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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A-4
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GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------
CHOICE HOTELS HOLDINGS, INC.
(TO BE RENAMED CHOICE HOTELS INTERNATIONAL, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
DELAWARE 52-1985619
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10750 COLUMBIA PIKE 20901
SILVER SPRING, MARYLAND (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (301) 979-5000
------------------------
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
- --------------------------------------------------------------------------------
COMMON STOCK, PAR NEW YORK STOCK EXCHANGE
VALUE $.01 PER SHARE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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ITEM 1. BUSINESS
The information required by this item is contained under the sections
"Summary," "Introduction," "Risk Factors," "The Distribution," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" of the Information Statement (the "Information Statement") attached
hereto as Exhibit 2.01 and such sections are incorporated herein by reference.
ITEM 2. FINANCIAL INFORMATION
The information required by this item is contained under the sections
"Summary," "Capitalization," "Selected Historical Financial Data," "Pro Forma
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of the Information Statement and such sections are
incorporated herein by reference.
ITEM 3. PROPERTIES
The information required by this item is contained under the section
"Business" of the Information Statement and such section is incorporated herein
by reference.
ITEM 4. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained under the section
"Security Ownership of Principal Stockholders and Management" of the Information
Statement and such section is incorporated herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is contained under the sections
"Management -- Executive Officers of the Company" and "The Board of Directors"
of the Information Statement and such sections are incorporated herein by
reference.
ITEM 6. EXECUTIVE COMPENSATION
The information required by this item is contained under the sections
"Management -- Compensation of Executive Officers" and "The Board of Directors"
of the Information Statement and such sections are incorporated herein by
reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the sections
"Relationship Between Manor Care and the Company After the Distribution" and
"Certain Relationships and Related Transactions" of the Information Statement
and such sections are incorporated herein by reference.
ITEM 8. LEGAL PROCEEDINGS
The information required by this item is contained under the sections
"Business -- Legal Proceedings" and "Business -- Environmental Matters" and in
the Notes to Combined Financial Statements of the Company under the heading
"Commitments and Contingencies" which are included in the Information Statement
and incorporated herein by reference.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The information required by this item is contained under the sections "The
Distribution -- Listing and Trading of Shares of the Company's Common Stock,"
"Dividend Policy," "Security Ownership of Principal Stockholders and Management"
and "Description of Capital Stock of the Company" of the Information Statement
and such sections are incorporated herein by reference.
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ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On October 1, 1996, the Registrant issued and sold 10 shares of its common
stock to Manor Care, Inc. for $.10 in order to become a wholly-owned subsidiary
of Manor Care, Inc. The sale was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The information required by this item is contained under the sections "The
Distribution -- Listing and Trading of Shares of the Company's Common Stock,"
"Description of Capital Stock of the Company" and "Purposes and Effects of
Certain Charter and By-Law Provisions" of the Information Statement and such
sections are incorporated herein by reference.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The information required by this item is contained under the section
"Liability and Indemnification of Officers and Directors" of the Information
Statement and such section is incorporated herein by reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained (i) under the sections
"Summary," "Capitalization," "Selected Historical Financial Data," "Pro Forma
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of the Information Statement and such sections are
incorporated herein by reference and (ii) in the Combined Financial Statements
and Supplemental Schedules incorporated by reference in Item 15 hereof, all of
which are incorporated herein by reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following Financial Statements of the Company are included in
Exhibit 2.01 hereto and incorporated herein by reference:
<TABLE>
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(i) Combined Financial Statements
-- Report of Arthur Andersen LLP, Independent Public Accountants, dated June
28, 1996;
-- Combined Balance Sheets as of May 31, 1995, May 31, 1996 and August 31, 1996
(Unaudited);
-- Combined Statements of Income for each of the fiscal years in the three-year
period ended May 31, 1996 and for the three-month periods ended August 31,
1995 (Unaudited) and August 31, 1996 (Unaudited);
-- Combined Statements of Cash Flows for each of the fiscal years in the
three-year period ended May 31, 1996 and for the three-month periods ended
August 31, 1995 (Unaudited) and August 31, 1996 (Unaudited);
-- Notes to Combined Financial Statements.
</TABLE>
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The following supplemental schedule of the Company is included in
Exhibit 99.01 hereto and incorporated herein by reference.
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(ii) Supplemental Schedule
-- Schedule II -- Valuation and Qualifying Accounts.
</TABLE>
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
2.01 Information Statement dated , 1996**
3.01 Form of Restated Certificate of Incorporation of the Registrant**
(attached to Information Statement as Appendix A)
3.02 Form of By-laws of the Registrant**
4.01 Form of Common Stock certificate**
10.01 Form of Distribution Agreement, dated October 31, 1996, between Manor
Care, Inc. and the Registrant**
10.02 Form of Trademark Agreement, between Manor Care, Inc. and the Registrant*
10.03 Intentionally omitted.
10.04 Form of Time Sharing Agreement between Manor Care, Inc. and the
Registrant*
10.05 Form of Corporate Services Agreement between Manor Care, Inc. and the
Registrant*
10.06 Form of Employee Benefits Administration Agreement between Manor Care,
Inc. and the Registrant*
10.07 Form of Employee Benefits and Other Employment Matters Allocation
Agreement between Manor Care, Inc. and the Registrant**
10.08 Form of Office Lease between Manor Care, Inc. and the Registrant*
10.09 Form of Office Lease between Manor Care, Inc. and the Registrant*
10.10 Form of Loan Agreement between MNR Finance Corp. and the Registrant*
10.11 Form of Procurement Agreement between Manor Care, Inc. and the Registrant*
10.12 Form of Risk Management Consulting Services Agreement between Manor Care,
Inc. and the Registrant*
10.13 Form of Tax Administration Agreement between Manor Care, Inc. and the
Registrant**
10.14 Form of Tax Sharing Agreement between Manor Care, Inc. and the Registrant*
10.15 Employment Agreement, dated September 1, 1995, between Manor Care, Inc.
and Donald Landry*
10.16 Form of Assignment Agreement among Manor Care, Inc., the Registrant and
Donald Landry.*
10.17 Form of Employment Agreement between the Registrant and Stewart Bainum,
Jr.**
10.18 Employment Agreement, dated September 30, 1996, among the Registrant,
Choice Hotels International, Inc. and William R. Floyd.**
10.19 Form of Employment Agreement between the Registrant and James A.
MacCutcheon**
10.20 Agreement, dated June 1, 1996, among the Registrant, Manor Care, Inc. and
Robert C. Hazard, Jr.*
10.21 Agreement, dated June 1, 1996, among the Registrant, Manor Care Inc. and
Gerald W. Petitt*
10.22 Form of Choice Hotels International, Inc. Supplemental Executive
Retirement Plan*
10.23 Form of Choice Hotels International, Inc. Non-Employee Director Stock
Option and Deferred Compensation Stock Purchase Plan*
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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10.24 Form of Choice Hotels International, Inc. 1996 Non-Employee Director Stock
Compensation Plan*
10.25 Form of Choice Hotels International, Inc. 1996 Long-Term Incentive Plan*
10.26 Form of Revolving Credit Facility Agreement between the Registrant and
Chase Manhattan Bank*
10.27 Form of Pikesville Sublease between Manor Care, Inc. and the Registrant*
12.01 Statement re: computation of ratio of earnings to fixed charges*
21.01 Subsidiaries of the Registrant*
24.01 Power of Attorney*
27.01 Financial Data Schedule*
99.01 Schedule II -- Valuation and Qualifying Accounts*
</TABLE>
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* Previously filed.
** Filed herewith.
4
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHOICE HOTELS HOLDINGS, INC.
Date: October 10, 1996 By: *
--------------------------------------
Name: Stewart Bainum, Jr.
Title: Chief Executive Officer
* /s/ JAMES H. REMPE
---------------------------------------------------
James H. Rempe
Attorney-in-Fact
5
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INDEX TO EXHIBITS
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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2.01 Information Statement dated , 1996**..........................
3.01 Form of Restated Certificate of Incorporation of the Registrant**
(attached to Information Statement as Appendix A).......................
3.02 Form of By-laws of the Registrant**.....................................
4.01 Form of Common Stock certificate**......................................
10.01 Form of Distribution Agreement, dated October 31, 1996 between Manor
Care, Inc. and the Registrant**.........................................
10.02 Form of Trademark Agreement between Manor Care, Inc. and the
Registrant*.............................................................
10.03 Intentionally omitted ..................................................
10.04 Form of Time Sharing Agreement between Manor Care, Inc. and the
Registrant*.............................................................
10.05 Form of Corporate Services Agreement between Manor Care, Inc. and the
Registrant*.............................................................
10.06 Form of Employee Benefits Administration Agreement between Manor Care,
Inc. and the Registrant*................................................
10.07 Form of Employee Benefits and Other Employment Matters Allocation
Agreement between Manor Care, Inc. and the Registrant**.................
10.08 Form of Office Lease between Manor Care, Inc. and the Registrant*.......
10.09 Form of Office Lease between Manor Care, Inc. and the Registrant*.......
10.10 Form of Loan Agreement between MNR Finance Corp. and the Registrant*....
10.11 Form of Procurement Agreement between Manor Care, Inc. and the
Registrant*.............................................................
10.12 Form of Risk Management Consulting Services Agreement between Manor
Care, Inc. and the Registrant*..........................................
10.13 Form of Tax Administration Agreement between Manor Care, Inc. and the
Registrant**............................................................
10.14 Form of Tax Sharing Agreement between Manor Care, Inc. and the
Registrant*.............................................................
10.15 Employment Agreement, dated September 1, 1995, between Manor Care, Inc.
and Donald Landry*......................................................
10.16 Form of Assignment Agreement among Manor Care, Inc., the Registrant and
Donald Landry.*.........................................................
10.17 Form of Employment Agreement between the Registrant and Stewart Bainum,
Jr.**...................................................................
10.18 Employment Agreement, dated September 30, 1996, among the Registrant,
Choice Hotels International, Inc. and William R. Floyd**................
10.19 Form of Employment Agreement between the Registrant and James A.
MacCutcheon**...........................................................
10.20 Agreement, dated June 1, 1996, among the Registrant, Manor Care, Inc.
and Robert C. Hazard, Jr.*..............................................
10.21 Agreement, dated June 1, 1996, among the Registrant, Manor Care Inc. and
Gerald W. Petitt*.......................................................
10.22 Form of Choice Hotels International, Inc. Supplemental Executive
Retirement Plan*........................................................
10.23 Form of Choice Hotels International, Inc. Non-Employee Director Stock
Option and Deferred Compensation Stock Purchase Plan*...................
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
10.24 Form of Choice Hotels International, Inc. 1996 Non-Employee Director
Stock Compensation Plan*................................................
10.25 Form of Choice Hotels International, Inc. 1996 Long-Term Incentive
Plan*...................................................................
10.26 Form of Revolving Credit Facility Agreement between the Registrant and
Chase Manhattan Bank*...................................................
10.27 Form of Pikesville Sublease between the Registrant and Manor Care,
Inc.*...................................................................
12.01 Statement re: computation of ratio of earnings to fixed charges*........
21.01 Subsidiaries of the Registrant*.........................................
24.01 Power of Attorney*......................................................
27.01 Financial Data Schedule*................................................
99.01 Schedule II -- Valuation and Qualifying Accounts*.......................
</TABLE>
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* Previously filed.
** Filed herewith.
<PAGE> 1
[MANOR CARE LETTERHEAD]
October 15, 1996
Dear Manor Care, Inc. Stockholder:
I am pleased to inform you that the Board of Directors of Manor Care, Inc.
("Manor Care") has approved a distribution to our stockholders of all the
outstanding shares of common stock of Choice Hotels Holdings, Inc. ("Choice").
The stock distribution will be made on November 1, 1996, to holders of record of
Manor Care common stock on October 10, 1996. You will receive one share of
Choice common stock for every share of Manor Care common stock you hold on the
record date.
As a result of the distribution of Choice common stock to Manor Care
shareholders, you will own shares in two separate and very different companies.
Manor Care will be a pure health care company focused on inpatient skilled
nursing and rehabilitation, assisted living, institutional pharmacy and home
health care. Choice will concentrate on franchising, managing and developing
hotels and other travel-related businesses.
Your Board of Directors and management believe that the separation of the
lodging and health care businesses into two public corporations via the
distribution of Choice common stock will improve capital-raising efficiency as
both debt and equity investors will be better able to assess the different risk
profiles and operating characteristics of both businesses. The distribution will
give Choice direct access to capital markets and will permit it to raise funds
on the basis of its own operating profile and credit fundamentals. Similarly,
Manor Care's cost to obtain financing following the distribution will be
representative of the operating profile and credit fundamentals of a health care
company. In addition, the Board of Directors and management believe that the
distribution will improve strategic freedom and focus at both Choice and Manor
Care.
The enclosed Information Statement explains the proposed distribution in
detail and provides financial and other important information regarding Choice.
We urge you to read it carefully. Holders of Manor Care common stock are not
required to take any action to participate in the distribution as a stockholder
vote is not required in connection with this matter.
Sincerely,
Stewart Bainum, Jr.
Chairman of the Board and
Chief Executive Officer
<PAGE> 2
INFORMATION STATEMENT
CHOICE HOTELS HOLDINGS, INC.
(TO BE RENAMED CHOICE HOTELS INTERNATIONAL, INC.)
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
This Information Statement is being furnished by Manor Care, Inc. ("Manor
Care") in connection with the distribution (the "Distribution") to holders of
record of Manor Care common stock on October 10, 1996 (the "Record Date") of one
share of common stock, par value $.01 per share (the "Company Common Stock"), of
Choice Hotels Holdings, Inc. (the "Company") for each share of Manor Care common
stock. At the time of the Distribution, the Company will own all of the
businesses and assets of, and be responsible for the liabilities associated
with, the lodging and hotel franchise business operations conducted by Manor
Care and certain of its subsidiaries. The distribution will result in 100% of
the outstanding shares of Company Common Stock being distributed to holders of
Manor Care common stock.
The Distribution will be effective as of November 1, 1996 (the
"Distribution Date"). No consideration will be paid by Manor Care's stockholders
for shares of Company Common Stock. Manor Care has received a ruling from the
Internal Revenue Service to the effect that the Distribution is not taxable for
federal income tax purposes to stockholders of the Company and Manor Care. See
"The Distribution -- Federal Income Tax Aspects of the Distribution."
There is no current trading market for the Company's Common Stock, although
it is expected that a "when-issued" trading market will develop prior to the
Distribution Date. The Company's Common Stock has been approved for listing on
the New York Stock Exchange under the symbol "CHH," subject to notice of
issuance.
Stockholders of Manor Care with inquiries related to the Distribution
should contact the Investor Relations Department of Manor Care at (301)
979-4408. Stockholders of Manor Care with inquiries related to their holdings in
Manor Care should contact Manor Care's stock transfer agent, Chase-Mellon
Shareholder Services, L.L.C., at (212) 946-7200.
IN REVIEWING THIS INFORMATION STATEMENT YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS INFORMATION
STATEMENT.
------------------------
NO STOCKHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT. WE ARE
NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
------------------------
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 COMMIS-
SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. ANY SUCH OFFERING MAY ONLY BE
MADE BY MEANS OF A SEPARATE PROSPECTUS PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT AND OTHERWISE IN COMPLIANCE WITH APPLICABLE LAW.
THE DATE OF THIS INFORMATION STATEMENT IS OCTOBER 15, 1996.
<PAGE> 3
INFORMATION STATEMENT
TABLE OF CONTENTS
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PAGE
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Summary............................................................................. 1
Introduction........................................................................ 6
The Distribution.................................................................... 6
Reasons for the Distribution...................................................... 6
Manner of Effecting the Distribution.............................................. 7
Federal Income Tax Aspects of the Distribution.................................... 7
Conditions; Termination........................................................... 8
Listing and Trading of Shares of the Company's Common Stock....................... 8
Risk Factors........................................................................ 9
Relationship Between Manor Care and the Company After the Distribution.............. 13
Financing........................................................................... 16
Capitalization...................................................................... 17
Dividend Policy..................................................................... 17
Selected Historical Financial Data.................................................. 18
Pro Forma Financial Data............................................................ 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 21
Business............................................................................ 26
General........................................................................... 26
The Lodging Industry.............................................................. 26
Franchise Business................................................................ 28
Owned and Managed Lodging Business................................................ 39
Competition....................................................................... 43
Service Marks and Other Intellectual Property..................................... 44
Non-Hotel Properties.............................................................. 44
Seasonality....................................................................... 44
Regulation........................................................................ 45
Insurance......................................................................... 45
Impact of Inflation and Other External Factors.................................... 45
Employees......................................................................... 46
Legal Proceedings................................................................. 46
Environmental Matters............................................................. 46
Management.......................................................................... 47
Executive Officers of the Company................................................. 47
Compensation of Executive Officers................................................ 48
Employment Agreements............................................................. 51
Retirement Plans.................................................................. 51
Option and Stock Purchase Plans................................................... 53
The Board of Directors.............................................................. 53
Directors of the Company.......................................................... 53
Certain Relationships and Related Transactions...................................... 56
Security Ownership of Principal Stockholders and Management......................... 57
</TABLE>
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Description of Capital Stock of the Company......................................... 60
Common Stock...................................................................... 60
Preferred Stock................................................................... 60
Preemptive Rights................................................................. 60
Purposes and Effects of Certain Charter and By-law Provisions....................... 60
General........................................................................... 60
Liability and Indemnification of Officers and Directors............................. 61
Elimination of Liability in Certain Circumstances................................. 61
Indemnification and Insurance..................................................... 61
Available Information............................................................... 62
Index to Combined Financial Statements.............................................. F-1
Appendix A -- Form of Restated Certificate of Incorporation of the Company.......... A-1
</TABLE>
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SUMMARY
The following summarizes certain information contained elsewhere in this
Information Statement. Reference is made to, and this summary is qualified by,
the more detailed information set forth in this Information Statement, which
should be read in its entirety. Unless the context otherwise requires, all
references herein to the Company and to Manor Care shall include their
respective subsidiaries and all references herein to the Company prior to the
Distribution Date shall refer to the Lodging Business (as defined herein) as
operated by Manor Care. As used with respect to financial information, "Parent"
refers to Manor Care. Unless otherwise indicated, all statistical information
and data relating to the hotel industry in this Information Statement are
derived from information provided by Smith Travel Research. Smith Travel
Research has not consented to the use of the hotel industry data presented
herein or provided any form of consultation, advice, or counsel regarding any
aspects of, and is in no way whatsoever associated with, the proposed
transaction.
THE COMPANY
The Company is a leading international hotel franchisor and a major owner
and manager of hotel properties. Both franchise and owned and managed hotel
properties principally operate under one of the Company's brand names:
Comfort(R), Quality(R), Clarion(R), Sleep(R), Rodeway(R) and Econo Lodge(R). In
addition, the Company recently introduced a new brand, MainStay Suites(SM). For
the fiscal year ended May 31, 1996, hotel franchising contributed 58.5% of the
Company's revenues and 73.0% of the Company's gross profits, while hotel
ownership and management contributed the remaining 41.5% of revenues and 27.0%
of gross profits. The Company's franchise operations and owned and managed hotel
operations have experienced significant growth in revenues and profitability
over the last few years. The Company's compound annual growth rate since fiscal
year 1991 was 20.1% for revenues and 21.8% for net income before unusual items.
For the fiscal year ended May 31, 1996, total revenues and net income were
$374.9 million and $8.5 million, respectively. Excluding unusual items, net
income for fiscal year 1996 was $28.6 million. For the quarter ended August 31,
1996, total revenues and net income were $119.4 million and $15.4 million,
respectively.
FRANCHISE OPERATIONS. The Company is one of the world's largest
franchisors of hotels with 3,052 properties open and operating in 30 countries
at May 31, 1996. As a franchisor, the Company licenses hotel operators to use
the Company's brand names and provides to these hotel operators products and
services designed to increase their revenues and profitability. Key products and
services provided include nationally recognized marketing and advertising
programs, access to a reservation system that delivers business to the
franchisees' hotels, access to innovative products and services developed by the
Company and other support services such as training programs, purchasing
discounts, operating manuals, quality standards and inspections.
In return for the use of the Company's brand names and access to the
Company's products and services, franchisees pay to the Company fees that are
generally based on a percentage of the franchise hotels' gross room revenues.
Since fiscal year 1994, the Company has grown revenues from franchise operations
at a compound annual rate of 15.1%, while direct franchise expenses have
increased at a compound annual rate of 8.8%. During the same period, gross
margins have improved from 56.5% for fiscal year 1994 to 61.1% for fiscal year
1996.
Key components of the Company's franchise strategy include:
- growth of the Company's domestic franchise system;
- increases in average actual royalty rates;
- strategic development of the international franchise system;
- expansion of preferred vendor programs; and
- pursuit of selected strategic investments and acquisitions.
1
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The Company's existing franchisees form a pool of potential buyers and
builders of new hotels that may affiliate with one of the Company's brands. The
Company believes that its focus on improving the performance of its franchisees
through the provision of revenue- and profitability-enhancing systems and
services will enable it to retain these franchisees and attract new franchisees
to its system. The Company is able to meet the needs of franchisees across a
wide range of market segments by maintaining an array of distinct brands, each
with its own marketing and operating strategy. The Company expects to continue
to expand its brand offerings by developing new brands for high-growth segments
of the hospitality industry.
OWNED AND MANAGED OPERATIONS. In addition to acting as franchisor, the
Company owns and manages hotels. At May 31, 1996, the Company owned and managed,
under its six principal brand names, 79 hotels in 25 states, as well as in
Germany, France and England. To take advantage of a recovering lodging industry,
the Company has pursued, over the past few years, a strategy of acquiring
domestic hotel properties at prices below their replacement cost and increasing
their value through the investment of capital to improve the physical site and
the installation of professional management and marketing teams to operate the
renovated properties. Since June 1992, the Company has spent approximately
$242.7 million to buy and renovate 52 hotel properties.
Under the Company's management and consistent with overall industry
improvements, the operating performance of hotels acquired pursuant to this
strategy has improved substantially. Occupancies at domestic hotels acquired
during fiscal year 1993 have improved from 56% in fiscal year 1993 to 76% in
fiscal year 1996, while occupancies for fiscal year 1994 domestic acquisitions
have improved from 66% in fiscal year 1994 to 74% in fiscal year 1996 and
occupancies for fiscal year 1995 domestic acquisitions have improved from 49% in
fiscal year 1995 to 58% in fiscal year 1996. Overall, revenues from owned and
managed hotel operations have grown at a compound annual rate of 44.9% since
fiscal year 1994, while hotel operations expenses have increased at a compound
annual rate of 32.9%. As a result, gross margins of the owned and managed hotel
operations have improved from 19.0% for fiscal year 1994 to 31.9% for fiscal
year 1996. Because many of the recently acquired and developed hotels have not
yet reached stabilized levels of operating performance, the Company believes
that revenues and gross profit at these hotels will continue to grow.
The Company's strategy for its owned and managed operations is to realize
cash proceeds from, or "monetize," its capital investment in Company-owned
hotels at values that reflect their improved operating performance. The Company
is exploring a variety of transactions, including, among others, asset
securitization, sale/leasebacks, joint ventures with third parties, debt
financing and asset divestitures. The Company intends to retain management and
franchise agreements relating to these properties. The proceeds from these
transactions will be used initially to repay outstanding indebtedness. The
remaining proceeds will be used to launch or provide support to recently
developed brands, such as Sleep Inn and MainStay Suites, to develop additional
new brands, to expand internationally by investing in selected international
gateway cities and to invest in other targeted growth areas.
2
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THE DISTRIBUTION
Reasons for the
Distribution.................. The Board of Directors and management of Manor
Care believe that the separation of Manor
Care's health care and lodging businesses into
two public companies via the Distribution will
improve capital-raising efficiency as both debt
and equity investors will be better able to
assess the different risk profiles and
operating characteristics of both businesses.
The Distribution will give the Company direct
access to capital markets and will permit it to
raise funds on the basis of its own operating
profile and credit fundamentals. Similarly,
Manor Care's cost to obtain financing following
the Distribution will be representative of the
operating profile and credit fundamentals of a
health care company. In addition, the Board of
Directors and management of Manor Care believe
that the Distribution will improve strategic
freedom and focus at both Choice and Manor
Care. See "The Distribution -- Reasons for the
Distribution."
Distributed Company........... Choice Hotels Holdings, Inc. (the "Company"), a
Delaware corporation (to be renamed Choice
Hotels International, Inc.) and a wholly-owned
subsidiary of Manor Care, will, on the
Distribution Date, own all of the business and
assets of, and be responsible for all of the
liabilities associated with, the lodging and
hotel franchise business operations conducted
by Manor Care and certain of its subsidiaries
(the "Lodging Business").
Distributing Company.......... Manor Care, Inc., a Delaware corporation
("Manor Care").
Securities to Be
Distributed................... Approximately 62,872,184 shares (the "Shares")
of common stock, par value $.01 per share of
the Company, based on 62,872,184 shares of
common stock, par value $.10 per share, of
Manor Care ("Manor Care Common Stock")
outstanding as of October 1, 1996.
Distribution Ratio............ One share of Company Common Stock for each
share of Manor Care Common Stock.
Tax Consequences.............. Manor Care has received a ruling from the
Internal Revenue Service to the effect, among
other things, that receipt of the Shares by
stockholders of Manor Care is tax free for
federal income tax purposes. See "The
Distribution -- Federal Income Tax Aspects of
the Distribution."
Listing and Trading Market.... The Shares have been approved for listing on
the New York Stock Exchange under the symbol
"CHH," subject to notice of issuance. See "The
Distribution -- Listing and Trading of Shares
of the Company's Common Stock."
Record Date................... Close of business on October 10, 1996.
Distribution Date............. As of November 1, 1996. On the Distribution
Date, Manor Care will deliver the Shares to the
Distribution Agent. As soon as practicable
thereafter, the Distribution Agent will mail
certificates representing the appropriate
number of Shares to the Manor Care stockholders
entitled thereto. See "The
Distribution -- Manner of Effecting the
Distribution."
Distribution Agent............ Chase-Mellon Shareholder Services, L.L.C., the
transfer agent for the Company.
The Company's Dividend Policy
After the Distribution........ It is currently contemplated that following the
Distribution, the Company will not pay cash
dividends on the Shares.
3
<PAGE> 8
Certain Charter and
By-law Provisions........... Certain provisions of the Restated Certificate
of Incorporation (the "Restated Certificate")
and the By-laws ("the By-laws") of the Company
have the effect of delaying or making more
difficult an acquisition of control of the
Company in a transaction not approved by its
Board of Directors. These provisions have been
designed to enable the Company, especially in
its initial years, to develop its businesses
and foster its long-term growth without
disruptions caused by the threat of a takeover
not deemed by its Board of Directors to be in
the best interest of the Company. See "Purposes
and Effects of Certain Charter and By-law
Provisions." The Restated Certificate would
eliminate certain liabilities of directors in
connection with the performance of their
duties. See "Liability and Indemnification of
Officers and Directors -- Elimination of
Liability in Certain Circumstances."
Risk Factors.................. Stockholders should carefully consider all of
the information contained in this Information
Statement, including the matters described
under "Risk Factors."
Principal Office of the
Company....................... 10750 Columbia Pike, Silver Spring, Maryland
20901. Its telephone number is (301) 979-5000.
Relationship between Manor
Care and the Company after the
Distribution................ For purposes of governing the ongoing
relationships between Manor Care and the
Company after the Distribution Date and in
order to provide for an orderly transfer of the
Lodging Business to the Company and facilitate
the transition to two separate publicly traded
companies, Manor Care and the Company have
entered into a distribution agreement and
various other agreements with respect to, among
other things, intercompany debt, tax matters,
employee benefits, risk management and
corporate and administrative services. See
"Relationship Between Manor Care and the
Company After the Distribution." The
relationship between Manor Care and the Company
may be subject to certain potential conflicts
of interest. See "Risk Factors -- Potential
Conflicts with Manor Care."
4
<PAGE> 9
SUMMARY FINANCIAL INFORMATION
The following table summarizes certain selected financial information with
respect to the Company and is derived from the Combined Financial Statements of
the Company. Historical financial information may not be indicative of the
Company's future performance as an independent company. The information set
forth below is qualified in its entirety by reference to, and should be read in
conjunction with, "Selected Historical Financial Data," "Pro Forma Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Combined Financial Statements and related notes included
elsewhere herein. The balance sheet data at August 31, 1996 and the income
statement data for the three months ended August 31, 1995 and August 31, 1996
are derived from unaudited combined financial statements of the Company that, in
the opinion of the Company, reflect all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the information set forth
below. The interim results for the three months ended August 31, 1996 are not
necessarily indicative of results for the entire 1997 fiscal year.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, THREE MONTHS ENDED AUGUST 31,
--------------------------------------------- ----------------------------------------
1994 1995 1996 PRO FORMA(A) 1995 1996 PRO FORMA(A)
-------- -------- -------- 1996 ----------- ----------- 1996
------------ (UNAUDITED) (UNAUDITED) ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT RATIO DATA)
STATEMENT OF INCOME DATA:
Revenues............................... $239,764 $302,535 $374,873 $387,819 $99,380 $119,380 $119,380
Operating expenses..................... 206,722 250,476 334,083(b) 349,961(b) 75,016 87,616 87,639
-------- -------- -------- -------- ------- -------- --------
Income before other expenses and income
taxes................................. 33,042 52,059 40,790 37,858 24,364 31,764 31,741
Interest expense on notes payable to
Parent................................ 10,665 15,492 19,673 20,339 4,612 5,079 5,079
Minority interest and other interest
and other expenses, net............... 4,699 6,612 5,259 3,727 1,180 788 788
-------- -------- -------- -------- ------- -------- --------
Income before income taxes............. 17,678 29,955 15,858 13,792 18,572 25,897 25,874
Income taxes........................... 8,019 13,144 7,400 6,429 7,658 10,500 10,491
-------- -------- -------- -------- ------- -------- --------
Net income...................... $ 9,659 $ 16,811 $ 8,458 $ 7,363 $10,914 $ 15,397 $ 15,383
========= ========= ======== ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
MAY 31,
------------------- AUGUST 31,
1995 1996 1996
-------- -------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $(34,663) $ (7,606) $ 64
Total assets........................... 391,475 491,304 512,206
Notes payable to Parent................ 198,522 225,723 225,723
Total debt............................. 251,191 294,861 295,128
Investments and advances from Parent... 65,829 147,559 170,261
RATIO DATA:
Ratio of earnings to fixed
charges (c).......................... 2.47x 1.63x 5.04x
========= ========= ==========
</TABLE>
- ---------------
(a) The pro forma statement of operations data for the year ended May 31, 1996
and the three months ended August 31, 1996 give effect to (i) the
Distribution and related transactions and (ii) the acquisition by the
Company of an aggregate of 16 hotels during fiscal year 1996 (the "1996
Acquisitions"), as if the Distribution and related transactions and the 1996
Acquisitions had occurred on June 1, 1995.
(b) Includes a provision of $33.3 million for impairment of certain long-lived
assets associated primarily with the Company's European operations and
certain restructuring costs, including severance and employee benefit plan
restructuring costs, directly associated with the Distribution.
(c) Earnings used in computing the ratio of earnings to fixed charges consist of
income before income taxes, fixed charges and extraordinary items. Fixed
charges consist of interest expense, including amounts capitalized and the
amortization of deferred financing fees, and that portion of operating lease
rental expense that is representative of interest (deemed to be one-third of
operating lease rentals).
5
<PAGE> 10
INTRODUCTION
The Company is one of the world's largest franchisors of hotels with 3,052
properties and a total of 261,456 rooms open and operating in 30 countries at
May 31, 1996. The properties principally operate under one of the Company's
brand names: Comfort, Quality, Clarion, Sleep, Rodeway and Econo Lodge. In
addition, the Company recently introduced a new brand, MainStay Suites. At May
31, 1996, another 716 franchise properties with a total of 63,785 rooms were
under development. In addition to acting as franchisor, at May 31, 1996, the
Company owned and managed, under its six principal brand names, 79 hotels in 25
states, as well as in Germany, France and England.
On March 7, 1996, the Board of Directors of Manor Care announced its
intention to distribute to holders of Manor Care Common Stock all of the
outstanding Shares. On March 6, 1996, the high and low sales prices of the Manor
Care Common Stock as reported on the New York Stock Exchange Composite Tape were
$39 and $38 5/8, respectively. On September 30, 1996, the Board of Directors of
Manor Care declared a dividend to effect the Distribution and set the Record
Date and Distribution Date. On September 30, 1996, the high and low sales prices
of the Manor Care Common Stock as reported on the New York Stock Exchange
Composite Tape were $38 1/2 and $37 1/4, respectively. Following the
Distribution, Manor Care will not own any Shares or other capital stock of the
Company, but will have certain contractual relationships with the Company. See
"Relationship Between Manor Care and the Company After the Distribution."
The Company, a Delaware corporation, was incorporated on June 27, 1996, and
is currently a wholly-owned subsidiary of Manor Care with no operations. Prior
to the Distribution, the Lodging Business has been conducted as a separate
division and through certain subsidiaries of Manor Care, including Choice Hotels
International, Inc., a wholly-owned subsidiary of Manor Care. On the
Distribution Date, Manor Care will contribute to the Company the Lodging
Business (including all of the stock of Choice Hotels International, Inc. and
the other subsidiaries comprising the Lodging Business, together with certain
assets relating to the Lodging Business held by Manor Care) and the Company will
change its name to Choice Hotels International, Inc. The existing Choice Hotels
International, Inc. will be renamed Choice Hotels Franchising, Inc.
Stockholders of Manor Care with inquiries relating to the Distribution
should contact the Investor Relations Department of Manor Care at (301)
979-4408. After the Distribution Date, stockholders of the Company should
contact the Investor Relations Department of Choice at (301) 979-5000.
THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
The Board of Directors and management of Manor Care have determined, for
the reasons set forth below, among others, to separate the Lodging Business from
Manor Care's other businesses.
The Board of Directors and management of Manor Care believe that the
separation of its health care and lodging businesses into two public
corporations via the distribution of the Shares will improve capital-raising
efficiency as both debt and equity investors will be better able to assess the
different risk profiles and operating characteristics of both businesses. The
Distribution will give the Company direct access to capital markets and will
permit it to raise funds on the basis of its own operating profile and credit
fundamentals. Similarly, Manor Care's cost to obtain financing following the
Distribution will be representative of the operating profile and credit
fundamentals of a health care company. In addition, the Board of Directors and
management believe that the Distribution will improve strategic freedom and
focus at both the Company and Manor Care.
The Board of Directors and management of Manor Care also believe that the
Distribution will (i) facilitate the expansion of each of Manor Care and the
Company through future acquisitions by making the stock of each entity a more
effective consideration with which to make any such acquisitions, (ii) enable
Manor Care and the Company to motivate their respective key employees, and
attract new employees, by offering incentives such as stock options whose value
will be directly affected by the performance of Manor
6
<PAGE> 11
Care or the Company, as the case may be, and (iii) simplify the process of
allocating indirect corporate overhead costs in computing governmental
reimbursements to the health care business.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions of the Distribution are set forth in the
distribution agreement (the "Distribution Agreement") to be entered into by the
Company and Manor Care prior to the Distribution.
Upon satisfaction of all the conditions contained in the Distribution
Agreement, it is contemplated that the Distribution will be made as of November
1, 1996 (the "Distribution Date") to stockholders of record of Manor Care at the
close of business on October 10, 1996 (the "Record Date"). On the Distribution
Date, the Shares will be delivered to the Distribution Agent for distribution as
soon as practicable thereafter to holders of record of Manor Care Common Stock
as of the close of business on the Record Date on the basis of one share of
Company Common Stock for each share of Manor Care Common Stock held on the
Record Date. The actual total number of Shares to be distributed will depend on
the number of shares of Manor Care Common Stock outstanding on the Record Date.
All such Shares will be fully paid and non-assessable and the holders thereof
will not be entitled to preemptive rights. See "Description of Capital Stock of
the Company." Following the Distribution, the Company will operate as an
independent public company.
No holder of Manor Care Common Stock will be required to pay any cash or
other consideration for the Shares received in the Distribution or to surrender
or exchange shares of Manor Care Common Stock in order to receive Shares.
FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION
Manor Care has received a ruling from the Internal Revenue Service to the
effect, among other things, that, for federal income tax purposes, the
Distribution will qualify as a tax-free spin-off under Section 355 of the
Internal Revenue Code of 1986, as amended, and that:
(1) No gain or loss will be recognized to (and no amount will be
included in the income of) holders of Manor Care Common Stock upon the
receipt of the Shares in the Distribution;
(2) Assuming that on the Distribution Date a holder of Manor Care
Common Stock holds Manor Care Common Stock as a capital asset, the holding
period for the Shares to be received in the Distribution will include the
period during which the Manor Care Common Stock was held;
(3) The tax basis of Manor Care Common Stock held by a Manor Care
stockholder at the time of the Distribution will be allocated, based upon
relative fair market values at the time of the Distribution, between such
Manor Care Common Stock and the Shares received by the stockholder in the
Distribution; and
(4) No gain or loss will be recognized by Manor Care or the Company on
the Distribution.
Within 90 days after the Distribution, Manor Care will provide to Manor
Care stockholders additional information regarding the allocation referred to in
(3) above.
Internal Revenue Service rulings, while generally binding on the Internal
Revenue Service, are subject to certain factual representations and assumptions.
Manor Care is not aware of any material facts or circumstances which would cause
such representations or assumptions to be untrue but there can be no assurance
that such representations and assumptions will continue to be true after the
Distribution Date. See "Risk Factors -- Certain Tax Considerations."
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF THE DISTRIBUTION UNDER CURRENT LAW AND IS INTENDED FOR GENERAL INFORMATION
ONLY. EACH STOCKHOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE
PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH STOCKHOLDER, INCLUDING THE
APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS, AND THE EFFECT OF POSSIBLE
CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE.
7
<PAGE> 12
CONDITIONS; TERMINATION
The Distribution Agreement provides that the Distribution is subject to
certain conditions, including final approval of the Manor Care Board of
Directors. See "Relationship Between Manor Care and the Company After the
Distribution -- Distribution Agreement." Even if all the conditions are
satisfied, the Manor Care Board of Directors may, in its discretion, terminate,
defer, modify or abandon the Distribution.
LISTING AND TRADING OF SHARES OF THE COMPANY'S COMMON STOCK
The Shares have been approved for listing on the New York Stock Exchange
(the "NYSE") under the symbol "CHH," subject to notice of issuance. As of the
Distribution Date, the Company is expected to have approximately 3,196 holders
of record of the Shares, based on the number of holders of record of Manor Care
Common Stock on October 1, 1996.
There is not currently a public market for the Shares. Prior to the
Distribution, the Shares are expected to begin trading on a "when-issued" basis
on a date to be determined by the NYSE. If the Distribution is not made, all
such "when-issued" trading will be null and void. Prices at which the Shares may
trade prior to the Distribution on a "when-issued" basis or after the
Distribution cannot be predicted. The prices at which the Shares trade will be
determined by the marketplace and may be influenced by many factors, including,
among others, the depth and liquidity of the market for the Shares, investor
perception of the Company and the industry in which its businesses participate,
the Company's dividend policy and general economic and market conditions. See
the description of the dividend policy of the Company under "Dividend Policy."
The Shares distributed to Manor Care stockholders will be freely
transferable, except for Shares received by persons who may be deemed to be
"affiliates" of the Company under the Securities Act of 1933, as amended (the
"Securities Act"). Persons who may be deemed to be affiliates of the Company
after the Distribution generally include individuals or entities that control,
are controlled by, or are under common control with the Company and may include
certain officers and directors of the Company. Persons who are affiliates of the
Company will be permitted to sell their Shares only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemption afforded
by Section 4(1) of the Securities Act and Rule 144 promulgated thereunder.
8
<PAGE> 13
RISK FACTORS
RISKS OF THE LODGING INDUSTRY; COMPETITION
General. Competition in the lodging business for hotel guests is based
upon many factors, including rates, quality of accommodations, brand
recognition, service levels, convenience and desirability of locations and
general, regional and local economic conditions. 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, and therefore hotel values, in the industry in the early 1990s.
Although the current outlook for the industry has improved, there can be no
assurance that in the future the lodging industry, including the Company, its
hotels and its franchisees, will not be adversely affected again by an
oversupply of rooms or by (i) national and regional economic conditions, (ii)
changes in travel patterns, gasoline prices and other costs of travel and
demographics, (iii) natural disasters, (iv) seasonality of the hotel business,
(v) taxes and government regulations that influence or determine wages, prices,
interest rates, refurbishment or improvement plans, construction procedures and
operating costs and (vi) the availability of credit. 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.
Risks of Franchise Business. As a franchisor, the Company's products are
its brand names and the support services it provides to its franchisees.
Competition among national brand franchisors in the lodging industry to grow
their franchise systems is intense. In addition, smaller chains pose some degree
of competitive pressure in selected markets. The Company believes that
competition for the sale of lodging franchises is based principally upon the
perceived value and quality of the brand and services as well as the nature of
those services offered to franchisees. The Company believes that prospective
franchisees value a franchise based upon their view of the relationship of the
costs imposed to the potential for increased revenue and profitability.
The Company's franchising revenues vary directly with franchisees' gross
room revenues, but are not directly dependent upon franchisees' profitability.
The Company believes, however, that the perceived value of its brand names to
prospective franchisees is in part a function of the success of its existing
franchisees. The ability of the Company's franchisees to compete in the lodging
industry is important to the Company's prospects because franchise fees are
primarily based on franchisees' gross room revenues. The Company's franchisees
are generally in intense competition with franchisees of other systems,
independent properties and owner-operated chains.
Risks of Developing, Acquiring and Owning Hotels. As an owner of hotels,
the Company is subject to the risks of construction and operation of lodging
facilities generally. Developing new hotels and acquiring hotels with
repositioning potential subjects the Company to pre-opening, pre-stabilization
and repositioning costs. As the Company opens additional Company-owned hotels,
such costs may adversely affect the Company's results of operations. Newly
opened hotels historically begin with lower occupancy and room rates that
improve over time. While the Company has in the past successfully opened or
repositioned new hotels, there can be no assurance that it will be able to
continue to do so. Construction, acquisition and repositioning of hotels involve
certain risks, including the possibility of construction cost overruns and
delays, site acquisition cost and availability, uncertainties as to market
potential, market deterioration after the acquisition or repositioning, possible
unavailability of financing on favorable terms and the emergence of market
competition from unanticipated sources. Although the Company seeks to manage its
construction, acquisition and repositioning activities so as to minimize such
risks, there can be no assurance that any such projects will perform in
accordance with the Company's expectations.
Hotel investments are relatively illiquid. Such illiquidity will tend to
limit the ability of the Company to respond to changes in economic or other
conditions. The Company's ownership of real property is substantial. Real estate
values are sensitive to changes in local market and economic conditions and to
fluctuations in the economy as a whole. In addition, the Company is subject to
the general risks of fluctuation in the hotel real estate transaction market,
which is impacted by variable prices and the availability of financing. There
can be no assurance that the Company's development, acquisition, repositioning
or disposition plans will not be adversely affected by changes in the real
estate market.
9
<PAGE> 14
Risks of Hotel Management. The Company currently manages 85 hotel
properties, including its 79 owned hotels and 6 properties managed under
agreements with third parties. In connection with its monetization strategy, the
Company expects to substantially increase the number of hotel properties managed
pursuant to third party management agreements. Management agreements expire or
are acquired, terminated or renegotiated in the ordinary course. There can be no
assurance that such third party agreements will be on terms as favorable to the
Company as existing intercompany agreements.
RISK OF GEOGRAPHIC CONCENTRATION
A substantial portion of the Company's franchise and owned hotels are
located in the southeastern United States. Such geographic concentration exposes
the Company's operating results to events or conditions that specifically affect
that region, such as economic, weather and other conditions. Adverse
developments that specifically affect the southeastern United States may have a
material adverse effect on the business, financial condition or results of
operations of the Company.
ABILITY TO IMPLEMENT MONETIZATION STRATEGY
The Company's strategy for its owned and managed operations is to monetize
its capital investment in Company-owned hotels at values that reflect their
improved operating performance. The Company is exploring a variety of
transactions, including, among others, asset securitizations, sale/leasebacks,
joint ventures with third parties, debt financings and asset divestitures. The
Company intends to retain management and franchise agreements relating to these
properties. The proceeds from these transactions will be used initially to repay
amounts owed to Manor Care. See "Financing -- The Manor Care Loan Agreement."
The Company currently intends to consummate any such transactions only if the
Company is able to retain the management and franchise contracts for such
hotels. Although transactions of the types being explored by the Company are
common in the hotel industry, there can be no assurance that the Company will be
able to successfully execute these plans. Furthermore, the Company's plan to
retain management and franchise contracts for such hotels will make certain
transactions more difficult to consummate. If the Company is not able to
successfully implement its monetization strategy, the Company will be unable to
reduce amounts owed to Manor Care as planned and will be required to obtain
additional sources of financing to repay such amounts before they come due on
November 1, 1999. There can be no assurance that the Company will be able to
obtain such financing on favorable terms or in a timely manner.
UNAVAILABILITY OF MANOR CARE FINANCIAL RESOURCES
Historically, adequate financial resources were available from Manor Care
to meet operating and investment needs of the Company. Following the
Distribution, the Company will no longer have access to Manor Care financial
resources and will be required to obtain financing based on its own credit
fundamentals as well as repay amounts owed to Manor Care. The Company will have
access to its cash flow from operations, which previously was distributed up to
Manor Care as part of Manor Care's internal cash management system. In addition,
the Company expects to have access to a revolving credit facility and is
currently negotiating the terms thereof with potential bank lenders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." There can be no assurance that
the lack of access to Manor Care's financial resources will not adversely affect
the Company's ability to obtain additional financing on favorable terms.
MARKET ACCEPTANCE OF NEW BRANDS AND PRODUCTS
As part of its growth strategy, the Company is developing new brands, such
as MainStay Suites(SM), an extended-stay lodging product, and new products, such
as Choice Picks(SM), a customized modular food service system for hotels and
other institutions. The Company has no operating history in either the
extended-stay lodging market or the food court service business and there can be
no assurance that either Main Stay Suites or Choice Picks will experience market
acceptance or that the Company will be successful in franchising these or other
new brands or products. Further, there can be no assurance that the capital
investments made by the Company to develop these and other new brands or
products will be recovered, or that such new brands or
10
<PAGE> 15
products will be profitable. As of May 31, 1996, the Company has invested
approximately $4.3 million in developing and marketing MainStay Suites and
Choice Picks, which includes $1.6 million to begin the construction of MainStay
Suites. The failure to successfully franchise these and other new brands could
have a material adverse effect on the business, financial condition and results
of operations of the Company.
RELIANCE ON KEY PERSONNEL
Upon completion of the Distribution, the ability of the Company to operate
successfully will be dependent, in part, upon the continued services of certain
of its employees, including Stewart Bainum, Jr., who will be the Chairman of the
Company and the Chairman and Chief Executive Officer of Manor Care, Inc.,
William R. Floyd, who will be the chief executive officer of the Company, Donald
J. Landry, who will be the President of the Company, and James A. MacCutcheon,
who will be the Executive Vice President, Chief Financial Officer and Treasurer
of the Company. Mr. Bainum, Jr.'s employment agreement with the Company will be
for a term of three years. Mr. Floyd's employment agreement with the Company and
Choice Hotels International, Inc. will be for a term of five years from
September 30, 1996. Mr. Landry's employment agreement with Choice Hotels
International, Inc. extends through November 30, 1999. Mr. MacCutcheon's
employment agreement with the Company and Choice Hotels International, Inc. will
be for a term of five years. There can be no assurance that a suitable
replacement for any of Mr. Bainum, Jr., Mr. Floyd, Mr. Landry or Mr. MacCutcheon
could be found in the event of termination of any of their employment. Following
the Distribution, Mr. Bainum, Jr. will devote approximately 25% of his
professional time to the affairs of the Company.
SIGNIFICANT BAINUM FAMILY INTEREST
Upon completion of the Distribution, Stewart Bainum, Stewart Bainum, Jr.,
and Barbara Bainum are expected to beneficially own approximately 19.9%, 19.4%
and 2.9%, respectively, of the Company Common Stock, in each case including
shares with respect to which voting power is shared with other individuals or
entities. See "Security Ownership of Principal Stockholders and Management." In
addition, Mr. Bainum, Mr. Bainum, Jr., and Ms. Bainum will be directors of the
Company. As a result, the Bainum family may be in a position to significantly
influence the affairs of the Company, including the election of directors.
POTENTIAL CONFLICTS WITH MANOR CARE
The Company and Manor Care will share four common directors. Stewart Bainum
serves as Vice Chairman and Stewart Bainum, Jr. serves as Chairman of the Board
of Directors and Chief Executive Officer of both Manor Care and the Company. Mr.
Bainum, Jr. will devote 75% of his time to Manor Care and 25% of his time to the
Company. Mr. Bainum, Jr.'s employment by both companies and his consequent
inability to devote 100% of his time to either company could create a conflict
in the future. Certain officers and directors of Manor Care and the Company also
own shares (and/or options or other rights to acquire shares) in both companies.
In connection with the Distribution, the Company and Manor Care will enter into
various contractual arrangements and the potential exists for disagreement in
the future as to contract compliance. For a description of the Company's ongoing
relationship with Manor Care, see "Relationship Between Manor Care and the
Company After the Distribution."
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements contained in this Information Statement, including in
the sections entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" contain "forward-looking"
information (as defined in the U.S. Private Securities Litigation Reform Act of
1995) that involves risk and uncertainties, including (i) the Company's plans to
monetize its capital investment in owned hotels, (ii) the Company's plans to
expand its international franchise operations, (iii) the Company's plans to
market new brands and products and (iv) the Company's plans to make selected
strategic investments and acquisitions. Actual future results and trends may
differ materially depending on a variety of factors discussed in this "Risk
Factors" section and elsewhere in this Information Statement, including (a) the
Company's success in implementing its business strategy, including its success
in arranging financing where required,
11
<PAGE> 16
(b) the nature and extent of future competition, and (c) political, economic and
demographic developments in countries where the Company does business or in the
future may do business.
CERTAIN TAX CONSIDERATIONS
Manor Care has received a ruling from the Internal Revenue Service to the
effect, among other things, that, for federal income tax purposes, the
Distribution will qualify as a tax-free distribution, both to Manor Care's
stockholders and to Manor Care. If the Company and Manor Care fail to comply
with the representations and assumptions under which the ruling was issued, and
as a result the Distribution is not treated as tax-free, the federal income tax
liability of Manor Care would be significant. Pursuant to the Tax Sharing
Agreement, the Company will assume liability for all taxes payable by the
Company or by Manor Care in the event the Distribution is determined not to be
tax-free for federal income tax purposes. Such liabilities could be substantial
and could have a material adverse effect on the business, financial condition
and results of operations of the Company. In addition, if the Distribution is
not treated as tax-free for federal income tax purposes, each Manor Care
stockholder that receives Choice Common Stock in the Distribution would be
treated as having received a taxable dividend.
12
<PAGE> 17
RELATIONSHIP BETWEEN MANOR CARE
AND THE COMPANY AFTER THE DISTRIBUTION
For purposes of governing the ongoing relationships between Manor Care and
the Company after the Distribution Date, and in order to provide for an orderly
transfer of the Lodging Business to the Company and facilitate the transition to
two separate publicly-traded companies, Manor Care and the Company have entered
or will enter into various agreements setting forth the Company's and Manor
Care's on-going responsibilities regarding various matters outlined below. The
agreements summarized in this section are included as exhibits to the Company's
Registration Statement on Form 10 of which this Information Statement is a part.
The following summaries are qualified in their entirety by reference to such
exhibits.
DISTRIBUTION AGREEMENT
On or prior to the Distribution Date, the Company and Manor Care will enter
into the Distribution Agreement which provides for, among other things, the
principal corporate transactions required to effect the Distribution, the
assumption by the Company of all liabilities relating to the Lodging Business
(to the extent not covered by Manor Care's insurance) and the allocation between
the Company and Manor Care of certain other liabilities, certain indemnification
obligations of the Company and Manor Care and certain other agreements governing
the relationship between the Company and Manor Care with respect to or in
consequence of the Distribution. The Distribution Agreement provides that the
Distribution is subject to the prior satisfaction of certain conditions
including, among other things, the transfer of the Lodging Business to the
Company, the execution of all ancillary agreements, certain of which are
described below, to the Distribution Agreement and the formal approval of the
Distribution by the Board of Directors of Manor Care.
CROSS-INDEMNIFICATION. Subject to certain exceptions, the Company has
agreed to indemnify Manor Care and its subsidiaries against any loss, liability
or expense incurred or suffered by Manor Care 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 Manor Care 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 Manor Care to perform or otherwise discharge the
liabilities retained by Manor Care under the Distribution Agreement. The
foregoing cross-indemnities do not apply to indemnification for tax claims and
liabilities, which are addressed in the Tax Sharing Agreement described below.
The Distribution Agreement also includes procedures for notice and payment of
indemnification claims and provides that the indemnifying party may assume the
defense of a claim or suit brought by a third party.
INTERCOMPANY ADVANCES AND ACCOUNTS. The Distribution Agreement provides
that on or prior to the Distribution Date the Company and a subsidiary of Manor
Care will enter into a loan agreement pursuant to which the Company will repay
to Manor Care over a three year period approximately $225.7 million in advances
made by Manor Care to the Company prior to the Distribution Date. See
"Financing -- The Manor Care Loan Agreement." All other intercompany loans or
advances have been or will be contributed to the capital of the Company.
CREDIT FACILITIES. The Distribution Agreement provides that, as a
condition to the Distribution, on or prior to the Distribution Date, Manor Care
will amend and restate its existing credit facility so as to release the Company
and any subsidiaries engaged in the Lodging Business from any liability or
obligation with respect thereto, and the Company will enter into a separate
revolving credit facility. See "Financing -- Credit Facility."
NON-COMPETE. The Distribution Agreement provides that until five years
after the Distribution Date, Manor Care and its subsidiaries shall not compete
with the lodging business of the Company, provided that Manor Care may engage in
any line of business in which the Company is not engaged, as of the Distribution
Date, including the operation of assisted living facilities, independent living
facilities or any business similar thereto, and the Company shall not compete
with the health care business or any such other business of Manor Care.
13
<PAGE> 18
GUARANTEES. The Distribution Agreement provides that Manor Care will
continue to guarantee certain mortgages and other long term debt of the Company
outstanding on the Distribution Date. The Company will pay Manor Care a
guarantee fee equal to 2.0% per annum of the aggregate principal amount of such
guaranteed obligations and other long term debt subject to such guarantees.
EXPENSES. The Distribution Agreement provides that except as otherwise
specifically provided, all costs and expenses incurred in connection with the
preparation, execution, delivery and implementation of the Distribution
Agreement and with the consummation of the transactions contemplated by the
Distribution Agreement (including transfer taxes and the fees and expenses of
all counsel, accountants and financial and other advisors) shall be paid by the
party incurring such cost or expense. Notwithstanding the foregoing, the Company
shall be obligated to pay the legal, filing, accounting, printing and other
accountable and out-of-pocket expenditures in connection with the preparation,
printing and filing of the Registration Statement on Form 10 and obtaining
financing.
TAX SHARING AGREEMENT
On or prior to the Distribution Date, the Company and Manor Care will enter
into the Tax Sharing Agreement for purposes of allocating pre-Distribution tax
liabilities among the Company and Manor Care and their respective subsidiaries.
In general, Manor Care will be responsible for (i) filing consolidated federal
income tax returns for the Manor Care affiliated group and combined or
consolidated state tax returns for any group that includes a member of the Manor
Care 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. The Company will reimburse Manor Care 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. In addition, the Company
will assume liability for all taxes payable by the Company or by Manor Care in
the event the Distribution is determined not be tax free for federal income tax
purposes. Manor Care and the Company have agreed to cooperate with each other,
and to share information, in preparing such tax returns and in dealing with
other tax matters.
EMPLOYEE BENEFITS ALLOCATION AGREEMENT
On or prior to the Distribution Date, the Company and Manor Care will enter
into an Employee Benefits and Other Employment Matters Allocation Agreement (the
"Employee Benefits Allocation Agreement").
The Employee Benefits Allocation Agreement provides for the allocation
subsequent to the Distribution of employee benefits, as they relate to employees
who remain employed by Manor Care or its subsidiaries ("Manor Care Employees")
after the Distribution and employees who are employed by the Company after the
Distribution ("Company Employees"). During the period beginning on the
Distribution Date and ending on December 31, 1996, the Company shall pay to
Manor Care, on a monthly basis, a payment equal to 2.1% of the payroll for all
Company Employees. In consideration therefor, during such period, Manor Care
will assume responsibility for all funding obligations and current plan year
matching contributions attributable to certain retirement and savings plans
specified in the Employee Benefits Allocation Agreement. During the same period,
the Company will also pay to Manor Care a monthly fee for each Company Employee
receiving services and benefits under a Manor Care medical plan. Manor Care
shall be responsible for all liabilities and obligations related to claims
incurred through December 31, 1996 in respect of Manor Care Employees and
Company Employees (whether such claims are assessed before or after December 31,
1996) under any Manor Care welfare plan and, with respect to pre-tax medical and
dependent care programs, will retain any funds remaining on January 1, 1997.
Pursuant to the Employee Benefits Allocation Agreement, Manor Care will continue
sponsorship of the various Manor Care profit sharing plans, retirement plans,
stock plans and health and welfare plans with respect to Manor Care Employees.
The Company will establish a number of plans which will allow the Company to
provide to its employees substantially the same benefits currently provided to
them as employees of Manor Care. With respect to each Manor Care profit sharing
and retirement plan, Manor Care shall transfer to the Company, on or before
January 1, 1997, an amount representing the present value of the full accrued
benefit of all Company Employees who had earned a benefit under any such Manor
Care plan. The Employee Benefits Allocation Agreement provides for
cross-guarantees between the Company
14
<PAGE> 19
and Manor Care with respect to the payment of benefits under certain plans and
for cross-indemnification with respect to pre-Distribution employment-related
claims.
The Employee Benefits Allocation Agreement also provides for the adjustment
of outstanding stock options. Prior to the Distribution Date (i) each Manor Care
Employee holding a nonqualified Manor Care stock option or an incentive stock
option to purchase Manor Care Common Stock will receive for each such option a
conversion award consisting of an option to purchase Manor Care Common Stock,
with the number of shares that may be acquired and the option price adjusted
pursuant to a formula designed to preserve the financial value of the options
and (ii) each Company Employee holding a nonqualified Manor Care stock option or
an incentive stock option to purchase Manor Care Common Stock will receive for
each such option a conversion award consisting of an option to purchase Company
Common Stock, with the number of shares that may be acquired and the option
price adjusted pursuant to a formula designed to preserve the financial value of
the options. Notwithstanding the foregoing, certain employees and non-employee
directors of Manor Care who do not become members of the Board of Directors of
the Company on the Distribution Date holding nonvested nonqualified options to
acquire Manor Care Common Stock may make a one-time election with respect to
such nonvested nonqualified options to (1) receive a conversion award that
relates exclusively to nonvested nonqualified options to acquire Manor Care
Common Stock, in the case of non-employee directors, or, in all other cases, the
Company Common Stock by which he or she will be employed after the Distribution
Date or (2) receive a conversion award with respect to which one-half relates
nonvested nonqualified options to acquire Manor Care in the case of nonemployee
directors or, in all other cases, the Company Common Stock by which he or she
will be employed after the Distribution Date and one-half is proportionately
allocated between nonvested nonqualified options to acquire Manor Care Common
Stock and nonvested nonqualified options to acquire Company Common Stock based
upon the relative trading values of such common stocks on the Distribution Date.
Certain employees and non-employee directors of Manor Care who do not become
members of the Board of Directors of the Company on the Distribution Date
holding vested nonqualified options to acquire Manor Care Common Stock may make
a one-time election to specify the manner in which such vested nonqualified
stock options shall be allocated between a conversion award relating to vested
nonqualified stock options to acquire Manor Care Common Stock and vested
nonqualified stock options to acquire Company Common Stock.
LEASE AGREEMENTS
On or prior to the Distribution Date, the Company and Manor Care will enter
into a lease agreement with respect to the building complex (the "Complex") in
Silver Spring, Maryland at which the Company's principal executive offices are
located (the "Silver Spring Lease"). Pursuant to the Silver Spring Lease, the
Company will lease from Manor Care for a period of 30 months certain office
space (approximately 30% of the Complex initially, with provisions to allow the
Company to use additional square footage as needed) at a monthly rental rate
equal to one-twelfth of the operating expenses (as defined therein) of the
Complex net of third party rental income paid to Manor Care by other tenants of
the Complex, less a pro rata portion of the operating expenses attributable to
the space occupied by Manor Care (initially approximately 29% of the Complex).
At the beginning of each fiscal year following the Distribution Date, Manor
Care's occupancy percentage will be redetermined. Operating expenses include all
of the costs associated with operating and maintaining the Complex including,
without limitation, supplies and materials used to maintain the Complex, wages
and salaries of employees who operate the Complex, insurance for the Complex,
costs of repairs and capital improvements to the Complex, the fees of the
property manager (which may be Manor Care), costs and expenses associated with
leasing space at the Complex and renovating space rented to tenants, costs of
environmental inspection, testing or cleanup, principal and interest payable on
indebtedness secured by mortgages against the Complex, or any portion thereof,
and charges for utilities, taxes and facilities services. On or prior to the
Distribution Date, the Company and Manor Care will also enter into (i) a
sublease agreement with respect to certain office space in Gaithersburg,
Maryland pursuant to which the Company will be obligated to rent from Manor
Care, on terms similar to the Silver Spring Lease, certain additional space as
such space becomes available during the 30 month period following the
Distribution Date and (ii) a sublease agreement with respect to the Comfort Inn
N.W., Pikesville, Maryland, pursuant to which the Company will
15
<PAGE> 20
sublease the property from Manor Care on the same terms and conditions that
govern Manor Care's rights and interests under the lease relating to such
property.
OTHER AGREEMENTS
On or prior to the Distribution Date, the Company and Manor Care will enter
into certain other agreements that will, as of 12:00 midnight on the
Distribution Date, fix the respective responsibilities of Manor Care and the
Company regarding the following: the provision by Manor Care of certain
corporate services (including administrative, accounting, systems and, for a
fixed annual fee of $1.0 million, certain consulting services), the transfer to
the Company of certain intellectual property rights, the availability to the
Company of certain aircraft owned by Manor Care, the provision by Manor Care of
certain risk management services, the procurement by Manor Care of certain
products and supplies used in the Lodging Business, and other miscellaneous
matters. None of these agreements extends for a period greater than 30 months
from the Distribution Date and they are not, either alone or in the aggregate,
expected to materially affect the Company or its results of operations.
FINANCING
THE MANOR CARE LOAN AGREEMENT
It is expected that on or prior to the Distribution Date, the Company and a
subsidiary of Manor Care will enter into a loan agreement (the "Loan
Agreement"), which shall govern the repayment by the Company of an aggregate of
$225.7 million previously advanced to the Company by Manor Care. The Loan
Agreement will contain a number of covenants that will, among other things,
restrict the ability of the Company and its subsidiaries to make certain
investments, incur debt, change its line of business, dispose of assets, create
liens, enter into transactions with affiliates and otherwise restrict certain
corporate activities. The Loan Agreement will also restrict the Company's
ability to pay dividends. In addition, the Loan Agreement will contain, among
other financial covenants, requirements that the Company maintain specified
financial ratios, including minimum net worth, maximum leverage and minimum
interest coverage. Interest on the amount of the loan will be payable
semiannually at a rate of 9% per annum. The loan will mature on November 1, 1999
and may be prepaid in whole or in part, together with accrued interest, without
penalty, at the option of the Company. The Company will be required to prepay
the loan with the proceeds from the monetization of Company-owned hotels.
CREDIT FACILITY
The Company currently is negotiating a commitment from a bank lender
pursuant to which such lender, together with other financial institutions, will,
from and after the Distribution Date, provide the Company with a revolving
credit facility in an aggregate principal amount of $100.0 million (the "Credit
Facility"). The Credit Facility will have a maturity of three years, subject to
extension, at the request of the Company, for up to two additional periods of
one year each. Depending on the type of loan requested by the Company, interest
on the loans will accrue at a rate based on LIBOR, certificate of deposit rates,
prime rates or federal funds rates. A portion of the Credit Facility not in
excess of $25.0 million shall be available for the issuance of letters of
credit. Upon consummation of the Distribution, approximately $50.0 million will
be drawn by the Company and used to refinance an equivalent amount borrowed by
the Lodging Business under Manor Care's credit facility. The remaining
availability under the Credit Facility will be used for working capital and
general corporate purposes.
The Credit Facility will contain a number of covenants that will, among
other things, restrict the ability of the Company and its subsidiaries to make
certain investments, incur debt, change its line of business, dispose of assets,
create liens, enter into transactions with affiliates and otherwise restrict
certain corporate activities. In addition, the Credit Facility will contain,
among other financial covenants, requirements that the Company maintain
specified financial ratios, including minimum net worth, maximum leverage and
minimum interest coverage, which covenants may impact the ability of the Company
to pay dividends.
16
<PAGE> 21
CAPITALIZATION
The following table sets forth the unaudited combined capitalization of the
Company as of August 31, 1996. This data should be read in conjunction with the
Company's financial statements and the notes thereto that are included elsewhere
in this Information Statement.
<TABLE>
<CAPTION>
AUGUST 31, 1996
---------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
Debt (including current portion)
Mortgage loans and other long term debt.................... $ 69,405
Notes payable to Parent.................................... 225,723
--------
Total debt......................................... 295,128
Equity....................................................... 170,261
--------
Total capitalization............................... $ 465,389
========
</TABLE>
DIVIDEND POLICY
It is currently contemplated that following the Distribution, the Company
will not pay cash dividends on the Shares. The payment of dividends, if any, in
the future will be a business decision to be made at the discretion of the Board
of Directors of the Company from time to time based on the Company's earnings
and financial position and such other considerations as the Board of Directors
of the Company considers relevant. In addition, the Loan Agreement will restrict
the Company's ability to pay dividends and the Credit Facility will contain
certain financial covenants which may impact the ability of the Company to pay
dividends. See "Financing."
17
<PAGE> 22
SELECTED HISTORICAL FINANCIAL DATA
The following selected combined financial data of the Company and its
subsidiaries should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Combined
Financial Statements and related notes included elsewhere herein. The income
statement and balance sheet data for the fiscal years ended May 31, 1993, 1994,
1995 and 1996 are derived from the audited combined financial statements of the
Company. The balance sheet data at August 31, 1995 and August 31, 1996, the
income statement data for the three months ended August 31, 1995 and August 31,
1996 and the data for the fiscal year ended May 31, 1992 are derived from
unaudited combined financial statements of the Company that, in the opinion of
the Company, reflect all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the information set forth below. The
interim results for the three months ended August 31, 1996 are not necessarily
indicative of results for the entire 1997 fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MAY 31, AUGUST 31,
----------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1995 1996
----------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues
Franchise.............................. $ 125,347 $137,346 $165,581 $188,021 $219,164 $ 60,299 $ 69,727
Hotel operations....................... 34,878 41,361 74,183 114,514 155,709 39,081 49,653
-------- -------- -------- -------- -------- -------- --------
Total revenues................... 160,225 178,707 239,764 302,535 374,873 99,380 119,380
-------- -------- -------- -------- -------- -------- --------
Operating expenses
Franchise marketing.................... 33,772 37,567 45,373 45,510 49,658 13,707 15,291
Franchise reservations................. 23,261 22,941 26,685 28,738 35,677 9,164 11,876
Hotel operations....................... 20,432 35,255 60,062 84,711 106,120 25,170 31,153
Selling, general and administrative
expenses............................. 45,949 44,745 57,081 69,676 83,267 20,935 22,356
Depreciation and amortization.......... 12,924 14,605 17,521 21,841 26,026 6,040 6,940
Provision for asset impairment and
restructuring........................ -- -- -- -- 33,335(a) -- --
-------- -------- -------- -------- -------- -------- --------
Total operating expenses......... 136,338 155,113 206,722 250,476 334,083 75,016 87,616
-------- -------- -------- -------- -------- -------- --------
Income before other expenses and income
taxes.................................. 23,887 23,594 33,042 52,059 40,790 24,364 31,764
-------- -------- -------- -------- -------- -------- --------
Other expenses
Interest expense on notes payable to
Parent............................... -- 7,083 10,665 15,492 19,673 4,612 5,079
Minority interest...................... 1,004 900 1,476 2,200 1,532 383 --
Other interest and other
expenses, net........................ 1,441 2,177 3,223 4,412 3,727 797 788
-------- -------- -------- -------- -------- -------- --------
Total other expenses............. 2,445 10,160 15,364 22,104 24,932 5,792 5,867
-------- -------- -------- -------- -------- -------- --------
Income before income taxes............... 21,442 13,434 17,678 29,955 15,858 18,572 25,897
Income taxes............................. 8,660 5,780 8,019 13,144 7,400 7,658 10,500
-------- -------- -------- -------- -------- -------- --------
Net income............................... $ 12,782 $ 7,654 $ 9,659 $ 16,811 $ 8,458 $ 10,914 $ 15,397
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA
Total assets............................. $ 194,078 $250,371 $303,158 $391,475 $491,304 $410,660 $512,206
Notes payable to Parent.................. -- $ 78,700 $147,061 $198,522 $225,723 $206,898 $225,723
Total debt............................... $ 20,902 $129,670 $200,875 $251,191 $294,861 $257,868 $295,128
Total liabilities........................ $ 50,313 $159,624 $247,950 $325,646 $343,745 $295,192 $341,945
Total investments and advances from
Parent................................. $ 143,765 $ 90,747 $ 55,208 $ 65,829 $147,559 $115,468 $170,261
</TABLE>
- ---------------
(a) The Company recorded a charge of $28.1 million for impairment of long-lived
assets associated primarily with the Company's European operations.
Additionally, the Company recorded a charge of $5.2 million related to
certain restructuring costs, including severance and employee benefit plan
restructuring costs, directly associated with the Distribution.
18
<PAGE> 23
PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined statements of income of the
Company give effect to (i) the Distribution and related transactions and (ii)
the acquisition by the Company of an aggregate of 16 hotels during fiscal year
1996 (the "1996 Acquisitions"), as if the Distribution and related transactions
and the 1996 Acquisitions had occurred on June 1, 1995. The pro forma financial
data are provided for information purposes only and do not purport to be
indicative of the results that actually would have been obtained if the
Distribution and related transactions and the 1996 Acquisitions had been
effected on the dates indicated or of those results that may be obtained in the
future. The pro forma combined statements of income are based on preliminary
estimates. The actual recording of the transactions will be based on actual
costs. Accordingly, the actual recording of the Distribution and related
transactions and the 1996 Acquisitions can be expected to differ from these pro
forma financial statements. No pro forma balance sheet is presented as there
were no pro forma adjustments to the historical balance sheet.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED MAY 31, 1996
<TABLE>
<CAPTION>
DISTRIBUTION ACQUISITIONS
HISTORICAL ADJUSTMENTS(A) ADJUSTMENTS(B) PRO FORMA
---------- -------------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues
Franchise.................................. $ 219,164 $ 219,164
Hotel operations........................... 155,709 $ 12,946 168,655
-------- -------- --------
Total revenues..................... 374,873 12,946 387,819
-------- -------- --------
Operating expenses
Franchise marketing........................ 49,658 49,658
Franchise reservations..................... 35,677 35,677
Hotel operations........................... 106,120 9,676 115,796
Selling, general and administrative
expenses................................ 83,267 $ 4,100(c)
90(d) 324 87,781
Depreciation and amortization.............. 26,026 1,688 27,714
Provision for asset impairment and
restructuring........................... 33,335 33,335
-------- ------- -------- --------
Total operating expenses........... 334,083 4,190 11,688 349,961
-------- ------- -------- --------
Income before other expenses and income
taxes...................................... 40,790 (4,190) 1,258 37,858
-------- ------- -------- --------
Other expenses
Interest expense on notes payable to
Parent.................................. 19,673 666 20,339
Minority interest.......................... 1,532 (1,532)(e) --
Other interest and other expenses.......... 3,727 3,727
-------- ------- -------- --------
Total other expenses............... 24,932 (1,532) 666 24,066
-------- ------- -------- --------
Income before income taxes................... 15,858 (2,658) 592 13,792
Income taxes................................. 7,400 (1,249)(f) 278 6,429
-------- ------- -------- --------
Net income................................... $ 8,458 $ (1,409) $ 314 $ 7,363
======== ======= ======== ========
Net income per share......................... $ 0.12(g)
========
</TABLE>
- ---------------
(a) Reflects the effect of the Distribution and related transactions.
(b) Reflects the incremental impact of the 1996 Acquisitions.
(c) Reflects the net additional costs associated with staffing of accounting,
finance, cash management, risk management, human resources and legal
personnel, directors' costs, incremental rental costs and the payment of
certain consulting fees to Manor Care.
(d) Reflects the estimated annual cost of the guarantee fee to be paid to Manor
Care.
(e) Reflects the elimination of minority interest associated with the purchase
of minority equity.
(f) Reflects tax benefits at the Company's effective tax rate of 47% related to
deduction of incremental costs per notes (c), (d) and (e).
(g) Pro forma income per share is computed by dividing pro forma net income by
the pro forma weighted average number of outstanding common shares,
aggregating 62.6 million in fiscal year 1996. The pro forma weighted average
number of outstanding common shares is based on Manor Care's weighted
average number of outstanding common shares at May 31, 1996.
19
<PAGE> 24
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
DISTRIBUTION
HISTORICAL ADJUSTMENTS(A) PRO FORMA
---------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues
Franchise............................................... $ 69,727 $ 69,727
Hotel operations........................................ 49,653 49,653
-------- --------
Total revenues.................................. 119,380 119,380
-------- --------
Operating expenses
Franchise marketing..................................... 15,291 15,291
Franchise reservations.................................. 11,876 11,876
Hotel operations........................................ 31,153 31,153
Selling, general and administrative expenses............ 22,356 $ 23(b) 22,379
Depreciation and amortization........................... 6,940 6,940
-------- ------- --------
Total operating expenses........................ 87,616 23 87,639
-------- ------- --------
Income before other expenses and income taxes............. 31,764 (23) 31,741
-------- ------- --------
Other expenses
Interest expense on notes payable to Parent............. 5,079 5,079
Other interest and other expenses....................... 788 788
-------- ------- --------
Total other expenses............................ 5,867 -- 5,867
-------- ------- --------
Income before income taxes................................ 25,897 (23) 25,874
Income taxes.............................................. 10,500 (9)(c) 10,491
-------- ------- --------
Net income................................................ $ 15,397 $ (14) $ 15,383
======== ======= ========
Net income per share...................................... $ 0.24(d)
========
</TABLE>
- ---------------
(a) Reflects the effect of the Distribution and related transactions.
(b) Reflects one quarter of the estimated annual cost of the guarantee fee to be
paid to Manor Care.
(c) Reflects tax benefits at the Company's effective tax rate of 41% related to
deduction of incremental costs per note (b).
(d) Pro forma income per share is computed by dividing pro forma net income by
the pro forma weighted average number of outstanding common shares,
aggregating 63.0 million in the three months ended August 31, 1996. The pro
forma weighted average number of outstanding common shares is based on Manor
Care's weighted average number of outstanding common shares at August 31,
1996.
20
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On March 7, 1996, Manor Care announced the Distribution and, on September
30, 1996, the Board of Directors of Manor Care declared a dividend to effect the
Distribution and set the Record Date and the Distribution Date. The Distribution
will separate the lodging and healthcare businesses of Manor Care into two
public corporations. As a result of the announced Distribution, Manor Care's
historical financial statements have been restated to report the Lodging
Business as discontinued operations. Included herein are the historical results
of operations of the Lodging Business for the years ended May 31, 1996, 1995,
and 1994 and the quarters ended August 31, 1996 and 1995, as if it had been a
separate entity for all periods presented. Upon completion of the Distribution,
the operations of the Company will consist principally of the hotel franchise
operations and the owned and managed hotel operations formerly conducted by
Manor Care directly or through Manor Care's subsidiaries. The Distribution will
result in the division of certain of Manor Care's existing corporate functions
between the two resulting entities. Historically, Manor Care allocated to its
operating units all corporate overhead expenses specifically identified with
such units' operations. These allocations will be discontinued after the
Distribution and responsibility for these support functions will be assumed by
the Company. The Company will establish its own accounting, finance, cash
management, risk management, human resources and legal departments separate from
Manor Care's. Accordingly, selling, general and administrative expenses in the
historical financial statements may not be indicative of such costs in the
future. In addition, the Lodging Business' historical operating results do not
reflect any estimated incremental costs expected to be incurred by the Company
to support its operations as a stand-alone entity after the Distribution. See
"Pro Forma Financial Data."
The principal factors that affect the Company's results are: growth in the
number of hotels; occupancies and room rates achieved by the Company's brands;
the number and relative mix of owned, managed and franchised hotels; and the
Company's ability to manage costs. The number of rooms at franchised properties
and occupancies and room rates significantly affect the Company's results
because franchise royalty fees are based upon room revenues at franchised
hotels. Increases in franchise and management fee revenues have a
disproportionate impact on the Company's operating margin due to the lower
incremental costs associated with these revenues.
COMPARISON OF RESULTS FOR THE QUARTERS ENDING AUGUST 31, 1995 AND 1996
Net income was $15.4 million for the quarter ended August 31, 1996, an
increase of $4.5 million, or 41.1%, compared to the same period of the prior
fiscal year.
Revenues for the quarter ended August 31, 1996 increased $20.0 million, or
20.1%, to $119.4 million compared to the quarter ended August 31, 1995.
Operating expenses for the quarter ended August 31, 1996 increased $12.6
million, or 16.8%, to $87.6 million, resulting in a $7.4 million, or 30.4%,
increase in operating profits.
Franchise revenues for the quarter ended August 31, 1996 increased $9.4
million, or 15.6%, when compared to the same period of the prior fiscal year.
Franchise revenues include base royalty fees, marketing fund assessments, fees
charged for utilization of the Company's centralized hotel reservation system
and product sales made to franchisees through the Company's group purchasing
program for franchisees. Except for product sales, fees and assessments are
generally calculated based on a percentage of the franchise hotels total
revenues and reservation call volume. The increase in franchise revenues was
largely the result of fees generated from franchisees and product sales to
franchisees. The increase in franchise fees was attributable to increases in
domestic royalties of $2.8 million, reservation fees of $630,000, and marketing
fees of $580,000. Revenues from franchise hotels increased as a result of
increases in the number of franchise hotels, increased average daily room rates
at franchise hotels and average actual royalty rates charged to franchisees. The
Company's domestic franchise hotels increased by 231 properties, or 9.8%, to
2,582 properties at August 31, 1996, from 2,351 properties at August 31, 1995.
Average daily room rates of domestic franchise hotels increased by approximately
4.6% for the quarter ended August 31, 1996 compared to the same period of the
prior fiscal year. Increased rates at the domestic franchise hotels resulted
from both general strengthening in
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<PAGE> 26
lodging industry fundamentals and national and local marketing efforts provided
by the Company to franchisees. Average occupancies at domestic franchise hotels
were 75.0% and 76.3% for the quarters ended August 31, 1996 and August 31, 1995,
respectively. In addition, the average actual royalty rate of domestic franchise
hotels increased to 3.5% for the quarter ended August 31, 1996 compared to 3.4%
for the same period of the prior fiscal year. Franchise revenues increased $3.4
million as a result of additional sales made to franchisees through the
Company's group purchasing program. The remaining portion of the increase for
the period relates to European operations and other international revenues.
Revenues from hotel operations for the quarter ended August 31, 1996
increased $10.6 million, or 27.1%, compared to the same period of the prior
fiscal year. The increase in revenue was principally achieved through the
acquisition and development of 17 operating hotels containing over 2,102 rooms
since August 31, 1995. Additionally, revenue improvements resulted from
increases in overall occupancies and in overall average daily room rates.
Overall average occupancies increased to 76.0% for the quarter ended August 31,
1996 compared to 74.2% for the quarter ended August 31, 1995, while overall
average daily room rates increased by 4.3% for the quarter ended August 31, 1995
compared to the same period of the prior fiscal year. These occupancy and rate
increases were the result of marketing efforts in both new and existing markets
as well as a general strengthening of lodging industry fundamentals. An increase
of $1.0 million in food and beverage sales also contributed to the revenue
growth.
Franchise marketing expenses increased 11.6% for the quarter ended August
31, 1996 compared to the same period of the prior fiscal year, principally due
to general increases in advertising costs. These increases were offset by
corresponding increases in marketing fees charged to the Company's franchise
hotels.
Franchise reservation expenses increased 29.6% for the quarter ended August
31, 1996 compared to the same period of the prior fiscal year. The increase in
reservation expenses relates primarily to growth in labor costs stemming from
increased services provided to the Company's franchisees and their customers.
Call volume related to reservation sales for franchise hotels was 6.6 million
and 6.3 million for the quarters ended August 31, 1996 and 1995, respectively.
The increase in expenses was partially offset by a 5.0% increase in reservation
fees charged to the Company's franchise hotels.
Hotel operating expenses increased 23.8% for the quarter ended August 31,
1996 compared to the quarter ended August 31, 1995, principally due to the
addition of hotels. Approximately 12.2% of the increase is due to increased food
and beverage costs. Hotel operating margins increased to 37.3% for the quarter
ended August 31, 1996 from 35.6% for the quarter ended August 31, 1995, as
marketing efforts enhanced occupancies in the newly renovated and repositioned
acquired hotels.
Selling, general and administrative expenses increased $1.4 million, or
6.8%, for the quarter ended August 31, 1996 compared to the same period last
year. As a percent of total revenues, selling, general and administrative
expenses decreased from 21.1% for the quarter ended August 31, 1995 to 18.7% for
the quarter ended August 31, 1996. Selling, general and administrative expenses
include the cost of product sales to franchisees made through the Company's
group purchasing program for franchisees. Increases in selling, general and
administrative expenses resulted in part from higher cost of sales on increased
product sales volume. Cost of product sales were $7.5 million and $4.3 million
for the quarters ended August 31, 1996 and 1995, respectively. Additional
general and administrative costs associated with the Company's acquired domestic
properties also contributed to the increase. Finally, selling, general and
administrative expenses increased as a result of costs associated with increased
corporate staffing in contemplation of the Distribution.
Depreciation and amortization expense increased 14.9% for the quarter ended
August 31, 1996 compared to the same period last year. Increases were
principally due to acquisition, development and renovation of the 16 hotels
acquired from September 1, 1994 through August 31, 1995. Renovations for hotels
were generally completed in twelve months, at which time they became subject to
full depreciation. Depreciation expense is charged from the date renovation is
completed.
Interest expense on notes payable to Parent increased $0.5 million, or
10.1%, for the quarter ended August 31, 1996 compared to the same period of the
prior fiscal year.
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<PAGE> 27
COMPARISON OF FISCAL YEAR RESULTS
Net income was $8.5 million for fiscal year 1996, a decrease of $8.4
million, or 49.7%, compared to fiscal year 1995. In fiscal year 1995, net income
increased $7.2 million, or 74.0%, compared to fiscal year 1994. Net income in
fiscal year 1996 includes a charge of $33.3 million relating to asset impairment
and restructuring charges.
Revenues increased $72.3 million, or 23.9%, to $374.9 million in fiscal
year 1996, while operating expenses increased $83.6 million, or 33.4%, to $334.1
million, resulting in an $11.3 million, or 21.7%, decrease in operating profits.
This compares to an increase of $62.8 million, or 26.2%, in revenues for fiscal
year 1995 and an increase of $43.8 million, or 21.2%, in expenses for fiscal
year 1995.
The Company's franchise revenues for fiscal years 1996, 1995 and 1994
increased $31.1 million, or 16.6%, $22.4 million, or 13.6%, and $28.2 million,
or 20.5%, respectively. Franchise revenues include base royalty fees, marketing
fund assessments, fees charged for utilization of the Company's centralized
hotel reservation system and product sales made to franchisees through the
Company's group purchasing program for franchisees. Except for product sales,
fees and assessments are generally calculated based on a percentage of the
franchised hotels total revenues and reservation call volume. The increases in
franchise revenues were principally the result of fees generated from
franchisees and product sales to franchisees. In fiscal year 1996, increases in
franchise fees were primarily attributable to increases in domestic royalties of
$10.6 million, increases in reservation fees of $7.5 million and increases in
marketing fees of $4.5 million. In fiscal year 1995, increases in franchise fees
were primarily attributable to increases in domestic royalties of $9.1 million,
reservation fees of $3.0 million and marketing fees of $1.1 million. In fiscal
year 1994, increases in franchise fees were primarily attributable to increases
in domestic royalties of $6.3 million, reservation fees of $4.6 million and
marketing fees of $6.3 million. Revenues at franchise hotels increased as a
result of increased average daily room rates and average actual royalty rates.
Average daily room rates of domestic franchise hotels increased by approximately
5.0% for fiscal year 1996 and 3.3% for fiscal year 1995. Average actual royalty
rates of domestic franchise hotels were 3.5%, 3.2% and 3.1% in fiscal 1996, 1995
and 1994, respectively. Increased daily room rates of the domestic franchise
hotels resulted from both general strengthening in lodging industry fundamentals
and national and local marketing efforts provided by the Company to franchisees.
Average occupancies remained constant at 63.8% in fiscal year 1996 and 1995. In
fiscal year 1994, average occupancies were 62.2%. Franchise revenues increased
$7.2 million, $2.1 million and $5.1 million in fiscal years 1996, 1995 and 1994,
respectively, as a result of sales made to franchisees through the Company's
group purchasing program. The remaining portion of the increase for each fiscal
year relates to European operations and other international revenues.
The Company's hotel operations revenues for fiscal years 1996, 1995 and
1994 increased $41.2 million, or 36.0%, $40.3 million, or 54.4%, and $32.8
million, or 79.2%, respectively. The increases in revenue were principally the
result of additional room capacity achieved through hotel acquisitions completed
during fiscal years 1993 through 1996. During this period, the Company purchased
a total of 52 hotels containing over 7,485 rooms. Overall average occupancies
were 64.8% in fiscal year 1996 compared to 64.1% in fiscal year 1995 and 60.4%
in fiscal year 1994. Overall average daily room rates increased 8.0% from fiscal
year 1995 to fiscal year 1996 and 5.0% from fiscal year 1994 to fiscal year
1995. These occupancy and rate increases were the result of marketing efforts in
both new and existing markets as well as a general strengthening of lodging
industry fundamentals. Increases in food and beverage sales of $3.2 million and
$3.1 million in fiscal years 1996 and 1995, respectively, also contributed to
revenue growth.
Franchise marketing expenses increased 9.1% from fiscal year 1995 to fiscal
year 1996 and remained flat from fiscal year 1994 to fiscal year 1995. These
increases in expenses were offset by corresponding increases in marketing fees
charged to the Company's franchise hotels.
Franchise reservation expenses increased 24.2% and 7.7% in fiscal years
1996 and 1995 from the prior fiscal years, respectively. Increases in
reservation expenses relate primarily to growth in labor costs (approximately
36% of the increase) and systems maintenance costs (approximately 36% of the
increase) stemming from increased reservation services provided to the Company's
franchisees and their customers. Call volume related to reservation sales for
franchised hotels was 18.1 million, 16.6 million and 15.0 million for
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<PAGE> 28
fiscal years 1996, 1995 and 1994, respectively. These increases in expenses were
offset by corresponding increases in reservation fees charged to the Company's
franchise hotels.
Hotel operating expenses increased 25.3% and 41.0% for fiscal years 1996
and 1995, respectively, of which approximately 3.0%, and 4.0%, respectively,
related to food and beverage costs. Increases in hotel operating expenses
resulted, principally from the addition of hotels. Hotel operating margins
increased to 31.9% in fiscal year 1996 from 26.0% in fiscal year 1995 and 19% in
fiscal year 1994, as marketing efforts enhanced occupancies in the newly
renovated and repositioned acquired hotels.
Selling, general and administrative expenses increased $13.6 million, or
19.5%, for fiscal year 1996 and $12.6 million, or 22.1%, for fiscal year 1995
compared to the prior years. As a percent of total revenues, selling, general
and administrative expenses declined to 22.2% in fiscal year 1996 from 23.0% in
fiscal year 1995 and 23.8% in fiscal year 1994. Selling, general and
administrative expenses include the cost of product sales to franchisees made
through the Company's group purchasing program for franchisees. Increases in
selling, general and administrative expenses principally resulted from higher
cost of sales on increased product sales volume. Cost of product sales was $20.7
million, $13.9 million and $12.0 million for fiscal years 1996, 1995 and 1994,
respectively. The remaining increases in selling, general and administrative
expenses were due primarily to additional general and administrative costs
associated with the Company's acquired domestic properties and growth in the
Company's European lodging business. Management expects that, after the
Distribution, selling, general and administrative expenses will increase due to
additional costs associated with staffing of accounting, finance, cash
management, risk management, human resources and legal personnel, directors'
costs, incremental rental costs and the payment of certain consulting fees to
Manor Care. Management currently estimates a net increase of approximately $4.1
million per year.
In fiscal year 1996, the Company recorded a charge against earnings of
$33.3 million relating to impairment of certain long-lived assets and
restructuring costs. The most significant components of the charge related to
impairment of assets associated with the Company's European operations and
certain restructuring costs, including severance and employee benefit plan
restructuring costs, directly associated with the Distribution. During fiscal
year 1996, in connection with the Company's equity investment in Friendly
Hotels, PLC, the Company restructured its European operations to focus more
specifically on selected geographic markets. The Company performed a review of
its European operations and determined that certain assets associated with these
operations were impaired. These assets relate primarily to European properties
opened or acquired in fiscal years 1993 and 1994. The Company's experience shows
that newly opened or acquired properties require up to three years to reach
stabilized operating levels. Operating results at the affected properties have
not improved as expected over the three year period. The amount of the
impairment charge was measured in accordance with the Company's policy. See the
Combined Financial Statements and related notes included elsewhere herein.
Depreciation and amortization expense increased 19.2% in fiscal year 1996
to $26.0 million. In fiscal year 1995, depreciation and amortization expense
increased 24.7%. Increases were due to acquisitions and renovation of the 52
hotels acquired from fiscal years 1993 through 1996.
Interest expense on notes payable to Parent increased 27.0% in fiscal year
1996 and 45.3% in fiscal year 1995. Other interest expense and other expenses
decreased 15.5% in fiscal year 1996 and increased 36.9% in fiscal year 1995. The
decrease in other interest expense in fiscal year 1996 related to the payoff of
a third party financed mortgage on a hotel property, as well as regularly
scheduled principal reductions on other third party financing. The increases
from fiscal year 1994 to fiscal year 1995 were principally due to borrowings to
finance the acquisition of the 36 acquired hotels and the acquisition of the
Resthotel Primevere hotel chain. The majority of Resthotel Primevere's
operations are franchise related and located within France.
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 1996 and May 31, 1996, Notes payable to Parent by the
Company totaling $225.7 million were outstanding. The notes are due three years
from the Distribution Date. Interest is charged at an annual rate of 9% on the
indebtedness. The notes payable to Parent are expected to be repaid with the
proceeds from the planned monetization of the Company's owned hotels or third
party financing. Historically,
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<PAGE> 29
all cash received by the Company has been deposited in or combined with Manor
Care's corporate funds as part of Manor Care's cash management system. Following
the Distribution, the Company will maintain its own cash balances and will
implement an internal cash management system. In addition, the Company expects
to have access to a revolving credit facility and is currently negotiating the
terms thereof with potential bank lenders. See "Financing -- Credit Facility."
Management believes cash flows from operations, third party financing sources
and the proceeds from the planned monetization of the Company's owned hotels
will be adequate to support on-going operations and meet debt service
requirements for the foreseeable future. If the Company is unable to
successfully implement its monetization strategy with respect to Company-owned
hotels, the Company will need to secure additional sources of financing to repay
the Loan Agreement on November 1, 1999. Net cash provided by operating
activities for the quarter ended August 31, 1996 was $14.4 million, compared to
$1.4 million used in operating activities during the same period of the prior
fiscal year. Improved cash flow resulted primarily from increased net income
during the first quarter of fiscal year 1997 and the use of cash to
significantly reduce other liabilities during the first quarter of fiscal year
1996. Net cash provided by operating activities for fiscal year 1996 was $54.7
million, an increase of 14.3% from the prior fiscal year. Net cash provided by
operating activities for fiscal year 1995 was $47.9 million, an increase of 7.5%
from the prior fiscal year.
The Company's working capital ratio at August 31, 1996 and May 31, 1996 was
1.0 and 0.8, respectively. The Company attempts to minimize its investment in
net current assets. Historically, the Company has been assured adequate
financing through Manor Care to meet seasonal fluctuations in working capital
requirements. Subsequent to the Distribution, the Company will utilize its
revolving credit facility to meet seasonal fluctuations in working capital
requirements.
Investment in property and equipment includes routine capital expenditures
for renovation and maintenance of the Company's owned hotels, as well as new
developments and enhancements of reservations and finance systems relating to
franchise operations. During the quarter ended August 31, 1996, Manor Care
transferred to the Company one property with a book value of $4.9 million.
During the fiscal year ended May 31, 1996, the Company purchased 16 operating
hotels for $49.6 million.
The Company plans capital expenditures for development of Sleep Inns and
MainStay Suites of $34.0 million and $68.6 million in fiscal years 1997 and
1998, respectively. These amounts include expected capital expenditures for the
construction of 10 Sleep Inns and 12 MainStay Suites over the next two fiscal
years. Planned capital expenditures for routine renovation and maintenance of
existing properties are $14.7 million and $16.3 million for fiscal years 1997
and 1998, respectively. Additionally, the Company plans capital expenditures of
approximately $8.0 million over the next two fiscal years for significant system
enhancements. Future capital expenditures will be financed with cash flow from
operations, proceeds from the monetization of the Company's owned hotels or
third party financing.
Long term debt and notes payable to Parent totaled $294.4 million at August
31, 1996 compared to $294.2 million at May 31, 1996. Notes payable to Parent
totaling $225.7 million are to be repaid over a three year period from the
Distribution Date.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company is required to adopt SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," no
later than fiscal year 1997. The Company's current policy is to regularly review
the recoverability of the net carrying value of its long-lived assets and make
adjustments accordingly. The adoption of SFAS No. 121 is not expected to have a
material impact on the Company's financial statements.
The Company is required to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation," no later than fiscal year 1997. Management expects to adopt SFAS
No. 123 utilizing the method which provides for disclosure of the impact of
stock-based compensation grants.
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<PAGE> 30
BUSINESS
GENERAL
The Company is a leading international hotel franchisor and a major owner
and manager of hotel properties. Both franchise and owned and managed hotel
properties principally operate under one of the Company's brand names: Comfort,
Quality, Clarion, Sleep, Rodeway, and Econo Lodge. In addition, the Company
recently introduced a new brand, MainStay Suites. For the nine months ended May
31, 1996, hotel franchising contributed 58.5% of the Company's revenues and
73.0% of the Company's gross profits, while hotel ownership and management
contributed the remaining 41.5% of revenues and 27.0% of gross profits. The
Company's franchise operations and owned and managed hotel operations have
experienced significant growth in revenues and profitability over the last few
years. The Company's compound annual growth rate since fiscal year 1991 was
20.1% for revenues and 21.8% for net income before unusual items. For the fiscal
year ended May 31, 1996 total revenues and net income were $374.9 million and
$8.5 million, respectively. Excluding unusual items net income for fiscal year
1996 was $28.6 million. For the quarter ended August 31, 1996, total revenues
and net income were $119.4 million and $15.4 million, respectively.
FRANCHISE OPERATIONS The Company is one of the world's largest franchisors
of hotels with 3,052 properties open and operating in 30 countries at May 31,
1996. At May 31, 1996, another 716 franchise properties with a total of 63,785
rooms were under development. As a franchisor, the Company licences hotel
operators to use the Company's brand names and provides to these hotel operators
products and services designed to increase their revenues and profitability. Key
products and services provided include nationally recognized marketing and
advertising programs, access to a reservation system that delivers business to
the franchisees' hotels, access to innovative products and services developed by
the Company and other support services such as training programs, purchasing
discounts, operating manuals, quality standards and inspections. In return for
the use of the Company's brand names and access to the Company's products and
services, franchisees pay to the Company fees that are generally based on a
percentage of the franchise hotels' gross room revenues.
OWNED AND MANAGED OPERATIONS In addition to acting as franchisor, the
Company owns and manages hotels. At May 31, 1996, the Company owned and managed,
under its six principal brand names, 79 hotels in 25 states, as well as in
Germany, France and England. To take advantage of a recovering lodging industry,
the Company over the past few years has pursued a strategy of acquiring domestic
hotel properties at prices below their replacement cost and increasing their
value through the investment of capital to improve the physical site and the
installation of professional management and marketing teams to operate the
renovated properties. Since June 1992, the Company has spent approximately
$242.7 million to buy and renovate 52 hotel properties. The Company's strategy
for its owned and managed operations is to monetize its capital investment in
Company-owned hotels at values that reflect their improved operating
performance. The Company is exploring a variety of transactions including, among
others, asset securitization, sale/leasebacks, joint ventures with third
parties, debt financing and asset divestitures. The Company intends to retain
management and franchise agreements relating to these properties.
THE LODGING INDUSTRY
As of June 1996, there are approximately 3.3 million hotel rooms in the
United States in hotels/motels containing twenty or more rooms. Of those rooms,
approximately 1.2 million rooms are not affiliated with a national or regional
brand, while the remaining approximately 2.1 million rooms are affiliated with a
brand either through franchise or the ownership/management of a national or
regional chain.
During the late 1980s, the industry added approximately 500,000 hotel rooms
to its inventory due largely to a favorable hotel lending environment, the
ability of hotel operators to regularly increase room rates and the
deductibility of passive tax losses, which encouraged hotel development. As a
result, the lodging industry saw an oversupply of rooms and a decrease in
industry performance.
The lodging industry in recent years has demonstrated a recovery, based on
year-to-year increases in room revenues, occupancy rates, revenue per available
room ("RevPAR"), and lodging industry profitability. RevPAR is calculated by
multiplying the percentage of occupied rooms by the average daily room rate
26
<PAGE> 31
charged. Since 1993, the lodging industry has been able to increase its average
daily rate ("ADR") at a pace faster than the increase in the Consumer Price
Index ("CPI"), a common measure of inflation published by the US Department of
Labor. Smith Travel Research's estimates indicate that occupancy rates in 1996
will increase to 66.4% from 65.5% in 1995, in part because of increases in room
demand attributable to the 1996 Summer Olympics, the 1996 national political
campaigns and conventions, and a continued improvement in the national economy.
The following chart demonstrates the recent trends:
THE US LODGING INDUSTRY'S GROWTH TRENDS SINCE 1991
<TABLE>
<CAPTION>
INCREASE IN AVERAGE
ROOM DAILY INCREASE INCREASE REVENUE PER
REVENUE (ROOM) IN ADR IN CPI AVAILABLE NEW
VERSUS OCCUPANCY RATES VERSUS VERSUS ROOM PROFITS ROOMS
YEAR PRIOR YEAR RATES (ADR) PRIOR YEAR PRIOR YEAR (REVPAR) (IN BILLIONS) ADDED
- -------------- ----------- --------- ------- ---------- ---------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992.......... N/A 62.1% $59.65 N/A 2.9% $ 37.04 break-even 34,000
1993.......... 6.3% 63.1% $61.30 2.8% 2.7% $ 38.68 $2.4 38,000
1994.......... 8.6% 64.7% $64.24 4.8% 2.7% $ 41.56 $5.5 44,000
1995.......... 7.9% 65.5% $67.34 4.8% 2.9% $ 44.11 $8.5 56,000
1996*......... N/A 66.4% $71.00 5.4% 2.9% $ 46.68 N/A 60,000 -
70,000
</TABLE>
- ---------------
Source: Smith Travel Research
* Estimated
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 there are three levels of service: full-service hotels (which offer
food and beverage services, meeting rooms, room service and similar guest
services); limited-service hotels (which offer amenities such as swimming pools,
continental breakfast, or similar services); and all-suites hotels (which
usually have limited public areas, but offer guests two rooms or one room with
distinct areas, and which may or may not offer food and beverage services).
The Company's Econo Lodge, Rodeway and Sleep brands compete primarily in
the limited-service economy market; the Company's Comfort and Quality brands
compete primarily in the limited-service middle-market; the Company's Clarion
brand competes primarily in the full-service upscale market; and the Company's
MainStay Suites brand will compete primarily in the all-suites middle-market.
New hotels opened in recent years typically have been limited service
hotels, as limited-service hotels are less costly to develop, enjoy higher gross
margins, and tend to have better access to financing. These hotels typically
operate in the economy and middle-market categories and are located in suburban
or highway locations. From 1993 to 1996, the average room count in new hotels
declined from 123 to 80, primarily because hotel developers found it difficult
to obtain financing of more than $3 million from their primary lending sources
(local banks and Small Business Administration guaranteed loan programs).
In recent years, operators of hotels not owned or managed by major lodging
companies have increasingly joined national hotel franchise chains as a means of
remaining competitive with hotels owned by or affiliated with national lodging
companies. Because hotels typically operate with high fixed costs, increases in
revenues generated by affiliation with a franchise lodging chain can improve a
hotel's financial performance. Of approximately 933 hotel properties that
changed their affiliation in 1995, 77% converted from independent status to
affiliation with a chain or converted from one chain to another, while only 23%
canceled or were required to cancel their chain affiliation. The share of US
hotel rooms affiliated with a chain was approximately 63% in 1995.
The shift to chain membership has been most pronounced among hotels in the
same categories as the Company, i.e., the economy and middle-market categories.
In 1995, 53% of all conversions to a chain from
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<PAGE> 32
independent status or from another chain were in the economy category, 37% were
in the middle-market category, and 10% were in the upscale category. Often by
affiliating with a middle-market or economy brand, a hotel operator can
reposition the hotel property in the price category best suited to its market.
The large franchise chains, including the Company, 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 fee and cost structure of the Company's franchise business provides
significant opportunities for the Company to increase profits by increasing the
number of franchised properties. Hotel franchisors such as the Company derive
substantially all of their revenue from annual franchise fees. Franchise fees
are comprised of an initial fee and ongoing royalty and marketing and
reservation fees charged by the franchisor as a percentage of the franchisee's
gross room revenues. The royalty portion of the franchise fee is intended to
cover the operating expenses of the franchisor, such as expenses incurred in
quality assurance, administrative support and other franchise services and to
provide the franchisor with operating profits. The marketing and reservation
portion of the franchise fee is intended to reimburse the franchisor for the
expenses associated with providing such franchise services as the central
reservation system and national marketing and media advertising.
Much of the variable costs associated with the Company's activities are
reimbursed by the franchisees through the marketing and reservation fees. The
Company's existing base of franchises more than covers the fixed cost of the
business at its current level so that the variable costs of overhead -- in such
areas as quality assurance, franchise services and administration, finance and
legal -- represent the bulk of incremental costs associated with the addition of
franchisees. Because the variable overhead costs associated with incremental
franchise system growth are substantially less than the incremental royalty
fees, the Company is able to capture a significant portion of these incremental
royalty fees as operating profit.
STRATEGY
The Company's franchise strategy is based on expanding its franchise system
by providing hotel operators with products and services that increase their
revenues and profitability, capitalizing on its franchising and marketing
expertise through joint marketing programs with preferred vendors and engaging
in strategic acquisitions in the lodging, travel-related and other franchise
industries. Key components of the Company's franchise strategy include:
- GROWTH OF THE COMPANY'S DOMESTIC FRANCHISE SYSTEM. The Company's
existing franchisees form a pool of potential buyers and builders of new
hotels that may affiliate with one of the Company's brands. Approximately
50% of new franchises sold by the Company in fiscal year 1996 were sold
to existing franchisees. The Company believes that its focus on improving
the revenues and profitability of its franchisees will allow it to retain
these current franchisees and attract new franchisees. During the ten
fiscal years ended May 31, 1996, the number of properties in the
Company's domestic franchise system increased through acquisition and
internal growth to 2,495 properties with 214,613 rooms, from 599
properties with 69,187 rooms. The Company believes that its operating
structure and the services it provides to its franchisees will enable the
Company to attract new hotels to its franchise system. The following are
the principal components of the Company's franchising system and
services:
RESERVATION SYSTEM -- The Company maintains a reservations system that
delivers customers to franchisees and produces incremental revenues for
both franchisees and the Company.
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<PAGE> 33
ADVERTISING CAMPAIGNS -- The Company promotes its brand awareness
through nationally recognized advertising campaigns including the long
running "celebrity in a suitcase" campaign.
PRODUCTS AND SERVICES -- The Company provides its franchisees with
access to the Company's products and services. Many of these products
and services are tested and developed by the Company in its owned
hotels before being adapted to the franchise system. For example, the
Company's franchised hotels may offer customized rooms designed to meet
the needs of niche markets, such as senior citizens and business
travelers. The Company also offers its franchisees innovative food
delivery concepts such as Choice Picks food court and K-Minus(SM)
Banqueting Kitchens.
APPROACH TO FRANCHISING -- The Company's franchising system structure
and internal performance measures have been developed to appeal to
current and potential franchisees.
-- Territorial Protection. Competition from same-brand franchisees
within a specific geographic area is limited in order to protect the
investments of current and potential franchisees.
-- Brand Segmentation. The Company is able to meet the needs of
current and potential franchisees across a wide range of market
segments by maintaining an array of distinct brands, each with its
own marketing and operating strategy. In addition, the Company plans
to continue to develop new brands to target high-growth segments of
the lodging industry. Brand segmentation enables the Company to
franchise multiple properties -- each under a different franchise
brand -- in a given geographic area.
-- RevPAR Focus. Revenue per available room per day, or RevPAR, is
calculated by multiplying the percentage of occupied rooms by the
average daily room rate charged. The Company believes that
franchisees view RevPAR as the single most important measure of the
operational success of their properties. Accordingly, the Company
has adopted overall systemwide RevPAR improvement as the key
internal measure of performance for the Company and its management
in order to better align the goals and objectives of the Company
with those of its customers.
- INCREASES IN AVERAGE ACTUAL ROYALTY RATES. The Company's average actual
royalty rate is determined by analyzing the revenues and royalty rates of
individual properties. Each property's royalty rates vary based upon the
brand and the age of the contract (with newer contracts generally having
higher royalty rates). The Company has increased its average actual
royalty rate each year since 1992, and the Company expects to continue to
increase its average actual royalty rate as franchise agreements with low
royalty fees expire, terminate or are amended.
- STRATEGIC DEVELOPMENT OF THE INTERNATIONAL FRANCHISE SYSTEM. During the
ten fiscal years ended May 31, 1996, the number of properties in the
Company's international franchise system increased to 557 properties with
46,843 rooms, from 46 properties with 4,505 rooms. The Company
anticipates further development in its existing international markets in
order to increase the number of Choice hotels and to allow for more
efficient use of existing financial, marketing and human resources. In
other parts of the world, the Company intends to expand in gateway cities
which attract international travelers who are familiar with the Company's
hotel brands. International development of the Company's brands may be
structured in a variety of ways, including development by the Company
directly, by master franchisees or by joint ventures.
- EXPANSION OF PREFERRED VENDOR PROGRAMS. The Company believes there is
significant opportunity to leverage its size and marketing expertise by
entering into joint marketing arrangements with national and
multinational companies that want to gain exposure to the millions of
guests who patronize the Company's franchise hotels each year. In the
past, these arrangements have added to the Company's and franchisees'
revenues and profits by attracting business to its franchise hotels. The
Company has also sought to structure these arrangements to include direct
payments to the Company from preferred vendors who wish to capitalize on
the Company's marketing reach. Firms that have entered into marketing
arrangements with the Company on such terms include AT&T, Pizza Hut,
Nortel (formerly Northern Telecom), Alamo Rent-A-Car and CUC Travel.
29
<PAGE> 34
- PURSUIT OF SELECTED STRATEGIC INVESTMENTS AND ACQUISITIONS. The Company
intends to pursue strategic investments and acquisitions, both in the
United States and abroad, of lodging, travel-related and other franchise
businesses. The Company believes that such opportunities are significant
and that the Company has financial capability sufficient to pursue such
opportunities.
FRANCHISE SYSTEM
The Company's franchise hotels principally operate under one of the
Company's brand names: Comfort, Quality, Clarion, Sleep, Rodeway and Econo
Lodge. The following table presents key statistics relative to the Company's
domestic franchise system over the three fiscal years ended May 31, 1996.
COMBINED DOMESTIC FRANCHISE SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED MAY
31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Number of properties, end of period................. 2,283 2,311 2,495
Number of rooms, end of period...................... 203,019 200,792 214,613
Average royalty rate................................ 3.1% 3.2% 3.5%
Average occupancy percentage........................ 62.2% 63.8% 63.8%
Average daily (room) rate (ADR)..................... $ 45.63 $ 47.13 $ 49.49
RevPAR*............................................. $ 28.40 $ 30.08 $ 31.60
Royalty fees ($000s)................................ $62,590 $71,665 $82,239
</TABLE>
- ---------------
* The Company's RevPAR figure for each fiscal year is an average of the RevPAR
calculated for each month in the fiscal year. The Company calculates RevPAR
each month based on information actually reported by franchisees on a timely
basis to the Company. In contrast, Smith Travel Research's monthly RevPAR
calculations are periodically updated to reflect information reported after
the Company's deadline for the receipt of monthly information. Smith Travel
Research's RevPAR calculations also reflect information reported by
franchisees directly to Smith Travel Research but not to the Company and Smith
Travel Research's estimates of RevPAR for properties that did not report to
either the Company or Smith Travel Research at all or for the whole period.
Smith Travel Research's calculations of the Company's domestic RevPAR for
fiscal years 1994, 1995 and 1996 were $28.87, $30.56 and $32.30, respectively.
30
<PAGE> 35
No master franchisee or other franchisee accounted for 10% or more of the
Company's total revenues or revenues related to franchise operations during the
last three fiscal years.
BRAND POSITIONING
The Company's hotels are primarily limited-service hotels (offering
amenities such as swimming pools and continental breakfast) or limited-to-full
service (offering amenities such as food and beverage services, meeting rooms
and room service). The following chart summarizes how the Company's brands are
positioned in the marketplace.
LOGO
COMFORT. Comfort Inns and Comfort Suites hotels offer rooms in the
limited-service, middle market category. Comfort Inns and Comfort Suites are
targeted to traditional businesses and leisure travelers. Principal competitor
brands include Days Inn, Fairfield Inn, Hampton Inn, Holiday Express and
LaQuinta. At May 31, 1996, there were 1,340 Comfort Inn properties and 87
Comfort Suite properties with a total of 106,179 and 7,493 rooms, respectively,
open and operating worldwide. An additional 198 Comfort Inn properties and 88
Comfort Suite properties with a total of 18,561 and 7,223 rooms, respectively,
were under development.
Comfort properties are located in the United States and in Australia, the
Bahamas, Belgium, Canada, France, Germany, India, Indonesia, Ireland, Italy,
Jamaica, Japan, Mexico, Norway, Portugal, Sweden, Switzerland, Thailand, the
United Kingdom and Uruguay. The following chart summarizes the Comfort system in
the United States:
COMFORT DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED MAY
31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Number of properties, end of period................. 935 1,015 1,129
Number of rooms, end of period...................... 82,479 87,551 94,160
Royalty fees ($000s)................................ $31,187 $37,635 $44,657
</TABLE>
31
<PAGE> 36
QUALITY. Certain Quality Inns and Quality Suites hotels compete in the
limited service, middle market category while others compete in the full
service, middle market category. Quality Inns and Quality Suites are targeted to
traditional business and leisure travelers. Principal competitor brands include
Best Western, Holiday Inn, Howard Johnson, Ramada Inn and Days Inn. At May 31,
1996, there were 553 Quality Inn properties with a total of 65,693 rooms, and 22
Quality Suites properties with a total of 3,377 rooms open worldwide. An
additional 110 Quality Inn properties and 5 Quality Suites properties with a
total of 12,382 rooms and 324 rooms, respectively, were under development.
Quality properties are located in the United States and in Argentina,
Australia, Belgium, Canada, Chile, Denmark, France, Germany, India, Indonesia,
Ireland, Italy, Jamaica, Japan, Mexico, New Zealand, Norway, Portugal, Puerto
Rico, Russia, Spain, Thailand, the United Kingdom and the United Arab Emirates.
The following chart summarizes the Quality system in the United States:
QUALITY DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED MAY
31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Number of properties, end of period................... 358 341 362
Number of rooms, end of period........................ 45,032 43,281 45,967
Royalty fees ($000s).................................. $14,890 $15,632 $16,606
</TABLE>
ECONO LODGE. Econo Lodge hotels operate in the limited-service, economy
category of the lodging industry. Econo Lodges are targeted to the senior travel
market and rely to a large extent on strong roadside name recognition. Principal
competitor brands include Days Inn, Ho-Jo Inn, Motel 6, Ramada Limited, Red
Carpet Inn, Red Roof Inn, Super 8 and Travelodge.
At May 31, 1996, there were 658 Econo Lodge properties with a total of
43,545 rooms open and operating in the United States and Canada, and an
additional 110 properties with a total of 7,863 rooms under development in those
two countries. The following chart summarizes the Econo Lodge system in the
United States:
ECONO LODGE DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED MAY
31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Number of properties, end of period................... 677 633 641
Number of rooms, end of period........................ 46,570 42,801 42,726
Royalty fees ($000s).................................. $11,231 $12,021 $12,760
</TABLE>
CLARION. Clarion Inns, Clarion Hotels, Clarion Resorts and Clarion Suites
hotels are full-service properties which operate in the upscale category.
Clarion hotels are targeted to traditional business and leisure travelers.
Principal competitor brands include Holiday Inn, Holiday Select, Crowne Plaza,
Four Points by Sheraton, Radisson, Courtyard by Marriott and Doubletree.
At May 31, 1996, there were 94 Clarion properties with a total of 15,504
rooms open and operating worldwide and an additional 24 properties with a total
of 3,783 rooms under development. The properties are located in the United
States, and in Anguilla, the Bahamas, Canada, the Cayman Islands, Dominica,
France, Germany, Guatemala, Honduras, Indonesia, Ireland, Japan, Mexico, Russia,
Thailand and Uruguay. The following chart summarizes the Clarion system in the
United States:
CLARION DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
MAY 31,
-----------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Number of properties, end of period..................... 65 63 75
Number of rooms, end of period.......................... 12,211 10,420 12,817
Royalty fees ($000s).................................... $2,735 $2,995 $3,602
</TABLE>
32
<PAGE> 37
RODEWAY. The Rodeway brand competes in the limited-service, economy
category and is targeted to the senior travel market. Principal competitor
brands include Ho-Jo Inn, Ramada Limited, Red Roof Inn, Budgetel, Shoney's Inn,
Super 8 and Motel 6. At May 31, 1996, there were 209 Rodeway Inn properties with
a total of 13,098 rooms, open and operating in the United States and Canada, and
an additional 41 properties with a total of 2,955 rooms under development in
those two countries. The following chart summarizes the Rodeway system in the
United States:
RODEWAY DOMESTIC SYSTEM(1)
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED MAY
31,
-------------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Number of properties, end of period................... 214 208 201
Number of rooms, end of period........................ 13,806 13,067 12,547
Royalty fees ($000s).................................. $1,941 $2,302 $2,506
</TABLE>
--------------------
(1) Includes data pertaining to the Friendship Inn(R) system, which is
being combined with the Rodeway Inn system.
SLEEP. Established in 1988, Sleep Inn is a new-construction hotel brand in
the limited-service, economy category. Sleep Inns are targeted to the
traditional business and leisure traveler. Principal competitor brands include
Days Inn, Fairfield Inn, Holiday Express, LaQuinta Inn, Ho-Jo Inn and Ramada
Inn.
At May 31, 1996, there were 89 Sleep Inn properties with a total of 6,567
rooms open and operating worldwide. An additional 139 properties with a total of
10,614 rooms were under development. The properties are located in the United
States, Canada and the Cayman Islands. The following chart summarizes the Sleep
system in the United States:
SLEEP DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
MAY 31,
-----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Number of properties, end of period..................... 34 51 87
Number of rooms, end of period.......................... 2,921 3,672 6,396
Royalty fees ($000s).................................... $605 $1,080 $2,108
</TABLE>
MAINSTAY SUITES. MainStay Suites, the Company's newest hotel brand, is a
middle market, extended-stay lodging product targeted to travelers who book
hotel rooms for five or more consecutive nights. The first MainStay Suites
hotel, which the Company will own and manage, is scheduled to open in Plano,
Texas, in October 1996.
The MainStay Suites brand is designed to fill the gap between existing
upscale and economy extended-stay lodging products. Principal competitors for
the brand will include Doubletree's new Candlewood hotels, Marriott's new middle
market extended stay concept, TownPlace Suites, as well as competition from
all-suite hotel properties and traditional extended stay operators in both the
upscale market (Residence Inn, Homewood Suites, Hawthorne Suites and Summerfield
Suites) and the economy market (Extended Stay America, Studio Plus and Oakwood).
INTERNATIONAL FRANCHISE OPERATIONS
The Company's international franchise operations have traditionally been
operated as a division separate from its domestic franchise operations. In some
cases international master franchisees are not required to separately report
royalty results by brand, making brand results on a worldwide basis unavailable.
In the past fiscal year, the Company entered into arrangements to enter eight
new international markets. At May 31, 1996, Choice had 557 franchise hotels open
in 29 countries outside the United States. The following table
33
<PAGE> 38
illustrates the growth of the Company's international franchise system over the
three fiscal years ended May 31, 1996:
COMBINED INTERNATIONAL FRANCHISE SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
MAY 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Number of properties, end of period....................... 430 524 557
Number of rooms, end of period............................ 36,725 44,877 46,843
Royalty fees ($000s)...................................... $ 1,201 $ 1,547 $ 945
</TABLE>
EUROPE. Choice is the second-largest international franchised hotel
chain in Europe, with 278 hotels open in 13 countries at May 31, 1996. In a
move to realign and streamline its European operations, the Company,
through its subsidiary, Manor Care Hotels (France) S.A., recently
consummated a transaction with Friendly Hotels, PLC ("Friendly") whereby
the Company purchased an equity interest for approximately $17 million in
Friendly to finance the development of ten new Comfort Inn or Quality Inn
hotels in the United Kingdom and Ireland. Additionally, Friendly purchased
from the Company a master franchise for the United Kingdom and Ireland. The
Company closed its London office as a result of the transaction. The
Company's French and German operations are being consolidated into the
Company's Paris, France office, which directly operates the Company's
business in most of Europe. There are also master franchise arrangements in
Scandinavia and Italy.
THE MIDDLE EAST. In August 1995, the Company signed a master
franchise for Israel. The Company opened its first franchised property in
Dubai, United Arab Emirates, in December 1995. At May 31, 1996, this was
the only property open in this region.
ASIA/PACIFIC. During fiscal year 1996, Company franchisees opened
seven hotels in Australia, two in New Zealand, two in India, two in
Thailand and four in Indonesia, bringing the total number of properties
open in the Asia/Pacific region at May 31, 1996 to 61.
CARIBBEAN. The Company's master franchisee had 6 properties open in
three Caribbean countries at May 31, 1996.
CENTRAL AND SOUTH AMERICA. The Company recently signed master
franchise agreements covering Brazil, Uruguay, Paraguay and Argentina. The
Company also has master franchisees operating in Guatemala, Chile and
Mexico. In total there were 19 open properties in this region at May 31,
1996.
CANADA. Choice Hotels Canada (a joint venture with Journey's End
Corporation of Belleville, Ontario, Canada ("Journey's End")) is Canada's
largest lodging organization with 192 properties open at May 31, 1996. The
joint venture, owned 50% by the Company and 50% by Journey's End, was
formed in 1993 when Journey's End converted substantially all of its
controlled hotels to the Company's brands and the Company contributed its
operations in Canada to form Choice Hotels Canada.
FRANCHISE SALES
The Company markets franchises principally to: (i) developers of hotels,
(ii) owners of independent hotels and motels, (iii) owners of hotels affiliated
with other franchisors' brands, (iv) its own franchisees, who may own, buy or
build other hotels which can be converted to the Company's brands, and (iv)
contractors who construct any of the foregoing. In fiscal year 1996, existing
franchisees accounted for approximately one-half of the Company's new franchise
agreements. In considering hotels for conversion to one of the Company's brands,
or sites for development of new hotels, the Company seeks properties in
locations which are in close proximity to major highways, airports, tourist
attractions and business centers that attract travelers.
At May 31, 1996, the Company employed approximately 40 sales directors,
each of whom is responsible for a particular region or geographic area. The
Company intends to increase its number of regional sales directors in the
current fiscal year. Sales directors contact potential franchisees directly and
receive compensation based on sales generated. Franchise sales efforts emphasize
the benefits of affiliating with one of
34
<PAGE> 39
the Company's well-known brand names, the Company's commitment to improving
RevPAR, the Company's "celebrity in a suitcase" television advertising campaign
(formerly used for the entire Choice family of brands and now used principally
for its three largest brands, Comfort, Quality and Econo Lodge), the Company's
reservation system, the Company's training and support systems, and the
Company's history of growth and profitability. Because it offers brands covering
a broad spectrum of the lodging marketplace, the Company is able to offer each
prospective franchisee a brand that fits its needs, lessening the chances that
the prospective franchisee would need to consider a competing franchise system.
During fiscal year 1996, the Company received 794 franchise applications,
approved 681 applications, signed 413 franchise agreements and placed 282 new
properties into operation in the United States under the Company's brands. Of
those placed into operation, 123 were newly constructed hotels. By comparison,
during fiscal year 1995, the Company received 741 franchise applications,
approved 578 applications, signed 341 franchise agreements and had 212 new US
properties come on line. 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.
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.
FRANCHISE AGREEMENTS
A 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 twenty (20) years, with certain rights to
the franchisee to terminate after 10 or 15 years. When the responsibility for
development is sold to a master franchisee, that party has the responsibility to
sell to local franchisees the Company's brands and the master franchisee
generally must manage the delivery of necessary services (such as quality
assurance, reservations and marketing) to support the franchised hotels in the
master franchise area. The master franchisee collects the fees paid by the local
franchisee and remits an agreed share to the Company. Master franchise
agreements generally have a term of at least 10 years.
Franchise agreements, other than master franchise agreements, can be
terminated by either party prior to the conclusion of their term under certain
circumstances, such as at certain anniversaries of the agreement or if a
franchisee fails to bring properties into compliance with contractual quality
standards within specified periods of time. Early termination options give 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 Company's different brands, but generally are
competitive with or slightly below the industry average within their market
group. Franchise fees usually have four components: an initial, one-time
affiliation fee; a royalty fee; a marketing fee; and a reservation fee. Proceeds
from the marketing fee and reservation fee are used exclusively to fund
marketing programs and 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 Company's brands. Royalty fees and affiliation
fees are the principal source of profits for the Company.
35
<PAGE> 40
Under the terms of the standard franchise agreements, the Company's
franchisees are typically required to pay the following initial fees and
on-going fees as a percentage of gross room revenues:
QUOTED FEES BY BRAND
<TABLE>
<CAPTION>
INITIAL FEE ON-GOING FEES AS A PERCENTAGE OF GROSS ROOM REVENUES
PER ROOM/ ---------------------------------------------------------
BRAND MINIMUM ROYALTY FEES MARKETING FEES RESERVATION FEES
---------------------- ------------ ------------ ------------------- ----------------
<S> <C> <C> <C> <C>
Comfort Inn........... $300/$40,000 5.0% 1.3%, plus $.28 per 1.75%
room per day
Comfort Suites........ $300/$50,000 5.0% 1.3%, plus $.28 per 1.75%
room per day
Quality Inn........... $300/$40,000 4.0% 1.3%, plus $.28 per 1.75%
room per day
Quality Suites........ $300/$50,000 4.0% 1.3%, plus $.28 per 1.25%
room per day
Sleep................. $300/$40,000 4.0% 1.3%, plus $.28 per 1.75%
room per day
Clarion............... $300/$40,000 2.75% 1.0% 1.25%
Econo Lodge........... $250/$25,000 4.0% 3.5%(1) --
MainStay Suites....... $300/$30,000 4.5% 2.5%(1) --
Rodeway
Year 1.............. $250/$25,000 3.5% 1.25% 1.25%
Year 2.............. -- 3.0% 1.25% 1.25%
Year 3.............. -- 3.0% 1.00% 1.00%
</TABLE>
- ---------------
(1) Fee includes both Marketing and Reservations.
The Company has increased its average actual royalty rate in each of the
past three years, primarily by raising the royalty fee for Comfort franchisees
to 5.0% of annual gross room revenues ("GRR") from 4.0% of GRR in 1993, and by
raising the royalty rate for franchisees in the former Friendship franchise
system to 3.0% of GRR from 2.0% of GRR in 1991. For the fiscal year ended May
31, 1996, the Company's average actual royalty rate was 3.5%, up from 3.2% for
the fiscal year ended May 31, 1995, and up from 3.1% for the fiscal year ended
May 31, 1994. The Company believes that its average actual royalty rate will
continue to increase as older franchise agreements expire, terminate or are
amended.
At May 31, 1996, the Company had 2,495 franchise agreements in effect in
the United States and 557 franchise agreements in effect in other countries. The
average age of the franchise agreements was 5.1 years. Twenty-three of the
franchise agreements are scheduled to expire during the five year period of June
1, 1996 through May 31, 2001; however, franchise agreements generally contain
early termination provisions.
FRANCHISE OPERATIONS
The Company's operations are designed to improve RevPAR for the Company's
franchisees, as this is the measure of performance that most directly impacts
franchisee profitability. It is the Company's belief that by helping its
franchisees to become more profitable it will enhance its ability to retain its
existing franchisees and attract new franchisees. The key aspects of the
Company's franchise operations are:
CENTRAL RESERVATION SYSTEM. Approximately 25% 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. The CHOICE 2001 system is designed to allow trained operators
to match each caller with a Company-branded hotel meeting the caller's
needs. It provides an instant data link to the Company's franchised
properties as well as to the Amadeus, Galileo, SABRE and Worldspan airline
reservation systems thereby facilitating the reservation process for travel
agents.
36
<PAGE> 41
To more sharply define 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. The Company allows its reservation
agents to cross-sell the Company's hotel brands. If a room in the Choice
hotel brand requested by a customer is not available in the location or
price range that the customer desires, the agent may offer the customer a
room in another Choice brand hotel that meets the customer's needs. 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
Company's brands. Marketing and advertising efforts are focused primarily
in the United States and include national television and radio advertising,
print advertising in consumer and trade media and promotional events,
including joint marketing promotions with vendors and corporate partners.
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, although it continues to use its
"suitcase" ads for its three largest brands, Comfort, Quality and Econo
Lodge. The marketing fees generated by these brands are used, in part, to
fund a national network television advertising campaign. The Company's
smaller hotel 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 is headed by a senior vice president. The
senior vice president of marketing is assisted by six vice presidents,
including a vice president for marketing, promotions and communications.
These officers direct an internal staff and also utilize the services of
independent advertising agencies. In addition, the Company employs sales
personnel at its Silver Spring, Maryland, headquarters and in its Phoenix,
Arizona, office. These sales personnel use telemarketing to target specific
customer groups, such as potential corporate clients in areas where the
Company's franchised hotels are located, the motor coach market, and
meeting planners. Most of these sales personnel sell reservations and
services for all of the Company's brands, but four are responsible
exclusively for the Clarion brand.
The Company's regional sales directors work with franchisees to
maximize RevPAR. These directors advise franchisees on topics such as how
to market their hotels and how to maximize the benefits offered by the
Company's 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
37
<PAGE> 42
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. Franchisees who fail to meet minimum quality standards
may be subject to consequences ranging from written warnings to termination
of the franchisee's franchise agreement.
The Company believes that a good measure of the quality of a hotel is
the rating granted to it by the American Automobile Association ("AAA").
AAA rates hotels based on the quality and range of amenities and service on
a scale of one to five diamonds, with five diamonds the highest rating. As
of May 1996, AAA has rated 78.5%, 78.4% and 80.2% of the Company's Comfort,
Quality and Clarion properties, respectively, located in the United States,
Canada, Mexico and the Caribbean. Among such properties 66% of Comfort
properties, 66% of Quality properties, and 80% of Clarion properties
received three diamonds or better.
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.
RESEARCH AND DEVELOPMENT. The Company seeks to enhance RevPAR by
providing to franchisees systems and products that will reduce costs and/or
improve their operations. Research and development activity resulted in the
launch of three new franchise products in fiscal year 1996, Choice Picks
food court, MainStay Suites hotels and K-Minus food service.
In January 1996, the Company introduced its MainStay Suites franchise
hotel brand, an extended-stay product targeted to travelers who book hotel
rooms for five or more consecutive nights. See "-- MainStay Suites."
In November 1995, the Company introduced Choice Picks food court, a
customized, modular food-service system tailored to the needs of
middle-market hotels. Choice Picks food courts offer hotel guests a "choice
pick" of nationally known branded food items, such as Nathan's Famous(R)
hot dogs, sandwiches made with Healthy Choice(R) deli meats, Pizzeria
Uno(R) pizza and calzone, Nestle Toll House(R) cookies and muffins, I Can't
Believe It's Yogurt(R) desserts, and Coca-Cola(R) beverages. The typical
Choice Picks food court can be operated by as few as two employees, thus
providing the properties with lower operating costs than properties with
conventional restaurants. Franchisees pay the Company a one-time
affiliation fee and monthly royalty fees equal to a percentage of gross
revenues on Choice Picks food court sales. Franchisees must buy equipment
and food service modules necessary to set up a Choice Picks food court.
Beginning in fiscal 1997, the Company intends to market Choice Picks food
court to larger hotel operators and other potential customers outside of
the Company's franchise system.
In November 1995, the Company also began to offer to its franchisees
the K-Minus food service system, which eliminates expensive banquet
kitchens by outsourcing food preparation and limiting on-site work to
assembly and rethermalization. Compared with a traditional banquet
operation, the K-Minus food service system saves labor costs and energy.
Franchisees who wish to implement the K-Minus system are given design and
technical assistance by the Company. The Company receives a one-time
technical assistance fee for the provision of these services based on the
scope of the project.
PURCHASING. The Company's product services department negotiates
volume purchases of various products needed by franchisees to run their
hotels, including such items as furniture, fixtures, carpets and
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<PAGE> 43
bathroom amenities. The department also helps to ensure consistency in such
products across its exclusively new-construction brands, Sleep Inn and
MainStay Suites brands. Sales to franchisees by the Company were $20.7
million during fiscal year 1996, up from $13.9 million during fiscal year
1995.
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,
primarily with independent lenders, to provide financing assistance to its
franchisees and prospective franchisees for hotel refinancing, acquisition,
renovation and development.
OWNED AND MANAGED LODGING BUSINESS
HISTORICAL ACQUISITION STRATEGY
To take advantage of a recovering lodging industry, the primary focus of
the Company's owned and managed hotel operations (the "Hotel Division") over the
past few years has been to acquire domestic hotel properties at prices below
their replacement cost and increase their value through (1) the investment of
capital to improve the physical site and (2) the installation of professional
management and marketing teams to operate the renovated properties. Since June
1992, the Company has spent approximately $242.7 million to buy and renovate 52
hotel properties with 7,485 rooms. During fiscal year 1996, the Hotel Division
acquired 16 hotels for a total planned investment, including initial
improvements, of approximately $71.8 million. In addition to the 52 hotel
properties acquired, the Company owned and managed as of May 31, 1996 14
European properties (four developed by the Company and ten acquired in
connection with the Company's Resthotel Primevere acquisition in fiscal 1994), 9
seasoned domestic properties and four Sleep Inns developed by the Company.
HOTEL DIVISION DOMESTIC ACQUISITIONS
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------------
1993 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total acquisitions................. 7 13 16 16
Total number of rooms acquired..... 1,276 1,933 2,336 1,940
Total cost of acquisitions (in
millions)
(including initial
improvements)................. $ 30.9 $ 55.8 $ 83.3 $ 71.8*
Average cost per room.............. $ 24,216 $ 28,867 $ 35,659 $ 37,095
</TABLE>
--------------------
* Includes $22.2 million planned for initial improvements.
Hotel acquisitions generally have been made pursuant to one of the
following strategies:
- Buy limited service economy hotels requiring limited rehabilitation
efforts.
- Buy distressed, limited service properties or portfolios requiring
substantial renovations.
- Buy full-service hotels below replacement cost and change operations
to improve the profit models.
- Buy well-located old and inefficient land use hotels, convert the
existing property to suites or extended stay concepts, reduce room
counts, eliminate restaurants and reduce parking requirements to allow
the development of a new limited service hotel on the existing site,
thereby having two Company-operated properties on the site. If such
development is not feasible, the excess land is targeted for sale.
Net operating income for the seven hotels purchased in fiscal year 1993
increased from $6.6 million in fiscal 1995 to $8.0 million in fiscal 1996, a 22%
improvement. For the 13 domestic hotels purchased in fiscal
39
<PAGE> 44
year 1994, net operating income increased 38% to $10.0 million in fiscal year
1996 from $7.2 million in fiscal year 1995. Net operating income for the 16
hotels acquired in fiscal year 1995 was $6.7 million in fiscal year 1996, a 268%
increase over the $1.8 million achieved in fiscal year 1995. The following chart
summarizes occupancy improvements for original domestic portfolio hotels, and
fiscal 1993, 1994 and 1995 acquisitions. Occupancy rates for the year acquired
reflect only the period during which the properties were owned by the Company.
Because many of the recently acquired and developed hotels have not yet reached
stabilized levels of operating performance, the Company believes that revenues
and gross profit at these hotels will continue to grow.
During fiscal year 1996, the Company began restructuring its European
operations. This restructuring effort included the purchase of an equity
interest in Friendly Hotels, PLC and a reevaluation of key geographic markets in
Europe. In connection with this restructuring, the Company performed a review of
its European operations and in May 1996 recognized a non-cash charge against
earnings related primarily to the impairment of assets associated with certain
European hotel operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
OWNED AND MANAGED DOMESTIC HOTELS
OCCUPANCY
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------
1993 1994 1995 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Original Domestic Portfolio......................... 62.27% 64.16% 67.19% 68.02%
Fiscal 1993 Acquisitions............................ 56.17 63.20 73.68 76.17
Fiscal 1994 Acquisitions............................ -- 66.09 70.71 73.76
Fiscal 1995 Acquisitions............................ -- -- 48.96 58.49
Fiscal 1996 Acquisitions............................ -- -- -- 53.23
</TABLE>
CURRENT BUSINESS STRATEGY
The Hotel Division plans to realize cash proceeds from, or "monetize," its
capital investment in Company-owned hotels at values that reflect their improved
operating performance. The Company is exploring a variety of transactions,
including, among others, asset securitization, sale/leasebacks, joint ventures
with third parties, debt financing and asset divestitures. The Company intends
to retain management and franchise agreements relating to these properties. The
proceeds from these transactions will be used initially to repay outstanding
indebtedness. The remaining proceeds will be used to launch or provide support
to recently developed brands, such as Sleep Inn and MainStay Suites, to develop
additional new brands, to expand internationally by investing in selected
international gateway cities and to invest in other targeted growth areas. The
timing, proceeds and other terms of any such transaction involve risks and
uncertainties which may be beyond the Company's control. No assurances can be
made that the Company's strategy will be successful. See "Risk
Factors -- Ability to Implement Monetization Strategy."
OPERATIONS
Each of the Company's owned and managed hotels operates under one of the
Company's brand names. The following table illustrates the growth of the
Company's Hotel Division in the United States over the four fiscal years ended
May 31, 1996.
DOMESTIC OWNED AND MANAGED HOTELS
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED MAY 31,
------------------------------------------
1993 1994 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Number of properties, end of period.......... 19 32 48 65
Number of rooms, end of period............... 3,686 5,605 7,941 9,713
Average occupancy percentage................. 61.36% 64.18% 67.10% 66.61%
Average daily (room) rate (ADR).............. $49.53 $49.15 $51.28 $55.97
RevPAR....................................... $30.39 $31.54 $34.40 $37.28
</TABLE>
40
<PAGE> 45
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED MAY 31,
1993 1994 1995 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
</TABLE>
OPERATING SYSTEMS AND PROCEDURES. The Company's owned and managed hotels
take advantage of the same systems and services available to franchisees with
respect to a particular brand. The hotels participate in the central reservation
system, marketing and advertising efforts and volume purchasing discounts and
are subject to the same quality assurance program. In addition, the following
are systems the Hotel Division has instituted in each of the hotels it operates:
- YIELD MANAGEMENT. An automated yield management program has been
installed at the hotels which allows the local management to take
advantage of the supply and demand conditions in their market place. The
system is automated to the point that it performs calculations and
suggests pricing strategies to the local hotel management. The program
continues to update information based on the availability of room supply
and reservation volume within each hotel.
- TRAINING. The Hotel Division has developed a training system for all
guest services representatives that teaches the basics of telephone sales
techniques. A computerized guest comment system was developed to solicit
the comments of guests and the experiences they had at the hotel while
providing management with immediate guest feedback.
- ACCOUNTING SYSTEMS. Each Company-operated hotel has a computerized front
desk and accounting system. This system allows key financial indicators
(such as daily occupancy and revenue) to be immediately gathered from each
hotel and electronically transmitted to the key operating officers and
managers of the Hotel Division. This instant access to information allows
management to quickly spot trends and make corrections and changes where
necessary. The system is completely computerized and allows for cost
savings in the accounting and bookkeeping departments of each hotel. In
addition, control over operational and capital expenditures is provided by
a dedicated group of financial controllers in the home office. This group
works with the hotel operations group to maintain expense standards as
well as established operating procedures.
- TIME AND ATTENDANCE SYSTEM. Each hotel maintains an automated time and
attendance system that is tied into a central payroll system at the
corporate headquarters. This computerized method of tracking time allows
management to make quick decisions on controlling labor costs and provides
immediate information on projected costs.
- FOOD AND BEVERAGE. The food and beverage efforts are headed by a vice
president of food and beverage. The department is responsible for the
daily food and beverage activities of the various hotels, as well as the
development of new food concepts. This group was responsible for the
development, testing and implementation of the Choice Picks food court
concept.
DEVELOPMENT AND ACQUISITIONS. In order to facilitate the growth process of
acquiring new hotels, the Hotel Division maintains an acquisitions department
dedicated to the investigation and analysis of potential acquisitions. The
department performs the initial evaluation of potential acquisitions along with
the due diligence investigations that are required in this process. This
department is also responsible for seeking land sites suitable for the
construction of Sleep Inns and MainStay Suites which are to be operated by the
Company.
PROPERTIES
The following chart lists by brand the Company's owned and managed domestic
hotels at May 31, 1996:
<TABLE>
<CAPTION>
NUMBER
OF
HOTEL MARKET ROOMS
--------------------------------------------- ------ ------
<S> <C> <C>
COMFORT
Comfort Inn Albuquerque Albuquerque, NM 114
Comfort Inn Norcross Atlanta, GA 110
Comfort Inn N.W., Pikesville, MD** Baltimore, MD 186
Comfort Inn University Baton Rouge, LA 150
Comfort Inn, Danvers Boston, MA 136
Comfort Suites Haverhill Boston, MA 131
</TABLE>
41
<PAGE> 46
<TABLE>
<CAPTION>
NUMBER
OF
HOTEL MARKET ROOMS
------------------------------------------------ --------------------------- ------
<S> <C> <C>
Comfort Inn Brooklyn Brooklyn, NY 67
Comfort Inn Canton Canton, OH 124
Comfort Inn Airport Charleston, SC 122
Comfort Inn Charlotte Charlotte, NC 151
Comfort Inn Cincinnati, OH 117
Comfort Inn Middleburg Hts. Cleveland, OH 136
Comfort Inn College Station College Station, TX 114
Comfort Inn Columbia Columbia, SC 98
Comfort Inn DFW Airport Dallas-Fort Worth, TX 152
Comfort Suites Deerfield Ft. Lauderdale, FL 101
Comfort Inn Deerfield East Ft. Lauderdale, FL 69
Comfort Inn Hershey Harrisburg, PA 125
Comfort Inn Hilton Head Hilton Head Island, SC 150
Comfort Inn Collierville Memphis, TN 94
Comfort Inn & Suites, Miami Springs Miami, FL 267
Comfort Inn Miami Springs Miami, FL 110
Comfort Inn -- Lee Road Orlando, FL 145
Comfort Inn -- Turf Paradise Phoenix, AZ 155
Comfort Inn -- North Phoenix, AZ 153
Comfort Inn Portland Portland, ME 126
Comfort Inn by the Bay* San Francisco, CA 135
Comfort Inn Westport St. Louis, MO 170
Comfort Inn Sturgis Sturgis, MI 83
Comfort Inn Traverse City Traverse City, MI 95
Comfort Inn Tyson's Washington, DC 250
Comfort Inn West Palm Beach West Palm Beach, FL 157
Comfort Inn Wichita Wichita, KS 114
QUALITY
Quality Inn Anderson Anderson, SC 121
Quality Inn & Suites -- Crown Point Charlotte, NC 100
Quality Inn Plymouth Detroit, MI 123
Quality Suites Deerfield Ft. Lauderdale, FL 107
Quality Inn & Suites Indianapolis Indianapolis, IN 116
Quality Inn Southpoint Jacksonville, FL 184
Quality Inn Lincoln Lincoln, NE 108
Quality Hotel Airport Los Angeles, CA 278
Quality Hotel Maingate -- Anaheim* Los Angeles, CA 284
Quality Inn & Suites Lumberton Lumberton, NC 120
Quality Inn & Suites Hampton Norfolk-Virginia Beach, VA 190
Quality Suites Raleigh, NC 114
Quality Inn Richmond Richmond, VA 187
Quality Inn Midvalley Salt Lake City, UT 131
Quality Inn, College Park, MD** Washington, DC 153
Quality Suites Shady Grove Washington, DC 123
Quality Hotel, Arlington, VA Washington, DC 391
</TABLE>
42
<PAGE> 47
<TABLE>
<CAPTION>
NUMBER
OF
HOTEL MARKET ROOMS
------------------------------------------------ --------------------------- ------
<S> <C> <C>
CLARION
Clarion Hotel Baltimore Baltimore, MD 103
Clarion Hotel Columbus, OH 232
Clarion Hotel Richardson Dallas-Fort Worth, TX 295
Clarion on the Lake Hot Springs, AR 151
Clarion Hotel Hollywood Beach Miami-Ft. Lauderdale, FL 309
Clarion Hotel Mobile, AL 250
Clarion Hotel Virginia Beach Norfolk-Virginia Beach, VA 149
Clarion Hotel Roanoke Roanoke, VA 148
Clarion Hotel Springfield Springfield, MO 199
SLEEP
Sleep Inn Baton Rouge Baton Rouge, LA 101
Sleep Inn Plano Dallas-Fort Worth, TX 104
Sleep Inn Houston Houston, TX 107
Sleep Inn San Antonio San Antonio, TX 107
ECONO LODGE
Econo Lodge Tolleson Phoenix, AZ 120
RODEWAY INN
Rodeway Inn Airport East Phoenix, AZ 100
</TABLE>
- ---------------
* Denotes leased property.
** Denotes hotel on leased land.
The Company also owns and manages ten hotels in France, three in Germany
and one in the United Kingdom.
COMPETITION
Competition among franchise lodging chains is intense, both in attracting
potential franchisees to the system and in generating reservations for
franchisees. In addition, hotel chains and independent hotels compete intensely
for guests and for meeting and banquet business.
The Company's principal competitor brands at the national and international
level in the economy category of the lodging industry are LaQuinta, Ho-Jo Inn,
Ramada Inn, Motel 6, Ramada Limited, Red Carpet Inn, Red Roof Inn, Budgetel,
Hampton Inn, Fairfield Inn, Holiday Express, Shoney's Inn, Super 8, Days Inn,
and Travelodge. The Company's principal competitor brands at the national and
international level in the middle market category of the lodging industry are
Days Inn, Fairfield Inn, Hampton Inn, Holiday Express, LaQuinta, Holiday Inn,
Best Western, Howard Johnson and Ramada Inns. The Company's principal competitor
brands at the national and international level in the upscale category are
Holiday Inn, Holiday Select, Crowne Plaza, Four Points by Sheraton, Radisson,
Courtyard by Marriott and Doubletree.
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. Hotel operators may also select a
franchisor in part based on the franchisor's reputation among other franchisees,
and the success of its existing franchisees.
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 (but not
directly on franchisees' profitability).
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<PAGE> 48
The ability of a hotel (including the Company's owned and managed hotels
and its franchisees) to compete may be affected by a number of factors,
including the location and quality of its property, the number and quality of
competing properties nearby, its affiliation with a recognized name brand, and
general regional and local economic conditions. The effect of economic
conditions on 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 30 countries, as well as its range of products and room rates.
SERVICE MARKS AND OTHER INTELLECTUAL PROPERTY
The service marks Quality Inn, Quality Suites, Comfort Inn, Comfort Suites,
Clarion Hotel, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites and related
logos are material to the 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, except for
MainStay Suites and K-Minus, which are the subject of pending applications. 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.
NON-HOTEL PROPERTIES
The principal executive offices of the Company are located at 10750
Columbia Pike, Silver Spring, Maryland, 20901. On the Distribution Date, the
Company and Manor Care will execute leases relating to such offices and to
certain other real estate being made available to the Company by Manor Care. See
"Relationship Between Manor Care and the Company After the Distribution -- Lease
Agreements." The Company owns its reservation system offices in Phoenix, AZ and
Minot, ND. The Company leases two additional reservation system offices in Grand
Junction, CO, pursuant to leases that expire in 1999 and 2000, and occupies
additional space in Toronto, Canada, on a month-to-month basis. In addition, the
Company leases 12 sales offices across the United States. The Company's European
headquarters, which the Company leases pursuant to a lease that expires on
December 31, 1997, is located in Paris, France. The Company also leases three
international sales offices in France, Germany and England, pursuant to leases
that terminate in June 1998, September 1996 and December 1997, respectively.
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.
SEASONALITY
The Company's principal sources of revenues are franchise fees based on the
gross room revenues of its franchise properties and revenues generated by its
owned and managed hotels. The Company experiences seasonal revenue patterns
similar to those of the lodging industry in general. Generally, the Company's
revenues are greater in the first and second fiscal quarters than in the third
and fourth fiscal quarters. This seasonality can be expected to cause quarterly
fluctuations in the revenues, profit margins and net income of the Company.
REGULATION
The Company's franchisees are responsible for compliance with all laws and
government regulations applicable to the hotels they own or operate. The Company
is responsible for such compliance at the hotels it owns. The lodging industry
is subject to numerous federal, state and local government regulations,
including those relating to the preparation and sale of food and beverage (such
as health and liquor license laws), building and zoning requirements and laws
governing a hotel owner's relationship with employees, including minimum wage
requirements, overtime, working conditions and work permit requirements. The
failure to obtain or retain liquor licenses or an increase in the minimum wage
rate, employee benefit costs or other costs associated with employees could
adversely affect the Company's owned hotels. Both at the federal and state
level, there are proposals under consideration to increase the minimum wage and
introduce a system of mandated health insurance. Under the Americans with
Disabilities Act of 1990 (the "ADA"), all public
44
<PAGE> 49
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. A determination that the Company is not in
compliance with the ADA could result in the imposition of fines or an award of
damages to private litigants. These and other initiatives could adversely affect
the Company as well as the lodging industry in general.
The Federal Trade Commission (the "FTC") and certain other jurisdictions
(including France, Province of Alberta, Canada, and Mexico and various states)
regulate the sale of franchises. The FTC requires franchisors to make extensive
disclosure to prospective franchisees but does not require registration. A
number of states require registration or disclosure in connection with franchise
offers and sales. In addition, several states have "franchise relationship laws"
or "business opportunity laws" that limit the ability of the franchisor to
terminate franchise agreements or to withhold consent to the renewal or transfer
of these agreements. While the Company's franchising operations have not been
materially adversely affected by such regulation, the Company cannot predict the
effect of future regulation or legislation.
INSURANCE
The Company maintains property insurance on its owned and leased lodging
facilities. The Company insures some of its liability exposures and
self-insures, either directly or indirectly through insurance arrangements
requiring it to reimburse insurance carriers, some of its liability risks other
than catastrophic exposures. The Company insures its workers' compensation risks
in some states and self-insures in others.
IMPACT OF INFLATION AND OTHER EXTERNAL FACTORS
The Company's principal sources of revenues are franchise fees and revenues
generated from bookings of rooms at the Company's owned and managed hotels.
Franchise fees and revenues from owned and managed hotels can be impacted by two
external factors: the supply of hotel rooms within the lodging industry relative
to the demand for rooms by travelers, and inflation.
Although industry-wide supply and demand for hotel rooms is fairly balanced
at present, any excess in supply that might develop in the future could have an
unfavorable impact on room revenues at the Company's franchised hotels and at
its owned and managed hotels, either by reducing the number of rooms reserved at
the Company's properties or by restricting the rates hotel operators can charge
for their rooms. In addition, an excess supply of hotel rooms may discourage
potential franchisees from opening new hotels, unfavorably impacting the
franchise fees received by the Company.
Although the Company believes that increases in the rate of inflation will
generally result in comparable increases in hotel room rates, severe inflation
could contribute to a slowing of the national economy, which could result in
reduced travel by both business and leisure travelers. That could lead to less
demand for hotel rooms, which could result in a temporary reduction in room
rates and fewer room reservations, negatively impacting revenues received by the
Company. A weak economy could also reduce demand for new hotels, negatively
impacting the franchise fees received by the Company.
EMPLOYEES
The Company employed 4,851 people full-time at May 31, 1996. Less than 5%
of the Company's employees are represented by unions. Such union contracts
expire between August 1996 and December 1997. The Company considers its
relations with its employees to be satisfactory.
LEGAL PROCEEDINGS
The Company is not a party to any litigation, other than routine litigation
incidental to the business of the Company. None of such litigation, either
individually or in the aggregate, is expected to be material to the business,
financial condition or results of operations of the Company.
45
<PAGE> 50
ENVIRONMENTAL MATTERS
Under various foreign, federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property, amongst others, may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under or in such property. Certain of such
laws impose liability whether or not the owner or operator knew of, or was at
fault for, the presence of such hazardous or toxic substances. Certain
environmental laws and common law principles may be used to impose liability for
release of asbestos-containing materials ("ACMs") into the environment,
including but not limited to the air, and third parties may seek recovery from
owners or operators of real properties for cleanup of, or personal injury
associated with exposure to, released ACMs. Environmental laws also may impose
restrictions on the manner in which property may be used or businesses may be
operated, and these restrictions may require expenditures. In connection with
its ownership or operation of hotels, the Company may be potentially liable for
such costs.
Although the Company is currently not aware of any material environmental
claims pending or threatened against it, no assurance can be given that a
material environmental claim will not be asserted against the Company. The cost
of defending against claims of liability or of remediating a contaminated
property could have a material adverse effect on the results of operations of
the Company.
46
<PAGE> 51
MANAGEMENT
EXECUTIVE OFFICERS OF THE COMPANY
The name, age, proposed title upon consummation of the Distribution and
business background of each of the persons who are expected to become on the
Distribution Date the executive officers of the Company are set forth below. The
business address of each prospective executive officer is 10750 Columbia Pike,
Silver Spring, Maryland 20901, unless otherwise indicated.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ ---- ---------------------------------------------------------
<S> <C> <C>
Stewart Bainum, Jr............ 50 Chairman of the Board
William R. Floyd.............. 52 Vice Chairman and Chief Executive Officer
Donald J. Landry.............. 47 President
James A. MacCutcheon.......... 44 Executive Vice President, Chief Financial Officer and
Treasurer
Mark A. Caruso................ 43 Senior Vice President -- Human Resources
Antonio DiRico................ 43 Senior Vice President -- Hotel Operations
Richard P. Kaden.............. 50 Senior Vice President -- Franchise Operations
Edward A. Kubis............... 37 Senior Vice President, General Counsel and Secretary
Barry L. Smith................ 54 Senior Vice President -- Marketing
Charles G. Warczak, Jr........ 48 Vice President -- Finance and Controller
</TABLE>
Stewart Bainum, Jr. Chairman of the Board and Chief Executive Officer of
Manor Care and Manor Healthcare Corp. ("Healthcare") since March 1987; Chief
Executive Officer of Manor Care since March 1987 and President since June 1989;
Vice Chairman of the Board of Vitalink Pharmacy Services, Inc. ("Vitalink")
since February 1995; Vice Chairman of the Board of Manor Care and subsidiaries
from June 1982 to March 1987; Director of Manor Care since August 1981, of
Vitalink since September 1991, of Healthcare since 1976 and of Choice Hotels
International, Inc. and its predecessors ("Choice Hotels") since 1977; Chief
Executive Officer of Healthcare since June 1989 and President from May 1990 to
May 1991; Chairman of the Board and Chief Executive Officer of Vitalink from
September 1991 to February 1995 and President and Chief Executive Officer from
March 1987 to September 1991; Chairman of the Board of Choice Hotels from March
1987 to June 1990.
William R. Floyd. Chief Executive Officer of Choice Hotels since October
1996; Chief Operating Officer of Taco Bell Corp., (a subsidiary of PepsiCo) from
July 1995 to October 1996, Chief Operating Officer of KFC (a subsidiary of
PepsiCo) from August 1994 to July 1995; National Vice President of Taco Bell
Company Operations from July 1992 to August 1994, Vice President of Taco Bell
Eastern Operations from December 1990 to January 1992.
Donald J. Landry. President of Choice Hotels since January 1995; President
of MCHD since March 1992; various executive positions with Richfield Hotel
Management, Inc. and its predecessors for more than 15 years, including
President of MHM Corporation.
James A. MacCutcheon. Senior Vice President, Chief Financial Officer and
Treasurer of Manor Care and Choice Hotels since September 1993; Senior Vice
President - Finance and Treasurer from October 1987 to September 1993; Treasurer
of Vitalink since September 1992 and a Director since September 1994.
Mark A. Caruso. Senior Vice President, Human Resources of Choice Hotels
since October 1995; Vice President, Worldwide Human Resources Development,
Holiday Inn Worldwide from March 1993 to October 1995; Director, Human Resources
Development, Holiday Inn Worldwide from February 1990 to March 1993.
Antonio DiRico. Senior Vice President, Hotel Operations of Manor Care
Hotel Division ("MCHD") since May 1992; Senior Vice President of Richfield Hotel
Management, Inc. and its predecessor, MHM Corporation, from May 1975 to May
1992.
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<PAGE> 52
Richard P. Kaden. Senior Vice President - Brands and Acting Chief
Financial Officer of Choice Hotels since April 1996; Senior Vice
President-Finance of Choice from August 1993 to April 1996; Executive Director
of Semmes, Bowen & Semmes from November 1987 to August 1993.
Edward A. Kubis. Assistant General Counsel and Assistant Secretary, Manor
Care since December 1993; Senior Attorney, Real Estate, from December 1990 to
December 1993; Staff Attorney, Real Estate from June 1987 to December 1990.
Barry L. Smith. Senior Vice President - Marketing of Choice Hotels since
February 1989.
Charles G. Warczak, Jr. Vice President - Finance and Controller of Choice
Hotels since March 1996; Vice President - Finance, MCHD from June 1992 to March
1996; Vice President - Finance, Richfield Hotel Management, Inc. from January
1991 to June 1992.
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth certain information concerning the annual
and long term compensation of those persons who, following the Distribution,
will serve as the chairman of the board and the four other most highly
compensated executive officers of the Company (the "Named Officers"). In
addition, information is presented with respect to certain persons who were
officers of Choice Hotels at May 31, 1996 who will not serve as executive
officers of the Company. No information is presented for Mr. Floyd, who will
serve as chief executive officer following the Distribution, as he was not
employed by either the Company or Manor Care prior to October 1996. For
information with respect to Mr. Floyd's compensation, see "-- Employment
Agreements."
48
<PAGE> 53
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ------------------------------
FISCAL ----------------------------- STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER SHARES(#)(1) COMPENSATION(2)
- -------------------------------- ------ -------- -------- ----- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(3).......... 1996 $625,102 $337,555 (5) 60,000 $33,543
Chairman and Chief Executive
Officer 1995 $572,308 $343,385 (5) -- $ 9,000
1994 457,867(4) 274,720 (5) 40,000 14,150
Richard P. Kaden................ 1996 196,603 88,471 (5) 8,000 2,925
Sr. Vice President, Franchise 1995 187,007 59,971 (5) -- 2,458
Operations 1994 133,270 0 (5) 10,000 1,868
Donald L. Landry................ 1996 366,702 201,686 (5) -- 5,000
President 1995 311,635 171,399 (5) 40,000 2,250
1994 275,712 144,059 (5) 25,000 3,537
James A. MacCutcheon(6)......... 1996 301,517 135,682 (5) 25,000 13,176
Senior Vice President, 1995 273,199 136,600 (5) -- 13,176
Chief Financial Officer and 1994 258,360 129,150 (5) 15,000 6,750
Treasurer
Barry L. Smith.................. 1996 233,640 116,820 (5) 5,000 10,427
Sr. Vice President, Marketing 1995 221,668 104,561 (5) -- 6,750
1994 209,151 98,642 (5) 5,000 3,072
Robert C. Hazard, Jr.(7)........ 1996 403,489 201,745 (5) -- 20,932
Co-Chairman 1995 373,709 186,855 (5) -- 9,000
Choice Hotels International,
Inc. 1994 346,124 173,062 (5) -- 14,150
Gerald W. Petitt(8)............. 1996 330,129 165,065 (5) -- 18,770
Co-Chairman 1995 323,553 161,776 (5) -- 9,000
Choice Hotels International,
Inc. 1994 283,193 141,596 (5) -- 14,150
</TABLE>
- ---------------
(1) Represents options to purchase shares of Manor Care Common Stock. For a
discussion of the treatment of options in connection with the Distribution,
see "Relationship Between Manor Care and the Company After the
Distribution -- Employee Benefits Allocation Agreement."
(2) Represents amounts contributed by Manor Care for fiscal years 1996, 1995
and 1994 under the 401(k) Plan and the Nonqualified Savings Plan, which
provide retirement and other benefits to eligible employees, including the
Named Officers. Amounts contributed in cash or stock by the Company during
fiscal year 1996 under the 401(k) Plan for the Named Officers were as
follows: Mr. Bainum, Jr., $9,000; Mr. Landry, $1,752; Mr. Kaden, $977; Mr.
MacCutcheon, $4,410; and Mr. Smith, $3,489. Amounts contributed in cash or
stock by Manor Care during fiscal year 1995 under the Nonqualified Savings
Plan for the Named Officers were as follows: Mr. Bainum, Jr., $24,543; Mr.
Landry, $3,498; Mr. Kaden, $1,948; Mr. MacCutcheon, $8,766; and Mr. Smith,
$6,938.
(3) Mr. Bainum, Jr. will resign as chief executive officer of the Company
effective on the Distribution Date. Following the Distribution, Mr. Bainum,
Jr. will be the chairman of the board of the Company and the chairman of
the board and chief executive officer of Manor Care. It is expected that he
will devote 25% of his time to the Company and 75% of his time to Manor
Care. The compensation reflected here is total compensation received for
services rendered to both the Lodging Business and Manor Care.
(4) Mr. Bainum, Jr. took an unpaid leave of absence during April and May 1994.
(5) The value of perquisites and other compensation does not exceed the lesser
of $50,000 or 10% of the amount of annual salary and bonus paid as to any
of the Named Officers.
(6) Mr. MacCutcheon, has been Senior Vice President, Chief Financial Officer
and Treasurer of Manor Care and Choice Hotels since September 1993. On the
Distribution Date, Mr. MacCutcheon will resign from his position at Manor
Care and will assume the position of Executive Vice President and Chief
Financial Officer of the Company. The compensation reflected here is total
compensation received for services rendered to both the Lodging Business
and Manor Care.
(7) Mr. Hazard and Mr. Petitt have served as Co-Chairmen of Choice Hotels since
January 1995. Prior to January 1, 1995, Mr. Hazard served as Chairman and
Chief Executive Officer of Choice Hotels and Mr. Petitt served as President
and Chief Operating Officer of Choice Hotels. Neither Mr. Hazard nor
49
<PAGE> 54
Mr. Petitt will serve as an executive officer of the Company following the
Distribution, however, each will continue as an unpaid employee of the
Company until May 31, 1997.
The following tables set forth certain information at May 31, 1996 and for
the fiscal year then ended concerning options to purchase Manor Care Common
Stock granted to the Named Officers. All Common Stock figures and exercise
prices have been adjusted to reflect stock dividends and stock splits effective
in prior fiscal years. In connection with the Distribution, existing Manor Care
stock options will be subject to certain adjustments or to conversion into
options to purchase Company Common Stock. See "Relationship Between Manor Care
and the Company After the Distribution -- Employee Benefits Allocation
Agreement."
MANOR CARE STOCK OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------- VALUE OF ASSUMED ANNUAL
PERCENTAGE OF RATE OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR OPTION
NUMBER OF GRANTED TO ALL EXERCISE TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR 1996 PER SHARE DATE 5%(2) 10%(3)
- -------------------------- --------- ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(4).... 60,000 10.5% $30.31 6/21/2005 $1,143,600 2,898,606
Richard P. Kaden(4)....... 8,000 1.4% $30.31 6/21/2005 $ 152,480 386,480
Donald J. Landry.......... -- -- -- -- -- --
James A. MacCutcheon(4)... 25,000 4.4% $30.31 6/21/2005 $ 476,500 1,207,750
Barry Smith(4)............ 5,000 0.9% $30.31 6/21/2005 $ 95,300 241,550
Robert C. Hazard, Jr. .... -- -- -- -- -- --
Gerald W. Petitt.......... -- -- -- -- -- --
</TABLE>
- ---------------
(1) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the Securities and Exchange Commission and therefore
are not intended to forecast future possible appreciation, if any, of the
Company's stock price. Since options are granted at market price, a zero
percent gain in the stock price will result in no realizable value to the
optionees.
(2) A 5% per year appreciation in stock price from $30.31 per share yields
$49.37.
(3) A 10% per year appreciation in stock price from $30.31 per share yields
$78.62.
(4) The options granted to the officers vest at the rate of 20% per year on the
first through the fifth anniversary of the date of the stock option grant.
AGGREGATED OPTION EXERCISES IN FISCAL 1996
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT MAY 31, 1996 IN-THE-MONEY OPTIONS AT MAY
ACQUIRED ON VALUE ---------------------------- 31, 1996(1)
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE ----------------------------
# $ # # EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.... -- -- 635,500 229,500 $17,236,482 $ 4,684,465
Richard P. Kaden...... -- -- 2,166 15,834 39,659 212,949
Donald J. Landry...... -- -- 37,000 148,000 810,190 2,668,922
James A. MacCutcheon.. 16,500 $510,180 84,250 118,250 2,399,197 3,359,956
Barry Smith........... 12,600 $334,880 -- 54,100 -- 1,334,179
Robert C. Hazard, Jr.. -- -- 78,000 34,500 2,281,721 1,034,130
Gerald W. Petitt...... 18,300 $536,119 39,500 34,500 1,184,330 1,034,130
</TABLE>
- ---------------
(1) The closing price of Manor Care's Common Stock as reported by the New York
Stock Exchange on May 31, 1996 was $39.00. The value is calculated on the
basis of the difference between the option exercise price and such closing
price multiplied by the number of shares of Manor Care Common Stock
underlying the option.
50
<PAGE> 55
EMPLOYMENT AGREEMENTS
The Company and Choice Hotels have entered into an employment agreement
with Stewart Bainum, Jr., effective upon the Distribution Date, providing for
Mr. Bainum, Jr.'s employment as Chairman of the Board of the Company. The
agreement has a term of three years. Either the Company or Mr. Bainum may
terminate the agreement upon thirty days' prior written notice on the first and
second anniversary dates of the agreement. The agreement provides that Mr.
Bainum, Jr. will devote 25% of his professional time to the affairs of the
Company and the remaining 75% of his professional time to the affairs of Manor
Care. The agreement provides for a base salary of $164,088 per annum for
services to the Company and a maximum bonus of 60% of Mr. Bainum, Jr.'s base
compensation based upon the performance of the Company.
Under the terms of an employment agreement among Mr. Landry, Manor Care and
Choice Hotels, Mr. Landry's annual salary is presently $404,250 with annual
cost-of-living increases. The agreement extends through November 30, 1999. Prior
to the Distribution, it is expected that Manor Care will assign its rights and
obligations under such contract to the Company. From February 17, 1992 to
January 1, 1995, Mr. Landry served as President of the Manor Care Hotel
Division. On January 1, 1995, Mr. Landry also became President of Choice. The
agreement provides for an annual bonus of up to 55% of his base compensation
based in part on performance of Manor Care and based in part on performance
(including a customer satisfaction component) of the Lodging Business. Following
the Distribution, Mr. Landry's annual bonus will be based on the performance of
the Company.
It is contemplated that the Company and Choice Hotels will enter into an
employment agreement with James A. MacCutcheon. The agreement has a term of five
years. The agreement provides for a base salary of $313,576 per annum, subject
to annual adjustments and an annual bonus of up to 55% of his base compensation,
based on the Company's performance (including a customer satisfaction
component).
The Company and Choice Hotels have entered into an employment agreement
with William R. Floyd. The agreement has a term of five years from September 30,
1996. The agreement provides for a base salary of $425,000 per annum, subject to
annual adjustments and an annual bonus of up to 60% of his base compensation,
based on the Company's performance (including a customer satisfaction
component). In addition, the employment agreement provides that the Company will
issue to Mr. Floyd that number of shares of restricted stock in an amount equal
to $1,250,000 divided by the closing trading price for the Company Common Stock
on the first day of public trading following the Distribution Date. The
restricted stock will vest annually over a period of three years. The Company
will also grant to Mr. Floyd as soon as practicable after the Distribution Date,
options to purchase that number of shares of Company Common Stock equal to
$4,500,000 divided by the average trading price on the first day of trading
following the Distribution Date. A certain number of the options will be
incentive stock options granted under the Company's 1996 Long Term Incentive
Plan, which number shall be the maximum number permitted under such plan and
Section 422(d) of the Internal Revenue Code of 1986, as amended, but in no event
more than 25% of the total number of options. The remainder of the options will
be nonqualified stock options. Mr. Floyd's employment agreement further provides
that, with respect to Mr. Floyd's participation in the Choice Hotels
International, Inc. Supplemental Executive Retirement Plan (the "SERP"), (i) Mr.
Floyd's normal retirement age will be 62 and (ii) no minimum years of services
for benefit eligibility will be applicable.
RETIREMENT PLANS
Prior to the Distribution, it is expected that the Company will adopt the
SERP. Participants will be selected by the Board or any designated committee and
will be at the level of Senior Vice President or above.
Participants in the SERP will receive a monthly benefit for life based upon
final average salary and years of service. Final average salary is the average
of the monthly base salary, excluding bonuses or commissions, earned in a 60
month period out of the 120 months of employment which produces the highest
average, prior to the first occurring of the early retirement date or the normal
retirement date. The normal retirement age is
51
<PAGE> 56
65, and participants must have a minimum of 15 years of service. Participants
may retire at age 60 and may elect to receive reduced benefits commencing prior
to age 65, subject to Board approval. All of the Named Officers who will be
participants are age 55 or younger, so that none of their compensation reported
above would be included in the final average salary calculation. See
"-- Employment Agreements" for a discussion of the terms applicable to Mr.
Floyd's participation in the SERP.
Assuming that the following officers continue to be employed by the Company
until they reach age 65, their credited years of service would be as follows:
<TABLE>
<CAPTION>
CURRENT YEARS YEARS OF SERVICE
NAME OF INDIVIDUAL OF SERVICE AT AGE 65
------------------------------------------------- ------------- ----------------
<S> <C> <C>
Stewart Bainum, Jr............................... 22.5 38
Donald Landry.................................... 4 22
James A. MacCutcheon............................. 9 30
</TABLE>
The table below sets forth estimated annual benefits payable upon
retirement to persons in specified compensation and years of service
classifications. These benefits are straight life annuity amounts, although
participants have the option of selecting a joint and 50% survivor annuity or
ten-year certain payments. The benefits are not subject to offset for social
security and other amounts.
YEARS OF SERVICE/BENEFIT AS
PERCENTAGE OF FINAL AVERAGE SALARY
<TABLE>
<CAPTION>
25 OR
REMUNERATION 15/15% 20/22.5% MORE/30%
-------------------------------------------- ------- -------- ---------
<S> <C> <C> <C>
$300,000.................................... $45,000 $ 67,500 $ 90,000
350,000.................................... 52,500 78,750 105,000
400,000.................................... 60,000 90,000 120,000
450,000.................................... 67,500 101,250 135,000
500,000.................................... 75,000 112,500 150,000
600,000.................................... 90,000 135,000 180,000
</TABLE>
Prior to the Distribution, it is expected that the Company will establish
the Choice Hotels International, Inc. Retirement Savings and Investment Plan
(the "401(k) Plan"), a defined contribution retirement, savings and investment
plan for its employees and the employees of its participating affiliated
companies. The 401(k) Plan will be qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and will include a cash
or deferred arrangement under Section 401(k) of the Code. All employees age 21
or over and who have worked for the Company (or Manor Care) for a twelve month
period during which such employee completed at least 1,000 hours will be
eligible to participate. Subject to certain non-discrimination requirements,
each employee will be able to contribute an amount to the 401(k) Plan on a
pre-tax basis up to 15% of the employee's salary, but not more than the current
federal limit of $9,500. The Company will match contributions made by its
employees subject to certain limitations. The amount of the match will be equal
to a percentage of the amount of salary reduction contribution made on behalf of
a participant during the plan year based upon a formula that involves the
profits of the Company for the year and the number of years of service of the
participant. Amounts contributed by Manor Care pursuant to its 401(k) Plan for
the Named Officers are included in the Summary Compensation Table under the
column headed "All Other Compensation."
Prior to the Distribution, it is expected that the Company will adopt the
Choice Hotels International, Inc. Nonqualified Retirement Savings and Investment
Plan (the "Nonqualified Savings Plan"). Certain select highly compensated
members of management of the Company will be eligible to participate in the
Plan. The Nonqualified Savings Plan will mirror the provisions of the 401(k)
Plan, to the extent feasible, and will be structured so as to provide the
participants with a pre-tax savings vehicle to the extent that pre-tax savings
are limited under the 401(k) Plan as a result of various governmental
regulations, such as non-discrimination testing. Amounts contributed by Manor
Care under the Manor Care Nonqualified Savings Plan for fiscal
52
<PAGE> 57
year 1996 for the Named Officers are included in the Summary Compensation Table
under the column headed "All Other Compensation".
The Company match under the 401(k) Plan and the Nonqualified Savings Plan
will be limited to a maximum aggregate of 6% of the annual salary of a
participant. Likewise, participant contributions under the two plans will not
exceed the aggregate of 15% of the annual salary of a participant.
OPTION AND STOCK PURCHASE PLANS
Prior to the Distribution, it is expected that the Company will adopt the
Choice Hotels International, Inc. Employee Stock Purchase Plan (the "Stock
Purchase Plan"). Under the Stock Purchase Plan, all employees who have completed
one year of service are eligible to participate. Eligible employees may purchase
stock of the Company in an amount of no less than 2% nor more than 10% of
compensation (as defined in the Stock Purchase Plan), subject to an overall
maximum purchase per employee per calendar year of $25,000. At the end of each
quarterly offering period, the Company will contribute cash equal to 10% of the
purchase price of the common stock so purchased. The Company will pay the
administrative costs for the purchase of the Company common stock.
Prior to the Distribution, it is expected that the Company will adopt the
Choice Hotels International, Inc. 1996 Long-Term Incentive Plan (the "Incentive
Plan"), pursuant to which key employees of the Company and its subsidiaries are
eligible to be granted awards under the Incentive Plan. The types of awards that
may be granted under the Incentive Plan are restricted shares, incentive stock
options, nonqualified stock options, stock appreciation rights and performance
shares. A total of up to 7,100,000 shares of common stock will be reserved for
issuance pursuant to the Incentive Plan.
THE BOARD OF DIRECTORS
DIRECTORS OF THE COMPANY
The Company's Board of Directors will be classified into three classes,
designated Class I, Class II and Class III, each class to be as nearly equal in
number of directors as possible. The term of the initial Class I directors will
terminate on the date of the 1997 annual meeting of the Company's stockholders;
the term of the initial Class II directors will terminate on the date of the
1998 annual meeting of the Company's stockholders; and the term of the initial
Class III directors will terminate on the date of the 1999 annual meeting of the
Company's stockholders. At each annual meeting of the Company's stockholders,
successors to the class of directors whose term expires at that annual meeting
will be elected for a three-year term. Newly created directorships resulting
from any increase in the number of directors and any vacancies on the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal or other cause will be filled solely by the affirmative vote of a
majority of the remaining directors then in office. Increases or decreases in
the number of directors shall be apportioned among the classes as nearly equal
as possible, and any additional director of any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class, but in no case will a decrease
in the number of directors shorten the term of any incumbent director.
53
<PAGE> 58
The name, age, proposed class of directorship upon consummation of the
Distribution and business background (other than executive officers who are
directors) of each of the persons who are expected to become on the Distribution
Date the directors of the Company are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- ------ ----------------------------------
<S> <C> <C>
Chairman of the Board; Class III
Stewart Bainum, Jr................. 50 Director
Stewart Bainum..................... 77 Class II Director
Barbara Bainum..................... 52 Class I Director
William R. Floyd................... 52 Vice Chairman; Class III Director
Paul A. Gould...................... 50 Class III Director
Robert C. Hazard, Jr............... 61 Class I Director
Frederick V. Malek................. 59 Class I Director
Gerald W. Petitt................... 50 Class II Director
Jerry E. Robertson, Ph.D. ......... 63 Class II Director
</TABLE>
Stewart Bainum. Vice Chairman of the Board of Manor Care and subsidiaries
since March 1987; Chairman of the Board of Manor Care from August 1981 to March
1987, Chief Executive Officer from July 1985 to March 1987, President from May
1982 to July 1985; Chairman of the Board of Healthcare from 1968 to March 1987
and a Director since 1968; Director of Vitalink from September 1991 to September
1994; Chairman of the Board of Choice Hotels from 1972 to March 1987 and a
Director since 1963; Chairman of the Board of Realty Investment Company, Inc.
since 1965.
Barbara Bainum. President, Secretary and Director of the Commonweal
Foundation since December 1990, December 1984 and December 1984, respectively;
Secretary and Director of Realty Investment Company, Inc. since July 1989 and
March 1982, respectively; Family Services Agency, Gaithersburg, Maryland,
Clinical Social Work since September 1994; Department of Social Services,
Rockville, Maryland, Social Work Case Management from September 1992 to May
1993; member of the Boards of Trustees of Columbia Union College (September 1987
to May 1991) and Atlantic Union College (September 1985 to May 1987).
Paul Gould. Managing Director of Allen & Company Incorporated (investment
banking firm) for more than five years and other positions at Allen & Company
Incorporated since 1973. Director: TeleCommunications International, Inc.,
United Video Satellite Group, Inc. and National Patent Development Corporation;
Board of Trustees: The New School, The Hackley School and The Holderness School.
Robert C. Hazard, Jr. Hotel Developer. Co-Chairman of Choice Hotels since
January 1995 and a Director since December 1980; Chairman from June 1990 to
January 1995 and Chief Executive Officer from December 1980 to January 1995;
President from December 1980 to June 1990. Advisory Board Outrigger Hotels. Mr.
Hazard will resign as Co-Chairman of Choice Hotels effective on the Distribution
Date and will be an unpaid employee of the Company until May 31, 1997.
Frederic V. Malek. Director of Manor Care since 1990; Co-Chairman of CB
Commercial Real Estate Group, since April 1989; Chairman of Thayer Capital
Partners since March 1993; Campaign Manager for Bush-Quayle '92 from January
1992 to November 1992; Vice Chairman of NWA, Inc. (airlines), July 1990 to
December 1991; Director: American Management Systems, Inc., Automatic Data
Processing Corp., FPL Group, Inc. (an affiliate of Florida Power and
Light -- power company), ICF Kaiser International, Inc., Intrav, Inc. (travel
and leisure services), National Education Corporation, Northwest Airlines and
various Paine Webber mutual funds.
Gerald W. Petitt. Hotel Developer. Co-Chairman of Choice Hotels since
January 1995 and a Director since December 1980; President from June 1990 to
January 1995 and Chief Operating Officer from December 1980 to January 1995. Mr.
Petitt will resign as Co-Chairman of Choice Hotels effective on the Distribution
Date and will be an unpaid employee of the Company until May 31, 1997.
54
<PAGE> 59
Jerry E. Robertson, Ph.D. Director of Manor Care since 1989; Retired;
Executive Vice President, 3M Life Sciences Sector and Corporate Services from
November 1986 to March 1994; Director: Allianz Life Insurance Company of North
America, Cardinal Health, Inc., Coherent, Inc., Haemonetics Corporation, Life
Technologies, Inc., Medwave, Inc., Project Hope and Steris Corporation.
Prior to the Distribution Date, the directors of the Company are Stewart
Bainum, Jr., James A. MacCutcheon, Senior Vice President, Chief Financial
Officer and Treasurer of Manor Care and James H. Rempe, Senior Vice President,
General Counsel and Secretary of Manor Care, and the only executive officer of
the Company is Stewart Bainum, Jr. Following the Distribution, Stewart Bainum,
Jr. will be chairman of the board of the Company and chairman of the board and
chief executive officer of Manor Care. It is expected that he will devote 25% of
his time to the Company and 75% of his time to Manor Care.
Upon consummation of the Distribution, the Board of Directors is expected
to consist of nine members. Following the Distribution Date, additional
non-employee directors may be elected to the Board of Directors. The additional
non-employee directors have not yet been determined. It is expected that the
Board of Directors will hold five meetings during the fiscal year and that the
standing committees of the Board will include the Audit Committee, the Finance
Committee, the Compensation/Key Executive Stock Option Plan Committee and the
Nominating Committee. The members of the committees have not yet been
determined.
The Compensation/Key Executive Stock Option Plan Committee will administer
the Company's stock option plans and grant stock options thereunder, will review
compensation of officers and key management employees, will recommend
development programs for employees such as training, bonus and incentive plans,
pensions and retirement, and will review other employee fringe benefit programs.
The Finance Committee will review the financial affairs of the Company and
will recommend financial objectives, goals and programs to the Board of
Directors and to management.
The Audit Committee will review the scope and results of the annual audit,
will review and approve the services and related fees of the Company's
independent public accountants, will review the Company's internal accounting
controls and will review the Company's Internal Audit Department and its
activities.
The Nominating Committee will recommend to the Board of Directors the
members to serve on the Board of Directors during the ensuing year. The
Committee will not consider nominees recommended by stockholders.
Prior to the Distribution, it is expected that the Company will adopt the
Choice Hotels International, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan. Part A of the Plan provides that
eligible non-employee directors will be granted options to purchase 5,000 shares
of Common Stock on their date of election and will be granted options to
purchase 1,000 shares on their date of election in subsequent calendar years.
Part B of the Plan provides that eligible non-employee directors may elect,
prior to May 31 of each year, to defer a minimum of 25% of committee fees earned
during the ensuing fiscal year. The fees which are so deferred will be used to
purchase Common Stock on the open market within 15 days after December 1,
February 28 and May 31 of such fiscal year. Pending such purchases, the funds
will be credited to an Interest Deferred Account, which will be interest
bearing. Stock which is so purchased will be deposited in a Stock Deferred
Account pending distribution in accordance with the Plan.
Directors who will be employees of the Company will receive no separate
remuneration for their services as directors. Pursuant to the Non-Employee
Director Stock Compensation Plan to be adopted by the Company prior to the
Distribution, eligible non-employee directors will receive annually, in lieu of
cash, restricted stock of the Company, the fair market value of which at the
time of grant will be equal to $30,000, which will represent the Board retainer
and meeting fees. In addition, all non-employee directors will receive $1,610
per diem for Committee meetings attended, except where the Committee meeting is
on the same day as a Board meeting, and will be reimbursed for travel expenses
and other out-of-pocket costs incurred in attending meetings.
55
<PAGE> 60
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of May 31, 1995, Manor Care purchased from each of Mr. Hazard and Mr.
Petitt 25 shares, representing one-half of their shares, of Choice Hotels common
stock. In accordance with a formula contained in an agreement dated December 20,
1994, Manor Care paid to each of Messrs. Hazard and Petitt the sum of
$13,683,704 for such shares. After the transaction, Messrs. Hazard and Petitt
each owned 25 shares of Choice Hotels common stock and Manor Care owned 850
shares of Choice Hotels common stock. As of May 31, 1996, Manor Care purchased
from each Mr. Hazard and Mr. Petitt his remaining 25 shares for a price of
$15,197,946 to each of them. As of June 1, 1996, each of Mr. Hazard and Mr.
Petitt has entered into an agreement with Manor Care and the Company, pursuant
to which he will remain an unpaid employee of the Company until May 31, 1997 and
options to purchase up to 5,000 shares of Manor Care Common Stock, which were
previously granted and are presently outstanding, will vest ratably beginning
June 1, 1996 and ending May 31, 1997. Pursuant to such agreements Mr. Hazard and
Mr. Petitt have each waived the initial grants to non-employee directors under
the Non-Employee Director Stock Compensation Plan.
Upon consummation of the Distribution, certain management employees of the
Lodging Business and of Manor Care will hold options to purchase shares of
Company Common Stock. See "Relationship Between Manor Care and the Company After
the Distribution -- Employee Benefits Allocation Agreement."
For a discussion of certain contracts to be executed between the Company
and Manor Care as of the Distribution Date, see "Relationship Between Manor Care
and the Company After the Distribution." For a discussion of the historical
financial relationship between the Company and Manor Care, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
56
<PAGE> 61
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the amount of Company Common Stock expected
to be beneficially owned by (1) each director and director nominee of the
Company, (2) the chief executive officer of the Company and the Named Officers,
(3) all officers and directors of the Company as a group and (4) all persons who
will own beneficially more than 5% of Company Common Stock, based on the Manor
Care Common Stock beneficially owned by such persons on September 9, 1996.
Unless otherwise specified, the address for each of them is 10750 Columbia Pike,
Silver Spring, Maryland 20901. On the Distribution Date, the holders of Manor
Care Common Stock as of the Record Date will be entitled to receive one share of
Company Common Stock for each share of Manor Care Common Stock. For purposes of
the following table, it is assumed that all options held by the persons
specified will be converted into options to purchase Company Common Stock. For a
discussion of the treatment of outstanding options to purchase Manor Care Common
Stock in connection with the Distribution, see "Relationship Between Manor Care
and the Company After the Distribution -- Employee Benefits Allocation
Agreement."
<TABLE>
<CAPTION>
TOTAL SHARES OF PERCENT OF SHARES
COMPANY COMMON STOCK OUTSTANDING
EXPECTED TO BE EXPECTED TO BE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------------------------------- -------------------- ------------------
<S> <C> <C>
Stewart Bainum, Jr. ....................... 12,308,102(2) 19.4%
Stewart Bainum............................. 12,548,386(3) 19.9%
Barbara Bainum............................. 1,820,946(4) 2.9%
Antonio DiRico............................. 3,846(5) *
William R. Floyd........................... --(6) --
Paul A. Gould.............................. -- --
Robert C. Hazard, Jr. ..................... 36,884(7) *
Richard B. Kaden........................... 6,210(8) *
Donald J. Landry........................... 38,778(9) *
James A. MacCutcheon....................... 116,234(10) *
Frederic V. Malek.......................... 2,666(11) *
Gerald W. Petitt........................... 82,937(12) *
Jerry E. Robertson, Ph.D. ................. 15,980(13) *
Barry L. Smith............................. 14,251(14) *
All Directors and Officers as a Group (17
persons)................................. 27,000,140(15) 42.4%
Ronald Baron............................... 4,345,184(16) 6.9%
</TABLE>
- ---------------
* Less than 1% of class.
(1) Percentages are based on 62,867,418 shares outstanding on September 9, 1996
plus, for each person, the shares which would be issued assuming that such
person exercises all options it holds which are exercisable within 60 days
thereafter.
(2) Includes 91,752 shares owned directly by Mr. Bainum, Jr. Also includes
5,417,761 shares owned by Bainum Associates Limited Partnership ("Bainum
Associates") and 4,415,250 shares owned by MC Investments Limited
Partnership ("MC Investments"), in both of which Mr. Bainum, Jr. is
managing general partner with the sole right to dispose of the shares.
Authority to vote such shares is held by the voting general partner, Mr. B.
Houston McCeney. Also includes 1,679,628 shares owned by Mid Pines
Associates Limited Partnership ("Mid Pines"), in which Mr. Bainum, Jr. is
managing general partner and has shared voting authority and 1,500 shares
owned by the Foundation for Maryland's Future, in which Mr. Bainum, Jr. is
the sole director. Mr. Bainum, Jr. has a direct or indirect pecuniary
interest in 1,172,144 shares, 817,936 shares and 343,791 shares owned
respectively by Bainum Associates, MC Investments and Mid Pines. Of the
shares owned by Bainum Associates, MC Investments and Mid Pines, 999,523,
1,271,541 and 1,679,628 shares, respectively, are also included in the
above table as owned beneficially by Stewart Bainum and Barbara Bainum, Mr.
Bainum, Jr.'s father and sister,
57
<PAGE> 62
respectively. Also includes 700,000 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 September 9, 1996, and
1,504 shares and 707 shares, respectively, which Mr. Bainum, Jr. has the
right to receive upon termination of his employment with the Company
pursuant to the terms of the Manor Care, Inc. Retirement Savings and
Investment Plan (the "Manor Care 401(k) Plan") and the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan (the "Manor Care
Nonqualified Savings Plan"). Does not include shares owned by Realty
Investment Company, Inc. and its subsidiaries ("Realty Investment"), a real
estate investment and management company in which Mr. Bainum, Jr. owns,
directly or indirectly, 25.0% of the outstanding common stock.
(3) Includes 4,036,278 shares held directly by the Stewart Bainum Declaration
of Trust, of which Mr. Bainum is the sole trustee and beneficiary; his
joint interest in 1,053,860 shares owned by Bainum Associates and 1,370,069
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 Investment, a real estate
investment and management company controlled by Mr. Bainum and his wife;
and 40,305 shares held by the Commonweal Foundation of which Mr. Bainum is
Chairman of the Board of Directors and has shared voting authority. Also
includes 798,711 shares held by the Jane L. Bainum Declaration of Trust,
the sole trustee of which is Mr. Bainum's wife, and 1,679,628 shares owned
by Mid Pines in which Mr. Bainum indirectly has shared voting authority.
Does not include shares included in the table above as owned beneficially
by Stewart Bainum, Jr., Mr. Bainum's son, or Ms. Barbara Bainum, Mr.
Bainum's daughter, except those shares owned by Bainum Associates, MC
Investments, Mid Pines and the Commonweal Foundation in which Mr. Bainum
has a beneficial interest. Also does not include 94,500 shares held by his
other two adult children.
(4) Includes 101,013 shares owned directly by Ms. Bainum. Also includes 40,305
shares owned by the Commonweal Foundation, of which Ms. Bainum is
President, Secretary and a member of the board, and with respect to which
she has shared voting authority and 1,679,628 shares owned by Mid Pines, in
which Ms. Bainum is a general partner and has shared voting authority.
Shares owned by the Commonweal Foundation and Mid Pines are also included
in the above table as owned beneficially by Stewart Bainum and Stewart
Bainum, Jr., respectively. Does not include (i) shares owned by Bainum
Associates in which Ms. Bainum is a limited partner, (ii) shares owned by
MC Investments, in which Ms. Bainum is a limited partner, (iii) shares
owned by Realty Investment, in which Ms. Bainum owns 8.3% of the
outstanding common stock and (iv) shares owned directly or indirectly by
Ms. Bainum's adult children or trusts for their benefit. Ms. Bainum is the
daughter of Mr. Bainum and the sister of Mr. Bainum, Jr.
(5) Includes 3,600 shares which Mr. DiRico has the right to acquire pursuant to
stock options which are presently exercisable or which become exercisable
within 60 days after September 9, 1996, 76 shares purchased by Mr. DiRico
pursuant to the terms of the Manor Care 1995 Employee Stock Purchase Plan
and 55 shares and 115 shares, respectively, which Mr. DiRico has the right
to receive upon termination of his employment pursuant to the terms of the
Manor Care 401(k) Plan and the Manor Care Nonqualified Savings Plan.
(6) As of September 9, 1996, Mr. Floyd was not affiliated with the Company or
Manor Care and did not officially own any shares. For a description of
certain restricted stock and stock option awards to be granted to Mr. Floyd
after the Distribution Date, see "Management -- Employment Agreements."
(7) Includes 4,500 shares which Mr. Hazard has the right to acquire pursuant to
stock options which are presently exercisable or which become exercisable
within 60 days after September 9, 1996, and 113 shares and 415 shares,
respectively, which Mr. Hazard has the right to receive upon termination of
his employment pursuant to the terms of the Manor Care 401(k) Plan and the
Manor Care Nonqualified Savings Plan.
(8) Includes 5,934 shares which Mr. Kaden has the right to acquire pursuant to
stock options which are presently exercisable or which become exercisable
within 60 days after September 9, 1996, and 276
58
<PAGE> 63
shares purchased by Mr. Kaden pursuant to the terms of the Manor Care
Employee Stock Purchase Plan.
(9) Includes 38,500 shares which Mr. Landry has the right to acquire pursuant
to stock options which are presently exercisable or which become
exercisable within 60 days after September 9, 1996, and 108 shares and 170
shares, respectively, which Mr. Landry has the right to receive upon
termination of his employment pursuant to the terms of the Manor Care
401(k) Plan and the Manor Care Nonqualified Savings Plan.
(10) Includes 116,000 shares which Mr. MacCutcheon has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after September 9, 1996, and 234 shares which
Mr. MacCutcheon has the right to receive upon termination of his employment
with the Company pursuant to the terms of the Manor Care 401(k) Plan.
(11) Includes 1,666 shares which Mr. Malek has the right to acquire pursuant to
stock options which are presently exercisable or which become exercisable
within 60 days after September 9, 1996.
(12) Includes 8,661 shares held in trust for minor children for which Mr. Petitt
is trustee. Beneficial ownership of such shares is disclaimed. Also
includes 4,500 shares which Mr. Petitt has the right to acquire pursuant to
stock options which are presently exercisable or which become exercisable
within 60 days after September 9, 1996 and 473 shares purchased by Mr.
Petitt pursuant to the terms of the Manor Care, Inc. 1995 Employee Stock
Purchase Plan (the "Manor Care Employee Stock Purchase Plan").
(13) Includes 1,666 shares which Mr. Robertson has the right to acquire pursuant
to stock options which are presently exercisable or which become
exercisable within 60 days after September 9, 1996, 814 shares acquired
pursuant to the Manor Care, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan.
(14) Includes 14,000 shares which Mr. Smith has the right to acquire pursuant to
stock options which are presently exercisable or which become exercisable
within 60 days after September 9, 1996, and 86 shares and 165 shares,
respectively, which Mr. Smith has the right to receive upon termination of
his employment with the Company pursuant to the terms of the Manor Care
401(k) Plan and the Manor Care Nonqualified Savings Plan.
(15) Includes a total of 896,532 shares which the officers and directors
included in the group have the right to acquire pursuant to stock options
which are presently exercisable or which become exercisable within 60 days
after September 9, 1996 and a total of 2,040 shares and 1,731 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 Manor Care 401(k) Plan and the Manor Care Nonqualified Savings Plan.
(16) As of June 18, 1996, based on a Schedule 13-D, as amended, filed by Mr.
Baron with the Securities and Exchange Commission (the "Commission"). Mr.
Baron's address is 450 Park Avenue, Suite 2800, New York, New York 10022.
59
<PAGE> 64
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
Under the Restated Certificate of the Company, which is attached as
Appendix A to this Information Statement, the total number of shares of capital
stock that the Company has authority to issue is 165,000,000, consisting of
160,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock (the "Preferred Stock"), par value $.01 per share.
Based on the number of shares of Manor Care Common Stock outstanding on
October 1, 1996, it is expected that 62,872,184 shares of the Company's Common
Stock will be issued to stockholders of Manor Care in the Distribution. All the
shares of the Company's Common Stock to be distributed to Manor Care
stockholders in the Distribution will be fully paid and non-assessable.
COMMON STOCK
The Restated Certificate designates a series of common stock consisting of
75,000,000 shares of common stock. The Company Common Stock being distributed on
the Distribution Date is part of such series. Holders of the Company's Common
Stock are entitled to receive, subject to preferences that may be applicable
from time to time with respect to any outstanding Preferred Stock, such
dividends as are declared by the Board of Directors of the Company, one vote for
each share at all meetings of stockholders, and, subject to preferences that may
be applicable from time to time with respect to any outstanding Preferred Stock,
the remaining assets of the Company upon liquidation, dissolution or winding up
of the Company. The Company is authorized to issue additional shares of common
stock without further stockholder approval (except as may be required by
applicable law or stock exchange regulations).
With respect to the issuance of common shares of any additional series, the
Board of Directors of the Company is authorized to determine, without any
further action by the holders of the Company's Common Stock, among other things,
the dividend rights, dividend rate, conversion rights, voting rights and rights
and terms of redemption, as well as the number of shares constituting such
series and the designation thereof. Should the Board of Directors of the Company
elect to exercise its authority, the rights and privileges of holders of the
Company's Common Stock could be made subject to rights and privileges of any
such other series of common stock. The Company has no present plans to issue any
common stock of a series other than the Company's Common Stock.
See "Dividend Policy" for a description of the dividend policy of the
Company after the Distribution.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue up to 5,000,000
shares of Preferred Stock without further stockholder approval (except as may be
required by applicable law or stock exchange regulations) and to fix from time
to time, by resolution or resolutions, the relative powers, preferences and
rights and the qualifications, limitations or restrictions of any series of
Preferred Stock, as well as the number of shares constituting such series and
the designation thereof.
PREEMPTIVE RIGHTS
Holders of shares of Company Common Stock have no preemptive rights.
PURPOSES AND EFFECTS OF CERTAIN CHARTER AND BY-LAW PROVISIONS
GENERAL
The provisions of the Restated Certificate and the By-Laws described in
this section, and the ability to issue additional series of capital stock
without a stockholder vote, may delay or make more difficult acquisitions of or
changes of control of the Company not approved by the Company's Board of
Directors. Such provisions enable the Company, particularly (but not
exclusively) in the initial years of its existence as an independent, publicly
owned company, to develop its business in a manner which will foster its long
term
60
<PAGE> 65
growth without disruption caused by the threat of a takeover not deemed by its
Board of Directors to be in the best interest of the Company and its
stockholders.
Pursuant to the Restated Certificate the affirmative vote of the holders of
shares representing not less than two-thirds of the voting power of the Company
is required for the approval of any proposal to merge or consolidate with any
other entity (other than an entity 90% owned by the Company) or sell, lease or
exchange all or substantially all of the Company's assets. In addition, among
other things, the Restated Certificate provides that (i) stockholder action can
be taken only at an annual or special meeting of stockholders and not by written
consent in lieu of a meeting and (ii) special meetings of the stockholders may
be called only by the Chairman or the Vice Chairman of the Board or by the
Secretary of the Company within 10 calendar days after receipt of the written
request of a majority of the total number of directors of the Company (assuming
no vacancies) or, if there are no directors in office, by a majority vote of the
stockholders. The Company's By-Laws require that stockholders desiring to bring
any business, including nominations for directors, before an annual meeting of
stockholders deliver written notice thereof to the Secretary of the Company not
later than 60 days in advance of the meeting of stockholders; provided, however,
that in the event that the date of the meeting is not publicly announced by the
Company by press release or inclusion in a report filed with the Commission or
furnished to stockholders more than 75 days prior to the meeting, notice by the
stockholder to be timely must be delivered to the secretary of the Company not
later than the close of business on the tenth day following the day on which
such announcement of the date of the meeting was so communicated. The By-Laws
further require that the notice by the stockholder set forth a description of
the business to be brought before the meeting and the reasons for conducting
such business at the meeting and certain information concerning the stockholder
proposing such business and the beneficial owner, if any, on whose behalf the
proposal is made, including their names and addresses, the class and number of
shares of the Company that are owned beneficially and of record by each of them,
and any material interest of either of them in the business proposed to be
brought before the meeting. The recipient of a revocable proxy is not deemed to
be a beneficial owner of the shares underlying such proxy, and the foregoing
provisions do not affect the granting or receipt of a revocable proxy.
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
ELIMINATION OF LIABILITY IN CERTAIN CIRCUMSTANCES
Pursuant to authority conferred by Delaware General Corporation Law Section
102, the Restated Certificate provides that no director of the Company shall be
liable to the Company 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 the Company or the stockholders, for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, for unlawful
payment of dividends, unlawful stock redemptions or repurchases and for any
transaction from which the director derived an improper personal benefit. This
provision is intended to eliminate the risk that a director might incur personal
liability to the Company or its stockholders for breach of the duty of care. The
Restated Certificate also provides that if Delaware law is amended to further
limit the liability of directors, then the liability of a director of the
Company shall be further limited to the fullest extent permitted by Delaware law
as so amended.
INDEMNIFICATION AND INSURANCE
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 expense incurred in connection with their service to the corporation
in those capacities. The Restated Certificate contains provisions requiring
indemnification by the Company of its directors and officers to the fullest
extent permitted by law. Among other things, the Restated Certificate provides
indemnification for officers and directors against liabilities for judgments in
and settlements of lawsuits and other proceedings and for the advance and
payment of fees and expenses reasonably incurred by the director or officer in
defense of any such lawsuit or proceeding.
61
<PAGE> 66
AVAILABLE INFORMATION
The Company has filed with the Commission a Form 10 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") with respect to the
Company Common Stock described herein. This Information Statement does not
contain all the information set forth in the Form 10 and exhibits thereto. For
further information reference is made to the Form 10 and the exhibits thereto.
When the Form 10 becomes effective, the Company will be subject to the
informational requirements of the Exchange Act of 1934, as amended, and in
accordance therewith will file reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at its principal offices at 450 Fifth Street, N.W., Washington, D.C.
20549, and at its regional offices at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material may be obtained at prescribed
rates from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of such
site is (http://www. sec. gov). Application has been made to list the Company's
Common Stock on the New York Stock Exchange and, if and when such shares
commence trading on the New York Stock Exchange, such reports, proxy statements
and other information concerning the Company will be available for inspection at
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
62
<PAGE> 67
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Combined Balance Sheets as of May 31, 1995 and May 31, 1996 and August 31, 1996
(Unaudited)......................................................................... F-3
Combined Statements of Income for the fiscal years ended May 31, 1994, May 31, 1995
and May 31, 1996, and for the three-month periods ended August 31, 1995 (Unaudited)
and August 31, 1996 (Unaudited)..................................................... F-4
Combined Statements of Cash Flows for the fiscal years ended May 31, 1994, May 31,
1995 and May 31, 1996, and for the three-month periods ended August 31, 1995
(Unaudited) and August 31, 1996 (Unaudited)......................................... F-5
Notes to Combined Financial Statements................................................ F-6
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Manor Care, Inc.:
We have audited the accompanying combined balance sheets of Choice Hotels
Holdings, Inc. (a Delaware corporation), as described under "Basis of
Presentation" in the Notes to Combined Financial Statements, as of May 31, 1995
and 1996, and the related combined statements of income and cash flows for each
of the three years in the period ended May 31, 1996. These combined financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Choice Hotels
Holdings, Inc. as of May 31, 1996 and 1995, and the combined results of their
operations and their combined cash flows for each of the three years in the
period ended May 31, 1996, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The schedule attached to the
Company's Registration Statement on Form 10 as Exhibit 99.01 is presented for
the purpose of complying with the Securities and Exchange Commission rules and
is not part of the basic combined financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic combined
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
combined financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.,
June 28, 1996
F-2
<PAGE> 69
CHOICE HOTELS HOLDINGS, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31,
--------------------- AUGUST 31,
1995 1996 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $ 2,088 $ 4,142 $ 4,635
Receivables (net of allowance for doubtful accounts of
$4,202, $4,825 and $5,782 (unaudited),
respectively)........................................ 21,946 30,619 37,228
Inventories............................................. 289 757 623
Current deferred income tax benefit..................... -- 1,266 1,266
Prepaid expenses........................................ 2,807 3,003 1,993
Other................................................... 955 1,215 1,605
-------- -------- ---------
Total current assets............................ 28,085 41,002 47,350
-------- -------- ---------
PROPERTY AND EQUIPMENT, AT COST, NET OF ACCUMULATED
DEPRECIATION............................................ 257,156 299,527 315,447
-------- -------- ---------
LODGING FRANCHISE RIGHTS, NET OF ACCUMULATED
AMORTIZATION............................................ 61,565 58,676 57,953
-------- -------- ---------
GOODWILL, NET OF ACCUMULATED AMORTIZATION................. 32,128 59,839 61,984
-------- -------- ---------
OTHER ASSETS.............................................. 12,541 32,260 29,472
-------- -------- ---------
$391,475 $491,304 $ 512,206
======== ======== =========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current portion of mortgages and long term debt......... $ 639 $ 669 684
Accounts payable........................................ 46,109 24,473 26,430
Accrued expenses........................................ 15,366 21,656 18,649
Income taxes payable.................................... 634 1,810 1,523
-------- -------- ---------
Total current liabilities....................... 62,748 48,608 47,286
-------- -------- ---------
MORTGAGES AND OTHER LONG TERM DEBT........................ 52,030 68,469 68,721
-------- -------- ---------
NOTES PAYABLE TO PARENT................................... 198,522 225,723 225,723
-------- -------- ---------
DEFERRED INCOME TAXES ($11,620, $0 AND $0 (UNAUDITED),
RESPECTIVELY) AND OTHER LIABILITIES..................... 12,346 945 215
-------- -------- ---------
EQUITY
Investments and advances from Parent.................... 65,829 147,559 170,261
-------- -------- ---------
$391,475 $491,304 $ 512,206
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-3
<PAGE> 70
CHOICE HOTELS HOLDINGS, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MAY 31, AUGUST 31,
------------------------------ -------------------------
1994 1995 1996 1995 1996
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Franchise....................................... $165,581 $188,021 $219,164 $60,299 $ 69,727
Hotel operations................................ 74,183 114,514 155,709 39,081 49,653
-------- -------- -------- ------- ---------
Total revenues........................... 239,764 302,535 374,873 99,380 119,380
-------- -------- -------- ------- ---------
OPERATING EXPENSES
Franchise marketing............................. 45,373 45,510 49,658 13,707 15,291
Franchise reservations.......................... 26,685 28,738 35,677 9,164 11,876
Hotel operations................................ 60,062 84,711 106,120 25,170 31,153
Selling, general and administration expenses.... 57,081 69,676 83,267 20,935 22,356
Depreciation and amortization................... 17,521 21,841 26,026 6,040 6,940
Provision for asset impairment and
restructuring................................. -- -- 33,335 -- --
-------- -------- -------- ------- ---------
Total operating expenses................. 206,722 250,476 334,083 75,016 87,616
-------- -------- -------- ------- ---------
INCOME BEFORE OTHER EXPENSES AND INCOME TAXES..... 33,042 52,059 40,790 24,364 31,764
-------- -------- -------- ------- ---------
OTHER EXPENSES
Interest expense on notes payable to Parent..... 10,665 15,492 19,673 4,612 5,079
Minority interest............................... 1,476 2,200 1,532 383 --
Other interest and other expenses, net.......... 3,223 4,412 3,727 797 788
-------- -------- -------- ------- ---------
Total other expenses..................... 15,364 22,104 24,932 5,792 5,867
-------- -------- -------- ------- ---------
Income before income taxes........................ 17,678 29,955 15,858 18,572 25,897
Income taxes...................................... 8,019 13,144 7,400 7,658 10,500
-------- -------- -------- ------- ---------
Net Income........................................ $ 9,659 $ 16,811 $ 8,458 $10,914 $ 15,397
======== ======== ======== ======= =========
</TABLE>
The accompanying notes are an integral part of these combined
statements of income.
F-4
<PAGE> 71
CHOICE HOTELS HOLDINGS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MAY 31, AUGUST 31,
------------------------------- -------------------------
1994 1995 1996 1995 1996
-------- -------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 9,659 $ 16,811 $ 8,458 $ 10,914 $ 15,397
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization.................. 17,521 21,841 26,026 6,040 6,940
Amortization of debt discount.................. 74 171 34 8 7
Provision for bad debts........................ 3,360 906 974 2,212 1,032
(Decrease) increase in deferred taxes.......... 3,328 827 (12,885) (2,363) --
Gain on sale of operating hotel................ -- -- 584 -- --
Provision for asset impairment................. -- -- 28,160 -- --
Change in assets and liabilities (excluding sold
hotels and acquisitions):
Change in receivables.......................... 1,063 (4,529) (9,647) (4,404) (7,641)
Change in inventories and other current
assets....................................... (340) 3,748 (1,047) (5,645) 754
Change in current liabilities.................. 8,457 5,691 11,153 100 (1,050)
Change in income taxes payable................. -- 634 1,176 260 (287)
Change in other liabilities.................... 1,454 1,803 1,750 (8,555) (730)
-------- -------- --------- -------- --------
NET CASH PROVIDED (UTILIZED) BY OPERATING
ACTIVITIES.............................. 44,576 47,903 54,736 (1,433) 14,422
-------- -------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment............. (17,939) (34,889) (47,443) (7,683) (16,405)
Acquisition of operating hotels.................. (44,200) (59,766) (49,617) (6,922) --
Acquisition of a hotel chain..................... (10,400) -- -- -- --
Proceeds from sale of operating hotels........... 7,200 -- 5,479 -- --
Purchase of minority interest.................... -- -- (55,269) (27,367) --
Investment in Friendly Hotels, PLC............... -- -- (17,069) -- --
Other items, net................................. (3,788) 1,595 (5,722) (1,124) (172)
-------- -------- --------- -------- --------
NET CASH UTILIZED BY INVESTING
ACTIVITIES.............................. (69,127) (93,060) (169,641) (43,096) (16,577)
-------- -------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and other long-term
debt........................................... 5,079 15,567 17,296 -- 850
Principal payments of debt....................... (1,993) (16,382) (810) (1,387) (590)
Proceeds from notes payable to Parent............ 68,361 51,461 27,201 -- --
Cash transfers (to) from Parent, net............. (45,198) (6,190) 73,272 47,101 2,388
-------- -------- --------- -------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES.............................. 26,249 44,456 116,959 45,714 2,648
-------- -------- --------- -------- --------
Net change in cash and cash equivalents............ 1,698 (701) 2,054 1,185 493
Cash and cash equivalents at beginning of period... 1,091 2,789 2,088 2,088 4,142
-------- -------- --------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD........................................... $ 2,789 $ 2,088 $ 4,142 $ 3,273 $ 4,635
======== ======== ========= ======== ========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
(UNAUDITED)
During August 1996, Manor Care transferred to the Company title to a
building, related land and furniture and fixtures with a book value of
$4,917,000. The property will be converted to an operating hotel.
The accompanying notes are an integral part of these combined statements
of cash flows.
F-5
<PAGE> 72
NOTES TO COMBINED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On March 7, 1996, Manor Care, Inc., ("Manor Care") announced its intention
to proceed with the separation of its lodging business from its health care
business via a spin-off of its lodging business (the "Distribution"). Manor
Care's Board of Directors voted to approve, in principle, the Distribution
subject to receipt of other approvals and consents and satisfactory
implementation of the arrangements for the Distribution. Manor Care intends to
consummate the Distribution in the second quarter of fiscal year 1997 through a
special dividend to its shareholders of one share of common stock of Choice
Hotels Holdings, Inc. (the "Company") for each share of Manor Care common stock.
The Distribution is conditional upon certain matters, including declaration of
the special dividend by Manor Care's Board of Directors.
Manor Care has received a ruling from the Internal Revenue Service that the
Distribution will be tax-free. The Company was formed on June 27, 1996 to
facilitate the proposed Distribution of Manor Care's lodging operations. Upon
consummation of the Distribution, the Company will change its name to Choice
Hotels International, Inc. The operations of the Company will consist
principally of the hotel franchise operations and the owned and managed hotel
operations formerly conducted by Manor Care directly or through Manor Care's
subsidiaries (the "Lodging Business"). As of May 31, 1996, the Company had
franchise agreements with 3,052 hotels operating in 30 countries principally
under the following brand names: Comfort, Clarion, Sleep, Quality, Rodeway and
Econo Lodge. The Company also owns and manages, under its six principal brand
names, 79 hotels in 25 states, as well as in Germany, France and England.
The combined financial statements present the financial position, results
of operations and cash flows of the Company as if it were formed as a separate
entity of Manor Care which conducted the Lodging Business for all periods
presented. Manor Care's historical basis in the assets and liabilities of the
Company has been carried over to the combined 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 cash transferred
between the Company and Manor Care.
An analysis of the activity in the "Investments and advances from Parent"
account for the three years ended May 31, 1996 and the quarter ended August 31,
1996 is as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
Balance, May 31, 1993.................................................. $ 90,747
Cash transfers to Parent, net.......................................... (45,198)
Net income............................................................. 9,659
------------
Balance, May 31, 1994.................................................. 55,208
Cash transfers to Parent, net.......................................... (6,190)
Net income............................................................. 16,811
------------
Balance, May 31, 1995.................................................. 65,829
Cash transfers from Parent, net........................................ 73,272
Net income............................................................. 8,458
------------
Balance, May 31, 1996.................................................. 147,559
Cash transfers from Parent, net (Unaudited)............................ 2,388
Transfer of property and equipment (Unaudited)......................... 4,917
Net income (Unaudited)................................................. 15,397
------------
Balance, August 31, 1996 (Unaudited)................................... $170,261
============
</TABLE>
F-6
<PAGE> 73
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The average balance of the investments and advances from Parent was $73.0
million, $60.5 million, $107.0 million and $150.9 million (unaudited) for fiscal
years 1994, 1995, 1996, and the quarter ended August 31, 1996, respectively.
PRO FORMA INCOME PER SHARE (UNAUDITED)
Per share data is not presented on a historical basis because the Company
was not a publicly-held company during the periods presented. Pro forma income
per share for fiscal year 1996 and the three months ended August 31, 1996, after
giving effect to the transactions described in the pro forma combined financial
statements, would have been $0.12 and $0.24, respectively. The pro forma income
per common share is computed by dividing pro forma net income by the pro forma
weighted average number of outstanding common shares, aggregating 62.6 million
and 63.0 million in fiscal year 1996 and the three months ended August 31, 1996,
respectively. The pro forma weighted average number of outstanding common shares
is based on Manor Care's weighted average number of outstanding common shares.
PROPERTY AND EQUIPMENT
The components of property and equipment at the respective dates presented
in the combined balance sheets were:
<TABLE>
<CAPTION>
MAY 31,
-----------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land......................................................... $ 35,676 $ 45,459
Building and improvements.................................... 206,510 227,611
Capitalized leases........................................... 6,244 6,244
Furniture, fixtures and equipment............................ 61,452 65,369
Hotels under construction.................................... 8,077 18,224
-------- --------
317,959 362,907
Less: Accumulated depreciation............................... (60,803) (63,380)
-------- --------
$257,156 $299,527
======== ========
</TABLE>
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows:
<TABLE>
<S> <C>
Building and improvements............................................... 10-40 years
Furniture, fixtures and equipment....................................... 3-20 years
</TABLE>
Accumulated depreciation includes $3.3 million at May 31, 1995 and $3.5
million at May 31, 1996 relating to capitalized leases. Capitalized leases are
amortized on a straight-line basis over the lesser of the lease term or the
remaining useful lives of the leased properties.
MINORITY INTEREST
Prior to May 31, 1996, certain members of the Company's management had a
minority ownership interest in Choice Hotels International, Inc., a majority
owned subsidiary. Amounts reflected as minority interest represent the minority
owners' share of income in Choice Hotels International, Inc. As of May 31, 1996,
the Company had repurchased all of the outstanding minority ownership interest
from management.
GOODWILL
Goodwill primarily represents an allocation of the excess purchase price of
the stock of Choice Hotels International, Inc. over the recorded minority
interest. Goodwill is being amortized over 40 years. Such amortization amounted
to $343,000 in each of the years ended May 31, 1994 and 1995 and $854,000 in the
F-7
<PAGE> 74
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
year ended May 31, 1996. Goodwill is net of accumulated amortization of $1.9
million and $2.8 million at May 31, 1995 and 1996, respectively.
DEFERRED DEVELOPMENT COSTS
Included in other assets are deferred costs of $934,000 and $172,000, net
of accumulated amortization, as of May 31, 1995 and 1996, respectively,
associated with the development of a computerized reservation system and other
related systems. These costs are being amortized over five years. Such
amortization amounted to approximately $1.0 million for the fiscal years ended
May 31, 1994 and 1995, and $762,000 for the fiscal year ended May 31, 1996.
Deferred development costs are net of accumulated amortization of $4.2 million
and $372,000 at May 31, 1995 and 1996, respectively.
FRANCHISE RIGHTS
Franchise rights are an intangible asset and represent an allocation in
purchase accounting for the value of long-term franchise contracts. The majority
of the balance resulted from the Econo Lodge and Rodeway acquisitions made in
fiscal year 1991. Franchise rights acquired are amortized over an average life
of twenty-six years. Amortization expense amounted to $2.9 million for each of
the years ended May 31, 1994, 1995 and 1996. Franchise rights are net of
accumulated amortization of $8.5 million and $11.4 million at May 31, 1995 and
1996, respectively.
The Company evaluates the recoverability of franchise rights no less than
annually, based on net, undiscounted expected cash flows associated with these
franchises. Such rights are considered to be impaired if the net, undiscounted
expected cash flows are less than the carrying amount of the asset. 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.
SELF-INSURANCE PROGRAM
Prior to the 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 have been treated
as paid to Manor Care, and as such, amounts paid to Manor Care have been charged
directly to investments and advances from Parent. Subsequent to the
Distribution, the Company will establish and maintain its own insurance program.
FRANCHISE REVENUES
The Company enters into numerous franchise agreements committing to provide
licensees with various marketing services, a centralized reservation system and
limited rights to utilize the Company's registered tradenames. These agreements
are typically for a period of twenty years, with certain rights to the
franchisee to terminate after 10 or 15 years. The Company has no significant
financial commitments to its franchisees.
Royalty fees, 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 administration expenses in the accompanying
combined statements of income.
The Company assesses franchisees monthly fees related to marketing and
reservations which are expended for national advertising, marketing, and selling
activities and the operation of a centralized reservation system.
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
F-8
<PAGE> 75
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
accounts and the related gain or loss is taken into income. Maintenance, repairs
and minor replacements are charged to expense.
Construction overhead and costs incurred to ready a project for its
intended use are capitalized for major development projects and are amortized
over the lives of the related assets. Personnel recruitment and training costs
related to hotels under construction are deferred until construction is
completed and then amortized over two years. Costs of approximately $359,000,
$585,000 and $2.6 million were capitalized in each of the fiscal years ended May
31, 1994, 1995 and 1996, respectively.
The Company capitalizes interest on borrowings applicable to hotels under
construction. Capitalized interest for the years ended May 31, 1994, 1995 and
1996 amounted to $117,000, $197,000 and $753,000, respectively.
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 fiscal years ended May 31, 1994, 1995 and 1996 were $21.2
million, $29.2 million and $29.9 million, respectively. Losses were generated by
foreign operations for the fiscal years ended May 31, 1994, 1995 and 1996 of
$5.5 million, $5.7 million and $19.3 million, respectively. Losses generated by
foreign operations for fiscal year 1996 include $15.0 million relating to a
provision for asset impairment and restructuring. Translation gains and losses
are recorded in the cumulative translation adjustment account included in
Investments and advances from Parent in the accompanying combined balance sheets
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance, May 31, 1993......................................... $ 352
Net adjustments............................................... (383)
-------
Balance, May 31, 1994......................................... (31)
Net adjustments............................................... 740
-------
Balance, May 31, 1995......................................... 709
Net adjustments............................................... (2,459)
-------
Balance, May 31, 1996......................................... $(1,750)
=======
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying combined balance sheet as of August 31, 1996 and the
combined statements of income and cash flows for the three month periods ended
August 31, 1995 and August 31, 1996 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 omitted. The Company believes the disclosures made are
adequate to make the information presented not misleading. In the opinion of the
Company, the accompanying unaudited combined financial statements reflect all
adjustments, including only normal recurring adjustments, necessary to present
fairly the financial position of the Company at August 31, 1996 and the results
of operations and cash flows for the three months ended
F-9
<PAGE> 76
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
August 31, 1995 and August 31, 1996. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal
variations.
INCOME TAXES
The Company is included in the consolidated federal income tax return of
Manor Care. The income tax provision included in these combined 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 fiscal years ended May 31, 1994, 1995
and 1996 were derived from the following:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes
Domestic operations.................................. $ 26,812 $ 39,329 $ 47,682
Foreign operations................................... (9,134) (9,374) (31,824)
-------- -------- --------
Combined income before income taxes............... $ 17,678 $ 29,955 $ 15,858
======== ======== ========
</TABLE>
Income before income taxes for domestic operations and foreign operations
for fiscal year 1996 includes provisions of $8.5 million and $24.8 million,
respectively, for asset impairment and restructuring.
The income tax provisions for fiscal years 1994, 1995 and 1996 were
accounted for under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." The provisions for income taxes follows for the
fiscal years ended May 31:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax (benefit) expense
Federal................................................ $ 7,683 $13,756 $ 19,978
Foreign................................................ (3,608) (3,703) (2,792)
State.................................................. 941 2,231 3,729
Deferred tax (benefit) expense
Federal................................................ 2,537 745 (3,071)
Foreign................................................ -- -- (9,778)
State.................................................. 466 115 (666)
------ ------- --------
$ 8,019 $13,144 $ 7,400
====== ======= ========
</TABLE>
Included in the 1994 tax provision is a charge of $156,000 due to the
impact of the change in the tax rates on prior periods.
F-10
<PAGE> 77
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following at May 31:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and amortization........................... $(11,289) $(11,760) $ (236)
Prepaid expenses........................................ (1,412) (1,386) (1,550)
Foreign operations...................................... (710) -- --
Other................................................... (2,147) (2,202) (2,112)
-------- -------- -------
Gross deferred tax liabilities.......................... (15,558) (15,348) (3,898)
-------- -------- -------
Foreign operations...................................... -- 1,086 1,931
Accrued expenses........................................ 2,893 1,393 3,757
Net operating loss...................................... 1,242 1,031 820
Other................................................... 776 218 556
-------- -------- -------
Gross deferred tax assets............................... 4,911 3,728 7,064
-------- -------- -------
Net deferred (benefit) tax.................... $(10,647) $(11,620) $ 3,166
======== ======== =======
</TABLE>
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the accompanying combined statements of income follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- ------
(IN THOUSANDS, EXCEPT
FEDERAL INCOME
TAX RATE)
<S> <C> <C> <C>
Federal income tax rate..................................... 35% 35% 35%
Federal taxes at statutory rate............................. $6,187 $10,484 $5,552
State income taxes, net of Federal tax benefit.............. 914 1,525 860
Other....................................................... 918 1,135 988
------ ------- ------
Income tax expense.......................................... $8,019 $13,144 $7,400
====== ======= ======
</TABLE>
Cash paid for state income taxes was $595,000, $571,000 and $1,586,000 for
the years ended May 31, 1994, 1995 and 1996, respectively. Federal income taxes
were paid by Manor Care.
ACCRUED EXPENSES
Accrued expenses at May 31, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Payroll............................................................ $ 6,284 $ 8,670
Taxes, other than income........................................... 2,981 3,426
Other.............................................................. 6,101 9,560
------- -------
$15,366 $21,656
======= =======
</TABLE>
F-11
<PAGE> 78
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
MORTGAGES AND OTHER LONG TERM DEBT
Maturities of mortgages and other long term debt at May 31, 1996 were as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
-----------
<S> <C>
1997........................................................... $ 669
1998........................................................... 414
1999........................................................... 442
2000........................................................... 599
2001........................................................... 646
2002 to 2009................................................... 66,368
-------
$69,138
=======
</TABLE>
Long term debt, consisting of foreign currency borrowings under Manor
Care's $250 million competitive advance and multi-currency revolving credit
facility, mortgages and capital leases was net of discount of $146,000 and
$112,000 at May 31, 1995 and 1996, respectively. Amortization of discount was
$74,000 in 1994, $171,000 in 1995 and $34,000 in 1996.
During fiscal year 1996, interest rates on mortgages and other long term
debt ranged from 5.8% to 10.0%. The effective interest rate in fiscal year 1996
was 7.2%.
The Company is a co-guarantor with Manor Care and other affiliates for the
$250 million competitive advance and multi-currency revolving credit facility.
The facility provides that up to $75.0 million is available in foreign currency
borrowings under the foreign currency portion of the facility. The Company's
borrowings under this facility amounted to $50.6 million at May 31, 1996. The
Company is 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. In connection with the Distribution, the Company intends to
secure financing to repay the Company's portion of borrowings under Manor Care's
foreign currency portion of the facility. Upon repayment, it is anticipated that
the Company will be released from all liabilities and guarantees relating to the
Manor Care credit facility.
At May 31, 1996, owned property with a net book value of $2.8 million was
pledged or mortgaged as collateral.
F-12
<PAGE> 79
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES
The Company operates certain property and equipment under leases, some with
purchase options that expire at various dates through 2051. Future minimum lease
payments are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
1997............................................................. $ 545 $ 771
1998............................................................. 370 568
1999............................................................. 296 500
2000............................................................. 186 500
2001............................................................. 172 500
Thereafter....................................................... 6,477 613
----- ------
Total minimum lease payments........................... $8,046 $3,452
======
Less: Amount representing interest............................... (817)
------
Present value of lease payments.................................. 2,635
Less: Current portion............................................ (532)
------
Lease obligations included in long term debt..................... $2,103
======
</TABLE>
Rental expense under noncancellable operating leases was $738,000 in 1994,
$721,000 in 1995 and $563,000 in 1996.
ACQUISITIONS AND DIVESTITURES
On May 31, 1995, Manor Care repurchased one-half of the 11% interest held
by its management in Choice Hotels International Inc. Approximately $19.8
million was allocated to goodwill; the purchase cost of $27.4 million was paid
in June and July 1995. On May 31, 1996, the Company repurchased the remaining
5.5% minority interest in Choice Hotels International, Inc. for $27.9 million.
Approximately $26.4 million was allocated to goodwill.
During fiscal year 1996, the Company purchased 16 operating hotels
containing over 1,900 rooms for $49.6 million. The Company also sold two
operating hotels for $6.5 million. In addition, the Company purchased an equity
interest in Friendly Hotels, PLC, a U.K. hotel company, for approximately $17
million.
During fiscal year 1995, the Company purchased 16 operating hotels
containing over 2,300 rooms for $59.8 million.
During fiscal year 1994, the Company purchased 13 operating hotels
containing over 1,900 rooms for $44.2 million. An additional $10.4 million was
spent to acquire a hotel chain (Resthotel Primevere) operating primarily in
France. The Company also sold a hotel for $7.2 million.
Unless otherwise noted, acquisitions are accounted for as a purchase.
Approximately 70% of the total costs for hotel acquisitions are allocated to
buildings, approximately 20% to land and the remainder to furniture, fixtures
and equipment.
F-13
<PAGE> 80
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited summary pro forma income statement data for the three fiscal
years ended May 31, 1996 assuming the above purchases of operating hotels
occurred at the beginning of the year immediately preceding the year each
purchase occurred, are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS)
Revenues............................................... $285,735 $347,401 $387,819
======== ======== ========
Net income............................................. $8,339 $16,865 $8,772
------ -------- ------
------ -------- ------
Pro forma net income per share......................... $0.14 $0.27 $0.14
----- ----- -----
----- ----- -----
</TABLE>
The pro forma net income per share is computed by dividing pro forma net
income by the pro forma weighted average number of outstanding common shares,
aggregating 60.5 million in 1994, 62.5 million in 1995 and 62.6 million in 1996.
The pro forma weighted average number of outstanding common shares is based on
Manor Care's weighted average number of outstanding common shares.
TRANSACTIONS WITH MANOR CARE
Indebtedness related to lodging acquisitions and renovations that is
reflected as notes payable to Parent in the accompanying combined balance sheets
totaling $198.5 million and $225.7 million at May 31, 1995 and 1996,
respectively, is due three years from the date of the Distribution. Interest
expense on these notes for the years ended May 31, 1994, 1995 and 1996 was $10.7
million, $15.5 million and $19.7 million, respectively. Interest is charged at
an annual rate of 9% on the indebtedness.
It is expected that on or prior to the Distribution Date, the Company and a
subsidiary of Manor Care will enter into a loan agreement, which shall govern
the repayment by the Company of an aggregate of $225.7 million previously
advanced to the Company by Manor Care. The loan agreement will contain a number
of covenants that will, among other things, restrict the ability of the Company
and its subsidiaries to make certain investments, incur debt, change its line of
business, dispose of assets, create liens, sell receivables, enter into
transactions with affiliates and otherwise restrict certain corporate
activities. The loan agreement will also restrict the Company's ability to pay
dividends. In addition, the loan agreement will contain, among other financial
covenants, requirements that the Company maintain specified financial ratios,
including maximum leverage and minimum interest coverage. The loan may be
prepaid in whole or in part, together with accrued interest, without penalty, at
the option of the Company. The Company will be required to prepay the loan with
the proceeds from the monetization of Company-owned hotels.
The Company participates in a cash concentration system with Manor Care and
as such maintains no significant cash balances or banking relationships.
Substantially all cash received by the Company has been immediately deposited in
and combined with Manor Care's corporate funds through its cash management
system. Similarly, operating expenses, capital expenditures and other cash
requirements of the Company have been paid by Manor Care and charged to the
Company. The net result of all of these intercompany transactions, with the
exception of amounts relating to the acquisition of Company operated hotels that
are reflected in the combined balance sheets as notes payable to Parent, are
included in investments and advances from Parent in the combined balance sheets.
Manor Care provides various services to the Company including, among
others, cash management, payroll and payables processing, employee benefit
plans, insurance, legal, accounting, tax, information systems and certain
administrative services, as required. Manor Care charges the Company fees for
general management, staff support and rental of office space on the basis of
such factors as employee time incurred and square footage. This is essentially
the same basis Manor Care utilizes to charge its other operating entities for
such services. General corporate expenses of $5.5 million, $6.3 million and $7.4
million, respectively, were charged to operations for the years ended May 31,
1994, 1995 and 1996. Management believes that the
F-14
<PAGE> 81
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
foregoing charges are reasonable allocations of the costs incurred by Manor Care
on the Company's behalf. The Company has estimated that general and
administrative expenses incurred annually will increase by approximately $4.1
million after the Distribution.
For purposes of providing an orderly transition after the Distribution,
Manor Care and the Company will enter into various agreements, including, among
others, a Distribution Agreement, Tax Sharing Agreement, Corporate Services
Agreement and Employee Benefits Allocation Agreement. Effective at the
Distribution, these agreements will provide, among other things, that the
Company (i) will receive certain corporate and support services, such as
accounting, tax and computer systems support, (ii) will establish pension,
profit sharing and incentive plans similar to those in place at Manor Care and
(iii) will receive certain risk management services and other miscellaneous
administrative services. These agreements will extend for a maximum period of 30
months from the Distribution date or until such time as the Company has arranged
to provide such services in-house or through another unrelated provider of such
services.
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.
As of May 31, 1996, the Company had contractual commitments of $15.1
million relating to its construction program.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
Bonuses accrued for key executives of the Company under incentive
compensation plans were $2.6 million in 1994, $1.7 million in 1995 and $1.2
million in 1996.
Employees of the Company participate in retirement plans sponsored by the
Parent. Costs allocated to the Company are based on the size of its payroll
relative to the Parent's payroll. Costs allocated to the Company were
approximately $1.0 million in 1994, $1.2 million in 1995 and $1.4 million in
1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the fair value of its financial
instruments in accordance with Statement of Financial Accounting Standards No.
107, "Disclosures about Fair Value of Financial Instruments." Fair values of
material balances were determined by using market rates currently available.
The balance sheet carrying amount of cash, cash equivalents and receivables
approximate fair value due to the short term nature of these items. Mortgages
and other long term debt consist of bank loans, mortgages and capital leases.
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 mortgages, capital leases and notes payable to Parent
approximate fair market values.
PROVISION FOR ASSET IMPAIRMENT AND RESTRUCTURING
The Company regularly reviews the recoverability of the net carrying value
of its long-lived assets (including goodwill related to franchise rights) and
makes adjustments accordingly. The Company performs
F-15
<PAGE> 82
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
this review no less than annually and considers such factors as the current
market value of assets, and the operating results and cash flows of business
units. An asset is considered to be impaired if the expected net, undiscounted
cash flows are less than the carrying amount of an asset. Impairment charges are
recorded based on the fair value of the assets.
During fiscal year 1996, the Company began restructuring its European
operations. This restructuring effort included the purchase of an equity
interest in Friendly Hotels, PLC and a reevaluation of key geographic markets in
Europe. In connection with this restructuring, the Company performed a review of
its European operations and in May 1996 recognized a $17.0 million non-cash
charge (net of an $11.1 million income tax benefit) against earnings related
primarily to the impairment of assets associated with certain European hotel
operations.
In addition, the Company recognized a restructuring charge of $3.1 million
(net of a $2.1 million income tax benefit) in May 1996. Restructuring costs
include severance and employee benefit plan restructuring costs and other costs
directly associated with the Distribution.
F-16
<PAGE> 83
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company is required to adopt SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," no
later than fiscal year 1997. The Company's current policy is to regularly review
the recoverability of the net carrying value of its long-lived assets and make
adjustments accordingly. The adoption of SFAS No. 121 is not expected to have a
material impact on the Company's financial statements.
The Company is required to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation," no later than fiscal year 1997. Management expects to adopt SFAS
No. 123 utilizing the method which provides for disclosure of the impact of
stock-based compensation grants.
SUMMARY OF QUARTERLY RESULTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
INCOME (LOSS) NET
BEFORE INCOME
QUARTERS ENDED REVENUES INCOME TAXES (LOSS)
- ---------------------------------------------------- -------- ------------- --------
<S> <C> <C> <C>
FISCAL 1995
August............................................ $ 78,427 $ 10,942 $ 6,295
November.......................................... 77,127 10,354 5,962
February.......................................... 63,845 (279) (486)
May............................................... 83,136 8,938 5,040
-------- ------------- --------
$302,535 $ 29,955 $ 16,811
======== =========== ========
FISCAL 1996
August............................................ $ 99,380 $ 18,572 $ 10,914
November.......................................... 95,198 13,952 8,131
February.......................................... 79,326 2,878 1,391
May............................................... 100,969 (19,544)(a) (11,978)
-------- ------------- --------
$374,873 $ 15,858 $ 8,458
======== =========== ========
FISCAL 1997
August............................................ $119,380 $ 25,897 $ 15,397
======== =========== ========
</TABLE>
- ---------------
(a) Includes a provision of $33.3 million for asset impairment and
restructuring.
F-17
<PAGE> 84
APPENDIX A
FORM OF
RESTATED CERTIFICATE OF INCORPORATION
OF
CHOICE HOTELS HOLDINGS, INC.
Choice Hotels Holdings, Inc. (the "Corporation"), a corporation
incorporated on June 27, 1996 and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "GCL"), hereby certifies as
follows:
FIRST: The board of directors of the Corporation (the "Board of Directors")
adopted a resolution proposing and declaring advisable the following amendments
to and restatement of the Certificate of Incorporation of the Corporation.
SECOND: This Restated Certificate of Incorporation was duly adopted by the
sole stockholder of the Corporation in accordance with the provisions of
Sections 228, 242 and 245 of the GCL.
THIRD: The text of the Certificate of Incorporation is hereby amended and
restated as herein set forth in full:
1. The name of the corporation is CHOICE HOTELS INTERNATIONAL, INC. (the
"Corporation").
2. The address of the Corporation's registered office in the State of
Delaware is 100 West Tenth Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
3. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the GCL.
4. The total number of shares of capital stock of all classifications which
the Corporation shall have authority to issue is One Hundred Sixty-Five Million
(165,000,000), of which One Hundred Sixty Million (160,000,000) shares having a
par value of One Cent ($.01) per share shall be common stock, and Five Million
(5,000,000) shares having a par value of One Cent ($.01) per share shall be
preferred stock.
Shares of common stock of the Corporation may be issued from time to time
in one or more classes or series, each of which class or series shall have such
distinctive designation or title as shall be fixed by the Board of Directors
prior to the issuance of any shares thereof. Each such class or series of common
stock shall have such voting powers (full or limited) or no voting powers, such
preferences and relative participating, optional or other special rights,
relative ranking and such qualifications, limitations or restrictions, as shall
be stated in such resolution or resolutions providing for the issue of such
class or series of common stock as may be adopted from time to time by the Board
of Directors prior to the issuance of any shares thereof pursuant to the
authority hereby expressly vested in it, all in accordance with the laws of the
State of Delaware.
Without limiting the generality of the foregoing, shares of a series of
common stock consisting of Seventy Five Million (75,000,000) shares, or such
larger number of shares as the Board of Directors shall from time to time fix by
resolution or resolutions, may be issued from time to time by the Board of
Directors. Shares of this series shall be designated, and are hereinafter called
"Common Stock."
The holders of record of the Common Stock shall be entitled to the
following rights:
(a) subject to the rights of any holders of any class or series of
capital stock as specified in the resolution providing for such class or
series of capital stock, to vote at all meetings of stockholders of the
Corporation, and at all such meetings such holders shall have one vote in
respect of each share of Common Stock held of record by them;
A-1
<PAGE> 85
(b) subject to the rights of any holders of any class or series of
capital stock having a preference with respect to dividends, to receive
when, if and as declared by the Board of Directors out of the assets of the
Corporation legally available therefor, such dividends as may be declared
by the Corporation from time to time to holders of Common Stock; and
(c) subject to the rights of any holders of any class or series of
capital stock having a preference with respect to distribution of assets
upon liquidation or dissolution, to receive the remaining assets of the
Corporation upon liquidation, dissolution or winding-up.
Shares of preferred stock of the Corporation may be issued from time to
time in one or more classes or series, each of which class or series shall have
such distinctive designation or title as shall be fixed by the Board of
Directors prior to the issuance of any shares thereof. Each such class or series
of preferred stock shall have such voting powers (full or limited) or no voting
powers, such preferences and relative participating, optional or other special
rights, relative ranking and such qualifications, limitations or restrictions,
as shall be stated in such resolution or resolutions providing for the issue of
such class or series of preferred stock as may be adopted from time to time by
the Board of Directors prior to the issuance of any shares thereof pursuant to
the authority hereby expressly vested in it, all in accordance with the laws of
the State of Delaware.
Subject to the rights of any holders of any class or series of capital
stock, as specified in the resolution providing for such class or series of
capital stock, the holders of Common Stock are expressly denied the preemptive
right to subscribe to any or all additional shares of capital stock of the
Corporation or any or all classes or series thereof.
Upon this Restated Certificate of Incorporation becoming effective pursuant
to the GCL (the "Effective Time"), each share of the Corporation's common stock,
par value $.01 per share (the "Old Common Stock"), issued and outstanding
immediately prior to the Effective Time, will be automatically reclassified as
and converted into one share of Common Stock. Any stock certificate that,
immediately prior to the Effective Time, represents shares of the Old Common
Stock will, from and after the Effective Time, automatically and without the
necessity of presenting the same for exchange, represent the number of shares of
Common Stock as equals the sum obtained by multiplying the number of shares of
Old Common Stock represented by such certificate immediately prior to the
Effective Time by one.
5. The Corporation expressly elects not to be governed by Section 203 of
the GCL.
6. Subject to the rights of any holders of any class or series of capital
stock as specified in the resolution providing for such class or series of
capital stock, any action required to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any consent in
writing of such stockholders in lieu of a meeting.
Special meetings of the stockholders of the Corporation may be called only
by (i) the Chairman or Vice Chairman of the Board of Directors or (ii) the
Secretary of the Corporation within 10 calendar days after receipt of the
written request of a majority of the total number of directors which the
Corporation would have if there were no vacancies (the "Whole Board").
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the Bylaws.
7. A. Subject to the rights of any holders of any class or series of
capital stock as specified in the resolution providing for such class or series
of capital stock, the business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors consisting of not less than
3 nor more than 12 directors, the exact number of directors to be determined
from time to time solely by resolution adopted by the affirmative vote of a
majority of the Whole Board. The directors shall be divided into three classes,
designated Class I, Class II and Class III. Each Class of directors shall
consist, as nearly as may be possible, of one-third of the total number of
directors constituting the Whole Board. The initial term of the Class I
directors shall expire upon the election and qualification of their successors
at the 1997 annual meeting of stockholders; the initial term of the Class II
directors shall expire upon the election and qualification of their successors
at the
A-2
<PAGE> 86
1998 annual meeting of stockholders; and the initial term of the Class III
directors shall expire upon the election and qualification of their successors
at the 1999 annual meeting of stockholders. At each annual meeting of
stockholders beginning with the 1997 annual meeting, successors to the Class of
directors whose term expires at that annual meeting shall be elected for a
three-year term and shall hold office until the annual meeting for the year in
which his or her term expires and until his or her successor shall be elected
and shall qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office.
B. Subject to the rights of any holders of any class or series of capital
stock as specified in the resolution providing for such class or series of
capital stock, newly created directorships resulting from any increase in the
number of directors and any vacancies on the Board of Directors resulting from
death, resignation, retirement, disqualification, removal or other cause will be
filled solely by the affirmative vote of a majority of the remaining directors
then in office, even though less than a quorum of the Board of Directors.
Increases or decreases in the number of directors shall be apportioned among the
Classes so as to maintain the number of directors in each Class as nearly equal
as possible, and any additional director of any Class elected to fill a vacancy
resulting from an increase in such Class shall hold office for a term that shall
coincide with the remaining term of that Class, but in no case will a decrease
in the number of directors shorten the term of any incumbent director.
C. The election of directors need not be by written ballot unless the
Bylaws shall so provide.
D. Notwithstanding the foregoing, whenever the holders of any one or more
series of capital stock shall have the right, voting separately as a class or
series, to elect directors, the election, removal, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Restated Certificate of Incorporation applicable thereto, and such
directors so elected shall not be divided into classes pursuant to Article 6,
Section A, unless expressly provided by such terms.
8. The affirmative vote of the holders of the outstanding shares of capital
stock representing not less than two-thirds of the Voting Power (as defined) of
the Corporation shall be required for the approval of any proposal for the
Corporation to dissolve, liquidate, merge, or consolidate with any other entity
(other than an entity 90% of the Voting Power of which is owned by the
Corporation), or sell, lease or exchange all or substantially all of its
property and assets, including its goodwill and its corporate franchises.
"Voting Power" means the total number of votes that may be cast by holders of
capital stock in the election of directors.
9. The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certificate of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation. Notwithstanding
anything contained in this Restated Certificate of Incorporation to the
contrary, the affirmative vote of the holders of the outstanding shares of
capital stock representing not less than two-thirds of the Voting Power of the
Corporation shall be required to amend, alter, change or repeal, or to adopt any
provision inconsistent with, Article 8 of this Restated Certificate of
Incorporation. The Board of Directors shall have the power to make, adopt,
alter, amend, change or repeal the Bylaws by resolution adopted by the
affirmative vote of a majority of the Whole Board. Stockholders may not make,
adopt, alter, amend, change or repeal the Bylaws except upon the affirmative
vote of the holders of the outstanding shares of capital stock representing not
less than two-thirds of the Voting Power of the Corporation and no Bylaws
hereafter adopted by the stockholders or otherwise shall invalidate any prior
act of the directors which would have been valid if such Bylaws had not been
adopted.
10. A. No director of the Corporation shall be liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the GCL, or (iv) for any transaction from which
the director derived an improper personal benefit. No amendment to or repeal of
this Article 10 shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal. If the
GCL is amended hereafter to further limit the liability of a director, then the
liability of a director of the Corporation shall be further limited to the
fullest extent permitted by the GCL, as so amended.
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<PAGE> 87
B. The Corporation shall indemnify each person who is or was or has agreed
to become a director or officer of the Corporation, and may indemnify other
employees and agents of the Corporation, to the fullest extent permitted by
Section 145 of the GCL, as the same may be amended or supplemented, against all
expenses and liabilities (including, but not limited to, counsel fees)
reasonably incurred by or imposed upon such person in connection with any
proceeding to which he or she may be made a party, or in which he or she may
become involved, by reason of his or her being or having been a director,
officer, employee or agent of the Corporation, or any settlement thereof,
whether or not he or she is a director, officer, employee or agent at the time
such expenses are incurred or liability incurred, except in such cases where the
director, officer, employee or agent is adjudged guilty of willful misfeasance
or malfeasance in the performance of his or her duties; provided that in the
event of a settlement the indemnification herein shall apply only when the Board
of Directors approves such settlement and reimbursement as being for the best
interests of the Corporation. Without limiting the generality or the effect of
the foregoing, the Corporation may adopt Bylaws, or enter into one or more
agreements with any person, which provide for indemnification greater or
different than that provided in this Article 10 or the GCL and the foregoing
right of indemnification shall be in addition to and not exclusive of all other
rights to which such director, officer, employee or agent may be entitled.
C. The Corporation may purchase insurance on behalf of any person who is a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted by him or her and incurred by him or her in any
such capacity, or arising out of his or her status as such, whether or not the
Corporation would have the power or the obligation to indemnify him or her
against such liability under the provisions of this Article 10.
11. The Board of Directors, each committee of the Board of Directors and
each individual director, in discharging their respective duties under
applicable law and this Restated Certificate of Incorporation and in determining
what they each believe to be in the best interests of the Corporation and its
stockholders, may consider the effects, both short-term and long-term, of any
action or proposed action taken or to be taken by the Corporation, the Board of
Directors or any committee of the Board of Directors on the interests of (i) the
employees, franchisees, licensees, customers, suppliers and/or creditors of the
Corporation and its subsidiaries and (ii) the communities in which the
Corporation and its subsidiaries own or lease property or conduct business, all
to the extent that the Board of Directors, any committee of the Board of
Directors or any individual director deems pertinent under the circumstances;
provided, however, that the provisions of this Article 11 shall not limit in any
way the right of the Board of Directors to consider any other lawful factors in
making its determinations, including, without limitation, the effects, both
short-term and long-term, or any action or proposed action on the Corporation or
its stockholders directly; and provided further that this Article 11 shall be
deemed solely to grant discretionary authority to the Board of Directors, each
committee of the Board of Directors and each individual director and shall not
be deemed to provide to any specific constituency any right to be considered.
12. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of the GCL or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of Section 279 of the GCL, order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
A-4
<PAGE> 88
IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of
Incorporation to be duly executed in its corporate name.
Dated: , 1996
--------------------------------------
Name: Stewart Bainum, Jr.
Chairman and Chief
Executive Officer
A-5
<PAGE> 1
EXHIBIT 3.02
FORM OF
BYLAWS
OF
CHOICE HOTELS HOLDINGS, INC.
(Hereinafter called the "Corporation")
As amended _______________
ARTICLE I
OFFICES
Section 1. Office. The registered office of the Corporation shall be in
the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Additional Offices. The Corporation may also have offices at
such other places, both within and without the State of Delaware, as the Board
of Directors may from time to time determine or as the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Time and Place. Meetings of stockholders for any purpose may be
held at such time and place, within or without the State of Delaware, as the
Board of Directors may fix from time to time and as shall be stated in the
notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meeting. Annual meetings of stockholders shall be held
on any date in the month of September or October in each year at 9:00 a.m. or at
such other time and such date and time shall be designated, from time to time,
by the Board of Directors and stated in the notice of the meeting. At such
annual meeting, the stockholders shall elect a board of directors and transact
such other business as may properly be brought before the meeting in accordance
with Section 7 of this Article II.
Section 3. Notice of Annual Meeting. Written notice of the annual meeting
stating the place, date and time thereof shall be given to each stockholder
entitled to vote at such meeting not less than 10 nor more than 60 days prior to
the meeting.
<PAGE> 2
-2-
Section 4. List of Stockholders. The officer in charge of the stock ledger
of the Corporation or the transfer agent shall prepare and make, at least 10
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for purpose germane to the meeting, during ordinary business hours, for a period
of at least 10 days prior to the meeting, either at a place within the city
where the meeting is to be held (other than the place of the meeting), which
place shall be specified in the notice of the meeting, or, if not so specified,
at the place where the meeting is to be held. The list shall also be produced
and kept at the time and place of the meeting during the whole time thereof, and
may be inspected by any stockholder who is present.
Section 5. Notice of Special Meeting. Written notice of a special meeting
stating the place, date and time thereof and the purpose or purposes for which
the meeting is called, shall be given to each stockholder entitled to vote at
such meeting not less than 10 nor more than 60 days prior to the meeting.
Section 6. Stockholder Proposals. To be properly brought before an annual
meeting, business must be (1) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (2)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors or (3) otherwise properly brought before the meeting by a
stockholder entitled to vote thereon. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be received not less than sixty days nor more than
ninety days prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than thirty days or delayed by more than sixty days
from such anniversary, notice by the stockholder to be timely must be so
received not earlier than the ninetieth day prior to such annual meeting and not
later than the close of business on the later of (1) the sixtieth day prior to
such annual meeting or (2) the tenth day following the date on which notice of
the date of the annual meeting was mailed or public disclosure thereof was made,
whichever first occurs. For purposes of calculating the first such notice period
following adoption of this Restated Certificate of Incorporation, the first
anniversary of the 1996 annual meeting shall be deemed to be , 1997. Each
such notice shall set forth as to each matter the stockholder proposes to bring
before the annual meeting: (a) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the meeting, (b) the name and address, as they appear on the Corporation's
books, of the stockholder proposing such business and the name and address of
the beneficial owner on whose behalf the proposal is being made, (c) the class,
series and number of shares of the Corporation which are beneficially owned by
the stockholder or by the beneficial owner on whose behalf the proposal is
<PAGE> 3
-3-
being made, (d) any material interest of the stockholder, or the beneficial
owner on whose behalf the proposal is being made, in such business, (e) a
representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting, and (f) a description of all arrangements or
understandings between the stockholder, the beneficial owner on whose behalf the
proposal is being made, or any other person or persons (naming such person or
persons) relating to the matter being proposed.
To be properly brought before a special meeting, business must be (i)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors or (ii) otherwise properly brought
before the meeting by or at the direction of the Board of Directors.
No business shall be conducted at any meeting of the stockholders except
in accordance with the procedures set forth in this Article II, Section 6. The
presiding officer of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Article II, Section 6 and if he or
she should so determine, any such business not properly brought before the
meeting shall not be transacted. Nothing herein shall be deemed to affect any
rights of stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
Section 7. Presiding Officer
(a) Meetings of stockholders shall be presided over by the Chairman of the
Board, or, if he is not present, by the Vice Chairman, or, if he is not present,
by the Chief Executive Officer, or if he is not present, by the President or, if
he is not present, by such person who may have been chosen by the Board of
Directors or, if none of such persons is present, by a chairman to be chosen by
the stockholders owning a majority of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote at the meeting and who
are present in person or by proxy. The Secretary of the Corporation or, if he is
not present, an Assistant Secretary or, if he is not present, such person who
may have been chosen by the Board of Directors, shall act as secretary of
meetings of stockholders, but if none of such persons is present the
stockholders owning a majority of the Voting Power of the Corporation and who
are present in person or by proxy shall choose any person present to act as
secretary of the meeting. "Voting Power" means the total number of votes that
may be cast by holders of capital stock in the election of directors.
<PAGE> 4
-4-
Section 8. Quorum. The holders of a majority of the Voting Power of the
Corporation, present in person or by proxy, shall be necessary to, and shall
constitute a quorum for, the transaction of business at all meetings of
stockholders, except as otherwise provided by statute or by the Certificate of
Incorporation. If, however, a quorum shall not be present in person or by proxy
at any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or by proxy, shall have the power to adjourn the meeting
from time to time, without notice of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken, until a quorum shall be present in person or by proxy. At any meeting of
the stockholders, the stockholders entitled to vote thereat, present in person
or by proxy, shall have the power to adjourn the meeting from time to time for
good cause, without notice of the adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken, until a
date which is not more than 30 days after the date of the original meeting. At
such adjourned meeting, at which a quorum shall be present in person or by
proxy, any business may be transacted which might have been transacted at the
meeting as originally called. If the adjournment is for more than 30 days or, if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
Section 9. Voting.
(a) At any meeting of stockholders, every stockholder having the right to
vote shall be entitled to vote in person or by proxy. Except as otherwise
provided by law or the Certificate of Incorporation or a resolution of the Board
of Directors creating a series or class of capital stock of the Corporation,
each stockholder of record shall be entitled to one vote for each share of
capital stock registered in his name on the books of the Corporation.
(b) All elections shall be determined by a plurality vote, and except as
otherwise provided by law or the Certificate of Incorporation, all other matters
shall be determined by a vote of a majority of the Voting Power present in
person or by proxy and voting on such other matters.
<PAGE> 5
-5-
ARTICLE III
DIRECTORS
Section 1. General Powers; Number; Tenure. The business of the Corporation
shall be managed by or under its Board of Directors, which may exercise all
powers of the Corporation and perform all lawful acts and things as are not by
law, the Certificate of Incorporation or these Bylaws directed or required to be
exercised or performed by the stockholders. The number of directors constituting
the whole Board of Directors shall be not less than 3 nor more than 12. The
first Board of Directors shall consist of 9 directors. Thereafter, within the
limits of above specified, the number of directors shall be determined by the
Board of Directors. The directors shall be elected and shall hold office as
specified in the Certificate of Incorporation. Directors need not be
stockholders. Directors, other than Stewart Bainum, Sr., shall retire
from the Board of Directors as of the annual meeting of stockholders next
following the date they attain the age of seventy (70) years.
Section 2. Nomination of Directors. Any stockholder entitled to vote in
the election of directors generally may nominate one or more persons for
election as directors at an annual meeting only pursuant to the Corporation's
notice of such meeting or if written notice of such stockholder's intent to make
such nomination or nominations has been received by the Secretary of the
Corporation not less than sixty nor more than ninety days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than thirty
days or delayed by more than sixty days from such anniversary, notice by the
stockholder to be timely must be so received not earlier than the ninetieth day
prior to such annual meeting and not later than the close of business on the
later of (1) the sixtieth day prior to such annual meeting or (2) the tenth day
following the day on which notice of the date of the annual meeting was mailed
or public disclosure thereof was made by the Corporation, whichever first
occurs. For purposes of calculating the first such notice period following
adoption of this Restated Certificate of Incorporation, the first anniversary of
the 1996 annual meeting shall be deemed to be , 1997. Each such notice shall set
forth: (a) the name and address of the stockholder who intends to make the
nomination and the name, age, business address, residence address and principal
occupation of the person or persons to be nominated; (b) a representation that
the stockholder is a holder of record of stock of the Corporation entitled to
vote at such meeting and intends to appear in person or by proxy at the meeting
to nominate the person or persons specified in the notice; (c) a description of
all arrangements or understandings between the stockholder and each nominee and
any other person or persons (naming such person or persons) relating to the
nomination or nominations; (d) the class and number of shares of the Corporation
which are beneficially owned by such stockholder and the person to be nominated
as of the date of such stockholder's notice and by any other stockholders
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known by such stockholder to be supporting such nominees as of the date of such
stockholder's notice; (e) such other information regarding each nominee proposed
by such stockholder as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission; and
(f) the consent of each nominee to serve as a director of the Corporation if so
elected.
In addition, in the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors, any stockholder
entitled to vote in the election of directors generally may nominate one or more
persons for election as directors at a special meeting only pursuant to the
Corporation's notice of meeting or if written notice of such stockholder's
intent to make such nomination or nominations, setting forth the information and
complying with the form described in the immediately preceding paragraph, has
been received by the Secretary of the Corporation not earlier than the ninetieth
day prior to such special meeting and not later than the close of business on
the later of (i) the sixtieth day prior to such special meeting or (ii) the
tenth day following the day on which notice of the date of the special meeting
was mailed or public disclosure thereof was made by the Corporation, whichever
comes first.
No person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures set forth in this Article
III, Section 2. The presiding officer of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this Article III, Section 2, and if
he or she should so determine, the defective nomination shall be disregarded.
Section 3. Vacancies; Resignations. (a) If any vacancies occur in the
Board of Directors, or if any new directorships are created, they shall be
filled solely by a majority of the directors then in office, although less than
a quorum. Each director so chosen shall hold office until the expiration of the
term of the class into which such director was elected and until his successor
is duly elected and qualified. If there are no directors in office a special
meeting of stockholders shall be called in accordance with the provisions of the
Certificate of Incorporation or these Bylaws, at which meeting such vacancies
shall be filled.
(b) Any director may resign at any time by giving written notice to the
Board of Directors, the Chairman of the Board, the Chief Executive Officer, the
President or the Secretary of the Corporation. Unless otherwise specified in
such written notice, a resignation shall take effect upon delivery thereof to
the Board of Directors or the designated officer. It shall not be necessary for
a resignation to be accepted before it becomes effective.
Section 4. Place of Meeting. The Board of Directors may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 5. First Meeting. The first regular meeting of each newly elected
Board of Directors shall be held immediately following the annual meeting of
stockholders and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present.
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Section 6. Regular Meetings. Additional regular meetings of the Board of
Directors may be held without notice, at such time and place as may from time to
time be determined by the Board of Directors.
Section 7. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board of Directors or, in the event of his
disability, by the Vice Chairman on 2 days' notice to each director in
accordance with Article V. Special meetings shall be called by the Chairman of
the Board, Vice Chairman, Chief Executive Officer, President or Secretary in
like manner and on like notice on the written request of 4 directors or one-half
(1/2) of the number of directors, whichever is less.
Section 8. Quorum. At all meetings of the Board of Directors one-half
(1/2) of the number of directors then in office, or such greater number as
equals one-third (1/3) of the total number of directors, shall constitute a
quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by law
or the Certificate of Incorporation. If a quorum is not present at any meeting
of the Board of Directors, the directors present may adjourn the meeting, from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
Section 9. Compensation. Directors shall be entitled to such compensation
for their services as directors and to such reimbursement for any reasonable
expenses incurred in attending directors' meetings as may from time to time be
fixed by the Board of Directors. The compensation of directors may be on such
basis as is determined by the Board of Directors. Any director may waive
compensation for any meeting. Any director receiving compensation under these
provisions shall not be barred from serving the Corporation in any other
capacity and receiving reasonable compensation for other such services.
Section 10. Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
a written consent to such action is signed by all members of the Board of
Directors and such written consent is filed with the minutes of the proceedings.
ARTICLE IV
COMMITTEES
Section 1. Executive Committee. The Board of Directors may appoint any
Executive Committee consisting of not less than 3 directors, one of whom shall
be designated as Chairman of the Executive Committee.
Section 2. Powers. The Executive Committee shall have and may exercise
those powers of the Board of Directors as may from time to time be granted to it
by the Board of Directors.
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Section 3. Procedure; Meetings. The Executive Committee shall fix its own
rules of procedure and shall meet at such times and at such place or places as
may be provided by such rules. The Executive Committee shall keep regular
minutes of its meetings and deliver such minutes to the Board of Directors.
The Chairman of the Executive Committee, or, in his absence, a member of
the Executive Committee chosen by a majority of the members present, shall
preside at meetings of the Executive Committee and another member thereof chosen
by the Executive Committee shall act as Secretary of the Executive Committee.
Section 4. Quorum. A majority of the Executive Committee shall constitute
a quorum for the transaction of business, and the affirmative vote of a majority
of the members thereof shall be required for any action of the Executive
Committee.
Section 5. Other Committees. The Board of Directors may appoint such other
committee or committees as it shall deem advisable and with such functions and
duties as the Board of Directors shall prescribe.
Section 6. Vacancies; Changes; Discharge. The Board of Directors shall
have the power at any time to fill vacancies in, to change the membership of,
and to discharge, any such committee.
Section 7. Compensation. Members of any committee shall be entitled to
such compensation for their services as members of any such committee and to
such reimbursement for any reasonable expenses incurred in attending committee
meetings as may from time to time be fixed by the Board of Directors. Any member
may waive compensation for any meeting.
Section 8. Action by Consent. Any action required or permitted to be taken
at any meeting of any committee of the Board of Directors may be taken without a
meeting if written consent to such action is signed by all members of the
committee and such written consent is filed with the minutes of its proceedings.
ARTICLE V
NOTICES
Section 1. Form; Delivery. Whenever, under the provisions of law, the
Certificate of Incorporation or these Bylaws, notice is required to be given to
any director or stockholder, it shall not be construed to mean personal notice
unless otherwise specifically provided, but such notice may be given by regular
or overnight mail, addressed to such director or stockholder, at his or her
address as it appears on the records of the Corporation, with postage thereon
prepaid. Notices given by regular mail shall be deemed to be given at the time
they are deposited in the United States mail. Notice to a director may also be
given personally, by telegram sent to his address as it appears on the records
of the Corporation, by facsimile (with a machine-generated confirmation) or by
telephone.
<PAGE> 9
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Section 2. Waiver. Whenever any notice is required to be given under the
provisions of law, the Certificate of Incorporation or these Bylaws, a written
waiver thereof, signed by the person or persons entitled to said notice, whether
before or after the time stated therein, shall be deemed to be equivalent to
such notice. In addition, any stockholder who attends a meeting of stockholders
in person, or is represented at such meeting by proxy, without protesting prior
to the conclusion of the meeting the lack of notice thereof to him, or any
director who attends a meeting of the Board of Directors without protesting,
prior to the commencement of the meeting, such lack of notice, shall be
conclusively deemed to have waived notice of such meeting.
ARTICLE VI
OFFICERS
Section 1. Designations. The officers of the Corporation shall be chosen
by the Board of Directors and shall be a Chairman of the Board, Vice Chairman of
the Board, a Chief Executive Officer, a President, a Secretary and a Treasurer.
The Board of Directors may also choose one or more Executive or Senior Vice
Presidents, one or more additional vice presidents, one or more assistant
secretaries and assistant treasurers, and such other officers and agents as it
shall deem necessary. All officers of the Corporation shall hold their offices
for such terms and shall exercise such power and perform such duties as shall
from time to time be determined by the Board of Directors. Any number of offices
may be held by the same person, unless the Certificate of Incorporation or these
Bylaws otherwise provide.
Section 2. Term of Office; Removal. The Board of Directors at its first
meeting after each annual meeting of stockholders shall choose a Chairman, a
Vice Chairman, a Chief Executive Officer, Chief Executive Officer, a President,
a Secretary and a Treasurer and such other officers as the Board of Directors
shall deem appropriate. The officers of the Corporation shall hold office until
their successors are chosen and shall qualify. Any officer elected or appointed
by the Board of Directors may be removed, with or without cause, at any time by
the affirmative vote of a majority of the directors then in office. Such removal
shall not prejudice the contract rights, if any, of the person so removed. Any
vacancy occurring in any office of the Corporation may be filled by the Board of
Directors.
Section 3. Compensation. The salaries of all officers of the Corporation
shall be fixed by the Board of Directors.
Section 4. The Chairman of the Board.
(a) The Chairman of the Board shall have general direction of the business
affairs of the Corporation, subject to the control of the Board of Directors.
The Chairman of the Board shall preside at all meetings of stockholders and the
Board of Directors which he shall attend. Except where, by law, the signature of
the President is required, the Chairman of the Board shall possess the same
power as the President to execute all certificates, contracts, bonds, mortgages
and other instruments of the Corporation.
(b) Unless otherwise prescribed by the Board of Directors, the Chairman
shall have full power and authority on behalf of the Corporation to attend, act
and vote at any meeting of security holders of other corporations in which the
Corporation may hold securities. At such meeting, the Chairman shall possess
and may exercise any and all rights and powers incident to the ownership of such
securities which the Corporation might have possessed and exercised if it had
been present. The Board of Directors may from time to time confer like powers
upon any other person or persons.
<PAGE> 10
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Section 5. Vice Chairman. The Vice Chairman shall, in the absence of the
Chairman of the Board or in the event of his disability, preside at all meetings
of the Board of Directors and Stockholders and perform the duties and exercise
the powers of the Chairman of the Board and shall perform such other duties and
have such other powers as may from time to time be prescribed by the Board of
Directors.
Section 6. Chief Executive Officer. The Chief Executive Officer shall be
the Chief Administrator of the Corporation, have general direction of
administration of the bureau affairs of the Corporation, subject to the
direction of the Board of Directors, and shall perform such other duties and
have such other powers as may from time to time be prescribed by the Board of
Directors.
Section 7. The President. The President shall be the Chief Operations
Officer of the Corporation and shall have general direction of the operation of
the business affairs of the Corporation, subject to the direction of the Chief
Executive Officer and the Board of Directors, and shall perform such other
duties and shall have such other powers as may from time to time be prescribed
by the Board of Directors.
Section 8. The Vice Presidents. The Vice President (or in the event there
by more than one, the Vice Presidents in the order designated, or in the absence
of any designation, then in order of their election) shall, in the absence of
the President or in the event of his disability, perform the duties and exercise
the powers of the President and shall generally assist the President and perform
such other duties and have such other powers as may from time to time be
prescribed by the Board of Directors.
Section 9. The Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all votes and the
proceedings of the meetings in a book to be kept for that purpose and shall
perform like duties for the Executive Committee or other committees, if
required. He shall give, or cause to be given, notice of all meetings of
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may from time to time be prescribed by the Board of
Directors, the Chairman of the Board or the President, under whose supervision
he shall act. He shall have custody of the seal of the Corporation and he, or an
Assistant Secretary, shall have authority to affix the same to any instrument
requiring it and, when so affixed, the seal may be attested by his signature or
by the signature of such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing thereof by his signature.
Section 10. The Assistant Secretary. The Assistant Secretary (or in the
event there be more than one, the Assistant Secretaries in the order designated,
or in the absence of any designation, then in the order of their election)
shall, in the absence of the Secretary or in the event of his disability,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as may from time to time be
prescribed by the Board of Directors.
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Section 11. The Treasurer. The Treasurer shall have the custody of the
corporate funds and other valuable effects, including securities, and shall keep
full and accurate accounts of receipts and disbursements in books belonging to
the Corporation and shall deposit all moneys and other valuable effects in the
name and to the credit of the Corporation in such depositories as may from time
to time be designated by the Board of Directors. He shall disburse the funds of
the Corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the Chairman of the Board
or the President, and the Board of Directors, at regular meetings of the Board,
or whenever they may require it, an account of all of his transactions as
Treasurer and of the financial condition of the Corporation.
Section 12. The Assistant Treasurer. The Assistant Treasurer (or in the
event there be more than one, the Assistant Treasurers in the order designated,
or in the absence of any designation, then in the order of their election)
shall, in the absence of the Treasurer or in the event of his disability,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as may from time to time be
prescribed by the Board of Directors.
ARTICLE VII
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
Section 1. Action, Other Than by or in the Right of the Corporation. The
Corporation shall 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 the Corporation (other than a judicial action or
suit brought by or in the right of the Corporation) by reason of the fact that
he is or was a director, officer, employee or agent of the Corporation, or that,
being or having been such a director, officer, employee or agent, he is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise (all such persons being referred to hereafter as an "Agent"), against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding, or any appeal thereof, if he or she acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of the Corporation, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The termination of any action, suit or proceeding -- whether by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent -- shall not, of itself, create a presumption that the person did
not act in good faith and in manner which he or she reasonably believed to be in
or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, that he or she had reasonable cause to
believe that his or her conduct was unlawful.
Section 2. Action, by or in the Right of the Corporation. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed judicial action or suit brought by
or in the right of the Corporation to procure a judgment
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in its favor by reason of the fact that he or she is or was an Agent (as defined
above) against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection with the defense, settlement or appeal of
such action or suit if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for gross negligence or misconduct in the performance of his or her duty
to the Corporation unless and only to the extent that the Court of Chancery 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 other such court
shall deem proper.
Section 3. Determination of Right of Indemnification. No indemnification
under Section 1 or 2 of this Article VII (unless ordered by a court) shall be
made by the Corporation if a determination is reasonably and promptly made (i)
by the Board of Directors by a majority vote consisting of directors who were
not parties to such action, suit or proceedings, even though less than a quorum
or (ii) if there are no such directors or if such directors so direct, by
independent legal counsel in a written opinion, or (iii) by the stockholders,
that such person did not act in good faith and in a manner that such person
reasonably believed to be in or not opposed to the best interests of the
Corporation, or, with respect to any criminal proceeding, that such person
believed or had reasonable cause to believe that his or her conduct was
unlawful.
Section 4. Indemnification Against Expenses of Successful Party.
Notwithstanding the other provisions of this Article, to the extent that an
Agent has been successful on the merits or otherwise, including the dismissal of
an action without prejudice or the settlement of an action without admission of
liability, in defense of any action, suit or proceeding or in defense of any
claim, issue or matter therein, or on appeal from any such proceeding, action,
claim or matter, such Agent shall be indemnified against all expenses actually
and reasonably incurred in connection therewith.
Section 5. Advances of Expenses. Except as limited by Section 6 of this
Article, expenses incurred in defending any civil, criminal, administrative or
investigative action, suit or proceeding or investigation or any appeal therein
shall be paid by the Corporation in advance of the final disposition of such
matter, if the Agent shall undertake to repay such amount in the event that it
is ultimately determined, as provided herein, that such person is not entitled
to indemnification. Notwithstanding the foregoing, no advance shall be made by
the Corporation if a determination is reasonably and promptly made by the Board
of Directors by a majority vote of disinterested directors, or (if there are no
such directors or such directors so direct) by independent legal counsel in a
written opinion, that, based upon the facts known to the Board or counsel at the
time such determination is made, such person did not act in good faith and in a
manner that such person believed to be in or not opposed to the best interests
of the Corporation, or, with respect to any criminal proceeding, that such
person believed or had reasonable cause to believe his or her conduct was
unlawful. In no event shall any advance be made in instances where the Board of
Directors or independent legal counsel reasonably determines that such person
deliberately breached his duty to the Corporation or its shareholders.
<PAGE> 13
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Section 6. Right of Agent to Indemnification Upon Application; Procedure
Upon Application. Any indemnification under Sections 1, 2, and 4, or advance
under Section 5 of this Article, shall be made promptly, and in any event within
ninety days, upon the written request of the Agent, unless with respect to
applications under Sections 1, 2, or 5, a determination is reasonably and
promptly be made by the Board of Directors by a majority vote of disinterested
directors that such Agent acted in a manner set forth in such Sections as to
justify the Corporation's not indemnifying or making an advance to the Agent. In
the event there are no such disinterested directors, the Board of Directors
shall promptly direct that independent legal counsel shall decide whether the
Agent acted in the manner set forth in such Sections as to justify the
Corporation's not indemnifying or making an advance to the Agent. The right to
indemnification or advances as granted by this Article shall be enforceable by
the Agent in any court of competent jurisdiction, if the Board or independent
legal counsel denies the claim, in whole or in part, or if no disposition of
such claim is made within ninety days. The Agent's expenses incurred in
connection with successfully establishing his right to indemnification, in whole
or in part, in any such proceeding shall also be indemnified by the Corporation.
Section 7. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in this
Article is held by a court of competent jurisdiction to be unavailable to an
indemnitee in whole or part, the Corporation, shall, in such an event, after
taking into account, among other things, contributions by other directors and
officers of the Corporation pursuant to indemnification agreements or otherwise,
and in the absence of personal enrichment, acts of intentional fraud or
dishonesty or criminal conduct on the part of the Agent, contribute to the
payment of Agent's losses to the extent that, after other contributions are
taken into account, such losses exceed: (i) in the case of a director of the
Corporation or any of its subsidiaries who is not an officer of the Corporation
or any of such subsidiaries, the amount of fees paid to him or her for serving
as a director during the 12 months preceding the commencement of the suit,
proceeding or investigation; or (ii) in the case of a director of the
Corporation or any of its subsidiaries who is also an officer of the Corporation
or any of such subsidiaries, the amount set forth in clause (i) plus 5% of the
aggregate cash compensation paid to said director for such office(s) during the
12 months preceding the commencement of the suit, preceding, or investigation;
or (ii) in the case of an officer of the Corporation or any of its subsidiaries,
5% of the aggregate cash compensation paid to such officer for service in such
office(s) during the 12 months preceding the commencement of such suit,
proceeding or investigation.
Section 8. Other Rights and Remedies. The indemnification provided by this
Article shall not be deemed exclusive of, and shall not affect, any other rights
to which an Agent seeking indemnification may be entitled under any Bylaws,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be an
Agent and shall inure to the benefit of the heirs, executors and administrators
of such a person. All rights to indemnification under this Article shall be
deemed to be provided by a contract between the Corporation and the agent who
serves in such capacity at any time while these bylaws and other relevant
provisions of the general corporation law and other applicable law, if any, are
in effect. Any repeal or modification thereof shall not affect any rights or
obligations then existing.
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Section 9. Insurance. Upon resolution passed by the Board, the Corporation
may purchase and maintain insurance on behalf of any person who is or was an
Agent against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this Article. The Corporation may create a trust fund, grant a
security interest or use other means (including, without limitation, a letter of
credit) to ensure the payment of such sums as may become necessary to effect
indemnification as provided herein.
Section 10. Constituent Corporations. For the purposes of this Article,
references to "the Corporation" include all constituent corporations absorbed in
a consolidation or merger as well as the resulting or surviving corporation, so
that any person who is or was a director, officer, employee, or trustee of such
a constituent corporation or who, being or having been such a director, officer,
employee or trustee, is or was serving at the request of such constituent
corporation as a director, officer, employee, trustee of another corporation,
partnership, joint venture, trust or other enterprise shall stand in the same
position under the provisions of this Article with respect to the resulting or
surviving corporation as he would if he had served the resulting or surviving
corporation in the same capacity.
Section 11. Other Enterprises, Fines, and Serving at Corporation's
Request. For purposes of this Article, references to "other enterprises" in
Section 1 and 7 shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on a person with respect to any employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service by Agent as director, officer, employee, trustee or
agent of the Corporation which imposes duties on, or involves services by, such
Agent with respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interests of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article.
Section 12. Savings Clause. If this Article or any portion thereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Agent as to expenses (including
attorneys' fees), judgements, fines and amounts paid in settlement with respect
to any action, suit, appeal, proceeding or investigation, whether civil,
criminal or administrative, and whether internal or external, including a grand
jury proceeding and an action or suit brought by or in the right of the
Corporation, to the full extent permitted by any applicable portion of this
Article that shall not have been invalidated, or by any other applicable law.
<PAGE> 15
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ARTICLE VIII
STOCK CERTIFICATES
Section 1. Form; Signatures.
(a) Every holder of stock in the Corporation shall be entitled to have a
certificate, signed by the Chairman of the Board or the Chief Executive Officer
and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Corporation, exhibiting the number, and class (and series, if
any), of shares owned by him, and bearing the seal of the Corporation. Such seal
may be a facsimile. Where a certificate is manually signed (i) by a transfer
agent other than the Corporation or its employee or (ii) by a registrar other
than the Corporation or its employee, the signature of any such officer may be a
facsimile. In case any officer who has signed, or whose facsimile signature was
placed on, a certificate shall have ceased to be such officer before such
certificate is issued, it may nevertheless be issued by the Corporation with the
same effect as if he were such officer at the date of its issue.
(b) All stock certificates representing shares of capital stock which are
subject to restrictions on transfer or to other restrictions, may have imprinted
thereon a notation to such effect, as shall be determined by the Board of
Directors.
Section 2. Registration of Transfer. Upon surrender to the Corporation or
any transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation or its transfer agent to issue
a new certificate to the person entitled thereto, to cancel the old certificate
and to record the transaction upon its books.
Section 3. Registered Stockholders.
(a) Except as otherwise provided by law, the Corporation shall be entitled
to recognize the exclusive right of a person who is registered on its books as
the owner of shares of capital stock to receive dividends or other
distributions, to vote as such owner, and to hold liable for calls and
assessments a person who is registered on its books as the owner of shares of
its capital stock. The Corporation shall not be bound to recognize any equitable
or legal claim to or interest in such shares on the part of any other person.
(b) Stockholders are responsible for giving written notice to the
Corporation or the transfer agent and registrar, if any, of any change of name
or address, and failure to do so shall relieve the Corporation, its directors,
officers and agents, and its transfer agent and registrar, if any, of liability
for failure to send notices or pay dividends or other distributions to a name or
address other than the name or address appearing on the stock ledger maintained
by the Corporation or by the transfer agent and registrar, if any.
<PAGE> 16
-16-
Section 4. Lost, Stolen or Destroyed Certificates. The Board of Directors
may direct a new certificate to be issued in place of any certificate
theretofore issued by the Corporation which is claimed to have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate, or his legal
representative, to advertise the same in such manner as it shall require and/or
to give the Corporation a bond in such sum as it may direct as indemnity against
any claim that may be made against the Corporation with respect to the
certificate claimed to have been lost, stolen or destroyed.
ARTICLE IX
GENERAL PROVISIONS
Section 1. Dividends. Subject to the provisions of the Certificate of
Incorporation, dividends upon the outstanding capital stock of the Corporation
may be declared by the Board of Directors at any regular or special meeting,
pursuant to law, and may be paid in cash, in property, or in shares of the
Corporation's capital stock.
Section 2. Reserves. The Board of Directors shall have full power, subject
to the provisions of law and the Certificate of Incorporation, to determine
whether any, and, if so, what part, of the funds legally available for the
payment of dividends shall be declared as dividends and paid to the stockholders
of the Corporation. The Board of Directors may fix a sum which may be set aside
or reserved over and above the paid-in capital of the Corporation for working
capital or as a reserve for any proper purpose, and may, from time to time,
increase, diminish or vary such fund in its absolute judgment and discretion.
Section 3. Fiscal Year. The fiscal year of the Corporation shall begin on
June 1 in each calendar year and end on May 31 in the following calendar year.
Section 4. Seal. The corporate seal shall have inscribed thereon the name
of the Corporation, the year of its incorporation and the words "Corporate Seal,
Delaware".
<PAGE> 1
Exhibit 4.1
COMMON STOCK COMMON STOCK
NUMBER INCORPORATED UNDER THE LAWS SHARES SHARES
OF THE STATE OF DELAWARE
CUSIP 170380 10 9
SEE REVERSE FOR CERTAIN DEFINITIONS
CHOICE HOTELS INTERNATIONAL, INC.
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF
$.01 EACH OF THE COMMON STOCK OF
SPECIMEN Choice Hotels International, Inc. transferable on the books of the
Corporation by the holder hereof
in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This
SEAL Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrant.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized Officers.
CORPORATE Dated
COUNTERSIGNED AND REGISTERED:
ChaseMellon Shareholder Services, L.L.C.
TRANSFER AGENT
BY AND REGISTRAR
American AUTHORIZED SIGNATURE SECRETARY CHIEF EXECUTIVE OFFICER
Bank Note
Company
<PAGE> 2
----------
The Corporation will furnish to any stockholder on request and without charge a
full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the stock of each
class which the Corporation is authorized to issue, of the differences in
the relative rights and preferences between the shares of each series of a
preferred or special class in series which the Corporation is authorized to
issue, to the extent they have been set, and the authority of the Board of
Directors to set the relative rights and preferences of subsequent series of a
preferred or special class of stock. Such request may be made to the Secretary
of the Corporation.
----------
Keep this certificate in a safe place. If it is lost, stolen or destroyed the
Corporation will require a Bond of Indemnity as a condition to the issuance of
a replacement certificate.
----------
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ______ Custodian _______
TEN ENT - as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to
JT TEN - as joint tenants with Minors Act _____________
right of survivorship (State)
and not as tenants in
common
Additional abbreviations may also be used though not in the above list.
For value received, ________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
__________________________________________________________________________
__________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP
CODE OF ASSIGNEE.
__________________________________________________________________________
__________________________________________________________________________
___________________________________________________________________ Shares
of the capital stock represented by the within Certificate and do hereby
irrevocably constitute and appoint _______________________________________
__________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named
Corporation with full power of substitution in the premises.
Dated, _____________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURES(S) GUARANTEED: THE SIGNATURES(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCK-BROKERS, SAVINGS AND LOAN ASSOCIATION
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad15.
AMERICAN BANKNOTE COMPANY PRODUCTION COORDINATOR-PEARL KENTRUS-215-830-2154
680 BLAIR MILL ROAD PROOF OF SEPTEMBER 10, 1996
HORSHAM, PA 19044 CHOICE HOTELS
215-657-3480 H 46319bk
SALES PERSON- C. SHARKEY-215-830-2153 Opr. hj NEW
/home/hi/inprogress/home12/Choice46319 /net/banknote/home41/F
<PAGE> 1
Exhibit 10.01
DISTRIBUTION AGREEMENT
dated as of
October 31, 1996
between
Manor Care, Inc.
and
Choice Hotels Holdings, Inc.
(to be renamed Choice Hotels International, Inc.)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I
DEFINITIONS
Section 1.01. Definitions............................................... 2
ARTICLE II
TRANSFER OF LODGING BUSINESS
Section 2.01. Transfer of Assets........................................ 8
Section 2.02. Assignment and Assumption of Liabilities.................. 9
Section 2.03. Assisted Living Facilities................................ 9
Section 2.04. Transfers Not Effected Prior to the Distribution Date..... 9
Section 2.05. NO REPRESENTATIONS OR WARRANTIES; CONSENTS................ 10
Section 2.06. Conveyancing and Stock Assumption Instruments............. 11
Section 2.07. Cash Allocation........................................... 12
ARTICLE III
THE DISTRIBUTION
Section 3.01. Cooperation Prior to the Distribution..................... 13
Section 3.02. Conduct of Lodging Business Pending Distribution.......... 13
Section 3.03. Manor Care Board Action; Conditions
Precedent to the Distribution........................... 14
Section 3.04. Outstanding Choice Stock.................................. 15
Section 3.05. The Distribution.......................................... 15
ARTICLE IV
INDEMNIFICATION
Section 4.01. Choice Indemnification of Manor Care...................... 16
Section 4.02. Manor Care Indemnification of Choice...................... 16
Section 4.03. Notice and Payment of Claims.............................. 16
Section 4.04. Notice and Defense of Third-Party Claims.................. 17
Section 4.05 Insurance Proceeds........................................ 19
Section 4.06 Contribution.............................................. 19
Section 4.07 Subrogation............................................... 20
Section 4.08 No Third-Party Beneficiaries.............................. 20
Section 4.09 Remedies Cumulative....................................... 20
Section 4.10 Survival of Indemnities................................... 20
Section 4.11 After-Tax Indemnification Payments........................ 20
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE V
CERTAIN ADDITIONAL MATTERS
Section 5.01. Intercompany Accounts..................................... 21
Section 5.02. Manor Care Guarantees..................................... 21
Section 5.03. Ancillary Agreements...................................... 22
Section 5.04. Choice Officers and Board of Directors.................... 22
Section 5.05. Choice Certificate of Incorporation and By-laws........... 22
Section 5.06. Credit Facilities......................................... 22
Section 5.07. Sales and Transfer Taxes.................................. 23
Section 5.08. Certain Post-Distribution Transactions.................... 23
Section 5.09. Non-Competition Agreement................................. 23
Section 5.10. Insurance Policies and Claims Administration.............. 24
ARTICLE VI
ACCESS TO INFORMATION
Section 6.01. Delivery of Corporate Records............................. 26
Section 6.02. Access to Information..................................... 27
Section 6.03. Litigation Cooperation.................................... 27
Section 6.04. Reimbursement............................................. 27
Section 6.05. Retention of Records...................................... 27
Section 6.06. Confidentiality........................................... 28
Section 6.07. Mail...................................................... 28
ARTICLE VII
INTENTIONALLY OMITTED
</TABLE>
<PAGE> 4
ARTICLE VIII
MISCELLANEOUS
<TABLE>
<S> <C> <C>
Section 8.01. Termination............................................... 29
Section 8.02. Expenses.................................................. 29
Section 8.03. Notices................................................... 29
Section 8.04. Amendment and Waiver...................................... 30
Section 8.05. Counterparts.............................................. 30
Section 8.06. Governing Law; Jurisdiction; Forum........................ 30
Section 8.07. Entire Agreement.......................................... 31
Section 8.08. Parties in Interest....................................... 31
Section 8.09. Tax Sharing Agreement; After-Tax Payments................. 31
Section 8.10. Further Assurances and Consents........................... 31
Section 8.11. Exhibits and Schedules.................................... 32
Section 8.12. Legal Enforceability...................................... 32
Section 8.13. Dispute Resolution........................................ 32
Section 8.14. Titles and Headings....................................... 34
</TABLE>
<TABLE>
<S> <C>
Schedule 1............................ Lodging Subsidiaries
Schedule 2.01(b)...................... Transferred Hotels
Schedule 2.03......................... Assisted Living Facilities
Schedule 5.02(a)...................... Manor Care Guarantees
Schedule 5.10(a)...................... Covered Claims
Exhibit A............................. Form of Corporate Services Agreement
Exhibit B............................. Form of Employee Benefits
Administration Agreement
Exhibit C............................. Form of Employee Benefits & Other
Employment Matters Allocation
Agreement
Exhibit D............................. Form of Gaithersburg Sublease Agreement
Exhibit E............................. Form of Loan Agreement
Exhibit F............................. Form of Pikesville Sublease Agreement
Exhibit G............................. Form of Procurement Services Agreement
Exhibit H............................. Form of Risk Management Consulting
Services Agreement
Exhibit I............................. Form of Silver Spring Lease Agreement
Exhibit J............................. Form of Tax Administration Agreement
Exhibit K............................. Form of Tax Sharing Agreement
Exhibit L............................. Form of Time Sharing Agreement
Exhibit M............................. Form of Trademark Agreement
<FN>
</TABLE>
<PAGE> 5
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT ("Agreement") dated as of October 31, 1996 by
and between Manor Care, Inc., a Delaware corporation (together with its
successors and permitted assigns, "Manor Care"), and Choice Hotels Holdings,
Inc., a Delaware corporation (to be renamed Choice Hotels International, Inc.
and together with its successors and permitted assigns, "Choice").
RECITALS
WHEREAS, Manor Care currently conducts the business of owning,
managing and franchising hotels and conducts certain related operations (the
"Lodging Business") primarily through certain subsidiaries of Manor Care (the
"Direct Lodging Subsidiaries"), their respective subsidiaries and certain
partnerships, all as identified on Schedule 1 hereto (collectively, the "Lodging
Subsidiaries").
WHEREAS, Choice is presently a wholly-owned subsidiary of Manor Care
established for the purposes of taking title to the capital stock and associated
goodwill of the Direct Lodging Subsidiaries and certain assets associated with
the Lodging Business, and assuming the liabilities associated with the Lodging
Business and certain other liabilities, all as specified herein, such that
Choice will own substantially all of the assets, business and operations
currently conducted by the Lodging Business.
WHEREAS, the Board of Directors of Manor Care has determined that it
is in the best interest of Manor Care and the stockholders of Manor Care to
distribute (the "Distribution") to the holders of Manor Care Common Stock (as
defined herein) all of the outstanding shares of Choice Common Stock (as defined
herein).
WHEREAS, it is the intention of the parties that the Distribution
will not be taxable to Manor Care or to the stockholders of Manor Care
(pursuant to Section 355 of the Code (as defined herein)).
WHEREAS, the parties have determined that it is necessary and
desirable to set forth the principal corporate transactions required to effect
the Distribution and to set forth other agreements that will govern certain
other matters following such Distribution.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual agreements, provisions and covenants contained in this Agreement, the
parties hereby agree as follows:
<PAGE> 6
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. As used herein, the following terms
have the following meaning:
"Action" means any claim, suit, arbitration, inquiry, proceeding or
investigation by or before any court, governmental or regulatory or
administrative agency or commission or any other tribunal.
"Affiliate" of any specified person means any other person that,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with such specified person.
"Ancillary Agreements" means the Corporate Services Agreement, the
Employee Benefits Administration Agreement, the Employee Benefits and Other
Employment Matters Allocation Agreement, the Gaithersburg Sublease Agreement,
the Loan Agreement, the Pikesville Sublease Agreement, the Procurement Services
Agreement, the Risk Management Consulting Services Agreement, the Silver Spring
Lease Agreement, the Tax Administration Agreement, the Tax Sharing Agreement,
the Time Sharing Agreement and the Trademark Agreement.
"Assisted Living Liabilities" means all Liabilities arising
exclusively from the operation of the assisted living facilities described on
Schedule 2.03 or the ownership or use of assets exclusively in connection
therewith.
<PAGE> 7
"Assumed Liabilities" means the Liabilities arising from the
operation of the Lodging Business or the ownership or use of assets (including
the Transferred Assets) or other activities in connection therewith, whether
arising before, on or after the Distribution Date, including but not limited to
any Liabilities arising or in connection with or related to (i) the Choice
Liabilities that are guaranteed by Manor Care, as specified in Schedule 5.02(a),
(ii) information contained in or omitted from the Form 10 or the Information
Statement and (iii) any Liabilities set forth or referenced in the audited
financial statements of Choice included in the Form 10 or the Information
Statement, (iv) hotel leases under which Manor Care may be deemed to be liable,
(v) liabilities arising from Franchise Agreements, (vi) liabilities in
connection with a Reimbursement and Indemnification Agreement of Chemical Bank
regarding a Chemical Bank-France guarantee and (vii) liabilities under
indemnification agreements between Manor Care and certain employees and
directors with respect to services rendered by such employee or director to
Choice Hotels or the Lodging Business. Notwithstanding the foregoing, the
Assumed Liabilities shall not include (i) any debt of Manor Care for money
borrowed (including but not limited to any such debt evidenced by a note,
debenture or other instrument), (ii) (X) any third party claims arising from the
conduct or operation of the Lodging Business or the ownership or use of assets
in connection therewith prior to the Distribution Date if such claims are
Covered Claims, (Y) any self-insured retention or deductible for such Covered
Claims that would be covered but for such retention or deductible other than any
amount payable by Choice in respect of Shock Losses (as defined) pursuant to
Section 5.10(a), (Z) any letters of credit of Manor Care in favor of an
insurance carrier relating to such retention or deductible, (iii) the Assisted
Living Liabilities, and (iv) any claims, losses, damages, demands, costs,
expenses or liabilities for any Tax (which shall be governed by the Tax Sharing
Agreement and Sections 4.11 and 5.07 hereof).
<PAGE> 8
"Choice Bylaws" means the bylaws of Choice in the form filed as an
exhibit to the Form 10.
"Choice Certificate" means the restated certificate of incorporation
of Choice in the form filed as an exhibit to the Form 10.
"Choice Common Stock" means the outstanding shares of common stock,
par value $.01 per share, of Choice.
"Choice Credit Facility" means a revolving credit facility for
Choice in the amount of $100.0 million.
"Choice Hotels" means Choice Hotels International, Inc., a Delaware
corporation (to be renamed Choice Hotels Franchising, Inc.), and, prior to the
Distribution, a wholly-owned subsidiary of Manor Care.
"Choice Liabilities" means all of (i) the Liabilities of Choice
under this Agreement, (ii) the Assumed Liabilities, and (iii) the Liabilities of
Choice arising after the Distribution Date.
<PAGE> 9
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Corporate Services Agreement" means the agreement to be entered
into between Manor Care and Choice, on or before the Distribution Date,
providing for certain matters relating to corporate, administrative, consulting
and other services, in substantially the form set forth as Exhibit A, as amended
from time to time.
"Covered Claims" means any claim that is of a type covered by
insurance or self insurance of Manor Care as in effect on the Distribution Date
and that is a type of claim specified as a covered claim on Schedule 5.10(a).
"Direct Lodging Subsidiaries" has the meaning specified in the first
recital of this Agreement.
"Distribution" has the meaning specified in the third recital of
this Agreement.
"Distribution Agent" means Chase-Mellon Shareholder Services,
L.L.C.
"Distribution Date" means the date determined by the Board of
Directors of Manor Care as the date on which the Distribution shall be effected,
which is contemplated to occur on November 1, 1996.
"Employee Benefits Administration Agreement" means the agreement to
be entered into between Manor Care and Choice, on or before the Distribution
Date, providing for certain matters relating to the administration of employee
benefits, in substantially the form set forth as Exhibit B, as amended from time
to time.
<PAGE> 10
"Employee Benefits & Other Employment Matters Allocation Agreement"
means the agreement to be entered into between Manor Care and Choice, on or
before the Distribution Date, providing for certain matters relating to the
allocation of employee benefits, the treatment of employee stock options and
other employee matters, in substantially the form set forth as Exhibit C, as
amended from time to time.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Existing Credit Facility" means the $250 million revolving credit
facility dated as of November 30, 1994, as amended June 23, 1995, among Chase
Manhattan Bank and Manor Care and the subsidiary guarantors named therein.
"Form 10" means the registration statement on Form 10 filed by
Choice with the Commission to effect the registration of the Choice Common Stock
pursuant to the Exchange Act, as such registration statement may be amended from
time to time.
"Franchise Agreements" means all franchise agreements to which Manor
Care or any Lodging Subsidiary is a party, pursuant to which Manor Care (either
directly or through any such Lodging Subsidiary) has granted franchise rights
with respect to the operation of hotel properties, and in exchange therefor,
receives franchise fees, royalties, license fees and service fees.
"Gaithersburg Sublease Agreement" means the agreement to be entered
into between Manor Care and Choice, on or before the Distribution Date with
respect to property located in Gaithersburg, Maryland, in substantially the
form set forth as Exhibit D, as amended from time to time.
"Healthcare Business" means any business conducted now or in the
future by Manor Care that is not part of the Lodging Business.
"Indemnifiable Loss" has the meaning specified in Section 4.01.
"Information Statement" means the information statement in the form
sent to each holder of Manor Care Common Stock in connection with the
Distribution.
"Insurance Charges" has the meaning specified in Section
5.10(c)(ii).
"IRS Ruling" means the ruling of the Internal Revenue Service dated
January 22, 1996 that the Distribution should not be taxable to Manor Care or
the stockholders of Manor Care pursuant to Section 355 of the Code.
<PAGE> 11
"Liabilities" means any and all claims, debts, liabilities and
obligations, absolute or contingent, matured or not matured, liquidated or
unliquidated, accrued or not accrued, known or unknown, whenever arising,
including all costs and expenses relating thereto, under any law, rule,
regulation, action, order or consent decree of any governmental entity or any
award of any arbitrator of any kind, and those arising under any contract,
commitment or undertaking.
"Loan Agreement" means the Loan Agreement to be entered into among MNR
and Choice and the subsidiary guarantors to be named therein, on or before the
Distribution Date, providing for the recapitalization of the Promissory Notes
and repayment of certain advances made by Manor Care to one or more of the
Lodging Subsidiaries prior to the Distribution Date, in substantially the form
set forth as Exhibit E, as amended from time to time.
"Lodging Business" has the meaning specified in the first recital of
this Agreement.
"Lodging Subsidiaries" has the meaning specified in the first
recital of this Agreement.
"Manor Care Common Stock" means the outstanding shares of common
stock, par value $.10 per share, of Manor Care.
"Manor Care Liabilities" means all of (i) the Liabilities of Manor
Care under this Agreement, (ii) the Liabilities of Manor Care (other than any
Choice Liabilities), whether arising before, on or after the Distribution Date,
(iii) (X) any third party claims arising from the conduct or operation of the
Lodging Business or the ownership or use of assets in connection therewith prior
to the Distribution Date if and only to the extent that such claims are Covered
Claims, (Y) any self-insured retention or deductible for such Covered Claims
that would be covered but for such retention or deductible other than any amount
payable by Choice in respect of Shock Losses pursuant to Section 5.10(a), (Z)
any letters of credit of Manor Care in favor of an insurance carrier relating to
such retention or deductible, (iv) the Assisted Living Liabilities and (v) any
claims, losses, damages, demands, costs, expenses or liabilities for any Tax
(which shall be governed by the Tax Sharing Agreement and Sections 4.11 and 5.07
hereof).
"MNR" means MNR Finance Corp., a Delaware corporation.
"Pikesville Sublease Agreement" means the agreement to be entered
into between Manor Care and Choice, on or before the Distribution Date, with
respect to the Subleased Hotel, in substantially the form set forth as Exhibit
F, as amended from time to time.
"Procurement Services Agreement" means the agreement to be entered
into between Manor Care and Choice, on or before the Distribution Date,
providing for certain matters relating to procurement of products and supplies
used in the Lodging Business, in substantially the form set forth as Exhibit G,
as amended from time to time.
"Promissory Notes" means promissory notes issued by Boulevard Motel
Corp. in the aggregate principal amount of $225,722,500.
<PAGE> 12
"Record Date" means the date determined by Manor Care's Board of
Directors as the date for determining the stockholders of record of Manor Care
entitled to receive the Distribution, which record date is contemplated to be
October 10, 1996, subject to fulfillment of certain conditions to the
Distribution set forth herein.
"Risk Management Consulting Services Agreement" means the agreement
to be entered into between Manor Care and Choice on or prior to the Distribution
Date relating to risk management, in substantially the form set forth as Exhibit
H, as amended from time to time.
"Securities Act" means the Securities Act of 1933, as amended.
"Silver Spring Lease Agreement" means the lease agreement to be
entered into by Manor Care and Choice, on or before the Distribution Date, with
respect to property located in Silver Spring, Maryland, in substantially the
form set forth as Exhibit I, as amended from time to time.
"Subleased Hotel" means the Comfort Inn Hotel located at 100 Wooded
Way, Pikesville, Maryland 21208, which prior to the Distribution Date was
operated by Manor Care under a lease from a third party.
"Tax" shall have the meaning given to such term in the Tax Sharing
Agreement.
"Tax Administration Agreement" means the agreement to be entered
into between Manor Care and Choice on or prior to the Distribution Date
providing for certain tax administration matters, in substantially the form set
forth as Exhibit J, as amended from time to time.
"Tax Sharing Agreement" means the agreement to be entered into
between Manor Care and Choice on or prior to the Distribution Date providing for
certain tax related matters, in substantially the form set forth as Exhibit K,
as amended from time to time.
"Time Sharing Agreement" means the agreement to be entered into
between Manor Care and Choice, on or before the Distribution Date, providing
for the use of certain aircraft, in substantially the form set forth as Exhibit
L, as amended from time to time.
"Trademark Agreement" means the agreement to be entered into
between Manor Care and Choice, on or before the Distribution Date, providing
for certain matters relating to the transfer of certain trademarks and other
intellectual property, in substantially the form set forth as Exhibit M, as
amended from time to time.
"Transferred Assets" has the meaning specified in Section 2.01.
ARTICLE II
TRANSFER OF LODGING BUSINESS
Section 2.01. Transfer of Assets. Prior to the Distribution Date,
Manor Care shall take or shall cause to be taken all actions necessary to cause
the transfer, assignment, delivery and conveyance to Choice of all of Manor
Care's and its subsidiaries' rights, title and interest in the assets listed
below (collectively, the "Transferred Assets"):
<PAGE> 13
(a) the shares of common stock and preferred stock, if any, and
associated goodwill, of the Direct Lodging Subsidiaries owned by Manor
Care as set forth on Schedule 1;
(b) the hotels described on Schedule 2.01(b) (the "Transferred
Hotels") and the real property on which such hotels are located, and all
fixtures, furnishings, furniture, equipment, supplies and other tangible
personal property located at the Transferred Hotels and the Subleased
Hotel;
(c) all contracts, agreements (including Franchise Agreements),
arrangements or commitments of any kind and all licenses and permits of
Manor Care that relate exclusively to the Transferred Hotels and the
Subleased Hotel;
(d) the trademarks, service marks, goodwill and other intangible
properties and rights covered by the Assignment of Marks Agreement; and
(e) all books, records and files of, or relating exclusively to,
the Lodging Business.
Section 2.02. Assignment and Assumption of Liabilities. On or
prior to the Distribution Date, Manor Care shall assign to Choice and Choice
shall assume all of the Choice Liabilities. Except as set forth in one or more
or the Ancillary Agreements, from and after the Distribution Date, (i) Choice
shall, and/or shall cause its subsidiaries to, assume, pay, perform and
discharge in due course all of the Choice Liabilities, and (ii) Manor Care
shall, and/or shall cause its subsidiaries to, pay, perform and discharge in
due course all of the Manor Care Liabilities and have assigned all of the
Assumed Liabilities to Choice.
Section 2.03. Assisted Living Facilities. (a) Prior to the
transfer of the Transferred Assets, Boulevard Motel Corp., a Direct Lodging
Subsidiary, shall transfer to Manor Care the assisted living facilities
described on Schedule 2.03, including the real property on which such facilities
are located and all (i) fixtures, furnishings, furniture, equipment, supplies
and other tangible personal property located at such facilities, and (ii)
contracts, agreements, arrangements or commitments of any kind, and all licenses
and permits and books, records and files, in each case that relate to such
facilities.
(b) Manor Care shall, and/or shall cause its subsidiaries to,
assume, pay, perform and discharge in due course all of the Assisted Living
Liabilities.
<PAGE> 14
Section 2.04. Transfers Not Effected Prior to the Distribution
Date. To the extent any transfers contemplated by this Article II shall not
have been fully effected prior to the Distribution Date, Manor Care and Choice
shall cooperate to effect such transfers as promptly as possible following the
Distribution Date. Nothing herein shall be deemed to require the transfer of
any assets or the assumption of any Liabilities that by their terms or by
operation of law cannot be transferred or assumed; provided, however, that Manor
Care and Choice and their respective subsidiaries and Affiliates shall cooperate
in seeking to obtain any necessary consents or approvals for the transfer of all
assets and Liabilities as contemplated by this Article II. In the event that
any such transfer of assets or Liabilities has not been consummated effective as
of the Distribution Date, the party retaining such asset or Liability shall
thereafter hold such asset in trust for the use and benefit of the party
entitled thereto (at the expense of the party entitled thereto) and retain such
Liability for the account of the party by whom such Liability is to be assumed
pursuant hereto, and take such other actions as may be reasonably required in
order to place the parties, insofar as reasonably possible, in the same position
as would have existed had such asset been transferred, or such Liability been
assumed as contemplated hereby. As and when any such asset or Liability becomes
transferable, such transfer and assumption shall be effected forthwith. Manor
Care and Choice agree that, as of the Distribution Date, each party hereto shall
be deemed to have acquired complete and sole beneficial ownership over all of
the assets, together with all of the rights, powers and privileges incidental
thereto, that such party is entitled to acquire pursuant to the terms of this
Agreement.
<PAGE> 15
Section 2.05. NO REPRESENTATIONS OR WARRANTIES; CONSENTS. EACH OF
THE PARTIES HERETO UNDERSTANDS AND AGREES THAT NO PARTY HERETO IS, IN THIS
AGREEMENT OR IN ANY OTHER AGREEMENT OR DOCUMENT CONTEMPLATED BY THIS AGREEMENT
OR OTHERWISE, REPRESENTING OR WARRANTING IN ANY WAY AS TO THE VALUE OR FREEDOM
FROM ENCUMBRANCE OF, OR ANY OTHER MATTER CONCERNING, ANY ASSETS OF SUCH PARTY,
OR AS TO THE LEGAL SUFFICIENCY TO CONVEY TITLE TO ANY ASSET TRANSFERRED PURSUANT
TO THIS AGREEMENT OR ANY ANCILLARY AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY
CONVEYANCING OR ASSUMPTION INSTRUMENTS. IT IS ALSO AGREED AND UNDERSTOOD THAT
THERE ARE NO WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, GIVEN BY EITHER PARTY TO
THE AGREEMENT, AS TO THE CONDITION, QUALITY, MERCHANTABILITY OR FITNESS OF ANY
OF THE ASSETS, BUSINESSES OR OTHER RIGHTS TRANSFERRED OR RETAINED BY THE
PARTIES, AS THE CASE MAY BE, AND ALL SUCH ASSETS, BUSINESSES AND OTHER RIGHTS
SHALL BE "AS IS, WHERE IS" AND "WITH ALL FAULTS" (PROVIDED THAT THE ABSENCE OF
WARRANTIES GIVEN BY THE PARTIES SHALL NOT NEGATE THE ALLOCATION OF LIABILITIES
UNDER THIS AGREEMENT AND SHALL HAVE NO EFFECT ON ANY MANUFACTURERS, SELLERS, OR
OTHER THIRD PARTY WARRANTIES THAT ARE INTENDED TO BE TRANSFERRED WITH SUCH
ASSETS). SIMILARLY, EACH PARTY HERETO UNDERSTANDS AND AGREES THAT NO PARTY
HERETO IS, IN THIS AGREEMENT OR IN ANY OTHER AGREEMENT OR DOCUMENT CONTEMPLATED
BY THIS AGREEMENT OR OTHERWISE, REPRESENTING OR WARRANTING IN ANY WAY THAT THE
OBTAINING OF ANY CONSENTS OR APPROVALS, THE EXECUTION AND DELIVERY OF ANY
AMENDATORY AGREEMENTS AND THE MAKING OF ANY FILINGS OR APPLICATIONS CONTEMPLATED
BY THIS AGREEMENT WILL SATISFY THE PROVISIONS OF ANY OR ALL APPLICABLE LAWS OF
JUDGMENTS OR OTHER INSTRUMENTS OR AGREEMENTS RELATING TO SUCH ASSETS.
Notwithstanding the foregoing, the parties shall use their good faith efforts to
obtain all consents and approvals, to enter into all reasonable amendatory
agreements and to make all filings and applications contemplated by this
Agreement, and shall take all such further actions as shall be deemed reasonably
necessary to preserve for each of Manor Care and Choice, to the greatest extent
reasonably feasible, consistent with this Agreement, the economic and
operational benefits of the allocation of assets provided for in this Agreement.
In case at any time after the Distribution Date any further action is necessary
or desirable to carry out the purposes of this Agreement, the proper officers
and directors of each party to this Agreement shall take all such necessary or
desirable action, provided, that any financial cost shall be borne by the party
receiving the benefit of the action.
<PAGE> 16
Section 2.06. Conveyancing and Stock Assumption Instruments. In
connection with the asset and stock transfers and the assumptions of Liabilities
contemplated by this Agreement, the parties shall execute or cause to be
executed by the appropriate entities conveyancing and assumption instruments,
including using reasonable efforts to obtain from third-parties appropriate
releases and novations, in such forms as the parties shall reasonably agree,
including deeds as may be appropriate, the assignment of trademarks and
franchise rights, and the assignment and assumption of existing lease
agreements. Any transfer of capital stock shall be effected by means of
delivery of stock certificates and executed stock powers and notation on the
stock record books of the corporation or other legal entities involved and, to
the extent required by applicable law, by notation on public registries.
Section 2.07. Cash Allocation.
(a) Cash Allocation on the Distribution Date. The allocation
between Manor Care and Choice of all domestic and international cash bank
balances, short-term investments and outstanding checks and drafts of Manor Care
and its subsidiaries recorded per the books of Manor Care and its subsidiaries
shall be in accordance with the following:
(i) all cash received in, and deposits of cash, checks, drafts or
short-term investments made to, depositary accounts as of the close of
business on the Distribution Date shall be remitted to Manor Care; and
(ii) all petty cash of the Lodging Business shall be allocated to
Choice on the Distribution Date; and
(iii) all Liabilities for payment of outstanding checks or drafts
drawn on or prior to the Distribution Date on accounts allocated to
Choice pursuant to Section 2.07(b) shall be paid by Choice.
(b) Cash Management After the Distribution Date. The petty cash,
depositary and disbursement accounts of the Lodging Business shall be
transferred to Choice on the Distribution Date after the allocations are made
pursuant to clause Section 2.07(a)(i) and (ii). Choice shall establish and
maintain a separate cash management system and accounting records with respect
to the Lodging Business effective as of 12:01 a.m. New York time on the day
following the Distribution Date.
<PAGE> 17
(c) For purposes of this Section 2.07, the parties contemplate that
the Lodging Business and the businesses to be retained by Manor Care after the
Distribution, including, but not limited to, the administration of accounts
payable and accounts receivable, will be conducted in the ordinary course of
business consistent with past practice prior to the Distribution Date.
(d) For purposes of this Section 2.07, any disagreement or dispute
shall be resolved by the Assistant Treasurer of Manor Care, which resolution
shall be binding and final upon each of the parties hereto and not subject to
further review.
ARTICLE III
THE DISTRIBUTION
Section 3.01. Cooperation Prior to the Distribution. (a) Manor
Care and Choice have prepared, and Manor Care shall mail to the holders of Manor
Care Common Stock, the Information Statement, which sets forth disclosure
concerning Choice, the Distribution and other matters. Manor Care and Choice
have also prepared, and Choice has filed with the Commission, the Form 10, which
includes or incorporates by reference the Information Statement. Manor Care and
Choice shall use their reasonable efforts to cause the Form 10 to become
effective under the Exchange Act.
(b) Manor Care and Choice shall cooperate in preparing, filing with
the Commission and causing to become effective any registration statements or
amendments thereto that are appropriate to reflect the establishment of or
amendments to any employee benefit and other plans contemplated by the Employee
Benefits and Other Matters Allocation Agreement.
(c) Manor Care and Choice shall take all such action as may be
necessary or appropriate under the securities or blue sky laws of the states or
other political subdivisions of the United States in connection with the
transactions contemplated by this Agreement.
(d) Choice has prepared and filed a preliminary listing application
and will pursue the approval of the application to permit listing of the Choice
Common Stock on the New York Stock Exchange.
<PAGE> 18
Section 3.02. Conduct of Lodging Business Pending Distribution.
(a) Prior to the Distribution Date, the Lodging Business shall be
operated by Manor Care for the sole benefit of Manor Care and its stockholders.
(b) Prior to the Distribution Date, Choice shall have no operations
or conduct any business except in preparation for the consummation of the
transactions contemplated by this Agreement.
Section 3.03. Manor Care Board Action; Conditions Precedent to the
Distribution. Manor Care's Board of Directors shall, in its sole discretion,
establish the Record Date and the Distribution Date and any appropriate
procedures in connection with the Distribution. In no event shall the
Distribution occur unless the following conditions shall, unless waived by Manor
Care in its sole discretion, have been satisfied:
(a) all necessary regulatory approvals and consents of third
parties shall have been received;
(b) the Form 10 shall have been declared effective under the
Exchange Act;
(c) a favorable response shall have been received from the Staff of
the Commission with respect to Manor Care's no-action request concerning,
among other things, whether the Distribution may be effected without
registration of the Choice Common Stock under the Securities Act;
(d) the Choice Credit Facility shall be available;
(e) Choice's Board of Directors, as named in the Form 10, shall
have been elected by Manor Care, as sole stockholder of Choice, and the
Choice Certificate and Choice Bylaws shall be in effect;
(f) the Choice Common Stock shall have been approved for listing on
the New York Stock Exchange, subject to official notice of issuance;
(g) Manor Care's Board of Directors shall have formally approved
the Distribution and shall not have abandoned, deferred or modified the
Distribution at any time prior to the Distribution Date;
(h) The IRS Ruling shall be in full force and effect and shall not
have been modified and the representations made to the IRS therein shall
be true in all material respects;
<PAGE> 19
(i) the transactions contemplated by Sections 2.01 and 2.02 and
Article V shall have been consummated in all material respects and each of
the Ancillary Agreements, in form and substance satisfactory to Manor
Care, shall have been executed by the parties thereto and each of the
transactions contemplated by the Ancillary Agreements to be consummated on
or prior to the Distribution Date shall have been consummated;
(j) Choice shall have obtained, or Manor Care shall have obtained
for Choice, insurance (or binders therefor) providing coverage to Choice
similar to the coverage provided by insurance in place prior to the
Distribution Date;
(k) Manor Care shall have amended and restated the Existing Credit
Facility on terms acceptable to it in its sole discretion; and
(l) no preliminary or permanent injunction or other order, decree
or ruling issued by a court of competent jurisdiction or by a government,
regulatory or administrative agency or commission, and no statute, rule,
regulation or executive order promulgated or enacted by any governmental
authority, shall be in effect preventing the payment of the Distribution;
provided that the satisfaction of such conditions shall not create any
obligation on the part of Manor Care to effect the Distribution or in any way
limit Manor Care's power of termination set forth in Section 8.01 or alter the
consequences of any such termination from those specified in such Section.
Section 3.04. Outstanding Choice Stock. On or prior to the
Distribution Date, Manor Care and Choice shall take all steps necessary to
increase the outstanding shares of Choice Common Stock so that immediately prior
to the Distribution, Manor Care will hold a number of shares of Choice Common
Stock equal to the number of shares of Manor Care Common Stock outstanding on
the Record Date.
Section 3.05. The Distribution. On the Distribution Date, or as
soon thereafter as practicable, subject to the conditions set forth in this
Agreement, Manor Care shall deliver to the Distribution Agent a certificate or
certificates representing all of the then outstanding shares of Choice held by
Manor Care, endorsed in blank, and shall instruct the Distribution Agent to
distribute to each holder of record of Manor Care Common Stock on the Record
Date a certificate or certificates representing one share of Choice Common Stock
for each share of Manor Care Common Stock so held. Choice agrees to provide all
certificates for shares of Choice Common Stock that the Distribution Agent shall
require in order to effect the Distribution.
<PAGE> 20
ARTICLE IV
INDEMNIFICATION
Section 4.01. Choice Indemnification of Manor Care. Except as
otherwise expressly provided in any of the Ancillary Agreements, from and after
the Distribution Date, Choice shall indemnify, defend and hold harmless Manor
Care and its subsidiaries, and each of their respective directors, officers,
employees, agents and Affiliates and each of the heirs, executors, successors
and assigns of any of the foregoing (the "Manor Care Indemnitees") from and
against any and all damage, loss, liability and expense (including, without
limitation, reasonable expenses of investigation and reasonable attorneys' fees
and expenses in connection with any or all such investigations or any and all
Actions or threatened Actions) (collectively, "Indemnifiable Losses") incurred
or suffered by any of the Manor Care Indemnitees and arising out of or related
to the failure of Choice or any of its subsidiaries to pay, perform or otherwise
discharge any of the Choice Liabilities.
Section 4.02. Manor Care Indemnification of Choice. Except as
otherwise expressly provided in any of the Ancillary Agreements, from and after
the Distribution Date, Manor Care shall indemnify, defend and hold harmless
Choice and its subsidiaries, and each of their respective directors, officers,
employees, agents and Affiliates and each of the heirs, executors, successors
and assigns of any of the foregoing (the "Choice Indemnitees") from and against
any and all Indemnifiable Losses incurred or suffered by any of the Choice
Indemnitees and arising out of or related to the failure of Manor Care or any of
its subsidiaries to pay, perform or otherwise discharge any of the Manor Care
Liabilities.
Section 4.03. Notice and Payment of Claims. If any Manor Care
Indemnitee or Choice Indemnitee (the "Indemnified Party") determines that it is
or may be entitled to indemnification by Choice or Manor Care, as the case may
be (the "Indemnifying Party"), under this Article IV (other than in connection
with any Action subject to Section 4.04), the Indemnified Party shall deliver to
the Indemnifying Party a written notice specifying, to the extent reasonably
practicable, the basis for its claim for indemnification and the amount for
which the Indemnified Party reasonably believes it is entitled to be
indemnified. After the Indemnifying Party shall have been notified of the
amount for which the Indemnified Party seeks indemnification, the Indemnifying
Party shall, within 15 days after receipt of such notice, either (i) pay the
Indemnified Party such amount in cash or other immediately available funds (or
reach agreement with the Indemnified Party as to a mutually agreeable
alternative payment schedule) or (ii) object to the claim for indemnification or
the amount thereof by giving the Indemnified Party written notice setting forth
the grounds therefor. Any objection shall be resolved in accordance with
Section 8.13. If the Indemnifying Party does not give such notice, the
Indemnifying Party shall be deemed to have acknowledged its liability for such
claim and the Indemnified Party may exercise any and all of its rights under
applicable law to collect such amount.
<PAGE> 21
Section 4.04. Notice and Defense of Third-Party Claims. (a)
Promptly following the earlier of (a) receipt of written notice of the
commencement by a third party of any Action against or otherwise involving any
Indemnified Party or (b) receipt of written information from a third party
alleging the existence of a claim against an Indemnified Party, in either case,
with respect to which indemnification may be sought pursuant to this Agreement
(a "Third-Party Claim"), the Indemnified Party shall give the Indemnifying Party
prompt written notice thereof. The failure of the Indemnified Party to give
notice as provided in this Section 4.04 shall not relieve the Indemnifying Party
of its obligations under this agreement, except to the extent that the
Indemnifying Party is prejudiced by such failure to give notice. Such notice
shall describe the Third-Party Claim in reasonable detail and shall indicate the
amount of the Indemnifiable Loss that has been or will be sustained by the
Indemnified Party.
(b) Within 30 days after receipt of such notice, the Indemnifying
Party may, by giving written notice thereof to the Indemnified Party, (i)
acknowledge liability for and at its option elect to assume the defense of such
Third-Party Claim at its sole cost and expense or (ii) object to the claim of
indemnification for such Third-Party Claim setting forth the grounds therefor.
Any objection shall be resolved in accordance with Section 8.13. If the
Indemnifying Party does not within such 30-day period give the Indemnified Party
such notice, the Indemnifying Party shall be deemed to have acknowledged its
liability for such Third-Party Claim.
(c) Any defense of a Third-Party Claim as to which the Indemnifying
Party has elected to assume the defense shall be conducted by attorneys employed
by the Indemnifying Party and reasonably satisfactory to Manor Care in the case
of Manor Care Indemnitees and Choice in the case of Choice Indemnitees. The
Indemnified Party shall have the right to participate in such proceedings and to
be represented by attorneys of its own choosing at the Indemnified Party's sole
cost and expense; provided that if the defendants or parties against which
relief is sought in any such claim include both the Indemnifying Party and one
or more Indemnified Parties and, in the reasonable judgment of Manor Care in the
case of Manor Care Indemnitees and Choice in the case of Choice Indemnitees, a
conflict of interest between such Indemnified Parties and such Indemnifying
Party exists in respect of such claim, such Indemnified Parties shall have the
right to employ one firm of counsel selected by Manor Care or Choice, as the
case may be, and in that event the reasonable fees and expenses of such separate
counsel (but not more than one separate counsel reasonably satisfactory to the
Indemnifying Party) shall be paid by such Indemnifying Party.
<PAGE> 22
(d) If the Indemnifying Party assumes the defense of a Third-Party
Claim, the Indemnifying Party may settle or compromise the claim without the
prior written consent of the Indemnified Party; provided that without the prior
written consent of Manor Care in the case of Manor Care Indemnitees and Choice
in the case of Choice Indemnitees, the Indemnifying Party may not agree to any
such settlement unless as a condition to such settlement the Indemnified Party
receives a written release from any and all liability relating to such
Third-Party Claim and such settlement or compromise does not include any remedy
or relief to be applied to or against the Indemnified Party, other than monetary
damages for which the Indemnifying Party shall be responsible hereunder.
(e) If the Indemnifying Party does not assume the defense of a
Third-Party Claim for which it has acknowledged liability for indemnification
under this Article IV, Manor Care in the case of Manor Care Indemnitees and
Choice in the case of Choice Indemnitees may pursue the defense of such
Third-Party Claim and choose one firm of counsel in connection therewith. The
Indemnifying Party is required to reimburse Manor Care or Choice, as the case
may be, on a current basis for its reasonable expenses of investigation,
reasonable attorney's fees and reasonable out-of-pocket expenses incurred by
Manor Care in the case of Manor Care Indemnitees and Choice in the case of
Choice Indemnitees in defending against such Third- Party Claim and the
Indemnifying Party shall be bound by the result obtained with respect thereto;
provided that the Indemnifying Party shall not be liable for any settlement
effected without the consent of Manor Care in the case of Manor Care Indemnitees
and Choice in the case of Choice Indemnitees, which consent shall not be
unreasonably withheld.
(f) The Indemnifying Party shall pay to the Indemnified Party in
cash the amount for which the Indemnified Party is entitled to be indemnified
(if any) within 15 days after the final resolution of such Third-Party Claim
(whether by the final nonappealable judgment of a court of competent
jurisdiction or otherwise) or, in the case of any Third-Party Claim as to which
the Indemnifying Party has not acknowledged liability, within 15 days after such
Indemnifying Party's objection has been resolved pursuant to Section 8.13.
Section 4.05. Insurance Proceeds. The amount that any Indemnifying
Party is or may be required to pay to any Indemnified Party pursuant to this
Article IV shall be reduced (including, without limitation, retroactively) by
any insurance proceeds or other amounts actually recovered by or on behalf of
such Indemnified Parties in reduction of the related Indemnifiable Loss. If an
Indemnified Party shall have received the payment required by this Agreement
from an Indemnifying Party in respect of an Indemnifiable Loss and shall
subsequently actually receive insurance proceeds, or other amounts in respect of
such Indemnifiable Loss as specified above, then such Indemnified Party shall
pay to such Indemnifying Party a sum equal to the amount of such insurance
proceeds or other amounts actually received after deducting therefrom all of the
Indemnified Party's costs and expenses associated with the recovery of any such
amount.
<PAGE> 23
Section 4.06. Contribution. If the indemnification provided for in
this Article IV is unavailable to an Indemnified Party in respect of any
Indemnifiable Loss arising out of or related to information contained in or
omitted from the Information Statement or the Form 10, then Choice, in lieu of
indemnifying the Manor Care Indemnitees, shall contribute to the amount paid or
payable by the Manor Care Indemnitees as a result of such Indemnifiable Loss in
such proportion as is appropriate to reflect the relative fault of Choice, on
the one hand, and Manor Care, on the other hand, in connection with the
statements or omissions that resulted in such Indemnifiable Loss. The relative
fault of the Choice Indemnitees on the one hand and of the Manor Care
Indemnitees on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
concerning Choice on the one hand or Manor Care on the other hand.
Section 4.07. Subrogation. In the event of payment by an
Indemnifying Party to any Indemnified Party in connection with any Third-Party
Claim, such Indemnifying Party shall be subrogated to and shall stand in the
place of such Indemnified Party as to any events or circumstances in respect of
which such Indemnified Party may have any right or claim relating to such
Third-Party Claim. Such Indemnified Party shall cooperate with such
Indemnifying Party in a reasonable manner, and at the cost and expense of such
Indemnifying Party, in prosecuting any subrogated right or claim.
Section 4.08. No Third-Party Beneficiaries. This Article IV shall
inure to the benefit of, and be enforceable by, Manor Care, the Manor Care
Indemnitees, Choice and the Choice Indemnitees and their respective successors
and permitted assigns. The indemnification provided for by this Article IV
shall not inure to the benefit of any other third party or parties and shall not
relieve any insurer who would otherwise be obligated to pay any claim of the
responsibility with respect thereto or, solely by virtue of the indemnification
provisions hereof, provide any subrogation rights with respect thereto and each
party agrees to waive such rights against the other to the fullest extent
permitted.
<PAGE> 24
Section 4.09. Remedies Cumulative. The remedies provided in this
Article IV shall be cumulative and shall not preclude assertion by any
Indemnified Party of any other rights or the seeking of any and all other
remedies against any Indemnifying Party. The procedures set forth in this
Article IV, however, shall be the exclusive procedures governing any indemnity
action brought under this Article IV or otherwise relating to Indemnifiable
Losses; provided, however, that nothing in this Article IV shall be deemed to
govern any indemnity action brought under Article VII relating to Indemnifiable
Claims.
Section 4.10. Survival of Indemnities. The obligations of each of
Manor Care and Choice under this Article IV shall survive the sale or other
transfer by it of any assets or businesses or the assignment by it of any
Liabilities, with respect to any Indemnifiable Loss of the other related to such
assets, businesses or Liabilities.
Section 4.11. After-Tax Indemnification Payments. Except as
otherwise expressly provided herein or in an Ancillary Agreement, any
indemnification payment made by any Indemnifying Party under this Article IV
shall be computed by taking into account the value of any and all applicable
deductions, losses, credits, offsets or other items for Federal, state or other
tax purposes attributable to the payment of the indemnified liability by the
Indemnified Party and any Tax incurred by the Indemnified Party attributable to
receipt of the indemnification payment.
ARTICLE V
CERTAIN ADDITIONAL MATTERS
Section 5.01. Intercompany Accounts. On the Distribution Date, Manor
Care shall contribute to MNR the Promissory Notes and MNR and Choice shall
execute the Loan Agreement. All intercompany amounts payable or receivable by
Manor Care or Choice to the other not covered by the Loan Agreement shall be
cancelled on the Distribution Date.
Section 5.02. Manor Care Guarantees. (a) After the Distribution
Date, Manor Care shall continue and maintain, in full force and effect, the
guarantees issued by Manor Care (the "Guaranteed Obligations"), set forth on
Schedule 5.02(a) hereto, with respect to certain obligations of the Lodging
Business. Choice shall use its reasonable best efforts to obtain a release of
Manor Care from its obligations under the Guaranteed Obligations if and to the
extent that such efforts are consistent with the business of Choice and do not
adversely affect the relationship between Choice and the other parties to the
Guaranteed Obligations. Choice shall provide to Manor Care, so long as the
Guaranteed Obligations have not been fully and finally discharged, such
information or certificates as Manor Care shall reasonably request regarding the
financial position of Choice and the status of the Guaranteed Obligations.
<PAGE> 25
(b) Choice agrees to pay to Manor Care on the Distribution Date and
on each anniversary of the Distribution Date thereafter until the Guaranteed
Obligations are terminated a guarantee fee equal to 2% per annum of the
aggregate principal amount of obligations (including financing leases) subject
to such guarantees outstanding on the Distribution Date or the relevant
anniversary of the Distribution Date. Such fee is not subject to any refund and
shall not be prorated.
(c) Neither Choice nor any subsidiary thereof shall take any action
(including, without limitation, by amendment, renewal or extensions of any
Guaranteed Obligations (or any part thereof), except for any such change in any
Guaranteed Obligation that is caused by the exercise of rights contained in the
agreements governing the underlying obligation as in effect on the Distribution
Date) that could reasonably be expected to adversely affect Manor Care's
potential liability with respect to the Guaranteed Obligations, whether by
increasing the likelihood or amount of any such liability, extending the time
during which such liability remains outstanding or otherwise.
Section 5.03. Ancillary Agreements. On or prior to the
Distribution Date, Manor Care and Choice shall execute and deliver the Ancillary
Agreements.
Section 5.04. Choice Officers and Board of Directors. On or prior
to the Distribution Date, Manor Care shall take and shall cause Choice to take
all actions necessary to appoint as officers and directors of Choice those
persons named in the Form 10 to constitute the officers and directors of Choice
on the Distribution Date.
Section 5.05. Choice Certificate of Incorporation and By-laws.
Prior to the Distribution Date, Manor Care shall take all action necessary to
cause the certificate of incorporation and by-laws of Choice to be amended and
restated substantially in the form attached to the Form 10 as exhibits
thereto.
Section 5.06. Credit Facilities. (a) Prior to the Distribution
Date, Manor Care shall take all necessary action to replace its credit facility
so as to release Choice and the Lodging Subsidiaries from any liability or
obligation with respect thereto from and after the Distribution Date.
<PAGE> 26
(b) Prior to the Distribution Date, Manor Care and Choice shall
take all necessary action to obtain the Choice Credit Facility.
Section 5.07. Sales and Transfer Taxes. Manor Care and Choice
agree to cooperate to determine the amount of sales, transfer or other taxes or
fees (including, without limitation, all real estate, patent, copyright and
trademark transfer taxes and recording fees) payable in connection with the
transactions contemplated by this Agreement (the "Transaction Taxes"). Manor
Care agrees to file promptly and timely the returns for such Transaction Taxes
with the appropriate taxing authorities and remit payment of the Transaction
Taxes and Choice will join in the execution of any such tax returns or other
documentation. Payment of all such Transaction Taxes shall be the
responsibility of Choice and shall be reimbursed to Manor Care by Choice
promptly upon request by Manor Care.
Section 5.08. Certain Post-Distribution Transactions. Each of
Manor Care and Choice shall, and shall cause each of their respective
subsidiaries to, comply in all material respects with each representation and
statement made, or to be made, to any taxing authority in connection with the
IRS Ruling or any other ruling obtained, or to be obtained, by Manor Care and
Choice acting together, from any such taxing authority with respect to any
transaction contemplated by this Agreement.
Section 5.09. Non-Competition Agreement.
(a) Manor Care. Until five years after the Distribution Date,
Manor Care and its subsidiaries shall not, without the express written consent
of Choice, compete with the Lodging Business of Choice, provided that this
covenant shall not prevent Manor Care or any of its subsidiaries from engaging
in any line of business in which Choice is not engaged, or in which Choice is
prohibited by law or by contract from engaging, on the Distribution Date,
including, without limitation, the business conducted by the Assisted Living
Facilities, any independent living facilities and any business similar thereto.
(b) Choice. Until five years after the Distribution Date, Choice
and its subsidiaries shall not, without the express written consent of Manor
Care, compete with the Healthcare Business of Manor Care, including, without
limitation, the business conducted by the Assisted Living Facilities, any
independent living facilities or any business similar thereto.
<PAGE> 27
Section 5.10. Insurance Policies and Claims Administration.
(a) Manor Care to Maintain Insurance Coverage Prior to Distribution
Date. Manor Care shall use reasonable efforts to maintain in full force and
effect at all times up to and including the Distribution Date its current
property and casualty insurance programs, including, without limitation, primary
and excess general liability, automobile, workers' compensation, property and
crime insurance policies (collectively, the "Policies" and individually, a
"Policy"). Manor Care and its subsidiaries shall retain with respect to any
Covered Claims as set forth on Schedule 5.10(a) relating to periods prior to the
Distribution Date all of their respective rights, benefits and privileges, if
any, under such Policies. To the extent not already provided for by the terms of
a Policy, Manor Care shall use reasonable efforts to cause Choice and its
subsidiaries, as appropriate, to be named as additional insureds under such
Policy in respect of Covered Claims arising or relating to periods prior to the
Distribution Date; provided, however, that nothing contained herein shall be
construed to require Manor Care or any of its subsidiaries to pay any additional
premium or other charges in respect to, or waive or otherwise limit any of its
rights, benefits or privileges under, any such Policy to effect the naming of
Choice and its subsidiaries as such additional insureds; provided, further, that
with respect to any existing Covered Claim that Manor Care determines, in its
sole discretion, has a potential total out-of-pocket cost to Manor Care in
excess of $250,000 (including loss reserves and actual cash payments, if any),
as set forth on Schedule 5.10(a) (collectively, "Shock Losses"), it is
specifically understood that (x) if the amount of Insurance Charges actually
payable by Manor Care with respect to such Shock Loss shall be equal to or
exceed $250,000, the full amount of such payment shall be the responsibility of,
and shall be paid by, Choice and (y) if the amount of Insurance Charges actually
payable by Manor Care with respect to such Shock Loss shall be less than
$250,000, such amount shall be the responsibility of, and shall be paid by,
Manor Care.
<PAGE> 28
(b) Choice Responsible for Establishing Insurance Coverage on and
After Distribution Date. Commencing on and as of the Distribution Date, Choice
and each of its subsidiaries shall be responsible for establishing and
maintaining its own separate insurance programs (including, without limitation,
primary and excess general liability, automobile, workers' compensation,
property, director and officer liability, fire, crime, surety and other similar
insurance policies) for activities and claims relating to any period on or after
the Distribution Date involving Choice or any of its subsidiaries.
Notwithstanding any other agreement or understanding to the contrary, except as
set forth in Section 5.10(a) with respect to Covered Claims relating to periods
prior to the Distribution Date and Section 5.10(c) with respect to claims
administration and financial administration of the Policies, neither Manor Care
nor any of its subsidiaries shall have any responsibility for or obligation to
Choice or its subsidiaries relating to liability and casualty insurance matters
for any period, whether prior to, at or after the Distribution Date.
<PAGE> 29
(c) Administration and Procedure. (i) Manor Care or a
subsidiary of Manor Care, as appropriate, shall be responsible for the claims
administration and financial administration of all Policies for Covered Claims
relating to the assets, ownership or operation prior to the Distribution Date of
the Lodging Business; provided, however, that such retention by Manor Care of
the Policies and the responsibility for claims administration and financial
administration of the Policies are in no way intended to limit, inhibit or
preclude any right to insurance coverage for any Covered Claims of a named
insured under the Policies. Manor Care shall be entitled to compensation for and
reimbursement of expenses incurred in connection with performing the claims
administration and financial administration of the Policies in accordance with
the terms of the Corporate Services Agreement. Except as set forth in the Risk
Management Consulting Services Agreement, Choice or a subsidiary thereof, as
appropriate, shall be responsible for all administrative and financial matters
relating to insurance policies established and maintained by Choice and its
subsidiaries for claims relating to any period on or after the Distribution Date
involving Choice or any of its subsidiaries.
(ii) Choice shall notify Manor Care of any Covered Claim relating to
Choice or a subsidiary thereof under one or more of the Policies relating to any
period prior to the Distribution Date, and Choice agrees to cooperate and
coordinate with Manor Care concerning any strategy Manor Care may reasonably
elect to pursue to secure coverage and payment for such Covered Claim by the
appropriate insurance carrier. Notwithstanding anything contained herein, in any
other agreement or applicable Policy or any understanding to the contrary,
Choice or an appropriate subsidiary thereof assumes responsibility for, and
shall pay to the appropriate insurance carriers or otherwise, any premiums,
retrospectively-rated premiums, defense costs, indemnity payments, deductibles,
retentions or other charges, as appropriate (collectively, "Insurance Charges"),
whenever arising, which shall become due and payable under the terms and
conditions of any applicable Policy in respect of any liabilities, losses,
claims, actions or occurrences, whenever arising or becoming known, involving or
relating to any of the assets, businesses, operations or liabilities of Choice
or any of its subsidiaries, which charges relate to (i) any Shock Losses to the
extent set forth in Section 5.10(a) or (ii) the period after the Distribution
Date. To the extent that the terms of any applicable Policy provide that
Manor Care or a subsidiary thereof, as appropriate, shall have an obligation
to pay or guarantee the payment of any Insurance Charges, Manor Care or such
subsidiary shall be entitled to demand that Choice or a subsidiary thereof
make such payment directly to the person or entity entitled thereto. In
connection with any such demand, Manor Care shall submit to Choice or a
subsidiary thereof a copy of any invoice received by Manor Care or a subsidiary
pertaining to such Insurance Charges, together with appropriate supporting
documentation, if available. In the event that Choice or its subsidiary fails
to pay any Insurance Charges when due and payable, whether at the request of
the party entitled to payment or upon demand by Manor Care or a subsidiary of
Manor Care, Manor Care or a subsidiary of Manor Care may (but shall not be
required to) pay such Insurance Charges for and on behalf of Choice or its
subsidiary and, thereafter, Choice or its subsidiary shall forthwith
reimburse Manor Care or such subsidiary of Manor Care for such payment.
<PAGE> 30
ARTICLE VI
ACCESS TO INFORMATION
Section 6.01. Delivery of Corporate Records. Each of Manor Care
and Choice shall arrange as soon as practicable following the Distribution Date
for the delivery to the other of existing corporate governance documents (e.g.
minute books, stock registers, stock certificates, documents of title, etc.) in
its possession relating to the other or to its business and affairs.
Section 6.02. Access to Information. From and after the
Distribution Date each of Manor Care and Choice shall afford the other,
including its accountants, counsel and other designated representatives,
reasonable access (including using reasonable efforts to give access to persons
or firms possessing information) and duplicating rights during normal business
hours to all records, books, contacts, instruments, computer data and other data
and information in such party's possession relating to the business and affairs
of the other (other than data and information subject to an attorney/client or
other privilege), insofar as such access is reasonably required by the other
party including, without limitation, for audit, accounting and litigation
purposes, as well as for purposes of fulfilling disclosure and reporting
obligations.
Section 6.03. Litigation Cooperation. Each of Manor Care and
Choice shall use reasonable efforts to make available to the other, upon written
request, its officers, directors, employees and agents as witnesses to the
extent that such persons may reasonably be required in connection with any
legal, administrative or other proceedings arising out of the business of the
other prior to the Distribution Date in which the requesting party may from time
to time be involved.
Section 6.04. Reimbursement. Each party providing information or
witnesses under Sections 6.01, 6.02 or 6.03 to the other shall be entitled to
receive from the recipient, upon the presentation of invoices therefor, payment
for all out-of- pocket costs and expenses as may be reasonably incurred in
providing such information or witnesses.
<PAGE> 31
Section 6.05. Retention of Records. Except as otherwise required by
law or agreed to in writing, each party shall, and shall cause each of its
respective subsidiaries to, retain all information relating to the other party's
business in accordance with the past practice of such party. Notwithstanding the
foregoing, except as provided in the Tax Sharing Agreement, any party may
destroy or otherwise dispose of any information at any time, providing that,
prior to such destruction or disposal, (a) such party shall provide no less than
90 days' prior written notice to the other party, specifying the information
proposed to be destroyed or disposed of, and (b) if the recipient of such notice
shall request in writing prior to the scheduled date for such destruction or
disposal that any of the information proposed to be destroyed or disposed of be
delivered to such requesting party, the party proposing the destruction or
disposal shall promptly arrange for the delivery of such of the information as
was requested at the expense of the requesting party.
Section 6.06. Confidentiality. Each party shall hold and shall
cause its directors, officers, employees, agents, consultants and advisors to
hold, in strict confidence, unless compelled to disclose by judicial or
administrative process or, in the opinion of its counsel, by other requirements
of law, all information concerning the other party (except to the
extent that such information can be shown to have been (a) in the public domain
through no fault of such party, (b) later lawfully acquired on a
non-confidential basis from other sources by the party to which it was furnished
or (c) information that typically would have been disclosed by Manor Care or
Choice, as the case may be, in the ordinary course of business consistent with
past practice). Neither party shall release or disclose any such information to
any other person, except its auditors, attorneys, financial advisors, bankers
and other consultants and advisors who shall be advised of and comply with the
provisions of this Section 6.06.
Section 6.07. Mail. After the Distribution Date, each of Manor
Care and Choice may receive mail, telegrams, packages and other communications
properly belonging to the other. Accordingly, at all times after the
Distribution Date, each of Manor Care and Choice authorizes the other to receive
and open all mail, telegrams, packages and other communications received by it
and not unambiguously intended for the other party or any of the other party's
officers or directors specifically in their capacities as such, and to retain
the same to the extent that they relate to the business of the receiving party
or, to the extent that they do not relate to the business of the receiving party
and do relate to the business of the other party, or to the extent that they
relate to both businesses, the receiving party shall promptly contact the other
party by telephone for delivery instructions and such mail, telegrams, packages
or other communications (or, in case the same relate to both businesses, copies
thereof) shall promptly be forwarded to the other party in accordance with its
delivery instructions. The foregoing provisions of this Section 6.07 shall
constitute full authorization to the postal authorities, all telegraph and
courier companies and all other persons to make deliveries to Manor Care or
Choice, as the case may be, addressed to either of them or to any of their
officers or directors specifically in their capacities as such. The provisions
of this Section 6.07 are not intended to and shall not be deemed to constitute
an authorization by either Manor Care or Choice to permit the other to accept
service of process on its behalf, and neither party is or shall be deemed to be
the agent of the other for service of process purposes or for any other purpose.
<PAGE> 32
ARTICLE VII
INTENTIONALLY OMMITTED
<PAGE> 33
ARTICLE VIII
MISCELLANEOUS
Section 8.01. Termination. This Agreement may be terminated and
the Distribution deferred, modified or abandoned at any time prior to the
Distribution Date by and in the sole discretion of the Board of Directors of
Manor Care without the approval of Choice or of Manor Care's stockholders. In
the event of such termination, no party shall have any liability to any other
party pursuant to this Agreement.
Section 8.02. Expenses. Except as specifically provided in this
Agreement or in an Ancillary Agreement, all costs and expenses incurred in
connection with the preparation, execution, delivery and implementation of this
Agreement and with the consummation of the transactions contemplated by this
Agreement shall be paid by the party incurring the expense. The determination of
who has incurred an expense shall be made by the Chief Financial Officer of
Manor Care, which determination shall be binding and final upon each of the
parties hereto and not subject to further review. In addition, it is understood
and agreed that Choice shall pay the legal, filing, accounting, printing and
other accountable and out-of-pocket expenditures in connection with (i) the
preparation, printing and filing of the Form 10 and the Information Statement,
(ii) obtaining of the Choice Credit Facility and (iii) amending the Existing
Credit Facility.
Section 8.03. Notices. All notices and communications under this
Agreement shall be in writing and any communication or delivery hereunder shall
be deemed to have been duly given when received addressed as follows:
If to Manor Care, to:
Manor Care, Inc.
11555 Darnestown Rd.
Gaithersburg, Maryland 20878-3200
Attn: General Counsel
Telecopy Number: 301-979-4007
If to Choice, to:
Choice Hotels International, Inc.
10750 Columbia Pike
Silver Spring, Maryland 20901
Attn: General Counsel
Telecopy Number: 301-979-4062
<PAGE> 34
Any party may, by written notice so delivered to the other parties, change the
address to which delivery of any notice shall thereafter be made.
Section 8.04. Amendment and Waiver. This Agreement may not be
altered or amended, nor may rights hereunder be waived, except by an instrument
in writing executed by the parties hereto. No waiver of any terms, provision or
condition of or failure to exercise or delay in exercising any rights or
remedies under this Agreement, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such term, provision,
condition, right or remedy or as a waiver of any other term, provision or
condition of this Agreement.
Section 8.05. Counterparts. This Agreement may be executed in one
or more counterparts each of which shall be deemed an original instrument, but
all of which together shall constitute but one and the same Agreement.
Section 8.06. Governing Law; Jurisdiction; Forum. This Agreement
shall be construed in accordance with, and governed by, the laws of the State of
Delaware, without regard to the conflicts of law rules of such state. Each
party hereto agrees that any action or proceeding to enforce, or which arises
out of or in any way relates to, directly or indirectly, this Agreement, or any
of the Ancillary Agreements, shall, subject to Section 8.13, be brought or
prosecuted in state court or courts in the State of Maryland or, in any action
or proceeding with respect to which federal courts shall have exclusive subject
matter jurisdiction, in the United States District Court for the District of
Maryland. Subject to Section 8.13, each party hereto expressly submits and
consents in advance to such jurisdiction in any action or proceeding commenced
hereunder or under any Ancillary Agreement, and hereby waives any claim that any
such state or federal court is an inconvenient or improper forum.
Section 8.07. Entire Agreement. This Agreement including the
schedules hereto, together with the Ancillary Agreements, constitute the entire
understanding of the parties hereto with respect to the subject matter hereof,
superseding all negotiations, prior discussions and prior agreements and
understandings relating to such subject matter. To the extent that the
provisions of this Agreement are inconsistent with the provisions of any
Ancillary Agreements, the provisions of such Ancillary Agreement shall prevail.
Section 8.08. Parties in Interest. Neither of the parties hereto
may assign its rights or delegate any of its duties under this Agreement without
the prior written consent of the other party. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns. Nothing contained in this Agreement, express
or implied, is intended to confer any benefits, rights or remedies upon any
person or entity other than Manor Care and Choice, and the Manor Care
Indemnitees and Choice Indemnitees pursuant to Article IV and Indemnitee
pursuant to Article VII hereof. Notwithstanding the rights of Indemnified
Parties pursuant to Article IV and Indemnitee pursuant to Article VII, this
Agreement may be altered or amended, and rights hereunder be waived, by an
instrument in writing executed only by the parties hereto.
<PAGE> 35
Section 8.09. Tax Sharing Agreement; After-Tax Payments. (a) Other
than as provided in this Section 8.09 and Sections 4.11 and 5.07, this Agreement
shall not govern any Tax, and any and all claims, losses, damages, demands,
costs, expenses, liabilities, refunds, deductions, write-offs, or benefits
relating to Taxes shall be exclusively governed by the Tax Sharing Agreement or
the Tax Administration Agreement, as applicable.
(b) If, at the time Choice is required to make any payment to Manor
Care under this Agreement, Manor Care owes Choice any amount under the Tax
Sharing Agreement, then such amounts shall be offset and the excess shall be
paid by the party liable for such excess. Similarly, if, at the time Manor Care
is required to make any payment to Choice under this Agreement, Choice owes
Manor Care any amount under the Tax Sharing Agreement, then such amounts shall
be offset and the excess shall be paid by the party liable for such excess.
Section 8.10. Further Assurances and Consents. In addition to the
actions specifically provided for elsewhere in this Agreement, each of the
parties hereto will use its reasonable efforts to (i) execute and deliver such
further instruments and documents and take such other actions as any other party
may reasonably request in order to effectuate the purposes of this Agreement and
to carry out the terms hereof and (ii) take, or cause to be taken, all actions,
and to do, or cause to be done, all things, reasonably necessary, proper or
advisable under applicable laws, regulations and agreements or otherwise to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, using its reasonable efforts to obtain any
consents and approvals and to make any filings and applications necessary or
desirable in order to consummate the transactions contemplated by this
Agreement; provided that no party hereto shall be obligated to pay any
consideration therefor (except for filing fees and other similar charges) to any
third party from whom such consents, approvals and amendments are requested or
to take any action or omit to take any action if the taking of or the omission
to take such action would be unreasonably burdensome to the party or its
business.
<PAGE> 36
Section 8.11. Exhibits and Schedules. The exhibits and schedules
hereto shall be construed with and as an integral part of this Agreement to the
same extent as if the same had been set forth verbatim herein.
Section 8.12. Legal Enforceability. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. Without
prejudice to any rights or remedies otherwise available to any party hereto,
each party hereto acknowledges that damages would be an inadequate remedy for
any breach of the provisions of this Agreement and agrees that the obligations
of the parties hereunder shall be specifically enforceable.
Section 8.13. Dispute Resolution. (a) Except as otherwise set
forth in Section 2.07 or Section 8.02 or the Lease Agreement, resolution of any
and all disputes arising from or in connection with this Agreement or any of the
Ancillary Agreements, whether based on contract, tort, statute or otherwise,
including, but not limited to, disputes over arbitrability and disputes in
connection with claims by third parties (collectively, "Disputes") shall be
exclusively governed by and settled in accordance with the provisions of this
Section 8.13; provided, however, that nothing contained herein shall preclude
either party from seeking or obtaining (a) injunctive relief or (b) equitable or
other judicial relief to enforce the provisions hereof or to preserve the status
quo pending resolution of Disputes hereunder.
(b) Manor Care or Choice (each a "Party") may commence proceedings
hereunder by delivering a written notice to the other Party providing a
reasonable description of the Dispute to the other (the "Demand").
(c) Promptly following a Demand, the Dispute shall be referred to
representatives of the parties for decision, each party being represented by a
senior executive officer who has no direct operational responsibility for the
matters contemplated by this Agreement (the "Representatives"). The
Representatives shall promptly meet in a good faith effort to resolve the
dispute. If the Representatives do not agree upon a decision within thirty (30)
calendar days after reference of the matter to them, each of Manor Care and
Choice shall be free to exercise the remedies available to them under Section
8.13(d).
<PAGE> 37
(d) The parties hereby agree to submit all Disputes not resolved by
negotiation pursuant to Section 8.13(c) to arbitration under the terms hereof,
which arbitration shall be final, conclusive and binding upon the parties, their
successors and assigns. The arbitration shall be conducted in Maryland by three
arbitrators acting by majority vote (the "Panel") selected by agreement of the
Parties not later than ten (10) days after the failure of the Representatives to
resolve the dispute as set forth in Section 8.13(c) or, failing such agreement,
appointed pursuant to the Commercial Arbitration Rules of the American
Arbitration Association, as amended from time to time (the "AAA Rules"). If an
arbitrator so selected becomes unable to serve, his or her successors shall be
similarly selected or appointed. The arbitration shall be conducted pursuant to
the United States Arbitration Act, 9 U.S.C. { 1, et seq. and such procedures as
the Parties may agree, or, in the absence of or failing such agreement, pursuant
to the AAA Rules. Notwithstanding the foregoing: (a) each Party shall have the
right to audit the books and records of the other Party that are reasonably
related to the Dispute; (b) each Party shall provide to the other, reasonably in
advance of any hearing, copies of all documents which a Party intends to present
in such hearing; (c) each party shall be allowed to conduct reasonable discovery
through written requests for information, document requests, requests for
stipulation of fact and depositions, the nature and extent of which discovery
shall be determined by the Panel, taking into account the needs of the Parties
and the desirability of making discovery expeditious and cost effective. All
hearings shall be conducted on an expedited schedule, and all proceedings shall
be confidential. Either party may at its expense make a stenographic record
thereof. The Panel shall complete all hearings not later than ninety (90) days
after its selection or appointment, and shall make a final award not later than
thirty (30) days thereafter. The award shall be in writing and shall specify
the factual and legal basis for the award. The fees and expenses of the
arbitrators shall be shared equally by the Parties and advanced by them from
time to time as required; provided that at the conclusion of the arbitration,
the Panel shall allocate costs and expenses (including the costs of the
arbitration previously advanced and the fees and expenses of attorneys,
accountants and other experts) and interest as the Panel determines is
appropriate among the parties. The arbitrators shall not be empowered to award
to any Party any consequential damages, lost profits or punitive damages in
connection with any Dispute and each party hereby irrevocably waives any right
to recover such damages.
<PAGE> 38
Section 8.14. Titles and Headings. Titles and headings to sections
herein are inserted for convenience of reference only and are not intended to be
a part of or to affect the meaning or interpretation of this Agreement.
<PAGE> 39
THIS AGREEMENT CONTAINS BINDING ARBITRATION PROVISIONS WHICH MAY BE
ENFORCED BY THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.
Manor Care, Inc.,
a Delaware corporation
By:
Name:
Title:
Choice Hotels Holdings, Inc.,
a Delaware corporation
By:
Name:
Title:
<PAGE> 40
Schedule 1
LODGING SUBSIDIARIES (1)
BOULEVARD MOTEL CORP.
Biscayne Land Associates, Inc.
Biscayne Properties, Inc.
Bowling Green Inn - Brandywine, Inc.
Cardinal Beverage Corp.
Everglades Beverage Corp.
Fairways Beverage Corp.
Fairways, Inc.
K & A Corp.
MCH Baltimore Corp.
MCH Hot Springs Corp.
MCH Lincoln Corp.
MCH Management, Inc.
MCH Roanoke Corp.
MCH Shady Grove Corp.
MCH Springfield Corp.
MCH Sturgis Corp.
MCH Wichita Corp.
MCHD Cypress Creek Corp.
MCHD Ft. Lauderdale Corp.
MCHD Hampton Corp.
Raleigh Hotel Holdings, Inc.
West Montgomery Hotel Holdings, Inc.
CACTUS HOTEL CORP.
CHOICE HOTELS INTERNATIONAL, INC. (Formerly Quality Inns
International, Inc.) ("Choice Hotels")
CH Europe, Inc. (d)
Choice Capital Corp.
Choice Hotels Australia Pty. Ltd. (90%)
Choice Hotels Canada Inc. (50%)
Choice Hotels (Cayman) Ltd. (10%)
Choice Hotels International Asia Pacific Pty. Ltd.
Choice Hotels International Pty. Ltd. (Formerly Quality
Inn Pty. Ltd.) (d)
Choice Hotels (Ireland) Limited (d)
- -------------------
(1) Direct Lodging Subsidiaries are set forth below in capital letters with
their subsidiaries immediately following. Entities are wholly owned except
where indicated.
<PAGE> 41
-2-
Choice Hotels Japan, Inc. (Formerly Quality Hotels Japan,
Inc.)
Choice Hotels Limited
Choice Hotels of Brazil, Inc.
Choice Hotels Pacific Asia K.K. (Formerly Quality Hotels
Pacific Asia, Inc.) (d)
Choice Hotels Pty. Ltd. (Formerly Quality Hotels Pty.
Ltd.) (d)
Choice Hotels Systems, Inc.
Choice Hotels Venezuela, C.A. (20%)
Clarion Hotel Pty. Ltd. (Formerly Royale Hotels Pty.
Ltd.) (d)
Comfort Hotels Pty. Ltd. (d)
Comfort Inn Pty. Ltd. (d)
Comfort Inns New Zealand Limited (Formerly Quality Inns
New Zealand Limited) (d)
Hoteles Cono Sur S.A.
QI Capital Corp. (d)
Quality Hotels (Ireland) Limited (d)
Quality Hotels Limited (Formerly Quality Hotels (China)
Limited (50%; 50% Manor Care, Inc.) (d)
Quality Hotels and Resorts, Inc. (d)
Baltimore Hotel Management. Inc. (d)
Myrtle Beach Hotel Management, Inc. (d)
Quality Inns International, Inc. (Formerly Choice Hotels
International, Inc.)
Quality Inter-Americas, Inc. (d)
Sleep Inn Pty. Ltd. (d)
QUALITY HOTELS EUROPE, INC.
COMFORT CALIFORNIA, INC.
GULF HOTEL CORP.
HEFRU FOOD SERVICES, INC.
QCM BEVERAGES, INC. (49%; 51% Texas resident)
QCM CORPORATION (d)
QI ADVERTISING AGENCY, INC.
QUALITY ARIZONA, INC. (d)
QH Europe, Inc. (d)
QUALITY HOTELS EUROPE, INC.
QUALITY INNS WORLD MARKETING CORPORATION
QUALITY INSURANCE ASSOCIATES, INC. (d)
REVERE GROUP, INC. (THE) (d)
SUNBURST HOTEL CORP.
THICKET, INC. (THE) (Non-Profit; owned by members)
<PAGE> 42
-3-
PARTNERSHIPS
QH Europe Partnership (80% Quality Hotels Europe, Inc. ("QHE"),
20% Choice Hotels International, Inc.)
Choice Hotels (Deutschland) G.m.b.H. (99%; 1% Choice
Hotels)
Choice Hotels (France) S.a.r.l. (99%; 1% Choice Hotels)
Choice Hotels Benelux S.A. (51%)
Manor Care Hotels (France) S.A.
Manor Care Hotels France No. 1 S.a.r.l.
Manor Care Hotels France No. 2 S.A.
Manor Care Hotels France No. 3 S.a.r.l.
Manor Care Hotels France No. 4 S.a.r.l.
Quality Hotels Limited (Formerly QI Hotels (U.K.) Limited)
(99%; 1% Choice Hotels)
Choice Hotels (UK) Limited
Quality Hotels Europe (Alsdorf) G.m.b.H. (99%; 1% QHE) (d)
Quality Hotels Europe (Herleshausen) G.m.b.H. (99%; 1%
QHE) (d)
Quality Hotels Europe (Jena) G.m.b.H. (formerly Quality
Hotels Europe (Deutschland) G.m.b.H.) (99%; 1% QHE)
Quality Hotels Europe (Leipzig) G.m.b.H. (99%; 1% QHE) (d)
Quality Hotels Europe (Peine) G.m.b.H. (99%; 1% QHE)
Quality Hotels Europe (Troisdorf) G.m.b.H. (99%; 1% QHE)
(d) = dormant companies
<PAGE> 43
Schedule 2.01(b)
Transferred Hotels
(1) Quality Inn Midvalley
4465 Century Drive
Salt Lake City, UT 84123; and
(2) Quality Hotel
1190 N. Courthouse Road
Arlington, VA 22201
<PAGE> 44
Schedule 2.03
Assisted Living Facilities
Springhouse Assisted Living
26111 Telegraph Road
Southfield, Michigan 48034
<PAGE> 45
Schedule 5.02(a)
Manor Care Guarantees:
1. Guarantee of $1,971,000 of Industrial Revenue Bonds
relating to the Phoenix Reservations Center.
2. Guarantee pursuant to Leases for the California properties
in effect on the Distribution Date.
<PAGE> 46
Schedule 5.10(a)
Covered Claims
General Liability
Commercial Property
Automobile Liability
Workers' Compensation Program (Insured States)
Workers' Compensation Program (Self-Insured States OH, PA, FL,
CA)
Texas Salary Maintenance & Medical Reimbursement Program
Texas Stop Gap Liability
Foreign Property & Liability DIC/DIL
Commercial Package Policy (Canada)
Commercial Property (Germany)
Commercial Property (Australia)
Commercial Property (France)
Commercial Property (UK)
Commercial Property (Japan)
General Liability (QH Jena)
General Liability (QH Peine)
General Liability (QH Troisdorf)
General Liability (France)
General Liability (UK)
General Liability (Japan)
Automobile Physical Damage & Liability (UK)
Automobile Physical Damage & Liability (Australia)
Automobile Physical Damage & Liability (Germany)
Automobile Physical Damage & Liability (France)
Workers' Compensation & Employer's Liability (Australia)
Workers' Compensation & Employer's Liability (Canada)
Employer's Liability (UK)
Employer's Liability (All Foreign Operations except
UK/CAN/Australia)
Sabotage & Terrorism (UK)
Juridical Protection (France)
Umbrella Liability
Crime
Boiler & Machinery
Products Liability
Aircraft Liability
Director's & Officer's Liability
Shock Losses
<PAGE> 1
EXHIBIT 10.07
EMPLOYEE BENEFITS & OTHER EMPLOYMENT
MATTERS ALLOCATION AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I DEFINITIONS........................................ 1
Section 1.01 Definitions........................................ 1
Aggregate Spread............................................... 1
Choice Business................................................ 1
Choice Individual.............................................. 1
Code ......................................................... 2
Collective Bargaining Agreement................................ 2
Commission..................................................... 2
Common Stock................................................... 2
(i) Employer Common Stock........................ 2
(ii) Manor Care Common Stock...................... 2
(iii) Choice Common Stock.......................... 2
Company Matching Contribution.................................. 2
Conversion Award............................................... 2
Current Plan Year.............................................. 2
Cut-off Date................................................... 2
Distribution Agreement......................................... 2
Distribution Date.............................................. 2
Employee....................................................... 3
(i) Choice Employee.............................. 3
(ii) Terminee..................................... 3
(iii) Retained Employee............................ 3
ERISA ......................................................... 3
HMO ......................................................... 3
IRS ......................................................... 3
Manor Care..................................................... 3
Manor Care Closing Stock Price................................. 3
Manor Care Medical Plan........................................ 3
Manor Care Stock Option........................................ 3
Plan ......................................................... 4
Post-Conversion Stock Price.................................... 4
Prior Plan Year................................................ 4
Profit Sharing Plan............................................ 4
(i) Manor Care, Inc. Retirement Savings and
Investment Plan.................................... 4
(ii) Choice Hotels International, Inc.
Retirement Savings and Investment Plan............. 4
Qualified Beneficiary.......................................... 4
(i) Manor Care Qualified Beneficiary................... 4
(ii) Choice Qualified Beneficiary....................... 5
Retained Individual............................................ 5
Service Credit................................................. 5
Subsidiary..................................................... 5
(i) Choice Subsidiary.................................. 5
(ii) Retained Subsidiary................................ 5
Welfare Plans.................................................. 5
Section 1.02 Other Terms........................................ 5
(i)
<PAGE> 3
Section 1.03 Certain Constructions.............................. 5
Section 1.04 Schedules, Sections ............................... 6
Section 1.05 Survival........................................... 6
ARTICLE II EMPLOYEE BENEFITS.................................. 6
Section 2.01 Employment......................................... 6
(a) Allocation of Responsibilities on
Distribution Date........................................ 6
(b) Service Credits.......................................... 6
(c) Funding Payment by Choice to Manor Care.................. 7
Section 2.02 Profit Sharing Plans............................... 7
(a) Manor Care, Inc. Retirement Savings and
Investment Plan.......................................... 7
(b) Manor Care, Inc. Nonqualified Retirement
Savings and Investment Plan.............................. 9
Section 2.03 Retirement Plans................................... 11
(a) Manor Care, Inc. Supplemental Executive
Retirement Plan.......................................... 11
(b) Manor Care, Inc. Cash Accumulation Retirement
Plan..................................................... 14
(c) Manor Care, Inc. Deferred Compensation Plan.............. 14
Section 2.04 Comprehensive Stock Plans.......................... 16
(a) Manor Care, Inc. Non-Employee Director Stock
Option and Deferred Compensation Stock
Purchase Plan............................................ 16
(b) Manor Care, Inc. 1996 Non-Employee Director
Stock Compensation Plan.................................. 16
(c) Manor Care, Inc. Stock Grant Plans....................... 17
(d) Manor Care Stock Option Plans............................ 17
(e) Manor Care, Inc. 1995 Employee Stock Purchase
Plan..................................................... 19
(f) Effect of the Distribution on Awards Made
Prior to the Cut-off Date................................ 19
(g) Effect of Post-Distribution Transfer on
Conversion Awards........................................ 22
Section 2.05 Existing Manor Care Stock Purchase Plan............ 22
Section 2.06 Manor Care Welfare Plans and Short-Term
Disability Plan.................................... 23
(ii)
<PAGE> 4
(a) Liability for Claims..................................... 23
(b) Continuation Coverage Administration..................... 23
(c) Continuation Coverage Claims............................. 23
(d) Continuation of Sponsorship of Manor Care Welfare
Plans.................................................... 24
(e) Welfare Plan Payments by Choice to Manor Care............ 24
(f) Continuation of Sponsorship of Manor Care, Inc.
Short-Term Disability Plan............................... 24
Section 2.07 Choice Welfare Plans and Short-Term
Disability Plan.................................... 25
(a) Establishment of Choice Welfare Plans.................... 25
(b) Liability for Claims..................................... 25
(c) Continuation Coverage Administration..................... 25
(d) Continuation Coverage Claims............................. 25
(e) Establishment of Choice Hotels International, Inc.
Short-Term Disability Plan............................... 26
Section 2.08 Vacation Pay and Sick Leave Liabilities............ 26
(a) Division of Liabilities.................................. 26
(b) Post-Distribution Transfers.............................. 26
Section 2.09 Employee Discounts................................. 27
Section 2.10 Preservation of Right To Amend or Terminate
Plans.............................................. 27
Section 2.11 Reimbursement...................................... 27
Section 2.12 Payroll Reporting and Withholding.................. 28
(a) Form W-2 Reporting....................................... 28
(b) Forms W-4 and W-5........................................ 28
(c) Garnishments, Tax Levies, Child Support Orders,
and Wage Assignments..................................... 28
(d) Authorizations for Payroll Deductions.................... 28
ARTICLE III LABOR AND EMPLOYMENT MATTERS....................... 29
Section 3.01 Separate Employers................................. 29
Section 3.02 Employment Policies and Practices.................. 29
Section 3.03 Collective Bargaining Agreements................... 29
Section 3.04 Claims............................................. 29
(a) Scope.................................................... 29
(iii)
<PAGE> 5
(b) Employment-Related Claims................................ 30
(c) Obligation to Indemnify.................................. 30
(d) Pre-Distribution Claims.................................. 30
(e) Distribution and Other Joint Liability
Claims................................................... 30
(f) Post-Distribution Employment-Related Claims.............. 31
Section 3.05 Funding of Union Plans............................. 31
Section 3.06 Notice of Claims................................... 31
Section 3.07 Assumption of Unemployment Tax Rates............... 31
Section 3.08 Intercompany Service Charge........................ 32
Section 3.09 WARN Claims........................................ 32
Section 3.10 Employees on Leave of Absence...................... 32
Section 3.11 No Third Party Beneficiary Rights.................. 32
Section 3.12 Attorney-Client Privilege.......................... 32
ARTICLE IV DEFAULT............................................ 33
Section 4.01 Default............................................ 33
Section 4.02 Force Majeure...................................... 33
ARTICLE V MISCELLANEOUS...................................... 33
Section 5.01 Relationship of Parties............................ 33
Section 5.02 Access to Information; Cooperation................. 33
Section 5.03 Assignment......................................... 33
Section 5.04 Headings........................................... 33
Section 5.05 Severability of Provisions......................... 34
Section 5.06 Parties Bound...................................... 34
Section 5.07 Notices............................................ 34
Section 5.08 Further Action..................................... 34
Section 5.09 Waiver............................................. 34
Section 5.10 Governing Law...................................... 35
Section 5.11 Consent to Jurisdiction............................ 35
(iv)
<PAGE> 6
Section 5.12 Entire Agreement................................... 35
Section 5.13 Commercially Reasonable Terms and Conditions....... 35
(v)
<PAGE> 7
EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS
ALLOCATION AGREEMENT
THIS EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT
("Agreement") is made and entered into as of___________________________, 1996,
by and between CHOICE HOTELS HOLDINGS, INC., (to be renamed Choice Hotels
International, Inc.) a Delaware corporation ("Choice"), and MANOR CARE, INC., a
Delaware corporation ("Manor Care").
R E C I T A L S
WHEREAS, pursuant to a Distribution Agreement (the "Distribution
Agreement") dated as of ____________, 1996, as implemented in documents executed
or delivered by Choice and Manor Care in connection with the closing thereunder,
Choice and Manor Care have agreed to enter into an Employee Benefits & Other
Employment Matters Allocation Agreement with the terms and conditions set forth
herein pursuant to which Choice and Manor Care will each assume certain
liabilities and obligations, each generally with respect to its own employees,
to adopt or continue certain employee benefit, stock and retirement plans and
programs substantially equivalent to those provided by Manor Care on the
Distribution Date.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Manor Care and Choice agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01 Definitions. As used in this Agreement, the following terms
shall have the meanings indicated below:
Aggregate Spread: the difference between the exercise price of a
Manor Care Stock Option and the Manor Care Closing Stock Price, multiplied by
the number of shares covered by such Manor Care Stock Option remaining
unexercised on the Cut-off Date.
Choice Business: any business or operation of Manor Care or its
Subsidiaries which is, pursuant to the Distribution Agreement, to be conducted,
following the Distribution Date, by Choice or any Choice Subsidiary.
Choice Individual: any individual who (i) is a Choice Employee, or
(ii) is a beneficiary of any individual specified in clause (i).
<PAGE> 8
Code: the Internal Revenue Code of 1986, as amended, or any
successor legislation.
Collective Bargaining Agreement: any collective bargaining agreement
or other labor agreement to which Manor Care or any of its subsidiaries or
affiliates was a party on or before the Cut-off Date.
Commission: the Securities and Exchange Commission.
Common Stock: the common stock of Manor Care or Choice, as more
specifically described below:
(i) Employer Common Stock: Manor Care Common Stock in the
case of Retained Employees and Choice Common Stock in the case of Choice
Employees; or
(ii) Manor Care Common Stock: the common stock, par value
$0.10 per share, of Manor Care after the Distribution Date; or
(iii) Choice Common Stock: the common stock, par value [$1]
per share, of Choice after the Distribution Date.
Company Matching Contribution: the Company Matching Contribution of
Manor Care under the Manor Care, Inc. Retirement Savings and Investment Plan (as
provided in the Manor Care Retirement Savings and Investment Plan document) and
the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan, each
as may be supplemented in the sole and absolute discretion of the Manor Care
Board of Directors.
Conversion Award: an award of Common Stock or of an option to
acquire Common Stock made to a Choice Individual or a Retained Individual to
reflect the effect of the Distribution on awards of Manor Care Common Stock or
Manor Care Stock Options held on the Cut-off Date, in accordance with Section
2.04.
Current Plan Year: the plan year or fiscal year, to the extent
applicable with respect to any Plan, during which the Distribution occurs.
Cut-off Date: the date immediately preceding the Distribution Date.
Distribution Agreement: the agreement described in the first recital
of this Agreement.
Distribution Date: the date on which the Distribution occurs.
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<PAGE> 9
Employee: an individual who on the Distribution Date,
is identified as being in any of the following categories:
(i) Choice Employee: any individual who is an Employee of
Choice or any Choice Subsidiary on the Distribution Date; or
(ii) Terminee: any individual formerly employed by Manor Care
or any Subsidiary of Manor Care who terminated such employment prior to the
Distribution Date, including but not limited to any Manor Care employee who has
retired prior to the Distribution Date; or
(iii) Retained Employee: any individual who remains an
Employee of Manor Care or any Retained Subsidiary on the Distribution Date.
ERISA: the Employee Retirement Income Security Act of 1974, as
amended, or any successor legislation.
HMO: any health maintenance organization organized under 42 U.S.C.
Section 300a-9, or a state health maintenance organization statute that provides
medical services for Retained Individuals or Choice Individuals under any Plan.
IRS: the Internal Revenue Service.
Manor Care: Manor Care, Inc., a Delaware corporation.
Manor Care Closing Stock Price: the New York Stock Exchange closing
price per share for Manor Care Common Stock on the Distribution Date, trading
regular way, with a due bill for the special dividend of Choice Common Stock to
be made in connection with the Distribution.
Manor Care Medical Plan: any welfare plan maintained by Manor Care
(or to which Manor Care makes contributions) which provides medical benefits,
including medical benefits provided through an HMO, an indemnity program or a
point of service program.
Manor Care Stock Option: an option to purchase Manor Care Common
Stock pursuant to an option granted under the Manor Care, Inc. Non-Employee
Director Stock Option and Deferred Compensation Stock Purchase Plan, the Manor
Care, Inc. 1995 Long Term Incentive Plan, the Manor Care, Inc. Key Executive
Stock Option Plan, or the Manor Care, Inc. Key Executive Stock Option Plan of
1993.
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<PAGE> 10
Plan: any plan, policy, arrangement, contract or agreement providing
compensation benefits for any group of Employees or former employees or any
individual Employee or former employee, or the dependents or beneficiaries of
any such Employee or former Employee, whether formal or informal or written or
unwritten, and including, without limitation, any means, whether or not legally
required, pursuant to which any benefit is provided by an employer to any
Employee or former employee or the beneficiaries of any such Employee or former
employee. The term "Plan" as used in this Agreement does not include any
contract, agreement or understanding entered into by Manor Care prior to the
Distribution Date or by Manor Care or Choice after the Distribution Date by
relating to settlement of actual or potential employee related litigation
claims.
Post-Conversion Stock Price: the per share price of Choice Common
Stock or Manor Care Common Stock on the Distribution Date, based on the Manor
Care Closing Stock Price and the when-issued closing price of Choice Common
Stock on the New York Stock Exchange on the Distribution Date.
Prior Plan Year: a plan year or fiscal year or portion thereof, to
the extent applicable with respect to any Plan, ending on or prior to the
Cut-off Date.
Profit Sharing Plan: a salary reduction contribution plan maintained
pursuant to Sections 401(a) and 401(k) of the Code for Employees and their
beneficiaries, as specifically identified using one of the categories described
below:
(i) Manor Care, Inc. Retirement Savings and Investment Plan:
the Manor Care, Inc. Retirement Savings and Investment Plan and Trust as in
effect on the Distribution Date; or
(ii) Choice Hotels International, Inc. Retirement Savings and
Investment Plan: the Choice Hotels International, Inc. Retirement Savings and
Investment Plan and Trust as in effect on the Distribution Date.
Qualified Beneficiary: an individual (or dependent thereof) who
either (1) experiences a "qualified event" (as that term is defined in Code
Section 4980B(f)(3) and ERISA Section 603) while a participant in any Welfare
Plan, or (2) becomes a "qualified beneficiary" (as that term is defined in Code
Section 4980B(g)(1) and ERISA 607(3)) under any Welfare Plan, and who is
included in any one of the following categories:
(i) Manor Care Qualified Beneficiary: any Retained Employee
(or dependent thereof) who becomes a Qualified Beneficiary on or after the
Distribution Date under any Manor Care Welfare Plan; or any Retained Employee
(or dependent
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<PAGE> 11
thereof) who, on or before the Cut-off Date, was a Qualified Beneficiary under
any Manor Care Welfare Plan.
(ii) Choice Qualified Beneficiary: Any Choice Employee (or
dependent thereof) who becomes a Qualified Beneficiary on or after the
Distribution Date but before January 1, 1997 under any Manor Care Welfare Plan;
or any individual (or dependent thereof) who, on or before the Cut-off Date, was
a Qualified Beneficiary under any Manor Care Welfare Plan and who became a
Choice Employee after the Distribution Date.
Retained Business: any business or operation of Manor Care or its
Subsidiaries which is, pursuant to the Distribution Agreement, to be conducted,
following the Distribution Date, by Manor Care or any Retained Subsidiary.
Retained Individual: any individual who (i) is a Retained Employee,
or (ii) is a beneficiary of any individual described in clause (i).
Service Credit: the period taken into account under any Plan for
purposes of determining length of service to satisfy eligibility, vesting,
benefit accrual and similar requirements under such Plan.
Subsidiary: any corporation, a majority of whose capital stock with
voting power, under ordinary circumstances, to elect directors is, at the date
of determination, directly or indirectly owned by any person as to which a
determination of subsidiary status is to be made, including each of the
following categories:
(i) Choice Subsidiary: all subsidiaries of Choice as of the
Distribution Date; or
(ii) Retained Subsidiary: any subsidiary of Manor Care, except
Choice and the Choice Subsidiaries.
Welfare Plans: any welfare plan providing medical, dental, life,
pre-paid legal services, accidental death & dismemberment or long-term
disability benefits as set forth in Exhibit A. The term "Welfare Plan" does not
include any short-term disability program.
Section 1.02 Other Terms. Any capitalized terms used herein but not
defined herein shall have the meaning set forth in the Distribution Agreement.
Section 1.03 Certain Constructions. References to the singular in this
Agreement shall refer to the plural and vice-versa and references to the
masculine shall refer to the feminine and vice-versa.
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<PAGE> 12
Section 1.04 Schedules, Sections . References to a "Schedule" are, unless
otherwise specified, to one of the Schedules attached to this Agreement, and
references to a "Section " are, unless otherwise specified, to one of the
Sections of this Agreement.
Section 1.05 Survival. Obligations described in this Agreement shall
remain in full force and effect and shall survive the Distribution Date.
ARTICLE II
EMPLOYEE BENEFITS
Section 2.01 Employment.
(a) Allocation of Responsibilities on Distribution Date. On the
Distribution Date, except to the extent retained or assumed by Manor Care under
this Agreement or any other agreement relating to the Distribution, Choice shall
retain or assume, as the case may be, responsibility as employer for the Choice
Employees. On the Distribution Date, except to the extent retained or assumed by
Choice under this Agreement or any other agreement relating to the Distribution,
Manor Care shall retain or assume, as the case may be, responsibility as
employer for the Retained Employees. The assumption or retention of
responsibility as employer by Manor Care or Choice described in this Section
2.01 shall not, of itself, constitute a severance or a termination of employment
under any Plan of severance maintained by Manor Care.
(b) Service Credits. (i) Distribution Date transfers. In connection
with the Distribution and for purposes of determining Service Credits (but
excluding accrual of benefits other than vacation leave and sick leave) under
any Plans, Manor Care shall credit each Retained Employee and Choice shall
credit each Choice Employee with such Employee's original hire date as reflected
in the Manor Care payroll system records as of the Cutoff Date. Such hire date
shall continue to be maintained as described herein for as long as the Employee
does not terminate employment.
(ii) Post-Distribution Date terminations. Subject to the
provisions of ERISA and to Section 2.08(b) (governing post-Distribution
transfers through May 31, 1998), Choice may, in the case of Choice Employees,
and Manor Care may, in the case of Retained Employees, each in its sole
discretion, make such decisions as it deems appropriate with respect to
determining Service Credits and vacation and sick leave balances for such
Employees who terminate employment from the other company after the Distribution
Date.
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<PAGE> 13
(c) Funding Payment by Choice to Manor Care. Choice shall make a
payment to Manor Care in an amount equal to 2.1% of Choice's aggregate payroll
for all Choice Employees with respect to the time period beginning on the
Distribution Date and ending on December 31, 1996. Such payment shall be made to
Manor Care on a monthly basis no more than ten (10) days after the end of each
month ending after the Distribution Date through December 31, 1996. In
consideration of receipt of such payments, Manor Care shall (i) assume
responsibility for all funding obligations attributable to the Manor Care, Inc.
Cash Accumulation Retirement Plan and (ii) assume responsibility for the Company
Matching Contribution attributable to the Current Plan Year under the Manor
Care, Inc. Retirement Savings and Investment Plan, the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan, the Choice Hotels
International, Inc. Retirement Savings and Investment Plan, and the Choice
Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan.
It is also agreed that Choice will be responsible for any incremental costs
associated with the establishment of the Choice Hotels International, Inc.
Retirement Savings and Investment Plan and the Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan.
Section 2.02 Profit Sharing Plans.
(a) Manor Care, Inc. Retirement Savings and Investment Plan.
(i) Continuation of Sponsorship of Manor Care, Inc. Retirement
Savings and Investment Plan. Effective as of the Distribution Date, Manor Care
shall continue sponsorship of the Manor Care, Inc. Retirement Savings and
Investment Plan for all Retained Employees and Terminees. Participants in such
Plan who are Retained Employees or Terminees shall have a one-time election to
convert Choice Common Stock credited to their accounts into cash or into Manor
Care Common Stock.
(ii) Establishment of Choice Hotels International, Inc.
Retirement Savings and Investment Plan. On or before January 1, 1997, Choice
shall take, or cause to be taken, all action necessary and appropriate to
establish and administer a new Plan named the Choice Hotels International, Inc.,
Retirement Savings and Investment Plan and Trust and to provide benefits
thereunder after the date of the establishment of such Plan and Trust for all
Choice Individuals who, immediately prior to the Distribution Date, were
participants in or otherwise entitled to benefits under the Manor Care, Inc.
Retirement Savings and Investment Sharing Plan. Manor Care will fund the Company
Matching Contribution required with respect to the Current Plan Year in
consideration for the payment by Choice of the Funding Payment described in
Section 2.01(c), above. Participants in such Plan shall have a one-time election
to convert transferred Manor Care Common Stock into cash or into
- 7 -
<PAGE> 14
Choice Common Stock. The Choice Hotels International, Inc. Retirement Savings
and Investment Plan shall be intended to qualify for tax-favored treatment under
Sections 401(a) and 401(k) of the Code and to be in compliance with the
requirements of ERISA.
(iii) Transfer and Acceptance of Account Balances. As soon as
practicable after the date of the establishment of the Choice Hotels
International, Inc. Retirement Savings and Investment Plan, Manor Care shall
cause the trustees of the Manor Care, Inc. Retirement Savings and Investment
Plan to transfer to the trustee or other funding agent of the Choice Hotels
International, Inc. Retirement Savings and Investment Plan the amounts (in cash,
securities, other property or a combination thereof) representing the account
balances of all Choice Individuals, said amounts to be established as account
balances or accrued benefits of such individuals under the Choice Hotels
International, Inc. Retirement Savings and Investment Plan. Each such transfer
shall comply with Section 414(l) of the Code and the requirements of ERISA and
the regulations promulgated thereunder. Choice agrees to cause the trustees or
other funding agent of the Choice Hotels International, Inc. Retirement Savings
and Investment Plan to accept the plan-to-plan transfer from the Manor Care,
Inc. Retirement Savings and Investment Plan trustees, and to credit the accounts
of such Choice Individuals under the Choice Hotels International, Inc.
Retirement Savings and Investment Plan with amounts transferred on their behalf.
Notwithstanding the foregoing, Manor Care and Choice agree that if, subsequent
to such transfer of account balances to the Choice Hotels International, Inc.
Retirement Savings and Investment Plan, a subsequent audit or other review
establishes that additional funds should be transferred to the Choice Hotels
International, Inc. Retirement Savings and Investment Plan from the Manor Care,
Inc. Retirement Savings and Investment Plan or that funds should be returned
from the Choice Hotels International, Inc. Retirement Savings and Investment
Plan to the Manor Care, Inc. Retirement Savings and Investment Plan, both
parties shall take all appropriate steps to effectuate the required transfer
between the trusts maintained for such plans.
(iv) Manor Care to Provide Information. Manor Care shall
provide Choice, as soon as practicable after the date of the establishment of
the Choice Hotels International, Inc. Retirement Savings and Investment Plan
(with the cooperation of Choice to the extent that relevant information is in
the possession of Choice or a Choice Subsidiary, and in accordance with Section
5.02), with a list of Choice Individuals who, to the best knowledge of Manor
Care, were participants in or otherwise entitled to benefits under the Manor
Care, Inc. Retirement Savings and Investment Plan on the Cut-off Date, together
with a listing of each participant's Service Credits under such Plan and a
listing of each account balance thereunder. Manor Care shall, as soon as
practicable after the Distribution Date and in accordance with Section 5.02,
provide Choice with such additional information in
- 8 -
<PAGE> 15
the possession of Manor Care or a Retained Subsidiary (and not already in the
possession of Choice or a Choice Subsidiary) as may be reasonably requested by
Choice and necessary for Choice or the Choice Subsidiary to establish and
administer effectively the Choice Hotels International, Inc. Retirement Savings
and Investment Plan.
(v) Regulatory Filings. Choice and Manor Care shall, in
connection with the plan-to-plan transfer described in Section 2.02(a)(iii),
cooperate in making any and all appropriate filings required by the Commission
or the IRS, or required under the Code or ERISA or any applicable securities
laws and the regulations thereunder, and take all such action as may be
necessary and appropriate to cause such plan-to-plan transfer to take place as
soon as practicable after the date of the establishment of the Choice Hotels
International, Inc. Retirement Savings and Investment Plan or otherwise when
required by law. Further, Choice shall seek a favorable IRS determination letter
that the Choice Hotels International, Inc. Retirement Savings and Investment
Plan, as organized, satisfies all qualification requirements under Section
401(a) of the Code, and the transfers described in Section 2.02(a)(iii) shall
take place as soon as practicable after the receipt of such favorable IRS
determination letter. Notwithstanding the foregoing, such transfers may take
place pending issuance of such favorable determination letter, upon receipt of
an opinion of counsel for Choice reasonably satisfactory to Manor Care that the
aforesaid Plan so qualifies, or that it can be made to so qualify by retroactive
amendment, and that any such retroactive amendment shall not decrease the
accrued benefit of any participant in such Plan. Manor Care agrees to provide to
Choice's counsel such information in the possession of Manor Care or any
Retained Subsidiary as may reasonably be requested by Choice's counsel in
connection with the issuance of such opinion, in accordance with Section 5.02.
Manor Care and Choice shall each make any necessary amendments on a retroactive
basis to the Manor Care, Inc. Retirement Savings and Investment Plan or the
Choice Hotels International, Inc. Retirement Savings and Investment Plan,
respectively, as required by the IRS to issue the favorable determination letter
described above.
(b) Manor Care, Inc. Nonqualified Retirement Savings and Investment
Plan.
(i) Continuation of Sponsorship of Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan. On the Distribution Date,
Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole
responsibility for all liabilities and obligations under the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan, including the obligation to
make a Company Matching Contribution for Retained Employees and Choice Employees
with respect to the Current Plan Year, and Choice shall have no liability or
- 9 -
<PAGE> 16
obligation with respect thereto, except to pay to Manor Care the Funding Payment
described in Section 2.01(c), above. Participants in such Plan who are Retained
Employees or Terminees shall have a one-time election to convert Choice Common
Stock credited to their accounts into cash or into Manor Care Common Stock.
(ii) Establishment of Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan. On or before January 1,
1997 Choice shall take, or cause to be taken, all action necessary and
appropriate to establish and administer a new nonqualified retirement savings
and investment plan named the Choice Hotels International, Inc. Nonqualified
Retirement Savings and Investment Plan and to provide benefits thereunder after
the date of the establishment of such Plan and Trust for all Choice Employees
who immediately prior to the Distribution Date, were participants in or
otherwise entitled to benefits under the Manor Care, Inc. Nonqualified
Retirement Savings and Investment Plan. However, the obligation to make a
Matching Company Contribution for Choice Employees with respect to the Current
Plan Year shall be assumed by Manor Care in consideration of the payment by
Choice of the Funding Payment described in Section 2.01(c) above. Participants
in such Plan shall have a one-time election to convert transferred Manor Care
Common Stock into cash or into Choice Common Stock.
(iii) Transfer and Acceptance of Account Balances. As soon as
practicable after the date of the establishment of the Choice Hotels
International, Inc. Nonqualified Retirement Savings and Investment Plan, Manor
Care shall cause the trustee of the "rabbi" trust relating to the Manor Care,
Inc. Nonqualified Retirement Savings and Investment Plan to transfer to a
separate "rabbi" trust to be established by Choice with respect to the Choice
Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan
the amounts (in cash, securities, other property or a combination thereof)
representing the account balances of all Choice Individuals who had account
balances in the "rabbi" trust relating to the Manor Care, Inc. Nonqualified
Retirement Savings and Investment Plan on the Cut-off Date, said amounts to be
established as account balances or accrued benefits of such individuals in the
"rabbi" trust established with respect to the Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan. In addition, each Choice
Individual for whom an account balance in the rabbi trust established on behalf
of the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan is
transferred to a rabbi trust established on behalf of the Choice Hotels
International, Inc. Nonqualified Retirement Savings and Investment Plan shall be
required to execute a waiver which acknowledges that all liabilities for
benefits accrued under the Manor Care, Inc. Nonqualified Retirement Savings and
Investment Plan through the date immediately preceding the date of the
establishment of the Choice Hotels International, Inc. Nonqualified Retirement
Savings and Investment Plan, shall be assumed by Choice, except that Manor Care
shall remain liable, for a period of thirty (30) months following the
- 10 -
<PAGE> 17
Distribution Date, for such benefits to the extent such amounts are not paid
when due by Choice.
(iv) Manor Care to Provide Information. Manor Care agrees to
provide Choice (to the extent not already in Choice's possession), as soon as
practicable after the date of the establishment of the Choice Hotels
International, Inc. Nonqualified Retirement Savings and Investment Plan, with a
list of Choice Individuals who were, to the best knowledge of Choice,
participants in or otherwise entitled to benefits under the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan on the Cut-off Date,
together with a listing of each participant's Service Credits under such Plan
and a listing of each account balance thereunder. Manor Care shall, as soon as
practicable after the Distribution Date, in accordance with Section 5.02 provide
Choice with such additional information in the possession of Manor Care or a
Retained Subsidiary and not already in the possession of Choice or a Choice
Subsidiary as may reasonably be requested by Choice and necessary in order for
Choice or a Choice Subsidiary to administer effectively the Choice International
Hotels, Inc. Nonqualified Retirement Savings and Investment Plan.
(v) Benefit Guarantees. On and after the Distribution Date, a
Retained Employee's and Terminee's right, if any, to receive benefits under the
Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan shall be
the responsibility of Manor Care. However, the payment of any benefits due under
the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan for the
first thirty (30) months following the Distribution Date shall be guaranteed by
Choice, to the extent not otherwise paid by Manor Care. On and after the date of
the establishment of the Choice Hotels International, Inc. Nonqualified
Retirement Savings and Investment Plan, a Choice Individual's right to receive
benefits under the Choice Hotels International, Inc. Nonqualified Retirement
Savings and Investment Plan shall be the responsibility of Choice. However, the
payment of any benefits due under the Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan which are attributable to
the transferred accrued benefits earned under the Manor Care, Inc. Deferred
Compensation Plan shall be guaranteed by Manor Care for the first thirty (30)
months following the Distribution Date, to the extent not otherwise paid by
Choice.
Section 2.03 Retirement Plans.
(a) Manor Care, Inc. Supplemental Executive Retirement Plan.
(i) Continuation of Sponsorship of Manor Care, Inc.
Supplemental Executive Retirement Plan. On the Distribution Date, Manor Care
shall retain (or shall cause a Retained Subsidiary to assume) sole
responsibility for all liabilities and obligations under the Manor Care, Inc.
Supplemental Executive Retirement Plan, and Choice shall have no liability or
obligation
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<PAGE> 18
with respect thereto, except as defined in Section 2.03(a)(ii) below. Manor Care
shall provide future benefits thereunder accruing after the Cut-off Date for
Retained Employees and Terminees who, on the Cut-off Date, were participants in
or otherwise entitled to benefits under the Manor Care, Inc.
Supplemental Executive Retirement Plan.
(ii) Establishment of Choice Hotels International, Inc.
Supplemental Executive Retirement Plan. Effective as of the Distribution Date,
Choice shall take, or cause to be taken, all action necessary and appropriate to
establish and administer a new supplemental executive retirement plan named the
Choice Hotels International, Inc. Supplemental Executive Retirement Plan and to
provide benefits thereunder after the Distribution Date for all Choice Employees
who immediately prior to the Distribution Date, were participants in or
otherwise entitled to benefits under the Manor Care, Inc. Supplemental Executive
Retirement Plan.
(iii) Transfer and Acceptance of Account Balances. As soon as
practicable after the Distribution Date, Manor Care shall transfer to Choice an
amount (in cash, securities, other property or a combination thereof)
representing the present value of the full accrued benefit of all Choice
Employees who had earned a benefit in the Manor Care, Inc. Supplemental
Executive Retirement Plan on the Cut-off Date, said amounts to be established as
the initial accrued benefits of such individuals under the Choice Hotels
International, Inc. Supplemental Executive Retirement Plan. Manor Care and
Choice shall take such steps as may be necessary to obtain releases of Manor
Care from Choice Employees whose accrued benefits are transferred from the Manor
Care, Inc. Supplemental Executive Retirement to the Choice Hotels International,
Inc. Supplemental Executive Retirement Plan in accordance with this Section . In
addition, each Choice Individual for whom an accrued benefit under the Manor
Care, Inc. Supplemental Executive Retirement Plan has been assumed by the Choice
Hotels International, Inc. Supplemental Executive Retirement Plan shall be
required to execute a waiver which acknowledges that all liabilities for
benefits accrued under the Manor Care, Inc. Supplemental Executive Retirement
Plan through the date immediately preceding the Distribution Date shall be
assumed by Choice, except that Manor Care shall remain liable, for a period of
thirty (30) months following the Distribution Date, for such benefits to the
extent such amounts are not paid when due by Choice.
(iv) Manor Care to Provide Information. Manor Care agrees to
provide Choice (to the extent not already in Choice's possession), as soon as
practicable after the Distribution Date, with a list of Choice Individuals who
were, to the best knowledge of Choice, participants in or otherwise entitled to
benefits under the Manor Care, Inc. Supplemental
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Executive Retirement Plan on the Cut-off Date, together with a listing of each
participant's Service Credits under such Plan and a listing of such
participant's accrued benefits thereunder. Manor Care shall, as soon as
practicable after the Distribution Date, in accordance with Section 5.02 provide
Choice with such additional information in the possession of Manor Care or a
Retained Subsidiary and not already in the possession of Choice or a Choice
Subsidiary as may reasonably be requested by Choice and necessary in order for
Choice or a Choice Subsidiary to administer effectively the Choice International
Hotels, Inc. Supplemental Executive Retirement Plan.
(v) Benefit Guarantees. On and after the Distribution Date, a
Retained Employee's or a Terminee's right, if any, to receive benefits under the
Manor Care, Inc. Supplemental Executive Retirement Plan shall be the
responsibility of Manor Care. However, the payment of any benefits due under the
Manor Care, Inc. Supplemental Executive Retirement Plan for the first thirty
(30) months following the Distribution Date shall be guaranteed by Choice, to
the extent not otherwise paid by Manor Care. On and after the Distribution Date,
a Choice Individual's right to receive benefits under the Choice Hotels
International, Inc. Supplemental Executive Retirement Plan shall be the
responsibility of Choice. However, the payment of any benefits due under the
Choice Hotels International, Inc. Supplemental Executive Retirement Plan which
are attributable to the transferred accrued benefits earned under the Manor
Care, Inc. Deferred Compensation Plan shall be guaranteed by Manor Care for the
first thirty (30) months following the Distribution Date, to the extent not
otherwise paid by Choice.
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(b) Manor Care, Inc. Cash Accumulation Retirement Plan. As of the
Distribution Date, Manor Care or a Retained Subsidiary shall assume or retain
sponsorship of and shall be solely responsible for all liabilities and
obligations in connection with the Manor Care, Inc. Cash Accumulation Retirement
Plan, and Choice and the Choice Subsidiaries shall have no such liability or
obligation, except for the payment to Manor Care of the Funding Payment
described in Section 2.01(c), above. Subject to the approval of the Board of
Directors of Manor Care, the Manor Care, Inc. Cash Accumulation Retirement Plan
shall be frozen as to future participation effective as of August 15, 1996 and
shall be frozen as to future benefit accruals as of December 31, 1996.
Participants in the Manor Care, Inc. Cash Accumulation Retirement Plan shall
continue to earn Service Credits for purposes of vesting. To the extent that
additional contributions are required for individuals who are participants in
the Manor Care, Inc. Cash Accumulation Retirement Plan on the Cut-off Date and
who become Choice Employees, Manor Care shall be solely responsible for all
liabilities and obligations in connection with such contributions.
(c) Manor Care, Inc. Deferred Compensation Plan.
(i) Continuation of Sponsorship of Manor Care, Inc. Deferred
Compensation Plan. On the Distribution Date, Manor Care shall retain (or shall
cause a Retained Subsidiary to assume) sole responsibility for all liabilities
and obligations under the Manor Care, Inc. Deferred Compensation Plan, and
Choice shall have no liability or obligation with respect thereto, except as
defined in Section 2.03(c)(ii) below. Manor Care shall provide future benefits
thereunder accruing after the Cut-off Date for Retained Employees, individuals
who are directors of Manor Care, and Terminees who, on the Cut-off Date, were
participants in or otherwise entitled to benefits under the Manor Care, Inc.
Deferred Compensation Plan.
(ii) Establishment of Choice Hotels International, Inc.
Deferred Compensation Plan. Effective as of the Distribution Date, Choice shall
take, or cause to be taken, all action necessary and appropriate to establish
and administer a new deferred compensation plan named the Choice Hotels
International, Inc. Deferred Compensation Plan and to provide benefits
thereunder after the Distribution Date for all Choice Employees who immediately
prior to the Distribution Date, were participants in or otherwise entitled to
benefits under the Manor Care, Inc. Deferred Compensation Plan, and for Choice
directors.
(iii) Transfer and Acceptance of Account Balances. As soon as
practicable after the Distribution Date, Manor Care shall transfer to Choice the
amounts (in cash, securities, other property or a combination thereof)
representing the account balances of all Choice Employees who had account
balances in the
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Manor Care, Inc. Deferred Compensation Plan on the Cut-off Date, said amounts to
be established as account balances or accrued benefits of such individuals under
the Choice Hotels International, Inc. Deferred Compensation Plan. Manor Care and
Choice shall take such steps as may be necessary to obtain releases of Manor
Care from Choice Employees whose account balances are transferred from the Manor
Care, Inc. Deferred Compensation Plan to the Choice Hotels International, Inc.
Deferred Compensation Plan in accordance with this Section . In addition, each
Choice Individual whose account balance under the Manor Care, Inc. Deferred
Compensation Plan has been transferred to the Choice Hotels International, Inc.
Deferred Compensation Plan shall be required to execute a waiver which
acknowledges that all liabilities for benefits accrued under the Manor Care,
Inc. Deferred Compensation Plan through the date immediately preceding the
Distribution Date shall be assumed by Choice, except that Manor Care shall
remain liable, for a period of thirty (30) months following the Distribution
Date, for such benefits to the extent such amounts are not paid when due by
Choice.
(iv) Manor Care to Provide Information. Manor Care agrees to
provide Choice (to the extent not already in Choice's possession), as soon as
practicable after the Distribution Date, with a list of Choice Employees who
were, to the best knowledge of Manor Care, participants in or otherwise entitled
to benefits under the Manor Care, Inc. Deferred Compensation Plan on the Cut-off
Date. Manor Care shall, as soon as practicable after the Distribution Date, in
accordance with Section 5.02 provide Choice with such additional information in
the possession of Manor Care or a Retained Subsidiary and not already in the
possession of Choice or a Choice Subsidiary as may reasonably be requested by
Choice and necessary in order for Choice or a Choice Subsidiary to administer
effectively the Choice Hotels International, Inc. Deferred Compensation Plans.
(v) Benefit Guarantees. On and after the Distribution Date, a
Retained Employee's, Terminee's or Manor Care director's right to receive
benefits under the Manor Care, Inc. Deferred Compensation Plan shall be the
responsibility of Manor Care. However, the payment of any benefits due under the
Manor Care, Inc. Deferred Compensation Plan for the first thirty (30) months
following the Distribution Date shall be guaranteed by Choice, to the extent not
otherwise paid by Manor Care. On and after the Distribution Date, a Choice
Individual's right to receive benefits under the Choice Hotels International,
Inc. Deferred Compensation Plan shall be the responsibility of Choice. However,
the payment of any benefits due under the Choice Hotels International, Inc.
Deferred Compensation Plan which are attributable to the transferred accrued
benefits earned under the Manor Care, Inc. Deferred Compensation Plan shall be
guaranteed by Manor Care for the first thirty (30) months following the
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Distribution Date, to the extent not otherwise paid by Choice.
Section 2.04 Comprehensive Stock Plans.
(a) Manor Care, Inc. Non-Employee Director Stock Option and Deferred
Compensation Stock Purchase Plan.
(i) Continuation of Sponsorship of Manor Care, Inc.
Non-Employee Director Stock Option and Deferred Compensation Stock Purchase
Plan. On the Distribution Date, Manor Care shall retain (or shall cause a
Retained Subsidiary to assume) sole responsibility for all liabilities and
obligations under the Manor Care, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan for all non-employee directors of
Manor Care after the Distribution Date through the issuance of Conversion
Awards, subject to the stock adjustment provisions described in Section
2.04(f)(iii) and Section 2.04(f)(iv) below and the election procedures
described in Section 2.04(f)(v) and (vi) below, and Choice shall have no
liability or obligation with respect thereto. Notwithstanding the above, on the
Distribution Date, any Director of Manor Care who becomes a member of the Board
of Directors of Choice as of the Distribution Date and who holds an option to
acquire Manor Care Common Stock under the Manor Care, Inc. Non-Employee
Director Stock Option and Deferred Compensation Stock Purchase Plan will
receive a Conversion Award in exchange for such Manor Care Stock Options (i)
with respect to which the Aggregate Spread shall equal the Aggregate Spread
attributable to such Manor Care Stock options, and (ii) with respect to which
the Aggregate Spread shall be proportionately allocated between options to
acquire Manor Care Common Stock and options to acquire Choice Common Stock
based upon the relative trading values of Manor Care and Choice on the
Distribution Date.
(ii) Establishment of Choice Hotels International, Inc.
Non-Employee Director Stock Option and Deferred Compensation Stock Purchase
Plan. Effective as of the Distribution Date, Choice shall take, or cause to be
taken, all action necessary and appropriate to establish and administer a new
non-employee director stock option and deferred compensation stock purchase plan
named the Choice Hotels International, Inc. Non-Employee Director Stock Option
and Deferred Compensation Stock Purchase Plan and to provide benefits thereunder
after the Distribution Date for all non-employee Choice directors.
(b) Manor Care, Inc. 1996 Non-Employee Director Stock Compensation
Plan.
(i) Continuation of Sponsorship of Manor Care, Inc. 1996
Non-Employee Director Stock Compensation Plan. On the Distribution Date, Manor
Care shall retain (or shall cause a Retained Subsidiary to assume) sole
responsibility for all liabilities and obligations under the Manor Care, Inc.
1996 Non- Employee Director Stock Compensation Plan for all non-employee
directors of Manor Care after the Distribution Date through the issuance of
Conversion Awards, subject to the stock adjustment provisions described in
Section 2.04(f) below, and Choice shall have no liability or obligation with
respect thereto.
(ii) Establishment of Choice Hotels International, Inc.
Non-Employee Director Stock Compensation Plan. Effective as of the Distribution
Date, Choice shall take, or cause to be taken, all action necessary and
appropriate to establish and administer a new non-employee director stock
compensation plan named the Choice Hotels International, Inc. Non-Employee
Director Stock Compensation Plan and to provide benefits thereunder after the
Distribution Date for all non-employee Choice directors.
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(c) Manor Care, Inc. Stock Grant Plans.
(i) Continuation of Sponsorship of Manor Care, Inc. Nursing
Field Operations Stock Grant Plan for Key Management Employees. On the
Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary
to assume) sole responsibility for all liabilities and obligations under the
Manor Care, Inc. Nursing Field Operations Stock Grant Plan for Key Management
Employees for all eligible key management employees eligible thereunder after
the Distribution Date, and Choice shall have no liability or obligation with
respect thereto.
(ii) Continuation of Sponsorship of Manor Care, Inc.
Restricted Stock Plan. On the Distribution Date, Manor Care shall retain (or
shall cause a Retained Subsidiary to assume) sole responsibility for all
liabilities and obligations under the Manor Care, Inc. Restricted Stock Plan for
Key Management Employees for all eligible key management employees eligible
thereunder after the Distribution Date, and Choice shall have no liability or
obligation with respect thereto. At such time as Manor Care stock is released
from restriction, Manor Care shall claim a compensation deduction for the
then-current value of such stock and shall cause the unrestricted shares of
Manor Care stock to be delivered directly to the Employee entitled to such
shares whether such Employee is currently employed by Manor Care or Choice.
(iii) Continuation of Sponsorship of Manor Care, Inc. Hotel
Franchise Operations Stock Grant Plan for Choice Hotels International, Inc. Key
Management Employees. On the Distribution Date, Manor Care shall retain (or
shall cause a Retained Subsidiary to assume) sole responsibility for all
liabilities and obligations under the Manor Care, Inc. Hotel Franchise
Operations Stock Grant Plan for Choice Hotels International, Inc. Key Management
Employees for all eligible key management employees eligible thereunder after
the Distribution Date, and Choice shall have no liability or obligation with
respect thereto. At such time as Manor Care stock is released from restriction,
Manor Care shall claim a compensation deduction for the then-current value of
such stock and shall cause the unrestricted shares of Manor Care stock to be
delivered directly to the Employee entitled to such shares, whether or not such
Employee is employed by Manor Care or Choice.
(d) Manor Care Stock Option Plans.
(i) Continuation of Sponsorship of Manor Care, Inc. 1995 Long
Term Incentive Plan and Establishment of Choice Hotels International, Inc. Long
Term Incentive Plan. On the Distribution Date, Manor Care shall retain (or shall
cause a Retained Subsidiary to assume) sole responsibility for all liabilities
and obligations under the Manor Care, Inc. 1995 Long
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<PAGE> 24
Term Incentive Plan for all Retained Employees and Terminees who are
participants in such Plan on the Distribution Date through the issuance of
Conversion Awards, subject to the stock adjustment provisions described in
Section 2.04(f) below, and Choice shall have no liability or obligation with
respect thereto. In addition, Conversion Awards shall be issued to all Choice
Employees who were participants in such Plan on the Cutoff Date in accordance
with Section 2.04(f). Issuance of a Conversion Award shall be conditioned upon
the execution of an appropriate release by the Choice Employee to whom the
Conversion Award is conveyed, which release shall acknowledge that such Choice
Employee's options to purchase Manor Care Common Stock are cancelled in
consideration of receipt of the Conversion Award. Effective as of the
Distribution Date, Choice shall take, or cause to be taken, all action necessary
and appropriate to establish and administer a new long term incentive plan named
the Choice Hotels International, Inc. Long Term Incentive Plan and to provide
benefits thereunder after the Distribution Date for all Choice officers and key
employees.
(ii) Continuation of Sponsorship of Manor Care, Inc. Key
Executive Stock Option Plan. On the Distribution Date, Manor Care shall retain
(or shall cause a Retained Subsidiary to assume) sole responsibility for all
liabilities and obligations under the Manor Care, Inc. Key Executive Stock
Option Plan for all Retained Employees and Terminees who are participants in
such Plan on the Distribution Date through the issuance of Conversion Awards,
subject to the stock adjustment provisions described in Section 2.04(f) below,
and Choice shall have no liability or obligation with respect thereto. In
addition, Conversion Awards shall be issued to all Choice Employees who were
participants in such Plan on the Cut-off Date in accordance with Section
2.04(f). Issuance of a Conversion Award shall be conditioned upon the execution
of an appropriate release by the Choice Employee to whom the Conversion Award is
conveyed, which release shall acknowledge that such Choice Employee's options to
purchase Manor Care Common Stock are cancelled in consideration of receipt of
the Conversion Award.
(iii) Continuation of Sponsorship of Manor Care, Inc. Key
Executive Stock Option Plan of 1993. On the Distribution Date, Manor Care shall
retain (or shall cause a Retained Subsidiary to assume) sole responsibility for
all liabilities and obligations under the Manor Care, Inc. Key Executive Stock
Option Plan of 1993 for all Retained Employees and Terminees who are
participants in such Plan on the Distribution Date through the issuance of
Conversion Awards, subject to the stock adjustment provisions described in
Section 2.04(f) below, and Choice shall have no liability or obligation with
respect thereto. In addition, Conversion Awards shall be issued to all Choice
Employees who were participants in such Plan on the Cut-off Date in accordance
with Section
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2.04(f). Issuance of a Conversion Award shall be conditioned upon the execution
of an appropriate release by the Choice Employee to whom the Conversion Award is
conveyed, which release shall acknowledge that such Choice Employee's options to
purchase Manor Care Common Stock are cancelled in consideration of receipt of
the Conversion Award.
(e) Manor Care, Inc. 1995 Employee Stock Purchase
Plan.
(i) Continuation of Sponsorship of Manor Care, Inc. 1995
Employee Stock Purchase Plan. On the Distribution Date, Manor Care shall retain
(or shall cause a Retained Subsidiary to assume) sole responsibility for all
liabilities and obligations under the Manor Care, Inc. 1995 Employee Stock
Purchase Plan for all Retained Employees and Terminees who are participants in
such Plan on the Distribution Date, subject to the stock adjustment provisions
described in Section 2.04(f) below, and Choice shall have no liability or
obligation with respect thereto.
(ii) Establishment of Choice Hotels International, Inc.
Employee Stock Purchase Plan. Effective as of the Distribution Date, Choice
shall take, or cause to be taken, all action necessary and appropriate to
establish and administer a new stock purchase plan named the Choice Hotels
International, Inc. Employee Stock Purchase Plan and to provide benefits
thereunder after the Distribution Date for all Choice officers and key
employees.
(f) Effect of the Distribution on Awards Made Prior to the Cut-off
Date.
(i) Restricted Stock: After the Distribution Date, the grantee
of each restricted share of Manor Care Common Stock awarded under the Manor
Care, Inc. Nursing Field Operations Stock Grant Plan for Key Management
Employees, the Manor Care, Inc. Restricted Stock Plan, the Manor Care, Inc.
Hotel Franchise Operations Stock Grant Plan for Choice Hotels International,
Inc. Key Management Employees, or the Manor Care, Inc. 1995 Long Term Incentive
Plan as of the Cut-off Date shall retain such share, and shall receive as part
of the Distribution one restricted share of Choice Common Stock for each such
restricted share of Manor Care Common Stock. The restricted shares of Choice
Common Stock received as part of the Distribution will be subject to
restrictions identical to those applicable to the underlying restricted shares
of Manor Care Common Stock. In the case of Choice Employees, future service for
Choice will be treated as service for Manor Care for purposes of determining
satisfaction of the restrictions attributable to the Manor Care Common Stock and
Choice Common Stock. Restricted shares of Choice Common Stock awarded as part of
the Distribution shall be released from restrictions at the same time and on the
same schedule as the
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shares of Manor Care Common Stock retained, under the terms of the restrictions
to which the grantee's initial award was subject.
(ii) Substitution of Stock Options: Subject to the provisions
of Section 2.04(f)(v) and (vi), below, on the Distribution Date, each grantee of
a nonqualified award of a Manor Care Stock Option who is a Retained Employee or
Terminee shall receive for each such award a Conversion Award, consisting of an
option to purchase shares of Manor Care Common Stock equal in number to the
number of shares covered by the Manor Care Stock Option, adjusted, however,
pursuant to Section 2.04(f)(iv), below. On the Distribution Date, each grantee
of a Manor Care Stock Option awarded as an incentive stock option who is a
Retained Employee or Terminee shall automatically receive in its place a
Conversion Award of an option to purchase shares of Manor Care Common Stock
equal in number to the number of shares covered by the Manor Care Stock Option,
adjusted, however, pursuant to Section 2.04(f)(iv) below. Subject to the
provisions of Section 2.04(f)(v) and (vi), below, on the Distribution Date, each
grantee of a nonqualified award of a Manor Care Stock Option who is a Choice
Employee shall receive for each such award a Conversion Award, consisting of an
option to purchase shares of Choice Common Stock equal in number to the number
of shares covered by the Manor Care Stock Option, adjusted, however, pursuant to
Section 2.04(f)(iv) below. On the Distribution Date, each grantee of a Manor
Care Stock Option awarded as an incentive stock option who is a Choice Employee
shall automatically receive in its place a Conversion Award of an option to
purchase shares of Choice Common Stock equal in number to the number of shares
covered by the Manor Care Stock Option, adjusted, however, pursuant to Section
2.04(f)(iv) below. Notwithstanding the above, on the Distribution Date, each
Manor Care Stock Option held by Stewart Bainum, Jr., whether issued as an
incentive stock option or as a nonqualified stock option award, shall be
exchanged for a Conversion Award (i) with respect to which the Aggregate Spread
shall equal the Aggregate Spread attributable to such incentive stock option or
nonqualified stock option award, as the case may be, and (ii) with respect to
which the Aggregate Spread shall be proportionately allocated between options
to acquire Manor Care Common Stock and options to acquire Choice Common Stock
based upon the relative trading values of Manor Care and Choice on the
Distribution Date.
(iii) Adjustment of Option Price: For purposes of determining
the adjusted option price of a Conversion Award replacing a Manor Care Stock
Option, the following formula shall be used to maintain the grantee's Aggregate
Spread on each outstanding grant of Manor Care Stock Options. The Aggregate
Spread on each such outstanding grant shall be maintained by setting the
adjusted option price to ensure that the difference between (1) the aggregate
total Post-Conversion Stock Price for each Conversion Award of an option to
acquire Manor Care Common Stock or Choice Common Stock, as the case may be, and
(2) the aggregate adjusted option exercise price for each such Conversion Award,
is equal to (3) the Aggregate Spread. In addition, the adjusted option price of
each Conversion Award of an option to acquire Manor Care Common Stock or Choice
Common Stock, as the case may be, shall be set to maintain the ratio of the
exercise price of each Manor Care Stock Option being converted to the
Post-Conversion Stock Price of the Common Stock purchasable under the Conversion
Award by ensuring that the aforesaid ratio shall
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equal the ratio of (1) such adjusted option price for the Conversion Award to
(2) the Post-Conversion Stock Price of the Common Stock purchasable under the
Conversion Award (Manor Care Common Stock or Choice Common Stock, respectively).
(iv) Adjustment of Number of Shares Covered by Options: In the
case of Conversion Awards of nonqualified stock options or incentive stock
options to acquire shares of shares of Manor Care Common Stock or Choice Common
Stock, the total number of shares that may be acquired with respect to each such
company shall be adjusted as necessary to maintain the Aggregate Spread and
ratio described in Section 2.04(f)(iii).
(v) Special Election for Employees and Certain Directors of
Manor Care, Inc.: On or before the Cut-off Date, each holder of a nonvested
nonqualified option to acquire Manor Care Common Stock who is a direct employee
of Manor Care, Inc. or who is a non-employee Director of Manor Care who does not
become a member of the Board of Directors of Choice on the Distribution Date
shall make a one-time election with respect to such nonvested nonqualified
option, (1) to receive a Conversion Award which relates exclusively to nonvested
nonqualified options to acquire Common Stock of (i) Manor Care, in the case of a
non-employee Director and (ii) in all other cases, Common Stock of the entity
(Manor Care or Choice) of which such individual shall be an Employee on the
Distribution Date, or (2) to receive a Conversion Award with respect to which
(a) one-half of the Aggregate Spread relates to nonvested nonqualified options
to acquire Common Stock of (i) Manor Care, in the case of a non-employee
Director and (ii) in all other cases, Common Stock of the entity of which such
individual shall be an employee on the Distribution Date and (b) one-half of the
Aggregate Spread is proportionately allocated between nonvested nonqualified
options to acquire Manor Care Common Stock and nonvested nonqualified options to
acquire Choice Common Stock based upon the relative trading values of Manor Care
and Choice on the Distribution Date. A failure to make a timely election shall
be deemed to constitute an election to receive a Conversion Award of nonvested
nonqualified options relating solely to (i) Manor Care, in the case of a
non-employee Director and (ii) in all other cases, Common Stock of the entity
of which such individual shall become an Employee on the Distribution Date.
(vi) Special Election for Employees With Respect to Vested
Nonqualified Stock Options: On or before the Cut-off Date, each holder of a
vested nonqualified stock option to acquire Manor Care Common Stock who is an
Employee or who is a non-employee Director of Manor Care who does not become a
member of the Board of Directors of Choice on the Distribution Date may make a
one-time election to specify the manner in which the Aggregate Spread
attributable to such vested nonqualified stock option shall be allocated between
a Conversion Award relating to vested nonqualified stock options to acquire
Manor Care Common Stock and a Conversion Award relating to vested nonqualified
stock options to acquire Choice Common Stock. With respect to an Employee who is
a holder of vested nonqualified stock options but who is not a direct employee
of Manor Care, Inc., such election shall relate to a selection between (1) a
Conversion Award which relates exclusively to vested nonqualified options to
acquire Common Stock of the entity for which such individual shall become an
Employee on the Distribution Date or (2) a Conversion Award pursuant to which
the Aggregate Spread is proportionately allocated between vested nonqualified
options to acquire Manor Care Common Stock and vested nonqualified options to
acquire Choice Common Stock based upon the relative trading values of Manor Care
and Choice on the Distribution Date. With respect to a holder of a vested
nonqualified stock option who is either a direct employee of Manor Care or who
is a non-employee Director of Manor Care who does not become a member of the
Board of Directors of Choice as of the Distribution Date, such election shall
relate to a selection between (1) a Conversion Award which relates exclusively
to vested nonqualified options to acquire Common Stock of (a) Manor Care, in the
case of a non-employee Director and (b) in all other cases, the entity for which
such individual shall become an Employee on the Distribution Date, (2) a
Conversion Award pursuant to which the Aggregate Spread is proportionately
allocated between vested nonqualified options to acquire Manor Care Common Stock
and vested nonqualified options to acquire Choice Common Stock based upon the
relative trading values of Manor Care and Choice on the Distribution Date, or
(3) a Conversion Award pursuant to which (a) no less than fifty percent (50%) of
the Aggregate Spread relates to vested nonqualified options to acquire Common
Stock of (i) Manor Care, in the case of a non-employee Director and (ii) in all
other cases, the entity of which such individual shall become an Employee on the
Distribution Date and (b) the remaining amount of the Aggregate Spread relates
to vested nonqualified options to acquire Common Stock of (i) Choice, in the
case of a non-employee Director or (ii) in all other cases, the entity (Manor
Care or Choice, as the case may be) of which such individual does not become an
Employee as of the Distribution Date. A failure to make a timely election with
respect to such vested nonqualified stock options shall be deemed to constitute
an election to receive a single Conversion Award of vested nonqualified options
relating solely to (i) Manor Care, in the case of a non-employee Director and
(ii) in all other cases, Common Stock of the entity of which such individual
does become an Employee on the Distribution Date.
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(g) Effect of Post-Distribution Transfer on Conversion Awards.
Conversion Awards made pursuant to this Section 2.04 of shares of or options in
Manor Care Common Stock or Choice Common Stock shall be administered with
respect to any provisions relating to continuing employment requirements to give
Service Credit for service with the party employing the grantee as of the
Distribution Date (Manor Care in the case of Retained Employees and Choice in
the case of Choice Employees). Solely with respect to such Conversion Awards
(and not with respect to new awards made after the Cut-off Date), for purposes
of determining whether a termination of employment has occurred under the terms
of any provision requiring continued employment, termination of employment
through May 31, 1998 shall not be deemed to occur if an Employee leaves the
service of one party to immediately begin employment with the other party (i.e.,
leaving Manor Care employment to work for Choice, or leaving Choice employment
to work for Manor Care); the business operation or business unit from which such
Employee terminates employment shall promptly notify the administrator of the
Comprehensive Stock Plan of each party of the occurrence of any termination
subject to the provisions of this Section 2.04(g). Whichever party is the new
employer shall inform the former employer of any termination of employment of
such transferred Employee. Any termination of employment other than as described
in the preceding sentence shall be treated by applying the applicable provisions
of the Comprehensive Stock Plan relating to terminations of employment without
the modifications described in this paragraph.
Section 2.05 Existing Manor Care Stock Purchase Plan. The Manor Care Stock
Purchase Plan shall continue in effect after the Distribution Date and payroll
deductions for all eligible Plan participants who are Retained Employees shall
continue at the same levels after the Pre-Distribution Purchase Date until the
earlier to occur of: (i) final purchase of stock at the end of the Current Plan
Year quarter in which the Distribution Date occurs (the "Post-Distribution
Purchase") or (ii) the date the participant withdraws from said Plan. Choice
shall assume all obligations under said Plan with respect to Post-Distribution
Purchases by Choice Employees, who will have the right to acquire Choice Common
Stock substituted for their right to acquire Manor Care Common Stock. Retained
Employees will have the right to acquire Manor Care Common Stock in the
Post-Distribution Purchase. As soon as practicable after the Distribution Date,
Manor Care will transfer to the Choice Hotels International, Inc. Stock Purchase
Plan a cash amount equal to all contributions made to the Manor Care Stock
Purchase Plan by Choice Employees during the Current Plan Year quarter in which
the Distribution Date occurs, and such amounts will be used to purchase Choice
Common
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Stock on behalf of such Choice Employees after the end of the Current Plan Year
quarter in which the Distribution Date occurs.
Section 2.06 Manor Care Welfare Plans and Short-Term Disability Plan.
(a) Liability for Claims. Except as otherwise provided herein, as of
the Cut-off Date, Manor Care or a Retained Subsidiary shall assume or retain and
shall be responsible for, or cause its insurance carriers or HMOs to be
responsible for, all liabilities and obligations related to claims incurred
through December 31, 1996 in respect of any Employee (whether such claims are
asserted before or after December 31, 1996) under any Manor Care Welfare Plan
and shall be responsible for claims incurred after December 31, 1996 in respect
of any Retained Individual or Terminee under any Manor Care Welfare Plan, and
Choice and the Choice Subsidiaries shall have no liability or obligation with
respect thereto, except to make contributions to Manor Care in respect of such
coverage of Choice Individuals as provided below. Notwithstanding the foregoing,
with respect to the pre-tax medical and dependent care programs, Manor Care will
retain any funds remaining on January 1, 1997 to pay for any claims incurred
under such programs on or prior to December 31, 1996. After all such claims have
been paid, Manor Care shall be entitled to retain any remaining funds
attributable to the pre-tax medical and dependent care programs.
(b) Continuation Coverage Administration. As of the Distribution
Date, Manor Care or a Retained Subsidiary shall assume or retain and shall be
solely responsible for, or cause its insurance carriers or HMOs to be
responsible for, the administration of the continuation coverage requirements
imposed by Code Section 4980B and ERISA Sections 601 through 608 as they relate
to any Manor Care Qualified Beneficiary, and shall be responsible for the
administration of continuation coverage requirements for Choice Individuals
through December 31, 1996, and Choice and the Choice Subsidiaries shall have no
liability or obligation with respect thereto.
(c) Continuation Coverage Claims. As of the Distribution Date, Manor
Care or a Retained Subsidiary shall assume or retain and shall be responsible
for, or cause its insurance carriers or HMOs to be responsible for, all
liabilities and obligations in connection with claims incurred or premiums owed
through December 31, 1996, whether asserted before or after December 31, 1996,
under any Manor Care Welfare Plan in respect of any Manor Care Qualified
Beneficiary or Choice Qualified Beneficiary and shall be responsible for claims
incurred or premiums owed after December 31, 1996 under any Manor Care Welfare
Plan in respect of any Manor Care Qualified Beneficiary, and Choice and the
Choice Subsidiaries shall have no liability or obligation with respect thereto.
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(d) Continuation of Sponsorship of Manor Care Welfare Plans. As soon
as practicable after the date hereof and effective as of the Distribution Date,
Manor Care shall take, or cause to be taken, all action necessary and
appropriate to continue to administer the Manor Care Welfare Plans and to
provide benefits thereunder for all Retained Individuals and Manor Care
Qualified Beneficiaries who, immediately prior to the Distribution Date, were
participants in or otherwise entitled to benefits under the Manor Care Welfare
Plans and to provide benefits through December 31, 1996 to Choice Individuals.
Manor Care will assess Choice a monthly amount, described in Section 2.06(e)
below, to cover the projected costs of providing continued benefits to Choice
Individuals through December 31, 1996 under the Manor Care Welfare Plans. Choice
will provide Manor Care, as soon as practicable after the Distribution Date
(with the cooperation of Manor Care to the extent that relevant information is
in the possession of Manor Care or a Retained Subsidiary, and in accordance with
Section 5.02), with a list of individuals (and dependents thereof) employed by
Manor Care or any Retained Subsidiary who were, to the best knowledge of Choice,
participants in or otherwise entitled to benefits under the existing Manor Care
Welfare Plans immediately prior to the Distribution Date, together with a
listing of each such individual's Service Credits under such existing Plans and
a listing of each such individual's expenses incurred towards deductibles,
out-of-pocket limits, maximum benefit payments, and any benefit usage towards
plan limits thereunder.
(e) Welfare Plan Payments by Choice to Manor Care. Choice shall make
monthly payments to Manor Care in an amount equal to $216 multiplied by the
number of Choice Employees who are participants in a Manor Care Medical Plan
with respect to the time period beginning on the Distribution Date and ending on
December 31, 1996. Such payments shall be made to Manor Care on a monthly basis
no more than ten (10) days after the end of each month ending after the
Distribution Date through December 31, 1996. In consideration of receipt of such
payments, Manor Care shall provide the services and benefits described in
Section 2.06. It is understood that Choice shall not make any changes in any of
the benefit structures attributable to the Manor Care Welfare Plans and will not
modify the procedures attributable to the administration and implementation of
the Manor Care Welfare Plans. It is also agreed that Choice will be responsible
for the funding of any costs attributable to the design, implementation,
enrollment, and administration of any Welfare Plans established by Choice to
provide coverage to Choice Employees subsequent to December 31, 1996.
(f) Continuation of Sponsorship of Manor Care, Inc. Short-Term
Disability Plan. On the Distribution Date, Manor Care shall retain (or shall
cause a Retained Subsidiary to assume) sole responsibility for all benefit
payments due under the Manor
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Care, Inc. Short-Term Disability Plan with respect to all Retained Employees and
Terminees who are participants in such Plan on the Distribution Date and Choice
shall have no liability or obligation with respect thereto.
Section 2.07 Choice Welfare Plans and Short-Term Disability Plan.
(a) Establishment of Choice Welfare Plans. As soon as practicable
after the date hereof and effective January 1, 1997, Choice shall take, or cause
to be taken, all action necessary and appropriate to establish the Choice
Welfare Plans and to provide benefits thereunder for all Choice Individuals who,
immediately prior to January 1, 1997, were participants in or otherwise entitled
to benefits under the Manor Care Welfare Plans. Each such individual shall, to
the extent applicable, for all purposes under the Plans established by Choice
(i) have coverage comparable to that provided immediately prior to the
Distribution Date and (ii) have no preexisting condition limitation imposed
other than that which is or was already imposed under the existing applicable
Manor Care Welfare Plans.
(b) Liability for Claims. As of January 1, 1997, Choice or a Choice
Subsidiary shall assume or retain and shall be responsible for, or cause its
insurance carriers or HMOs to be responsible for, all liabilities and
obligations in connection with claims incurred or premiums due on and after
January 1, 1997 in respect of any Choice Individual, and Manor Care and the
Retained Subsidiaries shall have no liability or obligation with respect
thereto.
(c) Continuation Coverage Administration. As of January 1, 1997,
Choice or a Choice Subsidiary shall assume or retain, as the case may be, and
shall be solely responsible for, or cause its insurance carriers or HMOs to be
responsible for, the administration of the continuation coverage requirements
imposed by Code Section 4980B and ERISA Sections 601 through 608 as they relate
to any Choice Qualified Beneficiary after December 31, 1996, and Manor Care and
the Retained Subsidiaries shall have no liability or obligation with respect
thereto.
(d) Continuation Coverage Claims. As of the January 1, 1997, Choice
or a Choice Subsidiary shall be solely responsible for, or cause its insurance
carriers or HMOs to be responsible for, all liabilities and obligations
whatsoever in connection with claims incurred or premiums due on and after
January 1, 1997 under any Choice Welfare Plans (or successor thereto) in respect
of any Choice Qualified Beneficiary, and Manor Care and the Retained
Subsidiaries shall have no liability or obligation with respect thereto. Each
Choice Qualified Beneficiary shall, to the extent applicable, for all purposes
under the Plans provided by Choice (i) have coverage comparable
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that provided to him or her immediately prior to the Distribution Date and (ii)
have no preexisting condition limitation imposed other than that which is or was
already imposed under the applicable existing Plan.
(e) Establishment of Choice Hotels International, Inc. Short-Term
Disability Plan. Effective as of the Distribution Date, Choice shall take, or
cause to be taken, all action necessary and appropriate to establish and
administer a new short-term disability plan named the Choice Hotels
International, Inc. Short-Term Disability Plan and to provide benefits
thereunder after the Distribution Date for all Choice Employees, including
Choice Employees who had incurred a disability prior to the Distribution Date
and who were receiving benefits prior to the Distribution Date under the Manor
Care, Inc. Short-Term Disability Plan.
Section 2.08 Vacation Pay and Sick Leave Liabilities.
(a) Division of Liabilities. Effective on the Distribution Date,
Choice shall assume, as to the Choice Employees, and Manor Care shall retain, as
to the Retained Employees, all accrued liabilities (whether vested or unvested,
and whether funded or unfunded) for vacation leave and sick leave in respect of
employees of Manor Care as of the Cut-off Date. Choice shall be solely
responsible for the payment of such vacation leave and sick leave to Choice
Employees after the Cutoff Date, and Manor Care shall be solely responsible for
the payment of such vacation leave and sick leave to Retained Employees after
the Cut-off Date. Each party shall provide to its own Employees on the
Distribution Date the same vested and unvested balances of vacation leave and
sick leave as credited to such Employee on the Manor Care payroll system on the
Cut-off Date, and shall continue to accrue vacation leave and sick leave in
respect of each such Employee from the Distribution Date at the same rate of
accrual as accrued in respect of such individual by Manor Care on the Cut-off
Date.
(b) Post-Distribution Transfers. Through May 31, 1998, an Employee
who leaves the service of one party to immediately begin employment with the
other party (i.e., leaving Manor Care employment to work for Choice, or leaving
Choice employment to work for Manor Care) shall be provided by the new employer
with the same balance of vested and unvested vacation leave and sick leave hours
as had been accrued by the old employer through the termination date. The old
employer shall promptly notify the new employer in writing of the occurrence of
any termination subject to the provisions of this Section 2.08(b), and shall
make a payment to such new employer within thirty (30) days of the aforesaid
termination date in an amount equal to the value of the terminating Employee's
vested balance of vacation leave and sick leave accrued by the old employer
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through such termination date, based on the Employee's final rate of pay with
the old employer. No payment shall be made by the old employer to the new
employer for any unvested leave balance.
Section 2.09 Employee Discounts. Employees of Choice shall be granted
discounts with Manor Care on the same terms and conditions as Manor Care
employee discounts, and employees of Manor Care shall be granted discounts with
Choice on the same terms and conditions as Choice employee discounts. Such
discounts shall be intended to qualify as a fringe benefit excludible from the
gross income of employees under Section 132(a) of the Code. This Agreement shall
constitute a reciprocal agreement between the parties within the meaning of
Section 132(h) of the Code, and the parties shall execute such further
documentation as may be required for tax purposes or as otherwise necessary to
effect such discounts. In accordance with Section 5.02, each party shall furnish
the other with such information as is necessary for the administration of the
aforesaid employee discount programs, including but not limited to information
on the utilization of the discounts by the employees of such other party. Each
party shall be solely responsible for any payroll taxes, excise taxes, corporate
income taxes or penalties attributable to the availability of discounts to or
utilization by its employees (whether or not such discounts qualify under
Section 132(a) of the Code), and the other party shall have no liability or
obligation with respect thereto.
Section 2.10 Preservation of Right To Amend or Terminate Plans. Except as
otherwise expressly provided in Article II, no provisions of this Agreement,
including, without limitation, the agreement of Manor Care or Choice, or any
Retained Subsidiary or Choice Subsidiary, to make a contribution or payment to
or under any Plan herein referred to for any period, shall be construed as a
limitation on the right of Manor Care or Choice or any Retained Subsidiary or
Choice Subsidiary to amend such Plan or terminate its participation therein
which Manor Care or Choice or any Retained Subsidiary or Choice Subsidiary would
otherwise have under the terms of such Plan or otherwise, and no provision of
this Agreement shall be construed to create a right in any employee or former
employee, or dependent or beneficiary of such employee or former employee under
a Plan which such person would not otherwise have under the terms of the Plan
itself.
Section 2.11 Reimbursement. Manor Care and Choice acknowledge that Manor
Care and the Retained Subsidiaries, on the one hand, and Choice and the Choice
Subsidiaries, on the other hand, may incur costs and expenses, including, but
not limited to, contributions to Plans and the payment of insurance premiums
arising from or related to any of the Plans which are, as set forth in this
Agreement, the responsibility of the other party hereto. Accordingly, Manor Care
(and any Retained Subsidiary
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responsible therefor) and Choice (and any Choice Subsidiary responsible
therefor) shall reimburse each other, as soon as practicable, but in any event
within thirty (30) days of receipt from the other party of appropriate
verification, for all such costs and expenses.
Section 2.12 Payroll Reporting and Withholding.
(a) Form W-2 Reporting. Choice and Manor Care hereby adopt the
"alternative procedure" for preparing and filing IRS Forms W-2 (Wage and Tax
Statements), as described in Section 5 of Revenue Procedure 84-77, 1984-2 IRS
Cumulative Bulletin 753 ("Rev. Proc. 84-77"). Under this procedure Choice as the
successor employer shall provide all required Forms W-2 to all Choice
Individuals reflecting all wages paid and taxes withheld by both Manor Care as
the predecessor and Choice as the successor employer for the entire year during
which the Distribution takes place. Manor Care shall provide all required Forms
W-2 to all Retained Individuals reflecting all wages and taxes paid and withheld
by Manor Care before, on and after the Distribution Date.
In connection with the aforesaid agreement under Rev. Proc. 84-77, each
business unit or business operation of Manor Care shall be assigned to either
Manor Care or Choice, depending upon whether it is a Retained Business or Choice
Business, and each Retained Individual or Choice Individual associated with such
business unit or business operation shall be assigned for payroll reporting
purposes to Manor Care or Choice, as the case may be.
(b) Forms W-4 and W-5. Choice and Manor Care agree to adopt the
alternative procedure of Rev. Proc. 84-77 for purposes of filing IRS Forms W-4
(Employee's Withholding Allowance Certificate) and W-5 (Earned Income Credit
Advance Payment Certificate). Under this procedure Manor Care shall provide to
Choice as the successor employer all IRS Forms W-4 and W-5 on file with respect
to each Choice Individual, and Choice will honor these forms until such time, if
any, that such Choice Individual submits a revised form.
(c) Garnishments, Tax Levies, Child Support Orders, and Wage
Assignments. With respect to Employees with garnishments, tax levies, child
support orders, and wage assignments in effect with Manor Care on the Cut-off
Date, Choice as the successor employer with respect to each Choice Individual
shall honor such payroll deduction authorizations and will continue to make
payroll deductions and payments to the authorized payee, as specified by the
court or governmental order which was filed with Manor Care.
(d) Authorizations for Payroll Deductions. Unless otherwise
prohibited by this or another agreement entered into in
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connection with the Distribution, or by a Plan document, with respect to
Employees with authorizations for payroll deductions in effect with Manor Care
on the Cut-off Date, Choice as the successor employer will honor such payroll
deduction authorizations relating to each Choice Individual, and shall not
require that such Choice Individual submit a new authorization to the extent
that the type of deduction by Choice does not differ from that made by Manor
Care. Such deduction types include, without limitation, contributions to any
Plan, U.S. Savings Bonds; scheduled loan repayments to the Profit Sharing Plan;
and Direct Deposit of Payroll, bonus advances, union dues, employee relocation
loans, and other types of authorized company receivables usually collectible
through payroll deductions.
ARTICLE III
LABOR AND EMPLOYMENT MATTERS
Notwithstanding any other provision of this Agreement or any other
Agreement between Choice and Manor Care to the contrary, Choice and Manor Care
understand and agree that:
Section 3.01 Separate Employers. On and after the Distribution Date and
the separation of Employees into their respective companies, Choice and Manor
Care will be separate and independent employers.
Section 3.02 Employment Policies and Practices. Subject to the provisions
of ERISA and Sections 2.01(b) on Service Credits and 2.04(e) and 2.08(b)
governing post-Distribution transfers through May 31, 1998, Choice and Manor
Care may adopt, continue, modify or terminate such employment policies,
compensation practices, retirement plans, welfare benefit plans, and other
employee benefit plans of any kind or description, as each may determine, in its
sole discretion, are necessary and appropriate.
Section 3.03 Collective Bargaining Agreements. With regard to employees of
Manor Care covered by a Collective Bargaining Agreement on the Cut-off Date who
become Choice Employees or Retained Employees, Choice and Manor Care promise and
covenant to each other not to take any action which disrupts or otherwise
negatively impacts the labor relations of the other. Choice and Manor Care will
diligently work to substitute the appropriate employer for Manor Care in
Collective Bargaining Agreements.
Section 3.04 Claims.
(a) Scope. This Section is intended to allocate all liabilities for
employment-related claims involving Manor Care or
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Choice including, but not limited to, claims against either or both Manor Care
and Choice and their officers, directors, agents and employees, or against or by
their various employee benefit plans and plan administrators and fiduciaries. In
the event of any conflicting provision of any agreement including, but not
limited to, management agreements for hotel properties, this Section 3.04 shall
control the allocation of liabilities for employment-related claims.
(b) Employment-Related Claims. An employment-related claim shall
include any actual or threatened lawsuit, arbitration, ERISA claim, or federal,
state, or local judicial or administrative proceeding of whatever kind involving
a demand by or on behalf of or relating to Retained Individuals or Choice
Individuals, or by or relating to a collective bargaining agent of Employees, or
by or relating to any federal, state or local government agency alleging
liability against Manor Care or Choice, or against any employee health, welfare,
deferred compensation or other benefit plan and their respective officers,
directors, agents, employees, administrators, trustees and fiduciaries.
(c) Obligation to Indemnify. The duty of a party to indemnify,
defend and hold harmless the other party under this Section 3.04 shall include
the following obligations of the party having such duty: to provide a legal
defense and incur all attorneys fees and litigation costs which may be
associated with such a defense; to pay all costs of settlement or judgment where
the indemnifying party has the full duty to do so or to pay the full percentage
of the party's share when the duty is only a percentage of the full settlement
or judgment; and to hold harmless from all claims and costs which may be
asserted with or arising from the duty of the indemnifying party to defend and
indemnify.
(d) Pre-Distribution Claims.
(i) Choice shall indemnify, defend and hold harmless Manor
Care from any employment-related claims of a Choice Individual arising on or
before the Cut-off Date.
(ii) Manor Care shall indemnify, defend and hold harmless
Choice from any employment-related claims of a Retained Individual arising on or
before the Cut-off Date.
(e) Distribution and Other Joint Liability Claims. Where
employment-related claims alleging or involving joint and several liability
asserted against Choice and Manor Care are not separately traceable to
liabilities relating to Choice Individuals or Retained Individuals, any
liability shall be apportioned between Choice and Manor Care in accordance with
the percentage that each party's Employees represents of the combined
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total number of Employees of both parties, as described below. The percentage of
the liability assumed by Choice shall equal the ratio of (i) the total number of
Choice Employees on the Distribution Date, to (ii) the combined total number of
Choice Employees and Retained Employees on such date. The percentage of the
liability assumed by Manor Care shall equal the ratio of (i) the total number of
Manor Care Employees on the Distribution Date, to (ii) the combined total number
of Choice Employees and Retained Employees on such date. Each party will
indemnify, defend, and hold harmless the other to the extent of the indemnifying
party's apportioned percentage determined in accordance herewith.
(f) Post-Distribution Employment-Related Claims. Employment-related
claims arising after the Distribution and division of the Employees between the
parties and not relating to, arising from, or in connection with the
Distribution, will be the sole responsibility of Choice as to Choice Individuals
and of Manor Care as to Retained Individuals. Each Company will indemnify,
defend, and hold harmless the other from employment-related claims of the other
company.
Section 3.05 Funding of Union Plans. Without limitation to the scope and
application of Section 3.04, any claims by or on behalf of employees or their
collective bargaining agent or any federal, state or local governmental agency
for alleged under-funding of, or failure to make payments to, union health,
welfare and pension funds based on acts or omissions occurring on or before the
Distribution Date or arising from or in connection with the Distribution, or
resulting from actuarial recalculation by auditors of the union plans and funds,
will be the sole responsibility of each party as to its own employees (i.e.,
Choice with respect to Choice Individuals, and Manor Care with respect to
Retained Individuals), and the responsible party will indemnify, defend, and
hold harmless the other from any such claims.
Section 3.06 Notice of Claims. Without limitation to the scope and
application to each party in the performance of its duties under Section 3.04
and 3.05 herein, each party will notify in writing and consult with the other
party prior to making any settlement of an employee claim, for the purpose of
avoiding any prejudice to such other party arising from the settlement.
Section 3.07 Assumption of Unemployment Tax Rates. Changes in state
unemployment tax experience from that of Manor Care as of the Cut-off Date shall
be handled as follows. In the event an option exists to allocate state
unemployment tax experience of Manor Care, the Manor Care experience shall be
transferred to Choice if this results in the lowest aggregate unemployment tax
costs for both Manor Care and Choice combined, and the Manor Care experience
shall be retained by Manor Care if
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this results in the lowest aggregate unemployment tax costs for Manor Care and
Choice combined.
Section 3.08 Intercompany Service Charge. Legal, professional, managerial,
administrative, clerical, consulting, and support or production services
provided to one party by personnel of the other party, upon the request of the
first party or when such services are otherwise required by this Agreement
between Choice and Manor Care, shall be charged to the party receiving such
services on commercially reasonable terms to be negotiated (or in accordance
with the provisions of any applicable agreement between the parties).
Section 3.09 WARN Claims. Before and after the Distribution Date, each
party shall comply in all material respects with the Worker Adjustment and
Retraining Act ("WARN"). Manor Care shall be responsible for WARN claims
relating to Retained Individuals or the Employees who prior to the Distribution
Date were employed in a Retained Business. Choice shall be responsible for WARN
Claims relating to Choice Individuals or to Employees who prior to the
Distribution Date were employed in a Choice Business. Each party shall
indemnify, defend and hold harmless the other in connection with WARN Claims for
which the indemnitor is responsible and which are brought against the
indemnitees.
Section 3.10 Employees on Leave of Absence. After the Distribution Date,
Choice shall assume responsibility, if any, as employer for all Employees
returning to Choice or a Choice Business from an approved leave of absence who
prior to the Distribution Date were employed in a Choice Business. After the
Distribution Date, Manor Care shall assume responsibility, if any, as employer
for all Employees returning to Manor Care or a Retained Business from an
approved leave of absence who prior to the Distribution Date were employed in a
Retained Business.
Section 3.11 No Third Party Beneficiary Rights. Neither this Agreement nor
any other intercompany agreement between Choice and Manor Care is intended to
nor does it create any third party contractual or other common law rights. No
person shall be deemed a third-party beneficiary of the agreements between
Choice and Manor Care.
Section 3.12 Attorney-Client Privilege. The provisions herein requiring
either party to this Agreement to cooperate shall not be deemed to be a waiver
of the attorney/client privilege for either party nor shall it require either
party to waive its attorney/client privilege.
ARTICLE IV
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DEFAULT
Section 4.01 Default. If either party materially defaults hereunder, the
non-defaulting party shall be entitled to all remedies provided by law or equity
(including reasonable attorneys' fees and costs of suit incurred).
Section 4.02 Force Majeure. Choice and Manor Care shall incur no liability
to each other due to a default under the terms and conditions of this Agreement
resulting from fire, flood, war, strike, lock-out, work stoppage or slow-down,
labor disturbances, power failure, major equipment breakdowns, construction
delays, accident, riots, acts of God, acts of United States' enemies, laws,
orders or at the insistence or result of any governmental authority or any other
delay beyond each other's reasonable control.
ARTICLE V
MISCELLANEOUS
Section 5.01 Relationship of Parties. Nothing in this Agreement shall be
deemed or construed by the parties or any third party as creating the
relationship of principal and agent, partnership or joint venture between the
parties, it being understood and agreed that no provision contained herein, and
no act of the parties, shall be deemed to create any relationship between the
parties other than the relationship set forth herein.
Section 5.02 Access to Information; Cooperation. Manor Care and Choice and
their authorized agents will be given reasonable access to and may take copies
of all information relating to the subjects of this Agreement (to the extent
permitted by federal and state confidentiality laws) in the custody of the other
party, including any agent, contractor, subcontractor, agent or any other person
or entity under the contract of such party. The parties will provide one another
with such information within the scope of this Agreement as is reasonably
necessary to administer each party's Plans. The parties will cooperate with each
other to minimize the disruption caused by any such access and providing of
information.
Section 5.03 Assignment. Neither party shall, without the prior written
consent of the other, have the right to assign any rights or delegate any
obligations under this Agreement.
Section 5.04 Headings. The headings used in this Agreement are inserted
only for the purpose of convenience and reference, and in no way define or limit
the scope or intent of any provision or part hereof.
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Section 5.05 Severability of Provisions. Neither Manor Care nor Choice
intend to violate statutory or common law by executing this Agreement. If any
section, sentence, paragraph, clause or combination of provisions in this
Agreement is in violation of any law, such sections, sentences, paragraphs,
clauses or combinations shall be inoperative and the remainder of this Agreement
shall remain in full force and effect and shall be binding upon the parties.
Section 5.06 Parties Bound. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective successors and
permitted assigns. Nothing herein, expressed or implied, shall be construed to
give any other person any legal or equitable rights hereunder.
Section 5.07 Notices. All notices, consents, approvals and other
communications given or made pursuant hereto shall be in writing and shall be
deemed to have been duly given when delivered personally or by overnight courier
or three days after being mailed by registered or certified mail (postage
prepaid, return receipt requested) to the named representatives of the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice, except that notices of changes of address shall be
effective upon receipt):
(a) if to Manor Care
MANOR CARE, INC.
11555 Darnestown Road
Gaithersburg, MD 20878-3200
Attention: GENERAL COUNSEL
(b) if to Choice
CHOICE HOTELS INTERNATIONAL, INC.
10750 Columbia Pike
Silver Spring, MD 20901
Attention: GENERAL COUNSEL
Choice agrees that, upon the request of Manor Care, Choice will give copies of
all of its notices, consents, approvals and other communications hereunder to
any lender to Manor Care or other person specified by Manor Care.
Section 5.08 Further Action. Choice and Manor Care each shall cooperate in
good faith and take such steps and execute such papers as may be reasonably
requested by the other party to implement the terms and provisions of this
Agreement.
Section 5.09 Waiver. Choice and Manor Care each agree that the waiver of
any default under any term or condition of
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this Agreement shall not constitute a waiver of any subsequent default or
nullify the effectiveness of that term or condition.
Section 5.10 Governing Law. All controversies and disputes arising out of
or under this Agreement shall be determined pursuant to the laws of the State of
Maryland, regardless of the laws that might be applied under applicable
principles of conflicts of laws.
Section 5.11 Consent to Jurisdiction. The parties irrevocably submit to
the exclusive jurisdiction of (a) the Courts of the State of Maryland,
Montgomery County, or (b) any federal district court in the State of Maryland
where there is federal jurisdiction for the purpose of any suit, action or other
Court proceeding arising out of this Agreement.
Section 5.12 Entire Agreement. This Agreement and the Distribution
Agreement constitute the entire understanding between the parties hereto, and
supersede all prior written or oral communications, relating to the subject
matter covered by said agreements. No amendment, modification, extension or
failure to enforce any condition of this Agreement by either party shall be
deemed a waiver of any of its rights herein. This Agreement shall not be amended
except by a writing executed by the parties.
Section 5.13 Commercially Reasonable Terms and Conditions. The terms and
provisions of this Agreement are intended to reflect commercially reasonable
terms and conditions (including, but not limited to, pricing) that are at least
as favorable and as competitive to Choice as the terms and conditions Manor Care
would grant or require of third parties for substantially similar goods and
services.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
MANOR CARE, INC., a
Delaware corporation
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
CHOICE HOTELS HOLDINGS, INC., a
Delaware corporation
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
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EXHIBIT A
HEALTH AND WELFARE PLANS
* Medical plans
* Dental Plan
* HMOs
* Group-Term Life
* Pretax Spending Accounts
* Hyatt Legal Services
* Long-term Disability
* Accidental Death & Dismemberment
<PAGE> 1
EXHIBIT 10.13
TAX ADMINISTRATION AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of
_________________, 1996 by and between MANOR CARE, INC., a Delaware corporation
("Manor"), and CHOICE HOTELS HOLDINGS, INC. (to be renamed Choice Hotels
International, Inc.), a Delaware corporation ("Choice").
RECITALS
WHEREAS, pursuant to a Distribution agreement (the "Distribution
Agreement" dated as of ____________, 1996, Choice and Manor have agreed to enter
into this agreement relating to certain tax administration matters on the terms
and conditions set forth herein; and
WHEREAS, Manor shall retain the personnel and systems formerly utilized
in the administration of the services described herein; and
WHEREAS, Choice desires to retain Manor as described herein, and Manor
desires to render such assistance on an equitable, arms length basis for a fee;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Choice and Manor agree as follows:
1. Definitions. As used in this Agreement, the terms indicated below shall have
the following meanings:
"Ancillary Agreement" shall have the meaning described in the
Distribution Agreement.
"Distribution" means the distribution to the holders of Manor Care
Common Stock of all the outstanding shares of Choice Common Stock.
"Distribution Date" means the date determined by the Board of
Directors of Manor as the date on which the Distribution shall be
effected.
"Lodging Business" shall mean any business or operation of Choice
or the Lodging Subsidiaries (as defined in the Distribution Agreement) which is,
pursuant to the Distribution Agreement, to be conducted, following the
Distribution.
<PAGE> 2
"Prime Rate" shall be the rate identified from time to time in the
New York edition of the Wall Street Journal as being the Prime Rate of
interest.
"Tax Claim" means a claim by a Taxing Authority for sales, use,
occupancy, real estate, personal property or other taxes (other than
income tax), miscellaneous licenses, permits, and fees, interest and
penalties (other than penalties for the delinquent payment of assessments)
which claims arise from or relate to the Lodging Business and which under
the Distribution Agreement or any Ancillary Agreement is charged to
Choice.
"Taxing Authority" means any Country, State, County, Municipality,
City or other governmental entity legally empowered to tax Choice
properties or operations. Any capitalized terms defined in the
Distribution Agreement and used herein shall have the meanings ascribed to
them in the Distribution Agreement unless otherwise defined herein.
2.1 Tax Claim Administration Services. Upon request of Choice, Manor shall
provide the services described in Exhibit B. Manor will promptly notify Choice
in writing of any Tax Claims for which it receives notice. Choice shall have
full authority to defend and settle all Tax Claims. Manor will not protest,
settle, compromise or pay any Tax Claims (except under protest), without the
prior written consent of Choice. Manor agrees to provide such services only if
it reasonably believes the service will not interfere with the conduct of the
business of Manor or pose an unreasonable burden.
2.2 Standard of Care. All services provided hereunder shall be
administered in accordance with Manor's standard policies, procedures and
practices in effect as of the date hereof and as may be changed, and as more
particularly described below, or as otherwise specified in accordance with the
terms thereof. In so doing, Manor shall follow commonly accepted standards of
care in the industry and exercise the same care and skill as it exercises in
performing like services for itself.
3. Financial Provisions.
3.1 Reimbursement. Choice will reimburse Manor for any Tax Claims for
which Manor is ultimately held liable, other than Tax Claims for which Choice is
entitled to indemnification under Section 4(a) hereof, together with all
out-of-pocket expenses including legal fees incurred by Manor in protesting or
disputing any Tax Claim or endeavoring to obtain a refund at Choice's request.
3.2 Pricing and Payment for Services. Choice shall pay Manor for services
requested and rendered hereunder as follows:
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<PAGE> 3
(a) The charging mechanisms for rates or charges for each service
shall include (i) activity-based charges where the per unit price
will be multiplied by the variable number of units; (ii) fixed fee
based charges, meaning a fixed amount per accounting period for
Manor to perform the service; (iii) usage based charges for which
Choice will pay according to actual use of the service; (iv) time
and materials charges; (v) any out-of-pocket expenses, including,
but not limited to, fees of consultants and attorneys; or (vi) a
variation or a combination of any of the foregoing methods as
agreed to by the parties.
(b) Choice shall pay any and all additional costs and expenses
which Manor may incur for the express purpose of providing
services to Choice hereunder.
(c) Choice shall pay Manor for all services provided hereunder
within thirty (30) days after receipt of an invoice therefor.
Choice will remit the amount of any Tax Claims payable by Manor
before Manor is required to remit such amount to any Taxing
Authority. If Manor subsequently recovers any amounts paid by
Choice hereunder or if Manor recovers any Tax Claim previously
paid, it will remit such amounts to Choice within thirty (30) days
of receipt. Choice shall pay fixed charges in advance on the first
business day of the applicable Accounting Period. Any payments not
made by Choice to Manor, or not made by Manor to Choice, when due
shall bear interest, computed daily, from the date due to the date
of payment based on the annual percentage rate equal to the Prime
Rate plus two (2) percentage points, as same may vary from time to
time.
4. Indemnification.
(a) Manor will defend, indemnify and hold harmless Choice, its
subsidiaries, affiliates, directors, officers, employees and
agents from Tax Claims arising from (i) Manor's failure to file a
required tax return or (ii) Manor's failure to pay the tax shown
as due on any tax return applicable to the Lodging Business
unless in the case of (ii), such Tax Claim is being contested by
Manor or a Manor subsidiary in good faith on the date of this
Agreement.
(b) Choice will defend, indemnify and hold harmless Manor, its
subsidiaries, affiliates, directors, officers, employees and
agents from any Tax Claims which are not subject to
indemnification by Manor pursuant to Section 4(a) above, and any
out-of-pocket expenses incurred by Manor in protesting or
disputing any Tax Claims at Choice's request.
(c) Choice shall indemnify, defend and hold harmless Manor and its
subsidiaries, and Manor shall indemnify, defend and hold harmless
Choice and its subsidiaries from and
3
<PAGE> 4
against any liability, cost, or expense, including, without
limitation, any fine, penalty, interest charge (restricted to
interest in excess of the rate established under Section 6621 of
the Code and interest which is in respect of the penalty portion
of an assessment), or accountants' or attorney's fee, arising out
of fraudulent or negligently prepared information, workpapers,
documents, and other items used in the preparation of, or
presented in, any return, amended return, or claim or refund
filed, and which information, workpapers, documents, or other
items originated with and/or were prepared by such indemnifying
party.
5. Access to Information. Choice and its authorized agents will be given
reasonable access to and may take copies of all information relating to the Tax
Claims, Manor's time and expense charges for providing the services provided
hereunder, and Manor's out-of-pocket expenses. Choice and its authorized agents
may, upon fourteen (14) days written notice, annually audit Manor's claims,
administration policies, procedures and practices and the Tax Claims. The
parties will cooperate with one another to minimize the disruption caused by any
such audit. Manor will retain all information relating to Tax Claims in
accordance with the retention policies in the Distribution Agreement, with
Manor's internal record retention policy and in accordance with applicable laws.
6. Term. The term of this Agreement shall commence on the Distribution
Date and shall remain in effect through the end of the first full Fiscal Year
immediately following the Distribution Date. Unless terminated pursuant to the
terms hereof, the Agreement shall automatically renew each Fiscal Year
thereafter for the extended term of said Fiscal Year and shall not extend past
the last day of the 30th month following the Distribution; provided, however,
that Choice may terminate this agreement or any services provided hereunder at
any time for any reason or no reason upon sixty (60) days' prior written notice
to Manor. This Agreement may also be terminated in the event of a default (past
the expiration of any applicable cure period provided herein) in accordance with
the provisions of this Agreement.
7. Default. If either party materially defaults hereunder, the
non-defaulting party may terminate this Agreement effective immediately (subject
to the cure periods set forth herein below) upon written notice to the
defaulting party. The non-defaulting party shall be entitled to all remedies
provided by law or equity (including reasonable attorneys' fees and costs of
suit incurred). The following events shall be deemed to be material defaults
hereunder:
(a) Failure by either party to make any payment required to be
made to the other hereunder, which failure is not remedied with
five (5) days after receipt of written notice thereof; or
(b) Except as otherwise provided herein, failure by either party
substantially to perform in accordance with the terms and
conditions of this Agreement, which failure is not
4
<PAGE> 5
remedied within thirty (30) days after receipt of written notice
from the other party specifying the nature of such default; or
(c) (i) Filing of a voluntary bankruptcy petition by either party;
(ii) filing of any involuntary bankruptcy petition against either
party which is not withdrawn within sixty (60) days after filing;
(iii) assignment for the benefit of creditors made by either
party; or (iv) appointment of a receiver for either party.
8. Force Majeure. Manor and Choice shall incur no liability to each other
due to a default under the terms and conditions of this Agreement resulting from
fire, flood, war, strike, lock-out, work stoppage or slow-down, labor
disturbances, power failure, major equipment breakdowns, construction delays,
accident, riots, acts of God, acts of United States' enemies, laws, orders or at
the insistence or result of any governmental authority or any other delay beyond
each other's reasonable control.
9. Relationship of Parties. Nothing in this Agreement shall be deemed or
construed by the parties or any third party as creating the relationship of
principal and agent, partnership or joint venture between the parties, it being
understood and agreed that no provision contained herein, and no act of the
parties, shall be deemed to create any relationship between the parties.
10. Assignment. Neither party shall, without the prior written consent of
the other, assign any rights or delegate any obligations under this Agreement,
such consent not to be unreasonably withheld, conditioned or delayed.
11. Headings. The headings used in this Agreement are inserted only for
the purpose of convenience and reference, and in no way define or limit the
scope or intent of any provision or part hereof.
12. Severability of Provisions. Neither Manor nor Choice intend to violate
statutory or common law by executing this Agreement. If any section, sentence,
paragraph, clause or combination of provisions in this Agreement is in violation
of any law, such sections, sentences, paragraphs, clauses or combinations shall
be inoperative and the remainder of this Agreement shall remain in full force
and effect and shall be binding upon the parties.
13. Parties Bound. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and permitted
assigns. Nothing herein, expressed or implied, shall be construed to give any
person any legal or equitable rights hereunder.
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<PAGE> 6
14. Notices. All notices and other communications hereunder shall be in
writing and shall be delivered by hand or shall be deemed to have been properly
made and given one (1) business day after being deposited with a reputable
overnight courier service such as Federal Express, Airborne Express or UPS Next
Day Air for next business day delivery to the following addresses (or at such
other addresses for a party as shall be specified by like notice):
to Choice:
Choice Hotels International, Inc.
10750 Columbia Pike
Silver Spring, MD 20901
Attention: General Counsel
to Manor:
Manor Care, Inc.
11555 Darnestown Road
Gaithersburg, MD 20878-3200
Attention: General Counsel
15. Further Action. Manor and Choice each shall cooperate in good faith
and take such steps and execute such papers as may be reasonably requested by
the other party to implement the terms and provisions of this Agreement.
16. Waiver. Manor and Choice each agree that the waiver of any default
under any term or condition of this Agreement shall not constitute any waiver of
any subsequent default or nullify the effectiveness of that term or condition.
17. Governing Law. All controversies and disputes arising out of or under
this Agreement shall be determined pursuant to the laws of the State of
Maryland, United States of America, regardless of the laws that might be applied
under applicable principles of conflicts of laws.
18. Consent to Jurisdiction. The parties irrevocably submit to the
exclusive jurisdiction of (a) the Courts of the State of Maryland in Montgomery
County, and (b) the United States District Court for the State of Maryland for
the purposes of any suit, action or other proceeding arising out of this
Agreement.
19. Commercially Reasonable Terms and Conditions. The terms and provisions
of this Agreement are and shall reflect commercially reasonable terms and
conditions (including, but not limited to, pricing) that are at least
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<PAGE> 7
as favorable and as competitive to Choice as the terms and conditions Manor
would grant or require of third parties for substantially similar goods and
services.
20. Liaisons. Choice and Manor shall each appoint a managerial level
individual (hereinafter "Representative") to facilitate communications and
performance under this Agreement. Each party may treat an act of a
Representative of the other party as being authorized by such other party
without inquiring behind such act or ascertaining whether such Representative
had authority to so act. The initial Representatives are named on Exhibit A.
Each party shall have the right at any time and from time to time to replace its
Representative by giving notice in writing to the other party setting forth the
name of (i) the Representative to be replaced and (ii) the replacement, and
certifying that the replacement Representative is authorized to act for the
party giving the notice in all matters relating to this Agreement.
21. Other Agreements. Notwithstanding anything to the contrary contained
herein, Choice shall not be charged under this Agreement for any services which
are required to be performed under any operating lease or other agreement
between Choice and Manor, or their respective subsidiaries.
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<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CHOICE HOTELS HOLDINGS, INC., a
Delaware corporation
By:______________________________________
Name:______________________________
Title:_______________________________
MANOR CARE, INC., a
Delaware corporation
By:______________________________________
Name:______________________________
Title:_______________________________
8
<PAGE> 9
EXHIBIT A
REPRESENTATIVES
Darrell Carlisle - Manor Care, Inc.
Terry Ingalsbe - Choice Hotels International, Inc.
9
<PAGE> 10
EXHIBIT B
SERVICES
[ATTACHED]
10
<PAGE> 11
PERSONAL PROPERTY TAX RETURNS AND AUDITS
SCHEDULE OF SERVICES
1. Extract detailed Fixed Assets data from Global Fixed Asset System.
2. Review prior year return for audit settlements and special issues. For new
facilities (construction and/or acquisition) contact taxing authorities
for property information.
Maintain and update due date schedule.
3. Review return instructions for law changes; perform research as required.
4. Classify current year acquisitions as taxable or non-taxable and by type
of asset - i.e., computer, furniture or equipment.
5. Analyze total unit cost for reasonableness; identify unrecorded
dispositions.
6. Adjust asset basis for non-taxable costs.
7. Process return using available resources. Estimate assessed value and tax
due.
8. Mail return.
9. Compare assessed value per notice to return. File appeals as needed.
10. Pay bill and monitor accruals.
11. Prepare annual unit budgets.
12. Respond to audit requests; settle audit issues.
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<PAGE> 12
SALES/USE AND OCCUPANCY TAX COMPLIANCE
SCHEDULE OF SERVICES
1. Extract sales and accruals for each unit from the general ledger; enter
data into worksheet.
2. Review exempt sales report and contact unit manager if necessary; make
appropriate adjustments.
3. Determine if accruals are in balance and make adjustments if necessary;
4. Reconcile unit accruals; determine that over/under are within guidelines.
5. Print worksheets, over/under accrual memo, and transmittal letter.
6. Print return.
7. Pay tax due; compare to transmittal letter, return, and accrual balance.
8. Present return for Choice review.
9. Copy and timely mail return.
10. Prepare reply to inquiries.
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<PAGE> 13
SALES/USE AND OCCUPANCY TAX AUDITS
SCHEDULE OF SERVICES
1. Schedule audits with Taxing Authority's auditors;
2. Determine the scope of audits and the audit methods and procedures for
such auditors;
3. Prepare and transmit responses to auditor's Information Document Requests;
4. Research and prepare proposals for resolving audit issues;
5. Prepare summary reports on each audit covering audit issues,
recommendations for payment or protest and actions to be taken to correct
deficiencies;
6. Prepare written protests for deficiencies which cannot be settled;
7. Prepare quarterly state audit reports.
13
<PAGE> 14
MAINTENANCE OF FIXED ASSETS - TAX BOOKS 2, 5, 6
(FEDERAL, AMT & ACE)
SCHEDULE OF SERVICES
1. Review Federal regulations for law changes; perform research as required.
2. Extract monthly fixed asset data from Global F/A System. This includes
additions, adjustments and retirements.
3. Classify monthly additions by asset type and depreciation method. Submit
corrections to Fixed Asset department as needed.
4. Review new facility/renovation additions for Section 1245 classification.
Obtain construction cost report and analyze for details.
5. Review acquisition additions for accuracy and reasonableness. Obtain
copies of settlement sheets, purchase agreements, etc. for details to
fixed asset allocation.
6. Review monthly dispositions and retirements. Calculate tax gain or loss as
needed.
7. Obtain fixed asset information for separate companies (such as Choice
foreign operations). Review and submit entries for tax books to Fixed
Asset department.
8. Review Global F/A System for luxury auto limitations calculations. Submit
corrections as needed.
9. Extract reports from Global F/A System as needed for special projects or
projections.
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<PAGE> 15
REAL ESTATE TAX - CONSULTING
SCHEDULE OF SERVICES
1. Review lease or management agreement. Perform real estate tax projections
on acquisitions.
2. Investigate local assessment ratios and procedures.
3. Collect current year financial data.
4. Input financial data and perform targeting analysis to determine if an
appeal should be filed. Hire consultant where necessary.
5. Contact assessor and set up initial meeting.
6. Inspect subject property and competitive properties.
7. Review assessor's worksheet and comps.
8. Prepare mini-appraisal of value based on the income approach, cost
approach and market sales comparison.
9. Prepare appeal documents.
10. Attend hearing with assessor.
11. Proceed to Administrative Board if necessary.
12. Contract an appraiser for an appraisal of the subject property where
necessary.
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<PAGE> 1
EXHIBIT 10.17
AGREEMENT
This Agreement ("Agreement") dated this _____ day of _________________,
1996 between Choice Hotels Holdings, Inc. (to be renamed Choice Hotels
International, Inc.) ("Employer"), a Delaware corporation with principal offices
at 10750 Columbia Pike, Silver Spring, Maryland 20901, and Stewart Bainum, Jr.
("Employee"), sets forth the terms and conditions governing the employment
relationship between Employee and Employer.
1. Employment. During the term of this Agreement, as hereinafter
defined, Choice hereby employs Employee as Executive Chairman. Employee hereby
accepts such employment upon the terms and conditions hereinafter set forth and
agrees to faithfully and to the best of his ability perform such duties as may
be from time to time assigned by Employer, its Board of Directors or its
designees, such duties to be rendered at the principal office of Employer or at
such other place or places as Employer shall require. Employee also agrees to
perform his duties in accordance with policies established by Employer's Board
of Directors, which may be changed from time to time.
2. Term. Subject to the provisions for termination hereinafter
provided, the term of this Agreement shall begin on October __, 1996 (the
"Effective Date") and shall terminate three (3) years thereafter. Upon
expiration of said period, the parties may extend the term if they mutually
agree to do so. Notwithstanding the aforesaid term, either party may terminate
this Agreement upon thirty days' written notice to the other on the first and
second anniversaries of the Effective Date.
3. Compensation. For all services rendered by Employee under this
Agreement during the term thereof, Employer shall pay Employee the following
compensation:
(a) Salary. A base salary of One Hundred Sixty-Four Thousand
Eighty Eight Dollars ($164,088) per annum payable in
accordance with Employer's standard payroll practices from
time to time in effect. Such salary shall be reviewed from
time to time by the Employer's Compensation Committee and may
be increased at the discretion of Employer.
(b) Incentive Bonus. Employee shall have the opportunity to
earn up to a maximum of Sixty Percent (60%) per annum of the
base salary set forth in subparagraph 3(a) above in Employer's
bonus plans as adopted from time to time by Employer's Board
of Directors.
(c) Automobile. Employer shall provide Employee with allowance
for automobile expenses of $2,925 per year.
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<PAGE> 2
(d) Club Membership. Employer shall provide Employee with an
appropriate corporate membership at a dining and/or
recreational club for the purpose of business entertainment.
(e) Stock Options. Employee shall be eligible to receive
options under the Choice Hotels International , Inc. Long Term
Incentive Plan, or similar plan, to purchase common shares of
the Employer in accordance with the policy of the Board of
Directors as in effect from time to time.
(f) Other Benefits. Employee shall, when eligible, be entitled
to participate in all other fringe benefits accorded
headquarters employees by Employer as are in effect from time
to time.
4. Extent of Services. Employee shall devote twenty-five percent (25%)
of his professional time, attention, and energies to the business of Employer,
and shall not during the term of this Agreement be engaged in any other business
activity whether or not such business activity is pursued for gain, profit, or
other pecuniary advantage except for Employee's services as the Chairman and
Chief Executive Officer of Manor Care, Inc. ("Manor Care"), for which he shall
devote seventy-five percent (75%) of his professional time; but the foregoing
shall not be construed as preventing Employee from investing his assets in the
securities of public companies, or the securities of private companies or
limited partnerships outside the healthcare and lodging industries. Employee
warrants and represents that he has no contracts or obligations to others which
would materially inhibit the performance of his services under this Agreement.
5. Disclosure and Use of Information. Employee recognizes and
acknowledges that Employer's and affiliates' present and prospective clients,
franchises, management contracts, acquisitions and personnel, as they may exist
from time to time, are valuable, special and unique assets of Employer's
business. Throughout the term of this Agreement and for a period of two (2)
years after its termination or expiration for whatever cause or reason except as
required by applicable law, Employee shall not directly or indirectly, or cause
others to, make use of or disclose to others any information relating to the
business of Employer that has not otherwise been made public, including but not
limited to Employer's present or prospective clients, franchises, management
contracts or acquisitions. In the event of an actual or threatened breach by
Employee of the provisions of this paragraph, Employer shall be entitled to
injunctive relief restraining Employee from committing such breach or threatened
breach. Nothing herein stated shall be construed as preventing Employer from
pursuing any other remedies available to Employer for such breach or threatened
breach, including the recovery of damages from Employee.
6. Notices. Any notice, request or demand required or permitted to be
given under this Agreement shall be in writing, and shall be delivered
personally to the recipient or sent by certified or registered mail to his
residence in the case of Employee, or to its principal office in the case of the
Employer.
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<PAGE> 3
7. Elective Positions. Nothing contained in this Agreement is intended
to nor shall be construed to abrogate, limit or affect the powers, rights and
privileges of the Board of Directors or stockholders to remove Employee from the
positions set forth in paragraph 1, with or without just cause, during the term
of this Agreement or to elect someone other than Employee to those positions, as
provided by law and the By-Laws of Employer; provided, however, that if Employee
is so removed without cause, it is expressly understood and agreed, in the event
any one or combination of the foregoing occurs, Employee's rights under this
Agreement shall in no way be prejudiced, and Employee shall be entitled to
receive compensation referred to in paragraph above, except ungranted stock
options, provided that he is ready, willing and able to perform the duties and
responsibilities set forth above. Notwithstanding the foregoing, the election or
appointment of Employee to a different executive position shall not be
considered removal hereunder. Employee upon removal shall be entitled to pursue
other employment, and Employer shall be entitled to receive as offset and
thereby reduce its payment, the amount received by Employee from any other
active employment (other than the moneys received by Employee from Manor Care as
contemplated in paragraph 4 above). As a condition to Employee receiving his
compensation from Employer, Employee agrees to furnish Employer annually with
full information regarding such other employment and to permit verification of
his employment records and Federal income tax returns by an independent attorney
or accountant. Employer shall receive credit for unemployment insurance
benefits, social security insurance or like amounts actually received by
Employee.
8. Waiver of Breach. The waiver of either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
9. Assignment. The rights and obligations of Employer under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of Employer. The obligations of Employee hereunder may not be
assigned or delegated.
10. Termination of Agreement. This Agreement shall terminate upon the
following events and conditions:
(a) Upon expiration of its term;
(b) For just cause, including but not limited to refusal to
carry out duties and instructions relative to the position,
dishonesty, violation of this Agreement, and any willful acts
or omissions inimical to or contrary to policies of Employer
not arbitrarily applied in the case of Employee. In the event
of termination by Employer for just cause, vested but
unexercised options granted during the term of this Agreement
shall be forfeited as a result thereof, as of the date of
notice. In the event of a willful breach of this Agreement by
Employee, Employer shall have the right to purchase from
Employee, at the price paid by Employee, such of its Common
Stock as has been acquired by Employee by exercise of a stock
option granted during the term of this Agreement if such
exercise is within six (6) months prior to termination of this
Agreement as a result of such breach.
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<PAGE> 4
Employee shall be entitled to fourteen (14) days advance
written notice of termination, except where the basis for
termination constitutes conduct on the part of Employee
involving dishonesty or bad faith, in which case the
termination shall be effective upon the sending of notice.
(c) Subject to state and federal laws, if Employee is unable
to perform the essential functions of the services described
herein, Employer shall have the right to terminate this
Agreement by written notice to Employee. In the event of such
termination, all non-vested obligations of Employer to
Employee pursuant to this Agreement shall terminate.
(d) In the event of Employee's death during the term of this
Agreement, the Agreement shall terminate as of the date
thereof.
11. Entire Agreement. This instrument contains the entire agreement of
the parties. It may be changed only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension,
or discharge is sought. This Agreement shall be governed by the laws of the
State of Maryland, and any litigation shall be conducted in the State of
Maryland.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first set forth above.
Employer:
CHOICE HOTELS HOLDINGS, INC.
(to be renamed Choice Hotels International, Inc.)
By: ______________________________
Title:____________________________
Employee:
__________________________________
Stewart Bainum, Jr.
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<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
This Agreement ("Agreement") dated this 30th day of September, 1996
among Choice Hotels International, Inc. (to be renamed Choice Hotels
Franchising, Inc.) ("Choice Franchising") and Choice Hotels Holdings, Inc. (to
be renamed Choice Hotels International, Inc.) ("Choice Hotels" and, collectively
with Choice Franchising, the "Employer"), both Delaware corporations with
principal offices at 10750 Columbia Pike, Silver Spring, Maryland 20901, and
William R. Floyd ("Employee"), sets forth the terms and conditions governing the
employment relationship between Employee and Employer.
1. Employment. During the term of this Agreement, as hereinafter
defined, Employer hereby employs Employee as Chief Executive Officer ("CEO").
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth and agrees to faithfully and to the best of his ability
perform such duties as may be from time to time assigned by Employer's Board of
Directors, such duties to be rendered at the principal office of Employer,
subject to reasonable travel. The Employer shall assign to Employee only those
duties consistent with his position as CEO. The Employee, in his position as
CEO, shall report directly to the Employer's Board of Directors and all senior
executives of the Employer shall report either directly to Employee or
indirectly through other senior executives. Employee also agrees to perform his
duties in accordance with policies established by Employer's Board of Directors,
which may be changed from time to time. At the Effective Date (defined below),
Employee shall be appointed to the Board of Directors of Choice Hotels (the
"Choice Hotels Board") as a Class III director, as specified in the Restated
Certificate of Incorporation of Choice Hotels. After the distribution of Choice
Hotels common stock to the stockholders of Manor Care, Inc. (the "Distribution
Date"), the term "Employer" under this Agreement shall refer solely to Choice
Hotels.
2. Term. Subject to the provisions for termination hereinafter
provided, the term of this Agreement shall begin on October 21, 1996 ("Effective
Date") and shall terminate five (5) years thereafter (the "Termination Date").
The Termination Date shall automatically be extended for successive one-year
terms unless either party gives written notice no less than nine months prior to
the Termination Date that it elects not to extend the Termination Date.
3. Compensation. For all services rendered by Employee under this
Agreement during the term thereof, Employer shall pay Employee the following
compensation:
(a) Salary. A base salary of Four Hundred Twenty-five Thousand
Dollars ($425,000) per annum payable in equal bi-weekly
installments. Such salary shall be reviewed by the Compensation
Committee of the Board of Directors of Employer on the first
anniversary of the Effective Date and thereafter at the end of each
fiscal year and may be increased at the discretion of Employer.
(b) Incentive Bonus. Employee shall have the opportunity to earn up
to a maximum of Sixty Percent (60%) per annum of the base salary
set forth in subparagraph 3(a) above in Employer's bonus plans as
adopted from time to time
<PAGE> 2
by Employer's Board of Directors. For the Employer's 1997 fiscal
year, the Employee's bonus shall be calculated on a pro rata basis
from the Effective Date. Additionally, the Employer shall pay the
Employee a one-time bonus of $121,232, payable at the Effective
Date.
(c) Restricted Stock. As soon as practicable after the Distribution
Date, Choice Hotels shall issue to Employee restricted Choice
Hotels common stock ("Common Stock") in an amount equal to
$1,250,000 divided by the closing trading price of the Common Stock
on its first day of public trading following the Distribution Date.
Upon issuance, Choice Hotels and Employee shall enter into a Stock
Agreement substantially in the form of Exhibit A hereto. The
restrictions on such shares shall lapse upon vesting, which shall
occur as specified on Exhibit A hereto.
(d) Automobile. Employer shall provide Employee with an allowance
for automobile expenses of $975 per month.
(e) Club Membership. Employer shall provide Employee with an
appropriate corporate membership, including initial and annual
fees, at a dining and/or recreational club at the choice of
Employee for the purpose of business entertainment.
(f) Stock Options. Employee shall be eligible to receive options
under the Choice Hotels International, Inc. Long Term Incentive
Plan ("LTIP"), or similar plan, to purchase Common Stock in
accordance with the policy of the Choice Hotels Board as in effect
from time to time. Additionally, the Employee shall be granted, as
soon as practicable after the Distribution Date, options to
purchase such number of shares of Common Stock as is equal to
$4,500,000 divided by the average of the high and low trading price
of the Common Stock on its first day of public trading following
the Distribution Date ("First Average Trading Price"). A number of
the options shall be incentive stock options granted under the
LTIP, which number shall be the maximum number permitted under the
LTIP and Section 422(d) of the Internal Revenue Code of 1986, as
amended, but in no event more than 25% of the total number of
options granted pursuant to this Section 3(f). The remainder of the
options shall be nonqualified stock options. The options shall be
exercisable at an amount per share equal to the First Average
Trading Price and shall vest as specified on Exhibit B hereto.
(g) SERP. At the Distribution Date, Employee shall participate in
the Choice Hotels International, Inc. Supplemental Executive
Retirement Plan ("SERP"), with the following amendments:
(1) Section 1.05 of the SERP is deleted and replaced with: "
'Final Average Salary' shall mean the highest average of the
monthly base salary, excluding bonuses or commissions, earned
in a sixty-month period out of
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<PAGE> 3
the 120 months of employment prior to Normal Retirement Age,
Early Retirement Age or the last day of service, as the case
may be."
(2) Section 1.08 of the SERP is deleted and replaced with: "
'Years of Service' shall mean the number of years and months of
actual employment between the Employment Date and the Normal
Retirement Date, the Early Retirement Date or the last day of
service (as the case may be), excluding any period during which
Participant is employed on a part-time basis."
(3) Notwithstanding the calculation of benefits specified is
Section 4.01 of the SERP, the Employee's monthly retirement
benefit will be calculated as follows:
<TABLE>
<CAPTION>
Years of Service * at Retirement Benefit * as %
Normal Retirement Age * of Final Average Salary *
----------------------- --------------------------
<S> <C> <C>
10 or more 30.0%
7.5 22.5%
5 15%
----------------
* Terms are defined in the SERP.
</TABLE>
Years of Service under the SERP shall be calculated as of the
Effective Date.
(4) Notwithstanding Section 5.01 of the SERP, the Employee may
elect Early Retirement at age 62, whether or not employed by
the Employer at such time, with full payment of benefits to
which Employee is entitled commencing thereon, without any
reduction for Early Retirement. All references to "15 Years of
Service" in Section 5.01 and Article VII of the SERP are
replaced with "5 Years of Service."
(h) Other Benefits. Employee shall, when eligible, be entitled to
participate in all other fringe benefits, including vacation
policy, generally accorded the most senior executive officers of
Employer as are in effect from time to time on the same basis as
such other senior executive officers.
(i) Relocation Expenses. Employee shall be entitled to all benefits
under the Relocation Policy of Employer, as adopted in August 1996,
with the following additions:
(1) Notwithstanding Section II(C) of the Relocation Policy, the
Employer will pay for the separate shipping of two automobiles;
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<PAGE> 4
(2) Notwithstanding Section III(A) of the Relocation Policy,
the Employer will pay for as many trips as are reasonably
necessary for the purpose of locating suitable housing; and,
(3) Notwithstanding Section III(B) of the Relocation Policy,
Employer will reimburse Employee for the reasonable costs of a
furnished apartment, including rent, utilities and broker's
fees, for a period of up to one year from the Effective Date
and first-class return trips for Employee and Employee's spouse
to Employee's California home as are reasonably needed.
(4) The Employer will also provide the Employee with a bridge
loan with a term of one year and limited to 90% of the amount
of equity in Employee's present house (as determined in
accordance with Employer's policy on such loans) and secured by
a lien on the house that Employee is selling. The other terms
of the bridge loan shall be in accordance with Employer's
policy on such loans.
(5) Pursuant to its Home Purchase Policy, the Employer shall
offer to purchase the Employee's home in accordance with the
terms and conditions of such policy.
(6) Employer and Employee acknowledge that if Employee
voluntarily terminates this Agreement prior to one year from
the Effective Date because he is "Constructively Terminated"
(as defined in Section 7), Employee shall have no obligation to
reimburse the Employer for relocation costs.
4. Extent of Services. Employee shall devote his full professional
time, attention, and energies to the business of Employer, and shall not during
the term of this Agreement be engaged in any other business activity whether or
not such business activity is pursued for gain, profit, or other pecuniary
advantage; but the foregoing shall not be construed as preventing Employee from
investing his assets in the securities of public companies, or the securities of
private companies or limited partnerships outside the lodging industries if such
holdings are passive investments of one percent or less of outstanding
securities and Employee does not hold positions of director, officer, employee
or general partner. Employee warrants and represents that he has no contracts or
obligations to others which would materially inhibit the performance of his
services under this Agreement.
5. Disclosure and Use of Information. Employee recognizes and
acknowledges that Employer's and affiliates' present and prospective clients,
franchises, management contracts, acquisitions and personnel, as they may exist
from time to time, are valuable, special and unique assets of Employer's
business. Throughout the term of this Agreement and for a period of two (2)
years after its termination or expiration for whatever cause or reason except as
required by
4
<PAGE> 5
applicable law, Employee shall not directly or indirectly, or cause others to,
make use of or disclose to others any information relating to the business of
Employer that has not otherwise been made public, including but not limited to
Employer's present or prospective clients, franchises, management contracts or
acquisitions. In the event of an actual or threatened breach by Employee of the
provisions of this paragraph, Employer shall be entitled to injunctive relief
restraining Employee from committing such breach or threatened breach. Nothing
herein stated shall be construed as preventing Employer from pursuing any other
remedies available to Employer for such breach or threatened breach, including
the recovery of damages from Employee.
6. Notices. Any notice, request or demand required or permitted to be
given under this Agreement shall be in writing, and shall be delivered
personally to the recipient or, if sent by certified or registered mail to his
residence in the case of Employee, or to its principal office in the case of the
Employer. Such notice shall be deemed given when delivered if personally
delivered or within three days of mailing if sent certified or registered mail.
7. Elective Positions.
(a) Nothing contained in this Agreement is intended to nor shall be
construed to abrogate, limit or affect the powers, rights and privileges of the
Board of Directors or stockholders to remove Employee from the positions set
forth in Section 1, with or without Cause (as defined in Section 10 below),
during the term of this Agreement or to elect someone other than Employee to
those positions, as provided by law and the By-Laws of Employer; provided,
however, that if Employee is Constructively Terminated (as defined in Section
7(b) below), it is expressly understood and agreed that Employee's rights under
this Agreement shall in no way be prejudiced, and Employee shall be entitled to
receive compensation referred to in Section 3 above, except ungranted stock
options (but including the continued vesting of previously granted restricted
stock and stock options). Employee upon removal shall not be required to
mitigate damages but nevertheless shall be entitled to pursue other employment,
and Employer shall be entitled to receive as offset and thereby reduce its
payment, the amount received by Employee from any other active employment. As a
condition to Employee receiving his compensation from Employer, Employee agrees
to permit verification of his employment records and Federal income tax returns
by an independent attorney or accountant, selected by Employer but reasonably
acceptable to Employee, who agrees to preserve the confidentiality of the
information disclosed by Employee except to the extent required to permit
Employer to verify the amount received by Employee from other active employment.
Employer shall receive credit for unemployment insurance benefits, social
security insurance or like amounts actually received by Employee.
(b) For purposes of this Section 7, "Constructively Terminated" shall
mean removal or termination of Employee other than in accordance with Section
10, failure of the Employer to place Employee's name in nomination for
re-election to the Choice Hotels Board, assignment of duties by the Employer
inconsistent with Section 1, a change in Employee's title or the line of
reporting set forth in Section 1 or any other material breach of this Agreement
by Employer
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<PAGE> 6
provided Employer shall be given fourteen days advance written notice of such
claim of material breach, which written notice shall specify in reasonable
detail the grounds for such claim of material breach. Except in the case of bad
faith, Employer shall have an opportunity to cure the basis for Constructive
Termination during the fourteen day period after written notice.
8. Waiver of Breach. The waiver of either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
9. Assignment. The rights and obligations of Employer under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of Employer. The obligations of Employee hereunder may not be
assigned or delegated.
10. Termination of Agreement. This Agreement shall terminate upon the
following events and conditions:
(a) Upon expiration of its term;
(b) For Cause which means, including but not limited to, refusal to
carry out duties and instructions of the Employer's Board of Directors
consistent with the position, material dishonesty, a violation or a
willful breach of this Agreement, conviction of a felony involving
moral turpitude, fraud or misappropriation of corporate funds or any
willful acts or omissions inimical to or contrary to material policies
of Employer not arbitrarily applied in the case of Employee. In the
event of termination by Employer for Cause, vested but unexercised
options granted during the term of this Agreement shall be forfeited as
a result thereof, as of the date of notice and Employer shall have the
right to purchase from Employee, at the price paid by Employee, such of
its Common Stock as has been acquired by Employee by exercise of a
stock option granted during the term of this Agreement if such exercise
is within six (6) months prior to termination of this Agreement as a
result of such breach. Employee shall be entitled to fourteen (14) days
advance written notice of termination, except where the basis for
termination constitutes conduct on the part of Employee involving
dishonesty or bad faith, in which case the termination shall be
effective upon the sending of notice. Such written notice shall specify
in reasonable detail the grounds for Cause. Except in the case of
material dishonesty, bad faith, conviction of a felony or fraud,
Employee shall have an opportunity to cure the basis for termination
during the fourteen day period after written notice.
(c) If Employee is unable to perform the essential functions of the
services described herein for more than 180 days (whether or not
consecutive) in any period of 365 consecutive days, Employer shall have
the right to terminate this Agreement by written notice to Employee. In
the event of such termination, all non-vested obligations of Employer
to Employee pursuant to this Agreement shall terminate.
(d) In the event of Employee's death during the term of this Agreement,
the Agreement shall terminate as of the date thereof.
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<PAGE> 7
11. Legal Fees. Employer shall reimburse the Employee for all
reasonable attorneys fees incurred in connection with the negotiation and
execution of this Agreement.
12. Registration Rights. The Employer shall use its reasonable best
efforts to register on Form S-8 the restricted stock issued pursuant to Section
3(c) and the nonqualified options issued pursuant to Section 3(f) of this
Agreement. All costs in connection with such registration shall be borne by the
Employer.
13. Entire Agreement. This instrument contains the entire agreement of
the parties. It may be changed only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension,
or discharge is sought. This Agreement shall be governed by the laws of the
State of Maryland, and any disputes arising out of or relating to this Agreement
shall be brought and heard in any court of competent jurisdiction in the State
of Maryland.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
7
<PAGE> 8
14. BOARD APPROVAL. NOTWITHSTANDING ANY OTHER PROVISION TO THE
CONTRARY, THIS AGREEMENT IS SUBJECT TO THE APPROVAL OF THE CHOICE HOTELS BOARD
AND THE CHOICE FRANCHISING BOARD AT ITS SEPTEMBER 30, 1996 MEETING AND SHALL NOT
BE VALID, BINDING AND ENFORCEABLE PRIOR THERETO. PRIOR TO SUCH APPROVAL, NEITHER
PARTY HERETO SHALL MAKE ANY PUBLIC ANNOUNCEMENT WITH RESPECT TO THIS AGREEMENT
OR THE EMPLOYMENT OF EMPLOYEE BY EMPLOYER.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first set forth above.
Employer:
CHOICE HOTELS INTERNATIONAL, INC.
By:
------------------------------
James H. Rempe
Senior Vice President
CHOICE HOTELS HOLDINGS, INC.
(to be renamed Choice Hotels International, Inc.)
By:
-----------------------------
James H. Rempe
Senior Vice President
Employee:
--------------------------------
William R. Floyd
8
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
This Agreement ("Agreement") dated this __ day of October, 1996 among
Choice Hotels International, Inc. (to be renamed Choice Hotels Franchising,
Inc.) ("Choice Franchising") and Choice Hotels Holdings, Inc. (to be renamed
Choice Hotels International, Inc.) ("Choice Hotels" and, collectively with
Choice Franchising, the "Employer"), both Delaware corporations with principal
offices at 10750 Columbia Pike, Silver Spring, Maryland 20901, and James A.
MacCutcheon ("Employee"), sets forth the terms and conditions governing the
employment relationship between Employee and Employer.
1. Employment. During the term of this Agreement, as hereinafter
defined, Employer hereby employs Employee as Chief Financial Officer ("CFO") and
Executive Vice President. Employee hereby accepts such employment upon the terms
and conditions hereinafter set forth and agrees to faithfully and to the best of
his ability perform such duties as may be from time to time assigned by
Employer's Board of Directors or Chief Executive Officer (CEO), such duties to
be rendered at the principal office of Employer, subject to reasonable travel.
The Employer shall assign to Employee only those duties consistent with his
position as CFO and Executive Vice President. The Employee, in his position as
CFO, shall report directly to the CEO. The Employee also agrees to perform his
duties in accordance with policies established by Employer's Board of Directors,
which may be changed from time to time. After the distribution of Choice Hotels
common stock to the stockholders of Manor Care, Inc. (the "Distribution Date"),
the term "Employer" under this Agreement shall refer solely to Choice Hotels.
2. Term. Subject to the provisions for termination hereinafter
provided, the term of this Agreement shall begin on October __, 1996 ("Effective
Date") and shall terminate five (5) years thereafter (the "Termination Date").
The Termination Date shall automatically be extended for successive one-year
terms unless either party gives written notice no less than nine months prior to
the Termination Date that it elects not to extend the Termination Date.
3. Compensation. For all services rendered by Employee under this
Agreement during the term thereof, Employer shall pay Employee the following
compensation:
(a) Salary. A base salary of Three Hundred Thirteen Thousand
Five Hundred Seventy-eight Dollars ($313,578) per annum
payable in equal bi-weekly installments. Such salary shall be
reviewed by the Compensation Committee of the Board of
Directors of Employer on the first anniversary of the
Effective Date and thereafter at the end of each fiscal year
and may be increased at the discretion of Employer.
(b) Incentive Bonus. Employee shall have the opportunity to
earn up to a maximum of Fifty-five Percent (55%) per annum of
the base salary set forth in subparagraph 3(a) above in
Employer's bonus plans as adopted from time to time by
Employer's Board of Directors. For the Employer's 1997 fiscal
year, the Employee's bonus shall be calculated on a pro rata
basis from the Effective Date.
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<PAGE> 2
(c) Automobile. Employer shall provide Employee with an
allowance for automobile expenses of $975 per month.
(d) Club Membership. Employer shall pay Employee's corporate
membership fees at an appropriate country and/or recreational
club at the choice of Employee for the purpose of business
entertainment.
(e) Stock Options. Employee shall be eligible to receive
options under the Choice Hotels International, Inc. Long Term
Incentive Plan ("LTIP"), or similar plan, to purchase Common
Stock in accordance with the policy of the Choice Hotels Board
as in effect from time to time.
(f) Other Benefits. Employee shall, when eligible, be entitled
to participate in all other fringe benefits, including
vacation policy, generally accorded the most senior executive
officers of Employer as are in effect from time to time on the
same basis as such other senior executive officers.
4. Extent of Services. Employee shall devote his full professional
time, attention, and energies to the business of Employer, and shall not during
the term of this Agreement be engaged in any other business activity whether or
not such business activity is pursued for gain, profit, or other pecuniary
advantage; but the foregoing shall not be construed as preventing Employee from
investing his assets in the securities of public companies, or the securities of
private companies or limited partnerships outside the lodging industries if such
holdings are passive investments of one percent or less of outstanding
securities and Employee does not hold positions of director, officer, employee
or general partner. Employee warrants and represents that he has no contracts or
obligations to others which would materially inhibit the performance of his
services under this Agreement.
5. Disclosure and Use of Information. Employee recognizes and
acknowledges that Employer's and affiliates' present and prospective clients,
franchises, management contracts, acquisitions and personnel, as they may exist
from time to time, are valuable, special and unique assets of Employer's
business. Throughout the term of this Agreement and for a period of two (2)
years after its termination or expiration for whatever cause or reason except as
required by applicable law, Employee shall not directly or indirectly, or cause
others to, make use of or disclose to others any information relating to the
business of Employer that has not otherwise been made public, including but not
limited to Employer's present or prospective clients, franchises, management
contracts, personnel or acquisitions. In the event of an actual or threatened
breach by Employee of the provisions of this paragraph, Employer shall be
entitled to injunctive relief restraining Employee from committing such breach
or threatened breach. Nothing herein stated shall be construed as preventing
Employer from pursuing any other remedies available to Employer for such breach
or threatened breach, including the recovery of damages from Employee.
6. Notices. Any notice, request or demand required or permitted to be
given under this Agreement shall be in writing, and shall be delivered
personally to the recipient or, if sent by
2
<PAGE> 3
certified or registered mail to his residence in the case of Employee, or to its
principal office in the case of the Employer. Such notice shall be deemed given
when delivered if personally delivered or within three days of mailing if sent
certified or registered mail.
7. Elective Positions.
(a) Nothing contained in this Agreement is intended to nor shall be
construed to abrogate, limit or affect the powers, rights and privileges of the
Board of Directors or stockholders to remove Employee from the positions set
forth in Section 1, with or without Cause (as defined in Section 10 below),
during the term of this Agreement or to elect someone other than Employee to
those positions, as provided by law and the By-Laws of Employer; provided,
however, that if Employee is Constructively Terminated (as defined in Section
7(b) below), it is expressly understood and agreed that Employee's rights under
this Agreement shall in no way be prejudiced, and Employee shall be entitled to
receive compensation referred to in Section 3 above, except ungranted stock
options (but including the continued vesting of previously granted restricted
stock and stock options). Employee upon removal shall not be required to
mitigate damages but nevertheless shall be entitled to pursue other employment,
and Employer shall be entitled to receive as offset and thereby reduce its
payment, the amount received by Employee from any other active employment. As a
condition to Employee receiving his compensation from Employer, Employee agrees
to permit verification of his employment records and Federal income tax returns
by an independent attorney or accountant, selected by Employer but reasonably
acceptable to Employee, who agrees to preserve the confidentiality of the
information disclosed by Employee except to the extent required to permit
Employer to verify the amount received by Employee from other active employment.
Employer shall receive credit for unemployment insurance benefits, social
security insurance or like amounts actually received by Employee.
(b) For purposes of this Section 7, "Constructively Terminated" shall
mean removal or termination of Employee other than in accordance with Section
10, assignment of duties by the Employer inconsistent with Section 1, a change
in Employee's title or line of reporting as set forth in Section 1 or any other
material breach of this Agreement by Employer provided Employer shall be given
fourteen days advance written notice of such claim of material breach, which
written notice shall specify in reasonable detail the grounds for such claim of
material breach. Except in the case of bad faith, Employer shall have an
opportunity to cure the basis for Constructive Termination during the fourteen
day period after written notice.
8. Waiver of Breach. The waiver of either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
9. Assignment. The rights and obligations of Employer under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of Employer. The obligations of Employee hereunder may not be
assigned or delegated.
10. Termination of Agreement. This Agreement shall terminate upon the
following
3
<PAGE> 4
events and conditions:
(a) Upon expiration of its term;
(b) For Cause which means, including but not limited to, refusal to
carry out duties and instructions of the Employer's Board of Directors
and/or CEO consistent with the position, material dishonesty, a
violation or a willful breach of this Agreement, conviction of a felony
involving moral turpitude, fraud or misappropriation of corporate funds
or any willful acts or omissions inimical to or contrary to material
policies of Employer not arbitrarily applied in the case of Employee.
In the event of termination by Employer for Cause, vested but
unexercised options granted during the term of this Agreement shall be
forfeited as a result thereof, as of the date of notice and Employer
shall have the right to purchase from Employee, at the price paid by
Employee, such of its Common Stock as has been acquired by Employee by
exercise of a stock option granted during the term of this Agreement if
such exercise is within six (6) months prior to termination of this
Agreement as a result of such breach. Employee shall be entitled to
fourteen (14) days advance written notice of termination, except where
the basis for termination constitutes conduct on the part of Employee
involving dishonesty or bad faith, in which case the termination shall
be effective upon the sending of notice. Such written notice shall
specify in reasonable detail the grounds for Cause. Except in the case
of material dishonesty, bad faith, conviction of a felony or fraud,
Employee shall have an opportunity to cure the basis for termination
during the fourteen day period after written notice.
(c) If Employee is unable to perform the essential functions of the
services described herein for more than 180 days (whether or not
consecutive) in any period of 365 consecutive days, Employer shall have
the right to terminate this Agreement by written notice to Employee. In
the event of such termination, all non-vested obligations of Employer
to Employee pursuant to this Agreement shall terminate.
(d) In the event of Employee's death during the term of this Agreement,
the Agreement shall terminate as of the date thereof.
11. Legal Fees. Employer shall reimburse the Employee for all
reasonable attorneys fees incurred in connection with the negotiation and
execution of this Agreement.
12. Entire Agreement. This instrument contains the entire agreement of
the parties. It may be changed only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension,
or discharge is sought. This Agreement shall be governed by the laws of the
State of Maryland, and any disputes arising out of or relating to this Agreement
shall be brought and heard in any court of competent jurisdiction in the State
of Maryland.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first set forth above.
Employer:
CHOICE HOTELS INTERNATIONAL, INC.
By: ______________________________
James H. Rempe
Senior Vice President
CHOICE HOTELS HOLDINGS, INC.
(to be renamed Choice Hotels International, Inc.)
By:_______________________________
James H. Rempe
Senior Vice President
Employee:
__________________________________
James A. MacCutcheon
5
