<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
------------------------
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------
CHOICE HOTELS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE NOT YET AVAILABLE
(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) 905-4600
------------------------
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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COMMON STOCK, PAR NEW YORK STOCK EXCHANGE
VALUE $.01 PER SHARE
</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 dated , 1996 (the "Information
Statement") attached hereto as Exhibit 2.01 and such sections are incorporated
herein by reference.
ITEM 2. FINANCIAL INFORMATION
The information required by this item is contained under the sections
"Summary," "Capitalization," "Selected Historical Financial Data," "Pro Forma
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of the Information Statement and such sections are
incorporated herein by reference.
ITEM 3. PROPERTIES
The information required by this item is contained under the section
"Business" of the Information Statement and such section is incorporated herein
by reference.
ITEM 4. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained under the section
"Security Ownership of Principal Stockholders and Management" of the Information
Statement and such section is incorporated herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is contained under the sections
"Management -- Executive Officers of the Company" and "The Board of Directors"
of the Information Statement and such sections are incorporated herein by
reference.
ITEM 6. EXECUTIVE COMPENSATION
The information required by this item is contained under the sections
"Management -- Compensation of Executive Officers" and "The Board of Directors"
of the Information Statement and such sections are incorporated herein by
reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the sections
"Relationship Between Manor Care and the Company After the Distribution" and
"Certain Relationships and Related Transactions" of the Information Statement
and such sections are incorporated herein by reference.
ITEM 8. LEGAL PROCEEDINGS
The information required by this item is contained under the section
"Business -- Legal Proceedings" and in the Notes to Combined Financial
Statements of the Company under the heading "Commitments and Contingencies"
which are included in the Information Statement and incorporated herein by
reference.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The information required by this item is contained under the sections "The
Distribution -- Listing and Trading of Shares of the Company's Common Stock,"
"Dividend Policy," "Security Ownership of Principal
<PAGE> 3
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
None.
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 Provisions" of the Information Statement and such sections are
incorporated herein by reference.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The information required by this item is contained under the section
"Liability and Indemnification of Officers and Directors" of the Information
Statement and such section is incorporated herein by reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained (i) under the sections
"Summary," "Capitalization," "Selected Historical Financial Data," "Pro Forma
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of the Information Statement and such sections are
incorporated herein by reference and (ii) in the Combined Financial Statements
and Supplemental Schedules incorporated by reference in Item 15 hereof, all of
which are incorporated herein by reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following Financial Statements of the Company are included in
Exhibit 2.01 hereto and incorporated herein by reference:
<TABLE>
<S> <C>
(i) Combined Financial Statements
-- Report of Arthur Andersen LLP, Independent Certified Public Accountants,
dated July 10, 1996;
-- Combined Balance Sheets as of May 31, 1994, May 31, 1995 and February 29,
1996;
-- Combined Statements of Income for each of the fiscal years in the three-year
period ended May 31, 1995 and for the nine-month periods ended February 28,
1995 and February 29, 1996;
-- Combined Statements of Cash Flows for each of the fiscal years in the
three-year period ended May 31, 1995 and for the nine-month periods ended
February 28, 1995 and February 29, 1996;
-- Notes to Combined Financial Statements.
</TABLE>
The following supplemental schedule of the Company is included in
Exhibit 99.01 hereto and incorporated herein by reference.
<TABLE>
<S> <C>
(ii) Supplemental Schedule
-- Schedule II -- Valuation and Qualifying Accounts.
</TABLE>
2
<PAGE> 4
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
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<C> <S>
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 Amended 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 Assignment of Marks Agreement, dated , 1996, between Manor Care,
Inc. and the Registrant**
10.03 Form of Corporate Planes Agreement dated , 1996 between Manor
Care, Inc. and the Registrant**
10.04 Form of Corporate Services Agreement, dated , 1996, between Manor
Care, Inc. and the Registrant**
10.05 Form of Employee Benefits Administration Agreement, dated , 1996,
between Manor Care, Inc. and the Registrant**
10.06 Form of Employee Benefits & Other Employment Matters Allocation Agreement,
dated , 1996, between Manor Care, Inc. and the Registrant**
10.07 Form of Lease Agreement dated , 1996 between Manor Care, Inc. and
the Registrant**
10.08 Form of Loan Agreement dated , 1996 between Manor Care, Inc. and
the Registrant**
10.09 Form of Procurement Agreement, dated , 1996, between Manor Care,
Inc. and the Registrant**
10.10 Form of Risk Management Consulting Services Agreement, dated ,
1996, between Manor Care, Inc. and the Registrant**
10.11 Form of Support Services Agreement dated , 1996 between Manor Care,
Inc. and the Registrant**
10.12 Form of Tax Administration Agreement, dated , 1996, between Manor
Care, Inc. and the Registrant**
10.13 Form of Tax Sharing Agreement, dated , 1996, between Manor Care,
Inc. and the Registrant**
10.14 Employment Agreement, dated , 1996, between [Manor Care, Inc.]
and Donald Landry**
10.15 Employment Agreement dated , 1996 between the Registrant and
Stewart Bainum, Jr.**
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*
27.02 Financial Data Schedule*
27.03 Financial Data Schedule*
99.01 Schedule II -- Valuation and Qualifying Accounts*
</TABLE>
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* Filed herewith.
** To be filed by amendment.
3
<PAGE> 5
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHOICE HOTELS HOLDINGS, INC.
Date: July 11, 1996 By: /s/ JAMES H. REMPE
Name: James H. Rempe
Title: Authorized Signatory
4
<PAGE> 6
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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<C> <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 Amended 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 Assignment of Marks Agreement, dated , 1996, between Manor Care,
Inc. and the Registrant**................................................
10.03 Form of Corporate Planes Agreement dated , 1996 between Manor
Care, Inc. and the Registrant**..........................................
10.04 Form of Corporate Services Agreement, dated , 1996, between
Manor Care, Inc. and the Registrant**....................................
10.05 Form of Employee Benefits Administration Agreement, dated ,
1996, between Manor Care, Inc. and the Registrant**......................
10.06 Form of Employee Benefits & Other Employment Matters Allocation
Agreement, dated , 1996, between Manor Care, Inc. and the
Registrant**.............................................................
10.07 Form of Lease Agreement dated , 1996 between Manor Care, Inc.
and the Registrant**.....................................................
10.08 Form of Loan Agreement dated , 1996 between Manor Care, Inc.
and the Registrant**.....................................................
10.09 Form of Procurement Agreement, dated , 1996, between Manor
Care, Inc. and the Registrant**..........................................
10.10 Form of Risk Management Consulting Services Agreement, dated ,
1996, between Manor Care, Inc. and the Registrant**......................
10.11 Form of Support Services Agreement dated , 1996 between Manor Care,
Inc. and the Registrant**................................................
10.12 Form of Tax Administration Agreement, dated , 1996, between
Manor Care, Inc. and the Registrant**....................................
10.13 Form of Tax Sharing Agreement, dated , 1996, between Manor
Care, Inc. and the Registrant**..........................................
10.14 Employment Agreement, dated , 1996, between [Manor Care, Inc.]
and Donald Landry**......................................................
10.15 Employment Agreement dated , 1996 between the Registrant and
Stewart Bainum, Jr.**....................................................
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*.................................................
27.02 Financial Data Schedule*.................................................
27.03 Financial Data Schedule*.................................................
99.01 Schedule II -- Valuation and Qualifying Accounts*........................
</TABLE>
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* 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 to holders of record of Manor Care common
stock on , 1996. You will receive one share of Choice common
stock for every share of Manor Care common stock you hold on the record date.
As a result of the distribution of Choice common stock to Manor Care
shareholders, you will own shares in two separate and very different companies.
Manor Care will be a pure health care company focused on inpatient skilled
nursing and rehabilitation, assisted living, institutional pharmacy and home
health care. Choice will concentrate on franchising, managing and developing
hotels and other travel-related businesses.
Your Board of Directors and management believe that the separation of the
lodging and health care businesses into two public corporations via the
distribution of Choice common stock will improve capital-raising efficiency as
both debt and equity investors will be better able to assess the different risk
profiles and operating characteristics of both businesses. The distribution will
give Choice direct access to capital markets and will permit it to raise funds
on the basis of its own operating profile and credit fundamentals. Similarly,
Manor Care's cost to obtain financing following the distribution will be
representative of the operating profile and credit fundamentals of a health care
company. In addition, the Board of Directors and management believe that the
distribution will improve strategic freedom and focus at both Choice and Manor
Care.
The enclosed Information Statement explains the proposed distribution in
detail and provides financial and other important information regarding Choice.
We urge you to read it carefully. Holders of Manor Care common stock are not
required to take any action to participate in the distribution as a stockholder
vote is not required in connection with this matter.
Sincerely,
Stewart Bainum, Jr.
Chairman of the Board and
Chief Executive Officer
<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 , 1996 (the "Record Date") of one
share of common stock, par value $.01 per share (the "Company Common Stock"), of
Choice Hotels Holdings, Inc. (the "Company") for each share of Manor Care common
stock. At the time of the Distribution, the Company will own all of the
businesses and assets of, and be responsible for the liabilities associated
with, the lodging and hotel franchise business operations conducted by Manor
Care and certain of its subsidiaries. The distribution will result in 100% of
the outstanding shares of Company Common Stock being distributed to holders of
Manor Care common stock.
The Distribution will be effective as of , 1996 (the
"Distribution Date"). No consideration will be paid by Manor Care's stockholders
for shares of Company Common Stock. Manor Care has received a ruling from the
Internal Revenue Service to the effect that the Distribution is not taxable for
federal income tax purposes to stockholders of the Company and Manor Care. See
"The Distribution -- Federal Income Tax Aspects of the Distribution."
There is no current trading market for the Company's Common Stock, although
it is expected that a "when-issued" trading market will develop prior to the
Distribution Date. Application has been made to list the Company's Common Stock
on the New York Stock Exchange.
Stockholders of Manor Care with inquiries related to the Distribution
should contact the Investor Relations Department of Manor Care at (301)
905-4408. Stockholders of Manor Care with inquiries related to their holdings in
Manor Care should contact Manor Care's stock transfer agent, Chase-Mellon
Shareholder Services, L.L.C., at (212) 946-7200.
IN REVIEWING THIS INFORMATION STATEMENT YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER "RISK FACTORS" BEGINNING ON PAGE 8 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
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary............................................................................. 1
Introduction........................................................................ 5
The Distribution.................................................................... 5
Reasons for the Distribution...................................................... 5
Manner of Effecting the Distribution.............................................. 6
Federal Income Tax Aspects of the Distribution.................................... 6
Conditions; Termination........................................................... 6
Listing and Trading of Shares of the Company's Common Stock....................... 7
Risk Factors........................................................................ 8
Relationship Between Manor Care and the Company After the Distribution.............. 10
Financing........................................................................... 12
Capitalization...................................................................... 13
Dividend Policy..................................................................... 13
Selected Historical Financial Data.................................................. 14
Pro Forma Financial Data............................................................ 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 17
Business............................................................................ 21
General........................................................................... 21
The Lodging Industry.............................................................. 21
Franchise Business................................................................ 23
Owned and Managed Lodging Business................................................ 34
Competition....................................................................... 38
Service Marks and Other Intellectual Property..................................... 39
Non-Hotel Properties.............................................................. 39
Seasonality....................................................................... 39
Regulation........................................................................ 39
Insurance......................................................................... 40
Impact of Inflation and Other External Factors.................................... 40
Employees......................................................................... 40
Legal Proceedings................................................................. 41
Environmental Matters............................................................. 41
Management.......................................................................... 42
Executive Officers of the Company................................................. 42
Compensation of Executive Officers................................................ 42
Employment Agreements............................................................. 45
Retirement Plans.................................................................. 45
Option and Stock Purchase Plans................................................... 46
The Board of Directors.............................................................. 46
Directors of the Company.......................................................... 46
Certain Relationships and Related Transactions...................................... 49
Security Ownership of Principal Stockholders and Management......................... 50
</TABLE>
i
<PAGE> 4
<TABLE>
<S> <C>
Description of Capital Stock of the Company......................................... 53
Common Stock...................................................................... 53
Preferred Stock................................................................... 53
No Preemptive Rights.............................................................. 53
Purposes and Effects of Certain Charter Provisions.................................. 53
General........................................................................... 53
Liability and Indemnification of Officers and Directors............................. 54
Elimination of Liability in Certain Circumstances................................. 54
Indemnification and Insurance..................................................... 54
Available Information............................................................... 55
Index to Combined Financial Statements.............................................. F-1
Appendix A -- Restated Certificate of Incorporation of the Company
</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 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). For
the nine months ended February 29, 1996, hotel franchising contributed 60% of
the Company's revenues and 75% of the Company's gross profits, while hotel
ownership and management contributed the remaining 40% of revenues and 25% 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.
FRANCHISE OPERATIONS. The Company is one of the world's largest
franchisors of hotels with 2,978 properties open and operating in 31 countries
at February 29, 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 1993, the Company has grown revenues from franchise operations
at a compound annual rate of 17%. During the same period, gross margins have
improved from 56% for fiscal year 1993 to 62% for the twelve months ended
February 29, 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 acquisitions.
The Company's existing franchisees form a pool of potential buyers and
builders of new hotels that may affiliate with one of the Company's brands. The
Company believes that its focus on improving the 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.
1
<PAGE> 6
OWNED AND MANAGED OPERATIONS. In addition to acting as franchisor, the
Company owns and manages hotels. At February 29, 1996, the Company owned and
managed, under its six principal brand names, 77 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 $238 million to buy and renovate 51 hotel properties.
Under the Company's management, 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 74% in fiscal year 1995, while occupancies for fiscal year
1994 domestic acquisitions have improved from 66% in fiscal year 1994 to 71% in
fiscal year 1995. Overall, revenues from owned and managed hotel operations have
grown at a compound annual rate of 58% since fiscal year 1993. At the same time,
gross margins of the owned and managed hotel operations have improved from 15%
for fiscal year 1993 to 31% for the twelve months ended February 29, 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 leverage
and/or divest its owned hotels at values that reflect their improved operating
performance, while retaining management and franchise agreements relative to
these properties. The proceeds from these transactions will be used to repay
outstanding indebtedness, 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 DISTRIBUTION
Reasons for the
Distribution.................. The Board of Directors and management of Manor
Care believe that the separation of Manor
Care's health care and lodging businesses into
two public companies via the Distribution will
improve capital-raising efficiency as both debt
and equity investors will be better able to
assess the different risk profiles and
operating characteristics of both businesses.
The Distribution will give the Company direct
access to capital markets and will permit it to
raise funds on the basis of its own operating
profile and credit fundamentals. Similarly,
Manor Care's cost to obtain financing following
the Distribution will be representative of the
operating profile and credit fundamentals of a
health care company. In addition, the Board of
Directors and management of Manor Care believe
that the Distribution will improve strategic
freedom and focus at both Choice and Manor
Care. See "The Distribution -- Reasons for the
Distribution."
Distributed Company........... Choice Hotels Holdings, Inc. (the "Company"), a
Delaware corporation (to be renamed Choice
Hotels International, Inc.) and a wholly-owned
subsidiary of Manor Care, will, on the
Distribution Date, own all of the business and
assets of, and be responsible for all of the
liabilities associated with, the lodging and
hotel franchise business operations conducted
by Manor Care and certain of its subsidiaries
(the "Lodging Business").
Distributing Company.......... Manor Care, Inc., a Delaware corporation
("Manor Care").
Securities to Be
Distributed................... Approximately shares (the "Shares")
of common stock, par value $.01 per share of
the Company, based on shares of
common stock, par value $.10 per share, of
2
<PAGE> 7
Manor Care ("Manor Care Common Stock")
outstanding as of , 1996.
Distribution Ratio............ One share of Company Common Stock for each
share of Manor Care Common Stock.
Tax Consequences.............. Manor Care has received a ruling from the
Internal Revenue Service to the effect, among
other things, that receipt of the Shares by
stockholders of Manor Care is tax free for
federal income tax purposes. See "The
Distribution -- Federal Income Tax Aspects of
the Distribution."
Listing and Trading Market.... Application has been made to list the Shares on
the New York Stock Exchange under the symbol
"CHH." See "The Distribution -- Listing and
Trading of Shares of the Company's Common
Stock."
Record Date................... Close of business on , 1996.
Distribution Date............. As of , 1996. On the Distribution
Date, Manor Care will deliver the Shares to the
Distribution Agent. As soon as practicable
thereafter, the Distribution Agent will mail
certificates representing the appropriate
number of Shares to the Manor Care stockholders
entitled thereto. See "The
Distribution -- Manner of Effecting the
Distribution."
Distribution Agent............ , 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.
Certain Charter Provisions.... Certain provisions of the Restated Certificate
of Incorporation (the "Restated Certificate")
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 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.
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."
3
<PAGE> 8
SUMMARY FINANCIAL INFORMATION
The following table summarizes certain selected financial information with
respect to the Company and is derived from the Combined Financial Statements of
the Company. Historical financial information may not be indicative of the
Company's future performance as an independent company. The information set
forth below is qualified in its entirety by reference to, and should be read in
conjunction with, "Selected Historical Financial Data," "Pro Forma Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Combined Financial Statements and related notes included
elsewhere herein.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS, EXCEPT RATIO DATA)
YEAR ENDED MAY 31, NINE MONTHS ENDED
-------------------------------------------- ---------------------------------------------
PRO FORMA
PRO FORMA FEBRUARY 28, FEBRUARY 29, FEBRUARY 29,
1993 1994 1995 1995 1995 1996 1996
-------- -------- -------- ----------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues........... $178,707 $239,764 $302,535 $ 347,401 $ 219,399 $ 273,904 $ 284,817
Operating
expenses......... 155,113 206,722 250,476 292,644 181,432 220,426 231,983
-------- -------- -------- --------- --------- --------- ---------
Income before other
income and
(expenses) and
income taxes..... 23,594 33,042 52,059 54,757 37,967 53,478 52,834
Interest expense on
notes payable to
Parent........... (7,083) (10,665) (15,492) (20,070) (11,150) (14,595) (15,261)
Other interest and
other expenses,
net.............. (3,077) (4,699) (6,612) (6,612) (5,800) (3,481) (3,481)
-------- -------- -------- --------- --------- --------- ---------
Income before
income taxes..... 13,434 17,678 29,955 28,075 21,017 35,402 34,092
Income taxes....... 5,780 8,019 13,144 12,321 9,246 14,966 14,409
-------- -------- -------- --------- --------- --------- ---------
Net
income.. $ 7,654 $ 9,659 $ 16,811 $ 15,754 $ 11,771 $ 20,436 $ 19,683
======== ======== ======== ========= ========= ========= =========
<CAPTION>
YEAR ENDED MAY 31,
------------------- FEBRUARY 29,
1994 1995 1996
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.... $ 279 $(34,663) $ (5,904)
Total assets....... 303,158 391,475 451,083
Notes payable to
Parent........... 147,061 198,522 225,723
Total debt......... 200,875 251,191 275,363
Investments and
advances from
Parent........... 55,208 65,829 128,130
RATIO DATA:
Ratio of earnings
to fixed
charges.......... 2.18x 2.47x 2.90x
======== ======== =========
</TABLE>
4
<PAGE> 9
INTRODUCTION
The Company is one of the world's largest franchisors of hotels with 2,978
properties and a total of 255,545 rooms open and operating in 31 countries at
February 29, 1996. The properties principally operate under one of the Company's
brand names: Comfort, Quality, Clarion, Sleep, Rodeway and Econo Lodge. At
February 29, 1996, another 692 franchise properties with a total of 61,431 rooms
were under development. The Company recently introduced a new brand, MainStay
Suites(SM). In addition to acting as franchisor, at February 29, 1996, the
Company owned and managed, under its six principal brand names, 77 hotels in 25
states, as well as in Germany, France and England.
On March 7, 1996, the Board of Directors of Manor Care announced its
intention to distribute to holders of Manor Care Common Stock all of the
outstanding Shares. On March 6, 1996, the high and low sales prices of the Manor
Care Common Stock as reported on the New York Stock Exchange Composite Tape were
$39 and $38 5/8, respectively. On , 1996, the Board of Directors of
Manor Care declared a dividend to effect the Distribution and set the Record
Date and Distribution Date. On , 1996, the high and low sales prices
of the Manor Care Common Stock as reported on the New York Stock Exchange
Composite Tape were $ and $ , respectively. Following the Distribution,
Manor Care will not own any Shares or other capital stock of the Company, but
will have certain contractual relationships with the Company. See "Relationship
Between Manor Care and the Company After the Distribution."
The Company, a Delaware corporation, was incorporated on June 27, 1996, and
is currently a wholly-owned subsidiary of Manor Care with no operations. The
Lodging Business has been conducted as a separate division and through certain
subsidiaries of Manor Care. On the Distribution Date, Manor Care will contribute
to the Company the Lodging Business and the Company will change its name to
Choice Hotels International, Inc.
Stockholders of Manor Care with inquiries relating to the Distribution
should contact the Investor Relations Department of Manor Care at (301)
905-4408. After the Distribution Date, stockholders of the Company should
contact the Investor Relations Department of Choice at (301) - .
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 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.
5
<PAGE> 10
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions of the Distribution are set forth in the
distribution agreement (the "Distribution Agreement") to be entered into by the
Company and Manor Care prior to the Distribution.
Upon satisfaction of all the conditions contained in the Distribution
Agreement, it is contemplated that the Distribution will be made as of
, 1996 (the "Distribution Date") to stockholders of record of Manor
Care at the close of business on , 1996 (the "Record Date"). On the
Distribution Date, the Shares will be delivered to the Distribution Agent for
distribution as soon as practicable thereafter to holders of record of Manor
Care Common Stock as of the close of business on the Record Date on the basis of
one share of Company Common Stock for each share of Manor Care Common Stock held
on the Record Date. The actual total number of Shares to be distributed will
depend on the number of shares of Manor Care Common Stock outstanding on the
Record Date. All such Shares will be fully paid and non-assessable and the
holders thereof will not be entitled to preemptive rights. See "Description of
Capital Stock of the Company." Following the Distribution, the Company will
operate as an independent public company.
No holder of Manor Care Common Stock will be required to pay any cash or
other consideration for the Shares received in the Distribution or to surrender
or exchange shares of Manor Care Common Stock in order to receive Shares.
FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION
Manor Care has received a ruling from the Internal Revenue Service to the
effect, among other things, that, for federal income tax purposes, the
Distribution will qualify as a tax-free spin-off under Section 355 of the
Internal Revenue Code of 1986, as amended, and that:
(1) No gain or loss will be recognized to (and no amount will be
included in the income of) holders of Manor Care Common Stock upon the
receipt of the Shares in the Distribution;
(2) Assuming that on the Distribution Date a holder of Manor Care
Common Stock holds Manor Care Common Stock as a capital asset, the holding
period for the Shares to be received in the Distribution will include the
period during which the Manor Care Common Stock was held;
(3) The tax basis of Manor Care Common Stock held by a Manor Care
stockholder at the time of the Distribution will be allocated, based upon
relative fair market values at the time of the Distribution, between such
Manor Care Common Stock and the Shares received by the stockholder in the
Distribution; and
(4) No gain or loss will be recognized by Manor Care or the Company on
the Distribution.
Shortly 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.
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.
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.
6
<PAGE> 11
LISTING AND TRADING OF SHARES OF THE COMPANY'S COMMON STOCK
Application has been made for listing of the Shares on the New York Stock
Exchange (the "NYSE") under the symbol "CHH." As of the Distribution Date, the
Company is expected to have approximately
holders of record of the Shares based on the number of holders of record of
Manor Care Common Stock on the Record Date.
There is not currently a public market for the Shares. Prior to the
Distribution, the Shares are expected to begin trading on a "when-issued" basis
on a date to be determined by the NYSE. If the Distribution is not made, all
such "when-issued" trading will be null and void. Prices at which the Shares may
trade prior to the Distribution on a "when-issued" basis or after the
Distribution cannot be predicted. The prices at which the Shares trade will be
determined by the marketplace and may be influenced by many factors, including,
among others, the depth and liquidity of the market for the Shares, investor
perception of the Company and the industry in which its businesses participate,
the Company's dividend policy and general economic and market conditions. See
the description of the dividend policy of the Company under "Dividend Policy."
The Shares distributed to Manor Care stockholders will be freely
transferable, except for Shares received by persons who may be deemed to be
"affiliates" of the Company under the Securities Act of 1933, as amended (the
"Securities Act"). Persons who may be deemed to be affiliates of the Company
after the Distribution generally include individuals or entities that control,
are controlled by, or are under common control with the Company and may include
certain officers and directors of the Company. Persons who are affiliates of the
Company will be permitted to sell their Shares only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemption afforded
by Section 4(1) of the Securities Act and Rule 144 promulgated thereunder.
7
<PAGE> 12
RISK FACTORS
COMPETITION AND RISKS OF THE LODGING INDUSTRY
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. 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.
As an owner of hotels, the Company is subject to similar competitive
factors as well as the risks of construction and operation of lodging facilities
generally. 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. 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. 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.
OWNED AND MANAGED HOTEL OPERATIONS STRATEGY
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.
The Company plans to leverage and/or sell or otherwise dispose of
Company-owned hotels in one or more transactions which may take place as early
as the current fiscal year. The proceeds from these transactions will be used
initially to repay amounts owed to Manor Care. See "Financing -- The Manor Care
8
<PAGE> 13
Loan Agreement." The Company currently intends to consummate any such sales or
dispositions only if the Company can retain the management and franchise
contracts for such hotels. Although transactions of this type 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 such transactions
more difficult to consummate than if the hotels were to be sold without such a
requirement. If the Company is not able to sell or otherwise dispose of hotels
as planned, the Company will be unable to reduce amounts owed to Manor Care as
planned and will be required to obtain additional sources of financing to repay
such amounts before they come due on , 1999. There can be no assurance
that the Company will be able to obtain such financing on favorable terms or in
a timely manner.
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.
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. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
NEW BRAND AND PRODUCT DEVELOPMENT
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.
POTENTIAL CONFLICTS WITH MANOR CARE
The Company and Manor Care will share four common directors. Stewart
Bainum, Jr. serves as Chairman of the Board of Directors and Chief Executive
Officer of both Manor Care and the Company. 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. As of May 31, 1996, Stewart Bainum, the Vice
Chairman of the Board of Directors of Manor Care, and Stewart Bainum, Jr.
beneficially own approximately 17.1% and 19.4%, respectively, of the Manor Care
Common Stock and will receive on the Distribution Date approximately the same
percentages, respectively, of the Shares. With respect to the various
contractual arrangements between the two companies, the potential exists for
disagreement 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."
9
<PAGE> 14
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
conditions to the Distribution, the allocation to the Company of liabilities
relating to the Lodging Business (to the extent not covered by Manor Care's
insurance) and the division between the Company and Manor Care of certain other
liabilities incurred as of or prior to the Distribution Date, certain
indemnification obligations by the Company for specified claims and liabilities
of Manor Care and its subsidiaries and affiliates and the provision of services
and certain other agreements governing the relationship between the Company and
Manor Care with respect to or in consequence of the Distribution.
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.
ENVIRONMENTAL AND OTHER CLAIMS INDEMNIFICATION. In addition to the
indemnification described above, the Company has agreed to indemnify Manor
HealthCare Corp., Manor Care, their affiliates, subsidiaries and their
respective directors, employees and agents (collectively, the "Indemnitees")
from any and all losses which may arise from (i) certain pending environmental
claims; and (ii) currently unknown but potential or future environmental, third
party personal injury and other claims arising out of the activities of, or
conditions affecting properties formerly or presently owned, leased, operated or
used by, Cenco Incorporated ("Cenco") a corporation that was merged into Manor
HealthCare Corp. in 1982, its subsidiary and affiliated companies, and any and
all of Cenco's predecessor corporations, subsidiaries and affiliates. 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 HealthCare Corp., 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 HealthCare Corp. 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.
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 (the "Loan Agreement") pursuant to which
the Company will repay to Manor Care over a three year period
10
<PAGE> 15
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 on or prior to
the Distribution Date, Manor Care will replace 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 credit facility. See "Financing."
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 any
required 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 Allocation and Other Employment Matters Agreement (the
"Employee Benefits Allocation Agreement") providing for the allocation of
certain responsibilities with respect to employee compensation, benefit and
labor matters after the Distribution and the treatment of outstanding options in
connection with the Distribution.
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
11
<PAGE> 16
Care and the Company regarding the following: the provision of certain corporate
and support services, the maintenance, operation and rental of certain commonly
occupied premises, the transfer of certain intellectual property rights, the
provision of certain risk management services and other miscellaneous
administrative matters. None of these agreements extends for a period greater
than 30 months 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
Manor Care will enter into the Loan Agreement. The Loan Agreement will contain
restrictions on the Company's ability to declare dividends. [Describe additional
financial covenants, if any.] Interest on the amount of the loan will be payable
semiannually at a rate of 9% per annum. The loan will be payable on ,
1999 and may be prepaid in whole or in part, together with accrued interest,
without penalty, at the option of the Company. The Company will be required to
prepay the loan with the proceeds of any sales of its owned hotels or any
borrowings which are secured by such hotels.
CREDIT FACILITY
Prior to the Distribution Date, the Company intends to enter into a credit
facility to refinance an equivalent amount borrowed by the Lodging Business
under the Manor Care credit facility. The Company is exploring all of its
options with respect to obtaining such credit facility, including entering into
one or more agreements with various lenders, which may include Manor Care.
12
<PAGE> 17
CAPITALIZATION
The following table sets forth the unaudited combined capitalization of the
Company as of February 29, 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>
FEBRUARY 29, 1996
-------------------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C>
Debt (including current portion)
Mortgage loans and other long term debt....................... $ 49,640
Notes payable to Parent....................................... 225,723
---------
Total debt............................................ 275,363
Equity.......................................................... 128,130
---------
Total capitalization.................................. $ 403,493
==========
</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 between the
Company and Manor Care will restrict the Company's ability to pay dividends. See
"Financing -- The Manor Care Loan Agreement."
13
<PAGE> 18
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." The income statement
data for the fiscal years ended 1993, 1994 and 1995 are derived from the audited
combined financial statements of the Company. The balance sheet data at February
29, 1996 and the income statement data for the nine months ended February 28,
1995 and February 29, 1996 and the data for the fiscal years ended 1991 and 1992
are derived from unaudited combined financial statements that, in the opinion of
the Company, reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the information set forth below. The
interim results for the nine months ended February 29, 1996 are not necessarily
indicative of results for the entire 1996 fiscal year.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
NINE MONTHS ENDED
YEAR ENDED MAY 31, ---------------------------
---------------------------------------------------- FEBRUARY 28, FEBRUARY 29,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues
Franchise..................... $115,702 $125,347 $137,346 $165,581 $188,021 $139,997 $163,825
Hotel operations.............. 34,182 34,878 41,361 74,183 114,514 79,402 110,079
-------- -------- -------- -------- -------- ------------ ------------
Total revenues......... 149,884 160,225 178,707 239,764 302,535 219,399 273,904
-------- -------- -------- -------- -------- ------------ ------------
Operating Expenses
Franchise marketing........... 30,726 33,772 37,567 45,373 45,510 35,332 37,131
Franchise reservations........ 20,055 23,261 22,941 26,685 28,738 21,031 25,705
Hotel operations.............. 21,789 20,432 35,255 60,062 84,711 58,167 75,609
Selling, general and
administrative expenses..... 45,556 45,949 44,745 57,081 69,676 51,143 62,836
Depreciation and
amortization................ 9,911 12,924 14,605 17,521 21,841 15,759 19,145
-------- -------- -------- -------- -------- ------------ ------------
Total operating
expenses............. 128,037 136,338 155,113 206,722 250,476 181,432 220,426
-------- -------- -------- -------- -------- ------------ ------------
Income Before Other Income and
(Expenses) and Income Taxes... 21,847 23,887 23,594 33,042 52,059 37,967 53,478
-------- -------- -------- -------- -------- ------------ ------------
Other Income and (Expenses)
Interest expense on notes
payable to Parent........... -- -- (7,083) (10,665) (15,492) (11,150) (14,595)
Minority interest............. (1,495) (1,004) (900) (1,476) (2,200) (1,650) (1,149)
Other interest and other
expenses.................... (2,215) (1,441) (2,177) (3,223) (4,412) (4,150) (2,332)
-------- -------- -------- -------- -------- ------------ ------------
Total other income and
(expenses)........... (3,710) (2,445) (10,160) (15,364) (22,104) (16,950) (18,076)
-------- -------- -------- -------- -------- ------------ ------------
Income Before Income Taxes...... 18,137 21,442 13,434 17,678 29,955 21,017 35,402
Income Taxes.................... 7,460 8,660 5,780 8,019 13,144 9,246 14,966
-------- -------- -------- -------- -------- ------------ ------------
Net Income...................... $ 10,677 $ 12,782 $ 7,654 $ 9,659 $ 16,811 $ 11,771 $ 20,436
========= ========= ========= ========= ========= =========== ===========
BALANCE SHEET DATA
Total assets.................... $170,432 $194,078 $250,371 $303,158 $391,475 $357,301 $451,083
Notes payable to Parent......... -- -- $ 78,700 $147,061 $198,522 $184,421 $225,723
Total debt...................... $ 15,602 $ 20,902 $129,670 $200,875 $251,191 $250,094 $275,363
Total liabilities............... $ 48,269 $ 50,313 $159,624 $247,950 $325,646 $299,833 $322,953
Total investments and advances
from Parent................... $122,163 $143,765 $ 90,747 $ 55,208 $ 65,829 $ 57,468 $128,130
</TABLE>
14
<PAGE> 19
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, (ii) the
acquisition by the Company of an aggregate of 16 hotels during fiscal year 1995
(the "1995 Acquisitions") and (iii) the acquisition by the Company of an
aggregate of 15 hotels during the nine months ended February 29, 1996 (the "1996
Acquisitions"), as if the Distribution and related transactions, the 1995
Acquisitions and the 1996 Acquisitions had occurred as of June 1, 1994 with
respect to the statement of income for the year ended May 31, 1995 and as if the
Distribution and related transactions and the 1996 Acquisitions had occurred as
of June 1, 1995 with respect to the statement of income for the nine months
ended February 29, 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, the 1995 Acquisitions 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,
the 1995 Acquisitions 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 STATEMENTS OF INCOME
FOR THE YEAR ENDED MAY 31, 1995
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DISTRIBUTION ACQUISITIONS
HISTORICAL ADJUSTMENTS(A) ADJUSTMENTS(B) PRO FORMA
---------- -------------- -------------- ---------
<S> <C> <C> <C> <C>
Revenues
Franchise.................................. $ 188,021 $ 188,021
Hotel operations........................... 114,514 $ 43,391 157,905
--------- -------- ---------
Total revenues..................... 302,535 43,391 345,926
--------- -------- ---------
Operating Expenses
Franchise marketing........................ 45,510 45,510
Franchise reservations..................... 28,738 28,738
Hotel operations........................... 77,198 31,764 108,962
Selling, general and administrative
expenses................................ 77,189 3,100(c) 80,289
Depreciation and amortization.............. 21,841 5,930 27,771
--------- -------- -------- ---------
Total operating expenses........... 250,476 3,100 37,694 291,270
--------- -------- -------- ---------
Income Before Other Income and
(Expenses) and Income Taxes................ 52,059 (3,100) 5,697 54,656
--------- -------- -------- ---------
Other Income and Expenses)
Interest expense on notes payable to
Parent.................................. (15,492) (4,578) (20,070)
Minority interest.......................... (2,200) (2,200)
Other interest and other expenses.......... (4,412) (4,412)
--------- -------- ---------
Total other income and
(expenses)....................... (22,104) (4,578) (26,682)
--------- -------- -------- ---------
Income Before Income Taxes................... 29,955 (3,100) 1,119 27,974
Income Taxes................................. 13,144 (1,360)(d) 491 12,275
--------- -------- -------- ---------
Net Income................................... $ 16,811 $ (1,740) $ 628 $ 15,699
======== ======== ======== =========
</TABLE>
- ---------------
(a) Reflects the effect of the Distribution and related transactions.
(b) Reflects the incremental impact of the 1995 Acquisitions and 1996
Acquisitions.
(c) Reflects additional costs associated with additional staffing of finance,
cash management and human resource personnel, directors' costs and
incremental rental costs.
(d) Reflects tax benefits at the Company's effective tax rate of 44% related to
deduction of incremental costs per note (c).
15
<PAGE> 20
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED FEBRUARY 29, 1996
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1996
DISTRIBUTION ACQUISITIONS
HISTORICAL ADJUSTMENTS(A) ADJUSTMENTS(B) PRO FORMA
---------- -------------- -------------- ---------
<S> <C> <C> <C> <C>
Revenues
Franchise.................................. $ 163,825 $ 163,825
Hotel operations........................... 110,079 $ 10,913 120,992
--------- -------- ---------
Total revenues..................... 273,904 10,913 284,817
--------- -------- ---------
Operating Expenses
Franchise marketing........................ 37,131 37,131
Franchise reservations..................... 25,705 25,705
Hotel operations........................... 70,109 8,068 78,177
Selling, general and administrative
expenses................................ 68,336 2,325(c) 70,661
Depreciation and amortization.............. 19,145 1,164 20,309
--------- -------- -------- ---------
Total operating expenses........... 220,426 2,325 9,232 231,983
--------- -------- -------- ---------
Income Before Other Income and (Expenses) and
Income Taxes............................... 53,478 (2,325) 1,681 52,834
--------- -------- -------- ---------
Other Income and (Expenses)
Interest expense on notes payable to
Parent.................................. (14,595) (666) (15,261)
Minority interest.......................... (1,149) (1,149)
Other interest and other expenses.......... (2,332) (2,332)
--------- -------- ---------
Total other income and
(expenses)....................... (18,076) (666) (18,742)
--------- -------- -------- ---------
Income Before Income Taxes................... 35,402 (2,325) 1,015 34,092
Income Taxes................................. 14,966 (983)(d) 426 14,409
--------- -------- -------- ---------
Net Income................................... $ 20,436 $ (1,342) $ 589 $ 19,683
========= ======== ======== =========
</TABLE>
- ---------------
(a) Reflects the effect of the Distribution and related transactions.
(b) Reflects the incremental impact of the 1996 Acquisitions.
(c) Reflects additional costs associated with additional staffing of finance,
cash management and human resource personnel, directors' costs and
incremental rental costs.
(d) Reflects tax benefits at the Company's effective tax rate of 42% related to
deduction of incremental costs per note (c).
16
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following review of operating results includes the historical results
of operations of the Company for the years ended May 31, 1995, 1994, and 1993
and the nine month periods ended February 29, 1996 and February 28, 1995. 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.
COMPARISON OF RESULTS FOR THE NINE MONTH PERIODS ENDING FEBRUARY 29, 1996 AND
FEBRUARY 28, 1995
Net income was $20.4 million for the nine months ended February 29, 1996,
an increase of $8.7 million, or 74%, compared to the same period last year.
Revenues for the nine months ended February 29, 1996 increased $54.5
million, or 25%, to $273.9 million compared to the nine months ended February
28, 1995. Operating expenses for the nine months ended February 29, 1996
increased $39.0 million, or 21%, to $220.4 million, resulting in a $15.5
million, or 41%, increase in operating profits.
The Company's franchise revenues for the nine months ended February 29,
1996 increased $23.8 million, or 17%, when compared to the same period last
year. Franchise revenues include base royalty fees, marketing fund assessments
and fees charged for utilization of the Company's centralized hotel reservation
system. These fees and assessments are generally calculated based on a
percentage of the franchise hotels total revenues and reservation call volume.
The increases in franchise revenues were principally the result of fees
generated from franchisees as a result of increases in the number of franchise
hotels, occupancies, average daily room rates and average actual royalty rates
charged to franchisees. The Company's domestic franchise hotels increased by 124
properties, or 5.4%, to 2,431 properties at February 29, 1996, from 2,307
properties at February 28, 1995. Average occupancies of domestic franchise
hotels were 64.2% and 64.1% for the nine months ended February 29, 1996 and
February 28, 1995, respectively. Average daily room rates of domestic franchise
hotels increased by approximately 4.8% for the nine months ended February 29,
1996 as compared to the same period last year. In addition, the average actual
royalty rate of domestic franchise hotels increased to 3.4% for the nine months
ended February 29, 1996 as compared to 3.2% for the same period last year.
Increased occupancies and rates at 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.
The Company's hotel operations revenues for the nine months ended February
29, 1996 increased $30.7 million, or 39%, compared to the same period last year.
The increase in revenue was principally achieved through the acquisition and
development of 23 operating hotels since February 28, 1995. Additionally,
revenue improvements resulted from increases in overall occupancies and in
overall average daily room rates. Overall average occupancies increased to 63.3%
for the nine months ended February 29, 1996 compared to 62.4% for the nine
months ended February 28, 1995, while overall average daily room rates increased
by 9.2% for the nine months ended February 29, 1996 as compared to the same
period last 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.
Franchise marketing expenses increased 5% for the nine months ended
February 29, 1996 compared to the prior year period, 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 22% for the nine months ended
February 29, 1996 when compared to the prior year period. The increase in
reservation expenses relates primarily to growth in labor costs and systems
maintenance costs stemming from increased reservation services provided to the
Company's franchisees and their customers. Call volume related to reservation
sales for franchise hotels was 13.4 million and 12.4 million for the nine months
ended February 29, 1996 and February 28, 1995, respectively. The increase in
expenses was offset by a corresponding increase in reservation fees charged to
the Company's franchise hotels.
17
<PAGE> 22
Hotel operating expenses increased 30% for the nine months ended February
29, 1996 compared to the nine months ended February 28, 1995, principally due to
the addition of hotels. Hotel operating margins increased to 31% for the nine
months ended February 29, 1996 from 27% for the nine months ended February 28,
1995, as marketing efforts enhanced occupancies in the newly renovated and
repositioned acquired hotels.
Selling, general and administrative expenses increased $11.7 million, or
23%, for the nine months ended February 29, 1996 compared to the prior year
period. As a percent of total revenues, selling, general and administrative
expenses remained constant at 23% for each of the nine months ended February 29,
1996 and February 28, 1995. 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 $13.8 million and $8.7 million
for the nine months ended February 29, 1996 and February 28, 1995, respectively.
Additional general and administrative costs associated with the Company's
acquired domestic properties also contributed to the increase.
Depreciation and amortization expense increased 21% for the nine months
ended February 29, 1996 compared to the same period of the prior fiscal year.
Increases were principally due to acquisitions and renovations of the 14 hotels
acquired between March 1, 1994 and February 28, 1995. Renovations for these
hotels were generally completed by March 1, 1995, 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 $3.4 million, or 31%,
for the nine months ended February 29, 1996 compared to the prior year period.
Increases in interest on notes payable to Parent were principally due to
advances and borrowings to finance the acquisition of 22 hotels. Other interest
expense and other expenses decreased $1.8 million during the same period,
principally due to increases in miscellaneous other income.
COMPARISON OF FISCAL YEAR RESULTS
Net income was $16.8 million, an increase of $7.2 million, or 74%, for
fiscal year 1995. This compares to an increase of $2.0 million, or 26%, for
fiscal year 1994.
Revenues increased $62.8 million, or 26%, to $302.5 million in fiscal year
1995, while operating expenses increased $43.8 million, or 21%, to $250.5
million, resulting in a $19.0 million, or 58%, increase in operating profits.
This compares to an increase of $61 million, or 34%, in revenues and an increase
of $51.6 million, or 33%, in expenses for fiscal year 1994.
The Company's franchise revenues for fiscal years 1995 and 1994 increased
$22.4 million, or 14%, and $28.2 million, or 21%, respectively. Franchise
revenues include base royalty fees, marketing fund assessments and fees charged
for utilization of the Company's centralized hotel reservation system. These
fees and assessments are generally calculated based on a percentage of the
franchised hotels total revenues and reservation call volume. The increases in
franchise revenues were principally the result of fees generated from
franchisees as a result of increased occupancies, average daily room rates and
average actual royalty rates at franchised hotels. Average occupancies of
domestic franchise hotels were 63.8%, 62.2%, and 61.0% in fiscal years 1995,
1994 and 1993, respectively. Average daily room rates of domestic franchise
hotels increased by approximately 3.3% for fiscal year 1995 and 2.5% for fiscal
year 1994. Average actual royalty rates of domestic franchise hotels were 3.2%,
3.1% and 2.8% in fiscal 1995, 1994 and 1993, respectively. Increased occupancies
and 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.
The Company's hotel operations revenues for fiscal years 1995 and 1994
increased $40.3 million, or 54%, and $32.8 million, or 79%, respectively. The
increases in revenue were principally the result of additional room capacity
achieved through hotel acquisitions completed during fiscal years 1993 through
1995. During this period, the Company purchased a total of 36 hotels containing
over 5,500 rooms. Overall average occupancies increased to 64.1% in fiscal year
1995 from 60.4% in fiscal year 1994 and 59.5% in fiscal year 1993. Overall
18
<PAGE> 23
average daily room rates increased 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.
Franchise marketing expenses were constant in fiscal year 1995 compared to
fiscal year 1994. Marketing expense increases of 21% from fiscal year 1993 to
fiscal year 1994 were primarily attributable to a special summer promotion.
These increases in expenses were offset by corresponding increases in marketing
fees charged to the Company's franchise hotels.
Franchise reservation expenses increased 8% and 16% in fiscal year 1995 and
1994 from the prior fiscal years, respectively. Increases in reservation
expenses relate primarily to growth in labor costs and systems maintenance costs
stemming from increased reservation services provided to the Company's
franchisees and their customers. Call volume related to reservation sales for
franchised hotels was 16.6 million, 15.0 million and 13.0 million for fiscal
years 1995, 1994 and 1993, respectively. These increases in expenses were offset
by corresponding increases in reservation fees charged to the Company's
franchise hotels.
Hotel operating expenses increased 41% and 70% for fiscal years 1995 and
1994, respectively, principally due to the addition of hotels. Hotel operating
margins increased to 26% in fiscal year 1995 from 19% in fiscal year 1994 and
15% in fiscal year 1993, as marketing efforts enhanced occupancies in the newly
renovated and repositioned acquired hotels.
Selling, general and administrative expenses increased $12.6 million, or
22%, for fiscal year 1995 and $12.3 million, or 28%, for fiscal year 1994
compared to the prior year periods. As a percent of total revenues, selling,
general and administrative expenses declined to 23% in fiscal year 1995 from 24%
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 were $13.9 million, $12.0 million and $7.4
million for fiscal years 1995, 1994 and 1993, respectively. Additional general
and administrative costs associated with the Company's acquired domestic
properties and growth in the Company's European lodging business also
contributed to the increase.
Depreciation and amortization expense increased 25% in fiscal year 1995 to
$21.8 million. In fiscal year 1994, depreciation and amortization expense
increased 20%. Increases were due to acquisitions and renovation of the 36
hotels acquired from fiscal years 1993 through 1995.
Interest expense on notes payable to Parent increased 45% in fiscal year
1995 and 51% in fiscal year 1994. Other interest expense and other expenses
increased 37% in fiscal year 1995 and 48% in fiscal year 1994. The increases
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 February 29, 1996 and May 31, 1995, notes payable to Parent by the
Company totaling $225.7 million and $198.5 million, respectively, were
outstanding. The notes are due three years from the Distribution Date. Interest
is charged at an annual rate of 9% on the indebtedness. Historically, adequate
financial resources were available from Manor Care to meet operating and
investment needs of the Company. Management believes cash flows from operations,
third party financing sources and the proceeds from the planned divestiture or
leveraging of the Company's owned and managed hotels will be adequate to support
on-going operations and meet debt service requirements for the foreseeable
future. Net cash provided by operating activities for the nine months ended
February 29, 1996 was $35.2 million, an increase of 8% from the same period for
the prior fiscal year. Net cash provided by operating activities for fiscal year
1995 was $47.9 million, an increase of 7% from the same period for the prior
fiscal year. Net cash provided by operating activities for fiscal year 1994 was
$44.6 million, an increase of 97% from the same period for the prior fiscal
year.
19
<PAGE> 24
The Company's working capital ratio at February 29, 1996 and May 31, 1995
was 0.8 and 0.4, respectively. The Company attempts to minimize its investment
in net current assets. Historically, the Company has been assured adequate
financing through Manor Care to meet seasonal fluctuations in working capital
requirements.
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 nine months ended February 29, 1996, the
Company purchased 15 operating hotels for $50.0 million. During the fiscal year
ended May 31, 1995, the Company purchased 16 operating hotels for $59.8 million.
Long term debt and notes payable to Parent totaled $274.7 million at
February 29, 1996 compared to $250.6 million at May 31, 1995 and $200.1 million
at May 31, 1994. Notes payable to Parent totaling $225.7 million are to be
repaid over a three year period from the Distribution Date. The increase in long
term debt and notes payable to Parent is mainly attributable to the Company's
acquisition of 16 operating hotels in fiscal year 1995 and 15 operating hotels
during the nine months ended February 29, 1996.
20
<PAGE> 25
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. For the nine months ended
February 29, 1996, hotel franchising contributed 60% of the Company's revenues
and 75% of the Company's gross profits, while hotel ownership and management
contributed the remaining 40% of revenues and 25% 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.
FRANCHISE OPERATIONS The Company is one of the world's largest franchisors
of hotels with 2,978 properties open and operating in 31 countries at February
29, 1996. 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 February 29, 1996, the Company owned and
managed, under its six principal brand names, 77 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 $238 million to buy and renovate 51 hotel properties.
THE LODGING INDUSTRY
As of June 1996, there are approximately 3.3 million hotel rooms in the
United States in hotels/motels containing twenty or more rooms. Of those rooms,
approximately 1.2 million rooms are not affiliated with a national or regional
brand, while the remaining approximately 2.1 million rooms are affiliated with a
brand either through franchise or the ownership/management of a national or
regional chain.
During the late 1980s, the industry added approximately 500,000 hotel rooms
to its inventory due largely to a favorable hotel lending environment, the
ability of hotel operators to regularly increase room rates and the
deductibility of passive tax losses, which encouraged hotel development. As a
result, the lodging industry saw an oversupply of rooms and a decrease in
industry performance.
The lodging industry in recent years has demonstrated a recovery, based on
year-to-year increases in room revenues, occupancy rates, revenue per available
room ("RevPAR"), and lodging industry profitability. RevPAR is calculated by
multiplying the percentage of occupied rooms by the average daily room rate
charged. Since 1993, the lodging industry has been able to increase its average
daily rate ("ADR") at a pace 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
21
<PAGE> 26
Summer Olympics, the 1996 national political campaigns and conventions, and a
continued improvement in the national economy. The following chart demonstrates
the recent trends:
THE US LODGING INDUSTRY'S GROWTH TRENDS SINCE 1991
<TABLE>
<CAPTION>
INCREASE IN AVERAGE
ROOM DAILY INCREASE INCREASE REVENUE PER
REVENUE (ROOM) IN ADR IN CPI AVAILABLE NEW
VERSUS OCCUPANCY RATES VERSUS VERSUS ROOM PROFITS ROOMS
YEAR PRIOR YEAR RATES (ADR) PRIOR YEAR PRIOR YEAR (REVPAR) (IN BILLIONS) ADDED
- -------------- ----------- --------- ------- ---------- ---------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992.......... N/A 62.1% $59.65 N/A 2.9% $ 37.04 break-even 34,000
1993.......... 6.3% 63.1% $61.30 2.8% 2.7% $ 38.68 $2.4 38,000
1994.......... 8.6% 64.7% $64.24 4.8% 2.7% $ 41.56 $5.5 44,000
1995.......... 7.9% 65.5% $67.34 4.8% 2.9% $ 44.11 $8.5 56,000
1996*......... N/A 66.4% $71.00 5.4% 2.9% $ 46.68 N/A 60,000 -
70,000
</TABLE>
- ---------------
Source: Smith Travel Research
* Estimated
The Company believes the lodging industry can be divided into three
categories: luxury or upscale, middle-market and economy. The Company believes
the luxury category generally has room rates above $70 per night, the
middle-market category generally has room rates between $46 and $70 per night
and the economy category generally has room rates less than $46 per night.
Service is a distinguishing characteristic in the lodging industry.
Generally there are three levels of service: full-service hotels (which offer
food and beverage services, meeting rooms, room service and similar guest
services); limited-service hotels (which offer amenities such as swimming pools,
continental breakfast, or similar services); and all-suites hotels (which
usually have limited public areas, but offer guests two rooms or one room with
distinct areas, and which may or may not offer food and beverage services).
The Company's Econo Lodge, Rodeway and Sleep brands compete primarily in
the limited-service economy market; the Company's Comfort and Quality brands
compete primarily in the limited-service middle-market; the Company's Clarion
brand competes primarily in the full-service upscale market; and the Company's
MainStay Suites brand will compete primarily in the all-suites middle-market.
New hotels opened in recent years typically have been limited service
hotels, as limited-service hotels are less costly to develop, enjoy higher gross
margins, and tend to have better access to financing. These hotels typically
operate in the economy and middle-market categories and are located in suburban
or highway locations. From 1993 to 1996, the average room count in new hotels
declined from 123 to 80, primarily because hotel developers found it difficult
to obtain financing of more than $3 million from their primary lending sources
(local banks and Small Business Administration guaranteed loan programs).
In recent years, operators of hotels not owned or managed by major lodging
companies have increasingly joined national hotel franchise chains as a means of
remaining competitive with hotels owned by or affiliated with national lodging
companies. Because hotels typically operate with high fixed costs, increases in
revenues generated by affiliation with a franchise lodging chain can improve a
hotel's financial performance. Of approximately 933 hotel properties that
changed their affiliation in 1995, 77% converted from independent status to
affiliation with a chain or converted from one chain to another, while only 23%
canceled or were required to cancel their chain affiliation. The share of US
hotel rooms affiliated with a chain was approximately 63% in 1995.
The shift to chain membership has been most pronounced among hotels in the
same categories as the Company, i.e., the economy and middle-market categories.
In 1995, 53% of all conversions to a chain from independent status or from
another chain were in the economy category, 37% were in the middle-market
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.
22
<PAGE> 27
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 1995 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 nine
fiscal years ended May 31, 1995, the number of properties in the
Company's domestic franchise system increased through acquisition and
internal growth to 2,311 properties with 200,792 rooms, from 599
properties with 69,187 rooms. As of February 29, 1996, the domestic
franchise system contained 2,431 properties with 209,047 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.
ADVERTISING CAMPAIGNS -- The Company promotes its brand awareness
through nationally recognized advertising campaigns including the long
running "celebrity in a suitcase" campaign.
23
<PAGE> 28
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
nine fiscal years ended May 31, 1995, the number of properties in the
Company's international franchise system increased to 525 properties with
45,032 rooms, from 46 properties with 4,505 rooms. As of February 29,
1996, the international franchise system contained 547 properties with
46,498 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.
24
<PAGE> 29
- PURSUIT OF SELECTED STRATEGIC ACQUISITIONS. The Company intends to
pursue strategic acquisitions, both in the US and abroad, of lodging,
travel-related and other franchise businesses. The Company believes that
acquisition 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, 1995 and the
nine months ended February 28, 1995 and February 29, 1996.
COMBINED DOMESTIC FRANCHISE SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
AS OF OR FOR THE YEAR ENDED MAY ENDED FEBRUARY
31, 28/29,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of properties, end of
period......................... 2,190 2,283 2,311 2,307 2,431
Number of rooms, end of period... 196,567 203,019 200,792 202,672 209,047
Average royalty rate............. 2.8% 3.1% 3.2% 3.2% 3.4%
Average occupancy percentage..... 61.0% 62.2% 63.8% 64.1% 64.2%
Average daily (room) rate
(ADR).......................... $ 44.50 $ 45.63 $ 47.13 $ 47.17 $ 49.44
RevPAR........................... $ 27.13 $ 28.40 $ 30.08 $ 30.23 $ 31.74
Royalty fees ($000s)............. $56,266 $62,589 $71,665 $54,355 $61,566
</TABLE>
25
<PAGE> 30
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 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. Principal competitor brands include
Days Inn, Fairfield Inn, Hampton Inn, Holiday Express and LaQuinta. At February
29, 1996, there were 1,309 Comfort Inn properties and 81 Comfort Suite
properties with a total of 104,558 and 7,054 rooms, respectively, open and
operating worldwide. An additional 215 Comfort Inn properties and 74 Comfort
Suite properties with a total of 19,728 and 6,270 rooms, respectively, were
under development.
Comfort properties are located in the United States and in the Bahamas,
Belgium, Canada, the Cayman Islands, Costa Rica, France, Germany, India,
Indonesia, Ireland, Italy, Jamaica, Japan, Mexico, Norway, Portugal, Sweden,
Switzerland, Thailand, the United Kingdom, Uruguay and the U.S. Virgin Islands.
The following chart summarizes the Comfort system in the United States:
COMFORT DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
AS OF OR FOR THE YEAR ENDED MAY ENDED FEBRUARY
31, 28/29,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of properties, end of
period......................... 824 935 1,015 970 1,100
Number of rooms, end of period... 71,616 82,479 87,551 84,852 92,510
Royalty fees ($000s)............. $25,169* $31,187 $37,635 $28,321 $33,495
</TABLE>
- ---------------
* Estimated based on actual 1994 results.
26
<PAGE> 31
QUALITY. Quality Inns and Quality Suites hotels compete in the limited to
full service, middle market category. Principal competitor brands include Best
Western, Holiday Inn, Howard Johnson, Ramada Inn and Days Inn. At February 29,
1996, there were 335 Quality Inn properties with a total of 41,311 rooms, and 22
Quality Suites properties with a total of 3,377 rooms open in the United States.
An additional 56 Quality Inn properties and 3 Quality Suites properties with a
total of 6,783 rooms and 196 rooms, respectively, were under development.
Quality properties are located in the United States and in Argentina,
Australia, Belgium, Canada, Chile, China, Costa Rica, the Czech Republic,
Denmark, France, Germany, Guatemala, India, Indonesia, Ireland, Italy, Jamaica,
Japan, Mexico, Norway, Paraguay, Portugal, Puerto Rico, Russia, Spain and the
United Kingdom.
The following chart summarizes the Quality system in the United States:
QUALITY DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
AS OF OR FOR THE YEAR ENDED MAY ENDED FEBRUARY
31, 28/29,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of properties, end of
period......................... 390 358 341 353 357
Number of rooms, end of period... 50,273 45,032 43,281 44,271 44,688
Royalty fees ($000s)............. $14,854* $14,890 $15,632 $11,827 $12,414
</TABLE>
- ---------------
* Estimated based on actual 1994 results.
ECONO LODGE. Econo Lodge hotels operate in the limited-service, economy
category of the lodging industry. Principal competitor brands include Days Inn,
Ho-Jo Inn, Motel 6, Ramada Limited, Red Carpet Inn, Red Roof Inn, Super 8 and
Travelodge.
At February 29, 1996, there were 649 Econo Lodge properties with a total of
43,119 rooms open and operating in the United States and Canada, and an
additional 104 properties with a total of 7,310 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
NINE MONTHS
AS OF OR FOR THE YEAR ENDED MAY ENDED FEBRUARY
31, 28/29,
------------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Number of properties, end of
period.......................... 677 677 633 666 634
Number of rooms, end of period.... 47,827 46,570 42,801 45,124 42,394
Royalty fees ($000s).............. $11,512 $11,231 $12,021 $9,390 $9,692
</TABLE>
CLARION. Clarion Inns, Clarion Hotels, Clarion Resorts and Clarion Suites
hotels are full-service properties which operate in the upscale category.
Principal competitor brands include Holiday Inn, Holiday Select, Crowne Plaza,
Four Points by Sheraton, Radisson, Courtyard by Marriott and Doubletree.
At February 29, 1996, there were 86 Clarion properties with a total of
14,163 rooms open and operating worldwide and an additional 26 properties with a
total of 3,948 rooms under development. The properties are located in the United
States, and in Anguilla, Argentina, Australia, the Bahamas, Belgium, Canada, the
27
<PAGE> 32
Cayman Islands, Costa Rica, Dominica, France, Germany, Honduras, Indonesia,
Ireland, Mexico, Russia and Thailand. The following chart summarizes the Clarion
system in the United States:
CLARION DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
AS OF OR FOR THE YEAR ENDED ENDED FEBRUARY
MAY 31, 28/29,
---------------------------- ------------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of properties, end of
period............................. 59 65 63 62 69
Number of rooms, end of period....... 10,777 12,211 10,420 11,542 11,908
Royalty fees ($000s)................. $2,273* $2,735 $2,995 $2,268 $2,576
</TABLE>
- ---------------
* Estimated based on actual 1994 results.
RODEWAY. The Rodeway brand competes in the limited-service, economy
category. Principal competitor brands include Ho-Jo Inn, Ramada Limited, Red
Roof Inn, Budgetel, Shoney's Inn, Super 8 and Motel 6. At February 29, 1996,
there were 203 Rodeway Inn properties with a total of 12,542 rooms, open and
operating in the United States and Canada, and an additional 42 properties with
a total of 2,852 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
NINE MONTHS
AS OF OR FOR THE YEAR ENDED ENDED FEBRUARY
MAY 31, 28/29,
------------------------------ ------------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of properties, end of
period.......................... 221 214 208 215 196
Number of rooms, end of period.... 14,565 13,806 13,067 13,835 12,085
Royalty fees ($000s).............. $2,148 $1,941 $2,302 $1,789 $1,862
</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. Principal competitor brands include Days
Inn, Fairfield Inn, Holiday Express, LaQuinta Inn, Ho-Jo Inn and Ramada Inn.
At February 29, 1996, there were 75 Sleep Inn properties with a total of
5,462 rooms open and operating in the United States and one property with 116
rooms in the Cayman Islands. An additional 134 properties with a total of 10,268
rooms were under development. The following chart summarizes the Sleep system in
the United States:
SLEEP DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
AS OF OR FOR THE YEAR ENDED ENDED FEBRUARY
MAY 31, 28/29,
---------------------------- ------------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of properties, end of
period............................. 19 34 51 41 75
Number of rooms, end of period....... 1,509 2,921 3,672 3,048 5,462
Royalty fees ($000s)................. $ 310* $ 605 $1,080 $ 760 $1,527
</TABLE>
- ---------------
* Estimated based on actual 1994 results.
MAINSTAY SUITES. MainStay Suites hotels is a middle market, extended-stay
lodging product and the Company's newest brand. The first MainStay Suites hotel,
which the Company will own and manage, is scheduled to open in Plano, Texas, in
September 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
28
<PAGE> 33
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 February 29, 1996, Choice had 547 franchise hotels
open in 30 countries outside the United States. The following table illustrates
the growth of the Company's international franchise system over the three fiscal
years ended May 31, 1995, and the nine months ended February 28, 1995 and
February 29, 1996:
COMBINED INTERNATIONAL FRANCHISE SYSTEMS
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
AS OF OR FOR THE YEAR ENDED FEBRUARY
ENDED MAY 31, 28/29,
------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of properties, end of period.......... 192 430 525 513 547
Number of rooms, end of period............... 20,423 36,725 45,032 44,103 46,498
Royalty fees ($000's)........................ 813 1,201 1,547 989 727
</TABLE>
EUROPE. Choice became the second-largest international franchised
hotel chain in Europe during 1995, with 270 hotels open in 13 countries at
February 29, 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 February 29, 1996, this
was the only property open in this region.
ASIA/PACIFIC. During the nine months ended February 29, 1996, Company
franchisees opened seven hotels in Australia, one in New Zealand, one in
India, two in Thailand and one in Indonesia, bringing the total number of
properties open in the Asia/Pacific region at February 29, 1996 to 63.
CARIBBEAN. The Company's master franchisee had 6 properties open in
three Caribbean countries at February 29, 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, Costa Rica,
Chile and Mexico. In total there were 20 open properties in this region at
February 29, 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 187 properties open at February 29, 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.
29
<PAGE> 34
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 1995, 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.
The Company employs 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 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.
In the nine months ended February 29, 1996, the Company received 610
franchise applications, approved 497 applications, signed 305 franchise
agreements and placed 201 new properties into operation in the United States
under the Company's brands. Of those placed into operation, 114 were newly
constructed hotels. By comparison, in the nine months ended February 28, 1995,
the Company received 579 franchise applications, approved 448 applications,
signed 259 franchise agreements and had 165 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, normally for a period of twenty (20) 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.
30
<PAGE> 35
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.
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, 1995, the Company's average actual royalty rate was 3.2%, up from 3.1% for
the fiscal year ended May 31, 1994, and up from 2.9% for the fiscal year ended
May 31, 1993. The Company believes that its average actual royalty rate will
continue to increase as older franchise agreements expire, terminate or are
amended.
At February 29, 1996, the Company had 2,431 franchise agreements in effect
in the United States and 547 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
31
<PAGE> 36
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.
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.
32
<PAGE> 37
QUALITY ASSURANCE PROGRAMS. Consistent quality standards are critical
to the success of a hotel franchise. The Company has established quality
standards for all of its franchised brands which cover housekeeping,
maintenance, brand identification and level of services offered. The
Company inspects properties for compliance with its quality standards when
application is made for admission to the franchise system. The compliance
of existing franchisees with quality standards is monitored through
scheduled and unannounced Quality Assurance Reviews conducted at least once
per year at each property. Properties which fail to maintain a minimum
score are reinspected on a more frequent basis until deficiencies are
cured, or until such properties are terminated.
To encourage compliance with quality standards, the Company offers
various brand-specific incentives to franchisees who maintain consistent
quality standards. 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. AAA
has rated 80.4%, 79.3% and 86.7% 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 1996, Choice Picks food
court, MainStay Suites hotels and K-Minus food service.
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 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 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
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<PAGE> 38
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 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 $14.3 million for
the nine months ended February 29, 1996, up from $9.0 million in the
year-earlier nine-month period.
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 $238 million to buy and renovate 51
hotel properties with 7,418 rooms. In the nine months ended February 29, 1996,
the Hotel Division acquired 15 hotels for a total planned investment, including
initial improvements, of approximately $68 million. In addition to the 51 hotel
properties acquired, the Company owned and managed as of February 29, 1996 14
European properties (four developed by the Company and ten acquired in
connection with the Company's Resthotel Primevere acquisition in fiscal 1994),
10 seasoned domestic properties and two Sleep Inns developed by the Company.
HOTEL DIVISION DOMESTIC ACQUISITIONS
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED
-------------------------------------------- FEBRUARY
1993 1994 1995 29, 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Total acquisitions................. 7 13 16 15
Total number of rooms acquired..... 1,276 1,933 2,336 1,873
Total cost of acquisitions (in
millions)
(including initial
improvements)................. $ 30.9 $ 55.8 $ 83.3 $ 67.5*
Average cost per room.............. $ 24,216 $ 28,867 $ 35,659 $36,492
</TABLE>
--------------------
* Includes $17.5 million planned for initial improvements.
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<PAGE> 39
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.
Net operating income for the seven hotels purchased in fiscal year 1993
increased from $4 million in fiscal 1994 to $6.6 million in fiscal 1995, a 66%
improvement. For the 13 domestic hotels purchased in fiscal year 1994, net
operating income increased 184% to $7.2 million in fiscal 1995 from $2.5 million
prior to acquisition. 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.
OWNED AND MANAGED DOMESTIC HOTELS
OCCUPANCY
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR FEBRUARY 28/29
------------------------- -------------------
1993 1994 1995 1995 1996
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Original Domestic Portfolio.............. 62.27% 64.16% 67.19% 65.88% 66.36%
Fiscal 1993 Acquisitions................. 56.17 63.20 73.68 70.93 74.22
Fiscal 1994 Acquisitions................. -- 66.09 70.71 68.61 72.06
Fiscal 1995 Acquisitions................. -- -- 48.96 44.57 56.64
</TABLE>
CURRENT BUSINESS STRATEGY
The Hotel Division plans to leverage and/or divest its owned hotels at
values which reflect their improved operating performance, and retain management
and franchise agreements relating to these divested hotels. The proceeds from
these transactions will be used initially to repay outstanding indebtedness. The
remaining proceeds will be used to launch or provide support to recently
developed brands, such as Sleep Inn and MainStay Suites, to develop additional
new brands, to expand internationally by investing in selected international
gateway cities and to invest in other targeted growth areas. The timing,
proceeds and other terms of any such transaction involve risks and uncertainties
which may be beyond the Company's control. No assurances can be made that the
Company's strategy will be successful.
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 three fiscal years ended
May 31, 1995 and the nine months ended February 28, 1995 and February 29, 1996.
35
<PAGE> 40
DOMESTIC OWNED AND MANAGED HOTELS
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
AS OF OR FOR THE YEAR ENDED ENDED FEBRUARY
MAY 31, 28/29,
------------------------------ ------------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of properties, end of
period.......................... 19 32 48 41 63
Number of rooms, end of period.... 3,686 5,605 7,941 6,889 9,687
Average occupancy percentage...... 61.36% 64.18% 67.10% 65.61% 65.09%
Average daily (room) rate (ADR)... $49.53 $49.15 $51.28 $50.33 $55.46
RevPAR............................ $30.39 $31.54 $34.41 $33.02 $36.10
</TABLE>
OPERATING SYSTEMS AND PROCEDURES. The Company's owned and managed hotels
take advantage of the same systems and services available to franchisees with
respect to a particular brand. The hotels participate in the central reservation
system, marketing and advertising efforts and volume purchasing discounts and
are subject to the same quality assurance program. In addition, the following
are systems the Hotel Division has instituted in each of the hotels it operates:
- YIELD MANAGEMENT. An automated yield management program has been
installed at the hotels which allows the local management to take
advantage of the supply and demand conditions in their market place. The
system is automated to the point that it performs calculations and
suggests pricing strategies to the local hotel management. The program
continues to update information based on the availability of room supply
and reservation volume within each hotel.
- TRAINING. The Hotel Division has developed a training system for all
guest services representatives that teaches the basics of telephone sales
techniques. A computerized guest comment system was developed to solicit
the comments of guests and the experiences they had at the hotel while
providing management with immediate guest feedback.
- ACCOUNTING SYSTEMS. Each Company-operated hotel has a computerized front
desk and accounting system. This system allows key financial indicators
(such as daily occupancy and revenue) to be immediately gathered from each
hotel and electronically transmitted to the key operating officers and
managers of the Hotel Division. This instant access to information allows
management to quickly spot trends and make corrections and changes where
necessary. The system is completely computerized and allows for cost
savings in the accounting and bookkeeping departments of each hotel. In
addition, control over operational and capital expenditures is provided by
a dedicated group of financial controllers in the home office. This group
works with the hotel operations group to maintain expense standards as
well as established operating procedures.
- TIME AND ATTENDANCE SYSTEM. Each hotel maintains an automated time and
attendance system that is tied into a central payroll system at the
corporate headquarters. This computerized method of tracking time allows
management to make quick decisions on controlling labor costs and provides
immediate information on projected costs.
- FOOD AND BEVERAGE. The food and beverage efforts are headed by a vice
president of food and beverage. The department is responsible for the
daily food and beverage activities of the various hotels, as well as the
development of new food concepts. This group was responsible for the
development, testing and implementation of the Choice Picks food court
concept.
DEVELOPMENT AND ACQUISITIONS. In order to facilitate the growth process of
acquiring new hotels, the Hotel Division maintains an acquisitions department
dedicated to the investigation and analysis of potential acquisitions. The
department performs the initial evaluation of potential acquisitions along with
the due diligence investigations that are required in this process. This
department is also responsible for seeking land sites suitable for the
construction of Sleep Inns and MainStay Suites which are to be operated by the
Company.
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<PAGE> 41
PROPERTIES
The following chart lists by brand the Company's owned and managed domestic
hotels at February 29, 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
</TABLE>
<TABLE>
<S> <C> <C>
Comfort Inn University Baton Rouge, LA 150
Comfort Inn, Danvers Boston, MA 136
Comfort Suites Haverhill Boston, MA 131
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 Inn at Six Flags Dallas-Fort Worth, TX 250
Comfort Suites Deerfield Ft. Lauderdale, FL 101
Comfort Inn Deerfield East Ft. Lauderdale, FL 69
Comfort Inn Hershey Harrisburg, PA 125
Comfort Inn Hilton Head Hilton Head Island, SC 150
Comfort Inn Collierville Memphis, TN 94
Comfort Inn & Suites, Miami Springs Miami, FL 267
Comfort Inn Miami Springs Miami, FL 110
Comfort Inn -- Lee Road Orlando, FL 145
Comfort Inn -- Turf Paradise Phoenix, AZ 155
Comfort Inn -- North Phoenix, AZ 153
Comfort Inn Portland Portland, ME 126
Comfort Inn by the Bay* San Francisco, CA 135
Comfort Inn Westport St. Louis, MO 170
Comfort Inn Sturgis Sturgis, MI 83
Comfort Inn Traverse City Traverse City, MI 95
Comfort Inn Tyson's Washington, DC 250
Comfort Inn West Palm Beach West Palm Beach, FL 157
Comfort Inn Wichita Wichita, KS 114
QUALITY
Quality Inn Anderson Anderson, SC 121
Quality Inn & Suites -- Crown Point Charlotte, NC 100
Quality Inn Plymouth Detroit, MI 123
Quality Suites Deerfield Ft. Lauderdale, FL 107
Quality Inn & Suites Indianapolis Indianapolis, IN 116
Quality Inn Southpoint Jacksonville, FL 184
Quality Inn Lincoln Lincoln, NE 108
</TABLE>
37
<PAGE> 42
<TABLE>
<CAPTION>
NUMBER
OF
HOTEL MARKET ROOMS
------------------------------------------------ --------------------------- ------
<S> <C> <C>
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 Plano Dallas-Fort Worth, TX 104
Sleep Inn San Antonio San Antonio, TX 107
ECONO LODGE
Econo Lodge Tolleson Phoenix, AZ 120
RODEWAY INN
Rodeway Inn Airport East Phoenix, AZ 100
</TABLE>
- ---------------
* Denotes leased property.
** Denotes hotel on leased land.
The Company also owns and manages ten hotels in France, three in Germany
and one in the United Kingdom.
COMPETITION
Competition among franchise lodging chains is intense, both in attracting
potential franchisees to the system and in generating reservations for
franchisees. In addition, hotel chains and independent hotels compete intensely
for guests and for meeting and banquet business.
The Company's principal competitor brands at the national and international
level in the economy category of the lodging industry are LaQuinta, Ho-Jo Inn,
Ramada Inn, Motel 6, Ramada Limited, Red Carpet Inn, Red Roof Inn, Budgetel,
Hampton Inn, Fairfield Inn, Holiday Express, Shoney's Inn, Super 8, Days Inn,
and Travelodge. The Company's principal competitor brands at the national and
international level in the middle market category of the lodging industry are
Days Inn, Fairfield Inn, Hampton Inn, Holiday Express, LaQuinta, Holiday Inn,
Best Western, Howard Johnson and Ramada Inns. The Company's principal competitor
brands at the national and international level in the upscale category are
Holiday Inn, Holiday Select, Crowne Plaza, Four Points by Sheraton, Radisson,
Courtyard by Marriott and Doubletree.
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<PAGE> 43
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 more than 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 a lease relating to such offices. The
Company owns its reservation system offices in Phoenix, AZ and is in the process
of purchasing its offices in Minot, ND. The purchase is expected to close during
August 1996. 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.
Management believes that its executive, reservation systems and sales offices
are sufficient to meet its present needs and does not anticipate any difficulty
in securing additional or alternative space, as needed, on terms acceptable to
the Company.
SEASONALITY
The Company's principal sources of revenues are franchise fees based on the
gross room revenues of its franchise properties and revenues generated by its
owned and managed hotels. The Company experiences seasonal revenue patterns
similar to those of the lodging industry in general. Generally, the Company's
revenues are greater in the first and second fiscal quarters than in the third
and fourth fiscal quarters. This seasonality can be expected to cause quarterly
fluctuations in the revenues, profit margins and net earnings 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
39
<PAGE> 44
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.
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.
40
<PAGE> 45
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 material to the business 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. See
"Relationship Between Manor Care and the Company After the
Distribution--Distribution Agreement."
41
<PAGE> 46
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................ 42 Senior Vice President -- Human Resources
Antonio DiRico................ 43 Senior Vice President -- Operations
Richard P. Kaden.............. 50 Senior Vice President -- Brands and Acting Chief
Financial Officer
Edward A. Kubis............... 37 Senior Vice President, General Counsel and Secretary
Barry L. Smith................ 54 Senior Vice President -- Marketing
</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") since 1977; Chief Executive
Officer of Healthcare since June 1989 and President from May 1990 to May 1991;
Chairman of the Board and Chief Executive Officer of Vitalink from September
1991 to February 1995 and President and Chief Executive Officer from March 1987
to September 1991; Chairman of the Board of Choice from March 1987 to June 1990.
Mark A. Caruso. Senior Vice President, Human Resources with Choice 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 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 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 since February
1989.
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, 1995 who will not continue as executive officers
of the Company.
42
<PAGE> 47
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ------------------------------
FISCAL ----------------------------- STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER SHARES(#) COMPENSATION(1)
- -------------------------------- ------ -------- -------- ----- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(2).......... 1995 $572,308 $343,385 (4) -- $ 9,000
Chairman and 1994 457,867(3) 274,720 (4) 40,000 14,150
Chief Executive Officer 1993 499,200 269,568 (4) 30,000 13,732
Donald J. Landry................ 1995 311,635 171,399 (4) 40,000 2,250
President 1994 275,712 144,059 (4) 25,000 3,537
1993 254,856 25,000 (4) 15,000 --
Barry L. Smith.................. 1995 221,668 104,561 (4) -- 6,750
Sr. Vice President, Marketing 1994 209,151 98,642 (4) 5,000 3,072
1993 197,284 93,851 (4) 10,000 2,524
Richard P. Kaden................ 1995 187,007 59,971 (4) -- 2,458
Sr. Vice President, Brands & 1994 133,270 0 (4) 10,000 1,868
Acting Chief Financial Officer 1993 --(5) (4) -- --
Antonio DiRico.................. 1995 159,678 50,813 (4) -- 2,153
Sr. Vice President, Operations 1994 133,719 0 (4) 5,000 1,986
1993 120,000 0 (4) 5,000 --
Robert C. Hazard, Jr.(6)........ 1995 373,709 186,855 (4) -- 9,000
Co-Chairman 1994 346,124 173,062 (4) -- 14,150
Choice Hotels International,
Inc. 1993 320,578 160,289 (4) -- 13,732
Gerald W. Petitt(6)............. 1995 323,553 161,776 (4) -- 9,000
Co-Chairman 1994 283,193 141,596 (4) -- 14,150
Choice Hotels International,
Inc. 1993 262,291 131,146 (4) -- 13,732
</TABLE>
- ---------------
(1) Represents amounts contributed by the Company for fiscal years 1995, 1994
and 1993 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 years 1995 under the 401(k) Plan for the Named Officers were as
follows: Mr. Bainum, Jr., $9,000; Mr. Landry, $1,420; Mr. Kaden, $890; Mr.
Smith, $2,329; and Mr. DiRico, $720. Amounts contributed in cash or stock
by the Company during fiscal 1995 under the Nonqualified Savings Plan for
the Named Officers were as follows: Mr. Bainum, Jr., $0; Mr. Landry, $830;
Mr. Kaden, $1,568; Mr. Smith, $4,421; and Mr. DiRico, $1,433.
(2) Following the Distribution, Mr. Bainum, Jr. will be the chief executive
officer of the Company and of Manor Care. Therefore, it is expected that he
will devote of his time to each company. The compensation reflected
here is total compensation received for services rendered to both the
Company and Manor Care.
(3) Mr. Bainum, Jr. took an unpaid leave of absence during April and May 1994
while he devoted a substantial portion of his time exploring the
possibility of seeking an elective governmental position, resulting in a
decrease in salary paid in fiscal year 1994 compared to fiscal year 1993.
(4) 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.
(5) Mr. Kaden was not hired by the Company until August 23, 1993.
(6) Mr. Hazard and Mr. Petitt served as Co-Chairmen of Choice Hotels
International, Inc. from January 1995 to May 31, 1996. Prior to January 1,
1995, Mr. Hazard served as Chairman and Chief Executive Officer of Choice
Hotels International, Inc. and Mr. Petitt served as President and Chief
Operating Officer of Choice Hotels International, Inc. 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.
43
<PAGE> 48
The following tables set forth certain information at May 31, 1995 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.
MANOR CARE STOCK OPTION GRANTS IN FISCAL 1995
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------- VALUE OF ASSUMED
PERCENTAGE OF ANNUAL RATE OF STOCK
TOTAL OPTIONS PRICE APPRECIATION FOR
NUMBER OF GRANTED TO ALL EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED FISCAL 1995 PER SHARE DATE 5%(2) 10%(3)
- ----------------------- --------- -------------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. ... -- -- -- -- -- --
Donald J. Landry(4).... 40,000 50% $28.63 11/16/2004 $720,000 $1,824,800
Richard P. Kaden....... -- -- -- -- -- --
Barry Smith............ -- -- -- -- -- --
Antonio DiRico......... -- -- -- -- -- --
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 $28.63 per share yields
$46.63.
(3) A 10% per year appreciation in stock price from $28.63 per share yields
$74.25.
(4) The options granted to Mr. Landry vest at the rate of 10% per year
commencing on the second through the fifth anniversary of the date of the
stock option grant and 20% per year on the sixth through the eighth
anniversaries.
AGGREGATED OPTION EXERCISES IN FISCAL 1995
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT MAY 31, 1995 IN-THE-MONEY OPTIONS AT MAY
ACQUIRED ON VALUE ---------------------------- 31, 1995(1)
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE ----------------------------
# $ # # EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr..... -- -- 565,500 239,500 $ 9,758,070 $ 3,792,480
Donald J. Landry(5).... -- -- 22,500 162,500 162,500 1,391,255
Richard P. Kaden....... -- -- -- 10,000 -- 85,600
Barry Smith............ 10,600 $183,100 -- 61,700 -- 1,041,171
Antonio DiRico......... -- -- 500 9,500 -- 74,400
Robert C. Hazard,
Jr. ................. -- -- 58,500 54,000 1,127,865 1,091,160
Gerald W. Petitt....... 10,000 $146,966 38,300 54,000 765,781 1,091,160
</TABLE>
- ---------------
(1) The closing price of Manor Care's Common Stock as reported by the New York
Stock Exchange on May 31, 1995 was $29.25. 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.
44
<PAGE> 49
EMPLOYMENT AGREEMENTS
Under the terms of an employment agreement among Mr. Landry, Manor Care and
Choice, Mr. Landry's annual salary is presently $350,000 with annual
cost-of-living increases. The agreement extends through February 28, 1997.
[Prior to the Distribution, it is expected that Manor Care, Inc. 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 the Company and based in part on performance
(including a customer satisfaction component) of the Lodging Business. The
agreement will be amended in connection with the Distribution.
It is contemplated that Choice 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
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
45
<PAGE> 50
and investment plan for its employees and the employees of its participating
affiliated companies. The 401(k) Plan will be qualified under Section 401(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), and will include a
cash or deferred arrangement under Section 401(k) of the Code. All employees age
21 or over and who have worked for the Company (or Manor Care) for a twelve
month period during which such employee completed at least 1,000 hours will be
eligible to participate. Subject to certain non-discrimination requirements,
each employee will be able to contribute an amount to the 401(k) Plan on a
pre-tax basis up to 15% of the employee's salary, but not more than the current
federal limit of $9,500. The Company will match contributions made by its
employees subject to certain limitations described in greater detail below. 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. In no event will the Company
make a matching contribution which exceeds 6% of a participant's salary. 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 1995 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
employee stock option plans similar to the Manor Care employee stock option
plans and that certain outstanding Manor Care options will be converted into
options to purchase Company Common Stock.
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, disqualification, removal or other
cause will be filled solely by the affirmative vote of a majority of the
remaining directors then in office. Increases or decreases in the number of
directors shall be apportioned among the classes as nearly equal as possible,
and any additional director of any class elected to fill a vacancy resulting
from an increase in such class shall hold office for a term that shall coincide
with the remaining term of that class, but in no case will a decrease in the
number of directors shorten the term of any incumbent director.
46
<PAGE> 51
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 [ ]
Stewart Bainum, Jr................. 50 Director
Stewart Bainum..................... 77 Class [ ] Director
Barbara Bainum..................... 52 Class [ ] Director
Robert C. Hazard, Jr............... 61 Class [ ] Director
Frederick V. Malek................. 59 Class [ ] Director
Gerald W. Petitt................... 50 Class [ ] Director
Jerry E. Robertson, Ph.D. ......... 63 Class [ ] 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 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. Co-Chairman of Choice from January 1995 until May
1996 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.
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., ICF Kaiser International, Inc., Intrav, Inc.,
National Education Corporation, Northwest Airlines and various Paine Webber
mutual funds.
Gerald W. Petitt. Co-Chairman of Choice from January 1995 until May 1996
and a Director since December 1980; President from June 1990 to January 1995 and
Chief Operating Officer from December 1980 to January 1995.
Jerry E. Robertson, Ph.D. Director of Manor Care since 1989; Retired;
Executive Vice President, 3M Life Sciences Sector and Corporate Services from
November 1986 to March 1994; Director: Allianz Life Insurance Company of North
America, Cardinal Health, Inc., Coherent, Inc., Haemonics Corporation, Life
Technologies, Inc., Medwave, Inc., Project Hope and Steris Corporation.
Prior to the Distribution Date, the directors of the Company are Stewart
Bainum, Jr., James A. MacCutcheon, Senior Vice President, Chief Financial
Officer and Treasurer of Manor Care and James H. Rempe, Senior Vice President,
General Counsel and Secretary of Manor Care, and the only executive officer of
the Company is Stewart Bainum, Jr. Following the Distribution, Stewart Bainum,
Jr. will be the chief executive officer of both the Company and Manor Care. It
is expected that he will devote % of his time to each company.
47
<PAGE> 52
Upon consummation of the Distribution, the Board of Directors is expected
to consist of members. On or prior to the Distribution Date,
additional independent directors will be elected to the board. The additional
independent 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 each Committee 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. In lieu of an annual cash retainer
of $12,650 and Board meeting fees of $2,185 per diem, it is expected that,
pursuant to the Non-Employee Director Stock Compensation Plan to be adopted by
the Company prior to the Distribution, non-employee directors will receive an
annual grant of shares of Company Common Stock. 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.
Prior to the Distribution, it is expected that the Company will adopt the
Directors Retirement Plan pursuant to which a non-employee director who retires
after serving as director for at least ten years will be entitled to an annual
benefit for the remainder of his or her lifetime or five years, whichever is
less, which will equal 75% of the annual retainer payable to directors on the
date of retirement plus 5% for each year served as a non-employee director in
excess of ten years, but not to exceed 100% of the annual retainer payable to
the director on the date of retirement. Unpaid benefits will be forfeited if
such director becomes an owner, director, officer, employee or consultant of a
lodging facility located within 10 miles of a Company-owned or franchised
lodging facility, provided that such other facility is, in the opinion of the
Board, in competition with the business of the Company.
48
<PAGE> 53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of May 31, 1995, the Company purchased from each of Mr. Hazard and Mr.
Petitt 25 shares, representing one-half of their shares, of Choice common stock.
In accordance with a formula contained in an agreement dated December 20, 1994,
the Company 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 common stock and the Company owned 850 shares of Choice common
stock. As of May 31, 1996, the Company purchased from each Mr. Hazard and Mr.
Petitt his remaining 25 shares for a price of $13,950,927 to each of them,
subject as of July 15, 1996 under certain circumstances to an increase not to
exceed $1.2 million each. As of June 1, 1996, each of Mr. Hazard and Mr. Pettit
has entered into an agreement with 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.
Upon consummation of the Distribution, certain management employees of
Choice will hold options to purchase up to shares of Company Common
Stock and certain management employees of Manor Care will have the right to
convert options to purchase Manor Care Common Stock into options to purchase up
to shares of Company Common Stock.
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."
49
<PAGE> 54
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth as of May 31, 1996 the amount of Manor Care
Common Stock 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
owned beneficially more than 5% of Manor Care Common Stock. Unless otherwise
specified, the address for each of them is 10750 Columbia Pike, Silver Spring,
Maryland 20901.
<TABLE>
<CAPTION>
PERCENT
NAME OF BENEFICIAL OWNER TOTAL OF CLASS(1)
--------------------------------------------------------- ---------- -----------
<S> <C> <C>
Stewart Bainum, Jr. ..................................... 12,254,752(2) 19.4%
Stewart Bainum........................................... 10,714,227(3) 17.1%
Barbara Bainum........................................... 1,820,946(4) 2.9%
Frederic V. Malek........................................ 1,002 *
Jerry E. Robertson, Ph.D. ............................... 14,175(5) *
Gerald W. Petitt......................................... 88,178(6) *
Robert C. Hazard, Jr. ................................... 79,620(7) *
Donald J. Landry......................................... 37,144(8) *
Barry L. Smith........................................... 1,119(9) *
Richard B. Kaden......................................... 3,894(10) *
Antonio DiRico........................................... 3,247(11) *
All Directors and Officers as a Group (15 persons)....... 25,025,768(12) 39.4%
Ronald Baron............................................. 4,345,184(13) 6.9%
</TABLE>
- ---------------
* Less than 1% of class.
(1) Percentages are based on 62,672,068 shares outstanding on May 31, 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 1,186,739 shares, 844,400 shares and 348,777 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, that also are included in the
above table as owned beneficially by Stewart Bainum and Barbara Bainum, Mr.
Bainum, Jr.'s father and sister, respectively. Also includes 647,500 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 May 31, 1996, and 1,265 shares and 96 shares, respectively, which Mr.
Bainum, Jr. has the right to receive upon termination of his employment
with the Company pursuant to the terms of the Manor Care, Inc. Retirement
Savings and Investment Plan (the "401(k) Plan") and the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan (the "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 which represents a
pecuniary interest in 850,140 shares of Manor Care stock owned by Realty
Investment.
(3) Includes 4,036,278 shares held directly by the Stewart Bainum Declaration
of Trust, the sole trustee of which is Mr. Bainum; his joint interest in
999,523 shares owned by Bainum Associates and 1,271,541
50
<PAGE> 55
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. 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 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. Also does not
include shares owned by Mid Pines in which Mr. Bainum and Mrs. Bainum's
Trusts are limited partners and in which Mr. Bainum and his wife had a
pecuniary interest equal to 3,791 shares of Manor Care stock.
(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 and
in which she has a pecuniary interest equal to 285,370 shares of Manor Care
stock. 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 and in which she
has a pecuniary interest equal to 1,076,283 shares of Manor Care stock,
(ii) shares owned by MC Investments, in which Ms. Bainum is a limited
partner and in which she has a pecuniary interest equal to 765,807 shares
of Manor Care stock, (iii) shares owned by Realty Investment, in which Ms.
Bainum owns 8.3% of the outstanding common stock, which represents a
pecuniary interest in 283,338 shares of Manor Care stock owned by Realty
Investment, 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 675 shares acquired pursuant to the Manor Care, Inc. Non-Employee
Director Stock Option and Deferred Compensation Stock Purchase Plan.
(6) 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 57,800 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 May 31, 1996 and 214 shares purchased by
Mr. Petitt pursuant to the terms of the Manor Care, Inc. 1995 Employee
Stock Purchase Plan (the "Employee Stock Purchase Plan").
(7) Includes 78,000 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 May 31, 1996, and 46 shares and 218
shares, respectively, which Mr. Hazard has the right to receive upon
termination of his employment with the Company pursuant to the terms of the
401(k) Plan and the Nonqualified Savings Plan.
(8) Includes 37,000 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 May 31, 1996, and 62 shares and 82 shares,
respectively, which Mr. Landry has the right to receive upon termination of
his employment with the Company pursuant to the terms of the 401(k) Plan
and the Nonqualified Savings Plan.
(9) Includes 1,000 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 May 31, 1996, and 41 shares and 78 shares,
respectively, which Mr. Smith has the right to receive upon termination of
his employment with the Company pursuant to the terms of the 401(k) Plan
and the Nonqualified Savings Plan.
(10) Includes 3,767 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 May 31, 1996, and 127 shares purchased by Mr. Kaden
pursuant to the terms of the Employee Stock Purchase Plan.
51
<PAGE> 56
(11) Includes 3,100 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 May 31, 1996, 35 shares purchased by Mr. DiRico
pursuant to the terms of the 1995 Employee Stock Purchase Plan and 31
shares and 81 shares, respectively, which Mr. DiRico has the right to
receive upon termination of his employment with the Company pursuant to the
terms of the 401(k) Plan and the Nonqualified Savings Plan.
(12) Includes a total of 817,234 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 May 31, 1996 and a total of 1,584 shares and 657 shares,
respectively, which such directors and officers have the right to receive
upon termination of their employment with the Company pursuant to the terms
of the 401(k) Plan and the Nonqualified Savings Plan.
(13) 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.
52
<PAGE> 57
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
Under the Restated Certificate of the Company, which is attached as
Appendix A to this Information Statement, the total number of shares of capital
stock that the Company has authority to issue is 165,000,000, consisting of
160,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock (the "Preferred Stock"), par value $.01 per share.
Based on the number of shares of Manor Care Common Stock outstanding at the
Record Date, it is expected that shares of the Company's Common Stock
will be issued to stockholders of Manor Care in the Distribution. All the shares
of the Company's Common Stock to be distributed to Manor Care stockholders in
the Distribution will be fully paid and non-assessable.
COMMON STOCK
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 Company 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, 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.
NO PREEMPTIVE RIGHTS
Holders of capital stock of the Company have no preemptive rights.
PURPOSES AND EFFECTS OF CERTAIN CHARTER PROVISIONS
GENERAL
The provisions of the Restated Certificate described in this section 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 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.
It is anticipated that the Company's Certificate of Incorporation will be
amended and restated prior to the consummation of the Distribution to provide
that the affirmative vote of the holders of shares representing not
53
<PAGE> 58
less than two-thirds of the voting power of the Company is required for the
approval of any proposal to reorganize, merge or consolidate with any other
entity (other than an entity 90% owned by the Company) or sell, lease, exchange
or otherwise dispose of all or substantially all of the Company's assets or
business. In addition, among other things, it is expected that the Restated
Certificate will provide 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 of the Board or 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 also
will be amended (the "Amended By-Laws") to 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 Amended By-Laws will 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
personally liable to it or its stockholders for monetary damages for breach of
fiduciary duty as a director except for breach of the director's duty of
loyalty, bad faith, intentional misconduct, knowing violation of law, unlawful
payment of dividends, unlawful stock redemptions or repurchases and transactions
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 eliminate or
further limit the liability of directors, then the liability of a director of
the Company shall be eliminated or limited, without further shareholder action,
to the fullest extent permissible under 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, and advancement of expenses to, 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.
54
<PAGE> 59
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 Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Room 1228, 75 Park
Place, New York, New York 10007. 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. 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.
55
<PAGE> 60
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Combined Balance Sheets as of May 31, 1994, May 31, 1995 and February 29, 1996
(Unaudited)......................................................................... F-3
Combined Statements of Income for the fiscal years ended May 31, 1993, May 31, 1994
and May 31, 1995, and for the nine-month periods ended February 28, 1995 (Unaudited)
and February 29, 1996 (Unaudited)................................................... F-4
Combined Statements of Cash Flows for the fiscal years ended May 31, 1993, May 31,
1994 and May 31, 1995, and for the nine-month periods ended February 28, 1995
(Unaudited) and February 29, 1996 (Unaudited)....................................... F-5
Notes to Combined Financial Statements................................................ F-6
</TABLE>
F-1
<PAGE> 61
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 1994, and the related combined statements of income and cash flows for each
of the three years in the period ended May 31, 1995. 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 Hotel
Holdings, Inc. as of May 31, 1995 and 1994, and the combined results of their
operations and their combined cash flows for each of the three years in the
period ended May 31, 1995, 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.,
July 10, 1996
F-2
<PAGE> 62
CHOICE HOTELS HOLDINGS, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
MAY 31, FEBRUARY
------------------- 29,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 2,789 $ 2,088 $ 1,556
Receivables (net of allowance for doubtful accounts of
$8,950, $4,202, and $5,579, respectively)................ 18,323 21,946 25,045
Inventories................................................. 269 289 612
Current deferred income tax benefit......................... 1,350 -- --
Prepaid expenses............................................ 7,164 2,807 1,624
Other....................................................... 366 955 974
-------- -------- -----------
Total current assets................................ 30,261 28,085 29,811
-------- -------- -----------
PROPERTY AND EQUIPMENT, AT COST, NET OF ACCUMULATED
DEPRECIATION................................................ 179,111 257,156 316,808
-------- -------- -----------
LODGING FRANCHISE RIGHTS, NET OF ACCUMULATED AMORTIZATION..... 64,454 61,565 59,398
-------- -------- -----------
GOODWILL, NET OF ACCUMULATED AMORTIZATION..................... 12,696 32,128 32,279
-------- -------- -----------
OTHER ASSETS.................................................. 16,636 12,541 12,787
-------- -------- -----------
$303,158 $391,475 $ 451,083
======== ======== =========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current portion of long term debt........................... $ 771 $ 639 $ 653
Accounts payable............................................ 14,645 46,109 20,545
Accrued expenses............................................ 14,566 15,366 14,123
Income taxes payable........................................ -- 634 394
-------- -------- -----------
Total current liabilities........................... 29,982 62,748 35,715
-------- -------- -----------
MORTGAGES AND OTHER LONG TERM DEBT............................ 53,043 52,030 48,987
-------- -------- -----------
NOTES PAYABLE TO PARENT....................................... 147,061 198,522 225,723
-------- -------- -----------
DEFERRED INCOME TAXES ($10,647, $11,620 AND $9,196,
RESPECTIVELY) AND OTHER LIABILITIES......................... 17,864 12,346 12,528
-------- -------- -----------
EQUITY
Investments and advances from Parent........................ 55,208 65,829 128,130
-------- -------- -----------
$303,158 $391,475 $ 451,083
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-3
<PAGE> 63
CHOICE HOTELS HOLDINGS, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MAY 31, ---------------------------
------------------------------ FEBRUARY 28, FEBRUARY 29,
1993 1994 1995 1995 1996
-------- -------- -------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Franchise...................................... $137,346 $165,581 $188,021 $139,997 $163,825
Hotel operations............................... 41,361 74,183 114,514 79,402 110,079
-------- -------- -------- ------------ ------------
Total revenues.......................... 178,707 239,764 302,535 219,399 273,904
-------- -------- -------- ------------ ------------
OPERATING EXPENSES
Franchise marketing............................ 37,567 45,373 45,510 35,332 37,131
Franchise reservations......................... 22,941 26,685 28,738 21,031 25,705
Hotel operations............................... 35,255 60,062 84,711 58,167 75,609
Selling, general and administration expenses... 44,745 57,081 69,676 51,143 62,836
Depreciation and amortization.................. 14,605 17,521 21,841 15,759 19,145
-------- -------- -------- ------------ ------------
Total operating expenses................ 155,113 206,722 250,476 181,432 220,426
-------- -------- -------- ------------ ------------
INCOME BEFORE OTHER INCOME AND (EXPENSES) AND
INCOME TAXES................................... 23,594 33,042 52,059 37,967 53,478
-------- -------- -------- ------------ ------------
OTHER INCOME AND (EXPENSES)
Interest expense on notes payable to Parent.... (7,083) (10,665) (15,492) (11,150) (14,595)
Minority interest.............................. (900) (1,476) (2,200) (1,650) (1,149)
Other interest and other expenses, net......... (2,177) (3,223) (4,412) (4,150) (2,332)
-------- -------- -------- ------------ ------------
Total other income and (expenses)....... (10,160) (15,364) (22,104) (16,950) (18,076)
-------- -------- -------- ------------ ------------
Income before income taxes....................... 13,434 17,678 29,955 21,017 35,402
Income taxes..................................... 5,780 8,019 13,144 9,246 14,966
-------- -------- -------- ------------ ------------
Net Income....................................... $ 7,654 $ 9,659 $ 16,811 $ 11,771 $ 20,436
========= ========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements of
income.
F-4
<PAGE> 64
CHOICE HOTELS HOLDINGS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MAY 31, ---------------------------
------------------------------ FEBRUARY 28, FEBRUARY 29,
1993 1994 1995 1995 1996
-------- -------- -------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 7,654 $ 9,659 $ 16,811 $ 11,771 $ 20,436
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization................ 14,605 17,521 21,841 15,759 19,145
Amortization of debt discount................ 103 74 171 162 26
Provision for bad debts...................... 2,541 3,360 906 1,393 1,945
(Decrease) increase in deferred taxes........ (2,173) 3,328 827 1,543 (1,436)
Gain on sale of operating hotel.............. -- -- -- -- (528)
Change in assets and liabilities (excluding
sold hotels and acquisitions):
Change in receivables........................ (2,656) 1,063 (4,529) (1,185) (5,027)
Change in inventories and other current
assets..................................... (230) (340) 3,748 621 (421)
Change in current liabilities................ 2,167 8,457 5,691 691 (234)
Change in income taxes payable............... -- -- 634 676 (240)
Change in other liabilities.................. 576 1,454 1,803 1,104 1,618
-------- -------- -------- ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES............................ 22,587 44,576 47,903 32,535 35,284
-------- -------- -------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment........... (45,137) (17,939) (34,889) (27,934) (28,148)
Acquisition of operating hotels................ (25,115) (44,200) (59,766) (32,252) (50,018)
Acquisition of a hotel chain................... -- (10,400) -- -- --
Proceeds from sale of operating hotels......... -- 7,200 -- -- 3,689
Purchase of minority interest.................. -- -- -- -- (27,367)
Other items, net............................... 290 (3,788) 1,595 3,846 (1,053)
-------- -------- -------- ------------ ------------
NET CASH UTILIZED BY INVESTING
ACTIVITIES............................ (69,962) (69,127) (93,060) (56,340) (102,897)
-------- -------- -------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and other long-term
debt......................................... 32,834 5,079 15,567 15,431 --
Principal payments of debt..................... (2,766) (1,993) (16,382) (3,232) (1,985)
Proceeds from notes payable to Parent.......... 78,700 68,361 51,461 37,360 27,201
Cash transfers (to) from Parent, net........... (60,672) (45,198) (6,190) (9,511) 41,865
-------- -------- -------- ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................ 48,096 26,249 44,456 40,048 67,081
-------- -------- -------- ------------ ------------
Net change in cash and cash equivalents.......... 721 1,698 (701) 16,243 (532)
Cash and cash equivalents at beginning of
period......................................... 370 1,091 2,789 2,789 2,088
-------- -------- -------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD......................................... $ 1,091 $ 2,789 $ 2,088 $ 19,032 $ 1,556
========= ========= ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these combined statements of cash
flows.
F-5
<PAGE> 65
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 February 29, 1996, the Company had
franchise agreements with 2,978 hotels operating in 31 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, 77 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, 1995 and nine months ended February
29, 1996 is as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS
OF DOLLARS)
<S> <C>
Balance, May 31, 1992.................................................. $143,765
Cash transfers to Parent, net.......................................... (60,672)
Net income............................................................. 7,654
------------
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 (Unaudited)............................ 41,865
Net income (Unaudited)................................................. 20,436
------------
Balance, February 29, 1996 (Unaudited)................................. $128,130
============
</TABLE>
F-6
<PAGE> 66
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The average balance of the investments and advances from Parent was $117.3
million, $73.0 million, $60.5 million and $97.0 million for the fiscal years
1993, 1994 and 1995 and the nine months ended February 29, 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 1995, after giving effect to the transactions described in the pro
forma combined financial statements, would have been $0.25. 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 62.5 million
in 1995. 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,
------------------- FEBRUARY 29,
1994 1995 ------------
-------- -------- 1996
-----------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Land.................................................. $ 23,606 $ 35,676 $ 44,321
Building and improvements............................. 148,053 206,510 246,278
Capitalized leases.................................... 6,244 6,244 6,244
Furniture, fixtures and equipment..................... 48,198 61,452 63,122
Hotels under construction............................. 3,979 8,077 19,740
-------- -------- -----------
230,080 317,959 379,705
Less: Accumulated depreciation........................ (50,969) (60,803) (62,897)
-------- -------- -----------
$179,111 $257,156 $ 316,808
======== ======== =========
</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 $3.1 million at May 31, 1994 and $3.3
million at May 31, 1995 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
Certain members of management have 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, 1993, 1994, and 1995,
respectively.
F-7
<PAGE> 67
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED DEVELOPMENT COSTS
Included in other assets are deferred costs of $1.9 million and $0.9
million, net of accumulated amortization, as of May 31, 1994 and 1995,
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 $1.0 million for each of the three years
ended May 31, 1993, 1994 and 1995.
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, 1993, 1994 and 1995. The Company periodically evaluates
the recoverability of the net value of franchise rights based on expected cash
flows.
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.
INITIAL FRANCHISE AND ROYALTY FEES
Initial franchise fees are recorded as income upon execution of binding
agreements. Royalty fees, based on gross room revenues of each franchise, are
recorded when earned.
MARKETING AND RESERVATION FEES
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. Marketing and
reservation fees are based on gross room revenues of each franchise and, in the
case of marketing fees for certain franchise brands, a fixed per room charge.
CAPITALIZATION POLICIES
Major renovations and replacements are capitalized to appropriate property
and equipment accounts. Upon sale or retirement of property, the cost and
related accumulated depreciation are eliminated from the accounts and the
related gain or loss is taken into income. Maintenance, repairs and minor
replacements are charged to expense.
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.
The Company capitalizes interest on borrowings applicable to hotels under
construction. Capitalized interest for the years ended May 31, 1993, 1994 and
1995 amounted to $1.6 million, $117,000 and $197,000, respectively.
F-8
<PAGE> 68
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 February 29, 1996 and the
combined statements of income and cash flows for the nine month periods ended
February 29, 1995 and February 28, 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 February 29, 1996 and the
results of operations and cash flows for the nine months ended February 29, 1995
and February 28, 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 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.
The income tax provisions for fiscal years 1993, 1994 and 1995 were
accounted for under Statement of Financial Accounting Standards No. 109 which
the Company adopted in fiscal year 1993. The adoption did not have a material
effect on the Company's financial statements in fiscal year 1993. The provisions
for income taxes follows for the years ended May 31:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current tax expense
Federal................................................... $4,965 $4,075 $10,053
State..................................................... 1,252 941 2,231
Deferred tax expense
Federal................................................... (250) 2,537 745
State..................................................... (187) 466 115
------ ------ -------
$5,780 $8,019 $13,144
====== ====== =======
</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-9
<PAGE> 69
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following at May 31:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Depreciation and amortization.......................... $(10,750) $(11,289) $(11,760)
Prepaid expenses....................................... (1,165) (1,412) (1,386)
Foreign operations..................................... -- (710) --
Other.................................................. (777) (2,147) (2,202)
-------- -------- --------
Gross deferred tax liabilities......................... (12,692) (15,558) (15,348)
-------- -------- --------
Foreign operations..................................... 2,396 -- 1,086
Accrued expenses....................................... 1,488 2,893 1,393
Net operating loss..................................... 1,411 1,242 1,031
Other.................................................. 581 776 218
-------- -------- --------
Gross deferred tax assets.............................. 5,876 4,911 3,728
-------- -------- --------
Net deferred tax............................. $ (6,816) $(10,647) $(11,620)
======== ======== ========
</TABLE>
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the combined statements of income follows:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ -------
(IN THOUSANDS OF DOLLARS
EXCEPT FEDERAL INCOME
TAX RATE)
<S> <C> <C> <C>
Federal income tax rate..................................... 34% 35% 35%
Federal taxes at statutory rate............................. $4,568 $6,187 $10,484
State income taxes, net of Federal tax benefit.............. 703 914 1,525
Other....................................................... 509 918 1,135
------ ------ -------
Income tax expense.......................................... $5,780 $8,019 $13,144
====== ====== =======
</TABLE>
Cash paid for state income taxes was $329,000, $595,000 and $571,000 for
the years ended May 31, 1993, 1994 and 1995, respectively. Federal income taxes
were paid by Manor Care.
ACCRUED EXPENSES
Accrued expenses at May 31, 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Payroll............................................................ $ 6,577 $ 6,284
Taxes, other than income........................................... 2,449 2,981
Other.............................................................. 5,540 6,101
------- -------
$14,566 $15,366
======= =======
</TABLE>
F-10
<PAGE> 70
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
MORTGAGES AND OTHER LONG TERM DEBT
Maturities of mortgages and other long term debt at May 31, 1995 were as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS
FISCAL YEAR OF DOLLARS)
----------- --------------
<S> <C>
1996........................................................... $ 639
1997........................................................... 568
1998........................................................... 413
1999........................................................... 441
2000........................................................... 33,860
2001 to 2024................................................... 16,748
-----------
$ 52,669
===========
</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 $317,000 and
$146,000 at May 31, 1994 and 1995, respectively. Amortization of discount was
$103,000 in 1993, $74,000 in 1994 and $171,000 in 1995.
During fiscal year 1995, interest rates on mortgages and other long term
debt ranged from 5.1% to 11.3%. The effective interest rate in fiscal year 1995
was 6.9%.
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 $33.3 million at May 31, 1995. 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. At 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, 1995, Manor Care had guaranteed mortgages and other long term
debt of the Company of $5.1 million. To the extent the guarantees are not
released after the Distribution, the Company will pay Manor Care a guarantee fee
equal to 2.0% per annum of the aggregate principal amounts of mortgages and
other long term debt subject to the guarantees.
At May 31,1995, owned property with a net book value of $4.7 million was
pledged or mortgaged as collateral.
F-11
<PAGE> 71
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 OF
DOLLARS)
<S> <C> <C>
1996............................................................. $ 494 $ 801
1997............................................................. 473 771
1998............................................................. 333 568
1999............................................................. 260 500
2000............................................................. 150 500
Thereafter....................................................... 6,523 792
--------- -----------
Total minimum lease payments........................... $ 8,233 $ 3,932
=======
Less: Amount representing interest............................... 931
-----------
Present value of lease payments.................................. 3,001
Less: Current portion............................................ 476
-----------
Lease obligations included in long-term debt..................... $ 2,525
========
</TABLE>
Rental expense under noncancellable operating leases was $704,000 in 1993,
$738,000 in 1994 and $721,000 in 1995.
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.
During the nine months ended February 29, 1996, the Company purchased 15
operating hotels containing over 1,800 rooms for $50.0 million. The Company also
sold one operating hotel for $3.8 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.
During fiscal year 1993, the Company purchased seven operating hotels
containing over 1,200 rooms for approximately $25.1 million.
Unless otherwise noted, acquisitions are accounted for as a purchase.
Approximately 70% of the total costs for hotel acquisitions are allocated to
buildings, approximately 20% to land and the remainder to furniture, fixtures
and equipment.
F-12
<PAGE> 72
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited summary pro forma income statement data for the three years ended
May 31, 1995 assuming the above purchases of operating hotels occurred at the
beginning of the year immediately preceding the year the purchases occurred, are
as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
Revenues............................................... $211,722 $285,735 $345,926
======== ======== ========
Net income............................................. $6,566 $8,967 $17,439
======== ======== ========
Pro forma net income per share......................... $0.11 $0.15 $0.28
======== ======== ========
</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 57.3 million in 1993, 60.5 million in 1994 and 62.5 million in 1995.
The pro forma weighted average number of outstanding common shares is based on
Manor Care's weighted average number of outstanding common shares.
SUBSEQUENT EVENTS
Since February 29, 1996, the Company acquired one operating hotel for
approximately $3.2 million and sold one operating hotel for approximately $2.7
million. In addition, the Company purchased an equity interest in Friendly
Hotels PLC for approximately $17.0 million.
In May 1996, the Company recognized a $17.0 million after tax non-cash
charge against earnings related to the impairment of certain long-lived assets.
The Company evaluated the net realizable value of the lodging assets of its
European and domestic hotel operations based on the expected cash flows of such
assets.
In addition, the Company accrued $3.1 million in after tax restructuring
costs in May 1996. The restructuring costs include severance, costs related to
restructuring employee benefit plans and other costs associated with the
Distribution.
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.
TRANSACTIONS WITH MANOR CARE (PARENT COMPANY)
Indebtedness related to lodging acquisitions and renovations that is
reflected as notes payable to Parent in the combined balance sheets totaling
$147.1 million and $198.5 million at May 31, 1994 and 1995, respectively, and
$225.7 million at February 29, 1996, is due three years from the date of the
Distribution. Interest expense on these notes for the years ended May 31, 1993,
1994 and 1995 was $7.1 million, $10.7 million and $15.5 million, respectively.
Interest is charged at an annual rate of 9% on the indebtedness. The Company
will be required to prepay the loan with the proceeds of any sales of its owned
hotels or any borrowings which are secured by such 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.
F-13
<PAGE> 73
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 $5.0 million, $5.5 million and $6.3
million, respectively, were charged to operations for the years ended May 31,
1993, 1994 and 1995. Management believes that the foregoing charges are
reasonable allocations of the costs incurred by Manor Care on the Company's
behalf. The Company has estimated that general and administrative expenses
incurred annually will increase by approximately $3.1 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, Employee Benefits Allocation Agreement and Support Services
Agreement. Effective at the Distribution, these agreements will provide, among
other things, that the Company (i) will receive certain corporate and support
services, such as accounting, tax and computer systems support, (ii) will
establish pension, profit sharing and incentive plans similar to those in place
at Manor Care and (iii) will receive certain risk management services and other
miscellaneous administrative services. These agreements will extend for a period
of 30 months from the Distribution date or until such time as the Company has
arranged to provide such services in-house or through another unrelated provider
of such services. These agreements are attached as exhibits to the Company's
Registration Statement on Form 10.
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 financial position or results of operations.
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.
As of May 31, 1995, the Company had contractual commitments of $1.6 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 $2.0 million in 1993, $2.6 million in 1994 and $1.7
million in 1995.
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 $700,000
in 1993, $1.0 million in 1994 and $1.2 million in 1995.
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,
F-14
<PAGE> 74
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
SUMMARY OF QUARTERLY RESULTS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
INCOME
(LOSS)
BEFORE NET
INCOME INCOME
QUARTERS ENDED REVENUES TAXES (LOSS)
- -------------- -------- ------- -------
<S> <C> <C> <C>
FISCAL 1994
August......................................................... $ 63,355 $ 6,484 $ 3,546
November....................................................... 60,523 8,901 5,163
February....................................................... 52,568 (1,167) (923)
May............................................................ 63,318 3,460 1,873
-------- ------- -------
$239,764 $17,678 $ 9,659
======== ======= =======
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
======== ======= =======
</TABLE>
F-15
<PAGE> 1
DISTRIBUTION AGREEMENT
dated as of
, 1996
between
Manor Care, Inc.
and
Choice Hotels Holdings, Inc.
(to be renamed Choice Hotels International, Inc.)
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
Section 1.01. Definitions............................................... 2
ARTICLE II
TRANSFER OF LODGING BUSINESS
Section 2.01. Transfer of Assets........................................ 8
Section 2.02. Assignment and Assumption of Liabilities.................. 9
Section 2.03. Assisted Living Facilities................................ 9
Section 2.04. Transfers Not Effected Prior to the Distribution Date..... 9
Section 2.05. No Representations or Warranties; Consents................ 10
Section 2.06. Conveyancing and Stock Assumption Instruments............. 11
Section 2.07. Cash Allocation........................................... 11
ARTICLE III
THE DISTRIBUTION
Section 3.01. Cooperation Prior to the Distribution..................... 12
Section 3.02. Conduct of Lodging Business Pending Distribution.......... 13
Section 3.03. Manor Care Board Action; Conditions
Precedent to the Distribution........................... 13
Section 3.04. Outstanding Choice Stock.................................. 15
Section 3.05. The Distribution.......................................... 15
ARTICLE IV
INDEMNIFICATION
Section 4.01. Choice Indemnification of Manor Care...................... 15
Section 4.02. Manor Care Indemnification of Choice...................... 16
Section 4.03. Notice and Payment of Claims.............................. 16
Section 4.04. Notice and Defense of Third-Party Claims.................. 16
Section 4.05 Insurance Proceeds........................................ 18
Section 4.06 Contribution.............................................. 19
Section 4.07 Subrogation............................................... 19
Section 4.08 No Beneficiaries.......................................... 19
Section 4.09 Remedies Cumulative....................................... 20
Section 4.10 Survival of Indemnities................................... 20
Section 4.11 After-Tax Indemnification Payments........................ 20
<PAGE> 3
ARTICLE V
CERTAIN ADDITIONAL MATTERS
Section 5.01. Intercompany Accounts..................................... 20
Section 5.02. Manor Care Guarantees..................................... 20
Section 5.03. Ancillary Agreements...................................... 21
Section 5.04. Choice Officers and Board of Directors.................... 21
Section 5.05. Choice Certificate of Incorporation and By-laws........... 21
Section 5.06. Credit Facilities......................................... 22
Section 5.07. Sales and Transfer Taxes.................................. 22
Section 5.08. Certain Post-Distribution Transactions.................... 22
Section 5.09. Non-Competition Agreement................................. 22
Section 5.10. Insurance Policies and Claims Administration.............. 23
ARTICLE VI
ACCESS TO INFORMATION
Section 6.01. Provision of Corporate Records............................ 26
Section 6.02. Access to Information..................................... 26
Section 6.03. Litigation Cooperation.................................... 26
Section 6.04. Reimbursement............................................. 26
Section 6.05. Retention of Records...................................... 26
Section 6.06. Confidentiality........................................... 27
Section 6.07. Mail...................................................... 27
ARTICLE VII
ENVIRONMENTAL AND OTHER CLAIMS INDEMNIFICATION PROVISIONS
Section 7.01. Environmental and Other Claims Indemnification............ 28
Section 7.02. Scope of Indemnification.................................. 29
Section 7.03. Procedures for Indemnification for Current and
Potential Environmental and Other Claims................ 29
Section 7.04. Losses Net of Insurance or Other Recovery................. 31
Section 7.05. No Beneficiaries.......................................... 32
Section 7.06. Remedies Cumulative....................................... 32
Section 7.07. Survival of Indemnities................................... 32
<PAGE> 4
ARTICLE VIII
MISCELLANEOUS
Section 8.01. Termination............................................... 32
Section 8.02. Expenses.................................................. 32
Section 8.03. Notices................................................... 33
Section 8.04. Amendment and Waiver...................................... 33
Section 8.05. Counterparts.............................................. 33
Section 8.06. Governing Law; Jurisdiction; Forum........................ 34
Section 8.07. Entire Agreement.......................................... 34
Section 8.08. Parties in Interest....................................... 34
Section 8.09. Tax Sharing Agreement; After-Tax Payments................. 34
Section 8.10. Further Assurances and Consents........................... 35
Section 8.11. Exhibits and Schedules.................................... 35
Section 8.12. Legal Enforceability...................................... 35
Section 8.13. Dispute Resolution........................................ 36
Section 8.14. Titles and Headings....................................... 37
Exhibit A............................ Form of Assignment of Marks Agreement
Exhibit B............................. Form of [Corporate Planes] Agreement
Exhibit C............................. Form of Corporate Services Agreement
Exhibit D............................. Form of Employee Benefits Administration
Agreement
Exhibit E............................. Form of Employee Benefits & Other
Employment Matters
Allocation Agreement
Exhibit F............................. Form of Lease Agreement
Exhibit G............................. Form of Loan Agreement
Exhibit H............................. Form of Procurement Services Agreement
Exhibit I............................. Form of Risk Management
Consulting Services Agreement
Exhibit J............................. Form of Support Services Agreement
Exhibit K............................. Form of Tax Administration Agreement
Exhibit L............................. Form of Tax Sharing Agreement
<PAGE> 5
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT ("Agreement") dated as of , 1996 by
and between Manor Care, Inc., a Delaware corporation (together with its
successors and permitted assigns, "Manor Care"), and Choice Hotels Holdings,
Inc., a Delaware corporation (to be renamed Choice Hotels International, Inc.
and together with its successors and permitted assigns, "Choice").
RECITALS
WHEREAS, Manor Care currently conducts the business of owning,
managing and franchising hotels (the "Lodging Business") primarily through
certain subsidiaries of Manor Care (the "Direct Lodging Subsidiaries"), their
respective subsidiaries and certain partnerships, all as identified on Schedule
1 hereto (collectively, the "Lodging Subsidiaries").
WHEREAS, Choice is presently a wholly-owned subsidiary of Manor Care
established for the purposes of taking title to the capital stock and associated
goodwill of the Direct Lodging Subsidiaries and certain assets associated with
the Lodging Business, and assuming certain liabilities associated with the
Lodging Business, all as specified herein, such that Choice will own
substantially all of the assets, business and operations currently conducted by
the Lodging Business.
WHEREAS, the Board of Directors of Manor Care has determined that it
is in the best interest of Manor Care and the stockholders of Manor Care to
distribute (the "Distribution") to the holders of Manor Care Common Stock (as
defined herein) all of the outstanding shares of Choice Common Stock (as defined
herein).
WHEREAS, it is the intention of the parties that the Distribution
will not be taxable to Manor Care or to the stockholders of Manor Care
(pursuant to Section 355 of the Code (as defined herein)).
WHEREAS, the parties have determined that it is necessary and
desirable to set forth the principal corporate transactions required to effect
the Distribution and to set forth other agreements that will govern certain
other matters following such Distribution.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual agreements, provisions and covenants contained in this Agreement, the
parties hereby agree as follows:
<PAGE> 6
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. As used herein, the following terms
have the following meaning:
"Action" means any claim, suit, arbitration, inquiry, proceeding or
investigation by or before any court, governmental or regulatory or
administrative agency or commission or any other tribunal.
"Affiliate" of any specified person means any other person that,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with such specified person.
"Ancillary Agreements" means the Assignment of Marks Agreement,
the [Corporate Planes Agreement,] the Corporate Services Agreement, the
Employee Benefits Administration Agreement, the Employee Benefits and Other
Employment Matters Allocation Agreement, the Lease Agreement, the Loan
Agreement, the Procurement Services Agreement, the Risk Management Consulting
Services Agreement, the Support Services Agreement, the Tax Administration
Agreement and the Tax Sharing Agreement.
"Assignment of Marks Agreement" means the agreement to be entered
into between Manor Care and Choice, on or before the Distribution Date,
providing for certain matters relating to the transfer of trademarks and other
intellectual property, in substantially the form set forth as Exhibit A, as
amended from time to time.
"Assisted Living Liabilities" means all Liabilities arising
exclusively from the operation of the assisted living facilities described on
Schedule 2.03 or the ownership or use of assets exclusively in connection
therewith.
<PAGE> 7
"Assumed Liabilities" means the Liabilities arising from the
operation of the Lodging Business or the ownership or use of assets (including
the Transferred Assets) or other activities in connection therewith, whether
arising before, on or after the Distribution Date, including but not limited to
any Liabilities arising or in connection with or related to (i) the Choice
Liabilities that are guaranteed by Manor Care, as specified in Schedule 5.02(a),
(ii) information contained in or omitted from the Form 10 or the Information
Statement and (iii) any Liabilities set forth or referenced in the audited
financial statements of Choice included in the Form 10 or the Information
Statement. Notwithstanding the foregoing, the Assumed Liabilities shall not
include (i) any debt of Manor Care for money borrowed (including but not limited
to any such debt evidenced by a note, debenture or other instrument), (ii) (X)
any third party claims arising from the conduct or operation of the Lodging
Business or the ownership or use of assets in connection therewith prior to the
Distribution Date if such claims are Covered Claims, (Y) any self-insured
retention or deductible for such Covered Claims that would be covered but for
such retention other than any amount payable by Choice in respect of Shock
Losses (as defined) pursuant to Section 5.10(a), (Z) any letters of credit of
Manor Care in favor of an insurance carrier relating to such retention or
deductible, (iii) the Assisted Living Liabilities, (iv) operating leases under
which Manor Care remains liable, (v) properties for which Manor Care has
contingent liability, (vi) liabilities arising from franchise agreements, (vii)
liabilities in connection with a Reimbursement and Indemnification Agreement of
Chemical Bank regarding a Chemical Bank-France guarantee and (viii) any claims,
losses, damages, demands, costs, expenses or liabilities for any Tax (which
shall be governed by the Tax Sharing Agreement).
<PAGE> 8
"Choice Bylaws" means the bylaws of Choice in the form filed as an
exhibit to the Form 10.
"Choice Certificate" means the restated certificate of incorporation
of Choice in the form filed as an exhibit to the Form 10.
"Choice Common Stock" means the outstanding shares of common stock,
par value $.01 per share, of Choice.
"Choice Credit Facility" means a revolving credit facility for
Choice in the amount of $ million.
"Choice Hotels" means Choice Hotels International, Inc., a Delaware
corporation and, prior to the Distribution, a wholly-owned subsidiary of Manor
Care.
"Choice Liabilities" means all of (i) the Liabilities of Choice
under this Agreement, (ii) the Assumed Liabilities, and (iii) the Liabilities of
Choice arising after the Distribution Date.
<PAGE> 9
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Corporate Planes Agreement" means the agreement to be entered
into between Manor Care and Choice, on or before the Distribution Date,
providing for the distribution of [the corporate planes], in substantially the
form set forth as Exhibit B, as amended from time to time.
"Corporate Services Agreement" means the agreement to be entered
into between Manor Care and Choice, on or before the Distribution Date,
providing for certain matters relating to corporate and administrative services,
in substantially the form set forth as Exhibit C, as amended from time to time.
"Covered Claims" means any claim that is of a type covered by
insurance or self insurance of Manor Care as in effect on the Distribution Date
and that is a type of claim specified as a covered claim on Schedule 5.10(a).
"Direct Lodging Subsidiaries" has the meaning specified in the first
recital of this Agreement.
"Distribution" has the meaning specified in the third recital of
this Agreement.
"Distribution Agent" means Chemical-Mellon Shareholder Services,
L.L.C.
"Distribution Date" means the date determined by the Board of
Directors of Manor Care as the date on which the Distribution shall be effected,
which is contemplated to occur on _________, 1996.
"Employee Benefits Administration Agreement" means the agreement to
be entered into between Manor Care and Choice, on or before the Distribution
Date, providing for certain matters relating to the administration of employee
benefits, in substantially the form set forth as Exhibit D, as amended from time
to time.
<PAGE> 10
"Employee Benefits & Other Employment Matters Allocation Agreement"
means the agreement to be entered into between Manor Care and Choice, on or
before the Distribution Date, providing for certain matters relating to the
allocation of employee benefits and related matters, in substantially the form
set forth as Exhibit E, as amended from time to time.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Existing Credit Facility" means the $250 million revolving credit
facility dated as of ________ among [Bank], Manor Care and the subsidiary
guarantors named therein.
"Form 10" means the registration statement on Form 10 filed by
Choice with the Commission to effect the registration of the Choice Common Stock
pursuant to the Exchange Act, as such registration statement may be amended from
time to time.
"Franchise Agreements" means all franchise agreements to which Manor
Care or any Lodging Subsidiary is a party, pursuant to which Manor Care (either
directly or through any such Lodging Subsidiary) has granted franchise rights
with respect to the operation of hotel properties, and in exchange therefor,
receives franchise fees, royalties, license fees and service fees.
"Healthcare Business" means any business conducted now or in the
future by Manor Care which is not part of the Lodging Business.
"Indemnifiable Loss" has the meaning specified in Section 4.01.
"Information Statement" means the information statement in the form
sent to each holder of Manor Care Common Stock in connection with the
Distribution.
"Insurance Charges" has the meaning specified in Section
5.10(c)(ii).
"IRS Ruling" means the ruling of the Internal Revenue Service dated
January 22, 1996 that the Distribution should not be taxable to the stockholders
of Manor Care pursuant to Section 355 of the Code.
"Lease Agreement" means the Lease Agreement to be entered into by
Manor Care and Choice, on or before the Distribution Date, providing for the
allocation of the executive offices of Choice, in substantially the form set
forth as Exhibit F, as amended from time to time.
<PAGE> 11
"Liabilities" means any and all claims, debts, liabilities and
obligations, absolute or contingent, matured or not matured, liquidated or
unliquidated, accrued or not accrued, known or unknown, whenever arising,
including all costs and expenses relating thereto under any law, rule,
regulation, action, order or consent decree of any governmental entity or any
award of any arbitrator of any kind, and those arising under any contract,
commitment or undertaking.
"Loan Agreement" means the Loan Agreement to be entered into among
MNR, Choice and the subsidiary guarantors to be named therein, on or before the
Distribution Date, providing for the recapitalization of the Promissory Notes
and repayment of certain advances made by Manor Care to one or more of the
Lodging Subsidiaries prior to the Distribution Date, in substantially the form
set forth as Exhibit G, as amended from time to time.
"Lodging Business" has the meaning specified in the first recital of
this Agreement.
"Lodging Subsidiaries" has the meaning specified in the first
recital of this Agreement.
"Manor Care Common Stock" means the outstanding shares of common
stock of Manor Care.
"Manor Care Liabilities" means all of (i) the Liabilities of Manor
Care under this Agreement, (ii) the Liabilities of Manor Care (other than any
Choice Liabilities), whether arising before, on or after the Distribution Date,
(iii) (X) any third party claims arising from the conduct or operation of the
Lodging Business or the ownership or use of assets in connection therewith prior
to the Distribution Date if and only to the extent that such claims are Covered
Claims, (Y) any self-insured retention or deductible for such Covered Claims
that would be covered but for such retention other than any amount payable by
Choice in respect of Shock Losses pursuant to Section 5.10(a), (Z) any letters
of credit of Manor Care in favor of an insurance carrier relating to such
retention or deductible, and (iv) the Assisted Living Liabilities.
"MNR" means MNR Finance Corp., a Delaware corporation.
"Procurement Services Agreement" means the agreement to be entered
into between Manor Care and Choice, on or before the Distribution Date,
providing for certain matters relating to procurement of services, in
substantially the form set forth as Exhibit H, as amended from time to time.
"Promissory Notes" means promissory notes issued by in the aggregate
principal amount of $225,722,500.
<PAGE> 12
"Record Date" means the date determined by Manor Care's Board of
Directors as the date for determining the stockholders of record of Manor Care
entitled to receive the Distribution, which record date is contemplated to be
, 1996, subject to fulfillment of certain conditions to the
Distribution set forth herein.
"Risk Management Consulting Services Agreement" means the agreement
to be entered into between Manor Care and Choice on or prior to the Distribution
Date relating to risk management, in substantially the form set forth as Exhibit
I, as amended from time to time.
"Securities Act" means the Securities Act of 1933, as amended.
"Support Services Agreement" means the agreement to be entered into
between Manor Care and Choice, on or prior to the Distribution Date, providing
for certain matters relating to the allocation of support services, in
substantially the form set forth as Exhibit J, as amended from time to time.
"Tax" shall have the meaning given to such term in the Tax Sharing
Agreement.
"Tax Administration Agreement" means the agreement to be entered
into between Manor Care and Choice on or prior to the Distribution Date
providing for certain tax administration matters, in substantially the form set
forth as Exhibit K, as amended from time to time.
"Tax Sharing Agreement" means the agreement to be entered into
between Manor Care and Choice on or prior to the Distribution Date providing for
certain tax related matters, in substantially the form set forth as Exhibit L,
as amended from time to time.
"Transferred Assets" has the meaning specified in Section 2.01.
ARTICLE II
TRANSFER OF LODGING BUSINESS
Section 2.01. Transfer of Assets. Prior to the Distribution Date,
Manor Care shall take or shall cause to be taken all actions necessary to cause
the transfer, assignment, delivery and conveyance to Choice of all of Manor
Care's and its subsidiaries' rights, title and interest in the assets listed
below (collectively, the "Transferred Assets"):
<PAGE> 13
(a) the shares of common stock and preferred stock, if any, and
associated goodwill, of the Direct Lodging Subsidiaries owned by Manor
Care as set forth on Schedule 1;
(b) the hotels described on Schedule 2.01(b) (the "Transferred
Hotels"), the real property on which such hotels are located, and all
fixtures, furnishings, furniture, equipment, supplies and other tangible
personal property located at such hotels;
(c) all contracts, agreements (including Franchise Agreements),
arrangements or commitments of any kind and all licenses and permits of
Manor Care that relate exclusively to the Transferred Hotels;
(d) the trademarks, service marks, goodwill and other intangible
properties and rights covered by the Assignment of Marks Agreement; and
(e) all books, records and files of, or relating exclusively to,
the Lodging Business.
Section 2.02. Assignment and Assumption of Liabilities. Except as
set forth in one or more of the Ancillary Agreements, from and after the
Distribution Date, (i) Choice shall, and/or shall cause its subsidiaries to,
assume, pay, perform and discharge in due course all of the Choice Liabilities,
and (ii) Manor Care shall, and/or shall cause its subsidiaries to, pay, perform
and discharge in due course all of the Manor Care Liabilities.
Section 2.03. Assisted Living Facilities. (a) Prior to the
transfer of the Transferred Assets, Boulevard Motel Corp., a Direct Lodging
Subsidiary, shall transfer to Manor Care the assisted living facilities
described on Schedule 2.03, including the real property on which such facilities
are located and all (i) fixtures, furnishings, furniture, equipment, supplies
and other tangible personal property located at such facilities, and (ii)
contracts, agreements, arrangements or commitments of any kind, and all licenses
and permits and books, records and files, in each case that relate to such
facilities.
(b) Manor Care shall, and/or shall cause its subsidiaries to,
assume, pay, perform and discharge in due course all of the Assisted Living
Liabilities.
<PAGE> 14
Section 2.04. Transfers Not Effected Prior to the Distribution
Date. To the extent any transfers contemplated by this Article II shall not
have been fully effected prior to the Distribution Date, Manor Care and Choice
shall cooperate to effect such transfers as promptly as possible following the
Distribution Date. Nothing herein shall be deemed to require the transfer of
any assets or the assumption of any Liabilities that by their terms or by
operation of law cannot be transferred or assumed; provided, however, that Manor
Care and Choice and their respective subsidiaries and Affiliates shall cooperate
in seeking to obtain any necessary consents or approvals for the transfer of all
assets and Liabilities as contemplated by this Article II. In the event that
any such transfer of assets or Liabilities has not been consummated effective as
of the Distribution Date, the party retaining such asset or Liability shall
thereafter hold such asset in trust for the use and benefit of the party
entitled thereto (at the expense of the party entitled thereto) and retain such
Liability for the account of the party by whom such Liability is to be assumed
pursuant hereto, and take such other actions as may be reasonably required in
order to place the parties, insofar as reasonably possible, in the same position
as would have existed had such asset been transferred, or such Liability been
assumed as contemplated hereby. As and when any such asset or Liability becomes
transferable, such transfer and assumption shall be effected forthwith. Manor
Care and Choice agree that, as of the Distribution Date, each party hereto shall
be deemed to have acquired complete and sole beneficial ownership over all of
the assets, together with all of the rights, powers and privileges incidental
thereto, that such party is entitled to acquire pursuant to the terms of this
Agreement.
<PAGE> 15
Section 2.05. No Representations or Warranties; Consents. Each of
the parties hereto understands and agrees that no party hereto is, in this
Agreement or in any other agreement or document contemplated by this Agreement
or otherwise, representing or warranting in any way as to the value or freedom
from encumbrance of, or any other matter concerning, any assets of such party,
or as to the legal sufficiency to convey title to any asset transferred pursuant
to this Agreement or any Ancillary Agreement, including, without limitation, any
conveyancing or assumption instruments. It is also agreed and understood that
there are no warranties whatsoever, express or implied, given by either party to
the Agreement, as to the condition, quality, merchantability or fitness of any
of the assets, businesses or other rights transferred or retained by the
parties, as the case may be, and all such assets, businesses and other rights
shall be "as is, where is" and "with all faults" (provided that the absence of
warranties given by the parties shall not negate the allocation of Liabilities
under this Agreement and shall have no effect on any manufacturers, sellers, or
other third party warranties that are intended to be transferred with such
assets). Similarly, each party hereto understands and agrees that no party
hereto is, in this Agreement or in any other agreement or document contemplated
by this Agreement or otherwise, representing or warranting in any way that the
obtaining of any consents or approvals, the execution and delivery of any
amendatory agreements and the making of any filings or applications contemplated
by this Agreement will satisfy the provisions of any or all applicable laws of
judgments or other instruments or agreements relating to such assets.
Notwithstanding the foregoing, the parties shall use their good faith efforts to
obtain all consents and approvals, to enter into all reasonable amendatory
agreements and to make all filings and applications contemplated by this
Agreement, and shall take all such further actions as shall be deemed reasonably
necessary to preserve for each of Manor Care and Choice, to the greatest extent
reasonably feasible, consistent with this Agreement, the economic and
operational benefits of the allocation of assets provided for in this Agreement.
In case at any time after the Distribution Date any further action is necessary
or desirable to carry out the purposes of this Agreement, the proper officers
and directors of each party to this Agreement shall take all such necessary or
desirable action, provided, that any financial cost shall be borne by the party
receiving the benefit of the action.
<PAGE> 16
Section 2.06. Conveyancing and Stock Assumption Instruments. In
connection with the asset and stock transfers and the assumptions of Liabilities
contemplated by this Agreement, the parties shall execute or cause to be
executed by the appropriate entities conveyancing and assumption instruments,
including appropriate releases and novations, in such forms as the parties shall
reasonably agree, including deeds as may be appropriate, the assignment of
trademarks and franchise rights, and the assignment and assumption of existing
lease agreements. Any transfer of capital stock shall be effected by means of
delivery of stock certificates and executed stock powers and notation on the
stock record books of the corporation or other legal entities involved and, to
the extent required by applicable law, by notation on public registries.
Section 2.07. Cash Allocation.
(a) Cash Allocation on the Distribution Date. The allocation
between Manor Care and Choice of all domestic and international cash bank
balances and short-term investments ("cash") of Manor Care and its subsidiaries
recorded per the books of Manor Care and its subsidiaries as of the close of
business on the Distribution Date (the "Pre-Distribution Cash Balance") shall be
in accordance with the following:
(i) all cash received in, and deposits of cash, checks, drafts or
cash equivalents made to, depositary accounts to and including the
Distribution Date shall be remitted to Manor Care; and
(ii) all petty cash of the Lodging Business shall be allocated to
Choice on the Distribution Date; and
(iii) all Liabilities for payment of outstanding drafts drawn on or
prior to the Distribution Date on accounts allocated to Choice pursuant to
clause (ii) shall be paid by Choice.
(b) Cash Management After the Distribution Date. The petty cash,
depositary and disbursement accounts shall be transferred to Choice on the
Distribution Date after the allocation is made pursuant to clause (a)(ii) above.
Choice shall establish and maintain a separate cash management system and
accounting records with respect to the Lodging Business effective as of 12:01
a.m. New York time on the day following the Distribution Date.
<PAGE> 17
(c) For purposes of this Section 2.07, the parties contemplate that
the Lodging Business and the businesses to be retained by Manor Care after the
Distribution, including, but not limited to, the administration of accounts
payable and accounts receivable, will be conducted in the ordinary course of
business consistent with past practice prior to the Distribution Date.
(d) For purposes of this Section 2.07, any disagreement or dispute
shall be resolved by the Assistant Treasurer of Manor Care, which resolution
shall be binding and final upon each of the parties hereto and not subject to
further review.
ARTICLE III
THE DISTRIBUTION
Section 3.01. Cooperation Prior to the Distribution. (a) Manor
Care and Choice have prepared, and Manor Care shall mail to the holders of Manor
Care Common Stock, the Information Statement, which sets forth disclosure
concerning Choice, the Distribution and other matters. Manor Care and Choice
have also prepared, and Choice has filed with the Commission, the Form 10, which
includes or incorporates by reference the Information Statement. Manor Care and
Choice shall use their reasonable efforts to cause the Form 10 to become
effective under the Exchange Act.
(b) Manor Care and Choice shall cooperate in preparing, filing with
the Commission and causing to become effective any registration statements or
amendments thereto that are appropriate to reflect the establishment of or
amendments to any employee benefit and other plans contemplated by the Employee
Benefits Agreement.
(c) Manor Care and Choice shall take all such action as may be
necessary or appropriate under the securities or blue sky laws of the states or
other political subdivisions of the United States in connection with the
transactions contemplated by this Agreement.
(d) Choice has prepared and filed a preliminary listing application
and will pursue the approval of the application to permit listing of the Choice
Common Stock on the New York Stock Exchange.
<PAGE> 18
Section 3.02. Conduct of Lodging Business Pending Distribution.
(a) Prior to the Distribution Date, the Lodging Business shall be
operated by Manor Care for the sole benefit of Manor Care and its stockholders.
(b) Prior to the Distribution Date, Choice shall have no operations
or conduct any business except in preparation for the consummation of the
transactions contemplated by this Agreement.
Section 3.03. Manor Care Board Action; Conditions Precedent to the
Distribution. Manor Care's Board of Directors shall, in its discretion,
establish the Record Date and the Distribution Date and any appropriate
procedures in connection with the Distribution. In no event shall the
Distribution occur unless the following conditions shall, unless waived by Manor
Care in its sole discretion, have been satisfied:
(a) all necessary regulatory approvals and consents of third
parties shall have been received;
(b) the Form 10 shall have been declared effective under the
Exchange Act;
(c) a favorable response shall have been received from the Staff of
the Commission with respect to Manor Care's no-action request concerning,
among other things, whether the Distribution may be effected without
registration of the Choice Common Stock under the Securities Act;
(d) the Choice Credit Facility shall be available;
(e) Choice's Board of Directors, as named in the Form 10, shall
have been elected by Manor Care, as sole stockholder of Choice, and the
Choice Certificate and Choice Bylaws shall be in effect;
(f) the Choice Common Stock shall have been approved for listing on
the New York Stock Exchange, subject to official notice of issuance;
(g) Manor Care's Board of Directors shall have formally approved
the Distribution and shall not have abandoned, deferred or modified the
Distribution at any time prior to the Distribution Date;
(h) The IRS Ruling shall be in full force and effect and shall not
have been modified and the representations made to the IRS shall be true
in all material respects;
<PAGE> 19
(i) the transactions contemplated by Sections 2.01 and 2.02 and
Article V shall have been consummated in all material respects and each of
the Ancillary Agreements, in form and substance satisfactory to Manor
Care, shall have been executed by the parties thereto and each of the
transactions contemplated by the Ancillary Agreements to be consummated on
or prior to the Distribution Date shall have been consummated;
(j) Choice shall have obtained, or Manor Care shall have obtained
for Choice, insurance (or binders therefor) providing coverage to Choice
similar to the coverage provided by insurance in place prior to the
Distribution Date;
(k) Manor Care shall have obtained refinancing of the Existing
Credit Facility on terms acceptable to it in its sole discretion; and
(l) no preliminary or permanent injunction or other order, decree
or ruling issued by a court of competent jurisdiction or by a government,
regulatory or administrative agency or commission, and no statute, rule,
regulation or executive order promulgated or enacted by any governmental
authority, shall be in effect preventing the payment of the Distribution;
provided that the satisfaction of such conditions shall not create any
obligation on the part of Manor Care to effect the Distribution or in any way
limit Manor Care's power of termination set forth in Section 8.01 or alter the
consequences of any such termination from those specified in such Section.
Section 3.04. Outstanding Choice Stock. On or prior to the
Distribution Date, Manor Care and Choice shall take all steps necessary to
increase the outstanding shares of Choice Common Stock so that immediately prior
to the Distribution, Manor Care will hold a number of shares of Choice Common
Stock equal to the number of shares of Manor Care Common Stock outstanding on
the Record Date.
Section 3.05. The Distribution. On the Distribution Date, or as
soon thereafter as practicable, subject to the conditions set forth in this
Agreement, Manor Care shall deliver to the Distribution Agent a certificate or
certificates representing all of the then outstanding shares of Choice held by
Manor Care, endorsed in blank, and shall instruct the Distribution Agent to
distribute to each holder of record of Manor Care Common Stock on the Record
Date a certificate or certificates representing one share of Choice Common Stock
for each share of Manor Care Common Stock so held. Choice agrees to provide all
certificates for shares of Choice Common Stock that the Distribution Agent shall
require in order to effect the Distribution.
<PAGE> 20
ARTICLE IV
INDEMNIFICATION
Section 4.01. Choice Indemnification of Manor Care. Except as
otherwise expressly provided in any of the Ancillary Agreements, from and after
the Distribution Date, Choice and its subsidiaries (the "Choice Indemnitors")
shall jointly and severally indemnify, defend and hold harmless Manor Care and
its subsidiaries, and each of their respective directors, officers, employees,
agents and Affiliates and each of the heirs, executors, successors and assigns
of any of the foregoing (the "Manor Care Indemnitees") from and against any and
all damage, loss, liability and expense (including, without limitation,
reasonable expenses of investigation and reasonable attorneys' fees and expenses
in connection with any or all such investigations or any and all Actions or
threatened Actions) (collectively, "Indemnifiable Losses") incurred or suffered
by any of the Manor Care Indemnitees and arising out of or related to the
failure of Choice or any of its subsidiaries to pay, perform or otherwise
discharge any of the Choice Liabilities.
Section 4.02. Manor Care Indemnification of Choice. Except as
otherwise expressly provided in any of the Ancillary Agreements, from and after
the Distribution Date, Manor Care and its subsidiaries (the "Manor Care
Indemnitors") shall indemnify, defend and hold harmless Choice and its
subsidiaries, and each of their respective directors, officers, employees,
agents and Affiliates and each of the heirs, executors, successors and assigns
of any of the foregoing (the "Choice Indemnitees") from and against any and all
Indemnifiable Losses incurred or suffered by any of the Choice Indemnitees and
arising out of or related to the failure of Manor Care or any of its
subsidiaries to pay, perform or otherwise discharge any of the Manor Care
Liabilities.
Section 4.03. Notice and Payment of Claims. If any Manor Care
Indemnitee or Choice Indemnitee (the "Indemnified Party") determines that it is
or may be entitled to indemnification by the Choice Indemnitors or the Manor
Care Indemnitors, as the case may be (the "Indemnifying Party"), under this
Article IV (other than in connection with any Action subject to Section 4.04),
the Indemnified Party shall deliver to the Indemnifying Party a written notice
specifying, to the extent reasonably practicable, the basis for its claim for
indemnification and the amount for which the Indemnified Party reasonably
believes it is entitled to be indemnified. After the Indemnifying Party shall
have been notified of the amount for which the Indemnified Party seeks
indemnification, the Indemnifying Party shall, within 15 days after receipt of
such notice, either (i) pay the Indemnified Party such amount in cash or other
immediately available funds (or reach agreement with the Indemnified Party as to
a mutually agreeable alternative payment schedule) or (ii) object to the claim
for indemnification or the amount thereof by giving the Indemnified Party
written notice setting forth the grounds therefor. Any objection shall be
resolved in accordance with Section 8.13. If the Indemnifying Party does not
give such notice, the Indemnifying Party shall be deemed to have acknowledged
its liability for such claim and the Indemnified Party may exercise any and all
of its rights under applicable law to collect such amount.
<PAGE> 21
Section 4.04. Notice and Defense of Third-Party Claims. (a)
Promptly following the earlier of (a) receipt of written notice of the
commencement by a third party of any Action against or otherwise involving any
Indemnified Party or (b) receipt of written information from a third party
alleging the existence of a claim against an Indemnified Party, in either case,
with respect to which indemnification may be sought pursuant to this Agreement
(a "Third-Party Claim"), the Indemnified Party shall give the Indemnifying Party
prompt written notice thereof. The failure of the Indemnified Party to give
notice as provided in this Section 4.04 shall not relieve the Indemnifying Party
of its obligations under this agreement, except to the extent that the
Indemnifying Party is prejudiced by such failure to give notice. Such notice
shall describe the Third-Party Claim in reasonable detail and shall indicate the
amount of the Indemnifiable Loss that has been or will be sustained by the
Indemnified Party.
(b) Within 30 days after receipt of such notice, the Indemnifying
Party may, by giving written notice thereof to the Indemnified Party, (i)
acknowledge liability for and at its option elect to assume the defense of such
Third-Party Claim at its sole cost and expense or (ii) object to the claim of
indemnification for such Third-Party Claim setting forth the grounds therefor.
Any objection shall be resolved in accordance with Section 8.13. If the
Indemnifying Party does not within such 30-day period give the Indemnified Party
such notice, the Indemnifying Party shall be deemed to have acknowledged its
liability for such Third-Party Claim.
(c) Any defense of a Third-Party Claim as to which the Indemnifying
Party has elected to assume the defense shall be conducted by attorneys employed
by the Indemnifying Party and reasonably satisfactory to Manor Care in the case
of Manor Care Indemnitees and Choice in the case of Choice Indemnitees. The
Indemnified Party shall have the right to participate in such proceedings and to
be represented by attorneys of its own choosing at the Indemnified Party's sole
cost and expense; provided that if the defendants or parties against which
relief is sought in any such claim include both the Indemnifying Party and one
or more Indemnified Parties and, in the reasonable judgment of Manor Care in the
case of Manor Care Indemnitees and Choice in the case of Choice Indemnitees, a
conflict of interest between such Indemnified Parties and such Indemnifying
Party exists in respect of such claim, such Indemnified Parties shall have the
right to employ one firm of counsel selected by Manor Care or Choice, as the
case may be, and in that event the reasonable fees and expenses of such separate
counsel (but not more than one separate counsel reasonably satisfactory to the
Indemnifying Party) shall be paid by such Indemnifying Party.
<PAGE> 22
(d) If the Indemnifying Party assumes the defense of a Third-Party
Claim, the Indemnifying Party may settle or compromise the claim without the
prior written consent of the Indemnified Party; provided that without the prior
written consent of Manor Care in the case of Manor Care Indemnitees and Choice
in the case of Choice Indemnitees, the Indemnifying Party may not agree to any
such settlement unless as a condition to such settlement the Indemnified Party
receives a written release from any and all liability relating to such
Third-Party Claim and such settlement or compromise does not include any remedy
or relief to be applied to or against the Indemnified Party, other than monetary
damages for which the Indemnifying Party shall be responsible hereunder.
(e) If the Indemnifying Party does not assume the defense of a
Third-Party Claim for which it has acknowledged liability for indemnification
under this Article IV, Manor Care in the case of Manor Care Indemnitees and
Choice in the case of Choice Indemnitees may pursue the defense of such
Third-Party Claim and choose one firm of counsel in connection therewith. The
Indemnifying Party is required to reimburse Manor Care or Choice, as the case
may be, on a current basis for its reasonable expenses of investigation,
reasonable attorney's fees and reasonable out-of-pocket expenses incurred by
Manor Care in the case of Manor Care Indemnitees and Choice in the case of
Choice Indemnitees in defending against such Third- Party Claim and the
Indemnifying Party shall be bound by the result obtained with respect thereto;
provided that the Indemnifying Party shall not be liable for any settlement
effected without the consent of Manor Care in the case of Manor Care Indemnitees
and Choice in the case of Choice Indemnitees, which consent shall not be
unreasonably withheld.
(f) The Indemnifying Party shall pay to the Indemnified Party in
cash the amount for which the Indemnified Party is entitled to be indemnified
(if any) within 15 days after the final resolution of such Third-Party Claim
(whether by the final nonappealable judgment of a court of competent
jurisdiction or otherwise) or, in the case of any Third-Party Claim as to which
the Indemnifying Party has not acknowledged liability, within 15 days after such
Indemnifying Party's objection has been resolved pursuant to Section 8.13 or by
settlement, compromise or the final nonappealable judgment of a court of
competent jurisdiction.
Section 4.05. Insurance Proceeds. The amount that any Indemnifying
Party is or may be required to pay to any Indemnified Party pursuant to this
Article IV shall be reduced (including, without limitation, retroactively) by
any insurance proceeds or other amounts actually recovered by or on behalf of
such Indemnified Parties in reduction of the related Indemnifiable Loss. If an
Indemnified Party shall have received the payment required by this Agreement
from an Indemnifying Party in respect of an Indemnifiable Loss and shall
subsequently actually receive insurance proceeds, or other amounts in respect of
such Indemnifiable Loss as specified above, then such Indemnified Party shall
pay to such Indemnifying Party a sum equal to the amount of such insurance
proceeds or other amounts actually received after deducting therefrom all of the
Indemnifiying Party's costs and expenses associated with such Loss.
<PAGE> 23
Section 4.06. Contribution. If the indemnification provided for in
this Article IV is unavailable to an Indemnified Party in respect of any
Indemnifiable Loss arising out of or related to information contained in or
omitted from the Information Statement or the Form 10, then the Choice
Indemnitees, in lieu of indemnifying the Manor Care Indemnitees, shall
contribute to the amount paid or payable by the Manor Care Indemnitees as a
result of such Indemnifiable Loss in such proportion as is appropriate to
reflect the relative fault of Choice, on the one hand, and Manor Care, on the
other hand, in connection with the statements or omissions which resulted in
such Indemnifiable Loss. The relative fault of the Choice Indemnitees on the
one hand and of the Manor Care Indemnitees on the other hand shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information concerning Choice on the one hand or Manor
Care on the other hand.
Section 4.07. Subrogation. In the event of payment by an
Indemnifying Party to any Indemnified Party in connection with any Third-Party
Claim, such Indemnifying Party shall be subrogated to and shall stand in the
place of such Indemnified Party as to any events or circumstances in respect of
which such Indemnified Party may have any right or claim relating to such
Third-Party Claim. Such Indemnified Party shall cooperate with such
Indemnifying Party in a reasonable manner, and at the cost and expense of such
Indemnifying Party, in prosecuting any subrogated right or claim.
Section 4.08. No Third-Party Beneficiaries. This Article IV shall
inure to the benefit of, and be enforceable by, Manor Care, the Manor Care
Indemnitees, Choice and the Choice Indemnitees and their respective successors
and permitted assigns. The indemnification provided for by this Article IV
shall not inure to the benefit of any other third party or parties and shall not
relieve any insurer who would otherwise be obligated to pay any claim of the
responsibility with respect thereto or, solely by virtue of the indemnification
provisions hereof, provide any subrogation rights with respect thereto and each
party agrees to waive such rights against the other to the fullest extent
permitted.
<PAGE> 24
Section 4.09. Remedies Cumulative. The remedies provided in this
Article IV shall be cumulative and shall not preclude assertion by any
Indemnified Party of any other rights or the seeking of any and all other
remedies against any Indemnifying Party. The procedures set forth in this
Article IV, however, shall be the exclusive procedures governing any indemnity
action brought under this Article IV or otherwise relating to Indemnifiable
Losses.
Section 4.10. Survival of Indemnities. The obligations of each of
Manor Care and Choice under this Article IV shall survive the sale or other
transfer by it of any assets or businesses or the assignment by it of any
Liabilities, with respect to any Indemnifiable Loss of the other related to such
assets, businesses or Liabilities.
Section 4.11. After-Tax Indemnification Payments. Except as
otherwise expressly provided herein or in an Ancillary Agreement, any
indemnification payment made by either party under this Article IV shall give
effect to, and be reduced by the value of, any and all applicable deductions,
losses, credits, offsets or other items for Federal, state or other tax purposes
attributable to the payment of the indemnified liability by the Indemnified
Party in a manner consistent with the treatment of tax indemnity payments under
the Tax Sharing Agreement.
ARTICLE V
CERTAIN ADDITIONAL MATTERS
Section 5.01. Intercompany Accounts. On the Distribution Date,
Manor Care shall contribute to MNR the Promissory Notes and MNR, Choice and the
subsidiary guarantors to be named therein shall execute the Loan Agreement. All
intercompany amounts payable or receivable by Manor Care or Choice not covered
by the Loan Agreement shall be cancelled on the Distribution Date.
Section 5.02. Manor Care Guarantees. (a) After the Distribution
Date, Manor Care shall continue and maintain, in full force and effect, the
guarantees issued by Manor Care (the "Guaranteed Obligations"), set forth on
Schedule 5.02(a) hereto, with respect to certain obligations of the Lodging
Business. Choice shall use its reasonable best efforts to obtain a release of
Manor Care from its obligations under the Guaranteed Obligations if and to the
extent that such efforts are consistent with the business of Choice and do not
adversely affect the relationship between Choice and the other parties to the
Guaranteed Obligations. Choice shall provide to Manor Care, so long as the
Guaranteed Obligations have not been fully and finally discharged, such
information or certificates as Manor Care shall reasonably request regarding the
financial position of Choice and the status of the Guaranteed Obligations.
<PAGE> 25
(b) Choice agrees to pay to Manor Care on the Closing Date and on
each anniversary of the Closing Date thereafter until the Guaranteed Obligations
are terminated a guarantee fee equal to 2% per annum of the aggregate principal
amount of obligations (including financing leases) subject to such guarantees.
Such fee is not subject to any refund and shall not be prorated.
(c) Neither Choice nor any subsidiary thereof shall take any action
(including, without limitation, by amendment, renewal or extensions of any
Guaranteed Obligations (or any part thereof), except for any such change in any
Guaranteed Obligation that is caused by the exercise of rights contained in the
agreements governing the underlying obligation as in effect on the Distribution
Date) that could reasonably be expected to adversely affect Manor Care's
potential liability with respect to the Guaranteed Obligations, whether by
increasing the likelihood or amount of any such liability, extending the time
during which such liability remains outstanding or otherwise.
Section 5.03. Ancillary Agreements. On or prior to the
Distribution Date, Manor Care and Choice shall execute and deliver the Ancillary
Agreements.
Section 5.04. Choice Officers and Board of Directors. On or prior
to the Distribution Date, Manor Care shall take and shall cause Choice to take
all actions necessary to appoint as officers and directors of Choice those
persons named in the Form 10 to constitute the officers and directors of Choice
on the Distribution Date.
Section 5.05. Choice Certificate of Incorporation and By-laws.
Prior to the Distribution Date, Manor Care shall take all action necessary to
cause the certificate of incorporation and by-laws of Choice to be amended and
restated substantially in the form of attached to the Form 10 as exhibits
thereto.
Section 5.06. Credit Facilities. (a) Prior to the Distribution
Date, Manor Care shall take all necessary action to replace its credit facility
so as to release Choice and the Lodging Subsidiaries from any liability or
obligation with respect thereto from and after the Distribution Date.
<PAGE> 26
(b) Prior to the Distribution Date, Manor Care and Choice shall
take all necessary action to obtain the Choice Credit Facility.
Section 5.07. Sales and Transfer Taxes. Manor Care and Choice
agree to cooperate to determine the amount of sales, transfer or other taxes or
fees (including, without limitation, all real estate, patent, copyright and
trademark transfer taxes and recording fees) payable in connection with the
transactions contemplated by this Agreement (the "Transaction Taxes"). Manor
Care agrees to file promptly and timely the returns for such Transaction Taxes
with the appropriate taxing authorities and remit payment of the Transaction
Taxes and Choice will join in the execution of any such tax returns or other
documentation. Payment of all such Transaction Taxes shall be the
responsibility of Choice and shall be reimbursed to Manor Care by Choice
promptly upon request by Manor Care.
Section 5.08. Certain Post-Distribution Transactions. Each of
Manor Care and Choice shall, and shall cause each of their respective
subsidiaries to, comply in all material respects with each representation and
statement made, or to be made, to any taxing authority in connection with the
IRS Ruling or any other ruling obtained, or to be obtained, by Manor Care and
Choice acting together, from any such taxing authority with respect to any
transaction contemplated by this Agreement.
Section 5.09. Non-Competition Agreement.
(a) Manor Care. Until [five] years after the Distribution Date,
Manor Care and its subsidiaries shall not, without the express written consent
of Choice, compete with the Lodging Business of Choice, provided that this
covenant shall not prevent Manor Care or any of its subsidiaries from engaging
in any line of business in which Choice is not engaged or in which Choice is
prohibited by law or by contract from engaging on the Distribution Date,
including, without limitation, the business conducted by the Assisted Living
Facilities, any independent living facilities and any business similar thereto.
(b) Choice. Until [five] years after the Distribution Date, Choice
and its subsidiaries shall not, without the express written consent of Manor
Care, compete with the Healthcare Business of Manor Care, including, without
limitation, the business conducted by the Assisted Living Facilities, any
independent living facilities or any business similar thereto.
<PAGE> 27
Section 5.10. Insurance Policies and Claims Administration.
(a) Manor Care to Maintain Insurance Coverage Prior to Distribution
Date. Manor Care shall use reasonable efforts to maintain in full force and
effect at all times up to and including the Distribution Date its current
property and casualty insurance programs, including, without limitation, primary
and excess general liability, automobile, workers' compensation, property and
crime insurance policies (collectively, the "Policies" and individually, a
"Policy"). Manor Care and its subsidiaries shall retain with respect to any
Covered Claims as set forth on Schedule 5.10(a) relating to periods prior to the
Distribution Date all of their respective rights, benefits and privileges, if
any, under such Policies. To the extent not already provided for by the terms of
a Policy, Manor Care shall use reasonable efforts to cause Choice and its
subsidiaries, as appropriate, to be named as additional insureds under such
Policy in respect of Covered Claims arising or relating to periods prior to the
Distribution Date; provided, however, that nothing contained herein shall be
construed to require Manor Care or any of its subsidiaries to pay any additional
premium or other charges in respect to, or waive or otherwise limit any of its
rights, benefits or privileges under, any such Policy to effect the naming of
Choice and its subsidiaries as such additional insureds; provided, further, that
with respect to any existing Covered Claim that Manor Care determines, in its
sole discretion, has a potential total out-of-pocket cost to Manor Care in
excess of $250,000 (including loss reserves and actual cash payments, if any),
as set forth on Schedule 5.10(a) (collectively, "Shock Losses"), it is
specifically understood that (x) if the amount of Insurance Charges actually
payable by Manor Care with respect to such Shock Loss shall be equal to or
exceed $250,000, the full amount of such payment shall be the responsibility of,
and shall be paid by, Choice and (y) if the amount of Insurance Charges actually
payable by Manor Care with respect to such Shock Loss shall be less than
$250,000, such amount shall be the responsibility of, and shall be paid by,
Manor Care.
<PAGE> 28
(b) Choice Responsible for Establishing Insurance Coverage on and
After Distribution Date. Commencing on and as of the Distribution Date, Choice
and each of its subsidiaries shall be responsible for establishing and
maintaining its own separate insurance programs (including, without limitation,
primary and excess general liability, automobile, workers' compensation,
property, director and officer liability, fire, crime, surety and other similar
insurance policies) for activities and claims relating to any period on or after
the Distribution Date involving Choice or any of its subsidiaries.
Notwithstanding any other agreement or understanding to the contrary, except as
set forth in Section 5.10(c) with respect to claims administration and financial
administration of the Policies, neither Manor Care nor any of its subsidiaries
shall have any responsibility for or obligation to Choice or its subsidiaries
relating to liability and casualty insurance matters for any period, whether
prior to, at or after the Distribution Date.
<PAGE> 29
(c) Administration and Procedure. (i) Manor Care or a
subsidiary of Manor Care, as appropriate, shall be responsible for the Claims
Administration and Financial Administration of all Policies for Covered Claims
relating to the assets, ownership or operation prior to the Distribution Date of
the Lodging Business; provided, however, that such retention by Manor Care of
the Policies and the responsibility for Claims Administration and Financial
Administration of the Policies are in no way intended to limit, inhibit or
preclude any right to insurance coverage for any Covered Claims of a named
insured under the Policies. Manor Care shall be entitled to compensation for and
reimbursement of expenses incurred in connection with performing the Claims
Administration and Financial Administration of the Policies in accordance with
the terms of the Corporate Services Agreement. Except as set forth in the Risk
Management Consulting Services Agreement, Choice or a subsidiary thereof, as
appropriate, shall be responsible for all administrative and financial matters
relating to insurance policies established and maintained by Choice and its
subsidiaries for claims relating to any period on or after the Distribution Date
involving Choice or any of its subsidiaries.
(ii) Choice shall notify Manor Care of any Covered Claim relating to
Choice or a subsidiary thereof under one or more of the Policies relating to any
period prior to the Distribution Date, and Choice agrees to cooperate and
coordinate with Manor Care concerning any strategy Manor Care may reasonably
elect to pursue to secure coverage and payment for such Covered Claim by the
appropriate insurance carrier. Notwithstanding anything contained herein, in any
other agreement or applicable Policy or any understanding to the contrary,
Choice or an appropriate subsidiary thereof assumes responsibility for, and
shall pay to the appropriate insurance carriers or otherwise, any premiums,
retrospectively-rated premiums, defense costs, indemnity payments, deductibles,
retentions or other charges, as appropriate (collectively, "Insurance Charges"),
whenever arising, which shall become due and payable under the terms and
conditions of any applicable Policy in respect of any liabilities, losses,
claims, actions or occurrences, whenever arising or becoming known, involving or
relating to any of the assets, businesses, operations or liabilities of Choice
or any of its subsidiaries, which charges relate to any Shock Losses to the
extent set forth in Section 5.10(a) and any such charges that relate to the
period after the Distribution Date. To the extent that the terms of any
applicable Policy provide that Manor Care or a subsidiary thereof, as
appropriate, shall have an obligation to pay or guarantee the payment of any
Insurance Charges, Manor Care or such subsidiary shall be entitled to demand
that Choice or a subsidiary thereof make such payment directly to the person or
entity entitled thereto. In connection with any such demand, Manor Care shall
submit to Choice or a subsidiary thereof a copy of any invoice received by Manor
Care or a subsidiary pertaining to such Insurance Charges, together with
appropriate supporting documentation, if available. In the event that Choice or
its subsidiary fails to pay any Insurance Charges when due and payable, whether
at the request of the party entitled to payment or upon demand by Manor Care or
a subsidiary of Manor Care, Manor Care or a subsidiary of Manor Care may (but
shall not be required to) pay such Insurance Charges for and on behalf of Choice
or its subsidiary and, thereafter, Choice or its subsidiary shall forthwith
reimburse Manor Care or such subsidiary of Manor Care for such payment.
<PAGE> 30
ARTICLE VI
ACCESS TO INFORMATION
Section 6.01. Provision of Corporate Records. Each of Manor Care
and Choice shall arrange as soon as practicable following the Distribution Date
for the provision to the other of existing corporate governance documents (e.g.
minute books, stock registers, stock certificates, documents of title, etc.) in
its possession relating to the other or to its business and affairs.
Section 6.02. Access to Information. From and after the
Distribution Date each of Manor Care and Choice shall afford the other,
including its accountants, counsel and other designated representatives,
reasonable access (including using reasonable efforts to give access to persons
or firms possessing information) and duplicating rights during normal business
hours to all records, books, contacts, instruments, computer data and other data
and information in such party's possession relating to the business and affairs
of the other (other than data and information subject to an attorney/client or
other privilege), insofar as such access is reasonably required by the other
party including, without limitation, for audit, accounting and litigation
purposes, as well as for purposes of fulfilling disclosure and reporting
obligations.
Section 6.03. Litigation Cooperation. Each of Manor Care and
Choice shall use reasonable efforts to make available to the other, upon written
request, its officers, directors, employees and agents as witnesses to the
extent that such persons may reasonably be required in connection with any
legal, administrative or other proceedings arising out of the business of the
other prior to the Distribution Date in which the requesting party may from time
to time be involved.
Section 6.04. Reimbursement. Each party providing information or
witnesses under Sections 6.01, 6.02 or 6.03 to the other shall be entitled to
receive from the recipient, upon the presentation of invoices therefor, payment
for all out-of- pocket costs and expenses as may be reasonably incurred in
providing such information or witnesses.
<PAGE> 31
Section 6.05. Retention of Records. Except as otherwise required by
law or agreed to in writing, each party shall, and shall cause each of its
respective subsidiaries to, retain all information relating to the other party's
business in accordance with the past practice of such party. Notwithstanding the
foregoing, except as provided in the Tax Sharing Agreement, any party may
destroy or otherwise dispose of any information at any time, providing that,
prior to such destruction or disposal, (a) such party shall provide no less than
90 days' prior written notice to the other party, specifying the information
proposed to be destroyed or disposed of and (b) if the recipient of such notice
shall request in writing prior to the scheduled date for such destruction or
disposal that any of the information proposed to be destroyed or disposed of be
delivered to such requesting party, the party proposing the destruction or
disposal shall promptly arrange for the delivery of such of the information as
was requested at the expense of the requesting party.
Section 6.06. Confidentiality. Each party shall hold and shall
cause its directors, officers, employees, agents, consultants and advisors to
hold, in strict confidence, unless compelled to disclose by judicial or
administrative process or, in the opinion of its counsel, by other requirements
of law, all information (other than any such information relating solely to the
business or affairs of such party) concerning the other party (except to the
extent that such information can be shown to have been (a) in the public domain
through no fault of such party, (b) later lawfully acquired on a
non-confidential basis from other sources by the party to which it was furnished
or (c) information that typically would have been disclosed by Manor Care or
Choice, as the case may be, in the ordinary course of business consistent with
past practice). Neither party shall release or disclose any such information to
any other person, except its auditors, attorneys, financial advisors, bankers
and other consultants and advisors who shall be advised of and agree to comply
with the provisions of this Section 6.06; provided, that with respect to the
matters identified on Schedule 6.06 hereof, no information may be disclosed by
either party under any circumstance without the prior written consent of the
other party hereto.
Section 6.07. Mail. After the Distribution Date, each of Manor
Care and Choice may receive mail, telegrams, packages and other communications
properly belonging to the other. Accordingly, at all times after the
Distribution Date, each of Manor Care and Choice authorizes the other to receive
and open all mail, telegrams, packages and other communications received by it
and not unambiguously intended for the other party or any of the other party's
officers or directors specifically in their capacities as such, and to retain
the same to the extent that they relate to the business of the receiving party
or, to the extent that they do not relate to the business of the receiving party
and do relate to the business of the other party, or to the extent that they
relate to both businesses, the receiving party shall promptly contact the other
party by telephone for delivery instructions and such mail, telegrams, packages
or other communications (or, in case the same relate to both businesses, copies
thereof) shall promptly be forwarded to the other party in accordance with its
delivery instructions. The foregoing provisions of this Section 6.07 shall
constitute full authorization to the postal authorities, all telegraph and
courier companies and all other persons to make deliveries to Manor Care or
Choice, as the case may be, addressed to either of them or to any of their
officers or directors specifically in their capacities as such. The provisions
of this Section 6.07 are not intended to and shall not be deemed to constitute
an authorization by either Manor Care or Choice to permit the other to accept
service of process on its behalf, and neither party is or shall be deemed to be
the agent of the other for service of process purposes or for any other purpose.
<PAGE> 32
ARTICLE VII
ENVIRONMENTAL AND OTHER CLAIMS
INDEMNIFICATION PROVISIONS
Section 7.01. Environmental and Other Claims Indemnification.
Choice (the "Indemnitor") shall indemnify, defend and hold harmless Manor
Healthcare Corp., Manor Care Inc., their affiliates, subsidiaries and their
respective directors, employees and agents (collectively referred to as the
"Indemnitee") subject to Section 7.02 from and against any loss, liability,
claim, damage, fine, penalty or other expense (including but not limited to
reasonable legal and consultant fees and expenses, and any sums necessary to
respond to any third-party claim, including but not limited to any federal,
state or local government directives or orders) (any "Loss") suffered or
incurred by Indemnitee, on a pretax basis, to the extent arising from: (1) any
and all currently pending claims as specified on Schedule 7.01 (the "Current
Indemnified Claims"); and (2) any and all currently unknown but potential or
future environmental third-party personal injury and other claims, including,
but not limited to, new claims arising out of the sites identified on Schedule
7.01, arising out of the activities of Cenco Incorporated, and its subsidiary
and affiliated companies, and any and all of Cenco Incorporated's predecessor
corporations, subsidiaries and affiliates (the "Potential Indemnified Claims").
(The Current Indemnified Claims and the Potential Indemnified Claims shall be
collectively referred to as the "Indemnified Claims.")
Section 7.02. Scope of Indemnification. The Loss to be
indemnified does not apply to any expenditures made prior to the Distribution.
The Loss shall include but not be limited to: (1) all amounts required to be
reimbursed to an insurer for insurance proceeds previously paid by such insurer
as a result of an Indemnified Claim; (2) all deductible amounts required to be
paid under any insurance policy before coverage attaches for an Indemnified
Claim; (3) all amounts paid to third parties in excess of insurance coverage;
(4) all other amounts not paid by insurers in connection with Indemnified
Claims; and (5) the cost of any action against insurers to obtain insurance
coverage. Notwithstanding anything to the contrary contained herein, Losses to
be indemnified with respect to the Imperial, Darlington and Lisbon sites
identified on Schedule 7.01 only include Losses that are in excess of the
reserves reflected in the most recent monthly balance sheet of Manor HealthCare
Corp. available prior to the Distribution Date.
<PAGE> 33
Section 7.03. Procedures for Indemnification for Current and
Potential Environmental and Other Claims. (a) Manor Care shall notify
Indemnitor in writing promptly after learning of any Potential Indemnified Claim
for which an Indemnitee intends to seek indemnification from Indemnitor under
this Agreement. The failure of Manor Care to give such notice shall not relieve
Indemnitor of its obligations under this Article except to the extent that
Indemnitor is actually prejudiced by such failure to give notice. Such notice
shall describe such Potential Indemnified Claim in reasonable detail considering
the information provided to Indemnitee and shall include copies of all notices
and documents received by an Indemnitee from the person or entity making the
Potential Indemnified Claim.
(b) Following the Distribution, Manor Care shall control the
investigation and defense or settlement of all Indemnified Claims, without
prejudice to its right to seek indemnification hereunder. However, except as
otherwise provided in subsection (c) of this Section, Indemnitor may, with the
approval of Manor Care, at any time after the Distribution, undertake to jointly
defend or settle an Indemnified Claim. If Indemnitor undertakes the joint
defense of any Indemnified Claim, Indemnitor shall thereby admit its obligation
to indemnify Indemnitee against any Loss associated with such Indemnified Claim,
and neither Indemnitee nor Indemnitor may settle or compromise such Indemnified
Claim, without the prior written consent of Choice or Manor Care, as the case
may be. Subject to subsection (c) of this Section, in the case of such joint
defense, the Indemnitor and Indemnitee shall use the same outside legal counsel,
who shall be chosen by Manor Care, and Indemnitor shall be responsible for all
costs of such joint defense, including legal fees and expenses, pursuant to
subsection (e) of this Section.
<PAGE> 34
(c) If Indemnitor seeks to undertake the joint defense of an
Indemnified Claim, and if Indemnitee reasonably determines that its interests
differ from those of Indemnitor, or that there may be legal defenses or claims
available to it that are different from or in addition to those available to
Indemnitor which may make it inappropriate for Indemnitor to undertake the joint
defense or settlement of an Indemnified Claim, then Indemnitor shall not be
entitled to undertake the joint defense or settlement of such Indemnified Claim;
and counsel for Indemnitor, who shall be chosen by Choice, shall be entitled to
conduct the defense of Indemnitor and counsel for Indemnitee, who shall be
chosen by Manor Care, shall be entitled to conduct the defense of Indemnitee,
all at Indemnitor's expense, it being understood that both will direct their
respective counsel to cooperate with each other to conduct the defense or
settlement of such action as efficiently as possible.
(d) Both parties shall make available to each other, their counsel
and other representatives all information and documents reasonably available to
them which relate to any Indemnified Claim, and otherwise cooperate as may
reasonably be required in connection with investigation, defense and settlement
thereof (while taking such steps as are necessary to preserve the
attorney-client and work product privileges, including through the execution of
a joint defense agreement). Such cooperation shall include the retention and
(upon Choice's request) the provision to Choice of records and information that
are reasonably relevant to such Indemnified Claim and the availability of
employees on a mutually convenient basis to provide additional information and
explanation of any material provided hereunder. Any joint defense agreement
entered into by Indemnitor or Indemnitee with any third party relating to any
Indemnified Claim shall provide that either party may, if requested, provide
information obtained through any such agreement to the other party.
(e) Manor Care shall be responsible to make payments on any and all
Loss(es) as each such payment becomes due. Manor Care shall provide to Choice a
monthly Statement of Loss, including reasonable documentation regarding the
expenditures detailed therein. Choice shall remit payment for such Loss to
Manor Care within 30 days of receipt of each such Statement of Loss. In the
event that Choice disputes an individual expenditure or expenditures, Choice
shall promptly pay the undisputed portion to Manor Care and shall promptly
notify Manor Care, in writing, of its reasons for disputing the unpaid
portion(s). In response to such written notification, Manor Care shall provide
Choice, at Choice's expense, with such additional information as Choice may
request in order to assure the reasonableness or appropriateness of any fees or
expenses charged to Choice.
<PAGE> 35
Section 7.04. Losses Net of Insurance or Other Recovery. (a) The
amount of any Loss for which indemnification is provided shall be reduced
(including, without limitation, retroactively) by any insurance proceeds or
other amounts actually recovered or received by or on behalf of Indemnitee in
reduction of such Loss. If, after Indemnitor has made indemnification to
Indemnitee for any Loss, Indemnitee actually receives insurance proceeds or
other amounts in respect of such Loss, Indemnitee shall pay to Indemnitor a sum
equal to the amount of such insurance proceeds or other amount actually received
after deducting therefrom all of Indemnitee's costs and expenses associated with
such Loss.
(b) Indemnitor and Indemnitee understand and agree that Indemnitee,
with the assistance of Indemnitor, will undertake reasonable efforts to obtain
reimbursement from its insurers for the Indemnified Claims. With respect to the
Current Indemnified Claims specified in Table 1 of Schedule 7.01, such efforts
shall include mediation, arbitration or litigation against at least the primary
insurers. With respect to the Current Indemnified Claims identified in Tables
2, 3 and 4 and the Potential Indemnified Claims, such efforts shall include
timely notification to relevant insurers of the initiation of claims and of
important events or deadlines during any litigation regarding such claims
(including trial dates and the filing of summary judgment motions), prompt
responses to insurers' requests for information about claims, as well as the
initiation of mediation, arbitration or litigation, if necessary and appropriate
to obtain insurance reimbursement.
Section 7.05. No Third-Party Beneficiaries. This Article VII shall
inure to the benefit of and be enforceable by Indemnitee and its successors and
assigns but shall not inure to the benefit of any other third party or parties,
including, but not limited to, any insurer that may have provided coverage
applicable to the defense or indemnity of any or all of the Indemnified Claims,
or any state, federal, or local government instrumentality, any legal or
equitable rights hereunder. Nothing herein shall be construed to affect
insurance coverage that exists or that may exist prior to the date of this
Agreement.
Section 7.06. Remedies Cumulative. The remedies provided in this
Article VII shall be cumulative and shall not preclude assertion by any party of
any other rights or the seeking of any other remedies against any party.
Moreover, to the extent that this Article VII conflicts with any other Article
or portion of this Agreement with respect to the subject matter hereof, this
Article VII shall govern. The procedures set forth in this Article VII shall be
the exclusive procedures governing any indemnity action brought under this
Article VII or otherwise relating to Indemnifiable Claims.
<PAGE> 36
Section 7.07. Survival of Indemnities. The obligations of each of
Manor Care and Choice under this Article VII shall survive the sale or other
transfer by it of any assets or businesses or the assignment by it of any
Liabilities with respect to any Indemnifiable Claims of the other.
ARTICLE VIII
MISCELLANEOUS
Section 8.01. Termination. This Agreement may be terminated and
the Distribution deferred, modified or abandoned at any time prior to the
Distribution Date by and in the sole discretion of the Board of Directors of
Manor Care without the approval of Choice or of Manor Care's stockholders. In
the event of such termination, no party shall have any liability to any other
party pursuant to this Agreement.
Section 8.02. Expenses. Except as specifically provided in this
Agreement or in an Ancillary Agreement, all costs and expenses incurred in
connection with the preparation, execution, delivery and implementation of this
Agreement and with the consummation of the transactions contemplated by this
Agreement shall be paid by the party incurring the expense. The determination of
who has incurred an expense shall be made by the Chief Financial Officer of
Manor Care, which determination shall be binding and final upon each of the
parties hereto and not subject to further review. In addition, it is understood
and agreed that Choice shall pay the legal, filing, accounting, printing and
other accountable and out-of-pocket expenditures in connection with (i) the
preparation, printing and filing of the Form 10 and the Information Statement,
(ii) obtaining of the Choice Credit Facility and (iii) amending the Existing
Credit Facility.
Section 8.03. Notices. All notices and communications under this
Agreement shall be in writing and any communication or delivery hereunder shall
be deemed to have been duly given when received addressed as follows:
If to Manor Care, to:
Manor Care, Inc.
11555 Darnestown Rd.
Gaithersburg, Maryland 20878-3200
Attn: [General Counsel]
Telecopy Number:
If to Choice, to:
Choice Hotels International, Inc.
10750 Columbia Pike
Silver Spring, Maryland 20901
Attn: General Counsel
Telecopy Number:
<PAGE> 37
Any party may, by written notice so delivered to the other parties, change the
address to which delivery of any notice shall thereafter be made.
Section 8.04. Amendment and Waiver. This Agreement may not be
altered or amended, nor may rights hereunder be waived, except by an instrument
in writing executed by the party or parties to be charged with such amendment or
waiver. No waiver of any terms, provision or condition of or failure to exercise
or delay in exercising any rights or remedies under this Agreement, in any one
or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such term, provision, condition, right or remedy or as
a waiver of any other term, provision or condition of this Agreement.
Section 8.05. Counterparts. This Agreement may be executed in one
or more counterparts each of which shall be deemed an original instrument, but
all of which together shall constitute but one and the same Agreement.
Section 8.06. Governing Law; Jurisdiction; Forum. This Agreement
shall be construed in accordance with, and governed by, the laws of the State of
Delaware, without regard to the conflicts of law rules of such state. Each
party hereto agrees that any action or proceeding to enforce, or which arises
out of or in any way relates to, directly or indirectly, this Agreement, or any
of the Ancillary Agreements, shall, subject to Section 8.13, be brought or
prosecuted in state court or courts in the State of Maryland or, in any action
or proceeding with respect to which federal courts shall have exclusive subject
matter jurisdiction, in the United States District Court for the District of
Maryland. Each party hereto expressly submits and consents in advance to such
jurisdiction in any action or proceeding commenced hereunder or under any
Ancillary Agreement, and hereby waives any claim that any such state or federal
court is an inconvenient or improper forum.
Section 8.07. Entire Agreement. This Agreement including the
schedules hereto, together with the Ancillary Agreements, constitute the entire
understanding of the parties hereto with respect to the subject matter hereof,
superseding all negotiations, prior discussions and prior agreements and
understandings relating to such subject matter. To the extent that the
provisions of this Agreement are inconsistent with the provisions of any
Ancillary Agreements, the provisions of such Ancillary Agreement shall prevail.
Section 8.08. Parties in Interest. Neither of the parties hereto
may assign its rights or delegate any of its duties under this Agreement without
the prior written consent of each other party. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns. Nothing contained in this Agreement, express
or implied, is intended to confer any benefits, rights or remedies upon any
person or entity other than Manor Care and Choice, and the Manor Care
Indemnitees and Choice Indemnitees under Article IV hereof.
<PAGE> 38
Section 8.09. Tax Sharing Agreement; After-Tax Payments. (a) Other
than as provided in Sections 4.11 and 5.07, this Agreement shall not govern any
Tax, and any and all claims, losses, damages, demands, costs, expenses,
liabilities, refunds, deductions, write-offs, or benefits relating to Taxes
shall be exclusively governed by the Tax Sharing Agreement or the Tax
Administration Agreement, as applicable.
(b) If, at the time Choice is required to make any payment to Manor
Care under this Agreement, Manor Care owes Choice any amount under the Tax
Sharing Agreement, then such amounts shall be offset and the excess shall be
paid by the party liable for such excess. Similarly, if, at the time Manor Care
is required to make any payment to Choice under this Agreement, Choice owes
Manor Care any amount under the Tax Sharing Agreement, then such amounts shall
be offset and the excess shall be paid by the party liable for such excess.
Section 8.10. Further Assurances and Consents. In addition to the
actions specifically provided for elsewhere in this Agreement, each of the
parties hereto will use its reasonable efforts to (i) execute and deliver such
further instruments and documents and take such other actions as any other party
may reasonably request in order to effectuate the purposes of this Agreement and
to carry out the terms hereof and (ii) take, or cause to be taken, all actions,
and to do, or cause to be done, all things, reasonably necessary, proper or
advisable under applicable laws, regulations and agreements or otherwise to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, using its reasonable efforts to obtain any
consents and approvals and to make any filings and applications necessary or
desirable in order to consummate the transactions contemplated by this
Agreement; provided that no party hereto shall be obligated to pay any
consideration therefor (except for filing fees and other similar charges) to any
third party from whom such consents, approvals and amendments are requested or
to take any action or omit to take any action if the taking of or the omission
to take such action would be unreasonably burdensome to the party or its
business.
<PAGE> 39
Section 8.11. Exhibits and Schedules. The Exhibits and Schedules
shall be construed with and as an integral part of this Agreement to the same
extent as if the same had been set forth verbatim herein.
Section 8.12. Legal Enforceability. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. Without
prejudice to any rights or remedies otherwise available to any party hereto,
each party hereto acknowledges that damages would be an inadequate remedy for
any breach of the provisions of this Agreement and agrees that the obligations
of the parties hereunder shall be specifically enforceable.
Section 8.13. Dispute Resolution. (a) Except as otherwise set
forth in Section 2.07 or Section 8.02 or the Lease Agreement, resolution of any
and all disputes arising from or in connection with this Agreement or any of the
Ancillary Agreements, whether based on contract, tort, statute or otherwise,
including, but not limited to, disputes over arbitrability and disputes in
connection with claims by third parties (collectively, "Disputes") shall be
exclusively governed by and settled in accordance with the provisions of this
Section 8.13; provided, however, that nothing contained herein shall preclude
either party from seeking or obtaining (a) injunctive relief or (b) equitable or
other judicial relief to enforce the provisions hereof or to preserve the status
quo pending resolution of Disputes hereunder.
(b) Manor Care or Choice (each a "Party") may commence proceedings
hereunder by delivering a written notice to the other Party providing a
reasonable description of the Dispute to the other (the "Demand").
(c) Promptly following a Demand, the Dispute shall be referred to
representatives of the parties for decision, each party being represented by a
senior executive officer who has no direct operational responsibility for the
matters contemplated by this Agreement (the "Representatives"). The
Representatives shall promptly meet in a good faith effort to resolve the
dispute. If the Representatives do not agree upon a decision within thirty (30)
calendar days after reference of the matter to them, each of Manor Care and
Choice shall be free to exercise the remedies available to them under Section
8.13(d).
<PAGE> 40
(d) The parties hereby agree to submit all Disputes not resolved by
negotiation pursuant to Section 8.13(c) to arbitration under the terms hereof,
which arbitration shall be final, conclusive and binding upon the parties, their
successors and assigns. The arbitration shall be conducted in Maryland by three
arbitrators acting by majority vote (the "Panel") selected by agreement of the
Parties not later than ten (10) days after delivery of the Demand or, failing
such agreement, appointed pursuant to the Commercial Arbitration Rules of the
American Arbitration Association, as amended from time to time (the "AAA
Rules"). If an arbitrator so selected becomes unable to serve, his or her
successors shall be similarly selected or appointed. The arbitration shall be
conducted pursuant to the United States Arbitration Act, 9 U.S.C. { 1, et seq.
and such procedures as the Parties may agree, or, in the absence of or failing
such agreement, pursuant to the AAA Rules. Notwithstanding the foregoing: (a)
each Party shall have the right to audit the books and records of the other
Party that are reasonably related to the Dispute; (b) each Party shall provide
to the other, reasonably in advance of any hearing, copies of all documents
which a Party intends to present in such hearing; (c) each party shall be
allowed to conduct reasonable discovery through written requests for
information, document requests, requests for stipulation of fact and
depositions, the nature and extent of which discovery shall be determined by the
Panel, taking into account the needs of the Parties and the desirability of
making discovery expeditious and cost effective. All hearings shall be
conducted on an expedited schedule, and all proceedings shall be confidential.
Either party may at its expense make a stenographic record thereof. The Panel
shall complete all hearings not later than ninety (90) days after its selection
or appointment, and shall make a final award not later than thirty (30) days
thereafter. The award shall be in writing and shall specify the factual and
legal basis for the award. The fees and expenses of the Institute and the
arbitrators shall be shared equally by the Parties and advanced by them from
time to time as required; provided that at the conclusion of the arbitration,
the Panel shall allocate costs and expenses (including the costs of the
arbitration previously advanced and the fees and expenses of attorneys,
accountants and other experts) and interest as the Panel determines is
appropriate among the parties. The arbitrators shall not be empowered to award
to any Party any consequential damages, lost profits or punitive damages in
connection with any Dispute and each party hereby irrevocably waives any right
to recover such damages.
<PAGE> 41
Section 8.14. Titles and Headings. Titles and headings to sections
herein are inserted for convenience of reference only and are not intended to be
a part of or to affect the meaning or interpretation of this Agreement.
<PAGE> 42
[THIS AGREEMENT CONTAINS BINDING ARBITRATION PROVISIONS WHICH MAY BE
ENFORCED BY THE PARTIES.]
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.
Manor Care, Inc.,
a Delaware corporation
By:
Name:
Title:
Choice Hotels Holding, Inc.,
a Delaware corporation
By:
Name:
Title:
<PAGE> 1
EXHIBIT 12.01
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31, NINE MONTHS
------------------------------- ENDED
1993 1994 1995 FEB. 29, 1996
------- ------- ------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
Income before income taxes..................... $13,434 $17,678 $29,955 $35,402
Fixed charges (net of capitalized interest).... 9,397 14,749 20,076 18,008
------- ------- ------- -------------
Earnings....................................... $22,831 $32,427 $50,031 $53,410
======= ======= ======= =============
Fixed charges
Interest expense and amortization of debt
discount.................................. $ 9,165 $14,505 $19,838 $17,868
Rent expense (interest portion).............. 232 244 238 140
Capitalized interest......................... 1,612 117 197 439
------- ------- ------- -------------
Total fixed charges.................. $11,009 $14,866 $20,273 $18,447
======= ======= ======= =============
Ratio of earnings to fixed charges............. 2.07x 2.18x 2.47x 2.90x
======= ======= ======= =============
</TABLE>
<PAGE> 1
EXHIBIT 24.01
POWER OF ATTORNEY
The undersigned chief executive officer of Choice Hotels Holdings, Inc., a
Delaware corporation (the "Company"), does hereby constitute and appoint James
A. MacCutcheon and James H. Rempe, or either of them, as the undersigned's true
and lawful attorneys in-fact and agents to do any and all things in the
undersigned's name and on behalf of the undersigned in the undersigned's
capacity as chief executive officer of the Company, and to execute any and all
instruments for the undersigned and in the undersigned's name and capacity as
chief executive officer, that such person or persons may deem necessary,
appropriate or desirable to effectuate the spinoff of the lodging business
currently conducted by Manor Care, Inc., including specifically, but not limited
to, power and authority to sign for the undersigned, in the undersigned's
capacity as chief executive officer of the Company, that certain Registration
Statement on Form 10 (the "Registration Statement"), and any and all amendments
thereto, including post-effective amendments, and to otherwise comply with the
Exchange Act of 1934, as amended, and any rules, regulations or requirements of
the Securities and Exchange Commission in connection with the Registration
Statement. The undersigned does hereby ratify and confirm all that such person
or persons shall do or cause to be done by virtue hereof.
Dated: July 3, 1996
By: /s/ STEWART BAINUM, JR.
----------------------------------
Stewart Bainum, Jr.
<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> 9-MOS
<FISCAL-YEAR-END> MAY-01-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 1,566
<SECURITIES> 0
<RECEIVABLES> 30,624
<ALLOWANCES> 5,579
<INVENTORY> 612
<CURRENT-ASSETS> 29,811
<PP&E> 379,705
<DEPRECIATION> 62,897
<TOTAL-ASSETS> 451,083
<CURRENT-LIABILITIES> 35,715
<BONDS> 274,710
0
0
<COMMON> 0
<OTHER-SE> 128,130
<TOTAL-LIABILITY-AND-EQUITY> 451,083
<SALES> 0
<TOTAL-REVENUES> 273,904
<CGS> 0
<TOTAL-COSTS> 220,426
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,945
<INTEREST-EXPENSE> 18,076
<INCOME-PRETAX> 35,402
<INCOME-TAX> 14,966
<INCOME-CONTINUING> 20,436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,436
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</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> YEAR
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAY-31-1995
<CASH> 2,088
<SECURITIES> 0
<RECEIVABLES> 26,148
<ALLOWANCES> 4,202
<INVENTORY> 289
<CURRENT-ASSETS> 28,085
<PP&E> 317,959
<DEPRECIATION> 60,803
<TOTAL-ASSETS> 391,475
<CURRENT-LIABILITIES> 62,748
<BONDS> 250,552
0
0
<COMMON> 0
<OTHER-SE> 65,829
<TOTAL-LIABILITY-AND-EQUITY> 391,475
<SALES> 0
<TOTAL-REVENUES> 302,535
<CGS> 0
<TOTAL-COSTS> 250,476
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 906
<INTEREST-EXPENSE> 22,104
<INCOME-PRETAX> 29,955
<INCOME-TAX> 13,144
<INCOME-CONTINUING> 16,811
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,811
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</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> YEAR
<FISCAL-YEAR-END> MAY-31-1994
<PERIOD-START> JUN-01-1993
<PERIOD-END> MAY-31-1994
<CASH> 2,789
<SECURITIES> 0
<RECEIVABLES> 27,273
<ALLOWANCES> 8,950
<INVENTORY> 269
<CURRENT-ASSETS> 30,261
<PP&E> 230,080
<DEPRECIATION> 50,969
<TOTAL-ASSETS> 303,158
<CURRENT-LIABILITIES> 29,982
<BONDS> 200,104
0
0
<COMMON> 0
<OTHER-SE> 55,208
<TOTAL-LIABILITY-AND-EQUITY> 303,158
<SALES> 0
<TOTAL-REVENUES> 239,764
<CGS> 0
<TOTAL-COSTS> 206,722
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,360
<INTEREST-EXPENSE> 15,364
<INCOME-PRETAX> 17,678
<INCOME-TAX> 8,019
<INCOME-CONTINUING> 9,659
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,659
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.01
CHOICE HOTELS HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE AT
BEGINNING PROFIT END
DESCRIPTION OF PERIOD AND LOSS OTHER WRITE-OFFS OF PERIOD
- ------------------------------------------------ ---------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C> <C>
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
======== ======== ===== ======== ========
Year ended May 31, 1993
Allowance for doubtful accounts............... $7,113 $2,541 -- $ (2,672) $6,982
======== ======== ===== ======== ========
</TABLE>
