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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A-3
------------------------
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------
CHOICE HOTELS HOLDINGS, INC.
(TO BE RENAMED CHOICE HOTELS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
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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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (301) 979-5000
------------------------
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
- --------------------------------------------------------------------------------------------
COMMON STOCK, PAR NEW YORK STOCK EXCHANGE
VALUE $.01 PER SHARE
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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<PAGE> 2
ITEM 1. BUSINESS
The information required by this item is contained under the sections
"Summary," "Introduction," "Risk Factors," "The Distribution," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" of the Information Statement (the "Information Statement") attached
hereto as Exhibit 2.01 and such sections are incorporated herein by reference.
ITEM 2. FINANCIAL INFORMATION
The information required by this item is contained under the sections
"Summary," "Capitalization," "Selected Historical Financial Data," "Pro Forma
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of the Information Statement and such sections are
incorporated herein by reference.
ITEM 3. PROPERTIES
The information required by this item is contained under the section
"Business" of the Information Statement and such section is incorporated herein
by reference.
ITEM 4. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained under the section
"Security Ownership of Principal Stockholders and Management" of the Information
Statement and such section is incorporated herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is contained under the sections
"Management -- Executive Officers of the Company" and "The Board of Directors"
of the Information Statement and such sections are incorporated herein by
reference.
ITEM 6. EXECUTIVE COMPENSATION
The information required by this item is contained under the sections
"Management -- Compensation of Executive Officers" and "The Board of Directors"
of the Information Statement and such sections are incorporated herein by
reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the sections
"Relationship Between Manor Care and the Company After the Distribution" and
"Certain Relationships and Related Transactions" of the Information Statement
and such sections are incorporated herein by reference.
ITEM 8. LEGAL PROCEEDINGS
The information required by this item is contained under the sections
"Business -- Legal Proceedings" and "Business -- Environmental Matters" and in
the Notes to Combined Financial Statements of the Company under the heading
"Commitments and Contingencies" which are included in the Information Statement
and incorporated herein by reference.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
<PAGE> 3
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 October 1, 1996, the Registrant issued and sold 10 shares of its common
stock to Manor Care, Inc. for $.10 in order to become a wholly-owned subsidiary
of Manor Care, Inc. The sale was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The information required by this item is contained under the sections "The
Distribution -- Listing and Trading of Shares of the Company's Common Stock,"
"Description of Capital Stock of the Company" and "Purposes and Effects of
Certain Charter and By-Law Provisions" of the Information Statement and such
sections are incorporated herein by reference.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The information required by this item is contained under the section
"Liability and Indemnification of Officers and Directors" of the Information
Statement and such section is incorporated herein by reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained (i) under the sections
"Summary," "Capitalization," "Selected Historical Financial Data," "Pro Forma
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of the Information Statement and such sections are
incorporated herein by reference and (ii) in the Combined Financial Statements
and Supplemental Schedules incorporated by reference in Item 15 hereof, all of
which are incorporated herein by reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following Financial Statements of the Company are included in
Exhibit 2.01 hereto and incorporated herein by reference:
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(i) Combined Financial Statements
-- Report of Arthur Andersen LLP, Independent Public Accountants, dated June
28, 1996;
-- Combined Balance Sheets as of May 31, 1995, May 31, 1996 and August 31, 1996
(Unaudited);
-- Combined Statements of Income for each of the fiscal years in the three-year
period ended May 31, 1996 and for the three-month periods ended August 31,
1995 (Unaudited) and August 31, 1996 (Unaudited);
-- Combined Statements of Cash Flows for each of the fiscal years in the
three-year period ended May 31, 1996 and for the three-month periods ended
August 31, 1995 (Unaudited) and August 31, 1996 (Unaudited);
-- Notes to Combined Financial Statements.
</TABLE>
2
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The following supplemental schedule of the Company is included in
Exhibit 99.01 hereto and incorporated herein by reference.
(ii) Supplemental Schedule
-- Schedule II -- Valuation and Qualifying Accounts.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
2.01 Information Statement dated , 1996**
3.01 Form of Restated Certificate of Incorporation of the Registrant**
(attached to Information Statement as Appendix A)
3.02 Form of By-laws of the Registrant*
4.01 Form of Common Stock certificate***
10.01 Form of Distribution Agreement dated , 1996 between Manor Care,
Inc. and the Registrant*
10.02 Form of Trademark Agreement, between Manor Care, Inc. and the Registrant*
10.03 Intentionally omitted.
10.04 Form of Time Sharing Agreement between Manor Care, Inc. and the
Registrant*
10.05 Form of Corporate Services Agreement between Manor Care, Inc. and the
Registrant*
10.06 Form of Employee Benefits Administration Agreement between Manor Care,
Inc. and the Registrant*
10.07 Form of Employee Benefits and Other Employment Matters Allocation
Agreement between Manor Care, Inc. and the Registrant**
10.08 Form of Office Lease between Manor Care, Inc. and the Registrant*
10.09 Form of Office Lease between Manor Care, Inc. and the Registrant*
10.10 Form of Loan Agreement between MNR Finance Corp. and the Registrant**
10.11 Form of Procurement Agreement between Manor Care, Inc. and the Registrant*
10.12 Form of Risk Management Consulting Services Agreement between Manor Care,
Inc. and the Registrant**
10.13 Form of Tax Administration Agreement between Manor Care, Inc. and the
Registrant*
10.14 Form of Tax Sharing Agreement between Manor Care, Inc. and the
Registrant**
10.15 Employment Agreement, dated September 1, 1995, between Manor Care, Inc.
and Donald Landry*
10.16 Form of Assignment Agreement among Manor Care, Inc., the Registrant and
Donald Landry.*
10.17 Form of Employment Agreement between the Registrant and Stewart Bainum,
Jr.***
10.18 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*
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*
10.24 Form of Revolving Credit Facility Agreement between the Registrant and
Chase Manhattan Bank**
</TABLE>
3
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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10.25 Form of Pikesville Sublease between Manor Care, Inc. and the Registrant**
12.01 Statement re: computation of ratio of earnings to fixed charges**
21.01 Subsidiaries of the Registrant*
24.01 Power of Attorney*
27.01 Financial Data Schedule**
99.01 Schedule II -- Valuation and Qualifying Accounts**
</TABLE>
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* Previously filed.
** Filed herewith.
*** To be filed by amendment.
4
<PAGE> 6
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHOICE HOTELS HOLDINGS, INC.
Date: October 3, 1996 By: *
--------------------------------------
Name: Stewart Bainum, Jr.
Title: Chief Executive Officer
* /s/ JAMES H. REMPE
---------------------------------------------------
James H. Rempe
Attorney-in-Fact
5
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INDEX TO EXHIBITS
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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2.01 Information Statement dated , 1996**..........................
3.01 Form of Restated Certificate of Incorporation of the Registrant**
(attached to Information Statement as Appendix A).......................
3.02 Form of By-laws of the Registrant*......................................
4.01 Form of Common Stock certificate***.....................................
10.01 Form of Distribution Agreement dated , 1996 between Manor
Care, Inc. and the Registrant*..........................................
10.02 Form of Trademark Agreement between Manor Care, Inc. and the
Registrant*.............................................................
10.03 Intentionally omitted ..................................................
10.04 Form of Time Sharing Agreement between Manor Care, Inc. and the
Registrant*.............................................................
10.05 Form of Corporate Services Agreement between Manor Care, Inc. and the
Registrant*.............................................................
10.06 Form of Employee Benefits Administration Agreement between Manor Care,
Inc. and the Registrant*................................................
10.07 Form of Employee Benefits and Other Employment Matters Allocation
Agreement between Manor Care, Inc. and the Registrant**.................
10.08 Form of Office Lease between Manor Care, Inc. and the Registrant*.......
10.09 Form of Office Lease between Manor Care, Inc. and the Registrant*.......
10.10 Form of Loan Agreement between MNR Finance Corp. and the Registrant**...
10.11 Form of Procurement Agreement between Manor Care, Inc. and the
Registrant*.............................................................
10.12 Form of Risk Management Consulting Services Agreement between Manor
Care, Inc. and the Registrant**.........................................
10.13 Form of Tax Administration Agreement between Manor Care, Inc. and the
Registrant*.............................................................
10.14 Form of Tax Sharing Agreement between Manor Care, Inc. and the
Registrant**............................................................
10.15 Employment Agreement, dated September 1, 1995, between Manor Care, Inc.
and Donald Landry*......................................................
10.16 Form of Assignment Agreement among Manor Care, Inc., the Registrant and
Donald Landry.*.........................................................
10.17 Form of Employment Agreement between the Registrant and Stewart Bainum,
Jr.***..................................................................
10.18 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*.......................................................
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*...................................................................
10.24 Form of Revolving Credit Facility Agreement between the Registrant and
Chase Manhattan Bank**..................................................
</TABLE>
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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10.25 Form of Pikesville Sublease between the Registrant and Manor Care,
Inc.**..................................................................
12.01 Statement re: computation of ratio of earnings to fixed charges**.......
21.01 Subsidiaries of the Registrant*.........................................
24.01 Power of Attorney*......................................................
27.01 Financial Data Schedule**...............................................
99.01 Schedule II -- Valuation and Qualifying Accounts**......................
</TABLE>
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* Previously filed.
** Filed herewith.
*** To be filed by amendment.
<PAGE> 1
[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 on November 1, 1996, to holders of record of
Manor Care common stock on October 10, 1996. You will receive one share of
Choice common stock for every share of Manor Care common stock you hold on the
record date.
As a result of the distribution of Choice common stock to Manor Care
shareholders, you will own shares in two separate and very different companies.
Manor Care will be a pure health care company focused on inpatient skilled
nursing and rehabilitation, assisted living, institutional pharmacy and home
health care. Choice will concentrate on franchising, managing and developing
hotels and other travel-related businesses.
Your Board of Directors and management believe that the separation of the
lodging and health care businesses into two public corporations via the
distribution of Choice common stock will improve capital-raising efficiency as
both debt and equity investors will be better able to assess the different risk
profiles and operating characteristics of both businesses. The distribution will
give Choice direct access to capital markets and will permit it to raise funds
on the basis of its own operating profile and credit fundamentals. Similarly,
Manor Care's cost to obtain financing following the distribution will be
representative of the operating profile and credit fundamentals of a health care
company. In addition, the Board of Directors and management believe that the
distribution will improve strategic freedom and focus at both Choice and Manor
Care.
The enclosed Information Statement explains the proposed distribution in
detail and provides financial and other important information regarding Choice.
We urge you to read it carefully. Holders of Manor Care common stock are not
required to take any action to participate in the distribution as a stockholder
vote is not required in connection with this matter.
Sincerely,
Stewart Bainum, Jr.
Chairman of the Board and
Chief Executive Officer
<PAGE> 2
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 October 10, 1996 (the "Record Date") of one
share of common stock, par value $.01 per share (the "Company Common Stock"), of
Choice Hotels Holdings, Inc. (the "Company") for each share of Manor Care common
stock. At the time of the Distribution, the Company will own all of the
businesses and assets of, and be responsible for the liabilities associated
with, the lodging and hotel franchise business operations conducted by Manor
Care and certain of its subsidiaries. The distribution will result in 100% of
the outstanding shares of Company Common Stock being distributed to holders of
Manor Care common stock.
The Distribution will be effective as of November 1, 1996 (the
"Distribution Date"). No consideration will be paid by Manor Care's stockholders
for shares of Company Common Stock. Manor Care has received a ruling from the
Internal Revenue Service to the effect that the Distribution is not taxable for
federal income tax purposes to stockholders of the Company and Manor Care. See
"The Distribution -- Federal Income Tax Aspects of the Distribution."
There is no current trading market for the Company's Common Stock, although
it is expected that a "when-issued" trading market will develop prior to the
Distribution Date. The Company's Common Stock has been approved for listing on
the New York Stock Exchange under the symbol "CHH," subject to notice of
issuance.
Stockholders of Manor Care with inquiries related to the Distribution
should contact the Investor Relations Department of Manor Care at (301)
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.
------------------------
NO STOCKHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT. WE ARE
NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. ANY SUCH OFFERING MAY ONLY BE
MADE BY MEANS OF A SEPARATE PROSPECTUS PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT AND OTHERWISE IN COMPLIANCE WITH APPLICABLE LAW.
THE DATE OF THIS INFORMATION STATEMENT IS , 1996.
<PAGE> 3
INFORMATION STATEMENT
TABLE OF CONTENTS
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........................................................................ 22
Business............................................................................ 27
General........................................................................... 27
The Lodging Industry.............................................................. 27
Franchise Business................................................................ 29
Owned and Managed Lodging Business................................................ 40
Competition....................................................................... 44
Service Marks and Other Intellectual Property..................................... 45
Non-Hotel Properties.............................................................. 45
Seasonality....................................................................... 45
Regulation........................................................................ 46
Insurance......................................................................... 46
Impact of Inflation and Other External Factors.................................... 46
Employees......................................................................... 47
Legal Proceedings................................................................. 47
Environmental Matters............................................................. 47
Management.......................................................................... 49
Executive Officers of the Company................................................. 49
Compensation of Executive Officers................................................ 50
Employment Agreements............................................................. 52
Retirement Plans.................................................................. 53
Option and Stock Purchase Plans................................................... 54
The Board of Directors.............................................................. 54
Directors of the Company.......................................................... 54
Certain Relationships and Related Transactions...................................... 57
Security Ownership of Principal Stockholders and Management......................... 58
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Description of Capital Stock of the Company......................................... 61
Common Stock...................................................................... 61
Preferred Stock................................................................... 61
Preemptive Rights................................................................. 61
Purposes and Effects of Certain Charter and By-law Provisions....................... 61
General........................................................................... 61
Liability and Indemnification of Officers and Directors............................. 62
Elimination of Liability in Certain Circumstances................................. 62
Indemnification and Insurance..................................................... 62
Available Information............................................................... 63
Index to Combined Financial Statements.............................................. F-1
Appendix A -- Form of Restated Certificate of Incorporation of the Company.......... A-1
</TABLE>
ii
<PAGE> 5
SUMMARY
The following summarizes certain information contained elsewhere in this
Information Statement. Reference is made to, and this summary is qualified by,
the more detailed information set forth in this Information Statement, which
should be read in its entirety. Unless the context otherwise requires, all
references herein to the Company and to Manor Care shall include their
respective subsidiaries and all references herein to the Company prior to the
Distribution Date shall refer to the Lodging Business (as defined herein) as
operated by Manor Care. As used with respect to financial information, "Parent"
refers to Manor Care. Unless otherwise indicated, all statistical information
and data relating to the hotel industry in this Information Statement are
derived from information provided by Smith Travel Research. Smith Travel
Research has not consented to the use of the hotel industry data presented
herein or provided any form of consultation, advice, or counsel regarding any
aspects of, and is in no way whatsoever associated with, the proposed
transaction.
THE COMPANY
The Company is a leading international hotel franchisor and a major owner
and manager of hotel properties. Both franchise and owned and managed hotel
properties principally operate under one of the Company's brand names:
Comfort(R), Quality(R), Clarion(R), Sleep(R), Rodeway(R) and Econo Lodge(R). In
addition, the Company recently introduced a new brand, MainStay Suites(SM). For
the fiscal year ended May 31, 1996, hotel franchising contributed 58.5% of the
Company's revenues and 73.0% of the Company's gross profits, while hotel
ownership and management contributed the remaining 41.5% of revenues and 27.0%
of gross profits. The Company's franchise operations and owned and managed hotel
operations have experienced significant growth in revenues and profitability
over the last few years. The Company's compound annual growth rate since fiscal
year 1991 was 20.1% for revenues and 21.8% for net income before unusual items.
For the fiscal year ended May 31, 1996, total revenues and net income were
$374.9 million and $8.5 million, respectively. Excluding unusual items, net
income for fiscal year 1996 was $28.6 million. For the quarter ended August 31,
1996, total revenues and net income were $119.4 million and $15.4 million,
respectively.
FRANCHISE OPERATIONS. The Company is one of the world's largest
franchisors of hotels with 3,052 properties open and operating in 30 countries
at May 31, 1996. As a franchisor, the Company licenses hotel operators to use
the Company's brand names and provides to these hotel operators products and
services designed to increase their revenues and profitability. Key products and
services provided include nationally recognized marketing and advertising
programs, access to a reservation system that delivers business to the
franchisees' hotels, access to innovative products and services developed by the
Company and other support services such as training programs, purchasing
discounts, operating manuals, quality standards and inspections.
In return for the use of the Company's brand names and access to the
Company's products and services, franchisees pay to the Company fees that are
generally based on a percentage of the franchise hotels' gross room revenues.
Since fiscal year 1994, the Company has grown revenues from franchise operations
at a compound annual rate of 15.1%, while direct franchise expenses have
increased at a compound annual rate of 8.8%. During the same period, gross
margins have improved from 56.5% for fiscal year 1994 to 61.1% for fiscal year
1996.
Key components of the Company's franchise strategy include:
- growth of the Company's domestic franchise system;
- increases in average actual royalty rates;
- strategic development of the international franchise system;
- expansion of preferred vendor programs; and
- pursuit of selected strategic investments and acquisitions.
1
<PAGE> 6
The Company's existing franchisees form a pool of potential buyers and
builders of new hotels that may affiliate with one of the Company's brands. The
Company believes that its focus on improving the performance of its franchisees
through the provision of revenue- and profitability-enhancing systems and
services will enable it to retain these franchisees and attract new franchisees
to its system. The Company is able to meet the needs of franchisees across a
wide range of market segments by maintaining an array of distinct brands, each
with its own marketing and operating strategy. The Company expects to continue
to expand its brand offerings by developing new brands for high-growth segments
of the hospitality industry.
OWNED AND MANAGED OPERATIONS. In addition to acting as franchisor, the
Company owns and manages hotels. At May 31, 1996, the Company owned and managed,
under its six principal brand names, 79 hotels in 25 states, as well as in
Germany, France and England. To take advantage of a recovering lodging industry,
the Company has pursued, over the past few years, a strategy of acquiring
domestic hotel properties at prices below their replacement cost and increasing
their value through the investment of capital to improve the physical site and
the installation of professional management and marketing teams to operate the
renovated properties. Since June 1992, the Company has spent approximately
$242.7 million to buy and renovate 52 hotel properties.
Under the Company's management and consistent with overall industry
improvements, the operating performance of hotels acquired pursuant to this
strategy has improved substantially. Occupancies at domestic hotels acquired
during fiscal year 1993 have improved from 56% in fiscal year 1993 to 76% in
fiscal year 1996, while occupancies for fiscal year 1994 domestic acquisitions
have improved from 66% in fiscal year 1994 to 74% in fiscal year 1996 and
occupancies for fiscal year 1995 domestic acquisitions have improved from 49% in
fiscal year 1995 to 58% in fiscal year 1996. Overall, revenues from owned and
managed hotel operations have grown at a compound annual rate of 44.9% since
fiscal year 1994, while hotel operations expenses have increased at a compound
annual rate of 32.9%. As a result, gross margins of the owned and managed hotel
operations have improved from 19.0% for fiscal year 1994 to 31.9% for fiscal
year 1996. Because many of the recently acquired and developed hotels have not
yet reached stabilized levels of operating performance, the Company believes
that revenues and gross profit at these hotels will continue to grow.
The Company's strategy for its owned and managed operations is to realize
cash proceeds from, or "monetize," its capital investment in Company-owned
hotels at values that reflect their improved operating performance. The Company
is exploring a variety of transactions, including, among others, asset
securitization, sale/leasebacks, joint ventures with third parties, debt
financing and asset divestitures. The Company intends to retain management and
franchise agreements relating to these properties. The proceeds from these
transactions will be used initially to repay outstanding indebtedness. The
remaining proceeds will be used to launch or provide support to recently
developed brands, such as Sleep Inn and MainStay Suites, to develop additional
new brands, to expand internationally by investing in selected international
gateway cities and to invest in other targeted growth areas.
2
<PAGE> 7
THE DISTRIBUTION
Reasons for the
Distribution.................. The Board of Directors and management of Manor
Care believe that the separation of Manor
Care's health care and lodging businesses into
two public companies via the Distribution will
improve capital-raising efficiency as both debt
and equity investors will be better able to
assess the different risk profiles and
operating characteristics of both businesses.
The Distribution will give the Company direct
access to capital markets and will permit it to
raise funds on the basis of its own operating
profile and credit fundamentals. Similarly,
Manor Care's cost to obtain financing following
the Distribution will be representative of the
operating profile and credit fundamentals of a
health care company. In addition, the Board of
Directors and management of Manor Care believe
that the Distribution will improve strategic
freedom and focus at both Choice and Manor
Care. See "The Distribution -- Reasons for the
Distribution."
Distributed Company........... Choice Hotels Holdings, Inc. (the "Company"), a
Delaware corporation (to be renamed Choice
Hotels International, Inc.) and a wholly-owned
subsidiary of Manor Care, will, on the
Distribution Date, own all of the business and
assets of, and be responsible for all of the
liabilities associated with, the lodging and
hotel franchise business operations conducted
by Manor Care and certain of its subsidiaries
(the "Lodging Business").
Distributing Company.......... Manor Care, Inc., a Delaware corporation
("Manor Care").
Securities to Be
Distributed................... Approximately 62,872,184 shares (the "Shares")
of common stock, par value $.01 per share of
the Company, based on 62,872,184 shares of
common stock, par value $.10 per share, of
Manor Care ("Manor Care Common Stock")
outstanding as of October 1, 1996.
Distribution Ratio............ One share of Company Common Stock for each
share of Manor Care Common Stock.
Tax Consequences.............. Manor Care has received a ruling from the
Internal Revenue Service to the effect, among
other things, that receipt of the Shares by
stockholders of Manor Care is tax free for
federal income tax purposes. See "The
Distribution -- Federal Income Tax Aspects of
the Distribution."
Listing and Trading Market.... The Shares have been approved for listing on
the New York Stock Exchange under the symbol
"CHH," subject to notice of issuance. See "The
Distribution -- Listing and Trading of Shares
of the Company's Common Stock."
Record Date................... Close of business on October 10, 1996.
Distribution Date............. As of November 1, 1996. On the Distribution
Date, Manor Care will deliver the Shares to the
Distribution Agent. As soon as practicable
thereafter, the Distribution Agent will mail
certificates representing the appropriate
number of Shares to the Manor Care stockholders
entitled thereto. See "The
Distribution -- Manner of Effecting the
Distribution."
Distribution Agent............ Chase-Mellon Shareholder Services, L.L.C., the
transfer agent for the Company.
The Company's Dividend Policy
After the Distribution........ It is currently contemplated that following the
Distribution, the Company will not pay cash
dividends on the Shares.
3
<PAGE> 8
Certain Charter and
By-law Provisions........... Certain provisions of the Restated Certificate
of Incorporation (the "Restated Certificate")
and the By-laws ("the By-laws") of the Company
have the effect of delaying or making more
difficult an acquisition of control of the
Company in a transaction not approved by its
Board of Directors. These provisions have been
designed to enable the Company, especially in
its initial years, to develop its businesses
and foster its long-term growth without
disruptions caused by the threat of a takeover
not deemed by its Board of Directors to be in
the best interest of the Company. See "Purposes
and Effects of Certain Charter and By-law
Provisions." The Restated Certificate would
eliminate certain liabilities of directors in
connection with the performance of their
duties. See "Liability and Indemnification of
Officers and Directors -- Elimination of
Liability in Certain Circumstances."
Risk Factors.................. Stockholders should carefully consider all of
the information contained in this Information
Statement, including the matters described
under "Risk Factors."
Principal Office of the
Company....................... 10750 Columbia Pike, Silver Spring, Maryland
20901. Its telephone number is (301) 979-5000.
Relationship between Manor
Care and the Company after the
Distribution................ For purposes of governing the ongoing
relationships between Manor Care and the
Company after the Distribution Date and in
order to provide for an orderly transfer of the
Lodging Business to the Company and facilitate
the transition to two separate publicly traded
companies, Manor Care and the Company have
entered into a distribution agreement and
various other agreements with respect to, among
other things, intercompany debt, tax matters,
employee benefits, risk management and
corporate and administrative services. See
"Relationship Between Manor Care and the
Company After the Distribution." The
relationship between Manor Care and the Company
may be subject to certain potential conflicts
of interest. See "Risk Factors -- Potential
Conflicts with Manor Care."
4
<PAGE> 9
SUMMARY FINANCIAL INFORMATION
The following table summarizes certain selected financial information with
respect to the Company and is derived from the Combined Financial Statements of
the Company. Historical financial information may not be indicative of the
Company's future performance as an independent company. The information set
forth below is qualified in its entirety by reference to, and should be read in
conjunction with, "Selected Historical Financial Data," "Pro Forma Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Combined Financial Statements and related notes included
elsewhere herein. The balance sheet data at August 31, 1996 and the income
statement data for the three months ended August 31, 1995 and August 31, 1996
are derived from unaudited combined financial statements of the Company that, in
the opinion of the Company, reflect all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the information set forth
below. The interim results for the three months ended August 31, 1996 are not
necessarily indicative of results for the entire 1997 fiscal year.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, THREE MONTHS ENDED AUGUST 31,
--------------------------------------------- ----------------------------------------
PRO FORMA(a) PRO FORMA(a)
1994 1995 1996 1996 1995 1996 1996
-------- -------- --------- ------------ ----------- ----------- ------------
(UNAUDITED) (UNAUDOTED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues............................... $239,764 $302,535 $374,873 $387,819 $99,380 $ 119,380 $119,380
Operating expenses..................... 206,722 250,476 334,083(b) 349,961(b) 75,016 87,616 87,639
-------- -------- -------- -------- ------- --------- --------
Income before other expenses and income
taxes................................. 33,042 52,059 40,790 37,858 24,364 31,764 31,741
Interest expense on notes payable to
Parent................................ 10,665 15,492 19,673 20,339 4,612 5,079 5,079
Minority interest and other interest
and other expenses, net............... 4,699 6,612 5,259 3,727 1,180 788 788
-------- -------- -------- -------- ------- -------- --------
Income before income taxes............. 17,678 29,955 15,858 13,792 18,572 25,897 25,874
Income taxes........................... 8,019 13,144 7,400 6,429 7,658 10,500 10,491
-------- -------- -------- -------- ------- --------- --------
Net income...................... $ 9,659 $ 16,811 $ 8,458 $ 7,363 $10,914 $ 15,397 $ 15,383
======== ======== ======== ======== ======= ========= ========
</TABLE>
<TABLE>
<CAPTION>
MAY 31,
------------------- AUGUST 31,
1995 1996 1996
-------- -------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $(34,663) $ (7,606) $ 64
Total assets........................... 391,475 491,304 512,206
Notes payable to Parent................ 198,522 225,723 225,723
Total debt............................. 251,191 294,861 295,128
Investments and advances from Parent... 65,829 147,559 170,261
RATIO DATA:
Ratio of earnings to fixed charges
(c)................................... 2.47x 1.63x 5.04x
======== ======== =========
</TABLE>
- ---------------
(a) The pro forma statement of operations data for the year ended May 31, 1996
and the three months ended August 31, 1996 give effect to (i) the
Distribution and related transactions and (ii) the acquisition by the
Company of an aggregate of 16 hotels during fiscal year 1996 (the "1996
Acquisitions"), as if the Distribution and related transactions and the 1996
Acquisitions had occurred on June 1, 1995 with respect to the statement of
income data for the fiscal year ended May 31, 1996, and as if the
Distribution and related transactions had occurred on June 1, 1996 with
respect to the statement of income data for the three months ended August
31, 1996.
(b) Includes a provision of $33.3 million for impairment of certain long-lived
assets associated primarily with the Company's European operations and
certain restructuring costs, including severance and employee benefit plan
restructuring costs, directly associated with the Distribution.
(c) Earnings used in computing the ratio of earnings to fixed charges consist of
income before income taxes, fixed charges and extraordinary items. Fixed
charges consist of interest expense, including amounts capitalized and the
amortization of deferred financing fees, and that portion of operating lease
rental expense that is representative of interest (deemed to be one-third of
operating lease rentals).
5
<PAGE> 10
INTRODUCTION
The Company is one of the world's largest franchisors of hotels with 3,052
properties and a total of 261,456 rooms open and operating in 30 countries at
May 31, 1996. The properties principally operate under one of the Company's
brand names: Comfort, Quality, Clarion, Sleep, Rodeway and Econo Lodge. In
addition, the Company recently introduced a new brand, MainStay Suites. At May
31, 1996, another 716 franchise properties with a total of 63,785 rooms were
under development. In addition to acting as franchisor, at May 31, 1996, the
Company owned and managed, under its six principal brand names, 79 hotels in 25
states, as well as in Germany, France and England.
On March 7, 1996, the Board of Directors of Manor Care announced its
intention to distribute to holders of Manor Care Common Stock all of the
outstanding Shares. On March 6, 1996, the high and low sales prices of the Manor
Care Common Stock as reported on the New York Stock Exchange Composite Tape were
$39 and $38 5/8, respectively. On September 30, 1996, the Board of Directors of
Manor Care declared a dividend to effect the Distribution and set the Record
Date and Distribution Date. On September 30, 1996, the high and low sales prices
of the Manor Care Common Stock as reported on the New York Stock Exchange
Composite Tape were $38 1/2 and $37 1/4, respectively. Following the
Distribution, Manor Care will not own any Shares or other capital stock of the
Company, but will have certain contractual relationships with the Company. See
"Relationship Between Manor Care and the Company After the Distribution."
The Company, a Delaware corporation, was incorporated on June 27, 1996, and
is currently a wholly-owned subsidiary of Manor Care with no operations. Prior
to the Distribution, the Lodging Business has been conducted as a separate
division and through certain subsidiaries of Manor Care, including Choice Hotels
International, Inc., a wholly-owned subsidiary of Manor Care. On the
Distribution Date, Manor Care will contribute to the Company the Lodging
Business (including all of the stock of Choice Hotels International, Inc. and
the other subsidiaries comprising the Lodging Business, together with certain
assets relating to the Lodging Business held by Manor Care) and the Company will
change its name to Choice Hotels International, Inc. The existing Choice Hotels
International, Inc. will be renamed Choice Hotels Franchising, Inc.
Stockholders of Manor Care with inquiries relating to the Distribution
should contact the Investor Relations Department of Manor Care at (301)
979-4408. After the Distribution Date, stockholders of the Company should
contact the Investor Relations Department of Choice at (301) 979-5000.
THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
The Board of Directors and management of Manor Care have determined, for
the reasons set forth below, among others, to separate the Lodging Business from
Manor Care's other businesses.
The Board of Directors and management of Manor Care believe that the
separation of its health care and lodging businesses into two public
corporations via the distribution of the Shares will improve capital-raising
efficiency as both debt and equity investors will be better able to assess the
different risk profiles and operating characteristics of both businesses. The
Distribution will give the Company direct access to capital markets and will
permit it to raise funds on the basis of its own operating profile and credit
fundamentals. Similarly, Manor Care's cost to obtain financing following the
Distribution will be representative of the operating profile and credit
fundamentals of a health care company. In addition, the Board of Directors and
management believe that the Distribution will improve strategic freedom and
focus at both the Company and Manor Care.
The Board of Directors and management of Manor Care also believe that the
Distribution will (i) facilitate the expansion of each of Manor Care and the
Company through future acquisitions by making the stock of each entity a more
effective consideration with which to make any such acquisitions, (ii) enable
Manor Care and the Company to motivate their respective key employees, and
attract new employees, by offering incentives such as stock options whose value
will be directly affected by the performance of Manor
6
<PAGE> 11
Care or the Company, as the case may be, and (iii) simplify the process of
allocating indirect corporate overhead costs in computing governmental
reimbursements to the health care business.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions of the Distribution are set forth in the
distribution agreement (the "Distribution Agreement") to be entered into by the
Company and Manor Care prior to the Distribution.
Upon satisfaction of all the conditions contained in the Distribution
Agreement, it is contemplated that the Distribution will be made as of November
1, 1996 (the "Distribution Date") to stockholders of record of Manor Care at the
close of business on October 10, 1996 (the "Record Date"). On the Distribution
Date, the Shares will be delivered to the Distribution Agent for distribution as
soon as practicable thereafter to holders of record of Manor Care Common Stock
as of the close of business on the Record Date on the basis of one share of
Company Common Stock for each share of Manor Care Common Stock held on the
Record Date. The actual total number of Shares to be distributed will depend on
the number of shares of Manor Care Common Stock outstanding on the Record Date.
All such Shares will be fully paid and non-assessable and the holders thereof
will not be entitled to preemptive rights. See "Description of Capital Stock of
the Company." Following the Distribution, the Company will operate as an
independent public company.
No holder of Manor Care Common Stock will be required to pay any cash or
other consideration for the Shares received in the Distribution or to surrender
or exchange shares of Manor Care Common Stock in order to receive Shares.
FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION
Manor Care has received a ruling from the Internal Revenue Service to the
effect, among other things, that, for federal income tax purposes, the
Distribution will qualify as a tax-free spin-off under Section 355 of the
Internal Revenue Code of 1986, as amended, and that:
(1) No gain or loss will be recognized to (and no amount will be
included in the income of) holders of Manor Care Common Stock upon the
receipt of the Shares in the Distribution;
(2) Assuming that on the Distribution Date a holder of Manor Care
Common Stock holds Manor Care Common Stock as a capital asset, the holding
period for the Shares to be received in the Distribution will include the
period during which the Manor Care Common Stock was held;
(3) The tax basis of Manor Care Common Stock held by a Manor Care
stockholder at the time of the Distribution will be allocated, based upon
relative fair market values at the time of the Distribution, between such
Manor Care Common Stock and the Shares received by the stockholder in the
Distribution; and
(4) No gain or loss will be recognized by Manor Care or the Company on
the Distribution.
Within 90 days after the Distribution, Manor Care will provide to Manor
Care stockholders additional information regarding the allocation referred to in
(3) above.
Internal Revenue Service rulings, while generally binding on the Internal
Revenue Service, are subject to certain factual representations and assumptions.
Manor Care is not aware of any material facts or circumstances which would cause
such representations or assumptions to be untrue but there can be no assurance
that such representations and assumptions will continue to be true after the
Distribution Date. See "Risk Factors -- Certain Tax Considerations."
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF THE DISTRIBUTION UNDER CURRENT LAW AND IS INTENDED FOR GENERAL INFORMATION
ONLY. EACH STOCKHOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE
PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH STOCKHOLDER, INCLUDING THE
APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS, AND THE EFFECT OF POSSIBLE
CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE.
7
<PAGE> 12
CONDITIONS; TERMINATION
The Distribution Agreement provides that the Distribution is subject to
certain conditions, including final approval of the Manor Care Board of
Directors. See "Relationship Between Manor Care and the Company After the
Distribution -- Distribution Agreement." Even if all the conditions are
satisfied, the Manor Care Board of Directors may, in its discretion, terminate,
defer, modify or abandon the Distribution.
LISTING AND TRADING OF SHARES OF THE COMPANY'S COMMON STOCK
The Shares have been approved for listing on the New York Stock Exchange
(the "NYSE") under the symbol "CHH," subject to notice of issuance. As of the
Distribution Date, the Company is expected to have approximately 3,196 holders
of record of the Shares, based on the number of holders of record of Manor Care
Common Stock on October 1, 1996.
There is not currently a public market for the Shares. Prior to the
Distribution, the Shares are expected to begin trading on a "when-issued" basis
on a date to be determined by the NYSE. If the Distribution is not made, all
such "when-issued" trading will be null and void. Prices at which the Shares may
trade prior to the Distribution on a "when-issued" basis or after the
Distribution cannot be predicted. The prices at which the Shares trade will be
determined by the marketplace and may be influenced by many factors, including,
among others, the depth and liquidity of the market for the Shares, investor
perception of the Company and the industry in which its businesses participate,
the Company's dividend policy and general economic and market conditions. See
the description of the dividend policy of the Company under "Dividend Policy."
The Shares distributed to Manor Care stockholders will be freely
transferable, except for Shares received by persons who may be deemed to be
"affiliates" of the Company under the Securities Act of 1933, as amended (the
"Securities Act"). Persons who may be deemed to be affiliates of the Company
after the Distribution generally include individuals or entities that control,
are controlled by, or are under common control with the Company and may include
certain officers and directors of the Company. Persons who are affiliates of the
Company will be permitted to sell their Shares only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemption afforded
by Section 4(1) of the Securities Act and Rule 144 promulgated thereunder.
8
<PAGE> 13
RISK FACTORS
RISKS OF THE LODGING INDUSTRY; COMPETITION
General. Competition in the lodging business for hotel guests is based
upon many factors, including rates, quality of accommodations, brand
recognition, service levels, convenience and desirability of locations and
general, regional and local economic conditions. During the 1980s, construction
of lodging facilities in the United States resulted in an excess supply of
available rooms. This oversupply had an adverse effect on occupancy levels and
room rates, and therefore hotel values, in the industry in the early 1990s.
Although the current outlook for the industry has improved, there can be no
assurance that in the future the lodging industry, including the Company, its
hotels and its franchisees, will not be adversely affected again by an
oversupply of rooms or by (i) national and regional economic conditions, (ii)
changes in travel patterns, gasoline prices and other costs of travel and
demographics, (iii) natural disasters, (iv) seasonality of the hotel business,
(v) taxes and government regulations that influence or determine wages, prices,
interest rates, refurbishment or improvement plans, construction procedures and
operating costs and (vi) the availability of credit. Due in part to the strong
correlation between the lodging industry's performance and economic conditions,
the lodging industry is subject to cyclical changes in revenues and profits.
Risks of Franchise Business. As a franchisor, the Company's products are
its brand names and the support services it provides to its franchisees.
Competition among national brand franchisors in the lodging industry to grow
their franchise systems is intense. In addition, smaller chains pose some degree
of competitive pressure in selected markets. The Company believes that
competition for the sale of lodging franchises is based principally upon the
perceived value and quality of the brand and services as well as the nature of
those services offered to franchisees. The Company believes that prospective
franchisees value a franchise based upon their view of the relationship of the
costs imposed to the potential for increased revenue and profitability.
The Company's franchising revenues vary directly with franchisees' gross
room revenues, but are not directly dependent upon franchisees' profitability.
The Company believes, however, that the perceived value of its brand names to
prospective franchisees is in part a function of the success of its existing
franchisees. The ability of the Company's franchisees to compete in the lodging
industry is important to the Company's prospects because franchise fees are
primarily based on franchisees' gross room revenues. The Company's franchisees
are generally in intense competition with franchisees of other systems,
independent properties and owner-operated chains.
Risks of Developing, Acquiring and Owning Hotels. As an owner of hotels,
the Company is subject to the risks of construction and operation of lodging
facilities generally. Developing new hotels and acquiring hotels with
repositioning potential subjects the Company to pre-opening, pre-stabilization
and repositioning costs. As the Company opens additional Company-owned hotels,
such costs may adversely affect the Company's results of operations. Newly
opened hotels historically begin with lower occupancy and room rates that
improve over time. While the Company has in the past successfully opened or
repositioned new hotels, there can be no assurance that it will be able to
continue to do so. Construction, acquisition and repositioning of hotels involve
certain risks, including the possibility of construction cost overruns and
delays, site acquisition cost and availability, uncertainties as to market
potential, market deterioration after the acquisition or repositioning, possible
unavailability of financing on favorable terms and the emergence of market
competition from unanticipated sources. Although the Company seeks to manage its
construction, acquisition and repositioning activities so as to minimize such
risks, there can be no assurance that any such projects will perform in
accordance with the Company's expectations.
Hotel investments are relatively illiquid. Such illiquidity will tend to
limit the ability of the Company to respond to changes in economic or other
conditions. The Company's ownership of real property is substantial. Real estate
values are sensitive to changes in local market and economic conditions and to
fluctuations in the economy as a whole. In addition, the Company is subject to
the general risks of fluctuation in the hotel real estate transaction market,
which is impacted by variable prices and the availability of financing. There
can be no assurance that the Company's development, acquisition, repositioning
or disposition plans will not be adversely affected by changes in the real
estate market.
9
<PAGE> 14
Risks of Hotel Management. The Company currently manages 85 hotel
properties, including its 79 owned hotels and 6 properties managed under
agreements with third parties. In connection with its monetization strategy, the
Company expects to substantially increase the number of hotel properties managed
pursuant to third party management agreements. Management agreements expire or
are acquired, terminated or renegotiated in the ordinary course. There can be no
assurance that such third party agreements will be on terms as favorable to the
Company as existing intercompany agreements.
RISK OF GEOGRAPHIC CONCENTRATION
A substantial portion of the Company's franchise and owned hotels are
located in the southeastern United States. Such geographic concentration exposes
the Company's operating results to events or conditions that specifically affect
that region, such as economic, weather and other conditions. Adverse
developments that specifically affect the southeastern United States may have a
material adverse effect on the business, financial condition or results of
operations of the Company.
ABILITY TO IMPLEMENT MONETIZATION STRATEGY
The Company's strategy for its owned and managed operations is to monetize
its capital investment in Company-owned hotels at values that reflect their
improved operating performance. The Company is exploring a variety of
transactions, including, among others, asset securitizations, sale/leasebacks,
joint ventures with third parties, debt financings and asset divestitures. The
Company intends to retain management and franchise agreements relating to these
properties. The proceeds from these transactions will be used initially to repay
amounts owed to Manor Care. See "Financing -- The Manor Care Loan Agreement."
The Company currently intends to consummate any such transactions only if the
Company is able to retain the management and franchise contracts for such
hotels. Although transactions of the types being explored by the Company are
common in the hotel industry, there can be no assurance that the Company will be
able to successfully execute these plans. Furthermore, the Company's plan to
retain management and franchise contracts for such hotels will make certain
transactions more difficult to consummate. If the Company is not able to
successfully implement its monetization strategy, the Company will be unable to
reduce amounts owed to Manor Care as planned and will be required to obtain
additional sources of financing to repay such amounts before they come due on
November 1, 1999. There can be no assurance that the Company will be able to
obtain such financing on favorable terms or in a timely manner.
UNAVAILABILITY OF MANOR CARE FINANCIAL RESOURCES
Historically, adequate financial resources were available from Manor Care
to meet operating and investment needs of the Company. Following the
Distribution, the Company will no longer have access to Manor Care financial
resources and will be required to obtain financing based on its own credit
fundamentals as well as repay amounts owed to Manor Care. The Company will have
access to its cash flow from operations, which previously was distributed up to
Manor Care as part of Manor Care's internal cash management system. In addition,
the Company expects to have access to a revolving credit facility and is
currently negotiating the terms thereof with potential bank lenders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." There can be no assurance that
the lack of access to Manor Care's financial resources will not adversely affect
the Company's ability to obtain additional financing on favorable terms.
MARKET ACCEPTANCE OF NEW BRANDS AND PRODUCTS
As part of its growth strategy, the Company is developing new brands, such
as MainStay Suites(SM), an extended-stay lodging product, and new products, such
as Choice Picks(SM), a customized modular food service system for hotels and
other institutions. The Company has no operating history in either the
extended-stay lodging market or the food court service business and there can be
no assurance that either Main Stay Suites or Choice Picks will experience market
acceptance or that the Company will be successful in franchising these or other
new brands or products. Further, there can be no assurance that the capital
investments made by the Company to develop these and other new brands or
products will be recovered, or that such new brands or
10
<PAGE> 15
products will be profitable. As of May 31, 1996, the Company has invested
approximately $4.3 million in developing and marketing MainStay Suites and
Choice Picks, which includes $1.6 million to begin the construction of MainStay
Suites. The failure to successfully franchise these and other new brands could
have a material adverse effect on the business, financial condition and results
of operations of the Company.
RELIANCE ON KEY PERSONNEL
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, its affiliates and subsidiaries and their respective directors, employees
and agents 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 Care,
its affiliates and subsidiaries and their respective directors, employees and
agents (collectively, the "Indemnitees") from any and all losses which may arise
from (i) certain currently pending environmental and other claims; and (ii) any
and all 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 a subsidiary
of Manor Care in 1982, its subsidiaries and affiliates, 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 Manor Care, 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 Manor Care 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 For Certain
Environmental Claims."
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. Manor Care shall be responsible for all liabilities and obligations
related to claims incurred through December 31, 1996 in respect of Manor Care
Employees and Company Employees (whether such claims are assessed before or
after December 31, 1996) under any Manor Care welfare plan and, with respect to
pre-tax medical and dependent care programs, will retain any funds remaining on
January 1, 1997. Pursuant to the Employee Benefits Allocation Agreement, Manor
Care will continue sponsorship of the various Manor Care profit sharing plans,
retirement plans, stock plans and health and welfare plans with respect to Manor
Care Employees. The Company will establish a number of plans which will allow
the Company to provide to its employees substantially the same benefits
currently provided to them as employees of Manor Care. With respect to each
Manor Care profit sharing and retirement plan, Manor Care shall transfer to the
Company, 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. Notwithstanding the foregoing, certain employees and non-employee
directors of Manor Care 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 Manor Care, in
the case of non-employee directors, or, in all other cases, 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 and non-employee directors of Manor Care
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
15
<PAGE> 20
third party rental income paid to Manor Care by other tenants of the Complex,
less a pro rata portion of the operating expenses attributable to the space
occupied by Manor Care (initially approximately 29% of the Complex). At the
beginning of each fiscal year following the Distribution Date, Manor Care's
occupancy percentage will be redetermined. Operating expenses include all of the
costs associated with operating and maintaining the Complex including, without
limitation, supplies and materials used to maintain the Complex, wages and
salaries of employees who operate the Complex, insurance for the Complex, costs
of repairs and capital improvements to the Complex, the fees of the property
manager (which may be Manor Care), costs and expenses associated with leasing
space at the Complex and renovating space rented to tenants, costs of
environmental inspection, testing or cleanup, principal and interest payable on
indebtedness secured by mortgages against the Complex, or any portion thereof,
and charges for utilities, taxes and facilities services. On or prior to the
Distribution Date, the Company and Manor Care will also enter into (i) a
sublease agreement with respect to certain office space in Gaithersburg,
Maryland pursuant to which the Company will be obligated to rent from Manor
Care, on terms similar to the Silver Spring Lease, certain additional space as
such space becomes available during the 30 month period following the
Distribution Date and (ii) a sublease agreement with respect to the Comfort Inn
N.W., Pikesville, Maryland, pursuant to which the Company will 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 November 1, 1999 and may be
prepaid in whole or in part, together with accrued interest, without penalty, at
the option of the Company. The Company will be required to prepay the loan with
the proceeds from the monetization of Company-owned hotels.
CREDIT FACILITY
The Company currently is negotiating a commitment from a bank lender
pursuant to which such lender, together with other financial institutions, will,
from and after the Distribution Date, provide the Company with a revolving
credit facility in an aggregate principal amount of $100.0 million (the "Credit
Facility"). The
16
<PAGE> 21
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 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. 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, which covenants may impact the ability of the Company
to pay dividends.
17
<PAGE> 22
CAPITALIZATION
The following table sets forth the unaudited combined capitalization of the
Company as of August 31, 1996. This data should be read in conjunction with the
Company's financial statements and the notes thereto that are included elsewhere
in this Information Statement.
<TABLE>
<CAPTION>
AUGUST 31, 1996
---------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
Debt (including current portion)
Mortgage loans and other long term debt.................... $ 69,405
Notes payable to Parent.................................... 225,723
--------
Total debt......................................... 295,128
Equity....................................................... 170,261
--------
Total capitalization............................... $ 465,389
========
</TABLE>
DIVIDEND POLICY
It is currently contemplated that following the Distribution, the Company
will not pay cash dividends on the Shares. The payment of dividends, if any, in
the future will be a business decision to be made at the discretion of the Board
of Directors of the Company from time to time based on the Company's earnings
and financial position and such other considerations as the Board of Directors
of the Company considers relevant. In addition, the Loan Agreement will restrict
the Company's ability to pay dividends and the Credit Facility will contain
certain financial covenants which may impact the ability of the Company to pay
dividends. See "Financing."
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. The balance sheet data at August 31, 1995 and August 31, 1996, the
income statement data for the three months ended August 31, 1995 and August 31,
1996 and the data for the fiscal year ended May 31, 1992 are derived from
unaudited combined financial statements of the Company that, in the opinion of
the Company, reflect all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the information set forth below. The
interim results for the three months ended August 31, 1996 are not necessarily
indicative of results for the entire 1997 fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MAY 31, AUGUST 31,
----------------------------------------------------------- --------------------
1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- --------
1992
-----------
(UNAUDITED) (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues
Franchise.............................. $ 125,347 $137,346 $165,581 $188,021 $219,164 $ 60,299 $ 69,727
Hotel operations....................... 34,878 41,361 74,183 114,514 155,709 39,081 49,653
-------- -------- -------- -------- -------- -------- --------
Total revenues................... 160,225 178,707 239,764 302,535 374,873 99,380 119,380
-------- -------- -------- -------- -------- -------- --------
Operating expenses
Franchise marketing.................... 33,772 37,567 45,373 45,510 49,658 13,707 15,291
Franchise reservations................. 23,261 22,941 26,685 28,738 35,677 9,164 11,876
Hotel operations....................... 20,432 35,255 60,062 84,711 106,120 25,170 31,153
Selling, general and administrative
expenses............................. 45,949 44,745 57,081 69,676 83,267 20,935 22,356
Depreciation and amortization.......... 12,924 14,605 17,521 21,841 26,026 6,040 6,940
Provision for asset impairment and
restructuring........................ -- -- -- -- 33,335(a) -- --
-------- -------- -------- -------- -------- -------- --------
Total operating expenses......... 136,338 155,113 206,722 250,476 334,083 75,016 87,616
-------- -------- -------- -------- -------- -------- --------
Income before other expenses and income
taxes.................................. 23,887 23,594 33,042 52,059 40,790 24,364 31,764
-------- -------- -------- -------- -------- -------- --------
Other expenses
Interest expense on notes payable to
Parent............................... -- 7,083 10,665 15,492 19,673 4,612 5,079
Minority interest...................... 1,004 900 1,476 2,200 1,532 383 --
Other interest and other
expenses, net........................ 1,441 2,177 3,223 4,412 3,727 797 788
-------- -------- -------- -------- -------- -------- --------
Total other expenses............. 2,445 10,160 15,364 22,104 24,932 5,792 5,867
-------- -------- -------- -------- -------- -------- --------
Income before income taxes............... 21,442 13,434 17,678 29,955 15,858 18,572 25,897
Income taxes............................. 8,660 5,780 8,019 13,144 7,400 7,658 10,500
-------- -------- -------- -------- -------- -------- --------
Net income............................... $ 12,782 $ 7,654 $ 9,659 $ 16,811 $ 8,458 $ 10,914 $ 15,397
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA
Total assets............................. $ 194,078 $250,371 $303,158 $391,475 $491,304 $410,660 $512,206
Notes payable to Parent.................. -- $ 78,700 $147,061 $198,522 $225,723 $206,898 $225,723
Total debt............................... $ 20,902 $129,670 $200,875 $251,191 $294,861 $257,868 $295,128
Total liabilities........................ $ 50,313 $159,624 $247,950 $325,646 $343,745 $295,192 $341,945
Total investments and advances from
Parent................................. $ 143,765 $ 90,747 $ 55,208 $ 65,829 $147,559 $115,468 $170,261
</TABLE>
- ---------------
(a) The Company recorded a charge of $28.1 million for impairment of long-lived
assets associated primarily with the Company's European operations.
Additionally, the Company recorded a charge of $5.2 million related to
certain restructuring costs, including severance and employee benefit plan
restructuring costs, directly associated with the Distribution.
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 with respect to the
statement of income for the fiscal year ended May 31, 1996 and as if the
Distribution and related transactions had occurred on June 1, 1996 with respect
to the statement of income for the three months ended August 31, 1996. The pro
forma financial data are provided for information purposes only and do not
purport to be indicative of the results that actually would have been obtained
if the Distribution and related transactions and the 1996 Acquisitions had been
effected on the dates indicated or of those results that may be obtained in the
future. The pro forma combined statements of income are based on preliminary
estimates. The actual recording of the transactions will be based on actual
costs. Accordingly, the actual recording of the Distribution and related
transactions and the 1996 Acquisitions can be expected to differ from these pro
forma financial statements. No pro forma balance sheet is presented as there
were no pro forma adjustments to the historical balance sheet.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED MAY 31, 1996
<TABLE>
<CAPTION>
DISTRIBUTION ACQUISITIONS
HISTORICAL ADJUSTMENTS(A) ADJUSTMENTS(B) PRO FORMA
---------- -------------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues
Franchise.................................. $ 219,164 $ 219,164
Hotel operations........................... 155,709 $ 12,946 168,655
-------- -------- --------
Total revenues..................... 374,873 12,946 387,819
-------- -------- --------
Operating expenses
Franchise marketing........................ 49,658 49,658
Franchise reservations..................... 35,677 35,677
Hotel operations........................... 106,120 9,676 115,796
Selling, general and administrative
expenses................................ 83,267 $ 4,100(c)
90(d) 324 87,781
Depreciation and amortization.............. 26,026 1,688 27,714
Provision for asset impairment and
restructuring........................... 33,335 33,335
-------- ------- -------- --------
Total operating expenses........... 334,083 4,190 11,688 349,961
-------- ------- -------- --------
Income before other expenses and income
taxes...................................... 40,790 (4,190) 1,258 37,858
-------- ------- -------- --------
Other expenses
Interest expense on notes payable to
Parent.................................. 19,673 666 20,339
Minority interest.......................... 1,532 (1,532)(e) --
Other interest and other expenses.......... 3,727 3,727
-------- ------- -------- --------
Total other expenses............... 24,932 (1,532) 666 24,066
-------- ------- -------- --------
Income before income taxes................... 15,858 (2,658) 592 13,792
Income taxes................................. 7,400 (1,249)(f) 278 6,429
-------- ------- -------- --------
Net income................................... $ 8,458 $ (1,409) $ 314 $ 7,363
======== ======= ======== ========
Net income per share......................... $ 0.12(g)
========
</TABLE>
- ---------------
(a) Reflects the effect of the Distribution and related transactions.
(b) Reflects the incremental impact of the 1996 Acquisitions.
(c) Reflects the net additional costs associated with staffing of accounting,
finance, cash management, risk management, human resources and legal
personnel, directors' costs, incremental rental costs and the payment of
certain consulting fees to Manor Care.
(d) Reflects the estimated annual cost of the guarantee fee to be paid to Manor
Care.
(e) Reflects the elimination of minority interest associated with the purchase
of minority equity.
(f) Reflects tax benefits at the Company's effective tax rate of 47% related to
deduction of incremental costs per notes (c), (d) and (e).
(g) Pro forma income per share is computed by dividing pro forma net income by
the pro forma weighted average number of outstanding common shares,
aggregating 62.6 million in fiscal year 1996. The pro forma weighted average
number of outstanding common shares is based on Manor Care's weighted
average number of outstanding common shares at May 31, 1996.
20
<PAGE> 25
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
DISTRIBUTION
HISTORICAL ADJUSTMENTS(A) PRO FORMA
---------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues
Franchise............................................... $ 69,727 $ 69,727
Hotel operations........................................ 49,653 49,653
-------- --------
Total revenues.................................. 119,380 119,380
-------- --------
Operating expenses
Franchise marketing..................................... 15,291 15,291
Franchise reservations.................................. 11,876 11,876
Hotel operations........................................ 31,153 31,153
Selling, general and administrative expenses............ 22,356 $ 23(b) 22,379
Depreciation and amortization........................... 6,940 6,940
-------- ------- --------
Total operating expenses........................ 87,616 23 87,639
-------- ------- --------
Income before other expenses and income taxes............. 31,764 (23) 31,741
-------- ------- --------
Other expenses
Interest expense on notes payable to Parent............. 5,079 5,079
Other interest and other expenses....................... 788 788
-------- ------- --------
Total other expenses............................ 5,867 -- 5,867
-------- ------- --------
Income before income taxes................................ 25,897 (23) 25,874
Income taxes.............................................. 10,500 (9)(c) 10,491
-------- ------- --------
Net income................................................ $ 15,397 $ (14) $ 15,383
======== ======= ========
Net income per share...................................... $ 0.24(d)
========
</TABLE>
- ---------------
(a) Reflects the effect of the Distribution and related transactions.
(b) Reflects one quarter of the estimated annual cost of the guarantee fee to be
paid to Manor Care.
(c) Reflects tax benefits at the Company's effective tax rate of 41% related to
deduction of incremental costs per note (b).
(d) Pro forma income per share is computed by dividing pro forma net income by
the pro forma weighted average number of outstanding common shares,
aggregating 63.0 million in the three months ended August 31, 1996. The pro
forma weighted average number of outstanding common shares is based on Manor
Care's weighted average number of outstanding common shares at August 31,
1996.
21
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On March 7, 1996, Manor Care announced the Distribution and, on September
30, 1996, the Board of Directors of Manor Care declared a dividend to effect the
Distribution and set the Record Date and the Distribution Date. The Distribution
will separate the lodging and healthcare businesses of Manor Care into two
public corporations. As a result of the announced Distribution, Manor Care's
historical financial statements have been restated to report the Lodging
Business as discontinued operations. Included herein are the historical results
of operations of the Lodging Business for the years ended May 31, 1996, 1995,
and 1994 and the quarters ended August 31, 1996 and 1995, as if it had been a
separate entity for all periods presented. Upon completion of the Distribution,
the operations of the Company will consist principally of the hotel franchise
operations and the owned and managed hotel operations formerly conducted by
Manor Care directly or through Manor Care's subsidiaries. The Distribution will
result in the division of certain of Manor Care's existing corporate functions
between the two resulting entities. Historically, Manor Care allocated to its
operating units all corporate overhead expenses specifically identified with
such units' operations. These allocations will be discontinued after the
Distribution and responsibility for these support functions will be assumed by
the Company. The Company will establish its own accounting, finance, cash
management, risk management, human resources and legal departments separate from
Manor Care's. Accordingly, selling, general and administrative expenses in the
historical financial statements may not be indicative of such costs in the
future. In addition, the Lodging Business' historical operating results do not
reflect any estimated incremental costs expected to be incurred by the Company
to support its operations as a stand-alone entity after the Distribution. See
"Pro Forma Financial Data."
The principal factors that affect the Company's results are: growth in the
number of hotels; occupancies and room rates achieved by the Company's brands;
the number and relative mix of owned, managed and franchised hotels; and the
Company's ability to manage costs. The number of rooms at franchised properties
and occupancies and room rates significantly affect the Company's results
because franchise royalty fees are based upon room revenues at franchised
hotels. Increases in franchise and management fee revenues have a
disproportionate impact on the Company's operating margin due to the lower
incremental costs associated with these revenues.
COMPARISON OF RESULTS FOR THE QUARTERS ENDING AUGUST 31, 1995 AND 1996
Net income was $15.4 million for the quarter ended August 31, 1996, an
increase of $4.5 million, or 41.1%, compared to the same period of the prior
fiscal year.
Revenues for the quarter ended August 31, 1996 increased $20.0 million, or
20.1%, to $119.4 million compared to the quarter ended August 31, 1995.
Operating expenses for the quarter ended August 31, 1996 increased $12.6
million, or 16.8%, to $87.6 million, resulting in a $7.4 million, or 30.4%,
increase in operating profits.
Franchise revenues for the quarter ended August 31, 1996 increased $9.4
million, or 15.6%, when compared to the same period of the prior fiscal year.
Franchise revenues include base royalty fees, marketing fund assessments, fees
charged for utilization of the Company's centralized hotel reservation system
and product sales made to franchisees through the Company's group purchasing
program for franchisees. Except for product sales, fees and assessments are
generally calculated based on a percentage of the franchise hotels total
revenues and reservation call volume. The increase in franchise revenues was
largely the result of fees generated from franchisees and product sales to
franchisees. The increase in franchise fees was attributable to increases in
domestic royalties of $2.8 million, reservation fees of $630,000, and marketing
fees of $580,000. Revenues from franchise hotels increased as a result of
increases in the number of franchise hotels, increased average daily room rates
at franchise hotels and average actual royalty rates charged to franchisees. The
Company's domestic franchise hotels increased by 231 properties, or 9.8%, to
2,582 properties at August 31, 1996, from 2,351 properties at August 31, 1995.
Average daily room rates of domestic franchise hotels increased by approximately
4.6% for the quarter ended August 31, 1996 compared to the same period of the
prior fiscal year. Increased rates at the domestic franchise hotels resulted
from both general strengthening in
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<PAGE> 27
lodging industry fundamentals and national and local marketing efforts provided
by the Company to franchisees. Average occupancies at domestic franchise hotels
were 75.0% and 76.3% for the quarters ended August 31, 1996 and August 31, 1995,
respectively. In addition, the average actual royalty rate of domestic franchise
hotels increased to 3.5% for the quarter ended August 31, 1996 compared to 3.4%
for the same period of the prior fiscal year. Franchise revenues increased $3.4
million as a result of additional sales made to franchisees through the
Company's group purchasing program. The remaining portion of the increase for
the period relates to European operations and other international revenues.
Revenues from hotel operations for the quarter ended August 31, 1996
increased $10.6 million, or 27.1%, compared to the same period of the prior
fiscal year. The increase in revenue was principally achieved through the
acquisition and development of 17 operating hotels containing over 2,102 rooms
since August 31, 1995. Additionally, revenue improvements resulted from
increases in overall occupancies and in overall average daily room rates.
Overall average occupancies increased to 76.0% for the quarter ended August 31,
1996 compared to 74.2% for the quarter ended August 31, 1995, while overall
average daily room rates increased by 4.3% for the quarter ended August 31, 1995
compared to the same period of the prior fiscal year. These occupancy and rate
increases were the result of marketing efforts in both new and existing markets
as well as a general strengthening of lodging industry fundamentals. An increase
of $1.0 million in food and beverage sales also contributed to the revenue
growth.
Franchise marketing expenses increased 11.6% for the quarter ended August
31, 1996 compared to the same period of the prior fiscal year, principally due
to general increases in advertising costs. These increases were offset by
corresponding increases in marketing fees charged to the Company's franchise
hotels.
Franchise reservation expenses increased 29.6% for the quarter ended August
31, 1996 compared to the same period of the prior fiscal year. The increase in
reservation expenses relates primarily to growth in labor costs stemming from
increased services provided to the Company's franchisees and their customers.
Call volume related to reservation sales for franchise hotels was 6.6 million
and 6.3 million for the quarters ended August 31, 1996 and 1995, respectively.
The increase in expenses was partially offset by a 5.0% increase in reservation
fees charged to the Company's franchise hotels.
Hotel operating expenses increased 23.8% for the quarter ended August 31,
1996 compared to the quarter ended August 31, 1995, principally due to the
addition of hotels. Approximately 12.2% of the increase is due to increased food
and beverage costs. Hotel operating margins increased to 37.3% for the quarter
ended August 31, 1996 from 35.6% for the quarter ended August 31, 1995, as
marketing efforts enhanced occupancies in the newly renovated and repositioned
acquired hotels.
Selling, general and administrative expenses increased $1.4 million, or
6.8%, for the quarter ended August 31, 1996 compared to the same period last
year. As a percent of total revenues, selling, general and administrative
expenses decreased from 21.1% for the quarter ended August 31, 1995 to 18.7% for
the quarter ended August 31, 1996. Selling, general and administrative expenses
include the cost of product sales to franchisees made through the Company's
group purchasing program for franchisees. Increases in selling, general and
administrative expenses resulted in part from higher cost of sales on increased
product sales volume. Cost of product sales were $7.5 million and $4.3 million
for the quarters ended August 31, 1996 and 1995, respectively. Additional
general and administrative costs associated with the Company's acquired domestic
properties also contributed to the increase. Finally, selling, general and
administrative expenses increased as a result of costs associated with increased
corporate staffing in contemplation of the Distribution.
Depreciation and amortization expense increased 14.9% for the quarter ended
August 31, 1996 compared to the same period last year. Increases were
principally due to acquisition, development and renovation of the 16 hotels
acquired from September 1, 1994 through August 31, 1995. Renovations for hotels
were generally completed in twelve months, at which time they became subject to
full depreciation. Depreciation expense is charged from the date renovation is
completed.
Interest expense on notes payable to Parent increased $0.5 million, or
10.1%, for the quarter ended August 31, 1996 compared to the same period of the
prior fiscal year.
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<PAGE> 28
COMPARISON OF FISCAL YEAR RESULTS
Net income was $8.5 million for fiscal year 1996, a decrease of $8.4
million, or 49.7%, compared to fiscal year 1995. In fiscal year 1995, net income
increased $7.2 million, or 74.0%, compared to fiscal year 1994. Net income in
fiscal year 1996 includes a charge of $33.3 million relating to asset impairment
and restructuring charges.
Revenues increased $72.3 million, or 23.9%, to $374.9 million in fiscal
year 1996, while operating expenses increased $83.6 million, or 33.4%, to $334.1
million, resulting in an $11.3 million, or 21.7%, decrease in operating profits.
This compares to an increase of $62.8 million, or 26.2%, in revenues for fiscal
year 1995 and an increase of $43.8 million, or 21.2%, in expenses for fiscal
year 1995.
The Company's franchise revenues for fiscal years 1996, 1995 and 1994
increased $31.1 million, or 16.6%, $22.4 million, or 13.6%, and $28.2 million,
or 20.5%, respectively. Franchise revenues include base royalty fees, marketing
fund assessments, fees charged for utilization of the Company's centralized
hotel reservation system and product sales made to franchisees through the
Company's group purchasing program for franchisees. Except for product sales,
fees and assessments are generally calculated based on a percentage of the
franchised hotels total revenues and reservation call volume. The increases in
franchise revenues were principally the result of fees generated from
franchisees and product sales to franchisees. In fiscal year 1996, increases in
franchise fees were primarily attributable to increases in domestic royalties of
$10.6 million, increases in reservation fees of $7.5 million and increases in
marketing fees of $4.5 million. In fiscal year 1995, increases in franchise fees
were primarily attributable to increases in domestic royalties of $9.1 million,
reservation fees of $3.0 million and marketing fees of $1.1 million. In fiscal
year 1994, increases in franchise fees were primarily attributable to increases
in domestic royalties of $6.3 million, reservation fees of $4.6 million and
marketing fees of $6.3 million. Revenues at franchise hotels increased as a
result of increased average daily room rates and average actual royalty rates.
Average daily room rates of domestic franchise hotels increased by approximately
5.0% for fiscal year 1996 and 3.3% for fiscal year 1995. Average actual royalty
rates of domestic franchise hotels were 3.5%, 3.2% and 3.1% in fiscal 1996, 1995
and 1994, respectively. Increased daily room rates of the domestic franchise
hotels resulted from both general strengthening in lodging industry fundamentals
and national and local marketing efforts provided by the Company to franchisees.
Average occupancies remained constant at 63.8% in fiscal year 1996 and 1995. In
fiscal year 1994, average occupancies were 62.2%. Franchise revenues increased
$7.2 million, $2.1 million and $5.1 million in fiscal years 1996, 1995 and 1994,
respectively, as a result of sales made to franchisees through the Company's
group purchasing program. The remaining portion of the increase for each fiscal
year relates to European operations and other international revenues.
The Company's hotel operations revenues for fiscal years 1996, 1995 and
1994 increased $41.2 million, or 36.0%, $40.3 million, or 54.4%, and $32.8
million, or 79.2%, respectively. The increases in revenue were principally the
result of additional room capacity achieved through hotel acquisitions completed
during fiscal years 1993 through 1996. During this period, the Company purchased
a total of 52 hotels containing over 7,485 rooms. Overall average occupancies
were 64.8% in fiscal year 1996 compared to 64.1% in fiscal year 1995 and 60.4%
in fiscal year 1994. Overall average daily room rates increased 8.0% from fiscal
year 1995 to fiscal year 1996 and 5.0% from fiscal year 1994 to fiscal year
1995. These occupancy and rate increases were the result of marketing efforts in
both new and existing markets as well as a general strengthening of lodging
industry fundamentals. Increases in food and beverage sales of $3.2 million and
$3.1 million in fiscal years 1996 and 1995, respectively, also contributed to
revenue growth.
Franchise marketing expenses increased 9.1% from fiscal year 1995 to fiscal
year 1996 and remained flat from fiscal year 1994 to fiscal year 1995. These
increases in expenses were offset by corresponding increases in marketing fees
charged to the Company's franchise hotels.
Franchise reservation expenses increased 24.2% and 7.7% in fiscal years
1996 and 1995 from the prior fiscal years, respectively. Increases in
reservation expenses relate primarily to growth in labor costs (approximately
36% of the increase) and systems maintenance costs (approximately 36% of the
increase) stemming from increased reservation services provided to the Company's
franchisees and their customers. Call volume related to reservation sales for
franchised hotels was 18.1 million, 16.6 million and 15.0 million for
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<PAGE> 29
fiscal years 1996, 1995 and 1994, respectively. These increases in expenses were
offset by corresponding increases in reservation fees charged to the Company's
franchise hotels.
Hotel operating expenses increased 25.3% and 41.0% for fiscal years 1996
and 1995, respectively, of which approximately 3.0%, and 4.0%, respectively,
related to food and beverage costs. Increases in hotel operating expenses
resulted, principally from the addition of hotels. Hotel operating margins
increased to 31.9% in fiscal year 1996 from 26.0% in fiscal year 1995 and 19% in
fiscal year 1994, as marketing efforts enhanced occupancies in the newly
renovated and repositioned acquired hotels.
Selling, general and administrative expenses increased $13.6 million, or
19.5%, for fiscal year 1996 and $12.6 million, or 22.1%, for fiscal year 1995
compared to the prior years. As a percent of total revenues, selling, general
and administrative expenses declined to 22.2% in fiscal year 1996 from 23.0% in
fiscal year 1995 and 23.8% in fiscal year 1994. Selling, general and
administrative expenses include the cost of product sales to franchisees made
through the Company's group purchasing program for franchisees. Increases in
selling, general and administrative expenses principally resulted from higher
cost of sales on increased product sales volume. Cost of product sales was $20.7
million, $13.9 million and $12.0 million for fiscal years 1996, 1995 and 1994,
respectively. The remaining increases in selling, general and administrative
expenses were due primarily to additional general and administrative costs
associated with the Company's acquired domestic properties and growth in the
Company's European lodging business. Management expects that, after the
Distribution, selling, general and administrative expenses will increase due to
additional costs associated with staffing of accounting, finance, cash
management, risk management, human resources and legal personnel, directors'
costs, incremental rental costs and the payment of certain consulting fees to
Manor Care. Management currently estimates a net increase of approximately $4.1
million per year.
In fiscal year 1996, the Company recorded a charge against earnings of
$33.3 million relating to impairment of certain long-lived assets and
restructuring costs. The most significant components of the charge related to
impairment of assets associated with the Company's European operations and
certain restructuring costs, including severance and employee benefit plan
restructuring costs, directly associated with the Distribution. During fiscal
year 1996, in connection with the Company's equity investment in Friendly
Hotels, PLC, the Company restructured its European operations to focus more
specifically on selected geographic markets. The Company performed a review of
its European operations and determined that certain assets associated with these
operations were impaired. These assets relate primarily to European properties
opened or acquired in fiscal years 1993 and 1994. The Company's experience shows
that newly opened or acquired properties require up to three years to reach
stabilized operating levels. Operating results at the affected properties have
not improved as expected over the three year period. The amount of the
impairment charge was measured in accordance with the Company's policy. See the
Combined Financial Statements and related notes included elsewhere herein.
Depreciation and amortization expense increased 19.2% in fiscal year 1996
to $26.0 million. In fiscal year 1995, depreciation and amortization expense
increased 24.7%. Increases were due to acquisitions and renovation of the 52
hotels acquired from fiscal years 1993 through 1996.
Interest expense on notes payable to Parent increased 27.0% in fiscal year
1996 and 45.3% in fiscal year 1995. Other interest expense and other expenses
decreased 15.5% in fiscal year 1996 and increased 36.9% in fiscal year 1995. The
decrease in other interest expense in fiscal year 1996 related to the payoff of
a third party financed mortgage on a hotel property, as well as regularly
scheduled principal reductions on other third party financing. The increases
from fiscal year 1994 to fiscal year 1995 were principally due to borrowings to
finance the acquisition of the 36 acquired hotels and the acquisition of the
Resthotel Primevere hotel chain. The majority of Resthotel Primevere's
operations are franchise related and located within France.
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 1996 and May 31, 1996, Notes payable to Parent by the
Company totaling $225.7 million were outstanding. The notes are due three years
from the Distribution Date. Interest is charged at an annual rate of 9% on the
indebtedness. The notes payable to Parent are expected to be repaid with the
proceeds from the planned monetization of the Company's owned hotels or third
party financing. Historically,
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<PAGE> 30
all cash received by the Company has been deposited in or combined with Manor
Care's corporate funds as part of Manor Care's cash management system. Following
the Distribution, the Company will maintain its own cash balances and will
implement an internal cash management system. In addition, the Company expects
to have access to a revolving credit facility and is currently negotiating the
terms thereof with potential bank lenders. See "Financing -- Credit Facility."
Management believes cash flows from operations, third party financing sources
and the proceeds from the planned monetization of the Company's owned hotels
will be adequate to support on-going operations and meet debt service
requirements for the foreseeable future. If the Company is unable to
successfully implement its monetization strategy with respect to Company-owned
hotels, the Company will need to secure additional sources of financing to repay
the Loan Agreement on November 1, 1999. Net cash provided by operating
activities for the quarter ended August 31, 1996 was $14.4 million, compared to
$1.4 million used in operating activities during the same period of the prior
fiscal year. Improved cash flow resulted primarily from increased net income
during the first quarter of fiscal year 1997 and the use of cash to
significantly reduce other liabilities during the first quarter of fiscal year
1996. Net cash provided by operating activities for fiscal year 1996 was $54.7
million, an increase of 14.3% from the prior fiscal year. Net cash provided by
operating activities for fiscal year 1995 was $47.9 million, an increase of 7.5%
from the prior fiscal year.
The Company's working capital ratio at August 31, 1996 and May 31, 1996 was
1.0 and 0.8, respectively. The Company attempts to minimize its investment in
net current assets. Historically, the Company has been assured adequate
financing through Manor Care to meet seasonal fluctuations in working capital
requirements. Subsequent to the Distribution, the Company will utilize its
revolving credit facility to meet seasonal fluctuations in working capital
requirements.
Investment in property and equipment includes routine capital expenditures
for renovation and maintenance of the Company's owned hotels, as well as new
developments and enhancements of reservations and finance systems relating to
franchise operations. During the quarter ended August 31, 1996, Manor Care
transferred to the Company one property with a book value of $4.9 million.
During the fiscal year ended May 31, 1996, the Company purchased 16 operating
hotels for $49.6 million.
The Company plans capital expenditures for development of Sleep Inns and
MainStay Suites of $34.0 million and $68.6 million in fiscal years 1997 and
1998, respectively. These amounts include expected capital expenditures for the
construction of 10 Sleep Inns and 12 MainStay Suites over the next two fiscal
years. Planned capital expenditures for routine renovation and maintenance of
existing properties are $14.7 million and $16.3 million for fiscal years 1997
and 1998, respectively. Additionally, the Company plans capital expenditures of
approximately $8.0 million over the next two fiscal years for significant system
enhancements. Future capital expenditures will be financed with cash flow from
operations, proceeds from the monetization of the Company's owned hotels or
third party financing.
Long term debt and notes payable to Parent totaled $294.4 million at August
31, 1996 compared to $294.2 million at May 31, 1996. Notes payable to Parent
totaling $225.7 million are to be repaid over a three year period from the
Distribution Date.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company is required to adopt SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," no
later than fiscal year 1997. The Company's current policy is to regularly review
the recoverability of the net carrying value of its long-lived assets and make
adjustments accordingly. The adoption of SFAS No. 121 is not expected to have a
material impact on the Company's financial statements.
The Company is required to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation," no later than fiscal year 1997. Management expects to adopt SFAS
No. 123 utilizing the method which provides for disclosure of the impact of
stock-based compensation grants.
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<PAGE> 31
BUSINESS
GENERAL
The Company is a leading international hotel franchisor and a major owner
and manager of hotel properties. Both franchise and owned and managed hotel
properties principally operate under one of the Company's brand names: Comfort,
Quality, Clarion, Sleep, Rodeway, and Econo Lodge. In addition, the Company
recently introduced a new brand, MainStay Suites. For the nine months ended May
31, 1996, hotel franchising contributed 58.5% of the Company's revenues and
73.0% of the Company's gross profits, while hotel ownership and management
contributed the remaining 41.5% of revenues and 27.0% of gross profits. The
Company's franchise operations and owned and managed hotel operations have
experienced significant growth in revenues and profitability over the last few
years. The Company's compound annual growth rate since fiscal year 1991 was
20.1% for revenues and 21.8% for net income before unusual items. For the fiscal
year ended May 31, 1996 total revenues and net income were $374.9 million and
$8.5 million, respectively. Excluding unusual items net income for fiscal year
1996 was $28.6 million. For the quarter ended August 31, 1996, total revenues
and net income were $119.4 million and $15.4 million, respectively.
FRANCHISE OPERATIONS The Company is one of the world's largest franchisors
of hotels with 3,052 properties open and operating in 30 countries at May 31,
1996. At May 31, 1996, another 716 franchise properties with a total of 63,785
rooms were under development. As a franchisor, the Company licences hotel
operators to use the Company's brand names and provides to these hotel operators
products and services designed to increase their revenues and profitability. Key
products and services provided include nationally recognized marketing and
advertising programs, access to a reservation system that delivers business to
the franchisees' hotels, access to innovative products and services developed by
the Company and other support services such as training programs, purchasing
discounts, operating manuals, quality standards and inspections. In return for
the use of the Company's brand names and access to the Company's products and
services, franchisees pay to the Company fees that are generally based on a
percentage of the franchise hotels' gross room revenues.
OWNED AND MANAGED OPERATIONS In addition to acting as franchisor, the
Company owns and manages hotels. At May 31, 1996, the Company owned and managed,
under its six principal brand names, 79 hotels in 25 states, as well as in
Germany, France and England. To take advantage of a recovering lodging industry,
the Company over the past few years has pursued a strategy of acquiring domestic
hotel properties at prices below their replacement cost and increasing their
value through the investment of capital to improve the physical site and the
installation of professional management and marketing teams to operate the
renovated properties. Since June 1992, the Company has spent approximately
$242.7 million to buy and renovate 52 hotel properties. The Company's strategy
for its owned and managed operations is to monetize its capital investment in
Company-owned hotels at values that reflect their improved operating
performance. The Company is exploring a variety of transactions including, among
others, asset securitization, sale/leasebacks, joint ventures with third
parties, debt financing and asset divestitures. The Company intends to retain
management and franchise agreements relating to these properties.
THE LODGING INDUSTRY
As of June 1996, there are approximately 3.3 million hotel rooms in the
United States in hotels/motels containing twenty or more rooms. Of those rooms,
approximately 1.2 million rooms are not affiliated with a national or regional
brand, while the remaining approximately 2.1 million rooms are affiliated with a
brand either through franchise or the ownership/management of a national or
regional chain.
During the late 1980s, the industry added approximately 500,000 hotel rooms
to its inventory due largely to a favorable hotel lending environment, the
ability of hotel operators to regularly increase room rates and the
deductibility of passive tax losses, which encouraged hotel development. As a
result, the lodging industry saw an oversupply of rooms and a decrease in
industry performance.
The lodging industry in recent years has demonstrated a recovery, based on
year-to-year increases in room revenues, occupancy rates, revenue per available
room ("RevPAR"), and lodging industry profitability. RevPAR is calculated by
multiplying the percentage of occupied rooms by the average daily room rate
27
<PAGE> 32
charged. Since 1993, the lodging industry has been able to increase its average
daily rate ("ADR") at a pace faster than the increase in the Consumer Price
Index ("CPI"), a common measure of inflation published by the US Department of
Labor. Smith Travel Research's estimates indicate that occupancy rates in 1996
will increase to 66.4% from 65.5% in 1995, in part because of increases in room
demand attributable to the 1996 Summer Olympics, the 1996 national political
campaigns and conventions, and a continued improvement in the national economy.
The following chart demonstrates the recent trends:
THE US LODGING INDUSTRY'S GROWTH TRENDS SINCE 1991
<TABLE>
<CAPTION>
INCREASE IN AVERAGE
ROOM DAILY INCREASE INCREASE REVENUE PER
REVENUE (ROOM) IN ADR IN CPI AVAILABLE NEW
VERSUS OCCUPANCY RATES VERSUS VERSUS ROOM PROFITS ROOMS
YEAR PRIOR YEAR RATES (ADR) PRIOR YEAR PRIOR YEAR (REVPAR) (IN BILLIONS) ADDED
- -------------- ----------- --------- ------- ---------- ---------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992.......... N/A 62.1% $59.65 N/A 2.9% $ 37.04 break-even 34,000
1993.......... 6.3% 63.1% $61.30 2.8% 2.7% $ 38.68 $2.4 38,000
1994.......... 8.6% 64.7% $64.24 4.8% 2.7% $ 41.56 $5.5 44,000
1995.......... 7.9% 65.5% $67.34 4.8% 2.9% $ 44.11 $8.5 56,000
1996*......... N/A 66.4% $71.00 5.4% 2.9% $ 46.68 N/A 60,000 -
70,000
</TABLE>
- ---------------
Source: Smith Travel Research
* Estimated
The Company believes the lodging industry can be divided into three
categories: luxury or upscale, middle-market and economy. The Company believes
the luxury category generally has room rates above $70 per night, the
middle-market category generally has room rates between $46 and $70 per night
and the economy category generally has room rates less than $46 per night.
Service is a distinguishing characteristic in the lodging industry.
Generally there are three levels of service: full-service hotels (which offer
food and beverage services, meeting rooms, room service and similar guest
services); limited-service hotels (which offer amenities such as swimming pools,
continental breakfast, or similar services); and all-suites hotels (which
usually have limited public areas, but offer guests two rooms or one room with
distinct areas, and which may or may not offer food and beverage services).
The Company's Econo Lodge, Rodeway and Sleep brands compete primarily in
the limited-service economy market; the Company's Comfort and Quality brands
compete primarily in the limited-service middle-market; the Company's Clarion
brand competes primarily in the full-service upscale market; and the Company's
MainStay Suites brand will compete primarily in the all-suites middle-market.
New hotels opened in recent years typically have been limited service
hotels, as limited-service hotels are less costly to develop, enjoy higher gross
margins, and tend to have better access to financing. These hotels typically
operate in the economy and middle-market categories and are located in suburban
or highway locations. From 1993 to 1996, the average room count in new hotels
declined from 123 to 80, primarily because hotel developers found it difficult
to obtain financing of more than $3 million from their primary lending sources
(local banks and Small Business Administration guaranteed loan programs).
In recent years, operators of hotels not owned or managed by major lodging
companies have increasingly joined national hotel franchise chains as a means of
remaining competitive with hotels owned by or affiliated with national lodging
companies. Because hotels typically operate with high fixed costs, increases in
revenues generated by affiliation with a franchise lodging chain can improve a
hotel's financial performance. Of approximately 933 hotel properties that
changed their affiliation in 1995, 77% converted from independent status to
affiliation with a chain or converted from one chain to another, while only 23%
canceled or were required to cancel their chain affiliation. The share of US
hotel rooms affiliated with a chain was approximately 63% in 1995.
The shift to chain membership has been most pronounced among hotels in the
same categories as the Company, i.e., the economy and middle-market categories.
In 1995, 53% of all conversions to a chain from
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<PAGE> 33
independent status or from another chain were in the economy category, 37% were
in the middle-market category, and 10% were in the upscale category. Often by
affiliating with a middle-market or economy brand, a hotel operator can
reposition the hotel property in the price category best suited to its market.
The large franchise chains, including the Company, provide a number of
services to hotel operators to improve the financial performance of their
properties, including national reservation systems, marketing and advertising
programs and direct sales programs. The Company believes that national franchise
chains with a larger number of hotels enjoy greater brand awareness among
potential guests than those with fewer numbers of hotels, and that greater brand
awareness can increase the desirability of a hotel to its potential guests.
The Company believes that hotel operators choose lodging franchisors based
primarily on the perceived value and quality of each franchisor's brand and its
services, and the extent to which affiliation with that franchisor may increase
the franchisee's reservations and profits.
FRANCHISE BUSINESS
ECONOMICS OF FRANCHISE BUSINESS
The fee and cost structure of the Company's franchise business provides
significant opportunities for the Company to increase profits by increasing the
number of franchised properties. Hotel franchisors such as the Company derive
substantially all of their revenue from annual franchise fees. Franchise fees
are comprised of an initial fee and ongoing royalty and marketing and
reservation fees charged by the franchisor as a percentage of the franchisee's
gross room revenues. The royalty portion of the franchise fee is intended to
cover the operating expenses of the franchisor, such as expenses incurred in
quality assurance, administrative support and other franchise services and to
provide the franchisor with operating profits. The marketing and reservation
portion of the franchise fee is intended to reimburse the franchisor for the
expenses associated with providing such franchise services as the central
reservation system and national marketing and media advertising.
Much of the variable costs associated with the Company's activities are
reimbursed by the franchisees through the marketing and reservation fees. The
Company's existing base of franchises more than covers the fixed cost of the
business at its current level so that the variable costs of overhead -- in such
areas as quality assurance, franchise services and administration, finance and
legal -- represent the bulk of incremental costs associated with the addition of
franchisees. Because the variable overhead costs associated with incremental
franchise system growth are substantially less than the incremental royalty
fees, the Company is able to capture a significant portion of these incremental
royalty fees as operating profit.
STRATEGY
The Company's franchise strategy is based on expanding its franchise system
by providing hotel operators with products and services that increase their
revenues and profitability, capitalizing on its franchising and marketing
expertise through joint marketing programs with preferred vendors and engaging
in strategic acquisitions in the lodging, travel-related and other franchise
industries. Key components of the Company's franchise strategy include:
- GROWTH OF THE COMPANY'S DOMESTIC FRANCHISE SYSTEM. The Company's
existing franchisees form a pool of potential buyers and builders of new
hotels that may affiliate with one of the Company's brands. Approximately
50% of new franchises sold by the Company in fiscal year 1996 were sold
to existing franchisees. The Company believes that its focus on improving
the revenues and profitability of its franchisees will allow it to retain
these current franchisees and attract new franchisees. During the ten
fiscal years ended May 31, 1996, the number of properties in the
Company's domestic franchise system increased through acquisition and
internal growth to 2,495 properties with 214,613 rooms, from 599
properties with 69,187 rooms. The Company believes that its operating
structure and the services it provides to its franchisees will enable the
Company to attract new hotels to its franchise system. The following are
the principal components of the Company's franchising system and
services:
RESERVATION SYSTEM -- The Company maintains a reservations system that
delivers customers to franchisees and produces incremental revenues for
both franchisees and the Company.
29
<PAGE> 34
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.
30
<PAGE> 35
- 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.
31
<PAGE> 36
No master franchisee or other franchisee accounted for 10% or more of the
Company's total revenues or revenues related to franchise operations during the
last three fiscal years.
BRAND POSITIONING
The Company's hotels are primarily limited-service hotels (offering
amenities such as swimming pools and continental breakfast) or limited-to-full
service (offering amenities such as food and beverage services, meeting rooms
and room service). The following chart summarizes how the Company's brands are
positioned in the marketplace.
LOGO
COMFORT. Comfort Inns and Comfort Suites hotels offer rooms in the
limited-service, middle market category. Comfort Inns and Comfort Suites are
targeted to traditional businesses and leisure travelers. Principal competitor
brands include Days Inn, Fairfield Inn, Hampton Inn, Holiday Express and
LaQuinta. At May 31, 1996, there were 1,340 Comfort Inn properties and 87
Comfort Suite properties with a total of 106,179 and 7,493 rooms, respectively,
open and operating worldwide. An additional 198 Comfort Inn properties and 88
Comfort Suite properties with a total of 18,561 and 7,223 rooms, respectively,
were under development.
Comfort properties are located in the United States and in Australia, the
Bahamas, Belgium, Canada, France, Germany, India, Indonesia, Ireland, Italy,
Jamaica, Japan, Mexico, Norway, Portugal, Sweden, Switzerland, Thailand, the
United Kingdom and Uruguay. The following chart summarizes the Comfort system in
the United States:
COMFORT DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED MAY
31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Number of properties, end of period................. 935 1,015 1,129
Number of rooms, end of period...................... 82,479 87,551 94,160
Royalty fees ($000s)................................ $31,187 $37,635 $44,657
</TABLE>
32
<PAGE> 37
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>
33
<PAGE> 38
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
34
<PAGE> 39
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
35
<PAGE> 40
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.
36
<PAGE> 41
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.
37
<PAGE> 42
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
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<PAGE> 43
property. Properties which fail to maintain a minimum score are reinspected
on a more frequent basis until deficiencies are cured, or until such
properties are terminated.
To encourage compliance with quality standards, the Company offers
various brand-specific incentives to franchisees who maintain consistent
quality standards. Franchisees who fail to meet minimum quality standards
may be subject to consequences ranging from written warnings to termination
of the franchisee's franchise agreement.
The Company believes that a good measure of the quality of a hotel is
the rating granted to it by the American Automobile Association ("AAA").
AAA rates hotels based on the quality and range of amenities and service on
a scale of one to five diamonds, with five diamonds the highest rating. As
of May 1996, AAA has rated 78.5%, 78.4% and 80.2% of the Company's Comfort,
Quality and Clarion properties, respectively, located in the United States,
Canada, Mexico and the Caribbean. Among such properties 66% of Comfort
properties, 66% of Quality properties, and 80% of Clarion properties
received three diamonds or better.
TRAINING. The Company maintains a training department which conducts
mandatory training programs for all franchisees and their employees. The
Company also conducts regularly scheduled regional and national training
meetings for both property-level staff and managers. Training programs
teach franchisees how to take advantage of the Company's reservation system
and marketing programs, and fundamental hotel operations such as
housekeeping, maintenance, and inventory yield management.
Training is conducted by a variety of methods, including group
instruction seminars and video programs. The Company is developing an
interactive computer-based training system that will train hotel employees
at their own pace. Franchisees will be required to purchase hardware to
operate the training system, and will use software developed by the
Company.
RESEARCH AND DEVELOPMENT. The Company seeks to enhance RevPAR by
providing to franchisees systems and products that will reduce costs and/or
improve their operations. Research and development activity resulted in the
launch of three new franchise products in fiscal year 1996, Choice Picks
food court, MainStay Suites hotels and K-Minus food service.
In January 1996, the Company introduced its MainStay Suites franchise
hotel brand, an extended-stay product targeted to travelers who book hotel
rooms for five or more consecutive nights. See "-- MainStay Suites."
In November 1995, the Company introduced Choice Picks food court, a
customized, modular food-service system tailored to the needs of
middle-market hotels. Choice Picks food courts offer hotel guests a "choice
pick" of nationally known branded food items, such as Nathan's Famous(R)
hot dogs, sandwiches made with Healthy Choice(R) deli meats, Pizzeria
Uno(R) pizza and calzone, Nestle Toll House(R) cookies and muffins, I Can't
Believe It's Yogurt(R) desserts, and Coca-Cola(R) beverages. The typical
Choice Picks food court can be operated by as few as two employees, thus
providing the properties with lower operating costs than properties with
conventional restaurants. Franchisees pay the Company a one-time
affiliation fee and monthly royalty fees equal to a percentage of gross
revenues on Choice Picks food court sales. Franchisees must buy equipment
and food service modules necessary to set up a Choice Picks food court.
Beginning in fiscal 1997, the Company intends to market Choice Picks food
court to larger hotel operators and other potential customers outside of
the Company's franchise system.
In November 1995, the Company also began to offer to its franchisees
the K-Minus food service system, which eliminates expensive banquet
kitchens by outsourcing food preparation and limiting on-site work to
assembly and rethermalization. Compared with a traditional banquet
operation, the K-Minus food service system saves labor costs and energy.
Franchisees who wish to implement the K-Minus system are given design and
technical assistance by the Company. The Company receives a one-time
technical assistance fee for the provision of these services based on the
scope of the project.
PURCHASING. The Company's product services department negotiates
volume purchases of various products needed by franchisees to run their
hotels, including such items as furniture, fixtures, carpets and
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<PAGE> 44
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.
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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
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<PAGE> 46
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
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<PAGE> 47
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>
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<PAGE> 48
<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,
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<PAGE> 49
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
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<PAGE> 50
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> 51
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 Manor Care'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.
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<PAGE> 52
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.
48
<PAGE> 53
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 Hotels 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.
49
<PAGE> 54
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.
50
<PAGE> 55
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.
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<PAGE> 56
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
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<PAGE> 57
through November 30, 1999. Prior to the Distribution, it is expected that Manor
Care will assign its rights and obligations under such contract to the Company.
From February 17, 1992 to January 1, 1995, Mr. Landry served as President of the
Manor Care Hotel Division. On January 1, 1995, Mr. Landry also became President
of Choice. The agreement provides for an annual bonus of up to 55% of his base
compensation based in part on performance of Manor Care and based in part on
performance (including a customer satisfaction component) of the Lodging
Business. Following the Distribution, Mr. Landry's annual bonus will be based on
the performance of the Company.
It is contemplated that the Company 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
53
<PAGE> 58
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 7,100,000 shares of common stock will be reserved for
issuance pursuant to the Incentive Plan.
THE BOARD OF DIRECTORS
DIRECTORS OF THE COMPANY
The Company's Board of Directors will be classified into three classes,
designated Class I, Class II and Class III, each class to be as nearly equal in
number of directors as possible. The term of the initial Class I directors will
terminate on the date of the 1997 annual meeting of the Company's stockholders;
the term of the initial Class II directors will terminate on the date of the
1998 annual meeting of the Company's stockholders; and the term of the initial
Class III directors will terminate on the date of the 1999 annual meeting of the
Company's stockholders. At each annual meeting of the Company's stockholders,
successors to the class of directors whose term expires at that annual meeting
will be elected for a three-year term. Newly created directorships resulting
from any increase in the number of directors and any vacancies on the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal or other cause will be filled
54
<PAGE> 59
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
55
<PAGE> 60
Insurance Company of North America, Cardinal Health, Inc., Coherent, Inc.,
Haemonetics Corporation, Life Technologies, Inc., Medwave, Inc., Project Hope
and Steris Corporation.
Prior to the Distribution Date, the directors of the Company are Stewart
Bainum, Jr., James A. MacCutcheon, Senior Vice President, Chief Financial
Officer and Treasurer of Manor Care and James H. Rempe, Senior Vice President,
General Counsel and Secretary of Manor Care, and the only executive officer of
the Company is Stewart Bainum, Jr. Following the Distribution, Stewart Bainum,
Jr. will be 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> 61
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."
57
<PAGE> 62
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
58
<PAGE> 63
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.
59
<PAGE> 64
(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.
60
<PAGE> 65
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
Under the Restated Certificate of the Company, which is attached as
Appendix A to this Information Statement, the total number of shares of capital
stock that the Company has authority to issue is 165,000,000, consisting of
160,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock (the "Preferred Stock"), par value $.01 per share.
Based on the number of shares of Manor Care Common Stock outstanding on
October 1, 1996, it is expected that 62,872,184 shares of the Company's Common
Stock will be issued to stockholders of Manor Care in the Distribution. All the
shares of the Company's Common Stock to be distributed to Manor Care
stockholders in the Distribution will be fully paid and non-assessable.
COMMON STOCK
The Restated Certificate designates a series of common stock consisting of
75,000,000 shares of common stock. The Company Common Stock being distributed on
the Distribution Date is part of such series. Holders of the Company's Common
Stock are entitled to receive, subject to preferences that may be applicable
from time to time with respect to any outstanding Preferred Stock, such
dividends as are declared by the Board of Directors of the Company, one vote for
each share at all meetings of stockholders, and, subject to preferences that may
be applicable from time to time with respect to any outstanding Preferred Stock,
the remaining assets of the Company upon liquidation, dissolution or winding up
of the Company. The Company is authorized to issue additional shares of common
stock without further stockholder approval (except as may be required by
applicable law or stock exchange regulations).
With respect to the issuance of common shares of any additional series, the
Board of Directors of the Company is authorized to determine, without any
further action by the holders of the Company's Common Stock, among other things,
the dividend rights, dividend rate, conversion rights, voting rights and rights
and terms of redemption, as well as the number of shares constituting such
series and the designation thereof. Should the Board of Directors of the Company
elect to exercise its authority, the rights and privileges of holders of the
Company's Common Stock could be made subject to rights and privileges of any
such other series of common stock. The Company has no present plans to issue any
common stock of a series other than the Company's Common Stock.
See "Dividend Policy" for a description of the dividend policy of the
Company after the Distribution.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue up to 5,000,000
shares of Preferred Stock without further stockholder approval (except as may be
required by applicable law or stock exchange regulations) and to fix from time
to time, by resolution or resolutions, the relative powers, preferences and
rights and the qualifications, limitations or restrictions of any series of
Preferred Stock, as well as the number of shares constituting such series and
the designation thereof.
PREEMPTIVE RIGHTS
Holders of shares of Company Common Stock have no preemptive rights.
PURPOSES AND EFFECTS OF CERTAIN CHARTER AND BY-LAW PROVISIONS
GENERAL
The provisions of the Restated Certificate and the By-Laws described in
this section, and the ability to issue additional series of capital stock
without a stockholder vote, may delay or make more difficult acquisitions of or
changes of control of the Company not approved by the Company's Board of
Directors. Such provisions enable the Company, particularly (but not
exclusively) in the initial years of its existence as an independent, publicly
owned company, to develop its business in a manner which will foster its long
term
61
<PAGE> 66
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.
62
<PAGE> 67
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.
63
<PAGE> 68
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Combined Balance Sheets as of May 31, 1995 and May 31, 1996 and August 31, 1996
(Unaudited)......................................................................... F-3
Combined Statements of Income for the fiscal years ended May 31, 1994, May 31, 1995
and May 31, 1996, and for the three-month periods ended August 31, 1995 (Unaudited)
and August 31, 1996 (Unaudited)..................................................... F-4
Combined Statements of Cash Flows for the fiscal years ended May 31, 1994, May 31,
1995 and May 31, 1996, and for the three-month periods ended August 31, 1995
(Unaudited) and August 31, 1996 (Unaudited)......................................... F-5
Notes to Combined Financial Statements................................................ F-6
</TABLE>
F-1
<PAGE> 69
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> 70
CHOICE HOTELS HOLDINGS, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31,
--------------------- AUGUST 31,
1995 1996 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $ 2,088 $ 4,142 $ 4,635
Receivables (net of allowance for doubtful accounts of
$4,202, $4,825 and $5,782 (unaudited),
respectively)........................................ 21,946 30,619 37,228
Inventories............................................. 289 757 623
Current deferred income tax benefit..................... -- 1,266 1,266
Prepaid expenses........................................ 2,807 3,003 1,993
Other................................................... 955 1,215 1,605
-------- --------
Total current assets............................ 28,085 41,002 47,350
-------- --------
PROPERTY AND EQUIPMENT, AT COST, NET OF ACCUMULATED
DEPRECIATION............................................ 257,156 299,527 315,447
-------- --------
LODGING FRANCHISE RIGHTS, NET OF ACCUMULATED
AMORTIZATION............................................ 61,565 58,676 57,953
-------- --------
GOODWILL, NET OF ACCUMULATED AMORTIZATION................. 32,128 59,839 61,984
-------- --------
OTHER ASSETS.............................................. 12,541 32,260 29,472
-------- --------
$391,475 $491,304 $ 512,206
======== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current portion of mortgages and long term debt......... $ 639 $ 669 684
Accounts payable........................................ 46,109 24,473 26,430
Accrued expenses........................................ 15,366 21,656 18,649
Income taxes payable.................................... 634 1,810 1,523
-------- --------
Total current liabilities....................... 62,748 48,608 47,286
-------- --------
MORTGAGES AND OTHER LONG TERM DEBT........................ 52,030 68,469 68,721
-------- --------
NOTES PAYABLE TO PARENT................................... 198,522 225,723 225,723
-------- --------
DEFERRED INCOME TAXES ($11,620, $0 AND $0 (UNAUDITED),
RESPECTIVELY) AND OTHER LIABILITIES..................... 12,346 945 215
-------- --------
EQUITY
Investments and advances from Parent.................... 65,829 147,559 170,261
-------- --------
$391,475 $491,304 $ 512,206
======== ========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-3
<PAGE> 71
CHOICE HOTELS HOLDINGS, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, THREE MONTHS ENDED AUGUST
------------------------------ 31,
1994 1995 1996 -------------------------
-------- -------- -------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Franchise....................................... $165,581 $188,021 $219,164 $60,299 $ 69,727
Hotel operations................................ 74,183 114,514 155,709 39,081 49,653
-------- -------- -------- ----------- -----------
Total revenues........................... 239,764 302,535 374,873 99,380 119,380
-------- -------- -------- ----------- -----------
OPERATING EXPENSES
Franchise marketing............................. 45,373 45,510 49,658 13,707 15,291
Franchise reservations.......................... 26,685 28,738 35,677 9,164 11,876
Hotel operations................................ 60,062 84,711 106,120 25,170 31,153
Selling, general and administration expenses.... 57,081 69,676 83,267 20,935 22,356
Depreciation and amortization................... 17,521 21,841 26,026 6,040 6,940
Provision for asset impairment and
restructuring................................. -- -- 33,335 -- --
-------- -------- -------- ----------- -----------
Total operating expenses................. 206,722 250,476 334,083 75,016 87,616
-------- -------- -------- ----------- -----------
INCOME BEFORE OTHER EXPENSES AND INCOME TAXES..... 33,042 52,059 40,790 24,364 31,764
-------- -------- -------- ----------- -----------
OTHER EXPENSES
Interest expense on notes payable to Parent..... 10,665 15,492 19,673 4,612 5,079
Minority interest............................... 1,476 2,200 1,532 383 --
Other interest and other expenses, net.......... 3,223 4,412 3,727 797 788
-------- -------- -------- ----------- -----------
Total other expenses..................... 15,364 22,104 24,932 5,792 5,867
-------- -------- -------- ----------- -----------
Income before income taxes........................ 17,678 29,955 15,858 18,572 25,897
Income taxes...................................... 8,019 13,144 7,400 7,658 10,500
-------- -------- -------- ----------- -----------
Net Income........................................ $ 9,659 $ 16,811 $ 8,458 $10,914 $ 15,397
========= ========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements of
income.
F-4
<PAGE> 72
CHOICE HOTELS HOLDINGS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31, THREE MONTHS ENDED AUGUST
------------------------------- 31,
1994 1995 1996 -------------------------
-------- -------- --------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 9,659 $ 16,811 $ 8,458 $ 10,914 $ 15,397
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization.................. 17,521 21,841 26,026 6,040 6,940
Amortization of debt discount.................. 74 171 34 8 7
Provision for bad debts........................ 3,360 906 974 2,212 1,032
(Decrease) increase in deferred taxes.......... 3,328 827 (12,885) (2,363) --
Gain on sale of operating hotel................ -- -- 584 -- --
Provision for asset impairment................. -- -- 28,160 -- --
Change in assets and liabilities (excluding sold
hotels and acquisitions):
Change in receivables.......................... 1,063 (4,529) (9,647) (4,404) (7,641)
Change in inventories and other current
assets....................................... (340) 3,748 (1,047) (5,645) 754
Change in current liabilities.................. 8,457 5,691 11,153 100 (1,050)
Change in income taxes payable................. -- 634 1,176 260 (287)
Change in other liabilities.................... 1,454 1,803 1,750 (8,555) (730)
-------- -------- --------- -------- --------
NET CASH PROVIDED (UTILIZED) BY OPERATING
ACTIVITIES.............................. 44,576 47,903 54,736 (1,433) 14,422
-------- -------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment............. (17,939) (34,889) (47,443) (7,683) (16,405)
Acquisition of operating hotels.................. (44,200) (59,766) (49,617) (6,922) --
Acquisition of a hotel chain..................... (10,400) -- -- -- --
Proceeds from sale of operating hotels........... 7,200 -- 5,479 -- --
Purchase of minority interest.................... -- -- (55,269) (27,367) --
Investment in Friendly Hotels, PLC............... -- -- (17,069) -- --
Other items, net................................. (3,788) 1,595 (5,722) (1,124) (172)
-------- -------- --------- -------- --------
NET CASH UTILIZED BY INVESTING
ACTIVITIES.............................. (69,127) (93,060) (169,641) (43,096) (16,577)
-------- -------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and other long-term
debt........................................... 5,079 15,567 17,296 -- 850
Principal payments of debt....................... (1,993) (16,382) (810) (1,387) (590)
Proceeds from notes payable to Parent............ 68,361 51,461 27,201 -- --
Cash transfers (to) from Parent, net............. (45,198) (6,190) 73,272 47,101 2,388
-------- -------- --------- -------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES.............................. 26,249 44,456 116,959 45,714 2,648
-------- -------- --------- -------- --------
Net change in cash and cash equivalents............ 1,698 (701) 2,054 1,185 493
Cash and cash equivalents at beginning of period... 1,091 2,789 2,088 2,088 4,142
-------- -------- --------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD........................................... $ 2,789 $ 2,088 $ 4,142 $ 3,273 $ 4,635
======== ======== ========= ======== ========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
(UNAUDITED)
During August 1996, Manor Care transferred to the Company title to a
building, related land and furniture and fixtures with a book value of
$4,917,000. The property will be converted to an operating hotel.
The accompanying notes are an integral part of these combined statements of cash
flows.
F-5
<PAGE> 73
NOTES TO COMBINED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On March 7, 1996, Manor Care, Inc., ("Manor Care") announced its intention
to proceed with the separation of its lodging business from its health care
business via a spin-off of its lodging business (the "Distribution"). Manor
Care's Board of Directors voted to approve, in principle, the Distribution
subject to receipt of other approvals and consents and satisfactory
implementation of the arrangements for the Distribution. Manor Care intends to
consummate the Distribution in the second quarter of fiscal year 1997 through a
special dividend to its shareholders of one share of common stock of Choice
Hotels Holdings, Inc. (the "Company") for each share of Manor Care common stock.
The Distribution is conditional upon certain matters, including declaration of
the special dividend by Manor Care's Board of Directors.
Manor Care has received a ruling from the Internal Revenue Service that the
Distribution will be tax-free. The Company was formed on June 27, 1996 to
facilitate the proposed Distribution of Manor Care's lodging operations. Upon
consummation of the Distribution, the Company will change its name to Choice
Hotels International, Inc. The operations of the Company will consist
principally of the hotel franchise operations and the owned and managed hotel
operations formerly conducted by Manor Care directly or through Manor Care's
subsidiaries (the "Lodging Business"). As of May 31, 1996, the Company had
franchise agreements with 3,052 hotels operating in 30 countries principally
under the following brand names: Comfort, Clarion, Sleep, Quality, Rodeway and
Econo Lodge. The Company also owns and manages, under its six principal brand
names, 79 hotels in 25 states, as well as in Germany, France and England.
The combined financial statements present the financial position, results
of operations and cash flows of the Company as if it were formed as a separate
entity of Manor Care which conducted the Lodging Business for all periods
presented. Manor Care's historical basis in the assets and liabilities of the
Company has been carried over to the combined financial statements. All material
intercompany transactions and balances between the Company and its subsidiaries
have been eliminated. Changes in the investments and advances from Parent
represent the net income of the Company plus the net change in cash transferred
between the Company and Manor Care.
An analysis of the activity in the "Investments and advances from Parent"
account for the three years ended May 31, 1996 and the quarter ended August 31,
1996 is as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
Balance, May 31, 1993.................................................. $ 90,747
Cash transfers to Parent, net.......................................... (45,198)
Net income............................................................. 9,659
------------
Balance, May 31, 1994.................................................. 55,208
Cash transfers to Parent, net.......................................... (6,190)
Net income............................................................. 16,811
------------
Balance, May 31, 1995.................................................. 65,829
Cash transfers from Parent, net........................................ 73,272
Net income............................................................. 8,458
------------
Balance, May 31, 1996.................................................. 147,559
Cash transfers from Parent, net (Unaudited)............................ 2,388
Transfer of property and equipment (Unaudited)......................... 4,917
Net income (Unaudited)................................................. 15,397
------------
Balance, August 31, 1996 (Unaudited)................................... $170,261
============
</TABLE>
F-6
<PAGE> 74
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The average balance of the investments and advances from Parent was $73.0
million, $60.5 million, $107.0 million and $150.9 million (unaudited) for fiscal
years 1994, 1995, 1996, and the quarter ended August 31, 1996, respectively.
PRO FORMA INCOME PER SHARE (UNAUDITED)
Per share data is not presented on a historical basis because the Company
was not a publicly-held company during the periods presented. Pro forma income
per share for fiscal year 1996 and the three months ended August 31, 1996, after
giving effect to the transactions described in the pro forma combined financial
statements, would have been $0.12 and $0.24, respectively. The pro forma income
per common share is computed by dividing pro forma net income by the pro forma
weighted average number of outstanding common shares, aggregating 62.6 million
and 63.0 million in fiscal year 1996 and the three months ended August 31, 1996,
respectively. The pro forma weighted average number of outstanding common shares
is based on Manor Care's weighted average number of outstanding common shares.
PROPERTY AND EQUIPMENT
The components of property and equipment at the respective dates presented
in the combined balance sheets were:
<TABLE>
<CAPTION>
MAY 31,
-----------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land......................................................... $ 35,676 $ 45,459
Building and improvements.................................... 206,510 227,611
Capitalized leases........................................... 6,244 6,244
Furniture, fixtures and equipment............................ 61,452 65,369
Hotels under construction.................................... 8,077 18,224
-------- --------
317,959 362,907
Less: Accumulated depreciation............................... (60,803) (63,380)
-------- --------
$257,156 $299,527
======== ========
</TABLE>
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows:
<TABLE>
<S> <C>
Building and improvements............................................... 10-40 years
Furniture, fixtures and equipment....................................... 3-20 years
</TABLE>
Accumulated depreciation includes $3.3 million at May 31, 1995 and $3.5
million at May 31, 1996 relating to capitalized leases. Capitalized leases are
amortized on a straight-line basis over the lesser of the lease term or the
remaining useful lives of the leased properties.
MINORITY INTEREST
Prior to May 31, 1996, certain members of the Company's management had a
minority ownership interest in Choice Hotels International, Inc., a majority
owned subsidiary. Amounts reflected as minority interest represent the minority
owners' share of income in Choice Hotels International, Inc. As of May 31, 1996,
the Company had repurchased all of the outstanding minority ownership interest
from management.
GOODWILL
Goodwill primarily represents an allocation of the excess purchase price of
the stock of Choice Hotels International, Inc. over the recorded minority
interest. Goodwill is being amortized over 40 years. Such amortization amounted
to $343,000 in each of the years ended May 31, 1994 and 1995 and $854,000 in the
F-7
<PAGE> 75
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
year ended May 31, 1996. Goodwill is net of accumulated amortization of $1.9
million and $2.8 million at May 31, 1995 and 1996, respectively.
DEFERRED DEVELOPMENT COSTS
Included in other assets are deferred costs of $934,000 and $172,000, net
of accumulated amortization, as of May 31, 1995 and 1996, respectively,
associated with the development of a computerized reservation system and other
related systems. These costs are being amortized over five years. Such
amortization amounted to approximately $1.0 million for the fiscal years ended
May 31, 1994 and 1995, and $762,000 for the fiscal year ended May 31, 1996.
Deferred development costs are net of accumulated amortization of $4.2 million
and $372,000 at May 31, 1995 and 1996, respectively.
FRANCHISE RIGHTS
Franchise rights are an intangible asset and represent an allocation in
purchase accounting for the value of long-term franchise contracts. The majority
of the balance resulted from the Econo Lodge and Rodeway acquisitions made in
fiscal year 1991. Franchise rights acquired are amortized over an average life
of twenty-six years. Amortization expense amounted to $2.9 million for each of
the years ended May 31, 1994, 1995 and 1996. Franchise rights are net of
accumulated amortization of $8.5 million and $11.4 million at May 31, 1995 and
1996, respectively.
The Company evaluates the recoverability of franchise rights no less than
annually, based on net, undiscounted expected cash flows associated with these
franchises. Such rights are considered to be impaired if the net, undiscounted
expected cash flows are less than the carrying amount of the asset. Impairment
charges are recorded based upon the difference between the carrying value of the
asset and the expected net cash flows, discounted at an appropriate interest
rate.
SELF-INSURANCE PROGRAM
Prior to the Distribution, the Company participated in Manor Care's
self-insurance program for certain levels of general and professional liability,
automobile liability and workers' compensation coverage. The estimated costs of
these programs are accrued at present values based on actuarial projections for
known and anticipated claims. All accrued self-insurance costs have been treated
as paid to Manor Care, and as such, amounts paid to Manor Care have been charged
directly to investments and advances from Parent. Subsequent to the
Distribution, the Company will establish and maintain its own insurance program.
FRANCHISE REVENUES
The Company enters into numerous franchise agreements committing to provide
licensees with various marketing services, a centralized reservation system and
limited rights to utilize the Company's registered tradenames. These agreements
are typically for a period of twenty years, with certain rights to the
franchisee to terminate after 10 or 15 years. The Company has no significant
financial commitments to its franchisees.
Royalty fees, based on gross room revenues of each franchisee, are recorded
when earned. Reserves for uncollectible accounts are charged to bad debt expense
and included in selling, general and administration expenses in the accompanying
combined statements of income.
The Company assesses franchisees monthly fees related to marketing and
reservations which are expended for national advertising, marketing, and selling
activities and the operation of a centralized reservation system.
CAPITALIZATION POLICIES
Major renovations and replacements are capitalized to appropriate property
and equipment accounts. Upon sale or retirement of property, the cost and
related accumulated depreciation are eliminated from the
F-8
<PAGE> 76
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
accounts and the related gain or loss is taken into income. Maintenance, repairs
and minor replacements are charged to expense.
Construction overhead and costs incurred to ready a project for its
intended use are capitalized for major development projects and are amortized
over the lives of the related assets. Personnel recruitment and training costs
related to hotels under construction are deferred until construction is
completed and then amortized over two years. Costs of approximately $359,000,
$585,000 and $2.6 million were capitalized in each of the fiscal years ended May
31, 1994, 1995 and 1996, respectively.
The Company capitalizes interest on borrowings applicable to hotels under
construction. Capitalized interest for the years ended May 31, 1994, 1995 and
1996 amounted to $117,000, $197,000 and $753,000, respectively.
FOREIGN OPERATIONS
The Company accounts for foreign currency translation in accordance with
SFAS No. 52, "Foreign Currency Translation." Revenues generated by foreign
operations for the fiscal years ended May 31, 1994, 1995 and 1996 were $21.2
million, $29.2 million and $29.9 million, respectively. Losses were generated by
foreign operations for the fiscal years ended May 31, 1994, 1995 and 1996 of
$5.5 million, $5.7 million and $19.3 million, respectively. Losses generated by
foreign operations for fiscal year 1996 include $15.0 million relating to a
provision for asset impairment and restructuring. Translation gains and losses
are recorded in the cumulative translation adjustment account included in
Investments and advances from Parent in the accompanying combined balance sheets
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance, May 31, 1993......................................... $ 352
Net adjustments............................................... (383)
-------
Balance, May 31, 1994......................................... (31)
Net adjustments............................................... 740
-------
Balance, May 31, 1995......................................... 709
Net adjustments............................................... (2,459)
-------
Balance, May 31, 1996......................................... $(1,750)
=======
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying combined balance sheet as of August 31, 1996 and the
combined statements of income and cash flows for the three month periods ended
August 31, 1995 and August 31, 1996 have been prepared by the Company without
audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been omitted. The Company believes the disclosures made are
adequate to make the information presented not misleading. In the opinion of the
Company, the accompanying unaudited combined financial statements reflect all
adjustments, including only normal recurring adjustments, necessary to present
fairly the financial position of the Company at August 31, 1996 and the results
of operations and cash flows for the three months ended
F-9
<PAGE> 77
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
August 31, 1995 and August 31, 1996. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal
variations.
INCOME TAXES
The Company is included in the consolidated federal income tax return of
Manor Care. The income tax provision included in these combined financial
statements reflects the historical income tax provision and temporary
differences attributable to the operations of the Company on a separate return
basis. Deferred taxes are recorded for the tax effect of temporary differences
between book and tax income.
Income before income taxes for the fiscal years ended May 31, 1994, 1995
and 1996 were derived from the following:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes
Domestic operations.................................. $ 26,812 $ 39,329 $ 47,682
Foreign operations................................... (9,134) (9,374) (31,824)
-------- -------- --------
Combined income before income taxes............... $ 17,678 $ 29,955 $ 15,858
======== ======== ========
</TABLE>
Income before income taxes for domestic operations and foreign operations
for fiscal year 1996 includes provisions of $8.5 million and $24.8 million,
respectively, for asset impairment and restructuring.
The income tax provisions for fiscal years 1994, 1995 and 1996 were
accounted for under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." The provisions for income taxes follows for the
fiscal years ended May 31:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax (benefit) expense
Federal................................................ $ 7,683 $13,756 $ 19,978
Foreign................................................ (3,608) (3,703) (2,792)
State.................................................. 941 2,231 3,729
Deferred tax (benefit) expense
Federal................................................ 2,537 745 (3,071)
Foreign................................................ -- -- (9,778)
State.................................................. 466 115 (666)
------ ------- --------
$ 8,019 $13,144 $ 7,400
====== ======= ========
</TABLE>
Included in the 1994 tax provision is a charge of $156,000 due to the
impact of the change in the tax rates on prior periods.
F-10
<PAGE> 78
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following at May 31:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and amortization........................... $(11,289) $(11,760) $ (236)
Prepaid expenses........................................ (1,412) (1,386) (1,550)
Foreign operations...................................... (710) -- --
Other................................................... (2,147) (2,202) (2,112)
-------- -------- -------
Gross deferred tax liabilities.......................... (15,558) (15,348) (3,898)
-------- -------- -------
Foreign operations...................................... -- 1,086 1,931
Accrued expenses........................................ 2,893 1,393 3,757
Net operating loss...................................... 1,242 1,031 820
Other................................................... 776 218 556
-------- -------- -------
Gross deferred tax assets............................... 4,911 3,728 7,064
-------- -------- -------
Net deferred (benefit) tax.................... $(10,647) $(11,620) $ 3,166
======== ======== =======
</TABLE>
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the accompanying combined statements of income follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- ------
(IN THOUSANDS, EXCEPT
FEDERAL INCOME
TAX RATE)
<S> <C> <C> <C>
Federal income tax rate..................................... 35% 35% 35%
Federal taxes at statutory rate............................. $6,187 $10,484 $5,552
State income taxes, net of Federal tax benefit.............. 914 1,525 860
Other....................................................... 918 1,135 988
------ ------- ------
Income tax expense.......................................... $8,019 $13,144 $7,400
====== ======= ======
</TABLE>
Cash paid for state income taxes was $595,000, $571,000 and $1,586,000 for
the years ended May 31, 1994, 1995 and 1996, respectively. Federal income taxes
were paid by Manor Care.
ACCRUED EXPENSES
Accrued expenses at May 31, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Payroll............................................................ $ 6,284 $ 8,670
Taxes, other than income........................................... 2,981 3,426
Other.............................................................. 6,101 9,560
------- -------
$15,366 $21,656
======= =======
</TABLE>
F-11
<PAGE> 79
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
MORTGAGES AND OTHER LONG TERM DEBT
Maturities of mortgages and other long term debt at May 31, 1996 were as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
---------------------------------------------------------------
<S> <C>
1997........................................................... $ 669
1998........................................................... 414
1999........................................................... 442
2000........................................................... 599
2001........................................................... 646
2002 to 2009................................................... 66,368
--------------
$ 69,138
===========
</TABLE>
Long term debt, consisting of foreign currency borrowings under Manor
Care's $250 million competitive advance and multi-currency revolving credit
facility, mortgages and capital leases was net of discount of $146,000 and
$112,000 at May 31, 1995 and 1996, respectively. Amortization of discount was
$74,000 in 1994, $171,000 in 1995 and $34,000 in 1996.
During fiscal year 1996, interest rates on mortgages and other long term
debt ranged from 5.8% to 10.0%. The effective interest rate in fiscal year 1996
was 7.2%.
The Company is a co-guarantor with Manor Care and other affiliates for the
$250 million competitive advance and multi-currency revolving credit facility.
The facility provides that up to $75.0 million is available in foreign currency
borrowings under the foreign currency portion of the facility. The Company's
borrowings under this facility amounted to $50.6 million at May 31, 1996. The
Company is charged interest for amounts borrowed under the foreign currency
portion of the facility at one of several interest rates, including LIBOR plus
26.25 basis points. In connection with the Distribution, the Company intends to
secure financing to repay the Company's portion of borrowings under Manor Care's
foreign currency portion of the facility. Upon repayment, it is anticipated that
the Company will be released from all liabilities and guarantees relating to the
Manor Care credit facility.
At May 31, 1996, owned property with a net book value of $2.8 million was
pledged or mortgaged as collateral.
F-12
<PAGE> 80
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES
The Company operates certain property and equipment under leases, some with
purchase options that expire at various dates through 2051. Future minimum lease
payments are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
1997............................................................. $ 545 $ 771
1998............................................................. 370 568
1999............................................................. 296 500
2000............................................................. 186 500
2001............................................................. 172 500
Thereafter....................................................... 6,477 613
--------- -----------
Total minimum lease payments........................... $ 8,046 $ 3,452
=======
Less: Amount representing interest............................... (817)
-----------
Present value of lease payments.................................. 2,635
Less: Current portion............................................ (532)
-----------
Lease obligations included in long term debt..................... $ 2,103
========
</TABLE>
Rental expense under noncancellable operating leases was $738,000 in 1994,
$721,000 in 1995 and $563,000 in 1996.
ACQUISITIONS AND DIVESTITURES
On May 31, 1995, Manor Care repurchased one-half of the 11% interest held
by its management in Choice Hotels International Inc. Approximately $19.8
million was allocated to goodwill; the purchase cost of $27.4 million was paid
in June and July 1995. On May 31, 1996, the Company repurchased the remaining
5.5% minority interest in Choice Hotels International, Inc. for $27.9 million.
Approximately $26.4 million was allocated to goodwill.
During fiscal year 1996, the Company purchased 16 operating hotels
containing over 1,900 rooms for $49.6 million. The Company also sold two
operating hotels for $6.5 million. In addition, the Company purchased an equity
interest in Friendly Hotels, PLC, a U.K. hotel company, for approximately $17
million.
During fiscal year 1995, the Company purchased 16 operating hotels
containing over 2,300 rooms for $59.8 million.
During fiscal year 1994, the Company purchased 13 operating hotels
containing over 1,900 rooms for $44.2 million. An additional $10.4 million was
spent to acquire a hotel chain (Resthotel Primevere) operating primarily in
France. The Company also sold a hotel for $7.2 million.
Unless otherwise noted, acquisitions are accounted for as a purchase.
Approximately 70% of the total costs for hotel acquisitions are allocated to
buildings, approximately 20% to land and the remainder to furniture, fixtures
and equipment.
F-13
<PAGE> 81
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited summary pro forma income statement data for the three fiscal
years ended May 31, 1996 assuming the above purchases of operating hotels
occurred at the beginning of the year immediately preceding the year each
purchase occurred, are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS)
Revenues............................................... $285,735 $347,401 $387,819
======== ======== ========
Net income............................................. $8,339 $16,865 $8,772
------ -------- ------
------ -------- ------
Pro forma net income per share......................... $0.14 $0.27 $0.14
----- ----- -----
----- ----- -----
</TABLE>
The pro forma net income per share is computed by dividing pro forma net
income by the pro forma weighted average number of outstanding common shares,
aggregating 60.5 million in 1994, 62.5 million in 1995 and 62.6 million in 1996.
The pro forma weighted average number of outstanding common shares is based on
Manor Care's weighted average number of outstanding common shares.
TRANSACTIONS WITH MANOR CARE
Indebtedness related to lodging acquisitions and renovations that is
reflected as notes payable to Parent in the accompanying combined balance sheets
totaling $198.5 million and $225.7 million at May 31, 1995 and 1996,
respectively, is due three years from the date of the Distribution. Interest
expense on these notes for the years ended May 31, 1994, 1995 and 1996 was $10.7
million, $15.5 million and $19.7 million, respectively. Interest is charged at
an annual rate of 9% on the indebtedness.
It is expected that on or prior to the Distribution Date, the Company and a
subsidiary of Manor Care will enter into a loan agreement, which shall govern
the repayment by the Company of an aggregate of $225.7 million previously
advanced to the Company by Manor Care. The loan agreement will contain a number
of covenants that will, among other things, restrict the ability of the Company
and its subsidiaries to make certain investments, incur debt, change its line of
business, dispose of assets, create liens, sell receivables, enter into
transactions with affiliates and otherwise restrict certain corporate
activities. The loan agreement will also restrict the Company's ability to pay
dividends. In addition, the loan agreement will contain, among other financial
covenants, requirements that the Company maintain specified financial ratios,
including maximum leverage and minimum interest coverage. The loan may be
prepaid in whole or in part, together with accrued interest, without penalty, at
the option of the Company. The Company will be required to prepay the loan with
the proceeds from the monetization of Company-owned hotels.
The Company participates in a cash concentration system with Manor Care and
as such maintains no significant cash balances or banking relationships.
Substantially all cash received by the Company has been immediately deposited in
and combined with Manor Care's corporate funds through its cash management
system. Similarly, operating expenses, capital expenditures and other cash
requirements of the Company have been paid by Manor Care and charged to the
Company. The net result of all of these intercompany transactions, with the
exception of amounts relating to the acquisition of Company operated hotels that
are reflected in the combined balance sheets as notes payable to Parent, are
included in investments and advances from Parent in the combined balance sheets.
Manor Care provides various services to the Company including, among
others, cash management, payroll and payables processing, employee benefit
plans, insurance, legal, accounting, tax, information systems and certain
administrative services, as required. Manor Care charges the Company fees for
general management, staff support and rental of office space on the basis of
such factors as employee time incurred and square footage. This is essentially
the same basis Manor Care utilizes to charge its other operating entities for
such services. General corporate expenses of $5.5 million, $6.3 million and $7.4
million, respectively, were charged to operations for the years ended May 31,
1994, 1995 and 1996. Management believes that the
F-14
<PAGE> 82
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
foregoing charges are reasonable allocations of the costs incurred by Manor Care
on the Company's behalf. The Company has estimated that general and
administrative expenses incurred annually will increase by approximately $4.1
million after the Distribution.
For purposes of providing an orderly transition after the Distribution,
Manor Care and the Company will enter into various agreements, including, among
others, a Distribution Agreement, Tax Sharing Agreement, Corporate Services
Agreement and Employee Benefits Allocation Agreement. Effective at the
Distribution, these agreements will provide, among other things, that the
Company (i) will receive certain corporate and support services, such as
accounting, tax and computer systems support, (ii) will establish pension,
profit sharing and incentive plans similar to those in place at Manor Care and
(iii) will receive certain risk management services and other miscellaneous
administrative services. These agreements will extend for a maximum period of 30
months from the Distribution date or until such time as the Company has arranged
to provide such services in-house or through another unrelated provider of such
services.
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and general counsel to the
Company, the ultimate outcome of such litigation will not have a material
adverse effect on the Company's business, financial position or results of
operations. 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 at the sites in question prior to Manor Care'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 matter is not resolved by settlement, a court would have to allocate
responsibility and Manor Care's allocation could change.
F-15
<PAGE> 83
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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-16
<PAGE> 84
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company is required to adopt SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," no
later than fiscal year 1997. The Company's current policy is to regularly review
the recoverability of the net carrying value of its long-lived assets and make
adjustments accordingly. The adoption of SFAS No. 121 is not expected to have a
material impact on the Company's financial statements.
The Company is required to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation," no later than fiscal year 1997. Management expects to adopt SFAS
No. 123 utilizing the method which provides for disclosure of the impact of
stock-based compensation grants.
SUMMARY OF QUARTERLY RESULTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
INCOME (LOSS) NET
BEFORE INCOME
QUARTERS ENDED REVENUES INCOME TAXES (LOSS)
- ---------------------------------------------------- -------- ------------- --------
<S> <C> <C> <C>
FISCAL 1995
August............................................ $ 78,427 $ 10,942 $ 6,295
November.......................................... 77,127 10,354 5,962
February.......................................... 63,845 (279) (486)
May............................................... 83,136 8,938 5,040
-------- ------------- --------
$302,535 $ 29,955 $ 16,811
======== =========== ========
FISCAL 1996
August............................................ $ 99,380 $ 18,572 $ 10,914
November.......................................... 95,198 13,952 8,131
February.......................................... 79,326 2,878 1,391
May............................................... 100,969 (19,544)(a) (11,978)
-------- ------------- --------
$374,873 $ 15,858 $ 8,458
======== =========== ========
FISCAL 1997
August............................................ $119,380 $ 25,897 $ 15,397
======== =========== ========
</TABLE>
- ---------------
(a) Includes a provision of $33.3 million for asset impairment and
restructuring.
F-17
<PAGE> 85
APPENDIX A
FORM OF
RESTATED CERTIFICATE OF INCORPORATION
OF
CHOICE HOTELS HOLDINGS, INC.
Choice Hotels Holdings, Inc. (the "Corporation"), a corporation
incorporated on June 27, 1996 and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "GCL"), hereby certifies as
follows:
FIRST: The board of directors of the Corporation (the "Board of Directors")
adopted a resolution proposing and declaring advisable the following amendments
to and restatement of the Certificate of Incorporation of the Corporation.
SECOND: This Restated Certificate of Incorporation was duly adopted by the
sole stockholder of the Corporation in accordance with the provisions of
Sections 228, 242 and 245 of the GCL.
THIRD: The text of the Certificate of Incorporation is hereby amended and
restated as herein set forth in full:
1. The name of the corporation is CHOICE HOTELS INTERNATIONAL, INC. (the
"Corporation").
2. The address of the Corporation's registered office in the State of
Delaware is 100 West Tenth Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
3. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the GCL.
4. The total number of shares of capital stock of all classifications which
the Corporation shall have authority to issue is One Hundred Sixty-Five Million
(165,000,000), of which One Hundred Sixty Million (160,000,000) shares having a
par value of One Cent ($.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> 86
(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> 87
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> 88
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> 89
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 10.07
EMPLOYEE BENEFITS & OTHER EMPLOYMENT
MATTERS ALLOCATION AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I DEFINITIONS........................................ 1
Section 1.01 Definitions........................................ 1
Aggregate Spread............................................... 1
Choice Business................................................ 1
Choice Individual.............................................. 1
Code ......................................................... 2
Collective Bargaining Agreement................................ 2
Commission..................................................... 2
Common Stock................................................... 2
(i) Employer Common Stock........................ 2
(ii) Manor Care Common Stock...................... 2
(iii) Choice Common Stock.......................... 2
Company Matching Contribution.................................. 2
Conversion Award............................................... 2
Current Plan Year.............................................. 2
Cut-off Date................................................... 2
Distribution Agreement......................................... 2
Distribution Date.............................................. 2
Employee....................................................... 3
(i) Choice Employee.............................. 3
(ii) Terminee..................................... 3
(iii) Retained Employee............................ 3
ERISA ......................................................... 3
HMO ......................................................... 3
IRS ......................................................... 3
Manor Care..................................................... 3
Manor Care Closing Stock Price................................. 3
Manor Care Medical Plan........................................ 3
Manor Care Stock Option........................................ 3
Plan ......................................................... 4
Post-Conversion Stock Price.................................... 4
Prior Plan Year................................................ 4
Profit Sharing Plan............................................ 4
(i) Manor Care, Inc. Retirement Savings and
Investment Plan.................................... 4
(ii) Choice Hotels International, Inc.
Retirement Savings and Investment Plan............. 4
Qualified Beneficiary.......................................... 4
(i) Manor Care Qualified Beneficiary................... 4
(ii) Choice Qualified Beneficiary....................... 5
Retained Individual............................................ 5
Service Credit................................................. 5
Subsidiary..................................................... 5
(i) Choice Subsidiary.................................. 5
(ii) Retained Subsidiary................................ 5
Welfare Plans.................................................. 5
Section 1.02 Other Terms........................................ 5
(i)
<PAGE> 3
Section 1.03 Certain Constructions.............................. 5
Section 1.04 Schedules, Sections ............................... 6
Section 1.05 Survival........................................... 6
ARTICLE II EMPLOYEE BENEFITS.................................. 6
Section 2.01 Employment......................................... 6
(a) Allocation of Responsibilities on
Distribution Date........................................ 6
(b) Service Credits.......................................... 6
(c) Funding Payment by Choice to Manor Care.................. 7
Section 2.02 Profit Sharing Plans............................... 7
(a) Manor Care, Inc. Retirement Savings and
Investment Plan.......................................... 7
(b) Manor Care, Inc. Nonqualified Retirement
Savings and Investment Plan.............................. 9
Section 2.03 Retirement Plans................................... 11
(a) Manor Care, Inc. Supplemental Executive
Retirement Plan.......................................... 11
(b) Manor Care, Inc. Cash Accumulation Retirement
Plan..................................................... 13
(c) Manor Care, Inc. Deferred Compensation Plan.............. 14
Section 2.04 Comprehensive Stock Plans.......................... 15
(a) Manor Care, Inc. Non-Employee Director Stock
Option and Deferred Compensation Stock
Purchase Plan............................................ 15
(b) Manor Care, Inc. 1996 Non-Employee Director
Stock Compensation Plan.................................. 16
(c) Manor Care, Inc. Stock Grant Plans....................... 16
(d) Manor Care Stock Option Plans............................ 17
(e) Manor Care, Inc. 1995 Employee Stock Purchase
Plan..................................................... 18
(f) Effect of the Distribution on Awards Made
Prior to the Cut-off Date................................ 19
(g) Effect of Post-Distribution Transfer on
Conversion Awards........................................ 21
Section 2.05 Existing Manor Care Stock Purchase Plan............ 22
Section 2.06 Manor Care Welfare Plans and Short-Term
Disability Plan.................................... 22
(ii)
<PAGE> 4
(a) Liability for Claims..................................... 22
(b) Continuation Coverage Administration..................... 23
(c) Continuation Coverage Claims............................. 23
(d) Continuation of Sponsorship of Manor Care Welfare
Plans.................................................... 23
(e) Welfare Plan Payments by Choice to Manor Care............ 24
(f) Continuation of Sponsorship of Manor Care, Inc.
Short-Term Disability Plan............................... 24
Section 2.07 Choice Welfare Plans and Short-Term
Disability Plan.................................... 24
(a) Establishment of Choice Welfare Plans.................... 24
(b) Liability for Claims..................................... 24
(c) Continuation Coverage Administration..................... 25
(d) Continuation Coverage Claims............................. 25
(e) Establishment of Choice Hotels International, Inc.
Short-Term Disability Plan............................... 25
Section 2.08 Vacation Pay and Sick Leave Liabilities............ 25
(a) Division of Liabilities.................................. 25
(b) Post-Distribution Transfers.............................. 26
Section 2.09 Employee Discounts................................. 26
Section 2.10 Preservation of Right To Amend or Terminate
Plans.............................................. 27
Section 2.11 Reimbursement...................................... 27
Section 2.12 Payroll Reporting and Withholding.................. 27
(a) Form W-2 Reporting....................................... 27
(b) Forms W-4 and W-5........................................ 28
(c) Garnishments, Tax Levies, Child Support Orders,
and Wage Assignments..................................... 28
(d) Authorizations for Payroll Deductions.................... 28
ARTICLE III LABOR AND EMPLOYMENT MATTERS....................... 28
Section 3.01......................................................... 28
Section 3.02 Employment Policies and Practices.................. 29
Section 3.03 Collective Bargaining Agreements................... 29
Section 3.04 Claims............................................. 29
(a) Scope.................................................... 29
(iii)
<PAGE> 5
(b) Employment-Related Claims................................ 29
(c) Obligation to Indemnify.................................. 29
(d) Pre-Distribution Claims.................................. 30
(e) Distribution and Other Joint Liability
Claims................................................... 30
(f) Post-Distribution Employment-Related Claims.............. 30
Section 3.05 Funding of Union Plans............................. 30
Section 3.06 Notice of Claims................................... 31
Section 3.07 Assumption of Unemployment Tax Rates............... 31
Section 3.08 Intercompany Service Charge........................ 31
Section 3.09 WARN Claims........................................ 31
Section 3.10 Employees on Leave of Absence...................... 32
Section 3.11 No Third Party Beneficiary Rights.................. 32
Section 3.12 Attorney-Client Privilege.......................... 32
ARTICLE IV DEFAULT............................................ 32
Section 4.01 Default............................................ 32
Section 4.02 Force Majeure...................................... 32
ARTICLE V MISCELLANEOUS...................................... 32
Section 5.01 Relationship of Parties............................ 32
Section 5.02 Access to Information; Cooperation................. 33
Section 5.03 Assignment......................................... 33
Section 5.04 Headings........................................... 33
Section 5.05 Severability of Provisions......................... 33
Section 5.06 Parties Bound...................................... 33
Section 5.07 Notices............................................ 33
Section 5.08 Further Action..................................... 34
Section 5.09 Waiver............................................. 34
Section 5.10 Governing Law...................................... 34
Section 5.11 Consent to Jurisdiction............................ 34
(iv)
<PAGE> 6
Section 5.12 Entire Agreement................................... 34
Section 5.13 Commercially Reasonable Terms and Conditions....... 35
(v)
<PAGE> 7
EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS
ALLOCATION AGREEMENT
THIS EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT
("Agreement") is made and entered into as of___________________________, 1996,
by and between CHOICE HOTELS HOLDINGS, INC., (to be renamed Choice Hotels
International, Inc.) a Delaware corporation ("Choice"), and MANOR CARE, INC., a
Delaware corporation ("Manor Care").
R E C I T A L S
WHEREAS, pursuant to a Distribution Agreement (the "Distribution
Agreement") dated as of ____________, 1996, as implemented in documents executed
or delivered by Choice and Manor Care in connection with the closing thereunder,
Choice and Manor Care have agreed to enter into an Employee Benefits & Other
Employment Matters Allocation Agreement with the terms and conditions set forth
herein pursuant to which Choice and Manor Care will each assume certain
liabilities and obligations, each generally with respect to its own employees,
to adopt or continue certain employee benefit, stock and retirement plans and
programs substantially equivalent to those provided by Manor Care on the
Distribution Date.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Manor Care and Choice agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01 Definitions. As used in this Agreement, the following terms
shall have the meanings indicated below:
Aggregate Spread: the difference between the exercise price of a
Manor Care Stock Option and the Manor Care Closing Stock Price, multiplied by
the number of shares covered by such Manor Care Stock Option remaining
unexercised on the Cut-off Date.
Choice Business: any business or operation of Manor Care or its
Subsidiaries which is, pursuant to the Distribution Agreement, to be conducted,
following the Distribution Date, by Choice or any Choice Subsidiary.
Choice Individual: any individual who (i) is a Choice Employee, or
(ii) is a beneficiary of any individual specified in clause (i).
<PAGE> 8
Code: the Internal Revenue Code of 1986, as amended, or any
successor legislation.
Collective Bargaining Agreement: any collective bargaining agreement
or other labor agreement to which Manor Care or any of its subsidiaries or
affiliates was a party on or before the Cut-off Date.
Commission: the Securities and Exchange Commission.
Common Stock: the common stock of Manor Care or Choice, as more
specifically described below:
(i) Employer Common Stock: Manor Care Common Stock in the
case of Retained Employees and Choice Common Stock in the case of Choice
Employees; or
(ii) Manor Care Common Stock: the common stock, par value
$0.10 per share, of Manor Care after the Distribution Date; or
(iii) Choice Common Stock: the common stock, par value [$1]
per share, of Choice after the Distribution Date.
Company Matching Contribution: the Company Matching Contribution of
Manor Care under the Manor Care, Inc. Retirement Savings and Investment Plan (as
provided in the Manor Care Retirement Savings and Investment Plan document) and
the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan, each
as may be supplemented in the sole and absolute discretion of the Manor Care
Board of Directors.
Conversion Award: an award of Common Stock or of an option to
acquire Common Stock made to a Choice Individual or a Retained Individual to
reflect the effect of the Distribution on awards of Manor Care Common Stock or
Manor Care Stock Options held on the Cut-off Date, in accordance with Section
2.04.
Current Plan Year: the plan year or fiscal year, to the extent
applicable with respect to any Plan, during which the Distribution occurs.
Cut-off Date: the date immediately preceding the Distribution Date.
Distribution Agreement: the agreement described in the first recital
of this Agreement.
Distribution Date: the date on which the Distribution occurs.
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Employee: an individual who on the Distribution Date,
is identified as being in any of the following categories:
(i) Choice Employee: any individual who is an Employee of
Choice or any Choice Subsidiary on the Distribution Date; or
(ii) Terminee: any individual formerly employed by Manor Care
or any Subsidiary of Manor Care who terminated such employment prior to the
Distribution Date, including but not limited to any Manor Care employee who has
retired prior to the Distribution Date; or
(iii) Retained Employee: any individual who remains an
Employee of Manor Care or any Retained Subsidiary on the Distribution Date.
ERISA: the Employee Retirement Income Security Act of 1974, as
amended, or any successor legislation.
HMO: any health maintenance organization organized under 42 U.S.C.
Section 300a-9, or a state health maintenance organization statute that provides
medical services for Retained Individuals or Choice Individuals under any Plan.
IRS: the Internal Revenue Service.
Manor Care: Manor Care, Inc., a Delaware corporation.
Manor Care Closing Stock Price: the New York Stock Exchange closing
price per share for Manor Care Common Stock on the Distribution Date, trading
regular way, with a due bill for the special dividend of Choice Common Stock to
be made in connection with the Distribution.
Manor Care Medical Plan: any welfare plan maintained by Manor Care
(or to which Manor Care makes contributions) which provides medical benefits,
including medical benefits provided through an HMO, an indemnity program or a
point of service program.
Manor Care Stock Option: an option to purchase Manor Care Common
Stock pursuant to an option granted under the Manor Care, Inc. Non-Employee
Director Stock Option and Deferred Compensation Stock Purchase Plan, the Manor
Care, Inc. 1995 Long Term Incentive Plan, the Manor Care, Inc. Key Executive
Stock Option Plan, or the Manor Care, Inc. Key Executive Stock Option Plan of
1993.
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<PAGE> 10
Plan: any plan, policy, arrangement, contract or agreement providing
compensation benefits for any group of Employees or former employees or any
individual Employee or former employee, or the dependents or beneficiaries of
any such Employee or former Employee, whether formal or informal or written or
unwritten, and including, without limitation, any means, whether or not legally
required, pursuant to which any benefit is provided by an employer to any
Employee or former employee or the beneficiaries of any such Employee or former
employee. The term "Plan" as used in this Agreement does not include any
contract, agreement or understanding entered into by Manor Care prior to the
Distribution Date or by Manor Care or Choice after the Distribution Date by
relating to settlement of actual or potential employee related litigation
claims.
Post-Conversion Stock Price: the per share price of Choice Common
Stock or Manor Care Common Stock on the Distribution Date, based on the Manor
Care Closing Stock Price and the when-issued closing price of Choice Common
Stock on the New York Stock Exchange on the Distribution Date.
Prior Plan Year: a plan year or fiscal year or portion thereof, to
the extent applicable with respect to any Plan, ending on or prior to the
Cut-off Date.
Profit Sharing Plan: a salary reduction contribution plan maintained
pursuant to Sections 401(a) and 401(k) of the Code for Employees and their
beneficiaries, as specifically identified using one of the categories described
below:
(i) Manor Care, Inc. Retirement Savings and Investment Plan:
the Manor Care, Inc. Retirement Savings and Investment Plan and Trust as in
effect on the Distribution Date; or
(ii) Choice Hotels International, Inc. Retirement Savings and
Investment Plan: the Choice Hotels International, Inc. Retirement Savings and
Investment Plan and Trust as in effect on the Distribution Date.
Qualified Beneficiary: an individual (or dependent thereof) who
either (1) experiences a "qualified event" (as that term is defined in Code
Section 4980B(f)(3) and ERISA Section 603) while a participant in any Welfare
Plan, or (2) becomes a "qualified beneficiary" (as that term is defined in Code
Section 4980B(g)(1) and ERISA 607(3)) under any Welfare Plan, and who is
included in any one of the following categories:
(i) Manor Care Qualified Beneficiary: any Retained Employee
(or dependent thereof) who becomes a Qualified Beneficiary on or after the
Distribution Date under any Manor Care Welfare Plan; or any Retained Employee
(or dependent
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<PAGE> 11
thereof) who, on or before the Cut-off Date, was a Qualified Beneficiary under
any Manor Care Welfare Plan.
(ii) Choice Qualified Beneficiary: Any Choice Employee (or
dependent thereof) who becomes a Qualified Beneficiary on or after the
Distribution Date but before January 1, 1997 under any Manor Care Welfare Plan;
or any individual (or dependent thereof) who, on or before the Cut-off Date, was
a Qualified Beneficiary under any Manor Care Welfare Plan and who became a
Choice Employee after the Distribution Date.
Retained Business: any business or operation of Manor Care or its
Subsidiaries which is, pursuant to the Distribution Agreement, to be conducted,
following the Distribution Date, by Manor Care or any Retained Subsidiary.
Retained Individual: any individual who (i) is a Retained Employee,
or (ii) is a beneficiary of any individual described in clause (i).
Service Credit: the period taken into account under any Plan for
purposes of determining length of service to satisfy eligibility, vesting,
benefit accrual and similar requirements under such Plan.
Subsidiary: any corporation, a majority of whose capital stock with
voting power, under ordinary circumstances, to elect directors is, at the date
of determination, directly or indirectly owned by any person as to which a
determination of subsidiary status is to be made, including each of the
following categories:
(i) Choice Subsidiary: all subsidiaries of Choice as of the
Distribution Date; or
(ii) Retained Subsidiary: any subsidiary of Manor Care, except
Choice and the Choice Subsidiaries.
Welfare Plans: any welfare plan providing medical, dental, life,
pre-paid legal services, accidental death & dismemberment or long-term
disability benefits as set forth in Exhibit A. The term "Welfare Plan" does not
include any short-term disability program.
Section 1.02 Other Terms. Any capitalized terms used herein but not
defined herein shall have the meaning set forth in the Distribution Agreement.
Section 1.03 Certain Constructions. References to the singular in this
Agreement shall refer to the plural and vice-versa and references to the
masculine shall refer to the feminine and vice-versa.
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<PAGE> 12
Section 1.04 Schedules, Sections . References to a "Schedule" are, unless
otherwise specified, to one of the Schedules attached to this Agreement, and
references to a "Section " are, unless otherwise specified, to one of the
Sections of this Agreement.
Section 1.05 Survival. Obligations described in this Agreement shall
remain in full force and effect and shall survive the Distribution Date.
ARTICLE II
EMPLOYEE BENEFITS
Section 2.01 Employment.
(a) Allocation of Responsibilities on Distribution Date. On the
Distribution Date, except to the extent retained or assumed by Manor Care under
this Agreement or any other agreement relating to the Distribution, Choice shall
retain or assume, as the case may be, responsibility as employer for the Choice
Employees. On the Distribution Date, except to the extent retained or assumed by
Choice under this Agreement or any other agreement relating to the Distribution,
Manor Care shall retain or assume, as the case may be, responsibility as
employer for the Retained Employees. The assumption or retention of
responsibility as employer by Manor Care or Choice described in this Section
2.01 shall not, of itself, constitute a severance or a termination of employment
under any Plan of severance maintained by Manor Care.
(b) Service Credits. (i) Distribution Date transfers. In connection
with the Distribution and for purposes of determining Service Credits (but
excluding accrual of benefits other than vacation leave and sick leave) under
any Plans, Manor Care shall credit each Retained Employee and Choice shall
credit each Choice Employee with such Employee's original hire date as reflected
in the Manor Care payroll system records as of the Cutoff Date. Such hire date
shall continue to be maintained as described herein for as long as the Employee
does not terminate employment.
(ii) Post-Distribution Date terminations. Subject to the
provisions of ERISA and to Section 2.08(b) (governing post-Distribution
transfers through May 31, 1998), Choice may, in the case of Choice Employees,
and Manor Care may, in the case of Retained Employees, each in its sole
discretion, make such decisions as it deems appropriate with respect to
determining Service Credits and vacation and sick leave balances for such
Employees who terminate employment from the other company after the Distribution
Date.
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<PAGE> 13
(c) Funding Payment by Choice to Manor Care. Choice shall make a
payment to Manor Care in an amount equal to 2.1% of Choice's aggregate payroll
for all Choice Employees with respect to the time period beginning on the
Distribution Date and ending on December 31, 1996. Such payment shall be made to
Manor Care on a monthly basis no more than ten (10) days after the end of each
month ending after the Distribution Date through December 31, 1996. In
consideration of receipt of such payments, Manor Care shall (i) assume
responsibility for all funding obligations attributable to the Manor Care, Inc.
Cash Accumulation Retirement Plan and (ii) assume responsibility for the Company
Matching Contribution attributable to the Current Plan Year under the Manor
Care, Inc. Retirement Savings and Investment Plan, the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan, the Choice Hotels
International, Inc. Retirement Savings and Investment Plan, and the Choice
Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan.
It is also agreed that Choice will be responsible for any incremental costs
associated with the establishment of the Choice Hotels International, Inc.
Retirement Savings and Investment Plan and the Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan.
Section 2.02 Profit Sharing Plans.
(a) Manor Care, Inc. Retirement Savings and Investment Plan.
(i) Continuation of Sponsorship of Manor Care, Inc. Retirement
Savings and Investment Plan. Effective as of the Distribution Date, Manor Care
shall continue sponsorship of the Manor Care, Inc. Retirement Savings and
Investment Plan for all Retained Employees and Terminees. Participants in such
Plan who are Retained Employees or Terminees shall have a one-time election to
convert Choice Common Stock credited to their accounts into cash or into Manor
Care Common Stock.
(ii) Establishment of Choice Hotels International, Inc.
Retirement Savings and Investment Plan. On or before January 1, 1997, Choice
shall take, or cause to be taken, all action necessary and appropriate to
establish and administer a new Plan named the Choice Hotels International, Inc.,
Retirement Savings and Investment Plan and Trust and to provide benefits
thereunder after the date of the establishment of such Plan and Trust for all
Choice Individuals who, immediately prior to the Distribution Date, were
participants in or otherwise entitled to benefits under the Manor Care, Inc.
Retirement Savings and Investment Sharing Plan. Manor Care will fund the Company
Matching Contribution required with respect to the Current Plan Year in
consideration for the payment by Choice of the Funding Payment described in
Section 2.01(c), above. Participants in such Plan shall have a one-time election
to convert transferred Manor Care Common Stock into cash or into
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<PAGE> 14
Choice Common Stock. The Choice Hotels International, Inc. Retirement Savings
and Investment Plan shall be intended to qualify for tax-favored treatment under
Sections 401(a) and 401(k) of the Code and to be in compliance with the
requirements of ERISA.
(iii) Transfer and Acceptance of Account Balances. As soon as
practicable after the date of the establishment of the Choice Hotels
International, Inc. Retirement Savings and Investment Plan, Manor Care shall
cause the trustees of the Manor Care, Inc. Retirement Savings and Investment
Plan to transfer to the trustee or other funding agent of the Choice Hotels
International, Inc. Retirement Savings and Investment Plan the amounts (in cash,
securities, other property or a combination thereof) representing the account
balances of all Choice Individuals, said amounts to be established as account
balances or accrued benefits of such individuals under the Choice Hotels
International, Inc. Retirement Savings and Investment Plan. Each such transfer
shall comply with Section 414(l) of the Code and the requirements of ERISA and
the regulations promulgated thereunder. Choice agrees to cause the trustees or
other funding agent of the Choice Hotels International, Inc. Retirement Savings
and Investment Plan to accept the plan-to-plan transfer from the Manor Care,
Inc. Retirement Savings and Investment Plan trustees, and to credit the accounts
of such Choice Individuals under the Choice Hotels International, Inc.
Retirement Savings and Investment Plan with amounts transferred on their behalf.
Notwithstanding the foregoing, Manor Care and Choice agree that if, subsequent
to such transfer of account balances to the Choice Hotels International, Inc.
Retirement Savings and Investment Plan, a subsequent audit or other review
establishes that additional funds should be transferred to the Choice Hotels
International, Inc. Retirement Savings and Investment Plan from the Manor Care,
Inc. Retirement Savings and Investment Plan or that funds should be returned
from the Choice Hotels International, Inc. Retirement Savings and Investment
Plan to the Manor Care, Inc. Retirement Savings and Investment Plan, both
parties shall take all appropriate steps to effectuate the required transfer
between the trusts maintained for such plans.
(iv) Manor Care to Provide Information. Manor Care shall
provide Choice, as soon as practicable after the date of the establishment of
the Choice Hotels International, Inc. Retirement Savings and Investment Plan
(with the cooperation of Choice to the extent that relevant information is in
the possession of Choice or a Choice Subsidiary, and in accordance with Section
5.02), with a list of Choice Individuals who, to the best knowledge of Manor
Care, were participants in or otherwise entitled to benefits under the Manor
Care, Inc. Retirement Savings and Investment Plan on the Cut-off Date, together
with a listing of each participant's Service Credits under such Plan and a
listing of each account balance thereunder. Manor Care shall, as soon as
practicable after the Distribution Date and in accordance with Section 5.02,
provide Choice with such additional information in
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<PAGE> 15
the possession of Manor Care or a Retained Subsidiary (and not already in the
possession of Choice or a Choice Subsidiary) as may be reasonably requested by
Choice and necessary for Choice or the Choice Subsidiary to establish and
administer effectively the Choice Hotels International, Inc. Retirement Savings
and Investment Plan.
(v) Regulatory Filings. Choice and Manor Care shall, in
connection with the plan-to-plan transfer described in Section 2.02(a)(iii),
cooperate in making any and all appropriate filings required by the Commission
or the IRS, or required under the Code or ERISA or any applicable securities
laws and the regulations thereunder, and take all such action as may be
necessary and appropriate to cause such plan-to-plan transfer to take place as
soon as practicable after the date of the establishment of the Choice Hotels
International, Inc. Retirement Savings and Investment Plan or otherwise when
required by law. Further, Choice shall seek a favorable IRS determination letter
that the Choice Hotels International, Inc. Retirement Savings and Investment
Plan, as organized, satisfies all qualification requirements under Section
401(a) of the Code, and the transfers described in Section 2.02(a)(iii) shall
take place as soon as practicable after the receipt of such favorable IRS
determination letter. Notwithstanding the foregoing, such transfers may take
place pending issuance of such favorable determination letter, upon receipt of
an opinion of counsel for Choice reasonably satisfactory to Manor Care that the
aforesaid Plan so qualifies, or that it can be made to so qualify by retroactive
amendment, and that any such retroactive amendment shall not decrease the
accrued benefit of any participant in such Plan. Manor Care agrees to provide to
Choice's counsel such information in the possession of Manor Care or any
Retained Subsidiary as may reasonably be requested by Choice's counsel in
connection with the issuance of such opinion, in accordance with Section 5.02.
Manor Care and Choice shall each make any necessary amendments on a retroactive
basis to the Manor Care, Inc. Retirement Savings and Investment Plan or the
Choice Hotels International, Inc. Retirement Savings and Investment Plan,
respectively, as required by the IRS to issue the favorable determination letter
described above.
(b) Manor Care, Inc. Nonqualified Retirement Savings and Investment
Plan.
(i) Continuation of Sponsorship of Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan. On the Distribution Date,
Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole
responsibility for all liabilities and obligations under the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan, including the obligation to
make a Company Matching Contribution for Retained Employees and Choice Employees
with respect to the Current Plan Year, and Choice shall have no liability or
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<PAGE> 16
obligation with respect thereto, except to pay to Manor Care the Funding Payment
described in Section 2.01(c), above. Participants in such Plan who are Retained
Employees or Terminees shall have a one-time election to convert Choice Common
Stock credited to their accounts into cash or into Manor Care Common Stock.
(ii) Establishment of Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan. On or before January 1,
1997 Choice shall take, or cause to be taken, all action necessary and
appropriate to establish and administer a new nonqualified retirement savings
and investment plan named the Choice Hotels International, Inc. Nonqualified
Retirement Savings and Investment Plan and to provide benefits thereunder after
the date of the establishment of such Plan and Trust for all Choice Employees
who immediately prior to the Distribution Date, were participants in or
otherwise entitled to benefits under the Manor Care, Inc. Nonqualified
Retirement Savings and Investment Plan. However, the obligation to make a
Matching Company Contribution for Choice Employees with respect to the Current
Plan Year shall be assumed by Manor Care in consideration of the payment by
Choice of the Funding Payment described in Section 2.01(c) above. Participants
in such Plan shall have a one-time election to convert transferred Manor Care
Common Stock into cash or into Choice Common Stock.
(iii) Transfer and Acceptance of Account Balances. As soon as
practicable after the date of the establishment of the Choice Hotels
International, Inc. Nonqualified Retirement Savings and Investment Plan, Manor
Care shall cause the trustee of the "rabbi" trust relating to the Manor Care,
Inc. Nonqualified Retirement Savings and Investment Plan to transfer to a
separate "rabbi" trust to be established by Choice with respect to the Choice
Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan
the amounts (in cash, securities, other property or a combination thereof)
representing the account balances of all Choice Individuals who had account
balances in the "rabbi" trust relating to the Manor Care, Inc. Nonqualified
Retirement Savings and Investment Plan on the Cut-off Date, said amounts to be
established as account balances or accrued benefits of such individuals in the
"rabbi" trust established with respect to the Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan. In addition, each Choice
Individual for whom an account balance in the rabbi trust established on behalf
of the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan is
transferred to a rabbi trust established on behalf of the Choice Hotels
International, Inc. Nonqualified Retirement Savings and Investment Plan shall be
required to execute a waiver which acknowledges that all liabilities for
benefits accrued under the Manor Care, Inc. Nonqualified Retirement Savings and
Investment Plan through the date immediately preceding the date of the
establishment of the Choice Hotels International, Inc. Nonqualified Retirement
Savings and Investment Plan, shall be assumed by Choice, except that Manor Care
shall remain liable, for a period of thirty (30) months following the
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<PAGE> 17
Distribution Date, for such benefits to the extent such amounts are not paid
when due by Choice.
(iv) Manor Care to Provide Information. Manor Care agrees to
provide Choice (to the extent not already in Choice's possession), as soon as
practicable after the date of the establishment of the Choice Hotels
International, Inc. Nonqualified Retirement Savings and Investment Plan, with a
list of Choice Individuals who were, to the best knowledge of Choice,
participants in or otherwise entitled to benefits under the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan on the Cut-off Date,
together with a listing of each participant's Service Credits under such Plan
and a listing of each account balance thereunder. Manor Care shall, as soon as
practicable after the Distribution Date, in accordance with Section 5.02 provide
Choice with such additional information in the possession of Manor Care or a
Retained Subsidiary and not already in the possession of Choice or a Choice
Subsidiary as may reasonably be requested by Choice and necessary in order for
Choice or a Choice Subsidiary to administer effectively the Choice International
Hotels, Inc. Nonqualified Retirement Savings and Investment Plan.
(v) Benefit Guarantees. On and after the Distribution Date, a
Retained Employee's and Terminee's right, if any, to receive benefits under the
Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan shall be
the responsibility of Manor Care. However, the payment of any benefits due under
the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan for the
first thirty (30) months following the Distribution Date shall be guaranteed by
Choice, to the extent not otherwise paid by Manor Care. On and after the date of
the establishment of the Choice Hotels International, Inc. Nonqualified
Retirement Savings and Investment Plan, a Choice Individual's right to receive
benefits under the Choice Hotels International, Inc. Nonqualified Retirement
Savings and Investment Plan shall be the responsibility of Choice. However, the
payment of any benefits due under the Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan which are attributable to
the transferred accrued benefits earned under the Manor Care, Inc. Deferred
Compensation Plan shall be guaranteed by Manor Care for the first thirty (30)
months following the Distribution Date, to the extent not otherwise paid by
Choice.
Section 2.03 Retirement Plans.
(a) Manor Care, Inc. Supplemental Executive Retirement Plan.
(i) Continuation of Sponsorship of Manor Care, Inc.
Supplemental Executive Retirement Plan. On the Distribution Date, Manor Care
shall retain (or shall cause a Retained Subsidiary to assume) sole
responsibility for all liabilities and obligations under the Manor Care, Inc.
Supplemental Executive Retirement Plan, and Choice shall have no liability or
obligation
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<PAGE> 18
with respect thereto, except as defined in Section 2.03(a)(ii) below. Manor Care
shall provide future benefits thereunder accruing after the Cut-off Date for
Retained Employees and Terminees who, on the Cut-off Date, were participants in
or otherwise entitled to benefits under the Manor Care, Inc.
Supplemental Executive Retirement Plan.
(ii) Establishment of Choice Hotels International, Inc.
Supplemental Executive Retirement Plan. Effective as of the Distribution Date,
Choice shall take, or cause to be taken, all action necessary and appropriate to
establish and administer a new supplemental executive retirement plan named the
Choice Hotels International, Inc. Supplemental Executive Retirement Plan and to
provide benefits thereunder after the Distribution Date for all Choice Employees
who immediately prior to the Distribution Date, were participants in or
otherwise entitled to benefits under the Manor Care, Inc. Supplemental Executive
Retirement Plan.
(iii) Transfer and Acceptance of Account Balances. As soon as
practicable after the Distribution Date, Manor Care shall transfer to Choice an
amount (in cash, securities, other property or a combination thereof)
representing the present value of the full accrued benefit of all Choice
Employees who had earned a benefit in the Manor Care, Inc. Supplemental
Executive Retirement Plan on the Cut-off Date, said amounts to be established as
the initial accrued benefits of such individuals under the Choice Hotels
International, Inc. Supplemental Executive Retirement Plan. Manor Care and
Choice shall take such steps as may be necessary to obtain releases of Manor
Care from Choice Employees whose accrued benefits are transferred from the Manor
Care, Inc. Supplemental Executive Retirement to the Choice Hotels International,
Inc. Supplemental Executive Retirement Plan in accordance with this Section . In
addition, each Choice Individual for whom an accrued benefit under the Manor
Care, Inc. Supplemental Executive Retirement Plan has been assumed by the Choice
Hotels International, Inc. Supplemental Executive Retirement Plan shall be
required to execute a waiver which acknowledges that all liabilities for
benefits accrued under the Manor Care, Inc. Supplemental Executive Retirement
Plan through the date immediately preceding the Distribution Date shall be
assumed by Choice, except that Manor Care shall remain liable, for a period of
thirty (30) months following the Distribution Date, for such benefits to the
extent such amounts are not paid when due by Choice.
(iv) Manor Care to Provide Information. Manor Care agrees to
provide Choice (to the extent not already in Choice's possession), as soon as
practicable after the Distribution Date, with a list of Choice Individuals who
were, to the best knowledge of Choice, participants in or otherwise entitled to
benefits under the Manor Care, Inc. Supplemental
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<PAGE> 19
Executive Retirement Plan on the Cut-off Date, together with a listing of each
participant's Service Credits under such Plan and a listing of such
participant's accrued benefits thereunder. Manor Care shall, as soon as
practicable after the Distribution Date, in accordance with Section 5.02 provide
Choice with such additional information in the possession of Manor Care or a
Retained Subsidiary and not already in the possession of Choice or a Choice
Subsidiary as may reasonably be requested by Choice and necessary in order for
Choice or a Choice Subsidiary to administer effectively the Choice International
Hotels, Inc. Supplemental Executive Retirement Plan.
(v) Benefit Guarantees. On and after the Distribution Date, a
Retained Employee's or a Terminee's right, if any, to receive benefits under the
Manor Care, Inc. Supplemental Executive Retirement Plan shall be the
responsibility of Manor Care. However, the payment of any benefits due under the
Manor Care, Inc. Supplemental Executive Retirement Plan for the first thirty
(30) months following the Distribution Date shall be guaranteed by Choice, to
the extent not otherwise paid by Manor Care. On and after the Distribution Date,
a Choice Individual's right to receive benefits under the Choice Hotels
International, Inc. Supplemental Executive Retirement Plan shall be the
responsibility of Choice. However, the payment of any benefits due under the
Choice Hotels International, Inc. Supplemental Executive Retirement Plan which
are attributable to the transferred accrued benefits earned under the Manor
Care, Inc. Deferred Compensation Plan shall be guaranteed by Manor Care for the
first thirty (30) months following the Distribution Date, to the extent not
otherwise paid by Choice.
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(b) Manor Care, Inc. Cash Accumulation Retirement Plan. As of the
Distribution Date, Manor Care or a Retained Subsidiary shall assume or retain
sponsorship of and shall be solely responsible for all liabilities and
obligations in connection with the Manor Care, Inc. Cash Accumulation Retirement
Plan, and Choice and the Choice Subsidiaries shall have no such liability or
obligation, except for the payment to Manor Care of the Funding Payment
described in Section 2.01(c), above. Subject to the approval of the Board of
Directors of Manor Care, the Manor Care, Inc. Cash Accumulation Retirement Plan
shall be frozen as to future participation effective as of August 15, 1996 and
shall be frozen as to future benefit accruals as of December 31, 1996.
Participants in the Manor Care, Inc. Cash Accumulation Retirement Plan shall
continue to earn Service Credits for purposes of vesting. To the extent that
additional contributions are required for individuals who are participants in
the Manor Care, Inc. Cash Accumulation Retirement Plan on the Cut-off Date and
who become Choice Employees, Manor Care shall be solely responsible for all
liabilities and obligations in connection with such contributions.
(c) Manor Care, Inc. Deferred Compensation Plan.
(i) Continuation of Sponsorship of Manor Care, Inc. Deferred
Compensation Plan. On the Distribution Date, Manor Care shall retain (or shall
cause a Retained Subsidiary to assume) sole responsibility for all liabilities
and obligations under the Manor Care, Inc. Deferred Compensation Plan, and
Choice shall have no liability or obligation with respect thereto, except as
defined in Section 2.03(c)(ii) below. Manor Care shall provide future benefits
thereunder accruing after the Cut-off Date for Retained Employees, individuals
who are directors of Manor Care, and Terminees who, on the Cut-off Date, were
participants in or otherwise entitled to benefits under the Manor Care, Inc.
Deferred Compensation Plan.
(ii) Establishment of Choice Hotels International, Inc.
Deferred Compensation Plan. Effective as of the Distribution Date, Choice shall
take, or cause to be taken, all action necessary and appropriate to establish
and administer a new deferred compensation plan named the Choice Hotels
International, Inc. Deferred Compensation Plan and to provide benefits
thereunder after the Distribution Date for all Choice Employees who immediately
prior to the Distribution Date, were participants in or otherwise entitled to
benefits under the Manor Care, Inc. Deferred Compensation Plan, and for Choice
directors.
(iii) Transfer and Acceptance of Account Balances. As soon as
practicable after the Distribution Date, Manor Care shall transfer to Choice the
amounts (in cash, securities, other property or a combination thereof)
representing the account balances of all Choice Employees who had account
balances in the
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<PAGE> 21
Manor Care, Inc. Deferred Compensation Plan on the Cut-off Date, said amounts to
be established as account balances or accrued benefits of such individuals under
the Choice Hotels International, Inc. Deferred Compensation Plan. Manor Care and
Choice shall take such steps as may be necessary to obtain releases of Manor
Care from Choice Employees whose account balances are transferred from the Manor
Care, Inc. Deferred Compensation Plan to the Choice Hotels International, Inc.
Deferred Compensation Plan in accordance with this Section . In addition, each
Choice Individual whose account balance under the Manor Care, Inc. Deferred
Compensation Plan has been transferred to the Choice Hotels International, Inc.
Deferred Compensation Plan shall be required to execute a waiver which
acknowledges that all liabilities for benefits accrued under the Manor Care,
Inc. Deferred Compensation Plan through the date immediately preceding the
Distribution Date shall be assumed by Choice, except that Manor Care shall
remain liable, for a period of thirty (30) months following the Distribution
Date, for such benefits to the extent such amounts are not paid when due by
Choice.
(iv) Manor Care to Provide Information. Manor Care agrees to
provide Choice (to the extent not already in Choice's possession), as soon as
practicable after the Distribution Date, with a list of Choice Employees who
were, to the best knowledge of Manor Care, participants in or otherwise entitled
to benefits under the Manor Care, Inc. Deferred Compensation Plan on the Cut-off
Date. Manor Care shall, as soon as practicable after the Distribution Date, in
accordance with Section 5.02 provide Choice with such additional information in
the possession of Manor Care or a Retained Subsidiary and not already in the
possession of Choice or a Choice Subsidiary as may reasonably be requested by
Choice and necessary in order for Choice or a Choice Subsidiary to administer
effectively the Choice Hotels International, Inc. Deferred Compensation Plans.
(v) Benefit Guarantees. On and after the Distribution Date, a
Retained Employee's, Terminee's or Manor Care director's right to receive
benefits under the Manor Care, Inc. Deferred Compensation Plan shall be the
responsibility of Manor Care. However, the payment of any benefits due under the
Manor Care, Inc. Deferred Compensation Plan for the first thirty (30) months
following the Distribution Date shall be guaranteed by Choice, to the extent not
otherwise paid by Manor Care. On and after the Distribution Date, a Choice
Individual's right to receive benefits under the Choice Hotels International,
Inc. Deferred Compensation Plan shall be the responsibility of Choice. However,
the payment of any benefits due under the Choice Hotels International, Inc.
Deferred Compensation Plan which are attributable to the transferred accrued
benefits earned under the Manor Care, Inc. Deferred Compensation Plan shall be
guaranteed by Manor Care for the first thirty (30) months following the
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Distribution Date, to the extent not otherwise paid by Choice.
Section 2.04 Comprehensive Stock Plans.
(a) Manor Care, Inc. Non-Employee Director Stock Option and Deferred
Compensation Stock Purchase Plan.
(i) Continuation of Sponsorship of Manor Care, Inc.
Non-Employee Director Stock Option and Deferred Compensation Stock Purchase
Plan. On the Distribution Date, Manor Care shall retain (or shall cause a
Retained Subsidiary to assume) sole responsibility for all liabilities and
obligations under the Manor Care, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan for all non-employee directors of
Manor Care after the Distribution Date through the issuance of Conversion
Awards, subject to the stock adjustment provisions described in Section
2.04(f)(iii) and Section 2.04(f)(iv) below and the election procedures
described in Section 2.04(f)(v) and (vi) below, and Choice shall have no
liability or obligation with respect thereto. Notwithstanding the above, on the
Distribution Date, any Director of Manor Care who becomes a member of the Board
of Directors of Choice as of the Distribution Date and who holds an option to
acquire Manor Care Common Stock under the Manor Care, Inc. Non-Employee
Director Stock Option and Deferred Compensation Stock Purchase Plan will
receive a Conversion Award in exchange for such Manor Care Stock Options (i)
with respect to which the Aggregate Spread shall equal the Aggregate Spread
attributable to such Manor Care Stock options, and (ii) with respect to which
the Aggregate Spread shall be proportionately allocated between options to
acquire Manor Care Common Stock and options to acquire Choice Common Stock
based upon the relative trading values of Manor Care and Choice on the
Distribution Date.
(ii) Establishment of Choice Hotels International, Inc.
Non-Employee Director Stock Option and Deferred Compensation Stock Purchase
Plan. Effective as of the Distribution Date, Choice shall take, or cause to be
taken, all action necessary and appropriate to establish and administer a new
non-employee director stock option and deferred compensation stock purchase plan
named the Choice Hotels International, Inc. Non-Employee Director Stock Option
and Deferred Compensation Stock Purchase Plan and to provide benefits thereunder
after the Distribution Date for all non-employee Choice directors.
(b) Manor Care, Inc. 1996 Non-Employee Director Stock Compensation
Plan.
(i) Continuation of Sponsorship of Manor Care, Inc. 1996
Non-Employee Director Stock Compensation Plan. On the Distribution Date, Manor
Care shall retain (or shall cause a Retained Subsidiary to assume) sole
responsibility for all liabilities and obligations under the Manor Care, Inc.
1996 Non- Employee Director Stock Compensation Plan for all non-employee
directors of Manor Care after the Distribution Date through the issuance of
Conversion Awards, subject to the stock adjustment provisions described in
Section 2.04(f) below, and Choice shall have no liability or obligation with
respect thereto.
(ii) Establishment of Choice Hotels International, Inc.
Non-Employee Director Stock Compensation Plan. Effective as of the Distribution
Date, Choice shall take, or cause to be taken, all action necessary and
appropriate to establish and administer a new non-employee director stock
compensation plan named the Choice Hotels International, Inc. Non-Employee
Director Stock Compensation Plan and to provide benefits thereunder after the
Distribution Date for all non-employee Choice directors.
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(c) Manor Care, Inc. Stock Grant Plans.
(i) Continuation of Sponsorship of Manor Care, Inc. Nursing
Field Operations Stock Grant Plan for Key Management Employees. On the
Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary
to assume) sole responsibility for all liabilities and obligations under the
Manor Care, Inc. Nursing Field Operations Stock Grant Plan for Key Management
Employees for all eligible key management employees eligible thereunder after
the Distribution Date, and Choice shall have no liability or obligation with
respect thereto.
(ii) Continuation of Sponsorship of Manor Care, Inc.
Restricted Stock Plan. On the Distribution Date, Manor Care shall retain (or
shall cause a Retained Subsidiary to assume) sole responsibility for all
liabilities and obligations under the Manor Care, Inc. Restricted Stock Plan for
Key Management Employees for all eligible key management employees eligible
thereunder after the Distribution Date, and Choice shall have no liability or
obligation with respect thereto. At such time as Manor Care stock is released
from restriction, Manor Care shall claim a compensation deduction for the
then-current value of such stock and shall cause the unrestricted shares of
Manor Care stock to be delivered directly to the Employee entitled to such
shares whether such Employee is currently employed by Manor Care or Choice.
(iii) Continuation of Sponsorship of Manor Care, Inc. Hotel
Franchise Operations Stock Grant Plan for Choice Hotels International, Inc. Key
Management Employees. On the Distribution Date, Manor Care shall retain (or
shall cause a Retained Subsidiary to assume) sole responsibility for all
liabilities and obligations under the Manor Care, Inc. Hotel Franchise
Operations Stock Grant Plan for Choice Hotels International, Inc. Key Management
Employees for all eligible key management employees eligible thereunder after
the Distribution Date, and Choice shall have no liability or obligation with
respect thereto. At such time as Manor Care stock is released from restriction,
Manor Care shall claim a compensation deduction for the then-current value of
such stock and shall cause the unrestricted shares of Manor Care stock to be
delivered directly to the Employee entitled to such shares, whether or not such
Employee is employed by Manor Care or Choice.
(d) Manor Care Stock Option Plans.
(i) Continuation of Sponsorship of Manor Care, Inc. 1995 Long
Term Incentive Plan and Establishment of Choice Hotels International, Inc. Long
Term Incentive Plan. On the Distribution Date, Manor Care shall retain (or shall
cause a Retained Subsidiary to assume) sole responsibility for all liabilities
and obligations under the Manor Care, Inc. 1995 Long
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<PAGE> 24
Term Incentive Plan for all Retained Employees and Terminees who are
participants in such Plan on the Distribution Date through the issuance of
Conversion Awards, subject to the stock adjustment provisions described in
Section 2.04(f) below, and Choice shall have no liability or obligation with
respect thereto. In addition, Conversion Awards shall be issued to all Choice
Employees who were participants in such Plan on the Cutoff Date in accordance
with Section 2.04(f). Issuance of a Conversion Award shall be conditioned upon
the execution of an appropriate release by the Choice Employee to whom the
Conversion Award is conveyed, which release shall acknowledge that such Choice
Employee's options to purchase Manor Care Common Stock are cancelled in
consideration of receipt of the Conversion Award. Effective as of the
Distribution Date, Choice shall take, or cause to be taken, all action necessary
and appropriate to establish and administer a new long term incentive plan named
the Choice Hotels International, Inc. Long Term Incentive Plan and to provide
benefits thereunder after the Distribution Date for all Choice officers and key
employees.
(ii) Continuation of Sponsorship of Manor Care, Inc. Key
Executive Stock Option Plan. On the Distribution Date, Manor Care shall retain
(or shall cause a Retained Subsidiary to assume) sole responsibility for all
liabilities and obligations under the Manor Care, Inc. Key Executive Stock
Option Plan for all Retained Employees and Terminees who are participants in
such Plan on the Distribution Date through the issuance of Conversion Awards,
subject to the stock adjustment provisions described in Section 2.04(f) below,
and Choice shall have no liability or obligation with respect thereto. In
addition, Conversion Awards shall be issued to all Choice Employees who were
participants in such Plan on the Cut-off Date in accordance with Section
2.04(f). Issuance of a Conversion Award shall be conditioned upon the execution
of an appropriate release by the Choice Employee to whom the Conversion Award is
conveyed, which release shall acknowledge that such Choice Employee's options to
purchase Manor Care Common Stock are cancelled in consideration of receipt of
the Conversion Award.
(iii) Continuation of Sponsorship of Manor Care, Inc. Key
Executive Stock Option Plan of 1993. On the Distribution Date, Manor Care shall
retain (or shall cause a Retained Subsidiary to assume) sole responsibility for
all liabilities and obligations under the Manor Care, Inc. Key Executive Stock
Option Plan of 1993 for all Retained Employees and Terminees who are
participants in such Plan on the Distribution Date through the issuance of
Conversion Awards, subject to the stock adjustment provisions described in
Section 2.04(f) below, and Choice shall have no liability or obligation with
respect thereto. In addition, Conversion Awards shall be issued to all Choice
Employees who were participants in such Plan on the Cut-off Date in accordance
with Section
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2.04(f). Issuance of a Conversion Award shall be conditioned upon the execution
of an appropriate release by the Choice Employee to whom the Conversion Award is
conveyed, which release shall acknowledge that such Choice Employee's options to
purchase Manor Care Common Stock are cancelled in consideration of receipt of
the Conversion Award.
(e) Manor Care, Inc. 1995 Employee Stock Purchase
Plan.
(i) Continuation of Sponsorship of Manor Care, Inc. 1995
Employee Stock Purchase Plan. On the Distribution Date, Manor Care shall retain
(or shall cause a Retained Subsidiary to assume) sole responsibility for all
liabilities and obligations under the Manor Care, Inc. 1995 Employee Stock
Purchase Plan for all Retained Employees and Terminees who are participants in
such Plan on the Distribution Date, subject to the stock adjustment provisions
described in Section 2.04(f) below, and Choice shall have no liability or
obligation with respect thereto.
(ii) Establishment of Choice Hotels International, Inc.
Employee Stock Purchase Plan. Effective as of the Distribution Date, Choice
shall take, or cause to be taken, all action necessary and appropriate to
establish and administer a new stock purchase plan named the Choice Hotels
International, Inc. Employee Stock Purchase Plan and to provide benefits
thereunder after the Distribution Date for all Choice officers and key
employees.
(f) Effect of the Distribution on Awards Made Prior to the Cut-off
Date.
(i) Restricted Stock: After the Distribution Date, the grantee
of each restricted share of Manor Care Common Stock awarded under the Manor
Care, Inc. Nursing Field Operations Stock Grant Plan for Key Management
Employees, the Manor Care, Inc. Restricted Stock Plan, the Manor Care, Inc.
Hotel Franchise Operations Stock Grant Plan for Choice Hotels International,
Inc. Key Management Employees, or the Manor Care, Inc. 1995 Long Term Incentive
Plan as of the Cut-off Date shall retain such share, and shall receive as part
of the Distribution one restricted share of Choice Common Stock for each such
restricted share of Manor Care. The restricted shares of Choice Common Stock
received as part of the Distribution will be subject to restrictions identical
to those applicable to the underlying restricted shares of Manor Care Common
Stock. In the case of Choice Employees, future service for Choice will be
treated as service for Manor Care for purposes of determining satisfaction of
the restrictions attributable to the Manor Care Common Stock and Choice Common
Stock. Restricted shares of Choice Common Stock awarded as part of the
Distribution shall be released from restrictions at the same time and on the
same schedule as the
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shares of Manor Care Common Stock retained, under the terms of the restrictions
to which the grantee's initial award was subject.
(ii) Substitution of Stock Options: Subject to the provisions
of Section 2.04(f)(v) and (vi), below, on the Distribution Date, each grantee of
a nonqualified award of a Manor Care Stock Option who is a Retained Employee or
Terminee shall receive for each such award a Conversion Award, consisting of an
option to purchase shares of Manor Care Common Stock equal in number to the
number of shares covered by the Manor Care Stock Option, adjusted, however,
pursuant to Section 2.04(f)(iv), below. On the Distribution Date, each grantee
of a Manor Care Stock Option awarded as an incentive stock option who is a
Retained Employee or Terminee shall automatically receive in its place a
Conversion Award of an option to purchase shares of Manor Care Common Stock
equal in number to the number of shares covered by the Manor Care Stock Option,
adjusted, however, pursuant to Section 2.04(f)(iv) below. Subject to the
provisions of Section 2.04(f)(v) and (vi), below, on the Distribution Date, each
grantee of a nonqualified award of a Manor Care Stock Option who is a Choice
Employee shall receive for each such award a Conversion Award, consisting of an
option to purchase shares of Choice Common Stock equal in number to the number
of shares covered by the Manor Care Stock Option, adjusted, however, pursuant to
Section 2.04(f)(iv) below. On the Distribution Date, each grantee of a Manor
Care Stock Option awarded as an incentive stock option who is a Choice Employee
shall automatically receive in its place a Conversion Award of an option to
purchase shares of Choice Common Stock equal in number to the number of shares
covered by the Manor Care Stock Option, adjusted, however, pursuant to Section
2.04(f)(iv) below. Notwithstanding the above, on the Distribution Date, each
Manor Care Stock Option held by Stewart Bainum, Jr., whether issued as an
incentive stock option or as a nonqualified stock option award, shall be
exchanged for a Conversion Award (i) with respect to which the Aggregate Spread
shall equal the Aggregate Spread attributable to such incentive stock option or
nonqualified stock option award, as the case may be, and (ii) with respect to
which the Aggregate Spread shall be proportionately allocated between options
to acquire Manor Care Common Stock and options to acquire Choice Common Stock
based upon the relative trading values of Manor Care and Choice on the
Distribution Date.
(iii) Adjustment of Option Price: For purposes of determining
the adjusted option price of a Conversion Award replacing a Manor Care Stock
Option, the following formula shall be used to maintain the grantee's Aggregate
Spread on each outstanding grant of Manor Care Stock Options. The Aggregate
Spread on each such outstanding grant shall be maintained by setting the
adjusted option price to ensure that the difference between (1) the aggregate
total Post-Conversion Stock Price for each Conversion Award of an option to
acquire Manor Care Common Stock or Choice Common Stock, as the case may be, and
(2) the aggregate adjusted option exercise price for each such Conversion Award,
is equal to (3) the Aggregate Spread. In addition, the adjusted option price of
each Conversion Award of an option to acquire Manor Care Common Stock or Choice
Common Stock, as the case may be, shall be set to maintain the ratio of the
exercise price of each Manor Care Stock Option being converted to the
Post-Conversion Stock Price of the Common Stock purchasable under the Conversion
Award by ensuring that the aforesaid ratio shall
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equal the ratio of (1) such adjusted option price for the Conversion Award to
(2) the Post-Conversion Stock Price of the Common Stock purchasable under the
Conversion Award (Manor Care Common Stock or Choice Common Stock, respectively).
(iv) Adjustment of Number of Shares Covered by Options: In the
case of Conversion Awards of nonqualified stock options or incentive stock
options to acquire shares of shares of Manor Care Common Stock or Choice Common
Stock, the total number of shares that may be acquired with respect to each such
company shall be adjusted as necessary to maintain the Aggregate Spread and
ratio described in Section 2.04(f)(iii).
(v) Special Election for Employees and Certain Directors of
Manor Care, Inc.: On or before the Cut-off Date, each holder of a nonvested
nonqualified option to acquire Manor Care Common Stock who is a direct employee
of Manor Care, Inc. or who is a non-employee Director of Manor Care who does not
become a member of the Board of Directors of Choice on the Distribution Date
shall make a one-time election with respect to such nonvested nonqualified
option, (1) to receive a Conversion Award which relates exclusively to nonvested
nonqualified options to acquire Common Stock of (i) Manor Care, in the case of a
non-employee Director and (ii) in all other cases, Common Stock of the entity
(Manor Care or Choice) of which such individual shall be an Employee on the
Distribution Date, or (2) to receive a Conversion Award with respect to which
(a) one-half of the Aggregate Spread relates to nonvested nonqualified options
to acquire Common Stock of (i) Manor Care, in the case of a non-employee
Director and (ii) in all other cases, Common Stock of the entity of which such
individual shall be an employee on the Distribution Date and (b) one-half of the
Aggregate Spread is proportionately allocated between nonvested nonqualified
options to acquire Manor Care Common Stock and nonvested nonqualified options to
acquire Choice Common Stock based upon the relative trading values of Manor Care
and Choice on the Distribution Date. A failure to make a timely election shall
be deemed to constitute an election to receive a Conversion Award of nonvested
nonqualified options relating solely to (i) Manor Care, in the case of a
non-employee Director and (ii) in all other cases, Common Stock of the entity
for which such individual shall become an Employee on the Distribution Date.
(vi) Special Election for Employees With Respect to Vested
Nonqualified Stock Options: On or before the Cut-off Date, each holder of a
vested nonqualified stock option to acquire Manor Care Common Stock who is an
Employee or who is a non-employee Director of Manor Care who does not become a
member of the Board of Directors of Choice on the Distribution Date may make a
one-time election to specify the manner in which the Aggregate Spread
attributable to such vested nonqualified stock option shall be allocated between
a Conversion Award relating to vested nonqualified stock options to acquire
Manor Care Common Stock and a Conversion Award relating to vested nonqualified
stock options to acquire Choice Common Stock. With respect to an Employee who is
a holder of vested nonqualified stock options but who is not a direct employee
of Manor Care, Inc., such election shall relate to a selection between (1) a
Conversion Award which relates exclusively to vested nonqualified options to
acquire Common Stock of the entity for which such individual shall become an
Employee on the Distribution Date or (2) a Conversion Award pursuant to which
the Aggregate Spread is proportionately allocated between vested nonqualified
options to acquire Manor Care Common Stock and vested nonqualified options to
acquire Choice Common Stock based upon the relative trading values of Manor Care
and Choice on the Distribution Date. With respect to a holder of a vested
nonqualified stock option who is either a direct employee of Manor Care or who
is a non-employee Director of Manor Care who does not become a member of the
Board of Directors of Choice as of the Distribution Date, such election shall
relate to a selection between (1) a Conversion Award which relates exclusively
to vested nonqualified options to acquire Common Stock of (a) Manor Care, in the
case of a non-employee Director and (b) in all other cases, the entity for which
such individual shall become an Employee on the Distribution Date, (2) a
Conversion Award pursuant to which the Aggregate Spread is proportionately
allocated between vested nonqualified options to acquire Manor Care Common Stock
and vested nonqualified options to acquire Choice Common Stock based upon the
relative trading values of Manor Care and Choice on the Distribution Date, or
(3) a Conversion Award pursuant to which (a) no less than fifty percent (50%) of
the Aggregate Spread relates to vested nonqualified options to acquire Common
Stock of (i) Manor Care, in the case of a non-employee Director and (ii) in all
other cases, the entity of which such individual shall become an Employee on the
Distribution Date and (b) the remaining amount of the Aggregate Spread relates
to vested nonqualified options to acquire Common Stock of (i) Choice, in the
case of a non-employee Director or (ii) in all other cases, the entity (Manor
Care or Choice, as the case may be) of which such individual does not become an
Employee as of the Distribution Date. A failure to make a timely election with
respect to such vested nonqualified stock options shall be deemed to constitute
an election to receive a single Conversion Award of vested nonqualified options
relating solely to (i) Manor Care, in the case of a non-employee Director and
(ii) in all other cases, Common Stock of the entity of which such individual
does become an Employee on the Distribution Date.
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(g) Effect of Post-Distribution Transfer on Conversion Awards.
Conversion Awards made pursuant to this Section 2.04 of shares of or options in
Manor Care Common Stock or Choice Common Stock shall be administered with
respect to any provisions relating to continuing employment requirements to give
Service Credit for service with the party employing the grantee as of the
Distribution Date (Manor Care in the case of Retained Employees and Choice in
the case of Choice Employees). Solely with respect to such Conversion Awards
(and not with respect to new awards made after the Cut-off Date), for purposes
of determining whether a termination of employment has occurred under the terms
of any provision requiring continued employment, termination of employment
through May 31, 1998 shall not be deemed to occur if an Employee leaves the
service of one party to immediately begin employment with the other party (i.e.,
leaving Manor Care employment to work for Choice, or leaving Choice employment
to work for Manor Care); the business operation or business unit from which such
Employee terminates employment shall promptly notify the administrator of the
Comprehensive Stock Plan of each party of the occurrence of any termination
subject to the provisions of this Section 2.04(g). Whichever party is the new
employer shall inform the former employer of any termination of employment of
such transferred Employee. Any termination of employment other than as described
in the preceding sentence shall be treated by applying the applicable provisions
of the Comprehensive Stock Plan relating to terminations of employment without
the modifications described in this paragraph.
Section 2.05 Existing Manor Care Stock Purchase Plan. The Manor Care Stock
Purchase Plan shall continue in effect after the Distribution Date and payroll
deductions for all eligible Plan participants who are Retained Employees shall
continue at the same levels after the Pre-Distribution Purchase Date until the
earlier to occur of: (i) final purchase of stock at the end of the Current Plan
Year quarter in which the Distribution Date occurs (the "Post-Distribution
Purchase") or (ii) the date the participant withdraws from said Plan. Choice
shall assume all obligations under said Plan with respect to Post-Distribution
Purchases by Choice Employees, who will have the right to acquire Choice Common
Stock substituted for their right to acquire Manor Care Common Stock. Retained
Employees will have the right to acquire Manor Care Common Stock in the
Post-Distribution Purchase. As soon as practicable after the Distribution Date,
Manor Care will transfer to the Choice Hotels International, Inc. Stock Purchase
Plan a cash amount equal to all contributions made to the Manor Care Stock
Purchase Plan by Choice Employees during the Current Plan Year quarter in which
the Distribution Date occurs, and such amounts will be used to purchase Choice
Common
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Stock on behalf of such Choice Employees after the end of the Current Plan Year
quarter in which the Distribution Date occurs.
Section 2.06 Manor Care Welfare Plans and Short-Term Disability Plan.
(a) Liability for Claims. Except as otherwise provided herein, as of
the Cut-off Date, Manor Care or a Retained Subsidiary shall assume or retain and
shall be responsible for, or cause its insurance carriers or HMOs to be
responsible for, all liabilities and obligations related to claims incurred
through December 31, 1996 in respect of any Employee (whether such claims are
asserted before or after December 31, 1996) under any Manor Care Welfare Plan
and shall be responsible for claims incurred after December 31, 1996 in respect
of any Retained Individual or Terminee under any Manor Care Welfare Plan, and
Choice and the Choice Subsidiaries shall have no liability or obligation with
respect thereto, except to make contributions to Manor Care in respect of such
coverage of Choice Individuals as provided below. Notwithstanding the foregoing,
with respect to the pre-tax medical and dependent care programs, Manor Care will
retain any funds remaining on January 1, 1997 to pay for any claims incurred
under such programs on or prior to December 31, 1996. After all such claims have
been paid, Manor Care shall be entitled to retain any remaining funds
attributable to the pre-tax medical and dependent care programs.
(b) Continuation Coverage Administration. As of the Distribution
Date, Manor Care or a Retained Subsidiary shall assume or retain and shall be
solely responsible for, or cause its insurance carriers or HMOs to be
responsible for, the administration of the continuation coverage requirements
imposed by Code Section 4980B and ERISA Sections 601 through 608 as they relate
to any Manor Care Qualified Beneficiary, and shall be responsible for the
administration of continuation coverage requirements for Choice Individuals
through December 31, 1996, and Choice and the Choice Subsidiaries shall have no
liability or obligation with respect thereto.
(c) Continuation Coverage Claims. As of the Distribution Date, Manor
Care or a Retained Subsidiary shall assume or retain and shall be responsible
for, or cause its insurance carriers or HMOs to be responsible for, all
liabilities and obligations in connection with claims incurred or premiums owed
through December 31, 1996, whether asserted before or after December 31, 1996,
under any Manor Care Welfare Plan in respect of any Manor Care Qualified
Beneficiary or Choice Qualified Beneficiary and shall be responsible for claims
incurred or premiums owed after December 31, 1996 under any Manor Care Welfare
Plan in respect of any Manor Care Qualified Beneficiary, and Choice and the
Choice Subsidiaries shall have no liability or obligation with respect thereto.
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(d) Continuation of Sponsorship of Manor Care Welfare Plans. As soon
as practicable after the date hereof and effective as of the Distribution Date,
Manor Care shall take, or cause to be taken, all action necessary and
appropriate to continue to administer the Manor Care Welfare Plans and to
provide benefits thereunder for all Retained Individuals and Manor Care
Qualified Beneficiaries who, immediately prior to the Distribution Date, were
participants in or otherwise entitled to benefits under the Manor Care Welfare
Plans and to provide benefits through December 31, 1996 to Choice Individuals.
Manor Care will assess Choice a monthly amount, described in Section 2.06(e)
below, to cover the projected costs of providing continued benefits to Choice
Individuals through December 31, 1996 under the Manor Care Welfare Plans. Choice
will provide Manor Care, as soon as practicable after the Distribution Date
(with the cooperation of Manor Care to the extent that relevant information is
in the possession of Manor Care or a Retained Subsidiary, and in accordance with
Section 5.02), with a list of individuals (and dependents thereof) employed by
Manor Care or any Retained Subsidiary who were, to the best knowledge of Choice,
participants in or otherwise entitled to benefits under the existing Manor Care
Welfare Plans immediately prior to the Distribution Date, together with a
listing of each such individual's Service Credits under such existing Plans and
a listing of each such individual's expenses incurred towards deductibles,
out-of-pocket limits, maximum benefit payments, and any benefit usage towards
plan limits thereunder.
(e) Welfare Plan Payments by Choice to Manor Care. Choice shall make
monthly payments to Manor Care in an amount equal to $216 multiplied by the
number of Choice Employees who are participants in a Manor Care Medical Plan
with respect to the time period beginning on the Distribution Date and ending on
December 31, 1996. Such payments shall be made to Manor Care on a monthly basis
no more than ten (10) days after the end of each month ending after the
Distribution Date through December 31, 1996. In consideration of receipt of such
payments, Manor Care shall provide the services and benefits described in
Section 2.06. It is understood that Choice shall not make any changes in any of
the benefit structures attributable to the Manor Care Welfare Plans and will not
modify the procedures attributable to the administration and implementation of
the Manor Care Welfare Plans. It is also agreed that Choice will be responsible
for the funding of any costs attributable to the design, implementation,
enrollment, and administration of any Welfare Plans established by Choice to
provide coverage to Choice Employees subsequent to December 31, 1996.
(f) Continuation of Sponsorship of Manor Care, Inc. Short-Term
Disability Plan. On the Distribution Date, Manor Care shall retain (or shall
cause a Retained Subsidiary to assume) sole responsibility for all benefit
payments due under the Manor
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Care, Inc. Short-Term Disability Plan with respect to all Retained Employees and
Terminees who are participants in such Plan on the Distribution Date and Choice
shall have no liability or obligation with respect thereto.
Section 2.07 Choice Welfare Plans and Short-Term Disability Plan.
(a) Establishment of Choice Welfare Plans. As soon as practicable
after the date hereof and effective January 1, 1997, Choice shall take, or cause
to be taken, all action necessary and appropriate to establish the Choice
Welfare Plans and to provide benefits thereunder for all Choice Individuals who,
immediately prior to January 1, 1997, were participants in or otherwise entitled
to benefits under the Manor Care Welfare Plans. Each such individual shall, to
the extent applicable, for all purposes under the Plans established by Choice
(i) have coverage comparable to that provided immediately prior to the
Distribution Date and (ii) have no preexisting condition limitation imposed
other than that which is or was already imposed under the existing applicable
Manor Care Welfare Plans.
(b) Liability for Claims. As of January 1, 1997, Choice or a Choice
Subsidiary shall assume or retain and shall be responsible for, or cause its
insurance carriers or HMOs to be responsible for, all liabilities and
obligations in connection with claims incurred or premiums due on and after
January 1, 1997 in respect of any Choice Individual, and Manor Care and the
Retained Subsidiaries shall have no liability or obligation with respect
thereto.
(c) Continuation Coverage Administration. As of January 1, 1997,
Choice or a Choice Subsidiary shall assume or retain, as the case may be, and
shall be solely responsible for, or cause its insurance carriers or HMOs to be
responsible for, the administration of the continuation coverage requirements
imposed by Code Section 4980B and ERISA Sections 601 through 608 as they relate
to any Choice Qualified Beneficiary after December 31, 1996, and Manor Care and
the Retained Subsidiaries shall have no liability or obligation with respect
thereto.
(d) Continuation Coverage Claims. As of the January 1, 1997, Choice
or a Choice Subsidiary shall be solely responsible for, or cause its insurance
carriers or HMOs to be responsible for, all liabilities and obligations
whatsoever in connection with claims incurred or premiums due on and after
January 1, 1997 under any Choice Welfare Plans (or successor thereto) in respect
of any Choice Qualified Beneficiary, and Manor Care and the Retained
Subsidiaries shall have no liability or obligation with respect thereto. Each
Choice Qualified Beneficiary shall, to the extent applicable, for all purposes
under the Plans provided by Choice (i) have coverage comparable
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that provided to him or her immediately prior to the Distribution Date and (ii)
have no preexisting condition limitation imposed other than that which is or was
already imposed under the applicable existing Plan.
(e) Establishment of Choice Hotels International, Inc. Short-Term
Disability Plan. Effective as of the Distribution Date, Choice shall take, or
cause to be taken, all action necessary and appropriate to establish and
administer a new short-term disability plan named the Choice Hotels
International, Inc. Short-Term Disability Plan and to provide benefits
thereunder after the Distribution Date for all Choice Employees, including
Choice Employees who had incurred a disability prior to the Distribution Date
and who were receiving benefits prior to the Distribution Date under the Manor
Care, Inc. Short-Term Disability Plan.
Section 2.08 Vacation Pay and Sick Leave Liabilities.
(a) Division of Liabilities. Effective on the Distribution Date,
Choice shall assume, as to the Choice Employees, and Manor Care shall retain, as
to the Retained Employees, all accrued liabilities (whether vested or unvested,
and whether funded or unfunded) for vacation leave and sick leave in respect of
employees of Manor Care as of the Cut-off Date. Choice shall be solely
responsible for the payment of such vacation leave and sick leave to Choice
Employees after the Cutoff Date, and Manor Care shall be solely responsible for
the payment of such vacation leave and sick leave to Retained Employees after
the Cut-off Date. Each party shall provide to its own Employees on the
Distribution Date the same vested and unvested balances of vacation leave and
sick leave as credited to such Employee on the Manor Care payroll system on the
Cut-off Date, and shall continue to accrue vacation leave and sick leave in
respect of each such Employee from the Distribution Date at the same rate of
accrual as accrued in respect of such individual by Manor Care on the Cut-off
Date.
(b) Post-Distribution Transfers. Through May 31, 1998, an Employee
who leaves the service of one party to immediately begin employment with the
other party (i.e., leaving Manor Care employment to work for Choice, or leaving
Choice employment to work for Manor Care) shall be provided by the new employer
with the same balance of vested and unvested vacation leave and sick leave hours
as had been accrued by the old employer through the termination date. The old
employer shall promptly notify the new employer in writing of the occurrence of
any termination subject to the provisions of this Section 2.08(b), and shall
make a payment to such new employer within thirty (30) days of the aforesaid
termination date in an amount equal to the value of the terminating Employee's
vested balance of vacation leave and sick leave accrued by the old employer
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<PAGE> 33
through such termination date, based on the Employee's final rate of pay with
the old employer. No payment shall be made by the old employer to the new
employer for any unvested leave balance.
Section 2.09 Employee Discounts. Employees of Choice shall be granted
discounts with Manor Care on the same terms and conditions as Manor Care
employee discounts, and employees of Manor Care shall be granted discounts with
Choice on the same terms and conditions as Choice employee discounts. Such
discounts shall be intended to qualify as a fringe benefit excludible from the
gross income of employees under Section 132(a) of the Code. This Agreement shall
constitute a reciprocal agreement between the parties within the meaning of
Section 132(h) of the Code, and the parties shall execute such further
documentation as may be required for tax purposes or as otherwise necessary to
effect such discounts. In accordance with Section 5.02, each party shall furnish
the other with such information as is necessary for the administration of the
aforesaid employee discount programs, including but not limited to information
on the utilization of the discounts by the employees of such other party. Each
party shall be solely responsible for any payroll taxes, excise taxes, corporate
income taxes or penalties attributable to the availability of discounts to or
utilization by its employees (whether or not such discounts qualify under
Section 132(a) of the Code), and the other party shall have no liability or
obligation with respect thereto.
Section 2.10 Preservation of Right To Amend or Terminate Plans. Except as
otherwise expressly provided in Article II, no provisions of this Agreement,
including, without limitation, the agreement of Manor Care or Choice, or any
Retained Subsidiary or Choice Subsidiary, to make a contribution or payment to
or under any Plan herein referred to for any period, shall be construed as a
limitation on the right of Manor Care or Choice or any Retained Subsidiary or
Choice Subsidiary to amend such Plan or terminate its participation therein
which Manor Care or Choice or any Retained Subsidiary or Choice Subsidiary would
otherwise have under the terms of such Plan or otherwise, and no provision of
this Agreement shall be construed to create a right in any employee or former
employee, or dependent or beneficiary of such employee or former employee under
a Plan which such person would not otherwise have under the terms of the Plan
itself.
Section 2.11 Reimbursement. Manor Care and Choice acknowledge that Manor
Care and the Retained Subsidiaries, on the one hand, and Choice and the Choice
Subsidiaries, on the other hand, may incur costs and expenses, including, but
not limited to, contributions to Plans and the payment of insurance premiums
arising from or related to any of the Plans which are, as set forth in this
Agreement, the responsibility of the other party hereto. Accordingly, Manor Care
(and any Retained Subsidiary
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responsible therefor) and Choice (and any Choice Subsidiary responsible
therefor) shall reimburse each other, as soon as practicable, but in any event
within thirty (30) days of receipt from the other party of appropriate
verification, for all such costs and expenses.
Section 2.12 Payroll Reporting and Withholding.
(a) Form W-2 Reporting. Choice and Manor Care hereby adopt the
"alternative procedure" for preparing and filing IRS Forms W-2 (Wage and Tax
Statements), as described in Section 5 of Revenue Procedure 84-77, 1984-2 IRS
Cumulative Bulletin 753 ("Rev. Proc. 84-77"). Under this procedure Choice as the
successor employer shall provide all required Forms W-2 to all Choice
Individuals reflecting all wages paid and taxes withheld by both Manor Care as
the predecessor and Choice as the successor employer for the entire year during
which the Distribution takes place. Manor Care shall provide all required Forms
W-2 to all Retained Individuals reflecting all wages and taxes paid and withheld
by Manor Care before, on and after the Distribution Date.
In connection with the aforesaid agreement under Rev. Proc. 84-77, each
business unit or business operation of Manor Care shall be assigned to either
Manor Care or Choice, depending upon whether it is a Retained Business or Choice
Business, and each Retained Individual or Choice Individual associated with such
business unit or business operation shall be assigned for payroll reporting
purposes to Manor Care or Choice, as the case may be.
(b) Forms W-4 and W-5. Choice and Manor Care agree to adopt the
alternative procedure of Rev. Proc. 84-77 for purposes of filing IRS Forms W-4
(Employee's Withholding Allowance Certificate) and W-5 (Earned Income Credit
Advance Payment Certificate). Under this procedure Manor Care shall provide to
Choice as the successor employer all IRS Forms W-4 and W-5 on file with respect
to each Choice Individual, and Choice will honor these forms until such time, if
any, that such Choice Individual submits a revised form.
(c) Garnishments, Tax Levies, Child Support Orders, and Wage
Assignments. With respect to Employees with garnishments, tax levies, child
support orders, and wage assignments in effect with Manor Care on the Cut-off
Date, Choice as the successor employer with respect to each Choice Individual
shall honor such payroll deduction authorizations and will continue to make
payroll deductions and payments to the authorized payee, as specified by the
court or governmental order which was filed with Manor Care.
(d) Authorizations for Payroll Deductions. Unless otherwise
prohibited by this or another agreement entered into in
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<PAGE> 35
connection with the Distribution, or by a Plan document, with respect to
Employees with authorizations for payroll deductions in effect with Manor Care
on the Cut-off Date, Choice as the successor employer will honor such payroll
deduction authorizations relating to each Choice Individual, and shall not
require that such Choice Individual submit a new authorization to the extent
that the type of deduction by Choice does not differ from that made by Manor
Care. Such deduction types include, without limitation, contributions to any
Plan, U.S. Savings Bonds; scheduled loan repayments to the Profit Sharing Plan;
and Direct Deposit of Payroll, bonus advances, union dues, employee relocation
loans, and other types of authorized company receivables usually collectible
through payroll deductions.
ARTICLE III
LABOR AND EMPLOYMENT MATTERS
Notwithstanding any other provision of this Agreement or any other
Agreement between Choice and Manor Care to the contrary, Choice and Manor Care
understand and agree that:
Section 3.01 Separate Employers. On and after the Distribution Date and
the separation of Employees into their respective companies, Choice and Manor
Care will be separate and independent employers.
Section 3.02 Employment Policies and Practices. Subject to the provisions
of ERISA and Sections 2.01(b) on Service Credits and 2.04(e) and 2.08(b)
governing post-Distribution transfers through May 31, 1998, Choice and Manor
Care may adopt, continue, modify or terminate such employment policies,
compensation practices, retirement plans, welfare benefit plans, and other
employee benefit plans of any kind or description, as each may determine, in its
sole discretion, are necessary and appropriate.
Section 3.03 Collective Bargaining Agreements. With regard to employees of
Manor Care covered by a Collective Bargaining Agreement on the Cut-off Date who
become Choice Employees or Retained Employees, Choice and Manor Care promise and
covenant to each other not to take any action which disrupts or otherwise
negatively impacts the labor relations of the other. Choice and Manor Care will
diligently work to substitute the appropriate employer for Manor Care in
Collective Bargaining Agreements.
Section 3.04 Claims.
(a) Scope. This Section is intended to allocate all liabilities for
employment-related claims involving Manor Care or
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<PAGE> 36
Choice including, but not limited to, claims against either or both Manor Care
and Choice and their officers, directors, agents and employees, or against or by
their various employee benefit plans and plan administrators and fiduciaries. In
the event of any conflicting provision of any agreement including, but not
limited to, management agreements for hotel properties, this Section 3.04 shall
control the allocation of liabilities for employment-related claims.
(b) Employment-Related Claims. An employment-related claim shall
include any actual or threatened lawsuit, arbitration, ERISA claim, or federal,
state, or local judicial or administrative proceeding of whatever kind involving
a demand by or on behalf of or relating to Retained Individuals or Choice
Individuals, or by or relating to a collective bargaining agent of Employees, or
by or relating to any federal, state or local government agency alleging
liability against Manor Care or Choice, or against any employee health, welfare,
deferred compensation or other benefit plan and their respective officers,
directors, agents, employees, administrators, trustees and fiduciaries.
(c) Obligation to Indemnify. The duty of a party to indemnify,
defend and hold harmless the other party under this Section 3.04 shall include
the following obligations of the party having such duty: to provide a legal
defense and incur all attorneys fees and litigation costs which may be
associated with such a defense; to pay all costs of settlement or judgment where
the indemnifying party has the full duty to do so or to pay the full percentage
of the party's share when the duty is only a percentage of the full settlement
or judgment; and to hold harmless from all claims and costs which may be
asserted with or arising from the duty of the indemnifying party to defend and
indemnify.
(d) Pre-Distribution Claims.
(i) Choice shall indemnify, defend and hold harmless Manor
Care from any employment-related claims of a Choice Individual arising on or
before the Cut-off Date.
(ii) Manor Care shall indemnify, defend and hold harmless
Choice from any employment-related claims of a Retained Individual arising on or
before the Cut-off Date.
(e) Distribution and Other Joint Liability Claims. Where
employment-related claims alleging or involving joint and several liability
asserted against Choice and Manor Care are not separately traceable to
liabilities relating to Choice Individuals or Retained Individuals, any
liability shall be apportioned between Choice and Manor Care in accordance with
the percentage that each party's Employees represents of the combined
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<PAGE> 37
total number of Employees of both parties, as described below. The percentage of
the liability assumed by Choice shall equal the ratio of (i) the total number of
Choice Employees on the Distribution Date, to (ii) the combined total number of
Choice Employees and Retained Employees on such date. The percentage of the
liability assumed by Manor Care shall equal the ratio of (i) the total number of
Manor Care Employees on the Distribution Date, to (ii) the combined total number
of Choice Employees and Retained Employees on such date. Each party will
indemnify, defend, and hold harmless the other to the extent of the indemnifying
party's apportioned percentage determined in accordance herewith.
(f) Post-Distribution Employment-Related Claims. Employment-related
claims arising after the Distribution and division of the Employees between the
parties and not relating to, arising from, or in connection with the
Distribution, will be the sole responsibility of Choice as to Choice Individuals
and of Manor Care as to Retained Individuals. Each Company will indemnify,
defend, and hold harmless the other from employment-related claims of the other
company.
Section 3.05 Funding of Union Plans. Without limitation to the scope and
application of Section 3.04, any claims by or on behalf of employees or their
collective bargaining agent or any federal, state or local governmental agency
for alleged under-funding of, or failure to make payments to, union health,
welfare and pension funds based on acts or omissions occurring on or before the
Distribution Date or arising from or in connection with the Distribution, or
resulting from actuarial recalculation by auditors of the union plans and funds,
will be the sole responsibility of each party as to its own employees (i.e.,
Choice with respect to Choice Individuals, and Manor Care with respect to
Retained Individuals), and the responsible party will indemnify, defend, and
hold harmless the other from any such claims.
Section 3.06 Notice of Claims. Without limitation to the scope and
application to each party in the performance of its duties under Section 3.04
and 3.05 herein, each party will notify in writing and consult with the other
party prior to making any settlement of an employee claim, for the purpose of
avoiding any prejudice to such other party arising from the settlement.
Section 3.07 Assumption of Unemployment Tax Rates. Changes in state
unemployment tax experience from that of Manor Care as of the Cut-off Date shall
be handled as follows. In the event an option exists to allocate state
unemployment tax experience of Manor Care, the Manor Care experience shall be
transferred to Choice if this results in the lowest aggregate unemployment tax
costs for both Manor Care and Choice combined, and the Manor Care experience
shall be retained by Manor Care if
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<PAGE> 38
this results in the lowest aggregate unemployment tax costs for Manor Care and
Choice combined.
Section 3.08 Intercompany Service Charge. Legal, professional, managerial,
administrative, clerical, consulting, and support or production services
provided to one party by personnel of the other party, upon the request of the
first party or when such services are otherwise required by this Agreement
between Choice and Manor Care, shall be charged to the party receiving such
services on commercially reasonable terms to be negotiated (or in accordance
with the provisions of any applicable agreement between the parties).
Section 3.09 WARN Claims. Before and after the Distribution Date, each
party shall comply in all material respects with the Worker Adjustment and
Retraining Act ("WARN"). Manor Care shall be responsible for WARN claims
relating to Retained Individuals or the Employees who prior to the Distribution
Date were employed in a Retained Business. Choice shall be responsible for WARN
Claims relating to Choice Individuals or to Employees who prior to the
Distribution Date were employed in a Choice Business. Each party shall
indemnify, defend and hold harmless the other in connection with WARN Claims for
which the indemnitor is responsible and which are brought against the
indemnitees.
Section 3.10 Employees on Leave of Absence. After the Distribution Date,
Choice shall assume responsibility, if any, as employer for all Employees
returning to Choice or a Choice Business from an approved leave of absence who
prior to the Distribution Date were employed in a Choice Business. After the
Distribution Date, Manor Care shall assume responsibility, if any, as employer
for all Employees returning to Manor Care or a Retained Business from an
approved leave of absence who prior to the Distribution Date were employed in a
Retained Business.
Section 3.11 No Third Party Beneficiary Rights. Neither this Agreement nor
any other intercompany agreement between Choice and Manor Care is intended to
nor does it create any third party contractual or other common law rights. No
person shall be deemed a third-party beneficiary of the agreements between
Choice and Manor Care.
Section 3.12 Attorney-Client Privilege. The provisions herein requiring
either party to this Agreement to cooperate shall not be deemed to be a waiver
of the attorney/client privilege for either party nor shall it require either
party to waive its attorney/client privilege.
ARTICLE IV
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<PAGE> 39
DEFAULT
Section 4.01 Default. If either party materially defaults hereunder, the
non-defaulting party shall be entitled to all remedies provided by law or equity
(including reasonable attorneys' fees and costs of suit incurred).
Section 4.02 Force Majeure. Choice and Manor Care shall incur no liability
to each other due to a default under the terms and conditions of this Agreement
resulting from fire, flood, war, strike, lock-out, work stoppage or slow-down,
labor disturbances, power failure, major equipment breakdowns, construction
delays, accident, riots, acts of God, acts of United States' enemies, laws,
orders or at the insistence or result of any governmental authority or any other
delay beyond each other's reasonable control.
ARTICLE V
MISCELLANEOUS
Section 5.01 Relationship of Parties. Nothing in this Agreement shall be
deemed or construed by the parties or any third party as creating the
relationship of principal and agent, partnership or joint venture between the
parties, it being understood and agreed that no provision contained herein, and
no act of the parties, shall be deemed to create any relationship between the
parties other than the relationship set forth herein.
Section 5.02 Access to Information; Cooperation. Manor Care and Choice and
their authorized agents will be given reasonable access to and may take copies
of all information relating to the subjects of this Agreement (to the extent
permitted by federal and state confidentiality laws) in the custody of the other
party, including any agent, contractor, subcontractor, agent or any other person
or entity under the contract of such party. The parties will provide one another
with such information within the scope of this Agreement as is reasonably
necessary to administer each party's Plans. The parties will cooperate with each
other to minimize the disruption caused by any such access and providing of
information.
Section 5.03 Assignment. Neither party shall, without the prior written
consent of the other, have the right to assign any rights or delegate any
obligations under this Agreement.
Section 5.04 Headings. The headings used in this Agreement are inserted
only for the purpose of convenience and reference, and in no way define or limit
the scope or intent of any provision or part hereof.
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<PAGE> 40
Section 5.05 Severability of Provisions. Neither Manor Care nor Choice
intend to violate statutory or common law by executing this Agreement. If any
section, sentence, paragraph, clause or combination of provisions in this
Agreement is in violation of any law, such sections, sentences, paragraphs,
clauses or combinations shall be inoperative and the remainder of this Agreement
shall remain in full force and effect and shall be binding upon the parties.
Section 5.06 Parties Bound. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective successors and
permitted assigns. Nothing herein, expressed or implied, shall be construed to
give any other person any legal or equitable rights hereunder.
Section 5.07 Notices. All notices, consents, approvals and other
communications given or made pursuant hereto shall be in writing and shall be
deemed to have been duly given when delivered personally or by overnight courier
or three days after being mailed by registered or certified mail (postage
prepaid, return receipt requested) to the named representatives of the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice, except that notices of changes of address shall be
effective upon receipt):
(a) if to Manor Care
MANOR CARE, INC.
11555 Darnestown Road
Gaithersburg, MD 20878-3200
Attention: GENERAL COUNSEL
(b) if to Choice
CHOICE HOTELS INTERNATIONAL, INC.
10750 Columbia Pike
Silver Spring, MD 20901
Attention: GENERAL COUNSEL
Choice agrees that, upon the request of Manor Care, Choice will give copies of
all of its notices, consents, approvals and other communications hereunder to
any lender to Manor Care or other person specified by Manor Care.
Section 5.08 Further Action. Choice and Manor Care each shall cooperate in
good faith and take such steps and execute such papers as may be reasonably
requested by the other party to implement the terms and provisions of this
Agreement.
Section 5.09 Waiver. Choice and Manor Care each agree that the waiver of
any default under any term or condition of
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<PAGE> 41
this Agreement shall not constitute a waiver of any subsequent default or
nullify the effectiveness of that term or condition.
Section 5.10 Governing Law. All controversies and disputes arising out of
or under this Agreement shall be determined pursuant to the laws of the State of
Maryland, regardless of the laws that might be applied under applicable
principles of conflicts of laws.
Section 5.11 Consent to Jurisdiction. The parties irrevocably submit to
the exclusive jurisdiction of (a) the Courts of the State of Maryland,
Montgomery County, or (b) any federal district court in the State of Maryland
where there is federal jurisdiction for the purpose of any suit, action or other
Court proceeding arising out of this Agreement.
Section 5.12 Entire Agreement. This Agreement and the Distribution
Agreement constitute the entire understanding between the parties hereto, and
supersede all prior written or oral communications, relating to the subject
matter covered by said agreements. No amendment, modification, extension or
failure to enforce any condition of this Agreement by either party shall be
deemed a waiver of any of its rights herein. This Agreement shall not be amended
except by a writing executed by the parties.
Section 5.13 Commercially Reasonable Terms and Conditions. The terms and
provisions of this Agreement are intended to reflect commercially reasonable
terms and conditions (including, but not limited to, pricing) that are at least
as favorable and as competitive to Choice as the terms and conditions Manor Care
would grant or require of third parties for substantially similar goods and
services.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
MANOR CARE, INC., a
Delaware corporation
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
CHOICE HOTELS HOLDINGS, INC., a
Delaware corporation
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
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<PAGE> 42
EXHIBIT A
HEALTH AND WELFARE PLANS
* Medical plans
* Dental Plan
* HMOs
* Group-Term Life
* Pretax Spending Accounts
* Hyatt Legal Services
* Long-term Disability
* Accidental Death & Dismemberment
<PAGE> 1
EXHIBIT 10.10
LOAN AGREEMENT
Dated as of [ ], 1996
among
CHOICE HOTELS HOLDINGS, INC.,
(to be renamed CHOICE HOTELS INTERNATIONAL, INC.)
as Borrower,
and
MNR FINANCE CORP.,
as Lender
<PAGE> 2
2
LOAN AGREEMENT dated as of [ ], 1996, among
MNR Finance Corp., a Delaware corporation (the
"Lender") and CHOICE HOTELS INTERNATIONAL, INC., a
Delaware corporation (the "Borrower" or the
"Company").
WHEREAS, Borrower and Lender are presently wholly-owned
subsidiaries of Manor Care, Inc., a Delaware corporation ("Manor Care");
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 to the holders of Manor Care's common stock all of the outstanding
shares of Borrower's common stock;
WHEREAS, Manor Care, Inc. has previously made a capital
contribution to Lender of those certain promissory notes set forth on Schedule A
herein (the promissory notes referred to collectively, the "Promissory Notes");
WHEREAS, Lender has previously extended credit to Borrower in
the form of cash advances in the aggregate amount of $225,722,500 (the
"Advances"); and
WHEREAS, Borrower and Lender wish to formalize the repayment
terms of such previous Advances by Lender to Borrower and to amend the terms of
those certain Promissory Notes and Lender and Borrower have agreed that Borrower
will repay such Advances and the obligations owing under those certain
Promissory Notes over a three year period, subject to the terms and conditions
of this Agreement;
NOW THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, Borrower and Lender agree
as follows:
ARTICLE I. DEFINITIONS
SECTION 1.01. Defined Terms. As used in this Agreement, the following
terms shall have the meanings specified below:
"Affiliate" shall mean, when used with respect to a specified person,
another person that directly, or indirectly through one or more intermediaries,
Controls or is Controlled by or is under common Control with the person
specified. Following the Distribution, the Borrower and the Subsidiaries shall
not be deemed to be Affiliates of Manor Care or its subsidiaries merely by
virtue of such companies' having common shareholders or directors as a result of
the Distribution.
<PAGE> 3
3
"Agreement" shall mean this Loan Agreement, as the same may be amended,
restated, modified, supplemented, renewed or replaced from time to time.
"Asset Sale" shall mean, with respect to the Borrower or any
Subsidiary, any sale, transfer or other disposition of any assets or other
properties (including individual business assets, patents, trademarks and other
intangibles) of the Borrower or such Subsidiary, including the sale, transfer or
disposition of any capital stock of or any merger or consolidation involving any
Subsidiary and any issuance or sale by any Subsidiary of shares of its capital
stock, other than (i) sales of inventory and used equipment in the ordinary
course of business of the person (whether the Borrower or a Subsidiary) owning
and selling such inventory or used equipment; (ii) sales, transfers and other
dispositions of any tangible assets by the Borrower or any Subsidiary if the
Borrower or such Subsidiary enters into an agreement to replace such assets with
a comparable asset as soon as practicable (and in no event later than three
months) after the disposition and, pending such replacement, diligently pursues
the replacement thereof, and the fair market value of the replacement asset is
substantially equivalent to or exceeds that of the asset so disposed of; (iii)
sales, transfers and other dispositions of any assets to the Borrower or any
Subsidiary; (iv) Sale and Lease-Back Transactions; (v) sales by the Borrower or
Subsidiaries of assets acquired from persons other than the Borrower or other
Subsidiaries, which sales occur not more than 12 months after the respective
dates on which such assets were acquired and (vii) the Distribution and
transactions contemplated in the Form 10.
"Business Day" shall mean any day (other than a day which is a
Saturday, Sunday or legal holiday in the State of New York) on which banks are
open for business in New York City.
"Capital Lease Obligations" of any person shall mean the obligations of
such person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such person under GAAP
applied on a consistent basis and, for the purposes of this Agreement, the
amount of such obligations at any time shall be the capitalized amount thereof
at such time determined in accordance with GAAP applied on a consistent basis.
A "Change in Control" shall be deemed to have occurred if (a) any
person or group (within the meaning of Rule 13d-5 of the Securities and Exchange
Commission as in effect on the date hereof) other than Stewart Bainum and his
family shall own directly or indirectly, beneficially or of record, shares
representing more than 15% of the aggregate ordinary voting power represented by
the issued and outstanding capital stock of the Borrower, except that such a
person or group may own directly or indirectly, beneficially or of record,
shares representing not more than 20% of the aggregate voting power represented
by
<PAGE> 4
4
the issued and outstanding capital stock of the Borrower if such person or group
reports and continues to report such ownership on Schedule 13G (filed pursuant
to Rule 13d-1(b), Rule 13d-1(c), or, in the case of amendments, Rule 13d-2(b),
of the Securities and Exchange Commission as in effect on the date hereof); (b)
a majority of the seats (other than vacant seats) on the board of directors of
the Borrower shall at any time have been occupied by persons who were neither
(i) nominated by the management of the Borrower or by the Nominating Committee
of the Borrower's board of directors in connection with an annual meeting of the
stockholders of the Borrower, nor (ii) appointed by directors so nominated; or
(c) any person or group other than Stewart Bainum and his family shall otherwise
directly or indirectly Control the Borrower. Notwithstanding the foregoing, if a
trust or foundation or other entity established by Stewart Bainum or his family
holds shares representing in excess of 15% of the aggregate ordinary voting
power represented by the issued and outstanding capital stock of the Borrower
and Stewart Bainum or his family Controls such trust or foundation or such other
entity and the vote of such shares held by such trust or foundation or such
other entity and Stewart Bainum and his family remain in Control of the
Borrower, there shall be no Change in Control for purposes of this Agreement;
provided, however, that any transfer of such shares by Stewart Bainum, such
trust or such foundation or such other entity shall stand on its own merits for
purposes of this Agreement.
"Choice Hotels Franchising" shall mean Choice Hotels International,
Inc., a Delaware corporation, to be renamed Choice Hotels Franchising, Inc.
following the Distribution.
"Closing Date" shall mean the Distribution Date.
"Code" shall mean the Internal Revenue Code of 1986, as the same may be
amended from time to time.
"Consolidated EBITDA" shall mean, for any period, without duplication,
the sum for such period of (a) Consolidated Net Income, (b) depreciation and
amortization expense, (c) Consolidated Interest Expense, (d) provisions for
income tax expense, (e) restructuring charges incurred in connection with the
Distribution and (f) non-cash charges related to the impairment of assets
(pursuant to FAS 121), all as determined in accordance with GAAP consistently
applied.
"Consolidated Funded Indebtedness" means, as of any date of
determination, all obligations accounted for as indebtedness on a consolidated
balance sheet of the Borrower on such date, in accordance with GAAP consistently
applied, whether such obligations are classified as long-term or short-term.
<PAGE> 5
5
"Consolidated Interest Coverage Ratio" shall mean, for any period, the
ratio of (a) Consolidated EBITDA for such period to (b) Consolidated Interest
Expense for such period.
"Consolidated Interest Expense" shall mean, for any period, gross total
expenses of the Borrower and its consolidated Subsidiaries accounted for as
interest expense (including capitalized interest determined in accordance with
GAAP consistently applied) for such period, including (i) the portion of rental
payments under Capital Lease Obligations deemed to represent interest in
accordance with GAAP consistently applied, (ii) the amortization of debt
discounts, (iii) the amortization of all fees (including fees with respect to
interest rate protection agreements) payable in connection with the incurrence
of Indebtedness to the extent included in interest expense, all as determined on
a consolidated basis in accordance with GAAP consistently applied. For purposes
of the foregoing, gross interest expense shall be determined after giving effect
to any net payments made or received with respect to interest rate protection
agreements entered in to as a hedge against interest rate exposure.
"Consolidated Leverage Ratio" shall mean the ratio of Consolidated
Funded Indebtedness to Consolidated EBITDA. In the event the Borrower shall
complete, directly or through a Subsidiary, an acquisition or divestiture of any
Person or business unit during any period, the Consolidated Leverage Ratio as of
the end of and for such period shall thereafter be determined on a pro forma
basis as if such acquisition or divestiture had been completed on the first day
of such period.
"Consolidated Net Income" shall mean, for any period, the net income
(or loss) of the Borrower and its consolidated Subsidiaries for such period, as
determined on a consolidated basis in accordance with GAAP consistently applied.
"Consolidated Net Worth" shall mean, as at any date of determination,
the consolidated stockholders' equity of the Borrower and its consolidated
Subsidiaries, as determined on a consolidated basis in accordance with GAAP
consistently applied.
"Consolidated Total Assets" shall mean, as at any date of
determination, the total assets of the Borrower and its consolidated
Subsidiaries at such time, as determined on a consolidated basis in accordance
with GAAP consistently applied.
"Control" shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a
person, whether through the ownership of voting securities, by contract or
otherwise, and "Controlling" and "Controlled" shall have meanings correlative
thereto; provided, however, the existence of a management contract by the
Borrower or one of its Affiliates to manage another entity shall not be deemed
to be Control.
<PAGE> 6
6
"Default" shall mean any event or condition which upon notice, lapse of
time or both would constitute an Event of Default.
"Distribution" shall mean the distribution by Manor Care to its
shareholders of all the capital stock of Borrower in the manner, on the terms
and with the results set forth in the Form 10.
"Distribution Date" shall mean the date determined by the Board of
Directors of Manor Care as the date of which the Distribution shall be effected.
"dollars" or "$" shall mean dollars in lawful currency of the United
States of America.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as the same may be amended from time to time.
"ERISA Affiliate" shall mean any trade or business (whether or not
incorporated) that is a member of a group of which the Borrower is a member and
which is treated as a single employer under Section 414 of the Code.
"Event of Default" shall have the meaning assigned to such term in
Article VI.
"Financial Officer" of any corporation shall mean the chief financial
officer, principal accounting officer, Treasurer or Controller of such
corporation.
"Form 10" shall mean the registration statement on Form 10 under the
Securities Exchange Act of 1934 of the Borrower filed with the Securities and
Exchange Commission on July 11, 1996, as amended and distributed to the Lenders
prior to the date hereof.
"GAAP" shall mean generally accepted accounting principles as in effect
from time to time in the United States of America.
"Governmental Authority" shall mean any Federal, state, local or
foreign court or governmental agency, authority, instrumentality or regulatory
body.
"Guarantee" of or by any person shall mean any obligation, contingent
or otherwise, of such person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other person (the "primary obligor") in any
manner, whether directly or indirectly, and including any obligation of such
person, direct or indirect, (a) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Indebtedness or to purchase (or to advance
or supply funds for the purchase of) any security for the payment of such
Indebtedness, (b) to purchase property, securities or services for the purpose
of assuring the owner of such Indebtedness of the payment of such Indebtedness
or (c) to maintain working capital, equity capital or other financial statement
<PAGE> 7
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condition or liquidity of the primary obligor so as to enable the primary
obligor to pay such Indebtedness; provided, however, that the term Guarantee
shall not include endorsements for collection or deposit, in either case in the
ordinary course of business.
"Hotel Properties" shall mean the properties set forth on Schedule
1.01, including fixtures and personalty associated therewith.
"Indebtedness" of any person shall mean, without duplication, (a) all
obligations of such person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such person
upon which interest charges are customarily paid, (d) all obligations of such
person under conditional sale or other title retention agreements relating to
property or assets purchased by such person, (e) all obligations of such person
issued or assumed as the deferred purchase price of property or services, (f)
all Indebtedness of others secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien on property owned or acquired by such person, whether or not the
obligations secured thereby have been assumed, (g) all Guarantees by such person
of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i)
all obligations of such person in respect of interest rate protection
agreements, foreign currency exchange agreements or other interest or exchange
rate hedging arrangements and (j) all obligations of such person as an account
party in respect of letters of credit (other than (x) documentary letters of
credit (including commercial and trade letters of credit) issued to secure
payment obligations in respect of goods and services in the ordinary course of
business and (y) letters of credit and surety bonds with respect to obligations
of such person that are fully accounted for as liabilities in the financial
records of such person) and bankers' acceptances. The Indebtedness of any person
shall include the Indebtedness of any partnership in which such person is a
general partner.
"Interest Payment Date" shall mean, with respect to the Loan, the last
Business Day of each November, February, May, and August, commencing on the
first of such days to occur after the date hereof.
"Lien" shall mean, with respect to any asset, (a) any mortgage, deed of
trust, lien, pledge, encumbrance, charge or security interest in or on such
asset, (b) the interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement relating to such asset and
(c) in the case of securities, any purchase option, call or similar right of a
third party (excluding rights of first refusal) with respect to such securities.
"Loan" shall mean the Loan hereunder as defined in Section 2.01.
"Loan Documents" shall mean this Agreement and the Note.
<PAGE> 8
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"Manor Care Note" shall mean (a) Indebtedness of the Borrower to MNR
Finance Corp., a subsidiary of Manor Care, in an aggregate principal amount not
in excess of $225,722,500 having a three year term and bearing interest at a
rate equal to 9% per annum, and (b) any Indebtedness that renews, extends,
refinances or replaces the Manor Care Note; provided, however, that the
Indebtedness that extends, renews, refinances or replaces the Manor Care Note
has (i) a maturity and schedule of principal or redemption payments no earlier
than that of the Manor Care Note and (ii) an aggregate principal amount that is
equal to or less than the aggregate principal amount then outstanding (plus fees
and expenses, including any premium and defeasance costs) of the Manor Care
Note.
"Material Adverse Effect" shall mean a materially adverse effect on the
business, assets, property or condition, financial or otherwise, of the Borrower
and the Subsidiaries taken as a whole.
"Maturity Date" shall mean the third anniversary of the date hereof.
"Multiemployer Plan" shall mean a multiemployer plan as defined in
Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate (other
than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of
Section 414 of the Code) is making or accruing an obligation to make
contributions, or has within any of the preceding five plan years made or
accrued an obligation to make contributions.
"Non-Recourse Hotel Indebtedness" shall mean Indebtedness, incurred
solely in respect of a Hotel Property, (i) as to which neither the Borrower nor
any Subsidiary (x) provides credit support (including any undertaking, agreement
or instrument which would constitute Indebtedness) or has given or made other
assurances regarding repayment, (y) is directly or indirectly personally liable
or (z) constitutes the lender and (ii) the obligees of which will have recourse
solely against the assets comprising such Hotel Property for repayment of the
principal of and interest on such Indebtedness and any fees, indemnities,
expense reimbursements or other amounts of whatever nature accrued or payable in
connection with such Indebtedness.
"Note" shall mean the promissory note of Borrower, substantially in the
form of Exhibit A hereto, evidencing the obligation of Borrower to repay the
Loan.
"Obligations" shall mean (a) the Borrowers' obligations in respect of
the due and punctual payment of principal of and interest on the Loan when and
as due whether at maturity, by acceleration, upon one or more dates set for
prepayment or otherwise, (b) all expenses, indemnities, reimbursements and other
obligations, monetary or otherwise, of the Borrower under this Agreement or any
other Loan Document and (c) all obligations, monetary or otherwise, of each
Subsidiary under each Loan Document to which it is a party.
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"PBGC" shall mean the Pension Benefit Guaranty Corporation referred to
and defined in ERISA.
"Permitted Investments" shall mean:
(a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States
of America (or by any agency thereof to the extent such obligations are
backed by the full faith and credit of the United States of America);
(b) investments in commercial paper having credit ratings of
at least A-1 from S&P and P-1 from Moody's;
(c) investments in certificates of deposit, banker's
acceptances and time deposits issued or guaranteed by or placed with,
and money market deposit accounts issued or offered by, any domestic
office of any commercial bank organized under the laws of the United
States of America or any State thereof which has a combined capital and
surplus and undivided profits of not less than $200,000,000;
(d) investments in the ordinary course of business in
customary repurchase agreements with respect to freely marketable,
short-term securities of the type customarily subject to repurchase
agreements; and
(e) other readily marketable debt and equity securities traded
on national securities exchanges or on other nationally recognized
markets, including over-the-counter markets.
"person" shall mean an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint venture or
other entity or a government or any agency or political subdivision thereof.
"Plan" shall mean any pension plan (other than a Multiemployer Plan)
subject to the provisions of Title IV of ERISA or Section 412 of the Code which
is maintained for employees of the Company or any ERISA Affiliate.
"Prime Rate" shall mean the rate published by Chase Manhattan Bank,
N.A. as its prime rate from time to time.
"Proceeds" shall mean, with respect to any Asset Sale, (a) the gross
amount of consideration or other amounts payable to or receivable by the
Borrower or a Subsidiary in respect of such Asset Sale, less (b) the amount, if
any, of all estimated taxes payable with respect to such Asset Sale whether or
not payable during the taxable year in which such Asset Sale shall have
occurred, and less (c) reasonable and customary fees, commissions, costs and
other expenses (other than those payable to the Borrower or a Subsidiary or
Affiliate of the Borrower) which are incurred in connection with such Asset Sale
<PAGE> 10
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and are payable by the seller or the transferor of the assets or property to
which such Asset Sale relates, but only to the extent not already deducted in
arriving at the amount referred to in clause (a) above. For purposes of
determining Proceeds, the value of all noncash consideration payable or
receivable by the Borrower or any Subsidiary, as the case may be, shall be the
fair market value of such noncash consideration as determined in good faith by
the Borrower and the Borrower shall provide to the Agent a certificate of a
Financial Officer of the Borrower with respect to the fair market value of such
consideration, in form and substance reasonably satisfactory to the Agent.
"Promissory Notes" shall have the meaning set forth in the preamble to
this Agreement.
"Quality Hotels" shall mean Quality Hotels Europe, Inc., a Subsidiary.
"Reportable Event" shall mean any reportable event as defined in
Section 4043(b) of ERISA or the regulations issued thereunder with respect to a
Plan (other than a Plan maintained by an ERISA Affiliate which is considered an
ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the
Code).
"Responsible Officer" of any corporation shall mean any executive
officer or Financial Officer of such corporation and any other officer or
similar official thereof responsible for the administration of the obligations
of such corporation in respect of this Agreement.
"Sale and Lease-Back Transaction" shall mean any arrangement, directly
or indirectly, with any person whereby such person shall sell or transfer any
property, real or personal, used or useful in its business, whether now owned or
hereafter acquired, and thereafter rent or lease such property or other property
which it intends to use for substantially the same purpose or purposes as the
property being sold or transferred.
"Significant Subsidiary" shall mean at any time (a) Choice Hotels
Franchising, (b) any Subsidiary of the Borrower with revenues during the fiscal
year of the Borrower most recently ended greater than or equal to 5% of the
total revenues of the Borrower and its Subsidiaries during such year, computed
and consolidated in accordance with GAAP consistently applied ("Consolidated
Revenues"), (c) any Subsidiary of the Borrower with assets as of the last day of
the Borrower's most recently ended fiscal year greater than or equal to 5% of
the total assets of the Borrower and its Subsidiaries at such date, computed and
consolidated in accordance with GAAP consistently applied ("Consolidated
Assets"), (d) any Subsidiary with stockholder's equity as of the last day of the
Borrower's most recently ended fiscal year greater than or equal to 5% of the
stockholder's equity of the Borrower and the Subsidiaries at such date, computed
and consolidated in accordance with GAAP consistently applied ("Net
Stockholders' Equity"), (e) any Subsidiary designated in writing by the Borrower
<PAGE> 11
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as a Significant Subsidiary, (f) any Subsidiary created or acquired by the
Borrower after the date hereof that falls within or that comes to meet one of
clauses (a) through (e) or (g) any Subsidiary in existence on the date hereof
which comes to meet one of clauses (a) through (e) after the date hereof;
provided, however, that if at any time (x) the aggregate revenues of all
Subsidiaries that are Significant Subsidiaries during any fiscal year of the
Borrower shall not equal or exceed 90% of Consolidated Revenues for such fiscal
year, (y) the aggregate assets of all Subsidiaries that are Significant
Subsidiaries as of the last day of any fiscal year of the Borrower shall not
equal or exceed 90% of Consolidated Assets at such date, or (z) the aggregate
stockholders' equity of all Subsidiaries that are Significant Subsidiaries as of
the last day of any fiscal year of the Borrower shall not equal or exceed 90% of
Net Stockholders' Equity at such date, then the term Significant Subsidiary
shall be deemed to include such Subsidiaries (as determined pursuant to the next
following sentence) of the Borrower as may be required so that none of clauses
(x), (y) and (z) above shall continue to be true. For purposes of the proviso to
the next preceding sentence, the Subsidiaries which shall be deemed to be
Significant Subsidiaries shall be determined based on the percentage that the
assets of each such Subsidiary are of Consolidated Assets, with the Subsidiary
with the highest such percentage being selected first, and each other Subsidiary
required to satisfy the requirements set forth in such proviso being selected in
descending order of such percentage.
"SPC" shall mean a special purpose corporation formed by the Borrower
as a wholly owned Subsidiary and possessing only Hotel Properties as assets.
"subsidiary" shall mean, with respect to any person (herein referred to
as the "parent"), any corporation, partnership, association or other business
entity (a) of which securities or other ownership interests representing more
than 50% of the equity or more than 50% of the ordinary voting power or more
than 50% of the general partnership interests are, at the time any determination
is being made, owned, controlled or held, or (b) which is, at the time any
determination is made, otherwise Controlled by the parent or one or more
subsidiaries of the parent or by the parent and one or more subsidiaries of the
parent.
"Subsidiary" shall mean any subsidiary of the Borrower.
"Transactions" shall have the meaning assigned to such term in Section
3.02.
"Withdrawal Liability" shall mean liability to a Multiemployer Plan as
a result of a complete or partial withdrawal from such Multiemployer Plan, as
such terms are defined in Part I of Subtitle E of Title IV of ERISA.
SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall
apply equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
<PAGE> 12
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masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
All references herein to Articles, Sections, Exhibits and Schedules shall be
deemed references to Articles and Sections of, and Exhibits and Schedules to,
this Agreement unless the context shall otherwise require. Except as otherwise
expressly provided herein, all terms of an accounting or financial nature shall
be construed in accordance with GAAP consistently applied, as in effect from
time to time; provided, however, that, for purposes of determining compliance
with any covenant set forth in Article V, such terms shall be construed in
accordance with GAAP as in effect on the date of this Agreement applied on a
basis consistent with the application used in preparing the Company's audited
financial statements referred to in Section 3.05.
ARTICLE II. AMOUNT AND TERMS OF THE LOAN
SECTION 2.01. Amount of the Loan. Subject to the terms and conditions
hereof, Lender and Borrower agree to (a) refinance all obligations owed by
Borrower to Lender pursuant to those certain Promissory Notes of Borrower held
by Lender and (b) formalize the repayment obligations of Borrower for the
Advances previously made by Lender to Borrower in the form of a term loan to
Borrower in an aggregate principal amount of $225,722,500 (the "Loan"). Upon
execution of this Agreement and the Note, the Lender shall surrender the
Promissory Notes to Borrower for cancellation.
SECTION 2.02. The Note. Borrower shall execute and deliver to Lender a
Note in the form of Exhibit A to evidence the Loan, such Note to be in the
principal amount of the Loan. The Note shall be held by Lender or its designee.
The Note shall (a) be dated as of the date hereof, (b) be stated to mature on
the Maturity Date and (c) bear interest for the period from the date hereof to
the Maturity Date on the unpaid principal amount thereof from time to time
outstanding as provided in subsection 2.4(a). Interest on the Note shall be
payable as specified in subsection 2.4(b).
SECTION 2.03. Optional Prepayments. Borrower may repay at any time the
Loan made hereunder, in whole or in part, without premium or penalty, upon
irrevocable notice to Lender by 12:00 P.M. at least five business days prior to
the date of prepayment, specifying the date and amount of prepayment. If such
notice is given, Borrower shall make such prepayment and the payment amount
specified in such notice shall be due and payable on the date specified therein,
together with accrued interest to such date on the amount prepaid. Partial
prepayments shall be in aggregate principal amount of $1,000,000 (or a whole
multiple thereof) or if a lesser amount of the Loan remains outstanding, then
prepayment shall be made in the full aggregate amount of the Loan outstanding,
unless such prepayment is being paid pursuant to Section 5.06.
<PAGE> 13
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SECTION 2.04. Interest Rate and Payment Dates. (a) The Loan shall bear
interest on the outstanding principal amount, for each day from the date the
Loan is made until it becomes due, at a rate per annum equal to 9% for such day.
Interest shall be calculated on the basis of a 360 day year.
(b) Interest shall be payable in arrears on each Interest Payment Date.
(c) Any overdue interest on the Loan shall bear interest, payable on
demand, for each day until paid at a rate per annum equal to the
greater of (i) the Prime Rate plus 200 basis points for such day or
(ii) 11%.
SECTION 2.05 Payments. All payments (including prepayments) to be made
by Borrower on account of principal and interest shall be made to the Lender
without set-off, deduction or counterclaim in lawful money of the United States
of America and in immediately available funds. If any payment hereunder becomes
due and payable on a day other than a Business Day, such payment shall be
extended to the next succeeding Business Day and, with respect to payments of
principal, interest thereon shall be payable at the interest rate set forth in
Section 2.4(a) during such extension.
SECTION 2.06. Indemnity. The Borrower shall indemnify the Lender
against any loss or expense which such Lender may sustain or incur as a
consequence of any default in payment or prepayment of the principal amount of
any Loan or any part thereof or interest accrued thereon, as and when due and
payable at the due date thereof (whether by scheduled maturity, acceleration,
irrevocable notice of prepayment or otherwise).
SECTION 2.07. Taxes. (a) Any and all payments by any Borrower hereunder
shall be made, in accordance with Section 2.5, free and clear of and without
deduction for any and all present or future taxes, imposts, deductions, charges
or withholdings, and all liabilities with respect thereto, excluding (i)
estimated taxes deducted to arrive at Proceeds, (ii) taxes imposed on the
Lender's (or any transferee's or assignee's, (any such entity a "Transferee"))
net income and (iii) franchise taxes imposed on the Lender (or Transferee) by
any jurisdiction or any political subdivision thereof (all such nonexcluded
taxes, levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes"). If Borrower shall be required by law to
deduct any Taxes from or in respect of any sum payable hereunder to the Lender
(or any Transferee), (i) the sum payable shall be increased by the amount
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section) Lender (or Transferee,
as the case may be) shall receive an amount equal to the sum it would have
received had no such deductions been made, (ii) Borrower shall make such
deductions and (iii) Borrower shall pay the full amount deducted to the relevant
taxing authority or other Governmental Authority in accordance with applicable
law.
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(b) In addition, Borrower shall pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or
similar levies which arise from any payment made hereunder or from the
execution, delivery or registration of, or otherwise with respect to,
this Agreement or any other Loan Document (hereinafter referred to as
"Other Taxes").
(c) Borrower shall indemnify Lender (or Transferee) for the full amount
of Taxes and Other Taxes (including any Taxes or Other Taxes imposed by
any jurisdiction on amounts payable under this Section) paid by Lender
(or Transferee) and any liability (including penalties, interest and
reasonable out-of-pocket expenses) arising therefrom or with respect
thereto, whether or not such Taxes or Other Taxes were correctly or
legally asserted by the relevant taxing authority or other Governmental
Authority. Such indemnification shall be made within 30 days after the
date Lender (or Transferee) makes written demand therefor, which demand
may be made after Lender (or Transferee) in its sole discretion
(reasonably exercised) and at the sole expense of the applicable
Borrower, determines to challenge or contest such assertion of Taxes or
Other Taxes. After the Borrower makes full payment to the Lender (or
Transferee) with respect to such indemnification for Taxes or Other
Taxes asserted, if Lender (or Transferee) believes in its sole
discretion that reasonable grounds exist to challenge or contest the
Taxes or Other Taxes imposed, then Lender (or Transferee) shall so
contest or challenge in good faith the Taxes or Other Taxes asserted,
which contest or challenge shall be at the sole expense of Borrower. If
Lender (or Transferee) shall become aware that it is entitled to
receive a refund in respect of Taxes or Other Taxes, it shall promptly
notify the Borrower of the availability of such refund and shall,
within 30 days after receipt of a request by Borrower, apply for such
refund at the Borrower's reasonable out-of-pocket expense. If Lender
(or Transferee) receives a refund in respect of any Taxes or Other
Taxes for which Lender (or Transferee) has received payment from
Borrower hereunder it shall promptly notify Borrower of such refund and
shall promptly upon receipt repay such refund to Borrower, net of all
out-of-pocket expenses of Lender and without interest; provided,
however, that Borrower, upon the request of Lender (or Transferee),
agrees to return such refund (plus penalties, interest or other
charges) to Lender (or Transferee) in the event Lender (or Transferee)
is required to repay such refund.
(d) Within 30 days after the date of any payment of Taxes or Other
Taxes withheld by Borrower in respect of any payment to Lender (or
Transferee), Borrower will furnish to Lender, at its address referred
to in Section 8.01, the original or a certified copy of a receipt
evidencing payment thereof.
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(e) Without prejudice to the survival of any other agreement contained
herein, the agreements and obligations contained in this Section shall
survive the payment in full of the principal of and interest on all
Loans made hereunder.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Lender that:
SECTION 3.01. Authorization; No Violations. The execution, delivery and
performance by the Borrower of each of the Loan Documents to which it is a party
and the borrowings hereunder by the Borrower (collectively, the "Transactions")
(a) have been duly authorized by all requisite action, including, if required,
stockholder action on the part of the Borrower, and (b) will not (i) violate (A)
any provision of law, statute, rule or regulation, or of the certificate or
articles of incorporation or other constitutive documents or by-laws of the
Borrower or any Subsidiary, (B) any order of any Governmental Authority or (C)
any provision of any indenture, agreement or other instrument to which the
Borrower or any Subsidiary is a party or by which any of them or any of their
property is or may be bound, (ii) be in conflict with, result in a breach of or
constitute (alone or with notice or lapse of time or both) a default under any
such indenture, agreement or other instrument or (iii) result in the creation or
imposition of any Lien upon or with respect to any property or assets now owned
or hereafter acquired by the Borrower or any Subsidiary.
SECTION 3.02. Enforceability. This Agreement has been duly executed and
delivered by the Borrower and constitutes, and each other Loan Document when
executed and delivered by the Borrower will constitute, a legal, valid and
binding obligation of Borrower enforceable against Borrower in accordance with
its terms.
SECTION 3.03. No Material Misstatements. No information, report,
financial statement, exhibit or schedule furnished by or on behalf of Borrower
to the Lender in connection with any Loan Document will contain any material
misstatement of fact or will omit to state any material fact necessary to make
the statements therein, in the light of the circumstances under which they will
be made, not misleading.
<PAGE> 16
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ARTICLE IV. AFFIRMATIVE COVENANTS
The Borrower covenants and agrees with each Lender that, so long as
this Agreement shall remain in effect or the principal of or interest on any
Loan, any Fees or any other expenses or amounts payable under any Loan Document
shall be unpaid, unless the Lender shall otherwise consent in writing, the
Borrower shall, and shall cause each of the Subsidiaries to:
SECTION 4.01. Existence; Businesses and Properties. (a) Do or cause to
be done all things necessary to preserve, renew and keep in full force and
effect its legal existence, except as otherwise expressly permitted under
Section 5.05.
(b) Do or cause to be done all things necessary to obtain, preserve,
renew, extend and keep in full force and effect the rights, licenses, permits,
franchises, authorizations, patents, copyrights, trademarks and trade names
material to the conduct of its business; maintain and operate such business in
substantially the manner in which it is presently conducted and operated (except
for the Distribution); comply in all material respects with all applicable laws,
rules, regulations and orders of any Governmental Authority, whether now in
effect or hereafter enacted; and at all times maintain and preserve all property
material to the conduct of such business and keep such property in good repair,
working order and condition and from time to time make, or cause to be made, all
needful and proper repairs, renewals, additions, improvements and replacements
thereto necessary in order that the business carried on in connection therewith
may be properly conducted at all times.
SECTION 4.02. Insurance. Keep its insurable properties adequately
insured at all times by financially sound and reputable insurers; maintain such
other insurance, to such extent and against such risks, including fire and other
risks insured against by extended coverage, as is customary with companies in
the same or similar businesses, including public liability insurance against
claims for personal injury or death or property damage occurring upon, in, about
or in connection with the use of any properties owned, occupied or controlled by
it; and maintain such other insurance as may be required by law.
SECTION 4.03. Obligations and Taxes. Pay its Indebtedness and other
obligations promptly and in accordance with their terms and pay and discharge
promptly when due all taxes, assessments and governmental charges or levies
imposed upon it or upon its income or profits or in respect of its property,
before the same shall become delinquent or in default, as well as all lawful and
valid claims for labor, materials and supplies or otherwise which, if unpaid,
might give rise to a Lien upon such properties or any part thereof; provided,
however, that such payment and discharge shall not be required with respect to
any such tax, assessment, charge, levy or claim so long as the validity or
amount thereof shall be contested in good faith by appropriate proceedings and
the Borrower or such
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17
Subsidiary shall have set aside on its books adequate reserves with respect
thereto.
SECTION 4.04. Financial Statements, Reports, etc. In the case of the
Borrower, furnish to the Lender:
(a) within 100 days after the end of each fiscal year, its
audited consolidated balance sheets and related statements of income
and cash flow, showing the financial condition of the Borrower and its
consolidated subsidiaries as of the close of such fiscal year and the
results of its operations and the operations of such subsidiaries
during such year, all audited by Arthur Andersen & Co. or other
independent public accountants of recognized national standing
acceptable to the Lender and accompanied by an opinion of such
accountants (which shall not be qualified in any material respect) to
the effect that such consolidated financial statements fairly present
the financial condition and results of operations of the Borrower on a
consolidated basis in accordance with GAAP consistently applied;
(b) within 50 days after the end of each of the first three
fiscal quarters of each fiscal year, its unaudited consolidated balance
sheets and related statements of income and cash flow, showing the
financial condition of the Borrower and its consolidated subsidiaries
as of the close of such fiscal quarter and the results of its
operations and the operations of such subsidiaries during such fiscal
quarter and the then elapsed portion of the fiscal year, all certified
by one of the Financial Officers of the Borrowers as fairly presenting
the financial condition and results of operations of the Borrower on a
consolidated basis in accordance with GAAP consistently applied,
subject to normal year-end audit adjustments;
(c) concurrently with any delivery of financial statements
under clause (a) or (b) above, a certificate of the accounting firm or
Financial Officer of the Borrower opining on or certifying such
statements (which certificate, when furnished by an accounting firm,
may be limited to accounting matters and disclaim responsibility for
legal interpretations) (i) certifying that no Event of Default or
Default has occurred or, if such an Event of Default or Default has
occurred, specifying the nature and extent thereof and any corrective
action taken or proposed to be taken with respect thereto and (ii)
setting forth computations in reasonable detail satisfactory to the
Lender demonstrating compliance with the covenants contained in
Sections 5.06, 5.13, 5.14 and 5.15;
(d) promptly after the same become publicly available, copies
of all periodic and other reports, proxy statements and other materials
filed by it with the Securities and Exchange Commission, or
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18
any Governmental Authority succeeding to any of or all the functions of
said Commission, or with any national securities exchange, or
distributed to its shareholders, as the case may be; and
(e) promptly, from time to time, such other information
regarding the operations, business affairs and financial condition of
the Borrower or any Subsidiary, or compliance with the terms of any
Loan Document, as the Lender may reasonably request.
SECTION 4.05. Litigation and Other Notices. Furnish to the Lender
prompt written notice of the following:
(a) any Event of Default or Default, specifying the nature and
extent thereof and the corrective action (if any) proposed to be taken
with respect thereto;
(b) the filing or commencement of, or any threat or notice of
intention of any person to file or commence, any action, suit or
proceeding, whether at law or in equity or by or before any
Governmental Authority, against the Borrower or any Affiliate thereof
as to which there is a reasonable probability of an adverse
determination and which, if such probable adverse determination
occurred, could reasonably be anticipated to result in a Material
Adverse Effect; and
(c) any development that has resulted in, or could reasonably
be anticipated to result in, a Material Adverse Effect.
SECTION 4.06. ERISA. (a) Comply in all material respects with the
applicable provisions of ERISA and (b) furnish to the Lender (i) as soon as
possible, and in any event within 30 days after any Responsible Officer of the
Borrower or any ERISA Affiliate either knows or has reason to know that any
Reportable Event has occurred that alone or together with any other Reportable
Event could reasonably be expected to result in liability of the Borrower or any
ERISA Affiliate to the PBGC in an aggregate amount exceeding $5,000,000, a
statement of a Financial Officer of the Borrower setting forth details as to
such Reportable Event and the action proposed to be taken with respect thereto,
together with a copy of the notice, if any, of such Reportable Event given to
the PBGC, (ii) promptly after receipt thereof, a copy of any notice the Borrower
or any ERISA Affiliate may receive from the PBGC relating to the intention of
the PBGC to terminate any Plan or Plans (other than a Plan maintained by an
ERISA Affiliate which is considered an ERISA Affiliate only pursuant to
subsection (m) or (o) of Section 414 of the Code) or to appoint a trustee to
administer any Plan or Plans, (iii) within 10 days after the due date for filing
with the PBGC pursuant to Section 412(n) of the Code of a notice of failure to
make a required installment or other payment with respect to a Plan, a statement
of a Financial Officer of the Borrower setting forth details as to such failure
and the action proposed to be taken with respect thereto, together with a copy
of such notice given to the PBGC and (iv) promptly and in any event within 30
days after
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19
receipt thereof by the Borrower or any ERISA Affiliate from the sponsor of a
Multiemployer Plan, a copy of each notice received by the Borrower or any ERISA
Affiliate concerning (A) the imposition of Withdrawal Liability in excess of
$500,000 or (B) a determination that a Multiemployer Plan is, or is expected to
be, terminated or in reorganization, in each case within the meaning of Title IV
of ERISA.
SECTION 4.07. Maintaining Records; Access to Properties and
Inspections. Maintain all financial records in accordance with GAAP consistently
applied and upon reasonable notice by any Lender permit any representatives
designated by such Lender, subject to Section 7.16 of this Agreement, to visit
and inspect the financial records and the properties of the Borrower or any
Subsidiary at reasonable times and as often as requested and to make extracts
from and copies of such financial records, and permit any representatives
designated by any Lender to discuss the affairs, finances and condition of the
Borrower or any Subsidiary with the officers thereof and independent accountants
therefor.
SECTION 4.08. Ownership. Subject to 5.05, maintain Quality Hotels as a
wholly owned Subsidiary, except that shares representing up to 10% of the shares
of any class of the capital stock of Quality Hotels (but not representing more
than 10% of the aggregate ordinary voting power represented by the issued and
outstanding capital stock of Quality Hotels) may be sold to certain members of
management, and maintain Choice Hotels Franchising as a Subsidiary in which the
Borrower owns shares representing not less than 88.9% of the aggregate ordinary
voting power represented by the issued and outstanding capital stock of Choice
Hotels Franchising. Continue to own, directly or indirectly, the operations of
Choice Hotels Franchising substantially as they exist on the date hereof.
ARTICLE V. NEGATIVE COVENANTS
The Borrower covenants and agrees with each Lender that, so long as
this Agreement shall remain in effect or the principal of or interest on any
Loan, any Fees or any other expenses or amounts payable under any Loan Document
shall be unpaid unless the Lender shall otherwise consent in writing, the
Borrower shall not, and shall not cause or permit any of the Subsidiaries to:
SECTION 5.01. Indebtedness. Incur, create, assume or permit to exist
any Indebtedness, except (without duplication):
(a) Indebtedness existing on the date hereof and set forth in
Schedule 5.01(a) and any extensions, renewals or replacements of
existing mortgages and Capital Lease Obligations; provided, however,
that (i) the principal amount of any such extension, renewal or
replacement shall not exceed the principal amount of the mortgage or
<PAGE> 20
20
Capital Lease Obligation so extended, renewed or replaced, (ii) the
mortgage or Capital Lease Obligation so extended, renewed or replaced
shall not be secured by any property or asset that was not already
pledged to secure the existing mortgage or Capital Lease Obligation,
and (iii) such extension, renewal or replacement is not on terms
materially more restrictive to the Borrower or its Subsidiaries or
materially less favorable to the Lenders than the mortgage or Capital
Lease Obligation so extended, renewed or replaced;
(b) Indebtedness represented by the Loan Documents; provided,
however, that Indebtedness consisting of commercial paper of the
Borrower may also be incurred pursuant to this clause (b) to the extent
the sum of such Indebtedness and the aggregate principal amount of
Loans then outstanding do not exceed the Advances at such time (subject
to Section 5.01(n) to the extent in excess of $100,000,000).
(c) Indebtedness incurred upon the acquisition of any property
or asset secured by Liens on such property or asset in accordance with
5.02(b); provided, however, that the amount of such Indebtedness shall
not exceed the purchase price of any such property or asset;
(d) Indebtedness secured by Liens permitted under 5.02(i),
5.02(j) or 5.02(m);
(e) Indebtedness of Subsidiaries existing at the time they are
acquired by the Borrower and not incurred in contemplation of such
acquisition;
(f) other Indebtedness of Subsidiaries not prohibited by
Section 5.09;
(g) Indebtedness of (i) the Borrower to any wholly owned
Subsidiary, Choice Hotels Franchising or Quality Hotels; (ii) any
wholly owned Subsidiary, Choice Hotels Franchising or Quality Hotels to
the Borrower; and (iii) any Subsidiary, Choice Hotels Franchising or
Quality Hotels to any wholly owned Subsidiary (or to Choice Hotels
Franchising or Quality Hotels) (for the purposes of this clause (g),
"wholly owned Subsidiary" includes any wholly owned subsidiary of
Choice Hotels Franchising and/or Quality Hotels, any Subsidiary that
would otherwise constitute a wholly owned Subsidiary but for directors'
qualifying shares or similar matters, and any Subsidiary the only
direct shareholders, members or participants in which are wholly owned
Subsidiaries, Choice Hotels Franchising or Quality Hotels);
(h) Indebtedness represented by notes or letters of credit
issued for the account of the Borrower or any Subsidiary in connection
with insurance policies and in a form substantially similar to the
notes or
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21
letters of credit issued for the account of the Borrower or any
Subsidiary set forth in Schedule 5.01(h) issued in connection with
existing insurance policies of the Borrower or such Subsidiary;
(i) Indebtedness represented by utility bonds, performance
bonds, state self insurance bonds and miscellaneous other bonds other
than those existing on the date hereof and listed in Schedule 5.01(a)
(including any extensions, renewals and replacements), the aggregate
principal amount of such Indebtedness at any one time not to exceed
$20,000,000 (subject to Section 5.01(n) to the extent in excess of
$20,000,000);
(j) Indebtedness of the Borrower consisting of Guarantees in
connection with pension and deferred compensation arrangements arising
in connection with the Distribution; provided, however, that the
aggregate amount of such Indebtedness shall not exceed $40,000,000;
(k) Indebtedness consisting of the Manor Care Note;
(l) Non-Recourse Hotel Indebtedness; provided, that, so long
as the Manor Care Note remains in effect or any principal, interest or
any other expenses or amounts payable thereunder shall be unpaid, the
proceeds of the incurrence of such Non-Recourse Hotel Indebtedness
shall be applied solely to prepay amounts outstanding under the Manor
Care Note;
(m) Indebtedness consisting of Sale and Lease-back
Transactions permitted under Section 5.03; and
(n) other unsecured Indebtedness of the Borrower in an
aggregate principal amount at any one time outstanding not to exceed
$100,000,000; provided, however, that the covenants and events of
default contained in any such Indebtedness with an aggregate principal
amount in excess of $10,000,000 shall not be more restrictive of the
Borrower and its Subsidiaries than those in this Agreement; and
provided further, that the aggregate amount of Guarantees by the
Borrower may not exceed $50,000,000.
SECTION 5.02. Liens. Create, incur, assume or permit to exist any Lien
on any property or assets (including stock or other securities of any person,
including any Subsidiary) now owned or hereafter acquired by it or on any income
or revenues or rights (excluding rights of first refusal) in respect of any
thereof, except (without duplication):
(a) Liens on property or assets of the Borrower and its
Subsidiaries existing on the date hereof and set forth in Schedule
5.02; provided, however, that such Liens shall secure only those
obligations which they secure on the date hereof except as otherwise
permitted hereunder;
<PAGE> 22
22
(b) any Lien existing on any property or asset prior to the
acquisition thereof by the Borrower or any Subsidiary; provided,
however, that (i) such Lien is not created in contemplation of or in
connection with such acquisition and (ii) such Lien does not apply to
any other property or assets of the Borrower or any Subsidiary;
(c) Liens for taxes not yet due or which are being contested
in compliance with Section 4.03;
(d) carriers', warehousemen's, mechanic's, materialmen's,
repairmen's or other like Liens arising in the ordinary course of
business and securing obligations that are not due or which are being
contested in compliance with Section 4.03;
(e) statutory liens of landlords in respect of property leased
by the Borrower or any Subsidiary;
(f) pledges and deposits made in the ordinary course of
business in compliance with workmen's compensation, unemployment
insurance and other social security laws or regulations;
(g) deposits to secure the performance of bids, trade
contracts (other than for Indebtedness), leases (other than Capital
Lease Obligations), statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in
the ordinary course of business;
(h) zoning restrictions, easements, rights-of-way,
restrictions on use of real property and other similar encumbrances
incurred in the ordinary course of business which, in the aggregate,
are not substantial in amount and do not materially detract from the
value of the property subject thereto or interfere with the ordinary
conduct of the business of the Borrower or any of its Subsidiaries;
(i) purchase money security interests in real property,
improvements thereto or equipment hereafter acquired (or, in the case
of improvements, constructed) by the Borrower or any Subsidiary and
liens securing refinancings of existing mortgages; provided, however,
that the aggregate principal amount of the Indebtedness secured by such
security interests does not exceed $50,000,000; and provided further,
that (i) such security interests are incurred, and the Indebtedness
secured thereby is created, within 120 days after such acquisition, or
construction or refinancing, (ii) the Indebtedness secured thereby does
not exceed 80% of the fair market value of the subject real property,
improvements or equipment at the time of such acquisition, construction
or refinancing, and (iii) such security interests do not apply to the
subject property or
<PAGE> 23
23
assets of the Borrower or any Subsidiary other than the purchased
property or assets or the property or assets subject to the mortgage
being refinanced, as the case may be;
(j) mortgages on properties listed on Schedule 5.02(j);
provided, however, that (i) such mortgages do not apply to the property
or assets of the Borrower or any Subsidiary other than the scheduled
properties and (ii) the aggregate principal amount of the Indebtedness
secured by such security interests does not exceed $100,000,000;
(k) Liens created in favor of the Lenders;
(l) Liens securing Indebtedness incurred pursuant to Sections
5.01(l) or 5.09(ii); and
(m) other Liens to secure Indebtedness of the Borrower or any
Subsidiary; provided, however, that the aggregate principal amount of
the Indebtedness so secured at any time, when added to the net book
value of all property the subject of Sale and Lease-Back Transactions
(other than Sale and Lease-back Transactions referred to in the proviso
to Section 5.03) at such time, does not exceed 15% of Consolidated
Total Assets at such time.
SECTION 5.03. Sale and Lease-Back Transactions. Enter into any Sale and
Lease-Back Transaction unless immediately thereafter the net book value of all
property the subject of Sale and Lease-Back Transactions, when added to the
aggregate principal amount of Indebtedness of the Borrower or any Subsidiary
secured at such time by Liens permitted only under Section 5.02(m), does not
exceed 10% of Consolidated Total Assets at such time; provided, however, that
this Section 5.03 shall be deemed not to apply to any Sale and Lease-back
Transaction entered into by an SPC so long as (i) neither the Borrower nor any
other Subsidiary (x) provides credit support (including any undertaking,
agreement or instrument which would constitute Indebtedness) or has given or
made other assurances regarding repayment, (y) is directly or indirectly
personally liable or (z) is the lessor and (ii) the obligees will have recourse
solely against the assets of such SPC for repayment of the amounts owed in
connection with such Sale and Lease-back Transaction and any fees, indemnities,
expense reimbursements or other amounts of whatever nature accrued or payable in
connection with such Sale and Lease-back Transaction; and provided further,
that, so long as the Manor Care Note remains in effect or any principal,
interest or any other expenses or amounts payable thereunder shall be unpaid,
the proceeds of such Sale and Lease-back Transaction shall be applied solely to
prepay amounts outstanding under the Manor Care Note.
SECTION 5.04. Investments, Loans and Advances. Purchase, hold or
acquire any capital stock, comparable ownership interests, evidences of
indebtedness or other securities of, make or permit to exist any loans or
<PAGE> 24
24
advances to, or make or permit to exist any investment or any other interest in,
any other person, except:
(a) the investments and guarantees existing on the date hereof
set forth on Schedule 5.04 and investments by the Borrower or any
Subsidiary in the capital stock or comparable ownership interests of
the Subsidiaries, including by means of contributions by any Subsidiary
of Hotel Properties to the Borrower or a Subsidiary;
(b) loans or advances by the Borrower to Subsidiaries or by
Subsidiaries to the Borrower or other Subsidiaries;
(c) purchases by the Borrower of the capital stock of Quality
Hotels held by Alain Ammar pursuant to rights held by Alain Ammar as of
the date hereof;
(d) Guarantees permitted under Section 5.01(j);
(e) Permitted Investments; and
(f) other investments, capital contributions, loans and
advances not to exceed at any time 15% of Consolidated Total Assets at
such time.
SECTION 5.05. Mergers and Consolidations. Mergers and Consolidations.
Merge into or consolidate with any other person, or permit any other person to
merge into or consolidate with it, or sell, transfer, lease or otherwise dispose
of (in one transaction or in a series of transactions) all or substantially all
its assets whether now owned or hereafter acquired, except that:
(a) (i) the Borrower may merge or consolidate with a
Subsidiary or (ii) a Subsidiary may merge or consolidate with the
Borrower so long as the Borrower is the surviving entity;
(b) any Subsidiary may merge or consolidate with any
Subsidiary;
(c) the Borrower or any Subsidiary may merge or consolidate
with another person; provided, however, that:
(i) the Borrower or such Subsidiary is the
surviving entity;
(ii) no Event of Default or event which, with notice
or the passage of time or both, would constitute an Event of
Default exists after giving effect to such merger or
consolidation; and
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25
(iii) the Lender shall receive a certificate signed
by a Financial Officer of the Borrower, confirming compliance
with clause (ii) above;
(e) the Borrower and the Subsidiaries may consummate the
Distribution.
SECTION 5.06. Asset Sales. Consummate any Asset Sale, other than (i)
sales of receivables for collection (and not for financing or factoring
purposes) in the ordinary course of business, (ii) Asset Sales which, when added
to the Proceeds from all other Asset Sales previously consummated in the same
fiscal year, would not exceed 10% of Consolidated Total Assets as of the end of
the preceding fiscal year, and (iii) Asset Sales, in a single transaction or
series of transactions, of Hotel Properties or the SPC; provided that no Asset
Sale referenced in clause (iii) above shall be permitted if (a) a Default has
occurred or would occur after giving effect to such Asset Sale, or (b) so long
as the Manor Care Note remains in effect or any principal, interest or any other
expenses or amounts payable thereunder shall be unpaid, the net proceeds of such
Asset Sale are used other than to prepay (x) amounts outstanding under the Manor
Care Note or (y) Indebtedness secured by Liens on the Hotel Properties that are
the subject of such Asset Sale.
SECTION 5.07. Transactions with Affiliates. Sell or transfer any
property or assets to, or purchase or acquire any property or assets from, or
otherwise engage in any other transactions with, any of its Affiliates, except
that as long as no Default or Event of Default shall have occurred and be
continuing, the Borrower or any Subsidiary may (a) consummate the Distribution
or (b) engage in any of the foregoing transactions (i) in the ordinary course of
business at prices and on terms and conditions not less favorable to the
Borrower or such Subsidiary than could be obtained on an arm's-length basis from
unrelated third parties or (ii) between or among the Borrower and its wholly
owned Subsidiaries.
SECTION 5.08. Business of Borrower and Subsidiaries. Engage at any time
in any business or business activity other than the business currently conducted
by it or related or collateral activities in the hospitality, travel or
franchise-related industries.
SECTION 5.09. Subsidiary Indebtedness. Permit any Subsidiary to create,
incur, assume or permit to exist any Indebtedness except:
(i) any Indebtedness permitted by Section 5.01;
(ii) Indebtedness of any SPC in the form of collateralized
mortgage obligations or obligations under a real estate investment
trust; provided, however, that, in respect of such Indebtedness, (i)
neither the Borrower nor any other Subsidiary (x) provides credit
support (including any
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26
undertaking, agreement or instrument which would constitute
Indebtedness) or has given or made other assurances regarding
repayment, (y) is directly or indirectly personally liable or (z) is
the lender and (ii) the obligees will have recourse solely against the
assets of SPC for repayment of the principal of and interest on such
Indebtedness and any fees, indemnities, expense reimbursements or other
amounts of whatever nature accrued or payable in connection with such
Indebtedness; and provided further, that, so long as the Manor Care
Note remains in effect or any principal, interest or any other expenses
or amounts payable thereunder shall be unpaid, the proceeds of the
incurrence of such Indebtedness shall be applied solely to prepay
amounts outstanding under the Manor Care Note; and
(iii) other Indebtedness of any Subsidiary; provided, however,
that the aggregate principal amount (the "Subsidiary Debt Amount")
outstanding of all such other Indebtedness of all Subsidiaries
(excluding amounts permitted under clause (i) above) may not exceed 15%
of Consolidated Total Assets at such time; provided further, however,
that, at any time during which the Manor Care Note remains in effect or
any principal, interest or any other expenses or amounts payable
thereunder shall be unpaid, the Subsidiary Debt Amount may not exceed
5% of Consolidated Total Assets at such time.
SECTION 5.10. Agreements. Permit any Subsidiary to enter into any
agreement or incur any obligation the terms of which would impair the ability of
any Subsidiary to pay dividends, to make intercompany loans or advances or to
make distributions (it being agreed that this Section shall not be breached by
any such agreement or obligation binding upon a Subsidiary at the time it
becomes a Subsidiary and not incurred in contemplation of its becoming a
Subsidiary).
SECTION 5.11. Fiscal Year and Accounting Practices. Change its fiscal
year end or accounting practices from those in effect at May 31, 1996, other
than as required by GAAP.
SECTION 5.12. No Further Negative Pledges. Except with respect to
prohibitions against other encumbrances on specific property encumbered to
secure payment of particular Indebtedness (which Indebtedness relates solely to
such specific property, and improvements and accretions thereto, and is
otherwise permitted hereby), enter into any agreement prohibiting the creation
or assumption of any Lien upon the properties or assets of the Borrower or any
Subsidiary, whether now owned or hereafter acquired, or requiring an obligation
to be secured if some other obligation is secured.
SECTION 5.13. Minimum Consolidated Net Worth. In the case of the
Borrower, permit its Consolidated Net Worth at any time to be less than the
greater of (i) the sum of (x) $75,000,000, (y) 50% of the Borrower's
Consolidated
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27
Net Income accrued during the period (treated as one accounting period)
commencing on the date of the Distribution and ending on the last day of the
most recent fiscal quarter for which financial statements have been delivered
pursuant to Section 4.04 (which amount shall not include Consolidated Net Income
for any fiscal quarter in which the Borrower's Consolidated Net Income is
negative) and (z) the aggregate net cash proceeds received by the Borrower from
the issuance or sale of its capital stock since the date hereof, and (ii) the
sum of (W) the amount that is equal to 75% of the Borrower's Consolidated Net
Worth as of the last day of the month in which the Distribution occurs plus (X)
50% of the Borrower's Consolidated Net Income accrued during the period (treated
as one accounting period) commencing on the date on which the Distribution
occurs, and ending on the last day of the most recent fiscal quarter for which
financial statements have been delivered pursuant to Section 4.04 (which amount
shall not include Consolidated Net Income for any fiscal quarter in which the
Borrower's Consolidated Net Income is negative), plus (Y) the aggregate net cash
proceeds received by the Borrower from the issuance or sale of its capital stock
since the date hereof, minus (Z) an amount equal to the decrease, if any, in the
Borrower's Consolidated Net Worth (as measured at the date of the Distribution)
resulting from the sale, transfer or other disposition of Hotel Properties or an
SPC.
SECTION 5.14. Consolidated Leverage Ratio. In the case of the Borrower,
permit the Consolidated Leverage Ratio as of the last day of and for any period
of four fiscal quarters ending during the period from and including the date
hereof through the Maturity Date to exceed (i) 3.75 to 1.0, at any time during
which the Manor Care Note remains in effect or any principal, interest or any
other expenses or amounts payable thereunder shall be unpaid, and (ii) 3.25 to
1.0, at any other time. The Consolidated Leverage Ratio shall be calculated as
of the end of each fiscal quarter based on the period of the four consecutive
fiscal quarters ending on such date.
SECTION 5.15. Consolidated Interest Coverage Ratio. In the case of the
Borrower, permit its Consolidated Interest Coverage Ratio at any time during the
period from and including the date hereof through the Maturity Date to be less
than (i) 3.25 to 1.0, at any time during which the Manor Care Note remains in
effect or any principal, interest or any other expenses or amounts payable
thereunder shall be unpaid, and (ii) 3.75 to 1.0, at any other time. The
Consolidated Interest Coverage Ratio shall be calculated as of the end of each
fiscal quarter based on the period of the four consecutive fiscal quarters
ending on such date.
SECTION 5.16. Dividends and Distributions. Declare or pay, directly or
indirectly, any dividend or make any other distribution (by reduction of capital
or otherwise), whether in cash, property, securities or a combination thereof,
with respect to any shares of its capital stock or directly or indirectly
redeem, purchase, retire or otherwise acquire for value (or permit any
Subsidiary to
<PAGE> 28
28
purchase or acquire) any shares of any class of its capital stock or set aside
any amount for any such purpose; provided, however, that any Subsidiary may
declare and pay dividends or make other distributions to the Borrower or another
Subsidiary; and provided, further, that nothing contained in this Section 5.16
shall prevent the transfer of assets to an SPC if such transfer is otherwise
permitted by this Agreement.
ARTICLE VI. EVENTS OF DEFAULT
In case of the happening of any of the following events ("Events of
Default"):
(a) any representation or warranty made or deemed made (such
representation or warranty being deemed made as provided in Section
3.01) in or in connection with any Loan Document or the borrowings
hereunder, or any representation, warranty, statement or information
contained in any report, certificate, financial statement or other
instrument furnished in connection with or pursuant to any Loan
Document, shall prove to have been false or misleading in any material
respect when so made, deemed made or furnished;
(b) default shall be made in the payment of any principal of the Loan
when and as the same shall become due and payable, whether at the due
date thereof or at a date fixed for prepayment thereof or by
acceleration thereof or otherwise;
(c) default shall be made in the payment of any interest on the Loan or
any Fee or any other amount (other than an amount referred to in clause
(b) above) due under any Loan Document, when and as the same shall
become due and payable, and such default shall continue unremedied for
a period of five Business Days;
(d) default shall be made in the due observance or performance by the
Borrower or any Subsidiary of any covenant, condition or agreement
contained in Section 4.01(a) or 4.05 or in Article V;
(e) default shall be made in the due observance or performance by the
Borrower or any Subsidiary of any covenant, condition or agreement
contained in any Loan Document (other than those specified in clauses
(b), (c) and (d) above) and such default shall continue unremedied for
a period of five Business Days after notice thereof from the Lender to
the Borrower;
(f) the Borrower or any Subsidiary shall (i) fail to pay any principal
or interest, regardless of amount, due in respect of any Indebtedness
in an
<PAGE> 29
29
aggregate principal amount in excess of $10,000,000, when and as the
same shall become due and payable, or (ii) fail to observe or perform
any other term, covenant, condition or agreement contained in any
agreement or instrument evidencing or governing any Indebtedness in an
aggregate principal amount in excess of $10,000,000 if the effect of
any failure referred to in this clause (ii) is to cause, or to permit
the holder or holders of such Indebtedness or a trustee on its or their
behalf (with or without the giving of notice, the lapse of time or
both) to cause, such Indebtedness to become due prior to its stated
maturity;
(g) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking
(i) relief in respect of the Borrower or any Subsidiary, or of a
substantial part of the property or assets of the Borrower or a
Subsidiary, under Title 11 of the United States Code, as now
constituted or hereafter amended, or any other Federal, state or
foreign bankruptcy, insolvency, receivership or similar law, (ii) the
appointment of a receiver, trustee, custodian, sequestrator,
conservator or similar official for the Borrower or any Subsidiary or
for a substantial part of the property or assets of the Borrower or a
Subsidiary or (iii) the winding-up or liquidation of the Borrower or
any Subsidiary; and such proceeding or petition shall continue
undismissed for 60 days or an order or decree approving or ordering any
of the foregoing shall be entered;
(h) the Borrower or any Subsidiary shall (i) voluntarily commence any
proceeding or file any petition seeking relief under Title 11 of the
United States Code, as now constituted or hereafter amended, or any
other Federal, state or foreign bankruptcy, insolvency, receivership or
similar law, (ii) consent to the institution of, or fail to contest in
a timely and appropriate manner, any proceeding or the filing of any
petition described in clause (g) above, (iii) apply for or consent to
the appointment of a receiver, trustee, custodian, sequestrator,
conservator or similar official for the Borrower or any Subsidiary or
for a substantial part of the property or assets of the Borrower or any
Subsidiary, (iv) file an answer admitting the material allegations of a
petition filed against it in any such proceeding, (v) make a general
assignment for the benefit of creditors, (vi) become unable, admit in
writing its inability or fail generally to pay its debts as they become
due or (vii) take any action for the purpose of effecting any of the
foregoing;
(i) one or more judgments for the payment of money in an aggregate
amount in excess of $5,000,000 shall be rendered against the Borrower,
any Subsidiary or any combination thereof and the same shall remain
undischarged for a period of 60 consecutive days during which execution
shall not be effectively stayed, or any action shall be legally taken
by a judgment creditor to levy upon assets or properties of the
Borrower or any Subsidiary to enforce any such judgment;
<PAGE> 30
30
(j) a Reportable Event or Reportable Events, or a failure to make a
required installment or other payment (within the meaning of Section
412(n)(l) of the Code), shall have occurred with respect to any Plan or
Plans that reasonably could be expected to result in liability of the
Borrower to the PBGC or to a Plan in an aggregate amount exceeding
$5,000,000 and, within 30 days after the reporting of any such
Reportable Event to the Lender or after the receipt by the Lender of
the statement required pursuant to Section 4.06, the Lender shall have
notified the Borrower in writing that (i) it has made a determination
that, on the basis of such Reportable Event or Reportable Events or the
failure to make a required payment, there are reasonable grounds (A)
for the termination of such Plan or Plans by the PBGC, (B) for the
appointment by the appropriate United States District Court of a
trustee to administer such Plan or Plans or (C) for the imposition of a
lien in favor of a Plan and (ii) as a result thereof an Event of
Default exists hereunder; or a trustee shall be appointed by a United
States District Court to administer any such Plan or Plans; or the PBGC
shall institute proceedings to terminate any Plan or Plans;
(k) (i) the Borrower or any ERISA Affiliate shall have been notified by
the sponsor of a Multiemployer Plan that it has incurred Withdrawal
Liability to such Multiemployer Plan, (ii) the Borrower or such ERISA
Affiliate does not have reasonable grounds for contesting such
Withdrawal Liability or is not in fact contesting such Withdrawal
Liability in a timely and appropriate manner and (iii) the amount of
the Withdrawal Liability specified in such notice, when aggregated with
all other amounts required to be paid to Multiemployer Plans in
connection with Withdrawal Liabilities (determined as of the date or
dates of such notification), exceeds $1,000,000 or requires payments
exceeding $1,000,000 in any year;
(l) the Borrower or any ERISA Affiliate shall have been notified by the
sponsor of a Multiemployer Plan that such Multiemployer Plan is in
reorganization or is being terminated, within the meaning of Title IV
of ERISA, if solely as a result of such reorganization or termination
the aggregate annual contributions of the Borrower and its ERISA
Affiliates to all Multiemployer Plans that are then in reorganization
or have been or are being terminated have been or will be increased
over the amounts required to be contributed to such Multiemployer Plans
for their most recently completed plan years by an amount exceeding
$1,000,000; or
(m) there shall have occurred a Change in Control;
then, and in every such event (other than an event with respect to Borrower
described in clause (g) or (h) above), and at any time thereafter during the
continuance of such event, the Lender shall, by notice to the Borrower, declare
the Loan then outstanding to be forthwith due and payable in whole or in part,
<PAGE> 31
31
whereupon the principal of the Loan so declared to be due and payable, together
with accrued interest thereon and all other liabilities of the Borrower accrued
hereunder and under any other Loan Document, shall become forthwith due and
payable, without presentment, demand, protest or any other notice of any kind,
all of which are hereby expressly waived by the Borrower, anything contained
herein or in any other Loan Document to the contrary notwithstanding; and in any
event with respect to any Borrower described in clause (g) or (h) above, the
principal of the Loan then outstanding, together with accrued interest thereon
and all other liabilities of the Borrower accrued hereunder and under
any other Loan Document, shall automatically become due and payable, without
presentment, demand, protest or any other notice of any kind, all of which are
hereby expressly waived by the Borrower, anything contained herein or in any
other Loan Document to the contrary notwithstanding.
ARTICLE VII. MISCELLANEOUS
SECTION 7.01. Notices. Notices and other communications provided for
herein shall be in writing and shall be delivered by hand or overnight courier
service, mailed or sent by telex, graphic scanning or other telegraphic
communications equipment of the sending party, as follows:
(a) if to the Borrower at 10750 Columbia Pike, Silver Spring, Maryland
20901, Attention of General Counsel; and
(b) if to the Lender, at 11555 Darnestown Road, Gaithersburg, Maryland,
20878-3200, Attention of General Counsel.
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt, in each case delivered, sent or mailed (properly addressed) to
such party as provided in this Section 7.01 or in accordance with the latest
unrevoked direction from such party given in accordance with this Section 7.01.
SECTION 7.02. Survival of Agreement. All covenants, agreements,
representations and warranties made by the Borrower and Guarantors herein and in
the certificates or other instruments prepared or delivered in connection with
or pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the Lender and shall survive the making by the Lender
of the Loans, and the execution and delivery to the Lender of the Notes
evidencing such Loans, regardless of any investigation made by the Lender or on
their behalf, and shall continue in full force and effect as long as the
principal of or any accrued interest on any Loan or any other amount payable
under this Agreement or any other Loan Document is outstanding and unpaid and so
long as the Commitments have not been terminated.
<PAGE> 32
32
SECTION 7.03. Binding Effect. This Agreement shall become effective on
the Distribution Date, and thereafter shall be binding upon and inure to the
benefit of the Borrower, the Lender and their respective successors and assigns,
except that Borrower may not assign or delegate its rights or obligations
hereunder or any interest herein without the prior consent of the Lender.
SECTION 7.04. Successors and Assigns. Whenever in this Agreement any of
the parties hereto is referred to, such reference shall be deemed to include the
successors and assigns of such party; and all covenants, promises and agreements
by or on behalf of the Borrower, or the Lender that are contained in this
Agreement shall bind and inure to the benefit of their respective successors and
assigns.
SECTION 7.05. Expenses; Indemnity. (a) Borrower agrees to pay all
reasonable out-of-pocket expenses incurred by Lender and its Affiliates in
connection with the preparation of this Agreement and the other Loan Documents
and the syndication of the facilities provided for herein or in connection with
any amendments, modifications or waivers of the provisions hereof or thereof
(whether or not the transactions hereby contemplated shall be consummated) or
incurred by the Lender in connection with the enforcement or protection of their
rights (as such rights may relate to any Borrower or any Subsidiary) in
connection with this Agreement and the other Loan Documents or in connection
with the Loan made or the Notes issued hereunder, including counsel for Lender,
including the allocated costs of in-house counsel.
(b) The Borrower agrees to indemnify the Lender and its respective
directors, officers, employees, agents and Affiliates (each such person
being called an "Indemnitee") against, and to hold each Indemnitee
harmless from, any and all losses, claims, damages, liabilities and
related expenses, including reasonable counsel fees and expenses,
incurred by or asserted against any Indemnitee arising out of, in any
way connected with, or as a result of (i) the execution or delivery of
this Agreement or any other Loan Document or any agreement or
instrument contemplated thereby, the performance by the parties thereto
of their respective obligations thereunder or the consummation of the
Transactions and the other transactions contemplated thereby, (ii) the
use of the proceeds of the Loan or (iii) any claim, litigation,
investigation or proceeding relating to any of the foregoing, whether
or not any Indemnitee is a party thereto; provided, however, that such
indemnity shall not, as to any Indemnitee, be available to the extent
that such losses, claims, damages, liabilities or related expenses are
determined by a court of competent jurisdiction by final and
nonappealable judgment to have resulted from the negligence or
misconduct of such Indemnitee. Promptly after receipt by an Indemnitee
of notice of any complaint or the commencement of any action or
proceeding with respect to which indemnification is being sought
hereunder, such person shall notify the Borrower of such complaint or
of the commencement of such action or proceeding, but failure so to
notify
<PAGE> 33
33
the Borrower will relieve Borrower from any liability which Borrower
may have hereunder only if, and to the extent that such failure results
in the forfeiture by Borrower of substantial rights and defenses, and
shall not in any event relieve Borrower from any other obligation or
liability that Borrower may have to any Indemnitee otherwise than under
this Agreement. If Borrower so elects or is requested by such
Indemnitee, Borrower shall assume the defense of such action or
proceeding, including the employment of counsel reasonably satisfactory
to the Indemnitee and the payment of the reasonable fees and
disbursements of such counsel. In the event, however, such Indemnitee
reasonably determines in its judgment that having common counsel would
present such counsel with a conflict of interest or if the defendant
in, or targets of, any such action or proceeding include both the
Indemnitee and Borrower, and such Indemnitee reasonably concludes that
there may be legal defenses available to it or other Indemnitees that
are different from or in addition to those available to Borrower or if
Borrower fails to assume the defense of the action or proceeding or to
employ counsel reasonably satisfactory to such Indemnitee, in either
case in a timely manner, then the Indemnitee may employ separate
counsel to represent or defend it in any such action or proceeding and
Borrower shall pay the reasonable fees and disbursements of such
counsel. In any action or proceeding the defense of which Borrower
assumes, the Indemnitee shall have the right to participate in such
litigation and to retain its own counsel at the Indemnitee's own
expense. Borrower further agrees that it shall not, without the prior
written consent of the Indemnitee, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action,
suit or proceeding in respect of which indemnification may be sought
hereunder (whether or not an Indemnitee is an actual or potential party
to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes (i) an unconditional release of each
Indemnitee hereunder from all liability arising out of such claim,
action, suit or proceeding or (ii) a covenant not to sue each
Indemnitee, or another similar alternative which is consented to by
each Indemnitee party to such claim, action, suit or proceeding, which
covenant not to sue or other approved alternative has the effect of an
unconditional release of each Indemnitee hereunder from all liability
arising out of such claim, action, suit or proceeding.
(c) The provisions of this Section shall remain operative and in full
force and effect regardless of the expiration of the term of this
Agreement, the consummation of the transactions contemplated hereby,
the repayment of any of the Loans, the invalidity or unenforceability
of any term or provision of this Agreement or any other Loan Document,
or any investigation made by or on behalf of the Agent or any Lender.
All amounts due under this Section shall be payable on written demand
therefor.
<PAGE> 34
34
SECTION 7.06. Right of Setoff. If an Event of Default shall have
occurred and be continuing, Lender is hereby authorized at any time and from
time to time, to the fullest extent permitted by law, to set off and apply any
and all deposits (general or special, time or demand, provisional or final) at
any time held and other indebtedness at any time owing by Lender to or for the
credit or the account of Borrower against any of and all the obligations of
Borrower now or hereafter existing under this Agreement and other Loan Documents
held by Lender, irrespective of whether or not Lender shall have made any demand
under this Agreement or such other Loan Document and although such obligations
may be unmatured. The rights of Lender under this Section are in addition to
other rights and remedies (including other rights of setoff) which Lender may
have.
SECTION 7.07. APPLICABLE LAW. THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF MARYLAND WITHOUT REFERENCE TO ITS CONFLICTS OF LAWS PRINCIPLES OR
PROVISIONS.
SECTION 7.08. Waivers; Amendment. (a) No failure or delay of the Lender
in exercising any power or right hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of the Lender hereunder and under the
other Loan Documents are cumulative and are not exclusive of any rights or
remedies which they would otherwise have. No waiver of any provision of this
Agreement or any other Loan Document or consent to any departure by Borrower
therefrom shall in any event be effective unless the same shall be permitted by
Section 8.08(b), and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given. No notice or demand on
Borrower in any case shall entitle Borrower to any other or further notice or
demand in similar or other circumstances.
(b) Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to an agreement or agreements in
writing entered into by the Borrower and the Lender; provided, however,
that no such agreement shall (i) decrease the principal amount of, or
extend the maturity of or any scheduled principal payment date or date
for the payment of any interest on the Loan, or waive or excuse any
such payment or any part thereof, or decrease the rate of interest on
the Loan, without the prior written consent of each holder of a Note
affected thereby, or (ii) amend or modify the provisions of this
Section without the prior written consent of Lender. Lender and each
holder of a Note shall be bound by any waiver, amendment or
modification authorized by this Section regardless of whether its Note
shall have been marked to make reference thereto, and any consent by
Lender or holder of a Note
<PAGE> 35
35
pursuant to this Section shall bind any person subsequently acquiring a
Note from it, whether or not such Note shall have been so marked.
SECTION 7.09. Interest Rate Limitation. Notwithstanding anything herein
or in the Notes to the contrary, if at any time the applicable interest rate,
together with all fees and charges which are treated as interest under
applicable law (collectively the "Charges"), as provided for herein or in any
other document executed in connection herewith, or otherwise contracted for,
charged, received, taken or reserved by Lender, shall exceed the maximum lawful
rate (the "Maximum Rate") which may be contracted for, charged, taken, received
or reserved by Lender in accordance with applicable law, the rate of interest
payable under the Note held by Lender, together with all Charges payable to
Lender, shall be limited to the Maximum Rate.
SECTION 7.10. Entire Agreement. This Agreement and the other Loan
Documents constitute the entire contract between the parties relative to the
subject matter hereof. Any previous agreement among the parties with respect to
the subject matter hereof is superseded by this Agreement and the other Loan
Documents. Nothing in this Agreement or in the other Loan Documents, expressed
or implied, is intended to confer upon any party other than the parties hereto
and thereto any rights, remedies, obligations or liabilities under or by reason
of this Agreement or the other Loan Documents.
SECTION 7.11. Waiver of Jury Trial; Punitive Damages. Each party hereto
hereby waives, to the fullest extent permitted by applicable law, (a) any right
it may have to a trial by jury in respect of any litigation directly or
indirectly arising out of, under or in connection with this Agreement or any of
the other Loan Documents and (b) any claims for punitive damages (to the extent
such claims arise from the use of proceeds of the Loans for the purpose of
acquisitions). Each party hereto (i) certifies that no representative, agent or
attorney of any other party has represented, expressly or otherwise, that such
other party would not, in the event of litigation, seek to enforce the foregoing
waiver and (ii) acknowledges that it and the other parties hereto have been
induced to enter into this Agreement and the other Loan Documents, as
applicable, by, among other things, the mutual waivers and certifications in
this Section.
SECTION 7.12. Severability. In the event any one or more of the
provisions contained in this Agreement or in any other Loan Document should be
held invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein and therein
shall not in any way be affected or impaired thereby. The parties shall endeavor
in good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.
<PAGE> 36
36
SECTION 7.13. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall constitute an original but all of which
when taken together shall constitute but one contract, and shall become
effective as provided in Section 7.03.
SECTION 7.14. Headings. Article and Section headings and the Table of
Contents used herein are for convenience of reference only, are not part of this
Agreement and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.
SECTION 7.15. Jurisdiction; Consent to Service of Process; Judgment
Currency. (a) Borrower hereby irrevocably and unconditionally submits, for
itself and its property, to the nonexclusive jurisdiction of any Maryland State
court or Federal court of the United States of America sitting in Maryland, and
any appellate court from any thereof, in any action or proceeding arising out of
or relating to this Agreement or the other Loan Documents, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such Maryland court or, to the extent
permitted by law, in such Federal court. Each of the parties hereto agrees that
a final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that any
Lender may otherwise have to bring any action or proceeding relating to this
Agreement or the other Loan Documents against any Borrower or its properties in
the courts of any jurisdiction.
(b) Borrower hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, any objection
which it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this agreement or
the other Loan Documents in any Maryland or Federal court. Each of the
parties hereto hereby irrevocably waives, to the fullest extent
permitted by law, the defense of an inconvenient forum to the
maintenance of such action or proceeding in any such court.
SECTION 7.16. Confidentiality. Unless otherwise agreed to in writing by
the Company, Lender hereby agrees to keep all Proprietary Information (as
defined below) confidential and not to disclose or reveal any Proprietary
Information to any person other than the Lender's directors, officers,
employees, Affiliates and agents and to actual, and then only on a confidential
basis; provided, however, that Lender may disclose Proprietary Information (a)
as required by law, rule, regulation or judicial process, (b) to its attorneys
and accountants, (c) as requested or required by any state or Federal or foreign
authority or examiner regulating banks or banking or (d) subject to appropriate
confidentiality projections, in any legal proceedings between Lender and
Borrower arising out of this Agreement. For purposes of this Agreement, the
<PAGE> 37
37
term "Proprietary Information" shall include all information about the Borrower
or any of their Affiliates which has been furnished by Borrower or any of its
Affiliates, whether furnished before or after the date hereof, and regardless of
the manner in which it is furnished; provided, however, that Proprietary
Information does not include information which (x) is or becomes generally
available to the public other than as a result of a disclosure by Lender not
permitted by this Agreement, (y) was obtained or otherwise became available
Lender on a nonconfidential basis prior to its disclosure to Lender by Borrower
or any of its Affiliates or (z) becomes available to Lender on a nonconfidential
basis from a person other than Borrower or its Affiliates who, to the best
knowledge of Lender, as the case may be, is not otherwise bound by a
confidentiality agreement with Borrower or any of its Affiliates, or is not
otherwise prohibited from transmitting the information to Lender. If the
foregoing provision is inconsistent with the undertakings of the Borrower and
the Lender and their respective Affiliates in agreements executed in connection
with the Distribution, the confidentiality provisions of each agreement shall
also govern herein.
IN WITNESS WHEREOF, the Borrower and the Lender have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
CHOICE HOTELS INTERNATIONAL, INC.,
as Borrower,
By: ___________________________________
Name:
Title:
MNR FINANCE CORP., as Lender
By: ___________________________________
Name:
Title:
<PAGE> 38
EXHIBIT A
NOTE
$[ ] NEW YORK, NEW YORK
[ ], 1996
FOR VALUE RECEIVED, the undersigned [Name of Borrower], a [ ]
corporation ("Borrower"), hereby unconditionally promises to pay to the order of
MNR Finance Corp. (the "Lender"), the principal amount of [ ] dollars ($[ ]) on
the Maturity Date pursuant to the terms of the Loan Agreement referred to below.
The undersigned further promises to pay interest on the unpaid principal amount
hereof a rate of [ ]% per annum on the dates set forth in the Loan Agreement.
This Note is the Note referred to in the Loan Agreement dated
as of [ ], 1996 between the Borrower and the Lender (as the same may be amended
from time to time, the "Loan Agreement"). Terms used herein and not defined
shall have the meaning ascribed to such terms in the Loan Agreement. Reference
is made to the Loan Agreement for provisions for the prepayment hereof and the
acceleration of the maturity hereof.
This Note shall be governed by and construed and interpreted
in accordance with the New York law.
[Name of Borrower]
By: ___________________________
Name:
Title:
<PAGE> 39
SCHEDULE TO NOTE
of
[Name of Borrower]
Dated [ ], 1996
Amount Amount of
Notation
Date of Loan Principal Repaid Date
- ---- ------- ---------------- ----
Made By
- -------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE> 40
SCHEDULE A
List of Capital Contributions by Manor Care, Inc.
<PAGE> 41
SCHEDULE B
List of Owned Properties
<PAGE> 42
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I. DEFINITIONS...................................................................................... 2
SECTION 1.01. Defined Terms. ........................................................................ 2
SECTION 1.02. Terms Generally........................................................................ 11
ARTICLE II. .................................................................................................. 12
SECTION 2.01. Amount of the Loan..................................................................... 12
SECTION 2.02. The Note............................................................................... 12
SECTION 2.03. Optional Prepayments................................................................... 12
SECTION 2.04. Interest Rate and Payment Dates........................................................ 13
SECTION 2.05 Payments............................................................................... 13
SECTION 2.06. Indemnity.............................................................................. 13
SECTION 2.07. Taxes.................................................................................. 13
ARTICLE III. REPRESENTATIONS AND WARRANTIES................................................................... 15
SECTION 3.01. Authorization; No Violations........................................................... 15
SECTION 3.02. Enforceability......................................................................... 15
SECTION 3.03. No Material Misstatements. ............................................................ 15
ARTICLE IV. AFFIRMATIVE COVENANTS............................................................................ 15
SECTION 4.01. Existence; Businesses and Properties................................................... 16
SECTION 4.02. Insurance.............................................................................. 16
SECTION 4.03. Obligations and Taxes.................................................................. 16
SECTION 4.04. Financial Statements, Reports, etc..................................................... 17
SECTION 4.05. Litigation and Other Notices........................................................... 18
SECTION 4.06. ERISA.................................................................................. 18
SECTION 4.07. Maintaining Records; Access to Properties and Inspections.............................. 19
SECTION 4.08. Ownership.............................................................................. 19
ARTICLE V. NEGATIVE COVENANTS............................................................................... 19
SECTION 5.01. Indebtedness........................................................................... 19
SECTION 5.02. Liens.................................................................................. 21
SECTION 5.03. Sale and Lease-Back Transactions....................................................... 23
SECTION 5.04. Investments, Loans and Advances........................................................ 23
SECTION 5.05. Mergers and Consolidations............................................................. 24
SECTION 5.06. Asset Sales............................................................................ 25
SECTION 5.07. Transactions with Affiliates........................................................... 25
SECTION 5.08. Business of Borrower and Subsidiaries.................................................. 25
SECTION 5.09. Subsidiary Indebtedness................................................................ 25
</TABLE>
<PAGE> 43
<TABLE>
<S> <C>
SECTION 5.10. Agreements............................................................................. 26
SECTION 5.11. Fiscal Year and Accounting Practices................................................... 26
SECTION 5.12. No Further Negative Pledges............................................................ 26
SECTION 5.13. Minimum Consolidated Net Worth......................................................... 26
SECTION 5.14. Consolidated Leverage Ratio. .......................................................... 27
SECTION 5.15. Consolidated Interest Coverage Ratio................................................... 27
SECTION 5.16. Dividends and Distributions............................................................ 27
ARTICLE VII. MISCELLANEOUS.................................................................................... 31
SECTION 7.01. Notices................................................................................ 31
SECTION 7.02. Survival of Agreement.................................................................. 31
SECTION 7.03. Binding Effect......................................................................... 32
SECTION 7.04. Successors and Assigns................................................................. 32
SECTION 7.05. Expenses; Indemnity.................................................................... 32
SECTION 7.06. Right of Setoff........................................................................ 34
SECTION 7.07. Applicable Law......................................................................... 34
SECTION 7.08. Waivers; Amendment..................................................................... 34
SECTION 7.09. Interest Rate Limitation............................................................... 35
SECTION 7.10. Entire Agreement....................................................................... 35
SECTION 7.11. Waiver of Jury Trial; Punitive Damages................................................. 35
SECTION 7.12. Severability........................................................................... 35
SECTION 7.13. Counterparts........................................................................... 36
SECTION 7.14. Headings............................................................................... 36
SECTION 7.15. Jurisdiction; Consent to Service of Process; Judgment Currency. ....................... 36
SECTION 7.16. Confidentiality. ...................................................................... 36
</TABLE>
Exhibit A Note
Exhibit B Assignment and Acceptance
<PAGE> 1
EXHIBIT 10.12
RISK MANAGEMENT CONSULTING SERVICES AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of
____________, 1996 by and between MANOR CARE, INC., a Delaware corporation
("Manor"), and CHOICE HOTELS HOLDINGS, INC., a Delaware corporation ("Choice").
In consideration of the mutual covenants contained herein, and other
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Choice and Manor agree as follows:
1. Definitions.As used in this Agreement, the following capitalized terms
shall have the meanings indicated unless the context requires otherwise:
"Distribution" means the distribution to the holders of Manor Care
Common Stock all the outstanding shares of Choice Common Stock.
"Distribution Date" means the date determined by the Board of
Directors of Manor as the date on which the Distribution shall be
effected.
"Prime Rate" shall be the rate identified from time to time in the
New York edition of the Wall Street Journal as being the Prime Rate of
interest.
2. Description of Services
Manor agrees to provide the following risk management consulting services:
Insurance Renewals - Domestic and International: Negotiate the
renewal and placement of property and casualty insurance including property,
boiler, crime, auto liability, general liability, workers' compensation,
umbrella liability and directors and officers liability. This includes
assembling historical loss information and renewal information, calculation of
values, evaluation and negotiation of proposals, premiums and coverages with
brokers and underwriters on behalf of Choice.
Contract Review: Review insurance, indemnity and bond provisions of
proposed contracts as requested. Assist attorneys or others to negotiate
acceptable terms.
Surety Bond Procurement: Assist Choice managers with bond
applications and procedures, request bonds from broker, have bonds executed and
delivered to requesting party. Maintain bond log and schedule. Obtain renewals
or releases of expired bonds, review and approve accuracy of premium invoices.
Certificate Tracking: Monitor licensee certificate tracking program.
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Financial and Regulatory Support: Provide the following accounting
services:
- Annual/quarterly state compliance reports on outstanding
self-insurance liabilities incurred.
- Provide internal reporting associated with outstanding losses,
accounts receivable, LOC and Surety Bond requirements.
Premium and Claims Payment Processing and Reimbursement: Manor shall
process payments on behalf of Choice for Choice's financial obligations under
policies and self-insurance plans with an effective date on or after the
Distribution Date. Reimbursement for all such policies and self-insurance plans
shall be as follows:
(1) Invoices for premiums and services related to such policies and plans
shall be paid within five (5) days of receipt by Choice;
(2) An escrow account shall be established for the payment of claims. This
account will be structured to allow for three (3) months average claims
payments. The replenishment in whole or in part, shall be due to Manor on
the first day of each month, unless the account is in negative balance,
thereby requiring replenishment within forty-eight (48) hours.
Risk Management Resource: Provide research, advice and counsel to Choice
as requested on insurance and risk management related issues, both domestically
and internationally. Review insurance coverage, policies and provide risk
management services listed below:
Certificates of Insurance Review (contractors)
Certificates of Insurance Issuance
Administration of prior programs
Actuarial Review of liabilities
Self Administer Workers' Compensation claims in PA
Monitor Claims (Set reserves, settle claims)
Handle first party claims (Property, Crime, etc.)
Oversee Auto Claims against others
Oversee claims against contractors and/or subcontractors
Self Insurance Filings and Assessments
Oversee Franchise Property and Casualty and Group Insurance Programs
Contract Review and Development
Negotiate and contract with outside services as needed (Brokers, Claims
Adjusters, Managed Care)
Safety and Loss prevention
Budgeting and Allocation of premiums
IOC Policies (Crime and Directors and Officers) and contractual issues
Potential development of International Franchise insurance program
Review Franchise Agreements and recommend appropriate wording
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Determine loss estimates for future years
Any other Risk Management related duties as deemed applicable
All services provided hereunder shall be administered in accordance with
Manor's standard policies, procedures and practices in effect as of the
Distribution Date and as the same may be changed from time to time. In providing
such services, Manor shall follow commonly accepted standards of care in the
industry and exercise the same care and skill as it exercises in performing like
services for itself. Choice shall adopt reasonable measures to limit its
exposure with respect to any potential Losses (defined below).
Manor agrees to provide such services only if it reasonably believes the
service will not interfere with the conduct of the business of Manor or pose an
unreasonable burden.
3. Term. The term of this Agreement shall commence on the Distribution
Date and shall remain in effect through the end of the first full Fiscal Year
immediately following the Distribution Date. Unless terminated pursuant to the
terms hereof, the Agreement shall automatically renew each Fiscal Year
thereafter for the extended term of said Fiscal Year and shall not extend past
the last day of the thirtieth (30th) month following the Distribution; provided,
however, that Choice may terminate this agreement or any services provided
hereunder at any time for any reason or no reason by sending 60 days prior
written notice to Manor. This Agreement may also be terminated in the event of a
default (past the expiration of any applicable cure period provided herein) in
accordance with the provisions of this Agreement.
4. Fees; Premiums.
Fees will be $438,000 per year, prorated through May 31, 1997, payable in
equal monthly installments. Fiscal year fees will be determined within sixty
(60) days prior to the commencement of the subsequent Fiscal Year. Fees for
services rendered in addition to those specified hereunder shall be mutually
agreed upon by Manor and Choice based upon appropriate supporting
documentation. In addition, Choice shall pay Manor for all insurance premiums,
self-insurance and administrative costs.
Payments hereunder shall be made by Choice to Manor within 30 days of
receipt of invoice for payment (with appropriate supporting documentation if
requested). Any payments not made by Choice to Manor when due shall bear
interest, computed daily, from the date due to the date of payment based on the
annual percentage rate equal to the Prime Rate, as same may vary from time to
time, plus two (2) percentage points.
Payment for all policies and self insurance plans with an effective date
on or after Distribution Date shall be payable as follows:
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1) Invoices for premiums and services related to such policies and plans
shall be paid within 5 days of receipt by Choice.
2) An escrow account shall be established for the payment of claims. This
account will be structured to allow for three (3) months average claims
payments, and the replenishment, in whole or in part, shall be due to
Manor on the first of each month, unless the account is in negative
balance, requiring replenishment within 48 hours.
5. Termination.
If either party materially defaults hereunder, the non-defaulting party
may terminate this Agreement effective immediately (subject to the cure periods
set forth herein below) upon written notice to the defaulting party. The
non-defaulting party shall be entitled to all remedies provided by law or equity
(including reasonable attorneys' fees and costs of suit incurred). The following
events shall be deemed to be material defaults hereunder:
(a) Failure by either party to make any payment required to be made to the
other hereunder, which failure is not remedied within five (5) days after
receipt of written notice thereof; or
(b) Except as otherwise provided herein, failure by either party
substantially to perform in accordance with the terms and conditions of
this Agreement, which failure is not remedied within thirty (30) days
after receipt of written notice from the other party specifying the nature
of such default; or
(c) (i) Filing of a voluntary bankruptcy petition by either party; (ii)
filing of an involuntary bankruptcy petition against either party which is
not timely controverted and results in the entry of an order for relief;
(iii) assignment for the benefit of creditors made by either party; or
(iv) appointment of a receiver for either party.
6. Disclaimers; Limitation of Liability; Indemnification.
The following disclaimers, limitation of liability and indemnification
provisions shall apply during the term of this Agreement:
(a) MANOR DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT
LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE, WITH RESPECT TO THE SERVICES. Manor shall use
reasonable efforts to perform the services in a professional and
workmanlike manner and in accordance with the standard of care set forth
herein but the results of the services are furnished "as is."
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(b) With regard to Losses arising out of errors or omissions in the
provision of services which are caused by Manor, Manor's sole liability to
Choice for such Losses shall be to furnish correct information, payment
and/or adjustment in the services, at no additional cost or expense to
Choice; provided, Choice must promptly advise Manor of any such error or
omission of which it becomes aware after having used reasonable efforts to
detect any such errors or omissions in accordance with the standard of
care set forth herein. If it is determined that Manor is not guilty of any
errors or omissions, it will be the responsibility of Choice to reimburse
Manor for any costs and expenses incurred.
(c) With regard to Losses arising out of the unavailability, delay or
interruption of any services for any reason beyond Manor's reasonable
control, Manor's sole liability to Choice for such Losses shall be to use
reasonable efforts to make the services available and/or to resume
performing the services as promptly as reasonably practicable and at no
additional charge to Choice.
(d) EXCEPT FOR ITS OBLIGATION TO COMPLY WITH SUBPARAGRAPHS (a),
(b), and (c),
(i) MANOR SHALL NOT BE LIABLE FOR ANY ERRORS, OMISSIONS, DELAYS, OR
LOSSES UNLESS CAUSED SOLELY BY ITS CRIMINAL CONDUCT, FRAUD, BAD
FAITH OR GROSS NEGLIGENCE. CHOICE AGREES THAT IN NO EVENT WILL MANOR
BE LIABLE FOR INCIDENTAL, INDIRECT, SPECIAL, OR CONSEQUENTIAL
DAMAGES.
(ii) CHOICE FURTHER AGREES THAT IN NO EVENT WILL THE TOTAL AGGREGATE
LIABILITY OF MANOR FOR ANY AND ALL CLAIMS, LOSSES, OR DAMAGES
ARISING UNDER THIS AGREEMENT AND FOR THE SERVICES PERFORMED
HEREUNDER EXCEED THE VALUE OF CHOICE'S PAYMENT FOR SAID SPECIFIC
SERVICE OVER ONE FOUR-WEEK ACCOUNTING PERIOD'S TIME.
(e) CHOICE AGREES TO INDEMNIFY, DEFEND AND HOLD HARMLESS MANOR (ITS
DIRECTORS, OFFICERS, EMPLOYEES AND ATTORNEYS) FROM ALL LOSSES (AS DEFINED)
ASSERTED BY OR ON BEHALF OF THIRD PARTIES OR WHICH RESULT FROM
GOVERNMENTAL ACTION OTHER THAN ANY SUCH LOSSES CAUSED BY MANOR'S SOLE
CRIMINAL CONDUCT, FRAUD, BAD FAITH OR GROSS NEGLIGENCE. THE PROVISIONS OF
THIS INDEMNITY SHALL APPLY ONLY TO LOSSES (AS DEFINED) WHICH RELATE
DIRECTLY TO THE PROVISION OF THE SERVICES.
(f) With regard to either parties' indemnification, the party required to
indemnify pursuant to this Section (the "Indemnitor"), upon demand by the
other party ("Indemnitee"), at its sole cost and expense, shall resist or
defend such claim, action or proceeding (in the Indemnitee's
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name, if necessary), using such attorneys as the Indemnitee shall approve,
which approval shall not be unreasonably withheld. If, in the Indemnitee's
reasonable opinion, there exists a conflict of interest which would make
it inadvisable to be represented by counsel for the Indemnitor, the
Indemnitor and the Indemnitee shall jointly select acceptable attorneys,
and the Indemnitor shall pay the reasonable fees and disbursements of such
attorneys.
(g) The foregoing provisions of this Section set forth the full extend of
the parties' liability (monetary or otherwise) under the Agreement for any
and all Losses.
For purposes of this Agreement, "Losses" shall mean any and all suits,
debts, causes of action, losses, liabilities, claims or demands (whether at law
or in equity), and any damages, settlement, judgment, penalty or other
disposition of the same, and all costs and expense of the same (including,
without limitation, attorneys' fees but in no situation whatsoever shall Manor
be liable to Choice for incidental, indirect, special or consequential damages),
which arise from or are related to the services of this Agreement.
7. Representatives.
Choice and Manor hereby appoint the two managerial level Representatives
to facilitate communications and performance hereunder. Each party may treat an
act of a Representative of the other party as being authorized by such other
party without inquiring behind such act or ascertaining whether such
Representative had authority to so act. The initial Representatives are named
below and either party may change its Representative by providing the other
party notice.
INITIAL REPRESENTATIVES
_________________________________________ - Manor
_________________________________________ - Choice
8. Governing Law.
This Agreement shall be governed by Maryland law, without reference to its
conflict of laws principles.
9. Commercially Reasonable Terms and Conditions.
The terms and provisions of this Agreement are intended to reflect
commercially reasonable terms and conditions (including, but not limited to,
pricing) that are at least as favorable and as competitive to Choice as the
terms and conditions Manor would grant or require of third parties for
substantially similar goods and services.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CHOICE HOTELS HOLDINGS, INC., a
Delaware corporation
By:______________________________________
Name:____________________________________
Title:____________________________________
MANOR CARE, INC., a
Delaware corporation
By:______________________________________
Name:____________________________________
Title:___________________________________
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EXHIBIT 10.14
TAX SHARING AGREEMENT
THIS AGREEMENT, executed this ____ day of ________________, 1996, is
entered into by and among Choice Hotels Holdings, Inc. (to be renamed Choice
Hotels International, Inc.), a Delaware corporation ("Choice"), Manor Care,
Inc., a Delaware corporation, ("Manor"), and all direct and indirect
subsidiaries of one or both of Choice and Manor.
RECITALS
A. Choice, Manor, and the subsidiaries of Choice and Manor have
heretofore joined in filing consolidated federal income tax returns under the
Internal Revenue Code of 1986, as amended (the "Code"), and the applicable
Treasury Regulations promulgated thereunder by the Treasury Department (the
"Regulations") and have heretofore joined in filing certain consolidated,
combined, and unitary state income tax returns.
B. Pursuant to the Distribution Agreement of even date herewith between
Choice and Manor, Manor will distribute all of its stock in Choice to the common
shareholders of Manor in a transaction intended to qualify for tax free
treatment under Section 355 of the Code, and Choice and its subsidiaries will
therefore leave the affiliated group (within the meaning of Section 1504(a) of
the Code) of corporations (the "Manor Group") of which Manor is the common
parent.
C. The parties hereto desire to allocate their respective federal,
state, and local income tax liabilities, assessed in connection with the filing
of returns, including but not limited to consolidated, unitary, combined, or
separate returns, among themselves for the following fiscal years: (a) the
fiscal year ending May 31, 1996 ("FY 1996"); (b) the fiscal year commencing on
June 1, 1996 and ending on May 31, 1997 ("FY 1997"); (c) where relevant, the
fiscal year ending on the Distribution Date ("Stub 97"); and (d) where relevant,
the fiscal year commencing on the day after the Distribution Date and ending on
May 31, 1997 ("Short 97").
D. The parties hereto desire to provide for the compensation and
reimbursement of each other for federal and state income tax deficiencies paid,
by one party hereto although allocated pursuant to this Agreement to the other,
(plus interest and penalties) or refunds received (plus interest) as a result of
audits by the Internal Revenue Service (the "Service") and other taxing
authorities and judicial determination, if any, involving consolidated federal
and state income tax returns ("Joint Return Deficiencies/Refunds").
E. The parties hereto desire to provide and fix the responsibilities
for: (1) the preparation and filing of tax returns along with the payments of
taxes shown to be due and payable thereon (as well as estimated or advance
payments required prior to the filing of said returns) for all periods prior and
subsequent to the Distribution Date; (2) the retention and maintenance of all
relevant records necessary to prepare and file appropriate tax returns, as well
as providing for appropriate access to those records for all parties to this
Agreement; (3) the conduct of audits, examinations, and
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proceedings by appropriate governmental authorities which could result in a
redetermination of tax liabilities (for all periods prior to or subsequent to
the Distribution Date) of any party to this Agreement; and (4) the cooperation
of all parties with one another in order to fulfill their duties and
responsibilities under this Agreement and under applicable law.
NOW THEREFORE, the parties agree as follows:
SECTION 1. DEFINITIONS.
As used herein, the following terms shall have the following meanings:
(a) "Affiliated Group" shall have the meaning attributed to that
term in Section 1504 of the Code, determined without regard to
Section 1504(b) of the Code.
(b) "Manor Group" shall mean the group of corporations at any given
time (either prior to, or subsequent to, the Distribution)
consisting of the Affiliated Group of which Manor is the Common
Parent.
(c) "Code" is defined in the preamble.
(d) "Common Parent" shall have the meaning attributed to that term
in the Consolidated Return Regulations (Treas. Reg. Section
1.1502-1 et seg.) promulgated pursuant to Section 1502 of the
Code.
(e) "Consolidated Return Regulations" is defined in section 4
hereof.
(f) "Distribution" shall mean the distribution by Manor of all its
stock in Choice to its shareholders.
(g) "Distribution Date" shall mean the date on which the
Distribution occurs.
(h) "Choice" is defined in the preamble.
(i) "Choice Group" shall mean the group of corporations immediately
after the Distribution Date consisting of the Affiliated Group
of which Choice is the Common Parent, as well as all other
corporations which would be included in such group subsequent to
the Distribution.
(j) "I.R.S." or "Service" shall mean the Internal Revenue Service.
(k) "Joint Contest" shall mean a Tax Contest seeking a
redetermination of Taxes involving one or more Members
(determined by reference to the time period for which such
return was filed) of the Manor Group and one or more Members of
the Choice Group,
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whether such corporations joined in the filing of returns on a
consolidated, combined, or unitary basis or otherwise.
(l) "Joint Return Deficiencies/Refunds" is defined in the preamble.
(m) "Member" shall have the meaning attributed to that term in
Section 1.1502-1(b) of the Regulations, but without regard to
whether a corporation qualifies to be a Member of an Affiliated
Group under Section 1504(b) of the Code.
(n) "Minimum Tax Credit" is defined in section 5 hereof.
(o) "Regulations" is defined in the preamble.
(p) "Separate Contest" shall mean a Tax Contest involving only
Members of either the Manor Group or the Choice Group.
(q) "Tax Attributes" shall mean any losses, credits and other tax
attributes that may be carried forward or back by any Member of
the Manor Group or the Choice Group on a separate return or
consolidated basis to a taxable year other than the taxable year
in which such attribute is recognized, including, but not
limited to, net operating losses, alternative minimum tax
credits, targeted jobs tax credits, investment tax credits,
foreign tax credits, research and development credits, and
similar credits under state or local law.
(r) "Taxes" shall mean (i) all federal income taxes and state,
local, and foreign income and franchise taxes (or taxes in lieu
thereof) plus (ii) any penalties, fines or additions to tax with
respect thereto, plus (iii) any interest with respect to the
items contained in (i) and (ii).
(s) "Tax Contest" shall mean an audit, review, examination or the
like, inclusive of litigation, with the purpose of redetermining
taxes of any corporation (without regard to whether such matter
was initiated by an appropriate taxing authority or in response
to a claim for refund by one or more corporations).
SECTION 2. COMPUTATION OF TAX; ALLOCATION OF CERTAIN YEARS' TAXES
(a) Computations & Elections. In determining the federal and state
income tax liabilities of the Manor Group and its Members for FY
1996, FY 1997, and where relevant, Stub 97 and Short 97, the
computations of the tax liabilities of the Manor Group and its
Members shall, to the extent permitted by law, be made in
accordance with the methods used in the consolidated returns
which include Manor and Choice for the fiscal years ending prior
to the beginning of FY 1996.
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(b) Allocation of Tax (i) The taxes assessed pursuant to the
returns described in the preceding subsection will be allocated
among the Members of the Manor Group pursuant to the Manor
Group's historic tax allocation method, described in section
1552(a)(2) of the Code and section 1502-33(d)(2)(ii) of the
Regulations.
(ii) With respect to FY 1997, if the consolidated tax liability
of the Manor Group for FY 1997 (the "97 Manor Liability") is
less than the sum of the taxes allocated for FY 1997 to Choice
and its subsidiaries pursuant to section 2(b)(i) hereof (the
"Choice Separate Allocations"), the amounts allocated pursuant
to section 2(b)(i) to Choice and its subsidiaries will be
reduced by an amount equal to the excess of the Choice Separate
Allocations over the 97 Manor Liability.
(iii) With respect to the state and local taxes which are
determined on a combined or unitary basis, similar principles as
those described in section 2(b)(i) and (ii) shall govern the
allocation of such tax liabilities among the parties hereto.
(c) Post-Distribution Date Allocations and Payments. (i) The
final allocations of FY 1996 Taxes and FY 1997 Taxes (to be made
by Manor for FY 1996 and FY 1997) will be made not later than 90
days following the filing of the Federal consolidated income tax
return of the Manor Group for such period. With respect to the
final allocations of FY 1996 and FY 1997 Taxes, Choice and/or
its subsidiaries shall make payments to Manor and/or its
subsidiaries, or receive payments from Manor and/or its
subsidiaries based on the following principles:
(1) the payment shall equal the amount of the adjustments, if
any, to taxable income or loss of Members of the Choice
Group multiplied by the applicable highest marginal rate
of taxation in effect for the period for which the
adjustment is made; or
(2) in the case of adjustments to credits, the payments made
or received shall be in an amount equal to the
adjustments, if any, of the credit of Members of the
Choice Group.
SECTION 3. SEPARATE COMPANY LIABILITIES.
Notwithstanding the provisions of section 2 hereof, for all years
through and including FY 1997, Taxes (including income taxes imposed by state or
foreign jurisdictions or political subdivisions thereof) imposed upon Choice or
any of its direct and indirect subsidiaries and which are determined or assessed
on a separate company basis will be the separate liability of Choice or such
subsidiary and not subject to allocation or sharing among other Members of the
Manor Group.
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SECTION 4. ALLOCATION OF TAX ATTRIBUTES.
All Tax Attributes of the Manor Group will be allocated among Manor,
Choice, and their respective subsidiaries in accordance with the Regulations
promulgated pursuant to Section 1502 of the Code or analogous provisions of
state, local, or foreign law (the "Consolidated Return Regulations").
SECTION 5. CARRYBACKS OF TAX ATTRIBUTES.
(a) Choice Carrybacks. If for any taxable year beginning on or after
the Distribution Date, Choice or any Member of the Choice Group
recognizes a Tax Attribute which Choice or such Member of the
Choice Group, under the applicable provisions of the Code and
Treasury Regulations promulgated under Section 1502 thereof, is
permitted or required to carry back to a prior Taxable year of
the Manor Group or the prior Taxable year of a Member of the
Manor Group (either on a consolidated or separate return basis)
Manor (or a Member of the Manor Group) shall file appropriate
refund claims within a reasonable period after being requested
by Choice with the consent of Manor, which consent shall not be
unreasonably withheld. Manor (or the Member of the Manor Group
receiving such refund) shall promptly remit to Choice any refund
of Taxes it receives with respect to any Tax Attribute so
carried back.
(b) Manor Carrybacks. If for any taxable year Manor or a Member of
the Manor Group recognizes a Tax Attribute which Manor or the
Member of the Manor Group, under the applicable provision of the
Code and Consolidated Return Regulations is permitted or
required to carry back to one of its prior taxable years, Manor
or the Member of the Manor Group may file appropriate refund
claims and shall be entitled to any refund of Taxes resulting
from such claims.
SECTION 6. CONDUCT OF TAX CONTESTS.
(a) "Joint Contests."
(i) The conduct of Joint Contests shall be the responsibility of
Manor. Choice, as the common parent of the Choice Group or
otherwise, agrees to take all such actions and to cause its
subsidiaries to take all such actions as may be necessary to
permit Manor to conduct such contests.
(ii) In the case of a Joint Contest of a consolidated federal or
state income tax return which included Choice and/or its
subsidiaries, Choice and/or its subsidiaries as appropriate,
shall be notified by Manor of such Tax Contest and shall be
entitled to
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participate, at their own expense, in contesting all relevant
items that affect the tax liability or tax attributes of such
entities with respect to such Tax Contest in administrative and
judicial proceedings. Choice and its subsidiaries agree to
notify Manor of any actual or proposed Tax Contest of a
consolidated federal or state income tax return of the Manor
Group for any period ending on or before May 31, 1997. Choice
will, and shall cause any of its subsidiaries to cooperate in
connection with any such Tax Contest. Manor and Choice shall
share jointly in any decisions involved in connection with
settlements of tax disputes to the extent that items are
involved that affect the tax, penalty, or interest liability or
tax attributes of Choice or its subsidiaries. Manor may not
agree to settle such a dispute without the consent of Choice
unless Manor releases Choice from its liability to pay its share
of the disputed amount hereunder. If both parties agree to
contest a tax matter, then the costs of contesting the matter
shall be borne equally by each party. If only one party requests
the contest of a tax matter, the party requesting the contest
shall bear its expenses associated with such contest; provided
however, that the other party will agree to cooperate with the
contesting party, and further provided that the non-contesting
party shall bear its own costs and expenses, if any, and shall
not be entitled to reimbursement for the fair cost of its own
employees related to its participation in, or cooperation with
the contesting party in such contest.
(b) Separate Contests. Any Separate Contests with respect to tax
returns filed by any Member of either the Choice Group or Manor
Group on a separate company basis shall be conducted by the
entity which filed such tax return (or the Common Parent of the
Affiliated Group of which such entity is a Member at the time of
such contest), and such entity shall have sole and compete
authority to conduct such contest, including the authority to
negotiate with and enter into settlements with any Taxing
authority. If at any point of the proceedings of a "Separate
Contest," it becomes a Joint Contest, then it shall thereafter
be conducted as a Joint Contest.
(c) Cooperation. Choice (and the Member of the Choice Group and
Manor (and the Members of the Manor Group) shall each provide
the assistance reasonably requested by other with respect to
conducting any Tax Contest, including providing access to books,
records, tax returns and supporting work papers and providing
any powers of attorney required to conduct any Tax Contest.
SECTION 7. REDETERMINED TAX LIABILITIES.
In the event of a redetermination of federal, state or local income tax
liabilities as a result of audits by the Service or other taxing authority
and/or judicial determinations, payments in connection therewith, if any, made
or received by or among Choice, Manor, and their respective subsidiaries, shall
be governed by the following principles:
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(a) Upon the redetermination of any tax liability upon audit,
examination, etc. the redetermined liability will be borne by
(that is, any increases in liability will be paid by, and any
decreases in liability will be received by) the applicable
entities in the case of matters arising out of Separate
Contests.
(b) In the case of liabilities redetermined with respect to
consolidated, combined, or unitary returns, which
redeterminations are Joint Contests, the increase to the
liabilities shall be paid to the relevant taxing authority by,
and the decreases received from the relevant taxing authority
shall be paid to, Manor and/or its subsidiaries. Whether or not
a payment is required to or from a relevant taxing jurisdiction
and subject to the provisions of section 7(c) hereof, Choice
and/or its subsidiaries shall make payments to Manor and/or its
subsidiaries, or receive payments from Manor and/or its
subsidiaries based on the following principles:
(1) the payment shall equal the amount of the adjustments, if
any, to taxable income or loss of Members of the Choice
Group multiplied by the applicable highest marginal rate
of taxation in effect for the period for which the
adjustment is made; or
(2) in the case of adjustments to credits, the payments made
or received shall be in an amount equal to the
adjustments, if any, of the credit of Members of the
Choice Group.
(c) If there is a redetermination of tax liabilities in connection
with either a Joint Contest or a Separate Contest, and as a
result thereof there is an adjustment to credits or attributes
allocated among the parties hereto pursuant to section 4 hereof,
Manor shall make a payment to Choice equal to the amount of any
resulting reduction in items allocated to Members of the Choice
Group to the extent such reduction is attributable to income
adjustments to Members of the Manor Group and Choice shall make
a payment to Manor equal to the amount of any resulting
reduction in items allocated to Members of the Manor Group to
the extent such reduction is attributable to income adjustments
to Members of the Choice Group.
(d) Any liability arising from adjustments to income made by (1)
treating the Distribution as a taxable distribution of property
or (2) recognizing "boot" in connection with the reorganization
of, and the transfer of assets and liabilities to, Choice
precedent to the Distribution shall be borne entirely by Choice.
SECTION 8. RETENTION OF RECORDS: ACCESS TO RECORDS; COOPERATION
AND ASSISTANCE.
(a) Retention of Records.
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(i) Duties of Choice. Choice shall retain all tax returns, tax
reports, related work papers and all schedules (along with all
documents that pertain to any such tax returns, reports or work
papers) which relate to a tax period ending on or before May 31,
1997. Choice shall make such documents available to Manor and/or
its subsidiaries at Manor's request. Choice shall not dispose of
such documents without the permission of Manor.
(ii) Duties of Manor. Manor shall retain all tax returns, tax
reports, related work papers and all schedules (along with all
documents that pertain to any such tax returns, reports or work
papers) which relate to a tax period ending on or before May 31,
1997. Manor shall make such documents available to Choice and/or
its subsidiaries at Choice's request. Manor shall not dispose of
such documents without the permission of Choice.
(b) Access to Records.
(i) Duties of Choice. Choice will permit Manor or its
subsidiaries, or their designated representative, to have access
at any reasonable time and from time to time, after the
Distribution Date, to all relevant tax returns and supporting
papers therefor of Choice and the other members of the Choice
Group (as they were constituted immediately prior to the
Distribution Date) in respect of periods ending on or before the
Distribution Date, wherever located, and furnish, and request
that the independent accountants of Choice or any of the member
of the Choice Group furnish, to Manor and its subsidiaries, as
the case may be, such additional tax and other information and
documents with respect to consolidated federal and state income
tax returns filed in respect of periods ending on or before May
31, 1997, as Manor or any of its subsidiaries may from time to
time reasonably request.
(ii) Duties of Manor. Manor will permit Choice or its
subsidiaries, or their designated representative, to have access
at any reasonable time and from time to time, after the
Distribution Date, to all relevant tax returns and supporting
papers therefor of Manor and the other members of the Manor
Group (as they were constituted immediately prior to the
Distribution Date) in respect of periods ending on or before the
Distribution Date, wherever located, and furnish, and request
that the independent accountants of Manor or any of the member
of the Manor Group furnish, to Choice and its subsidiaries, as
the case may be, such additional tax and other information and
documents with respect to consolidated federal and state income
tax returns filed in respect of periods ending on or before May
31, 1997, as Choice or any of its subsidiaries may from time to
time reasonably request.
(c) Assistance and Cooperation. Manor (and Members of the Manor
Group) and Choice (and Members of the Choice Group) will provide
each other with such cooperation, assistance and information as
either of them reasonably may request of the other with respect
to the filing of any tax return amended return, claim for refund
or other document with any taxing authority. With respect to the
federal consolidated tax return
8
<PAGE> 9
or any combined state tax return filed by Manor for tax periods
which begin before the Distribution Date and end after the
Distribution Date, such assistance shall include the timely
submission by Choice to Manor of pro forma tax returns for
Choice and each Member of the Choice Group, prepared on the
basis that each such Member's tax period ended on the
Distribution Date.
SECTION 9. PREPARATION OF TAX RETURNS: ESTIMATED PAYMENTS.
(a) FY 1996. Manor and Choice shall work together to prepare the
consolidated, separate, and combined returns for FY 1996. It
shall be the responsibility of Manor to timely file such returns
and to make any payments required in connection with the
consolidated and combined returns to the applicable taxing
authorities.
(b) FY 1997. Manor shall prepare and timely file the consolidated
returns for FY 1997. In connection with the preceding sentence,
Choice and its subsidiaries will, on or prior to December 15,
1997 with respect to the Stub 97: (1) furnish to Manor all
information and documentation (with respect to Choice and its
subsidiaries) necessary or useful in the preparation of the
consolidated federal and state income tax returns for the Manor
Group for FY 1997; (2) permit Manor to have access at any
reasonable time and from time to time, after the Distribution
Date, to all tax returns and supporting papers therefor of
Choice and its subsidiaries, wherever located; and (3) furnish
to Manor such additional tax and other information and documents
in the possessions of such companies, with respect to
consolidated federal and state income tax returns filed in
respect of periods including or ending before the Distribution
Date, as Manor may from time to time reasonably request. Choice
will, and shall cause its subsidiaries to, cooperate in
connection with the preparation of the consolidated federal and
state income tax returns of the Manor Group for FY 1997. It
shall be the responsibility of Manor to make any payments
required in connection therewith to the applicable taxing
authorities. Choice and its subsidiaries shall file its own tax
returns which are filed on a separate or combined basis for FY
1997. Manor and its subsidiaries shall prepare and file its own
tax returns which are filed on a separate or combined basis for
FY 1997.
(c) Taxable Period Before FY 1996. All tax returns of the Manor
Group which are filed on a consolidated or combined basis for
tax periods ending before May 31, 1996 were prepared and filed
by Manor. Manor shall be solely responsible for the payment of
all Taxes for such periods. Manor shall not file or amend such
consolidated or combined tax returns without affording Choice
the opportunity to review and comment on such tax returns to the
extent that the tax liabilities relating to such returns are, or
could be allocated, assessed or charged to Choice and/or any of
its subsidiaries, whether such allocation, assessment, or charge
is by law or by contract or agreement.
9
<PAGE> 10
(d) Post-Distribution Date Taxable Years.
(i) Choice's Separate Returns. All tax returns of the Choice
Group which are filed on a consolidated, separate or combined
basis for Choice and/or any of its subsidiaries for tax periods
beginning on or after the Distribution Date shall be prepared
and filed by Choice. Choice shall be solely responsible for the
payment of all Taxes due with respect to such tax returns for
such tax periods.
(ii) Manor's Separate Returns. All tax returns of the Manor
Group which are filed on a consolidated, separate, or combined
basis for Manor and/or any of its subsidiaries for tax periods
beginning on or after the Distribution Date shall be prepared
and filed by Manor. Manor shall be solely responsible for the
payment of all Taxes due with respect to such tax returns for
such tax periods.
(e) Estimated Payments. All payments (including estimated payments
or payments made in connection with requests for extensions of
time to file such returns) made subsequent to the date hereof
with respect to consolidated, combined, or unitary income tax
liabilities of the Manor Group and its Members for FY 1996 and
FY 1997 shall be made by Manor. Manor shall promptly thereafter
notify Choice of the portion, if any, of such payment which it
in good faith believes to be attributable to Choice's share of
the FY 1996 and FY 1997 liability, as determined under the
provisions of section 2 hereof. Choice shall thereafter promptly
pay such amount to Manor or advise Manor of the basis for its
disagreement. Choice must make estimated payments for its Group
for periods beginning on/after the Distribution Date.
SECTION 10. PAYROLL TAX REPORTING AND WITHHOLDING IN STOCK OPTIONS.
(a) Upon the exercise of any nonqualified stock option covered by
Employee Benefits and Other Employment Matters Allocation
Agreement, the employer of the employee exercising such option
shall be responsible for collecting from the employee and timely
remitting to the applicable taxing authority any required
income, employment, payroll, or other tax withholding with
respect to the income to be recognized by such employee as a
result of such exercise, and shall include on such employee's
initial wage statement or other payroll tax reporting form for
the calendar year in which the option is exercised, the amount
of such income and withholdings. In addition, upon the exercise
of any unqualified stock option covered by the Employee
Benefits and Other Employee Matters Allocation Agreement, the
employer of the employee exercising such option shall be
responsible for paying to any applicable taxing authority any
taxes imposed on an employer in connection with such exercise.
If an employee exercises an option with respect to, other than
his or her employer's stock, then the issuer of that stock
shall be required to provide the employer with information
sufficient to allow the employer to satisfy its withholding
and reporting obligations, including, without limitation, the
number of option shares exercised, the fair market value of
the issuer's stock on the date of exercise and the option
price paid for the stock. The issuer of such stock shall
retain the stock to be issued upon the exercise of an option
by a person who is not an employee of such issuer until such
time as both the exercise price for the stock has been paid
and any required withholding with respect to the income to be
recognized to such person has been remitted to his or her
employer. The employer, if the employer is not the issuer of
the stock shall promptly notify the issuer when such required
withholding has been remitted. The employer of the employee
exercising a stock option, covered by the Employee Benefits and
Other Employee Matters Allocation Agreement shall be entitled to
claim any and all deductions, to the extent permitted, on any
tax return for the income recognized by such employee as a
result of such exercise.
(b) If an employee is employed by both Manor and Choice, for the
purpose of this Section 10, such employee shall be treated as an
employee of Manor with respect to his or her Manor stock
options and as an employee of Choice with respect to his or her
Choice stock options.
(c) For purposes of this Section 10, the term "employee" shall
include Directors, whether or not employed.
SECTION 11. INDEMNIFICATION.
With respect to all consolidated federal and state income tax returns
filed by the Manor Group:
(a) Choice shall indemnify, defend and hold harmless Manor and its
subsidiaries, and Manor shall indemnify, defend and hold
harmless Choice and its subsidiaries from and against any
liability, cost, or expense, including, without limitation, and
fine, penalty, interest charge (restricted to interest in excess
of the rate established under Section 6621 of the Code and
interest which is in respect of the penalty portion of an
assessment), or accountants' or attorney's fee, arising out of
fraudulent or negligently prepared information, workpapers,
documents, and other items used in the preparation of, or
presented in, any return, amended return, or claim or refund
filed for the Manor Group for the FY 1996, Stub 97, Short 97, or
FY 1997, and which information, workpapers, documents, or other
items originated with and/or were prepared by such indemnifying
party.
10
<PAGE> 11
(b) Choice shall indemnify, defend and hold harmless Manor from and
against any liability, cost, or expense incurred or paid by
Manor in excess of its share thereof as allocated pursuant to
section 7 hereof, including any amount paid by Manor in
connection with an assessment by the Service or other taxing
authority.
(c) Manor shall indemnify, defend and hold harmless Choice from and
against any liability, cost, or expense incurred or paid by
Choice in excess of its share thereof as allocated pursuant to
section 7 hereof, including any amount paid by Choice in
connection with an assessment by the Service or other taxing
authority.
SECTION 12. RESOLUTION OF DISPUTES.
Any disputes among the parties with respect to this Agreement shall be
resolved by a public accounting firm or a law firm reasonably satisfactory to
Manor and Choice. The fees and expenses of such firm shall be borne equally by
Choice and Manor. In the event that Choice and Manor are unable to appoint such
a firm, then all disputes arising under this Agreement shall be resolved under
the terms of the Distribution Agreement.
SECTION 13. SUBSIDIARIES.
Any reference herein to a subsidiary or subsidiaries does not include
any corporation that is or was, in the relevant tax year, not permitted to join
in the filing of a consolidated federal income tax return pursuant to Section
1504 of the Code. To the extent that the provisions of the Agreement pertain to
a subsidiary or subsidiaries of Manor or Choice, Manor and Choice respectively
agree that it will cause the respective subsidiary or subsidiaries to carry out
the terms of this Agreement.
SECTION 14. SURVIVABILITY.
This Agreement and each of its provisions shall be binding upon and
inure to the benefit of the parties and their respective heirs and successors.
This Agreement shall be effective only from and after the close of business on
the Distribution Date. Nothing in this Agreement is intended or shall be
construed to give any person or entity other than the parties and their
respective heirs or successors any rights or remedies under or by reason of the
Agreement.
SECTION 15. NOTICES.
All notices and other communications required or permitted under this
Agreement shall be in writing, shall be deemed delivered upon receipt by hand or
shall be deemed to have been properly made and given one (1) business day after
being deposited with a reputable overnight courier service
11
<PAGE> 12
such as Federal Express, Airborne Express or UPS Next Day Air for next business
day delivery to the parties at their respective addresses set forth below, or as
to any party at such other address as shall be designated by such party in a
written notice to the other party complying as to delivery with the terms of
this paragraph:
To Choice: Choice Hotels Holdings, Inc.
10750 Columbia Pike
Silver Spring, MD 20901
Attn: General Counsel
To Manor: Manor Care, Inc.
11555 Darnestown Road
Gaithersburg, MD 20878-3200
Attn: General Counsel
SECTION 16. GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with,
the laws of the state of Maryland, without reference to its conflict of laws
principles.
SECTION 17. COSTS AND EXPENSES.
In any action brought to enforce or interpret this Agreement, each
party shall pay its own costs and expenses of maintaining or defending such
action.
SECTION 18. REMEDIES CUMULATIVE.
The remedies provided in this Agreement are cumulative and not
excluding of any remedies provided by law.
SECTION 19. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original and all of which taken together shall
constitute but one and the same Agreement.
SECTION 20. SEVERABILITY.
In the event that any portion of this Agreement shall be declared
invalid by order, decree or judgment of a court, or governmental agency having
jurisdiction, this Agreement shall be construed
12
<PAGE> 13
as if such portion had not been inserted herein, except when such construction
would operate as an undue hardship on any party to this Agreement or constitute
a substantial deviation from the general intent and purpose of said parties as
reflected in this Agreement
SECTION 21. AMENDMENTS; WAIVER.
This Agreement may be amended, and the observance of any term of this
Agreement may be waived, in a written document signed by Manor and Choice.
SECTION 22. EFFECTIVENESS OF AGREEMENT.
This Agreement shall become effective on the Distribution Date and
shall continue in effect until otherwise agreed in writing by Manor and Choice,
or their successors.
SECTION 23. COMMERCIALLY REASONABLE TERMS AND CONDITIONS.
The terms and provisions of this Agreement are intended to reflect
commercially reasonable terms and conditions (including, but not limited to,
pricing) that are at least as favorable and as competitive to Choice as the
terms and conditions Manor would grant or require of third parties for
substantially similar goods and services.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
CHOICE HOTELS HOLDINGS, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
MANOR CARE, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
13
<PAGE> 1
EXHIBIT 10.24
COMPETITIVE ADVANCE AND MULTI-CURRENCY
REVOLVING CREDIT FACILITY AGREEMENT dated as of
October [ ], 1996, among CHOICE HOTELS HOLDINGS,
INC., a Delaware corporation (the "Borrower"), the
lenders listed in Schedule 2.01 (the "Lenders"),
NATIONSBANK, N.A., as co-agent, and THE CHASE
MANHATTAN BANK, a New York banking corporation, as
agent for the Lenders (in such capacity, the
"Agent").
The Borrower has requested the Lenders to extend credit to
the Borrower in order to enable it to borrow on a standby revolving credit basis
on and after the date hereof and at any time and from time to time prior to the
Maturity Date (as herein defined) a principal amount not in excess of
$100,000,000 at any time outstanding. The Borrower has requested that up to
$75,000,000 of such principal amount be available to the Borrower in Alternative
Currencies (as herein defined). The Borrower has also requested the Lenders to
provide a procedure pursuant to which the Borrower may invite the Lenders to bid
on an uncommitted basis on short-term borrowings by the Borrower. The Borrower
has requested the Issuing Bank (as herein defined) to issue letters of credit,
in an aggregate face amount at any time outstanding not in excess of
$25,000,000, to support payment obligations incurred in the ordinary course of
business by the Borrower and its Subsidiaries (as herein defined). The proceeds
of the borrowings hereunder shall be used for general corporate purposes of the
Borrower and its Subsidiaries, including working capital, capital expenditures,
acquisitions and equity investments. The Lenders are willing to extend such
credit to the Borrower and the Issuing Bank is willing to issue letters of
credit for the account of the Borrower on the terms and subject to the
conditions herein set forth. Accordingly, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS
SECTION 1.01. Defined Terms. As used in this
Agreement, the following terms shall have the meanings
specified below:
"ABR Borrowing" shall mean a Borrowing comprised
of ABR Loans.
<PAGE> 2
2
"ABR Loan" shall mean any Loan denominated in dollars bearing
interest at a rate determined by reference to the Alternate Base Rate in
accordance with the provisions of Article II.
"ABR Standby Loan" shall mean any Standby Loan denominated in
dollars bearing interest at a rate determined by reference to the Alternate Base
Rate in accordance with the provisions of Article II.
"Adjusted CD Rate" shall mean, with respect to any CD
Borrowing for any Interest Period, an interest rate per annum (rounded upwards,
if necessary, to the next 1/100 of 1%) equal to the sum of (a) a rate per annum
equal to the product of (i) the Fixed CD Rate in effect for such Interest Period
and (ii) Statutory Reserves, plus (b) the Assessment Rate. For purposes hereof,
the term "Fixed CD Rate" shall mean the arithmetic average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the prevailing rates per annum bid at or
about 10:00 a.m., New York City time, to the Agent on the first Business Day of
the Interest Period applicable to such CD Borrowing by three New York City
negotiable certificate of deposit dealers of recognized national standing
selected by the Agent for the purchase at face value of negotiable certificates
of deposit of major United States money center banks in a principal amount
approximately equal to the Reference Bank's portion of such CD Borrowing and
with a maturity comparable to such Interest Period.
"Administrative Questionnaire" shall mean an
Administrative Questionnaire in the form of Exhibit B.
"Affiliate" shall mean, when used with respect to a specified
person, another person that directly, or indirectly through one or more
intermediaries, Controls or is Controlled by or is under common Control with the
person specified. Following the Distribution, the Borrower and the Subsidiaries
shall not be deemed to be Affiliates of Manor Care or its subsidiaries merely by
virtue of such companies' having common shareholders or directors as a result of
the Distribution.
"Agent and Administrative Fees" shall have the meaning
assigned to such term in Section 2.06(b).
"Aggregate Principal Amount Outstanding" shall
mean, at any time, the sum of (i) the aggregate principal
<PAGE> 3
3
amount at such time of all outstanding Loans denominated in dollars and (ii) the
aggregate Equivalent Dollar Amount at such time of the principal amounts of all
outstanding Eurocurrency Loans.
"Aggregate Revolving Credit Exposure" shall mean the aggregate
amount of the Lenders' Revolving Credit Exposures.
"Alternate Base Rate" shall mean, for any day, a rate per
annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the
greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in
effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on
such day plus 1/2 of 1%. For purposes hereof, "Prime Rate" shall mean the rate
of interest per annum publicly announced from time to time by the Agent as its
prime rate in effect at its principal office in New York City; each change in
the Prime Rate shall be effective on the date such change is publicly announced
as effective. "Base CD Rate" shall mean the sum of (a) the product of (i) the
Three-Month Secondary CD Rate and (ii) Statutory Reserves and (b) the Assessment
Rate. "Three-Month Secondary CD Rate" shall mean, for any day, the secondary
market rate for three-month certificates of deposit reported as being in effect
on such day (or, if such day shall not be a Business Day, the next preceding
Business Day) by the Board through the public information telephone line of the
Federal Reserve Bank of New York (which rate will, under the current practices
of the Board, be published in Federal Reserve Statistical Release H.15(519)
during the week following such day), or, if such rate shall not be so reported
on such day or such next preceding Business Day, the average of the secondary
market quotations for three-month certificates of deposit of major money center
banks in New York City received at approximately 10:00 a.m., New York City time,
on such day (or, if such day shall not be a Business Day, on the next preceding
Business Day) by the Agent from the New York City negotiable certificate of
deposit dealers of recognized national standing selected by it. "Federal Funds
Effective Rate" shall mean, for any day, the weighted average of the rates on
overnight Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as published on the next succeeding Business
Day by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day which is a Business Day, the average of the quotations for
the day of such transactions received by the Agent from
<PAGE> 4
4
three Federal funds brokers of recognized national standing selected by it. If
for any reason the Agent shall have determined that it is unable to ascertain
the Base CD Rate or the Federal Funds Effective Rate or both for any reason,
including the inability or failure of the Agent to obtain sufficient quotations
in accordance with the terms thereof, the Alternate Base Rate shall be
determined without regard to clauses (b) or (c) of the first sentence of this
definition, as appropriate, until the circumstances giving rise to such
inability no longer exist. Any change in the Alternate Base Rate due to a change
in the Prime Rate, the Three Month Secondary CD Rate or the Federal Funds
Effective Rate shall be effective on the effective date of such change in the
Prime Rate, the Three Month Secondary CD Rate or the Federal Funds Effective
Rate, respectively.
"Alternative Currency" shall mean Sterling, French Francs,
Deutsche Marks and any other freely available currency (other than ECUs) that is
freely transferable and freely convertible into dollars and in which dealings in
deposits are carried on in the London interbank market, which shall be requested
by the Borrower and approved by the Lenders.
"Applicable Percentage" shall mean, with respect to any CD
Loan or Eurodollar Standby Loan or with respect to the Facility Fees, as the
case may be, the applicable percentage set forth in the table below under the
caption "Eurodollar Spread", "CD Spread" or "Facility Fee Percentage", as the
case may be, based upon the Consolidated Leverage Ratio as of the end of and for
the most recent period of four consecutive fiscal quarters for which financial
statements of the Borrower are required to have been delivered under Section
5.04(a) or (b), whether or not
<PAGE> 5
5
financial statements in respect of any subsequent period
shall have been delivered:
<TABLE>
<CAPTION>
============================================================================================================================
<S> <C> <C> <C> <C>
Consolidated Facility Fee Euro- CD
Leverage Ratio Percentage dollar Spread
Spread
- ----------------------------------------------------------------------------------------------------------------------------
Category 1 Less than or
equal to 0.50 to
1.00 .100% .200% .325%
- ----------------------------------------------------------------------------------------------------------------------------
Category 2 Greater than
0.50 to 1.00,
but less than or
equal to 1.50 to
1.00 .125% .225% .350%
- ----------------------------------------------------------------------------------------------------------------------------
Category 3 Greater than
1.50 to 1.00,
but less than or
equal to 2.50 to
1.00 .175% .275% .400%
- ----------------------------------------------------------------------------------------------------------------------------
Category 4 Greater than
2.50 to 1.00,
but less than or
equal to 3.00 to
1.00 .200% .350% .475%
- ----------------------------------------------------------------------------------------------------------------------------
Category 5 Greater than
3.00 to 1.00 .250% .500% .625%
============================================================================================================================
</TABLE>
;provided that the Applicable Percentage for the period commencing on the date
hereof and ending on November 30, 1996, shall be determined by reference to
Category 4; provided further that at any time when financial statements required
to have been delivered under Section 5.04(a) or (b) have not been delivered, the
Applicable Percentage shall be determined by reference to Category 5.
"Assessment Rate" shall mean for any date the annual rate
(rounded upwards, if necessary, to the next 1/100 of 1%) identified by the Agent
(or, if need be, reasonably estimated by the Agent) as the then current net
annual assessment rate that will be employed in determining amounts payable by
the Agent to the Federal Deposit Insurance Corporation (or any successor) for
insurance by
<PAGE> 6
6
such Corporation (or such successor) of time deposits made in dollars at the
Agent's domestic offices.
"Asset Sale" shall mean, with respect to the Borrower or any
Subsidiary, any sale, transfer or other disposition of any assets or other
properties (including individual business assets, patents, trademarks and other
intangibles) of the Borrower or such Subsidiary, including the sale, transfer or
disposition of any capital stock of or any merger or consolidation involving any
Subsidiary and any issuance or sale by any Subsidiary of shares of its capital
stock, other than (i) sales of inventory and used equipment in the ordinary
course of business of the person (whether the Borrower or a Subsidiary) owning
and selling such inventory or used equipment; (ii) sales, transfers and other
dispositions of any tangible assets by the Borrower or any Subsidiary if the
Borrower or such Subsidiary enters into an agreement to replace such assets with
a comparable asset as soon as practicable (and in no event later than three
months) after the disposition and, pending such replacement, diligently pursues
the replacement thereof, and the fair market value of the replacement asset is
substantially equivalent to or exceeds that of the asset so disposed of; (iii)
sales, transfers and other dispositions of any assets to the Borrower or any
Subsidiary; (iv) Sale and Lease-Back Transactions; (v) sales by the Borrower or
Subsidiaries of assets acquired from persons other than the Borrower or other
Subsidiaries, which sales occur not more than 12 months after the respective
dates on which such assets were acquired and (vii) the Distribution.
"Assignment and Acceptance" shall mean an assignment and
acceptance entered into by a Lender and an assignee, and accepted by the Agent,
in the form of Exhibit C.
"Board" shall mean the Board of Governors of the Federal
Reserve System of the United States.
"Borrowing" shall mean a group of Loans of a single Type made
by the Lenders (or, in the case of a Competitive Borrowing, by the Lender or
Lenders whose Competitive Bids have been accepted pursuant to Section 2.03) on a
single date and as to which a single Interest Period is in effect.
"Borrowing Request" shall mean a request by the Borrower in
accordance with the terms of Section 2.04.
<PAGE> 7
7
"Business Day" shall mean any day (other than a day which is a
Saturday, Sunday or legal holiday in the State of New York) on which banks are
open for business in New York City; provided, however, that (i) when used in
connection with a Eurodollar Loan, the term "Business Day" shall also exclude
any day on which banks are not open for dealings in dollar deposits in the
London interbank market and (ii) when used in connection with a Eurocurrency
Loan, "Business Day" shall also exclude any day on which commercial banks are
not open for foreign exchange business in London or, if such reference relates
to the date on which any amount is to be paid or made available in an
Alternative Currency, in the principal financial center in the country of such
Alternative Currency.
"Capital Lease Obligations" of any person shall mean the
obligations of such person to pay rent or other amounts under any lease of (or
other arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such person under GAAP
applied on a consistent basis and, for the purposes of this Agreement, the
amount of such obligations at any time shall be the capitalized amount thereof
at such time determined in accordance with GAAP applied on a consistent basis.
"CD Borrowing" shall mean a Borrowing comprised of
CD Loans.
"CD Loan" shall mean any Loan bearing interest at a rate
determined by reference to the Adjusted CD Rate in accordance with the
provisions of Article II.
"CD Standby Borrowing" shall mean a Borrowing composed of CD
Standby Loans.
"CD Standby Loan" shall mean any Standby Loan bearing interest
at a rate determined by reference to the Adjusted CD Rate in accordance with the
provisions of Article II.
A "Change in Control" shall be deemed to have occurred if (a)
any person or group (within the meaning of Rule 13d-5 of the Securities and
Exchange Commission as in effect on the date hereof) other than Stewart Bainum
and his family shall own directly or indirectly, beneficially or of record,
shares representing more than 15% of the aggregate
<PAGE> 8
8
ordinary voting power represented by the issued and outstanding capital stock of
the Borrower, except that such a person or group may own directly or indirectly,
beneficially or of record, shares representing not more than 20% of the
aggregate voting power represented by the issued and outstanding capital stock
of the Borrower if such person or group reports and continues to report such
ownership on Schedule 13G (filed pursuant to Rule 13d-1(b), Rule 13d- 1(c), or,
in the case of amendments, Rule 13d-2(b), of the Securities and Exchange
Commission as in effect on the date hereof); (b) a majority of the seats (other
than vacant seats) on the board of directors of the Borrower shall at any time
have been occupied by persons who were neither (i) nominated by the management
of the Borrower or by the Nominating Committee of the Borrower's board of
directors in connection with an annual meeting of the stockholders of the
Borrower, nor (ii) appointed by directors so nominated; or (c) any person or
group other than Stewart Bainum and his family shall otherwise directly or
indirectly Control the Borrower. Notwithstanding the foregoing, if a trust or
foundation or other entity established by Stewart Bainum or his family holds
shares representing in excess of 15% of the aggregate ordinary voting power
represented by the issued and outstanding capital stock of the Borrower and
Stewart Bainum or his family Controls such trust or foundation or such other
entity and the vote of such shares held by such trust or foundation or such
other entity and Stewart Bainum and his family remain in Control of the
Borrower, there shall be no Change in Control for purposes of this Agreement;
provided, however, that any transfer of such shares by Stewart Bainum, such
trust or such foundation or such other entity shall stand on its own merits for
purposes of this Agreement.
"Choice Hotels Franchising" shall mean Choice Hotels
International, Inc., a Delaware corporation, to be renamed Choice Hotels
Franchising, Inc. following the Distribution.
"Code" shall mean the Internal Revenue Code of 1986, as the
same may be amended from time to time.
"Commitment" shall mean, with respect to each Lender, the
commitment of such Lender hereunder as set forth in Schedule 2.01, as such
Lender's Commitment may be permanently terminated or reduced from time to time
pursuant to Section 2.11. The Commitments shall automatically and permanently
terminate on the Maturity Date.
<PAGE> 9
9
"Competitive Bid" shall mean an offer by a Lender to make a
Competitive Loan pursuant to Section 2.03.
"Competitive Bid Accept/Reject Letter" shall mean a
notification made by the Borrower pursuant to Section 2.03(d) in the form of
Exhibit A-4.
"Competitive Bid Rate" shall mean, as to any Competitive Bid
made by a Lender pursuant to Section 2.03(b), (i) in the case of a Eurodollar
Competitive Loan, the Competitive Margin, and (ii) in the case of a Fixed Rate
Loan, the fixed rate of interest offered by the Lender making such Competitive
Bid.
"Competitive Bid Request" shall mean a request made pursuant
to Section 2.03 in the form of Exhibit A-1.
"Competitive Borrowing" shall mean a borrowing consisting of a
Competitive Loan or concurrent Competitive Loans from the Lender or Lenders
whose Competitive Bids for such Borrowing have been accepted by the Borrower
under the bidding procedure described in Section 2.03.
"Competitive Loan" shall mean a Loan from a Lender to the
Borrower pursuant to the bidding procedure described in Section 2.03. Each
Competitive Loan shall be a Eurodollar Competitive Loan or a Fixed Rate Loan.
"Competitive Margin" shall mean, as to any Eurodollar
Competitive Loan, the margin (expressed as a percentage rate per annum in the
form of a decimal to no more than four decimal places) to be added to or
subtracted from the LIBO Rate in order to determine the interest rate applicable
to such Loan, as specified in the Competitive Bid relating to such Loan.
"Consolidated EBITDA" shall mean, for any period, without
duplication, the sum for such period of (a) Consolidated Net Income, (b)
depreciation and amortization expense, (c) Consolidated Interest Expense, (d)
provisions for income tax expense, (e) restructuring charges incurred in
connection with the Distribution and (f) non-cash charges related to the
impairment of assets (pursuant to FAS 121), all as determined in accordance with
GAAP consistently applied.
"Consolidated Funded Indebtedness" means, as of any date of
determination, all obligations accounted for as
<PAGE> 10
10
indebtedness on a consolidated balance sheet of the Borrower on such date, in
accordance with GAAP consistently applied, whether such obligations are
classified as long-term or short-term.
"Consolidated Interest Coverage Ratio" shall mean, for any
period, the ratio of (a) Consolidated EBITDA for such period to (b) Consolidated
Interest Expense for such period.
"Consolidated Interest Expense" shall mean, for any period,
gross total expenses of the Borrower and its consolidated Subsidiaries accounted
for as interest expense (including capitalized interest determined in accordance
with GAAP consistently applied) for such period, including (i) the portion of
rental payments under Capital Lease Obligations deemed to represent interest in
accordance with GAAP consistently applied, (ii) the amortization of debt
discounts, (iii) the amortization of all fees (including fees with respect to
interest rate protection agreements) payable in connection with the incurrence
of Indebtedness to the extent included in interest expense, all as determined on
a consolidated basis in accordance with GAAP consistently applied. For purposes
of the foregoing, gross interest expense shall be determined after giving effect
to any net payments made or received with respect to interest rate protection
agreements entered in to as a hedge against interest rate exposure.
"Consolidated Leverage Ratio" shall mean the ratio of
Consolidated Funded Indebtedness to Consolidated EBITDA. In the event the
Borrower shall complete, directly or through a Subsidiary, an acquisition or
divestiture of any Person or business unit during any period, the Consolidated
Leverage Ratio as of the end of and for such period shall thereafter be
determined on a pro forma basis as if such acquisition or divestiture had been
completed on the first day of such period.
"Consolidated Net Income" shall mean, for any period, the net
income (or loss) of the Borrower and its consolidated Subsidiaries for such
period, as determined on a consolidated basis in accordance with GAAP
consistently applied.
"Consolidated Net Worth" shall mean, as at any date of
determination, the consolidated stockholders' equity of the Borrower and its
consolidated Subsidiaries, as
<PAGE> 11
11
determined on a consolidated basis in accordance with GAAP consistently applied.
"Consolidated Total Assets" shall mean, as at any date of
determination, the total assets of the Borrower and its consolidated
Subsidiaries at such time, as determined on a consolidated basis in accordance
with GAAP consistently applied.
"Control" shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of a
person, whether through the ownership of voting securities, by contract or
otherwise, and "Controlling" and "Controlled" shall have meanings correlative
thereto; provided, however, the existence of a management contract by the
Borrower or one of its Affiliates to manage another entity shall not be deemed
to be Control.
"Credit Event" shall have the meaning assigned to
such term in Section 4.01.
"Default" shall mean any event or condition which upon notice,
lapse of time or both would constitute an Event of Default.
"Denomination Date" shall mean, in relation to any
Eurocurrency Borrowing, the date that is three Business Days before the date of
such Borrowing.
"Deutsche Marks" shall mean the lawful money of the Federal
Republic of Germany.
"Distribution" shall mean the distribution by Manor Care to
its shareholders of all the capital stock of the Borrower in the manner, on the
terms and with the results set forth in the Form 10.
"Distribution Agreement" shall mean the Distribution Agreement
dated as of [ ], 1996, by and between Manor Care and the Borrower.
"dollars" or "$" shall mean lawful money of the United States
of America.
"Effective Date" shall mean the date on which this Agreement
becomes effective in accordance with Section 4.02.
<PAGE> 12
12
"Equivalent Dollar Amount" shall mean, with respect to an
amount of any Alternative Currency on any date, the amount of dollars that may
be purchased with such amount of such Alternative Currency at the Spot Exchange
Rate on such date.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as the same may be amended from time to time.
"ERISA Affiliate" shall mean any trade or business (whether or
not incorporated) that is a member of a group of which the Borrower is a member
and which is treated as a single employer under Section 414 of the Code.
"Eurocurrency Borrowing" shall mean a Borrowing
comprised of Eurocurrency Loans.
"Eurocurrency Loan" shall mean any Loan denominated in an
Alternative Currency and bearing interest at a rate determined by reference to
the LIBO Rate in accordance with the provisions of Article II.
"Eurocurrency Sublimit" shall mean $75,000,000.
"Eurodollar Borrowing" shall mean a Borrowing comprised of
Eurodollar Loans.
"Eurodollar Competitive Loan" shall mean any Competitive Loan
denominated in dollars and bearing interest at a rate determined by reference to
the LIBO Rate in accordance with the provisions of Article II.
"Eurodollar Loan" shall mean any Eurodollar Competitive Loan
or Eurodollar Standby Loan.
"Eurodollar Standby Borrowing" shall mean a Borrowing
comprised of Eurodollar Standby Loans.
"Eurodollar Standby Loan" shall mean any Standby Loan
denominated in dollars and bearing interest at a rate determined by reference to
the LIBO Rate in accordance with the provisions of Article II.
"Event of Default" shall have the meaning assigned to such
term in Article VII.
<PAGE> 13
13
"Facility Fee" shall have the meaning assigned to such term in
Section 2.06(a).
"Fees" shall mean the Facility Fee and the Agent
and Administrative Fees, the L/C Participation Fees and the
Issuing Bank Fees.
"Financial Officer of the Borrower" of any corporation shall
mean the chief financial officer, principal accounting officer, Treasurer or
Controller of such corporation.
"Fixed Rate Borrowing" shall mean a Borrowing comprised of
Fixed Rate Loans.
"Fixed Rate Loan" shall mean any Competitive Loan bearing
interest at a fixed percentage rate per annum (expressed in the form of a
decimal to no more than four decimal places) specified by the Lender making such
Loan in its Competitive Bid.
"Form 10" shall mean the registration statement on Form 10
under the Securities Exchange Act of 1934 of the Borrower filed with the
Securities and Exchange Commission on July 11, 1996, as amended and distributed
to the Lenders prior to the date hereof.
"French Francs" shall mean the lawful money of the
Republic of France.
"GAAP" shall mean generally accepted accounting principles.
"Governmental Authority" shall mean any Federal, state, local
or foreign court or governmental agency, authority, instrumentality or
regulatory body.
"Guarantee" of or by any person shall mean any obligation,
contingent or otherwise, of such person guaranteeing or having the economic
effect of guaranteeing any Indebtedness of any other person (the "primary
obligor") in any manner, whether directly or indirectly, and including any
obligation of such person, direct or indirect, (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment of such Indebtedness, (b) to purchase property, securities or
services for the purpose of assuring
<PAGE> 14
14
the owner of such Indebtedness of the payment of such Indebtedness or (c) to
maintain working capital, equity capital or other financial statement condition
or liquidity of the primary obligor so as to enable the primary obligor to pay
such Indebtedness; provided, however, that the term Guarantee shall not include
endorsements for collection or deposit, in either case in the ordinary course of
business.
"Hotel Properties" shall mean the properties set forth on
Schedule 1.01, including fixtures and personalty associated therewith.
"Indebtedness" of any person shall mean, without duplication,
(a) all obligations of such person for borrowed money or with respect to
deposits or advances of any kind, (b) all obligations of such person evidenced
by bonds, debentures, notes or similar instruments, (c) all obligations of such
person upon which interest charges are customarily paid, (d) all obligations of
such person under conditional sale or other title retention agreements relating
to property or assets purchased by such person, (e) all obligations of such
person issued or assumed as the deferred purchase price of property or services,
(f) all Indebtedness of others secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien on property owned or acquired by such person, whether or not the
obligations secured thereby have been assumed, (g) all Guarantees by such person
of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i)
all obligations of such person in respect of interest rate protection
agreements, foreign currency exchange agreements or other interest or exchange
rate hedging arrangements and (j) all obligations of such person as an account
party in respect of letters of credit (other than (x) documentary letters of
credit (including commercial and trade letters of credit) issued to secure
payment obligations in respect of goods and services in the ordinary course of
business and (y) letters of credit and surety bonds with respect to obligations
of such person that are fully accounted for as liabilities in the financial
records of such person) and bankers' acceptances. The Indebtedness of any person
shall include the Indebtedness of any partnership in which such person is a
general partner.
"Interest Payment Date" shall mean, with respect to any Loan,
the last day of the Interest Period applicable thereto and, in the case of a
Eurocurrency Loan or Eurodollar Loan with an Interest Period of more than three
<PAGE> 15
15
months' duration or a Fixed Rate Loan or a CD Loan with an Interest Period of
more than 90 days' duration, each day that would have been an Interest Payment
Date for such Loan had successive Interest Periods of three months' duration or
90 days' duration, as the case may be, been applicable to such Loan and, in
addition, the date of any refinancing or conversion of such Loan with or to a
Loan of a different Type.
"Interest Period" shall mean (a) as to any Eurocurrency
Borrowing or Eurodollar Borrowing, the period commencing on the date of such
Borrowing and ending on the numerically corresponding day (or, if there is no
numerically corresponding day, on the last day) in the calendar month that is 1,
2, 3 or 6 months thereafter, as the applicable Borrower may elect, (b) as to any
CD Borrowing, a period of 30, 60, 90 or 180 days' duration, as the Borrower may
elect, commencing on the date of such Borrowing, (c) as to any ABR Borrowing,
the period commencing on the date of such Borrowing and ending on the date 90
days thereafter or, if earlier, on the Maturity Date or the date of prepayment
of such Borrowing and (d) as to any Fixed Rate Borrowing, the period commencing
on the date of such Borrowing and ending on the date specified in the
Competitive Bids in which the offer to make the Fixed Rate Loans comprising such
Borrowing were extended, which shall not be earlier than seven days after the
date of such Borrowing or later than 360 days after the date of such Borrowing;
provided, however, that if any Interest Period would end on a day other than a
Business Day, such Interest Period shall be extended to the next succeeding
Business Day unless, in the case of Eurocurrency Loans and Eurodollar Loans
only, such next succeeding Business Day would fall in the next calendar month,
in which case such Interest Period shall end on the next preceding Business Day.
Interest shall accrue from and including the first day of an Interest Period to
but excluding the last day of such Interest Period.
"Interest Rate Determination Date" shall mean, with respect to
a Eurocurrency Borrowing or Eurodollar Borrowing, the date which is two Business
Days prior to the commencement of any Interest Period for such Borrowing.
"Issuing Bank" shall mean, as the context may require, (a) The
Chase Manhattan Bank, or (b) any other Lender that may become an Issuing Bank
pursuant to
<PAGE> 16
16
Section 2.20(i), with respect to Letters of Credit issued by such Lender.
"Issuing Bank Agreement" shall mean an agreement in
substantially the form of Exhibit E.
"Issuing Bank Fees" shall have the meaning assigned to such
term in Section 2.06(c).
"L/C Commitment" shall mean, with respect to any Issuing Bank,
the commitment of such Issuing Bank to issue Letters of Credit pursuant to
Section 2.20.
"L/C Disbursement" shall mean a payment or disbursement made
by an Issuing Bank pursuant to a Letter of Credit.
"L/C Exposure" shall mean at any time the sum of (a) the
aggregate undrawn amount of all outstanding Letters of Credit at such time, plus
(b) the aggregate principal amount of all L/C Disbursements that have not yet
been reimbursed at such time. The L/C Exposure of any Lender at any time shall
mean its Pro Rata Percentage of the aggregate L/C Exposure at such time.
"L/C Participation Fee" shall have the meaning assigned to
such term in Section 2.06(c)(i).
"Letter of Credit" shall mean any letter of credit
issued pursuant to Section 2.20.
"LIBO Rate" shall mean, (a) with respect to any Eurocurrency
Borrowing for any Interest Period, an interest rate per annum (rounded upwards,
if necessary, to the next 1/16 of 1%) equal to the rate at which deposits in the
currency in which such Loan is denominated approximately equal in principal
amount to the Reference Bank's portion of such Eurocurrency Borrowing and for a
maturity comparable to such Interest Period are offered to the principal London
office of the Agent, in immediately available funds in the London interbank
market at approximately 11:00 a.m., London time, on the relevant Interest Rate
Determination Date, and (b) with respect to any Eurodollar Borrowing for any
Interest Period, an interest rate per annum (rounded upwards, if necessary, to
the next 1/16 of 1%) equal to the rate at which dollar deposits approximately
equal in principal amount to (i) in the case of a Standby Borrowing, the
Reference Bank's portion of such Standby Borrowing and
<PAGE> 17
17
(ii) in the case of a Competitive Borrowing, a principal amount that would have
been the Reference Bank's portion of such Competitive Borrowing had such
Competitive Borrowing been a Standby Borrowing, and for a maturity comparable to
such Interest Period are offered to the principal London office of the Agent, in
immediately available funds in the London interbank market at approximately
11:00 a.m., London time, on the applicable Interest Rate Determination Date.
"Lien" shall mean, with respect to any asset, (a) any
mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest
in or on such asset, (b) the interest of a vendor or a lessor under any
conditional sale agreement, capital lease or title retention agreement relating
to such asset and (c) in the case of securities, any purchase option, call or
similar right of a third party (excluding rights of first refusal) with respect
to such securities.
"Loan" shall mean a Competitive Loan or a Standby Loan,
whether made as a Eurocurrency Loan, a Eurodollar Loan, a CD Loan, an ABR Loan
or a Fixed Rate Loan, as permitted hereby.
"Loan Documents" shall mean this Agreement and the Letters of
Credit.
"Manor Care" shall mean Manor Care, Inc., a Delaware
corporation.
"Manor Care Note" shall mean (a) Indebtedness of the Borrower
to MNR Finance Corp., a subsidiary of Manor Care, in an aggregate principal
amount not in excess of $225,722,500 having a three year term and bearing
interest at a rate equal to 9% per annum (the "Note), and (b) any Indebtedness
that renews, extends, refinances or replaces the Note; provided, however, that
the Indebtedness that extends, renews, refinances or replaces the Note has (i) a
maturity and schedule of principal or redemption payments no earlier than that
of the Note and (ii) an aggregate principal amount that is equal to or less than
the aggregate principal amount then outstanding (plus fees and expenses,
including any premium and defeasance costs) of the Note.
"Margin Stock" shall have the meaning given such term under
Regulation U.
<PAGE> 18
18
"Material Adverse Effect" shall mean a materially adverse
effect on the business, assets, property or condition, financial or otherwise,
of the Borrower and the Subsidiaries taken as a whole.
"Maturity Date" shall mean the third anniversary of the date
hereof.
"Moody's" shall mean Moody's Investors Service, Inc.
"Multiemployer Plan" shall mean a multiemployer plan as
defined in Section 4001(a)(3) of ERISA to which the Borrower or any ERISA
Affiliate (other than one considered an ERISA Affiliate only pursuant to
subsection (m) or (o) of Section 414 of the Code) is making or accruing an
obligation to make contributions, or has within any of the preceding five plan
years made or accrued an obligation to make contributions.
"Non-Recourse Hotel Indebtedness" shall mean Indebtedness,
incurred solely in respect of a Hotel Property, (i) as to which neither the
Borrower nor any Subsidiary (x) provides credit support (including any
undertaking, agreement or instrument which would constitute Indebtedness) or has
given or made other assurances regarding repayment, (y) is directly or
indirectly personally liable or (z) constitutes the lender and (ii) the obligees
of which will have recourse solely against the assets comprising such Hotel
Property for repayment of the principal of and interest on such Indebtedness and
any fees, indemnities, expense reimbursements or other amounts of whatever
nature accrued or payable in connection with such Indebtedness.
"Obligations" shall mean (a) the Borrower's obligations in
respect of the due and punctual payment of principal of and interest on the
Loans when and as due whether at maturity, by acceleration, upon one or more
dates set for prepayment or otherwise, (b) all Fees, expenses, indemnities,
reimbursements and other obligations, monetary or otherwise, of the Borrower
under this Agreement or any other Loan Document and (c) all obligations,
monetary or otherwise, of each Subsidiary under each Loan Document to which it
is a party.
"Original Credit Agreement" shall have the meaning ascribed
thereto in the preamble to this Agreement.
<PAGE> 19
19
"PBGC" shall mean the Pension Benefit Guaranty Corporation
referred to and defined in ERISA.
"Permitted Investments" shall mean:
(a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States
of America (or by any agency thereof to the extent such obligations are
backed by the full faith and credit of the United States of America);
(b) investments in commercial paper having credit
ratings of at least A-2 from S&P and P-2 from Moody's;
(c) investments in certificates of deposit, banker's
acceptances and time deposits issued or guaranteed by or placed with,
and money market deposit accounts issued or offered by, any domestic
office of any commercial bank organized under the laws of the United
States of America or any State thereof which has a combined capital and
surplus and undivided profits of not less than $200,000,000;
(d) investments in the ordinary course of business in
customary repurchase agreements with respect to freely marketable,
short-term securities of the type customarily subject to repurchase
agreements; and
(e) other readily marketable debt and equity securities traded
on national securities exchanges or on other nationally recognized
markets, including over-the-counter markets.
"person" shall mean any natural person, corporation, business
trust, joint venture, association, company, limited liability company,
partnership or government, or any agency or political subdivision thereof.
"Plan" shall mean any pension plan (other than a Multiemployer
Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code
which is maintained for employees of the Borrower or any ERISA Affiliate.
"Proceeds" shall mean, with respect to any Asset Sale, (a) the
gross amount of consideration or other amounts payable to or receivable by the
Borrower or a Subsidiary in respect of such Asset Sale, less (b) the amount, if
any, of
<PAGE> 20
20
all estimated taxes payable with respect to such Asset Sale whether or not
payable during the taxable year in which such Asset Sale shall have occurred,
and less (c) reasonable and customary fees, commissions, costs and other
expenses (other than those payable to the Borrower or a Subsidiary or Affiliate
of the Borrower) which are incurred in connection with such Asset Sale and are
payable by the seller or the transferor of the assets or property to which such
Asset Sale relates, but only to the extent not already deducted in arriving at
the amount referred to in clause (a) above. For purposes of determining
Proceeds, the value of all noncash consideration payable or receivable by the
Borrower or any Subsidiary, as the case may be, shall be the fair market value
of such noncash consideration as determined in good faith by the Borrower and
the Borrower shall provide to the Agent a certificate of a Financial Officer of
the Borrower with respect to the fair market value of such consideration, in
form and substance reasonably satisfactory to the Agent.
"Pro Rata Percentage" of any Lender at any time shall mean the
percentage of the Total Commitment represented by such Lender's Commitment. In
the event the Commitments shall have expired or been terminated, the Pro Rata
Percentages shall be determined on the basis of the Commitments most recently in
effect (giving effect to any assignments under Section 9.04).
"Quality Hotels" shall mean Quality Hotels Europe, Inc., a
Subsidiary.
"Reference Bank" shall mean the Agent or, in the case where
the Agent's Commitment is not the largest of the Lenders' Commitments, the
Lender possessing the largest Commitment.
"Register" shall have the meaning given such term in Section
9.04(d).
"Regulation D" shall mean Regulation D of the Board as from
time to time in effect and all official rulings and interpretations thereunder
or thereof.
"Regulation G" shall mean Regulation G of the Board as from
time to time in effect and all official rulings and interpretations thereunder
or thereof.
<PAGE> 21
21
"Regulation U" shall mean Regulation U of the Board as from
time to time in effect and all official rulings and interpretations thereunder
or thereof.
"Regulation X" shall mean Regulation X of the Board as from
time to time in effect and all official rulings and interpretations thereunder
or thereof.
"Reportable Event" shall mean any reportable event as defined
in Section 4043(b) of ERISA or the regulations issued thereunder with respect to
a Plan (other than a Plan maintained by an ERISA Affiliate which is considered
an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the
Code).
"Required Lenders" shall mean, at any time, Lenders having
Commitments representing at least a majority of the Total Commitment or, if the
Commitments have been terminated, Lenders holding Loans and L/C Exposures
representing at least a majority of the sum of the aggregate amount of L/C
Exposures and aggregate principal amount of the Loans then outstanding.
"Responsible Officer" of any corporation shall mean any
executive officer or Financial Officer of such corporation and any other officer
or similar official thereof responsible for the administration of the
obligations of such corporation in respect of this Agreement.
"Revolving Credit Exposure" shall mean, with respect to any
Lender at any time, the aggregate principal amount at such time of all
outstanding Standby Loans of such Lender denominated in dollars, plus the
Equivalent Dollar Amount at such time of the aggregate principal amount at such
time of all outstanding Standby Loans of such Lender that are Alternative
Currency Loans, plus the aggregate amount at such time of such Lender's L/C
Exposure.
"Sale and Lease-Back Transaction" shall mean any arrangement,
directly or indirectly, with any person whereby such person shall sell or
transfer any property, real or personal, used or useful in its business, whether
now owned or hereafter acquired, and thereafter rent or lease such property or
other property which it intends to use for substantially the same purpose or
purposes as the property being sold or transferred.
<PAGE> 22
22
"Significant Subsidiary" shall mean at any time (a) Choice
Hotels Franchising, (b) any Subsidiary of the Borrower with revenues during the
fiscal year of the Borrower most recently ended greater than or equal to 5% of
the total revenues of the Borrower and its Subsidiaries during such year,
computed and consolidated in accordance with GAAP consistently applied
("Consolidated Revenues"), (c) any Subsidiary of the Borrower with assets as of
the last day of the Borrower's most recently ended fiscal year greater than or
equal to 5% of the total assets of the Borrower and its Subsidiaries at such
date, computed and consolidated in accordance with GAAP consistently applied
("Consolidated Assets"), (d) any Subsidiary with stockholder's equity as of the
last day of the Borrower's most recently ended fiscal year greater than or equal
to 5% of the stockholder's equity of the Borrower and the Subsidiaries at such
date, computed and consolidated in accordance with GAAP consistently applied
("Net Stockholders' Equity"), (e) any Subsidiary designated in writing by the
Borrower as a Significant Subsidiary, (f) any Subsidiary created or acquired by
the Borrower after the date hereof that falls within or that comes to meet one
of clauses (a) through (e) or (g) any Subsidiary in existence on the date hereof
which comes to meet one of clauses (a) through (e) after the date hereof;
provided, however, that if at any time (x) the aggregate revenues of all
Subsidiaries that are Significant Subsidiaries during any fiscal year of the
Borrower shall not equal or exceed 90% of Consolidated Revenues for such fiscal
year, (y) the aggregate assets of all Subsidiaries that are Significant
Subsidiaries as of the last day of any fiscal year of the Borrower shall not
equal or exceed 90% of Consolidated Assets at such date, or (z) the aggregate
stockholders' equity of all Subsidiaries that are Significant Subsidiaries as of
the last day of any fiscal year of the Borrower shall not equal or exceed 90% of
Net Stockholders' Equity at such date, then the term Significant Subsidiary
shall be deemed to include such Subsidiaries (as determined pursuant to the next
following sentence) of the Borrower as may be required so that none of clauses
(x), (y) and (z) above shall continue to be true. For purposes of the proviso to
the next preceding sentence, the Subsidiaries which shall be deemed to be
Significant Subsidiaries shall be determined based on the percentage that the
assets of each such Subsidiary are of Consolidated Assets, with the Subsidiary
with the highest such percentage being selected first, and each other Subsidiary
required to satisfy the requirements
<PAGE> 23
23
set forth in such proviso being selected in descending order of such percentage.
"S&P" shall mean Standard & Poor's Ratings Group, a division
of McGraw-Hill, Inc.
"SPC" shall mean a special purpose corporation formed by the
Borrower as a wholly owned Subsidiary and possessing only Hotel Properties as
assets.
"Spot Exchange Rate" shall mean, on any day, with respect to
any Alternative Currency, the spot rate at which dollars are offered on such day
by The Chase Manhattan Bank in London for such Alternative Currency at
approximately 11:00 A.M. (London time).
"Standby Borrowing" shall mean a borrowing consisting of
simultaneous Standby Loans from each of the Lenders.
"Standby Borrowing Request" shall mean a request made pursuant
to Section 2.04 in the form of Exhibit A-5.
"Standby Loans" shall mean the revolving loans made by the
Lenders to the Borrower pursuant to Section 2.04. Each Standby Loan shall be a
Eurocurrency Loan, a Eurodollar Standby Loan, a CD Loan or an ABR Loan.
"Statutory Reserves" shall mean a fraction (expressed as a
decimal), the numerator of which is the number one and the denominator of which
is the number one minus the aggregate of the maximum reserve percentages
(including any marginal, special, emergency or supplemental reserves) expressed
as a decimal established by the Board and any other banking authority to which
the Agent is subject for new negotiable nonpersonal time deposits in dollars of
over $100,000 with maturities approximately equal to the applicable Interest
Period. Statutory Reserves shall be adjusted automatically on and as of the
effective date of any change in any reserve percentage.
"Sterling" or "(pound)" shall mean the lawful money of
the United Kingdom.
"Subordinated Indebtedness" shall mean Indebtedness of the
Borrower that is subordinated in right of payment to any of the Obligations.
<PAGE> 24
24
"subsidiary" shall mean, with respect to any person (herein
referred to as the "parent"), any corporation, partnership, association or other
business entity (a) of which securities or other ownership interests
representing more than 50% of the equity or more than 50% of the ordinary voting
power or more than 50% of the general partnership interests are, at the time any
determination is being made, owned, controlled or held, or (b) which is, at the
time any determination is made, otherwise Controlled by the parent or one or
more subsidiaries of the parent or by the parent and one or more subsidiaries of
the parent.
"Subsidiary" shall mean any subsidiary of the
Borrower.
"Total Commitment" shall mean at any time the aggregate amount
of the Lenders' Commitments, as in effect at such time.
"Transactions" shall have the meaning assigned to
such term in Section 3.02.
"Type", when used in respect of any Loan or Borrowing, shall
refer to the Rate by reference to which interest on such Loan or on the Loans
comprising such Borrowing is determined and the currency in which such Loan or
the Loans comprising such Borrowing are denominated. For purposes hereof, "Rate"
shall include the LIBO Rate, the Adjusted CD Rate, the Alternate Base Rate and
the Fixed Rate, and "currency" shall include Dollars, French Francs, Deutsche
Marks, Sterling and any other Alternative Currency permitted hereunder.
"Withdrawal Liability" shall mean liability to a Multiemployer
Plan as a result of a complete or partial withdrawal from such Multiemployer
Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.
SECTION 1.02. Terms Generally. The definitions in Section 1.01
shall apply equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
All references herein to Articles, Sections, Exhibits and Schedules shall be
deemed references to Articles and Sections of, and Exhibits and Schedules to,
this Agreement unless the context shall oth-
<PAGE> 25
25
erwise require. Except as otherwise expressly provided herein, all terms of an
accounting or financial nature shall be construed in accordance with GAAP
consistently applied, as in effect from time to time; provided, however, that,
for purposes of determining compliance with any covenant set forth in Article
VI, such terms shall be construed in accordance with GAAP as in effect on the
date of this Agreement applied on a basis consistent with the application used
in preparing the Borrower's audited financial statements referred to in Section
3.05.
ARTICLE II. THE CREDITS
SECTION 2.01. Commitments. Subject to the terms and conditions
and relying upon the representations and warranties herein set forth, each
Lender agrees, severally and not jointly, to make Standby Loans (including
Eurocurrency Loans) to the Borrower, at any time and from time to time on and
after the date hereof and until the earlier of the Maturity Date and the
termination of the Commitment of such Lender, in an aggregate principal amount
at any time outstanding that will not result in such Lender's Revolving Credit
Exposure exceeding such Lender's Commitment minus the amount by which the
Competitive Loans outstanding at such time shall be deemed to have used such
Commitment pursuant to Section 2.16, subject, however, to the conditions that
(a) at no time shall any Loan be made if, immediately after giving effect
thereto and to the application of the proceeds thereof, the Aggregate Principal
Amount Outstanding would exceed the Total Commitment minus the L/C Exposure, (b)
at no time shall any Loan be made if, immediately after giving effect thereto
and to the application of the proceeds thereof, the aggregate Equivalent Dollar
Amount of all outstanding Eurocurrency Loans would exceed the Eurocurrency
Sublimit and (c) at all times the outstanding aggregate principal amount of all
Standby Loans made by each Lender shall equal the product of (i) the percentage
which its Commitment represents of the Total Commitment times (ii) the
outstanding aggregate principal amount of all Standby Loans made pursuant to
Section 2.04. Each Lender's Commitment is set forth opposite its respective name
in Schedule 2.01. Such Commitments may be terminated or reduced from time to
time pursuant to Section 2.11. Within the foregoing limits, the Borrower may
borrow, pay or prepay and reborrow hereunder, on and after the Effective Date
and prior to the Maturity
<PAGE> 26
26
Date, subject to the terms, conditions and limitations set forth herein.
SECTION 2.02. Loans. (a) Each Standby Loan shall be made as
part of a Borrowing consisting of Loans made by the Lenders ratably in
accordance with their Commitments; provided, however, that the failure of any
Lender to make any Standby Loan shall not in itself relieve any other Lender of
its obligation to lend hereunder (it being understood, however, that no Lender
shall be responsible for the failure of any other Lender to make any Loan
required to be made by such other Lender). Each Competitive Loan shall be made
in accordance with the procedures set forth in Section 2.03. Except for Loans
deemed made pursuant to Section 2.02(e), the Standby Loans or Competitive Loans
comprising any Borrowing shall be (i) in the case of Competitive Loans, in an
aggregate principal amount which is an integral multiple of $1,000,000 and not
less than $5,000,000 and (ii) in the case of Standby Loans, in an aggregate
principal amount which is an integral multiple of $1,000,000 and not less than
$5,000,000 (or an aggregate principal amount equal to the remaining balance of
the available Commitments); provided, however, that if the Equivalent Dollar
Amount of any Eurocurrency Loan at the end of the Interest Period applicable
thereto does not exceed by more than 5%, and is not less than 95% of, the
Equivalent Dollar Amount of such Loan on the relevant Denomination Date, then
the applicable Borrower may (notwithstanding clauses (i) and (ii) above)
refinance such Loan with a new Loan denominated in the same Alternative Currency
and with the same principal amount (in such Alternative Currency) at the end of
such Interest Period, notwithstanding that the Equivalent Dollar Amount of the
new Loan is not an integral multiple of $1,000,000. For purposes of this
Section, any Eurocurrency Borrowing shall be deemed to be in an amount equal to
the Equivalent Dollar Amount of such Eurocurrency Borrowing determined as of its
Denomination Date.
(b) Each Standby Borrowing shall be comprised entirely of
Eurocurrency Loans, Eurodollar Standby Loans, CD Loans or ABR Loans and each
Competitive Borrowing shall be comprised entirely of Eurodollar Competitive
Loans or Fixed Rate Loans as the Borrower may request pursuant to Section 2.03
or 2.04, as applicable. Each Lender may at its option make any Eurocurrency Loan
or Eurodollar Loan by causing any domestic or foreign branch or Affiliate of
such Lender to make such Loan; provided, however, that (i) any exercise of such
option shall not affect the obligation of
<PAGE> 27
27
the applicable Borrower to repay such Loan in accordance with the terms of this
Agreement and (ii) in exercising such option, the Lender shall use its
reasonable efforts to minimize any increased costs to the applicable Borrower
resulting therefrom (which obligation of the Lender shall not require it to
take, or refrain from taking, actions that it determines would result in
increased costs for which it will not be compensated hereunder or that it
determines would be otherwise disadvantageous to it and in the event of such
request for costs for which compensation is provided under this Agreement, the
provisions of Section 2.13(c) shall apply). Borrowings of more than one Type may
be outstanding at the same time; provided, however, that the Borrower shall not
be entitled to request any Borrowing which, if made, would result in (A) an
aggregate of more than fifteen separate Standby Loans of any Lender being
outstanding hereunder at any one time, (B) there being Loans outstanding in an
aggregate of more than six currencies, (C) there being at any time more than
five Borrowers with Eurocurrency Loans outstanding or (D) there being more than
30 Eurocurrency Borrowings having an Interest Period of one month during any
twelve-month period. For purposes of the foregoing, Loans having different
Interest Periods, regardless of whether they commence on the same date, shall be
considered separate Loans.
(c) Subject to Section 2.05 and except with respect to Loans
made pursuant to Section 2.02(e), each Lender shall make each Loan to be made by
it hereunder on the proposed date thereof by wire transfer of immediately
available funds to such account as the Agent may designate, not later than 12:00
noon, New York City time, or, in the case of funds in an Alternative Currency,
12:00 noon, London time, and the Agent shall by 3:00 p.m., New York City time,
or, in the case of funds in an Alternative Currency, 3:00 p.m., London time,
credit the amounts so received to an account designated by the applicable
Borrower with the Agent or, if a Borrowing shall not occur on such date because
any condition precedent herein specified shall not have been met, return the
amounts so received to the respective Lenders. Competitive Loans shall be made
by the Lender or Lenders whose Competitive Bids therefor are accepted pursuant
to Section 2.03 in the amounts so accepted and Standby Loans shall be made by
the Lenders pro rata in accordance with Section 2.16. Unless the Agent shall
have received notice from a Lender prior to (or, in the case of an ABR
Borrowing, on) the date of any Borrowing that such Lender shall not make
available to the Agent such Lender's
<PAGE> 28
28
portion of such Borrowing, the Agent may assume that such Lender has made such
portion available to the Agent on the date of such Borrowing in accordance with
this Section 2.02(c) and the Agent may, in reliance upon such assumption, make
available to the applicable Borrower on such date a corresponding amount. If the
Agent shall have so made funds available then, to the extent that such Lender
shall not have made such portion available to the Agent, such Lender and the
applicable Borrower severally agree to repay to the Agent forthwith on demand
such corresponding amount together with interest thereon, for each day from the
date such amount is made available to the applicable Borrower until the date
such amount is repaid to the Agent at (i) in the case of the applicable
Borrower, the interest rate applicable at the time to the Loans comprising such
Borrowing and (ii) in the case of such Lender, a rate determined by the Agent to
represent its cost of overnight or short-term funds in the relevant currency
(which determination shall be conclusive absent manifest error). If such Lender
shall repay to the Agent such corresponding amount, such amount shall constitute
such Lender's Loan as part of such Borrowing for purposes of this Agreement.
(d) Notwithstanding any other provision of this Agreement, the
Borrower shall not be entitled to request any Borrowing if the Interest Period
requested with respect thereto would end after the Maturity Date.
(e) If the Issuing Bank shall not have received from the
Borrower the payment required to be made by Section 2.20(e) within the time
specified in such Section, the Issuing Bank will promptly notify the Agent of
the L/C Disbursement and the Agent will promptly notify each Lender of such L/C
Disbursement and its Pro Rata Percentage thereof. Each Lender shall pay by wire
transfer of immediately available funds to the Agent not later than 2:00 p.m.,
New York City time, on such date (or, if such Lender shall have received such
notice later than 12:00 (noon), New York City time, on any day, not later than
10:00 a.m., New York City time, on the immediately following Business Day), an
amount equal to such Lender's Pro Rata Percentage of such L/C Disbursement (it
being understood that such amount shall be deemed to constitute an ABR Loan of
such Lender and such payment shall be deemed to have reduced the L/C Exposure),
and the Agent will promptly pay to the Issuing Bank amounts so received by it
from the Lenders. The Agent will promptly pay to the Issuing Bank any amounts
received by it from the Borrower pursuant to
<PAGE> 29
29
Section 2.20(e) prior to the time that any Lender makes any payment pursuant to
this paragraph (e); any such amounts received by the Agent thereafter will be
promptly remitted by the Agent to the Lenders that shall have made such payments
and to the Issuing Bank, as their interests may appear. If any Lender shall not
have made its Pro Rata Percentage of such L/C Disbursement available to the
Agent as provided above, such Lender and the Borrower severally agree to pay
interest on such amount, for each day from and including the date such amount is
required to be paid in accordance with this paragraph to but excluding the date
such amount is paid, to the Agent for the account of the Issuing Bank at (i) in
the case of the Borrower, the Alternate Base Rate, and (ii) in the case of such
Lender, for the first such day, the Federal Funds Effective Rate, and for each
day thereafter, the Alternate Base Rate.
SECTION 2.03. Competitive Bid Procedure. (a) In order to
request Competitive Bids, the Borrower shall hand deliver, telex or telecopy to
the Agent a duly completed Competitive Bid Request in the form of Exhibit A-1,
to be received by the Agent (i) in the case of a Eurodollar Competitive
Borrowing, not later than 10:00 a.m., New York City time, four Business Days
before a proposed Competitive Borrowing and (ii) in the case of a Fixed Rate
Borrowing, not later than 10:00 a.m., New York City time, one Business Day
before a proposed Competitive Borrowing. No Eurocurrency Loan, CD Loan or ABR
Loan shall be requested in, or made pursuant to, a Competitive Bid Request. A
Competitive Bid Request that does not conform substantially to the format of
Exhibit A-1 may be rejected in the Agent's sole discretion, and the Agent shall
promptly notify the Borrower of such rejection by telex or telecopier. Such
request shall in each case refer to this Agreement and specify (x) whether the
Borrowing then being requested is to be a Eurodollar Borrowing or a Fixed Rate
Borrowing, (y) the date of such Borrowing (which shall be a Business Day) and
the aggregate principal amount thereof which shall be in a minimum principal
amount of $5,000,000 and in an integral multiple of $1,000,000, and (z) the
Interest Period with respect thereto (which may not end after the Maturity
Date). Promptly after its receipt of a Competitive Bid Request that is not
rejected as aforesaid, the Agent shall invite by telex or telecopier (in the
form of Exhibit A-2) the Lenders to bid, on the terms and conditions of this
Agreement, to make Competitive Loans pursuant to such Competitive Bid Request.
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30
(b) Each Lender may, in its sole discretion, make one or more
Competitive Bids to the Borrower responsive to a Competitive Bid Request. Each
Competitive Bid by a Lender must be received by the Agent via telex or
telecopier, in the form of Exhibit A-3, (i) in the case of a Eurodollar
Competitive Borrowing, not later than 9:30 a.m., New York City time, three
Business Days before a proposed Competitive Borrowing and (ii) in the case of a
Fixed Rate Borrowing, not later than 9:30 a.m., New York City time, on the day
of a proposed Competitive Borrowing. Multiple bids shall be accepted by the
Agent. Competitive Bids that do not conform substantially to the format of
Exhibit A-3 may be rejected by the Agent after conferring with, and upon the
instruction of, the Borrower, and the Agent shall notify the Lender making such
nonconforming bid of such rejection as soon as practicable. Each Competitive Bid
shall refer to this Agreement and specify (x) the principal amount (which shall
be in a minimum principal amount of $5,000,000 and in an integral multiple of
$1,000,000 and which may equal the entire principal amount of the Competitive
Borrowing requested by the Borrower) of the Competitive Loan or Loans that the
Lender is willing to make to the Borrower, (y) the Competitive Bid Rate or Rates
at which the Lender is prepared to make the Competitive Loan or Loans and (z)
the Interest Period and the last day thereof. If any Lender shall elect not to
make a Competitive Bid, such Lender shall so notify the Agent via telex or
telecopier (I) in the case of Eurodollar Competitive Loans, not later than 9:30
a.m., New York City time, three Business Days before a proposed Competitive
Borrowing and (II) in the case of Fixed Rate Loans, not later than 9:30 a.m.,
New York City time, on the day of a proposed Competitive Borrowing; provided,
however, that failure by any Lender to give such notice shall not cause such
Lender to be obligated to make any Competitive Loan as part of such Competitive
Borrowing. A Competitive Bid submitted by a Lender pursuant to this Section
2.03(b) shall be irrevocable.
(c) The Agent shall promptly notify the Borrower by telex or
telecopier of all the Competitive Bids made, the Competitive Bid Rate and the
principal amount of each Competitive Loan in respect of which a Competitive Bid
was made and the identity of the Lender that made each bid. The Agent shall send
a copy of all Competitive Bids to the Borrower for its records as soon as
practicable after completion of the bidding process set forth in this Section.
<PAGE> 31
31
(d) The Borrower may in its sole and absolute discretion,
subject only to the provisions of this Section 2.03(d), accept or reject any
Competitive Bid referred to in Section 2.03(c). The Borrower shall notify the
Agent by telephone, confirmed by telex or telecopier in the form of a
Competitive Bid Accept/Reject Letter substantially in the form set forth in
Exhibit A-4, whether and to what extent it has decided to accept or reject any
of or all the bids referred to in Section 2.03(c), (y) in the case of a
Eurodollar Competitive Borrowing, not later than 10:30 a.m., New York City time,
three Business Days before a proposed Competitive Borrowing and (z) in the case
of a Fixed Rate Borrowing, not later than 10:30 a.m., New York City time, on the
day of a proposed Competitive Borrowing; provided, however, that (i) the failure
by the Borrower to give such notice shall be deemed to be a rejection of all the
bids referred to in Section 2.03(c), (ii) the Borrower shall not accept a bid
made at a particular Competitive Bid Rate if the Borrower has decided to reject
a bid made at a lower Competitive Bid Rate, (iii) the aggregate amount of the
Competitive Bids accepted by the Borrower shall not exceed the principal amount
specified in the Competitive Bid Request, (iv) if the Borrower shall accept a
bid or bids made at a particular Competitive Bid Rate but the amount of such bid
or bids shall cause the total amount of bids to be accepted by the Borrower to
exceed the amount specified in the Competitive Bid Request, then the Borrower
shall accept a portion of such bid or bids in an amount equal to the amount
specified in the Competitive Bid Request less the amount of all other
Competitive Bids accepted with respect to such Competitive Bid Request, which
acceptance, in the case of multiple bids at such Competitive Bid Rate, shall be
made pro rata in accordance with the amount of each such bid at such Competitive
Bid Rate, and (v) except pursuant to clause (iv) above, no bid shall be accepted
for a Competitive Loan unless such Competitive Loan is in a minimum principal
amount of $5,000,000 and an integral multiple of $1,000,000; provided further,
however, that if a Competitive Loan must be in an amount less than $5,000,000
because of the provisions of clause (iv) above, such Competitive Loan may be for
a minimum of $1,000,000 or any integral multiple thereof, and in calculating the
pro rata allocation of acceptances of portions of multiple bids at a particular
Competitive Bid Rate pursuant to clause (iv) above the amounts shall be rounded
to integral multiples of $1,000,000 in a manner which shall be in the discretion
of the Borrower. A notice given by the Borrower pursuant to this Section 2.03(d)
shall be irrevocable.
<PAGE> 32
32
(e) The Agent shall promptly notify each bidding Lender
whether or not its Competitive Bid has been accepted (and if so, in what amount
and at what Competitive Bid Rate) by telex or telecopier sent by the Agent, and
each successful bidder shall thereupon become bound, subject to the other
applicable conditions hereof, to make the Competitive Loan in respect of which
its bid has been accepted.
(f) A Competitive Bid Request shall not be made within three
Business Days after the date of any previous Competitive Bid Request.
(g) If the Agent shall elect to submit a Competitive Bid in
its capacity as a Lender, it shall submit such bid directly to the Borrower one
quarter of an hour earlier than the latest time at which the other Lenders are
required to submit their bids to the Agent pursuant to Section 2.03(b).
(h) All Notices required by this Section shall be given in
accordance with Section 9.01.
SECTION 2.04. Standby Borrowing Procedure. In order to request
a Borrowing (other than a Competitive Borrowing or a deemed Borrowing pursuant
to Section 2.02(e), as to which this Section 2.04 shall not apply), the Borrower
shall hand deliver, telex or telecopy to the Agent a duly completed Standby
Borrowing Request in the form of Exhibit A-5 (a) in the case of a Eurocurrency
Borrowing, not later than 10:30 a.m., London time, three Business Days before a
proposed borrowing, (b) in the case of a Eurodollar Borrowing, not later than
10:30 a.m., New York City time, three Business Days before a proposed borrowing,
(c) in the case of a CD Borrowing, not later than 10:30 a.m., New York City
time, one Business Day before a proposed borrowing and (d) in the case of an ABR
Borrowing, not later than 10:30 a.m., New York City time, on the day of a
proposed borrowing. No Fixed Rate Loan shall be requested or made pursuant to a
Borrowing Request. Such notice shall be irrevocable and shall in each case
specify (i) whether the Borrowing then being requested is to be a Eurocurrency
Borrowing, a Eurodollar Borrowing, a CD Borrowing or an ABR Borrowing; (ii) the
date of such Borrowing (which shall be a Business Day) and the amount thereof,
which, in the case of a Eurocurrency Borrowing, shall be expressed in the
Equivalent Dollar Amount; (iii) if such Borrowing is to be a Eurocurrency
Borrowing, the Alternative Currency in which
<PAGE> 33
33
such Borrowing is to be denominated and the number and location of the account
to which funds are to be disbursed; and (iv) if such Borrowing is to be a
Eurocurrency Borrowing, Eurodollar Borrowing or CD Borrowing, the Interest
Period with respect thereto. If no election as to the Type of Borrowing is
specified in any such notice, then the requested Borrowing shall be an ABR
Borrowing. If no Interest Period with respect to any Eurocurrency Borrowing,
Eurodollar Borrowing or CD Borrowing is specified in any such notice, then the
applicable Borrower shall be deemed to have selected an Interest Period of one
month's duration, in the case of a Eurocurrency Borrowing or a Eurodollar
Borrowing, or 30 days' duration, in the case of a CD Borrowing. If the
applicable Borrower shall not have given notice in accordance with this Section
of its election to refinance a Borrowing prior to the end of the Interest Period
in effect for such Borrowing, then the applicable Borrower shall (unless such
Borrowing is repaid at the end of such Interest Period) be deemed to have given
notice of an election to refinance such Borrowing with an ABR Borrowing. The
Agent shall promptly advise the Lenders of any notice given pursuant to this
Section and of each Lender's portion of the requested Borrowing.
SECTION 2.05. Refinancings. A Borrower may refinance all or
any part of any Borrowing with a Borrowing of the same or a different Type made
pursuant to Section 2.03 or Section 2.04, subject to the conditions and
limitations set forth herein and elsewhere in this Agreement, including
refinancings of Competitive Borrowings with Standby Borrowings and Standby
Borrowings with Competitive Borrowings. Any Borrowing or part thereof so
refinanced with a Borrowing denominated in the same currency shall be deemed to
be repaid in accordance with Section 2.07 with the proceeds of a new Borrowing
hereunder and the proceeds of the new Borrowing, to the extent they do not
exceed the principal amount of the Borrowing being refinanced, shall not be paid
by the Lenders to the Agent or by the Agent to the applicable Borrower pursuant
to Section 2.02(c); provided, however, that (i) if the principal amount extended
by a Lender in a refinancing is greater than the principal amount extended by
such Lender in the Borrowing being refinanced, then such Lender shall pay such
difference to the Agent for distribution to the Lenders described in (ii) below,
(ii) if the principal amount extended by a Lender in the Borrowing being
refinanced is greater than the principal amount being extended by such Lender in
the refinancing, the Agent shall return the
<PAGE> 34
34
difference to such Lender out of amounts received pursuant to (i) above, and
(iii) to the extent any Lender fails to pay the Agent amounts due from it
pursuant to (i) above, any Loan or portion thereof being refinanced shall not be
deemed repaid in accordance with Section 2.07 and shall be payable by the
applicable Borrower.
SECTION 2.06. Fees. (a) The Borrower agrees to pay to each
Lender, through the Agent, on each March 31, June 30, September 30 and December
31, on the date on which the Commitment of such Lender shall be terminated as
provided herein and on the Maturity Date, a facility fee (a "Facility Fee")
equal to the Applicable Percentage per annum in effect from time to time on the
amount of the Commitment of such Lender, whether used or unused, in effect from
time to time during the preceding quarter (or shorter period commencing with the
date hereof or ending with the Maturity Date or any date on which the Commitment
of such Lender shall be terminated). The Facility Fees shall be computed on the
basis of the actual number of days elapsed in a year of 360 days. The Facility
Fee due to each Lender shall commence to accrue on the date hereof and shall
cease to accrue on the earlier of (i) the termination of the Commitment of such
Lender and (ii) the Maturity Date.
(b) The Borrower shall pay to the Agent, for its own account,
agent and administrative fees (the "Agent and Administrative Fees") at the times
and in the amounts agreed upon in the letter agreement dated August 20, 1996,
between the Borrower and the Agent.
(c) The Borrower agrees to pay (i) to each Lender, through the
Agent, on the last day of March, June, September and December of each year and
on the date on which the Commitment of such Lender shall be terminated as
provided herein, a fee (an "L/C Participation Fee") calculated on such Lender's
Pro Rata Percentage of the average daily aggregate L/C Exposure (excluding the
portion thereof attributable to unreimbursed L/C Disbursements) during the
preceding quarter (or shorter period commencing with the date hereof or ending
with the Maturity Date or the date on which all Letters of Credit have been
canceled or have expired and the Commitments of all Lenders shall have been
terminated) at a rate equal to the Applicable Percentage from time to time used
to determine the interest rate on Standby Borrowings comprised of Eurodollar
Standby Loans pursuant to Section 2.08, and (ii) to the Issuing Bank with
respect to each Letter of Credit the standard fronting,
<PAGE> 35
35
issuance and drawing fees, if any, as may be specified in the Issuing Bank
Agreement (the "Issuing Bank Fees"). All L/C Participation Fees and Issuing Bank
Fees shall be computed on the basis of the actual number of days elapsed in a
year of 360 days.
(d) All Fees shall be paid on the dates due, in immediately
available funds, to the Agent for distribution, if and as appropriate, among the
Lenders except that the Issuing Bank Fees shall be paid directly to the Issuing
Bank. Once paid, none of the Fees shall be refundable under any circumstances
unless such Fees were paid in error.
SECTION 2.07. Evidence of Indebtedness; Repayment
of Loans. (a) The Borrower hereby unconditionally promises
to pay to the Agent for the account of each Lender the then
unpaid principal amount of each Loan on the Maturity Date.
(b) Each Lender shall maintain in accordance with its usual
practice an account or accounts evidencing the indebtedness of the Borrower to
such Lender resulting from each Loan made by such Lender, including the amounts
of principal and interest payable and paid to such Lender from time to time
hereunder.
(c) The Agent shall maintain accounts in which it shall record
(i) the amount of each Loan made hereunder, the Type thereof and the Interest
Period applicable thereto, (ii) the amount of any principal or interest due and
payable or to become due and payable from the Borrower to each Lender hereunder
and (iii) the amount of any sum received by the Agent hereunder for the account
of the Lenders and each Lender's share thereof.
(d) The entries made in the accounts maintained pursuant to
paragraphs (b) and (c) of this Section shall be prima facie evidence of the
existence and amounts of the obligations recorded therein; provided that the
failure of any Lender or the Agent to maintain such accounts or any error
therein shall not in any manner affect the obligation of the Borrower to
properly repay the Loans in accordance with the terms of this Agreement.
(e) Any Lender may request that Loans made by it be evidenced
by a promissory note. In such event, the Borrower shall prepare, execute and
deliver to such Lender a promissory note payable to the order of such Lender
(or, if
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36
requested by such Lender, to such Lender and its registered assigns) and in a
form approved by the Agent.
SECTION 2.08. Interest on Loans. (a) Subject to the provisions
of Section 2.09, the Loans comprising each Eurocurrency Borrowing and Eurodollar
Borrowing shall bear interest (computed on the basis of the actual number of
days elapsed over a year of 360 days) at a rate per annum equal to (i) in the
case of each Eurocurrency Loan or Eurodollar Standby Loan, the LIBO Rate for the
Interest Period in effect for such Borrowing plus the Applicable Percentage, and
(ii) in the case of each Eurodollar Competitive Loan, the LIBO Rate for the
Interest Period in effect for such Borrowing plus the Competitive Margin offered
by the Lender making such Loan and accepted by the Borrower pursuant to Section
2.03. Interest on each Eurocurrency Borrowing and Eurodollar Borrowing shall be
payable on each applicable Interest Payment Date. The LIBO Rate for each
Interest Period shall be determined by the Agent in accordance with the
definition of LIBO Rate herein. The Agent shall promptly advise the applicable
Borrower and each Lender, as appropriate, of such determination.
(b) Subject to the provisions of Section 2.09, the Loans
comprising each CD Borrowing shall bear interest (computed on the basis of the
actual number of days elapsed over a year of 360 days) at a rate per annum equal
to the Adjusted CD Rate for the Interest Period in effect for such Borrowing
plus the Applicable Percentage. Interest on each CD Borrowing shall be payable
on each applicable Interest Payment Date. The Adjusted CD Rate for each Interest
Period shall be determined by the Agent in accordance with the definition of
Adjusted CD Rate herein. The Agent shall promptly advise the Borrower and each
Lender of such determination.
(c) Subject to the provisions of Section 2.09, the Loans
comprising each ABR Borrowing shall bear interest (computed on the basis of the
actual number of days elapsed over a year of (i) 365 or 366 days, as the case
may be, during any period in which the Alternate Base Rate is based on the Prime
Rate, and (ii) 360 days, during any period in which the Alternate Base Rate is
based on the Base CD Rate or the Federal Funds Effective Rate) at a rate per
annum equal to the Alternate Base Rate. Interest on each ABR Borrowing shall be
payable on each applicable Interest Payment Date. The Alternate Base Rate shall
be determined
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37
by the Agent in accordance with the definition of Alternate Base Rate herein.
(d) Subject to the provisions of Section 2.09, each Fixed Rate
Loan shall bear interest at a rate per annum (computed on the basis of the
actual number of days elapsed over a year of 360 days) equal to the fixed rate
of interest offered by the Lender making such Loan and accepted by the Borrower
pursuant to Section 2.03. Interest on each Fixed Rate Loan shall be payable on
the Interest Payment Dates applicable to such Loan except as otherwise provided
in this Agreement.
SECTION 2.09. Default Interest. If the Borrower shall default
in the payment of the principal of or interest on any Loan or any other amount
becoming due hereunder, whether by scheduled maturity, notice of prepayment,
acceleration or otherwise, such Borrower shall on demand from time to time from
the Agent pay interest, to the extent permitted by law, on such defaulted amount
up to (but not including) the date of actual payment (after as well as before
judgment) at a rate per annum (computed on the basis of the actual number of
days elapsed over a year of 360 days) equal to the Alternate Base Rate plus 2%.
SECTION 2.10. Alternate Rate of Interest. (a) In the event,
and on each occasion, that on the day two Business Days prior to the
commencement of any Interest Period for a Eurocurrency Borrowing or a Eurodollar
Borrowing the Agent shall have determined (i) that deposits in the principal
amounts of the Loans comprising such Borrowing and in the currency in which such
Loan is to be denominated are not generally available in the relevant market, or
that the rates at which such deposits are being offered will not adequately and
fairly reflect the cost to any Lender of making or maintaining its Eurocurrency
Loan or Eurodollar Loan, as applicable, during such Interest Period, or that
reasonable means do not exist for ascertaining the LIBO Rate, or (ii) in the
case of a Eurocurrency Borrowing, that there shall have occurred any change in
national or international financial, political or economic conditions (including
the imposition of or any change in exchange controls) or currency exchange rates
which would make it impracticable to make Loans denominated in the applicable
Alternative Currency, the Agent shall, as promptly as practicable, give written,
telex or telecopy notice of such determination to the Borrower and the Lenders.
In the event of any such determination, until the Agent shall have
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38
advised the Borrower and the Lenders that the circumstances giving rise to such
notice no longer exist, (A) any request by the Borrower for a Eurodollar
Competitive Borrowing pursuant to Section 2.03 shall be of no force and effect
and shall be denied by the Agent, (B) any request by the Borrower for a
Eurodollar Standby Borrowing pursuant to Section 2.04 shall be deemed to be a
request for an ABR Borrowing and (C) any request by a Borrower for a
Eurocurrency Borrowing pursuant to Section 2.04 shall be deemed to be a request
by the Borrower for an ABR Borrowing.
(b) In the event, and on each occasion, that on or before the
day on which the Adjusted CD Rate for a CD Borrowing is to be determined the
Agent shall have determined that such Adjusted CD Rate cannot be determined for
any reason, including the inability of the Agent to obtain sufficient bids in
accordance with the terms of the definition of Fixed CD Rate, or the Agent shall
determine that the Adjusted CD Rate for such CD Borrowing will not adequately
and fairly reflect the cost to any Lender of making or maintaining its CD Loan
during such Interest Period, the Agent shall, in a timely manner, give written
or telex notice of such determination to the Borrower and the Lenders. In the
event of any such determination, any request by the Borrower for a CD Borrowing
pursuant to Section 2.04 shall, until the Agent shall have advised the Borrower
and the Lenders that the circumstances giving rise to such notice no longer
exist, be deemed to be a request for an ABR Borrowing.
SECTION 2.11. Termination and Reduction of Commitments. (a)
The Commitments and the L/C Commitments shall be automatically terminated on the
Maturity Date.
(b) Upon at least five Business Days' prior irrevocable
written or telex notice to the Agent, the Borrower may at any time in whole
permanently terminate, or from time to time in part permanently reduce, the
Total Commitment; provided, however, that (i) each partial reduction of the
Total Commitment shall be in an integral multiple of $1,000,000 and in a minimum
principal amount of $10,000,000 and (ii) no such termination or reduction shall
be made which would reduce the Total Commitment to an amount less than the
aggregate outstanding principal amount of the Competitive Loans. If, following
any partial reduction of the Total Commitment, the Total Commitment (as so
reduced) shall be less than the Eurocurrency Sublimit, the
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39
Eurocurrency Sublimit shall be automatically reduced so as to equal the Total
Commitment.
(c) In the event that the aggregate Proceeds from all Asset
Sales after the date of this Agreement shall exceed 30% of Consolidated Total
Assets as of the end of the preceding fiscal year, then at the time of each
Asset Sale (including the Asset Sale that results in the aggregate Proceeds from
Asset Sales exceeding 30% of Consolidated Total Assets as of the end of the
preceding fiscal year) the Commitments shall be automatically and permanently
reduced by an amount equal to 50% of the Proceeds of such Asset Sale in excess
of 30% of Consolidated Total Assets as of the end of the preceding fiscal year
aggregate amount. If any reduction of the Commitments required by this paragraph
would result in the Total Commitment being less than the aggregate principal
amount of the outstanding Competitive Loans, such reduction shall be deferred
for the minimum period necessary to avoid such result.
(d) Each reduction in the Total Commitment hereunder shall be
made ratably among the Lenders in accordance with their respective Commitments.
The Borrower shall pay to the Agent for the accounts of the Lenders, on the date
of each termination or reduction, the Facility Fees on the amount of the
Commitments so terminated or reduced accrued through the date of such
termination or reduction.
SECTION 2.12. Prepayment. (a) The Borrower shall have the
right at any time and from time to time to prepay any Standby Borrowing, in
whole or in part, upon giving written or telex notice (or telephone notice
promptly confirmed by written or telex notice) to the Agent before 10:00 a.m.,
New York City time (or, in the case of any Eurocurrency Borrowing, 10:00 a.m.,
London time), three Business Days prior to prepayment; provided, however, that
each partial prepayment shall be in an amount which is (or the Equivalent Dollar
Amount of which is) an integral multiple of $1,000,000 and not less than
$5,000,000. The Borrower shall not have the right to prepay any Competitive
Borrowing.
(b) On the date of any termination or reduction of the
Commitments pursuant to Section 2.11, the Borrower shall pay or prepay so much
of the Standby Borrowings as shall be necessary in order that the Aggregate
Revolving Credit Exposure shall not exceed the Total Commitment after giving
effect to such termination or reduction.
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40
(c) Each notice of prepayment shall specify the prepayment
date and the principal amount of each Borrowing (or portion thereof) to be
prepaid, shall be irrevocable and shall commit the applicable Borrower to prepay
such Borrowing (or portion thereof) by the amount stated therein on the date
stated therein. All prepayments under this Section shall be subject to Section
2.15 but otherwise without premium or penalty. All prepayments under this
Section shall be accompanied by accrued interest on the principal amount being
prepaid to the date of payment.
SECTION 2.13. Reserve Requirements; Change in Circumstances.
(a) Notwithstanding any other provision herein, if after the date of this
Agreement any change in applicable law or regulation or in the interpretation or
administration thereof by any Governmental Authority charged with the
interpretation or administration thereof (whether or not having the force of
law) shall change the basis of taxation of payments to any Lender or Issuing
Bank of the principal of or interest on any Eurocurrency Loan, Eurodollar Loan,
CD Loan or Fixed Rate Loan made by such Lender or any Fees or other amounts
payable hereunder (other than changes in respect of taxes imposed on the overall
net income of such Lender or Issuing Bank by any jurisdiction or any political
subdivision thereof) or shall impose, modify or deem applicable any reserve,
special deposit or similar requirement against assets of, deposits with or for
the account of or credit extended by such Lender or such Issuing Bank (except
any such reserve requirement which is already reflected in the definition of the
applicable Rate), or shall impose on such Lender or such Issuing Bank or the
London interbank market any other condition affecting this Agreement or any
Eurocurrency Loan, Eurodollar Loan, CD Loan or Fixed Rate Loan made by such
Lender or any Letter of Credit or participation therein, and the result of any
of the foregoing shall be to increase the cost to such Lender or Issuing Bank of
making or maintaining any Eurocurrency Loan, Eurodollar Loan, CD Loan or Fixed
Rate Loan or increase the cost to any Lender of issuing or maintaining any
Letter of Credit or purchasing or maintaining a participation therein or to
reduce the amount of any sum received or receivable by such Lender or such
Issuing Bank hereunder (whether of principal, interest or otherwise) by an
amount deemed by such Lender or such Issuing Bank to be material, then the
applicable Borrower shall pay to such Lender or such Issuing Bank, as the case
may be, upon demand such additional amount or amounts as will compensate such
Lender or such Issuing Bank, as the case may be, for such
<PAGE> 41
41
additional costs incurred or reduction suffered. Notwithstanding the foregoing,
no Lender shall be entitled to request compensation under this paragraph with
respect to any Competitive Loan if it should have been aware of the change
giving rise to such request at the time of submission of the Competitive Bid
pursuant to which such Competitive Loan shall have been made.
(b) If any Lender or Issuing Bank shall have determined that
the applicability of any law, rule, regulation or guideline adopted pursuant to
or arising out of the July 1988 report of the Basle Committee on Banking
Regulations and Supervisory Practices entitled "International Convergence of
Capital Measurement and Capital Standards", or the adoption after the date
hereof of any other law, rule, regulation or guideline regarding capital
adequacy, or any change in any of the foregoing or in the interpretation or
administration of any of the foregoing by any Governmental Authority charged
with the interpretation or administration thereof, or compliance by any Lender
(or any lending office of such Lender) or any Issuing Bank or any Lender's or
Issuing Bank's holding company with any request or directive regarding capital
adequacy (whether or not having the force of law) of any such Governmental
Authority, has or would have the effect of reducing the rate of return on such
Lender's or Issuing Bank's capital or on the capital of such Lender's or Issuing
Bank's holding company, if any, as a consequence of this Agreement or the Loans
made or participations in Letters of Credit purchased by such Lender pursuant
hereto or the Letters of Credit issued by such Issuing Bank pursuant hereto to a
level below that which such Lender or Issuing Bank or such Lender's or Issuing
Bank's holding company could have achieved but for such adoption, change or
compliance (taking into consideration such Lender's or Issuing Bank's policies
and the policies of such Lender's or Issuing Bank's holding company with respect
to capital adequacy) by an amount deemed by such Lender or Issuing Bank to be
material, then from time to time the Borrower shall pay to such Lender or
Issuing Bank, as the case may be, such additional amount or amounts as will
compensate such Lender or Issuing Bank or such Lender's or Issuing Bank's
holding company for any such reduction suffered.
(c) A certificate of a Lender or Issuing Bank setting forth
such amount or amounts as shall be necessary to compensate such Lender or
Issuing Bank, as applicable, as specified in paragraph (a) or (b) above, as the
case may be,
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42
shall be delivered to the Borrower. The Borrower shall pay each Lender or
Issuing Bank the amount shown as due on any such certificate delivered by it
within 10 days after the receipt of the same. In the event any Lender delivers
such a certificate, the Borrower may, at its sole expense and effort, require
such Lender to transfer and assign, without recourse (in accordance with Section
9.04) all its interests, rights and obligations under this Agreement to an
assignee which shall assume such assigned obligations (which assignee may be
another Lender, if a Lender accepts such assignment); provided, however, that
(i) such assignment shall not conflict with any law, rule or regulation or order
of any Governmental Authority, (ii) the Borrower shall have received a written
consent of the Agent in the case of an assignee that is not a Lender, which
consent shall not unreasonably be withheld, and (iii) the Borrower or such
assignee shall have paid to the assigning Lender in immediately available funds
the principal of and interest accrued to the date of such payment on the Loans
made by it hereunder and all other amounts owed to it hereunder.
(d) Failure on the part of any Lender or the Issuing Bank to
demand compensation for any increased costs or reduction in amounts received or
receivable or reduction in return on capital with respect to any period shall
not constitute a waiver of such Lender's or Issuing Bank's right to demand
compensation with respect to such period or any other period.
(e) Without prejudice to the survival of any other agreement
contained herein, the agreements and obligations contained in this Section shall
survive the payment in full of the principal of and interest on all Loans made
hereunder.
SECTION 2.14. Change in Legality. (a) Notwithstanding any
other provision herein, if any change in any law or regulation or in the
interpretation thereof by any Governmental Authority charged with the
administration or interpretation thereof shall make it unlawful for any Lender
to make or maintain any Eurocurrency Loan or Eurodollar Loan or to give effect
to its obligations as contemplated hereby with respect to any Eurocurrency Loan
or Eurodollar Loan, then, by written notice to the Borrower and to the Agent,
such Lender may:
(i) declare that Eurocurrency Loans or Eurodollar Loans, as
the case may be, shall not thereafter be made
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43
by such Lender hereunder, whereupon such Lender shall not submit a
Competitive Bid in response to a request for Eurodollar Competitive
Loans and any request by the Borrower for a Eurocurrency Loan or
Eurodollar Standby Borrowing, as the case may be, shall, as to such
Lender only, be deemed a request for an ABR Loan to the Borrower unless
such declaration shall be subsequently withdrawn; and
(ii) require that all outstanding Eurocurrency Loans or
Eurodollar Loans, as the case may be, made by it be converted to ABR
Loans, in which event all such Eurocurrency Loans or Eurodollar Loans,
as the case may be, shall be automatically converted to ABR Loans as of
the effective date of such notice as provided in paragraph (b) below
(such conversion to be made, in the case of a Eurocurrency Loan, into
dollars at the applicable Spot Exchange Rate).
In the event any Lender shall exercise its rights under (i) or (ii) above, all
payments and prepayments of principal which would otherwise have been applied to
repay the Eurocurrency Loans or Eurodollar Loans, as the case may be, that would
have been made by such Lender or the converted Eurocurrency Loans or Eurodollar
Loans of such Lender shall instead be applied to repay the ABR Loans made by
such Lender in lieu of, or resulting from the conversion of, such Eurocurrency
Loans or Eurodollar Loans.
(b) For purposes of this Section, a notice to the Borrower by
any Lender shall be effective as to each Eurocurrency Loan or Eurodollar Loan,
as the case may be, if lawful, on the last day of the Interest Period then
applicable to such Eurocurrency Loan or Eurodollar Loan; in all other cases such
notice shall be effective on the date of receipt by the Borrower.
SECTION 2.15. Indemnity. The Borrower shall indemnify each
Lender against any loss or expense which such Lender may sustain or incur as a
consequence of (a) any failure by the Borrower to fulfill on the date of any
borrowing hereunder the applicable conditions set forth in Article IV, (b) any
failure by the Borrower to borrow or to refinance any Loan hereunder after
irrevocable notice of such borrowing or refinancing has been given pursuant to
Section 2.03 or 2.04, (c) any payment, prepayment, assignment pursuant to
Section 2.13(c), conversion of a Eurocurrency Loan or Eurodollar Loan pursuant
to
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44
Section 2.14(a) or conversion of a Eurocurrency Loan, Eurodollar Loan, CD Loan
or Fixed Rate Loan required by any other provision of this Agreement or
otherwise made or deemed made on a date other than the last day of the Interest
Period applicable thereto, (d) any default in payment or prepayment of the
principal amount of any Loan or any part thereof or interest accrued thereon, as
and when due and payable at the due date thereof (whether by scheduled maturity,
acceleration, irrevocable notice of prepayment or otherwise) or (e) the
occurrence of any Event of Default, including, in each such case, any loss or
reasonable expense sustained or incurred or to be sustained or incurred in
liquidating or employing deposits from third parties acquired to effect or
maintain such Loan or any part thereof as a Eurocurrency Loan, Eurodollar Loan,
CD Loan or Fixed Rate Loan. Such loss or reasonable expense shall include an
amount equal to the excess, if any, as reasonably determined by such Lender, of
(i) its cost of obtaining the funds for the Loan being paid, prepaid, assigned,
converted or not borrowed (based on the LIBO Rate or Adjusted CD Rate or, in the
case of a Fixed Rate Loan, the fixed rate of interest applicable thereto) for
the period from the date of such payment, prepayment, assignment, conversion or
failure to borrow to the last day of the Interest Period for such Loan (or, in
the case of a failure to borrow, the Interest Period for such Loan which would
have commenced on the date of such failure) over (ii) the amount of interest (as
reasonably determined by such Lender) that would be realized by such Lender in
reemploying the funds so paid, prepaid, assigned, converted or not borrowed for
such period or Interest Period, as the case may be. A certificate of any Lender
setting forth any amount or amounts which such Lender is entitled to receive
pursuant to this Section and evidencing a loss suffered by such Lender of such
amount or amounts shall be delivered to the Borrower.
SECTION 2.16. Pro Rata Treatment. Except as required under
Section 2.14, each Standby Borrowing, each payment or prepayment of principal of
any Standby Borrowing, each payment of interest on the Standby Loans, each
payment of the Facility Fees, each reduction of the Commitments and each
refinancing of any Borrowing with a Standby Borrowing of any Type, shall be
allocated pro rata among the Lenders in accordance with their respective
Commitments (or, if such Commitments shall have expired or been terminated, in
accordance with the respective principal amounts of their outstanding Standby
Loans). Each payment of principal of any Competitive Borrowing shall be
allocated pro rata among
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45
the Lenders participating in such Borrowing in accordance with the respective
principal amounts of their outstanding Competitive Loans comprising such
Borrowing. Each payment of interest on any Competitive Borrowing shall be
allocated pro rata among the Lenders participating in such Borrowing in
accordance with the respective amounts of accrued and unpaid interest on their
outstanding Competitive Loans comprising such Borrowing. For purposes of
determining the available Commitments of the Lenders at any time, each
outstanding Competitive Borrowing shall be deemed to have utilized the
Commitments of the Lenders (including those Lenders which shall not have made
Loans as part of such Competitive Borrowing) pro rata in accordance with such
respective Commitments. Each Lender agrees that in computing such Lender's
portion of any Borrowing to be made hereunder, the Agent may, in its discretion,
round each Lender's percentage of such Borrowing to the next higher or lower
whole dollar amount.
SECTION 2.17. Sharing of Setoffs. Each Lender agrees that if
it shall, through the exercise of a right of banker's lien, setoff or
counterclaim against the Borrower , or pursuant to a secured claim under Section
506 of Title 11 of the United States Code or other security or interest arising
from, or in lieu of, such secured claim, received by such Lender under any
applicable bankruptcy, insolvency or other similar law or otherwise, or by any
other means (other than an assignment pursuant to Section 2.13(c) or 10.04),
obtain payment (voluntary or involuntary) in respect of any Standby Loan or L/C
Disbursement as a result of which the unpaid principal portion of its Standby
Loans and participations in L/C Disbursements shall be proportionately less than
the unpaid principal portion of the Standby Loans and participations in L/C
Disbursements of any other Lender, it shall be deemed simultaneously to have
purchased from such other Lender at face value, and shall promptly pay to such
other Lender the purchase price for, a participation in the Standby Loans and
L/C Exposure of such other Lender, so that the aggregate unpaid principal amount
of the Standby Loans and L/C Exposure and participations in the Standby Loans
and L/C Exposure held by each Lender shall be in the same proportion to the
aggregate unpaid principal amount of all Standby Loans and L/C Exposure then
outstanding as the principal amount of its Standby Loans and L/C Exposure prior
to such exercise of banker's lien, setoff or counterclaim or other event was to
the principal amount of all Standby Loans outstanding prior to such exercise of
banker's lien, setoff or counterclaim or other event; provided, however, that,
if
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any such purchase or purchases or adjustments shall be made pursuant to this
Section and the payment giving rise thereto shall thereafter be recovered, such
purchase or purchases or adjustments shall be rescinded to the extent of such
recovery and the purchase price or prices or adjustment restored without
interest. The Borrower expressly consents to the foregoing arrangements and
agrees that any Lender holding a participation in a Standby Loan or L/C
Disbursement deemed to have been so purchased may exercise any and all rights of
banker's lien, setoff or counterclaim with respect to any and all moneys owing
by such Borrower to such Lender by reason thereof as fully as if such Lender had
made a Standby Loan directly to such Borrower in the amount of such
participation.
SECTION 2.18. Payments. (a) The Borrower shall make each
payment (including principal of or interest on the Loans or any L/C Disbursement
or any Fees or other amounts) hereunder and under any other Loan Document to
such account of the Agent as the Agent shall have specified, not later than
10:30 a.m., local time, at the place of payment, on the date when due, in the
currency in which such Loan was made and in federal funds or such other
immediately available funds as may then be customary for the settlement of
international transactions in the relevant currency at such place. The Borrower
shall make each payment of Fees not later than 12:00 noon, New York time, on the
date when due in dollars in immediately available funds to the Agent at its
address referred to in Section 9.01.
(b) Whenever any payment (including principal of or interest
on any Borrowing or any Fees or other amounts) hereunder or under any other Loan
Document shall become due, or otherwise would occur, on a day that is not a
Business Day, such payment may (except as otherwise provided in the definition
of "Interest Period") be made on the next succeeding Business Day, and such
extension of time shall in such case be included in the computation of interest
or Fees, if applicable.
SECTION 2.19. Taxes. (a) Any and all payments by the Borrower
hereunder shall be made, in accordance with Section 2.18, free and clear of and
without deduction for any and all present or future taxes, imposts, deductions,
charges or withholdings, and all liabilities with respect thereto, excluding
taxes imposed on the Agent's or any Lender's or any Issuing Bank's (or any
transferee's or assignee's, including a participation holder's (any such
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47
entity a "Transferee")) net income and franchise taxes imposed on the Agent or
any Lender or any Issuing Bank (or Transferee) by any jurisdiction or any
political subdivision thereof (all such nonexcluded taxes, levies, imposts,
deductions, charges, withholdings and liabilities being hereinafter referred to
as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from
or in respect of any sum payable hereunder to the Lenders or any Issuing Bank
(or any Transferee) or the Agent, (i) the sum payable shall be increased by the
amount necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this Section) such Lender
or such Issuing Bank (or Transferee) or the Agent (as the case may be) shall
receive an amount equal to the sum it would have received had no such deductions
been made, (ii) such Borrower shall make such deductions and (iii) such Borrower
shall pay the full amount deducted to the relevant taxing authority or other
Governmental Authority in accordance with applicable law.
(b) In addition, the Borrower shall pay any present or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies which arise from any payment made hereunder or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement or any other Loan Document (hereinafter referred to as "Other Taxes").
(c) The Borrower shall indemnify each Lender, Issuing Bank (or
Transferee) and the Agent for the full amount of Taxes and Other Taxes
(including any Taxes or Other Taxes imposed by any jurisdiction on amounts
payable under this Section) paid by such Lender or such Issuing Bank (or
Transferee) or the Agent, as the case may be, and any liability (including
penalties, interest and reasonable out-of-pocket expenses) arising therefrom or
with respect thereto, whether or not such Taxes or Other Taxes were correctly or
legally asserted by the relevant taxing authority or other Governmental
Authority. Such indemnification shall be made within 30 days after the date any
Lender or Issuing Bank (or Transferee) or the Agent, as the case may be, makes
written demand therefor, which demand may be made after such Lender, Issuing
Bank (or Transferee) or the Agent, in its sole discretion (reasonably exercised)
and at the sole expense of the applicable Borrower, determines to challenge or
contest such assertion of Taxes or Other Taxes. After the Borrower makes full
payment to the Lender, Issuing Bank (or Transferee) or the Agent with
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respect to such indemnification for Taxes or Other Taxes asserted, if such
Lender, Issuing Bank (or Transferee) or the Agent believes in its sole
discretion that reasonable grounds exist to challenge or contest the Taxes or
Other Taxes imposed, then such Lender, Issuing Bank (or Transferee) or the
Agent, as the case may be, shall so contest or challenge in good faith the Taxes
or Other Taxes asserted, which contest or challenge shall be at the sole expense
of such Borrower. If a Lender, Issuing Bank (or Transferee) or the Agent shall
become aware that it is entitled to receive a refund in respect of Taxes or
Other Taxes, it shall promptly notify the Borrower of the availability of such
refund and shall, within 30 days after receipt of a request by such Borrower,
apply for such refund at the Borrower's reasonable out-of-pocket expense. If any
Lender, Issuing Bank (or Transferee) or the Agent receives a refund in respect
of any Taxes or Other Taxes for which such Lender, Issuing Bank (or Transferee)
or the Agent has received payment from the Borrower hereunder it shall promptly
notify such Borrower of such refund and shall promptly upon receipt repay such
refund to such Borrower, net of all out-of-pocket expenses of such Lender or
Issuing Bank and without interest; provided, however, that such Borrower, upon
the request of such Lender, Issuing Bank (or Transferee) or the Agent, agrees to
return such refund (plus penalties, interest or other charges) to such Lender,
Issuing Bank (or Transferee) or the Agent in the event such Lender, Issuing Bank
(or Transferee) or the Agent is required to repay such refund.
(d) Within 30 days after the date of any payment of Taxes or
Other Taxes withheld by the Borrower in respect of any payment to any Lender,
Issuing Bank (or Transferee) or the Agent, such Borrower will furnish to the
Agent, at its address referred to in Section 9.01, the original or a certified
copy of a receipt evidencing payment thereof.
(e) Without prejudice to the survival of any other agreement
contained herein, the agreements and obligations contained in this Section shall
survive the payment in full of the principal of and interest on all Loans made
hereunder.
(f) On or before the date it becomes a party to this Agreement
and from time to time thereafter as renewals are due and upon any change in
status rendering any certificate or documents previously delivered pursuant to
this Section 2.19(f) invalid or inaccurate, each Lender,
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Issuing Bank or Transferee that is organized outside the United States or
Germany shall (but (x) in the case of a Transferee or (y) in the case of a
Lender or Issuing Bank with respect to any renewal or change in status, only if
legally able to do so) upon written request of a Borrower, deliver to such
Borrower such certificates, documents or other evidence, as specified by such
Borrower and, as the case may be, required by (A) in the case of a Borrower
organized in the United States and a non-United States Lender or Issuing Bank,
the Code or Treasury Regulations issued pursuant thereto, including Internal
Revenue Service Form 1001 or Form 4224 and any other certificate or statement of
exemption required by Treasury Regulation Section 1.1441-1(a) or Section
1.1441-6(c) or any subsequent version thereof, or (B) in the case of a Borrower
in Germany and a non-German Lender or Issuing Bank, such forms that may be
required under the laws, regulations, official interpretations or treaties (the
"Controlling Tax Laws") enacted by, made or entered into with Germany, in each
case properly completed and duly executed by such Lender (or Transferee)
establishing that such payment is, as the case may be, (i) not subject to
withholding under the Code because such payment is effectively connected with
the conduct by such Lender, Issuing Bank or Transferee of a trade or business in
the United States, (ii) totally exempt from United States tax under a provision
of an applicable tax treaty or (iii) exempt from German withholding tax under
the Controlling Tax Laws of Germany. Unless the Borrower and the Agent have
received forms or other documents satisfactory to them indicating that payments
hereunder are not subject to United States or German withholding tax, as the
case may be, or are subject to such tax at a rate reduced by an applicable tax
treaty, the Borrower or the Agent shall withhold taxes from such payments at the
applicable statutory rate in the case of payments to or for any Lender, Issuing
Bank or Transferee or assignee organized under the laws of a jurisdiction
outside the United States or Germany, as the case may be.
(g) A Borrower shall not be required to pay any additional
amounts to any Lender, Issuing Bank or Transferee in respect of United States
withholding tax or German withholding tax pursuant to Section 2.19(a) if the
obligation to pay such additional amounts would not have arisen but for a
failure by such Lender, Issuing Bank or Transferee to comply with the provisions
of Section 2.19(f) unless such failure results from (i) a change in applicable
law, regulation or official interpretation thereof or
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(ii) an amendment, modification or revocation of any applicable tax treaty or a
change in official position regarding the application or interpretation thereof,
in each case after the Effective Date (and, in the case of a Transferee, after
the date of assignment or transfer); provided, however, that the Borrower shall
be required to pay those amounts to any Lender, Issuing Bank or Transferee that
it was required to pay hereunder prior to the failure of such Lender, Issuing
Bank or Transferee to comply with the provisions of Section 2.19(f).
(h) Any Lender, Issuing Bank or Transferee claiming any
additional amounts payable pursuant to this Section shall use reasonable efforts
(consistent with legal and regulatory restrictions) to file any certificate or
document in a timely manner requested by the Borrower or to change the
jurisdiction of its applicable lending office if the making of such a filing or
change would avoid the need for or reduce the amount of any such additional
amounts which may thereafter accrue and would not, in the sole and reasonable
determination of such Lender, Issuing Bank or Transferee be otherwise
disadvantageous to such Lender, Issuing Bank or Transferee.
SECTION 2.20. Letters of Credit. (a) General. The Borrower may
request the issuance of a Letter of Credit for its own account, in a form
reasonably acceptable to the Agent and the Issuing Bank, at any time and from
time to time while the Commitments remain in effect. Each Letter of Credit shall
be denominated in dollars. This Section shall not be construed to impose an
obligation upon the Issuing Bank to issue any Letter of Credit that is
inconsistent with the terms and conditions of this Agreement.
(b) Notice of Issuance, Amendment, Renewal, Extension; Certain
Conditions. In order to request the issuance of a Letter of Credit (or to amend,
renew or extend an existing Letter of Credit), the Borrower shall hand deliver
or telecopy to the Issuing Bank and the Agent (reasonably in advance of the
requested date of issuance, amendment, renewal or extension) a notice requesting
the issuance of a Letter of Credit, or identifying the Letter of Credit to be
amended, renewed or extended, the date of issuance, amendment, renewal or
extension, the date on which such Letter of Credit is to expire (which shall
comply with paragraph (c) below), the amount of such Letter of Credit, the name
and address of the beneficiary thereof and such other information as shall be
necessary to prepare such
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Letter of Credit. Following receipt of such notice and prior to the issuance of
the requested Letter of Credit or the applicable amendment, renewal or
extension, the Agent shall notify the Borrower and the Issuing Bank of the
amount of the Aggregate Revolving Credit Exposure and the aggregate principal
amount of the outstanding Competitive Borrowings after giving effect to (i) the
issuance, amendment, renewal or extension of such Letter of Credit, (ii) the
issuance or expiration of any other Letter of Credit that is to be issued or
will expire prior to the requested date of issuance of such Letter of Credit and
(iii) the borrowing or repayment of any Standby Loans or Competitive Loans that
(based upon notices delivered to the Agent by the Borrower) are to be borrowed
or repaid prior to the requested date of issuance of such Letter of Credit. A
Letter of Credit shall be issued, amended, renewed or extended only if, and upon
issuance, amendment, renewal or extension of each Letter of Credit the Borrower
shall be deemed to represent and warrant that, after giving effect to such
issuance, amendment, renewal or extension (A) the L/C Exposure shall not exceed
$25,000,000 and (B) the sum of the Aggregate Revolving Credit Exposure and the
aggregate principal amount of outstanding Competitive Borrowings shall not
exceed the Total Commitment.
(c) Expiration Date. Each Letter of Credit shall expire at the
close of business on the earlier of the date one year after the date of the
issuance of such Letter of Credit and the date that is five Business Days prior
to the Maturity Date, unless such Letter of Credit expires by its terms on an
earlier date.
(d) Participations. By the issuance of a Letter of Credit and
without any further action on the part of the Issuing Bank or the Lenders, the
Issuing Bank hereby grants to each Lender, and each such Lender hereby acquires
from the Issuing Bank, a participation in such Letter of Credit equal to such
Lender's Pro Rata Percentage of the aggregate amount available to be drawn under
such Letter of Credit, effective upon the issuance of such Letter of Credit. In
consideration and in furtherance of the foregoing, each Lender hereby absolutely
and unconditionally agrees to pay to the Agent, for the account of the Issuing
Bank, such Lender's Pro Rata Percentage of each L/C Disbursement made by such
Issuing Bank and not reimbursed by the Borrower forthwith on the date due as
provided in Section 2.02(e). Each Lender acknowledges and agrees that its
obligation to acquire participations pursuant to this paragraph in respect
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of Letters of Credit is absolute and unconditional and shall not be affected by
any circumstance whatsoever, including the occurrence and continuance of a
Default or an Event of Default or the termination of the Commitments, and that
each such payment shall be made without any offset, abatement, withholding or
reduction whatsoever.
(e) Reimbursement. If an Issuing Bank shall make any L/C
Disbursement in respect of a Letter of Credit, the Borrower shall pay to the
Agent an amount equal to such L/C Disbursement not later than two hours after
the Borrower shall have received notice from such Issuing Bank that payment of
such draft will be made, or, if the Borrower shall have received such notice
later than 10:00 a.m., New York City time, on any Business Day, not later than
10:00 a.m., New York City time, on the immediately following Business Day.
(f) Obligations Absolute. The Borrower's obligations to
reimburse L/C Disbursements as provided in paragraph (e) above shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement, under any and all circumstances
whatsoever, and irrespective of:
(i) any lack of validity or enforceability of any
Letter of Credit or this Agreement, or any term or
provision therein;
(ii) any amendment or waiver of or any consent to
departure from all or any of the provisions of any
Letter of Credit or this Agreement;
(iii) the existence of any claim, setoff, defense or other right
that the Borrower, any other party guaranteeing, or otherwise obligated
with, the Borrower, any Subsidiary or other Affiliate thereof or any
other person may at any time have against the beneficiary under any
Letter of Credit, any Issuing Bank, the Agent or any Lender or any
other person, whether in connection with this Agreement or any other
related or unrelated agreement or transaction;
(iv) any draft or other document presented under a Letter of
Credit proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any
respect;
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(v) payment by the Issuing Bank under a Letter of Credit
against presentation of a draft or other document that does not comply
with the terms of such Letter of Credit; and
(vi) any other act or omission to act or delay of any kind of
any Issuing Bank, the Lenders, the Agent or any other person or any
other event or circumstance whatsoever, whether or not similar to any
of the foregoing, that might, but for the provisions of this Section,
constitute a legal or equitable discharge of the Borrower's obligations
hereunder.
Without limiting the generality of the foregoing, it is
expressly understood and agreed that the absolute and unconditional obligation
of the Borrower hereunder to reimburse L/C Disbursements will not be excused by
the gross negligence or wilful misconduct of any Issuing Bank. However, the
foregoing shall not be construed to excuse any Issuing Bank from liability to
the Borrower to the extent of any direct damages (as opposed to consequential
damages, claims in respect of which are hereby waived by the Borrower to the
extent permitted by applicable law) suffered by the Borrower that are caused by
such Issuing Bank's gross negligence or wilful misconduct in determining whether
drafts and other documents presented under a Letter of Credit comply with the
terms thereof; it is understood that each Issuing Bank may accept documents that
appear on their face to be in order, without responsibility for further
investigation, regardless of any notice or information to the contrary and, in
making any payment under any Letter of Credit (i) an Issuing Bank's exclusive
reliance on the documents presented to it under such Letter of Credit as to any
and all matters set forth therein, including reliance on the amount of any draft
presented under such Letter of Credit, whether or not the amount due to the
beneficiary thereunder equals the amount of such draft and whether or not any
document presented pursuant to such Letter of Credit proves to be insufficient
in any respect, if such document on its face appears to be in order, and whether
or not any other statement or any other document presented pursuant to such
Letter of Credit proves to be forged or invalid or any statement therein proves
to be inaccurate or untrue in any respect whatsoever and (ii) any noncompliance
in any immaterial respect of the documents presented under such Letter of Credit
with the terms thereof shall, in each case, be deemed not to constitute wilful
misconduct or gross negligence of an Issuing Bank.
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(g) Disbursement Procedures. The Issuing Bank shall, promptly
following its receipt thereof, examine all documents purporting to represent a
demand for payment under a Letter of Credit. Such Issuing Bank shall as promptly
as possible give telephonic notification, confirmed by telecopy, to the Agent
and the Borrower of such demand for payment and whether such Issuing Bank has
made or will make an L/C Disbursement thereunder; provided that any failure to
give or delay in giving such notice shall not relieve the Borrower of its
obligation to reimburse the Issuing Bank and the Lenders with respect to any
such L/C Disbursement. The Agent shall promptly give each Lender notice thereof.
(h) Interim Interest. If an Issuing Bank shall make any L/C
Disbursement in respect of a Letter of Credit, then, unless the Borrower shall
reimburse such L/C Disbursement in full on such date, the unpaid amount thereof
shall bear interest for the account of such Issuing Bank, for each day from and
including the date of such L/C Disbursement, to but excluding the earlier of the
date of payment by the Borrower or the date on which interest shall commence to
accrue thereon as provided in Section 2.02(e), at the rate per annum that would
apply to such amount if such amount were an ABR Loan.
(i) Resignation or Removal of an Issuing Bank. An Issuing Bank
may resign at any time by giving 180 days' prior written notice to the Agent,
the Lenders and the Borrower, and may be removed at any time by the Borrower by
notice to the Issuing Bank, the Agent and the Lenders. Subject to the next
succeeding paragraph, upon the acceptance of any appointment as an Issuing Bank
hereunder by a Lender that shall agree to serve as successor Issuing Bank, such
successor shall succeed to and become vested with all the interests, rights and
obligations of the retiring Issuing Bank and the retiring Issuing Bank shall be
discharged from its obligations to issue additional Letters of Credit hereunder.
At the time such removal or resignation shall become effective, the Borrower
shall pay all accrued and unpaid fees pursuant to Section 2.06(c)(ii). The
acceptance of any appointment as an Issuing Bank hereunder by a successor Lender
shall be evidenced by an agreement entered into by such successor, in a form
satisfactory to the Borrower and the Agent, and, from and after the effective
date of such agreement, (i) such successor Lender shall have all the rights and
obligations of the previous Issuing Bank under this Agreement and (ii)
references herein to the term "Issuing Bank" shall be
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55
deemed to refer to such successor or to any previous Issuing Bank, or to such
successor and all previous Issuing Banks, as the context shall require. After
the resignation or removal of an Issuing Bank hereunder, the retiring Issuing
Bank shall remain a party hereto and shall continue to have all the rights and
obligations of an Issuing Bank under this Agreement with respect to Letters of
Credit issued by it prior to such resignation or removal, but shall not be
required to issue additional Letters of Credit.
(j) Cash Collateralization. If any Event of Default shall
occur and be continuing, the Borrower shall, on the Business Day it receives
notice from the Agent or the Required Lenders (or, if the maturing of the Loans
has been accelerated, Lenders holding participations in outstanding Letters of
Credit representing greater than 50% of the aggregate undrawn amount of all
outstanding Letters of Credit) thereof and of the amount to be deposited,
deposit in an account with the Agent, for the benefit of the Lenders, an amount
in cash equal to the L/C Exposure as of such date. Such deposit shall be held by
the Agent as collateral for the payment and performance of the obligations of
the Borrower under this Agreement. The Agent shall have exclusive dominion and
control, including the exclusive right of withdrawal, over such account. Other
than any interest earned on the investment of such deposits in Permitted
Investments, which investments shall be made at the option and sole discretion
of the Agent, such deposits shall not bear interest. Interest or profits, if
any, on such investments shall accumulate in such account. Moneys in such
account shall (i) automatically be applied by the Agent to reimburse the Issuing
Bank for L/C Disbursements for which they have not been reimbursed, (ii) be held
for the satisfaction of the reimbursement obligations of the Borrower for the
L/C Exposure at such time and (iii) if the maturity of the Loans has been
accelerated (but subject to the consent of Lenders holding participations in
outstanding Letters of Credit representing greater than 50% of the aggregate
undrawn amount of all outstanding Letters of Credit), be applied to satisfy
other obligations of the Borrower under this Agreement. If the Borrower is
required to provide an amount of cash collateral hereunder as a result of the
occurrence of an Event of Default, such amount (to the extent not applied as
aforesaid) shall be returned to the Borrower within three Business Days after
all Events of Default have been cured or waived.
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SECTION 2.21 Extension of Maturity Date. (a) The Borrower may,
by notice to the Agent (which shall promptly deliver a copy to each of the
Lenders) given not more than 60 days prior to any anniversary of the date hereof
while the Commitments remain in effect, request that the Lenders extend the
Maturity Date for an additional one year period (but in no event beyond the
fifth anniversary of the Closing Date) from the Maturity Date then in effect
(the "Existing Maturity Date"). Each Lender shall, by notice to the Borrower and
the Agent given not later than the 10th Business Day after the date of the
Borrower's notice, advise the Borrower whether or not such Lender agrees to such
extension (and any Lender that does not so advise the Borrower on or before such
day shall be deemed to have advised the Borrower that it will not agree to such
extension).
(b) If (and only if) Lenders holding Commitments that
represent at least 60% of the total Commitments on the 60th day prior to the
applicable anniversary of the date hereof shall have agreed to extend the
Existing Maturity Date (such Lenders being called the "Continuing Lenders"),
then (i) the Maturity Date shall be extended to the first anniversary of the
Existing Maturity Date (provided, that if such date is not a Business Day, then
the Maturity Date as so extended shall be the next following Business Day), and
(ii) the Commitment of each Lender that is not a Continuing Lender shall
terminate on the Existing Maturity Date (with the result that the total
Commitments will decrease by the amount of such Commitment), and all Loans of
each such Lender shall become due and payable, together with all interest
accrued thereon and all other amounts owed to such Lender hereunder, on the
Existing Maturity Date.
Notwithstanding the foregoing, no extension of the Maturity
Date shall be effective with respect to any Lender unless, on and as of the
Existing Maturity Date, the conditions set forth in paragraphs (b) and (c) of
Section 4.01 shall be satisfied (with all references to a Borrowing being deemed
to be references to such extension) and the Agent shall have received a
certificate to that effect dated the Existing Maturity Date and executed by a
Financial Officer of the Borrower.
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ARTICLE III. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to each of the Lenders
that:
SECTION 3.01. Organization; Powers. Each of the Borrower and
the Subsidiaries (a) is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization, (b) has all requisite
power and authority to own its property and assets and to carry on its business
as now conducted and as proposed to be conducted, (c) is qualified to do
business in every jurisdiction where such qualification is required, except
where the failure so to qualify would not result in a Material Adverse Effect,
and (d) has the power and authority to execute, deliver and perform its
obligations under this Agreement and each other agreement or instrument
contemplated hereby and to borrow hereunder.
SECTION 3.02. Authorization. The execution, delivery and
performance by the Borrower of this Agreement and the borrowings hereunder by
the Borrower (collectively, the "Transactions") (a) have been duly authorized by
all requisite action, including, if required, stockholder action on the part of
the Borrower, as the case may be, and (b) will not (i) violate (A) any provision
of law, statute, rule or regulation, or of the certificate or articles of
incorporation or other constitutive documents or by-laws of the Borrower or any
Subsidiary, (B) any order of any Governmental Authority or (C) any provision of
any indenture, agreement or other instrument to which the Borrower or any
Subsidiary is a party or by which any of them or any of their property is or may
be bound, (ii) be in conflict with, result in a breach of or constitute (alone
or with notice or lapse of time or both) a default under any such indenture,
agreement or other instrument or (iii) result in the creation or imposition of
any Lien upon or with respect to any property or assets now owned or hereafter
acquired by the Borrower or any Subsidiary.
SECTION 3.03. Enforceability. This Agreement has been duly
executed and delivered by the Borrower and constitutes, and each other Loan
Document when executed and delivered by the Borrower will constitute, a legal,
valid and binding obligation of the Borrower enforceable against the Borrower
including against the Borrower in accordance with its terms.
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SECTION 3.04. Governmental Approvals. No action, consent or
approval of, registration or filing with or any other action by any Governmental
Authority is or will be required in connection with the Transactions, except
such as have been made or obtained and are in full force and effect.
SECTION 3.05. Financial Statements. The Borrower has
heretofore furnished to the Lenders the combined balance sheets and statements
of income and cash flow of the Borrower as of and for the fiscal year ended May
31, 1996, audited by and accompanied by the opinion of Arthur Andersen & Co.,
independent public accountants, and the unaudited combined balance sheets and
statements of income and cash flow of the Borrower as of and for the fiscal
quarter ended August 31, 1996, each certified by the chief financial officer
(or, in the absence of such a position, comptroller) of the Borrower or Manor
Care. Such financial statements and monthly summaries of pretax income or loss
present fairly the financial condition and results of operations of the Borrower
and its combined subsidiaries as of such dates and for such periods. Such
balance sheets and the notes thereto disclose all material liabilities, direct
or contingent, of the Borrower and its combined subsidiaries as of the dates
thereof. Such financial statements and monthly summaries of pretax income or
loss were prepared in accordance with GAAP applied on a consistent basis.
SECTION 3.06. No Material Adverse Change. As of the date
hereof, there has been no material adverse change in the business, assets,
property or condition, financial or otherwise, of the Borrower and the
Subsidiaries, taken as a whole, since May 31, 1996 (it being understood that
changes in general economic conditions shall not be deemed to constitute such a
material adverse change).
SECTION 3.07. Title to Properties; Possession Under Leases.
(a) Each of the Borrower and the Subsidiaries has good and marketable title to,
or valid leasehold interests in, all its material properties and assets, except
for minor defects in title that do not interfere with its ability to conduct its
business as currently conducted or to utilize such properties and assets for
their intended purposes. All such material properties and assets are free and
clear of Liens, other than Liens expressly permitted by Section 6.02.
(b) Each of the Borrower and the Subsidiaries has complied
with all material obligations under all material
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leases to which it is a party and all such leases are in full force and effect.
Each of the Borrower and the Subsidiaries enjoys peaceful and undisturbed
possession under all such material leases.
(c) On and as of the date of the initial Credit Event under
this Agreement, the Borrower will own all of the assets, business and operations
currently conducted by the Lodging Business (as defined in the Distribution
Agreement), (other than assets since disposed of prior to the date of such
Borrowing in the ordinary course of business and assets described on Schedule
3.07).
SECTION 3.08. Subsidiaries. Schedule 3.08 sets
forth as of the date hereof a list of all Subsidiaries of
the Borrower and the percentage ownership interest of the
Borrower therein.
SECTION 3.09. Litigation; Compliance with Laws. (a) There are
not any actions, suits or proceedings at law or in equity or by or before any
Governmental Authority now pending or, to the knowledge of the Borrower,
threatened against or affecting the Borrower or any Subsidiary or any business,
property or rights of any such person (i) which involve any Loan Document or the
Transactions (excluding any such actions, suits or proceedings threatened by the
Lenders or the Agent) or (ii) as to which there is a reasonable probability of
an adverse determination and which, if such probable adverse determination
occurred, could, individually or in the aggregate, reasonably be anticipated to
result in a Material Adverse Effect.
(b) To the best knowledge of the Borrower, neither the
Borrower nor any of the Subsidiaries is in violation of any law, rule or
regulation, or in default with respect to any judgment, writ, injunction or
decree of any Governmental Authority, where such violation or default could
reasonably be anticipated to result in a Material Adverse Effect.
SECTION 3.10. Agreements. (a) Neither the Borrower nor any of
the Subsidiaries is a party to any agreement or instrument or subject to any
corporate or other restriction that has resulted or could reasonably be
anticipated to result in a Material Adverse Effect.
(b) Neither the Borrower nor any of its Subsidiaries is in
default in any manner under any provision of any
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indenture or other agreement or instrument evidencing Indebtedness, or any other
material agreement or instrument to which it is a party or by which it or any of
its properties or assets are or may be bound, where such default could
reasonably be anticipated to result in a Material Adverse Effect.
SECTION 3.11. Federal Reserve Regulations. (a) Neither the
Borrower nor any of the Subsidiaries is engaged principally, or as one of its
important activities, in the business of extending credit for the purpose of
purchasing or carrying Margin Stock.
(b) No part of the proceeds of any Loan or any Letter of
Credit will be used, whether directly or indirectly, and whether immediately,
incidentally or ultimately, (i) to purchase or carry Margin Stock or to extend
credit to others for the purpose of purchasing or carrying Margin Stock or to
refund indebtedness originally incurred for such purpose, or (ii) for any
purpose which entails a violation of, or which is inconsistent with, the
provisions of the Regulations of the Board, including Regulation G, U or X.
SECTION 3.12. Investment Company Act; Public Utility Holding
Company Act. Neither the Borrower nor any Subsidiary is (a) an "investment
company" as defined in, or subject to regulation under, the Investment Company
Act of 1940 or (b) a "holding company" as defined in, or subject to regulation
under, the Public Utility Holding Company Act of 1935.
SECTION 3.13. Use of Proceeds. The Borrower will use the
proceeds of the Loans and will request the issuance of Letters of Credit only
for the purposes specified in the preamble to this Agreement.
SECTION 3.14. Tax Returns. Each of the Borrower and the
Subsidiaries has filed or caused to be filed all Federal, state, local and
foreign tax returns required to have been filed by it and has paid or caused to
be paid all taxes shown to be due and payable on such returns or on any
assessments received by it, except taxes that are being contested in good faith
by appropriate proceedings and for which the Borrower or such Subsidiary shall
have set aside on its books adequate reserves.
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SECTION 3.15. No Material Misstatements. No information,
report, financial statement, exhibit or schedule furnished by or on behalf of
the Borrower to the Agent or any Lender in connection with the negotiation of
any Loan Document or included therein or delivered pursuant thereto contained,
contains or will contain any material misstatement of fact or omitted, omits or
will omit to state any material fact necessary to make the statements therein,
in the light of the circumstances under which they were, are or will be made,
not misleading.
SECTION 3.16. Employee Benefit Plans. Each of the Borrower and
its ERISA Affiliates is in compliance in all material respects with the
applicable provisions of ERISA and the regulations and published interpretations
thereunder. No Reportable Event has occurred as to which the Borrower or any
ERISA Affiliate was required to file a report with the PBGC, and the present
value of all benefit liabilities under each Plan (based on those assumptions
used to fund such Plan) did not, as of the last annual valuation date applicable
thereto, exceed by more than $5,000,000 the value of the assets of such Plan.
Neither the Borrower nor any ERISA Affiliate has incurred any Withdrawal
Liability which remains unpaid and that could result in a Material Adverse
Effect. Neither the Borrower nor any ERISA Affiliate has received any
notification that any Multiemployer Plan is in reorganization or has been
terminated within the meaning of Title IV of ERISA, and to the best knowledge of
the Borrower no Multiemployer Plan is reasonably expected to be in
reorganization or to be terminated, where such reorganization or termination has
resulted or could reasonably be expected to result, through increases in the
contributions required to be made to such Plan or otherwise, in a Material
Adverse Effect.
SECTION 3.17. Environmental Matters. The Borrower and each
Subsidiary has complied in all material respects with all Federal, state, local
and other statutes, ordinances, orders, judgments, rulings and regulations
relating to environmental pollution or to environmental regulation or control or
to employee health or safety. Neither the Borrower nor any Subsidiary has
received notice of any failure so to comply. The Borrower's and the Subsid-
iaries' facilities do not manage any hazardous wastes, hazardous substances,
hazardous materials, toxic substances, toxic pollutants or substances similarly
denominated, as those terms or similar terms are used in the Resource
Conservation and Recovery Act, the Comprehensive Environ-
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mental Response Compensation and Liability Act, the Hazardous Materials
Transportation Act, the Toxic Substance Control Act, the Clean Air Act, the
Clean Water Act or any other applicable law, in material violation of any such
law or any regulations promulgated pursuant thereto.
SECTION 3.18. Solvency. As of the Effective Date
and after giving effect to the Distribution:
(a) The fair salable value of the assets of the Borrower and
each Significant Subsidiary will exceed the amount that will be
required to be paid on or in respect of the existing debts and other
liabilities of such Borrower or Significant Subsidiary as such debts
and liabilities become absolute and mature.
(b) The assets of the Borrower and each Significant Subsidiary
will not constitute unreasonably small capital for such Borrower or
Significant Subsidiary to carry out its businesses as now conducted and
as proposed to be conducted including the capital needs of such
Borrower or Significant Subsidiary, taking into account the particular
capital requirements of the business conducted by such Borrower or
Significant Subsidiary and projected capital requirements and capital
availability thereof.
(c) Neither the Borrower nor any Significant Subsidiaries
intends to incur debts or liabilities beyond its ability to pay such
debts and liabilities as they mature, taking into account the timing
and amounts of cash to be received by it, and of amounts to be payable
on or in respect of its debts and liabilities. The cash flow of the
Borrower and each Significant Subsidiary, after taking into account all
anticipated uses of the cash of such Borrower or such Significant
Subsidiary, will at all times be sufficient to pay all such amounts on
or in respect of debt and liabilities of such Borrower or such
Significant Subsidiary when such amounts are required to be paid.
SECTION 3.19. Distribution. As of the Effective Date, the
Distribution will have been effected in a manner not materially different from
the description thereof in the Form 10 (including but not limited to the tax
consequences of the Distribution) that will not materially adversely effect the
rights or interests of the Lenders or the creditworthiness of the Borrower.
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63
ARTICLE IV. CONDITIONS OF LENDING
The effectiveness of this Agreement and the obligations of the
Lenders to make Loans and of the Issuing Bank to issue Letters of Credit
hereunder are subject to the satisfaction of the following conditions:
SECTION 4.01. All Credit Events. On the date of each
Borrowing, including on the date of each issuance of a Letter of Credit (each
event being called a "Credit Event"):
(a) The Agent shall have received a notice of such Borrowing
as required by Section 2.03 or Section 2.04, as applicable (or such
notice shall have been deemed given in accordance with Section 2.04)
including on the date of each issuance of a Letter of Credit.
(b) The representations and warranties set forth in Article
III hereof (except (i) in the case of a refinancing of a Standby
Borrowing with a new Standby Borrowing that does not increase the
aggregate principal amount of the Loans of any Lender outstanding, the
representation set forth in Section 3.09(a), and (ii) in the case of a
refinancing of a Competitive Borrowing with a Standby Borrowing that
does not increase the aggregate principal amount of the Loans
outstanding, the representation set forth in Section 3.09(a), provided
that the exception contained in this clause (ii) shall be applicable
only if, on the date of the applicable Competitive Borrowing, the
Borrower satisfied all conditions for the making of a new Standby
Borrowing that did not refinance an existing Standby Borrowing) shall
be true and correct in all material respects on and as of the date of
such Credit Event with the same effect as though made on and as of such
date, except to the extent such representations and warranties
expressly relate to an earlier date.
(c) The Borrower shall be in compliance with all the terms and
provisions set forth herein and in each other Loan Document on its part
to be observed or performed, and at the time of and immediately after
such Credit Event, no Event of Default or Default shall have occurred
and be continuing.
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64
Each Credit Event shall be deemed to constitute a representation and warranty by
the Borrower on the date of such Credit Event as to the matters specified in
paragraphs (b) and (c) of this Section 4.01.
SECTION 4.02. First Credit Event. On the
Effective Date:
(a) All legal matters incident to this Agreement and the
borrowings hereunder shall be satisfactory to the Lenders and their
counsel and to the Issuing Bank and to Cravath, Swaine & Moore, counsel
for the Agent.
(b) The Agent shall have received (i) a copy of the
certificate or articles of incorporation (or analogous documents) and
all amendments thereto of the Borrower, certified as of a recent date
by the Secretary of State (or other appropriate Governmental Authority)
of the state (or country) of its organization or such other evidence as
is reasonably satisfactory to the Agent; (ii) a certificate as to the
good standing (or other analogous certification to the extent
available) of the Borrower as of a recent date, from the appropriate
Secretary of State (or other appropriate Governmental Authority) or
such other evidence as is reasonably satisfactory to the Agent; (iii) a
certificate of the Secretary or Assistant Secretary of the Borrower
dated the Effective Date and certifying (A) that attached thereto is a
true and complete copy of the by-laws (or such other analogous
documents to the extent available) of the Borrower as in effect on the
Effective Date and at all times since a date prior to the date of the
resolutions described in clause (B) below, (B) that attached thereto is
a true and complete copy of resolutions duly adopted by the Board of
Directors of the Borrower authorizing the execution, delivery and
performance of the Loan Documents and the borrowings hereunder, and
that such resolutions have not been modified, rescinded or amended and
are in full force and effect, (C) that the certificate or articles of
incorporation (or analogous documents) of the Borrower have not been
amended since the date of the last amendment thereto shown on the
certificate of good standing (or other analogous certification or such
other evidence reasonably satisfactory to the Agent) furnished pursuant
to clause (i) or (ii) above, and (D) as to the incumbency and specimen
signature of each officer executing any
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65
Loan Document or any other document delivered in connection herewith on
behalf of the Borrower; (iv) a certificate of another officer as to the
incumbency and specimen signature of the Secretary or Assistant
Secretary executing the certificate pursuant to (iii) above; and (v)
such other documents as the Lenders or their counsel, the Issuing Bank
or Cravath, Swaine & Moore, counsel for the Agent, may reasonably
request.
(c) The Agent shall have received a certificate of the
Borrower, dated the Effective Date and signed by a Financial Officer of
the Borrower confirming compliance with the conditions precedent set
forth in paragraphs (b) and (c) of Section 4.01.
(d) The Agent shall have received all Fees and other amounts
due and payable on or prior to the Effective Date.
(e) The Agent shall have received a favorable written opinion
of the General Counsel for Manor Care, dated the Effective Date and
addressed to the Lenders and the Issuing Bank, to the effect set forth
in Exhibit D, and the Borrower hereby instructs such counsel to deliver
such opinion to the Agent.
(f) The Agent shall have received evidence of the receipt by
the Borrower of all governmental and third party approvals necessary or
advisable, if any, in connection with the transactions contemplated by
this Agreement.
(g) The Lenders shall have received copies of the Form 10
(including the Distribution Agreement attached as an exhibit thereto).
(h) The Distribution shall have been effected and regular way
trading in the common stock of the Borrower shall have commenced on The
New York Stock Exchange.
ARTICLE V. AFFIRMATIVE COVENANTS
The Borrower covenants and agrees with each Lender that, so
long as this Agreement shall remain in effect or the principal of or interest on
any Loan, any Fees or any other expenses or amounts payable under any Loan
Document shall be unpaid, and until all Letters of Credit have been
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canceled or have expired and all amounts drawn thereunder have been reimbursed
in full, unless the Required Lenders shall otherwise consent in writing, the
Borrower shall, and shall cause each of the Subsidiaries to:
SECTION 5.01. Existence; Businesses and Properties. (a) Do or
cause to be done all things necessary to preserve, renew and keep in full force
and effect its legal existence, except as otherwise expressly permitted under
Section 6.05.
(b) Do or cause to be done all things necessary to obtain,
preserve, renew, extend and keep in full force and effect the rights, licenses,
permits, franchises, authorizations, patents, copyrights, trademarks and trade
names material to the conduct of its business; maintain and operate such
business in substantially the manner in which it is presently conducted and
operated (except for the Distribution); comply in all material respects with all
applicable laws, rules, regulations and orders of any Governmental Authority,
whether now in effect or hereafter enacted; and at all times maintain and
preserve all property material to the conduct of such business and keep such
property in good repair, working order and condition and from time to time make,
or cause to be made, all needful and proper repairs, renewals, additions,
improvements and replacements thereto necessary in order that the business
carried on in connection therewith may be properly conducted at all times.
SECTION 5.02. Insurance. Keep its insurable properties
adequately insured at all times by financially sound and reputable insurers;
maintain such other insurance, to such extent and against such risks, including
fire and other risks insured against by extended coverage, as is customary with
companies in the same or similar businesses, including public liability
insurance against claims for personal injury or death or property damage
occurring upon, in, about or in connection with the use of any properties owned,
occupied or controlled by it; and maintain such other insurance as may be
required by law.
SECTION 5.03. Obligations and Taxes. Pay its Indebtedness and
other obligations promptly and in accordance with their terms and pay and
discharge promptly when due all taxes, assessments and governmental charges or
levies imposed upon it or upon its income or profits or in respect of its
property, before the same shall become
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delinquent or in default, as well as all lawful and valid claims for labor,
materials and supplies or otherwise which, if unpaid, might give rise to a Lien
upon such properties or any part thereof; provided, however, that such payment
and discharge shall not be required with respect to any such tax, assessment,
charge, levy or claim so long as the validity or amount thereof shall be
contested in good faith by appropriate proceedings and the Borrower or such
Subsidiary shall have set aside on its books adequate reserves with respect
thereto.
SECTION 5.04. Financial Statements, Reports, etc. In the case
of the Borrower, furnish to the Agent and each Lender:
(a) within 100 days after the end of each fiscal year, its
audited consolidated balance sheets and related statements of income
and cash flow, showing the financial condition of the Borrower and its
consolidated subsidiaries as of the close of such fiscal year and the
results of its operations and the operations of such subsidiaries
during such year, all audited by Arthur Andersen & Co. or other
independent public accountants of recognized national standing
acceptable to the Required Lenders and accompanied by an opinion of
such accountants (which shall not be qualified in any material respect)
to the effect that such consolidated financial statements fairly
present the financial condition and results of operations of the
Borrower on a consolidated basis in accordance with GAAP consistently
applied;
(b) within 50 days after the end of each of the first three
fiscal quarters of each fiscal year, its unaudited consolidated balance
sheets and related statements of income and cash flow, showing the
financial condition of the Borrower and its consolidated subsidiaries
as of the close of such fiscal quarter and the results of its
operations and the operations of such subsidiaries during such fiscal
quarter and the then elapsed portion of the fiscal year, all certified
by one of the Financial Officers of the Borrowers as fairly presenting
the financial condition and results of operations of the Borrower on a
consolidated basis in accordance with GAAP consistently applied,
subject to normal year-end audit adjustments;
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68
(c) concurrently with any delivery of financial statements
under clause (a) or (b) above, a certificate of the accounting firm or
Financial Officer of the Borrower opining on or certifying such
statements (which certificate, when furnished by an accounting firm,
may be limited to accounting matters and disclaim responsibility for
legal interpretations) (i) certifying that no Event of Default or
Default has occurred or, if such an Event of Default or Default has
occurred, specifying the nature and extent thereof and any corrective
action taken or proposed to be taken with respect thereto and (ii)
setting forth computations in reasonable detail satisfactory to the
Agent demonstrating compliance with the covenants contained in Sections
6.06, 6.13, 6.14 and 6.15;
(d) promptly after the same become publicly available, copies
of all periodic and other reports, proxy statements and other materials
filed by it with the Securities and Exchange Commission, or any
Governmental Authority succeeding to any of or all the functions of
said Commission, or with any national securities exchange, or
distributed to its shareholders, as the case may be; and
(e) promptly, from time to time, such other information
regarding the operations, business affairs and financial condition of
the Borrower or any Subsidiary, or compliance with the terms of any
Loan Document, as the Agent or any Lender may reasonably request.
SECTION 5.05. Litigation and Other Notices. Furnish to the
Agent, the Issuing Bank and each Lender prompt written notice of the following:
(a) any Event of Default or Default, specifying the nature and
extent thereof and the corrective action (if any) proposed to be taken
with respect thereto;
(b) the filing or commencement of, or any threat or notice of
intention of any person to file or commence, any action, suit or
proceeding, whether at law or in equity or by or before any
Governmental Authority, against the Borrower or any Affiliate thereof
as to which there is a reasonable probability of an adverse
determination and which, if such probable
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69
adverse determination occurred, could reasonably be anticipated to
result in a Material Adverse Effect; and
(c) any development that has resulted in, or could reasonably
be anticipated to result in, a Material Adverse Effect.
SECTION 5.06. ERISA. (a) Comply in all material respects with
the applicable provisions of ERISA and (b) furnish to the Agent and each Lender
(i) as soon as possible, and in any event within 30 days after any Responsible
Officer of the Borrower or any ERISA Affiliate either knows or has reason to
know that any Reportable Event has occurred that alone or together with any
other Reportable Event could reasonably be expected to result in liability of
the Borrower or any ERISA Affiliate to the PBGC in an aggregate amount exceeding
$5,000,000, a statement of a Financial Officer of the Borrower setting forth
details as to such Reportable Event and the action proposed to be taken with
respect thereto, together with a copy of the notice, if any, of such Reportable
Event given to the PBGC, (ii) promptly after receipt thereof, a copy of any
notice the Borrower or any ERISA Affiliate may receive from the PBGC relating to
the intention of the PBGC to terminate any Plan or Plans (other than a Plan
maintained by an ERISA Affiliate which is considered an ERISA Affiliate only
pursuant to subsection (m) or (o) of Section 414 of the Code) or to appoint a
trustee to administer any Plan or Plans, (iii) within 10 days after the due date
for filing with the PBGC pursuant to Section 412(n) of the Code of a notice of
failure to make a required installment or other payment with respect to a Plan,
a statement of a Financial Officer of the Borrower setting forth details as to
such failure and the action proposed to be taken with respect thereto, together
with a copy of such notice given to the PBGC and (iv) promptly and in any event
within 30 days after receipt thereof by the Borrower or any ERISA Affiliate from
the sponsor of a Multiemployer Plan, a copy of each notice received by the
Borrower or any ERISA Affiliate concerning (A) the imposition of Withdrawal
Liability in excess of $500,000 or (B) a determination that a Multiemployer Plan
is, or is expected to be, terminated or in reorganization, in each case within
the meaning of Title IV of ERISA.
SECTION 5.07. Maintaining Records; Access to Properties and
Inspections. Maintain all financial records in accordance with GAAP consistently
applied and upon reasonable notice by any Lender permit any representatives
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designated by such Lender, subject to Section 9.17 of this Agreement, to visit
and inspect the financial records and the properties of the Borrower or any
Subsidiary at reasonable times and as often as requested and to make extracts
from and copies of such financial records, and permit any representatives
designated by any Lender to discuss the affairs, finances and condition of the
Borrower or any Subsidiary with the officers thereof and independent accountants
therefor.
SECTION 5.08. Use of Proceeds. Use the proceeds of the Loans
and request the issuance of Letters of Credit only for the purposes set forth in
the preamble to this Agreement.
SECTION 5.09. Ownership. Subject to Section 6.05, maintain
Quality Hotels as a wholly owned Subsidiary, except that shares representing up
to 10% of the shares of any class of the capital stock of Quality Hotels (but
not representing more than 10% of the aggregate ordinary voting power
represented by the issued and outstanding capital stock of Quality Hotels) may
be sold to certain members of management, and maintain Choice Hotels Franchising
as a Subsidiary in which the Borrower owns shares representing not less than
88.9% of the aggregate ordinary voting power represented by the issued and
outstanding capital stock of Choice Hotels Franchising. Continue to own,
directly or indirectly, the operations of Choice Hotels Franchising
substantially as they exist on the date hereof.
ARTICLE VI. NEGATIVE COVENANTS
The Borrower covenants and agrees with each Lender, the
Issuing Bank and the Agent that, so long as this Agreement shall remain in
effect or the principal of or interest on any Loan, any Fees or any other
expenses or amounts payable under any Loan Document shall be unpaid, and until
all Letters of Credit have been cancelled or have expired and all amounts drawn
thereunder have been reimbursed in full, unless the Required Lenders shall
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otherwise consent in writing, the Borrower shall not, and shall not cause or
permit any of the Subsidiaries to:
SECTION 6.01. Indebtedness. Incur, create, assume or permit to
exist any Indebtedness, except (without duplication):
(a) Indebtedness existing on the date hereof and set forth in
Schedule 6.01(a) and any extensions, renewals or replacements of
existing mortgages and Capital Lease Obligations; provided, however,
that (i) the principal amount of any such extension, renewal or
replacement shall not exceed the principal amount of the mortgage or
Capital Lease Obligation so extended, renewed or replaced, (ii) the
mortgage or Capital Lease Obligation so extended, renewed or replaced
shall not be secured by any property or asset that was not already
pledged to secure the existing mortgage or Capital Lease Obligation,
and (iii) such extension, renewal or replacement is not on terms
materially more restrictive to the Borrower or its Subsidiaries or
materially less favorable to the Lenders than the mortgage or Capital
Lease Obligation so extended, renewed or replaced;
(b) Indebtedness represented by the Loan Documents; provided,
however, that Indebtedness consisting of commercial paper of the
Borrower may also be incurred pursuant to this clause (b) to the extent
the sum of such Indebtedness and the aggregate principal amount of
Loans then outstanding do not exceed the Total Commitment at such time
(subject to Section 6.01(n) to the extent in excess of $100,000,000).
(c) Indebtedness incurred upon the acquisition of any property
or asset secured by Liens on such property or asset in accordance with
Section 6.02(b); provided, however, that the amount of such
Indebtedness shall not exceed the purchase price of any such property
or asset;
(d) Indebtedness secured by Liens permitted under Section
6.02(i), 6.02(j) or 6.02(m);
(e) Indebtedness of Subsidiaries existing at the time they are
acquired by the Borrower and not incurred in contemplation of such
acquisition;
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(f) other Indebtedness of Subsidiaries not prohibited by
Section 6.09;
(g) Indebtedness of (i) the Borrower to any wholly owned
Subsidiary, Choice Hotels Franchising or Quality Hotels; (ii) any
wholly owned Subsidiary, Choice Hotels Franchising or Quality Hotels to
the Borrower; and (iii) any Subsidiary, Choice Hotels Franchising or
Quality Hotels to any wholly owned Subsidiary (or to Choice Hotels
Franchising or Quality Hotels)(for the purposes of this clause (g),
"wholly owned Subsidiary" includes any wholly owned subsidiary of
Choice Hotels Franchising and/or Quality Hotels, any Subsidiary that
would otherwise constitute a wholly owned Subsidiary but for directors'
qualifying shares or similar matters, and any Subsidiary the only
direct shareholders, members or participants in which are wholly owned
Subsidiaries, Choice Hotels Franchising or Quality Hotels);
(h) Indebtedness represented by notes or letters of credit
issued for the account of the Borrower or any Subsidiary in connection
with insurance policies and in a form substantially similar to the
notes or letters of credit issued for the account of the Borrower or
any Subsidiary set forth in Schedule 6.01(h) issued in connection with
existing insurance policies of the Borrower or such Subsidiary;
(i) Indebtedness represented by utility bonds, performance
bonds, state self insurance bonds and miscellaneous other bonds other
than those existing on the date hereof and listed in Schedule 6.01(a)
(including any extensions, renewals and replacements), the aggregate
principal amount of such Indebtedness at any one time not to exceed
$20,000,000 (subject to Section 6.01(n) to the extent in excess of
$20,000,000);
(j) Indebtedness of the Borrower consisting of Guarantees in
connection with pension and deferred compensation arrangements arising
in connection with the Distribution; provided, however, that the
aggregate amount of such Indebtedness shall not exceed $40,000,000;
(k) Indebtedness consisting of the Manor Care Note;
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(l) Non-Recourse Hotel Indebtedness; provided, that, so long
as the Manor Care Note remains in effect or any principal, interest or
any other expenses or amounts payable thereunder shall be unpaid, the
proceeds of the incurrence of such Non-Recourse Hotel Indebtedness
shall be applied solely to prepay amounts outstanding under the Manor
Care Note;
(m) Indebtedness consisting of Sale and Lease-back
Transactions permitted under Section 6.03; and
(n) other unsecured Indebtedness of the Borrower in an
aggregate principal amount at any one time outstanding not to exceed
$100,000,000; provided, however, that the covenants and events of
default contained in any such Indebtedness with an aggregate principal
amount in excess of $10,000,000 shall not be more restrictive of the
Borrower and its Subsidiaries than those in this Agreement; and
provided further, that the aggregate amount of Guarantees by the
Borrower may not exceed $50,000,000.
SECTION 6.02. Liens. Create, incur, assume or permit to exist
any Lien on any property or assets (including stock or other securities of any
person, including any Subsidiary) now owned or hereafter acquired by it or on
any income or revenues or rights (excluding rights of first refusal) in respect
of any thereof, except (without duplication):
(a) Liens on property or assets of the Borrower and its
Subsidiaries existing on the date hereof and set forth in Schedule
6.02; provided, however, that such Liens shall secure only those
obligations which they secure on the date hereof except as otherwise
permitted hereunder;
(b) any Lien existing on any property or asset prior to the
acquisition thereof by the Borrower or any Subsidiary; provided,
however, that (i) such Lien is not created in contemplation of or in
connection with such acquisition and (ii) such Lien does not apply to
any other property or assets of the Borrower or any Subsidiary;
(c) Liens for taxes not yet due or which are being contested
in compliance with Section 5.03;
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(d) carriers', warehousemen's, mechanic's, materialmen's,
repairmen's or other like Liens arising in the ordinary course of
business and securing obligations that are not due or which are being
contested in compliance with Section 5.03;
(e) statutory liens of landlords in respect of property leased
by the Borrower or any Subsidiary;
(f) pledges and deposits made in the ordinary course of
business in compliance with workmen's compensation, unemployment
insurance and other social security laws or regulations;
(g) deposits to secure the performance of bids, trade
contracts (other than for Indebtedness), leases (other than Capital
Lease Obligations), statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in
the ordinary course of business;
(h) zoning restrictions, easements, rights-of-way,
restrictions on use of real property and other similar encumbrances
incurred in the ordinary course of business which, in the aggregate,
are not substantial in amount and do not materially detract from the
value of the property subject thereto or interfere with the ordinary
conduct of the business of the Borrower or any of its Subsidiaries;
(i) purchase money security interests in real property,
improvements thereto or equipment hereafter acquired (or, in the case
of improvements, constructed) by the Borrower or any Subsidiary and
liens securing refinancings of existing mortgages; provided, however,
that the aggregate principal amount of the Indebtedness secured by such
security interests does not exceed $50,000,000; and provided further,
that (i) such security interests are incurred, and the Indebtedness
secured thereby is created, within 120 days after such acquisition, or
construction or refinancing, (ii) the Indebtedness secured thereby does
not exceed 80% of the fair market value of the subject real property,
improvements or equipment at the time of such acquisition, construction
or refinancing, and (iii) such security interests do not apply to the
subject property or assets of the Borrower or any Subsidiary other than
the purchased property or assets
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or the property or assets subject to the mortgage being refinanced,
as the case may be;
(j) mortgages on properties listed on Schedule 6.02(j);
provided, however, that (i) such mortgages do not apply to the
property or assets of the Borrower or any Subsidiary other than the
scheduled properties and (ii) the aggregate principal amount of the
Indebtedness secured by such security interests does not exceed
$100,000,000;
(k) Liens created in favor of the Lenders;
(l) Liens securing Indebtedness incurred pursuant to
Sections 6.01(l) or 6.09(ii); and
(m) other Liens to secure Indebtedness of the Borrower or
any Subsidiary; provided, however, that the aggregate principal
amount of the Indebtedness so secured at any time, when added to the
net book value of all property the subject of Sale and Lease-Back
Transactions (other than Sale and Lease-back Transactions referred to
in the proviso to Section 6.03) at such time, does not exceed 15% of
Consolidated Total Assets at such time.
SECTION 6.03. Sale and Lease-Back Transactions.
Enter into any Sale and Lease-Back Transaction unless immediately thereafter the
net book value of all property the subject of Sale and Lease-Back Transactions,
when added to the aggregate principal amount of Indebtedness of the Borrower or
any Subsidiary secured at such time by Liens permitted only under Section
6.02(m), does not exceed 10% of Consolidated Total Assets at such time;
provided, however, that this Section 6.03 shall be deemed not to apply to any
Sale and Lease-back Transaction entered into by an SPC so long as (i) neither
the Borrower nor any other Subsidiary (x) provides credit support (including any
undertaking, agreement or instrument which would constitute Indebtedness) or has
given or made other assurances regarding repayment, (y) is directly or
indirectly personally liable or (z) is the lessor and (ii) the obligees will
have recourse solely against the assets of such SPC for repayment of the amounts
owed in connection with such Sale and Lease-back Transaction and any fees,
indemnities, expense reimbursements or other amounts of whatever nature accrued
or payable in connection with such Sale and Lease-back Transaction; and provided
further, that, so long as the Manor Care Note remains in
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effect or any principal, interest or any other expenses or amounts payable
thereunder shall be unpaid, the proceeds of such Sale and Lease-back Transaction
shall be applied solely to prepay amounts outstanding under the Manor Care Note.
SECTION 6.04. Investments, Loans and Advances.
Purchase, hold or acquire any capital stock, comparable ownership interests,
evidences of indebtedness or other securities of, make or permit to exist any
loans or advances to, or make or permit to exist any investment or any other
interest in, any other person, except:
(a) the investments and guarantees existing on the date
hereof set forth on Schedule 6.04 and investments by the Borrower or
any Subsidiary in the capital stock or comparable ownership interests
of the Subsidiaries, including by means of contributions by any
Subsidiary of Hotel Properties to the Borrower or a Subsidiary;
(b) loans or advances by the Borrower to Subsidiaries or by
Subsidiaries to the Borrower or other Subsidiaries;
(c) purchases by the Borrower of the capital stock of
Quality Hotels held by Alain Ammar;
(d) Guarantees permitted under Section 6.01(j);
(e) Permitted Investments; and
(f) other investments, capital contributions, loans and
advances not to exceed at any time 15% of Consolidated Total Assets
at such time.
SECTION 6.05. Mergers and Consolidations. Merge
into or consolidate with any other person, or permit any other person to merge
into or consolidate with it, or sell, transfer, lease or otherwise dispose of
(in one transaction or in a series of transactions) all or substantially all its
assets whether now owned or hereafter acquired, except that:
(a) (i) the Borrower may merge or consolidate with a
Subsidiary or (ii) a Subsidiary may merge or consolidate with the
Borrower so long as the Borrower is the surviving entity;
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(b) any Subsidiary may merge or consolidate with any
Subsidiary;
(c) the Borrower or any Subsidiary may merge or consolidate
with another person; provided, however, that:
(i) the Borrower or such Subsidiary is the
surviving entity;
(ii) no Event of Default or event which, with notice
or the passage of time or both, would constitute an Event
of Default exists after giving effect to such merger or
consolidation; and
(iii) the Agent shall receive a certificate signed by
a Financial Officer of the Borrower of the Borrower,
confirming compliance with clause (ii) above;
(e) the Borrower and the Subsidiaries may consummate the
Distribution.
SECTION 6.06. Asset Sales. Consummate any Asset
Sale, other than (i) sales of receivables for collection (and not for financing
or factoring purposes) in the ordinary course of business, (ii) Asset Sales
which, when added to the Proceeds from all other Asset Sales previously
consummated in the same fiscal year, would not exceed 10% of Consolidated Total
Assets as of the end of the preceding fiscal year, and (iii) Asset Sales, in a
single transaction or series of transactions, of Hotel Properties or the SPC;
provided that no Asset Sale referenced in clause (iii) above shall be permitted
if (a) a Default has occurred or would occur after giving effect to such Asset
Sale, or (b) so long as the Manor Care Note remains in effect or any principal,
interest or any other expenses or amounts payable thereunder shall be unpaid,
the net proceeds of such Asset Sale are used other than to prepay (x) amounts
outstanding under the Manor Care Note or (y) Indebtedness secured by Liens on
the Hotel Properties that are the subject of such Asset Sale.
SECTION 6.07. Transactions with Affiliates. Sell
or transfer any property or assets to, or purchase or acquire any property or
assets from, or otherwise engage in any other transactions with, any of its
Affiliates, except that as long as no Default or Event of Default shall have
occurred and be continuing, the Borrower or any Subsidiary
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may (a) consummate the Distribution or (b) engage in any of the foregoing
transactions (i) in the ordinary course of business at prices and on terms and
conditions not less favorable to the Borrower or such Subsidiary than could be
obtained on an arm's-length basis from unrelated third parties or (ii) between
or among the Borrower and its wholly owned Subsidiaries.
SECTION 6.08. Business of Borrower and
Subsidiaries. Engage at any time in any business or business activity other than
the business currently conducted by it or related or collateral activities in
the hospitality, travel or franchise-related industries.
SECTION 6.09. Subsidiary Indebtedness. Permit any
Subsidiary to create, incur, assume or permit to exist any Indebtedness except:
(i) any Indebtedness permitted by Section 6.01;
(ii) Indebtedness of any SPC in the form of collateralized
mortgage obligations or obligations under a real estate investment
trust; provided, however, that, in respect of such Indebtedness, (i)
neither the Borrower nor any other Subsidiary (x) provides credit
support (including any undertaking, agreement or instrument which
would constitute Indebtedness) or has given or made other assurances
regarding repayment, (y) is directly or indirectly personally liable
or (z) is the lender and (ii) the obligees will have recourse solely
against the assets of SPC for repayment of the principal of and
interest on such Indebtedness and any fees, indemnities, expense
reimbursements or other amounts of whatever nature accrued or payable
in connection with such Indebtedness; and provided further, that, so
long as the Manor Care Note remains in effect or any principal,
interest or any other expenses or amounts payable thereunder shall be
unpaid, the proceeds of the incurrence of such Indebtedness shall be
applied solely to prepay amounts outstanding under the Manor Care
Note; and
(iii) other Indebtedness of any Subsidiary; provided, however,
that the aggregate principal amount (the "Subsidiary Debt Amount")
outstanding of all such other Indebtedness of all Subsidiaries
(excluding amounts permitted under clause (i) above) may not
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exceed 15% of Consolidated Total Assets at such time; provided
further, however, that, at any time during which the Manor Care Note
remains in effect or any principal, interest or any other expenses or
amounts payable thereunder shall be unpaid, the Subsidiary Debt
Amount may not exceed 5% of Consolidated Total Assets at such time.
SECTION 6.10. Agreements. Permit any Subsidiary
to enter into any agreement or incur any obligation the terms of which would
impair the ability of any Subsidiary to pay dividends, to make intercompany
loans or advances or to make distributions (it being agreed that this Section
shall not be breached by any such agreement or obligation binding upon a
Subsidiary at the time it becomes a Subsidiary and not incurred in contemplation
of its becoming a Subsidiary).
SECTION 6.11. Fiscal Year and Accounting Practices. Change
its fiscal year end or accounting practices from those in effect at May 31,
1996, other than as required by GAAP.
SECTION 6.12. No Further Negative Pledges.
Except with respect to prohibitions against other encumbrances on specific
property encumbered to secure payment of particular Indebtedness (which
Indebtedness relates solely to such specific property, and improvements and
accretions thereto, and is otherwise permitted hereby), enter into any agreement
prohibiting the creation or assumption of any Lien upon the properties or assets
of the Borrower or any Subsidiary, whether now owned or hereafter acquired, or
requiring an obligation to be secured if some other obligation is secured.
SECTION 6.13. Minimum Consolidated Net Worth. In
the case of the Borrower, permit its Consolidated Net Worth at any time to be
less than the greater of (i) the sum of (x) $75,000,000, (y) 50% of the
Borrower's Consolidated Net Income accrued during the period (treated as one
accounting period) commencing on the date of the Distribution and ending on the
last day of the most recent fiscal quarter for which financial statements have
been delivered pursuant to Section 5.04 (which amount shall not include
Consolidated Net Income for any fiscal quarter in which the Borrower's
Consolidated Net Income is negative) and (z) the aggregate net cash proceeds
received by the Borrower from the issuance or sale of its capital stock since
the date hereof, and (ii) the sum of (W) the amount that is equal to 75% of the
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Borrower's Consolidated Net Worth as of the last day of the month in which the
Distribution occurs plus (X) 50% of the Borrower's Consolidated Net Income
accrued during the period (treated as one accounting period) commencing on the
date on which the Distribution occurs, and ending on the last day of the most
recent fiscal quarter for which financial statements have been delivered
pursuant to Section 5.04 (which amount shall not include Consolidated Net Income
for any fiscal quarter in which the Borrower's Consolidated Net Income is
negative), plus (Y) the aggregate net cash proceeds received by the Borrower
from the issuance or sale of its capital stock since the date hereof, minus (Z)
an amount equal to the decrease, if any, in the Borrower's Consolidated Net
Worth (as measured at the date of the Distribution) resulting from the sale,
transfer or other disposition of Hotel Properties or an SPC.
SECTION 6.14. Consolidated Leverage Ratio. In the case of
the Borrower, permit the Consolidated Leverage Ratio as of the last day of and
for any period of four fiscal quarters ending during the period from and
including the date hereof through the Maturity Date to exceed (i) 3.75 to 1.0,
at any time during which the Manor Care Note remains in effect or any principal,
interest or any other expenses or amounts payable thereunder shall be unpaid,
and (ii) 3.25 to 1.0, at any other time. The Consolidated Leverage Ratio shall
be calculated as of the end of each fiscal quarter based on the period of the
four consecutive fiscal quarters ending on such date.
SECTION 6.15. Consolidated Interest Coverage Ratio. In the
case of the Borrower, permit its Consolidated Interest Coverage Ratio at any
time during the period from and including the date hereof through the Maturity
Date to be less than (i) 3.25 to 1.0, at any time during which the Manor Care
Note remains in effect or any principal, interest or any other expenses or
amounts payable thereunder shall be unpaid, and (ii) 3.75 to 1.0, at any other
time. The Consolidated Interest Coverage Ratio shall be calculated as of the end
of each fiscal quarter based on the period of the four consecutive fiscal
quarters ending on such date.
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ARTICLE VII. EVENTS OF DEFAULT
In case of the happening of any of the following events
("Events of Default"):
(a) any representation or warranty made or deemed made
(such representation or warranty being deemed made as provided in
Section 4.01) in or in connection with any Loan Document or the
borrowings or issuances of Letter of Credit hereunder, or any
representation, warranty, statement or information contained in any
report, certificate, financial statement or other instrument
furnished in connection with or pursuant to any Loan Document, shall
prove to have been false or misleading in any material respect when
so made, deemed made or furnished;
(b) default shall be made in the payment of any principal
of any Loan or the reimbursement with respect to any L/C Disbursement
when and as the same shall become due and payable, whether at the due
date thereof or at a date fixed for prepayment thereof or by
acceleration thereof or otherwise;
(c) default shall be made in the payment of any interest on
any Loan or any Fee or L/C Disbursement or any other amount (other
than an amount referred to in clause (b) above) due under any Loan
Document, when and as the same shall become due and payable, and such
default shall continue unremedied for a period of five Business Days;
(d) default shall be made in the due observance or
performance by the Borrower or any Subsidiary of any covenant,
condition or agreement contained in Section 5.01(a) or 5.05 or in
Article VI;
(e) default shall be made in the due observance or
performance by the Borrower or any Subsidiary of any covenant,
condition or agreement contained in any Loan Document (other than
those specified in clauses (b), (c) and (d) above) and such default
shall continue unremedied for a period of five Business Days after
notice thereof from the Agent or any Lender to the Borrower;
(f) the Borrower or any Subsidiary shall (i) fail to pay
any principal or interest, regardless of amount,
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due in respect of any Indebtedness in an aggregate principal amount
in excess of $10,000,000, when and as the same shall become due and
payable, or (ii) fail to observe or perform any other term, covenant,
condition or agreement contained in any agreement or instrument
evidencing or governing any Indebtedness in an aggregate principal
amount in excess of $10,000,000 if the effect of any failure referred
to in this clause (ii) is to cause, or to permit the holder or
holders of such Indebtedness or a trustee on its or their behalf
(with or without the giving of notice, the lapse of time or both) to
cause, such Indebtedness to become due prior to its stated maturity;
(g) an involuntary proceeding shall be commenced or an
involuntary petition shall be filed in a court of competent
jurisdiction seeking (i) relief in respect of the Borrower or any
Subsidiary, or of a substantial part of the property or assets of the
Borrower or a Subsidiary, under Title 11 of the United States Code,
as now constituted or hereafter amended, or any other Federal, state
or foreign bankruptcy, insolvency, receivership or similar law, (ii)
the appointment of a receiver, trustee, custodian, sequestrator,
conservator or similar official for the Borrower or any Subsidiary or
for a substantial part of the property or assets of the Borrower or a
Subsidiary or (iii) the winding-up or liquidation of the Borrower or
any Subsidiary; and such proceeding or petition shall continue
undismissed for 60 days or an order or decree approving or ordering
any of the foregoing shall be entered;
(h) the Borrower or any Subsidiary shall (i) voluntarily
commence any proceeding or file any petition seeking relief under
Title 11 of the United States Code, as now constituted or hereafter
amended, or any other Federal, state or foreign bankruptcy,
insolvency, receivership or similar law, (ii) consent to the
institution of, or fail to contest in a timely and appropriate
manner, any proceeding or the filing of any petition described in
clause (g) above, (iii) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator, conservator or similar
official for the Borrower or any Subsidiary or for a substantial part
of the property or assets of the Borrower or any Subsidiary, (iv)
file an answer admitting the material allegations of a petition filed
against it in any such proceeding, (v) make a general
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83
assignment for the benefit of creditors, (vi) become unable, admit in
writing its inability or fail generally to pay its debts as they
become due or (vii) take any action for the purpose of effecting any
of the foregoing;
(i) one or more judgments for the payment of money in an
aggregate amount in excess of $5,000,000 shall be rendered against
the Borrower, any Subsidiary or any combination thereof and the same
shall remain undischarged for a period of 60 consecutive days during
which execution shall not be effectively stayed, or any action shall
be legally taken by a judgment creditor to levy upon assets or
properties of the Borrower or any Subsidiary to enforce any such
judgment;
(j) a Reportable Event or Reportable Events, or a failure
to make a required installment or other payment (within the meaning
of Section 412(n)(l) of the Code), shall have occurred with respect
to any Plan or Plans that reasonably could be expected to result in
liability of the Borrower to the PBGC or to a Plan in an aggregate
amount exceeding $5,000,000 and, within 30 days after the reporting
of any such Reportable Event to the Agent or after the receipt by the
Agent of the statement required pursuant to Section 5.06, the Agent
shall have notified the Borrower in writing that (i) the Required
Lenders have made a determination that, on the basis of such
Reportable Event or Reportable Events or the failure to make a
required payment, there are reasonable grounds (A) for the
termination of such Plan or Plans by the PBGC, (B) for the
appointment by the appropriate United States District Court of a
trustee to administer such Plan or Plans or (C) for the imposition of
a lien in favor of a Plan and (ii) as a result thereof an Event of
Default exists hereunder; or a trustee shall be appointed by a United
States District Court to administer any such Plan or Plans; or the
PBGC shall institute proceedings to terminate any Plan or Plans;
(k) (i) the Borrower or any ERISA Affiliate shall have been
notified by the sponsor of a Multiemployer Plan that it has incurred
Withdrawal Liability to such Multiemployer Plan, (ii) the Borrower or
such ERISA Affiliate does not have reasonable grounds for contesting
such Withdrawal Liability or is not in fact contesting such
Withdrawal Liability in a timely and
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84
appropriate manner and (iii) the amount of the Withdrawal Liability
specified in such notice, when aggregated with all other amounts
required to be paid to Multiemployer Plans in connection with
Withdrawal Liabilities (determined as of the date or dates of such
notification), exceeds $5,000,000 or requires payments exceeding
$1,000,000 in any year;
(l) the Borrower or any ERISA Affiliate shall have been
notified by the sponsor of a Multiemployer Plan that such
Multiemployer Plan is in reorganization or is being terminated,
within the meaning of Title IV of ERISA, if solely as a result of
such reorganization or termination the aggregate annual contributions
of the Borrower and its ERISA Affiliates to all Multiemployer Plans
that are then in reorganization or have been or are being terminated
have been or will be increased over the amounts required to be
contributed to such Multiemployer Plans for their most recently
completed plan years by an amount exceeding $1,000,000; or
(m) there shall have occurred a Change in Control;
then, and in every such event (other than an event with respect to the Borrower
described in clause (g) or (h) above), and at any time thereafter during the
continuance of such event, the Agent, at the request of the Required Lenders,
shall, by notice to the Borrower, take any or all of the following actions, at
the same or different times: (i) terminate forthwith the Commitments or L/C
Commitments, (ii) declare the Loans then outstanding to be forthwith due and
payable in whole or in part, whereupon the principal of the Loans so declared to
be due and payable, together with accrued interest thereon and any unpaid
accrued Fees and all other liabilities of the Borrower accrued hereunder and
under any other Loan Document, shall become forthwith due and payable, without
presentment, demand, protest or any other notice of any kind, all of which are
hereby expressly waived by the Borrower, anything contained herein or in any
other Loan Document to the contrary notwithstanding and (iii) require cash
collateral as contemplated by Section 2.20(j); and in any event with respect to
the Borrower described in clause (g) or (h) above, the Commitments shall
automatically terminate and the principal of the Loans then outstanding,
together with accrued interest thereon and any unpaid accrued Fees and all other
liabilities of the Borrower accrued hereunder and under any other Loan Document,
shall automatically become due and payable,
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85
without presentment, demand, protest or any other notice of any kind, all of
which are hereby expressly waived by the Borrower, anything contained herein or
in any other Loan Document to the contrary notwithstanding.
ARTICLE VIII. THE AGENT
In order to expedite the transactions contemplated
by this Agreement, The Chase Manhattan Bank is hereby appointed to act as Agent
on behalf of the Lenders and the Issuing Bank. Each of the Lenders hereby
irrevocably authorizes the Agent to take such actions on behalf of such Lender
or Issuing Bank and to exercise such powers as are specifically delegated to the
Agent by the terms and provisions hereof, together with such actions and powers
as are reasonably incidental thereto. The Agent is hereby expressly authorized
by the Lenders and the Issuing Bank, without hereby limiting any implied
authority, (a) to receive on behalf of the Lenders and the Issuing Bank all
payments of principal of and interest on the Loans, all payments in respect of
L/C Disbursements and all other amounts due to the Lenders hereunder, and
promptly to distribute to each Lender or Issuing Bank its proper share of each
payment so received; (b) to give notice on behalf of each of the Lenders to the
Borrower of any Event of Default specified in this Agreement of which the Agent
has actual knowledge acquired in connection with its agency hereunder; and (c)
to distribute to each Lender copies of all notices, financial statements and
other materials delivered pursuant to this Agreement as received by the Agent.
Neither the Agent nor any of its directors, offi-
cers, employees or agents shall be liable to the Lenders as such for any action
taken or omitted by any of them except for its or his own gross negligence or
wilful misconduct, or be responsible for any statement, warranty or
representation herein or the contents of any document delivered in connection
herewith (other than any statement, representation or warranty relating to the
Agent or relating to the functions of the Agent hereunder), or be required to
ascertain or to make any inquiry concerning the performance or observance by the
Borrower of any of the terms, conditions, covenants or agreements contained in
any Loan Document. The Agent shall not be responsible to the Lenders for the due
execution, genuineness, validity, enforceability or effectiveness of this
Agreement or any other Loan Documents or other instruments or agreements. The
Agent may deem and treat the
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payee of any note referred to in Section 2.07 as the owner thereof for all
purposes hereof until it shall have received from the payee of such note notice,
given as provided herein, of the transfer thereof. The Agent shall in all cases
be fully protected in acting, or refraining from acting, in accordance with
written instructions signed by the Required Lenders and, except as otherwise
specifically provided herein, such instructions and any action or inaction
pursuant thereto shall be binding on all the Lenders. The Agent shall, in the
absence of knowledge to the contrary, be entitled to rely on any instrument or
document believed by it in good faith to be genuine and correct and to have been
signed or sent by the proper person or persons. Neither the Agent nor any of its
directors, officers, employees or agents shall have any responsibility to the
Borrower on account of the failure of or delay in performance or breach by any
Lender or Issuing Bank of any of its obligations hereunder or to any Lender or
Issuing Bank on account of the failure of or delay in performance or breach by
any other Lender or Issuing Bank or the Borrower of any of their respective
obligations hereunder or under any other Loan Document or in connection herewith
or therewith. The Agent may execute any and all duties hereunder by or through
agents or employees and shall be entitled to rely upon the advice of legal
counsel selected by it with respect to all matters arising hereunder and shall
not be liable for any action taken or suffered in good faith by it in accordance
with the advice of such counsel.
The Lenders hereby acknowledge that the Agent shall be
under no duty to take any discretionary action permitted to be taken by it
pursuant to the provisions of this Agreement unless it shall be requested in
writing to do so by the Required Lenders.
Subject to the appointment and acceptance of a successor
Agent as provided below, the Agent may resign at any time by notifying the
Lenders and the Borrower. Upon any such resignation, the Required Lenders shall
have the right to appoint a successor subject to the written consent of the
Borrower to such successor (which consent will not be unreasonably withheld). If
no successor shall have been so appointed by the Required Lenders and shall have
accepted such appointment within 30 days after the retiring Agent gives notice
of its resignation, then the retiring Agent may, on behalf of the Lenders,
appoint a successor Agent which shall be a bank with offices in New York, New
York and London, England, having a combined capital and surplus of at
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87
least $500,000,000 or an Affiliate of any such bank. Upon the acceptance of any
appointment as Agent hereunder by a successor bank, such successor shall succeed
to and become vested with all the rights, powers, privileges and duties of the
retiring Agent and the retiring Agent shall be discharged from its duties and
obligations hereunder. After the Agent's resignation hereunder, the provisions
of this Article and Section 9.05 shall continue in effect for its benefit in
respect of any actions taken or omitted to be taken by it while it was acting as
Agent.
With respect to the Loans made by it hereunder, the Agent
in its individual capacity and not as Agent shall have the same rights and
powers as any other Lender and may exercise the same as though it were not the
Agent, and the Agent and its Affiliates may accept deposits from, lend money to
and generally engage in any kind of business with the Borrower or any Subsidiary
or other Affiliate thereof as if it were not the Agent.
Each Lender agrees (i) to reimburse the Agent, on demand,
in the amount of its pro rata share (based on its Commitment hereunder or, if
the Commitments shall have been terminated, on its Commitment most recently in
effect) of any expenses incurred for the benefit of the Lenders by the Agent,
including counsel fees and compensation of agents and employees paid for
services rendered on behalf of the Lenders, which the Borrower shall be
obligated to reimburse under Section 9.05 but which shall not have been
reimbursed by the Borrower and (ii) to indemnify and hold harmless the Agent and
any of its directors, officers, employees or agents, on demand, in the amount of
such pro rata share, from and against any and all liabilities, taxes,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever which may be imposed
on, incurred by or asserted against it in its capacity as the Agent or any of
them in any way relating to or arising out of the Agent's role under this
Agreement or any other Loan Document or any action taken or omitted by it or any
of them under this Agreement or any other Loan Document, to the extent the same
shall not have been reimbursed by the Borrower; provided, however, that no
Lender shall be liable to the Agent for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from the gross negligence or wilful
misconduct of the Agent or any of its directors, officers, employees or agents.
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Each Lender acknowledges that it has, independently and
without reliance upon the Agent or any other Lender and based on such documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement. Each Lender also acknowledges that it
will, independently and without reliance upon the Agent or any other Lender and
based on such documents and information as it shall from time to time deem
appropriate, continue to make its own decisions in taking or not taking action
under or based upon this Agreement or any other Loan Document, any related
agreement or any document furnished hereunder or thereunder.
The Co-Agent shall not have any responsibilities or
obligations as Co-Agent under any of the Loan Documents.
ARTICLE IX. MISCELLANEOUS
SECTION 9.01. Notices. Notices and other communications
provided for herein shall be in writing and shall be delivered by hand or
overnight courier service, mailed or sent by telex, graphic scanning or other
telegraphic communications equipment of the sending party, as follows:
(a) if to the Borrower, at 10750 Columbia Pike, Silver
Spring, MD 20901, Attention of General Counsel, with a copy to the
Chief Financial Officer of the Borrower (Telecopy No. 301-979-4007);
(b) if to the Agent, to it at The Chase Manhattan Bank,
Agent Bank Services Group, Grand Central Tower, 140 East 45th Street,
New York, NY 10017. Attention of Janet Belden, (Telecopy No. (212)
270-0002), with a copy to The Chase Manhattan Bank, 270 Park Avenue,
New York, New York 10017, Attention of [James S. Ely, III], (Telecopy
No. 212-270-3279) and Chase Manhattan International Limited, Trinity
Tower, 9 Thomas More Street, London, England E19YT, Attention of
Steven Hurford (Telecopy No. 011 44 71 777 2360); and
(c) if to a Lender, to it at its address (or telecopy
number) set forth in Schedule 2.01 or in the Assignment and
Acceptance pursuant to which such Lender became a party hereto.
Except as otherwise provided in Section 9.15(c), all notices and other
communications given to any party hereto in
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accordance with the provisions of this Agreement shall be deemed to have been
given on the date of receipt, in each case delivered, sent or mailed (properly
addressed) to such party as provided in this Section 9.01 or in accordance with
the latest unrevoked direction from such party given in accordance with this
Section 9.01.
SECTION 9.02. Survival of Agreement. All covenants,
agreements, representations and warranties made by the Borrower herein and in
the certificates or other instruments prepared or delivered in connection with
or pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the Lenders and the Issuing Bank and shall survive the
making by the Lenders of the Loans and the issuance of Letters of Credit by the
Issuing Bank, regardless of any investigation made by the Lenders or the Issuing
Bank or on their behalf, and shall continue in full force and effect as long as
the principal of or any accrued interest on any Loan or any Fee or any other
amount payable under this Agreement or any other Loan Document is outstanding
and unpaid or any Letter of Credit is outstanding and so long as the Commitments
have not been terminated.
SECTION 9.03. Binding Effect. This Agreement shall become
effective when it shall have been executed by the Borrower, each other Borrower
and the Agent and when the Agent shall have received copies hereof which, when
taken together, bear the signatures of each Lender, and thereafter shall be
binding upon and inure to the benefit of the Borrower, each other Borrower, the
Agent and each Lender and their respective successors and assigns, except that
the Borrower may not assign or delegate its rights or obligations hereunder or
any interest herein without the prior consent of all the Lenders.
SECTION 9.04. Successors and Assigns. (a) Whenever in this
Agreement any of the parties hereto is referred to, such reference shall be
deemed to include the successors and assigns of such party; and all covenants,
promises and agreements by or on behalf of the Borrower, the Agent, the Issuing
Bank or the Lenders that are contained in this Agreement shall bind and inure to
the benefit of their respective successors and assigns.
(b) Each Lender may assign to one or more assignees all or
a portion of its interests, rights and obligations under this Agreement
(including all or a portion
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of its Commitment and the Loans at the time owing to it); provided, however,
that (i) except in the case of an assignment to a Lender or an Affiliate of such
Lender, the Borrower and the Agent (and, in the case of any assignment of a
Commitment, the Issuing Bank) must give their prior written consent to such
assignment (which consent shall not be unreasonably withheld), (ii) the amount
of the Commitment of the assigning Lender subject to each such assignment
(determined as of the date the Assignment and Acceptance with respect to such
assignment is delivered to the Agent) shall not be less than $5,000,000 and the
amount of the Commitment of such Lender remaining after such assignment shall
not be less than $5,000,000 or shall be zero, (iii) the parties to each such
assignment shall execute and deliver to the Agent an Assignment and Acceptance,
together with a processing and recordation fee of $2,000 and (iv) the assignee,
if it shall not be a Lender, shall deliver to the Agent an Administrative
Questionnaire. Upon acceptance and recording pursuant to Section 9.04(e), from
and after the effective date specified in each Assignment and Acceptance, which
effective date shall be at least five Business Days after the execution thereof,
(A) the assignee thereunder shall be a party hereto and, to the extent of the
interest assigned by such Assignment and Acceptance, have the rights and
obligations of a Lender under this Agreement and (B) the assigning Lender
thereunder shall, to the extent of the interest assigned by such Assignment and
Acceptance, be released from its obligations under this Agreement (and, in the
case of an Assignment and Acceptance covering all or the remaining portion of an
assigning Lender's rights and obligations under this Agreement, such Lender
shall cease to be a party hereto (but shall continue to be entitled to the
benefits of Sections 2.13, 2.15, 2.19 and 10.05, as well as to any Fees accrued
for its account hereunder and not yet paid)).
(c) By executing and delivering an Assignment and
Acceptance, the assigning Lender thereunder and the assignee thereunder shall be
deemed to confirm to and agree with each other and the other parties hereto as
follows: (i) such assigning Lender warrants that it is the legal and beneficial
owner of the interest being assigned thereby free and clear of any adverse claim
and that its Commitment, and the outstanding balances of its Loans, in each case
without giving effect to assignments thereof which have not become effective,
are as set forth in such Assignment and Acceptance, (ii) except as set forth in
(i) above, such assigning Lender makes no representation or warranty and
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assumes no responsibility with respect to any statements, warranties or
representations made in or in connection with this Agreement, or the execution,
legality, validity, enforceability, genuineness, sufficiency or value of this
Agreement, any other Loan Document or any other instrument or document furnished
pursuant hereto or the financial condition of the Borrower or any Subsidiary or
the performance or observance by the Borrower or any Subsidiary of any of its
obligations under this Agreement, any other Loan Document or any other
instrument or document furnished pursuant hereto; (iii) such assignee represents
and warrants that it is legally authorized to enter into such Assignment and
Acceptance; (iv) such assignee confirms that it has received a copy of this
Agreement, together with copies of the most recent financial statements
delivered pursuant to Section 5.04 and such other documents and information as
it has deemed appropriate to make its own credit analysis and decision to enter
into such Assignment and Acceptance; (v) such assignee will independently and
without reliance upon the Agent, such assigning Lender or any other Lender and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under this Agreement; (vi) such assignee appoints and authorizes the Agent to
take such action as agent on its behalf and to exercise such powers under this
Agreement as are delegated to the Agent by the terms hereof, together with such
powers as are reasonably incidental thereto; and (vii) such assignee agrees that
it will perform in accordance with their terms all the obligations which by the
terms of this Agreement are required to be performed by it as a Lender.
(d) The Agent shall maintain at one of its offices in The
City of New York a copy of each Assignment and Acceptance delivered to it and a
register for the recordation of the names and addresses of the Lenders, and the
Commitment of, and principal amount of the Loans owing to, each Lender pursuant
to the terms hereof from time to time (the "Register"). The entries in the
Register shall be conclusive in the absence of manifest error and the Borrower,
the Agent, the Issuing Bank and the Lenders may treat each person whose name is
recorded in the Register pursuant to the terms hereof as a Lender hereunder for
all purposes of this Agreement. The Register shall be available for inspection
by the Borrower, the Issuing Bank and any Lender, at any reasonable time and
from time to time upon reasonable prior notice.
<PAGE> 92
92
(e) Upon its receipt of a duly completed Assignment and
Acceptance executed by an assigning Lender and an assignee together with an
Administrative Questionnaire completed in respect of the assignee (unless the
assignee shall already be a Lender hereunder), the processing and recordation
fee referred to in Section 9.04(b) and, if required, the written consent of the
Borrower, the Issuing Bank and the Agent to such assignment, the Agent shall (i)
accept such Assignment and Acceptance, (ii) record the information contained
therein in the Register and (iii) give prompt notice thereof to the Lenders and
the Issuing Bank.
(f) Each Lender may without the consent of the Borrower,
the Issuing Bank or the Agent sell participations to one or more banks or other
entities in all or a portion of its rights and obligations under this Agreement
(including all or a portion of its Commitment and the Loans owing to it);
provided, however, that (i) such Lender's obligations under this Agreement shall
remain unchanged, (ii) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, (iii) the participating
banks or other entities shall be entitled to the benefit of the cost protection
provisions contained in Sections 2.13, 2.15 and 2.19 to the same extent as if
they were Lenders but not in excess of those cost protections to which the
Lender from which it purchased its participation would be entitled to under
Sections 2.13, 2.15 and 2.19 and (iv) the Borrower, the Agent, the Issuing Bank
and the other Lenders shall continue to deal solely and directly with such
Lender (and shall not be required to deal with any participating bank or other
entity, notwithstanding any other provision contained herein) in connection with
such Lender's rights and obligations under this Agreement, and such Lender shall
retain the sole right to enforce the obligations of the Borrower relating to the
Loans or L/C Disbursements and to approve any amendment, modification or waiver
of any provision of this Agreement (other than amendments, modifications or
waivers decreasing any fees payable hereunder, increasing the Commitment of such
Lender or decreasing the amount of principal of or the rate at which interest is
payable on the Loans, or extending any scheduled principal payment date or date
fixed for the payment of interest on the Loans).
(g) Any Lender or participant may, in connection with any
assignment or participation or proposed assignment
<PAGE> 93
93
or participation pursuant to this Section 9.04, disclose to the assignee or
participant or proposed assignee or participant any information relating to the
Borrower furnished to such Lender by or on behalf of the Borrower; provided,
however, that, prior to any such disclosure of information designated by the
Borrower as confidential, each such assignee or participant or proposed assignee
or participant shall execute an agreement whereby such assignee or participant
shall agree to preserve the confidentiality of such confidential information
(subject to those exceptions set forth in Section 9.17). It is understood that
confidential information relating to the Borrower would not ordinarily be
provided in connection with assignments or participations of Competitive Loans.
(h) Any Lender may at any time assign all or any portion of
its rights under this Agreement to a Federal Reserve Bank; provided, however,
that no such assignment shall release a Lender from any of its obligations
hereunder.
SECTION 9.05. Expenses; Indemnity. (a) The Borrower agrees
to pay all reasonable out-of-pocket expenses incurred by each of the Agent and
the Issuing Bank and its Affiliates in connection with the preparation of this
Agreement and the other Loan Documents and the syndication of the facilities
provided for herein or in connection with any amendments, modifications or
waivers of the provisions hereof or thereof (whether or not the transactions
hereby contemplated shall be consummated) or incurred by the Agent or any Lender
in connection with the enforcement or protection of their rights (as such rights
may relate to the Borrower or any Subsidiary) in connection with this Agreement
and the other Loan Documents or in connection with the Loans made or Letters of
Credit issued hereunder and under the Issuing Bank Agreements, as applicable,
including the reasonable fees and disbursements of Cravath, Swaine & Moore,
counsel for the Agent, any other counsel for the Agent and counsel for any
Lender, including the allocated costs of in-house counsel.
(b) The Borrower agrees to indemnify the Agent, each
Lender, and the Issuing Bank, and their respective directors, officers,
employees, agents and Affiliates (each such person being called an "Indemnitee")
against, and to hold each Indemnitee harmless from, any and all losses, claims,
damages, liabilities and related expenses, including reasonable counsel fees and
expenses, incurred by or
<PAGE> 94
94
asserted against any Indemnitee arising out of, in any way connected with, or as
a result of (i) the execution or delivery of this Agreement or any other Loan
Document or any agreement or instrument contemplated thereby, the performance by
the parties thereto of their respective obligations thereunder or the
consummation of the Transactions and the other transactions contemplated
thereby, (ii) the use of the proceeds of the Loans or issuance of Letters of
Credit, or (iii) any claim, litigation, investigation or proceeding relating to
any of the foregoing, whether or not any Indemnitee is a party thereto;
provided, however, that such indemnity shall not, as to any Indemnitee, be
available to the extent that such losses, claims, damages, liabilities or
related expenses are determined by a court of competent jurisdiction by final
and nonappealable judgment to have resulted from the negligence or misconduct of
such Indemnitee. Promptly after receipt by an Indemnitee of notice of any
complaint or the commencement of any action or proceeding with respect to which
indemnification is being sought hereunder, such person shall notify the Borrower
of such complaint or of the commencement of such action or proceeding, but
failure so to notify the Borrower will relieve the Borrower from any liability
which such Borrower may have hereunder only if, and to the extent that such
failure results in the forfeiture by such Borrower of substantial rights and
defenses, and shall not in any event relieve such Borrower from any other
obligation or liability that such Borrower may have to any Indemnitee otherwise
than under this Agreement. If the Borrower so elects or is requested by such
Indemnitee, such Borrower shall assume the defense of such action or proceeding,
including the employment of counsel reasonably satisfactory to the Indemnitee
and the payment of the reasonable fees and disbursements of such counsel. In the
event, however, such Indemnitee reasonably determines in its judgment that
having common counsel would present such counsel with a conflict of interest or
if the defendant in, or targets of, any such action or proceeding include both
the Indemnitee and such Borrower, and such Indemnitee reasonably concludes that
there may be legal defenses available to it or other Indemnitees that are
different from or in addition to those available to such Borrower or if such
Borrower fails to assume the defense of the action or proceeding or to employ
counsel reasonably satisfactory to such Indemnitee, in either case in a timely
manner, then the Indemnitee may employ separate counsel to represent or defend
it in any such action or proceeding and such Borrower shall pay the reasonable
fees and disbursements of such counsel. In any action or proceeding
<PAGE> 95
95
the defense of which the Borrower assumes, the Indemnitee shall have the right
to participate in such litigation and to retain its own counsel at the
Indemnitee's own expense. The Borrower further agrees that it shall not, without
the prior written consent of the Indemnitee, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not an Indemnitee is an actual or potential party to such claim, action, suit
or proceeding) unless such settlement, compromise or consent includes (i) an
unconditional release of each Indemnitee hereunder from all liability arising
out of such claim, action, suit or proceeding or (ii) a covenant not to sue each
Indemnitee, or another similar alternative which is consented to by each
Indemnitee party to such claim, action, suit or proceeding, which covenant not
to sue or other approved alternative has the effect of an unconditional release
of each Indemnitee hereunder from all liability arising out of such claim,
action, suit or proceeding.
(c) The provisions of this Section shall remain operative
and in full force and effect regardless of the expiration of the term of this
Agreement, the consummation of the transactions contemplated hereby, the
repayment of any of the Loans, the expiration of any Letter of Credit, the
invalidity or unenforceability of any term or provision of this Agreement or any
other Loan Document, or any investigation made by or on behalf of the Agent or
any Lender or any Issuing Bank. All amounts due under this Section shall be
payable on written demand therefor.
SECTION 9.06. Right of Setoff. If an Event of Default shall
have occurred and be continuing, each Lender is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by such Lender
to or for the credit or the account of the Borrower against any of and all the
obligations of the Borrower now or hereafter existing under this Agreement held
by such Lender, irrespective of whether or not such Lender shall have made any
demand under this Agreement and although such obligations may be unmatured. The
rights of each Lender under this Section are in addition to other rights and
remedies (including other rights of setoff) which such Lender may have.
<PAGE> 96
96
SECTION 9.07. APPLICABLE LAW. THIS AGREEMENT SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK
WITHOUT REFERENCE TO ITS CONFLICTS OF LAWS PRINCIPLES OR PROVISIONS. EACH LETTER
OF CREDIT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE
LAWS OR RULES DESIGNATED IN SUCH LETTER OF CREDIT, OR IF NO SUCH LAWS OR RULES
ARE DESIGNATED, THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1993
REVISION), INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500 (THE "UNIFORM
CUSTOMS") AND, AS TO MATTERS NOT GOVERNED BY THE UNIFORM CUSTOMS, THE LAWS OF
THE STATE OF NEW YORK.
SECTION 9.08. Waivers; Amendment. (a) No failure or delay
of the Agent or any Lender or any Issuing Bank in exercising any power or right
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or further exercise
thereof or the exercise of any other right or power. The rights and remedies of
the Agent, the Issuing Bank and the Lenders hereunder and under the other Loan
Documents are cumulative and are not exclusive of any rights or remedies which
they would otherwise have. No waiver of any provision of this Agreement or any
other Loan Document or consent to any departure by the Borrower therefrom shall
in any event be effective unless the same shall be permitted by Section 9.08(b),
and then such waiver or consent shall be effective only in the specific instance
and for the purpose for which given. No notice or demand on the Borrower in any
case shall entitle such Borrower to any other or further notice or demand in
similar or other circumstances.
(b) Neither this Agreement nor any provision hereof may be
waived, amended or modified except pursuant to an agreement or agreements in
writing entered into by the Borrower and the Required Lenders; provided,
however, that no such agreement shall (i) decrease the principal amount of, or
extend the maturity of or any scheduled principal payment date or date for the
payment of any interest on any Loan or any date for reimbursement of an L/C
Disbursement, or Fees, or waive or excuse any such payment or any part thereof,
or decrease the rate of interest on any Loan or L/C Disbursement, without the
prior written consent of each Lender affected thereby, (ii) increase the
Commitment or change the Facility Fees of any Lender without the prior written
consent of such Lender, or (iii) amend or modify the
<PAGE> 97
97
provisions of Section 2.16, the provisions of this Section or the definition of
the "Required Lenders", without the prior written consent of each affected
Lender; provided further that no such agreement shall amend, modify or otherwise
affect the rights or duties of the Agent or any Issuing Bank hereunder without
the prior written consent of the Agent or such Issuing Bank.
(c) Notwithstanding the foregoing, any Issuing Bank
Agreement may be waived, amended or modified by the parties thereto with the
written approval of the Agent if and to the extent that such waiver, amendment
or modification would be permitted in connection with the execution and delivery
of a replacement of such agreement.
SECTION 9.09. Interest Rate Limitation. Notwithstanding
anything herein to the contrary, if at any time the applicable interest rate or
participation in any L/C Disbursement, together with all fees and charges which
are treated as interest or such Loan or participation in any L/C Disbursement
under applicable law (collectively the "Charges"), as provided for herein or in
any other document executed in connection herewith, or otherwise contracted for,
charged, received, taken or reserved by any Lender, shall exceed the maximum
lawful rate (the "Maximum Rate") which may be contracted for, charged, taken,
received or reserved by such Lender in accordance with applicable law, together
with all Charges payable to such Lender, shall be limited to the Maximum Rate.
SECTION 9.10. Entire Agreement. This Agreement and the
other Loan Documents and the letter agreement referred to in Section 2.06(b)
constitute the entire contract between the parties relative to the subject
matter hereof. Any previous agreement among the parties with respect to the
subject matter hereof is superseded by this Agreement and the other Loan
Documents. Nothing in this Agreement or in the other Loan Documents, expressed
or implied, is intended to confer upon any party other than the parties hereto
and thereto any rights, remedies, obligations or liabilities under or by reason
of this Agreement or the other Loan Documents.
SECTION 9.11. Waiver of Jury Trial; Punitive Damages. Each
party hereto hereby waives, to the fullest extent permitted by applicable law,
(a) any right it may have to a trial by jury in respect of any litigation
directly or indirectly arising out of, under or in connection with
<PAGE> 98
98
this Agreement or any of the other Loan Documents and (b) any claims for
punitive damages (to the extent such claims arise from the use of proceeds of
the Loans for the purpose of acquisitions). Each party hereto (i) certifies that
no representative, agent or attorney of any other party has represented,
expressly or otherwise, that such other party would not, in the event of
litigation, seek to enforce the foregoing waiver and (ii) acknowledges that it
and the other parties hereto have been induced to enter into this Agreement and
the other Loan Documents, as applicable, by, among other things, the mutual
waivers and certifications in this Section .
SECTION 9.12. Severability. In the event any one or more of
the provisions contained in this Agreement or in any other Loan Document should
be held invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein and therein
shall not in any way be affected or impaired thereby. The parties shall endeavor
in good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.
SECTION 9.13. Counterparts. This Agreement may be executed
in two or more counterparts, each of which shall constitute an original but all
of which when taken together shall constitute but one contract, and shall become
effective as provided in Section 9.03.
SECTION 9.14. Headings. Article and Section headings and
the Table of Contents used herein are for convenience of reference only, are not
part of this Agreement and are not to affect the construction of, or to be taken
into consideration in interpreting, this Agreement.
SECTION 9.15. Jurisdiction; Consent to Service of Process;
Judgment Currency. (a) The Borrower hereby irrevocably and unconditionally
submits, for itself and its property, to the nonexclusive jurisdiction of any
New York State court or Federal court of the United States of America sitting in
New York City, and any appellate court from any thereof, in any action or
proceeding arising out of or relating to this Agreement or the other Loan
Documents, or for recognition or enforcement of any judgment, and each of the
parties hereto hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or
<PAGE> 99
99
proceeding may be heard and determined in such New York State court or, to the
extent permitted by law, in such Federal court. Each of the parties hereto
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Nothing in this Agreement shall affect any
right that the Agent, any Issuing Bank, or any Lender may otherwise have to
bring any action or proceeding relating to this Agreement or the other Loan
Documents against the Borrower or its properties in the courts of any
jurisdiction.
(b) The Borrower hereby irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection which it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this agreement or the other
Loan Documents in any New York State or Federal court. Each of the parties
hereto hereby irrevocably waives, to the fullest extent permitted by law, the
defense of an inconvenient forum to the maintenance of such action or proceeding
in any such court.
(c) The Borrower and each other party hereto consents to
service of process in the manner provided for notices in Section 9.01. Nothing
in this Agreement will affect the right of any party to this Agreement to serve
process in any other manner permitted by law.
(d) If for the purpose of obtaining judgment in any court
it is necessary to convert a sum due hereunder in one currency into another
currency, the parties hereto agree, to the fullest extent that they may
effectively do so under applicable law, that the rate of exchange used shall be
the spot rate at which in accordance with normal banking procedures the first
currency could be purchased in New York City with such other currency by the
person obtaining such judgment on the Business Day preceding that on which final
judgment is given.
(e) The parties agree, to the fullest extent that they may
effectively do so under applicable law, that the obligations of the Borrower to
make payments in any currency of the principal of and interest on the Loans of
such Borrower and any other amounts due from such Borrower hereunder to the
Agent as provided in Section 2.16 (i) shall not be discharged or satisfied by
any tender, or any recovery pursuant to any judgment (whether or not entered in
<PAGE> 100
100
accordance with Section 9.15(d)), in any currency other than the relevant
currency, except to the extent that such tender or recovery shall result in the
actual receipt by the Agent at its relevant office as provided in Section 2.16
on behalf of the Lenders of the full amount of the relevant currency expressed
to be payable in respect of the principal of and interest on the Loans and all
other amounts due hereunder (it being assumed for purposes of this clause (i)
that the Agent will convert any amount tendered or recovered into the relevant
currency on the date of such tender or recovery), (ii) shall be enforceable as
an alternative or additional cause of action for the purpose of recovering in
the relevant currency the amount, if any, by which such actual receipt shall
fall short of the full amount of the relevant currency so expressed to be
payable and (iii) shall not be affected by an unrelated judgment being obtained
for any other sum due under this Agreement.
SECTION 9.16. Confidentiality. Unless otherwise agreed to
in writing by the Borrower, the Issuing Bank, the Agent and each Lender hereby
agree to keep all Proprietary Information (as defined below) confidential and
not to disclose or reveal any Proprietary Information to any person other than
the Agent's or such Lender's directors, officers, employees, Affiliates and
agents and to actual or potential assignees and participants, and then only on a
confidential basis; provided, however, that the Agent, the Issuing Bank or any
Lender may disclose Proprietary Information (a) as required by law, rule,
regulation or judicial process, (b) to its attorneys and accountants, (c) as
requested or required by any state or Federal or foreign authority or examiner
regulating banks or banking or (d) subject to appropriate confidentiality
protections, in any legal proceedings between the Agent, the Issuing Bank or
such Lender and the Borrower arising out of this Agreement. For purposes of this
Agreement, the term "Proprietary Information" shall include all information
about the Borrower or any of their Affiliates which has been furnished by the
Borrower or any of its Affiliates, whether furnished before or after the date
hereof, and regardless of the manner in which it is furnished; provided,
however, that Proprietary Information does not include information which (x) is
or becomes generally available to the public other than as a result of a
disclosure by the Agent, the Issuing Bank or any Lender not permitted by this
Agreement, (y) was obtained or otherwise became available to the Agent, the
Issuing Bank or any Lender on a nonconfidential basis prior to its disclosure to
the Agent, the Issuing Bank or such
<PAGE> 101
101
Lender by the Borrower or any of its Affiliates or (z) becomes available to the
Agent, the Issuing Bank or any Lender on a nonconfidential basis from a person
other than the Borrower or its Affiliates who, to the best knowledge of the
Agent, the Issuing Bank or such Lender, as the case may be, is not otherwise
bound by a confidentiality agreement with the Borrower or any of its Affiliates,
or is not otherwise
<PAGE> 102
prohibited from transmitting the information to the Agent, the Issuing Bank or
such Lender.
IN WITNESS WHEREOF, the Borrower, the Agent, the Issuing
Bank and the Lenders have caused this Agreement to be duly executed by their
respective authorized officers as of the day and year first above written.
CHOICE HOTELS HOLDINGS, INC., as a
Borrower,
by_________________________________
Name:
Title:
by_________________________________
Name:
Title:
<PAGE> 103
103
THE CHASE MANHATTAN BANK, individually
and as Issuing Bank and Agent,
by____________________________________
Name:
Title:
[OTHER LENDERS]
<PAGE> 104
EXHIBIT A-1
FORM OF COMPETITIVE BID REQUEST
The Chase Manhattan Bank, as Agent for
the Lenders referred to below,
140 East 45th Street, 29th Floor
New York, NY 10017-3162
Attention of Ms. Janet Belden
[Date]
Dear Sirs:
The undersigned, Choice Hotels International, Inc. (the
"Borrower"), refers to the Competitive Advance and Multi-Currency Revolving
Credit Facility Agreement dated as of October [ ], 1996, among Choice Hotels
Holdings, Inc. (subsequently renamed Choice Hotels International Inc.), the
lenders listed in Schedule 2.01 thereto, Nationsbank, N.A., as co-agent, and The
Chase Manhattan Bank, as agent for the lenders (the "Credit Agreement").
Capitalized terms used herein and not otherwise defined herein shall have the
meanings assigned to such terms in the Credit Agreement. The Borrower hereby
gives you notice pursuant to Section 2.03(a) of the Credit Agreement that it
requests a Competitive Borrowing under the Credit Agreement, and in that
connection sets forth below the terms on which such Competitive Borrowing is
requested to be made:
(A) Date of Competitive Borrowing
(which is a Business Day) ______________________
(B) Principal Amount of
Competitive Borrowing(1) ______________________
(C) Interest rate basis(2) ______________________
- --------
(1) In Dollars not less than $5,000,000 (and in integral multiples of
$1,000,000) or greater than the Total Commitment then available.
(2) Eurodollar Loan or Fixed Rate Loan.
<PAGE> 105
2
(D) Interest Period and the last
day thereof(3) ______________________
Upon acceptance of any or all of the Loans offered by the
Lenders in response to this request, the Borrower shall be deemed to have
represented and warranted that the conditions to lending specified in Section
4.01(b) and (c) of the Credit Agreement have been satisfied.
Very truly yours,
by__________________________________
Title: [Responsible Officer]
Copy to:
Chase Manhattan International Limited (London),
on behalf of the Agent for the
Lenders referred to below
Trinity Tower
9 Thomas More Street
London, England E19YT
Attention of Mr. Steve Hurford
- --------
(3) Which shall be subject to the definition of "Interest Period" and end
not later than the Maturity Date.
<PAGE> 106
EXHIBIT A-2
FORM OF NOTICE OF COMPETITIVE BID REQUEST
[Name of Bank]
[Address]
New York, NY
Attention:
[Date]
Dear Sirs:
Reference is made to the Competitive Advance and Multi-Currency
Revolving Credit Facility Agreement dated as of October [ ], 1996, among Choice
Hotels Holdings, Inc., a Delaware corporation (the "Borrower"), the lenders
listed in Schedule 2.01 thereto, Nationsbank, N.A., as co-agent, and The Chase
Manhattan Bank, as agent for the lenders (the "Credit Agreement"). Capitalized
terms used herein and not otherwise defined herein shall have the meanings
assigned to such terms in the Credit Agreement. The Borrower made a Competitive
Bid Request on , 19 , pursuant to Section 2.03(a) of the Credit Agreement, and
in that connection you are invited to submit a Competitive Bid by
[Date]/[Time].(4) Your Competitive Bid must comply with Section 2.03(b) of the
Credit Agreement and the terms set forth below on which the Competitive Bid
Request was made:
(A) Date of Competitive Borrowing ____________________
(B) Principal amount of
Competitive Borrowing ____________________
(C) Interest rate basis ____________________
- --------
(4) The Competitive Bid must be received by the Agent (i) in the case of
Eurodollar Loans, not later than 9:30 a.m., New York City time, three Business
Days before a proposed Competitive Borrowing and (ii) in the case of Fixed Rate
Loans, not later than 9:30 a.m., New York City time, on the Business Day of a
proposed Competitive Borrowing.
<PAGE> 107
2
(D) Interest Period and the
last day thereof ____________________
Very truly yours,
THE CHASE MANHATTAN BANK,
as Agent,
by______________________________
Title:
<PAGE> 108
EXHIBIT A-3
FORM OF COMPETITIVE BID
The Chase Manhattan Bank, as Agent for
the Lenders referred to below,
140 East 45th Street, 29th Floor
New York, NY 10017-3162
Attention of Ms. Janet Belden
[Date]
Dear Sirs:
The undersigned, [Name of Bank], refers to the
Competitive Advance and Multi-Currency Revolving Credit Facility Agreement dated
as of October [ ], 1996, among Choice Hotels Holdings, Inc., a Delaware
corporation (the "Borrower"), the lenders listed in Schedule 2.01 thereto,
Nationsbank, N.A., as co-agent, and The Chase Manhattan Bank, as agent for the
lenders (the "Credit Agreement"). Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to such terms in the
Credit Agreement. The undersigned hereby makes a Competitive Bid pursuant to
Section 2.03(b) of the Credit Agreement, in response to the Competitive Bid
Request made by the Borrower on , 19 , and in that connection sets forth below
the terms on which such Competitive Bid is made:
(A) Principal Amount(5) ____________________
(B) Competitive Bid Rate(6) ____________________
(C) Interest Period and last
day thereof ____________________
- --------
(5) In Dollars not less than $5,000,000 or greater than the requested
Competitive Borrowing and in integral multiples of $1,000,000. Multiple bids
will be accepted by the Agent.
(6) I.e., LIBO Rate + or - %, in the case of Eurodollar Loans
or %, in the case of Fixed Rate Loans.
<PAGE> 109
2
The undersigned hereby confirms that it is prepared,
subject to the conditions set forth in the Credit Agreement, to extend credit to
the Borrower upon acceptance by the Borrower of this bid in accordance with
Section 2.03(d) of the Credit Agreement.
Very truly yours,
[NAME OF LENDER,]
by____________________________
Title:
Copy to:
Chase Manhattan International Limited (London),
on behalf of the Agent for the
Lenders referred to below
Trinity Tower
9 Thomas More Street
London, England E19YT
Attention of Mr. Steve Hurford
<PAGE> 110
EXHIBIT A-4
FORM OF COMPETITIVE BID ACCEPT/REJECT LETTER
The Chase Manhattan Bank, as Agent for
the Lenders referred to below,
140 East 45th Street, 29th Floor
New York, NY 10017-3162
Attention of Ms. Janet Belden
[Date]
Dear Sirs:
The undersigned, Choice Hotels International, Inc.
(the "Borrower"), refers to the Competitive Advance and Multi-Currency Revolving
Credit Facility Agreement dated as of October [ ], 1996, among Choice Hotels
Holdings, Inc. (as subsequently renamed Choice Hotels International, Inc.), a
Delaware corporation (the "Borrower"), the lenders listed in Schedule 2.01
thereto, Nationsbank, N.A., as co-agent, and The Chase Manhattan Bank, as agent
for the lenders (the "Credit Agreement").
In accordance with Section 2.03(c) of the Credit
Agreement, we have received a summary of bids in connection with our Competitive
Bid Request dated and in accordance with Section 2.03(d) of the Credit
Agreement, we hereby accept the following bids for maturity on [date]:
Principal Amount Fixed Rate/Margin Lender
- ---------------- ----------------- ------
$ [%]/[+/-. %]
$
We hereby reject the following bids:
Principal Amount Fixed Rate/Margin Lender
- ---------------- ----------------- ------
$ [%]/[+/-. %]
$
<PAGE> 111
2
The $ should be deposited in Chemical Bank
account number [ ] on [date].
Very truly yours,
CHOICE HOTELS INTERNATIONAL,
INC.,
by_________________________________
Name:
Title:
Copy to:
Chase Manhattan International Limited (London),
on behalf of the Agent for the
Lenders referred to below
Trinity Tower
9 Thomas More Street
London, England E19YT
Attention of Mr. Steve Hurford
<PAGE> 112
EXHIBIT A-5
FORM OF STANDBY BORROWING REQUEST
The Chase Manhattan Bank, as Agent for
the Lenders referred to below,
140 East 45th Street, 29th Floor
New York, NY 10017-3162
Attention of Ms. Janet Belden
[Date]
Dear Sirs:
The undersigned, Choice Hotels International, Inc.
(the "Borrower"), refers to the Competitive Advance and Multi-Currency Revolving
Credit Facility Agreement dated as of October [ ], 1996, among Choice Hotels
Holdings, Inc. (subsequently renamed Choice Hotels International, Inc.), a
Delaware corporation (the "Borrower"), the lenders listed in Schedule 2.01
thereto, Nationsbank, N.A., as co-agent, and The Chase Manhattan Bank, as agent
for the lenders (the "Credit Agreement"). Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to such terms in the
Credit Agreement. The Borrower hereby gives you notice pursuant to Section 2.04
of the Credit Agreement that it requests a Standby Borrowing under the Credit
Agreement, and in that connection sets forth below the terms on which such
Standby Borrowing is requested to be made:
(A) Date of Standby Borrowing
(which is a Business Day) ____________________
(B) Principal Amount of
Standby Borrowing(7) ____________________
(C) Interest rate basis(8) ____________________
- --------
(7) Not less than $5,000,000 (and in integral multiples of $1,000,000) or
greater than the Total Commitment then available. For Eurocurrency Borrowings,
express in Equivalent Dollar Amount.
(8) Eurocurrency Loan, Eurodollar Loan, CD Loan or ABR Loan.
<PAGE> 113
2
(D) Interest Period and the last
day thereof(9) ____________________
(E) For Eurocurrency Borrowings:
(1) Type of Alternative Currency ____________________
(2) Funds are requested to be
disbursed to the following:
Bank Name:_________________________________________________
Bank Address:______________________________________________
For Credit to:
Account Name:______________________________________________
Account Number:____________________________________________
Upon acceptance of any or all of the Loans made by the Lenders in
response to this request, the Borrower shall be deemed to have represented and
warranted that the conditions to lending specified in Section 4.01(b) and (c) of
the Credit Agreement have been satisfied.
Very truly yours,
by____________________________
Title: [Responsible Officer]
Copy to:
Chase Manhattan International Limited (London),
on behalf of the Agent for the
Lenders referred to below
Trinity Tower
9 Thomas More Street
London, England E19YT
Attention of Mr. Steve Hurford
- --------
(9) Which shall be subject to the definition of "Interest Period" and end
not later than the Maturity Date.
<PAGE> 114
EXHIBIT B
ADMINISTRATIVE QUESTIONNAIRE
MANOR CARE, INC.
ADMINISTRATIVE QUESTIONNAIRE
Please accurately complete the following information and return via FAX to the
attention of Katherine Wolf at The Chase Manhattan Bank as soon as possible.
FAX NUMBER: 212-622-0122
LEGAL NAME TO APPEAR IN DOCUMENTATION:
- --------------------------------------------------------------------------------
GENERAL INFORMATION - DOMESTIC LENDING OFFICE:
Institution Name:
---------------------------------------------------------
Street Address:
---------------------------------------------------------
City, State, Zip Code:
---------------------------------------------------------
GENERAL INFORMATION - EURODOLLAR LENDING OFFICE:
Institution Name:
---------------------------------------------------------
Street Address:
---------------------------------------------------------
City, State, Zip Code:
---------------------------------------------------------
CONTACTS/NOTIFICATION METHODS:
CREDIT CONTACTS:
Primary Contact:
---------------------------------------------------------
<PAGE> 115
2
Street Address:
---------------------------------------------------------
City, State, Zip Code:
---------------------------------------------------------
Phone Number:
---------------------------------------------------------
FAX Number:
---------------------------------------------------------
Backup Contact:
---------------------------------------------------------
Street Address:
---------------------------------------------------------
City, State, Zip Code:
---------------------------------------------------------
Phone Number:
---------------------------------------------------------
FAX Number:
---------------------------------------------------------
TAX WITHHOLDING:
Non Resident Alien _____________________Y* _____________________N
*Form 4224 Enclosed
Tax ID Number _________________________________________________________
CONTACTS/NOTIFICATION METHODS:
ADMINISTRATIVE CONTACTS - BORROWINGS, PAYDOWNS, INTEREST, FEES, ETC.
Contact:
---------------------------------------------------------
Street Address:
---------------------------------------------------------
City, State, Zip Code:
---------------------------------------------------------
<PAGE> 116
3
Phone Number:
---------------------------------------------------------
FAX Number:
---------------------------------------------------------
BID LOAN NOTIFICATION:
ADMINISTRATIVE CONTACTS - BORROWINGS, PAYDOWNS, INTEREST, FEES, ETC.
Contact:
---------------------------------------------------------
Street Address:
---------------------------------------------------------
City, State, Zip Code:
---------------------------------------------------------
Phone Number:
---------------------------------------------------------
FAX Number:
---------------------------------------------------------
PAYMENT INSTRUCTIONS:
Name of Bank where funds are to be transferred:
----------------------------------------------------------------------------
Routing Transit/ABA number of Bank where funds are to be transferred:
----------------------------------------------------------------------------
Name of Account, if applicable:
----------------------------------------------------------------------------
Account Number:
----------------------------------------------------------
Additional Information:
----------------------------------------------------------
MAILINGS:
Please specify who should receive financial information:
<PAGE> 117
4
Name:
----------------------------------------------------------
Street Address:
----------------------------------------------------------
City, State, Zip Code:
----------------------------------------------------------
It is very important that all of the above information is accurately filled in
and returned promptly. If there is someone other than yourself who should
receive this questionnaire, please notify us of their name and FAX number and we
will FAX them a copy of the questionnaire. If you have any questions, please
call me on 212-622-9360.
<PAGE> 118
EXHIBIT C
[FORM OF]
ASSIGNMENT AND ACCEPTANCE
Reference is made to the Competitive Advance and Multi-Currency
Revolving Credit Facility Agreement dated as of October [ ], 1996, among Choice
Hotels Holdings, Inc., a Delaware corporation (the "Borrower"), the lenders
listed in Schedule 2.01, Nationsbank, N.A., as co-agent, and The Chase Manhattan
Bank, a New York banking corporation, as agent for the Lenders (the "Credit
Agreement"). Terms defined in the Credit Agreement are used herein with the same
meanings.
1. The Assignor hereby sells and assigns, without recourse, to the
Assignee, and the Assignee hereby purchases and assumes, without recourse, from
the Assignor, effective as of the Effective Date set forth on the reverse
hereof, the interests set forth on the reverse hereof (the "Assigned Interest")
in the Assignor's rights and obligations under the Credit Agreement, including,
without limitation, the interests set forth on the reverse hereof in the
Commitment of the Assignor on the Effective Date and the Competitive Loans and
Standby Loans owing to the Assignor which are outstanding on the Effective Date.
Each of the Assignor and the Assignee hereby makes and agrees to be bound by all
the representations, warranties and agreements set forth in Section 9.04(c) of
the Credit Agreement, a copy of which has been received by each such party. From
and after the Effective Date (i) the Assignee shall be a party to and be bound
by the provisions of the Credit Agreement and, to the extent of the interests
assigned by this Assignment and Acceptance, have the rights and obligations of a
Lender thereunder and under the Loan Documents and (ii) the Assignor shall, to
the extent of the interests assigned by this Assignment and Acceptance,
relinquish its rights and be released from its obligations under the Credit
Agreement.
2. This Assignment and Acceptance is being delivered to the Agent
together with (i) if the Assignee is organized under the laws of a jurisdiction
outside the United States, the forms specified in Section 2.19(f) of the Credit
Agreement, duly completed and executed by such Assignee, (ii) if the Assignee is
not already a Lender under the Credit Agreement, an Administrative Questionnaire
in the form of Exhibit B to the Credit Agreement and (iv) a processing and
recordation fee of $2,000.
3. This Assignment and Acceptance shall be governed by and construed
in accordance with the laws of the State of New York without reference to its
conflicts of laws principles or provisions.
<PAGE> 119
2
Date of Assignment:
Legal Name of Assignor:
Legal Name of Assignee:
Assignee's Address for Notices:
Effective Date of Assignment
(may not be fewer than 5 Business
Days after the Date of Assignment):
<TABLE>
<CAPTION>
Percentage Assigned of
Facility and Commitment
Thereunder (as set forth, to
at least 8 decimals, as a
percentage of the Facility and
the aggregate Commitments of
Facility Principal Amount Assigned all Lenders thereunder)
- -------- ------------------------- ------------------------------
<S> <C> <C>
ABR Loans:
CD Loans:
Eurocurrency Loans:
Eurodollar Competitive
Loans:
Eurodollar Standby Loans:
Fixed Rate Competitive
Loans:
</TABLE>
The terms set forth above and on the
reverse side hereof are hereby agreed to: Accepted:
____________________________, as Assignor THE CHASE MANHATTAN BANK, as agent
By:_________________________ By:__________________________
Name: Name:
Title: Title:
____________________________, as Assignee [Name of Borrower]
By:_________________________ By:___________________________
Name: Name:
Title Title:
<PAGE> 120
EXHIBIT D
FORM OF OPINION
OF [ ], ESQ.
GENERAL COUNSEL FOR THE BORROWER
1. The Borrower (a) is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization, (b)
has all requisite power and authority to own its property and assets and to
carry on its business as now conducted and as proposed to be conducted, (c) is
qualified to do business in every jurisdiction where such qualification is
required, except where the failure so to qualify would not result in a Material
Adverse Effect, and (d) has the power and authority to execute, deliver and
perform its obligations under each of the Loan Documents and each other
agreement or instrument contemplated thereby to which it is or will be a party
and to borrow under the Loan Documents.
2. The execution, delivery and performance by the Borrower of each of
the Loan Documents and the borrowings under the Loan Documents by the Borrower
(collectively, the "Transactions") (a) have been duly authorized by all
requisite action, including, if required, stockholder action on the part of the
Borrower and (b) will not (i) violate (A) to my best knowledge after due
inquiry, any provision of law, statute, rule or regulation, (B) any provision of
the certificate or articles of incorporation or other constitutive documents or
by-laws of the Borrower, (C) to my best knowledge after due inquiry, any order
of any Governmental Authority or (D) to my best knowledge after due inquiry, any
provision of any indenture, agreement or other instrument to which the Borrower
is a party or by which any of them or any of their property is or may be bound,
(ii) to my best knowledge after due inquiry, be in conflict with, result in a
breach of or constitute (alone or with notice or lapse of time or both) a
default under any such indenture, agreement or other instrument or (iii) result
in the creation or imposition of any Lien upon or with respect to any property
or assets now owned or hereafter acquired by the Borrower.
3. The Credit Agreement has been duly executed and delivered by the
Borrower and constitutes, and each of the other Loan Documents when executed and
delivered by the Borrower will constitute, a legal, valid and binding obligation
of the Borrower enforceable against the Borrower in accordance with its terms.
<PAGE> 121
2
4. No action, consent or approval of, registration or filing with or
any other action by any Governmental Authority is or will be required in
connection with the Transactions, except such as have been made or obtained and
are in full force and effect.
5. (a) There are not any actions, suits or proceedings at law or in
equity or by or before any Governmental Authority now pending or, to the
knowledge of the Borrower, threatened against or affecting the Borrower or any
business, property or rights of any such person (i) which involve any Loan
Document or the Transactions (excluding any such actions, suits or proceedings
threatened by the Lenders or the Agent) or (ii) as to which there is a
reasonable probability of any adverse determination and which, if such probable
adverse determination occurred, could reasonably be anticipated to result in a
Material Adverse Effect.
(b) The Borrower is not in violation of any law, rule or regulation,
or in default with respect to any judgment, writ, injunction or decree of any
Governmental Authority, where such violation or default could reasonably be
anticipated to result in a Material Adverse Effect.
6. The Borrower is not (a) an "investment company" as defined in, or
subject to regulation under, the Investment Company Act of 1940 or (b) a
"holding company" as defined in, or subject to regulation under, the Public
Utility Holding Company Act of 1935.
<PAGE> 122
EXHIBIT E
[FORM OF ISSUING BANK AGREEMENT]
ISSUING BANK AGREEMENT dated as of [ ] between CHOICE
HOTELS HOLDINGS, INC., a Delaware corporation (the "Borrower"), and
the financial institution identified on Schedule I hereto as the
Issuing Bank (the "Issuing Bank").
Reference is made to the Competitive Advance and Multi-Currency
Revolving Credit Facility Agreement dated as of October [ ], 1996 (as amended,
modified, extended or restated from time to time, the "Credit Agreement"), among
the Borrower, the Lenders named therein and The Chase Manhattan Bank, as Agent.
The Borrower and the Issuing Bank desire to enter into this Agreement in order
to provide for Letters of Credit to be issued by the Issuing Bank as
contemplated by the Credit Agreement. Accordingly, the parties hereto agree as
follows:
SECTION 1. Defined Terms. Capitalized terms used herein and not
otherwise defined herein shall have the respective meanings specified in the
Credit Agreement. The provisions of Section 1.02 of the Credit Agreement shall
apply to this Agreement as though set forth herein.
SECTION 2. Letter of Credit Commitment. The Issuing Bank hereby
agrees to be an "Issuing Bank" under, and, subject to the terms and conditions
hereof and of the Credit Agreement, to issue Letters of Credit under, the Credit
Agreement; provided, however, that Letters of Credit issued by the Issuing Bank
hereunder shall be subject to the limitations, if any, set forth on Schedule I
hereto, in addition to the limitations set forth in the Credit Agreement.
SECTION 3. Issuance Procedure. In order to request the issuance of a
Letter of Credit hereunder, the Borrower shall hand deliver or telecopy a notice
(specifying the information required by Section 2.20(b) of the Credit Agreement)
to the Issuing Bank, as its address or telecopy number specified on Schedule I
hereto (or such other address or telecopy number as the Issuing Bank may specify
by notice to the Borrower), not later than the time of day (local time at such
address) specified on Schedule I hereto prior to the proposed date of issuance
of such Letter of Credit. A copy of such notice shall be sent, concurrently, by
the Borrower
<PAGE> 123
2
to the Agent in the manner specified for borrowing requests under the Credit
Agreement. Upon receipt of such notice, the Issuing Bank shall consult the Agent
by telephone in order to determine (i) whether the conditions specified in the
last sentence of Section 2.20(b) of the Credit Agreement will be satisfied in
connection with the issuance of such Letter of Credit and (ii) whether the
requested expiration date for such Letter of Credit complies with Section
2.20(c) of the Credit Agreement.
SECTION 4. Issuing Bank Fees, Interest and Payments. The Issuing Bank
Fees payable to the Issuing Bank in respect of Letters of Credit issued
hereunder are specified on Schedule I hereto (and such fees shall be in addition
to the Issuing Bank's customary documentary and processing charges in connection
with the issuance, amendment or transfer of any Letter of Credit issued
hereunder). Each payment of Issuing Bank Fees payable hereunder shall be made
not later than 12:00 (noon), local time at the place of payment, on the date
when due, in immediately available funds, to the account of the Issuing Bank
specified on Schedule I hereto or to such other Lender specified on Schedule I
hereto (or to such other account of the Issuing Bank as it may specify by notice
to the Borrower).
SECTION 5. Credit Agreement Terms. Notwithstanding any provision
hereof which may be construed to the contrary, it is expressly understood and
agreed that (a) this Agreement is supplemental to the Credit Agreement and is
intended to constitute an Issuing Bank Agreement, as defined therein (and, as
such, constitutes an integral part of the Credit Agreement as though the terms
of this Agreement were set forth in the Credit Agreement), (b) each Letter of
Credit issued hereunder and each and L/C Disbursement made under any such Letter
of Credit shall constitute a "Letter of Credit" and an "L/C Disbursement",
respectively, for all purposes of the Credit Agreement, (c) the Issuing Bank's
commitment to issue Letters of Credit hereunder, and each and every Letter of
Credit requested or issued hereunder, shall in each case be subject to the terms
and conditions and entitled to the benefits of the Credit Agreement and (d) the
terms and conditions of the Credit Agreement are hereby incorporated herein as
though set forth herein in full and shall supersede any contrary provisions
hereof.
SECTION 6. Assignment. The Issuing Bank may not assign its commitment
to issue Letters of Credit hereunder without the consent of the Borrower and
prior notice to the
<PAGE> 124
3
Agent. In the event of an assignment by the Issuing Bank of all its other
interests, rights and obligations under the Credit Agreement, then the Issuing
Bank's commitment to issue Letters of Credit hereunder shall terminate unless
the Issuing Bank, the Borrower and the Agent otherwise agree.
SECTION 7. Effectiveness. This Agreement shall not be effective until
counterparts hereof executed on behalf of each of the Borrower and the Issuing
Bank have been delivered to and accepted by the Agent.
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Agreement to be duly executed and delivered as of the date
first above written.
CHOICE HOTELS HOLDINGS, INC.,
by
---------------------
Name:
Title:
[ISSUING BANK],
by
--------------------
Name:
Title:
Accepted:
THE CHASE MANHATTAN BANK, as Agent,
by
---------------------
Name:
Title:
<PAGE> 125
Schedule I to the
Issuing Bank Agreement
Issuing Bank:
Letters of Credit:
Issuing Bank's Address
and Telecopy Number for
Notice:
Time of Day by which
Notices must be received: A notice requesting the issuance of a Letter of Credit
must be received by the Issuing Bank by 11:00 a.m. not less than three Business
Days prior to the proposed date of issuance.
Issuing Bank Fees: [ ]% per annum on the average daily undrawn amount of each
Letter of Credit issued hereunder, payable on the dates that L/C Participation
Fees are payable pursuant to Section 2.06 of the Credit Agreement.
Issuing Bank's Account
for Payment of Issuing
Bank Fees:
<PAGE> 126
TABLE OF CONTENTS
ARTICLE I Page
Definitions
SECTION 1.01. Defined Terms................................... 1
SECTION 1.02. Terms Generally................................. 25
ARTICLE II
The Credits
SECTION 2.01. Commitments..................................... 25
SECTION 2.02. Loans........................................... 26
SECTION 2.03. Competitive Bid Procedure....................... 30
SECTION 2.04. Standby Borrowing Procedure..................... 33
SECTION 2.05. Refinancings.................................... 34
SECTION 2.06. Fees............................................ 34
SECTION 2.07. Evidence of Indebtedness;
Repayment of Loans......................... 36
SECTION 2.08. Interest on Loans............................... 36
SECTION 2.09. Default Interest................................ 38
SECTION 2.10. Alternate Rate of Interest...................... 38
SECTION 2.11. Termination and Reduction of
Commitments................................ 39
SECTION 2.12. Prepayment...................................... 40
SECTION 2.13. Reserve Requirements;
Change in Circumstances.................... 41
SECTION 2.14. Change in Legality.............................. 43
SECTION 2.15. Indemnity....................................... 45
SECTION 2.16. Pro Rata Treatment.............................. 46
SECTION 2.17. Sharing of Setoffs.............................. 46
SECTION 2.18. Payments........................................ 47
SECTION 2.19. Taxes........................................... 48
SECTION 2.20. Letters of Credit............................... 51
SECTION 2.21. Extension of Maturity Date...................... 51
ARTICLE III
Representations And Warranties
SECTION 3.01. Organization; Powers............................ 57
SECTION 3.02. Authorization................................... 58
SECTION 3.03. Enforceability.................................. 58
SECTION 3.04. Governmental Approvals.......................... 58
SECTION 3.05. Financial Statements............................ 59
i
<PAGE> 127
SECTION 3.06. No Material Adverse Change...................... 59
SECTION 3.07. Title to Properties; ...........................
Possession Under Leases......................... 59
SECTION 3.08. Subsidiaries.................................... 59
SECTION 3.09. Litigation; Compliance with Laws................ 60
SECTION 3.10. Agreements...................................... 60
SECTION 3.11. Federal Reserve Regulations..................... 60
SECTION 3.12. Investment Borrower Act;
Public Utility Holding Borrower Act........ 61
SECTION 3.13. Use of Proceeds................................. 61
SECTION 3.14. Tax Returns..................................... 61
SECTION 3.15. No Material Misstatements....................... 61
SECTION 3.16. Employee Benefit Plans.......................... 62
SECTION 3.17. Environmental Matters........................... 62
SECTION 3.18. Solvency........................................ 62
SECTION 3.19. Distribution.................................... 62
ARTICLE IV
Conditions Of Lending
SECTION 4.01. All Credit Events............................... 63
SECTION 4.02. First Credit Event.............................. 64
ARTICLE V
Affirmative Covenants
SECTION 5.01. Existence; Businesses and Properties............ 66
SECTION 5.02. Insurance....................................... 67
SECTION 5.03. Obligations and Taxes........................... 67
SECTION 5.04. Financial Statements, Reports, etc. ............ 67
SECTION 5.05. Litigation and Other Notices.................... 69
SECTION 5.06. ERISA........................................... 69
SECTION 5.07. Maintaining Records;
Access to Properties
and Inspections............................ 70
SECTION 5.08. Use of Proceeds................................. 70
SECTION 5.09. Ownership....................................... 70
ARTICLE VI
Negative Covenants
SECTION 6.01. Indebtedness.................................... 71
SECTION 6.02. Liens........................................... 74
SECTION 6.03. Sale and Lease-Back Transactions................ 76
SECTION 6.04. Investments, Loans and Advances................. 76
ii
<PAGE> 128
SECTION 6.05. Mergers and Consolidations...................... 77
SECTION 6.06. Asset Sales..................................... 78
SECTION 6.07. Transactions with Affiliates.................... 78
SECTION 6.08. Business of Borrower and Subsidiaries........... 79
SECTION 6.09. Subsidiary Indebtedness......................... 79
SECTION 6.10. Agreements...................................... 79
SECTION 6.11. Fiscal Year Accounting Practices................ 79
SECTION 6.12. No Further Negative Pledges..................... 79
SECTION 6.11. Minimum Consolidated Net Worth.................. 80
SECTION 6.12. Consolidated Leverage Ratio..................... 80
SECTION 6.13. Consolidated Interest Coverage Ratio............ 81
ARTICLE VII
Events of Default
ARTICLE VIII
The Agent
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices......................................... 88
SECTION 9.02. Survival of Agreement........................... 89
SECTION 9.03. Binding Effect.................................. 90
SECTION 9.04. Successors and Assigns.......................... 90
SECTION 9.05. Expenses; Indemnity............................. 94
SECTION 9.06. Right of Setoff................................. 96
SECTION 9.07. Applicable Law.................................. 96
SECTION 9.08. Waivers; Amendment.............................. 96
SECTION 9.09. Interest Rate Limitation........................ 97
SECTION 9.10. Entire Agreement................................ 98
SECTION 9.11. Waiver of Jury Trial;
Punitive Damages........................... 98
SECTION 9.12. Severability.................................... 98
SECTION 9.13. Counterparts.................................... 99
SECTION 9.14. Headings........................................ 99
SECTION 9.15. Jurisdiction; Consent to Service
of Process; Judgment Currency.............. 99
SECTION 9.16. Confidentiality................................. 101
iii
<PAGE> 129
Exhibit A-1 Form of Competitive Bid Request
Exhibit A-2 Form of Notice of Competitive Bid Request
Exhibit A-3 Form of Competitive Bid
Exhibit A-4 Form of Competitive Bid
Acceptance/Rejection
Exhibit A-5 Form of Standby Borrowing Request
Exhibit B Form of Administrative Questionnaire
Exhibit C Form of Assignment and Acceptance
Exhibit D Form of Opinion of Counsel
Exhibit E Form of Issuing Bank Agreement
Schedule 1.01 Hotel Properties
Schedule 2.01 Commitments
Schedule 3.01 Asset Dispositions
Schedule 3.08 Subsidiaries
Schedule 6.01(a) Permitted Indebtedness
Schedule 6.01(i) Insurance Programs
Schedule 6.01(j) Existing Bonds
Schedule 6.02 Permitted Liens
Schedule 6.02(j) Permitted Mortgages
Schedule 6.04 Permitted Investments
iv
<PAGE> 1
EXHIBIT 10.25
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT (hereinafter the "Sublease") is made as of the
________ day of _____________________________, 1996, by and between MANOR CARE,
INC. (hereinafter "Sublandlord"), a Delaware corporation having offices at 11555
Darnestown Road, Gaithersburg, Maryland 20878; and BOULEVARD MOTEL CORP.,
(hereinafter "Subtenant"), a Maryland corporation having offices at 10750
Columbia Pike, Silver Spring, MD 20901.
WHEREAS, Sublandlord is the successor lessee under that certain Ground
Lease dated October 29, 1963 by and between Lester S. Levy and Reuben
Oppemheimer, Trustees under an Indenture of and Declaration of Trust made by
Beatrice S. Levy and Pikesville Motel Corporation, as previously amended from
time-to-time (the "Base Lease"), copies of which lease and amendments are
attached hereto as Exhibit "A", for that certain parcel of land more
particularly described on Exhibit "B" attached hereto and made a part hereof
(the "Premises" or "Leased Premises").
WHEREAS, Seller wishes to sublease, and Purchaser wishes to take and
sublease the Premises subject to the conditions herein set forth.
NOW, THEREFORE, in consideration of the mutual covenants and provisions
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
1. Sublease. Sublandlord has agreed to lease and does hereby demise and
lease unto Subtenant, and Subtenant has agreed to lease and take and does hereby
lease from Sublandlord, effective on the Term Commencement Date (hereinafter
defined) the Leased Premises to have and to hold all of the same unto Subtenant,
its successors and assigns, for the term, at the rentals, and upon the
conditions hereinabove and hereinafter set forth.
2. Consideration. In consideration for Sublandlord's subletting of the
Leased Premises to Subtenant, Subtenant shall pay to Sublandlord the sum of
__________________________ Dollars ($________________) (hereinafter the
"Purchase Price") to be paid as follows:
On the "Term Commencement Date" (hereinafter defined) Subtenant shall
pay to Sublandlord the Purchase Price in immediately available funds.
3. Term. The initial term of this Sublease (hereinafter the "Initial
Term"), shall commence on the date of this Sublease (hereinabove and hereinafter
the "Term Commencement Date") and shall terminate on the date within is one (1)
day before the expiration date of the Base Lease.
1
<PAGE> 2
4. Delivery of Possession. Sublandlord shall deliver possession of the
Leased Premises to Subtenant on the Term Commencement Date.
5. Utilities. Prior to the Term Commencement Date, Subtenant shall
contact all utility companies to transfer all utilities to Subtenant's account.
Subtenant shall assume the obligation for all utility payments from and after
the Term Commencement Date.
6. Rental. Subtenant covenants to pay as rent for the use and occupancy
of the Leased Premises the an amount equal to all rent, additional rent,
percentage rent, taxes, and all other sums due and payable by lessee under the
terms of the Base Lease. Such sum shall be paid, without offset, deduction,
notice or demand, to the Base Lease Landlord or to such other person or entity
as the Sublandlord may hereafter require. The Rent Commencement Date shall be
the same date as the Term Commencement Date. All sums due shall be paid on or
before the date due under the Base Lease.
Subtenant shall also pay as additional rent, any tax which is levied or
assessed against the rental, whether the same be called a rental tax, excise
tax, sales tax or otherwise, and shall reimburse Sublandlord for any such taxes
which Sublandlord is required to pay, or in fact pays, but Subtenant shall not
be required to pay or reimburse Sublandlord for payment of any part of
Sublandlord's general state or federal income taxes. Subtenant shall be
responsible for any and all other charges and expenses required to be paid by
the lessee under the Base Lease, including, but not limited to, tenant dues and
assessments, maintenance charges, fees for advertising and security services,
and utilities.
7. Interest on Past Due Rent. Any and all rent hereunder and other sums
that may be and become due and owing from Subtenant to Sublandlord hereunder
which is not paid when due shall bear interest thereafter at the lesser of
eighteen percent (18%) per annum or the highest contract rate permitted by law,
and Sublandlord shall be entitled to recover any costs incurred in collecting
any sums due hereunder, including reasonable attorneys' fees.
8. Effect of Base Lease. It is understood and agreed that this is a
sublease and subject and subordinate in all respects to the Base Lease. All
applicable terms and conditions of the Base Lease are incorporated into and made
a part of this Sublease as if Sublandlord were the lessor thereunder and
Subtenant were the lessee thereunder. Subtenant covenants that for and during
the term of this Sublease it will, in addition to any and all other requirements
of this Sublease and except to the extent otherwise specifically herein
provided, be bound by, and will assume and be responsible for the prompt and
faithful performance, or discharge of, each and every obligation, covenant, and
agreement which by the express terms and conditions of the Base Lease and any
other agreement pertaining to the Leased Premises are the responsibility of, or
binding upon, the lessee thereunder. Subtenant shall not commit or suffer any
act or omission that will violate any of the terms of the Base Lease.
Sublandlord shall have, as against Subtenant, all of the rights granted or
reserved in the Base Lease to the lessor thereunder. Subtenant shall be entitled
to exercise any and all rights and/or privileges granted to the lessee
2
<PAGE> 3
under the Base Lease (except any option to extend the term of the Base Lease and
except any rights as are personal to Sublandlord), and Sublandlord agrees to
assist and cooperate with Subtenant in exercising any such rights; it being
understood, however, that Sublandlord does not guarantee compliance with the
terms of the Base Lease by Base Lease Lessor and shall not be liable if the Base
Lease Lessor fails or refuses to performs its obligations. If the Base Lease is
terminated, this Sublease shall terminate simultaneously therewith.
9. Use. Subtenant's use of the Leased Premises shall be limited to
those uses permitted under the Base Lease. In conducting its business upon the
Leased Premises, Subtenant agrees to conform to all applicable lawful statutes,
rules, regulations, orders, and ordinances of duly constituted governmental
authority.
10. Surrender of Possession. Subtenant shall on or before the last day
of the term hereby granted or upon the sooner termination of this Sublease
peaceably and quietly leave, surrender, and yield up unto Sublandlord the Leased
Premises, free of subtenancies, broom clean, and in good order and condition,
reasonable wear and tear excepted.
11. Quiet Enjoyment. Sublandlord covenants and agrees that Subtenant,
upon paying all rentals and other charges provided for herein, and upon
observing and keeping all of the covenants, conditions, and provisions of this
Sublease on its part to be observed and kept, shall lawfully and quietly hold,
occupy, and enjoy the Leased Premises during the term hereof, without hindrance
or molestation by or from anyone claiming by, through or under Sublandlord,
subject to the terms of this Sublease, the Base Lease, and any applicable
ordinances, zoning laws, rules and regulations, mortgages, encumbrances,
covenants, restrictions, easements, or exception of title now or hereafter
affecting the Leased Premises or now or hereafter placed on the Leased Premises
by Sublandlord.
12. Condition of Leased Premises. Subtenant accepts the Leased Premises
in "AS IS" condition, it being hereby expressly understood that Sublandlord has
made no representations or warranties whatsoever with respect to such Leased
Premises and that Subtenant has inspected the same and is satisfied therewith.
During the term of this Sublease, Subtenant, at its sole cost and expense, shall
keep the Leased Premises and every part thereof, including all buildings at any
time situated thereon, in a clean condition and in good repair and shall
maintain the Leased Premises so that in all respects and at all times they fully
comply with all lawful health and police regulations. Sublandlord makes no
representations or warranties whatsoever as to the validity or enforceability of
the Base Lease as against the lessor thereunder.
13. Alterations and Additions. Subtenant may, to the extent the same is
authorized by and in compliance with the terms of the Base Lease, remodel the
buildings located upon the Leased Premises according to its needs. Any such
alterations or additions shall be erected and finished in a good and workmanlike
manner and in such manner as to comply in all respects with the rules and
regulations of any state, municipal, or other governmental authority having
jurisdiction thereover. Subtenant shall promptly pay for all such alterations
and additions, and
3
<PAGE> 4
shall discharge within thirty (30) days (or such shorter period as may be
provided under the Base Lease) any and all liens filed against the Leased
Premises arising out of such alterations or additions and shall indemnify,
defend, and hold Sublandlord harmless from any claims by any contractors,
subcontractors, materialmen or workers for any amounts granted by them in
connection therewith. Subtenant shall indemnify, defend, and hold Sublandlord
harmless from any and all loss, damage, liability, cost, or expense incurred by
reason of (i) any injury to any person or persons or property arising directly
or indirectly out of such alterations or additions, or (ii) Subtenant's
violation of any term of the Base Lease pertaining to alterations.
14. Insurance. Subtenant shall carry at its own cost and expense during
the entire term of this Sublease, in addition to any insurance required under
the terms of the Base Lease, the following:
a. Workers' Compensation with statutory limits and Employers' Liability
insurance with a minimum limit of $100,000 per accident and per occupational
disease;
b. Comprehensive General Liability insurance including contractual,
personal injury, fire legal, premises/operations, independent contractors,
products liability coverage and broad form property damage liability coverage
with a combined single limit of not less than Five Million Dollars
($5,000,000.00) per occurrence for bodily injury and property damage;
c. All Risk Property insurance coverage, including flood and
earthquake, insuring the Leased Premises and any contents of the Leased
Premises, which policy shall include a replacement cost endorsement (whereby the
insurer will be obligated to pay the full cost of repair or replacement) with
$300,000 minimum limits as to contents. The loss proceeds of this policy shall
be payable to Sublandlord, Subtenant, and the Base Lease Landlord as their
interests may appear. Such policy shall contain a provision that such policy
shall be primary and non-contributory with respect to any policies carried by
Sublandlord and that any coverage carried by Sublandlord shall be excess
insurance, and shall not be subject to any contribution of "other insurance
clauses" in Subtenant's policy;
d. Liquor Liability insurance with a minimum limit of Five Million
Dollars ($5,000,000) per occurrence; and,
e. Such additional amounts or types of insurance as Sublandlord may
from time to time reasonably require.
Any such policies shall be with insurers acceptable to Sublandlord and
policies shall include a provision for thirty (30) days' advance written notice
to Sublandlord in the event of any material change or cancellation of said
insurance. Prior to the commencement of the term hereof, Subtenant shall deliver
to Sublandlord a certificate of insurance showing such insurance (as well as any
other insurance required by the Base Lease) to be in effect and naming the Base
Lease Landlord, and Sublandlord, its parent and affiliated companies, their
respective officers, directors, employees and agents as additional insureds
thereon. Such insurance shall be provided by insurers acceptable to Sublandlord.
At all times thereafter Subtenant shall assure that Sublandlord has in its
possession current certificates of insurance evidencing that the coverages
required by this Article are in full force and effect. Renewals of such
certificates of insurance shall be delivered to Sublandlord within fifteen (15)
days of the expiration date of any policy
4
<PAGE> 5
shown on such certificate. Subtenant covenants and agrees not to do or permit
anything that would increase Sublandlord's insurance rates, conflict with fire
laws or regulations or with regulations or conditions of any insurance company,
or local, state, municipal or federal laws or regulations. If Subtenant's acts
or omissions cause Sublandlord's rates to increase, Subtenant shall be
responsible for the amount of such increase as additional rent.
15. Waiver of Recovery; Limitation of Liability. Subtenant hereby
agrees to waive its right of recovery against Sublandlord and Base Lease Lessor
for loss or damage to Subtenant's buildings, contents, equipment, improvements,
or other property whatsoever. It is the intent of this provision that Subtenant
shall rely solely on its own property insurance policies. If any of Subtenant's
property insurance policies require an endorsement to affect a waiver of
subrogation, Subtenant shall cause them to be so endorsed. This paragraph does
not apply to any act or omission performed by any officer, director, agent,
employee and/or servant of Sublandlord while such individual is on the Leased
Premises.
If Sublandlord, its employees, officers, directors or agents are
ordered to pay Subtenant a money judgment because of Sublandlord's default, then
Subtenant's sole remedy to satisfy the judgment shall be: (i) Landlord's
leasehold interest in the Base Lease Premises including the rental income and
proceeds from sale; and (ii) any insurance or condemnation proceeds received, if
any, because of damage or condemnation to, or of, the Base Lease Premises that
are available for use by Sublandlord.
16. Default.
a. If (i) Subtenant defaults in the payment of any installment of
rent, percentage rent, or additional rent due hereunder, and such default
continues for ten (10) days (or, if less, the cure period provided in the Base
Lease minus three (3) days) after written notice thereof to Subtenant (provided
that if Sublandlord has served two (2) or more notices of default and
opportunities to correct for the same, similar, or different defaults within any
twelve (12) month period, then no opportunity to correct need be given); or (ii)
Subtenant defaults in any of the covenants, agreements, conditions, or
undertakings herein contained to be kept, observed, and performed by Subtenant
other than the payment of rent or any part thereof when due, and such default
continues for thirty (30) days (or, if less, the cure period provided in the
Base Lease minus three (3) days) after written notice thereof to Subtenant
(provided that if Sublandlord has served two (2) or more notices of default and
opportunities to correct for the same, similar, or different defaults within any
twelve (12) month period, then no opportunity to correct need be given); or
(iii) proceedings in bankruptcy or for liquidation, reorganization, or
rearrangement of Subtenant's affairs are instituted by or against Subtenant and
if not dismissed within sixty (60) days; or (iv) a receiver or trustee is
appointed for all or substantially all of Subtenant's business or assets on the
grounds of Subtenant's insolvency; or (v) a trustee is appointed for Subtenant
after a petition has been filed for Subtenant's reorganization under the
Bankruptcy Act of the United States; or (vi) Subtenant makes an assignment for
the benefit of its creditors; or (vii) Subtenant vacates or abandons the Leased
Premises; or (viii) any other event occurs which is an event of default under
the terms of the Base Lease; then in any of the above events, Sublandlord,
5
<PAGE> 6
at its election, may declare the term of this Sublease ended and, to the extent
permitted by law, either with or without process of law, re-enter, expel,
remove, and put out Subtenant and all persons occupying the Leased Premises
under Subtenant, using such reasonable force as may be necessary in so doing,
and repossess and enjoy the Leased Premises. Such reentry and repossession shall
not work a forfeiture of the rents to be paid and the covenants to be performed
by Subtenant during the full term of this Sublease.
b. Upon termination of the Sublease by reason of the happening of any
of the events hereinabove described, or in the event of the termination of the
Sublease or right to possession or both, as the case may be, by summary
dispossession proceedings or under any provision of law now or at any time
hereafter in force, by reason of or based upon or arising out of a default under
or breach of the Sublease on the part of Subtenant, or upon Sublandlord
recovering possession of the Leased Premises under any of the foregoing
circumstances whatsoever, whether with or without legal proceedings, by reason
of or based upon or arising out of a default under or breach of the Sublease on
the part of Subtenant, Sublandlord may, at its option, at any time and from time
to time, relet the Leased Premises or any part or parts thereof for the account
of Subtenant or otherwise and receive and collect the rents therefor, applying
the same first to the payment of such expenses as Sublandlord may have incurred
in recovering possession of the Leased Premises, including (i) legal expenses
and attorneys' fees, (ii) expenses of putting the Leased Premises into good
order or condition or preparing or altering the same for re-rental, and (iii)
expenses, commissions, and charges paid, assumed, or incurred by Sublandlord in
and about the reletting of the Leased Premises, and then to the fulfillment of
the covenants of Subtenant hereunder. Any such reletting herein provided for may
be for the remainder of the Sublease term or for a longer or shorter period.
c. In any case of reletting and whether or not the Leased Premises or
any part thereof be relet, Subtenant shall pay to Sublandlord the rent and all
other charges required to be paid by Subtenant up to the time of such
termination of the Sublease, or of such recovery of possession of the Leased
Premises by Sublandlord, as the case may be; and thereafter Subtenant covenants
and agrees, if required by Sublandlord, to pay to Sublandlord until the end of
the Sublease term the equivalent of the amount of all the rent reserved herein
and all other charges required to be paid by Subtenant less the net proceeds of
reletting, if any, and the same shall be due and payable by Subtenant to
Sublandlord on each of the days rent payments are payable hereunder. In any of
the circumstances hereinabove mentioned in which Sublandlord shall have the
right to hold Subtenant liable, upon the several rent days herein specified, to
pay Sublandlord the equivalent of the amount of all the rent and all other
charges required to be paid by Subtenant less the net proceeds of reletting, if
any, Sublandlord shall have the option instead of holding Subtenant so liable,
forthwith to recover against Subtenant, as damages for the loss of the benefit
of its bargain and not as a penalty, an aggregate sum which, at the time of such
termination of the Sublease, or of such recovery of possession of the Leased
Premises by Sublandlord, as the case may be, represents the then present worth
of the excess, if any, of the aggregate of the rent and all other charges
payable by Subtenant hereunder that would have accrued for the balance of the
term over the aggregate rental value of the Leased Premises for the balance of
such term.
6
<PAGE> 7
d. Subtenant waives any right to trial by jury of any issue(s) in a
summary proceeding or any other suit, action, proceeding or counterclaim at any
time brought or instituted by or against the other with respect to or involving
the Leased Premises or any matter arising under or connected with this Sublease.
e. Sublandlord shall not be deemed to be in default under this Lease
unless and until Lessee has given written notice to Sublandlord of any such
default by Sublandlord and Sublandlord has failed to cure such default within
sixty (60) days after Lessor received notice thereof, provided, however, that if
the nature of Sublandlord's default is such that more than thirty (30) days are
reasonably required for a cure, then Sublandlord shall not be deemed to be in
default if Sublandlord commences such cure within the sixty (60) day period and
thereafter diligently prosecutes the cure to completion.
f. Any and all remedies available to Sublandlord under this Sublease:
(i) shall be in addition to any and all other remedies Sublandlord may have at
law or in equity, (ii) shall be in addition to any and all other remedies
Sublandlord may have under the terms of the Base Lease, (iii) shall be
cumulative, and (iv) may be pursued successively or concurrently as Sublandlord
may elect. The exercise or any remedy by Sublandlord shall not be deemed an
election of remedies or preclude Sublandlord from exercising any other remedies
in the future.
17. Sublandlord's Right to Cure. If Subtenant fails to perform any of
its obligations hereunder or required under the Base Lease to be performed by
the lessee thereunder, Sublandlord, at its option, may (but shall not be
required to) do the same or cause the same to be done. In addition to any and
all rights and remedies of Sublandlord, the cost incurred by Sublandlord in
connection with such performance by Sublandlord shall be additional rental due
from Subtenant to Sublandlord, together with interest thereon at the rate of the
lesser of eighteen percent (18%) per annum or the highest contract rate
permitted by law.
18. Sublandlord's Right to Inspect. Sublandlord and its agents shall
have access to the Leased Premises at all reasonable times for the purposes of
inspecting the Leased Premises upon reasonable notice to Subtenant.
19. Indemnification. If Sublandlord shall be subject to any claim,
demand, liability, cost, expense or penalty (including, but not limited to,
liability and/or claims of any kind for loss or damage to property or for any
injury to or death of any person) or become a party to any suit or claim by
reason of any act or omission by Subtenant, its employees or agents, or by
reason of Subtenant's use and/or occupancy of the Leased Premises, or by reason
of any act occurring in, on or about the Leased Premises, or by reason of any
act or omission or negligence with respect to Subtenant's operation of its
business, or by reason of a breach or default by Subtenant under the terms of
this Sublease, Subtenant shall indemnify and hold Sublandlord harmless against
all claims, liabilities, judgments, settlements, penalties, losses, damages and
expenses of any kind (including but not limited to reasonable attorneys' fees,
court costs, and other expenses of litigation or administrative proceedings)
incurred by or imposed upon Sublandlord in connection
7
<PAGE> 8
with such claim or litigation or administrative proceeding, and, at the election
of Sublandlord, Subtenant shall also defend Sublandlord, using an attorney
acceptable to Sublandlord.
Subtenant shall also pay all costs and expenses, including reasonable
attorneys' fees, which may be incurred by Sublandlord in enforcing any of the
covenants and agreements of this Sublease. All such costs, expenses, and
attorneys' fees shall, if paid by Sublandlord, together with any interest
thereon, be additional rent due on the next rent date after such payment or
payments.
20. Assignment and Subletting. Subtenant may not assign this Sublease
or sublet the Leased Premises or any part thereof, permit the sale or transfer
of its interest herein by legal process or otherwise, including the sale of
stock, or enter into an agreement for the management of its business upon the
Leased Premises without the prior written consent of Sublandlord which consent
shall not be unreasonably withheld (and of Base Lease Lessor to the extent
required under the terms of the Base Lease). Any consent to any assignment or
subletting shall not constitute a waiver of the necessity for such consent to
any subsequent assignment or subletting. Upon any assignment, such assignee
shall by an instrument in writing assume and agree to perform the terms hereof
and Subtenant shall promptly deliver a copy thereof to Sublandlord, and upon any
sublease, such subtenant shall acknowledge the existence of the Base Lease and
this Sublease and shall covenant not to do or permit to be done anything that
would constitute a breach thereof, and Subtenant shall promptly deliver a copy
of any such Sublease to Sublandlord.
21. Holding Over. Subtenant shall not hold over beyond the expiration
or sooner termination of the term hereof. If nevertheless there be any holding
over by Subtenant, such shall give rise to a tenancy at the sufferance of
Sublandlord upon the same conditions as are provided for herein but with a
monthly rental for the period of such holding over which is double the monthly
installment of rent last required to be paid by Subtenant during the Sublease
term, and interest thereon, as liquidated damages, and not as a penalty.
Sublandlord's acceptance of any rent after holding over begins shall not be
deemed to renew this Sublease nor shall this provision be deemed to be a waiver
of Sublandlord's rights of re-entry or any other right hereunder resulting from
Subtenant's breach of the covenant not to hold over or any other breach
hereunder. Subtenant shall indemnify and hold Sublandlord harmless from and
against any and all claims, losses, damages and suits arising out of such
holding over.
22. Waiver. The failure of either party to enforce any condition or
provision contained herein or in the Base Lease at any time shall not be
construed as a waiver of that condition or provision nor shall it operate as a
forfeiture of any right of future enforcement of any such condition or
provision.
23. Accord and Satisfaction. No payment by Subtenant or receipt by
Sublandlord of a lesser amount than the monthly rent herein stipulated shall be
deemed to be other than on account of the earliest stipulated rent, nor shall
any endorsement or statement on any check or any letter
8
<PAGE> 9
accompanying any check or payment as rent be deemed an accord and satisfaction.
Sublandlord may accept such check or payment without prejudice to Sublandlord's
right to recover the balance of such rent or pursue any other remedy provided
for herein.
24. Recording of Sublease. Upon the request of either party hereto, the
other party shall join in the execution of a memorandum of the Sublease for the
purpose of recordation. The party requesting execution of such a memorandum
shall bear all costs for recording the same.
25. Sale of Equipment. Sublandlord hereby agrees to sell and convey the
furniture, fixtures and equipment owned by Sublandlord and located in the Leased
Premises (hereinafter the "Equipment") to Subtenant on the Term Commencement
Date. Subtenant agrees to accept delivery of the Equipment at the Leased
Premises, whereon the Equipment is currently located, in "AS IS" condition as of
the Term Commencement Date, without warranty, express or implied, including,
without limitation, any warranties or representations of merchantability or
fitness for a particular purpose.
26. Termination. In the event that the Subtenant shall acquire good and
marketable title to the entire Leased Premises and become the lessor under the
Base Lease, then this Sublease shall terminate and be of no further force and
effect from an after the date Subtenant acquires title so long and Subtenant
shall terminate the Base Lease and relieve Sublandlord, it successor and assigns
of and from all liabilities and obligations whatsoever under the Base Lease.
27. Gender and Number. Words of any gender shall be held to include any
other gender and words in the singular number shall be held to include the
plural and vice versa, as the context may require.
28. Headings. Headings of the sections hereof are inserted for
convenience only and shall not constitute a part of this Sublease.
29. Notice. All notices required or permitted to be given hereunder
shall be in writing and sent by United States registered or certified mail,
postage prepaid, return receipt requested. Addressed to the parties at the
addresses first set forth above, or to such other address as the parties may
direct by notice given as hereinabove provided. Notice shall be deemed given
when received as evidenced by the return receipt or the date such notice is
first refused, if that be the case. All Notices received by the Sublandlord from
the Base Lease Lessor, or any governmental entities, concerning the subject
premises shall be forthwith delivered to the Subtenant by the Sublandlord.
30. Compliance. In addition to all its other obligations hereunder,
Subtenant shall comply, at its sole cost and expense, with all applicable laws,
rules, regulations and codes pertaining to the Premises or the subject matter of
this Sublease, including without limitation The
9
<PAGE> 10
Americans with Disabilities Act, and the Comprehensive Environmental Response
Compensation and Liability Act.
31. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior and contemporaneous
agreements and undertakings of the parties pertaining to the subject matter
hereof. This Agreement may not be modified except by a written instrument duly
executed by the party hereto against whom the modification is sought to be
enforced.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ATTEST: SUBLANDLORD:
MANOR CARE, INC.
BY: ______________________ BY:____________________________
__________________________ Title: ________________________
ATTEST: SUBTENANT:
BOULEVARD MOTEL CORP.
BY: ______________________ BY: ___________________________
__________________________ Title:_________________________
10
<PAGE> 1
EXHIBIT 12.01
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES:
<TABLE>
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
FISCAL YEAR ENDED MAY 31,
--------------------------------------- THREE MONTHS ENDED
1994 1995 1996 AUGUST 31, 1996
-------- ------ ------ -------------------
<S> <C> <C> <C> <C>
Income before income taxes...................................... $17,678 $29,955 $15,858 $25,897
Fixed charges (net of capitalized interest)..................... 14,749 20,076 23,105 5,884
------- ------- ------- -------
Earnings........................................................ $32,427 $50,031 $38,963 $31,781
======= ======= ======= =======
Fixed charges
Interest expense and amortization of debt discount............ $14,505 $19,838 $22,816 $ 5,819
Rent expense (interest portion)............................... 244 238 289 65
Capitalized interest.......................................... 117 197 753 428
------- ------- ------- -------
Total fixed charges..................................... $14,866 $20,273 $23,858 $ 6,312
======= ======= ======= =======
Ratio of earnings to fixed charges.............................. 2.18x 2.47x 1.63x 5.04x
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Combined
Balance Sheets, the Combined Statements of Income and the Combined Statements of
Cash Flows and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 4,635
<SECURITIES> 0
<RECEIVABLES> 44,685
<ALLOWANCES> 7,457
<INVENTORY> 623
<CURRENT-ASSETS> 47,350
<PP&E> 384,008
<DEPRECIATION> 68,561
<TOTAL-ASSETS> 512,206
<CURRENT-LIABILITIES> 47,286
<BONDS> 294,444
0
0
<COMMON> 0
<OTHER-SE> 170,261
<TOTAL-LIABILITY-AND-EQUITY> 512,206
<SALES> 0
<TOTAL-REVENUES> 119,380
<CGS> 0
<TOTAL-COSTS> 87,616
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,032
<INTEREST-EXPENSE> 5,819
<INCOME-PRETAX> 25,897
<INCOME-TAX> 10,500
<INCOME-CONTINUING> 15,397
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,397
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.01
CHOICE HOTELS HOLDINGS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE AT
BEGINNING PROFIT END
DESCRIPTION OF PERIOD AND LOSS WRITE-OFFS OF PERIOD
- -------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Three months ended August 31,
1996 (Unaudited)
Allowance for doubtful accounts..... $4,825 $1,032 $ (75) $5,782
====== ====== ======= ======
Year ended May 31, 1996
Allowance for doubtful accounts..... $4,202 $ 974 $ (351) $4,825
====== ====== ======= ======
Year ended May 31, 1995
Allowance for doubtful accounts..... $8,950 $ 906 $(5,654) $4,202
====== ====== ======= ======
Year ended May 31, 1994
Allowance for doubtful accounts..... $6,982 $3,360 $(1,392) $8,950
====== ====== ======= ======
</TABLE>
