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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A-2
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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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (301) 979-5000
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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COMMON STOCK, PAR NEW YORK STOCK EXCHANGE
VALUE $.01 PER SHARE
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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 dated , 1996 (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
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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.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On September , 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:
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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 and May 31, 1996;
-- Combined Statements of Income for each of the fiscal years in the three-year
period ended May 31, 1996;
-- Combined Statements of Cash Flows for each of the fiscal years in the
three-year period ended May 31, 1996;
-- Notes to Combined Financial Statements.
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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.
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(b) Exhibits
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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 , 1996 between Manor Care,
Inc. and the Registrant**
10.02 Form of Trademark Agreement, dated , 1996, between Manor Care,
Inc. and the Registrant*
10.03 Form of Assignment of Marks Agreement dated , 1996 between
Manor Care Hotels International, Inc. and Choice Hotels France, S.A.*
10.04 Form of Time Sharing Agreement dated , 1996 between Manor Care,
Inc. and the Registrant*
10.05 Form of Corporate Services Agreement, dated , 1996, between
Manor Care, Inc. and the Registrant*
10.06 Form of Employee Benefits Administration Agreement, dated ,
1996, between Manor Care, Inc. and the Registrant*
10.07 Form of Employee Benefits and Other Employment Matters Allocation
Agreement, dated , 1996, between Manor Care, Inc. and the
Registrant*
10.08 Form of Office Lease dated , 1996 between Manor Care, Inc. and
the Registrant*
10.09 Form of Office Lease dated , 1996 between Manor Care, Inc. and
the Registrant*
10.10 Form of Loan Agreement dated , 1996 between MNR Finance Corp.
and the Registrant***
10.11 Form of Procurement Agreement, dated , 1996, between Manor Care,
Inc. and the Registrant*
10.12 Form of Risk Management Consulting Services Agreement, dated ,
1996, between Manor Care, Inc. and the Registrant*
10.13 Form of Tax Administration Agreement, dated , 1996, between
Manor Care, Inc. and the Registrant*
10.14 Form of Tax Sharing Agreement, dated , 1996, 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, dated , 1996 among Manor Care,
Inc., the Registrant and Donald Landry.*
10.17 Employment Agreement dated , 1996 between the Registrant and
Stewart Bainum, Jr.***
10.18 Agreement, dated June 1, 1996 among the Registrant, Manor Care, Inc. and
Robert C. Hazard, Jr.*
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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10.19 Agreement, dated June 1, 1996, among the Registrant, Manor Care Inc. and
Gerald W. Petitt*
10.20 Form of Choice Hotels International, Inc. Supplemental Executive
Retirement Plan**
10.21 Form of Choice Hotels International, Inc. Non-Employee Director Stock
Option and Deferred Compensation Stock Purchase Plan**
10.22 Form of Choice Hotels International, Inc. 1996 Non-Employee Director Stock
Compensation Plan**
10.23 Form of Choice Hotels International, Inc. 1996 Long-Term Incentive Plan**
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*
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* Previously filed.
** Filed herewith.
*** To be filed by amendment.
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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: September 13, 1996 By: *
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Name: Stewart Bainum, Jr.
Title: Chief Executive Officer
* /s/ JAMES H. REMPE
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James H. Rempe
Attorney-in-Fact
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INDEX TO EXHIBITS
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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 , 1996 between Manor
Care, Inc. and the Registrant**.........................................
10.02 Form of Trademark Agreement, dated , 1996, between Manor Care,
Inc. and the Registrant*................................................
10.03 Form of Assignment of Marks Agreement dated , 1996 between
Manor Care Hotels International, Inc. and Choice Hotels France, S.A.*...
10.04 Form of Time Sharing Agreement dated , 1996 between Manor
Care, Inc. and the Registrant*..........................................
10.05 Form of Corporate Services Agreement, dated , 1996, between
Manor Care, Inc. and the Registrant*....................................
10.06 Form of Employee Benefits Administration Agreement, dated ,
1996, between Manor Care, Inc. and the Registrant*......................
10.07 Form of Employee Benefits and Other Employment Matters Allocation
Agreement, dated , 1996, between Manor Care, Inc. and the
Registrant*.............................................................
10.08 Form of Office Lease dated , 1996 between Manor Care, Inc. and
the Registrant*.........................................................
10.09 Form of Office Lease dated , 1996 between Manor Care, Inc. and the
Registrant*.............................................................
10.10 Form of Loan Agreement dated , 1996 between MNR Finance Corp.
and the Registrant***...................................................
10.11 Form of Procurement Agreement, dated , 1996, between Manor
Care, Inc. and the Registrant*..........................................
10.12 Form of Risk Management Consulting Services Agreement, dated ,
1996, between Manor Care, Inc. and the Registrant*......................
10.13 Form of Tax Administration Agreement, dated , 1996, between
Manor Care, Inc. and the Registrant*....................................
10.14 Form of Tax Sharing Agreement, dated , 1996, 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, dated , 1996 among Manor Care,
Inc., the Registrant and Donald Landry.*................................
10.17 Employment Agreement dated , 1996 between the Registrant and
Stewart Bainum, Jr.***..................................................
10.18 Agreement, dated June 1, 1996 among the Registrant, Manor Care, Inc. and
Robert C. Hazard, Jr.*..................................................
10.19 Agreement, dated June 1, 1996, among the Registrant, Manor Care Inc. and
Gerald W. Petitt*.......................................................
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EXHIBIT
NUMBER DESCRIPTION
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10.20 Form of Choice Hotels International, Inc. Supplemental Executive
Retirement Plan**.......................................................
10.21 Form of Choice Hotels International, Inc. Non-Employee Director Stock
Option and Deferred Compensation Stock Purchase Plan**..................
10.22 Form of Choice Hotels International, Inc. 1996 Non-Employee Director
Stock Compensation Plan**...............................................
10.23 Form of Choice Hotels International, Inc. 1996 Long-Term Incentive
Plan**..................................................................
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*.......................
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* Previously filed.
** Filed herewith.
*** To be filed by amendment.
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[MANOR CARE LETTERHEAD]
, 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 to holders of record of Manor Care common
stock on , 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
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PRELIMINARY 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 , 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 , 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. Application has been made to list the Company's Common Stock
on the New York Stock Exchange.
Stockholders of Manor Care with inquiries related to the Distribution
should contact the Investor Relations Department of Manor Care at (301)
905-4408. 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.
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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.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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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 , 1996.
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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...................................................................... 18
Dividend Policy..................................................................... 18
Selected Historical Financial Data.................................................. 19
Pro Forma Financial Data............................................................ 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 21
Business............................................................................ 25
General........................................................................... 25
The Lodging Industry.............................................................. 25
Franchise Business................................................................ 27
Owned and Managed Lodging Business................................................ 38
Competition....................................................................... 42
Service Marks and Other Intellectual Property..................................... 43
Non-Hotel Properties.............................................................. 43
Seasonality....................................................................... 43
Regulation........................................................................ 44
Insurance......................................................................... 44
Impact of Inflation and Other External Factors.................................... 44
Employees......................................................................... 45
Legal Proceedings................................................................. 45
Environmental Matters............................................................. 45
Management.......................................................................... 47
Executive Officers of the Company................................................. 47
Compensation of Executive Officers................................................ 48
Employment Agreements............................................................. 50
Retirement Plans.................................................................. 51
Option and Stock Purchase Plans................................................... 52
The Board of Directors.............................................................. 52
Directors of the Company.......................................................... 52
Certain Relationships and Related Transactions...................................... 55
Security Ownership of Principal Stockholders and Management......................... 56
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Description of Capital Stock of the Company......................................... 59
Common Stock...................................................................... 59
Preferred Stock................................................................... 59
Preemptive Rights................................................................. 59
Purposes and Effects of Certain Charter and By-law Provisions....................... 59
General........................................................................... 59
Liability and Indemnification of Officers and Directors............................. 60
Elimination of Liability in Certain Circumstances................................. 60
Indemnification and Insurance..................................................... 60
Available Information............................................................... 61
Index to Combined Financial Statements.............................................. F-1
Appendix A -- Form of Restated Certificate of Incorporation of the Company.......... A-1
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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 the period was $28.6 million.
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.
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
1
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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 shares (the "Shares")
of common stock, par value $.01 per share of
the Company, based on shares of
common stock, par value $.10 per share, of
Manor Care ("Manor Care Common Stock")
outstanding as of , 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.... Application has been made to list the Shares on
the New York Stock Exchange under the symbol
"CHH." See "The Distribution -- Listing and
Trading of Shares of the Company's Common
Stock."
Record Date................... Close of business on , 1996.
Distribution Date............. As of , 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.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------------------
1994 1995 1996 PRO FORMA(A)
-------- -------- -------- 1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT RATIO DATA)
STATEMENT OF INCOME DATA:
Revenues........................................... $239,764 $302,535 $374,873 $387,819
Operating expenses................................. 206,722 250,476 334,083(b) 349,961(b)
-------- -------- -------- ------------
Income before other expenses and income taxes...... 33,042 52,059 40,790 37,858
Interest expense on notes payable to Parent........ 10,665 15,492 19,673 20,339
Minority interest and other interest
and other expenses, net.......................... 4,699 6,612 5,259 3,727
-------- -------- -------- ------------
Income before income taxes......................... 17,678 29,955 15,858 13,792
Income taxes....................................... 8,019 13,144 7,400 6,429
-------- -------- -------- ------------
Net income............................... $ 9,659 $ 16,811 $ 8,458 $ 7,363
======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
MAY 31,
-------------------
1995 1996
-------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.................................... $(34,663) $ (7,606)
Total assets....................................... 391,475 491,304
Notes payable to Parent............................ 198,522 225,723
Total debt......................................... 251,191 294,861
Investments and advances from Parent............... 65,829 147,559
RATIO DATA:
Ratio of earnings to fixed charges (c)............. 2.47x 1.63x
======== ========
</TABLE>
- ---------------
(a) The pro forma statement of operations data for the year ended May 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, as if all such transactions 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 , 1996, the Board of Directors of
Manor Care declared a dividend to effect the Distribution and set the Record
Date and Distribution Date. On , 1996, the high and low sales prices
of the Manor Care Common Stock as reported on the New York Stock Exchange
Composite Tape were $ and $ , 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
, 1996 (the "Distribution Date") to stockholders of record of Manor
Care at the close of business on , 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
Application has been made for listing of the Shares on the New York Stock
Exchange (the "NYSE") under the symbol "CHH." As of the Distribution Date, the
Company is expected to have approximately holders of record of the
Shares, based on the number of holders of record of Manor Care Common Stock on
the Record Date.
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
, 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
The ability of the Company to operate successfully is dependent, in part,
upon the continued services of certain of its employees, including Stewart
Bainum, Jr., the Chairman and Chief Executive Officer of the Company and Manor
Care, Inc. and Donald J. Landry, the President of the Company. Mr. Bainum, Jr.'s
employment agreement with the Company will be for a term of years from the
Distribution Date. Mr. Landry's employment agreement with Choice Hotels
International, Inc. extends through November 30, 1999. There can be no assurance
that a suitable replacement for either Mr. Bainum, Jr. or Mr. Landry could be
found in the event of termination of either of their employment. Following the
Distribution, Mr. Bainum, Jr. will devote approximately one-third 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 two-thirds of his time to Manor Care and one-third 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."
POTENTIAL INDEMNIFICATION OBLIGATIONS FOR CERTAIN ENVIRONMENTAL CLAIMS
Pursuant to the Distribution Agreement, the Company will indemnify Manor
Care and its subsidiaries and affiliates from liabilities of predecessor
companies of Manor Care relating to waste disposal sites which allegedly are or
may be subject to remedial action under federal and state environmental laws.
The indemnity covers all losses arising from pending and future actions that are
not covered by Manor Care's insurance. Manor Care and its insurers are
vigorously contesting liability in the pending actions and it is not possible at
the present time to estimate the Company's ultimate indemnification liability,
if any. The Company believes that its indemnification obligations, if any, will
not have a material adverse effect on its business, financial conditions or
results of operations. See "Relationship Between Manor Care and the Company
After the Distribution -- Distribution Agreement -- Certain Environmental and
Other Claims Indemnification" and "Business -- Environmental Matters."
11
<PAGE> 16
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, (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,
and indemnification for environmental claims and liabilities specifically
addressed by the provision 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.
CERTAIN ENVIRONMENTAL AND OTHER CLAIMS INDEMNIFICATION. In addition to the
indemnification described above, the Company has agreed to indemnify Manor
HealthCare Corp. ("HealthCare"), Manor Care, their affiliates, subsidiaries and
their respective directors, employees and agents (collectively, the
"Indemnitees") from any and all losses which may arise from (i) certain pending
environmental claims; and (ii) currently unknown but potential or future
environmental, third party personal injury and other claims arising out of the
activities or operations of, or conditions affecting properties formerly or
presently owned, leased, operated or used by, Cenco Incorporated a corporation
that was merged into HealthCare in 1982, its subsidiary and affiliated
companies, and any and all of Cenco Incorporated's predecessor corporations,
subsidiaries and affiliates (together, "Cenco"). The losses to be indemnified by
the Company include, among other things, all amounts required to be reimbursed
to a third-party insurer for insurance proceeds previously paid by the insurer,
all deductible amounts required to be paid under any insurance policy before
coverage attaches to a claim, all amounts paid to third parties in excess of
insurance coverage, all amounts not paid by insurers with respect to current,
potential and future claims and, as to certain sites owned by affiliates of
HealthCare, all sums necessary to comply with any and all federal, state and
local regulatory and judicial consent decrees or orders or any settlements
regarding environmental remediation of these properties in excess of the
reserves reflected in the most recent monthly balance sheet of HealthCare
available prior to the Distribution Date. The Company cannot predict the amount
it may have to pay to Indemnitees in the future to satisfy this indemnity
obligation. See "Business -- Environmental Matters" and "Risk
Factors -- Potential Indemnification Obligations."
13
<PAGE> 18
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.
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
14
<PAGE> 19
("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. 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, as
soon as practicable after the Distribution Date, 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 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. On 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. Certain employees 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 the common stock of the
company 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 to the common stock of the company 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 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,
15
<PAGE> 20
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 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, 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. Interest on the amount of the loan will be payable semiannually at a
rate of 9% per annum. The loan will mature on , 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. 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
16
<PAGE> 21
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, sell receivables, enter into transactions with affiliates and
otherwise restrict certain corporate activities. The Credit Facility will also
restrict the Company's ability to pay dividends. In addition, the Credit
Facility will contain, among other financial covenants, requirements that the
Company maintain specified financial ratios, including maximum leverage and
minimum interest coverage.
17
<PAGE> 22
CAPITALIZATION
The following table sets forth the unaudited combined capitalization of the
Company as of May 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>
MAY 31, 1996
--------------
(IN THOUSANDS)
<S> <C>
Debt (including current portion)
Mortgage loans and other long term debt.............................. $ 69,138
Notes payable to Parent.............................................. 225,723
--------
Total debt................................................... 294,861
Equity................................................................. 147,559
--------
Total capitalization......................................... $442,420
========
</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 and the
Credit Facility will restrict the Company's ability to pay dividends. See
"Financing."
18
<PAGE> 23
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.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------------------------------
1992 1993 1994 1995 1996
----------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues
Franchise....................................... $125,347 $137,346 $165,581 $188,021 $219,164
Hotel operations................................ 34,878 41,361 74,183 114,514 155,709
-------- -------- -------- -------- --------
Total revenues........................... 160,225 178,707 239,764 302,535 374,873
-------- -------- -------- -------- --------
Operating expenses
Franchise marketing............................. 33,772 37,567 45,373 45,510 49,658
Franchise reservations.......................... 23,261 22,941 26,685 28,738 35,677
Hotel operations................................ 20,432 35,255 60,062 84,711 106,120
Selling, general and administrative expenses.... 45,949 44,745 57,081 69,676 83,267
Depreciation and amortization................... 12,924 14,605 17,521 21,841 26,026
Provision for asset impairment and
restructuring................................. -- -- -- -- 33,335(a)
-------- -------- -------- -------- --------
Total operating expenses................. 136,338 155,113 206,722 250,476 334,083
-------- -------- -------- -------- --------
Income before other expenses and income taxes..... 23,887 23,594 33,042 52,059 40,790
-------- -------- -------- -------- --------
Other expenses
Interest expense on notes payable to Parent..... -- 7,083 10,665 15,492 19,673
Minority interest............................... 1,004 900 1,476 2,200 1,532
Other interest and other
expenses, net................................. 1,441 2,177 3,223 4,412 3,727
-------- -------- -------- -------- --------
Total other expenses..................... 2,445 10,160 15,364 22,104 24,932
-------- -------- -------- -------- --------
Income before income taxes........................ 21,442 13,434 17,678 29,955 15,858
Income taxes...................................... 8,660 5,780 8,019 13,144 7,400
-------- -------- -------- -------- --------
Net income........................................ $ 12,782 $ 7,654 $ 9,659 $ 16,811 $ 8,458
======== ======== ======== ======== ========
BALANCE SHEET DATA
Total assets...................................... $194,078 $250,371 $303,158 $391,475 $491,304
Notes payable to Parent........................... -- $ 78,700 $147,061 $198,522 $225,723
Total debt........................................ $ 20,902 $129,670 $200,875 $251,191 $294,861
Total liabilities................................. $ 50,313 $159,624 $247,950 $325,646 $343,745
Total investments and advances from Parent........ $143,765 $ 90,747 $ 55,208 $ 65,829 $147,559
</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.
19
<PAGE> 24
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 date indicated or of those results that may be obtained in the
future. The pro forma combined statement of income is 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 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 note (c).
(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 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.
20
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On March 7, 1996, Manor Care announced the Distribution. 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 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 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 and fees charged for utilization of the Company's centralized
hotel reservation system. These 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. 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. The remaining portion of the increase for each
fiscal year relates to European operations and other international revenues.
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
21
<PAGE> 26
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%.
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 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.
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
22
<PAGE> 27
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 May 31, 1996 and May 31, 1995, notes payable to Parent by the Company
totaling $225.7 million and $198.5 million, respectively, 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, 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
, 1999. 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% from the prior fiscal year.
The Company's working capital ratio at May 31, 1996 and May 31, 1995 was
0.8 and 0.4, 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 fiscal year ended May 31, 1996, the Company
purchased 16 operating hotels for $49.6 million. During the fiscal year ended
May 31, 1995, the Company purchased 16 operating hotels for $59.8 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
23
<PAGE> 28
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 $294.2 million at May
31, 1996 compared to $250.6 million at May 31, 1995. Notes payable to Parent
totaling $225.7 million are to be repaid over a three year period from the
Distribution Date. The increase in long term debt and notes payable to Parent is
mainly attributable to the Company's acquisition of 16 operating hotels in
fiscal year 1996.
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.
24
<PAGE> 29
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 the period
was $28.6 million.
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
charged. Since 1993, the lodging industry has been able to increase its average
daily rate ("ADR") at a pace
25
<PAGE> 30
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 independent status or from
another chain were in the economy category, 37% were in the middle-market
26
<PAGE> 31
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.
27
<PAGE> 32
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.
28
<PAGE> 33
- 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.
29
<PAGE> 34
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.
[CHART]
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>
30
<PAGE> 35
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>
31
<PAGE> 36
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
32
<PAGE> 37
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
33
<PAGE> 38
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.
34
<PAGE> 39
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.
35
<PAGE> 40
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
36
<PAGE> 41
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
37
<PAGE> 42
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.
38
<PAGE> 43
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 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
39
<PAGE> 44
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>
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
40
<PAGE> 45
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
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
</TABLE>
41
<PAGE> 46
<TABLE>
<CAPTION>
NUMBER
OF
HOTEL MARKET ROOMS
------------------------------------------------ --------------------------- ------
<S> <C> <C>
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
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,
42
<PAGE> 47
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).
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
43
<PAGE> 48
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 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.
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<PAGE> 49
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.
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.
Pursuant to the Distribution Agreement, the Company has agreed to indemnify
Manor Care, its affiliates and certain other persons for liabilities related to
the Lodging Business which will be assumed by the Company and for certain other
specified environmental, third party personal injury and other liabilities
arising out of the alleged activities of Cenco. See "Relationship Between Manor
Care and the Company After the Distribution--Distribution Agreement."
One or more subsidiaries or affiliates of Manor Care have been identified
as defendants and/or potentially responsible parties ("PRPs") in a variety of
actions (the "Actions") relating to alleged activities of Cenco at approximately
eleven waste disposal sites, which allegedly are subject to remedial action
under the Comprehensive Environmental Response, Compensation & Liability Act, as
amended, 42 U.S.C. sec.sec. 9601 et seq. ("CERCLA") and similar state laws.
CERCLA imposes retroactive, strict, joint and several liability on PRPs for the
costs of hazardous substance clean-up. The Actions allege that Cenco transported
and/or generated hazardous substances that came to be located at the sites in
question prior to Healthcare's acquisition of Cenco. Environmental proceedings
such as the Actions may involve owners and/or operators of the hazardous waste
site and multiple waste generators and waste transportation disposal companies.
Such proceedings typically involve efforts of governmental entities and/or
private parties to allocate or recover site investigation and cleanup costs,
which costs may be substantial. None of the approximately eleven waste disposal
sites implicated in the Actions is related to the healthcare business of Manor
Care or the Lodging Business, and none of such sites is owned or operated by, or
will be owned or operated by, the Company. Certain of the sites currently are
owned or operated by affiliates of Manor Care. Manor Care believes it has
adequate insurance coverage for a substantial portion of the claims asserted in
the Actions. Pursuant to the Distribution Agreement, the Company will indemnify
Manor Care for any portion of the claims not covered by insurance.
45
<PAGE> 50
The most significant Action for Manor Care arises from the Kramer landfill,
located in Mantua, New Jersey. On October 30, 1989, the New Jersey Department of
Environmental Protection sued Manor Care and other defendants in U.S. District
Court, District of New Jersey, seeking clean-up costs at the site where
subsidiaries of Cenco allegedly transported waste. At about the same time, the
United States filed a lawsuit against approximately 25 defendants in the same
court seeking recovery of its expenses arising in connection with this site.
Manor Care is a third party defendant in the latter suit. Based upon a recent
court-approved final allocation plan, and also in view of its insurance
coverage, Manor Care believes that the Kramer Action will not have a material
adverse effect on its financial condition or results of operations. The Company
believes that any liability it may have for indemnification of Manor Care will
not have a material adverse effect on the Company's business, financial
condition or results of operations. This final allocation plan is not binding.
If the matter is not resolved by settlement, a court would have to allocate
responsibility and Manor Care's allocation could change.
Although Manor Care, together with its insurers, is vigorously contesting
its liability in the Actions, it is not possible at the present time to estimate
the ultimate legal and financial liability of Manor Care with respect to the
Actions or the ultimate indemnification liability, if any, 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 and Chief Executive Officer
Donald J. Landry.............. 47 President
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 and Acting
Chief Financial Officer
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 from March 1987 to
June 1990.
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.
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.
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.
Barry L. Smith. Senior Vice President - Marketing of Choice Hotels since
February 1989.
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<PAGE> 52
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 chief executive officer 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
the Lodging Business at May 31, 1996 who are no longer executive officers of the
Company.
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 1995 $572,308 $343,385 (5) -- $ 9,000
Chief Executive Officer 1994 457,867(4) 274,720 (5) 40,000 14,150
Antonio DiRico.................. 1996 179,904 71,962 (5) 8,000 2,225
Sr. Vice President, 1995 159,678 50,813 (5) -- 2,153
Hotel Operations 1994 133,719 0 (5) 5,000 1,986
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 and Acting 1994 133,270 0 (5) 10,000 1,868
Chief Financial Officer
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
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.(6)........ 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(6)............. 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. Smith,
$3,489; and Mr. DiRico, $890. 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. Smith, $6,938; and Mr. DiRico, $1,335.
(3) Following the Distribution, Mr. Bainum, Jr. will be the chief executive
officer of the Company and of Manor Care. It is expected that he will
devote one-third of his time to the Company and two-thirds 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. 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 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.
49
<PAGE> 54
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
Antonio DiRico(4)......... 8,000 1.4% $30.31 6/21/2005 $ 152,480 386,480
Richard P. Kaden(4)....... 8,000 1.4% $30.31 6/21/2005 $ 152,480 386,480
Donald J. Landry.......... -- -- -- -- -- --
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
Antonio DiRico........ -- -- 1,500 16,500 26,160 215,260
Richard P. Kaden...... -- -- 2,166 15,834 39,659 212,949
Donald J. Landry...... -- -- 37,000 148,000 810,190 2,668,922
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.
EMPLOYMENT AGREEMENTS
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
50
<PAGE> 55
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. The bonus provisions of the agreement will be amended in connection
with the Distribution.
It is contemplated that the Company will enter into an employment agreement
with Mr. Stewart Bainum, Jr. The terms of such agreement have not yet been
determined.
RETIREMENT PLANS
Prior to the Distribution, it is expected that the Company will adopt the
Choice Hotels International, Inc. Supplemental Executive Retirement Plan (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 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.
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
</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
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<PAGE> 56
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 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 2,000,000 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
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<PAGE> 57
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.
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 Vice Chairman; Class II Director
Barbara Bainum..................... 52 Class I 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 III 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).
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.
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
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<PAGE> 58
Insurance Company of North America, Cardinal Health, Inc., Coherent, Inc.,
Haemonics 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 the chief executive officer of both the Company and Manor Care. It
is expected that he will devote one-third of his time to the Company and
two-thirds of his time to Manor Care.
Upon consummation of the Distribution, the Board of Directors is expected
to consist of seven 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.
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<PAGE> 59
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."
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<PAGE> 60
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) *
Robert C. Hazard, Jr. ..................... 36,884(6) *
Richard B. Kaden........................... 6,210(7) *
Donald J. Landry........................... 38,778(8) *
Frederic V. Malek.......................... 2,666(9) *
Gerald W. Petitt........................... 82,937(10) *
Jerry E. Robertson, Ph.D. ................. 15,980(11) *
Barry L. Smith............................. 14,251(12) *
All Directors and Officers as a Group (14
persons)................................. 2,883,906(13) 42.2%
Ronald Baron............................... 4,345,184(14) 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, 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
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<PAGE> 61
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) 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.
(7) 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 shares purchased by Mr.
Kaden pursuant to the terms of the Manor Care Employee Stock Purchase Plan.
(8) 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.
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<PAGE> 62
(9) 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.
(10) 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").
(11) 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.
(12) 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.
(13) Includes a total of 780,532 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.
(14) 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.
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<PAGE> 63
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 at the
Record Date, it is expected that 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
59
<PAGE> 64
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). 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.
60
<PAGE> 65
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.
61
<PAGE> 66
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........................... F-3
Combined Statements of Income for the fiscal years ended May 31, 1994, May 31, 1995
and May 31, 1996.................................................................... F-4
Combined Statements of Cash Flows for the fiscal years ended May 31, 1994, May 31,
1995 and May 31, 1996............................................................... F-5
Notes to Combined Financial Statements................................................ F-6
</TABLE>
F-1
<PAGE> 67
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> 68
CHOICE HOTELS HOLDINGS, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................ $ 2,088 $ 4,142
Receivables (net of allowance for doubtful accounts of $4,202, and
$4,825, respectively)............................................. 21,946 30,619
Inventories.......................................................... 289 757
Current deferred income tax benefit.................................. -- 1,266
Prepaid expenses..................................................... 2,807 3,003
Other................................................................ 955 1,215
-------- --------
Total current assets......................................... 28,085 41,002
-------- --------
PROPERTY AND EQUIPMENT, AT COST, NET OF ACCUMULATED DEPRECIATION....... 257,156 299,527
-------- --------
LODGING FRANCHISE RIGHTS, NET OF ACCUMULATED AMORTIZATION.............. 61,565 58,676
-------- --------
GOODWILL, NET OF ACCUMULATED AMORTIZATION.............................. 32,128 59,839
-------- --------
OTHER ASSETS........................................................... 12,541 32,260
-------- --------
$391,475 $491,304
======== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current portion of mortgages and long term debt...................... $ 639 $ 669
Accounts payable..................................................... 46,109 24,473
Accrued expenses..................................................... 15,366 21,656
Income taxes payable................................................. 634 1,810
-------- --------
Total current liabilities.................................... 62,748 48,608
-------- --------
MORTGAGES AND OTHER LONG TERM DEBT..................................... 52,030 68,469
-------- --------
NOTES PAYABLE TO PARENT................................................ 198,522 225,723
-------- --------
DEFERRED INCOME TAXES ($11,620 AND $0, RESPECTIVELY) AND OTHER
LIABILITIES.......................................................... 12,346 945
-------- --------
EQUITY
Investments and advances from Parent................................. 65,829 147,559
-------- --------
$391,475 $491,304
======== ========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-3
<PAGE> 69
CHOICE HOTELS HOLDINGS, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Franchise.............................................................. $165,581 $188,021 $219,164
Hotel operations....................................................... 74,183 114,514 155,709
-------- -------- --------
Total revenues.................................................. 239,764 302,535 374,873
-------- -------- --------
OPERATING EXPENSES
Franchise marketing.................................................... 45,373 45,510 49,658
Franchise reservations................................................. 26,685 28,738 35,677
Hotel operations....................................................... 60,062 84,711 106,120
Selling, general and administration expenses........................... 57,081 69,676 83,267
Depreciation and amortization.......................................... 17,521 21,841 26,026
Provision for asset impairment and restructuring....................... -- -- 33,335
-------- -------- --------
Total operating expenses........................................ 206,722 250,476 334,083
-------- -------- --------
INCOME BEFORE OTHER EXPENSES AND INCOME TAXES............................ 33,042 52,059 40,790
-------- -------- --------
OTHER EXPENSES
Interest expense on notes payable to Parent............................ 10,665 15,492 19,673
Minority interest...................................................... 1,476 2,200 1,532
Other interest and other expenses, net................................. 3,223 4,412 3,727
-------- -------- --------
Total other expenses............................................ 15,364 22,104 24,932
-------- -------- --------
Income before income taxes............................................... 17,678 29,955 15,858
Income taxes............................................................. 8,019 13,144 7,400
-------- -------- --------
Net Income............................................................... $ 9,659 $ 16,811 $ 8,458
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these combined statements of income.
F-4
<PAGE> 70
CHOICE HOTELS HOLDINGS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-----------------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................................... $ 9,659 $ 16,811 $ 8,458
Reconciliation of net income to net cash provided by operating
activities:
Depreciation and amortization................................... 17,521 21,841 26,026
Amortization of debt discount................................... 74 171 34
Provision for bad debts......................................... 3,360 906 974
(Decrease) increase in deferred taxes........................... 3,328 827 (12,885)
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)
Change in inventories and other current assets.................. (340) 3,748 (1,047)
Change in current liabilities................................... 8,457 5,691 11,153
Change in income taxes payable.................................. -- 634 1,176
Change in other liabilities..................................... 1,454 1,803 1,750
-------- -------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 44,576 47,903 54,736
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment.............................. (17,939) (34,889) (47,443)
Acquisition of operating hotels................................... (44,200) (59,766) (49,617)
Acquisition of a hotel chain...................................... (10,400) -- --
Proceeds from sale of operating hotels............................ 7,200 -- 5,479
Purchase of minority interest..................................... -- -- (55,269)
Investment in Friendly Hotels, PLC................................ -- -- (17,069)
Other items, net.................................................. (3,788) 1,595 (5,722)
-------- -------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES.................. (69,127) (93,060) (169,641)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and other long-term debt.................. 5,079 15,567 17,296
Principal payments of debt........................................ (1,993) (16,382) (810)
Proceeds from notes payable to Parent............................. 68,361 51,461 27,201
Cash transfers (to) from Parent, net.............................. (45,198) (6,190) 73,272
-------- -------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................. 26,249 44,456 116,959
-------- -------- ---------
Net change in cash and cash equivalents............................. 1,698 (701) 2,054
Cash and cash equivalents at beginning of period.................... 1,091 2,789 2,088
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................................................ $ 2,789 $ 2,088 $ 4,142
========= ========= ==========
</TABLE>
The accompanying notes are an integral part
of these combined statements of cash flows.
F-5
<PAGE> 71
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 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
============
</TABLE>
The average balance of the investments and advances from Parent was $73.0
million, $60.5 million and $107.0 million for the fiscal years 1994, 1995 and
1996, respectively.
F-6
<PAGE> 72
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 1996, after giving effect to the transactions described in the pro
forma combined financial statements, would have been $0.12. 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
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.
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
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.
F-7
<PAGE> 73
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 administrative 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 accounts and the
related gain or loss is taken into income. Maintenance, repairs and minor
replacements are charged to expense.
F-8
<PAGE> 74
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-9
<PAGE> 75
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-10
<PAGE> 76
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
F-11
<PAGE> 77
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-12
<PAGE> 78
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
F-13
<PAGE> 79
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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. Although the Company is currently not aware of any material
environment claims pending against it, pursuant to the Distribution Agreement,
the Company has agreed to indemnify Manor Care, its affiliates and certain other
persons for liabilities related to the Lodging Business which will be assumed by
the Company and for certain other specified environmental, third party personal
injury and other liabilities.
One or more subsidiaries or affiliates of Manor Care have been identified
as defendants and/or potentially responsible parties ("PRPs") in a variety of
actions (the "Actions") relating to approximately eleven waste disposal sites,
which allegedly are subject to remedial action under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
sec.sec. 9601 et seq. ("CERCLA") and similar state laws. CERCLA imposes
retroactive, strict, joint and several liability on PRPs for the costs of
hazardous substance clean-up. The Actions arise out of the alleged activities of
Cenco and allege that Cenco transported and/or generated hazardous substances
that came to be located the sites in question prior to Healthcare's acquisition
of Cenco. Environmental proceedings such as the Actions may involve owners
and/or operators of the hazardous waste site and multiple waste generators and
waste transportation disposal companies. Such proceedings typically involve
efforts of governmental entities and/or private parties to allocate or recover
site investigation and cleanup costs, which costs may be substantial. Manor Care
believes it has adequate insurance coverage for a substantial portion of the
claims asserted in the Actions. Pursuant to the Distribution Agreement, the
Company will indemnify Manor Care for any portion of the claims not covered by
insurance.
The most significant Action for Manor Care arises from the Kramer landfill,
located in Mantua, New Jersey. On October 30, 1989, the New Jersey Department of
Environmental Protection sued Manor Care and other defendants in U.S. District
Court, District of New Jersey, seeking clean-up costs at the site where
subsidiaries of Cenco allegedly transported waste. At about the same time, the
United States filed a lawsuit against approximately 25 defendants in the same
court seeking recovery of its expenses arising in connection with this site.
Manor Care is a third party defendant in the latter suit. Based upon a recent
court-approved final allocation plan, and also in view of its insurance
coverage, Manor Care believes that the Kramer Action will not have a material
adverse effect on its financial condition or results of operation. The Company
believes that any liability it may have for indemnification of Manor Care will
not have a material adverse effect on the Company's business, financial
condition or results of operations. This final allocation plan is not binding.
If the
F-14
<PAGE> 80
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
matter is not resolved by settlement, a court would have to allocate
responsibility and Manor Care's allocation could change.
Although Manor Care, together with its insurers, is vigorously contesting
its liability in the Actions, it is not possible at the present time to estimate
the ultimate legal and financial liability of Manor Care in respect to the
Actions or the ultimate indemnification liability, if any, of the Company.
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 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-15
<PAGE> 81
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
======== =========== ========
</TABLE>
- ---------------
(a) Includes a provision of $33.3 million for asset impairment and
restructuring.
F-16
<PAGE> 82
APPENDIX A
FORM OF
RESTATED CERTIFICATE OF INCORPORATION
OF
CHOICE HOTELS HOLDINGS, INC.
Choice Hotels Holdings, Inc. (the "Corporation"), a corporation
incorporated on June 27, 1996 and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "GCL"), hereby certifies as
follows:
FIRST: The board of directors of the Corporation (the "Board of Directors")
adopted a resolution proposing and declaring advisable the following amendments
to and restatement of the Certificate of Incorporation of the Corporation.
SECOND: This Restated Certificate of Incorporation was duly adopted by the
sole stockholder of the Corporation in accordance with the provisions of
Sections 228, 242 and 245 of the GCL.
THIRD: The text of the Certificate of Incorporation is hereby amended and
restated as herein set forth in full:
1. The name of the corporation is CHOICE HOTELS INTERNATIONAL, INC. (the
"Corporation").
2. The address of the Corporation's registered office in the State of
Delaware is 100 West Tenth Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
3. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the GCL.
4. The total number of shares of capital stock of all classifications which
the Corporation shall have authority to issue is One Hundred Sixty-Five Million
(165,000,000), of which One Hundred Sixty Million (160,000,000) shares having a
par value of One Cent ($.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> 83
(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> 84
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.
A-3
<PAGE> 85
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> 86
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 3.01
[Please see Appendix A to Exhibit 2.01]
<PAGE> 1
Exhibit 10.01
DISTRIBUTION AGREEMENT
dated as of
, 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
ENVIRONMENTAL AND OTHER CLAIMS INDEMNIFICATION PROVISIONS
Section 7.01. Certain Environmental and Other Claims Indemnification.... 29
Section 7.02. Scope of Indemnification.................................. 29
Section 7.03. Procedures for Indemnification for Current and
Potential Indemnified Claims............................ 30
Section 7.04. Losses Net of Insurance or Other Recovery................. 32
Section 7.05. No Third-Party Beneficiaries.............................. 32
Section 7.06. Remedies Cumulative....................................... 33
Section 7.07. Survival of Indemnities................................... 33
Section 7.08. After-Tax Indemnification Payments........................ 33
</TABLE>
<PAGE> 4
ARTICLE VIII
MISCELLANEOUS
<TABLE>
<S> <C> <C>
Section 8.01. Termination............................................... 33
Section 8.02. Expenses.................................................. 34
Section 8.03. Notices................................................... 34
Section 8.04. Amendment and Waiver...................................... 34
Section 8.05. Counterparts.............................................. 35
Section 8.06. Governing Law; Jurisdiction; Forum........................ 35
Section 8.07. Entire Agreement.......................................... 35
Section 8.08. Parties in Interest....................................... 35
Section 8.09. Tax Sharing Agreement; After-Tax Payments................. 36
Section 8.10. Further Assurances and Consents........................... 36
Section 8.11. Exhibits and Schedules.................................... 37
Section 8.12. Legal Enforceability...................................... 37
Section 8.13. Dispute Resolution........................................ 37
Section 8.14. Titles and Headings....................................... 39
</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
Schedule 6.06......................... Restricted Information
Schedule 7.01......................... Schedule of Current Indemnified 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 , 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 $ 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 Chemical-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 _________, 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 ________ among Chase Manhattan Bank, 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, 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 [Choice Hotels]
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
, 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 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 refinanced 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 which 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, Choice and the
subsidiary guarantors to be named therein shall execute the Loan Agreement. All
intercompany amounts payable or receivable by Manor Care or Choice 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 (other than any such information relating solely to the
business or affairs of such party) 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; provided, that with respect to the matters
identified on Schedule 6.06 hereof, no information may be disclosed by either
party under any circumstance without the prior written consent of the other
party hereto.
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
CERTAIN ENVIRONMENTAL AND OTHER CLAIMS
INDEMNIFICATION PROVISIONS
Section 7.01. Certain Environmental and Other Claims
Indemnification. Choice (the "Indemnitor") shall indemnify, defend and hold
harmless Manor Care Inc., its Affiliates and subsidiaries and their respective
directors, employees and agents (collectively, the "Indemnitee") subject to
Section 7.02 from and against any loss, liability, claim, damage, fine, penalty
or other expense (including but not limited to reasonable legal and consultant
fees and expenses, and any sums necessary to respond to any third-party claim,
including but not limited to any foreign, federal, state or local government
directives or orders) (any "Loss") suffered or incurred by Indemnitee, on a
pretax basis, to the extent arising from: (1) any and all currently pending
claims as specified on Schedule 7.01 (the "Current Indemnified Claims"); and (2)
any and all currently unknown but potential or future environmental, third-party
personal injury and other claims, including, but not limited to, new claims
arising out of the sites identified on Schedule 7.01 and new claims, arising out
of the activities or operations of, or conditions affecting, properties formerly
or presently owned, leased, operated or used by, Cenco Incorporated and its
subsidiaries and Affiliates, and any and all of Cenco Incorporated's predecessor
corporations, subsidiaries and Affiliates (collectively, the "Potential
Indemnified Claims"). The Current Indemnified Claims and the Potential
Indemnified Claims are collectively referred to as the "Indemnified Claims."
Section 7.02. Scope of Indemnification. The Loss to be
indemnified does not include any expenditures made prior to the Distribution.
The Loss shall include but not be limited to: (1) all amounts required to be
reimbursed to an insurer for insurance proceeds previously paid by such insurer
as a result of an Indemnified Claim; (2) all deductible amounts required to be
paid under any insurance policy before coverage attaches for an Indemnified
Claim; (3) all amounts paid to third parties in excess of insurance coverage;
(4) all other amounts not paid by insurers in connection with Indemnified
Claims; and (5) the cost of any action against insurers to obtain insurance
coverage. Notwithstanding anything to the contrary contained herein, Losses to
be indemnified with respect to the Imperial, Darlington and Lisbon sites
identified on Schedule 7.01 only include Losses that are in excess of the
reserves reflected in the most recent monthly balance sheet of Manor HealthCare
Corp. available prior to the Distribution Date.
<PAGE> 33
Section 7.03. Procedures for Indemnification for Current and
Potential Indemnified Claims. (a) Manor Care shall notify Indemnitor in writing
promptly after learning of any Potential Indemnified Claim for which an
Indemnitee intends to seek indemnification from Indemnitor under this Article
VII. The failure of Manor Care to give such notice shall not relieve Indemnitor
of its obligations under this Article VII except to the extent that Indemnitor
is actually prejudiced by such failure to give notice. Such notice shall
describe such Potential Indemnified Claim in reasonable detail considering the
information provided to Indemnitee and shall include copies of all notices and
documents received by an Indemnitee from the person or entity making the
Potential Indemnified Claim.
(b) Following the Distribution Date, Manor Care shall control the
investigation and defense or settlement of all Indemnified Claims, without
prejudice to its right to seek indemnification hereunder. However, except as
otherwise provided in Section 7.03(c), Indemnitor may, with the approval of
Manor Care, at any time after the Distribution Date, undertake to jointly defend
or settle an Indemnified Claim. If Indemnitor undertakes the joint defense of
any Indemnified Claim, Indemnitor shall thereby admit its obligation to
indemnify Indemnitee against any Loss associated with such Indemnified Claim,
and neither Indemnitee nor Indemnitor may settle or compromise such Indemnified
Claim, without the prior written consent of Choice or Manor Care, as the case
may be. Subject to Section 7.03(c), in the case of such joint defense, the
Indemnitor and Indemnitee shall use the same outside legal counsel, who shall be
chosen by Manor Care, and Indemnitor shall be responsible for all costs of such
joint defense, including legal fees and expenses, pursuant to Section 7.03(e).
<PAGE> 34
(c) If Indemnitor seeks to undertake the joint defense of an
Indemnified Claim, and if Manor Care reasonably determines that Indemnitee's
interests differ from those of Indemnitor, or that there may be legal defenses
or claims available to it that are different from or in addition to those
available to Indemnitor that may make it inappropriate for Indemnitor to
undertake the joint defense or settlement of an Indemnified Claim, then
Indemnitor shall not be entitled to undertake the joint defense or settlement of
such Indemnified Claim; and counsel for Indemnitor, who shall be chosen by
Choice, shall be entitled to conduct the defense of Indemnitor and counsel for
Indemnitee, who shall be chosen by Manor Care, shall be entitled to conduct the
defense of Indemnitee, all at Indemnitor's expense, it being understood that
both will direct their respective counsel to cooperate with each other to
conduct the defense or settlement of such action as efficiently as possible.
(d) Both parties shall make available to each other, their counsel
and other representatives all information and documents reasonably available to
them that relate to any Indemnified Claim, and otherwise cooperate as may
reasonably be required in connection with investigation, defense and settlement
thereof (while taking such steps as are necessary to preserve the
attorney-client and work product privileges, including through the execution of
a joint defense agreement). Such cooperation shall include the retention and
(upon Choice's request) the provision to Choice of records and information that
are reasonably relevant to such Indemnified Claim and the availability of
employees on a mutually convenient basis to provide additional information and
explanation of any material provided hereunder. Any joint defense agreement
entered into by Indemnitor or Indemnitee with any third party relating to any
Indemnified Claim shall provide that either party may, if requested, provide
information obtained through any such agreement to Indemnitor or Indemnitee, as
the case may be.
(e) Manor Care shall be responsible to make payments on any and all
Loss(es) as each such payment becomes due. Manor Care shall, within 15 days
after the end of each month beginning 15 days after the end of the month in
which the Distribution Date occurs, provide to Choice a monthly statement of
Loss, including reasonable documentation regarding the expenditures detailed
therein. Choice shall remit payment for such Loss to Manor Care within
30 days of receipt of each such Statement of Loss. In the event that Choice
disputes an individual expenditure or expenditures, Choice shall promptly pay
the undisputed portion to Manor Care and shall promptly notify Manor Care, in
writing, of its reasons for disputing the unpaid portion(s). In response to
such written notification, Manor Care shall provide Choice, at Choice's
expense, with such additional information as Choice may request in order to
assure the reasonableness or appropriateness of any fees or expenses charged
to Choice. Any disputes shall be resolved in accordance with Section 8.13.
<PAGE> 35
Section 7.04. Losses Net of Insurance or Other Recovery. (a) The
amount of any Loss for which indemnification is provided shall be reduced
(including, without limitation, retroactively) by any insurance proceeds or
other amounts actually recovered or received by or on behalf of Indemnitee in
reduction of such Loss. If, after Indemnitor has made indemnification to
Indemnitee for any Loss, Indemnitee actually receives insurance proceeds or
other amounts in respect of such Loss, Indemnitee shall pay to Indemnitor a sum
equal to the amount of such insurance proceeds or other amount actually received
after deducting therefrom all of Indemnitee's costs and expenses associated with
the recovery of any such amount.
(b) Indemnitor and Indemnitee understand and agree that Manor Care,
with the assistance of Indemnitor, will undertake reasonable efforts to obtain
reimbursement from its insurers for the Indemnified Claims. With respect to the
Current Indemnified Claims specified in Table 1 of Schedule 7.01, such efforts
shall include mediation, arbitration or litigation against at least the primary
insurers. With respect to the Current Indemnified Claims identified in Tables
2, 3 and 4 and the Potential Indemnified Claims, such efforts shall include
timely notification to relevant insurers of the initiation of claims and of
important events or deadlines during any litigation regarding such claims
(including trial dates and the filing of summary judgment motions), prompt
responses to insurers' requests for information about claims, as well as the
initiation of mediation, arbitration or litigation, if necessary and appropriate
to obtain insurance reimbursement.
Section 7.05. No Third-Party Beneficiaries. This Article VII shall
inure to the benefit of and be enforceable by Indemnitee and its successors and
assigns but shall not inure to the benefit of any other third party or parties,
including, but not limited to, any insurer that may have provided coverage
applicable to the defense or indemnity of any or all of the Indemnified Claims,
or any state, federal, or local government instrumentality, any legal or
equitable rights hereunder. Nothing herein shall be construed to affect
insurance coverage that exists or that may exist prior to the date of this
Agreement.
Section 7.06. Remedies Cumulative. The remedies provided in this
Article VII shall be cumulative and shall not preclude assertion by any party of
any other rights or the seeking of any other remedies against any party.
Moreover, to the extent that this Article VII conflicts with any other Article
or portion of this Agreement with respect to the subject matter hereof, this
Article VII shall govern. The procedures set forth in this Article VII shall be
the exclusive procedures governing any indemnity action brought under this
Article VII or otherwise relating to Indemnifiable Claims.
<PAGE> 36
Section 7.07. Survival of Indemnities. The obligations of each of
Manor Care and Choice under this Article VII 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 Claims of the other.
Section 7.08. After-Tax Indemnification Payments. Except as
otherwise expressly provided herein or in an Ancillary Agreement, any
indemnification payment made by the Indemnitor under this Article VII 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
Indemnitee and any Tax incurred by the Indemnitee attributable to receipt of
the indemnification payment.
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: 301-979-4007
<PAGE> 37
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> 38
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> 39
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> 40
(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> 41
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> 42
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 Holding, Inc.,
a Delaware corporation
By:
Name:
Title:
<PAGE> 43
Schedule 1
LODGING SUBSIDIARIES (1)
BOULEVARD MOTEL CCRP.
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> 44
-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 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> 45
-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> 46
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> 47
Schedule 2.03
Assisted Living Facilities
Springhouse Assisted Living
26111 Telegraph Road
Southfield, Michigan 48034
<PAGE> 48
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> 49
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> 50
Schedule 6.06
Restricted Information
<PAGE> 51
Schedule 7.01
Schedule of Current Indemnified Claims
Table 1
Schedule of Currently Pending Lawsuits and Directives
Regarding Allegedly Environmentally Contaminated Sites
Site Proceeding
---- ----------
BEMS Landfill In the Matter of the Burlington
Environmental Management Services,
Inc. Landfill, Southampton Township,
New Jersey, and Almo Anti-Pollution
Services Corporation, et al., New
Jersey Department of Environmental
Protection, Directive and Notice to
Insurers, 1995-16
Borne Chemical In the Matter of the Borne Chemical
Company Site, Elizabeth, New Jersey,
and Agip USA, Inc., et al., New Jersey
Department of Environmental
Protection, Directive (1994)
GEMS Landfill Allen v. Amadei, Superior Court of New
Jersey Law Division: Camden County,
Docket No. L-03659-88
GEMS Landfill Baltra v. Amadei, Superior Court of
New Jersey Law Division: Camden
County, Docket No. L-081673-86
GEMS Landfill Brooks v. Amadei, Superior Court of
New Jersey Law Division: Camden
County, Docket No. L-080058-85
GEMS Landfill Burns v. Amadei, Superior Court of New
Jersey Law Division: Camden County,
Docket No. L-92398-87
GEMS Landfill Coyne v. Amadei, Superior Court of New
Jersey Law Division: Camden County,
Docket No. L-81700-86
GEMS Landfill Diegel v. Amadei, Superior Court of
New Jersey Law Division: Camden
County, Docket No. L-074522-86
<PAGE> 52
-2-
Site Processing
---- ----------
GEMS Landfill Charles Diegel and Wendy Diegel, et
al. v. Township of Gloucester, et al.,
Superior Court of New Jersey Law
Division: Camden County, Docket No.
L-068199-85
GEMS Landfill Dold v. Amadei, Superior Court of New
Jersey Law Division: Camden County,
Docket No. L-0815292-86
GEMS Landfill Favilla v. Amadei, Superior Court of
New Jersey Law Division: Camden
County, Docket No. L-081687-86
GEMS Landfill Keating v. Amadei, Superior Court of
New Jersey Law Division: Camden
County, Docket No. L-12152990
GEMS Landfill Garson v. Amadei, Superior Court of
New Jersey Law Division: Camden
County, Docket No. L-066302-87
GEMS Landfill Lucia v. Amadei, Superior Court of New
Jersey Law Division: Camden County,
Docket No. L-081681-86
GEMS Landfill Tuzza v. Amadei, Superior Court of New
Jersey Law Division: Camden County,
Docket No. L-074521-86
GEMS Landfill Volusher v. Amadei, Superior Court of
New Jersey Law Division: Camden
County, Docket No. L-068199-85
GEMS Landfill New Jersey Department of Environmental
Protection v. Gloucester Environmental
Management Services, Inc., et al.,
United States District Court for the
District of New Jersey, Civil No.
84-0152(B), and United States of
America v. Air Products & Chemicals,
Inc., et al., Civil No. 92-3860
<PAGE> 53
-3-
Site Proceeding
---- ----------
JEMS Landfill In the Matter of the Florence Land
Recontouring Landfill, Florence and
Mansfield Townships, Burlington
County, New Jersey, and Aaxon
Industrial, Inc., et al., New Jersey
Department of Environmental
Protection, Directive and Notice to
Insurers Number One (1989)
Kin-Buc Landfill Transtech Industries, Inc., et al. v.
A&Z Septic Clean, et al., United
States District Court for the District
of New Jersey, Civil No. 2-90-2578
Kramer Landfill New Jersey Department of Environmental
Protection v. Almo-Anti-Pollution
Services Corp., et al., United States
District Court for the District of New
Jersey, Civil No. 89-4380
Lipari Landfill United States of America and New
Jersey Department of Environmental
Protection v. Rohm and Haas Company,
Inc., et al., United States District
Court for the District of New Jersey,
Civil No. 85-4386
Lipari Landfill Wilson v. Rohm & Haas, et al.,
Superior Court of New Jersey,
Gloucester County, Docket No.
GLO-L-1375-95.
Marvin Jonas Transfer In the Matters of the Marvin Jonas
Station Transfer Station, Deptford Township,
Gloucester County, New Jersey; Florence Land
Recontouring Landfill, Florence and Mansfield
Townships, Burlington County, New Jersey; Helen
Kramer Landfill, Mantua Township, Gloucester
County, New Jersey; P.J.P. Landfill, Jersey City,
Hudson County, New Jersey; and A&B Dump Truc,
Service, Inc., et al., New Jersey Department of
Environmental Protection, Multi-Site Directive and
Notice to Insurers Number One (1990)
<PAGE> 54
-4-
Site Proceeding
---- ----------
Reserve Environmental Reserve v. Industrial Wastes, United
Services Facility States District Court for the Northern
District of Ohio, Case No. 4:93 CV
1157
SC Holdings SC Holdings v. A.A.A. Realty Co., et
al., Civil Action No. 95-CV-947
Scientific Chemical AT&T Technologies, Inc., et al. v.
Processing - Carlstadt Transtech Industries, Inc., et al.,
United States District Court for the
District of New Jersey, Civil Action
No. 88-4267
Scientific Chemical AT&T Technologies, Inc., et al. v.
Processing - Newark Presto, et al., United States District
Court for the District of New Jersey,
Civil Action No. 88-4828
<PAGE> 55
-5-
Table 2
Schedule of Allegedly Environmentally Contaminated Sites
For Which No Formal Claim Has Yet Been Made
Site Location
---- --------
McAdoo Landfill Kline Township, PA
Nyanza Superfund Site Ashland, MA
Standard Candy Site Eislee, Tennessee
<PAGE> 56
-6-
Table 3
Current Sites With
Ongoing Cleanup Pursuant to Government Directive
Site Location
---- --------
Imperial Site Imperial, Pennsylvania
Darlington Site Darlington, Pennsylvania
Lisbon Site Lisbon, Ohio
<PAGE> 57
-7-
Table 4
Other Current Sites
Schedule of Cases
Case Name Court
--------- -----
Audio Visual Publications, Inc. U.S. District Court for the
v. Cenco, Incorporated Southern District of New
York
Shields v. Izzy's Place, et al. Supreme Court for New York
v. Maternity & Homemaking County, State of New York
Servs., Inc.
Wetherall v. Central Scientific Great Falls, Montana [state
Co. or federal court?]
<PAGE> 1
EXHIBIT 10.20
CHOICE HOTELS INTERNATIONAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Choice Hotels International, Inc. has adopted the following
Supplemental Executive Retirement Plan (the "Plan") for the benefit of eligible
employees.
ARTICLE I
DEFINITIONS
As used herein, the following words and phrases shall have the meaning
specified below, unless a different meaning is plainly required by the context:
Section 1.01. "Board of Directors" shall mean the Board of Directors
of the Company (or any designated committee thereof).
Section 1.02. "Early Retirement Date" shall mean the date upon which
a Participant becomes eligible to receive benefits hereunder as set forth in
Section 5.01(b).
Section 1.03. "Employer" shall mean the Company, its successors and
assigns, any subsidiary authorized by the Board of Directors to participate in
this Plan, and any corporation into which an Employer may be merged or
consolidated or to which all or substantially all of its assets may be
transferred, provided such corporation does not affirmatively disavow this
Plan.
Section 1.04. "Employment Date" shall mean the date upon which a
Participant commenced full-time employment with the Company.
Section 1.05. "Final Average Salary" shall mean the highest average
of the monthly base salary, excluding any bonuses or commissions, earned in a
sixty-month period out of the 120 months of employment immediately prior to the
Normal Retirement Date or the Early Retirement Date (as the case may be).
Section 1.06. "Normal Retirement Date" shall mean the date upon which
Participants become eligible to receive benefits hereunder as set forth in
Section 5.01(a).
1
<PAGE> 2
Section 1.07. "Participant" shall mean any individual who has been
approved eligible to participate in the Plan pursuant to Article III hereunder.
Section 1.08. "Years of Service" shall mean the number of years and
months between the Employment Date and the Normal Retirement Date or the Early
Retirement Date (as the case may be), excluding any period during which a
Participant is employed on a part-time basis by an Employer.
ARTICLE II
ADMINISTRATION OF PLAN
Section 2.01. The Board of Directors shall have responsibility for
the administration of the Plan. Such responsibility shall include, but not be
limited to, approval of individual Participants, interpretation of the Plan,
and the granting of exceptions to the Plan, if any. All such determinations by
the Board of Directors shall be conclusive and binding on all Participants.
ARTICLE III
PARTICIPANT ELIGIBILITY
Section 3.01. Participants shall be selected officers of an Employer.
Participants must be individually submitted to, and approved by, the Board of
Directors.
ARTICLE IV
CALCULATION OF BENEFIT
Section 4.01. Participants will receive a monthly retirement benefit
for life based upon Years of Service and Final Average Salary as shown below.
For each month between fifteen and twenty-five Years of Service, retirement
benefit as a percentage of Final Average Salary shall be increased by .125%.
The amount of the monthly benefit will be paid with no offset for benefits a
Participant may receive from Social Security.
2
<PAGE> 3
<TABLE>
<CAPTION>
Years of Service at Retirement Benefit as %
Normal Retirement Date of Final Average Salary
- ---------------------- -----------------------
<S> <C>
25 or more 30.0%
24 28.5%
23 27.0%
22 25.5%
21 24.0%
20 22.5%
19 21.0%
18 19.5%
17 18.0%
16 16.5%
15 15.0%
</TABLE>
Section 4.02. Retirement benefits shown in Section 4.01 above are
shown as straight life annuity payments. Participants may also elect upon
retirement a joint and 50% survivor annuity or a ten-year certain (120 months
guaranteed) payment. If other than a straight life annuity payment is elected,
benefit payments will be adjusted in accordance with standard actuarial tables
selected by the Company.
ARTICLE V
PAYMENT OF BENEFITS
Section 5.01. Participants are not entitled to any benefits unless
they are eligible for normal or early retirement benefits when their employment
terminates for any reason.
3
<PAGE> 4
Participants are eligible to receive benefits upon:
(a) Normal retirement - Participants retiring at age 65 with a
minimum of 15 Years of Service will start receiving monthly
benefits upon the first day of the month following their
retirement.
(b) Early Retirement - Participants with a minimum of 15 Years of
Service may retire between ages 60 and 65 with approval of the
Board of Directors. Benefit payments to such Participants
shall start upon the first day of the month following their
65th birthday.
The Board of Directors may authorize benefit payments to start prior
to age 65 when it feels it is in the Company's best interest and such
payments are desired by the Participant. In such a case, the amount
of the monthly benefit will be reduced according to the age of the
Participant when the payments commence, as shown below:
<TABLE>
<CAPTION>
Percent of Monthly Retirement
Age when Benefits Commence Benefit to be Paid
- -------------------------- --------------------------------------
<S> <C>
64 93.3%
63 86.7%
62 80.0%
61 73.3%
60 66.7%
</TABLE>
Section 5.02. Participants who desire to work past age 65, and
who are allowed to do so by permission of the Company, may, at their option, be
either (i) paid benefits hereunder in accordance with Section 5.01(a) as if the
Participants had retired, or (ii) have such benefits increased actuarially for
each Year of Service past age 65.
Section 5.03. All Participants at the time of retirement, as a
condition of receiving any benefits hereunder, must agree that they shall not
become the owner of, or an officer, director, employee or consultant of any
entity which, in the opinion of the Board of Directors, is in competition with
any business of the Company.
4
<PAGE> 5
Section 5.04. Spouses of Participants with at least 15 Years of
Service who die prior to retirement and after their 60th birthday will receive
50% of the benefit they would have received had the Participant retired on the
first day of the month before death and chosen retirement benefits in the form
of a joint and 50% survivor annuity.
ARTICLE VI
EFFECTIVE DATE
Section 6.01. The Plan covers Participants retiring on or after
[ ], 1996. All past Years of Service for an Employer and its
predecessor are recognized.
ARTICLE VII
EFFECTIVE DATE
Section 7.01. The Company retains the right to amend or
terminate the Plan at any time. Should the Plan be terminated, Participants
with at least fifteen Years of Service at time of Plan termination shall be
entitled to the Retirement Benefit specificed in Article IV determined on the
basis of their Years of Service at the time of Plan termination. In addition,
Participants who do not have at least fifteen Years of Service at the time of
Plan termination shall be entitled to a pro rata portion of the Retirement
Benefit specified in Article IV of a Participant with fifteen Years of
Service. Such pro rata portion shall be calculated by using the Participant's
number of Years of Service at the time of Plan Termination as the numerator and
15 as the denominator. Payment of such benefits will not commence prior to
when it would have commenced had the Plan remained in effect.
ARTICLE VIII
MISCELLANEOUS
Section 8.01. Any rules, regulations, or procedures that may be
necessary for the proper administration or functioning of this Plan may be
promulgated and adopted by the Board of Directors.
Section 8.02. This Plan shall be interpreted and enforced in
accordance with the laws of the State of Maryland, without regard to its
conflict of laws principles.
5
<PAGE> 6
Section 8.03. This Plan shall not be deemed to constitute an
employment contract between an Employer and any Participant or to be a
consideration or an inducement for the employment of any Participant. Nothing
contained in this Plan shall be deemed to give any Participant the right to be
retained in the service of an Employer or to interfere with the right of an
Employer to discharge any Participant at any time regardless of the effect
which such discharge shall have upon him as a Participant of the Plan.
6
<PAGE> 1
EXHIBIT 10.21
CHOICE HOTELS INTERNATIONAL, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION AND
DEFERRED COMPENSATION STOCK PURCHASE PLAN
Choice Hotels International, Inc. has adopted and established a
non-qualified stock option plan for Non-Employee Directors in accordance with
the following terms and conditions. The plan also provides Non-Employee
Directors the ability to elect to defer compensation and purchase stock with
director fees.
SECTION ONE
DESIGNATION AND PURPOSE OF THE PLAN
A. DESIGNATION. This Plan is designated the "Choice Hotels
International, Inc. Non-Employee Director Stock Option and Deferred
Compensation Stock Purchase Plan".
B. PURPOSE. The purpose of this Plan is to secure for the
Company and its stockholders the benefits of the incentive inherent in
increased ownership of Company Stock by Non-Employee Directors. It is expected
that such ownership will provide such Non-Employee Directors with a more direct
stake in the future welfare of the Company and encourage them to remain
directors of the Company. It is also expected that the Plan will encourage
qualified persons to become directors of the Company.
C. GOVERNING LAW. This Plan shall be interpreted and enforced in
accordance with the laws of the State of Maryland, without reference to its
conflict of laws principles.
SECTION TWO
DEFINITIONS
As used in this Plan, the following terms mean:
A. "BOARD" means the Board of Directors of the Company.
B. "COMPANY" means Choice Hotels International, Inc.
C. "NON-EMPLOYEE DIRECTOR" means a member of the Board of the
Company who is not an employee of the Company or any of its subsidiaries.
D. "OPTION" means a non-qualified stock option granted to a
Participant under this Plan. It also means any Option which remains after a
Participant has exercised his Option with respect to part of the shares covered
by an Option agreement.
E. "PARTICIPANT" means any Non-Employee Director who is granted
an Option as provided in this Plan.
<PAGE> 2
F. "PLAN" means this Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan.
G. "STOCK" and "COMPANY STOCK" mean the common stock of Choice
Hotels International, Inc.
H. Wherever appropriate, words used in this Plan in the singular
may mean the plural, the plural may mean the singular and the masculine may
mean the feminine.
PART A
RULES RELATING TO STOCK OPTION PROGRAM
SECTION THREE
STOCK SUBJECT TO OPTION
A. TOTAL NUMBER OF SHARES. The total number of shares of Stock
which may be included in all Options granted to all Participants under this
Part A is 150,000 shares. The maximum number of shares authorized may be
increased from time to time by approval of the Board, and if required, pursuant
to Rule 16b-3 of the Securities and Exchange Commission or its successors or
the applicable rules of any stock exchange, the stockholders of the Company.
Such Stock may be either authorized and unissued Stock or reacquired Stock.
B. EXPIRED OPTIONS. If any Option granted under this Part A (i)
is unexercisable, or (ii) is terminated, or (iii) expires or is canceled for
any other reason, in whole or in part, the shares (or remaining shares) of
Stock subject to that particular Option shall again be available for grant
under this Part A.
SECTION FOUR
ADMINISTRATION OF THIS PART A
This Part A shall be administered by the Board. The Board shall
have all the powers vested in it by the terms of this Part A, such powers to
include authority (within the limitation described herein) to prescribe the
form of the agreement embodying awards of Options made under this Part A.
Subject to the provisions of this Part A, the Board shall have the power to
construe this Part A, to determine all questions arising thereunder, and to
adopt and amend such rules and regulations for the administration of this Part
A as it may deem desirable. Any decision of the Board in the administration of
this Part A, as described herein, shall be final and conclusive. The Board may
act only by a majority of its members in office, except that the members
thereof may authorize any one or more of their number or the Secretary or any
other officer of the Company to execute and deliver documents on behalf of the
Board.
2
<PAGE> 3
SECTION FIVE
SELECTION OF PARTICIPANTS
Each Non-Employee Director shall be eligible to receive an Option
in accordance with Section Six. Each Option granted under this Part A shall be
evidenced by an agreement in such form as the Board shall prescribe from time
to time in accordance with this Part A and shall comply with the terms and
conditions set forth in Sections Six and Seven. Such an agreement shall
incorporate the provisions of this Part A by reference.
SECTION SIX
GRANT OF OPTIONS
AND LIMITATIONS ON EXERCISE
A. INITIAL GRANT FOR INCUMBENT MEMBERS OF THE BOARD. Each
Non-Employee Director as of [ ] shall receive an Option (a [
] Option") to purchase for five years 5,000 shares of Stock, subject to the
terms and conditions herein; provided, however, Robert C. Hazard, Jr. and
Gerald W. Petitt shall not receive a [ ] Option.
B. INITIAL GRANT FOR NEW MEMBERS OF THE BOARD. Each Non-Employee
Director (other than Robert C. Hazard, Jr. and Gerald W. Petitt) who is not a
recipient of a [ ] Option, upon the date of his initial election or
appointment as a director of the Company, shall receive an Option to purchase
for five years 5,000 shares of Stock, subject to the terms and conditions
herein.
C. ANNUAL GRANT. As of each annual Stockholders Meeting of the
Company thereafter, commencing in the calendar year subsequent to the calendar
year in which an initial grant was awarded the Non-Employee Director pursuant
to Sections Six A or B above, each Non-Employee Director shall receive an
Option to purchase for five years 1,000 shares of Stock, subject to the terms
and conditions herein.
D. VESTING. The Option is not exercisable for a period of two
years from the date of grant. Thereafter, an Option becomes exercisable (a) to
the extent of one-third of the total number of shares subject to the option
following the expiration of two years from the date of grant; (b) to the extent
of an additional one-third following the expiration of three years from the
date of grant; and (c) to the extent of an additional one-third following the
expiration of four years from the date of grant. An Option is cumulative and
any portion of an Option not exercised at the time it becomes exercisable may
be exercised at any time thereafter prior to its termination date.
E. LIMITATION. In no event may an Option be exercised by anyone
after the expiration of five years from the date of grant.
3
<PAGE> 4
F. BOARD RETIREMENT. A Participant who ceases to serve on the
Board after reaching age 65 and who has been a member of the Board for at least
ten years prior to the date of retirement shall be permitted to exercise his
entire Option notwithstanding the limitations of Section Six D above.
G. INSUFFICIENT NUMBER OF SHARES. In the event that the number
of shares of Stock available for future grant under this Part A is insufficient
to make all grants required to be made on any date, then all Participants
entitled to a grant on such date shall share ratably in the number of shares of
Stock which may be included in Options granted to Participants under this Part
A.
SECTION SEVEN
OPTION PRICES
A. DETERMINATION OF OPTION PRICE. The Option price for Stock
shall be equal to 100% of the fair market value of the Stock on the date of
grant.
B. DETERMINATION OF FAIR MARKET VALUE. The fair market value of
the Stock on the date of granting an Option shall be the mean of the high and
low prices at which the Stock was sold on the market on such date. In the
event no such sales of Stock occurred on such date, the fair market value of
the Stock shall be determined by the mean of the high and low prices at which
the Stock was sold on the market on the next preceding date for which the Stock
was so sold.
SECTION EIGHT
EXERCISE OF OPTION
A. METHOD OF EXERCISING AN OPTION. Subject to the terms of a
particular Option, a Participant may exercise it in whole or in part by written
notice to the Company's President or Secretary stating in such written notice
the number of shares of Stock such Participant elects to purchase under his
Option.
B. NO OBLIGATION TO EXERCISE OPTION. A Participant is under no
obligation to exercise an Option or any part thereof.
C. PAYMENT FOR OPTION STOCK. Stock purchased pursuant to an
Option agreement shall be paid in full at the time of purchase. Payment may be
made (a) in cash, (b) by delivery to the Company of shares of Stock having an
aggregate fair market value equal to the exercise price, or (c) a combination
of (a) and (b). Upon receipt of payment and subject to paragraph E of this
Section Eight, the Company shall, without transfer or issue tax to the
Participant or other person entitled to exercise the Option, deliver to the
Participant (or other person entitled to exercise the Option) a certificate or
certificates for such shares.
4
<PAGE> 5
D. DELIVERY OF STOCK TO PARTICIPANT. The Company shall
undertake and follow all necessary procedures to make prompt delivery of the
number of shares of Stock which the Participant elects to purchase upon
exercise of an Option granted under this Part A. Such delivery, however, may
be postponed, at the sole discretion of the Company, to enable the Company to
comply with any applicable procedures, regulations or listing requirements of
any government agency, stock exchange or regulatory authority.
E. FAILURE TO ACCEPT DELIVERY OF STOCK. If a Participant
refuses to pay for Stock which he has elected to purchase under his Option, in
accordance with the terms of payment, which had previously been agreed upon,
his Option shall thereupon, at the sole discretion of the Board, terminate, and
such funds previously paid for unissued Stock shall be refunded. Stock which
has been previously issued to the Participant and been fully paid for shall
remain the property of the Participant and shall be unaffected by such
termination.
SECTION NINE
TRANSFERABILITY OF OPTIONS
The Board may impose such restrictions on transferability of an
Option, if any, as it may in its sole discretion determine.
SECTION TEN
PURCHASE FOR INVESTMENT
A. WRITTEN AGREEMENT BY PARTICIPANTS. Unless a registration
statement under the Securities Act of 1933 is then in effect with respect to
the Stock a Participant receives upon exercise of his Option, a Participant
shall acquire the Stock he receives upon exercise of his Option for investment
and not for resale or distribution and he shall furnish the Company with a
written statement to that effect when he exercises his Option and a reference
to such investment warranty shall be inscribed on the Stock certificate(s).
B. REGISTRATION REQUIREMENT. Each Option shall be subject to
the requirement that, if at any time the Board determines that the listing,
registration or qualification of the shares subject to the Option upon any
securities exchange or under any state or Federal law is necessary or desirable
as a condition of, or in connection with, the issuance of shares thereunder,
the Option may not be exercised in whole or in part unless such listing,
registration or qualification shall have been effected or obtained (and the
same shall have been free of any conditions not acceptable to the Board).
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SECTION ELEVEN
CHANGES IN CAPITAL STRUCTURE OR SHARES
In the event any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, or extraordinary dividend or
divestiture (including a spin-off), or any other change in the capital
structure or shares of the Company, the Committee shall make adjustments,
determined by the Committee in its discretion to be appropriate, as to the
number and kind of securities subject to this Plan and specified in Section
Three of this Plan and as to the number and kind of securities covered by each
outstanding Option and, where applicable, the price per share thereunder.
SECTION TWELVE
CORPORATE REORGANIZATION OR DISSOLUTION
A. In the event of the dissolution or liquidation of the
Company, any Option granted under this Part A shall terminate as of a date to
be fixed by the Board, provided that not less than 15 days written notice of
the date so fixed shall be given to each Participant and each such Participant
shall have the right during such period to exercise his Option as to all or any
part of the Stock covered thereby including Stock as to which such Option would
not otherwise be exercisable by reason of an insufficient lapse of time.
B. In the event of a Reorganization (as hereinafter defined) in
which the Company is not the surviving or acquiring company, or in which the
Company is or becomes a wholly owned subsidiary of another company after the
effective date of the Reorganization, then:
1) If there is no plan or agreement respecting the Reorganization
("Reorganization Agreement") or if the Reorganization
Agreement does not specifically provide for the change,
conversion, or exchange of the Stock under outstanding and
unexercised Options for securities of another corporation,
then the Board shall take such action, and the Options shall
terminate, as provided in paragraph A of this Section Twelve,
or
2) If there is a Reorganization Agreement and if the
Reorganization Agreement specifically provides for the change,
conversion, or exchange of the Stock under outstanding and
unexercised Options for securities of another corporation,
then the Board shall adjust the shares under such outstanding
and unexercised Options (and shall adjust the shares remaining
under this Part A which are then to be available for grant
under this Part A, if the Reorganization Agreement makes
specific provisions therefor) in a manner not inconsistent
with the provisions of the Reorganization Agreement for the
adjustment, change, conversion, or exchange of such Options.
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The term "Reorganization" as used in this paragraph B of this Section Twelve
shall mean any statutory merger, statutory consolidation, sale of all or
substantially all of the assets of the Company, or sale, pursuant to an
agreement with the Company, of securities of the Company pursuant to which the
Company is or becomes a wholly owned subsidiary of another company after the
effective date of the Reorganization.
C. Adjustments and determinations under this Section Twelve
shall be made by the Board, whose decisions as to what adjustments or
determinations shall be made, and the extent thereof, shall be final, binding,
and conclusive.
SECTION THIRTEEN
TERMINATION OF SERVICE
A. SEVERANCE. Subject to the provision of Paragraph B of this
Section Thirteen, in the event a Participant ceases to be a Non-Employee
Director, his Option terminates one month from the date of such cessation of
service. Subject to the provisions of Paragraph F of Section Six, such Option
shall be exercisable only to the extent the Participant was entitled to
exercise the Option on the date of such cessation of service.
B. DEATH. If a Participant dies prior to the full exercise of
his Option, his Option to purchase Stock under such Option may be exercised to
the extent, if any, that Participant would be entitled to exercise it at the
date of Participant's death by the person to whom the Option shall pass by will
or by the laws of descent and distribution within twelve months of
Participant's death or the expiration of the term of the Option whichever date
is sooner.
SECTION FOURTEEN
APPLICATION OF FUNDS
All proceeds received by the Company from the exercise of Options
shall be paid into its treasury and such proceeds shall be used for general
corporate purposes.
SECTION FIFTEEN
PARTICIPANT'S RIGHTS AS A STOCKHOLDER
A Participant has no rights as a stockholder with respect to any
shares of Stock covered by his Option until the date a stock certificate is
issued to him for such shares. Except as otherwise provided for in Section
Eleven of this Part A, no adjustment shall be made for dividends or other
rights for which the record date is prior to the date such stock certificate is
issued.
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SECTION SIXTEEN
AMENDMENT AND TERMINATION OF THIS PART A
A. DISCRETION OF THE BOARD OF DIRECTORS. This Part A may be
terminated or amended at any time and from time to time by the Board as the
Board shall deem advisable including, but not limited to amendments necessary
to qualify for any exemption or to comply with applicable law or regulations;
provided, however, that this Part A shall not be amended more than once every
six months, other than to comport with changes in the Internal Revenue Code of
1986, as amended, or the regulations thereunder, or the Employee Retirement
Income Security Act of 1974, as amended, or the regulations thereunder. No
amendment of this Part A shall materially and adversely affect any right of any
Participant with respect to any Option theretofore granted without such
Participant's written consent.
B. AUTOMATIC TERMINATION. This Part A shall terminate on
September [ ], 2006. Options may be granted under this Part A at any time
and from time to time prior to this Part A's termination. Any Option
outstanding at the time this Part A is terminated shall remain in effect until
said Option is exercised or expires.
PART B
RULES RELATING TO DEFERRED COMPENSATION
STOCK PURCHASE
SECTION SEVENTEEN
DEFERRAL OF FEES
A Non-Employee Director may elect by written notice to defer
payment on all or a portion of his fees (including Committee fees) for any
year, subject to the following conditions:
During the period of the active service (as hereinafter defined)
of a Non-Employee Director, the Non-Employee Director agrees to serve the
Company faithfully and, to the best of the ability of the Non-Employee
Director, to perform such services and duties as shall be assigned to the
Non-Employee Director by the Board.
For purposes of this Part B, the period of the active service of
the Non-Employee Director shall mean the period commencing with the date of
election or appointment of the Non-Employee Director and expiring on the date
on which occurs the termination of the service of the Non-Employee Director by
reason of expiration of term or the date of resignation, removal or death of
the Non-Employee Director, whichever shall occur first. Nothing contained
herein shall be construed as conferring upon the Non-Employee Director the
right to continue in the active service of the Company.
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SECTION EIGHTEEN
ELECTION AND DEFERRED ACCOUNTS
A. Prior to the thirty-first day of May of each year during the
period of the active service of the Non-Employee Director, the Non-Employee
Director may instruct the Company by delivery to it of written notice to
withhold a specified percentage (not less than 25%) of any fees otherwise
payable to the Non-Employee Director for services to be rendered in the
following fiscal year (the "Deferred Amounts"). Such election shall be
irrevocable with respect to such fiscal year. The Company shall establish a
grantor "Rabbi Trust" and shall establish thereunder on behalf of the
Non-Employee Director upon a deferral election a liability account which shall
consist of a Stock Deferred Account and an Interest Deferred Account (each a
"Deferred Account").
B(i) Stock Deferred Account
(a) An agent (the "Agent") shall be appointed by the
Board or any individual or committee to which the Board has delegated authority
to act with respect to the appointment of the Agent to perform the functions
and have the responsibilities assigned to the Agent in this Section Eighteen
with respect to the purchase of Stock. The Board or such individual or
committee shall have the right to change the Agent at any time. Except as
provided in Section 18B(i)(b), the Company shall pay the compensation and
expenses of the Agent.
(b) Deferred Amounts shall initially be deposited to the
Interest Deferred Account (the "Initial Deferred Amounts"). For each fiscal
year of the Company, the Agent shall cause all Initial Deferred Amounts to be
applied to the open market purchase of whole shares of Stock within fifteen
days after December 1, February 28 and May 31 of such fiscal year. The Agent
shall have all authority to determine the times of such purchases, the prices
at which such purchases are made, the manner of such purchases and the
selection of brokers or dealers (which may include the Agent) to make such
purchases. All brokerage fees and commissions with respect to such purchases
shall be deducted from the Initial Deferred Amounts. The Agent shall credit
each Stock Deferred Account with the number of whole shares of Stock equal to
such account's Initial Deferred Amount applied by the Agent to the purchase of
Stock divided by the average price per share purchased by the Agent. Initial
Deferred Amounts representing a fraction of the purchase price of a share shall
be credited to their respective Interest Deferred Account. Any shares of Stock
held in a Stock Deferred Account shall be voted by the trustee of the "Rabbi
Trust".
(c) In the alternative, but only if and to the extent
that the Company shall have instructed the Agent concurrent with or prior to
the delivery to the Agent of the Initial Deferred Amounts, the Agent shall
purchase whole shares of Stock directly from the Company and not in the open
market. Each such purchase from the Company shall be at
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a price equal to the closing price of Stock on the market on the business day
preceding the date such purchase is made.
(d) During the period that such Stock Deferred Account is
maintained, on each date on which the Company pays dividends on its Stock, the
Interest Deferred Account shall be credited with an amount equivalent to the
amount of dividends declared by the Company with respect to the Stock held in
the Stock Deferred Account ("Dividend Equivalents").
(e) The total number of shares of Stock which may be
purchased under this Part B is 80,000 shares. The maximum number of shares may
be increased from time to time by approval of the Board, and if required,
pursuant to Rule 16b-3 of the Securities and Exchange Commission or its
successors or the applicable rules of any stock exchange, the stockholders of
the Company. Such Stock may be either authorized and unissued shares or
reacquired shares.
(f) In the event of a change in the capital structure or
shares of the Company as described in Section Eleven, the number and kind of
securities specified in Section Eighteen of this Part B, and the number and
kind of securities entered in a Stock Deferred Account shall be adjusted in a
manner consistent with Section Eleven.
B(ii) Interest Deferred Account
All additions to the Interest Deferred Account will be invested
in short- to mid-term fixed-income investments selected by the Company from
time to time. There shall be credited to the Interest Deferred Account all
gains, losses, and income attributable to such investments.
SECTION NINETEEN
ANNUAL STATEMENT
The Company will provide an annual statement of the Deferred
Accounts to each participant Non-Employee Director showing amounts of fees
deferred and additional amounts credited to his Deferred Accounts in accordance
with Section 18.
SECTION TWENTY
PAYMENT
Upon the termination of active service of a Non-Employee
Director, the Company shall pay such Non-Employee Director his Deferred
Accounts in one lump sum payment as soon after his termination of active
service as is administratively feasible unless such
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Non-Employee Director had previously made an election, at least sixty (60) days
prior to the effective date of such termination of active service, to receive
his Deferred Accounts in the form of installment payments. At least sixty (60)
days prior to his termination of active service, a Non-Employee Director may
make an irrevocable election to receive his Deferred Accounts in the form of
installment payments over a period of time designated by the Non-Employee
Director but in no event to exceed twenty (20) years. In the event that the
installment method of payment is selected, the Non-Employee Director will
further designate whether installment payments are to be made on a monthly,
quarterly, semi-annual or annual basis. During the period of installment
distributions, the Interest Deferred Account will be credited with an earnings
factor computed pursuant to the principles described in Section 18 B(ii),
above. In the event that a Non-Employee Director dies after having made an
installment election but prior to the receipt of all installment payments
thereunder, the remaining payments will be made to the beneficiary by the
Non-Employee Director designated for purposes of this Part B through the
remaining duration of the elected installment period, unless the Non-Employee
Director has provided in such installment election for a different form of
payment to the beneficiary of the Non-Employee Director in the event of the
death of the Non-Employee Director, in which event such different form of
payment shall be made to the beneficiary of the Non-Employee Director. The
computation of the amount of a lump sum payment or the amount of an installment
payment shall be made by reference to the balance of the Deferred Account as of
the date of the distribution.
SECTION TWENTY-ONE
DEATH OF NON-EMPLOYEE DIRECTOR
Where the death of the Non-Employee Director occurs prior to
making his election, payments of compensation deferred shall be made in such
manner determined by the beneficiary.
SECTION TWENTY-TWO
DEATH OF NON-EMPLOYEE DIRECTOR AND BENEFICIARY
If both the Non-Employee Director and his designated beneficiary
should die, the total amount standing to the credit of the Non-Employee
Director in the Deferred Accounts shall be determined as of the date of death
of the designated beneficiary (including any additional amounts credited to
such Account pursuant to Section Eighteen B(ii)) and shall be paid as promptly
as possible in one lump sum to the estate of such designated beneficiary.
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SECTION TWENTY-THREE
TAXES
Payments will be made to the Non-Employee Director or beneficiary
after deducting taxes required by federal and/or state governments, if any.
SECTION TWENTY-FOUR
ADMINISTRATION OF THIS PART B
This Part B shall be administered by the Board, except as
provided in Section 18. The Board shall have all the powers vested in it by
the terms of Part B. Subject to the provisions of this Part B, the Board shall
have the power to construe this Part B, to determine all questions arising
thereunder, and to adopt and amend such rules and regulations for the
administration of this Part B as it may deem desirable. Any decision of the
Board in the administration of this Part B, as described herein, shall be final
and conclusive. The Board may act only by a majority of its members in office,
except that members thereof may authorize any one or more of their number or
the Secretary or any other officer of the Company to execute and deliver
documents on behalf of the Board.
SECTION TWENTY-FIVE
UNSECURED GENERAL CREDITOR
Nothing contained in this Part B and no action taken pursuant to
the provisions of this Part B shall create or be construed to create a trust of
any kind other than a grantor "Rabbi Trust", or a fiduciary relationship
between the Company and the Non-Employee Director, his designated beneficiary
or any other person. Any compensation deferred under the provisions of this
Part B shall continue for all purposes to be a part of the general funds of the
Company. To the extent that any person acquires a right to receive payment
from the Company under this Part B, such right shall be no greater than the
right of any unsecured general creditor of the Company.
SECTION TWENTY-SIX
NO ASSIGNMENT
The right of the Non-Employee Director or any other person to the
payment of deferred compensation or other benefits under this Part B shall not
be assigned, transferred, pledged, or encumbered except by will or by the laws
of descent and distribution.
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SECTION TWENTY-SEVEN
SUCCESSORS AND ASSIGNS
This Part B shall be binding upon and inure to the benefit of the
Company and its subsidiaries, its successors and assigns and the Non-Employee
Director and his heirs, executors, administrators and legal representatives.
SECTION TWENTY-EIGHT
CHANGE OF CONTROL
In the event of a change of control of the Company, the Company
shall immediately pay the Non-Employee Director his Deferred Accounts,
including accrued interest. A "change of control" shall mean (i) a merger or
consolidation in which the Company is not the surviving corporation or (ii) the
acquisition of twenty-five percent or more of the voting securities of the
Company by a person, group, or entity or (iii) the sale of all or substantially
all of the assets of the Company or (iv) individuals who were members of the
Board immediately prior to a meeting of the stockholders of the Company
involving a contest for the election of Non-Employee Directors do not
constitute a majority of the Board immediately following such election, unless
that election of such new Non-Employee Directors was recommended to the
stockholders by management of the Company.
SECTION TWENTY-NINE
AMENDMENT AND TERMINATION OF THIS PART B
A. DISCRETION OF THE BOARD OF DIRECTORS. The Board of Directors
may at any time terminate or amend this Part B. Except as herein provided, no
such termination may affect Stock previously purchased.
B. AUTOMATIC TERMINATION. This Part B shall terminate on
[ ], 2006.
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EXHIBIT 10.22
CHOICE HOTELS INTERNATIONAL, INC.
1996 NON-EMPLOYEE DIRECTOR
STOCK COMPENSATION PLAN
Choice Hotels International, Inc. has adopted and established a
stock compensation plan for Non-Employee Directors in accordance with the
following terms and conditions.
SECTION ONE
DESIGNATION AND PURPOSE OF THE PLAN
A. Designation. This Plan is designated the "Choice Hotels
International, Inc. Non-Employee Director Stock Compensation Plan."
B. Purpose. The purpose of this Plan is to increase the
stock-based component of Non-Employee Director compensation so as to encourage
stock ownership by Non-Employee Directors and to further align the interest of
Non-Employee Directors and stockholders.
SECTION TWO
DEFINITIONS
As used in the Plan, the following terms mean:
A. "Award" means restricted stock granted hereunder.
B. "Board" means the Board of Directors of the Company.
C. "Company" means Choice Hotels International, Inc.
D. "Custodial Account" means the account described in Section
7(A) herein.
E. "Disability" means a permanent and total disability within the
meaning of Section 22(e)(3) of the Internal Revenue Code of 1986 as amended.
F. "Non-Employee Director" means a member of the Board of the
Company who is not an employee of the Company or any of its subsidiaries.
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G. "Participant" means any Non-Employee Director who is granted
an Award as provided in this Plan.
H. "Plan" means this Non-Employee Director Stock Compensation
Plan.
I. "Retirement" means termination of service as a Director for
either of the following reasons: (i) after attaining 65 years of age or (ii)
failure to be re-elected as a Director by the shareholders of the Company at an
Annual Meeting of Stockholders.
J. "Stock" means the common stock of Choice Hotels International,
Inc.
SECTION THREE
EFFECTIVE DATE, DURATION AND STOCKHOLDER APPROVAL
The Plan shall be effective upon the approval of the Plan by a
majority of the outstanding shares of Stock voted at the [ ]
("Stockholder Approval").
SECTION FOUR
ADMINISTRATION OF THIS PLAN
This Plan shall be administered by the Board. The Board shall
have all the powers vested in it by the terms of this Plan, such powers to
include authority (within the limitation described herein) to prescribe the
form of the agreement embodying Awards made under this Plan. Subject to the
provisions of this Plan, the Board shall have the power to construe this Plan,
to determine all questions arising thereunder, and to adopt and amend such
rules and regulations for the administration of this Plan as it may deem
desirable. Any decision of the Board in the administration of this Plan, as
described herein, shall be final and conclusive. The Board may act only by a
majority of its members in office, except that the members thereof may
authorize any one or more of their number or the Secretary or any other officer
of the Company to execute and deliver documents on behalf of the Board.
SECTION FIVE
GRANT OF AWARDS AND LIMITATION OF
NUMBER OF SHARES SUBJECT TO AWARD
A. Compensation in Common Stock. Subject to stockholder
approval, effective as of [ ] and as of each annual meeting
thereafter, each Non-Employee Director shall be granted a number of shares
equal to $30,000 fair market value (as determined in accordance with Section
5(B) below) of Stock on the date of each annual meeting. Such Award shall be
in lieu of all Board retainer and Board attendance fees.
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B. Determination of Fair Market Value. The fair market value of
the Stock on the date of granting an Award shall be the mean of the high and
low prices at which the Stock was sold on the market on such date. In the
event no such sales of Stock occurred on such date, the fair market value of
the Stock shall be determined by the mean of the high and low prices at which
the Stock was sold on the market on the next preceding date for which the Stock
was so sold.
C. Fractions of Shares. Whenever under the terms of the Plan
fractional shares would be required to be issued, the fractional shares shall
be rounded up to the next full share.
D. Total Number of Shares. Subject to any adjustment pursuant to
Section 8, the total number of shares of Stock which may be awarded under this
Plan is 240,000 shares. The maximum number of shares authorized may be
increased from time to time by approval of the Board and, if required pursuant
to Rule 16b-3 of the Securities and Exchange Commission or its successors or
the applicable rules of any stock exchange, the stockholders of the Company.
To the extent that an Award lapses or the rights of the
Participant to whom it was granted terminate, expire or are cancelled for any
other reason, in whole or in part, shares of Stock (or remaining shares)
subject to such Award shall again be available for the grant of an Award under
the Plan. Shares delivered by the Company under the Plan may be authorized and
unissued Stock, Stock held in the treasury of the Company or Stock purchased on
the open market (including private purchases) in accordance with applicable
securities laws.
E. Insufficient Number of Shares. In the event that the number
of shares of Stock available for future Awards under this Plan is insufficient
to make all Awards required to be made on any date, then all Participants
entitled to an Award on such date shall share ratably in the number of shares
of Stock which may be included in Awards granted to Participants under this
Plan.
SECTION SIX
ELIGIBILITY
Each Non-Employee Director shall be eligible to receive an Award
in accordance with Section Five. Each Award granted under this Plan shall be
evidenced by an agreement in such form as the Board shall prescribe from time
to time in accordance with this Plan and shall comply with the terms and
conditions set forth in Section 7. Such an agreement shall incorporate the
provisions of this Plan by reference.
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SECTION SEVEN
RESTRICTIONS ON SHARES
A. Custodial Account. The shares shall be held by the Company,
in trust, in a Custodial Account on behalf of the Participant until such time
as the shares have vested pursuant to the terms of Section 7(B) of this Plan.
Any amounts deferred under the provisions of this Plan shall continue for all
purposes to be a part of the general assets of the Company. To the extent that
Participant acquires a right to receive payment from the Company under this
Plan, such right shall be no greater than the right of any unsecured general
creditor of the Company.
B. Vesting. The shares held by the Company, in trust, shall
remain in the Custodial Account until vesting which shall occur (a) to the
extent of one-third of the total number of shares, subject to an Award
following the expiration of one year from the date of the Award, (b) to the
extent of an additional one-third following the expiration of two years from
the date of the Award, and (c) to the extent of an additional one-third
following the expiration of three years from the date of the Award.
Upon vesting, the shares shall be distributed to the Participant
within a reasonable period of time not to exceed ninety (90) days from the date
of vesting and the Custodial Account shall be terminated as to such shares.
C. Forfeiture. Subject to Section 7(E) below, if the Participant
ceases to be a Non-Employee Director for any reason prior to vesting, the
Participant shall forfeit the shares, and the Custodial Account shall be
terminated. Ownership of the forfeited shares shall revert back to the
Company.
D. No Assignment. The shares granted under the Plan, while held
by the Company pursuant to the Custodial Account, shall not be transferred,
assigned, pledged, or hypothecated in any way (whether by operation of law or
otherwise), and shall not be subject to execution, attachment, or similar
process. Upon any attempt to so transfer, assign, pledge, hypothecate, or
otherwise dispose of the shares, or of any right or privilege conferred
thereby, contrary to the provisions hereof, or upon the levy of any attachment
or similar process upon such rights and privileges, the Participant shall
forfeit the shares and ownership of the forfeited shares shall revert back to
the Company.
E. Death, Disability and Board Retirement. A Participant who
ceases to serve on the Board by reason of (i) death, (ii) Disability, or (iii)
Retirement, shall be vested in his or her entire Award notwithstanding the
limitation of Section 7(B) above.
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SECTION EIGHT
CHANGES IN CAPITAL STRUCTURE
In the event of any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, or extraordinary dividend or
divestiture (including a spin-off), or any other change in the capital
structure or shares of the Company, the Board shall make adjustments,
determined by the Board in its discretion to be appropriate, as to the number
and kind of securities subject to this Plan and specified in Section 5 of this
Plan and as to the number and kind of securities covered by each outstanding
Award and, where applicable, the price per share thereunder.
SECTION NINE
RIGHTS AS A STOCKHOLDER
The Participant shall be entitled to give direction to the
Company, as fiduciary, to vote the shares held by the Company on behalf of the
Participant in the Custodial Account in accordance with the Participant's
written instructions. Any cash or non-cash dividend payable with respect to
shares held in the Custodial Account will remain in the Custodial Account
subject to risk of forfeiture until such time as the shares with respect to
which such cash or non-cash dividend, as the case may be, was declared is
either distributed to the Participant or forfeited by the Participant.
Notwithstanding anything to the contrary contained herein, no
Stock or cash dividends shall be transferred by the Company to a Custodial
Account prior to the date of Stockholder Approval, and no Non-Employee Director
shall be entitled to any rights as a stockholder with respect to any Stock
granted hereunder, including, without limitation voting rights until such Stock
has been transferred to a Custodial Account.
SECTION TEN
TITLE
Subject to Section 13 herein, the shares held by the Company
shall be held in the name of the Participant. Such shares shall at all times
remain in the Company Custodial Account until they have been (i) forfeited by
the Participant, (ii) distributed to the Participant, or (iii) transferred to a
grantor "Rabbi Trust" in accordance with the provisions of Section 13.
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SECTION ELEVEN
RISK OF LOSS
The Participant agrees to assume all risks in connection with any
decrease in the value of the shares granted to the Participant placed into the
Custodial Account for the benefit of the Participant.
SECTION TWELVE
NOTICE TO COMPANY
The Participant shall notify the Company immediately if he or she
elects to make an election under Section 83(b) of the Internal Revenue Code or
upon the occurrence of any other event resulting in the value of the shares
being included in the Participant's gross income prior to vesting.
SECTION THIRTEEN
DEFERRAL
A Participant, provided he or she has not made the election
referred to in Section 12 herein, may elect by written notice to defer payment
on all or a portion of the shares held in the Custodial Account prior to any
vesting, subject to the following conditions:
A. Such election shall be irrevocable. An election to defer
payment shall be made at least sixty (60) days prior to any vesting for which
the election to defer payment is made. The Participant may elect to defer the
receipt of the shares held in the Custodial Account prior to any vesting for a
period of time which ends no sooner than the earlier of (i) a date at least
twenty-four (24) months from the date of any such vesting or (ii) cessation of
service as a Non-Employee Director. During such deferral period, Participant
shall not be entitled to (i) vote the shares granted to him or her for which a
deferral has been elected, and (ii) currently receive cash dividends or
non-cash dividends.
B. The Company shall establish a grantor "Rabbi Trust" and shall
establish thereunder on behalf of the Participant upon a deferral election a
liability account (the "Deferred Compensation Account") which shall be credited
with any shares, cash dividends, and non-cash dividends subject to such
deferral election. Any shares transferred from the Custodial Account to the
Deferred Compensation Account shall be retitled and held in the name of the
trustee of the grantor "Rabbi Trust".
C. There shall be credited to the Deferred Compensation
Account an additional amount with respect to the cash dividends (i.e., in
addition to the items
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credited pursuant to paragraph (B) hereof) equal to the earnings generated
through the investment of the cash dividends by the trustee of the grantor
trust.
D. The Company will provide an annual statement of the
Deferred Compensation Account to the Participant showing amounts credited to
his or her account in accordance with paragraph (C).
E. Nothing contained in this Plan and no action taken
pursuant to the provisions of this Plan shall create or be construed to create
a trust of any kind other than a grantor "Rabbi Trust", or a fiduciary
relationship between the Company and the Participant, his or her designated
beneficiary or any other person. Any amounts deferred under the provisions of
this Plan shall continue for all purposes to be a part of the general assets of
the Company. To the extent that Participant acquires a right to receive
payment from the Company under this Plan, such right shall be no greater than
the right of any unsecured general creditor of the Company.
F. The right of the Company or any other person to the
payment of deferred compensation or other benefits under this Plan shall not be
assigned, transferred, pledged, or encumbered except by will or by the laws of
descent and distribution.
SECTION FOURTEEN
GENDER
Where applicable, words in the feminine shall include the
masculine, words in the neuter shall include the masculine and feminine, and
words in the singular shall include the plural, and vice versa.
SECTION FIFTEEN
SUCCESSORS
This Plan shall be binding upon and inure to the benefit of the
Company and its subsidiaries, its successors and assigns and the Participant
and his or her heirs, executors, administrators and legal representatives.
SECTION SIXTEEN
NO RIGHT TO CONTINUE AS A DIRECTOR
Neither the Plan, nor the granting of an Award, nor any other
action taken pursuant to Plan, shall constitute or be evidence of any agreement
or understanding, express or implied, that the Company will retain a
Non-Employee Director for any period of time, or at any particular rate of
compensation. Nothing in this Plan shall in any way limit or affect the right
of the Board or the stockholders of the Company to
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remove any Non-Employee Director or otherwise terminate his or her service as a
director of the Company.
SECTION SEVENTEEN
MISCELLANEOUS PROVISIONS
A. Government and Other Regulations. The obligation of the
Company to make payment of Awards in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
government agencies as may be required. The Company shall be under no
obligation to register under the Securities Act of 1933, as amended ("Act"),
any of the shares of Stock issued, delivered or paid in settlement under the
Plan. If Stock awarded under the Plan may in certain circumstances be exempt
from registration under the Act, the Company may restrict its transfer in such
manner as it deems advisable to ensure such exempt status.
B. Governing Law. All matters relating to the Plan or to Awards
granted hereunder shall be governed by the laws of the State of Maryland,
without regard to its principles of conflict of laws.
C. Titles and Headings. The titles and headings of the sections
in the Plan are for convenience of reference only, and in the event of any
conflict, the text of the Plan, rather than such titles and headings, shall
control.
SECTION EIGHTEEN
AMENDMENT AND TERMINATION
This Plan may be terminated or amended at any time and from time
to time by the Board as the Board shall deem advisable. No modification or
amendment of this Plan shall, without the written consent of the Participant,
materially and adversely affect his or her rights under this Plan.
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EXHIBIT 10.23
CHOICE HOTELS INTERNATIONAL, INC.
1996 LONG-TERM INCENTIVE PLAN
SECTION ONE
DESIGNATION AND PURPOSE OF PLAN
The purpose of the Choice Hotels International, Inc. 1996
Long-Term Incentive Plan (the "Plan") is to increase the ownership of Company
Stock by those officers, professional staff and other key employees who are
mainly responsible for the continued growth and development and financial
success of the Company and its subsidiaries. Such stock ownership gives such
employees a proprietary interest in the Company which induces them to continue
in its employ. The Plan also enables the Company to attract and retain such
employees and reward them for the continued profitable performance of Choice
Hotels International, Inc.
SECTION TWO
DEFINITIONS
The following definitions are applicable herein:
A. "Award" - Individually or collectively, Options, Stock
Appreciation Rights, Performance Shares or Restricted Stock granted hereunder.
B. "Award Period" - the period of time during which a Stock
Appreciation Right which has not been granted pursuant to an Option may be
exercised. The Award Period shall be set forth in the document issuing the
Stock Appreciation Right to the selected Eligible Employee.
C. "Board" - the Board of Directors of the Company.
D. "Book Value" - the book value of a share of Stock determined
in accordance with the Company's regular accounting practices as of the last
business day of the month immediately preceding the month in which a Stock
Appreciation Right is exercised as provided in Section Nine D.
E. "Code" - the Internal Revenue Code of 1986, as amended.
Reference in the Plan to any section of the Code shall be deemed to include any
amendments or successor provisions to such section and any regulations
promulgated thereunder.
F. "Committee" - the Key Executive Stock Option Plan Committee
appointed to administer the Plan pursuant to Section Four.
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G. "Company" - Choice Hotels International, Inc., including any
present or future "subsidiary corporation" as such term is defined in Section
424(f) of the 1986 Internal Revenue Code, as amended.
H. "Covered Employee" - an individual described in Section
162(m)(3) of the Code.
I. "Date of Grant" - the date on which the granting of an Award
is authorized by the Committee or such later date as may be specified by the
Committee in such authorization.
J. "Eligible Employee" - any person employed by the Company or a
Subsidiary on a regularly scheduled basis who satisfies all of the requirements
of Section Six.
K. "Exercise Period" - the period or periods during which a Stock
Appreciation Right is exercisable as described in Section Nine B.
L. "Fair Market Value" - the fair market value of the Stock as
determined in accordance with Section Eight D.
M. "Incentive Stock Option" - an incentive stock option within
the meaning of Section 422 of the Code.
N. "Option" or "Stock Option" - either a nonqualified stock
option or an Incentive Stock Option granted under Section Eight. It also means
any Option which remains after a Participant has exercised his Option with
respect to part of the shares covered by a Stock Option Agreement as described
in Section Eight B.
O. "Option Period" or "Option Periods" - the period or periods
during which an Option is exercisable as described in Section Eight E.
P. "Option Price" - the price, expressed on a per share basis,
for which the Company Stock can be acquired by the holder of an Option pursuant
to the exercise of such Option.
Q. "Participant" - an Eligible Employee of the Company or a
Subsidiary who has been granted an Option, a Stock Appreciation Right, a
Performance Share Award or a Restricted Stock Award under this Plan.
R. "Performance Share" - an Award granted under Section Ten.
S. "Restricted Stock" - an Award granted under Section Seven.
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T. "Stock" and "Company Stock" - the common stock of the Company.
U. "Stock Appreciation Right" - an Award granted under Section
Nine.
V. "Subsidiary" - any corporation of which fifty percent (50%) or
more of its outstanding voting stock or voting power is beneficially owned,
directly or indirectly, by the Company.
W. "Ten Percent Shareholder" - a Participant who, at the Date of
Grant, owns directly or indirectly (within the meaning of Section 424(d) of the
Internal Revenue Code) stock possessing more then ten percent (10%) of the
total combined voting power of all classes of stock of the Company or a
subsidiary thereof.
X. Wherever appropriate, words used in this Plan in the singular
may mean the plural, the plural may mean the singular and the masculine may
mean the feminine.
SECTION THREE
EFFECTIVE DATE, DURATION AND STOCKHOLDER APPROVAL
A. Effective Date and Stockholder Approval. Subject to the
approval of the Plan by a majority of the outstanding shares of Stock, the Plan
shall be effective as of [ ], 1996.
B. Period for Grant of Awards. Awards may be made as provided
herein for a period of ten (10) years after [ ],1996.
SECTION FOUR
ADMINISTRATION
A. Appointment of Committee. The Board of Directors shall
appoint one or more Key Executive Stock Option Plan Committees which shall
consist of not less than two (2) members of such Board of Directors and which
members shall be Non-Employee Directors as defined in Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (or such greater number of members
which may be required by said Rule 16b-3). In addition, such Board of
Directors shall designate a member of the Committee to act as Chairman of the
Committee, and such Board of Directors may remove any member of the Committee
at any time and appoint any director to fill any vacancy on the Committee.
B. Committee Meetings. The Committee shall hold its
meetings at such times and places as specified by the Committee Chairman. A
majority of the Committee shall constitute a quorum. All actions of the
Committee shall be taken by all of the members of the meeting duly called by
its Chairman; provided, however, any action taken by a written
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document signed by a majority of the members of the Committee shall be as
effective as action taken by the Committee at a meeting duly called and held.
C. Committee Powers. Subject to the provisions of this Plan, the
Committee shall have full authority in its discretion to (i) designate the
Participants to whom Awards shall be granted, (ii) determine the number of
shares to be made available under each such Award, (iii) determine the period
or periods in which the Participant may exercise such Award, (iv) determine the
date when such Award expires, (v) determine the price for Stock under such
Award, and (vi) determine the grounds of forfeiture of an Award. The Committee
shall have all powers necessary to administer the Plan in accordance with its
terms, including the power to interpret this Plan and resolve all questions
arising thereunder. The Committee may prescribe such rules and regulations for
administering this Plan as the Committee deems appropriate.
SECTION FIVE
GRANT OF AWARDS AND
LIMITATION OF NUMBER OF SHARES SUBJECT TO AWARD
The Committee may, from time to time, grant Awards to one or more
Eligible Employees, provided that (i) subject to any adjustment pursuant to
Section Eleven, the aggregate number of shares of Stock subject to Stock
Options, Stock Appreciation Rights, Performance Share Awards or Restricted
Stock Awards under this Plan may not exceed 2,000,000 shares; (ii) to the
extent that a Stock Option, Stock Appreciation Right, Performance Share Award
or Restricted Stock Award lapses or the rights of the Participant to whom it
was granted terminate, expire or are cancelled for any other reason, in whole
or in part, shares of Stock (or remaining shares) subject to such Award shall
again be available for the grant of an Award under the Plan; and (iii) Shares
delivered by the Company under the Plan may be authorized and unissued Stock,
Stock held in the treasury of the Company or Stock purchased on the open market
(including private purchases) in accordance with applicable securities laws.
In determining the size of Awards, the Committee shall take into account the
responsibility level, performance, potential, and cash compensation level of a
Participant, and the Fair Market Value of the Stock at the time of Awards, as
well as such other considerations it deems appropriate.
SECTION SIX
ELIGIBILITY
Key employees of the Company and its Subsidiaries (including
employees who are members of the Board, but excluding directors who are not
employees) who, in the opinion of the Committee, are mainly responsible for the
continued growth and development and financial success of the business of the
Company or one or more of its Subsidiaries shall be eligible to be granted
Awards under the Plan. Subject to the provisions of the Plan, the Committee
may from time to time select from such eligible persons those to whom Awards
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shall be granted and determine the nature and amount of each Award. No
employee of the Company or its Subsidiaries shall have any right to be granted
an Award under this Plan. A member of the Committee shall not be eligible for
any Award hereunder.
Notwithstanding any provision to the contrary contained herein,
Options shall be granted under this Plan to persons, including without
limitation, employees of Manor Care, Inc., its subsidiaries, and affiliated
companies in substitution for prior Options under plans of Manor Care, Inc. in
accordance with the terms of the Employee Benefits and other Employee Matters
Allocation Agreement between Manor Care, Inc. and the Company.
SECTION SEVEN
RESTRICTED STOCK AWARDS
A. Grants of Shares of Restricted Stock. An Award made pursuant
to this Section Seven shall be granted in the form of shares of Stock,
restricted as provided in this Section Seven. Shares of the Restricted Stock
shall be issued to the Participant without the payment of consideration by the
Participant. The shares of Restricted Stock shall be issued in the name of the
Participant and shall bear a restrictive legend prohibiting sale, transfer,
pledge or hypothecation of the shares of Restricted Stock until the expiration
of the restriction period.
The Committee may also impose such other restrictions and
conditions on the shares of Restricted Stock as it deems appropriate.
B. Restriction Period. At the time a Restricted Stock Award is
made, the Committee may establish a restriction period applicable to such Award
which shall not be more than ten (10) years. Each Restricted Stock Award may
have a different restriction period, at the discretion of the Committee. In
addition to or in lieu of a restriction period, the Committee may establish a
performance goal which must be achieved as a condition to the retention of the
Restricted Stock. The performance goal may be based on the attainment of
specified types of performance measurement criteria, which may differ as to
various Participants or classes or categories of Participants. Such criteria
may include, without limitation, the attainment of certain performance levels
by the individual Participant, the Company, a department or division of the
Company and/or a group or class of participants. Any such performance goals,
together with the ranges of Restricted Stock Awards for which the Participants
may be eligible shall be set from time to time by the Committee and shall be
timely communicated to the Eligible Employees in advance of the commencement of
the performance of services to which such performance goals relate. The total
number of shares of Restricted Stock which may be granted to any single Covered
Employee under this Plan during any calendar year shall be limited to 100,000.
C. Forfeiture or Payout of Award. In the event a Participant
ceases employment during a restriction period, or in the event performance
goals attributable to a Restricted Stock Award are not achieved, subject to the
terms of each particular Restricted Stock Award, and subject to discretionary
action by the Committee as set forth below in Section Thirteen, a Restricted
Stock Award is subject to forfeiture of the shares of stock which had not
previously been removed from restriction under the terms of the Award.
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Any shares of Restricted Stock which are forfeited will be
transferred to the Company.
Upon completion of the restriction period and satisfaction of any
performance-goal criteria, all restrictions upon the Award will expire and new
certificates representing the Award will be issued without the restrictive
legend described in Section Seven A. As a condition precedent to receipt of
the new certificates, the Participant (or the designated beneficiary or
personal representative of the Participant) will agree to make payment to the
Company in the amount of any taxes, payable by the Participant, which are
required to be withheld with respect to such shares of Stock.
SECTION EIGHT
STOCK OPTIONS
A. Grant of Option. One or more Options may be granted to any
Eligible Employee. Upon the grant of an Option to an Employee, the Committee
shall specify whether the Option is intended to constitute a non-qualified
stock option or an Incentive Stock Option. The total number of shares of Stock
subject to Options which may be granted to any single Covered Employee under
this Plan during any calendar year shall be limited to 100,000.
B. Stock Option Agreement. Each Option granted under the Plan
shall be evidenced by a written "Stock Option Agreement" between the Company
and the Participant containing such terms and conditions as the Committee
determines, including, without limitation, provisions to qualify Incentive
Stock Options as such under Section 422 of the Code. Such agreements shall
incorporate the provisions of this Plan by reference. The date of granting an
Option is the date specified in the written Stock Option Agreement which is
signed by the Participant and the Company.
C. Determination of Option Price. The Option price for Stock
shall be not less than 100% of the fair market value of the Stock on the date
of grant. Notwithstanding the foregoing, in the case of an Option which is
designed to qualify as an Incentive Stock Option (as defined in Section 422 of
the Code) which is granted to a Ten Percent Shareholder, the Option Price shall
not be less than 110% of such fair market value.
D. Determination of Fair Market Value. The fair market value of
the Stock on the date of granting an Option shall be the mean of the high and
low prices at which the Stock was sold on the market on such date. In the
event no such sales of Stock occurred on such date, the fair market value of
the Stock shall be determined by the Committee in accordance with applicable
Regulations of the Internal Revenue Service.
E. Term of Option. The term of an Option may vary within the
Committee's discretion; provided, however, that the term of an Option shall not
exceed ten (10) years
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from the date of granting the Option to the Participant, and, to this end, all
Options granted pursuant to this Plan must provide that each such Option cannot
be exercised after the expiration of ten (10) years from the date each such
Option is granted. Notwithstanding the foregoing, in the case of any Option
which is designed to qualify as an Incentive Stock Option (as defined in
Section 422 of the Code) which is granted to a Ten Percent Shareholder, the
term of such Option may not exceed five (5) years from the date of grant of
such Option.
F. Limitation on Exercise of Option. The Committee may limit an
Option by restricting its exercise in whole or in part for specified periods.
G. Method of Exercising an Option. Subject to the terms of a
particular Option, a Participant may exercise it in whole or in part by written
notice to the Secretary of the Company stating in such written notice the
number of shares of Stock such Participant elects to purchase under his Option.
H. No Obligation to Exercise Option. A Participant is under no
obligation to exercise an Option or any part thereof.
I. Payment for Option Stock. Stock purchased pursuant to an
Option shall be paid in full at the time of purchase. Payment may be made (a)
in cash, (b) with the approval of the Committee, by delivery to the Company of
shares of Stock having an aggregate fair market value equal to the exercise
price, or (c) a combination of (a) and (b). Payment may also be made, in the
discretion of the Committee, by delivery (including by facsimile transmission)
to the Company or its designated agent of an executed irrevocable Option
exercise form together with irrevocable instructions to a broker-dealer to sell
(or margin) a sufficient portion of the shares and deliver the sale (or margin
loan) proceeds directly to the Company to pay for the exercise price. Upon
receipt of payment and subject to paragraph J of this Section Eight, the
Company shall, without transfer or issue tax to the Participant or other person
entitled to exercise the Option, deliver to the Participant (or other person
entitled to exercise the Option) a certificate or certificates for such shares.
J. Delivery of Stock to Participant. The Company shall undertake
and follow all necessary procedures to make prompt delivery of the number of
shares of Stock which the Participant elects to purchase upon exercise of an
Option granted under this Plan. Such delivery, however, may be postponed, at
the sole discretion of the Company, to enable the Company to comply with any
applicable procedures, regulations or listing requirements of any government
agency, stock exchange or regulatory authority.
K. Failure to Accept Delivery of Stock. If a Participant refuses
to pay for Stock which he has elected to purchase under his Option, in
accordance with the terms of payment, which had previously been agreed upon,
his Option shall thereupon, at the sole discretion of the Committee, terminate,
and such funds previously paid for unissued Stock
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shall be refunded. Stock which has been previously issued to the Participant
and been fully paid for shall remain the property of the Participant and shall
be unaffected by such termination.
L. Non-Transferability of Options. During the lifetime of a
Participant, an Incentive Stock Option granted to him may be exercised only by
him. It may not be sold, assigned, pledged or otherwise transferred except by
will or by the laws of descent and distribution. In the case of Options which
are not Incentive Stock Options, the Committee may impose such restrictions on
transferability, if any, as it may in its sole discretion determine.
M. Purchase for Investment
(a) Written Agreement by Participants. Unless a
registration statement under the Securities Act of 1933 is then in effect with
respect to the Stock a Participant receives upon exercise of his Option, a
Participant shall acquire the Stock he receives upon exercise of his Option for
investment and not for resale or distribution and he shall furnish the Company
with a written statement to that effect when he exercises his Option and a
reference to such investment warranty shall be inscribed on the Stock
certificate(s).
(b) Registration Requirement. Each Option shall be
subject to the requirement that, if at any time the Board determines that the
listing, registration or qualification of the shares subject to the Option upon
any securities exchange or under any state or Federal law is necessary or
desirable as a condition of, or in connection with, the issuance of shares
thereunder, the Option may not be exercised in whole or in part unless such
listing, registration or qualification shall have been effected or obtained
(and the same shall have been free of any conditions not acceptable to the
Board).
N. Special Limitations on Exercise of Incentive Stock Options.
The aggregate fair market value (determined at the time the Incentive Stock
Option is granted) of the Stock with respect to which any Incentive Stock
Option is first exercisable during any calendar year shall not exceed $100,000.
SECTION NINE
STOCK APPRECIATION RIGHTS
A. Grant of Stock Appreciation Rights. Stock Appreciation Rights
may be granted under the Plan in conjunction with an Option either at the time
of grant or by amendment or may be separately awarded. Stock Appreciation
Rights shall be subject to such terms and conditions not inconsistent with the
Plan as the Committee shall impose. However, the total number of Stock
Appreciation Rights which may be granted to a single Covered Employee under
this Plan during any calendar year shall be limited to 100,000.
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B. Right to Exercise; Exercise Period. A Stock Appreciation
Right issued pursuant to an Option shall be exercisable to the extent the
Option is exercisable. A Stock Appreciation Right issued independent of an
Option shall be exercisable pursuant to such terms and conditions established
in the grant.
C. Automatic Redemption of Unexercised Stock Appreciation
Rights. If on the last day of the Option Period, in the case of a Stock
Appreciation Right granted pursuant to an Option, or the specified Award
Period, in the case of a Stock Appreciation Right issued independent of an
Option, the Participant has not exercised such Stock Appreciation Right, then
such Stock Appreciation Right shall be automatically redeemed by the Company
for an amount equal to the payment that would otherwise have been made to the
Participant if the Participant had chosen to exercise the Stock Appreciation
Right on the last day of the Option Period or the specified Award Period, as
the case may be.
D. Rights Upon Exercise. An exercisable Stock Appreciation Right
granted pursuant to an Option shall entitle the Participant to surrender
unexercised the Option or any portion thereof to which the Stock Appreciation
Right is attached, and to receive in exchange for the Stock Appreciation Right
a payment (in cash or Stock or a combination thereof as described below) equal
to the Fair Market Value of one share of Stock at the date of exercise minus
the Option Price times the number of shares called for by the Stock
Appreciation Right (or portion thereof) which is so exercised. With respect to
the issuance of Stock Appreciation Rights which are not granted pursuant to an
Option, the Committee shall specify upon the Date of the Grant of the Stock
Appreciation Right whether the Stock Appreciation Right is a "regular" Stock
Appreciation Right or a "book value" Stock Appreciation Right. Upon the
exercise of a regular Stock Appreciation Right, the Participant will receive a
payment equal to the Fair Market Value of one share of Stock at the date of
exercise minus the Fair Market Value of one share of Stock as of the Date of
Grant of the Stock Appreciation Right times the number of shares called for by
the Stock Appreciation Right (or portion thereof) which is so exercised. Upon
the exercise of a book value Stock Appreciation Right, the Participant will
receive a payment equal to the Book Value of one share of Stock at the date of
exercise minus the Book Value of one share of Stock as of the Date of the Grant
of the Stock Appreciation Right times the number of shares called for by the
Stock Appreciation Right (or portion thereof) which is so exercised.
The value of any Stock to be received upon exercise of a Stock
Appreciation Right shall be the Fair Market Value of the Stock on such date of
exercise. To the extent that a Stock Appreciation Right issued pursuant to an
Option is exercised, such Option shall be deemed to have been exercised, and
shall not be deemed to have lapsed.
E. Transferability. The Committee may impose such restrictions
on transferability of Stock Appreciation Rights, if any, as it may in its sole
discretion determine.
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SECTION TEN
PERFORMANCE SHARES
A. Grant of Performance Share Units. Awards made pursuant to
this Section Ten shall be granted in the form of Performance Shares, subject to
such terms and conditions not inconsistent with the Plan as the Committee shall
impose. Performance Shares shall be issued to the Participant without the
payment of consideration by the Participant. Awards shall be based on the
attainment of specified types and combination of performance measurement
criteria, which may differ as to various Participants or classes or categories
of Participants. Such criteria may include, without limitation, the attainment
of certain performance levels by the individual Participant, the Company, a
department or division of the Company and/or a group or class of Participants.
Such criteria, together with the ranges of Performance Shares from which
employees may be eligible shall be set from time to time by the Committee and
shall be communicated to the Eligible Employees. The total number of
Performance Shares which may be granted to any single Covered Employee under
this Plan during any calendar year shall be limited to 100,000.
B. Performance Period. The measuring period to establish the
performance criteria set forth in a Performance Share Award shall be determined
by the Committee. A Performance Share Award may initially provide, or the
Committee may at any time thereafter, but no more frequently than once in any
six (6) month period, amend it to provide, for waiver or reduction of the
measuring period and, if appropriate, for adjustment of the performance
criteria set forth in the Performance Share Award, upon the occurrence of
events determined by the Committee in its sole discretion to justify such
waiver, reduction or adjustment.
C. Form of Payment. Upon the completion of the applicable
measuring period, a determination shall be made by the Committee in accordance
with the Award as to the number of shares of Stock to be awarded to the
Participant. The appropriate number of shares of Stock shall thereupon be
issued to the Participant in accordance with the Award in satisfaction of such
Performance Share Award.
SECTION ELEVEN
CHANGES IN CAPITAL STRUCTURE OR SHARES
In the event any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, or extraordinary dividend or
divestiture (including a spin-off), or any other change in the capital
structure or shares of the Company, the Committee shall make adjustments,
determined by the Committee in its discretion to be appropriate, as to the
number and kind of securities subject to this Plan and specified in Section
Five of this Plan and as to the number and kind of securities covered by each
outstanding Award and, where applicable,
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the price per share thereunder; provided, however, that with respect to
Incentive Stock Options, such adjustments shall be made in accordance with
Section 424(h) of the Code unless the Committee determines otherwise.
SECTION TWELVE
CORPORATE REORGANIZATION OR DISSOLUTION
A. Discontinuation of the Plan. The Plan shall be discontinued
in the event of the dissolution or liquidation of the Company or in the event
of a Reorganization (as hereinafter defined) in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization and no plan or agreement respecting the Reorganization is
established which specifically provides for the continuation of the Plan and
the change, conversion, or exchange of the stock relating to existing Awards
under this Plan for securities of another corporation. Upon the dissolution of
the Plan in connection with an event described in this Paragraph A, all Awards
shall become fully vested and all outstanding Options and Stock Appreciation
Rights shall become immediately exercisable by the holder thereof. Any Options
or Stock Appreciation Rights granted under the Plan may be terminated as of a
date fixed by the Committee, provided that no less than fifteen (15) days
written notice of the date so fixed shall be given to each Participant and each
such Participant shall have the right during such period to exercise all or any
portion of such Options or Stock Appreciation Rights. Any Stock Appreciation
Rights not so exercised shall be redeemed.
B. Continuation of the Plan Upon a Reorganization. In the event
of a Reorganization (as hereinafter defined) (i) in which the Company is not
the surviving or acquiring company, or in which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization, and (ii) with respect to which there is a reorganization
agreement which undertakes to continue the Plan and to provide for the change,
conversion or exchange of the Stock attributable to outstanding Awards for
securities of another corporation, then the Plan shall continue and the
Committee shall adjust the shares under such outstanding Awards (and shall
adjust the shares remaining under the Plan which are then to be available for
the grant of additional Awards under the Plan, if the reorganization agreement
makes specific provisions therefor), in a manner not inconsistent with the
provisions of the reorganization agreement and this Plan for the adjustment,
change, conversion or exchange of such Awards.
The term "Reorganization" as used in this Section Twelve shall
mean any statutory merger, statutory consolidation, sale of all or
substantially all of the assets of the Company, or sale, pursuant to an
agreement with the Company, of securities of the Company pursuant to which the
Company is or becomes a wholly-owned subsidiary of another company after the
effective date of the Reorganization.
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C. Adjustments and Determinations. Adjustments and
determinations under this Section Twelve shall be made by the Committee, whose
decisions as to what adjustments or determinations shall be made, and the
extent thereof, shall be final, binding, and conclusive.
SECTION THIRTEEN
RETIREMENT AND DISABILITY
The Committee may, in its discretion, waive the forfeiture,
termination, or lapse of an Award in the event of retirement or disability of a
Participant (each as determined by the Committee, in its discretion). Exercise
of such discretion by the Committee in any individual case, however, shall not
be deemed to require, or to establish a precedent suggesting such exercise in
any other case.
SECTION FOURTEEN
MISCELLANEOUS PROVISIONS
A. Nontransferability. The Committee may impose such
restrictions on the transferability of an Award, if any, as it may in its sole
discretion determine.
B. No Employment Right. Neither this Plan nor any action taken
hereunder shall be construed as giving any right to be retained as an officer
or employee of the Company or any of its Subsidiaries.
C. Tax Withholding. Either the Company or a Subsidiary, as
appropriate, shall have the right to deduct from all Awards paid in cash any
federal, state or local taxes as it deems to be required by law to be withheld
with respect to such cash payments. In the case of Awards paid in Stock, the
employee or other person receiving such Stock may be required to pay to the
Company or a Subsidiary, as appropriate, the amount of any such taxes which the
Company or Subsidiary is required to withhold with respect to such Stock. At
the request of a Participant, or as required by law, such sums as may be
required for the payment of any estimated or accrued income tax liability may
be withheld and paid over to the governmental entity entitled to receive the
same. The Committee may from time to time establish procedures for withholding
of Stock.
D. Fractional Shares. Any fractional shares concerning Awards
shall be eliminated at the time of payment by rounding down for fractions of
less than one-half and rounding up for fractions of equal to or more than
one-half. No cash settlements shall be made with respect to fractional shares
eliminated by rounding.
E. Government and Other Regulations. The obligation of the
Company to make payment of Awards in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
government agencies as may be required. The
12
<PAGE> 13
Company shall be under no obligation to register under the Securities Act of
1933, as amended ("Act"), any of the shares of Stock issued, delivered or paid
in settlement under the Plan. If Stock awarded under the Plan may in certain
circumstances be exempt from registration under the Act, the Company may
restrict its transfer in such manner as it deems advisable to ensure such
exempt status.
F. Severance. Subject to the provision of Paragraph B of this
Section Fourteen, in the event a Participant's employment with the Company
terminates, his rights under any Award which constitutes an Option or a Stock
Appreciation Right terminate one (1) month from the date of such termination of
employment. Such rights shall be exercisable only to the extent the
Participant was entitled to exercise such rights under the Award on the date of
such termination of employment.
G. Death. If a Participant dies prior to the full exercise of
his Option and/or Stock Appreciation Right, his Option to purchase Stock under
such Option and/or Stock Appreciation Right may be exercised to the extent, if
any, that Participant would be entitled to exercise it at the date of the death
of the Participant by the person to whom the Option and/or Stock Appreciation
Right shall pass by will or by the laws of descent and distribution within
twelve (12) months of the death of the Participant or the expiration of the
term of the Option and/or Stock Appreciation Right whichever date is sooner.
H. Limitation. In no event may an Option be exercised by anyone
after the expiration date provided for in Section Eight of the Plan.
I. Limits on Discretion. Anything in this Plan to the contrary
notwithstanding, if the Award so provides, the Committee shall not have any
discretion to increase the amount of compensation payable under the Award to
the extent such discretion would cause the Award to lose its qualification as
performance-based compensation for purposes of Section 162(m)(4)(C) of the Code
and the regulations thereunder.
J. Governing Law. All matters relating to the Plan or to Awards
granted hereunder shall be governed by the laws of the State of Maryland,
without regard to its principles of conflict of laws.
K. Titles and Headings. The titles and headings of the sections
in the Plan are for convenience of reference only, and in the event of any
conflict, the text of the Plan, rather than such titles and headings, shall
control.
SECTION FIFTEEN
AMENDMENT OF PLAN
A. Discretion of the Board. The Board may at any time and from
time to time alter, amend, suspend or terminate the Plan in whole or in part,
except (i) any such action
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<PAGE> 14
affecting Options granted or to be granted under this Plan which are intended
to qualify as Incentive Stock Options shall be subject to stockholder approval
to the extent such stockholder approval is required pursuant to Section 422 of
the Internal Revenue Code and (ii) no such action may be taken without the
consent of the Participant to whom any Award shall theretofore have been
granted, which adversely affects the rights of such Participant concerning such
Award, except as such termination or amendment of the Plan is required by
statute, or rules and regulations promulgated thereunder.
B. Automatic Termination. This Plan shall terminate on [ ],
2006. Awards may be granted under this Plan at any time and from time to
time prior to the termination of the Plan. Any Award outstanding at the time
the Plan is terminated shall remain in effect until said Award is exercised or
expires.
14
<PAGE> 1
Exhibit 21.01
SUBSIDIARIES OF CHOICE HOTELS HOLDINGS, INC.*
---------------------------------------------
BOULEVARD MOTEL CORP.
Bay Ridge Spirits 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)
Choice Hotels Japan, Inc. (Formerly Quality Hotels Japan, Inc.)
Choice Hotels Limited
Choice Hotels of Brazil, Inc.
- ------------------
* Direct subsidiaries of the Registrant are set forth below in capital
letters with their subsidiaries immediately following. Entities are
wholly owned except were indicated.
<PAGE> 2
-2-
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. (d)
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 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> 3
-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
