As filed with the Securities and Exchange Commission on December 12, 2023
Registration Statement No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION ON AUGUST 31, 1998
REGISTRATION NO. 333-[ ]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
Washington, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CHOICE HOTELS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7011 52-1209792
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(IRS EMPLOYER IDENTIFICATION
(STATE OR OTHER NUMBER)
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
AFFILIATE REGISTRANTS
(Exact name of Registrant as specified in its charter)
| Delaware | 7011 | 52-1209792 | ||
| (State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) |
Choice Hotels International, Inc.,
915 Meeting St., North Bethesda, Maryland 20852
(301) 592-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL J. DESANTIS, ESQ.
GENERAL COUNSEL
CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MD 20901
(Address, including zip code, and telephone number, including area code, of Registrants’ principal executive offices)
Simone Wu
Senior Vice President, General Counsel, Corporate Secretary & External Affairs
Choice Hotels International, Inc.
915 Meeting St., North Bethesda, Maryland 20852
(301) 592-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
WITH A COPY TO:
SCOTT HERLIHY, ESQ.
LATHAM
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Adam M. Turteltaub, Esq.
Danielle Scalzo, Esq.
Willkie Farr & WATKINS
1001 PENNSYLVANIA AVE., N.W. SUITE 1300
WASHINGTON, D.C. 20004-2505
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:Gallagher LLP
787 Seventh Avenue
New York, New York 10019
(212) 728-8000
Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this registration statement becomes effective and upon completion of the effective date of this Registration Statement.
transactions described in the enclosed offer to exchange.
If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, please check the following box. [_]
☐
If this formForm is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] .
☐
If this formForm is a post-effective amendment fieldfiled pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] .
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
| Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has been calculatedelected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:
Exchange Act Rule 457(a) and13e-4(i) (Cross-Border Issuer Tender Offer) ☐
Exchange Act Rule 457(f)(1) under14d-1(d) (Cross-Border Third-Party Tender Offer) ☐
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933,or until this registration statement shall become effective on such date as amended. The Proposed
Maximum Aggregate Offering price is estimated solely for the purpose of
calculating the registration fee.
(2) PursuantSecurities and Exchange Commission, acting pursuant to Rule 457(n)said Section 8(a), no additional registration fee is being paid in
respect of the Guarantees.
---------------
may determine.
THE REGISTRANT HEREBY AMENDSINFORMATION IN THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES ASOFFER TO EXCHANGE MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTILCHANGE. WE MAY NOT COMPLETE THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THEOFFER AND ISSUE THESE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIESSECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMESCOMMISSION IS EFFECTIVE. THIS PROSPECTUS SHALLOFFER TO EXCHANGE IS NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFERTHESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIESSECURITIES IN ANY STATE IN WHICH SUCHWHERE THE OFFER SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 31, 1998
PROSPECTUSDECEMBER 12, 2023
Offer to Exchange
Each Outstanding Share of Common Stock
of
Wyndham Hotels & Resorts, Inc.
for
$49.50 in cash and
0.324 Shares of Common Stock of Choice Hotels International, Inc.,
subject to the election and proration procedures described in this offer to exchange
and the related letter of election and transmittal,
by
WH Acquisition Corporation,
a wholly owned subsidiary
of
Choice Hotels International, Inc.
THE OFFER TO EXCHANGE
7.125% SENIOR NOTES DUE 2008 FOR ALL OUTSTANDING
7.125% SENIOR NOTES DUE 2008
OF
CHOICE HOTELS INTERNATIONAL, INC.
THE EXCHANGE OFFERAND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH 8, 2024, UNLESS THE OFFER IS EXTENDED.
WH Acquisition Corporation (“Purchaser”), 1998,
UNLESS EXTENDED.a wholly owned subsidiary of Choice Hotels International, Inc. (“Choice”, a Delaware corporation (the "Company"“we” or "Choice"“us”), hereby offers, (the "Exchange Offer"), upon the terms and subject to the conditions set forth in this ProspectusExchange Offer (as defined below) and in the related letter of election and transmittal, to exchange for each issued and outstanding share of common stock (“Wyndham Common Stock”) of Wyndham Hotels & Resorts, Inc. (“Wyndham”), at the election of the holder:
$49.50 in cash and 0.324 shares of Choice Common Stock (as defined below) (the “Standard Election Consideration”);
an amount in cash (the “Cash Election Consideration”), equal to the equivalent market value of the Standard Election Consideration (based on the volume-weighted average price as reported by Bloomberg, L.P. (“VWAP”) of the Choice Common Stock as quoted on the New York Stock Exchange (the “NYSE”), over the five NYSE trading days ending on the 10th Business Day preceding the date of expiration of the Offer (as defined below)); or
a number of shares of Choice Common Stock (the “Stock Election Consideration”) having a value equal to the equivalent market value of the Standard Election Consideration (in each case based on the VWAP of the Choice Common Stock as quoted on the NYSE over the five NYSE trading days ending on the 10th Business Day preceding the date of expiration of the Offer (as defined below));
subject in each case to the election and proration procedures described in this Exchange Offer and in the related letter of election and transmittal. See the section of this Exchange Offer titled “The Offer— Elections and Proration” beginning on page 65; and
| • | in the event the Competition Laws Condition (as defined below) remains unsatisfied as of the one-year anniversary of the satisfaction of the Minimum Tender Condition (such date, the “Ticking Fee Commencement Date”), the Additional Consideration (as defined below) subject to, and conditioned upon, acceptance of the shares tendered in the Offer. The “Additional Consideration” means an amount equal to (i) $0.45 multiplied by (ii) the Ticking Fee Proration Factor. The“Ticking Fee Proration Factor” meansthe number of calendar months elapsed after the Ticking Fee Commencement Date to (but excluding) the date of acceptance of the shares tendered in the Offer (prorated for any partial months based on (1) the number of days after the Ticking Fee Commencement Date in the calendar month in which the Ticking Fee Commencement Date occurs divided by the number of calendar days in such calendar month and (2) the number of days prior to the date of acceptance of the shares tendered in the Offer in the calendar month in which such date occurs divided by the number of calendar days in such calendar month). The Additional Consideration shall be payable in cash or shares of Choice Common Stock, valued at the VWAP of Choice Common Stock as quoted on the NYSE over the five NYSE trading days ending on the 10th Business Day preceding the date of acceptance by Choice of the shares tendered in the Offer, at Choice’s election. |
The purpose of the Offer is for Choice to acquire all of the outstanding shares of Wyndham Common Stock in order to combine the businesses of Choice and Wyndham (the “Proposed Combination”). Choice intends, promptly after consummation of the Offer, to cause Purchaser to merge with and into Wyndham with Wyndham as the surviving corporation (the “First Merger”), immediately following which Wyndham will merge with and into a newly formed wholly-owned subsidiary of Choice (“NewCo”) with NewCo as the surviving corporation (together with the First Merger, the “Second-Step Mergers”), after which Wyndham would be a direct or indirect wholly owned subsidiary of Choice.
THE OFFER IS SUBJECT TO THE CONDITIONS SET FORTH IN THE SECTION OF THIS EXCHANGE OFFER TITLED “THE OFFER—CONDITIONS TO THE OFFER.” These include the Minimum Tender Condition, the Anti-Takeover Devices Condition, the Registration Statement Condition, the Choice Stockholder Approval Condition, the Competition Laws Condition, the Diligence Condition, the Financing Condition, the No Wyndham Material Adverse Effect Condition, the Stock Exchange Listing Condition and the accompanying Letterother conditions set forth in the section of Transmittalthis Exchange Offer titled “The Offer—Conditions to the Offer” beginning on page 86.
Shares of Choice common stock (“Choice Common Stock”) trade on the NYSE under the symbol “CHH.” Wyndham Common Stock trades on the NYSE under the symbol “WH.”
The board of directors of Wyndham (the "Letter“Wyndham Board”) has refused to continue to discuss the terms and conditions of Transmittal"),the Proposed Combination with Choice. Choice made numerous attempts to exchangeengage the Wyndham Board, making three private proposals between April and September 2023, increasing its outstanding 7.125%
Senior Notesproposed purchase price each time. As the Wyndham Board rejected each private proposal and refused to engage in meaningful discussions, Choice announced its offer to acquire Wyndham publicly on October 17, 2023. Following Wyndham’s public rejection of that proposal, Choice made a fourth proposal privately to Wyndham on November 14, 2023, reaffirming the economic and other terms of the prior proposal. Choice also proposed a regulatory termination fee, a ticking fee if the transaction did not close by a certain date and a proposal to take all actions required to obtain the requisite regulatory approvals so long as such actions would not have a material adverse effect on the combined company. The regulatory termination fee would have been payable if the transaction did not close due 2008 (the "Original Notes"),to the failure to obtain the requisite regulatory approvals and the ticking fee would have been payable upon a successful closing, if applicable. Choice also offered a mutual non-disclosure agreement to allow the parties to conduct confirmatory due diligence. On November 13, 2023, Choice began purchasing shares of which an aggregate of
$100,000,000 in principal amount is outstanding asWyndham Common Stock on the open market. As of the date hereof,of this Offer, Choice has acquired in excess of $110 million of Wyndham Common Stock. On November 21, 2023, Wyndham publicly rejected the proposed terms of Choice’s offer made on November 14, 2023. In addition to rejecting each offer, the Wyndham Board declined Choice’s repeated requests for confidential mutual, confirmatory due diligence. Due to Wyndham’s unwillingness to even discuss the proposal for a negotiated transaction with Choice and the Wyndham Board’s public statements with respect to Choice’s prior proposals, and because Choice does not believe that it is appropriate for the Wyndham Board to have a veto right over whether the Offer is made available to Wyndham stockholders, Choice is making the Offer directly to Wyndham stockholders upon the terms and subject to the conditions set forth in this Offer as an equal principal amount of newly issued 7.125% Senior Notes due 2008 (the
"Exchange Notes"), which exchange has been registered under the Securities Act
of 1933, as amended (the "Securities Act") pursuantalternative to a registration statementnegotiated transaction.
On the date of which this Prospectus is a part (the "Registration Statement"). The form and
terms ofExchange Offer, Choice filed the Exchange Notes will be the same as the form and terms of the
Original Notes except that (i) the Exchange Notes will be registered under the
Securities Act and hence will not bear legends restricting the transfer
thereof, and (ii) the holders of Exchange Notes will not be entitled to certain
rights of holders of Original Notes under the Registration Agreement (as
defined) which rights will terminate uponnotification required for the consummation of the Exchange
Offer. The Exchange NotesProposed Combination by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). Choice believes the proposed transaction will evidencereceive necessary clearance under the same debt asHSR Act and has commenced discussions with the Original Notes
(which they replace) and will be entitledU.S. Federal Trade Commission (the “FTC”) regarding the requisite approvals required under the HSR Act.
When permitted to do so pursuant to the benefitsWyndham Bylaws (as defined below), Choice intends to nominate at least a sufficient number of an indenture dated
as of May 4, 1998 by and among Choice, Quality Hotels Europe, Inc. ("QHE"),directors, who if elected, would constitute a wholly owned subsidiarymajority of the Company, QH Europe Partnership ("QHE
Partnership"), a general partnership whose partnership interestsWyndham Board, to give the Wyndham stockholders another direct voice with respect to the Offer. Choice believes that the election of its nominees would further demonstrate that Wyndham stockholders support the Proposed Combination, in addition to the support shown by those stockholders tendering Wyndham Common Stock pursuant to the Offer. If our nominees are held byelected, they would be obligated to act in accordance with their duties as directors of Wyndham and would not owe any fiduciary duties to Choice. If elected, our nominees could take steps to support and facilitate the Company and QHE, and Marine Midland Bank, as trustee (the "Trustee")
governing the Original NotesOffer and the Exchange Notes (the "Indenture"). The
Indenture provides forSecond-Step Mergers should the issuancenominees, as new directors, deem it appropriate in the exercise of both the Exchange Notestheir duties to Wyndham and the Original
Notes. The Exchange Notes andWyndham stockholders.
See the Original Notes are sometimes referred to
herein collectively as the "Notes." See "The Exchange Offer" and "Descriptionsection of Exchange Notes."
The Exchange Notes will mature on May 1, 2008 and will bear interest at the
rate of 7.125% per annum from their date of issuance. Interest on the Exchange
Notes will be payable semiannually on May 1 and November 1 of each year,
commencing , 199 . Interest on the Original Notes accepted for exchange
will cease to accrue upon issuance of the Exchange Notes. Interest accrued on
the exchanged Original Notes from the most recent date to which interest has
been paid or duly provided for on such Original Notes or, if no interest has
been paid or duly provided for, from May 4, 1998, through, but not including
the Rate the Exchange Notes are issued, will be paid with the first interest
payment on the Exchange Notes. The Exchange Notes may be redeemed at any time
at the option of the Company, in whole or in part at any time or from time to
time, at a price equal to 100% of the principal amount thereof plus accrued
interest to the date of redemption plus a Make-Whole Premium (as defined), if
any, relating to the then-prevailing Treasury Yield (as defined) and the
remaining life of the Exchange Notes. The Original Notes were issued by Choice
in an offering (the "Offering") of the Original Notes, consummated on May 4,
1998.
The Original Notes are, and the Exchange Notes will be, senior unsecured
obligations of the Company, ranking pari passu with all existing and future
senior debt of the Company and senior in right of payment to all future
subordinated debt of the Company. The Original Notes are, and the Exchange
Notes will be, guaranteed on a senior unsecured basis by QHE, QHE Partnership,
and, under certain circumstances, by other subsidiaries of the Company
(collectively, the "Subsidiary Guarantors"). The Indenture contains no limits
on the amount of debt that may be incurred by the Company and its subsidiaries.
(continued on next page)
--------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
--------
The date of this Prospectus is , 1998.
(continued from previous page)
The Company will accept for exchange any and all validly tendered Original
Notes not withdrawn on or prior to 5:00 p.m., New York City time, on ,
1998, unless the Exchange Offer is extended by the Company in its sole
discretion (if and as extended, the "Expiration Date"). Tenders of Original
Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Original Notes being tendered for exchange. The Original
Notes may be tendered only in integral multiples of $1,000. In the event the
Company terminates the Exchange Offer and does not accept for exchange any
Original Notes, the Company will promptly return all previously tendered
Original Notes to the Holders thereof. The Exchange Offer is subject to
customary conditions. See "The Exchange Offer--Conditions."
Based upon an interpretation by the staff of the Commission set forth in
certain no-action letters issued to third parties, the Company believes that a
holder (other than (i) a broker-dealer who purchases Exchange Notes directly
from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who exchanges Original Notes for Exchange Notes in the ordinary course of
business and who is not participating, does not intend to participate, and has
no arrangement with any person to participate, in a distribution of the
Exchange Notes, will be allowed to resell Exchange Notes to the public without
further registration under the Securities Act and without delivering the
purchasers of the Exchange Notes a prospectus that satisfies the requirements
of Section 10 of the Securities Act. However, if any holder acquires Exchange
Notes in the Exchange Offer for the purpose of distributing or participating
in the distribution of the Exchange Notes or is a broker-dealer, such holder
cannot rely on the position of the staff of the Commission enumerated in
certain no-action letters issued to third parties and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration
is otherwise available. Each broker-dealer that receives Exchange Notes for
its own account in exchange for Original Notes, where such Original Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Original Notes where
such Original Notes were acquired by such broker-dealer as a result of market-
making or other trading activities. Pursuant to the Registration Agreement,
the Company has agreed to make this Prospectus, as it may be amended or
supplemented from time to time, available to broker-dealers for use in
connection with any resale starting on the date hereof and ending on the close
of business on the earlier to occur of (i) the date on which all Exchange
Notes held by broker-dealers eligible to use the Prospectus to satisfy their
prospectus delivery obligations under the Securities Act have been sold and
(ii) the date 180 days after the Expiration Date. See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the
Exchange Notes. There can be no assurance as to the liquidity of any market
that may develop for the Exchange Notes, the ability of holders to sell the
Exchange Notes or the price at which holders would be able to sell the
Exchange Notes. The Company does not intend to list the Exchange Notes for
trading on any national securities exchange or over-the-counter market system.
Future trading prices of the Exchange Notes will depend on many factors,
including among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. See "Risk Factors--
Lack of Public Market."
Any Original Notes not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the rights and will be subject
to the limitations applicable thereto under the Indenture. Following
consummation of the Exchange Offer, the holders of Original Notes will
continue to be subject to the existing restrictions upon transfer thereof and
the Company will have no further obligation to such holders to provide for
registration under the Securities Act of the Original Notes held by them. To
the extent that Original Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered Original Notes could be adversely
affected. See "Risk Factors--Consequences of Failure to Exchange" and
"Exchange Offer--Procedures for Tendering."
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to this Exchange Offer will be issued in the form of one or more Global Notes
ii
(as defined herein), which will be deposited with, ortitled “Risk Factors” beginning on behalf of, The
Depository Trust Company (the "Depositary") and registered in its name or in
the name of its nominee. Beneficial interests in a Global Note representing
the Exchange Notes will be shown on, and transfers thereof will be effected
through, records maintained by the Depositary and its participants. After the
initial issuance of the Global Notes, Exchange Notes in certificated form will
be issued in exchangepage 28 for a Global Note only ondiscussion of various factors that you, as a stockholder of Wyndham, should consider about the terms set forth inOffer.
Neither the Indenture. See "Description of Exchange Notes--Book Entry, Delivery and Form."
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. No dealer-manager is being used in connection
with this Exchange Offer. The Company will pay all expenses incurred by it
incident to the Exchange Offer. See "Use of Proceeds" and "Plan of
Distribution."
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER, OR A
SOLICITATION IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS, NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
iii
TABLE OF CONTENTS
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 14
Use of Proceeds........................................................... 17
Capitalization............................................................ 18
Pro Forma Financial Information........................................... 18
The Exchange Offer........................................................ 19
Selected Historical Consolidated Financial Data........................... 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 30
Business.................................................................. 38
Management................................................................ 54
Security Ownership of Certain Beneficial Owners and Management............ 64
Certain Relationships and Related Transactions............................ 67
Relationship Between The Company and Sunburst............................. 67
Description of Certain Indebtedness....................................... 72
Description of Exchange Notes............................................. 73
Certain United States Federal Tax Consequences............................ 87
Plan of Distribution...................................................... 89
Legal Matters............................................................. 90
Independent Public Accountants............................................ 90
Index to Financial Statements............................................. F-1
AVAILABLE INFORMATION
The Company and the Subsidiary Guarantor has filed with theU.S. Securities and Exchange Commission (the "Commission"“SEC”) nor any state securities commission or regulatory authority has approved or disapproved of these securities or passed upon the adequacy or accuracy of this Exchange Offer. Any representation to the contrary is a registrationcriminal offense.
The Dealer Managers for this Exchange Offer are
Goldman Sachs & Co. LLC 200 West Street New York, NY 10282 Call Collect: (800) 323-5678 Call Toll-Free: (212) 902-1000 | Moelis & Company LLC 399 Park Avenue, 4th Floor New York, NY 10022 Call Toll Free: (800) 224-7417 |
The date of this Exchange Offer is December 12, 2023.
This Exchange Offer incorporates important business and financial information about Choice and Wyndham from documents filed with the SEC that have not been included in, or delivered with, this Exchange Offer. This information is available on the SEC’s website at http://www.sec.gov and from other sources. See the section of this Exchange Offer titled “Where You Can Find More Information” beginning on page 141.
You may also request copies of these documents from us, without charge, upon written or oral request to our Information Agent, MacKenzie Partners, Inc., at: (212) 929-5500 or toll-free: at: (800) 322-2885.
In order to receive timely delivery of the documents, you must make requests no later than five Business Days before the scheduled Expiration Date (as defined below) of the Offer, as it may be extended from time to time.
| 12 | ||||
| 16 | ||||
| 28 | ||||
CHOICE SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION | 41 | |||
WYNDHAM SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION | 42 | |||
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION | 43 | |||
| 45 | ||||
| 46 | ||||
| 48 | ||||
| 50 | ||||
| 58 | ||||
| 62 | ||||
| 62 | ||||
| 64 | ||||
| 66 | ||||
| 66 | ||||
| 66 | ||||
| 67 | ||||
Exchange of Shares of Wyndham Common Stock; Delivery of Choice Common Stock | 68 | |||
| 69 | ||||
| 69 | ||||
| 73 | ||||
| 74 | ||||
| 74 | ||||
| 78 | ||||
| 79 | ||||
| 81 | ||||
| 81 | ||||
| 82 | ||||
| 83 | ||||
| 85 | ||||
| 92 | ||||
| 93 | ||||
| 96 | ||||
| 97 | ||||
| 97 | ||||
| 98 | ||||
| 100 |
i
ii
QUESTIONS AND ANSWERS ABOUT THE OFFER
The following are some of the questions you, as a stockholder of Wyndham, may have and answers to those questions. These questions and answers, as well as the following summary, are not meant to be a substitute for the information contained in the remainder of this offer to exchange (“Exchange Offer”), including the information incorporated by reference and the related letter of election and transmittal and this information is qualified in its entirety by the more detailed descriptions and explanations contained in this Exchange Offer and in the related letter of election and transmittal (the Exchange Offer and such letter, together the “Offer”). We urge you to read both documents in their entirety prior to making any decision as to your shares of Wyndham Common Stock.
| Q: | WHO IS OFFERING TO ACQUIRE MY SHARES OF WYNDHAM COMMON STOCK? |
| A: | The Offer is being made by Choice through Purchaser, a wholly owned subsidiary of Choice formed for the purpose of making this Offer. Choice is primarily a hotel franchisor with franchise agreements and owned hotels located in 50 states, the District of Columbia and over 45 countries and territories, with brands including Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Clarion Pointe™, Ascend Hotel Collection®, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay Suites®, Suburban Studios™, WoodSpring Suites®, Everhome Suites®, Cambria® Hotels, Radisson Blu®, Radisson RED®, Radisson®, Park Plaza®, Country Inn & Suites® by Radisson, Radisson Inn & SuitesSM, Park Inn by Radisson®, Radisson Individuals®, and Radisson Collection®. Across these brands and nearly 7,500 hotel locations, Choice’s franchise portfolio runs the gamut from full-service, upper upscale properties to midscale, extended stay and economy, enabling Choice to meet travelers’ needs in more places and for more occasions while driving more value for franchise owners and Choice stockholders. |
| Q: | WHAT ARE THE CLASSES AND AMOUNTS OF WYNDHAM SECURITIES CHOICE IS OFFERING TO EXCHANGE IN THE OFFER? |
| A: | Choice is seeking to acquire all of the issued and outstanding shares of Wyndham Common Stock. |
| Q: | WHAT WILL I RECEIVE FOR MY SHARES OF WYNDHAM COMMON STOCK? |
| A: | Choice is offering to exchange, for each of the issued and outstanding shares of Wyndham Common Stock, at the election of the holder: |
the Standard Election Consideration set forth on the cover page of this Exchange Offer;
the Cash Election Consideration set forth on the cover page of this Exchange Offer; or
the Stock Election Consideration set forth on the cover page of this Exchange Offer; and, in each case, subject to the election and proration procedures described in this Offer and the Additional Consideration, if any.
1
We will not allot or issue fractional shares of Choice Common Stock to holders of Wyndham Common Stock who accept the Offer. To the extent you would be entitled to fractional shares, those fractional entitlements will be aggregated and, if a fractional share results from such aggregation, you will be entitled to receive, in lieu of such fractional share, an amount in cash determined by multiplying the fractional share by a price equal to the VWAP of Choice Common Stock as quoted on the NYSE over the five NYSE trading days ending on the 10th Business Day preceding the date of expiration of the Offer.
An election to receive the Standard Election Consideration, Cash Election Consideration or Stock Election Consideration shall be referred to as the Standard Election (“Standard Election”), Cash Election (“Cash Election”) or Stock Election (“Stock Election”), respectively.
Wyndham stockholders who tender their shares of Wyndham Common Stock in the Offer but do not make a valid election will be treated as if they made the Standard Election.
| Q: | WILL I HAVE TO PAY ANY FEES OR COMMISSIONS TO EXCHANGE SHARES OF WYNDHAM COMMON STOCK? |
| A: | If you are the owner of record of your shares of Wyndham Common Stock and you tender your shares of Wyndham Common Stock directly to Computershare Trust Company, N.A. (“Computershare”), the exchange agent for the Offer (the “Exchange Agent”), you will not have to pay brokerage fees, commissions or incur similar expenses. If you hold your shares of Wyndham Common Stock in “street name” through a broker, dealer, commercial bank, trust company or other nominee, and your broker, dealer, commercial bank, trust company or other nominee tenders the shares of Wyndham Common Stock on your behalf, your broker or such other nominee may charge you a fee for doing so. You should consult your broker, dealer, commercial bank, trust company or other nominee to determine whether any charges will apply. |
| Q: | WHAT IS THE PURPOSE OF THE OFFER? |
| A: | The purpose of the Offer is for Choice to acquire all of the outstanding shares of Wyndham Common Stock in order to combine the businesses of Choice and Wyndham. Choice intends, promptly after consummation of the Offer, to cause Purchaser to merge with and into Wyndham with Wyndham as the surviving corporation, immediately following which Wyndham will merge with and into NewCo with NewCo as the surviving corporation (i.e., the Second-Step Mergers), after which Wyndham would be a direct or indirect wholly owned subsidiary of Choice. The purpose of the Second-Step Mergers is for Choice to acquire all of the issued and outstanding shares of Wyndham Common Stock that are not acquired in the Offer. In the initial merger of the Second-Step Mergers, each Remaining Share (as defined below) of Wyndham Common Stock (other than shares held in treasury by Wyndham, shares held by Choice and its subsidiaries (which as of the date of this document is 1,447,264 shares of Wyndham Common Stock) and shares held by Wyndham stockholders who properly exercise applicable dissenters’ rights under Delaware law) |
2
| will be cancelled and converted into the right to receive, at the election of the Wyndham stockholders, the Cash Election Consideration or the Stock Election Consideration, subject to proration, or the Standard Election Consideration. After the Second-Step Mergers, Choice would own all of the issued and outstanding shares of Wyndham Common Stock. See the sections of this Exchange Offer titled “The Offer—Elections and Proration”; “The Offer—Purpose of the Offer; Second-Step Mergers”; “The Offer—Statutory Requirements; Approval of the Second-Step Mergers”; and “The Offer—Plans for Wyndham.” |
| Q: | HAVE YOU DISCUSSED THE OFFER WITH THE WYNDHAM BOARD? |
| A: | The Wyndham Board has refused to continue to discuss the Proposed Combination with Choice. Choice made numerous attempts to engage the Wyndham Board, making three private proposals between April and September 2023, increasing its proposed purchase price each time. As the Wyndham Board rejected each private proposal and refused to engage in meaningful discussions, Choice announced its offer to acquire Wyndham publicly on October 17, 2023. Following Wyndham’s public rejection of that proposal, Choice made a fourth proposal privately to Wyndham on November 14, 2023, reaffirming the economic and other terms of the prior proposal. Choice also proposed a regulatory termination fee, a ticking fee if the transaction did not close by a certain date and a proposal to take all actions required to obtain the requisite regulatory approvals so long as such actions would not have a material adverse effect on the combined company. The regulatory termination fee would have been payable if the transaction did not close due to the failure to obtain the requisite regulatory approvals and the ticking fee would have been payable upon a successful closing, if applicable. Choice also offered a mutual non-disclosure agreement to allow the parties to conduct confirmatory due diligence. On November 13, 2023, Choice began purchasing shares of Wyndham Common Stock on the open market. As of the date of this Offer, Choice has acquired in excess of $110 million of Wyndham Common Stock. On November 21, 2023, Wyndham publicly rejected the proposed terms of Choice’s offer made on November 14, 2023. In addition to rejecting each offer, the Wyndham Board declined Choice’s repeated requests for confidential mutual, confirmatory due diligence. Due to Wyndham’s unwillingness to even discuss the proposal for a negotiated transaction with Choice and the Wyndham Board’s public statements with respect to Choice’s prior proposals, and because Choice does not believe that it is appropriate for the Wyndham Board to have a veto right over whether the Offer is made available to Wyndham stockholders, Choice is making the Offer directly to Wyndham stockholders upon the terms and subject to the conditions set forth in this Exchange Offer as an alternative to a negotiated transaction. |
This Exchange Offer reflects the per share consideration (including the cash and stock mix and election proration mechanisms), and regulatory ticking fee offered by Choice to Wyndham in its November 14, 2023 proposal. See the section of this Offer titled “Background of the Offer” for more information on Choice’s earlier and most recent proposals. Within ten Business Days after the date of this Exchange Offer, Wyndham is required by law to publish, send or give to you (and file with the SEC) a statement as to whether it recommends acceptance or rejection of the Offer, that it has no opinion with respect to the Offer or that it is unable to take a position with respect to the Offer.
3
| Q: | WHY IS CHOICE MAKING THE OFFER? |
| A: | We believe that the combination of Choice and Wyndham represents a strategically and financially compelling value-creating opportunity for Wyndham stockholders and Choice and its stockholders. We also believe that the combined company will have substantial strategic benefits, including significant franchisee benefits and cost-driven synergies, enhanced competitiveness and acceleration of both companies’ long-term growth strategies. For a more complete description of compelling reasons for the Offer, see the section of this Exchange Offer titled “Reasons for the Offer” and for a discussion of some of the important factors that could prevent our strategy from being achieved, see the section of this Exchange Offer titled “Forward-Looking Statements.” |
| Q: | WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF RECEIVING SHARES OF CHOICE COMMON STOCK AND/OR CASH IN EXCHANGE FOR MY WYNDHAM SHARES IN THE OFFER AND THE FIRST MERGER? |
| A: | Provided that following the completion of the Offer and the Second-Step Mergers the value of the Choice shares constitutes at least 40% of the total value of the consideration (including any Additional Consideration) received by Wyndham stockholders, the Offer and the Second-Step Mergers, taken together, are intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. A U.S. holder (as defined under “Material U.S. Federal Income Tax Consequences”) of shares of Wyndham Common Stock that receives a combination of shares of Choice Common Stock and cash (other than cash received in lieu of fractional shares of Choice Common Stock) in exchange for shares of Wyndham Common Stock pursuant to the Offer and/or the First Merger generally will recognize gain (but not loss) for U.S. federal income tax purposes in an amount equal to the lesser of (i) the amount by which the sum of the fair market value of Choice Common Stock and cash received by the U.S. holder exceeds such U.S. holder’s adjusted tax basis in its shares of Wyndham Common Stock surrendered and (ii) the amount of cash received by such U.S. holder. A U.S. holder of shares of Wyndham Common Stock that receives solely Choice Common Stock (other than cash received in lieu of fractional shares of Choice Common Stock) in exchange for shares of Wyndham Common Stock pursuant to the Offer and/or the First Merger generally will not recognize any gain or loss for U.S. federal income tax purposes as a result of such exchange. A U.S. holder of shares of Wyndham Common Stock that receives solely cash in exchange for shares of Wyndham Common Stock pursuant to the Offer and/or the First Merger generally will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the cash received by the U.S. holder and such U.S. holder’s adjusted tax basis in its shares of Wyndham Common Stock surrendered. For this purpose any Additional Consideration should be treated as additional consideration received by a U.S. holder in exchange for its Wyndham Common Stock. |
Each Wyndham stockholder should read the discussion under “Material U.S. Federal Income Tax Consequences” for a more complete discussion of the U.S. federal income tax consequences of the Offer and the Second-Step Mergers. Tax matters can be complicated, and the tax consequences of the Offer and the Second-Step Mergers to a particular Wyndham stockholder will depend on Form S-4
(the "Registration Statement", which term shall include all amendments,
exhibits, annexessuch stockholder’s particular facts and schedules thereto)circumstances. Wyndham stockholders should consult their own tax advisors to determine the specific consequences to them of exchanging their shares of Wyndham Common Stock for the transaction consideration pursuant to the Securities Act,Offer or the First Merger.
4
| Q: | WHAT ARE THE CONDITIONS TO THE OFFER? |
| A: | The Offer is subject to a number of conditions, including the Minimum Tender Condition, the Anti-Takeover Devices Condition, the Registration Statement Condition, the Choice Stockholder Approval Condition, the Stock Exchange Listing Condition, the Competition Laws Condition, the Diligence Condition, the Financing Condition, the No Wyndham Material Adverse Effect Condition and the other conditions set forth in the section of this Exchange Offer titled “The Offer—Conditions to the Offer.” |
Subject to the applicable rules and regulations promulgated thereunder, coveringof the Exchange Notes
being offered hereby. This Prospectus doesSEC and the terms and conditions of the Offer, Choice expressly reserves the right (but will not contain allbe obligated) to waive any conditions to the information set
forth inOffer at any time, except for the Competition Laws Condition, the Registration Statement certain partsCondition, the Choice Stockholder Approval Condition and the Stock Exchange Listing Condition, in each case by giving oral or written notice of such waiver to the Exchange Agent and by making public announcement thereof.
| Q: | WHEN DO YOU EXPECT THE OFFER TO BE COMPLETED? |
| A: | The timing for consummation of the Exchange Offer and the Second-Step Mergers will depend on the satisfaction of the conditions to the Offer, including the expiration or termination of any applicable waiting periods as well as obtaining any approvals or clearances determined to be required as described in the Competition Laws Condition and the Wyndham Board or a court removing the obstacles to consummation of the Exchange Offer and the Second-Step Mergers described in the Anti-Takeover Devices Condition. As a result of the satisfaction of these conditions being outside of Choice’s control, there can be no certainty as to when, and whether, Choice will be able to complete the Offer. |
| Q: | WHAT OBSTACLES TO THE PROPOSED COMBINATION WITH WYNDHAM DOES THE ANTI-TAKEOVER DEVICES CONDITION COVER? |
| A: | The Anti-Takeover Devices Condition relates to obstacles to consummating the Exchange Offer and the Second-Step Mergers that the Wyndham Board could unilaterally eliminate, including: |
the interested stockholder provisions of Section 203 of the Delaware General Corporations Law (the “DGCL”) which are omittedwill not apply if the Wyndham Board approves the Exchange Offer and the Second-Step Mergers before either is consummated or if Choice is able to acquire in the Offer in excess of 85% of the shares of Wyndham Common Stock outstanding at the time the Offer commenced in accordance with Section 203 of the DGCL; and
the requirement for a stockholder vote on the Second-Step Mergers, which may be eliminated if the Wyndham Board approves a merger agreement, and the transaction is consummated, in accordance with Section 251(h) of the DGCL.
See the section of this Exchange Offer titled “The Offer—Conditions to the Offer—Anti-Takeover.”
5
| Q: | WHAT OBSTACLES TO THE PROPOSED COMBINATION WITH WYNDHAM DOES THE COMPETITION LAWS CONDITION COVER? |
| A: | The Competition Laws Condition relates to the expiration or termination of any applicable waiting periods, including under the HSR Act, as well as obtaining any approvals or clearances, including those required by any international bodies, if applicable, and, in each case, as determined to be required on terms satisfactory to Choice. On the date of this Exchange Offer, Choice filed the notification required for the consummation of the Proposed Combination by the HSR Act. Choice believes the proposed transaction will receive necessary clearance under the HSR Act. Choice commenced discussions with the FTC on December 5, 2023, regarding the proposed transaction and commits to take all actions required to obtain the requisite regulatory approvals so long as such actions would not have a material adverse effect on the combined company. See the section of this Exchange Offer titled “The Offer—Conditions to the Offer.” |
| Q: | DO I NEED TO VOTE AT ANY MEETING TO APPROVE THE OFFER OR THE SECOND-STEP MERGERS? |
| A: | Your vote is not required in connection with the Offer. You simply need to tender your shares of Wyndham Common Stock, if you choose to do so. In the event that Choice accepts shares of Wyndham Common Stock for exchange in the Offer, Choice intends to acquire all shares of Wyndham Common Stock not tendered in the Offer pursuant to the Second-Step Mergers. If the conditions to the Offer are satisfied, Choice accepts shares of Wyndham Common Stock for exchange, and a merger agreement is executed between Choice and Wyndham, no vote of Wyndham stockholders will be necessary to complete the Second-Step Mergers. |
| Q: | DO YOU INTEND TO ATTEMPT TO REPLACE WYNDHAM’S BOARD AT WYNDHAM’S 2024 ANNUAL MEETING OF STOCKHOLDERS? |
| A: | When permitted to do so pursuant to the Wyndham Bylaws, Choice intends to nominate at least a sufficient number of directors, who if elected, would constitute a majority of the Wyndham Board, to give the Wyndham stockholders another direct voice with respect to the Offer. Choice believes that the election of its nominees would further demonstrate that Wyndham stockholders support the Proposed Combination, in addition to the support shown by those stockholders tendering Wyndham Common Stock pursuant to the Offer. If our nominees are elected, they would be obligated to act in accordance with their duties as directors of Wyndham and would not owe any fiduciary duties to Choice. If elected, our nominees could take steps to support and facilitate the Offer and the Second-Step Mergers should the nominees, as new directors, deem it appropriate in the exercise of their duties to Wyndham and the Wyndham stockholders. |
Choice intends to solicit proxies from Wyndham stockholders (and, when permitted, to distribute definitive proxy materials and proxy cards to Wyndham stockholders) to vote in favor of the election of our nominees at Wyndham’s 2024 annual meeting of stockholders. The Offer does not constitute a solicitation of proxies in connection with such matter. Any such solicitation will be made only pursuant to separate proxy materials complying with the requirements of the rules and regulations of the Commission. CopiesSEC.
6
| Q: | IS CHOICE’S FINANCIAL CONDITION RELEVANT TO MY DECISION TO TENDER MY SHARES OF WYNDHAM COMMON STOCK IN THE OFFER? |
| A: | Yes. Unless you elect to receive the Cash Election Consideration, your election is not prorated and there is no Additional Consideration paid in shares of Choice Common Stock in accordance with the terms of this Offer, shares of Wyndham Common Stock accepted in the Offer will be exchanged in whole or in part for shares of Choice Common Stock and therefore you should consider Choice’s financial condition before you decide to become a Choice stockholder by accepting the Offer. You also should consider the effect that the Proposed Combination with Wyndham may have on Choice’s financial condition. In considering Choice’s financial condition, you should review the documents incorporated by reference in this Exchange Offer, as well as the unaudited pro forma condensed combined financial information set forth under the section of this Exchange Offer titled “Unaudited Pro Forma Condensed Combined Financial Statements,” because they contain detailed business, financial and other information about Choice. |
| Q: | HOW DOES THE OFFER RELATE TO CHOICE’S SOLICITATION OF PROXIES WITH RESPECT TO A SPECIAL MEETING OF CHOICE STOCKHOLDERS? |
| A: | A special meeting of Choice stockholders will be held to approve the issuance of the shares of Choice Common Stock in connection with the Exchange Offer and the Second-Step Mergers, as well as certain ancillary matters related to the Exchange Offer and the Second-Step Mergers. Choice expects to file a preliminary proxy statement with respect to a special meeting of Choice stockholders to obtain this approval prior to the expiration of this Offer, and it is Choice’s intention to obtain this approval prior to Wyndham’s 2024 annual meeting of stockholders. You do not need to take any action with respect to Choice’s solicitation of its stockholders in your capacity as a Wyndham stockholder. |
| Q: | DOES CHOICE HAVE THE FINANCIAL RESOURCES TO COMPLETE THE OFFER AND THE SECOND-STEP MERGERS? |
| A: | Choice expects to have sufficient financial resources to complete the transactions contemplated by the Offer and the Second-Step Mergers through a combination of (1) Choice’s cash on hand, (2) debt financing or (3) as necessary, a registered underwritten offering and/or private placement of equity or equity-linked securities. See the section of this Exchange Offer titled “The Offer—Financing of the Offer; Sources and Amount of Funds.” Although Choice believes it will have sufficient financial resources to complete the Offer and Second-Step Mergers, there can be no assurances Choice will obtain such financing. See the section of this Exchange Offer titled “The Offer—Conditions to the Offer— The Financing Condition.” For further discussion of Wyndham’s outstanding debt, see “Risk Factors—Choice has only conducted a review of Wyndham’s publicly-available information and has not had access to Wyndham’s non-public information. Therefore, Choice may not be able to retain certain agreements and may be subject to liabilities of Wyndham unknown to Choice, which may have a material adverse effect on Choice’s profitability, financial condition and results of operations and which may result in a decline in the market value of Choice Common Stock.” |
7
| Q: | WHAT PERCENTAGE OF CHOICE’S COMMON STOCK WILL FORMER HOLDERS OF SHARES OF WYNDHAM COMMON STOCK OWN AFTER THE OFFER? |
| A: | Choice estimates that, upon consummation of the Offer and the Second-Step Mergers, former Wyndham stockholders will own, in the aggregate, approximately 35% of Choice Common Stock on a diluted basis. For a more detailed discussion of the assumptions on which this estimate is based, see the section of this Exchange Offer titled “The Offer—Ownership of Choice After the Offer.” |
| Q: | WHEN DOES THE OFFER EXPIRE? |
| A: | The Offer is scheduled to expire at 5:00 p.m., New York City time, on March 8, 2024, unless further extended by Choice, in which case the Expiration Time will be the latest time and date on which the Offer, as so extended, expires (the “Expiration Time” and the date on which the Expiration Time occurs, the “Expiration Date”). For more information, you should read the discussion under the section of this Exchange Offer titled “The Offer—Extension, Termination and Amendment.” |
| Q: | CAN THE OFFER BE EXTENDED AND, IF SO, UNDER WHAT CIRCUMSTANCES? |
| A: | Choice may, in its sole discretion, at any time or from time to time until 9:00 a.m., New York City time, on the first Business Day after the previously scheduled Expiration Time, extend the Offer to a later Expiration Date and Expiration Time. For instance, the Offer may be extended if any of the conditions specified in “The Offer—Conditions to the Offer” are not satisfied prior to the scheduled Expiration Time. The Expiration Time of the Offer also may be subject to multiple extensions. Any decision to extend the Offer, and if so, for how long, will be made by Choice. Any decision by Choice to extend the Offer will be made public by an announcement regarding such extension as described in the section of this Exchange Offer titled “The Offer—Extension, Termination and Amendment.” |
| Q: | HOW DO I TENDER MY SHARES? |
| A: | In order for a holder of shares of Wyndham Common Stock to validly tender shares of Wyndham Common Stock pursuant to the Offer, the Exchange Agent must receive prior to the Expiration Time the letter of election and transmittal (or a manually or electronically signed copy thereof), properly completed and duly executed, together with any required signature guarantees or, in the case of a book-entry transfer, an Agent’s Message (as defined in the section of this Exchange Offer titled “The Offer—Exchange of Shares of Wyndham Common Stock; Delivery of Choice Common Stock”), and any other documents required by the letter of election and transmittal, at its address set forth on the back cover of this Exchange Offer and either (1) the certificates representing tendered shares of Wyndham Common Stock must be received by the Exchange Agent at such address or such shares of Wyndham Common Stock must be tendered pursuant to the procedure for book-entry transfer described below and the Book-entry Confirmation must be received by the Exchange Agent (including an Agent’s Message), in each case prior to the Expiration Time, or (2) the tendering Wyndham stockholder must comply with the guaranteed delivery procedures described in this Exchange Offer. For a complete discussion on the procedures for tendering your shares of Wyndham Common Stock, see the section of this Exchange Offer titled “The Offer—Procedure for Tendering.” |
8
| Q: | UNTIL WHAT TIME CAN I WITHDRAW TENDERED SHARES OF WYNDHAM COMMON STOCK? |
| A: | You may withdraw previously tendered shares of Wyndham Common Stock any time prior to the Expiration Time, and, if Choice has not accepted your shares of Wyndham Common Stock for exchange after the Expiration Time, at any time following 60 Business Days from commencement of the Offer. |
| Q: | HOW DO I WITHDRAW PREVIOUSLY TENDERED SHARES OF WYNDHAM COMMON STOCK? |
| A: | To withdraw previously tendered shares of Wyndham Common Stock, a written notice of withdrawal must be timely received by the Exchange Agent at its address set forth on the back cover page of this Exchange Offer. Any such notice of withdrawal must specify the name of the person who tendered the shares of Wyndham Common Stock to be withdrawn, the number of shares of Wyndham Common Stock to be withdrawn and the name of the registered holder of such shares of Wyndham Common Stock, if different from that of the person who tendered such shares of Wyndham Common Stock. If certificates representing shares of Wyndham Common Stock to be withdrawn have been delivered or otherwise identified to the Exchange Agent, then, prior to the physical release of such certificates, the serial numbers shown on such certificates must be submitted to the Exchange Agent and, unless such shares of Wyndham Common Stock have been tendered by or for the account of an Eligible Institution as described below, the signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution. If shares of Wyndham Common Stock have been tendered pursuant to the procedure for book-entry transfer as set forth in the section of this Exchange Offer titled “The Offer—Procedure for Tendering,” any notice of withdrawal must specify the name and number of the account at The Depository Trust Company (“DTC”), to be credited with the withdrawn shares of Wyndham Common Stock. For a complete discussion on the procedures for withdrawing your shares of Wyndham Common Stock, see the section of this Exchange Offer titled “The Offer—Withdrawal Rights.” |
| Q: | WHEN AND HOW WILL I RECEIVE THE OFFER CONSIDERATION IN EXCHANGE FOR MY TENDERED SHARES OF WYNDHAM COMMON STOCK? |
| A: | Choice will exchange all tendered and not properly withdrawn shares of Wyndham Common Stock promptly after the Expiration Time, upon the terms hereof and subject to the satisfaction or waiver of the conditions to the Offer, as set forth in the section of this Exchange Offer titled “The Offer—Conditions to the Offer.” Choice will deliver the consideration, including the Additional Consideration, if any, for your validly tendered and not properly withdrawn shares of Wyndham Common Stock by depositing the consideration therefor with the Exchange Agent, for the purpose of receiving consideration offered in the Offer (the “Offer Consideration”) from Choice and transmitting such consideration to you. In |
9
| all cases, an exchange of tendered shares of Wyndham Common Stock will be made only after timely receipt by the Exchange Agent of certificates for such shares of Wyndham Common Stock (or of a confirmation of a book-entry of such shares of Wyndham Common Stock as set forth in the section of this Exchange Offer titled “The Offer—Procedure for Tendering”) and a properly completed and duly executed letter of election and transmittal (or Agent’s Message) and any other required documents. |
| Q: | ARE DISSENTERS’ OR APPRAISAL RIGHTS AVAILABLE IN EITHER THE OFFER AND/OR THE SECOND-STEP MERGERS? |
| A: | No dissenters’ or appraisal rights are available in connection with the Offer. However, in connection with the First Merger, which Choice expects to be consummated promptly after consummation of the Offer without a vote of Wyndham stockholders, Wyndham stockholders who have not tendered their shares of Wyndham Common Stock in the Offer will have rights under Delaware law to dissent from the First Merger and demand appraisal of their shares of Wyndham Common Stock. Stockholders who perfect dissenters’ rights by complying with the procedures set forth in Section 262 of the DGCL will be entitled to receive a cash payment equal to the “fair value” of their shares of Wyndham Common Stock, as determined by a Delaware court. See the section of this Exchange Offer titled “The Offer—Appraisal/Dissenters’ Rights” and “The Offer—Conditions to the Offer.” |
| Q: | WHAT IS THE MARKET VALUE OF MY SHARES OF WYNDHAM COMMON STOCK AS OF A RECENT DATE? |
| A: | The closing price of Wyndham Common Stock on the NYSE on December 4, 2023 was $78.21. |
| Q: | WHAT IS THE TOTAL CONSIDERATION WORTH? |
| A: | Based on the closing price of Choice Common Stock on the NYSE on December 4, 2023 of $114.31, the equivalent market value of the Standard Election would be $86.54. Based on Wyndham’s closing share price of $65.65 as of May 22, 2023, the day before the potential transaction contemplated by this Offer was first reported by TheWall Street Journal (such date, the “Unaffected Date”), Choice’s offer of $49.50 in cash and 0.324 shares of Choice Common Stock per share of Wyndham Common Stock represented a 32% premium to the value of Wyndham’s Common Stock. |
The closing price of such
material canChoice Common Stock used in the above calculation is for purposes of illustration only. The price of Choice Common Stock fluctuates and may be obtained fromhigher or lower than the Company upon request.
The Company is subjectprice assumed in this example at the time shares of Wyndham Common Stock are exchanged pursuant to the informational requirementsOffer. The price of Choice Common Stock has decreased since the Securities
Exchange Act of 1934, as amended,Unaffected Date. Stockholders are encouraged to obtain current market quotations for Wyndham Common Stock and the rules and regulations promulgated
thereunder (the "Exchange Act") and, in accordance therewith, file reports,
proxy statements and other information with the Commission. All such
information filed by the Company with the Commission may be inspected at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, or at its regional offices located
at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and 7 World Trade Center, 13th Floor, New York, New York 10007. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. Such Web site is located at
http://www.sec.gov. WhileChoice Common Stock prior to making any Exchange Notes remain outstanding, the Company
will make available, upon request, to any holder of the Exchange Notes, the
information required pursuant to Rule 144A(d)(4) under the Securities Act
during any period in which the Company is not subject to Section 13 or 15(d)
of the Exchange Act. Any such request should be directed to the General
Counsel of the Company at 10750 Columbia Pike, Silver Spring, Maryland 20901.
iv
FORWARD-LOOKING INFORMATION
Certain statements contained in this Prospectus under the captions
"Prospectus Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere constitute
estimates of future performance or other forward-looking statements within the
meaning of Section 27A of the Securities Act. Forward-looking statements
include statements regarding the intent, belief or current expectations of the
Company, primarilydecision with respect to the future operating performanceOffer.
10
| Q: | HOW AND WHEN WILL YOU NOTIFY ME OF THE VALUE OF THE CASH ELECTION AND THE STOCK ELECTION? |
| A: | We will issue a press release on the 10th Business Day preceding the scheduled date of expiration of the Offer, which will specify the equivalent market value of the Standard Election Consideration and the resulting amount of the Cash Election Consideration and the number of shares of Choice Common Stock comprising the Stock Election Consideration, subject to proration, as applicable, and the Additional Consideration, if any. |
| Q: | HOW MAY I CHANGE MY ELECTION TO TENDER? |
| A: | An election to tender is irrevocable, except the shares of Wyndham Common Stock tendered pursuant to the Offer may be withdrawn at any time prior to the Expiration Time and, if Choice has not accepted shares of Wyndham Common Stock for exchange, at any time following 60 Business Days from commencement of the Offer. After a valid withdrawal, shares of Wyndham Common Stock may be re-tendered at any time prior to the Expiration Time and a new election may be made by following one of the procedures described in the section of this Exchange Offer titled “The Offer—Procedure for Tendering.” |
| Q: | WHERE CAN I FIND OUT MORE INFORMATION ABOUT CHOICE AND WYNDHAM? |
| A: | You can find out information about Choice and Wyndham from the sources described under the section of this Exchange Offer titled “Where You Can Find More Information.” |
| Q: | WHO CAN I CONTACT WITH ANY ADDITIONAL QUESTIONS ABOUT THE OFFER? |
| A: | You can call the Information Agent or the Dealer Managers for the Offer. |
The Information Agent for the Offer is:
MacKenzie Partners, Inc.
Toll-Free: (800) 322-2885
Email: exchangeoffer@mackenziepartners.com
The Dealer Managers for the Offer are:
| Goldman Sachs & Co. LLC | Moelis & Company LLC | |
| 200 West Street | 399 Park Avenue, 4th Floor | |
| New York, NY 10282 | New York, NY 10022 | |
| Toll-Free: (800) 323-5678 | Toll-Free: (800) 224-7417 | |
| Attention: Equity Capital Markets |
11
This Exchange Offer and the documents incorporated by reference herein contain certain statements that are forward-looking. Certain, but not necessarily all, of the
Company or related industry developments. When used in this Prospectus, terms
such as "anticipate," "believe," "estimate," "expect," "intend," "may be,"
"objective," "plan," "predict" and "will be" are intended to identify such
statements. Any such forward-looking statements can be identified by the use of forward-looking terminology, such as “expect,” “estimate,” “believe,” “anticipate,” “should,” “will,” “forecast,” “plan,” “project,” “assume” or similar words of futurity. All statements other than historical facts are forward-looking statements. These forward-looking statements are based on management’s current beliefs, assumptions and expectations regarding future events, which in turn are based on information currently available to management. Such statements may relate to projections of our revenue, expenses, Adjusted EBITDA , earnings, debt levels, ability to repay outstanding indebtedness, payment of dividends, repurchases of common stock and other financial and operational measures, including occupancy and open hotels, revenue per available room, our ability to benefit from any rebound in travel demand and our liquidity, among other matters. We caution you not guarantees ofto place undue reliance on any such forward-looking statements. Forward-looking statements do not guarantee future performance and involve known and unknown risks, uncertainties and other importantfactors. Several factors that could cause theour actual results, performance or achievements of the Company to differ materially from any future results,
performancethose expressed in or achievements expressed or impliedcontemplated by suchthe forward-looking statements. Such risks include, but are not limited to:
the ultimate outcome of the Offer and the Second-Step Mergers, including the possibility that the parties will not agree to pursue a business combination transaction or that the terms of any definitive agreement will be materially different from those proposed or the ultimate removal or the failure to render inapplicable the obstacles to consummation of the Offer and the Second-Step Mergers described in the Anti-Takeover Devices Condition by the Wyndham Board;
uncertainties as to whether Wyndham will cooperate with Choice regarding the proposed transaction;
the ultimate result should Choice determine to commence a proxy contest for election of directors to Wyndham Board;
Choice’s ability to consummate the proposed transaction with Wyndham;
the conditions to the completion of the proposed transaction, including the receipt of any required shareholder approvals and any required regulatory approvals;
Choice’s ability to finance the proposed combination with Wyndham;
Choice’s indebtedness, including the substantial indebtedness Choice expects to incur in connection with the proposed transaction with Wyndham and the need to generate sufficient cash flows to service and repay such debt;
the possibility that Choice may be unable to achieve expected synergies and operating efficiencies within the expected time-frames or at all and to successfully integrate Wyndham’s operations with those of Choice, including the Choice loyalty program;
the possibility that Choice may be unable to achieve the benefits of the proposed transaction for its franchisees, associates, investors and guests within the expected timeframes or at all, including that such integration may be more difficult, time-consuming or costly than expected;
12
that operating costs and business disruption (including, without limitation, difficulties in maintaining relationships with associates, guests or franchisees) may be greater than expected following the proposed transaction or the public announcement of the Proposed Combination;
the retention of certain key employees may be difficult;
our ability to attract and retain key personnel;
changes to general, domestic and foreign economic conditions, including access to liquidity and capital;
the resurgence of the COVID-19 pandemic, including with respect to new strains or variants, and the related impact on the global hospitality industry, particularly but not exclusively the U.S. travel market;
changes in consumer demand and confidence, including consumer discretionary spending and the demand for travel, transient and group business;
future domestic or global outbreaks of epidemics, pandemics or contagious diseases, or fear of such outbreaks;
changes in law and regulation applicable to the travel, lodging or franchising industries, including with respect to the status of our relationship with employees of our franchisees;
foreign currency fluctuations;
impairments or declines in the value of our assets;
operating risks common in the travel, lodging or franchising industries;
changes to the desirability of our brands as viewed by hotel operators and customers;
changes to the terms or termination of our contracts with franchisees and our relationships with our franchisees;
our ability to keep pace with improvements in technology utilized for marketing and reservations systems and other important factors include,
among other things:operating systems;
our ability to grow our franchise system;
exposure to risks related to our hotel development, financing and ownership activities;
exposures to risks associated with our investments in new businesses;
fluctuations in the Company's plans to market new brands and products; the
Company's success in implementing its business strategies, including its
success in arranging financing where required; the balance between supply of and demand for hotel rooms; the Company's
our ability to developrealize anticipated benefits from other acquired businesses;
impairments or losses relating to acquired businesses;
the level of acceptance of alternative growth strategies we may implement;
the impact of inflation;
cybersecurity and maintain
positive relationsdata breach risks;
climate change and sustainability related concerns;
ownership and financing activities;
hotel closures or financial difficulties of our franchisees;
operating risks associated with currentour international operations;
labor shortages;
the outcome of litigation; and potential franchisees;
our ability to effectively manage our indebtedness, and secure our indebtedness, including additional indebtedness incurred as a result of the Company's plans
to expand its international franchise operations; competition; government
regulation; general economic and business conditions;successful consummation of the Proposed Combination.
13
Additional risks that may affect Choice’s operations and other factors referencedthat are set forth in this Prospectus. the “Risk Factors” section, the “Legal Proceedings” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of Choice’s 2023 Annual Report on Form 10-K, as well as in Choice’s Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC.
These forward-looking statements speak only as of the date of this Prospectus. The Company expressly disclaimscommunication or as of the date to which they refer, and Choice assumes no obligation to update any obligationforward-looking statements as a result of new information or undertaking to disseminate any updatesfuture events or revisionsdevelopments, except as required by law.
See also the section of this Exchange Offer titled “Risk Factors.”
This Exchange Offer also includes certain non-GAAP financial measures, including those described below.
Choice evaluates its operations utilizing, among others, the performance metric Adjusted EBITDA , which is a non-GAAP financial measurement. This measure should not be considered as an alternative to any forward-lookingmeasure of performance or liquidity as promulgated under or authorized by GAAP, such as net income. Choice’s calculation of this measurement may be different from the calculations used by other companies, including Wyndham, and comparability may therefore be limited. We discuss management’s reasons for reporting this non-GAAP measure and how it is calculated below.
In addition to the specific adjustments noted below with respect to Adjusted EBITDA , the non-GAAP measures presented herein also exclude restructuring of the company’s operations including employee severance benefit, income taxes and legal costs, acquisition related due diligence, transition and transaction costs, and gains/losses on sale/disposal and impairment of assets primarily related to hotel ownership and development activities to allow for period-over-period comparison of ongoing core operations before the impact of these discrete and infrequent charges.
Calculation of Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA”): Adjusted EBITDA reflects net income excluding the impact of interest expense, interest income, provision for income taxes, depreciation and amortization, franchise-agreement acquisition cost amortization, other (gains) and losses, equity in net income (loss) of unconsolidated affiliates, mark-to-market adjustments on non-qualified retirement plan investments, share based compensation expense (benefit) and surplus or deficits generated by reimbursable revenue from franchised and managed properties. We consider Adjusted EBITDA and Adjusted EBITDA margins to be an indicator of operating performance because it measures our ability to service debt, fund capital expenditures, and expand our business. We also use these measures, as do analysts, lenders, investors, and others, to evaluate companies because it excludes certain items that can vary widely across industries or among companies within the same industry. For example, interest expense can be dependent on a company’s capital structure, debt levels, and credit ratings, and share based compensation expense (benefit) is dependent on the design of compensation plans in place and the usage of them. Accordingly, the impact of interest expense and share based compensation expense (benefit) on earnings can vary significantly among companies. The tax positions of companies can also vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a
14
result, effective tax rates and provision for income taxes can vary considerably among companies. These measures also exclude depreciation and amortization because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets or amortizing franchise-agreement acquisition costs. These differences can result in considerable variability in the relative asset costs and estimated lives and, therefore, the depreciation and amortization expense among companies. Mark-to-market adjustments on non-qualified retirement-plan investments recorded in SG&A are excluded from EBITDA, as the company accounts for these investments in accordance with accounting for deferred-compensation arrangements when investments are held in a rabbi trust and invested. Changes in the fair value of the investments are recognized as both compensation expense in SG&A and other gains and losses. As a result, the changes in the fair value of the investments do not have a material impact on Choice’s net income. Surpluses and deficits generated from reimbursable revenues from franchised and managed properties are excluded, as Choice’s franchise and management agreements require these revenues to be used exclusively for expenses associated with providing franchise and management services, such as central reservation and property-management systems, hotel employee and operating costs, reservation delivery and national marketing and media advertising. Franchised and managed property owners are required to reimburse the company for any deficits generated from these activities and Choice is required to spend any surpluses generated in future periods. Since these activities will be managed to break-even over time, quarterly or annual surpluses and deficits have been excluded from the measurements utilized to assess the company’s operating performance.
15
This summary highlights the material information in this Exchange Offer. To more fully understand the offer to Wyndham stockholders, and for a more complete description of the terms of the Offer and the Second-Step Mergers, you should read carefully this entire document, including the exhibits, schedules and documents incorporated by reference herein, and the other documents referred to herein. For information on how to obtain the documents that are on file with the SEC, see the section of this Exchange Offer titled “Where You Can Find More Information.”
Information About the Companies (see page 63)
Choice
Choice, a NYSE-listed company, is primarily a hotel franchisor operating in 50 states, the District of Columbia and over 45 countries and territories. At September 30, 2023, we had 7,463 hotels with 627,694 rooms open and operating, and 980 hotels with 99,076 rooms under construction, awaiting conversion, approved for development or committed to future franchise development on outstanding master development agreements. Our brand names include Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Clarion PointeTM, Ascend Hotel Collection®, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay Suites®, Suburban StudiosTM, WoodSpring Suites®, Everhome Suites®, and Cambria® Hotels.
Additionally, through our acquisition of Radisson, completed on August 11, 2022, our brands expanded to include Radisson Blu®, Radisson RED®, Radisson®, Park Plaza®, Country Inn & Suites® by Radisson, Radisson Inn & SuitesSM, Park Inn by Radisson®, Radisson Individuals®, and Radisson Collection®, which are located across the United States, Canada, the Caribbean and Latin America.
Choice was incorporated in 1980 in the State of Delaware.
Choice’s principal executive offices are located at 915 Meeting St., North Bethesda, Maryland 20852, and its telephone number at that location is (301) 592-5000.
Additional information concerning Choice is included in the Choice reports incorporated by reference in this Exchange Offer. See the section in this Exchange Offer titled “Where You Can Find More Information.”
Purchaser
Purchaser is a Delaware corporation incorporated on December 7, 2023 with principal executive offices at 915 Meeting St., North Bethesda, Maryland 20852. The telephone number of Purchaser’s principal executive offices is (301) 592-5000. Purchaser is a wholly owned subsidiary of Choice that was formed to facilitate the transactions contemplated by this Exchange Offer. Purchaser has engaged in no activities to date and has no material assets or liabilities of any kind, in each case, other than those incidental to its formation and its activities and obligations in connection with the Offer.
16
Wyndham
Wyndham, a NYSE-listed company, is primarily a hotel franchisor, with approximately 9,100 affiliated hotels with approximately 843,000 rooms located in over 95 countries and welcoming over 130 million guests annually worldwide. Wyndham operates a hotel portfolio of 24 brands, including Vienna House and ECHO Suites Extended Stay by Wyndham, its first economy extended stay brand launched in the first quarter of 2022. Wyndham’s 24 brands are primarily located in secondary and tertiary cities and approximately 80% of the U.S. population lives within ten miles of at least one of its affiliated hotels.
Wyndham was incorporated in 2017 under the laws of the state of Delaware in connection with its 2018 spin-off from Wyndham Worldwide Corporation. Wyndham’s principal executive offices are located at 22 Sylvan Way, Parsippany, New Jersey 07054, and its telephone number at that location is (973) 753-6000.
Additional information concerning Wyndham is included in the Wyndham reports incorporated by reference in this Exchange Offer. See the section in this Exchange Offer titled “Where You Can Find More Information.”
The Offer (see page 77)
Choice is offering to exchange, for each issued and outstanding share of Wyndham Common Stock, at the election of the holder:
the Standard Election Consideration set forth on the cover page of this Exchange Offer;
the Cash Election Consideration set forth on the cover page of this Exchange Offer; or
the Stock Election Consideration set forth on the cover page of this Exchange Offer; and, in each case,
subject to the election and proration procedures described in this Exchange Offer and in the related letter of election and transmittal and the Additional Consideration, if any. We will not allot or issue fractional shares of Choice Common Stock. To the extent that holders of Wyndham Common Stock are entitled to fractional shares, those fractional entitlements will be aggregated and, if a fractional share results from such aggregation, the holders of Wyndham Common Stock will be entitled to receive, in lieu of such fractional share, an amount in cash determined by multiplying the fractional share by a price equal to the VWAP of Choice Common Stock as quoted on the NYSE over the five NYSE trading days ending on the 10th Business Day preceding the date of expiration of the Offer, and will be paid promptly following our acceptance of shares of Wyndham Common Stock in the Offer, subject to the satisfaction and/or waiver of the conditions to the Offer as further described herein. See the section of this Exchange Offer titled “The Offer—Conditions to the Offer.”
17
Elections and Proration (see page 79)
Choice plans to pay an aggregate of approximately $4.2 billion in cash in the Offer and the Second-Step Mergers, which represents the total amount of the Cash Election Consideration available under the Offer, excluding any cash that may be paid as Additional Consideration. In order to reserve a proportionate amount of cash for payment in the Second-Step Mergers, Choice will pay pursuant to the Offer an amount in cash (the “Total Cash Payable in the Offer”) equal to approximately $4.2 billion multiplied by the percentage of the shares of Wyndham Common Stock on a diluted basis (including shares of Wyndham Common Stock owned by Choice or its subsidiaries) that are tendered and accepted for exchange in the Offer. For this purpose, Choice has estimated and will therefore assume that the number of shares of Wyndham Common Stock on a diluted basis (including shares of Wyndham Common Stock owned by Choice or its subsidiaries) is 84.9 million.
As a result, the Total Cash Payable in the Offer will equal:
$4.2 billion, multiplied by
the number of shares of Wyndham Common Stock that are tendered and accepted for exchange in the Offer, divided by
84.9 million.
If, after taking into account elections by tendering Wyndham stockholders, the cash payable in the Offer would otherwise be different from the Total Cash Payable in the Offer, elections that tendering Wyndham stockholders have made (Cash Elections or Stock Elections, as applicable) will be subject to proration (and the prorated amounts will be deemed to be Stock Elections or Cash Elections, as applicable) such that the cash payable in the Offer is equal to the Total Cash Payable in the Offer. See the section of this Exchange Offer titled “The Offer—Elections and Proration” for more information on the proration procedures.
The difference between $4.2 billion and the Total Cash Payable in the Offer is being reserved for payment in connection with the Second-Step Mergers. In addition, if payable, the Additional Consideration will be paid in cash or shares of Choice Common Stock at Choice’s election, regardless of the election made by Wyndham stockholders.
Reasons for the Offer (see page 73)
We are confident that the Proposed Combination represents a financially and strategically compelling, value-creating opportunity for Wyndham stockholders and Choice stockholders. Based on our discussions with significant Wyndham stockholders and Choice stockholders, we believe there is broad support for the Proposed Combination. Wyndham stockholders have routinely cited the persuasive industrial logic and appreciate the value that could be created by combining Choice and Wyndham, which Choice is convinced outweighs—and is incremental to—anything Wyndham could achieve on its own. We believe the Offer is the best available option for Wyndham stockholders to maximize the value of their investment. In fact, members of Wyndham’s own leadership have acknowledged the industrial logic of the Proposed Combination.
18
We believe the Offer is financially compelling to the Wyndham stockholders for the following reasons:
| • | Attractive Valuation: Choice’s offer to Wyndham is comprised of $49.50 in cash and 0.324 shares of Choice Common Stock per share of Wyndham Common Stock, representing a value of $40.50 based on Choice’s trading price as of October 16, 2023, the day prior to Choice’s first public offer (the “Pre-Release Date”). As of the Pre-Release Date, the proposed offer price equates to a 30% premium to Wyndham’s closing share price of $69.10, and reflects a 14.9x multiple of Wyndham’s consensus 2023 adjusted EBITDA estimate, a forward multiple Wyndham has never achieved, absent COVID-19 disruptions. |
| • | Immediate Value Realization: The $49.50 per share cash component of the Standard Election Consideration provides Wyndham stockholders with an opportunity to realize significant immediate cash value for their shares. |
| • | Substantial Long-Term Value: The significant stock component of the Choice offer will provide Wyndham stockholders with a substantial ongoing equity interest in the combined company, allowing Wyndham stockholders to benefit from the resulting synergies and substantial long-term value creation opportunities of the combined company, a value proposition that would be difficult to achieve by either company on a standalone basis. |
We believe the Offer is strategically compelling for the following reasons:
| • | Franchisee Benefits: The combined company will be well-positioned to capitalize on Choice’s proven franchisee success system and provide franchisees with significant benefits and lower costs by: |
driving more business to franchisees through lower-cost direct booking channels, resulting in lower customer acquisition commissions and fees, and lower hotel operating costs and technology-driven labor efficiencies, while continuing to control their own commercial and pricing strategy;
nearly doubling the resources available to spend on marketing up to approximately $1.2 billion, which expands customer reach and drives direct bookings to franchisees’ hotels;
establishing a larger rewards member base with potentially 168 million members that is on par and able to effectively compete with the top global programs in hospitality;
improving value of franchisees’ real estate assets by enhancing applicable cap rates and cash flows resulting from affiliation with the combined company;
19
allowing franchisees to scale properties and create far greater conversion and co-branding opportunities;
offering guests a broader portfolio of brands, no matter their stay occasions, within a single system; and
promoting increased investment and innovation in proprietary technology systems, processes, and training at the hotel and corporate level, driving incremental topline reservation delivery to hotel owners’ properties, while lowering the total cost of hotel operations returns for current Choice franchisees.
| • | Significant Synergies: Choice believes there are approximately $150 million of annual cost-driven synergies, the majority of which could be achieved within 24 months following the Second-Step Mergers. Wyndham stockholders would stand to benefit from their share of over $2 billion of potential value creation from the realization of such synergies, based on applying Choice’s Pre-Release Adjusted EBITDA for the next twelve months trading multiple of approximately 13.8x to such synergies. Choice’s management has a robust track record of realizing cost savings and is therefore well-positioned to deliver synergies faster, more efficiently, and with a greater impact. |
| • | Deleveraging Opportunity: The combined company is expected to benefit from significant free cash flow growth, enabling accelerated deleveraging of its balance sheet following the Second-Step Mergers, while still being able to maintain continued investment in the business. Choice expects that at the time the Proposed Transaction closes, it will have a net debt to Adjusted EBITDA leverage ratio of approximately 5.25x, with a year one interest coverage ratio of approximately 3.0x, a long-term leverage target of approximately 3-4x and an expectation to return to its target leverage range within 24 months of the consummation of the Offer and Second-Step Mergers. |
| • | Enhanced Competitive Position: The combined company’s expected total revenue and annual Adjusted EBITDA for 2024 of approximately $3.1 billion and $1.4 billion, which includes run-rate cost synergies of approximately $150 million, respectively, being generated by potentially millions of unique guests annually and 168 million rewards members staying across a portfolio of 16,360 hotels and 1.43 million rooms, would increase its competitive position against larger industry players, which includes lodging peers (e.g., traditional hotel companies such as Marriott and Hilton), online distributors (e.g., Expedia and Booking Holdings, etc.) and alternative accommodation providers (e.g., Airbnb and VRBO, etc.). The combined company is also expected to create a leading platform to broaden its offerings in the expanding global lodging market, which was at $411 billion in 2022 and expected to reach $744 billion in 2028, approximately $25 billion in gross rooms revenue, 150 million plus annual check-ins, 300 million plus occupied rooms/nights, $411 billion global lodging and $133 billion US lodging total addressable market metrics. Choice also believes that the combined company is projected to grow rapidly at a rate of 7-10% on an annualized basis. The Choice Board believes this will allow the combined company to be strategically positioned to grow its share, increase efficiency, and allow for excess cash flow generation to fund continuous deleveraging and innovation. Customers of the combined company would benefit from having streamlined and integrated end-to-end solutions and services. |
20
| • | Proven Leadership: A combination of the two companies will require strong, tested leadership to build a new culture and organizational structure, assimilate global systems and drive the expected growth. Through Choice’s acquisition of Radisson, completed on August 11, 2022, its brands expanded to include Radisson Blu®, Radisson RED®, Radisson®, Park Plaza®, Country Inn & Suites® by Radisson, Radisson Inn & SuitesSM, Park Inn by Radisson®, Radisson Individuals®, and Radisson Collection®, which are located across the United States, Canada, the Caribbean and Latin America. The successful Radisson acquisition, including the better-than-expected realization of revenue and cost-driven synergies resulting in such business growing from negative $12 million of Adjusted EBITDA in 2021 to an expected $80 million in 2024 is evidence of our management team’s ability to successfully integrate a meaningful acquisition. With Radisson franchisees already benefitting meaningfully from lower OTA commissions, increased guest traffic to direct and digital traffic, improvement in conversion rates and access to more corporate accounts, Choice’s management has demonstrated that it can integrate large hotel operations into its own and produce stockholder benefits across its brands. |
See the section of this Exchange Offer titled “Reasons for the Offer” for more information.
Conditions to the Offer (see page 100)
The Offer is conditioned upon satisfaction, in the reasonable judgment of Choice, of the following conditions:
| • | Minimum Tender Condition — There shall have been validly tendered and not properly withdrawn prior to the expiration of the Offer, a number of shares of Wyndham Common Stock which, together with any other shares of Wyndham Common Stock that Choice (or its controlled affiliates, including Purchaser) then owns or has a right to acquire, is a majority of the total number of outstanding shares of Wyndham Common Stock on a fully diluted basis as of the date that we accept shares of Wyndham Common Stock for exchange pursuant to the Offer. |
| • | Anti-Takeover Devices Condition — The impediments to the consummation of the Offer and the Second-Step Mergers which the Wyndham Board can remove shall have been rendered inapplicable to the Offer and the Second-Step Mergers. The following shall have occurred: |
the Wyndham Board shall have approved the Offer and the Second-Step Mergers under Section 203 of the DGCL, or Section 203 of the DGCL shall otherwise be inapplicable to the Offer and the Second-Step Mergers or Choice shall acquire in the Offer in excess of 85% of the shares of Wyndham Common Stock outstanding at the time the transaction commenced in accordance with Section 203 of the DGCL;
21
the Wyndham Board shall have taken steps to ensure that the Second-Step Mergers can be completed in the short-form manner permitted by Section 251(h) of the DGCL; and
any other impediments to the consummation of the Offer and Second-Step Mergers of which Choice is (on the date of this Exchange Offer) unaware and which the Wyndham Board can remove shall have been removed or otherwise rendered inapplicable to the Offer and the Second-Step Mergers.
| • | Choice Stockholder Approval Condition — Choice stockholders shall have approved (i) the issuance of Choice Common Stock contemplated in connection with the Offer and the First Merger, in accordance with the rules of the NYSE, on which the Choice Common Stock is listed and (ii) other matters ancillary to the Offer and the Second-Step Mergers. Choice expects to file a preliminary proxy statement with respect to a special meeting of Choice stockholders to obtain this approval prior to the Expiration Time of this Exchange Offer, and it is Choice’s intention to obtain this approval prior to Wyndham’s 2024 annual meeting of stockholders. |
| • | Competition Laws Condition — The waiting period applicable to the Offer and the Second-Step Mergers under the HSR Act, shall have expired or been terminated (the “HSR Condition”). The waiting period (or extension thereof) applicable to the Offer and the Second-Step Mergers under any applicable antitrust laws and regulations, other than the HSR Act, shall have expired or been terminated, and any approvals or clearances, including those required by any international bodies, if applicable, and, in each case as determined by Choice to be required or advisable thereunder shall have been obtained on terms satisfactory to Choice (together with the HSR Condition, the “Competition Laws Condition”). On the date of this Exchange Offer, Choice filed the notification required for the consummation of the Proposed Combination by the HSR Act. |
| • | Diligence Condition— Choice shall have been given access to Wyndham’s non-public information related to Wyndham’s business, assets, and liabilities to complete its confirmatory due diligence review and Choice shall have concluded, in its reasonable judgment, that there are no material adverse facts or developments concerning or affecting Wyndham’s business, assets and liabilities that have not been publicly disclosed prior to the commencement of the Offer that would result or be reasonably likely to result in a diminution in the value of shares of Wyndham Common Stock or the benefits expected to be derived by Choice as a result of the transactions contemplated by the Offer and the Second-Step Mergers (in either event, a “Diminution of Value”). The Diligence Condition is only a condition to the Offer due to the fact that Wyndham has refused to engage in meaningful discussions with respect to a negotiated transaction, and accordingly, Choice has had to rely solely on publicly available information. |
| • | Financing Condition — Choice shall have obtained financing proceeds in amounts, together with its cash on hand, sufficient to consummate the Exchange Offer and the Second-Step Mergers and pay related fees and expenses. |
22
| • | Stock Exchange Listing Condition — The Choice Common Stock issuable to Wyndham stockholders in connection with the Offer and the Second-Step Mergers shall have been approved for listing on the NYSE, subject to official notice of issuance. |
| • | Registration Statement Condition — The registration statement of which this Exchange Offer is a part shall have become effective under the Securities Act of 1933, as amended (“Securities Act”). No stop order suspending the effectiveness of the registration statement shall have been issued, and no proceedings for that purpose shall have been initiated or be threatened, by the SEC. |
| • | No Injunction Condition — No court or other governmental entity of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any law, statute or ordinance, common law, rule, regulation, standard, judgment, order, writ, injunction, decree, arbitration award or agency requirement (whether temporary, preliminary or permanent) that is in effect and restrains, enjoins or otherwise prohibits consummation of the Offer and the Second-Step Mergers. |
| • | No Wyndham Material Adverse Effect Condition —Since December 31, 2022, there shall not have occurred any change, event, circumstance or development (“Circumstance”), that has had, or would reasonably be likely to have, a Wyndham Material Adverse Effect, as described in the section of this Offer titled “The Offer—Conditions to the Offer—No Wyndham Material Adverse Effect Condition.” |
The Offer is also subject to additional conditions referred to in the section of this Exchange Offer titled “The Offer—Conditions to the Offer.”
Expiration of the Offer (see page 81)
The Offer is scheduled to expire at 5:00 p.m., New York City time, on March 8, 2024 unless extended by Choice. For more information, you should read the discussion below under the section of this Exchange Offer titled “The Offer—Extension, Termination and Amendment.”
Extension, Termination and Amendment (see page 82)
Subject to the applicable rules and regulations of the SEC and the terms and conditions of the Offer, Choice expressly reserves the right (but will not be obligated) (1) to extend, for any reason, the period of time during which the Offer is open; (2) to delay acceptance for exchange of, or the exchange of, shares of Wyndham Common Stock in order to comply in whole or in part with applicable law (any such delay shall be effected in compliance with Rule 14e-1(c) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), which requires Choice to pay the consideration offered or to return shares of Wyndham Common Stock deposited by or on behalf of Wyndham stockholders promptly after the termination or withdrawal of the Offer); (3) to amend or terminate the Offer without accepting for exchange or exchanging any shares of Wyndham Common Stock under circumstances where any of the conditions referred to in the section of this Exchange Offer titled “The Offer—Conditions to the Offer” have not been satisfied or if Choice or any of its affiliates enters into a definitive agreement or announces an agreement in principle with Wyndham providing for a merger or other business combination or transaction with or involving Wyndham or any of its subsidiaries, or the purchase
23
or exchange of securities or assets of Wyndham or any of its subsidiaries, or Choice and Wyndham reach any other agreement or understanding, in either case, pursuant to which it is agreed or provided that the Offer will be terminated; and (4) to amend the Offer or to waive any conditions to the Offer at any time, except for the Competition Laws Condition, the Registration Statement Condition, the Choice Stockholder Approval Condition and the Stock Exchange Listing Condition, in each case by giving oral or written notice of such delay, termination, waiver or amendment to the Exchange Agent and by making public announcement thereof. Any such extension, delay, termination, waiver or amendment will be followed as promptly as practicable by a public announcement thereof.
No subsequent offering period will be available after the Offer.
Exchange of Shares of Wyndham Common Stock; Delivery of Choice Common Stock (see page 83)
Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any extension or amendment), Choice will accept for exchange promptly after the Expiration Time all shares of Wyndham Common Stock validly tendered and not properly withdrawn. For more information, see the section of this Exchange Offer titled “The Offer—Exchange of Shares of Wyndham Common Stock; Delivery of Choice Common Stock.”
Procedure for Tendering Shares (see page 84)
The procedure for tendering shares of Wyndham Common Stock varies depending on whether you possess physical certificates, a nominee holds your certificates for you, or you or a nominee holds your shares of Wyndham Common Stock in book-entry form. See the section of this Exchange Offer titled “The Offer—Procedure for Tendering,” as well as the transmittal materials, including the letter of election and transmittal, for a discussion of the procedure for tendering your shares.
Withdrawal Rights (see page 88)
You can withdraw tendered shares of Wyndham Common Stock at any time prior to the Expiration Time and, if Choice has not accepted your shares of Wyndham Common Stock for exchange, at any time following 60 Business Days from commencement of the Offer. See the section of this Exchange Offer titled “The Offer—Withdrawal Rights.” Withdrawn shares of Wyndham Common Stock may be re-tendered at any time prior to the Expiration Time by following one of the procedures described in the section of this Exchange Offer titled “The Offer—Procedure for Tendering.”
Material U.S. Federal Income Tax Consequences (see page 89)
Provided that following the completion of the Offer and the Second-Step Mergers the value of the Choice shares constitutes at least 40% of the total value of the consideration (including any Additional Consideration) received by Wyndham stockholders, the Offer and the Second-Step Mergers, taken together, are intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. A U.S. holder (as defined under “Material U.S. Federal Income Tax Consequences”) of shares of Wyndham Common Stock that receives a combination of shares of Choice Common Stock and cash (other than cash received in lieu of fractional shares of Choice Common Stock) in exchange for shares of Wyndham Common Stock pursuant to the Offer and/or the First Merger generally will recognize gain (but not loss) for U.S. federal income tax purposes in an amount equal to the lesser of (i) the amount by which the sum of the fair market value of Choice Common Stock and cash received by the U.S. holder exceeds such U.S. holder’s adjusted tax basis in its shares of Wyndham Common Stock surrendered and (ii) the amount of cash received by such U.S. holder. A U.S. holder of shares of Wyndham Common Stock that receives solely Choice Common Stock (other than cash received in lieu of fractional shares of Choice Common Stock) in exchange for shares of Wyndham Common Stock pursuant to the Offer and/or the First Merger generally will not recognize any gain or loss for U.S. federal income tax purposes as a result of such exchange. A U.S. holder of shares of Wyndham Common Stock that receives solely cash in exchange for shares of Wyndham Common Stock pursuant to the Offer and/or the First Merger generally will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the cash received by the U.S. holder and such U.S. holder’s adjusted tax basis in its shares of Wyndham Common Stock surrendered. For this purpose, any Additional Consideration should be treated as additional consideration received by a U.S. holder in exchange for its Wyndham Common Stock.
24
Each Wyndham stockholder should read the discussion under “Material U.S. Federal Income Tax Consequences” for a more complete discussion of the U.S. federal income tax consequences of the Offer and the Second-Step Mergers. Tax matters can be complicated, and the tax consequences of the Offer and the Second-Step Mergers to a particular Wyndham stockholder will depend on such stockholder’s particular facts and circumstances. Wyndham stockholders should consult their own tax advisors to determine the specific consequences to them of exchanging their shares of Wyndham Common Stock for the transaction consideration pursuant to the Offer or the Second-Step Mergers.
Ownership of Choice After the Offer (see page 93)
Choice estimates that, upon consummation of the Offer and the Second-Step Mergers, former Wyndham stockholders will own, in the aggregate, approximately 35% of Choice Common Stock on a diluted basis. For a more detailed discussion of the assumptions on which this estimate is based, see the section of this Exchange Offer titled “The Offer—Ownership of Choice After the Offer.”
Appraisal/Dissenters’ Rights (see page 96)
Wyndham stockholders do not have dissenters’ or appraisal rights in connection with the Offer. However, upon consummation of the First Merger, which Choice expects to be consummated promptly after consummation of the Offer without a vote of Wyndham stockholders, Wyndham stockholders who have not tendered their shares of Wyndham Common Stock in the Offer and who have perfected their dissenters’ or appraisal rights will have rights under Delaware law to dissent from the First Merger and demand appraisal of their shares of Wyndham Common Stock. Stockholders who perfect dissenters’ rights by complying with the procedures set forth in Section 262 of the DGCL will be entitled to receive a cash payment equal to the “fair value” of their shares of Wyndham Common Stock, as determined by a Delaware court. See the section of this Exchange Offer titled “The Offer—Appraisal/Dissenters’ Rights.”
Regulatory Approvals (see page 111)
In addition to the approvals and clearances described in the Competition Laws Condition, the Offer and the Second-Step Mergers may also be subject to review by government authorities and other regulatory agencies, including in jurisdictions outside the United States. Choice intends to file promptly all notifications that it determines are necessary or advisable under the applicable laws, rules and regulations of the respective identified authorities, agencies and jurisdictions for the consummation of the Offer and/or the Second-Step Mergers and to file all post-completion notifications that it determines are necessary or advisable as soon as possible after completion has taken place.
25
Accounting Treatment (see page 115)
The Proposed Combination with Wyndham would be accounted for under the acquisition method of accounting under U.S. generally accepted accounting principles, with Choice being the accounting acquirer, which means that Wyndham’s results of operations will be included with Choice’s results of operations from the date of completion of the Offer and the Second-Step Mergers and its consolidated assets and liabilities will be recorded at their fair values at the same date.
Comparison of Holders’ Rights (see page 126)
Wyndham stockholders who validly tender their shares in the Offer and do not withdraw such shares (other than Wyndham stockholders who receive only the Cash Election Consideration and cash in respect of any Additional Consideration that may be payable) will receive shares of Choice Common Stock following consummation of the Offer. While Choice and Wyndham are both Delaware corporations, there are a number of differences between the rights of a Wyndham stockholder and the rights of a Choice stockholder provided for under either company’s certificate of incorporation and/or bylaws. See the discussion in the section of this Exchange Offer titled “Comparison of Holders’ Rights.”
Risk Factors (see page 28)
In addition to the risks relating to each of Wyndham’s and Choice’s businesses, the Offer and the Second-Step Mergers are, and the combined company will be, subject to several risks which you should carefully consider prior to participating in the Offer.
Principal Risks Relating to the Offer and the Second-Step Mergers, and the Combined Company (see page 33)
Because the market price of Choice Common Stock will fluctuate, you cannot be sure of the value of Choice Common Stock you may receive in the Offer, and you may not receive all consideration in the form you elected;
The Offer is subject to a variety of conditions that Choice cannot control;
Choice has not negotiated the price or terms of the Offer or Second-Step Mergers with Wyndham; and
Because Wyndham’s independent registered public accounting firm has not permitted the use of its reports in Choice’s registration statement of which this Exchange Offer forms a part, you may be unable to assert a claim against such firm under Section 11 of the Securities Act.
26
In addition, in the event the Offer and the Second-Step Mergers are completed, you will continue to be subject to the following risks as a stockholder in the combined company:
Wyndham and Choice may not successfully integrate, which may have a material adverse effect on Choice’s financial condition and results of operations;
The Offer could trigger certain provisions contained in Wyndham’s equity plan or award agreements and certain employee benefit plans or agreements that could require Choice to vest outstanding equity awards, make change of control or severance payments or accelerate vesting and payment of certain deferred compensation amounts;
Choice will incur a substantial amount of indebtedness to acquire the shares of Wyndham Common Stock pursuant to the Offer and the Second-Step Mergers and its failure to meet its debt service obligations, including a failure to comply with the restrictive covenants contained in the related agreements, could have a material adverse effect on its financial condition and results of operations;
The consummation of the Offer and the Second-Step Mergers may result in ratings organizations and/or securities analysts taking actions which may adversely affect the combined company’s financial condition and operating results;
Future results of Choice may differ materially from the unaudited pro forma condensed combined financial statements of Choice and Wyndham presented in this Exchange Offer; and
The trading price of Choice Common Stock may be affected by factors different from those affecting the price of Wyndham Common Stock.
In addition to the above risks, in deciding whether to tender your shares of Wyndham Common Stock for exchange pursuant to the Offer, you should read and consider all of the risk factors discussed or referenced in the section of this Exchange Offer titled “Risk Factors.”
27
In deciding whether to tender your shares of Wyndham Common Stock for exchange pursuant to the Offer, Wyndham stockholders should read carefully this Exchange Offer, all documents incorporated by reference into this Exchange Offer and all other documents to which this Exchange Offer refers. In addition to the risk factors set forth below, Wyndham stockholders should read and consider all of the other risk factors specific to the respective Choice and Wyndham businesses that will also affect Choice after consummation of the Offer and the Second-Step Mergers, described in Part I, Item 1A of Choice’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 1, 2023 (“Choice 10-K”) and Wyndham’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 16, 2023 (“Wyndham 10-K”), and other documents that have been filed with the SEC and which are incorporated by reference into this Exchange Offer. If any of the risks described below or in the reports incorporated by reference into this Exchange Offer actually occur, the respective businesses, financial results, financial conditions, operating results or share prices of Choice or Wyndham could be materially adversely affected. Wyndham stockholders should also carefully consider the following factors:
Risk Factors Relating to the Offer and the Second-Step Mergers
Because the market price of Choice Common Stock that Wyndham stockholders may receive in the Offer will fluctuate, Wyndham stockholders cannot be sure of the value of Choice Common Stock they may receive.
Upon consummation of the Offer, each share of Wyndham Common Stock tendered and accepted for exchange by Choice pursuant to the Offer will be converted into the right to receive consideration consisting of, at the election of each Wyndham stockholder, (1) the Standard Election Consideration, (2) the Cash Election Consideration or (3) the Stock Election Consideration, subject, in each case, to the election and proration procedures described in this Offer and the Additional Consideration, if any. The market value of the consideration Wyndham stockholders will receive in the Offer (if they receive Choice Common Stock) will be based in whole or in part on the value of Choice Common Stock at the time the consideration in the Offer is received. If the price of Choice Common Stock declines, Wyndham stockholders could receive less value for their shares of Wyndham Common Stock upon the consummation of the Offer than the value calculated on the date the first public offer was announced, as of the date of the filing of this Exchange Offer or as of the date such Wyndham stockholder made its election and tendered shares into the Offer. Stock price changes may result from a variety of factors, many of which are beyond the companies’ control, including general market and economic conditions, changes in business prospects, catastrophic events, both natural and man-made, and regulatory considerations. In addition, the ongoing businesses of Choice and Wyndham may be adversely affected by actions taken by Choice or Wyndham in connection with the Offer, including payment by the companies of certain expenses relating to the Offer, including certain legal, accounting, financing and financial and other advisory fees.
28
Because the Offer and the Second-Step Mergers will not be completed until certain conditions have been satisfied or, where relevant, waived (see the section of this Exchange Offer titled “The Offer—Conditions to the Offer”), a significant period of time is likely to pass between the commencement of the Offer and the time the Purchaser accepts shares of Wyndham Common Stock for exchange. Therefore, at the time when you tender your shares of Wyndham Common Stock pursuant to the Offer, you will not know the exact market value of Choice Common Stock that you may receive if Purchaser accepts such shares of Wyndham Common Stock for exchange. However, tendered shares of Wyndham Common Stock may be withdrawn at any time prior to the Expiration Time of the Offer and, unless we have already accepted the tendered shares for exchange, at any time following 60 Business Days from commencement of the Offer. See the section of this Exchange Offer titled “The Offer—Withdrawal Rights.”
Wyndham stockholders are urged to obtain current market quotations for Wyndham Common Stock and Choice Common Stock (and to consider the equivalent market value of each election based on current market quotations for shares of Choice Common Stock) when they consider whether to tender, or withdraw, their shares of Wyndham Common Stock pursuant to the Offer. See the section of this Exchange Offer titled “Comparative Per Share Market Price and Dividend Information” for the historical high and low closing prices of Choice Common Stock and Wyndham Common Stock, as well as cash dividends per share of Wyndham Common Stock for each quarter of the period 2021 through December 11, 2023.
Choice must obtain governmental and regulatory approvals to consummate the Offer, which, if delayed or not granted, may delay, jeopardize or prohibit the Offer and the Second-Step Mergers.
The Offer is conditioned on the waiting period (or any extension thereof) applicable to the Offer and the Second-Step Mergers under the HSR Act and any other applicable antitrust laws and regulations having expired or been terminated, and any approvals or clearances, including those required by any international bodies, if applicable, and, in each case as determined by Choice to be required or advisable thereunder having been obtained. If Choice does not receive these approvals, then Choice will not be obligated to accept shares of Wyndham Common Stock for exchange in the Offer. On the date of this Exchange Offer, Choice filed the notification required for the consummation of the Proposed Combination by the HSR Act. While Choice believes the proposed transaction will receive necessary clearance under the HSR Act, Choice understands based on pre-filing communications with the FTC that the Proposed Combination will be subject to an investigation by the FTC.
The governmental and regulatory agencies from which Choice will seek these approvals have broad discretion in administering the applicable governing regulations. As a condition to their approval of the transactions contemplated by this Exchange Offer, those agencies may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of the combined company’s business and Choice has committed to take any action requested to be taken by such regulators so long as such action would not have a material adverse effect on the Combined Company. These requirements, limitations, costs, divestitures or restrictions could jeopardize or delay the consummation of the exchange offer or may reduce the anticipated benefits of the Proposed Combination contemplated by the exchange offer. Although Choice believes that it will obtain all necessary approvals, no assurance can be given that the required approvals will be obtained or that the required conditions to the Offer will be satisfied, and, if all required approvals are obtained and the conditions to the consummation of the Offer are satisfied, no assurance can be given as to the terms,
29
conditions and timing of the approvals. If Choice agrees to any material requirements, limitations, costs, divestitures or restrictions in order to obtain any consents or approvals required to consummate this Exchange Offer, these requirements, limitations, additional costs or restrictions could adversely affect Choice’s ability to integrate the operations of Choice and Wyndham or reduce the anticipated benefits of the Proposed Combination contemplated by the Exchange Offer and the Second-Step Mergers. This could have a material adverse effect on the business, financial condition and results of operations of the combined company and the market value of Choice Common Stock after the acquisition. In addition, a third party could attempt to intervene in any governmental or regulatory filings to be made by Choice or otherwise object to the granting to Choice of any such governmental or regulatory authorizations, consents, orders or approvals, which may cause a delay in obtaining, or the imposition of material requirements, limitations, costs, divestitures or restrictions on, or the failure to obtain, any such authorizations, consents, orders or approvals. See the section of this Exchange Offer titled “The Offer—Conditions to the Offer” for a discussion of the conditions to the Offer and the sections of this Exchange Offer titled “The Offer—Certain Legal Matters” and “The Offer—Regulatory Approvals” for a description of the regulatory approvals necessary in connection with the Offer and the Second-Step Mergers.
Tendering Wyndham stockholders may not receive all consideration in the form elected.
Elections that tendering Wyndham stockholders make (Cash Elections or Stock Elections, as applicable) will be subject to proration (and the prorated amounts will be deemed to be Stock Elections or Cash Elections, as applicable). Accordingly, some of the consideration a tendering Wyndham stockholder receives in the Offer may differ from the type of consideration the holder selected and that difference may be significant. In addition, if payable, the Additional Consideration will be paid in cash or shares of Choice Common Stock at Choice’s election, regardless of the election made by Wyndham stockholders. Discussions of the proration mechanism and Additional Consideration can be found in the section of this Exchange Offer titled “The Offer—Elections and Proration” and “The Offer—Elections and Proration — Additional Consideration,” respectively.
The stock prices of Choice and Wyndham may be adversely affected if the Offer and the Second-Step Mergers are not completed.
If the Offer and the Second-Step Mergers are not completed, the prices of Choice Common Stock and Wyndham Common Stock may decline to the extent that the current market prices of Choice Common Stock and Wyndham Common Stock reflect a market assumption that the Offer and the Second-Step Mergers will be completed.
The receipt of shares of Choice Common Stock in the Offer and/or the First Merger may be taxable to Wyndham stockholders.
Provided that following the completion of the Offer and the Second-Step Mergers the value of the Choice shares constitutes at least 40% of the total value of the consideration (including any Additional Consideration) received by Wyndham stockholders, it is intended that the Offer and the Second-Step Mergers, taken together, will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. However, if Choice elects to pay the Additional Consideration in cash in an amount sufficient to cause the stock component of the Offer Consideration to constitute less than 40% of the aggregate fair market value of the Offer Consideration, if the Offer and the Second-Step Mergers are not treated as component parts of an integrated transaction for U.S. federal income tax purposes, if the Second-Step Mergers are not completed or if the transaction otherwise fails to qualify as a “reorganization” within the meaning of Section 368(a) of the Code, the exchange of Wyndham Common Stock for shares of Choice Common Stock in the Offer and/or the First Merger will be taxable to such Wyndham stockholders for U.S. federal income tax purposes. In such event, a Wyndham stockholder would generally recognize gain or loss in an amount equal to the difference, if any, between (i) the sum of the fair market value of the Choice Common Stock and/or cash it receives pursuant to the Offer and/or the First Merger and (ii) such holder’s adjusted tax basis in its shares of Wyndham Common Stock exchanged in the Offer and/or First Merger. For this purpose, any Additional Consideration should be treated as additional consideration received by a U.S. holder in exchange for its Wyndham Common Stock.
30
Wyndham stockholders should consult their own tax advisors to determine the specific tax consequences to them of the Offer and the Second-Step Mergers, including any federal, state, local, foreign or other tax consequences, and any tax return filing or other reporting requirements, and should read the discussion under “Material U.S. Federal Income Tax Consequences.”
The Offer is subject to other conditions that Choice does not control.
The Offer is subject to other conditions, including the Minimum Tender Condition, the Anti-Takeover Devices Condition, the Registration Statement Condition, the Competition Laws Condition, the Diligence Condition, the Financing Condition, the Choice Stockholder Approval Condition, the Stock Exchange Listing Condition and the No Wyndham Material Adverse Effect Condition. No assurance can be given that all of the conditions to the Offer will be satisfied, including, but not limited to, the ability to obtain the necessary financing, or, if they are, as to the timing of such satisfaction. In addition, Wyndham and the Wyndham Board may seek to take actions and put in place obstacles that will delay, or frustrate, the satisfaction of one or more conditions, such as, but not limited to, adopting a “poison pill.” If the conditions to the Offer are not satisfied, then Choice may allow the Offer to expire, or could amend or extend the Offer. See the section of this Exchange Offer titled “The Offer—Conditions to the Offer” for a discussion of the conditions to the Offer.
Uncertainties associated with the Offer and the Second-Step Mergers may affect the future business and operations of Choice and/or Wyndham.
Uncertainty about the effect of the Offer and the Second-Step Mergers on franchisees, associates, development partners, employees and others may have an adverse effect on Choice and/or Wyndham and consequently on the combined company following the Second-Step Mergers. These uncertainties may impair the ability to attract, retain and engage current and prospective franchisees and motivate key personnel during the pendency, and following the consummation, of the Offer and/or the Second-Step Mergers, and could cause franchisees, development partners, associates and others that deal with Choice and/or Wyndham to defer entering into contracts, including franchisee agreements, with Choice and/or Wyndham or making other decisions concerning Wyndham or seek to change existing business relationships with Wyndham. If key employees of Wyndham depart because of uncertainty about their future roles, Wyndham’s business and, as a result, the combined company’s business following the Offer and the Second-Step Mergers could be harmed. While the Offer and the Second-Step Mergers are pending, Wyndham may not be able to hire replacements for departed key employees to the same extent that they have been able to in the past.
31
The offer may adversely affect the liquidity and value of non-tendered shares of Wyndham Common Stock.
In the event that not all of the shares of Wyndham Common Stock are tendered in the Offer and we accept for exchange those shares tendered in the Offer, the number of stockholders and the number of shares of Wyndham Common Stock held by individual holders will be greatly reduced. As a result, Choice’s acceptance of shares for exchange in the Offer could adversely affect the liquidity and could also adversely affect the market value of the remaining shares of Wyndham Common Stock held by the public. Subject to the rules of the NYSE, Choice may also seek to cause Wyndham to delist the shares of Wyndham Common Stock on the NYSE. As a result of such delisting, shares of Wyndham Common Stock not tendered pursuant to the Offer may become illiquid and may be of reduced value. See the section of this Exchange Offer titled “The Offer—Plans for Wyndham.”
Choice has not negotiated the price or terms of the Offer or Second-Step Mergers with Wyndham.
In evaluating the Offer, you should be aware that Choice has not negotiated the price or terms of the Offer or the Second-Step Mergers with Wyndham, and neither Wyndham nor the Wyndham Board has approved the Offer or the Second-Step Mergers. Choice intends, promptly after consummation of the Offer, to cause Purchaser to merge with and into Wyndham with Wyndham as the surviving corporation, immediately following which Wyndham will merge with and into NewCo with NewCo as the surviving corporation, after which Wyndham would be a direct or indirect, wholly owned subsidiary of Choice. Choice made numerous attempts to engage the Wyndham Board, making three private proposals between April and September 2023, increasing its proposed purchase price each time. As the Wyndham Board rejected each private proposal and refused to engage in meaningful discussions, Choice announced its offer to acquire Wyndham publicly on October 17, 2023. Following Wyndham’s public rejection of that proposal, Choice made a fourth proposal privately to Wyndham on November 14, 2023, reaffirming the economic and other terms of the prior proposal. Choice also offered a mutual non-disclosure agreement to allow the parties to conduct confirmatory due diligence. On November 21, 2023, Wyndham publicly rejected the proposed terms of Choice’s offer made November 14, 2023.
As a result of filing this Registration Statement, Wyndham is now required under the rules and regulations of the SEC to issue a statement as to whether it recommends acceptance or rejection of the Offer, that it expresses no opinion and remains neutral toward the Offer or that it is unable to take a position with respect to the Offer, and to file with the SEC a solicitation/recommendation statement on Schedule 14D-9 describing its position, if any, and certain related information, no later than ten Business Days from the date this Exchange Offer is first published, sent or given to stockholders. Choice recommends that you review this Schedule 14D-9 when it becomes available.
You may be unable to assert a claim against Wyndham’s independent registered public accounting firm under Section 11 of the Securities Act.
Section 11(a) of the Securities Act provides that if part of a registration statement at the time it becomes effective contains an untrue statement of a material fact or omits a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring a security pursuant to such registration statement (unless it is proved that at the time of such acquisition such person knew of such untruth or omission) may assert a claim against, among others, any accountant or expert who has consented to be named as having certified any part of the registration statement or as having prepared any report for use in connection with the registration statement. Although audit reports were issued on Wyndham’s
32
historical financial statements and are included in Wyndham’s filings with the SEC, Wyndham’s independent registered public accounting firm has not permitted the use of its reports in Choice’s registration statement of which this Exchange Offer forms a part. Choice is requesting but has not, as of the date hereof, received the consent of such independent registered public accounting firm. If Choice does not receive this consent, Choice plans to request dispensation pursuant to Rule 437 under the Securities Act from this requirement. If Choice receives the consent of Wyndham’s independent registered public accounting firm, Choice will promptly file it as an exhibit to Choice’s registration statement of which this Exchange Offer forms a part. Accordingly, if Choice is unable to obtain the consent of Wyndham’s independent registered public accounting firm, you may not be able to assert a claim against Wyndham’s independent registered public accounting firm under Section 11 of the Securities Act.
Risk Factors Relating to Wyndham’s Business.
You should read and consider the risk factors specific to Wyndham’s business that will also affect Choice after the consummation of the Offer and the Second-Step Mergers, described in Part I, Item 1A of the Wyndham 10-K, and other documents that have been filed by Wyndham with the SEC and which are incorporated by reference into this Exchange Offer.
Risk Factors Relating to Choice’s Business.
You should read and consider the other risk factors specific to Choice’s business that also will affect Choice after the consummation of the Offer and the Second-Step Mergers, described in Part I, Item 1A of the Choice 10-K, and other documents that have been filed by Choice with the SEC and which are incorporated by reference into this Exchange Offer.
Risk Factors Relating to Choice Following the Offer and the Second-Step Mergers
Wyndham and Choice may not successfully integrate.
If Choice consummates the Offer and the Second-Step Mergers, achieving the anticipated benefits of the Proposed Combination with Wyndham will depend in part upon whether the two companies integrate their businesses in an effective and efficient manner. The companies may not be able to accomplish this integration process successfully, including as a result of actions that Wyndham may continue to take to frustrate the Offer. The integration of any business may be complex and time-consuming. The difficulties that could be encountered include the following:
integration of personnel, internal systems, technology, programs, and controls;
application of different accounting policies, assumptions, or judgments to Wyndham’s operational results than Wyndham applied in the past;
changes in laws and regulations that may impact our or Wyndham’s business, financial condition, results of operations, or growth prospects;
potential unknown liabilities and unforeseen increased expenses, delays, or regulatory conditions associated with the acquisition;
33
coordinating the geographically dispersed organizations;
distraction of management and employees from operations;
the loss of franchisees, sales and other commercial relationships;
failure to retain key employees who may be difficult to replace;
maintaining business relationships; and
other complexities associated with the integration of the operations of the combined company.
Choice may not realize the financial benefits expected following the consummation of the Proposed Combination.
As Choice has not been given access to Wyndham’s non-public information related to Wyndham’s business, assets, and liabilities, Choice may be unaware of significant issues with respect to the business of Wyndham that, following the consummation of the Proposed Combination, may prevent the realization of the financial benefits expected in connection therewith.
An inability to realize the full extent of the anticipated benefits of the Proposed Combination with Wyndham, including the approximately $150 million in estimated cost-driven synergies, as well as any delays encountered in the integration process and realizing such benefits, could have an adverse effect upon the revenues, level of expenses and operating results of Choice, which may affect adversely the value of Choice Common Stock after the consummation of the Offer and the Second-Step Mergers.
There will also be integration costs and non-recurring transaction costs (such as fees paid to legal, financial, accounting and other advisors and other fees paid in connection with the Offer and the Second-Step Mergers, including financing fees) associated with the Proposed Combination with Wyndham, combining the operations of Choice and Wyndham and achieving the synergies we expect to obtain, and such costs are expected to be significant.
Choice has only conducted a review of Wyndham’s publicly available information and has not had access to Wyndham’s non-public information. Therefore, Choice may not be able to retain certain agreements and may be subject to liabilities of Wyndham unknown to Choice, which may have a material adverse effect on Choice’s profitability, financial condition and results of operations and which may result in a decline in the market value of Choice Common Stock.
To date, Choice has only conducted a due diligence review of Wyndham’s publicly available information. As a result, after the consummation of the Offer and the Second-Step Mergers, Choice may be subject to liabilities of Wyndham unknown to Choice or Wyndham, which may have a material adverse effect on the business, financial condition and results of operations of the combined company and the market value of Choice Common Stock after the consummation of the Offer and the Second-Step Mergers.
34
The consummation of the Offer or the Second-Step Mergers may constitute a breach or default, or an event that, with or without notice or lapse of time or both, would constitute a breach or default, or result in the acceleration or other change of any right or obligation (including, without limitation, any payment obligation) or termination of an agreement under agreements of Wyndham that are not publicly available. If this happens, Choice may have liabilities relating to the breach or default and may have to seek to replace that agreement with a new agreement. Choice cannot provide assurance that it will be able to replace a terminated agreement on comparable terms or at all. Depending on the importance of a terminated agreement to Wyndham’s business, failure to replace that agreement on similar terms or at all may increase the costs to Choice of operating Wyndham’s business or prevent Choice from operating part or all of Wyndham’s business. In addition, Wyndham may be committed to arrangements or agreements of which Choice is not aware.
Based upon a review of Wyndham’s public filings with the SEC, pursuant to the Credit Agreement dated as of May 30, 2018, as amended on each of April 30, 2020, August 10, 2020, April 8, 2022 and May 25, 2023 (the “Credit Agreement”), the Offer and the Second-Step Mergers could result in an event of default under the Credit Agreement, thereby permitting the lenders thereunder to terminate their commitments and declare any outstanding principal and accrued interest amounts immediately due and payable. Wyndham could also seek a waiver of any such event of default, which would require the approval of the lenders under the Credit Agreement. As of September 30, 2023, Wyndham’s outstanding long-term debt obligations totaled approximately $2.136 billion, inclusive of certain term loans and the revolving credit facility provided for under the Credit Agreement, as well as approximately $500 million outstanding principal amount of Wyndham’s 4.375% senior unsecured notes due August 2028 (“Notes”). The Notes are governed by that certain Fifth Supplemental Indenture, dated as of August 13, 2020 (“Supplemental Indenture”). In accordance with the provisions of the Supplemental Indenture, in the event that the consummation of the Offer constitutes a change of control under the Supplemental Indenture and such change of control is accompanied by a downgrade of the Notes by each of Moody’s and S&P’s rating of the Notes within a specified period, (i.e., starting from the earlier of (i) date of the first public announcement of the consummation of the Offer and (ii) the occurrence thereof, until 60 days following the consummation of the Offer), such that the rating of the Notes on any day during such period is below the lower of the rating (i) immediately before the public announcement; and (ii) the date on which the Notes were originally issued under the Supplemental Indenture, the holders of the Notes would have the right to cause Wyndham to repurchase all or any part of the outstanding Notes. Choice may not be able to obtain sufficient capital to repurchase or refinance the Notes in these circumstances. For a further discussion of the risks relating to Choice’s indebtedness, see “—Choice expects to incur a substantial amount of indebtedness to acquire the shares of Wyndham Common Stock pursuant to the Offer and the Second-Step Mergers and, as a result, will increase its outstanding indebtedness. Choice’s failure to meet its debt service obligations, including a failure to comply with the restrictive covenants contained in the related agreements, could have a material adverse effect on its business, financial condition and results of operations” and “—The consummation of the Offer and the Second-Step Mergers may result in ratings organizations and/or securities analysts taking actions which may adversely affect the combined companies’ business, financial condition and operating results, as well as the market price of Choice Common Stock.”
35
In respect of all information relating to Wyndham presented in, incorporated by reference into or omitted from, this Exchange Offer, Choice has relied upon publicly available information, including information publicly filed by Wyndham with the SEC. Although Choice has no knowledge that would indicate that any statements contained herein to reflect any changeregarding Wyndham’s condition, including its financial or operating condition (based upon such publicly filed reports and documents) are inaccurate, incomplete or untrue, Choice was not involved in the Company's expectationspreparation of such information and statements. For example, Choice has made adjustments and assumptions in preparing the pro forma financial information presented in this Exchange Offer that have necessarily involved Choice’s estimates with regard theretorespect to Wyndham’s financial information that, given the lack of information received, could be materially different than currently presented. See the section of this Exchange Offer titled “Unaudited Pro Forma Condensed Combined Financial Statements.” Any financial, operating or other information regarding Wyndham that may be detrimental to Choice following the consummation of the Offer and the Second-Step Mergers that has not been publicly disclosed by Wyndham, or errors in Choice’s estimates due to the lack of cooperation and information from Wyndham, may have a material adverse effect on the business, financial condition and results of operations of the combined company and the market value of Choice Common Stock after the consummation of the Offer and the Second-Step Mergers.
In the alternative, if Choice has not been given access to Wyndham’s non-public information related to Wyndham’s business, assets, and liabilities to complete its confirmatory due diligence review, Choice may elect not to consummate the Offer in accordance with the terms described herein. For more information on the conditions to the Offer, including the Diligence Condition, see the section of this Exchange Offer titled “The Offer—Conditions to the Offer.”
Choice expects to incur a substantial amount of indebtedness to acquire the shares of Wyndham Common Stock pursuant to the Offer and the Second-Step Mergers and, as a result, will increase its outstanding indebtedness. Choice’s failure to meet its debt service obligations, including a failure to comply with the restrictive covenants contained in the related agreements, could have a material adverse effect on its business, financial condition and results of operations.
Choice anticipates that it will need to borrow approximately $6.0 billion to complete the Offer and the Second-Step Mergers.
Choice’s increased indebtedness following consummation of the Offer and the Second-Step Mergers could adversely affect Choice’s operations and liquidity. Choice’s anticipated level of indebtedness could, among other things:
make it more difficult for Choice to pay or refinance its debts as they become due during adverse economic and industry conditions because Choice may not have sufficient cash flows to make its scheduled debt payments;
cause Choice to use a larger portion of its cash flow to fund interest and principal payments, reducing the availability of cash to fund working capital, capital expenditures, research and development and other business activities;
36
cause Choice to be less able to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions;
cause Choice to be more vulnerable to general adverse economic and industry conditions;
cause Choice to be disadvantaged compared to competitors with less leverage;
result in a downgrade in the credit rating of Choice or any indebtedness of Choice or its subsidiaries, which is likely to increase the cost of further borrowings; and
limit Choice’s ability to borrow additional monies in the future to fund working capital, capital expenditures, research and development and other general corporate purposes.
In addition, the terms of Choice’s indebtedness following the consummation of the Offer are expected to restrict certain actions by Choice and its subsidiaries, including financial, affirmative and negative covenants, including limitations on the ability to incur indebtedness, create liens, and merge, amalgamate and consolidate with other companies, in each case, subject to exceptions and baskets to be mutually agreed upon by Choice and the parties thereto, the exact terms of which are to be negotiated prior to consummation of the Offer.
Choice also may incur additional long-term debt and working capital lines of credit to meet future financing needs, subject to certain restrictions under its existing debt, which would increase its total indebtedness. Although the terms of Choice’s existing credit agreements and of the indentures governing Choice’s existing debt (collectively, the “Existing Debt Documents”) contain restrictions on the incurrence of additional debt, including secured debt, these restrictions are subject to a number of important exceptions and debt incurred in compliance with these restrictions could be substantial. In addition, if the restrictions in the Existing Debt Documents limit Choice’s ability to incur additional indebtedness necessary to finance the acquisition of Wyndham, or if the incurrence of such additional indebtedness would lead to a breach of, or default under, the Existing Debt Documents, Choice may be required to seek an amendment or waiver with respect to certain provisions of the Existing Debt Documents, and there can be no assurance that Choice will be able to obtain such amendment or waiver. If Choice and its restricted subsidiaries incur significant additional debt, the related risks that Choice faces could intensify.
Choice cannot guarantee that the combined company will be able to generate sufficient cash flow to make all of the principal and interest payments under its indebtedness following the consummation of the Offer and the Second-Step Mergers when such payments are due or that it will be able, if necessary, to refinance such indebtedness.
All of our debt obligations, and any future indebtedness we may incur, will have priority over our common stock with respect to payment in the event of a liquidation, dissolution or winding up.
In any liquidation, dissolution or winding up of Choice, the Choice Common Stock would rank below all debt claims against Choice. In addition, any convertible or exchangeable securities or other equity securities that we may issue in the future may have rights, preferences and privileges more favorable than those of Choice Common Stock. As a result, holders of Choice Common Stock will not be entitled to receive any payment or other distribution of assets upon the liquidation or dissolution until after our obligations to our debt holders and holders of equity securities that rank senior to the Choice Common Stock have been satisfied.
37
The consummation of the Offer and the Second-Step Mergers may result in ratings organizations and/or securities analysts taking actions which may adversely affect the combined companies’ business, financial condition and operating results, as well as the market price of Choice Common Stock.
Choice’s current corporate credit rating is BBB- for Standard and Poor’s and Baa3 for Moody’s. In connection with the consummation of the Offer and/or the Second-Step Mergers, one or both of these ratings agencies may reevaluate Choice’s ratings. A downgrade may increase Choice’s cost of borrowing, may negatively impact Choice’s ability to raise additional debt capital, may negatively impact Choice’s ability to successfully compete in the marketplace and may negatively impact the willingness of counterparties to deal with Choice, each of which could have a material adverse effect on the business, financial condition and results of operations of the combined company and the market value of Choice Common Stock.
In addition, the trading market for shares of Choice Common Stock depends in part on the research and reports that third-party securities analysts publish about Choice and its industry. In connection with the consummation of the Offer and/or the Second-Step Mergers, one or more of these analysts could downgrade the Choice Common Stock or issue other negative commentary about Choice or its industry, which could cause the trading price of Choice Common Stock to decline.
The Offer could trigger certain provisions contained in Wyndham’s equity plan or award agreements and certain employee benefit plans or agreements that could require Choice to vest outstanding equity awards, make change of control or severance payments or accelerate vesting and payment of certain deferred compensation amounts.
Certain of Wyndham’s equity plan or award agreements and employee benefit plans or agreements contain change of control clauses providing for outstanding equity awards to vest or compensation to be paid to certain members of Wyndham senior management either upon a change of control, or if, following a change of control, Wyndham terminates the employment relationship between Wyndham and these employees under certain circumstances, or if these employees terminate the employment relationship because of certain adverse changes. In addition, certain of Wyndham’s non-qualified deferred compensation plans contain change of control clauses providing for vesting and payment of deferred compensation amounts under such plans. If consummated, the Offer would constitute a change of control of Wyndham, thereby giving rise to potential vesting of outstanding equity awards and change of control, severance or other compensatory payments described above.
Future results of Choice may differ materially from the unaudited pro forma condensed combined financial statements of Choice and Wyndham presented in events, conditionsthis Exchange Offer.
The future results of Choice following the consummation of the Offer and the Second-Step Mergers may be materially different than those shown in the Unaudited Pro Forma Condensed Combined Financial Statements presented in this Exchange Offer, which show only a combination of Choice’s and Wyndham’s standalone historical results after giving effect to the Offer and the Second-Step Mergers, subject to the matters noted therein. Choice has estimated that it will record approximately $75 million in transaction expenses (excluding fees paid in connection with obtaining any necessary financing), as described in the notes to the Unaudited Pro Forma Condensed Combined Financial Statements included in this Exchange Offer. In
38
addition, the final amount of any charges relating to acquisition accounting adjustments that Choice may be required to record will not be known until following the consummation of the Offer and the Second-Step Mergers. These and other expenses and charges may be significantly higher or circumstanceslower than estimated.
Resales of Choice Common Stock following the Offer may cause the market price of Choice Common Stock to fall.
Choice expects that it will issue approximately 27.5 million shares of Choice Common Stock in connection with the Offer and the Second-Step Mergers. The issuance of these new shares and the sale of additional shares that may become eligible for sale in the public market from time to time upon exercise of options could have the effect of depressing the market price for shares of Choice Common Stock. The increase in the number of Choice Common Stock may lead to sales of such Choice Common Stock or the perception that such sales may occur, either of which may adversely affect the market for, and the market price of, Choice Common Stock.
The trading price of Choice Common Stock may be affected by factors different from those affecting the price of Wyndham Common Stock.
Upon consummation of the Offer and the Second-Step Mergers, Wyndham stockholders (other than those that receive only the Cash Election Consideration and Choice elects to pay any Additional Consideration solely in cash) will become holders of Choice Common Stock. Choice’s business differs from that of Wyndham, and Choice’s results of operations, as well as the trading price of Choice Common Stock, may be affected by factors different from those affecting Wyndham’s results of operations and the price of Wyndham Common Stock.
The Choice Common Stock to be received by Wyndham stockholders as consideration will have different rights from the shares of Wyndham Common Stock.
Upon receipt of Choice Common Stock in the Offer, Wyndham stockholders will become Choice stockholders and their rights as stockholders will be governed by the certificate of incorporation of Choice (the “Choice Certificate of Incorporation”), the bylaws of Choice (the “Choice Bylaws”), and the Delaware General Corporation Law (“DGCL”). Certain of the rights associated with Wyndham Common Stock are different from the rights associated with Choice Common Stock. See the section of this Exchange Offer titled “Comparison of Holders’ Rights” for a discussion of the different rights associated with Choice Common Stock.
Wyndham stockholders will have a reduced ownership and voting interest after the consummation of the Offer and the Second-Step Mergers and will exercise less influence over the management and policies of Choice than they do over Wyndham.
Wyndham stockholders currently have the right to vote in the election of the Wyndham Board and on other matters affecting Wyndham. When the shares of Wyndham Common Stock tendered in the Offer are exchanged, each participating Wyndham stockholder (other than those that receive only the Cash Election Consideration and Choice elects to pay any Additional Consideration solely in cash) and, following consummation of the Second-Step Mergers, each remaining Wyndham stockholder, will become a Choice stockholder with a percentage ownership of the combined company that is
39
smaller than the stockholder’s percentage ownership of Wyndham. Choice estimates that, upon consummation of the Offer and the Second-Step Mergers, former Wyndham stockholders will own, in the aggregate, approximately 35% of Choice Common Stock on a diluted basis. For a more detailed discussion of the assumptions on which any statementthis estimate is based.
v
PROSPECTUS SUMMARY
based, see the section of this Exchange Offer titled “The Offer—Ownership of Choice After the Offer.” Because of this, Wyndham stockholders will have less influence over the management and policies of Choice than they now have over the management and policies of Wyndham.
40
CHOICE SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following summarytable sets forth selected historical consolidated financial information for Choice as of the end of and for the periods indicated. The statements of income information for each of the years ended December 31, 2022, 2021 and 2020, and the balance sheet information as of December 31, 2022 and 2021, are derived from Choice’s audited financial statements filed as part of the Choice 10-K, which is incorporated by reference into this Exchange Offer. The statements of income and the balance sheet information for the nine-month period ended September 30, 2023 are derived from Choice’s unaudited financial statements filed as part of Choice’s quarterly report on Form 10-Q filed with the SEC on November 7, 2023 (the “Latest Choice 10-Q”), which is incorporated by reference into this Exchange Offer. The operating results for the periods presented are not necessarily indicative of the results of operations for any future period. More comprehensive financial information, including management’s discussion and analysis of Choice’s financial condition and results of operations, is contained in the Choice 10-K and other reports filed by Choice with the SEC, including the Latest Choice 10-Q. The following selected historical consolidated financial information is qualified in its entirety by reference to such other documents and all of the financial information and notes contained in those documents See the section of this Exchange Offer titled “Where You Can Find More Information” for instructions on how to obtain these other documents and more complete information relating to Choice.
| Historical Data | ||||||||||||||||
| (in thousands, except per share data) | Nine Months Ended September 30, 2023 | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||||
REVENUES | ||||||||||||||||
Royalty, licensing and management fees | $ | 396,503 | $ | 471,759 | $ | 397,218 | $ | 263,308 | ||||||||
Initial franchise fees | 21,240 | 28,074 | 26,342 | 25,906 | ||||||||||||
Platform and procurement services | 58,186 | 63,800 | 50,393 | 45,242 | ||||||||||||
Owned hotels | 74,075 | 70,826 | 37,833 | 20,168 | ||||||||||||
Other | 33,211 | 64,740 | 28,669 | 16,880 | ||||||||||||
Other revenues from franchised and managed properties | 602,554 | 702,750 | 528,843 | 402,568 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenues | 1,185,769 | 1,401,949 | 1,069,298 | 774,072 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Selling, general and administrative | 182,000 | 207,275 | 145,623 | 148,910 | ||||||||||||
Depreciation and amortization | 29,468 | 30,425 | 24,773 | 25,831 | ||||||||||||
Owned hotels | 53,924 | 48,837 | 24,754 | 16,066 | ||||||||||||
Other expenses from franchised and managed properties | 583,095 | 653,060 | 444,946 | 446,847 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total operating expenses | 848,487 | 939,597 | 640,096 | 637,654 | ||||||||||||
Impairment of long-lived assets | — | — | (282 | ) | (14,751 | ) | ||||||||||
Gain on sale of business and assets, net | — | 16,249 | 13 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 337,282 | 478,601 | 428,933 | 121,667 | ||||||||||||
OTHER INCOME AND EXPENSES, NET | ||||||||||||||||
Interest expense | 46,522 | 43,797 | 46,680 | 49,028 | ||||||||||||
Interest income | (5,836 | ) | (7,288 | ) | (4,981 | ) | (7,688 | ) | ||||||||
Loss on extinguishment of debt | — | — | — | 16,565 | ||||||||||||
Other loss (gain) | (2,752 | ) | 7,018 | (5,134 | ) | (4,533 | ) | |||||||||
Equity in net (gain) loss of affiliates | (1,923 | ) | (1,732 | ) | 15,876 | 15,289 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other income and expenses, net | 36,011 | 41,795 | 52,441 | 68,661 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Income before income taxes | 301,271 | 436,806 | 376,492 | 53,006 | ||||||||||||
Income tax expense (benefit) | 71,717 | 104,654 | 87,535 | (22,381 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income | $ | 229,554 | $ | 332,152 | $ | 288,957 | $ | 75,387 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Basic earnings per share | $ | 4.51 | $ | 6.05 | $ | 5.20 | $ | 1.36 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted earnings per share | $ | 4.47 | $ | 5.99 | $ | 5.15 | $ | 1.35 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Consolidated balance sheet data (at end of period) | ||||||||||||||||
Cash and cash equivalents | $ | 36,432 | $ | 41,566 | $ | 511,605 | ||||||||||
Total assets | 2,232,237 | 2,102,175 | 1,931,824 | |||||||||||||
Current and long-term debt | 1,395,688 | 1,203,523 | 1,060,474 | |||||||||||||
Total liabilities | 2,159,824 | 1,947,515 | 1,665,942 | |||||||||||||
Choice shareholders’ equity | 72,413 | 154,660 | 265,882 | |||||||||||||
41
WYNDHAM SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected historical consolidated financial information for Wyndham as of the end of and for the periods indicated. The statements of earnings information for each of the years ended December 31, 2022, 2021 and 2020, and the balance sheet information as of December 31, 2022 and 2021, are derived from Wyndham’s audited financial statements filed as part of the Wyndham 10-K, which is incorporated by reference into this Exchange Offer. The statements of income and the balance sheet information for the nine-month period ended September 30, 2023 are derived from Choice’s unaudited financial statements filed as part of Wyndham’s quarterly report on Form 10-Q filed with the SEC on October 26, 2023 (the “Latest Wyndham 10-Q”), which is incorporated by reference into this Exchange Offer. The operating results for the periods presented are not necessarily indicative of the results of operations for any future period. More comprehensive financial information, including management’s discussion and analysis of Wyndham’s financial condition and results of operations, is contained in the Wyndham 10-K and other reports filed by Wyndham with the SEC, including the Latest Wyndham 10-Q. The following selected historical consolidated financial information is qualified in its entirety by reference to such other documents and all of the financial information and notes contained in those documents. See the section of this Exchange Offer titled “Where You Can Find More Information” for instructions on how to obtain these other documents and more complete information relating to Wyndham.
| Historical Data | ||||||||||||||||
| (in millions, except per share data) | Nine Months Ended September 30, 2023 | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||||
Net revenues | ||||||||||||||||
Royalties and franchise fees | $ | 415 | $ | 512 | $ | 461 | $ | 328 | ||||||||
Marketing, reservation and loyalty | 445 | 544 | 468 | 370 | ||||||||||||
Management and other fees | 11 | 57 | 117 | 64 | ||||||||||||
License and other fees | 83 | 100 | 79 | 84 | ||||||||||||
Other | 110 | 141 | 120 | 104 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Fee-related and other revenues | 1,064 | 1,354 | 1,245 | 950 | ||||||||||||
Cost reimbursements | 12 | 144 | 320 | 350 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net revenues | 1,076 | 1,498 | 1,565 | 1,300 | ||||||||||||
Expenses | ||||||||||||||||
Marketing, reservation and loyalty | 446 | 524 | 450 | 419 | ||||||||||||
Operating | 65 | 106 | 132 | 109 | ||||||||||||
General and administrative | 93 | 123 | 113 | 116 | ||||||||||||
Cost reimbursements | 12 | 144 | 320 | 350 | ||||||||||||
Depreciation and amortization | 56 | 77 | 95 | 98 | ||||||||||||
Gain on asset sale, net | — | (35 | ) | — | — | |||||||||||
Separation-related | — | 1 | 3 | 2 | ||||||||||||
Impairments, net | — | — | 6 | 206 | ||||||||||||
Restructuring | — | — | — | 34 | ||||||||||||
Transaction-related, net | 5 | — | — | 12 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total expenses | 677 | 940 | 1,119 | 1,346 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income (loss) | 399 | 558 | 446 | (46 | ) | |||||||||||
Interest expense, net | 73 | 80 | 93 | 112 | ||||||||||||
Early extinguishment of debt | 3 | 2 | 18 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Income (loss) before income taxes | 323 | 476 | 335 | (158 | ) | |||||||||||
Provision for (benefit from) income taxes | 83 | 121 | 91 | (26 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) | $ | 240 | $ | 355 | $ | 244 | $ | (132 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
Basic earnings per share | $ | 2.81 | $ | 3.93 | $ | 2.61 | $ | (1.42 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
Diluted earnings per share | $ | 2.79 | $ | 3.91 | $ | 2.60 | $ | (1.42 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
Consolidated balance sheet data (at end of period) | ||||||||||||||||
Cash and cash equivalents | $ | 79 | $ | 161 | $ | 171 | ||||||||||
Total assets | 4,100 | 4,123 | 4,269 | |||||||||||||
Current and long-term debt | 2,160 | 2,077 | 2,084 | |||||||||||||
Total liabilities | 3,244 | 3,161 | 3,180 | |||||||||||||
Wyndham stockholders’ equity | 856 | 962 | 1,089 | |||||||||||||
42
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The selected unaudited pro forma condensed combined financial information was prepared by Choice and gives effect to the Proposed Combination, including the related financing, which we refer to as the Transaction.
The selected unaudited pro forma condensed combined statements of income for the year ended December 31, 2022 and nine months ended September 30, 2023 give effect to the Transaction as if it had occurred on January 1, 2022. The selected unaudited pro forma condensed combined balance sheet, as of September 30, 2023 gives effect to the Transaction as if it had occurred on September 30, 2023.
The unaudited pro forma condensed combined financial statements have been presented for informational purposes only. The pro forma information is not necessarily indicative of what the combined company’s financial position or results of operations actually would have been had the Proposed Combination been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future financial position or operating results of the combined company.
The unaudited pro forma condensed combined financial statements are prepared with Choice treated as the assumed accounting acquirer. In determining the acquirer for accounting purposes, Choice considered the five factors identified in ASC 805-10-55-12. Additionally, the accounting for the acquisition of Wyndham is dependent upon certain valuations that are provisional and are subject to change. Because Wyndham has not permitted us to conduct any due diligence, and we are limited in our understanding based only on what is publicly available, we have not performed the detailed valuation analyses necessary to arrive at the final estimates of the fair market value of the Wyndham assets to be acquired and liabilities to be assumed and the related allocations of purchase price. However, as indicated in the notes to the unaudited pro forma condensed combined financial statements, Choice has made certain adjustments to the historical book values of the assets and liabilities of Wyndham to reflect preliminary estimates of the fair value of intangible assets acquired with the residual excess of the purchase price over the historical net assets of Wyndham recorded as goodwill. Actual adjustments will differ from those reflected in the unaudited pro forma condensed combined financial statements once Choice is able to determine the final purchase price for Wyndham and has completed the valuation analyses necessary to finalize the purchase price allocations and identified any necessary conforming accounting changes or other acquisition-related adjustments for Wyndham. Choice will finalize these amounts as we obtain the information necessary to complete the measurement process. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing these unaudited pro forma condensed combined financial statements. Differences between these preliminary estimates and the final acquisition accounting will likely occur and these differences could be material. The differences, if any, could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and Choice’s future results of operations and financial position.
Furthermore, while the unaudited pro forma condensed combined financial information does give effect to the costs incurred to effectuate the Transaction, it does not give effect to any anticipated synergies, operating efficiencies, revenue enhancements or cost savings that may result from the Transaction, or the costs necessary to achieve these synergies, operating efficiencies and cost savings. Further, the unaudited pro forma condensed combined financial information does not reflect the effect of any regulatory actions that may impact the unaudited pro forma condensed combined financial statements when the Transaction is completed.
43
| Nine Months Ended September 30, 2023 | Year Ended | |||||||
| (in millions, except per share data) | Pro Forma Combined | |||||||
| Pro Forma Condensed Combined Income Statement | ||||||||
| REVENUES | ||||||||
Royalty, licensing and management fees | $ | 907 | $ | 1,139 | ||||
Initial franchise fees | 32 | 43 | ||||||
Platform and procurement services | 58 | 64 | ||||||
Owned hotels | 74 | 71 | ||||||
Other | 143 | 206 | ||||||
Other revenues from franchised and managed properties | 1,060 | 1,391 | ||||||
|
|
|
| |||||
Total revenues | 2,274 | 2,914 | ||||||
OPERATING EXPENSES | ||||||||
Selling, general and administrative | 333 | 501 | ||||||
Depreciation and amortization | 214 | 274 | ||||||
Owned hotels | 54 | 49 | ||||||
Other expenses from franchised and managed properties | 1,041 | 1,321 | ||||||
|
|
|
| |||||
Total operating expenses | 1,642 | 2,145 | ||||||
Impairment of long-lived assets | — | — | ||||||
Gain on sale of business and assets, net | — | 51 | ||||||
|
|
|
| |||||
Operating income | 632 | 820 | ||||||
OTHER INCOME AND EXPENSES, NET | ||||||||
Interest expense, net | 480 | 582 | ||||||
Other loss | 8 | 11 | ||||||
Equity in net gain of affiliates | (2 | ) | (2 | ) | ||||
|
|
|
| |||||
Total other income and expenses, net | 486 | 591 | ||||||
|
|
|
| |||||
Income before income taxes | 146 | 229 | ||||||
Income tax expense | 37 | 62 | ||||||
|
|
|
| |||||
Net income | $ | 109 | $ | 167 | ||||
|
|
|
| |||||
Basic earnings per share | $ | 1.40 | $ | 2.02 | ||||
|
|
|
| |||||
Diluted earnings per share | $ | 1.39 | $ | 2.01 | ||||
|
|
|
| |||||
| (in millions) | As of September 30, 2023 | |||
Pro Forma Condensed Combined Balance Sheet | ||||
Total assets | $ | 13,983 | ||
Current and long-term debt | 7,799 | |||
Total liabilities | 10,825 | |||
Choice shareholders’ equity | 3,158 | |||
44
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE INFORMATION
The following table summarizes unaudited per share information for Choice and Wyndham on a historical basis, pro forma combined basis for Choice and equivalent pro forma combined basis for Wyndham. The following information should be read in conjunction with the more detailed information (includingaudited consolidated financial informationstatements and accompanying notes of Choice and Wyndham that are incorporated by reference into this Offer to Exchange, and the related notes thereto) included elsewhereunaudited pro forma condensed combined financial statements beginning on page 116. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of what the operating results or financial position would have been if the Offer and the Second-Step Mergers had been completed as of the beginning of the period presented, nor is it necessarily indicative of the future operating results or financial position of the combined companies. The historical income per share, dividends per share and book value per share of Choice and Wyndham shown in this
Prospectus.the table below are derived from their respective audited consolidated financial statements for Choice Hotels International, Inc. and its subsidiariesWyndham as of and for the year ended December 31, 2022, and their respective unaudited consolidated financial statements as of and for the nine months ended September 30, 2023. The historical book value per share is computed by dividing total stockholders’ equity by the number of common shares outstanding at the end of the period, excluding any shares held in treasury. The pro forma combined income per share from continuing operations is computed by dividing the pro forma income from continuing operations available to holders of common shares by the pro forma weighted-average number of shares outstanding. The pro forma combined book value per share is computed by dividing total pro forma shareholders’ equity by the pro forma number of common shares outstanding at the end of the period. Wyndham equivalent pro forma combined per share amounts are collectively referredcalculated by multiplying Choice pro forma combined per share amounts by the exchange ratio for the Standard Election of 0.324.
| Nine Months Ended September 30, 2023 | Year Ended December 31, 2022 | |||||||
Choice - Historical | ||||||||
Historical per share of Choice common stock: | ||||||||
Diluted earnings per share from continuing operations | $ | 4.47 | $ | 5.99 | ||||
Cash dividends declared per share | 0.86 | 0.95 | ||||||
Book value per share | 1.46 | 2.96 | ||||||
Wyndham - Historical | ||||||||
Historical per share of Wyndham common stock | ||||||||
Diluted earnings per share from continuing operations: | $ | 2.79 | $ | 3.91 | ||||
Cash dividends declared per share | 1.05 | 1.28 | ||||||
Book value per share | 10.31 | 11.13 | ||||||
Unaudited Pro Forma Combined | ||||||||
Unaudited pro forma per share of Choice common stock: | ||||||||
Diluted earnings per share from continuing operations | $ | 1.39 | $ | 2.01 | ||||
Cash dividends declared per share* | 0.86 | 0.95 | ||||||
Book value per share | 38.47 | — | ||||||
Unaudited Pro Forma Wyndham Equivalent | ||||||||
Unaudited pro forma per share of Wyndham common stock: | ||||||||
Diluted earnings per share from continuing operations | $ | 0.45 | $ | 0.65 | ||||
Cash dividends declared per share | 0.28 | 0.31 | ||||||
Book value per share | 12.46 | — | ||||||
| * | The current Choice dividend is assumed to continue following the completion of the Offer to Exchange and the Second-Step Mergers for purposes of the unaudited pro forma condensed combined financial statements. |
45
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
Choice Common Stock is listed on the NYSE under the symbol “CHH.” Wyndham Common Stock is listed on the NYSE under the symbol “WH.” The tables below set forth, for the calendar quarters indicated, the high and low sale prices per share reported on the NYSE and the dividends declared on Choice Common Stock and on Wyndham Common Stock.
| Choice Common Stock |
|
| ||||||||||
| High | Low | Dividend | ||||||||||
2023 | ||||||||||||
Fourth Quarter (through December 11, 2023) | $ | 124.90 | $ | 110.16 | $ | 0.2875 | ||||||
Third Quarter | $ | 134.30 | $ | 117.20 | $ | 0.2875 | ||||||
Second Quarter | $ | 129.79 | $ | 111.69 | $ | 0.2875 | ||||||
First Quarter | $ | 130.01 | $ | 110.13 | $ | 0.2875 | ||||||
2022 | ||||||||||||
Fourth Quarter | $ | 130.38 | $ | 109.52 | $ | 0.2375 | ||||||
Third Quarter | $ | 122.93 | $ | 104.22 | $ | 0.2375 | ||||||
Second Quarter | $ | 147.58 | $ | 110.77 | $ | 0.2375 | ||||||
First Quarter | $ | 154.62 | $ | 128.51 | $ | 0.2375 | ||||||
2021 | ||||||||||||
Fourth Quarter | $ | 155.99 | $ | 132.08 | $ | 0.2375 | ||||||
Third Quarter | $ | 130.46 | $ | 112.61 | $ | 0.225 | ||||||
Second Quarter | $ | 123.08 | $ | 108.74 | $ | 0.225 | ||||||
First Quarter | $ | 114.68 | $ | 100.64 | $ | 0 | ||||||
|
|
|
| |||||||||
| Wyndham Common Stock |
|
| ||||||||||
| High | Low | Dividend | ||||||||||
2023 | ||||||||||||
Fourth Quarter (through December 11, 2023) | $ | 79.56 | $ | 66.83 | $ | 0 | * | |||||
Third Quarter | $ | 78.07 | $ | 67.95 | $ | 0.35 | ||||||
Second Quarter | $ | 73.82 | $ | 64.95 | $ | 0.35 | ||||||
First Quarter | $ | 80.87 | $ | 64.65 | $ | 0.35 | ||||||
2022 | ||||||||||||
Fourth Quarter | $ | 76.16 | $ | 62.15 | $ | 0.32 | ||||||
Third Quarter | $ | 72.36 | $ | 59.22 | $ | 0.32 | ||||||
Second Quarter | $ | 90.71 | $ | 64.66 | $ | 0.32 | ||||||
First Quarter | $ | 90.29 | $ | 75.77 | $ | 0.32 | ||||||
2021 | ||||||||||||
Fourth Quarter | $ | 90.18 | $ | 76.42 | $ | 0.32 | ||||||
Third Quarter | $ | 79.04 | $ | 66.49 | $ | 0.24 | ||||||
Second Quarter | $ | 76.88 | $ | 70.91 | $ | 0.16 | ||||||
First Quarter | $ | 71.36 | $ | 57.34 | $ | 0.16 | ||||||
| * | On November 14, 2023, Wyndham declared a quarterly cash dividend of $0.35 per share, payable on December 27, 2023 |
46
The following table presents trading information for Choice Common Stock and Wyndham Common Stock on October 16, 2023, the last trading day before the public announcement of the Proposed Combination with Wyndham, and on May 22, 2023, the last day before the Proposed Combination was first-reported by the Wall Street Journal (referred to herein as "Choice" or the "Company" unless otherwise
indicated orUnaffected Date).
| Wyndham Common Stock | Choice Common Stock | |||||||||||||||||||||||
| High | Low | Close | High | Low | Close | |||||||||||||||||||
October 16, 2023 | $ | 69.36 | $ | 68.17 | $ | 69.10 | $ | 125.56 | $ | 123.75 | $ | 124.90 | ||||||||||||
Unaffected Date (May 22, 2023) | $ | 66.45 | $ | 65.63 | $ | 65.65 | $ | 120.21 | $ | 118.16 | $ | 118.82 | ||||||||||||
The value of the context otherwise requires. Unless otherwise indicated, all
statistical informationshares of Choice Common Stock that form a part of the Offer consideration will change as the market price of Choice Common Stock fluctuates during the pendency of the Offer and data relatingthereafter, and therefore will likely be different from the prices set forth above at the time you receive your shares of Choice Common Stock in accordance with the terms of the Exchange Offer. See the section in this Exchange Offer titled “Risk Factors.” Stockholders are encouraged to obtain current market quotations for Choice Common Stock and Wyndham Common Stock prior to making any decision with respect to the Offer.
47
INFORMATION ABOUT THE COMPANIES
Choice
Choice is primarily a hotel industryfranchisor operating in this
Prospectus are derived from information provided by Smith Travel Research.
Smith Travel Research has neither consented to the use of the hotel industry
data presented herein nor has it provided any form of consultation, advice or
counsel regarding any aspects of, nor is it in any way whatsoever associated
with, the Offering. During 1997, the Company changed its fiscal year from a May
31 year-end to a December 31 year-end.
THE COMPANY
OVERVIEW
Choice Hotels International, Inc. is the world's second largest franchisor of
hotel properties with 3,567 franchised properties open and 870 franchised
properties under development at June 30, 1998, representing 297,396 rooms open
and 76,523 rooms under development in 33 countries. The Company franchises
lodging properties under its proprietary brand names (the "Choice Brands"):
Comfort(R), Quality(R), Clarion(R), Sleep(R), Rodeway(R), Econo Lodge(R) and
MainStay (R). The Company has over 2,100 franchisees in its domestic franchise
system, the largest of which, Sunburst Hospitality Corporation, accounted for
approximately 5% of the Company's royalty fees for the six-months ended June
30, 1998. The Company franchises hotels in all 50 states, and the District of Columbia and 32 additionalover 45 countries and territories. At September 30, 2023, we had 7,463 hotels with 94%627,694 rooms open and operating, and 980 hotels with 99,076 rooms under construction, awaiting conversion, approved for development or committed to future franchise development on outstanding master development agreements. Our brand names include Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Clarion PointeTM, Ascend Hotel Collection®, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay Suites®, Suburban StudiosTM, WoodSpring Suites®, Everhome Suites®, and Cambria® Hotels.
Additionally, through our acquisition of its franchising revenue
generated from hotels franchisedRadisson, completed on August 11, 2022, our brands expanded to include Radisson Blu®, Radisson RED®, Radisson®, Park Plaza®, Country Inn & Suites® by Radisson, Radisson Inn & SuitesSM, Park Inn by Radisson®, Radisson Individuals®, and Radisson Collection®, which are located across the United States, Canada, the Caribbean and Latin America.
Choice was incorporated in 1980 in the United States. With recognized brands
and a diverse and growing franchisee base, the Company believes it has
established a strong foundation for continued growth.
The Company is a "pure-play" lodging franchisor with limited real estate
exposure and low capital expenditure requirements. With a focus on hotel
franchising versus ownership, the Company benefits from the economiesState of scale
inherent in the franchising business. The fee and cost structures of the
Company's business provide significant opportunities to increase profits by
increasing the number of franchised properties. The Company derives
substantially all of its revenues from franchise fees which consist of an
initial fee and ongoing royalty fees which are based on a percentage of the
franchisees' gross room revenues. The principal factors that affect the
Company's operating results are: (i) growth in the number of hotels under
franchise, (ii) occupancy and room rates achieved by the hotels under
franchise, (iii) the number and relative mix of franchised hotels and (iv) the
Company's ability to manage costs. The number of rooms at franchised properties
and occupancy and room rates at those properties significantly affect the
Company's results because royalty fees are based upon room revenues at
franchised hotels. The variable overhead costs associated with franchise system
growth are substantially less than incremental royalty fees generated from new
franchisees, therefore the Company is able to capture a significant portion of
these royalty fees as operating income.
The Company believes that the continued growth of its franchise business
should enable it to capture increasing benefits from the operating leverage in
place and thereby continue to improve operating margins. The Company's
operating margins have improved from 47.1% for the year ended May 31, 1995 to
55.0% for the year ended May 31, 1997. Furthermore, the Company has generated
steady royalty fee income from its increasing franchisee base growing from
$51.0 million for the year ended May 31, 1992 to $97.2 million for the year
ended May 31, 1997, representing a compounded annual growth rate of 13.8%.
Earnings before interest expense, income taxes (EBITDA), depreciation and
amortization have grown at a compounded annual growth rate of 20.5% from $32.2
million for the year ended May 31, 1992 to $81.7 million for the year ended May
31, 1997. Operating margins have improved from 40% for the six month period
ended June 30, 1997 to 49% for the six
1
month period ended June 30, 1998. Similarly, EBITDA has increased from $39.0
million for the six month period ended June 30, 1997 to $51.6 million for the
six month period ended June 30, 1998.
Service is a distinguishing characteristic in the lodging industry.
Generally, the Company believes there are three levels of service: full-service
hotels (which typically offer food and beverage services, meeting rooms, room
service and similar guest services); limited-service hotels (which typically
offer amenities such as swimming pools and continental breakfast or similar
services); and all-suites hotels (which typically have limited public areas,
but offer guests two rooms or one room with distinct areas, and which may or
may not offer food and beverage services). The Company's Econo Lodge, Rodeway
and Sleep brands compete primarily in the limited-service economy category and
its Comfort and Quality brands compete primarily in the limited-service middle-
market category. The Company's MainStay brand competes primarily in the all-
suites middle-market category and its Clarion brand competes primarily in the
full-service upscale category.
The following table provides an overview by brand of hotels open and under
development as of June 30, 1998 for the Company's U.S. franchise system:
HOTELS UNDER
BRAND HOTELS OPEN DEVELOPMENT
----- ------------------ -----------------
PROPERTIES ROOMS PROPERTIES ROOMS
---------- ------- ---------- ------
Comfort.............................. 1,351 108,270 307 26,907
Quality.............................. 427 50,258 106 10,795
Econo Lodge.......................... 693 44,675 111 8,281
Clarion.............................. 97 16,240 32 5,387
Rodeway.............................. 197 12,340 49 3,401
Sleep ............................... 171 12,785 146 11,505
MainStay ............................ 15 1,380 25 2,276
----- ------- --- ------
Total............................... 2,951 245,948 776 68,552
===== ======= === ======
BUSINESS STRATEGY
The Company's strategy is to create an organization that is focused on: (i)
serving franchisee and consumer needs, (ii) optimizing its brands, (iii)
strategically growing the franchise system, (iv) improving margins through
increased productivity, (v) growing profitably internationally and (vi)
pursuing complementary business opportunities.
. Serving Franchisee and Consumer Needs. The Company has created an
organizational structure that focuses on consumers, serves franchisees
and leverages the franchise system.
--Consumer Focus: Brand management, new product development and
traditional marketing and advertising are all combined under the
Company's marketing department to create consumer focus and to drive
demand for the Company's brand products. New product development is
based on consumer needs determined through consumer research. The
Company believes that this focus leads to greater demand for its
products, which in turn results in higher revenue from the Company's
franchise system.
--Franchisee Service: The Company has established five regional
operating teams that are responsible for franchisee service and sales
in their respective regions. This structure provides each franchisee
with one primary contact who is responsible for assessing and
responding to each hotel's specialized needs. Led by seasoned
executives averaging over 20 years' experience in the lodging and
franchising industries, the Company believes it is positioned to
strategically develop new hotel franchises and enhance the operating
performance of its existing hotels.
2
--Leveraging the Franchise System: Strategic partnerships, purchasing
and other functions that leverage the scale of the franchise system
are combined under the Company's partner services group. The Company
believes there is significant opportunity to leverage the franchise
system by entering into joint marketing arrangements with national and
multi-national companies that want to gain exposure to the millions of
guests who patronize the Company's franchised hotels each year. In the
past, these arrangements have added to the Company's and its
franchisees' revenues and profits by attracting business to its
franchised hotels.
. Optimizing its Brands. The Company believes that each of its brands has
particular attributes and strengths. The Company's strategy is to
leverage the strengths of each brand for profit growth and for
identifying new niches into which the Company may expand. This strategy
is effected by raising the Company's brand standards which are strictly
enforced through a consumer-driven quality assurance program.
. Strategically Growing the Franchise System. The Company is taking
advantage of its regional structure to analyze key markets in the U.S.
and, in conjunction with its franchisees, identify the best opportunities
for new development or conversion to one of the Company's brands.
. Improving Margins Through Increased Productivity. The Company enhances
the competitiveness of its own and its franchisees' profitability by
initiating revenue generating programs and implementing cost reduction
programs. A key component of this strategy is the implementation of the
Company's proprietary property and yield management system "Profit
Manager by Choice," which the Company believes will improve the operating
performance of its franchisees. This system has been supplemented by
continued enforcement of the Company's contracts (including franchisee
audits) and an aggressive focus on strategic partnership opportunities.
. Growing Profitably Internationally. As of June 30, 1998, the Company's
international franchise system had 616 properties with 51,448 rooms. The
Company's international franchise system includes hotels in 32 countries
outside the United States. The Company plans to continue to grow
profitably its brands internationally by strategically pursuing joint
ventures, master franchising agreements and brand-specific development
agreements for certain geographic areas.
. Pursuing Complementary Business Opportunities. The separation of the
Company from Former Choice (as defined below) allows the Company to focus
solely on franchising, including acquisition opportunities that are
complementary to the Company's core business and unique operating skills.
The Company's acquisition strategy includes the potential purchase of
lodging brands that would enhance the spectrum of brands and services the
Company currently offers its franchisees and hotel consumers.
COMPANY HISTORY
Prior to becoming a separate, publicly-held company on October 15, 1997
pursuant to the Company Spin-Off (as defined below), the Company was known as
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 business of franchising hotels under
the Choice Brands (which had been conducted primarily by the Company) and its
European hotel ownership and franchising business pursuant to a pro rata
distribution to its stockholders of all the stock of the Company (the "Company
Spin-Off"). At the time of the Company Spin-Off, the Company changed its name
to "Choice Hotels International, Inc." and Former Choice changed its name to
"Sunburst Hospitality Corporation." For purposes of this Prospectus, references
to the Company's former parent corporation prior to the Company Spin-Off are to
"Former Choice," and references to such corporation after the Company Spin-Off
are to "Sunburst."
Prior to November 1996, the Company and Former Choice were each subsidiaries
of Manor Care, Inc. ("Manor Care") which, directly and through its
subsidiaries, engaged in the hotel franchising business currently
3
conducted by the Company as well as in the business of owning and managing
hotels under the Choice Brands (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 the
stock of Former Choice (the "Former Choice Spin-Off"). In connection with the
Former Choice Spin-Off, the Company became a wholly-owned subsidiary of Former
Choice and remained as such until consummation of the Company Spin-Off.
The Company's common stock, $.01 par value per share, is listed on the New
York Stock Exchange under the trading symbol "CHH."
The Company is a Delaware corporation and itsDelaware.
Choice’s principal executive offices are located at 10750 Columbia Pike, Silver Spring,915 Meeting St., North Bethesda, Maryland 20901. The Company's20852, and its telephone number at that location is (301) 592-5000.
Additional information concerning Choice is included in the Choice reports incorporated by reference in this Exchange Offer. See the section in this Exchange Offer titled “Where You Can Find More Information.”
Purchaser
Purchaser is a Delaware corporation incorporated on December 7, 2023, with principal executive offices 915 Meeting St., North Bethesda, Maryland 20852. The telephone number of Purchaser’s principal executive offices is (301) 592-5000. Purchaser is a wholly owned subsidiary of Choice that was formed to facilitate the transactions contemplated by this Exchange Offer. Purchaser has engaged in no activities to date and has no material assets or liabilities of any kind, in each case other than those incidental to its formation and its activities and obligations in connection with the Offer.
Wyndham
Wyndham is primarily a hotel franchisor, with approximately 9,100 affiliated hotels with approximately 843,000 rooms located in over 95 countries and welcoming over 130 million guests annually worldwide. Wyndham operates a hotel portfolio of 24 brands, including Vienna House and ECHO Suites Extended Stay by Wyndham, its first economy extended stay brand launched in the first quarter of 2022. Wyndham’s 24 brands are primarily located in secondary and tertiary cities and approximately 80% of the U.S. population lives within ten miles of at least one of its affiliated hotels.
48
Wyndham was incorporated in 2017 under the laws of the state of Delaware in connection with its 2018 spin-off from Wyndham Worldwide Corporation. Wyndham’s principal executive offices are located at 22 Sylvan Way, Parsippany, New Jersey 07054, and its telephone number at that location is (973) 753-6000.
Additional information concerning Wyndham is included in the Wyndham reports incorporated by reference in this Exchange Offer. See the section in this Exchange Offer titled “Where You Can Find More Information.”
49
BACKGROUND OF THE OFFERING
OFFER
In April 2023, following years of informal and intermittent conversations regarding a potential transaction between Choice and Wyndham, Stewart W. Bainum, Jr., Chair of the board of directors of Choice (the “Choice Board”), contacted Stephen P. Holmes, Chair of the Wyndham Board, to discuss a proposal to combine the two companies. In light of the parties’ prior conversations about a potential transaction, Mr. Holmes said that he would expect the proposal would represent a control premium, and, if it did not, that there were likely to be issues relating to management and governance. Mr. Bainum told Mr. Holmes that a formal proposal would be forthcoming.
Shortly following this conversation, on April 28, 2023, Choice submitted an offer letter to the Wyndham Board, proposing to acquire all of the outstanding shares of Wyndham Common Stock for $80 per share, comprised of 40% cash and 60% Choice Common Stock, which, at the time, represented a 19% premium over Wyndham’s 30-day average share price as of the close of trading on the prior day (the “First Proposal”). Later that day, Mr. Holmes communicated to Moelis & Company LLC (“Moelis”), one of Choice’s financial advisors, that the First Proposal was “uninspiring” and “not a good start.”
On May 4, 1998,9, 2023, Wyndham rejected the Company consummatedFirst Proposal, notifying Choice that it was not interested in engaging in further discussions with Choice.
On May 10, 2023, a representative of Moelis spoke to Mr. Holmes. Mr. Holmes noted that he viewed the Offering. The Company used
approximately $99 millionprice as insufficient, that he would prefer more cash, that the lack of governance rights was inconsistent with the net proceeds fromconsideration mix and that he was not authorized to negotiate a potential transaction with Choice.
On May 15, 2023, Choice delivered a second written proposal to Wyndham, which addressed the Offering to repay
amounts outstanding under the revolving portion of the Credit Facility (as
defined below).
The Original Notes were soldconcerns raised by the Company on May 4, 1998 to Salomon
Brothers Inc., Bear, Stearns & Co. Inc. and Lehman Brothers Inc. (the "Initial
Purchasers") pursuantMr. Holmes. Choice increased its offer to a Purchase Agreement dated April 28, 1998price per share of $85, comprised of 55% cash and 45% Choice Common Stock, which, at the time, represented a 31% premium over Wyndham’s 30-day average share price as of May 12, 2023 (the "Purchase Agreement"“Second Proposal”). The Initial PurchasersSecond Proposal also offered Wyndham stockholders participation in the combined company’s governance, offering Wyndham the opportunity to designate two independent members of the board of directors of the combined company. The Second Proposal expressed that if Wyndham would engage in discussions, the parties might be able to identify additional synergies and drivers of value that would allow Choice to increase the value of its offer with the goal of reaching a negotiated agreement and consummating a transaction producing substantial value for the stockholders of both companies.
On May 23, 2023 (the “Unaffected Date”), the Wall Street Journal published an article disclosing rumors regarding the companies’ discussions to date. At the time, neither company confirmed that Choice had made multiple private proposals to Wyndham.
On May 29, 2023, Wyndham rejected the Second Proposal, asserting that the Second Proposal still undervalued Wyndham, presented Wyndham stockholders with uncertain value given the stock consideration and the potential negative impacts of the resulting leverage of the combined company.
50
On June 1, 2023, Choice replied by letter to Wyndham, refuting each of Wyndham’s assertions. Choice responded that: (i) the consideration offered by the Second Proposal represented a 29% premium to Wyndham’s closing stock on the date before the Unaffected Date, a 27% premium over Wyndham’s 60-day average stock price as of the Unaffected Date and a 21% premium to Wyndham’s 52-week average stock price, as well as a 14.7x last twelve months Adjusted EBITDA as of March 31, 2023 and 14.2x 2023E EBITDA; (ii) since the completion of the spin-off of Wyndham in 2018, Choice’s stock had traded at a 3.5x higher enterprise value over consensus analysts’ research Adjusted EBITDA for the next twelve months, starting from the quarter following the referenced date multiple to Wyndham’s over that period; (iii) as compared to Wyndham’s projected 2.9% CAGR between January 1, 2023 and December 31, 2024, Choice is instead projected to grow at 7.5% during such time (each such growth rate based on analyst consensus projections, which exclude the full reflection of the value derived from the successful June 2022 acquisition of Radisson Hospitality, Inc.); and (iv) Choice had, and still has, one of the strongest balance sheets in the industry and expects to be able to rapidly de-lever post-Proposed Combination. Choice restated that its evaluation of Wyndham’s financials were limited to public records and strongly encouraged the Wyndham Board to engage in a dialogue and clarify any misconceptions, possibly leading to even more value for Wyndham’s stockholders.
On June 2, 2023, Mr. Holmes informed Moelis that he was out of the country at sea and would be back in the U.S. on June 14 or 15. On June 14, 2023, Mr. Bainum spoke with Mr. Holmes who again expressed concerns regarding the mix of consideration and value. Mr. Holmes told Mr. Bainum that he was not willing to meet to discuss the latest proposal unless Choice signed a non-disclosure agreement (“NDA”). Mr. Bainum told Mr. Holmes that Choice was not willing to do so unless there was a meeting of the minds on a value range. Mr. Holmes expressed continued reluctance and told Mr. Bainum that Deutsche Bank Securities, Inc. (“Deutsche Bank”) was acting as Wyndham’s financial advisor and suggested that Moelis and Deutsche Bank speak directly.
Later that day, representatives of Moelis and Deutsche Bank spoke, and Deutsche Bank noted that Wyndham’s counsel, Kirkland & Ellis LLP (“K&E”), would be delivering a draft of the NDA to Willkie Farr & Gallagher LLP, the Company’s legal counsel, (“Willkie”) and that Wyndham was unwilling to have any discussions whatsoever, including by financial advisors, unless and until the NDA was executed. Moelis responded that Choice would likely be unwilling to sign an NDA with an extended standstill that would restrict its strategic options to pursue the Proposed Combination, unless Wyndham acknowledged a willingness to transact and discuss relative valuation.
Later that day, Willkie received a draft of a three-year NDA, which included an 18-month mutual standstill provision (the “Standstill Provision”), generally preventing either party from acquiring any common stock of the other party (including arranging any financing with respect thereto), launching a proxy contest, announcing any intentions concerning the Proposed Combination and/or proposing any matters relating to the Proposed Combination be voted on by either party’s stockholders, among other restrictions, during the 18-month standstill period.
On June 15, 2023, representatives of K&E and Willkie discussed the proposed terms of the NDA. K&E relayed that the Second Proposal’s terms were not yet within a negotiable range, but also that, even though almost seven weeks had passed since it received the First Proposal, Wyndham did not
51
have a fully formed view concerning its own, or Choice’s, market value. Given this explanation, Choice declined to enter into an NDA containing an extended Standstill Provision, as it believed Wyndham was not prepared to seriously consider the Proposed Combination or enter into good faith discussions concerning the transaction. During this call, K&E acknowledged and agreed with Willkie, contrary to the position taken by Deutsche Bank the previous day, that Choice and Wyndham could engage in discussions regarding a Proposed Combination without an NDA in place, so long as no confidential information was disclosed to the other party.
On June 22, 2023, Mr. Bainum, Mr. Holmes and the respective Chief Executive Officers of Choice, Patrick Pacious, and Wyndham, Geoffrey Ballotti, met in person to discuss the Second Proposal and the strategic rationale of the Proposed Combination. During this meeting, Choice indicated that it would also be willing to offer Wyndham stockholders the ability to elect their form of consideration, subject to a customary proration mechanism. Mr. Holmes expressed that Wyndham could likely agree to a transaction with some stock consideration but that Choice would need to offer significantly more cash in order to transact.
On June 28, 2023, Mr. Holmes called Mr. Bainum to tell him that Choice’s proposed price was still too low but did not indicate what price would be acceptable. Mr. Holmes also noted a preference for a higher percentage of cash consideration and a higher headline valuation, expressed his belief that the Choice stock was overvalued and Wyndham stock was undervalued at the time and cautioned against making the offer public. During these discussions, Mr. Holmes also expressed concerns about post-transaction liquidity for himself and other stockholders of Wyndham.
On June 30, 2023, Mr. Bainum and Mr. Holmes had another call, during which Mr. Holmes stated that the Wyndham Board acknowledged the logic of the transaction but would not support the Proposed Combination if Choice did not increase the cash component of the offer. Mr. Bainum and Mr. Holmes agreed to speak again shortly.
On July 11, 2023, Choice issued a business update in which it reaffirmed its 2023 guidance and provided 2024 guidance of Adjusted EBITDA growth of greater than 10%. On the same day, Mr. Bainum and Mr. Holmes spoke again to discuss how the election mechanism Choice offered could result in more cash for Wyndham stockholders who desired cash relative to Choice stock. For the first time, Mr. Holmes also raised a concern about potential regulatory issues relating to the Proposed Combination, including the potential for a prolonged approval process. Mr. Holmes again acknowledged the industrial logic of the Proposed Combination.
On July 14, 2023, Moelis and Deutsche Bank had a call to discuss historical data on various transactions involving potential cash and stock election mechanisms.
On August 14, 2023, Mr. Bainum and Mr. Holmes spoke again regarding the strategic rationale for the Proposed Combination. Mr. Bainum told Mr. Holmes he would like to meet to discuss the possibility of Choice increasing its offer to $90 per share.
On August 17, 2023, Mr. Bainum and Mr. Holmes met personally to discuss the Proposed Combination. Mr. Holmes requested that Choice send a proposal reflecting $90 per share in writing and asked for clarification regarding the proposed mix of cash and stock consideration. Mr. Bainum and Mr. Holmes discussed the threats the two companies faced from larger competitors and the strategic benefits of a Proposed Combination. Mr. Holmes
52
again noted concerns with respect to the timing of regulatory approvals, which Wyndham viewed as an impediment to a transaction, regardless of valuation. Mr. Bainum expressed Choice’s confidence that regulatory approvals would be obtained and suggested that the companies’ respective counsels discuss regulatory and other matters. The following day, Willkie and K&E held a call to discuss the terms of the NDA, including the Standstill Provision, and certain regulatory aspects of the Proposed Combination.
Over the next two weeks, Choice had calls with numerous potential financing sources that confirmed their willingness to provide the necessary debt financing that would be required in connection with the Proposed Combination.
On August 21, 2023, Mr. Bainum and Mr. Holmes spoke again. Mr. Holmes reiterated that, given Wyndham’s perception of the potential for a lengthy regulatory process, Wyndham would not transact even at a much higher valuation. Mr. Bainum expressed his disappointment and let Mr. Holmes know that Choice planned to send a revised offer to Wyndham reflecting $90 per share.
Choice subsequently resoldsubmitted a third written offer to Wyndham’s Board, increasing the Original
Notesproposed purchase price a second time to qualified institutional buyers pursuant$90 per share, comprised of 55% cash and 45% Choice common stock (the “Third Proposal”). The Third Proposal also included a cash or stock election mechanism, which would provide Wyndham stockholders with the ability to Rule 144Achoose either cash, stock, or a combination of both, subject to a customary proration mechanism, and maintained the earlier proposal for Wyndham stockholders to participate in the governance of the combined company.
Mr. Holmes responded by email to the Third Proposal on August 22, 2023, expressing concerns about: (i) the offer value relative to Wyndham’s future growth potential; (ii) the value of Choice’s stock; and (iii) the business and execution risk facing the Proposed Combination. However, Mr. Holmes did not raise leverage as a continuing concern at this time. Mr. Holmes concluded by stating his desire to end any correspondence regarding the Proposed Combination, a position he reversed the following day and made several claims regarding his recent discussions with Mr. Bainum. Mr. Bainum responded by email, reiterating Choice’s full commitment to pursuing the Proposed Combination and also refuting various claims made by Mr. Holmes. Mr. Bainum noted that Choice had been unwilling to agree to an extended Standstill Provision as a result of Wyndham’s refusal to engage in meaningful or substantive discussions regarding price and indicating that Choice would be willing to sign an NDA with a standstill provision so that the parties could pursue confirmatory due diligence, if Wyndham were willing to engage in a constructive dialogue on price and other key terms of a transaction.
Both companies’ advisors continued to engage with one another, with discussions occurring over the course of that week. The discussions included a high-level evaluation of regulatory matters and the value of the proposed consideration. On August 24, 2023, representatives of Willkie and K&E had a call during which K&E noted that the Wyndham Board had three primary concerns: (i) absolute value, and noted, notwithstanding Choice’s initial proposal almost four months earlier, that Wyndham still did not have a fully formed view on its own value, (ii) the value of Choice’s stock and (iii) regulatory considerations. During a subsequent call on August 29, 2023, Willkie and K&E’s antitrust specialists discussed the potential antitrust considerations relating to the Proposed Combination, with timing and strategy as focal points. On this call, Wyndham’s counsel acknowledged and agreed with Choice’s counsel that the Proposed Combination has pro-competitive justifications.
53
On August 29, 2023, Mr. Holmes emailed Mr. Bainum to suggest the two coordinate a discussion with their financial advisors present.
On August 30, 2023, Mr. Bainum, Mr. Holmes and representatives from Moelis and Deutsche Bank engaged in further high-level discussions regarding the regulatory approval process and value of the proposed consideration. On this call, Mr. Holmes and his advisors again acknowledged the strategic rationale of the Proposed Combination. Mr. Holmes also expressed their concerns that the regulatory approval process could be extended and that, if they were to transact, they would require a six-month drop-dead date and a reverse termination fee representing 10% of Wyndham’s enterprise value based on the most recent Choice offer (approximately $1 billion), payable if Choice was unable to obtain all requisite regulatory approvals within six months. Choice was advised by its financial and legal advisors that Wyndham’s proposal was well outside of market norms.
On September 5, 2023, Choice, Wyndham and their respective financial advisors participated in another call, discussing the regulatory approval process and the value and cash/stock mix of the proposed consideration. During this call, Wyndham again acknowledged the industrial logic of the Proposed Combination and that the purchase price was in a negotiable range but reiterated its concern with the value of Choice’s shares. To allow Wyndham another opportunity to evaluate its purported concerns with the value of Choice’s stock, Choice proposed a one-way, short-term non-disclosure agreement, with no standstill provisions, to facilitate Wyndham’s access to certain confidential information about Choice’s business and the value of Choice’s common stock (the “Short-Term NDA”), and invited Wyndham to prepare a list of due diligence inquiries regarding Choice. Wyndham expressed a commitment to understanding Choice’s views on the value of Choice’s stock and acknowledged that Wyndham having an opportunity diligence Choice under the Securities Act. PursuantShort-Term NDA was a good solution. Subsequently, Willkie sent a draft of the Short-Term NDA to K&E.
On September 6, 2023, Moelis and Deutsche Bank engaged in further discussions, during which Deutsche Bank confirmed that Wyndham was willing to consider a transaction but that regulatory concerns represented a fundamental threshold issue that needed to be addressed. Moelis indicated that, while Choice had a different perspective on the regulatory timeframe, Choice was willing to agree to allocate risk in a way that would assuage Wyndham’s concerns.
During the course of the next week, Willkie and K&E had numerous calls and further discussed the due diligence request list and the Short-Term NDA. During this time, K&E stressed that regulatory risk allocation was a threshold issue for Wyndham and that Mr. Holmes would not take the current proposal to the Purchase Agreement,Wyndham Board unless and until their regulatory concerns were fully addressed.
On September 12, 2023, K&E provided Willkie with an initial request list of due diligence items. During that week, Moelis and Deutsche Bank had two separate calls discussing such initial request list to address certain changes Wyndham requested. However, despite broad alignment on the Companyrequests and the Initial
Purchasers enteredstrategy for engagement and Choice’s willingness to provide its confidential business information (including three years of projections and other detailed financial metrics), Wyndham abruptly refused to engage further on the Short-Term NDA, and therefore, relinquished another opportunity to diligence Choice’s business and evaluate its stated concerns by gaining access to Choice’s non-public information.
54
During the week of September 18, 2023, Willkie and K&E had multiple calls to discuss certain regulatory matters and related consideration, in addition Willkie continued to ask if Wyndham intended to enter into the registration rights agreement dated April 28, 1998
(the "Registration Agreement"), which grantsshort-term NDA. During a call on September 26, 2023, the holdersparties discussed antitrust risk allocation, and K&E noted, without substantiation, that Wyndham had significant antitrust concerns notwithstanding the pro-competitive aspects of the Original Notes
certain exchangeProposed Combination. Neither Wyndham nor its representatives ever provided comments to, or feedback on, the Short Term NDA.
On September 26, 2023, representatives of Moelis and registration rights. The Exchange OfferDeutsche Bank spoke and acknowledged that the parties had not made substantial progress, and Moelis expressed that Choice believed that Wyndham had no intention of meaningfully engaging regarding the Proposed Combination given that Wyndham is intendeddeclining Choice’s offer of a one-way opportunity to satisfy certain obligationsdiligence its confidential information in the face of Wyndham’s concerns regarding the value of Choice’s shares. Moelis explained to Deutsche Bank that, as a result of such continued refusals, Wyndham was leaving Choice with very few alternatives to advance the Proposed Combination and achieve the attendant stockholder benefits.
On September 27, 2023, Mr. Bainum and Mr. Holmes, along with their financial advisors, held. During this call, Choice offered to engage on risk allocation relating to regulatory matters, including two separate offers from Choice and its representatives to discuss mechanisms to enhance certainty and to alleviate Wyndham’s concerns on risk allocation and timing of closing, including a potential above-market reverse termination fee and a possible ticking fee. However, despite these demonstrated efforts to address Wyndham’s demands and progress toward an agreement, Wyndham made clear to Choice and its advisors that it was unwilling to proceed with further discussions regarding the Proposed Combination. Mr. Bainum reiterated that Choice was fully committed to the transaction as it believed the companies’ stockholders would see the long-term value of the Company underProposed Combination despite any perceived regulatory risk and that Choice was aware of all of its options to pursue a transaction. Mr. Holmes responded that Wyndham was prepared for any possibility.
On October 17, 2023, Wyndham’s decision to cease discussions following months of intermittent engagement and despite Choice’s many efforts to address Wyndham’s stated concerns, Choice issued a press release (the “First Public Offer”) and filed certain communications with the Registration Agreement.
RECENT DEVELOPMENTS
SEC, including a presentation to investors published to its company website, to provide the public with information about the Proposed Combination and the good-faith proposals offered to Wyndham with respect thereto and to urge the Wyndham Board to engage in a negotiated transaction. The First Public Offer highlighted the information Choice and its advisors had been attempting to stress to Wyndham privately to date, namely the industrial logic of the Proposed Combination and the value both companies’ stockholders and other constituents could realize in the event these two strong companies were to combine.
Later that day, Wyndham issued a press release formally rejecting the Third Proposal and reiterating its refusal to engage in further discussion regarding the Proposed Combination.
55
In June 1998, William R. Floyd,an effort to facilitate further engagement, Choice issued a second press release on October 25, 2023, calling upon the Company's Chief Executive OfficerWyndham Board to engage meaningfully and President, resigned fromprogress towards a negotiated transaction. In addition, on or about October 25, 2023, Choice determined to engage Goldman Sachs & Co. LLC (“GS”) as an additional financial advisor in connection with the Companyproposed transaction.
On October 26, 2023, Wyndham hosted its quarterly earnings call for the period ended September 30, 2023, and fromreleased an investor presentation reaffirming and expanding upon Wyndham’s rationale for rejecting Choice’s offers to date. Wyndham discussed: (i) the Boardpotentially uncertain regulatory timeline and limited downside protections for Wyndham shareholders thus far proposed by Choice, (ii) the uncertain value of Directors for
personal reasons. In August 1998, Charles A. Ledsinger was namedChoice shares and (iii) Wyndham’s standalone prospects as well as the new
Chief Executive Officerhigh pro forma leverage of the combined company. Mr. Holmes further confirmed on this call that Wyndham had previously sought to acquire Choice, reaffirming the industrial logic of a potential combination of the two companies.
On November 7, 2023, Choice hosted its quarterly earnings call for the period ended September 30, 2023, and Presidentreleased an investor presentation to discuss its third-quarter results and was appointedthe Proposed Combination. Choice emphasized the merits of the Proposed Combination and expressed its continued desire to engage with Wyndham and pursue the Board of
Directors. Donald Dempsey, the Company's Executive Vice President andProposed Combination. Scott E. Oaksmith, Choice’s Chief Financial Officer, resigned in July 1998 for personal reasons unrelatedalso confirmed on this call that Choice had purchased Wyndham shares.
On November 13, 2023, Choice began purchasing additional shares of Wyndham Common Stock on the open market. As of December 11, 2023, Choice owns 1,447,264 shares of Wyndham Common Stock.
On November 14, 2023, representatives of Moelis called Deutsche Bank to inform them Choice would be sending an enhanced proposal to the departureWyndham Board with the goal of Mr. Floyd. Twoaddressing the regulatory concerns regarding the Proposed Combination and to propose that the parties enter into a mutual non-disclosure agreement. During the call between Moelis and Deutsche Bank, a representative from Deutsche Bank acknowledged that (i) Wyndham had been tracking the trading prices of Choice’s stock, which appeared to be undervalued due to technical factors and, relatedly, (ii) a fair explanation for the rise in Wyndham’s share price since the First Public Offer was because of the market’s support of the Proposed Combination. Later that night, Choice submitted its fourth offer letter to Wyndham (the “Fourth Proposal”) reaffirming the Third Proposal’s purchase price, and proposing, among other things: (a) a $435 million reverse termination fee (representing approximately 6% of the total equity purchase price offered, payable if the transaction did not close due to the failure to obtain the required regulatory approvals); (b) a monthly ticking fee (representing 0.5% of the total purchase price), accruing daily after the one-year anniversary of signing the definitive transaction agreement payable upon the closing of the transaction; (c) an efforts clause obligating Choice to take actions required by antitrust regulators to close the Proposed Combination so long as such actions would not have a material adverse effect on the combined company; and (d) a limited, mutual non-disclosure agreement allowing for direct negotiations of binding agreements and confirmatory diligence between the companies, but not otherwise restricting Choice’s ability to continue preparations to pursue the Proposed Combination by other means, such as an exchange offer and/or proxy contest, given Wyndham’s disinclination to meaningfully engage to date. The Fourth Proposal again offered an opportunity for Wyndham to participate in the combined company’s governance in the form of two mutually acceptable independent members of the current Wyndham Board being nominated to the board of Directors, Stewart Bainum,
age 78,the combined company.
56
Following the contact with Deutsche Bank and Robert C. Hazard, age 62, retiredChoice’s submission of the Fourth Proposal on November 14, 2023, Wyndham and its advisors made no attempts to engage Choice or its advisors. Instead, Wyndham released a letter publicly rejecting (and disclosing) the Fourth Proposal on November 21, 2023.
On November 16, 2023, Willkie was informed by the FTC that it had commenced a nonpublic investigation into the Proposed Combination. Following that call, Choice volunteered to meet with the FTC to explain the pro-competitive nature of the Proposed Combination. On December 5, 2023, Choice and its representatives met with representatives of the FTC to discuss the Proposed Combination and offered to provide the FTC with additional information regarding the hospitality market and its views on the merits of the Proposed Combination. On the date of this Exchange Offer, Choice filed the notification required for the consummation of the Proposed Combination by the HSR Act
On December 1, 2023, a representative of Deutsche Bank contacted Moelis to ask for clarification on certain terms of the proposal that Choice had sent to Wyndham on November 14, 2023, which Wyndham had publicly rejected over a week earlier on November 21, 2023, without contacting Choice or its advisors to discuss the proposal.
On December 5, 2023, a representative of K&E contacted Willkie to ask if Choice would be willing to meaningful increase the reverse termination fee included in Choice’s November 14, 2023 proposal. Willkie informed K&E that Choice was prepared to discuss all material terms of the Proposed Combination but was unwilling to discuss any one term individually. K&E said it would discuss with Wyndham and get back to Willkie. As of the date of this Offer, there have been no further communications between the parties.
57
The Choice Board is confident that the Proposed Combination of Choice and Wyndham represents a financially and strategically compelling, value-creating opportunity for Wyndham stockholders and Choice stockholders. Based on our discussions with many significant Wyndham stockholders and Choice stockholders, as well as franchisees of both companies, we believe there is broad support for the Offer. Wyndham has itself acknowledged the industrial logic and many of its stockholders appreciate the value that could be created by combining Choice and Wyndham, which Choice is convinced vastly outweighs anything Wyndham could or will achieve on its own. We believe the Offer is the best available option for Wyndham stockholders and franchisees to maximize the value of their respective investments.
We believe the Offer is financially compelling for the following reasons:
| • | Attractive Valuation: Choice’s offer to Wyndham is comprised of $49.50 in cash and 0.324 shares of Choice Common Stock per share of Wyndham Common Stock, representing a value of $40.50 based on Choice’s trading price as of October 16, 2023, the Pre-Release Date. As of the Pre-Release Date, the proposed offer price equates to a 30% premium to Wyndham’s closing share price of $69.10, and reflects a 14.9x multiple of Wyndham’s consensus 2023 adjusted EBITDA estimate, a forward multiple Wyndham has never achieved, absent COVID-19 disruptions. |
| • | Immediate Value Realization: The $49.50 per share cash component of the Standard Election Consideration provides Wyndham stockholders with an opportunity to realize significant immediate cash value for their shares. |
| • | Substantial Long-Term Value: The significant stock component of the Choice offer will provide Wyndham stockholders with a substantial ongoing equity interest in the combined company, allowing Wyndham stockholders to benefit from the resulting synergies and substantial long-term value creation opportunities of the combined company, a value proposition that would be difficult to achieve by either company on a standalone basis. |
We believe the Offer is strategically compelling for the following reasons:
| • | Franchisee Benefits: The combined company will be well-positioned to capitalize on Choice’s proven franchisee success system and provide franchisees with significant benefits and lower costs by: |
driving more business to franchisees through lower-cost direct booking channels, resulting in lower customer acquisition commissions and fees, and lower hotel operating costs and technology-driven labor efficiencies, while continuing to control their own commercial and pricing strategy;
58
nearly doubling the resources available to spend on marketing up to approximately $1.2 billion, which expands customer reach and drives direct bookings to franchisees’ hotels;
establishing a larger rewards member base with potentially 168 million members that is on par and able to effectively compete with the top global programs in hospitality;
improving value of franchisees’ real estate assets by enhancing applicable cap rates and cash flows resulting from affiliation with the combined company;
allowing franchisees to scale properties and create far greater conversion and co-branding opportunities;
offering guests a broader portfolio of brands, no matter their stay occasions, within a single system; and
promoting increased investment and innovation in proprietary technology systems, processes, and training at the hotel and corporate level, driving incremental topline reservation delivery to hotel owners’ properties, while lowering the total cost of hotel operations returns for current Choice franchisees.
| • | Significant Synergies: Choice believes there are approximately $150 million of annual cost-driven synergies, the majority of which could be achieved within 24 months following the Second-Step Mergers. Wyndham stockholders would stand to benefit from their share of over $2 billion of potential value creation from the realization of such synergies, based on applying Choice’s Pre-Release Adjusted EBITDA for the next twelve months trading multiple of approximately 13.8x to such synergies. Choice’s management has a robust track record of realizing cost savings and is therefore well-positioned to deliver synergies faster, more efficiently, and with a greater impact. |
| • | Deleveraging Opportunity: The combined company is expected to benefit from significant free cash flow growth, enabling accelerated deleveraging of its balance sheet following the Second-Step Mergers, while still being able to maintain continued investment in the business. Choice expects that at the time the Proposed Transaction closes, it will have a net debt to Adjusted EBITDA leverage ratio of approximately 5.25x, with a year one interest coverage ratio of approximately 3.0x, a long-term leverage target of approximately 3-4x and an expectation to return to its target leverage range within 24 months of the consummation of the Offer and Second-Step Mergers. |
| • | Enhanced Competitive Position: The combined company’s expected total revenue and annual Adjusted EBITDA for 2024 of approximately $3.1 billion and $1.4 billion, which includes run-rate cost synergies of approximately $150 million, respectively, being generated by potentially millions of unique guests annually and 168 million rewards members staying across a portfolio of 16,360 hotels and 1.43 million rooms, would increase its competitive position against larger industry players, which includes lodging peers (e.g., traditional hotel companies such as Marriott and Hilton), online distributors (e.g., Expedia and Booking Holdings, etc.) and alternative |
59
accommodation providers (e.g., Airbnb and VRBO, etc.). The combined company is also expected to create a leading platform to broaden its offerings in the expanding global lodging market, which was at $411 billion in 2022 and expected to reach $744 billion in 2028, approximately $25 billion in gross rooms revenue, 150 million plus annual check-ins, 300 million plus occupied rooms/nights, $411 billion global lodging and $133 billion US lodging total addressable market metrics. Choice also believes that the combined company is projected to grow rapidly at a rate of 7-10% on an annualized basis. The Choice Board believes this will allow the combined company to be strategically positioned to grow its share, increase efficiency, and allow for excess cash flow generation to fund continuous deleveraging and innovation. Customers of the combined company would benefit from having streamlined and integrated end-to-end solutions and services. |
| • | Proven Leadership: A combination of the two companies will require strong, tested leadership to build a new culture and organizational structure, assimilate global systems and drive the expected growth. Through Choice’s acquisition of Radisson, completed on August 11, 2022, its brands expanded to include Radisson Blu®, Radisson RED®, Radisson®, Park Plaza®, Country Inn & Suites® by Radisson, Radisson Inn & SuitesSM, Park Inn by Radisson®, Radisson Individuals®, and Radisson Collection®, which are located across the United States, Canada, the Caribbean and Latin America. The successful Radisson acquisition, including the better-than-expected realization of revenue and cost-driven synergies resulting in such business growing from negative $12 million of Adjusted EBITDA in 2021 to an expected $80 million in 2024 is evidence of our management team’s ability to successfully integrate a meaningful acquisition. With Radisson franchisees already benefitting meaningfully from lower OTA commissions, increased guest traffic to direct and digital traffic, improvement in conversion rates and access to more corporate accounts, Choice’s management has demonstrated that it can integrate large hotel operations into its own and produce stockholder benefits across its brands. |
Other than the obstacles imposed by the Wyndham Board, including the hurdles that Wyndham can unilaterally eliminate described in the Anti-Takeover Devices Condition, we believe there are no material obstacles to consummating the Offer and the Second-Step Mergers within a reasonable timeframe:
| • | Regulatory Hurdles to Business Combination: We are confident that we will be able to obtain the acquired regulatory approvals to complete the Offer and the Second-Step Mergers within a reasonable timeframe. If there are any objections from applicable regulatory agencies, we do not believe such agencies will impose terms or conditions in order to resolve potential objections that would adversely and materially affect the anticipated operations and financial results of the combined company. We have committed to take all actions required to obtain the requisite regulatory approvals so long as such actions would not have a material adverse effect on the combined company. |
60
| • | Available Financial Resources: Choice expects to have sufficient cash resources available to complete the transactions contemplated by the Exchange Offer and the Second-Step Mergers. In addition to cash on hand, Choice currently intends to borrow or otherwise finance up to approximately $6.0 billion to complete the acquisition of Wyndham, repay Wyndham’s indebtedness, if required, and pay related transaction expenses. Choice is highly confident in its ability to obtain fully committed financing based on indications from two separate bulge bracket global banks for such amounts; however, Choice has not negotiated the terms of, or entered into, any such financing agreement and Choice cannot provide any assurances that such financing will be available when and as needed or on terms that Choice believes to be commercially reasonable. |
We realize there can be no assurance about future results, including results expected as described in the reasons listed above, such as assumptions regarding potential synergies or other benefits expected to be realized following the Offer. Choice’s reasons for the Offer and all other information in this section are forward-looking in nature and, therefore, should be read in light of Directorsthe factors discussed in Julythe sections of this Exchange Offer titled “Risk Factors” and August 1998, respectively. The Company is currently seeking candidates
to fill these positions.
4
61
THE EXCHANGE OFFER
Securities Offered...... $100,000,000 aggregate principal amount of 7.125%
Senior Notes due 2008 (the "Exchange Notes").
The Exchange Offer...... The Company
Choice is offering to exchange, up to $100
million principal amountfor each issued and outstanding share of Wyndham Common Stock, at the election of the Exchange Notes for a
like principal amount of Original Notes. The Exchange
Note may be exchanged only in multiples of $1,000
principal amount. The Company will issue holder:
the Exchange
Notes on or promptly after the Expiration Date. See
"The Exchange Offer."
Based upon an interpretation by the staff of the
CommissionStandard Election Consideration set forth on the cover page of this Exchange Offer;
the Cash Election Consideration set forth on the cover page of this Exchange Offer; or
the Stock Election Consideration set forth on the cover page of this Exchange Offer; and, in certain no-action letters
issuedeach case,
subject to third parties, the Company believes that a
holder (other than (i) a broker-dealer who purchases
such Exchange Notes directly fromelection and proration procedures and the Company to
resell pursuant to Rule 144A or any other available
exemptionAdditional Consideration described under the Securities Actsections below titled “The Offer—Elections and Proration—Over-Election of Cash,” “The Offer—Elections and Proration—Under-Election of Cash” and The Offer—Elections and Proration—Additional Consideration” below.
We will not allot or (ii) any such
holderissue fractional shares of Choice Common Stock to holders of Wyndham Common Stock who accept the Offer. To the extent that is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act) who
exchanges Original Notes for Exchange Notes in the
ordinary course of business and who is not
participating, does not intendyou would be entitled to participate, and
has no arrangement with any person to participate, in
a distribution of the Exchange Notes,fractional shares, those fractional entitlements will be allowedaggregated and, if a fractional share results from such aggregation, you will be entitled to resell Exchange Notesreceive, in lieu of such fractional share, an amount in cash determined by multiplying the fractional share by a price equal to the public without
further registration under the Securities Act and
without delivering the purchasersVWAP of the Exchange
Notes a prospectus that satisfies the requirements of
Section 10 of the Securities Act. However, if any
holder acquires Exchange Notes in the Exchange Offer
for the purpose of distributing or participating in
the distribution of the Exchange Notes or is a
broker-dealer, such holder cannot relyChoice Common Stock as quoted on the position ofNYSE over the staff of the Commission enumerated in
certain no-action letters issued to third parties and
must comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction, unless an
exemption from registration is otherwise available.
Each broker-dealer that receives Exchange Notes for
its own account in exchange for Original Notes, where
such Original Notes were acquired by such broker-
dealer as a result of market-making activities or
otherfive NYSE trading activities, must acknowledge that it
will deliver a prospectus in connection with any
resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange
for Original Notes where such Original Notes were
acquired by such broker-dealer as a result of market-
making or other trading activities. Pursuant to the
Registration Agreement, the Company has agreed to
make this Prospectus, as it may be amended or
supplemented from time to time, available to broker-
dealers for use in connection with any resale
starting on the date hereof anddays ending on the close
of business on the earlier to occur of (i)10th Business Day preceding the date on which all Exchange Notes held by broker-dealers
eligible to use the Prospectus to satisfy their
prospectus delivery obligations under the
5
Securities Act have been sold and (ii) the date 180
days after the Expiration Date. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer with the
intention to participate, or for the purpose of
participating, in a distributionexpiration of the Exchange
Notes should not rely on the position of the Staff of
the Commission enunciated in no-action letters and,
in the absence of an exemption therefrom, must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection with
any resale transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities Act
for which the holder is not indemnified by the
Company. See "Plan of Distribution."
To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for
sale or register the Exchange Notes prior to offering
or selling such Exchanges Notes. If a holder of
Original Notes does not exchange such Original Notes
for the Exchange Notes pursuant to the Exchange
Offer, such Original Notes will continue to be
subject to the restrictions on transfer contained in
the legend thereon. In general, Original Notes may
not be offered or sold, unless registered under the
Securities Act, except pursuant to an exception from,
or in a transaction not subject to the Securities Act
and applicable state securities laws. See "Risk
Factors--Consequences of Failure to Exchange" and
"Description of Exchange Notes."
Expiration Date......... Offer.
The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998,March 8, 2024, unless extended,Choice extends the period of time for which the Offer is open, in which case the term "Expiration Date" shall meanExpiration Time will be the latest time and date and time toon which the Exchange Offer, isas so extended.
Accrued Interest on the
Exchange Notes and the Each Exchange Note will bear interest at the rate of
Original Notes......... 7.125% per annum from their date of issuance.
Interest on the Exchange Notes will be payable semi-
annually on each May 1 and November 1, commencing on
, 199 . Interest on the Original Notes accepted
for exchange will cease to accrue upon issuance of
the Exchange Notes. Interest accrued on exchanged
Original Notes from the most recent date to which
interest has been paid or duly provided for on such
Original Notes or, if no interest has been paid or
duly provided for, from May 4, 1998, through, but not
including the date the Exchange Notes are issued,
will be paid with the first interest payment on the
Exchange Notes.
Conditions to the
Exchange Offer......... extended, expires.
The Exchange Offer is subject to certain customarya number of conditions, which are described in the section of this Exchange Offer titled “The Offer—Conditions to the Offer.” Choice expressly reserves the right, subject to the applicable rules and regulations of the SEC, to waive any condition of the Offer described herein in its discretion, except for the Competition Laws Condition, the Registration Statement Condition, the Choice Stockholder Approval Condition and the Stock Exchange Listing Condition, each of which cannot be waived. Choice expressly reserves the right to make any changes to the terms and conditions of the Offer (subject to any obligation to extend the Offer pursuant to the applicable rules and regulations of the SEC).
The purpose of the Offer is for Choice to acquire all of the outstanding shares of common stock of Wyndham in order to combine the businesses of Choice and Wyndham. Choice intends, promptly after consummation of the Offer, to cause Purchaser to merge with and into Wyndham with Wyndham as the surviving corporation, immediately following which Wyndham will merge with and into NewCo with NewCo as the surviving corporation, after which Wyndham would be a direct or indirect, wholly owned subsidiary of Choice. Choice made numerous attempts to engage the
62
Wyndham Board, making three private proposals between April and September 2023, increasing its proposed purchase price each time. As the Wyndham Board rejected each private proposal and refused to engage in meaningful discussions, Choice announced its offer to acquire Wyndham publicly on October 17, 2023. Following Wyndham’s public rejection of that proposal, Choice made a fourth proposal privately to Wyndham on November 14, 2023, reaffirming the economic and other terms of the prior proposal. Choice also proposed a regulatory termination fee, a ticking fee if the transaction did not close by a certain date and a proposal to take all actions required to obtain the requisite regulatory approvals so long as such actions would not have a material adverse effect on the combined company. The regulatory termination fee would have been payable if the transaction did not close due to the failure to obtain the requisite regulatory approvals and the ticking fee would have been payable upon a successful closing, if applicable. Choice also offered a mutual non-disclosure agreement to allow the parties to conduct confirmatory due diligence. On November 13, 2023, Choice began purchasing shares of Wyndham Common Stock on the open market. As of the date of this Offer, Choice has acquired in excess of $110 million of Wyndham Common Stock. On November 21, 2023, Wyndham publicly rejected the proposed terms of Choice’s offer made on November 14, 2023. In addition to rejecting each offer, the Wyndham Board declined Choice’s repeated requests for confidential mutual, confirmatory due diligence. Due to Wyndham’s unwillingness to even discuss the proposal for a negotiated transaction with Choice and the Wyndham Board’s public statements with respect to Choice’s prior proposals, and because Choice does not believe that it is appropriate for the Wyndham Board to have a veto right over whether the Offer is made available to Wyndham stockholders, Choice is making the Offer directly to Wyndham stockholders upon the terms and subject to the conditions set forth in this Exchange Offer as an alternative to a negotiated transaction. See the section of this Exchange Offer titled “Background of the Offer.”
In the event Choice accepts shares of Wyndham Common Stock for exchange in the Offer, Choice intends to acquire Wyndham pursuant to the Second-Step Mergers. The consideration payable to Wyndham stockholders in the Second-Step Mergers is described in more detail in this Exchange Offer. After the Second-Step Mergers, former remaining Wyndham stockholders will no longer have any ownership interest in Wyndham and, other than those Wyndham stockholders who receive only the Cash Election Consideration and cash in respect of any Additional Consideration that may be waivedpayable, will be stockholders of Choice.
Subject to applicable law, Choice reserves the right to amend or terminate the Offer, including in connection with entering into a merger agreement with Wyndham. Holders of Wyndham Common Stock should be aware that no merger agreement has been entered into between Choice and Wyndham.
Choice estimates that, upon consummation of the Offer and the Second-Step Mergers, former Wyndham stockholders will own, in the aggregate, approximately 35% of Choice Common Stock on a diluted basis. For a more detailed discussion of the assumptions on which this estimate is based, see the section of this Exchange Offer titled “The Offer—Ownership of Choice After the Offer.”
63
Elections
Each tendering Wyndham stockholder may:
elect to receive the Standard Election Consideration set forth on the cover page of this Exchange Offer;
elect to receive the Cash Election Consideration set forth on the cover page of this Exchange Offer; or
elect to receive the Stock Election Consideration set forth on the cover page of this Exchange Offer; and, in each case,
subject to the election and proration procedures and the Additional Consideration described under the sections below titled “The Offer—Elections and Proration—Over-Election of Cash,” “The Offer—Elections and Proration—Under-Election of Cash” and The Offer—Elections and Proration—Additional Consideration” below.
The letter of election and transmittal will allow each holder of Wyndham Common Stock to elect to receive only one type of consideration in the form of the Stock Election Consideration or the Cash Election Consideration, subject to proration, or Standard Election Consideration, and in each case, the Additional Consideration, if any.
Choice will issue a press release on the 10th Business Day preceding the scheduled date of expiration of the Offer, which will specify the equivalent market value of the Standard Election Consideration and the resulting amount of the Cash Election Consideration and the number of shares of Choice Common Stock comprising the Stock Election Consideration, subject to proration, as applicable.
Cash Payable in the Offer and the Second-Step Mergers
Choice plans to pay an aggregate of approximately $4.2 billion in cash in the Offer and the Second-Step Mergers, excluding any cash payable in respect of the Additional Consideration. In order to reserve a proportionate amount of cash for payment in the Second-Step Mergers, Choice will pay pursuant to the Offer the Total Cash Payable in the Offer equal to approximately $4.2 billion multiplied by the Companypercentage of the shares of Wyndham Common Stock on a diluted basis (including shares of Wyndham Common Stock owned by Choice or its subsidiaries) that are tendered and accepted for exchange in the Offer. For this purpose, Choice has estimated and will therefore assume that the number of shares of Wyndham Common Stock on a diluted basis (including shares of Wyndham Common Stock owned by Choice or its subsidiaries) is 84.9 million.
As a result, the Total Cash Payable in the Offer will equal:
Approximately $4.2 billion, multiplied by
the number of shares of Wyndham Common Stock that are tendered and accepted for exchange in the Offer, divided by
84.9 million.
64
Over-Election of Cash
If, after taking into account elections by tendering Wyndham stockholders, the cash payable in the Offer would otherwise be greater than the Total Cash Payable in the Offer, the number of shares of Wyndham Common Stock covered by Cash Elections will be deemed reduced pro rata by the least amount required so that the cash payable in the Offer is no longer greater than the Total Cash Payable in the Offer (and the shares of Wyndham Common Stock no longer covered by Cash Elections as a result of such pro rata reduction will thereupon automatically be deemed to be covered by Stock Elections). For the avoidance of doubt, the Standard Election will not be subject to proration as set forth in this Exchange Offer.
Under-Election of Cash
If, after taking into account elections by tendering Wyndham stockholders, the cash payable in the Offer would otherwise be less than the Total Cash Payable in the Offer, the number of shares of Wyndham Common Stock covered by Stock Elections will be deemed reduced pro rata by the least amount required so that the cash payable in the Offer is no longer less than the Total Cash Payable in the Offer (and the shares of Wyndham Common Stock no longer covered by Stock Elections as a result of such pro rata reduction will thereupon automatically be deemed to be covered by Cash Elections). For the avoidance of doubt, the Standard Election will not be subject to proration as set forth in this Exchange Offer.
Prorationing and Rounding
For purposes of performing any proration described in the sections titled “The Offer—Elections and Proration—Over-Election of Cash” and “The Offer—Elections and Proration—Under-Election of Cash,” the proration will initially be performed pro rata in accordance with the number of shares of Wyndham Common Stock covered by each applicable election subject to proration without rounding and then, for each election that has been prorated, the reduction in the number of shares of Wyndham Common Stock covered by such election as a result of the proration will be rounded to the nearest whole share of Wyndham Common Stock. For the avoidance of doubt, the Standard Election will not be subject to proration as set forth in this Exchange Offer.
65
Additional Consideration
In the event the Competition Laws Condition remains unsatisfied as of the Ticking Fee Commencement Date, each tendering Wyndham stockholder will be entitled to receive Additional Consideration subject to, and conditioned upon, the acceptance of the shares tendered into the Offer. The Additional Consideration shall be payable in cash or shares of Choice Common Stock, valued at the VWAP of Choice Common Stock as quoted on the NYSE over the five NYSE trading days ending on the 10th Business Day preceding the date of acceptance by Choice of the shares tendered in the Offer, at Choice’s election.
Consequences of Tendering with No Election
Wyndham stockholders who tender their shares of Wyndham Common Stock in the Offer but do not make a valid election will be treated as if they made the Standard Election.
Consideration Payable in the Second-Step Mergers
In the Second-Step Mergers, each remaining share of Wyndham Common Stock (other than shares held by Choice and its subsidiaries (which as of the date of this document is 1,447,264 shares of Wyndham Common Stock) and shares held in treasury by Wyndham and other than shares held by Wyndham stockholders who properly exercise applicable dissenters’ rights under Delaware law) will be cancelled and converted into the right to receive, with respect to such stockholders’ shares, the Cash Election Consideration or the Stock Election Consideration, subject to proration, or the Standard Election Consideration, and the receipt of Additional Consideration, if any. See the section of this Exchange Offer titled “The Offer—Purpose of the Offer; Second-Step Mergers.”
The Offer is scheduled to expire at 5:00 p.m., New York City time, on March 8, 2024, unless extended by Choice. For more information, you should read the discussion under the section of this Exchange Offer titled “The Offer—Extension, Termination and Amendment.”
66
Extension, Termination and Amendment
Subject to the applicable rules and regulations of the SEC and the terms and conditions of the Offer, Choice expressly reserves the right (but will not be obligated) (1) to extend, for any reason, the period of time during which the Offer is open; (2) to delay acceptance for exchange of, or the exchange of, shares of Wyndham Common Stock in order to comply in whole or in part and from timewith applicable law (any such delay shall be effected in compliance with Rule 14e-1(c) under the Exchange Act, which requires Choice to timepay the consideration offered or to return shares of Wyndham Common Stock deposited by or on behalf of Wyndham stockholders promptly after the termination or withdrawal of the Offer); (3) to amend or terminate the Offer without accepting for exchange or exchanging any shares of Wyndham Common Stock under circumstances where any of the conditions referred to in its sole
discretion. See "The Exchange Offer--Conditions." Thethe section of this Exchange Offer istitled “The Offer—Conditions to the Offer” have not conditioned uponbeen satisfied or if Choice or any minimum
aggregate principal amount of Original Notes being
tenderedits subsidiaries enters into a definitive agreement or announces an agreement in principle with Wyndham providing for exchange.
6
Procedures for
Tenderinga merger or other business combination or transaction with or involving Wyndham or any of its subsidiaries, or the Original Each holderpurchase or exchange of Original Notes wishing to accept the
Notes.................. Exchange Offer must complete, signsecurities or assets of Wyndham or any of its subsidiaries, or Choice and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with such
Original Notes andWyndham reach any other required documentation,agreement or understanding, in either case, pursuant to which it is agreed or provided that the Offer will be terminated; and (4) to amend the Offer or to waive any conditions to the Offer at any time, except for the Competition Laws Condition, the Registration Statement Condition, the Choice Stockholder Approval Condition and the Stock Exchange Listing Condition, in each case by giving oral or written notice of such delay, termination, waiver or amendment to the Exchange Agent (as defined) atand by making public announcement thereof.
Any such extension, delay, termination, waiver or amendment will be followed as promptly as practicable by a public announcement thereof. In the address set
forth herein. By executingcase of an extension, the Letter of Transmittal,
each holder ofrelated announcement will be issued no later than 9:00 a.m. New York City time, on the Original Notes will representnext Business Day after the previously scheduled Expiration Time. Subject to the Company that, among other things, applicable law (including Rules 14d-4(d)(i), 14d-6(c) and 14e-1 under the Exchange NotesAct, which require that any material change in the information published, sent or given to be acquired by such holder of
Original NotesWyndham stockholders in connection with the Exchange Offer are being acquired by such holder in the ordinary
course of its business, (ii) if such holder is not a
broker-dealer, such holder is not currently
participating in, does not intendbe promptly disseminated to participate in,
and has no arrangement or understanding with any
person to participatestockholders in a distributionmanner reasonably designed to inform stockholders of such changes) and without limiting the Exchange Notes, (iii) such holder ismanner in which we may choose to make any public announcement, Choice will have no obligation to publish, advertise or otherwise communicate any information of this type, other than by issuing a broker-dealer
registeredpress release or other announcement.
Rule 14e-1(c) under the Exchange Act requires Choice to pay the consideration offered or is participatingreturn the shares of Wyndham Common Stock tendered promptly after the termination or withdrawal of the Offer.
If Choice increases or decreases the percentage of shares of Wyndham Common Stock being sought or the consideration offered in the Exchange Offer and the Offer is scheduled to expire at any time before the expiration of ten Business Days from, and including, the date that notice of such increase or decrease is first published, sent or given in the manner specified above, the Offer will be extended until the expiration of ten Business Days from, and including, the date of such notice. If Choice makes a material change in the terms of the Offer (other than a change in the percentage of securities sought or the consideration offered in the Offer) or in the information concerning the Offer, or waives a material condition of the Offer, Choice will extend the Offer, if required by applicable law, for a period sufficient to allow Wyndham stockholders to consider the purposesamended terms of distributing the Exchange Notes, such holderOffer. Choice will comply with Rule 14d-4(d)(2) under the registration and prospectus delivery
requirements of the SecuritiesExchange Act in connection with a secondary resale transactionmaterial changes to the terms of the Offer.
This Offer and all other relevant materials are being mailed to record holders of shares of Wyndham Common Stock and furnished to brokers, dealers, banks, trust companies and similar persons whose names, or the names of whose nominees, appear on Wyndham’s stockholders lists, or, if applicable, who are listed as participants in a clearing agency’s security position listing for subsequent transmittal to beneficial owners of shares of Wyndham Common Stock by Choice.
As used in this Exchange Notes
acquired by such personOffer, “Business Day” means: any day other than a Saturday, Sunday or federal holiday, and cannot rely on the
positionconsisting of the stafftime period from 12:01 a.m. through 12:00 midnight, New York City time. If, prior to the Expiration Time, Choice increases the consideration being exchanged for shares of Wyndham Common Stock pursuant to the Offer, such increased consideration will be received by all stockholders whose shares of Wyndham Common Stock are exchanged pursuant to the Offer, whether or not such shares of Wyndham Common Stock were tendered prior to the announcement of the Commissionincrease of such consideration.
No subsequent offering period will be available after the Offer.
67
Exchange of Shares of Wyndham Common Stock; Delivery of Choice Common Stock
Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any extension or amendment), Choice will accept for exchange promptly after the Expiration Time all shares of Wyndham Common Stock validly tendered and not properly withdrawn (in accordance with the procedure set out in the section of this Exchange Offer titled “The Offer—Withdrawal Rights”) prior to the Expiration Time. Choice will exchange all shares of Wyndham Common Stock validly tendered and not withdrawn promptly following the acceptance of shares of Wyndham Common Stock for exchange pursuant to the Offer. Choice expressly reserves the right, in its discretion, but subject to the applicable rules and regulations of the SEC, to delay acceptance for and thereby delay exchange of shares of Wyndham Common Stock in order to comply in whole or in part with applicable laws or if any of the conditions referred to in the section of this Exchange Offer titled “The Offer—Conditions to the Offer” have not been satisfied or if any event specified in that section has occurred.
In all cases, Choice will exchange all shares of Wyndham Common Stock tendered and accepted for exchange pursuant to the Offer only after timely receipt by the Exchange Agent of (1) the certificates representing such shares of Wyndham Common Stock (or a timely confirmation of a book-entry transfer of such shares of Wyndham Common Stock into the Exchange Agent’s account at DTC, pursuant to the procedures set forth in no-action letters, (iv) such holder understandsthe section of this Exchange Offer titled “The Offer—Procedure for Tendering” (“Book-entry Confirmation”)), (2) the letter of election and transmittal (or a manually signed facsimile thereof), properly completed and duly executed, with any required signature guarantees or, in the case of a book-entry transfer, an Agent’s Message and (3) any other documents required under the letter of election and transmittal. An “Agent’s Message” means: a message transmitted by DTC to, and received by, the Exchange Agent and forming a part of the Book-entry Confirmation which states that a secondary resale transaction described in clause
(iii) above and any resales of Exchange Notes
obtained by such holder in exchange for Original
Notes acquired by such holder directlyDTC has received an express acknowledgment from the Company shouldparticipant in DTC tendering the shares of Wyndham Common Stock that are the subject of such Book-entry Confirmation, that such participant has received and agrees to be coveredbound by an effective
registration statement containing the selling
securityholder information required by Item 507 or
Item 508, as applicable,letter of Regulation S-Kelection and transmittal and that Choice may enforce such agreement against such participant.
For purposes of the CommissionOffer, Choice will be deemed to have accepted for exchange, and (v)thereby exchanged, shares of Wyndham Common Stock validly tendered and not properly withdrawn, if and when Choice gives oral or written notice to the Exchange Agent of Choice’s acceptance for exchange of such holder is an "affiliate," (as
defined in Rule 405 undershares of Wyndham Common Stock pursuant to the Securities Act)Offer. Upon the terms and subject to the conditions of the Company. Any Original NotesOffer, exchange of shares of Wyndham Common Stock accepted for exchange pursuant to the Offer will be made by deposit of the Offer Consideration being exchanged therefor with the Exchange Agent, which will act as agent for tendering Wyndham stockholders for the purpose of receiving the Offer Consideration from Choice and transmitting such offer consideration to tendering Wyndham stockholders whose shares of Wyndham Common Stock have been accepted for exchange. Under no circumstances will Choice pay interest on the Offer Consideration for shares of Wyndham Common Stock, regardless of any extension of the Offer or other delay in making such exchange.
68
If any tendered shares of Wyndham Common Stock are not accepted for exchange for any reason, or if certificates representing such shares of Wyndham Common Stock are submitted evidencing more shares of Wyndham Common Stock than are tendered, certificates evidencing unexchanged or untendered shares of Wyndham Common Stock will be returned, without expense, to the tendering holder thereofWyndham stockholder (or, in the case of Wyndham Common Stock tendered by book-entry transfer into the Exchange Agent’s account at DTC pursuant to the procedures set forth below under the section in this Exchange Offer titled “The Offer—Procedure for Tendering,” such shares of Wyndham Common Stock will be credited to an account maintained at DTC), as promptly as practicable after thefollowing expiration or termination of the Exchange Offer. See "The Exchange Offer--
Procedures for Tendering."
Untendered Original Following
Choice reserves the consummationright to transfer or assign, in whole or in part from time to time to one or more of its affiliates, the right to exchange all or any portion of the shares of Wyndham Common Stock tendered pursuant to the Offer, but any such transfer or assignment will not relieve Choice of its obligations under the Offer or prejudice the rights of the tendering Wyndham stockholders to exchange shares of Wyndham Common Stock validly tendered and accepted for exchange pursuant to the Offer.
Cash in Lieu of Fractional Choice Common Stock
We will not allot or issue fractional shares of Choice Common Stock to holders of Wyndham Common Stock who accept the Offer. To the extent that you would be entitled to fractional shares, those fractional entitlements will be aggregated, and if a fractional share results from such aggregation, you will be entitled to receive, in lieu of such fractional share, an amount in cash determined by multiplying the fractional share by a price equal to the VWAP of Choice Common Stock as quoted on the NYSE over the five NYSE trading days ending on the 10th Business Day preceding the date of expiration of the Offer.
In order for Wyndham stockholders to validly tender shares of Wyndham Common Stock pursuant to the Offer, the Exchange Agent must receive prior to the Expiration Time the letter of election and transmittal (or a manually signed facsimile thereof), properly completed and duly executed, together with any required signature guarantees or, in the case of a book-entry transfer, an Agent’s Message, and any other documents required by the letter of election and transmittal, at one of its addresses set forth on the back cover of this Exchange Offer Notes................... holdersand either (1) the certificates representing tendered shares of Original Notes eligibleWyndham Common Stock must be received by the Exchange Agent at such address or such shares of Wyndham Common Stock must be tendered pursuant to participatethe procedure for book-entry transfer described below and the Book-entry Confirmation must be received by the Exchange Agent (including an Agent’s Message), in each case prior to the Expiration Time, or (2) the tendering Wyndham stockholder must comply with the guaranteed delivery procedures described below.
69
Wyndham stockholders who wish to tender their shares should complete the “Exchange Offer Election” section in the letter of election and transmittal to elect the type of consideration to be received in exchange for the shares of Wyndham Common Stock being tendered thereby. Wyndham stockholders who tender their shares of Wyndham Common Stock but
who do not tender their Original Notesmake a valid election will not have
any further exchange rightsbe treated as if they made the Standard Election. See the section in this Exchange Offer titled “The Offer—Elections and such Original Notes
will continue to be subject to certain restrictions
on transfer. Accordingly,Proration.”
The method of delivery of share certificates and all other required documents, including delivery through DTC, is at the liquidityoption and risk of the markettendering Wyndham stockholder, and the delivery will be deemed made only when actually received by the Exchange Agent. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed to ensure timely delivery.
Book-Entry Transfer. The Exchange Agent will establish accounts with respect to the shares of Wyndham Common Stock at DTC for purposes of the Offer. Any financial institution that is a participant in the system of DTC may make a book-entry delivery of shares of Wyndham Common Stock by causing DTC to transfer such shares of Wyndham Common Stock from the common CUSIP account to the CONTRA CUSIP account at DTC in accordance with DTC’s procedures for such Original Notes couldtransfer. However, although delivery of shares of Wyndham Common Stock may be adversely affected.
Special Procedureseffected through book-entry transfer at DTC, an Agent’s Message and any other required documents must, in any case, be received by the Exchange Agent at one of its addresses set forth on the back cover of this Exchange Offer prior to the Expiration Time. Delivery of documents to DTC does not constitute delivery to the Exchange Agent.
Signature Guarantees. A signature guarantee is required on a letter of election and transmittal (1) if the letter of election and transmittal is signed by a registered holder of shares of Wyndham Common Stock and/or has completed either the box titled “Special Issuance or Payment Instructions” or the box titled “Special Delivery Instructions” on the letter of election and transmittal or (2) if shares of Wyndham Common Stock are tendered for Beneficial Holders..... Any beneficial holder whose Original Notes arethe account of a financial institution that is a member of the Security Transfer Agent Medallion Signature Program, or by any other “Eligible Guarantor Institution,” as such term is defined in Rule 17Ad-15 under the Exchange Act (each an “Eligible Institution”). All signatures on letters of election and transmittal must be guaranteed by an Eligible Institution. If a certificate representing shares of Wyndham Common Stock is registered in the name of a broker, dealer,
commercial bank, trust companyperson other than the signer of the letter of election and transmittal, then such certificate must be endorsed or other nomineeaccompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appears on the certificate, with the signature(s) on such certificate or stock powers guaranteed by an Eligible Institution. See Instructions 1 and who wishes5 of the letter of election and transmittal.
Guaranteed Delivery. If a Wyndham stockholder desires to tender should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. If such
beneficial holder wishes to tender on its own behalf,
such beneficial holder must, prior to completing and
executing the Lettershares of Transmittal and delivering
its Original Notes, either make appropriate
arrangements to register ownership of the Original
Notes in such holder's
7
name or obtain a properly completed bond power from
the registered holder. The transfer of registered
ownership may take considerable time and may not be
able to be completed priorWyndham Common Stock pursuant to the Expiration Date.
See "The Exchange Offer--Procedures for Tendering."
Shelf Registration In the event that (i) any changes in law or
Statement............... applicable interpretationsOffer and such stockholder’s certificates representing such shares of the staff of the
Commission do not permit the Company to effect the
Exchange Offer, (ii) for any other reason the
registration statement of which this Prospectus is a
part is not declared effective within 180 days of the
issuance date of the Original Notes or the Exchange
Offer is not consummated within 210 days, (iii) the
Initial Purchasers so request with respect to
Original Notes not eligible to be exchanged for
Exchange Notes in the Exchange Offer or (iv) any
holder of Original Notes (other than an Initial
Purchaser) is not eligible to participate in the
Exchange Offer or does not receive freely tradeable
Exchange Notes in the Exchange Offer other than by
reason of such holder being an affiliate of the
Company (it being understood that the requirement
that a broker-dealer deliver this prospectus in
connection with sales of Exchange Notes shall not
result in such Exchange Notes being not freely
tradeable), the Company will, at its cost, (a) as
promptly as practicable, file a resale "Shelf"
Registration Statement (the "Shelf Registration
Statement") covering resales of the Original Notes or
the Exchange Notes, as the case may be, (b) cause the
Shelf Registration Statement to be declared effective
under the Securities Act and (c) use its best efforts
to keep the Shelf Registration Statement effective
until two years after its effective date.
Guaranteed Delivery Holders of the Original Notes who wish to tender
Procedures.............. their Original Notes and whose Original NotesWyndham Common Stock are not immediately available, or whosuch stockholder cannot deliver their
Original Notes or anysuch certificates and all other documents required by the
Letter of Transmittaldocuments to the Exchange Agent prior to the Expiration Date, must tender their Original Notes
accordingTime, or such stockholder cannot complete the procedure for delivery by book-entry transfer on a timely basis, such shares of Wyndham Common Stock may nevertheless be tendered, provided that all the following conditions are satisfied:
| 1. | the tender is made by or through an Eligible Institution; |
70
| 2. | a properly completed and duly executed notice of guaranteed delivery, substantially in the form made available by Choice, is received by the Exchange Agent prior to the Expiration Time as provided below; and |
| 3. | the share certificates (or Book-entry Confirmation) representing all tendered shares of Wyndham Common Stock, in proper form for transfer, in each case together with the letter of election and transmittal (or a manually signed facsimile thereof), properly completed and duly executed, with any required signature guarantees (or, in the case of a book-entry transfer, an Agent’s Message in lieu of the letter of election and transmittal), and any other documents required by the letter of election and transmittal, are received by the Exchange Agent within two NYSE trading days after the date of execution of such notice of guaranteed delivery. |
The notice of guaranteed delivery may be delivered by mail or by email to the guaranteed delivery proceduresExchange Agent and must include a guarantee by an Eligible Institution in the form set forth in "The Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights....... Tenders of Original Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the
Expiration Date. For a withdrawal to be effective, a
written or facsimilesuch notice of withdrawal must be
received by the Exchange Agent at its address set
forth herein. Such notice must (i) specify the name
of the person having tendered the Original Notes to
be withdrawn; (ii) identify the Original Notes to be
withdrawn (including the serial number or numbers and
principal amount of Original Notes to be withdrawn);
(iii) be signed by the holder in the same manner as
the original signature on the Letter of Transmittal
by which such Original Notes were tendered; and (iv)
specify the name in which the Original Notes are to
be registered, if different from that of the
withdrawing holder. See "The Exchange Offer--
Withdrawal of Tenders."
Acceptance of Original
Notes and Delivery of The Company will accept for exchange any andguaranteed delivery.
In all Exchange Notes......... Original Notes which are properly tendered in the
Exchange Offer and not withdrawn prior to 5:00 p.m.,
New York City time, on the Expiration Date. The
Exchange
8
Notes issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date. See
"The Exchange Offer--Terms of the Exchange Offer."
Consequences of Failure
to Exchange............ Holders of Original Notes who do not exchange their
Original Notes for the Exchange Notes pursuant to the
Exchange Offer will continue to be subject to the
restrictions on transfer of such Original Notes as
set forth in the legend thereon. In general, the
Original Notes that are not exchanged pursuant to the
Exchange Offer may not be offered or sold except
pursuant to a registration statement under the
Securities Act or an exemption from registration
thereunder and in compliance with applicable state
securities laws. In the event the Company completes
the Exchange Offer, the interest rate on Original
Notes will remain as stated thereon and holders of
Original Notes will have no further rights under the
Registration Agreement.
Certain Tax
Considerations.......... Latham & Watkins, counsel to the Company, has advised
the Company that because the Exchange Notes should
not be considered to differ materially from the
Original Notes, thecases, exchange of the Original Notesshares of Wyndham Common Stock tendered and accepted for Exchange Notes should not result in any material
federal income tax consequences to holders exchanging
the Original Notes for the Exchange Notes. For a full
description of the basis of, and limitations on, this
opinion, see "Certain United States Federal Tax
Consequences."
Registration Rights Pursuant to a registration rights agreement (the
Agreement............... "Registration Agreement") among the Company and the
Initial Purchasers, the Company has agreed (i) to
file a registration statement with respect to an
offer to exchange the Original Notes for a like
principal amount of Exchange Notes and (ii) to use
their reasonable best efforts to cause such
registration statement to become effective under the
Securities Act. This Exchange Offer is intended to
satisfy the rights of holders of Original Notes under
the Registration Agreement, which rights terminate
upon consummation of the Exchange Offer. The holders
of the Exchange Notes are not entitled to any
exchange or registration rights with respect to the
Exchange Notes.
Exchange Agent..........
Marine Midland Bank is the Exchange Agent. The
address and telephone number of the Exchange Agent
are set forth in "The Exchange Offer--Exchange
Agent."
Use of Proceeds......... There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
9
THE EXCHANGE NOTES
The Exchange Offer applies to $100 million aggregate principal amount of the
Original Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Original Notes (which they replace) except that (i) the
Exchange Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof, and (ii) the holders of
Exchange Notes will not be entitled to certain rights under the Registration
Agreement, including the provisions providing for an increase in the interest
rate on the Original Notes in certain circumstances relating to the timing of
the Exchange Offer, which rights will terminate when the Exchange Offer is
consummated. See "The Exchange Offer--Purpose and Effect of the Exchange
Offer." The Exchange Notes will evidence the same debt as the Original Notes
and the Notes will be entitled to the benefits of the Indenture and treated as
a single class of debt securities thereunder. See "Description of Exchange
Notes."
Issuer.................. Choice Hotels International, Inc., a Delaware
corporation.
Exchange Notes $100,000,000 aggregate principal amount of 7.125%
Offered................ Senior Notes Due 2008.
Maturity Date........... May 1, 2008.
Interest Payment May 1 and November 1 of each year, commencing ,
Dates.................. 199 .
Sinking Fund............ None.
Ranking................. The Exchange Notes will be senior unsecured
obligations of the Company, ranking pari passu with
all existing and future senior debt of the Company
and senior in right of payment to all future
subordinated debt of the Company. The Original Notes
are, and the Exchange Notes will be, unconditionally
guaranteed, jointly and severally on a senior
unsecured basis by QHE, QHE Partnership and, under
certain circumstances, by other subsidiaries of the
Company (collectively, the "Subsidiary Guarantors").
The Exchange Notes will be effectively subordinated
to all existing and future debt and other liabilities
of the Company's subsidiaries which are not
Subsidiary Guarantors. The Exchange Notes will also
be effectively subordinated to all secured debt and
other obligations of the Company to the extent of the
value of the assets securing such debt and other
obligations. As of June 30, 1998, the Company has on
a consolidated basis, approximately $293.7 million of
debt outstanding (excluding outstanding letters of
credit, purchase money security obligations and trade
payables incurred in the normal course of business),
including approximately $171.0 million outstanding
under the Credit Facility (as defined below) and $8.2
million under a separate working capital credit
facility with which the Exchange Notes would rank
pari passu and approximately $1.5 million of debt
secured by a lien on assets of the Company. As of
June 30, 1998, the total debt of the Company's
subsidiaries was approximately $15.1 million. The
Indenture contains no limits on the amount of debt
that may be incurred by the Company and its
subsidiaries. The terms of the Company's Credit
Facility limit the amount of additional debt that the
Company and its subsidiaries may incur; however, the
Credit Facility may be repaid or its terms may be
amended without the consent of the holders of the
Exchange Notes. See "Capitalization," "Description of
Exchange Notes" and "Description of Certain
Indebtedness."
10
Optional Redemption..... The Exchange Notes may be redeemed at the option of
the Company, in whole or in part at any time or from
time to time, at a price equal to 100% of the
principal amount thereof plus accrued interest to the
date of redemption plus a Make-Whole Premium (as
defined below), if any, relating to the then-
prevailing Treasury Yield (as defined below) and the
remaining life of the Exchange Notes. See
"Description of Exchange Notes--Optional Redemption."
Certain Covenants....... The Indenture contains limitations on the ability of
the Company and its subsidiaries to: (i) Incur Liens
(as defined below), (ii) engage in Sale and Leaseback
Transactions (as defined below) and (iii) in the case
of the Company, enter into mergers or consolidations
or transfer substantially all its assets. The
covenants are subject to numerous significant
exceptions and qualifications. See "Description of
Exchange Notes--Certain Covenants."
RISK FACTORS
For a discussion of certain risk factors that should be considered by holders
of Original Notes in evaluating a tender of Original Notes for Exchange Notes
pursuant to the Exchange Offer, see "Risk Factors."
11
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table summarizes certain historical consolidated financial data
of the Company as of and for the six-month periods ended June 30, 1998 and
1997, the seven-month periods ended December 31, 1997 and 1996 and the three
fiscal years ended May 31, 1997, 1996 and 1995. During September 1997, the
Company changed its fiscal year from a May 31 year-end to a December 31 year-
end. The summary historical consolidated financial data as of and for the seven
months ended December 31, 1997 and the three fiscal years ended May 31, 1997,
1996 and 1995 are derived from the audited consolidated financial statements of
the Company. The summary historical consolidated financial data for the six-
month periods ended June 30, 1998 and 1997, and the seven-month period ended
December 31, 1996 are derived from the Company's unaudited consolidated
financial statements which, in the opinion of management, include all material
adjustments necessary at such dates and for such periods. The summary
historical consolidated financial data presented herein for all periods are
presented as if the Company were a separate entity. See the "Basis of
Presentation" note to the Company's Consolidated Financial Statements. The
Company's historical net income and cash flows as a wholly-owned subsidiary of
Manor Care or Former Choice (all periods prior to October 15, 1997) are not
necessarily indicative of the net income and cash flows the Company might have
realized as an independent entity. The data set forth below should be read in
conjunction with "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and related
notes thereto contained elsewhere herein.
SIX-MONTH SIX-MONTH
PERIOD ENDED PERIOD ENDED SEVEN-MONTH PERIOD
JUNE 30, JUNE 30, ENDED DECEMBER 31, YEAR ENDED MAY 31,
------------ ------------ ------------------------ ------------------------------
1998 1997 1997 1996 1997 1996 1995
------------ ------------ --------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
STATEMENT OF INCOME
DATA:
Revenues(9)........... $ 77,606 $ 81,688 $ 107,839 $99,978 $168,039 $151,748 $129,027
Operating
expenses(9).......... 39,955 49,178 55,665 54,511 97,677 117,365(1) 87,061
Operating income...... 37,651 32,510 52,174 45,467 70,362 34,383 41,966
Net income............ 21,133 16,047 27,287 23,345 34,730 11,664 16,228
Basic earnings per
share(2)............. 0.36 0.26 0.46 0.37 0.55 0.19 0.26
Diluted earnings per
share................ 0.35 0.26 0.45 0.37 0.55 0.19 0.26
OTHER DATA:
EBITDA (unaudited)(3)
(10)................. $ 51,551 $ 38,972 $ 61,330 $51,514 $ 81,743 $ 69,450(4) $ 51,534
Cash flows from
operating
activities........... 17,054 29,816 33,607 25,153 45,505 32,742 37,851
Cash flows from
investing
activities........... (8,700) (6,515) (149,739) (7,523) (16,928) (78,499) (7,733)
Cash flows from
financing
activities........... (12,271) (22,820) 122,247 (17,442) (28,222) 48,513 (31,261)
Ratio of earnings to
fixed charges
(unaudited)(5)....... 4.59x 5.99x 5.69x 7.05x 5.56x 2.42x 3.03x
Number of franchised
properties
(unaudited).......... 3,567 3,397 3,484 3,220 3,344 3,052 2,835
Number of rooms
(unaudited).......... 297,396 287,444 292,733 272,819 283,034 261,456 245,669
Average royalty rate
(unaudited)(6)....... 3.50% 3.40% 3.51% 3.43% 3.43% 3.34% 3.20%
BALANCE SHEET DATA (AT
PERIOD END):
Working capital
(unaudited).......... $ 8,384 $ -- $ 5,397 $ 500 $ (416) $ (3,927) $(29,423)
Total assets.......... 408,344(7) -- 386,395(7) 217,870 221,473 212,803 189,087
Total debt(8)......... 293,719 -- 282,821 133,700 125,163 145,315 128,205
Total investment and
advances from (to)
Parent............... -- -- -- 49,170 57,193 30,532 (12,699)
Total shareholders'
equity............... 57,187 -- 49,258 -- -- -- --
- --------
(1) Fiscal year 1996 operating expenses include a non-cash, pre-tax charge of
$24.8 million for impairment of certain long-lived assets associated with
the Company's European operations.
(2) Basic earnings per share have been calculated for fiscal years 1995 and
1996 based on the weighted average shares outstanding of the Company's
former parent Manor Care of 62,480,000 and 62,628,000, respectively,
12
and for fiscal year 1997 based on the weighted average shares outstanding
of the Company's former parent Former Choice of 62,680,000. Basic earnings
per share have been calculated for the seven-month period ended December
31, 1996 based on the weighted average shares outstanding of Manor Care
from June 1, 1996 through November 1, 1996 and of Former Choice from
November 2, 1996 through December 31, 1996 of 63,063,146, for the seven-
month period ended December 31, 1997 based on the weighted average shares
outstanding of Former Choice from June 1, 1997 through October 15, 1997 and
of the Company from October 16, 1997 through December 31, 1997 of
59,798,000, and for the six-month period ended June 30, 1998 based on the
weighted average shares outstanding from January 1, 1998 through June 30,
1998.
(3) EBITDA consists of the sum of net income, interest expense, income taxes,
depreciation and amortization and non-cash asset writedowns. EBITDA is
presented because such data is used by certain investors to determine the
Company's ability to meet debt service obligations, fund capital
expenditures and expand its business. The Company considers EBITDA to be
an indicative measure of operating performance particularly due to the
large amount of goodwill and franchise rights amortization. Such
information should not be considered an alternative to net income,
operating income, cash flow from operations or any other operating or
liquidity performance measure prescribed by GAAP. Cash expenditures
(including nondiscretionary expenditures) for various long-term assets,
interest expense and income taxes have been, and will be, incurred which
are not reflected in the EBITDA presentation and therefore EBITDA does not
represent funds available for management's discretionary use. EBITDA
presented by the Company may not be comparable to EBITDA defined and
presented by other companies.
(4) Fiscal year 1996 EBITDA excludes a non-cash, pre-tax charge of $24.8
million for impairment of certain long-lived assets associated with the
Company's European operations.
(5) Earnings used in computing the ratio of earnings to fixed charges consist
of income before income taxes and fixed charges. Fixed charges consist of
interest expense and the amortization of deferred financing fees and that
portion of rental expense representative of interest.
(6) Represents domestic royalty fees as a percentage of aggregate gross room
revenues of all domestic Choice Brand franchised hotels.
(7) Includes the Term Note (as defined below) in an aggregate principal amount
of $115.0 million plus accrued interest thereon as of December 31, 1997
and June 30, 1998 of $2.4 million and $4.9 million, respectively and a
receivable from Sunburst as of December 31, 1997 and June 30, 1998 of
$25.1 million and $19.9 million, respectively. See "Risk Factors--
Significant Receivables from Sunburst."
(8) Includes a note payable to Manor Care in the amount of $78.7 million, as
of December 31, 1996 and as of May 31, 1997, 1996 and 1995.
(9) During the second quarter of 1998, the Company changed its presentation of
marketing and reservation fees such that the fees collected and associated
expenses are reported on a net basis. All periods have been restated to
conform to this presentation.
(10) Depreciation and amortization related to the marketing and reservation
funds included in EBITDA was $2.2 million for the six month period ended
June 30, 1998, $1.2 million for the six months ended June 30, 1997, $2.2
million for the seven-month period ended December 31, 1997 and $2.8
million, $2.7 million and $2.1 million for the fiscal years ended May 31,
1997, May 31, 1996 and May 31, 1995, respectively.
13
RISK FACTORS
Holders of Original Notes should carefully consider the following risk
factors in addition to the other information contained in this Prospectus in
evaluating the Company and its business in connection with the Exchange Offer.
INHERENT RISKS OF THE LODGING INDUSTRY; COMPETITION
The Company derives a significant portion of its revenues from fees based
upon room revenues at hotels franchised under one of the Choice Brands. As
such, the Company's business is subject, directly or through its franchisees,
to the risks inherent in the lodging industry. These risks include, among
other things, adverse effects of general and local economic conditions,
changes in local market conditions, oversupply of hotel space, a reduction in
local demand for hotel rooms, changes in travel patterns, changes in
governmental regulations that influence or determine wages, prices or
construction costs, changes in interest rates, the availability of credit and
changes in real estate taxes and other operating expenses. Due in part to the
strong correlation between the lodging industry's performance and economic
conditions, the lodging industry is subject to cyclical changes in revenues
and profits. Downturns or prolonged adverse conditions in real estate or
capital markets or the economy as a whole that affect the Company's franchised
hotels will have a material impact on the Company. During the 1980s,
construction of lodging facilities in the United States resulted in an excess
supply of available rooms. This oversupply had an adverse effect on occupancy
levels and room rates in the industry.
The lodging industry is highly competitive. Competitive factors in the
industry include reasonableness of room rates, quality of accommodations,
brand recognition, service levels and convenience of locations. The Company's
franchised hotels generally operate in areas that contain numerous other
competitors. The Company believes that hotel operators choose lodging
franchisors based primarily on the perceived value and quality of each
franchisor's brand and services, and the extent to which affiliation with that
franchisor may increase the franchisee's reservations and profits.
Demographic, economic or other changes in markets may adversely affect the
convenience or desirability of the Choice Brands and, correspondingly, the
number of hotels franchised under the Choice Brands. The Company primarily
franchises hotels that operate in the limited-service segment of the domestic
lodging industry, which has experienced a significant amount of new hotel
construction. There can be no assurance that, in the markets in which the
Company's franchised hotels operate, competing hotels will not pose greater
competition for guests than presently exists, or that new hotels will not
enter such locales. In addition, an excess supply of hotel rooms may
discourage potential franchisees from opening new hotels, thereby limiting a
source of growth of the franchise fees received by the Company. Such excess
supply of hotel rooms may also lead to lower room rates at the Company's
franchised hotels and, correspondingly, a reduction in the franchise fees
received by the Company.
ADVERSE IMPACT OF EXTERNAL FACTORS
The Company's principal sources of revenues are franchise fees which can be
negatively impacted by inflation and other external factors. Increases in
costs due to inflation may not be able to be totally offset by increases in
hotel room rates. Moreover, significant increases in inflation could
contribute to a slowing of the national economy. Such a slowdown would likely
result in reduced travel by both business and leisure travelers, less demand
for hotel rooms, a reduction in room rates and fewer room reservations,
negatively impacting the Company's revenues. A weak economy could also reduce
demand for new hotels, negatively impacting the amount of franchise fees
received by the Company.
The Company's revenues may also be negatively impacted by certain other
unpredictable external factors which would have an especially significant
impact on the travel and lodging industries. These factors include airline
strikes, gasoline price increases and severe weather, which would likely
result in reduced travel by both business and leisure travelers.
14
POTENTIAL CONFLICT WITH SUNBURST
The ongoing relationship between the Company and Sunburst resulting from the
agreements and arrangements described under "Relationship Between the Company
and Sunburst" may give rise to a 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 continued productive relationship.
In addition, Frederic V. Malek serves as a director of both the Company and
Sunburst. As a result of the Company Spin-Off, Mr. Malek, as well as certain
other officers and directors of the Company and of Sunburst, own shares and/or
options or other rights to acquire shares in each of the Company and Sunburst.
Stewart Bainum, Jr. is the chairman of the Board of Directors of the Company
and his sister, Barbara Bainum, is also a director. Their father, Stewart
Bainum, is the chairman of the Board of Directors of Sunburst and the Bainum
family has a significant ownership interest in both the Company and Sunburst.
Policies and procedures are followed by the Boards 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.
SIGNIFICANT RECEIVABLES FROM SUNBURST
At June 30, 1998, the Term Note (as defined below) and receivables from
Sunburst totaled $142.2 million. In connection with the Company Spin-Off,
Sunburst issued to the Company a note in an aggregate principal amount of
$115.0 million (the "Term Note"). The Term Note matures on October 15, 2002,
is subordinated to all senior indebtedness of Sunburst and restricts
Sunburst's ability to merge or consolidate or dispose of all or substantially
all of its assets. Simple interest accrues at an annual rate of 11%
(representing an effective annual rate of 8.8%), all of which is payable on
maturity. Total interest accrued on the Term Note through June 30, 1998 was
approximately $7.3 million. Additionally, Sunburst is the obligor on
receivables totaling approximately $19.9 million at June 30, 1998. This amount
is payable in cash or Sunburst common stock (or a combination thereof) no
later than December 31, 1998. In addition, in connection with the Company
Spin-Off, the Company guaranteed certain lease and other payment obligations
owed by Sunburst to Manor Care. See "Certain Relationships and Related
Transactions" and "Relationship Between the Company and Sunburst."
Sunburst is a highly leveraged company whose business is subject to many of
the risks of the lodging industry outlined in this section. Sunburst, the
Company's largest franchisee, owned 85 hotels franchised under the Choice
Brands as of June 30, 1998. A material adverse change in Sunburst's business
would adversely affect its ability to repay its obligations to the Company,
which in turn could have a material adverse effect on the Company.
REGULATION
The Federal Trade Commission (the "FTC"), various states and certain foreign
jurisdictions (including France, the Province of Alberta, Canada and Mexico)
regulate the sale of franchises. The FTC requires franchisors to make
extensive disclosure to prospective franchisees but does not require
registration. A number of states in which the Company's franchisees operate
require registration or disclosure in connection with franchise offers and
sales. In addition, several states in which the Company's franchisees operate
have "franchise relationship laws" or "business opportunity laws" that limit
the ability of the franchisor to terminate franchise agreements or to withhold
consent to the renewal or transfer of these agreements. While the Company's
business has not been materially adversely affected by such regulation, there
can be no assurance that this will continue or that future regulation or
legislation will not have such an effect.
15
FRAUDULENT TRANSFER
The Company's obligations under the Original Notes are, and under the
Exchange Notes will be, guaranteed by the Subsidiary Guarantors. The
guarantees may be subject to review under state or federal fraudulent transfer
laws in the event of the bankruptcy or other financial difficulty of a
Subsidiary Guarantor. Under those laws, if a court in a lawsuit by an unpaid
creditor or representative of creditors of a Subsidiary Guarantor, such as a
trustee in bankruptcy or a Subsidiary Guarantor as debtor in possession, were
to find that at the time the Subsidiary Guarantor issued its guarantee, it
either (i) was insolvent, (ii) was rendered insolvent, (iii) was engaged in a
business or transaction for which its remaining unencumbered assets
constituted unreasonably small capital or (iv) intended to incur or believed
that it would incur debts beyond its ability to pay as such debts matured,
such court could avoid the guarantee and the Subsidiary Guarantor's
obligations thereunder, and direct the return of any amounts paid thereunder
to the Company or to a fund for the benefit of its creditors. Moreover,
regardless of the factors identified in the foregoing clauses (i) through
(iv), the court could avoid the guarantee and direct such repayment if it
found that the guarantee was issued with actual intent to hinder, delay, or
defraud the Subsidiary Guarantor's creditors.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured.
LACK OF PUBLIC MARKET
Prior to the Exchange Offer, there has not been any public market for the
Notes. The Original Notes have not been registered under the Securities Act or
any state securities laws and will be subject to restrictions on
transferability to the extent that they are not exchanged for Exchange Notes
by holders who are eligible to participate in the Exchange Offer. The Exchange
Notes will constitute a new issue of securities with no established trading
market and will not be listed on any national securities exchange or for
quotation of the Exchange Notes on an automated dealer quotation system.
Although the Initial Purchasers in the Offering have each informed the
Company that they currently intend to make a market in the Exchange Notes,
they are not obligated to do so, and any such market-making, if initiated, may
be discontinued at any time without notice. The liquidity of any market for
Exchange Notes will depend upon the number of holders of the Exchange Notes,
the interest of securities dealers in making a market in the Exchange Notes
and other factors. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Exchange Notes. If an active
trading market for the Exchange Notes does not develop, the market price and
liquidity of the Exchange Notes may be adversely affected. If the Exchange
Notes are traded, they may trade at a discount from their face value,
depending upon prevailing interest rates, the market for similar securities,
the performance of the Company and certain other factors.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Original Notes who do not exchange their Original Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Original Notes as set forth in the legend
thereon as a consequence of the issuance of the Original Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Original Notes may not be offered or sold, unless registered
under the Securities Act and applicable state securities laws, or pursuant to
an exemption therefrom. The Company does not intend to register the Original
Notes under the Securities Act. In addition, any holder of Original Notes who
tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes may be deemed to have received restricted
securities and, if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives
16
Exchange Notes for its own account in exchange for Original Notes, where such
Original Notes were acquired by such broker-dealer as a result of market-
making activities or any other trading activities, must acknowledge that it
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. Any broker-dealer that
resells Exchange Notes that were received by it for its own account pursuant
to the Exchange Offer may be deemed to be an "underwriter" within the meaning
of the Securities Act. To the extent that Original Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Original Notes could be adversely affected due to the limited
amount, or "float," of the Original Notes that are expected to remain
outstanding following the Exchange Offer. Generally, a lower "float" of a
security could result in less demand to purchase such security and could,
therefore, result in lower prices for such security. For the same reason, to
the extent that a large amount of Original Notes are not tendered or are
tendered and not accepted in the Exchange Offer, the trading market for the
Exchange Notes could be adversely affected. See "Plan of Distribution" and
"The Exchange Offer."
CONSEQUENCES OF FAILURE TO PROPERLY TENDER THE ORIGINAL NOTES IN THE EXCHANGE
Issuance of the Exchange Notes in exchange for the Original Notes pursuant
to the Exchange Offer will be made only after timely receipt by the Exchange Agent of the certificates representing such Original Notes,shares of Wyndham Common Stock, or the Book-entry Confirmation of the delivery of such shares of Wyndham Common Stock, and the letter of election and transmittal (or a manually signed facsimile thereof), properly completed and duly executed, Letter of
Transmittal and all other required documents. Therefore, holders of the
Original Notes desiring to tender such Original Notes in exchange for Exchange
Notes should allow sufficient time to ensure timely delivery. Neither the
Exchange Agent nor the Company is under any duty to give notification of
defects or irregularities with respect to tenders of Original Notes for
exchange. Original Notes that are not tendered or that are tendered but not
accepted by the Company for exchange, will, following consummation of the
Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof under the Securities Act and, upon consummation of the
Exchange Offer, certain registration rights under the Registration Agreement
will terminate.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. The Exchange Offer is intended to satisfy
certain of the Company's obligations under the Registration Agreement. In
consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive in exchange, Original Notes in like
principal amount, the terms of which are identical to the Exchange Notes. The
Original Notes surrendered in exchange for the Exchange Notes will not result
in any increase in the indebtedness of the Company.
The net proceeds to the Company from the Offering (after deducting the
Initial Purchasers' discounts and expenses payable by the Company in
connection with the Offering), of approximately $99 million were used to repay
amounts outstanding under the revolving portion of the Credit Facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Certain
Indebtedness" for a description of the interest rate and maturity date under
the Credit Facility and of the use of proceeds borrowed thereunder.
17
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of June 30, 1998. This information should be read in conjunction with "Use
of Proceeds," "Selected Historical Consolidated Financial Data," "Pro Forma
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Description of Certain Indebtedness,"
"Description of Notes" and the Company's Consolidated Financial Statements and
related notes thereto included elsewhere in this Offering Memorandum.
AS OF
JUNE 30,
1998
--------
Cash and cash equivalents........................................... $ 6,365
========
Debt:
Credit Facility(1) and working capital line........................ $179,200
7.125% Senior Notes Due 2008....................................... 99,436(2)
Other Long-term Debt............................................... 15,083
--------
Total Debt...................................................... 293,719
Shareholders' equity................................................ 57,187
--------
Total Capitalization............................................ $350,906
========
- --------
(1) Includes the current portion of long-term debt in the amount of
approximately $10.04 million.
(2) Net of discount in connection with the issuance of the Original Notes.
PRO FORMA FINANCIAL INFORMATION
The purpose of the Offering is to refinance certain of the Company's
existing short-term bank borrowings under the Credit Facility, with long-term
debt to be represented by the Notes issued in the Offering at a rate of
7.125%. The impact of the Offering and the application of the estimated
proceeds therefrom on the Company's interest expense and income from
continuing operations for the six-month period ended June 30, 1998 assuming
the refinancing occurred as of the beginning of the period would be to
increase interest expense by $270,000 and to decrease income from continuing
operations by $157,000. The impact of the Offering on interest expense and
income from continuing operations of the Company and its subsidiaries for the
seven-month period ended December 31, 1997 assuming the refinancing occurred
as of the beginning of the period would be to decrease interest expense by
$65,000 and to increase income from continuing operations by $38,000. The
impact of the Offering on interest expense and income from continuing
operations of the Company and its subsidiaries for the fiscal year ended May
31, 1997 would be to decrease interest expense by $597,000 and increase income
from continuing operations by $348,000. The offering will have no impact on
the Company's June 30, 1998 balance sheet. This pro forma financial
information is provided for informational purposes only and does not purport
to be indicative of the results of operations and financial position of the
Company and its subsidiaries that actually would have been obtained if the
Offering had been effected on the dates indicated or of those results that may
be obtained in the future.
18
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Original Notes were originally sold by the Company on May 4, 1998 to the
Initial Purchasers pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Original Notes to qualified institutional buyers in
reliance on Rule 144A under the Securities Act. As a condition to the
completion of the Offering, the Company entered into the Registration
Agreement with the Initial Purchasers pursuant to which the Company agreed to
file with the Commission the Registration Statement on the appropriate form
under the Securities Act with respect to an offer to exchange the Original
Notes for Exchange Notes. The Exchange Notes will be substantially identical
to the Original Notes, except that the Exchange Notes will have been
registered under the Securities Act and, therefore, will not contain terms
with respect to transfer restrictions (other than those that might be imposed
by state securities laws). In the event that (i) any changes in law or
applicable interpretations of the Staff of the Commission do not permit the
Company to effect the Exchange Offer, (ii) for any other reason the
registration statement of which this Prospectus is a part is not declared
effective within 180 days of the issuance date of the Original Notes or the
Exchange Offer is not consummated within 210 days, (iii) the Initial
Purchasers so request with respect to Original Notes not eligible to be
exchanged for Exchange Notes in the Exchange Offer or (iv) any holder of
Original Notes (other than an Initial Purchaser) is not eligible to
participate in the Exchange Offer or does not receive freely tradeable
Exchange Notes in the Exchange Offer other than by reason of such holder being
an affiliate of the Company (it being understood that the requirement that a
broker-dealer deliver this prospectus in connection with sales of Exchange
Notes shall not result in such Exchange Notes being not freely tradeable), the
Company will, at its cost, (a) as promptly as practicable, file a Shelf
Registration Statement covering resales of the Original Notes or the Exchange
Notes, as the case may be, (b) cause the Shelf Registration Statement to be
declared effective under the Securities Act and (c) use its best efforts to
keep the Shelf Registration Statement effective until two years after its
effective date.
Based upon an interpretation by the staff of the Commission set forth in
certain no-action letters issued to third parties, the Company believes that a
holder (other than (i) a broker-dealer who purchases such Exchange Notes
directly from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act or (ii) any such holder that is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) who exchanges Original Notes for Exchange Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement with any person to participate, in a
distribution of the Exchange Notes, will be allowed to resell Exchange Notes
to the public without further registration under the Securities Act and
without delivering the purchasers of the Exchange Notes a prospectus that
satisfies the requirements of Section 10 the Securities Act. However, if any
holder acquires Exchange Notes in the Exchange Offer for the purpose of
distributing or participating in the distribution of the Exchange Notes or is
a broker-dealer, such holder cannot rely on the position of the staff of the
Commission enumerated in certain no-action letters issued to third parties and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, unless an exemption
from registration is otherwise available. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Original Notes, where such
Original Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of Exchange Notes received in exchange for
Original Notes where such Original Notes were acquired by such broker-dealer
as a result of market-making or other trading activities. Pursuant to the
Registration Agreement, the Company has agreed to make this Prospectus, as it
may be amended or supplemented from time to time, available to broker-dealer
for use in connection with any resale starting on the date hereof and ending
on the close of business on the earlier to occur of (i) the date on which all
Exchange Notes held by broker-dealers eligible to use the Prospectus to
satisfy their prospectus delivery obligations under the Securities Act have
been sold and (ii) the date 180 days after the Expiration Date. See "Plan of
Distribution."
19
Each holder who wishes to exchange such Original Notes for Exchange Notes in
the Exchange Offer will be required to make certain representations, including
representations that (i) the Exchange Notes to be acquired by such holder of
Original Notes in connection with the Exchange Offer are being acquired by
such holder in the ordinary course of its business, (ii) if such holder is not
a broker-dealer, such holder is not currently participating in, does not
intend to participate in, and has no arrangement or understanding with any
person to participate in a distribution of the Exchange Notes, (iii) such
holder is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of distributing the
Exchange Notes, such holder will comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction of the Exchange Notes acquired by such person and cannot
rely on the position of the staff of the Commission set forth in no-action
letters, (iv) such holder understands that a secondary resale transaction
described in clause (iii) above and any resales of Exchange Notes obtained by
such holder in exchange for Original Notes acquired by such holder directly
from the Company should be covered by an effective registration statement
containing the selling securityholder information required by Item 507 or Item
508, as applicable, of Regulation S-K of the Commission and (v) it is not an
affiliate (as defined in Rule 405 under the Securities Act) of the Company.
The summary herein of certain provisions of the Registration Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by, all the provisions of the Registration Agreement, a copy of which is filed
as an exhibit to the Exchange Offer Registration Statement of which this
Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Original
Notes who were eligible to participate in the Exchange Offer but who did not
tender their Original Notes will not have any further registration rights and
such Original Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Original Notes
could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Original
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of Exchange Notes in exchange for each $1,000 principal amount of outstanding
Original Notes accepted in the Exchange Offer. Holders may tender some or all
of their Original Notes pursuant to the Exchange Offer. However, Original
Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the Exchange Notes have been registered
under the Securities Act and hence will not bear legends restricting the
transfer thereof and (ii) the holders of the Exchange Notes will not be
entitled to certain rights under the Registration Agreement, including the
provisions providing for an increase in the interest rate on the Original
Notes in certain circumstances relating to the timing of the Exchange Offer,
all of which rights generally will terminate when the Exchange Offer is
terminated. The Exchange Notes will evidence the same debt as the Original
Notes and will be entitled to the benefits of the Indenture.
The Exchange Offer is not conditioned upon any minimum number of Original
Notes being tendered. As of the date of this Prospectus, $100,000,000
aggregate principal amount of Original Notes were outstanding.
Holders of Original Notes do not have any appraisal or dissenters rights
under the General Corporation Law of Delaware or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Original Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Company.
20
If any tendered Original Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Original Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date. See "--Procedure for Tendering," "--
Book-Entry Transfer," "--Guaranteed Delivery Procedures" and "--Conditions."
Holders whose Original Notes are not tendered or are tendered but not
accepted in the Exchange Offer will continue to hold such Original Notes and
will be entitled to all the rights and preferences and subject to the
limitations applicable thereto under the Indenture. Following consummation of
the Exchange Offer, the holders will continue to be subject to the existing
restrictions upon transfer thereon and the Company will have no further
obligation to such holders to provide for the registration under the
Securities Act of the Original Notes held by them. To the extent that Original
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Original Notes could be adversely
affected. See "Risk Factors--Consequences of Failure to Exchange."
Holders who tender Original Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Original
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSION; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Original Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the registered holders.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at the rate of 7.125% per annum from
their date of issuance. Interest on the Exchange Notes will be payable semi-
annually on May 1 and November 1 of each year, commencing , 199 .
Interest on the Original Notes accepted for exchange will cease to accrue upon
issuance of the Exchange Notes. Interest accrued on the Original Notes so
accepted for exchange from the most recent date to which interest has been
paid or duly provided for on such Original Notes or, if no interest has been
paid or duly provided for, from May 4, 1998, through, but not including, the
date that the Exchange Notes are issued, will be paid with the first interest
payment on the Exchange Notes.
PROCEDURES FOR TENDERING
For a holder of Original Notes to tender Original Notes validly pursuant to
the Exchange Offer, a properly completed and duly executed Letter of
Transmittal (or facsimile thereof), with any required signature guarantee,guarantees or, (inin the case of a book-entry transfer)transfer, an Agent'sAgent’s Message, (as defined below)
in lieu of the Letter of Transmittal, and any other required documents must
be receivedrequired by the Exchange Agent at the address set forth in the Letterletter of Transmittal prior to 5:00 p.m., New York City time, on the Expiration Date. In
addition, prior to
21
5:00 p.m., New York City time, on the Expiration Date, either (a) certificates
for tendered Original Notes must be received by the Exchange Agent at such
address or (b) such Original Notes must be transferred pursuant to the
procedures for book-entry transfer described below (and a confirmationelection and transmittal.
Determination of such
tender received by the Exchange Agent, including an Agent's Message if the
tendering holder has not delivered a LetterValidity. Choice’s interpretation of Transmittal).
The term "Agent's Message" means a message transmitted by the Depositary,
received by the Exchange Agent and forming part of the confirmation of a book-
entry transfer, which states that the Depositary has received an express
acknowledgment from the participant in the Depositary tendering Original Notes
which are the subject of such book-entry confirmation that such participant
has received and agrees to be bound by the terms of the Letter of Transmittal
and that the Company may enforce such agreement against such participant. In
the case of an Agent's Message relating to guaranteed delivery, the term means
a message transmitted by the Depositary and received by the Exchange Agent,
which states that the Depositary has received an express acknowledgment from
the participant in the Depositary tendering Original Notes that such
participant has received and agrees to be bound by the Notice of Guaranteed
Delivery.
By tendering Original Notes pursuant to the procedures set forth above, each
holder will make to the Company the representations set forth above in the
third paragraph under the heading "--Purpose and Effect of the Exchange
Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the terms and subjectconditions of the Offer (including the letter of election and transmittal and the instructions thereto) will be final and binding to the conditions set forth herein and in the Letter of
Transmittal. THE METHOD OF DELIVERY OF ORIGINAL NOTES AND THE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL,
HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR ORIGINAL NOTES SHOULD
BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner whose Original Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender such Original Notes, such beneficial owner
must, prior to completing and executing the Letter of Transmittal and
delivering such Original Notes in such beneficial owner's name, either make
appropriate arrangements to register ownership of the Original Notes in such
beneficial owner's name or obtain a properly completed bond power from the
registered holder of the Original Notes. The transfer of registered ownership
may take considerable time and may not be able to be completed prior to the
Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteedfullest extent permitted by an Eligible Institution (as defined below)
unless the Original Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution (as defined below)law. In the
event that signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are required to be guaranteed, such guarantee must be by a
member firm of a recognized signature guarantee medallion program within the
meaning of Rule 17Ad-15 of the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Original Notes listed therein, such Original Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Original
Notes with the signature thereon guaranteed by an Eligible Institution.
22
If the Letter of Transmittal or any Original Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, offices
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Exchange Agent and the Depositary have confirmed that the Exchange Offer
is eligible for DTC's Automated Tender Offer Program ("ATOP"). Accordingly,
DTC participants may electronically transmit their acceptance of the Exchange
Offer by causing DTC as the Depositary to transfer Original Notes to the
Exchange Agent in accordance with DTC's ATOP procedures for transfer. The
Depositary will then send an Agent's Message to the Exchange Agent.(including(including time of receipt),receipt) and acceptance for exchange of tendered Original Notes and withdrawalany shares of tendered
Original NotesWyndham Common Stock will be determined by the CompanyChoice in its sole discretion, which determination willshall be final and binding. The Companybinding to the fullest extent permitted by law. Choice reserves the absolute right to reject any and all Original Notestenders determined by it not properly tenderedto be in proper form or any
Original Notes the Company's acceptance of or exchange for which would,may, in the opinion of its counsel, for the Company, be unlawful. The CompanyChoice also reserves the absolute right in
its sole discretion to waive any condition of the Offer to the extent permitted by applicable law except for the Competition Laws Condition, the Registration Statement Condition, the Choice Stockholder Approval Condition and the Stock Exchange Listing Condition or any defect or irregularity in the tender of any shares of any particular stockholder, whether or not similar defects or irregularities are waived in the case of other stockholders. No tender of shares of Wyndham Common Stock will be deemed to have been validly made until all defects and irregularities relating thereto have been cured or conditionswaived. None of Choice or any of its respective affiliates or assigns, the dealer managers, the Exchange Agent, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification.
71
A tender asof shares of Wyndham Common Stock pursuant to particular Original Notes. The Company's interpretationany of the procedures described above will constitute the tendering Wyndham stockholder’s acceptance of the terms and conditions of the Offer, as well as the tendering Wyndham stockholder’s representation and warranty to Choice that (1) such stockholder owns the tendered shares of Wyndham Common Stock (and any and all other shares of Wyndham Common Stock or other securities issued or issuable in respect of such shares of Wyndham Common Stock), (2) the tender complies with Rule 14e-4 under the Exchange Offer (includingAct, (3) such stockholder has the instructionsfull power and authority to tender, sell, assign and transfer the tendered shares of Wyndham Common Stock (and any and all other shares of Wyndham Common Stock or other securities issued or issuable in respect of such shares of Wyndham Common Stock) and (4) when the same are accepted for exchange by Choice, Choice will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claims.
The acceptance for exchange by Choice of shares of Wyndham Common Stock pursuant to any of the procedures described above will constitute a binding agreement between the tendering Wyndham stockholder and Choice upon the terms and subject to the conditions of the Offer.
Appointment. By executing a letter of election and transmittal, or through delivery of an Agent’s Message, as set forth above, a tendering Wyndham stockholder irrevocably appoints designees of Choice as such stockholder’s agents, attorneys-in-fact and proxies, each with full power of substitution, in the Lettermanner set forth in the letter of Transmittal) will be finalelection and binding on all parties. Unless
waived, any defects or irregularities in connection with tenderstransmittal, to the full extent of Original
Notes must be cured within such time as the Company shall determine. Although
the Company intends, to notify holders of defects or irregularitiesstockholder’s rights with respect to tendersthe shares of Original Notes, neitherWyndham Common Stock tendered by such stockholder and accepted for exchange by Choice (and with respect to any and all other shares of Wyndham Common Stock or other securities issued or issuable in respect of such shares of Wyndham Common Stock on or after the Company,date of the Exchange Agentcommencement of the Offer). All such powers of attorney and proxies will be considered irrevocable and coupled with an interest in the tendered shares of Wyndham Common Stock (and such other shares of Wyndham Common Stock and securities). Such appointment will be effective when, and only to the extent that, Choice accepts such shares of Wyndham Common Stock for exchange. Upon appointment, all prior powers of attorney and proxies given by such stockholder with respect to such shares of Wyndham Common Stock (and such other shares of Wyndham Common Stock and securities) will be revoked, without further action, and no subsequent powers of attorney or proxies may be given nor any other person shall incur any liability for failure to givesubsequent written consent executed by such notification. Tenders of Original Notesstockholder (and, if given or executed, will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any Original
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waivedbe effective) with respect thereto. The designees of Choice will, be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
BOOK-ENTRY TRANSFER
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the Original Notesshares of Wyndham Common Stock (and such other shares of Wyndham Common Stock and securities) for which the appointment is effective, be empowered to exercise all voting, consent and other rights of such stockholder as they in their discretion may deem proper at any annual or special meeting of Wyndham stockholders or any adjournment or postponement thereof, by written consent in lieu of any such meeting or otherwise. Choice reserves the Depositaryright to require that, in order for the purposeshares of facilitating the Exchange
Offer,Wyndham Common Stock to be deemed validly tendered, immediately upon Choice’s acceptance of shares of Wyndham Common Stock for exchange, Choice must be able to exercise full voting, consent and subject to the establishment thereof, any financial institution
that is a participant in the Depositary's system may make book-entry delivery
of Original Notes by causing the Depositary to transfer such Original Notes
into the Exchange Agent's accountother rights with respect to the Original Notes in
accordance with the Depositary's proceduressuch shares of Wyndham Common Stock (and such other shares of Wyndham Common Stock and securities).
The foregoing proxies are effective only upon acceptance for such transfer. Although
deliveryexchange of the Original Notes may be effected through book-entry transfer
into the Exchange Agent's account at the Depositary, an appropriate Lettershares of Transmittal properly completed and duly executed with any required signature
guarantee, or, in the case of a book-entry transfer, an Agent's Message in
lieu of the Letter of Transmittal and all other required documents must in
each case be transmitted to and received or confirmed by the Exchange Agent at
its address set forth in the Letter of Transmittal on or priorWyndham Common Stock tendered pursuant to the Expiration Date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures. Delivery
of documents to the DepositaryOffer. The Offer does not constitute deliverya solicitation of proxies (absent an exchange of shares of Wyndham Common Stock) for any meeting of Wyndham stockholders, which will be made only pursuant to separate proxy materials complying with the Exchange
Agent.
Unless an exemption applies underrequirements of the applicable lawrules and regulations concerning "backup withholding" of federal income tax, the Exchange Agent will
be required to withhold, and will withhold, 31% of the gross proceeds
otherwise payable to a holderSEC.
72
Tenders of shares of Wyndham Common Stock made pursuant to the Exchange Offer if the holder
does not provide its taxpayer identification number (social security number or
employer identification number) and certifyare irrevocable except that such number is correct. Each
tendering holder should complete and sign the main signature form and the
Substitute Form W-9 included as partshares of the Letter of Transmittal, so as to
provide the information and certification necessary to avoid backup
withholding, unless an applicable exemption exists and is proved in a manner
satisfactory to the Company and the Exchange Agent.
23
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original Notes
are not immediately available, (ii) who cannot deliver their Original Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent or (iii) who cannot complete the procedures for book-entry transfer,
prior to the Expiration Date, may effect a tender if: (a) the tender is made
through an Eligible Institution; (b) prior to the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by facsimile transmission,
mail or hand delivery) setting forth the name and address of the holder, the
certificate number(s) of such Original Notes and the principal amount of
Original Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five New YorkWyndham Common Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof) together
with the certificate(s) representing the Original Notes (or a confirmation of
book-entry transfer of such Original Notes into the Exchange Agent's account
at the Depositary), and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent; and (c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificates representing all tendered
Original Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Original Notes into the Exchange Agent's account at the
Depositary), and all other documents required by the Letter of Transmittal are
received by the Exchange Agent upon five New York Stock Exchange trading days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Original Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tenderTime and, if Choice has not accepted shares of Original NotesWyndham Common Stock for exchange, at any time following 60 Business Days from commencement of the Offer. If Choice elects to extend the Offer, is delayed in its acceptance for exchange of shares of Wyndham Common Stock or is unable to accept shares of Wyndham Common Stock for exchange pursuant to the Offer for any reason, then, without prejudice to Choice’s rights under the Offer, the Exchange Agent may, on behalf of Choice, retain tendered shares of Wyndham Common Stock, and such shares of Wyndham Common Stock may not be withdrawn except to the extent that tendering Wyndham stockholders are entitled to withdrawal rights as described in this section. Any such delay will be by extension of the Offer to the extent required by law. See the section of this Exchange Offer titled “The Offer—Extension, Termination and Amendment.”
For a withdrawal to be effective, a written or
facsimile notice of withdrawal must be timely received by the Exchange Agent at its address set forth in the Letter of Transmittal prior to 5:00 p.m., New York
City time, on the Expiration Date.back cover page of this Exchange Offer. Any such notice of withdrawal must (i)
specify the name of the person having depositedwho tendered the Original Notesshares of Wyndham Common Stock to be withdrawn, (the "Depositor"), (ii) identify the Original Notesnumber of shares of Wyndham Common Stock to be withdrawn (includingand the certificate number(s) and principal amountname of the registered holder of such Original
Notes,shares of Wyndham Common Stock, if different from that of the person who tendered such shares of Wyndham Common Stock. If certificates representing shares of Wyndham Common Stock to be withdrawn have been delivered or otherwise identified to the Exchange Agent, then, prior to the physical release of such certificates, the serial numbers shown on such certificates must be submitted to the Exchange Agent and, unless such shares of Wyndham Common Stock have been tendered by or for the account of an Eligible Institution, the signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution. If shares of Wyndham Common Stock have been tendered pursuant to the procedure for book-entry transfer as set forth in the casesection of Original Notes transferred by book-entry transfer,this Exchange Offer titled “The Offer—Procedure for Tendering,” any notice of withdrawal must specify the name and number of the account at the DepositaryDTC to be credited), (iii)credited with the withdrawn shares of Wyndham Common Stock.
Withdrawals of tendered shares of Wyndham Common Stock may not be signed by the holder in the same manner as the original signature on the
Letterrescinded. Any tendered shares of Transmittal by which such Original Notes were tendered (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Original Notes register the
transfer of such Original Notes into the name of the person withdrawing the
tender and (iv) specify the name in which any such Original Notes are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such noticesWyndham Common Stock properly withdrawn will be determined by the Company, whose determination shall be final and
binding on all parties. Any Original Notes so withdrawn willthereafter be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange
Notes willOffer. However, withdrawn shares of Wyndham Common Stock may be issued with respect thereto unless the Original Notes so
withdrawn are validly retendered. Any Original Notes which have been tendered
but which are not accepted for exchange will be returnedre-tendered at any time prior to the holder thereof
without cost to such holder as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer. Properly withdrawn Original
Notes may be retenderedExpiration Time by following one of the procedures described in the section of this Exchange Offer titled “The Offer—Procedure for Tendering.”
All questions as to the form and validity (including time of receipt) of any notice of withdrawal will be determined by Choice in its discretion, which determination will be final and binding to the fullest extent permitted by law. None of Choice or any of its respective affiliates or assigns, the dealer managers, the Exchange Agent, the Information Agent or any other person will be under any duty to give any notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification.
73
Announcement of Results of the Offer
Choice will announce the final results of the Offer, including whether all of the conditions to the Offer have been satisfied or waived and whether Choice will accept the tendered shares of Wyndham Common Stock for exchange after the Expiration Time. The announcement will be made by a press release.
Material U.S. Federal Income Tax Consequences
The following is a general discussion of the material U.S. federal income tax consequences to U.S. holders (as defined to below) of Wyndham Common Stock whose shares are exchanged pursuant to the Offer and/or the First Merger for shares of Choice Common Stock and/or cash. The following discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), the U.S. Treasury regulations promulgated thereunder, rulings, judicial decisions and administrative pronouncements of the U.S. Internal Revenue Service (the “IRS”), in each case in effect as of the date hereof. These authorities may change, possibly with retroactive effect, and any such change could affect the accuracy of the statements and conclusions set forth in this discussion. This discussion does not address all aspects of U.S. federal income taxes and does not deal with foreign, state, local or other tax considerations, such as estate and gift tax laws, that may be relevant to U.S. holder in light of their particular circumstances (including Medicare contribution tax on net investment income). We have not sought and will not seek any rulings from the IRS regarding the matters discussed below. There can be no assurance that the IRS or a court will not take a contrary position to that discussed below regarding the tax consequences of the Offer or the Second-Step Mergers or the ownership or disposition of Choice Common Stock.
For purposes of this discussion, the term “U.S. holder” means a beneficial owner of shares of Wyndham Common Stock or Choice Common Stock (other than an entity treated as a partnership for U.S. federal income tax purposes) that is: (1) a citizen or resident of the United States; (2) a corporation (or any other entity or arrangement treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof, or the District of Columbia; (3) a trust if (x) a court within the United States is able to exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust or (y) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or (4) an estate that is subject to U.S. federal income tax on its worldwide income regardless of its source.
The following discussion applies only to U.S. holders of shares of Wyndham Common Stock, or shares of Choice Common Stock received in exchange for shares of Wyndham Common Stock pursuant to the Offer and/or the First Merger, who hold such shares as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). Further, this discussion does not purport to consider all aspects of U.S. federal income taxation that might be relevant to U.S. holders in light of their particular circumstances and does not apply to U.S. holders subject to special treatment under the U.S. federal income tax laws (such as, dealers or brokers in securities, commodities or foreign currencies, traders in securities that elect to apply a mark-to-market method of accounting, U.S. holders deemed to sell Wyndham Common Stock or Choice Common Stock under the constructive sale provisions of the Code, banks and certain other financial institutions, insurance companies, mutual funds, tax-exempt organizations or governmental organizations, tax-qualified retirement plans, holders liable for any alternative minimum tax, Subchapter S corporations, partnerships or other pass-through entities or investors in partnerships or such other pass-through entities, regulated investment companies, real estate investment trusts, U.S. holders whose functional currency is not the U.S. dollar, U.S. holders who hold shares of Wyndham Common Stock or Choice Common Stock as part of a hedge, straddle, constructive sale or conversion transaction or other integrated investment, U.S. holders who hold or receive Wyndham Common Stock or Choice Common Stock pursuant to the exercise of employee stock options, through a tax qualified retirement plan or otherwise as compensation, or holders who exercise appraisal rights, accrual method U.S. holders that are subject to Section 451(b) of the Code or U.S. holders that hold Wyndham Common Stock or will hold Choice Common Stock through a non-U.S. financial institution).
74
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds shares of Wyndham Common Stock, the tax treatment of a partner in such partnership generally will depend on the status of the partner and the activities of the partnership. U.S. holders that are partners of a partnership holding shares of Wyndham Common Stock are urged to consult their tax advisors regarding the tax consequences of the partnership exchanging the shares of Wyndham Common Stock pursuant to the Offer and/or the First Merger for shares of Choice Common Stock.
This discussion is for informational purposes only and is not tax advice. U.S. holders are urged to consult their tax advisors as to the specific tax consequences to them of the receipt of Choice Common Stock and/or cash in exchange for shares of Wyndham Common Stock pursuant to the Offer and the Second-Step Mergers, including the applicability and effect of any state, local, foreign and other federal tax laws or under applicable income tax treaty. This discussion is not applicable to non-U.S. holders and any non-U.S. holders are urged to consult their U.S. an non-U.S. tax advisors.
Treatment of the Offer and the Second-Step Mergers as a “Reorganization”
Provided that following the completion of the Offer and the Second-Step Mergers the value of the Choice shares constitutes at least 40% of the total value of the consideration (including any Additinal Consideration) received by Wyndham stockholders, it is intended that the Offer and the Second-Step Mergers, taken together, will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. However, if Choice elects to pay the Additional Consideration in cash in an amount sufficient to cause the stock component of the Offer Consideration to constitute less than 40% of the aggregate fair market value of the Offer Consideration, if the Offer and the Second-Step Mergers are not treated as component parts of an integrated transaction for U.S. federal income tax purposes, if the Second-Step Mergers are not completed or if the transaction otherwise fails to qualify as a “reorganization” within the meaning of Section 368(a) of the Code, the exchange of Wyndham Common Stock for shares of Choice Common Stock in the Offer and/or the First Merger will be taxable to such Wyndham stockholders for U.S. federal income tax purposes.
If the Offer and the Second-Step Mergers, taken together, qualify as a “reorganization” within the meaning of Section 368(a) of the Code, the U.S. federal income tax consequences to U.S. holders who receive shares of Choice Common Stock and/or cash in exchange for shares of Wyndham Common Stock pursuant to Offer and/or the First Merger generally will be as described below. However, neither the Offer nor the Second-Step Mergers are conditioned on the receipt of an opinion from counsel that the Offer and the Second-Step Mergers, taken together, qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Furthermore, no ruling has been requested, nor is any ruling intended to be requested, from the IRS with respect to the U.S. federal income tax consequences of the Offer or the Second-Step Mergers. Accordingly, there can be no assurance that the IRS will not assert, or that a court would not sustain, a position contrary to such intended treatment of the Offer and the Second-Step Mergers.
75
Tax Consequences of the Offer and the Second-Step Mergers
Assuming, as discussed above, that the Offer and the Second-Step Mergers, taken together, qualify as a “reorganization” within the meaning of Section 368(a) of the Code, the U.S. federal income tax consequences of the Offer and the Second-Step Mergers to U.S. holders are as follows:
a U.S. holder who receives a combination of shares of Choice Common Stock and cash (other than cash received in lieu of fractional shares of Choice Common Stock) in exchange for shares of Wyndham Common Stock pursuant to the Offer and/or the First Merger generally will recognize gain (but not loss) in an amount equal to the lesser of (i) the amount by which the sum of the fair market value of the Choice Common Stock and cash received by the U.S. holder exceeds such U.S. holder’s adjusted tax basis in its shares of Wyndham Common Stock surrendered and (ii) the amount of cash received by such U.S. holder (in each case excluding any cash received in lieu of fractional shares in Choice Common Stock, which will be treated as discussed below);
a U.S. holder who receives solely Choice Common Stock (other than cash received in lieu of fractional shares of Choice Common Stock) in exchange for shares of Wyndham Common Stock pursuant to the Offer and/or the First Merger generally will not recognize any gain or loss for U.S. federal income tax purposes as a result of such exchange;
a U.S. holder who receives solely cash in exchange for shares of Wyndham Common Stock pursuant to the Offer and/or the First Merger generally will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the cash received by the U.S. holder and such U.S. holder’s adjusted tax basis in its shares of Wyndham Common Stock surrendered;
the aggregate tax basis of shares of Choice Common Stock received pursuant to the Offer and the First Merger (including any fractional shares of Choice Common Stock deemed received and exchanged for cash, as discussed below) will be the same as the aggregate tax basis of the shares of Wyndham Common Stock surrendered in exchange therefor, decreased by the amount of cash received (excluding any cash received in lieu of fractional shares of Choice Common Stock), and increased by the amount of gain recognized on the exchange (excluding any gain recognized with respect to any fractional shares of Choice Common Stock for which cash is received, as discussed below); and
the holding period of the Choice Common Stock received in exchange for shares of Wyndham Common Stock (including any fractional shares of Choice Common Stock deemed received and exchanged for cash, as discussed below) will include the holding period of the Choice Common Stock for which it is exchanged.
If the Offer and the Second-Step Mergers, taken together, do not qualify as a “reorganization” within the meaning of Section 368(a) of the Code, then the receipt of Choice common stock and/or cash in exchange for Wyndham common stock in the Offer and/or First Merger will be a taxable transaction. In such a case, a U.S. holder generally will recognize gain or loss in an amount equal to the difference, if any, between (i) the sum of the fair market value of the Choice common stock received in the Offer and/or First Merger plus the amount of any cash and (ii) such holder’s adjusted tax basis in its shares of Wyndham common stock exchanged in the Offer and/or First Merger.
For purposes of the above discussion, any Additional Consideration should be treated as additional consideration received by a U.S. holder in exchange for its Wyndham Common Stock. If a U.S. holder acquired different blocks of shares of Wyndham Common Stock at different times or at different prices, any gain or loss will be determined separately with respect to each block of shares of Wyndham Common Stock, and such U.S. holder’s basis and holding period in its shares of Choice Common Stock may be determined with reference to each block of shares of Wyndham Common Stock. Any such U.S. holder should consult its tax advisors regarding the manner in which cash and shares of Choice Common Stock received in the Offer and the First Merger should be allocated among different blocks of shares of Wyndham Common Stock and with respect to identifying the bases or holding periods of the particular shares of Choice Common Stock received.
Any gain or loss recognized by a U.S. holder in connection with the Offer and the Second-Step Mergers generally will constitute capital gain or loss and will constitute long-term capital gain or loss if such U.S. holder has held its shares of Wyndham Common Stock surrendered for more than one year as of the date of the exchange. Long-term capital gains of certain non-corporate holders, including individuals, are generally taxed at preferential rates. The deductability of capital losses is subject to limitations.
76
Cash in Lieu of a Fractional Share
If the Offer and the Second-Step Mergers, taken together, qualify as a “reorganization” within the meaning of Section 368(a) of the Code, a U.S. holder who receives cash in lieu of a fractional share of Choice Common Stock will generally be treated as having received the fractional share pursuant to the Offer or the First Merger, as applicable, and then as having sold that fractional share of Choice Common Stock for cash. As a result, such U.S. holder will generally recognize gain or loss equal to the difference between the amount of cash received and the tax basis allocated to such fractional share of Choice Common Stock (as discussed above). Gain or loss recognized with respect to cash received in lieu of a fractional share of Choice Common Stock will generally constitute capital gain or loss, and will constitute long-term capital gain or loss if, as of the date of the exchange, the holding period for such share is greater than one year. The deductibility of capital losses is subject to limitations.
Ownership and Disposition of Choice Common Shares
Distributions
The gross amount of a distribution made by Choice with respect to Choice Common Stock will be a dividend for U.S. federal income tax purposes to the extent paid out of Choice’s current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Such amount will be included in a U.S. holder’s gross income as ordinary income for the taxable year in which it is received. If a distribution exceeds the portion of Choice’s earnings and profits attributable to such distribution, the excess will be treated as a nontaxable return of capital to the extent of a U.S. holder’s tax basis in such Choice Common Stock and thereafter as a capital gain. Dividends may be eligible for the dividends received deduction allowed to corporations. Corporate U.S. holders should consult with their tax advisors with respect to the potential application of the dividends received deduction.
Dividends received by individuals and other non-corporate U.S. holders of Choice Common Stock who meet the holding period requirements will generally be eligible for reduced rates of taxation, as qualified dividends.
Sale or Other Disposition of Choice Common Shares
U.S. holders will recognize gain or loss for U.S. federal income tax purposes upon a sale or other disposition of Choice Common Stock in an amount equal to the difference, if any, between the amount realized from such sale or disposition and the U.S. holder’s adjusted tax basis in such Choice Common Stock (as determined on a stock-by-stock basis). Such gain or loss will be capital gain or loss and will be long-term capital gain or loss if the Choice Common Stock has been held for more than one year as of the date of disposition. Long-term capital gains recognized by U.S. holders that are not treated as corporations for U.S. federal income tax purposes generally will be eligible for reduced rates of taxation. The deductibility of capital losses recognized by U.S. holders may be subject to certain limitations.
77
Information Reporting and Backup Withholding
Payments made to U.S. holders in exchange for shares of Wyndham Common Stock pursuant to the Offer or the First Merger will be subject to information reporting and may be subject to backup withholding. Dividend payments with respect to Choice Common Stock and proceeds from the sale, exchange or redemption of Choice Common Stock, may be subject to information reporting to the IRS and possible United States backup withholding. Backup withholding will not apply, however, to U.S. holders who furnish a correct taxpayer identification number and make other required certifications, or who are otherwise exempt from backup withholding and establish such exempt status.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. holder’s U.S. federal income tax liability, and a U.S. holder generally may obtain a refund of any excess amounts withheld under "--Proceduresthe backup withholding rules by timely filing the appropriate claim for Tendering"refund with the IRS and furnishing any required information.
Reporting
Holders of Wyndham Common Stock who owned at least five percent (by vote or value) of the total outstanding shares of Wyndham Common Stock, or owned shares of Wyndham Common Stock with a tax basis of $1 million or more, are required to attach a statement to their tax returns for the year in which the Offer and the Second-Step Mergers are completed that contains the information set forth in U.S. Treasury Regulations Section 1.368-3(b). Such statement must include the fair market value, determined immediately before the exchange, of all of such holder’s shares of Wyndham Common Stock exchanged pursuant to the Offer and the First Merger and such holder’s tax basis, determined immediately before the exchange, in its shares of Wyndham Common Stock.
Ownership of Choice After the Offer
Upon consummation of the Offer and the Second-Step Mergers, former Wyndham stockholders will own in the aggregate approximately 35% of Choice Common Stock on a diluted basis. This estimate assumes that:
the number of outstanding shares of Wyndham Common Stock immediately prior to the consummation of the Offer is 82,961,907, the total number of outstanding shares of Wyndham Common Stock reported in the Latest Wyndham 10-Q;
pursuant to the Offer (including the terms relating to proration of elections), Purchaser acquires all of the outstanding shares of Wyndham Common Stock other than the 1,447,264 shares of Wyndham Common Stock directly owned by or allocated to Choice or its subsidiaries;
pursuant to the Second-Step Mergers, the 1,447,264 shares of Wyndham Common Stock directly owned by or allocated to Choice or its subsidiaries and the shares of Wyndham Common Stock acquired pursuant to the Offer are cancelled;
no Additional Consideration is required to be paid; and
the information about options, restricted stock units, performance-based restricted stock units and other equity-based awards contained in the Wyndham 10-Q is accurate and remains current at consummation of the Second-Step Mergers and, in connection with the Second-Step
78
Mergers, (1) unvested options to purchase Wyndham Common Stock will become vested options, (2) vested options to purchase Wyndham Common Stock are treated as though they were shares of Wyndham Common Stock with a market value equal to their aggregate spread (relative to exercise price) receiving the Standard Election Consideration per share and (3) all unvested restricted stock units and performance-based restricted stock units of Wyndham Common Stock will become vested and are treated as though they were an equivalent number of shares of Wyndham Common Stock receiving the Standard Election Consideration per share (and for purposes of determining the number of Choice Common Stock on a diluted basis represented by shares or share awards issued in respect of Wyndham options, restricted stock units and performance-based restricted stock units as discussed in this bullet, assuming that option spreads and the diluted share calculation are based on the closing price of Choice Common Stock as of $114.31). |
Purpose of the Offer; Second-Step Mergers
The purpose of the Offer is for Choice to acquire all of the outstanding shares of common stock of Wyndham in order to combine the businesses of Choice and Wyndham. Choice intends, promptly after consummation of the Offer, to cause Purchaser to merge with and into Wyndham with Wyndham as the surviving corporation, immediately following which Wyndham will merge with and into NewCo with NewCo as the surviving corporation, after which Wyndham would be a direct or indirect, wholly owned subsidiary of Choice. The purpose of the Second-Step Mergers is for Choice to acquire all issued and outstanding shares of Wyndham Common Stock that are not acquired in the Offer.
In the Second-Step Mergers, each remaining share of Wyndham Common Stock (other than shares held by Choice and its subsidiaries (which as of the date of this document is 1,447,264 shares of Wyndham Common Stock) and shares held in treasury by Wyndham and other than shares held by Wyndham stockholders who properly exercise applicable dissenters’ rights under Delaware law) (a “Remaining Share”), will be cancelled and converted into the right to receive, at the election of the holder, the Cash Election Consideration or the Stock Election Consideration, subject to proration, or the Standard Election Consideration, and in each case, the Additional Consideration, if any.
Choice will prorate elections in the Second-Step Mergers in the same manner as the Offer. Pursuant to the Second-Step Mergers, Choice will pay for the Remaining Shares an amount in cash equal to the number of such shares times the cash portion of the Standard Election Consideration Purchaser pays in the Offer (the “Total Cash Payable in the Second-Step Mergers”).
79
If, after taking into account elections by holders of Remaining Shares, the cash payable in the Second-Step Mergers would otherwise be greater than the Total Cash Payable in the Second-Step Mergers, the number of Remaining Shares covered by Cash Elections will be deemed reduced pro rata by the least amount required so that the cash payable in the Second-Step Mergers is no longer greater than the Total Cash Payable in the Second-Step Mergers (and the Remaining Shares no longer covered by Cash Elections as a result of such pro rata reduction will thereupon automatically be deemed to be covered by Stock Elections).
If, after taking into account elections by holders of Remaining Shares, the cash payable in the Second-Step Mergers would otherwise be less than the Total Cash Payable in the Second-Step Mergers, the number of Remaining Shares covered by Stock Elections will be deemed reduced pro rata by the least amount required so that the cash payable in the Second-Step Mergers is no longer less than the Total Cash Payable in the Second-Step Mergers (and the Remaining Shares no longer covered by Stock Elections as a result of such pro rata reduction will thereupon automatically be deemed to be covered by Cash Elections).
Promptly after the Second-Step Mergers, Choice will send election forms to holders of Remaining Shares enabling them to make Standard Elections, Cash Elections or Stock Elections with respect to their shares. Holders of the Remaining Shares who do not make a valid election will be treated as if they made the Standard Election.
In the event the Competition Laws Condition remains unsatisfied as of the Ticking Fee Commencement Date, each tendering Wyndham stockholder will be entitled to receive Additional Consideration subject to, and conditioned upon, the acceptance of the shares tendered into the Offer. The Additional Consideration shall be payable in cash or shares of Choice Common Stock, valued at the VWAP of Choice Common Stock as quoted on the NYSE over the five NYSE trading days ending on the 10th Business Day preceding the date of acceptance by Choice of the shares tendered in the Offer, at Choice’s election. Additional Consideration, if any, will be paid to holders of Remaining Shares upon consummation of the Second-Step Mergers.
Because it will take some time after the Second-Step Mergers for holders of Remaining Shares to complete and return their election forms, Choice expects that there will be a delay of several weeks before holders of Remaining Shares will be eligible to receive their merger consideration. Choice will not pay interest on the merger consideration.
80
After the Second-Step Mergers, Choice would own all of the issued and outstanding shares of Wyndham Common Stock. See the sections of this Exchange Offer titled “The Offer—Elections and Proration”; “The Offer—Statutory Requirements; Approval of the Second-Step Mergers”; and “The Offer—Plans for Wyndham.”
Statutory Requirements; Approval of the Second-Step Mergers
Under Section 251(h) of the DGCL, if (a) Wyndham and Purchaser have entered into a merger agreement approving the Offer and Second-Step Mergers under Section 203 of the DGCL and opting into Section 251(h) of the DGCL before consummation of the Offer and (b) Purchaser acquires shares of Wyndham Common Stock pursuant to the Offer and, following consummation of the Offer, owns a majority of the outstanding shares of Wyndham Common Stock, Purchaser will be able to effect each of the Second-Step Mergers as a “short form” merger without further approval of the Wyndham Board or a vote of the remaining Wyndham stockholders. The Offer is effectively conditioned on those events occurring (since it is conditioned on the Wyndham Board taking steps to assure that the Second-Step Mergers can be completed in the short-form manner permitted by Section 251(h) of the DGCL and on the tender of a number of shares of Wyndham Common Stock which, together with any other shares of Wyndham Common Stock that Choice (or its controlled affiliates, including Purchaser) owns or has a right to acquire, is a majority of the total number of outstanding shares of Wyndham Common Stock). Choice intends to take all necessary and appropriate action to cause the Second-Step Mergers to become effective promptly after consummation of the Offer, without a meeting of Wyndham stockholders. This condition may be waived by Choice in its sole discretion.
Wyndham stockholders do not have dissenters’ or appraisal rights in connection with the Offer. However, in connection with the First Merger, which Choice expects to be consummated without a vote of Wyndham stockholders, Wyndham stockholders who have not tendered their shares of Wyndham Common Stock in the Offer will have rights under Delaware law to dissent from the First Merger and demand appraisal of their shares of Wyndham Common Stock. Stockholders who perfect appraisal rights by complying with the procedures set forth in Section 262 of the DGCL will be entitled to receive a cash payment equal to the “fair value” of their shares of Wyndham Common Stock, as determined by a Delaware court. Because appraisal rights are not available in connection with the Offer, no demand for appraisal under Section 262 of the DGCL may be made at this time. Any such judicial determination of the fair value of the shares of Wyndham Common Stock could be based upon considerations other than or in addition to the consideration paid in the Offer and the market value of the shares of Wyndham Common Stock. Wyndham stockholders should recognize that the value so determined could be higher or lower than, or the same as, the consideration per share paid pursuant to the Offer or the consideration paid in such a merger. Moreover, we may argue in an appraisal proceeding that, for purposes of such a proceeding, the fair value of the shares of Wyndham Common Stock is less than the consideration paid in the Offer or in such a merger.
81
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS. BECAUSE OF THE COMPLEXITY OF DELAWARE LAW RELATING TO APPRAISAL RIGHTS, WE ENCOURAGE YOU TO SEEK THE ADVICE OF YOUR OWN LEGAL COUNSEL. THE FOREGOING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE DGCL AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DGCL. THE DESCRIPTION OF SECTION 262 ABOVE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SECTION, A COPY OF WHICH IS ATTACHED TO THIS EXCHANGE OFFER AS ANNEX A.
The Offer is the first step in Choice’s plan to acquire all of the issued and outstanding shares of Wyndham Common Stock and effect a business combination of Choice and Wyndham. Choice intends, promptly following acceptance for exchange and exchange of shares of Wyndham Common Stock in the Offer, to complete the Second-Step Mergers pursuant to which Choice will acquire all Remaining Shares of Wyndham Common Stock. See the sections of this Exchange Offer titled “The Offer—Purpose of the Offer; Second-Step Mergers” and “The Offer—Statutory Requirements; Approval of the Second-Step Mergers.”
Choice intends, promptly after consummation of the Offer, to cause Purchaser to merge with and into Wyndham with Wyndham as the surviving corporation, immediately following which Wyndham will merge with and into NewCo with NewCo as the surviving corporation, after which Wyndham would be a direct or indirect, wholly owned subsidiary of Choice. Choice made numerous attempts to engage the Wyndham Board, making three private proposals between April and September 2023, increasing its proposed purchase price each time. As the Wyndham Board rejected each private proposal and refused to engage in meaningful discussions, Choice announced its offer to acquire Wyndham publicly on October 17, 2023. Following Wyndham’s public rejection of that proposal, Choice made a fourth proposal privately to Wyndham on November 14, 2023, reaffirming the economic and other terms of the prior proposal. Choice also proposed a regulatory termination fee, a ticking fee if the transaction did not close by a certain date and a proposal to take all actions required to obtain the requisite regulatory approvals so long as such actions would not have a material adverse effect on the combined company. Choice also offered a mutual non-disclosure agreement to allow the parties to conduct confirmatory due diligence. On November 21, 2023, Wyndham publicly rejected the proposed terms of Choice’s offer made November 14, 2023. In addition to rejecting each offer, the Wyndham Board declined Choice’s repeated requests for confidential mutual, confirmatory due diligence. Due to Wyndham’s unwillingness to even discuss the proposal for a negotiated transaction with Choice and the Wyndham Board’s public statements with respect to Choice’s prior proposals, and because Choice does not believe that it is appropriate for the Wyndham Board to have a veto right over whether the Offer is made available to Wyndham stockholders, Choice is making the Offer directly to Wyndham stockholders upon the terms and subject to the conditions set forth in this Exchange Offer as an alternative to a negotiated transaction. See the section of this Exchange Offer titled “Background of the Offer.”
When permitted to do so pursuant to the Wyndham Bylaws, Choice intends to nominate at least a sufficient number of directors, who if elected, would constitute a majority of the Wyndham Board, to give the Wyndham stockholders another direct voice with respect to the Offer. Choice believes that the election of its nominees would further demonstrate that Wyndham stockholders support the Proposed Combination, in addition to the support shown by those stockholders tendering Wyndham Common Stock pursuant to the Offer. If our nominees are elected, they would be obligated to act in
82
accordance with their duties as directors of Wyndham and would not owe any fiduciary duties to Choice. If elected, our nominees could take steps to support and facilitate the Offer and the Second-Step Mergers should the nominees, as new directors, deem it appropriate in the exercise of their duties to Wyndham and the Wyndham stockholders.
If, and to the extent that, Choice (and/or any of Choice’s subsidiaries) acquires control of Wyndham or otherwise obtains access to the books and records of Wyndham, Choice intends to conduct a detailed review of Wyndham’s business, operations, capitalization and management and consider and determine what, if any, changes would be desirable in light of the circumstances which then exist. Such strategies could include, among other things, changes in Wyndham’s business, corporate structure, rationalization of employment and cost levels, marketing strategies, capitalization, management structure and personnel or dividend policy.
Effect of the Offer on the Market for Shares of Wyndham Common Stock; NYSE Listing; Registration under the Exchange Act; Margin Regulations
Effect of the Offer on the Market for the Shares of Wyndham Common Stock
The exchange of shares of Wyndham Common Stock by Choice pursuant to the Offer will reduce the number of shares of Wyndham Common Stock that might otherwise trade publicly and will reduce the number of holders of shares of Wyndham Common Stock, which could adversely affect the liquidity and market value of the Remaining Shares of Wyndham Common Stock held by the public. The extent of the public market for Wyndham Common Stock and the availability of quotations reported in the over-the-counter market depends upon the number of stockholders holding Wyndham Common Stock, the aggregate market value of the shares remaining at such time, the interest of maintaining a market in the shares on the part of any securities firms and other factors. According to the Latest Wyndham 10-Q, there were 82,961,907 shares of Wyndham Common Stock outstanding. Choice intends, promptly after consummation of the Offer, to cause Purchaser to merge with and into Wyndham with Wyndham as the surviving corporation, immediately following which Wyndham will merge with and into NewCo with NewCo as the surviving corporation.
83
NYSE Listing
The shares of Wyndham Common Stock are quoted on the NYSE. Depending upon the number of shares of Wyndham Common Stock exchanged pursuant to the Offer and the number of Wyndham stockholders remaining thereafter, the shares of Wyndham Common Stock may no longer meet the requirements of the NYSE for continued listing and may be delisted from the NYSE. According to the NYSE’s published guidelines, the NYSE would consider delisting the shares of Wyndham Common Stock if, among other things, (1) the number of total round-lot stockholders of Wyndham should fall below 400, (2) the number of total stockholders should fall below 1,200 and the average monthly trading volume for the shares of Wyndham Common Stock is less than 100,000 for the most recent 12 months or (3) the number of publicly held shares of Wyndham Common Stock (exclusive of holdings of officers and directors of Wyndham and their immediate families and other concentrated holdings of 10% or more) should fall below 600,000.
If, as a result of the exchange of shares of Wyndham Common Stock pursuant to the Offer or otherwise, the shares of Wyndham Common Stock no longer meet the requirements of the NYSE for continued listing and the listing of the shares of Wyndham Common Stock is discontinued, the market for the shares of Wyndham Common Stock could be adversely affected. If the NYSE were to delist the shares of Wyndham Common Stock, it is possible that the shares of Wyndham Common Stock would continue to trade on another securities exchange or in the over-the-counter market and that price or other quotations would be reported by such exchange or other sources. The extent of the public market therefor and the availability of such quotations would depend, however, upon such factors as the number of stockholders and/or the aggregate market value of such securities remaining at such time, the interest in maintaining a market in the shares of Wyndham Common Stock on the part of securities firms, the possible termination of registration under the Exchange Act as described below, and other factors. Choice cannot predict whether the reduction in the number of shares of Wyndham Common Stock that might otherwise trade publicly would have an adverse or beneficial effect on the market price for or marketability of the shares of Wyndham Common Stock or whether it would cause future market prices to be greater or less than the consideration being offered in the Offer. If shares of Wyndham Common Stock are not delisted prior to the Second-Step Mergers, then shares of Wyndham Common Stock will cease to be listed on the NYSE upon consummation of the Second-Step Mergers. Choice intends, promptly after consummation of the Offer, to cause Purchaser to merge with and into Wyndham with Wyndham as the surviving corporation, immediately following which Wyndham will merge with and into NewCo with NewCo as the surviving corporation.
Registration Under the Exchange Act
Wyndham Common Stock is currently registered under the Exchange Act. This registration may be terminated upon application by Wyndham to the SEC if Wyndham Common Stock is not listed on a “national securities exchange” and there are fewer than 300 record holders. Termination of registration would substantially reduce the information required to be furnished by Wyndham to holders of Wyndham Common Stock and to the SEC and would make certain provisions of the Exchange Act, such as the short-swing profit recovery provisions of Section 16(b), the requirement of furnishing a proxy statement in connection with stockholders’ meetings and the requirements of Exchange Act Rule 13e-3 with respect to “going private” transactions, no longer applicable to Wyndham Common Stock. In addition, “affiliates” of Wyndham and persons holding “restricted securities”
84
of Wyndham may be deprived of the ability to dispose of these securities pursuant to Rule 144 under the Securities Act. If registration of Wyndham Common Stock is not terminated prior to the Second-Step Mergers, then the registration of Wyndham Common Stock under the Exchange Act will be terminated upon consummation of the Second-Step Mergers. Choice intends, promptly after consummation of the Offer, to cause Purchaser to merge with and into Wyndham with Wyndham as the surviving corporation, immediately following which Wyndham will merge with and into NewCo with NewCo as the surviving corporation.
Margin Regulations
Shares of Wyndham Common Stock are currently “margin securities,” as such term is defined under the rules of the Board of Governors of the Federal Reserve System (“Federal Reserve Board”), which has the effect, among other things, of allowing brokers to extend credit on the collateral of such securities. Depending upon factors similar to those described above regarding listing and market quotations, following the Offer, it is possible that the shares of Wyndham Common Stock might no longer constitute “margin securities” for purposes of the margin regulations of the Federal Reserve Board, in which event such shares of Wyndham Common Stock generally could no longer be used as collateral for loans made by brokers. In addition, if registration of the shares of Wyndham Common Stock under the Exchange Act were terminated, the shares of Wyndham Common Stock would no longer constitute “margin securities.” Choice intends, promptly after consummation of the Offer, to cause Wyndham to merge with Purchaser.
Notwithstanding any other provision of the Offer and in addition to (and not in limitation of) Choice’s right to extend and amend the Offer at any time, prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Companyin its discretion, Choice shall not be required to accept for exchange orany shares of Wyndham Common Stock tendered pursuant to the Offer, shall not (subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act) be required to make any exchange Notes for any Original Notes,shares of Wyndham Common Stock accepted for exchange and may extend, terminate or amend the Exchange Offer, as provided herein before the
acceptance of such Original Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the Company's reasonable discretion, might materially
24
impair the ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the Staff of
the Commission is proposed, adopted or enacted, which, in the Company's
reasonable discretion, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in the Company's reasonable discretion, deem necessary for
the consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any
Original Notes and return all tendered Original Notes to the tendering
holders, (ii) extend the Exchange Offer and retain all Original Notes tenderedif immediately prior to the expiration of the Exchange Offer, subject, however,in the reasonable judgment of Choice, any one or more of the following conditions shall not have been satisfied:
Minimum Tender Condition
There shall have been validly tendered and not properly withdrawn prior to the rightsexpiration of holdersthe Offer, a number of shares of Wyndham Common Stock which, together with any other shares of Wyndham Common Stock that Choice (or its controlled affiliates, including Purchaser) Purchaser then owns or has a right to withdraw such Original Notes (see "--Withdrawalacquire, is a majority of Tenders"),the total number of outstanding shares of Wyndham Common Stock on a fully diluted basis as of the date that we accept shares of Wyndham Common Stock for exchange pursuant to the Offer.
85
Anti-Takeover Devices Condition
The impediments to the consummation of the Offer and the Second-Step Mergers which the Wyndham Board can remove shall have been rendered inapplicable to the Offer and the Second-Step Mergers. The following shall have occurred (in the reasonable judgment of Choice):
the Wyndham Board shall have approved the Offer and the Second-Step Mergers under Section 203 of the DGCL, or (iii) waive such unsatisfied conditionsSection 203 of the DGCL shall otherwise be inapplicable to the Offer and the Second-Step Mergers or Choice shall acquire in the Offer in excess of 85% of the shares of Wyndham Common Stock outstanding at the time the transaction commenced in accordance with Section 203 of the DGCL;
the Wyndham Board shall have taken steps to ensure that the Second-Step Mergers can be completed in the short-form manner permitted by Section 251(h) of the DGCL; and
any other impediments to the consummation of the Offer and Second-Step Mergers of which Choice is (on the date of this Exchange Offer) unaware and which the Wyndham Board can remove shall have been removed or otherwise rendered inapplicable to the Offer and the Second-Step Mergers.
Choice Stockholder Approval Condition
Choice stockholders shall have approved (i) the issuance of Choice Common Stock contemplated in connection with the Offer and the Second-Step Mergers, in accordance with the rules of the NYSE, on which the Choice Common Stock is listed and (ii) other matters ancillary to the Offer and the Second-Step Mergers. Choice expects to file a preliminary proxy statement with respect to a special meeting of Choice stockholders to obtain this approval prior to the expiration of this Exchange Offer, and it is Choice’s intention to obtain this approval prior to Wyndham’s 2024 annual meeting of stockholders.
Competition Laws Condition
The waiting period applicable to the Offer and the Second-Step Mergers under the HSR Act shall have expired or been terminated. In addition:
the waiting period (or extension thereof) applicable to the Offer and the Second-Step Mergers under any applicable antitrust laws and regulations, other than the HSR Act, shall have expired or been terminated, and any approvals or clearances, including those required by any international bodies, if applicable, and, in each case as determined by Choice to be required or advisable thereunder shall have been obtained on terms satisfactory to Choice, and
any other approval, permit, authorization, extension, action or non-action, waiver or consent of any governmental authority as determined by Choice to be required or advisable shall have been obtained on terms satisfactory to Choice.
On the date of this Exchange Offer, Choice filed the notification required for the consummation of the Proposed Combination by the HSR Act. Choice commenced discussions with the FTC on December 5, 2023, regarding the proposed transaction and commits to take all actions required to obtain the requisite regulatory approvals so long as such actions would not have a material adverse effect on the combined company.
86
Stock Exchange Listing Condition
The Choice Common Stock issuable to Wyndham stockholders in connection with the Offer and the Second-Step Mergers shall have been approved for listing on the NYSE, subject to official notice of issuance.
Registration Statement Condition
The registration statement of which this Exchange Offer is a part shall have become effective under the Securities Act. No stop order suspending the effectiveness of the registration statement shall have been issued, and no proceedings for that purpose shall have been initiated or be threatened, by the SEC.
No Injunction Condition
No court or other governmental entity of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any law, statute or ordinance, common law, rule, regulation, standard, judgment, order, writ, injunction, decree, arbitration award or agency requirement (whether temporary, preliminary or permanent) that is in effect and restrains, enjoins or otherwise prohibits consummation of the Offer and the Second-Step Mergers.
No Wyndham Material Adverse Effect Condition
A “Wyndham Material Adverse Effect” means: any Circumstance that, individually or in the aggregate, (i) has had, or would reasonably be expected to have, a materially adverse effect on the financial condition, business, operations, assets, liabilities or results of operations of Wyndham and its subsidiaries, taken as a whole, or (ii) would, or would reasonably be expected to, materially impair the ability of Wyndham or any of its subsidiaries to consummate the Offer or the Second-Step Mergers; provided, however, that solely for purposes of the foregoing clause (i) only, to the extent any Circumstance results from the following items, then it will be excluded in determining whether there has been a Wyndham Material Adverse Effect: (A) changes after the date hereof in GAAP or the official interpretation or enforcement thereof or any other accounting requirements generally applicable to the industry in which Wyndham or any of its subsidiaries operates, (B) changes after the date hereof generally affecting the financial, securities, debt or financing markets or general economic or political conditions, (C) changes after the date hereof in Law of general applicability to companies in the industry in which Wyndham or any of its subsidiaries operates, (D) acts or declarations of war or other armed hostilities, sabotage or terrorism, and (E) any failure by Wyndham or any of its subsidiaries to meet any internal or published estimates, budgets, projections, forecasts or predictions of financial performance for any period (it being understood that the underlying cause of any such failure described in this clause (E) may be considered in determining whether or not a Wyndham Material Adverse Effect has occurred); provided that, in the case of clauses (A), (B), (C) and (D), any such Circumstances may be taken into account in determining whether or not there has been a Wyndham Material Adverse Effect to the extent any such Circumstance has been, or is reasonably likely to be, disproportionately adverse to such person and its subsidiaries, taken as a whole, as compared to other participants in the industry in which such person and any of its subsidiaries operate.
87
Diligence Condition
Choice shall have been given reasonable access to Wyndham’s non-public information related to Wyndham’s business, assets, and liabilities to complete its confirmatory due diligence review and Choice shall have concluded, in its reasonable judgment, that there are no material adverse facts or developments concerning or affecting Wyndham’s business, assets and liabilities that have not been publicly disclosed prior to the commencement of the Offer that would result or be reasonably likely to result in a Diminution of Value. The Diligence Condition is only a condition to the Offer due to the fact that Wyndham has refused to engage in meaningful discussions with respect to a negotiated transaction, and accordingly, Choice has had to rely solely on publicly available information.
Financing Condition
Choice shall have obtained financing proceeds in amounts, together with its cash on hand, sufficient to consummate the Exchange Offer and accept all properly tendered Original Notes whichthe Second-Step Mergers and pay related fees and expenses.
Choice expects to have sufficient cash resources available to complete the transactions contemplated by the Exchange Offer and the Second-Step Mergers. In addition to cash on hand, Choice currently intends to borrow or otherwise finance up to approximately $6.0 billion to complete the acquisition of Wyndham, repay Wyndham’s indebtedness, if required, and pay related transaction expenses. Choice is highly confident in its ability to obtain fully committed financing based on indications from two separate bulge bracket global banks for such amounts; however, Choice has not been withdrawn.
Thenegotiated the terms of, or entered into, any such financing agreement and Choice cannot provide any assurances that such financing will be available when and as needed or on terms that Choice believes to be commercially reasonable.
Other Conditions to the Offer
None of the following events shall have occurred and be continuing and be of a nature that could reasonably be expected to make it inadvisable for us to complete the Offer or Second-Step Mergers:
| (1) | there shall be threatened, instituted or pending any action, proceeding or application before any court, government or governmental authority or other regulatory or administrative agency or commission, domestic or foreign, (i) which challenges the acquisition by Choice of Wyndham Common Stock, seeks to restrain, delay or prohibit the consummation of the Offer or the Second-Step Mergers or seeks to obtain any material damages or otherwise directly or indirectly relates to the Offer or the Second-Step Mergers, (ii) which seeks to prohibit or impose material limitations on Choice’s acquisition, ownership or operation of all or any portion of Choice’s or Wyndham’s businesses or assets (including the businesses or assets of their respective affiliates and subsidiaries) or of Wyndham Common Stock (including, without limitation, the right to vote the shares purchased by Choice or an affiliate thereof, on an equal basis with all other shares of Wyndham Common Stock on all matters presented to the stockholders of Wyndham), or seeks to compel Choice to dispose of or hold separate all or any portion of its own or Wyndham’s businesses or assets (including the businesses or assets of their respective affiliates |
88
| and subsidiaries) as a result of the transactions contemplated by the Offer or the Second-Step Mergers, (iii) which might adversely affect Wyndham, Choice, or any of their respective affiliates or subsidiaries (“Adverse Effect”), or result in a Diminution in the Value, (iv) which seeks to impose any condition to the Offer or the Second-Step Mergers unacceptable to Choice, except that this condition will not fail to be satisfied as a result of a governmental entity requiring that Choice (A) divest, license, or hold separate (including by trust or otherwise) any businesses or assets of Choice, Wyndham or their respective affiliates, or (B) agree to or effect any action that limits any freedom of action with respect to Choice’s, Wyndham’s or their respective affiliates’ ability to retain, operate, manage, govern or influence any of their respective businesses or assets (which requirements in clauses (A) and (B) collectively referred to as a “Regulatory Action”), as long as such Regulatory Action would not have a material adverse effect on the financial condition, business, operations, assets, liabilities or results of operations of Choice, Wyndham and their respective subsidiaries, taken as a whole, or (v) adversely affecting the financing of the Offer; |
| (2) | other than the waiting periods under the HSR Act and any other applicable antitrust laws and regulations, any statute, rule, regulation or order or injunction shall be sought, proposed, enacted, promulgated, entered, enforced or deemed or become applicable to the Offer, the Second-Step Mergers or the transactions contemplated by the Offer or Second-Step Mergers that might, directly or indirectly, result in any of the consequences referred to in clauses (i) through (iv) of paragraph (1) above, except that this condition will not fail to be satisfied as a result of a governmental entity requiring that Choice agree to or effect any Regulatory Action as long as such Regulatory Action would not have a material adverse effect on the financial condition, business, operations, assets, liabilities or results of operations of Choice, Wyndham and their respective subsidiaries, taken as a whole; |
| (3) | there shall have occurred (i) any general suspension of, or limitation on times or prices for, trading in securities on any national securities exchange or in the over-the-counter market, (ii) any decline in either the Dow Jones Industrial Average, the Standard and Poor’s Index of 500 Industrial Companies or the Nasdaq 100 Index by any amount in excess of 15% measured from the close of business on December 11, 2023, (iii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iv) the outbreak or escalation of a war, armed hostilities or other international or national calamity directly or indirectly involving the United States, (v) any limitation (whether or not mandatory) by any governmental authority or other regulatory agency on, or any other event which might affect the extension of credit by, banks or other lending institutions or the availability of the financing of the Offer, (vi) a suspension of or limitation (whether or not mandatory) on the currency exchange markets or the imposition of, or material changes in, any currency or exchange control laws in the United States or (vii) in the case of any of the foregoing existing at the time of the commencement of the Offer, a material acceleration or worsening thereof; |
89
| (4) | Wyndham or any subsidiary of Wyndham shall have (i) issued, distributed, pledged or sold, or authorized, or proposed the issuance, distribution, pledge or sale of (A) any shares of its capital stock (other than sales or issuances pursuant to the present terms of employee stock awards outstanding on the date of this Exchange Offer) of any class (including, without limitation, Wyndham Common Stock) or securities convertible into or exchangeable for any such shares of capital stock, or any rights, warrants or options to acquire any such shares or convertible securities or any other securities of Wyndham (other than any employee awards referred to in the financial statements in Wyndham’s 10-K for the fiscal year ended December 31, 2022), (B) any other securities in respect of, in lieu of or in substitution for Wyndham Common Stock or (C) any debt securities or any securities convertible into or exchangeable for debt securities or any rights, warrants or options entitling the holder thereof to purchase or otherwise acquire any debt securities, (ii) purchased or otherwise acquired, or proposed or offered to purchase or otherwise acquire, any outstanding shares of Wyndham Common Stock or other securities, (iii) proposed, recommended, authorized, declared, issued or paid any dividend or distribution on any shares of Wyndham Common Stock or any other security, whether payable in cash, securities or other property, other than Wyndham’s regular quarterly dividend of $0.35 per share of Wyndham Common Stock, (iv) altered or proposed to alter any material term of any outstanding security, (v) incurred, agreed to incur or announced its intention to incur any debt other than in the ordinary course of business and consistent with past practice, (vi) authorized, recommended, proposed or publicly announced its intent to enter into any merger, consolidation, liquidation, dissolution, business combination, acquisition or disposition of assets or securities other than in the ordinary course of business, any material change in its capitalization, any release or relinquishment of any material contractual or other rights or any comparable event, or taken any action to implement any such transaction previously authorized, recommended, proposed or publicly announced or (vii) entered into any other agreement or otherwise effected any other arrangement with any other party or with its officers or other employees of Wyndham, which in any of the cases described in (i) through (vi) above might, individually or in the aggregate, have an Adverse Effect or result in a Diminution in Value; |
| (5) | Wyndham or any of its subsidiaries shall have amended or proposed or authorized any amendment to Wyndham’s Second Amended and Restated Certificate of Incorporation (the “Wyndham Charter”), the Third Amended and Restated Bylaws of Wyndham (the “Wyndham Bylaws”) or similar organizational documents, or Choice shall have learned that Wyndham or any of its subsidiaries shall have proposed, adopted or recommended any such amendment, which has not previously been publicly disclosed by Wyndham and also set forth in filings with the SEC prior to commencement of the Offer, in a manner that, in the reasonable judgment of Choice, might, directly or indirectly, (i) delay or otherwise restrain, impede or prohibit the Offer or the Second-Step Mergers or (ii) prohibit or limit the full rights of ownership of shares of Wyndham Common Stock by Choice or any of its affiliates, including, without limitation, the right to vote any shares of Wyndham Common Stock acquired by Choice pursuant to the Offer or otherwise on all matters properly presented to Wyndham stockholders; |
90
| (6) | Wyndham or any of its subsidiaries shall have transferred into trust, escrow or similar arrangement any amounts required to fund any existing benefit, employment or severance agreements with any of its employees or shall have entered into or otherwise effected with its officers or any other employees any additional benefit, employment, severance or similar agreements, arrangements or plans other than in the ordinary course of business or entered into or amended any agreements, arrangements or plans so as to provide for increased benefits to such employee or employees as a result of or in connection with the transactions contemplated by the Offer or the Second-Step Mergers; |
| (7) | (i) a tender or exchange offer for some or all of the shares of Wyndham Common Stock has been publicly proposed to be made or has been made by another person (including Wyndham or any of its subsidiaries or affiliates, but excluding Choice or any of its affiliates), or has been publicly disclosed, or Choice otherwise learns that any person or “group” (as defined in Section 13(d)(3) of the Exchange Act) has acquired or proposes to acquire beneficial ownership of more than 5% of any class or series of capital stock of Wyndham (including the Wyndham Common Stock), through the acquisition of stock, the formation of a group or otherwise, or is granted any option, right or warrant, conditional or otherwise, to acquire beneficial ownership of more than 5% of any class or series of capital stock of Wyndham (including the Wyndham Common Stock) other than acquisitions for bona fide arbitrage purposes only and other than as disclosed in a Schedule 13D or 13G on file with the SEC on the date of this Exchange Offer, (ii) any such person or group which, prior to the date of this Exchange Offer, had filed such a Schedule 13D or 13G with the SEC has acquired or proposes to acquire beneficial ownership of additional shares of any class or series of capital stock of Wyndham, through the acquisition of stock, the formation of a group or otherwise, constituting 1% or more of any such class or series, or is granted any option, right or warrant, conditional or otherwise, to acquire beneficial ownership of additional shares of any class or series of capital stock of Wyndham constituting 1% or more of any such class or series, (iii) any person or group has entered into a definitive agreement or an agreement in principle or made a proposal with respect to a tender or exchange offer or a merger, consolidation or other business combination with or involving Wyndham or (iv) any person has filed a Notification and Report Form under the HSR Act or made a public announcement reflecting an intent to acquire Wyndham or any assets or securities of Wyndham; |
| (8) | Choice becomes aware (i) that any material contractual right of Wyndham or any of its subsidiaries has been or will be impaired or otherwise adversely affected or that any material amount of indebtedness of Wyndham or any of its subsidiaries has been accelerated or has otherwise become due or become subject to acceleration prior to its stated due date, in each case with or without notice or the lapse of time or both, as a result of or in connection with the Offer or the completion by Choice or any of Choice’s affiliates of the Second-Step Mergers or any other business combination involving Wyndham or (ii) of any covenant, term or condition in any instrument or agreement of Wyndham or any of its subsidiaries that, in Choice’s reasonable judgment, has or may have material adverse significance with respect to either the value of Wyndham or any of its subsidiaries or affiliates or the value of the Wyndham Common Stock to Choice or any of |
91
| Choice’s affiliates (including, without limitation, any event of default that may ensue as a result of or in connection with the Offer, the acceptance for payment of or payment for some or all of the shares of Wyndham Common Stock by Choice or the completion of the Second-Step Mergers or any other similar business combination involving Wyndham; and/or |
| (9) | Wyndham or any of its subsidiaries shall have (i) granted to any person proposing a merger or other business combination with or involving Wyndham or any of its subsidiaries or the purchase or exchange of securities or assets of Wyndham or any of its subsidiaries any type of option, warrant or right which, in Choice’s reasonable judgment, constitutes a “lock-up” device (including, without limitation, a right to acquire or receive any shares of Wyndham Common Stock or other securities, assets or business of Wyndham or any of its subsidiaries) or (ii) paid or agreed to pay any cash or other consideration to any party in connection with or in any way related to any such business combination, purchase or exchange. |
Each of the conditions are solelyunder this section of this Exchange Offer titled “The Offer—Conditions to the Offer” is for the sole benefit of the CompanyChoice and may be asserted by the Company in good faithChoice regardless of the circumstances (including any action or inaction by us) giving rise to any such conditions or, except as otherwise expressly set forth herein to the contrary, may be waived by the CompanyChoice in whole or in part at any time and from time to time in itsChoice’s sole discretion. The determination as to whether any condition has occurred shall be in Choice’s reasonable judgment and that judgment shall be final and binding on all parties. The failure by the
CompanyChoice at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. In addition,Notwithstanding the Company has reservedfact that Choice reserves the right notwithstandingto assert the satisfactionoccurrence of eacha condition following acceptance for exchange but prior to exchange in order to delay issuance of Choice Common Stock or cancel Choice’s obligation to pay the consideration payable for properly tendered shares of Wyndham Common Stock, Choice will either promptly pay that consideration for properly tendered shares of Wyndham Common Stock or promptly return such shares of Wyndham Common Stock.
A public announcement shall be made of a material change in, or waiver of, such conditions, and the Offer may, in certain circumstances, be extended in connection with any such change or waiver.
If, on or after the date hereof, Wyndham should (1) split, combine or otherwise change the Wyndham Common Stock or its capitalization, (2) acquire currently outstanding Wyndham Common Stock or otherwise cause a reduction in the number of shares of outstanding Wyndham Common Stock or (3) issue or sell additional Wyndham Common Stock, shares of any other class of capital stock, other voting securities or any securities convertible into, or rights, warrants or options to acquire, any of the foregoing, other than Wyndham Common Stock issued pursuant to terminate or amend the Exchange Offer.
EXCHANGE AGENT
Marine Midland Bank (the "Exchange Agent") has been appointedexercise of stock options outstanding as Exchange
Agent forof the Exchange Offer. Questions and requests for assistance, requests
for additional copiesdate of this Prospectus orExchange Offer, then, subject to the conditions of the LetterOffer above, Choice, in its sole discretion, may make such adjustments as it deems appropriate in the Offer price and other terms of Transmittalthe Offer, including, without limitation, the number or type of securities offered to be purchased.
92
If, on or after the date of this Exchange Offer, Wyndham should declare or pay any cash dividend on the Wyndham Common Stock or other distribution on the Wyndham Common Stock, other than Wyndham’s regular quarterly dividend of $0.35 per share of Wyndham Common Stock, or issue with respect to the Wyndham Common Stock any additional Wyndham Common Stock, shares of any other class of capital stock, other voting securities or any securities convertible into, or rights, warrants or options, conditional or otherwise, to acquire, any of the foregoing, payable or distributable to stockholders of record on a date prior to the transfer of the shares of Wyndham Common Stock purchased pursuant to the Offer to Choice or its nominee or transferee on Wyndham’s stock transfer records, then, subject to the conditions of the Offer above, (1) the Offer price and requestsother terms of the Offer may, in Choice’s sole discretion, be adjusted to reflect the amount of any such cash dividend or cash distribution and (2) the whole of any such non-cash dividend, distribution or issuance to be received by the tendering stockholders will (i) be received and held by the tendering stockholders for Notice of Guaranteed Delivery shouldChoice’s account and will be directedrequired to be promptly remitted and transferred by each tendering stockholder to the Exchange Agent addressed as follows:
By Registeredfor Choice’s account, accompanied by appropriate documentation of transfer, or Certified Mail; By Overnight Courier; or By Hand:
Marine Midland Bank
140 Broadway
Level A
New York, New York 10005-1180
Attention: Corporate Trust Services
(212) 658-5931
By Facsimile:
(212) 658-2292
Attention: Corporate Trust Services
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses(ii) at Choice’s direction, be exercised for Choice’s benefit, in which case the proceeds of soliciting tenderssuch exercise will promptly be remitted to Choice. Pending such remittance and subject to applicable law, Choice will be borneentitled to all rights and privileges as owner of any such non-cash dividend, distribution, issuance or proceeds and may withhold the entire Offer price or deduct from the Offer price the amount or value thereof, as determined by Choice in its sole discretion.
General. Except as otherwise disclosed herein, based upon an examination of publicly available filings with respect to Wyndham, Choice is not aware of any licenses or other regulatory permits which appear to be material to the business of Wyndham and which might be adversely affected by the Company.acquisition of Wyndham Common Stock by Choice pursuant to the Offer or the Second-Step Mergers or, except as otherwise described in this Exchange Offer, of any approval or other action by any governmental, administrative or regulatory agency or authority which would be required for the acquisition or ownership of Wyndham Common Stock by Choice pursuant to the Offer or the Second-Step Mergers. Should any such approval or other action be required, it is currently contemplated that such approval or action would be sought or taken. There can be no assurance that any such approval or action, if needed, would be obtained or, if obtained, that it will be obtained without substantial conditions or that adverse consequences might not result to Wyndham’s or Choice’s business or that certain parts of Wyndham’s or Choice’s business might not have to be disposed of in the event that such approvals were not obtained or such other actions were not taken, any of which could cause Choice to elect to terminate the Offer without the acceptance for exchange of Wyndham Common Stock thereunder. Choice’s obligation under the Offer to accept for exchange and issue Choice Common Stock is subject to certain conditions specified above.
Antitrust Clearance. The principal solicitationOffer is beingsubject to review by the FTC and the Department of Justice Antitrust Division (the “DOJ” and collectively with the FTC as the “Antitrust Agencies”). Under the HSR Act, the Offer may not be completed until certain information has been provided to the Antitrust Agencies and the applicable HSR Act waiting period has expired or been terminated.
93
On the date of this Exchange Offer, Choice filed the notification required for the consummation of the Proposed Combination by the HSR Act. While Choice believes the proposed transaction will receive necessary clearance under the HSR Act, Choice understands based on pre-filing communications with the FTC that the Proposed Combination will be subject to at least a nonpublic investigation by the FTC. Choice commenced discussions with the FTC on December 5, 2023 regarding the proposed transaction and commits to take all actions required to obtain the requisite regulatory approvals so long as such actions would not have a material adverse effect on the combined company.
The FTC or DOJ may extend the initial waiting period by issuing a Request for Additional Information and Documentary Material (a “Second Request”). In such an event, the statutory waiting period would extend until 30 days after Choice has substantially complied with the Second Request, unless it is earlier terminated by the applicable Antitrust Agency. Choice has and intends to continue to cooperate with the FTC, the DOJ and other applicable governmental and regulatory agencies.
The Antitrust Agencies frequently scrutinize the legality under the antitrust laws of transactions such as Choice’s acquisition of Wyndham Common Stock pursuant to the Offer. At any time before or after the consummation of any such transactions, one of the Antitrust Agencies could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the exchange of shares pursuant to the Offer or seeking divestiture of the Wyndham Common Stock so acquired, divestiture of certain of Choice’s or Wyndham’s businesses or assets, or placing restrictions on the conduct of the combined company’s business. States and private parties may also bring legal actions under the antitrust laws. There can be no assurance that a challenge to the Offer and/or the Second-Step Mergers on antitrust grounds will not be made, or if such a challenge is made, what the result will be. See the section of this Exchange Offer titled “The Offer—Conditions to the Offer” for certain conditions to the Offer, including conditions with respect to litigation and certain governmental actions.
The Offer and/or the Second-Step Mergers may also be subject to review by mail; however, additional solicitationantitrust authorities in jurisdictions outside the United States. Under some of these jurisdictions, the Offer and/or the Second-Step Mergers may not be consummated before a notification has been submitted to the relevant antitrust authority and/or certain consents, approvals, permits or authorizations have been obtained and/or the applicable waiting period has expired or has been terminated; in addition, there may be made by telegraph, telecopy, telephone orjurisdictions where the submission of a notification is only voluntary but advisable. Choice intends to make all necessary and advisable (at the sole discretion of Choice) notifications in person by officers and
regular employeesthese jurisdictions as soon as practicable. The consummation of the CompanyOffer and/or of the Second-Step Mergers is subject to the condition that the waiting period (or extension thereof) applicable to the Offer and the Second-Step Mergers under any applicable antitrust laws and regulations shall have expired or been earlier terminated, and any approvals or clearances, including those required by any international bodies, if applicable, and, in each case as determined by Choice to be required or advisable thereunder shall have been obtained.
Section 203 of the DGCL. The Offer is subject to the condition that the Wyndham Board shall have approved the Offer and the Second-Step Mergers under Section 203 of the DGCL, or Choice shall be satisfied, in its affiliates.
25
94
withdrawn prior to the Expiration Time a number of shares of Wyndham Common Stock that, together with the shares of Wyndham Common Stock then beneficially owned by Choice, would represent at least 85% of the voting stock of Wyndham outstanding on the Expiration Date (excluding shares of Wyndham Common Stock owned by certain employee stock plans and persons who are directors and also officers of Wyndham).
Section 203 of the DGCL would otherwise apply to the Second-Step Mergers or any other “business combination” (as defined in Section 203) involving Choice (and/or any of its subsidiaries) and Wyndham. Section 203 could make it more difficult and/or significantly delay Choice’s (and/or any of its subsidiaries’) ability to acquire all of the outstanding shares of Wyndham Common Stock. Section 203, in general, prevents an “interested stockholder” (generally, a stockholder and an affiliate or associate thereof owning 15% or more of a corporation’s outstanding voting stock) from engaging in a business combination (defined to include a merger or consolidation and certain other transactions) with a Delaware corporation for a period of three years following the time such stockholder became an interested stockholder unless (1) before the stockholder became an interested stockholder the corporation’s board of directors approved either the business combination or the transaction which resulted in such stockholder becoming an interested stockholder, (2) upon consummation of the transaction which resulted in such stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the corporation’s voting stock outstanding at the time the transaction commenced (excluding shares of stock owned by certain employee stock plans and persons who are directors and also officers of the corporation) or (3) at or after the time the stockholder became an interested stockholder the business combination was approved by the corporation’s board of directors and authorized at an annual or special meeting of stockholders (and not by written consent) by the affirmative vote of at least 66 2/3% of the outstanding voting stock of the corporation not owned by the interested stockholder.
The Companyprovisions of Section 203 of the DGCL do not apply to a Delaware corporation if, among other things, (1) such corporation amends its certificate of incorporation or bylaws to elect not to be governed by Section 203 (which, as of the date of this Exchange Offer, Wyndham has not) and such amendment is approved by (in addition to any other required vote) the affirmative vote of a majority of the shares of common stock of such corporation entitled to vote; provided that such amendment would not retainedbe effective until 12 months after its adoption and would not apply to any dealer-managerbusiness combination between such corporation and any person who became an interested stockholder on or prior to the date of such adoption, (2) such corporation does not have a class of voting stock that is listed on a national securities exchange, or held of record by more than 2,000 stockholders, unless any of the foregoing results from action taken, directly or indirectly, by an interested stockholder or from a transaction in which a person becomes an interested stockholder, or (3) certain business combinations are proposed prior to the consummation or abandonment of, and subsequent to the earlier of the public announcement or the notice required under Section 203 of, any one of certain proposed transactions which (i) is with or by a person who was not an interested stockholder during the previous three years or who became an interested stockholder with the approval of the corporation’s board of directors and (ii) is approved or not opposed by a majority of the board of directors then in office who were directors prior to any person becoming an interested stockholder during the previous three years or were recommended for election to succeed such directors by a majority of such directors. The description of Section 203 above is qualified in its entirety by reference to such section, a copy of which is attached to this Exchange Offer as Annex B.
95
State Takeover Laws. A number of states have adopted laws and regulations applicable to offers to acquire securities of corporations which are incorporated in such states and/or which have substantial assets, stockholders, principal executive offices or principal places of business therein. In Edgar v. MITE Corporation, the Supreme Court of the United States held that the Illinois Business Takeover Statute, which made the takeover of certain corporations more difficult, imposed a substantial burden on interstate commerce and was therefore unconstitutional. In CTS Corporation v. Dynamics Corporation of America, the Supreme Court held that as a matter of corporate law, and in particular, those laws concerning corporate governance, a state may constitutionally disqualify an acquirer of “control shares” (ones representing ownership in excess of certain voting power thresholds, e.g., 20%, 33% or 50%) of a corporation incorporated in its state and meeting certain other jurisdictional requirements from exercising voting power with respect to those shares without the approval of a majority of the disinterested stockholders.
We do not believe that any state takeover laws (other than Section 203 of the DGCL) purport to apply to the Offer or the Second-Step Mergers. We have not currently complied with any state takeover statute or regulation. We reserve the right to challenge the applicability or validity of any state law purportedly applicable to the Offer or the Second-Step Mergers and nothing in this Exchange Offer or any action taken in connection with the Offer or the Second-Step Mergers is intended as a waiver of such right. If it is asserted that any state takeover statute is applicable to the Offer or the Second-Step Mergers and if an appropriate court does not determine that it is inapplicable or invalid as applied to the Offer or the Second-Step Mergers, we might be required to file certain information with, or to receive approvals from, the relevant state authorities, we might be unable to accept for payment or pay for Wyndham Common Stock tendered pursuant to the Offer, or be delayed in consummating the Offer or the Second-Step Mergers. In such case, we may not be obliged to accept for payment or pay for any shares of Wyndham Common Stock tendered pursuant to the Offer.
In addition to the approvals and clearances described in the Competition Laws Condition, the Offer and the Second-Step Mergers may also be subject to review by government authorities and other regulatory agencies, including in jurisdictions outside the United States. Choice intends to file promptly all notifications that it determines are necessary or advisable under the applicable laws, rules and regulations of the respective identified authorities, agencies and jurisdictions for the consummation of the Offer and/or the Second-Step Mergers and to file all post-completion notifications that it determines are necessary or advisable as soon as possible after completion has taken place.
96
Financing of the Offer; Sources and Amount of Funds
Choice estimates that the total amount of cash required to complete the transactions contemplated by the Offer and the Second-Step Mergers will be approximately $6.0 billion (excluding the Additional Consideration, if any, transaction fees and expenses, such as fees associated with new borrowings and/or issuances of debt securities in connection with the Offer and Second-Step Mergers, and excluding litigation expenses and any cash and cash equivalents from Wyndham). The estimated amount of cash required is based on Choice’s due diligence review of Wyndham’s publicly available information to date and is subject to change. For a further discussion of the risks relating to Choice’s limited due diligence review, see the section of this Exchange Offer titled “Risk Factors—Risk Factors Relating to the Offer and the Second-Step Mergers.”
Choice expects to have sufficient cash resources available to complete the transactions contemplated by the Exchange Offer and the Second-Step Mergers. In addition to cash on hand, Choice currently intends to borrow or otherwise finance, including, as necessary, via a registered underwritten offering and/or private placement of equity or equity-linked securities, up to $6.0 billion to complete the acquisition of Wyndham, repay Wyndham’s indebtedness, if required, and pay related transaction expenses. Choice is highly confident in its ability to obtain fully committed financing based on indications from two separate bulge bracket global banks for such amounts; however, Choice has not negotiated the terms of, or entered into, any such financing agreement and Choice cannot provide any assurances that such financing will be available when and as needed or on terms that Choice believes to be commercially reasonable.
As of September 30, 2023, Choice had approximately $36,432,000 of cash and cash equivalents on hand (as reported in the Latest Choice 10-Q). For a further discussion of the risks relating to Choice’s debt obligations, see the section of this Exchange Offer titled “Risk Factors—Risk Factors Relating to Choice Following the Offer.”
Certain Relationships with Wyndham and Interest of Choice and Choice’s Executive Officers and Directors in the Offer
Except as set forth in this Exchange Offer, neither we nor, to the best of our knowledge, any of our directors, executive officers or other affiliates or any of the other persons set forth in Schedule I has any contract, arrangement, understanding or relationship with any other person with respect to any securities of Wyndham, including, but not makelimited to, any paymentscontract, arrangement, understanding or relationship concerning the transfer or the voting of any securities, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss or the giving or withholding of proxies. Except as otherwise described in this Exchange Offer, there have been no contacts, negotiations or transactions during the past two years, between us or, to brokers, dealers,the best of our knowledge, any of the persons listed on Schedule I to this Exchange Offer, on the one hand, and Wyndham or others
soliciting acceptancesits affiliates, on the other hand, concerning a merger, consolidation or acquisition, an exchange offer or other acquisition of securities, an election of directors, or a sale or other transfer of a material amount of assets.
As of the date of the Offer, Choice directly owns 1,447,264 shares of Wyndham Common Stock and for purposes of the Exchange Act beneficially owns 1,447,264 shares of Wyndham Common Stock, representing less than 1.7% of the outstanding shares of Wyndham Common Stock. Choice has purchased 1,447,264 shares of Wyndham Common Stock within the past 60 days.
97
As of the date of the Offer, Choice owns, personally and/or through entities directly or indirectly controlled by public shareholders, 1,447,264 shares of Wyndham Common Stock, representing approximately 1.7% of the outstanding shares of Wyndham Common Stock.
The name, citizenship, business address, business telephone number, principal occupation or employment, and five-year employment history for each of the directors and executive officers of Choice and certain other information are set forth in Schedule I to this Exchange Offer. Except as described in this Exchange Offer and in Schedule I hereto, none of Choice or, after due inquiry and to the best knowledge and belief of Choice, any of the persons listed on Schedule I to this Exchange Offer, has during the last five years (1) been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (2) been a party to any judicial or administrative proceeding (except for matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws or finding any violation of such laws. Except as set forth in this Exchange Offer, to Choice’s knowledge, after reasonable inquiry, none of the persons listed on Schedule I to this Exchange Offer, nor any of their respective associates or majority-owned subsidiaries, beneficially owns or has the right to acquire any securities of Wyndham or has effected any transaction in securities of Wyndham during the past 60 days.
We do not believe that the Offer and the Second-Step Mergers will result in a change in control under any of Choice’s equity plans. As a result, no stock options or other outstanding equity awards held by executive officers of Choice or members of the Choice Board will vest as a result of the Offer and the Second-Step Mergers. The Offer and the Second-Step Mergers may result in a change in control under the severance benefit agreements between Choice and certain of its executive officers and under Choice’s severance benefit plan in which certain of its executive officers who do not have an employment or severance benefit agreement are participants. Pursuant to such severance benefit agreements and plan, certain executive officers of Choice (including the persons listed on Schedule I to this Exchange Offer) may be entitled to enhanced severance payments if such executive officer’s employment is terminated by Choice under certain circumstances or by the executive officer because of certain adverse changes, in each case, within a fixed time period following the Offer and the Second-Step Mergers.
Information Agent
Choice has retained MacKenzie Partners Inc. (the “Information Agent”) in connection with the Offer. The Company,Information Agent may contact holders of shares of Wyndham Common Stock by mail, telephone, facsimile, the Internet, email, newspapers and other publications of general distribution and in person and may request brokers, dealers, commercial banks, trust companies and other nominees to forward materials relating to the Offer to beneficial owners of shares of Wyndham Common Stock. Choice will pay the Information Agent a customary fee for these services and the solicitation and advisory services described below, in addition to the Information Agent’s reasonable, customary and documented out-of-pocket expenses. Choice agreed to indemnify the Information Agent against certain liabilities and expenses in connection with the Offer.
98
Choice has also retained the Information Agent for solicitation and advisory services in connection with certain solicitations described in this Exchange Offer, for which the Information Agent will receive a reasonable and customary fee. Choice has also agreed to reimburse the Information Agent for certain out-of-pocket expenses and to indemnify the Information Agent against certain liabilities and expenses, including reasonable legal fees and related charges.
Lenders
As discussed above, Choice expects to have sufficient cash resources available to complete the transactions contemplated by the Exchange Offer and the Second-Step Mergers. In addition to cash on hand, Choice currently intends to borrow or otherwise finance up to approximately $6.0 billion to complete the acquisition of Wyndham, repay Wyndham’s indebtedness, if required, and pay related transaction expenses. Choice is highly confident in its ability to obtain fully committed financing based on indications from two separate bulge bracket global banks for such amounts; however, Choice has not negotiated the terms of, or entered into, any such financing agreement and Choice cannot provide any assurances that such financing will be available when and as needed or on terms that Choice believes to be commercially reasonable. In the event such debt financing is received, Choice will pay such lenders certain fees relating to such debt financing.
Exchange Agent
In addition, Choice has retained Computershare as the Exchange Agent in connection with the Offer. Choice will pay the Exchange Agent reasonable and customary feescompensation for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer, will be paid by the Company. Such expenses include fees and expenses ofreimburse the Exchange Agent for its reasonable out-of-pocket expenses and Trustee, accountingwill indemnify the Exchange Agent against certain liabilities and legalexpenses.
Dealer Managers
Choice has retained GS and Moelis to act as joint dealer managers in connection with the Offer and will pay the dealer managers a customary fee as compensation for their services. Choice has also agreed to reimburse the dealer managers for certain expenses. The obligations of the dealer managers to perform this function are subject to certain conditions. Choice has agreed to indemnify the dealer managers against certain liabilities, including liabilities under the federal securities laws. Questions about the terms of the Offer may be directed to the dealer managers at their address and telephone number set forth on the back cover page of this Exchange Offer.
The dealer managers and its affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. The dealer managers and their respective affiliates have provided, and may in the future provide, a variety of these services to us and to persons and entities with relationships with us, for which they have received or will receive customary fees and printing costs,
among others.
ACCOUNTING TREATMENTexpenses.
99
In the ordinary course of their various business activities, the dealer managers and their respective affiliates, officers, directors and employees may purchase, sell or hold a broad array of investments and actively trade securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts of their respective customers, and such investment and trading activities may involve or relate to assets, securities and/or instruments of Choice or Wyndham (in either case directly, as collateral securing other obligations or otherwise) and/or persons and entities with relationships with Choice or Wyndham. The Exchange Notesdealer managers and their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments.
Except as set forth above, Choice will not pay any fees or commissions to any broker, dealer or other person for soliciting tenders of shares pursuant to the Offer. Choice will reimburse brokers, dealers, commercial banks and trust companies and other nominees, upon request, for customary clerical and mailing expenses incurred by them in forwarding offering materials to their customers.
The Proposed Combination with Wyndham would be accounted for under the acquisition method of accounting under U.S. generally accepted accounting principles, with Choice being the accounting acquirer, which means that Wyndham’s results of operations will be included with Choice’s results of operations from the date of completion of Offer and Second-Step Mergers and Wyndham’s consolidated assets and liabilities will be recorded at their fair values at the same carrying value asdate.
100
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The Offer to Exchange is being made by Choice through Purchaser, directly to Wyndham’s stockholders. In accordance with this Offer to Exchange, each outstanding share of Wyndham Common Stock would be exchanged for the Original Notes, which is face value, net of original issue discount, as
reflected inStandard Election Consideration, the Company's accounting records onCash Election Consideration or the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company. The expenses of the Exchange Offer will be expensed over the term of
the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Original Notes who do not exchange their Original Notes for
Exchange Notes pursuant to the Exchange Offer will continue to beStock Election Consideration, subject to the restrictionselection and proration procedures described in this Offer to Exchange, plus the Additional Consideration, if any.
In light of Wyndham’s recent unwillingness to discuss the proposal for a negotiated business combination with Choice, and the Wyndham board of director’s public statements with respect to Choice’s prior proposals, Choice is making the Offer to Exchange directly to Wyndham stockholders upon the terms and subject to the conditions set forth in this Offer to Exchange as an alternative to a negotiated transaction only due to the fact that Wyndham refuses to discuss the proposal with Choice.
In connection with the Proposed Combination, Choice expects to have sufficient cash resources available to complete the transactions contemplated by the Offer to Exchange and the Second-Step Mergers. In addition to cash on transferhand, Choice currently intends to borrow or otherwise finance up to approximately $6 billion to complete the Proposed Combination, repay a portion of Wyndham’s indebtedness and pay related transaction expenses. Choice is highly confident in its ability to obtain fully committed financing based on indications from two separate bulge bracket global banks for such amounts; however, Choice has not negotiated the terms of, or entered into, any such financing agreement and Choice cannot provide any assurances that such financing will be available when and as needed or on terms that Choice believes to be commercially reasonable.
At this time, no merger agreement relating to the Proposed Combination has been entered into between Choice and Wyndham, and Choice can provide no assurance as to whether or when any such agreement may be executed or when the Proposed Combination will be consummated, nor can it provide assurance on the terms of such Original Notesan agreement if or when executed. Accordingly, the terms of any agreement with respect to the Proposed Combination may be different than those reflected within these unaudited pro forma condensed combined financial statements, which are based on the terms as set forth within this Offer to Exchange, and that difference could be material.
As discussed in Note 1, Choice is not affiliated with Wyndham and has not had the cooperation of Wyndham’s management or due diligence access to Wyndham or its business or management in the legend
thereon. In general,preparation of the Original Notes mayunaudited pro forma condensed combined financial information contained herein. Choice has not be offered or sold, unless
registered under the Securities Act, except pursuant to an exemptionreceived information from or
in a transaction not subjectWyndham concerning its business and financial condition for any purpose, including preparing these unaudited pro forma condensed combined financial statements. Accordingly, these unaudited pro forma condensed combined financial statements have been prepared by Choice based solely on publicly available information, including Wyndham’s financial statements, analyst reports and investor presentations.
The selected unaudited pro forma condensed combined financial information was prepared by Choice and gives effect to the Securities Act and applicable state
securities laws. The Company does not intend to register the Original Notes
under the Securities Act.
FEDERAL INCOME TAX CONSEQUENCES
The exchange of Original Notes for Exchange Notes by holders will not be a
taxable exchange for federal income tax purposes, and holders should not
recognize any taxable gain or loss or any interest income as a result of such
exchange.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Original Notes are urged
to consult their financial and tax advisors in making their own decisions on
what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Original Notes pursuant to the terms of this Exchange Offer,
the Company will have fulfilled a covenant contained in the terms of the
Original NotesProposed Combination and the Registration Agreement. Holders ofrelated financing (together, the Original Notes
who do not tender their certificates in“Transaction”).
The unaudited pro forma condensed combined financial information contained herein sets forth the Exchange Offer will continue to
hold such certificates and will be entitled to all the rights, and limitations
applicable thereto, under the Indenture, except for any such rights under the
Registration Agreement which by their terms terminate or cease to have further
effect as a result of the making of this Exchange Offer. See "Description of
Exchange Notes." All untendered Original Notes will continue to be subject to
the restriction on transfer set forth in the Indenture. To the extent that
Original Notes are tendered and accepted in the Exchange Offer, the trading
market, if any, for the Original Notes could be adversely affected. See "Risk
Factors--Consequences of Failure to Exchange."
following:
The Company may in the future seek to acquire untendered Original Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plan to acquire any Original
Notes which are not tendered in the Exchange Offer.
26
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial datainformation of the CompanyChoice, as of and for the six-months periodnine months ended JuneSeptember 30, 19982023 (unaudited), derived from Choice’s unaudited consolidated financial statements; and 1997,for the seven-month periodsyear ended December 31, 1997 and 1996 and the five
fiscal years ended May 31, 1997, 1996, 1995, 1994 and 1993. During September
1997, the Company changed its fiscal year2022, derived from a May 31 year-end to a December
31 year-end.
The selected historicalChoice’s audited consolidated financial datastatements;
The historical financial information of Wyndham, adjusted to reflect certain reclassifications to conform the financial statement presentation with that of Choice, as of and for the sevennine months ended September 30, 2023 (unaudited), derived from Wyndham’s unaudited condensed consolidated financial statements; and for the year ended December 31, 1997 and the four fiscal years ended May 31, 1997,
1996, 1995 and 1994 (with respect to income statement data only) are2022, derived from theWyndham’s audited consolidated financial statements;
Pro forma adjustments to give effect to the Transaction on the unaudited pro forma condensed combined balance sheet as of September 30, 2023, as if the Transaction closed on September 30, 2023; and
Pro forma adjustments to give effect to the Transaction on the unaudited pro forma condensed combined statements of the Company. The
selected historical consolidated financial dataincome for the six-month periods
ended June 30, 1998 and 1997, the seven-month periodyear ended December 31, 19962022, and the fiscal yearnine months ended May 31, 1993 and the selected historical
consolidated balance sheet data and certain other data as of May 31, 1994 are
derived from the Company's unaudited consolidated financial statements which,
in the opinion of management, include all material adjustments necessary at
such dates and for such periods. The selected historical consolidated
financial data presented herein for all periods are presentedSeptember 30, 2023, as if the Company were a separate entity. See the "Basis of Presentation" note to the
Company's Consolidated Financial Statements. The Company's historical net
income and cash flows as a wholly-owned subsidiary of Manor Care or Former
Choice (all periods prior to October 15, 1997) are not necessarily indicative
of the net income and cash flows the Company might have realized as an
independent entity. The data set forth belowTransaction closed January 1, 2022.
This unaudited pro forma condensed combined financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's Consolidated Financial Statementswith:
Choice’s audited consolidated financial statements and related notes thereto, contained elsewhere herein.
27
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
SIX-MONTH SIX-MONTH
PERIOD ENDED PERIOD ENDED SEVEN-MONTH PERIOD
JUNE 30, JUNE 30, ENDED DECEMBER 31, YEAR ENDED MAY 31,
------------ ------------ ------------------------- -------------------------------------------
1998 1997 1997 1996 1997 1996 1995 1994(1)
------------ ------------ --------- ----------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
STATEMENT OF INCOME
DATA:
Revenues(13)...... $ 77,606 $81,688 $ 107,839 $99,978 $168,039 $151,748 $129,027 $112,829
Operating
expenses(13)..... 39,955 49,178 55,665 54,511 97,677 117,365(2) 87,061 84,706
-------- ------- --------- ------- -------- -------- -------- --------
Operating income.. 37,651 32,510 52,174 45,467 70,362 34,383 41,966 28,123
-------- ------- --------- ------- -------- -------- -------- --------
Interest on notes
payable to Manor
Care............. -- -- -- -- 7,083 7,083 7,083 7,083
Minority interest
expense.......... -- -- -- -- -- 1,532 2,200 1,476
Interest and
other, net....... 1,433(12) 5,008 5,791(3) 5,784 3,704(4) 4,791 3,672 3,591
-------- ------- --------- ------- -------- -------- -------- --------
Total other
expenses....... 1,433 5,008 5,791 5,784 10,787 13,406 12,955 12,150
-------- ------- --------- ------- -------- -------- -------- --------
Income before
income taxes...... 36,218 27,502 46,383 39,683 59,575 20,977 29,011 15,973
Income taxes....... (15,085) (11,455) (19,096) (16,338) (24,845) (9,313) (12,783) (7,372)
-------- ------- --------- ------- -------- -------- -------- --------
Net income......... $ 21,133 $16,047 $ 27,287 $23,345 $ 34,730 $ 11,664 $ 16,228 $ 8,601
-------- ------- --------- ------- -------- -------- -------- --------
Basic earnings per
share(5).......... $ 0.36 $ 0.26 $ 0.46 $ 0.37 $ 0.55 $ 0.19 $ 0.26 $ 0.14
======== ======= ========= ======= ======== ======== ======== ========
Diluted earnings
per share......... $ 0.35 $ 0.26 $ 0.45 $ 0.37 $ 0.55 $ 0.19 $ 0.26 $ 0.14
======== ======= ========= ======= ======== ======== ======== ========
OTHER DATA:
EBITDA
(unaudited)(6)(14).. $ 51,551 $38,972 $ 61,330 $51,514 $ 81,743 $ 69,450(7) $ 51,534 $ 37,472
Cash flows from
operating
activities....... 17,054 29,816 33,607 25,153 45,505 32,742 37,851 N/A
Cash flows from
investing
activities....... (8,700) (6,515) (149,739) (7,523) (16,928) (78,499) (7,733) N/A
Cash flows from
financing
activities....... (12,271) (22,820) 122,247 (17,442) (28,222) 48,513 (31,261) N/A
Ratio of earnings
to fixed charges
(unaudited)(8) .. 4.59x 5.99x 5.69x 7.05x 5.56x 2.42x 3.03x 2.18x
Number of
franchised
properties
(unaudited)...... 3,567 3,397 3,484 3,220 3,344 3,052 2,835 2,713
Number of rooms
(unaudited)...... 297,396 287,444 292,733 272,819 283,034 261,456 245,669 239,744
Average royalty
rate
(unaudited)(9)... 3.50% 3.40% 3.51% 3.43% 3.43% 3.34% 3.20% 3.10%
BALANCE SHEET DATA
(AT PERIOD END):
Working capital
(unaudited)...... $ 8,384 -- $ 5,397 $ 500 $ (416) $ (3,927) $(29,423) N/A
Total assets...... 408,344(10) -- 386,395(10) 217,870 221,473 212,803 189,087 $173,646
Total debt(11).... 293,719 -- 282,821 133,700 125,163 145,315 128,205 126,294
Total
liabilities...... 351,157 -- 337,137 168,700 164,280 182,271 201,786 169,237
Total investments
and advances from
(to) Parent...... -- -- -- 49,170 57,193 30,532 (12,699) 4,409
Total
shareholders'
equity........... 57,187 -- 49,258 -- -- -- -- --
1993
-----------
(UNAUDITED)
STATEMENT OF INCOME
DATA:
Revenues(13)...... $ 80,545
Operating
expenses(13)..... 57,490
-----------
Operating income.. 23,055
-----------
Interest on notes
payable to Manor
Care............. 7,083
Minority interest
expense.......... 900
Interest and
other, net....... 145
-----------
Total other
expenses....... 8,128
-----------
Income before
income taxes...... 14,927
Income taxes....... (6,422)
-----------
Net income......... $ 8,505
-----------
Basic earnings per
share(5).......... $ 0.15
===========
Diluted earnings
per share......... $ 0.15
===========
OTHER DATA:
EBITDA
(unaudited)(6)(14).. $ 31,337
Cash flows from
operating
activities....... N/A
Cash flows from
investing
activities....... N/A
Cash flows from
financing
activities....... N/A
Ratio of earnings
to fixed charges
(unaudited)(8) .. 2.58x
Number of
franchised
properties
(unaudited)...... 2,381
Number of rooms
(unaudited)...... 216,990
Average royalty
rate
(unaudited)(9)... N/A
BALANCE SHEET DATA
(AT PERIOD END):
Working capital
(unaudited)...... N/A
Total assets...... $170,815
Total debt(11).... 122,909
Total
liabilities...... 144,982
Total investments
and advances from
(to) Parent...... 25,833
Total
shareholders'
equity........... --
- -------
(1) The selected historical consolidated income statement data for the fiscal
year ended MayDecember 31, 1994 are derived from2022, included in Choice’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (“SEC”) on March 1, 2023;
101
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Choice’s unaudited consolidated financial statements and related notes thereto, as of and for the nine months ended September 30, 2023, included in Choice’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, as filed with the SEC on November 7, 2023; and
Wyndham’s audited consolidated financial statements ofand related notes thereto, for the Company. The selected historical consolidated
balance sheet datayear ended December 31, 2022, and certain other data as of May 31, 1994 are derived
from unaudited condensed consolidated financial statements of the Company.
(2) Fiscal year 1996 operating expenses include a non-cash, pre-tax charge of
$24.8 million for impairment of certain long-lived assets associated with
the Company's European operations.
(3) Includes interest expense and other for the seven-month period ended
December 31, 1997related notes thereto, as of $8.79 million offset by approximately $2.4 million
of accrued interest income on the Term Note (see note 10 below) and
approximately $550,000 in dividend income from the Company's investment
in Friendly Hotels, PLC ("Friendly").
28
(4)Includes interest expense and other for fiscal year 1997 of approximately
$4.65 million offset by approximately $943,000 in dividend income from the
Company's investment in Friendly.
(5) Basic earnings per share have been calculated for fiscal years 1993,
1994, 1995 and 1996 based on the weighted average shares outstanding of
the Company's former parent Manor Care of 57,316,000, 60,524,000,
62,480,000 and 62,628,000, respectively, and for fiscal year 1997 based
on the weighted average shares outstanding of the Company's former parent
Former Choice of 62,680,000. Basic earnings per share have been
calculated for the six-month period ended June 30, 1998 based on the
weighted average shares outstanding from January 1, 1998 through June 30,
1998, for the seven-month period ended December 31, 1996 based on the
weighted average shares outstanding of Manor Care from June 1, 1996
through November 1, 1996 and of Former Choice from November 2, 1996
through December 31, 1996 of 63,063,146 and for the seven-month periodnine months ended December 31, 1997 based on the weighted average shares outstanding
of Former Choice from June 1, 1997 through October 15, 1997 andSeptember 30, 2023, which are incorporated by reference into this Offer to Exchange.
The unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11, Pro Forma Financial Information (“Article 11”) under Regulation S-X of the Company from October 16, 1997 through December 31, 1997 of 59,798,000.
(6) EBITDA consistsExchange Act, giving effect to the application of the sumacquisition method of accounting, as promulgated by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”), and the related financing necessary to effectuate the Transaction. ASC 805 requires, among other things, that under the acquisition method of accounting, the acquired assets and assumed liabilities be recognized at their acquisition-date fair value, using the fair value concepts as defined in ASC Topic 820, Fair Value Measurement (“ASC 820”).
The unaudited pro forma condensed combined financial statements are prepared with Choice treated as the assumed accounting acquirer. In determining the acquirer for accounting purposes, Choice considered the five factors identified in ASC 805-10-55-12. Additionally, the accounting for the acquisition of Wyndham is dependent upon certain valuations that are provisional and are subject to change. Because Wyndham has not permitted us to conduct any due diligence, and we are limited in our understanding based only on what is publicly available, we have not performed the detailed valuation analyses necessary to arrive at the final estimates of the fair market value of the Wyndham assets to be acquired and liabilities to be assumed and the related allocations of purchase price. However, as indicated in the notes to the unaudited pro forma condensed combined financial statements, Choice has made certain adjustments to the historical book values of the assets and liabilities of Wyndham to reflect preliminary estimates of the fair value of intangible assets acquired with the residual excess of the purchase price over the historical net income, interest expense, income taxes,
depreciation and amortization and non-cash asset writedowns. EBITDAassets of Wyndham recorded as goodwill. Actual adjustments will differ from those reflected in the unaudited pro forma condensed combined financial statements once Choice is presented because such data is used by certain investorsable to determine the Company's ability to meet debt service obligations, fund capital
expendituresfinal purchase price for Wyndham and expand its business. The Company considers EBITDA to be
an indicative measure of operating performance particularly due to the
large amount of goodwill and franchise rights amortization. Such
information should not be considered an alternative to net income,
operating income, cash flow from operations or any other operating or
liquidity performance measure prescribed by GAAP. Cash expenditures
(including nondiscretionary expenditures) for various long-term assets,
interest expense and income taxes have been, and will be, incurred which
are not reflected in the EBITDA presentation and therefore EBITDA does
not represent funds available for management's discretionary use. EBITDA
presented by the Company may not be comparable to EBITDA defined and
presented by other companies.
(7) Fiscal year 1996 EBITDA excludes a non-cash, pre-tax charge of $24.8
million for impairment of certain long-lived assets associated with the
Company's European operations.
(8) Earnings used in computing the ratio of earnings to fixed charges consist
of income before income taxes and fixed charges. Fixed charges consist of
interest expense and the amortization of deferred financing fees and that
portion of rental expense representative of interest.
(9) Represents domestic royalty fees as a percentage of aggregate gross room
revenues of all domestic Choice Brand franchised hotels.
(10) Includes the Term Note in an aggregate principal amount of $115.0 million
plus accrued interest thereon as of December 31, 1997 and June 30, 1998
of $2.4 million and 4.9 million, respectively and a receivable from
Sunburst as of December 31, 1997 and June 30, 1998 of $25.1 million and
$19.9 million, respectively. See "Risk Factors--Significant Receivables
from Sunburst."
(11) Includes a note payable to Manor Care in the amount of $78.7 million, as
of December 31, 1996 and as of May 31, 1997, 1996, 1995, 1994 and 1993.
(12) Includes interest expense and other for the six-month period ended
June 30, 1998 of $9.6 million offset by approximately $4.9 million of
accrued interest income on the Term Note (see note 10 above),
approximately $1.0 million in dividend income from the Company's
investment in Friendly Hotels PLC ("Friendly") and approximately
$2.2 million of gain recognized from the sale of certain investments.
(13) During the second quarter of 1998, the Company changed its presentation
of marketing and reservation fees such that the fees collected and
associated expenses are reported on a net basis. All periods have been
restated to conform to this presentation.
(14) Depreciation and amortization related to the marketing and reservation
funds included in EBITDA was $2.2 million for the six month period ended
June 30, 1998, $1.2 million for the six months ended June 30, 1997, $2.2
million for the seven-month period ended December 31, 1997 and $2.8
million, $2.7 million and $2.1 million for the fiscal years ended May 31,
1997, May 31, 1996 and May 31, 1995, respectively.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company is the world's second largest franchisor of hotel properties
with 3,567 franchised properties open and 870 franchised properties under
development at June 30, 1998, representing 297,396 rooms open and 76,523 rooms
under development in 33 countries. The Company franchises lodging properties
under the Choice Brands: Comfort, Quality, Clarion, Sleep, Rodeway, Econo
Lodge and MainStay. The Company has over 2,100 franchisees in its domestic
franchise system, the largest of which, Sunburst, accounted for approximately
5% of the Company's royalty fees for the six months ended June 30, 1998. The
Company franchises hotels in all 50 states and the District of Columbia and 32
additional countries, with 94% of its franchising revenue generated from
hotels franchised in the United States. Accordingly, management's discussion
of its franchise operating results focuses on the performance of the domestic
system.
The principal factors that affect the Company's operating results are: (i)
growth in the number of hotels under franchise, (ii) occupancy and room rates
achieved by the hotels under franchise, (iii) the number and relative mix of
franchised hotels and (iv) the Company's ability to manage costs. The number
of rooms at franchised properties and occupancy and room rates at those
properties significantly affect the Company's results because franchise
royalty fees are based upon room revenues at franchised hotels. The variable
overhead costs associated with franchise system growth are substantially less
than incremental royalty fees generated from new franchisees, therefore the
Company is able to capture a significant portion of those royalty fees as
operating income.
During September 1997, the Company changed its fiscal year from a May 31
year-end to a December 31 year-end. Accordingly, the following discussion
includes a discussion of the unaudited results of the six months ended June
30, 1998 as compared to unaudited results from the comparable six month period
in 1997 as well as the audited results of the seven months ended December 31,
1997, as compared to unaudited results from the comparable seven-month period
in 1996.
Comparison of Six Month Period Ended June 30, 1998 Operating Results and Six
Month Period Ended June 30, 1997 Operating Results
The Company reported net income of $21.1 million, or $0.35 per diluted
share, for the six months ended June 30, 1998, compared to net income for the
same period of 1997 of $16.0 million, or $0.26 per diluted share. The $0.35
per share includes approximately $0.02 resulting from a sale of certain
investments held by the Company. Exclusive of this gain, diluted earnings per
share increased 26.9% to $0.33 per share from $0.26 per share. The increase in
net income for the period is primarily attributable to an increase in
franchise revenue as a direct result of the addition of new licensees to the
franchise system, improvements in the operating performance of franchised
hotels and the control of the Company's selling, general and administrative
costs.
30
Franchise Revenues
In operating the franchise business, the Company collects marketing and
reservation fees and assessments from its franchisees. The Company is
contractually obligated to disburse these fees for marketing and reservation
activities to be provided on behalf of its franchisees. Management, therefore,
analyzes its franchise business based on revenues net of marketing and
reservation fees ("net franchise revenue") and franchise operating expenses
which are reflected as selling, general and administrative expenses.
Net franchise revenues include royalty fees, initial franchise fees and
relicensing fees earned on contracts signed and other revenues, including
partner service revenue. Net franchise revenues are dependent upon growth in
the number of franchised properties as well as the underlying performance of
franchised hotels for continued growth. The key industry standard for
measuring hotel operating performance is revenue per available room
("RevPAR"), which is calculated by multiplying the percentage of occupied
rooms by the average daily room rate realized.
The Company's net franchise revenues were $64.1 million for the six months
ended June 30, 1998 and $61.2 million for the six months ended June 30, 1997.
Total net franchise revenues are computed as follows:
JUNE 30, JUNE 30,
1998 1997
-------- --------
(IN MILLIONS)
Total franchise revenues...................................... $ 76.5 $ 73.1
Product sales................................................. (12.4) (11.9)
------ ------
Total net franchise revenues.................................. $ 64.1 $ 61.2
====== ======
Royalties increased $5.0 million to $50.1 million in 1998 from $45.1 million
in 1997, an increase of 11.1%. The increase in royalties is attributable to a
net increase of 157 franchisees during the period representing an additional
12,077 rooms added to the system, an improvement in domestic RevPAR of 1.4%
and an increase in the effective royalty rate of the domestic hotel system to
3.50% from 3.40%. Also, foreign fees increased $1.6 million for the six months
ended June 30, 1998 from the six months ended June 30, 1997. Initial fee and
relicensing fee revenue generated from domestic franchise contracts signed
decreased to $7.6 million from $8.8 million in 1997. However, total franchise
agreements signed in the six months ended June 30, 1998 were 368, as compared
to 324 for the six months ended June 30, 1997. The decline in initial and
relicensing fee revenue is attributable to certain incentives offered related
to the Company's Sleep Inn brand. The total number of hotels open and under
development increased to 4,437 from 4,191, an increase of 5.9% for the period
ending June 30, 1998. This represents an increase in the number of rooms open
and under development of 4.6% from 357,451 as of June 30, 1997 to 373,919 as
of June 30, 1998.
Franchise Expenses
Selling, general and administrative expenses declined approximately $1
million between years. As a percentage of total net franchising revenues,
total franchising selling, general and administrative expenses declined to
36.9% for the six months ended June 30, 1998 as compared to 40.4% for 1997.
The improvement in the franchising margins relates to the economies of scale
generated from operating a larger franchisee base, cost control initiatives
and improvements in franchised hotel performance.
Product Sales
Sales made to franchisees through the Company's group purchasing program
increased $500,000 (or 4.2%) to $12.4 million for the six months ended June
30, 1998 from $11.9 million at June 30, 1997. The group purchasing program
utilizes bulk purchases to obtain favorable pricing from third party vendors
for franchisees ordering similar products. The Company acts as a "clearing-
house" between the franchisee and the vendor, and orders are shipped directly
to the franchisee.
31
Similarly, product cost of sales increased approximately $300,000 (or 2.7%)
for the six months ended June 30, 1998. The product services margins increased
for the six months ended June 30, 1998 to 6.2% from 4.7% at June 30, 1997.
This purchasing program is provided to the franchisees as a service and is not
expected to be a major component of the Company's profitability.
Other
For the six months ended June 30, 1998, the Company recognized approximately
$1.0 million in dividend income from its investment in Friendly and
approximately $4.9 million of interest income from its subordinated term note
to Sunburst Hospitality, Inc. For the six months ended June 30, 1998, the
Company recognized a gain of approximately $2.2 million from the sale of
certain investments.
Comparison of Seven-Month Period Ended December 31, 1997 Operating Results
and Seven-Month Period Ended December 31, 1996 Operating Results
The Company recorded net income of $27.3 million for the seven-month period
ended December 31, 1997 ("December 1997"), an increase of $4.0 million,
compared to net income of $23.3 million for the seven-month period ended
December 31, 1996 ("December 1996"). The increase in net income for December
1997 was primarily attributable to an increase in royalty fee revenue as a
direct result of the addition of new franchisees to the system and
improvements in the operating performance of franchised hotels.
Summarized financial results for December 1997 and December 1996 are as
follows:
SEVEN MONTHS ENDED
DECEMBER 31,
--------------------
1997 1996
-------- -----------
(UNAUDITED)
(IN THOUSANDS)
REVENUES:
Royalty fees............................................. $ 70,308 $ 61,821
Marketing and reservation fees........................... 72,284 66,273
Product sales............................................ 13,524 14,717
Initial franchise fees and relicensing fees.............. 8,597 9,304
Other, including partner service revenue................. 4,869 3,161
European hotel operations................................ 10,541 10,975
-------- --------
Total revenue.......................................... 180,123 166,251
OPERATING EXPENSES:
Marketing and reservation................................ 70,102 63,379
European hotel operations................................ 9,203 9,745
Selling, general and administrative...................... 29,454 28,132
Product services cost of sales........................... 13,031 13,481
Depreciation and amortization............................ 6,159 6,047
-------- --------
Total operating expenses............................... 127,949 120,784
Operating income........................................... 52,174 45,467
Interest expense and other, net............................ 5,791 5,784
-------- --------
Income before income taxes................................. 46,383 39,683
Income taxes............................................... 19,096 16,338
-------- --------
Net income................................................. $ 27,287 $ 23,345
======== ========
Net franchise revenues were $83.8 million for December 1997 and $74.3
million for December 1996. Royalties increased $8.5 million to $70.3 million
from $61.8 million in December 1996, an increase of 13.8%. The increase in
royalties is attributable to a net increase of 264 franchised properties from
December 31, 1996 to
32
December 31, 1997 representing an additional 19,914 rooms added to the system,
an improvement in domestic RevPAR of 2.4% and an increase in the effective
royalty rate of the domestic hotel system to 3.51% from 3.43%. Initial and
relicensing fee revenue generated from franchise contracts signed declined
7.5% to $8.6 million from $9.3 million in December 1996. Total franchise
agreements signed in December 1997 were 368, down 14% from the total contracts
signed in December 1996 of 428. The decline in initial fees is primarily a
result of the Company's sales force reorganization and the resulting temporary
displacement of the sales force. The reorganization of the regional market
management sales and support force was completed in September 1997. Revenues
generated from strategic partnership relationships increased to $3.4 million
from $1.5 million in December 1996. This revenue relates to agreements that
provide preferred vendors access to the Company's franchisees.
Franchise Expenses. The cost to operate the franchising business is
reflected in selling, general and administrative expenses. Selling, general
and administrative expenses were $29.5 million for December 1997, an increase
of $1.4 million from the December 1996 total of $28.1 million. The increases
in selling, general and administrative expenses were primarily due to
additional personnel to support company growth and new company initiatives.
Selling, general and administrative expenses declined to 35.2% of net
franchise revenues in December 1997 from 37.8% in December 1996. The
improvement in the franchising margins relates to the economies of scale
generated from operating a larger franchisee base, cost control initiatives
and improvements in franchised hotel performance.
Product Sales. Sales made to franchisees through the Company's group
purchasing program declined $1.2 million to $13.5 million in December 1997
from $14.7 million in December 1996. The group purchasing program utilizes
bulk purchases to obtain favorable pricing from third party vendors for
franchisees ordering similar products. The Company acts as a "clearing-house"
between the franchisee and the vendor, and orders are shipped directly to the
franchisee.
Similarly, product cost of sales decreased $0.45 million (or 3.3%) in
December 1997. The product services margins decreased in December 1997 to 3.6%
from 8.4% in December 1996. This purchasing program is provided to the
franchisees as a service and is not expected to be a major component of the
Company's profitability.
European Hotel Operations. In January 1998, the Company and Friendly Hotels,
PLC ("Friendly") consummated a transaction in which Friendly acquired from the
Company the master franchise rights for the Comfort, Quality and Clarion
brands for all of Europe with the exception of Scandinavia for a period of ten
years, for a payment of $8.0 million payable in eight equal annual
installments. As part of the transaction, Friendly acquired from the Company
ten hotels in France, two in Germany and one in the United Kingdom in exchange
for $22.2 million in 5.75% convertible preferred shares in Friendly. In
addition, Friendly will pay the Company deferred compensation of $4.0 million
in cash, payable by the fifth anniversary of the transaction or sooner
depending on the level of future profits of the hotels acquired.
Depreciation and Amortization. Depreciation and amortization increased to
$6.2 million in December 1997 from $6.0 million in December 1996. The increase
was primarily due to recent capital improvements to the Company's financial
and billing information systems.
Interest expense and other, net. Interest expense and other for December
1997 was $8.8 million offset by approximately $2.4 million of accrued interest
income on the Term Note and approximately $0.55 million in dividend income
from the Company's investment in Friendly. The increase in interest expense
results from additional debt incurred in connection with the Company Spin-Off.
Comparison of Fiscal Year 1997 Operating Results and Fiscal Year 1996
Operating Results
The Company recorded net income of $34.7 million for the fiscal year ended
May 31, 1997 ("fiscal 1997"), an increase of $23.0 million, compared to net
income of $11.7 million for the fiscal year ended May 31, 1996
33
("fiscal 1996"). Fiscal 1996 results include a non-cash, pre-tax $24.8 million
asset impairment charge related to the Company's European hotel operations.
Exclusive of this charge, fiscal 1996 net income was $26.7 million. The
increase in net income for fiscal 1997 was primarily attributable to an
increase in royalty fee revenue as a direct result of the addition of new
franchisees to the franchise system and improvements in the operating
performance of franchised hotels.
Franchise Revenues. Net franchise revenues were $126.7 million for fiscal
1997 and $110.6 million for fiscal 1996. Royalties increased $9.2 million to
$97.2 million from $88.0 million in fiscal 1996, an increase of 10.5%. The
increase in royalties is attributable to a net increase of 292 franchised
properties during the period representing an additional 21,578 rooms added to
the system, an improvement in domestic RevPAR of 2.9% and an increase in the
effective royalty rate of the domestic hotel system to 3.43% from 3.34%.
Initial franchising and relicensing fees increased 7.9% to $16.8 million from
$15.6 million in fiscal 1996. Total franchise agreements signed in fiscal 1997
were 495, up 13.5% from the total contracts signed in fiscal 1996 of 436.
Revenues generated from strategic vendor relationships increased to $6.1
million from $1.8 million in fiscal 1996. This revenue relates to agreements
that provide preferred vendors access to the Company's franchisees.
Franchise Expenses. Selling, general and administrative expenses were $51.1
million in fiscal 1997, an increase of $5.9 million from the fiscal 1996 total
of $45.2 million. $4.8 million of the increase was directly attributable to
additional costs of operating as an independent company apart from Manor Care.
These additional costs are primarily additional staffing, incremental rental
expenses, and consulting fees as the Company assumed certain administrative
tasks previously provided by Manor Care. The remaining increases in selling,
general and administrative expenses were primarily due to additional personnel
to support company growth and new company initiatives.
Franchising selling, general and administrative expenses were 40.3% of net
franchising revenues in fiscal year 1997 and 40.9% of net franchising revenues
in fiscal 1996. Exclusive of the $4.8 million increase resulting from the
Former Choice Spin-Off, as a percentage of net franchising revenues, selling,
general and administrative expenses declined to 36.5% in fiscal 1997 from
40.9% in fiscal year 1996. The improvement in the franchising margins
primarily relates to the economies of scale generated from operating a larger
franchisee base.
Product Sales. Sales made to franchisees through the Company's group
purchasing program increased $2.0 million to $23.6 million in fiscal 1997 from
$21.6 million in fiscal 1996.
Similarly, product cost of sales increased $2.1 million (or 9.9%) in fiscal
1997. The product services margins decreased in fiscal 1997 to 3.7% from 4.0%
in fiscal 1996. This purchasing program is provided to the franchisees as a
service and is not expected to be a major component of the Company's
profitability.
European Hotel Operations. Total revenues at the Company's owned hotel
operations in Europe declined to $17.7 million in fiscal 1997 from $19.6
million in fiscal 1996. Operating margins at the hotels declined to 8.9% in
fiscal 1997 from 10.6% in fiscal 1996. The decline in revenue and operating
performance reflects the difficult economic and competitive climates in which
a number of the European hotels operated.
Depreciation and Amortization. Depreciation and amortization decreased $1.4
million (or 11.9%) to $10.4 million in fiscal 1997 from $11.8 million in
fiscal 1996. The decrease was primarily due to the asset impairment charge
against European fixed assets which reduced the asset base upon which
depreciation is determined.
Provision for Asset Impairment. In fiscal 1996, the Company recorded a non-
cash, pre-tax charge against earnings of $24.8 million relating to impairment
of certain long-lived assets related to the Company's European hotel
operations.
Other. In fiscal 1997, the Company recognized $0.94 million in dividend
income from its investment in Friendly.
34
Comparison of Fiscal Year 1996 Operating Results and Fiscal Year 1995
Operating Results
Net income for fiscal 1996 was $11.7 million, a decrease of $4.5 million (or
27.8%) compared to net income of $16.2 million for the fiscal year ended May
31, 1995 ("fiscal 1995"). Net income in fiscal 1996 includes a one-time non-
cash, pre-tax $24.8 million asset impairment charge relating to the Company's
European hotel operations. Exclusive of the $24.8 million charge, net income
increased to $26.7 million in fiscal 1996, a 64.8% increase over fiscal 1995.
Franchise Revenues. Net franchise revenues were $110.6 million for fiscal
1996 and $95.9 million for fiscal 1995. Royalties increased $9.9 million to
$88.0 million in fiscal 1996 from $78.1 million, an increase of 12.7%. The
increase in royalties is attributable to a net increase of 217 franchised
properties during the period, representing an additional 15,787 rooms added to
the system, an improvement in domestic RevPAR of 5.1% and an increase in the
effective royalty rate of the domestic hotel system to 3.34% from 3.20%.
Initial franchising and relicensing fees increased 33.3% to $15.6 million in
fiscal 1996 from $11.7 million in fiscal 1995. Total franchise agreements
signed in fiscal 1996 were 436, up 21.4% from the total contracts signed in
fiscal 1995 of 359.
Franchise Expenses. Selling, general and administrative costs declined to
$45.2 million in fiscal 1996 from $45.6 million in fiscal 1995.
Selling, general and administrative expenses as a percentage of net
franchise revenues declined to 40.9% in fiscal 1996 from 47.5% in fiscal 1995.
The improvement in the franchising margins relates to the economies of scale
generated from operating a larger franchisee base and improved operating
performance of the franchised hotels.
Product Sales. Sales made to franchisees through the Company's group
purchasing program increased $7.1 million to $21.6 million in fiscal 1996 from
$14.5 million in fiscal 1995.
Similarly, product cost of sales increased $6.8 million (or 49.2%) in fiscal
1996. The product services margins were 4.0% in fiscal 1996 and fiscal 1995.
This purchasing program is provided to the franchisees as a service and is not
expected to be a major component of the Company's profitability.
European Hotel Operations. Revenues from European hotel operations increased
5.2% in fiscal 1996. Operating margins increased to 10.6% in fiscal 1996 from
3.8% in fiscal 1995. The increase in fiscal 1996 was primarily due to improved
performance of newly completed owned and managed hotels.
Other Expenses. In fiscal 1996, the Company recorded a non-cash, pre-tax
charge against earnings of $24.8 million relating to impairment of certain
long-lived assets associated with the Company's European hotel operations.
Liquidity and Capital Resources
Net cash provided by operating activities was $33.6 million for December
1997, an increase of $8.4 million from $25.2 million for December 1996. At
December 31, 1997, the total debt outstanding for the Company was $282.8
million.
Net cash provided by operating activities was $17.1 million for the six
months ended June 30, 1998, a decrease of approximately $12.7 million from
$29.8 million for 1997. As June 30, 1998, the total long-term debt outstanding
for the Company was $293.7 million.
In May 1998, the Company consummated the Offering of the Original Notes with
an aggregated payment amount of $100,000,000. The Original Notes bear a coupon
rate of 7.125% and will mature on May 1, 2008, with interest to be paid semi-
annually. The Company used the net proceeds from the offering of approximately
$99 million to repay amounts outstanding under the Company's $300 million
revolving credit facility. In connection with the Company Spin-Off on October
15, 1997, the Company was issued a $115.0 million 5-year 11% Subordinated Term
Note from Sunburst (referred to elsewhere as the "Term Note"). The note is
payable in full, along with accrued interest on October 15, 2002. Total
interest accrued at June 30, 1998 was $7.3 million. As of June 30, 1998,
approximately $19.9 million of receivables are due to the Company from
Sunburst, which are included in current assets. These receivables relate to a
net worth guarantee relating to the allocation of Former Choice liabilities
between the Company and Sunburst as provided for under the terms of the
Distribution Agreement and the reimbursement of various expenses paid by the
Company subsequent to the date of the Company Spin-Off. See "Relationship
Between the Company and Sunburst--Distribution Agreement."
35
During fiscal 1995, prior to the Former Choice Spin-Off, the Company
repurchased one-half of the 11% interest held by its management for $27.4
million. Approximately $19.8 million was allocated to goodwill. On May 31,
1996, the Company repurchased the remaining 5.5% minority interest in the
Company for $27.9 million. Approximately $26.4 million was allocated to
goodwill. During fiscal 1996, the Company purchased a 5% common stock interest
and a preferred stock interest in Friendly for approximately $17.1 million.
Investment in property and equipment includes computer hardware as well as
new developments and enhancements of reservation and finance systems. During
the six month period ended June 30, 1998, December 1997 and fiscal 1997,
capital expenditures totaled $5.6 million, $7.3 million and $10.6 million,
respectively, and related primarily to the development of a new property
management system and the installation of new financial systems. Capital
expenditures in prior years included amounts for computer hardware,
reservation systems and European hotel capital improvements.
On October 15, 1997, the Company entered into a five-year $300 million
competitive advance and multi-currency credit facility. The credit facility
provides for a term loan of $150 million and a revolving credit facility of
$150 million, $50 million of which is available in foreign currency
borrowings. At the time of the Distribution, the Company borrowed $150 million
under the term loan and $89.5 million under the revolving credit facility, the
proceeds of which were used to fund the Term Note and to refinance existing
indebtedness. As of December 31, 1997, the Company had $150 million of term
loans outstanding, $86.6 million of revolving loans and $31 million of multi-
currency borrowings. The term loan is payable over five years, $15 million of
which is due in 1998. The Credit Facility includes customary financial and
other covenants that require the maintenance of certain ratios including
maximum leverage, minimum net worth and interest coverage and restrict the
Company's ability to make certain investments, repurchase stock, incur debt,
and dispose of assets. At the Company's option, the interest rate may be based
on LIBOR, a certificate of deposit rate or an alternate base rate (as defined
therein), plus a facility fee percentage. The rate is determined based on the
Company's consolidated leverage ratio at time of borrowing. Interest on
current borrowings is based on one of several rates including LIBOR. The
average interest rate of the borrowings under the Credit Facility at December
31, 1997 was 6.60%.
During the six months ended June 30, 1998, the Company repurchased
approximately 1.8 million shares at a total cost of $26.8 million. Subsequent
to June 30, 1998, the Company has repurchased 249,000 shares of its common
stock at a total cost of $3.2 million. The Company has authorization from its
Board of Directors to repurchase up to an additional 6.7 million shares.
The Company believes that cash flow from operations and available financing
capacity is adequate to meet the expected operating, investing, financing and
debt service requirements for the business for the immediate future.
The Company has entered into interest rate swap agreements with a notional
amount of $115 million at June 30, 1998, to fix certain of its variable rate
debt in order to reduce the Company's exposure to fluctuations in interest
rates. The interest rate differential to be paid or received on interest rate
swap agreements is accrued as interest rates change and is recognized as an
adjustment to interest expense. On average, the interest rate swap agreements
have a life of three and one-half years with a fixed rate of 6.68% and a
variable rate at December 31, 1997 of 6.39%. As of June 30, 1998, the interest
rate swap agreements have a fair market valuation of approximately ($1.9)
million.
Impact of Recently Issued Accounting Standards
The Company has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The adoption
of SFAS No. 121 did not have a material impact on the Company's financial
statements.
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income," in
the first quarter of 1998. The impact of adoption was not material to the
financial statements.
The Company is required to adopt SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," no later than fiscal 1999.
Management is evaluating the impact this pronouncement will have on the
Company's financial statements.
36
YEAR 2000 COMPLIANCE
The Company is engaged in an ongoing effort to evaluate and remediate the
Year 2000 computer problem shared by virtually all companies and businesses.
As part of this effort, a cross-functional Year 2000 Compliance Committee was
established to manage and supervise the efforts to become compliant and a Year
2000 action plan has been developed. The Company has completed the first two
phases ofvaluation analyses necessary to finalize the plan, which include (i) makingpurchase price allocations and identified any necessary conforming accounting changes or other acquisition-related adjustments for Wyndham. Choice will finalize these amounts as we obtain the Company's internal
organizations aware ofinformation necessary to complete the Year 2000 issuemeasurement process. Accordingly, the pro forma adjustments are preliminary and assigning responsibility
internally, and (ii) inventorying and initial testing of its proprietary
software. The remaining phases include: (i) assessing the risk form third
party vendors and franchisees and (ii) inventorying and testing secondary
internal systems (e.g. employee PC's). Throughout the process, remedial
actions have been ormade solely for the purpose of providing these unaudited pro forma condensed combined financial statements. Differences between these preliminary estimates and the final acquisition accounting will be taken as warranted.
The Company's exposure to potential Year 2000 problems exists in two general
areas: technological operations in the sole control of the Company,likely occur and technological operations dependent in some way on one or more third parties.
With respect to the Company's internal systems, it has conducted Year 2000
compliance testing on all of its proprietary software, including its
reservations and reservations support systems, its franchise support system
and its franchisee property management support systems. The tests have
indicated that the proprietary software is year 2000 compliant. The Company
has also been in the process of replacing its hardware platforms for these systems and a number of smaller support systems and has kept them updated so
that by the end of 1998, all of the Company's large system computers will be
no more than eighteen months old. Based on manufacturer's specifications, the
Company believes that these new hardware platforms are year 2000 compliant.
The Company is also in the process of conducting an inventory of third party
software, including PC operating systems and word processing and other
commercial software. The Company anticipates that it will need to upgrade
approximately 80% of its employee workstation PC's. The Company has not
quantified the costs of such upgrades to its PC based systems, but the Company
does not currently expect such costs todifferences could be material. The Year 2000 Compliance Committee is currently identifying third party
vendors and service providers whose non-compliant systemsdifferences, if any, could have a material impact on the Companyaccompanying unaudited pro forma condensed combined financial statements and undertaking an assessment as to such
parties' compliant status. These parties include franchisees, airline global
distribution systems ("GDS"), utility providers, telephone service providers,
banksChoice’s future results of operations and data processing services. financial position.
The GDS companies, which provide databases
through which travel agents can book hotel rooms, have assured the Companyunaudited pro forma condensed combined financial information should be read in writing that they are making the necessary changes in their system to become
compliant and the Company expects to conduct testsconjunction with the GDS companies in
September and October 1998. The Year 2000 Compliance Committeenotes herein, is in the
processfor informational purposes only, is not intended to represent nor be indicative of assessing other third parties as to their compliance and the
consequences in the event they are not compliant. The Committee expects that
such assessment will be completed by the fourth quarter of 1998.
Costs of addressing potential Year 2000 problems have not been material to
date and, based upon preliminary information gathered to date, are not
currently expected to have a material adverse impact on the Company's
financial position,actual results of operations or cash flows. However, iffinancial position of Choice or Wyndham had the Company, its vendorsTransaction been completed on the dates assumed, nor should it be considered indicative of future consolidated results of operations or franchisees are unable to resolve such Year 2000
issues in a timely manner, it could result in a material financial risk,
including loss of revenue, substantial unanticipated costs and service
interruptions.
FORWARD-LOOKING STATEMENTS
The statements contained in this document that are not historical facts are
forward-looking statements within the meaningposition of the Private Securities
Litigation Reform Actcombined company. Furthermore, while the unaudited pro forma condensed combined financial information does give effect to the costs incurred to effectuate the Transaction, it does not give effect to any anticipated synergies, operating efficiencies, revenue enhancements or cost savings that may result from the Transaction, or the costs necessary to achieve these synergies, operating efficiencies and cost savings. Further, the unaudited pro forma condensed combined financial information does not reflect the effect of 1995.
A number of important factors could causeany regulatory actions that may impact the Company's actual results for
future periodsunaudited pro forma condensed combined financial statements when the Transaction is completed.
Because Choice presents its historical financial statements in thousands, some amounts may not match Choice’s historical financial statements due to differ materially from those expressed in any forward-
looking statements made by, or on behalfrounding.
102
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023
(IN MILLIONS, EXCEPT PER SHARE DATA)
| Pro Forma Adjustments | ||||||||||||||||||||||||
| Choice Historical | Wyndham Historical, as Reclassified (Note 2) | Financing Adjustments (Note 4) | Transaction Adjustments (Note 5) | Pro Forma Combined | ||||||||||||||||||||
REVENUES | ||||||||||||||||||||||||
Royalty, licensing and management fees | $ | 397 | $ | 498 | $ | — | $ | 12 | (e) | $ | 907 | |||||||||||||
Initial franchise fees | 21 | 11 | — | — | 32 | |||||||||||||||||||
Platform and procurement services | 58 | — | — | — | 58 | |||||||||||||||||||
Owned hotels | 74 | — | — | — | 74 | |||||||||||||||||||
Other | 33 | 110 | — | — | 143 | |||||||||||||||||||
Other revenues from franchised and managed properties | 603 | 457 | — | — | 1,060 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total revenues | 1,186 | 1,076 | — | 12 | 2,274 | |||||||||||||||||||
OPERATING EXPENSES | ||||||||||||||||||||||||
Selling, general and administrative | 182 | 155 | — | (4 | ) | (b) | 333 | |||||||||||||||||
Depreciation and amortization | 29 | 56 | — | 129 | (d) | 214 | ||||||||||||||||||
Owned hotels | 54 | — | — | 54 | ||||||||||||||||||||
Other expenses from franchised and managed properties | 583 | 458 | — | — | 1,041 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total operating expenses | 848 | 669 | — | 125 | 1,642 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating income (loss) | 338 | 407 | — | (113 | ) | 632 | ||||||||||||||||||
OTHER INCOME AND EXPENSES, NET | ||||||||||||||||||||||||
Interest expense, net | 41 | 73 | 389 | (b) | (23 | ) | (f)(h) | 480 | ||||||||||||||||
Other loss (gain) | (3 | ) | 11 | — | — | 8 | ||||||||||||||||||
Equity in net gain of affiliates | (2 | ) | — | — | — | (2 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total other income and expenses, net | 36 | 84 | 389 | (23 | ) | 486 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Income (loss) before income taxes | 302 | 323 | (389 | ) | (90 | ) | 146 | |||||||||||||||||
Income tax expense (benefit) | 72 | 83 | (96 | ) | (c) | (22 | ) | (i) | 37 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Net income (loss) | $ | 230 | $ | 240 | $ | (293 | ) | $ | (68 | ) | $ | 109 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Basic earnings per share | $ | 4.51 | $ | 2.81 | (n) | $ | 1.40 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Diluted earnings per share | $ | 4.47 | $ | 2.79 | (n) | $ | 1.39 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
See accompanying notes to the unaudited pro forma condensed combined financial information.
103
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2022
(IN MILLIONS, EXCEPT PER SHARE DATA)
| Pro Forma Adjustments | ||||||||||||||||||||||||||||
| Choice Historical | Wyndham Historical, as Reclassified (Note 2) | Financing Adjustments (Note 4) | Transaction Adjustments (Note 5) | Pro Forma Combined | ||||||||||||||||||||||||
REVENUES | ||||||||||||||||||||||||||||
Royalty, licensing and management fees | $ | 472 | $ | 654 | $ | — | $ | 13 | (e | ) | $ | 1,139 | ||||||||||||||||
Initial franchise fees | 28 | 15 | — | — | 43 | |||||||||||||||||||||||
Platform and procurement services | 64 | — | — | — | 64 | |||||||||||||||||||||||
Owned hotels | 71 | — | — | — | 71 | |||||||||||||||||||||||
Other | 65 | 141 | — | — | 206 | |||||||||||||||||||||||
Other revenues from franchised and managed properties | 703 | 688 | — | — | 1,391 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total revenues | 1,403 | 1,498 | — | 13 | 2,914 | |||||||||||||||||||||||
OPERATING EXPENSES | ||||||||||||||||||||||||||||
Selling, general and administrative | 207 | 228 | — | 66 | (b | )(g) | 501 | |||||||||||||||||||||
Depreciation and amortization | 30 | 77 | — | 167 | (d | ) | 274 | |||||||||||||||||||||
Owned hotels | 49 | — | — | — | 49 | |||||||||||||||||||||||
Other expenses from franchised and managed properties | 653 | 668 | — | — | 1,321 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total operating expenses | 939 | 973 | — | 233 | 2,145 | |||||||||||||||||||||||
Gain on sale of business and assets, net | 16 | 35 | — | — | 51 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Operating income (loss) | 480 | 560 | — | (220 | ) | 820 | ||||||||||||||||||||||
OTHER INCOME AND EXPENSES, NET | ||||||||||||||||||||||||||||
Interest expense, net | 37 | 80 | 520 | (b | ) | (55 | ) | (f | )(h) | 582 | ||||||||||||||||||
Other loss | 7 | 4 | — | — | 11 | |||||||||||||||||||||||
Equity in net gain of affiliates | (2 | ) | — | — | — | (2 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total other income and expenses, net | 42 | 84 | 520 | (55 | ) | 591 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Income (loss) before income taxes | 438 | 476 | (520 | ) | (165 | ) | 229 | |||||||||||||||||||||
Income tax expense (benefit) | 105 | 121 | (129 | ) | (c | ) | (35 | ) | (i | ) | 62 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Net income (loss) | $ | 333 | $ | 355 | $ | (391 | ) | $ | (130 | ) | $ | 167 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Basic earnings per share | $ | 6.05 | $ | 3.93 | (n | ) | $ | 2.02 | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
Diluted earnings per share | $ | 5.99 | $ | 3.91 | (n | ) | $ | 2.01 | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
See accompanying notes to the unaudited pro forma condensed combined financial information.
104
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2023
(IN MILLIONS)
| Pro Forma Adjustments | ||||||||||||||||||||||||||||
| Choice Historical | Wyndham Historical, as Reclassified (Note 2) | Financing Adjustments (Note 4) | Transaction Adjustments (Note 5) | Pro Forma Combined | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 36 | $ | 79 | $ | 5,914 | (a | ) | $ | (5,839 | ) | (a | ) | $ | 190 | |||||||||||||
Accounts receivable, net | 224 | 272 | — | — | 496 | |||||||||||||||||||||||
Income taxes receivable | 6 | — | — | — | 6 | |||||||||||||||||||||||
Notes receivable, net | 53 | — | — | — | 53 | |||||||||||||||||||||||
Prepaid expenses and other current assets | 34 | 115 | — | (5 | ) | (b | ) | 144 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total current assets | 353 | 466 | 5,914 | (5,844 | ) | 889 | ||||||||||||||||||||||
Property and equipment, at cost (net) | 470 | 91 | — | — | 561 | |||||||||||||||||||||||
Operating lease right-of-use assets | 91 | — | — | — | 91 | |||||||||||||||||||||||
Goodwill | 220 | 1,525 | — | 3,141 | (c | ) | 4,886 | |||||||||||||||||||||
Intangible assets, net | 781 | 1,787 | — | 4,513 | (d | )(e) | 7,081 | |||||||||||||||||||||
Notes receivable, net | 50 | — | — | — | 50 | |||||||||||||||||||||||
Investments, employee benefit plans, at fair value | 36 | — | — | — | 36 | |||||||||||||||||||||||
Investments in affiliates | 55 | — | — | — | 55 | |||||||||||||||||||||||
Deferred income taxes | 92 | — | — | 6 | 98 | |||||||||||||||||||||||
Other assets | 85 | 231 | — | (80 | ) | (b | )(f)(h) | 236 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total assets | $ | 2,233 | $ | 4,100 | $ | 5,914 | $ | 1,736 | $ | 13,983 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||||
Accounts payable | $ | 124 | $ | 46 | $ | — | $ | — | $ | 170 | ||||||||||||||||||
Accrued expenses and other current liabilities | 97 | 268 | — | 72 | (g | ) | 437 | |||||||||||||||||||||
Deferred revenue | 108 | 83 | — | — | 191 | |||||||||||||||||||||||
Current portion of long-term debt | 4 | 37 | 5,914 | (a | ) | (37 | ) | (h | ) | 5,918 | ||||||||||||||||||
Liability for guest loyalty program - current | 86 | — | — | — | 86 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total current liabilities | 419 | 434 | 5,914 | 35 | 6,802 | |||||||||||||||||||||||
Long-term debt | 1,391 | 2,123 | — | (1,633 | ) | (h | ) | 1,881 | ||||||||||||||||||||
Long-term deferred revenue | 135 | 170 | — | — | 305 | |||||||||||||||||||||||
Deferred compensation and retirement plan obligations | 41 | — | — | — | 41 | |||||||||||||||||||||||
Deferred income taxes (liability) | — | 338 | — | 1,118 | (i | ) | 1,456 | |||||||||||||||||||||
Income taxes payable | 9 | — | — | (13 | ) | (i | ) | (4 | ) | |||||||||||||||||||
Operating lease liabilities | 110 | — | — | — | 110 | |||||||||||||||||||||||
Liability for guest loyalty program - noncurrent | 44 | — | — | — | 44 | |||||||||||||||||||||||
Other liabilities | 11 | 179 | — | — | 190 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total liabilities | 2,160 | 3,244 | 5,914 | (493 | ) | 10,825 | ||||||||||||||||||||||
Common stock | 1 | 1 | — | — | (j | ) | 2 | |||||||||||||||||||||
Additional paid-in-capital | 322 | 1,588 | — | 1,555 | (k | ) | 3,465 | |||||||||||||||||||||
Accumulated other comprehensive loss | (5 | ) | 34 | — | (34 | ) | (l | ) | (5 | ) | ||||||||||||||||||
Treasury stock, at cost | (1,987 | ) | (1,234 | ) | — | 1,234 | (l | ) | (1,987 | ) | ||||||||||||||||||
Retained earnings | 1,742 | 467 | — | (526 | ) | (m | ) | 1,683 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total shareholders’ equity | 73 | 856 | — | 2,229 | 3,158 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,233 | $ | 4,100 | $ | 5,914 | $ | 1,736 | $ | 13,983 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
See accompanying notes to the unaudited pro forma condensed combined financial information.
105
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN MILLIONS UNLESS OTHERWISE INDICATED)
1. Description of the Company.
Certain statements containedTransaction and Basis of Presentation
Choice is offering to exchange for each issued and outstanding share of Wyndham Common Stock, at the election of the holder, $49.50 in this Form 10-Q, including thosecash and 0.324 shares of Choice stock, plus the Additional Consideration, if any. The purpose of the Offer to Exchange is for Choice to acquire all of the outstanding shares of common stock of Wyndham in order to combine the businesses of Choice and Wyndham. Choice intends, promptly after consummation of the Offer to Exchange, to cause Purchaser to merge with and into Wyndham, with Wyndham as the surviving corporation (the “First Merger”), immediately following which Wyndham will merge with and into a newly formed wholly owned subsidiary of Choice (“NewCo”), with NewCo as the surviving corporation (together with the First Merger, the “Second-Step Mergers”), after which Wyndham would be a direct or indirect wholly owned subsidiary of Choice.
With respect to the Proposed Combination, it should be noted that Choice is not affiliated with Wyndham and has not had the cooperation of Wyndham’s management or due diligence access to Wyndham or its business or management in the section entitled "Management's Discussionpreparation of these unaudited pro forma condensed combined financial statements. Choice has not received, in connection with the Proposed Combination, information from Wyndham concerning its business and Analysis of Operating Resultsfinancial condition for any purpose, including preparing these unaudited pro forma condensed combined financial statements. Accordingly, these unaudited pro forma condensed combined financial statements have been prepared by Choice based solely on publicly available information, including Wyndham’s financial statements, analyst reports and Financial Condition," contain forward-lookinginvestor presentations. Supplemental information and procedures may provide Choice with additional information that involves
riskcould materially affect the purchase price allocation as well as the accompanying assumptions and uncertainties. Actual future results and trends may differ materially
depending on a variety of factors discussed in the "Risk Factors" sectionpro forma adjustments. Disclosures are included in the Company's SEC filings, includingaccompanying notes to the natureunaudited pro forma condensed combined financial statements to the extent certain limitations are identified, which may have a significant impact on the pro forma adjustments.
Choice has prepared the unaudited pro forma condensed combined financial information in accordance with Article 11 of Regulation S-X, applying the acquisition method of accounting under ASC 805, with Choice as the acquirer and extentWyndham as the acquiree for accounting purposes. Pursuant to the guidance in ASC 805, the acquisition method of future competition, and political, economic and demographic developments in
countries whereaccounting requires the Company does business or inpurchase price to be allocated to the future may do business.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only asacquisition-date fair values of the date hereof. The Company undertakes no
obligation to revise or update these forward-looking statements.
37
BUSINESS
Overviewacquired assets and assumed liabilities, with any excess recorded as goodwill. To facilitate this allocation of purchase price and using the fair value concepts outlined in ASC 820, Choice Hotels International, Inc. ishas estimated the world's second largest franchisor
of hotel properties with 3,567 franchised properties open and 870 franchised
properties under development at June 30, 1998, representing 297,396 rooms open
and 76,523 rooms under development in 33 countries. The Company franchises
lodging properties under the Choice Brands: Comfort, Quality, Clarion, Sleep,
Rodeway, Econo Lodge and MainStay. The Company has over 2,100 franchisees in
its domestic franchise system, the largest of which, Sunburst, accounts for
approximately 5% of the Company's royalty fees for the six- months ended June
30, 1998. The Company franchises hotels in all 50 states and the District of
Columbia and 32 additional countries, with 94% of its franchising revenue
generated from hotels franchised in the United States. With recognized brands
and a diverse and growing franchisee base, the Company believes it has
established a strong foundation for continued growth.
The Company is a "pure-play" lodging franchisor with limited real estate
exposure and low capital expenditure requirements. With a focus on hotel
franchising versus ownership, the Company benefits from the economies of scale
inherent in the franchising business. The fee and cost structures of the
Company's business provide significant opportunities to increase profits by
increasing the number of franchised properties. The Company derives
substantially all of its revenues from franchise fees which consist of an
initial fee and ongoing royalty, marketing, and reservation fees which are
based on a percentage of the franchisees' gross room revenues. The principal
factors that affect the Company's operating results are: (i) growth in the
number of hotels under franchise, (ii) occupancy and room rates achieved by
the hotels under franchise, (iii) the number and relative mix of franchised
hotels and (iv) the Company's ability to manage costs. The number of rooms at
franchised properties and occupancy and room rates at those properties
significantly affect the Company's results because royalty fees are based upon
room revenues at franchised hotels. The variable overhead costs associated
with franchise system growth are substantially less than incremental royalty
fees generated from new franchisees, therefore the Company is able to capture
a significant portion of these royalty fees as operating income.
The Company believes that the continued growth of its franchise business
should enable it to capture increasing benefits from the operating leverage in
place and thereby continue to improve operating margins. The Company's
operating margins have improved from 47.1% for the year ended May 31, 1995 to
55.0% for the year ended May 31, 1997. Furthermore, the Company has generated
steady royalty fee income from its increasing franchisee base growing from
$51.0 million for the year ended May 31, 1992 to $97.2 million for the year
ended May 31, 1997, representing a compounded annual growth rate of 13.8%.
Earnings before interest expense, income taxes, depreciation and amortization
have grown at a compounded annual growth rate of 20.5% from $32.2 million for
the year ended May 31, 1992 to $81.7 million for the year ended May 31, 1997.
Similarly, EBITDA has increased from $39.0 million for the six month period
ended June 30, 1997 to $51.6 million for the six month period ended June 30,
1998. Operating margins have improved from 40% for the six month period ended
June 30, 1997 to 49% for the six month period ended June 30, 1998.
The Lodging Industry
As of December 31, 1997, there were approximately 3.5 million hotel rooms in
the United States in hotels/motels containing twenty or more rooms. Of those
rooms, approximately 1.0 million rooms were not affiliated with a national or
regional brand, while the remaining approximately 2.5 million rooms were
affiliated with a brand either through the franchise or the
ownership/management of a national or regional chain.
During the late 1980s, the industry added approximately 500,000 hotel rooms
to its inventory due largely to a favorable hotel lending environment, the
ability of hotel operators to regularly increase room rates and the
deductibility of passive tax losses, which encouraged hotel development. As a
result, the lodging industry saw an oversupply of rooms and a decrease in
industry performance.
38
The lodging industry in recent years has demonstrated strong performance,
based on year-to-year increases in room revenues, average daily rates, revenue
per available room ("RevPAR"), and lodging industry profitability. RevPAR is
calculated by multiplying the percentage of occupied rooms by the average
daily room rate realized. Since 1993, the lodging industry has been able to
increase its average daily rate ("ADR") at a rate faster than the increase in
the Consumer Price Index ("CPI"), a common measure of inflation published by
the US Department of Labor. The following chart demonstrates the recent
trends:
THE US LODGING INDUSTRY'S GROWTH TRENDS SINCE 1991
AVERAGE
INCREASES IN DAILY INCREASE INCREASE REVENUE PER
ROOM REVENUE ROOM IN ADR IN CPI AVAILABLE NEW
VERSUS OCCUPANCY RATES VERSUS VERSUS ROOM PROFITS ROOMS
YEAR PRIOR YEAR RATES (ADR) PRIOR YEAR PRIOR YEAR (REVPAR) (IN BILLIONS) ADDED
- ---- ------------ --------- ------- ---------- ---------- ----------- ------------- -------
1992.................... 3.5% 62.6% $58.91 1.4% 2.9% $36.87 break-even 36,000
1993.................... 4.6% 63.5% $60.53 2.7% 2.7% $38.42 $ 2.4 40,000
1994.................... 7.1% 64.7% $62.86 3.8% 2.7% $40.70 $ 5.5 45,000
1995.................... 6.7% 65.1% $65.81 4.7% 2.9% $42.83 $ 8.5 64,000
1996.................... 8.9% 65.0% $70.81 7.6% 2.9% $46.06 $12.5 101,000
1997.................... 8.8% 64.5% $75.16 6.1% 1.9% $48.50 $14.5 123,000
- --------
Source: Smith Travel Research
The Company believes the lodging industry can be divided into three
categories: luxury or upscale, middle-market and economy. The Company believes
the luxury category generally has room rates above $70 per night, the middle-
market category generally has room rates between $46 and $70 per night and the
economy category generally has room rates less than $46 per night.
Service is a distinguishing characteristic in the lodging industry.
Generally, the Company believes there are three levels of service: full-
service hotels (which typically offer food and beverage services, meeting
rooms, room service and similar guest services); limited-service hotels (which
typically offer amenities such as swimming pools and continental breakfast or
similar services); and all-suites hotels (which typically have limited public
areas, but offer guests two rooms or one room with distinct areas, and which
may or may not offer food and beverage services).
The Company's Econo Lodge, Rodeway and Sleep brands compete primarily in the
limited-service economy market and its Comfort and Quality brands compete
primarily in the limited-service middle-market. The Company's MainStay brand
competes primarily in the all-suites middle-market and its Clarion brand
competes primarily in the full-service upscale market.
New hotels opened in recent years typically have been limited-service
hotels, as limited-service hotels are less costly to develop, enjoy higher
gross margins, and tend to have better access to financing. These hotels
typically operate in the economy and middle-market categories and are located
in suburban or highway locations. From 1991 through 1996, the average room
count in new hotels declined from 122 to 87, primarily because hotel
developers found it difficult to obtain financing of more than $3 million from
their primary lending sources (local banks and Small Business Administration-
guaranteed loan programs).
In recent years, operators of hotels not owned or managed by major lodging
companies have increasingly joined national hotel franchise chains as a means
of remaining competitive with hotels owned by or affiliated with national
lodging companies. Because the costs of owning and operating a hotel are
generally fixed, increases in revenues generated by affiliation with a
franchise lodging chain can improve a hotel's financial performance. Of
approximately 2,198 hotel properties that changed their affiliation in 1996,
88% converted from independent status to affiliation with a chain or converted
from one chain to another, while only 12% canceled or were required to cancel
their chain affiliation. A total of 466 independent properties switched to a
franchise chain in 1996, the second largest number in the past ten years.
39
The large franchise lodging chains, including the Company, generally provide
a number of services to hotel operators to improve the financial performance
of their properties, including national reservation systems, marketing and
advertising programs and direct sales programs. The Company believes that
national franchise chains with a larger number of hotels enjoy greater brand
awareness among potential guests than those with fewer numbers of hotels, and
that greater brand awareness can increase the desirability of a hotel to its
potential guests. The Company believes that hotel operators choose lodging
franchisors based primarily on the perceived value and quality of each
franchisor's brand and its services, and the extent to which affiliation with
that franchisor may increase the franchisee's reservations and profits.
Franchise Business
Economics of Franchise Business. The Company's fee and cost structures
provide significant opportunities for the Company to increase profits by
increasing the number of franchised properties. The Company derives
substantially all of its revenue from franchise fees which consist of an
initial fee and ongoing royalty fees which are based on a percentage of the
franchisees' gross room revenues. The royalty portion of the franchise fee is
intended to provide operating profits and cover the Company's operating
expenses, such as expenses incurred in quality assurance, administrative
support and other franchise services and to provide the Company with operating
profits. The Company also collects marketing and reservation fees from its
franchisees. The marketing and reservation fees are intended to reimburse the
Company for the expenses associated with providing such franchise services as
the central reservation system and national marketing and media advertising.
Much of the variable costs associated with the Company's activities are
reimbursed by the franchisees through the initial fees. The royalty fees
generated from franchisees more than cover the fixed costs of the business at
its current level. The variable overhead costs associated with franchise
system growth are substantially less than incremental royalty fees generated
from new franchisees, therefore the Company is able to capture a significant
portion of these royalty fees as operating income.
Strategy. The Company's strategy is to create an organization that is
focused on: (i) serving franchisee and consumer needs, (ii) optimizing its
brands, (iii) strategically growing the franchise system, (iv) improving
margins through increased productivity, (v) growing profitably internationally
and (vi) pursuing complementary business opportunities.
. Serving Franchisee and Consumer Needs. The Company has created an
organizational structure that focuses on consumers, serves franchisees
and leverages the franchise system.
-- Consumer Focus: Brand management, new product development and
traditional marketing and advertising are all combined under the
Company's marketing department to create consumer focus and to drive
demand for the Company's brand products. New product development is
based on consumer needs determined through consumer research. The
Company believes that this focus leads to greater demand for its
products, which in turn results in higher revenue from the Company's
franchise system.
-- Franchisee Service: The Company has established five regional
operating teams that are responsible for franchisee service and
sales in their respective regions. This structure provides each
franchisee with one primary contact who is responsible for assessing
and responding to each hotel's specialized needs. Led by seasoned
executives averaging over 20 years' experience in the lodging and
franchising industries, the Company believes it is positioned to
strategically develop new hotel franchises and enhance the operating
performance of its existing hotels.
-- Leveraging the Franchise System: Strategic partnerships, purchasing
and other functions that leverage the scale of the franchise system
are combined under the Company's partner services group. The Company
believes there is significant opportunity to leverage the franchise
system by entering into joint marketing arrangements with national
and multi-national companies that want to gain exposure to the
millions of guests who patronize the Company's franchised hotels
each year. In the past, these arrangements have added to the
Company's and its franchisees' revenues and profits by attracting
business to its franchised hotels.
40
. Optimizing its Brands. The Company believes that each of its brands has
particular attributes and strengths. The Company's strategy is to
leverage the strengths of each brand for profit growth and for
identifying new niches into which the Company may expand. This strategy
is effected by raising the Company's brand standards which are strictly
enforced through a consumer-driven quality assurance program.
. Strategically Growing the Franchise System. The Company is taking
advantage of its regional structure to analyze key markets in the U.S.
and, in conjunction with its franchisees, identify the best
opportunities for new development or conversion to one of the Company's
brands.
. Improving Margins Through Increased Productivity. The Company enhances
the competitiveness of its own and its franchisees' profitability by
initiating revenue generating programs and implementing cost reduction
programs. A key component of this strategy is the implementation of the
Company's proprietary property and yield management system "Profit
Manager by Choice," which the Company believes will improve the
operating performance of its franchisees. This system has been
supplemented by continued enforcement of the Company's contracts
(including franchisee audits) and an aggressive focus on strategic
partnership opportunities.
. Growing Profitably Internationally. As of June 30, 1998, the Company's
international franchise system had 616 properties with 51,448 rooms. The
Company's international franchise system includes hotels in 32 countries
outside the United States. The Company plans to continue to grow
profitably its brands internationally by strategically pursuing joint
ventures, master franchising agreements and brand-specific development
agreements for certain geographic areas.
. Pursuing Complementary Business Opportunities. The separation of the
Company from Former Choice allows the Company to focus solely on
franchising, including acquisition opportunities that are complementary
to the Company's core business and unique operating skills. The
Company's acquisition strategy includes the potential purchase of
lodging brands that would enhance the spectrum of brands and services
the Company currently offers its franchisees and hotel consumers.
Franchise System
The Company's franchised hotels operate under one of the Choice Brands:
Comfort, Quality, Clarion, Sleep, Rodeway, Econo Lodge and MainStay. The
following table presents key statistics relative to the Company's domestic
franchise system over the four fiscal years ended May 31, 1994, 1995, 1996 and
1997, for the seven-month periods ended December 31, 1996 and 1997, and for
the six-month periods ended June 30, 1997 and 1998.
COMBINED DOMESTIC FRANCHISE SYSTEM
AS OF AND AS OF AND
FOR THE SEVEN FOR THE SIX
MONTHS ENDED MONTHS ENDED
AS OF AND FOR THE YEAR ENDED MAY 31, DECEMBER 31, JUNE 30,
------------------------------------------ ---------------- ----------------
1994 1995 1996 1997 1996 1997 1997 1998
--------- --------- --------- --------- ------- ------- ------- -------
Number of properties,
end of period.......... 2,283 2,311 2,495 2,781 2,672 2,879 2,814 2,951
Number of rooms, end of
period................. 203,019 200,792 214,613 235,431 226,346 242,094 238,136 245,948
Average Royalty
Rate(1)................ 3.10% 3.20% 3.34% 3.43% 3.43% 3.51% 3.4% 3.50%
Average occupancy
percentage............. 62.2% 63.8% 63.8% 62.6% 67.7% 66.2% 57.6% 56.0%
Average daily room rate
(ADR).................. $ 45.63 $ 47.13 $ 49.49 $ 51.92 $ 52.50 $ 54.97 $ 51.78 $ 53.94
RevPAR(2)............... $ 28.40 $ 30.08 $ 31.60 $ 32.52 $ 35.54 $ 36.39 $ 29.81 $ 30.23
Royalty fees ($000s).... $ 62,590 $ 71,665 $ 82,238 $ 91,724 $58,025 $65,271 $42,277 $46,394
- --------
(1) Represents domestic royalty fees as a percentage of aggregate gross room
revenues of all of the domestic Choice Brand franchised hotels.
(2) RevPAR figures for the Company's combined domestic franchise system and
for each brand for each fiscal year or seven-month period are averages of
the RevPAR calculated for each month in the fiscal year or seven-month
period. The Company calculates RevPAR each month based on information
reported by franchisees on a timely basis to the Company.
41
The Company has over 2,100 domestic franchisees and operates in all 50
states and the District of Columbia. Approximately 94% of the total royalty
income is generated from domestic franchise operations. Consequently, the
Company's analysis of its franchise system is focused on the domestic
operations. Sunburst is the Company's largest franchisee with a portfolio of
85 hotels containing 11,796 rooms located in 28 states as of June 30, 1998.
Brand Positioning
The Company's hotels are primarily limited-service hotels that offer
amenities such as swimming pools and continental breakfast or similar services
or limited-to-full service hotels that offer amenities such as food and
beverage services, meeting rooms, room service and similar guest services.
Comfort. The Comfort brand is the Company's largest brand. Comfort Inns and
Comfort Suites hotels offer rooms in the limited-service, middle-market
category. Comfort Inns and Comfort Suites are targeted to business and leisure
travelers. Principal competitor brands include Days Inn, Fairfield Inn,
Hampton Inn, Holiday Express and LaQuinta Inn. At June 30, 1998, there were
1,492 Comfort Inn properties and 174 Comfort Suites properties with a total of
115,318 and 14,312 rooms, respectively, open and operating worldwide. An
additional 185 Comfort Inn properties and 153 Comfort Suites properties with a
total of 17,263 and 11,788 rooms, respectively, were under development.
Comfort properties are located in the United States and in Australia, the
Bahamas, Belgium, Canada, France, Germany, India, Ireland, Italy, Jamaica,
Mexico, Norway, Portugal, Puerto Rico, Sweden, Switzerland, Thailand, the
United Kingdom and the United Arab Emirates.
The following chart summarizes the Comfort system in the United States:
COMFORT DOMESTIC SYSTEM
AS OF AND AS OF AND
FOR THE SEVEN FOR THE SIX
MONTHS ENDED MONTHS ENDED
AS OF AND FOR THE YEAR ENDED MAY 31, DECEMBER 31, JUNE 30,
------------------------------------------ ---------------- ----------------
1994 1995 1996 1997 1996 1997 1997 1998
--------- --------- --------- --------- ------- ------- ------- -------
Number of properties,
end of period.......... 935 1,015 1,129 1,255 1,205 1,304 1,267 1,351
Number of rooms, end of
period................. 82,479 87,551 94,160 102,722 99,343 105,384 103,424 108,270
Royalty fees ($000s).... $ 31,187 $ 37,635 $ 44,657 $ 50,758 $32,156 $36,446 $23,491 $25,978
Average occupancy
percentage............. 68.0% 69.5% 68.7% 67.2% 72.6% 71.3% 61.5% 60.1%
Average daily room rate
(ADR).................. $ 46.46 $ 48.24 $ 51.13 $ 54.17 $ 54.97 $ 57.15 $53.52 $ 55.72
RevPAR.................. $ 31.57 $ 33.54 $ 35.11 $ 36.39 $ 39.90 $ 40.75 $32.94 $ 33.48
Sleep. Established in 1988, Sleep is an exclusively new-construction hotel
brand in the limited-service, economy category. Sleep Inns are targeted to the
business and leisure traveler. Principal competitor brands include Days Inn,
Fairfield Inn, Holiday Express, LaQuinta Inn, Ho-Jo Inn and Ramada Inn.
At June 30, 1998, there were 174 Sleep Inn properties with a total of 13,075
rooms open and operating worldwide. An additional 152 properties with a total
of 11,901 rooms were under development. The properties are located in the
United States, Canada, the Cayman Islands and Thailand.
42
The following chart summarizes the Sleep system in the United States:
SLEEP DOMESTIC SYSTEM
AS OF AND AS OF AND
FOR THE SEVEN FOR THE SIX
MONTHS ENDED MONTHS ENDED
AS OF AND FOR THE YEAR ENDED MAY 31, DECEMBER 31, JUNE 30,
------------------------------------------ -------------- --------------
1994 1995 1996 1997 1996 1997 1997 1998
--------- --------- --------- --------- ------ ------ ------ ------
Number of properties,
end of period.......... 34 51 87 131 114 157 136 171
Number of rooms, end of
period................. 2,921 3,672 6,396 9,635 8,365 11,595 9,980 12,785
Royalty fees ($000s).... $ 605 $ 1,080 $ 2,108 $ 3,343 $2,037 $2,630 $1,627 $2,162
Average occupancy
percentage............. 64.6% 65.3% 65.5% 63.9% 69.3% 66.5% 58.9% 57.3%
Average daily room rate
(ADR).................. $ 39.11 $ 41.89 $ 45.11 $ 48.11 $48.68 $50.54 $47.80 $49.58
RevPAR.................. $ 25.28 $ 27.37 $ 29.56 $ 30.75 $33.73 $33.60 $28.15 $28.43
Quality. Certain Quality Inns and Quality Suites hotels compete in the
limited-service, middle-market category while others compete in the full-
service, middle-market category. Quality Inns and Quality Suites are targeted
to business and leisure travelers. Principal competitor brands include Best
Western, Holiday Inn, Howard Johnson, Ramada Inn and Days Inn. At June 30,
1998, there were 583 Quality Inn properties with a total of 65,692 rooms, and
91 Quality Suites properties with a total of 10,163 rooms open worldwide. An
additional 97 Quality Inn properties and 47 Quality Suites properties with a
total of 11,598 rooms and 2,811 rooms, respectively, were under development.
Quality properties are located in the United States and in Australia,
Canada, Chile, Costa Rica, the Czech Republic, Denmark, France, Germany,
Guatemala, India, Indonesia, Ireland, Italy, Jamaica, Malaysia, Mexico, New
Zealand, Norway, Portugal, Russia, Spain, Sweden, Thailand, the United Kingdom
and the United Arab Emirates.
The following chart summarizes the Quality system in the United States:
QUALITY DOMESTIC SYSTEM
AS OF AND AS OF AND
FOR THE SEVEN FOR THE SIX
MONTHS ENDED MONTHS ENDED
AS OF AND FOR THE YEAR ENDED MAY 31, DECEMBER 31, JUNE 30,
------------------------------------------ ---------------- --------------
1994 1995 1996 1997 1996 1997 1997 1998
--------- --------- --------- --------- ------- ------- ------ ------
Number of properties,
end of period.......... 358 341 362 409 385 420 419 427
Number of rooms, end of
period................. 45,032 43,281 45,967 50,487 47,668 50,787 51,657 50,258
Royalty fees ($000s).... $ 14,890 $ 15,632 $ 16,606 $ 17,623 $11,311 $12,459 $7,787 $8,790
Average occupancy
percentage............. 61.6% 63.1% 62.5% 61.3% 66.0% 63.8% 55.9% 54.8%
Average daily room rate
(ADR).................. $ 50.07 $ 50.94 $ 52.90 $ 54.61 $ 55.20 $ 57.58 $54.36 $57.29
RevPAR.................. $ 30.83 $ 32.16 $ 33.08 $ 33.46 $ 36.43 $ 36.73 $30.40 $31.40
Clarion. Clarion Inns, Clarion Hotels, Clarion Resorts and Clarion Suites
hotels are full-service properties which operate in the upscale category.
Clarion properties are targeted to business and leisure travelers. Principal
competitor brands include Holiday Inn, Holiday Select, Crowne Plaza, Four
Points by Sheraton, Radisson, Courtyard by Marriott and Doubletree.
At June 30, 1998, there were 117 Clarion properties with a total of 18,779
rooms open and operating worldwide and an additional 40 properties with a
total of 6,746 rooms under development. The properties are located in the
United States, Canada, Chile, France, Indonesia, Ireland, Japan, Mexico,
Norway, Russia and Uruguay.
43
The following chart summarizes the Clarion system in the United States:
CLARION DOMESTIC SYSTEM
AS OF AND
FOR THE AS OF AND
SEVEN FOR THE SIX
MONTHS ENDED MONTHS ENDED
AS OF AND FOR THE YEAR ENDED MAY 31, DECEMBER 31, JUNE 30,
------------------------------------------ -------------- --------------
1994 1995 1996 1997 1996 1997 1997 1998
--------- --------- --------- --------- ------ ------ ------ ------
Number of properties,
end of period.......... 65 63 75 92 79 96 93 97
Number of rooms, end of
period................. 12,211 10,420 12,817 14,721 13,101 16,161 14,850 16,240
Royalty fees ($000s).... $ 2,735 $ 2,995 $ 3,602 $ 4,081 $2,168 $2,957 $2,342 $2,521
Average occupancy
percentage............. 62.0% 63.7% 63.3% 63.3% 67.1% 64.7% 59.7% 56.3%
Average daily room rate
(ADR).................. $ 62.47 $ 63.71 $ 64.36 $ 67.76 $66.96 $71.53 $69.76 $71.09
RevPAR.................. $ 38.75 $ 40.58 $ 40.74 $ 42.86 $44.94 $46.29 $41.64 $40.03
Econo Lodge. Econo Lodge hotels operate in the limited-service, economy
category. Econo Lodges are primarily targeted to senior citizens and rely to a
large extent on strong roadside name recognition. Principal competitor brands
include Days Inn, Ho-Jo Inn, Motel 6, Ramada Limited, Red Carpet Inn, Red Roof
Inn, Super 8 and Travelodge. At June 30, 1998, there were 718 Econo Lodge
properties with a total of 45,907 rooms open and operating in the United
States and Canada, and an additional 120 properties with a total of 8,535
rooms under development in those two countries.
The following chart summarizes the Econo Lodge system in the United States:
ECONO LODGE DOMESTIC SYSTEM
AS OF AND AS OF AND
FOR THE SEVEN FOR THE SIX
MONTHS ENDED MONTHS ENDED
AS OF AND FOR THE YEAR ENDED MAY 31, DECEMBER 31, JUNE 30,
------------------------------------------ -------------- --------------
1994 1995 1996 1997 1996 1997 1997 1998
--------- --------- --------- --------- ------ ------ ------ ------
Number of properties,
end of period.......... 677 633 641 682 674 691 687 693
Number of rooms, end of
period................. 46,570 42,801 42,726 44,636 44,525 44,937 44,966 44,675
Royalty fees ($000s).... $ 11,231 $ 12,021 $ 12,760 $ 13,288 $8,641 $8,991 $5,851 $5,730
Average occupancy
percentage............. 56.7% 57.5% 58.0% 56.4% 61.8% 60.7% 50.9% 49.0%
Average daily room rate
(ADR).................. $ 37.27 $ 38.31 $ 39.97 $ 41.33 $42.51 $43.86 $40.21 $40.90
RevPAR.................. $ 21.14 $ 22.04 $ 23.17 $ 23.30 $26.29 $26.63 $20.46 $20.05
Rodeway. The Rodeway brand competes in the limited-service, economy category
and is primarily targeted to senior citizens. Principal competitor brands
include Ho-Jo Inn, Ramada Limited, Red Carpet Inn, Red Roof Inn, Budgetel,
Shoney's Inn, Super 8, Motel 6 and Travelodge. At June 30, 1998, there were
202 Rodeway Inn properties with a total of 12,752 rooms open and operating in
the United States and Canada, and an additional 50 properties with a total of
3,495 rooms under development in those two countries.
The following chart summarizes the Rodeway system in the United States:
RODEWAY DOMESTIC SYSTEM
AS OF AND AS OF AND
FOR THE SEVEN FOR THE SIX
AS OF AND MONTHS ENDED MONTHS ENDED
FOR THE YEAR ENDED MAY 31, DECEMBER 31, JUNE 30,
------------------------------ -------------- --------------
1994 1995 1996 1997 1996 1997 1997 1998
------ ------ ------ ------ ------ ------ ------ ------
Number of properties,
end of period.......... 214 208 201 216 214 208 211 197
Number of rooms, end of
period................. 13,806 13,067 12,547 13,509 13,248 12,940 13,163 12,340
Royalty fees ($000s).... $1,941 $2,302 $2,506 $2,631 $1,711 $1,756 $1,160 $1,094
Average occupancy
percentage............. 51.4% 50.5% 52.7% 52.7% 57.0% 54.7% 47.8% 46.0%
Average daily room rate
(ADR).................. $36.89 $38.93 $40.66 $41.15 $42.07 $44.11 $41.26 $41.23
RevPAR.................. $19.00 $19.64 $21.48 $21.68 $23.99 $24.13 $19.73 $18.97
44
MainStay. MainStay, the Company's newest hotel brand, is an exclusively new-
construction middle-market, extended-stay lodging product targeted to
travelers who book hotel rooms for five nights or more. The first MainStay
Suites hotel, which Sunburst owns and manages, opened in Plano, Texas in
November 1996. As of June 30, 1998, there were 15 open hotels with 1,380 rooms
and an additional 26 properties with 2,386 rooms under development.
The MainStay brand is designed to fill the gap in the middle-market category
between existing upscale and economy extended-stay lodging products.
MainStay's principal competitors are all-suite hotel properties and
traditional extended stay operators in the middle market (including Candlewood
Hotels, TownePlace Suites and Studio Plus), the upscale market (including
Hawthorne Suites, Homewood Suites, Residence Inns and Summerfield Suites) and
the economy market (including Extended Stay America and Oakwood). The Company
has granted to Sunburst an option exercisable under certain circumstances at
January 1, 2000, to purchase the brand names, marks, franchise agreements and
other assets of the MainStay system. See "Relationship Between the Company and
Sunburst--Strategic Alliance Agreement."
International Franchise Operations
The Company's international franchise operations are conducted through
master franchise arrangements. These agreements provide the master franchisee
the right to develop Choice-branded hotels in a specific geographic region,
usually for a fee. The agreements govern the relationship between the Company
and the master franchisee, who share the royalties generated by the underlying
franchised hotels. At June 30, 1998, the Company had 616 franchise hotels open
in 32 countries outside the United States.
The following table illustrates the growth of the Company's international
franchise system over the four fiscal years ended May 31, 1994, 1995, 1996 and
1997, for the seven-month periods ended December 31, 1996 and 1997 and for the
six-month period ended June 30, 1998 and 1997.
COMBINED INTERNATIONAL FRANCHISE SYSTEM(1)
AS OF AND AS OF AND
FOR THE SEVEN FOR THE SIX
MONTHS ENDED MONTHS ENDED
AS OF AND FOR THE YEAR ENDED MAY 31, DECEMBER 31, JUNE 30,
--------------------------------------- ------------- -------------
1994 1995 1996 1997 1996 1997 1997 1998
--------- --------- --------- --------- ------ ------ ------ ------
Number of properties,
end of period.......... 430 524 557 563 548 605 583 616
Number of rooms, end of
period................. 36,725 44,877 46,843 47,603 46,473 50,639 49,319 51,448
Royalty fees ($000s).... $ 1,667 $ 1,998 $ 1,586 $ 1,672 $ 696 $ 958 $1,704 $3,254
- --------
(1) Master franchise contracts do not currently require the reporting of
operating statistics (e.g. average occupancy percentage and average daily
room rate) of the underlying hotels, thus RevPAR is not calculated for
foreign hotels.
Europe. The Company is the second-largest international franchised hotel
chain in Europe, with 261 hotels open in 15 countries at June 30, 1998.
In order to realign and streamline its European operations, in May 1996, the
Company, through its subsidiary, ManorCare Hotels (France) S.A., acquired
750,000 ordinary (common) shares and 10,000,000 convertible preferred shares
of Friendly for approximately $17.1 million. The proceeds from this investment
have been and will be used by Friendly to finance the development of ten new
Comfort Inn or Quality Inn hotels in the United Kingdom and Ireland.
Additionally, the Company granted to Friendly a master franchise for the
United Kingdom and Ireland in exchange for an additional 333,333 Friendly
ordinary shares. Each 5.75% convertible preferred share is immediately
convertible into one Friendly ordinary share for every 150p nominalpreliminary fair value of the 5.75% convertible preferred shares.
45
In January 1998,acquired assets and assumed liabilities as of September 30, 2023, Wyndham’s most recent historical financial reporting date. Because Choice has not had the Company and Friendly consummated a second transactioncooperation of Wyndham management in which Friendly acquired from the Company the master franchise rights for
the Comfort, Quality and Clarion brands for allpreparing these preliminary estimates of Europe with the exception
of Scandinavia for a period of ten years, for a payment of $8 million, payable
in eight equal annual installments. As part of the transaction, Friendly
acquired from the Company ten hotels in France, two in Germany and onefair value, Choice’s assumptions used in the United Kingdom in exchange for 13,624,742 additional 5.75% convertible
preferred shares with a value of $22.2 million. Each such 5.75% convertible
preferred share is convertible on or after the announcement by Friendly of its
1998 financial results (which is expected to occur in April 1999) into one
Friendly ordinary share for each 150p nominal value of the 5.75% convertible
preferred shares. In addition, Friendly will pay the Company deferred
compensation of $4 million in cash, payable by the fifth anniversary of the
transaction or sooner depending on the level of future profits of the hotels
acquired. After consummation of this transaction (and the receipt of
additional ordinary shares resulting from the payment of dividends in ordinary
shares), the Company holds 1,139,881 Friendly ordinary shares and 23,624,742
5.75% convertible preferred shares of Friendly (convertible into 15,749,828
Friendly ordinary shares). Assuming conversion to Friendly ordinary shares of
all Friendly convertible preferred shares held by the Company, the Company
would hold approximately 45% of the outstanding Friendly ordinary shares.
Under the terms of its investment, the Company currently has the right to
appoint three of the ten directors to the Friendly board.
There is also a master franchise arrangement in Scandinavia that has 56 open
properties as of June 30, 1998.
Canada. Choice Hotels Canada is Canada's largest lodging organization with
213 properties open at June 30, 1998. Choice Hotels Canada is a joint venture,
owned 50% by the Company and 50% by Journey's End Corporation ("Journey's
End"), which was formed in 1993 when Journey's End converted substantially all
of its controlled hotels to Choice's brands and Choice contributed its
operations in Canada to form Choice Hotels Canada.
Australia. In July, 1998 the Company and Flag International Limited,
Australia's largest lodging chain, agreed to form Flag Choice Hotels Limited.
Effective July 1, 1998, Flag Choice Hotels Limited will franchise
approximately 500 properties representing 26,000 rooms across Australia, New
Zealand, Fiji and Papua New Guinea. Through the agreement, Flag Choice Hotels
will operate as the Company's master franchisee under a 20-year Australian
master franchise agreement to use the Choice brands of Clarion, Quality and
Comfort. The agreement also provides the Company the opportunity to acquire,
within the first four years of the agreement, up to 30 percent of the equity
of Flag Choice Hotels.
Other International Relationships. The Company has master franchise
arrangements with developers in various countries, including Australia, New
Zealand, Mexico and Brazil. At June 30, 1998, 86 hotels were open and
operating under these master franchise arrangements, generating annual royalty
fees to the Company of over $1.8 million.
Franchise Sales
The Company has identified key market areas for hotel development based on
supply/demand relationships and strategic objectives. Development
opportunities are first offered to existing franchisees and then to: (i)
developers of hotels, (ii) owners of independent hotels and motels, (iii)
owners of hotels affiliated with other franchisors' brands and (iv)
contractors who construct any of the foregoing. In the six-months ended June
30, 1998, existing franchisees accounted for approximately 64% of the
Company's new franchise agreements. In considering hotels for conversion to
one of the Choice Brands, or sites for development of new hotels, the Company
considers locations which are close to major highways, airports, tourist
attractions and business centers that attract travelers.
At June 30, 1998, the Company employed approximately 36 sales directors,
each of whom is responsible for a particular region or geographic area. Sales
directors contact potential franchisees directly and receive compensation
based on sales generated. Franchise sales efforts emphasize the benefits of
affiliating with one of the Choice Brands, the Company's commitment to
improving RevPAR, the Company's "celebrity in a suitcase"
46
television advertising campaign (formerly used for the entire family of Choice
Brands and now used principally for its three largest brands, Comfort, Quality
and Econo Lodge), the Choice reservation system, the Company's training and
support systems, and the Company's history of growth and profitability.
Because the Choice Brands cover a broad spectrum of the lodging marketplace,
the Company is able to offer each prospective franchisee a brand that fits its
needs, reducing the chances that the prospective franchisee would need to
consider a competing franchise system.
Because retention of existing franchisees is important to the Company's
growth strategy, existing franchisees are offered the right to object to a
same-brand property within 15 miles, and are protected from the opening of a
same-brand property within a specific distance, generally two to five miles,
depending upon the size of the property and the market size. The Company
believes that it is the only major franchise company to routinely offer such
territorial protection to its franchisees.
For the six months ended June 30, 1998, the Company received 452
applications, approved 382 applications, signed 368 franchise agreements and
placed 157 properties into operation in the U.S. Of those placed into
operation, 137 were newly constructed hotels. During fiscal 1997, the Company
received 1,078 franchise applications, approved 874 applications, signed 715
franchise agreements and placed 390 new properties into operation in the
United States. Of those placed into operation, 203 were newly constructed
hotels. By comparison, during the fiscal year ended May 31, 1996, the Company
received 993 franchise applications, approved 862 applications, signed 665
franchise agreements and had 284 new U.S. properties operating. Of those
placed into operation, 150 were newly constructed. Applications may not result
in signed franchise agreements either because an applicant is unable to obtain
financing or because the Company and the applicant are unable to agree on the
financial terms of the franchise agreement. Nonetheless, the Company believes
that increased applications lead to an increased number of hotels entering the
Company's franchise system.
Franchise Agreements
The Company's standard franchise agreement grants a franchisee the right to
non-exclusive use of the Company's franchise system in the operation of a
single hotel at a specified location, typically for a period of 20 years, with
certain rights to each of the franchisor and franchisee to terminate the
franchise agreement before the twentieth year. When the responsibility for
development is sold to a master franchisee, that party has the responsibility
to sell to local franchisees the Choice Brands and the master franchisee
generally must manage the delivery of necessary services (such as quality
assurance, reservations and marketing) to support the franchised hotels in the
master franchise area. The master franchisee collects the fees paid by the
local franchisee and remits an agreed share to the Company. Master franchise
agreements generally have a term of at least 10 years. The Company has only
entered into master franchise agreements with respect to franchise hotels
outside the United States.
Either party to a franchise agreement, other than master franchise
agreements, can terminate a franchise agreement prior to the conclusion of its
term under certain circumstances, such as at certain anniversaries of the
agreement or if a franchisee fails to bring properties into compliance with
contractual quality standards within specified periods of time. Early
termination options give the Company flexibility in eliminating or re-branding
properties which become weak performers for reasons other than contractual
failure by the franchisee. Master franchise agreements typically contain
provisions permitting the Company to terminate the agreement for failure to
meet a specified development schedule.
Franchise fees vary among the different Choice Brands, but generally are
competitive with the industry average within their market group. Franchise
fees usually have four components: an initial, one-time affiliation fee; a
royalty fee; a marketing fee; and a reservation fee. Proceeds from the
marketing fee and reservation fee are used exclusively to fund marketing
programs and the Company's central reservation system, respectively. Most
marketing fees support brand-specific marketing programs, although the Company
occasionally contributes a portion of such fees to marketing programs designed
to support all of the Choice Brands. Royalty fees and affiliation fees are the
principal sources of profits for the Company.
47
The standard franchise agreements typically require the Company's
franchisees to pay the following fees:
QUOTED FEES BY PRODUCT
INITIAL FEE ONGOING FEES AS A PERCENTAGE OF GROSS ROOM REVENUES
PER ROOM/ -------------------------------------------------------------------
PRODUCT MINIMUM ROYALTY FEES MARKETING FEES RESERVATION FEES
------- ------------ ----------------- ----------------- -------------------
Comfort Inn............. $300/$45,000 5.25% 2.1% 1.75%
Comfort Suites.......... $300/$50,000 5.00% 2.1% 1.75%
Quality Inn............. $300/$35,000 4.0% 2.1% 1.75%
Quality Suites.......... $300/$50,000 4.0% 2.1% 1.25%
Sleep Inn............... $300/$40,000 4.5% 2.1% 1.75%
Clarion................. $300/$40,000 3.75% 1.0% 1.25%
Econo Lodge............. $250/$25,000 4.0% 3.5%(1) --
MainStay Suites......... $300/$30,000 4.5% 2.5%(1) --
Rodeway................. $250/$25,000 3.5% 1.25% 1.25%
- --------
(1) Fee includes both Marketing and Reservation Fees.
For a description of the franchising agreements between the Company and
Sunburst, see "Relationship Between the Company and Sunburst--Franchise
Agreements."
The Company has increased its average royalty rate since fiscal year 1993,
primarily by raising the quoted royalty fee for Comfort Inn franchisees to
5.25% of annual gross room revenues ("GRR") from 4.0% of GRR in 1993, and by
increasing the number of franchise agreements providing for royalty fees that
are higher than the Company's average royalty fees. The Company has increased
its average royalty rate for all Choice Brands from 3.10% from fiscal year
1994 to 3.43% for fiscal year 1997. The Company believes that its average
royalty rate will continue to increase as new franchisees are added and as
older franchise agreements expire, terminate or are amended.
At June 30, 1998, the Company had 2,951 franchise agreements in effect in
the United States and 616 franchise agreements in effect in other countries.
The average age of the franchise agreements was 4.6 years. Ninety-four of the
franchise agreements are scheduled to expire during the five-year period
beginning June 30, 1998.
Franchise Operations
The Company's operations are designed to improve RevPAR for its franchisees,
as this is the measure of performance that most directly impacts franchisee
profitability. The Company believes that by helping its franchisees to become
more profitable it will enhance its ability to both retain its existing
franchisees and attract new franchisees. The key aspects of the Company's
franchise operations are:
Central Reservation System. On average, approximately 30.0% of the room
nights booked at franchisees' properties are reserved through the toll-free
telephone reservation system operated by the Company. The Company's
reservation system consists of a computer reservation system known as CHOICE
2001, five reservation centers in North America and several international
reservation centers run by the Company or its master franchisees. Operators
trained on the CHOICE 2001 system can match each caller with a Choice-branded
hotel meeting the caller's needs. The CHOICE 2001 system provides an instant
data link to the Company's franchised properties as well as to the Amadeus,
Galileo, SABRE and Worldspan airline reservation systems that facilitate the
reservation process for travel agents.
To define more sharply the market and image for each of its brands, the
Company began advertising separate toll-free reservation numbers for all of
its brands in fiscal year 1995, although the Company allows its
48
reservation agents to cross-sell the Choice Brands. If a room in the Choice-
branded hotel requested by a customer is not available in the location or
price range that the customer desires, the agent may offer the customer a room
in another Choice-branded hotel that meets the customer's needs. The Company
believes that cross-selling enables the Company and its franchisees to capture
additional business.
On-line reports generated by the CHOICE 2001 system enable franchisees to
analyze their reservation patterns over time. In addition, the Company
provides and is currently improving a yield management product for its
franchisees to allow them to improve the management of their mix of rates and
occupancy based on current and forecasted demand on a property-by-property
basis. The Company also markets to its franchisees a property management
product. Such products are designed to manage the financial and operations
information of an individual hotel and improve its efficiency.
Brand Name Marketing and Advertising. The Company's marketing and
advertising programs are designed to heighten consumer awareness of the Choice
Brands. Marketing and advertising efforts are focused primarily in the United
States and include national television and radio advertising, print
advertising in consumer and trade media and promotional events, including
joint marketing promotions, with vendors and corporate partners.
The Company is recognized for its "celebrity in a suitcase" television
advertisements. In fiscal year 1996, the Company began using brand-specific
marketing and largely discontinued the strategy of advertising its multiple
brands under the Choice umbrella. The marketing fees generated by these brands
are used, in part, to fund a national network television advertising campaign.
The smaller Choice Brands conduct advertising campaigns that also include
cable television, radio and print.
The Company conducts numerous marketing programs targeting specific groups,
including senior citizens, motorist club members, families, government and
military employees, and meeting planners. Other marketing efforts include
telemarketing and telesales campaigns, domestic and international trade show
programs, publication of group and tour rate directories, direct-mail
programs, discounts to holders of preferred credit cards, centralized
commissions for travel agents, fly-drive programs in conjunction with major
airlines, and twice-yearly publication of a Travel and Vacation Directory.
Marketing and advertising programs are directed by the Company's marketing
department, which utilizes the services of independent advertising agencies.
The Company also employs sales personnel at its Silver Spring, Maryland,
headquarters and at its Phoenix, Arizona office. These sales personnel use
telemarketing to target specific customer groups, such as potential corporate
clients in areas where the Company's franchised hotels are located, the motor
coach market and meeting planners. Mostdetermination of these sales personnel sell
reservationspreliminary estimates of fair value will likely change once Choice is given access to management and services for all of the Choice Brands.
The Company's regional sales directors work with franchisees to maximize
RevPAR. These directors advise franchisees on topics such as marketing their
hotelsfurther information concerning Wyndham’s assets and maximizing the benefits offered by the Choice reservations system.
Quality Assurance Programs. Consistent quality standards are critical to the
success of a hotel franchise. The Company has established quality standards
for all of its franchised brands which cover housekeeping, maintenance, brand
identification and level of services offered. The Company inspects properties
for compliance with its quality standards when application is made for
admission to the franchise system. The compliance of existing franchisees with
quality standards is monitored through scheduled and unannounced Quality
Assurance Reviews conducted at least once per year at each property.
Properties which fail to maintain a minimum score are reinspected on a more
frequent basis until deficiencies are cured, or until such properties are
terminated.
To encourage compliance with quality standards, the Company offers various
brand-specific incentives to franchisees who maintain consistent quality
standards. The Company identifies franchisees whose properties
49
operate below minimum quality standards and assists them in complying with
brand specifications. Franchisees who fail to improve on identified quality
matters may be subject to consequences ranging from written warnings to
termination of the franchisee's franchise agreement. During the six-months
ended June 30, 1998, the seven-months ended December 1997, fiscal year 1997
and fiscal year 1996, the Company terminated 90, 20, 49 and 48 properties,
respectively, for failure to maintain minimum quality assurance scores.
Training. The Company maintains a training department which conducts
mandatory training programs for all franchisees and their employees. The
Company also conducts regularly scheduled regional and national training
meetings for both property-level staff and managers. Training programs teach
franchisees how to take advantage of the Company's reservation system and
marketing programs, and fundamental hotel operations such as housekeeping,
maintenance, and inventory yield management.
Training is conducted by a variety of methods, including group instruction
seminars and video programs. The Company is developing an interactive
computer-based training system that will train hotel employees at their own
pace. Franchisees will be required to purchase hardware to operate the
training system, and will use software developed by the Company.
Purchasing. The Company's product services department negotiates volume
purchases of various products needed by franchisees to run their hotels,
including furniture, fixtures, carpets and bathroom amenities. The department
also helps to ensure consistency in such products across its exclusively new-
construction brands, Sleep and MainStay. The Company utilizes its group
purchasing program to obtain favorable pricing from third-party vendors for
franchisees ordering similar products. The Company acts as a clearinghouse
between the franchisee and the vendor, and most orders are shipped directly to
the franchisee.
Design and Construction. The Company maintains a design and construction
department to assist franchisees in refurbishing, renovating, or constructing
their properties prior to or after joining the system. Department personnel
assist franchisees in meeting the Company's brand specifications by providing
technical expertise and cost-savings suggestions.
Financial Assistance Programs. The Company has established programs or
helped franchisees obtain financing through: (i) a wholly-owned subsidiary;
(ii) strategic partnerships with hotel lenders; and (iii) by referral to hotel
lenders for hotel refinancing, acquisition, renovation and development. Some
of the specific programs include:
(a) "Construction to Permanent Financing" program to qualified
franchisees. Salomon Smith Barney is offering $100 million in "Construction
to Permanent Financing" per year to qualified franchisees. All Choice
Brands are included in this program. The construction loan is issued for a
term up to three years at a floating rate of 355 basis points over the 30-
day LIBOR. The loan amount will not exceed 75% of cost. The franchisee is
responsible for cost of all third party reports and fees in the amount of
2.75% of the loan amount. A stabilized debt service coverage ratio of at
least 1.4:1 is required for the permanent loans, which are issued for a 10-
year term with amortization up to 25 years with the balance payable at
maturity and a fixed interest rate of 225 basis points over the 10-year
U.S. Treasury interest rate on the day of closing. The permanent loan
requires a fee of 1% of the loan amount. The Company's guarantee is based
on loans outstanding with a maximum guarantee amount of $10 million. At
June 30, 1998, loans under the program totaled $12.5 million and the
Company's guarantee covered $6.3 million in loans.
(b) Econo Lodge exterior renovation program. Under this program, loans up
to an amount of $17,500 per property are granted to qualified Econo Lodge
franchisees for standardized exterior renovation. Franchisee participation
requires, among other things, extension of the franchise agreement. The
loan is forgiven at the expiration of the extended franchise agreement,
assuming no defaults have occurred thereunder. At June 30, 1998, the
Company had loans of $2.4 million outstanding under this program.
50
(c) Second Mortgage Financing. The Company previously offered second
mortgage financing for the development and construction of Quality Inns,
Quality Suites, Quality Inn and Suites, MainStay Suites and Sleep Inns. The
financing program ceased issuing Loan Commitments in March of 1997. At June
30, 1998, loans outstanding under the program were $1.5 million, with two
unfunded commitments totaling $4.7 million.
Competition
Competition among franchise lodging chains is intense, both in attracting
potential franchisees to the system and in generating reservations for
franchisees. The Company believes that hotel operators choose lodging
franchisors based primarily on the perceived value and quality of each
franchisor's brand and services, and the extent to which affiliation with that
franchisor may increase the franchisee's reservations and profits. The Company
believes that hotel operators select a franchisor in part based on the
franchisor's reputation among other franchisees, and the success of its
existing franchisees.
The Company is the second largest hotel franchisor in the world. The
largest, Cendant Corporation (formerly HFS, Inc.), has over 5,300 franchised
hotels. Accor SA has 2,465, Holiday Corporation has 2,260, Marriott
International, Inc. has 1,268, Promus Hotel Corporation has 1,136, Societe de
Louvre has 511, Carlson Radisson/SAS has 437, ITT Corporation has 413 and
Hilton Hotels Corporation has 245. The figures in this paragraph are with
respect to U.S. hotel properties as indicated in the July 1997 issue of Hotels
Magazine.
The Company's prospects for growth are largely dependent upon the ability of
its franchisees to compete in the lodging market, since the Company's
franchise system revenues are based on franchisees' gross room revenues. The
ability of a hotel to compete may be affected by a number of factors,
including the location and quality of its property, the number and quality of
competing properties nearby, its affiliation with a recognized name brand, and
general regional and local economic conditions. The effect of local economic
conditions on the Company's results is substantially reduced by the geographic
diversity of the Company's franchised properties, which are located in all 50
states and in 32 other countries, as well as its range of products and room
rates. See "Risk Factors--Inherent Risks of the Lodging Industry;
Competition."
Service Marks and Other Intellectual Property
The service marks Quality, Comfort, Clarion, Sleep, Econo Lodge, Rodeway,
MainStay and related logos are material to the Company's business. The
Company, directly and through its franchisees, actively uses these marks. All
of the material marks are registered with the United States Patent and
Trademark Office. In addition, the Company has registered certain of its marks
with the appropriate governmental agencies in over 100 countries where it is
doing business or anticipates doing business in the foreseeable future. The
Company seeks to protect its brands and marks throughout the world, although
the strength of legal protection available varies from country to country.
Headquarters and Office Facilities
The Company's principal executive offices are located at 10750 Columbia
Pike, Silver Spring, Maryland, 20901. Its telephone number is (301) 592-5000.
These offices are leased from Manor Care pursuant to the Silver Spring Lease
(as defined in "Relationship Between Company and Sunburst"). For a description
of the Silver Spring Lease and the sublease entered into by the Company,
Sunburst and Manor Care, see "Relationship Between the Company and Sunburst--
Lease Agreements." The Company owns its reservation system offices in Phoenix,
Arizona and Minot, North Dakota and leases two additional reservation system
offices in Grand Junction, Colorado, pursuant to leases that expire in 1999
and 2000, and occupies additional space in Toronto, Canada, on a month-to-
month basis. In addition, the Company leases 12 sales offices across the
United States. Management believes that its executive, reservation systems and
sales offices are sufficient to meet its present needs and does not anticipate
any difficulty in securing additional or alternative space, as needed, on
terms acceptable to the Company.
51
Seasonality
The Company's principal sources of revenues are franchise fees based on the
gross room revenues of its franchised properties. The Company experiences
seasonal revenue patterns similar to those of the lodging industry in general.
This seasonality can be expected to cause quarterly fluctuations in the
Company's revenues, profit margins and net income.
Regulation
The Company's franchisees are responsible for compliance with all laws and
government regulations applicable to the hotels they own or operate. The
lodging industry is subject to numerous federal, state and local government
regulations, including those relating to the preparation and sale of food and
beverage (such as health and liquor license laws), building and zoning
requirements and laws governing with employee relations, including minimum
wage requirements, overtime, working conditions and work permit requirements.
The FTC, various states and certain foreign jurisdictions (including France,
the Province of Alberta, Canada and Mexico) regulate the sale of franchises.
The FTC requires franchisors to make extensive disclosure to prospective
franchisees but does not require registration. A number of states in which the
Company's franchisees operate require registration or disclosure in connection
with franchise offers and sales. In addition, several states in which the
Company's franchisees operate have "franchise relationship laws" or "business
opportunity laws" that limit the ability of the franchisor to terminate
franchise agreements or to withhold consent to the renewal or transfer of
these agreements. While the Company's business has not been materially
adversely affected by such regulation, thereliabilities. There can be no assurance that this
will continue or that future regulation or legislationthese changes will not be material.
The unaudited pro forma condensed combined financial information does not give effect to any anticipated synergies, operating efficiencies or cost savings that may be a result of the Transaction or the costs necessary to achieve these synergies, operating efficiencies and cost savings. It does, however, give effect to the anticipated costs to be incurred by Choice to effectuate the Transaction that had not yet been recorded as of the date of the unaudited pro forma condensed combined balance sheet. See Note 5 for further details.
During the preparation of the unaudited pro forma condensed combined financial information, Choice performed a preliminary review of Wyndham’s accounting policies, based on the information publicly disclosed by Wyndham. Accordingly, Choice has only performed limited procedures to date because Wyndham has not permitted us to conduct any due diligence on Wyndham, nor engaged in conversations with us that would allow us to perform a fulsome assessment and identification of any accounting policy differences. Based on the publicly available information we reviewed, we did not identify any adjustments that were necessary and quantifiable to conform the accounting policies used to produce Wyndham’s historical financial statements to those of Choice. Where possible, certain reclassifications have such an
effect.
Year 2000 Compliance
As isbeen made in order to conform the casehistorical financial statement presentation of Wyndham with most other companies using computers in their
operations, the Company is faced with the taskChoice. See Note 2 for detailed reclassification adjustments. Final review of addressing the year 2000
problem during the next two years. This problem results from the past practice
in the computer industry of using two digits rather than four to designate the
calendar year. This practiceWyndham’s accounting policies will result in incorrect resultsbe performed if and when the computer software programs perform arithmetic operations, comparisons of data
field sorting involving years later than 1999.
The Company's reservations systems, its current software products offered
for license to franchisees as well as its internal financial systems are being
analyzed for year 2000 compliance. Although the testing of these systemsTransaction is not yet complete, the Company does not believe any of the above elements willconsummated. Differences may be identified that, when conformed, could have a material impact on the Company's resultsunaudited pro forma condensed combined financial information. Furthermore, in an effort to present the unaudited pro forma condensed combined financial statements in a manner that we believe is clear and most useful for the potential users of these unaudited pro forma condensed combined financial statements, we have presented the values contained herein in millions (unless otherwise stated), and certain Choice historical financial statement captions have been condensed. Because Choice presents its historical financial statements in thousands, some amounts may not match Choice’s historical financial statements due to rounding.
106
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN MILLIONS UNLESS OTHERWISE INDICATED)
2. Reclassification Adjustments
The following presents the impacts of certain reclassification adjustments made to the Wyndham historical financial statements, in order to conform Wyndham’s financial statement presentation to our expected presentation for the go-forward combined company. These adjustments have been identified by Choice based solely on our review of Wyndham’s public financial information. The adjustments identified below may have been different and additional adjustments may have been identified had Choice been given access to Wyndham’s management and/or further information regarding the nature and breakdown of each account balance.
WYNDHAM HOTELS & RESORTS, INC.
STATEMENT OF INCOME
RECLASSIFICATION ADJUSTMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023
| Wyndham Historical | Reclassification Adjustments | Wyndham Historical, as Reclassified | Combined Company Presentation | |||||||||||||||
Net revenues | ||||||||||||||||||
Royalties and franchise fees | 415 | (11 | ) | (a | ) | 404 | Royalty, licensing and management fees | |||||||||||
| 11 | (a | ) | 11 | Initial franchise fees | ||||||||||||||
Marketing, reservation and loyalty | 445 | — | 445 | Other revenues from franchised and managed properties | ||||||||||||||
Management and other fees | 11 | — | 11 | Royalty, licensing and management fees | ||||||||||||||
License and other fees | 83 | — | 83 | Royalty, licensing and management fees | ||||||||||||||
Other | 110 | — | 110 | Other | ||||||||||||||
|
|
|
|
|
| |||||||||||||
Fee-related and other revenues | 1,064 | — | 1,064 | |||||||||||||||
Cost reimbursements | 12 | — | 12 | Other revenues from franchised and managed properties | ||||||||||||||
|
|
|
|
|
| |||||||||||||
Net revenues | 1,076 | — | 1,076 | |||||||||||||||
Expenses | ||||||||||||||||||
Marketing, reservation and loyalty | 446 | — | 446 | Other expenses from franchised and managed properties | ||||||||||||||
Operating | 65 | (8 | ) | (b | ) | 57 | Selling, general and administrative | |||||||||||
| 8 | (b | ) | 8 | Other loss (gain) | ||||||||||||||
General and administrative | 93 | — | 93 | Selling, general and administrative | ||||||||||||||
Cost reimbursements | 12 | — | 12 | Other expenses from franchised and managed properties | ||||||||||||||
Depreciation and amortization | 56 | — | 56 | Depreciation and amortization | ||||||||||||||
Transaction-related | 5 | — | 5 | Selling, general and administrative | ||||||||||||||
|
|
|
|
|
| |||||||||||||
Total expenses | 677 | — | 677 | |||||||||||||||
|
|
|
|
|
| |||||||||||||
Operating income | 399 | — | 399 | |||||||||||||||
Interest expense, net | 73 | — | 73 | Interest expense, net | ||||||||||||||
Early extinguishment of debt | 3 | — | 3 | Other loss (gain) | ||||||||||||||
|
|
|
|
|
| |||||||||||||
Income before income taxes | 323 | — | 323 | |||||||||||||||
Provision for income taxes | 83 | — | 83 | Income tax expense (benefit) | ||||||||||||||
|
|
|
|
|
| |||||||||||||
Net income | $ | 240 | $ | — | $ | 240 | ||||||||||||
|
|
|
|
|
| |||||||||||||
Reclassification adjustments made to the Wyndham historical statement of operations for the nine months ended September 30, 2023:
| (a) | Represents a reclassification of Royalties and franchise fees to Initial franchise fees to align with our expected combined company presentation. |
| (b) | Represents a reclassification of identifiable foreign currency gains and losses from Operating expense to Other loss (gain) to align with our expected combined company presentation. |
107
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN MILLIONS UNLESS OTHERWISE INDICATED)
WYNDHAM HOTELS & RESORTS, INC.
STATEMENT OF INCOME
RECLASSIFICATION ADJUSTMENTS
FOR THE YEAR ENDED DECEMBER 31, 2022
| Wyndham Historical | Reclassification Adjustments | Wyndham Historical, as Reclassified | Combined Company Presentation | |||||||||||||
Net revenues | ||||||||||||||||
Royalties and franchise fees | $ | 512 | $ | (15 | ) | (a) | $ | 497 | Royalty, licensing and management fees | |||||||
| 15 | (a) | 15 | Initial franchise fees | |||||||||||||
Marketing, reservation and loyalty | 544 | — | 544 | Other revenues from franchised and managed properties | ||||||||||||
Management and other fees | 57 | — | 57 | Royalty, licensing and management fees | ||||||||||||
License and other fees | 100 | — | 100 | Royalty, licensing and management fees | ||||||||||||
Other | 141 | — | 141 | Other | ||||||||||||
|
|
|
|
|
| |||||||||||
Fee-related and other revenues | 1,354 | — | 1,354 | |||||||||||||
Cost reimbursements | 144 | — | 144 | Other revenues from franchised and managed properties | ||||||||||||
|
|
|
|
|
| |||||||||||
Net revenues | 1,498 | — | 1,498 | |||||||||||||
Expenses | ||||||||||||||||
Marketing, reservation and loyalty | 524 | — | 524 | Other expenses from franchised and managed properties | ||||||||||||
Operating | 106 | (2 | ) | (b) | 104 | Selling, general and administrative | ||||||||||
| 2 | (b) | 2 | Other loss (gain) | |||||||||||||
General and administrative | 123 | — | 123 | Selling, general and administrative | ||||||||||||
Cost reimbursements | 144 | — | 144 | Other expenses from franchised and managed properties | ||||||||||||
Depreciation and amortization | 77 | — | 77 | Depreciation and amortization | ||||||||||||
Gain on asset sale, net | (35 | ) | — | (35 | ) | Gain on sale of business and assets, net | ||||||||||
Separation-related | 1 | — | 1 | Selling, general and administrative | ||||||||||||
|
|
|
|
|
| |||||||||||
Total expenses | 940 | — | 940 | |||||||||||||
|
|
|
|
|
| |||||||||||
Operating income | 558 | — | 558 | |||||||||||||
Interest expense, net | 80 | — | 80 | Interest expense, net | ||||||||||||
Early extinguishment of debt | 2 | — | 2 | Other loss (gain) | ||||||||||||
|
|
|
|
|
| |||||||||||
Income before income taxes | 476 | — | 476 | |||||||||||||
Provision for income taxes | 121 | — | 121 | Income tax expense (benefit) | ||||||||||||
|
|
|
|
|
| |||||||||||
Net income | $ | 355 | $ | — | $ | 355 | ||||||||||
|
|
|
|
|
| |||||||||||
Reclassification adjustments made to the Wyndham historical statement of operations for the year ended December 31, 2022:
| (a) | Represents a reclassification of Royalties and franchise fees revenue to Initial franchise fees revenue to align with our expected combined company presentation. |
| (b) | Represents a reclassification of identifiable foreign currency gains and losses from Operating expense to Other loss (gain) to align with our expected combined company presentation. |
108
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN MILLIONS UNLESS OTHERWISE INDICATED)
WYNDHAM HOTELS & RESORTS, INC.
BALANCE SHEET
RECLASSIFICATION ADJUSTMENTS
AS OF SEPTEMBER 30, 2023
| Wyndham Historical | Reclassification Adjustments | Wyndham Historical, as Reclassified | Combined Company Presentation | |||||||||||||||
Assets | ||||||||||||||||||
Current assets | ||||||||||||||||||
Cash and equivalents | $ | 79 | $ | — | $ | 79 | Cash and cash equivalents | |||||||||||
Trade receivables, net | 272 | — | 272 | Accounts receivable, net | ||||||||||||||
Prepaid expenses | 53 | — | 53 | Prepaid expenses and other current assets | ||||||||||||||
Other current assets | 62 | — | 62 | Prepaid expenses and other current assets | ||||||||||||||
|
|
|
|
|
| |||||||||||||
Total current assets | 466 | — | 466 | |||||||||||||||
Property and equipment, net | 91 | — | 91 | Property and equipment, at cost (net) | ||||||||||||||
Goodwill | 1,525 | — | 1,525 | Goodwill | ||||||||||||||
Trademarks, net | 1,231 | — | 1,231 | Intangible assets, net | ||||||||||||||
Franchise agreements and other intangibles, net | 353 | — | 353 | Intangible assets, net | ||||||||||||||
Other non-current assets | 434 | (203 | ) | (a | ) | 231 | Other assets | |||||||||||
| 203 | (a | ) | 203 | Intangible assets, net | ||||||||||||||
|
|
|
|
|
| |||||||||||||
Total assets | $ | 4,100 | $ | — | $ | 4,100 | ||||||||||||
|
|
|
|
|
| |||||||||||||
Liabilities and stockholders’ equity | ||||||||||||||||||
Current liabilities | ||||||||||||||||||
Current portion of long-term debt | $ | 37 | $ | — | $ | 37 | Current portion of long-term debt | |||||||||||
Accounts payable | 46 | — | 46 | Accounts payable | ||||||||||||||
Deferred revenues | 83 | — | 83 | Deferred revenue | ||||||||||||||
Accrued expenses and other current liabilities | 268 | — | 268 | Accrued expenses and other current liabilities | ||||||||||||||
|
|
|
|
|
| |||||||||||||
Total current liabilities | 434 | — | 434 | |||||||||||||||
Long-term debt | 2,123 | — | 2,123 | Long-term debt | ||||||||||||||
Deferred income taxes | 338 | — | 338 | Deferred income taxes (liability) | ||||||||||||||
Deferred revenues | 170 | — | 170 | Long-term deferred revenue | ||||||||||||||
Other non-current liabilities | 179 | — | 179 | Other liabilities | ||||||||||||||
|
|
|
|
|
| |||||||||||||
Total liabilities | 3,244 | — | 3,244 | |||||||||||||||
|
|
|
|
|
| |||||||||||||
Stockholders’ equity | ||||||||||||||||||
Common stock | 1 | — | 1 | Common stock | ||||||||||||||
Treasury stock | (1,234 | ) | — | (1,234 | ) | Treasury stock | ||||||||||||
Additional paid in capital | 1,588 | — | 1,588 | Additional paid in capital | ||||||||||||||
Retained earnings | 467 | — | 467 | Retained earnings | ||||||||||||||
Accumulated other comprehensive loss | 34 | — | 34 | Accumulated other comprehensive loss | ||||||||||||||
|
|
|
|
|
| |||||||||||||
Total stockholders’ equity | $ | 856 | $ | — | $ | 856 | ||||||||||||
|
|
|
|
|
| |||||||||||||
Total liabilities and stockholders’ equity | $ | 4,100 | $ | — | $ | 4,100 | ||||||||||||
|
|
|
|
|
| |||||||||||||
Reclassification adjustments made to the Wyndham historical balance sheet as of September 30, 2023:
| (a) | Represents a reclassification of Development Advance Notes from Other non-current assets to Intangible assets, net to align with our expected combined company presentation. |
109
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN MILLIONS UNLESS OTHERWISE INDICATED)
3. Preliminary Purchase Price and Resulting Allocation
As part of the acquisition method of accounting, the preliminary purchase price has been estimated to be $8,983. This preliminary purchase price has been allocated to the acquired assets and assumed liabilities, based on their preliminary acquisition-date fair values, in accordance with ASC 805 and ASC 820. Further, the purchase price allocation for the purposes of these unaudited pro forma condensed combined financial statements was primarily limited to the identification and valuation of intangible assets. Choice believes this is an appropriate approach based on a review of similar type acquisitions which appeared to indicate that the most significant and material portion of the purchase price would be allocated to identifiable intangible assets and goodwill. For purposes of these unaudited pro forma condensed combined financial statements, Choice has assumed Wyndham’s historical carrying values approximate fair value, unless otherwise indicated in Note 5.
| Assets acquired | Amount | |||
Cash and cash equivalents | $ | 79 | ||
Accounts receivable | 272 | |||
Prepaid expenses and other current assets | 110 | |||
Property and equipment | 91 | |||
Intangible assets | 6,300 | |||
Deferred income taxes | 6 | |||
Other assets | 151 | |||
|
| |||
Total assets acquired | $ | 7,009 | ||
|
| |||
Liabilities assumed | ||||
Accounts payable | $ | 46 | ||
Accrued expenses and other current liabilities | 268 | |||
Deferred revenue - current | 83 | |||
Long-term debt | 490 | |||
Long-term deferred revenue | 170 | |||
Deferred income taxes (liability) | 1,456 | |||
Other liabilities | 179 | |||
|
| |||
Total liabilities assumed | $ | 2,692 | ||
|
| |||
Fair value of net assets acquired | $ | 4,317 | ||
Goodwill | 4,666 | |||
|
| |||
Total purchase consideration | $ | 8,983 | ||
|
| |||
These preliminary fair values were determined using the best information available as of the date of this filing. The adjustments necessary to reflect the application of purchase accounting and recognition of the acquired assets and assumed liabilities at their acquisition-date fair value are further described in Note 5 below. As discussed in Note 1 herein, the finalization of these preliminary fair values, the preliminary purchase price and resulting allocation of such, is ongoing. Accordingly, the finalized amounts may differ from these preliminary amounts presented herein, and those differences may be material.
The following is a discussion regarding certain amounts not otherwise addressed in Note 5, but which may directly impact the aforementioned allocation of purchase price and resulting goodwill.
Property and equipment: Because we were not able to conduct detailed due diligence on the underlying assets that comprise Wyndham’s reported Property and equipment balance, we have assumed for purposes of these unaudited pro forma condensed combined financial statements, that the carrying value of these assets approximates fair value. Choice does not have sufficient information as of the date of this Offer to Exchange regarding the specific nature, age, condition, or location of Wyndham’s property and equipment to determine fair value. Given these elements can result in differences between fair value and current net book value, Choice will conduct a valuation of the acquired property and equipment, if and when the Transaction is complete.
Operating lease right-of-use assets and liabilities: Similar to property and equipment, Choice has assumed the carrying values for operating lease right-of-use assets and liabilities approximates fair value. Given the lack of detailed information available to Choice as of the date of this Offer to Exchange regarding the specific nature, location, and arrangements of the respective leases, the fair value is not determinable at this time and a full assessment will be conducted if and when the Transaction is complete.
110
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN MILLIONS UNLESS OTHERWISE INDICATED)
The following table summarizes the components of the estimated consideration (in millions except per-share information and the exchange ratio):
Wyndham common shares outstanding* | 83.0 | |||
Estimated outstanding equity awards, to be exchanged** | 1.9 | |||
|
| |||
Estimated Wyndham shares outstanding | 84.9 | |||
Cash consideration (per Wyndham share) | $ | 49.50 | ||
|
| |||
Estimated cash portion of purchase price | $ | 4,203 | ||
Estimated Wyndham shares outstanding | 84.9 | |||
Exchange ratio | 0.324 | |||
|
| |||
Total Choice common shares issued | 27.5 | |||
Choice’s share price*** | $ | 114.31 | ||
|
| |||
Equity portion of purchase price | $ | 3,144 | ||
Estimated payoff of Wyndham debt | $ | 1,636 | ||
|
| |||
Total estimated consideration to be paid | $ | 8,983 | ||
|
|
| * | Represents Wyndham’s common shares outstanding, as of September 30, 2023, not excluding those purchased by Choice during the fourth quarter 2023. |
| ** | Calculated using the treasury stock method. |
| *** | Represents Choice’s share price as of December 4, 2023. |
The equity portion of the purchase price will depend on the market price of the Choice’s common shares when the acquisition is consummated. Based on historical volatility, Choice believes that a 10% increase or decrease in the market price of its common stock is reasonably possible, which would result in a $314 increase or decrease in the equity portion of purchase price.
111
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN MILLIONS UNLESS OTHERWISE INDICATED)
4. Pro Forma Financing Adjustments
| a. | Choice expects to have sufficient cash resources available to complete the transactions contemplated by the Offer to Exchange. In addition to cash on hand, Choice currently intends to borrow or otherwise finance to complete the Proposed Combination, repay a portion of Wyndham’s indebtedness and pay related transaction expenses. Choice is highly confident in its ability to obtain fully committed financing based on indications from two separate bulge bracket global banks for such amounts; however, Choice has not negotiated the terms of, nor entered into, any such financing agreement. Among financing alternatives, Choice is in consideration of a 364-day, $5,997 bridge loan (the “Bridge Loan”), with interest based on a one-month benchmark rate (e.g., Secured Overnight Financing Rate) plus certain margins. For purposes of these unaudited pro forma condensed combined financial statements, it is assumed that Choice will obtain the Bridge Loan and will incur $83 of debt issuance costs, resulting in net proceeds of $5,914 cash and corresponding debt, which is classified as a currently liability. It is expected that Choice will secure long-term financing before the Bridge Loan matures. |
We have included fees and expenses relating to the Bridge Loan only to the extent we believe they represent a reasonable estimate of the continuing impact of long-term financing. Interest expense on new financing does not include fees of approximately $135 million that would be payable in respect of the Bridge Loan if loans under this facility were to remain unpaid more than 90 days after borrowing, as we consider these fees as nonrecurring and not reflective of the blended interest rate we expect to incur on long-term financing. The fees and interest expense Choice will ultimately pay could vary significantly from what is assumed in these unaudited pro forma condensed combined financial condition.
Legal Proceedings
statements.
| b. | The adjustments to record interest expense and amortization of debt issuance costs assumes the Bridge Loan was obtained on January 1, 2022, and was outstanding for the entire year ended December 31, 2022, and the nine months ended September 30, 2023. Given that Choice expects to secure long-term financing but has not negotiated the terms of such financing agreements, these unaudited pro forma condensed combined financial statements assume the same interest rate and prorated share of additional debt issuance costs for the nine months ended September 30, 2023. |
| Financing Adjustments to Interest expense, net | Nine Months Ended September 30, 2023 | Year Ended December 31, 2022 | ||||||
Estimated interest expense on the Bridge Loan | $ | 327 | $ | 437 | ||||
Amortization of related debt issuance costs | 62 | 83 | ||||||
|
|
|
| |||||
Financing Adjustments to Interest expense, net | $ | 389 | $ | 520 | ||||
|
|
|
| |||||
A 1/8 of a percentage point increase or decrease in the benchmark rate would result in a change in interest expense of approximately $6 for the nine months ended September 30, 2023 and approximately $8 for the year ended December 31, 2022.
| c. | To record the income tax effect of the pro forma financing adjustments for the nine months ended September 30, 2023 and year ended December 31, 2022, based on a blended foreign, federal, and state effective rate of approximately 24.78% and 24.72%, respectively. The effective tax rate of the combined company could be significantly different than what is presented in these unaudited pro forma condensed combined financial statements depending on post-acquisition activities, including legal entity restructuring and the geographical mix of taxable income. |
5. Pro Forma Transaction Accounting Adjustments
The Companybelow adjustments reflect the Company’s application of purchase accounting, pursuant to ASC 805 and ASC 820. The resulting impact of these adjustments, applicable to the acquired assets and assumed liabilities, are included in the purchase price allocation and determination of goodwill, as described in Note 3.
| a. | Reflects the cash consideration to be paid in connection with the Transaction, which includes the estimated cash portion of the purchase price of $4,203 and the estimated settlement of a portion of Wyndham’s debt of $1,636; refer to Note 3. |
| b. | Reflects adjustments to remove Wyndham’s unamortized capitalized costs of $5 and $32, from Prepaid expenses and other current assets and Other assets, respectively. Corresponding adjustments of $4 and $6 were made to reduce Selling, general and administrative expense in the unaudited pro forma condensed combined statements of income (loss) for the nine months ended September 30, 2023 and year ended December 31, 2022, respectively. |
| c. | Reflects adjustments to remove Wyndham’s historical goodwill of $1,525 and recognize estimated transaction goodwill of $4,666 recognized as a result of the preliminary purchase price allocation; refer to Note 3. |
112
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN MILLIONS UNLESS OTHERWISE INDICATED)
| d. | Reflects the net adjustment to remove Wyndham’s intangible assets at historic carrying value of $1,584, Wyndham’s unamortized franchise agreement acquisition costs of $203 (as further described in Note 5(e) below), and recognize the acquired intangible assets at their preliminary fair value of $6,300. As a result of this adjustment, the unaudited pro forma condensed combined statements of income (loss) have also been adjusted to include the resulting incremental amortization expense, which is based on Choice’s estimate of the remaining useful lives of these acquired assets. |
The following table summarizes the preliminary fair value of the acquired intangible assets, their estimated useful lives, and the resulting amortization expense:
| Amortization Expense | ||||||||||||||||
| Identifiable intangible assets | Preliminary Fair Value | Estimated Useful Life (years) | Nine Months Ended September 30, 2023 | Year Ended December 31, 2022 | ||||||||||||
Trade names and trademarks | $ | 3,300 | N/A | N/A | N/A | |||||||||||
Franchise agreements | 2,800 | 15.0 | 140 | 187 | ||||||||||||
Management agreements | 200 | 18.0 | 8 | 11 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total | 6,300 | 148 | 198 | |||||||||||||
Less: Historical Wyndham Amounts(1) | 1,584 | 19 | 31 | |||||||||||||
|
|
|
|
|
| |||||||||||
Pro Forma Transaction Accounting Adjustment | $ | 4,716 | $ | 129 | $ | 167 | ||||||||||
|
|
|
|
|
| |||||||||||
| (1) | Adjusted to exclude amounts related to franchise agreement acquisition costs, described in Note 5(e). |
These preliminary estimates of fair value and corresponding useful lives are still being finalized. Accordingly, a 10% change in the valuation of these assets would cause a corresponding increase or decrease in the balance of goodwill and would increase or decrease the annual amortization expense by $20.
| e. | Reflects the adjustment to remove $203 of Wyndham’s unamortized franchise agreement acquisition costs from Intangible assets, net as of September 30, 2023. These costs pertain to amounts Wyndham paid to franchisees as an incentive to enter into new franchise agreements. Corresponding adjustments of $12 and $13 were made to reduce Royalty, licensing and management fees in the unaudited pro forma condensed combined statements of income (loss) for the nine months ended September 30, 2023 and year ended December 31, 2022, respectively. |
| f. | Reflects adjustment of $45 to remove the interest rate swap used to hedge interest rate attributable to the historical Wyndham debt, which is expected to be extinguished in connection with the Transaction. Related adjustments were made to unwind the historical impacts to Interest expense, net, resulting in a $26 increase and a $2 decrease to the unaudited pro forma condensed combined statements of income for the nine months ended September 30, 2023 and year ended December 31, 2022, respectively. |
| g. | Reflects estimated, nonrecurring acquisition-related costs of $72, which are expected to be incurred by Choice in connection with the Transaction. |
| h. | Reflects the adjustment to remove certain Wyndham debt of $37 and $1,587 from the current and noncurrent portion of Long-term debt, respectively, which is expected to be settled in connection with the Transaction, and $3 of unamortized deferred issuance costs from Other assets. Additionally, Long-term debt reflects a reduction of $46 to recognize, at its acquisition-date fair value, Wyndham’s 4.375% senior unsecured notes (due August 2028), which are expected to be assumed by Choice in connection with the Transaction. |
As a result of the adjustments made to the relevant debt captions, corresponding adjustments of $56 and $62, were made to reduce Interest expense to reflect the debt payoff in the unaudited pro forma condensed combined statements of income (loss) for the nine months ended September 30, 2023 and year ended December 31, 2022, respectively. To reflect the discount in fair value of the senior unsecured notes, corresponding adjustments of $7 and $9 were made to reduce interest expense for the nine months ended September 30, 2023 and year ended December 31, 2022.
| i. | To record the income tax effect of the pro forma adjustments for the nine months ended September 30, 2023 and year ended December 31, 2022, based on a blended foreign, federal, and state effective rate of approximately 24.78% and 24.72%, respectively. The effective tax rate of the combined company could be significantly different than what is presented in these unaudited pro forma condensed combined financial statements depending on post-acquisition activities, including legal entity restructuring and the geographical mix of taxable income. |
113
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN MILLIONS UNLESS OTHERWISE INDICATED)
| j. | To eliminate Wyndham’s common stock and record Choice common shares to be issued in connection with the Proposed Combination, as follows: |
| (in millions) | As of September 30, 2023 | |||
Eliminate Wyndham’s common stock | $ | (1 | ) | |
Record issuance of Choice common shares in connection with the Proposed Combination; refer to Note 3 | 1 | |||
|
| |||
Total | $ | — | ||
| k. | To eliminate Wyndham’s Additional paid-in capital and to record Choice common shares to be issued in connection with the Proposed Combination, as follows: |
| (in millions) | As of September 30, 2023 | |||
Eliminate Wyndham additional paid-in capital | $ | (1,588 | ) | |
Record issuance of Choice common shares in connection with the Proposed Combination; refer to Note 3 | 3,143 | |||
|
| |||
Total | 1,555 | |||
| l. | To eliminate Wyndham’s Accumulated other comprehensive loss and Treasury stock. |
| m. | To adjust retained earnings, as follows: |
| (in millions) | As of September 30, 2023 | |||
Eliminate Wyndham’s accumulated retained earnings | $ | (467 | ) | |
Record estimated transaction costs expected to be incurred by Choice in connection with the Proposed Combination, net of tax | (59 | ) | ||
|
| |||
Total | (526 | ) | ||
| n. | As shown in Note 3, Choice is estimated to issue 27.5 additional shares in connection with the Transaction. These shares are combined with the historical Choice shares for purposes of determining earnings per share. Accordingly, the computation of basic and diluted earnings per share for the combined company is as follows: |
| (in millions, except per share amounts) | Nine Months Ended September 30, 2023 | Year Ended December 31, 2022 | ||||||
Numerator: | ||||||||
Net income | $ | 109 | $ | 167 | ||||
Income allocated to participating securities | — | (1 | ) | |||||
|
|
|
| |||||
Net income available to common shareholders | $ | 109 | $ | 166 | ||||
|
|
|
| |||||
Denominator: | ||||||||
Weighted average shares of common stock outstanding – basic | 78.1 | 82.1 | ||||||
|
|
|
| |||||
Basic earnings per share | $ | 1.40 | $ | 2.02 | ||||
|
|
|
| |||||
Numerator: | ||||||||
Net income | $ | 109 | $ | 167 | ||||
Income allocated to participating securities | — | (1 | ) | |||||
|
|
|
| |||||
Net income available to common shareholders | $ | 109 | $ | 166 | ||||
|
|
|
| |||||
Denominator: | ||||||||
Weighted average shares of common stock outstanding – basic | 78.1 | 82.1 | ||||||
Dilutive effect of stock options and PVRSUs | 0.4 | 0.5 | ||||||
|
|
|
| |||||
Weighted average shares of common stock outstanding – diluted | 78.5 | 82.6 | ||||||
|
|
|
| |||||
Diluted earnings per share | $ | 1.39 | $ | 2.01 | ||||
|
|
|
| |||||
114
DESCRIPTION OF CHOICE CAPITAL STOCK
The following summary of the terms of the capital stock of Choice is not meant to be complete and is qualified by reference to the relevant provisions of the DGCL and the complete texts of the Choice Certificate of Incorporation and the Choice Bylaws. Copies of the Choice Certificate of Incorporation and the Choice Bylaws are incorporated by reference and will be sent to holders of shares of Choice Common Stock and Wyndham Common Stock upon request. See “Where You Can Find More Information” below.
Common Stock
The Choice Certificate of Incorporation authorizes the issuance of 160,000,000 shares of common stock, par value $0.01 per share. Shares of common stock of Choice may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the Choice Board prior to the issuance of any shares thereof. A series of common stock consisting of 75,000,000 shares, or such larger number of shares as the Choice Board shall from time to time fix by resolution or resolutions, may be issued from time to time by the Choice Board. Such shares have the rights summarized in this section. Choice may issue additional shares of common stock without further stockholder approval, up to the maximum authorized number of shares, except as may be otherwise required by applicable law or stock exchange regulations.
Dividend Rights
Holders of Choice Common Stock are entitled to receive, subject to preferences that may be applicable from time to time with respect to any outstanding class or series of stock having a preference with respect to dividends, such dividends as are declared by the Choice Board.
Voting Rights
Each holder of common stock is entitled to one vote for each share of common stock held of record on the applicable record date on all matters submitted to a vote of stockholders. Holders of Choice Common Stock do not have cumulative voting rights.
Rights upon Liquidation or involvedDissolution
In the event of liquidation, dissolution or winding-up of Choice, each share of common stock is entitled to share pro rata in litigation. Noneany distribution of such litigation currently involvingChoice assets after payment or providing for the Company, either
individuallypayment of liabilities and the liquidation preference of any outstanding class or series of stock having a preference with respect to distribution of assets upon liquidation or dissolution. Holders of Choice Common Stock have no preferential, preemptive, conversion, sinking fund or redemption rights.
Certain Anti-takeover Matters
The Choice Certificate of Incorporation and the Choice Bylaws contain provisions that may make it more difficult for a potential acquirer to acquire Choice by means of a transaction that is not negotiated with Choice’s board of directors. These provisions and the DGCL could delay or prevent entirely a merger or acquisition that Choice’s stockholders consider favorable. These provisions may also discourage acquisition proposals or have the effect of delaying or preventing entirely a change in control, which could harm Choice’s stock price.
115
The following is a description of the anti-takeover effects of certain provisions of the Choice Certificate of Incorporation, the Choice Bylaws and the DGCL.
No Stockholder Action by Written Consent
The DGCL provides that stockholders of a Delaware corporation can act by written consent instead of by vote at a stockholder meeting, unless the corporation’s certificate of incorporation provides otherwise. The Choice Certificate of Incorporation provides that, subject to the rights of any holders of any class or series of capital stock as specified in the aggregate, is expected to be materialresolution providing for such class or series of stock, stockholders may not act by written consent.
No Cumulative Voting
The DGCL provides that stockholders of a Delaware corporation are not entitled to the Company's
business, financial conditionright to cumulate votes in the election of directors unless its certificate of incorporation provides otherwise. The Choice Certificate of Incorporation does not provide for cumulative voting.
Special Meetings of Stockholders
The Choice Certificate of Incorporation provides that special meetings of stockholders may only be called by the chairman or results of operations.
Employees
The Company employed approximately 2,268 people as of June 30, 1998. Nonevice chairman of the Company's employees are represented by unionsboard of directors or covered by collective
bargaining agreements. The Company considers its relations with its employees
to be satisfactory.
Company History
Prior to becomingthe corporate secretary upon the written request of a separate, publicly-held company on October 15, 1997
pursuant to the Company Spin-Off, the Company was known as Choice Hotels
Franchising, Inc. and was a wholly-owned subsidiary of Former
52
Choice. On October 15, 1997, Former Choice distributed to its stockholders its
business of franchising hotels under the Choice Brands (which had been
conducted primarily by the Company) and its European hotel ownership and
franchising business pursuant to the Company Spin-Off. At the timemajority of the Company Spin-Off, the Company changed its name to "Choice Hotels
International, Inc.," and Former Choice changed its name to "Sunburst
Hospitality Corporation."
Prior to November 1996, Former Choice was a subsidiary of Manor Care which,
directly and through its subsidiaries, engaged in the Lodging Business and the
health care business. On November 1, 1996, Manor Care separated the Lodging
Business from its health care business pursuant to the Former Choice Spin-Off.
In connection with the Former Choice Spin-Off, the Company became a wholly-
owned subsidiary of Former Choice and remained as such until consummation of
the Company Spin-Off.
53
MANAGEMENT
Board of Directors
The Company's Board of Directors is divided into three classes, designated
Class I, Class II and Class III, each as nearly equal intotal number of directors as possible. The termswhich Choice would have if there were no vacancies on the board. Choice Bylaws provide that to properly bring business before a special meeting of stockholders, the business must be specified in a notice of meeting given by or at the direction of the Class Iboard of directors will terminateor otherwise properly brought before the meeting by or at the direction of the board of directors. However, in the event Choice calls a special meeting of stockholders for the purpose of electing one or more directors, stockholders seeking to nominate candidates for election as directors must do so pursuant to Choice’s notice of meeting or provide timely notice of their nominations in writing to Choice’s corporate secretary.
Generally, to be timely, a stockholder’s notice must be received by the corporate secretary not earlier than the 90th day prior to the special meeting and not later than the close of business on the later of the (i) 60th day prior to such special meeting or (ii) 10th day following the day on which notice of the date of the 2001special meeting was mailed or public disclosure thereof was made by Choice, whichever first occurs. Choice Bylaws also specify requirements as to the form and content of a stockholder’s notice. These provisions may impede stockholders’ ability to make nominations for directors at a special meeting of stockholders called for the purpose of electing directors.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
The Choice Bylaws provide that stockholders seeking to nominate candidates for election as directors or to bring business before an annual meeting of stockholders must provide timely notice of their proposal in writing to Choice’s corporate secretary.
Generally, to be timely, a stockholder’s notice must be received at Choice’s principal executive offices not less than 60 days nor more than 90 days prior to the Company's stockholders; the termsfirst anniversary of the Class
II directors will terminate onprevious year’s annual meeting. However, in the event that the date of the 1999 annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary, notice by the stockholder must be timely received not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the Company's stockholders; and(i) 60th day prior to such annual meeting or (ii) 10th day following the terms
116
date on which notice of the Class III directors will
terminate on the date of the 2000annual meeting was mailed or public disclosure thereof was made by Choice, whichever first occurs. Choice Bylaws also specify requirements as to the form and content of a stockholder’s notice. These provisions may impede stockholders’ ability to bring matters before an annual meeting of the Company's
stockholders. At eachstockholders or make nominations for directors at an annual meeting of stockholders.
Heightened Voting Requirements for Dissolutions, Liquidations, Mergers or Consolidations, or Sales, Leases or Exchanges of All or Substantially All of Choice’s Property or Assets
The Choice Certificate of Incorporation provides that the Company'saffirmative vote of the holders of the outstanding shares of capital stock of Choice representing not less than two-thirds of the total number of votes that may be cast by holders of capital stock of Choice in the election of directors is required to approve of any proposal for Choice to dissolve, liquidate, merge, or consolidate with any other entity (other than an entity 90% of the voting power of which is owned by Choice), or sell, lease or exchange all or substantially all of its property and assets, including its goodwill and its corporate franchises.
Heightened Voting Requirements for Certain Amendments to Governance Documents
The Choice Certificate of Incorporation provides that the affirmative vote of the holders of the outstanding shares of capital stock representing not less than two-thirds of the total number of votes that may be cast by holders of capital stock in the election of directors is required to amend, alter, change or repeal, or to adopt any provision inconsistent with, Article 8 of the Choice Certificate of Incorporation (described above under the heading “Heightened Voting Requirements for Dissolutions, Liquidations, Mergers or Consolidations, or Sales, Leases or Exchanges of All or Substantially All of Choice’s Property or Assets”).
The Choice Certificate of Incorporation also provides that stockholders successorsmay not make, adopt, alter, amend, change or repeal the Choice Bylaws except upon the affirmative vote of the holders of the outstanding shares of capital stock representing not less than two-thirds of the total number of votes that may be cast by holders of capital stock in the election of directors.
Listing
The Choice Common Stock is listed on the New York Stock Exchange under the trading symbol “CHH.”
117
Wyndham stockholders who validly tender their shares in the Offer and do not properly withdraw such shares may receive Choice Common Stock following consummation of the Offer. As Choice and Wyndham are Delaware corporations, the rights of their respective stockholders are governed by the applicable laws of the State of Delaware, including the DGCL, and by such companies’ respective Certificates of Incorporation and Bylaws.
The following is a summary comparison of:
the current rights of Wyndham stockholders under the DGCL and the Wyndham Charter and Wyndham Bylaws; and
the rights Wyndham stockholders will have as Choice stockholders under the Choice Certificate of Incorporation and the Choice Bylaws upon the consummation of the Offer and the Second-Step Mergers.
The following summary is not a complete statement of the rights of stockholders of either of the two companies or a complete description of the specific provisions referred to below. The statements in this section are qualified in their entirety by reference to, and are subject to, the classdetailed provisions of directors whose terms expire at that annual meetingthe DGCL, the Choice Certificate of Incorporation, Choice Bylaws and the Wyndham Charter and Wyndham Bylaws. Copies of the Choice Certificate of Incorporation, Choice Bylaws and the Wyndham Charter and Wyndham Bylaws are incorporated by reference herein and will be electedsent to Wyndham stockholders, upon request. See the section of this Exchange Offer titled “Where You Can Find More Information.”
| Choice | Wyndham | |||
| Authorized Capital | The aggregate number of shares which Choice has the authority to issue is 165,000,000 shares of capital stock consisting of (i) 160,000,000 shares of common stock, par value $0.01 per share, and (ii) 5,000,000 shares of preferred stock, par value $0.01 per share. Choice does not have any shares of preferred stock outstanding as of the date of this Exchange Offer. | The aggregate number of shares which Wyndham has the authority to issue is 606,000,000 shares of capital stock consisting of (i) 600,000,000 shares of common stock, par value $0.01 per share, and (ii) 6,000,000 shares of preferred stock, par value $0.01 per share. Wyndham has not issued any shares of preferred stock as of the date of this Exchange Offer. | ||
| Voting Rights | Except as otherwise specifically provided in the Choice Certificate of Incorporation and except as otherwise provided by law, voting rights upon any and all matters are vested exclusively in the holders of Choice Common Stock with each share of Choice Common Stock having one vote. | Except as otherwise specifically provided in the Wyndham Charter and except as otherwise provided by law, voting rights upon any and all matters are vested exclusively in the holders of Wyndham Common Stock with each share of Wyndham Common Stock having one vote. | ||
118
| Number and Election of Directors | Subject to the rights of any holders of any class or series of stock as specified in the resolutions providing for such class or series of stock, the Choice Board must consist of no less than three and no more than 12 directors. The authorized number of directors may be determined from time to time exclusively by resolution of a majority of the total number of directors which Choice would have if there were no vacancies (the “Whole Choice Board”). No decrease in the number of directors will shorten the term of any incumbent director. At each annual meeting of stockholders, directors are elected to hold office until the next annual meeting. Unless the election is contested, each director is elected by the affirmative vote of a majority of the votes cast for or against the director by the holders of the shares of Choice entitled to vote in the election at any meeting for the election of directors at which a quorum is present. In a contested election, directors are elected by a plurality of the votes cast at a meeting of stockholders at which a quorum is present by the holders of shares entitled to vote in the election. An election is considered contested if as of the tenth day preceding the date Choice first mails its notice of meeting to stockholders for the election of directors there are more nominees for election than positions on the board of directors to be filled by election at the meeting. | Subject to the terms of any outstanding class or series of preferred stock, the Wyndham Board must consist of no less than three and no more than 15 directors. The authorized number of directors shall exclusively be determined from time to time only by a vote of a majority of the total number of directors of Wyndham. No decrease in the number of directors will shorten the term of any incumbent director. At each annual meeting of stockholders, directors are elected to hold office until the next annual meeting. Any director who is not elected shall promptly offer to resign from the Wyndham Board, which the Wyndham Board may then accept or reject in accordance with the Wyndham Bylaws. Except as described in the following sentence, each director is elected by the affirmative vote of a majority of the votes cast for or against the director by the holders of the shares of Wyndham entitled to vote in the election at any meeting for the election of directors at which a quorum is present. In the event a stockholder has notified the secretary of Wyndham that it intends to propose one or more director nominees for election and such nomination has not been formally and irrevocably withdrawn on or prior to the date that is ten days in advanced of the date that Wyndham gives notice of such meeting to its stockholders, directors are elected by a plurality of the votes cast at a meeting of stockholders at which a quorum is present by the holders of shares entitled to vote in the election. | ||
119
| Vacancies on the Board of Directors and Removal of Directors | Subject to the rights of any holders of any class or series of stock as specified in the resolutions providing for such class or series of stock, any vacancies on the Choice Board, or if any new directorships are created, shall be filled solely by a majority of the directors then in office, whether or not less than a quorum. Each director so chosen shall hold office until the next annual meeting of stockholders and until a successor is duly elected and qualified, subject, however, to prior death, resignation, retirement, disqualification or removal from office. If there are no directors in office, a special meeting of stockholders shall be called in accordance with the provisions of Choice’s Certificate of Incorporation or its bylaws, at which meeting such vacancies shall be filled. | Subject to the terms of any outstanding class or series of preferred stock, any vacancy on the Wyndham Board that results from an increase in the number of directors may be filled by a majority of the directors then in office, provided that a quorum is present, and any other vacancy may be filled by a majority of directors then in office, even if less than a quorum, or by a sole remaining director. Each director so chosen shall hold office until the until the next annual meeting of stockholders and until a successor is duly elected and qualified, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Unless otherwise provided therein, under Section 242 of the DGCL, unless the certificate of incorporation requires a greater vote of the stockholders, a proposed amendment to the certificate of incorporation must be approved by the affirmative vote of a majority of the voting power of the outstanding stock entitled to vote thereon and a majority of the outstanding stock of each class entitled to vote as a class thereon. | ||
Amendments to the Certificate of Incorporation | The Choice Certificate of Incorporation provides that an affirmative vote of the stockholders holding outstanding shares of capital stock representing not less than two-thirds of the voting power of Choice will be required to amend, alter, change or repeal, or to adopt any provision inconsistent with, Article 8 of the Choice Certificate of Incorporation. | |||
120
| Unless otherwise provided therein, under Section 242 of the DGCL, unless the certificate of incorporation requires a greater vote of the stockholders, a proposed amendment to the certificate of incorporation must be approved by the affirmative vote of a majority of the voting power of the outstanding stock entitled to vote thereon and a majority of the outstanding stock of each class entitled to vote as a class thereon. | ||||
| Amendments to Bylaws | The Choice Board shall have the power to make, adopt, alter, amend, change or repeal the Choice Bylaws by resolution adopted by the affirmative vote of a majority of the Whole Choice Board. The affirmative vote of the holders of the outstanding shares of capital stock representing not less than two- thirds of the voting power of Choice may adopt, alter, amend, change or repeal Choice Bylaws. | The Wyndham Board shall have the power to make, adopt, alter, amend, or repeal the Wyndham Bylaws by resolution adopted by the affirmative vote of a majority of the entire Wyndham Board. Holders of at least a majority of the voting power of the shares entitled to vote generally in the election of directors may adopt, alter, amend, or repeal the Wyndham Bylaws. | ||
| Ability to Call Special Meeting of Stockholders | Special meetings of the stockholders may be called at any time by the chairman or vice chairman of the Choice Board or the secretary upon the written request of a majority of the Whole Choice Board. | Special meetings of the stockholders may be called by the chairman of the Wyndham Board or Wyndham’s chief executive officer, and shall be called by Wyndham’s chief executive officer upon the written request of the majority of the Wyndham Board or a committee of the Wyndham Board whose power and authority includes the power to call such meetings. A stockholders right to call a special meeting is specifically denied by the Wyndham Bylaws. | ||
| Limitation of Personal Liability of Directors and Officers | The Choice Certificate of Incorporation provides that no director shall be liable to Choice or its stockholders for monetary damages for breach of fiduciary duty as a director except for breach of the director’s duty of loyalty to Choice or the stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a | The Wyndham Charter provides that no director or officer of Wyndham shall be personally liable to Wyndham or its stockholders for monetary damages for breach of fiduciary duty as a director or officer, as applicable, to the full extent permitted by the DGCL or any other applicable law in effect. | ||
121
knowing violation of law, for unlawful payment of dividends, unlawful stock redemptions or repurchases or for any transaction from which the director derived an improper personal benefit. Section 102(b)(7) of the DGCL provides that a corporation may include in its certificate of incorporation a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. However, the provision may not eliminate or limit the liability of a director for: (i) a breach of the duty of loyalty; (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) unlawful payments of dividends, certain stock repurchases or redemptions; or (iv) any transaction from which the director derived an improper personal benefit. | Section 102(b)(7) of the DGCL provides that a corporation may include in its certificate of incorporation a provision eliminating or limiting the personal liability of a director or officer to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. However, the provision may not eliminate or limit the liability of (a) a director or officer for (i) a breach of the duty of loyalty; (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; or (iii); any transaction from which the director derived an improper personal benefit; (b) a director for unlawful payments of dividends, certain stock repurchases or redemptions; and (c) a officer in any action by or in the right of the corporation. | |||
| Indemnification of Directors and Officers | Choice’s Certificate of Incorporation provides that Choice shall indemnify each person who is or was or has agreed to become a director or officer of Choice, and may indemnify other employees and agents of Choice, to the fullest extent permitted by Section 145 of the DGCL, against all expenses and liabilities (including but not limited to counsel fees) reasonably incurred by or imposed upon such person in connection with any proceeding to which he or she may be a made a party by reason of his or her being or having been a director, officer, employee or agent of | Wyndham’s Certificate of Incorporation provides that Wyndham shall indemnify its directors and officers to the fullest extent authorized or permitted by law, and such right to indemnification shall continue as to a person who has ceased to be a director or officer of Wyndham and shall inure to the benefit of his or her heirs, executors and personal and legal representatives. The right to indemnification shall include the right to be paid by the Corporation the expenses incurred in defending or otherwise participating in any proceeding in advance of its final disposition. | ||
122
Choice, or any settlement thereof, whether or not he or she is a director, officer, employee or agent is adjudged guilty of willful misfeasance or malfeasance in the performance of his or her duties. Choice Bylaws provide that Choice shall indemnify any person who was or is a party or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding or investigation, whether civil, criminal or administrative, and whether external or internal to Choice (other than a judicial action or suit brought by or in the right of Choice) by reason of the fact that he is or was a director, officer, employee or agent of Choice, or that, being or having been such a director, officer, employee or agent, he is or was serving at the request of Choice as a director, officer, employee or agent or another corporation, partnership, joint venture, trust or other enterprise (“Agents”), against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding, or any appeal thereof, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of Choice, and with respect to any criminal action or proceeding had no reasonable cause to believe his or her conduct was unlawful. | The Wyndham Bylaws provide that, unless otherwise provided in the Bylaws, Wyndham shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of Wyndham), by reason of the fact that such person is or was a director or officer of Wyndham, or is or was a director or officer of Wyndham serving at the request of Wyndham as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of Wyndham, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. The Wyndham Bylaws provide that, unless otherwise provided in the Bylaws, Wyndham shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Wyndham to procure a judgment in its favor by reason of the fact that such | |||
123
Choice Bylaws provide that Choice shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed juridical action or suit brought by or in the right of Choice to procure a judgment in its favor by reason of the fact that he or she is or was an Agent (as defined above) against expenses (including attorneys’ fees) actually and reasonably incurred by him or her in connection with the defense, settlement or appeal of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of Choice, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for gross negligence or misconduct in the performance of his or her duty to Choice unless and only to extent that the Court of Chancery or the court in which such action or suit was brought shall have determined upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or other such court shall deem proper. Section 145 of the DGCL provides that, subject to certain limitations in the case of derivative suits brought by a corporation’s stockholders in its name, a corporation may indemnify any person who was or is made a party to any threatened, pending or completed action, suit or proceeding on account of being or having been a director, officer, | person is or was a director or officer of the Wyndham, or is or was a director or officer of the Wyndham serving at the request of the Wyndham as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Wyndham; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Wyndham unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145 of the DGCL provides that, subject to certain limitations in the case of derivative suits brought by a corporation’s stockholders in its name, a corporation may indemnify any person who was or is made a party to any threatened, pending or completed action, suit or proceeding on account of being or | |||
124
employee or agent of the corporation (or is or was serving at the request of the corporation in such capacity for another corporation, partnership, joint venture, trust or other enterprise) against expenses, including attorney’s fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with the action, suit or proceeding through, among other things, a majority vote of the directors who were not parties to the action, suit or proceeding, even if less than a quorum, if the person: (i) acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation; and (ii) with respect to a criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Section 145 of the DGCL also permits indemnification by a corporation against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made in respect of any claim, issue or matter as to which the person is adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which the action or suit was brought determines upon application that the person is fairly and reasonably entitled to indemnity for the expenses which the court deems to be proper. | having been a director, officer, employee or agent of the corporation (or is or was was serving at the request of the corporation in such capacity for another corporation, partnership, joint venture, trust or other enterprise) against expenses, including attorney’s fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with the action, suit or proceeding through, among other things, a majority vote of the directors who were not parties to the action, suit or proceeding, even if less than a quorum, if the person: (i) acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation; and (ii) with respect to a criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Section 145 of the DGCL also permits indemnification by a corporation against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made in respect of any claim, issue or matter as to which the person is adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which the action or suit was brought determines upon | |||
125
To the extent a director or officer is successful in the defense of such an action, suit or proceeding, the corporation is required by Section 145 of the DGCL to indemnify such person against expenses actually and reasonably incurred thereby. Expenses (including attorneys’ fees) incurred by such persons in defending any action, suit or proceeding may be paid in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of that person to repay the amount if it is ultimately determined that that person is not entitled to be so indemnified. | application that the person is fairly and reasonably entitled to indemnity for the expenses which the court deems to be proper. To the extent a director or officer is successful in the defense of such an action, suit or proceeding, the corporation is required by Section 145 of the DGCL to indemnify such person against expenses actually and reasonably incurred thereby. Expenses (including attorneys’ fees) incurred by such persons in defending any action, suit or proceeding may be paid in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of that person to repay the amount if it is ultimately determined that that person is not entitled to be so indemnified. | |||
| Preemptive Rights of Stockholders | Holders of Choice Common Stock have no preferential, preemptive, conversion, sinking fund or redemption rights. | Holders of Wyndham Common Stock have no preferential, preemptive, conversion, sinking fund or redemption rights. | ||
| Dividends | Dividends upon the outstanding capital stock of Choice may be declared by the Choice Board at any regular or special meeting, out of assets legally available therefor, pursuant to law, and may be paid in cash, in property, or in shares of Choice Common Stock. | Dividends upon the outstanding capital stock of Wyndham may be declared by the Wyndham Board at any regular or special meeting, out of assets legally available therefor, pursuant to law, and may be paid in cash, in property, or in shares of Wyndham Common Stock. | ||
| State Anti-Takeover Statutes | The Choice Certificate of Incorporation and Choice Bylaws and the DGCL contain provisions that may make it more difficult for a potential acquirer to acquire Choice by means of a transaction that is not negotiated with the | The Wyndham Charter, Wyndham Bylaws and the DGCL contain provisions that may make it more difficult for a potential acquirer to acquire Wyndham by means of a transaction that is not negotiated with the Wyndham | ||
126
Choice Board. These provisions could delay or prevent entirely a merger or acquisition that Choice’s stockholders consider favorable. These provisions may also discourage acquisition proposals or have the effect of delaying or preventing entirely a change in control, which could harm Choice’s stock price. Choice’s Certificate of Incorporation provides that Choice expressly elects not to be governed by Section 203 of the DGCL. Choice’s Certificate of Incorporation provides that stockholders may not act by written consent and that special meetings of stockholders may only be called by the chairman or vice chairman of the board of directors or the corporate secretary upon the written request of a majority of the Whole Choice Board. The authorization in Choice’s Certificate of Incorporation of undesignated preferred stock makes it possible for Choice’s Board to issue Choice preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of Choice. This provision may have the effect of deferring hostile takeovers or delaying changes of control of Choice’s management. | Board. These provisions could delay or prevent entirely a merger or acquisition that Wyndham’s stockholders consider favorable. These provisions may also discourage acquisition proposals or have the effect of delaying or preventing entirely a change in control, which could harm Wyndham stock price. Wyndham is subject to Section 203 of the DGCL, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date such person becomes an interested stockholder, unless the business combination or the transaction in which such person becomes an interested stockholder is approved in a prescribed manner. Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an “interested stockholder” is a person that, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status did own, 15% or more of a corporation’s voting stock. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by Wyndham Board and the anti-takeover effect includes discouraging attempts that might result in a premium over the market price for the shares of Wyndham Common Stock. Wyndham Charter and Wyndham Bylaws eliminate the right of the | |||
127
stockholders to act by written consent. Wyndham’s Certificate of Incorporation provides that stockholders may not act by written consent and that special meetings of stockholders may only be called by the chairman of the board of directors or the chief executive officer, and shall be called by the chief executive officer upon the written request of a majority of the board of directors or a committee of the Wyndham Board whose power and authority includes the power to call such meetings . The authorization in Wyndham’s Certificate of Incorporation of undesignated preferred stock makes it possible for Wyndham Board to issue Wyndham preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of Wyndham. This provision may have the effect of deferring hostile takeovers or delaying changes of control of Wyndham’s management. | ||||
| Transactions Involving Officers or Directors | Section 143 of the DGCL provides that a corporation may lend money to, or guarantee any obligation of, or otherwise assist its officers or other employees (including directors) if, in the judgment of the board of directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. Section 144 of the DGCL provides that any contract or transaction between the corporation and one or more of its directors or officers is neither void nor voidable solely because the interested | Section 143 of the DGCL provides that a corporation may lend money to, or guarantee any obligation of, or otherwise assist its officers or other employees (including directors) if, in the judgment of the board of directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. Section 144 of the DGCL provides that any contract or transaction between the corporation and one or more of its directors or officers is neither void nor voidable solely because the interested | ||
128
director or officer was present, participates or votes at the board or board committee meeting that authorizes the contract or transaction, if either: (i) the material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (ii) the material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; (iii) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the stockholders. | director or officer was present, participates or votes at the board or board committee meeting that authorizes the contract or transaction, if either: (i) the material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (ii) the material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; (iii) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the stockholders. |
129
ADDITIONAL NOTE REGARDING THE OFFER
The Offer is being made solely by this Exchange Offer and the accompanying letter of election and transmittal and is being made to holders of shares of Wyndham Common Stock. Choice is not aware of any jurisdiction where the making of the Offer or the tender of shares of Wyndham Common Stock in connection therewith would not be in compliance with the laws of such jurisdiction. If Choice becomes aware of any jurisdiction in which the making of the Offer or the tender of shares of Wyndham Common Stock in connection therewith would not be in compliance with applicable law, Choice will make a three-year term. Forgood faith effort to comply with any such law. If, after such good faith effort, Choice cannot comply with any such law, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of shares of Wyndham Common Stock in such jurisdiction. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a discussionlicensed broker or dealer, the Offer shall be deemed to be made on behalf of recent changesChoice by the dealer manager or by one or more registered brokers or dealers licensed under the laws of such jurisdiction.
130
The financial statements and management’s assessment of the effectiveness of internal control over financial reporting (which is included in Management’s Report on Internal Control over Financial Reporting) incorporated in this Exchange Offer by reference to the Choice 10-K have been so incorporated in reliance on the reports of Ernst & Young LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements and related financial statement schedule of Wyndham, incorporated in this Exchange Offer by reference to the Wyndham 10-K and management’s report on internal control over financial reporting as of December 31, 2022 included therein, and incorporated herein by reference, have been audited by an independent registered public accounting firm, as set forth in their reports thereon, included therein. Pursuant to Rule 436 under the Securities Act, Choice and Purchaser require the consent of Wyndham’s independent registered public accounting firm to incorporate by reference their audit report included in the Company's boardWyndham 10-K into this Exchange Offer. Choice has requested but has not, as of the date hereof, received such consent from Wyndham’s independent registered public accounting firm. If Choice receives this consent, Choice and Purchaser will promptly file it as an exhibit to Choice’s registration statement of which this Exchange Offer forms a part.
132
WHERE YOU CAN FIND MORE INFORMATION
Choice and Wyndham file annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. The SEC maintains a website that contains reports, proxy statements and other information that Choice and Wyndham file electronically with the SEC which you can access over the internet to read at the SEC’s website http://www.sec.gov.
Choice has filed a registration statement on Form S-4 to register with the SEC the Choice Common Stock to be issued in connection with the Offer and the Second-Step Mergers. This Exchange Offer is a part of that registration statement. As allowed by SEC rules, this Exchange Offer does not contain all the information you can find in the registration statement or the exhibits to the registration statement. In addition, Choice has also filed with the SEC a statement on Schedule TO pursuant to Rule 14d-3 under the Exchange Act to furnish certain information about the Offer. You may obtain copies of the Form S-4 and the Schedule TO (and any amendments to those documents) in the manner described above.
The SEC allows Choice to “incorporate by reference” information into this Exchange Offer, which means that Choice can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is deemed to be part of this Exchange Offer, except for any information superseded by information contained directly in this Exchange Offer. This Exchange Offer incorporates by reference the documents set forth below that Choice and Wyndham have previously filed with the SEC. These documents contain important information about Choice and Wyndham and their financial condition.
The following documents previously filed by Choice with the SEC which are incorporated by reference into this Exchange Offer:
| (a) | Choice’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 1, 2023; |
| (b) | Choice’s Quarterly Report on Form 10-Q for the quarters ended March 31, 2023, filed on May 9, 2023, June 30, 2023, filed on August 8, 2023, and September 30, 2023, filed on November 7, 2023; |
| (c) | Choice’s Current Reports on Form 8-K filed on February 14, 2023, March 24, 2023, April 13, 2023, May 19, 2023, August 30, 2023, and October 17, 2023; |
| (d) | Choice’s Definitive Proxy Statement on Schedule 14A for the 2023 annual meeting of stockholders, filed on April 18, 2023; and |
| (e) | The description of Choice Common Stock contained in Form 10-2B, filed on September 19, 1997, as updated by Exhibit 4.1 to Choice’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, including any subsequent amendment or any report filed for the purpose of updating such description. |
133
Stockholders may request a copy of the documents incorporated by reference at no cost by writing or telephoning Choice at the following address: Choice Hotels International, Inc., 915 Meeting St., North Bethesda, Maryland 20852 (301) 592-5000 Attention: Corporate Secretary.
Choice SEC filings are also available free of charge at the Investors Relations section of Choice’s website at http://www.choicehotels.com as soon as reasonably practicable following the time that they are filed with or furnished to the SEC.
The following documents previously filed by Wyndham with the SEC:
| (a) | Wyndham’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (other than the report of Wyndham’s independent public accounting firm contained therein which is not incorporated by reference because the consent of Wyndham’s independent public accounting firm has not yet been obtained); |
| (b) | Wyndham’s Quarterly Report on Form 10-Q for the quarters ended March 31, 2023, filed on April 27, 2023, June 30, 2023, filed on July 27, 2023, and September 30, 2023, filed on October 26, 2023; |
| (c) | Wyndham’s Current Reports on Form 8-K filed on January 6, 2023, May 10, 2023, May 25, 2023, and November 14, 2023 (other than any portion of any documents not deemed to be filed); |
| (d) | Wyndham’s Definitive Proxy Statement on Schedule 14A for the 2023 annual meeting of stockholders, filed on March 28, 2023; and |
| (e) | The description of Wyndham Common Stock set forth in Wyndham’s registration statements filed by Wyndham pursuant to Section 12 of the Exchange Act, as updated by Exhibit 4.1 to Wyndham’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, including any subsequent amendment or any report filed for the purpose of updating such description. |
All documents filed by Choice and Wyndham pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act from the date of this Exchange Offer to the date that shares of Wyndham Common Stock are accepted for exchange pursuant to the Offer, or the date that the Offer is terminated, shall also be deemed to be incorporated herein by reference.
Stockholders may obtain any of these documents without charge upon written or oral request from the SEC at the SEC’s website at http://www.sec.gov. Wyndham SEC filings are also available free of charge at the Investors section of Wyndham website at https://investor.wyndhamhotels.com/company-information/shareholder-services as soon as reasonably practicable following the time that they are filed with or furnished to the SEC.
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM CHOICE, PLEASE CONTACT THE INFORMATION AGENT NO LATER THAN FIVE BUSINESS DAYS BEFORE THE EXPIRATION DATE TO RECEIVE THEM BEFORE THE EXPIRATION TIME OF THE OFFER. If you request any incorporated documents, the Information Agent will mail them to you by first-class mail, or other equally prompt means, within one Business Day of receipt of your request.
134
We have not authorized anyone to give any information or make any representation about the Offer that is different from, or in addition to, that contained in this Exchange Offer or in any of the materials that we have incorporated by reference into this Exchange Offer. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where offers to exchange or sell, or solicitations of offers to exchange or purchase, the securities offered by this document are unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the Offer presented in this document does not extend to you. For additional information, see the section of this Exchange Offer titled “Additional Note Regarding the Offer”. The information contained in this document speaks only as of the date of this document unless the information specifically indicates that another date applies.
135
All information concerning Wyndham, its businesses, operations, financial condition and management presented or incorporated by reference in this Exchange Offer is taken from publicly available information other than the description of Wyndham’s actions taken in response to the various Choice proposals as set forth in the section of this Exchange Offer titled “Background of the Offer.” This information may be examined and copies may be obtained at the places and in the manner set forth in the section of this Exchange Offer titled “Where You Can Find More Information.” Choice is not affiliated with Wyndham, and Wyndham has not permitted Choice to have access to its books and records. Therefore, non-public information concerning Wyndham was not available to Choice for the purpose of preparing this Exchange Offer. Although Choice has no knowledge that would indicate that statements relating to Wyndham contained or incorporated by reference in this Exchange Offer are inaccurate or incomplete, Choice was not involved in the preparation of those statements and cannot verify them. None of Choice or any of its officers or directors see "Prospectus Summary -- Recent Developments."
assumes any responsibility for the accuracy or completeness of such information or for any failure by Wyndham to disclose events or facts which may have occurred or which may affect the significance or accuracy of any such information but which are unknown to Choice.
Pursuant to Rule 409 under the Securities Act and Rule 12b-21 under the Exchange Act, Choice is requesting that Wyndham provide Choice with information required for complete disclosure regarding the businesses, operations, financial condition and management of Wyndham. Choice will amend or supplement this Exchange Offer to provide any and all information Choice receives from Wyndham, if Choice receives the information before the Expiration Time of the Offer and Choice considers it to be material, reliable and appropriate.
An auditor’s report was issued on Wyndham’s financial statements and included in Wyndham’s filings with the SEC. Pursuant to Rule 436 under the Securities Act, Choice requires the consent of Wyndham’s independent registered public accounting firm to incorporate by reference their audit report to the Wyndham 10-K into this Exchange Offer. Choice is requesting but has not, as of the date of this Exchange Offer, received such consent from Wyndham’s independent registered public accounting firm. If Choice does not receive this consent, Choice plans to request dispensation pursuant to Rule 437 under the Securities Act from this requirement. If Choice receives the consent of Wyndham’s independent registered public accounting firm, Choice will promptly file it as an exhibit to Choice’s registration statement of which this Exchange Offer forms a part. Because Choice has not been able to obtain the consent of Wyndham’s independent registered public accounting firm, you may not be able to assert a claim against Wyndham’s independent registered public accounting firm under Section 11 of the Securities Act for any untrue statements of a material fact contained in the financial statements audited by Wyndham’s independent registered public accounting firm or any omissions to state a material fact required to be stated therein.
136
SCHEDULE I - DIRECTORS AND EXECUTIVE OFFICERS OF CHOICE AND PURCHASER
The name, age, business address, present principal occupation or employment and class of directorshipfive-year employment history of each of the seven persons who are
the directors and executive officers of the Company are set forth below:
Directors of recent changes in the Company's executive officers, see
"Prospectus Summary -- Recent Developments."
Choice (Including Executive Officers Who Are Directors)
| Name | Age | Present Principal Occupation or Employment; Five-Year Employment History | ||
| Brian B. Bainum | 38 | Mr. Bainum has served as a director and a member of the investment committee of SunBridge Capital Management, LLC (“SunBridge”) since 2017 and 2012, respectively. He has also been a member of the Choice Board since 2019. Mr. Bainum has also served as a member of the board of directors of Realty Investment Company, Inc., a privately held real estate investment and development company (“RIC”), Sunburst Hospitality Corporation (“Sunburst”), a hotel operator, since 2017 and Three Graces Foundation, an organization supporting health and education projects in the developing world and a member of the Governing Council of Artis Senior Living, LLC (“Artis Senior Living”), a developer owner-operator of assisted living residences, since 2016. Mr. Bainum previously worked at Deloitte Consulting, LLP and Infosys Limited, has an MBA from the UCLA Anderson School of Management, and has experience in the hospitality industry from positions he previously held in hotel operations at Sunburst and in franchise development at Choice. Mr. Bainum’s family and entities affiliated with Mr. Bainum’s family own approximately 39% of the outstanding shares of Choice, thus, Mr. Bainum serves as an effective voice for stockholders. | ||
| Stewart W. Bainum, Jr. | 77 | Mr. Bainum has been the Chairman of the Choice Board since October 1997, previously serving in the same role from March 1987 to November 1996. Mr. Bainum was also the Chairman and Chief Executive Officer of ManorCare, Inc. from March 1987 to September 1998; President of ManorCare of America, Inc. and Chief Executive Officer of ManorCare Health Services, Inc. from March 1987 to September 1998, and the Vice Chairman of ManorCare of America, Inc. | ||
Schedule I-1
| Name | Age | Present Principal Occupation or Employment; Five-Year Employment History | ||
| from June 1982 to March 1987. He has also served as a member of the board of directors of (i) RIC, from December 2005 through December 2016, as well as chairman of such board from December 2005 through June 2009; (ii) Sunburst, from November 1996 through December 2016 and chairman of such board from November 1996 through June 2009; (iii) SunBridge, from December 2014 through December 2016; (iv) and ManorCare, Inc., from September 1998 to September 2002, while also serving as chairman of such board from September 1998 to September 2001. Mr. Bainum has also been the Managing Member of Artis Senior Living since 2012 and currently serves on the Board of Advisors of UCLA’s Anderson School of Management. Mr. Bainum beneficially owns approximately 20% of the outstanding shares of Choice. He, his family and entities affiliated with his family own approximately 39% of the outstanding shares of Choice, thus, Mr. Bainum serves as an effective voice for stockholders. Mr. Bainum’s long-standing relationship with Choice provides the Choice Board with a valuable historical perspective on Choice’s culture and direction that is important concerning Choice’s future direction. Prior to 1976, when Mr. Bainum began his extensive history serving as an executive of Choice, he worked for Choice’s predecessor businesses starting in 1958, at the age of 12, serving as a janitor at his father’s 28-room motel and thereafter serving in a variety of manual labor roles through completion of high school. Since 1976, when Mr. Bainum joined Choice’s leadership team, Choice’s business has grown from a franchisor of 290 hotels, with a market value of less than $6 million, operating under one brand, to a global enterprise with more than 7,400 hotels operating under 22 brands. In addition to his long-standing involvement with Choice, his prior experience as the board chairman for a hospitality-based real estate development and management company allows Mr. Bainum to provide the Choice Board with unique opinions and perspectives regarding development and operational issues that affect Choice’s hotel brands. |
Schedule I-2
| Name | Age | Present Principal Occupation or Employment; Five-Year Employment History | ||
| William L. Jews (Independent) | 71 | Mr. Jews was the President and Chief Executive Officer of CareFirst, Inc. from January 1998 to December 2006, as well as in the same positions for CareFirst of Maryland, Inc. and Group Hospitalization and Medical Services, Inc., and as the Chief Executive Officer of Blue Cross Blue Shield of Delaware, Inc., and Blue Cross Blue Shield of Maryland, Inc. from April 1993 until January 1998. Mr. Jews has been a member of the Choice Board since 2000, except during 2005-2006. He also currently serves as a member of the board of directors for each of CACI International, Inc., KCI Technologies, Inc. and was the former Lead Director of CalAtlantic Group Inc. | ||
| Monte J.M. Koch (Independent) | 60 | Mr. Koch has been a member of the Choice Board since 2014. He is a retired, private investor with 26 years of investment banking experience specializing in advising clients from the lodging, gaming and real estate sectors on major transactions, with experience as a partner of BDT& Company, a merchant bank that provides advice and access to long-term, differentiated capital to help family owned and founder-led businesses pursue their strategic and financial objectives and the Global Head of Real Estate Investment Banking and the Chairman of Mergers & Acquisitions for the Americas at Deutsche Bank Securities Inc. He was also the co-founder of Auction.com and Ten-X, the nation’s leading online sellers of residential and commercial real estate. Mr. Koch has also served as a member of the board of directors for each of Auction.com, Ten-X and the National Business Aviation Association. | ||
| Liza K. Landsman (Independent) | 54 | Ms. Landsman has been the CEO of Stash, a digital investment platform, since February 2023, currently is a Special Partner and previously has been a General Partner at New Enterprise Associates, a leading venture capital firm, since 2019. She also served as the former President of Jet.com (acquired by Walmart in 2016); EVP and Chief Marketing Officer of E*TRADE; Managing Director of Digital at BlackRock. Inc.; and the Operating Partner and Acting Chief Marketing Officer at Bravas Partners LLC. She also served in a variety of senior roles at Citigroup. Inc. over a 10-year period. Ms. Landsman is currently a member of the board of directors of Squarespace, Inc., as well as a member of its audit Committee; and was a former director of Veritiv Corporation. | ||
Schedule I-3
| Name | Age | Present Principal Occupation or Employment; Five-Year Employment History | ||
| Patrick S. Pacious (Chief Executive Officer) | 57 | Mr. Pacious has been the President and Chief Executive Officer of Choice since 2017 and a member of the Choice Board since 2017. He previously served in the following positions at Choice: President and Chief Operating Officer from May 2016 to September 2017; Chief Operating Officer from January 2014 until May 2016; Executive Vice President, Global Strategy & Operations from February 2011 to December 2013; Senior Vice President, Corporate Strategy and Information Technology from August 2009 to February 2011; Senior Vice President, Corporate Development and Strategy from December 2007 to August 2009; Vice President, Corporate Development and Innovation from May 2006 to December 2007; and Senior Director of Corporate Strategy from July 2005 to May 2006. Prior to joining Choice, Mr. Pacious served as a Senior Manager at BearingPoint Inc. from 2002 until 2005 and at Arthur Andersen Business Consulting LLP from 1996 until 2002. Mr. Pacious also serves on the board of Valvoline Inc. and the Wolf Trap Foundation for the Performing Arts. | ||
| Ervin R. Shames (Independent) | 83 | Mr. Shames has been an independent management consultant to consumer goods and services companies advising on management and marketing strategy since January 1995. He has been a member of the Choice Board since 2002. Mr. Shames was a former lecturer at the University of Virginia’s Darden Graduate School of Business from 1996 until 2008. He served as the Chief Executive Officer of Borden, Inc. from December 1993 to January 1995, and was the President and Chief Operating Officer from July 1993 until December 1993. He was also previously the President and Chief Executive Officer of Stride Rite Corporation from 1990 to 1992, and then served as its Chairman, President and Chief Executive Officer until 1993. He served in various management positions with General Foods and Kraft Foods from 1967 to 1989. Mr. Shames currently serves on the boards of directors of RiceTec, Inc., the Liechtenstein Foundation and Johnsonville Sausage Co. Mr. Shames was the former Chairman of the Board of | ||
| Gordon A. (Lead Independent Director) | 65 | Mr. Smith has been a member of the Choice Board since 2022, and was previously on the Choice Board from 2004 to 2017. Mr. Smith served as a former Vice Chairman of JPMorgan Chase and Co-President and Chief Operating Officer of JPMorgan Chase from 2018 to 2021 and as the | ||
Schedule I-4
| Name | Age | Present Principal Occupation or Employment; Five-Year Employment History | ||
| Chief Executive Officer, Chase Consumer and Community Banking of JP Morgan Chase from 2012 to 2021. Mr. Smith joined Chase in 2007. Before joining Chase, Mr. Smith spent more than 25 years at American Express, where he led and managed several businesses, including the U.S. Domestic Consumer Card Business. From 2005 until 2007, he was the President of the Global Commercial Card business at American Express and he is a former director of Nordstrom, Inc. (JWN). | ||||
| Maureen D. Sullivan (Independent) | 42 | Ms. Sullivan is a Partner at TCG Capital Management since April 2021 and brings with her significant leadership experience at the intersection of technology, product development, marketing and operations. She has been a member of the Choice Board since 2018. She previously served as the President and Chief Operating Officer at Heyday Skincare, from September 2020 to March 2021; President and COO at Rent the Runway, from September 2015 to March 2020; and President, | ||
| John P. Tague (Independent) | 61 | Mr. Tague is a retired President and Chief Executive Officer of Hertz Global Holdings, Inc. He has been a member of the Choice Board since 2012. Mr. Tague has served as the Chairman and CEO of Cardinal Logistics Holdings from July 2011 to November 2014; President of UAL Corporation from 2009 through October 2010; and the Executive Vice President and Chief Revenue Officer of United Air Lines, Inc. and UAL Corporation from April 2006 until May 2008. Mr. Tague was also a former director of United Road Services and Victory Innovations (both Carlyle portfolio companies) and The Hertz Corporation (HTZ). | ||
Schedule I-5
| Name | Age | Present Principal Occupation or Employment; Five-Year Employment History | ||
| Donna F. Vieira (Independent) | 59 | Ms. Vieira is the Executive Vice President and Chief Commercial Officer at Sallie Mae, where she oversees the company’s top line revenue growth, credit, pricing and loss mitigation, as well as products, sales, marketing, customer and digital experience, and business development. She has been a member of the Choice Board since 2021. Ms. Vieira is also a Member of the Executive Leadership Council, a pre-eminent membership organization that is committed to increasing the number of Black executives in global enterprises. She has served as the former Chief Marketing Officer of Consumer Banking and Wealth Management at JPMorgan Chase and has prior work experience at other leading financial services companies including American Express. |
Schedule I-6
Executive Officers Who Are Not Directors
| Name | Age | Present Principal Occupation or Employment; Five-Year Employment History | ||
| Dominic Dragisich | 41 | Mr. Dragisich is the Executive Vice President, Operations and Chief Global Brand Officer. He was the Chief Financial Officer from March 2017 to August 2023. Prior to joining Choice, he was employed by XO Communications as Chief Financial Officer from July 2015 to February 2017 and Vice President, Financial Planning and Analysis and Strategic Finance from September 2014 to July 2015. Before that, he was Senior Director, Communications as Chief Financial Officer from July 2015 to February 2017 and Vice President, Financial Planning and Analysis and Strategic Finance from September 2014 to July 2015. Before that, he was Senior Director, IR Business Consultancy of Marriott International from October 2013 to September 2014, Global Director of FP&A of NII Holdings, Inc. from March 2012 to October 2013, and held various management positions at Deloitte Consulting from 2004 to 2012. | ||
| Scott E. Oaksmith | 52 | Mr. Oaksmith is the Chief Financial Officer. He served as Senior Vice President, | ||
| Simone Wu | 58 | Ms. Wu has been the Senior Vice President, General Counsel, Corporate Secretary & External Affairs since 2015. She was Senior Vice President, General Counsel, Corporate Secretary & Chief Compliance Officer from 2012 to 2015. Prior to joining Choice in 2012, she was employed by XO Communications and its affiliates as Executive Vice President, General Counsel and Secretary from 2011 until 2012, Senior Vice President, General Counsel and Secretary | ||
Schedule I-7
| Name | Age | Present Principal Occupation or Employment; Five-Year Employment History | ||
| David A. Pepper | 56 | Mr. Pepper has been Chief Development Officer since May 2015. He was Senior Vice President, Global Development from October 2009 to May 2015. He was Senior Vice President, Franchise Development & Emerging Brands from July 2007 to October 2009. He was Senior Vice President and Division President Cambria Suites and Extended Stay Market Brands from January 2007 to July 2007 and was Senior Vice President, Franchise Growth and Performance of Choice from December 2005 until January 2007. He was Senior Vice President, Development from January 2005 until December 2005. He was Vice President, Franchise Sales from June 2002 until January 2005. Prior to joining Choice, he was Vice President, Franchise Sales with U.S. Franchise Systems, Inc., a hotel franchisor, from 1996 through June 2002. | ||
| Noha Abdalla | 46 | Ms. Abdalla is the Chief Marketing Officer for Choice, joining Choice Hotels in 2022. Ms. Abdalla came to Choice from MyEyeDr., a Goldman Sachs equity-backed optical company with more than 800 locations nationwide, where she served as chief marketing officer. In this capacity, Ms. Abdalla led the company’s first-ever marketing transformation to support the launch of a new CRM (customer relationship management) system, online booking platform, patient portal and in-house media planning and buying function. As the Global Vice President of Digital and Content Marketing for Hilton, Ms. Abdalla led the company’s digital owned channels and oversaw all digital marketing communications. Earlier in her career, Ms. Abdalla held positions of increasing responsibility on Capital One’s digital brand strategy and social media team as well as in Discovery Inc.’s Animal Planet marketing department. | ||
Schedule I-8
| Name | Age | Present Principal Occupation or Employment; Five-Year Employment History | ||
| Robert McDowell | 57 | Mr. McDowell has been Chief Commercial Officer since February 2016. He was Senior Vice President, Marketing and Distribution from May 2011 until January 2016. Prior to joining Choice, he was employed by United Airlines from 1995 to 2006. He joined C+H International as Chief Operating Officer from January to December 2007. He rejoined United Airlines January 2008 to 2011 as Managing Director of Distribution and eCommerce. | ||
| Patrick J. Cimerola | 55 | Mr. Cimerola has been Chief Human Resources Officer since 2015. He was Senior Vice President, Human Resources and Administration from September 2009 to 2015. He was Vice President of Human Resources from January 2003 to September 2009. He was Sr. Director of Human Resources from January 2002 to January 2003. | ||
| Raul Ramirez Sanchez | 40 | Mr. Ramirez Sanchez has been Chief Strategy and International Operations Officer since October 2021. He was Senior Vice President, Head of International and Strategic & Financial Planning from June 2020 until October 2021. He was Senior Vice President, International Strategic Planning and Global Head of Financial Planning and Analysis from August 2019 until June 2020 and was Vice President, Strategic Finance and Financial Planning and Analysis from August 2017 until August 2019. Prior to joining Choice, he was Head of Finance, XO Business Unit for Verizon Communications from February 2019 until August 2019 and was employed at XO Communications as Vice President, Financial Planning and Analysis and Corporate Development from September 2015 until January 2019. | ||
Schedule I-9
OWNERSHIP OF WYNDHAM COMMON STOCK BY CHOICE OR PURCHASER DIRECTORS AND OFFICERS
No directors or officers of Executive Officers
Stewart Bainum, Jr. See--"Management--BackgroundChoice or Purchaser own shares of Directors."
Charles A. Ledsinger, Jr. See--"Management--Background of Directors."
Michael J. DeSantis. Senior Vice President, General CounselWyndham Common Stock.
146
DIRECTORS AND EXECUTIVE OFFICERS OF PURCHASER
Dominic Dragisich, Scott Oaksmith and Secretary ofSimone Wu are the Company since June 1997 and of Former Choice from June 1997 to October
1997; Senior Attorney for Former Choice from November 1996 to June 1997;
Senior Attorney for Manor Care from January 1996 to October 1996; Vice
President, Associate General Counsel and Assistant Secretary for Caterair
International Corporation from April 1994 to December 1995; Assistant General
Counsel of Caterair International from May 1990 to March 1994.
Thomas Mirgon. Senior Vice President, Administration of the Company since
April 1998; Senior Vice President, Human Resources of the Company from March
1997 to April 1998 and of Former Choice from March 1997 to October 1997;
Senior Vice President, Partner Services of the Company from October 1997 to ;
Vice President, Administration of Interim Services from August 1993 to
February 1997; employed by Taco Bell Corp. from January 1986 to August 1993,
last serving as Senior Director, Field Human Resources from February 1992 to
August 1993.
Mark C. Wells. Senior Vice President, Marketing of the Company since April
1998; Senior Vice President, Franchise Services of Promus Hotel Corp. from
January 1996 to April 1998; Senior Vice President, Marketing of Promus Hotel
Corp. from August 1993 to January 1996; Senior Vice President, Embassy Suites,
Inc. from January 1992 to August 1993; Vice President, Marketing of Hampton
Inns, Inc. from September 1986 to January 1992; Vice President, Marketing of
Days Inn, Inc. from July 1982 to September 1986; Vice President, Operations
and Marketing of Holiday Clubs International from April 1980 to July 1982.
Director: Pegasus Systems, Inc.
Joseph M. Squeri. Vice President, Treasurer and Controller of the Company
since April 1998; Vice President, Finance and Controller of the Company since
March 1997 and of Former Choice from March 1997 to October 1997; Director of
Investment Funds, The Carlyle Group, from November 1994 to February 1997;
various positions with Arthur Andersen LLP from July 1987 to November 1994,
most recently as Manager.
Compensation of Executive Officers
Summary Compensation. The following tables set forth certain information
concerning the annual and long-term compensation of the chief executive
officer, the four other most highly compensated executive officers of Purchaser. Simone Wu is the Company, allsole director of whom were servingPurchaser. Information on these individuals is included in such capacity at the end of the last
fiscal year,section on directors and one former executive officer of the Company who otherwise
would have been one of the four other most highly compensated executive officers (the "Named Officers"). Messrs. Ledsinger and Wells were not employed
by the Company at the end of the last fiscal year.
56
Compensation received by the Named Officers prior to consummationChoice.
Schedule I-1
SCHEDULE II—SECURITIES TRANSACTIONS IN THE PAST 60 DAYS
Name | Trade Date | Buy / Sell | No. of Shares / Quantity | Average Price Per Share | Security | |||||||||||||||
Wyndham Hotels & Resorts Inc. | 17-Oct-23 | Buy | 10 | $ | 76.80 | Common Stock | ||||||||||||||
Wyndham Hotels & Resorts Inc. | 13-Nov-23 | Buy | 94,702 | $ | 76.68 | Common Stock | ||||||||||||||
Wyndham Hotels & Resorts Inc. | 14-Nov-23 | Buy | 97,433 | $ | 77.64 | Common Stock | ||||||||||||||
Wyndham Hotels & Resorts Inc. | 15-Nov-23 | Buy | 149,239 | $ | 77.27 | Common Stock | ||||||||||||||
Wyndham Hotels & Resorts Inc. | 16-Nov-23 | Buy | 100,744 | $ | 76.39 | Common Stock | ||||||||||||||
Wyndham Hotels & Resorts Inc. | 17-Nov-23 | Buy | 109,172 | $ | 77.98 | Common Stock | ||||||||||||||
Wyndham Hotels & Resorts Inc. | 20-Nov-23 | Buy | 88,535 | $ | 77.77 | Common Stock | ||||||||||||||
Wyndham Hotels & Resorts Inc. | 21-Nov-23 | Buy | 130,000 | $ | 77.58 | Common Stock | ||||||||||||||
Wyndham Hotels & Resorts Inc. | 22-Nov-23 | Buy | 91,888 | $ | 78.02 | Common Stock | ||||||||||||||
Wyndham Hotels & Resorts Inc. | 24-Nov-23 | Buy | 47,628 | $ | 78.30 | Common Stock | ||||||||||||||
Wyndham Hotels & Resorts Inc. | 27-Nov-23 | Buy | 121,775 | $ | 78.17 | Common Stock | ||||||||||||||
Wyndham Hotels & Resorts Inc. | 28-Nov-23 | Buy | 98,000 | $ | 77.95 | Common Stock | ||||||||||||||
Wyndham Hotels & Resorts Inc. | 29-Nov-23 | Buy | 156,913 | $ | 77.78 | Common Stock | ||||||||||||||
Wyndham Hotels & Resorts Inc. | 30-Nov-23 | Buy | 72,199 | $ | 77.43 | Common Stock | ||||||||||||||
Wyndham Hotels & Resorts Inc. | 1-Dec-23 | Buy | 89,026 | $ | 78.63 | Common Stock | ||||||||||||||
Schedule I-2
ANNEX A—SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
(a) Any stockholder of the
Former Choice Spin-Off was paid by Manor Care. Compensation received by the
Named Officers after the Former Choice Spin-Off, but prior to the Company
Spin-Off, was paid by Former Choice. Compensation received by the Named
Officers after the Company Spin-Off was paid by the Company.
SUMMARY COMPENSATION TABLE
(b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent, converting, transferring, domesticating or continuing corporation in a merger, consolidation, conversion, transfer, domestication or continuance to be effected pursuant to § 251 (other than a merger effected pursuant to § 251(g) of this title), § 252, § 254, § 255, § 256, § 257, § 258, § 263, § 264, § 266 or § 390 of this title (other than, in each case and solely with respect to a converted or domesticated corporation, a merger, consolidation, conversion, transfer, domestication or continuance authorized pursuant to and in accordance with the provisions of § 265 or § 388 of this title):
(1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock, which vest on November 4,
1999. The other one-half as well asstock, or depository receipts in respect thereof, at the portion which vests in 2000 are
canceled. Mr. Floyd has agreedrecord date fixed to keep confidential any business informationdetermine the stockholders entitled to receive notice of the Company andmeeting of stockholders, or at the record date fixed to determine the stockholders entitled to consent pursuant to § 228 of this title, to act upon the agreement of merger or consolidation or the resolution providing for one year notthe conversion, transfer, domestication or continuance (or, in the case of a merger pursuant to solicit for employment any Company
employees.
On December 18, 1997, the Company entered into a Consulting Agreement with
Barry L. Smith under which Mr. Smith will provide consulting services§ 251(h) of this title, as of immediately prior to the Company upon his retirement. Mr. Smith will retire as Senior Vice President,
Marketing upon 45 days of a successor being appointed, but in no event later
than December 15, 1998. The initial termexecution of the agreement of merger), were either: (i) listed on a national securities exchange or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall commence on
Mr. Smith's retirement and end on December 15, 1998. At the mutual electionbe available for any shares of stock of the parties,constituent corporation surviving a merger if the agreementmerger did not require for its approval the vote of the stockholders of the surviving corporation as provided in § 251(f) of this title.
(2) Notwithstanding paragraph (b)(1) of this section, appraisal rights under this section shall be extendedavailable for successive one-
62
year periods. For the initial term, Mr. Smith shall receiveshares of any class or series of stock of a pro rata portionconstituent, converting, transferring, domesticating or continuing corporation if the holders thereof are required by the terms of an annual feeagreement of $265,000, depending uponmerger or consolidation, or by the commencementterms of a resolution providing for conversion, transfer, domestication or continuance, pursuant to § 251, § 252, § 254, § 255, § 256, § 257, § 258, § 263, § 264, § 266 or § 390 of this title to accept for such stock anything except:
a. Shares of stock of the initial
term. During any extension period, Mr. Smith shall be paid at a rate of $200
per hour. Mr. Smith agrees that during the termcorporation surviving or resulting from such merger or consolidation, or of the agreement (and any
extensions), he will not compete with the Company.
On December 16, 1997, the Company and Mr. Sibley entered into an agreement
which was effective upon Mr. Sibley's resignation from the Company on November
20, 1997. The agreement provides for a payment to Mr. Sibley in the aggregate
amount of $150,000. The agreement also provides that Mr. Sibley's stock
options will continue to vest through July 5, 2001 and that Mr. Sibley agrees
not to compete with the Company during that period.
RETIREMENT PLANS
The Company has adopted the Choice Hotels International, Inc. Supplemental
Executive Retirement Plan (the "SERP"). Participants are Senior Vice
Presidents and other officers who report directly to the CEO.
Participants in the SERP receive a monthly benefit for life based upon final
average salary and years of service. Final average salary is the average of
the monthly base salary, excluding bonuses or commissions, earned in a 60-
month period which produces the highest average out of the 120 months of
employment, prior to the first occurring of the early retirement dateconverted entity or the normal retirement date. The nominal retirement age is 65, and participants
must haveentity resulting from 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 55transfer, domestication or younger, so that none of their compensation reported
above would be included in the final average salary calculation.
Assuming that the following officers continue to be employed by the Company
until they reach age 65, their credited years of service are as follows:
A-1
b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or depository receipts at the effective date of the merger, consolidation, conversion, transfer, domestication or continuance will be either listed on a national securities exchange or held of record by the Company under its Non-
Qualified Savings Plan for fiscal year 1997 for the Named Officers are
includedmore than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts described in the Summary Compensation Table underforegoing paragraphs (b)(2)a. and b. of this section; or
d. Any combination of the column headed "All Other
Compensation."
The Company match undershares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the 401(k) Planforegoing paragraphs (b)(2)a., b. and c. of this section.
(3) In the Non-Qualified Savings Plan
is limitedevent all of the stock of a subsidiary Delaware corporation party to a maximum aggregatemerger effected under § 253 or § 267 of 6% of the annual salary of a participant.
Likewise, participant contributions under the two plans willthis title is not exceed the
aggregate of 15% of the annual salary of a participant.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the amount of the Company's common stock
beneficially owned by (i) each director of the Company, (ii) the Company's
chief executive officer and the other 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, each as of August
15, 1998. Unless otherwise specified, the address for each of them is 10750
Columbia Pike, Silver Spring, Maryland 20901.
(4) [Repealed.]
(c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which Mr. Bainum, Jr. is the sole director.
Also includes 327,000 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 Measurement Date, and
148 shares which Mr. Bainum, Jr. has the right to receive upon
termination of his employment with the Company pursuant to the terms of
the Choice Hotels International, Inc. Non-Qualified Retirement Savings
and Investment Plan ("Non-Qualified Savings Plan").
(3) Includes 101,697 shares owned directly by Ms. Bainum. Also includes
1,779,628 shares owned by Mid Pines, in which Ms. Bainum's trustcorporation 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; 73,200 shares owned by Vintage, L.P. in which Ms. Bainum is a
general partner and has shared voting authority, and 70,305 shares owned
byconstituent corporation, the Commonweal Foundation, in which Ms. Bainum is President and
Director and has shared voting authority. Also includes 4,070 shares of
restricted stock issued to Ms. Bainum under the Non-Employee Director
Stock Compensation Plan which shares are not vested, but which Ms. Bainum
has the right to vote.
(4) Includes 900 shares owned directly and 8,990 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 measurement date.
(5) Mr. Floyd resigned from the Company on June 15, 1998.
(6) Includes 28,590 shares held directly and 28,490 shares of restricted
shares which are not yet vested, but which Mr. Floyd has the right to
vote. Also includes 82,589 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 Measurement Date.
(7) Consists of restricted shares which are not yet vested, but which Mr.
Ledsinger has the right to vote.
(8) Includes 1,948 shares owned directly by Mr. Malek; 5,999 shares which Mr.
Malek has the right to acquire pursuant to stock options which are
presently exercisable, 5,591 restricted shares granted under the Non-
Employee Director Stock Compensation Plan which are not vested, but which
Mr. Malek has the right to vote and 580 shares held in a [Rabbi Trust]
pursuant to the Choice Hotels International, Inc. Non-Employee Director
Stock Option and Deferred Compensation Stock Purchase Plan (the "Deferred
Compensation and Stock Purchase Plan").
(9) Consists of shares which Mr. Mirgon has the right to acquire pursuant to
stock options which are currently exercisable or exercisable within 60
days of the Measurement Date.
(10) Includes 76,324 shares held directly by Mr. Petitt and 8,661 shares held
in trust for minor children for which Mr. Petitt is trustee. Beneficial
ownership of such shares is disclaimed. Also includes 4,070 restricted
shares granted under the Non-Employee Director Stock Compensation Plan
which are not yet vested, but which Mr. Petitt has the right to vote.
(11) Includes 49,678 shares owned directly by Mr. Rempe and 83,851 shares
which Mr. Rempe has the right to acquire pursuant to stock options which
are presently exercisable or exercisable within 60 days of the
Measurement Date. Also includes 2,808 restricted shares granted under the
Non-Employee Director Stock Compensation Plan which are not yet vested,
but which Mr. Rempe has the right to vote.
(12) Includes 2,710 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
65
authority and 4,598 restricted shares granted under the Non-Employee
Director Stock Compensation Plan which are not yet vested, but which Mr.
Robertson has the right to vote. Also includes 2,564 shares which Mr.
Robertson has the right to acquire pursuant to stock options which are
presently exercisable and 1,478 shares acquired pursuant to the Deferred
Compensation Stock Purchase Plan.
(13) Includes 15,322 shares which Mr. Smith has the right to acquire pursuant
to stock options which are presently exercisable or exercisable within 60
days of the Measurement Date and 254 shares and 555 shares, respectively,
which Mr. Smith has the right to receive upon termination of his
employment pursuant to the terms of the Choice Hotels International, Inc.
Retirement Savings and Investment Plan ("401(k) Plan") and the Non-
Qualified Savings Plan.
(14) Mr. Sibley's employment with the Company was terminated in November 1997.
(15) Includes 27,031 shares held directly by Mr. Sibley, and 43,740 shares
which Mr. Sibley has the right to acquire pursuant to stock options which
are presently exercisable or exercisable within 60 days of the
Measurement Date.
(16) Includes a total of 575,720 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
Measurement Date, and a total of 1,994 shares and 3,528 shares,
respectively, which such directors and officers have the right to receive
upon termination of their employment with the Company pursuant to the
terms of the 401(k) Plan and the Non-Qualified Savings Plan.
(17) Includes 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 905,421 shares owned by Bainum Associates and 1,099,190
shares owned by MC Investments, each of which is a limited partnership in
which Mr. Bainum has joint ownership with his wife as a limited partner
and as such has the right to acquire at any time a number of shares equal
in value to the liquidation preference of their limited partnership
interests; 3,567,869 shares held directly by Realty, in which Mr. Bainum
and his wife have shared voting authority; and 70,305 shares held by the
Commonwealth Foundation of which Mr. Bainum is Chairman of the Board of
Directors and has shared voting authority. Also includes 798,711 shares
held by the Jane L. Bainum Declaration of Trust, the sole trustee and
beneficiary of which is Mr. Bainum's wife, and 5,999 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 Measurement Date. Also includes 5,591 shares of restricted stock
granted by the Company to Mr. Bainum under the Choice Hotels
International, Inc. Non-Employee Director Stock Compensation Plan (the
"Non-Employee Director Stock Compensation Plan") which are not vested but
which Mr. Bainum has the right to vote.
(18) Includes 94,500 shares owned directly by Mr. Bainum. Also includes
1,779,628 shares owned by Mid Pines and 73,200 shares owned by Vintage,
L.P., in each of which Mr. Bainum is a general partner and has shared
voting authority, 3,567,869 shares owned by Realty in which Mr. Bainum's
trust has voting stock and shares voting authority and 70,305 shares
owned by the Commonwealth Foundation, in which Mr. Bainum is a Director
and has shared voting authority. Mr. Bainum's address is 8737 Colesville
Road, Suite 800, Silver Spring, Maryland, 20910.
(19) As of February 3, 1998 based on a Schedule 13-D, as amended, filed by Mr.
Baron with the Commission. Mr. Baron's address is 450 Park Avenue, Suite
2800, New York, New York 10022. Pursuant to a letter agreement dated
February 4, 1998 between the Company, Mr. Baron and entities under the
control of Mr. Baron (together with Mr. Baron, the "Baron Entities"),
each Baron Entity covenanted not to (i) acquire any additional shares of
stock or security convertible into stock of the Company; (ii) take any
action or participate in any transaction which may constitute an event of
default under the Credit Facility; or (iii) seek representation on the
Board of Directors of the Company.
66
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationship with Manor Care. Stewart Bainum, Jr. is the Chairman of the
Company's Board of Directors and is also the Chairman of the Board of
Directors of Manor Care. James Rempe is a Director of the Company and Senior
Vice President and General Counsel of Manor Care. Additionally, Messrs.
Bainum, Bainum, Jr. and Rempe, as well as certain other officers and directors
of the Company and of Manor Care own shares and/or options or other rights to
acquire shares of each of the Company and Manor Care.
In connection with the Company Spin-Off, 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 Spin-Off, (ii) guaranteed Sunburst's payment obligations
under certain leases (which have since been terminated) and (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.
Relationship with Sunburst. For a discussion of the relationship between the
Company and Sunburst resulting from the Company Spin-Off, see "Relationship
Between the Company and Sunburst."
Other Relationships. Creative Hotel is a franchisee of the Company which
owns Sleep Inns in Ormond Beach, Florida and Albuquerque, New Mexico and a
Comfort Inn and Suites in Carbondale, Colorado. Gerald W. Petitt is a director
of the Company and the President and Chief Executive Officer of Creative
Hotel. Robert C. Hazard, Jr., who resigned as a director of the Company in
July 1998, is Chairman of Creative Hotel. Total payments to the Company in the
six months ended June 30, 1998 were $47,579.
RELATIONSHIP BETWEEN THE COMPANY AND SUNBURST
In connection with the Company Spin-Off, the Company and Sunburst entered
into certain agreements intended to govern the relationship between the
parties after the Company Spin-Off. 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 Company Spin-Off, the Company and Sunburst entered
into a Distribution Agreement which provided for, among other things, the
principal corporate transactions required to effect the Company Spin-Off, 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 the Company and certain
other agreements governing the relationship between the Company and Sunburst
with respect to or in consequence of the Company Spin-Off.
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.
To avoid adverse tax consequences of the Company Spin-Off, each of the
Company and Sunburst has agreed to comply in all material respects with each
representation and statement made to any taxing authority in
67
connection with the IRS tax ruling or any other tax ruling obtained by the
Company and Sunburst in connection with the Company Spin-Off.
Under the Distribution Agreement, each of the Company and Sunburst will be
granted access to certain records and information in the possession of the
other, and requires the retention of such information in its possession for
specified periods and thereafter requires that each party give the other prior
notice of its intention to dispose of such information. In addition, the
Distribution Agreement provides for the allocation of shared privileges with
respect to certain information and requires each of the Company and Sunburst
to obtain the consent of the other prior to waiving any shared privilege.
STRATEGIC ALLIANCE AGREEMENT
At the time of the Company Spin-Off, the Company and Sunburst entered into a
Strategic Alliance Agreement pursuant to which: (i) Sunburst granted a right
of first refusal, subject to certain exceptions, to the Company to franchise
any lodging property that Sunburst develops or acquires and intends to operate
under franchise; (ii) Sunburst agreed, barring a material change in market
conditions, to continue to develop Sleep Inns and MainStay Suites hotels so
that it will have opened a total of 14 Sleep Inns and 15 MainStay Suites
hotels by October 15, 2001 (48 months from the date of the Company Spin-Off);
(iii) the Company has granted to Sunburst an option (exercisable only in the
event that there are not 100 MainStay Suites open or under construction by
January 1, 2000), to purchase the brand names, marks, franchise agreements and
other assets of the MainStay Suites hotel system; (iv) the Company and
Sunburst have agreed to continue to cooperate with respect to matters of
mutual interest, including new product and concept testing for the Company in
hotels owned by Sunburst; and (v) Sunburst has authorized the Company to
negotiate with third party vendors on Sunburst's behalf for the purchase of
certain items. The Strategic Alliance Agreement extends for a term of 20 years
with rights of mutual termination on the fifth, tenth and fifteenth
anniversaries of the Company Spin-Off.
Under the Strategic Alliance Agreement, each new hotel property owned by
Sunburst and franchised under a Choice Brand after the Company Spin-Off is
subject to the Company's standard franchise agreement, except that the initial
fee and royalty, reservation and marketing fees payable thereunder by Sunburst
are commensurate with such fees paid by other multi-unit franchisees of the
Company.
AMENDMENT AND GUARANTY
In connection with the Company Spin-Off, the Company, Manor Care and
Sunburst 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 Spin-Off 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
Transactions--Relationship with Manor Care" and "--Lease Agreements."
TERM NOTE; ACCOUNTS RECEIVABLE
In connection with the Company Spin-Off, the Company loaned to Sunburst
approximately $115 million which was used by Sunburst to repay approximately
$91 million outstanding under Former Choice's credit facility and to repay
that portion of the Former Choice indebtedness to an affiliate of Manor Care
allocated to Sunburst in connection with the Company Spin-Off (approximately
$37 million).
This loan is represented by a term note in an aggregate principal amount of
$115.0 million (the "Term Note"). The Term Note matures on October 15, 2002
and accrues simple interest monthly at an annual rate equal to 11% with an
annual effective rate through maturity of 8.8%. The Term Note is subordinated
to all senior debt of Sunburst and restricts Sunburst's ability to merge or
consolidate or disposesale of all or substantially all of its assets. Total
interest accrued on the Term Note through June 30, 1998 was $7.3 million. All
interest on the Term Note is payable at maturity. Sunburst is also the obligor
to the Company on accounts receivable totaling $19.9
68
million. This amount will be paid in cash or Sunburst stock. Subsequent to
year-end, Sunburst paid $7.5 millionassets of the receivable and reached an
understanding with the Company whereby Sunburst will pay the balance of the
amount in cashcorporation or Sunburst common stock (or a combination thereof) no later
than December 31, 1998. See "Risk Factors--Significant Receivables from
Sunburst."
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
Company Spin-Off 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 Company Spin-Off, 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 Company
Spin-Off of employee benefits, as they relate to employees who remained
employed by Sunburst or its subsidiaries ("Sunburst Employees") after the
Company Spin-Off and employees who are employed by the Company or its
subsidiaries after the Company Spin-Off ("Choice Employees"). Pursuant to the
Employee Benefits Allocation Agreement, Sunburst will continue sponsorship of
the various Sunburst profit sharing plans, stock plans and health and welfare
plans with respect to Sunburst Employees. The Company has established a number
of plans which allow it to provide to its employees substantially the same
benefits previously 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 claims
relating to prior to the Company Spin-Off.
The Employee Benefits Allocation Agreement also provided for the adjustment
of outstanding options to purchase shares of Sunburst common stock held by
Sunburst Employees, Choice Employees and employees of Manor Care who hold such
options as a result of the Former Choice Spin-Off. As a result of these
adjustments, the Company granted options to purchase approximately 5.2 million
shares of Company common stock to Choice Employees, Sunburst Employees and
employees of Manor Care.
LEASE AGREEMENTS
Sunburst and the Company entered into a sublease agreement (the "Silver
Spring Sublease") with respect to the Company's principal executive offices at
10750 Columbia Pike, Silver Spring, Maryland, 20901. The sublease was
terminated on May 31, 1998. For the six months ended June 30, 1998, the
Company paid to Sunburst approximately $952,000 under the sublease.
TRANSITIONAL SERVICE AGREEMENTS
The Company and Sunburst have entered into a number of agreementsconversion effected pursuant to which§ 266 of this title or a transfer, domestication or continuance effected pursuant to § 390 of this title. If 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
69
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
Each of the 76 hotel properties owned by Sunburst at the time of the Company
Spin-Off is subject to a franchise agreement between the Company and Sunburst,
as franchisee, and except as otherwise described herein, such franchise
agreement is substantially identical to the franchise agreements with the
Company's other franchisees. The material terms of such agreements are
described below.
Although most of the Company franchise agreements have an initial term of 20
years, the agreement for the Rodeway Inn owned by Sunburst in Tempe, Arizona
(the "Rodeway Inn-Phoenix (Tempe)") is a year-to-year agreement.
Typically, a franchisee 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. However, the
franchise agreement with respect to the Quality Hotel in Arlington, Virginia
owned by Sunburst (the "Non-Standard Franchise Agreement") does not allow
Sunburst to terminate such Franchise Agreement. The Non-Standard Franchise
Agreement otherwise 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) certain 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%
of monthly gross room revenues 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 and reservation fees are
generally subject to reasonable increases during the term of the franchise if
the Company raises such fees uniformly among all its franchisees. 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.
New Hotels. Each new hotel property owned by Sunburst and franchised under a
Choice Brand after the Company Spin-Off is subject to the Company's standard
franchise agreement described above except that the initial fee and the
royalty, reservation and marketing fees payable thereunder by Sunburst are
commensurate with such fees paid by other multi-unit franchisees of the
Company.
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 Company Spin-Off, subject to the
70
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 Company Spin-Off ("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 Company Spin-Off 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 of owning and operating hotel properties (the
"Hotel Business"). The Company is also prohibited from acquiring any entity
conducting a business that competes with the Hotel Business, with certain
exceptions outlined below, unless, prior to such acquisition, the Company
offers to sell such competing business to Sunburst on substantially 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 Company Spin-Off 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, or (iv) the ownership of equity interests of
any entity that competes with the Hotel Business, or 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 give rise to a 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, Frederic V. Malek serves as a director of each of the Company
and Sunburst. As a result of the Company Spin-Off, Mr. Malek, as well as
certain other officers and directors of the Company and of Sunburst, also own
shares and/or options or other rights to acquire shares in each of the Company
and Sunburst. Additionally, Stewart Bainum, Jr. is the chairman of the Company
and his sister, Barbara Bainum, is also a director. Their father, Stewart
Bainum, is the Chairman of Sunburst and the Bainum family has a significant
71
ownership interest in both companies. Policies and procedures are followed by
the Boards 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. See "Risk Factors--Potential
Conflict with Sunburst" and "--Significant Receivables from Sunburst."
DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company is the borrower under a $300 million Competitive Advance and
Multi-Currency Credit Facilities Agreement (the "Credit Facility") provided by
a group of 14 commercial banks. The Credit Facility has a term of five years
and provides for (a) a term loan of $150 million and (b) a revolving credit
loan of $150 million, $50 million of which is available in foreign currency
borrowings. In addition, the Company has the option to request participating
banks to bid on loan participation at lower rates than those contractually
provided by the Credit Facility. The Credit Facility will terminate on October
15, 2002. As of June 30, 1998, the Company had $145 million of term loans and
$26 million of multi-currency borrowings outstanding. In connection with the
Company Spin-Off, the Company borrowed $150 million under the Credit Facility
term loan and $89.5 million under the Credit Facility revolving loan in order
to fund the Term Note and to refinance existing indebtedness (including $78.7
million to repay indebtedness of Former Choice to Manor Care which was
allocated to the Company in connection with the Company Spin-Off). At the
Company's option, the interest rate may be based on LIBOR, a certificate of deposit rate or an alternate base rate, plus facility fee percentage. The rate
is determined based on the Company's consolidated leverage ratio atincorporation contains such a time of
borrowing with interest on current borrowings based on one of several rates
including LIBOR. The average interest rate on all borrowings under the Credit
Facility was 6.7% at June 30, 1998.
The Credit Facility includes customary financial and other covenants that
require the maintenance of certain ratios with respect to maximum leverage,
minimum net worth and interest coverage and restrict the Company's ability to
make certain investments, repurchase stock, incur debt, create liens and
dispose of assets.
The term loan under the Credit Facility began to amortize pursuant to
quarterly payments commencing on May 31, 1998.
The Company maintains a separate uncommitted $15 million working capital
line of credit with a commercial bank which expires on April 30, 1999. Total
borrowings under this line were $8.2 million as of June 30, 1998.
Additionally, the Company's payment obligations under the Credit Facility
are jointly and severally guaranteed by QHE, a wholly-owned subsidiary of the
Company, and QHE Partnership, a general partnership whose partnership
interests are held by the Company and QHE. Under the terms of the Credit
Facility, if any other subsidiary of the Company has or acquires assets
greater than or equal to 10% of the Company's Consolidated Total Assets (as
defined in the Credit Facility), then such subsidiary will also be required to
guarantee the Company's obligations thereunder.
The Company used approximately $99 million of net proceeds of the Offering
to repay amounts outstanding under the revolving portion of the Credit
Facility. See "Use of Proceeds."
72
DESCRIPTION OF EXCHANGE NOTES
The Original Notes were issued and the Exchange Notes will be issued
pursuant to the Indenture dated as of May 4, 1998 (the "Indenture"), among the
Company, the Subsidiary Guarantors and Marine Midland Bank, as Trustee (the
"Trustee"). The Exchange Notes will evidence the same indebtedness as the
Original Notes (which they replace) and will be entitled to the benefits of
the Indenture. The form and terms of the Exchange Notes are the same as the
form and terms of the Original Notes except that (i) the Exchange Notes will
have been registered under the Securities Act, and, therefore, the Exchange
Notes will not bear legends restricting the transfer thereof and (ii) holders
of the Exchange Notes will not be entitled to certain rights of holders of
Original Notes under the Registration Agreement, which rights will terminate
upon the consummation of the Exchange Offer. The terms of the Exchange Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (the "TIA") as in effect on the
date of the Indenture. The following summary of certain terms and provisions
of the Indenture does not purport to be complete and is subject, and is
qualified in its entirety by reference, to the TIA and to allprovision, the provisions of the Notesthis section, including those set forth in subsections (d), (e), and the Indenture, including the definitions therein of certain
terms.
For purposes(g) of this Section, references to the "Company"section, shall mean Choice
Hotels International, Inc., excluding its subsidiaries. Capitalized terms used
in this Section and not otherwise defined below have the respective meanings
assigned to them in the Indenture.
GENERAL
The Exchange Notes will be unsecured senior obligations of the Company,
limited to $100 million aggregate principal amount, and will mature on May 1,
2008. The Exchange Notes will be guaranteed on a senior unsecured basis by QHE
and QHE Partnership and, under certain circumstances, by other subsidiaries of
the Company. See "Certain Covenants--Future Subsidiary Guarantors." The
Exchange Notes will bear interest at the rate per annum shown on the cover
page hereof from the date of issuance or from the most recent date to which
interest has been paid, payable semiannually in arrears on May 1 and November
1 of each year, commencing November 1, 1998, to Holders of record at the close
of business on the April 15 or October 15 immediately preceding the interest
payment date. Interestapply as nearly as is computed on the basis of a 360-day year comprised of
twelve 30-day months.
Principal of and interest on the Exchange Notes are payable, and the
Exchange Notes are exchangeable and transferable, at an office or agency of
the Company, one of whichpracticable.
(d) Appraisal rights shall be maintainedperfected as follows:
(1) If a proposed merger, consolidation, conversion, transfer, domestication or continuance for such purpose in The Citywhich appraisal rights are provided under this section is to be submitted for approval at a meeting of New York (which initially will bestockholders, the corporate trust office of the Trustee);
provided, however, that payment of interest may be made at the option of the
Company by check mailed to the Person entitled thereto as shown on the
Security Register.
The Exchange Notes will be issued in fully registered form, without coupons,
in denominations of $1,000 or integral multiples thereof. No service charge is
be made for any registration of transfer or exchange of Notes, but the Company
may require payment of a sum sufficient to cover any transfer tax or other
similar governmental charge payable in connection therewith.
OPTIONAL REDEMPTION
The Notes are redeemable, at the option of the Company, in whole or in part
at any time or from time to time, uponcorporation, not less than 30 and not more than 60
days' notice as provided in the Indenture, on any date prior to maturity (the
"Redemption Date") at a redemption price equal to 100% of the principal amount
of the Notes to be redeemed plus accrued interest to the Redemption Date
(subject to the right of Holders of record on the relevant record date to
receive interest due on an interest payment date that is on or prior to the
Redemption Date) plus a Make-Whole Premium, if any (the "Redemption Price").
In no event will the Redemption Price ever be less than 100% of the principal
amount of the Notes plus accrued interest to the Redemption Date.
73
The amount of the Make-Whole Premium with respect to any Note (or portion
thereof) to be redeemed will be equal to the excess, if any, of:
(1) the sum of the present values, calculated as of the Redemption Date,
of:
(a) each interest payment that, but for such redemption, would have
been payable on the Note (or portion thereof) being redeemed on each
interest payment date occurring after the Redemption Date (excluding
any accrued interest for the period prior to the Redemption Date); and
(b) the principal amount that, but for such redemption, would have
been payable at the final maturity of the Note (or portion thereof)
being redeemed;
over
(2) the principal amount of the Note (or portion thereof) being redeemed.
The present values of interest and principal payments referred to in clause
(1) above will be determined in accordance with generally accepted principles
of financial analysis. Such present values will be calculated by discounting
the amount of each payment of interest or principal from the date that each
such payment would have been payable, but for the redemption, to the
Redemption Date at a discount rate equal to the Treasury Yield (as defined
below) plus 25 basis points.
The Make-Whole Premium will be calculated by an independent investment
banking institution of national standing appointed by the Company; provided,
that if the Company fails to make such appointment at least 30 calendar20 days prior to the Redemption Date,meeting, shall notify each of its stockholders who was such on the record date for notice of such meeting (or such members who received notice in accordance with § 255(c) of this title) with respect to shares for which appraisal rights are available pursuant to subsection (b) or (c) of this section that appraisal rights are available for any or all of the shares of the constituent corporations or the converting, transferring, domesticating or continuing corporation, and shall include in such notice either a copy of this section (and, if 1 of the institution so appointedconstituent corporations or the converting corporation is unwillinga nonstock corporation, a copy of § 114 of this title) or unableinformation directing the stockholders to makea publicly available electronic resource at which this section (and, § 114 of this title, if applicable) may be accessed without subscription
A-2
or cost. Each stockholder electing to demand the appraisal of such calculation, such calculation will be made by Salomon
Smith Barney Holdings Inc, or an affiliate thereof, or, if such firm is
unwilling or unable to make such calculation, by an independent investment
banking institution of national standing appointed by the Trustee (in any such
case, an "Independent Investment Banker").
For purposes of determining the Make-Whole Premium, "Treasury Yield" means a
rate of interest per annum equalstockholder’s shares shall deliver to the weekly average yield to maturity of
United States Treasury Notes that have a constant maturity that corresponds tocorporation, before the remaining term to maturitytaking of the Notes, calculated to the nearest 1/12th
of a year (the "Remaining Term"). The Treasury Yield will be determined as of
the third business day immediately preceding the applicable Redemption Date.
The weekly average yields of United States Treasury Notes will be determined
by reference to the most recent statistical release published by the Federal
Reserve Bank of New York and designated "H.15(519) Selected Interest Rates" or
any successor release (the "H.15 Statistical Release"). If the H.15
Statistical Release sets forth a weekly average yield for United States
Treasury Notes having a constant maturity that is the same as the Remaining
Term, then the Treasury Yield will be equal to such weekly average yield. In
all other cases, the Treasury Yield will be calculated by interpolation, on a
straight-line basis, between the weekly average yieldsvote on the United States
Treasury Notes that havemerger, consolidation, conversion, transfer, domestication or continuance, a constant maturity closest to and greater than the
Remaining Term and the United States Treasury Notes that have a constant
maturity closest to and less than the Remaining Term (in each case as set
forth in the H.15 Statistical Release). Any weekly average yields so
calculated by interpolation will be rounded to the nearest 1/100th of 1%, with
any figure of 1/200th of 1% or above being rounded upward. If weekly average
yieldswritten demand for United States Treasury Notes are not available in the H.15
Statistical Release or otherwise, then the Treasury Yield will be calculated
by interpolation of comparable rates selected by the Independent Investment
Banker.
Any notice to the Holders of Notesappraisal of such stockholder’s shares; provided that a redemption need not set forth
the redemption price of such Notes but need only set forth the calculation
thereof as described in the immediately preceding paragraph. The redemption
price, calculated as aforesaid, shalldemand may be set forth in an Officers' Certificate delivered to the Trustee no later than two business days priorcorporation by electronic transmission if directed to an information processing system (if any) expressly designated for that purpose in such notice. Such demand will be sufficient if it reasonably informs the Redemption Date.
In the case of any partial redemption, selectioncorporation of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other
method as the Trustee in its sole discretion shall deem to be fair and
74
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portionidentity of the principal amount thereofstockholder and that the stockholder intends thereby to be redeemed. A new Note in principal amount equal
todemand the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note.
RANKING
The Original Notes are, and the Exchange Notes will be senior unsecured
obligations of the Company, rank pari passu in right of payment with all
existing and future senior debt of the Company and senior in right of payments
to all future subordinated debt of the Company. As a result of the Offering
and the application of the net proceeds therefrom, as of June 30, 1998, the
Company had, on a consolidated basis, $293.7 million of debt outstanding
(excluding outstanding letters of credit, purchase money security obligations
and trade payables incurred in the normal course of business), including
$171.0 million outstanding under the Credit Facility and $8.2 million under a
separate working capital credit facility, with which the Notes rank pari
passu. None of the Company's debt asappraisal of such date, after givingstockholder’s shares. A proxy or vote against the merger, consolidation, conversion, transfer, domestication or continuance shall not constitute such effect,
would have been subordinated to the Notes.
All existing and future debt and other liabilities of the Company's
Subsidiaries, including the claims of trade creditors and claims of preferred
stockholders, if any, of such Subsidiaries, are effectively senior to the
Notes. As of June 30, 1998, the total debt of the Company's Subsidiaries was
approximately $15.2 million. The Company and its Subsidiaries have other
liabilities, including contingent liabilities, which may be significant. The
Original Notes are, and the Exchange Notes will be effectively subordinated to
any secured debt of the Company, to the extent of the value of the assets
securing such debt. The Company had secured debt as of June 30, 1998 of
approximately $1.5 million.
BOOK-ENTRY, DELIVERY AND FORM
Except as described below, the Exchange Notes will initially be represented
one or more Global Notes. The Global Notes will be deposited with, or on
behalf of, the Depository and registered in the name of the Depository or its
nominee. Except as set forth below, the Global Notes may be transferred, in
whole and not in part, only to the Depository or another nominee of the
Depository. Investors may hold their beneficial interests in the Global Notes
directly through the Depository if they have an account with the Depository or
indirectly through organizations which have accounts with the Depository.
Upon the transfer of an Exchange Note in definitive form, such Exchange Note
will, unless the Global Notes have previously been exchanged for Exchange
Notes in definitive form, be exchanged for an interest in the Global Notes
representing the principal amount of Exchange Notes being transferred.
The Depositary has advised the Company as follows: The Depositary is a limited-purpose trust company and organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depositary was created to hold securities of institutions that have accounts
with the Depositary ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such
securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. The Depositary's participants include securities brokers and
dealers (which may include the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, whether directly or indirectly
(collectively, the "indirect participants"). Holders who are not participants
may own securities held by or on behalf of the Depositary only through
participants or indirect participants.
Upon the issuance of the Global Notes, the Depositary will credit, on its
book-entry registration and transfer system, the principal amount of the Notes
represented by such Global Notes to the accounts of participants.
75
Ownership of beneficial interests in the Global Notes will be limited to
participants or persons that may hold interests through participants. Any
person acquiring an interest in a Global Note through an offshore transaction
in reliance on Regulation S may hold such interest through Euroclear or Cedel.
Ownership of beneficial interests in the Global Notes will be shown on, and
the transfer of those ownership interests will be effected only through,
records maintained by the Depository (with respect to participants' interest)
and such participants (with respect to the owners of beneficial interests in
the Global Notes other than participants). The laws of some jurisdictions may
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and laws may impair the ability to
transfer or pledge beneficial interests in the Global Notes.
So long as the Depositary, or its nominee, is the registered holder and
owner of the Global Notes, the Depositary or such nominee, as the case may be,
will be considered the sole legal owner and holder of the related Exchange
Notes for all purposes of such Exchange Notes and the Indenture. Except as set
forth below, owners of beneficial interests in the Global Notes will not be
entitled to have the Exchange Notes represented by the Global Notes registered
in their names, will not receive or be entitled to receive physical delivery
of certificated Notes in definitive form and will not be considered to be the
owners or holders of any Exchange Notes under the Global Notes. The Company
understands that under existing industry practice, in the event an owner of a
beneficial interest in the Global Notes desires to take any action that the
Depositary, as the holder of the Global Note, is entitled to take, the
Depositary would authorize the participantsdemand. A stockholder electing to take such action and that the
participants would authorize beneficial owners owning through such
participants to take such action or would otherwise act upon the instructions
of beneficial owners owning through them.
Payment of principal of and interest on Exchange Notes represented by the
Global Notes registered in the name of and held by the Depository or its
nominee will be made to the Depositary or its nominee, as the case may be, as
the registered owner and holder of the Global Notes.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal of or interest on the Global Notes, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Notes as
shown on the records of the Depository or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in the
Global Notes held through such participants will be governed by standing
instructions and customary practices and will be the responsibility of such
participants. The Company will not have any responsibility or liability for
any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in the Global Notes for any Exchange Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests or for any other aspect of the relationship
between the Depositary and its participants or the relationship between such
participants and the owners of beneficial interests in the Global Notes owning
through such participants.
Unless and until it is exchanged in whole or in part for certificated
Exchange Notes in definitive form, the Global Notes may not be transferred
except as a whole by the Depositary to a nominee of such Depositary ormust do so by a nominee of such Depositary to such Depositary or another nominee of such
Depositary.
Although the Depositary has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Notes among participants of
the Depositary, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. Neither
the Trustee nor the Company will have any responsibility for the performance
by the Depositary or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES
The Exchange Notes represented by the Global Notes are exchangeable for
certificated Exchange Notes in definitive form of like tenorseparate written demand as such Exchange
Notes in denominations of U.S. $1,000 and integral multiples thereof if (i)
the Depositary notifies the Company that it is unwilling or unable to continue
as Depositary for the Global Notes or if at any time the Depositary ceases to
be a clearing agency registered under the Exchange Act
76
and a successor Depositary is not appointed by the Company within 90 days,
(ii) the Company in its discretion at any time determines not to have all of
the Exchange Notes represented by the Global Notes or (iii) an Event of
Default has occurred and is continuing. Any Exchange Note that is exchangeable
pursuant to the preceding sentence is exchangeable for certificated Exchange
Notes issuable in authorized denominations and registered in such names as the
Depositary shall direct. Subject to the foregoing, the Global Notes are not
exchangeable, except for Global Notes of the same aggregate denomination to be
registered in the name of the Depositary or its nominee.
SAME-DAY PAYMENT
The Indenture requires that payments in respect of Notes (including
principal, premium and interest) be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof or, if no
such account is specified, by mailing a check to each such Holder's registered
address. The Notes will clear in the Depositary's Same-Day Funds Settlement
System until maturity, and secondary market trading activity in the Notes that
is effected through the Depository will therefore be required by the
Depository to settle in immediately available funds.
SUBSIDIARY GUARANTIES
The obligations of the Company under the Indenture are fully and
unconditionally guaranteed, jointly and severally, on a senior unsecured basis
by the Subsidiary Guarantors. As of June 30, 1998, after giving effect to the
Offering and the application of the net proceeds therefrom, the assets of
Subsidiaries of the Company not giving Subsidiary Guaranties represented
approximately 1.1% of the Company's consolidated total assets. For the six-
month period then ended, such Subsidiaries generated approximately 0.7% of the
Company's consolidated total revenues.
Upon the sale or other disposition of a Subsidiary Guarantor, the sale or
disposition of all or substantially all the assets of a Subsidiary Guarantor
(in each case other than to the Company or an Affiliate of the Company)
permitted by the Indenture, or the release or termination of any guarantee
provided by a Subsidiary Guarantor under the Credit Facility, such Subsidiary
Guarantor will be released from all its obligations under its Subsidiary
Guarantee.
Each of the Company and the Subsidiary Guarantors will agree to contribute
to any other Subsidiary Guarantor which makes payments pursuant to its
Subsidiary Guarantee an amount equal to the Company's or such Subsidiary
Guarantor's proportionate share of such payment, based on the net worth of the
Company or such Subsidiary Guarantor relative to the aggregate net worth of
the Company and the Subsidiary Guarantors.
CERTAIN COVENANTS
The Indenture does not limit the amount of indebtedness or other obligations
that may be incurred by the Company and its Subsidiaries and does not contain
provisions which would give Holders of Notes the right to require the Company
to repurchase their Notes in the event of a decline in the credit rating of
the Company's debt securities or a change of control of the Company. The
Indenture does contain the following covenants, among others:
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly, create,
Incur or otherwise cause or suffer to exist or become effective any Liens of
any kind upon any Principal Property or any Capital Stock or Debt of any
Subsidiary which owns or leases Principal Property (whether such Principal
Property, Capital Stock or Debt are now owned or hereafter acquired), or any
interest therein or any increase or profits therefrom, unless all payments due
under the Indenture and the Notes are secured on an equal and ratable basis
with (or prior to) the obligations so secured until such time as such
obligation is no longer secured by a Lien, except in the case of Permitted
Liens or as provided under "--Exempted Debt" below.
77
Limitation on Sale and Leaseback Transactions. The Indenture provides that,
except as provided under "--Exempted Debt" below, the Company will not, and
will not permit any Subsidiaries to, enter into any Sale and Leaseback
Transaction with respect to any Principal Property unless either (a) the
Company or such Subsidiary would be entitled, pursuant to the provisions of
the Indenture, to Incur Debt secured by a Lien on the Property to be leased in
an amount equal to the Attributable Debt with respect to such transaction
without equally and ratably securing the Notes, or (b) the Company, within 180herein provided. Within 10 days after the effective date of such transaction, appliesmerger, consolidation, conversion, transfer, domestication or continuance, the surviving, resulting or converted entity shall notify each stockholder of each constituent or converting, transferring, domesticating or continuing corporation who has complied with this subsection and has not voted in favor of or consented to the voluntary
retirementmerger, consolidation, conversion, transfer, domestication or continuance, and any beneficial owner who has demanded appraisal under paragraph (d)(3) of its Funded Debt an amount equalthis section, of the date that the merger, consolidation or conversion has become effective; or
(2) If the merger, consolidation, conversion, transfer, domestication or continuance was approved pursuant to § 228, § 251(h), § 253, or § 267 of this title, then either a constituent, converting, transferring, domesticating or continuing corporation before the valueeffective date of the merger, consolidation, conversion, transfer, domestication or continuance, or the surviving, resulting or converted entity within 10 days after such effective date, shall notify each stockholder of any class or series of stock of such transaction, defined as the greaterconstituent, converting, transferring, domesticating or continuing corporation who is entitled to appraisal rights of the net proceedsapproval of the salemerger, consolidation, conversion, transfer, domestication or continuance and that appraisal rights are available for any or all shares of such class or series of stock of such constituent, converting, transferring, domesticating or continuing corporation, and shall include in such notice either a copy of this section (and, if 1 of the Principal Property leased in such transactionconstituent corporations or the fair value, inconverting, transferring, domesticating or continuing corporation is a nonstock corporation, a copy of § 114 of this title) or information directing the opinionstockholders to a publicly available electronic resource at which this section (and § 114 of this title, if applicable) may be accessed without subscription or cost. Such notice may, and, if given on or after the effective date of the Company's Board of Directors,merger, consolidation, conversion, transfer, domestication or continuance, shall, also notify such stockholders of the leased Principal Property
at the time such transaction was entered into.
Exempted Debt. Notwithstanding the foregoing limitations on Liens and Sale
and Leaseback Transactions, the Company and its Subsidiaries may create, Incur
or otherwise cause to suffer to exist or become effective Liens without
securing the Notes or enter into a Sale and Leaseback Transaction without
retiring Funded Debt, or enter into a combination of such transactions,
provided that, at the time of such event, and after giving effect thereto and
to the retirement of any other such Debt which is concurrently being repaid,
the sum of (x) the principal amount of such Debt secured by such Liens or the
Attributable Debt in respect of such Sale and Leaseback Transaction, as the
case may be, and (y) the principal amount of all other such Debt secured by
such Liens (not including Liens permitted under "--Limitations on Liens") and
all other Attributable Debt in respect of Sale and Leaseback Transactions then
outstanding (not including Sale and Leaseback Transactions permitted under "--
Sale and Leaseback Transactions"), measured, in each case, at the time any
such Lien is Incurred or any such Sale and Leaseback Transaction is entered
into, does not exceed the greater of (i) $25 million or (ii) 15%date of the Consolidated Net Tangible Assetsmerger, consolidation, conversion, transfer, domestication or continuance. Any stockholder entitled to appraisal rights may, within 20 days after the date of the Company and its consolidated
Subsidiaries.
Future Subsidiary Guarantors. The Indenture provides that the Company will
cause each Person that provides a guarantee under the Credit Facilitygiving such notice or, any
extension, revision, refinancing or any replacement thereof by a lender or a
group of lenders following the Issue Date to execute and deliver to the
Trustee a Subsidiary Guarantee at the time such Person executes such guarantee
under the Credit Facility.
Merger and Consolidation. The Indenture provides that the Company may
consolidate or amalgamate with or merge into any other Person or convey,
transfer, lease or otherwise dispose of its Property substantially as an
entirety to any Person or may permit any Person to consolidate or amalgamate
with or merge into, or convey, transfer, lease or otherwise dispose of its
Property substantially as an entirety to, the Company; provided, however, that
(a) the successor, transferee or lessee is organized under the laws of any
United States jurisdiction; (b) the successor, transferee or lessee, if other
than the Company, expressly assumes the Company's obligations under the
Indenture and the Notes by means of a supplemental indenture entered into with
the Trustee; (c) immediately before and after giving effect to the transaction
on a pro forma basis, no Default shall have occurred and be continuing; and
(d) certain other conditions are met.
Under any consolidation or amalgamation by the Company with, or merger by
the Company into, any other Person or any conveyance, transfer, lease or other
disposition of the Property of the Company substantially as an entirety as
described in the preceding paragraphs, the successor resulting from such
consolidation or amalgamation or into which the Company is merged or the
transferee or lessee to which such conveyance, transfer, lease or disposition
is made, will succeed to, and be substituted for, and may exercise every right
and power of, the Company under the Indenture, and thereafter, except in the case of a conveyance, transfer, leasemerger approved pursuant to § 251(h) of this title, within the later of the consummation of the offer contemplated by § 251(h) of this title and 20 days after the date of giving such notice, demand in writing from the surviving, resulting or disposition,converted entity the predecessorappraisal of such holder’s shares; provided that a demand may be delivered to such entity by electronic transmission if directed to an information processing system (if stillany) expressly designated for that purpose in existence)such notice. Such demand will be released from its obligationssufficient if it reasonably informs such entity of the identity of the stockholder and covenantsthat the stockholder intends thereby to demand the appraisal of such holder’s shares. If such notice did not notify stockholders of the effective date of the merger, consolidation, conversion, transfer, domestication or continuance, either (i) each such constituent corporation or the converting,
A-3
transferring, domesticating or continuing corporation shall send a second notice before the effective date of the merger, consolidation, conversion, transfer, domestication or continuance notifying each of the holders of any class or series of stock of such constituent, converting, transferring, domesticating or continuing corporation that are entitled to appraisal rights of the effective date of the merger, consolidation, conversion, transfer, domestication or continuance or (ii) the surviving, resulting or converted entity shall send such a second notice to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more than 20 days following the sending of the first notice or, in the case of a merger approved pursuant to § 251(h) of this title, later than the later of the consummation of the offer contemplated by § 251(h) of this title and 20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is entitled to appraisal rights and who has demanded appraisal of such holder’s shares in accordance with this subsection and any beneficial owner who has demanded appraisal under paragraph (d)(3) of this section. An affidavit of the secretary or assistant secretary or of the transfer agent of the corporation or entity that is required to give either notice that such notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of determining the stockholders entitled to receive either notice, each constituent corporation or the converting, transferring, domesticating or continuing corporation may fix, in advance, a record date that shall be not more than 10 days prior to the date the notice is given, provided, that if the notice is given on or after the effective date of the merger, consolidation, conversion, transfer, domestication or continuance, the record date shall be such effective date. If no record date is fixed and the notice is given prior to the effective date, the record date shall be the close of business on the day next preceding the day on which the notice is given.
(3) Notwithstanding subsection (a) of this section (but subject to this paragraph (d)(3)), a beneficial owner may, in such person’s name, demand in writing an appraisal of such beneficial owner’s shares in accordance with either paragraph (d)(1) or (2) of this section, as applicable; provided that (i) such beneficial owner continuously owns such shares through the effective date of the merger, consolidation, conversion, transfer, domestication or continuance and otherwise satisfies the requirements applicable to a stockholder under the Indenturefirst sentence of subsection (a) of this section and (ii) the demand made by such beneficial owner reasonably identifies the holder of record of the shares for which the demand is made, is accompanied by documentary evidence of such beneficial owner’s beneficial ownership of stock and a statement that such documentary evidence is a true and correct copy of what it purports to be, and provides an address at which such beneficial owner consents to receive notices given by the surviving, resulting or converted entity hereunder and to be set forth on the verified list required by subsection (f) of this section.
(e) Within 120 days after the effective date of the merger, consolidation, conversion, transfer, domestication or continuance, the surviving, resulting or converted entity, or any person who has complied with subsections (a) and (d) of this section and who is otherwise entitled to appraisal rights, may commence an appraisal proceeding by filing a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger, consolidation, conversion, transfer, domestication or continuance, any person entitled to appraisal rights who has not commenced an appraisal proceeding or
A-4
joined that proceeding as a named party shall have the right to withdraw such person’s demand for appraisal and to accept the terms offered upon the merger, consolidation, conversion, transfer, domestication or continuance. Within 120 days after the effective date of the merger, consolidation, conversion, transfer, domestication or continuance, any person who has complied with the requirements of subsections (a) and (d) of this section, upon request given in writing (or by electronic transmission directed to an information processing system (if any) expressly designated for that purpose in the notice of appraisal), shall be entitled to receive from the surviving, resulting or converted entity a statement setting forth the aggregate number of shares not voted in favor of the merger, consolidation, conversion, transfer, domestication or continuance (or, in the case of a merger approved pursuant to § 251(h) of this title, the aggregate number of shares (other than any excluded stock (as defined in § 251(h)(6)d. of this title)) that were the subject of, and were not tendered into, and accepted for purchase or exchange in, the offer referred to in § 251(h)(2) of this title)), and, in either case, with respect to which demands for appraisal have been received and the Notes.
EVENTS OF DEFAULT
An Eventaggregate number of Defaultstockholders or beneficial owners holding or owning such shares (provided that, where a beneficial owner makes a demand pursuant to paragraph (d)(3) of this section, the record holder of such shares shall not be considered a separate stockholder holding such shares for purposes of such aggregate number). Such statement shall be given to the person within 10 days after such person’s request for such a statement is definedreceived by the surviving, resulting or converted entity or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) of this section, whichever is later.
(f) Upon the filing of any such petition by any person other than the surviving, resulting or converted entity, service of a copy thereof shall be made upon such entity, which shall within 20 days after such service file in the Indenture to be (i) failure to pay any
interest upon anyoffice of the NotesRegister in Chancery in which the petition was filed a duly verified list containing the names and addresses of all persons who have demanded appraisal for 30 daystheir shares and with whom agreements as to the value of their shares have not been reached by such entity. If the petition shall be filed by the surviving, resulting or more afterconverted entity, the petition shall be accompanied by such payment is due,
(ii) failurea duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to pay the principalsurviving, resulting or converted entity and to the persons shown on the list at the addresses therein stated. The forms of the notices by mail and premium,by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving, resulting or converted entity.
(g) At the hearing on such petition, the Court shall determine the persons who have complied with this section and who have become entitled to appraisal rights. The Court may require the persons who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any on any of the Notes
when due, (iii) failureperson fails to comply with any other covenants insuch direction, the IndentureCourt may dismiss the proceedings as to such person. If immediately before the merger, consolidation, conversion, transfer, domestication or continuance the shares of the class or series of stock of the constituent, converting, transferring, domesticating or continuing corporation as to which will not have been
78
remedied byappraisal rights are available were listed on a national securities exchange, the endCourt shall dismiss the proceedings as to all holders of a periodsuch shares who are otherwise entitled to appraisal rights unless (1) the total number of 30 days after written noticeshares entitled to the Company
by the Trustee or to the Company and the Trustee by the Holders of at least
25% in principal amountappraisal exceeds 1% of the outstanding Notes, (iv) acceleration of, or
failure by the Company or any Subsidiary to pay when due, the principal of any
Debt for money borrowedshares of the Companyclass or any Subsidiary having an aggregate
principal amount atseries eligible for appraisal, (2) the time in excessvalue of the greaterconsideration provided in the merger, consolidation, conversion, transfer, domestication or continuance for such total number of $15shares exceeds $1 million, and 5%or (3) the merger was approved pursuant to § 253 or § 267 of Consolidated Net Worth or its foreign currency equivalent at such time, if
such acceleration is not annulled, or such Debt is not discharged, bythis title.
A-5
(h) After the end
of a period of 20 days after written noticeCourt determines the persons entitled to an appraisal, the Company by the Trustee or
to the Company and the Trustee by the Holders of at least 25% in principal
amount of the outstanding Notes (the "cross acceleration provision"), (v)
certain events of bankruptcy, insolvency or reorganization of the Company or a
Significant Subsidiary (the "bankruptcy provisions") or (vi) any Subsidiary
Guarantee ceases toappraisal proceeding shall be in full force and effect (other thanconducted in accordance with the termsrules of the Indenture orCourt of Chancery, including any rules specifically governing appraisal proceedings. Through such Subsidiary Guarantee) or any Subsidiary
Guarantor denies or disaffirms its obligations under its Subsidiary Guarantee
(the "guarantee provisions").
The Indenture provides that if an Event of Default (other than of a type
referred to in clause (v)proceeding the Court shall determine the fair value of the preceding paragraph with respect toshares exclusive of any element of value arising from the Company) shall have occurred and is continuing, either the Trusteeaccomplishment or the
Holders of at least 25% in principal amountexpectation of the outstanding Notes by noticemerger, consolidation, conversion, transfer, domestication or continuance, together with interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. Unless the Court in writing toits discretion determines otherwise for good cause shown, and except as provided in this subsection, interest from the Company (and to the Trustee if given by the Holdereffective date of the Notes) may declaremerger, consolidation, conversion, transfer, domestication or continuance through the principal amount of all Notes to be immediately due and
payable. Such declaration may be rescinded if certain conditions are
satisfied. If an Event of Default of the type referred to in clause (v) of the
preceding paragraph shall have occurred with respect to the Company, the
principal amount of the outstanding Notes shall automatically become
immediately due and payable.
The Indenture also provides that the Holders of not less than a majority in
principal amount of the outstanding Notes may direct the time, method and
place of conducting any proceedings for any remedy available to the Trustee,
or exercising any trust or power conferred on the Trustee, provided that such
direction is not in conflict with any rule of law or with the Indenture. The
Trustee may take any other action deemed proper by the Trustee which is not
inconsistent with such direction.
The Indenture contains provisions entitling the Trustee, subject to the duty
of the Trustee during the continuance of an Event of Default to act with the
required standard of care, to be indemnified by the Holders of Notes before
proceeding to exercise any right or power under the Indenture at the request
of the Holders of Notes.
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless (i) such Holder
shall have previously given to the Trustee written notice of a continuing
Event of Default, (ii) the Holders of at least 25% in aggregate principal
amount of the outstanding Notes shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as Trustee
and (iii) the Trustee shall not have received from the Holders of a majority
in aggregate principal amount of the outstanding Notes a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days. However, such limitations do not apply to a suit
instituted by a Holder of a Note for enforcementdate of payment of the principaljudgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the merger, consolidation or conversion and premium,the date of payment of the judgment. At any time before the entry of judgment in the proceedings, the surviving, resulting or converted entity may pay to each person entitled to appraisal an amount in cash, in which case interest shall accrue thereafter as provided herein only upon the sum of (1) the difference, if any, between the amount so paid and the fair value of the shares as determined by the Court, and (2) interest theretofore accrued, unless paid at that time. Upon application by the surviving, resulting or converted entity or by any person entitled to participate in the appraisal proceeding, the Court may, in its discretion, proceed to trial upon the appraisal prior to the final determination of the persons entitled to an appraisal. Any person whose name appears on the list filed by the surviving, resulting or converted entity pursuant to subsection (f) of this section may participate fully in all proceedings until it is finally determined that such person is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving, resulting or converted entity to the persons entitled thereto. Payment shall be so made to each such person upon such terms and conditions as the Court may order. The Court’s decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving, resulting or converted entity be an entity of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a person whose name appears on the list filed by the surviving, resulting or converted entity pursuant to subsection (f) of this section who participated in the proceeding and incurred expenses in connection therewith, the Court may order all or a portion of such expenses, including, without limitation, reasonable attorney’s fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal not dismissed pursuant to subsection (k) of this section or subject to such an award pursuant to a reservation of jurisdiction under subsection (k) of this section.
A-6
(k) Subject to the remainder of this subsection, from and after the effective date of the merger, consolidation, conversion, transfer, domestication or continuance, no person who has demanded appraisal rights with respect to some or all of such person’s shares as provided in subsection (d) of this section shall be entitled to vote such shares for any purpose or to receive payment of dividends or other distributions on such Note onshares (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger, consolidation, conversion, transfer, domestication or continuance). If a person who has made a demand for an appraisal in accordance with this section shall deliver to the surviving, resulting or converted entity a written withdrawal of such person’s demand for an appraisal in respect of some or all of such person’s shares in accordance with subsection (e) of this section, either within 60 days after the respective
due dates expressed in such Note.
The Indenture requires the Company to file annuallyeffective date or thereafter with the Trustee a
certificate, executed by a designated officerwritten approval of the Company, statingcorporation, then the right of such person to an appraisal of the shares subject to the bestwithdrawal shall cease. Notwithstanding the foregoing, an appraisal proceeding in the Court of such officer's knowledge thatChancery shall not be dismissed as to any person without the Company is not in default under the
terms, provisions and conditionsapproval of the Indenture or, ifCourt, and such officer has
knowledge that the Company is in such default, specifying such default.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indentureapproval may be amended withconditioned upon such terms as the consentCourt deems just, including, without limitation, a reservation of jurisdiction for any application to the HoldersCourt made under subsection (j) of a majority in principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange for
the Notes) and any past default or compliance with any provisions may also be
waived with the consent of the Holders of a majority in principal amount of
the Notes then outstanding. However, without the
79
consent of each Holder of an outstanding Note affected thereby, no amendment
may (i) reduce the amount of Notes whose Holders must consent to an amendment
or waiver, (ii) reduce the rate of or extend the time for payment of interest
on any Note, (iii) reduce the principal of or extend the Stated Maturity of
any Note, (iv) reduce the amount payable upon the redemption of any Note or
change the time at which any Note may be redeemed as described under "--
Optional Redemption" above, (v) make any Note payable in a place or in money
other thanthis section; provided, however that stated in the Note, (vi) impairthis provision shall not affect the right of any Holderperson who has not commenced an appraisal proceeding or joined that proceeding as a named party to withdraw such person’s demand for appraisal and to accept the terms offered upon the merger, consolidation, conversion, transfer, domestication or continuance within 60 days after the effective date of the Notesmerger, consolidation, conversion, transfer, domestication or continuance, as set forth in subsection (e) of this section. If a petition for an appraisal is not filed within the time provided in subsection (e) of this section, the right to receive payment of principal of and interest on such Holder's Notes
on or after the due dates therefor or to institute suit for the enforcement of
any payment on orappraisal with respect to all shares shall cease.
(l) The shares or other equity interests of the surviving, resulting or converted entity to which the shares of stock subject to appraisal under this section would have otherwise converted but for an appraisal demand made in accordance with this section shall have the status of authorized but not outstanding shares of stock or other equity interests of the surviving, resulting or converted entity, unless and until the person that has demanded appraisal is no longer entitled to appraisal pursuant to this section.
A-7
ANNEX B—SECTION 203 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
(a) Notwithstanding any other provisions of this chapter, a corporation shall not engage in any business combination with any interested stockholder for a period of 3 years following the time that such Holder's Notesstockholder became an interested stockholder, unless:
(1) Prior to such time the board of directors of the corporation approved either the business combination or any Subsidiary
Guarantee, (vii) make any changethe transaction which resulted in the amendment or waiver provisions which
require each Holder's consent or (viii) make any change in any Subsidiary
Guarantee that would adversely affect the holdersstockholder becoming an interested stockholder;
(2) Upon consummation of the Notes.
Withouttransaction which resulted in the consent of any Holderstockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the Notes, the Company and the Trustee
may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporationvoting stock of the obligationscorporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned (i) by persons who are directors and also officers and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
(3) At or subsequent to such time the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the Company underoutstanding voting stock which is not owned by the Indenture,interested stockholder.
(b) The restrictions contained in this section shall not apply if:
(1) The corporation’s original certificate of incorporation contains a provision expressly electing not to provide for uncertificated
Notesbe governed by this section;
(2) The corporation, by action of its board of directors, adopts an amendment to its bylaws within 90 days of February 2, 1988, expressly electing not to be governed by this section, which amendment shall not be further amended by the board of directors;
(3) The corporation, by action of its stockholders, adopts an amendment to its certificate of incorporation or bylaws expressly electing not to be governed by this section; provided that, in addition to any other vote required by law, such amendment to the certificate of incorporation or in placebylaws must be adopted by the affirmative vote of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f)a majority of the Code, or inoutstanding stock entitled to vote thereon. In the case of a manner suchcorporation that the uncertificated Notes are
described in Section 163(f)(2)(B)both (i) has never had a class of voting stock that falls within any of the Code), to add additional guarantees
with respect to the Notes or to release Subsidiary Guarantors from Subsidiary
Guarantees as provided2 categories set out in paragraph (b)(4) of this section, and (ii) has not elected by the termsa provision in its original certificate of the Indenture, to secure the Notes, to
add to the covenants of the Company for the benefit of the Holders of the
Notes or to surrender any right or power conferred upon the Company, to make
any change that does not adversely affect the rights of any Holder of the
Notes or to comply with any requirement of the Commission in connection with
the qualification of the Indenture under the Trust Indenture Act.
The consent of the Holders of the Notes is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all Holders of the
Notes,incorporation or any defect therein, will not impair or affect the validity of the
amendment.
TRANSFER
The Notes are issued in registered form and are transferable onlyamendment thereto to be governed by this section, such amendment shall become effective upon the
surrender of the Notes being transferred for registration of transfer. The
Company may require payment of a sum sufficient to cover any tax, assessment
or other governmental charge payable in connection with certain transfers and
exchanges.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register
the transfer or exchange of the Notes, to replace mutilated, destroyed, lost
or stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the
covenants described under "--Certain Covenants" (other than the covenant
described under "--Certain Covenants--Merger and Consolidation"), the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to Significant Subsidiaries and the guarantee provisions described
under "--Events of Default" above and the limitations contained in clauses (c)
and (d) under the first paragraph of "--Certain Covenants--Merger and
Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the Notes may not be accelerated
because of an Event of Default specified in clause (iii), (iv), (v) or (vi)
under "--Events of Default" above or because of the failure of the Company to
80
comply with clause (c) or (d) under the first paragraph of "--Certain
Covenants--Merger and Consolidation" above. If the Company exercises either
its legal defeasance option or its covenant defeasance option, each Subsidiary
Guarantor will be released from all its obligations under its Subsidiary
Guarantee.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes
to redemption or maturity, as the case may be, and must comply with certain
other conditions, including delivery to the Trustee of an Opinion of Counsel
to the effect that Holders of the Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such deposit and
defeasance and will be subject to federal income tax on the same amounts and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and,(i) in the case of legal defeasance
only,an amendment to the certificate of incorporation, the date and time at which the certificate filed in accordance with § 103 of this title becomes effective thereunder or (ii) in the case of an amendment to the bylaws, the date of the adoption of such Opinionamendment. In all other cases, an amendment adopted pursuant to this paragraph shall become effective (i) in the case of Counsel mustan amendment to the certificate of incorporation, 12 months after the date and time at which the certificate filed in accordance with § 103 of this title becomes effective thereunder or (ii) in the case of an amendment to the bylaws, 12 months after the date of the adoption of such amendment, and, in either case, the election not to be basedgoverned by this section shall not apply to any business
B-1
combination between such corporation and any person who became an interested stockholder of such corporation on or before (A) in the case of an amendment to the certificate of incorporation, the date and time at which the certificate filed in accordance with § 103 of this title becomes effective thereunder; or (B) in the case of an amendment to the bylaws, the date of the adoption of such amendment. A bylaw amendment adopted pursuant to this paragraph shall not be further amended by the board of directors;
(4) The corporation does not have a class of voting stock that is: (i) listed on a rulingnational securities exchange; or (ii) held of record by more than 2,000 stockholders, unless any of the Internal
Revenue Serviceforegoing results from action taken, directly or indirectly, by an interested stockholder or from a transaction in which a person becomes an interested stockholder;
(5) A stockholder becomes an interested stockholder inadvertently and (i) as soon as practicable divests itself of ownership of sufficient shares so that the stockholder ceases to be an interested stockholder; and (ii) would not, at any time within the 3-year period immediately prior to a business combination between the corporation and such stockholder, have been an interested stockholder but for the inadvertent acquisition of ownership;
(6) The business combination is proposed prior to the consummation or abandonment of and subsequent to the earlier of the public announcement or the notice required hereunder of a proposed transaction which (i) constitutes 1 of the transactions described in the second sentence of this paragraph; (ii) is with or by a person who either was not an interested stockholder during the previous 3 years or who became an interested stockholder with the approval of the corporation’s board of directors or during the period described in paragraph (b)(7) of this section; and (iii) is approved or not opposed by a majority of the members of the board of directors then in office (but not less than 1) who were directors prior to any person becoming an interested stockholder during the previous 3 years or were recommended for election or elected to succeed such directors by a majority of such directors. The proposed transactions referred to in the preceding sentence are limited to (x) a merger or consolidation of the corporation (except for a merger in respect of which, pursuant to § 251(f) of this title, no vote of the stockholders of the corporation is required); (y) a sale, lease, exchange, mortgage, pledge, transfer or other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
Marine Midland Bank isdisposition (in 1 transaction or a series of transactions), whether as part of a dissolution or otherwise, of assets of the Trustee undercorporation or of any direct or indirect majority-owned subsidiary of the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regardcorporation (other than to any direct or indirect wholly-owned subsidiary or to the Notes.
The Holderscorporation) having an aggregate market value equal to 50% or more of either that aggregate market value of all of the assets of the corporation determined on a majority in principal amountconsolidated basis or the aggregate market value of all the outstanding stock of the corporation; or (z) a proposed tender or exchange offer for 50% or more of the outstanding Notes havevoting stock of the rightcorporation. The corporation shall give not less than 20 days’ notice to directall interested stockholders prior to the consummation of any of the transactions described in clause (x) or (y) of the second sentence of this paragraph; or
(7) The business combination is with an interested stockholder who became an interested stockholder at a time when the restrictions contained in this section did not apply by reason of any of paragraphs (b)(1) through (4) of this section, provided, however, that this paragraph (b)(7) shall not apply if, at the time methodsuch interested stockholder became an interested stockholder, the corporation’s certificate of incorporation contained a provision authorized by the last sentence of this subsection (b).
B-2
Notwithstanding paragraphs (b)(1), (2), (3) and place(4) of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercisethis section, a corporation may elect by a provision of its power,original certificate of incorporation or any amendment thereto to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of
Notes, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense and then
only to the extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by this section; provided that any such amendment to the certificate of incorporation shall not apply to restrict a business combination between the corporation and construedan interested stockholder of the corporation if the interested stockholder became such before the date and time at which the certificate filed in accordance with § 103 of this title becomes effective thereunder.
(c) As used in this section only, the laws of the State of New York without
reference to principles of conflicts of law to the extentterm:
(1) “Affiliate” means a person that the application
of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Affiliate" means, with respect to any Person, a Person (i) which directly, or indirectly through one1 or more intermediaries, controls, or is controlled by, or is under common control with, another person.
(2) “Associate,” when used to indicate a relationship with any person, means: (i) Any corporation, partnership, unincorporated association or other entity of which such Person, (ii) whichperson is a director, officer or partner or is, directly or indirectly, through one or more intermediaries beneficially owns or holds 10%the owner of 20% or more of any class of the Voting Stockvoting stock; (ii) any trust or other estate in which such person has at least a 20% beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of such Person (orperson, or any relative of such spouse, who has the same residence as such person.
(3) “Business combination,” when used in reference to any corporation and any interested stockholder of such corporation, means:
(i) Any merger or consolidation of the corporation or any direct or indirect majority-owned subsidiary of the corporation with (A) the interested stockholder, or (B) with any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by the interested stockholder and as a 10%result of such merger or greater
equity interest in a Person whichconsolidation subsection (a) of this section is not applicable to the surviving entity;
(ii) Any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in 1 transaction or a corporation)series of transactions), except proportionately as a stockholder of such corporation, to or (iii)with the interested stockholder, whether as part of a dissolution or otherwise, of assets of the corporation or of any direct or indirect majority-owned subsidiary of the corporation which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all the assets of the corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the corporation;
(iii) Any transaction which results in the issuance or transfer by the corporation or by any direct or indirect majority-owned subsidiary of the corporation of any stock of the corporation or of such subsidiary to the interested stockholder, except: (A) pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of such corporation or any such subsidiary which securities were outstanding prior to the time that the interested stockholder became such; (B) pursuant to a merger under § 251(g) of this title; (C) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of such corporation or any such subsidiary which security is distributed, pro rata to all holders of a class or series of stock of such corporation subsequent to the time the interested stockholder became such; (D) pursuant to an exchange offer by the corporation to purchase stock made on the same terms to all
B-3
holders of said stock; or (E) any issuance or transfer of stock by the corporation; provided however, that in no case under items (C)-(E) of this subparagraph shall there be an increase in the interested stockholder’s proportionate share of the stock of any class or series of the Voting Stock (or, in the case of a Person which is
not a corporation 10% or more of the equity interest) is beneficially ownedvoting stock of the corporation;
(iv) Any transaction involving the corporation or heldany direct or indirect majority-owned subsidiary of the corporation which has the effect, directly or indirectly, of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the corporation or of any such subsidiary which is owned by the interested stockholder, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares of stock not caused, directly or indirectly, by the interested stockholder; or
(v) Any receipt by the interested stockholder of the benefit, directly or indirectly (except proportionately as a stockholder of such corporation), of any loans, advances, guarantees, pledges or other financial benefits (other than those expressly permitted in paragraphs (c)(3)(i)-(iv) of this section) provided by or through onethe corporation or more intermediaries by such
Person. The term "control"any direct or indirect majority-owned subsidiary.
(4) “Control,” including the terms “controlling,” “controlled by” and “under common control with,” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person,person, whether through the ownership of voting securities,stock, by contract or otherwise. "Attributable Debt"A person who is the owner of 20% or more of the outstanding voting stock of any corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity, in respectthe absence of proof by a Salepreponderance of the evidence to the contrary; Notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting stock, in good faith and Leaseback Transactionnot for the purpose of circumventing this section, as an agent, bank, broker, nominee, custodian or trustee for 1 or more owners who do not individually or as a group have control of such entity.
(5) “Interested stockholder” means any person (other than the corporation and any direct or indirect majority-owned subsidiary of the corporation) that (i) is the owner of 15% or more of the outstanding voting stock of the corporation, or (ii) is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any date of determination, (a) if such Sale and Leaseback Transaction is a
Capital Lease Obligation,time within the amount of Debt represented thereby according to
the definition of "Capital Lease Obligation" and (b) in all other instances,
the present value of the total obligations of the lessee for rental payments
during the remaining term of the lease included in such Sale and Leaseback
Transaction (including any3-year period for which such lease has been extended)
determined in accordance with GAAP, discounted at a rate that at the inception
of the lease the lessee would have incurred to borrow over a similar term the
funds necessary to purchase the leased assets.
81
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" means any obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP and the amount of Debt represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such leaseimmediately prior to the first date uponon which it is sought to be determined whether such leaseperson is an interested stockholder, and the affiliates and associates of such person; provided, however, that the term “interested stockholder” shall not include (x) any person who (A) owned shares in excess of the 15% limitation set forth herein as of, or acquired such shares pursuant to a tender offer commenced prior to, December 23, 1987, or pursuant to an exchange offer announced prior to the aforesaid date and commenced within 90 days thereafter and either (I) continued to own shares in excess of such 15% limitation or would have but for action by the corporation or (II) is an affiliate or associate of the corporation and so continued (or so would have continued but for action by the corporation) to be the owner of 15% or more of the outstanding voting stock of the corporation at any time within the 3-year period immediately prior to the date on which it is sought to be determined whether such a person is an interested stockholder or (B) acquired said shares from a person described in item (A)
B-4
of this paragraph by gift, inheritance or in a transaction in which no consideration was exchanged; or (y) any person whose ownership of shares in excess of the 15% limitation set forth herein is the result of action taken solely by the corporation; provided that such person shall be an interested stockholder if thereafter such person acquires additional shares of voting stock of the corporation, except as a result of further corporate action not caused, directly or indirectly, by such person. For the purpose of determining whether a person is an interested stockholder, the voting stock of the corporation deemed to be outstanding shall include stock deemed to be owned by the person through application of paragraph (9) of this subsection but shall not include any other unissued stock of such corporation which may be terminated by the lessee without
paymentissuable pursuant to any agreement, arrangement or understanding, or upon exercise of a penalty. For purposes of "--Certain Covenants--Limitation on
Liens," a Capital Lease Obligation shall be deemed secured by a Lien on the
Property being leased.
"Capital Stock" of any Personconversion rights, warrants or options, or otherwise.
(6) “Person” means any and all shares, interests, rights to
purchase, warrants, options, participationsindividual, corporation, partnership, unincorporated association or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible or exchangeable
into such equity interest.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Consolidated Net Tangible Assets" means, as of any date of determination,
the total amount of assets (less applicable reserves and other properly
deductible items) after deducting (1) all current liabilities (excluding the
amount of those which are by their terms extendable or renewable at the option
of the obligor to a date more than 12 months after the date as of which the
amount is being determined and excluding all intercompany items between the
Company and any Subsidiary or between Subsidiaries) and (2) all goodwill,
tradenames, trademarks, patents, unamortized debt discount and expense and
other like intangible assets, all as determined in accordance with GAAP.
"Consolidated Net Worth" means the excess of assets over liabilities of the
Company and its consolidated Subsidiaries, plus Minority Interests, as
determined from time to time in accordance with GAAP.
"Currency Agreement" means, in respect of any Person, any foreign exchange
contract, currency swap agreement, currency option or other similar agreement
or arrangement designed to protect such Person against fluctuations in
currency exchange rates.
"Debt"entity.
(7) “Stock” means, with respect to any Person on any date of determination
(without duplication), (a) the principal ofcorporation, capital stock and, premium (if any) in respect of
(i) debt of such Person for money borrowed and (ii) debt evidenced by notes,
debentures, bonds or other similar instruments for the payment of which such
Person is responsible or liable; (b) all Capital Lease Obligations of such
Person and all Attributable Debt in respect of Sale and Leaseback Transactions
entered into by such Person; (c) all obligations of such Person issued or
assumed as the deferred purchase price of Property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable arising in the
ordinary course of business); (d) all obligations of such Person for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (a) through
(c) above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement following
payment on the letter of credit); (e) the amount of all obligations of such
Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Subsidiary of such Person,other entity, any Preferred Stock (but excluding, in each case, any accrued dividends); (f) all
obligations of the type referred to in clauses (a) through (e) of other
Persons and all dividends of other Persons for the payment of which, in either
case, such Person is responsible or liable, directly or indirectly, as
obligor, guarantor or otherwise, including by means of any Guarantee; (g) all
obligations of the type referred to in clauses (a) through (f) of other
Persons secured by any Lien on any Property of such Person (whether or not
such obligation is assumed by such Person), the amount of such obligation
being deemed to be
82
the lesser of the value of such Property or the amount of the obligation so
secured; and (h) to the extent not otherwise included in this definition,
Hedging Obligations of such Person. The amount of Debt of any Person at any
date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence
of the contingency giving rise to the obligation, of any contingent
obligations at such date.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock"equity interest.
(8) “Voting stock” means, with respect to any Person, Redeemable Stock of
such Person as to which (i) the maturity, (ii) mandatory redemption or (iii)
redemption, conversion or exchange at the option of the holder thereof occurs,
or may occur, on or prior to the first anniversary of the Stated Maturity of
the Notes; provided, however, that Redeemable Stock of such Person that would
not otherwise be characterized as Disqualified Stock under this definition
shall not constitute Disqualified Stock if such Redeemable Stock is
convertible or exchangeable into Debt solely at the option of the issuer
thereof.
"Exchange Act" means the Securities Exchange Act of 1934.
"Funded Debt" means all Debt of the Company and its Subsidiaries with a
Stated Maturity more than one year after, or which is renewable or extendable
at the option of the Company for a period ending more than one year after, the
date as of which Funded Debt is being determined.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board and (iii) the rules
and regulations of the Commission governing the inclusion of financial
statements (including pro forma financial statements) in periodic reports
required to be filed pursuant to Section 13 of the Exchange Act, including
opinions and pronouncements in staff accounting bulletins and similar written
statements from the accounting staff of the Commission.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (a) to
purchase or pay (or advance or supply funds for the purchase or payment of)
such Debt of such other Person (whether arising by virtue of partnership
arrangements, or by agreements to keep-well, to purchase assets, goods,
securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (b) entered into for the purpose of assuring in
any other manner the obligee against loss in respect thereof (in whole or in
part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning. The term
"Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligation" of any Person means any obligation of such Person
pursuant to any Interest Rate Agreement, Currency Agreement or any other
similar agreement or arrangement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
on the Registrar's books.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by merger, conversion, exchange or otherwise),
extend, assume, Guarantee or become liable in respect of such Debt or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Debt or obligation on the balance sheet of such Person (and "Incurrence"
and "Incurred" shall have meanings correlative to the foregoing); provided,
however, that a change in GAAP that results in an obligation of such Person
that exists at such time, and is not theretofore classified as Debt, becoming
Debt shall not be deemed an Incurrence of such Debt.
83
"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or
other similar agreement or arrangement designed to protect such Person against
fluctuations in interest rates.
"Issue Date" means the date on which the Notes are originally issued.
"Joint Venture" means (i) with respect to properties located in the United
States, any partnership, corporation, or other entity, in which up to and
including 50% of the partnership interests, outstanding voting stock or other
equity interest is owned, directly or indirectly, by the Company and/or one or
more Subsidiaries, and (ii) with respect to properties located outside the
United States, any partnership, corporation or other entity, in which up to
and including 60% of the partnership interests, outstanding voting stock or
other equity interests is owned, directly or indirectly, by the Company and/or
one or more Subsidiaries.
"Legal Holiday" is a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Lien" means, with respect to any Property of any Person, any mortgage or
deed of trust, pledge, security interest, encumbrance, hypothecation,
assignment, deposit arrangement, lien, charge or adverse claim affecting title
or resulting in an encumbrance against Property (including any Capital Lease
Obligation, conditional sale or other title retention agreement or lease in
the nature thereof or any filing or agreement to file a financing statement as
debtor under the Uniform Commercial Code or any similar statute other than to
reflect ownership by another Person of Property leased to such Person under a
lease that is not in the nature of a Capital Lease Obligation, conditional
sale or title retention agreement).
"Minority Interest" means any Capital Stock of a Subsidiary of the Company
that is not owned by the Company or another such Subsidiary.
"Permitted Liens" means:
(a) Liens for taxes, assessments or governmental charges or levies on the
Property of the Company or any Subsidiary if the same shall not at the time
be delinquent or thereafter can be paid without penalty, or are being
contested in good faith and by appropriate proceedings, provided that any
reserve or other appropriate provision that shall be required in conformity
with GAAP shall have been made therefor;
(b) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens on the Property of the Company or any Subsidiary arising
in the ordinary course of business and securing payment of obligations
which are not more than 60 days past due or are being contested in good
faith and by appropriate proceedings;
(c) Liens on the Property of the Company or any Subsidiary Incurred in
the ordinary course of business to secure performance of obligations with
respect to statutory or regulatory requirements, performance or return-of-
money bonds, surety bonds or other obligations of a like nature, in each
case which are not incurred in connection with the borrowing of money, the
obtaining of advances or credit or the payment of the deferred purchase
price of Property and which do not in the aggregate impair in any material
respect the use of Property in the operation of the business of the Company
and the Subsidiaries taken as a whole;
(d) Liens on Property at the time the Company or any Subsidiary acquired
such Property, including any acquisition by means of a merger or
consolidation with or into the Company or any Subsidiary; provided,
however, that any such Lien may not extend to any other Property of the
Company or any Subsidiary except as otherwise provided herein;
(e) Liens on the Property or securing the Debt or Capital Stock of a
Person at the time such Person becomes a Subsidiary; provided, however,
that any such Lien may not extend to any other Property of the Company or
any other Subsidiary which is not a direct Subsidiary of such Person except
as otherwise provided herein;
84
(f) pledges or deposits by the Company or any Subsidiary under workmen's
compensation laws, unemployment insurance laws or similar legislation, or
good faith deposits in connection with bids, tenders, contracts (other than
for the payment of Debt) or leases to which the Company or any Subsidiary
is party, or deposits to secure public or statutory obligations of the
Company, or deposits for the payment of rent, in each case Incurred in the
ordinary course of business;
(g) Liens on the stock, partnership or other equity interest of the
Company or any Subsidiary in any Joint Venture or any Subsidiary which owns
an equity interest in such Joint Venture to secure Debt, provided the
amount of such Debt is contributed and or advanced solely to such Joint
Venture;
(h) Liens on Property to secure Debt Incurred for the purpose of
financing all or any part of the cost of acquisition, construction,
improvement, development or expansion of any such Property; provided such
Debt is Incurred and related Liens are created within 24 months of the
completion of acquisition, construction, improvement, development or
expansion and commencement of full operation, whichever is later, and such
Debt does not exceed the aggregate amount of the cost thereof;
(i) utility easements, building restrictions and such other encumbrances
or charges against real Property as are of a nature generally existing with
respect to properties of a similar character;
(j) Liens on franchise agreements of the Company or any Subsidiary
securing Debt in an aggregate principal amount not to exceed the greater of
(i) $25 million or (ii) two percent of Consolidated Net Tangible Assets;
(k) Liens existing on the Issue Date not otherwise described in clauses
(a) through (j) above; or
(l) Liens on the Property of the Company or any Subsidiary to secure any
Refinancing, in whole or in part, of any Debt secured by Liens referred to
in clause (b), (d), (e), (g), (h) or (k) above; provided, however, that any
such Lien shall be limited to all or part of the same Property that secured
the original Lien (together with improvements and accessions to such
Property) and the aggregate principal amount of Debt that is secured by
such Lien shall not be increased to an amount greater than the sum of (i)
the outstanding principal amount, or, if greater, the committed amount, of
the Debt secured by Liens described under clause (b), (d), (e), (g), (h) or
(k) above, as the case may be, at the time of such Refinancing and (ii) an
amount necessary to pay any premiums, fees and other expenses incurred by
the Company in connection with such Refinancing.
"Person" means any individual, corporation, partnership, company (including
any limited liability company), joint venture, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred
asseries entitled to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"principal" of the Notes means the principal amount of the Notes plus the
premium, if any, on the Notes.
"Principal Property" means any Property owned or leased by the Company or
any Subsidiary of the Company, the net book value of which exceeds the greater
of (i) $5 million or (ii) two percent of Consolidated Net Tangible Assets and
any franchise agreement of the Company or any Subsidiary.
"Property" means, with respect to any Person, all types of real, personal,
tangible, intangible or mixed property owned by such Person whether or not
included in the most recent consolidated balance sheet of such Person and its
Subsidiaries under GAAP.
"Redeemable Stock" means, with respect to any Person, any Capital Stock that
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable) or otherwise (a) matures or is mandatorily
redeemable pursuant to a sinking fund obligation or otherwise, (b) is or may
become redeemable or
85
repurchaseable at the option of the holder thereof, in whole or in part, or
(c) is convertible or exchangeable for Debt or Disqualified Stock.
"Refinance" means, in respect of any Debt, to refinance, extend, renew,
refund, repay, prepay, redeem, defease or retire, or to issue other Debt, in
exchange or replacement for, such Debt. "Refinanced" and "Refinancing" shall
have correlative meanings.
"Sale and Leaseback Transaction" means any arrangement with any Person
(other than the Company or any Subsidiary) providing for the leasing by the
Company or a Subsidiary of any Principal Property owned by the Company or such
Subsidiary (except for leases for a term of not more than three years), which
property has been or is to be sold or transferred by the Company or such
Subsidiary to such Person on the security of such Principal Property more than
365 days after the acquisition thereof or the completion of construction and
commencement of full operation thereof.
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-
X promulgated by the Commission.
"Stated Maturity" means, with respect to any security or any installment of
interest thereon, the date specified in such security as the fixed date on
which the principal of such security or such installment of interest is due
and payable.
"Subsidiary", in respect of any Person, means (i) any Person of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote generally in the election of directors managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by any Person or one or more of the Subsidiaries of
that Person or a combination thereof, and, (ii) any partnership, joint venture
or other Person in which such Person or one or more of the Subsidiaries of
that Person or a combination thereof has the power to control by contract or
otherwise the board of directors or equivalent governing body or otherwise
controls such entity.
"Subsidiary Guarantor" means, unless released from their Subsidiary
Guaranties as permitted by the Indenture, QHE, QHE Partnership and any other
Person that becomes a Subsidiary Guarantor pursuant to the covenant described
under "--Certain Covenants--Future Subsidiary Guarantors".
"Subsidiary Guarantee" means a Guarantee on the terms set forth in the
Indenture by a Subsidiary Guarantor of the Company's obligations with respect to the Notes.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of Americaentity that is pledged
and which are not callable at the issuer's option.
"Voting Stock" of a corporation, means all classes of Capital Stock of such
corporation then outstanding and normallyany equity interest entitled (without regard to the
occurrence of any contingency) to vote generally in the election of directors, managersthe governing body of such entity. Every reference to a percentage of voting stock shall refer to such percentage of the votes of such voting stock.
(9) “Owner,” including the terms “own” and “owned,” when used with respect to any stock, means a person that individually or trustees thereof.
"Wholly Owned Subsidiary" means, atwith or through any time,of its affiliates or associates:
(i) Beneficially owns such stock, directly or indirectly; or
(ii) Has (A) the right to acquire such stock (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided, however, that a Subsidiary allperson shall not be deemed the Voting
Stockowner of which (other than directors' qualifying shares)stock tendered pursuant to a tender or exchange offer made by such person or any of such person’s affiliates or associates until such tendered stock is ataccepted for purchase or exchange; or (B) the right to vote such time owned
bystock pursuant to any agreement, arrangement or understanding; provided, however, that a person shall not be deemed the Companyowner of any stock because of such person’s right to vote such stock if the agreement, arrangement or oneunderstanding to vote such stock arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to ten or more other Wholly Owned Subsidiaries.
86
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income and estate tax consequences relevant topersons; or
(iii) Has any agreement, arrangement or understanding for the exchange of Original Notes
for Exchange Notes and the ownership and disposition of Exchange Notes by an
initial beneficial owner of Original Notes. This discussion is based upon the
United States federal tax law now in effect, which is subject to change,
possibly retroactively. The tax treatment of the holders of the Notes may vary
depending upon their particular situations. Certain holders (including
insurance companies, tax exempt organizations, financial institutions,
subsequent purchasers of Notes and broker-dealers) may be subject to special
rules not discussed below. In addition, this discussion does not describe any
tax consequences arising under the laws of any state, locality or taxing
jurisdiction other than the United States federal government. In general, the
discussion assumes that a holder acquires a Note at original issuance and
holds such Notes as a capital asset and not as part of a "hedge," "straddle,"
"conversion transaction," "synthetic security" or other integrated investment.
Prospective investors are urged to consult their tax advisors regarding the
United States federal tax consequencespurpose of acquiring, holding, andvoting (except voting pursuant to a revocable proxy or consent as described in item (B) of subparagraph (ii) of this paragraph), or disposing of Notes, as well assuch stock with any tax consequencesother person that may arise under the laws of any
foreign, state, localbeneficially owns, or other taxing jurisdiction.
As used herein, the term "United States Holder" means a beneficial ownerwhose affiliates or associates beneficially own, directly or indirectly, such stock.
B-5
(d) No provision of a Notecertificate of incorporation or bylaw shall require, for any vote of stockholders required by this section, a greater vote of stockholders than that specified in this section.
(e) The Court of Chancery is for United States federal income tax purposes, a citizen or
resident (as defined in Section 7701 (b)(1) of the Code) of the United States,
a corporation, partnership or other entity created or organized in the United
States or under the law of the United States or of any political subdivision
thereof, an estate whose income is includible in gross income for United
States federal income tax purposes regardless of its source or a trust, if a
U.S. court is ablehereby vested with exclusive jurisdiction to exercise primary supervision over the administration of
the trusthear and one or more U.S. persons have the authority to controldetermine all substantial decisions of the trust.
UNITED STATES HOLDERS
Stated Interest. Stated interest on a Note will be taxable to a United
States Holder as ordinary interest income at the time that such interest
accrues or is received, in accordance with the United States Holder's regular
method of accounting for federal income tax purposes.
EXCHANGE OFFER
An exchange of Exchange Notes for Original Notes pursuant to the Exchange
Offer should not be treated as an exchange or other taxable event for United
States federal income tax purposes because the Exchange Notes should not be
considered to differ materially in kind or extent from the Notes. As a result,
holders who exchange Exchange Notes for Original Notes pursuant to the
Exchange Offer should not recognize any income, gain or loss for federal
income tax purposes at the time of the exchange and any such holder should
have the same adjusted tax basis and holding period in the Exchange Notes as
it had in the Original Notes immediately before the exchange.
Sales, Exchange or Retirement of the Notes. Upon the sale, exchange,
redemption, retirement at maturity or other disposition of a Note, a United
States Holder will generally recognize taxable gain or loss equal to the
difference between the sum of cash plus the fair market value of all other
property received on such disposition (except to the extent such cash or
property is attributable to accrued interest which will be taxable as ordinary
income) and such holder's adjusted tax basis in the Note. A United States
Holder's adjusted tax basis in the Notes will equal the holder's purchase
price for such Notes. Gain or loss recognized on the disposition of a Note
generally will be capital gain or loss and will be long term capital gain or
loss if the Holders' holding period in the Notes was longer than one year.
Backup Withholding and Information Reporting. In general, a United States
Holder of a Note will be subject to backup withholding at the rate of 31%matters with respect to interest, principalthis section.
B-6
The Exchange Agent for the Offer is:
| By First Class Mail: | By Email Transmission: (FOR NOTICE OF GUARANTEE ONLY) | By Registered or Overnight Courier | ||
Computershare Trust Company, N.A. Attn: Corp Actions P.O. Box 43011 Providence, RI 02940- 3011 | CANOTICEOFGUARANTEE@computershare.com | Computershare Trust Company, N.A. Attn: Corporate Actions Voluntary Offer 150 Royall Street, Suite V Canton, MA 02021 |
Any questions or requests for assistance or additional copies of this Offer, the notice of guaranteed delivery and premium, if any, paid on a Note, unless the
holder (a) is an entity (including corporations, tax-exempt organizations and
certain qualified nominees) that is exempt from withholding and, when
required, demonstrates this fact, or (b) provides the
87
Company with its Taxpayer Identification Number ("TIN") (which, for an
individual wouldrelated offer materials may be the holder's Social Security number), certifies that the
TIN provideddirected to the Information Agent at its telephone numbers and locations listed below. Stockholders may also contact their local broker, commercial bank, trust company or nominee for assistance concerning the Offer.
The Information Agent for the Offer is:
1407 Broadway
New York, New York 10018
(212) 929-5500
Or
Call Toll-Free: (800) 322-2885
Email: exchangeoffer@mackenziepartners.com
B-7
The Dealer Managers for the Offer are:
 |  | |||||
| Goldman Sachs & Co. LLC | Moelis & Company LLC | |||||
200 West Street New York, NY 10282 | 399 Park Avenue, 4th Floor New York, NY 10022 | |||||
Call Collect: (800) 323-5678 Call Toll-Free: (212) 902-1000 | Call Toll Free: (800) 224-7417 |
B-8
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification of Officers and Directors
Set forth below is correct and that the holder has not been
notified by the IRS that it is subject to backup withholding due to
underreportinga description of interest or dividends, and otherwise complies with
applicable requirementscertain provisions of the backup withholding rules. In addition, such
paymentsChoice Certificate of interest, principal and premium to United States Holders that are
not corporations, tax-exempt organizations or qualified nominees will
generally be subject to information reporting requirements.
The amount of any backup withholding from a payment to a United States
Holder will be allowedIncorporation, Choice Bylaws, as a credit against such holder's federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the IRS.
NON-UNITED STATES HOLDERS
Stated Interest. Interest paid by the Company to any beneficial owner of a
Note that is not a United States Holder ("Non-United States Holder") will not
be subject to United States federal income or withholding tax if such interest
is not effectively connected with the conduct of a trade or business within
the United States by such Non-United States Holder and (a) such Non-United
States Holder (i) does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company; (ii) is
not a controlled foreign corporation with respect to which the Company is a
"related person" within the meaning of the Code; and (iii) satisfies certain
certification requirements or (b) such Non-United States Holder is entitled to
the benefits of an income tax treaty under which the interest is exempt from
United States withholding tax, and such Non-United States Holder provides a
properly executed IRS Form 1001 claiming the exemption (or, after December 31,
1999, IRS Form W-8, which may require obtaining a Taxpayer Identification
Number and making certain certifications).
Sale, Exchange or Retirement of the Notes. A Non-United States Holder will
generally not be subject to United States federal income tax on gain
recognized on a sale, redemption, retirement at maturity or other disposition
of a Note unless (i) the gain is effectively connected with the conduct of a
trade or business within the United States by the Non-United States Holder or
(ii) in the case of a Non-United States Holder who is a nonresident alien
individual and holds the Note or Debenture as a capital asset, such holder is
present in the United States for 183 or more days in the taxable year and
certain other requirements are met.
Federal Estate Taxes. If interest on the Notes is exempt from withholding of
United States federal income tax under clause (a) of the rules described under
"Stated Interest," the Notes will not be included in the estate of a deceased
Non-United States Holder for United States federal estate tax purposes.
Backup Withholding and Information Reporting. The Company will, where
required, report to the holders of Notes and the Internal Revenue Service the
amount of any interest paid on the Notes in each calendar year and the amounts
of tax withheld, if any, with respect to such payments.
In the case of payments of interest to Non-United States Holders, Treasury
Regulations provide that the 31% backup withholding tax and certain
information reporting will not apply to such payment with respect to which
either the requisite certification has been received or an exemption has
otherwise been established; provided that neither the Company nor its payment
agent has actual knowledge that the holder is a United States person or that
the conditions of any other exemption are not in fact satisfied. Under the
Treasury Regulations, these information reporting and backup withholding
requirements will apply, however, to the gross proceeds paid to a Non-United
States Holder on the disposition of the Notes by or through a United States
office of a United States or foreign broker, unless certain certification
requirements are met or the holder otherwise establishes an exemption.
Information reporting requirements, but not backup withholding, will also
apply to a payment of the proceeds of a disposition of the Notes by or through
a foreign office of a United States broker or foreign brokers with certain
types of relationships to the United States unless the holder is an exempt
recipient (as demonstrated through appropriate certification) or such broker
has documentary evidence in its file that the holder of the Notes is not a
United States person and has no actual knowledge to the contrary and certain
other conditions are met.
88
Neither information reporting nor backup withholding generally will apply to a
payment of the proceeds of a disposition of the Notes by or through a foreign
office of a foreign broker not subject to the preceding sentence.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the IRS. Non-United States Holders are
urged to consult their tax advisors with respect to the application of these
final regulations.
Recently, the Treasury Department has promulgated final regulations
regarding the withholding and information reporting rules discussed above. In
general, the proposed regulations do not significantly alter the substantive
withholding and information reporting requirements but unify current
certification procedures and forms and clarify reliance standards. Under the
final regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. The final regulations would generally be
effective for payments made after December 31, 1999, subject to certain
transition rules.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account in
connection with the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by broker-dealers during the period referred to below in connection with
resales of Exchange Notes received in exchange for Original Notes where such
Original Notes were acquired by such broker-dealers for their own accounts as
a result of market-making activities or other trading activities. The Company
has agreed that this Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
such Exchange Notes for a period starting on the date hereof and ending on the
close of business on the earlier to occur of (i) the date on which all
Exchange Notes held by broker-dealers eligible to use the Prospectus to
satisfy their prospectus delivery obligations under the Securities Act have
been sold and (ii) the date 180 days after the consummation of the Exchange
Offer. However, a broker-dealer who intends to use this Prospectus in
connection with the resale of Exchange Notes received in exchange for Original
Notes pursuant to the Exchange Offer must notify the Company, or cause the
Company to be notified, on or prior to the Expiration Date, that it is a
broker-dealer. Such notice may be given in the space provided for that purpose
in the Letter of Transmittal or may be delivered to the Exchange Agent at one
of the addresses set forth in the Letter of Transmittal. See "The Exchange
Offer--Resales of Exchange Notes."
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
accounts in connection with the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account in connection with the Exchange Offer and
any broker or dealer that participates in a distribution of such Exchange
Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
89
For a period commencing on the date on which the Exchange Offer Registration
Statement is declared effective and ending on the close of business on the
earlier to occur of (i) the date on which all Exchange Notes held by broker-
dealers eligible to use the Prospectus to satisfy their prospectus delivery
obligation under the Securities Act have been sold and (ii) the date 180 days
after the consummation of the Exchange Offer, the Company will promptly send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any broker-dealer that requests such documents in the Letter of
Transmittal. The Company has agreed to pay all expenses incident to the
Exchange Offer (including the expenses of one counsel for the holders of the
Notes) other than commissions or concessions of any brokers or dealers and
will indemnify the holders of the Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Michael J. DeSantis.
EXPERTS
The financial statements and schedule included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
90
INDEX TO FINANCIAL STATEMENTS
CHOICE HOTELS INTERNATIONAL, INC.
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and May 31, 1997..... F-3
Consolidated Statements of Income for the seven months ended December 31,
1997 and for the fiscal years ended May 31, 1997, May 31, 1996 and May
31, 1995................................................................ F-4
Consolidated Statements of Cash Flows for the seven months ended December
31, 1997 and for the fiscal years ended May 31, 1997, May 31, 1996 and
May 31, 1995............................................................ F-5
Consolidated Statement of Shareholders' Equity for the period October 15,
1997 through December 31, 1997.......................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and December
31, 1997................................................................ F-21
Consolidated Statements of Income for the six months ended June 30, 1998
and June 30, 1997 (unaudited)........................................... F-23
Consolidated Statements of Cash Flows for the six months ended June 30,
1998 and June 30, 1997.................................................. F-24
Notes to Consolidated Financial Statements (unaudited) .................. F-25
Management's Discussion and Analysis of Results of Operations and
Financial Condition .................................................... F-27
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Choice Hotels International, Inc.:
We have audited the accompanying consolidated balance sheets of Choice
Hotels International, Inc., as defined under "Basis of Presentation" in the
Notes to Consolidated Financial Statements, as of December 31, 1997 and May
31, 1997, and the related consolidated statements of income and cash flows for
the seven months ended December 31, 1997 and for each of the three fiscal
years in the period ended May 31, 1997, and the statement of shareholders'
equity for the period from October 15, 1997 (inception) to December 31, 1997.
These consolidated financial statements are the responsibility of Choice
Hotels International, Inc.'s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Choice Hotels
International, Inc. as of December 31, 1997 and May 31, 1997, and the
consolidated results of their operations and their consolidated cash flows for
the seven months ended December 31, 1997, and each of the three fiscal years
in the period ended May 31, 1997, and the statement of shareholders' equity
for the period from October 15, 1997 (inception) to December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Washington, D.C.,
January 27, 1998
F-2
CHOICE HOTELS INTERNATIONAL, INC.
(SEE BASIS OF PRESENTATION)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MAY 31,
1997 1997
------------ --------
(IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents.............................. $ 10,282 $ 4,167
Receivables (net of allowance for doubtful accounts of
$7,608 and $6,159, respectively)...................... 28,347 24,472
Other.................................................. 9,904 5,676
Receivable from Sunburst Hospitality................... 25,066 --
-------- --------
Total current assets................................. 73,599 34,315
Property and equipment, at cost, net of accumulated
depreciation............................................ 37,040 43,377
Goodwill, net of accumulated amortization................ 68,792 69,939
Franchise rights, net of accumulated amortization........ 48,819 50,503
Investment in Friendly Hotels, PLC....................... 17,011 17,161
Assets held for sale..................................... 12,935 --
Other assets............................................. 10,752 6,178
Note receivable from Sunburst Hospitality................ 117,447 --
-------- --------
Total assets......................................... $386,395 $221,473
======== ========
LIABILITIES AND EQUITY
Current liabilities
Current portion of long-term debt...................... $ 15,041 $ 36
Accounts payable....................................... 26,452 20,412
Accrued expenses....................................... 20,702 10,965
Income taxes payable................................... 6,007 3,318
-------- --------
Total current liabilities............................ 68,202 34,731
-------- --------
Long-term debt........................................... 267,780 46,427
Notes payable to Manor Care, Inc. ....................... -- 78,700
Deferred income taxes ($0 and $3,498, respectively) and
other liabilities....................................... 1,155 4,422
-------- --------
Total liabilities.................................... 337,137 164,280
-------- --------
Shareholders' Equity
Common Stock, $.01 par value, 160,000,000 shares
authorized and 59,828,878 shares issued and
outstanding........................................... 598 --
Additional paid-in capital............................. 47,907 --
Cumulative translation adjustment...................... (8,316) --
Treasury stock......................................... (189) --
Retained earnings...................................... 9,258 --
Investments and advances from Parent................... -- 57,193
-------- --------
Total shareholders' equity........................... 49,258 57,193
-------- --------
Total liabilities and shareholders' equity........... $386,395 $221,473
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
CHOICE HOTELS INTERNATIONAL, INC.
(SEE BASIS OF PRESENTATION)
CONSOLIDATED STATEMENTS OF INCOME
SEVEN MONTHS
ENDED YEAR ENDED MAY 31,
DECEMBER 31, ----------------------------
1997 1997 1996 1995
------------ -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues
Royalty fees...................... $ 70,308 $ 97,215 $ 87,994 $ 78,092
Product sales..................... 13,524 23,643 21,570 14,461
European hotel operations......... 10,541 17,737 19,609 18,638
Initial franchise fees and
relicensing fees................. 8,597 16,802 15,578 11,656
Other, including partner services
revenue.......................... 4,869 12,642 6,997 6,180
-------- -------- -------- --------
Total revenues.................. 107,839 168,039 151,748 129,027
-------- -------- -------- --------
Operating expenses
Selling, general and
administrative................... 29,454 51,102 45,196 45,589
Product cost of sales............. 13,031 22,766 20,709 13,882
European hotel operations......... 9,203 16,166 17,521 17,922
Depreciation and amortization..... 3,977 7,643 9,179 9,668
Provision for asset impairment.... -- -- 24,760 --
-------- -------- -------- --------
Total operating expenses........ 55,665 97,677 117,365 87,061
-------- -------- -------- --------
Operating income.................... 52,174 70,362 34,383 41,966
-------- -------- -------- --------
Other
Minority interest expense......... -- -- 1,532 2,200
Interest on notes payable to Manor
Care............................. -- 7,083 7,083 7,083
Interest expense and other........ 8,788 4,647 4,791 3,672
Interest and dividend income
(including interest income on the
Sunburst Note of $2.4 million for
December 31, 1997)............... (2,997) (943) -- --
-------- -------- -------- --------
Total other expenses............ 5,791 10,787 13,406 12,955
-------- -------- -------- --------
Income before income taxes.......... 46,383 59,575 20,977 29,011
Income taxes........................ (19,096) (24,845) (9,313) (12,783)
-------- -------- -------- --------
Net income.......................... $ 27,287 $ 34,730 $ 11,664 $ 16,228
======== ======== ======== ========
Weighted average shares
outstanding........................ 59,798 62,680 62,628 62,480
======== ======== ======== ========
Basic earnings per share............ $ 0.46 $ 0.55 $ 0.19 $ 0.26
======== ======== ======== ========
Diluted earnings per share.......... $ 0.45 $ 0.55 $ 0.19 $ 0.26
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements of
income.
F-4
CHOICE HOTELS INTERNATIONAL, INC.
(SEE BASIS OF PRESENTATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
SEVEN MONTHS ENDED YEAR ENDED MAY 31,
DECEMBER 31, ----------------------------
1997 1997 1996 1995
------------------ -------- -------- --------
(IN THOUSANDS)
Cash flows from operating
activities
Net income.................... $ 27,287 $ 34,730 $ 11,664 $ 16,228
Reconciliation of net income
to net cash provided by
operating activities:
Depreciation and
amortization............... 6,159 10,438 11,839 11,768
Provision for bad debt...... 2,274 2,238 685 692
Increase (decrease) in
deferred taxes............. (4,828) 3,171 (13,527) 68
Non-cash interest and
dividend income............ (2,997) (943) -- --
Provision for asset
impairment................. -- -- 24,760 --
Change in assets and
liabilities:
Change in receivables....... (10,606) (4,835) (7,533) (3,000)
Change in prepaid expenses
and other current assets... 2,403 1,615 (990) 1,524
Change in current
liabilities................ 11,226 (2,145) 4,050 3,694
Change in income taxes
payable.................... 2,689 1,061 (265) 158
Change in other
liabilities................ -- 175 2,059 6,719
--------- -------- -------- --------
Net cash provided by
operating activities....... 33,607 45,505 32,742 37,851
--------- -------- -------- --------
Cash flows from investing
activities
Investment in property and
equipment.................. (7,329) (10,630) (6,506) (13,611)
Purchase of minority
interest................... -- (2,494) (55,269) --
Investment in Friendly
Hotels, PLC................ -- -- (17,069) --
Advances to Sunburst
Hospitality................ (25,066) -- -- --
Note receivable from
Sunburst Hospitality....... (115,000) -- -- --
Other items, net............ (2,344) (3,804) 345 5,878
--------- -------- -------- --------
Net cash utilized in
investing activities....... (149,739) (16,928) (78,499) (7,733)
--------- -------- -------- --------
Cash flows from financing
activities
Proceeds from mortgages and
other long-term debts...... 236,509 31,107 17,296 15,567
Principal payments of debt.. (78,851) (51,260) (350) (13,492)
Purchase of treasury stock.. (189) -- -- --
Cash transfers (to) from
Parent, net................ (35,222) (8,069) 31,567 (33,336)
--------- -------- -------- --------
Net cash provided by
(utilized in) financing
activities................. 122,247 (28,222) 48,513 (31,261)
--------- -------- -------- --------
Net change in cash and cash
equivalents.................. 6,115 355 2,756 (1,143)
Cash and cash equivalents at
beginning of period.......... 4,167 3,812 1,056 2,199
--------- -------- -------- --------
Cash and cash equivalents at
end of period................ $ 10,282 $ 4,167 $ 3,812 $ 1,056
========= ======== ======== ========
The accompanying notes are an integral part of these consolidated statements of
cash flows.
F-5
CHOICE HOTELS INTERNATIONAL, INC.
(SEE BASIS OF PRESENTATION)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
------------------ PAID-IN- TRANSLATION TREASURY RETAINED
SHARES AMOUNT CAPITAL ADJUSTMENT STOCK EARNINGS
---------- ------ ---------- ----------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Initial capitalization-
October 15, 1997....... 59,767,716 $598 $48,064 $(8,662) $ -- $ --
Net income.............. -- -- -- -- -- 27,287
Exercise of stock
options/grants, net.... 71,876 -- (157) -- -- --
Translation adjustment.. -- -- -- 346 -- --
Treasury purchases...... (10,714) -- -- -- (189) --
Transfers of net income
to Sunburst prior to
the distribution....... -- -- -- -- -- (18,029)
---------- ---- ------- ------- ----- --------
Balance as of December
31, 1997............... 59,828,878 $598 $47,907 $(8,316) $(189) $ 9,258
========== ==== ======= ======= ===== ========
The accompanying notes are an integral part of this consolidated statement of
shareholders' equity.
F-6
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On March 7, 1996, Manor Care, Inc. ("Manor Care") announced its intention to
proceed with the separation of its lodging business ("Choice Hotels Holdings,
Inc." or "Holdings") from its health care business via a Spin-Off of its
lodging business (the "Manor Care Distribution"). On September 30, 1996 the
Board of Directors of Manor Care declared a special dividend to its
shareholders of one share of common stock of Holdings for each share of Manor
Care stock, and the Board set the record date and the distribution date. The
Manor Care Distribution was made on November 1, 1996 to holders of record of
Manor Care's common stock on October 10, 1996.
The Manor Care Distribution separated the lodging and health care businesses
of Manor Care into two public corporations. The operations of Holdings
consisted principally of the hotel franchise operations and the owned and
managed hotel operations formerly conducted by Manor Care directly or through
its subsidiaries (the "Lodging Business").
On November 1, 1996, concurrent with the Manor Care Distribution, Holdings
changed its name from Choice Hotels Holdings, Inc. to Choice Hotels
International, Inc. ("CHI") and CHI's franchising subsidiary, formerly named
Choice Hotels International, Inc., changed its name to Choice Hotels
Franchising, Inc. ("Franchising").
On April 29, 1997, CHI's Board of Directors announced its intention to
separate CHI's franchising business from its owned hotel business (hereinafter
referred to as the "Sunburst Distribution"). On September 16, 1997 the Board
of Directors and shareholders of CHI approved the separation of the business
via a Spin-Off of the franchising business, along with CHI's European hotel
and franchising operations, to its shareholders. The Board set October 15,
1997 as the date of distribution and on that date, CHI shareholders received
one share in Franchising (renamed "Choice Hotels International, Inc." and
referred to hereafter as the "Company") for every share of CHI stock held on
October 7, 1997 (the date of record). Concurrent with the October 15, 1997
distribution date, CHI changed its name to Sunburst Hospitality Corporation
(referred to hereafter as "Sunburst") and effected a one-for-three reverse
stock split of its common stock.
The Company is in the business of hotel franchising. As of December 31,
1997, the Company had franchise agreements with 3,484 hotels operating in 33
countries under the following brand names: Comfort, Clarion, Sleep, Quality,
Rodeway, Econo Lodge and MainStay.
The consolidated financial statements present the financial position,
results of operations, cash flows and equity of the Company as if it were
formed as a separate entity of its parent (Manor Care prior to the Manor Care
Distribution and Sunburst prior to the Sunburst Distribution, in each case,
the "Parent") which conducted the hotel franchising business and European
hotel operations and as if the Company were a separate company for all periods
presented. The Parent's historical basis in the assets and liabilities of the
Company has been carried over to the consolidated financial statements. All
material intercompany transactions and balances between the Company and its
subsidiaries have been eliminated. Changes in the Investments and advances
from Parent represent the net income of the Company plus the net change in
transfers between the Company and Manor Care through November 1, 1996 and
Sunburst through October 15, 1997.
F-7
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
An analysis of the activity in the "Investments and advances from Parent"
account for the three years ended May 31, 1997 and the seven months ended
December 31, 1997 is as follows:
(IN THOUSANDS)
--------------
Balance, May 31, 1994......................................... $ 4,409
Transfers to Parent, net...................................... (33,336)
Net income.................................................... 16,228
--------
Balance, May 31, 1995......................................... (12,699)
Transfers from Parent, net.................................... 31,567
Net income.................................................... 11,664
--------
Balance, May 31, 1996......................................... 30,532
Transfers to Parent, net...................................... (8,069)
Net income.................................................... 34,730
--------
Balance, May 31, 1997......................................... 57,193
Net income from June 1, 1997 through October 15, 1997......... 18,029
Transfers to Parent, net through October 15, 1997............. (35,222)
Initial capitalization........................................ (40,000)
--------
Balance, October 15, 1997..................................... $ 0
========
The average balance of the Investments and advances from Parent was $43.9
million, $8.9 million and ($4.1) million for fiscal years 1997, 1996 and 1995,
respectively and $48.6 million for the period June 1, 1997 through October 15,
1997.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. The Company revised
its presentation of marketing and reservation fees. All years presented have
been restated to conform to the current presentation. See Significant
Accounting Policies -- Revenue Recognition.
SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
Prior to December 1997, the Company's fiscal year was the twelve-month
period ended May 31. During September 1997, the Company changed its fiscal
year from a May 31 year-end to December 31 year-end.
ASSETS HELD FOR SALE
Assets held for sale by the Company are stated at the lower of cost or
estimated net realizable value.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less at the date of purchase to be cash
equivalents.
F-8
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
The components of property and equipment in the consolidated balance sheets
were:
DECEMBER 31, MAY 31,
1997 1997
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Land........................................... $ 996 $ 3,033
Buildings and improvements..................... 18,238 27,409
Furniture, fixtures and equipment.............. 31,228 30,526
-------- --------
50,462 60,968
Less: accumulated depreciation................. (13,422) (17,591)
-------- --------
$ 37,040 $ 43,377
======== ========
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows:
Building and improvements........ 10-40 years
Furniture, fixtures and
equipment....................... 3-20 years
MINORITY INTEREST
Prior to May 31, 1996, certain former members of the Company's management
had a minority ownership interest in the Company. Amounts reflected as
minority interest represent the minority owners' share of income in the
Company. The Company repurchased all of the outstanding minority ownership
interest in fiscal years 1995 and 1996.
GOODWILL
Goodwill primarily represents an allocation of the excess purchase price of
the stock of the Company over the recorded minority interest. Goodwill is
being amortized on a straight-line basis over 40 years. Such amortization
amounted to $1.1 million in the period ended December 31, 1997 and $1.9
million, $1.1 million, and $598,000 in the fiscal years ended May 31, 1997,
1996 and 1995, respectively. Goodwill is net of accumulated amortization of
$6.1 million and $5.0 million at December 31, 1997 and May 31, 1997,
respectively.
FRANCHISE RIGHTS
Franchise rights are an intangible asset and represent an allocation in
purchase accounting for the value of long-term franchise contracts. The
majority of the balance resulted from the Econo Lodge and Rodeway acquisitions
made in fiscal year 1991. Franchise rights acquired are amortized over an
average life of 26 years. Amortization expense for the periods ended December
31, 1997, May 31, 1997, 1996 and 1995 amounted to $1.7 million, $2.9 million,
$2.6 million and $2.6 million, respectively. Franchise rights are net of
accumulated amortization of $15.7 million and $14.0 million at December 31,
1997 and May 31, 1997, respectively.
SELF-INSURANCE PROGRAM
Subsequent to the Manor Care Distribution, the Company maintained its own
self-insurance program for certain levels of general and professional
liability, automobile liability and workers' compensation coverage. The
estimated costs of these programs were accrued at present values based on
actuarial projections for known and anticipated claims. As of June 1, 1997,
the Company was no longer self-insured.
F-9
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to the Manor Care Distribution, the Company participated in Manor
Care's self-insurance program for certain levels of general and professional
liability, automobile liability and workers' compensation coverage. The
estimated costs of these programs are accrued at present values based on
actuarial projections for known and anticipated claims. All accrued self-
insurance costs through November 1, 1996 were assumed by Manor Care and have
been treated as paid to Manor Care, andDGCL as such amounts paid to Manor Care up
to November 1, 1996 have been charged directly to Investments and advances
from Parent.
REVENUE RECOGNITION
The Company enters into numerous franchise agreements committing to provide
franchisees with various marketing services, a centralized reservation system
and limited rights to utilize the Company's registered trade names. These
agreements are typically for a period of twenty years, with certain rights to
the franchisee to terminate after five, 10 or 15 years.
Initial franchise fees are recognized upon sale, because the initial
franchise fee is non-refundable and the Company has no continuing obligations
related to the franchisee.
Royalty fees, primarily based on gross room revenues of each franchisee, are
recorded when earned. Reserves for uncollectible accounts are charged to bad
debt expense and included in selling, general and administrative expenses in
the accompanying consolidated statements of income.
The Company's franchise agreements require the payment of franchise fees
which include marketing and reservation fees. These fees, which are based on a
percentage of the franchisees' gross room revenues, are used exclusively to
reimburse the Company for expenses associated with providing such franchise
services as central reservation systems, national marketing, and media
advertising. The Company is contractually obligated to expend the reservation
and marketing fees it collects from franchisees in accordance with the
franchise agreements; as such no income or loss to the Company is generated.
Amounts charged and expended under these programs are recorded on a net basis
IMPAIRMENT POLICY
The Company has adopted the Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" in fiscal year 1997. Accordingly, the
Company evaluates the recoverability of long-lived assets, including franchise
rights and goodwill, whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability is
measured based on net, undiscounted expected cash flows. Assets are considered
to be impaired if the net, undiscounted expected cash flows are less than the
carrying amount of the assets. Impairment charges are recorded based upon the
difference between the carrying value of the asset and the expected net cash
flows, discounted at an appropriate interest rate. The adoption of SFAS No.
121 did not have a material impact on the Company's financial statements.
CAPITALIZATION POLICIES
Major renovations and replacements are capitalized to appropriate property
and equipment accounts. Upon sale or retirement of property, the cost and
related accumulated depreciation are eliminated from the accounts and the
related gain or loss is taken into income. Maintenance, repairs and minor
replacements are charged to expense.
INTEREST RATE HEDGES
The Company has entered into interest rate swap agreements with a notional
amount of $115 million at December 31, 1997 to fix certain of its variable
rate debt in order to reduce the Company's exposure to fluctuations in
interest rates. The interest rate differential to be paid or received on
interest rate swap agreements is accrued as interest rates change and is
recognized as an adjustment to interest expense. On average, the interest rate
swap agreements have a life of three and one-half years with a fixed rate of
6.68% and a variable rate of
F-10
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6.39%. As of December 31, 1997, the interest rate swap agreements have a fair
market valuation of approximately ($496,000).
FOREIGN OPERATIONS
The Company accounts for foreign currency translation in accordance with
SFAS No. 52, "Foreign Currency Translation." Revenues generated by foreign
operations for the seven months ended December 31, 1997 and the fiscal years
ended May 31, 1997, 1996 and 1995 were $16.2 million, $27.5 million, $29.9
million and $29.2 million, respectively. The Company's foreign operations had
net income of $313,000 for the seven months ended December 31, 1997. Net
losses were generated by foreign operations for the years ended May 31, 1997,
1996 and 1995 of $1.8 million, $19.4 million and $5.7 million, respectively.
Net losses generated by foreign operations for fiscal year 1996 include a
$15.0 million net of tax charge relating to a provision for asset impairment.
Total assets relating to foreign operations were $34.3 million and $48.8
million at December 31, 1997 and May 31, 1997, respectively. The majority of
the revenues and assets of foreign operationsprovisions relate to the Company's European
business operations (See "Acquisitionsindemnification of Choice’s directors and Divestitures"). Translation gainsofficers. This description is intended only as a summary and losses are recordedis qualified in the cumulative translation adjustment account
included in Investments and advances from Parent in the accompanying
consolidated balance sheets prior to October 15, 1997 and are shown separately
in shareholders' equity after October 15, 1997 as follows:
(IN THOUSANDS)
--------------
Balance, May 31, 1994......................................... $ (31)
Net adjustments............................................... 740
-------
Balance, May 31, 1995......................................... 709
Net adjustments............................................... (2,459)
-------
Balance, May 31, 1996......................................... (1,750)
Net adjustments............................................... (5,268)
-------
Balance, May 31, 1997......................................... (7,018)
Net Adjustments............................................... (1,298)
-------
Balance, December 31, 1997.................................... $(8,316)
=======
The cumulative translation adjustment included in the December 31, 1997
balance sheet relating to assets held for sale was $(6.6) million.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
F-11
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EARNINGS PER SHARE
The Company adopted SFAS 128, "Earnings Per Share" in 1997. The following
table illustrates the reconciliation of the earnings and number of shares used
in the basic and diluted earnings per share calculations (in millions, except
per share amounts).
DECEMBER 31,
1997
------------
Computation of Basic Earnings Per Share
Net Income.................................................... $27.3
Weighted average shares outstanding........................... 59.8
-----
Basic Earnings Per Share.................................... $0.46
=====
Computation of Diluted Earnings Per Share
Net income for diluted earnings per share..................... $27.3
Weighted average shares outstanding........................... 59.8
Effect of Dilutive Securities--
Employee stock option plan.................................... 1.5
-----
Shares for diluted earnings per share......................... 61.3
-----
Diluted Earnings Per Share.................................. $0.45
=====
The effect of dilutive securities is computed using the treasury stock
method and average market prices during the period. The Company does not have
any options outstanding that were excluded from the computation of diluted
earnings per share. The Company had no shares outstandingits entirety by reference to the public or
material dilutive securities prior to the Sunburst Distribution and therefore,
no reconciliation has been provided for periods prior to December 31, 1997.
The weighted average number of common shares outstanding is based on the
Company's weighted average number of outstanding common shares for the period
October 15, 1997 through December 31, 1997, Sunburst's weighted average number
of outstanding common shares for the period November 1, 1996 through October
15, 1997 and Manor Care's weighted average number of outstanding common shares
prior to November 1, 1996.
INCOME TAXES
The Company was included in the consolidated federal income tax returns of
Manor Care and Sunburst prior to October 15, 1997. Subsequent to October 15,
1997, the Company is required to make its own filings. The income tax
provision included in these consolidated financial statements reflects the
historical income tax provision and temporary differences attributable to the
operations of the Company on a separate return basis. Deferred taxes are
recorded for the tax effect of temporary differences between book and tax
income.
Income before income taxes for the seven months ended December 31, 1997 and
the fiscal years ended May 31, 1997, 1996 and 1995 were derived from the
following:
MAY 31,
DECEMBER 31, -------------------------
1997 1997 1996 1995
------------ ------- ------- -------
(IN THOUSANDS)
Income before income taxes
Domestic operations................ $45,866 $62,641 $52,801 $38,385
Foreign operations................. 517 (3,066) (31,824) (9,374)
------- ------- ------- -------
Income before income taxes........... $46,383 $59,575 $20,977 $29,011
======= ======= ======= =======
F-12
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income before income taxes for domestic operations and foreign operations
for fiscal year 1996 includes a pre-tax provision of $24.8 million for asset
impairment.
The provisions for income taxes follows for the period ended December 31,
1997 and for the fiscal years ended May 31, 1997, 1996 and 1995:
MAY 31,
DECEMBER 31, -------------------------
1997 1997 1996 1995
------------ ------- ------- -------
(IN THOUSANDS)
Current tax (benefit) expense
Federal.......................... $15,742 $19,421 $20,097 $14,169
Federal benefit of foreign
operations...................... 204 (1,213) (2,792) (3,703)
State............................ 3,475 3,950 3,754 2,292
Deferred tax (benefit) expense
Federal.......................... (223) 2,293 125 58
Federal benefit of foreign
operations...................... -- -- (9,778) --
State............................ (102) 394 (2,093) (33)
------- ------- ------- -------
$19,096 $24,845 $ 9,313 $12,783
======= ======= ======= =======
Deferred tax assets (liabilities) are comprised of the following at December
31, 1997 and May 31, 1997:
DECEMBER 31, MAY 31,
1997 1997
------------ -------
Depreciation and amortization...................... $(3,184) $(5,145)
Prepaid expenses................................... (1,484) (856)
Other.............................................. (2,458) (2,799)
------- -------
Gross deferred tax liabilities..................... (7,126) (8,800)
------- -------
Foreign operations................................. 2,843 2,271
Accrued expenses................................... 5,283 3,181
Net operating loss................................. 398 609
Other.............................................. 1,001 310
------- -------
Gross deferred tax assets.......................... 9,525 6,371
------- -------
Net deferred tax asset (liability)................. $ 2,399 $(2,429)
======= =======
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the accompanying consolidated statements of income
follows:
MAY 31,
DECEMBER 31, ------------------------
1997 1997 1996 1995
-------------- ------- ------ -------
(IN THOUSANDS) (IN THOUSANDS)
Federal income tax rate........... 35% 35% 35% 35%
Federal taxes at statutory rate... $16,234 $20,853 $7,345 $10,154
State income taxes, net of Federal
tax benefit...................... 2,192 2,824 1,080 1,468
Minority interest................. -- -- 536 770
Other............................. 670 1,168 352 391
------- ------- ------ -------
Income tax expense................ $19,096 $24,845 $9,313 $12,783
======= ======= ====== =======
F-13
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash paid for state income taxes was $197,000, $1.3 million, $1.4 million
and $549,000 for the period ended December 31, 1997 and the fiscal years ended
May 31, 1997, 1996 and 1995, respectively. Federal income taxes were paid by
Manor Care for the years ended May 31, 1995 and May 31, 1996 and the period
ending October 31, 1996. Federal income taxes were paid by Sunburst for the
period beginning November 1, 1996 through May 31, 1997. The Company paid $9.1
million for the period June 1, 1997 to December 31, 1997.
Consistent with the existing Company tax-sharing policy, all current Federal
provision amounts have been treated as paid to, or received from, the Company,
and as such, there are no current tax provision balances due to Sunburst at
May 31, 1997. Differences between amounts paid to or received from Manor Care
and Sunburst and the Company have been charged or credited directly to
Investments and advances from Parent. As part of the tax sharing agreement,
the current taxes payable as of October 15, 1997 were assumed by Sunburst.
ACCRUED EXPENSES
Accrued expenses were as follows:
DECEMBER 31, MAY 31,
1997 1997
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Payroll........................................ $ 8,729 $ 7,950
Other.......................................... 11,973 3,015
------- -------
$20,702 $10,965
======= =======
LONG TERM DEBT AND NOTES PAYABLE
Debt consisted of the following:
DECEMBER 31, MAY 31,
1997 1997
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
$300 million competitive advance and multi-
currency revolving credit facility with an
average rate of 6.60% at December 31, 1997.. $267,600 $ --
$125 million competitive advance and multi-
currency revolving credit facility with an
average rate of 6.28% at May 31, 1997....... -- 31,107
Notes payable to Manor Care, Inc. with a rate
of 9% at May 31, 1997....................... -- 78,700
Capital lease obligations.................... 13,469 13,531
Other notes with an average rate of 5.95% and
5.94% at December 31, 1997 and May 31,
1997........................................ 1,752 1,825
-------- --------
Total indebtedness........................... $282,821 $125,163
======== ========
Maturities of debt at December 31, 1997 were as follows:
(IN THOUSANDS)
--------------
1998.......................................................... $ 15,041
1999.......................................................... 22,679
2000.......................................................... 32,726
2001.......................................................... 42,769
2002.......................................................... 155,471
Thereafter.................................................... 14,135
--------
$282,821
========
F-14
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During fiscal year 1996 and through November 1, 1996, the Company was a co-
guarantor with Manor Care and other affiliates for a $250.0 million
competitive advance and multi-currency revolving credit facility. The facility
provided that up to $75.0 million was available in foreign currency borrowings
under the foreign currency portion of the facility. The Company was charged
interest for amounts borrowed under the foreign currency portion of the
facility at one of several interest rates, including LIBOR plus 26.25 basis
points. Subsequent to the Manor Care Distribution, the Company utilized its
new credit facility, as described below, to repay the Company's portion of
borrowings under Manor Care's foreign currency portion of the facility, and
the Company was released from all liabilities and guarantees relating to the
Manor Care credit facility.
On October 30, 1996, the Company entered into a $100.0 million competitive
advance and multi-currency revolving credit facility provided by a group of
seven banks. Borrowings under the facility were, at the option of the
borrower, at one of several rates including LIBOR plus from 20.0 to 62.5 basis
points, based upon a defined financial ratio and the loan type. The Company
had $31.1 million outstanding under the facility at May 31, 1997. In
connection with the Sunburst Distribution, all outstanding amounts were
repaid.
The Company's portion of the payable to Manor Care was $78.7 million as of
May 31, 1997 and 1996, which was pushed down as part of the Manor Care
Distribution and is reflected as notes payable to Manor Care in the
accompanying consolidated balance sheets. Interest on the amount of the loan
was payable quarterly at an annual rate of 9%. Interest expense on those notes
for the seven months ended December 31, 1997 was $2.7 million and $7.1 million
for the fiscal years ended May 31, 1997, 1996 and 1995. The Company repaid the
note at the Sunburst Distribution.
On October 15, 1997, the Company entered into a $300 million competitive
advance and multi-currency revolving credit facility (the "Credit Facility")
provided by a group of 14 banks. The Credit Facility provides for a term loan
of $150 million and a revolving credit facility of $150 million, $50 million
of which is available for borrowings in foreign currencies. The credit
facility includes customary financial and other covenants that require the
maintenance of certain ratios including maximum leverage, minimum net worth
and interest coverage and restrict the Company's ability to make certain
investments, repurchase stock, incur debt and dispose of assets. The term loan
is payable over five years, $15 million of which is due in 1998. Borrowings
under the facility are, at the option of the borrower, at one of several rates
including LIBOR plus from 20.0 to 87.5 basis points, based upon a defined
financial ratio and the loan type. In addition, the Company has the option to
request participating banks to bid on loan participation at lower rates than
those contractually provided by the facility. The Credit Facility requires the
Company to pay annual fees of 1/10 of 1% to 1/3 of 1%, based upon a defined
financial ratio of the total loan commitment. The Credit Facility will
terminate on October 15, 2002.
In connection with the Sunburst Distribution, the Company borrowed $115
million under its Credit Facility in order to fund a subordinated term note to
Sunburst. The Subordinated Term Note of $115 million accrues interest monthly
at 11% with an effective rate through maturity of 8.8%, and is due on October
15, 2002. No interest is payable until maturity. Total interest accrued at
December 31, 1997 was $2.4 million.
Cash paid for interest was $7.9 million, $11.6 million, $11.8 million and
$10.8 million for December 31, 1997, and May 31, 1997, 1996 and 1995,
respectively.
LEASES
Rental expense under non-cancelable operating leases was $181,000, $171,000,
$231,000 and $400,000 for the seven months ended December 31, 1997 and fiscal
years ended May 31, 1997, 1996 and 1995, respectively.
F-15
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company paid office rent of $1.1 million and $4.0 million to Sunburst for
the seven months ended December 31, 1997 and the year ended May 31, 1997 based
on the portion of total space occupied by the Company.
In addition, the Company operates certain property and equipment under
leases that expire in 2014. Future minimum lease payments are as follows:
OPERATING CAPITALIZED
LEASES LEASE
--------- -----------
(IN THOUSANDS)
1998................................................... $2,058 $ 811
1999................................................... 699 939
2000................................................... 223 950
2001................................................... 189 950
2002................................................... 146 950
Thereafter............................................. -- 20,553
------ --------
Total minimum lease payments........................... $3,315 25,153
======
Less: interest......................................... (11,684)
--------
Present value of lease payment......................... $ 13,469
========
In accordance with the Manor Care Lease Amendment and Guaranty, the Company,
Sunburst and Manor Care have added the Company as a guarantor of Sunburst's
obligations under the Gaithersburg Lease and the Silver Spring Lease.
Additionally, Sunburst and Choice have entered into a sublease agreement with
respect to the Silver Spring Lease for the Company's principal executive
offices. The Company subleases approximately 54.3% of the office space
available under the Silver Spring Lease with financial terms approximately
equal (on a square foot basis) to the terms of the Silver Spring Lease. The
lease expires April 1, 1999.
ACQUISITIONS AND DIVESTITURES
On May 31, 1995, the Company repurchased one-half of the 11% interest held
by its management in the Company. Approximately $19.8 million was allocated to
goodwill; the purchase cost of $27.4 million was paid in June and July 1995.
On May 31, 1996, the Company repurchased the remaining 5.5% minority interest
in the Company for $27.9 million. Approximately $26.4 million was allocated to
goodwill.
On May 31, 1996, the Company invested approximately $17.1 million in the
capital stock of Friendly Hotels, PLC ("Friendly"). In exchange for the $17.1
million investment, the Company received 750,000 shares of common stock and 10
million newly issued immediately convertible preferred shares. In addition,
the Company granted to Friendly a Master Franchise Agreement for the United
Kingdom and Ireland in exchange for 333,333 additional shares of common stock.
At May 31, 1997, the Company owned approximately 5% of the outstanding shares
of Friendly which would increase to approximately 27% if the Company's
preferred stock were converted. The preferred shares carry a 5.75% dividend
payable in cash or in stock, at the Company's option. The dividend accrues
annually with the first dividend paid on the earlier of the third anniversary
of completion or on a conversion date. The proceeds of the investment received
by Friendly are to be used to support the construction of 10 Quality or
Comfort hotels. As a condition to the investment, the Company has the right to
appoint three directors to the board of Friendly. The Company is accounting
for the common stock investment under the equity method.
The Company recognized $550,083 and $943,000 in preferred dividend income
from the Friendly investment for the period ended December 31, 1997 and May
31, 1997.
F-16
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In January 1998, the Company completed a transaction with Friendly in which
Friendly would assume the master franchise rights for Choice's Comfort,
Quality and Clarion brand hotels throughout Europe (with the exception of
Scandinavia) for the next 10 years. In exchange, the Company will receive from
Friendly $8.0 million, payable in eight equal annual installments.
As part of the transaction, Friendly acquired European hotels currently
owned by the Company for a total consideration of approximately $26.2 million
in convertible preferred shares and cash. In exchange for 10 hotels in France,
two in Germany and one in the United Kingdom, the Company will receive $22.2
million in new unlisted 5.75 percent convertible preferred shares in Friendly
at par, convertible for one new Friendly ordinary share for every 150p nominal
of the preferred convertible shares. In addition, Friendly will pay the
Company deferred compensation of $4.0 million in cash, payable by the fifth
anniversary of completion or sooner dependent on the level of future profits
of the hotels acquired. The European hotels included in this transaction have
a carrying value, which includes a cumulative translation adjustment of $(6.6)
million, totaling approximately $17.3 million. The Company has reflected the
net assets subject to this transaction as assets held for sale in the December
31, 1997 accompanying consolidated balance sheet.
TRANSACTIONS WITH SUNBURST
Subsequent to the Manor Care Distribution, the Company participated in a
cash concentration system with Sunburst and as such maintained no significant
cash balances or banking relationships. Substantially all cash received by the
Company was immediately deposited in and combined with Sunburst's corporate
funds through its cash management system. Similarly, operating expenses,
capital expenditures and other cash requirements of the Company have been paid
by Sunburst and charged to the Company. The net result of all these
intercompany transactions is reflected in Investments and advances from
Parent.
Since the Manor Care Distribution, the Company has provided certain services
to Sunburst including, among others, executive management, human resources,
legal, accounting, tax, information systems and certain administrative
services, as required. Also since the Manor Care Distribution, Sunburst has
provided services to the Company, either directly or through the Corporate
Services Agreement with Manor Care, including, among others, cash management,
payroll and payables processing, employee benefits plans, insurance,
accounting and certain administrative services as required. Costs associated
with the Manor Care Corporate Services Agreement as well as costs of services
provided by Sunburst to the Company or provided by the Company to Sunburst
have been allocated between the entity providing the services and the entity
receiving the services in the accompanying financial statements. As a result,
future administrative and corporate expenses are expected to vary from
historical results. However, the Company has estimated that general and
administrative expenses incurred annually will not materially change after the
Distribution.
As part of the Sunburst Distribution, Sunburst and the Company have entered
into a strategic alliance agreement. Among other things, the agreement
provides for: (i) a right of first refusal to the Company to franchise any
lodging properties to be acquired or developed by Sunburst, (ii) certain
commitments by Sunburst for the development of Sleep Inns and MainStay Suites
hotels, (iii) continued cooperation of both parties with respect to matters of
mutual interest, such as new product and concept testing, (iv) continued
cooperation with respect to third party vendor arrangements; and (v) certain
limitations on competition in each others' line of business. The strategic
alliance agreement extends for a term of 20 years with mutual rights of
termination on the fifth, 10th and 15th anniversaries of the Sunburst
Distribution.
For purposes of providing an orderly transition after the Sunburst
Distribution, Sunburst and the Company entered into various agreements,
including, among others, a Distribution Agreement, a Tax Sharing Agreement, a
Corporate Services Agreement and an Employee Benefits Allocation Agreement.
Effective as of October 15,
F-17
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1997, these agreements provide, among other things, that Sunburst (i) will
receive and/or provide certain corporate and support services, such as
accounting, tax and computer systems support, (ii) will adjust outstanding
options to purchase shares of Company common stock held by Company employees,
Sunburst employees, and employees of Manor Care, (iii) is responsible for
filing and paying the related taxes on consolidated federal tax returns and
consolidated or combined state tax returns for itself and any of its
affiliates (including the Company) for the periods of time that the affiliates
were members of the consolidated group, (iv) will be reimbursed by the Company
for the portion of income taxes paid that relate to the Company and its
subsidiaries, and (v) guarantees that the Company will, at the date of
distribution, have a specified minimum level of net worth. These agreements
will extend for a maximum period of 30 months from the distribution date or
until such time as the Company and Sunburst have arranged to provide such
services in-house or through another unrelated provider of such services.
During the periods presented, Sunburst operated substantially all of its
hotels pursuant to franchise agreements with the Company. Total fees paid to
the Company included in the accompanying financial statements for franchising
royalty, marketing and reservation fees were $6.2 for the seven months ended
December 31, 1997 and $9.5 million, $7.5 million, and $5.3 million for the
years ended May 31, 1997, 1996 and 1995, respectively.
In accordance with the Sunburst 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 Distribution.
As of December 31, 1997, approximately $25 million is due to the Company from
Sunburst, which is included in other current assets. This receivable relates
to the net worth guarantee and the reimbursement of various expenses paid by
the Company, subsequent to the Sunburst Distribution. Subsequent to year-end,
Sunburst paid $7.5 million of the outstanding balance.
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and general counsel to the
Company, the ultimate outcome of such litigation will not have a material
adverse effect on the Company's business, financial position or results of
operations.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
Bonuses accrued for key executives of the Company under incentive
compensation plans were $520,000 for the seven months ended December 31, 1997,
$1.4 million in 1997, $1.1 million in 1996, and $1.4 million in 1995.
Employees of the Company participate in retirement plans sponsored by the
Company, and prior to the Manor Care Distribution and Sunburst Distribution,
employees participated in retirement plans sponsored by Manor Care and
Sunburst. Costs allocated to the Company are based on the size of its payroll
relative to the sponsor's payroll. Costs allocated to the Company were
approximately $817,000 for the seven months ended December 31, 1997, $1.4
million in 1997, $817,000 in 1996 and $776,000 in 1995.
F-18
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CAPITAL STOCK
Since the Sunburst Distribution, the Company repurchased 10,714 shares of
its common stock at a total cost of $189,000. Subsequent to December 31, 1997,
the Company has repurchased 490,214 shares of its common stock at a total cost
of $7.9 million. The Company has authorization from its Board of Directors to
repurchase up to an additional 1.27 million shares. In fiscal year 1997, the
Company granted a key executive 85,470 restricted shares of common stock with
a value of $1.25 million on the grant date. The restricted stock vests over a
three-year period.
The Company has stock option plans for which it is authorized to grant
options to purchase up to 7.1 million shares of the Company's common stock.
Stock options may be granted to officers, key employees and non-employee
directors with an exercise price not less than the fair market value of the
common stock on the date of grant. In connection with the Sunburst
Distribution, the outstanding options held by current and former employees of
the Company were redenominated in the stock of the newly separated companies
and the number and exercise prices of the options were adjusted based on the
relative trading prices of the common stock of the two companies in order to
retain the intrinsic value of the options.
Option activity under the above plans is as follows:
NUMBER WEIGHTED
OF SHARES OPTION PRICE
---------- -------------
Outstanding at October 15, 1997.................... 4,689,515 $ 8.71
Granted............................................ 15,000 17.63
Exercised.......................................... (28,550) 3.32
Canceled........................................... (508,920) 10.05
--------- ------
Outstanding at December 31, 1997................... 4,167,045 $ 8.62
========= ======
At December 31, 1997, options with a weighted average remaining life of 4.2
years covering 1,845,642 shares were exercisable at $2.64 to $12.21 per share
with a weighted average of $5.80 per share.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies
to provide additional note disclosures about employee stock-based compensation
plans based on a fair value based method of accounting. As permitted by this
accounting standard, the Company continues to account for these plans under
APB Opinion 25, under which no compensation cost has been recognized.
Compensation cost for the Company's stock option plan was determined based
on the fair value at the grant dates for awards under those plans consistent
with the method of SFAS No. 123. The fair value of each option grant has been
estimated on the date of the grant using an option-pricing model with the
following weighted average assumptions used for grants in 1997: risk-free
interest rate of 5.65% and volatility of 23.6%, expected lives of 10 years and
0% dividend yield. The weighted average fair value per option granted during
fiscal year 1997 was $8.79. If options had been reported as compensation
expense based on their fair value pro forma, net income would have been $27.3
million for 1997, and pro forma earnings per share would have been $0.46.
Since this methodology has not been applied to options granted prior to the
Sunburst Distribution date, the resulting pro forma compensation cost is not
likely to be representative of that to be expected in future years.
F-19
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The balance sheet carrying amount of cash and cash equivalents and
receivables approximate fair value due to the short-term nature of these
items. Long-term debt consists of bank loans and notes payable to Manor Care.
Interest rates on bank loans adjust frequently based on current market rates;
accordingly, the carrying amount of bank loans is equivalent to fair value.
The carrying amounts for long-term debt approximate fair market values.
The Note Receivable from Sunburst approximates fair value based on its
current yield to maturity, which is equivalent to those investments of similar
quality and terms.
PROVISION FOR ASSET IMPAIRMENT
During fiscal year 1996, the Company began restructuring its European
operations. This restructuring effort included the purchase of an equity
interest in Friendly and a reevaluation of key geographic markets in Europe.
In connection with this restructuring, the Company performed a review of its
European operations and in May 1996 recognized a $15.0 million non-cash charge
(net of a $9.8 million income tax benefit) against earnings related to the
impairment of assets associated with certain European hotel operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted SFAS No. 128, "Earnings Per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure," during 1997. The adoption
of these pronouncements did not materially affect the Company's financial
statements. The Company is required to adopt SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," no later than 1998. Management is
evaluating the impact that these pronouncements will have on the Company's
financial statements.
SUBSEQUENT EVENTS (UNAUDITED)
On February 19, 1998, the Board of Directors adopted a shareholder rights
plan under which a dividend of one preferred stock purchase right was
distributed for each outstanding share of the Company's common stock to
shareholders of record on April 3, 1998. Each right will entitle the holder to
buy 1/100th of a share of a newly issued series of junior participating
preferred stock of the Company at an exercise price of $75 per share. The
rights will be exercisable, subject to certain exceptions, 10 days after a
person or group acquires beneficial ownership of 10% or more of the Company's
common stock. Shares owned by a person or group on February 19, 1998, and held
continuously thereafter are exempt for purposes of determining beneficial
ownership under the rights plan. The rights will be non-voting and will expire
on January 31, 2008, unless exercised or previously redeemed by the Company
for $.001 each. If the Company is involved in a merger or certain other
business combinations not approved by the Board of Directors, each right will
entitle its holder, other than the acquiring person or group, to purchase
common stock of either the Company or the acquiror having a value of twice the
exercise price of the right.
F-20
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents........................... $ 6,365 $ 10,282
Receivables (net of allowance for doubtful accounts
of $5,394 and $7,608, respectively)................ 26,868 28,347
Other............................................... 12,476 9,904
Receivable from Sunburst Hospitality................ 19,921 25,066
-------- --------
Total current assets.............................. 65,630 73,599
Property and equipment, at cost, net of accumulated
depreciation......................................... 39,146 37,040
Goodwill, net of accumulated amortization............. 67,866 68,792
Franchise rights, net of accumulated amortization..... 47,578 48,819
Investment in Friendly Hotels, PLC, net............... 41,552 17,011
Other assets.......................................... 24,204 12,935
Assets held for sale.................................. -- 10,752
Note receivable from Sunburst Hospitality............. 122,368 117,447
-------- --------
Total assets...................................... $408,344 $386,395
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt................... $ 10,041 $ 15,041
Accounts payable.................................... 24,149 26,452
Accrued expenses.................................... 16,302 20,702
Income taxes payable................................ 6,754 6,007
-------- --------
Total current liabilities......................... 57,246 68,202
-------- --------
Long-term debt........................................ 283,678 267,780
Deferred income taxes and other....................... 10,233 1,155
-------- --------
Total liabilities................................. 351,157 337,137
Shareholders' Equity
Common stock, $.01 par value........................ 604 598
Additional paid-in capital.......................... 51,561 47,907
Accumulated other comprehensive income.............. 1,660 (8,316)
Treasury stock...................................... (27,029) (189)
Retained earnings................................... 30,391 9,258
-------- --------
Total shareholders' equity........................ 57,187 49,258
-------- --------
Total liabilities & shareholders' equity.......... $408,344 $386,395
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-21
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED
------------------
1998 1997
-------- --------
(UNAUDITED)
Revenues
Royalty fees.............................................. $ 50,058 $ 45,171
Product sales............................................. 12,374 11,900
Initial franchise fees and relicensing fees............... 7,649 8,831
Other, including partner service revenue.................. 6,427 7,198
European hotel operations................................. 1,098 8,588
-------- --------
Total revenues.......................................... 77,606 81,688
-------- --------
Operating expenses
Selling, general and administrative....................... 23,664 24,681
Product cost of sales..................................... 11,608 11,346
Depreciation and amortization............................. 3,550 5,262
European hotel operations................................. 1,133 7,889
-------- --------
Total operating expenses................................ 39,955 49,178
-------- --------
Operating Income............................................ 37,651 32,510
Other
Interest expense.......................................... 9,583 5,008
Interest and dividend income.............................. (5,960) --
Gain from sale of investments............................. (2,190) --
-------- --------
Total other............................................. 1,433 5,008
-------- --------
Income before income taxes.................................. 36,218 27,502
Income taxes................................................ 15,085 11,455
-------- --------
Net income.................................................. $ 21,133 $ 16,047
======== ========
Weighted average shares outstanding......................... 59,522 62,674
======== ========
Diluted shares outstanding.................................. 60,757 62,674
======== ========
Basic earnings per share.................................... $ 0.36 $ 0.26
======== ========
Diluted earnings per share.................................. $ 0.35 $ 0.26
======== ========
The accompanying notes are an integral part of these consolidated statements of
income.
F-22
CHOICE HOTELS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED
-------------------
JUNE 30, JUNE 30,
1998 1997
--------- --------
(UNAUDITED)
Cash flows from operating activities:
Net income................................................ $ 21,133 $ 16,047
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization........................... 5,653 5,262
Provision for bad debts................................. 553 486
Increase in deferred taxes and other.................... 2,211 3,179
Non cash interest and dividend income................... (5,943) --
Changes in assets and liabilities:
Change in receivables................................... 926 3,700
Change in inventories and other current assets.......... (1,713) 542
Change in current liabilities........................... (6,513) (1,414)
Change in income taxes payable.......................... 747 2,014
--------- --------
Net cash provided by operating activities............... 17,054 29,816
--------- --------
Cash flow from investing activities:
Investment in property and equipment.................... (5,593) (6,515)
Repayments of Sunburst Hospitality advances, net........ 5,286 --
Other items, net........................................ (8,393) --
--------- --------
Net cash utilized by investing activities............... (8,700) (6,515)
--------- --------
Cash flow from financing activities:
Proceeds from long-term debt............................ 118,959 --
Repayment of long-term debt............................. (108,061) (21,775)
Purchase of treasury stock.............................. (26,840) --
Proceeds from issuance of common stock.................. 3,671 --
Transfers to Parent, net................................ -- (1,045)
--------- --------
Net cash utilized by financing activities............... (12,271) (22,820)
--------- --------
Net change in cash and cash equivalents................... (3,917) 481
Cash and cash equivalents, beginning of period............ 10,282 2,973
--------- --------
Cash and cash equivalents, end of period.................. $ 6,365 $ 3,454
========= ========
The accompanying notes are an integral part of these consolidated statements of
cash flows.
F-23
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying consolidated financial statements of Choice Hotels
International, Inc. (the "Company") and subsidiaries have been prepared by the
Company without audit. Certain information and footnote disclosures normally
included in financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted. The Company
believes the disclosures made are adequate to make the information presented
not misleading. The consolidated financial statements should be read in
conjunction with the consolidated financial statements for the stub year ended
December 31, 1997 and notes thereto included in the Company's Form 10-K, dated
March 31, 1998. In the opinion of management, all adjustments (which include
any normal recurring adjustments) considered necessary for a fair presentation
have been included. Interim results are not necessarily indicative of fiscal
year performance because of seasonal and short-term variations. All
intercompany transactions and balances between Choice Hotels International,
Inc. and its subsidiaries have been eliminated. Certain reclassifications have
been made to the prior year amounts to conform to current period presentation.
2. In January 1998, the Company completed a transaction with Friendly
Hotels, PLC ("Friendly") in which Friendly assumed the master franchise rights
for Choice's Comfort, Quality and Clarion brand hotels throughout Europe (with
the exception of Scandinavia) for the next 10 years. In exchange, the Company
will receive from Friendly $8.0 million, payable in eight equal annual
installments.
As part of the transaction, Friendly acquired European hotels currently
owned by the Company for a total consideration of approximately $26.2 million
in convertible preferred shares and cash. In exchange for 10 hotels in France,
two in Germany and one in the United Kingdom, the Company received $22.2
million in new unlisted 5.75 percent convertible preferred shares in Friendly
at par, convertible into one new Friendly ordinary share for every 150p
nominal of the preferred convertible shares. In addition, Friendly will pay
the Company deferred compensation of $4.0 million in cash, payable by the
fifth anniversary of completion or sooner dependent on the level of future
profits of the hotels acquired. The European hotels included in this
transaction have a carrying value, which includes a cumulative translation
adjustment of $(6.6) million, totaling approximately $19.9 million. The
Company had a gain on the sale of $2.0 million which has been deferred and is
presented net of the Investment in Friendly Hotels, PLC in the accompanying
consolidated balance sheets.
3. In May 1998, the Company consummated a $100 million senior unsecured note
offering (the "Notes"), bearing a coupon rate of 7.125%. The Notes will mature
on May 1, 2008, with interest on the Notes to be paid semi-annually. The
Company has used the net proceeds from the offering of approximately $99
million to repay amounts outstanding under the Company's $300 million
revolving credit facility.
4. During the six months ended June 30, 1998, the Company's comprehensive
income (consisting of net income plus foreign currency translation
adjustments) exceeded net income by approximately $3 million.
5. During the second quarter of 1998, the Company changed its presentation
of marketing and reservation fees such that the fees collected and associated
expenses are reported on a net basis. The Company's franchise agreements
require the payment of franchise fees which include marketing and reservation
fees. These fees, which are based on a percentage of the franchisees' gross
room revenues, are used exclusively to reimburse the Company for expenses
associated with providing such franchise services as central reservation
systems, national marketing, and media advertising. The Company is
contractually obligated to expend the reservation and marketing fees it
collects from franchisees in accordance with the franchise agreements; as such
no income or loss to the Company is generated. All prior periods have been
restated to conform to the new presentation.
The total marketing and reservation fees received by the Company (previously
reported as revenue) were $56.7 million and $43.8 million for the six months
ended June 30, 1998 and June 30, 1997, respectively.
F-24
CHOICE HOTELS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and amortization charged to reservation and marketing expenses
was $2.2 million and $1.2 million for the six months ending June 30, 1998 and
June 30, 1997, respectively. Reservation fees and marketing fees not expended
in the current year are carried over to the next fiscal year and expended in
accordance with the franchise agreements. Shortfall amounts are similarly
recovered in subsequent years. Excess or shortfall amounts from the operation
of these programs are recorded as a payable or receivable from the particular
fund. The shortfall amount recorded as a current receivable in other assets on
the Company's balance sheet was $7.2 million and $1.7 million at June 30, 1998
and December 31, 1997, respectively.
F-25
CHOICE HOTELS INTERNATIONAL, INC.
All tendered Original Notes, executed Letters of Transmittal, and other
related documents should be directed to the Exchange Agent. Requests for
assistance and for additional copies of the Prospectus, the Letter of
Transmittal and other related documents should be directed to the Exchange
Agent.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS
MARINE MIDLAND BANK
by Facsimile:
(212) 658-2292
Attention: Corporate Trust Services
Confirm by telephone
(212) 658-5931
By Registered or Certified Mail:
Marine Midland Bank
140 Broadway
Level A
New York, New York 10005-1180
Attention: Corporate Trust Services
By Hand
Marine Midland Bank
140 Broadway
Level A
New York, New York 10005-1180
Attention: Corporate Trust Services
By Overnight Courier:
Marine Midland Bank
140 Broadway
Level A
New York, New York 10005-1180
Attention: Corporate Trust Services
(212) 658-5931
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to authority conferred by Delaware General Corporation Law Section
102, the Restated Certificate of Incorporation, Choice Bylaws and the DGCL.
Section 102(b)(7) of the Company provides that noDGCL enables a corporation to eliminate or limit the personal liability of a director of the Company shall be liableor officer to the Companycorporation or its stockholders for monetary damages for breach of the director’s fiduciary duty, as a director exceptexcept: (i) for any breach of the director'sdirector’s duty of loyalty to the Companycorporation or the stockholders,its stockholder; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law,law; (iii) pursuant to Section 174 of the DGCL (providing for liability of directors for unlawful payment of dividends or unlawful stock redemptionspurchases or repurchases orredemptions); (iv) for any transaction from which the director or officer derived an improper personal benefit. This provision is intended to eliminatebenefit; or (v) for any officer in any action by or in the risk that a director might incur personal liability to the Company or its
stockholders for breachright of the dutycorporation. In accordance with Section 102(b)(7) of care. The Restatedthe DGCL, the Choice Certificate of Incorporation of the Company also provides that if Delaware law is amended to
further limit the liability of directors, then the liability of a director of
the Company shall be further limitedincludes provisions eliminating, to the fullest extent permitted by Delaware law as so amended.
Delaware General Corporation Law Section 145 contains provisions permitting
and, in some situations, requiring Delaware corporations, such as the Company,
to provide indemnification to their officers and directors for losses and
litigation expenses incurred in connection with their service toDGCL, the corporation in those capacities. The Restated Certificate of Incorporation of
the Company contains provisions requiring indemnification by the Companyliability of its directors and officers to the fullest extent permitted by law. Among other
things, the Restated CertificateChoice or Choice’s stockholders for monetary damages for breach of Incorporationfiduciary duties as directors. Section 145(a) of the Company provides
indemnification for officersDGCL empowers a corporation to indemnify any present or former director, officer, employee or agent of the corporation, or any individual serving at the corporation’s request as a director, officer, employee or agent of another organization, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), against expenses (including attorneys’ fees), judgments, fines and directors against liabilities for judgmentsamounts paid in settlement actually and settlements of lawsuits and other proceedings and for the advance and
payment of fees and expenses reasonably incurred by the person in connection with such action, suit or proceeding provided that such director, officer, employee or agent acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding; provided further that such director, officer, in
defenseemployee or agent had no reasonable cause to believe his or her conduct was unlawful.
The DGCL provides that the indemnification described above shall not be deemed exclusive of any such lawsuitother indemnification that may be granted by a corporation pursuant to its Bylaws, disinterested directors’ vote, stockholders’ vote, agreement or proceeding.otherwise. The above discussionDGCL also provides corporations with the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company's Restatedcorporation, or is or was serving at the request of the corporation in a similar capacity for another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability as described above.
II-1
In accordance with Section 145(a) of the DGCL, Choice Bylaws provide that any person who was or is a party or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding or investigation, whether civil, criminal or administrative, and whether external or internal to Choice (other than a judicial action or suit brought by or in the right of Choice) by reason of the fact that he or she is or was Choice’s director, officer, employee or agent, or that, being or having been such a director, officer, employee or agent, he or she is or was serving at Choice’s request as a director, officer, employee or agent or another corporation, partnership, joint venture, trust or other enterprise (all such persons being referred to hereafter as an “Agent”), shall be indemnified and held harmless against all expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding, or any appeal thereof, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to Choice’s best interests, and with respect to any criminal action or proceeding had no reasonable cause to believe his or her conduct was unlawful. Expenses incurred in defending any civil, criminal, administrative or investigative action, suit or proceeding or investigation or any appeal therein shall be paid by Choice in advance of the final disposition of such matter, if the Agent shall undertake to repay such amount in the event that it is ultimately determined, as provided herein, that such person is not entitled to indemnification.
Choice may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or other Agent against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not we would have the power to indemnify him or her against such liability under the provisions of Choice Bylaws. Choice has purchased and maintained insurance under which Choice’s directors, officers, employees or other Agents are insured against loss arising from claims made against any of them due to wrongful acts while acting in their individual and collective capacities as such, subject to certain exclusions.
The limitation of liability and indemnification provisions in the Choice Certificate of Incorporation and AmendedChoice Bylaws may discourage Choice’s stockholders from bringing a lawsuit against directors and Restated Bylaws is not intendedofficers for breach of their fiduciary duties. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit Choice and Choice’s stockholders. In addition, the stockholder’s investment may be adversely affected to be exhaustivethe extent Choice pays the costs of settlement and is
respectively qualified in its entirety by such documents.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) damage awards against directors and officers pursuant to these indemnification provisions.
II-2
Exhibits and Financial Statements
EXHIBIT INDEX
| * | Filed as an exhibit to the Choice 10-K. |
| ** | Filed as an exhibit to Choice’s Current Report on Form 8-K filed with the SEC on June 13, 2022. |
II-3
Undertakings
The undersigned registrant hereby undertakes:
| (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
| (i) | To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; |
| (ii) | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and |
| (iii) | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; |
| (2) | That, for the |
| (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
| (4) | That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
| (i) | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; |
| (ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
II-4
| (iii) | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or his securities provided by or on behalf of the undersigned registrant; and |
| (iv) | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
The undersigned registrant hereby undertakes, that, for purposes of determining any liability under the Securities Act of 1933, each filing of a registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the identical document filed as an exhibitsecurities offered therein, and the offering of such securities at that time shall be deemed to Choice Hotels International, Inc.'s Transitional Report on Form 10-K
dated June 1, 1997, to December 31, 1997, filed on March 31, 1998.
(b) Incorporated by reference tobe the identical document filed as an exhibit
to Choice Hotels International, Inc.'s Current Report on Form 8-K dated
October 15, 1997, filed on October 29, 1997.
(c) Incorporated by reference to the identical document filed as an exhibit
to Choice Hotels International, Inc.'s Current Report on Form 8-K dated
October 15, 1997, filed on December 16 1997.
(d) Incorporated by reference to the identical document filed as an exhibit
to Choice Hotels International, Inc.'s Registration Statement filed on Form
S-8, filed on December 2, 1997 (Reg. No. 333-41357).
(e) Incorporated by reference to the identical document filed as an exhibit
to Choice Hotels International, Inc.'s Current Report on Form 8-K dated
February 19, 1998, filed on March 11, 1998.
(f) Incorporated by reference to the identical document filed as an exhibit
to Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q filed
for the quarterly period ended March 31, 1998, filed on May 15, 1998.
(g) Incorporated by reference to the identical document filed as an exhibit
to Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q filed
for the quarter ended June 30, 1998, filed on August 11, 1998.
(b) Financial Statements Schedules
Schedule II--Valuation and Qualifying Accounts
II-3
ITEM 22. UNDERTAKINGS
initial bona fide offering thereof.
| (1) | The undersigned registrant hereby undertakes as follows: That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. |
| (2) | The registrant undertakes that every prospectus (i) that is filed pursuant to the immediately preceding paragraph, or (ii) that purports to meet the requirements of section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provision described under Item 20foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAD DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SILVER SPRING, STATE OF
MARYLAND, ON AUGUST 27, 1998.
CHOICE HOTELS INTERNATIONAL, INC.
/s/ Stewart Bainum, Jr.
By: __________________________________
Stewart Bainum, Jr.
Chairman
II-5
The undersigned registrant hereby undertakes that:
| (1) | For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
| (2) | For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one Business Day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Board
registration statement through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.
II-6
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the in the City of Bethesda, State of Maryland, on December 12, 2023.
CHOICE HOTELS INTERNATIONAL, INC. | ||
By: | /s/ Patrick S. Pacious | |
Name: Patrick S. Pacious | ||
Title: President and Chief Executive Officer | ||
POWER OF ATTORNEY
Each person whose signature appears below appoints Michael J. DeSantis as his
We, the undersigned, do hereby constitute and appoint Dominic E. Dragisich, Scott E. Oaksmith and Simone Wu our true and lawful attorney-in-factattorneys-in-fact and agentagents, with full and several power of substitution and resubstitution, for him and in his or her name place and stead,on his or her behalf, in any and all capacities, to sign any orand all amendments (including post-effective amendments), to this Registration Statement,registration statement, whether pre-effective or post-effective, including any subsequent registration statement for the same offering which may be filed under Rule 462(b) under the Securities Act, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission,SEC, granting unto said attorneys-in-fact and agents, and each said attorney-in-fact
and agentof them full power andof authority to do and perform each and every act and thing requisite andor necessary to be done in and about the foregoing,premises, as fully to all intents and purposes as he or she might or could do in person, herebythereby ratifying and confirming all that each said attorney-in-factattorneys-in-fact and agent,agents or hisany of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT OR AMENDMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
/s/ Charles A. Ledsinger, Jr. Chief Executive August 27, 1998
- ------------------------------------ Officer and
CHARLES A. LEDSINGER, JR. President
(principal
executive officer)
and Director
/s/ Joseph M. Squeri Vice President, August 27, 1998
- ------------------------------------ Treasurer and
JOSEPH M. SQUERI Controller
(principal
financial and
accounting
officer)
/s/ Stewart Bainum, Jr. Director August 27, 1998
- ------------------------------------
STEWART BAINUM, JR.
/s/ Barbara Bainum Director August 27, 1998
- ------------------------------------
BARBARA BAINUM
/s/ Frederic V. Malek Director August 27, 1998
- ------------------------------------
FREDERIC V. MALEK
/s/ Gerald W. Petitt Director August 27, 1998
- ------------------------------------
GERALD W. PETITT
II-5
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAD DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SILVER SPRING, STATE OF
MARYLAND, ON AUGUST 27, 1998.
QUALITY HOTELS EUROPE, INC.
/s/ Charles A. Ledsinger
By: _________________________________
Charles A. Ledsinger
President
POWER OF ATTORNEY
Each person whose signature appears below appoints Michael J. DeSantis as
his true and lawful attorney-in-fact and agent with full power
Pursuant to the requirements of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective
amendments), to this Registration Statement, and to file the same, with all
exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing, requisite and necessary to be done in and about the foregoing, as fully
to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact and agent, or his
substitute, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
/s/ Charles A. Ledsinger President and August 27, 1998
- ------------------------------------- Director (principal
CHARLES A. LEDSINGER executive officer)
/s/ Michael J. DeSantis Senior Vice August 27, 1998
- ------------------------------------- President,
MICHAEL J. DESANTIS Secretary and
Director
/s/ Joseph M. Squeri Vice President, August 27, 1998
- ------------------------------------- Treasurer and
JOSEPH M. SQUERI Director (principal
accounting and
finance officer)
II-6
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAD DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SILVER SPRING, STATE OF
MARYLAND, ON AUGUST 27, 1998.
QH EUROPE PARTNERSHIP
By: Choice Hotels International,
Inc. its general partner
/s/ Charles A. Ledsinger
By: _________________________________
Charles A. Ledsinger
Chief Executive Officer and
President
By: Quality Hotels Europe, Inc.
its general partner
/s/ Charles A. Ledsinger
By: _________________________________
Charles A. Ledsinger
President
II-7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Stockholders of Choice Hotels International, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Choice Hotels International, Inc.
included inAct, this registration statement and have issued our opinion thereon
dated January 27, 1998. Our audit was made forhas been signed below by the purpose of forming an
opinionfollowing persons in the capacities and on the basic consolidated financial statements taken as a whole. The
schedule included on page S-2 is presented for the purpose of complying with
the Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Washington, D.C.
January 27, 1998
S-1
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
dates indicated.
Name | Position | Date | ||
/s/ Stewart W. Bainum, Jr Stewart W. Bainum, Jr | Chairman, Director | December | ||
/s/ Patrick S. Pacious Patrick S. Pacious | President and | December 12, 2023 | ||
/s/ Brian B. Bainum Brian B. Bainum | Director | December 12, 2023 | ||
/s/ William L. Jews William L. Jews | Director | December 12, 2023 | ||
Name | Position | Date | ||
/s/ Monte J.M. Koch Monte J.M. Koch | Director | December 12, 2023 | ||
/s/ Liza K. Landsman Liza K. Landsman | Director | December 12, 2023 | ||
/s/ Ervin R. Shames Ervin R. Shames | Director | December 12, 2023 | ||
/s/ Gordon A. Smith Gordon A. Smith | Director | December 12, 2023 | ||
/s/ Maureen Sullivan Maureen Sullivan | Director | December 12, 2023 | ||
/s/ John P. Tague John P. Tague | Director | December 12, 2023 | ||
/s/ Donna F. Vieira Donna F. Vieira | Director | December 12, 2023 | ||
/s/ Scott E. Oaksmith Scott E. Oaksmith | Chief Financial Officer (Principal Financial Officer and | |||
| December |