<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
[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 Certificate)
CHOICE HOTELS INTERNATIONAL, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(4)
and 0-11.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] 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:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:/1/
4) Proposed maximum aggregate value of transaction:
5) (Set forth the amount on which the filing fee is calculated and state
how it was determined)
[_] 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.:
3) Filing Party:
4) Date Filed:
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
10750 Columbia Pike
Silver Spring, Maryland 20901
-------------------------
NOTICE OF ANNUAL MEETING
To Be Held April 29, 1999
-------------------------
To the Stockholders of
CHOICE HOTELS INTERNATIONAL, INC.
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders (the
"Annual Meeting") of Choice Hotels International, Inc., a Delaware corporation
(the "Company"), will be held on Thursday, April 29, 1999 at the Company
corporate office, 10750 Columbia Pike, Silver Spring, Maryland at 9:00 a.m.
(E.S.T.) for the following purposes:
1. To elect two Class II directors to hold office for a three year term
ending at the 2002 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 10, 1999 will be entitled to notice of, and to vote at, the Annual
Meeting or any adjournment(s) or postponement(s) thereof. Stockholders are
reminded that your shares of 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.
Michael J. DeSantis
Secretary
March 29, 1999
Silver Spring, Maryland
TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED
PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MARYLAND 20901
-------------------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
APRIL 29, 1999
-------------------------
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 1999
Annual Meeting of Stockholders of the Company to be held at 9:00 a.m. (E.S.T.)
on April 29, 1998, at its Corporate Offices, 10750 Columbia Pike, Silver
Spring, 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 29, 1999.
The Company's Annual Report (including certified financial statements) for
the fiscal year ended December 31, 1998, has been mailed separately from this
Proxy Statement. The Annual Report is not part of the proxy solicitation
material.
Voting of Proxies
Your vote is important. Shares can be voted at the Annual Meeting only if
you are present in person or represented by proxy. Even if you plan to attend
the meeting, you are urged to sign, date and return the accompanying proxy
card.
When the enclosed proxy card is properly signed, dated and returned, the
stock represented by the proxy will be voted in accordance with your
directions. You can specify your voting instructions by marking the appropriate
box on the proxy card. If your proxy card is signed and returned without
specific voting instructions, your shares of Choice Hotels common stock will be
voted as recommended by the directors: "FOR" the election of the two nominees
for director named on the proxy card. Abstentions marked on the proxy card are
voted "against" the directors' proposals but are counted in the determination
of a quorum.
You may revoke your proxy at any time before it is voted at the meeting by
(i) filing with ChaseMellon Shareholder Services, L.L.C. in its capacity as
transfer agent for 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 10, 1999 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 55,336,553 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
1
<PAGE>
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 36.72% 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.
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 II will be elected
at the Annual Meeting to serve for a term expiring at the Company's Annual
Meeting in the year 2002. The directors in Classes I and III are serving terms
expiring at the Company's annual Meeting of Stockholders in 2001 and 2000,
respectively.
The Company's Board of Directors has proposed the following nominees for
election as directors at the annual meeting:
Nominees for Class II Directors
With Terms Expiring at the Annual Meeting in the Year 2002:
Stewart Bainum, Jr.
James H. Rempe
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. Mr. Rempe will attain the age
of 70 prior to the annual meeting in 2000 and, according to the By-Laws, must
retire at the 2000 Annual Meeting. Except as set forth in the preceding
sentence, the Board of Directors knows of no reason why any of the nominees
will be unavailable or unable to serve.
2
<PAGE>
Nominees for Election as Directors
Class II -- Nominees for Terms Expiring in 2002
Stewart Bainum, Jr., 52, Chairman of the Board of the Company from March
1987 to November 1996 and since October 1997; Director of the Company since
1977; Chairman of the Board of Sunburst Hospitality Corporation ("Sunburst")
since November 1996; Chairman of the Board of HCR Manor Care, Inc. since
September, 1998; Chairman of the Board and Chief Executive Officer of Manor
Care, Inc. from March 1987 to September, 1998; Chief Executive Officer of Manor
Care and its subsidiary ManorCare Health Services, Inc. ("MCHS") from March
1987 to September, 1998 and President from June 1989 to September, 1998; Vice
Chairman of the Board of Vitalink Pharmacy Services, Inc. ("Vitalink") from
December 1994 to September, 1998; Vice Chairman of the Board of Manor Care and
subsidiaries from June 1982 to March 1987; Director of Manor Care from August
1981 to September 1998, of Vitalink from September 1991 to September, 1998, of
MCHS from 1976 to September 1998; 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.
James H. Rempe, 68, Retired, Senior Vice President, General Counsel and
Secretary of Manor Care from August 1981 to December 1998; Senior Vice
President, General Counsel and Secretary of the Company from February 1981 to
November 1996; Director of the Company since October 1997; Director of In Home
Health Inc. from October 1995 to November, 1998 and Vitalink Pharmacy Services,
Inc. from 1994 to September 1998.
Directors Whose Term of Office Continue
Class I -- Term Expires in 2000
Gerald W. Petitt, 53, 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 and Bessemer Trust Co.
Jerry E. Robertson, Ph.D., 66, 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 of Manor Care from 1989 to September 1998; Director: Allianz Life
Insurance Company of North America, Cardinal Health, Inc., Coherent, Inc.,
Haemonetics, Inc., Medwave, Inc., and Steris Corporation.
Class III -- Terms Expire 2000
Barbara Bainum, 54, 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.
Charles A. Ledsinger, Jr., 49, President, Chief Executive Officer and
Director of the Company since August, 1998; President and Chief Operating
Officer of St. Joe Company from February 1998 to August 1998, Senior Vice
President and Chief Financial Officer of St. Joe Company from May 1997 to
February 1998; Senior Vice President and Chief Financial Officer of Harrah's
Entertainment, Inc. from June 1995 to May 1997; Senior Vice President and Chief
Financial Officer of Promus Companies Incorporated from August 1990 to June
1995. Director: FelCor Lodging Trust, Inc., Friendly's Ice Cream Corporation
and TBC.
3
<PAGE>
Lawrence R. Levitan, 57, Retired, Managing Partner, Northeast and Southeast
Regions and Managing Partner, Communications Industry of Andersen Consulting
from September 1995 to August, 1997. Various positions with Andersen Consulting
since 1963. Director: Sequent Computer Systems.
Frederic V. Malek,* 62, Chairman of Thayer Capital Partners since March
1993; Co-Chairman of CB Richard Ellis, 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: HCR Manor
Care, Inc., Sunburst, Aegis Communications, Inc., American Management Systems,
Inc., Automatic Data Processing Corp., CB Richard Ellis, Inc., FPL Group, Inc.
(an affiliate of Florida Power and Light-power company), Global Vacation Group,
Northwest Airlines and various Paine Webber mutual funds.
- --------
* Mr. Malek has retired from the Board of Directors effective as of the Annual
Meeting.
The Board of Directors
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. At the beginning of
1998, the Board of Directors consisted of nine directors. During the fiscal
year, William R. Floyd resigned from the Board of Directors and Stewart Bainum
and Robert C. Hazard, Jr. retired. In February 1999, Larry R. Levitan was
appointed to fill one of the vacancies. Frederic V. Malek has indicated his
intention to retire from the Board of Directors following the Annual Meeting.
In fiscal year 1998, the Board of Directors held seven meetings and each
director, except for Mr. Malek, attended all of the meetings of the Board of
Directors and all of the committees of the Board of Directors on which such
director served. Mr. Malek was unable to attend two Board meetings.
Committees of the Board
The standing committees of the Board of Directors include the Audit
Committee and the Compensation/Key Executive Stock Option Plan Committee. At
the January 21, 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:
Compensation/Key Executive Stock Option Nominating & Corporate
Plan Committee Governance Committee
Jerry E. Robertson, Chair Gerald W. Petitt, Chair
Frederic V. Malek Jerry E. Robertson
Barbara Bainum Frederic V. Malek
Audit Committee
Frederick V. Malek, Chair
Jerry E. Robertson
Gerald W. Petitt
The Compensation/Key Executive Stock Option Plan Committee administers the
Company's stock option plans and grant stock options thereunder, reviews
compensation of officers and key management employees, recommends development
programs for employees such as training, bonus and incentive plans, pensions
and retirement, and reviews other employee fringe benefit programs. Prior to
Mr. Bainum's retirement from the Board, a Compensation/Key Executive Stock
Option Plan Committee No. 2 existed on which he did not serve. The purpose of
this second committee was to approve matters that required a committee of
"outside directors" for which Mr. Bainum did not qualify. Upon his retirement,
the second committee was abolished. The Compensation/Key Executive Stock Option
Plan Committee met three times during the 1998 fiscal year.
4
<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 held one meeting in the 1998 fiscal year.
The Audit Committee reviews the scope and results of the annual audit,
reviews and approves the services and related fees of the Company's independent
public accountants, reviews the Company's internal accounting controls and
reviews the Company's Internal Audit Department and its activities. The Audit
Committee met twice in fiscal year 1998.
Compensation of Directors
The Company has adopted the Choice Hotels International, Inc. Non-Employee
Director Stock Option and Deferred Compensation Stock Purchase Plan ("Option
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 once a 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 the end of each fiscal quarter. Pending
such purchases, the funds will be credited to an Interest Deferred Account,
which will be interest bearing. Stock which is so purchased will be deposited
in a Stock Deferred Account pending distribution in accordance with the Plan.
Pursuant to the Non-Employee Director Stock Compensation Plan 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.
Upon Mr. Bainum's and Mr. Hazard's retirement, the Board of Directors
approved the continuing vesting and accelerated vesting, respectively, of their
awards under the Option Plan and the Stock Plan. The Board of Directors has
also approved the vesting of Mr. Malek's awards under the Option Plan and the
Stock Plan upon his retirement following the Annual Meeting.
Directors who are employees of the Company receive no separate remuneration
for their services as directors.
5
<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, the other four most highly compensated executive
officers, a former Chief Executive Officer and two former 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 10, 1999, 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 Shares
Name of Beneficial Owner Beneficially Owned Outstanding(1)
------------------------ ------------------ -----------------
<S> <C> <C>
Stewart Bainum, Jr..................... 15,473,952(2)** 27.84%
Barbara Bainum......................... 5,637,599(3)** 10.18%
Donald H. Dempsey(4)................... 0 *
Michael J. DeSantis.................... 24,155(5) *
William R. Floyd(6).................... 150,992(7) *
Charles A. Ledsinger, Jr............... 65,842(8) *
Larry R. Levitan....................... 0 *
Frederic V. Malek...................... 15,204(9) *
Thomas Mirgon.......................... 25,627(10) *
Gerald W. Petitt....................... 89,055(11) *
James H. Rempe......................... 152,050(12) *
Jerry E. Robertson, Ph.D............... 29,548(13) *
Barry L. Smith(14)..................... 1,490(15) *
All Directors and Officers as a Group
(11 persons).......................... 15,885,077(16) 28.50%
Bruce Bainum........................... 5,624,502(17)** 10.16%
Stewart Bainum......................... 10,590,051(18)** 19.14%
Ronald Baron........................... 9,697,000(19) 35.59%
</TABLE>
- --------
* Less than 1% of class.
** Because of SEC reporting rules, shares held by certain Bainum family
entities are attributed to more than one of the Bainums included in this
table because such named Bainums have shared voting or dispositive control.
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 36.72% of the number of outstanding
shares of Company common stock.
1. Percentages are based on 55,336,553 shares outstanding on March 10, 1999
(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 42,127 shares owned directly by Mr. Bainum, Jr. 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 250,000 shares which Mr. Bainum, Jr. has the right
to acquire pursuant to stock options which are presently exercisable or
which become exercisable within 60 days after the Record Date, and 1,017
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").
6
<PAGE>
3. Includes 102,677 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, 112,200 shares owned by Vintage L.P., in which Ms. Bainum is a
shareholder and director of the corporate general partner and shares voting
authority, and 70,305 shares owned by the Commonweal Foundation, in which
Ms. Bainum is President and Director and has shared voting authority. Also
includes 3,089 shares of restricted stock issued to Ms. Bainum which shares
are not vested, but which Ms. Bainum has the right to vote and 1,831 shares
which Ms. Bainum has the right to acquire pursuant to stock options which
are currently exercisable or become exercisable within 60 days of the Record
Date.
4. Mr. Dempsey resigned from the Company in July 1998.
5. Includes 13,490 shares which Mr. DeSantis has the right to acquire pursuant
to stock options which are currently exercisable or become exercisable
within 60 days of the Record Date. Also includes 106 and 5,569 shares,
respectively under the 401(k) Plan and Non-Qualified Plan.
6. Mr. Floyd resigned from the Company in June 1998.
7. Includes 150,892 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.
8. Consist of restricted stock not yet vested, but which Mr. Ledsinger has the
right to vote.
9. Includes 3,523 shares owed directly; 7,665 shares which Mr. Malek has the
right to acquire pursuant to stock options which are presently exercisable
or become exercisable within 60 days of the Record Date and 4,016
restricted shares granted under the Non-Employer Director Stock
Compensation Plan ("Stock Compensation Plan") which are not vested, but
which Mr. Malek has the right to vote.
10. Includes 24,073 shares which Mr. Mirgon has the right to acquire pursuant
to stock options which are currently exercisable or become exercisable
within 60 days of the Record Date.
11. Includes 77,304 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 3,090 restricted
shares granted under the Stock Compensation Plan which are not yet vested,
but which Mr. Petitt has the right to vote.
12. Includes 59,882 shares held directly and 89,861 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
2,477 restricted shares granted under the Stock Compensation Plan which are
not yet vested, but which Mr. Rempe has the right to vote.
13. Includes 6,299 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 3,354
restricted shares granted under the Stock Compensation Plan which are not
yet vested, but which Mr. Robertson has the right to vote. Also includes
4,395 shares which Mr. Robertson has the right to acquire pursuant to stock
options which are presently exercisable or become 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.
14. Mr. Smith retired from the Company in April 1998.
15. Consist of 606 shares and 884 shares, respectively which Mr. Smith has the
right to receive pursuant to the terms of the 401(k) Plan and the Non-
Qualified Savings Plan.
16. Includes a total of 404,935 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 106 shares and 9,657 shares, respectively,
which such directors and officers have the right to receive pursuant to the
terms of the 401 (k) Plan and the Non-Qualified Savings Plan.
17. 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,
112,200 shares owned by Vintage L.P., in which Mr. Bainum is a shareholder
and director of the corporate general partner and
7
<PAGE>
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.
18. Includes 2,523 shares held directly by Mr. Bainum, 3,906,542 shares held
directly by the Stewart Bainum Declaration of Trust, of which Mr. Bainum
is the sole trustee and beneficiary, his joint interest in 983,878 shares
owned by Bainum Associates and 1,248,542 shares owned by MC Investments,
each of which is a limited partnership in which Mr. Bainum has joint
ownership with his wife as a limited partner and as such has the right to
acquire at any time a number of shares equal in value to the liquidation
preference of their limited partnership interests; 3,567,869 shares held
directly by Realty, in which Mr. Bainum and his wife have shared voting
authority; and 70,305 shares held by the Commonweal Foundation of which
Mr. Bainum is Chairman of the Board of Directors and has shared voting
authority. Also includes 798,711 shares held by the Jane L. Bainum
Declaration of Trust, the sole trustee and beneficiary of which is
Mr. Bainum's wife, and 7,665 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
4,016 shares of restricted stock granted by the issuer to Mr. Bainum under
the Stock Compensation Plan, which are not vested but which Mr. Bainum has
the right to vote.
19. 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 January , 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.
8
<PAGE>
EXECUTIVE COMPENSATION
Compensation received by the Named Officers prior to consummation of the
Former Choice Spinoff/1/ 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 Named Officers after the
Spinoff was paid by the Company.
- --------
1. 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 and the Company were subsidiaries 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.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation(1) Long-Term Compensation
--------------------------------- ----------------------------------------------
Name and Principal Fiscal Restricted Stock Option All Other
Position Year(1) Salary Bonus Other StockAwards(5) Shares(#)(2) Compensation(3)
------------------ ------- -------- ------- -------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(4).. 1998 $169,149 $57,829 (5) -- 57,300 $6,453
Chairman 1997A 148,310 47,683 (5) -- -- --
1997B 656,357 388,520 (5) -- 60,000(6) --
1996 625,102 337,555 (5) -- 60,000(7) 33,543
Charles A. Ledsinger,
Jr.(8)................. 1998 159,633 -- $99,632(9) $825,000 598,563 --
President and Chief
Executive Office
Thomas Mirgon(10)....... 1998 239,325 92,083 (5) -- 22,500 --
Senior Vice President,
Administration 1997A 188,423 51,315 $169,624(11) -- 7,100(12) --
1997B 58,477 26,315 (5) -- 40,000(13) --
1996 -- -- -- -- -- --
Michael J.
DeSantis(14)........... 1998 166,538 36,750 (5) -- 22,500 1,920
Senior Vice President,
General Counsel and
Secretary.............. 1997A 122,870 19,204 (5) -- 40,000(15) --
1997B 99,530 3,477 (5) -- -- --
1996 35,625 -- -- -- -- --
Mark C. Wells(16)....... 1998 167,115 -- 121,130(17) 300,000 65,000 --
Senior Vice President,
Marketing
William R. Floyd(18).... 1998 224,841 193,634 (5) -- -- 459,975(19)
1997A 437,260 267,233 $139,403(20) -- 65,000(21) --
1997B 270,373 146,001 (5) $250,000(23) 307,693(24) --
1996 -- -- -- -- -- --
Barry L Smith(25)....... 1998 162,058 74,354 (5) -- -- 144,337(26)
1997A 254,231 108,000 (5) - 37,900(27) 11,086
1997B 240,000 108,000 (5) - 25,000(28) 11,086
1996 233,650 116,820 (5) -- 5,000(29) 10,427
Donald H. Dempsey(3).... 1998 171,250 -- 46,100(31) 249,152 100,000 --
</TABLE>
9
<PAGE>
- --------
1. On September 16, 1997, the Company changed its fiscal year end from May 31
to December 31. Accordingly, the summary compensation information presented
for the periods prior to 1998 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. and Smith, the grants in 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, Former Choice/Sunburst for 1997A and the Company for 1998 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 the Company
during 1998 under the 401(k) Plan and Non-qualified Savings Plan,
respectively, for the Named Offices were as follows: Mr. Bainum, Jr., $0
and $6,453; Mr. DeSantis, $1,920 and $0; Mr. Floyd, $2,370 and $0; and Mr.
Smith, $5,925 and $5,911.
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.
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. Ledsinger's employment as President and Chief Executive Officer
commenced August, 1998.
9. Includes $95,571 in relocation expenses.
10. Mr. Mirgon's employment with the Company and Former Choice commenced March
3, 1997.
11. Consists of $160,994 in relocation expenses and $8,630 in automobile
allowance.
12. 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.
13. 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.
14. Mr. DeSantis' employment commenced in January 1996. He was appointed
Senior Vice President, General Counsel and Secretary in June 1997.
15. 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.
16. Mr. Wells' employment as Senior Vice President, Marketing commenced May
1998.
17. Includes $115,638 in relocation expenses.
18. Mr. Floyd's employment as Chief Executive Officer of Former Choice and the
Company commenced October 16, 1996 and ended on June 16, 1998.
19. In connection with Mr. Floyd's resignation, the Company agreed to continue
payments to Mr. Floyd in an amount equal to one year's base salary and
automobile allowance in consideration of the cancellation of his
employment agreement and confidentiality undertakings. The amount of such
payments paid in 1998 is $227,033.
20. Consists of $127,703 in relocation expenses (including $107,831 reported
under 1997B) and $11,700 in automobile allowance.
10
<PAGE>
21. 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.
22 Consists of relocation expenses.
23. 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. In connection with his resignation,
Mr. Floyd forfeited 42,735 shares.
24. 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.
25. Mr. Smith retired from the Company in May 1998.
26. Includes $132,500 in consulting fees paid pursuant to a Consulting
Agreement with the Company for a term from Mr. Smith=s retirement through
December 15, 1998.
27. 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.
28. 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.
29. 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.
30. Mr. Dempsey resigned from the Company in July 1998.
31. Includes $40,607 in relocation expenses.
STOCK OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
Potential Realizable
Value of Assumed
Rate of Stock Price
Appreciation for
Individual Grants Option Term(1)
---------------------------------------------- ----------------------
Percentage of
Total Options
Number of Granted to all Exercise
Options Employees in Base Price Expiration
Name Granted 1998 Per Share Date 5%(2) 10%(3)
---- --------- -------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.
(4).................... 47,300 4.4% $ 14.125 9/23/08 $ 420,170 $ 1,064,798
Charles A. Ledsinger,
Jr. (4)................ 598,563 56.2% $ 12.53 7/31/08 $4,716,676 $11,953,063
Thomas Mirgon (4)....... 22,500 2.1% $14.8437 1/26/08 $ 210,040 $ 532,282
Michael J. DeSantis
(4).................... 22,500 2.1% $14.8437 1/26/08 $ 210,040 $ 532,292
Mark C. Wells (4)....... 65,000 6 .1% $ 16.00 5/18/08 $ 654,050 $ 1,657,494
William R. Floyd........ 0 -- -- -- -- --
Barry L. Smith.......... 0 -- -- -- -- --
Donald H. Dempsey ...... 100,000 9.4% $14.6563 1/12/08(5) $ 921,730 $ 2,335,840
</TABLE>
- --------
1. The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the Securities and Exchange Commission and therefore
are not intended to forecast future possible appreciation, if any, of the
stock price. Since options are granted at market price, a zero percent gain
in the stock price will result in no realizable value to the optionees.
2. A 5% per year appreciation in stock price from $14.125 per share yields
$23.0081, from $14.8437 per share yields $24.1788, from $12.53 per share
yields $26.0623, from $12.53 per share yields $20.41, and from $14.6563 per
share yields $23.8736.
3. A 10% per year appreciation in stock price from $14.125 per share yields
$36.6366, from $14.8437 per share yields $38.5007, from $16.00 per share
yields $41.4999, from $12.53 per share yields $32.4996, and from $14.6563
per share yields $38.0147.
4. The options granted to the officers vest at the rate of 20% per year on the
first through the fifth anniversaries of the date of the stock option grant.
5. Such options were forfeited upon Mr. Dempsey's resignation.
11
<PAGE>
AGGREGATED OPTION EXERCISES IN 1998
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised
Options at December, 31, 1998
--------------------------------
Value of Unexercised
Shares Acquired Value in-the-money Options--
on Exercise Realized Exercisable Unexercisable at December 31, 1998(1)
--------------- -------- -------------- --------------- -------------------------
Name # $ # # Exercisable Unexercisable
---- --------------- -------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr...... 105,000 $982,107 250,000 152,300 $2,047,611 $ 450,370
Charles A. Ledsinger,
Jr..................... -- -- 0 598,563 -- $ 374,102
Thomas Mirgon........... -- -- 10,585 64,839 $ 4,574 $ (11,938)
Michael J. DeSantis.. .. -- -- 8,990 58,456 $ 2,690 $ (19,475)
Mark C. Wells........... -- -- 0 65,000 -- $(162,500)
Donald H. Dempsey....... -- -- 0 0 -- --
William R. Floyd........ -- -- 150,892 0 $ 133,603 --
Barry L. Smith.......... 83,384 731,475 0 0 -- --
</TABLE>
- --------
1. The closing prices of Company common stock as reported by the New York Stock
Exchange on December 31, 1998 was $13.50. 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 underlying
the option.
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. 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. Under the agreement, Mr.
Bainum, Jr. is currently paid a base salary of $204,000 per annum for services
to the Company and a maximum bonus of 60% of Mr. Bainum, Jr.'s base
compensation based upon the performance of the Company.
The Company entered into an employment agreement Charles A. Ledsinger. The
agreement has a term of five years from July 31, 1998 and provides for a base
salary of $500,000 per annum, subject to annual adjustments and an annual bonus
of up to 60% of his base compensation, based on Company performance. The
agreement also provides for a make-whole bonus payment to compensate Mr.
Ledsinger for the pro rata portion of a bonus from his previous employer that
he forfeited upon employment with the Company. Pursuant to the employment
agreement, Mr. Ledsinger was granted 65,842 shares of restricted Company common
stock and options to purchase 598,563 shares of common stock, of which 39,900
of the options were incentive stock options granted under the Former Choice
1996 Long Term Incentive Plan. The remainder of the options were non-qualified
stock options. The agreement also contains a change of control provision which
provides for a severance payment equal to 200% of his base salary and 75% of a
prior year's bonus if he is terminated within twelve months of a change of
control of the Company.
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 Mark C. Wells. The
agreement has a term of five years from May 18, 1998 and provides for a base
salary of $275,000 per annum, subject to annual adjustments and an annual bonus
of up to 50% of his base compensation, based on performance. Pursuant to the
employment agreement, Mr. Wells was granted 18,750 shares of restricted Company
common stock and options to purchase 65,000 shares of common stock, of which
16,250 of the options were incentive stock options granted under the Former
Choice 1996 Long Term Incentive Plan. The remainder of the options were non-
qualified stock options.
12
<PAGE>
The Company entered into an employment agreement with Michael J. DeSantis.
The agreement has a term of five years from April 29, 1998 and provides for a
base salary of $170,000 per annum, subject to annual adjustments and an annual
bonus of up to 50% of his base compensation, based on performance.
The Company assumed an employment agreement between Former Choice and
William R. Floyd, who resigned from the Company in June 1998. The agreement had
a term of five years from October 21, 1996 and provided 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 were incentive stock options
granted under the Former Choice 1996 Long Term Incentive Plan. The remainder of
the options were 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. In connection with his
resignation, the Company and Mr. Floyd entered into an Agreement which
terminated the employment agreement and provided for one-year of base salary
and automobile allowance, continued vesting of stock options until June 16,
1999, and the vesting of one-half of the restricted common stock which vested
on November 4, 1998. The remaining options and restricted stock were forfeited.
The Company entered into an employment agreement with Donald H. Dempsey, who
resigned from the Company in July, 1998. The agreement had a term of five years
from January 12, 1998 and provided 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 provided
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. Upon his resignation, all options and restricted stock
were forfeited.
On December 18, 1997, the Company entered into a consulting agreement with
Barry L. Smith under which Smith provided consulting services to the Company
upon his retirement in May 1998 until December 15, 1998. Smith received
consulting fees of $132,500 during the term of the consulting agreement. Smith
agreed that during the term of the agreement, he would not compete with the
Company.
Retirement Plans
The Company has adopted the Choice Hotels International, Inc. Supplemental
Executive Retirement Plan (the "SERP"). Participants are the CEO and 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.
13
<PAGE>
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>
Charles A. Ledsinger....................... 0 16
Thomas Mirgon.............................. 2 24
Mark C. Wells.............................. 1 17
Michael J. DeSantis........................ 3 28
</TABLE>
The table below sets forth estimated annual benefits payable upon retirement
to persons in specified compensation and years of service classifications.
These benefits are straight life annuity amounts, although participants have
the option of selecting a joint and 50% survivor annuity or ten-year certain
payments. The benefits are not subject to offset for social security and other
amounts.
Years of Service/Benefit as
Percentage of Final Average Salary
<TABLE>
<CAPTION>
25 or
Remuneration 15/15% 20/22.5% more/30%
------------ ------- -------- --------
<S> <C> <C> <C>
$300,000 $45,000 $67,500 $90,000
350,000 52,500 78,750 105,000
400,000 60,000 90,000 120,000
450,000 67,500 101,250 135,000
500,000 75,000 112,500 150,000
600,000 90,000 135,000 180,000
</TABLE>
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 1998 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.
14
<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
During part of fiscal year 1998, there were two compensation committees for
the Company, the Compensation/Key Executive Stock Option Plan Committee (the
"Committee") and the Compensation/Key Executive Stock Option Plan Committee No.
2 ("Committee No. 2"). The role of Committee No. 2, which was comprised of
"outside directors" as defined in Section 162(m)(3) of the Code, was to approve
awards under the 1997 Long-Term Incentive Plan to the Chief Executive Officer
and the Named Officers defined below. However, since the retirement of Stewart
Bainum from the Board of Directors, the role of Committee No. 2 has been
assumed by the Committee and Committee No. 2 has been abolished. The current
members of the Committee, Messrs. Robertson (Chairman), Malek and Ms. Bainum,
were appointed effective November 21, 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 January 1998. In June 1998, William R. Floyd, Chief
Executive Officer and President, resigned from the Company. In September 1998,
Charles A. Ledsinger, Jr. was appointed Chief Executive Officer and President.
For the twelve months ended December 31, 1998, compensation for the current
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.
15
<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 in July 1998, it was acquired by
Meditrust Companies, which has diversified holdings in real estate, healthcare
and hospitality. It was included as a comparison company for compensation
purposes because such comparison was done before the acquisition.
Policy with Respect to Qualifying Compensation for Deductibility
Section 162(m) of the Code imposes a $1 million ceiling on tax-deductible
compensation paid to the Chief Executive Officer and the next four most highly
compensated executive officers.
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 Charles A. Ledsinger's employment
agreement, Mr. Ledsinger was granted 65,842 non-performance based restricted
shares of Company Common Stock which vest in three equal annual installments
beginning July 31, 1999. At vesting (unless Mr. Ledsinger elects to defer
receipt), the fair market value of the stock will be compensation to Mr.
Ledsinger and included in calculating the $1 million ceiling. Additionally, the
employment agreement provides for options to purchase 498,563 shares of Company
Common Stock which were granted outside of the 1997 Incentive Plan and which
vest in five equal monthly installments beginning July 31, 1999. Upon the
exercise of such options by Mr. Ledsinger 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.
Annual merit adjustments for the executive officers affecting compensation
paid in the twelve months ended December 31, 1998 were set in January 1998.
In 1997, the Committee revised its performance measurements for awards under
the annual cash bonus program 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 measurements include 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 1998 fiscal year, 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 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 Committee reviewed and
approved a Stock Option Guide Chart for the Company's executives which utilizes
a market based salary multiple to establish a competitive range of stock
options from which executive awards could be determined.
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Compensation of the Chief Executive Officer
Mr. Floyd served as Chief Executive Officer and President until June 1998.
His base salary was established by his rights under his employment agreement,
approved by the Committee. The base salary was reviewed each year by the
Committee and was subject to merit increases based primarily on his achievement
of performance objectives and the comparison to competitive market data and the
comparison companies. In September 1997, the Committee approved a 5% merit
increase to Mr. Floyd's base salary.
Under the annual cash bonus program, Mr. Floyd had the potential to be
awarded up to 60% of his base salary if bonus objectives were achieved. Unlike
the other executive officers, Mr. Floyd's bonus objectives were tied 100% to
earning per share. Mr. Floyd received his full bonus payout for fiscal year
1997 in February 1998.
Mr. Ledsinger was appointed Chief Executive Officer and President in August
1998. His base salary is established by his rights under his employment
agreement, approved by the 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 February 1999, the Committee
approved a 5% annualized (3.75% pro rata) merit increase to Mr. Ledsinger's
base salary.
Under the annual cash bonus program, Mr. Ledsinger has the potential to be
awarded up to 60% of his base salary if bonus objectives are achieved. Unlike
the other executive officers, Mr. Ledsinger's bonus objectives are tied 100% to
earning per share. For the fiscal year ended December 31, 1998, actual
performance exceeded the goals for earnings per share. In addition to the pro
rata bonus payout for fiscal year 1998, Mr. Ledsinger's employment agreement
provided for a make-whole provision with respect to the pro rata portion of a
bonus from his previous employer which he forfeited when he accepted employment
with the Company.
THE COMPENSATION COMMITTEE
Jerry E. Robertson, Chairman
Frederic V. Malek
Barbara Bainum
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PERFORMANCE GRAPH
The following graph compares the performance of Choice common stock with the
performance of the New York Stock Exchange Composite Index ("NYSE Composite
Index") and a peer group index (the "Peer Group Index") by measuring the
changes in common stock prices from 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, Cendent
Corporation and Hilton Hotels Corp.
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.
<TABLE>
<CAPTION>
October 10, December 31, March 31, June 30, September 30, December 31,
1997 1997 1998 1998 1998 1998
----------- ------------ --------- -------- ------------- ------------ ---
<S> <C> <C> <C> <C> <C> <C> <C>
Choice Hotels 100 94.1 108 79.8 74.6 80.5
NYSE Composite Index 100 101.5 114.2 116.3 102.0 121.8
Peer Group 100 100.6 111.4 98.3 65.5 77.8
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 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
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Chairman of Creative Hotel Associates LLP and Gerald W. Petitt is the President
and Chief Executive Officer. Total payments to the Company for fiscal year 1998
were $212,000. The Company and Creative Hotels have also entered into an
agreement which provides for no royalty fees for two selected hotels for a
period of five years. Mr. Petitt is a director of the Company and Mr. Hazard,
Jr. retired from the Board of Directors in August, 1998.
Pursuant to its relocation policy, the Company entered into a bridge loan
agreement with Charles A. Ledsinger in the amount of $754,000 for the purchase
of his residence. The bridge loan was interest-free and was repaid in March
1999. Also under its relocation policy, the Company purchased Mr. Ledsinger
Jr.'s previous residence.
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 HCR Manor Care, the parent
company of Manor Care. Additionally, Stewart Bainum, who retired as a Director
of the Company in August 1998, is a director of HCR Manor Care and James Rempe,
who is a Director of the Company, served as Senior Vice President and General
Counsel of Manor Care until December 1998. Additionally, Messrs. Bainum, Bainum
Jr. and Rempe, as well as certain other officers and directors of HCR Manor
Care own shares and/or options or other rights to acquire shares of the
Company.
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 a 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. The Gaithersburg Lease
and the Silver Spring Lease and the related guarantees were terminated in May,
1998, 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 intended to govern the relationship between the parties
after the Spinoff. In addition, Sunburst is the Company's largest franchisee,
with a portfolio of 88 hotels containing 12,125 rooms located in 28 states as
of March 1999. 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.
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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 were
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.
In accordance with the Distribution Agreement, the Company agreed to assume
and pay certain liabilities of Sunburst, subject to the Company maintaining a
minimum net worth of $40 million, at the date of the Spinoff. As of December
31, 1997 the Company reflected a $25 million receivable due from Sunburst on
its consolidated balance sheet. In 1998, net payments of approximately $8
million were collected from Sunburst in cash. On December 28, 1998, the Company
and Sunburst amended the Strategic Alliance Agreement (defined below) entered
into in connection with the Spinoff. As part of that amendment, the Company
exchanged the remaining $17 million balance in return for, among other things,
the termination of Sunburst's option for the exclusive rights to the MainStay
Suites brand and a commitment from Sunburst to build a total of 25 MainStay
Suites.
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 of the Spinoff); (iii) The Company 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 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 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.
On December 28, 1998, Sunburst and the Company amended the Strategic
Alliance Agreement to: (i) cancel Sunburst's option to acquire the MainStay
Suites system; (ii) change Sunburst's development obligations to 13 Sleep Inns
and 25 MainStay Suites by October 15, 2001; and (iii) provide certain other
global amendments to Sunburst's franchise agreements.
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).
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<PAGE>
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
initially accrues interest monthly at an simple rate of 11% per annum though
October 14, 2000. At October 15, 2000, interest accrues at a rate of 11% per
annum compounded daily. The Term Note is subordinated to all senior debt of
Sunburst and contains certain restrictive covenants comparable to those
contained in Sunburst's senior credit facility (including restrictions on
Sunburst's ability to make certain investments, incur debt, pay dividends,
dispose of assets and create liens on its assets).
Corporate Services Agreement
The Company and Sunburst entered into a Corporate Services Agreement which
provides that the Company will provide to Sunburst certain corporate support
services, including human resources, accounting, tax and computer systems
support, and Sunburst will provide to the Company certain services including
asset management and accounts payable processing. As of March 31, 1999, all
services provided by each party under the Corporate Services Agreement, except
for human resources and tax services provided by the Company, will be
terminated. During fiscal year 1998, the Company paid Sunburst $168,660 and
Sunburst paid the Company $1,664,750 for services under the Corporate Services
Agreement.
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,
During fiscal year 1998, the Company paid Sunburst $116,268 pursuant to the
Consulting Agreement.
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
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<PAGE>
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 was added as a guarantor
of Sunburst's obligations under a lease for certain office space in
Gaithersburg, Maryland (the "Gaithersburg Lease") a lease agreement with
respect to the complex at 10750 and 10770 Columbia Pike, Silver Spring,
Maryland (the "Silver Spring Complex") at which Sunburst's principal executive
offices were located (the "Silver Spring Lease"). Additionally, Sunburst and
Choice entered 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 Gaithersburg Lease, the Silver Spring Lease
and the Silver Spring Sublease were canceled in May, 1998. In fiscal year 1998,
the Company paid to Sunburst $977,500 under the Silver Spring Sublease.
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 the Company. 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.) Total fees paid to the Company for
franchising, royalty, marketing and reservation fees for fiscal year 1998 were
$11.2 million.
Term.
Each Franchise Agreement has an initial term of 20 years, except the
agreement for Tempe, Arizona which is a year to year agreement. The Franchise
Agreements have varying original dates, from 1982 through
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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.
In December 1998, the Company and Sunburst entered into an amendment which
provided that (i) Sunburst shall pay an application fee of $20,000 on all
future franchise agreements, and (ii) no royalties, marketing or reservation
fees shall be payable for a period of two years for the next ten franchise
agreements entered into after the amendment.
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
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promote those aspects of the franchise business; and (c) to periodically
inspect the Property. The Franchise Agreements also impose affirmative
obligations upon Sunburst including: (a) to participate in a specified
reservation system; (b) to keep and comply with the up-to-date version of 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
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Sunburst on substantially 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. Frederick V. Malek serves as a
director of each of the Company and Sunburst. As a result of the Spinoff,
Messrs. 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.
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 fiscal year ended December 31, 1998, except for the
following late filings: (i) Michael J. DeSantis was one day late in filing a
Form 4, and (ii) Joseph M. Squeri was three days late in filing a Form 4.
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
25
<PAGE>
in so doing; and certain directors, officers and other employees of the
Company, not specially employed for the purpose, may solicit proxies, without
additional remuneration therefor, by personal interview, mail, telephone or
telegraph.
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 2000 Annual Meeting
Stockholder proposals intended to be presented at the Company's 2000 Annual
Meeting of Stockholders must be received by the Company's Corporate Secretary
no later than February 28, 2000. 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 2000 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 1999 annual meeting other than those specifically set forth in the
notice of meeting. If any other matters are properly introduced at the meeting
for consideration, including, among other things, consideration of a motion to
adjourn the meeting to another time or place, the individuals named on the
enclose proxy card will have discretion to vote in accordance with their best
judgment, unless otherwise restricted by law.
By Order of the Board of Directors
Michael J. DeSantis
Secretary
Dated: March 29, 1999
26
<PAGE>
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, 1999
The undersigned hereby appoints JERRY E. ROBERTSON and CHARLES A. LEDSINGER, JR.
and each of them, the true and lawful attorneys and proxies, with full power of
substitution, to attend the Annual Meeting of Shareholders of Choice Hotels
International, Inc. (The "Company") to be held on April 29, 1999 at 9:00 a.m. at
the Company's Corporate Headquarters, Choice Centre, 10770 Columbia Pike, Silver
Spring, 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 the Election of
Directors, such proxies will be voted in accordance with the Board of Directors'
recommendation as set forth herein with respect to such proposal.
CHOICE HOTELS INTERNATIONAL, INC., ANNUAL MEETING, APRIL 29, 1999 AT 9:00 A.M.
DIRECTIONS TO CHOICE CENTRE
10770 Columbia Pike
Silver Spring, MD 20901
From Washington, DC - 16th Street North to Route 29 (Colesville Road). Pass over
the Beltway (495), at which point Colesville Road becomes Columbia Pike. Choice
Centre is on the left side approximately 2 miles past the Beltway.
From National Airport to Headquarters - Take George Washington Parkway
approximately 8 miles to the Beltway I-495 North. Go North and follow Beltway as
it curves East to (2nd Silver Spring Exit 30 North Colesville Road). Go
approximately 2 1/2 miles to Choice Hotels Headquarters on your left side.
From Dulles Airport to Headquarters - Use Dulles Free Access (stay off toll
road). Go East approximately 18 miles to I-495 North Beltway. Go North and
follow Beltway as it curves east to (2nd Silver Spring Exit 30 North Colesville
Road). Go approximately 2 1/2 miles to Choice Hotels Headquarters on your left
hand side.
From BWI to Headquarters - Take 195 west for 4 miles. The take I-95 south for 14
miles to Highway 198 west toward Burtonsville. Go west 3 miles to Route 29
(Colesville Road). Turn left on Route 29 (south) and go approximately 7 miles to
Choice Hotels Headquarters - next to Mobil gas station.
From Baltimore, MD - Take I-95 South to Highway 198 west toward Burtonsville. Go
west 3 miles to Route 29 (Colesville Road). Turn left on Rte. 29 (south) and go
approximately 7 miles to Choice Centre.
<PAGE>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
ELECTION OF THE PROPOSED DIRECTORS
Election of two Directors:
FOR all nominees WITHHOLD
listed below AUTHORITY
(except as marked to vote for all nominees NOMINEES: Stewart Bainum, Jr.
to the contrary) Listed to the right and James H. Rempe
[ ] [ ]
(Instruction: To withhold authority to vote
for any individual nominee, write that
nominee's name in the space provided
below)
__________________________________________
If you plan to attend the Annual
Meeting of Shareholders, please
mark the following box and
promptly return this Proxy Card.
Dated _____________________ 1999
----------------------------------
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.)
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