<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
SUNBURST HOSPITALITY CORPORATION
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(Name of Registrant as Specified In Its Charter)
SUNBURST HOSPITALITY CORPORATION
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] 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:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] 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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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
<PAGE>
SUNBURST HOSPITALITY CORPORATION
10770 Columbia Pike
Silver Spring, Maryland 20901
NOTICE OF ANNUAL MEETING
To Be Held June 16, 1999
----------------
To the Stockholders of
SUNBURST HOSPITALITY CORPORATION
The 1999 Annual Meeting of Stockholders (the "Annual Meeting") of Sunburst
Hospitality Corporation, a Delaware corporation ("Sunburst") will be held in
the Roosevelt Room of the Quality Hotel, 1200 N. Courthouse Road, Arlington,
Virginia 22201 at 10:00 a.m. (E.D.T.) on Wednesday, June 16, 1999 for the
following purposes:
1. To elect two Class III directors to hold office for a three-year term
ending at the 2002 Annual Meeting of Stockholders and their successors
are elected and qualified; and
2. To transact such other business as may properly come before the Annual
Meeting.
Holders of record of Sunburst common stock at the close of business on April
30, 1999, will be entitled to notice of, and to vote at, the Annual Meeting or
any adjournment(s) or postponement(s) thereof. Stockholders are reminded that
your shares of Sunburst common stock cannot be voted unless you properly
execute and return the enclosed proxy card or make other arrangements to have
your shares represented at the meeting. A list of stockholders will be
available for inspection at the office of Sunburst located at the address
above, at least 10 days prior to the Annual Meeting.
By Order of the Board of Directors
SUNBURST HOSPITALITY CORPORATION
/s/ Douglas H. Verner
Douglas H. Verner
Secretary
May 10, 1999
Silver Spring, Maryland
TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND
MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
<PAGE>
SUNBURST HOSPITALITY CORPORATION
10770 COLUMBIA PIKE
SILVER SPRING, MARYLAND 20901
----------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
JUNE 16, 1999
----------------
GENERAL INFORMATION
This proxy statement ("Proxy Statement") is furnished in connection with the
solicitation of proxies by the Board of Directors of Sunburst Hospitality
Corporation, a Delaware corporation ("Sunburst"), for use at the 1999 Annual
Meeting of Stockholders of Sunburst to be held at 10:00 a.m. (E.D.T.) on June
16, 1999, in the Roosevelt Room of the Quality Hotel, 1200 N. Courthouse Road,
Arlington, Virginia and at any adjournment(s) or postponement(s) thereof (the
"Annual Meeting"). This Proxy Statement and proxy card are being mailed to
Sunburst's stockholders on or about May 10, 1999.
Sunburst's Annual Report on Form 10-K (including certified financial
statements) for the twelve-month period ended December 31, 1998 accompanies
this Proxy Statement, but is not part of the proxy solicitation material.
Voting of Proxies
Your vote is important. Shares can be voted at the Annual Meeting only if
you are present in person or represented by proxy. Even if you plan to attend
the meeting, you are urged to sign, date and return the accompanying proxy
card.
When the enclosed proxy card is properly signed, dated and returned, the
stock represented by the proxy will be voted in accordance with your
directions. You can specify your voting instructions by marking the
appropriate box on the proxy card. If your proxy card is signed and returned
without specific voting instructions, your shares of Sunburst common stock
will be voted as recommended by the directors: "FOR" the election of the two
nominees for director named on the proxy card. Abstentions marked on the proxy
card are voted "against" the directors' proposals but are counted in the
determination of a quorum.
You may revoke your proxy at any time before it is voted at the meeting by
(i) filing with ChaseMellon Shareholder Services, L.L.C. in its capacity as
transfer agent for Sunburst (the "Transfer Agent"), at or before the Annual
Meeting, a written notice of revocation bearing a later date than the proxy,
(ii) executing a later-dated proxy relating to the same shares of Sunburst
Common Stock and delivering it to the Transfer Agent at or before the Annual
Meeting, or (iii) attending the Annual Meeting and voting in person (although
attendance at the Annual Meeting will not, in and of itself, constitute a
revocation of a proxy). Any written notice revoking a proxy should be sent to
ChaseMellon Shareholder Services, L.L.C., Overpeck Centre, 85 Challenger Road,
Ridgefield Park, New Jersey 07660.
Votes Required
The close of business on April 30, 1999 has been fixed as the record date for
determination of holders of Sunburst common stock entitled to notice of and to
vote at the Annual Meeting. On that date, there were outstanding and entitled
to vote 19,011,800 shares of Sunburst 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.
Abstentions and broker no-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. [A broker "non-vote" occurs when a nominee
holding shares of Sunburst common stock for a beneficial owner does not vote
on a particular item and has not received instructions from the beneficial
owner.]
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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 one or both 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. Each proposal is tabulated separately. Abstentions are counted
towards a quorum 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 a plurality of shares of Sunburst common stock
present in person or represented by proxy at the Annual Meeting is required to
elect the directors nominated. "Plurality" means that the individuals who
receive the largest number of votes cast are elected as directors up to the
maximum number of directors to be chosen at the meeting.
Certain members of the Bainum family (including various trusts, partnerships
and corporations established by members of the Bainum family) in the aggregate
have the right to vote approximately 37.8% of the number of outstanding shares
of Sunburst common stock and have indicated an intention to vote in accordance
with the recommendations of the Board of Directors.
Solicitation of Proxies
Sunburst will bear the cost of the solicitation. In addition to solicitation
by mail, Sunburst will request banks, brokers and other custodian nominees and
fiduciaries to supply proxy material to the beneficial owners of Sunburst
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
Sunburst, not specially employed for the purpose, may solicit proxies, without
additional remuneration therefor, by personal interview, mail, telephone or
telegraph.
ELECTION OF CLASS III DIRECTORS
The Board of Directors currently consists of three classes of directors, as
nearly equal in number as possible. Directors hold office for staggered terms
of three years (or less if they are filling a vacancy) and until their
successors are elected and qualified. One of the three classes, comprising
approximately one third of the directors, is elected each year to succeed the
directors whose terms are expiring. The directors in Class III will be elected
at the Annual Meeting to serve for a term expiring at Sunburst's Annual
Meeting of Stockholders in the year 2002. The directors in Classes I and II
are serving terms expiring at Sunburst's Annual Meeting of Stockholders in
2000 and 2001, respectively.
On June 29, 1998, Stewart Bainum resigned from the Board of Directors and
Christine A. Shreve was appointed by the Board of Directors to fill that
vacancy. On July 15, 1998, Stewart Bainum, Jr. resigned from the Board of
Directors and Stewart Bainum was re-elected and appointed Chairman. On
December 4, 1998, Stewart Bainum resigned from the Board Directors and Stewart
Bainum, Jr. was re-elected and appointed Chairman. On April 12, 1999, Frederic
V. Malek resigned from the Board of Directors and Leland C. Pillsbury was
appointed by the Board of Directors to fill that vacancy.
Sunburst's Board of Directors has proposed the following nominees for
election as directors at the annual meeting:
Nominees for Class III Directors
With Terms Expiring at the Annual Meeting in the Year 2002:
Donald J. Landry
Leland C. Pillsbury
The Board of Directors recommends a vote "FOR" the election of the above-
named nominees as directors for a term of three years. Proxies solicited by
the Board of Directors will be voted "FOR" the election of the nominees,
unless otherwise instructed on the proxy card.
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Information is provided below with respect to each nominee for election and
each director continuing in office. Should one or more of these nominees
become unavailable to accept nomination or election as a director, the
individuals named as proxies on the enclosed proxy card will vote the shares
that they represent for the election of such other persons as the board may
recommend, unless the board reduces the number of directors. The Board of
Directors knows of no reason why any of the nominees will be unavailable or
unable to serve.
Nominees for Election as Directors
Class III -- Nominees for Terms Expiring in 2002
Donald J. Landry, 50, Chief Executive Officer and Vice Chairman of Sunburst
since October 1997; President of Choice Hotels International, Inc. from
January 1995 to October 1997; President of Manor Care Hotel Division ("MCHD")
from March 1992 to November 1996; various executive positions with Richfield
Hotel Management, Inc. and its predecessors for more than 16 years, including
President of MHM Corporation.
Leland C. Pillsbury, 52, Founder, Chairman and CEO of Thayer Lodging Group,
Inc. (one of the 10 largest private owner/developer of hotels in the U.S.) He
has held those positions with Thayer since 1989. Mr. Pillsbury was appointed
by the Board of Directors to fill the vacancy left by the resignation of
Frederic V. Malek.
Frederic V. Malek resigned from the Board of Directors on April 12, 1999.
His resignation did not arise from any dispute with Sunburst.
Class I -- Terms Expire 2000
Christine A. Shreve, 41 Member of the Board of Sunburst since June 1998.
President, Shreve, Bowersox, P.C., an independent accounting firm, since 1992.
Ms. Shreve was appointed by the Board of Directors to fill the vacancy left by
the resignation of Stewart Bainum.
Stewart Bainum resigned from the Board of Directors on June 29, 1998. His
resignation did not arise from any dispute with Sunburst.
Carole Y. Prest, 47, Member of the Board of Sunburst since November 1997.
President, Maridea LLC, a strategy planning consulting firm, since December
1998; Senior Vice President, Strategy, Marketing and Product Development for
Manor Care from September 1997 to November 1998; President and Chairman of the
Board, Manor Care Foundation, April 1997 to November, 1998; Vice President,
Corporate Strategic Planning, September 1995, through September 1997; Vice
President and General Manager and various other positions at GenRad 1985
through 1994.
Keith B. Pitts, 41, Member of the Board of Sunburst since November 1997.
Chairman and Chief Executive Officer of the Mariner Post-Acute Network, Inc.
since November 1997; Consultant to Apollo from August 1997 to November 1997;
Consultant to Tenant Healthcare Corp. ("Tenant") from February 1997 to August
1997; Executive Vice President and Chief Financial Officer of orNda HealthCorp
from August 1992 until its merger with Tenet in January 1997. Director:
Mariner Post-Acute Network, Inc.
Class II--Terms Expire 2001
Stewart Bainum, Jr., 54, Chairman of the Board of Sunburst from November
1996 to July 1998 and since December 1998; a member of the Board of Sunburst's
predecessors from 1982 to July 1998; Chairman of the Board of Choice Hotels
International, Inc. from March 1987 to November 1996 and since October 1997;
Chairman of the Board of HCR/Manor Care since September 1998; Chairman of the
Board and Chief Executive Officer of Manor Care and Manor Care Health
Services, Inc. ("MCHS") from March 1987 to September 1998, Chief Executive
Officer of Manor Care since March 1987 and President since June 1989; Vice
Chairman of the Board of Vitalink Pharmacy Services, Inc. ("Vitalink") since
December 1994; Vice Chairman of the Board of Manor Care and subsidiaries from
June 198 to March 1987; Director of Manor Care since August 1981, of Vitalink
since September 1991 and of MCHS since 1976; President of MCHS 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.
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Paul A. Gould, 53, Managing Director of Allen & Company Incorporated
(investment banking firm) for more than five years and other positions at
Allen & Company Incorporated since 1973; Director of Sunburst since November
1996. Director: Tele-Communications, Inc., Tele-Communications International,
Inc. and Ascent Entertainment Group.
The Board of Directors
The Board of Directors is responsible for overseeing the overall performance
of Sunburst. Members of the board are kept informed of Sunburst's business
through discussions with the Chairman, the Chief Executive Officer and other
members of Sunburst's management, by reviewing materials provided to them and
by participating in board and committee meetings. The Board of Directors
consists of seven directors. Five of the directors are not, and have never
been, officers of Sunburst.
For the twelve-months ended December 31, 1998, the Board of Directors held
six meetings. In 1998, each director attended all of the meetings of the Board
of Directors and of the committees of the Board of Directors on which such
director served since the time that such director joined the Board of
Directors.
Committees of the Board
The standing committees of the Board of Directors include the Audit, Ethics
and Compliance Committee, the Compensation/Key Executive Stock Option Plan
Committee, the Compensation/Key Executive Stock Option Plan Committee No. 2,
and the Nominating and Corporate Governance Committee. The current members of
the standing committees are as follows:
Compensation/Key Executive Stock Nominating & Corporate
Option
Plan Committee Governance Committee
Keith B. Pitts, Chair Carole Y. Prest, Chair
Leland C. Pillsbury Paul A. Gould
Compensation/Key Executive Stock Audit, Ethics and Compliance
Option
Plan Committee No. 2 Committee
Keith B. Pitts, Chair Paul A. Gould, Chair
Leland C. Pillsbury Keith B. Pitts
Christine A. Shreve
The Compensation/Key Executive Stock Option Plan Committees administer
Sunburst's stock option plans and grant stock options thereunder, review
compensation of officers and key management employees, recommend development
programs for employees such as training, bonus and incentive plans, pensions
and retirement, and review other employee fringe benefit programs. The
Compensation/Key Executive Stock Option Plan Committees each met twice during
the twelve-months ended December 31, 1998.
The Nominating and Corporate Governance Committee is responsible for
administering the Sunburst Corporate Governance Guidelines, assessing the
functioning of the Board, determining size and composition of the Board,
recommending candidates to fill vacancies on the Board, determining actions to
be taken with respect to directors who are unable to perform their duties,
setting Sunburst's policies regarding the conduct of business between Sunburst
and any other entity affiliated with a director and determining the
compensation of non-employee directors. The Nominating and Corporate
Governance Committee met twice during the twelve-month period ended December
31, 1998. This Committee will consider nominees submitted by security holders.
To make a nomination for director at the Annual Meeting of Stockholders to be
held in 2000, security holders should submit a name, and brief biography of
the nominee, to Sunburst's corporate secretary by March 10, 2000.
The Audit, Ethics and Compliance Committee reviews the scope and results of
the annual audit, reviews and approves the services and related fees of
Sunburst's independent public accountants, reviews Sunburst's internal
accounting controls and reviews Sunburst's Internal Audit Department and its
activities. It also reviews
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telephone calls to the Sunburst ethics hotline, and oversees the
implementation of the Sunburst corporate compliance program. The Audit
Committee met twice during the twelve-month period ended December 31, 1998.
Compensation of Directors
Sunburst has adopted the Sunburst Hospitality Corporation Non-Employee
Director Stock Option and Deferred Compensation Stock Purchase Plan. Part A of
the Plan provides that eligible non-employee directors are granted options to
purchase 5,000 shares of Sunburst's common stock on their first date of
election and are granted options to purchase 1,000 shares on the date of the
annual meeting in subsequent calendar years. Part B of the Plan provides that
eligible non-employee directors may elect 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's 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.
Pursuant to the Non-Employee Director Stock Compensation Plan (the "Stock
Plan") adopted by Sunburst, eligible non-employee directors will receive
annually, in lieu of cash, restricted shares of Sunburst's common stock, 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 receive $1,610 per diem for Committee
meetings attended on a date other than a date that the Board of Directors
meets. Directors are reimbursed in cash for travel expenses and other out-of-
pocket expenses.
Directors who are employees of Sunburst receive no separate remuneration for
their services as directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the amount of Sunburst's common stock
beneficially owned by (i) each director of Sunburst, (ii) Sunburst's chief
executive officer and the other four most highly compensated executive
officers (the "Named Officers"), (iii) all officers and directors of Sunburst
as a group and (iv) all persons who are known by Sunburst to own beneficially
more than 5% of Sunburst's common stock, as of April 30, 1999. Unless
otherwise specified, the address for each of them is 10770 Columbia Pike,
Silver Spring, Maryland, 20901.
<TABLE>
<CAPTION>
Shares of
Common Stock Percent of
Beneficially Shares
Name of Beneficial Owner Owned Outstanding(1)
------------------------ ------------ --------------
<S> <C> <C>
Stewart Bainum, Jr............................. 3,437.631(2) 18.1%++
Stewart Bainum and Jane Bainum................. 3,575,803(2) 18.8%++
Barbara Bainum................................. 2,560,477(2) 13.5%++
Roberta Bainum................................. 1,910,934(2) 10.1%++
Bruce Bainum................................... 3,193,348(2) 16.8%++
Realty Investment Company, Inc. ............... 1,189,290 6.3%++
Antonio DiRico................................. 85,854(3) *
Gregory Miller................................. 13,937(4) *
Paul A. Gould.................................. 126,038(5) *
Kevin P. Hanley................................ 19,774(6) *
Donald J. Landry............................... 376,351(7) *
James A. MacCutcheon........................... 188,393(8) *
Frederic V. Malek.............................. 7,938(9) *
Keith B. Pitts................................. 5,318(10) *
Carole Y. Prest................................ 8,485(11) *
Christine A. Shreve............................ 5,782(12) *
All Officers and Directors as Group (11
persons)...................................... 4,275,501(13) 22.5%
Ronald Baron................................... 5,870,140(14) 30.9%
Eric S. Dobbin................................. 1,146,899(15) 6.0%
</TABLE>
- --------
*Less than 1% of class.
++The Bainum family and affiliated companies together control approximately
37.8% of Sunburst stock.
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(1) Percentages are based on 19,011,800 shares outstanding on April 30, 1999
(the "Record Date") plus, for each person, the shares which would be
issued assuming that such person exercises all options he or she holds
which are exercisable on such date or become exercisable within 60 days
thereafter.
(2) The Bainum family and affiliated companies hold the following beneficial
interests:
Stewart Bainum, Jr., 3,437,631 shares, including 847,204 shares held
directly by the Stewart Bainum, Jr. Declaration of Trust ("SBJ Trust"), of
which Mr. Bainum, Jr. is the sole trustee and beneficiary; 1,189,290
shares held directly by Realty Investment Company, a real estate
management and investment company in which the SBJ Trust is a stockholder
and has shared voting authority; 85,000 shares held by Vintage Limited
Partnership, a family investment partnership of which Mr. Bainum, Jr. is a
stockholder of the Corporate General Partner and has shared voting
authority; 3,553 shares held by the Foundation for Maryland's Future of
which Mr. Bainum, Jr. is the sole Director; and 593,209 shares owned by
Mid Pines Associates, Limited Partnership in which the SBJ Trust is the
Managing General Partner and has shared voting authority. Also includes
635,457 shares held by the Roberta Bainum Irrevocable Trust, in which Mr.
Bainum, Jr. is a co-trustee and has shared voting authority.
Stewart Bainum and Jane Bainum, 3,575,803 shares, including 2,009,327
shares held directly by the Stewart Bainum Declaration of Trust ("SB
Trust"), of which Mr. Bainum is the sole trustee and beneficiary;
1,189,290 shares held directly by Realty Investment Company, in which the
SB Trust and the JB Trust are stockholders and Mr. Bainum is President and
Chairman of the Board of Directors and has shared voting authority; 85,000
shares held by Vintage Limited Partnership, of which Mr. Bainum is the
Chairman of the Board of the Corporate General Partner and has shared
voting authority; and 23,435 shares held by the Commonweal Foundation of
which Mr. Bainum is Chairman of the Board of Directors and has shared
voting authority. Also includes 266,237 shares held by the Jane L. Bainum
Declaration of Trust ("JB Trust"), the sole trustee and beneficiary of
which is Mr. Bainum's wife. Also includes 514 shares of registered stock
granted under the Company's Non Employee Director Stock Compensation Plan
to Mr. Bainum which are not vested but Mr. Bainum has the right to vote.
Also includes 2,000 shares which Mr. Bainum has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days.
Barbara Bainum, 2,560,477 shares, including 33,671 shares owned
directly; 635,457 held by the Barbara Bainum Declaration of Trust ("BB
Trust"), of which Ms. Bainum is the sole trustee and beneficiary;
1,189,290 shares held directly by Realty Investment Company, in which the
BB Trust is a stockholder and Ms. Bainum is a Director and has shared
voting authority; 85,000 shares held by Vintage Limited Partnership, of
which Ms. Bainum is a stockholder and Director of the Corporate General
Partner and has shared voting authority; 23,435 shares owned by Commonweal
Foundation in which Ms. Bainum is President and Director and has shared
voting authority; and 593,209 shares owned by Mid Pines Associates,
Limited Partnership in which the BB Trust is a General Partner and has
shared voting authority. Also includes 415 restricted shares granted under
the Non-Employee Director Stock Compensation Plan which are not vested but
which Ms. Bainum has the right to vote.
Roberta Bainum, 1,910,934 shares, including 20,000 shares owned
directly; 1,189,290 shares held directly by Realty Investment Company, in
which Ms. Bainum is a Director and has shared voting authority; 85,000
shares held by Vintage Limited Partnership, of which Ms. Bainum is a
stockholder and Director of the Corporate General Partner and has shared
voting authority; 23,435 shares owned by Commonwealth Foundation in which
Ms. Bainum is a Director and has shared voting authority; and 593,209
shares owned by Mid Pines Associates, Limited Partnership in which Ms.
Bainum is a General Partner and has shared voting authority.
Bruce Bainum, 3,193,348 shares, including 31,500 shares owned directly;
635,457 held by the Bruce Bainum Declaration of Trust ("BB Trust"), of
which Mr. Bainum is the sole trustee and beneficiary; 1,189,290 shares
held directly by Realty Investment Company, in which the BB Trust is a
stockholder and Mr. Bainum is a Director and has shared voting authority;
85,000 shares held by Vintage Limited Partnership, of which Mr. Bainum is
a stockholder and Director of the Corporate General Partner and has shared
voting authority; 23,435 shares owned by Commonweal Foundation in which
Mr. Bainum is a Director and has shared voting authority; and 593,209
shares owned by Mid Pines Associates, Limited
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Partnership in which the BB Trust is a General Partner and has shared
voting authority. Also includes 635,457 shares owned by the Roberta Bainum
Irrevocable Trust in which Mr. Bainum is a co-trustee and has shared
voting authority.
(3) Includes 3,561 shares held directly by Mr. DiRico and 3,779 shares and
11,919 shares, respectively, which Mr. DiRico has the right to receive
upon termination of his employment pursuant to the terms of the
Retirement Savings and Investment Plan ("401(k) Plan") and Non-Qualified
Savings and Investment Plan ("Non-Qualified Plan"). Also includes 66,595
shares, which Mr. DiRico has the right to acquire pursuant to stock
options which are currently exercisable or become exercisable within 60
days of the Record Date.
(4) Includes 2,406 held directly by Mr. Miller and 270 and 522 shares,
respectively, which Mr. Miller has the right to receive upon termination
of his employment pursuant to the terms of the 401(k) Plan and the Non-
Qualified Plan. Also includes 10,739 shares which Mr. Miller has the
right to acquire pursuant to stock options which are currently
exercisable or become exercisable within 60 days of the Record Date.
(5) Includes 124,079 shares held directly by Mr. Gould, 2,896 shares of
restricted stock granted under the Stock Plan to Mr. Gould which are not
vested and 1,236 which have vested. Mr. Gould has the right to vote all
4,132 shares. Also includes 1,959 shares which Mr. Gould has a right to
acquire pursuant to stock options which are currently exercisable or
become exercisable within 60 days of the Record Date.
(6) Includes 4,066 shares held directly by Mr. Hanley and 15,708 shares Mr.
Hanley has the right to acquire pursuant to stock options which are
presently exercisable or which become exercisable within 60 days after
the Record Date.
(7) Includes 18,498 shares owned directly by Mr. Landry and 337,593 shares
Mr. Landry has the right to acquire pursuant to stock options which are
presently exercisable or which become exercisable within 60 days after
the Record Date. Also includes 3,166 shares and 17,094 shares which Mr.
Landry has the right to receive on termination of his employment pursuant
to the terms of the 401(k) Plan and Non-Qualified Plan, respectively.
(8) Includes 5,000 shares owned directly by Mr. MacCutcheon and 659 and 1,167
shares, respectively, which Mr. MacCutcheon has the right to receive upon
termination of his employment pursuant to the 401(k) Plan and the Non-
Qualified Plan. Also includes 100 shares held by minor children.
Beneficial ownership of such shares is disclaimed. Also includes 181,567
shares Mr. MacCutcheon has the right to acquire pursuant to stock options
which are presently exercisable or which become exercisable within 60
days after the Record Date.
(9) Includes 1,162 shares held directly by Mr. Malek, 2,555 shares which Mr.
Malek has the right to acquire pursuant to stock options which are
presently exercisable or become exercisable within 60 days of the Record
Date and 2,985 restricted shares granted under the Stock Plan which are
not vested and 1,236 which have vested. Mr. Malek has the right to vote
all 4,221 shares.
(10) Consists of 4,082 restricted shares granted under the Stock Plan which
are not vested and 1,236 which have vested. Mr Pitts has the right to
vote all 5,318 shares.
(11) Includes 4,221 restricted shares granted under the Stock Plan which are
not vested,and 1,236 shares which have vested. Ms. Prest has the right to
vote all 5,457 shares. Also includes 3,028 shares Ms. Prest has the right
to acquire pursuant to stock options which are presently exercisable or
which become exercisable within 60 days after the Record Date.
(12) Includes 1,600 shares held directly by Ms. Shreve and 4,182 restricted
shares granted under the Non-Employer Director Stock Compensation Plan
which are not vested, but which Ms. Shreve has the right to vote.
(14) As of October 16, 1997, based on a Schedule 13-D, as amended, filed by
Mr. Baron with the Securities and Exchange Commission (the "Commission").
Mr. Baron filed on behalf of Baron Capital, Inc. Mr. Baron's address is
450 Park Avenue, Suite 2800, New York, New York 10022.
(15) As of April 9, 1999, based on a Schedule 13-G filed by Mr. Dobbin with
the Commission. Mr. Dobbin filed on behalf of Hamilton Partners Limited.
Mr. Dobbin's address is 415 Madison Avenue, New York, New York 10017.
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.
7
<PAGE>
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
There are currently two compensation committees for Sunburst, 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 Long-Term Incentive Plan to the Chief
Executive Officer and the Named Officers defined below. During 1998, the
members of the Committee were Messrs. Malek (Chairman), and Pitts. Mr. Malek
resigned from the Board on April 12, 1999.
The following philosophy and principles have been set forth as a framework
within which the Committee operates.
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 stockholder value through sustained
improvement in revenues, customer satisfaction and earnings before
interest, taxes, depreciation, and amortization ("EBITDA"); and
.Position base pay at market so that Sunburst can vary total compensation
based on performance.
Executive Compensation Policies
Compensation Levels
The Committee relates total compensation levels for Sunburst'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 a number of
companies in the hotel industry are used as the primary comparison and
companies in the service sector 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 Sunburst's targeted performance goals are exceeded.
Similarly, total compensation may lag the market when performance goals are
not achieved. For the twelve-months ended December 31, 1998, total
compensation for the executive officers, as a group, was below the median for
the primary comparison group (eleven hotel companies).
Policy with Respect to Qualifying Compensation for Deductibility
Sunburst'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 Sunburst and its stockholders. However, Sunburst reserves the
right to authorize the payment of nondeductible compensation if it deems that
is appropriate. The Committee intends to monitor Sunburst's compensation
programs with respect to such laws.
Annual Compensation
The base salary pay practice is to target at the 55th percentile of the
market range among the comparison groups for a particular position and to
adjust as appropriate for experience and performance.
8
<PAGE>
Awards under the annual cash bonus program for the twelve-months ended
December 31, 1998 were based on certain performance measurements, which were
based 60% on achieving targeted net operating profits, 20% on customer
satisfaction goals and 20% on revenue. For the twelve-months ended December
31, 1998, actual performance exceeded the measurement goals for customer
satisfaction, and was below the measurement goals for the net operating profit
and revenue components. For 1999, Sunburst will alter the cash bonus program
for executive officers by basing 60% on EBITDA, instead of net operating
profit, because EBITDA measures operating profits after corporate overhead is
deducted. The remaining 40% will continue to be based equally on revenue and
customer satisfaction.
Long- Term Incentives
Sunburst will award long-term incentives under the 1996 Long-Term Incentive
Plan. That 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 Sunburst's past
practice. In June 1997, the Compensation Committee approved a Stock Option
Guide Chart for Sunburst's executives. The Stock Option Guide Chart was
reviewed and revised in February 1998. It utilizes a market-based salary
multiple to establish a competitive range of stock options from which
executive awards can be determined. In 1998, executive officers were awarded
stock grants in lieu of raises.
Compensation of the Chief Executive Officer
Donald J. Landry was Chief Executive Officer throughout 1998. He is
compensated pursuant to an employment agreement effective October 15, 1997.
The terms of the agreement are described below under "Executive Compensation--
Employment Agreements." Compensation levels for Mr. Landry under the
Employment Agreement is based on the compensation paid to Mr. Landry's
predecessor. Mr. Landry's bonus, stock option grants, and restricted stock
awards for 1998 were based on his performance in restructing Sunburst
following the Choice Spin-off, and the 1997 performance of the assets which
remained in Sunburst following the Choice Spin-off. (for the definition of
"Choice Spin-off," see the "Manor Care Lease Agreements" section under
"Certain Relationships and Related Transactions.")
THE COMPENSATION COMMITTEE
Frederic V. Malek, Chair (resigned April 12, 1999)
Keith B. Pitts
PERFORMANCE GRAPH
The following graph compares the performance of Sunburst's 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 October 16, 1997 (when Sunburst
started trading in its present form as owner and operator, but not franchisor
of hotels), plus assumed reinvested dividends. The Commission's rules require
that Sunburst 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, Sunburst has selected a peer group that
includes companies which are actively traded on the New York Stock Exchange or
the NASDAQ Stock Market and which are in the hotel franchising and/or
hospitality industry. The common stock of the following companies have been
included in the Peer Group Index: Prime Hospitality Corp., Red Roof Inns,
Inc., Candlewood Hotel Company, Inc., and Lodgian, Inc. (formerly known as
Servico)./1/
- --------
/1/The Peer Group has changed from the group included in past year's
Performance Graph by the deletion of three members, LaQuinta Hotel
Corporation, Bristol Hotel Company, and CapStar Hotel Company, and the
addition of Candlewood Hotel Company, Inc. Candlewood Hotel competes in the
mid-period extended-stay suite market. That market comprises an increasing
share of Sunburst business. LaQuinta was acquired by a real estate
investment trust and LaQuinta's shares are no longer publicly traded.
Bristol sold its assets to a real estate investment trust and now is
primarily a hotel management company. CapStar merged with a real estate
investment trust and its size and structure is now very different from
Sunburst.
9
<PAGE>
The graph assumes that $100 was invested on October 16, 1997, in each of
Sunburst common stock, the NYSE Composite Index and the Peer Group Index, and
that all dividends were reinvested. In addition, the graph weighs the
constituent companies on the basis of their respective capitalization,
measured at the beginning of each relevant time period.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
10/16/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99
-------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Sunburst................ 100.00 95.75 84.84 67.27 43.63 41.21 36.36
NYSE Composite Index.... 100.00 102.39 115.27 117.31 102.98 122.85 124.98
Peer Group Index........ 100.00 93.90 100.33 86.59 51.17 57.69 53.55
</TABLE>
10
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation(1) Long-Term compensation
---------------------- ----------------------
All Other
Name and Principal Fiscal Restricted Stock Stock Option Compensation
Position Year(1) Salary Bonus Other Awards ($)(2) Shares (#)(3) (4)
------------------ ------- ------- ------- --------- ---------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Donald J. Landry(8)..... 1998 424,463 198,533 95,077.85 110,000 19,631
Vice Chairman and Chief 1997A 421,975 200,508 -- 106,000(9) 6,035
Executive Officer 1997B 404,250 200,508 (6) -- 100,000(10) 6,035
James A.
MacCutcheon(11)........ 1998 322,980 141,196 52,542.01 50,000 20,304
Executive Vice
President, 1997A 312,900 52,263 -- 46,500(12) 18,682
Chief Financial Officer
& 1997B 313,578 158,953 (6) -- 67,500(13) 18,682
Treasurer
Antonio DiRico.......... 1998 259,500 100,120 35,194.56 65,000 8,360
President & Chief
Operating 1997B 259,499 86,524 -- 80,600(14) 3,043
Officer 1997A 196,200 86,584 (6) -- 25,000(15) 3,043
Kevin D. Hanley......... 1998 175,000 51,594 27,750.79 45,000 --
Senior Vice President 1997A 174,999 84,452 (6) -- 51,200(16) --
Real Estate Development 1997B 144,890 51,776 (6) -- 2,727(17) --
Gregory Miller.......... 1998 158,350.34 66,538.92 (6) 20,297.20 20,000 7,110
Senior Vice President 1997A -- -- -- -- --
Human Resources 1997B -- -- -- -- --
Douglas H. Verner....... 1998 117,691.68(18) 12,326.09 76,660.70(19) 7,610.32 45,036 --
Senior Vice President 1997A -- -- -- -- -- --
General Counsel & 1997B -- -- -- -- -- --
Secretary
</TABLE>
- --------
(1) On September 16, 1997, Sunburst changed its fiscal year end from May 31
to December 31. Accordingly, the summary compensation information
presented is for the twelve-months ended December 31, 1997 ("1997A"), the
fiscal year ended May 31, 1997 ("1997B"). Summary compensation data paid
to the Named Officers during the period between January 1, 1997 and May
31, 1997 is reflected in each of the 1997A and 1997B periods.
(2) On June 29, 1998, Sunburst issued restricted stock to officers in lieu of
merit increases for calendar year 1998. The restricted stock vests over
three (3) years.
(3) For all of the Named Officers, except for Mr. MacCutcheon, the grants in
1997B represent options to purchase shares of Manor Care common stock.
When Sunburst stock was distributed to Manor Care's stockholders, the
options to purchase Manor Care common stock were converted, in some cases
100%, to options to purchase Sunburst common stock. For Mr. MacCutcheon
and with respect to grants in 1997B and for all of the Named Officers
with respect to grants in 1997A, represents options to acquire shares of
Sunburst common stock. When Sunburst distributed the stock of Choice to
Sunburst's stockholders, the options to purchase Sunburst common stock
were converted to successor options to purchase Sunburst common stock and
Choice common stock. In all cases, however, the exercise prices were
adjusted to maintain the same financial value to the option holder before
and after these two stock distributions.
(4) Represents amounts contributed by Sunburst for 1998, 1997A and 1997B
under their respective 401(k) Plan and 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
Sunburst for 1998, 1997A and 1997B under the 401(k) Plan and Non-
qualified Savings Plan, respectively, for the Named Offices were as
follows: Mr. Landry, $19,632, $2,375 and $3,660; Mr. MacCutcheon,
$20,304, $6,240 and $12,443; Mr. DiRico, $8,360, $966 and $2,077; and Mr.
Miller $7,110.
11
<PAGE>
(5) Intentionally omitted.
(6) 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.
(7) In connection with the distribution of Choice stock to Sunburst
stockholders (the "Spin-off"), these options were converted on a pro rata
basis into options to acquire 20,000 shares of Sunburst common stock at
an exercise price of $7.1894 and 60,000 shares of Choice at an exercise
price of $12.1130.
(8) Mr. Landry was appointed Vice Chairman and Chief Executive Officer upon
the Spin-off. Prior to the Spin-off, he was President of Sunburst.
(9) In connection with the Spin-off, these options were converted into
options to purchase 124,631 shares of Sunburst common stock at an
exercise price of $7.8815 and 53,000 shares of Choice common stock at an
exercise price of $13.2791.
(10) In connection with the Spin-off, these options were converted into
options to purchase 291,795 shares of Sunburst common stock at an
exercise price of $7.1894 and 153,497 shares of Choice common stock at an
exercise price of $12.113.
(11) For 1996 and part of 1997B, Mr. MacCutcheon was Senior Vice President,
Chief Financial Officer and Treasurer of Manor Care and Sunburst. On
November 1, 1996, Mr. MacCutcheon resigned from Manor Care and assumed the
position of Executive Vice President, Chief Financial Officer and
Treasurer of Sunburst. The compensation reflected for 1996 and 1997B are
total compensation received for services rendered to both Manor Care and
Sunburst. For the period of 1997B after the Manor Care Spin-off, the
amount of compensation paid solely by Sunburst was $209,052 for salary and
$103,690 for bonus. In connection with the Spin-off, Sunburst and Choice
entered into a Consulting Agreement whereby Choice would reimburse
Sunburst for 30% of Mr. MacCutcheon's base salary and bonus from October
15, 1997 through November 1, 2001. See "Certain Relationships and Related
Transactions."
(12) In connection with the Spin-off, these options were converted into
options to purchase 54,673 shares of Sunburst common stock at an exercise
price of $7.835 and 23,250 shares of Choice common stock at an exercise
price of $13.2008.
(13) In connection with the Spin-off, these options were converted into
options to purchase 138,806 shares of Sunburst common stock at an exercise
price of $6.884, 47,082 shares of Sunburst common stock at an exercise
price of $7.1894, 30,308 shares of Choice at an exercise price of $11.5986
and 15,642 shares of Choice common stock at an exercise price of $12.113.
(14) In connection with the Spin-off, these options were converted into
options to purchase 111,739 shares of Sunburst common stock at an exercise
price of $7.835 and 30,225 shares of Choice common stock at an exercise
price of $13.2008.
(15) In connection with the Spin-off, these options were converted into
options to purchase 82,498 shares of Sunburst common stock at an exercise
price of $7.1894 and 32,706 shares of Choice common stock at an exercise
price of $12.113.
(16) In connection with the Spin-off, these options were converted into
options to purchase 70,981 shares of Sunburst common stock at an exercise
price of $7.835 and 19,200 shares of Choice common stock at an exercise
price of $13.2008.
(17) In connection with the Spin-off, these options were converted into
options to purchase 3,779 shares of Sunburst common stock at an exercise
price of $7.1894 and 1,024 shares of Choice common stock at an exercise
price of $12.113.
(18) Mr. Verner joined Sunburst in March 1998 as Senior Vice President,
General Counsel and Secretary. On an annualized basis, his base salary is
$150,000 per year.
(19) Other compensation for Mr. Verner is reimbursement of relocation
expenses.
12
<PAGE>
Stock Options
The following tables set forth certain information at December 31, 1998 and
for the twelve-months then ended concerning options to purchase Sunburst
common stock granted to Named Officers. All common stock figures and exercise
prices have been adjusted to reflect stock dividends and stock splits
effective in prior fiscal years. With the Choice Spin-off, existing Sunburst
stock options were subject to certain adjustments or conversions into options
to purchase shares of Sunburst common stock and Choice common stock. The table
below represents the options grants on a post-conversion basis.
STOCK OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
Potential
Realizable Value of
Assumed Rate of
Stock Price
Percentage of Appreciation for
Number of Total Options Exercise Base Option Term (1)
Options Granted to all Price Per Expiration -------------------
Name Granted Employees in 1998 Share Date 5%(2) 10%(3)
---- --------- ----------------- ------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr...... 0 -- -- -- -- --
Donald J. Landry (4).... 110,000 25.6% $6.406 6/29/08 $443,157 $1,123,045
James A. MacCutcheon
(4).................... 50,000 11.5% 6.406 6/29/08 201,435 510,475
Antonio DiRico (4)...... 65,000 15.1% 6.406 6/29/08 261,866 663,618
Kevin P. Hanley (4)..... 45,000 10.4% 6.406 6/29/08 181,292 459,428
Gregory Miller (4)...... 20,000 4.6% 6.406 6/29/08 80,574 204,190
Douglas H. Verner (4)... 35,036 10.4%(5) 8.759 3/31/08 192,798 489,089
Douglas H. Verner....... 10,000 6.406 6/29/08 40,287 102,095
</TABLE>
- --------
(1) 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.
(2) A 5% per year appreciation in stock price from $6.406 per share yields
$10.437 and from $8.759 per share yields $14.2675.
(3) A 10% per year appreciation in stock price from $6.406 per share yields
$16.6155 and from $8.759 per share yields $22.7186.
(4) The options granted to the officers vest at the rate of 20% per year on
the first through the fifth anniversaries of the date of the stock option
grant.
(5) Includes both grants to Mr. Verner.
AGGREGATED OPTION EXERCISES IN 1998
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised
Options at
December 31, 1998
-------------------------
Shares Value of Unexercised in-
Acquired on Value the-money Options at
Exercise Realized Exercisable Unexercisable December 31, 1998
----------- -------- ----------- ------------- -------------------------
Name # $ # # Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. .... 83,889 36,112 126,381.38 8,811.35
Donald J. Landry........ 233,605 707,962 96,294.03 238,468.96
James A. MacCutcheon.... 181,595 310,332 92,639.01 41,629.29
Antonio DiRico.......... 66,595 239,230 2,513.98 4,154.01
Kevin P. Hanley......... 15,707 104,053 -- --
Gregory Miller.......... 10,739 62,953 -- --
Douglas H. Verner....... -- 45,036 -- --
</TABLE>
- --------
(1) The closing prices of Sunburst common stock as reported by the New York
Stock Exchange on December 31, 1998 was $4.25. 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 Sunburst common stock
underlying the option.
13
<PAGE>
Employment Agreements
On October 15, 1997, Sunburst amended and restated an employment agreement
with Stewart Bainum, Jr., providing for Mr. Bainum, Jr.'s employment as
Chairman of Sunburst's Board of Directors. The agreement had a term of three
years. The Agreement terminated on July 15, 1998 when Mr. Bainum, Jr. resigned
form the Board. Mr. Bainum, Jr. rejoined the Board on December 4, 1998, as a
non-employee director. Commencing January 1, 1999, Mr. Bainum, Jr. became an
employee director again, but did not enter into an employment agreement with
Sunburst.
Sunburst entered into an Employment Agreement with Donald J. Landry on June
25, 1997, effective upon the distribution of Choice stock by Sunburst on
October 15, 1997. The agreement has a term of three years from October 15,
1997 and provides for a base salary of $424,462 per annum, subject to annual
adjustments, and an annual bonus of up to 60% of his base compensation, based
upon Sunburst's performance. In the event of a change in control, as defined
in the agreement, Mr. Landry has the right to terminate the agreement within
six months.
Sunburst entered into an Employment Agreement with James A. MacCutcheon on
October 31, 1996, effective November 1, 1996. The agreement has a term of five
years and provides for a base salary of $313,578 per annum, subject to annual
adjustments, and an annual bonus of up to 55% of his base compensation, based
upon Sunburst's performance.
Sunburst adopted an Officer Retention and Severance Plan (the "Plan")
effective January 21, 1999, which provides that any officer who is terminated
(i) due to a Change of Control as that term is defined in the Second Amendment
to the 1996 Long-Term Incentive Plan; (ii) without cause; or (iii)
constructively through a significant reduction in compensation and
responsibilities measured as of the date of the Plan and, who is not under
contract with Sunburst, shall receive base salary for twelve-months plus two
weeks for each year of service with Sunburst and its predecessor companies, to
be paid bi-weekly. Payments will be reduced by any salary earned from other
employment by the officer. Any officer under contract will be covered by the
terms of the individual contract.
Retirement Plans
Sunburst has adopted the Sunburst Hospitality Corporation Supplemental
Executive Retirement Plan (the "SERP"). Participants are Senior Vice
Presidents and other officers selected by the Board of Directors to
participate.
Participants in the SERP receive a monthly benefit for life based upon final
average salary and years of service. Final average salary is the average of
the monthly base salary, excluding bonuses or commissions, earned in a 60
month period which produces the highest average out of the last 120 months of
employment, prior to the first occurring of the early retirement date or the
normal retirement date. The nominal 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 are participants are age 55
or younger, so that none of their compensation reported above would be
included in the final average salary calculation.
Assuming that the following officers continue to be employed by Sunburst
until they reach age 65, their credited years of service are as follows:
<TABLE>
<CAPTION>
Current Years Years of Service
Name of Individual of Service at Age 65
------------------ ------------- ----------------
<S> <C> <C>
Donald J. Landry........................... 7 22
James A. MacCutcheon....................... 11 30
Antonio DiRico............................. 7 23
Kevin P. Hanley............................ 4 28
Gregory Miller............................. 7 24
Douglas H. Verner.......................... 1 20
</TABLE>
14
<PAGE>
The table below sets forth estimated annual benefits payable upon retirement
to persons in specified compensation and years of service classifications.
These benefits are straight life annuity amounts, although participants have
the option of selecting a joint and 50% survivor annuity or ten-year certain
payments. The benefits are not subject to offset for social security and other
amounts.
Years of Service/Benefit as
Percentage of Final Average Salary
<TABLE>
<CAPTION>
25 or
Remuneration 15/15% 20/22.5% more/30%
------------ ----- ------- -------
<S> <C> <C> <C>
$300,000 $45,000 $ 67,500 $ 90,000
350,000 52,500 78,750 105,000
400,000 60,000 90,000 120,000
450,000 67,500 101,250 135,000
500,000 75,000 112,500 150,000
600,000 90,000 135,000 180,000
</TABLE>
In November 1996, Sunburst established the Sunburst Hospitality Corporation
Retirement Savings and Investment Plan (the "401(k) Plan"). The 401(k) Plan is
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 includes a cash or deferred arrangement under Section 401(k) of the Code.
All employees age 21 or over and who have worked for Sunburst 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 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 $10,000. Sunburst 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 Sunburst for the year and the number of years of
service of the participant. Amounts contributed by Sunburst pursuant to its
401(k) Plan for Named Officers are included in the Summary Compensation Table
under the column headed "All Other Compensation."
Sunburst also adopted the Sunburst Hospitality Corporation Non-Qualified
Retirement Savings and Investment Plan ("Non-Qualified Savings Plan"). Certain
select highly compensated members of management of Sunburst will be eligible
to participate in the Non-Qualified Savings Plan. The 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 Sunburst under its Non-Qualified Savings Plan
for fiscal year 1998 for the Named Officers are included in the Summary
Compensation Table under the column headed "All Other Compensation."
The Sunburst match under the 401(k) Plan and the Non-Qualified Savings Plan
is 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationship with Manor Care
Stewart Bainum, Jr. is the Chairman of Sunburst's Board of Directors and of
HCR Manor Care's Board of Directors.
Manor Care Lease Agreements
Sunburst was part of Manor Care, Inc. ("Manor Care") until November 1, 1996,
when the stock of Sunburst was distributed as a dividend to Manor Care
stockholders. That distribution is referred to as the Manor Care
15
<PAGE>
Spin-off. On October 16, 1997, Sunburst distributed as a dividend to its
stockholders the stock of Choice Hotels International, Inc. That distribution
is known as the Choice Spin-off.
In connection with the Manor Care Spin-off, Sunburst and Manor Care entered
into a lease agreement with respect to the complex at 10750 and 10770 Columbia
Pike, Silver Spring, Maryland (the "Silver Spring Complex") at which
Sunburst's principal executive offices were located (the "Silver Spring
Lease"). After the Choice Spin-off, Sunburst remained obligated under the
Silver Spring Lease and had subleased space at 10750 Columbia Pike to Choice
Hotels International, Inc. ("Choice") pursuant to a sublease. In June 1998,
Manor Care sold the Silver Spring Complex and Sunburst enter into a new lease
with the new owner. The sublease was terminated.
Sunburst 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 Sunburst was obligated to rent from Manor Care,
certain additional space as such space became available during the 30 month
period following the date of the Manor Care Spin-off. The Gaithersburg lease
was terminated in February 1999. In addition, at the time of the Manor Care
Spin-off, the parties entered into a sublease agreement with respect to the
Comfort Inn N.W., Pikesville, Maryland, pursuant to which Sunburst 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.
During the twelve-month period ended December 31, 1998, Sunburst paid to
Manor Care under the Gaithersburg Lease and the Silver Spring Lease
approximately $1.3 million.
Corporate Services Agreement
Sunburst and Manor Care entered into the Corporate Services Agreement (the
"Corporate Services Agreement") which provides for the provision, by Manor
Care, of certain corporate services, including administrative, accounting,
systems and, for a fixed annual fee of $1.0 million, certain consulting
services. The term of the Consulting Services Agreement is 30 months from
November 1, 1996. Sunburst terminated all services except the consulting
services under the Corporate Service Agreement in the first quarter of 1998.
In February 1999, Sunburst entered into a release with Manor Care which
effectively terminated the consulting services payment obligation.
Time Sharing Agreement
On October 10, 1996, Sunburst entered into a Time Sharing Agreement with
Manor Care under which Sunburst had the right to use from time to time a
Cessna Citation III and a Cessna Conquest I owned by Manor Care. The agreement
had a term of one year with automatic renewals unless otherwise terminated. In
January 1998, Manor Care gave notice that it was terminating the Time Share
Agreement. During 1998, there were no charges for aircraft usage pursuant to
the agreement.
Relationship with Choice
In connection with the Choice Spin-off, Sunburst and Choice entered into
certain agreements intended to govern the relationship between the parties
after the Choice Spin-off. In addition, Sunburst is Choice's largest
franchisee. The material terms of certain of these agreements and other
arrangements, entered into between Sunburst and Choice, including the
franchise agreements with respect to Sunburst's hotels, are described below.
Distribution Agreement
In connection with the Choice Spin-off, Sunburst and Choice entered into a
Distribution Agreement which provided for, among other things, the principal
corporate transactions required to effect the Choice Spin-off, the assumption
by Choice of all liabilities relating to its business and the allocation
between Sunburst and Choice of certain other liabilities, certain
indemnification obligations of Sunburst and Choice and certain other
agreements governing the relationship between Sunburst and Choice with respect
to or in consequence of the Choice Spin-off.
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Subject to certain exceptions, Choice has agreed to indemnify Sunburst and
its subsidiaries against any loss, liability or expense incurred or suffered
by Sunburst or its subsidiaries arising out of or related to the failure by
Choice to perform or otherwise discharge liabilities allocated to and assumed
by Choice under the Distribution Agreement, and Sunburst has agreed to
indemnify Choice against any loss, liability or expense incurred or suffered
by Choice arising out of or related to the failure by Sunburst to perform or
otherwise discharge the liabilities retained by Sunburst 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.
To avoid adversely affecting the intended tax consequences of the Choice
Spin-off, each of Choice and Sunburst will agree to comply in all material
respects with each representation and statement made to any taxing authority
in connection with the IRS tax ruling or any other tax ruling obtained by
Choice and Sunburst in connection with the Choice Spin-off.
Under the Distribution Agreement, each of Choice and Sunburst will be
granted access to certain records and information in the possession of the
other, and requires the retention of such information in its possession for
specified periods and thereafter requires that each party give the other prior
notice of its intention to dispose of such information. In addition, the
Distribution Agreement provides for the allocation of shared privileges with
respect to certain information and requires each of Choice and Sunburst to
obtain the consent of the other prior to waiving any shared privilege.
In accordance with the Distribution Agreement, Choice agreed to assume and
pay certain liabilities of Sunburst, subject to Choice maintaining a minimum
net worth of $40 million, at the date of the Choice Spin-off. As of December
31, 1997, Sunburst reflected a $19.9 million receivable due to Choice on its
consolidated balance sheet plus other accounts payable to Choice of
approximately $5.1 million. In 1998, net payments of approximately $8 million
were paid in cash to Choice. On December 28, 1998, Sunburst and Choice amended
the Strategic Alliance Agreement (defined below). As part of that amendment,
Choice exchanged the remaining $17 million balance in return for, among other
things, the termination of Sunburst's option for the exclusive rights to the
MainStay Suites brand and an intention to build a total of 25 MainStay Suites.
Strategic Alliance Agreement
At the time of the Choice Spin-off, Choice and Sunburst entered into a
Strategic Alliance Agreement pursuant to which: (i) Sunburst granted a right
of first refusal to Choice to franchise any lodging property that Sunburst
develops or acquires and intends to operate under franchise; (ii) Sunburst has
also agreed, barring a material change in market conditions, to continue to
develop Sleep Inns and MainStay Suites hotels so that it will have opened a
total of 14 Sleep Inns and 15 MainStay Suites hotels by October 15, 2001 (48
months of the Distribution Date); (iii) Choice has granted 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) Choice and Sunburst have agreed to continue to cooperate with
respect to matters of mutual interest, including new product and concept
testing for Choice in hotels owned by Sunburst; and (v) Sunburst has
authorized Choice to negotiate with third party vendors on Sunburst's behalf
for the purchase of certain items. The Strategic Alliance Agreement extends
for a term of 20 years. Either party has the right to terminate the Strategic
Alliance Agreement on its fifth, tenth, and fifteenth anniversaries.
On December 28, 1998, Choice and Sunburst amended the Strategic Alliance
Agreement to: (i) cancel Sunburst's option to acquire the MainStay Suites
system; (ii) with respect to franchise agreements, cap termination damages at
$100,000 and eliminate termination damages on hotels Sunburst sells; (iii)
change Sunburst's development obligations to 13 Sleep Inns and 25 MainStay
Suites by October 15, 2001; and (iv) provide certain other global amendments
to Sunburst's franchise agreements.
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Amendment and Guaranty
In connection with the Choice Spin-off, Choice entered into the Amendment
and Guaranty for the purpose of adding Choice as a party to certain agreements
entered into between Sunburst and Manor Care in connection with the Manor Care
Spin-off and adding Choice as a guarantor of certain payment obligations of
Sunburst to Manor Care pursuant to agreements between Sunburst and Manor Care.
For a discussion of the Amendment and Guaranty, see "Certain Relationships and
Related Transactions--Relationship with Manor Care."
Term Note
In connection with the Choice Spin-off, Choice loaned to Sunburst
approximately $115 million which was used by Sunburst to repay approximately
$96 million outstanding under Choice's credit facility and to repay that
portion of Choice's indebtedness under a note to Manor Care allocated to
Choice and Sunburst in connection with the Manor Care Spin-off (approximately
$37 million).
This loan is represented by a Term Note in an aggregate principal amount of
$115 million (the "Term Note"). The Term Note has a maturity of five years and
accrues interest at a rate equal to 500 basis points above the interest rate
on a 5-year U.S. Treasury Note. The Term Note is subordinated to all senior
debt of Sunburst and contains certain restrictive covenants comparable to
those contained in Sunburst's senior credit facility (including restrictions
on Sunburst's ability to make certain investments, incur debt, pay dividends,
dispose of assets and create liens on its assets).
Corporate Services Agreement
Sunburst and Choice entered into a Corporate Service Agreement which
provides that Choice will provide to Sunburst certain corporate support
services, including human resources, accounting, tax and computer systems
support, and Sunburst will provide to Choice certain services including asset
management and accounts payable processing. As of March 31, 1999, all services
provided by either party under the Corporate Services Agreement, except for
human resources and tax services provided by Choice, were terminated. During
fiscal year 1998, Choice paid Sunburst $168,660 and Sunburst paid Choice
$1,664,750 for services under the Corporate Services Agreement.
Consulting Agreement
Sunburst and Choice entered into a Consulting Agreement in which Sunburst
will provide consulting and advisory services to Choice related to financial
issues affecting Choice. The term of the agreement commences October 15, 1997
and terminates on November 1, 2001. Sunburst is entitled to an annual retainer
fee equal to 30% of the annual compensation (including base salary, incentive
bonus and fringe benefits) paid to James A. MacCutcheon by Sunburst during
such period. If Mr. MacCutcheon ceases to be employed by Sunburst, the
agreement can be terminated by either party, but if terminated by Choice, then
Choice shall pay Sunburst a termination fee equal to 30% of any amount due by
Sunburst to Mr. MacCutcheon under his employment agreement as a result of his
separation. During fiscal year 1998, Choice paid Sunburst $116,268 pursuant to
the Consulting Agreement.
Tax Sharing Agreement
Choice and Sunburst have entered into a Tax Sharing Agreement for purposes
of allocating tax liabilities of Former Choice from before the Choice Spin-off
among Choice and Sunburst and their respective subsidiaries. In general,
Sunburst will be responsible for (i) filing consolidated federal income tax
returns for Sunburst affiliated group and combined or consolidated state tax
returns for any group that includes a member of Sunburst affiliated group,
including in each case Choice 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
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authorities (including any subsequent adjustments resulting from the
redetermination of such tax liabilities by the applicable taxing authorities).
Choice will reimburse Sunburst for the portion of such taxes that relates to
Choice and its subsidiaries, as determined based on their hypothetical
separate Sunburst income tax liabilities. Choice and Sunburst 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
In connection with the Choice Spin-off, Choice and Sunburst entered 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 Choice Spin-off of
employee benefits, as they relate to employees who remained employed by
Sunburst or its subsidiaries ("Sunburst Employees") after the Spin-off and
employees who are employed by Choice or its subsidiaries after the Spin-off
("Choice Employees"). Pursuant to the Employee Benefits Allocation Agreement,
Sunburst will continue sponsorship of the various Sunburst profit sharing
plans, stock plans and health and welfare plans with respect to Sunburst
Employees. Choice has established a number of plans which allow it to provide
to its employees substantially the same benefits currently provided to them as
employees of Sunburst. The Employee Benefits Allocation Agreement provides for
cross-guarantees between Choice and Sunburst with respect to the payment of
benefits under certain plans and for cross-indemnification with respect to
employment-related claim relating to prior to the Choice Spin-off.
The Employee Benefits Allocation Agreement also provided for the adjustment
of outstanding options to purchase shares of Sunburst common stock held by
Sunburst Employees, Choice Employees and employees of Manor Care who held such
options as a result of the Manor Care Spin-off.
Transitional Service Agreements
Choice and Sunburst have entered into a number of agreements pursuant to
which Choice provides, or 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. The primary transitional services agreements are
summarized below.
Pursuant to the Employee Benefits Administration Agreement, Choice provides
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, Choice provides certain sales, use, occupancy, and
personal property tax return administration, audit and appeals services for
Sunburst.
Franchise Agreements
The Clarion, Comfort, Econo Lodge, Sleep Inn, Quality, MainStay Suites and
Rodeway marks are each owned by Choice. Each hotel property owned by Sunburst
is subject to a franchise agreement between Choice and Sunburst, as franchisee
(the "Franchise Agreements"). (The material terms of such agreements are
described below.) Total fees paid to Choice for franchising, royalty,
marketing and reservation fees for fiscal year 1998 were $11.2 million.
Term
Each Franchise Agreement has an initial term of 20 years, except the
agreement for the Rodeway Inn in 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.
In addition, all franchise agreements allow for early
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termination by Sunburst, subject to liquidated damage provisions which range
from zero dollars to a maximum of $100,000 per property.
Termination by Sunburst
Sunburst (except with respect to one property as described below) may
terminate a Franchise Agreement if Choice defaults on its material obligations
under such Franchise Agreement and fails to cure such defaults within 30 days
following written notice. Sunburst may also terminate a Franchise Agreement on
any hotel it sells without paying Choice for any future damages.
Termination by Choice
Choice 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. Choice may terminate a Franchise
Agreement immediately upon notice to Sunburst if, among other things, (a)
certain bankruptcy events occur with respect to Sunburst; (b) Sunburst loses
possession or the right to possession of the Property; (c) Sunburst breaches
transfer restrictions in the related Franchise Agreement; (d) any action is
taken to dissolve or liquidate Sunburst; or (e) there is a threat or danger to
the public health and safety in the continued operation of the Property.
Fees
The Franchise Agreements require the payment of certain fees and charges,
including the following: (a) a royalty fee of between 1.93% to 5.0% of monthly
gross room revenues; (b) a marketing fee of between 0.7% and 2.5% plus $0.28
per day multiplied by the specified room count; and (c) a reservation fee of
0.88% to 1.75% of monthly gross room revenues (or 1% of monthly gross room
revenues plus $1.00 per room confirmed through Choice's reservation system).
The marketing fee and the reservation fee are subject to reasonable increases
during the term of the franchise if Choice raises such fees uniformly among
all its franchisees, generally. Late payments (i) will be a breach of the
Franchise Agreement and (ii) will accrue interest from the date of delinquency
at a rate of 1.5% per month or portion thereof.
In December 1998, Sunburst and Choice entered into an amendment which
provided that (i) Sunburst shall pay an application fee of $20,000 on all
future MainStay Suites franchise agreements, and (ii) no royalties, marketing
or reservation fees shall be payable for a period of two years for the next
ten MainStay Suites franchise agreements entered into after the amendment.
Certain Covenants
The Franchise Agreements impose certain affirmative obligations upon Choice
including: (a) to lend the Franchisee 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 Choice's rules and regulations for
properly running the specified franchise; (c) to prepare monthly financial and
other records; (d) to not interfere with the franchised mark(s) and Choice'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 Choice except that, among other things, certain percentages of
ownership interests in Sunburst may be transferred without Choice's consent.
Choice'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 Choice; (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.
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Choice 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 Choice to
absolve itself from the obligations that it transfers under the Franchise
Agreement. Upon the assignment of Choice's obligations under the Non-Standard
Franchise Agreement, Choice will no longer be liable with respect to the
obligations it so transfers.
Noncompetition Agreement
Choice and Sunburst have entered into a non-competition agreement that
defines the rights and obligations with respect to certain businesses to be
operated by Choice and Sunburst. Under the non-competition agreement, for a
period of five years from the date of the Spin-off, subject to the exceptions
set forth below, Sunburst will be prohibited from conducting any business that
competes with the business operated by Choice (the "Choice Business").
Sunburst will also be prohibited from acquiring any entity conducting a
business that competes with the Choice Business, with certain exceptions
outlined below, unless, prior to such acquisition, Sunburst offers to sell
such competing business to Choice on substantially the same terms and
conditions; provided, however, that Sunburst will not be required to make such
an offer to Choice where the competing business is not readily divisible from
other businesses permitted to be held or acquired by Sunburst and the gross
sales from such competing business for the 12 months prior to such acquisition
do not exceed the greater of $1,000,000 (as adjusted for increases to the
Consumer Price Index during the term) or 5% of gross sales of the businesses
to be acquired. Subject to the foregoing, however, the non-competition
agreement does not prohibit Sunburst from engaging in the following
activities: (i) the continued operation and development of any business
operated as of the date of the Spin-off by Sunburst and retained by Sunburst;
(ii) any activities otherwise permitted under the Strategic Alliance
Agreement; (iii) the ownership of up to 5% of the equity interests of a
publicly-traded entity that competes with Choice's business; and (iv) the
ownership of equity interests of any entity that competes with Choice's
business, if (A) the competing business does not comprise such entity's
primary business, (B) the gross sales of such entity for the prior 12 months
attributable to such competing business does not exceed 20% of such entity's
consolidated gross sales, and (C) neither the fair market value of, nor the
value, if any, attributed by the acquisition agreement to, the competing
business is in excess of $5,000,000 (as adjusted for increases to the Consumer
Price Index during the term).
During the term of the non-competition agreement, subject to the exceptions
set forth below, Choice will be prohibited from conducting any business that
competes with the business operated by Sunburst and retained by Sunburst in
the Spin-off (the "Hotel Business"). Choice is also prohibited from acquiring
any entity conducting a business that competes with the Hotel Business, with
certain exceptions outlined below, unless, prior to such acquisition, Choice
offers to sell such competing business to Sunburst on substantially the same
terms and conditions; provided, however, that Choice will not be required to
make such an offer to Sunburst where the competing business is not readily
divisible from other business permitted to be held or acquired by Choice and
the gross revenues from such competing business for the 12 months prior to
such acquisition do not exceed the greater of $1,000,000 (as adjusted for
increases to the Consumer Price Index during the term) or 5% of gross sales of
the businesses to be acquired. Subject to the foregoing, however, the non-
competition agreement will not prohibit Choice from the following activities,
(i) continued operation and development of any business operated as of the
date of the Spin-off by Choice, (ii) any activities otherwise permitted under
the Strategic Alliance Agreement, (iii) the ownership of up to 5% of the
equity interests of a publicly-traded entity that competes with the Hotel
Business, and (iv) the ownership of equity interests of any entity that
competes with the Hotel Business, if (A) the competing business does not
comprise such entity's primary business, (B) the gross revenue of such entity
for the prior 12 months attributable to such competing business does not
exceed 20% of such entity's consolidated gross sales, and (C) neither the fair
market value of, nor the value, if any, attributed by the acquisition
agreement to, the competing business is in excess of $5,000,000 (as adjusted
for increases to the Consumer Price Index during the term).
Potential Conflict
The ongoing relationship between Choice and Sunburst resulting from the
agreements and arrangements described above may potentially give rise to
conflict of interest between Choice and Sunburst. With respect to
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the agreements between the parties, the potential exists for disagreements as
to the quality of the services provided by the parties and as to contract
compliance. Nevertheless, Sunburst believes that there will be sufficient
commonality of interest between the two companies to result in a mutually
productive relationship.
Stewart Bainum, Jr. serves as Chairman of the Boards of Directors of both
Sunburst and Choice. As a result of the Choice Spin-off, Mr. Bainum, Jr. and
certain other officers and directors of Sunburst and Choice, own shares and/or
options or other right to acquire shares in each of Sunburst and Choice.
Appropriate policies and procedures are followed by the Boards of Directors of
Choice and Sunburst to limit the involvement of the overlapping directors
(and, if appropriate, relevant officers of such companies) in conflict
situations, including requiring them to abstain from voting as directors of
either Choice or Sunburst on certain matters which present a conflict between
the two companies.
Relationship With Independent Public Accountants
Since 1996, Arthur Andersen LLP has served as Sunburst's independent public
accounting firm. It is expected that representatives of Arthur Andersen will
be present at the annual meeting. They will be given an opportunity to make a
statement if they desire to do so, and it is expected that they will be
available to respond to appropriate questions.
Other Relationships
During the twelve-months ended December 31, 1998, Sunburst paid to Allen &
Company Incorporated a total of $12,350 in brokerage commissions in connection
with the repurchase of Sunburst common stock by Sunburst. Paul A. Gould, a
director of Sunburst, is a Managing Director of Allen & Company. From January
1, 1999 through April 13, 1999, an additional $13,360.35 was paid to Allen &
Company in brokerage commissions for such stock repurchases.
MISCELLANEOUS ADMINISTRATIVE MATTERS
Procedures for Stockholder Proposals and Nominations
Under Sunburst's Bylaws, nominations for director may be made only by the
Board of Directors or a committee of the board, or by a stockholder entitled
to vote who has delivered notice to Sunburst not less than 60, nor more than
90, days before the first anniversary of the preceding year's annual meeting,
unless the meeting is advanced by more than 30 days. The deadline for
submitting stockholder nominations for the 2000 Sunburst annual meeting is
March 10, 2000.
The Bylaws also provide that no business may be brought before an annual
meeting except as specified in the notice of meeting (which includes
stockholder proposals that Sunburst is required to set forth in its proxy
statement under Commission Rule 14a-8) or as otherwise brought before the
meeting by or at the direction of the board or by a stockholder entitled to
vote who has delivered notice to Sunburst (containing certain information
specified in the Bylaws) within the time limits described above for a
nomination for the election of a director. These requirements are separate and
apart from, and in addition to, the Commission's requirements that a
stockholder must comply with in order to have a stockholder proposal included
in Sunburst's proxy statement under Commission Rule 14a-8.
Stockholder Proposals for 2000 Annual Meeting
Stockholder proposals intended to be presented at Sunburst's 2000 Annual
Meeting of Stockholders must be received by Sunburst's Corporate Secretary no
later than March 10, 2000. Such proposals must meet the requirements set forth
in the rules and regulations of the Commission in order to be eligible for
inclusion in Sunburst's 2000 proxy materials.
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Other Matters to Come Before the Meeting
The Board of Directors does not know of any matters which will be brought
before the 1999 annual meeting other than those specifically set forth in the
notice of meeting. If any other matters are properly introduced at the meeting
for consideration, including, among other things, consideration of a motion to
adjourn the meeting to another time or place, the individuals named on the
enclose proxy card will have discretion to vote in accordance with their best
judgment.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act") requires Sunburst's reporting officers and directors, and
persons who own more than ten percent of Sunburst's common stock, to file
reports of ownership and changes in ownership on Forms 3, 4 and 5 with the
Securities and Exchange Commission (the "Commission"), the New York Stock
Exchange and Sunburst. Sunburst believes that all of its reporting officers,
directors and greater than ten percent beneficial owners complied with all
filing requirements applicable to them during the fiscal year ended December
31, 1998.
By Order Of The Board of Directors
-------------------------------------
Douglas H. Verner, Secretary
Silver Spring, Maryland
May 10, 1999
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Dear Stockholder:
PROXY STATEMENT AND ANNUAL REPORT
Enclosed is the Sunburst Proxy Statement and Annual Report. As part of our
continuing efforts to reduce overhead costs, we have decided to distribute to
stockholders a copy of the Annual Report on Form 10K as filed with the
Securities and Exchange Commission in lieu of a traditional, "glossy" and
costly annual report. We did this last year and received favorable comments
from stockholders.
You will find below summary comments on the lodging industry and capital
markets, Sunburst's year in review, and its future.
THE INDUSTRY AND CAPITAL MARKETS
The lodging industry posted record results for calendar year 1998 with
almost $20 billion in profits, up almost 12% from 1997. While the lodging
industry reported healthy increases in revenues per available room and record
profits, the capital markets took note early in the year of increased new
hotel construction. We then witnessed a rapid decline in stock price
valuations for all lodging companies. The lodging industry also experienced a
significant tightening in overall credit and a number of major hotel
developers, including Sunburst, announced plans to reduce or curtail new hotel
development. If there is good news in all of this, it is that the capital
markets reacted quickly to a perceived over-building situation and we are now
seeing a meaningful decline in new hotel construction starts. After two years
of significant increases in new supply, this should bode well for the supply
and demand relationship in the year 2000 and beyond.
While the performance of a handful of large cap stocks have pushed the Dow
Jones Industrial Average up almost 15% in a year and past the mythical 10,000
level, small cap stocks remain clearly out of favor. In fact, the Russell 2000
small cap stock index is down 17% in the past 12 months. At the moment,
Sunburst is a small cap lodging stock and lodging is one of the stock market's
least favored industries. Lodging stocks as of the date of this letter are
trading at the low end of historical multiple ranges and the average lodging
stock is about 40% lower than it was a year ago. Many hotels stocks are
trading at 50%--80% discounts from year-earlier levels.
Some Wall Street analysts are, however now predicting that lodging stocks
will outperform the market over the next two years as the effect of reduced
construction starts is realized. As for the market's preference for large cap
stocks at the expense of small cap valuations, there are a variety of
predictions as to if and when that valuation gap will be narrowed. Only time
will tell!
So, how do we take advantage of the market's current aversion to small cap
lodging stocks? I am pleased to report that in September, 1998, our Board of
Directors authorized a 2.5 million share repurchase program. Upon completion
of that program, each remaining stockholder's interest in the company will
have increased by more than 12%. Through the date of this letter, we have
purchased in excess of one million shares on the open market. Given the
currently distressed level of our stock, we believe this is an excellent use
of our capital and we intend to continue our share repurchase program in 1999.
10770 Columbia Pike . Silver Spring, MD 20901-4448 . 301-592-3800 . Fax: 301-
592-3830
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SUNBURST'S YEAR IN REVIEW
Sunburst's 1998 revenues increased 13.3% to $204.1 million. More
impressively, the gross operating profit generated by those hotels increased a
full 16% to $72.2 million and recurring domestic EBITDA (earnings before
interest taxes, depreciation and amortization), increased 17% to $58.3
million. Basic earnings per share from continuing operations increased 12.5%
to $0.18 in 1998.
While capital markets tend to paint industries with a broad brush, it is
never quite that simple. The fact of the matter is that when new hotels open,
the hotels that suffer are the less competitive hotels in over-supplied
markets. At Sunburst, we pride ourselves in reacting to and taking advantage
of the opportunities created by the cyclical nature of our industry. In
anticipation of significant new supply in certain markets, we began a program
of reallocating capital, by selling older hotels in the most "at risk" markets
and redeploying the proceeds into fresh, new hotels in attractive markets.
During 1998, we sold two hotels and in 1999 have already sold two more hotels.
As of the date of this letter, we have five hotels under contract to sell with
anticipated closings within the next three months.
The "broad brush" approach to industry analysis also ignores the reality
that not all market or niches have the same supply and demand relationship. As
we reported last year, we believe that the most attractive niche within the
lodging industry is the mid-priced, extended stay segment, where demand
significantly exceeds supply by as much as two to one as estimated by
PriceWaterhouseCoopers. Through December 31, 1998, we have opened fifteen mid-
priced extended stay hotels. These are all new construction and are branded
MainStay Suites (a brochure is enclosed). As of January 1, we had an
additional six MainStay Suites hotels under construction all of which will
open in 1999 or early 2000. This does represent a reduction from the
development plan outlined last year wherein we stated a development objective
of 15+ new properties per year. While we will continue to pursue the best
development projects, we are being more cautious in light of the current
capital market situation.
Our operating focus during the year concentrated on improving the
performance of our core portfolio of hotels, ramping up newly opened hotels
and aggressively streamlining our corporate overhead. Our success with hotel
operations is evidenced by the increased operating margins and profits. On the
overhead front, we eliminated 30 corporate level positions and established the
objective of reducing corporate overhead to approximately 5% of sales in 1999,
as compared to 6.8% in 1998. As of the date of this letter, we are on target
to reach that goal.
During 1998, we also restructured our strategic alliance with our franchise
partner, Choice Hotels, to, among other things, provide Sunburst with greater
flexibility in the termination of franchise agreements for properties sold.
This amendment to our Strategic Alliance Agreement also resolved some
outstanding financial issues related to the 1997 Choice/Sunburst spin-off and
its net result was a meaningful improvement in the Sunburst debt to equity
ratio.
SUNBURST'S FUTURE
Going forward, Sunburst will create value for our guests by providing
superior service in fresh, well maintained hotels. Sunburst will also create
value for our associates with effective training and rewarding opportunities
and Sunburst will seek to create long-term value for our shareholders by
striving to improve profit margins, cash flows, earnings per share and returns
on capital. We have a history of creating value for shareholders, customers
and associates and we intend to continue doing that, as we professionally and
effectively manage our portfolio of hotels and grow our expertise in the
exciting extended stay segment of the industry.
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In closing, I want to formally thank Fred Malek who is stepping down this
year as a Director. Fred has been a valued member of the Sunburst Board of
Directors and served on the Manor Care Board for many years. While Fred's
lodging industry experience and his uncanny ability to consistently find the
right answer will be missed, we are fortunate to have identified another
lodging industry veteran, Lee Pillsbury, to succeed him.
To our Board of Directors, our Shareholders, and the Sunburst associates who
serve our guests, we thank you for all of your support. To show our
appreciation and to experience our enthusiasm for our new extended stay
product, MainStay Suites, we invite you to come stay with us. Please call,
write or e-mail lauren [email protected] and we will send you a
certificate for one free night at any one of our MainStay Suites. We also
invite you to visit our website at www.sunbursthospitality.com for more
information on Sunburst and as a vehicle to share your comments about our
products.
At your service,
Donald J. Landry
Chief Executive Officer
3
<PAGE>
SUNBURST HOSPITALITY CORPORATION
10770 Columbia Pike, Silver Spring, Maryland 20901
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 16, 1999
The undersigned hereby appoints CAROLE Y. PREST and CHRISTINE A. SHREVE, and
each of them, the true and lawful attorneys and proxies, with full power of
substitution, to attend the Annual Meeting of Shareholders of Sunburst
Hospitality Corporation (the "Company"} to be held on June 16, 1999 at 10:00
a.m. in the Roosvelt Room located at the Quality Hotel, 1190 North Courthouse
Road, Arlington, Virginia and at any adjournment thereof, and to vote all shares
of common stock held of record which the undersigned could vote, with all the
powers the undersigned would possess if personally present at such meeting, as
designated below.
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 Item 1, such proxies will
be voted in accordance with the Board of Directors' recommendations as set forth
herein with respect to such proposal(s).
.FOLD AND DETACH HERE.
SUNBURST HOSPITALITY CORPORATION ANNUAL MEETING, JUNE 16, 1999 AT 10:00 A.M.
DIRECTIONS TO QUALITY HOTEL COURTHOUSE PLAZA
1200 NORTH COURTHOUSE ROAD
ARLINGTON, VIRGINIA 22201
(703) 524-4000 (Ask for extension 5555 for automated directions)
From Points North
Take I-95 South to I-495 West towards Northern Virginia to
Route 50 (Arlington Blvd) East Go approximately 8 miles To
North Courthouse Road Exit (left exit)
Points South
Take I-95 North To I-395 North To
Washington Blvd/Columbia Pike Exit #8A Go approximately 1 1/2 miles To
Route 50 (Arlington Blvd) East Go approximately 1 mile To
North Courthouse Road Exit (left exit)
Points West
I-81 North or South to I-66 East To
Lee Highway/Spout Run Exit #72
Turn Right at the Light Onto Lee Highway
Go through 5 Traffic Lights and Turn Right Onto North Veitch Street
Go Through Two Traffic Lights and Turn Right Onto North Courthouse Road
From National Airport
Take the George Washington Memorial Parkway (North) To
Route 50 (Arlington Blvd) West
Go Approximately 1 Mile to
North Courthouse Road Exit
From Dulles Airport
Take the Dulles Access Road To
Route 66 East To
Lee Highway/Spout Run Exit #72
Turn Right at the Light Onto Lee Highway
Go through 5 Traffic Lights and Turn Right Onto North Veitch Street
Go Through Two Traffic Lights and Turn Right Onto North Courthouse Road
From BWI Airport
BWI Parkway South Towards Washington to
I-495 West Towards Northern Virginia To
U.S. Route 50 (Arlington Blvd) East
Go Approximately 7 Miles to North Courthouse Road Exit (Left Exit)
<PAGE>
Mark ballot per
this example [X]
<TABLE>
<CAPTION>
(1) Election of two Directors: NOMINEES: DONALD J. LANDRY and LELAND C. PILLSBURY
<S> <C> <C>
FOR all nominees WITHHOLD (Instructions: to withhold authority to vote for any individual nominee,
listed to the right AUTHORITY write that nominee's name in the space provided below.)
(except as marked to vote for all nominees
to the contrary) listed to the right
[_] [_] ----------------------------------------------------------------------
</TABLE>
If you plan to attend the Annual Meeting of Shareholders, please mark the
following box and promptly return this Proxy Card. [_]
Signature Signature Date
--------------------- -------------------- -----------
(Signatures should correspond exactly with the name or names appearing above.
Attorneys, trustees, executors, administrators, guardians and others signing in
a representative capacity should designate their full titles. If the signer is a
corporation, please sign the full corporate name by a duly authorized officer.)
. FOLD AND DETACH HERE .
