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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_] [_] Confidential, For Use of
the Commission Only (as
permitted by Rule 14a-6(e)
(2))
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Definitive Proxy Statement
[_] Soliciting Materials Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
CHOICE HOTELS INTERNATIONAL, INC.
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(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CHOICE HOTELS INTERNATIONAL, INC.
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(NAME OF PERSON(S) FILING PROXY STATEMENT)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-(6)(i)(1) or 14a6(j)(2).
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value, $.01 per share.
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(2) Aggregate number of securities to which transaction applies:
61,163,298
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(3) Per unit price or other underlying value of transaction computed to
Exchange Act Rule 0-11:/1/
$.70
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/1/ Book value of securities to be distributed ($43,045,000),
calculated pursuant to Exchange Act Rule 0-11(a)(4).
(4) Proposed maximum aggregate value of transaction:
$43,045,000
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Book value of securities to be distributed calculated pursuant to
Exchange. Act Rule 0-11(a)(4).
(5) Total fee paid:
$8,609
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[X] Fee paid previously with preliminary materials:
Preliminary Proxy Statement, dated May 30, 1997
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[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[LOGO OF CHOICE APPEARS HERE]
August, 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.) in the auditorium located at 11555 Darnestown Road, Gaithersburg,
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"). After 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
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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 in the auditorium located at 11555 Darnestown
Road, Gaithersburg, 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) to 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 9 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.
The Board of Directors of the Company has fixed the close of business on
August __, 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.
[signature]
Michael J. DeSantis
Secretary
August , 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.
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TABLE OF CONTENTS
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SUMMARY OF MATTERS TO BE CONSIDERED..........................................1
VOTING AT THE MEETING........................................................2
PROXY STATEMENT SUMMARY......................................................3
PROPOSAL ONE: RATIFICATION OF THE DISTRIBUTION.............................13
THE DISTRIBUTION.....................................................12
Background and Reasons for the Distribution.................13
Solvency Opinion............................................14
Manner of Effecting the Distribution........................14
Federal Income Tax Aspects of the Distribution..............15
Listing and Trading of Franchising Common Stock.............15
Listing and Trading of Sunburst Common Stock................16
Conditions; Termination.....................................16
Interest of Certain Persons in the Distribution.............17
Risk Factors.........................................................18
Relationship Between the Company and Franchising after the
Distribution................................................23
Accounting Treatment.................................................28
Post-distribution Dividend Policy....................................28
Certain Information Concerning Franchising...........................29
Pro Forma Data..............................................28
Selected Historical Financial Data..........................30
Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................32
Business And Properties.....................................35
Management..................................................51
Certain Relationships and Related Transactions..............60
Security Ownership..........................................60
Description of Franchising Capital Stock....................62
Purposes and Antitakeover Effects of Certain Provisions of
the Franchising Certificate and Bylaws....................63
Liability and Indemnification of Officers and Directors.....66
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Certain Information Concerning Sunburst..............................68
Pro Forma Financial Data....................................68
Business and Properties.....................................71
Management..................................................78
PROPOSAL TWO: AMENDMENTS TO THE RESTATED CERTIFICATE OF INCORPORATION
OF THE COMPANY.......................................................81
PROPOSAL THREE: RATIFICATION OF THE FRANCHISING BOARD OF DIRECTORS.........84
PROPOSAL FOUR: RATIFICATION OF CERTAIN FRANCHISING BENEFIT PLANS...........84
PROPOSAL FIVE: ELECTION OF DIRECTORS.......................................89
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
STOCKHOLDERS PROPOSALS FOR 1998............................................111
GENERAL....................................................................111
INDEX TO FINANCIAL STATEMENTS..............................................F-1
ANNEX A: FORM OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
CHOICE HOTELS FRANCHISING, INC......................................A-1
ANNEX B: FORM OF BYLAWS OF CHOICE HOTELS FRANCHISING, INC.................B-1
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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
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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, in the auditorium located at 11555 Darnestown Road, Gaithersburg, 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 , 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) to 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 9 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.
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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 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 , 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 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
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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 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, LLP 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, LLP, 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.P. 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.
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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
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Date, Time and Place of Annual
Meeting................................... The Annual Meeting of Stockholders (the "Annual Meeting") of Choice Hotels
International, Inc., a Delaware Corporation (the "Company") will be held
9:00 a.m. (E.S.T.) in the auditorium located at 11555 Darnestown Road,
Gaithersburg, 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) to 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 9 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
Franchising of the Choice Hotels Franchising, Inc. 1997
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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 stockholder vote FOR Proposals Five through Seven.
Annual Meeting Record Date................ August , 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 July 8, 1997, there were 60,163,298 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 with
respect to the Distribution Proposals and the Additional Proposal.
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THE DISTRIBUTION
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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 Suites(SM) 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").
After the Distribution, Franchising will change its corporate name to
Choice Hotels International, Inc.
Distributing Company...................... Choice Hotels International, Inc., a Delaware corporation (the "Company").
After 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 60,163,298 shares of Franchising Common Stock based on
60,163,298 shares of Company Common outstanding as of July 8, 1997.
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
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<S> <C>
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 notice 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 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. 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."
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
</TABLE>
7
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<TABLE>
<S> <C>
separate publicly traded companies, the Company and Franchising have
entered into a Distribution Agreement, a Strategic Alliance Agreement,
Franchising Agreements and various other agreements with respect to,
among other things, intercompany debt, tax matters, employee benefits,
risk management and corporate and administrative services. See
"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--The Distribution--Risk Factors--No Current Market
for Franchising Common Stock."
Record Date............................... Close of business on , 1997 (the "Distribution Record Date").
Distribution Date......................... As of , 1997. 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, LLP, the transfer agent for the
Company.
</TABLE>
8
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<TABLE>
<S> <C>
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."
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, Paul R. Gould,
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.
Certain Restated Certificate of
Incorporation and Bylaw Provisions........ The Restated Certificate of Incorporation (the "Franchising Certificate")
and the Bylaws of Franchising (the "Franchising Bylaws) 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 "Purposes and Effects of
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Certain Provisions of the Franchising Certificate and Bylaws." The
Franchising Certificate would 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.,
Donald J. Landry, Frederic V. Malek, and up to four additional directors
to be selected by the Company's Board of Directors prior to the
Distribution. At least __ of the directors selected to fill such
vacancies will be persons who are not Sunburst employees or directors or
employees 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.
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--The Listing and Trading
of Sunburst Common Stock."
Principal Office.......................... 10770 Columbia Pike, Silver Spring, Maryland 20901. Its telephone number
is (301) 979-3800.
</TABLE>
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--Management's Discussion and
Analysis of Financial Conditions 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%
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C>
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 in 1996.
(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.
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<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.
13
<PAGE>
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 February 1997, 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. In April 1997,
management discussed with the Company's Board of Directors the results of its
inquiry, and the proposal to effect the Distribution, as ultimately developed by
management of the Company, was presented to and approved by the Company's Board
of Directors. In developing its recommendation for separating the Hotel Business
from the Franchising Business, management and the Board of Directors rejected
certain alternatives -- such as asset divestitures, sale/leasebacks and joint
ventures with third parties -- as disadvantageous from a tax standpoint and/or
not fully accomplishing the objective of fully separating the businesses.
The Distribution Proposals are separately presented in accordance
with applicable 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
aggregate assets of the Company, before consummation of the Distribution, over
the total identified liabilities (including contingent liabilities) of the
Company
14
<PAGE>
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 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, LLP, as
the Distribution Agent (the "Distribution Agent"). As soon thereafter as
practicable, certificates therefor will be mailed by the Distribution Agent to
holders of Company Common Stock as of the Distribution Record Date on the basis
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
15
<PAGE>
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 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 "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
16
<PAGE>
outstanding after the Distribution, see "--Relationship Between the Company and
Franchising After the Distribution--Employee Benefits Allocation Agreement."
The Company filed a request for no-action letter with the Securities and
Exchange Commission on June 8, 1997, setting forth, among other things, the
Company's view that the distribution of Franchising Common Stock does not
require registration under the Securities Act of 1933, as amended (the
"Securities Act"). Accordingly, the effect of obtaining such no-action letter
will be that the distribution of the Franchising Common Stock need not be
registered under 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 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
Sunburst's Hotel Business, 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 "--The
Distribution--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
17
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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
As noted elsewhere herein, certain current members of the Board of
Directors and executive officers of the Company will become directors and/or
executive officers of Franchising in connection with the Distribution. For a
discussion of the interests of such persons in the Distribution, see "--Certain
Information Concerning Franchising--Management"; and "--Certain Information
Concerning Sunburst--Management."
18
<PAGE>
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 leverage 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 $246.0 million and total stockholders' equity of $67.0 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 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. 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 respective 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.
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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 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 certain restrictions on their future actions 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."
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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 Reserve 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."
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. Frederick V. Malek will
serve as a director of each of Sunburst and Franchising. Messrs. Bainum, Jr. 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
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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
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 Delaware General
Corporation Law ("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 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, Jr. 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
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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 conditions, 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.
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.
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", "--Certain Information Concerning Franchising.--Business
and Properties", "Certain Information Concerning Sunburst--Business and
Properties" and elsewhere constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. 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, until the second
anniversary of the Distribution Date, Franchising must obtain an opinion of
counsel reasonably satisfactory to Sunburst or a supplemental tax ruling before
Franchising may make certain material dispositions of its assets, engage in
certain repurchases of Franchising capital stock or cease the active conduct of
its business independently, with its own employees and without material changes.
Franchising does not expect these limitations to inhibit significantly its
operations, growth opportunities or its ability to respond to unanticipated
developments. Sunburst must also obtain an opinion of counsel reasonably
satisfactory to Franchising or a supplemental tax ruling before Sunburst may
engage in similar transactions during such period. See "--Risk Factors--Certain
Tax Considerations." The Company does not expect these limitations to inhibit
significantly its operations, growth opportunities or its ability to respond to
unanticipated developments.
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"; "--Management."
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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 by such information in its
possession, 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 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 franchise; (ii)
Sunburst will, barring a material change in market conditions, continue to
develop Sleep Inns and MainStay Suite Hotels so that it will have opened a total
of 14 Sleep Inns and 15 MainStay Suite 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
material interest, including new product and concept testing for Franchising in
hotels owned by Sunburst; (v) Sunburst will authorize Franchising to negotiate
with third party vendors on Sunburst's behalf for the purchase of certain items;
and (vi) each party agrees not to engage in the other's line of business unless,
in the context of an acquisition, merger or other business combination, it would
be uneconomical to structure such transactions to exclude such business. The
Strategic Alliance Agreement extends for a term of 20 years with a mutual
termination provision 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
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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 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 , 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 shares 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 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. 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 shares of common stock of such employee's employer after the
Distribution, and one-half of the financial value of which will comprise a pro
rata combination of shares of Sunburst Common Stock and Franchising Common
Stock.
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On the Distribution Date, each employee of Manor Care holding vested non-
qualified options to purchase shares of Company Common Stock may make a one-time
election to choose a conversion award consisting of 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, whereby the number of
shares that may be acquired under, and the option price of, each conversion
award will be 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 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 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.
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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, excepting
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 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; (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 gross room
revenue for the preceding 12 months, multiplied by (ii) the royalty fee (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 similar termination provisions as
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.
29
<PAGE>
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% (or 1% 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 will be (i) 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 Mortgagor 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
trademark(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
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 which relates to an offering 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 credit agreement with a syndicate of banks ("Sunburst
Credit Facility"), pursuant to which the lenders will provide an approximately
$75.0 million revolving credit facility to Sunburst, including a sub-limit (in
an amount to be determined) which will be available for letters of credit. The
final maturity for the Sunburst Credit Facility is expected to be three years
from the Distribution Date. At the Distribution, the Company expects
approximately $18.0 million will be drawn under such facility, and together with
the $115.0 million of proceeds realized under the Term Note, will be used to
repay $96 million of basic debt and the $37 million of Sunburst's allocable
portion of the debt outstanding to an affiliate of Manor Care (the "Manor Care
Note").
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<PAGE>
The Sunburst Credit Facility is expected to contain customary
covenants with respect to, among other things, (i) requirements that Sunburst
maintain certain minimum interest coverage ratios, maximum ratios of Total Debt
to EBITDA, and minimum net worth, and (ii) limits on Sunburst's incurrence of
debt, liens, dividend payments, stock repurchases, certain investments,
transactions with affiliates, asset sales, mergers and consolidations and any
change of control of Sunburst. 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.
In the event that Sunburst is unable to establish the credit
facility, Franchising will provide Sunburst with a senior revolving credit
facility on comparable terms.
Franchising
As part of the Distribution, Franchising will be allocated
approximately $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 revolving credit facility which Franchising
intends to enter into on or prior to the Distribution Date (the "Franchising
Credit Facility"). The final maturity for the Franchising Credit Facility is
expected to be three years from the Distribution Date. It is expected that the
available facility will equal $300.0 million, with $226.6 million (representing
$115.0 million disbursed to Sunburst under the Term Note plus $111.6 million to
refinance the obligations allocated to Franchising) drawn under such facility as
of the Distribution.
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.
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<PAGE>
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.
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>
32
<PAGE>
(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, directors' costs, 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.
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 all of 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.
33
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended May 31,
(In thousands)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(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
--------- --------- --------- --------- ---------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Year Ended May 31,
(In thousands)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
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 $1 28,205 $ 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.
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<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 total gross room receipts as a percentage of
available room nights multiplied by the average occupancy percentage.
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
36
<PAGE>
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 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.
37
<PAGE>
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
38
<PAGE>
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.
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.
39
<PAGE>
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 audit
finality prior to the Distribution to repay its portion of borrowing under the
Company's existing Credit Facility.
40
<PAGE>
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.
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.
41
<PAGE>
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 Suites(SM). 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 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 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.
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:
42
<PAGE>
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 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
43
<PAGE>
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.
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.
44
<PAGE>
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 international countries.
45
<PAGE>
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.
. 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.
46
<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>
- ----------------------
* 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. In contrast, Smith Travel Research's monthly RevPAR
calculations are periodically updated to reflect information reported after
Franchising's deadline for the receipt of monthly information. Smith Travel
Research's RevPAR calculations also reflect information reported by Franchisees
directly to Smith Travel Research but not to Franchising and Smith Travel
Research's estimates of RevPAR for properties that did not report to either
Franchising or Smith Travel Research at all or for the whole period. Smith
Travel Research's calculations of Franchising's domestic RevPAR for fiscal years
1994, 1995, 1996 and 1997 were $28.87, $30.56, $32.30, and $32.64 respectively.
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.
47
<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 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.
48
<PAGE>
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>
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.
49
<PAGE>
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.
50
<PAGE>
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).
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 and
occupancy rates for international properties.
51
<PAGE>
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 include: Comfort
Inn, Kensington, England; Troisdorf, Peine and Jena, Germany; and Moulins,
Perpignan, Lormont, Montlucon, Paris, Ponte-a-Mousson, Vierzon, St. Catherine,
Reims and Cherbourg, France.
52
<PAGE>
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 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.
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<PAGE>
Franchise fees vary among Franchising's different brands, but
generally are competitive with or slightly below 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:
<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
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--Franchising 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.
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:
54
<PAGE>
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
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.
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<PAGE>
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 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
56
<PAGE>
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, Comfort Inn,
Comfort Suites, Comfort 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) Econo Lodge exterior renovation program. Loans up to an
amount of $17,500 per property are given to 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 loan to 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 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.
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<PAGE>
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.
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.
- ------------------
* The figures in this paragraph are with respect to U.S. hotel properties as
indicated in the August 1996 issue of Lodging Hospitality.
-------------------
58
<PAGE>
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.
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 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 and severe weather.
59
<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 it 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.
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<PAGE>
<TABLE>
<CAPTION>
Name Age Class of Director
- ---- --- -----------------
<S> <C> <C>
Stewart Bainum, Jr......................................... 50 Class II
Stewart Bainum............................................. 77 Class I
Barbara Bainum............................................. 52 Class III
William R. Floyd........................................... 52 Class II
Paul R. Gould.............................................. 50 Class II
Robert C. Hazard, Jr....................................... 61 Class III
Frederic V. Malek.......................................... 60 Class III
Gerald W. Petitt........................................... 50 Class I
Jerry E. Robertson, Ph.D................................... 64 Class I
</TABLE>
Background of Directors
For biographical information with respect to the persons listed
above, see "Proposal Five: Election of Directors."
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 it'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 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.
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<PAGE>
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.
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............................. 50 Chairman of the Board of Directors
William R. Floyd............................... 52 Vice Chairman and Chief Executive Officer
James A. MacCutcheon........................... 44 Executive Vice President, Chief Financial Officer and Treasurer
Thomas Mirgon.................................. 41 Senior Vice President, Human Resources
Barry L. Smith................................. 54 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."
62
<PAGE>
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
Long-Term Compensation
Restricted
63
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation
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 $ (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 $105,100(7) 1,250,000 307,693 --
Vice Chairman and 1996 -- -- -- -- -- --
Chief Executive Officer 1995 -- -- -- -- -- --
James A. MacCutcheon (8)........... 1997 313,578 (4) -- 67,500(9) 18,682
Executive Vice President, 1996 301,517 135,682 (4) -- 25,000(10) 13,176
Chief Financial Officer and 1995 273,199 136,600 (4) -- -- 13,176
Treasurer
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>
64
<PAGE>
<TABLE>
<S> <C>
(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 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 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 $81,551
for base salary and $ 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) Includes $105,100 in 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
</TABLE>
65
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
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.
66
<PAGE>
STOCK OPTION GRANTS IN FISCAL 1997
Individual Grants
<TABLE>
<CAPTION>
Percentage of
Total Options Potential Realizable
Granted to all Value of Assumed Rate of Stock
Number of Employees in Exercise Base Price Appreciation for Option
Options Fiscal Year Price Expiration Term(2)
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.
67
<PAGE>
<TABLE>
<S> <C>
(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 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 anniversary 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.
</TABLE>
68
<PAGE>
AGGREGATE OPTION EXERCISES IN FISCAL 1997
AND YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
Shares Number of Unexercised Value of Unexercised In-The-Money
Acquired on Options as May 31, 1997 Options at May 31, 1997(2)
Exercise Value Realized ----------------------- --------------------------
Name Company* # $ 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 -- 346,54
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 was
$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.
69
<PAGE>
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 "Relationship Between the Company and Franchising
after the Distribution--Employee Benefits Allocation and Administration
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, the
Company is expected to assign its rights under that employment agreement to
Franchising.
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, the Company is expected to assign its rights under that employment
agreement to Franchising.
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. Effective upon the Distribution
Date, the Company is expected to assign its rights under that employment
agreement to Franchising.
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.
70
<PAGE>
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 out of the 120 months of employment which produces the highest
average, 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 "Certain Information Concerning
Franchising--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>
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 Named
Officers are included in the Summary Compensation Table under the column headed
"All Other Compensation."
71
<PAGE>
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 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."
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 July 8, 1997. 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 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
72
<PAGE>
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) 26.48%
Stewart Bainum.................................. 10,462,320 (3) 17.39%
Barbara Bainum.................................. 5,520,867 (4) 9.18%
William R. Floyd................................ 85,570 (5) *
Paul A. Gould................................... 2,844 (6) *
Robert C. Hazard, Jr............................ 40,756 (7) *
James A. MacCutcheon............................ 181,910 (8) *
Frederic V. Malek............................... 5,510 (9) *
Thomas Mirgon................................... 0 *
Gerald W. Petitt................................ 86,281 (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) 35.46%
Bruce Bainum.................................... 5,512,302 (15) 9.16%
Ronald Baron.................................... 13,647,383 (16) 22.68%
</TABLE>
- -------------------------------
*Less than 1% of class.
(1) Percentages are based on 60,163,298 shares outstanding on July 8, 1997
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 July 8, 1997, 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 943,923 shares owned by Bainum
Associates and 1,170,723 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
73
<PAGE>
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
July 8, 1997. Also includes 2,844 shares of restricted stock granted by
the issuer to Mr. Bainum which is 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 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) Consists of restricted shares granted pursuant to the Non-Employee
Director Stock Compensation Plan which shares are not 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 Non-Employee Director Stock Compensation Plan,
which are not yet vested, but which Mr. Hazard has the right to vote,
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.
(8) 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 July 8, 1997 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.
(9) 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.
(10) 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 Company Non-Employee Director Stock
Compensation Plan which are not yet vested, but which Mr. Petitt has
the right to vote.
(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, 2,844 restricted shares granted under the Non-
Employer 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 July 8, 1997 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 July 8, 1997,
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 July 8, 1997, 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 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.
(16) As of June 26, 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 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
July 8, 1997, it is expected that approximately 60,163,298 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 designates 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 is authorized to issue additional shares of common stock without
further stockholder approval (except as may be required by applicable law or
stock exchange regulations).
With respect to the issuance of common shares of any additional 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
series and the designation thereof. Should the Board of Directors of Franchising
elect to exercise its authority, the rights and privileges of holders of
Franchising's
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Common Stock could be made subject to rights and privileges of any such other
series of common stock. the Company has no present plans to issue any common
stock of a 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
The 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 series of Preferred Stock, as well as the number of shares constituting such
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 Bylaws
of Franchising (the "Franchising Bylaws") will be amended by the Company as sole
stockholder of Franchising to make the Franchising Certificate and 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 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 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 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.
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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 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 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 form of which is 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.
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
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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 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 or, if there are no directors in office, by a majority
of the stockholders. 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 a
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 in Franchising, the Board of Directors will have sufficient time to
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 or special 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 the Company. The Bylaws further require that
the notice by the stockholder set
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forth a description of the business to be brought concerning the stockholder
proposing such business and the beneficial owner, if any, on whose behalf the
proposal is made, including their names an addressees, the class and number of
shares of the Company 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 Company's
board 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 Company's
board 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 of 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 the Company, even if the
conduct of such solicitation or such attempt might be beneficial to the Company
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 the
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, it is important to note and 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 series and its specific
designation. Such action by the Franchising Board of Directors would 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 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.
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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
advance and payment of fees and expenses reasonably incurred by the director or
officer in defense of any such lawsuit or proceeding.
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CERTAIN INFORMATION CONCERNING SUNBURST
Pro Forma Financial Data
The following unaudited pro forma combined statements of income
illustrate 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 Sunburst and assumes that the Distribution was consummated on that
date. The Pro Forma income statement is based on the income statement of
Sunburst 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 information 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
PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of May 31, 1997
<TABLE>
<CAPTION>
Choice Hotels Distribution Pro Forma
International, Inc. Adjustments(A) Sunburst
------------------- -------------- ---------
ASSETS
<S> <C> <C> <C>
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
========= ============= ===========
</TABLE>
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<TABLE>
<CAPTION>
Choice Hotels Distribution Pro Forma
International, Inc. Adjustments(A) Sunburst
------------------- -------------- ---------
LIABILITIES AND EQUITY
<S> <C> <C> <C>
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>
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SUNBURST
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.................................. $245,119 $(254,518) $ 9,399(B) $ --
Hotel operations........................... 185,753 (17,737) -- 168,016
--------- ---------- -------- --------
Total revenues........................... 430,872 (272,255) 9,399 168,016
--------- ---------- -------- --------
OPERATING EXPENSES
Franchise ................................. 183,769 (183,769) -- --
Hotel operations........................... 148,250 (18,124) 9,399(B) 139,525
-- -- 3,955(C) 3,955
--------- ---------- -------- --------
Total operating expenses................. 332,019 (201,893) 13,354 143,480
--------- ---------- -------- --------
INCOME BEFORE OTHER EXPENSES AND
INCOME TAXES.................................. 98,853 (70,362) (3,955)(C) 24,536
--------- ---------- -------- --------
OTHER EXPENSES
Interest expense on Notes payable to Manor
Care.................................... 18,568 (7,083) (8,815)(D) 2,670
Minority interest.......................... -- -- -- --
Other interest and other expenses, net..... 8,061 (3,704) 8,309(D) 12,666
--------- ---------- -------- --------
Total other expenses..................... 26,629 (10,787) (506) 15,336
--------- ---------- -------- --------
Income before income taxes.................... 72,224 (59,575) (3,449) 9,200
--------- ---------- -------- --------
Income taxes.................................. (30,200) 24,845 1,380(E) (2,009)
--------- ---------- -------- --------
Net income before extraordinary item.......... $ 42,024 $ (34,730) $ (2,069) $ 2,868
========= ========== ======== ========
Pro forma earnings per share.................. .25(F)
========
</TABLE>
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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 and franchise
fee expense 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 the following 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 three-for-one stock split.
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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 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.
85
<PAGE>
<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>
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>
86
<PAGE>
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 upscale
Quality Hotel & Inns........................... 5 1,327 mid-price
</TABLE>
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 hotels properties compete in the mid-price
and economy price segments. The table below identifies Sunburst's limited
service hotels by brand and price segment.
<TABLE>
<CAPTION>
Limited Service Hotels
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>
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
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
Calendar
Market Hotel Year of Opening
------ ----- ---------------
<S> <C> <C>
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
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) 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 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.
88
<PAGE>
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.
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
89
<PAGE>
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.
. 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
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
Year
Constructed/
No. of Last Major
Hotel Market Rooms Renovation
----- ------ ----- ----------
<S> <C> <C> <C>
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
</TABLE>
91
<PAGE>
<TABLE>
<S> <C> <C> <C>
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 (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
Mid-Price
---------
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
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>
92
<PAGE>
-------------------
(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 fiscal year
1997 for Sunburst's hotels that have been operated by the Company for twelve
months or longer:
<TABLE>
<S> <C>
ADR...................................... $59.97
Occupancy................................ 69.32%
RevPAR................................... $41.57
</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, seven of the nine current
members of the Company's Board of Directors will resign and Donald J. Landry,
the Chief Executive Officer of Sunburst is expected to be appointed to fill one
vacancy on the Sunburst Board of Directors.
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 seven
directorship upon consummation of the Distribution of three of the persons who
are expected to become directors of Sunburst on the Distribution Date are set
forth below. The Company's Board of Directors will select candidates to fill the
remaining four vacancies on the Sunburst Board of Directors resulting from the
Distribution. At least [ ] of the directors filling such vacancies will be
persons who are not Sunburst employees or directors or employees of
Franchising.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr..................... 50 Class
Donald J. Landry....................... 48 Class
Frederic V. Malek...................... 60 Class
</TABLE>
93
<PAGE>
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 does
independent public accountants, will review Sunburst's internal accounting
controls and reviews 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 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 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 to become on the
Distribution Date the executive officers of Sunburst are set
94
<PAGE>
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............................. 50 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 19976; 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."
95
<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 Delaware law, 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 Company. 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 Financing 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 Company Common Stock. As of July 8, 1998, the
Company had outstanding 60,163,298 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 individual
brokers from dealing in low-prices because such practices and procedures make
the handling of low-priced stocks economically unattractive. A low stock price
also has the
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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 priced 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 transaction costs 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 Age 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 make 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.
Decrease Number of Authorized Shares. The Company has authorized
160,000,000 shares of Company Common Stock, of which approximately 60,163,298
are issued and outstanding as of July 8, 1997. In connection with the Reverse
Stock Split, the outstanding shares of Company Common Stock will be
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reduced to approximately 20,054,433. 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.
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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., Steward Bainum, Barbara Bainum, William R. Floyd, Paul
R. Gould, Robert C. Hazard, Jr., Frederic V. Malek, Gerald W. Petitt 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--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 until the Franchising annual meeting of stockholders to be held in 1998
and until his successor has been elected and qualified.
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 stockholder 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 in 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 all 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 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 7.1 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 private transactions).
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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 approved 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 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, 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, 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 descent. 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 shares of Stock Options 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.
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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.
Incentive Stock Options are not transferrable except by will or the
laws of descent and distribution. With respect to nonqualified options, the
Committee may impose such restrictions on transferability as it may determine.
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
can not 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 shares of 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 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,
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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) no such action may
be taken without the consent of the participant to whom any award has been
granted, 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 on _____, 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 Exhibit D-2 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 to eligible employees.
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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 Service.
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.
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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 1996
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.
It is expected that in connection with the consummation of the
Distribution, Stewart Bainum, Barbara Bainum, William R. Floyd,
Robert C. Hazard, Jr., Gerald W. Petitt, Jerry E. Robertson, Ph.D.
and Paul A. Gould 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 Director of
Name Age Position Expire Choice Hotels since
---- --- -------- ------ -------------------
<S> <C> <C> <C> <C>
Nominees for terms expiring in 2000:
Barbara Bainum*................................................ 52 Director 2000 1996
Robert C. Hazard, Jr........................................... 61 Director 2000 1980
Frederic V. Malek.............................................. 60 Director 2000 1990
Directors whose terms expire after 1997 and who are not
currently nominees for re-election:
Stewart Bainum*................................................ 77 Director 1998 1963
Gerald W. Petitt............................................... 50 Director 1998 1981
Jerry E. Robertson, Ph.D....................................... 64 Director 1998 1989
Stewart Bainum, Jr.*........................................... 50 Chairman of the Board 1999 1977
and Director
William R. Floyd............................................... 52 Director 1999 1996
Paul A. Gould.................................................. 50 Director 1999 1996
</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
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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 Commonwealth
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).
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 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. Co-Chairman of CB Commercial Real Estate Group,
since April 1989; Chairman of Thayer Capital Partners since March 1993; 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., FPL Group,
Inc. (an affiliate of Florida Power and Light--power company), ICF Kaiser
International, Inc., Intrav, Inc. (travel and leisure services), National
Education Corporation, 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,
Health, Inc., Coherent, Inc., Haemonetics Corporation, Life Technologies, Inc.,
Medwave, Inc., Project Hope and Steris Corporation.
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The Board of Directors recommends a vote "FOR" the election of all
the nominees named herein.
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 Option Plan Committee Finance Committee
Jerry E. Robertson, Chairman Stewart Bainum, Chairman
Stewart Bainum Stewart Bainum, Jr.
Frederic V. Malek Paul A. Gould
Barbara Bainum Frederic V. Malek
William R. Floyd
Compensation/Key Executive
Stock Option Plan Committee No. 2 Audit Committee
Jerry E. Robertson, Chairman Jerry E. Robertson, Chairman
Frederic V. Malek Paul A. Gould
Barbara Bainum Gerald W. Pettit
Nominating Committee
Gerald W. Pettit
Robert C. Hazard, Jr.
The Compensation/Key Executive Stock Option Plan Committee
administers 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.
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<PAGE>
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 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 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.
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. 50 Chairman of the Board of Directors
William R. Floyd 52 Vice Chairman and Chief Executive Officer
James A. MacCutcheon 44 Executive Vice President, Chief Financial Officer
and Treasurer
Thomas Mirgon 41 Senior Vice President, Human Resources
Barry L Smith 54 Senior Vice President--Marketing
Michael J. DeSantis 38 Senior Vice President, General Counsel and
Secretary
Joseph M. Squeri 32 Vice President--Financial Controller
</TABLE>
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.
Barry L. Smith. Senior Vice President - Marketing of Choice Hotels
since February 1989.
107
<PAGE>
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 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.
108
<PAGE>
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 $ (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 $105,100(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 (4) -- 67,500(11) 18,682
Senior Vice President, 1996 301,517 135,682 (4) -- 25,000(12) 13,176
Chief Financial Officer and 1995 273,199 136,600 (4) -- -- 13,176
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%, 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.
(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
109
<PAGE>
Manor Care Spin-off, the amount of compensation paid solely by Company
was $81,551 for base salary and $ 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) Includes $105,100 in 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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<PAGE>
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.
111
<PAGE>
STOCK OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------
Percentage of
Total Options Potential Realizable
Granted to all Value of Assumed Rate of
Number of Employees in Exercise Base Stock Price Appreciation
Options Fiscal Year Price Expiration for Option Term (2)
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>
112
<PAGE>
- --------------------
* 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%, 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 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 anniversary of the date of the stock
option grant.
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<PAGE>
AGGREGATE OPTION EXERCISES IN FISCAL 1997
AND YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
Shares Number of Unexercised Value of Unexercised In-The-Money
Acquired on Options at May 31, 1997 Options at May 31, 1997(2)
Exercise Value Realized ----------------------- -------------------------------
Name Company* # $ 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 -- 346,54
MNR -- -- 0 0 -- --
Donald J. Landry CHI -- -- 151,321 625,810 1,376,894 2,897,138
MNR -- -- 0 0 -- --
James A. MacCutchon 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.
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<PAGE>
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 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 17.39% and 26.60% 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
(the date of the Manor Care distribution) date, 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
115
<PAGE>
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.
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, enter into transactions with affiliates and 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 or Bill 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.
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 $_____
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.
116
<PAGE>
Security Ownership of Principal Stockholders and Management
The following table sets forth the amount of Company Common Stock
beneficially owned 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 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
Expected to be Expected to be
Name of Beneficial Owner Beneficially Owned Beneficially Owned
- ------------------------ ------------------ ------------------
<S> <C> <C>
Stewart Bainum, Jr........................................................... 16,003,408(2) 26.48%
Stewart Bainum............................................................... 10,462,320(3) 17.39%
Barbara Bainum................................................................ 5,520,867(4) 9.18%
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.................................................................. 13,647,383(17) 22.68%
</TABLE>
- --------------------
* Less than 1% of class.
(1) Percentages are based on 60,163,298 shares outstanding on July 8,
1997 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
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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 July 8, 1997, 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 943,923 shares owned by Bainum
Associates and 1,170,723 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 July 8, 1997. Also includes 2,844 shares of
restricted stock granted by the issuer to Mr. Bainum which is 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 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)") 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 July 8, 1997 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 July 8, 1997 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.
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(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, 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 July 8, 1997 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.
(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 July 8, 1997, 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 June 26, 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 Choice for Choice's fiscal year
ending May 31, 1998. Arthur Andersen LLP is considered by the management of
Choice 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,
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, directors and
holders of more than 10% of the Company's Common Stock complied with all Section
16(a) filing requirements.
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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 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
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. 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 industries 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
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
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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.
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 consisted 60% on achieving
targeted gross operating profits, 20% on licensee/customer satisfaction goals
and 20% on RevPAR. 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 to 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.
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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 Compensation Committee or by an executive officer of Manor Care.
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
Frederic V. Malek
Barbara Bainum
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.
[To be revised to add HFS]
COMPANY, NYSE COMPOSITE INDEX, PEER GROUP INDEX
COMPARISON OF CUMULATIVE TOTAL RETURNS
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
Symbol: 11/04/97 02/25/97 05/30/97
<S> <C> <C> <C>
. Choice Common Stock $100 $105.1 107.7
Peer Group Index $100 $96.0 86.0
NYSE Composite Index $100 $111.6 119.1
</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.
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 splits, 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 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 difference between the purchase price and sale 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 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
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determine either the number of employees eligible to participate in the 1996
Incentive Plan or the amount of awards which will be made.
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, 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
descent. 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 of Stock Options 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.
Incentive Stock Options are not transferable except by will or the
laws of descent and distribution. With respect to nonqualified options, the
Committee may impose such restrictions on transferability as it may determine.
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 can not 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
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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.
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 shares of 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
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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.
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) no such action may be taken without the consent of the participant
to whom any award has been granted, 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.
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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 to 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 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 Service.
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
128
<PAGE>
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.
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, 1997 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 "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, 1996 (the "the Company
1996 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 1996 10-K will not
be supplied unless specifically requested, for which there may be a reasonable
charge. Those stockholders wishing to obtain a copy of the Company 1996 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, LLP 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.
129
<PAGE>
Document processed with L&W HeadingNumbering by CBROOKS (L&W) on Tuesday,
April 8, 1997 at 2:18 AM -- User definable
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
---- ----
ASSETS
<S> <C> <C>
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
-------- --------
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
May 31,
1997 1996
---- ----
<S> <C> <C>
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-4
<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
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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
======== ======== ========
The accompanying notes are an integral part of these combined statements of income.
</TABLE>
F-6
<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 provided 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 current 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)
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
Year ended May 31,
------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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 period........................ 3,812 1,056 2,199
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................. $ 4,167 $ 3,812 $ 1,056
======== ======== =========
The accompanying notes are an integral part of these combined statements of cash flows.
</TABLE>
F-8
<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 Stock 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 Lodging Business through
November 1, 1996 and as if the Distribution of Franchising had been completed
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-9
<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.
F-10
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
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>
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:
Building and improvements....................................... 10-40 years
Furniture, fixtures and equipment............................... 3-20 years
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.
F-11
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
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.
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.
F-12
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
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.
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.
F-13
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
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>
F-14
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS-(Continued)
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>
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 benefit................................. 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.
F-15
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS-(Continued)
ACCRUED EXPENSES
Accrued expenses at May 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands)
<S> <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>
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
</TABLE>
F-16
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS-(Continued)
<TABLE>
<S> <C>
2002.......................................................................................... 215
Thereafter.................................................................................... 14,603
---------
$125,163
</TABLE>
F-17
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS-(Continued)
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 Franchise 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%.
F-18
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS-(Continued)
Cash paid for interest was $11.6 million, $11.8 million
and $10.8 million for fiscal years 1997, 1996 and 1995, respectively.
F-19
<PAGE>
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
F-20
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS-(Continued)
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 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) 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 hotels, (iii) continued cooperation of both parties with respect to
matters of material 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 a mutual
termination provision on the 5th, 10th and 15th anniversaries.
During the periods presented, Sunburst franchised substantially all
of its hotels through 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.
F-21
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS-(Continued)
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.
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-22
<PAGE>
Annex A
FORM OF
AMENDED AND 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 FRANCHISING,
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
A-1
<PAGE>
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 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.
Upon this Restated Certificate of Incorporation becoming effective
pursuant to the GCL (the "Effective Time"), each share of the Corporation's
common stock, par value $.01 per share (the "Old Common Stock"), issued and
outstanding immediately prior to the Effective Time, will be automatically
reclassified as and converted into one share of Common Stock. Any stock
certificate that, immediately prior to the Effective Time, represents shares of
the Old Common Stock will, from and after the Effective Time, automatically and
without the necessity of presenting the same for exchange, represent the number
of shares of Common Stock as equals the sum obtained by multiplying the number
of shares of Old Common Stock represented by such certificate immediately prior
to the Effective Time by one.
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").
A-2
<PAGE>
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 1997 annual meeting of stockholders; the initial term of the Class II
directors shall expire upon the election and qualification of their successors
at the 1998 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 1999 annual meeting of stockholders. At each annual meeting of
stockholders beginning with the 1997 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 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 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
A-3
<PAGE>
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 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
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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.
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 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 a board of 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 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
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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 I 0 nor more than 60 days prior to the
meeting.
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,
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 1996 annual meeting shall be deemed to be , 1997. 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 the 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
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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 shares 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
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.
(d) 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.
(e) 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 or under 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 of 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
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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 1996 annual meeting, shall be deemed
to be 1997. 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
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 president 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, although 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.
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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
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 tinder these
provisions shall not be barred from serving the Corporation in any other
capacity and receiving reasonable compensation for other such 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 the proceedings.
ARTICLE IV
COMMITTEES
Section 1. Executive Committee. The Board of Directors may appoint
any 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
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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.
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 chosen under
the provisions of law, the Certificate of Incorporation or these B laws, a
written waiver thereof. signed , 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
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offices for such terms and shall exercise such power 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 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 Chair-man 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, have general direction of
administration of the business affairs of the Corporation, subject to the
direction of the Board of Directors, and shall perform 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
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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
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 indemnity any person who was or is a party or is
threatened to be made a part,., 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 lie
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 . action, suit
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 contenders 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, and, with respect to any criminal action or proceeding. that he or
she had reasonable cause to believe that his or her conduct was unlawful.
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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 tot he
Corporation unless and only to extent that the Court of Chancery or the court in
which such action or suit was brought shall 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 I 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 proceedings, 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.
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 an-,,
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. and 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,
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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
other-,vise, 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 9 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, preceding, or investigation;
or (ii) 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 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 a-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 tile 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. of this Article, references to "other enterprises" in Section I and 7
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
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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 there of
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify each Agent as to expense (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 tile 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.
(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, 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.
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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, diminish or any such fund in its absolute judgment and
discretion.
Section 3. Fiscal Year. The fiscal year of the Corporation shall
begin on June 1 in each calendar year and end on May 31 in the following
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-1
CHOICE HOTELS FRANCHISING, INC.
1997 LONG-TERM INCENTIVE PLAN
[TO BE ADDED]
C-I-1
<PAGE>
Annex C-2
CHOICE HOTELS FRANCHISING, INC.
EMPLOYEE STOCK PURCHASE PLAN
[TO BE ADDED]
C-II-1
<PAGE>
Annex D
AMENDMENTS TO
CHOICE HOTELS FRANCHISING, INC.
RESTATED CERTIFICATE
OF INCORPORATION
Article THIRD of the Certificate of Incorporation shall be amended to read in
full as follows:
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 SUNBURST HOSPITALITY CORPORATION
(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 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) issued and outstanding shares of
Common Stock or issued 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. The Corporation shall pay to each
stockholder who would otherwise be entitled to a fractional share as a result of
such conversion, the cash value of such fractional share determined by reference
to the average of the high and low closing bid and asked prices of the Common
Stock for a period of ten trading days immediately preceding the Effective Date,
as reported in the principal market for the Corporation's Common Stock. Each
certificate for Common Stock shall thereupon and thereafter evidence the 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 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."
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Annex D
AMENDMENTS TO
CHOICE HOTELS FRANCHISING, INC.
RESTATED CERTIFICATE
OF INCORPORATION
Existing Article THIRD of the Certificate of Incorporation:
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 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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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 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.
Upon this Restated Certificate of Incorporation becoming effective
pursuant to the GCL (the "Effective Time"), each share of the Corporation's
common stock, par value $.01 per share (the "Old Common Stock"), issued and
outstanding immediately prior to the Effective Time, will be automatically
reclassified as and converted into one share of Common Stock. Any stock
certificate that, immediately prior to the Effective Time, represents shares of
the Old Common Stock will, from and after the Effective Time, automatically and
without the necessity of presenting the same for exchange, represent the number
of shares of Common Stock as equals the sum obtained by multiplying the number
of shares of Old Common Stock represented by such certificate immediately prior
to the Effective Time by one-third.
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").
D-2
<PAGE>
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.
Upon this Restated Certificate of Incorporation becoming effective
pursuant to the GCL (the "Effective Time"), each share of the Corporation's
common stock, par value $.01 per share (the "Old Common Stock"), issued and
outstanding immediately prior to the Effective Time, will be automatically
reclassified as and converted into one share of Common Stock. Any stock
certificate that, immediately prior to the Effective Time, represents shares of
the Old Common Stock will, from and after the Effective Time, automatically and
without the necessity of presenting the same for exchange, represent the number
of shares of Common Stock as equals the sum obtained by multiplying the number
of shares of Old Common Stock represented by such certificate immediately prior
to the Effective Time by one.
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
D-2
<PAGE>
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 1997 annual meeting of stockholders; the initial term of the Class II
directors shall expire upon the election and qualification of their successors
at the 1998 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 1999 annual meeting of stockholders. At each annual meeting of
stockholders beginning with the 1997 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 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 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
D-3
<PAGE>
Class I directors shall expire upon the election and qualification of their
successors at the 1997 annual meeting of stockholders; the initial term of the
Class II directors shall expire upon the election and qualification of their
successors at the 1998 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 1999 annual meeting of stockholders. At each annual
meeting of stockholders beginning with the 1997 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 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 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
D-4
<PAGE>
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 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
D-4
<PAGE>
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 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
D-4
<PAGE>
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.
D-5
<PAGE>
Annex E-1
CHOICE HOTELS INTERNATIONAL, INC.
1997 LONG-TERM INCENTIVE PLAN
[TO BE ADDED]
E-I-1
<PAGE>
Annex E-2
CHOICE HOTELS INTERNATIONAL, INC.
EMPLOYEE STOCK PURCHASE PLAN
[TO BE ADDED]
E-II-1
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 16, 1997
The undersigned hereby appoints William R. Floyd Jr. and James A.
MacCutcheon, and each of them, his or her attorneys and agents, with full power
or substitution to vote as proxy for the undersigned, as herein stated, at the
Annual Meeting of Shareholders of Choice Hotels International, Inc. (the
"Company") to be held on September 16, 1997 at 9:00 a.m. in the auditorium
located at 11555 Darnestown Road, Gaithersburg, Maryland and at any adjournment
thereof, according to the number of votes the undersigned would be entitled to
vote if personally present on the proposals set forth below and in accordance
with their discretion on any other matters that may properly come before the
meeting or any adjournment thereof.
DISTRIBUTION PROPOSALS:
- --------------------------------------------------------------------------------
PROPOSALS ONE THROUGH FOUR LISTED BELOW CONSTITUTE THE "DISTRIBUTION PROPOSALS."
THE EFFECTIVENESS OF EACH OF THE DISTRIBUTION PROPOSALS IS CONDITIONED UPON THE
APPROVAL OF ALL OF THE DISTRIBUTION PROPOSALS. ACCORDINGLY, FAILURE OF THE
SHAREHOLDERS 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 SHAREHOLDERS VOTE FOR
ALL OF THE DISTRIBUTION PROPOSALS.
(INSTRUCTION: Shareholders may vote on the Distribution Proposals
either as a group or for each Distribution Proposal separately. To vote on the
Distribution Proposals separately, mark the appropriate box set forth under each
numbered Distribution Proposal One through Four. To vote on the Distribution
Proposals as a group, mark the appropriate box set forth immediately below.)
FOR all Distribution Proposals [_] AGAINST all Distribution Proposals [_]
ABSTAIN [_]
(INSTRUCTION: If you have elected to vote on the Distribution
Proposals as a group by checking the appropriate box set forth above, you need
not (and should not) vote on the Distribution Proposals separately and may
proceed directly to the section of the Proxy Card captioned "Additional
Proposals." All proxies in which a shareholder has elected to vote on the
Distribution Proposals as a group will be voted in accordance with such vote,
whether or not Distribution Proposals as a group will be voted in accordance
with such vote, whether or not votes are registered for each Distribution
Proposal separately.)
PLEASE SIGN AND DATE ON PAGE 3
<PAGE>
1. 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 (the "Company
Common Stock"), on a share-for-share basis of all outstanding shares of
common stock, par value $.01 per share (the "Franchising Common Stock"), of
the Company's wholly-owned subsidiary, Choice Hotels Franchising, Inc.
("Franchising"), and the related arrangements between the Company and
Franchising, and the policies to be adopted by such companies, in
connection therewith.
FOR [_] AGAINST [_] ABSTAIN [_]
2. PROPOSAL TWO: Approval of the amendment of the 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 160,000,00 to 60,000,000, and (iii) to 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").
FOR [_] AGAINST [_] ABSTAIN [_]
3. PROPOSAL THREE: Ratification of the election by the Company, as sole
stockholder of Franchising, of 9 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.
FOR [_] AGAINST [_] ABSTAIN [_]
4. PROPOSAL FOUR: Ratification of adoption by Franchising of the Franchising
Stock Incentive Plan and the Franchising Employee Stock Purchase Plan.
FOR [_] AGAINST [_] ABSTAIN [_]
ADDITIONAL PROPOSALS:
- --------------------------------------------------------------------------------
PROPOSALS FIVE THROUGH SEVEN LISTED BELOW CONSTITUTE THE "ADDITIONAL PROPOSALS."
THE EFFECTIVENESS OF THE ADDITIONAL PROPOSALS IS NOT CONDITIONED ON THE APPROVAL
OF THE DISTRIBUTION PROPOSALS.
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR
ALL OF THE ADDITIONAL PROPOSALS.
5. 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.
FOR all nominees listed below
(except as marked to the contrary) [_]
WITHHOLD AUTHORITY
to vote for all nominees listed below [_]
Nominees: Barbara Bainum; Robert C. Hazard, Jr.; and Frederic V. Malek
(INSTRUCTION: To withhold your vote for any individual nominee, write that
nominee's name in the space provided below.)
6. PROPOSAL SIX: Ratification of the Choice Hotels International, Inc. 1996
Long-Term Incentive Plan.
2
<PAGE>
FOR [_] AGAINST [_] ABSTAIN [_]
7. PROPOSAL SEVEN: Ratification of the Choice Hotels International, Inc.
Employee Stock Purchase Plan.
FOR [_] AGAINST [_] ABSTAIN [_]
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 herein. If no instructions are indicated for a
Distribution Proposal, or Proposal Five, such proxies will be voted in
accordance with the Boar of Directors' recommendations as set forth herein
with respect to such proposal(s).
If you plan to attend the Annual Meeting of Shareholders, please mark the
following box and promptly return this Proxy Card. [_]
PLEASE FILL IN DATE, SIGN AND RETURN THIS
PROXY IN THE ACCOMPANYING ENVELOPE
Dated: , 1997
Signature
----------------------------------
Signature
----------------------------------
Signatures of shareholders should correspond
exactly with the names shown on the Proxy
Card. Attorneys, trustees, executors,
administrators, guardians and others signing
in a representative capacity should
designate their full titles. If a
corporation, please sign in full corporate
name by President or other authorized
officer. If a partnership, please sign in
partnership names by authorized persons.
3
