMON GROUP COMPOSITE
STOCK INDEX INDEX
----------- --------- ----------
<S> <C> <C> <C>
11/04/1996 $100.00 $100.00 $100.00
02/28/1997 $105.1 $96.0 $111.6
05/30/1997 $107.7 $86.0 $119.1
</TABLE>
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PROPOSAL SIX: APPROVAL OF CHOICE HOTELS INTERNATIONAL, INC.
1996 LONG-TERM INCENTIVE PLAN
General. On October 11, 1996, the Board of Directors adopted the Choice
Hotels International, Inc. 1996 Long-Term Incentive Plan (the "1996 Incentive
Plan") for key employees (including officers) of the Company and its
subsidiaries subject to approval of the 1996 Incentive Plan by the affirmative
vote of the holders of a majority of the number of shares of Company Common
Stock present in person or by proxy at the Annual Meeting. The 1996 Incentive
Plan authorizes the awarding of a maximum of 7.1 million shares (subject to
adjustment for stock splits and similar capital changes) of Company Common
Stock to eligible employees as described in greater detail below. As of August
5, 1997, 6,083,230 shares of Company Common Stock remain for issuance under
the 1996 Incentive Plan.
The continuing growth and development and financial success of the Company
and its subsidiaries are dependent upon ensuring the best possible management.
The Board of Directors believes the 1996 Incentive Plan will be an important
aid to the Company in attracting and retaining individuals of outstanding
abilities and in rewarding them for the continued profitable performance of
the Company and its subsidiaries.
The types of awards that may be granted under the 1996 Incentive Plan are
restricted shares, incentive stock options, nonqualified stock options, stock
appreciation rights and performance shares. The 1996 Incentive Plan provides
that over the next ten years restricted shares, incentive stock options,
nonqualified stock options, stock appreciation rights, and/or performance
shares involving up to 7.1 million shares (subject to adjustment for stock and
similar capital changes) of Company Common Stock may be granted. Company
Common Stock issued under the 1996 Incentive Plan may be authorized and
unissued stock, treasury stock or stock purchased on the open market
(including in private transactions). To the extent that an award lapses or the
rights of a participant to whom it was granted terminate, any shares of
Company Common Stock subject to the award will again be available for awards
under the 1996 Incentive Plan. The following description of the 1996 Incentive
Plan is qualified in its entirety by reference to the Choice Hotels
International, Inc. 1996 Long-Term Incentive Plan, a copy of which is attached
as Exhibit E-1 to this Proxy Statement. The amount of compensation that will
accrue to the participants pursuant to the 1996 Incentive Plan, if approved by
the stockholders at the Annual Meeting, is not currently determinable.
The 1996 Incentive Plan was drafted to obtain the benefits of the exemption
from Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act")
provided by Rule 16b-3. Section 16(b) of the Exchange Act provides, among
other things, that an officer who purchases and sells the stock of the
corporation which employs him within a six month period is liable to the
corporation for the amount by which the sales price exceeds the purchase
price. Rule 16b-3 promulgated under the Exchange Act provides that the
acquisition of stock by an officer of the corporation under an 1996 Incentive
Plan, pursuant to certain requirements, does not constitute a "transaction"
subject to Section 16(b) of the Exchange Act.
Administration. The 1996 Incentive Plan provides that it will be
administered by one or more Key Executive Stock Option Plan Committee(s) of
the Board of Directors (the "Committee"), which establishes the conditions of
each grant made under the 1996 Incentive Plan and determines which key
employees will receive awards as well as the type and amount of each award.
Members of at least one of the Committees shall be non-employee directors as
defined in Rule 16b-3 and are not eligible to receive awards under the 1996
Incentive Plan.
Eligibility. Key employees of the Company and its subsidiaries (including
employees who are members of the Board of Directors, but excluding directors
who are not employees) who, in the opinion of the Committee, are mainly
responsible for the continued growth and development and financial success of
the business of the Company or one of its subsidiaries are eligible to be
granted awards under the 1996 Incentive Plan. Subject to the provisions of the
1996 Incentive Plan, the Committee shall from time to time select from such
eligible persons those to whom awards shall be granted and determine the
number of shares to be granted. Because eligibility is determined by these
subjective criteria, it is not possible at this time to determine either the
number of employees eligible to participate in the 1996 Incentive Plan or the
amount of awards which will be made.
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In connection with the Manor Care Spin-off, Manor Care options held by
Company employees and some Manor Care employees were converted into options to
purchase Company Common Stock. Such converted options are deemed to be
governed by the 1996 Incentive Plan but are not deemed to be issued under the
1996 Incentive Plan. On March 4, 1996, the Company granted to William R. Floyd
under the 1996 Incentive Plan 85,470 shares of restricted Company Common
Stock, including 34,188 shares pursuant to Incentive Stock Options. On
February 25, 1997, the Company granted to Thomas Mirgon under the 1996
Incentive Plan options to purchase 40,000 shares of Company Common Stock,
including 10,000 shares pursuant to Incentive Stock Options, and to Joseph
Squeri, options to purchase 20,000 shares of Company Common Stock, including
5,000 shares pursuant to Incentive Stock Options. All of such awards will vest
at the rate of twenty percent per year for the first five years, and expire
ten years after the date of the award.
Restricted Shares. Restricted share awards are shares of Company Common
Stock bearing restrictive legends prohibiting their sale, transfer, pledge or
hypothecation until the expiration of a restriction period of not more than
ten years set at the time of grant. In addition or in lieu of a restriction
period, the Committee may establish a performance goal which must be achieved
as a condition to retention of the award. The recipient of an award is
entitled to receive dividends and vote the restricted shares, unless
forfeited.
Stock Options. Options granted under the 1996 Incentive Plan may be either
Incentive Stock Options, as defined in the Internal Revenue Code, as amended,
or options which do not so qualify ("nonqualified options"). At the time an
option is granted, the Committee determines the number of shares of Company
Common Stock subject to each stock option, the manner and time of exercise,
and the vesting schedule. No options granted under the 1996 Incentive Plan may
be exercised more than 10 years after date of grant; however, Incentive Stock
Options granted to a Ten Percent Shareholder (as defined) may not be exercised
more than 5 years after the date of grant. The option price per share for
stock options will be set in the grant, but will be equal to or greater than
the fair market value of a share of Company Common Stock on the date of grant,
except with respect to an Incentive Stock Option granted to a Ten Percent
Shareholder (as defined) shall be at least 110% of the fair market value on
the date of grant. The option exercise price may be paid with cash and/or
shares of Company Common Stock. Options will be evidenced by stock option
agreements in a form approved by the Committee and are not transferable except
by will or the laws of descent and distribution. Under the 1996 Incentive
Plan, no Covered Employee (as defined in Section 162(m)(3) of the Internal
Revenue Code) may be granted more than 100,000 shares during any calendar
year. With respect to Incentive Stock Options granted stock options for any
employee, the aggregate fair market value determined on the date of grant with
respect to which any Incentive Stock Option is first exercisable shall not
exceed $100,000.
The granting of an option does not entitle the participant to any dividends,
voting or other rights of a stockholder, unless and until the participant
receives stock upon exercise of the option. The Committee may limit an option
by restricting its exercise in whole or in part for specified periods.
Stock Appreciation Rights. An SAR is the right to receive payment for the
appreciation in value of one share of Company Common Stock over a specified
price. An SAR may be granted either in tandem with a stock option award or
independently. If the SAR is granted in tandem with a stock option award, the
payment is measured by the excess of the fair market value of the Company
Common Stock at the time of exercise over the option price (which cannot be
less than the fair market value of the stock at the time of grant). If the SAR
is granted independent of a stock option, the Committee will specify whether
the award is a "regular" SAR or whether the award is a "book value" SAR. If
the award is a "regular" SAR, the payment is measured by the excess of the
fair market value of the stock at the time of exercise over the fair market
value at the time of grant. If the award is a "book value" SAR, the payment is
measured by the excess of the book value of the Company Common Stock at the
time of exercise over the book value of the Company Common Stock at the time
of grant.
Stock appreciation payments, at the election of the participant, may be made
in cash or Company Common Stock or a combination of both. The Committee must
approve any election to receive cash.
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An SAR issued pursuant to an option cannot be exercised less than six months
after the grant; an SAR issued independently is subject to the terms and
conditions established on grant. SARs are deemed to be exercised on the last
day of the Exercise Period, if not previously exercised, which may not extend
more than ten years beyond the date of grant. The Committee may impose such
restrictions on transferability of SARs as it may determine.
The granting of an SAR does not entitle the participant to any dividend,
voting or other rights of a stockholder, unless and until the participant
receives stock upon the exercise of an SAR. SARs which are not exercisable
immediately upon being granted may be made immediately exercisable upon the
occurrence of retirement or disability, as determined by the Committee in its
sole discretion. Under the 1996 Incentive Plan, no Covered Employee (as
defined in Section 162(m)(3) of the Internal Revenue Code) may be granted more
than 100,000 SARs during any calendar year.
Performance Shares. A performance share award involves the grant of a right
to receive a specified number of shares of the Company Common Stock upon
satisfaction of certain performance-related objectives specified in the
granting instrument. The performance-related objectives may relate to the
individual, the Company, a department or a division of the Company and/or a
group or class of participants. The measuring period used to establish the
performance criteria will be specified by the Committee at the time of grant
and may be subsequently waived or reduced, or the performance criteria may be
adjusted, upon the occurrence of events determined by the Committee in its
sole discretion to justify such waiver, reduction or adjustment. Under the
1996 Incentive Plan, no Covered Employee (as defined in Section 162(m)(3) of
the Internal Revenue Code) may be granted more than 100,000 Performance Shares
during any calendar year.
Retirement or Disability. The Committee may, in its discretion, waive the
forfeiture, termination or lapse of an award in the event of retirement or
disability of the participant.
Income Tax Consequences. The Federal income tax consequences of an award
under the 1996 Incentive Plan depend on the type of award, as discussed below.
The grant of a restricted share award or a performance share award does not
immediately produce taxable income to a recipient or a tax deduction to the
Company. However, at the time the restrictions expire or the performance
objectives have been achieved, as the case may be, a recipient will recognize
taxable ordinary income in an amount equal to the fair market value of the
stock on the date the restrictions expire or the performance criteria are
achieved and the Company will be entitled to a corresponding income tax
deduction. In the case of a restricted share award, during the restriction
period, a recipient will be taxed on the dividends received from the
restricted shares as additional compensation, and the Company will be entitled
to a corresponding compensation deduction.
Generally, a recipient of an incentive stock option will not recognize
taxable income at the time of grant or exercise and the Company will not be
entitled to an income tax deduction. Provided the minimum holding periods are
satisfied, any gain on a disposition of stock acquired through an incentive
stock option will be taxable to a recipient as long-term capital gain. If the
minimum holding periods are not satisfied, a recipient will recognize ordinary
income in the amount of the excess of the fair market value of the stock on
the date the option is exercised over the option price, and the Company will
be entitled to a corresponding income tax deduction.
The grant of a nonqualified stock option does not result in taxable income
to a recipient or a tax deduction for the Company. Upon exercise, a recipient
will recognize taxable ordinary income in an amount equal to the excess of the
fair market value of the stock on the date of exercise over the option price,
and the Company will be entitled to a corresponding income tax deduction.
A recipient of a stock appreciation right will not recognize taxable income
at the time the right is granted, and the Company will not be entitled to a
tax deduction. However, ordinary taxable income will be recognized by a
recipient and a corresponding deduction will be taken by the Company, at the
time of exercise, in an amount equal to the cash and the fair market value of
the stock received.
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Amendment and Termination. The Board of Directors may at any time and from
time to time alter, amend, suspend or terminate the 1996 Incentive Plan in
whole or in part, except (i) any such action affecting options granted or to
be granted under the 1996 Incentive Plan which are intended to qualify as
Incentive Stock Options shall be subject to stockholder approval to the extent
such stockholder approval is required pursuant to Section 422 of the Internal
Revenue Code and (ii) without the consent of the participant to whom any award
has been granted, no such action may be taken which adversely affects the
rights of such participant concerning such award, except as such termination
or amendment of the 1996 Incentive Plan is required by statute, or rules and
regulations promulgated thereunder.
The 1996 Incentive Plan terminates on October 11, 2006. Awards may be
granted under the 1996 Incentive Plan at any time and from time to time prior
to the termination of the 1996 Incentive Plan. Any award outstanding at the
time the 1996 Incentive Plan is terminated shall remain in effect until said
award is exercised or expires.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
PROPOSAL SIX.
PROPOSAL SEVEN: APPROVAL OF CHOICE HOTELS INTERNATIONAL, INC.1996 EMPLOYEE
STOCK PURCHASE PLAN
General. On October 11, 1997, the Board of Directors unanimously approved
the Choice Hotels International, Inc. 1997 Employee Stock Purchase Plan (the
"Stock Purchase Plan") subject to approval of the Stock Purchase Plan by a
majority of the shares of Company Common Stock present in person or by proxy
at the Annual Meeting.
The purposes of the Stock Purchase Plan are to build a proprietary interest
among employees of the Company and to assist the Company in its goal of
recruiting and retaining highly qualified employees at all levels of the
organization.
The following description of the Stock Purchase Plan is qualified in its
entirety by reference to the Choice Hotels International, Inc. 1997 Employee
Stock Purchase Plan, a copy of which is attached as Exhibit E-2 to this Proxy
Statement. The amount of compensation that will accrue to the employees
pursuant to the Stock Purchase Plan, if approved by the stockholders, is not
currently determinable.
The Stock Purchase Plan authorizes the purchase of a maximum of 1,000,000
shares (subject to adjustment for stock splits and similar capital changes) of
Company Common Stock by eligible employees.
Eligibility. Each employee of the Company and its subsidiaries having at
least one year of continuous service on the first day of each January, April,
July and October (an "Offering Date"), beginning January 1, 1997, is eligible
to participate in the Stock Purchase Plan. All employees will be eligible to
participate after completing one year of employment. Any employee who
immediately after the grant of a right owns 5% or more of the Company Common
Stock, however, would not be eligible to participate. At June 30, 1997, the
Company employed approximately 5,450 persons, of whom approximately 2,970 meet
the eligibility requirements set forth above.
Administration. The Stock Purchase Plan is administered by the Board of
Directors.
Rights will be granted quarterly on each Offering Date, and are exercisable
effective on the succeeding last trading day of March, June, September and
December, respectively. Eligible employees may purchase shares of Company
Common Stock through accumulation of payroll deductions (of not less than 2%
nor more than 10% of compensation, as defined in the Stock Purchase Plan). No
Participant shall have the right to purchase shares of Company Common Stock
under the Plan at a rate of more than $25,000 in value in any calendar year,
such value to be based on the fair market value of the Company Common Stock as
of the Offering Date on which the Participant becomes eligible to purchase
Company Common Stock in such year under the terms of the Plan. At
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the end of each three month Offering Period, the Company will contribute cash
equal to one-ninth of the employee payroll deductions to the Stock Purchase
Plan, and the aggregate employee payroll deductions and the Company
contribution will be used either by the Company to sell Company Common Stock
to the participants or by the Company's designated agent to purchase Company
Common Stock in the open market. The agent will allocate the purchased Company
Common Stock among the employee accounts in proportion to their payroll
deductions. The Company will pay the administrative expenses for the purchase
of the Company Common Stock, including broker's commissions, transfer fees and
similar costs.
Amendment and Termination. The Board of Directors may at any time amend or
terminate the Stock Purchase Plan except that no action may be made without
the approval of stockholders to the extent such approval is required pursuant
to Section 423 of the Internal Revenue Code.
Federal Income Tax Consequences. Generally, a recipient of stock acquired
through the Stock Purchase Plan will not recognize taxable income (and the
Company will not be entitled to an income tax deduction) until such recipient
disposes of the stock. Provided the minimum holding periods are satisfied,
upon disposition of stock acquired through the Stock Purchase Plan, the lesser
of (1) the excess of the fair market value of the stock on the date of
purchase over the price paid, or (2) the excess of the fair market value of
the stock at the time of disposition over the price paid, will be taxable to a
recipient as ordinary income (compensation), and the Company will not be
entitled to a corresponding income tax deduction. Any additional gain will be
taxable to such recipient as long-term capital gain. If the minimum holding
periods are not satisfied, a recipient will recognize ordinary income
(compensation) in the amount of the excess of the fair market value of the
stock on the date of purchase over the price paid, and the Company will be
entitled to a corresponding income tax deduction. Any additional gain will be
taxable to such recipient as long-term capital gain.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
PROPOSAL SEVEN.
STOCKHOLDERS PROPOSALS FOR 1998
Under the rules of the Commission, any stockholder proposal intended for
inclusion in the proxy material for the annual meeting of stockholders to be
held in 1998 must be received by the Company by April 18, 1998 to be eligible
for inclusion in such proxy material. Proposals should be addressed to Michael
J. DeSantis, Secretary, Choice Hotels International, Inc., 10750 Columbia
Pike, Silver Spring, Maryland 20901. Proposals must comply with the proxy
rules of the Commission relating to stockholder proposals in order to be
included in the proxy materials.
GENERAL
The Company's Annual Report for 1997, including consolidated financial
statements and other information (the "Company 1997 Annual Report"),
accompanies copies of this Proxy Statement being mailed to the Company
stockholders but does not form a part of the proxy soliciting materials. A
complete list of the stockholders entitled to vote at the Company Annual
Meeting will be open and available for examination by any stockholder, for any
purpose germane to the Company Annual Meeting, between 9:00 a.m. and 5:00 p.m.
at the Company's offices at 10750 Columbia Pike, Silver Spring, Maryland 20901
from September 5, 1997 through September 15, 1997 and at the time and the
place of the Company annual meeting.
The Company will provide each of the stockholders, without charge, upon the
written request of any such person, a copy of the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1997 (the "Company 1997 10-K"),
including the financial statements and the financial statement schedules
required to be filed with the Commission pursuant to the rules promulgated
under the Exchange Act. Exhibits to the Company 1997 10-K will not be supplied
unless specifically requested, for which there may be a reasonable charge.
Those
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stockholders wishing to obtain a copy of the Company 1997 Form 10-K should
submit a written request to Michael J. DeSantis, Secretary, Choice Hotels
International, Inc., 10750 Columbia Pike, Silver Spring, Maryland 20901.
In addition to solicitation by mail, proxies may be solicited in person, or
by telephone or telegraph, by directors and by officers and other regular
employees of the Company. The Company has also retained ChaseMellon
Shareholder Services, L.L.C. to act as solicitation agent on behalf of the
Company for a fee not to exceed $7,500. All expenses in connection with the
preparation of proxy material and the solicitation of proxies will be borne by
the Company.
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INDEX TO FINANCIAL STATEMENTS
Choice Hotels Franchising, Inc.
<TABLE>
<S> <C>
Report of Independent Public Accountants................................... F-2
Combined Balance Sheets as of May 31, 1997 and May 31, 1996................ F-3
Combined Statements of Income for the fiscal years ended May 31, 1997, May
31, 1996 and
May 31, 1995.............................................................. F-4
Combined Statements of Cash Flows for the fiscal years ended May 31, 1997,
May 31, 1996 and
May 31, 1995.............................................................. F-5
Notes to Combined Financial Statements..................................... F-6
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Choice Hotels Franchising, Inc.:
We have audited the accompanying combined balance sheets of Choice Hotels
Franchising, Inc., as defined under "Basis of Presentation" in the Notes to
Combined Financial Statements, as of May 31, 1997 and 1996, and the related
combined statements of income and cash flows for each of the three years in
the period ended May 31, 1997. These combined financial statements are the
responsibility of Franchising's management. Our responsibility is to express
an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Choice Hotels
Franchising, Inc. as of May 31, 1997 and 1996, and the combined results of
their operations and their combined cash flows for each of the three years in
the period ended May 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Washington, D.C.,
June 24, 1997
F-2
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
(SEE BASIS OF PRESENTATION)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................. $ 4,167 $ 3,812
Receivables (net of allowance for doubtful accounts of
$6,159 and $4,515, respectively).......................... 24,472 21,875
Prepaid expenses........................................... 599 2,793
Other...................................................... 5,077 3,429
-------- --------
Total current assets..................................... 34,315 31,909
-------- --------
PROPERTY AND EQUIPMENT, AT COST, NET OF ACCUMULATED
DEPRECIATION................................................ 43,377 38,305
-------- --------
GOODWILL, NET OF ACCUMULATED AMORTIZATION.................... 69,939 65,377
-------- --------
FRANCHISE RIGHTS, NET OF ACCUMULATED AMORTIZATION............ 50,503 53,138
-------- --------
INVESTMENT IN FRIENDLY HOTELS, PLC........................... 17,161 17,069
-------- --------
OTHER ASSETS................................................. 6,178 7,005
-------- --------
$221,473 $212,803
======== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current portion of long term debt.......................... $ 36 $ 57
Accounts payable........................................... 20,412 18,338
Accrued expenses........................................... 10,965 15,184
Income taxes payable....................................... 3,318 2,257
-------- --------
Total current liabilities................................ 34,731 35,836
-------- --------
LONG TERM DEBT............................................... 46,427 66,558
-------- --------
NOTES PAYABLE TO MANOR CARE.................................. 78,700 78,700
-------- --------
DEFERRED INCOME TAXES ($3,498 AND $427, RESPECTIVELY) AND
OTHER LIABILITIES........................................... 4,422 1,177
-------- --------
INVESTMENTS AND ADVANCES FROM PARENT......................... 57,193 30,532
-------- --------
$221,473 $212,803
======== ========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-3
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
(SEE BASIS OF PRESENTATION)
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Royalty fees................................... $ 95,157 $ 86,173 $ 75,402
Marketing and reservation fees................. 104,216 98,906 83,645
Product sales.................................. 23,643 21,570 14,461
European hotel operations...................... 17,737 19,609 18,638
Initial franchise fees......................... 14,250 13,520 9,837
Other.......................................... 17,252 10,876 10,689
-------- -------- --------
Total revenues............................... 272,255 250,654 212,672
-------- -------- --------
OPERATING EXPENSES
Marketing and reservation...................... 101,421 96,246 81,545
Selling, general and administrative............ 51,102 45,196 45,589
Product cost of sales.......................... 22,766 20,709 13,882
European hotel operations...................... 16,166 17,521 17,922
Depreciation and amortization.................. 10,438 11,839 11,768
Provision for asset impairment................. -- 24,760 --
-------- -------- --------
Total operating expenses..................... 201,893 216,271 170,706
-------- -------- --------
Operating income............................. 70,362 34,383 41,966
-------- -------- --------
OTHER
Minority interest expense...................... -- 1,532 2,200
Interest on notes payable to Manor Care........ 7,083 7,083 7,083
Interest and other, net........................ 3,704 4,791 3,672
-------- -------- --------
Total other expenses......................... 10,787 13,406 12,955
-------- -------- --------
Income before income taxes....................... 59,575 20,977 29,011
Income taxes..................................... (24,845) (9,313) (12,783)
-------- -------- --------
NET INCOME....................................... $ 34,730 $ 11,664 $ 16,228
======== ======== ========
Pro forma weighted average shares outstanding.... 62,680 62,628 62,480
======== ======== ========
Pro forma earnings per share..................... $ 0.55 $ 0.19 $ 0.26
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements of
income.
F-4
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
(SEE BASIS OF PRESENTATION)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 34,730 $ 11,664 $ 16,228
Reconciliation of net income to net cash pro-
vided by operating activities:
Depreciation and amortization................ 10,438 11,839 11,768
Provision for bad debts...................... 2,238 685 692
Increase (decrease) in deferred taxes........ 3,171 (13,527) 68
Provision for asset impairment............... -- 24,760 --
Change in assets and liabilities:
Change in receivables...................... (4,835) (7,533) (3,000)
Change in prepaid expenses and other cur-
rent assets............................... 1,615 (990) 1,524
Change in current liabilities.............. (2,145) 4,050 3,694
Change in income taxes payable............. 1,061 (265) 158
Change in other liabilities................ 175 2,059 6,719
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.. 46,448 32,742 37,851
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment........... (10,630) (6,506) (13,611)
Purchase of minority interest.................. (2,494) (55,269) --
Investment in Friendly Hotels, PLC............. -- (17,069) --
Other items, net............................... (4,747) 345 5,878
-------- -------- --------
NET CASH UTILIZED IN INVESTING ACTIVITIES........ (17,871) (78,499) (7,733)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and other long-term
debt.......................................... 31,107 17,296 15,567
Principal payments of debt..................... (51,260) (350) (13,492)
Cash transfers (to) from Parent, net........... (8,069) 31,567 (33,336)
-------- -------- --------
NET CASH (UTILIZED IN) PROVIDED BY
FINANCING ACTIVITIES...................... (28,222) 48,513 (31,261)
-------- -------- --------
Net change in cash and cash equivalents.......... 355 2,756 (1,143)
Cash and cash equivalents at beginning of peri-
od.............................................. 3,812 1,056 2,199
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....... $ 4,167 $ 3,812 $ 1,056
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements of
cash flows.
F-5
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On March 7, 1996, Manor Care, Inc. ("Manor Care") announced its intention to
proceed with the separation of its lodging business ("Choice Hotels
International, Inc." or the "Company") from its health care business through a
spin-off of its lodging business (the "Manor Care 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 of Directors set the Record Date and the
Distribution Date. The Manor Care Distribution was made on November 1, 1996 to
holders of record of Manor Care's Common Stock on October 10, 1996.
The Manor Care 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 directly or through
its subsidiaries (the "Lodging Business").
On November 1, 1996, concurrent with the Manor Care Distribution, the
Company changed its name from Choice Hotels Holdings, Inc. to Choice Hotels
International, Inc., and the Company's franchising subsidiary, formerly named
Choice Hotels International, Inc., changed its name to Choice Hotels
Franchising, Inc.
On April 29, 1997, Choice Hotels International, Inc. announced its intention
to proceed with the separation of its domestic lodging business from its
franchising and European hotel business through a spin-off of its franchising
business (the "Distribution"). The Company's Board of Directors voted to
approve, in principle, the Distribution subject to receipt of other approvals
and consents and satisfactory implementation of the arrangements for the
Distribution. The Company intends to consummate the Distribution in the second
quarter of fiscal year 1998 through a special dividend to its stockholders of
one share of common stock of Choice Hotels Franchising, Inc. ("Franchising")
for each share of Company common stock. The Distribution is conditional upon
certain matters, including declaration of the special dividend by the
Company's Board of Directors, receipt of a ruling from the Internal Revenue
Service that the Distribution will be tax-free and approval by the Company's
shareholders of the special dividend and of the proposed reverse stock split
of the Company post-Distribution. It is anticipated that upon the
Distribution, the Company will change its corporate name to Sunburst
Hospitality Corporation ("Sunburst") and Choice Hotels Franchising, Inc. will
change its name to Choice Hotels International, Inc.
As of May 31, 1997, Franchising had franchise agreements with 3,344 hotels
operating in 33 countries under the following brand names: Comfort, Clarion,
Sleep, Quality, Rodeway, Econo Lodge and MainStay Suites. Franchising also
owns or manages 14 hotels in Germany, France and England. The operations of
Franchising will consist principally of the hotel franchise operations and the
hotel operations in Europe formerly conducted by the Company.
The combined financial statements present the financial position, results of
operations and cash flows of Franchising as if it were formed as a separate
entity of Manor Care which conducted the hotel franchising business and
European hotel operations of Manor Care through November 1, 1996 and as if
Franchising were a separate company for all periods presented. Manor Care's
and the Company's historical basis in the assets and liabilities of
Franchising has been carried over to the combined financial statements. All
material intercompany transactions and balances between Franchising and its
subsidiaries have been eliminated. Changes in the Investments and advances
from Parent represent the net income of Franchising plus the net change in
cash transferred between Franchising and Manor Care through November 1, 1996
and the Company through May 31, 1997.
F-6
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
An analysis of the activity in the "Investments and advances from Parent"
account for the three years ended May 31, 1997 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Balance, May 31, 1994......................................... $ 4,409
Cash transfers to Parent, net................................. (33,336)
Net income.................................................... 16,228
--------
Balance, May 31, 1995......................................... (12,699)
Cash transfers from Parent, net............................... 31,567
Net income.................................................... 11,664
--------
Balance, May 31, 1996......................................... 30,532
Cash transfers to Parent, net................................. (8,069)
Net income.................................................... 34,730
--------
Balance, May 31, 1997......................................... $ 57,193
========
</TABLE>
The average balance of the Investments and advances from Parent was $43.9
million, $8.9 million and ($4.1) million for fiscal years 1997, 1996 and 1995,
respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year combined
financial statements to conform to the current year presentation.
PRO FORMA INCOME PER SHARE (UNAUDITED)
The pro forma income per common share is computed by dividing net income by
the pro forma weighted average number of outstanding common shares,
aggregating 62.7 million, 62.6 million and 62.5 million in fiscal years 1997,
1996 and 1995, respectively. The pro forma weighted average number of
outstanding common shares is based on the Company's weighted average number of
outstanding common shares for the period November 1, 1996 through May 31, 1997
and Manor Care's weighted average number of outstanding common shares for the
period June 1, 1996 through October 31, 1996 and for fiscal years 1996 and
1995.
CASH AND CASH EQUIVALENTS
Franchising considers all highly liquid investments purchased with a
maturity of three months or less at the date of purchase to be cash
equivalents.
PROPERTY AND EQUIPMENT
The components of property and equipment in the combined balance sheets
were:
<TABLE>
<CAPTION>
MAY 31,
-----------------
1997 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Land...................................................... $ 3,033 $ 3,124
Building and improvements................................. 27,409 29,274
Furniture, fixtures and equipment......................... 30,526 25,181
------- --------
60,968 57,579
Less: Accumulated depreciation............................ (17,591) (19,274)
------- --------
$43,377 $ 38,305
======= ========
</TABLE>
F-7
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows:
<TABLE>
<S> <C>
Building and improvements........................................ 10-40 years
Furniture, fixtures and equipment................................ 3-20 years
</TABLE>
MINORITY INTEREST
Prior to May 31, 1996, certain former members of the Company's management
had a minority ownership interest in Choice Hotels Franchising, Inc., a
majority owned subsidiary. Amounts reflected as minority interest represent
the minority owners' share of income in Choice Hotels Franchising, Inc. As of
May 31, 1997, the Company had repurchased all of the outstanding minority
ownership interest.
GOODWILL
Goodwill primarily represents an allocation of the excess purchase price of
the stock of Choice Hotels Franchising, Inc. over the recorded minority
interest. Goodwill is being amortized on a straight-line basis over 40 years.
Such amortization amounted to $1.9 million in the year ended May 31, 1997,
$1.1 million in the year ended May 31, 1996, and $598,000 in the year ended
May 31, 1995. Goodwill is net of accumulated amortization of $5.0 million and
$3.1 million at May 31, 1997 and 1996, respectively.
FRANCHISE RIGHTS
Franchise rights are an intangible asset and represent an allocation in
purchase accounting for the value of long-term franchise contracts. The
majority of the balance resulted from the Econo Lodge and Rodeway acquisitions
made in fiscal year 1991. Franchise rights acquired are amortized over an
average life of twenty-six years. Amortization expense for the fiscal years
ended May 31, 1997, 1996 and 1995 amounted to $2.9 million, $2.6 million and
$2.6 million, respectively. Franchise rights are net of accumulated
amortization of $14.0 million and $11.1 million at May 31, 1997 and 1996,
respectively.
SELF-INSURANCE PROGRAM
Subsequent to the Manor Care Distribution, Franchising maintained its own
self-insurance program for certain levels of general and professional
liability, automobile liability and workers' compensation coverage. The
estimated costs of these programs are accrued at present values based on
actuarial projections for known and anticipated claims.
Prior to the Manor Care Distribution, Franchising participated in Manor
Care's self-insurance program for certain levels of general and professional
liability, automobile liability and workers' compensation coverage. The
estimated costs of these programs are accrued at present values based on
actuarial projections for known and anticipated claims. All accrued self-
insurance costs through November 1, 1996 were assumed by Manor Care and have
been treated as paid to Manor Care, and as such, amounts paid to Manor Care up
to November 1, 1996 have been charged directly to Investments and advances
from Parent.
REVENUE RECOGNITION
Franchising enters into numerous franchise agreements committing to provide
licensees with various marketing services, a centralized reservation system
and limited rights to utilize Franchising's registered tradenames. These
agreements are typically for a period of twenty years, with certain rights to
the franchisee to terminate after 5, 10 or 15 years.
Initial franchise fees are recognized upon sale, because the initial
franchise fee is non-refundable and Franchising has no continuing obligations
related to the franchisee.
F-8
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Royalty fees, primarily based on gross room revenues of each franchisee, are
recorded when earned. Reserves for uncollectible accounts are charged to bad
debt expense and included in selling, general and administrative expenses in
the accompanying combined statements of income.
Franchising assesses franchisees monthly fees related to marketing and
reservations which are expended for national advertising, marketing, and
selling activities and the operation of a centralized reservation system.
IMPAIRMENT POLICY
Franchising evaluates the recoverability of long lived assets, including
franchise rights and goodwill, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability is measured based on net, undiscounted expected cash flows.
Assets are considered to be impaired if the net, undiscounted expected cash
flows are less than the carrying amount of the assets. Impairment charges are
recorded based upon the difference between the carrying value of the asset and
the expected net cash flows, discounted at an appropriate interest rate.
CAPITALIZATION POLICIES
Major renovations and replacements are capitalized to appropriate property
and equipment accounts. Upon sale or retirement of property, the cost and
related accumulated depreciation are eliminated from the accounts and the
related gain or loss is taken into income. Maintenance, repairs and minor
replacements are charged to expense.
FOREIGN OPERATIONS
Franchising accounts for foreign currency translation in accordance with
SFAS No. 52, "Foreign Currency Translation." Revenues generated by foreign
operations for the fiscal years ended May 31, 1997, 1996 and 1995 were $27.5
million, $29.9 million and $29.2 million, respectively. Losses were generated
by foreign operations for the fiscal years ended May 31, 1997, 1996 and 1995
of $1.8 million, $19.4 million and $5.7 million, respectively. Losses
generated by foreign operations for fiscal year 1996 include a $15.0 million
net of tax charge relating to a provision for asset impairment. The majority
of the revenues and losses of foreign operations relate to Franchising's
European business operations. Total assets relating to foreign operations were
$48.8 million and $56.8 million at May 31, 1997 and 1996, respectively.
Translation gains and losses are recorded in the cumulative translation
adjustment account included in Investments and advances from Parent in the
accompanying combined balance sheets as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Balance, May 31, 1994........................................ $ (31)
Net adjustments.............................................. 740
--------
Balance, May 31, 1995........................................ 709
Net adjustments.............................................. (2,459)
--------
Balance, May 31, 1996........................................ (1,750)
Net adjustments.............................................. (5,268)
--------
Balance, May 31, 1997........................................ $ (7,018)
========
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
F-9
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
Franchising is included in the consolidated federal income tax returns of
Manor Care and the Company. The income tax provision included in these
combined financial statements reflects the historical income tax provision and
temporary differences attributable to the operations of Franchising on a
separate return basis. Deferred taxes are recorded for the tax effect of
temporary differences between book and tax income.
Income before income taxes for the fiscal years ended May 31, 1997, 1996 and
1995 were derived from the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes
Domestic operations............................. $62,641 $52,801 $38,385
Foreign operations.............................. (3,066) (31,824) (9,374)
------- ------- -------
Combined income before income taxes............... $59,575 $20,977 $29,011
======= ======= =======
</TABLE>
Income before income taxes for domestic operations and foreign operations
for fiscal year 1996 includes a pretax provision of $24.8 million for asset
impairment.
The provisions for income taxes follows for the fiscal years ended May 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax (benefit) expense
Federal......................................... $19,421 $20,097 $14,169
Federal benefit of foreign operations........... (1,213) (2,792) (3,703)
State........................................... 3,950 3,754 2,292
Deferred tax (benefit) expense
Federal......................................... 2,293 125 58
Federal benefit of foreign operations........... -- (9,778) --
State........................................... 394 (2,093) (33)
------- ------- -------
$24,845 $ 9,313 $12,783
======= ======= =======
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at May 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and amortization.................... $(5,145) $(1,637) $(12,755)
Prepaid expenses................................. (856) (1,550) (1,386)
Other............................................ (2,799) (1,542) (2,165)
------- ------- --------
Gross deferred tax liabilities................... (8,800) (4,729) (16,306)
------- ------- --------
Foreign operations............................... 2,271 1,931 1,086
Accrued expenses................................. 3,181 2,065 1,343
Net operating loss............................... 609 820 1,031
Other............................................ 310 655 61
------- ------- --------
Gross deferred tax assets........................ 6,371 5,471 3,521
------- ------- --------
Net deferred tax (liability) asset............... $(2,429) $ 742 $(12,785)
======= ======= ========
</TABLE>
F-10
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the accompanying combined statements of income follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT
FEDERAL INCOME TAX RATE)
<S> <C> <C> <C>
Federal income tax rate....................... 35% 35% 35%
Federal taxes at statutory rate............... $20,853 $7,345 $10,154
State income taxes, net of Federal tax bene-
fit.......................................... 2,824 1,080 1,468
Minority interest............................. -- 536 770
Other......................................... 1,168 352 391
-------- ------- --------
Income tax expense............................ $ 24,845 $ 9,313 $ 12,783
======== ======= ========
</TABLE>
Cash paid for state income taxes was $1.3 million, $1.4 million and $549,000
for the years ended May 31, 1997, 1996 and 1995, respectively. Federal income
taxes were paid by Manor Care for the years ended May 31, 1995 and May 31,
1996 and the period from June 1, 1996 through October 31, 1996. Federal income
taxes were paid by the Company for the short period beginning November 1, 1996
and ending May 31, 1997.
Consistent with the existing Company tax sharing policy, all current Federal
provision amounts have been treated as paid to, or received from, the Company,
and as such, there are no current tax provision balances due to the Company at
May 31, 1997 or to Manor Care at May 31, 1996. Differences between amounts
paid to or received from Manor Care and the Company have been charged or
credited directly to Investments and advances from Parent.
ACCRUED EXPENSES
Accrued expenses at May 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Payroll.................................................. $ 7,950 $ 7,041
Other.................................................... 3,015 8,143
------- -------
$10,965 $15,184
======= =======
</TABLE>
LONG TERM DEBT AND NOTES PAYABLE
Debt consisted of the following at May 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
$250 million competitive advance and multi-currency
revolving credit facility with an average rate of 5.69%
at May 31, 1996.......................................... $ -- $ 50,557
$125 million competitive advance and multi-currency
revolving credit facility with an average rate of 6.28%
at May 31, 1997.......................................... 31,107 --
Notes payable to Manor Care, Inc. with a rate of 9% at May
31, 1997 and 1996, respectively.......................... 78,700 78,700
Capital lease obligations................................. 13,531 13,951
Other notes with an average rate of 5.94% and 6.33% at May
31, 1997 and 1996, respectively.......................... 1,825 2,107
-------- --------
Total indebtedness........................................ $125,163 $145,315
======== ========
</TABLE>
F-11
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of debt at May 31, 1997 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
----------- --------------
<S> <C>
1998.......................................................... $ 36
1999.......................................................... 87
2000.......................................................... 110,012
2001.......................................................... 210
2002.......................................................... 215
Thereafter.................................................... 14,603
--------
$125,163
========
</TABLE>
During fiscal year 1996 and through November 1, 1996, the Company was a co-
guarantor with Manor Care and other affiliates for a $250 million competitive
advance and multi-currency revolving credit facility. The facility provided
that up to $75.0 million was available in foreign currency borrowings under
the foreign currency portion of the facility. Franchising's borrowings under
this facility amounted to $50.6 million at May 31, 1996. Franchising was
charged interest for amounts borrowed under the foreign currency portion of
the facility at one of several interest rates, including LIBOR plus 26.25
basis points. Subsequent to the Manor Care Distribution, the Company utilized
its new credit facility, as described below, to repay Franchising's portion of
borrowings under Manor Care's foreign currency portion of the facility, and
the Company was released from all liabilities and guarantees relating to the
Manor Care credit facility.
On October 30, 1996, the Company entered into a $100.0 million competitive
advance and multi-currency revolving credit facility provided by a group of
seven banks. As a subsidiary of the Company, Franchising's cash requirements
and related borrowings were provided by the Company. This facility provides
that up to $75.0 million is available for borrowings in foreign currencies.
Borrowings under the facility are, at the option of the borrower, at one of
several rates including LIBOR plus from 20.0 to 62.5 basis points, based upon
a defined financial ratio and the loan type. In addition, the Company has the
option to request participating banks to bid on loan participation at lower
rates than those contractually provided by the facility. The facility
presently requires the Company to pay annual fees of 1/10 of 1% to 1/4 of 1%,
based upon a defined financial ratio, of the total loan commitment. The
facility will terminate on October 30, 1999. On May 5, 1997, the Company
increased the size of the facility from $100 million to $125 million. The
Company has $121.6 million outstanding under the facility at May 31, 1997 of
which $31.1 million has been allocated to Franchising. In connection with the
Distribution, Franchising intends to secure financing to repay its portion of
borrowings under the Company's foreign currency portion of the facility as
well as to provide for seasonal cash requirements.
The Company has $115.7 million payable to Manor Care as of May 31, 1997
assumed as part of the Manor Care Distribution. The portion of this
indebtedness related to Franchising acquisitions has been pushed down to
Franchising and is reflected as Notes payable to Manor Care in the
accompanying combined balance sheets totaling $78.7 million at May 31, 1997
and 1996, respectively. The loan will mature on November 1, 1999 and may be
prepaid in whole or in part, together with accrued interest, at the Company's
option. If the loan is prepaid prior to November 1, 1997, the Company will be
required to reimburse Manor Care on demand for any actual loss incurred or to
be incurred by Manor Care (for the period up to and including November 1,
1997) in the redeployment of the funds released by a prepayment of the loan.
The Notes payable to Manor Care are expected to be repaid with the proceeds
from operating cash flow or with third-party financing. Interest expense on
those notes for each of the years ended May 31, 1997, 1996 and 1995 was $7.1
million. Interest on the amount of the loan is payable quarterly at an annual
rate of 9%.
Cash paid for interest was $11.6 million, $11.8 million and $10.8 million
for fiscal years 1997, 1996 and 1995, respectively.
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CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
LEASES
Franchising operates certain property and equipment under operating leases
that expire at various dates through 2001. Future minimum lease payments total
approximately $280,000. Rental expense under non-cancellable operating leases
was $171,000 in 1997, $231,000 in 1996 and $400,000 in 1995. No amounts have
been included in minimum lease payments for office rent because Franchising is
not subject to a rental agreement. Franchising paid office rent of $4.0
million to the Company in 1997 based on the portion of total space occupied by
Franchising. Subsequent to the Distribution, Franchising will sublease office
space from Sunburst.
ACQUISITIONS AND DIVESTITURES
On May 31, 1995, Franchising repurchased one-half of the 11% interest held
by its management in Choice Hotels Franchising, Inc. Approximately $19.8
million was allocated to goodwill; the purchase cost of $27.4 million was paid
in June and July 1995. On May 31, 1996, Franchising repurchased the remaining
5.5% minority interest in Choice Hotels Franchising, Inc. for $27.9 million.
Approximately $26.4 million was allocated to goodwill.
On May 31, 1996, Franchising invested approximately $17.1 million in the
capital stock of Friendly Hotels, PLC ("Friendly"). In exchange for the $17.1
million investment, Franchising received 750,000 shares of common stock and
10,000,000 newly issued immediately convertible preferred shares. In addition,
Franchising granted to Friendly a Master Franchise Agreement for the United
Kingdom and Ireland in exchange for 333,333 additional shares of common stock.
At May 31, 1997, Franchising owned approximately 5% of the outstanding shares
of Friendly which would increase to approximately 27% if Franchising's
preferred stock were converted. The preferred shares carry a 5.75% dividend
payable in cash or in stock, at the Company's option. The dividend accrues
annually with the first dividend paid on the earlier of the third anniversary
of completion or on a conversion date. The proceeds of the investment received
by Friendly are to be used to support the construction of 10 Quality or
Comfort hotels. As a condition to the investment, Franchising has the right to
appoint two directors to the board of Friendly. Franchising is accounting for
the common stock investment under the equity method.
Franchising recognized $943,000 in preferred dividend income from the
Friendly investment during 1997.
TRANSACTIONS WITH SUNBURST
Franchising participates in a cash concentration system with the Company and
as such maintains no significant cash balances or banking relationships.
Substantially all cash received by Franchising has been immediately deposited
in and combined with the Company's corporate funds through its cash management
system. Similarly, operating expenses, capital expenditures and other cash
requirements of Franchising have been paid by the Company and charged to
Franchising. The net result of all of these intercompany transactions are
reflected in Investments and advances from Parent.
Since the Manor Care Distribution, Franchising has provided certain services
to the Company including, among others, executive management, human resources,
legal, accounting, tax, information systems and certain administrative
services, as required. Also since the Manor Care Distribution, the Company has
provided services to Franchising, either directly or through the Corporate
Services Agreement with Manor Care, including, among others, cash management,
payroll and payables processing, employee benefits plans, insurance,
accounting and certain administrative services, as required. Costs associated
with the Manor Care Corporate Services Agreement as well as costs of services
provided by the Company to Franchising or provided by Franchising to the
Company
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<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
have been allocated between the entity providing the services and the entity
receiving the services in the accompanying financial statements. As a result,
future administrative and corporate expenses are expected to vary from
historical results. However, Franchising has estimated that general and
administrative expenses incurred annually will not materially change after the
Distribution.
For purposes of providing an orderly transition after the Distribution, the
Company and Franchising will enter into various agreements, including, among
others, a Distribution Agreement, Tax Sharing Agreement, Corporate Services
Agreement and Employee Benefits Allocation Agreement. Effective at the
Distribution, these agreements will provide, among other things, that
Franchising (i) will receive and/or provide certain corporate and support
services, such as accounting, tax and computer systems support, (ii) will
establish pension, profit sharing and incentive plans similar to those in
place at the Company, (iii) will receive certain risk management services and
other miscellaneous administrative services and (iv) will adjust outstanding
options to purchase shares of Company Common Stock held by Company employees,
Franchising employees and employees of Manor Care. These agreements will
extend for a maximum period of 30 months from the Distribution date or until
such time as Franchising and the Company have arranged to provide such
services in-house or through another unrelated provider of such services.
On or prior to the Distribution date, the Company and Franchising will enter
into a strategic alliance agreement. Among other things, the agreement will
provide for (i) a right of first refusal to Franchising to franchise lodging
properties to be acquired or developed by the Company, (ii) certain
commitments by the Company for the development of Sleep Inns and MainStay
Suites hotels, (iii) continued cooperation of both parties with respect to
matters of mutual interest, such as new product and concept testing, (iv)
continued cooperation with respect to third party vendor arrangements and (v)
certain limitations on competition in each others' line of business. The
strategic alliance agreement extends for a term of 20 years with mutual rights
of termination on the 5th, 10th and 15th anniversaries.
During the periods presented, Sunburst operated substantially all of its
hotels pursuant to franchise agreements with Franchising. Total fees paid to
Franchising included in the accompanying financial statements for franchising
royalty, marketing and reservation fees were $9.5 million, $7.5 million, and
$5.3 million for the years ended May 31, 1997, 1996 and 1995, respectively.
COMMITMENTS AND CONTINGENCIES
Franchising is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and general counsel to
Franchising, the ultimate outcome of such litigation will not have a material
adverse effect on Franchising's business, financial position or results of
operations.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
Bonuses accrued for key executives of Franchising under incentive
compensation plans were $1.4 million in 1997, $1.1 million in 1996 and $1.4
million in 1995.
Employees of Franchising participate in retirement plans sponsored by the
Company, and prior to the Manor Care Distribution employees participated in
retirement plans sponsored by Manor Care. Costs allocated to Franchising are
based on the size of its payroll relative to the sponsor's payroll. Costs
allocated to Franchising were approximately $1.4 million in 1997, $817,000 in
1996 and $776,000 in 1995.
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CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Franchising is required to disclose the fair value of its financial
instruments in accordance with Statement of Financial Accounting Standards No.
107, "Disclosures about Fair Value of Financial Instruments." Fair values of
material balances were determined by using market rates currently available.
The balance sheet carrying amount of cash, cash equivalents and receivables
approximate fair value due to the short term nature of these items. Long term
debt consist of bank loans and Notes payable to Manor Care. Interest rates on
bank loans adjust frequently based on current market rates; accordingly, the
carrying amount of bank loans is equivalent to fair value. The carrying
amounts for long-term debt approximate fair market values.
PROVISION FOR ASSET IMPAIRMENT
During fiscal year 1996, Franchising began restructuring its European
operations. This restructuring effort included the purchase of an equity
interest in Friendly Hotels, PLC and a reevaluation of key geographic markets
in Europe. In connection with this restructuring, Franchising performed a
review of its European operations and in May 1996 recognized a $15.0 million
non-cash charge (net of a $9.8 million income tax benefit) against earnings
related to the impairment of assets associated with certain European hotel
operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Franchising has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption
of SFAS No. 121 did not have a material impact on Franchising's financial
statements.
Franchising plans to utilize the method under SFAS No. 123, "Accounting for
Stock-Based Compensation," which provides for disclosure of the impact of
stock-based compensation grants.
Franchising is required to adopt SFAS No. 128, "Earnings Per Share," and
SFAS No. 129, "Disclosure of Information about Capital Structure," no later
than fiscal year 1998. The adoption of these pronouncements will not
materially affect Franchising's financial statements. Franchising is required
to adopt SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," no
later than fiscal 1999. Management is still evaluating the impact that these
pronouncements will have on Franchising's financial statements.
F-15
<PAGE>
ANNEX A
FORM OF
RESTATED CERTIFICATE OF INCORPORATION
OF
CHOICE HOTELS FRANCHISING, INC.
Choice Hotels Franchising, Inc. (the "Corporation"), a corporation
incorporated on December 12, 1980 and existing under and by virtue of the
General Corporation Law of the State of Delaware (the "GCL"), hereby certifies
as follows:
FIRST: The board of directors of the Corporation (the "Board of Directors")
adopted a resolution proposing and declaring advisable the following
amendments to and restatement of the Certificate of Incorporation of the
Corporation.
SECOND: This Restated Certificate of Incorporation was duly adopted by the
sole stockholder of the Corporation in accordance with the provisions of
Sections 228, 242 and 245 of the GCL.
THIRD: The text of the Certificate of Incorporation is hereby amended and
restated as herein set forth in full:
1. The name of the Corporation is CHOICE HOTELS INTERNATIONAL, INC. (the
"Corporation").
2. The address of the Corporation's registered office in the State of
Delaware is 100 West Tenth Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
3. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the GCL.
4. The total number of shares of capital stock of all classifications
which the Corporation shall have authority to issue is One Hundred Sixty-
Five Million (165,000,000), of which One Hundred Sixty Million
(160,000,000) shares having a par value of One Cent ($.01) per share shall
be common stock, and Five Million (5,000,000) shares having a par value of
One Cent ($.01) per share shall be preferred stock.
Shares of common stock of the Corporation may be issued from time to time in
one or more classes or series, each of which class or series shall have such
distinctive designation or title as shall be fixed by the Board of Directors
prior to the issuance of any shares thereof. Each such class or series of
common stock shall have such voting powers (full or limited) or no voting
powers, such preferences and relative participating, optional or other special
rights, relative ranking and such qualifications, limitations or restrictions,
as shall be stated in such resolution or resolutions providing for the issue
of such class or series of common stock as may be adopted from time to time by
the Board of Directors prior to the issuance of any shares thereof pursuant to
the authority hereby expressly vested in it, all in accordance with the laws
of the State of Delaware.
Without limiting the generality of the foregoing, shares of a series of
common stock consisting of Seventy Five Million (75,000,000) shares, or such
larger number of shares as the Board of Directors shall from time to time fix
by resolution or resolutions, may be issued from time to time by the Board of
Directors. Shares of this series shall be designated, and are hereinafter
called "Common Stock."
The holders of record of the Common Stock shall be entitled to the following
rights:
(a) subject to the rights of any holders of any class or series of
capital stock as specified in the resolution providing for such class or
series of capital stock, to vote at all meetings of stockholders of the
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Corporation, and at all such meetings such holders shall have one vote in
respect of each share of Common Stock held of record by them;
(b) subject to the rights of any holders of any class or series of
capital stock having a preference with respect to dividends, to receive
when, if and as declared by the Board of Directors out of the assets of the
Corporation legally available therefor, such dividends as may be declared
by the Corporation from time to time to holders of Common Stock; and
(c) subject to the rights of any holders of any class or series of
capital stock having a preference with respect to distribution of assets
upon liquidation or dissolution, to receive the remaining assets of the
Corporation upon liquidation, dissolution or winding-up.
Shares of preferred stock of the Corporation may be issued from time to time
in one or more classes or series, each of which class or series shall have
such distinctive designation or title as shall be fixed by the Board of
Directors prior to the issuance of any shares thereof. Each such class or
series of preferred stock shall have such voting powers (full or limited) or
no voting powers, such preferences and relative participating, optional or
other special rights, relative ranking and such qualifications, limitations or
restrictions, as shall be stated in such resolution or resolutions providing
for the issue of such class or series of preferred stock as may be adopted
from time to time by the Board of Directors prior to the issuance of any
shares thereof pursuant to the authority hereby expressly vested in it, all in
accordance with the laws of the State of Delaware.
Subject to the rights of any holders of any class or series of capital
stock, as specified in the resolution providing for such class or series of
capital stock, the holders of Common Stock are expressly denied the preemptive
right to subscribe to any or all additional shares of capital stock of the
Corporation or any or all classes or series thereof.
5. The Corporation expressly elects not to be governed by Section 203 of
the GCL.
6. Subject to the rights of any holders of any class or series of capital
stock as specified in the resolution providing for such class or series of
capital stock, any action required to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any consent in
writing of such stockholders in lieu of a meeting.
Special meetings of the stockholders of the Corporation may be called only
by (i) the Chairman or Vice Chairman of the Board of Directors or (ii) the
Secretary of the Corporation within 10 calendar days after receipt of the
written request of a majority of the total number of directors which the
Corporation would have if there were no vacancies (the "Whole Board").
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
outside the State of Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the Bylaws.
7. A. Subject to the rights of any holders of any class or series of
capital stock as specified in the resolution providing for such class or
series of capital stock, the business and affairs of the Corporation shall
be managed by or under the direction of the Board of Directors consisting
of not less than 3 nor more than 12 directors, the exact number of
directors to be determined from time to time solely by resolution adopted
by the affirmative vote of a majority of the Whole Board. The directors
shall be divided into three classes, designated Class I, Class II and Class
III. Each Class of directors shall consist, as nearly as may be possible,
of one-third of the total number of directors constituting the Whole Board.
The initial term of the Class I directors shall expire upon the election
and qualification of their successors at the 1998 annual meeting of
stockholders; the initial term of the Class II directors shall expire upon
the election and qualification of their successors at the 1999 annual
meeting of stockholders; and the initial term of the Class III directors
shall expire upon the election and qualification of their successors at the
2000 annual meeting of stockholders. At each annual meeting of stockholders
beginning with the 1998 annual meeting, successors to the Class of
directors whose term expires at that annual meeting shall be elected for a
three-year term and shall hold office until the annual meeting for the year
in which his or her term expires and
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until his or her successor shall be elected and shall qualify, subject,
however, to prior death, resignation, retirement, disqualification or
removal from office.
B. Subject to the rights of any holders of any class or series of capital
stock as specified in the resolution providing for such class or series of
capital stock, newly created directorships resulting from any increase in
the number of directors and any vacancies on the Board of Directors
resulting from death, resignation, retirement, disqualification, removal or
other cause will be filled solely by the affirmative vote of a majority of
the remaining directors then in office, even though less than a quorum of
the Board of Directors. Increases or decreases in the number of directors
shall be apportioned among the Classes so as to maintain the number of
directors in each Class as nearly equal as possible, and any additional
director of any Class elected to fill a vacancy resulting from an increase
in such Class shall hold office for a term that shall coincide with the
remaining term of that Class, but in no case will a decrease in the number
of directors shorten the term of any incumbent director.
C. The election of directors need not be by written ballot unless the
Bylaws shall so provide.
D. Notwithstanding the foregoing, whenever the holders of any one or more
class or series of capital stock shall have the right, voting separately as
a class or series, to elect directors, the election, removal, term of
office, filling of vacancies and other features of such directorships shall
be governed by the terms of this Restated Certificate of Incorporation
applicable thereto, and such directors so elected shall not be divided into
classes pursuant to Article 6, Section A, unless expressly provided by such
terms.
8. The affirmative vote of the holders of the outstanding shares of
capital stock representing not less than two-thirds of the Voting Power (as
defined) of the Corporation shall be required for the approval of any
proposal for the Corporation to dissolve, liquidate, merge, or consolidate
with any other entity (other than an entity 90% of the Voting Power of
which is owned by the Corporation), or sell, lease or exchange all or
substantially all of its property and assets, including its goodwill and
its corporate franchises. "Voting Power" means the total number of votes
that may be cast by holders of capital stock in the election of directors.
9. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate of Incorporation, in
the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
Notwithstanding anything contained in this Restated Certificate of
Incorporation to the contrary, the affirmative vote of the holders of the
outstanding shares of capital stock representing not less than two-thirds
of the Voting Power of the Corporation shall be required to amend, alter,
change or repeal, or to adopt any provision inconsistent with, Article 8 of
this Restated Certificate of Incorporation. The Board of Directors shall
have the power to make, adopt, alter, amend, change or repeal the Bylaws by
resolution adopted by the affirmative vote of a majority of the Whole
Board. Stockholders may not make, adopt, alter, amend, change or repeal the
Bylaws except upon the affirmative vote of the holders of the outstanding
shares of capital stock representing not less than two-thirds of the Voting
Power of the Corporation and no Bylaws hereafter adopted by the
stockholders or otherwise shall invalidate any prior act of the directors
which would have been valid if such Bylaws had not been adopted.
10. A. No director of the Corporation shall be liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the GCL, or (iv) for any
transaction from which the director derived an improper personal benefit.
No amendment to or repeal of this Article 10 shall apply to or have any
effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal. If the GCL is amended
hereafter to further limit the liability of a director, then the liability
of a director of the Corporation shall be further limited to the fullest
extent permitted by the GCL, as so amended.
B. The Corporation shall indemnify each person who is or was or has
agreed to become a director or officer of the Corporation, and may
indemnify other employees and agents of the Corporation, to the fullest
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extent permitted by Section 145 of the GCL, as the same may be amended or
supplemented, against all expenses and liabilities (including, but not
limited to, counsel fees) reasonably incurred by or imposed upon such
person in connection with any proceeding to which he or she may be made a
party, or in which he or she may become involved, by reason of his or her
being or having been a director, officer, employee or agent of the
Corporation, or any settlement thereof, whether or not he or she is a
director, officer, employee or agent at the time such expenses are incurred
or liability incurred, except in such cases where the director, officer,
employee or agent is adjudged guilty of willful misfeasance or malfeasance
in the performance of his or her duties; provided that in the event of a
settlement the indemnification herein shall apply only when the Board of
Directors approves such settlement and reimbursement as being for the best
interests of the Corporation. Without limiting the generality or the effect
of the foregoing, the Corporation may adopt Bylaws, or enter into one or
more agreements with any person, which provide for indemnification greater
or different than that provided in this Article 10 or the GCL and the
foregoing right of indemnification shall be in addition to and not
exclusive of all other rights to which such director, officer, employee or
agent may be entitled.
C. The Corporation may purchase insurance on behalf of any person who is
a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted by him or her and incurred by him
or her in any such capacity, or arising out of his or her status as such,
whether or not the Corporation would have the power or the obligation to
indemnify him or her against such liability under the provisions of this
Article 10.
11. The Board of Directors, each committee of the Board of Directors and
each individual director, in discharging their respective duties under
applicable law and this Restated Certificate of Incorporation and in
determining what they each believe to be in the best interests of the
Corporation and its stockholders, may consider the effects, both short-term
and long-term, of any action or proposed action taken or to be taken by the
Corporation, the Board of Directors or any committee of the Board of
Directors on the interests of (i) the employees, franchisees, licensees,
customers, suppliers and/or creditors of the Corporation and its
subsidiaries and (ii) the communities in which the Corporation and its
subsidiaries own or lease property or conduct business, all to the extent
that the Board of Directors, any committee of the Board of Directors or any
individual director deems pertinent under the circumstances; provided,
however, that the provisions of this Article 11 shall not limit in any way
the right of the Board of Directors to consider any other lawful factors in
making its determinations, including, without limitation, the effects, both
short-term and long-term, or any action or proposed action on the
Corporation or its stockholders directly; and provided further that this
Article 11 shall be deemed solely to grant discretionary authority to the
Board of Directors, each committee of the Board of Directors and each
individual director and shall not be deemed to provide to any specific
constituency any right to be considered.
12. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application
in a summary way of this Corporation or of any creditor or stockholder
thereof or on the application of any receiver or receivers appointed for
this Corporation under the provisions of Section 291 of the GCL or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of the
GCL, order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority
in number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and
to any reorganization of this Corporation as consequence of such compromise
or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said
application has been made, be binding on all the creditors or class of
creditors, and/or on all the stockholders or class of stockholders, of this
Corporation, as the case may be, and also on this Corporation.
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IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of
Incorporation to be duly executed in its corporate name.
Dated: , 1997
-------------------------------------
Name: Stewart Bainum, Jr.
Chairman
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ANNEX B
FORM OF
AMENDED AND RESTATED
BYLAWS OF
CHOICE HOTELS INTERNATIONAL, INC.
(FORMERLY KNOWN AS "CHOICE HOTELS FRANCHISING, INC."
AND HEREINAFTER REFERRED TO AS THE "CORPORATION")
AS AMENDED AND RESTATED, 1997
ARTICLE I
OFFICES
Section 1. Office. The registered office of the Corporation shall be in the
City of Wilmington, County of New Castle, State of Delaware.
Section 2. Additional Offices. The Corporation may also have offices at such
other places, both within and without the State of Delaware, as the Board of
Directors may from time to time determine or as the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Time and Place. Meetings of stockholders for any purpose may be
held at such time and place, within or without the State of Delaware, as the
Board of Directors may fix from time to time and as shall be stated in the
notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meeting. Annual meetings of stockholders shall be held on
any date in the month of September or October in each year at 9:00 a.m. or at
such other [time and such] date and time as shall be designated, from time to
time, by the Board of Directors and stated in the notice of the meeting. At
such annual meeting, the stockholders shall elect directors and transact such
other business as may properly be brought before the meeting in accordance
with Section 7 of this Article II.
Section 3. Notice of Annual Meeting. Written notice of the annual meeting
stating the place, date and time thereof shall be given to each stockholder
entitled to vote at such meeting not less than 10 nor more than 60 days prior
to the meeting.
Section 4. List of Stockholders. The officer in charge of the stock ledger
of the Corporation or the transfer agent shall prepare and make, at least 10
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing
the address of each stockholder and the number of shares registered in the
name of each stockholder. Such list shall be open to the examination of any
stockholder for any purpose germane to the meeting, during ordinary business
hours, for a period of at least 10 days prior to the meeting either at a place
within the city where the meeting is to be held (other than the place of the
meeting), which place shall be specified in the notice of the meeting, or, if
not so specified, at the place where the meeting is to be held. The list shall
also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder who is present.
Section 5. Notice of Special Meeting. Written notice of a special meeting
stating the place, date and time thereof and the purpose or purposes for which
the meeting is called, shall be given to each stockholder entitled to vote at
such meeting not less than 10 nor more than 60 days prior to the meeting.
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Section 6. Stockholder Proposals. To be properly brought before an annual
meeting, business must be (1) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors,
(2) otherwise properly brought before the meeting by or at the direction of
the Board of Directors or (3) otherwise properly brought before the meeting by
a stockholder entitled to vote thereon. For business to be properly brought
before an annual meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice must be received not less than sixty days nor
more than ninety days prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that the date of the
annual meeting is advanced by more than thirty days or delayed by more than
sixty days from such anniversary, notice by the stockholder to be timely must
be so received not earlier than the ninetieth day prior to such annual meeting
and not later than the close of business on the later of (1) the sixtieth day
prior to such annual meeting or (2) the tenth day following the date on which
notice of the date of the annual meeting was mailed or public disclosure
thereof was made by the Corporation, whichever first occurs. For purposes of
calculating the first such notice period following adoption of this Restated
Certificate of Incorporation. the first anniversary of the 1997 annual meeting
shall be deemed to be , 1998. Each such notice shall set forth as to each
matter the stockholder proposes to bring before the annual meeting: (a) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the meeting, (b) the
name and address, as they appear on the Corporation's books, of the
stockholder proposing such business and the name and address of the beneficial
owner on whose behalf the proposal is being made, (c) the class, series and
number of shares of the Corporation which are beneficially owned by the
stockholder or by the beneficial owner on whose behalf the proposal is being
made, (d) any material interest of the stockholder, or the beneficial owner on
whose behalf the proposal is being made, in such business, (e) a
representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person
or by proxy at the meeting, and (f) a description of all arrangements or
understandings between the stockholder, the beneficial owner on whose behalf
the proposal is being made, or any other person or persons (naming such person
or persons) relating to the matter being proposed.
To be properly brought before a special meeting, business must be (1)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors or (ii) otherwise properly brought
before the meeting by or at the direction of the Board of Directors,
No business shall be conducted at any meeting of the stockholders except in
accordance with the procedures set forth in this Article II, Section 6. The
presiding officer of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the
meeting and in accordance with the provisions of this Article II, Section 6
and if he or she should so determine, any such business not properly brought
before the meeting shall not be transacted. Nothing herein shall be deemed to
affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
Section 7. Presiding Officer. Meetings of stockholders shall be presided
over by the Chairman of the Board, or, if he is not present, by the Vice
Chairman, or, if he is not present, by the Chief Executive Officer, or if he
is not present, by the President or, if he is not present, by such person who
may have been chosen by the Board of Directors or, if none of such persons is
present, by a chairman to be chosen by the stockholders owning a majority of
the shares of capital stock of the Corporation issued and outstanding and
entitled to vote at the meeting and who are present in person or by proxy. The
Secretary of the Corporation or, if he is not present, an Assistant Secretary
or, if he is not present, such person who may have been chosen by the Board of
Directors, shall act as secretary of meetings of stockholders, but if none of
such persons is present the stockholders owning a majority of the Voting Power
of the Corporation and who are present in person or by proxy shall choose any
person present to act as secretary of the meeting. "Voting Power" means the
total number of votes that may be cast by holders of capital stock in the
election of directors.
Section 8. Quorum. The holders of a majority of the Voting Power of the
Corporation, present in person or represented by proxy, shall be necessary to,
and shall constitute a quorum for, the transaction of business at
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all meetings of stockholders, except as otherwise provided by statute or by
the Certificate of Incorporation. If, however, a quorum shall not be present
in person or by proxy at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by proxy, shall
have the power to adjourn the meeting from time to time, without notice of the
adjourned meeting if the time and place thereof are announced at the meeting
at which the adjournment is taken, until a quorum shall be present in person
or by proxy. At any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have the power
to adjourn the meeting from time to time for good cause, without notice of the
adjourned meeting if the time and place thereof are announced at the meeting
at which the adjournment is taken. until a date which is not more than 30 days
after the date of the original meeting. At such adjourned meeting, at which a
quorum shall be present in person or by proxy, any business may be transacted
which might have been transacted at the meeting as originally called. If the
adjournment is for more than 30 days, or if after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting
shall be given to each stockholder of record entitled to vote at the meeting.
Section 9. Voting.
(a) At any meeting of stockholders, every stockholder having the right to
vote shall be entitled to vote in person or by proxy. Except as otherwise
provided by law or the Certificate of Incorporation or a resolution of the
Board of Directors creating a series or class of capital stock of the
Corporation, each stockholder of record shall be entitled to one vote for
each share of capital stock registered in his name on the books of the
Corporation.
(b) All elections shall be determined by a plurality vote, and except as
otherwise provided by law or the Certificate of Incorporation, all other
matters shall be determined by a vote of a majority of the Voting Power
present in person or by proxy and voting, on such other matters.
ARTICLE III
DIRECTORS
Section 1. General Powers: Number: Tenure. The business of the Corporation
shall be managed by its Board of Directors, which may exercise all powers of
the Corporation and perform all lawful acts and things as are not by law, the
Certificate of Incorporation or these Bylaws directed or required to be
exercised or performed by the stockholders. The number of directors
constituting the whole Board of Directors shall be not less than 3 nor more
than 12. The first Board of Directors shall consist of 9 directors.
Thereafter, within the limits above specified, the number of directors shall
be determined by the Board of Directors. The directors shall be elected and
shall hold office as specified in the Certificate of Incorporation. Directors
need not be stockholders. Directors, other than Stewart Bainum, Sr., shall
retire from the Board of Directors as of the annual meeting of stockholders
next following the date they attain the age of seventy (70) years.
Section 2. Nomination of Directors. Any stockholder entitled to vote in the
election of directors generally may nominate one or more persons for election
as directors at an annual meeting only pursuant to the Corporation's notice of
such meeting or if written notice of such stockholder's intent to make such
nomination or nominations has been received by the Secretary of the
Corporation not less than sixty nor more than ninety days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than thirty
days or delayed by more than sixty days from such anniversary, notice by the
stockholder to be timely must be so received not earlier than the ninetieth
day prior to such annual meeting and not later than the close of business on
the later of (1) the sixtieth day prior to such annual meeting or (2) the
tenth day following the day on which notice of the date of the annual meeting
was mailed or public disclosure thereof was made by the Corporation, whichever
first occurs. For purposes of calculating the first such notice period
following adoption of this Restated Certificate of Incorporation, the first
anniversary of the 1997 annual meeting, shall be deemed to be 1998. Each
such notice shall set forth: (a) the name and address of the stockholder who
intends to make the nomination and the name, age, business
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address, residence address and principal occupation of the person or persons
to be nominated; (b) a representation that the stockholder is a holder of
record of stock of the Corporation entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person
or persons specified in the notice; (c) a description of all arrangements or
understandings between the stockholder and each nominee and any other person
or persons (naming, such person or persons) relating to the nomination or
nominations; (d) the class and number of shares of the Corporation which are
beneficially owned by such stockholder and the person to be nominated as of
the date of such stockholder's notice and by any other stockholders known by
such stockholder to be supporting such nominees as of the date of such
stockholder's notice; (e) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission: and (f) the consent of each nominee to serve as a director of the
Corporation if so elected.
In addition, in the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors, any
stockholder entitled to vote in the election of directors generally may
nominate one or more persons for election as directors at a special meeting
only pursuant to the Corporation's notice of meeting or if written notice of
such stockholder's intent to make such nomination or nominations, setting
forth the information and complying with the form described in the immediately
preceding paragraph, has been received by the Secretary of the Corporation not
earlier than the ninetieth day prior to such special meeting and not later
than the close of business on the later of (i) the sixtieth day prior to such
special meeting or (ii) the tenth day following the day on which notice of the
date of the special meeting was mailed or public disclosure thereof was made
by the Corporation, whichever comes first.
No person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures set forth in this Article
III, Section 2. The presiding officer of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made
in accordance with the procedures prescribed by this Article III, Section 2;
and if he or she should so determine, the defective nomination shall be
disregarded.
Section 3. Vacancies: Resignations.
(a) If any vacancies occur in the Board of Directors, or if any new
directorships are created, they shall be filled solely by a majority of the
directors then in office, whether or not less than a quorum. Each director
so chosen shall hold office until the expiration of the term of the class
into which such director was elected and until his successor is duly
elected and qualified. If there are no directors in office a special
meeting of stockholders shall be called in accordance with the provisions
of the Certificate of Incorporation or these Bylaws, at which meeting such
vacancies shall be filled.
(b) Any director may resign at any time by giving written notice to the
Board of Directors, the Chairman of the Board, the Chief Executive Officer,
the President or the Secretary of the Corporation. Unless otherwise
specified in such written notice, a resignation shall take effect upon
delivery thereof to the Board of Directors or the designated officer. It
shall not be necessary for a resignation to be accepted before it becomes
effective.
Section 4. Place of Meeting. The Board of Directors may hold meetings, both
regular and special, either within or without the State of Delaware.
Section 5. First Meeting. The first regular meeting of each newly elected
Board of Directors shall be held immediately following the annual meeting of
stockholders and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a
quorum shall be present.
Section 6. Regular Meetings. Additional regular meetings of the Board of
Directors may be held without notice, at such time and place as may from time
to time be determined by the Board of Directors.
Section 7. Special Meetings. Special meetings of the Board of Directors may
be called by the Chairman of the Board of Directors or, in the event of his
disability, by the Vice Chairman, on 2 days' notice to each
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director in accordance with Article V. Special meetings shall be called by the
Chairman of the Board, Vice Chairman, Chief Executive Officer, President or
Secretary in like manner and on like notice on the written request of 4
directors or one-half ( 1/2) of the number of directors. whichever is less.
Section 8. Quorum. At all meetings of the Board of Directors one-half ( 1/2)
of the number of directors then in office, or such greater number as equals
one-third ( 1/3) of the total number of directors shall constitute a quorum
for the transaction of business and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the
Board of Directors, except as may be otherwise specifically provided by law or
the Certificate of Incorporation. If a quorum is not present at any meeting of
the Board of Directors, the directors present may adjourn the meeting, from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
Section 9. Compensation. Directors shall be entitled to such compensation
for their services as directors and to such reimbursement for any reasonable
expenses incurred in attending directors' meetings as may from time to time be
fixed by the Board of Directors. The compensation of directors may be on such
basis as is determined by the Board of Directors. Any director may waive
compensation for any meeting. Any director receiving compensation under these
provisions shall not be barred from serving the Corporation in any other
capacity and receiving reasonable compensation for such other services.
Section 10. Action by Consent. Any action required or permitted to be taken
at any meeting of the Board of Directors may be taken without a meeting if a
written consent to such action is signed by all members of the Board of
Directors and such written consent is filed with the minutes of its
proceedings.
ARTICLE IV
COMMITTEES
Section 1. Executive Committee. The Board of Directors may appoint Executive
Committee consisting of not less than directors, one of whom shall be
designated as Chairman of the Executive Committee.
Section 2. Powers. The Executive Committee shall have and may exercise those
powers of the Board of Directors as may from time to time be granted to it by
the Board of Directors.
Section 3. Procedure, Meetings. The Executive Committee shall fix its own
rules of procedure and shall meet at such times and at such place or places as
may be provided by such rules. The Executive Committee shall keep regular
minutes of its meetings and deliver such minutes to the Board of Directors.
The Chairman of the Executive Committee, or, in his absence, a member of the
Executive Committee chosen by a majority of the members present, shall preside
at meetings of the Executive Committee and another member thereof chosen by
the Executive Committee shall act as Secretary of the Executive Committee.
Section 4. Quorum. A majority of the Executive Committee shall constitute a
quorum for the transaction of business, and the affirmative vote of a majority
of the members thereof shall be required for any action of the Executive
Committee.
Section 5. Other Committees. The Board of Directors may appoint such other
committee or committees as it shall deem advisable and with such functions and
duties as the Board of Directors shall prescribe.
Section 6. Vacancies: Changes: Discharge. The Board of Directors shall have
the power at any time to fill vacancies in, to change the membership of, and
to discharge, any such committee.
Section 7. Compensation. Members of any committee shall be entitled to such
compensation for their services as members of any such committee and to such
reimbursement for any reasonable expenses incurred in attending committee
meetings as may from time to time be fixed by the Board of Directors. Any
member may waive compensation for any meeting.
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Section 8. Action by Consent. Any action required or permitted to be taken
at any meeting of any committee of the Board of Directors may be taken without
a meeting, if written consent to such action is signed by all members of the
committee and such written consent is filed with the minutes of its
proceedings.
ARTICLE V
NOTICES
Section 1. Form; Delivery. Whenever, under the provisions of law, the
Certificate of Incorporation or these Bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice unless otherwise specifically provided, but such notice may be given by
regular or overnight mail, addressed to such director or stockholder at his or
her address as it appears on the records of the Corporation, with postage
thereon prepaid. Notices given by regular mail shall be deemed to be given at
the time they are deposited in the United States mail. Notice to a director
may also be given personally, by telegram sent to his address as it appears on
the records of the Corporation, by facsimile (with a machine generated
confirmation) or by telephone.
Section 2. Waiver. Whenever any notice is required to be given under the
provisions of law, the Certificate of Incorporation or these Bylaws, a written
waiver thereof signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed to be
equivalent to such notice. In addition, any stockholder who attends a meeting
of stockholders in person, or is represented at such meeting by proxy, without
protesting prior to the conclusion of the meeting the lack of notice thereof
to him, or any director who attends a meeting of the Board of Directors
without protesting, prior to the commencement of the meeting such lack of
notice, shall be conclusively deemed to have waived notice of such meeting.
ARTICLE VI
OFFICERS
Section 1. Designations. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a Chairman of the Board, Vice Chairman of
the Board, a Chief Executive Officer, a President, a Secretary and a
Treasurer. The Board of Directors may also choose one or more Executive or
Senior Vice Presidents, one or more additional vice presidents, one or more
assistant secretaries and assistant treasurers, and such other officers and
agents as it shall deem necessary. All officers of the Corporation shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall from time to time be determined by the Board of Directors. Any
number of offices may be held by the same person, unless the Certificate of
Incorporation or these Bylaws otherwise provide.
Section 2. Term of Office, Removal. The Board of Directors at its first
meeting after each annual meeting of stockholders shall choose a Chairman, a
Vice Chairman, a Chief Executive Officer, a President, a Secretary and a
Treasurer and such other officers as the Board of Directors shall deem
appropriate. The officers of the Corporation shall hold office until their
successors are chosen and shall qualify. Any officer elected or appointed by
the Board of Directors may be removed, with or without cause, at any time by
the affirmative vote of a majority of the directors then in office. Such
removal shall not prejudice the contract rights, if any, of the person so
removed. Any vacancy occurring in any office of the Corporation may be filled
by the Board of Directors.
Section 3. Compensation. The salaries of all officers of the Corporation
shall be fixed by the Board of Directors.
Section 4. The Chairman of the Board.
(a) The Chairman of the Board shall have general direction of the
business affairs of the Corporation, subject to the control of the Board of
Directors. The Chairman shall preside at all meetings of stockholders
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and the Board of Directors which he shall attend. Except where, by law, the
signature of the President is required, the Chairman shall possess the same
power as the President to execute all certificates, contracts, bonds,
mortgages and other instruments of the Corporation.
(b) Unless otherwise prescribed by the Board of Directors, the Chairman
shall have full power and authority on behalf of the Corporation to attend,
act and vote at any meeting of security holders of other corporations in
which the Corporation may hold securities. At such meeting, the Chairman
shall possess and may exercise any and all rights and powers incident to
the ownership of such securities which the Corporation might have possessed
and exercised if it had been present. The Board of Directors may from time
to time confer like powers upon any other person or persons.
Section 5. Vice Chairman. The Vice Chairman shall, in the absence of the
Chairman of the Board or in the event of his disability, preside at all
meetings of the Board of Directors and stockholders and perform the duties and
exercise the powers of the Chairman of the Board and shall perform such other
duties and have such other powers as may from time to time be prescribed by
the Board of Directors.
Section 6. Chief Executive Officer. The Chief Executive Officer shall be the
chief administrator of the Corporation and shall have general direction of
administration of the business affairs of the Corporation, subject to the
direction of the Board of Directors, and shall perform such other duties and
have such other powers as may from time to time be prescribed by the Board of
Directors.
Section 7. The President. The President shall be the chief operations
officer of the Corporation and shall have general direction of the operation
of the Corporation, subject to the direction of the Chief Executive Officer
and the Board of Directors, and shall perform such other duties and shall have
such other powers as may from time to time be prescribed by the Board of
Directors.
Section 8. The Vice Presidents. The Vice President (or in the event there by
more than one, the Vice Presidents in the order designated, or in the absence
of any designation, then in order of their election) shall, in the absence of
the President or in the event of his disability, perform the duties and
exercise the powers of the President and shall generally assist the President
and perform such other duties and have such other powers as may from time to
time be prescribed by the Board of Directors.
Section 9. The Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all votes and
the proceedings of the meetings in a book to be kept for that purpose and
shall perform like duties for the Executive Committee or other committees, if
required. He shall give, or cause to be given, notice of all meetings of
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may from time to time be prescribed by the Board of
Directors, the Chairman of the Board or the President, under whose supervision
he shall act. He shall have custody of the seal of the Corporation and he, or
an Assistant Secretary, shall have authority to affix the same to any
instrument requiring it and, when so affixed, the seal may be attested by his
signature or by the signature of such Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing thereof by his signature.
Section 10. The Assistant Secretary. The Assistant Secretary (or in the
event there be more than one, the Assistant Secretaries in the order
designated, or in the absence of any designation, then in the order of their
election) shall, in the absence of the Secretary or in the event of his
disability, perform the duties and exercise the powers of the Secretary and
shall perform such other duties and have such other powers as may from time to
time be prescribed by the Board of Directors.
Section 11. The Treasurer. The Treasurer shall have the custody of the
corporate funds and other valuable effects, including securities, and shall
keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories
as may from time to time be designated by the Board of Directors. He shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking
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proper vouchers for such disbursements, and shall render to the Chairman of
the Board or the President, and the Board of Directors at regular meetings of
the Board, or whenever they may require it, an account of all of his
transactions as Treasurer and of the financial condition of the Corporation.
Section 12. The Assistant Treasurer. The Assistant Treasurer (or in the
event there be more than one, the Assistant Treasurers in the order
designated, or in the absence of any designation, then in the order of their
election) shall, in the absence of the Treasurer or in the event of his
disability, perform the duties and exercise the powers of the Treasurer and
shall perform such other duties and have such other powers as may from time to
time be prescribed by the Board of Directors.
ARTICLE VII
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
Section 1. Action Other Than by or in the Right of the Corporation. The
Corporation shall indemnify any person who was or is a party or is threatened
to be made a party, to any threatened, pending or completed action, suit or
proceeding or investigation, whether civil, criminal or administrative, and
whether external or internal to the Corporation (other than a judicial action
or suit brought by or in the right of the Corporation) by reason of the fact
that he is or was a director, officer, employee or agent of the Corporation,
or that, being or having been such a director, officer, employee or agent, he
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise (all such persons being referred to hereafter as an "Agent"),
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding, or any appeal thereof, if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his
or her conduct was unlawful. The termination of any action, suit or
proceeding--whether by judgment, order, settlement, conviction, or upon a plea
of nolo contendere or its equivalent -- shall not, of itself, create a
presumption that the person did not act in good faith and in manner which he
or she reasonably believed to be in or not opposed to the best interests of
the Corporation, or, with respect to any criminal action or proceeding, that
he or she had reasonable cause to believe that his or her conduct was
unlawful.
Section 2. Action by or in the Right of the Corporation. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed juridical action or suit brought
by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he or she is or was an Agent (as defined above)
against expenses (including attorneys' fees) actually and reasonably incurred
by him or her in connection with the defense, settlement or appeal of such
action or suit if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for gross negligence or misconduct in the performance of his or her
duty to the Corporation unless and only to extent that the Court of Chancery
or the court in which such action or suit was brought shall have determined
upon application that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or other
such court shall deem proper.
Section 3. Determination of Right of Indemnification. No indemnification
under Section 1 or 2 of this Article VII (unless ordered by a court) shall be
made by the Corporation if a determination is reasonably and promptly made (i)
by the Board of Directors by a majority vote consisting of directors who were
not parties to such action, suit or proceeding, even though less than a quorum
or (ii) if there are no such directors or if such directors so direct, by
independent legal counsel in a written opinion, or (iii) by the stockholders.
that such person did not act in good faith and in a manner that such person
reasonably believed to be in or not opposed to the best interests of the
Corporation, or, with respect to any criminal proceeding, that such person
believed or had reasonable cause to believe that his or her conduct was
unlawful.
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Section 4. Indemnification Against Expenses of Successful
Party. Notwithstanding the other provisions of this Article, to the extent
that an Agent has been successful on the merits or otherwise, including the
dismissal of an action without prejudice or the settlement of an action
without admission of liability, in defense of any action, suit or proceeding
or in defense of any, claim, issue or matter therein, or on appeal from any
such proceeding, action, claim or matter, such Agent shall be indemnified
against all expenses actually and reasonably incurred in connection therewith.
Section 5. Advances of Expenses. Except as limited by Section 6 of this
Article, expenses incurred in defending any civil, criminal, administrative or
investigative action, suit or proceeding or investigation or any appeal
therein shall be paid by the Corporation in advance of the final disposition
of such matter, if the Agent shall undertake to repay such amount in the event
that it is ultimately determined, as provided herein, that such person is not
entitled to indemnification. Notwithstanding the foregoing, no advance shall
be made by the Corporation if a determination is reasonably and promptly made
by the Board of Directors by a majority vote of disinterested directors, or
(if there are no such directors or such directors so direct) by independent
legal counsel in a written opinion, that, based upon the facts known to the
Board or counsel at the time such determination is made, such person did not
act in good faith and in a manner that such person believed to be in or not
opposed to the best interests of the Corporation, or, with respect to any
criminal proceeding, that such person believed or had reasonable cause to
believe his or her conduct was unlawful. In no event shall any advance be made
in instances where the Board of Directors or independent legal counsel
reasonably determines that such person deliberately breached his duty to the
Corporation or its shareholders.
Section 6. Right of Agent to Indemnification Upon Application; Procedure
Upon Application. Any indemnification under Sections 1, 2, or 4. or advance
under Section 5 of this Article, shall be made promptly, and in any event
within ninety days, upon the written request of the Agent, unless with respect
to applications under Sections 1, 2 or 5, a determination is reasonably and
promptly be made by the Board of Directors by a majority vote of disinterested
directors that such Agent acted in a manner set forth in such Sections as to
justify the Corporation's not indemnifying or making an advance to the Agent.
In the event there are no such disinterested directors, the Board of Directors
shall promptly direct that independent legal counsel shall decide whether the
Agent acted in the manner set forth in such Sections as to justify the
Corporation's not indemnifying or making an advance to the Agent. The right to
indemnification or advances as granted by this Article shall be enforceable by
the Agent in any court of competent jurisdiction, if the Board or independent
legal counsel denies the claim, in whole or in part, or if no disposition of
such claim is made within ninety days. The Agent's expenses incurred in
connection with successfully establishing his right to indemnification, in
whole or in part, in any such proceeding shall also be indemnified by the
Corporation.
Section 7. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
this Article is held by a court of competent jurisdiction to be unavailable to
an indemnitee in whole or part, the Corporation, shall, in such an event,
after taking into account, among other things, contributions by other
directors and officers of the Corporation pursuant to indemnification
agreements or otherwise, and in the absence of personal enrichment, acts of
intentional fraud or dishonesty or criminal conduct on the part of the Agent,
contribute to the payment of Agent's losses to the extent that, after other
contributions are taken into account, such losses exceed: (i) in the case of a
director of the Corporation or any of its subsidiaries who is not an officer
of the Corporation or any of such subsidiaries, the amount of fees paid to him
or her for serving as a director during the 12 months preceding the
commencement of the suit, proceeding, or investigation; or (ii) in the case of
a director of the Corporation or any of its subsidiaries who is also an
officer of the Corporation or any of such Subsidiaries, the amount set forth
in clause (i) plus 5% of the aggregate cash compensation paid to said director
for such office(s) during the 12 months preceding the commencement of the
suit, proceeding, or investigation; or (iii) in the case of an officer of the
Corporation or any of its subsidiaries, 5% of the aggregate cash compensation
paid to such officer for service in such office(s) during the 12 months
preceding the commencement of such suit, proceeding or investigation.
Section 8. Other Rights and Remedies. The indemnification provided by this
Article shall not be deemed exclusive of, and shall not affect, any other
rights to which an Agent seeking indemnification may be
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entitled under any Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to
a person who has ceased to be an Agent and shall inure to the benefit of the
heirs, executors and administrators of such a person. All rights to
indemnification under this Article shall be deemed to be provided by a
contract between the Corporation and the Agent who serves in such capacity, at
any time while these Bylaws and other relevant provisions of the General
Corporation Law and other applicable law, if any, are in effect. Any repeal or
modification thereof shall not affect any rights or obligations then existing.
Section 9. Insurance. Upon resolution passed by the Board, the Corporation
may purchase and maintain insurance on behalf of any person who is or was an
Agent against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of this Article. The Corporation may create a trust fund, grant
a security interest or use other means (including, without limitation, a
letter of credit) to ensure the payment of such sums as may become necessary
to effect indemnification as provided herein.
Section 10. Constituent Corporations. For the purposes of this Article,
references to "the Corporation" include all constituent corporations absorbed
in a consolidation or merger as well as the resulting or surviving
corporation, so that any person who is or was a director, officer, employee,
or trustee of such a constituent corporation or who, being or having been such
a director, officer, employee or trustee, is or was serving at the request of
such constituent corporation as a director, officer, employee, trustee of
another corporation, partnership, joint venture, trust or other enterprise
shall stand in the same position under the provisions of this Article with
respect to the resulting or surviving corporation as he would if he had served
the resulting or surviving corporation in the same capacity.
Section 11. Other Enterprises, Fines, and Serving at Corporation's
Request. References to "other enterprises" in Sections 1, 7 and 10 shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service by Agent as director, officer, employee, trustee or agent of the
Corporation which imposes duties on, or involves services by, such Agent with
respect to any employee benefit plan, its participants, or beneficiaries; and
a person who acted in good faith and in a manner he reasonably believed to be
in the interests of the participants and beneficiaries of an employee benefit
plan shall be deemed to have acted in a manner "not opposed to the best
interests of the Corporation" as referred to in this Article.
Section 12. Savings Clause. If this Article or any portion thereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Agent as to expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement with respect
to any action, suit, appeal, proceeding or investigation, whether civil,
criminal or administrative, and whether internal or external, including a
grand jury proceeding and an action or suit brought by or in the right of the
Corporation, to the full extent permitted by any applicable portion of this
Article that shall not have been invalidated, or by any other applicable law.
ARTICLE VIII
STOCK CERTIFICATES
Section 1. Form: Signatures.
(a) Every holder of stock in the Corporation shall be entitled to have a
certificate, signed by the Chairman of the Board or the Chief Executive
Officer and the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the Corporation, exhibiting the number, and class
(and series, if any), of shares owned by him, and bearing the seal of the
Corporation. Such seal may be a facsimile. Where a certificate is manually
signed (i) by a transfer agent other than the Corporation or its employee
or (ii) by a registrar other than the Corporation or its employee, the
signature of any such officer may be a facsimile. In case any officer who
has signed, or whose facsimile signature was placed on, a certificate shall
have ceased to be such officer before such certificate is issued, it may
nevertheless be issued by the Corporation with the same effect as if he
were such officer at the date of its issue.
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(b) All stock certificates representing shares of capital stock which are
subject to restrictions on transfer or to other restrictions, may have
imprinted thereon a notation to such effect, as shall be determined by the
Board of Directors.
Section 2. Registration of Transfer. Upon surrender to the Corporation or
any transfer agent of the Corporation of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Corporation or its transfer
agent to issue a new certificate to the person entitled thereto, to cancel the
old certificate and to record the transaction upon its books.
Section 3. Registered Stockholders.
(a) Except as otherwise provided by law, the Corporation shall be
entitled to recognize the exclusive right of a person who is registered on
its books as the owner of shares of capital stock to receive dividends or
other distributions and to vote as such owner, and to hold liable for calls
and assessments a person who is registered on its books as the owner of
shares of its capital stock. The Corporation shall not be bound to
recognize any equitable or legal claim to or interest in such shares on the
part of any other person.
(b) Stockholders are responsible for giving written notice to the
Corporation or the transfer agent and registrar, if any, of any change of
name or address, and failure to do so shall relieve the Corporation, its
directors, officers and agents, and its transfer agent and registrar, if
any, of liability for failure to send notices or pay dividends or other
distributions to a name or address other than the name or address appearing
on the stock ledger maintained by the Corporation or by the transfer agent
and registrar, if any.
Section 4. Lost, Stolen or Destroyed Certificates. The Board of Directors
may direct a new certificate to be issued in place of any certificate
theretofore issued by the Corporation which is claimed to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate, the Board of Directors may, in
its discretion and as a condition precedent to the issuance thereof, require
the owner of such lost. stolen or destroyed certificate. or his legal
representative, to advertise the same in such manner as it shall require
and/or to give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate claimed to have been lost, stolen or destroyed.
ARTICLE IX
GENERAL PROVISIONS
Section 1. Dividends. Subject to the provisions of the Certificate of
Incorporation, dividends upon the outstanding capital stock of the Corporation
may be declared by the Board of Directors at any regular or special meeting,
pursuant to law, and may be paid in cash, in property, or in shares of the
Corporation's capital stock.
Section 2. Reserves. The Board of Directors shall have full power, subject
to the provisions of law and the Certificate of Incorporation, to determine
whether any, and, if so, what part, of the funds legally available for the
payment of dividends shall be declared as dividends and paid to the
stockholders of the Corporation. The Board of Directors may fix a sum which
may be set aside or reserved over and above the paid-in capital of the
Corporation for working capital or as a reserve for any proper purpose, and
may, from time to time, increase or diminish any such fund in its absolute
judgment and discretion.
Section 3. Fiscal Year. The fiscal year of the Corporation shall begin on
January 1 in each calendar year and end on December 31 in that calendar year.
Section 4. Seal. The corporate seal shall have inscribed thereon the name of
the Corporation, the year of its incorporation and the words "Corporate Seal,
Delaware."
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ANNEX C-I
CHOICE HOTELS FRANCHISING, INC.
1997 LONG-TERM INCENTIVE PLAN
SECTION ONE
Designation and Purpose of Plan
The purpose of the Choice Hotels Franchising, Inc. 1997 Long-Term Incentive
Plan (the "Plan") is to increase the ownership of Company Stock by those
officers, professional staff and other key employees who are mainly
responsible for the continued growth and development and financial success of
the Company and its subsidiaries. Such stock ownership gives such employees a
proprietary interest in the Company which induces them to continue in its
employ. The Plan also enables the Company to attract and retain such employees
and reward them for the continued profitable performance of Choice Hotels
Franchising, Inc.
SECTION TWO
Definitions
The following definitions are applicable herein:
A. "Award"--Individually or collectively, Options, Stock Appreciation
Rights, Performance Shares or Restricted Stock granted hereunder.
B. "Award Period"--the period of time during which a Stock Appreciation
Right which has not been granted pursuant to an Option may be exercised. The
Award Period shall be set forth in the document issuing the Stock Appreciation
Right to the selected Eligible Employee.
C. "Board"--the Board of Directors of the Company.
D. "Book Value"--the book value of a share of Stock determined in accordance
with the Company's regular accounting practices as of the last business day of
the month immediately preceding the month in which a Stock Appreciation Right
is exercised as provided in Section Nine D.
E. "Code"--the Internal Revenue Code of 1986, as amended. Reference in the
Plan to any section of the Code shall be deemed to include any amendments or
successor provisions to such section and any regulations promulgated
thereunder.
F. "Committee"--the Key Executive Stock Option Plan Committee appointed to
administer the Plan pursuant to Section Four. "If two or more Key Executive
Stock Option Plan Committees are appointed with the power to grant Awards to
different classes of employees, references in this Plan to the "Committee'
shall refer to the Key Executive Stock Option Plan Committee administering the
portion of the Plan pertaining to Awards to the applicable class of
employees."
G. "Company"--Choice Hotels Franchising, Inc., including any present or
future "subsidiary corporation" as such term is defined in Section 424(f) of
the 1986 Internal Revenue Code, as amended.
H. "Covered Employee"--an individual described in Section 162(m)(3) of the
Code.
I. "Date of Grant"--the date on which the granting of an Award is authorized
by the Committee or such later date as may be specified by the Committee in
such authorization.
J. "Eligible Employee"--any person employed by the Company or a Subsidiary
on a regularly scheduled basis who satisfies all of the requirements of
Section Six.
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K. "Exercise Period"--the period or periods during which a Stock
Appreciation Right is exercisable as described in Section Nine B.
L. "Fair Market Value"--the fair market value of the Stock as determined in
accordance with Section Eight D.
M. "Incentive Stock Option"--an incentive stock option within the meaning of
Section 422 of the Code.
N. "Option" or "Stock Option"--either a nonqualified stock option or an
Incentive Stock Option granted under Section Eight. It also means any Option
which remains after a Participant has exercised his Option with respect to
part of the shares covered by a Stock Option Agreement as described in Section
Eight B.
O. "Option Period" or "Option Periods"--the period or periods during which
an Option is exercisable as described in Section Eight E.
P. "Option Price"--the price, expressed on a per share basis, for which the
Company Stock can be acquired by the holder of an Option pursuant to the
exercise of such Option.
Q. "Participant"--an Eligible Employee of the Company or a Subsidiary who
has been granted an Option, a Stock Appreciation Right, a Performance Share
Award or a Restricted Stock Award under this Plan.
R. "Performance Share"--an Award granted under Section Ten.
S. "Restricted Stock"--an Award granted under Section Seven.
T. "Stock" and "Company Stock"--the common stock of the Company.
U. "Stock Appreciation Right"--an Award granted under Section Nine.
V. "Subsidiary"--any corporation of which fifty percent (50%) or more of its
outstanding voting stock or voting power is beneficially owned, directly or
indirectly, by the Company.
W. "Ten Percent Shareholder"--a Participant who, at the Date of Grant, owns
directly or indirectly (within the meaning of Section 424(d) of the Internal
Revenue Code) stock possessing more then ten percent (10%) of the total
combined voting power of all classes of stock of the Company or a subsidiary
thereof.
X. Wherever appropriate, words used in this Plan in the singular may mean
the plural, the plural may mean the singular and the masculine may mean the
feminine.
SECTION THREE
Effective Date, Duration and Stockholder Approval
A. Effective Date and Stockholder Approval. Subject to the approval of the
Plan by a majority of the outstanding shares of Stock, the Plan shall be
effective as of [ ], 1997.
B. Period for Grant of Awards. Awards may be made as provided herein for a
period of ten (10) years after [ ],1997.
SECTION FOUR
Administration
A. Appointment of Committee. The Board of Directors shall appoint one or
more Key Executive Stock Option Plan Committees which shall consist of not
less than two (2) members of such Board of Directors and
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which members shall be Non-Employee Directors as defined in Rule 16b-3 under
the Securities Exchange Act of 1934, as amended (or such greater number of
members which may be required by said Rule 16b-3). In addition, such Board of
Directors shall designate a member of the Committee to act as Chairman of the
Committee, and such Board of Directors may remove any member of the Committee
at any time and appoint any director to fill any vacancy on the Committee.
B. Committee Meetings. The Committee shall hold its meetings at such times
and places as specified by the Committee Chairman. A majority of the Committee
shall constitute a quorum. All actions of the Committee shall be taken by all
of the members of the meeting duly called by its Chairman; provided, however,
any action taken by a written document signed by a majority of the members of
the Committee shall be as effective as action taken by the Committee at a
meeting duly called and held.
C. Committee Powers. Subject to the provisions of this Plan, the Committee
shall have full authority in its discretion to (i) designate the Participants
to whom Awards shall be granted, (ii) determine the number of shares to be
made available under each such Award, (iii) determine the period or periods in
which the Participant may exercise such Award, (iv) determine the date when
such Award expires, (v) determine the price for Stock under such Award, and
(vi) determine the grounds of forfeiture of an Award. The Committee shall have
all powers necessary to administer the Plan in accordance with its terms,
including the power to interpret this Plan and resolve all questions arising
thereunder. The Committee may prescribe such rules and regulations for
administering this Plan as the Committee deems appropriate.
SECTION FIVE
Grant of Awards and
Limitation of Number of Shares Subject to Award
The Committee may, from time to time, grant Awards to one or more Eligible
Employees, provided that (i) subject to any adjustment pursuant to Section
Eleven, the aggregate number of shares of Stock subject to Stock Options,
Stock Appreciation Rights, Performance Share Awards or Restricted Stock Awards
under this Plan may not exceed 7,100,000 shares; (ii) to the extent that a
Stock Option, Stock Appreciation Right, Performance Share Award or Restricted
Stock Award lapses or the rights of the Participant to whom it was granted
terminate, expire or are cancelled for any other reason, in whole or in part,
shares of Stock (or remaining shares) subject to such Award shall again be
available for the grant of an Award under the Plan; and (iii) Shares delivered
by the Company under the Plan may be authorized and unissued Stock, Stock held
in the treasury of the Company or Stock purchased on the open market
(including private purchases) in accordance with applicable securities laws.
In determining the size of Awards, the Committee shall take into account the
responsibility level, performance, potential, and cash compensation level of a
Participant, and the Fair Market Value of the Stock at the time of Awards, as
well as such other considerations it deems appropriate.
SECTION SIX
Eligibility
Key employees of the Company and its Subsidiaries (including employees who
are members of the Board, but excluding directors who are not employees) who,
in the opinion of the Committee, are mainly responsible for the continued
growth and development and financial success of the business of the Company or
one or more of its Subsidiaries shall be eligible to be granted Awards under
the Plan. Subject to the provisions of the Plan, the Committee may from time
to time select from such eligible persons those to whom Awards shall be
granted and determine the nature and amount of each Award. No employee of the
Company or its Subsidiaries shall have any right to be granted an Award under
this Plan. A member of the Committee shall not be eligible for any Award
hereunder.
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Notwithstanding any provision to the contrary contained herein, Options
shall be granted under this Plan to persons, including without limitation,
employees of Manor Care, Inc., its subsidiaries, and affiliated companies in
substitution for prior Options under plans of Manor Care, Inc. in accordance
with the terms of the Employee Benefits and other Employee Matters Allocation
Agreement between Manor Care, Inc. and the Company.
SECTION SEVEN
Restricted Stock Awards
A. Grants of Shares of Restricted Stock. An Award made pursuant to this
Section Seven shall be granted in the form of shares of Stock, restricted as
provided in this Section Seven. Shares of the Restricted Stock shall be issued
to the Participant without the payment of consideration by the Participant.
The shares of Restricted Stock shall be issued in the name of the Participant
and shall bear a restrictive legend prohibiting sale, transfer, pledge or
hypothecation of the shares of Restricted Stock until the expiration of the
restriction period.
The Committee may also impose such other restrictions and conditions on the
shares of Restricted Stock as it deems appropriate.
B. Restriction Period. At the time a Restricted Stock Award is made, the
Committee may establish a restriction period applicable to such Award which
shall not be more than ten (10) years. Each Restricted Stock Award may have a
different restriction period, at the discretion of the Committee. In addition
to or in lieu of a restriction period, the Committee may establish a
performance goal which must be achieved as a condition to the retention of the
Restricted Stock. The performance goal may be based on the attainment of
specified types of performance measurement criteria, which may differ as to
various Participants or classes or categories of Participants. Such criteria
may include, without limitation, the attainment of certain performance levels
by the individual Participant, the Company, a department or division of the
Company and/or a group or class of participants. Any such performance goals,
together with the ranges of Restricted Stock Awards for which the Participants
may be eligible shall be set from time to time by the Committee and shall be
timely communicated to the Eligible Employees in advance of the commencement
of the performance of services to which such performance goals relate. The
total number of shares of Restricted Stock which may be granted to any single
Covered Employee under this Plan during any calendar year shall be limited to
100,000.
C. Forfeiture or Payout of Award. In the event a Participant ceases
employment during a restriction period, or in the event performance goals
attributable to a Restricted Stock Award are not achieved, subject to the
terms of each particular Restricted Stock Award, and subject to discretionary
action by the Committee as set forth below in Section Thirteen, a Restricted
Stock Award is subject to forfeiture of the shares of stock which had not
previously been removed from restriction under the terms of the Award.
Any shares of Restricted Stock which are forfeited will be transferred to
the Company.
Upon completion of the restriction period and satisfaction of any
performance-goal criteria, all restrictions upon the Award will expire and new
certificates representing the Award will be issued without the restrictive
legend described in Section Seven A. As a condition precedent to receipt of
the new certificates, the Participant (or the designated beneficiary or
personal representative of the Participant) will agree to make payment to the
Company in the amount of any taxes, payable by the Participant, which are
required to be withheld with respect to such shares of Stock.
SECTION EIGHT
Stock Options
A. Grant of Option. One or more Options may be granted to any Eligible
Employee. Upon the grant of an Option to an Employee, the Committee shall
specify whether the Option is intended to constitute a non-
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qualified stock option or an Incentive Stock Option. The total number of
shares of Stock subject to Options which may be granted to any single Covered
Employee under this Plan during any calendar year shall be limited to 100,000.
B. Stock Option Agreement. Each Option granted under the Plan shall be
evidenced by a written "Stock Option Agreement" between the Company and the
Participant containing such terms and conditions as the Committee determines,
including, without limitation, provisions to qualify Incentive Stock Options
as such under Section 422 of the Code. Such agreements shall incorporate the
provisions of this Plan by reference. The date of granting an Option is the
date specified in the written Stock Option Agreement which is signed by the
Participant and the Company.
C. Determination of Option Price. The Option price for Stock shall be not
less than 100% of the fair market value of the Stock on the date of grant.
Notwithstanding the foregoing, in the case of an Option which is designed to
qualify as an Incentive Stock Option (as defined in Section 422 of the Code)
which is granted to a Ten Percent Shareholder, the Option Price shall not be
less than 110% of such fair market value.
D. Determination of Fair Market Value. The fair market value of the Stock on
the date of granting an Option shall be the mean of the high and low prices at
which the Stock was sold on the market on such date. In the event no such
sales of Stock occurred on such date, the fair market value of the Stock shall
be determined by the Committee in accordance with applicable Regulations of
the Internal Revenue Service.
E. Term of Option. The term of an Option may vary within the Committee's
discretion; provided, however, that the term of an Option shall not exceed ten
(10) years from the date of granting the Option to the Participant, and, to
this end, all Options granted pursuant to this Plan must provide that each
such Option cannot be exercised after the expiration of ten (10) years from
the date each such Option is granted. Notwithstanding the foregoing, in the
case of any Option which is designed to qualify as an Incentive Stock Option
(as defined in Section 422 of the Code) which is granted to a Ten Percent
Shareholder, the term of such Option may not exceed five (5) years from the
date of grant of such Option.
F. Limitation on Exercise of Option. The Committee may limit an Option by
restricting its exercise in whole or in part for specified periods.
G. Method of Exercising an Option. Subject to the terms of a particular
Option, a Participant may exercise it in whole or in part by written notice to
the Secretary of the Company stating in such written notice the number of
shares of Stock such Participant elects to purchase under his Option.
H. No Obligation to Exercise Option. A Participant is under no obligation to
exercise an Option or any part thereof.
I. Payment for Option Stock. Stock purchased pursuant to an Option shall be
paid in full at the time of purchase. Payment may be made (a) in cash, (b)
with the approval of the Committee, by delivery to the Company of shares of
Stock having an aggregate fair market value equal to the exercise price, or
(c) a combination of (a) and (b). Payment may also be made, in the discretion
of the Committee, by delivery (including by facsimile transmission) to the
Company or its designated agent of an executed irrevocable Option exercise
form together with irrevocable instructions to a broker-dealer to sell (or
margin) a sufficient portion of the shares and deliver the sale (or margin
loan) proceeds directly to the Company to pay for the exercise price. Upon
receipt of payment and subject to paragraph J of this Section Eight, the
Company shall, without transfer or issue tax to the Participant or other
person entitled to exercise the Option, deliver to the Participant (or other
person entitled to exercise the Option) a certificate or certificates for such
shares.
J. Delivery of Stock to Participant. The Company shall undertake and follow
all necessary procedures to make prompt delivery of the number of shares of
Stock which the Participant elects to purchase upon exercise of an Option
granted under this Plan. Such delivery, however, may be postponed, at the sole
discretion of the Company, to enable the Company to comply with any applicable
procedures, regulations or listing requirements of any government agency,
stock exchange or regulatory authority.
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K. Failure to Accept Delivery of Stock. If a Participant refuses to pay for
Stock which he has elected to purchase under his Option, in accordance with
the terms of payment, which had previously been agreed upon, his Option shall
thereupon, at the sole discretion of the Committee, terminate, and such funds
previously paid for unissued Stock shall be refunded. Stock which has been
previously issued to the Participant and been fully paid for shall remain the
property of the Participant and shall be unaffected by such termination.
L. Non-Transferability of Options. During the lifetime of a Participant, an
Incentive Stock Option granted to him may be exercised only by him. It may not
be sold, assigned, pledged or otherwise transferred except by will or by the
laws of descent and distribution. In the case of Options which are not
Incentive Stock Options, the Committee may impose such restrictions on
transferability, if any, as it may in its sole discretion determine.
M. Purchase for Investment
(a) Written Agreement by Participants. Unless a registration statement
under the Securities Act of 1933 is then in effect with respect to the
Stock a Participant receives upon exercise of his Option, a Participant
shall acquire the Stock he receives upon exercise of his Option for
investment and not for resale or distribution and he shall furnish the
Company with a written statement to that effect when he exercises his
Option and a reference to such investment warranty shall be inscribed on
the Stock certificate(s).
(b) Registration Requirement. Each Option shall be subject to the
requirement that, if at any time the Board determines that the listing,
registration or qualification of the shares subject to the Option upon any
securities exchange or under any state or Federal law is necessary or
desirable as a condition of, or in connection with, the issuance of shares
thereunder, the Option may not be exercised in whole or in part unless such
listing, registration or qualification shall have been effected or obtained
(and the same shall have been free of any conditions not acceptable to the
Board).
N. Special Limitations on Exercise of Incentive Stock Options. The aggregate
fair market value (determined at the time the Incentive Stock Option is
granted) of the Stock with respect to which any Incentive Stock Option is
first exercisable during any calendar year shall not exceed $100,000.
SECTION NINE
Stock Appreciation Rights
A. Grant of Stock Appreciation Rights. Stock Appreciation Rights may be
granted under the Plan in conjunction with an Option either at the time of
grant or by amendment or may be separately awarded. Stock Appreciation Rights
shall be subject to such terms and conditions not inconsistent with the Plan
as the Committee shall impose. However, the total number of Stock Appreciation
Rights which may be granted to a single Covered Employee under this Plan
during any calendar year shall be limited to 100,000.
B. Right to Exercise; Exercise Period. A Stock Appreciation Right issued
pursuant to an Option shall be exercisable to the extent the Option is
exercisable. A Stock Appreciation Right issued independent of an Option shall
be exercisable pursuant to such terms and conditions established in the grant.
C. Automatic Redemption of Unexercised Stock Appreciation Rights. If on the
last day of the Option Period, in the case of a Stock Appreciation Right
granted pursuant to an Option, or the specified Award Period, in the case of a
Stock Appreciation Right issued independent of an Option, the Participant has
not exercised such Stock Appreciation Right, then such Stock Appreciation
Right shall be automatically redeemed by the Company for an amount equal to
the payment that would otherwise have been made to the Participant if the
Participant had chosen to exercise the Stock Appreciation Right on the last
day of the Option Period or the specified Award Period, as the case may be.
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D. Rights Upon Exercise. An exercisable Stock Appreciation Right granted
pursuant to an Option shall entitle the Participant to surrender unexercised
the Option or any portion thereof to which the Stock Appreciation Right is
attached, and to receive in exchange for the Stock Appreciation Right a
payment (in cash or Stock or a combination thereof as described below) equal
to the Fair Market Value of one share of Stock at the date of exercise minus
the Option Price times the number of shares called for by the Stock
Appreciation Right (or portion thereof) which is so exercised. With respect to
the issuance of Stock Appreciation Rights which are not granted pursuant to an
Option, the Committee shall specify upon the Date of the Grant of the Stock
Appreciation Right whether the Stock Appreciation Right is a "regular" Stock
Appreciation Right or a "book value" Stock Appreciation Right. Upon the
exercise of a regular Stock Appreciation Right, the Participant will receive a
payment equal to the Fair Market Value of one share of Stock at the date of
exercise minus the Fair Market Value of one share of Stock as of the Date of
Grant of the Stock Appreciation Right times the number of shares called for by
the Stock Appreciation Right (or portion thereof) which is so exercised. Upon
the exercise of a book value Stock Appreciation Right, the Participant will
receive a payment equal to the Book Value of one share of Stock at the date of
exercise minus the Book Value of one share of Stock as of the Date of the
Grant of the Stock Appreciation Right times the number of shares called for by
the Stock Appreciation Right (or portion thereof) which is so exercised.
The value of any Stock to be received upon exercise of a Stock Appreciation
Right shall be the Fair Market Value of the Stock on such date of exercise. To
the extent that a Stock Appreciation Right issued pursuant to an Option is
exercised, such Option shall be deemed to have been exercised, and shall not
be deemed to have lapsed.
E. Transferability. The Committee may impose such restrictions on
transferability of Stock Appreciation Rights, if any, as it may in its sole
discretion determine.
SECTION TEN
Performance Shares
A. Grant of Performance Share Units. Awards made pursuant to this Section
Ten shall be granted in the form of Performance Shares, subject to such terms
and conditions not inconsistent with the Plan as the Committee shall impose.
Performance Shares shall be issued to the Participant without the payment of
consideration by the Participant. Awards shall be based on the attainment of
specified types and combination of performance measurement criteria, which may
differ as to various Participants or classes or categories of Participants.
Such criteria may include, without limitation, the attainment of certain
performance levels by the individual Participant, the Company, a department or
division of the Company and/or a group or class of Participants. Such
criteria, together with the ranges of Performance Shares from which employees
may be eligible shall be set from time to time by the Committee and shall be
communicated to the Eligible Employees. The total number of Performance Shares
which may be granted to any single Covered Employee under this Plan during any
calendar year shall be limited to 100,000.
B. Performance Period. The measuring period to establish the performance
criteria set forth in a Performance Share Award shall be determined by the
Committee. A Performance Share Award may initially provide, or the Committee
may at any time thereafter, but no more frequently than once in any six (6)
month period, amend it to provide, for waiver or reduction of the measuring
period and, if appropriate, for adjustment of the performance criteria set
forth in the Performance Share Award, upon the occurrence of events determined
by the Committee in its sole discretion to justify such waiver, reduction or
adjustment.
C. Form of Payment. Upon the completion of the applicable measuring period,
a determination shall be made by the Committee in accordance with the Award as
to the number of shares of Stock to be awarded to the Participant. The
appropriate number of shares of Stock shall thereupon be issued to the
Participant in accordance with the Award in satisfaction of such Performance
Share Award.
C-I-7
<PAGE>
SECTION ELEVEN
Changes in Capital Structure or Shares
In the event any reorganization, merger, consolidation, recapitalization,
liquidation, reclassification, stock dividend, stock split, combination of
shares, rights offering, or extraordinary dividend or divestiture (including a
spin-off), or any other change in the capital structure or shares of the
Company, the Committee shall make adjustments, determined by the Committee in
its discretion to be appropriate, as to the number and kind of securities
subject to this Plan and specified in Section Five of this Plan and as to the
number and kind of securities covered by each outstanding Award and, where
applicable, the price per share thereunder; provided, however, that with
respect to Incentive Stock Options, such adjustments shall be made in
accordance with Section 424(h) of the Code unless the Committee determines
otherwise.
SECTION TWELVE
Corporate Reorganization or Dissolution
A. Discontinuation of the Plan. The Plan shall be discontinued in the event
of the dissolution or liquidation of the Company or in the event of a
Reorganization (as hereinafter defined) in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization and no plan or agreement respecting the Reorganization is
established which specifically provides for the continuation of the Plan and
the change, conversion, or exchange of the stock relating to existing Awards
under this Plan for securities of another corporation. Upon the dissolution of
the Plan in connection with an event described in this Paragraph A, all Awards
shall become fully vested and all outstanding Options and Stock Appreciation
Rights shall become immediately exercisable by the holder thereof. Any Options
or Stock Appreciation Rights granted under the Plan may be terminated as of a
date fixed by the Committee, provided that no less than fifteen (15) days
written notice of the date so fixed shall be given to each Participant and
each such Participant shall have the right during such period to exercise all
or any portion of such Options or Stock Appreciation Rights. Any Stock
Appreciation Rights not so exercised shall be redeemed.
B. Continuation of the Plan Upon a Reorganization. In the event of a
Reorganization (as hereinafter defined) (i) in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization, and (ii) with respect to which there is a reorganization
agreement which undertakes to continue the Plan and to provide for the change,
conversion or exchange of the Stock attributable to outstanding Awards for
securities of another corporation, then the Plan shall continue and the
Committee shall adjust the shares under such outstanding Awards (and shall
adjust the shares remaining under the Plan which are then to be available for
the grant of additional Awards under the Plan, if the reorganization agreement
makes specific provisions therefor), in a manner not inconsistent with the
provisions of the reorganization agreement and this Plan for the adjustment,
change, conversion or exchange of such Awards.
The term "Reorganization" as used in this Section Twelve shall mean any
statutory merger, statutory consolidation, sale of all or substantially all of
the assets of the Company, or sale, pursuant to an agreement with the Company,
of securities of the Company pursuant to which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization.
C. Adjustments and Determinations. Adjustments and determinations under this
Section Twelve shall be made by the Committee, whose decisions as to what
adjustments or determinations shall be made, and the extent thereof, shall be
final, binding, and conclusive.
C-I-8
<PAGE>
SECTION THIRTEEN
Retirement and Disability
The Committee may, in its discretion, waive the forfeiture, termination, or
lapse of an Award in the event of retirement or disability of a Participant
(each as determined by the Committee, in its discretion). Exercise of such
discretion by the Committee in any individual case, however, shall not be
deemed to require, or to establish a precedent suggesting such exercise in any
other case.
SECTION FOURTEEN
Miscellaneous Provisions
A. Nontransferability. The Committee may impose such restrictions on the
transferability of an Award, if any, as it may in its sole discretion
determine.
B. No Employment Right. Neither this Plan nor any action taken hereunder
shall be construed as giving any right to be retained as an officer or
employee of the Company or any of its Subsidiaries.
C. Tax Withholding. Either the Company or a Subsidiary, as appropriate,
shall have the right to deduct from all Awards paid in cash any federal, state
or local taxes as it deems to be required by law to be withheld with respect
to such cash payments. In the case of Awards paid in Stock, the employee or
other person entitled to receiving such Stock shall be required to satisfy any
tax withholding obligations in connection with such Awards in any of the
following ways, as elected by such employee or other person: (i) by paying in
cash to the Company or a Subsidiary, as appropriate, the amount of any
federal, state or local taxes required to be withheld (as determined by the
Company or a Subsidiary, as appropriate), (ii) by having the Company retain a
sufficient number of shares of Stock otherwise payable under the Award to
cover any federal, state or local taxes required to be withheld (as determined
by the Company or a Subsidiary, as appropriate), provided, however, that
management shall assure that the amount of such stock withholding does not
cause the Company to incur additional compensation expense, or (iii) by a
combination of (i) and (ii). The number of shares of Stock to be retained for
this purpose shall be determined on the basis of the Fair Market Value of the
Stock on the date of exercise.
D. Fractional Shares. Any fractional shares concerning Awards shall be
eliminated at the time of payment by rounding down for fractions of less than
one-half and rounding up for fractions of equal to or more than one-half. No
cash settlements shall be made with respect to fractional shares eliminated by
rounding.
E. Government and Other Regulations. The obligation of the Company to make
payment of Awards in Stock or otherwise shall be subject to all applicable
laws, rules, and regulations, and to such approvals by any government agencies
as may be required. The Company shall be under no obligation to register under
the Securities Act of 1933, as amended ("Act"), any of the shares of Stock
issued, delivered or paid in settlement under the Plan. If Stock awarded under
the Plan may in certain circumstances be exempt from registration under the
Act, the Company may restrict its transfer in such manner as it deems
advisable to ensure such exempt status.
F. Severance. Subject to the provision of Paragraph B of this Section
Fourteen, in the event a Participant's employment with the Company terminates,
his rights under any Award which constitutes an Option or a Stock Appreciation
Right terminate one (1) month from the date of such termination of employment.
Such rights shall be exercisable only to the extent the Participant was
entitled to exercise such rights under the Award on the date of such
termination of employment.
G. Death. If a Participant dies prior to the full exercise of his Option
and/or Stock Appreciation Right, his Option to purchase Stock under such
Option and/or Stock Appreciation Right may be exercised to the extent, if any,
that Participant would be entitled to exercise it at the date of the death of
the Participant by the person to whom the Option and/or Stock Appreciation
Right shall pass by will or by the laws of descent and distribution within
twelve (12) months of the death of the Participant or the expiration of the
term of the Option and/or Stock Appreciation Right whichever date is sooner.
H. Limitation. In no event may an Option be exercised by anyone after the
expiration date provided for in Section Eight of the Plan.
C-I-9
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I. Limits on Discretion. Anything in this Plan to the contrary
notwithstanding, if the Award so provides, the Committee shall not have any
discretion to increase the amount of compensation payable under the Award to
the extent such discretion would cause the Award to lose its qualification as
performance-based compensation for purposes of Section 162(m)(4)(C) of the
Code and the regulations thereunder.
J. Governing Law. All matters relating to the Plan or to Awards granted
hereunder shall be governed by the laws of the State of Maryland, without
regard to its principles of conflict of laws.
K. Titles and Headings. The titles and headings of the sections in the Plan
are for convenience of reference only, and in the event of any conflict, the
text of the Plan, rather than such titles and headings, shall control.
SECTION FIFTEEN
Amendment of Plan
A. Discretion of the Board. The Board may at any time and from time to time
alter, amend, suspend or terminate the Plan in whole or in part, except (i)
any such action affecting Options granted or to be granted under this Plan
which are intended to qualify as Incentive Stock Options shall be subject to
stockholder approval to the extent such stockholder approval is required
pursuant to Section 422 of the Internal Revenue Code and (ii) no such action
may be taken without the consent of the Participant to whom any Award shall
theretofore have been granted, which adversely affects the rights of such
Participant concerning such Award, except as such termination or amendment of
the Plan is required by statute, or rules and regulations promulgated
thereunder.
B. Automatic Termination. This Plan shall terminate on [ ], 2007. Awards
may be granted under this Plan at any time and from time to time prior to the
termination of the Plan. Any Award outstanding at the time the Plan is
terminated shall remain in effect until said Award is exercised or expires.
C-I-10
<PAGE>
ANNEX C-II
CHOICE HOTELS FRANCHISING, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
SECTION ONE. PURPOSES.
The 1997 Employee Stock Purchase Plan of Choice Hotels Franchising, Inc.
(the "Plan") is intended to provide a method whereby employees of Choice
Hotels Franchising, Inc. and its Subsidiaries (hereinafter referred to, unless
the context otherwise requires, as the "Company") will have an opportunity to
acquire a proprietary interest in the Company through the purchase of shares
of Common Stock. Such stock ownership induces such employees to continue in
the employ of the Company. The Plan also enables the Company to attract and
retain such employees. It is the intention of the Company to have the Plan
qualify as an "employee stock purchase plan" under Section 423 of the Code.
The provisions of the Plan shall, accordingly, be construed as to extend and
limit participation in a manner consistent with the requirements of that
section of the Code.
SECTION TWO. DEFINITIONS.
(a) AGENT. The term "Agent" shall have the meaning set forth in Section 13
hereof.
(b) BOARD OF DIRECTORS. The term "Board of Directors" shall mean the Board
of Directors of the Company or any individual or committee to which the Board
of Directors has delegated authority to act with respect to a specific
activity.
(c) CODE. The term "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(d) COMMON STOCK. The term "Common Stock" shall mean the $1.00 par value
Common Stock of the Company.
(e) COMPANY. The term "Company" shall mean Choice Hotels Franchising, Inc.,
a Delaware corporation.
(f) COMPENSATION. The term "Compensation" shall mean basic cash
compensation, before any payroll deductions for taxes or any other purposes,
including regular commissions paid by the Company or a Subsidiary to a
Participant in respect of the service of such Participant to the Company or a
Subsidiary during an Offering Period increased by any amounts with respect to
which the Participant has elected to defer or reduce remuneration for federal
income tax purposes (i) under the Choice Hotels Franchising, Inc. Retirement
Savings and Investment Plan, (ii) under the Choice Hotels Franchising, Inc.
Nonqualified Retirement Savings and Investment Plan, or (iii) under any
"cafeteria plan" (as described in Section 125 of the Code) maintained by the
Company or a Subsidiary. Compensation shall not include any amounts paid to
the Participant as (i) bonuses, (ii) overtime pay, (iii) any amounts paid
during that Offering Period on account of the Participant under any other
employee pension benefit plan (as defined in Section 3(2) of ERISA), and (iv)
except as otherwise provided in the preceding sentence, any amounts which are
not includible in the income of the Participant for federal income tax
purposes.
(g) CONTINUOUS SERVICE. The term "Continuous Service" as of any date shall
mean the period determined by the Company, on a uniform basis for employees
similarly situated, to represent the then unbroken period of service of an
employee as an employee of the Company or of a Subsidiary designed by the
Board of Directors to participate in the Plan; provided, however, that in the
case of such a Subsidiary, Continuous Service shall not include service prior
to the date of its affiliation with the Company, unless the Board of Directors
otherwise provides for recognition of such service. A break in Continuous
Service shall be deemed to have occurred whenever an employee voluntarily or
involuntarily ceases to be an employee. The transfer by an employee from one
corporation to another corporation participating in the Plan shall not affect
the Continuous Service of the employee.
C-II-1
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(h) DESIGNATED SUBSIDIARY. The term "Designated Subsidiary" shall mean a
Subsidiary designated by the Board of Directors to participate in the Plan.
(i) ERISA. The term "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
(j) MARKET PRICE. The term "Market Price" shall mean the price at which the
Agent purchases Common Stock in accordance with Section 13 hereof.
(k) NOMINEE. The term "Nominee" shall have the meaning as set forth in
Section 7 hereof.
(l) OFFERING DATE. The term "Offering Date" shall mean the first day of each
January, April, July and October, commencing [ ], 1997.
(m) OFFERING PERIOD. The term "Offering Period" shall mean a three-month
period commencing with an Offering Date and ending with the following Purchase
Date.
(n) OPTION. The term "Option" shall mean the right of a Participant to
acquire Common Stock pursuant to the provisions of the Plan.
(o) PARTICIPANT. The term "Participant" shall mean an eligible employee who
has authorized payroll deductions for the purchase of Common Stock under the
Plan in accordance with Section 4 hereof.
(p) PURCHASE DATE. The term "Purchase Date" shall mean the last trading day
of each March, June, September, and December, commencing [ ], 1997 or if a
pay period ends on the last day of a calendar quarter, the next trading day.
(q) RETIREMENT. The term "Retirement" shall mean termination of employment
of a Participant on or after the sixty-fifth birthday of the Participant.
(r) SUBSIDIARY. The term "Subsidiary" shall mean a Subsidiary corporation of
the Company as defined by Section 424(f) of the Code.
(s) Wherever appropriate, words used in this Plan in the singular may mean
the plural, the plural may mean the singular and the masculine may mean the
feminine.
SECTION THREE. ELIGIBILITY.
All employees of the Company, or Designated Subsidiaries of the Company, who
shall have completed one year of Continuous Service as of any Offering Date,
shall be eligible to participate in the Plan, provided that (i) no employee
shall be eligible who, immediately after any Option is granted, owns stock
possessing 5% or more of the total combined voting power or value of all
classes of stock of the Company or of any Subsidiary of the Company (applying
the rules of Section 424(d) of the Code in determining stock ownership), (ii)
no Director of the Company or of any Subsidiary, who is not an officer or
other employee of any thereof, shall participate in the Plan and (iii) no
employee shall be eligible whose customary employment is 20 hours or less per
week or whose customary employment is for not more than five months in any
calendar year.
SECTION FOUR. METHOD OF PURCHASE.
(a) On each Offering Date, each Participant shall be deemed to have been
granted the right to purchase such number of shares of Common Stock as may be
purchased, as provided herein, by a sum equal to (i) the amount of the
Compensation of the Participant determined in accordance with the following
Section during an Offering Period and (ii) the amount of the Participant's
share of the contribution of the Company during such Offering Period.
C-II-2
<PAGE>
An eligible employee shall become a Participant in the Plan by authorizing
payroll deductions for the purchase of Common Stock under the Plan prior to an
Offering Date with instructions for the purchase of Common Stock under the
Plan. At the time a Participant files his or her authorization, the
Participant shall elect to have deductions made from his or her pay on each
payday during the time he or she is a Participant at a rate not less than 2%
and not in excess of 10% in whole percentages of his or her Compensation. All
payroll deductions made for a Participant shall be credited to his or her
account under the Plan. A Participant may not make any separate cash payment
into such account. No interest will be paid on funds in the account of a
Participant.
A Participant shall be deemed to have continued his or her most recent
election to participate in the Plan for the next Offering Period unless he or
she notifies the Company on or before the twentieth day of the month preceding
the beginning of the next Offering Period that he or she elects not to
participate in the Plan for the next Offering Period. Such notice may not be
revoked. Similarly, a Participant may elect to increase or decrease the amount
of his or her payroll deduction on or before the twentieth day of the month
preceding the beginning of the next Offering Period, such increase or decrease
to be effective at the beginning of the next Offering Period.
On or before each Purchase Date, the Company shall contribute to the Agent
an amount equal to ten-ninths (10/9ths) of all contributions of the
Participants for such Offering Period (so as to have the effect of the Company
contributing ten percent (10%) of the purchase price of the Common Stock). The
Agent shall cause all the proceeds received from contributions of the
Participant and the contribution of the Company to be applied to the open
market purchase of Common Stock. The account of each Participant shall be
credited with the number of shares of Common Stock equal to the sum of the
contributions of the Participant and the share of the Participant of the
contribution of the Company applied by the Agent to the purchase of Common
Stock divided by the average price per share of Common Stock purchased by the
Agent. Unless the Company otherwise directs, the Agent may, but shall not be
obligated to allocate fractional shares of Common Stock for any Participant or
purchase shares of Common Stock in odd lots. Upon termination of an account,
any fractional shares in the Participant's account will be sold, and the
proceeds therefrom shall be delivered to such Participant. In the event
fractional shares are not allocated to the accounts of Participants under the
Plan, any accumulated payroll deductions which would have been used to
purchase fractional shares shall remain in the accounts of Participants. No
interest will be paid on such funds in accounts of Participants and shall be
deemed to be a payroll deduction of the next Offering Period.
(b) No Participant shall have the right to purchase Common Stock under the
Plan at a rate of more than $25,000 in value thereof in any calendar year,
such value to be based on the fair market value per share of the Common Stock
as of the Offering Date on which a Participant becomes eligible to purchase
Common Stock in such year under the terms of the Plan.
(c) A Participant may not increase or reduce the amount of his or her
payroll deduction during an Offering Period, provided, however, that a
Participant may reduce the amount of his or her payroll deduction to zero at
any time during the Offering Period in which case the employee may not
participate again in the Plan until the following Offering Period. A
Participant shall be deemed to have elected to purchase all of the shares
which his or her authorized payroll deductions and share of the contribution
of the Company would purchase on a Purchase Date.
(d) If at any time the number of shares as to which Options have been
granted shall exceed the remaining number of shares authorized for purchase
under the Plan, the number of shares which may be purchased by each
Participant shall be reduced proportionately.
(e) At any time prior to a Purchase Date the Board of Directors may
terminate the Plan without any obligation whatsoever to the Participants,
other than to refund to each Participant, without interest, any sum
accumulated for him or her by payroll deductions.
C-II-3
<PAGE>
SECTION FIVE. WITHDRAWALS.
A Participant may withdraw funds in his or her account under the Plan only
by withdrawal from the Plan; in the event of the withdrawal of the
Participant, he or she shall not be eligible to participate in the Plan until
the next Offering Date.
SECTION SIX. TERMINATION OF EMPLOYMENT.
Upon termination of the employment of a Participant for any reason,
excluding death while in the employ of the Company or a Designated Subsidiary
or Retirement, the Common Stock and/or cash credited to his or her account and
not used to purchase shares will be returned to the Participant within 60 days
after the end of the then current Offering Period or as soon as
administratively practicable thereafter. As an alternative to a distribution
of Common Stock, a Participant may request that the Agent sell the Common
Stock in the account of a Participant and forward the net proceeds to such
person or persons.
Upon termination of the employment of a Participant because of (i) death, or
(ii) Retirement, his or her beneficiary (as defined in Section 9), or the
Participant, as the case may be, shall have the right to elect, by written
notice given to the Secretary of the Company prior to the expiration of the
period of 30 days commencing with the date of the death of the Participant, or
Retirement of the Participant, as the case may be, either
(i) to withdraw all of the payroll deductions credited to the account of
the Participant under the Plan or
(ii) to exercise the Option of the Participant on the Purchase Date next
following the date of the death of the Participant or Retirement of the
Participant, as the case may be, for the purchase of the number of full
shares of Common Stock which the accumulated payroll deductions in the
account of the Participant at the date of the death of the Participant or
Retirement of the Participant, as the case may be, and the proportionate
share of the contribution of the Company, will purchase at the applicable
Purchase Price, and any excess in such account will be returned to said
beneficiary or Participant, as the case may be.
In the event that no such written notice of election shall be duly received
by the office of the Secretary of the Company, the beneficiary or Participant,
as the case may be, shall automatically be deemed to have elected to withdraw
the payroll deductions credited to the account of the Participant at the date
of the death or Retirement of the Participant, as the case may be, and the
same will be paid promptly to the said beneficiary or Participant after the
end of the current Offering Period.
In addition, upon termination of the employment of a Participant because of
(i) death, or (ii) Retirement, the Common Stock and/or cash (except as
otherwise provided in this Section Six) shall be distributed to the
Participant or to the person or persons entitled thereto under Section Nine
within sixty (60) days after the end of the current Offering Period or as soon
as administratively practicable thereafter. As an alternative to a
distribution of Common Stock, a Participant or such person or persons entitled
to receive the account of a Participant under Section Nine may request that
the Agent sell the Common Stock in the account of a Participant and forward
the net proceeds to the Participant or such person or persons.
SECTION SEVEN. STOCK
Subject to adjustment upon changes in capitalization of the Company as
provided in Section 10, the maximum number of shares of Common Stock which
shall be made available for purchase under the Plan is 1,000,000 shares.
Shares purchased pursuant to an Option will initially be registered in the
name of a Nominee designated by the Company, as custodian for the account of
the Participant entitled thereto. Stock certificates will not be issued to
Participants for shares held in the name of the Nominee, but all rights
accruing to an owner of record of such shares (including voting rights) will
belong to the Participant for whose account such shares are held.
Notwithstanding the foregoing, each Participant may elect to have some or all
of the full shares of Common Stock previously purchased and registered in the
name of the Nominee on his or her behalf registered in the name of such
Participant. Written notice of such an election must be given by the
Participant to the Nominee,
C-II-4
<PAGE>
specifying the number of full shares of Common Stock to be registered in the
name of such Participant. The specified number of shares of Common Stock will
be transferred to and registered in the name of the notifying Participant as
soon as administratively practicable.
The Board of Directors may, in its discretion, require as a condition to the
grant of the right to purchase hereunder that the shares of Common Stock
reserved for issuance upon the exercise of the Option shall have been duly
authorized for trading on a national securities exchange and that either
(i) a Registration Statement under the Securities Act of 1933, as amended,
with respect to said shares shall be effective; or
(ii) the Participant shall have represented in form and substance
satisfactory to the Company that it is the intention of the Participant to
purchase such shares for investment.
SECTION EIGHT. NONASSIGNABILITY.
Neither payroll deductions credited to the account of a Participant nor any
rights with regard to the exercise of an Option or to receive Common Stock
under the Plan may be assigned, transferred, pledged or otherwise disposed of
in any way by the Participant other than by will or the laws of descent and
distribution. Any such attempted assignment, transfer, pledge, or other
disposition shall be without effect, except that the Company may treat such
act as an election to withdraw funds in accordance with Section 5.
SECTION NINE. DESIGNATION OF BENEFICIARY.
A Participant may file a written designation of a beneficiary who is to
receive any shares of Common Stock and/or cash in the event of the death of
the Participant prior to the delivery of such shares or cash to Participant.
Such designation of beneficiary may be changed by the Participant at any time
by written notice to the Secretary of the Company. Within 30 days after the
death of the Participant, the beneficiary may, as provided in Section 6, elect
to exercise the Option of the Participant when it becomes exercisable on the
Purchase Date next following the date of the death of the Participant. Upon
the death of a Participant and upon receipt by the Company of proof of the
identity and survivorship of a beneficiary validly designated by the
Participant under the Plan, and notice of election of the beneficiary to
exercise the Option, the Company shall deliver such Common Stock and/or cash
to such beneficiary. In the event of the death of a Participant and in the
absence of a beneficiary validly designated under the Plan who is living at
the time of such death of a Participant, the Company shall deliver such Common
Stock and/or cash to the executor or administrator of the estate of the
Participant within 60 days after the end of the current Offering Period, or as
soon as administratively practicable thereafter, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the
Company, in its discretion, may deliver such Common Stock and/or cash to the
spouse or to any one or more dependents of the Participant as the Company may
designate. No beneficiary shall, prior to the death of the Participant by whom
he or she has been designated, acquire any interest in the Common Stock or
cash credited to the Participant under the Plan.
SECTION TEN. RECAPITALIZATION.
In the event any reorganization, merger, consolidation, recapitalization,
liquidation, reclassification, stock split, stock dividend, combination of
shares, rights offering, or extraordinary dividend or divestiture (including a
spin-off), or any other change in the capital structure or shares of stock of
the Company, the Board of Directors shall make adjustments, determine by the
Board of Directors in its discretion to be appropriate, as to the number and
kind of securities subject to this Plan and specified in Section Seven of this
Plan and as to the number and kind of securities covered by each outstanding
option, and, where applicable, the price per share thereunder.
SECTION ELEVEN. RIGHTS AS A STOCKHOLDER.
An employee shall have no rights as a stockholder with respect to any shares
offered hereunder until completion of payment therefor. Participants will not
be issued stock certificates unless requested. All Common Stock purchased
under the Plan during an Offering Period will be held by the Nominee for at
least two years
C-II-5
<PAGE>
from the Offering Date of the Offering Period. Common Stock may be sold during
this two-year period, but may not be transferred to another agent or nominee.
Notwithstanding the foregoing, a Participant must sell a minimum of 50 shares
of Common Stock each time he or she elects to sell Common Stock or such fewer
whole shares of Common Stock in the account of the Participant upon
termination of employment.
SECTION TWELVE. STATUS OF PLAN FUNDS.
All amounts held by the Company under the Plan shall be added to the general
funds of the Company and shall be used for such purposes as the Company shall
from time to time determine. The Company shall not be obligated to segregate
such payroll deductions.
SECTION THIRTEEN. ADMINISTRATION.
The Plan shall be administered by the Board of Directors. The interpretation
and construction of any provision of the Plan and the adoption of rules and
regulations for administering the Plan shall be made by the Board of
Directors. Determinations made by the Board of Directors with respect to any
matter or provision contained in the Plan shall be final, conclusive and
binding upon the Company and upon all Participants, their heirs or legal
representatives. Any rule or regulation adopted by the Board of Directors
shall remain in full force and effect unless and until altered, amended, or
repealed by the Board of Directors.
The Board of Directors may delegate to a committee any authority of the
Board of Directors under this Plan.
An Agent may be appointed by the Board of Directors to perform the functions
and have the responsibilities assigned to the Agent in this Section 13 with
respect to the purchase of Common Stock. The Board of Directors shall have the
right to change the Agent at any time.
Notwithstanding any other provision to the contrary contained herein, the
Agent shall have all authority to determine the times of such purchases, the
prices at which such purchases are made, the manner of such purchases and the
selection of brokers or dealers (which may include the Agent) to make such
purchases. If Common Stock is purchased at varying Market Prices, an average
price will be allocated to the account of each Participant.
All costs and expenses incurred in administering the Plan shall be paid by
the Company, excluding (i) costs associated with requests for the issuing of
stock certificates to Participants or to the person or persons entitled to
receive the same under Section 9 hereof, (ii) the costs of the sale of Common
Stock and (iii) the costs associated with a Participant terminating or
withdrawing from the Plan.
SECTION FOURTEEN. AMENDMENT OR TERMINATION.
Subject to Section 4(e), the Board of Directors may at any time terminate or
amend the Plan, except any such action shall be subject to stockholder
approval to the extent such stockholder approval is required pursuant to
Section 423 of the Internal Revenue Code.
SECTION FIFTEEN. NOTICES.
All notices or other communications by a Participant to the Company under or
in connection with the Plan shall be deemed to have been given when received
by the Secretary of the Company.
SECTION SIXTEEN. APPROVAL OF STOCKHOLDERS
The effectiveness of this Plan is subject to its approval by the
stockholders of the Company within 12 months after the date it is adopted by
the Board of Directors.
C-II-6
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SECTION SEVENTEEN. REGISTRATION AND QUALIFICATION OF THE PLAN UNDER APPLICABLE
SECURITIES LAWS.
No Option shall be granted under the Plan until such time as the Company has
qualified or registered the shares which are subject to the Option under the
applicable state and federal securities laws to the extent required by such
laws.
C-II-7
<PAGE>
ANNEX D
AMENDMENTS TO
RESTATED CERTIFICATE OF INCORPORATION
OF
CHOICE HOTELS INTERNATIONAL, INC.
Paragraph 1 of Article THIRD of the Certificate of Incorporation shall be
amended to read as follows:
1. The name of the corporation is SUNBURST HOSPITALITY CORPORATION (the
"Corporation").
Paragraph 4 of Article Third of the Certificate of Incorporation shall be
amended to read as follows:
4. The total number of shares of capital stock of all classifications
which the Corporation shall have authority to issue is Sixty-Five Million
(65,000,000), of which Sixty Million (60,000,000) shares having a par value
of One Cent ($.01) per share shall be common stock, and Five Million
(5,000,000) shares having a par value of One Cent ($.01) per share shall be
preferred stock. Upon the date of the effectiveness of the amendment of
this Article, (the "Effective Date"), each three (3) shares of Common Stock
issued and outstanding and held in the treasury of the Corporation shall be
converted into one (1) share of Common Stock. No fractional shares shall be
issued pursuant to such conversion, and as of the effective date of these
Amendments, stockholders otherwise entitled to receive fractions of shares
shall have no further interest as a stockholder in respect of such
fractions of shares. The Corporation will pay in cash the fair value, as
determined by the Board of Directors, of fractions of shares which
otherwise would result from such conversion. Each certificate for Common
Stock shall thereupon and thereafter evidence such number of shares of
Common Stock, and/or the right to receive cash into which such shares have
been converted, and may be surrendered to the Corporation for cancellation
in exchange for new certificates representing such number of shares and/or
cash.
Shares of common stock of the Corporation may be issued from time to time in
one or more classes or series, each of which class or series shall have such
distinctive designation or title as shall be fixed by the Board of Directors
prior to the issuance of any shares thereof. Each such class or series of
common stock shall have such voting powers (full or limited) or no voting
powers, such preferences and relative participating, optional or other special
rights, relative ranking and such qualifications, limitations or restrictions,
as shall be stated in such resolution or resolutions providing for the issue
of such class or series of common stock as may be adopted from time to time by
the Board of Directors prior to the issuance of any shares thereof pursuant to
the authority hereby expressly vested in it, all in accordance with the laws
of the State of Delaware.
Without limiting the generality of the foregoing, shares of a series of
common stock consisting of Twenty- Five Million (25,000,000) shares, or such
larger number of shares as the Board of Directors shall from time to time fix
by resolution or resolutions, may be issued from time to time by the Board of
Directors. Shares of this series shall be designated, and are hereinafter
called "Common Stock."
The holders of record of the Common Stock shall be entitled to the following
rights:
(a) subject to the rights of any holders of any class or series of
capital stock as specified in the resolution providing for such class or
series of capital stock, to vote at all meetings of stockholders of the
Corporation, and at all such meetings such holders shall have one vote in
respect of each share of Common Stock held of record by them;
(b) subject to the rights of any holders of any class or series of
capital stock having a preference with respect to dividends, to receive
when, if and as declared by the Board of Directors out of the assets of the
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Corporation legally available therefor, such dividends as may be declared
by the Corporation from time to time to holders of Common Stock; and
(c) subject to the rights of any holders of any class or series of
capital stock having a preference with respect to distribution of assets
upon liquidation or dissolution, to receive the remaining assets of the
Corporation upon liquidation, dissolution or winding-up.
Shares of preferred stock of the Corporation may be issued from time to time
in one or more classes or series, each of which class or series shall have
such distinctive designation or title as shall be fixed by the Board of
Directors prior to the issuance of any shares thereof. Each such class or
series of preferred stock shall have such voting powers (full or limited) or
no voting powers, such preferences and relative participating, optional or
other special rights, relative ranking and such qualifications, limitations or
restrictions, as shall be stated in such resolution or resolutions providing
for the issue of such class or series of preferred stock as may be adopted
from time to time by the Board of Directors prior to the issuance of any
shares thereof pursuant to the authority hereby expressly vested in it, all in
accordance with the laws of the State of Delaware.
Subject to the rights of any holders of any class or series of capital
stock, as specified in the resolution providing for such class or series of
capital stock, the holders of Common Stock are expressly denied the preemptive
right to subscribe to any or all additional shares of capital stock of the
Corporation or any or all classes or series thereof.
D-2
<PAGE>
ANNEX E-I
CHOICE HOTELS INTERNATIONAL, INC.
1996 LONG-TERM INCENTIVE PLAN
SECTION ONE
Designation and Purpose of Plan
The purpose of the Choice Hotels International, Inc. 1996 Long-Term
Incentive Plan (the "Plan") is to increase the ownership of Company Stock by
those officers, professional staff and other key employees who are mainly
responsible for the continued growth and development and financial success of
the Company and its subsidiaries. Such stock ownership gives such employees a
proprietary interest in the Company which induces them to continue in its
employ. The Plan also enables the Company to attract and retain such employees
and reward them for the continued profitable performance of Choice Hotels
International, Inc.
SECTION TWO
Definitions
The following definitions are applicable herein:
A. "Award"--Individually or collectively, Options, Stock Appreciation
Rights, Performance Shares or Restricted Stock granted hereunder.
B. "Award Period"--the period of time during which a Stock Appreciation
Right which has not been granted pursuant to an Option may be exercised. The
Award Period shall be set forth in the document issuing the Stock Appreciation
Right to the selected Eligible Employee.
C. "Board"--the Board of Directors of the Company.
D. "Book Value"--the book value of a share of Stock determined in accordance
with the Company's regular accounting practices as of the last business day of
the month immediately preceding the month in which a Stock Appreciation Right
is exercised as provided in Section Nine D.
E. "Code"--the Internal Revenue Code of 1986, as amended. Reference in the
Plan to any section of the Code shall be deemed to include any amendments or
successor provisions to such section and any regulations promulgated
thereunder.
F. "Committee"--the Key Executive Stock Option Plan Committee appointed to
administer the Plan pursuant to Section Four. "If two or more Key Executive
Stock Option Plan Committees are appointed with the power to grant Awards to
different classes of employees, references in this Plan to the "Committee'
shall refer to the Key Executive Stock Option Plan Committee administering the
portion of the Plan pertaining to Awards to the applicable class of
employees."
G. "Company"--Choice Hotels International, Inc., including any present or
future "subsidiary corporation" as such term is defined in Section 424(f) of
the 1986 Internal Revenue Code, as amended.
H. "Covered Employee"--an individual described in Section 162(m)(3) of the
Code.
I. "Date of Grant"--the date on which the granting of an Award is authorized
by the Committee or such later date as may be specified by the Committee in
such authorization.
J. "Eligible Employee"--any person employed by the Company or a Subsidiary
on a regularly scheduled basis who satisfies all of the requirements of
Section Six.
E-I-1
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K. "Exercise Period"--the period or periods during which a Stock
Appreciation Right is exercisable as described in Section Nine B.
L. "Fair Market Value"--the fair market value of the Stock as determined in
accordance with Section Eight D.
M. "Incentive Stock Option"--an incentive stock option within the meaning of
Section 422 of the Code.
N. "Option" or "Stock Option"--either a nonqualified stock option or an
Incentive Stock Option granted under Section Eight. It also means any Option
which remains after a Participant has exercised his Option with respect to
part of the shares covered by a Stock Option Agreement as described in Section
Eight B.
O. "Option Period" or "Option Periods"--the period or periods during which
an Option is exercisable as described in Section Eight E.
P. "Option Price"--the price, expressed on a per share basis, for which the
Company Stock can be acquired by the holder of an Option pursuant to the
exercise of such Option.
Q. "Participant"--an Eligible Employee of the Company or a Subsidiary who
has been granted an Option, a Stock Appreciation Right, a Performance Share
Award or a Restricted Stock Award under this Plan.
R. "Performance Share"--an Award granted under Section Ten.
S. "Restricted Stock"--an Award granted under Section Seven.
T. "Stock" and "Company Stock"--the common stock of the Company.
U. "Stock Appreciation Right"--an Award granted under Section Nine.
V. "Subsidiary"--any corporation of which fifty percent (50%) or more of its
outstanding voting stock or voting power is beneficially owned, directly or
indirectly, by the Company.
W. "Ten Percent Shareholder"--a Participant who, at the Date of Grant, owns
directly or indirectly (within the meaning of Section 424(d) of the Internal
Revenue Code) stock possessing more then ten percent (10%) of the total
combined voting power of all classes of stock of the Company or a subsidiary
thereof.
X. Wherever appropriate, words used in this Plan in the singular may mean
the plural, the plural may mean the singular and the masculine may mean the
feminine.
SECTION THREE
Effective Date, Duration and Stockholder Approval
A. Effective Date and Stockholder Approval. Subject to the approval of the
Plan by a majority of the outstanding shares of Stock, the Plan shall be
effective as of November 1, 1996.
B. Period for Grant of Awards. Awards may be made as provided herein for a
period of ten (10) years after November 1, 1996.
E-I-2
<PAGE>
SECTION FOUR
Administration
A. Appointment of Committee. The Board of Directors shall appoint one or
more Key Executive Stock Option Plan Committees which shall consist of not
less than two (2) members of such Board of Directors and which members shall
be Non-Employee Directors as defined in Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (or such greater number of members which may
be required by said Rule 16b-3). In addition, such Board of Directors shall
designate a member of the Committee to act as Chairman of the Committee, and
such Board of Directors may remove any member of the Committee at any time and
appoint any director to fill any vacancy on the Committee.
B. Committee Meetings. The Committee shall hold its meetings at such times
and places as specified by the Committee Chairman. A majority of the Committee
shall constitute a quorum. All actions of the Committee shall be taken by all
of the members of the meeting duly called by its Chairman; provided, however,
any action taken by a written document signed by a majority of the members of
the Committee shall be as effective as action taken by the Committee at a
meeting duly called and held.
C. Committee Powers. Subject to the provisions of this Plan, the Committee
shall have full authority in its discretion to (i) designate the Participants
to whom Awards shall be granted, (ii) determine the number of shares to be
made available under each such Award, (iii) determine the period or periods in
which the Participant may exercise such Award, (iv) determine the date when
such Award expires, (v) determine the price for Stock under such Award, and
(vi) determine the grounds of forfeiture of an Award. The Committee shall have
all powers necessary to administer the Plan in accordance with its terms,
including the power to interpret this Plan and resolve all questions arising
thereunder. The Committee may prescribe such rules and regulations for
administering this Plan as the Committee deems appropriate.
SECTION FIVE
Grant of Awards
Limitation of Number of Shares Subject to Award
The Committee may, from time to time, grant Awards to one or more Eligible
Employees, provided that (i) subject to any adjustment pursuant to Section
Eleven, the aggregate number of shares of Stock subject to Stock Options,
Stock Appreciation Rights, Performance Share Awards or Restricted Stock Awards
under this Plan may not exceed 7,100,000 shares; (ii) to the extent that a
Stock Option, Stock Appreciation Right, Performance Share Award or Restricted
Stock Award lapses or the rights of the Participant to whom it was granted
terminate, expire or are cancelled for any other reason, in whole or in part,
shares of Stock (or remaining shares) subject to such Award shall again be
available for the grant of an Award under the Plan; and (iii) Shares delivered
by the Company under the Plan may be authorized and unissued Stock, Stock held
in the treasury of the Company or Stock purchased on the open market
(including private purchases) in accordance with applicable securities laws.
In determining the size of Awards, the Committee shall take into account the
responsibility level, performance, potential, and cash compensation level of a
Participant, and the Fair Market Value of the Stock at the time of Awards, as
well as such other considerations it deems appropriate.
SECTION SIX
Eligibility
Key employees of the Company and its Subsidiaries (including employees who
are members of the Board, but excluding directors who are not employees) who,
in the opinion of the Committee, are mainly responsible
E-I-3
<PAGE>
for the continued growth and development and financial success of the business
of the Company or one or more of its Subsidiaries shall be eligible to be
granted Awards under the Plan. Subject to the provisions of the Plan, the
Committee may from time to time select from such eligible persons those to
whom Awards shall be granted and determine the nature and amount of each
Award. No employee of the Company or its Subsidiaries shall have any right to
be granted an Award under this Plan. A member of the Committee shall not be
eligible for any Award hereunder.
Notwithstanding any provision to the contrary contained herein, Options
shall be granted under this Plan to persons, including without limitation,
employees of Manor Care, Inc., its subsidiaries, and affiliated companies in
substitution for prior Options under plans of Manor Care, Inc. in accordance
with the terms of the Employee Benefits and other Employee Matters Allocation
Agreement between Manor Care, Inc. and the Company.
SECTION SEVEN
Restricted Stock Awards
A. Grants of Shares of Restricted Stock. An Award made pursuant to this
Section Seven shall be granted in the form of shares of Stock, restricted as
provided in this Section Seven. Shares of the Restricted Stock shall be issued
to the Participant without the payment of consideration by the Participant.
The shares of Restricted Stock shall be issued in the name of the Participant
and shall bear a restrictive legend prohibiting sale, transfer, pledge or
hypothecation of the shares of Restricted Stock until the expiration of the
restriction period.
The Committee may also impose such other restrictions and conditions on the
shares of Restricted Stock as it deems appropriate.
B. Restriction Period. At the time a Restricted Stock Award is made, the
Committee may establish a restriction period applicable to such Award which
shall not be more than ten (10) years. Each Restricted Stock Award may have a
different restriction period, at the discretion of the Committee. In addition
to or in lieu of a restriction period, the Committee may establish a
performance goal which must be achieved as a condition to the retention of the
Restricted Stock. The performance goal may be based on the attainment of
specified types of performance measurement criteria, which may differ as to
various Participants or classes or categories of Participants. Such criteria
may include, without limitation, the attainment of certain performance levels
by the individual Participant, the Company, a department or division of the
Company and/or a group or class of participants. Any such performance goals,
together with the ranges of Restricted Stock Awards for which the Participants
may be eligible shall be set from time to time by the Committee and shall be
timely communicated to the Eligible Employees in advance of the commencement
of the performance of services to which such performance goals relate. The
total number of shares of Restricted Stock which may be granted to any single
Covered Employee under this Plan during any calendar year shall be limited to
100,000.
C. Forfeiture or Payout of Award. In the event a Participant ceases
employment during a restriction period, or in the event performance goals
attributable to a Restricted Stock Award are not achieved, subject to the
terms of each particular Restricted Stock Award, and subject to discretionary
action by the Committee as set forth below in Section Thirteen, a Restricted
Stock Award is subject to forfeiture of the shares of stock which had not
previously been removed from restriction under the terms of the Award.
Any shares of Restricted Stock which are forfeited will be transferred to
the Company.
Upon completion of the restriction period and satisfaction of any
performance-goal criteria, all restrictions upon the Award will expire and new
certificates representing the Award will be issued without the restrictive
legend described in Section Seven A. As a condition precedent to receipt of
the new certificates, the Participant (or the designated beneficiary or
personal representative of the Participant) will agree to make payment to the
Company in the amount of any taxes, payable by the Participant, which are
required to be withheld with respect to such shares of Stock.
E-I-4
<PAGE>
SECTION EIGHT
Stock Options
A. Grant of Option. One or more Options may be granted to any Eligible
Employee. Upon the grant of an Option to an Employee, the Committee shall
specify whether the Option is intended to constitute a non-qualified stock
option or an Incentive Stock Option. The total number of shares of Stock
subject to Options which may be granted to any single Covered Employee under
this Plan during any calendar year shall be limited to 100,000.
B. Stock Option Agreement. Each Option granted under the Plan shall be
evidenced by a written "Stock Option Agreement" between the Company and the
Participant containing such terms and conditions as the Committee determines,
including, without limitation, provisions to qualify Incentive Stock Options
as such under Section 422 of the Code. Such agreements shall incorporate the
provisions of this Plan by reference. The date of granting an Option is the
date specified in the written Stock Option Agreement which is signed by the
Participant and the Company.
C. Determination of Option Price. The Option price for Stock shall be not
less than 100% of the fair market value of the Stock on the date of grant.
Notwithstanding the foregoing, in the case of an Option which is designed to
qualify as an Incentive Stock Option (as defined in Section 422 of the Code)
which is granted to a Ten Percent Shareholder, the Option Price shall not be
less than 110% of such fair market value.
D. Determination of Fair Market Value. The fair market value of the Stock on
the date of granting an Option shall be the mean of the high and low prices at
which the Stock was sold on the market on such date. In the event no such
sales of Stock occurred on such date, the fair market value of the Stock shall
be determined by the Committee in accordance with applicable Regulations of
the Internal Revenue Service.
E. Term of Option. The term of an Option may vary within the Committee's
discretion; provided, however, that the term of an Option shall not exceed ten
(10) years from the date of granting the Option to the Participant, and, to
this end, all Options granted pursuant to this Plan must provide that each
such Option cannot be exercised after the expiration of ten (10) years from
the date each such Option is granted. Notwithstanding the foregoing, in the
case of any Option which is designed to qualify as an Incentive Stock Option
(as defined in Section 422 of the Code) which is granted to a Ten Percent
Shareholder, the term of such Option may not exceed five (5) years from the
date of grant of such Option.
F. Limitation on Exercise of Option. The Committee may limit an Option by
restricting its exercise in whole or in part for specified periods.
G. Method of Exercising an Option. Subject to the terms of a particular
Option, a Participant may exercise it in whole or in part by written notice to
the Secretary of the Company stating in such written notice the number of
shares of Stock such Participant elects to purchase under his Option.
H. No Obligation to Exercise Option. A Participant is under no obligation to
exercise an Option or any part thereof.
I. Payment for Option Stock. Stock purchased pursuant to an Option shall be
paid in full at the time of purchase. Payment may be made (a) in cash, (b)
with the approval of the Committee, by delivery to the Company of shares of
Stock having an aggregate fair market value equal to the exercise price, or
(c) a combination of (a) and (b). Payment may also be made, in the discretion
of the Committee, by delivery (including by facsimile transmission) to the
Company or its designated agent of an executed irrevocable Option exercise
form together with irrevocable instructions to a broker-dealer to sell (or
margin) a sufficient portion of the shares and deliver the sale (or margin
loan) proceeds directly to the Company to pay for the exercise price. Upon
receipt of payment and subject to paragraph J of this Section Eight, the
Company shall, without transfer or issue tax to the Participant or other
person entitled to exercise the Option, deliver to the Participant (or other
person entitled to exercise the Option) a certificate or certificates for such
shares.
E-I-5
<PAGE>
J. Delivery of Stock to Participant. The Company shall undertake and follow
all necessary procedures to make prompt delivery of the number of shares of
Stock which the Participant elects to purchase upon exercise of an Option
granted under this Plan. Such delivery, however, may be postponed, at the sole
discretion of the Company, to enable the Company to comply with any applicable
procedures, regulations or listing requirements of any government agency,
stock exchange or regulatory authority.
K. Failure to Accept Delivery of Stock. If a Participant refuses to pay for
Stock which he has elected to purchase under his Option, in accordance with
the terms of payment, which had previously been agreed upon, his Option shall
thereupon, at the sole discretion of the Committee, terminate, and such funds
previously paid for unissued Stock shall be refunded. Stock which has been
previously issued to the Participant and been fully paid for shall remain the
property of the Participant and shall be unaffected by such termination.
L. Non-Transferability of Options. During the lifetime of a Participant, an
Incentive Stock Option granted to him may be exercised only by him. It may not
be sold, assigned, pledged or otherwise transferred except by will or by the
laws of descent and distribution. In the case of Options which are not
Incentive Stock Options, the Committee may impose such restrictions on
transferability, if any, as it may in its sole discretion determine.
M. Purchase for Investment
(a) Written Agreement by Participants. Unless a registration statement
under the Securities Act of 1933 is then in effect with respect to the
Stock a Participant receives upon exercise of his Option, a Participant
shall acquire the Stock he receives upon exercise of his Option for
investment and not for resale or distribution and he shall furnish the
Company with a written statement to that effect when he exercises his
Option and a reference to such investment warranty shall be inscribed on
the Stock certificate(s).
(b) Registration Requirement. Each Option shall be subject to the
requirement that, if at any time the Board determines that the listing,
registration or qualification of the shares subject to the Option upon any
securities exchange or under any state or Federal law is necessary or
desirable as a condition of, or in connection with, the issuance of shares
thereunder, the Option may not be exercised in whole or in part unless such
listing, registration or qualification shall have been effected or obtained
(and the same shall have been free of any conditions not acceptable to the
Board).
N. Special Limitations on Exercise of Incentive Stock Options. The aggregate
fair market value (determined at the time the Incentive Stock Option is
granted) of the Stock with respect to which any Incentive Stock Option is
first exercisable during any calendar year shall not exceed $100,000.
SECTION NINE
Stock Appreciation Rights
A. Grant of Stock Appreciation Rights. Stock Appreciation Rights may be
granted under the Plan in conjunction with an Option either at the time of
grant or by amendment or may be separately awarded. Stock Appreciation Rights
shall be subject to such terms and conditions not inconsistent with the Plan
as the Committee shall impose. However, the total number of Stock Appreciation
Rights which may be granted to a single Covered Employee under this Plan
during any calendar year shall be limited to 100,000.
B. Right to Exercise; Exercise Period. A Stock Appreciation Right issued
pursuant to an Option shall be exercisable to the extent the Option is
exercisable. A Stock Appreciation Right issued independent of an Option shall
be exercisable pursuant to such terms and conditions established in the grant.
C. Automatic Redemption of Unexercised Stock Appreciation Rights. If on the
last day of the Option Period, in the case of a Stock Appreciation Right
granted pursuant to an Option, or the specified Award Period, in the case of a
Stock Appreciation Right issued independent of an Option, the Participant has
not exercised
E-I-6
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such Stock Appreciation Right, then such Stock Appreciation Right shall be
automatically redeemed by the Company for an amount equal to the payment that
would otherwise have been made to the Participant if the Participant had
chosen to exercise the Stock Appreciation Right on the last day of the Option
Period or the specified Award Period, as the case may be.
D. Rights Upon Exercise. An exercisable Stock Appreciation Right granted
pursuant to an Option shall entitle the Participant to surrender unexercised
the Option or any portion thereof to which the Stock Appreciation Right is
attached, and to receive in exchange for the Stock Appreciation Right a
payment (in cash or Stock or a combination thereof as described below) equal
to the Fair Market Value of one share of Stock at the date of exercise minus
the Option Price times the number of shares called for by the Stock
Appreciation Right (or portion thereof) which is so exercised. With respect to
the issuance of Stock Appreciation Rights which are not granted pursuant to an
Option, the Committee shall specify upon the Date of the Grant of the Stock
Appreciation Right whether the Stock Appreciation Right is a "regular" Stock
Appreciation Right or a "book value" Stock Appreciation Right. Upon the
exercise of a regular Stock Appreciation Right, the Participant will receive a
payment equal to the Fair Market Value of one share of Stock at the date of
exercise minus the Fair Market Value of one share of Stock as of the Date of
Grant of the Stock Appreciation Right times the number of shares called for by
the Stock Appreciation Right (or portion thereof) which is so exercised. Upon
the exercise of a book value Stock Appreciation Right, the Participant will
receive a payment equal to the Book Value of one share of Stock at the date of
exercise minus the Book Value of one share of Stock as of the Date of the
Grant of the Stock Appreciation Right times the number of shares called for by
the Stock Appreciation Right (or portion thereof) which is so exercised.
The value of any Stock to be received upon exercise of a Stock Appreciation
Right shall be the Fair Market Value of the Stock on such date of exercise. To
the extent that a Stock Appreciation Right issued pursuant to an Option is
exercised, such Option shall be deemed to have been exercised, and shall not
be deemed to have lapsed.
E. Transferability. The Committee may impose such restrictions on
transferability of Stock Appreciation Rights, if any, as it may in its sole
discretion determine.
SECTION TEN
Performance Shares
A. Grant of Performance Share Units. Awards made pursuant to this Section
Ten shall be granted in the form of Performance Shares, subject to such terms
and conditions not inconsistent with the Plan as the Committee shall impose.
Performance Shares shall be issued to the Participant without the payment of
consideration by the Participant. Awards shall be based on the attainment of
specified types and combination of performance measurement criteria, which may
differ as to various Participants or classes or categories of Participants.
Such criteria may include, without limitation, the attainment of certain
performance levels by the individual Participant, the Company, a department or
division of the Company and/or a group or class of Participants. Such
criteria, together with the ranges of Performance Shares from which employees
may be eligible shall be set from time to time by the Committee and shall be
communicated to the Eligible Employees. The total number of Performance Shares
which may be granted to any single Covered Employee under this Plan during any
calendar year shall be limited to 100,000.
B. Performance Period. The measuring period to establish the performance
criteria set forth in a Performance Share Award shall be determined by the
Committee. A Performance Share Award may initially provide, or the Committee
may at any time thereafter, but no more frequently than once in any six (6)
month period, amend it to provide, for waiver or reduction of the measuring
period and, if appropriate, for adjustment of the performance criteria set
forth in the Performance Share Award, upon the occurrence of events determined
by the Committee in its sole discretion to justify such waiver, reduction or
adjustment.
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C. Form of Payment. Upon the completion of the applicable measuring period,
a determination shall be made by the Committee in accordance with the Award as
to the number of shares of Stock to be awarded to the Participant. The
appropriate number of shares of Stock shall thereupon be issued to the
Participant in accordance with the Award in satisfaction of such Performance
Share Award.
SECTION ELEVEN
Changes in Capital Structure or Shares
In the event any reorganization, merger, consolidation, recapitalization,
liquidation, reclassification, stock dividend, stock split, combination of
shares, rights offering, or extraordinary dividend or divestiture (including a
spin-off), or any other change in the capital structure or shares of the
Company, the Committee shall make adjustments, determined by the Committee in
its discretion to be appropriate, as to the number and kind of securities
subject to this Plan and specified in Section Five of this Plan and as to the
number and kind of securities covered by each outstanding Award and, where
applicable, the price per share thereunder; provided, however, that with
respect to Incentive Stock Options, such adjustments shall be made in
accordance with Section 424(h) of the Code unless the Committee determines
otherwise.
SECTION TWELVE
Corporate Reorganization or Dissolution
A. Discontinuation of the Plan. The Plan shall be discontinued in the event
of the dissolution or liquidation of the Company or in the event of a
Reorganization (as hereinafter defined) in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization and no plan or agreement respecting the Reorganization is
established which specifically provides for the continuation of the Plan and
the change, conversion, or exchange of the stock relating to existing Awards
under this Plan for securities of another corporation. Upon the dissolution of
the Plan in connection with an event described in this Paragraph A, all Awards
shall become fully vested and all outstanding Options and Stock Appreciation
Rights shall become immediately exercisable by the holder thereof. Any Options
or Stock Appreciation Rights granted under the Plan may be terminated as of a
date fixed by the Committee, provided that no less than fifteen (15) days
written notice of the date so fixed shall be given to each Participant and
each such Participant shall have the right during such period to exercise all
or any portion of such Options or Stock Appreciation Rights. Any Stock
Appreciation Rights not so exercised shall be redeemed.
B. Continuation of the Plan Upon a Reorganization. In the event of a
Reorganization (as hereinafter defined) (i) in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization, and (ii) with respect to which there is a reorganization
agreement which undertakes to continue the Plan and to provide for the change,
conversion or exchange of the Stock attributable to outstanding Awards for
securities of another corporation, then the Plan shall continue and the
Committee shall adjust the shares under such outstanding Awards (and shall
adjust the shares remaining under the Plan which are then to be available for
the grant of additional Awards under the Plan, if the reorganization agreement
makes specific provisions therefor), in a manner not inconsistent with the
provisions of the reorganization agreement and this Plan for the adjustment,
change, conversion or exchange of such Awards.
The term "Reorganization" as used in this Section Twelve shall mean any
statutory merger, statutory consolidation, sale of all or substantially all of
the assets of the Company, or sale, pursuant to an agreement with
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the Company, of securities of the Company pursuant to which the Company is or
becomes a wholly-owned subsidiary of another company after the effective date
of the Reorganization.
C. Adjustments and Determinations. Adjustments and determinations under this
Section Twelve shall be made by the Committee, whose decisions as to what
adjustments or determinations shall be made, and the extent thereof, shall be
final, binding, and conclusive.
SECTION THIRTEEN
Retirement and Disability
The Committee may, in its discretion, waive the forfeiture, termination, or
lapse of an Award in the event of retirement or disability of a Participant
(each as determined by the Committee, in its discretion). Exercise of such
discretion by the Committee in any individual case, however, shall not be
deemed to require, or to establish a precedent suggesting such exercise in any
other case.
SECTION FOURTEEN
Miscellaneous Provisions
A. Nontransferability. The Committee may impose such restrictions on the
transferability of an Award, if any, as it may in its sole discretion
determine.
B. No Employment Right. Neither this Plan nor any action taken hereunder
shall be construed as giving any right to be retained as an officer or
employee of the Company or any of its Subsidiaries.
C. Tax Withholding. Either the Company or a Subsidiary, as appropriate,
shall have the right to deduct from all Awards paid in cash any federal, state
or local taxes as it deems to be required by law to be withheld with respect
to such cash payments. In the case of Awards paid in Stock, the employee or
other person entitled to receiving such Stock shall be required to satisfy any
tax withholding obligations in connection with such Awards in any of the
following ways, as elected by such employee or other person: (i) by paying in
cash to the Company or a Subsidiary, as appropriate, the amount of any
federal, state or local taxes required to be withheld (as determined by the
Company or a Subsidiary, as appropriate), (ii) by having the Company retain a
sufficient number of shares of Stock otherwise payable under the Award to
cover any federal, state or local taxes required to be withheld (as determined
by the Company or a Subsidiary, as appropriate), provided, however, that
management shall assure that the amount of such stock withholding does not
cause the Company to incur additional compensation expense, or (iii) by a
combination of (i) and (ii). The number of shares of Stock to be retained for
this purpose shall be determined on the basis of the Fair Market Value of the
Stock on the date of exercise.
D. Fractional Shares. Any fractional shares concerning Awards shall be
eliminated at the time of payment by rounding down for fractions of less than
one-half and rounding up for fractions of equal to or more than one-half. No
cash settlements shall be made with respect to fractional shares eliminated by
rounding.
E. Government and Other Regulations. The obligation of the Company to make
payment of Awards in Stock or otherwise shall be subject to all applicable
laws, rules, and regulations, and to such approvals by any government agencies
as may be required. The Company shall be under no obligation to register under
the Securities Act of 1933, as amended ("Act"), any of the shares of Stock
issued, delivered or paid in settlement under the Plan. If Stock awarded under
the Plan may in certain circumstances be exempt from registration under the
Act, the Company may restrict its transfer in such manner as it deems
advisable to ensure such exempt status.
F. Severance. Subject to the provision of Paragraph B of this Section
Fourteen, in the event a Participant's employment with the Company terminates,
his rights under any Award which constitutes an Option or a Stock Appreciation
Right terminate one (1) month from the date of such termination of employment.
Such rights shall be exercisable only to the extent the Participant was
entitled to exercise such rights under the Award on the date of such
termination of employment.
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G. Death. If a Participant dies prior to the full exercise of his Option
and/or Stock Appreciation Right, his Option to purchase Stock under such
Option and/or Stock Appreciation Right may be exercised to the extent, if any,
that Participant would be entitled to exercise it at the date of the death of
the Participant by the person to whom the Option and/or Stock Appreciation
Right shall pass by will or by the laws of descent and distribution within
twelve (12) months of the death of the Participant or the expiration of the
term of the Option and/or Stock Appreciation Right whichever date is sooner.
H. Limitation. In no event may an Option be exercised by anyone after the
expiration date provided for in Section Eight of the Plan.
I. Limits on Discretion. Anything in this Plan to the contrary
notwithstanding, if the Award so provides, the Committee shall not have any
discretion to increase the amount of compensation payable under the Award to
the extent such discretion would cause the Award to lose its qualification as
performance-based compensation for purposes of Section 162(m)(4)(C) of the
Code and the regulations thereunder.
J. Governing Law. All matters relating to the Plan or to Awards granted
hereunder shall be governed by the laws of the State of Maryland, without
regard to its principles of conflict of laws.
K. Titles and Headings. The titles and headings of the sections in the Plan
are for convenience of reference only, and in the event of any conflict, the
text of the Plan, rather than such titles and headings, shall control.
SECTION FIFTEEN
Amendment of Plan
A. Discretion of the Board. The Board may at any time and from time to time
alter, amend, suspend or terminate the Plan in whole or in part, except (i)
any such action affecting Options granted or to be granted under this Plan
which are intended to qualify as Incentive Stock Options shall be subject to
stockholder approval to the extent such stockholder approval is required
pursuant to Section 422 of the Internal Revenue Code and (ii) no such action
may be taken without the consent of the Participant to whom any Award shall
theretofore have been granted, which adversely affects the rights of such
Participant concerning such Award, except as such termination or amendment of
the Plan is required by statute, or rules and regulations promulgated
thereunder.
B. Automatic Termination. This Plan shall terminate on November 1, 2006.
Awards may be granted under this Plan at any time and from time to time prior
to the termination of the Plan. Any Award outstanding at the time the Plan is
terminated shall remain in effect until said Award is exercised or expires.
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ANNEX E-II
CHOICE HOTELS INTERNATIONAL, INC.
EMPLOYEE STOCK PURCHASE PLAN
SECTION ONE. PURPOSES.
The 1997 Employee Stock Purchase Plan of Choice Hotels International, Inc.
(the "Plan") is intended to provide a method whereby employees of Choice
Hotels International, Inc. and its Subsidiaries (hereinafter referred to,
unless the context otherwise requires, as the "Company") will have an
opportunity to acquire a proprietary interest in the Company through the
purchase of shares of Common Stock. Such stock ownership induces such
employees to continue in the employ of the Company. The Plan also enables the
Company to attract and retain such employees. It is the intention of the
Company to have the Plan qualify as an "employee stock purchase plan" under
Section 423 of the Code. The provisions of the Plan shall, accordingly, be
construed as to extend and limit participation in a manner consistent with the
requirements of that section of the Code.
SECTION TWO. DEFINITIONS.
(a) AGENT. The term "Agent" shall have the meaning set forth in Section 13
hereof.
(b) BOARD OF DIRECTORS. The term "Board of Directors" shall mean the Board
of Directors of the Company or any individual or committee to which the Board
of Directors has delegated authority to act with respect to a specific
activity.
(c) CODE. The term "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(d) COMMON STOCK. The term "Common Stock" shall mean the $1.00 par value
Common Stock of the Company.
(e) COMPANY. The term "Company" shall mean Choice Hotels International,
Inc., a Delaware corporation.
(f) COMPENSATION. The term "Compensation" shall mean basic cash
compensation, before any payroll deductions for taxes or any other purposes,
including regular commissions paid by the Company or a Subsidiary to a
Participant in respect of the service of such Participant to the Company or a
Subsidiary during an Offering Period increased by any amounts with respect to
which the Participant has elected to defer or reduce remuneration for federal
income tax purposes (i) under the Choice Hotels International, Inc. Retirement
Savings and Investment Plan, (ii) under the Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan, or (iii) under any
"cafeteria plan" (as described in Section 125 of the Code) maintained by the
Company or a Subsidiary. Compensation shall not include any amounts paid to
the Participant as (i) bonuses, (ii) overtime pay, (iii) any amounts paid
during that Offering Period on account of the Participant under any other
employee pension benefit plan (as defined in Section 3(2) of ERISA), and (iv)
except as otherwise provided in the preceding sentence, any amounts which are
not includible in the income of the Participant for federal income tax
purposes.
(g) CONTINUOUS SERVICE. The term "Continuous Service" as of any date shall
mean the period determined by the Company, on a uniform basis for employees
similarly situated, to represent the then unbroken period of service of an
employee as an employee of the Company or of a Subsidiary designed by the
Board of Directors to participate in the Plan; provided, however, that in the
case of such a Subsidiary, Continuous Service shall not include service prior
to the date of its affiliation with the Company, unless the Board of Directors
otherwise provides for recognition of such service. A break in Continuous
Service shall be deemed to have occurred whenever an employee voluntarily or
involuntarily ceases to be an employee. The transfer by an employee from one
corporation to another corporation participating in the Plan shall not affect
the Continuous Service of the employee.
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(h) DESIGNATED SUBSIDIARY. The term "Designated Subsidiary" shall mean a
Subsidiary designated by the Board of Directors to participate in the Plan.
(i) ERISA. The term "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
(j) MARKET PRICE. The term "Market Price" shall mean the price at which the
Agent purchases Common Stock in accordance with Section 13 hereof.
(k) NOMINEE. The term "Nominee" shall have the meaning as set forth in
Section 7 hereof.
(l) OFFERING DATE. The term "Offering Date" shall mean the first day of each
January, April, July and October, commencing January 1, 1997.
(m) OFFERING PERIOD. The term "Offering Period" shall mean a three-month
period commencing with an Offering Date and ending with the following Purchase
Date.
(n) OPTION. The term "Option" shall mean the right of a Participant to
acquire Common Stock pursuant to the provisions of the Plan.
(o) PARTICIPANT. The term "Participant" shall mean an eligible employee who
has authorized payroll deductions for the purchase of Common Stock under the
Plan in accordance with Section 4 hereof.
(p) PURCHASE DATE. The term "Purchase Date" shall mean the last trading day
of each March, June, September, and December, commencing November 1, 1996 or
if a pay period ends on the last day of a calendar quarter, the next trading
day.
(q) RETIREMENT. The term "Retirement" shall mean termination of employment
of a Participant on or after the sixty-fifth birthday of the Participant.
(r) SUBSIDIARY. The term "Subsidiary" shall mean a Subsidiary corporation of
the Company as defined by Section 424(f) of the Code.
(s) Wherever appropriate, words used in this Plan in the singular may mean
the plural, the plural may mean the singular and the masculine may mean the
feminine.
SECTION THREE. ELIGIBILITY.
All employees of the Company, or Designated Subsidiaries of the Company, who
shall have completed one year of Continuous Service as of any Offering Date,
shall be eligible to participate in the Plan, provided that (i) no employee
shall be eligible who, immediately after any Option is granted, owns stock
possessing 5% or more of the total combined voting power or value of all
classes of stock of the Company or of any Subsidiary of the Company (applying
the rules of Section 424(d) of the Code in determining stock ownership), (ii)
no Director of the Company or of any Subsidiary, who is not an officer or
other employee of any thereof, shall participate in the Plan and (iii) no
employee shall be eligible whose customary employment is 20 hours or less per
week or whose customary employment is for not more than five months in any
calendar year.
SECTION FOUR. METHOD OF PURCHASE.
(a) On each Offering Date, each Participant shall be deemed to have been
granted the right to purchase such number of shares of Common Stock as may be
purchased, as provided herein, by a sum equal to (i) the amount of the
Compensation of the Participant determined in accordance with the following
Section during an Offering Period and (ii) the amount of the Participant's
share of the contribution of the Company during such Offering Period.
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An eligible employee shall become a Participant in the Plan by authorizing
payroll deductions for the purchase of Common Stock under the Plan prior to an
Offering Date with instructions for the purchase of Common Stock under the
Plan. At the time a Participant files his or her authorization, the
Participant shall elect to have deductions made from his or her pay on each
payday during the time he or she is a Participant at a rate not less than 2%
and not in excess of 10% in whole percentages of his or her Compensation. All
payroll deductions made for a Participant shall be credited to his or her
account under the Plan. A Participant may not make any separate cash payment
into such account. No interest will be paid on funds in the account of a
Participant.
A Participant shall be deemed to have continued his or her most recent
election to participate in the Plan for the next Offering Period unless he or
she notifies the Company on or before the twentieth day of the month preceding
the beginning of the next Offering Period that he or she elects not to
participate in the Plan for the next Offering Period. Such notice may not be
revoked. Similarly, a Participant may elect to increase or decrease the amount
of his or her payroll deduction on or before the twentieth day of the month
preceding the beginning of the next Offering Period, such increase or decrease
to be effective at the beginning of the next Offering Period.
On or before each Purchase Date, the Company shall contribute to the Agent
an amount equal to ten-ninths (10/9ths) of all contributions of the
Participants for such Offering Period (so as to have the effect of the Company
contributing ten percent (10%) of the purchase price of the Common Stock). The
Agent shall cause all the proceeds received from contributions of the
Participant and the contribution of the Company to be applied to the open
market purchase of Common Stock. The account of each Participant shall be
credited with the number of shares of Common Stock equal to the sum of the
contributions of the Participant and the share of the Participant of the
contribution of the Company applied by the Agent to the purchase of Common
Stock divided by the average price per share of Common Stock purchased by the
Agent. Unless the Company otherwise directs, the Agent may, but shall not be
obligated to allocate fractional shares of Common Stock for any Participant or
purchase shares of Common Stock in odd lots. Upon termination of an account,
any fractional shares in the Participant's account will be sold, and the
proceeds therefrom shall be delivered to such Participant. In the event
fractional shares are not allocated to the accounts of Participants under the
Plan, any accumulated payroll deductions which would have been used to
purchase fractional shares shall remain in the accounts of Participants. No
interest will be paid on such funds in accounts of Participants and shall be
deemed to be a payroll deduction of the next Offering Period.
(b) No Participant shall have the right to purchase Common Stock under the
Plan at a rate of more than $25,000 in value thereof in any calendar year,
such value to be based on the fair market value per share of the Common Stock
as of the Offering Date on which a Participant becomes eligible to purchase
Common Stock in such year under the terms of the Plan.
(c) A Participant may not increase or reduce the amount of his or her
payroll deduction during an Offering Period, provided, however, that a
Participant may reduce the amount of his or her payroll deduction to zero at
any time during the Offering Period in which case the employee may not
participate again in the Plan until the following Offering Period. A
Participant shall be deemed to have elected to purchase all of the shares
which his or her authorized payroll deductions and share of the contribution
of the Company would purchase on a Purchase Date.
(d) If at any time the number of shares as to which Options have been
granted shall exceed the remaining number of shares authorized for purchase
under the Plan, the number of shares which may be purchased by each
Participant shall be reduced proportionately.
(e) At any time prior to a Purchase Date the Board of Directors may
terminate the Plan without any obligation whatsoever to the Participants,
other than to refund to each Participant, without interest, any sum
accumulated for him or her by payroll deductions.
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<PAGE>
SECTION FIVE. WITHDRAWALS.
A Participant may withdraw funds in his or her account under the Plan only
by withdrawal from the Plan; in the event of the withdrawal of the
Participant, he or she shall not be eligible to participate in the Plan until
the next Offering Date.
SECTION SIX. TERMINATION OF EMPLOYMENT.
Upon termination of the employment of a Participant for any reason,
excluding death while in the employ of the Company or a Designated Subsidiary
or Retirement, the Common Stock and/or cash credited to his or her account and
not used to purchase shares will be returned to the Participant within 60 days
after the end of the then current Offering Period or as soon as
administratively practicable thereafter. As an alternative to a distribution
of Common Stock, a Participant may request that the Agent sell the Common
Stock in the account of a Participant and forward the net proceeds to such
person or persons.
Upon termination of the employment of a Participant because of (i) death, or
(ii) Retirement, his or her beneficiary (as defined in Section 9), or the
Participant, as the case may be, shall have the right to elect, by written
notice given to the Secretary of the Company prior to the expiration of the
period of 30 days commencing with the date of the death of the Participant, or
Retirement of the Participant, as the case may be, either
(i) to withdraw all of the payroll deductions credited to the account of
the Participant under the Plan or
(ii) to exercise the Option of the Participant on the Purchase Date next
following the date of the death of the Participant or Retirement of the
Participant, as the case may be, for the purchase of the number of full
shares of Common Stock which the accumulated payroll deductions in the
account of the Participant at the date of the death of the Participant or
Retirement of the Participant, as the case may be, and the proportionate
share of the contribution of the Company, will purchase at the applicable
Purchase Price, and any excess in such account will be returned to said
beneficiary or Participant, as the case may be.
In the event that no such written notice of election shall be duly received
by the office of the Secretary of the Company, the beneficiary or Participant,
as the case may be, shall automatically be deemed to have elected to withdraw
the payroll deductions credited to the account of the Participant at the date
of the death or Retirement of the Participant, as the case may be, and the
same will be paid promptly to the said beneficiary or Participant after the
end of the current Offering Period.
In addition, upon termination of the employment of a Participant because of
(i) death, or (ii) Retirement, the Common Stock and/or cash (except as
otherwise provided in this Section Six) shall be distributed to the
Participant or to the person or persons entitled thereto under Section Nine
within sixty (60) days after the end of the current Offering Period or as soon
as administratively practicable thereafter. As an alternative to a
distribution of Common Stock, a Participant or such person or persons entitled
to receive the account of a Participant under Section Nine may request that
the Agent sell the Common Stock in the account of a Participant and forward
the net proceeds to the Participant or such person or persons.
SECTION SEVEN. STOCK
Subject to adjustment upon changes in capitalization of the Company as
provided in Section 10, the maximum number of shares of Common Stock which
shall be made available for purchase under the Plan is 1,000,000 shares.
Shares purchased pursuant to an Option will initially be registered in the
name of a Nominee designated by the Company, as custodian for the account of
the Participant entitled thereto. Stock certificates will not be issued to
Participants for shares held in the name of the Nominee, but all rights
accruing to an owner of record of such shares (including voting rights) will
belong to the Participant for whose account such shares are held.
Notwithstanding the foregoing, each Participant may elect to have some or all
of the full shares of Common
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<PAGE>
Stock previously purchased and registered in the name of the Nominee on his or
her behalf registered in the name of such Participant. Written notice of such
an election must be given by the Participant to the Nominee, specifying the
number of full shares of Common Stock to be registered in the name of such
Participant. The specified number of shares of Common Stock will be
transferred to and registered in the name of the notifying Participant as soon
as administratively practicable.
The Board of Directors may, in its discretion, require as a condition to the
grant of the right to purchase hereunder that the shares of Common Stock
reserved for issuance upon the exercise of the Option shall have been duly
authorized for trading on a national securities exchange and that either
(i) a Registration Statement under the Securities Act of 1933, as
amended, with respect to said shares shall be effective; or
(ii) the Participant shall have represented in form and substance
satisfactory to the Company that it is the intention of the Participant to
purchase such shares for investment.
SECTION EIGHT. NONASSIGNABILITY.
Neither payroll deductions credited to the account of a Participant nor any
rights with regard to the exercise of an Option or to receive Common Stock
under the Plan may be assigned, transferred, pledged or otherwise disposed of
in any way by the Participant other than by will or the laws of descent and
distribution. Any such attempted assignment, transfer, pledge, or other
disposition shall be without effect, except that the Company may treat such
act as an election to withdraw funds in accordance with Section 5.
SECTION NINE. DESIGNATION OF BENEFICIARY.
A Participant may file a written designation of a beneficiary who is to
receive any shares of Common Stock and/or cash in the event of the death of
the Participant prior to the delivery of such shares or cash to Participant.
Such designation of beneficiary may be changed by the Participant at any time
by written notice to the Secretary of the Company. Within 30 days after the
death of the Participant, the beneficiary may, as provided in Section 6, elect
to exercise the Option of the Participant when it becomes exercisable on the
Purchase Date next following the date of the death of the Participant. Upon
the death of a Participant and upon receipt by the Company of proof of the
identity and survivorship of a beneficiary validly designated by the
Participant under the Plan, and notice of election of the beneficiary to
exercise the Option, the Company shall deliver such Common Stock and/or cash
to such beneficiary. In the event of the death of a Participant and in the
absence of a beneficiary validly designated under the Plan who is living at
the time of such death of a Participant, the Company shall deliver such Common
Stock and/or cash to the executor or administrator of the estate of the
Participant within 60 days after the end of the current Offering Period, or as
soon as administratively practicable thereafter, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the
Company, in its discretion, may deliver such Common Stock and/or cash to the
spouse or to any one or more dependents of the Participant as the Company may
designate. No beneficiary shall, prior to the death of the Participant by whom
he or she has been designated, acquire any interest in the Common Stock or
cash credited to the Participant under the Plan.
SECTION TEN. RECAPITALIZATION.
In the event any reorganization, merger, consolidation, recapitalization,
liquidation, reclassification, stock split, stock dividend, combination of
shares, rights offering, or extraordinary dividend or divestiture (including a
spin-off), or any other change in the capital structure or shares of stock of
the Company, the Board of Directors shall make adjustments, determine by the
Board of Directors in its discretion to be appropriate, as to the number and
kind of securities subject to this Plan and specified in Section Seven of this
Plan and as to the number and kind of securities covered by each outstanding
option, and, where applicable, the price per share thereunder.
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<PAGE>
SECTION ELEVEN. RIGHTS AS A STOCKHOLDER.
An employee shall have no rights as a stockholder with respect to any shares
offered hereunder until completion of payment therefor. Participants will not
be issued stock certificates unless requested. All Common Stock purchased
under the Plan during an Offering Period will be held by the Nominee for at
least two years from the Offering Date of the Offering Period. Common Stock
may be sold during this two-year period, but may not be transferred to another
agent or nominee. Notwithstanding the foregoing, a Participant must sell a
minimum of 50 shares of Common Stock each time he or she elects to sell Common
Stock or such fewer whole shares of Common Stock in the account of the
Participant upon termination of employment.
SECTION TWELVE. STATUS OF PLAN FUNDS.
All amounts held by the Company under the Plan shall be added to the general
funds of the Company and shall be used for such purposes as the Company shall
from time to time determine. The Company shall not be obligated to segregate
such payroll deductions.
SECTION THIRTEEN. ADMINISTRATION.
The Plan shall be administered by the Board of Directors. The interpretation
and construction of any provision of the Plan and the adoption of rules and
regulations for administering the Plan shall be made by the Board of
Directors. Determinations made by the Board of Directors with respect to any
matter or provision contained in the Plan shall be final, conclusive and
binding upon the Company and upon all Participants, their heirs or legal
representatives. Any rule or regulation adopted by the Board of Directors
shall remain in full force and effect unless and until altered, amended, or
repealed by the Board of Directors.
The Board of Directors may delegate to a committee any authority of the
Board of Directors under this Plan.
An Agent may be appointed by the Board of Directors to perform the functions
and have the responsibilities assigned to the Agent in this Section 13 with
respect to the purchase of Common Stock. The Board of Directors shall have the
right to change the Agent at any time.
Notwithstanding any other provision to the contrary contained herein, the
Agent shall have all authority to determine the times of such purchases, the
prices at which such purchases are made, the manner of such purchases and the
selection of brokers or dealers (which may include the Agent) to make such
purchases. If Common Stock is purchased at varying Market Prices, an average
price will be allocated to the account of each Participant.
All costs and expenses incurred in administering the Plan shall be paid by
the Company, excluding (i) costs associated with requests for the issuing of
stock certificates to Participants or to the person or persons entitled to
receive the same under Section 9 hereof, (ii) the costs of the sale of Common
Stock and (iii) the costs associated with a Participant terminating or
withdrawing from the Plan.
SECTION FOURTEEN. AMENDMENT OR TERMINATION.
Subject to Section 4(e), the Board of Directors may at any time terminate or
amend the Plan, except any such action shall be subject to stockholder
approval to the extent such stockholder approval is required pursuant to
Section 423 of the Internal Revenue Code.
SECTION FIFTEEN. NOTICES.
All notices or other communications by a Participant to the Company under or
in connection with the Plan shall be deemed to have been given when received
by the Secretary of the Company.
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SECTION SIXTEEN. APPROVAL OF STOCKHOLDERS
The effectiveness of this Plan is subject to its approval by the
stockholders of the Company within 12 months after the date it is adopted by
the Board of Directors.
SECTION SEVENTEEN. REGISTRATION AND QUALIFICATION OF THE PLAN UNDER APPLICABLE
SECURITIES LAWS.
No Option shall be granted under the Plan until such time as the Company has
qualified or registered the shares which are subject to the Option under the
applicable state and federal securities laws to the extent required by such
laws.
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