<PAGE>
SCHEDULE 14A INFORMATION
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 Section 240.14a-11(c) or Section 240.14a-12
Choice Hotels International, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Choice Hotels International, Inc.
- --------------------------------------------------------------------------------
(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:
-------------------------------------------------------------------------
(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:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] 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:
-------------------------------------------------------------------------
(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:
<PAGE>
LOGO
CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MARYLAND 20901
----------------
NOTICE OF ANNUAL MEETING
TO BE HELD APRIL 29, 1998
----------------
To the Stockholders of
CHOICE HOTELS INTERNATIONAL, INC.
The 1998 Annual Meeting of Stockholders (the "Annual Meeting") of Choice
Hotels International, Inc., a Delaware corporation (the "Company"), will be
held at the Quality Suites Shady Grove, 3 Research Court, Rockville, Maryland
at 9:00 a.m. (E.S.T.) for the following purposes:
1. To elect three Class I directors to hold office for a three year term
ending at the 2001 Annual Meeting of Stockholders and until their
successors are elected and qualified;
2. To transact such other business as may properly come before the Annual
Meeting.
Holders of record of Choice Hotels common stock at the close of business on
March 12, 1998 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 Choice Hotels 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 the Company
located at the address above, at least 10 days prior to the Annual Meeting.
By Order of the Board of Directors
CHOICE HOTELS INTERNATIONAL, INC.
LOGO
Michael J. DeSantis
Secretary
March 30, 1998
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>
LOGO
----------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
APRIL 29, 1998
----------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Choice Hotels International, Inc. a
Delaware corporation ("Choice Hotels" or the "Company"), for use at the 1998
Annual Meeting of Stockholders of the Company to be held at 9:00 a.m. (E.S.T.)
on April 29, 1998, at the Quality Suites Shady Grove, 3 Research Court,
Rockville, Maryland and at any adjournment(s) or postponement(s) thereof (the
"Annual Meeting"). It is anticipated that this Proxy Statement and proxy will
first be mailed to the Company's stockholders on or about March 30, 1998.
The Company's Annual Report (including certified financial statements) for
the seven months ended December 31, 1997, is accompanying this Proxy
Statement. The Annual Report is not part of the proxy solicitation material.
Background of Spinoffs; Change In Fiscal Year
Prior to becoming a separate, publicly-held company on October 15, 1997
pursuant to the Spinoff (as defined below), the Company was named Choice
Hotels Franchising, Inc. and was a wholly-owned subsidiary of Choice Hotels
International, Inc. ("Former Choice"). On October 15, 1997, Former Choice
distributed to its stockholders its hotel franchising business (which had
previously been conducted primarily by the Company) and its European hotel
ownership business pursuant to a pro rata distribution to its stockholders of
all of the stock of the Company (the "Spinoff"). At the time of the Spinoff,
the Company changed its name to "Choice Hotels International, Inc.," and
Former Choice changed its name to "Sunburst Hospitality Corporation." For
purposes of this Proxy Statement, references to the Company's former parent
corporation pior to the Spinoff are to "Former Choice," and references to such
corporation after the Spinoff are to "Sunburst."
Prior to November 1996, Former Choice was a subsidiary of Manor Care, Inc.
("Manor Care") which, directly and through its subsidiaries, engaged in the
hotel franchising business currently conducted by the Company as well as the
ownership and management of hotels (together with the hotel franchising
business, the "Lodging Business") and the health care business. On November 1,
1996, Manor Care separated the Lodging Business from its health care business
through a pro rata distribution to the holders of Manor Care's common stock of
all of the stock of Former Choice (the "Former Choice Spinoff"). In connection
with the Former Choice Spinoff, the Company became a wholly-owned subsidiary
of Former Choice and remained as such until consummation of the Spinoff.
In September 1997, the Company changed its fiscal year end from May 31 to
December 31.
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.
1
<PAGE>
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 Choice Hotels common
stock will be voted as recommended by the directors: "FOR" the election of the
three nominees for director named on the proxy card. Abstentions marked on the
proxy card have the effect of being 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 the Company (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 Company
common stock and delivering it to the Transfer Agent at or before the Annual
Meeting, or (iii) attending the Annual Meeting and voting in person (although
attendance at the Annual Meeting will not, in and of itself, constitute a
revocation of a proxy). Any written notice revoking a proxy should be sent to
ChaseMellon Shareholder Services, L.L.C., Overpeck Centre, 85 Challenger Road,
Ridgefield Park, New Jersey, 07660.
Votes Required
The close of business on March 12, 1998 has been fixed as the record date
for determination of holders of Company Common Stock entitled to notice of and
to vote at the Annual Meeting. On that date, there were outstanding and
entitled to vote 59,741,072 shares of Company common stock. The presence,
either in person or by proxy, of persons entitled to cast a majority of such
votes constitutes a quorum for the transaction of business at the Annual
Meeting. 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 Choice Hotels common stock for a beneficial owner
does not vote on a particular item and has not received instructions from the
beneficial owner.
Stockholders are entitled to one vote per share on all matters submitted for
consideration at the Annual Meeting. With regard to the election of directors,
votes may be cast in favor of or withheld from nominees. Votes that are
withheld will be excluded entirely from the vote and will have no effect.
Abstentions may be specified on all proposals other than the election of
directors. Each proposal is tabulated separately. Abstentions are counted in
tabulations of the votes cast on proposals presented to the stockholders,
whereas broker non-votes are not counted for purposes of determining whether a
proposal has been approved.
The affirmative vote of a plurality of shares of Company common stock
present in person or represented by proxy at the Annual Meeting is required to
elect the directors nominated. "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 partnerships,
corporations and trusts established by members of the Bainum family) in the
aggregate have the right to vote approximately 34.11% of the number of
outstanding shares of Company common stock and have indicated an intention to
vote in accordance with the recommendations of the Board of Directors with
respect to the election of directors.
Solicitation of Proxies
The Company will bear the cost of the solicitation. In addition to
solicitation by mail, the Company will request banks, brokers and other
custodian nominees and fiduciaries to supply proxy material to the beneficial
owners of Company common stock of whom they have knowledge, and will reimburse
them for their expenses in so doing; and certain directors, officers and other
employees of the Company, not specially employed for the purpose, may solicit
proxies, without additional remuneration therefor, by personal interview,
mail, telephone or telefax.
2
<PAGE>
Relationship With Independent Public Accountants
Since 1980, Arthur Andersen LLP has served as the Company'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.
Procedures for Stockholder Proposals and Nominations
Under the Company'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 the Company not less than 60, nor more
than 90, days before the first anniversary of the preceding year's annual
meeting.
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 the Company is required to set forth in its proxy
statement under SEC 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 the Company (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 SEC's requirements that a stockholder must comply with in
order to have a stockholder proposal included in the Company's proxy statement
under SEC Rule 14a-8.
Stockholder Proposals for 1999 Annual Meeting
Stockholder proposals intended to be presented at the Company's 1999 Annual
Meeting of Stockholders must be received by the Company's Corporate Secretary
no later than February 28, 1999. Such proposals must meet the requirements set
forth in the rules and regulations of the SEC in order to be eligible for
inclusion in the Company's 1999 proxy materials.
Other Matters to Come Before the Meeting
The Board of Directors does not know of any matters which will be brought
before the 1998 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 the Company's reporting officers and directors, and
persons who own more than ten percent of the Company'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 the Company. Based solely on the Company's review of the forms
filed with the Commission and written representations from reporting persons
that they were not required to file Form 5 for certain specified years, the
Company 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 year ended December 31, 1997.
3
<PAGE>
ELECTION OF CLASS I 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 I will be elected
at the annual meeting to serve for a term expiring at the Company's annual
meeting in the year 2001. The directors in Classes II and III are serving
terms expiring at the Company's annual Meeting of Stockholders in 1999 and
2000, respectively.
Prior to the Spinoff, the Company's Board of Directors consisted of William
R. Floyd, Donald J. Landry and James A. MacCutcheon. In anticipation of the
Spinoff, the Company's board expanded its size from three to nine members, as
permitted under the Bylaws of the Company. Effective as of October 15, 1997,
Messrs. Landry and MacCutcheon resigned from the Company's board and Former
Choice, acting as the Company's sole stockholder, elected eight new directors
to the Company's board, including the three nominees for director. The
nominees have served continuously on the board since that time.
The Company's Board of Directors has proposed the following nominees for
election as directors at the annual meeting:
NOMINEES FOR CLASS I DIRECTORS
WITH TERMS EXPIRING AT THE ANNUAL MEETING IN THE YEAR 2001:
Stewart Bainum
Gerald W. Petitt
Jerry E. Robertson
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.
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 I--Nominees for Terms Expiring in 2001
STEWART BAINUM, 78, Vice Chairman of the Board of Manor Care and
subsidiaries since March 1987; Chairman of the Board of Manor Care from August
1981 to March 1987, Chief Executive Officer from July 1985 to March 1987,
President from May 1982 to July 1985; Chairman of the Board of ManorCare
Health Services, Inc. ("MCHS") from 1968 to March 1987 and a Director since
1968; Director of Vitalink from September 1991 to September 1994; Chairman of
the Board of the Company from 1972 to March 1987 and a Director from 1963 to
November 1996 and since October 1997; Chairman of the Board of Realty
Investment Company, Inc. since 1965; Director of Sunburst since November 1996.
GERALD W. PETITT, 52, President and Chief Executive Officer of Creative
Hotel Associates LLC since November 1996; Co-Chairman of the Company from
January 1995 to November 1996 and a Director from December 1980 to November
1996 and since October 1997; President from June 1990 to January 1995 and
Chief Operating Officer from December 1980 to January 1995; Director of Former
Choice from November 1996 to October 1997; Director, Old Westbury Private
Capital Fund LLC.
4
<PAGE>
JERRY E. ROBERTSON, PH.D., 65, Retired; Executive Vice President, 3M Life
Sciences Sector and Corporate Services from November 1986 to March 1994;
Director of the Company from 1989 to November 1996 and since October 1997;
Director: Manor Care, Allianz Life Insurance Company of North America,
Cardinal, Inc., Coherent, Inc., Haemonetics Corporation, Medwave, Inc.,
Project Hope and Steris Corporation.
DIRECTORS WHOSE TERM OF OFFICE CONTINUE
Class II--Term Expires in 1999
STEWART BAINUM, JR., 51, Chairman of the Board of the Company from March
1987 to November 1996 and since October 1997; Chairman of the Board of
Sunburst since November 1996; Chairman of the Board and Chief Executive
Officer of Manor Care and MCHS since March 1987; Chief Executive Officer of
Manor Care since March 1987 and President since June 1989; Vice Chairman of
the Board of Vitalink Pharmacy Services, Inc. ("Vitalink") since December
1994; Vice Chairman of the Board of Manor Care and subsidiaries from June 1982
to March 1987; Director of Manor Care since August 1981, of Vitalink since
September 1991, of MCHS since 1976 and of the Company since 1977; Chief
Executive Officer of MCHS since June 1989 and President from May 1990 to May
1991; Chairman of the Board and Chief Executive Officer of Vitalink from
September 1991 to February 1995 and President and Chief Executive Officer from
March 1987 to September 1991.
WILLIAM R. FLOYD, 53, Chief Executive Officer of the Company since October
1997, Chief Executive Officer of Former Choice from October 1996 to October
1997; President of the Company since November 1997; Chief Operating Officer of
Taco Bell Corp. (a subsidiary of PepsiCo) from July 1995 to October 1996,
Chief Operating Officer of KFC (a subsidiary of PepsiCo) from August 1994 to
July 1995; National Vice President of Taco Bell Company Operations from July
1992 to August 1994, Vice President of Taco Bell Eastern Operations from
December 1990 to January 1992; Director, Friendly Hotels PLC since 1996.
JAMES H. REMPE, 67, Senior Vice President, General Counsel and Secretary of
Manor Care since August 1981 and of the Company from February 1981 to November
1996; Director of the Company since October 1997; Director: In Home Health
Inc. and Vitalink Pharmacy Services, Inc.
Class III--Terms Expire 2000
BARBARA BAINUM, 53, President, Secretary and Director of the Commonweal
Foundation since December 1990, December 1984 and December 1994, respectively;
Secretary and Director of Realty Investment Company, Inc. since July 1989 and
March 1982, respectively; Family Services Agency, Gaithersburg, Maryland,
Clinical Social Work since September 1994; Department of Social Services,
Rockville, Maryland, Social Work Case Management from September 1992 to May
1993; member of the Boards of Trustees of Columbia Union College (September
1987 to May 1991) and Atlantic Union College (September 1985 to May 1987);
Director of the Company since October 1997 and of Former Choice from November
1996 to October 1997.
ROBERT C HAZARD, JR., 62, Chairman of Creative Hotel Associates LLC since
November 1996; Co-Chairman of the Company from January 1995 to November 1996
and a Director from December 1980 to November 1996 and since October 1997;
Chairman from June 1990 to January 1995 and Chief Executive Officer from
December 1980 to January 1995; President from December 1980 to June 1990;
Director of Former Choice from November 1996 to October 1997. Director:
Outrigger Enterprises and United States National Tourism Organization, Inc..
FREDERIC V MALEK, 61, Chairman of Thayer Capital Partners since March 1993;
Co-Chairman of CB Commercial Real Estate Group, Inc. from April 1989 to
October 1996; Campaign Manager for Bush-Quayle '92 from January 1992 to
November 1992; Vice Chairman of NWA, Inc. (airlines), July 1990 to December
1991; Director of the Company from 1990 to November 1996 and since October
1997; Director: Manor Care, Sunburst, American Management Systems, Inc.,
Automatic Data Processing Corp., CB Commercial Real Estate Group, Inc., FPL
Group, Inc. (an affiliate of Florida Power and Light-power company), Northwest
Airlines and various Paine Webber mutual funds.
5
<PAGE>
THE BOARD OF DIRECTORS
At the time of the Spinoff, Barbara Bainum, Jerry E. Robertson, Robert C.
Hazard, Jr., Gerald W. Petitt and William R. Floyd resigned from the Board of
Directors of Former Choice and were elected, along with James H. Rempe, to the
Board of Directors of the Company. Stewart Bainum, Jr., Stewart Bainum and
Frederic V. Malek remained on the Board of Directors of Former Choice (now
Sunburst) and were also elected to the Board of Directors of the Company.
The Board of Directors is responsible for overseeing the overall performance
of the Company. Members of the board are kept informed of the Company's
business through discussions with the Chairman, the Chief Executive Officer
and other members of the Company's management, by reviewing materials provided
to them and by participating in board and committee meetings. From October 15,
1997 (the date the Spinoff was consummated), the Board of Directors has
consisted of nine directors, four of whom were not present or past officers of
the Company. From October 15, 1997 to December 31, 1997, the Board of
Directors held one meeting and each director attended the meeting of the Board
of Directors and all of the committees of the Board of Directors on which such
director served.
COMMITTEES OF THE BOARD
The standing committees of the Board of Directors include the Audit
Committee, the Compensation/Key Executive Stock Option Plan Committee and the
Compensation/Key Executive Stock Option Plan Committee No. 2. At the January
27, 1998 Board Meeting, the Nominating Committee was abolished and the
Nominating and Corporate Governance Committee was established. The current
members of the standing committees are as follows:
<TABLE>
<S> <C>
COMPENSATION/KEY EXECUTIVE STOCK OPTION NOMINATING AND CORPORATE
PLAN COMMITTEE GOVERNANCE COMMITTEE
Jerry E. Robertson, Chair Gerald W. Petitt, Chair
Stewart Bainum Jerry E. Robertson
Frederic V. Malek Frederic V. Malek
Barbara Bainum Robert C. Hazard, Jr.
COMPENSATION/KEY EXECUTIVE STOCK OPTION AUDIT COMMITTEE
PLAN COMMITTEE NO. 2
Jerry E. Robertson, Chair Frederic V. Malek, Chair
Frederic V. Malek Jerry E. Robertson
Barbara Bainum Gerald W. Petitt
</TABLE>
The Compensation/Key Executive Stock Option Plan Committees administer the
Company'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 period from October 15, 1997 to December 31, 1997.
6
<PAGE>
The Nominating and Corporate Governance Committee is responsible for
administering the Choice Hotels Corporate Governance Guidelines, 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 the company's policies regarding
the conduct of business between the company and any other entity affiliated
with a director and determining the compensation of non-employee directors.
The Corporate Governance Guidelines are a set of principles which provide a
benchmark of what is "good" corporate governance. The main tenets of the
Guidelines are:
. Create value for shareholders by promoting their interests
. Focus on the future: formulate and evaluate corporate strategies
. Duty of loyalty to the Company by Directors
. Annual CEO evaluation by independent directors
. Annual approval of 3-year plan and one-year operating plan
. Annual assessment of Board effectiveness by Nominating/Governance
Committee
. No interlocking directorships
. Directors are required to reach and maintain ownership of $100,000 of
Company stock
. Annual report of succession planning and management development by CEO
The Nominating and Corporate Governance Committee was established in January,
1998 and therefore held no meetings in the twelve month period ended December
31, 1997.
The Audit Committee reviews the scope and results of the annual audit,
reviews and approves the services and related fees of the Company's
independent public accountants, reviews the Company's internal accounting
controls and reviews the Company's Internal Audit Department and its
activities.
COMPENSATION OF DIRECTORS
The Company has adopted the Choice Hotels International, Inc. Non-Employee
Director Stock Option and Deferred Compensation Stock Purchase Plan. Part A of
the Plan provides that eligible non-employee directors are granted options to
purchase 5,000 shares of the Company's common stock on their first date of
election and are granted options to purchase 1,000 shares on their date of
election in subsequent calendar years. Part B of the Plan provides that
eligible non-employee directors may elect, prior to May 31 of each year, to
defer a minimum of 25% of committee fees earned during the ensuing fiscal
year. The fees which are so deferred will be used to purchase the Company'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. In connection with the
Spinoff, the Board of Directors determined that Barbara Bainum, Jerry E.
Robertson, Robert C. Hazard, Jr. and Gerald W. Petitt would forego the initial
grant of 5,000 options under Part A of the plan in exchange for the continued
vesting of options granted under the identical plan of Former Choice which
otherwise would have lapsed upon their resignation from the Board of Directors
of Former Choice.
Pursuant to the Non-Employee Director Stock Compensation Plan adopted by the
Company, eligible non-employee directors will receive annually, in lieu of
cash, restricted shares of the Company'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 and
are reimbursed for travel expenses and other out-of-pocket expenses.
Directors who are employees of the Company receive no separate remuneration
for their services as directors.
7
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the amount of the Company's common stock
beneficially owned by (i) each director of the Company, (ii) the Company's
chief executive officer and the other four most highly compensated executive
officers (the "Named Officers"), (iii) all officers and directors of the
Company as a group and (iv) all persons who are expected to own beneficially
more than 5% of the Company's common stock, as of March 12, 1998, the Record
Date. Unless otherwise specified, the address for each of them is 10750
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. ......................... 16,041,777(2) 26.69%
Stewart Bainum............................... 10,194,595(3) 17.17%
Barbara Bainum............................... 5,521,754(4) 9.24%
Michael J. DeSantis.......................... 900 *
William R. Floyd............................. 153,873(5) *
Robert C. Hazard, Jr. ....................... 41,187(6) *
Frederic V. Malek............................ 8,443(7) *
Thomas Mirgon................................ 8,990(8) *
Gerald W. Petitt............................. 87,240(9) *
James H. Rempe............................... 177,808(10) *
Jerry E. Robertson, Ph.D. ................... 24,074(11) *
Barry L. Smith............................... 21,641(12) *
Rodney Sibley (13)........................... 41,733(14) *
All Directors and Officers as a Group (13
persons).................................... 20,908,946(15) 34.98%
Bruce Bainum................................. 5,512,302(16) 9.16%
Ronald Baron................................. 19,712,033(17) 26.23%
</TABLE>
- --------
* Less than 1% of class.
(1) Percentages are based on 59,741,072 shares outstanding on March 12, 1998
(the "Record Date") plus, for each person, the shares which would be
issued assuming that such person exercises all options it holds which are
exercisable on such date or become exercisable within 60 days thereafter.
(2) Includes 549,152 shares owned directly by the Stewart Bainum, Jr.
Declaration of Trust dated March 13, 1996, the sole trustee and
beneficiary of which is the reporting person. Also includes 5,417,761
shares owned by Bainum Associates Limited Partnership ("Bainum
Associates") and 4,415,250 shares owned by MC Investments Limited
Partnership ("MC Investments"), in both of which Mr. Bainum, Jr. is
managing general partner with the sole right to dispose of the shares;
3,567,869 shares held directly by Realty Investment Company, Inc.
("Realty"), a real estate management and investment company in which Mr.
Bainum, Jr. has shared voting authority; 1,779,628 shares owned by Mid
Pines Associates Limited Partnership ("Mid Pines"), in which Mr. Bainum,
Jr. is managing general partner and has shared voting authority and 300
shares owned by the Foundation for Maryland's Future, in which Mr.
Bainum, Jr. is the sole director. Also includes 311,669 shares which Mr.
Bainum, Jr. has the right to acquire pursuant to stock options which are
presently exercisable or which become exercisable within 60 days after
the Record Date, and 148 shares which Mr. Bainum, Jr. has the right to
receive upon termination of his employment with the Company pursuant to
the terms of the Choice Hotels International, Inc. Non-Qualified
Retirement Savings and Investment Plan ("Non- Qualified Savings Plan").
(3) Includes 3,907,226 shares held directly by the Stewart Bainum Declaration
of Trust, of which Mr. Bainum is the sole trustee and beneficiary, his
joint interest in 847,379 shares owned by Bainum Associates and 995,663
shares owned by MC Investments, each of which is a limited partnership in
which Mr. Bainum has joint ownership with his wife as a limited partner
and as such has the right to acquire at any time a number of shares equal
in value to the liquidation preference of their limited partnership
interests; 3,567,869 shares held directly by Realty, in which Mr. Bainum
and his wife have shared voting authority; and 70,305 shares held by the
Commonwealth Foundation of which Mr. Bainum is Chairman of the Board of
Directors and has shared voting authority. Also includes 798,711 shares
held by the Jane L. Bainum Declaration of Trust, the sole trustee and
beneficiary of which is Mr. Bainum's wife, and 3,666 shares which Mr.
Bainum has the right to acquire pursuant to stock options which are
presently exercisable or which become exercisable within 60 days after
the Record Date. Also includes 3,776 shares of restricted stock granted
by the issuer to Mr. Bainum under the Choice Hotels International, Inc.
Non-Employee Director Stock Compensation Plan (the "Non-Employee Director
Stock Compensation Plan") which are not vested but which Mr. Bainum has
the right to vote.
8
<PAGE>
(4) Includes 101,697 shares owned directly by Ms. Bainum. Also includes
1,779,628 shares owned by Mid Pines, in which Ms. Bainum's trust is a
general partner and has shared voting authority, 3,567,869 shares owned
by Realty, in which Ms. Bainum's trust has voting stock and shares voting
authority and 70,305 shares owned by the Commonwealth Foundation, in
which Ms. Bainum is President and Director and has shared voting
authority. Also includes 2,255 shares of restricted stock issued to Ms.
Bainum which shares are not vested, but which Ms. Bainum has the right to
vote.
(5) Includes 28,950 shares held directly and 56,980 shares of restricted
shares granted pursuant to Mr. Floyd's employment agreement which are not
yet vested, but which Mr. Floyd has the right to vote. Also includes
68,303 shares which Mr. Floyd has the right to acquire pursuant to stock
options which are currently exercisable or become exercisable within 60
days of the Record Date.
(6) Includes 38,404 shares owned directly by Mr. Hazard; 2,255 restricted
shares granted under the Non-Employee Director Stock Compensation Plan,
which are not yet vested, but which Mr. Hazard has the right to vote, and
113 and 415 shares, respectively, which Mr. Hazard has the right to
receive upon termination of his employment pursuant to the terms of the
Choice Hotels International, Inc. Retirement Savings and Investment Plan
("401(k) Plan") and the Non-Qualified Savings Plan.
(7) Includes 1,000 shares owed directly; 3,667 shares which Mr. Malek has the
right to acquire pursuant to stock options which are presently
exercisable or exercisable within 60 days of the Record Date and 3,776
restricted shares granted under the Non-Employer Director Stock
Compensation Plan which are not vested, but which Mr. Malek has the right
to vote.
(8) Consists of shares which Mr. Mirgon has the right to receive pursuant to
stock options which are currently exercisable or exercisable within 60
days of the Record Date.
(9) Includes 76,324 shares held directly by Mr. Petitt and 8,661 shares held
in trust for minor children for which Mr. Petitt is trustee. Beneficial
ownership of such shares is disclaimed. Also includes 2,255 restricted
shares granted under the Non-Employee Director Stock Compensation Plan
which are not yet vested, but which Mr. Petitt has the right to vote.
(10) Includes 126,144 shares which Mr. Rempe has the right to acquire
pursuant to stock options which are presently exercisable or exercisable
within 60 days of the Record Date. Also includes 993 restricted shares
granted under the Non-Employee Director Stock Corporation Plan which are
not yet vested, but which Mr. Rempe has the right to vote.
(11) Includes 948 shares held directly by Mr. Robertson and 15,500 shares
owned by the JJ Robertson Limited Partnership, of which Mr. Robertson and
his wife are the general partners with shared voting authority and 2,783
restricted shares granted under the Non-Employee Director Stock
Compensation Plan which are not yet vested, but which Mr. Robertson has
the right to vote. Also includes 4,029 shares which Mr. Robertson has the
right to acquire pursuant to stock options which are presently
exercisable or exercisable within 60 days of the Record Date and 814
shares acquired pursuant to the Choice Hotels International, Inc. Non-
Employee Director Stock Option and Deferred Compensation Stock Purchase
Plan.
(12) Includes 20,827 shares which Mr. Smith has the right to acquire pursuant
to stock options which are presently exercisable or exercisable within 60
days of the Record Date and 254 shares and 555 shares, respectively which
Mr. Smith has the right to receive upon termination of his employment
pursuant to the terms of the 401(k) Plan and the Non-Qualified Savings
Plan.
(13) Mr. Sibley's employment with the Company was terminated in November 1997.
(14) Includes 27,031 shares held directly by Mr. Sibley and 14,702 shares
which Mr. Sibley has the right to acquire pursuant to stock options which
are presently exercisable or exercisable within 60 days of the Record
Date.
(15) Includes a total of 730,779 shares which the officers and directors
included in the group have the right to acquire pursuant to stock options
which are presently exercisable, or exercisable within 60 days of the
Record Date, and a total of 1,994 shares and 3,528 shares, respectively,
which such directors and officers have the right to receive upon
termination of their employment with the Company pursuant to the terms of
the 401 (k) Plan and the Non-Qualified Savings Plan.
(16) Includes 94,500 shares owned directly by Mr. Bainum. Also includes
1,779,628 shares owned by Mid Pines, in which Mr. Bainum is a general
partner and has shared voting authority, 3,567,869 shares owned by Realty
in which Mr. Bainum's trust has voting stock and shares voting authority
and 70,305 shares owned by the Commonwealth Foundation, in which Mr.
Bainum is a Director and has shared voting authority. Mr. Bainum's
address is 8737 Colesville Road, Suite 800, Silver Spring, Maryland,
20910.
(17) As of February 3, 1998 based on a Schedule 13-D, as amended, filed by Mr.
Baron with the Securities and Exchange Commission (the "Commission"). Mr.
Baron's address is 450 Park Avenue, Suite 2800, New York, New York 10022.
Pursuant to a letter agreement dated February 4, 1998 between the
Company, Mr. Baron and entities under the control of Mr. Baron (together
with Mr. Baron, the "Baron Entities"), each Baron Entity covenanted not
to (i) acquire any additional shares of stock or security convertible
into stock of the Company; (ii) take any action or participate in any
transaction which may constitute an event of default under the Existing
Credit Facility or (iii) seek representation on the Board of Directors of
the Company.
9
<PAGE>
THE FOLLOWING COMPENSATION COMMITTEE REPORT AND THE PERFORMANCE GRAPH THAT
APPEARS IMMEDIATELY AFTER SUCH REPORT SHALL NOT BE DEEMED TO BE SOLICITING
MATERIAL OR TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 OR INCORPORATED
BY REFERENCE IN ANY DOCUMENT SO FILED.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
There are currently two compensation committees for the Company, the
Compensation/Key Executive Stock Option Plan Committee and the
Compensation/Key Executive Stock Option Plan Committee No. 2 ("Committee No.
2") (collectively, the "Committee"). The role of Committee No. 2, which is
comprised of "outside directors" as defined in Section 162(m)(3) of the Code,
is to approve awards under the 1997 Long-Term Incentive Plan to the Chief
Executive Officer and the Named Officers defined below. The current members of
the Committee, Messrs. Robertson (Chairman), Bainum (not a member of Committee
No. 2), Malek and Ms. Bainum, were appointed effective November 21, 1997.
As a wholly-owned subsidiary of Former Choice prior to the Spinoff, most of
the decisions and actions pertaining to the executive officers of the Company
for the year ended December 31, 1997 were either approved by the Compensation
Committee of the board of Former Choice or by an executive officer of Former
Choice. However, the current members of the Company's Compensation Committee
were also members of Former Choice's Compensation Committee during the period
from January 1, 1997 to October 15, 1997.
The following philosophy and principles have been set forth as a framework
within which the Committee will operate.
COMPENSATION COMMITTEE PHILOSOPHY AND GUIDING PRINCIPLES
. Attract and retain talented management;
. Closely align management's interests and actions with those of
shareholders through the establishment of appropriate award vehicles;
. Reward employees for enhancing shareholder value through sustained
improvement in earnings per share;
. Position base pay at market so that the Company can vary total
compensation costs with financial results by means of variable pay; and
. Recognize the concept that executive officers individually, and as a
group, should have a significant ownership stake in the Company.
EXECUTIVE COMPENSATION POLICIES
Compensation Levels
The Committee relates total compensation levels for the Company's executive
officers to the total compensation paid to similarly situated executives based
on various independently published compensation surveys, primarily conducted
and evaluated by independent consultants. Summary data on companies of similar
size in the service sector are used as the primary comparison and companies in
the hotel industry are used as a secondary comparison. Total compensation is
targeted to approximate the median of the competitive market data and
comparison companies. However, because of the performance-oriented nature of
the incentive programs, total compensation may exceed market norms when the
Company's targeted performance goals are exceeded. Similarly, total
compensation may lag the market when performance goals are not achieved.
Compensation for the executive officers, other than the Chief Executive
Officer, was set in June 1997, prior to the Spinoff. For the twelve months
ended December 31, 1997, compensation for the President and Chief Executive
Officer was slightly below the median while compensation for all of the other
executive officers, as a group, was at or above the median.
10
<PAGE>
One of the comparison companies, LaQuinta Hotel Corporation, was not
included as part of the Peer Group Index (defined below) for the performance
graph, see "Performance Graph", because it is solely an owner and manager of
hotels and has no franchise operations. It was included as a comparison
company for compensation purposes because such comparison was done before the
Spinoff.
Policy with Respect to Qualifying Compensation for Deductibility
The Company's policy with respect to the deductibility limit of Section
162(m) of the Internal Revenue Code generally is to preserve the federal
income tax deductibility of compensation paid when it is appropriate and is in
the best interests of the Company and its stockholders. However, the Company
reserves the right to authorize the payment of nondeductible compensation if
it deems that is appropriate. In connection with William R. Floyd's employment
agreement, Mr. Floyd was granted 85,470 non-performance based restricted
shares of Company Common Stock which vest in three equal annual installments
beginning November 4, 1997. Additionally, the employment agreement provides
for options to purchase 207,693 shares of Company Common Stock which were
granted outside of the 1996 Incentive Plan and which vest in five equal
monthly installments beginning November 4, 1997. Upon the exercise of such
options by Mr. Floyd during any fiscal year, his gain (the difference between
the fair market value on the date of exercise and the exercise price) will be
included in calculating the compensation for that fiscal year for which the
federal income tax deduction is disallowed. The Committee intends to monitor
the Company's compensation programs with respect to such laws.
Annual Compensation
The base salary pay practice as previously adopted by the Former Choice
Compensation Committee is to target compensation 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.
Because the Company was previously on a May 31 fiscal year end, annual merit
adjustments for the executive officers affecting compensation paid in the
twelve months ended December 31, 1997 were set in July 1996 and June 1997.
With the change in fiscal year to December 31, annual merit reviews will occur
in February commencing in 1998.
Awards under the annual cash bonus program for the fiscal year ended May 31,
1997 were based on certain performance measurements, which were based 60% on
achieving targeted gross operating profits, 20% on licensee/customer
satisfaction goals and 20% on RevPAR. For the this period, actual performance
exceeded the measurement goals for each component. For the seven months ended
December 31, 1997, the Committee revised the performance measurements to focus
heavily on management's responsibility to deliver earnings per share based on
earnings per share from continuing operations at established annual targets.
For executive officers other than the Chief Executive Officer, the proposal
also includes specific performance objectives directly accountable to the
executive officer. These performance objectives, where applicable, could
include licensee/customer satisfaction and RevPAR and would incorporate each
executive officer's accountability for the successful execution of key
initiatives tied to achievement of the Company's strategic plan. For the seven
month period ended December 31, 1997, the awards under the annual cash bonus
program were based 75% on achieving increased earnings per share and 25% on
achieving performance objectives. For this period, actual performance exceeded
the goals for earnings per share.
Long-Term Incentives
The Company will award long-term incentives under the 1997 Incentive Plan.
The plan gives the Compensation Committee the latitude of awarding Incentive
Stock Options, non-qualified stock options, restricted stock, and other types
of long-term incentive awards. The recommended awards were developed by
analyzing peer group average market data and the Company's past practice. The
Compensation Committee reviewed and approved a Stock Option Guide Chart for
the Company's executives which had previously been used by Former Choice. The
Stock Option Guide Chart utilized a market based salary multiple to establish
a competitive range of stock options from which executive awards could be
determined.
11
<PAGE>
Compensation of the Chief Executive Officer
Mr. Floyd's base salary is established by his rights under his employment
agreement, approved by the Former Choice Compensation Committee and ratified
by the Compensation Committee. The base salary is
reviewed each year by the Committee and is subject to merit increases based
primarily on his achievement of performance objectives and the comparison to
competitive market data and the comparison companies. The performance
objectives vary from year to year but in general relate to such matters as
positioning the Company for growth, achieving the Company's strategic plan and
other various financial goals. Although no specific weights are assigned to
any particular objective, a greater emphasis is placed on corporate and
personal performance than on competitive practices within the industry. In
September 1997, the Former Choice Compensation Committee approved a 5% merit
increase to Mr. Floyd's base salary.
Under the annual cash bonus program, Mr. Floyd has the potential to be
awarded up to 60% of his base salary if bonus objectives are achieved. Unlike
the other executive officers, Mr. Floyd's bonus objectives are tied 100% to
earning per share. For the fiscal year ended May 31, 1997 and the seven month
period ended December 31, 1997, actual performance exceeded the goals for
earnings per share.
THE COMPENSATION COMMITTEE
Jerry E. Robertson, Chairman
Stewart Bainum (not a member of Committee No. 2)
Frederic V. Malek
Barbara Bainum
12
<PAGE>
PERFORMANCE GRAPH
The following graph compares the performance of Choice common stock with the
performance of the New York Stock Exchange Composite Index ("NYSE Composite
Index") and a peer group index (the "Peer Group Index") by measuring the
changes in common stock prices from October 16, 1997, plus assumed reinvested
dividends. The Commission's rules require that the Company 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, the Company
has selected a peer group that includes companies which are actively traded on
the New York Stock Exchange and the NASDAQ Stock Market and which are in the
franchising and/or hospitality industry. The common stock of the following
companies have been included in the Peer Group Index: Prime Hospitality
Corporation, Marriott International, Inc., Promus Hotel Corporation, HFS, Inc.
and Hilton Hotels Corp. On Decenmber 18, 1997, HFS, Inc. was merged into
Cendant Corporation and its stock was delisted.
The graph assumes that $100 was invested on October 16, 1997, in each of
Choice common stock, the NYSE Composite Index and the Peer Group Index, and
that all dividends were reinvested. In addition, the graph weighs the
constituent companies on the basis of their respective capitalization,
measured at the beginning of each relevant time period.
COMPARISON OF CUMULATIVE RETURN
AMONG CHOICE HOTELS, NYSE COMPOSITE INDEX AND PEER GROUP
[GRAPH APPEARS HERE]
[PLOT POINTS FOR GRAPH}
OCTOBER 10, OCTOBER 31, NOVEMBER 28, DECEMBER 31,
1997 1997 1997 1997
----------- ----------- ------------ ------------
CHOICE HOTELS 100 103.3 102.6 94.1
NYSE COMPOSITE INDEX 100 95.1 98.9 101.5
PEER GROUP 100 94.2 94.8 100.6
13
<PAGE>
EXECUTIVE COMPENSATION
Compensation received by the Named Officers prior to consummation of the
Former Choice Spinoff was paid by Manor Care. Compensation received by the
Named Officers after the Former Choice Spinoff, but prior to the Spinoff, was
paid by Former Choice. Compensation received by the Choice Named Officers
after the Spinoff was paid by the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1) LONG-TERM COMPENSATION
----------------- --------------------------
RESTRICTED
NAME AND PRINCIPAL FISCAL STOCK STOCK OPTION ALL OTHER
POSITION YEAR(1) SALARY BONUS OTHER AWARDS($) SHARES(#)(2) COMPENSATION(3)
------------------ ------- -------- -------- -------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(4).. 1997A $148,310 $ 47,683 (5) -- -- --
Chairman 1997B 656,357 388,520 (5) -- 60,000(6) --
1996 625,102 337,555 (5) -- 60,000(7) $ 33,543
William R. Floyd(8)..... 1997A 437,260 267,233 $139,403(9) -- 65,000(10) --
President and Chief 1997B 270,373 146,001 107,833(11) $250,000(12) 307,693(13) --
Executive Officer 1996 -- -- -- -- -- --
Barry L. Smith.......... 1997A 254,231 108,000 (5) -- 37,900(14) 11,086
Sr. Vice President, 1997B 240,000 108,000 (5) -- 25,000(15) 11,086
Marketing Officer 1996 233,650 116,820 (5) -- 5,000(16) 10,427
Thomas Mirgon(17)....... 1997A 188,423 51,315 $169,624(18) -- 7,100(19) --
Senior Vice President, 1997B 58,477 26,315 (5) -- 40,000(20) --
Human Resources and 1996 -- -- -- -- -- --
Partner Services
Michael J. DeSantis
(21)................... 1997A 122,870 19,204 (5) -- 40,000(22) --
President 1997B 99,530 3,477 -- -- --
1996 35,625 -- -- -- --
Rodney Sibley (23)...... 1997A 308,970 139,105 31,382(24) -- 47,400(25) 177,329(26)
1997B 309,123 139,105 (5) -- 30,000(27) 27,329
1996 423,858 -- (5) -- -- 27,329
</TABLE>
- -------
(1) On September 16, 1997, the Company 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") and the fiscal year ended May
31, 1996 ("1996"). Summary compensation data paid to the Named Officers
during the period between January 1, 1997 and May 31, 1997 are reflected
in each of the 1997A and 1997B periods.
(2) For Messrs. Bainum, Jr., Smith and Sibley, the grants in fiscal years
1997B and 1996 represent options to purchase shares of Manor Care common
stock. In connection with the Former Choice Spinoff, the options to
purchase Manor Care common stock were converted, in some cases 100%, to
options to purchase Former Choice common stock. For Messrs. Floyd and
Mirgon 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
Former Choice common stock. In connection with the Spinoff, the options
to purchase Former Choice common stock were converted to successor
options to purchase Company common stock and Sunburst common stock. In
all cases, however, the exercise prices were adjusted to maintain the
same financial value to the option holder before and after the Former
Choice Spinoff and the Spinoff.
(3) Represents amounts contributed by Manor Care for 1996, Former Choice for
1997B and Former Choice/Sunburst for 1997A 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 Former Choice during 1997B and
1997A under the 401(k) Plan and Non-qualified Savings Plan, respectively,
for the Named Offices were as follows: Mr. Smith, $3,696 and $7,390 and
Mr. Sibley, $9,000 and $18,329.
(4) For part of 1997B and all of 1996, Mr. Bainum, Jr. was the Chairman and
Chief Executive Officer of Manor Care and Former Choice. In November,
1996, he resigned as Chief Executive Officer of Former Choice. The
compensation reflected for 1997B and 1996 is the total compensation
received for services rendered to both Manor Care and Former Choice. For
the period between January 1, 1997 and October 15, 1997, the amount of
compensation paid solely by Former Choice was $132,533 for base salary
and $47,683 for bonus. From October 15, 1997 to December 31, 1997 the
amount of compensation paid solely by the Company was $15,777 for the
period between October 16, 1997 and December 31, 1997.
(5) 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.
14
<PAGE>
(6) In connection with the Spinoff, these options were converted into options
to acquire 60,000 shares of Company common stock at an exercise price of
$12.1130 and 20,000 shares of Sunburst common stock at an exercise price
of $7.1894.
(7) In connection with the Spinoff, these options were converted into options
to acquire 60,000 shares of Company common stock at an exercise price of
$9.2807 and 20,000 shares of Sunburst common stock at an exercise price
of $5.5083.
(8) Mr. Floyd's employment as Chief Executive Officer of Former Choice and
the Company commenced October 16, 1996.
(9) Consists of $127,703 in relocation expenses (including $107,831 reported
under 1997B) and $11,700 in automobile allowance.
(10) In connection with the Spinoff, these options were converted into options
to purchase 71,631 shares of Company common stock at an exercise price of
$16.488 and 10,833 shares of Sunburst common stock at an exercise price
of $9.786.
(11) Consists of relocation expenses.
(12) Represents a grant of 85,470 restricted shares of Former Choice common
stock granted on November 4, 1996. The shares vest in three equal annual
installments beginning on November 4, 1997. The restricted shares are
entitled to dividends and in connection with the Spinoff, Mr. Floyd
received 85,470 shares of Company common stock as a dividend on such
shares of Former Choice common stock, of which 56,980 remain unvested.
(13) In connection with the Spinoff, these options were converted into options
to purchase 341,515 shares of Company common stock at an exercise price
of $12.2095 and 45,584 shares of Sunburst common stock at an exercise
price of $7.2466.
(14) In connection with the Spinoff, these options were converted into options
to purchase 42,586 shares of Company common stock at an exercise price of
$13.2008 and 4,738 shares of Sunburst common stock at an exercise price
of $7.835.
(15) In connection with the Former Choice Spinoff and the Spinoff, these
options were converted into options to acquire 77,624 shares of Company
common stock at an exercise price of $12.113 and 6,819 shares of Sunburst
common stock at an exercise price of $7.1894.
(16) In connection with the Former Choice Spinoff, these options were
converted into options to acquire 15,183 shares of Company common stock
at an exercise price of $9.2807 and 1,023 shares of Sunburst common stock
at an exercise price of $5.5083.
(17) Mr. Mirgon's employment with the Company and Former Choice commenced
March 3, 1997.
(18) Consists of $160,994 in relocation expenses and $8,630 in automobile
allowance.
(19) In connection with the Spinoff, these options were converted into options
to purchase 7,878 shares of Company common stock at an exercise price of
$13.2008 and 888 shares of Sunburst common stock at an exercise price of
$7.835.
(20) In connection with the Spinoff, these options were converted into options
to purchase 44,946 shares of Company common stock at an exercise price of
$13.0043 and 5,000 shares of Sunburst common stock at an exercise price
of $7.7421.
(21) Mr. DeSantis' employment commenced in January 1996. He was appointed
Senior Vice President, General Counsel and Secretary in June 1997.
(22) In connection with the Spinoff, these options were converted into options
to purchase 44,946 shares of Company common stock at an exercise price of
$13.2008 and 5,000 shares of Sunburst common stock at an exercise price
of $7.835.
(23) Prior to 1997A, Mr. Sibley's compensation was based on commissions. Mr.
Sibley's employment was terminated in November 1997.
(24) Consists of $29,029 in relocation expenses and $2,353 in automobile
allowance.
(25) In connection with the Spinoff, these options were converted into options
to purchase 53,261 shares of Company common stock at an exercise price of
$13.2008 and 5,925 shares of Sunburst common stock at an exercise price
of $7.835.
(26) In connection with his resignature, Mr. Sibley was paid $150,000.
(27) In connection with the Former Choice Spinoff and the Spinoff, these
options were converted into options to acquire 93,149 shares of Company
common stock at an exercise price of $12.113 and 8,182 shares of Sunburst
common stock at an exercise price of $7.1894.
15
<PAGE>
STOCK OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------
POTENTIAL REALIZABLE
VALUE OF ASSUMED RATE
PERCENTAGE OF OF STOCK PRICE
NUMBER TOTAL OPTIONS APPRECIATION FOR
OF GRANTED TO ALL EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME COMPANY* GRANTED 1997 PER SHARE DATE 10%(4)
---- -------- ------- -------------- ---------- ---------- 5%(3) -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr...... CHH 0 -- -- -- -- --
SNB 0 -- -- -- -- --
------
Total 0
William R. Floyd(5)..... CHH 71,431 (6) $ 16.488 9/16/07 740,682 1,114,066
SNB 10,833 (7) $ 9.786 9/16/07 66,670 168,955
------
Total 82,264
Barry L. Smith (5)...... CHH 42,586 (6) $13.2008 6/24/07 353,544 895,954
SNB 4,738 (7) $ 7.835 6/24/07 23,346 59,163
------
Total 47,324
Thomas Mirgon (5)....... CHH 44,946 (6) $13.0443 2/25/07 368,714 934,395
CHH 7,978 (7) $13.2008 6/24/07 66,232 167,846
SNB 5,000 (6) $ 7.7421 2/25/07 24,345 61,694
SNB 888 (7) $ 7.835 6/24/07 4,375 11,088
------
Total 58,812
Michael J. DeSantis (5). CHH 44,946 (6) $13.2008 6/24/07 373,137 945,605
SNB 5,000 (7) $ 7.835 6/24/07 24,637 62,435
------
Total 49,946
Rodney Sibley (5)....... CHH 53,261 (6) $13.2008 6/24/07(8) 442,167 1,120,542
SNB 5,925 (7) $ 7.835 6/24/07(8) 29,194 73,985
------
Total 59,186
</TABLE>
- --------
* References to CHH are to the Company and SNB are to Sunburst.
1. Options granted to the Named Officers were granted prior to the Spinoff
and were thus granted as options to purchase Former Choice common stock.
In connection with the Spinoff, these options to purchase Former Choice
common stock were converted to options to purchase Company common stock
and Sunburst common stock. In all cases, however, the exercise prices
were adjusted to maintain the same financial value to the option holder
before and after the Spinoff. The number of options set forth in the
table represent the number of Company and Sunburst options and the
adjusted exercise prices after the conversion.
2. The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and
therefore are not intended to forecast future possible appreciation, if
any, of the stock price. Since options are granted at market price, a
zero percent gain in the stock price will result in no realizable value
to the optionees.
3. A 5% per year appreciation in stock price from $16.488 per share yields
$10.3692, from $9.786 per share yields $6.1544, from $13.2008 per share
yields $8.3019, from $7.835 per share yields $4.9274, from $13.0443 per
share yields $8.2035 and from $7.7421 per share yields $4.8690.
4. A 10% per year appreciation in stock price from $16.488 per share yields
$26.2776, from $9.786 per share yields $15.5964, from $13.2008 per share
yields $21.0387, from $7.835 per share yields $12.4970, from $13.0443 per
share yields $20.7893 and from $7.7421 per share yields $12.3389.
5. The options granted to the officers vest at the rate of 20% per year on
the first through the fifth anniversaries of the date of the stock option
grant.
6. In the twelve months ended December 31, 1997, the Company only granted
options to two individuals for a total of 120,000 options granted. All
other outstanding Company options (including those listed in this table)
were issued in connection with the conversion of Former Choice options in
the Spinoff.
7. The options presented in this table are presented post-conversion from
Spinoff. Since the option grants presented in the table were granted
prior to the Spinoff conversion, the percentage of Former Choice/Sunburst
options is not presented as it would not be equivalent to the percentage
if calculated on a pre-Spinoff basis.
8. In connection with Mr. Sibley's resignation, the expiration date of these
options was changed to 7/5/01.
16
<PAGE>
AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
OPTIONS AT VALUE OF UNEXERCISED
SHARES ACQUIRED DECEMBER, 31, 1997 IN-THE-MONEY OPTIONS
ON EXERCISE VALUE EXERCISABLE UNEXERCISABLE AT DECEMBER 31, 1997(2)
--------------- REALIZED ------------------------- -------------------------
NAME COMPANY* # $ # # EXERCISABLE UNEXERCISABLE
---- -------- --------------- ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr...... CHH -- -- 303,000 157,000 $3,602,207 $1,188,693
SNB 46,500(3) $3,705,452 101,000 52,334 750,906 254,990
William R. Floyd........ CHH -- -- 68,303 334,643 258,902 1,000,752
SNB -- -- 9,117 47,300 23,963 96,815
Barry L. Smith.......... CHH 39,537(3) 156,324 68,539 168,500 727,316 1,036,330
SNB -- -- 6,135 20,988 48,467 91,205
Thomas Mirgon........... CHH -- -- 0 52,924 0 155,178
SNB -- -- 0 5,888 0 12,476
Michael J. DeSantis..... CHH -- -- 0 49,946 0 125,812
SNB 0 5,000 0 10,200
Rodney G. Sibley........ SNB -- -- 35,933 126,808 231,229 434,965
CHH -- -- 0 14,107 0 34,060
</TABLE>
- --------
* References to "CHH" are to the Company, and "SNB" are to Sunburst.
1. Options granted to the Named Officers were granted prior to the Spinoff
and were thus granted as options to purchase Former Choice Common Stock.
In connection with the Spinoff, these options to purchase Former Choice
Common Stock, were converted, to options to purchase Company common stock
and Sunburst common stock. In all cases, however, the exercise prices were
adjusted to maintain the same financial value to the option holder before
and after the Spinoff. The number of options set forth in the table
represent the number of Company and Sunburst options and the adjusted
exercise prices after the conversion.
2. The closing prices of Company common stock and Sunburst common stock as
reported by the New York Stock Exchange on December 31, 1997 were $16.00
and $9.875, respectively. The value is calculated on the basis of the
difference between the option exercise price and such closing price
multiplied by the number of shares of Company common stock or Sunburst
common stock underlying the option.
3. These exercises occurred prior to the Spinoff and therefore involved the
exercise of Former Choice options.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Stewart Bainum, Jr.,
providing for Mr. Bainum, Jr.'s employment as Chairman of the Company's Board
of Directors. The agreement has a term of three years from October 15, 1997.
Either Choice or Mr. Bainum may terminate the agreement upon 30 days' prior
written notice on the first and second anniversary dates of the agreement. The
agreement provides that Mr. Bainum, Jr. devote 12.5% of his professional time
to the Company's affairs, 12.5% of his professional time to the affairs of
Sunburst and the remaining 75% of his professional time to the affairs of
Manor Care. The agreement provides for a base salary of $82,702 per annum,
subject to adjustments, for services to the Company and a maximum bonus of 60%
of Mr. Bainum, Jr.'s base compensation based upon the performance of the
Company.
The Company assumed an employment agreement between Former Choice and
William R. Floyd. The agreement has a term of five years from October 21, 1996
and provides for a base salary of $425,000 per annum, subject to annual
adjustments and an annual bonus of up to 60% of his base compensation, based
on performance (including a customer satisfaction component). Pursuant to the
employment agreement, prior to the Spinoff, Former Choice granted to Mr. Floyd
85,470 shares of restricted Former Choice common stock and options to purchase
307,693 shares of Former Choice common stock, of which 34,188 of the options
are incentive stock options granted under the Former Choice 1996 Long Term
Incentive Plan. The remainder of the options are non-qualified stock options.
Upon assumption of the Employment Agreements by the Company, such restricted
stock and options were adjusted and converted into Company common stock and
options. Mr. Floyd's employment agreement further provides that, with respect
to Mr. Floyd's participation in the SERP (as defined below), (i) Mr. Floyd's
normal retirement age will be 62 and (ii) no minimum years of services for
benefit eligibility will be applicable.
17
<PAGE>
The Company assumed an employment agreement between Former Choice and Thomas
Mirgon. The agreement has a term of five years from March 3,1997 and provides
for a base salary of $230,000 per annum, subject to annual adjustments and an
annual bonus of up to 50% of his base compensation, based on the Company's
performance. The agreement also provides for (i) a one-time cash payment of
$50,000, payable in two equal installments: the first within 30 days of March
3, 1997 and the second within 30 days of March 3, 1998; and (ii) a grant of
30,000 non-qualified options and 10,000 incentive stock options.
The Company entered into an Employment Agreement with Donald H. Dempsey. The
agreement has a term of five years from January 12, 1998 and provides for a
base salary of $325,000 per annum, subject to annual adjustments, and an
annual bonus of up to 55% of his base compensation, based upon the Company's
performance. The agreement also provides for an award of 17,000 restricted
shares of the Company's common stock and options to acquire 100,000 shares of
the Company's common stock, both granted on January 12, 1998. The restricted
stock and stock options vest in five equal annual installments beginning on
January 12, 1999.
On December 18, 1997, the Company entered into a Consulting Agreement with
Barry L. Smith under which Smith will provide consulting services to the
Company upon his retirement. Smith will retire as Senior Vice President,
Marketing upon 45 days of a successor being appointed, but in no event later
than December 15, 1998. The initial term of the agreement shall commence on
Mr. Smith's retirement and end on December 15, 1998. At the mutual election of
the parties, the agreement shall be extended for successive one-year periods.
For the initial term, Smith shall receive a pro rata portion of an annual fee
of $265,000, depending upon the commencement of the initial term. During any
extension period, Smith shall be paid at a rate of $200 per hour. Smith agrees
that during the term of the agreement (and any extensions), he will not
compete with the Company.
On December 16, 1997, the Company and Mr. Sibley entered into an Agreement
which was effective upon Mr. Sibley's resignation from the Company on November
20, 1997. The Agreement provides for a payment to Mr. Sibley in the aggregate
amount of $150,000. The agreement also provides that Mr. Sibley's stock
options will continue to vest through July 5, 2001 and that Mr. Sibley agrees
not to compete with the Company during that period.
RETIREMENT PLANS
The Company has adopted the Choice Hotels International, Inc. Supplemental
Executive Retirement Plan (the "SERP"). Participants are Senior Vice
Presidents and other officers who report directly to the CEO.
Participants in the SERP receive a monthly benefit for life based upon final
average salary and years of service. Final average salary is the average of
the monthly base salary, excluding bonuses or commissions, earned in a 60
month period which produces the highest average out of the 120 months of
employment, prior to the first occurring of the early retirement date or the
normal retirement date. The 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, except for
Mr. Smith, are age 55 or younger, so that none of their compensation reported
above would be included in the final average salary calculation. See
"Employment Agreements" for a discussion of the terms applicable to Mr.
Floyd's participation in the SERP.
Assuming that the following officers continue to be employed by the Company
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>
Stewart Bainum, Jr. ........................ 22 38
Thomas Mirgon............................... 1 24
Barry L. Smith.............................. 8 18
Michael J. DeSantis......................... 2 28
Donald H. Dempsey........................... 0 12
</TABLE>
18
<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 October 1997, the Company established the Choice Hotels International,
Inc. 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 the Company for a twelve month period during which such employee completed
at least 1,000 hours will be eligible to participate. Subject to certain non-
discrimination requirements, each employee will be able to contribute an
amount to the 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 $10,0 00. The Company
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 the Company for the year and
the number of years of service of the participant. Amounts contributed by the
Company pursuant to its 401(k) Plan for Named Officers are included in the
Summary Compensation Table under the column headed "All Other Compensation."
The Company also adopted the Choice Hotels International, Inc. Non-Qualified
Retirement Savings and Investment Plan ("Non-Qualified Savings Plan"). Certain
select highly compensated members of management of the Company 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 the Company under its Non-
Qualified Savings Plan for fiscal year 1997 for the Named Officers are
included in the Summary Compensation Table under the column headed "All Other
Compensation."
The Company 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.
19
<PAGE>
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Creative Hotel Associates LLC is a franchisee of the Company with Sleep Inns
in Ormond Beach, Florida and Albuquerque, New Mexico and a Comfort Inn and
Suites in Carbondale, Colorado. Robert C. Hazard, Jr. is Chairman of Creative
Hotel Associates LLP and Gerald W. Petitt is the President and Chief Executive
Officer. Total payments to the Company in the twelve months ended December 31,
1997 were $66,943.
RELATIONSHIP WITH MANOR CARE
Stewart Bainum, Jr. is the Chairman of the Company's Board of Directors and
is also the Chairman of the Board of Directors of Manor Care. Additionally,
Stewart Bainum is a Director of the Company and of Manor Care and James Rempe
is a Director of the Company and Senior Vice President and General Counsel of
Manor Care. Additionally, Messrs. Bainum, Bainum Jr. and Rempe, as well as
certain other officers and directors of the Company and of Manor Care own
shares and/or options or other rights to acquire shares of each of the Company
and Manor Care.
In connection with the Spinoff, the Company, Sunburst and Manor Care entered
into an Omnibus Amendment and Guaranty Agreement (the "Amendment and
Guaranty") pursuant to which the Company (i) became a party to certain
agreements entered into between Manor Care and Former Choice at the time of
the Former Choice Spinoff, (ii) guaranteed Sunburst's payment obligations
under the Gaithersburg Lease and the Silver Spring Lease (each as defined
below), (iii) guaranteed Sunburst's payment obligations to Manor Care under an
agreement pursuant to which Manor Care provided to Former Choice/Sunburst
certain consulting services, and (iv) guaranteed Sunburst's payment
obligations under the Loan Note (the "MNR Note") in the principal amount of
$225,772,500 payable by Former Choice to MNR Finance Corp., a subsidiary of
Manor Care. For a discussion of the Gaithersburg Lease and the Silver Spring
Lease, see "Relationship with Sunburst-- Lease Agreements." All amounts due
under the MNR Note were repaid at the time of the Spinoff.
RELATIONSHIP WITH SUNBURST
In connection with the Spinoff, the Company and Sunburst entered into
certain agreements intend to govern the relationship between the parties after
the Spinoff. In addition, Sunburst is the Company's largest franchisee, with a
portfolio of 81 hotels containing 11,380 rooms located in 28 states as of
February 28, 1998. The material terms of certain of these agreements and other
arrangements, entered into between the Company and Sunburst, including the
franchise agreements with respect to Sunburst's hotels, are described below.
Distribution Agreement
In connection with the Spinoff, the Company and Sunburst entered into a
Distribution Agreement which provided for, among other things, the principal
corporate transactions required to effect the Spinoff, the assumption by the
Company of all liabilities relating to its business and the allocation between
the Company and Sunburst of certain other liabilities, certain indemnification
obligations of Sunburst and Choice and certain other agreements governing the
relationship between the Company and Sunburst with respect to or in
consequence of the Spinoff.
Subject to certain exceptions, the Company 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 the Company to perform or otherwise discharge liabilities allocated
to and assumed by the Company under the Distribution Agreement, and Sunburst
has agreed to indemnify the Company against any loss, liability or expense
incurred or suffered by the Company 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.
20
<PAGE>
To avoid adversely affecting the intended tax consequences of the Spinoff,
each of the Company 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 the
Company and Sunburst in connection with the Spinoff.
Under the Distribution Agreement, each of the Company 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 the Company and Sunburst
to obtain the consent of the other prior to waiving any shared privilege.
As of December 31, 1997, Sunburst owed the Company approximately $25
million, of which approximately $15 million represents a net equity adjustment
payment required under the Distribution Agreement. Sunburst and the Company
have agreed that Sunburst will pay this amount on or before December 31, 1998.
The remainder of the amount owed to the Company represents the reimburstment
of various expenses incurred subsequent to the Spinoff. Sunburst paid $7.5
million of this indebtedness in March, 1998.
Strategic Alliance Agreement
At the time of the Spinoff, the Company and Sunburst entered into a
Strategic Alliance Agreement pursuant to which: (i) Sunburst granted a right
of first refusal to the Company 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 from the Distribution Date); (iii) The Company 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) the Company and Sunburst have agreed to continue to
cooperate with respect to matters of mutual interest, including new product
and concept testing for the Company in hotels owned by Sunburst; and (v)
Sunburst has authorized the Company to negotiate with third party vendors on
Sunburst's behalf for the purchase of certain items. The Strategic Alliance
Agreement extends for a term of 20 years with rights of mutual termination on
the fifth, tenth and fifteenth anniversaries.
Amendment and Guaranty
In connection with the Spinoff, the Company entered into the Amendment and
Guaranty for the purpose of adding the Company as a party to certain
agreements entered into between Former Choice and Manor Care in connection
with the Former Choice Spinoff and adding the Company as a guarantor of
certain payment obligations of Sunburst to Manor Care pursuant to agreements
between Former Choice and Manor Care. For a discussion of the Amendment and
Guaranty, see "Certain Relationships and Related Transactions--Relationship
with Manor Care" and "--Lease Agreements."
Term Note
In connection with the Spinoff, the Company loaned to Sunburst approximately
$115 million which was used by Sunburst to repay approximately $96 million
outstanding under Former Choice's credit facility and to repay that portion of
the Former Choice indebtedness under the MNR Note allocated to Sunburst in
connection with the Spinoff (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).
21
<PAGE>
Consulting Agreement
The Company and Sunburst entered into a Consulting Agreement in which
Sunburst will provide consulting and advisory services to the Company related
to financial issues affecting Sunburst. The term of the agreement commences
October 15, 1997 and terminated 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 Sunburst, then the Company 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,
Tax Sharing Agreement
The Company and Sunburst have entered into a Tax Sharing Agreement for
purposes of allocating tax liabilities of Former Choice from before the
Spinoff among the Company and Sunburst and their respective subsidiaries. In
general, Sunburst will be responsible for (i) filing consolidated federal
income tax returns for the Sunburst affiliated group and combined or
consolidated state tax returns for any group that includes a member of the
Sunburst affiliated group, including in each case the Company and its
subsidiaries for the periods of time that such companies were members of the
applicable group and (ii) paying the taxes relating to such tax returns to the
applicable taxing authorities (including any subsequent adjustments resulting
from the redetermination of such tax liabilities by the applicable taxing
authorities). The Company will reimburse Sunburst for the portion of such
taxes that relates to the Company and its subsidiaries, as determined based on
their hypothetical separate company income tax liabilities. The Company 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 Spinoff, the Company 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 Spinoff of employee
benefits, as they relate to employees who remained employed by Sunburst or its
subsidiaries ("Sunburst Employees") after the Spinoff and employees who are
employed by the Company or its subsidiaries after the Spinoff ("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. The
Company 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 Former Choice. The Employee Benefits Allocation Agreement
provides for cross-guarantees between the Company 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 Spinoff.
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 hold such
options as a result of the Former Choice Spinoff. As a result of these
adjustments, the Company granted options to purchase approximately 5,222,474
shares of common stock to Choice Employees, Sunburst Employees and employees
of Manor Care.
Lease Agreements
Pursuant to the Amendment and Guaranty, the Company, Sunburst and Manor Care
have added the Company as a guarantor of Sunburst's obligations under the
Gaithersburg Lease and the Silver Spring Lease (each as defined below).
Additionally, Sunburst and Choice have enter into a sublease agreement (the
"Silver Spring Sublease") with respect to the Silver Spring Lease for the
Company's principal executive offices at 10750 Columbia Pike, Silver Spring,
Maryland, 20901. The Company subleases approximately 54.3% of the office space
available under the Silver Spring Lease with financial terms approximately
equal (on a square foot basis) to the terms of the Silver Spring Lease. From
the date of the consummation of the Spinoff through December 31, 1997, the
Company has paid to Sunburst approximately $375,000 under the Silver Spring
Sublease.
22
<PAGE>
In connection with the Former Choice Spinoff, Former Choice 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
Former Choice's principal executive offices were located (the "Silver Spring
Lease"). After the Spinoff, Sunburst remained obligated under the Silver
Spring Lease and has subleased the space at 10750 Columbia Pike to the Company
pursuant to the Silver Spring Sublease. Sunburst leases from Manor Care for a
period of 30 months certain office space (approximately 30% of the complex
initially, including the space subleased to the Company), with provisions to
allow Sunburst to use additional square footage as needed at a monthly rental
rate equal to one-twelfth of the operating expenses (as defined therein) of
the Silver Spring Complex net of third party rental income paid to Manor Care
by other tenants of the complex, less a pro rata portion of the operating
expenses attributable to the space occupied by Manor Care (initially
approximately 29% of the Silver Spring Complex). At the beginning of each
fiscal year following November 1, 1996 (the date of the Former Choice
Spinoff), Manor Care's occupancy percentage is redetermined. Operating
expenses include all of the costs associated with operating and maintaining
the complex including, without limitation, supplies and materials used to
maintain the complex, wages and salaries of employees who operate the complex,
insurance for the complex, costs of repairs and capital improvements to the
complex, the fees of the property manager (which may be Manor Care), costs and
expenses associated with leasing space at the complex and renovating space
rented to tenants, costs of environmental inspection, testing or cleanup,
principal and interest payable on indebtedness secured by mortgages against
the complex, or any portion thereof, and charges for utilities, taxes and
facilities services.
Former Choice 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 is obligated to rent from Manor Care, on
terms similar to the Silver Spring Lease, certain additional space as such
space becomes available during the 30 month period following the date of the
Former Choice Spinoff and (ii) 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.
As indicated above, in connection with the Spinoff, the Company guaranteed
Sunburst's obligations under the Gaithersburg Lease and the Silver Spring
Lease.
Transitional Service Agreements
The Company and Sunburst have entered into a number of agreements pursuant
to which the Company 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. Management believes that these agreements are based on
commercially reasonable terms including pricing and payment terms. The primary
transitional services agreements are summarized below.
Pursuant to the Employee Benefits Administration Agreement, the Company
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, the Company provides certain sales, use,
occupancy, real and personal property tax return administration, audit and
appeals services for Sunburst. Pursuant to the Vehicle Lease Agreement, the
Company provides the use of certain vehicles to 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 the Company and Sunburst, as
franchisee (the "Franchise Agreements"). (The material terms of such
agreements are described below.)
23
<PAGE>
Term
Each Franchise Agreement has an initial term of 20 years, except the
agreement for Tempe, Arizona which is a year to year agreement. The Franchise
Agreements have varying original dates, from 1982 through 1996. Certain
Franchise Agreements allow for unilateral termination by either party on the
5th, 10th, or 15th anniversary of the Franchise Agreement.
Termination by Sunburst
Sunburst (except with respect to one property as described below) may
terminate a Franchise Agreement if the Company defaults on its material
obligations under such Franchise Agreement and fails to cure such defaults
within 30 days following written notice. The Franchise Agreement with respect
to the Quality Hotel--Arlington (the "Non-Standard Franchise Agreement") does
not allow Sunburst to terminate such Franchise Agreement.
Termination by Choice
The Company (except with respect to the Non-Standard Franchise Agreement)
may suspend or terminate a Franchise Agreement at any time, if, among other
things, Sunburst (a) fails to submit reports when due; (b) fails to pay
amounts due under such Franchise Agreement; (c) fails to pay its debts
generally as they become due; or (d) receives two or more notices of default
for similar reasons for any 12 month period. The Company (except with respect
to the Non-Standard Franchise Agreement) may terminate a Franchise Agreement
immediately upon notice to Sunburst if, among other things, (a) certain
bankruptcy events occur with respect to Sunburst; (b) Sunburst loses
possession or the right to possession of the Property; (c) Sunburst breaches
transfer restrictions in the related Franchise Agreement; (d) any action is
taken to dissolve or liquidate Sunburst; or (e) there is a threat or danger to
the public health and safety in the continued operation of the Property. If a
Franchise Agreement is terminated by the Company for any of the reasons
discussed in the immediately preceding two sentences, Sunburst is required to
pay Special Interest equal to the product of (i) the average monthly gross
room revenue for the preceding 12 months, multiplied by (ii) the royalty fee
percentage (more fully described below), multiplied by (iii) the number of
months unexpired under the term of the related Franchise Agreement (in no
event less than $21-$50 multiplied by the specified room count).
The Non-Standard Franchise Agreement has termination provisions similar to
those in the other Franchise Agreements. The Company may terminate the Non-
Standard Franchise Agreement immediately upon notice to Sunburst if, among
other things, (a) certain bankruptcy events occur with respect to Sunburst;
(b) certain breaches of the related agreements are not remedied; (c) any
action is taken to dissolve or liquidate Sunburst; or (d) legal proceedings
against Sunburst are not dismissed within a certain period of time. Upon
termination, the Franchise Agreement for the Rodeway Inn-Phoenix (Tempe) calls
for Special Interest of the greater of (i) $50,000 and (ii) the sum of the
previous two years of fees paid by the licensee.
Fees
The Franchise Agreements require the payment of certain fees and charges,
including the following: (a) a royalty fee of between 1.93% to 5.0% of monthly
gross room revenues; (b) a marketing fee of between 0.7% and 2.5% plus $0.28
per day multiplied by the specified room count; and (c) a reservation fee of
0.88% to 1.75% of monthly gross room revenues (or 1% of monthly gross room
revenues plus $1.00 per room confirmed through Choice's reservation system).
The marketing fee and the reservation fee are subject to reasonable increases
during the term of the franchise if the Company raises such fees uniformly
among all its franchisees, generally. Late payments (i) will be a breach of
the Franchise Agreement and (ii) will accrue interest from the date of
delinquency at a rate of 1.5% per month or portion thereof.
Certain Covenants
The Franchise Agreements impose certain affirmative obligations upon the
Company including: (a) to lend the Franchisor an operations manual; (b) to
utilize money collected from marketing and reservation fees to promote those
aspects of the franchise business; and (c) to periodically inspect the
Property. The Franchise
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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 the Company'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 the Company'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 the Company except that, among other things, certain percentages of
ownership interests in Sunburst may be transferred without the Company's
consent. The Company'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 the Company; (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.
The Company 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 the
Company to absolve itself from the obligations that it transfers under the
Franchise Agreement. Upon the assignment of the Company's obligations under
the Non-Standard Franchise Agreement, the Company will no longer be liable
with respect to the obligations it so transfers.
Noncompetition Agreement
The Company and Sunburst have entered into a noncompetition agreement that
defines the rights and obligations with respect to certain businesses to be
operated by the Company and Sunburst. Under the noncompetition agreement, for
a period of five years from the date of the Spinoff, subject to the exceptions
set forth below, Sunburst will be prohibited from conducting any business that
competes with the business operated by Former Choice transferred to the
Company as part of the Spinoff ("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 the
Company on substantially the same terms and conditions; provided, however,
that Sunburst will not be required to make such an offer to the Company where
the competing business is not readily divisible from other businesses
permitted to be held or acquired by Sunburst and the gross sales from such
competing business for the 12 months prior to such acquisition do not exceed
the greater of $1,000,000 (as adjusted for increases to the Consumer Price
Index during the term) or 5% of gross sales of the businesses to be acquired.
Subject to the foregoing, however, the noncompetition agreement 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
Spinoff by Former Choice 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 the Company's business; and (iv) the ownership of equity
interests of any entity that competes with the Company'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 noncompetition agreement, subject to the exceptions
set forth below, the Company will be prohibited from conducting any business
that competes with the business operated by Former Choice and retained by
Sunburst in the Spinoff (the "Hotel Business"). The Company 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, the Company offers to sell such competing business to Sunburst on
substantially
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the same terms and conditions; provided, however, that the Company 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 the
Company and the gross revenues from such competing business for the 12 months
prior to such acquisition do not exceed the greater of $1,000,000 (as adjusted
for increases to the Consumer Price Index during the term) or 5% of gross
sales of the businesses to be acquired. Subject to the foregoing, however, the
noncompetition agreement will not prohibit the Company from the following
activities: (i) continued operation and development of any business operated
as of the date of the Spinoff by the Company, (ii) any activities otherwise
permitted under the Strategic Alliance Agreement, (iii) the ownership of up to
5% of the equity interests of a publicly-traded entity that competes with the
Hotel Business, (iv) the ownership of equity interests of any entity that
competes with the Hotel Business, if (A) the competing business does not
comprise such entity's primary business, (B) the gross revenue of such entity
for the prior 12 months attributable to such competing business does not
exceed 20% of such entity's consolidated gross sales, and (C) neither the fair
market value of, nor the value, if any, attributed by the acquisition
agreement to, the competing business is in excess of $5,000,000 (as adjusted
for increases to the Consumer Price Index during the term).
Potential Conflict
The ongoing relationship between the Company and Sunburst resulting from the
agreements and arrangements described above may potentially give rise to
conflict of interest between the Company and Sunburst. With respect to the
agreements between the parties, the potential exists for disagreements as to
the quality of the services provided by the parties and as to contract
compliance. Nevertheless, the Company believes that there will be sufficient
mutuality of interest between the two companies to result in a mutually
productive relationship.
In addition, Stewart Bainum Jr. serves as Chairman of the Boards of
Directors of both the Company and Sunburst. Stewart Bainum and Frederick V.
Malek each serve as a director of each of the Company and Sunburst. As a
result of the Spinoff, Messrs. Bainum, Bainum, Jr. and Malek, as well a
certain other officers and directors of the Company and of Sunburst, also own
shares and/or options or other right to acquire shares in each of the Company
and Sunburst. Appropriate polices and procedures are followed by the Board of
Directors of the Company and Sunburst to limit the involvement of the
overlapping directors (and, if appropriate, relevant officers of such
companies) in conflict situations, including requiring them to abstain from
voting as directors of either the Company or Sunburst on certain matters which
present a conflict between the two companies.
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CHOICE HOTELS INTERNATIONAL, INC.
10750 Columbia Pike, Silver Spring, Maryland 20901
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 29, 1998
The undersigned hereby appoints JERRY E. ROBERTSON and FREDERIC V. MALEK, and
each of them, the true and lawful attorneys and proxies, with full power of
substitution, to attend the Annual Meeting of Stockholders of Choice Hotels
International, Inc. (the "Company") to be held on April 29, 1998 at 9:00 a.m. in
the Ballroom located at the Quality Suites Shady Grove, 3 Research Court,
Rockville, Maryland 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' recommendation as set
forth herein with respect to such proposal(s).
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR ITEM 1.
(1) Election of two Directors: / / FOR all nominees listed below:
/ / WITHHOLD AUTHORITY to vote FOR all
nominees listed below:
STEWART BAINUM, GERALD W. PETTIT and JERRY E. ROBERTSON
(Instructions: to withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.)
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If you plan to attend the Annual Meeting of Stockholders, please mark the
following box and promptly return this Proxy Card. / /
Dated , 1998
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Signature
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Signature
(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.)
