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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A
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GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------
CHOICE HOTELS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 52-1985619
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10750 COLUMBIA PIKE 20901
SILVER SPRING, MARYLAND (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (301) 979-5000
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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COMMON STOCK, PAR NEW YORK STOCK EXCHANGE
VALUE $.01 PER SHARE
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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ITEM 1. BUSINESS
The information required by this item is contained under the sections
"Summary," "Introduction," "Risk Factors," "The Distribution," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" of the Information Statement dated , 1996 (the "Information
Statement") attached hereto as Exhibit 2.01 and such sections are incorporated
herein by reference.
ITEM 2. FINANCIAL INFORMATION
The information required by this item is contained under the sections
"Summary," "Capitalization," "Selected Historical Financial Data," "Pro Forma
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of the Information Statement and such sections are
incorporated herein by reference.
ITEM 3. PROPERTIES
The information required by this item is contained under the section
"Business" of the Information Statement and such section is incorporated herein
by reference.
ITEM 4. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained under the section
"Security Ownership of Principal Stockholders and Management" of the Information
Statement and such section is incorporated herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is contained under the sections
"Management -- Executive Officers of the Company" and "The Board of Directors"
of the Information Statement and such sections are incorporated herein by
reference.
ITEM 6. EXECUTIVE COMPENSATION
The information required by this item is contained under the sections
"Management -- Compensation of Executive Officers" and "The Board of Directors"
of the Information Statement and such sections are incorporated herein by
reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the sections
"Relationship Between Manor Care and the Company After the Distribution" and
"Certain Relationships and Related Transactions" of the Information Statement
and such sections are incorporated herein by reference.
ITEM 8. LEGAL PROCEEDINGS
The information required by this item is contained under the sections
"Business -- Legal Proceedings" and "Business -- Environmental Matters" and in
the Notes to Combined Financial Statements of the Company under the heading
"Commitments and Contingencies" which are included in the Information Statement
and incorporated herein by reference.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
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The information required by this item is contained under the sections "The
Distribution -- Listing and Trading of Shares of the Company's Common Stock,"
"Dividend Policy," "Security Ownership of Principal Stockholders and Management"
and "Description of Capital Stock of the Company" of the Information Statement
and such sections are incorporated herein by reference.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On 1996, the Registrant issued and sold 10 shares of its common
stock to Manor Care, Inc. for $.10 in order to become a wholly-owned subsidiary
of Manor Care, Inc. The sale was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The information required by this item is contained under the sections "The
Distribution -- Listing and Trading of Shares of the Company's Common Stock,"
"Description of Capital Stock of the Company" and "Purposes and Effects of
Certain Charter 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:
(i) Combined Financial Statements
-- Report of Arthur Andersen LLP, Independent Public
Accountants, dated June 28, 1996;
-- Combined Balance Sheets as of May 31, 1995 and May 31, 1996;
-- Combined Statements of Income for each of the fiscal years
in the three-year period ended May 31, 1996;
-- Combined Statements of Cash Flows for each of the fiscal
years in the three-year period ended May 31, 1996;
-- Notes to Combined Financial Statements.
2
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The following supplemental schedule of the Company is included in
Exhibit 99.01 hereto and incorporated herein by reference.
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(ii) Supplemental Schedule
-- Schedule II -- Valuation and Qualifying Accounts.
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(b) Exhibits
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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2.01 Information Statement dated , 1996*
3.01 Form of Restated Certificate of Incorporation of the Registrant* (attached
to Information Statement as Appendix A)
3.02 Form of 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 Trademark Agreement, dated , 1996, between Manor Care,
Inc. and the Registrant*
10.03 Form of Assignment of Marks Agreement dated , 1996 between
Manor Care Hotels International, Inc. and Choice Hotels France, S.A.*
10.04 Form of Time Sharing Agreement dated , 1996 between Manor Care,
Inc. and the Registrant*
10.05 Form of Corporate Services Agreement, dated , 1996, between
Manor Care, Inc. and the Registrant*
10.06 Form of Employee Benefits Administration Agreement, dated ,
1996, between Manor Care, Inc. and the Registrant*
10.07 Form of Employee Benefits and Other Employment Matters Allocation
Agreement, dated , 1996, between Manor Care, Inc. and the
Registrant*
10.08 Form of Office Lease dated , 1996 between Manor Care, Inc. and
the Registrant*
10.09 Form of Office Lease dated , 1996 between Manor Care, Inc. and
the Registrant*
10.10 Form of Loan Agreement dated , 1996 between MNR Finance Corp.
and the Registrant**
10.11 Form of Procurement Agreement, dated , 1996, between Manor Care,
Inc. and the Registrant*
10.12 Form of Risk Management Consulting Services Agreement, dated ,
1996, between Manor Care, Inc. and the Registrant*
10.13 Form of Tax Administration Agreement, dated , 1996, between
Manor Care, Inc. and the Registrant*
10.14 Form of Tax Sharing Agreement, dated , 1996, between Manor Care,
Inc. and the Registrant*
10.15 Employment Agreement, dated September 1, 1995, between Manor Care, Inc.
and Donald Landry*
10.16 Form of Assignment Agreement, dated , 1996 among Manor Care,
Inc., the Registrant and Donald Landry.*
10.17 Employment Agreement dated , 1996 between the Registrant and
Stewart Bainum, Jr.**
10.18 Agreement, dated June 1, 1996 among the Registrant, Manor Care, Inc. and
Robert C. Hazard, Jr.*
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EXHIBIT
NUMBER DESCRIPTION
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10.19 Agreement, dated June 1, 1996, among the Registrant, Manor Care Inc. and
Gerald W. Petitt*
10.20 Form of Choice Hotels International, Inc. Supplemental Executive
Retirement Plan**
10.21 Form of Choice Hotels International, Inc. Non-Employee Director Stock
Option and Deferred Compensation Stock Purchase Plan**
10.22 Form of Choice Hotels International, Inc. 1996 Non-Employee Director Stock
Compensation Plan**
10.23 Form of Choice Hotels International, Inc. 1996 Long-Term Incentive Plan**
12.01 Statement re: computation of ratio of earnings to fixed charges*
21.01 Subsidiaries of the Registrant*
24.01 Power of Attorney***
27.01 Financial Data Schedule*
99.01 Schedule II -- Valuation and Qualifying Accounts*
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* Filed herewith.
** To be filed by amendment.
*** Previously filed.
4
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHOICE HOTELS HOLDINGS, INC.
Date: August 30, 1996 By: *
--------------------------------------
Name: Stewart Bainum, Jr.
Title: Chief Executive Officer
* /s/ JAMES H. REMPE
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James H. Rempe
Attorney-in-Fact
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INDEX TO EXHIBITS
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EXHIBIT
NUMBER DESCRIPTION
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2.01 Information Statement dated , 1996*...........................
3.01 Form of Restated Certificate of Incorporation of the Registrant*
(attached to Information Statement as Appendix A).......................
3.02 Form of 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 Trademark Agreement, dated , 1996, between Manor Care,
Inc. and the Registrant**...............................................
10.03 Form of Assignment of Marks Agreement dated , 1996 between
Manor Care Hotels International, Inc. and Choice Hotels France, S.A.*...
10.04 Form of Time Sharing Agreement dated , 1996 between Manor
Care, Inc. and the Registrant*..........................................
10.05 Form of Corporate Services Agreement, dated , 1996, between
Manor Care, Inc. and the Registrant*....................................
10.06 Form of Employee Benefits Administration Agreement, dated ,
1996, between Manor Care, Inc. and the Registrant*......................
10.07 Form of Employee Benefits and Other Employment Matters Allocation
Agreement, dated , 1996, between Manor Care, Inc. and the
Registrant*.............................................................
10.08 Form of Office Lease dated , 1996 between Manor Care, Inc. and
the Registrant*.........................................................
10.09 Form of Office Lease dated , 1996 between Manor Care, Inc. and the
Registrant*.............................................................
10.10 Form of Loan Agreement dated , 1996 between MNR Finance Corp.
and the Registrant**....................................................
10.11 Form of Procurement Agreement, dated , 1996, between Manor
Care, Inc. and the Registrant*..........................................
10.12 Form of Risk Management Consulting Services Agreement, dated ,
1996, between Manor Care, Inc. and the Registrant*......................
10.13 Form of Tax Administration Agreement, dated , 1996, between
Manor Care, Inc. and the Registrant*....................................
10.14 Form of Tax Sharing Agreement, dated , 1996, between Manor
Care, Inc. and the Registrant*..........................................
10.15 Employment Agreement, dated September 1, 1995, between Manor Care, Inc.
and Donald Landry*......................................................
10.16 Form of Assignment Agreement, dated , 1996 among Manor Care,
Inc., the Registrant and Donald Landry.*................................
10.17 Employment Agreement dated , 1996 between the Registrant and
Stewart Bainum, Jr.**...................................................
10.18 Agreement, dated June 1, 1996 among the Registrant, Manor Care, Inc. and
Robert C. Hazard, Jr.*..................................................
10.19 Agreement, dated June 1, 1996, among the Registrant, Manor Care Inc. and
Gerald W. Petitt*.......................................................
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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10.20 Form of Choice Hotels International, Inc. Supplemental Executive
Retirement Plan**.......................................................
10.21 Form of Choice Hotels International, Inc. Non-Employee Director Stock
Option and Deferred Compensation Stock Purchase Plan**..................
10.22 Form of Choice Hotels International, Inc. 1996 Non-Employee Director
Stock Compensation Plan**...............................................
10.23 Form of Choice Hotels International, Inc. 1996 Long-Term Incentive
Plan**..................................................................
12.01 Statement re: computation of ratio of earnings to fixed charges*........
21.01 Subsidiaries of the Registrant*.........................................
24.01 Power of Attorney***....................................................
27.01 Financial Data Schedule*................................................
99.01 Schedule II -- Valuation and Qualifying Accounts*.......................
</TABLE>
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* Filed herewith.
** To be filed by amendment.
*** Previously filed.
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[MANOR CARE LETTERHEAD]
, 1996
Dear Manor Care, Inc. Stockholder:
I am pleased to inform you that the Board of Directors of Manor Care, Inc.
("Manor Care") has approved a distribution to our stockholders of all the
outstanding shares of common stock of Choice Hotels Holdings, Inc. ("Choice").
The stock distribution will be made to holders of record of Manor Care common
stock on , 1996. You will receive one share of Choice common
stock for every share of Manor Care common stock you hold on the record date.
As a result of the distribution of Choice common stock to Manor Care
shareholders, you will own shares in two separate and very different companies.
Manor Care will be a pure health care company focused on inpatient skilled
nursing and rehabilitation, assisted living, institutional pharmacy and home
health care. Choice will concentrate on franchising, managing and developing
hotels and other travel-related businesses.
Your Board of Directors and management believe that the separation of the
lodging and health care businesses into two public corporations via the
distribution of Choice common stock will improve capital-raising efficiency as
both debt and equity investors will be better able to assess the different risk
profiles and operating characteristics of both businesses. The distribution will
give Choice direct access to capital markets and will permit it to raise funds
on the basis of its own operating profile and credit fundamentals. Similarly,
Manor Care's cost to obtain financing following the distribution will be
representative of the operating profile and credit fundamentals of a health care
company. In addition, the Board of Directors and management believe that the
distribution will improve strategic freedom and focus at both Choice and Manor
Care.
The enclosed Information Statement explains the proposed distribution in
detail and provides financial and other important information regarding Choice.
We urge you to read it carefully. Holders of Manor Care common stock are not
required to take any action to participate in the distribution as a stockholder
vote is not required in connection with this matter.
Sincerely,
Stewart Bainum, Jr.
Chairman of the Board and
Chief Executive Officer
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PRELIMINARY INFORMATION STATEMENT
CHOICE HOTELS HOLDINGS, INC.
(TO BE RENAMED CHOICE HOTELS INTERNATIONAL, INC.)
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
This Information Statement is being furnished by Manor Care, Inc. ("Manor
Care") in connection with the distribution (the "Distribution") to holders of
record of Manor Care common stock on , 1996 (the "Record Date") of one
share of common stock, par value $.01 per share (the "Company Common Stock"), of
Choice Hotels Holdings, Inc. (the "Company") for each share of Manor Care common
stock. At the time of the Distribution, the Company will own all of the
businesses and assets of, and be responsible for the liabilities associated
with, the lodging and hotel franchise business operations conducted by Manor
Care and certain of its subsidiaries. The distribution will result in 100% of
the outstanding shares of Company Common Stock being distributed to holders of
Manor Care common stock.
The Distribution will be effective as of , 1996 (the
"Distribution Date"). No consideration will be paid by Manor Care's stockholders
for shares of Company Common Stock. Manor Care has received a ruling from the
Internal Revenue Service to the effect that the Distribution is not taxable for
federal income tax purposes to stockholders of the Company and Manor Care. See
"The Distribution -- Federal Income Tax Aspects of the Distribution."
There is no current trading market for the Company's Common Stock, although
it is expected that a "when-issued" trading market will develop prior to the
Distribution Date. Application has been made to list the Company's Common Stock
on the New York Stock Exchange.
Stockholders of Manor Care with inquiries related to the Distribution
should contact the Investor Relations Department of Manor Care at (301)
905-4408. Stockholders of Manor Care with inquiries related to their holdings in
Manor Care should contact Manor Care's stock transfer agent, Chase-Mellon
Shareholder Services, L.L.C., at (212) 946-7200.
IN REVIEWING THIS INFORMATION STATEMENT YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS INFORMATION
STATEMENT.
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NO STOCKHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT. WE ARE
NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
------------------------
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.
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INFORMATION STATEMENT
TABLE OF CONTENTS
PAGE
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Summary............................................................................. 1
Introduction........................................................................ 6
The Distribution.................................................................... 6
Reasons for the Distribution...................................................... 6
Manner of Effecting the Distribution.............................................. 7
Federal Income Tax Aspects of the Distribution.................................... 7
Conditions; Termination........................................................... 8
Listing and Trading of Shares of the Company's Common Stock....................... 8
Risk Factors........................................................................ 9
Relationship Between Manor Care and the Company After the Distribution.............. 13
Financing........................................................................... 16
Capitalization...................................................................... 18
Dividend Policy..................................................................... 18
Selected Historical Financial Data.................................................. 19
Pro Forma Financial Data............................................................ 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 21
Business............................................................................ 25
General........................................................................... 25
The Lodging Industry.............................................................. 25
Franchise Business................................................................ 27
Owned and Managed Lodging Business................................................ 38
Competition....................................................................... 42
Service Marks and Other Intellectual Property..................................... 43
Non-Hotel Properties.............................................................. 43
Seasonality....................................................................... 43
Regulation........................................................................ 44
Insurance......................................................................... 44
Impact of Inflation and Other External Factors.................................... 44
Employees......................................................................... 45
Legal Proceedings................................................................. 45
Environmental Matters............................................................. 45
Management.......................................................................... 47
Executive Officers of the Company................................................. 47
Compensation of Executive Officers................................................ 48
Employment Agreements............................................................. 50
Retirement Plans.................................................................. 51
Option and Stock Purchase Plans................................................... 52
The Board of Directors.............................................................. 52
Directors of the Company.......................................................... 52
Certain Relationships and Related Transactions...................................... 55
Security Ownership of Principal Stockholders and Management......................... 56
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Description of Capital Stock of the Company......................................... 59
Common Stock...................................................................... 59
Preferred Stock................................................................... 59
Preemptive Rights................................................................. 59
Purposes and Effects of Certain Charter and By-law Provisions....................... 59
General........................................................................... 59
Liability and Indemnification of Officers and Directors............................. 60
Elimination of Liability in Certain Circumstances................................. 60
Indemnification and Insurance..................................................... 60
Available Information............................................................... 61
Index to Combined Financial Statements.............................................. F-1
Appendix A -- Form of Restated Certificate of Incorporation of the Company.......... A-1
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SUMMARY
The following summarizes certain information contained elsewhere in this
Information Statement. Reference is made to, and this summary is qualified by,
the more detailed information set forth in this Information Statement, which
should be read in its entirety. Unless the context otherwise requires, all
references herein to the Company and to Manor Care shall include their
respective subsidiaries and all references herein to the Company prior to the
Distribution Date shall refer to the Lodging Business (as defined herein) as
operated by Manor Care. As used with respect to financial information, "Parent"
refers to Manor Care. Unless otherwise indicated, all statistical information
and data relating to the hotel industry in this Information Statement are
derived from information provided by Smith Travel Research. Smith Travel
Research has not provided any form of consultation, advice, or counsel regarding
any aspects of, and is in no way whatsoever associated with, the proposed
transaction.
THE COMPANY
The Company is a leading international hotel franchisor and a major owner
and manager of hotel properties. Both franchise and owned and managed hotel
properties principally operate under one of the Company's brand names:
Comfort(R), Quality(R), Clarion(R), Sleep(R), Rodeway(R) and Econo Lodge(R). In
addition, the Company recently introduced a new brand, MainStay Suites(SM). For
the fiscal year ended May 31, 1996, hotel franchising contributed 58.5% of the
Company's revenues and 73.0% of the Company's gross profits, while hotel
ownership and management contributed the remaining 41.5% of revenues and 27.0%
of gross profits. The Company's franchise operations and owned and managed hotel
operations have experienced significant growth in revenues and profitability
over the last few years. The Company's compound annual growth rate since fiscal
year 1991 was 20.1% for revenues and 21.8% for net income before unusual items.
For the fiscal year ended May 31, 1996, total revenues and net income were
$374.9 million and $8.5 million, respectively. Excluding unusual items, net
income for the period was $28.6 million.
FRANCHISE OPERATIONS. The Company is one of the world's largest
franchisors of hotels with 3,052 properties open and operating in 30 countries
at May 31, 1996. As a franchisor, the Company licenses hotel operators to use
the Company's brand names and provides to these hotel operators products and
services designed to increase their revenues and profitability. Key products and
services provided include nationally recognized marketing and advertising
programs, access to a reservation system that delivers business to the
franchisees' hotels, access to innovative products and services developed by the
Company and other support services such as training programs, purchasing
discounts, operating manuals, quality standards and inspections.
In return for the use of the Company's brand names and access to the
Company's products and services, franchisees pay to the Company fees that are
generally based on a percentage of the franchise hotels' gross room revenues.
Since fiscal year 1994, the Company has grown revenues from franchise operations
at a compound annual rate of 15.1%, while direct franchise expenses have
increased at a compound annual rate of 8.8%. During the same period, gross
margins have improved from 56.5% for fiscal year 1994 to 61.1% for fiscal year
1996.
Key components of the Company's franchise strategy include:
- growth of the Company's domestic franchise system;
- increases in average actual royalty rates;
- strategic development of the international franchise system;
- expansion of preferred vendor programs; and
- pursuit of selected strategic investments and acquisitions.
The Company's existing franchisees form a pool of potential buyers and
builders of new hotels that may affiliate with one of the Company's brands. The
Company believes that its focus on improving the performance of its franchisees
through the provision of revenue- and profitability-enhancing systems and
1
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services will enable it to retain these franchisees and attract new franchisees
to its system. The Company is able to meet the needs of franchisees across a
wide range of market segments by maintaining an array of distinct brands, each
with its own marketing and operating strategy. The Company expects to continue
to expand its brand offerings by developing new brands for high-growth segments
of the hospitality industry.
OWNED AND MANAGED OPERATIONS. In addition to acting as franchisor, the
Company owns and manages hotels. At May 31, 1996, the Company owned and managed,
under its six principal brand names, 79 hotels in 25 states, as well as in
Germany, France and England. To take advantage of a recovering lodging industry,
the Company has pursued, over the past few years, a strategy of acquiring
domestic hotel properties at prices below their replacement cost and increasing
their value through the investment of capital to improve the physical site and
the installation of professional management and marketing teams to operate the
renovated properties. Since June 1992, the Company has spent approximately
$242.7 million to buy and renovate 52 hotel properties.
Under the Company's management and consistent with overall industry
improvements, the operating performance of hotels acquired pursuant to this
strategy has improved substantially. Occupancies at domestic hotels acquired
during fiscal year 1993 have improved from 56% in fiscal year 1993 to 76% in
fiscal year 1996, while occupancies for fiscal year 1994 domestic acquisitions
have improved from 66% in fiscal year 1994 to 74% in fiscal year 1996 and
occupancies for fiscal year 1995 domestic acquisitions have improved from 49% in
fiscal year 1995 to 58% in fiscal year 1996. Overall, revenues from owned and
managed hotel operations have grown at a compound annual rate of 44.9% since
fiscal year 1994, while hotel operations expenses have increased at a compound
annual rate of 32.9%. As a result, gross margins of the owned and managed hotel
operations have improved from 19.0% for fiscal year 1994 to 31.9% for fiscal
year 1996. Because many of the recently acquired and developed hotels have not
yet reached stabilized levels of operating performance, the Company believes
that revenues and gross profit at these hotels will continue to grow.
The Company's strategy for its owned and managed operations is to monetize
its capital investment in Company-owned hotels at values that reflect their
improved operating performance. The Company is exploring a variety of
transactions, including, among others, asset securitization, sale/leasebacks,
joint ventures with third parties, debt financing and asset divestitures. The
Company intends to retain management and franchise agreements relating to these
properties. The proceeds from these transactions will be used initially to repay
outstanding indebtedness. The remaining proceeds will be used to launch or
provide support to recently developed brands such as Sleep Inn and MainStay
Suites, to develop additional new brands, to expand internationally by investing
in selected international gateway cities and to invest in other targeted growth
areas.
2
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THE DISTRIBUTION
Reasons for the
Distribution.................. The Board of Directors and management of Manor
Care believe that the separation of Manor
Care's health care and lodging businesses into
two public companies via the Distribution will
improve capital-raising efficiency as both debt
and equity investors will be better able to
assess the different risk profiles and
operating characteristics of both businesses.
The Distribution will give the Company direct
access to capital markets and will permit it to
raise funds on the basis of its own operating
profile and credit fundamentals. Similarly,
Manor Care's cost to obtain financing following
the Distribution will be representative of the
operating profile and credit fundamentals of a
health care company. In addition, the Board of
Directors and management of Manor Care believe
that the Distribution will improve strategic
freedom and focus at both Choice and Manor
Care. See "The Distribution -- Reasons for the
Distribution."
Distributed Company........... Choice Hotels Holdings, Inc. (the "Company"), a
Delaware corporation (to be renamed Choice
Hotels International, Inc.) and a wholly-owned
subsidiary of Manor Care, will, on the
Distribution Date, own all of the business and
assets of, and be responsible for all of the
liabilities associated with, the lodging and
hotel franchise business operations conducted
by Manor Care and certain of its subsidiaries
(the "Lodging Business").
Distributing Company.......... Manor Care, Inc., a Delaware corporation
("Manor Care").
Securities to Be
Distributed................... Approximately shares (the "Shares")
of common stock, par value $.01 per share of
the Company, based on shares of
common stock, par value $.10 per share, of
Manor Care ("Manor Care Common Stock")
outstanding as of , 1996.
Distribution Ratio............ One share of Company Common Stock for each
share of Manor Care Common Stock.
Tax Consequences.............. Manor Care has received a ruling from the
Internal Revenue Service to the effect, among
other things, that receipt of the Shares by
stockholders of Manor Care is tax free for
federal income tax purposes. See "The
Distribution -- Federal Income Tax Aspects of
the Distribution."
Listing and Trading Market.... Application has been made to list the Shares on
the New York Stock Exchange under the symbol
"CHH." See "The Distribution -- Listing and
Trading of Shares of the Company's Common
Stock."
Record Date................... Close of business on , 1996.
Distribution Date............. As of , 1996. On the Distribution
Date, Manor Care will deliver the Shares to the
Distribution Agent. As soon as practicable
thereafter, the Distribution Agent will mail
certificates representing the appropriate
number of Shares to the Manor Care stockholders
entitled thereto. See "The
Distribution -- Manner of Effecting the
Distribution."
Distribution Agent............ , the transfer agent for the
Company.
The Company's Dividend Policy
After the Distribution........ It is currently contemplated that following the
Distribution, the Company will not pay cash
dividends on the Shares.
3
<PAGE> 8
Certain Charter and
By-law Provisions........... Certain provisions of the Restated Certificate
of Incorporation (the "Restated Certificate")
and the Amended By-laws ("the By-laws") of the
Company have the effect of delaying or making
more difficult an acquisition of control of the
Company in a transaction not approved by its
Board of Directors. These provisions have been
designed to enable the Company, especially in
its initial years, to develop its businesses
and foster its long-term growth without
disruptions caused by the threat of a takeover
not deemed by its Board of Directors to be in
the best interest of the Company. See "Purposes
and Effects of Certain Charter and By-law
Provisions." The Restated Certificate would
eliminate certain liabilities of directors in
connection with the performance of their
duties. See "Liability and Indemnification of
Officers and Directors -- Elimination of
Liability in Certain Circumstances."
Risk Factors.................. Stockholders should carefully consider all of
the information contained in this Information
Statement, including the matters described
under "Risk Factors."
Principal Office of the
Company....................... 10750 Columbia Pike, Silver Spring, Maryland
20901. Its telephone number is (301) 979-5000.
Relationship between Manor
Care and the Company after the
Distribution................ For purposes of governing the ongoing
relationships between Manor Care and the
Company after the Distribution Date and in
order to provide for an orderly transfer of the
Lodging Business to the Company and facilitate
the transition to two separate publicly traded
companies, Manor Care and the Company have
entered into a distribution agreement and
various other agreements with respect to, among
other things, intercompany debt, tax matters,
employee benefits, risk management and
corporate and administrative services. See
"Relationship Between Manor Care and the
Company After the Distribution." The
relationship between Manor Care and the Company
may be subject to certain potential conflicts
of interest. See "Risk Factors -- Potential
Conflicts with Manor Care."
4
<PAGE> 9
SUMMARY FINANCIAL INFORMATION
The following table summarizes certain selected financial information with
respect to the Company and is derived from the Combined Financial Statements of
the Company. Historical financial information may not be indicative of the
Company's future performance as an independent company. The information set
forth below is qualified in its entirety by reference to, and should be read in
conjunction with, "Selected Historical Financial Data," "Pro Forma Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Combined Financial Statements and related notes included
elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------------------
1994 1995 1996 PRO FORMA(A)
-------- -------- -------- 1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT RATIO DATA)
STATEMENT OF INCOME DATA:
Revenues........................................... $239,764 $302,535 $374,873 $387,819
Operating expenses................................. 206,722 250,476 334,083(b) 349,961(b)
-------- -------- -------- ------------
Income before other expenses and income taxes...... 33,042 52,059 40,790 37,858
Interest expense on notes payable to Parent........ 10,665 15,492 19,673 20,339
Minority interest and other interest
and other expenses, net.......................... 4,699 6,612 5,259 3,727
-------- -------- -------- ------------
Income before income taxes......................... 17,678 29,955 15,858 13,792
Income taxes....................................... 8,019 13,144 7,400 6,429
-------- -------- -------- ------------
Net income............................... $ 9,659 $ 16,811 $ 8,458 $ 7,363
======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
MAY 31,
-------------------
1995 1996
-------- --------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................... $(34,663) $ (7,606)
Total assets....................................... 391,475 491,304
Notes payable to Parent............................ 198,522 225,723
Total debt......................................... 251,191 294,861
Investments and advances from Parent............... 65,829 147,559
RATIO DATA:
Ratio of earnings to fixed charges (c)............. 2.47x 1.63x
======== ========
</TABLE>
- ---------------
(a) The pro forma statement of operations data for the year ended May 31, 1996
gives effect to (i) the Distribution and related transactions and (ii) the
acquisition by the Company of an aggregate of 16 hotels during fiscal year
1996, as if all such transactions had occurred on June 1, 1995.
(b) Includes a provision of $33.3 million for impairment of certain long-lived
assets associated primarily with the Company's European operations and
certain restructuring costs, including severance and employee benefit plan
restructuring costs, directly associated with the Distribution.
(c) Earnings used in computing the ratio of earnings to fixed charges consist of
income before income taxes, fixed charges and extraordinary items. Fixed
charges consist of interest expense, including amounts capitalized and the
amortization of deferred financing fees, and that portion of operating lease
rental expense that is representative of interest (deemed to be one-third of
operating lease rentals).
5
<PAGE> 10
INTRODUCTION
The Company is one of the world's largest franchisors of hotels with 3,052
properties and a total of 261,456 rooms open and operating in 30 countries at
May 31, 1996. The properties principally operate under one of the Company's
brand names: Comfort, Quality, Clarion, Sleep, Rodeway and Econo Lodge. In
addition, the Company recently introduced a new brand, MainStay Suites. At May
31, 1996, another 716 franchise properties with a total of 63,785 rooms were
under development. In addition to acting as franchisor, at May 31, 1996, the
Company owned and managed, under its six principal brand names, 79 hotels in 25
states, as well as in Germany, France and England.
On March 7, 1996, the Board of Directors of Manor Care announced its
intention to distribute to holders of Manor Care Common Stock all of the
outstanding Shares. On March 6, 1996, the high and low sales prices of the Manor
Care Common Stock as reported on the New York Stock Exchange Composite Tape were
$39 and $38 5/8, respectively. On , 1996, the Board of Directors of
Manor Care declared a dividend to effect the Distribution and set the Record
Date and Distribution Date. On , 1996, the high and low sales prices
of the Manor Care Common Stock as reported on the New York Stock Exchange
Composite Tape were $ and $ , respectively. Following the Distribution,
Manor Care will not own any Shares or other capital stock of the Company, but
will have certain contractual relationships with the Company. See "Relationship
Between Manor Care and the Company After the Distribution."
The Company, a Delaware corporation, was incorporated on June 27, 1996, and
is currently a wholly-owned subsidiary of Manor Care with no operations. Prior
to the Distribution, the Lodging Business has been conducted as a separate
division and through certain subsidiaries of Manor Care, including Choice Hotels
International, Inc., a wholly-owned subsidiary of Manor Care. On the
Distribution Date, Manor Care will contribute to the Company the Lodging
Business (including all of the stock of Choice Hotels International, Inc. and
the other subsidiaries comprising the Lodging Business, together with certain
assets relating to the Lodging Business held by Manor Care) and the Company will
change its name to Choice Hotels International, Inc. The existing Choice Hotels
International, Inc. will be renamed Choice Hotels Franchising, Inc.
Stockholders of Manor Care with inquiries relating to the Distribution
should contact the Investor Relations Department of Manor Care at (301)
979-4408. After the Distribution Date, stockholders of the Company should
contact the Investor Relations Department of Choice at (301) 979-5000.
THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
The Board of Directors and management of Manor Care have determined, for
the reasons set forth below, among others, to separate the Lodging Business from
Manor Care's other businesses.
The Board of Directors and management of Manor Care believe that the
separation of its health care and lodging businesses into two public
corporations via the distribution of the Shares will improve capital-raising
efficiency as both debt and equity investors will be better able to assess the
different risk profiles and operating characteristics of both businesses. The
Distribution will give the Company direct access to capital markets and will
permit it to raise funds on the basis of its own operating profile and credit
fundamentals. Similarly, Manor Care's cost to obtain financing following the
Distribution will be representative of the operating profile and credit
fundamentals of a health care company. In addition, the Board of Directors and
management believe that the Distribution will improve strategic freedom and
focus at both the Company and Manor Care.
The Board of Directors and management of Manor Care also believe that the
Distribution will (i) facilitate the expansion of each of Manor Care and the
Company through future acquisitions by making the stock of each entity a more
effective consideration with which to make any such acquisitions, (ii) enable
Manor Care and the Company to motivate their respective key employees, and
attract new employees, by offering incentives such as stock options whose value
will be directly affected by the performance of Manor
6
<PAGE> 11
Care or the Company, as the case may be, and (iii) simplify the process of
allocating indirect corporate overhead costs in computing governmental
reimbursements to the health care business.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions of the Distribution are set forth in the
distribution agreement (the "Distribution Agreement") to be entered into by the
Company and Manor Care prior to the Distribution.
Upon satisfaction of all the conditions contained in the Distribution
Agreement, it is contemplated that the Distribution will be made as of
, 1996 (the "Distribution Date") to stockholders of record of Manor
Care at the close of business on , 1996 (the "Record Date"). On the
Distribution Date, the Shares will be delivered to the Distribution Agent for
distribution as soon as practicable thereafter to holders of record of Manor
Care Common Stock as of the close of business on the Record Date on the basis of
one share of Company Common Stock for each share of Manor Care Common Stock held
on the Record Date. The actual total number of Shares to be distributed will
depend on the number of shares of Manor Care Common Stock outstanding on the
Record Date. All such Shares will be fully paid and non-assessable and the
holders thereof will not be entitled to preemptive rights. See "Description of
Capital Stock of the Company." Following the Distribution, the Company will
operate as an independent public company.
No holder of Manor Care Common Stock will be required to pay any cash or
other consideration for the Shares received in the Distribution or to surrender
or exchange shares of Manor Care Common Stock in order to receive Shares.
FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION
Manor Care has received a ruling from the Internal Revenue Service to the
effect, among other things, that, for federal income tax purposes, the
Distribution will qualify as a tax-free spin-off under Section 355 of the
Internal Revenue Code of 1986, as amended, and that:
(1) No gain or loss will be recognized to (and no amount will be
included in the income of) holders of Manor Care Common Stock upon the
receipt of the Shares in the Distribution;
(2) Assuming that on the Distribution Date a holder of Manor Care
Common Stock holds Manor Care Common Stock as a capital asset, the holding
period for the Shares to be received in the Distribution will include the
period during which the Manor Care Common Stock was held;
(3) The tax basis of Manor Care Common Stock held by a Manor Care
stockholder at the time of the Distribution will be allocated, based upon
relative fair market values at the time of the Distribution, between such
Manor Care Common Stock and the Shares received by the stockholder in the
Distribution; and
(4) No gain or loss will be recognized by Manor Care or the Company on
the Distribution.
Within 90 days after the Distribution, Manor Care will provide to Manor
Care stockholders additional information regarding the allocation referred to in
(3) above.
Internal Revenue Service rulings, while generally binding on the Internal
Revenue Service, are subject to certain factual representations and assumptions.
Manor Care is not aware of any material facts or circumstances which would cause
such representations or assumptions to be untrue but there can be no assurance
that such representations and assumptions will continue to be true after the
Distribution Date.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF THE DISTRIBUTION UNDER CURRENT LAW AND IS INTENDED FOR GENERAL INFORMATION
ONLY. EACH STOCKHOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE
PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH STOCKHOLDER, INCLUDING THE
APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS, AND THE EFFECT OF POSSIBLE
CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE.
7
<PAGE> 12
CONDITIONS; TERMINATION
The Distribution Agreement provides that the Distribution is subject to
certain conditions, including final approval of the Manor Care Board of
Directors. See "Relationship Between Manor Care and the Company After the
Distribution -- Distribution Agreement." Even if all the conditions are
satisfied, the Manor Care Board of Directors may, in its discretion, terminate,
defer, modify or abandon the Distribution.
LISTING AND TRADING OF SHARES OF THE COMPANY'S COMMON STOCK
Application has been made for listing of the Shares on the New York Stock
Exchange (the "NYSE") under the symbol "CHH." As of the Distribution Date, the
Company is expected to have approximately holders of record of the
Shares, based on the number of holders of record of Manor Care Common Stock on
the Record Date.
There is not currently a public market for the Shares. Prior to the
Distribution, the Shares are expected to begin trading on a "when-issued" basis
on a date to be determined by the NYSE. If the Distribution is not made, all
such "when-issued" trading will be null and void. Prices at which the Shares may
trade prior to the Distribution on a "when-issued" basis or after the
Distribution cannot be predicted. The prices at which the Shares trade will be
determined by the marketplace and may be influenced by many factors, including,
among others, the depth and liquidity of the market for the Shares, investor
perception of the Company and the industry in which its businesses participate,
the Company's dividend policy and general economic and market conditions. See
the description of the dividend policy of the Company under "Dividend Policy."
The Shares distributed to Manor Care stockholders will be freely
transferable, except for Shares received by persons who may be deemed to be
"affiliates" of the Company under the Securities Act of 1933, as amended (the
"Securities Act"). Persons who may be deemed to be affiliates of the Company
after the Distribution generally include individuals or entities that control,
are controlled by, or are under common control with the Company and may include
certain officers and directors of the Company. Persons who are affiliates of the
Company will be permitted to sell their Shares only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemption afforded
by Section 4(1) of the Securities Act and Rule 144 promulgated thereunder.
8
<PAGE> 13
RISK FACTORS
RISKS OF THE LODGING INDUSTRY; COMPETITION
General. Competition in the lodging business for hotel guests is based
upon many factors, including rates, quality of accommodations, brand
recognition, service levels, convenience and desirability of locations and
general, regional and local economic conditions. During the 1980s, construction
of lodging facilities in the United States resulted in an excess supply of
available rooms. This oversupply had an adverse effect on occupancy levels and
room rates, and therefore hotel values, in the industry in the early 1990s.
Although the current outlook for the industry has improved, there can be no
assurance that in the future the lodging industry, including the Company, its
hotels and its franchisees, will not be adversely affected again by an
oversupply of rooms or by (i) national and regional economic conditions, (ii)
changes in travel patterns, gasoline prices and other costs of travel and
demographics, (iii) natural disasters, (iv) seasonality of the hotel business,
(v) taxes and government regulations that influence or determine wages, prices,
interest rates, refurbishment or improvement plans, construction procedures and
operating costs and (vi) the availability of credit. Due in part to the strong
correlation between the lodging industry's performance and economic conditions,
the lodging industry is subject to cyclical changes in revenues and profits.
Risks of Franchise Business. As a franchisor, the Company's products are
its brand names and the support services it provides to its franchisees.
Competition among national brand franchisors in the lodging industry to grow
their franchise systems is intense. In addition, smaller chains pose some degree
of competitive pressure in selected markets. The Company believes that
competition for the sale of lodging franchises is based principally upon the
perceived value and quality of the brand and services as well as the nature of
those services offered to franchisees. The Company believes that prospective
franchisees value a franchise based upon their view of the relationship of the
costs imposed to the potential for increased revenue and profitability.
The Company's franchising revenues vary directly with franchisees' gross
room revenues, but are not directly dependent upon franchisees' profitability.
The Company believes, however, that the perceived value of its brand names to
prospective franchisees is in part a function of the success of its existing
franchisees. The ability of the Company's franchisees to compete in the lodging
industry is important to the Company's prospects because franchise fees are
primarily based on franchisees' gross room revenues. The Company's franchisees
are generally in intense competition with franchisees of other systems,
independent properties and owner-operated chains.
Risks of Developing, Acquiring and Owning Hotels. As an owner of hotels,
the Company is subject to the risks of construction and operation of lodging
facilities generally. Developing new hotels and acquiring hotels with
repositioning potential subjects the Company to pre-opening, pre-stabilization
and repositioning costs. As the Company opens additional Company-owned hotels,
such costs may adversely affect the Company's results of operations. Newly
opened hotels historically begin with lower occupancy and room rates that
improve over time. While the Company has in the past successfully opened or
repositioned new hotels, there can be no assurance that it will be able to
continue to do so. Construction, acquisition and repositioning of hotels involve
certain risks, including the possibility of construction cost overruns and
delays, site acquisition cost and availability, uncertainties as to market
potential, market deterioration after the acquisition or repositioning, possible
unavailability of financing on favorable terms and the emergence of market
competition from unanticipated sources. Although the Company seeks to manage its
construction, acquisition and repositioning activities so as to minimize such
risks, there can be no assurance that any such projects will perform in
accordance with the Company's expectations.
Hotel investments are relatively illiquid. Such illiquidity will tend to
limit the ability of the Company to respond to changes in economic or other
conditions. The Company's ownership of real property is substantial. Real estate
values are sensitive to changes in local market and economic conditions and to
fluctuations in the economy as a whole. In addition, the Company is subject to
the general risks of fluctuation in the hotel real estate transaction market,
which is impacted by variable prices and the availability of financing. There
can be no assurance that the Company's development, acquisition, repositioning
or disposition plans will not be adversely affected by changes in the real
estate market.
9
<PAGE> 14
Risks of Hotel Management. The Company currently manages 85 hotel
properties, including its 79 owned hotels and 6 properties managed under
agreements with third parties. In connection with its monetization strategy, the
Company expects to substantially increase the number of hotel properties managed
pursuant to third party management agreements. Management agreements expire or
are acquired, terminated or renegotiated in the ordinary course. There can be no
assurance that such third party agreements will be on terms as favorable to the
Company as existing intercompany agreements.
RISK OF GEOGRAPHIC CONCENTRATION
A substantial portion of the Company's franchise and owned hotels are
located in the southeastern United States. Such geographic concentration exposes
the Company's operating results to events or conditions that specifically affect
that region, such as economic, weather and other conditions. Adverse
developments that specifically affect the southeastern United States may have a
material adverse effect on the business, financial condition or results of
operations of the Company.
ABILITY TO IMPLEMENT MONETIZATION STRATEGY
The Company's strategy for its owned and managed operations is to monetize
its capital investment in Company-owned hotels at values that reflect their
improved operating performance. The Company is exploring a variety of
transactions, including, among others, asset securitizations, sale/leasebacks,
joint ventures with third parties, debt financings and asset divestitures. The
Company intends to retain management and franchise agreements relating to these
properties. The proceeds from these transactions will be used initially to repay
amounts owed to Manor Care. See "Financing -- The Manor Care Loan Agreement."
The Company currently intends to consummate any such transactions only if the
Company is able to retain the management and franchise contracts for such
hotels. Although transactions of the types being explored by the Company are
common in the hotel industry, there can be no assurance that the Company will be
able to successfully execute these plans. Furthermore, the Company's plan to
retain management and franchise contracts for such hotels will make certain
transactions more difficult to consummate. If the Company is not able to
successfully implement its monetization strategy, the Company will be unable to
reduce amounts owed to Manor Care as planned and will be required to obtain
additional sources of financing to repay such amounts before they come due on
, 1999. There can be no assurance that the Company will be able to
obtain such financing on favorable terms or in a timely manner.
UNAVAILABILITY OF MANOR CARE FINANCIAL RESOURCES
Historically, adequate financial resources were available from Manor Care
to meet operating and investment needs of the Company. Following the
Distribution, the Company will no longer have access to Manor Care financial
resources and will be required to obtain financing based on its own credit
fundamentals as well as repay amounts owed to Manor Care. The Company will have
access to its cash flow from operations, which previously was distributed up to
Manor Care as part of Manor Care's internal cash management system. In addition,
the Company expects to have access to a revolving credit facility and is
currently negotiating the terms thereof with potential bank lenders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." There can be no assurance that
the lack of access to Manor Care's financial resources will not adversely affect
the Company's ability to obtain additional financing on favorable terms.
MARKET ACCEPTANCE OF NEW BRANDS AND PRODUCTS
As part of its growth strategy, the Company is developing new brands, such
as MainStay Suites(SM), an extended-stay lodging product, and new products, such
as Choice Picks(SM), a customized modular food service system for hotels and
other institutions. The Company has no operating history in either the
extended-stay lodging market or the food court service business and there can be
no assurance that either Main Stay Suites or Choice Picks will experience market
acceptance or that the Company will be successful in franchising these or other
new brands or products. Further, there can be no assurance that the capital
investments made by the Company to develop these and other new brands or
products will be recovered, or that such new brands or
10
<PAGE> 15
products will be profitable. As of May 31, 1996, the Company has invested
approximately $4.3 million in developing and marketing MainStay Suites and
Choice Picks, which includes $1.6 million to begin the construction of MainStay
Suites. The failure to successfully franchise these and other new brands could
have a material adverse effect on the business, financial condition and results
of operations of the Company.
RELIANCE ON KEY PERSONNEL
The ability of the Company to operate successfully is dependent, in part,
upon the continued services of certain of its employees, including Stewart
Bainum, Jr., the Chairman and Chief Executive Officer of the Company and Manor
Care, Inc. and Donald J. Landry, the President of the Company. Mr. Bainum, Jr.'s
employment agreement with the Company will be for a term of years from the
Distribution Date. Mr. Landry's employment agreement with Choice Hotels
International, Inc. extends through November 30, 1999. There can be no assurance
that a suitable replacement for either Mr. Bainum, Jr. or Mr. Landry could be
found in the event of termination of either of their employment. Following the
Distribution, Mr. Bainum, Jr. will devote approximately one-third of his
professional time to the affairs of the Company.
SIGNIFICANT BAINUM FAMILY INTEREST
Upon completion of the Distribution, Stewart Bainum, Stewart Bainum, Jr.,
and Barbara Bainum are expected to beneficially own approximately 19.8%, 19.3%
and 2.9%, respectively, of the Company Common Stock, in each case including
shares with respect to which voting power is shared with other individuals or
entities. See "Security Ownership of Principal Stockholders and Management." In
addition, Mr. Bainum, Mr. Bainum, Jr., and Ms. Bainum will be directors of the
Company. As a result, the Bainum family may be in a position to significantly
influence the affairs of the Company, including the election of directors.
POTENTIAL CONFLICTS WITH MANOR CARE
The Company and Manor Care will share four common directors. Stewart Bainum
serves as Vice Chairman and Stewart Bainum, Jr. serves as Chairman of the Board
of Directors and Chief Executive Officer of both Manor Care and the Company. Mr.
Bainum, Jr. will devote two-thirds of his time to Manor Care and one-third of
his time to the Company. Mr. Bainum, Jr.'s employment by both companies and his
consequent inability to devote 100% of his time to either company could create a
conflict in the future. Certain officers and directors of Manor Care and the
Company also own shares (and/or options or other rights to acquire shares) in
both companies. In connection with the Distribution, the Company and Manor Care
will enter into various contractual arrangements and the potential exists for
disagreement in the future as to contract compliance. For a description of the
Company's ongoing relationship with Manor Care, see "Relationship Between Manor
Care and the Company After the Distribution."
POTENTIAL INDEMNIFICATION OBLIGATIONS
Pursuant to the Distribution Agreement, the Company will indemnify Manor
Care and its subsidiaries and affiliates from liabilities of predecessor
companies of Manor Care relating to waste disposal sites which allegedly are or
may be subject to remedial action under federal and state environmental laws.
The indemnity covers all losses arising from pending and future actions that are
not covered by Manor Care's insurance. Manor Care and its insurers are
vigorously contesting liability in the pending actions and it is not possible at
the present time to estimate the Company's ultimate indemnification liability,
if any. The Company believes that its indemnification obligations, if any, will
not have a material adverse effect on its business, financial conditions or
results of operations. See "Relationship Between Manor Care and the Company
After the Distribution -- Distribution Agreement -- Certain Environmental and
Other Claims Indemnification" and "Business -- Environmental Matters."
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements contained in this Information Statement, including in
the sections entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" contain
11
<PAGE> 16
"forward-looking" information (as defined in the U.S. Private Securities
Litigation Reform Act of 1995) that involves risk and uncertainties, including
(i) the Company's plans to monetize its capital investment in owned hotels, (ii)
the Company's plans to expand its international franchise operations, (iii) the
Company's plans to market new brands and products and (iv) the Company's plans
to make selected strategic investments and acquisitions. Actual future results
and trends may differ materially depending on a variety of factors discussed in
this "Risk Factors" section and elsewhere in this Information Statement,
including (a) the Company's success in implementing its business strategy,
including its success in arranging financing where required, (b) the nature and
extent of future competition, and (c) political, economic and demographic
developments in countries where the Company does business or in the future may
do business.
12
<PAGE> 17
RELATIONSHIP BETWEEN MANOR CARE
AND THE COMPANY AFTER THE DISTRIBUTION
For purposes of governing the ongoing relationships between Manor Care and
the Company after the Distribution Date, and in order to provide for an orderly
transfer of the Lodging Business to the Company and facilitate the transition to
two separate publicly-traded companies, Manor Care and the Company have entered
or will enter into various agreements setting forth the Company's and Manor
Care's on-going responsibilities regarding various matters outlined below. The
agreements summarized in this section are included as exhibits to the Company's
Registration Statement on Form 10 of which this Information Statement is a part.
The following summaries are qualified in their entirety by reference to such
exhibits.
DISTRIBUTION AGREEMENT
On or prior to the Distribution Date, the Company and Manor Care will enter
into the Distribution Agreement which provides for, among other things, the
principal corporate transactions required to effect the Distribution, the
assumption by the Company of all liabilities relating to the Lodging Business
(to the extent not covered by Manor Care's insurance) and the allocation between
the Company and Manor Care of certain other liabilities, certain indemnification
obligations of the Company and Manor Care and certain other agreements governing
the relationship between the Company and Manor Care with respect to or in
consequence of the Distribution. The Distribution Agreement provides that the
Distribution is subject to the prior satisfaction of certain conditions
including, among other things, the transfer of the Lodging Business to the
Company, the execution of all ancillary agreements, certain of which are
described below, to the Distribution Agreement and the formal approval of the
Distribution by the Board of Directors of Manor Care.
CROSS-INDEMNIFICATION. Subject to certain exceptions, the Company has
agreed to indemnify Manor Care and its subsidiaries against any loss, liability
or expense incurred or suffered by Manor Care or its subsidiaries arising out of
or related to the failure by the Company to perform or otherwise discharge
liabilities allocated to and assumed by the Company under the Distribution
Agreement, and Manor Care has agreed to indemnify the Company against any loss,
liability or expense incurred or suffered by the Company arising out of or
related to the failure by Manor Care to perform or otherwise discharge the
liabilities retained by Manor Care under the Distribution Agreement. The
foregoing cross-indemnities do not apply to indemnification for tax claims and
liabilities, which are addressed in the Tax Sharing Agreement described below,
and indemnification for environmental claims and liabilities specifically
addressed by the provision described below. The Distribution Agreement also
includes procedures for notice and payment of indemnification claims and
provides that the indemnifying party may assume the defense of a claim or suit
brought by a third party.
CERTAIN ENVIRONMENTAL AND OTHER CLAIMS INDEMNIFICATION. In addition to the
indemnification described above, the Company has agreed to indemnify Manor
HealthCare Corp. ("HealthCare"), Manor Care, their affiliates, subsidiaries and
their respective directors, employees and agents (collectively, the
"Indemnitees") from any and all losses which may arise from (i) certain pending
environmental claims; and (ii) currently unknown but potential or future
environmental, third party personal injury and other claims arising out of the
activities or operations of, or conditions affecting properties formerly or
presently owned, leased, operated or used by, Cenco Incorporated a corporation
that was merged into HealthCare in 1982, its subsidiary and affiliated
companies, and any and all of Cenco Incorporated's predecessor corporations,
subsidiaries and affiliates (together, "Cenco"). The losses to be indemnified by
the Company include, among other things, all amounts required to be reimbursed
to a third-party insurer for insurance proceeds previously paid by the insurer,
all deductible amounts required to be paid under any insurance policy before
coverage attaches to a claim, all amounts paid to third parties in excess of
insurance coverage, all amounts not paid by insurers with respect to current,
potential and future claims and, as to certain sites owned by affiliates of
HealthCare, all sums necessary to comply with any and all federal, state and
local regulatory and judicial consent decrees or orders or any settlements
regarding environmental remediation of these properties in excess of the
reserves reflected in the most recent monthly balance sheet of HealthCare
available prior to the Distribution Date. The Company cannot predict the amount
it may have to pay to Indemnitees in the future to satisfy this indemnity
obligation. See "Business -- Environmental Matters" and "Risk
Factors -- Potential Indemnification Obligations."
13
<PAGE> 18
INTERCOMPANY ADVANCES AND ACCOUNTS. The Distribution Agreement provides
that on or prior to the Distribution Date the Company and a subsidiary of Manor
Care will enter into a loan agreement pursuant to which the Company will repay
to Manor Care over a three year period approximately $225.7 million in advances
made by Manor Care to the Company prior to the Distribution Date. See
"Financing -- The Manor Care Loan Agreement." All other intercompany loans or
advances have been or will be contributed to the capital of the Company.
CREDIT FACILITIES. The Distribution Agreement provides that, as a
condition to the Distribution, on or prior to the Distribution Date, Manor Care
will amend and restate its existing credit facility so as to release the Company
and any subsidiaries engaged in the Lodging Business from any liability or
obligation with respect thereto, and the Company will enter into a separate
revolving credit facility. See "Financing -- Credit Facility."
NON-COMPETE. The Distribution Agreement provides that until five years
after the Distribution Date, Manor Care and its subsidiaries shall not compete
with the lodging business of the Company, provided that Manor Care may engage in
any line of business in which the Company is not engaged, as of the Distribution
Date, including the operation of assisted living facilities, independent living
facilities or any business similar thereto, and the Company shall not compete
with the health care business or any such other business of Manor Care.
GUARANTEES. The Distribution Agreement provides that Manor Care will
continue to guarantee certain mortgages and other long term debt of the Company
outstanding on the Distribution Date. The Company will pay Manor Care a
guarantee fee equal to 2.0% per annum of the aggregate principal amount of such
guaranteed obligations and other long term debt subject to such guarantees.
EXPENSES. The Distribution Agreement provides that except as otherwise
specifically provided, all costs and expenses incurred in connection with the
preparation, execution, delivery and implementation of the Distribution
Agreement and with the consummation of the transactions contemplated by the
Distribution Agreement (including transfer taxes and the fees and expenses of
all counsel, accountants and financial and other advisors) shall be paid by the
party incurring such cost or expense. Notwithstanding the foregoing, the Company
shall be obligated to pay the legal, filing, accounting, printing and other
accountable and out-of-pocket expenditures in connection with the preparation,
printing and filing of the Registration Statement on Form 10 and obtaining
financing.
TAX SHARING AGREEMENT
On or prior to the Distribution Date, the Company and Manor Care will enter
into the Tax Sharing Agreement for purposes of allocating pre-Distribution tax
liabilities among the Company and Manor Care and their respective subsidiaries.
In general, Manor Care will be responsible for (i) filing consolidated federal
income tax returns for the Manor Care affiliated group and combined or
consolidated state tax returns for any group that includes a member of the Manor
Care affiliated group, including in each case the Company and its subsidiaries
for the periods of time that such companies were members of the applicable group
and (ii) paying the taxes relating to such tax returns to the applicable taxing
authorities. The Company will reimburse Manor Care for the portion of such taxes
that relates to the Company and its subsidiaries, as determined based on their
hypothetical separate company income tax liabilities. In addition, the Company
will assume liability for all taxes payable by the Company or by Manor Care in
the event the Distribution is determined not be tax free for federal income tax
purposes. Manor Care and the Company have agreed to cooperate with each other,
and to share information, in preparing such tax returns and in dealing with
other tax matters.
EMPLOYEE BENEFITS ALLOCATION AGREEMENT
On or prior to the Distribution Date, the Company and Manor Care will enter
into an Employee Benefits and Other Employment Matters Allocation Agreement (the
"Employee Benefits Allocation Agreement").
The Employee Benefits Allocation Agreement provides for the allocation
subsequent to the Distribution of employee benefits, as they relate to employees
who remain employed by Manor Care or its subsidiaries
14
<PAGE> 19
("Manor Care Employees") after the Distribution and employees who are employed
by the Company after the Distribution ("Company Employees"). During the period
beginning on the Distribution Date and ending on December 31, 1996, the Company
shall pay to Manor Care, on a monthly basis, a payment equal to 2.1% of the
payroll for all Company Employees. In consideration therefor, during such
period, Manor Care will assume responsibility for all funding obligations and
current plan year matching contributions attributable to certain retirement and
savings plans specified in the Employee Benefits Allocation Agreement. During
the same period, the Company will also pay to Manor Care a monthly fee for each
Company Employee receiving services and benefits under a Manor Care medical
plan. Pursuant to the Employee Benefits Allocation Agreement, Manor Care will
continue sponsorship of the various Manor Care profit sharing plans, retirement
plans, stock plans and health and welfare plans with respect to Manor Care
Employees. The Company will establish a number of plans which will allow the
Company to provide to its employees substantially the same benefits currently
provided to them as employees of Manor Care. With respect to each Manor Care
profit sharing and retirement plan, Manor Care shall transfer to the Company, as
soon as practicable after the Distribution Date, an amount representing the
present value of the full accrued benefit of all Company Employees who had
earned a benefit under any such Manor Care plan. The Employee Benefits
Allocation Agreement provides for cross-guarantees between the Company and Manor
Care with respect to the payment of benefits under certain plans and for
cross-indemnification with respect to pre-Distribution employment-related
claims.
The Employee Benefits Allocation Agreement also provides for the adjustment
of outstanding stock options. On the Distribution Date (i) each Manor Care
Employee holding a nonqualified Manor Care stock option or an incentive stock
option to purchase Manor Care Common Stock will receive for each such option a
conversion award consisting of an option to purchase Manor Care Common Stock,
with the number of shares that may be acquired and the option price adjusted
pursuant to a formula designed to preserve the financial value of the options
and (ii) each Company Employee holding a nonqualified Manor Care stock option or
an incentive stock option to purchase Manor Care Common Stock will receive for
each such option a conversion award consisting of an option to purchase Company
Common Stock, with the number of shares that may be acquired and the option
price adjusted pursuant to a formula designed to preserve the financial value of
the options. Certain employees holding nonvested nonqualified options to acquire
Manor Care Common Stock may make a one-time election with respect to such
nonvested nonqualified options to (1) receive a conversion award that relates
exclusively to nonvested nonqualified options to acquire the common stock of the
company by which he or she will be employed after the Distribution Date or (2)
receive a conversion award with respect to which one-half relates nonvested
nonqualified options to acquire to the common stock of the company by which he
or she will be employed after the Distribution Date and one-half is
proportionately allocated between nonvested nonqualified options to acquire
Manor Care Common Stock and nonvested nonqualified options to acquire Company
Common Stock based upon the relative trading values of such common stocks on the
Distribution Date. Certain employees holding vested nonqualified options to
acquire Manor Care Common Stock may make a one-time election to specify the
manner in which such vested nonqualified stock options shall be allocated
between a conversion award relating to vested nonqualified stock options to
acquire Manor Care Common Stock and vested nonqualified stock options to acquire
Company Common Stock.
LEASE AGREEMENTS
On or prior to the Distribution Date, the Company and Manor Care will enter
into a lease agreement with respect to the building complex (the "Complex") in
Silver Spring, Maryland at which the Company's principal executive offices are
located (the "Silver Spring Lease"). Pursuant to the Silver Spring Lease, the
Company will lease from Manor Care for a period of 30 months certain office
space (approximately 30% of the Complex initially, with provisions to allow the
Company to use additional square footage as needed) at a monthly rental rate
equal to one-twelfth of the operating expenses (as defined therein) of the
Complex net of third party rental income paid to Manor Care by other tenants of
the Complex, less a pro rata portion of the operating expenses attributable to
the space occupied by Manor Care (initially approximately 29% of the Complex).
At the beginning of each fiscal year following the Distribution Date, Manor
Care's occupancy percentage will be redetermined. Operating expenses include all
of the costs associated with operating and maintaining the Complex including,
without limitation, supplies and materials used to maintain the Complex,
15
<PAGE> 20
wages and salaries of employees who operate the Complex, insurance for the
Complex, costs of repairs and capital improvements to the Complex, the fees of
the property manager (which may be Manor Care), costs and expenses associated
with leasing space at the Complex and renovating space rented to tenants, costs
of environmental inspection, testing or cleanup, principal and interest payable
on indebtedness secured by mortgages against the Complex, or any portion
thereof, and charges for utilities, taxes and facilities services. On or prior
to the Distribution Date, the Company and Manor Care will also enter into (i) a
sublease agreement with respect to certain office space in Gaithersburg,
Maryland pursuant to which the Company will be obligated to rent from Manor
Care, on terms similar to the Silver Spring Lease, certain additional space as
such space becomes available during the 30 month period following the
Distribution Date and (ii) a sublease agreement with respect to a certain hotel
property in Pikesville, Maryland, pursuant to which the Company will sublease
the property from Manor Care on the same terms and conditions that govern Manor
Care's rights and interests under the lease relating to such property.
OTHER AGREEMENTS
On or prior to the Distribution Date, the Company and Manor Care will enter
into certain other agreements that will, as of 12:00 midnight on the
Distribution Date, fix the respective responsibilities of Manor Care and the
Company regarding the following: the provision by Manor Care of certain
corporate services (including administrative, accounting, systems, and, for a
fixed annual fee of $1.0 million, certain consulting services), the transfer to
the Company of certain intellectual property rights, the availability to the
Company of certain aircraft owned by Manor Care, the provision by Manor Care of
certain risk management services, the procurement by Manor Care of certain
products and supplies used in the Lodging Business, and other miscellaneous
matters. None of these agreements extends for a period greater than 30 months
from the Distribution Date and they are not, either alone or in the aggregate,
expected to materially affect the Company or its results of operations.
FINANCING
THE MANOR CARE LOAN AGREEMENT
It is expected that on or prior to the Distribution Date, the Company and a
subsidiary of Manor Care will enter into a loan agreement (the "Loan
Agreement"), which shall govern the repayment by the Company of an aggregate of
$225.7 million previously advanced to the Company by Manor Care. The Loan
Agreement will contain a number of covenants that will, among other things,
restrict the ability of the Company and its subsidiaries to make certain
investments, incur debt, change its line of business, dispose of assets, create
liens, sell receivables, enter into transactions with affiliates and otherwise
restrict certain corporate activities. The Loan Agreement will also restrict the
Company's ability to pay dividends. In addition, the Loan Agreement will
contain, among other financial covenants, requirements that the Company maintain
specified financial ratios, including maximum leverage and minimum interest
coverage. Interest on the amount of the loan will be payable semiannually at a
rate of 9% per annum. The loan will mature on , 1999 and may be
prepaid in whole or in part, together with accrued interest, without penalty, at
the option of the Company. The Company will be required to prepay the loan with
the proceeds from the monetization of Company-owned hotels.
CREDIT FACILITY
The Company currently is negotiating a commitment from a bank lender
pursuant to which such lender, together with other financial institutions, will,
from and after the Distribution Date, provide the Company with a revolving
credit facility in an aggregate principal amount of $100 million (the "Credit
Facility"). The Credit Facility will have a maturity of three years, subject to
extension, at the request of the Company, for up to two additional periods of
one year each. A portion of the Credit Facility not in excess of $25 million
shall be available for the issuance of letters of credit. Upon consummation of
the Distribution, approximately $50.0 million will be drawn by the Company and
used to refinance an equivalent amount borrowed by the Lodging
16
<PAGE> 21
Business under Manor Care's credit facility. The remaining availability under
the Credit Facility will be used for working capital and general corporate
purposes.
The Credit Facility will contain a number of covenants that will, among
other things, restrict the ability of the Company and its subsidiaries to make
certain investments, incur debt, change its line of business, dispose of assets,
create liens, sell receivables, enter into transactions with affiliates and
otherwise restrict certain corporate activities. The Credit Facility will also
restrict the Company's ability to pay dividends. In addition, the Credit
Facility will contain, among other financial covenants, requirements that the
Company maintain specified financial ratios, including maximum leverage and
minimum interest coverage.
17
<PAGE> 22
CAPITALIZATION
The following table sets forth the unaudited combined capitalization of the
Company as of May 31, 1996. This data should be read in conjunction with the
Company's financial statements and the notes thereto that are included elsewhere
in this Information Statement.
<TABLE>
<CAPTION>
MAY 31, 1996
--------------
(IN THOUSANDS)
<S> <C>
Debt (including current portion)
Mortgage loans and other long term debt.............................. $ 69,138
Notes payable to Parent.............................................. 225,723
--------
Total debt................................................... 294,861
Equity................................................................. 147,559
--------
Total capitalization......................................... $442,420
========
</TABLE>
DIVIDEND POLICY
It is currently contemplated that following the Distribution, the Company
will not pay cash dividends on the Shares. The payment of dividends, if any, in
the future will be a business decision to be made at the discretion of the Board
of Directors of the Company from time to time based on the Company's earnings
and financial position and such other considerations as the Board of Directors
of the Company considers relevant. In addition, the Loan Agreement and the
Credit Facility will restrict the Company's ability to pay dividends. See
"Financing."
18
<PAGE> 23
SELECTED HISTORICAL FINANCIAL DATA
The following selected combined financial data of the Company and its
subsidiaries should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Combined
Financial Statements and related notes included elsewhere herein. The income
statement and balance sheet data for the fiscal years ended May 31, 1993, 1994,
1995 and 1996 are derived from the audited combined financial statements of the
Company.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------------------
1993 1994 1995 1996
-------- -------- -------- --------
1992
--------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues
Franchise....................................... $125,347 $137,346 $165,581 $188,021 $219,164
Hotel operations................................ 34,878 41,361 74,183 114,514 155,709
-------- -------- -------- -------- --------
Total revenues........................... 160,225 178,707 239,764 302,535 374,873
-------- -------- -------- -------- --------
Operating expenses
Franchise marketing............................. 33,772 37,567 45,373 45,510 49,658
Franchise reservations.......................... 23,261 22,941 26,685 28,738 35,677
Hotel operations................................ 20,432 35,255 60,062 84,711 106,120
Selling, general and administrative expenses.... 45,949 44,745 57,081 69,676 83,267
Depreciation and amortization................... 12,924 14,605 17,521 21,841 26,026
Provision for asset impairment and
restructuring................................. -- -- -- -- 33,335(a)
-------- -------- -------- -------- --------
Total operating expenses................. 136,338 155,113 206,722 250,476 334,083
-------- -------- -------- -------- --------
Income before other expenses and income taxes..... 23,887 23,594 33,042 52,059 40,790
-------- -------- -------- -------- --------
Other expenses
Interest expense on notes payable to Parent..... -- 7,083 10,665 15,492 19,673
Minority interest............................... 1,004 900 1,476 2,200 1,532
Other interest and other
expenses, net................................. 1,441 2,177 3,223 4,412 3,727
-------- -------- -------- -------- --------
Total other expenses..................... 2,445 10,160 15,364 22,104 24,932
-------- -------- -------- -------- --------
Income before income taxes........................ 21,442 13,434 17,678 29,955 15,858
Income taxes...................................... 8,660 5,780 8,019 13,144 7,400
-------- -------- -------- -------- --------
Net income........................................ $ 12,782 $ 7,654 $ 9,659 $ 16,811 $ 8,458
======== ======== ======== ======== ========
BALANCE SHEET DATA
Total assets...................................... $194,078 $250,371 $303,158 $391,475 $491,304
Notes payable to Parent........................... -- $ 78,700 $147,061 $198,522 $225,723
Total debt........................................ $ 20,902 $129,670 $200,875 $251,191 $294,861
Total liabilities................................. $ 50,313 $159,624 $247,950 $325,646 $343,745
Total investments and advances from Parent........ $143,765 $ 90,747 $ 55,208 $ 65,829 $147,559
</TABLE>
- ---------------
(a) The Company recorded a charge of $28.1 million for impairment of long-lived
assets associated primarily with the Company's European operations.
Additionally, the Company recorded a charge of $5.2 million related to
certain restructuring costs, including severance and employee benefit plan
restructuring costs, directly associated with the Distribution.
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<PAGE> 24
PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined statements of income of the
Company give effect to (i) the Distribution and related transactions and (ii)
the acquisition by the Company of an aggregate of 16 hotels during fiscal year
1996 (the "1996 Acquisitions"), as if the Distribution and related transactions
and the 1996 Acquisitions had occurred on June 1, 1995. The pro forma financial
data are provided for information purposes only and do not purport to be
indicative of the results that actually would have been obtained if the
Distribution and related transactions and the 1996 Acquisitions had been
effected on the date indicated or of those results that may be obtained in the
future. The pro forma combined statement of income is based on preliminary
estimates. The actual recording of the transactions will be based on actual
costs. Accordingly, the actual recording of the Distribution and related
transactions and the 1996 Acquisitions can be expected to differ from these pro
forma financial statements. No pro forma balance sheet is presented as there
were no pro forma adjustments to the historical balance sheet.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED MAY 31, 1996
<TABLE>
<CAPTION>
DISTRIBUTION ACQUISITIONS
HISTORICAL ADJUSTMENTS(A) ADJUSTMENTS(B) PRO FORMA
---------- -------------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues
Franchise.................................. $ 219,164 $ 219,164
Hotel operations........................... 155,709 $ 12,946 168,655
-------- -------- --------
Total revenues..................... 374,873 12,946 387,819
-------- -------- --------
Operating expenses
Franchise marketing........................ 49,658 49,658
Franchise reservations..................... 35,677 35,677
Hotel operations........................... 106,120 9,676 115,796
Selling, general and administrative
expenses................................ 83,267 $ 4,100(c)
90(d) 324 87,781
Depreciation and amortization.............. 26,026 1,688 27,714
Provision for asset impairment and
restructuring........................... 33,335 33,335
-------- ------- -------- --------
Total operating expenses........... 334,083 4,190 11,688 349,961
-------- ------- -------- --------
Income before other expenses and income
taxes...................................... 40,790 (4,190) 1,258 37,858
-------- ------- -------- --------
Other expenses
Interest expense on notes payable to
Parent.................................. 19,673 666 20,339
Minority interest.......................... 1,532 (1,532)(e) --
Other interest and other expenses.......... 3,727 3,727
-------- ------- -------- --------
Total other expenses............... 24,932 (1,532) 666 24,066
-------- ------- -------- --------
Income before income taxes................... 15,858 (2,658) 592 13,792
Income taxes................................. 7,400 (1,249)(f) 278 6,429
-------- ------- -------- --------
Net income................................... $ 8,458 $ (1,409) $ 314 $ 7,363
======== ======= ======== ========
Net income per share......................... $ 0.12(g)
========
</TABLE>
- ---------------
(a) Reflects the effect of the Distribution and related transactions.
(b) Reflects the incremental impact of the 1996 Acquisitions.
(c) Reflects the net additional costs associated with staffing of accounting,
finance, cash management, risk management, human resources and legal
personnel, directors' costs, incremental rental costs and the payment of
certain consulting fees to Manor Care.
(d) Reflects the estimated cost of the Manor Care Guarantee Fee.
(e) Reflects the elimination of minority interest associated with the purchase
of minority equity.
(f) Reflects tax benefits at the Company's effective tax rate of 47% related to
deduction of incremental costs per note (c).
(g) Pro forma income per share is computed by dividing pro forma net income by
the pro forma weighted average number of outstanding common shares,
aggregating 62.6 million in 1996. The pro forma weighted average number of
outstanding common shares is based on Manor Care's weighted average number
of outstanding common shares at May 31, 1996.
20
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On March 7, 1996, Manor Care announced the Distribution. The Distribution
will separate the lodging and healthcare businesses of Manor Care into two
public corporations. As a result of the announced Distribution, Manor Care's
historical financial statements have been restated to report the Lodging
Business as discontinued operations. Included herein are the historical results
of operations of the Lodging Business for the years ended May 31, 1996, 1995,
and 1994 as if it had been a separate entity for all periods presented. Upon
completion of the Distribution, the operations of the Company will consist
principally of the hotel franchise operations and the owned and managed hotel
operations formerly conducted by Manor Care directly or through Manor Care's
subsidiaries. The Distribution will result in the division of certain of Manor
Care's existing corporate functions between the two resulting entities.
Historically, Manor Care allocated to its operating units all corporate overhead
expenses specifically identified with such units' operations. These allocations
will be discontinued after the Distribution and responsibility for these support
functions will be assumed by the Company. The Company will establish its own
accounting, finance, cash management, risk management, human resources and legal
departments separate from Manor Care's. Accordingly, selling, general and
administrative expenses in the historical financial statements may not be
indicative of such costs in the future. In addition, the Lodging Business'
historical operating results do not reflect any estimated incremental costs
expected to be incurred by the Company to support its operations as a
stand-alone entity after the Distribution. See "Pro Forma Financial Data."
The principal factors that affect the Company's results are: growth in the
number of hotels; occupancies and room rates achieved by the Company's brands;
the number and relative mix of owned, managed and franchised hotels; and the
Company's ability to manage costs. The number of rooms at franchised properties
and occupancies and room rates significantly affect the Company's results
because franchise royalty fees are based upon room revenues at franchised
hotels. Increases in franchise and management fee revenues have a
disproportionate impact on the Company's operating margin due to the lower
incremental costs associated with these revenues.
COMPARISON OF FISCAL YEAR RESULTS
Net income was $8.5 million for fiscal year 1996, a decrease of $8.4
million, or 49.7%, compared to fiscal year 1995. In fiscal year 1995, net income
increased $7.2 million, or 74.0%, compared to fiscal year 1994. Net income in
fiscal year 1996 includes a charge of $33.3 million relating to asset impairment
and restructuring charges.
Revenues increased $72.3 million, or 23.9%, to $374.9 million in fiscal
year 1996, while operating expenses increased $83.6 million, or 33.4%, to $334.1
million, resulting in an $11.3 million, or 21.7%, decrease in operating profits.
This compares to an increase of $62.8 million, or 26.2%, in revenues for fiscal
year 1995 and an increase of $43.8 million, or 21.2%, in expenses for fiscal
year 1995.
The Company's franchise revenues for fiscal years 1996, 1995 and 1994
increased $31.1 million, or 16.6%, $22.4 million, or 13.6%, and $28.2 million,
or 20.5%, respectively. Franchise revenues include base royalty fees, marketing
fund assessments and fees charged for utilization of the Company's centralized
hotel reservation system. These fees and assessments are generally calculated
based on a percentage of the franchised hotels total revenues and reservation
call volume. The increases in franchise revenues were principally the result of
fees generated from franchisees. In fiscal year 1996, increases in franchise
fees were primarily attributable to increases in domestic royalties of $10.6
million, increases in reservation fees of $7.5 million and increases in
marketing fees of $4.5 million. In fiscal year 1995, increases in franchise fees
were primarily attributable to increases in domestic royalties of $9.1 million,
reservation fees of $3.0 million and marketing fees of $1.1 million. In fiscal
year 1994, increases in franchise fees were primarily attributable to increases
in domestic royalties of $6.3 million, reservation fees of $4.6 million and
marketing fees of $6.3 million. The remaining portion of the increase for each
fiscal year relates to European operations and other international revenues.
Revenues at franchise hotels increased as a result of increased average daily
room rates and average actual royalty rates. Average daily room rates of
domestic franchise hotels increased by
21
<PAGE> 26
approximately 5.0% for fiscal year 1996 and 3.3% for fiscal year 1995. Average
actual royalty rates of domestic franchise hotels were 3.5%, 3.2% and 3.1% in
fiscal 1996, 1995 and 1994, respectively. Increased daily room rates of the
domestic franchise hotels resulted from both general strengthening in lodging
industry fundamentals and national and local marketing efforts provided by the
Company to franchisees. Average occupancies remained constant at 63.8% in fiscal
year 1996 and 1995. In fiscal year 1994, average occupancies were 62.2%.
The Company's hotel operations revenues for fiscal years 1996, 1995 and
1994 increased $41.2 million, or 36.0%, $40.3 million, or 54.4%, and $32.8
million, or 79.2%, respectively. The increases in revenue were principally the
result of additional room capacity achieved through hotel acquisitions completed
during fiscal years 1993 through 1996. During this period, the Company purchased
a total of 52 hotels containing over 7,485 rooms. Overall average occupancies
were 64.8% in fiscal year 1996 compared to 64.1% in fiscal year 1995 and 60.4%
in fiscal year 1994. Overall average daily room rates increased 8.0% from fiscal
year 1995 to fiscal year 1996 and 5.0% from fiscal year 1994 to fiscal year
1995. These occupancy and rate increases were the result of marketing efforts in
both new and existing markets as well as a general strengthening of lodging
industry fundamentals. Increases in food and beverage sales of $3.2 million and
$3.1 million in fiscal years 1996 and 1995, respectively, also contributed to
revenue growth.
Franchise marketing expenses increased 9.1% from fiscal year 1995 to fiscal
year 1996 and remained flat from fiscal year 1994 to fiscal year 1995. These
increases in expenses were offset by corresponding increases in marketing fees
charged to the Company's franchise hotels.
Franchise reservation expenses increased 24.2% and 7.7% in fiscal years
1996 and 1995 from the prior fiscal years, respectively. Increases in
reservation expenses relate primarily to growth in labor costs (approximately
36% of the increase) and systems maintenance costs (approximately 36% of the
increase) stemming from increased reservation services provided to the Company's
franchisees and their customers. Call volume related to reservation sales for
franchised hotels was 18.1 million, 16.6 million and 15.0 million for fiscal
years 1996, 1995 and 1994, respectively. These increases in expenses were offset
by corresponding increases in reservation fees charged to the Company's
franchise hotels.
Hotel operating expenses increased 25.3% and 41.0% for fiscal years 1996
and 1995, respectively, of which approximately 3.0%, and 4.0%, respectively,
related to food and beverage costs. Increases in hotel operating expenses
resulted, principally from the addition of hotels. Hotel operating margins
increased to 31.9% in fiscal year 1996 from 26.0% in fiscal year 1995 and 19% in
fiscal year 1994, as marketing efforts enhanced occupancies in the newly
renovated and repositioned acquired hotels.
Selling, general and administrative expenses increased $13.6 million, or
19.5%, for fiscal year 1996 and $12.6 million, or 22.1%, for fiscal year 1995
compared to the prior years. As a percent of total revenues, selling, general
and administrative expenses declined to 22.2% in fiscal year 1996 from 23.0% in
fiscal year 1995 and 23.8% in fiscal year 1994. Selling, general and
administrative expenses include the cost of product sales to franchisees made
through the Company's group purchasing program for franchisees. Increases in
selling, general and administrative expenses principally resulted from higher
cost of sales on increased product sales volume. Cost of product sales was $20.7
million, $13.9 million and $12.0 million for fiscal years 1996, 1995 and 1994,
respectively. The remaining increases in selling, general and administrative
expenses were due primarily to additional general and administrative costs
associated with the Company's acquired domestic properties and growth in the
Company's European lodging business. Management expects that, after the
Distribution, selling, general and administrative expenses will increase due to
additional costs associated with staffing of accounting, finance, cash
management, risk management, human resources and legal personnel, directors'
costs, incremental rental costs and the payment of certain consulting fees to
Manor Care. Management currently estimates an increase of approximately $4.1
million.
In fiscal year 1996, the Company recorded a charge against earnings of
$33.3 million relating to impairment of certain long-lived assets and
restructuring costs. The most significant components of the charge related to
impairment of assets associated with the Company's European operations and
certain restructuring costs, including severance and employee benefit plan
restructuring costs, directly associated with the Distribution. During fiscal
year 1996, in connection with the Company's equity investment in Friendly
Hotels, PLC, the Company restructured its European operations to focus more
specifically on selected geographic
22
<PAGE> 27
markets. The Company performed a review of its European operations and
determined that certain assets associated with these operations were impaired.
These assets relate primarily to European properties opened or acquired in
fiscal years 1993 and 1994. The Company's experience shows that newly opened or
acquired properties require up to three years to reach stabilized operating
levels. Operating results at the affected properties have not improved as
expected over the three year period. The amount of the impairment charge was
measured in accordance with the Company's policy. See the Combined Financial
Statements and related notes included elsewhere herein.
Depreciation and amortization expense increased 19.2% in fiscal year 1996
to $26.0 million. In fiscal year 1995, depreciation and amortization expense
increased 24.7%. Increases were due to acquisitions and renovation of the 52
hotels acquired from fiscal years 1993 through 1996.
Interest expense on notes payable to Parent increased 27.0% in fiscal year
1996 and 45.3% in fiscal year 1995. Other interest expense and other expenses
decreased 15.5% in fiscal year 1996 and increased 36.9% in fiscal year 1995. The
decrease in other interest expense in fiscal year 1996 related to the payoff of
a third party financed mortgage on a hotel property, as well as regularly
scheduled principal reductions on other third party financing. The increases
from fiscal year 1994 to fiscal year 1995 were principally due to borrowings to
finance the acquisition of the 36 acquired hotels and the acquisition of the
Resthotel Primevere hotel chain. The majority of Resthotel Primevere's
operations are franchise related and located within France.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 1996 and May 31, 1995, notes payable to Parent by the Company
totaling $225.7 million and $198.5 million, respectively, were outstanding. The
notes are due three years from the Distribution Date. Interest is charged at an
annual rate of 9% on the indebtedness. The notes payable to Parent are expected
to be repaid with the proceeds from the planned monetization of the Company's
owned hotels or third party financing. Historically, all cash received by the
Company has been deposited in or combined with Manor Care's corporate funds as
part of Manor Care's cash management system. Following the Distribution, the
Company will maintain its own cash balances and will implement an internal cash
management system. In addition, the Company expects to have access to a
revolving credit facility and is currently negotiating the terms thereof with
potential bank lenders. See "Financing -- Credit Facility." Management believes
cash flows from operations, third party financing sources and the proceeds from
the planned monetization of the Company's owned hotels will be adequate to
support on-going operations and meet debt service requirements for the
foreseeable future. If the Company is unable to successfully implement its
monetization strategy with respect to Company-owned hotels, the Company will
need to secure additional sources of financing to repay the Loan Agreement on
, 1999. Net cash provided by operating activities for fiscal year 1996
was $54.7 million, an increase of 14.3% from the prior fiscal year. Net cash
provided by operating activities for fiscal year 1995 was $47.9 million, an
increase of 7% from the prior fiscal year.
The Company's working capital ratio at May 31, 1996 and May 31, 1995 was
0.8 and 0.4, respectively. The Company attempts to minimize its investment in
net current assets. Historically, the Company has been assured adequate
financing through Manor Care to meet seasonal fluctuations in working capital
requirements. Subsequent to the Distribution, the Company will utilize its
revolving credit facility to meet seasonal fluctuations in working capital
requirements.
Investment in property and equipment includes routine capital expenditures
for renovation and maintenance of the Company's owned hotels, as well as new
developments and enhancements of reservations and finance systems relating to
franchise operations. During the fiscal year ended May 31, 1996, the Company
purchased 16 operating hotels for $49.6 million. During the fiscal year ended
May 31, 1995, the Company purchased 16 operating hotels for $59.8 million.
The Company plans capital expenditures for development of Sleep Inns and
MainStay Suites of $34.0 million and $68.6 million in fiscal years 1997 and
1998, respectively. These amounts include expected capital expenditures for the
construction of 10 Sleep Inns and 12 MainStay Suites over the next two fiscal
years. Planned capital expenditures for routine renovation and maintenance of
existing properties are $14.7 million and $16.3 million for fiscal years 1997
and 1998, respectively. Additionally, the Company plans capital
23
<PAGE> 28
expenditures of approximately $8.0 million over the next two fiscal years for
significant system enhancements. Future capital expenditures will be financed
with cash flow from operations, proceeds from the monetization of the Company's
owned hotels or third party financing.
Long term debt and notes payable to Parent totaled $294.2 million at May
31, 1996 compared to $250.6 million at May 31, 1995. Notes payable to Parent
totaling $225.7 million are to be repaid over a three year period from the
Distribution Date. The increase in long term debt and notes payable to Parent is
mainly attributable to the Company's acquisition of 16 operating hotels in
fiscal year 1996.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company is required to adopt SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," no
later than fiscal year 1997. The Company's current policy is to regularly review
the recoverability of the net carrying value of its long-lived assets and make
adjustments accordingly. The adoption of SFAS No. 121 is not expected to have a
material impact on the Company's financial statements.
The Company is required to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation," no later than fiscal year 1997. Management expects to adopt SFAS
No. 123 utilizing the method which provides for disclosure of the impact of
stock-based compensation grants.
24
<PAGE> 29
BUSINESS
GENERAL
The Company is a leading international hotel franchisor and a major owner
and manager of hotel properties. Both franchise and owned and managed hotel
properties principally operate under one of the Company's brand names: Comfort,
Quality, Clarion, Sleep, Rodeway, and Econo Lodge. In addition, the Company
recently introduced a new brand, MainStay Suites. For the nine months ended May
31, 1996, hotel franchising contributed 58.5% of the Company's revenues and
73.0% of the Company's gross profits, while hotel ownership and management
contributed the remaining 41.5% of revenues and 27.0% of gross profits. The
Company's franchise operations and owned and managed hotel operations have
experienced significant growth in revenues and profitability over the last few
years. The Company's compound annual growth rate since fiscal year 1991 was
20.1% for revenues and 21.8% for net income before unusual items. For the fiscal
year ended May 31, 1996 total revenues and net income were $374.9 million and
$8.5 million, respectively. Excluding unusual items net income for the period
was $28.6 million.
FRANCHISE OPERATIONS The Company is one of the world's largest franchisors
of hotels with 3,052 properties open and operating in 30 countries at May 31,
1996. At May 31, 1996, another 716 franchise properties with a total of 63,785
rooms were under development. As a franchisor, the Company licences hotel
operators to use the Company's brand names and provides to these hotel operators
products and services designed to increase their revenues and profitability. Key
products and services provided include nationally recognized marketing and
advertising programs, access to a reservation system that delivers business to
the franchisees' hotels, access to innovative products and services developed by
the Company and other support services such as training programs, purchasing
discounts, operating manuals, quality standards and inspections. In return for
the use of the Company's brand names and access to the Company's products and
services, franchisees pay to the Company fees that are generally based on a
percentage of the franchise hotels' gross room revenues.
OWNED AND MANAGED OPERATIONS In addition to acting as franchisor, the
Company owns and manages hotels. At May 31, 1996, the Company owned and managed,
under its six principal brand names, 79 hotels in 25 states, as well as in
Germany, France and England. To take advantage of a recovering lodging industry,
the Company over the past few years has pursued a strategy of acquiring domestic
hotel properties at prices below their replacement cost and increasing their
value through the investment of capital to improve the physical site and the
installation of professional management and marketing teams to operate the
renovated properties. Since June 1992, the Company has spent approximately
$242.7 million to buy and renovate 52 hotel properties. The Company's strategy
for its owned and managed operations is to monetize its capital investment in
Company-owned hotels at values that reflect their improved operating
performance. The Company is exploring a variety of transactions including, among
others, asset securitization, sale/leasebacks, joint ventures with third
parties, debt financing and asset divestitures. The Company intends to retain
management and franchise agreements relating to these properties.
THE LODGING INDUSTRY
As of June 1996, there are approximately 3.3 million hotel rooms in the
United States in hotels/motels containing twenty or more rooms. Of those rooms,
approximately 1.2 million rooms are not affiliated with a national or regional
brand, while the remaining approximately 2.1 million rooms are affiliated with a
brand either through franchise or the ownership/management of a national or
regional chain.
During the late 1980s, the industry added approximately 500,000 hotel rooms
to its inventory due largely to a favorable hotel lending environment, the
ability of hotel operators to regularly increase room rates and the
deductibility of passive tax losses, which encouraged hotel development. As a
result, the lodging industry saw an oversupply of rooms and a decrease in
industry performance.
The lodging industry in recent years has demonstrated a recovery, based on
year-to-year increases in room revenues, occupancy rates, revenue per available
room ("RevPAR"), and lodging industry profitability. RevPAR is calculated by
multiplying the percentage of occupied rooms by the average daily room rate
charged. Since 1993, the lodging industry has been able to increase its average
daily rate ("ADR") at a pace
25
<PAGE> 30
faster than the increase in the Consumer Price Index ("CPI"), a common measure
of inflation published by the US Department of Labor. Smith Travel Research's
estimates indicate that occupancy rates in 1996 will increase to 66.4% from
65.5% in 1995, in part because of increases in room demand attributable to the
1996 Summer Olympics, the 1996 national political campaigns and conventions, and
a continued improvement in the national economy. The following chart
demonstrates the recent trends:
THE US LODGING INDUSTRY'S GROWTH TRENDS SINCE 1991
<TABLE>
<CAPTION>
INCREASE IN AVERAGE
ROOM DAILY INCREASE INCREASE REVENUE PER
REVENUE (ROOM) IN ADR IN CPI AVAILABLE NEW
VERSUS OCCUPANCY RATES VERSUS VERSUS ROOM PROFITS ROOMS
YEAR PRIOR YEAR RATES (ADR) PRIOR YEAR PRIOR YEAR (REVPAR) (IN BILLIONS) ADDED
- -------------- ----------- --------- ------- ---------- ---------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992.......... N/A 62.1% $59.65 N/A 2.9% $ 37.04 break-even 34,000
1993.......... 6.3% 63.1% $61.30 2.8% 2.7% $ 38.68 $2.4 38,000
1994.......... 8.6% 64.7% $64.24 4.8% 2.7% $ 41.56 $5.5 44,000
1995.......... 7.9% 65.5% $67.34 4.8% 2.9% $ 44.11 $8.5 56,000
1996*......... N/A 66.4% $71.00 5.4% 2.9% $ 46.68 N/A 60,000 -
70,000
</TABLE>
- ---------------
Source: Smith Travel Research
* Estimated
The Company believes the lodging industry can be divided into three
categories: luxury or upscale, middle-market and economy. The Company believes
the luxury category generally has room rates above $70 per night, the
middle-market category generally has room rates between $46 and $70 per night
and the economy category generally has room rates less than $46 per night.
Service is a distinguishing characteristic in the lodging industry.
Generally there are three levels of service: full-service hotels (which offer
food and beverage services, meeting rooms, room service and similar guest
services); limited-service hotels (which offer amenities such as swimming pools,
continental breakfast, or similar services); and all-suites hotels (which
usually have limited public areas, but offer guests two rooms or one room with
distinct areas, and which may or may not offer food and beverage services).
The Company's Econo Lodge, Rodeway and Sleep brands compete primarily in
the limited-service economy market; the Company's Comfort and Quality brands
compete primarily in the limited-service middle-market; the Company's Clarion
brand competes primarily in the full-service upscale market; and the Company's
MainStay Suites brand will compete primarily in the all-suites middle-market.
New hotels opened in recent years typically have been limited service
hotels, as limited-service hotels are less costly to develop, enjoy higher gross
margins, and tend to have better access to financing. These hotels typically
operate in the economy and middle-market categories and are located in suburban
or highway locations. From 1993 to 1996, the average room count in new hotels
declined from 123 to 80, primarily because hotel developers found it difficult
to obtain financing of more than $3 million from their primary lending sources
(local banks and Small Business Administration guaranteed loan programs).
In recent years, operators of hotels not owned or managed by major lodging
companies have increasingly joined national hotel franchise chains as a means of
remaining competitive with hotels owned by or affiliated with national lodging
companies. Because hotels typically operate with high fixed costs, increases in
revenues generated by affiliation with a franchise lodging chain can improve a
hotel's financial performance. Of approximately 933 hotel properties that
changed their affiliation in 1995, 77% converted from independent status to
affiliation with a chain or converted from one chain to another, while only 23%
canceled or were required to cancel their chain affiliation. The share of US
hotel rooms affiliated with a chain was approximately 63% in 1995.
The shift to chain membership has been most pronounced among hotels in the
same categories as the Company, i.e., the economy and middle-market categories.
In 1995, 53% of all conversions to a chain from independent status or from
another chain were in the economy category, 37% were in the middle-market
26
<PAGE> 31
category, and 10% were in the upscale category. Often by affiliating with a
middle-market or economy brand, a hotel operator can reposition the hotel
property in the price category best suited to its market.
The large franchise chains, including the Company, provide a number of
services to hotel operators to improve the financial performance of their
properties, including national reservation systems, marketing and advertising
programs and direct sales programs. The Company believes that national franchise
chains with a larger number of hotels enjoy greater brand awareness among
potential guests than those with fewer numbers of hotels, and that greater brand
awareness can increase the desirability of a hotel to its potential guests.
The Company believes that hotel operators choose lodging franchisors based
primarily on the perceived value and quality of each franchisor's brand and its
services, and the extent to which affiliation with that franchisor may increase
the franchisee's reservations and profits.
FRANCHISE BUSINESS
ECONOMICS OF FRANCHISE BUSINESS
The fee and cost structure of the Company's franchise business provides
significant opportunities for the Company to increase profits by increasing the
number of franchised properties. Hotel franchisors such as the Company derive
substantially all of their revenue from annual franchise fees. Franchise fees
are comprised of an initial fee and ongoing royalty and marketing and
reservation fees charged by the franchisor as a percentage of the franchisee's
gross room revenues. The royalty portion of the franchise fee is intended to
cover the operating expenses of the franchisor, such as expenses incurred in
quality assurance, administrative support and other franchise services and to
provide the franchisor with operating profits. The marketing and reservation
portion of the franchise fee is intended to reimburse the franchisor for the
expenses associated with providing such franchise services as the central
reservation system and national marketing and media advertising.
Much of the variable costs associated with the Company's activities are
reimbursed by the franchisees through the marketing and reservation fees. The
Company's existing base of franchises more than covers the fixed cost of the
business at its current level so that the variable costs of overhead -- in such
areas as quality assurance, franchise services and administration, finance and
legal -- represent the bulk of incremental costs associated with the addition of
franchisees. Because the variable overhead costs associated with incremental
franchise system growth are substantially less than the incremental royalty
fees, the Company is able to capture a significant portion of these incremental
royalty fees as operating profit.
STRATEGY
The Company's franchise strategy is based on expanding its franchise system
by providing hotel operators with products and services that increase their
revenues and profitability, capitalizing on its franchising and marketing
expertise through joint marketing programs with preferred vendors and engaging
in strategic acquisitions in the lodging, travel-related and other franchise
industries. Key components of the Company's franchise strategy include:
- GROWTH OF THE COMPANY'S DOMESTIC FRANCHISE SYSTEM. The Company's
existing franchisees form a pool of potential buyers and builders of new
hotels that may affiliate with one of the Company's brands. Approximately
50% of new franchises sold by the Company in fiscal year 1996 were sold
to existing franchisees. The Company believes that its focus on improving
the revenues and profitability of its franchisees will allow it to retain
these current franchisees and attract new franchisees. During the ten
fiscal years ended May 31, 1996, the number of properties in the
Company's domestic franchise system increased through acquisition and
internal growth to 2,495 properties with 214,613 rooms, from 599
properties with 69,187 rooms. The Company believes that its operating
structure and the services it provides to its franchisees will enable the
Company to attract new hotels to its franchise system. The following are
the principal components of the Company's franchising system and
services:
RESERVATION SYSTEM -- The Company maintains a reservations system that
delivers customers to franchisees and produces incremental revenues for
both franchisees and the Company.
27
<PAGE> 32
ADVERTISING CAMPAIGNS -- The Company promotes its brand awareness
through nationally recognized advertising campaigns including the long
running "celebrity in a suitcase" campaign.
PRODUCTS AND SERVICES -- The Company provides its franchisees with
access to the Company's products and services. Many of these products
and services are tested and developed by the Company in its owned
hotels before being adapted to the franchise system. For example, the
Company's franchised hotels may offer customized rooms designed to meet
the needs of niche markets, such as senior citizens and business
travelers. The Company also offers its franchisees innovative food
delivery concepts such as Choice Picks food court and K-Minus(SM)
Banqueting Kitchens.
APPROACH TO FRANCHISING -- The Company's franchising system structure
and internal performance measures have been developed to appeal to
current and potential franchisees.
-- Territorial Protection. Competition from same-brand franchisees
within a specific geographic area is limited in order to protect the
investments of current and potential franchisees.
-- Brand Segmentation. The Company is able to meet the needs of
current and potential franchisees across a wide range of market
segments by maintaining an array of distinct brands, each with its
own marketing and operating strategy. In addition, the Company plans
to continue to develop new brands to target high-growth segments of
the lodging industry. Brand segmentation enables the Company to
franchise multiple properties -- each under a different franchise
brand -- in a given geographic area.
-- RevPAR Focus. Revenue per available room per day, or RevPAR, is
calculated by multiplying the percentage of occupied rooms by the
average daily room rate charged. The Company believes that
franchisees view RevPAR as the single most important measure of the
operational success of their properties. Accordingly, the Company
has adopted overall systemwide RevPAR improvement as the key
internal measure of performance for the Company and its management
in order to better align the goals and objectives of the Company
with those of its customers.
- INCREASES IN AVERAGE ACTUAL ROYALTY RATES. The Company's average actual
royalty rate is determined by analyzing the revenues and royalty rates of
individual properties. Each property's royalty rates vary based upon the
brand and the age of the contract (with newer contracts generally having
higher royalty rates). The Company has increased its average actual
royalty rate each year since 1992, and the Company expects to continue to
increase its average actual royalty rate as franchise agreements with low
royalty fees expire, terminate or are amended.
- STRATEGIC DEVELOPMENT OF THE INTERNATIONAL FRANCHISE SYSTEM. During the
ten fiscal years ended May 31, 1996, the number of properties in the
Company's international franchise system increased to 557 properties with
46,843 rooms, from 46 properties with 4,505 rooms. The Company
anticipates further development in its existing international markets in
order to increase the number of Choice hotels and to allow for more
efficient use of existing financial, marketing and human resources. In
other parts of the world, the Company intends to expand in gateway cities
which attract international travelers who are familiar with the Company's
hotel brands. International development of the Company's brands may be
structured in a variety of ways, including development by the Company
directly, by master franchisees or by joint ventures.
- EXPANSION OF PREFERRED VENDOR PROGRAMS. The Company believes there is
significant opportunity to leverage its size and marketing expertise by
entering into joint marketing arrangements with national and
multinational companies that want to gain exposure to the millions of
guests who patronize the Company's franchise hotels each year. In the
past, these arrangements have added to the Company's and franchisees'
revenues and profits by attracting business to its franchise hotels. The
Company has also sought to structure these arrangements to include direct
payments to the Company from preferred vendors who wish to capitalize on
the Company's marketing reach. Firms that have entered into marketing
arrangements with the Company on such terms include AT&T, Pizza Hut,
Nortel (formerly Northern Telecom), Alamo Rent-A-Car and CUC Travel.
28
<PAGE> 33
- PURSUIT OF SELECTED STRATEGIC INVESTMENTS AND ACQUISITIONS. The Company
intends to pursue strategic investments and acquisitions, both in the
United States and abroad, of lodging, travel-related and other franchise
businesses. The Company believes that such opportunities are significant
and that the Company has financial capability sufficient to pursue such
opportunities.
FRANCHISE SYSTEM
The Company's franchise hotels principally operate under one of the
Company's brand names: Comfort, Quality, Clarion, Sleep, Rodeway and Econo
Lodge. The following table presents key statistics relative to the Company's
domestic franchise system over the three fiscal years ended May 31, 1996.
COMBINED DOMESTIC FRANCHISE SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED MAY
31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Number of properties, end of period................. 2,283 2,311 2,495
Number of rooms, end of period...................... 203,019 200,792 214,613
Average royalty rate................................ 3.1% 3.2% 3.5%
Average occupancy percentage........................ 62.2% 63.8% 63.8%
Average daily (room) rate (ADR)..................... $ 45.63 $ 47.13 $ 49.49
RevPAR.............................................. $ 28.40 $ 30.08 $ 31.60
Royalty fees ($000s)................................ $62,590 $71,665 $82,239
</TABLE>
29
<PAGE> 34
No master franchisee or other franchisee accounted for 10% or more of the
Company's total revenues or revenues related to franchise operations during the
last three fiscal years.
BRAND POSITIONING
The Company's hotels are primarily limited-service hotels (offering
amenities such as swimming pools and continental breakfast) or limited-to-full
service (offering amenities such as food and beverage services, meeting rooms
and room service). The following chart summarizes how the Company's brands are
positioned in the marketplace.
LOGO
COMFORT. Comfort Inns and Comfort Suites hotels offer rooms in the
limited-service, middle market category. Comfort Inns and Comfort Suites are
targeted to traditional businesses and leisure travelers. Principal competitor
brands include Days Inn, Fairfield Inn, Hampton Inn, Holiday Express and
LaQuinta. At May 31, 1996, there were 1,340 Comfort Inn properties and 87
Comfort Suite properties with a total of 106,179 and 7,493 rooms, respectively,
open and operating worldwide. An additional 198 Comfort Inn properties and 88
Comfort Suite properties with a total of 18,561 and 7,223 rooms, respectively,
were under development.
Comfort properties are located in the United States and in Australia, the
Bahamas, Belgium, Canada, France, Germany, India, Indonesia, Ireland, Italy,
Jamaica, Japan, Mexico, Norway, Portugal, Sweden, Switzerland, Thailand, the
United Kingdom and Uruguay. The following chart summarizes the Comfort system in
the United States:
COMFORT DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED MAY
31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Number of properties, end of period................. 935 1,015 1,129
Number of rooms, end of period...................... 82,479 87,551 94,160
Royalty fees ($000s)................................ $31,187 $37,635 $44,657
</TABLE>
30
<PAGE> 35
QUALITY. Certain Quality Inns and Quality Suites hotels compete in the
limited service, middle market category while others compete in the full
service, middle market category. Quality Inns and Quality Suites are targeted to
traditional business and leisure travelers. Principal competitor brands include
Best Western, Holiday Inn, Howard Johnson, Ramada Inn and Days Inn. At May 31,
1996, there were 553 Quality Inn properties with a total of 65,693 rooms, and 22
Quality Suites properties with a total of 3,377 rooms open worldwide. An
additional 110 Quality Inn properties and 5 Quality Suites properties with a
total of 12,382 rooms and 324 rooms, respectively, were under development.
Quality properties are located in the United States and in Argentina,
Australia, Belgium, Canada, Chile, Denmark, France, Germany, India, Indonesia,
Ireland, Italy, Jamaica, Japan, Mexico, New Zealand, Norway, Portugal, Puerto
Rico, Russia, Spain, Thailand, the United Kingdom and the United Arab Emirates.
The following chart summarizes the Quality system in the United States:
QUALITY DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED MAY
31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Number of properties, end of period................... 358 341 362
Number of rooms, end of period........................ 45,032 43,281 45,967
Royalty fees ($000s).................................. $14,890 $15,632 $16,606
</TABLE>
ECONO LODGE. Econo Lodge hotels operate in the limited-service, economy
category of the lodging industry. Econo Lodges are targeted to the senior travel
market and rely to a large extent on strong roadside name recognition. Principal
competitor brands include Days Inn, Ho-Jo Inn, Motel 6, Ramada Limited, Red
Carpet Inn, Red Roof Inn, Super 8 and Travelodge.
At May 31, 1996, there were 658 Econo Lodge properties with a total of
43,545 rooms open and operating in the United States and Canada, and an
additional 110 properties with a total of 7,863 rooms under development in those
two countries. The following chart summarizes the Econo Lodge system in the
United States:
ECONO LODGE DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED MAY
31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Number of properties, end of period................... 677 633 641
Number of rooms, end of period........................ 46,570 42,801 42,726
Royalty fees ($000s).................................. $11,231 $12,021 $12,760
</TABLE>
CLARION. Clarion Inns, Clarion Hotels, Clarion Resorts and Clarion Suites
hotels are full-service properties which operate in the upscale category.
Clarion hotels are targeted to traditional business and leisure travelers.
Principal competitor brands include Holiday Inn, Holiday Select, Crowne Plaza,
Four Points by Sheraton, Radisson, Courtyard by Marriott and Doubletree.
At May 31, 1996, there were 94 Clarion properties with a total of 15,504
rooms open and operating worldwide and an additional 24 properties with a total
of 3,783 rooms under development. The properties are located in the United
States, and in Anguilla, the Bahamas, Canada, the Cayman Islands, Dominica,
France, Germany, Guatemala, Honduras, Indonesia, Ireland, Japan, Mexico, Russia,
Thailand and Uruguay. The following chart summarizes the Clarion system in the
United States:
CLARION DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
MAY 31,
-----------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Number of properties, end of period..................... 65 63 75
Number of rooms, end of period.......................... 12,211 10,420 12,817
Royalty fees ($000s).................................... $2,735 $2,995 $3,602
</TABLE>
31
<PAGE> 36
RODEWAY. The Rodeway brand competes in the limited-service, economy
category and is targeted to the senior travel market. Principal competitor
brands include Ho-Jo Inn, Ramada Limited, Red Roof Inn, Budgetel, Shoney's Inn,
Super 8 and Motel 6. At May 31, 1996, there were 209 Rodeway Inn properties with
a total of 13,098 rooms, open and operating in the United States and Canada, and
an additional 41 properties with a total of 2,955 rooms under development in
those two countries. The following chart summarizes the Rodeway system in the
United States:
RODEWAY DOMESTIC SYSTEM(1)
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED MAY
31,
-------------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Number of properties, end of period................... 214 208 201
Number of rooms, end of period........................ 13,806 13,067 12,547
Royalty fees ($000s).................................. $1,941 $2,302 $2,506
</TABLE>
--------------------
(1) Includes data pertaining to the Friendship Inn(R) system, which is
being combined with the Rodeway Inn system.
SLEEP. Established in 1988, Sleep Inn is a new-construction hotel brand in
the limited-service, economy category. Sleep Inns are targeted to the
traditional business and leisure traveler. Principal competitor brands include
Days Inn, Fairfield Inn, Holiday Express, LaQuinta Inn, Ho-Jo Inn and Ramada
Inn.
At May 31, 1996, there were 89 Sleep Inn properties with a total of 6,567
rooms open and operating worldwide. An additional 139 properties with a total of
10,614 rooms were under development. The properties are located in the United
States, Canada and the Cayman Islands. The following chart summarizes the Sleep
system in the United States:
SLEEP DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
MAY 31,
-----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Number of properties, end of period..................... 34 51 87
Number of rooms, end of period.......................... 2,921 3,672 6,396
Royalty fees ($000s).................................... $605 $1,080 $2,108
</TABLE>
MAINSTAY SUITES. MainStay Suites, the Company's newest hotel brand, is a
middle market, extended-stay lodging product targeted to travelers who book
hotel rooms for five or more consecutive nights. The first MainStay Suites
hotel, which the Company will own and manage, is scheduled to open in Plano,
Texas, in October 1996.
The MainStay Suites brand is designed to fill the gap between existing
upscale and economy extended-stay lodging products. Principal competitors for
the brand will include Doubletree's new Candlewood hotels, Marriott's new middle
market extended stay concept, TownPlace Suites, as well as competition from
all-suite hotel properties and traditional extended stay operators in both the
upscale market (Residence Inn, Homewood Suites, Hawthorne Suites and Summerfield
Suites) and the economy market (Extended Stay America, Studio Plus and Oakwood).
INTERNATIONAL FRANCHISE OPERATIONS
The Company's international franchise operations have traditionally been
operated as a division separate from its domestic franchise operations. In some
cases international master franchisees are not required to separately report
royalty results by brand, making brand results on a worldwide basis unavailable.
In the past fiscal year, the Company entered into arrangements to enter eight
new international markets. At May 31, 1996, Choice had 557 franchise hotels open
in 29 countries outside the United States. The following table
32
<PAGE> 37
illustrates the growth of the Company's international franchise system over the
three fiscal years ended May 31, 1996:
COMBINED INTERNATIONAL FRANCHISE SYSTEM
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
MAY 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Number of properties, end of period....................... 430 524 557
Number of rooms, end of period............................ 36,725 44,877 46,843
Royalty fees ($000s)...................................... $ 1,201 $ 1,547 $ 945
</TABLE>
EUROPE. Choice is the second-largest international franchised hotel
chain in Europe, with 278 hotels open in 13 countries at May 31, 1996. In a
move to realign and streamline its European operations, the Company,
through its subsidiary, Manor Care Hotels (France) S.A., recently
consummated a transaction with Friendly Hotels, PLC ("Friendly") whereby
the Company purchased an equity interest for approximately $17 million in
Friendly to finance the development of ten new Comfort Inn or Quality Inn
hotels in the United Kingdom and Ireland. Additionally, Friendly purchased
from the Company a master franchise for the United Kingdom and Ireland. The
Company closed its London office as a result of the transaction. The
Company's French and German operations are being consolidated into the
Company's Paris, France office, which directly operates the Company's
business in most of Europe. There are also master franchise arrangements in
Scandinavia and Italy.
THE MIDDLE EAST. In August 1995, the Company signed a master
franchise for Israel. The Company opened its first franchised property in
Dubai, United Arab Emirates, in December 1995. At May 31, 1996, this was
the only property open in this region.
ASIA/PACIFIC. During fiscal year 1996, Company franchisees opened
seven hotels in Australia, two in New Zealand, two in India, two in
Thailand and four in Indonesia, bringing the total number of properties
open in the Asia/Pacific region at May 31, 1996 to 61.
CARIBBEAN. The Company's master franchisee had 6 properties open in
three Caribbean countries at May 31, 1996.
CENTRAL AND SOUTH AMERICA. The Company recently signed master
franchise agreements covering Brazil, Uruguay, Paraguay and Argentina. The
Company also has master franchisees operating in Guatemala, Chile and
Mexico. In total there were 19 open properties in this region at May 31,
1996.
CANADA. Choice Hotels Canada (a joint venture with Journey's End
Corporation of Belleville, Ontario, Canada ("Journey's End")) is Canada's
largest lodging organization with 192 properties open at May 31, 1996. The
joint venture, owned 50% by the Company and 50% by Journey's End, was
formed in 1993 when Journey's End converted substantially all of its
controlled hotels to the Company's brands and the Company contributed its
operations in Canada to form Choice Hotels Canada.
FRANCHISE SALES
The Company markets franchises principally to: (i) developers of hotels,
(ii) owners of independent hotels and motels, (iii) owners of hotels affiliated
with other franchisors' brands, (iv) its own franchisees, who may own, buy or
build other hotels which can be converted to the Company's brands, and (iv)
contractors who construct any of the foregoing. In fiscal year 1996, existing
franchisees accounted for approximately one-half of the Company's new franchise
agreements. In considering hotels for conversion to one of the Company's brands,
or sites for development of new hotels, the Company seeks properties in
locations which are in close proximity to major highways, airports, tourist
attractions and business centers that attract travelers.
At May 31, 1996, the Company employed approximately 40 sales directors,
each of whom is responsible for a particular region or geographic area. The
Company intends to increase its number of regional sales directors in the
current fiscal year. Sales directors contact potential franchisees directly and
receive compensation based on sales generated. Franchise sales efforts emphasize
the benefits of affiliating with one of
33
<PAGE> 38
the Company's well-known brand names, the Company's commitment to improving
RevPAR, the Company's "celebrity in a suitcase" television advertising campaign
(formerly used for the entire Choice family of brands and now used principally
for its three largest brands, Comfort, Quality and Econo Lodge), the Company's
reservation system, the Company's training and support systems, and the
Company's history of growth and profitability. Because it offers brands covering
a broad spectrum of the lodging marketplace, the Company is able to offer each
prospective franchisee a brand that fits its needs, lessening the chances that
the prospective franchisee would need to consider a competing franchise system.
During fiscal year 1996, the Company received 794 franchise applications,
approved 681 applications, signed 413 franchise agreements and placed 282 new
properties into operation in the United States under the Company's brands. Of
those placed into operation, 123 were newly constructed hotels. By comparison,
during fiscal year 1995, the Company received 741 franchise applications,
approved 578 applications, signed 341 franchise agreements and had 212 new US
properties come on line. Applications may not result in signed franchise
agreements either because an applicant is unable to obtain financing or because
the Company and the applicant are unable to agree on the financial terms of the
franchise agreement.
Because retention of existing franchisees is important to the Company's
growth strategy, existing franchisees are offered the right to object to a
same-brand property within 15 miles, and are protected from the opening of a
same-brand property within a specific distance, generally two to five miles,
depending upon the size of the property and the market size. The Company
believes that it is the only major franchise company to routinely offer such
territorial protection to its franchisees.
FRANCHISE AGREEMENTS
A franchise agreement grants a franchisee the right to non-exclusive use of
the Company's franchise system in the operation of a single hotel at a specified
location, typically for a period of twenty (20) years, with certain rights to
the franchisee to terminate after 10 or 15 years. When the responsibility for
development is sold to a master franchisee, that party has the responsibility to
sell to local franchisees the Company's brands and the master franchisee
generally must manage the delivery of necessary services (such as quality
assurance, reservations and marketing) to support the franchised hotels in the
master franchise area. The master franchisee collects the fees paid by the local
franchisee and remits an agreed share to the Company. Master franchise
agreements generally have a term of at least 10 years.
Franchise agreements, other than master franchise agreements, can be
terminated by either party prior to the conclusion of their term under certain
circumstances, such as at certain anniversaries of the agreement or if a
franchisee fails to bring properties into compliance with contractual quality
standards within specified periods of time. Early termination options give the
Company flexibility in eliminating or re-branding properties which become weak
performers for reasons other than contractual failure by the franchisee. Master
franchise agreements typically contain provisions permitting the Company to
terminate the agreement for failure to meet a specified development schedule.
Franchise fees vary among the Company's different brands, but generally are
competitive with or slightly below the industry average within their market
group. Franchise fees usually have four components: an initial, one-time
affiliation fee; a royalty fee; a marketing fee; and a reservation fee. Proceeds
from the marketing fee and reservation fee are used exclusively to fund
marketing programs and the Company's central reservation system, respectively.
Most marketing fees support brand-specific marketing programs, although the
Company occasionally contributes a portion of such fees to marketing programs
designed to support all of the Company's brands. Royalty fees and affiliation
fees are the principal source of profits for the Company.
34
<PAGE> 39
Under the terms of the standard franchise agreements, the Company's
franchisees are typically required to pay the following initial fees and
on-going fees as a percentage of gross room revenues:
QUOTED FEES BY BRAND
<TABLE>
<CAPTION>
INITIAL FEE ON-GOING FEES AS A PERCENTAGE OF GROSS ROOM REVENUES
PER ROOM/ ---------------------------------------------------------
BRAND MINIMUM ROYALTY FEES MARKETING FEES RESERVATION FEES
---------------------- ------------ ------------ ------------------- ----------------
<S> <C> <C> <C> <C>
Comfort Inn........... $300/$40,000 5.0% 1.3%, plus $.28 per 1.75%
room per day
Comfort Suites........ $300/$50,000 5.0% 1.3%, plus $.28 per 1.75%
room per day
Quality Inn........... $300/$40,000 4.0% 1.3%, plus $.28 per 1.75%
room per day
Quality Suites........ $300/$50,000 4.0% 1.3%, plus $.28 per 1.25%
room per day
Sleep................. $300/$40,000 4.0% 1.3%, plus $.28 per 1.75%
room per day
Clarion............... $300/$40,000 2.75% 1.0% 1.25%
Econo Lodge........... $250/$25,000 4.0% 3.5%(1) --
MainStay Suites....... $300/$30,000 4.5% 2.5%(1) --
Rodeway
Year 1.............. $250/$25,000 3.5% 1.25% 1.25%
Year 2.............. -- 3.0% 1.25% 1.25%
Year 3.............. -- 3.0% 1.00% 1.00%
</TABLE>
- ---------------
(1) Fee includes both Marketing and Reservations.
The Company has increased its average actual royalty rate in each of the
past three years, primarily by raising the royalty fee for Comfort franchisees
to 5.0% of annual gross room revenues ("GRR") from 4.0% of GRR in 1993, and by
raising the royalty rate for franchisees in the former Friendship franchise
system to 3.0% of GRR from 2.0% of GRR in 1991. For the fiscal year ended May
31, 1996, the Company's average actual royalty rate was 3.5%, up from 3.2% for
the fiscal year ended May 31, 1995, and up from 3.1% for the fiscal year ended
May 31, 1994. The Company believes that its average actual royalty rate will
continue to increase as older franchise agreements expire, terminate or are
amended.
At May 31, 1996, the Company had 2,495 franchise agreements in effect in
the United States and 557 franchise agreements in effect in other countries. The
average age of the franchise agreements was 5.1 years. Twenty-three of the
franchise agreements are scheduled to expire during the five year period of June
1, 1996 through May 31, 2001; however, franchise agreements generally contain
early termination provisions.
FRANCHISE OPERATIONS
The Company's operations are designed to improve RevPAR for the Company's
franchisees, as this is the measure of performance that most directly impacts
franchisee profitability. It is the Company's belief that by helping its
franchisees to become more profitable it will enhance its ability to retain its
existing franchisees and attract new franchisees. The key aspects of the
Company's franchise operations are:
CENTRAL RESERVATION SYSTEM. Approximately 25% of the room nights
booked at franchisees' properties are reserved through the toll-free
telephone reservation system operated by the Company. The Company's
reservation system consists of a computer reservation system known as
CHOICE 2001, five reservation centers in North America and several
international reservation centers run by the Company or its master
franchisees. The CHOICE 2001 system is designed to allow trained operators
to match each caller with a Company-branded hotel meeting the caller's
needs. It provides an instant data link to the Company's franchised
properties as well as to the Amadeus, Galileo, SABRE and Worldspan airline
reservation systems thereby facilitating the reservation process for travel
agents.
35
<PAGE> 40
To more sharply define the market and image for each of its brands,
the Company began advertising separate toll-free reservation numbers for
all of its brands in fiscal year 1995. The Company allows its reservation
agents to cross-sell the Company's hotel brands. If a room in the Choice
hotel brand requested by a customer is not available in the location or
price range that the customer desires, the agent may offer the customer a
room in another Choice brand hotel that meets the customer's needs. The
Company believes that cross-selling enables the Company and its franchisees
to capture additional business.
On-line reports generated by the CHOICE 2001 system enable franchisees
to analyze their reservation patterns over time. In addition, the Company
provides and is currently improving a yield management product for its
franchisees to allow them to improve the management of their mix of rates
and occupancy based on current and forecasted demand on a property by
property basis. The Company also markets to its franchisees a property
management product. Such products are designed to manage the financial and
operations information of an individual hotel and improve its efficiency.
BRAND NAME MARKETING AND ADVERTISING. The Company's marketing and
advertising programs are designed to heighten consumer awareness of the
Company's brands. Marketing and advertising efforts are focused primarily
in the United States and include national television and radio advertising,
print advertising in consumer and trade media and promotional events,
including joint marketing promotions with vendors and corporate partners.
The Company is recognized for its "celebrity in a suitcase" television
advertisements. In fiscal year 1996, the Company began using brand-specific
marketing and largely discontinued the strategy of advertising its multiple
brands under the Choice umbrella, although it continues to use its
"suitcase" ads for its three largest brands, Comfort, Quality and Econo
Lodge. The marketing fees generated by these brands are used, in part, to
fund a national network television advertising campaign. The Company's
smaller hotel brands conduct advertising campaigns that also include cable
television, radio and print.
The Company conducts numerous marketing programs targeting specific
groups, including senior citizens, motorist club members, families,
government and military employees, and meeting planners. Other marketing
efforts include telemarketing and telesales campaigns, domestic and
international trade show programs, publication of group and tour rate
directories, direct-mail programs, discounts to holders of preferred credit
cards, centralized commissions for travel agents, fly-drive programs in
conjunction with major airlines, and twice yearly publication of a Travel
and Vacation Directory.
Marketing and advertising programs are directed by the Company's
Marketing Department, which is headed by a senior vice president. The
senior vice president of marketing is assisted by six vice presidents,
including a vice president for marketing, promotions and communications.
These officers direct an internal staff and also utilize the services of
independent advertising agencies. In addition, the Company employs sales
personnel at its Silver Spring, Maryland, headquarters and in its Phoenix,
Arizona, office. These sales personnel use telemarketing to target specific
customer groups, such as potential corporate clients in areas where the
Company's franchised hotels are located, the motor coach market, and
meeting planners. Most of these sales personnel sell reservations and
services for all of the Company's brands, but four are responsible
exclusively for the Clarion brand.
The Company's regional sales directors work with franchisees to
maximize RevPAR. These directors advise franchisees on topics such as how
to market their hotels and how to maximize the benefits offered by the
Company's reservations system.
QUALITY ASSURANCE PROGRAMS. Consistent quality standards are critical
to the success of a hotel franchise. The Company has established quality
standards for all of its franchised brands which cover housekeeping,
maintenance, brand identification and level of services offered. The
Company inspects properties for compliance with its quality standards when
application is made for admission to the franchise system. The compliance
of existing franchisees with quality standards is monitored through
scheduled and unannounced Quality Assurance Reviews conducted at least once
per year at each
36
<PAGE> 41
property. Properties which fail to maintain a minimum score are reinspected
on a more frequent basis until deficiencies are cured, or until such
properties are terminated.
To encourage compliance with quality standards, the Company offers
various brand-specific incentives to franchisees who maintain consistent
quality standards. Franchisees who fail to meet minimum quality standards
may be subject to consequences ranging from written warnings to termination
of the franchisee's franchise agreement.
The Company believes that a good measure of the quality of a hotel is
the rating granted to it by the American Automobile Association ("AAA").
AAA rates hotels based on the quality and range of amenities and service on
a scale of one to five diamonds, with five diamonds the highest rating. As
of May 1996, AAA has rated 78.5%, 78.4% and 80.2% of the Company's Comfort,
Quality and Clarion properties, respectively, located in the United States,
Canada, Mexico and the Caribbean. Among such properties 66% of Comfort
properties, 66% of Quality properties, and 80% of Clarion properties
received three diamonds or better.
TRAINING. The Company maintains a training department which conducts
mandatory training programs for all franchisees and their employees. The
Company also conducts regularly scheduled regional and national training
meetings for both property-level staff and managers. Training programs
teach franchisees how to take advantage of the Company's reservation system
and marketing programs, and fundamental hotel operations such as
housekeeping, maintenance, and inventory yield management.
Training is conducted by a variety of methods, including group
instruction seminars and video programs. The Company is developing an
interactive computer-based training system that will train hotel employees
at their own pace. Franchisees will be required to purchase hardware to
operate the training system, and will use software developed by the
Company.
RESEARCH AND DEVELOPMENT. The Company seeks to enhance RevPAR by
providing to franchisees systems and products that will reduce costs and/or
improve their operations. Research and development activity resulted in the
launch of three new franchise products in fiscal year 1996, Choice Picks
food court, MainStay Suites hotels and K-Minus food service.
In January 1996, the Company introduced its MainStay Suites franchise
hotel brand, an extended-stay product targeted to travelers who book hotel
rooms for five or more consecutive nights. See "-- MainStay Suites."
In November 1995, the Company introduced Choice Picks food court, a
customized, modular food-service system tailored to the needs of
middle-market hotels. Choice Picks food courts offer hotel guests a "choice
pick" of nationally known branded food items, such as Nathan's Famous(R)
hot dogs, sandwiches made with Healthy Choice(R) deli meats, Pizzeria
Uno(R) pizza and calzone, Nestle Toll House(R) cookies and muffins, I Can't
Believe It's Yogurt(R) desserts, and Coca-Cola(R) beverages. The typical
Choice Picks food court can be operated by as few as two employees, thus
providing the properties with lower operating costs than properties with
conventional restaurants. Franchisees pay the Company a one-time
affiliation fee and monthly royalty fees equal to a percentage of gross
revenues on Choice Picks food court sales. Franchisees must buy equipment
and food service modules necessary to set up a Choice Picks food court.
Beginning in fiscal 1997, the Company intends to market Choice Picks food
court to larger hotel operators and other potential customers outside of
the Company's franchise system.
In November 1995, the Company also began to offer to its franchisees
the K-Minus food service system, which eliminates expensive banquet
kitchens by outsourcing food preparation and limiting on-site work to
assembly and rethermalization. Compared with a traditional banquet
operation, the K-Minus food service system saves labor costs and energy.
Franchisees who wish to implement the K-Minus system are given design and
technical assistance by the Company. The Company receives a one-time
technical assistance fee for the provision of these services based on the
scope of the project.
PURCHASING. The Company's product services department negotiates
volume purchases of various products needed by franchisees to run their
hotels, including such items as furniture, fixtures, carpets and
37
<PAGE> 42
bathroom amenities. The department also helps to ensure consistency in such
products across its exclusively new-construction brands, Sleep Inn and
MainStay Suites brands. Sales to franchisees by the Company were $20.7
million during fiscal year 1996, up from $13.9 million during fiscal year
1995.
DESIGN AND CONSTRUCTION. The Company maintains a design and
construction department to assist franchisees in refurbishing, renovating,
or constructing their properties prior to or after joining the system.
Department personnel assist franchisees in meeting the Company's brand
specifications by providing technical expertise and cost-savings
suggestions.
FINANCIAL ASSISTANCE PROGRAMS. The Company has established programs,
primarily with independent lenders, to provide financing assistance to its
franchisees and prospective franchisees for hotel refinancing, acquisition,
renovation and development.
OWNED AND MANAGED LODGING BUSINESS
HISTORICAL ACQUISITION STRATEGY
To take advantage of a recovering lodging industry, the primary focus of
the Company's owned and managed hotel operations (the "Hotel Division") over the
past few years has been to acquire domestic hotel properties at prices below
their replacement cost and increase their value through (1) the investment of
capital to improve the physical site and (2) the installation of professional
management and marketing teams to operate the renovated properties. Since June
1992, the Company has spent approximately $242 million to buy and renovate 52
hotel properties with 7,485 rooms. During fiscal year 1996, the Hotel Division
acquired 16 hotels for a total planned investment, including initial
improvements, of approximately $72 million. In addition to the 52 hotel
properties acquired, the Company owned and managed as of May 31, 1996 14
European properties (four developed by the Company and ten acquired in
connection with the Company's Resthotel Primevere acquisition in fiscal 1994), 9
seasoned domestic properties and four Sleep Inns developed by the Company.
HOTEL DIVISION DOMESTIC ACQUISITIONS
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------------
1993 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total acquisitions................. 7 13 16 16
Total number of rooms acquired..... 1,276 1,933 2,336 1,940
Total cost of acquisitions (in
millions)
(including initial
improvements)................. $ 30.9 $ 55.8 $ 83.3 $ 71.8*
Average cost per room.............. $ 24,216 $ 28,867 $ 35,659 $ 37,095
</TABLE>
--------------------
* Includes $22.2 million planned for initial improvements.
38
<PAGE> 43
Hotel acquisitions generally have been made pursuant to one of the
following strategies:
- Buy limited service economy hotels requiring limited rehabilitation
efforts.
- Buy distressed, limited service properties or portfolios requiring
substantial renovations.
- Buy full-service hotels below replacement cost and change operations
to improve the profit models.
- Buy well-located old and inefficient land use hotels, convert the
existing property to suites or extended stay concepts, reduce room
counts, eliminate restaurants and reduce parking requirements to allow
the development of a new limited service hotel on the existing site,
thereby having two Company-operated properties on the site. If such
development is not feasible, the excess land is targeted for sale..
Net operating income for the seven hotels purchased in fiscal year 1993
increased from $6.6 million in fiscal 1995 to $8.0 million in fiscal 1996, a 22%
improvement. For the 13 domestic hotels purchased in fiscal year 1994, net
operating income increased 38% to $10.0 million in fiscal year 1996 from $7.2
million in fiscal year 1995. Net operating income for the 16 hotels acquired in
fiscal year 1995 was $6.7 million in fiscal year 1996, a 268% increase over the
$1.8 million achieved in fiscal year 1995. The following chart summarizes
occupancy improvements for original domestic portfolio hotels, and fiscal 1993,
1994 and 1995 acquisitions. Occupancy rates for the year acquired reflect only
the period during which the properties were owned by the Company. Because many
of the recently acquired and developed hotels have not yet reached stabilized
levels of operating performance, the Company believes that revenues and gross
profit at these hotels will continue to grow.
During fiscal year 1996, the Company began restructuring its European
operations. This restructuring effort included the purchase of an equity
interest in Friendly Hotels, PLC and a reevaluation of key geographic markets in
Europe. In connection with this restructuring, the Company performed a review of
its European operations and in May 1996 recognized a non-cash charge against
earnings related primarily to the impairment of assets associated with certain
European hotel operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
OWNED AND MANAGED DOMESTIC HOTELS
OCCUPANCY
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------
1993 1994 1995 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Original Domestic Portfolio......................... 62.27% 64.16% 67.19% 68.02%
Fiscal 1993 Acquisitions............................ 56.17 63.20 73.68 76.17
Fiscal 1994 Acquisitions............................ -- 66.09 70.71 73.76
Fiscal 1995 Acquisitions............................ -- -- 48.96 58.49
Fiscal 1996 Acquisitions............................ -- -- -- 53.23
</TABLE>
CURRENT BUSINESS STRATEGY
The Hotel Division plans to monetize its capital investment in
Company-owned hotels at values that reflect their improved operating
performance. The Company is exploring a variety of transactions, including,
among others, asset securitization, sale/leasebacks, joint ventures with third
parties, debt financing and asset divestitures. The Company intends to retain
management and franchise agreements relating to these properties. The proceeds
from these transactions will be used initially to repay outstanding
indebtedness. The remaining proceeds will be used to launch or provide support
to recently developed brands, such as Sleep Inn and MainStay Suites, to develop
additional new brands, to expand internationally by investing in selected
international gateway cities and to invest in other targeted growth areas. The
timing, proceeds and other terms of any such transaction involve risks and
uncertainties which may be beyond the Company's control. No assurances can be
made that the Company's strategy will be successful.
39
<PAGE> 44
OPERATIONS
Each of the Company's owned and managed hotels operates under one of the
Company's brand names. The following table illustrates the growth of the
Company's Hotel Division in the United States over the four fiscal years ended
May 31, 1996.
DOMESTIC OWNED AND MANAGED HOTELS
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED MAY 31,
------------------------------------------
1993 1994 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Number of properties, end of period.......... 19 32 48 65
Number of rooms, end of period............... 3,686 5,605 7,941 9,713
Average occupancy percentage................. 61.36% 64.18% 67.10% 66.61%
Average daily (room) rate (ADR).............. $49.53 $49.15 $51.28 $55.97
RevPAR....................................... $30.39 $31.54 $34.40 $37.28
</TABLE>
OPERATING SYSTEMS AND PROCEDURES. The Company's owned and managed hotels
take advantage of the same systems and services available to franchisees with
respect to a particular brand. The hotels participate in the central reservation
system, marketing and advertising efforts and volume purchasing discounts and
are subject to the same quality assurance program. In addition, the following
are systems the Hotel Division has instituted in each of the hotels it operates:
- YIELD MANAGEMENT. An automated yield management program has been
installed at the hotels which allows the local management to take
advantage of the supply and demand conditions in their market place. The
system is automated to the point that it performs calculations and
suggests pricing strategies to the local hotel management. The program
continues to update information based on the availability of room supply
and reservation volume within each hotel.
- TRAINING. The Hotel Division has developed a training system for all
guest services representatives that teaches the basics of telephone sales
techniques. A computerized guest comment system was developed to solicit
the comments of guests and the experiences they had at the hotel while
providing management with immediate guest feedback.
- ACCOUNTING SYSTEMS. Each Company-operated hotel has a computerized front
desk and accounting system. This system allows key financial indicators
(such as daily occupancy and revenue) to be immediately gathered from each
hotel and electronically transmitted to the key operating officers and
managers of the Hotel Division. This instant access to information allows
management to quickly spot trends and make corrections and changes where
necessary. The system is completely computerized and allows for cost
savings in the accounting and bookkeeping departments of each hotel. In
addition, control over operational and capital expenditures is provided by
a dedicated group of financial controllers in the home office. This group
works with the hotel operations group to maintain expense standards as
well as established operating procedures.
- TIME AND ATTENDANCE SYSTEM. Each hotel maintains an automated time and
attendance system that is tied into a central payroll system at the
corporate headquarters. This computerized method of tracking time allows
management to make quick decisions on controlling labor costs and provides
immediate information on projected costs.
- FOOD AND BEVERAGE. The food and beverage efforts are headed by a vice
president of food and beverage. The department is responsible for the
daily food and beverage activities of the various hotels, as well as the
development of new food concepts. This group was responsible for the
development, testing and implementation of the Choice Picks food court
concept.
DEVELOPMENT AND ACQUISITIONS. In order to facilitate the growth process of
acquiring new hotels, the Hotel Division maintains an acquisitions department
dedicated to the investigation and analysis of potential acquisitions. The
department performs the initial evaluation of potential acquisitions along with
the due diligence investigations that are required in this process. This
department is also responsible for seeking land sites suitable for the
construction of Sleep Inns and MainStay Suites which are to be operated by the
Company.
40
<PAGE> 45
PROPERTIES
The following chart lists by brand the Company's owned and managed domestic
hotels at May 31, 1996:
<TABLE>
<CAPTION>
NUMBER
OF
HOTEL MARKET ROOMS
------------------------------------------------ --------------------------- ------
<S> <C> <C>
COMFORT
Comfort Inn Albuquerque Albuquerque, NM 114
Comfort Inn Norcross Atlanta, GA 110
Comfort Inn N.W., Pikesville, MD** Baltimore, MD 186
</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 Brooklyn Brooklyn, NY 67
Comfort Inn Canton Canton, OH 124
Comfort Inn Airport Charleston, SC 122
Comfort Inn Charlotte Charlotte, NC 151
Comfort Inn Cincinnati, OH 117
Comfort Inn Middleburg Hts. Cleveland, OH 136
Comfort Inn College Station College Station, TX 114
Comfort Inn Columbia Columbia, SC 98
Comfort Inn DFW Airport Dallas-Fort Worth, TX 152
Comfort Suites Deerfield Ft. Lauderdale, FL 101
Comfort Inn Deerfield East Ft. Lauderdale, FL 69
Comfort Inn Hershey Harrisburg, PA 125
Comfort Inn Hilton Head Hilton Head Island, SC 150
Comfort Inn Collierville Memphis, TN 94
Comfort Inn & Suites, Miami Springs Miami, FL 267
Comfort Inn Miami Springs Miami, FL 110
Comfort Inn -- Lee Road Orlando, FL 145
Comfort Inn -- Turf Paradise Phoenix, AZ 155
Comfort Inn -- North Phoenix, AZ 153
Comfort Inn Portland Portland, ME 126
Comfort Inn by the Bay* San Francisco, CA 135
Comfort Inn Westport St. Louis, MO 170
Comfort Inn Sturgis Sturgis, MI 83
Comfort Inn Traverse City Traverse City, MI 95
Comfort Inn Tyson's Washington, DC 250
Comfort Inn West Palm Beach West Palm Beach, FL 157
Comfort Inn Wichita Wichita, KS 114
QUALITY
Quality Inn Anderson Anderson, SC 121
Quality Inn & Suites -- Crown Point Charlotte, NC 100
Quality Inn Plymouth Detroit, MI 123
Quality Suites Deerfield Ft. Lauderdale, FL 107
Quality Inn & Suites Indianapolis Indianapolis, IN 116
Quality Inn Southpoint Jacksonville, FL 184
Quality Inn Lincoln Lincoln, NE 108
Quality Hotel Airport Los Angeles, CA 278
</TABLE>
41
<PAGE> 46
<TABLE>
<CAPTION>
NUMBER
OF
HOTEL MARKET ROOMS
------------------------------------------------ --------------------------- ------
<S> <C> <C>
Quality Hotel Maingate -- Anaheim* Los Angeles, CA 284
Quality Inn & Suites Lumberton Lumberton, NC 120
Quality Inn & Suites Hampton Norfolk-Virginia Beach, VA 190
Quality Suites Raleigh, NC 114
Quality Inn Richmond Richmond, VA 187
Quality Inn Midvalley Salt Lake City, UT 131
Quality Inn, College Park, MD** Washington, DC 153
Quality Suites Shady Grove Washington, DC 123
Quality Hotel, Arlington, VA Washington, DC 391
CLARION
Clarion Hotel Baltimore Baltimore, MD 103
Clarion Hotel Columbus, OH 232
Clarion Hotel Richardson Dallas-Fort Worth, TX 295
Clarion on the Lake Hot Springs, AR 151
Clarion Hotel Hollywood Beach Miami-Ft. Lauderdale, FL 309
Clarion Hotel Mobile, AL 250
Clarion Hotel Virginia Beach Norfolk-Virginia Beach, VA 149
Clarion Hotel Roanoke Roanoke, VA 148
Clarion Hotel Springfield Springfield, MO 199
SLEEP
Sleep Inn Baton Rouge Baton Rouge, LA 101
Sleep Inn Plano Dallas-Fort Worth, TX 104
Sleep Inn Houston Houston, TX 107
Sleep Inn San Antonio San Antonio, TX 107
ECONO LODGE
Econo Lodge Tolleson Phoenix, AZ 120
RODEWAY INN
Rodeway Inn Airport East Phoenix, AZ 100
</TABLE>
- ---------------
* Denotes leased property.
** Denotes hotel on leased land.
The Company also owns and manages ten hotels in France, three in Germany
and one in the United Kingdom.
COMPETITION
Competition among franchise lodging chains is intense, both in attracting
potential franchisees to the system and in generating reservations for
franchisees. In addition, hotel chains and independent hotels compete intensely
for guests and for meeting and banquet business.
The Company's principal competitor brands at the national and international
level in the economy category of the lodging industry are LaQuinta, Ho-Jo Inn,
Ramada Inn, Motel 6, Ramada Limited, Red Carpet Inn, Red Roof Inn, Budgetel,
Hampton Inn, Fairfield Inn, Holiday Express, Shoney's Inn, Super 8, 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
42
<PAGE> 47
competitor brands at the national and international level in the upscale
category are Holiday Inn, Holiday Select, Crowne Plaza, Four Points by Sheraton,
Radisson, Courtyard by Marriott and Doubletree.
The Company believes that hotel operators choose lodging franchisors based
primarily on the perceived value and quality of each franchisor's brand and
services, and the extent to which affiliation with that franchisor may increase
the franchisee's reservations and profits. Hotel operators may also select a
franchisor in part based on the franchisor's reputation among other franchisees,
and the success of its existing franchisees.
The Company's prospects for growth are largely dependent upon the ability
of its franchisees to compete in the lodging market, since the Company's
franchise system revenues are based on franchisees' gross room revenues (but not
directly on franchisees' profitability).
The ability of a hotel (including the Company's owned and managed hotels
and its franchisees) to compete may be affected by a number of factors,
including the location and quality of its property, the number and quality of
competing properties nearby, its affiliation with a recognized name brand, and
general regional and local economic conditions. The effect of economic
conditions on the Company's results is substantially reduced by the geographic
diversity of the Company's franchised properties, which are located in all 50
states and in 30 countries, as well as its range of products and room rates.
SERVICE MARKS AND OTHER INTELLECTUAL PROPERTY
The service marks Quality Inn, Quality Suites, Comfort Inn, Comfort Suites,
Clarion Hotel, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites and related
logos are material to the Company's business. The Company, directly and through
its franchisees, actively uses these marks. All of the material marks are
registered with the United States Patent and Trademark Office, except for
MainStay Suites and K-Minus, which are the subject of pending applications. In
addition, the Company has registered certain of its marks with the appropriate
governmental agencies in over 100 countries where it is doing business or
anticipates doing business in the foreseeable future. The Company seeks to
protect its brands and marks throughout the world, although the strength of
legal protection available varies from country to country.
NON-HOTEL PROPERTIES
The principal executive offices of the Company are located at 10750
Columbia Pike, Silver Spring, Maryland, 20901. On the Distribution Date, the
Company and Manor Care will execute leases relating to such offices and to
certain other real estate being made available to the Company by Manor Care. See
"Relationship Between Manor Care and the Company After the Distribution -- Lease
Agreements." The Company owns its reservation system offices in Phoenix, AZ and
Minot, ND. The Company leases two additional reservation system offices in Grand
Junction, CO, pursuant to leases that expire in 1999 and 2000, and occupies
additional space in Toronto, Canada, on a month-to-month basis. In addition, the
Company leases 12 sales offices across the United States. The Company's European
headquarters, which the Company leases pursuant to a lease that expires on
December 31, 1997, is located in Paris, France. The Company also leases three
international sales offices in France, Germany and England, pursuant to leases
that terminate in June 1998, September 1996 and December 1997, respectively.
Management believes that its executive, reservation systems and sales offices
are sufficient to meet its present needs and does not anticipate any difficulty
in securing additional or alternative space, as needed, on terms acceptable to
the Company.
SEASONALITY
The Company's principal sources of revenues are franchise fees based on the
gross room revenues of its franchise properties and revenues generated by its
owned and managed hotels. The Company experiences seasonal revenue patterns
similar to those of the lodging industry in general. Generally, the Company's
revenues are greater in the first and second fiscal quarters than in the third
and fourth fiscal quarters. This seasonality can be expected to cause quarterly
fluctuations in the revenues, profit margins and net income of the Company.
43
<PAGE> 48
REGULATION
The Company's franchisees are responsible for compliance with all laws and
government regulations applicable to the hotels they own or operate. The Company
is responsible for such compliance at the hotels it owns. The lodging industry
is subject to numerous federal, state and local government regulations,
including those relating to the preparation and sale of food and beverage (such
as health and liquor license laws), building and zoning requirements and laws
governing a hotel owner's relationship with employees, including minimum wage
requirements, overtime, working conditions and work permit requirements. The
failure to obtain or retain liquor licenses or an increase in the minimum wage
rate, employee benefit costs or other costs associated with employees could
adversely affect the Company's owned hotels. Both at the federal and state
level, there are proposals under consideration to increase the minimum wage and
introduce a system of mandated health insurance. Under the Americans with
Disabilities Act of 1990 (the "ADA"), all public accommodations are required to
meet certain federal requirements related to access and use by disabled persons.
A determination that the Company is not in compliance with the ADA could result
in the imposition of fines or an award of damages to private litigants. These
and other initiatives could adversely affect the Company as well as the lodging
industry in general.
The Federal Trade Commission (the "FTC") and certain other jurisdictions
(including France, Province of Alberta, Canada, and Mexico and various states)
regulate the sale of franchises. The FTC requires franchisors to make extensive
disclosure to prospective franchisees but does not require registration. A
number of states require registration or disclosure in connection with franchise
offers and sales. In addition, several states have "franchise relationship laws"
or "business opportunity laws" that limit the ability of the franchisor to
terminate franchise agreements or to withhold consent to the renewal or transfer
of these agreements. While the Company's franchising operations have not been
materially adversely affected by such regulation, the Company cannot predict the
effect of future regulation or legislation.
INSURANCE
The Company maintains property insurance on its owned and leased lodging
facilities. The Company insures some of its liability exposures and
self-insures, either directly or indirectly through insurance arrangements
requiring it to reimburse insurance carriers, some of its liability risks other
than catastrophic exposures. The Company insures its workers' compensation risks
in some states and self-insures in others.
IMPACT OF INFLATION AND OTHER EXTERNAL FACTORS
The Company's principal sources of revenues are franchise fees and revenues
generated from bookings of rooms at the Company's owned and managed hotels.
Franchise fees and revenues from owned and managed hotels can be impacted by two
external factors: the supply of hotel rooms within the lodging industry relative
to the demand for rooms by travelers, and inflation.
Although industry-wide supply and demand for hotel rooms is fairly balanced
at present, any excess in supply that might develop in the future could have an
unfavorable impact on room revenues at the Company's franchised hotels and at
its owned and managed hotels, either by reducing the number of rooms reserved at
the Company's properties or by restricting the rates hotel operators can charge
for their rooms. In addition, an excess supply of hotel rooms may discourage
potential franchisees from opening new hotels, unfavorably impacting the
franchise fees received by the Company.
Although the Company believes that increases in the rate of inflation will
generally result in comparable increases in hotel room rates, severe inflation
could contribute to a slowing of the national economy, which could result in
reduced travel by both business and leisure travelers. That could lead to less
demand for hotel rooms, which could result in a temporary reduction in room
rates and fewer room reservations, negatively impacting revenues received by the
Company. A weak economy could also reduce demand for new hotels, negatively
impacting the franchise fees received by the Company.
44
<PAGE> 49
EMPLOYEES
The Company employed 4,851 people full-time at May 31, 1996. Less than 5%
of the Company's employees are represented by unions. Such union contracts
expire between August 1996 and December 1997. The Company considers its
relations with its employees to be satisfactory.
LEGAL PROCEEDINGS
The Company is not a party to any litigation, other than routine litigation
incidental to the business of the Company. None of such litigation, either
individually or in the aggregate, is expected to be material to the business,
financial condition or results of operations of the Company.
ENVIRONMENTAL MATTERS
Under various foreign, federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property, amongst others, may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under or in such property. Certain of such
laws impose liability whether or not the owner or operator knew of, or was at
fault for, the presence of such hazardous or toxic substances. Certain
environmental laws and common law principles may be used to impose liability for
release of asbestos-containing materials ("ACMs") into the environment,
including but not limited to the air, and third parties may seek recovery from
owners or operators of real properties for cleanup of, or personal injury
associated with exposure to, released ACMs. Environmental laws also may impose
restrictions on the manner in which property may be used or businesses may be
operated, and these restrictions may require expenditures. In connection with
its ownership or operation of hotels, the Company may be potentially liable for
such costs.
Although the Company is currently not aware of any material environmental
claims pending or threatened against it, no assurance can be given that a
material environmental claim will not be asserted against the Company. The cost
of defending against claims of liability or of remediating a contaminated
property could have a material adverse effect on the results of operations of
the Company. Pursuant to the Distribution Agreement, the Company has agreed to
indemnify Manor Care, its affiliates and certain other persons for liabilities
related to the Lodging Business which will be assumed by the Company and for
certain other specified environmental, third party personal injury and other
liabilities. See "Relationship Between Manor Care and the Company After the
Distribution--Distribution Agreement."
One or more subsidiaries or affiliates of Manor Care have been identified
as defendants and/or potentially responsible parties ("PRPs") in a variety of
actions (the "Actions") relating to approximately eleven waste disposal sites,
which allegedly are subject to remedial action under the Comprehensive
Environmental Response, Compensation & Liability Act, as amended, 42 U.S.C.
sec.sec. 9601 et seq. ("CERCLA") and similar state laws. CERCLA imposes
retroactive, strict, joint and several liability on PRPs for the costs of
hazardous substance clean-up. The Actions arise out of the alleged activities of
Cenco and allege that Cenco transported and/or generated hazardous substances
that came to be located at the sites in question prior to Healthcare's
acquisition of Cenco. Environmental proceedings such as the Actions may involve
owners and/or operators of the hazardous waste site and multiple waste
generators and waste transportation disposal companies. Such proceedings
typically involve efforts of governmental entities and/or private parties to
allocate or recover site investigation and cleanup costs, which costs may be
substantial. Manor Care believes it has adequate insurance coverage for a
substantial portion of the claims asserted in the Actions. Pursuant to the
Distribution Agreement, the Company will indemnify Manor Care for any portion of
the claims not covered by insurance.
The most significant Action for Manor Care arises from the Kramer landfill,
located in Mantua, New Jersey. On October 30, 1989, the New Jersey Department of
Environmental Protection sued Manor Care and other defendants in U.S. District
Court, District of New Jersey, seeking clean-up costs at the site where
subsidiaries of Cenco allegedly transported waste. At about the same time, the
United States filed a lawsuit against approximately 25 defendants in the same
court seeking recovery of its expenses arising in connection with this site.
Manor Care is a third party defendant in the latter suit. Based upon a recent
court-approved final allocation plan, and also in view of its insurance
coverage, Manor Care believes that the Kramer Action
45
<PAGE> 50
will not have a material adverse effect on its financial condition or results of
operations. The Company believes that any liability it may have for
indemnification of Manor Care will not have a material adverse effect on the
Company's business, financial condition or results of operations. This final
allocation plan is not binding. If the matter is not resolved by settlement, a
court would have to allocate responsibility and Manor Care's allocation could
change.
Although Manor Care, together with its insurers, is vigorously contesting
its liability in the Actions, it is not possible at the present time to estimate
the ultimate legal and financial liability of Manor Care with respect to the
Actions or the ultimate indemnification liability, if any, of the Company.
46
<PAGE> 51
MANAGEMENT
EXECUTIVE OFFICERS OF THE COMPANY
The name, age, proposed title upon consummation of the Distribution and
business background of each of the persons who are expected to become on the
Distribution Date the executive officers of the Company are set forth below. The
business address of each prospective executive officer is 10750 Columbia Pike,
Silver Spring, Maryland 20901, unless otherwise indicated.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ ---- ---------------------------------------------------------
<S> <C> <C>
Stewart Bainum, Jr............ 50 Chairman of the Board and Chief Executive Officer
Donald J. Landry.............. 47 President
Mark A. Caruso................ 43 Senior Vice President -- Human Resources
Antonio DiRico................ 43 Senior Vice President -- 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
Charles G. Warczak, Jr........ 48 Vice President -- Finance and Controller
</TABLE>
Stewart Bainum, Jr. Chairman of the Board and Chief Executive Officer of
Manor Care and Manor Healthcare Corp. ("Healthcare") since March 1987; Chief
Executive Officer of Manor Care since March 1987 and President since June 1989;
Vice Chairman of the Board of Vitalink Pharmacy Services, Inc. ("Vitalink")
since February 1995; Vice Chairman of the Board of Manor Care and subsidiaries
from June 1982 to March 1987; Director of Manor Care since August 1981, of
Vitalink since September 1991, of Healthcare since 1976 and of Choice Hotels
International, Inc. and its predecessors ("Choice Hotels") since 1977; Chief
Executive Officer of Healthcare since June 1989 and President from May 1990 to
May 1991; Chairman of the Board and Chief Executive Officer of Vitalink from
September 1991 to February 1995 and President and Chief Executive Officer from
March 1987 to September 1991; Chairman of the Board of Choice from March 1987 to
June 1990.
Mark A. Caruso. Senior Vice President, Human Resources of Choice Hotels
since October 1995; Vice President, Worldwide Human Resources Development,
Holiday Inn Worldwide from March 1993 to October 1995; Director, Human Resources
Development, Holiday Inn Worldwide from February 1990 to March 1993.
Antonio DiRico. Senior Vice President, Hotel Operations of Manor Care
Hotel Division ("MCHD") since May 1992; Senior Vice President of Richfield Hotel
Management, Inc. and its predecessor, MHM Corporation, from May 1975 to May
1992.
Richard P. Kaden. Senior Vice President - Brands and Acting Chief
Financial Officer of Choice Hotels since April 1996; Senior Vice
President-Finance of Choice from August 1993 to April 1996; Executive Director
of Semmes, Bowen & Semmes from November 1987 to August 1993.
Edward A. Kubis. Assistant General Counsel and Assistant Secretary, Manor
Care since December 1993; Senior Attorney, Real Estate, from December 1990 to
December 1993; Staff Attorney, Real Estate from June 1987 to December 1990.
Donald J. Landry. President of Choice Hotels since January 1995; President
of MCHD since March 1992; various executive positions with Richfield Hotel
Management, Inc. and its predecessors for more than 15 years, including
President of MHM Corporation.
Barry L. Smith. Senior Vice President - Marketing of Choice Hotels since
February 1989.
47
<PAGE> 52
Charles G. Warczak, Jr. Vice President - Finance and Controller of Choice
Hotels since March 1996; Vice President - Finance, MCHD from June 1992 to March
1996; Vice President - Finance, Richfield Hotel Management, Inc. from January
1991 to June 1992.
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth certain information concerning the annual
and long term compensation of those persons who, following the Distribution,
will serve as chief executive officer and the four other most highly compensated
executive officers of the Company (the "Named Officers"). In addition,
information is presented with respect to certain persons who were officers of
the Lodging Business at May 31, 1996 who are no longer executive officers of the
Company.
48
<PAGE> 53
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ------------------------------
FISCAL ----------------------------- STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER SHARES(#)(1) COMPENSATION(2)
- -------------------------------- ------ -------- -------- ----- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(3).......... 1996 $625,102 $337,555 (5) 60,000 $33,543
Chairman and 1995 $572,308 $343,385 (5) -- $ 9,000
Chief Executive Officer 1994 457,867(4) 274,720 (5) 40,000 14,150
Antonio DiRico.................. 1996 179,904 71,962 (5) 8,000 2,225
Sr. Vice President, Operations 1995 159,678 50,813 (5) -- 2,153
1994 133,719 0 (5) 5,000 1,986
Richard P. Kaden................ 1996 196,603 88,471 (5) 8,000 2,925
Sr. Vice President, Brands & 1995 187,007 59,971 (5) -- 2,458
Acting Chief Financial Officer 1994 133,270 0 (5) 10,000 1,868
Donald L. Landry................ 1996 366,702 201,686 (5) -- 5,000
President 1995 311,635 171,399 (5) 40,000 2,250
1994 275,712 144,059 (5) 25,000 3,537
Barry L. Smith.................. 1996 233,640 116,820 (5) 5,000 10,427
Sr. Vice President, Marketing 1995 221,668 104,561 (5) -- 6,750
1994 209,151 98,642 (5) 5,000 3,072
Robert C. Hazard, Jr.(6)........ 1996 403,489 201,745 (5) -- 20,932
Co-Chairman 1995 373,709 186,855 (5) -- 9,000
Choice Hotels International,
Inc. 1994 346,124 173,062 (5) -- 14,150
Gerald W. Petitt(6)............. 1996 330,129 165,065 (5) -- 18,770
Co-Chairman 1995 323,553 161,776 (5) -- 9,000
Choice Hotels International,
Inc. 1994 283,193 141,596 (5) -- 14,150
</TABLE>
- ---------------
(1) Represents options to purchase shares of Manor Care Common Stock. For a
discussion of the treatment of options in connection with the Distribution,
see "Relationship Between Manor Care and the Company After the
Distribution -- Employee Benefits Allocation Agreement."
(2) Represents amounts contributed by Manor Care for fiscal years 1996, 1995 and
1994 under the 401(k) Plan and the Nonqualified Savings Plan, which provide
retirement and other benefits to eligible employees, including the Named
Officers. Amounts contributed in cash or stock by the Company during fiscal
year 1996 under the 401(k) Plan for the Named Officers were as follows: Mr.
Bainum, Jr., $9,000; Mr. Landry, $1,752; Mr. Kaden, $977; Mr. Smith,
$3,489; and Mr. DiRico, $890. Amounts contributed in cash or stock by Manor
Care during fiscal year 1995 under the Nonqualified Savings Plan for the
Named Officers were as follows: Mr. Bainum, Jr., $24,543; Mr. Landry,
$3,498; Mr. Kaden, $1,948; Mr. Smith, $6,938; and Mr. DiRico, $1,335.
(3) Following the Distribution, Mr. Bainum, Jr. will be the chief executive
officer of the Company and of Manor Care. It is expected that he will
devote one-third of his time to the Company and two-thirds of his time to
Manor Care. The compensation reflected here is total compensation received
for services rendered to both the Lodging Business and Manor Care.
(4) Mr. Bainum, Jr. took an unpaid leave of absence during April and May 1994.
(5) The value of perquisites and other compensation does not exceed the lesser
of $50,000 or 10% of the amount of annual salary and bonus paid as to any
of the Named Officers.
(6) Mr. Hazard and Mr. Petitt served as Co-Chairmen of Choice Hotels from
January 1995 to May 31, 1996. Prior to January 1, 1995, Mr. Hazard served
as Chairman and Chief Executive Officer of Choice Hotels and Mr. Petitt
served as President and Chief Operating Officer of Choice Hotels. Neither
Mr. Hazard nor Mr. Petitt will serve as an executive officer of the Company
following the Distribution, however, each will continue as an unpaid
employee of the Company until May 31, 1997.
49
<PAGE> 54
The following tables set forth certain information at May 31, 1996 and for
the fiscal year then ended concerning options to purchase Manor Care Common
Stock granted to the Named Officers. All Common Stock figures and exercise
prices have been adjusted to reflect stock dividends and stock splits effective
in prior fiscal years. In connection with the Distribution, existing Manor Care
stock options will be subject to certain adjustments or to conversion into
options to purchase Company Common Stock. See "Relationship Between Manor Care
and the Company After the Distribution -- Employee Benefits Allocation
Agreement."
MANOR CARE STOCK OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------- VALUE OF ASSUMED ANNUAL
PERCENTAGE OF RATE OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR OPTION
NUMBER OF GRANTED TO ALL EXERCISE TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR 1996 PER SHARE DATE 5%(2) 10%(3)
- -------------------------- --------- ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(4).... 60,000 10.5% $30.31 6/21/2005 $1,143,600 2,898,606
Antonio DiRico(4)......... 8,000 1.4% $30.31 6/21/2005 $ 152,480 386,480
Richard P. Kaden(4)....... 8,000 1.4% $30.31 6/21/2005 $ 152,480 386,480
Donald J. Landry.......... -- -- -- -- -- --
Barry Smith(4)............ 5,000 0.9% $30.31 6/21/2005 $ 95,300 241,550
Robert C. Hazard, Jr. .... -- -- -- -- -- --
Gerald W. Petitt.......... -- -- -- -- -- --
</TABLE>
- ---------------
(1) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the Securities and Exchange Commission and therefore
are not intended to forecast future possible appreciation, if any, of the
Company's stock price. Since options are granted at market price, a zero
percent gain in the stock price will result in no realizable value to the
optionees.
(2) A 5% per year appreciation in stock price from $30.31 per share yields
$49.37.
(3) A 10% per year appreciation in stock price from $30.31 per share yields
$78.62.
(4) The options granted to the officers vest at the rate of 20% per year on the
first through the fifth anniversary of the date of the stock option grant.
AGGREGATED OPTION EXERCISES IN FISCAL 1996
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT MAY 31, 1996 IN-THE-MONEY OPTIONS AT MAY
ACQUIRED ON VALUE ---------------------------- 31, 1996(1)
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE ----------------------------
# $ # # EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.... -- -- 635,500 229,500 $17,236,482 $ 4,684,465
Antonio DiRico........ -- -- 1,500 16,500 26,160 215,260
Richard P. Kaden...... -- -- 2,166 15,834 39,659 212,949
Donald J. Landry...... -- -- 37,000 148,000 810,190 2,668,922
Barry Smith........... 12,600 $334,880 -- 54,100 -- 1,334,179
Robert C. Hazard,
Jr. ................ -- -- 78,000 34,500 2,281,721 1,034,130
Gerald W. Petitt...... 18,300 $536,119 39,500 34,500 1,184,330 1,034,130
</TABLE>
- ---------------
(1) The closing price of Manor Care's Common Stock as reported by the New York
Stock Exchange on May 31, 1996 was $39.00. The value is calculated on the
basis of the difference between the option exercise price and such closing
price multiplied by the number of shares of Manor Care Common Stock
underlying the option.
EMPLOYMENT AGREEMENTS
Under the terms of an employment agreement among Mr. Landry, Manor Care and
Choice Hotels, Mr. Landry's annual salary is presently $404,250 with annual
cost-of-living increases. The agreement extends
50
<PAGE> 55
through November 30, 1999. Prior to the Distribution, it is expected that Manor
Care will assign its rights and obligations under such contract to the Company.
From February 17, 1992 to January 1, 1995, Mr. Landry served as President of the
Manor Care Hotel Division. On January 1, 1995, Mr. Landry also became President
of Choice. The agreement provides for an annual bonus of up to 55% of his base
compensation based in part on performance of Manor Care and based in part on
performance (including a customer satisfaction component) of the Lodging
Business. The bonus provisions of the agreement will be amended in connection
with the Distribution.
It is contemplated that the Company will enter into an employment agreement
with Mr. Stewart Bainum, Jr. The terms of such agreement have not yet been
determined.
RETIREMENT PLANS
Prior to the Distribution, it is expected that the Company will adopt the
Choice Hotels International, Inc. Supplemental Executive Retirement Plan (the
"SERP"). Participants will be selected by the Board or any designated committee
and will be at the level of Senior Vice President or above.
Participants in the SERP will receive a monthly benefit for life based upon
final average salary and years of service. Final average salary is the average
of the monthly base salary, excluding bonuses or commissions, earned in a 60
month period out of the 120 months of employment which produces the highest
average, prior to the first occurring of the early retirement date or the normal
retirement date. The normal retirement age is 65, and participants must have a
minimum of 15 years of service. Participants may retire at age 60 and may elect
to receive reduced benefits commencing prior to age 65, subject to Board
approval. All of the Named Officers who will be participants are age 55 or
younger, so that none of their compensation reported above would be included in
the final average salary calculation.
Assuming that the following officers continue to be employed by the Company
until they reach age 65, their credited years of service would be as follows:
<TABLE>
<CAPTION>
CURRENT YEARS YEARS OF SERVICE
NAME OF INDIVIDUAL OF SERVICE AT AGE 65
------------------------------------------------- ------------- ----------------
<S> <C> <C>
[Stewart Bainum, Jr.............................. 22.5 38]
Donald Landry.................................... 4 22
</TABLE>
The table below sets forth estimated annual benefits payable upon
retirement to persons in specified compensation and years of service
classifications. These benefits are straight life annuity amounts, although
participants have the option of selecting a joint and 50% survivor annuity or
ten-year certain payments. The benefits are not subject to offset for social
security and other amounts.
YEARS OF SERVICE/BENEFIT AS
PERCENTAGE OF FINAL AVERAGE SALARY
<TABLE>
<CAPTION>
25 OR
REMUNERATION 15/15% 20/22.5% MORE/30%
-------------------------------------------- ------- -------- ---------
<S> <C> <C> <C>
$300,000.................................... $45,000 $ 67,500 $ 90,000
350,000.................................... 52,500 78,750 105,000
400,000.................................... 60,000 90,000 120,000
450,000.................................... 67,500 101,250 135,000
500,000.................................... 75,000 112,500 150,000
600,000.................................... 90,000 135,000 180,000
</TABLE>
Prior to the Distribution, it is expected that the Company will establish
the Choice Hotels International, Inc. Retirement Savings and Investment Plan
(the "401(k) Plan"), a defined contribution retirement, savings and investment
plan for its employees and the employees of its participating affiliated
companies. The 401(k) Plan will be qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and will include a cash
or deferred arrangement under Section 401(k) of the Code. All employees age 21
or
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<PAGE> 56
over and who have worked for the Company (or Manor Care) for a twelve month
period during which such employee completed at least 1,000 hours will be
eligible to participate. Subject to certain non-discrimination requirements,
each employee will be able to contribute an amount to the 401(k) Plan on a
pre-tax basis up to 15% of the employee's salary, but not more than the current
federal limit of $9,500. The Company will match contributions made by its
employees subject to certain limitations. The amount of the match will be equal
to a percentage of the amount of salary reduction contribution made on behalf of
a participant during the plan year based upon a formula that involves the
profits of the Company for the year and the number of years of service of the
participant. Amounts contributed by Manor Care pursuant to its 401(k) Plan for
the Named Officers are included in the Summary Compensation Table under the
column headed "All Other Compensation."
Prior to the Distribution, it is expected that the Company will adopt the
Choice Hotels International, Inc. Nonqualified Retirement Savings and Investment
Plan (the "Nonqualified Savings Plan"). Certain select highly compensated
members of management of the Company will be eligible to participate in the
Plan. The Nonqualified Savings Plan will mirror the provisions of the 401(k)
Plan, to the extent feasible, and will be structured so as to provide the
participants with a pre-tax savings vehicle to the extent that pre-tax savings
are limited under the 401(k) Plan as a result of various governmental
regulations, such as non-discrimination testing. Amounts contributed by Manor
Care under the Manor Care Nonqualified Savings Plan for fiscal year 1996 for the
Named Officers are included in the Summary Compensation Table under the column
headed "All Other Compensation".
The Company match under the 401(k) Plan and the Nonqualified Savings Plan
will be limited to a maximum aggregate of 6% of the annual salary of a
participant. Likewise, participant contributions under the two plans will not
exceed the aggregate of 15% of the annual salary of a participant.
OPTION AND STOCK PURCHASE PLANS
Prior to the Distribution, it is expected that the Company will adopt the
Choice Hotels International, Inc. Employee Stock Purchase Plan (the "Stock
Purchase Plan"). Under the Stock Purchase Plan, all employees who have completed
[one year] of service are eligible to participate. Eligible employees may
purchase stock of the Company in an amount of no less than 2% nor more than 10%
of compensation (as defined in the Stock Purchase Plan), subject to an overall
maximum purchase per employee per calendar year of $25,000. At the end of each
quarterly offering period, the Company will contribute cash equal to 10% of the
purchase price of the common stock so purchased. The Company will pay the
administrative costs for the purchase of the Company common stock.
Prior to the Distribution, it is expected that the Company will adopt the
Choice Hotels International, Inc. 1996 Long-Term Incentive Plan (the "Incentive
Plan"), pursuant to which key employees of the Company and its subsidiaries are
eligible to be granted awards under the Incentive Plan. The types of awards that
may be granted under the Incentive Plan are restricted shares, incentive stock
options, nonqualified stock options, stock appreciation rights and performance
shares. A total of up to shares of common stock will be reserved for
issuance pursuant to the Incentive Plan.
THE BOARD OF DIRECTORS
DIRECTORS OF THE COMPANY
The Company's Board of Directors will be classified into three classes,
designated Class I, Class II and Class III, each class to be as nearly equal in
number of directors as possible. The term of the initial Class I directors will
terminate on the date of the 1997 annual meeting of the Company's stockholders;
the term of the initial Class II directors will terminate on the date of the
1998 annual meeting of the Company's stockholders; and the term of the initial
Class III directors will terminate on the date of the 1999 annual meeting of the
Company's stockholders. At each annual meeting of the Company's stockholders,
successors to the class of directors whose term expires at that annual meeting
will be elected for a three-year term. Newly created directorships resulting
from any increase in the number of directors and any vacancies on the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal or other cause will be filled
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<PAGE> 57
solely by the affirmative vote of a majority of the remaining directors then in
office. Increases or decreases in the number of directors shall be apportioned
among the classes as nearly equal as possible, and any additional director of
any class elected to fill a vacancy resulting from an increase in such class
shall hold office for a term that shall coincide with the remaining term of that
class, but in no case will a decrease in the number of directors shorten the
term of any incumbent director.
The name, age, proposed class of directorship upon consummation of the
Distribution and business background (other than executive officers who are
directors) of each of the persons who are expected to become on the Distribution
Date the directors of the Company are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- ------
<S> <C> <C>
Chairman of the Board; Class III
Stewart Bainum, Jr................. 50 Director
Stewart Bainum..................... 77 Vice Chairman; Class II Director
Barbara Bainum..................... 52 Class I Director
Robert C. Hazard, Jr............... 61 Class I Director
Frederick V. Malek................. 59 Class I Director
Gerald W. Petitt................... 50 Class II Director
Jerry E. Robertson, Ph.D. ......... 63 Class III Director
</TABLE>
Stewart Bainum. Vice Chairman of the Board of Manor Care and subsidiaries
since March 1987; Chairman of the Board of Manor Care from August 1981 to March
1987, Chief Executive Officer from July 1985 to March 1987, President from May
1982 to July 1985; Chairman of the Board of Healthcare from 1968 to March 1987
and a Director since 1968; Director of Vitalink from September 1991 to September
1994; Chairman of the Board of Choice Hotels from 1972 to March 1987 and a
Director since 1963; Chairman of the Board of Realty Investment Company, Inc.
since 1965.
Barbara Bainum. President, Secretary and Director of the Commonweal
Foundation since December 1990, December 1984 and December 1984, respectively;
Secretary and Director of Realty Investment Company, Inc. since July 1989 and
March 1982, respectively; Family Services Agency, Gaithersburg, Maryland,
Clinical Social Work since September 1994; Department of Social Services,
Rockville, Maryland, Social Work Case Management from September 1992 to May
1993; member of the Boards of Trustees of Columbia Union College (September 1987
to May 1991) and Atlantic Union College (September 1985 to May 1987).
Robert C. Hazard, Jr. Hotel Developer. Co-Chairman of Choice Hotels 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. Advisory Board
Outrigger Hotels. Mr. Hazard will be an unpaid employee of the Company until May
31, 1997.
Frederic V. Malek. Director of Manor Care since 1990; Co-Chairman of CB
Commercial Real Estate Group, since April 1989; Chairman of Thayer Capital
Partners since March 1993; Campaign Manager for Bush-Quayle '92 from January
1992 to November 1992; Vice Chairman of NWA, Inc. (airlines), July 1990 to
December 1991; Director: American Management Systems, Inc., Automatic Data
Processing Corp., FPL Group, Inc. (an affiliate of Florida Power and
Light -- power company), ICF Kaiser International, Inc., Intrav, Inc. (travel
and leisure services), National Education Corporation, Northwest Airlines and
various Paine Webber mutual funds.
Gerald W. Petitt. Hotel Developer. Co-Chairman of Choice Hotels 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. Mr. Pettit will be an unpaid employee of the Company until May 31,
1997.
Jerry E. Robertson, Ph.D. Director of Manor Care since 1989; Retired;
Executive Vice President, 3M Life Sciences Sector and Corporate Services from
November 1986 to March 1994; Director: Allianz Life
53
<PAGE> 58
Insurance Company of North America, Cardinal Health, Inc., Coherent, Inc.,
Haemonics Corporation, Life Technologies, Inc., Medwave, Inc., Project Hope and
Steris Corporation.
Prior to the Distribution Date, the directors of the Company are Stewart
Bainum, Jr., James A. MacCutcheon, Senior Vice President, Chief Financial
Officer and Treasurer of Manor Care and James H. Rempe, Senior Vice President,
General Counsel and Secretary of Manor Care, and the only executive officer of
the Company is Stewart Bainum, Jr. Following the Distribution, Stewart Bainum,
Jr. will be the chief executive officer of both the Company and Manor Care. It
is expected that he will devote one-third of his time to the Company and
two-thirds of his time to Manor Care.
Upon consummation of the Distribution, the Board of Directors is expected
to consist of seven members. Following the Distribution Date, additional
non-employee directors may be elected to the Board of Directors. The additional
non-employee directors have not yet been determined. It is expected that the
Board of Directors will hold five meetings during the fiscal year and that the
standing committees of the Board will include the Audit Committee, the Finance
Committee, the Compensation/Key Executive Stock Option Plan Committee and the
Nominating Committee. The members of the committees have not yet been
determined.
The Compensation/Key Executive Stock Option Plan Committee will administer
the Company's stock option plans and grant stock options thereunder, will review
compensation of officers and key management employees, will recommend
development programs for employees such as training, bonus and incentive plans,
pensions and retirement, and will review other employee fringe benefit programs.
The Finance Committee will review the financial affairs of the Company and
will recommend financial objectives, goals and programs to the Board of
Directors and to management.
The Audit Committee will review the scope and results of the annual audit,
will review and approve the services and related fees of the Company's
independent public accountants, will review the Company's internal accounting
controls and will review the Company's Internal Audit Department and its
activities.
The Nominating Committee will recommend to the Board of Directors the
members to serve on the Board of Directors during the ensuing year. The
Committee will not consider nominees recommended by stockholders.
Prior to the Distribution, it is expected that the Company will adopt the
Choice Hotels International, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan. Part A of the Plan provides that
eligible non-employee directors will be granted options to purchase 5,000 shares
of Common Stock on their date of election and will be granted options to
purchase 1,000 shares on their date of election in subsequent calendar years.
Part B of the Plan provides that eligible non-employee directors may elect,
prior to May 31 of each year, to defer a minimum of 25% of committee fees earned
during the ensuing fiscal year. The fees which are so deferred will be used to
purchase Common Stock on the open market within 15 days after December 1,
February 28 and May 31 of such fiscal year. Pending such purchases, the funds
will be credited to an Interest Deferred Account, which will be interest
bearing. Stock which is so purchased will be deposited in a Stock Deferred
Account pending distribution in accordance with the Plan.
Directors who will be employees of the Company will receive no separate
remuneration for their services as directors. Pursuant to the Non-Employee
Director Stock Compensation Plan to be adopted by the Company prior to the
Distribution, eligible non-employee directors will receive annually, in lieu of
cash, restricted stock of the Company, the fair market value of which at the
time of grant will be equal to $30,000, which will represent the Board retainer
and meeting fees. In addition, all non-employee directors will receive $1,610
per diem for Committee meetings attended, except where the Committee meeting is
on the same day as a Board meeting, and will be reimbursed for travel expenses
and other out-of-pocket costs incurred in attending meetings.
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<PAGE> 59
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of May 31, 1995, Manor Care purchased from each of Mr. Hazard and Mr.
Petitt 25 shares, representing one-half of their shares, of Choice Hotels common
stock. In accordance with a formula contained in an agreement dated December 20,
1994, Manor Care paid to each of Messrs. Hazard and Petitt the sum of
$13,683,704 for such shares. After the transaction, Messrs. Hazard and Petitt
each owned 25 shares of Choice Hotels common stock and Manor Care owned 850
shares of Choice Hotels common stock. As of May 31, 1996, Manor Care purchased
from each Mr. Hazard and Mr. Petitt his remaining 25 shares for a price of
$15,197,946 to each of them. As of June 1, 1996, each of Mr. Hazard and Mr.
Pettit has entered into an agreement with Manor Care and the Company, pursuant
to which he will remain an unpaid employee of the Company until May 31, 1997 and
options to purchase up to 5,000 shares of Manor Care Common Stock, which were
previously granted and are presently outstanding, will vest ratably beginning
June 1, 1996 and ending May 31, 1997. Pursuant to such agreements Mr. Hazard and
Mr. Pettit have each waived the initial grants to non-employee directors under
the Non-Employee Director Stock Compensation Plan.
Upon consummation of the Distribution, certain management employees of the
Lodging Business 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. See "Relationship Between Manor
Care and the Company After the Distribution -- Employee Benefits Allocation
Agreement."
For a discussion of certain contracts to be executed between the Company
and Manor Care as of the Distribution Date, see "Relationship Between Manor Care
and the Company After the Distribution." For a discussion of the historical
financial relationship between the Company and Manor Care, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
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<PAGE> 60
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the amount of Company Common Stock expected
to be beneficially owned by (1) each director and director nominee of the
Company, (2) the chief executive officer of the Company and the Named Officers,
(3) all officers and directors of the Company as a group and (4) all persons who
will own beneficially more than 5% of Company Common Stock, based on the Manor
Care Common Stock beneficially owned by such persons on May 31, 1996. Unless
otherwise specified, the address for each of them is 10750 Columbia Pike, Silver
Spring, Maryland 20901. On the Distribution Date, the holders of Manor Care
Common Stock as of the Record Date will be entitled to receive one share of
Company Common Stock for each share of Manor Care Common Stock. For purposes of
the following table, it is assumed that all options held by the persons
specified will be converted into options to purchase Company Common Stock. For a
discussion of the treatment of outstanding options to purchase Manor Care Common
Stock in connection with the Distribution, see "Relationship Between Manor Care
and the Company After the Distribution -- Employee Benefits Allocation
Agreement."
<TABLE>
<CAPTION>
TOTAL SHARES OF PERCENT OF SHARES
COMPANY COMMON STOCK OUTSTANDING
EXPECTED TO BE EXPECTED TO BE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------------------------------- -------------------- ------------------
<S> <C> <C>
Stewart Bainum, Jr. ....................... 12,255,602(2) 19.3%
Stewart Bainum............................. 12,393,855(3) 19.8%
Barbara Bainum............................. 1,820,946(4) 2.9%
Antonio DiRico............................. 3,305(5) *
Robert C. Hazard, Jr. ..................... 79,884(6) *
Richard B. Kaden........................... 3,894(7) *
Donald J. Landry........................... 37,278(8) *
Frederic V. Malek.......................... 1,002 *
Gerald W. Petitt........................... 88,178(9) *
Jerry E. Robertson, Ph.D. ................. 14,314(10) *
Barry L. Smith............................. 1,251(11) *
All Directors and Officers as a Group (14
persons)................................. 26,703,880(12) 42.0%
Ronald Baron............................... 4,345,184(13) 6.9%
</TABLE>
- ---------------
* Less than 1% of class.
(1) Percentages are based on 62,731,168 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, are also included in the
above table as owned beneficially by Stewart Bainum and Barbara Bainum, Mr.
Bainum, Jr.'s father and sister, respectively. Also includes 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 1,504 shares and 707 shares, respectively, which
Mr. Bainum, Jr. has the right to receive upon termination of his employment
with the Company pursuant to the terms of the Manor Care, Inc.
56
<PAGE> 61
Retirement Savings and Investment Plan (the "Manor Care 401(k) Plan") and
the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan
(the "Manor Care Nonqualified Savings Plan"). Does not include shares owned
by Realty Investment Company, Inc. and its subsidiaries ("Realty
Investment"), a real estate investment and management company in which Mr.
Bainum, Jr. owns, directly or indirectly, 25.0% of the outstanding common
stock, which represents a pecuniary interest in 843,868 shares owned by
Realty.
(3) Includes 4,036,278 shares held directly by the Stewart Bainum Declaration
of Trust, of which Mr. Bainum is the sole trustee and beneficiary; his
joint interest in 999,523 shares owned by Bainum Associates and 1,271,541
shares owned by MC Investments, each of which is a limited partnership in
which Mr. Bainum has joint ownership with his wife as a limited partner and
as such has the right to acquire at any time a number of shares equal in
value to the liquidation preference of their limited partnership interests;
3,567,869 shares held directly by Realty Investment, a real estate
investment and management company controlled by Mr. Bainum and his wife;
and 40,305 shares held by the Commonweal Foundation of which Mr. Bainum is
Chairman of the Board of Directors and has shared voting authority. Also
includes 798,711 shares held by the Jane L. Bainum Declaration of Trust,
the sole trustee of which is Mr. Bainum's wife, and 1,679,628 shares owned
by Mid Pines in which Mr. Bainum indirectly has shared voting authority.
Does not include shares included in the table above as owned beneficially
by Stewart Bainum, Jr., Mr. Bainum's son, or Ms. Barbara Bainum, Mr.
Bainum's daughter, except those shares owned by Bainum Associates, MC
Investments and the Commonweal Foundation in which Mr. Bainum has a
beneficial interest. Also does not include 94,500 shares held by his other
two adult children.
(4) Includes 101,013 shares owned directly by Ms. Bainum. Also includes 40,305
shares owned by the Commonweal Foundation, of which Ms. Bainum is
President, Secretary and a member of the board, and with respect to which
she has shared voting authority and 1,679,628 shares owned by Mid Pines, in
which Ms. Bainum is a general partner and has shared voting authority and
in which she has a pecuniary interest equal to 285,370 shares of Manor Care
Common 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 Common
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 Common 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 283,249 shares of Manor Care Common
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 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 Manor Care 1995 Employee Stock Purchase Plan
and 55 shares and 115 shares, respectively, which Mr. DiRico has the right
to receive upon termination of his employment pursuant to the terms of the
Manor Care 401(k) Plan and the Manor Care Nonqualified Savings Plan.
(6) Includes 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 113 shares and 415
shares, respectively, which Mr. Hazard has the right to receive upon
termination of his employment pursuant to the terms of the Manor Care
401(k) Plan and the Manor Care Nonqualified Savings Plan.
(7) Includes 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 Manor Care Employee Stock Purchase Plan.
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<PAGE> 62
(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 108 shares and 170
shares, respectively, which Mr. Landry has the right to receive upon
termination of his employment pursuant to the terms of the Manor Care
401(k) Plan and the Manor Care Nonqualified Savings Plan.
(9) 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 39,500 shares which Mr. Petitt has the right to acquire pursuant
to stock options which are presently exercisable or which become
exercisable within 60 days after 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 "Manor Care Employee Stock Purchase Plan").
(10) Includes 814 shares acquired pursuant to the Manor Care, Inc. Non-Employee
Director Stock Option and Deferred Compensation Stock Purchase Plan.
(11) 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 86 shares and 165 shares,
respectively, which Mr. Smith has the right to receive upon termination of
his employment with the Company pursuant to the terms of the Manor Care
401(k) Plan and the Manor Care Nonqualified Savings Plan.
(12) Includes a total of 813,867 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 2,040 shares and 1,731 shares,
respectively, which such directors and officers have the right to receive
upon termination of their employment with the Company pursuant to the terms
of the Manor Care 401(k) Plan and the Manor Care Nonqualified Savings Plan.
(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.
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
Under the Restated Certificate of the Company, which is attached as
Appendix A to this Information Statement, the total number of shares of capital
stock that the Company has authority to issue is 165,000,000, consisting of
160,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock (the "Preferred Stock"), par value $.01 per share.
Based on the number of shares of Manor Care Common Stock outstanding at the
Record Date, it is expected that shares of the Company's Common Stock
will be issued to stockholders of Manor Care in the Distribution. All the shares
of the Company's Common Stock to be distributed to Manor Care stockholders in
the Distribution will be fully paid and non-assessable.
COMMON STOCK
The Restated Certificate designates a series of common stock consisting of
75,000,000 shares of common stock. The Company Common Stock being distributed on
the Distribution Date is part of such series. Holders of the Company's Common
Stock are entitled to receive, subject to preferences that may be applicable
from time to time with respect to any outstanding Preferred Stock, such
dividends as are declared by the Board of Directors of the Company, one vote for
each share at all meetings of stockholders, and, subject to preferences that may
be applicable from time to time with respect to any outstanding Preferred Stock,
the remaining assets of the Company upon liquidation, dissolution or winding up
of the Company. The Company is authorized to issue additional shares of common
stock without further stockholder approval (except as may be required by
applicable law or stock exchange regulations).
With respect to the issuance of common shares of any additional series, the
Board of Directors of the Company is authorized to determine, without any
further action by the holders of the Company's Common Stock, among other things,
the dividend rights, dividend rate, conversion rights, voting rights and rights
and terms of redemption, as well as the number of shares constituting such
series and the designation thereof. Should the Board of Directors of the Company
elect to exercise its authority, the rights and privileges of holders of the
Company's Common Stock could be made subject to rights and privileges of any
such other series of common stock. The Company has no present plans to issue any
common stock of a series other than the Company's Common Stock.
See "Dividend Policy" for a description of the dividend policy of the
Company after the Distribution.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue up to 5,000,000
shares of Preferred Stock without further stockholder approval (except as may be
required by applicable law or stock exchange regulations) and to fix from time
to time, by resolution or resolutions, the relative powers, preferences and
rights and the qualifications, limitations or restrictions of any series of
Preferred Stock, as well as the number of shares constituting such series and
the designation thereof.
PREEMPTIVE RIGHTS
Holders of shares of Company Common Stock have no preemptive rights.
PURPOSES AND EFFECTS OF CERTAIN CHARTER AND BY-LAW PROVISIONS
GENERAL
The provisions of the Restated Certificate and the By-Laws described in
this section, and the ability to issue additional series of capital stock
without a stockholder vote, may delay or make more difficult acquisitions of or
changes of control of the Company not approved by the Company's Board of
Directors. Such provisions enable the Company, particularly (but not
exclusively) in the initial years of its existence as an independent, publicly
owned company, to develop its business in a manner which will foster its long
term
59
<PAGE> 64
growth without disruption caused by the threat of a takeover not deemed by its
Board of Directors to be in the best interest of the Company and its
stockholders.
Pursuant to the Restated Certificate the affirmative vote of the holders of
shares representing not less than two-thirds of the voting power of the Company
is required for the approval of any proposal to merge or consolidate with any
other entity (other than an entity 90% owned by the Company) or sell, lease or
exchange all or substantially all of the Company's assets. In addition, among
other things, the Restated Certificate provides that (i) stockholder action can
be taken only at an annual or special meeting of stockholders and not by written
consent in lieu of a meeting and (ii) special meetings of the stockholders may
be called only by the Chairman or the Vice Chairman of the Board or by the
Secretary of the Company within 10 calendar days after receipt of the written
request of a majority of the total number of directors of the Company (assuming
no vacancies). The Company's By-Laws require that stockholders desiring to bring
any business, including nominations for directors, before an annual meeting of
stockholders deliver written notice thereof to the Secretary of the Company not
later than 60 days in advance of the meeting of stockholders; provided, however,
that in the event that the date of the meeting is not publicly announced by the
Company by press release or inclusion in a report filed with the Commission or
furnished to stockholders more than 75 days prior to the meeting, notice by the
stockholder to be timely must be delivered to the secretary of the Company not
later than the close of business on the tenth day following the day on which
such announcement of the date of the meeting was so communicated. The By-Laws
further require that the notice by the stockholder set forth a description of
the business to be brought before the meeting and the reasons for conducting
such business at the meeting and certain information concerning the stockholder
proposing such business and the beneficial owner, if any, on whose behalf the
proposal is made, including their names and addresses, the class and number of
shares of the Company that are owned beneficially and of record by each of them,
and any material interest of either of them in the business proposed to be
brought before the meeting. The recipient of a revocable proxy is not deemed to
be a beneficial owner of the shares underlying such proxy, and the foregoing
provisions do not affect the granting or receipt of a revocable proxy.
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
ELIMINATION OF LIABILITY IN CERTAIN CIRCUMSTANCES
Pursuant to authority conferred by Delaware General Corporation Law Section
102, the Restated Certificate provides that no director of the Company shall be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director except for liability for any breach of the
director's duty of loyalty to the Company or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, for unlawful payment of dividends, unlawful stock
redemptions or repurchases and for any transaction from which the director
derived an improper personal benefit. This provision is intended to eliminate
the risk that a director might incur personal liability to the Company or its
stockholders for breach of the duty of care. The Restated Certificate also
provides that if Delaware law is amended to further limit the liability of
directors, then the liability of a director of the Company shall be further
limited to the fullest extent permitted by Delaware law, as so amended.
INDEMNIFICATION AND INSURANCE
Delaware General Corporation Law Section 145 contains provisions permitting
and, in some situations, requiring Delaware corporations, such as the Company,
to provide indemnification to their officers and directors for losses and
litigation expense incurred in connection with their service to the corporation
in those capacities. The Restated Certificate contains provisions requiring
indemnification by the Company of its directors and officers to the fullest
extent permitted by law. Among other things, the Restated Certificate provides
indemnification for officers and directors against liabilities for judgments in
and settlements of lawsuits and other proceedings and for the advance and
payment of fees and expenses reasonably incurred by the director or officer in
defense of any such lawsuit or proceeding.
60
<PAGE> 65
AVAILABLE INFORMATION
The Company has filed with the Commission a Form 10 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") with respect to the
Company Common Stock described herein. This Information Statement does not
contain all the information set forth in the Form 10 and exhibits thereto. For
further information reference is made to the Form 10 and the exhibits thereto.
When the Form 10 becomes effective, the Company will be subject to the
informational requirements of the Exchange Act of 1934, as amended, and in
accordance therewith will file reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at its principal offices at 450 Fifth Street, N.W., Washington, D.C.
20549, and at its regional offices at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material may be obtained at prescribed
rates from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Application has been made to list the Company's
Common Stock on the New York Stock Exchange and, if and when such shares
commence trading on the New York Stock Exchange, such reports, proxy statements
and other information concerning the Company will be available for inspection at
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
61
<PAGE> 66
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Combined Balance Sheets as of May 31, 1995 and May 31, 1996........................... F-3
Combined Statements of Income for the fiscal years ended May 31, 1994, May 31, 1995
and May 31, 1996.................................................................... F-4
Combined Statements of Cash Flows for the fiscal years ended May 31, 1994, May 31,
1995 and May 31, 1996............................................................... F-5
Notes to Combined Financial Statements................................................ F-6
</TABLE>
F-1
<PAGE> 67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Manor Care, Inc.:
We have audited the accompanying combined balance sheets of Choice Hotels
Holdings, Inc. (a Delaware corporation), as described under "Basis of
Presentation" in the Notes to Combined Financial Statements, as of May 31, 1995
and 1996, and the related combined statements of income and cash flows for each
of the three years in the period ended May 31, 1996. These combined financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Choice Hotels
Holdings, Inc. as of May 31, 1996 and 1995, and the combined results of their
operations and their combined cash flows for each of the three years in the
period ended May 31, 1996, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The schedule attached to the
Company's Registration Statement on Form 10 as Exhibit 99.01 is presented for
the purpose of complying with the Securities and Exchange Commission rules and
is not part of the basic combined financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic combined
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
combined financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.,
June 28, 1996
F-2
<PAGE> 68
CHOICE HOTELS HOLDINGS, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................ $ 2,088 $ 4,142
Receivables (net of allowance for doubtful accounts of $4,202, and
$4,825, respectively)............................................. 21,946 30,619
Inventories.......................................................... 289 757
Current deferred income tax benefit.................................. -- 1,266
Prepaid expenses..................................................... 2,807 3,003
Other................................................................ 955 1,215
-------- --------
Total current assets......................................... 28,085 41,002
-------- --------
PROPERTY AND EQUIPMENT, AT COST, NET OF ACCUMULATED DEPRECIATION....... 257,156 299,527
-------- --------
LODGING FRANCHISE RIGHTS, NET OF ACCUMULATED AMORTIZATION.............. 61,565 58,676
-------- --------
GOODWILL, NET OF ACCUMULATED AMORTIZATION.............................. 32,128 59,839
-------- --------
OTHER ASSETS........................................................... 12,541 32,260
-------- --------
$391,475 $491,304
======== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current portion of mortgages and long term debt...................... $ 639 $ 669
Accounts payable..................................................... 46,109 24,473
Accrued expenses..................................................... 15,366 21,656
Income taxes payable................................................. 634 1,810
-------- --------
Total current liabilities.................................... 62,748 48,608
-------- --------
MORTGAGES AND OTHER LONG TERM DEBT..................................... 52,030 68,469
-------- --------
NOTES PAYABLE TO PARENT................................................ 198,522 225,723
-------- --------
DEFERRED INCOME TAXES ($11,620 AND $0, RESPECTIVELY) AND OTHER
LIABILITIES.......................................................... 12,346 945
-------- --------
EQUITY
Investments and advances from Parent................................. 65,829 147,559
-------- --------
$391,475 $491,304
======== ========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-3
<PAGE> 69
CHOICE HOTELS HOLDINGS, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Franchise.............................................................. $165,581 $188,021 $219,164
Hotel operations....................................................... 74,183 114,514 155,709
-------- -------- --------
Total revenues.................................................. 239,764 302,535 374,873
-------- -------- --------
OPERATING EXPENSES
Franchise marketing.................................................... 45,373 45,510 49,658
Franchise reservations................................................. 26,685 28,738 35,677
Hotel operations....................................................... 60,062 84,711 106,120
Selling, general and administration expenses........................... 57,081 69,676 83,267
Depreciation and amortization.......................................... 17,521 21,841 26,026
Provision for asset impairment and restructuring....................... -- -- 33,335
-------- -------- --------
Total operating expenses........................................ 206,722 250,476 334,083
-------- -------- --------
INCOME BEFORE OTHER EXPENSES AND INCOME TAXES............................ 33,042 52,059 40,790
-------- -------- --------
OTHER EXPENSES
Interest expense on notes payable to Parent............................ 10,665 15,492 19,673
Minority interest...................................................... 1,476 2,200 1,532
Other interest and other expenses, net................................. 3,223 4,412 3,727
-------- -------- --------
Total other expenses............................................ 15,364 22,104 24,932
-------- -------- --------
Income before income taxes............................................... 17,678 29,955 15,858
Income taxes............................................................. 8,019 13,144 7,400
-------- -------- --------
Net Income............................................................... $ 9,659 $ 16,811 $ 8,458
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined statements of
income.
F-4
<PAGE> 70
CHOICE HOTELS HOLDINGS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-----------------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................................... $ 9,659 $ 16,811 $ 8,458
Reconciliation of net income to net cash provided by operating
activities:
Depreciation and amortization................................... 17,521 21,841 26,026
Amortization of debt discount................................... 74 171 34
Provision for bad debts......................................... 3,360 906 974
(Decrease) increase in deferred taxes........................... 3,328 827 (12,885)
Gain on sale of operating hotel................................. -- -- 584
Provision for asset impairment.................................. -- -- 28,160
Change in assets and liabilities (excluding sold hotels and
acquisitions):
Change in receivables........................................... 1,063 (4,529) (9,647)
Change in inventories and other current assets.................. (340) 3,748 (1,047)
Change in current liabilities................................... 8,457 5,691 11,153
Change in income taxes payable.................................. -- 634 1,176
Change in other liabilities..................................... 1,454 1,803 1,750
-------- -------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 44,576 47,903 54,736
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment.............................. (17,939) (34,889) (47,443)
Acquisition of operating hotels................................... (44,200) (59,766) (49,617)
Acquisition of a hotel chain...................................... (10,400) -- --
Proceeds from sale of operating hotels............................ 7,200 -- 5,479
Purchase of minority interest..................................... -- -- (55,269)
Investment in Friendly Hotels, PLC................................ -- -- (17,069)
Other items, net.................................................. (3,788) 1,595 (5,722)
-------- -------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES.................. (69,127) (93,060) (169,641)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and other long-term debt.................. 5,079 15,567 17,296
Principal payments of debt........................................ (1,993) (16,382) (810)
Proceeds from notes payable to Parent............................. 68,361 51,461 27,201
Cash transfers (to) from Parent, net.............................. (45,198) (6,190) 73,272
-------- -------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................. 26,249 44,456 116,959
-------- -------- ---------
Net change in cash and cash equivalents............................. 1,698 (701) 2,054
Cash and cash equivalents at beginning of period.................... 1,091 2,789 2,088
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................................................ $ 2,789 $ 2,088 $ 4,142
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these combined statements of cash
flows.
F-5
<PAGE> 71
NOTES TO COMBINED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On March 7, 1996, Manor Care, Inc., ("Manor Care") announced its intention
to proceed with the separation of its lodging business from its health care
business via a spin-off of its lodging business (the "Distribution"). Manor
Care's Board of Directors voted to approve, in principle, the Distribution
subject to receipt of other approvals and consents and satisfactory
implementation of the arrangements for the Distribution. Manor Care intends to
consummate the Distribution in the second quarter of fiscal year 1997 through a
special dividend to its shareholders of one share of common stock of Choice
Hotels Holdings, Inc. (the "Company") for each share of Manor Care common stock.
The Distribution is conditional upon certain matters, including declaration of
the special dividend by Manor Care's board of directors.
Manor Care has received a ruling from the Internal Revenue Service that the
Distribution will be tax-free. The Company was formed on June 27, 1996 to
facilitate the proposed Distribution of Manor Care's lodging operations. Upon
consummation of the Distribution, the Company will change its name to Choice
Hotels International, Inc. The operations of the Company will consist
principally of the hotel franchise operations and the owned and managed hotel
operations formerly conducted by Manor Care directly or through Manor Care's
subsidiaries (the "Lodging Business"). As of May 31, 1996, the Company had
franchise agreements with 3,052 hotels operating in 30 countries principally
under the following brand names: Comfort, Clarion, Sleep, Quality, Rodeway and
Econo Lodge. The Company also owns and manages, under its six principal brand
names, 79 hotels in 25 states, as well as in Germany, France and England.
The combined financial statements present the financial position, results
of operations and cash flows of the Company as if it were formed as a separate
entity of Manor Care which conducted the Lodging Business for all periods
presented. Manor Care's historical basis in the assets and liabilities of the
Company has been carried over to the combined financial statements. All material
intercompany transactions and balances between the Company and its subsidiaries
have been eliminated. Changes in the investments and advances from Parent
represent the net income of the Company plus the net change in cash transferred
between the Company and Manor Care.
An analysis of the activity in the "Investments and advances from Parent"
account for the three years ended May 31, 1996 is as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
Balance, May 31, 1993.................................................. 90,747
Cash transfers to Parent, net.......................................... (45,198)
Net income............................................................. 9,659
------------
Balance, May 31, 1994.................................................. 55,208
Cash transfers to Parent, net.......................................... (6,190)
Net income............................................................. 16,811
------------
Balance, May 31, 1995.................................................. 65,829
Cash transfers from Parent, net........................................ 73,272
Net income............................................................. 8,458
------------
Balance, May 31, 1996.................................................. $147,559
============
</TABLE>
The average balance of the investments and advances from Parent was $73.0
million, $60.5 million and $107.0 million for the fiscal years 1994, 1995 and
1996, respectively.
F-6
<PAGE> 72
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA INCOME PER SHARE (UNAUDITED)
Per share data is not presented on a historical basis because the Company
was not a publicly-held company during the periods presented. Pro forma income
per share for 1996, after giving effect to the transactions described in the pro
forma combined financial statements, would have been $0.12. The pro forma income
per common share is computed by dividing pro forma net income by the pro forma
weighted average number of outstanding common shares, aggregating 62.6 million
in 1996. The pro forma weighted average number of outstanding common shares is
based on Manor Care's weighted average number of outstanding common shares.
PROPERTY AND EQUIPMENT
The components of property and equipment at the respective dates presented
in the combined balance sheets were:
<TABLE>
<CAPTION>
MAY 31,
-----------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land......................................................... $ 35,676 $ 45,459
Building and improvements.................................... 206,510 227,611
Capitalized leases........................................... 6,244 6,244
Furniture, fixtures and equipment............................ 61,452 65,369
Hotels under construction.................................... 8,077 18,224
-------- --------
317,959 362,907
Less: Accumulated depreciation............................... (60,803) (63,380)
-------- --------
$257,156 $299,527
======== ========
</TABLE>
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows:
<TABLE>
<S> <C>
Building and improvements............................................... 10-40 years
Furniture, fixtures and equipment....................................... 3-20 years
</TABLE>
Accumulated depreciation includes $3.3 million at May 31, 1995 and $3.5
million at May 31, 1996 relating to capitalized leases. Capitalized leases are
amortized on a straight-line basis over the lesser of the lease term or the
remaining useful lives of the leased properties.
MINORITY INTEREST
Prior to May 31, 1996, certain members of the Company's management had a
minority ownership interest in Choice Hotels International, Inc., a majority
owned subsidiary. Amounts reflected as minority interest represent the minority
owners' share of income in Choice Hotels International, Inc. As of May 31, 1996,
the Company had repurchased all of the outstanding minority ownership interest
from management.
GOODWILL
Goodwill primarily represents an allocation of the excess purchase price of
the stock of Choice Hotels International, Inc. over the recorded minority
interest. Goodwill is being amortized over 40 years. Such amortization amounted
to $343,000 in each of the years ended May 31, 1994 and 1995 and $854,000 in the
year ended May 31, 1996. Goodwill is net of accumulated amortization of $1.9
million and $2.8 million at May 31, 1995 and 1996, respectively.
F-7
<PAGE> 73
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED DEVELOPMENT COSTS
Included in other assets are deferred costs of $934,000 and $172,000, net
of accumulated amortization, as of May 31, 1995 and 1996, respectively,
associated with the development of a computerized reservation system and other
related systems. These costs are being amortized over five years. Such
amortization amounted to approximately $1.0 million for the fiscal years ended
May 31, 1994 and 1995, and $762,000 for the fiscal year ended May 31, 1996.
Deferred development costs are net of accumulated amortization of $4.2 million
and $372,000 at May 31, 1995 and 1996, respectively.
FRANCHISE RIGHTS
Franchise rights are an intangible asset and represent an allocation in
purchase accounting for the value of long-term franchise contracts. The majority
of the balance resulted from the Econo Lodge and Rodeway acquisitions made in
fiscal year 1991. Franchise rights acquired are amortized over an average life
of twenty-six years. Amortization expense amounted to $2.9 million for each of
the years ended May 31, 1994, 1995 and 1996. Franchise rights are net of
accumulated amortization of $8.5 million and $11.4 million at May 31, 1995 and
1996, respectively.
The Company evaluates the recoverability of franchise rights no less than
annually, based on net, undiscounted expected cash flows associated with these
franchises. Such rights are considered to be impaired if the net, undiscounted
expected cash flows are less than the carrying amount of the asset. Impairment
charges are recorded based upon the difference between the carrying value of the
asset and the expected net cash flows, discounted at an appropriate interest
rate.
SELF-INSURANCE PROGRAM
Prior to the Distribution, the Company participated in Manor Care's
self-insurance program for certain levels of general and professional liability,
automobile liability and workers' compensation coverage. The estimated costs of
these programs are accrued at present values based on actuarial projections for
known and anticipated claims. All accrued self-insurance costs have been treated
as paid to Manor Care, and as such, amounts paid to Manor Care have been charged
directly to investments and advances from Parent. Subsequent to the
Distribution, the Company will establish and maintain its own insurance program.
FRANCHISE REVENUES
The Company enters into numerous franchise agreements committing to provide
licensees with various marketing services, a centralized reservation system and
limited rights to utilize the Company's registered tradenames. These agreements
are typically for a period of twenty years, with certain rights to the
franchisee to terminate after 10 or 15 years. The Company has no significant
financial commitments to its franchisees.
Royalty fees, based on gross room revenues of each franchisee, are recorded
when earned. Reserves for uncollectible accounts are charged to bad debt expense
and included in selling, general and administrative expenses in the accompanying
combined statements of income.
The Company assesses franchisees monthly fees related to marketing and
reservations which are expended for national advertising, marketing, and selling
activities and the operation of a centralized reservation system.
CAPITALIZATION POLICIES
Major renovations and replacements are capitalized to appropriate property
and equipment accounts. Upon sale or retirement of property, the cost and
related accumulated depreciation are eliminated from the accounts and the
related gain or loss is taken into income. Maintenance, repairs and minor
replacements are charged to expense.
F-8
<PAGE> 74
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Construction overhead and costs incurred to ready a project for its
intended use are capitalized for major development projects and are amortized
over the lives of the related assets. Personnel recruitment and training costs
related to hotels under construction are deferred until construction is
completed and then amortized over two years. Costs of approximately $359,000,
$585,000 and $2.6 million were capitalized in each of the fiscal years ended May
31, 1994, 1995 and 1996, respectively.
The Company capitalizes interest on borrowings applicable to hotels under
construction. Capitalized interest for the years ended May 31, 1994, 1995 and
1996 amounted to $117,000, $197,000, and $753,000, respectively.
FOREIGN OPERATIONS
The Company accounts for foreign currency translation in accordance with
SFAS No. 52, "Foreign Currency Translation." Revenues generated by foreign
operations for the fiscal years ended May 31, 1994, 1995 and 1996 were $21.2
million, $29.2 million and $29.9 million, respectively. Losses were generated by
foreign operations for the fiscal years ended May 31, 1994, 1995 and 1996 of
$5.5 million, $5.7 million and $19.3 million, respectively. Losses generated by
foreign operations for fiscal year 1996 include $15.0 million relating to a
provision for asset impairment and restructuring. Translation gains and losses
are recorded in the cumulative translation adjustment account included in
Investments and advances from Parent in the accompanying combined balance sheets
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance, May 31, 1993......................................... $ 352
Net adjustments............................................... (383)
-------
Balance, May 31, 1994......................................... (31)
Net adjustments............................................... 740
-------
Balance, May 31, 1995......................................... 709
Net adjustments............................................... (2,459)
-------
Balance, May 31, 1996......................................... $(1,750)
=======
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
INCOME TAXES
The Company is included in the consolidated federal income tax return of
Manor Care. The income tax provision included in these combined financial
statements reflects the historical income tax provision and temporary
differences attributable to the operations of the Company on a separate return
basis. Deferred taxes are recorded for the tax effect of temporary differences
between book and tax income.
F-9
<PAGE> 75
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Income before income taxes for the fiscal years ended May 31, 1994, 1995
and 1996 were derived from the following:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes
Domestic operations.................................. $ 26,812 $ 39,329 $ 47,682
Foreign operations................................... (9,134) (9,374) (31,824)
-------- -------- --------
Combined income before income taxes............... $ 17,678 $ 29,955 $ 15,858
======== ======== ========
</TABLE>
Income before income taxes for domestic operations and foreign operations
for fiscal year 1996 includes provisions of $8.5 million and $24.8 million,
respectively, for asset impairment and restructuring.
The income tax provisions for fiscal years 1994, 1995 and 1996 were
accounted for under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." The provisions for income taxes follows for the
fiscal years ended May 31:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax (benefit) expense
Federal................................................ $ 7,683 $13,756 $ 19,978
Foreign................................................ (3,608) (3,703) (2,792)
State.................................................. 941 2,231 3,729
Deferred tax (benefit) expense
Federal................................................ 2,537 745 (3,071)
Foreign................................................ -- -- (9,778)
State.................................................. 466 115 (666)
------ ------- --------
$ 8,019 $13,144 $ 7,400
====== ======= ========
</TABLE>
Included in the 1994 tax provision is a charge of $156,000 due to the
impact of the change in the tax rates on prior periods.
Deferred tax assets (liabilities) are comprised of the following at May 31:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and amortization........................... $(11,289) $(11,760) $ (236)
Prepaid expenses........................................ (1,412) (1,386) (1,550)
Foreign operations...................................... (710) -- --
Other................................................... (2,147) (2,202) (2,112)
-------- -------- -------
Gross deferred tax liabilities.......................... (15,558) (15,348) (3,898)
-------- -------- -------
Foreign operations...................................... -- 1,086 1,931
Accrued expenses........................................ 2,893 1,393 3,757
Net operating loss...................................... 1,242 1,031 820
Other................................................... 776 218 556
-------- -------- -------
Gross deferred tax assets............................... 4,911 3,728 7,064
-------- -------- -------
Net deferred (benefit) tax.................... $(10,647) $(11,620) $ 3,166
======== ======== =======
</TABLE>
F-10
<PAGE> 76
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the accompanying combined statements of income follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- ------
(IN THOUSANDS EXCEPT
FEDERAL INCOME
TAX RATE)
<S> <C> <C> <C>
Federal income tax rate..................................... 35% 35% 35%
Federal taxes at statutory rate............................. $6,187 $10,484 $5,552
State income taxes, net of Federal tax benefit.............. 914 1,525 860
Other....................................................... 918 1,135 988
------ ------- ------
Income tax expense.......................................... $8,019 $13,144 $7,400
====== ======= ======
</TABLE>
Cash paid for state income taxes was $595,000, $571,000 and $1,586,000 for
the years ended May 31, 1994, 1995 and 1996, respectively. Federal income taxes
were paid by Manor Care.
ACCRUED EXPENSES
Accrued expenses at May 31, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Payroll............................................................ $ 6,284 $ 8,670
Taxes, other than income........................................... 2,981 3,426
Other.............................................................. 6,101 9,560
------- -------
$15,366 $21,656
======= =======
</TABLE>
MORTGAGES AND OTHER LONG TERM DEBT
Maturities of mortgages and other long term debt at May 31, 1996 were as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
--------------------------------------------------------------- --------------
<S> <C>
1997........................................................... 669
1998........................................................... 414
1999........................................................... 442
2000........................................................... 599
2001........................................................... 646
2002 to 2009................................................... 66,368
--------------
$ 69,138
===========
</TABLE>
Long term debt, consisting of foreign currency borrowings under Manor
Care's $250 million competitive advance and multi-currency revolving credit
facility, mortgages and capital leases was net of discount of $146,000 and
$112,000 at May 31, 1995 and 1996, respectively. Amortization of discount was
$74,000 in 1994, $171,000 in 1995 and $34,000 in 1996.
During fiscal year 1996, interest rates on mortgages and other long term
debt ranged from 5.8% to 10.0%. The effective interest rate in fiscal year 1996
was 7.2%.
The Company is a co-guarantor with Manor Care and other affiliates for the
$250 million competitive advance and multi-currency revolving credit facility.
The facility provides that up to $75.0 million is available in foreign currency
borrowings under the foreign currency portion of the facility. The Company's
borrowings under this facility amounted to $50.6 million at May 31, 1996. The
Company is charged interest for amounts borrowed under the foreign currency
portion of the facility at one of several interest rates, including LIBOR plus
26.25 basis points. In connection with the Distribution, the Company intends to
secure financing to repay
F-11
<PAGE> 77
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's portion of borrowings under Manor Care's foreign currency portion
of the facility. Upon repayment, it is anticipated that the Company will be
released from all liabilities and guarantees relating to the Manor Care credit
facility.
At May 31,1996, owned property with a net book value of $2.8 million was
pledged or mortgaged as collateral.
LEASES
The Company operates certain property and equipment under leases, some with
purchase options that expire at various dates through 2051. Future minimum lease
payments are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
1997............................................................. $ 545 $ 771
1998............................................................. 370 568
1999............................................................. 296 500
2000............................................................. 186 500
2001............................................................. 172 500
Thereafter....................................................... 6,477 613
--------- -----------
Total minimum lease payments........................... $ 8,046 $ 3,452
=======
Less: Amount representing interest............................... (817)
-----------
Present value of lease payments.................................. 2,635
Less: Current portion............................................ (532)
-----------
Lease obligations included in long-term debt..................... $ 2,103
========
</TABLE>
Rental expense under noncancellable operating leases was $738,000 in 1994,
$721,000 in 1995 and $563,000 in 1996.
ACQUISITIONS AND DIVESTITURES
On May 31, 1995, Manor Care repurchased one-half of the 11% interest held
by its management in Choice Hotels International Inc. Approximately $19.8
million was allocated to goodwill; the purchase cost of $27.4 million was paid
in June and July 1995. On May 31, 1996, the Company repurchased the remaining
5.5% minority interest in Choice Hotels International, Inc. for $27.9 million.
Approximately $26.4 million was allocated to goodwill.
During fiscal year 1996, the Company purchased 16 operating hotels
containing over 1,900 rooms for $49.6 million. The Company also sold two
operating hotels for $6.5 million. In addition, the Company purchased an equity
interest in Friendly Hotels, PLC, a U.K. hotel company, for approximately $17
million.
During fiscal year 1995, the Company purchased 16 operating hotels
containing over 2,300 rooms for $59.8 million.
During fiscal year 1994, the Company purchased 13 operating hotels
containing over 1,900 rooms for $44.2 million. An additional $10.4 million was
spent to acquire a hotel chain (Resthotel Primevere) operating primarily in
France. The Company also sold a hotel for $7.2 million.
Unless otherwise noted, acquisitions are accounted for as a purchase.
Approximately 70% of the total costs for hotel acquisitions are allocated to
buildings, approximately 20% to land and the remainder to furniture, fixtures
and equipment.
F-12
<PAGE> 78
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited summary pro forma income statement data for the three fiscal
years ended May 31, 1996 assuming the above purchases of operating hotels
occurred at the beginning of the year immediately preceding the year each
purchase occurred, are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS)
Revenues............................................... $285,735 $347,401 $387,819
======== ======== ========
Net income............................................. $8,339 $16,865 $8,772
------ -------- ------
------ -------- ------
Pro forma net income per share......................... $0.14 $0.27 $0.14
----- ----- -----
----- ----- -----
</TABLE>
The pro forma net income per share is computed by dividing pro forma net
income by the pro forma weighted average number of outstanding common shares,
aggregating 60.5 million in 1994, 62.5 million in 1995 and 62.6 million in 1996.
The pro forma weighted average number of outstanding common shares is based on
Manor Care's weighted average number of outstanding common shares.
TRANSACTIONS WITH MANOR CARE
Indebtedness related to lodging acquisitions and renovations that is
reflected as notes payable to Parent in the accompanying combined balance sheets
totaling $198.5 million and $225.7 million at May 31, 1995 and 1996,
respectively, is due three years from the date of the Distribution. Interest
expense on these notes for the years ended May 31, 1994, 1995 and 1996 was $10.7
million, $15.5 million and $19.7 million, respectively. Interest is charged at
an annual rate of 9% on the indebtedness.
It is expected that on or prior to the Distribution Date, the Company and a
subsidiary of Manor Care will enter into a loan agreement, which shall govern
the repayment by the Company of an aggregate of $225.7 million previously
advanced to the Company by Manor Care. The loan agreement will contain a number
of covenants that will, among other things, restrict the ability of the Company
and its subsidiaries to make certain investments, incur debt, change its line of
business, dispose of assets, create liens, sell receivables, enter into
transactions with affiliates and otherwise restrict certain corporate
activities. The loan agreement will also restrict the Company's ability to pay
dividends. In addition, the loan agreement will contain, among other financial
covenants, requirements that the Company maintain specified financial ratios,
including maximum leverage and minimum interest coverage. The loan may be
prepaid in whole or in part, together with accrued interest, without penalty, at
the option of the Company. The Company will be required to prepay the loan with
the proceeds from the monetization of Company-owned hotels.
The Company participates in a cash concentration system with Manor Care and
as such maintains no significant cash balances or banking relationships.
Substantially all cash received by the Company has been immediately deposited in
and combined with Manor Care's corporate funds through its cash management
system. Similarly, operating expenses, capital expenditures and other cash
requirements of the Company have been paid by Manor Care and charged to the
Company. The net result of all of these intercompany transactions, with the
exception of amounts relating to the acquisition of Company operated hotels that
are reflected in the combined balance sheets as notes payable to Parent, are
included in investments and advances from Parent in the combined balance sheets.
Manor Care provides various services to the Company including, among
others, cash management, payroll and payables processing, employee benefit
plans, insurance, legal, accounting, tax, information systems and certain
administrative services, as required. Manor Care charges the Company fees for
general management, staff support and rental of office space on the basis of
such factors as employee time incurred and square footage. This is essentially
the same basis Manor Care utilizes to charge its other operating entities
F-13
<PAGE> 79
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
for such services. General corporate expenses of $5.5 million, $6.3 million and
$7.4 million, respectively, were charged to operations for the years ended May
31, 1994, 1995 and 1996. Management believes that the foregoing charges are
reasonable allocations of the costs incurred by Manor Care on the Company's
behalf. The Company has estimated that general and administrative expenses
incurred annually will increase by approximately $4.1 million after the
Distribution.
For purposes of providing an orderly transition after the Distribution,
Manor Care and the Company will enter into various agreements, including, among
others, a Distribution Agreement, Tax Sharing Agreement, Corporate Services
Agreement and Employee Benefits Allocation Agreement. Effective at the
Distribution, these agreements will provide, among other things, that the
Company (i) will receive certain corporate and support services, such as
accounting, tax and computer systems support, (ii) will establish pension,
profit sharing and incentive plans similar to those in place at Manor Care and
(iii) will receive certain risk management services and other miscellaneous
administrative services. These agreements will extend for a period of 30 months
from the Distribution date or until such time as the Company has arranged to
provide such services in-house or through another unrelated provider of such
services.
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and general counsel to the
Company, the ultimate outcome of such litigation will not have a material
adverse effect on the Company's business, financial position or results of
operations. Although the Company is currently not aware of any material
environment claims pending against it, pursuant to the Distribution Agreement,
the Company has agreed to indemnify Manor Care, its affiliates and certain other
persons for liabilities related to the Lodging Business which will be assumed by
the Company and for certain other specified environmental, third party personal
injury and other liabilities.
One or more subsidiaries or affiliates of Manor Care have been identified
as defendants and/or potentially responsible parties ("PRPs") in a variety of
actions (the "Actions") relating to approximately eleven waste disposal sites,
which allegedly are subject to remedial action under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
sec.sec. 9601 et seq. ("CERCLA") and similar state laws. CERCLA imposes
retroactive, strict, joint and several liability on PRPs for the costs of
hazardous substance clean-up. The Actions arise out of the alleged activities of
Cenco and allege that Cenco transported and/or generated hazardous substances
that came to be located the sites in question prior to Healthcare's acquisition
of Cenco. Environmental proceedings such as the Actions may involve owners
and/or operators of the hazardous waste site and multiple waste generators and
waste transportation disposal companies. Such proceedings typically involve
efforts of governmental entities and/or private parties to allocate or recover
site investigation and cleanup costs, which costs may be substantial. Manor Care
believes it has adequate insurance coverage for a substantial portion of the
claims asserted in the Actions. Pursuant to the Distribution Agreement, the
Company will indemnify Manor Care for any portion of the claims not covered by
insurance.
The most significant Action for Manor Care arises from the Kramer landfill,
located in Mantua, New Jersey. On October 30, 1989, the New Jersey Department of
Environmental Protection sued Manor Care and other defendants in U.S. District
Court, District of New Jersey, seeking clean-up costs at the site where
subsidiaries of Cenco allegedly transported waste. At about the same time, the
United States filed a lawsuit against approximately 25 defendants in the same
court seeking recovery of its expenses arising in connection with this site.
Manor Care is a third party defendant in the latter suit. Based upon a recent
court-approved final allocation plan, and also in view of its insurance
coverage, Manor Care believes that the Kramer Action will not have a material
adverse effect on its financial condition or results of operation. The Company
believes that any liability it may have for indemnification of Manor Care will
not have a material adverse effect on the Company's business, financial
condition or results of operations. This final allocation plan is not binding.
If the matter is not resolved by settlement, a court would have to allocate
responsibility and Manor Care's allocation could change.
F-14
<PAGE> 80
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Although Manor Care, together with its insurers, is vigorously contesting
its liability in the Actions, it is not possible at the present time to estimate
the ultimate legal and financial liability of Manor Care in respect to the
Actions or the ultimate indemnification liability, if any, of the Company.
As of May 31, 1996, the Company had contractual commitments of $15.1
million relating to its construction program.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
Bonuses accrued for key executives of the Company under incentive
compensation plans were $2.6 million in 1994, $1.7 million in 1995 and $1.2
million in 1996.
Employees of the Company participate in retirement plans sponsored by the
Parent. Costs allocated to the Company are based on the size of its payroll
relative to the Parent's payroll. Costs allocated to the Company were
approximately $1.0 million in 1994, $1.2 million in 1995 and $1.4 million in
1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the fair value of its financial
instruments in accordance with Statement of Financial Accounting Standards No.
107 "Disclosures about Fair Value of Financial Instruments". Fair values of
material balances were determined by using market rates currently available.
The balance sheet carrying amount of cash, cash equivalents and receivables
approximate fair value due to the short term nature of these items. Mortgages
and other long term debt consist of bank loans, mortgages and capital leases.
Interest rates on bank loans adjust frequently based on current market rates;
accordingly, the carrying amount of bank loans is equivalent to fair value. The
carrying amounts for mortgages, capital leases and notes payable to Parent
approximate fair market values.
PROVISION FOR ASSET IMPAIRMENT AND RESTRUCTURING
The Company regularly reviews the recoverability of the net carrying value
of its long-lived assets (including goodwill related to franchise rights) and
makes adjustments accordingly. The Company performs this review no less than
annually and considers such factors as the current market value of assets, and
the operating results and cash flows of business units. An asset is considered
to be impaired if the expected net, undiscounted cash flows are less than the
carrying amount of an asset. Impairment charges are recorded based on the fair
value of the assets.
During fiscal year 1996, the Company began restructuring its European
operations. This restructuring effort included the purchase of an equity
interest in Friendly Hotels, PLC and a reevaluation of key geographic markets in
Europe. In connection with this restructuring, the Company performed a review of
its European operations and in May 1996 recognized a $17.0 million non-cash
charge (net of an $11.1 million income tax benefit) against earnings related
primarily to the impairment of assets associated with certain European hotel
operations.
In addition, the Company recognized a restructuring charge of $3.1 million
(net of a $2.1 million income tax benefit) in May 1996. Restructuring costs
include severance and employee benefit plan restructuring costs and other costs
directly associated with the Distribution.
F-15
<PAGE> 81
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company is required to adopt SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," no
later than fiscal year 1997. The Company's current policy is to regularly review
the recoverability of the net carrying value of its long-lived assets and make
adjustments accordingly. The adoption of SFAS No. 121 is not expected to have a
material impact on the Company's financial statements.
The Company is required to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation," no later than fiscal year 1997. Management expects to adopt SFAS
No. 123 utilizing the method which provides for disclosure of the impact of
stock-based compensation grants.
SUMMARY OF QUARTERLY RESULTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
INCOME (LOSS) NET
BEFORE INCOME
QUARTERS ENDED REVENUES INCOME TAXES (LOSS)
- ---------------------------------------------------- -------- ------------- --------
<S> <C> <C> <C>
FISCAL 1995
August............................................ $ 78,427 $ 10,942 $ 6,295
November.......................................... 77,127 10,354 5,962
February.......................................... 63,845 (279) (486)
May............................................... 83,136 8,938 5,040
-------- ------------- --------
$302,535 $ 29,955 $ 16,811
======== =========== ========
FISCAL 1996
August............................................ $ 99,380 $ 18,572 $ 10,914
November.......................................... 95,198 13,952 8,131
February.......................................... 79,326 2,878 1,391
May............................................... 100,969 (19,544)(a) (11,978)
-------- ------------- --------
$374,873 $ 15,858 $ 8,458
======== =========== ========
</TABLE>
- ---------------
(a) Includes a provision of $33.3 million for asset impairment and
restructuring.
F-16
<PAGE> 82
APPENDIX A
FORM OF
RESTATED CERTIFICATE OF INCORPORATION
OF
CHOICE HOTELS HOLDINGS, INC.
Choice Hotels Holdings, Inc. (the "Corporation"), a corporation
incorporated on June 27, 1996 and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "GCL"), hereby certifies as
follows:
FIRST: The board of directors of the Corporation (the "Board of Directors")
adopted a resolution proposing and declaring advisable the following amendments
to and restatement of the Certificate of Incorporation of the Corporation.
SECOND: This Restated Certificate of Incorporation was duly adopted by the
sole stockholder of the Corporation in accordance with the provisions of
Sections 228, 242 and 245 of the GCL.
THIRD: The text of the Certificate of Incorporation is hereby amended and
restated as herein set forth in full:
1. The name of the corporation is CHOICE HOTELS INTERNATIONAL, INC. (the
"Corporation").
2. The address of the Corporation's registered office in the State of
Delaware is 100 West Tenth Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
3. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the GCL.
4. The total number of shares of capital stock of all classifications which
the Corporation shall have authority to issue is One Hundred Sixty-Five Million
(165,000,000), of which One Hundred Sixty Million (160,000,000) shares having a
par value of One Cent ($.01) per share shall be common stock, and Five Million
(5,000,000) shares having a par value of One Cent ($.01) per share shall be
preferred stock.
Shares of common stock of the Corporation may be issued from time to time
in one or more classes or series, each of which class or series shall have such
distinctive designation or title as shall be fixed by the Board of Directors
prior to the issuance of any shares thereof. Each such class or series of common
stock shall have such voting powers (full or limited) or no voting powers, such
preferences and relative participating, optional or other special rights,
relative ranking and such qualifications, limitations or restrictions, as shall
be stated in such resolution or resolutions providing for the issue of such
class or series of common stock as may be adopted from time to time by the Board
of Directors prior to the issuance of any shares thereof pursuant to the
authority hereby expressly vested in it, all in accordance with the laws of the
State of Delaware.
Without limiting the generality of the foregoing, shares of a series of
common stock consisting of Seventy Five Million (75,000,000) shares, or such
larger number of shares as the Board of Directors shall from time to time fix by
resolution or resolutions, may be issued from time to time by the Board of
Directors. Shares of this series shall be designated, and are hereinafter called
"Common Stock."
The holders of record of the Common Stock shall be entitled to the
following rights:
(a) subject to the rights of any holders of any class or series of
capital stock as specified in the resolution providing for such class or
series of capital stock, to vote at all meetings of stockholders of the
Corporation, and at all such meetings such holders shall have one vote in
respect of each share of Common Stock held of record by them;
A-1
<PAGE> 83
(b) subject to the rights of any holders of any class or series of
capital stock having a preference with respect to dividends, to receive
when, if and as declared by the Board of Directors out of the assets of the
Corporation legally available therefor, such dividends as may be declared
by the Corporation from time to time to holders of Common Stock; and
(c) subject to the rights of any holders of any class or series of
capital stock having a preference with respect to distribution of assets
upon liquidation or dissolution, to receive the remaining assets of the
Corporation upon liquidation, dissolution or winding-up.
Shares of preferred stock of the Corporation may be issued from time to
time in one or more classes or series, each of which class or series shall have
such distinctive designation or title as shall be fixed by the Board of
Directors prior to the issuance of any shares thereof. Each such class or series
of preferred stock shall have such voting powers (full or limited) or no voting
powers, such preferences and relative participating, optional or other special
rights, relative ranking and such qualifications, limitations or restrictions,
as shall be stated in such resolution or resolutions providing for the issue of
such class or series of preferred stock as may be adopted from time to time by
the Board of Directors prior to the issuance of any shares thereof pursuant to
the authority hereby expressly vested in it, all in accordance with the laws of
the State of Delaware.
Subject to the rights of any holders of any class or series of capital
stock, as specified in the resolution providing for such class or series of
capital stock, the holders of Common Stock are expressly denied the preemptive
right to subscribe to any or all additional shares of capital stock of the
Corporation or any or all classes or series thereof.
Upon this Restated Certificate of Incorporation becoming effective pursuant
to the GCL (the "Effective Time"), each share of the Corporation's common stock,
par value $.01 per share (the "Old Common Stock"), issued and outstanding
immediately prior to the Effective Time, will be automatically reclassified as
and converted into one share of Common Stock. Any stock certificate that,
immediately prior to the Effective Time, represents shares of the Old Common
Stock will, from and after the Effective Time, automatically and without the
necessity of presenting the same for exchange, represent the number of shares of
Common Stock as equals the sum obtained by multiplying the number of shares of
Old Common Stock represented by such certificate immediately prior to the
Effective Time by one.
5. The Corporation expressly elects not to be governed by Section 203 of
the GCL.
6. Subject to the rights of any holders of any class or series of capital
stock as specified in the resolution providing for such class or series of
capital stock, any action required to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any consent in
writing of such stockholders in lieu of a meeting.
Special meetings of the stockholders of the Corporation may be called only
by (i) the Chairman or Vice Chairman of the Board of Directors or (ii) the
Secretary of the Corporation within 10 calendar days after receipt of the
written request of a majority of the total number of directors which the
Corporation would have if there were no vacancies (the "Whole Board").
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the Bylaws.
7. A. Subject to the rights of any holders of any class or series of
capital stock as specified in the resolution providing for such class or series
of capital stock, the business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors consisting of not less than
3 nor more than 12 directors, the exact number of directors to be determined
from time to time solely by resolution adopted by the affirmative vote of a
majority of the Whole Board. The directors shall be divided into three classes,
designated Class I, Class II and Class III. Each Class of directors shall
consist, as nearly as may be possible, of one-third of the total number of
directors constituting the Whole Board. The initial term of the Class I
directors shall expire upon the election and qualification of their successors
at the 1997 annual meeting of stockholders; the initial term of the Class II
directors shall expire upon the election and qualification of their successors
at the
A-2
<PAGE> 84
1998 annual meeting of stockholders; and the initial term of the Class III
directors shall expire upon the election and qualification of their successors
at the 1999 annual meeting of stockholders. At each annual meeting of
stockholders beginning with the 1997 annual meeting, successors to the Class of
directors whose term expires at that annual meeting shall be elected for a
three-year term and shall hold office until the annual meeting for the year in
which his or her term expires and until his or her successor shall be elected
and shall qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office.
B. Subject to the rights of any holders of any class or series of capital
stock as specified in the resolution providing for such class or series of
capital stock, newly created directorships resulting from any increase in the
number of directors and any vacancies on the Board of Directors resulting from
death, resignation, retirement, disqualification, removal or other cause will be
filled solely by the affirmative vote of a majority of the remaining directors
then in office, even though less than a quorum of the Board of Directors.
Increases or decreases in the number of directors shall be apportioned among the
Classes so as to maintain the number of directors in each Class as nearly equal
as possible, and any additional director of any Class elected to fill a vacancy
resulting from an increase in such Class shall hold office for a term that shall
coincide with the remaining term of that Class, but in no case will a decrease
in the number of directors shorten the term of any incumbent director.
C. The election of directors need not be by written ballot unless the
Bylaws shall so provide.
D. Notwithstanding the foregoing, whenever the holders of any one or more
series of capital stock shall have the right, voting separately as a class or
series, to elect directors, the election, removal, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Restated Certificate of Incorporation applicable thereto, and such
directors so elected shall not be divided into classes pursuant to Article 6,
Section A, unless expressly provided by such terms.
8. The affirmative vote of the holders of the outstanding shares of capital
stock representing not less than two-thirds of the Voting Power (as defined) of
the Corporation shall be required for the approval of any proposal for the
Corporation to dissolve, liquidate, merge, or consolidate with any other entity
(other than an entity 90% of the Voting Power of which is owned by the
Corporation), or sell, lease or exchange all or substantially all of its
property and assets, including its goodwill and its corporate franchises.
"Voting Power" means the total number of votes that may be cast by holders of
capital stock in the election of directors.
9. The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certificate of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation. Notwithstanding
anything contained in this Restated Certificate of Incorporation to the
contrary, the affirmative vote of the holders of the outstanding shares of
capital stock representing not less than two-thirds of the Voting Power of the
Corporation shall be required to amend, alter, change or repeal, or to adopt any
provision inconsistent with, Article 8 of this Restated Certificate of
Incorporation. The Board of Directors shall have the power to make, adopt,
alter, amend, change or repeal the Bylaws by resolution adopted by the
affirmative vote of a majority of the Whole Board. Stockholders may not make,
adopt, alter, amend, change or repeal the Bylaws except upon the affirmative
vote of the holders of the outstanding shares of capital stock representing not
less than two-thirds of the Voting Power of the Corporation and no Bylaws
hereafter adopted by the stockholders or otherwise shall invalidate any prior
act of the directors which would have been valid if such Bylaws had not been
adopted.
10. A. No director of the Corporation shall be liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the GCL, or (iv) for any transaction from which
the director derived an improper personal benefit. No amendment to or repeal of
this Article 10 shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal. If the
GCL is amended hereafter to further limit the liability of a director, then the
liability of a director of the Corporation shall be further limited to the
fullest extent permitted by the GCL, as so amended.
A-3
<PAGE> 85
B. The Corporation shall indemnify each person who is or was or has agreed
to become a director or officer of the Corporation, and may indemnify other
employees and agents of the Corporation, to the fullest extent permitted by
Section 145 of the GCL, as the same may be amended or supplemented, against all
expenses and liabilities (including, but not limited to, counsel fees)
reasonably incurred by or imposed upon such person in connection with any
proceeding to which he or she may be made a party, or in which he or she may
become involved, by reason of his or her being or having been a director,
officer, employee or agent of the Corporation, or any settlement thereof,
whether or not he or she is a director, officer, employee or agent at the time
such expenses are incurred or liability incurred, except in such cases where the
director, officer, employee or agent is adjudged guilty of willful misfeasance
or malfeasance in the performance of his or her duties; provided that in the
event of a settlement the indemnification herein shall apply only when the Board
of Directors approves such settlement and reimbursement as being for the best
interests of the Corporation. Without limiting the generality or the effect of
the foregoing, the Corporation may adopt Bylaws, or enter into one or more
agreements with any person, which provide for indemnification greater or
different than that provided in this Article 10 or the GCL and the foregoing
right of indemnification shall be in addition to and not exclusive of all other
rights to which such director, officer, employee or agent may be entitled.
C. The Corporation may purchase insurance on behalf of any person who is a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted by him or her and incurred by him or her in any
such capacity, or arising out of his or her status as such, whether or not the
Corporation would have the power or the obligation to indemnify him or her
against such liability under the provisions of this Article 10.
11. The Board of Directors, each committee of the Board of Directors and
each individual director, in discharging their respective duties under
applicable law and this Restated Certificate of Incorporation and in determining
what they each believe to be in the best interests of the Corporation and its
stockholders, may consider the effects, both short-term and long-term, of any
action or proposed action taken or to be taken by the Corporation, the Board of
Directors or any committee of the Board of Directors on the interests of (i) the
employees, franchisees, licensees, customers, suppliers and/or creditors of the
Corporation and its subsidiaries and (ii) the communities in which the
Corporation and its subsidiaries own or lease property or conduct business, all
to the extent that the Board of Directors, any committee of the Board of
Directors or any individual director deems pertinent under the circumstances;
provided, however, that the provisions of this Article 11 shall not limit in any
way the right of the Board of Directors to consider any other lawful factors in
making its determinations, including, without limitation, the effects, both
short-term and long-term, or any action or proposed action on the Corporation or
its stockholders directly; and provided further that this Article 11 shall be
deemed solely to grant discretionary authority to the Board of Directors, each
committee of the Board of Directors and each individual director and shall not
be deemed to provide to any specific constituency any right to be considered.
12. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of the GCL or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of Section 279 of the GCL, order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
A-4
<PAGE> 86
IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of
Incorporation to be duly executed in its corporate name.
Dated: , 1996
--------------------------------------
Name: Stewart Bainum, Jr.
Chairman and Chief
Executive Officer
A-5
<PAGE> 1
EXHIBIT 3.02
FORM OF
BYLAWS
OF
CHOICE HOTELS HOLDINGS, INC.
(Hereinafter called the "Corporation")
As amended _______________
ARTICLE I
OFFICES
Section 1. Office. The registered office of the Corporation shall be in
the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Additional Offices. The Corporation may also have offices at
such other places, both within and without the State of Delaware, as the Board
of Directors may from time to time determine or as the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Time and Place. Meetings of stockholders for any purpose may be
held at such time and place, within or without the State of Delaware, as the
Board of Directors may fix from time to time and as shall be stated in the
notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meeting. Annual meetings of stockholders shall be held
on any date in the month of September or October in each year at 9:00 a.m. or at
such other time and such date and time shall be designated, from time to time,
by the Board of Directors and stated in the notice of the meeting. At such
annual meeting, the stockholders shall elect a board of directors and transact
such other business as may properly be brought before the meeting in accordance
with Section 7 of this Article II.
Section 3. Notice of Annual Meeting. Written notice of the annual meeting
stating the place, date and time thereof shall be given to each stockholder
entitled to vote at such meeting not less than 10 nor more than 60 days prior to
the meeting.
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Section 4. List of Stockholders. The officer in charge of the stock ledger
of the Corporation or the transfer agent shall prepare and make, at least 10
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for purpose germane to the meeting, during ordinary business hours, for a period
of at least 10 days prior to the meeting, either at a place within the city
where the meeting is to be held (other than the place of the meeting), which
place shall be specified in the notice of the meeting, or, if not so specified,
at the place where the meeting is to be held. The list shall also be produced
and kept at the time and place of the meeting during the whole time thereof, and
may be inspected by any stockholder who is present.
Section 5. Notice of Special Meeting. Written notice of a special meeting
stating the place, date and time thereof and the purpose or purposes for which
the meeting is called, shall be given to each stockholder entitled to vote at
such meeting not less than 10 nor more than 60 days prior to the meeting.
Section 6. Stockholder Proposals. To be properly brought before an annual
meeting, business must be (1) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (2)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors or (3) otherwise properly brought before the meeting by a
stockholder entitled to vote thereon. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be received not less than sixty days nor more than
ninety days prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than thirty days or delayed by more than sixty days
from such anniversary, notice by the stockholder to be timely must be so
received not earlier than the ninetieth day prior to such annual meeting and not
later than the close of business on the later of (1) the sixtieth day prior to
such annual meeting or (2) the tenth day following the date on which notice of
the date of the annual meeting was mailed or public disclosure thereof was made,
whichever first occurs. For purposes of calculating the first such notice period
following adoption of this Restated Certificate of Incorporation, the first
anniversary of the 1996 annual meeting shall be deemed to be , 1997. Each
such notice shall set forth as to each matter the stockholder proposes to bring
before the annual meeting: (a) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the meeting, (b) the name and address, as they appear on the Corporation's
books, of the stockholder proposing such business and the name and address of
the beneficial owner on whose behalf the proposal is being made, (c) the class,
series and number of shares of the Corporation which are beneficially owned by
the stockholder or by the beneficial owner on whose behalf the proposal is
<PAGE> 3
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being made, (d) any material interest of the stockholder, or the beneficial
owner on whose behalf the proposal is being made, in such business, (e) a
representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting, and (f) a description of all arrangements or
understandings between the stockholder, the beneficial owner on whose behalf the
proposal is being made, or any other person or persons (naming such person or
persons) relating to the matter being proposed.
To be properly brought before a special meeting, business must be (i)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors or (ii) otherwise properly brought
before the meeting by or at the direction of the Board of Directors.
No business shall be conducted at any meeting of the stockholders except
in accordance with the procedures set forth in this Article II, Section 6. The
presiding officer of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Article II, Section 6 and if he or
she should so determine, any such business not properly brought before the
meeting shall not be transacted. Nothing herein shall be deemed to affect any
rights of stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
Section 7. Presiding Officer
(a) Meetings of stockholders shall be presided over by the Chairman of the
Board, or, if he is not present, by the Vice Chairman, or, if he is not present,
by the President or, if he is not present, by such person who may have been
chosen by the Board of Directors or, if none of such persons is present, by a
chairman to be chosen by the stockholders owning a majority of the shares of
capital stock of the Corporation issued and outstanding and entitled to vote at
the meeting and who are present in person or by proxy. The Secretary of the
Corporation or, if he is not present, an Assistant Secretary or, if he is not
present, such person who may have been chosen by the Board of Directors, shall
act as secretary of meetings of stockholders, but if none of such persons is
present the stockholders owning a majority of the Voting Power of the
Corporation and who are present in person or by proxy shall choose any person
present to act as secretary of the meeting. "Voting Power" means the total
number of votes that may be cast by holders of capital stock in the election of
directors.
<PAGE> 4
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Section 8. Quorum. The holders of a majority of the Voting Power of the
Corporation, present in person or by proxy, shall be necessary to, and shall
constitute a quorum for, the transaction of business at all meetings of
stockholders, except as otherwise provided by statute or by the Certificate of
Incorporation. If, however, a quorum shall not be present in person or by proxy
at any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or by proxy, shall have the power to adjourn the meeting
from time to time, without notice of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken, until a quorum shall be present in person or by proxy. At any meeting of
the stockholders, the stockholders entitled to vote thereat, present in person
or by proxy, shall have the power to adjourn the meeting from time to time for
good cause, without notice of the adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken, until a
date which is not more than 30 days after the date of the original meeting. At
such adjourned meeting, at which a quorum shall be present in person or by
proxy, any business may be transacted which might have been transacted at the
meeting as originally called. If the adjournment is for more than 30 days or, if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
Section 9. Voting.
(a) At any meeting of stockholders, every stockholder having the right to
vote shall be entitled to vote in person or by proxy. Except as otherwise
provided by law or the Certificate of Incorporation or a resolution of the Board
of Directors creating a series or class of capital stock of the Corporation,
each stockholder of record shall be entitled to one vote for each share of
capital stock registered in his name on the books of the Corporation.
(b) All elections shall be determined by a plurality vote, and except as
otherwise provided by law or the Certificate of Incorporation, all other matters
shall be determined by a vote of a majority of the Voting Power present in
person or by proxy and voting on such other matters.
<PAGE> 5
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ARTICLE III
DIRECTORS
Section 1. General Powers; Number; Tenure. The business of the Corporation
shall be managed by or under its Board of Directors which may exercise all
powers of the Corporation and perform all lawful acts and things as are not by
law, the Certificate of Incorporation or these Bylaws directed or required to be
exercised or performed by the stockholders. The number of directors constituting
the whole Board of Directors shall be not less than 3 nor more than 12. The
first Board of Directors shall consist of 7 directors. Thereafter, within the
limits of above specified, the number of directors shall be determined by the
Board of Directors. The directors shall be elected and shall hold office as
specified in the Certificate of Incorporation. Directors need not be
stockholders. Directors, other than the Chairman and Vice Chairman, shall retire
from the Board of Directors as of the annual meeting of stockholders next
following the date they attain the age of seventy-two (72) years.
Section 2. Nomination of Directors. Any stockholder entitled to vote in
the election of directors generally may nominate one or more persons for
election as directors at an annual meeting only pursuant to the Corporation's
notice of such meeting or if written notice of such stockholder's intent to make
such nomination or nominations has been received by the Secretary of the
Corporation not less than sixty nor more than ninety days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than thirty
days or delayed by more than sixty days from such anniversary, notice by the
stockholder to be timely must be so received not earlier than the ninetieth day
prior to such annual meeting and not later than the close of business on the
later of (1) the sixtieth day prior to such annual meeting or (2) the tenth day
following the day on which notice of the date of the annual meeting was mailed
or public disclosure thereof was made by the Corporation, whichever first
occurs. For purposes of calculating the first such notice period following
adoption of this Restated Certificate of Incorporation, the first anniversary of
the 1996 annual meeting shall be deemed to be , 1997. Each such notice shall set
forth: (a) the name and address of the stockholder who intends to make the
nomination and the name, age, business address, residence address and principal
occupation of the person or persons to be nominated; (b) a representation that
the stockholder is a holder of record of stock of the Corporation entitled to
vote at such meeting and intends to appear in person or by proxy at the meeting
to nominate the person or persons specified in the notice; (c) a description of
all arrangements or understandings between the stockholder and each nominee and
any other person or persons (naming such person or persons) relating to the
nomination or nominations; (d) the class and number of shares of the Corporation
which are beneficially owned by such stockholder and the person to be nominated
as of the date of such stockholder's notice and by any other stockholders
<PAGE> 6
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known by such stockholder to be supporting such nominees as of the date of such
stockholder's notice; (e) such other information regarding each nominee proposed
by such stockholder as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission; and
(f) the consent of each nominee to serve as a director of the Corporation if so
elected.
In addition, in the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors, any stockholder
entitled to vote in the election of directors generally may nominate one or more
persons for election as directors at a special meeting only pursuant to the
Corporation's notice of meeting or if written notice of such stockholder's
intent to make such nomination or nominations, setting forth the information and
complying with the form described in the immediately preceding paragraph, has
been received by the Secretary of the Corporation not earlier than the ninetieth
day prior to such special meeting and not later than the close of business on
the later of (i) the sixtieth day prior to such special meeting or (ii) the
tenth day following the day on which notice of the date of the special meeting
was mailed or public disclosure thereof was made by the Corporation, whichever
comes first.
No person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures set forth in this Article
III, Section 2. The presiding officer of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this Article III, Section 2, and if
he or she should so determine, the defective nomination shall be disregarded.
Section 3. Vacancies; Resignations. (a) If any vacancies occur in the
Board of Directors, or if any new directorships are created, they shall be
filled solely by a majority of the directors then in office, although less than
a quorum. Each director so chosen shall hold office until the expiration of the
term of the class into which such director was elected and until his successor
is duly elected and qualified. If there are no directors in office a special
meeting of stockholders shall be called in accordance with the provisions of the
Certificate of Incorporation or these Bylaws, at which meeting such vacancies
shall be filled.
(b) Any director may resign at any time by giving written notice to the
Board of Directors, the Chairman of the Board, the President or the Secretary of
the Corporation. Unless otherwise specified in such written notice, a
resignation shall take effect upon delivery thereof to the Board of Directors or
the designated officer. It shall not be necessary for a resignation to be
accepted before it becomes effective.
Section 4. Place of Meeting. The Board of Directors may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 5. First Meeting. The first regular meeting of each newly elected
Board of Directors shall be held immediately following the annual meeting of
stockholders and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present.
<PAGE> 7
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Section 6. Regular Meetings. Additional regular meetings of the Board of
Directors may be held without notice, at such time and place as may from time to
time be determined by the Board of Directors.
Section 7. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board of Directors or President on 2 days'
notice to each director in accordance with Article V. Special meetings shall be
called by the Chairman of the Board, President or Secretary in like manner and
on like notice on the written request of 4 directors or one-half (1/2) of the
number of directors, whichever is less.
Section 8. Quorum. At all meetings of the Board of Directors one-half
(1/2) of the number of directors then in office, or such greater number as
equals one-third (1/3) of the total number of directors, shall constitute a
quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by law
or the Certificate of Incorporation. If a quorum is not present at any meeting
of the Board of Directors, the directors present may adjourn the meeting, from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
Section 9. Compensation. Directors shall be entitled to such compensation
for their services as directors and to such reimbursement for any reasonable
expenses incurred in attending directors' meetings as may from time to time be
fixed by the Board of Directors. The compensation of directors may be on such
basis as is determined by the Board of Directors. Any director may waive
compensation for any meeting. Any director receiving compensation under these
provisions shall not be barred from serving the Corporation in any other
capacity and receiving reasonable compensation for other such services.
Section 10. Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
a written consent to such action is signed by all members of the Board of
Directors and such written consent is filed with the minutes of the proceedings.
ARTICLE IV
COMMITTEES
Section 1. Executive Committee. The Board of Directors may appoint any
Executive Committee consisting of not less than 3 directors, one of whom shall
be designated as Chairman of the Executive Committee.
Section 2. Powers. The Executive Committee shall have and may exercise
those powers of the Board of Directors as may from time to time be granted to it
by the Board of Directors.
<PAGE> 8
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Section 3. Procedure; Meetings. The Executive Committee shall fix its own
rules of procedure and shall meet at such times and at such place or places as
may be provided by such rules. The Executive Committee shall keep regular
minutes of its meetings and deliver such minutes to the Board of Directors.
The Chairman of the Executive Committee, or, in his absence, a member of
the Executive Committee chosen by a majority of the members present, shall
preside at meetings of the Executive Committee and another member thereof chosen
by the Executive Committee shall act as Secretary of the Executive Committee.
Section 4. Quorum. A majority of the Executive Committee shall constitute
a quorum for the transaction of business, and the affirmative vote of a majority
of the members thereof shall be required for any action of the Executive
Committee.
Section 5. Other Committees. The Board of Directors may appoint such other
committee or committees as it shall deem advisable and with such functions and
duties as the Board of Directors shall prescribe.
Section 6. Vacancies; Changes; Discharge. The Board of Directors shall
have the power at any time to fill vacancies in, to change the membership of,
and to discharge, any such committee.
Section 7. Compensation. Members of any committee shall be entitled to
such compensation for their services as members of any such committee and to
such reimbursement for any reasonable expenses incurred in attending committee
meetings as may from time to time be fixed by the Board of Directors. Any member
may waive compensation for any meeting.
Section 8. Action by Consent. Any action required or permitted to be taken
at any meeting of any committee of the Board of Directors may be taken without a
meeting if written consent to such action is signed by all members of the
committee and such written consent is filed with the minutes of its proceedings.
ARTICLE V
NOTICES
Section 1. Form; Delivery. Whenever, under the provisions of law, the
Certificate of Incorporation or these Bylaws, notice is required to be given to
any director or stockholder, it shall not be construed to mean personal notice
unless otherwise specifically provided, but such notice may be given by regular
or overnight mail, addressed to such director or stockholder, at his or her
address as it appears on the records of the Corporation, with postage thereon
prepaid. Notices given by regular mail shall be deemed to be given at the time
they are deposited in the United States mail. Notice to a director may also be
given personally, by telegram sent to his address as it appears on the records
of the Corporation, by facsimile (with a machine-generated confirmation) or by
telephone.
<PAGE> 9
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Section 2. Waiver. Whenever any notice is required to be given under the
provisions of law, the Certificate of Incorporation or these Bylaws, a written
waiver thereof, signed by the person or persons entitled to said notice, whether
before or after the time stated therein, shall be deemed to be equivalent to
such notice. In addition, any stockholder who attends a meeting of stockholders
in person, or is represented at such meeting by proxy, without protesting prior
to the conclusion of the meeting the lack of notice thereof to him, or any
director who attends a meeting of the Board of Directors without protesting,
prior to the commencement of the meeting, such lack of notice, shall be
conclusively deemed to have waived notice of such meeting.
ARTICLE VI
OFFICERS
Section 1. Designations. The officers of the Corporation shall be chosen
by the Board of Directors and shall be a Chairman of the Board, Vice Chairman of
the Board, a President, a Secretary and a Treasurer. The Board of Directors may
also choose one or more Executive or Senior Vice Presidents, one or more
additional vice presidents, one or more assistant secretaries and assistant
treasurers, and such other officers and agents as it shall deem necessary. All
officers of the Corporation shall hold their offices for such terms and shall
exercise such power and perform such duties as shall from time to time be
determined by the Board of Directors. Any number of offices may be held by the
same person, unless the Certificate of Incorporation or these Bylaws otherwise
provide.
Section 2. Term of Office; Removal. The Board of Directors at its first
meeting after each annual meeting of stockholders shall choose a Chairman, a
Vice Chairman, a President, a Secretary and a Treasurer and such other officers
as the Board of Directors shall deem appropriate. The officers of the
Corporation shall hold office until their successors are chosen and shall
qualify. Any officer elected or appointed by the Board of Directors may be
removed, with or without cause, at any time by the affirmative vote of a
majority of the directors then in office. Such removal shall not prejudice the
contract rights, if any, of the person so removed. Any vacancy occurring in any
office of the Corporation may be filled by the Board of Directors.
Section 3. Compensation. The salaries of all officers of the Corporation
shall be fixed by the Board of Directors.
Section 4. The Chairman of the Board. The Chairman of the Board shall be
the Chief Executive Officer of the Corporation and shall have general direction
of the business affairs of the Corporation, subject to the control of the Board
of Directors. The Chairman shall preside at all meetings of stockholders and the
Board of Directors which he shall attend. Except where, by law, the signature of
the President is required, the Chairman shall possess the same power as the
President to execute all certificates, contracts, bonds, mortgages and other
instruments of the Corporation.
<PAGE> 10
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Section 5. Vice Chairman. The Vice Chairman shall, in the absence of the
Chairman of the Board or in the event of his disability, preside at all meetings
of the Board of Directors and Stockholders and perform the duties and exercise
the powers of the Chairman of the Board and shall perform such other duties and
have such other powers as may from time to time be prescribed by the Board of
Directors.
Section 6. The President.
(a) The President shall be the Chief Administrator and Operations Officer
of the Corporation and shall have general direction of the administration and
operation of the business affairs of the Corporation, subject to the direction
of the Chairman of the Board and the Board of Directors.
(b) Unless otherwise prescribed by the Board of Directors, the President
shall have full power and authority on behalf of the Corporation to attend, act
and vote at any meeting of security holders of other corporations in which the
Corporation may hold securities. At such meeting, the President shall possess
and may exercise any and all rights and powers incident to the ownership of such
securities which the Corporation might have possessed and exercised if it had
been present. The Board of Directors may from time to time confer like powers
upon any other person or persons.
Section 7. The Vice Presidents. The Vice President (or in the event there
by more than one, the Vice Presidents in the order designated, or in the absence
of any designation, then in order of their election) shall, in the absence of
the President or in the event of his disability, perform the duties and exercise
the powers of the President and shall generally assist the President and perform
such other duties and have such other powers as may from time to time be
prescribed by the Board of Directors.
Section 8. The Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all votes and the
proceedings of the meetings in a book to be kept for that purpose and shall
perform like duties for the Executive Committee or other committees, if
required. He shall give, or cause to be given, notice of all meetings of
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may from time to time be prescribed by the Board of
Directors, the Chairman of the Board or the President, under whose supervision
he shall act. He shall have custody of the seal of the Corporation and he, or an
Assistant Secretary, shall have authority to affix the same to any instrument
requiring it and, when so affixed, the seal may be attested by his signature or
by the signature of such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing thereof by his signature.
Section 9. The Assistant Secretary. The Assistant Secretary (or in the
event there be more than one, the Assistant Secretaries in the order designated,
or in the absence of any designation, then in the order of their election)
shall, in the absence of the Secretary or in the event of his disability,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as may from time to time be
prescribed by the Board of Directors.
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Section 10. The Treasurer. The Treasurer shall have the custody of the
corporate funds and other valuable effects, including securities, and shall keep
full and accurate accounts of receipts and disbursements in books belonging to
the Corporation and shall deposit all moneys and other valuable effects in the
name and to the credit of the Corporation in such depositories as may from time
to time be designated by the Board of Directors. He shall disburse the funds of
the Corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the Chairman of the Board
or the President, and the Board of Directors, at regular meetings of the Board,
or whenever they may require it, an account of all of his transactions as
Treasurer and of the financial condition of the Corporation.
Section 11. The Assistant Treasurer. The Assistant Treasurer (or in the
event there be more than one, the Assistant Treasurers in the order designated,
or in the absence of any designation, then in the order of their election)
shall, in the absence of the Treasurer or in the event of his disability,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as may from time to time be
prescribed by the Board of Directors.
ARTICLE VII
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
Section 1. Action, Other Than by or in the Right of the Corporation. The
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding or investigation, whether civil, criminal or administrative, and
whether external or internal to the Corporation (other than a judicial action or
suit brought by or in the right of the Corporation) by reason of the fact that
he is or was a director, officer, employee or agent of the Corporation, or that,
being or having been such a director, officer, employee or agent, he is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise (all such persons being referred to hereafter as an "Agent"), against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding, or any appeal thereof, if he or she acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of the Corporation, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The termination of any action, suit or proceeding -- whether by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent -- shall not, of itself, create a presumption that the person did
not act in good faith and in manner which he or she reasonably believed to be in
or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, that he or she had reasonable cause to
believe that his or her conduct was unlawful.
Section 2. Action, by or in the Right of the Corporation. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed judicial action or suit brought by
or in the right of the Corporation to procure a judgment
<PAGE> 12
-12-
in its favor by reason of the fact that he or she is or was an Agent (as defined
above) against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection with the defense, settlement or appeal of
such action or suit if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for gross negligence or misconduct in the performance of his or her duty
to the Corporation unless and only to the extent that the Court of Chancery or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or other such court
shall deem proper.
Section 3. Determination of Right of Indemnification. No indemnification
under Section 1 or 2 of this Article VII (unless ordered by a court) shall be
made by the Corporation if a determination is reasonably and promptly made (i)
by the Board of Directors by a majority vote consisting of directors who were
not parties to such action, suit or proceedings, even though less than a quorum
or (ii) if there are no such directors or if such directors so direct, by
independent legal counsel in a written opinion, or (iii) by the stockholders,
that such person did not act in good faith and in a manner that such person
reasonably believed to be in or not opposed to the best interests of the
Corporation, or, with respect to any criminal proceeding, that such person
believed or had reasonable cause to believe that his or her conduct was
unlawful.
Section 4. Indemnification Against Expenses of Successful Party.
Notwithstanding the other provisions of this Article, to the extent that an
Agent has been successful on the merits or otherwise, including the dismissal of
an action without prejudice or the settlement of an action without admission of
liability, in defense of any action, suit or proceeding or in defense of any
claim, issue or matter therein, or on appeal from any such proceeding, action,
claim or matter, such Agent shall be indemnified against all expenses actually
and reasonably incurred in connection therewith.
Section 5. Advances of Expenses. Except as limited by Section 6 of this
Article, expenses incurred in defending any civil, criminal, administrative or
investigative action, suit or proceeding or investigation or any appeal therein
shall be paid by the Corporation in advance of the final disposition of such
matter, if the Agent shall undertake to repay such amount in the event that it
is ultimately determined, as provided herein, that such person is not entitled
to indemnification. Notwithstanding the foregoing, no advance shall be made by
the Corporation if a determination is reasonably and promptly made by the Board
of Directors by a majority vote of disinterested directors, or (if there are no
such directors or such directors so direct) by independent legal counsel in a
written opinion, that, based upon the facts known to the Board or counsel at the
time such determination is made, such person did not act in good faith and in a
manner that such person believed to be in or not opposed to the best interests
of the Corporation, or, with respect to any criminal proceeding, that such
person believed or had reasonable cause to believe his or her conduct was
unlawful. In no event shall any advance be made in instances where the Board of
Directors or independent legal counsel reasonably determines that such person
deliberately breached his duty to the Corporation or its shareholders.
<PAGE> 13
-13-
Section 6. Right of Agent to Indemnification Upon Application; Procedure
Upon Application. Any indemnification under Sections 1, 2, and 4, or advance
under Section 5 of this Article, shall be made promptly, and in any event within
ninety days, upon the written request of the Agent, unless with respect to
applications under Sections 1, 2, or 5, a determination is reasonably and
promptly be made by the Board of Directors by a majority vote of disinterested
directors that such Agent acted in a manner set forth in such Sections as to
justify the Corporation's not indemnifying or making an advance to the Agent. In
the event there are no such disinterested directors, the Board of Directors
shall promptly direct that independent legal counsel shall decide whether the
Agent acted in the manner set forth in such Sections as to justify the
Corporation's not indemnifying or making an advance to the Agent. The right to
indemnification or advances as granted by this Article shall be enforceable by
the Agent in any court of competent jurisdiction, if the Board or independent
legal counsel denies the claim, in whole or in part, or if no disposition of
such claim is made within ninety days. The Agent's expenses incurred in
connection with successfully establishing his right to indemnification, in whole
or in part, in any such proceeding shall also be indemnified by the Corporation.
Section 7. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in this
Article is held by a court of competent jurisdiction to be unavailable to an
indemnitee in whole or part, the Corporation, shall, in such an event, after
taking into account, among other things, contributions by other directors and
officers of the Corporation pursuant to indemnification agreements or otherwise,
and in the absence of personal enrichment, acts of intentional fraud or
dishonesty or criminal conduct on the part of the Agent, contribute to the
payment of Agent's losses to the extent that, after other contributions are
taken into account, such losses exceed: (i) in the case of a director of the
Corporation or any of its subsidiaries who is not an officer of the Corporation
or any of such subsidiaries, the amount of fees paid to him or her for serving
as a director during the 12 months preceding the commencement of the suit,
proceeding or investigation; or (ii) in the case of a director of the
Corporation or any of its subsidiaries who is also an officer of the Corporation
or any of such subsidiaries, the amount set forth in clause (i) plus 5% of the
aggregate cash compensation paid to said director for such office(s) during the
12 months preceding the commencement of the suit, preceding, or investigation;
or (ii) in the case of an officer of the Corporation or any of its subsidiaries,
5% of the aggregate cash compensation paid to such officer for service in such
office(s) during the 12 months preceding the commencement of such suit,
proceeding or investigation.
Section 8. Other Rights and Remedies. The indemnification provided by this
Article shall not be deemed exclusive of, and shall not affect, any other rights
to which an Agent seeking indemnification may be entitled under any Bylaws,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be an
Agent and shall inure to the benefit of the heirs, executors and administrators
of such a person. All rights to indemnification under this Article shall be
deemed to be provided by a contract between the Corporation and the agent who
serves in such capacity at any time while these bylaws and other relevant
provisions of the general corporation law and other applicable law, if any, are
in effect. Any repeal or modification thereof shall not affect any rights or
obligations then existing.
<PAGE> 14
-14-
Section 9. Insurance. Upon resolution passed by the Board, the Corporation
may purchase and maintain insurance on behalf of any person who is or was an
Agent against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this Article. The Corporation may create a trust fund, grant a
security interest or use other means (including, without limitation, a letter of
credit) to ensure the payment of such sums as may become necessary to effect
indemnification as provided herein.
Section 10. Constituent Corporations. For the purposes of this Article,
references to "the Corporation" include all constituent corporations absorbed in
a consolidation or merger as well as the resulting or surviving corporation, so
that any person who is or was a director, officer, employee, or trustee of such
a constituent corporation or who, being or having been such a director, officer,
employee or trustee, is or was serving at the request of such constituent
corporation as a director, officer, employee, trustee of another corporation,
partnership, joint venture, trust or other enterprise shall stand in the same
position under the provisions of this Article with respect to the resulting or
surviving corporation as he would if he had served the resulting or surviving
corporation in the same capacity.
Section 11. Other Enterprises, Fines, and Serving at Corporation's
Request. For purposes of this Article, references to "other enterprises" in
Section 1 and 7 shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on a person with respect to any employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service by Agent as director, officer, employee, trustee or
agent of the Corporation which imposes duties on, or involves services by, such
Agent with respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interests of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article.
Section 12. Savings Clause. If this Article or any portion thereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Agent as to expenses (including
attorneys' fees), judgements, fines and amounts paid in settlement with respect
to any action, suit, appeal, proceeding or investigation, whether civil,
criminal or administrative, and whether internal or external, including a grand
jury proceeding and an action or suit brought by or in the right of the
Corporation, to the full extent permitted by any applicable portion of this
Article that shall not have been invalidated, or by any other applicable law.
<PAGE> 15
-15-
ARTICLE VIII
STOCK CERTIFICATES
Section 1. Form; Signatures.
(a) Every holder of stock in the Corporation shall be entitled to have a
certificate, signed by the Chairman of the Board or the President and the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary
of the Corporation, exhibiting the number, and class (and series, if any), of
shares owned by him, and bearing the seal of the Corporation. Such seal may be a
facsimile. Where a certificate is manually signed (i) by a transfer agent other
than the Corporation or its employee or (ii) by a registrar other than the
Corporation or its employee, the signature of any such officer may be a
facsimile. In case any officer who has signed, or whose facsimile signature was
placed on, a certificate shall have ceased to be such officer before such
certificate is issued, it may nevertheless be issued by the Corporation with the
same effect as if he were such officer at the date of its issue.
(b) All stock certificates representing shares of capital stock which are
subject to restrictions on transfer or to other restrictions, may have imprinted
thereon a notation to such effect, as shall be determined by the Board of
Directors.
Section 2. Registration of Transfer. Upon surrender to the Corporation or
any transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation or its transfer agent to issue
a new certificate to the person entitled thereto, to cancel the old certificate
and to record the transaction upon its books.
Section 3. Registered Stockholders.
(a) Except as otherwise provided by law, the Corporation shall be entitled
to recognize the exclusive right of a person who is registered on its books as
the owner of shares of capital stock to receive dividends or other
distributions, to vote as such owner, and to hold liable for calls and
assessments a person who is registered on its books as the owner of shares of
its capital stock. The Corporation shall not be bound to recognize any equitable
or legal claim to or interest in such shares on the part of any other person.
(b) Stockholders are responsible for giving written notice to the
Corporation or the transfer agent and registrar, if any, of any change of name
or address, and failure to do so shall relieve the Corporation, its directors,
officers and agents, and its transfer agent and registrar, if any, of liability
for failure to send notices or pay dividends or other distributions to a name or
address other than the name or address appearing on the stock ledger maintained
by the Corporation or by the transfer agent and registrar, if any.
<PAGE> 16
-16-
Section 4. Lost, Stolen or Destroyed Certificates. The Board of Directors
may direct a new certificate to be issued in place of any certificate
theretofore issued by the Corporation which is claimed to have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate, or his legal
representative, to advertise the same in such manner as it shall require and/or
to give the Corporation a bond in such sum as it may direct as indemnity against
any claim that may be made against the Corporation with respect to the
certificate claimed to have been lost, stolen or destroyed.
ARTICLE IX
GENERAL PROVISIONS
Section 1. Dividends. Subject to the provisions of the Certificate of
Incorporation, dividends upon the outstanding capital stock of the Corporation
may be declared by the Board of Directors at any regular or special meeting,
pursuant to law, and may be paid in cash, in property, or in shares of the
Corporation's capital stock.
Section 2. Reserves. The Board of Directors shall have full power, subject
to the provisions of law and the Certificate of Incorporation, to determine
whether any, and, if so, what part, of the funds legally available for the
payment of dividends shall be declared as dividends and paid to the stockholders
of the Corporation. The Board of Directors may fix a sum which may be set aside
or reserved over and above the paid-in capital of the Corporation for working
capital or as a reserve for any proper purpose, and may, from time to time,
increase, diminish or vary such fund in its absolute judgment and discretion.
Section 3. Fiscal Year. The fiscal year of the Corporation shall begin on
June 1 in each calendar year and end on May 31 in the following calendar year.
Section 4. Seal. The corporate seal shall have inscribed thereon the name
of the Corporation, the year of its incorporation and the words "Corporate Seal,
Delaware".
<PAGE> 1
Exhibit 10.02
TRADEMARK AGREEMENT
THIS AGREEMENT is made and entered into as of this _____ day of _____,
1996 by and among MANOR CARE, INC., a Delaware corporation ("Manor Care"), and
CHOICE HOTELS HOLDINGS, INC. (to be renamed CHOICE HOTELS INTERNATIONAL,
INC.)("CHH"), a Delaware corporation.
RECITALS
Manor Care, directly and through certain subsidiaries ("Lodging
Subsidiaries") develops, owns and conducts the business of operating lodging
facilities (the "Lodging Business") and, directly and through its other
subsidiaries, develops, owns and conducts the business of operating health care
and senior living facilities;
CHH, directly and through its subsidiaries, engages in the business of
operating and franchising lodging facilities, resorts, food facilities, other
products procurement and distribution and other contract services businesses
pertaining to lodging;
Manor Care and CHH have entered into a distribution agreement dated as
of __________, 1996, whereby, inter alia, Manor Care and the Lodging
Subsidiaries transfer to CHH the stock of the Lodging Subsidiaries and certain
other assets relating principally to the Lodging Business, and whereby CHH will
conduct the Lodging Business formerly conducted by the Lodging Subsidiaries;
Manor Care and the Lodging Subsidiaries desire to assign and transfer
to CHH, and CHH desires to acquire, all of the right, title and interest of
Manor Care and the Lodging Subsidiaries in and to all the registered and pending
trademarks and service marks that are owned by Manor Care, Inc., and that are
used exclusively in the Lodging Business (marks in Schedule A, collectively
"Assigned Marks").
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<PAGE> 2
AGREEMENT
NOW THEREFORE, in consideration of the foregoing, the mutual promises
contained in this Agreement, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Manor Care and CHH
agree as follows:
1. ASSIGNMENT. Without representation or warranty of any kind, express or
implied, and subject to all existing licenses, Manor Care hereby grants and
assign to CHH all of its right, title and interest in and to:
a. The Assigned Marks;
b. All federal, state and foreign registrations related to the Assigned
Marks and all pending applications for the Assigned Marks;
c. All statutory, common law, equitable and civil law rights (whether
arising under federal, state or foreign law) related to the Assigned Marks;
d. All of the goodwill of the Lodging Business connected with and
symbolized by the Assigned Marks;
e. All rights to income, royalties, license and franchise fees and any
other payments now or hereafter due or payable with respect to the Assigned
Marks, including without limitation, all damages and payments for past, present
and future infringements of the Assigned Marks;
f. All right to sue for, and all rights of recovery with respect to,
all past, present and future infringements of the Assigned Marks;
g. All rights of Manor Care under all license agreements with respect
to the Assigned Marks;
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<PAGE> 3
and
h. All other rights and privileges pertaining to or associated with the
Assigned Marks throughout the world, the same to be held and enjoyed by CHH as
fully as the same would have been held and enjoyed by Manor Care had this
Agreement not been made. These rights in sections a. through h. above are
collectively the Assigned Mark Rights.
2. ASSUMPTION. CHH agrees to assume all obligations of Manor Care and the
Lodging Subsidiaries arising after the date of this Agreement under any license
agreements to which Manor Care or any of the Lodging Subsidiaries is a party
that are being assigned to CHH under this Agreement.
3. MANOR CARE OBLIGATIONS. Within a reasonable time of the execution of this
Agreement, not to exceed 3 months, Manor Care and the Lodging Subsidiaries agree
to:
a. Cease all use of the Assigned Marks or any mark that is confusingly
similar to, or a colorable imitation of, the Assigned Marks, and dispose of all
current inventory and supplies marked with the Assigned Marks;
b. Prepare and file with proper authorities all corporate resolutions
and forms necessary to change the corporate name, and trademark registrant
status of the marks listed in Schedule B, of the Lodging Subsidiary Manor Care
Hotels France, S.A. to Choice Hotels France, S.A.;
c. Prepare and file with proper authorities an assignment of rights,
registrations and obligations associated with all trademarks, service marks and
trade names, listed in Schedule C, of Manor Care Hotels International, Inc. to
Choice Hotels France, S.A.;
d. Prepare and file with proper authorities all forms necessary to
effect a change in each Manor Care business and corporate, except as otherwise
provided in this Agreement, name to a name which does not include the words
"Hotels ";
3
<PAGE> 4
e. Execute all internal resolutions or other forms necessary to change
the business or company's name under the applicable corporations law or other
corporations legislation, together with an appointment, by each party's officers
and employees as the corporation's agent to complete and lodge the form; and
f. Deliver to the CHH copies of the documents referenced above.
4. ACKNOWLEDGEMENT AND RECORDATION.
a. Manor Care acknowledges, without representation, warranty or inquiry
that, by virtue of the assignment made in this Agreement, CHH is the exclusive
owner of the Assigned Mark Rights, and that Manor Care and the Lodging
Subsidiaries do not have any right, title or interest in or to any of the
Assigned Mark Rights from and after the date of this Agreement, except as
otherwise provided in this Agreement.
b. Manor Care and the Lodging Subsidiaries agree to cooperate fully
with CHH in filing for the recordation of appropriate assignment and other
documents in the appropriate foreign, state, and/or local jurisdictions
evidencing CHH's acquisition and ownership of the Assigned Marks and the
Assigned Mark Rights, and evidencing name changes and other assignments
contemplated by this Agreement. Neither Manor Care nor the Lodging Subsidiaries
will take action inconsistent with CHH's ownership of and interest in the
Assigned Mark Rights.
c. Manor Care and the Lodging Subsidiaries may not attack the validity
of any of the Assigned Mark Rights, CHH's ownership of the Assigned Mark Rights,
or any of the terms of this Agreement, or assist any third party in doing any of
the same, and Manor Care and the Lodging Subsidiaries waive any right to contest
the validity of the Assigned Mark Rights.
5. RELATIONSHIP OF THE PARTIES. Nothing in this Agreement shall be construed to
create any relationship between the parties of agency, partnership or joint
venturer or render any party liable for
4
<PAGE> 5
any debts or obligations incurred by any other party to this Agreement. No party
is authorized to enter into agreements for or on behalf of any other party to
this Agreement, to collect any obligation due or owed to any such party, or to
bind any other party in any manner whatsoever.
6. GENERAL.
a. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement
between Manor Care and the Lodging Subsidiaries and CHH regarding the subjects
of this Agreement and supersedes all oral and written agreements, entered before
or at the same time as this Agreement, concerning the subjects of this
Agreement. This Agreement may be executed in one or more counterparts, each of
which shall be deemed original, and all such counterparts together shall
constitute but one and the same instrument.
b. MODIFICATION. This Agreement may be modified only by written
agreement signed by both parties to this Agreement.
c. WAIVER. No waiver of any obligation under this Agreement will be
effective unless in writing, and will then be effective only for the specific
instance for which such waiver was given.
d. ASSIGNMENT OF AGREEMENT. Neither party to this Agreement may
transfer or assign its rights under this Agreement; provided, however, that this
provision will not limit CHH from assigning rights to the Assigned Marks or the
Assigned Mark Rights to any party.
e. GOVERNING LAW. This Agreement will be governed by the laws of the
State of Maryland, without regard to Maryland conflicts of laws principles.
Parties to this Agreement consent to the exclusive personal jurisdiction of the
federal and state courts sitting in Maryland with respect to any action
concerning their respective obligations under this Agreement.
f. SEVERABILITY. If any provision of this Agreement is held by a court
of competent jurisdiction to be unenforceable, then such provision may be
rewritten by that court with the least
5
<PAGE> 6
modification necessary to render the provision valid, and the remaining
provisions of this Agreement will remain in full force and effect.
g. HEADINGS. The headings in this Agreement are for convenience only
and are not intended to affect the interpretation of this Agreement.
h. BINDING EFFECT. This Agreement shall be binding on and inure to the
benefit of the parties to this Agreement and their respective transferees and
successors.
i. GEOGRAPHIC SCOPE. This Agreement shall be effective within the
United States and in any country in which the Lodging Subsidiaries do business
or intend to do business, including, but not limited to, Belgium, France,
Germany, Great Britain, Italy, Luxembourg, the Netherlands, Portugal, Spain, and
Switzerland.
IN WITNESS WHEREOF, a duly authorized representative of each party has
executed this Agreement as of the date first above written.
MANOR CARE, INC.
By:_______________________________________
Title:____________________________________
Date: ____________________________________
CHOICE HOTELS HOLDINGS, INC.
By:_______________________________________
Title ____________________________________
Date: ____________________________________
NOTARIZATION ON NEXT PAGE
6
<PAGE> 7
STATE OF MARYLAND )
) SS:
COUNTY OF MONTGOMERY )
Before me, a Notary Public, in and for said County and State, on this
day personally appeared _______________________________, the
__________________________ of Manor Care, Inc., and
_______________________________, the _________________________ of Choice Hotels
Holdings, Inc., each known to me as those persons whose names are subscribed to
the foregoing instrument.
Given under my hand and seal this _______ day of ___________, 1996.
----------------------------------
Notary Public
My Commission Expires: _____________________________
7
<PAGE> 8
SCHEDULE A
MANOR CARE, INC.
APPLICATIONS/REGISTRATIONS: PENDING AND REGISTERED
<TABLE>
<CAPTION>
U.S. APPLICATION
<S> <C>
MARK APP.. NO.
FREQUENT SLEEPER 75/028437
U.K. REGISTRATION
MARK Reg. No.
FOUR SEASONS 1493169
</TABLE>
<PAGE> 9
SCHEDULE B
MANOR CARE HOTELS FRANCE, S.A.
INTERNATIONAL APPLICATIONS/REGISTRATIONS: PENDING AND REGISTERED
<TABLE>
<CAPTION>
WIPO REGISTRATIONS
<S> <C> <C>
MARK APP./REG. NO.
PRIMEVERE AND DESIGN 563843
RESTHOTEL PRIMEVERE AND DESIGN 545399
SAPHIR AND DESIGN 562038
RESTHOTEL SAPHIR AND DESIGN 546480
UK APPLICATIONS/REGISTRATIONS
MARK App./Reg. No.
PRIMEVERE 1538745
SAPHIR App. No.
1538744
RESTHOTEL SAPHIR App. No.
15387453
RESTHOTEL PRIMEVERE 1538742
RESTHOTEL PRIMEROSE B1538740
DORDINE HOTEL 1538741
OTHER EUROPEAN REGISTRATIONS
MARK REG. NO. COUNTRY
PRIMEVERE 555138 Benelux
PRIMEVERE 94506010 France
PRIMEVERE GE 94C 000242 Italy
PRIMEVERE AND 302688 Portugal
DESIGN
PRIMEVERE 302688 Portugal
PRIMEVERE 1918022 Spain
PRIMEVERE 423869 Switzerland
</TABLE>
<PAGE> 10
SCHEDULE C
MANOR CARE HOTELS INTERNATIONAL, INC.
INTERNATIONAL APPLICATIONS/REGISTRATIONS
<TABLE>
<CAPTION>
FRANCE REGISTRATIONS
MARK REG. NO.
<S> <C>
PRIMA PIZZA 1688145
PRIMEVERE AND DESIGN 1354090
RESTHOTEL PRIMEVERE AND DESIGN 1426424
SAPHIR AND DESIGN 1593020
RESTHOTEL SAPHIR AND DESIGN 1456476
DORDINN HOTEL 1562819
</TABLE>
<PAGE> 1
EXHIBIT 10.03
ASSIGNMENT OF MARKS
THIS AGREEMENT is made and entered into as of this _____ day of _____,
1996 by and among MANOR CARE HOTELS INTERNATIONAL, INC., a Delaware corporation
("MCHI"), and CHOICE HOTELS FRANCE S.A. ("CHF"), a French corporation.
RECITALS
MCHI owns and is the registrant of certain trademarks and service marks
pertaining to hotel services;
CHF engages in the business of operating and franchising lodging
facilities and other services businesses pertaining to lodging;
Pursuant to a distribution agreement dated as of __________, 1996
between MCHI's corporate parent, Manor Care, Inc. and CHF's corporate parent,
Choice Hotels International, Inc., those parties agreed to assign and transfer
to CHF certain registered trademarks and service marks (listed in Schedule A,
"Assigned Marks") that are owned by MCHI.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing, the mutual promises
contained in this Agreement, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, MCHI and CHF agree as
follows:
1. ASSIGNMENT. Without representation or warranty of any kind, express or
implied, and subject to all existing licenses, MCHI grants and assigns to CHF
all of its right, title and interest in and to:
a. The Assigned Marks;
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<PAGE> 2
b. All French registrations related to the Assigned Marks;
c. All statutory, common law, equitable and civil law rights (whether
arising under French law) related to the Assigned Marks;
d. All of the goodwill connected with and symbolized by the Assigned
Marks;
e. All rights to income, royalties, license and franchise fees and any
other payments now or hereafter due or payable with respect to the Assigned
Marks, including without limitation, all damages and payments for past, present
and future infringements of the Assigned Marks;
f. All right to sue for, and all rights of recovery with respect to,
all past, present and future infringements of the Assigned Marks;
g. All rights of MCHI under all license agreements with respect to the
Assigned Marks; and
h. All other rights and privileges pertaining to or associated with the
Assigned Marks throughout the world, the same to be held and enjoyed by CHF as
fully as the same would have been held and enjoyed by MCHI had this assignment
not been made. These rights in sections a. through h. above are collectively the
Assigned Mark Rights.
2. ASSUMPTION. CHF agrees to assume all obligations of MCHI and the Lodging
Subsidiaries arising after the date of this Agreement under any license
agreements to which MCHI or any of the Lodging Subsidiaries is a party that are
being assigned to CHF under this Agreement.
3. MCHI OBLIGATIONS. Within a reasonable time of the execution of this
Agreement, not to exceed 3 months, MCHI agrees to:
a. Cease all use of the Assigned Marks or any mark that is confusingly
similar to, or a
2
<PAGE> 3
colorable imitation of, the Assigned Marks, and dispose of all current inventory
and supplies marked with the Assigned Marks;
b. Prepare and file with proper authorities all forms necessary to
effect a change in each business and corporate name to a name which does not
include the words "Hotels ";
c. Execute all internal resolutions or other forms necessary to change
the business or company's name under the applicable corporations law or other
corporations legislation, together with an appointment, by each party's officers
and employees as the corporation's agent to complete and lodge the form; and
d. Deliver to the CHF copies of the documents referenced.
4. ACKNOWLEDGEMENT AND RECORDATION.
a. MCHI acknowledges, without representation, warranty or inquiry that,
by virtue of the assignment made in this Agreement, CHF is the exclusive owner
of the Assigned Mark Rights, and that MCHI does not have any right, title or
interest in or to any of the Assigned Mark Rights from and after the date of
this Agreement, except as otherwise provided herein.
b. MCHI agrees to cooperate fully with CHF in filing for the
recordation of appropriate assignment and other documents in the appropriate
foreign, state, and/or local jurisdictions evidencing CHF's acquisition and
ownership of the Assigned Marks and the Assigned Mark Rights. Neither MCHI nor
the Lodging Subsidiaries will take action inconsistent with CHF's ownership of
and interest in the Assigned Mark Rights.
c. MCHI may not attack the validity of any of the Assigned Mark Rights,
CHF's ownership of the Assigned Mark Rights, or any of the terms of this
Agreement, or assist any third party in doing any of the same, and MCHI waive
any right to contest the validity of the Assigned Mark Rights.
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5. RELATIONSHIP OF THE PARTIES. Nothing in this Agreement shall be construed to
create any relationship between the parties of agency, partnership or joint
venturer or render any party liable for any debts or obligations incurred by any
other party to this Agreement. No party is authorized to enter into agreements
for or on behalf of any other party to this Agreement, to collect any obligation
due or owed to any such party, or to bind any other party in any manner
whatsoever.
6. GENERAL.
a. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement
between MCHI and CHF regarding the Assigned Marks and supersedes all oral and
written agreements, entered before or at the same time as this Agreement,
concerning the Assigned Marks and/or the Assigned Mark Rights. This Agreement
may be executed in one or more counterparts, each of which shall be deemed
original, and all such counterparts together shall constitute but one and the
same instrument.
b. MODIFICATION. This Agreement may be modified only by written
agreement signed by both parties to this Agreement.
c. WAIVER. No waiver of any obligation under this Agreement will be
effective unless in writing, and will then be effective only for the specific
instance for which such waiver was given.
d. ASSIGNMENT. Neither party to this Agreement may transfer or assign
its rights under this Agreement; provided, however, that this provision will not
limit CHF from assigning rights to the Assigned Marks or the Assigned Mark
Rights to any party.
e. GOVERNING LAW. This Agreement will be governed by the laws of the
State of Maryland, without regard to Maryland conflicts of laws principles.
Parties to this Agreement consent to the exclusive personal jurisdiction of the
federal and state courts sitting in Maryland with respect to any action
concerning their respective obligations under this Agreement.
f. SEVERABILITY. If any provision of this Agreement is held by a court
of competent
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jurisdiction to be unenforceable, then such provision may be rewritten by that
court with the least modification necessary to render the provision valid, and
the remaining provisions of this Agreement will remain in full force and effect.
g. HEADINGS. The headings in this Agreement are for convenience only
and are not intended to affect the interpretation of this Agreement.
h. BINDING EFFECT. This Agreement shall be binding on and inure to the
benefit of the parties to this Agreement and their respective transferees and
successors.
i. GEOGRAPHIC SCOPE. This Agreement shall be effective within the
United States and in any country in which the Lodging Subsidiaries do business
or intend to do business, including, but not limited to, Belgium, France,
Germany, Great Britain, Italy, Luxembourg, the Netherlands, Portugal, Spain, and
Switzerland.
SIGNATURES ON NEXT PAGE
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IN WITNESS WHEREOF, a duly authorized representative of each party has
executed this Agreement as of the date first above written.
MANOR CARE HOTELS INTERNATIONAL, INC.
By:_____________________________________
Title:____________________________________
Date: ____________________________________
CHOICE HOTELS FRANCE S.A.
By:_____________________________________
Title ____________________________________
Date: ____________________________________
STATE OF MARYLAND )
) SS:
COUNTY OF MONTGOMERY )
Before me, a Notary Public, in and for said County and State, on this
day personally appeared _______________________________, the
__________________________ of Manor Care Hotels International, Inc., and
_______________________________, the _________________________ of Choice Hotels
France, S.A., each known to me as those persons whose names are subscribed to
the foregoing instrument.
Given under my hand and seal this _______ day of ___________, 1996.
----------------------------------
Notary Public
My Commission Expires: _______________________________________
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SCHEDULE A
MANOR CARE HOTELS INTERNATIONAL, INC.
INTERNATIONAL APPLICATIONS/REGISTRATIONS
FRANCE REGISTRATIONS
MARK REG. NO.
PRIMA PIZZA 1688145
PRIMEVERE AND DESIGN 1354090
RESTHOTEL PRIMEVERE AND DESIGN 1426424
SAPHIR AND DESIGN 1593020
RESTHOTEL SAPHIR AND DESIGN 1456476
DORDINN HOTEL 1562819
<PAGE> 1
Exhibit 10.04
TIME SHARING AGREEMENT
This agreement, made and entered into this ___ day of ______________,
19___, by and between Manor Care, Inc., a corporation incorporated under the
laws of the State of Delaware, with principal offices at 10750 Columbia Pike,
Silver Spring, MD 20901, (together with its successors and permitted assigns,
"LESSOR"), and Choice Hotels Holdings, Inc., a corporation incorporated under
the laws of the State of Delaware (to be renamed Choice Hotels International,
Inc.), 10750 Columbia Pike, Silver Spring, Maryland 20910, (together with its
successors and permitted assigns, "LESSEE").
W I T N E S S E T H
WHEREAS, LESSOR leases two civil AIRCRAFT bearing the United States
Registration Number N697MC, a Cessna Citation III, and United States
Registration N6885P, a Cessna Conquest I (hereinafter collectively referred to
as "AIRCRAFT"); and
WHEREAS, LESSOR employs a fully qualified flight crew to operate the
AIRCRAFT; and
WHEREAS, LESSOR and LESSEE desire to lease said AIRCRAFT and flight
crew on a TIME SHARING basis as defined in Section 91.501(c)(1) of the Federal
Aviation Regulations (FAR); and
WHEREAS, LESSOR is a member of the National Business Aircraft
Association and is authorized to operate the AIRCRAFT under the provisions of
Exemption 1637, as amended.
NOW THEREFORE, LESSOR AND LESSEE, declaring their intention to enter
into and be bound by this TIME SHARING AGREEMENT, and for the good and valuable
consideration set forth below, hereby covenant and agree as follows:
1. LESSOR agrees to lease the AIRCRAFT to LESSEE from time to time as
LESSEE shall require, pursuant to the provisions of FAR 91.501 9 (c)(1) and to
provide a fully qualified flight crew for all operations, subject to the LESSOR
maintaining its ownership of AIRCRAFT. The term of this Agreement shall commence
on the date of execution hereof and shall terminate thirty (30) months
thereafter.
2. For each flight conducted under this Agreement LESSEE shall pay
LESSOR the actual expenses for each such flight as authorized by FAR Part 91.501
(d). These expenses are the following:
(a) Fuel, oil, lubricants, and other additives.
(b) Travel expenses of the crew, including food, lodging and ground
transportation.
(c) Hangar and tie down costs away from the AIRCRAFT's base of
operation.
(d) Insurance obtained for the specific flight.
(e) Landing fees, airport taxes, and similar assessments.
<PAGE> 2
(f) Customs, foreign permit, and similar fees directly related to the
flight.
(g) In-flight food and beverages.
(h) Passenger ground transportation.
(i) Flight planning and weather contract services.
(j) An additional charge equal to 100% of the expenses listed in
subparagraph (a) of this paragraph.
3. In addition to the flight expenses described above in paragraph 2,
LESSEE shall be fully responsible for the payment of all IRC 4261 excise taxes.
4. LESSOR will pay all expenses related to the operation of the
AIRCRAFT when incurred, and will provide an invoice and bill LESSEE for the
expenses enumerated in paragraph 2 and the excise taxes referred to in paragraph
3 above on the last day of the month in which any flight or flights for the
account of LESSEE occur LESSEE shall pay LESSOR for said expenses within 30 days
of receipt of the invoice and bill thereof.
5. LESSEE will provide LESSOR with requests for flight time and
proposed flight schedule as far in advance of any given flight as possible.
Requests for flight time shall be in a form, whether oral or written, mutually
convenient to, and agreed upon by the parties. In addition to proposed schedules
and flight times LESSEE shall provide at least the following information for
each proposed flight at some time prior to scheduled departure as required by
the LESSOR's flight crew:
a) proposed departure point;
b) destination;
c) date and time of flight;
d) the names of anticipated passengers;
e) the nature and extent of luggage and/or cargo to be carried;
f) the date and time of return flight, if any; and
g) any other information concerning the proposed flight that may be
pertinent or required by LESSOR or LESSOR's flight crew.
6. LESSOR shall have final authority over the scheduling of the
AIRCRAFT, provided however, that LESSOR will use its best efforts to accommodate
LESSEE's needs to avoid conflicts in scheduling.
7. LESSOR shall be solely responsible for securing maintenance,
preventative maintenance and required or otherwise necessary inspections on the
AIRCRAFT, and shall take such requirements into account in scheduling the
AIRCRAFT. No period of maintenance, preventive maintenance or inspection shall
be delayed or postponed for the purpose of scheduling the AIRCRAFT, unless said
maintenance or inspection can be safely conducted at a later time in compliance
with all applicable laws and regulations, and within the sound discretion of the
Pilot in Command. The Chief Pilot and Pilot in Command shall have final and
complete authority to cancel any flight for any reason or condition which in his
judgment would comprise the safety of the flight.
<PAGE> 3
8. LESSOR shall employ, pay for and provide for LESSEE a qualified
flight crew for each flight undertaken under this Agreement.
9. In accordance with applicable Federal Aviation Regulations, the
qualified flight crew provided by LESSOR will exercise all of its duties and
responsibilities in regard to the safety of each flight conducted hereunder.
LESSEE specifically agrees that the flight crew, in its sole discretion, may
terminate any flight, refuse to commence any flight, or take other action which
in the considered judgment of the Pilot in Command is necessitated by
considerations of safety. No such action of the Pilot in Command shall create or
support any liability for loss, injury, damage or delay to LESSEE or any other
person. The parties further agree that LESSOR shall not be liable for delay or
failure to furnish the AIRCRAFT and crew pursuant to this Agreement when such
failure is caused by government regulation or authority, mechanical difficulty,
war, civil commotion, strikes or labor disputes, weather conditions, or acts of
God.
10. LESSEE shall carry its own comprehensive general liability
insurance at its expense, and shall cause LESSOR to be named as an additional
insured on all such policies. LESSEE shall be fully responsible for any damage
to the AIRCRAFT caused by LESSEE's passengers or cargo. LESSEE agrees that it
shall indemnify and hold LESSOR harmless from and against any and all claims,
liabilities, damages, costs or expenses (including reasonable attorney's fees)
arising or resulting in any manner from the acts or omissions of LESSEE, its
officers, employees, agents and passengers on the AIRCRAFT, in connection with
this Agreement.
11. LESSEE warrants that:
(a) It will use the AIRCRAFT for and on account of its own
business only, and will not use the AIRCRAFT for the purposes
of providing transportation of passengers or cargo in air
commerce for compensation or hire. The AIRCRAFT shall carry
for LESSEE only such passengers and cargo as may be legally
carried under FAR Part 91. The number of passengers carried
for LESSEE shall not exceed the number of seats legally
available on the AIRCRAFT, and the AIRCRAFT shall not be
loaded beyond its certified capacity.
(b) It shall refrain from incurring any mechanics or other
liens in connection with inspection, preventative maintenance,
maintenance or storage of the AIRCRAFT, whether permissible or
impermissible under this Agreement, nor shall there be any
attempt by any party hereto to convey, mortgage, assign, lease
or any way alienate the AIRCRAFT or create any kind of lien or
security interest involving the AIRCRAFT or do anything to
take any action that might mature into such lien.
(c) During the term of this Agreement, it will abide by and
conform to all such laws, governmental and airport orders,
rules and regulations, as shall from time to time be in effect
relating in any way to the operation and use of the AIRCRAFT
by a TIME SHARING Lessee. LESSEE will not allow carriage of
any contraband or illegal controlled substance.
<PAGE> 4
(d) Smoking shall be prohibited in the Aircraft; the Pilot in
command shall have authority to enforce this requirement.
12. For the purposes of this Agreement, the permanent base of operation
of the AIRCRAFT shall be Baltimore Washington International Airport. Lessor
shall have the right to change the permanent base of operation at its sole
discretion.
13. Neither this Agreement nor any party's interest herein shall be
assignable to any other party whatsoever. This Agreement shall inure to the
benefit of and be binding upon the parties hereto, their heirs, representatives
and successors.
14. CONTROL OF AIRCRAFT. It is expressly agreed and understood by the
parties that, for all flights for Lessee under this Agreement, Lessor shall have
possession, command, and control of the Aircraft, and shall maintain and
exercise operational control over the Aircraft, all pilots, all servicing and
loading of the Aircraft, and all Maintenance performed on the Aircraft.
For the purpose of this Agreement, operational control shall include,
without limitation, exclusive control over:
(a) all pilots;
(b) determinations whether any particular flight may be safely
operated;
(c) initiation and termination of flights
(d) directions to pilots to conduct flights;
(e) dispatch or release of flights;
(f) servicing the Aircraft; and
(g) airworthiness and performance of maintenance.
15. The laws of the State of Maryland, without reference to its
conflicts of laws, principles, shall govern the interpretation, validity,
performance and enforcement of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused the signature of
their authorized representatives to be affixed below on the day and year first
above written. The persons signing below warrant their authority to sign.
TRUTH IN LEASING STATEMENTS UNDER SECTION 91.23 (FORMERLY 91.54) OF THE
FEDERAL AVIATION REGULATIONS.
<PAGE> 5
(a) MANOR CARE, INC. (LESSOR), HEREBY CERTIFIES THAT THE AIRCRAFT HAS
BEEN INSPECTED AND MAINTAINED WITHIN THE 12 MONTH PERIOD PRECEDING THE
DATE OF THIS AGREEMENT IN ACCORDANCE WITH THE PROVISIONS OF FAR PART 91
AND ALL APPLICABLE REQUIREMENTS FOR THE MAINTENANCE AND INSPECTION
THEREUNDER HAVE BEEN MET.
(b) MANOR CARE, INC., (LESSOR), AGREES, CERTIFIES AND KNOWINGLY
ACKNOWLEDGES THAT WHEN THE AIRCRAFT IS OPERATED UNDER THIS AGREEMENT,
LESSOR SHALL BE KNOWN AS, CONSIDERED, AND SHALL IN FACT BE THE OPERATOR
OF THE AIRCRAFT AND IS CONSIDERED RESPONSIBLE FOR THE OPERATIONAL
CONTROL OF THE AIRCRAFT AND FURTHER CERTIFIES THAT LESSOR WILL OPERATE
THE AIRCRAFT IN COMPLIANCE WITH ALL APPLICABLE FEDERAL AVIATION
REGULATIONS.
(c) THE PARTIES UNDERSTAND THAT AN EXPLANATION OF FACTORS AND PERTINENT
FEDERAL AVIATION REGULATIONS BEARING ON OPERATIONAL CONTROL CAN BE
OBTAINED FROM THE GLEN BURNIE/BWI FAA FLIGHT STANDARDS DISTRICT OFFICE
OR FROM ANY OTHER FAA FLIGHT STANDARD DISTRICT OFFICE, GADO OR ACDO.
LESSEE AND LESSOR ACKNOWLEDGE THAT A TRUE COPY OF THIS EXECUTED
AGREEMENT MUST BE SENT TO: FLIGHT STANDARDS TECHNICAL DIVISION, P.O.
BOX 25724, OKLAHOMA CITY, OKLAHOMA 73125, WITHIN 24 HOURS OF ITS
EXECUTION, AS PROVIDED BY FAR 91.23(c)(1).
WITNESS: LESSOR:
MANOR CARE, INC.
__________________________ BY: ____________________________
TITLE:___________________________
WITNESS: LESSEE:
CHOICE HOTELS HOLDINGS, INC.
__________________________ BY: ______________________________
A copy of this Agreement must be carried in the AIRCRAFT while being operated
hereunder.
<PAGE> 1
Exhibit 10.05
CORPORATE SERVICES AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of
_______________, 1996, by and between MANOR CARE, INC., a Delaware corporation
("Manor"), and CHOICE HOTELS HOLDINGS, INC. (to be renamed Choice Hotels
International, Inc.), a Delaware corporation ("Choice").
RECITALS
WHEREAS, pursuant to a Distribution Agreement (the "Distribution
Agreement") dated as of ____________, 1996, Choice and Manor agreed to enter
into a corporate services agreement with the terms and conditions set forth
herein.
WHEREAS, Manor shall retain the personnel and systems formerly utilized
in the administration of the services described herein; and
WHEREAS, Choice desires to retain Manor as described herein, and Manor
desires to render such assistance on an equitable, arms length basis for a fee;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Choice and Manor agree as follows:
1. Definitions. As used in this Agreement, the following capitalized terms shall
have the meanings indicated unless the context requires otherwise:
"Accounting Period" shall be a one month period.
"Accounting Systems Support" shall mean data preparation and
other related accounting procedures required to perform the Functions
in a timely manner, consistent with current policies and procedures,
and in accordance with generally accepted accounting principles.
"Accounts Payable Services" shall have the meaning described
in Exhibit A.
"Additional Consulting Services" shall mean the additional
services related to the Functions, or any other services which Manor
may provide Choice from time to time (on a transitional basis and only
where such services shall not unreasonably interfere with Manor's
business operations and will not cause Manor to incur additional
expense without reasonable compensation therefor).
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"Ancillary Agreements" shall have the meaning described in the
Distribution Agreement.
"Construction Accounting Services" shall have the meaning
described on Exhibit A.
"Consulting Services" shall have the meaning described in
Exhibit C.
"Conversion Services" shall mean the initial conversion of
Choice's business data from Manor to Choice and archiving Choice's
business accounting records for certain periods prior to the
Distribution Date to the extent not already performed prior to the
execution of the Distribution Agreement.
"Corporate Accounting Systems Support" shall have the meaning
described on Exhibit A.
"Corporate Services" shall mean Conversion Services; Support
Services; Facilities Services, the Functions, the Consulting Services
and the Additional Consulting Services.
"Distribution" means the distribution to the holders of Manor
Care Common Stock all the outstanding shares of Choice Common Stock.
"Distribution Date" means the date determined by the Board of
Directors of Manor as the date on which the Distribution shall be
effected.
"Facilities Services" shall mean the Silver Spring Computer
Services, Telecommunication Services, Headquarters Telephone and Long
Distance Services, Travel Management Services, the Model Room Services,
and certain other services listed on Exhibit A.
"Functions" shall mean Payroll Services, Accounts Payable
Services, Corporate Accounting Systems Support, Property Accounting
Services and Construction Accounting Services for Choice's Lodging
Business as listed on Exhibit A.
"Lodging Business" shall mean any business or operation of
Choice or the Lodging Subsidiaries (as defined in the Distribution
Agreement) which is, pursuant to the Distribution Agreement, to be
conducted, following the Distribution, by Choice.
"Model Room Services" shall mean the operation of the model
rooms and the maintenance of the building of which they are a part at
the Silver Spring location, which shall include providing space for
such model rooms and the cost of normal building operating costs, but
which does not include
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costs of maintaining personal property of Choice used in connection
with such motel rooms, nor the cost of constructing, maintaining or
reconfiguring such Model rooms.
"Payroll Services" shall have the meaning described on Exhibit
A.
"Prime Rate" shall be the rate identified from time to time in
the New York edition of the Wall Street Journal as being the Prime Rate
of interest; should such rate be shown as a spread of rates, then the
highest such rate shall be utilized.
"Property Accounting Services" shall have the meaning
described on Exhibit A.
"Support Services" shall mean the support services needed to
perform the Functions and Facilities Services, including but not
limited to Accounting Systems Support and Systems Support.
"Systems Support" shall mean the computer hardware, computer
software, and telecommunications, including data transmission, data
distribution, report generation, and data entry capabilities needed to
process Choice's information for each Function and Facilities Service.
"Travel Management Services" shall have the meaning described
on Exhibit D.
Any capitalized terms defined in the Distribution Agreement and used
herein shall have the meanings ascribed to them in the Distribution Agreement
unless otherwise defined herein.
2. Services. Upon the request of Choice, Manor shall provide the
Corporate Services provided herein:
(a) Manor shall provide Choice with Support Services for the Functions
and Facilities Services in substantially the same manner as such
services are being provided to the Lodging Business on the Distribution
Date. Manor reserves the right to change the manner in which it
provides Accounting Support and Systems Support related to the
Functions and Facilities Services described herein, provided such
change is consistent with changes made for Manor's own business units
and provided Manor give Choice notice of such change (the same notice
Manor will provide its own businesses).
(b) Manor shall also provide Choice with Conversion Services at the
cost of Manor to provide such Services.
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(c) Choice may request that Manor provide Consulting Services and
Additional Consulting Services from time to time. Consulting Services
shall be provided on the terms and conditions specified on Exhibit C.
The parties will agree, at the time such services are requested, upon
the scope and final pricing for any Additional Consulting Services.
Whenever the parties deem necessary, Manor will draft an arrangement
letter outlining the scope of Additional Consulting Services,
deliverables, cost, and schedule for Choice's acceptance.
(d) Manor agrees to provide such services only if it reasonably
believes the service will not interfere with the conduct of the
business of Manor or pose an unreasonable burden.
3. Term. The term of this Agreement shall commence on the Distribution
Date and shall remain in effect through the end of the first full Fiscal Year
immediately following the Distribution Date. Unless terminated pursuant to the
terms hereof, the Agreement shall automatically renew each Fiscal Year
thereafter for the extended term of said Fiscal Year and shall not extend past
the last day of the thirtieth (30th) month following the Distribution; provided,
however, that Choice may terminate this agreement or any services provided
hereunder at any time for any reason or no reason by sending written notice to
Manor upon sixty (60) days' prior notice to Manor. This Agreement may also be
terminated in the event of a default (past the expiration of any applicable cure
period provided herein) in accordance with the provisions of this Agreement.
Notwithstanding the foregoing, the Consulting Services shall commence on the
Distribution Date and shall be provided for a period of thirty (30) months.
4. Database Access. Choice will regularly enter all required
information into the appropriate computer systems to enable Manor to provide the
Corporate Services contracted for hereunder. Manor will provide access to these
computer systems to enable Choice to maintain its employee, vendor, property and
general ledger databases. Choice will provide access to information and
employees necessary for Manor to provide such Corporate Services.
5. Price and Payment. Choice shall pay Manor for services requested and
rendered hereunder as follows:
(a) The charging mechanisms for rates or charges for each service shall
include (i) activity-based charges where the per unit price will be
multiplied by the variable number of units (for example, the number of
employees times the employee charge will determine the per Accounting
Period charge); (ii) fixed fee based charges, meaning a fixed amount
per Accounting Period for Manor to perform the service; (iii) usage
based charges for which Choice will pay according to actual use of the
service; (iv) time and materials charges; or (v) a variation or a
combination of any of the foregoing methods as agreed to by the
parties. Charging mechanisms for each Corporate Service are identified
on Exhibit B except with
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respect to Consulting Services which shall be paid for in accordance
with Exhibit C. If at any time during the term of the Agreement, Choice
moves its office location from 10750 Columbia Pike, Silver Spring,
Maryland, both the availability of certain services and their
associated rates may be subject to change.
(b) Except as provided in any Ancillary Agreement, Choice shall pay any
and all additional costs and expenses which Manor may incur for the
express purpose of providing services to Choice.
(c) Choice shall pay Manor on a time and materials basis for all costs
incurred by Manor in converting Choice business information and records
from Manor's services systems to either a third party provider or to
Choice.
(d) Payment for all services hereunder (other than Consulting Services)
shall be made by Choice to Manor within thirty (30) days of receipt of
invoice for payment (with appropriate supporting documentation for any
out-of-pocket expenses). Choice shall pay fixed charges in advance on
the first business day of the applicable Accounting Period. Any
payments not made by Choice to Manor when due shall bear interest,
computed daily, from the date due to the date of payment based on the
annual percentage rate equal to the Prime Rate, as same may vary from
time to time, plus two (2) percentage points.
6. Duty of Care.
(a) Manor's Obligations. All services provided hereunder shall be
administered in accordance with Manor's standard policies, procedures
and practices in effect as of the date hereof and as may be changed,
and as more particularly described below, or as otherwise specified in
accordance with the terms thereof. In so doing, Manor shall follow
commonly accepted standards of care in the industry and exercise the
same care and skill as it exercises in performing like services for
itself.
(b) Choice's Obligations. Choice shall adopt reasonable measures to
limit its exposure with respect to any potential losses and damages,
including, but not limited to, periodic examination and confirmation of
results, provision for identification and correction of errors and
omissions, preparation and storage of backup data, replacement of lost
or mutilated documents, and reconstruction of data.
7. Liaison. Choice and Manor shall each appoint two managerial level
individuals (hereinafter "Representatives") to facilitate communications and
performance under this Agreement. Each party may treat an act of a
Representative of the other party as being authorized by such other party
without inquiring behind such act or ascertaining whether such Representative
had authority
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<PAGE> 6
to so act. The initial Representatives are named on Exhibit E. Each party shall
have the right at any time and from time to time to replace either or both of
its Representatives by giving notice in writing to the other party setting forth
the name of (i) each Representative to be replaced and (ii) the replacement, and
certifying that the replacement Representative is authorized to act for the
party giving the notice in all matters relating to this Agreement.
8. Confidentiality.
(a) Manor and Choice agree that all information regarding the Corporate
Services provided hereunder, including, but not limited to, price,
methods of operation, and software, shall be maintained in confidence
and not be released to any third party for any reason whatsoever,
excluding such parties' counsel, agents, auditors or lenders. However,
one party may release this Agreement or such information to a third
party upon the prior approval of the other party (such approval not to
be unreasonably withheld, conditioned or delayed), upon court order, or
as required by any rules, regulations or laws. All confidential and
proprietary information which either party has obtained from the other
shall be returned upon the expiration or earlier termination of this
Agreement. The provisions of this paragraph shall survive expiration or
earlier termination of this Agreement.
(b) Any Choice information or other information provided by Choice to
Manor for use with the Corporate Services provided hereunder and
identified in writing as confidential shall remain the exclusive and
confidential property of Choice. Specifically, Choice's employee
database and payroll information shall be deemed confidential. Manor
shall treat such information as confidential and will not disclose or
otherwise make available any Choice information to any person other
than employees, consultants, or auditors of Manor with a need-to-know
or except as required by law or court order. Manor will instruct its
employees who have access to the Manor information to keep the same
confidential by using the same care and discretion that Manor uses with
respect to its own confidential property and trade secret.
(c) Manor will provide reasonable security provisions to insure that
third parties do not have access to Choice information. Manor reserves
the right to issue and change regulations and procedures from time to
time to improve file security.
(d) Manor will take reasonable precautions to prevent the loss or
alteration of Choice information. Choice will, to the extent it deems
necessary, keep copies of all source documents delivered to Manor and
will maintain a procedure external to Manor's systems for the
reconstruction of lost or altered Choice data.
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(e) Manor will, to the extent applicable, retain Choice's information
in accordance with and to the extent provided by Manor's then
prevailing records retention policies for similar activities. Manor
will, in conformity with its then prevailing records retention
policies, dispose of all Choice information in any manner deemed
appropriate by Manor unless Choice, prior to such disposal, furnishes
to Manor written instructions for the disposition of such Choice
information, at Choice's expense. At Choice's request Manor will
provide Choice, in a standard Manor format and at Manor's then standard
rates for such format, any and all Choice information requested by
Choice.
(f) Manor's systems used to perform the Corporate Services provided
hereunder, including but not limited to the payroll system, are
confidential and proprietary to Manor or third parties. Choice shall
treat these systems and all related procedures as confidential and
proprietary to Manor or its third party vendors. Choice agrees that all
software systems, procedures, and related materials provided to Choice
are for Choice's internal use exclusively and only as related to the
Corporate Services or any of the underlying systems used to provide
Corporate Services hereunder. Choice may not sell, transfer, assign, or
otherwise use the Corporate Services provided hereunder, in whole or in
part, for the benefit of any other party. Choice shall not copy,
modify, reverse engineer, or in any way alter these systems without
Manor's express written consent. Title to all software systems used in
performing the Corporate Services provided hereunder shall remain in
Manor or its third party vendors.
9. Warranties and Limitations of Liability.
(a) MANOR DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH
RESPECT TO THE CORPORATE SERVICES PROVIDED HEREUNDER. Manor will
use reasonable efforts to perform the Corporate Services provided
hereunder in a professional and workmanlike manner but the results of
the Corporate Services are furnished "as is."
(b) Manor's sole liability to Choice or any third party for claims,
notwithstanding the form of such claims (e.g. contract, negligence or
otherwise), arising out of errors or omissions in the Corporate
Services provided or to be provided by Manor hereunder which are caused
solely by Manor shall be to furnish correct information, payment,
and/or adjustment in the Corporate Services provided hereunder provided
that Choice promptly advises Manor thereof.
(c) Manor's sole liability to Choice or any third party for claims,
notwithstanding the form of such claims (e. g. contract, negligence or
otherwise), arising out of the unavailability of the Corporate Services
provided hereunder or the interruption in or delay in performing the
Corporate
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Services provided hereunder for any reason beyond Manor's reasonable
control shall be to use all reasonable efforts to make such services
available, and/or to resume performing the Corporate Services, as
promptly as reasonably practicable. Manor will maintain the same
back-up procedures for Choice's information that Manor has for its own
information.
(d) MANOR SHALL NOT BE LIABLE FOR ANY ERRORS, OMISSIONS, DELAYS, OR
LOSSES UNLESS CAUSED SOLELY BY ITS CRIMINAL CONDUCT, FRAUD, BAD FAITH
OR GROSS NEGLIGENCE. CHOICE AGREES THAT IN NO EVENT WILL MANOR BE
LIABLE FOR INCIDENTAL, INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES.
CHOICE FURTHER AGREES THAT IN NO EVENT WILL THE TOTAL AGGREGATE
LIABILITY OF MANOR FOR ANY AND ALL CLAIMS, LOSSES, OR DAMAGES ARISING
UNDER THIS AGREEMENT AND FOR THE CORPORATE SERVICES PERFORMED HEREUNDER
EXCEED THE VALUE OF CHOICE'S PAYMENT FOR SAID SPECIFIC CORPORATE
SERVICE IN DISPUTE OVER ONE FOUR-WEEK ACCOUNTING PERIOD'S TIME.
(e) The forgoing provisions of this Section 9 set forth the full extent
of Manor's liability hereunder (monetary or otherwise) for any claim or
action, regardless of the form in which any such claim or action may be
asserted against Manor (e.g. contract, negligence or otherwise).
10. Default. If either party materially defaults hereunder, the
non-defaulting party may terminate this Agreement effective immediately (subject
to the cure periods set forth herein below) upon written notice to the
defaulting party. The non-defaulting party shall be entitled to all remedies
provided by law or equity (including reasonable attorneys' fees and costs of
suit incurred). The following events shall be deemed to be material defaults
hereunder:
(a) Failure by either party to make any payment required to be made to
the other hereunder, which failure is not remedied within five (5) days
after receipt of written notice thereof; or
(b) Except as otherwise provided herein, failure by either party
substantially to perform in accordance with the terms and conditions of
this Agreement, which failure is not remedied within thirty (30) days
after receipt of written notice from the other party specifying the
nature of such default; or
(c) (i) Filing of a voluntary bankruptcy petition by either party; (ii)
filing of an involuntary bankruptcy petition against either party which
is not withdrawn within sixty (60) days after
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filing; (iii) assignment for the benefit of creditors made by either
party; or (iv) appointment of a receiver for either party.
11. Modification of Procedures. Manor may make changes from time to
time in its Functions and Facilities Services, standards and procedures for
performing the Corporate Services provided hereunder, but Manor will not
implement any substantial changes, unless required by law affecting Choice until
it has furnished Choice notice (the same notice Manor will provide its own
businesses) thereof and a reasonable opportunity to adapt its operations to
accommodate such changes or to reject the change. Choice's decision whether or
not to accept the proposed change must be made on or before the date Manor makes
its decision. Otherwise, the default would be Choice's acceptance. Choice agrees
to pay any charges (a) resulting from Manor's need to maintain different
versions of the same systems, procedures, technologies, or services and (b)
resulting from requirements of third party vendors.
12. Laws and Governmental Regulations. Choice shall be responsible for
(a) compliance with all laws and governmental regulations affecting its business
and (b) any use it may make of the Corporate Services to assist it in complying
with such laws and governmental regulations. While Manor shall not have any
responsibility for Choice's compliance with the laws and regulations referred to
above, Manor agrees to use reasonable efforts to cause the Corporate Services to
be designed in such manner that they will be able to assist Choice in complying
with its applicable legal and regulatory responsibilities as related to the
Corporate Services. For example, Manor's normal procedure is to monitor and keep
current all federal, state, and local withholding information for its own
payroll processing. Manor will implement these normal procedures for Choice's
benefit. In no event, however, shall Choice rely solely on its use of the
Corporate Services in complying with any laws and governmental regulations.
13. Indemnification.
(a) Choice. Choice shall indemnify, defend and hold harmless Manor and
its directors, officers and employees from Losses (as defined below),
other than Losses directly and proximately caused solely by Manor's
criminal conduct, fraud, bad faith, or gross negligence. The term
"Losses" shall include costs of any claim, lawsuit, settlement,
judgment, penalty, or reasonable attorneys' fees.
(b) Manor. Manor shall indemnify, defend and hold harmless Choice and
its directors, officers and employees from Losses directly and
proximately caused solely by Manor's criminal conduct, fraud, bad
faith, or gross negligence, unless the actions (or inaction) causing
the Losses were taken (or not taken) at the specific direction of
Choice, its subsidiaries, employees, or agents.
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14. Force Majeure. Manor and Choice shall incur no liability to each
other due to a failure to perform under the terms and conditions of this
Agreement resulting from fire, flood, war, strike, lock-out work stoppage or
slow-down, labor disturbances, power failure, major equipment breakdowns,
construction delays, accident, riots, acts of God, acts of United States'
enemies, laws, orders or at the insistence or result of any governmental
authority or any other event beyond each other's reasonable control. In
addition, Manor shall not be liable or deemed to be in default for any delay or
failure to perform hereunder resulting, directly or indirectly, from any cause
beyond Manor's reasonable control, including limitations upon the availability
of communications facilities or failures of other communications equipment or
failure of Choice to prepare data properly for input into the Corporate Systems.
15. Relationship of Parties. Nothing in this Agreement shall be deemed
or construed by the parties or any third party as creating the relationship of
principal and agent, partnership or joint venture between the parties, it being
understood and agreed that no provision contained herein, and no act of the
parties, shall be deemed to create any relationship between the parties other
than the relationship of buyer and seller.
16. Assignment. Neither party shall, without the prior written consent
of the other, assign any rights or delegate any obligations under this
Agreement, such consent not to be unreasonably withheld, conditioned or delayed.
17. Headings. The headings used in this Agreement are inserted only for
the purpose of convenience and reference, and in no way define or limit the
scope or intent of any provision or part hereof.
18. Severability of Provisions: Neither Manor nor Choice intend to
violate statutory or common law by executing this Agreement. If any section,
sentence, paragraph, clause or combination of provisions in this Agreement is in
violation of any law, such sections, sentences, paragraphs, clauses or
combinations shall be inoperative and the remainder of this Agreement shall
remain in full force and effect and shall be binding upon the parties.
19. Parties Bound. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and permitted
assigns. Nothing herein, expressed or implied, shall be construed to give any
other person any legal or equitable rights hereunder.
20. Notices. All notices and other communications hereunder shall be in
writing and shall be delivered by hand or shall be deemed to have been properly
made and given one (1) business day after being deposited with a reputable
overnight courier service such as Federal Express, Airborne Express or UPS Next
Day Air for next business day delivery or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other addresses for a
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party as shall be specified by like notice) and shall be deemed given on the
date on which such notice is received:
To Choice:
Choice Hotels Holdings, Inc.
10750 Columbia Pike
Silver Spring, MD 20901
Attention: General Counsel
To Manor:
Manor Care, Inc.
11555 Darnestown Road
Gaithersburg, MD 20878-3200
Attention: General Counsel
21. Further Action. Manor and Choice each shall cooperate in good faith
and take such steps and execute such papers as may be reasonably requested by
the other party to implement the terms and provisions of this Agreement.
22. Waiver. Manor and Choice each agree that the waiver of any default
under any term or condition of this Agreement shall not constitute any waiver of
any subsequent default or rights herein or nullify the effectiveness of that
term or condition.
23. Governing Law. All controversies and disputes arising out of or
under this Agreement shall be determined pursuant to the laws of the State of
Maryland, United States of America, regardless of the laws that might be applied
under applicable principles of conflicts of laws.
24. Consent to Jurisdiction. The parties irrevocably submit to the
exclusive jurisdiction of (a) the Courts of the State of Maryland in Montgomery
County, and (b) the United States District Court for the State of Maryland for
the purposes of any suit, action or other proceeding arising out of this
Agreement.
25. Entire Agreement; Amendment. This Agreement and the Distribution
Agreement constitute the entire understanding between the parties hereto and
supersedes all prior written or oral communications, relating to the subject
matter covered in this Agreement. This Agreement shall not be amended except by
a writing executed by the parties hereto.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CHOICE HOTELS HOLDINGS, INC., a
Delaware corporation
By:______________________________________
Name:_______________________________
Title:______________________________
MANOR CARE, INC., a
Delaware corporation
By:______________________________________
Name:_______________________________
Title:______________________________
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EXHIBIT A
[ATTACHED]
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PAYROLL SERVICES
Payroll Service. Beginning as of the Distribution Date, Manor shall provide
Payroll Service to Choice. Manor, as part of providing Payroll Service, shall
provide access to the Payroll System to enable Choice to maintain its employee
database (e.g., basic employee information, insurance data, retirement plan
deduction data, collective bargaining agreement data, etc.) The scope of Payroll
Services includes:
Issue
- Paychecks with authorized signature facsimile and
alternatively the capability of ACH direct deposit bank for
employees who elect that option. Paycheck stub statements and
direct deposit statements.
- Payroll check registers and other management reports currently
available on Manor's payroll system.
- Issue year-end form W-2s to all employees. Produce W-2C
(corrections) and reissue W-2s as necessary.
Payment and accrual features
- Vacation and sick leave
- Car allowance payments and imputed income for company car
usage
- Relocation data/through contract with Armslong
- Employee payroll tax returns and deposits/through contract
with Ceridian STS.
- Standard systems interface capabilities which may be modified
at Choice's expense and with Manor's consent. These interfaces
include general ledger for accounting distribution, accounts
payable for wage attachment disbursements, if appropriate on
the new PeopleSoft system check reconciliation system
interface, retirement savings, employee stock purchase plan,
medical benefits administration, unemployment claims data, and
ACH for direct bank deposits.
SERVICES NOT INCLUDED IN THE BASELINE PAYROLL SERVICES CHARGE
- Manor Payroll System for Choice's use; provided, however, that
any such additional features and functions shall be deemed
enhancements to the Payroll System and shall
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remain the property of Manor. Any requested enhancements are
subject to Manor's consent. Such enhancements would be
provided for under a separate consulting arrangement and would
be paid for by Choice under the terms stipulated in a separate
consulting agreement. If Manor subsequently uses substantially
all of such enhancement for its own payroll processing, Manor
will reimburse Choice for the cost of such enhancement.
- Choice will develop any computer software necessary to
electronically transmit Choice's employee timeclock
information in batch form into Payroll System. Manor will
review and approve any electronic transmission prior to being
implemented.
- Manor will accept paper submission of source documents until
Manor provides on-line or batch transmission features to
Choice.
- Other services which are billed directly to Choice, such as:
- United States Postal Service, UPS, and other courier
services to deliver payroll envelopes and packages.
- Computer operations costs related to Payroll System
usage.
- Any training or support requirements outside Manor
Headquarters or any support for Choice acquisitions and
divestitures are outside the scope of the fixed price. These
services will be charged on a time and materials basis.
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ACCOUNTS PAYABLE SERVICES
Accounts Payable Service. The scope of Accounts Payable Services includes:
- - Choice will submit paper source documents in accordance with the
established Company policies and Manor will process them on a timely
basis.
- - Manor will establish new vendors on the Vendor Master File and change
basic vendor information such as remittance address and payment terms.
- - Accounts payable check stubs and other forms of remittance advice, and
accounts payable checks with authorized signature facsimile.
- - A variety of management control and information reports in conventional
paper format using laser and impact printing technologies, such as:
1. AP070 - weekly check register
2. AP055 - excess memo report weekly report which lists all
vendors with credit balances by company and vendor number
currently in the A/P system.
3. AP090 - schedule of bills - this weekly report is designed to
list invoices paid or invoices to be paid in vendor
alphabetical order (approximately 60 days of history).
4. AP810A - vendor list - lists all active lodging vendors by
facility number.
5. AP810B - vendor list for facility 706 only.
6. AP810C - vendor list for facilities 700 - 799
7. AP211 - executive committee large check report - this report
lists all payments greater than $5,000.00.
8. AP004 - daily vendor maintenance edit validation - records all
vendor additions, changes and deletions to a vendor's name,
address or tax ID number.
9. AP130 - purged vendor listing - lists all temporary vendors
purged from the vendor file (90 days from entry date).
10. AP120 - duplicate report - highlights through several
variations, all possible duplicate payments.
11. APM010 - manual check register - this is a list of all hand
checks on a given day.
12. AP301 - keypunch report - tabulates the number of invoices and
journal entries keyed during a day's time for each key punch
operator.
13. AP302 - processor operators list - tabulates the total of
invoices processed daily per A/P processor.
14. AAPV0 - void register - lists total of void/stop payment
batches keyed.
15. APM030 - manual checks to be printed.
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16. AP400 - daily report which shows deletions and changes of
payable invoices.
17. APBC03 - batch status
18. AAPTRAIL - AAP dupe vendor maintenance
19. GL001 - online G/L entry
20. GL002 - worksheet log
21. GL003 - deletions on G/L
22. GL2000 - transaction log - lists all transactions daily, to be
posted to the General Ledger.
- - Standard system interface capabilities that may be modified at Choice's
expense and with Manor's consent. These include general ledger for
accounting distribution, drafts for check reconciliation, and fixed
assets.
SERVICES NOT INCLUDED IN THE BASELINE ACCOUNTS PAYABLE SERVICE
CHARGE
- - Manor Accounts Payable System features solely for Choice's use;
provided, however, that any such additional features and functions
shall be deemed enhancement to the Accounts Payable System and shall
remain the property of Manor. Such enhancements would be provided for
under a separate consulting arrangement and would be paid for by Choice
under the terms stipulated in a separate consulting arrangement. If
Manor subsequently uses substantially all of such enhancement for its
own accounts payable processing Manor will reimburse Choice for the
cost of such enhancement.
- - Choice will develop any computer software necessary to electronically
transmit invoice information from other Choice feeder systems into the
Accounts Payable System for subsequent processing and payment.
- - Other services which are billed directly to Choice, such as:
- United States Postal Service, UPS, and other courier services
to deliver accounts payable envelopes and packages from the
Silver Spring Computer Center.
- - Any training or support requirements outside Manor Headquarters or any
support for Choice acquisitions and divestitures are outside the scope
of the fixed price. These services will be charged on a time and
materials basis.
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PROPERTY ACCOUNTING SERVICES
Property Accounting Services. Beginning as of the Distribution Date, Manor shall
provide Property Accounting Services to Choice. These Property Accounting
Services shall encompass functions to ensure system and accounting control over
fixed assets belonging to Choice as may be agreed upon by the parties on a time
and materials basis.
CONSTRUCTION ACCOUNTING SERVICES
Construction Accounting Services. Beginning as of the Distribution
Date, Manor shall provide Construction Accounting Services to Choice. These
Construction Accounting Services shall encompass functions to ensure system and
accounting control over acquisition improvement construction projects and new
building construction/development projects belonging to Choice as may be agreed
upon by the parties on a time and materials basis.
[FACILITIES SERVICES - NEED TO SPECIFY]
[To be provided]
CORPORATE ACCOUNTING SYSTEMS SUPPORT]
[TO BE PROVIDED]
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EXHIBIT B
[ATTACHED]
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<PAGE> 20
CORPORATE SERVICES CHARGES
Attachment B
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SERVICE CHARGE BASIS
- -------------------------------------------------------------------------------
<S> <C>
Payroll Activity Based Charges
Accounts Payable Activity Based Charges
Property Accounting Activity Based Charged
Construction Accounting Activity Based Charges
Silver Spring Computer Services Activity Based Charges
Telecommunications Services Activity Based Charges
Headquarters Telephone, Local & Activity Based Charges
Long Distance Services
Model Room Services Fixed Fee Based Charge of
$100,000 per year,
payable in equal
monthly installments
of $8,333.33 each.
Additional Consulting Services Additional Consulting
Services Hourly
Billing Rates
- -------------------------------------------------------------------------------
</TABLE>
[Conversion Services to be provided]
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EXHIBIT C
CONSULTING SERVICES
A. Services to be Rendered. From and after the Distribution Date, Manor
shall provide the following consulting and advisory services to Choice;
(a) review and evaluate current operations and performance of Choice
with reference to period, quarterly and annual operating, capital
expenditure and other financial statements and reports,
(b) inspect and evaluate Choice operating facilities,
(c) review and evaluate Choice's organizational and personnel
structure,
(d) review and evaluate staffing needs and advise on performance of key
Choice operating executives,
(e) evaluate and review the compensation and benefit structure under
which Choice employees are compensated,
(f) review and evaluate Choice's proposed annual operating budget,
capital expenditures budget and business strategic review,
(g) review and evaluate new business opportunities (including renewals
and extensions of existing contracts) for Choice , including proposed
acquisitions or any capital expenditures or equity investments related
(h) review and evaluate Choice's marketing programs and assist in their
implementation, and
(i) review and evaluate Choice's accounting controls and systems.
Manor shall, upon the request of Choice, review and evaluate any other
of the operating systems, procedures, or structures of Choice as both Manor and
Choice mutually agree. In order to provide the foregoing services, Manor shall
make available to Choice the services of the Senior Vice President, Chief
Financial Officer and Treasurer; Vice President, Finance and Assistant
Treasurer; and other management personnel as appropriate.
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A policy of full cooperation shall prevail between the parties and
their authorized representatives with respect to all matters relating to
Consulting Services provided. Each party agrees in good faith to cooperate with
the other party and keep each other (through the representatives) regularly and
reasonably informed of the information, preparation and review of the matters
upon which Choice desires Manor's consultation and advice.
Timing. Any consulting services provided by Manor hereunder shall be
rendered as promptly as practicable taking into account the particular
circumstances of each request and the time reasonable necessary to provide a
report or evaluation. Choice shall provide all pertinent information relating to
each assignment as reasonably requested by Manor. Any and all recommendations,
advise or evaluations shall, at the request of Choice, be embodied in a written
report.
Services Advisory Only. It is further understood and agreed between the
parties that the services to be provided to Choice hereunder by Manor are
consultative and advisory in nature only and that under no circumstances shall
Manor be under any obligation to provide any day-to-day management services with
respect to the operations of Choice.
B. Compensation
Annual Retainer. For and in consideration of the continued agreement of
Manor to render consulting services to Choice as listed in Section l, Choice
will be entitled to an annual retainer fee in the amount of $1,000,000 payable
upon the Distribution Date and upon each annual anniversary thereof during the
term of the Agreement.
Out-of-Pocket Expenses. Choice will be responsible for the
reimbursement to Manor of its reasonable out-of-pocket expenses incurred for
travel, telephone, or like purposes. Reimbursement shall be made on a monthly
basis upon receipt of an invoice describing the nature and amount of such
expenses. Payment shall be made within ten (10) business days of receipt of an
invoice.
Limitation on Service. In no event will Manor be required to expend
more than 1,000 employee-hours per year in providing consulting services
hereunder.
C. Choice's Responsibility; Agency, Best Efforts. Notwithstanding the
consultation and advice to be rendered hereunder, it is understood that Manor
will act in an advisory capacity only. Choice shall have no obligation to
implement any recommendations or advice rendered by Manor. In performing its
services hereunder, Manor shall be an independent contractor and neither party
shall be an agent or representative of the other except as may be specifically
authorized in advance in writing. Manor shall only be required to exert its
reasonable best efforts to perform under this Agreement. In no event may any
provision of this Agreement be construed as or otherwise constitute
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<PAGE> 23
a guarantee by Manor that following any advice rendered by Manor under this
Agreement will attain the stated business objective, it being recognized by the
parties that Choice shall be fully responsible for the business and operations
of Choice and that, in any event, intervening events over which neither party
has any control may preclude the realization in whole or in part of Choice's
objectives.
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EXHIBIT D
TRAVEL MANAGEMENT SERVICES
Travel Management Services. Manor shall provide Travel management services in
accordance with Choice policy and procedures to the extent that they do not
conflict with Manor procedures. Manor's preferred vendor programs shall be used
unless otherwise stated below. Choice and Manor travel volumes shall be combined
for the purpose of negotiating discounts and preferred services for air, car
rental, corporate charge cards, and ground transportation. The scope of services
includes:
Travel Policy and Procedures.
- - Assistance in developing, updating, and communicating Choice travel
policy and procedures.
Reservations and/or Ticketing.
- - Reservations and/or ticketing for airline, rail, car rental and hotels.
- - Availability of Manor negotiated rates and services for airlines and
car rental (and hotel if so desired).
- - Use of Choice preferred hotels and rates for Choice employees.
Travel Payment.
- - Central Billings for airline charges, including reconciliation and
downloading to the general ledger.
- - Administration of Corporate Charge Card program.
Management Information Reports.
- - Monthly Airfare Exception Report.
- - Monthly Air Activity by Department.
- - Reports on demand for air, car rental, and hotel.
SERVICES NOT INCLUDED IN THE BASELINE TRAVEL MANAGEMENT SERVICES CHARGE
- - Any services which are billed directly to Choice, such as, ground
transportation and courier services.
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- - Use and maintenance of Manor developed or new third party software,
including, but not limited to, expense report processing, reservation
processes, and management information reporting.
Fees.
A. Usage Fees - Pass through of all third party charges
B. Activity Based Fees: percent (%) of transactions attributed to Choice times
Net Expenses (defined as total travel services expenses minus revenue share/
rebates from preferred vendor contracts).
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EXHIBIT E
REPRESENTATIVES
__________________________ - Manor
__________________________ - Choice
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Exhibit 10.06
EMPLOYEE BENEFITS ADMINISTRATION AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of
_______________, 1996, by and between Manor Care, Inc., a Delaware corporation
("Manor") and Choice Hotels Holdings, Inc., a Delaware corporation ("Choice").
R E C I T A L S
WHEREAS, pursuant to a Distribution Agreement (the "Distribution
Agreement") dated as of _____________, 1996, Choice and Manor have agreed to
enter into an employee benefits administration agreement with the terms and
conditions set forth herein; and
WHEREAS, in accordance with said Distribution Agreement, Choice and
Manor also have entered into an Employee Benefits & Other Employment Matters
Allocation Agreement (the Allocation Agreement") dated as of _________________,
1996, pursuant to which Choice and Manor each assumed certain liabilities and
obligations, each generally with respect to its own employees, to adopt or
continue certain employee benefit, stock and retirement plans and programs
substantially equivalent to those provided by Manor on the Distribution Date;
and
WHEREAS, Manor shall retain the personnel and systems formerly utilized
in the maintenance and administration of the aforesaid Manor employee plans and
programs; and
WHEREAS, Choice desires to retain Manor in the maintenance and
administration of Choice's employee plans and programs, and Manor desires to
render such assistance on an equitable, arms length basis for a fee;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Choice and Manor agree as follows:
1. Definitions. As used in this Agreement, the following capitalized
terms shall have the meanings indicated:
"Accounting Services" means the services provided by Manor to or on
behalf of Choice or any participant in any of the Plans, as provided
under Section 2.1 and Exhibit B of this Agreement.
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"Ancillary Agreement" shall have the meaning described in the
Distribution Agreement.
"Benefit and Compensation Additional Consulting Services" means the
services provided by Manor to or on behalf of Choice or any participant
in any of the Plans, as provided under Section 2.2 and Exhibit C of
this Agreement.
"Claims" means any claims reported on or after the Distribution Date by
any employee of the Lodging Business (and/or covered dependents) for
coverage or benefits under the Retirement Plans, Medical/Dental Plans,
Welfare Plans, Deferred Compensation or the Stock Plans. "Claims" also
includes any claims by any beneficiary of a deceased employee. For
purposes of this definition, employee of the Lodging Business includes
any active, disabled, former or retired employee (except a Retiree,
Qualified Beneficiary or an active, former or retired employee whose
account balance under the applicable Deferred Compensation Plan or the
applicable Retirement Plan has been transferred to a Manor deferred
compensation plan or a Manor retirement plan pursuant to the
Distribution).
"COBRA" means the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended.
"COBRA Administration Services" means the services provided by Manor to
or on behalf of Choice or any participant in any of the Medical/Dental
Plans or Qualified Beneficiary, as provided under Section 2.4 and
Exhibit E of this Agreement.
"COBRA Claims" means any claims reported on or after the Distribution
Date by any Qualified Beneficiary for coverage or benefits under any
Medical/Dental Plan (or any predecessor thereto).
"COBRA Continuation Coverage" means the coverage following a Qualifying
Event provided by Choice to a Qualified Beneficiary as required by
COBRA.
"Compliance Services" means the services provided by Manor to or on
behalf of Choice or any participant in any of the Plans, as provided
under Section 2.5 and Exhibit F of this Agreement.
"Deferred Compensation Plan(s)" means the deferred compensation plan(s)
set forth in the attached Schedule A, as it may be amended from time to
time with the written consent of both parties to this Agreement.
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<PAGE> 3
"Determination Period" means any 12 months during which the premium for
COBRA Continuation Coverage with respect to a Qualified Beneficiary
must remain fixed and may not be increased.
"Distribution" means the distribution to the holders of Manor Care
Common Stock all the outstanding shares of Choice Common Stock.
"Distribution Agreement" mans the agreement described in the first
recital of this Agreement.
"Distribution Date" means the date determined by the Board of Directors
of Manor as the date on which the Distribution shall be effected.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Fiduciary Services" means the services provided by Manor to or on
behalf of Choice or any participant in any of the Plans, as provided
under Section 2.6 of this Agreement.
"Health and Welfare Plans" means those plans listed on Schedule A
herein.
"HMO(s)" means health maintenance organization(s).
"Imprest Account(s)" means the account(s) established pursuant to
Section 4.1 of this Agreement.
"Lodging Business" means any business or operation of Choice or its
subsidiaries which is, pursuant to the Distribution Agreement, to be
conducted, following the Distribution, by Choice.
"Medical/Dental Plan(s)" means the medical and dental plans as set
forth in the attached Schedule A, as it may be amended from time to
time with the written consent of both parties to this Agreement.
"Plans" means the Choice Medical/Dental Plans, Welfare Plans,
Retirement Plans, Deferred Compensation Plans, and Stock Plans set
forth in the attached Schedule A, as it may be amended from time to
time with the written consent of both parties to this agreement.
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"Plan Administrator" means the administrator as defined in ERISA
Section 3(16)(A).
"Plan Administration Services" means the services provided by Manor to
or on behalf of Choice or any participant in any of the Plans, as
provided under Section 2.3 and Exhibit D of this Agreement.
"Prime Rate" means the rate identified from time to time in the New
York edition of the Wall Street Journal as being the prime rate of
interest.
"Qualified Beneficiary" means any former or part-time employee of the
Lodging Business (or dependent thereof) who either experiences (or
experienced) a Qualifying Event while a participant in any
Medical/Dental Plan (or any predecessor thereto), or becomes (or
became) a Qualified Beneficiary, as that term is defined in Internal
Revenue Code Section 4980B(g)(a) and ERISA 607(3), under any
Medical/Dental Plan (or any predecessor thereto).
"Qualifying Event" means an event upon which a Qualified Beneficiary
must be given the opportunity to elect COBRA Continuation Coverage as
specified in Internal Revenue Code Section 4980B(f)(3) and ERISA
Section 603.
"Retirement Plans" means the retirement plans set forth in the attached
Schedule A, as it may be amended from time to time with the written
consent of both parties to this Agreement.
"Services" means the Accounting Services, the Benefit and Compensation
Additional Consulting Services, the COBRA Administration Services, the
Plan Administration Services, the Compliance Services and the Fiduciary
Services, all as described in Section 2 of this Agreement.
"Stock Plans" means the stock plans set forth in the attached Schedule
A, as it may be amended from time to time with the written consent of
both parties to this Agreement.
"Welfare Plans" means the welfare plans set forth in the attached
Schedule A, as it may be amended from time to time with the written
consent of both parties to this Agreement.
Any capitalized terms defined in the Distribution Agreement and used herein
shall have the meanings ascribed to them in the Distribution Agreement unless
otherwise defined herein.
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2.0 Duties of Manor. Upon the request of Choice, Manor shall:
(a) Provide the Services to Choice with respect to the Plans;
(b) Provide such other services in connection with the Plans as shall
be mutually agreed upon by the parties to this Agreement (such other
services and costs thereof to be set forth as an addendum to this
Agreement); and
(c) Arrange for the maintenance of all records used to perform the
Services (and any other services), including Claims and COBRA Claims
files and records, for six (6) calendar years following any year in
which it performs Services (or any other services) hereunder.
The Services (and any other services) shall be administered in accordance with
Manor's standard policies, procedures and practices in effect as of the date
hereof and as may be changed, and as more particularly described below; or as
otherwise specified in accordance with the terms thereof. In so doing, Manor
shall exercise the standards of care set forth in Section 5.0.
It is expressly understood that in providing the Services (any other services)
to Choice, Manor shall be a service provider and not a plan sponsor, as defined
in ERISA 3(16)(B), of any of the Plans, and shall have the right to delegate its
obligations hereunder to or contact with any other party to provide such
Services (or any other services). Furthermore, it is the intent of the parties
to this Agreement that Manor shall be an independent contractor in providing the
Services (any other services) under this Agreement, and not as employee or agent
of Choice. Manor agrees to provide such Services only if it reasonably believes
the service will not interfere with the conduct of the business of Manor or pose
an unreasonable burden.
2.1 Accounting Services. Upon the request of Choice, Manor shall
provide the Accounting Services to Choice, as set forth in Exhibit B, to assist
Choice in meeting its accounting and financial reporting obligations under the
Plans.
2.2 Benefit and Compensation Additional Consulting Services. Upon the
request of Choice, Manor shall provide Benefit and Compensation Consulting
Services, as set forth in Exhibit C, to Choice to assist Choice in designing and
updating employee benefit plans and establishing competitive compensation
practices.
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2.3 Plan Administration Services. Upon the request of Choice, Manor
shall provide the Plan Administration Services, as set forth in Exhibit D, to
assist in the administration of its Plans.
2.4 COBRA Administration Services. Upon the request of Choice, Manor
shall provide the COBRA Administration Services, as set forth in Exhibit E, to
assist Choice, the Plan Administrator and the Medical/Dental Plans in the
performance of their responsibilities under COBRA.
2.5 Compliance Services. Upon the request of Choice, Manor or its
contractors shall provide the Compliance Services, as set forth in Exhibit F, to
assist Choice in fulfilling its disclosure and reporting obligations under
ERISA, the Internal Revenue Code and any other applicable federal or state law.
2.6 Fiduciary Services. Upon the request of Choice, Manor shall provide
the Fiduciary Services, as set forth in Exhibit G, in its administration of
Claims for disability (including payment), retirement, stock and deferred
compensation benefits (and appeals of denied or disputed Claims with respect
thereto), and in its final review of appeals of denied or disputed Claims and
COBRA Claims under the Medical/Dental Plans. Manor shall obtain and maintain
customary such fiduciary insurance coverage. Other than the fiduciary services
set forth in Exhibit G, Manor is vested only with ministerial authority and
shall have no discretionary authority to make decisions as to policies,
interpretations, practices and procedures under any of the Plans (except to the
extent otherwise set forth in Exhibit G), but shall perform its duties and
functions under this Agreement within the framework of the terms of each of the
Plans and policies, interpretations, rules, practices and procedures made by
Choice. Except as otherwise specified in this Section 2.6, Manor is not a
fiduciary with respect to any of the Plans and shall not be considered the Plan
Administrator, fiduciary, or named fiduciary under any of the Plans, within the
meaning of those terms as defined in ERISA.
3.0 Duties of Choice. Except as provided in Section 2.6, Choice shall
have the sole and primary responsibility as sponsor of the Plans for all
discretionary decisions and actions with respect thereto, for all financial and
other obligations arising therefrom, and for all funding and employer
contribution requirements under the terms of the Plans. In addition, Choice
shall, except to the extent expressly delegated to Manor:
(a) Provide Manor with assistance or authorizations to third parties
reasonably required for Manor to perform the Services and any other
services under this Agreement;
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(b) Obtain and maintain qualification for all tax-qualified, tax-exempt
or otherwise tax-favored Plans;
(c) Request from Choice shareholders share authorizations sufficient to
meet awards under the Stock Plans;
(d) For active employees participating in any of the Plans, collect
payroll deductions for each pay period for the amount of employee
contributions owed for the pay period and withhold applicable payroll
taxes under Choice's payroll system with respect to the Plans;
(e) Maintain all necessary records and documentation as required by law
or as needed for efficient administration of the Plans;
(f) Perform all necessary employee communications, including sending
notices required by law, determining eligibility and conducting
enrollment under the Plans;
(g) Complete required Securities and Exchange Commission registrations
and other filings required with respect to all Plans.
(h) Furnish Manor with any and all information in its possession
necessary to enable Manor to perform the Services under this Agreement.
(i) At the request of Manor, maintain the Imprest Account(s) with
sufficient funds to satisfy expenses of the Plans as they become due
and payable. Manor is not responsible for funding the Plans with any
contributions.
(j) Timely pay the Service Fees as they become due and payable.
4.0 Financial Provisions.
4.1 Imprest Account(s). Choice will open and maintain an imprest
account(s) against which Manor may write checks or initiate fund transfers to
cover all Claims and COBRA Claims payments and out-of-pocket expenses for
medical reports, "second opinions" obtained to evaluate claims, HMO premiums,
insurance company premiums, costs incurred for separately tracking Claims and
COBRA Claims, administrative contract fees paid to contractors for processing
Claims and COBRA Claims, toll-free phone service charged separately by claims
administrators, medical case management, hospital utilization review, claim
audits, outside legal fees and fees of other outside service providers, claim
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settlement charges and expenses, and all other similar expenses that are
normally incurred in the administration of Claims and COBRA Claims.
4.2 Pricing and Payment for Services. Choice shall pay Manor for
services requested and rendered hereunder as follows:
(a) The charging mechanisms for rates or charges for each service shall
include (i) activity-based charges where the per unit price will be
multiplied by the variable number of units (for example, the number of
active associates times the per associate charge will determine the per
Accounting Period charge); (ii)fixed fee based charges, meaning a fixed
amount per Accounting Period for Manor to perform the service; (iii)
usage based charges for which Choice will pay according to actual use
of the service; (iv) time and materials charges; or (v) a variation or
a combination of any of the foregoing methods as agreed to by the
parties.
(b) Except as provided in the Distribution Agreement, the Allocation
Agreement or any Ancillary Agreement, Choice shall pay any and all
additional costs and expenses which Manor may incur for the express
purpose of providing services to Choice.
(c) Choice shall pay Manor on a time and materials basis for all costs
incurred by Manor in converting Choice business information and records
from Manor services systems to either a third party provider or to
Choice.
(d) Choice shall pay Manor for all services provided hereunder within
thirty (30) days after receipt of an invoice therefor. Choice shall pay
fixed charges in advance on the first business day of the applicable
Accounting Period. Any payments not made by Choice to Manor when due
shall bear interest, computed daily from the date due to the date of
payment based on the annual percentage rate equal to the Prime Rate
plus two (2) percentage points, as same may vary from time to time.
5.0 Warranties and Limitations of Liability.
(a) MANOR DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE SERVICES PROVIDED
HEREUNDER. Manor will use reasonable efforts to perform the Services provided
hereunder in a professional and workmanlike manner but the results of the
Services are furnished "as is."
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(b) Manor's sole liability to Choice or any third party for
claims, notwithstanding the form of such claims (e.g. contract, negligence or
otherwise), arising out of errors or omissions in the Services provided or to be
provided by Manor hereunder which are caused solely by Manor shall be to furnish
correct information, payment, and/or adjustment in the Services provided
hereunder provided that Choice promptly advises Manor thereof.
(c) Manor's sole liability to Choice or any third party for
claims, notwithstanding the form of such claims (e. g. contract, negligence or
otherwise), arising out of the unavailability of the Services provided hereunder
or the interruption in or delay in performing the Services provided hereunder
for any reason beyond Manor's reasonable control shall be to use all reasonable
efforts to make such services available, and/or to resume performing the
Services, as promptly as reasonably practicable. Manor will maintain the same
back-up procedures for Choice's information that Manor has for its own
information.
(d) MANOR SHALL NOT BE LIABLE FOR ANY ERRORS, OMISSIONS,
DELAYS, OR LOSSES UNLESS CAUSED SOLELY BY ITS CRIMINAL CONDUCT, FRAUD, BAD FAITH
OR GROSS NEGLIGENCE. CHOICE AGREES THAT IN NO EVENT WILL MANOR BE LIABLE FOR
INCIDENTAL, INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES. CHOICE FURTHER AGREES
THAT IN NO EVENT WILL THE TOTAL AGGREGATE LIABILITY OF MANOR FOR ANY AND ALL
CLAIMS, LOSSES, OR DAMAGES ARISING UNDER THIS AGREEMENT AND FOR THE SERVICES
PERFORMED HEREUNDER EXCEED THE VALUE OF CHOICE'S PAYMENT FOR SAID SPECIFIC
SERVICE IN DISPUTE OVER ONE FOUR-WEEK ACCOUNTING PERIOD'S TIME.
(e) The forgoing provisions of this Section 5 set forth the
full extent of Manor's liability hereunder (monetary or otherwise) for any claim
or action, regardless of the form in which any such claim or action may be
asserted against Manor (e.g. contract, negligence or otherwise).
6.0 Indemnification: Standard of Care. Manor shall use the same care and skill
in the performance of its duties under this Agreement as a similarly situated
provider of like services would exercise following commonly accepted standards
of prudence in the relevant industry engaged in the provision of such services.
6.1 Manor Held Harmless. Choice will indemnify, defend and hold
harmless Manor and its directors, officers and employees from Losses (as defined
below) resulting
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from or arising out of or in connection with Manor's actions or failure to act
where such action or failure to act is required by any Choice employment,
compensation or benefits policy or practice, other than Losses for which Choice
is indemnifiable by Manor under Section 6.2. The term "Losses" shall include
costs of any claim, lawsuit, settlement, judgment, penalty, attorneys' fees, and
other expenses in connection with the Plans. In addition, Choice will indemnify
Manor against any premium taxes or any other fees or levies of any local, state
or federal government (including sales, use or similar taxes) assessed in
connection with any of the Plans, and against any income or payroll taxes,
interest or penalties assessed against any participant or beneficiary of any
Plan or against Choice as a result of such participant or beneficiary
recognizing income from benefits payable under any Plan.
6.2 Choice Held Harmless. Manor will indemnify, defend and hold
harmless Choice and its directors, officers and employees from Losses (other
than benefits due and payable under the terms of any Plan) resulting from or
arising out of or in connection with Manor's criminal conduct, fraud, bad faith
or gross negligence, unless the actions (or inaction) causing the Losses were
taken (or not taken) at the specific direction of Choice, its subsidiaries,
employees, or agents.
6.3 Notice and Defense. The party seeking indemnification must notify
the other party promptly in writing of any claim that may result in Losses, and
give the indemnifying party the opportunity to assist in the defense of the case
(at the indemnifying party's cost and expense), and must provide all necessary
information and assistance for such defense. In addition, Manor will provide all
necessary information and assistance to Choice (at Choice's cost and expense) in
the defense of any Claims, COBRA Claims, or other actions brought under any of
the Plans which could result in Losses for which Choice is primarily liable.
7.0 Access to Information: Cooperation. Subject to the requirements of
Section 24.0, Choice and its authorized agents will be given reasonable access
to and may take copies of all information relating to the Claims and COBRA
Claims (to the extent permitted by federal and state confidentiality laws) in
Manor's and/or its subcontractor's custody, as applicable. The parties will
cooperate with one another to minimize the disruption caused by any such access.
8.0 Term. The term of this Agreement shall commence on the Distribution
Date and shall remain in effect through the end of the first full Fiscal Year
immediately following the Distribution Date. Unless terminated pursuant to the
terms hereof, the Agreement shall automatically renew each Fiscal Year
thereafter for the extended term of said Fiscal Year and shall not extend beyond
30 months from the Distribution Date unless otherwise extended by
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the parties in writing; provided, however, that Choice may terminate this
Agreement or any services provided hereunder at any time for any reason or no
reason by sending written notice to Manor upon sixty (60) days' prior notice to
Manor and provided, further, in the event any service herein is dependent upon
any Function as defined in that certain Corporate Services Agreement between the
parties and dated the date hereof, notice of termination shall be determined by
reference to the Corporate Services Agreement. This Agreement may also be
terminated in the event of a default (past the expiration of any applicable cure
period provided herein) in accordance with the provisions of this Agreement or
may be terminated by mutual agreement. In the event of any termination, Articles
4,5,6 and 15 shall survive and remain in effect.
9.0 Default. If either party materially defaults hereunder, the
non-defaulting party may terminate this Agreement effective immediately (subject
to the cure periods set forth herein below) upon written notice to the
defaulting party. The non-defaulting party shall be entitled to all remedies
provided by law or equity (including reasonable attorney's fees and costs of
suit incurred). The following events shall be deemed to be material defaults
hereunder:
(a) Failure by either party to make any payment required to be made to
the other hereunder, which failure is not remedied within five (5) days
after receipt of written notice thereof; or
(b) Except as otherwise provided herein, failure by either party
substantially to perform in accordance with the terms and conditions of
this Agreement, which failure is not remedied within thirty (30) days
after receipt of written notice from the other party specifying the
nature of such default; or
(c) (i) Filing of a voluntary bankruptcy petition by either party; (ii)
filing of an involuntary bankruptcy petition against either party which
is not withdrawn within sixty (60) days after filing; (iii) assignment
for the benefit of creditors made by either party; or (iv) appointment
of a receiver for either party.
Notwithstanding the foregoing, the correction period provided for in Sections
9.0(a) and 9.0(b) shall apply only if such failure is due to reasonable cause
and not willful neglect.
10.0 Force Majeure. Manor and Choice shall incur no liability to each
other due to a failure to perform under the terms and conditions of this
Agreement resulting from fire, flood, war, strike, lock-out work stoppage or
slow-down, labor disturbances, power failure, major equipment breakdowns,
construction delays, accident, riots, acts of God, acts of
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United States' enemies, laws, orders or at the insistence or result of any
governmental authority or any other event beyond each other's reasonable
control. In addition, Manor shall not be liable or deemed to be in default for
any delay or failure to perform hereunder resulting, directly or indirectly,
from any cause beyond Manor's reasonable control, including limitations upon the
availability of communications facilities or failures of other communications
equipment or failure of Choice to prepare data properly for input into the
Corporate Systems. However, nothing in this provision shall relieve Choice of
any liability for failure to make any payments required to be made under this
Agreement because Choice Employees are on strike or engaged in a lock-out, work
stoppage or slow-down, or labor disputes.
11.0. Relationship of Parties. Nothing in this Agreement shall be
deemed or construed by the parties or any third party as creating the
relationship of principal and agent, partnership or joint venture between the
parties, it being understood and agreed that no provision contained herein, and
no act of the parties, shall be deemed to create any relationship between the
parties other than the relationship of independent contract administrator and
client.
12.0. Assignment. Subject to the provisions of Section 2.0, Neither
party shall, without the prior written consent of the other, assign any rights
or delegate any obligations under this Agreement, such consent not to be
unreasonably withheld, conditioned or delayed; provided, however, such consent
not to be required if the agreement is assigned to a wholly-owned subsidiary of
either party.
13.0 Headings. The headings used in this Agreement are inserted only
for the purpose of convenience and reference, and in no way define or limit the
scope or intent of any provision or part hereof.
14.0 Severability of Provisions: Neither Manor nor Choice intend to
violate statutory or common law by executing this Agreement. If any section,
sentence, paragraph, clause or combination of provisions in this Agreement is in
violation of any law, such sections, sentences, paragraphs, clauses or
combinations shall be inoperative and the remainder of this Agreement shall
remain in full force and effect and shall be binding upon the parties.
15.0 Parties Bound. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and permitted
assigns. Nothing herein, expressed or implied, shall be construed to give any
other person any legal or equitable rights hereunder.
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16.0 Notices. All notices and other communications hereunder shall be
in writing and shall be delivered by hand or shall be deemed to have been
properly made and given one (1) business day after being deposited with a
reputable overnight courier service such as Federal Express, Airborne Express or
UPS Next Day Air for next business day delivery or mailed by registered or
certified mail (return receipt requested) to the parties at the following
addresses (or at such other addresses for a party as shall be specified by like
notice) and shall be deemed given on the date on which such notice is received:
To Choice:
Choice Hotels International, Inc.
10750 Columbia Pike
Silver Spring, MD 20901
Attention: General Counsel
To Manor:
Manor Care, Inc.
11555 Darnestown Road
Gaithersburg, MD 20878-3200
Attention: General Counsel
17.0 Further Action. Manor and Choice each shall cooperate in good
faith and take such steps and execute such papers as may be reasonably requested
by the other party to implement the terms and provisions of this Agreement.
18.0 Waiver. Manor and Choice each agree that the waiver of any default
under any term or condition of this Agreement shall not constitute any waiver of
any subsequent default or nullify the effectiveness of that term or condition.
19.0 Governing Law. All controversies and disputes arising out of or
under this Agreement shall be determined pursuant to the laws of the District of
Maryland, regardless of the laws that might be applied under applicable
principles of conflicts of laws, except to the extent preempted by ERISA or
other applicable federal laws..
20.0 Consent to Jurisdiction. The parties irrevocably submit to the
exclusive jurisdiction of (a) the Courts of the State of Maryland in Montgomery
County, and (b) the United States District Court for the State of Maryland for
the purposes of any suit, action or other proceeding arising out of this
Agreement.
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21.0 Entire Agreement. This Agreement and the Distribution Agreement
constitute the entire understanding between the parties hereto, and supersede
all prior written or oral communications, relating to the subject matter covered
by said agreements. No amendment, modification, extension or failure to enforce
any condition of this Agreement by either party shall be deemed a waiver of any
of its rights herein. this Agreement shall not be amended except by a writing
executed by the parties.
22.0 Commercially Reasonable Terms and Conditions. Notwithstanding
anything in this Agreement to the contrary, the terms and provisions of this
Agreement reflect and shall reflect commercially reasonable terms and conditions
(including, but not limited to, pricing) that in the reasonable judgment of
Manor are at least as favorable and as competitive to Choice as the terms and
conditions Manor would grant or require of third parties for substantially
similar goods and services.
23.0 Representatives. Choice and Manor shall each appoint a managerial
level individual (hereinafter "Representatives") to facilitate communications
and performance hereunder. Each party may treat an act of the Representative of
the other party as being authorized by such other party without inquiring behind
such act or ascertaining whether such Representative had authority to so act.
The initial Representatives are named on Exhibit A. Each party shall have the
right at any time and from time to time to replace its Representative by giving
notice in writing to the other party setting forth the name of (i) the
Representative to be replaced and (ii) the replacement, and certifying that the
replacement Representative is authorized to act for the party giving the notice
in all matters relating to this Agreement.
24.0 Confidentiality. Manor and Choice agree that the terms of this
Agreement are confidential and further agree that this Agreement shall not be
released to any third parties, excluding such parties' counsel, agents or
lenders. However, one party may release this Agreement or such information to a
third party upon the prior approval of the other party (such approval not to be
unreasonably withheld, conditioned or delayed) upon court order, or as required
by any rules, regulations or laws. All confidential and proprietary information
which either party has obtained from the other shall be returned upon the
expiration or earlier termination of this Agreement. The provisions of this
paragraph shall survive expiration or earlier termination of this Agreement.
25.0 Expenses. Except as otherwise set forth in this Agreement or any
Ancillary Agreement (as defined in the Distribution Agreement), the parties
shall bear their own costs and expenses in connection with the preparation,
execution, delivery and implementation of this Agreement and the consummation of
the transactions contemplated hereby.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CHOICE HOTELS HOLDINGS, INC., a
Delaware corporation
By:_______________________________________
Name:_______________________________
Title:______________________________
MANOR CARE, INC., a
Delaware corporation
By:_______________________________________
Name:_______________________________
Title:______________________________
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EXHIBIT A
REPRESENTATIVES
_________________________________________ - Manor
_________________________________________ - Choice
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EXHIBIT B
ACCOUNTING SERVICES
B.0 General. The Accounting Services shall be limited to the following
services:
B.1 Accounting Services for Health and Welfare Plans. Manor shall:
(a) Arrange for the calculation, collection and remittance of
employee payroll deductions for each of the Health and
Welfare Plans, where required;
(b) Maintain financial records and prepare financial statements
for each of the Health and Welfare Plans, where needed;
(c) Arrange for the preparation of an independent certified
public accountant's report for each of the Health and Welfare
Plans, where needed;
(d) Prepare for Choice's review, signature and filing the Form
5500 for each of the Health and Welfare Plans, where needed;
(e) Review and reconcile bank and investment accounts for each of
the Health and Welfare Plans, where required;
(f) Reconcile billing statements and payments to HMOs and
insurance carriers with participant records;
(g) Reconcile claim reports;
(h) Initiate fund transfers in connection with the Health and
Welfare Plans;
(i) Assist in developing premium rates for Choice self-insured
Health and Welfare Plans;
(j) Beginning January 1, 1997, develop, recommend, and maintain
records showing employer contribution amounts under each of
the
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Health and Welfare Plans relating to the total cost of Health
and Welfare Plans for Choice to accrue on its books; and
B.2 Accounting Services for Retirement Plans. Manor shall:
(a) Establish, maintain and update a roster of participants in
each of the Retirement Plans;
(b) Maintain records of participant account balances or accrued
benefit, as applicable, for each of the Retirement Plans,
including records as to vesting;
(c) Coordinate the distribution of shares, cash and account
contributions under each of the Retirement Plans;
(d) Arrange for the calculation, collection and remittance of
direct employee contributions and employee payroll deductions
for each of the Retirement Plans, where required;
(e) Maintain financial records and prepare financial statements
for each of the Retirement Plans, where needed;
(f) Arrange for the preparation of an independent certified
public accountant's report for each of the Retirement Plans,
where needed;
(g) Prepare for Choice's review, signature, and filing of the
Form 5500 for each of the Retirement Plans, where needed;
(h) Review and reconcile bank and investment accounts for each of
the Retirement Plans;
(i) Develop, recommend, and maintain records showing employer
contribution amounts under each of the Retirement Plans for
Choice to accrue on its books; and
(j) Manage the process of withholding applicable payroll taxes
otherwise payable by Choice, where required.
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B.3 Accounting Services for Stock Plans. Manor shall:
(a) Establish, maintain and update a roster of participants in
each of the Stock Plans;
(b) Maintain records of participant account balances for each of
the Stock Plans, including records as to vesting;
(c) Coordinate the distribution of shares (and cash, where
applicable) under each of the Stock Plans;
(d) Arrange for the calculation, collection and remittance of
stock purchase proceeds or employee payroll deductions for
each of the Stock Plans where applicable;
(e) Maintain financial records and prepare financial statements
for each of the Stock Plans, where needed;
(f) Develop, recommend and maintain records showing employee
contribution amounts under each of the Stock Plans for Choice
to accrue on its books;
(g) Maintain for each of the Stock Plans share authorization,
issuance, cancellation, and forfeiture records; and
(h) Manage the process of withholding applicable payroll taxes
otherwise payable by Choice, where required.
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B.4 Accounting Services for Deferred Compensation Plans. Manor shall:
(a) Establish, maintain and update a roster of participants in
each of the Deferred Compensation Plans;
(b) Maintain records of participant account balances for each of
the Deferred Compensation Plans, including records as to
vesting;
(c) Coordinate the distribution of shares, cash and account
contributions under each of the Deferred Compensation Plans;
(d) Develop, recommend, and maintain records showing employer
contribution amounts under each of the deferred Compensation
Plans for Choice to accrue on its books; and
(e) Manage the process of withholding applicable payroll taxes
otherwise payable by Choice, where required.
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EXHIBIT C
BENEFIT AND COMPENSATION ADDITIONAL CONSULTING SERVICES
C.0 General. the Benefit and Compensation Additional Consulting
Services shall be limited to the following services:
C.1 Benefit Additional Consulting Services for Health and Welfare Plans
Manor shall:
Assist Choice annually to identify desired Additional Consulting
services and appropriate responsibility.
C.2 Benefit Additional Consulting Services for Retirement Plans. Manor
shall:
Assist Choice annually to identify desired Additional Consulting
services and appropriate responsibility.
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C.3. Benefit Additional Consulting Services for Stock Plans. Manor
shall:
Assist Choice annually to identify desired additional consulting
services and appropriate responsibility.
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C.4 Benefit Additional Consulting Services for Deferred Compensation
Plans. Manor shall:
Assist Choice annually to identify desired additional consulting
services and appropriate responsibility.
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C.5 Compensation Additional Consulting Services for Choice. Manor
shall:
Assist Choice annually to identify desired additional consulting
services and appropriate responsibility.
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EXHIBIT D
PLAN ADMINISTRATION SERVICES
D.0 General. the Plan Administration Services shall be limited to the
following services:
D.1 Plan Administration Services for Health and Welfare Plans. Manor
shall:
(a) Assist in the preparation of enrollment and communication
materials for each of the Health and Welfare Plans;
(b) Coordinate the production, printing and distribution of
enrollment and communication materials for each of the Health
and Welfare Plans;
(c) Assist Choice to negotiate contracts with insurance carriers
and HMOs;
(d) Assist Choice to negotiate contracts with insurance carriers
and HMOs;
(e) Assist Choice to negotiate fees for "administrative services
only" contracts and premiums for insured Health and Welfare
Plans;
(f) Coordinate the competitive bidding process among prospective
service providers and evaluate resulting bids for Choice.
(g) Oversee Choice contracts with insurance carriers and HMOs;
(h) Arrange for plan eligibility information to be provided to
insurance carriers and HMOs;
(i) Coordinate independent audits of medical and dental claim
administrators;
(j) Coordinate recovery of claims advances involving third party
liability claims;
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(k) Assist Choice in pursuing recovery of overpayments made by
medical and dental claim administrators;
(l) Coordinate the administration, review and evaluation of
Health and Welfare Claims in accordance with the terms of the
Health and Welfare Plans, standard policies, procedures and
practices;
(m) Investigate Claims under the Health and Welfare Plans to the
extent deemed necessary in its best judgment;
(n) Arrange for the payment of Claims in accordance with the
terms of the Health and Welfare Plans, standard policies,
procedures and practices; and
(o) Obtain consents, approvals, and elections under the Health
and Welfare Plans as provided under the terms thereof.
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D.2 Plan Administration Services for Retirement Plans. Manor shall:
(a) Assist in the preparation of enrollment and communication
materials for each of the Retirement Plans;
(b) Coordinate the production and printing of enrollment and
communication materials for each of the Retirement Plans;
(c) Coordinate the competitive bidding process among prospective
service providers and evaluate resulting bids for Choice;
(d) Coordinate the administration, review and evaluation of
Claims in accordance with the terms of the Retirement Plans,
standard policies, procedures and practices;
(e) Investigate Claims under the Retirement Plans to the extend
deemed necessary in its best judgment;
(f) Arrange for the payment of Claims in accordance with the
terms of the Retirement Plans, standard policies, procedures
and practices; and
(g) Obtain consents, approvals, and elections under the
Retirement Plans as provided under the terms thereof.
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D.3 Plan Administration Services for Stock Plans. Manor shall:
(a) Assist in the preparation of enrollment (where applicable),
nomination and communication materials for each of the Stock
Plans;
(b) Coordinate the production, printing and distribution of
enrollment (where applicable), nomination and communication
materials for each of the Stock Plans;
(c) Coordinate the competitive bidding process among prospective
service providers and evaluate resulting bids for Choice;
(d) Arrange for plan eligibility information to be provided to
awards administrators;
(e) Coordinate the administration, review and evaluation of
awards in accordance with the terms of the Stock Plans,
standard policies, procedures and practices;
(f) Investigate awards under the Stock Plans to the extent deemed
necessary in its best judgment;
(g) Arrange for the distribution of shares in accordance with the
terms of the Stock Plans, standard policies, procedures and
practices;
(h) Coordinate the exercise of stock options and the distribution
of shares and payments of dividends under the Stock Plans;
and
(i) Obtain consents, approvals, and elections under the Stock
Plans as provided under the terms thereof.
29
<PAGE> 30
D.4 Plan Administration Services for Deferred Compensation Plans.
Manor shall:
(a) Assist in the preparation of enrollment and communication
materials for each of the Deferred Compensation Plans;
(b) Coordinate the production, printing and distribution of
enrollment and communication materials for each of the
Deferred Compensation Plans;
(c) Coordinate the competitive bidding process among prospective
service providers and evaluate resulting bids for Choice.
(d) Arrange for plan eligibility information to be provided to
claim administrators;
(e) Coordinate the administration, review and evaluation of
Claims in accordance with the terms of the Deferred
Compensation Plans, standard policies, procedures and
practices;
(f) Investigate Claims under the deferred Compensation Plans to
the extent deemed necessary in its best judgment;
(g) Arrange for the payment of Claims in accordance with the
terms of the Deferred Compensation Plans, standard policies,
procedures and practices; and
(h) Obtain consents, approvals, and elections under the Deferred
Compensation Plans as provided under the terms thereof.
30
<PAGE> 31
EXHIBIT E
COBRA ADMINISTRATION SERVICES
E.0 General. The COBRA administration Services shall be limited to the
following services:
E.1 COBRA Administration Services for Medical/Dental Plans. Manor
shall:
(a) Send initial COBRA notices to Choice employees (and the
dependents thereof), as identified by Choice, who are
enrolled in the Medical/Dental Plans after the date of this
Agreement;
(b) Send COBRA notices and election forms to Qualified
Beneficiaries who are identified by Choice or Manor, as
appropriate, such COBRA notices to include, among other
things:
(1) Identification of the coverage on the date before the
Qualifying Event;
(2) The date the coverage ended;
(3) The reason the coverage ended;
(4) The right to elect COBRA Continuation Coverage;
(5) The duration of the COBRA Continuation Coverage;
(6) The duration of the grace period for payment of the
initial premium payment for COBRA Continuation Coverage;
and
(7) The Determination Period;
(c) Receive and process duly executed COBRA election forms
received from Qualified Beneficiaries in accordance with the
procedures established by Choice.
31
<PAGE> 32
(d) Send payment coupons to Qualified Beneficiaries who have
elected COBRA Continuation Coverage stating the amount of the
monthly COBRA premium payment as established by Choice, where
required;
(e) Receive and process amounts received as monthly COBRA premium
payments from Qualified Beneficiaries;
(f) Notify Qualified Beneficiaries of the extension of COBRA
Continuation Coverage from 18 months to 29 or 36 months or
termination of their COBRA Continuation Coverage, as
appropriate, under procedures established by Choice;
(g) Respond to telephone and written inquiries concerning COBRA
Continuation Coverage;
(h) Notify Qualified Beneficiaries of their right to convert to
other coverage, if applicable;
(i) Maintain an accounting of the COBRA premium payments to be
charged Qualified Beneficiaries;
(j) Assist Choice in developing COBRA premium payments to be
charged Qualified Beneficiaries;
(k) Coordinate the administration, review and evaluation of COBRA
Claims in accordance with the terms of the Medical/Dental
Plan as applicable, and stand policies, procedures and
practices;
(l) Investigate the COBRA Claims to the extent deemed necessary
in its best judgment; and
(m) Arrange for the payment of COBRA Claims in accordance with
the terms of the appropriate Medical/Dental Plan, standard
policies, procedures and practices.
32
<PAGE> 33
EXHIBIT F
COMPLIANCE SERVICES
F.0 General. the Compliance Services shall be limited to the following
services:
F.1 Compliance Services for Health and Welfare Plans. Manor shall:
(a) Assist Choice in the preparation of compliance and disclosure
documents pertaining to the Health and Welfare Plans, e.g.,
Plan documents, Plan amendments, summary Plan descriptions,
summaries of material modifications, and summary annual
reports;
(b) Assist Choice in the preparation of forms and disclosures
required by the Internal Revenue Service, the Department of
Labor and other regulatory agencies;
(c) Make recommendations and propose necessary amendments to Plan
documents and procedures for compliance with the Plan
documents, administrative procedures, ERISA and other
applicable laws and regulations; and
(d) Assist Choice to prepare for and respond to any government
audit or enforcement action with respect to the Health and
Welfare Plans.
33
<PAGE> 34
F.2 Compliance Services for Retirement Plans. Manor shall:
(a) Assist Choice in the preparation of compliance and disclosure
documents pertaining to the Retirement Plans, e.g., Plan
documents, Plan amendments, summary Plan descriptions,
summaries of material modifications, and summary annual
reports;
(b) Assist Choice in the preparation of application for tax
exempt status for its Retirement Plans;
(c) Assist Choice in the preparation of forms and disclosures
required by the Internal Revenue Service, the Department of
Labor and other regulatory agencies;
(d) Make recommendations and propose necessary amendments to Plan
documents and procedures for compliance with the Plan
documents, administrative procedures, ERISA and other
applicable laws and regulations; and
(e) Assist Choice to prepare for and respond to any government
audit or enforcement action with respect to the Retirement
Plans.
34
<PAGE> 35
F.3 Compliance Services for Stock Plans. Manor shall:
(a) Assist Choice in the preparation of compliance and disclosure
documents pertaining to the Retirement Plans, e.g., Plan
documents, Plan amendments, summary Plan descriptions,
summaries of material modifications, and summary annual
reports;
(b) Assist Choice in the preparation of forms and disclosures
required by the Internal Revenue Service, the Department of
Labor and other regulatory agencies;
(c) Make recommendations and propose necessary amendments to Plan
documents and procedures for compliance with the Plan
documents, administrative procedures, ERISA and other
applicable laws and regulations; and
(d) Assist Choice to prepare for and respond to any government
audit or enforcement action with respect to the Retirement
Plans.
35
<PAGE> 36
F.4 Compliance Services for Deferred Compensation Plans. Manor shall:
(a) Assist Choice in the preparation of compliance and disclosure
documents pertaining to the Deferred Compensation Plans,
e.g., Plan documents, Plan documents, Plan amendments,
summary Plan descriptions, summaries of material
modifications, and summary annual reports;
(b) Assist Choice in the preparation of forms and disclosures
required by the Internal Revenue Service, the Department of
Labor and other regulatory agencies;
(c) Make recommendations and propose necessary amendments to Plan
documents and procedures for compliance with the Plan
documents, administrative procedures, ERISA and other
applicable laws and regulations; and
(d) Assist Choice to prepare for and respond to any government
audit or enforcement action with respect to the Deferred
Compensation Plans.
36
<PAGE> 37
EXHIBIT G
FIDUCIARY SERVICES
G.0 General. the Fiduciary Services shall be limited to the following
services:
G.1 Fiduciary Services for Health and Welfare Plans. Manor shall have
the discretionary authority to:
(a) Administer and pay claims for disability benefits; and
(b) Review final appeals of denied or disputed Claims and COBRA
Claims under the Health and Welfare Plans in accordance with
the terms of the Health and Welfare Plans, standard policies,
procedures and practices and make final decisions with
respect thereto, subject to Choice's approval.
37
<PAGE> 38
G.2 Fiduciary Services for Retirement Plans. Manor shall:
(a) Develop investment guidelines and evaluate money managers for
decision by the Retirement Committee;
(b) Review performance of each money manager selected and discuss
investment results and overall strategy with money manager;
(c) Hold periodic meetings with Choice's Retirement Committee and
prepare minutes of each meeting;
(d) Collect and implement participant direction regarding
investment selection;
(e) Arrange for the maintenance of custodial accounts for all
Retirement Plan assets;
(f) Develop procedures for and monitor asset transfers among
funds;
(g) Reconcile plan assets to detailed participant accounts;
(h) arrange for the allocation of monthly earnings to participant
accounts;
(i) Prepare financial statements in accordance with generally
accepted accounting principles for Retirement Plans and
obtain annual audit;
(j) arrange for the performance of annual discrimination testing
and adjustment of participant accounts as instructed by the
Plan document;
(k) Administer Qualified Domestic Relations Orders, as defined in
Internal Revenue Code Section 414(p), plan loans, hardship
withdrawals, and beneficiary accounts;
(l) Have the discretionary authority to administer Claims for the
Retirement Plans; and
(m) Have the discretionary authority to review appeals of denied
or disputed Claims under the Retirement Plan in accordance
with the terms of the retirement plans, standard policies,
procedures and
38
<PAGE> 39
practices and make final decisions with respect thereto,
subject to Choice's approval.
39
<PAGE> 40
G.3 Fiduciary Services for Stock Plans. Manor shall:
(a) Have the discretionary authority to administer awards for the
Stock Plans; and
(b) Have the discretionary authority to review appeals of denied
or disputed Claims under the Stock Plans in accordance with
the terms of the Stock Plans, standard policies, procedures
and practices and make final decisions with respect thereto,
subject to Choice's approval.
40
<PAGE> 41
G.4 Fiduciary Services for Deferred Compensation Plans. Manor shall:
(a) Have the discretionary authority to administer Claims for the
Deferred Compensation Plans; and
(b) Have the discretionary authority to review appeals of denied
or disputed Claims under the Deferred Compensation Plans in
accordance with the terms of the deferred compensation plans,
standard policies, procedures and practices and make final
decisions with respect thereto, subject to Choice's approval.
41
<PAGE> 42
SCHEDULE A
HEALTH AND WELFARE PLANS
- - Medical plans
- - Dental Plan
- - Group-Term Life
- - Pretax Spending Accounts
- - Hyatt Legal Services
- - Short-term Disability
- - Long-term Disability
- - Accidental Death & Dismemberment
- - Vacation Benefit
- - Sick Leave
42
<PAGE> 43
RETIREMENT PLANS
Choice Hotels International, Inc.
Retirement Savings and Investment Plan
Choice Hotels International, Inc. Non-
Qualified Retirement Savings and
Investment Plan
Supplemental Executive Retirement Plan
STOCK PLANS
Choice Hotels International, Inc.
Employee Stock Purchase Plan
43
<PAGE> 44
DEFERRED COMPENSATION PLANS
Deferred Compensation Plan
44
<PAGE> 1
EXHIBIT 10.07
EMPLOYEE BENEFITS & OTHER EMPLOYMENT
MATTERS ALLOCATION AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I DEFINITIONS........................................ 1
Section 1.01 Definitions........................................ 1
Aggregate Spread............................................... 1
Choice Business................................................ 1
Choice Individual.............................................. 1
Code ......................................................... 2
Collective Bargaining Agreement................................ 2
Commission..................................................... 2
Common Stock................................................... 2
(i) Employer Common Stock........................ 2
(ii) Manor Care Common Stock...................... 2
(iii) Choice Common Stock.......................... 2
Company Matching Contribution.................................. 2
Conversion Award............................................... 2
Current Plan Year.............................................. 2
Cut-off Date................................................... 2
Distribution Agreement......................................... 2
Distribution Date.............................................. 2
Employee....................................................... 3
(i) Choice Employee.............................. 3
(ii) Terminee..................................... 3
(iii) Retained Employee............................ 3
ERISA ......................................................... 3
HMO ......................................................... 3
IRS ......................................................... 3
Manor Care..................................................... 3
Manor Care Closing Stock Price................................. 3
Manor Care Medical Plan........................................ 3
Manor Care Stock Option........................................ 3
Plan ......................................................... 4
Post-Conversion Stock Price.................................... 4
Prior Plan Year................................................ 4
Profit Sharing Plan............................................ 4
(i) Manor Care, Inc. Retirement Savings and
Investment Plan.................................... 4
(ii) Choice Hotels International, Inc.
Retirement Savings and Investment Plan............. 4
Qualified Beneficiary.......................................... 4
(i) Manor Care Qualified Beneficiary................... 4
(ii) Choice Qualified Beneficiary....................... 5
Retained Individual............................................ 5
Service Credit................................................. 5
Subsidiary..................................................... 5
(i) Choice Subsidiary.................................. 5
(ii) Retained Subsidiary................................ 5
Welfare Plans.................................................. 5
Section 1.02 Other Terms........................................ 5
(i)
<PAGE> 3
Section 1.03 Certain Constructions.............................. 5
Section 1.04 Schedules, Sections ............................... 6
Section 1.05 Survival........................................... 6
ARTICLE II EMPLOYEE BENEFITS.................................. 6
Section 2.01 Employment......................................... 6
(a) Allocation of Responsibilities on
Distribution Date........................................ 6
(b) Service Credits.......................................... 6
(c) Funding Payment by Choice to Manor Care.................. 7
Section 2.02 Profit Sharing Plans............................... 7
(a) Manor Care, Inc. Retirement Savings and
Investment Plan.......................................... 7
(b) Manor Care, Inc. Nonqualified Retirement
Savings and Investment Plan.............................. 9
Section 2.03 Retirement Plans................................... 11
(a) Manor Care, Inc. Supplemental Executive
Retirement Plan.......................................... 11
(b) Manor Care, Inc. Cash Accumulation Retirement
Plan..................................................... 13
(c) Manor Care, Inc. Deferred Compensation Plan.............. 14
Section 2.04 Comprehensive Stock Plans.......................... 15
(a) Manor Care, Inc. Non-Employee Director Stock
Option and Deferred Compensation Stock
Purchase Plan............................................ 15
(b) Manor Care, Inc. 1996 Non-Employee Director
Stock Compensation Plan.................................. 16
(c) Manor Care, Inc. Stock Grant Plans....................... 16
(d) Manor Care Stock Option Plans............................ 17
(e) Manor Care, Inc. 1995 Employee Stock Purchase
Plan..................................................... 18
(f) Effect of the Distribution on Awards Made
Prior to the Cut-off Date................................ 19
(g) Effect of Post-Distribution Transfer on
Conversion Awards........................................ 21
Section 2.05 Existing Manor Care Stock Purchase Plan............ 22
Section 2.06 Manor Care Welfare Plans and Short-Term
Disability Plan.................................... 22
(ii)
<PAGE> 4
(a) Liability for Claims..................................... 22
(b) Continuation Coverage Administration..................... 23
(c) Continuation Coverage Claims............................. 23
(d) Continuation of Sponsorship of Manor Care Welfare
Plans.................................................... 23
(e) Welfare Plan Payments by Choice to Manor Care............ 24
(f) Continuation of Sponsorship of Manor Care, Inc.
Short-Term Disability Plan............................... 24
Section 2.07 Choice Welfare Plans and Short-Term
Disability Plan.................................... 24
(a) Establishment of Choice Welfare Plans.................... 24
(b) Liability for Claims..................................... 24
(c) Continuation Coverage Administration..................... 25
(d) Continuation Coverage Claims............................. 25
(e) Establishment of Choice Hotels International, Inc.
Short-Term Disability Plan............................... 25
Section 2.08 Vacation Pay and Sick Leave Liabilities............ 25
(a) Division of Liabilities.................................. 25
(b) Post-Distribution Transfers.............................. 26
Section 2.09 Employee Discounts................................. 26
Section 2.10 Preservation of Right To Amend or Terminate
Plans.............................................. 27
Section 2.11 Reimbursement...................................... 27
Section 2.12 Payroll Reporting and Withholding.................. 27
(a) Form W-2 Reporting....................................... 27
(b) Forms W-4 and W-5........................................ 28
(c) Garnishments, Tax Levies, Child Support Orders,
and Wage Assignments..................................... 28
(d) Authorizations for Payroll Deductions.................... 28
ARTICLE III LABOR AND EMPLOYMENT MATTERS....................... 28
Section 3.01......................................................... 28
Section 3.02 Employment Policies and Practices.................. 29
Section 3.03 Collective Bargaining Agreements................... 29
Section 3.04 Claims............................................. 29
(a) Scope.................................................... 29
(iii)
<PAGE> 5
(b) Employment-Related Claims................................ 29
(c) Obligation to Indemnify.................................. 29
(d) Pre-Distribution Claims.................................. 30
(e) Distribution and Other Joint Liability
Claims................................................... 30
(f) Post-Distribution Employment-Related Claims.............. 30
Section 3.05 Funding of Union Plans............................. 30
Section 3.06 Notice of Claims................................... 31
Section 3.07 Assumption of Unemployment Tax Rates............... 31
Section 3.08 Intercompany Service Charge........................ 31
Section 3.09 WARN Claims........................................ 31
Section 3.10 Employees on Leave of Absence...................... 32
Section 3.11 No Third Party Beneficiary Rights.................. 32
Section 3.12 Attorney-Client Privilege.......................... 32
ARTICLE IV DEFAULT............................................ 32
Section 4.01 Default............................................ 32
Section 4.02 Force Majeure...................................... 32
ARTICLE V MISCELLANEOUS...................................... 32
Section 5.01 Relationship of Parties............................ 32
Section 5.02 Access to Information; Cooperation................. 33
Section 5.03 Assignment......................................... 33
Section 5.04 Headings........................................... 33
Section 5.05 Severability of Provisions......................... 33
Section 5.06 Parties Bound...................................... 33
Section 5.07 Notices............................................ 33
Section 5.08 Further Action..................................... 34
Section 5.09 Waiver............................................. 34
Section 5.10 Governing Law...................................... 34
Section 5.11 Consent to Jurisdiction............................ 34
(iv)
<PAGE> 6
Section 5.12 Entire Agreement................................... 34
(v)
<PAGE> 7
EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS
ALLOCATION AGREEMENT
THIS EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT
("Agreement") is made and entered into as of___________________________, 1996,
by and between CHOICE HOTELS HOLDINGS, INC., (to be renamed Choice Hotels
International, Inc.) a Delaware corporation ("Choice"), and MANOR CARE, INC., a
Delaware corporation ("Manor Care").
R E C I T A L S
WHEREAS, pursuant to a Distribution Agreement (the "Distribution
Agreement") dated as of ____________, 1996, as implemented in documents executed
or delivered by Choice and Manor Care in connection with the closing thereunder,
Choice and Manor Care have agreed to enter into an Employee Benefits & Other
Employment Matters Allocation Agreement with the terms and conditions set forth
herein pursuant to which Choice and Manor Care will each assume certain
liabilities and obligations, each generally with respect to its own employees,
to adopt or continue certain employee benefit, stock and retirement plans and
programs substantially equivalent to those provided by Manor Care on the
Distribution Date.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Manor Care and Choice agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01 Definitions. As used in this Agreement, the following terms
shall have the meanings indicated below:
Aggregate Spread: the difference between the exercise price of a
Manor Care Stock Option and the Manor Care Closing Stock Price, multiplied by
the number of shares covered by such Manor Care Stock Option remaining
unexercised on the Cut-off Date.
Choice Business: any business or operation of Manor Care or its
Subsidiaries which is, pursuant to the Distribution Agreement, to be conducted,
following the Distribution Date, by Choice or any Choice Subsidiary.
Choice Individual: any individual who (i) is a Choice Employee, or
(ii) is a beneficiary of any individual specified in clause (i).
<PAGE> 8
Code: the Internal Revenue Code of 1986, as amended, or any
successor legislation.
Collective Bargaining Agreement: any collective bargaining agreement
or other labor agreement to which Manor Care or any of its subsidiaries or
affiliates was a party on or before the Cut-off Date.
Commission: the Securities and Exchange Commission.
Common Stock: the common stock of Manor Care or Choice, as more
specifically described below:
(i) Employer Common Stock: Manor Care Common Stock in the
case of Retained Employees and Choice Common Stock in the case of Choice
Employees; or
(ii) Manor Care Common Stock: the common stock, par value
$0.10 per share, of Manor Care after the Distribution Date; or
(iii) Choice Common Stock: the common stock, par value [$1]
per share, of Choice after the Distribution Date.
Company Matching Contribution: the Company Matching Contribution of
Manor Care under the Manor Care, Inc. Retirement Savings and Investment Plan (as
provided in the Manor Care Retirement Savings and Investment Plan document) and
the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan, each
as may be supplemented in the sole and absolute discretion of the Manor Care
Board of Directors.
Conversion Award: an award of Common Stock or of an option to
acquire Common Stock made to a Choice Individual or a Retained Individual to
reflect the effect of the Distribution on awards of Manor Care Common Stock or
Manor Care Stock Options held on the Cut-off Date, in accordance with Section
2.04.
Current Plan Year: the plan year or fiscal year, to the extent
applicable with respect to any Plan, during which the Distribution occurs.
Cut-off Date: the date immediately preceding the Distribution Date.
Distribution Agreement: the agreement described in the first recital
of this Agreement.
Distribution Date: the date on which the Distribution occurs.
- 2 -
<PAGE> 9
Employee: an individual who on the Distribution Date,
is identified as being in any of the following categories:
(i) Choice Employee: any individual who is an Employee of
Choice or any Choice Subsidiary on the Distribution Date; or
(ii) Terminee: any individual formerly employed by Manor Care
or any Subsidiary of Manor Care who terminated such employment prior to the
Distribution Date, including but not limited to any Manor Care employee who has
retired prior to the Distribution Date; or
(iii) Retained Employee: any individual who remains an
Employee of Manor Care or any Retained Subsidiary on the Distribution Date.
ERISA: the Employee Retirement Income Security Act of 1974, as
amended, or any successor legislation.
HMO: any health maintenance organization organized under 42 U.S.C.
Section 300a-9, or a state health maintenance organization statute that provides
medical services for Retained Individuals or Choice Individuals under any Plan.
IRS: the Internal Revenue Service.
Manor Care: Manor Care, Inc., a Delaware corporation.
Manor Care Closing Stock Price: the New York Stock Exchange closing
price per share for Manor Care Common Stock on the Distribution Date, trading
regular way, with a due bill for the special dividend of Choice Common Stock to
be made in connection with the Distribution.
Manor Care Medical Plan: any welfare plan maintained by Manor Care
(or to which Manor Care makes contributions) which provides medical benefits,
including medical benefits provided through an HMO, an indemnity program or a
point of service program.
Manor Care Stock Option: an option to purchase Manor Care Common
Stock pursuant to an option granted under the Manor Care, Inc. Non-Employee
Director Stock Option and Deferred Compensation Stock Purchase Plan, the Manor
Care, Inc. 1995 Long Term Incentive Plan, the Manor Care, Inc. Key Executive
Stock Option Plan, or the Manor Care, Inc. Key Executive Stock Option Plan of
1993.
- 3 -
<PAGE> 10
Plan: any plan, policy, arrangement, contract or agreement providing
compensation benefits for any group of Employees or former employees or any
individual Employee or former employee, or the dependents or beneficiaries of
any such Employee or former Employee, whether formal or informal or written or
unwritten, and including, without limitation, any means, whether or not legally
required, pursuant to which any benefit is provided by an employer to any
Employee or former employee or the beneficiaries of any such Employee or former
employee. The term "Plan" as used in this Agreement does not include any
contract, agreement or understanding entered into by Manor Care prior to the
Distribution Date or by Manor Care or Choice after the Distribution Date by
relating to settlement of actual or potential employee related litigation
claims.
Post-Conversion Stock Price: the per share price of Choice Common
Stock or Manor Care Common Stock on the Distribution Date, based on the Manor
Care Closing Stock Price and the when-issued closing price of Choice Common
Stock on the New York Stock Exchange on the Distribution Date.
Prior Plan Year: a plan year or fiscal year or portion thereof, to
the extent applicable with respect to any Plan, ending on or prior to the
Cut-off Date.
Profit Sharing Plan: a salary reduction contribution plan maintained
pursuant to Sections 401(a) and 401(k) of the Code for Employees and their
beneficiaries, as specifically identified using one of the categories described
below:
(i) Manor Care, Inc. Retirement Savings and Investment Plan:
the Manor Care, Inc. Retirement Savings and Investment Plan and Trust as in
effect on the Distribution Date; or
(ii) Choice Hotels International, Inc. Retirement Savings and
Investment Plan: the Choice Hotels International, Inc. Retirement Savings and
Investment Plan and Trust as in effect on the Distribution Date.
Qualified Beneficiary: an individual (or dependent thereof) who
either (1) experiences a "qualified event" (as that term is defined in Code
Section 4980B(f)(3) and ERISA Section 603) while a participant in any Welfare
Plan, or (2) becomes a "qualified beneficiary" (as that term is defined in Code
Section 4980B(g)(1) and ERISA 607(3)) under any Welfare Plan, and who is
included in any one of the following categories:
(i) Manor Care Qualified Beneficiary: any Retained Employee
(or dependent thereof) who becomes a Qualified Beneficiary on or after the
Distribution Date under any Manor Care Welfare Plan; or any Retained Employee
(or dependent
- 4 -
<PAGE> 11
thereof) who, on or before the Cut-off Date, was a Qualified Beneficiary under
any Manor Care Welfare Plan.
(ii) Choice Qualified Beneficiary: Any Choice Employee (or
dependent thereof) who becomes a Qualified Beneficiary on or after the
Distribution Date but before January 1, 1997 under any Manor Care Welfare Plan;
or any individual (or dependent thereof) who, on or before the Cut-off Date, was
a Qualified Beneficiary under any Manor Care Welfare Plan and who became a
Choice Employee after the Distribution Date.
Retained Business: any business or operation of Manor Care or its
Subsidiaries which is, pursuant to the Distribution Agreement, to be conducted,
following the Distribution Date, by Manor Care or any Retained Subsidiary.
Retained Individual: any individual who (i) is a Retained Employee,
or (ii) is a beneficiary of any individual described in clause (i).
Service Credit: the period taken into account under any Plan for
purposes of determining length of service to satisfy eligibility, vesting,
benefit accrual and similar requirements under such Plan.
Subsidiary: any corporation, a majority of whose capital stock with
voting power, under ordinary circumstances, to elect directors is, at the date
of determination, directly or indirectly owned by any person as to which a
determination of subsidiary status is to be made, including each of the
following categories:
(i) Choice Subsidiary: all subsidiaries of Choice as of the
Distribution Date; or
(ii) Retained Subsidiary: any subsidiary of Manor Care, except
Choice and the Choice Subsidiaries.
Welfare Plans: any welfare plan providing medical, dental, life,
pre-paid legal services, accidental death & dismemberment or long-term
disability benefits as set forth in Exhibit A. The term "Welfare Plan" does not
include any short-term disability program.
Section 1.02 Other Terms. Any capitalized terms used herein but not
defined herein shall have the meaning set forth in the Distribution Agreement.
Section 1.03 Certain Constructions. References to the singular in this
Agreement shall refer to the plural and vice-versa and references to the
masculine shall refer to the feminine and vice-versa.
- 5 -
<PAGE> 12
Section 1.04 Schedules, Sections . References to a "Schedule" are, unless
otherwise specified, to one of the Schedules attached to this Agreement, and
references to a "Section " are, unless otherwise specified, to one of the
Sections of this Agreement.
Section 1.05 Survival. Obligations described in this Agreement shall
remain in full force and effect and shall survive the Distribution Date.
ARTICLE II
EMPLOYEE BENEFITS
Section 2.01 Employment.
(a) Allocation of Responsibilities on Distribution Date. On the
Distribution Date, except to the extent retained or assumed by Manor Care under
this Agreement or any other agreement relating to the Distribution, Choice shall
retain or assume, as the case may be, responsibility as employer for the Choice
Employees. On the Distribution Date, except to the extent retained or assumed by
Choice under this Agreement or any other agreement relating to the Distribution,
Manor Care shall retain or assume, as the case may be, responsibility as
employer for the Retained Employees. The assumption or retention of
responsibility as employer by Manor Care or Choice described in this Section
2.01 shall not, of itself, constitute a severance or a termination of employment
under any Plan of severance maintained by Manor Care.
(b) Service Credits. (i) Distribution Date transfers. In connection
with the Distribution and for purposes of determining Service Credits (but
excluding accrual of benefits other than vacation leave and sick leave) under
any Plans, Manor Care shall credit each Retained Employee and Choice shall
credit each Choice Employee with such Employee's original hire date as reflected
in the Manor Care payroll system records as of the Cutoff Date. Such hire date
shall continue to be maintained as described herein for as long as the Employee
does not terminate employment.
(ii) Post-Distribution Date terminations. Subject to the
provisions of ERISA and to Section 2.08(b) (governing post-Distribution
transfers through May 31, 1998), Choice may, in the case of Choice Employees,
and Manor Care may, in the case of Retained Employees, each in its sole
discretion, make such decisions as it deems appropriate with respect to
determining Service Credits and vacation and sick leave balances for such
Employees who terminate employment from the other company after the Distribution
Date.
- 6 -
<PAGE> 13
(c) Funding Payment by Choice to Manor Care. Choice shall make a
payment to Manor Care in an amount equal to 2.1% of Choice's aggregate payroll
for all Choice Employees with respect to the time period beginning on the
Distribution Date and ending on December 31, 1996. Such payment shall be made to
Manor Care on a monthly basis no more than ten (10) days after the end of each
month ending after the Distribution Date through December 31, 1996. In
consideration of receipt of such payments, Manor Care shall (i) assume
responsibility for all funding obligations attributable to the Manor Care, Inc.
Cash Accumulation Retirement Plan and (ii) assume responsibility for the Company
Matching Contribution attributable to the Current Plan Year under the Manor
Care, Inc. Retirement Savings and Investment Plan, the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan, the Choice Hotels
International, Inc. Retirement Savings and Investment Plan, and the Choice
Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan.
It is also agreed that Choice will be responsible for any incremental costs
associated with the establishment of the Choice Hotels International, Inc.
Retirement Savings and Investment Plan and the Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan.
Section 2.02 Profit Sharing Plans.
(a) Manor Care, Inc. Retirement Savings and Investment Plan.
(i) Continuation of Sponsorship of Manor Care, Inc. Retirement
Savings and Investment Plan. Effective as of the Distribution Date, Manor Care
shall continue sponsorship of the Manor Care, Inc. Retirement Savings and
Investment Plan for all Retained Employees and Terminees. Participants in such
Plan who are Retained Employees or Terminees shall have a one-time election to
convert Choice Common Stock credited to their accounts into cash or into Manor
Care Common Stock.
(ii) Establishment of Choice Hotels International, Inc.
Retirement Savings and Investment Plan. Effective as of the Distribution Date,
Choice shall take, or cause to be taken, all action necessary and appropriate to
establish and administer a new Plan named the Choice Hotels International, Inc.,
Retirement Savings and Investment Plan and Trust and to provide benefits
thereunder after the Distribution Date for all Choice Individuals who,
immediately prior to the Distribution Date, were participants in or otherwise
entitled to benefits under the Manor Care, Inc. Retirement Savings and
Investment Sharing Plan. Manor Care will fund the Company Matching Contribution
required with respect to the Current Plan Year in consideration for the payment
by Choice of the Funding Payment described in Section 2.01(c), above.
Participants in such Plan shall have a one-time election to convert transferred
Manor Care Common Stock into cash or into
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Choice Common Stock. The Choice Hotels International, Inc. Retirement Savings
and Investment Plan shall be intended to qualify for tax-favored treatment under
Sections 401(a) and 401(k) of the Code and to be in compliance with the
requirements of ERISA.
(iii) Transfer and Acceptance of Account Balances. As soon as
practicable after the Distribution Date, Manor Care shall cause the trustees of
the Manor Care, Inc. Retirement Savings and Investment Plan to transfer to the
trustee or other funding agent of the Choice Hotels International, Inc.
Retirement Savings and Investment Plan the amounts (in cash, securities, other
property or a combination thereof) representing the account balances of all
Choice Individuals, said amounts to be established as account balances or
accrued benefits of such individuals under the Choice Hotels International, Inc.
Retirement Savings and Investment Plan. Each such transfer shall comply with
Section 414(l) of the Code and the requirements of ERISA and the regulations
promulgated thereunder. Choice agrees to cause the trustees or other funding
agent of the Choice Hotels International, Inc. Retirement Savings and Investment
Plan to accept the plan-to-plan transfer from the Manor Care, Inc. Retirement
Savings and Investment Plan trustees, and to credit the accounts of such Choice
Individuals under the Choice Hotels International, Inc. Retirement Savings and
Investment Plan with amounts transferred on their behalf. Notwithstanding the
foregoing, Manor Care and Choice agree that if, subsequent to such transfer of
account balances to the Choice Hotels International, Inc. Retirement Savings and
Investment Plan, a subsequent audit or other review establishes that additional
funds should be transferred to the Choice Hotels International, Inc. Retirement
Savings and Investment Plan from the Manor Care, Inc. Retirement Savings and
Investment Plan or that funds should be returned from the Choice Hotels
International, Inc. Retirement Savings and Investment Plan to the Manor Care,
Inc. Retirement Savings and Investment Plan, both parties shall take all
appropriate steps to effectuate the required transfer between the trusts
maintained for such plans.
(iv) Manor Care to Provide Information. Manor Care shall
provide Choice, as soon as practicable after the Distribution Date (with the
cooperation of Choice to the extent that relevant information is in the
possession of Choice or a Choice Subsidiary, and in accordance with Section
5.02), with a list of Choice Individuals who, to the best knowledge of Manor
Care, were participants in or otherwise entitled to benefits under the Manor
Care, Inc. Retirement Savings and Investment Plan on the Cut-off Date, together
with a listing of each participant's Service Credits under such Plan and a
listing of each account balance thereunder. Manor Care shall, as soon as
practicable after the Distribution Date and in accordance with Section 5.02,
provide Choice with such additional information in
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the possession of Manor Care or a Retained Subsidiary (and not already in the
possession of Choice or a Choice Subsidiary) as may be reasonably requested by
Choice and necessary for Choice or the Choice Subsidiary to establish and
administer effectively the Choice Hotels International, Inc. Retirement Savings
and Investment Plan.
(v) Regulatory Filings. Choice and Manor Care shall, in
connection with the plan-to-plan transfer described in Section 2.02(a)(iii),
cooperate in making any and all appropriate filings required by the Commission
or the IRS, or required under the Code or ERISA or any applicable securities
laws and the regulations thereunder, and take all such action as may be
necessary and appropriate to cause such plan-to-plan transfer to take place as
soon as practicable after the Distribution Date or otherwise when required by
law. Further, Choice shall seek a favorable IRS determination letter that the
Choice Hotels International, Inc. Retirement Savings and Investment Plan, as
organized, satisfies all qualification requirements under Section 401(a) of the
Code, and the transfers described in Section 2.02(a)(iii) shall take place as
soon as practicable after the receipt of such favorable IRS determination
letter. Notwithstanding the foregoing, such transfers may take place pending
issuance of such favorable determination letter, upon receipt of an opinion of
counsel for Choice reasonably satisfactory to Manor Care that the aforesaid Plan
so qualifies, or that it can be made to so qualify by retroactive amendment, and
that any such retroactive amendment shall not decrease the accrued benefit of
any participant in such Plan. Manor Care agrees to provide to Choice's counsel
such information in the possession of Manor Care or any Retained Subsidiary as
may reasonably be requested by Choice's counsel in connection with the issuance
of such opinion, in accordance with Section 5.02. Manor Care and Choice shall
each make any necessary amendments on a retroactive basis to the Manor Care,
Inc. Retirement Savings and Investment Plan or the Choice Hotels International,
Inc. Retirement Savings and Investment Plan, respectively, as required by the
IRS to issue the favorable determination letter described above.
(b) Manor Care, Inc. Nonqualified Retirement Savings and Investment
Plan.
(i) Continuation of Sponsorship of Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan. On the Distribution Date,
Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole
responsibility for all liabilities and obligations under the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan, including the obligation to
make a Company Matching Contribution for Retained Employees and Choice Employees
with respect to the Current Plan Year, and Choice shall have no liability or
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obligation with respect thereto, except to pay to Manor Care the Funding Payment
described in Section 2.01(c), above. Participants in such Plan who are Retained
Employees or Terminees shall have a one-time election to convert Choice Common
Stock credited to their accounts into cash or into Manor Care Common Stock.
(ii) Establishment of Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan. Effective as of the
Distribution Date, Choice shall take, or cause to be taken, all action necessary
and appropriate to establish and administer a new nonqualified retirement
savings and investment plan named the Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan and to provide benefits
thereunder after the Distribution Date for all Choice Employees who immediately
prior to the Distribution Date, were participants in or otherwise entitled to
benefits under the Manor Care, Inc. Nonqualified Retirement Savings and
Investment Plan. However, the obligation to make a Matching Company Contribution
for Choice Employees with respect to the Current Plan Year shall be assumed by
Manor Care in consideration of the payment by Choice of the Funding Payment
described in Section 2.01(c) above. Participants in such Plan shall have a
one-time election to convert transferred Manor Care Common Stock into cash or
into Choice Common Stock.
(iii) Transfer and Acceptance of Account Balances. As soon as
practicable after the Distribution Date, Manor Care shall cause the trustee of
the "rabbi" trust relating to the Manor Care, Inc. Nonqualified Retirement
Savings and Investment Plan to transfer to a separate "rabbi" trust to be
established by Choice with respect to the Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan the amounts (in cash,
securities, other property or a combination thereof) representing the account
balances of all Choice Individuals who had account balances in the "rabbi" trust
relating to the Manor Care, Inc. Nonqualified Retirement Savings and Investment
Plan on the Cut-off Date, said amounts to be established as account balances or
accrued benefits of such individuals in the "rabbi" trust established with
respect to the Choice Hotels International, Inc. Nonqualified Retirement Savings
and Investment Plan. In addition, each Choice Individual for whom an account
balance in the rabbi trust established on behalf of the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan is transferred to a rabbi
trust established on behalf of the Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan shall be required to execute
a waiver which acknowledges that all liabilities for benefits accrued under the
Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan through the
date immediately preceding the Distribution Date shall be assumed by Choice,
except that Manor Care shall remain liable, for a period of thirty (30) months
following the
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<PAGE> 17
Distribution Date, for such benefits to the extent such amounts are not paid
when due by Choice.
(iv) Manor Care to Provide Information. Manor Care agrees to
provide Choice (to the extent not already in Choice's possession), as soon as
practicable after the Distribution Date, with a list of Choice Individuals who
were, to the best knowledge of Choice, participants in or otherwise entitled to
benefits under the Manor Care, Inc. Nonqualified Retirement Savings and
Investment Plan on the Cut-off Date, together with a listing of each
participant's Service Credits under such Plan and a listing of each account
balance thereunder. Manor Care shall, as soon as practicable after the
Distribution Date, in accordance with Section 5.02 provide Choice with such
additional information in the possession of Manor Care or a Retained Subsidiary
and not already in the possession of Choice or a Choice Subsidiary as may
reasonably be requested by Choice and necessary in order for Choice or a Choice
Subsidiary to administer effectively the Choice International Hotels, Inc.
Nonqualified Retirement Savings and Investment Plan.
(v) Benefit Guarantees. On and after the Distribution Date, a
Retained Employee's and Terminee's right, if any, to receive benefits under the
Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan shall be
the responsibility of Manor Care. However, the payment of any benefits due under
the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan for the
first thirty (30) months following the Distribution Date shall be guaranteed by
Choice, to the extent not otherwise paid by Manor Care. On and after the
Distribution Date, a Choice Individual's right to receive benefits under the
Choice Hotels International, Inc. Nonqualified Retirement Savings and Investment
Plan shall be the responsibility of Choice. However, the payment of any benefits
due under the Choice Hotels International, Inc. Nonqualified Retirement Savings
and Investment Plan which are attributable to the transferred accrued benefits
earned under the Manor Care, Inc. Deferred Compensation Plan shall be guaranteed
by Manor Care for the first thirty (30) months following the Distribution Date,
to the extent not otherwise paid by Choice.
Section 2.03 Retirement Plans.
(a) Manor Care, Inc. Supplemental Executive Retirement Plan.
(i) Continuation of Sponsorship of Manor Care, Inc.
Supplemental Executive Retirement Plan. On the Distribution Date, Manor Care
shall retain (or shall cause a Retained Subsidiary to assume) sole
responsibility for all liabilities and obligations under the Manor Care, Inc.
Supplemental Executive Retirement Plan, and Choice shall have no liability or
obligation
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<PAGE> 18
with respect thereto, except as defined in Section 2.03(a)(ii) below. Manor Care
shall provide future benefits thereunder accruing after the Cut-off Date for
Retained Employees and Terminees who, on the Cut-off Date, were participants in
or otherwise entitled to benefits under the Manor Care, Inc.
Supplemental Executive Retirement Plan.
(ii) Establishment of Choice Hotels International, Inc.
Supplemental Executive Retirement Plan. Effective as of the Distribution Date,
Choice shall take, or cause to be taken, all action necessary and appropriate to
establish and administer a new supplemental executive retirement plan named the
Choice Hotels International, Inc. Supplemental Executive Retirement Plan and to
provide benefits thereunder after the Distribution Date for all Choice Employees
who immediately prior to the Distribution Date, were participants in or
otherwise entitled to benefits under the Manor Care, Inc. Supplemental Executive
Retirement Plan.
(iii) Transfer and Acceptance of Account Balances. As soon as
practicable after the Distribution Date, Manor Care shall transfer to Choice an
amount (in cash, securities, other property or a combination thereof)
representing the present value of the full accrued benefit of all Choice
Employees who had earned a benefit in the Manor Care, Inc. Supplemental
Executive Retirement Plan on the Cut-off Date, said amounts to be established as
the initial accrued benefits of such individuals under the Choice Hotels
International, Inc. Supplemental Executive Retirement Plan. Manor Care and
Choice shall take such steps as may be necessary to obtain releases of Manor
Care from Choice Employees whose accrued benefits are transferred from the Manor
Care, Inc. Supplemental Executive Retirement to the Choice Hotels International,
Inc. Supplemental Executive Retirement Plan in accordance with this Section . In
addition, each Choice Individual for whom an accrued benefit under the Manor
Care, Inc. Supplemental Executive Retirement Plan has been assumed by the Choice
Hotels International, Inc. Supplemental Executive Retirement Plan shall be
required to execute a waiver which acknowledges that all liabilities for
benefits accrued under the Manor Care, Inc. Supplemental Executive Retirement
Plan through the date immediately preceding the Distribution Date shall be
assumed by Choice, except that Manor Care shall remain liable, for a period of
thirty (30) months following the Distribution Date, for such benefits to the
extent such amounts are not paid when due by Choice.
(iv) Manor Care to Provide Information. Manor Care agrees to
provide Choice (to the extent not already in Choice's possession), as soon as
practicable after the Distribution Date, with a list of Choice Individuals who
were, to the best knowledge of Choice, participants in or otherwise entitled to
benefits under the Manor Care, Inc. Supplemental
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<PAGE> 19
Executive Retirement Plan on the Cut-off Date, together with a listing of each
participant's Service Credits under such Plan and a listing of such
participant's accrued benefits thereunder. Manor Care shall, as soon as
practicable after the Distribution Date, in accordance with Section 5.02 provide
Choice with such additional information in the possession of Manor Care or a
Retained Subsidiary and not already in the possession of Choice or a Choice
Subsidiary as may reasonably be requested by Choice and necessary in order for
Choice or a Choice Subsidiary to administer effectively the Choice International
Hotels, Inc. Supplemental Executive Retirement Plan.
(v) Benefit Guarantees. On and after the Distribution Date, a
Retained Employee's or a Terminee's right, if any, to receive benefits under the
Manor Care, Inc. Supplemental Executive Retirement Plan shall be the
responsibility of Manor Care. However, the payment of any benefits due under the
Manor Care, Inc. Supplemental Executive Retirement Plan for the first thirty
(30) months following the Distribution Date shall be guaranteed by Choice, to
the extent not otherwise paid by Manor Care. On and after the Distribution Date,
a Choice Individual's right to receive benefits under the Choice Hotels
International, Inc. Supplemental Executive Retirement Plan shall be the
responsibility of Choice. However, the payment of any benefits due under the
Choice Hotels International, Inc. Supplemental Executive Retirement Plan which
are attributable to the transferred accrued benefits earned under the Manor
Care, Inc. Deferred Compensation Plan shall be guaranteed by Manor Care for the
first thirty (30) months following the Distribution Date, to the extent not
otherwise paid by Choice.
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(b) Manor Care, Inc. Cash Accumulation Retirement Plan. As of the
Distribution Date, Manor Care or a Retained Subsidiary shall assume or retain
sponsorship of and shall be solely responsible for all liabilities and
obligations in connection with the Manor Care, Inc. Cash Accumulation Retirement
Plan, and Choice and the Choice Subsidiaries shall have no such liability or
obligation, except for the payment to Manor Care of the Funding Payment
described in Section 2.01(c), above. Subject to the approval of the Board of
Directors of Manor Care, the Manor Care, Inc. Cash Accumulation Retirement Plan
shall be frozen as to future participation effective as of August 15, 1996 and
shall be frozen as to future benefit accruals as of December 31, 1996.
Participants in the Manor Care, Inc. Cash Accumulation Retirement Plan shall
continue to earn Service Credits for purposes of vesting. To the extent that
additional contributions are required for individuals who are participants in
the Manor Care, Inc. Cash Accumulation Retirement Plan on the Cut-off Date and
who become Choice Employees, Manor Care shall be solely responsible for all
liabilities and obligations in connection with such contributions.
(c) Manor Care, Inc. Deferred Compensation Plan.
(i) Continuation of Sponsorship of Manor Care, Inc. Deferred
Compensation Plan. On the Distribution Date, Manor Care shall retain (or shall
cause a Retained Subsidiary to assume) sole responsibility for all liabilities
and obligations under the Manor Care, Inc. Deferred Compensation Plan, and
Choice shall have no liability or obligation with respect thereto, except as
defined in Section 2.03(c)(ii) below. Manor Care shall provide future benefits
thereunder accruing after the Cut-off Date for Retained Employees, individuals
who are directors of Manor Care, and Terminees who, on the Cut-off Date, were
participants in or otherwise entitled to benefits under the Manor Care, Inc.
Deferred Compensation Plan.
(ii) Establishment of Choice Hotels International, Inc.
Deferred Compensation Plan. Effective as of the Distribution Date, Choice shall
take, or cause to be taken, all action necessary and appropriate to establish
and administer a new deferred compensation plan named the Choice Hotels
International, Inc. Deferred Compensation Plan and to provide benefits
thereunder after the Distribution Date for all Choice Employees who immediately
prior to the Distribution Date, were participants in or otherwise entitled to
benefits under the Manor Care, Inc. Deferred Compensation Plan, and for Choice
directors.
(iii) Transfer and Acceptance of Account Balances. As soon as
practicable after the Distribution Date, Manor Care shall transfer to Choice the
amounts (in cash, securities, other property or a combination thereof)
representing the account balances of all Choice Employees who had account
balances in the
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<PAGE> 21
Manor Care, Inc. Deferred Compensation Plan on the Cut-off Date, said amounts to
be established as account balances or accrued benefits of such individuals under
the Choice Hotels International, Inc. Deferred Compensation Plan. Manor Care and
Choice shall take such steps as may be necessary to obtain releases of Manor
Care from Choice Employees whose account balances are transferred from the Manor
Care, Inc. Deferred Compensation Plan to the Choice Hotels International, Inc.
Deferred Compensation Plan in accordance with this Section . In addition, each
Choice Individual whose account balance under the Manor Care, Inc. Deferred
Compensation Plan has been transferred to the Choice Hotels International, Inc.
Deferred Compensation Plan shall be required to execute a waiver which
acknowledges that all liabilities for benefits accrued under the Manor Care,
Inc. Deferred Compensation Plan through the date immediately preceding the
Distribution Date shall be assumed by Choice, except that Manor Care shall
remain liable, for a period of thirty (30) months following the Distribution
Date, for such benefits to the extent such amounts are not paid when due by
Choice.
(iv) Manor Care to Provide Information. Manor Care agrees to
provide Choice (to the extent not already in Choice's possession), as soon as
practicable after the Distribution Date, with a list of Choice Employees who
were, to the best knowledge of Manor Care, participants in or otherwise entitled
to benefits under the Manor Care, Inc. Deferred Compensation Plan on the Cut-off
Date. Manor Care shall, as soon as practicable after the Distribution Date, in
accordance with Section 5.02 provide Choice with such additional information in
the possession of Manor Care or a Retained Subsidiary and not already in the
possession of Choice or a Choice Subsidiary as may reasonably be requested by
Choice and necessary in order for Choice or a Choice Subsidiary to administer
effectively the Choice Hotels International, Inc. Deferred Compensation Plans.
(v) Benefit Guarantees. On and after the Distribution Date, a
Retained Employee's, Terminee's or Manor Care director's right to receive
benefits under the Manor Care, Inc. Deferred Compensation Plan shall be the
responsibility of Manor Care. However, the payment of any benefits due under the
Manor Care, Inc. Deferred Compensation Plan for the first thirty (30) months
following the Distribution Date shall be guaranteed by Choice, to the extent not
otherwise paid by Manor Care. On and after the Distribution Date, a Choice
Individual's right to receive benefits under the Choice Hotels International,
Inc. Deferred Compensation Plan shall be the responsibility of Choice. However,
the payment of any benefits due under the Choice Hotels International, Inc.
Deferred Compensation Plan which are attributable to the transferred accrued
benefits earned under the Manor Care, Inc. Deferred Compensation Plan shall be
guaranteed by Manor Care for the first thirty (30) months following the
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<PAGE> 22
Distribution Date, to the extent not otherwise paid by Choice.
Section 2.04 Comprehensive Stock Plans.
(a) Manor Care, Inc. Non-Employee Director Stock Option and Deferred
Compensation Stock Purchase Plan.
(i) Continuation of Sponsorship of Manor Care, Inc.
Non-Employee Director Stock Option and Deferred Compensation Stock Purchase
Plan. On the Distribution Date, Manor Care shall retain (or shall cause a
Retained Subsidiary to assume) sole responsibility for all liabilities and
obligations under the Manor Care, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan for all non-employee directors of
Manor Care after the Distribution Date through the issuance of Conversion
Awards, subject to the stock adjustment provisions described in Section 2.04(f)
below, and Choice shall have no liability or obligation with respect thereto.
(ii) Establishment of Choice Hotels International, Inc.
Non-Employee Director Stock Option and Deferred Compensation Stock Purchase
Plan. Effective as of the Distribution Date, Choice shall take, or cause to be
taken, all action necessary and appropriate to establish and administer a new
non-employee director stock option and deferred compensation stock purchase plan
named the Choice Hotels International, Inc. Non-Employee Director Stock Option
and Deferred Compensation Stock Purchase Plan and to provide benefits thereunder
after the Distribution Date for all non-employee Choice directors.
(b) Manor Care, Inc. 1996 Non-Employee Director Stock Compensation
Plan.
(i) Continuation of Sponsorship of Manor Care, Inc. 1996
Non-Employee Director Stock Compensation Plan. On the Distribution Date, Manor
Care shall retain (or shall cause a Retained Subsidiary to assume) sole
responsibility for all liabilities and obligations under the Manor Care, Inc.
1996 Non- Employee Director Stock Compensation Plan for all non-employee
directors of Manor Care after the Distribution Date through the issuance of
Conversion Awards, subject to the stock adjustment provisions described in
Section 2.04(f) below, and Choice shall have no liability or obligation with
respect thereto.
(ii) Establishment of Choice Hotels International, Inc.
Non-Employee Director Stock Compensation Plan. Effective as of the Distribution
Date, Choice shall take, or cause to be taken, all action necessary and
appropriate to establish and administer a new non-employee director stock
compensation plan named the Choice Hotels International, Inc. Non-Employee
Director Stock Compensation Plan and to provide benefits thereunder after the
Distribution Date for all non-employee Choice directors.
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(c) Manor Care, Inc. Stock Grant Plans.
(i) Continuation of Sponsorship of Manor Care, Inc. Nursing
Field Operations Stock Grant Plan for Key Management Employees. On the
Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary
to assume) sole responsibility for all liabilities and obligations under the
Manor Care, Inc. Nursing Field Operations Stock Grant Plan for Key Management
Employees for all eligible key management employees eligible thereunder after
the Distribution Date, and Choice shall have no liability or obligation with
respect thereto.
(ii) Continuation of Sponsorship of Manor Care, Inc.
Restricted Stock Plan. On the Distribution Date, Manor Care shall retain (or
shall cause a Retained Subsidiary to assume) sole responsibility for all
liabilities and obligations under the Manor Care, Inc. Restricted Stock Plan for
Key Management Employees for all eligible key management employees eligible
thereunder after the Distribution Date, and Choice shall have no liability or
obligation with respect thereto. At such time as Manor Care stock is released
from restriction, Manor Care shall claim a compensation deduction for the
then-current value of such stock and shall cause the unrestricted shares of
Manor Care stock to be delivered directly to the Employee entitled to such
shares whether such Employee is currently employed by Manor Care or Choice.
(iii) Continuation of Sponsorship of Manor Care, Inc. Hotel
Franchise Operations Stock Grant Plan for Choice Hotels International, Inc. Key
Management Employees. On the Distribution Date, Manor Care shall retain (or
shall cause a Retained Subsidiary to assume) sole responsibility for all
liabilities and obligations under the Manor Care, Inc. Hotel Franchise
Operations Stock Grant Plan for Choice Hotels International, Inc. Key Management
Employees for all eligible key management employees eligible thereunder after
the Distribution Date, and Choice shall have no liability or obligation with
respect thereto. At such time as Manor Care stock is released from restriction,
Manor Care shall claim a compensation deduction for the then-current value of
such stock and shall cause the unrestricted shares of Manor Care stock to be
delivered directly to the Employee entitled to such shares, whether or not such
Employee is employed by Manor Care or Choice.
(d) Manor Care Stock Option Plans.
(i) Continuation of Sponsorship of Manor Care, Inc. 1995 Long
Term Incentive Plan and Establishment of Choice Hotels International, Inc. Long
Term Incentive Plan. On the Distribution Date, Manor Care shall retain (or shall
cause a Retained Subsidiary to assume) sole responsibility for all liabilities
and obligations under the Manor Care, Inc. 1995 Long
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<PAGE> 24
Term Incentive Plan for all Retained Employees and Terminees who are
participants in such Plan on the Distribution Date through the issuance of
Conversion Awards, subject to the stock adjustment provisions described in
Section 2.04(f) below, and Choice shall have no liability or obligation with
respect thereto. In addition, Conversion Awards shall be issued to all Choice
Employees who were participants in such Plan on the Cutoff Date in accordance
with Section 2.04(f). Issuance of a Conversion Award shall be conditioned upon
the execution of an appropriate release by the Choice Employee to whom the
Conversion Award is conveyed, which release shall acknowledge that such Choice
Employee's options to purchase Manor Care Common Stock are cancelled in
consideration of receipt of the Conversion Award. Effective as of the
Distribution Date, Choice shall take, or cause to be taken, all action necessary
and appropriate to establish and administer a new long term incentive plan named
the Choice Hotels International, Inc. Long Term Incentive Plan and to provide
benefits thereunder after the Distribution Date for all Choice officers and key
employees.
(ii) Continuation of Sponsorship of Manor Care, Inc. Key
Executive Stock Option Plan. On the Distribution Date, Manor Care shall retain
(or shall cause a Retained Subsidiary to assume) sole responsibility for all
liabilities and obligations under the Manor Care, Inc. Key Executive Stock
Option Plan for all Retained Employees and Terminees who are participants in
such Plan on the Distribution Date through the issuance of Conversion Awards,
subject to the stock adjustment provisions described in Section 2.04(f) below,
and Choice shall have no liability or obligation with respect thereto. In
addition, Conversion Awards shall be issued to all Choice Employees who were
participants in such Plan on the Cut-off Date in accordance with Section
2.04(f). Issuance of a Conversion Award shall be conditioned upon the execution
of an appropriate release by the Choice Employee to whom the Conversion Award is
conveyed, which release shall acknowledge that such Choice Employee's options to
purchase Manor Care Common Stock are cancelled in consideration of receipt of
the Conversion Award.
(iii) Continuation of Sponsorship of Manor Care, Inc. Key
Executive Stock Option Plan of 1993. On the Distribution Date, Manor Care shall
retain (or shall cause a Retained Subsidiary to assume) sole responsibility for
all liabilities and obligations under the Manor Care, Inc. Key Executive Stock
Option Plan of 1993 for all Retained Employees and Terminees who are
participants in such Plan on the Distribution Date through the issuance of
Conversion Awards, subject to the stock adjustment provisions described in
Section 2.04(f) below, and Choice shall have no liability or obligation with
respect thereto. In addition, Conversion Awards shall be issued to all Choice
Employees who were participants in such Plan on the Cut-off Date in accordance
with Section
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2.04(f). Issuance of a Conversion Award shall be conditioned upon the execution
of an appropriate release by the Choice Employee to whom the Conversion Award is
conveyed, which release shall acknowledge that such Choice Employee's options to
purchase Manor Care Common Stock are cancelled in consideration of receipt of
the Conversion Award.
(e) Manor Care, Inc. 1995 Employee Stock Purchase
Plan.
(i) Continuation of Sponsorship of Manor Care, Inc. 1995
Employee Stock Purchase Plan. On the Distribution Date, Manor Care shall retain
(or shall cause a Retained Subsidiary to assume) sole responsibility for all
liabilities and obligations under the Manor Care, Inc. 1995 Employee Stock
Purchase Plan for all Retained Employees and Terminees who are participants in
such Plan on the Distribution Date, subject to the stock adjustment provisions
described in Section 2.04(f) below, and Choice shall have no liability or
obligation with respect thereto.
(ii) Establishment of Choice Hotels International, Inc.
Employee Stock Purchase Plan. Effective as of the Distribution Date, Choice
shall take, or cause to be taken, all action necessary and appropriate to
establish and administer a new stock purchase plan named the Choice Hotels
International, Inc. Employee Stock Purchase Plan and to provide benefits
thereunder after the Distribution Date for all Choice officers and key
employees.
(f) Effect of the Distribution on Awards Made Prior to the Cut-off
Date.
(i) Restricted Stock: After the Distribution Date, the grantee
of each restricted share of Manor Care Common Stock awarded under the Manor
Care, Inc. Nursing Field Operations Stock Grant Plan for Key Management
Employees, the Manor Care, Inc. Restricted Stock Plan, the Manor Care, Inc.
Hotel Franchise Operations Stock Grant Plan for Choice Hotels International,
Inc. Key Management Employees, or the Manor Care, Inc. 1995 Long Term Incentive
Plan as of the Cut-off Date shall retain such shares, and shall receive as part
of the Distribution ____ restricted shares of Choice Common Stock. The
restricted shares of Choice Common Stock received as part of the Distribution
will be subject to restrictions identical to those applicable to the underlying
restricted shares of Manor Care Common Stock. In the case of Choice Employees,
future service for Choice will be treated as service for Manor Care for purposes
of determining satisfaction of the restrictions attributable to the Manor Care
Common Stock and Choice Common Stock. Restricted shares of Choice Common Stock
awarded as part of the Distribution shall be released from restrictions at the
same time and on the same schedule as the
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shares of Manor Care Common Stock retained, under the terms of the restrictions
to which the grantee's initial award was subject.
(ii) Substitution of Stock Options: Subject to the provisions
of Section 2.04(f)(v) and (vi), below, on the Distribution Date, each grantee of
a nonqualified award of a Manor Care Stock Option who is a Retained Employee or
Terminee shall receive for each such award a Conversion Award, consisting of an
option to purchase shares of Manor Care Common Stock equal in number to the
number of shares covered by the Manor Care Stock Option, adjusted, however,
pursuant to Section 2.04(f)(iv), below. On the Distribution Date, each grantee
of a Manor Care Stock Option awarded as an incentive stock option who is a
Retained Employee or Terminee shall automatically receive in its place a
Conversion Award of an option to purchase shares of Manor Care Common Stock
equal in number to the number of shares covered by the Manor Care Stock Option,
adjusted, however, pursuant to Section 2.04(f)(iv) below. Subject to the
provisions of Section 2.04(f)(v) and (vi), below, on the Distribution Date, each
grantee of a nonqualified award of a Manor Care Stock Option who is a Choice
Employee shall receive for each such award a Conversion Award, consisting of an
option to purchase shares of Choice Common Stock equal in number to the number
of shares covered by the Manor Care Stock Option, adjusted, however, pursuant to
Section 2.04(f)(iv) below. On the Distribution Date, each grantee of a Manor
Care Stock Option awarded as an incentive stock option who is a Choice Employee
shall automatically receive in its place a Conversion Award of an option to
purchase shares of Choice Common Stock equal in number to the number of shares
covered by the Manor Care Stock Option, adjusted, however, pursuant to Section
2.04(f)(iv) below.
(iii) Adjustment of Option Price: For purposes of determining
the adjusted option price of a Conversion Award replacing a Manor Care Stock
Option, the following formula shall be used to maintain the grantee's Aggregate
Spread on each outstanding grant of Manor Care Stock Options. The Aggregate
Spread on each such outstanding grant shall be maintained by setting the
adjusted option price to ensure that the difference between (1) the aggregate
total Post-Conversion Stock Price for each Conversion Award of an option to
acquire Manor Care Common Stock or Choice Common Stock, as the case may be, and
(2) the aggregate adjusted option exercise price for each such Conversion Award,
is equal to (3) the Aggregate Spread. In addition, the adjusted option price of
each Conversion Award of an option to acquire Manor Care Common Stock or Choice
Common Stock, as the case may be, shall be set to maintain the ratio of the
exercise price of each Manor Care Stock Option being converted to the
Post-Conversion Stock Price of the Common Stock purchasable under the Conversion
Award by ensuring that the aforesaid ratio shall
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equal the ratio of (1) such adjusted option price for the Conversion Award to
(2) the Post-Conversion Stock Price of the Common Stock purchasable under the
Conversion Award (Manor Care Common Stock or Choice Common Stock, respectively).
(iv) Adjustment of Number of Shares Covered by Options: In the
case of Conversion Awards of nonqualified stock options or incentive stock
options to acquire shares of shares of Manor Care Common Stock or Choice Common
Stock, the total number of shares that may be acquired with respect to each such
company shall be adjusted as necessary to maintain the Aggregate Spread and
ratio described in Section 2.04(f)(iii).
(v) Special Election for Employees of Manor Care, Inc.: On or
before the Cut-off Date, each holder of a nonvested nonqualified option to
acquire Manor Care Common Stock who is a direct employee of Manor Care, Inc.
shall make a one-time election with respect to such nonvested nonqualified
options, (1) to receive a Conversion Award which relates exclusively to
nonvested nonqualified options to acquire Common Stock of the entity (Manor Care
or Choice) of which such individual shall be an Employee on the Distribution
Date, or (2) to receive a Conversion Award with respect to which (a) one-half of
the Aggregate Spread relates to nonvested nonqualified options to acquire Common
Stock of the entity of which such individual shall be an employee on the
Distribution Date and (b) one-half of the Aggregate Spread is proportionately
allocated between nonvested nonqualified options to acquire Manor Care Common
Stock and nonvested nonqualified options to acquire Choice Common Stock based
upon the relative trading values of Manor Care and Choice on the Distribution
Date. A failure to make a timely election shall be deemed to constitute an
election to receive a Conversion Award of nonvested nonqualified options
relating solely to the entity for which such individual shall become an Employee
on the Distribution Date.
(vi) Special Election Employees With Respect to Vested
Nonqualified Stock Options: On or before the Cut-off Date, each Employee who is
a holder of a vested nonqualified stock option to acquire Manor Care Common
Stock may make a one-time election to specify the manner in which the Aggregate
Spread attributable to such vested nonqualified stock options shall be allocated
between a Conversion Award relating to vested nonqualified stock options to
acquire Manor Care Common Stock and a Conversion Award relating to vested
nonqualified stock options to acquire Choice Common Stock. A failure to make a
timely election with respect to such vested nonqualified stock options shall be
deemed to constitute an election to receive a single Conversion Award of vested
nonqualified options relating solely
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to the entity for which such individual shall become an Employee on the
Distribution Date.
(g) Effect of Post-Distribution Transfer on Conversion Awards.
Conversion Awards made pursuant to this Section 2.04 of shares of or options in
Manor Care Common Stock or Choice Common Stock shall be administered with
respect to any provisions relating to continuing employment requirements to give
Service Credit for service with the party employing the grantee as of the
Distribution Date (Manor Care in the case of Retained Employees and Choice in
the case of Choice Employees). Solely with respect to such Conversion Awards
(and not with respect to new awards made after the Cut-off Date), for purposes
of determining whether a termination of employment has occurred under the terms
of any provision requiring continued employment, termination of employment
through May 31, 1998 shall not be deemed to occur if an Employee leaves the
service of one party to immediately begin employment with the other party (i.e.,
leaving Manor Care employment to work for Choice, or leaving Choice employment
to work for Manor Care); the business operation or business unit from which such
Employee terminates employment shall promptly notify the administrator of the
Comprehensive Stock Plan of each party of the occurrence of any termination
subject to the provisions of this Section 2.04(g). Whichever party is the new
employer shall inform the former employer of any termination of employment of
such transferred Employee. Any termination of employment other than as described
in the preceding sentence shall be treated by applying the applicable provisions
of the Comprehensive Stock Plan relating to terminations of employment without
the modifications described in this paragraph.
Section 2.05 Existing Manor Care Stock Purchase Plan. The Manor Care Stock
Purchase Plan shall continue in effect after the Distribution Date and payroll
deductions for all eligible Plan participants who are Retained Employees shall
continue at the same levels after the Pre-Distribution Purchase Date until the
earlier to occur of: (i) final purchase of stock at the end of the Current Plan
Year quarter in which the Distribution Date occurs (the "Post-Distribution
Purchase") or (ii) the date the participant withdraws from said Plan. Choice
shall assume all obligations under said Plan with respect to Post-Distribution
Purchases by Choice Employees, who will have the right to acquire Choice Common
Stock substituted for their right to acquire Manor Care Common Stock. Retained
Employees will have the right to acquire Manor Care Common Stock in the
Post-Distribution Purchase. As soon as practicable after the Distribution Date,
Manor Care will transfer to the Choice Hotels International, Inc. Stock Purchase
Plan a cash amount equal to all contributions made to the Manor Care Stock
Purchase Plan by Choice Employees during the Current Plan Year quarter in which
the Distribution Date occurs, and such amounts will be used to purchase Choice
Common
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Stock on behalf of such Choice Employees after the end of the Current Plan Year
quarter in which the Distribution Date occurs.
Section 2.06 Manor Care Welfare Plans and Short-Term Disability Plan.
(a) Liability for Claims. Except as otherwise provided herein, as of
the Cut-off Date, Manor Care or a Retained Subsidiary shall assume or retain and
shall be responsible for, or cause its insurance carriers or HMOs to be
responsible for, all liabilities and obligations related to claims incurred
through December 31, 1996 in respect of any Employee (whether such claims are
asserted before or after December 31, 1996) under any Manor Care Welfare Plan
and shall be responsible for claims incurred after December 31, 1996 in respect
of any Retained Individual or Terminee under any Manor Care Welfare Plan, and
Choice and the Choice Subsidiaries shall have no liability or obligation with
respect thereto, except to make contributions to Manor Care in respect of such
coverage of Choice Individuals as provided below. Notwithstanding the foregoing,
with respect to the pre-tax medical and dependent care programs, Manor Care will
retain any funds remaining on January 1, 1997 to pay for any claims incurred
under such programs on or prior to December 31, 1996. After all such claims have
been paid, Manor Care shall be entitled to retain any remaining funds
attributable to the pre-tax medical and dependent care programs.
(b) Continuation Coverage Administration. As of the Distribution
Date, Manor Care or a Retained Subsidiary shall assume or retain and shall be
solely responsible for, or cause its insurance carriers or HMOs to be
responsible for, the administration of the continuation coverage requirements
imposed by Code Section 4980B and ERISA Sections 601 through 608 as they relate
to any Manor Care Qualified Beneficiary, and shall be responsible for the
administration of continuation coverage requirements for Choice Individuals
through December 31, 1996, and Choice and the Choice Subsidiaries shall have no
liability or obligation with respect thereto.
(c) Continuation Coverage Claims. As of the Distribution Date, Manor
Care or a Retained Subsidiary shall assume or retain and shall be responsible
for, or cause its insurance carriers or HMOs to be responsible for, all
liabilities and obligations in connection with claims incurred or premiums owed
through December 31, 1996, whether asserted before or after December 31, 1996,
under any Manor Care Welfare Plan in respect of any Manor Care Qualified
Beneficiary or Choice Qualified Beneficiary and shall be responsible for claims
incurred or premiums owed after December 31, 1996 under any Manor Care Welfare
Plan in respect of any Manor Care Qualified Beneficiary, and Choice and the
Choice Subsidiaries shall have no liability or obligation with respect thereto.
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(d) Continuation of Sponsorship of Manor Care Welfare Plans. As soon
as practicable after the date hereof and effective as of the Distribution Date,
Manor Care shall take, or cause to be taken, all action necessary and
appropriate to continue to administer the Manor Care Welfare Plans and to
provide benefits thereunder for all Retained Individuals and Manor Care
Qualified Beneficiaries who, immediately prior to the Distribution Date, were
participants in or otherwise entitled to benefits under the Manor Care Welfare
Plans and to provide benefits through December 31, 1996 to Choice Individuals.
Manor Care will assess Choice a monthly amount, described in Section 2.06(e)
below, to cover the projected costs of providing continued benefits to Choice
Individuals through December 31, 1996 under the Manor Care Welfare Plans. Choice
will provide Manor Care, as soon as practicable after the Distribution Date
(with the cooperation of Manor Care to the extent that relevant information is
in the possession of Manor Care or a Retained Subsidiary, and in accordance with
Section 5.02), with a list of individuals (and dependents thereof) employed by
Manor Care or any Retained Subsidiary who were, to the best knowledge of Choice,
participants in or otherwise entitled to benefits under the existing Manor Care
Welfare Plans immediately prior to the Distribution Date, together with a
listing of each such individual's Service Credits under such existing Plans and
a listing of each such individual's expenses incurred towards deductibles,
out-of-pocket limits, maximum benefit payments, and any benefit usage towards
plan limits thereunder.
(e) Welfare Plan Payments by Choice to Manor Care. Choice shall make
monthly payments to Manor Care in an amount equal to $216 multiplied by the
number of Choice Employees who are participants in a Manor Care Medical Plan
with respect to the time period beginning on the Distribution Date and ending on
December 31, 1996. Such payments shall be made to Manor Care on a monthly basis
no more than ten (10) days after the end of each month ending after the
Distribution Date through December 31, 1996. In consideration of receipt of such
payments, Manor Care shall provide the services and benefits described in
Section 2.06. It is understood that Choice shall not make any changes in any of
the benefit structures attributable to the Manor Care Welfare Plans and will not
modify the procedures attributable to the administration and implementation of
the Manor Care Welfare Plans. It is also agreed that Choice will be responsible
for the funding of any costs attributable to the design, implementation,
enrollment, and administration of any Welfare Plans established by Choice to
provide coverage to Choice Employees subsequent to December 31, 1996.
(f) Continuation of Sponsorship of Manor Care, Inc. Short-Term
Disability Plan. On the Distribution Date, Manor Care shall retain (or shall
cause a Retained Subsidiary to assume) sole responsibility for all benefit
payments due under the Manor
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Care, Inc. Short-Term Disability Plan with respect to all Retained Employees and
Terminees who are participants in such Plan on the Distribution Date and Choice
shall have no liability or obligation with respect thereto.
Section 2.07 Choice Welfare Plans and Short-Term Disability Plan.
(a) Establishment of Choice Welfare Plans. As soon as practicable
after the date hereof and effective January 1, 1997, Choice shall take, or cause
to be taken, all action necessary and appropriate to establish the Choice
Welfare Plans and to provide benefits thereunder for all Choice Individuals who,
immediately prior to January 1, 1997, were participants in or otherwise entitled
to benefits under the Manor Care Welfare Plans. Each such individual shall, to
the extent applicable, for all purposes under the Plans established by Choice
(i) have coverage comparable to that provided immediately prior to the
Distribution Date and (ii) have no preexisting condition limitation imposed
other than that which is or was already imposed under the existing applicable
Manor Care Welfare Plans.
(b) Liability for Claims. As of January 1, 1997, Choice or a Choice
Subsidiary shall assume or retain and shall be responsible for, or cause its
insurance carriers or HMOs to be responsible for, all liabilities and
obligations in connection with claims incurred or premiums due on and after
January 1, 1997 in respect of any Choice Individual, and Manor Care and the
Retained Subsidiaries shall have no liability or obligation with respect
thereto.
(c) Continuation Coverage Administration. As of January 1, 1997,
Choice or a Choice Subsidiary shall assume or retain, as the case may be, and
shall be solely responsible for, or cause its insurance carriers or HMOs to be
responsible for, the administration of the continuation coverage requirements
imposed by Code Section 4980B and ERISA Sections 601 through 608 as they relate
to any Choice Qualified Beneficiary after December 31, 1996, and Manor Care and
the Retained Subsidiaries shall have no liability or obligation with respect
thereto.
(d) Continuation Coverage Claims. As of the January 1, 1997, Choice
or a Choice Subsidiary shall be solely responsible for, or cause its insurance
carriers or HMOs to be responsible for, all liabilities and obligations
whatsoever in connection with claims incurred or premiums due on and after
January 1, 1997 under any Choice Welfare Plans (or successor thereto) in respect
of any Choice Qualified Beneficiary, and Manor Care and the Retained
Subsidiaries shall have no liability or obligation with respect thereto. Each
Choice Qualified Beneficiary shall, to the extent applicable, for all purposes
under the Plans provided by Choice (i) have coverage comparable
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that provided to him or her immediately prior to the Distribution Date and (ii)
have no preexisting condition limitation imposed other than that which is or was
already imposed under the applicable existing Plan.
(e) Establishment of Choice Hotels International, Inc. Short-Term
Disability Plan. Effective as of the Distribution Date, Choice shall take, or
cause to be taken, all action necessary and appropriate to establish and
administer a new short-term disability plan named the Choice Hotels
International, Inc. Short-Term Disability Plan and to provide benefits
thereunder after the Distribution Date for all Choice Employees, including
Choice Employees who had incurred a disability prior to the Distribution Date
and who were receiving benefits prior to the Distribution Date under the Manor
Care, Inc. Short-Term Disability Plan.
Section 2.08 Vacation Pay and Sick Leave Liabilities.
(a) Division of Liabilities. Effective on the Distribution Date,
Choice shall assume, as to the Choice Employees, and Manor Care shall retain, as
to the Retained Employees, all accrued liabilities (whether vested or unvested,
and whether funded or unfunded) for vacation leave and sick leave in respect of
employees of Manor Care as of the Cut-off Date. Choice shall be solely
responsible for the payment of such vacation leave and sick leave to Choice
Employees after the Cutoff Date, and Manor Care shall be solely responsible for
the payment of such vacation leave and sick leave to Retained Employees after
the Cut-off Date. Each party shall provide to its own Employees on the
Distribution Date the same vested and unvested balances of vacation leave and
sick leave as credited to such Employee on the Manor Care payroll system on the
Cut-off Date, and shall continue to accrue vacation leave and sick leave in
respect of each such Employee from the Distribution Date at the same rate of
accrual as accrued in respect of such individual by Manor Care on the Cut-off
Date.
(b) Post-Distribution Transfers. Through May 31, 1998, an Employee
who leaves the service of one party to immediately begin employment with the
other party (i.e., leaving Manor Care employment to work for Choice, or leaving
Choice employment to work for Manor Care) shall be provided by the new employer
with the same balance of vested and unvested vacation leave and sick leave hours
as had been accrued by the old employer through the termination date. The old
employer shall promptly notify the new employer in writing of the occurrence of
any termination subject to the provisions of this Section 2.08(b), and shall
make a payment to such new employer within thirty (30) days of the aforesaid
termination date in an amount equal to the value of the terminating Employee's
vested balance of vacation leave and sick leave accrued by the old employer
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through such termination date, based on the Employee's final rate of pay with
the old employer. No payment shall be made by the old employer to the new
employer for any unvested leave balance.
Section 2.09 Employee Discounts. Employees of Choice shall be granted
discounts with Manor Care on the same terms and conditions as Manor Care
employee discounts, and employees of Manor Care shall be granted discounts with
Choice on the same terms and conditions as Choice employee discounts. Such
discounts shall be intended to qualify as a fringe benefit excludible from the
gross income of employees under Section 132(a) of the Code. This Agreement shall
constitute a reciprocal agreement between the parties within the meaning of
Section 132(h) of the Code, and the parties shall execute such further
documentation as may be required for tax purposes or as otherwise necessary to
effect such discounts. In accordance with Section 5.02, each party shall furnish
the other with such information as is necessary for the administration of the
aforesaid employee discount programs, including but not limited to information
on the utilization of the discounts by the employees of such other party. Each
party shall be solely responsible for any payroll taxes, excise taxes, corporate
income taxes or penalties attributable to the availability of discounts to or
utilization by its employees (whether or not such discounts qualify under
Section 132(a) of the Code), and the other party shall have no liability or
obligation with respect thereto.
Section 2.10 Preservation of Right To Amend or Terminate Plans. Except as
otherwise expressly provided in Article II, no provisions of this Agreement,
including, without limitation, the agreement of Manor Care or Choice, or any
Retained Subsidiary or Choice Subsidiary, to make a contribution or payment to
or under any Plan herein referred to for any period, shall be construed as a
limitation on the right of Manor Care or Choice or any Retained Subsidiary or
Choice Subsidiary to amend such Plan or terminate its participation therein
which Manor Care or Choice or any Retained Subsidiary or Choice Subsidiary would
otherwise have under the terms of such Plan or otherwise, and no provision of
this Agreement shall be construed to create a right in any employee or former
employee, or dependent or beneficiary of such employee or former employee under
a Plan which such person would not otherwise have under the terms of the Plan
itself.
Section 2.11 Reimbursement. Manor Care and Choice acknowledge that Manor
Care and the Retained Subsidiaries, on the one hand, and Choice and the Choice
Subsidiaries, on the other hand, may incur costs and expenses, including, but
not limited to, contributions to Plans and the payment of insurance premiums
arising from or related to any of the Plans which are, as set forth in this
Agreement, the responsibility of the other party hereto. Accordingly, Manor Care
(and any Retained Subsidiary
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responsible therefor) and Choice (and any Choice Subsidiary responsible
therefor) shall reimburse each other, as soon as practicable, but in any event
within thirty (30) days of receipt from the other party of appropriate
verification, for all such costs and expenses.
Section 2.12 Payroll Reporting and Withholding.
(a) Form W-2 Reporting. Choice and Manor Care hereby adopt the
"alternative procedure" for preparing and filing IRS Forms W-2 (Wage and Tax
Statements), as described in Section 5 of Revenue Procedure 84-77, 1984-2 IRS
Cumulative Bulletin 753 ("Rev. Proc. 84-77"). Under this procedure Choice as the
successor employer shall provide all required Forms W-2 to all Choice
Individuals reflecting all wages paid and taxes withheld by both Manor Care as
the predecessor and Choice as the successor employer for the entire year during
which the Distribution takes place. Manor Care shall provide all required Forms
W-2 to all Retained Individuals reflecting all wages and taxes paid and withheld
by Manor Care before, on and after the Distribution Date.
In connection with the aforesaid agreement under Rev. Proc. 84-77, each
business unit or business operation of Manor Care shall be assigned to either
Manor Care or Choice, depending upon whether it is a Retained Business or Choice
Business, and each Retained Individual or Choice Individual associated with such
business unit or business operation shall be assigned for payroll reporting
purposes to Manor Care or Choice, as the case may be.
(b) Forms W-4 and W-5. Choice and Manor Care agree to adopt the
alternative procedure of Rev. Proc. 84-77 for purposes of filing IRS Forms W-4
(Employee's Withholding Allowance Certificate) and W-5 (Earned Income Credit
Advance Payment Certificate). Under this procedure Manor Care shall provide to
Choice as the successor employer all IRS Forms W-4 and W-5 on file with respect
to each Choice Individual, and Choice will honor these forms until such time, if
any, that such Choice Individual submits a revised form.
(c) Garnishments, Tax Levies, Child Support Orders, and Wage
Assignments. With respect to Employees with garnishments, tax levies, child
support orders, and wage assignments in effect with Manor Care on the Cut-off
Date, Choice as the successor employer with respect to each Choice Individual
shall honor such payroll deduction authorizations and will continue to make
payroll deductions and payments to the authorized payee, as specified by the
court or governmental order which was filed with Manor Care.
(d) Authorizations for Payroll Deductions. Unless otherwise
prohibited by this or another agreement entered into in
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connection with the Distribution, or by a Plan document, with respect to
Employees with authorizations for payroll deductions in effect with Manor Care
on the Cut-off Date, Choice as the successor employer will honor such payroll
deduction authorizations relating to each Choice Individual, and shall not
require that such Choice Individual submit a new authorization to the extent
that the type of deduction by Choice does not differ from that made by Manor
Care. Such deduction types include, without limitation, contributions to any
Plan, U.S. Savings Bonds; scheduled loan repayments to the Profit Sharing Plan;
and Direct Deposit of Payroll, bonus advances, union dues, employee relocation
loans, and other types of authorized company receivables usually collectible
through payroll deductions.
ARTICLE III
LABOR AND EMPLOYMENT MATTERS
Notwithstanding any other provision of this Agreement or any other
Agreement between Choice and Manor Care to the contrary, Choice and Manor Care
understand and agree that:
Section 3.01 Separate Employers. On and after the Distribution Date and
the separation of Employees into their respective companies, Choice and Manor
Care will be separate and independent employers.
Section 3.02 Employment Policies and Practices. Subject to the provisions
of ERISA and Sections 2.01(b) on Service Credits and 2.04(e) and 2.08(b)
governing post-Distribution transfers through May 31, 1998, Choice and Manor
Care may adopt, continue, modify or terminate such employment policies,
compensation practices, retirement plans, welfare benefit plans, and other
employee benefit plans of any kind or description, as each may determine, in its
sole discretion, are necessary and appropriate.
Section 3.03 Collective Bargaining Agreements. With regard to employees of
Manor Care covered by a Collective Bargaining Agreement on the Cut-off Date who
become Choice Employees or Retained Employees, Choice and Manor Care promise and
covenant to each other not to take any action which disrupts or otherwise
negatively impacts the labor relations of the other. Choice and Manor Care will
diligently work to substitute the appropriate employer for Manor Care in
Collective Bargaining Agreements.
Section 3.04 Claims.
(a) Scope. This Section is intended to allocate all liabilities for
employment-related claims involving Manor Care or
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Choice including, but not limited to, claims against either or both Manor Care
and Choice and their officers, directors, agents and employees, or against or by
their various employee benefit plans and plan administrators and fiduciaries. In
the event of any conflicting provision of any agreement including, but not
limited to, management agreements for hotel properties, this Section 3.04 shall
control the allocation of liabilities for employment-related claims.
(b) Employment-Related Claims. An employment-related claim shall
include any actual or threatened lawsuit, arbitration, ERISA claim, or federal,
state, or local judicial or administrative proceeding of whatever kind involving
a demand by or on behalf of or relating to Retained Individuals or Choice
Individuals, or by or relating to a collective bargaining agent of Employees, or
by or relating to any federal, state or local government agency alleging
liability against Manor Care or Choice, or against any employee health, welfare,
deferred compensation or other benefit plan and their respective officers,
directors, agents, employees, administrators, trustees and fiduciaries.
(c) Obligation to Indemnify. The duty of a party to indemnify,
defend and hold harmless the other party under this Section 3.04 shall include
the following obligations of the party having such duty: to provide a legal
defense and incur all attorneys fees and litigation costs which may be
associated with such a defense; to pay all costs of settlement or judgment where
the indemnifying party has the full duty to do so or to pay the full percentage
of the party's share when the duty is only a percentage of the full settlement
or judgment; and to hold harmless from all claims and costs which may be
asserted with or arising from the duty of the indemnifying party to defend and
indemnify.
(d) Pre-Distribution Claims.
(i) Choice shall indemnify, defend and hold harmless Manor
Care from any employment-related claims of a Choice Individual arising on or
before the Cut-off Date.
(ii) Manor Care shall indemnify, defend and hold harmless
Choice from any employment-related claims of a Retained Individual arising on or
before the Cut-off Date.
(e) Distribution and Other Joint Liability Claims. Where
employment-related claims alleging or involving joint and several liability
asserted against Choice and Manor Care are not separately traceable to
liabilities relating to Choice Individuals or Retained Individuals, any
liability shall be apportioned between Choice and Manor Care in accordance with
the percentage that each party's Employees represents of the combined
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total number of Employees of both parties, as described below. The percentage of
the liability assumed by Choice shall equal the ratio of (i) the total number of
Choice Employees on the Distribution Date, to (ii) the combined total number of
Choice Employees and Retained Employees on such date. The percentage of the
liability assumed by Manor Care shall equal the ratio of (i) the total number of
Manor Care Employees on the Distribution Date, to (ii) the combined total number
of Choice Employees and Retained Employees on such date. Each party will
indemnify, defend, and hold harmless the other to the extent of the indemnifying
party's apportioned percentage determined in accordance herewith.
(f) Post-Distribution Employment-Related Claims. Employment-related
claims arising after the Distribution and division of the Employees between the
parties and not relating to, arising from, or in connection with the
Distribution, will be the sole responsibility of Choice as to Choice Individuals
and of Manor Care as to Retained Individuals. Each Company will indemnify,
defend, and hold harmless the other from employment-related claims of the other
company.
Section 3.05 Funding of Union Plans. Without limitation to the scope and
application of Section 3.04, any claims by or on behalf of employees or their
collective bargaining agent or any federal, state or local governmental agency
for alleged under-funding of, or failure to make payments to, union health,
welfare and pension funds based on acts or omissions occurring on or before the
Distribution Date or arising from or in connection with the Distribution, or
resulting from actuarial recalculation by auditors of the union plans and funds,
will be the sole responsibility of each party as to its own employees (i.e.,
Choice with respect to Choice Individuals, and Manor Care with respect to
Retained Individuals), and the responsible party will indemnify, defend, and
hold harmless the other from any such claims.
Section 3.06 Notice of Claims. Without limitation to the scope and
application to each party in the performance of its duties under Section 3.04
and 3.05 herein, each party will notify in writing and consult with the other
party prior to making any settlement of an employee claim, for the purpose of
avoiding any prejudice to such other party arising from the settlement.
Section 3.07 Assumption of Unemployment Tax Rates. Changes in state
unemployment tax experience from that of Manor Care as of the Cut-off Date shall
be handled as follows. In the event an option exists to allocate state
unemployment tax experience of Manor Care, the Manor Care experience shall be
transferred to Choice if this results in the lowest aggregate unemployment tax
costs for both Manor Care and Choice combined, and the Manor Care experience
shall be retained by Manor Care if
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this results in the lowest aggregate unemployment tax costs for Manor Care and
Choice combined.
Section 3.08 Intercompany Service Charge. Legal, professional, managerial,
administrative, clerical, consulting, and support or production services
provided to one party by personnel of the other party, upon the request of the
first party or when such services are otherwise required by this Agreement
between Choice and Manor Care, shall be charged to the party receiving such
services on commercially reasonable terms to be negotiated (or in accordance
with the provisions of any applicable agreement between the parties).
Section 3.09 WARN Claims. Before and after the Distribution Date, each
party shall comply in all material respects with the Worker Adjustment and
Retraining Act ("WARN"). Manor Care shall be responsible for WARN claims
relating to Retained Individuals or the Employees who prior to the Distribution
Date were employed in a Retained Business. Choice shall be responsible for WARN
Claims relating to Choice Individuals or to Employees who prior to the
Distribution Date were employed in a Choice Business. Each party shall
indemnify, defend and hold harmless the other in connection with WARN Claims for
which the indemnitor is responsible and which are brought against the
indemnitees.
Section 3.10 Employees on Leave of Absence. After the Distribution Date,
Choice shall assume responsibility, if any, as employer for all Employees
returning to Choice or a Choice Business from an approved leave of absence who
prior to the Distribution Date were employed in a Choice Business. After the
Distribution Date, Manor Care shall assume responsibility, if any, as employer
for all Employees returning to Manor Care or a Retained Business from an
approved leave of absence who prior to the Distribution Date were employed in a
Retained Business.
Section 3.11 No Third Party Beneficiary Rights. Neither this Agreement nor
any other intercompany agreement between Choice and Manor Care is intended to
nor does it create any third party contractual or other common law rights. No
person shall be deemed a third-party beneficiary of the agreements between
Choice and Manor Care.
Section 3.12 Attorney-Client Privilege. The provisions herein requiring
either party to this Agreement to cooperate shall not be deemed to be a waiver
of the attorney/client privilege for either party nor shall it require either
party to waive its attorney/client privilege.
ARTICLE IV
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<PAGE> 39
DEFAULT
Section 4.01 Default. If either party materially defaults hereunder, the
non-defaulting party shall be entitled to all remedies provided by law or equity
(including reasonable attorneys' fees and costs of suit incurred).
Section 4.02 Force Majeure. Choice and Manor Care shall incur no liability
to each other due to a default under the terms and conditions of this Agreement
resulting from fire, flood, war, strike, lock-out, work stoppage or slow-down,
labor disturbances, power failure, major equipment breakdowns, construction
delays, accident, riots, acts of God, acts of United States' enemies, laws,
orders or at the insistence or result of any governmental authority or any other
delay beyond each other's reasonable control.
ARTICLE V
MISCELLANEOUS
Section 5.01 Relationship of Parties. Nothing in this Agreement shall be
deemed or construed by the parties or any third party as creating the
relationship of principal and agent, partnership or joint venture between the
parties, it being understood and agreed that no provision contained herein, and
no act of the parties, shall be deemed to create any relationship between the
parties other than the relationship set forth herein.
Section 5.02 Access to Information; Cooperation. Manor Care and Choice and
their authorized agents will be given reasonable access to and may take copies
of all information relating to the subjects of this Agreement (to the extent
permitted by federal and state confidentiality laws) in the custody of the other
party, including any agent, contractor, subcontractor, agent or any other person
or entity under the contract of such party. The parties will provide one another
with such information within the scope of this Agreement as is reasonably
necessary to administer each party's Plans. The parties will cooperate with each
other to minimize the disruption caused by any such access and providing of
information.
Section 5.03 Assignment. Neither party shall, without the prior written
consent of the other, have the right to assign any rights or delegate any
obligations under this Agreement.
Section 5.04 Headings. The headings used in this Agreement are inserted
only for the purpose of convenience and reference, and in no way define or limit
the scope or intent of any provision or part hereof.
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<PAGE> 40
Section 5.05 Severability of Provisions. Neither Manor Care nor Choice
intend to violate statutory or common law by executing this Agreement. If any
section, sentence, paragraph, clause or combination of provisions in this
Agreement is in violation of any law, such sections, sentences, paragraphs,
clauses or combinations shall be inoperative and the remainder of this Agreement
shall remain in full force and effect and shall be binding upon the parties.
Section 5.06 Parties Bound. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective successors and
permitted assigns. Nothing herein, expressed or implied, shall be construed to
give any other person any legal or equitable rights hereunder.
Section 5.07 Notices. All notices, consents, approvals and other
communications given or made pursuant hereto shall be in writing and shall be
deemed to have been duly given when delivered personally or by overnight courier
or three days after being mailed by registered or certified mail (postage
prepaid, return receipt requested) to the named representatives of the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice, except that notices of changes of address shall be
effective upon receipt):
(a) if to Manor Care
MANOR CARE, INC.
11555 Darnestown Road
Gaithersburg, MD 20878-3200
Attention: GENERAL COUNSEL
(b) if to Choice
CHOICE HOTELS INTERNATIONAL, INC.
10750 Columbia Pike
Silver Spring, MD 20901
Attention: GENERAL COUNSEL
Choice agrees that, upon the request of Manor Care, Choice will give copies of
all of its notices, consents, approvals and other communications hereunder to
any lender to Manor Care or other person specified by Manor Care.
Section 5.08 Further Action. Choice and Manor Care each shall cooperate in
good faith and take such steps and execute such papers as may be reasonably
requested by the other party to implement the terms and provisions of this
Agreement.
Section 5.09 Waiver. Choice and Manor Care each agree that the waiver of
any default under any term or condition of
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<PAGE> 41
this Agreement shall not constitute a waiver of any subsequent default or
nullify the effectiveness of that term or condition.
Section 5.10 Governing Law. All controversies and disputes arising out of
or under this Agreement shall be determined pursuant to the laws of the State of
Maryland, regardless of the laws that might be applied under applicable
principles of conflicts of laws.
Section 5.11 Consent to Jurisdiction. The parties irrevocably submit to
the exclusive jurisdiction of (a) the Courts of the State of Maryland,
Montgomery County, or (b) any federal district court in the State of Maryland
where there is federal jurisdiction for the purpose of any suit, action or other
Court proceeding arising out of this Agreement.
Section 5.12 Entire Agreement. This Agreement and the Distribution
Agreement constitute the entire understanding between the parties hereto, and
supersede all prior written or oral communications, relating to the subject
matter covered by said agreements. No amendment, modification, extension or
failure to enforce any condition of this Agreement by either party shall be
deemed a waiver of any of its rights herein. This Agreement shall not be amended
except by a writing executed by the parties.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
MANOR CARE, INC., a
Delaware corporation
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
CHOICE HOTELS HOLDINGS, INC., a
Delaware corporation
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
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<PAGE> 42
EXHIBIT A
HEALTH AND WELFARE PLANS
* Medical plans
* Dental Plan
* HMOs
* Group-Term Life
* Pretax Spending Accounts
* Hyatt Legal Services
* Long-term Disability
* Accidental Death & Dismemberment
<PAGE> 1
EXHIBIT 10.08
OFFICE LEASE
BY AND BETWEEN
CHOICE HOTELS HOLDINGS, INC.
A DELAWARE CORPORATION (TO BE RENAMED CHOICE HOTELS INTERNATIONAL, INC.)
"TENANT"
AND
MANOR CARE, INC., A DELAWARE CORPORATION
"LANDLORD"
AT
10720, 10750, AND 10770 COLUMBIA PIKE
SILVER SPRING, MARYLAND 20901
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Title Page #
<S> <C> <C>
Article I. Definitions and Certain Basic Provisions 1
Article II. Granting Clause 2
Article III. Rental 2
Article IV. Cafeteria and Fitness Center
Article V. Construction and Acceptance of the
Demised Premises 5
Article VI. Uses and Care of Demised Premises 6
Article VII. Landlord's Services 7
Article VIII. Alterations 9
Article IX. Landlord's Right of Access and Use 9
Article X. Signs 10
Article XI. Utilities 10
Article XII. Indemnity, Public Liability Insurance and
Fire and Extended Coverage Insurance 10
Article XIII. Tenant's Insurance 10
Article XIV. Non-Liability for Certain Damages 11
Article XV. Damage by Casualty 12
Article XVI. Eminent Domain 12
Article XVII. Assignment and Subletting 13
Article XVIII. Default by Tenant and Remedies 13
Article XIX. Holding Over 16
Article XX. Subordination and Attornment; 16
Article XXI Estoppel Certificate
Article XXII. Notices 17
Article XXIII. Brokers 17
Article XXIV. Approval and Changes Required by Lender 17
Article XXV. Parking 17
Article XXVI. Waiver of Trial by Jury 18
Article XXVII. Furnishing of Financial Statements 18
Article XXVIII. Occupational and Environmental Compliance 18
Article XXIX. Miscellaneous 19
Article XXX. Attachments 21
</TABLE>
<PAGE> 3
OFFICE LEASE
This Lease is entered into this ____ day of ______________ 1996, by and between
Manor Care, Inc. a Delaware corporation ("Landlord") and Choice Hotels Holdings,
Inc., a Delaware corporation (to be renamed Choice Hotels International, Inc.)
("Tenant").
RECITALS:
A. Landlord is implementing a restructuring of itself in which,
among other things, it will distribute to its shareholders all
of the common stock of Tenant, pursuant to a Distribution
Agreement dated as of ____________________, 1996, between
Landlord and Tenant (the "Distribution Agreement") as a result
of which Landlord and Tenant will become separate publicly
traded corporations.
B. Landlord and Tenant occupy space together in an office complex
in Silver Spring, Maryland, owned by Landlord, and desire to
provide in this Lease for the continuing occupancy by Tenant,
after said stock distribution, of premises in said office
complex.
C. Landlord and Tenant each have determined that the rental and
other terms and conditions of this Lease are commercially
reasonable, based upon market conditions in the Silver Spring,
Maryland area.
ARTICLE I. DEFINITIONS AND CERTAIN BASIC PROVISIONS.
1.1
<TABLE>
<S> <C>
(a) "LANDLORD": Manor Care, Inc,
a Delaware corporation
(b) "LANDLORD'S ADDRESS": 11555 Darnestown Road
Gaithersburg, Maryland 20878-3200
Attn.: General Counsel
(Re: Real Estate)
(c) "TENANT": Choice Hotels Holdings, Inc., a
Delaware corporation (to be renamed Choice
Hotels International, Inc.)
(d) "TENANT'S ADDRESS": 10750 Columbia Pike
Silver Spring, Maryland 20910
Attn.: General Counsel
(Re: Real Estate)
</TABLE>
(e) "COMPLEX" shall refer to the complex of three office
buildings on the western side of Columbia Pike, known as 10720 Columbia Pike
(hereinafter the "10720 Building"), 10750 Columbia Pike (hereinafter the "10750
Building"), and 10770 Columbia Pike (hereinafter the ("10770 Building"). A plan
of the Complex is attached hereto as Exhibit A.
(f) "DEMISED PREMISES": (i) approximately 87,969 rentable
square feet of office space, consisting of 13,895 rentable square feet on the
first and second floors of the 10720 Building and the entire 10750 Building with
74,074 rentable square feet. The Demised Premises are more particularly shown in
the plan attached hereto as Exhibit B. If Tenant desires to add to the Demised
Premises any vacant space in the 10720 Building, Tenant shall notify Landlord
and such space shall be added to the Demised Premises unless (i) Landlord
requires such space or any part thereof for Landlord's own use, or (ii) Landlord
has committed to lease such space or any portion thereof to a tenant unrelated
to Landlord.
(g) "LEASE TERM": The period of time commencing from the
Commencement Date, as defined below, and terminating thirty (30) months after
such Commencement Date, unless such
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<PAGE> 4
termination date is other than the last day of a calendar month, in which event
this Lease shall terminate on the last day of the calendar month in which such
date falls. Landlord shall give Tenant prior written notice of the proposed sale
of the Complex or any building therein. Either party may elect to terminate this
Lease effective as of the date of such sale by written notice given to the other
party within thirty (30) days after Tenant's receipt of such notice of sale.
(h) "LEASE YEAR": In the case of the first Lease Year, that
period from the Commencement Date to May 31, 1997. Thereafter, "Lease Year"
shall mean each successive twelve (12) month period from June 1 to May 31
following the expiration of the first Lease Year, except that the last Lease
Year shall be the period from June 1 to the termination date of this Lease.
(i) "COMMENCEMENT DATE": the Distribution Date under the
Distribution Agreement. If the Commencement Date does not occur prior to May 31,
1997, either Landlord or Tenant may terminate this Lease by written notice to
the other party.
(j) "ANNUAL BASE RENT": See Section 3.1
(k) "PERMITTED USE": General Office Use. Warehouse and storage
use shall be permitted in the Warehouse Building.
ARTICLE II. GRANTING CLAUSE.
2.1. In consideration of the obligation of Tenant to pay rent and other
charges as provided in this Lease and in consideration of the other included
terms, covenants and conditions, Landlord Demises and Leases to Tenant, and
Tenant Leases from Landlord, the Demised Premises as described in ARTICLE I,
SECTION 1.1(F) TO HAVE AND TO HOLD said premises for the Lease Term specified in
ARTICLE I, SECTION 1.1(G), all upon the terms and conditions set forth in this
Lease. Landlord expressly reserves the right to name or change the name of the
Complex or any building therein without notice to the Tenant.
ARTICLE III. RENTAL
3.1 BASE RENT. Tenant shall pay to Landlord monthly rental installments
in an amount equal to 1/12th of the Annual Base Rent (as hereinafter defined) in
advance, without demand, deduction, counterclaim or offset, and without relief
from valuation and appraisement laws or any other deduction for any reason
whatsoever, on or before the first day of each and every calendar month during
the term of this Lease; provided, however, that if the Commencement Date shall
be on a day other than the first day of the calendar month or the expiration
date shall be a day other than the last day of the calendar month, the monthly
rental installment for such first or last fractional month shall be prorated on
the basis of the number of days during the month this Lease was in effect in
relation to the total number of days in such month.
Annual Base Rent for each Lease Year shall be calculated in accordance
with the following formula:
Annual Base Rent = (1- Manor Care Occupancy Percentage) x (Operating Expenses -
Third Party Rental Income)
Capitalized terms used in said formula shall have the meanings given to them in
Section 3.2 below.
At Landlord's sole discretion, at any time and from time to time during
the term of this Lease upon written notice to Tenant, Landlord may elect that
instead of using the aforesaid formula to calculate Annual Base Rent, Annual
Base Rent shall be the number of square feet of space in the Demised Premises
times the "Alternate Rent" as hereinafter defined. The Alternate Rent shall be
the annual fair market rental value per square foot for the Demised Premises in
their "as is" condition for the remaining Lease Term, as reasonably determined
by Landlord based on quoted rental rates at comparable office buildings in the
Silver Spring, Maryland area. Should Landlord so elect, the parties will enter
into an amendment to this Lease establishing the new Annual Base Rent and
providing that Tenant shall pay its pro rata share (based on the ratio of the
number of square feet in the Demised Premises to the number of square feet in
the Complex) of increases in real estate taxes and operating
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<PAGE> 5
expenses over a base year, with the terms "real estate taxes", "operating
expenses" and "base year" being defined consistent with the definitions of such
terms in leases of space in the Complex to tenants unrelated to Landlord.
3.2 DEFINITIONS. For the purpose of this Lease, the following
definitions shall apply:
(a) "MANOR CARE OCCUPANCY PERCENTAGE" shall mean the ratio of
(i) the number of rentable square feet in the Complex occupied by Manor Care,
Inc., a Delaware corporation, or any person or entity which directly or
indirectly controls, is controlled by, or is under common control with, Manor
Care, Inc., as of the commencement of the Lease Year in question; to (ii) the
total number of rentable square feet in the Complex, as the Complex may be
altered or enlarged in Landlord's discretion from time to time. The parties
agree that as of the Commencement Date the total number of rentable square feet
in the Complex is 226,010, consisting of 66,855 square feet in the 10720
Building, 74,074 square feet in the 10750 Building, and 85,081 square feet in
the 10770 Building. For the purposes of the preceding sentence (and also for
purposes of Section 3.2(c) and 17.1 of this Lease), in order for an entity to
control another, it must have voting control of and own greater than fifty
percent (50%) of every class of stock entitled to vote and/or other voting
equity interest of the other entity, in the case that the other entity is a
corporation; it must own greater than fifty percent (50%) of the partnership
interests in the assets, liabilities, income, loss and distributions of the
other entity, in the case that the other entity is a partnership; it must be the
sole beneficiary of the other entity, in the case that the other entity is a
trust. The parties further agree that as of the Commencement Date, Manor Care,
Inc. occupies 69,750 rentable square feet in the Complex.
(b) "OPERATING EXPENSES" shall mean any and all expenses
incurred by Landlord in connection with the servicing, operation, maintenance
and repair of the Complex and related appurtenances, including, but not limited
to: (1) wages and salaries of all employees engaged in operation, maintenance,
or security of the Complex including taxes, insurance and benefits relating
thereto; (2) all supplies and materials used in operation, maintenance or
security of the Complex; (3) cost of all maintenance and service agreements for
the Complex and the equipment therein, including but not limited to security and
energy management services, window cleaning and elevator maintenance; (4) cost
of all insurance relating to the Complex including the cost of casualty and
liability insurance applicable to the Complex and Landlord's personal property
used in connection therewith; (5) cost of repairs and general maintenance,
whether structural or non-structural, but excluding repairs and general
maintenance paid with proceeds of insurance or by Tenant or third parties; (6) a
management fee for the manager of the Complex, who may be Landlord or an
affiliate of Landlord; (7) the cost of any additional services provided to the
Complex by or on behalf of the Landlord in the prudent management of the
Complex; (8) the cost of any capital improvements or alterations made to the
Complex after the Commencement Date (and the entire cost of such capital
improvements shall be included in Operating Expenses in the Lease Year in which
such cost was paid or incurred); (9) leasing commissions, free rent, lease
takeover obligations and other inducements, costs, disbursements and expenses
incurred in connection with leasing space at the Complex; (10) costs incurred in
constructing, improving, renovating or decorating rented space or space for
tenants; (11) costs of environmental inspection, testing or cleanup; (12)
payments of principal, interest, and other costs relating to indebtedness
secured by mortgages or deeds of trust against the Complex or any portion
thereof; (13) costs incurred in leasing equipment, including air conditioning
systems, elevators, or other equipment ordinarily considered to be of a capital
nature; (14) depreciation and amortization of the buildings and improvements in
the Complex, in accordance with generally accepted accounting principles (15)
security services; (16) trash collection; (17) janitorial and cleaning services;
(18) all charges of utility companies or governmental entities for electricity,
water, sewer, gas or other utilities (excluding telephone) supplied to the
Complex; (19) taxes, assessments and governmental charges of any kind and nature
whatsoever (hereinafter collectively referred to as "Taxes") levied or assigned
against the Complex or any part thereof, and all expenses incurred by Landlord
in attempting to protest, reduce or minimize taxes; (20) ground rents, and
payments under any financing leases of the Complex or any portion thereof; (21)
any operating loss resulting from Landlord's operation of a cafeteria or fitness
center in the Complex; (22) costs of the "employee store" and other services
provided by the "Employee Service Center"at the Complex; and (23) costs of
mailroom/shipping and receiving services provided by Landlord.
(c) "THIRD PARTY RENTAL INCOME" shall mean all rental income
actually received by Landlord from tenants or occupants (excluding Tenant) of
space in the Complex during the Lease
3
<PAGE> 6
Year in question, other than any person or entity which controls, is controlled
by, or is under common control with, Manor Care, Inc.
3.3 As part of the rental arrangements between Landlord and Tenant,
Tenant has specifically reviewed, approved, and agreed to pay as herein
provided, each and every item in the foregoing definition of Operating Expenses.
3.4 PAYMENT OBLIGATION:
(a) Annual Base Rent shall be paid by Tenant to Landlord in
advance, in equal monthly installments, in an estimated amount reasonably
determined by Landlord prior to the commencement of the first Lease Year and
each subsequent Lease Year . (Landlord may revise its estimate at any time
during a Lease Year). Within a reasonable time following the end of each Lease
Year, Landlord shall submit to Tenant a statement which shall include a
comparison of (I) the Annual Base Rent therefore paid by Tenant for the Lease
Year in question on the basis of Landlord's estimate, and (II) Tenant's actual
obligation for Annual Base Rent for the Lease Year in question as determined by
Landlord. Any excess paid by Tenant, as disclosed by such comparison, shall be
credited against Tenant's next due installment(s) of Annual Base Rent, and any
additional sums disclosed by such comparison as being due to Landlord by Tenant
shall be paid to Landlord within thirty (30) days following delivery to Tenant
of such statement (including any statement delivered after the expiration or
termination of the Term). However, for the Lease Year during which the term of
this Lease ends, any excess paid by Tenant to Landlord and due to Tenant shall
be promptly refunded to Tenant.
(b) Tenant or its accountants shall have the right to inspect,
at reasonable times and in a reasonable manner and at the Landlord's offices or
such other place designated by Landlord, during the thirty (30) day period
following the delivery of Landlord's statement of the actual amount of Tenant's
Annual Base Rent for a particular Lease Year, such of Landlord's books of
account and records as pertain to and contain information concerning the
Operating Expenses, the Manor Care Occupancy Percentage and Third Party Rental
Income in order to verify the amounts thereof. In the event Tenant elects not to
inspect Landlord's books of account and records during said thirty (30) day
period, such election or failure to inspect shall constitute Tenant's
unconditional waiver of any and all rights to inspect Landlord's books of
account and records for the subject period and Tenant shall be forever estopped
from challenging or questioning the amount of its Annual Base Rent for said
period. In the event of any disagreement or dispute between Tenant and Landlord
concerning Landlord's statement, the decision of Landlord's Chief Financial
Officer shall be final and unreviewable.
3.5 Tenant shall be liable for all taxes levied against personal
property and trade fixtures placed by Tenant on the Complex. If any such taxes
are levied against Landlord or Landlord's property, and if Landlord elects to
pay the same or if the assessed value of Landlord's property is increased by
inclusion of personal property and trade fixtures placed by Tenant on the
property and Landlord elects to pay the taxes based on such increase, Tenant
shall pay to Landlord as additional rent hereunder, upon demand, the amount of
such taxes paid by Landlord.
3.6 If at any time during the term of this Lease, the present method of
taxation shall be changed so that in lieu of the whole or any part of any taxes,
assessments, levies, or charges levied, assessed or imposed on the Complex there
shall be levied, assessed or imposed on Landlord a capital levy or other tax
directly on the rents received therefrom and/or a franchise tax assessment, levy
or charge measured by or based, in whole or in part, upon such rents on the
present or any future building or buildings in the Complex, then all such taxes,
assessments, levies or charges, or the part thereof so measured or based, shall
be deemed to be included within the term "Taxes" for the purposes hereof.
3.7 LATE CHARGE. In the event Tenant fails to pay to Landlord, when
due, any installment of rental or other sum to be paid to Landlord which may
become due in this Lease, Landlord will incur additional expenses in an amount
not readily ascertainable and which has not been elsewhere provided for between
Landlord and Tenant. If Tenant should fail to pay to Landlord, when due, any
installment of rental or other sum to be paid hereunder, such unpaid amount
shall bear interest from the due date thereof to the date of payment at an
annual rate equal to the lesser of twelve percent (12%) or the highest rate
permitted by law. Provision for such late charge shall be in addition to all
4
<PAGE> 7
other rights and remedies available to Landlord within this Lease or at law or
in equity and shall not be construed as liquidated damages or limiting
Landlord's remedies in any manner.
3.8 All payments to be made by Tenant to Landlord pursuant to this
Lease shall be made by check payable to Landlord, and delivered to Landlord at
Landlord's Address or to such other person and place as may be designated by
notice in writing from Landlord to Tenant from time to time.
3.9 Unless otherwise agreed in writing between Landlord and Tenant, no
payment by Tenant or receipt by Landlord of a lesser amount than the monthly
installments of rent stipulated shall be deemed to be other than on account of
the above-stipulated rent, nor shall any endorsement or statement on any check
or any letter accompanying any check or payments as rent be deemed an accord
with satisfaction, and Landlord may accept such check for payment without
prejudice to Landlord's right to recover the balance of such rent or pursue any
other remedy in this Lease provided.
ARTICLE IV. CAFETERIA AND FITNESS CENTER
4.1 For as long as Landlord chooses to operate a cafeteria and/or
fitness center at the Complex, Tenant's officers and employees shall have the
right to use such facilities on a non-exclusive basis in common with Landlord's
officers and employees and others entitled thereto, upon payment of the current
fees and charges for such use. In Landlord's sole and unreviewable discretion
and without notice to Tenant, Landlord may discontinue operation of the
cafeteria and/or fitness center at any time.
ARTICLE V. ACCEPTANCE OF THE DEMISED PREMISES.
5.1 The Demised Premises are leased to Tenant in "AS IS" condition.
Landlord shall have no obligation to make any improvements or alterations to
prepare the Demised Premises for Tenant's use. By taking possession of the
Demised Premises, Tenant shall be deemed to have accepted the same and to have
acknowledged that the same fully comply with Landlord's covenants and
obligations under this Lease. Tenant further agrees that, if requested by
Landlord, Tenant will furnish Landlord with a written statement that Tenant has
accepted the Demised Premises and that Landlord has fully complied with
Landlord's covenants and obligations.
ARTICLE VI. USES AND CARE OF PREMISES.
6.1 The Demised Premises may be used only for the purpose or purposes
specified in ARTICLE I, SECTION 1.1(K) above, and for no other purpose or
purposes without the prior written consent of Landlord.
6.2 Tenant shall not use the Demised Premises for any unlawful purposes
or acts; shall not commit or permit any waste or damage to the Demised Premises;
shall use and maintain the Demised Premises in compliance with (I) all laws,
codes, ordinances, rules, regulations and orders (collectively "Laws") of any
governmental authority or agency, including, without limitation, those governing
zoning, health, safety (including fire safety), and the occupational hazards,
pollution and environmental control, and handicapped accessibility (including
but not limited to any such laws imposing upon Landlord or Tenant any duty
respecting or triggered by any change in use or occupancy or any alteration or
improvement of, in or to the Demised Premises, and (II) all reasonable
directions of the Landlord, including the building rules and regulations,
attached hereto as EXHIBIT "C", as may be modified from time to time by Landlord
on reasonable notice to Tenant. Tenant shall use his best efforts to cause its
agents, employees, customers, invitees, licensees, and concessionaires to comply
with the building rules and regulations and with the covenants and agreements of
this Section .
6.3 Tenant shall not, without Landlord's prior written consent, keep
anything within the Demised Premises for any purpose which increases the
insurance premium costs or invalidates any insurance policy carried on the
Demised Premises or other part of the property. Tenant shall pay as additional
rent, upon demand of Landlord, any such increased premium cost due to Tenant's
use or occupation of the property. All property kept, stored or maintained
within the property by Tenant shall be at Tenant's sole risk.
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<PAGE> 8
6.4 Tenant shall not conduct within the Demised Premises any fire,
auction, going out of business, liquidation or bankruptcy sales or operate
within Demised Premises a "Wholesale" or "Factory Outlet" store, a cooperative
store, a "Second Hand" store, a "Surplus" store or a store commonly refereed to
as a "Discount House." Tenant shall not advertise that it sells products or
services at "discount," "cut-price" or "cut-rate" prices. Tenant shall not
permit any objectionable or unpleasant odors to emanate from the Demised
Premises, nor place or permit any radio, television, loud-speaker, or amplifier
on the roof or outside of the Demised Premises, or where the same can be seen or
heard from outside the Demised Premises, nor place an antenna, awning, or other
projection on the exterior of the Demised Premises; nor solicit business or
distribute leaflets or other advertising material on the property outside the
Demised Premises; nor take any other action which, in the exclusive judgment of
Landlord, would constitute a nuisance or would disturb or endanger other tenants
of the Building or unreasonably interfere with their use of their respective
premises, nor do anything which would tend to injure the reputation of the
Building.
6.5 Tenant shall take good care of the Demised Premises and keep the
same free from waste at all times. Tenant shall keep the Demised Premises and
sidewalks, service-ways, and loading areas adjacent to the Demised Premises
neat, clean and free from dirt, rubbish, insects and pests at all times, and
shall store all trash and garbage within the Demised Premises, arranging for the
regular pickup of such trash and garbage at Tenant's expense. Tenant will store
all trash and garbage within the area designated by Landlord for such trash
pickup and removal and only in receptacles of the size, design and color from
time to time prescribed by Landlord. Receiving and delivery of goods and
merchandise and removal of garbage and trash shall be made only in the manner
and areas from time to time prescribed by Landlord. Landlord may, at its sole
option, arrange for collection of all trash and garbage and, should Landlord
exercise such election, the costs thereof will be part of Operating Expenses.
Tenant shall not operate an incinerator or burn trash or garbage within the
property.
6.6 Tenant shall not move any furniture or equipment into or out of the
Demised Premises except at such times as Landlord may from time to time
designate in writing to all tenants.
6.7 Tenant shall include the address and identity of its business
activities in the Demised Premises in all advertisements made by Tenant in which
the address and identity of any similar local business activity of Tenant is
mentioned.
6.8 Tenant shall not allow any animals other than seeing eye dogs onto
the property whatsoever.
6.9 Tenant shall procure, at its sole expense, any permits and licenses
required for the transaction of business in the Demised Premises and otherwise
comply with all applicable laws, ordinances and governmental regulations.
Landlord makes no representation or warranty, expressed or implied, with regard
to the fitness of the Demised Premises or the property for the Tenant's intended
use or for any particular purpose. Tenant shall bear the cost of all alterations
or improvements to the property required by any applicable laws, ordinances or
governmental regulation based upon Tenant's use of the property.
ARTICLE VII. LANDLORD'S SERVICES.
7.1 Landlord covenants and agrees that it will provide the following
services, the cost of which shall be included in Operating Expenses:
(a) keep the foundation, the exterior walls and roof of the Demised
Premises in good repair;
(b) provide heat and air conditioning to maintain the Demised Premises
at a reasonably comfortable temperature between the hours of 8:00 a.m. and 6:00
p.m., Monday through Friday of each week, and 8:00 a.m. and 1:00 p.m. on
Saturday of each week, except holidays recognized by the United States
Government. Landlord shall endeavor to provide HVAC during hours other than the
hours of full operation of the Building, upon request by Tenant at least
twenty-four (24) hours prior to the time Tenant desires such service. Tenant
agrees to cooperate fully with Landlord and to abide by all the regulations and
requirements which Landlord may reasonably prescribe for the proper functioning
and protection of the HVAC equipment and to pay the cost of any damage resulting
from Tenant's failure to comply with the foregoing provisions;
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(c) provide electricity for lighting purposes and operation of ordinary
office equipment, excluding, however, computers other than personal computers,
and other equipment requiring heavier than normal office use of electricity.
Within fifteen (15) days from the date of this Lease, Tenant shall submit to
Landlord its list of office equipment. Within fifteen (15) days from receipt of
such list, Landlord shall inform Tenant whether Landlord, in its reasonable
discretion, has determined that such equipment satisfies the requirements of
this SECTION 7.1(c).
(d) provide janitor services Monday through Friday of each week, except
holidays recognized by the United States Government, it being understood and
agreed, however, that Landlord shall not be liable in any way for any damage or
inconvenience caused by the cessation or interruption of such heating, air
conditioning, electricity, elevator, janitor services occasioned by fire,
accident, strikes, necessary maintenance, alterations, or repairs, or other
causes beyond Landlord's control. It is understood that employees of Landlord
are prohibited as such from receiving any packages or other articles delivered
to the Building for Tenant and that, should any such employee receive any such
packages or articles, he or she in so doing shall be the agent of Tenant and not
of Landlord.
(e) provide hot and cold water and lavatory supplies, it being
understood and agreed that hot and cold water shall be furnished by Landlord
only at those points of supply provided for general use of other tenants in the
Building as well as to Tenant's kitchen;
(f) provide automatically operated elevator service at all times;
(g) list the Tenant's trade name on the Building directory located in
the entrance lobby.
7.2 In the event any public utility company supplying energy, water,
sewer or other utility, or governmental law, regulation, executive or
administrative order requires that Landlord or Tenant reduce or maintain at a
certain level the consumption of a utility and such requirement affects the
HVAC, light, use of or hours of operation of the premises or Building, Landlord
and Tenant shall each adhere to and abide by said laws, regulations or executive
orders without any reduction in Rent.
7.3 Failure by Landlord to any extent to furnish the above described
services, or any cessation thereof, shall not render Landlord liable for damages
to either person or property, nor be construed as an eviction of Tenant, nor
give Tenant the right to an abatement of Rent, nor relieve Tenant from the
obligation to fulfill any covenant or agreement hereof, unless such failure to
provide services is a result of the gross negligence of Landlord or Landlord's
agents. Should any of the Building equipment or machinery break down, or for any
cause cease to function properly, Landlord shall use reasonable diligence to
repair the same promptly, and Tenant shall have no claim for an abatement of
rent or damages on account of any interruptions in service occasioned thereby or
resulting therefrom.
7.4 Landlord shall not be required to make any repairs occasioned by
the act or negligence of Tenant, its agents, employees, subtenants, licensees
and concessionaires, which repairs shall be made by Tenant. In the event that
the Demised Premises should become in need of repairs required to be made by
Landlord hereunder, Tenant shall give immediate written notice thereof to
Landlord and Landlord shall not be responsible in any way for failure to make
such repairs until a reasonable time shall have elapsed after delivery of such
written notice. Landlord's obligation hereunder is limited to repairs specified
in this article only, and Landlord shall have no liability for any damages or
injury arising out of any condition or occurrence causing a need for such
repairs.
The cost of such repairs and maintenance shall be included in the
Operating Expenses. There shall be no abatement of rent and no liability of
Landlord by reason of any injury to or interference with Tenant's business
arising from the making of any repairs, alterations or improvements in or to any
portion of the property or in or to any fixtures, appurtenances and equipment
therein or thereon.
7.5 Tenant shall furnish, maintain and replace all Building
Non-Standard electric light bulbs, tubes and tube casings.
7.6 Tenant shall keep the Demised Premises in good clean condition and
shall, at its sole cost and expense, make all needed repairs and replacements
including replacement of cracked or broken glass, except for repairs and
replacements expressly required to be made by Landlord under
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the provisions of ARTICLE VII, SECTION 7.1, ARTICLE XI, SECTION 11.1 and ARTICLE
XV, SECTION 15.3. If any repairs required to be made by Tenant hereunder are not
made within three (3) days after written notice delivered to Tenant by Landlord,
Landlord may, at its discretion, make such repairs without liability to Tenant
for any loss or damage which may result to its stock or business by reason of
such repairs, and Tenant shall pay to Landlord immediately upon demand as
additional rental hereunder the cost of such repairs plus ten percent (10%) of
the amount thereof and failure to do so shall constitute an event of default
hereunder. At the expiration of this Lease, Tenant shall surrender the Demised
Premises in good condition, reasonable wear and tear excepted, and shall
surrender all keys for the Demised Premises to Landlord and shall inform
Landlord of all combinations on locks, safes and vaults, if any, in the Demised
Premises.
ARTICLE VIII. ALTERATIONS.
8.1 Tenant shall not make any alterations, additions, or improvements
to the Demised Premises without the prior written consent of Landlord, which
Landlord may grant or deny in its sole discretion with respect to structural
alterations, except for the installation of unattached, movable trade fixtures
which may be installed without drilling, cutting or otherwise defacing the
Demised Premises. Landlord shall not unreasonably withhold or delay its consent
with respect to non-structural alterations. All alterations, additions,
improvements and fixtures, except that any Alterations, fixtures or any other
property installed in the Demised Premises at the sole expense of Tenant and
which can be removed without causing material damage to the Building, shall
remain upon and be surrendered with the Demised Premises and become the property
of Landlord at the termination of this Lease, unless Landlord requests their
removal in which event Tenant shall remove the same and restore the Demised
Premises to their original condition at Tenant's expense. Any linoleum,
carpeting or other floor covering which may be cemented or otherwise affixed to
the floor of the Demised Premises is a permanent fixture and shall become the
property of the Landlord without credit or compensation to Tenant.
8.2 All construction work done by Tenant within the Demised Premises
shall be performed in a good and workmanlike manner, in compliance with all
governmental requirements, and the requirements of any contract or deed or trust
to which the Landlord may be a party and in such manner as to cause a minimum of
interference with other construction in progress and with the transaction of
business in the Building. Tenant agrees to indemnify Landlord and hold it
harmless against any loss, liability or damage resulting from such work, and
Tenant shall, if requested by Landlord, furnish bond or other security
satisfactory to Landlord against any loss, liability or damage.
ARTICLE IX. LANDLORD'S RIGHT OF ACCESS AND USE.
9.1 Landlord shall have the right to enter upon the Demised Premises at
any reasonable time for the purpose of inspecting the same, or of making repairs
to the Demised Premises, or of making repairs, alterations or additions to
adjacent premises, or of showing the Demised Premises to prospective purchasers,
Tenants or lenders.
9.2 Landlord may, within one hundred twenty (120) days prior to the
expiration of the term, post and maintain notices, free from hindrance or
control of Tenant.
9.3 Use of the roof above the Demised Premises is reserved to Landlord.
9.4 In addition to the rights specified elsewhere in this Lease,
Landlord shall have the following rights regarding the use of the Demised
Premises or the property by Tenant, its employees, agents, customers and
invitees, each of which may be exercised without notice or liability to Tenant:
(a) Landlord may install such signs, advertisements or notices or
Tenant identification information on or in the Building, on the property or on
the directory board or Tenant access doors as it shall deem necessary or proper.
(b) Landlord shall approve or disapprove, prior to installation, all
types of drapes, shades and other window coverings used in the Demised Premises,
and may control all internal lighting and signage that may be visible from
outside the Demised Premises.
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(c) Landlord may grant to any person the exclusive right to conduct
business or render any service in the Building, provided that such exclusive
right shall not operate to limit Tenant from using the Demised Premises for the
use permitted in ARTICLE I, SECTION 1.1(k).
(d) Landlord may control the use of the property in such manner as it
deems necessary or proper, including by way of illustration and not limitation:
requiring all persons entering or leaving any Building in the Complex to
identify themselves and their business in the Building to a security guard;
excluding or expelling any peddler, solicitor or loud or unruly person from the
Building; closing or limiting access to the Building or any part thereof,
including entrances, corridors, doors and elevators, during times of emergency,
repairs or after regular business hours.
ARTICLE X. SIGNS.
10.1 All signs, decorations and advertising media shall conform in all
respects to the sign criteria established by Landlord for the Complex from time
to time in the exercise of its sole discretion, and shall be subject to the
prior written approval of Landlord as to construction, method of attachment,
size, shape, height, lighting, color, location and general appearance. All signs
shall be kept in good condition and in proper operating order at all times.
Other than Building directory signage and front entrance signage to the Demised
Premises, and Tenant's signage at the Complex existing as of the Commencement
Date, no other signs, advertisements or notices shall be painted, affixed or
displayed: (I) within the Demised Premises which are visible from outside of the
Demised Premises, (II) outside of the Demised Premises, (III) in, about or
outside of the Building, or (IV) on the land associated with Building.
ARTICLE XI. UTILITIES.
11.1 Landlord agrees to cause to be provided and maintained the
necessary mains, conduits and other facilities necessary to supply water,
electricity, gas (if available), telephone service and sewerage service to the
Demised Premises, and the charges therefor shall be included in Operating
Expenses (except telephone service, which shall be paid directly by Tenant).
11.2 Landlord shall not be liable for any interruption or failure
whatsoever in utility services. Landlord does not represent or warrant the
uninterrupted availability of such utilities or building services, and any such
interruption shall not be deemed an eviction or disturbance of Tenant's right to
possession, or render Landlord liable to Tenant for damages by abatement of rent
or otherwise, or relieve Tenant from the obligation to fully and timely perform
its obligations and covenants under this Lease.
ARTICLE XII. INDEMNITY, PUBLIC LIABILITY INSURANCE AND FIRE AND
EXTENDED COVERAGE INSURANCE.
12.1 Landlord shall not be liable to Tenant or to Tenant's employees,
agents or visitors, or to any other person or entity, whatsoever, for any injury
to person or damage to or loss of property on or about the Demised Premises or
the property caused by the negligence or misconduct of Tenant, its employees,
subtenants, licensees or concessionaires, or of any other person entering the
Building under the express or implied invitation of Tenant or arising out of the
use of the Demised Premises by Tenant and the conduct of its business therein,
or arising out of any breach or default by Tenant in the performance of its
obligations hereunder or resulting from any other cause except Landlord's gross
negligence, and Tenant agrees to indemnify Landlord and hold Landlord harmless
from any loss, expense or claims arising out of such damage or injury.
12.2 Landlord and Tenant agree and covenant that neither shall be
liable to the other for loss arising out of damage to or destruction of the
Demised Premises or contents thereof when such loss is caused by any perils
included within standard All Risk property insurance, including flood and
earthquake policies for buildings similar to the buildings in the Complex, in
Montgomery County, Maryland. This agreement shall be binding whether or not such
damage or destruction be caused by negligence of either party or their agents,
licensees, employees or visitors.
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ARTICLE XIII. TENANT'S INSURANCE.
13.1 Tenant agrees, at its sole cost, to carry and keep in full force
and effect at all times during the term of this Lease, a comprehensive general
liability policy with a single limit of at least Ten Million Dollars
($10,000,000.00), including coverage for bodily injury, property damage,
contractual liability for this Lease and personal injury liability. Tenant's
comprehensive general liability insurance policy and certificates evidencing
such insurance shall name Landlord and its property manager of the Complex as
additional insureds and shall also contain a provision by which the insurer
agrees that such policy shall not be canceled except after sixty (60) days
written notice to Landlord. Any liability insurance carried or to be carried by
Tenant hereunder shall be primary over any policy that might be carried by
Landlord. If Tenant shall fail to obtain or maintain such insurance, Landlord
may obtain, after providing written notice to Tenant with a thirty (30) day
opportunity to cure, such insurance on Tenant's behalf and the cost shall be
deemed additional rent and shall be payable upon Landlord's demand.
13.2 Tenant shall obtain All Risk property insurance, including flood
and earthquake insurance, insuring against loss to the Demised Premises
(including any improvements thereon). Such insurance shall be in the form and
amount reasonably satisfactory to Landlord, and Tenant shall, when requested
from time to time by Landlord, provide Landlord with evidence of such insurance.
Such insurance shall contain waiver of subrogation provisions in favor of
Landlord and its agents.
13.3 Tenant agrees to carry and keep in full force and effect at all
times during the term of this Lease, at its sole cost, Worker's Compensation and
Employer's Liability insurance, with a minimum Employer's Liability limit of
$1,000,000 each occurrence.
13.4 At the request of Landlord, Tenant shall obtain business
interruption insurance naming Landlord as loss payee, which insurance shall be
in an amount sufficient to pay all rent due hereunder.
ARTICLE XIV. NON-LIABILITY FOR CERTAIN DAMAGES.
14.1 Landlord and Landlord's agents and employees shall not be liable
to Tenant or any other person or entity whomsoever for any injury to person or
damage to property caused by the Demised Premises or other portions of the
property becoming out of repair or by defect (including latent defects) in or
failure of any building equipment, pipes or wiring, or broken glass, or by the
backing up of drains, or by gas, water, steam, electricity or oil leaking,
escaping or flowing into the Demised Premises, nor shall Landlord be liable to
Tenant or any other person or entity whomsoever from any loss or damage that may
be occasioned by or through the acts or omissions of other tenants of the
Building or of any other persons or entity whomsoever. Tenant shall indemnify
and hold harmless Landlord from any loss, cost, expense or claims arising out of
such injury or damage referred to in this ARTICLE XIV, SECTION 14.1.
14.2 In the event of any violation of this Lease by Landlord, Tenant's
exclusive remedy shall be an action for damages (Tenant waiving the benefit of
any laws granting it a lien upon the property of Landlord and/or upon rent due
the Landlord), but prior to any such action Tenant will give Landlord written
notice specifying such violation with particularity, and Landlord shall
thereupon have thirty (30) days in which to cure any such violation. Unless and
until Landlord fails to so cure any violation after such notice, Tenant shall
not have any remedy or cause of action by reason thereof. All obligations of
Landlord hereunder will be construed as covenants, not conditions; and all such
obligations will be binding upon Landlord only during the period of its
ownership of the property and not thereafter.
The term "Landlord" shall mean only the owner, for the time being, of
the property and in the event of the transfer by such owner of its
interest in the property such owner shall thereupon be released and
discharged from all covenants and obligations of the Landlord
thereafter accruing, but such covenants and obligations shall be
binding during the Lease term upon each new owner for the duration of
such owner's ownership.
Notwithstanding any other provision hereof, Landlord shall not have any
personal liability hereunder. In the event of any breach or default by
Landlord in any term or provision of this Lease, Tenant agrees to look
solely to the equity or interest then owned by Landlord in the land and
improvements which constitute the property; however, in no event shall
any
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deficiency judgment or any money judgment of any kind be sought or
obtained against Landlord or affiliated companies.
ARTICLE XV. DAMAGE BY CASUALTY.
15.1 Tenant shall give immediate written notice to Landlord of any
damage caused to the Demised Premises by fire or other casualty.
15.2 If a Building shall be destroyed or damaged in excess of $100,000
by a casualty, then Landlord may elect either to terminate this Lease as
hereinafter provided with respect to so much of the Demised Premises as may be
located in said Building, or to proceed to rebuild and repair the Demised
Premises. Should Landlord elect to terminate this Lease, it shall give written
notice of such election to Tenant within ninety (90) days after the occurrence
of such casualty. If Landlord should not elect to terminate this Lease, Landlord
shall proceed with reasonable diligence to rebuild and repair the Demised
Premises (and the cost of such repairs in excess of insurance proceeds shall be
included in Operating Expenses).
15.3 Landlord's obligation to rebuild and repair under this ARTICLE XV
shall in any event be limited to restoration to substantially the condition in
which the Demised Premises existed prior to the casualty, and shall be further
limited to the extent of the insurance proceeds available to Landlord for such
restoration, and Tenant agrees that promptly after the completion of such work
by Landlord, it will proceed with reasonable diligence and at its sole cost and
expense to rebuild, repair and restore its signs, fixtures, equipment and
furnishings.
15.4 During the period from the occurrence of the casualty until
Landlord's repairs are substantially completed, there shall be no reduction in
the Annual Base Rent.
15.5 All damage or injury to the Demised Premises or the Building
caused by the act or omission of Tenant, its employees, agents, invitees,
licensees or contractors, shall be promptly repaired by Tenant at Tenant's sole
cost and expense, to the satisfaction of Landlord except to the extent covered
by insurance carried by Landlord; provided, however, Tenant shall pay any
deductible under Landlord's policy required to be paid thereunder.
ARTICLE XVI. EMINENT DOMAIN.
16.1 If the entire Demised Premises or the Complex should be taken for
any public or quasi-public use under governmental law, ordinance or regulation,
or by right of eminent domain or by private purchase in lieu thereof, this Lease
shall terminate and the rent shall be abated during the unexpired portion of
this Lease, effective on the date physical possession is taken by the condemning
authority. If less than the entire Demised Premises or Complex should be taken
as aforesaid, this Lease shall continue in full force and effect and there shall
be no abatement in Annual Base Rent.
16.2 All compensation awarded for any taking (or the proceeds of
private sales in lieu thereof) of the Demised Premises or the property shall be
the property of Landlord, and Tenant assigns its interest in any such award to
Landlord; provided, however, Landlord shall have no interest in any award made
to Tenant for loss of business or the taking of Tenant's fixtures and other
property if a separate award for such items is made to Tenant.
ARTICLE XVII. ASSIGNMENT AND SUBLETTING.
17.1 Tenant shall not assign or transfer all or any portion of its
interest in this Lease or in the Demised Premises, or sublet all or any portion
of the Demised Premises, without the prior written consent of Landlord, which
consent may be withheld at the sole and absolute discretion of the Landlord. Any
assignment or sublease without the Landlord's prior written consent shall be
voidable and, at Landlord's election, shall constitute a default of Tenant
hereunder. Consent by Landlord to one or more assignments or sublettings shall
not operate as a waiver of Landlord's rights with respect to any subsequent
assignment or subletting. The term "sublet" shall be deemed to include the
granting of licenses, concession, and any other rights of occupancy of any
portion of the Demised Premises. Notwithstanding the foregoing, Landlord's
consent shall not be required in the case of an assignment to a person or entity
which controls, is controlled by, or is under common control with, Tenant,
provided that Tenant remains primarily liable under this Lease.
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17.2 In the event of the transfer and assignment by Landlord of its
interest in this Lease or in the property to a person expressly assuming
Landlord's obligations under this Lease, Landlord shall thereby be released from
any further obligations hereunder, and Tenant agrees to look solely to such
successor in interest of the Landlord for performance of such obligations. Any
such security given by Tenant to secure performance of Tenant's obligations
hereunder may be assigned and transferred to such successor in interest, and
Landlord shall thereby be discharged of any further obligations relating
thereto.
17.3 Tenant shall not mortgage, pledge or otherwise encumber its
interest in this Lease or in the Demised Premises.
17.4 In no case may Tenant assign any options granted to Tenant
hereunder, all such options being deemed personal to Tenant and exercisable by
Tenant only.
17.5 Any request by Tenant for approval to sell or sublet the Demised
Premises or to transfer or assign Tenant's interest in this Lease, shall be
accompanied by a processing charge in the amount of Five Hundred Dollars
($500.00) payable to Landlord.
17.6 In the event Landlord approves Tenant subletting this Lease and
the subtenant or assignee is paying to Tenant an amount in excess of that paid
by Tenant to Landlord under this Lease (which such amount shall be deemed the
aggregate sum of all payments by subtenants to Tenant), then fifty percent (50%)
of any such excess amounts shall be deemed rent under this Agreement and shall
be immediately paid by Tenant to Landlord. If any court of law should find this
provision invalid, then, in such event, Tenant shall be prohibited from
subletting or assigning this Lease for an amount in excess of the amounts paid
by Tenant to Landlord pursuant to the terms of this Lease.
ARTICLE XVIII. DEFAULT BY TENANT AND REMEDIES.
18.1 The following events shall be deemed to be events of default by
Tenant under this Lease:
(a) Tenant shall fail to pay any installment of rental or any
other expense required to be paid by Tenant hereunder when due, and such failure
continues for ten (10) days after Tenant receives written notice thereof from
Landlord.
(b) Tenant shall fail to comply with any term, provision or
covenant in this Lease, other than the payment of rental or expenses demanded by
Landlord and shall not cure such failure within thirty (30) days after receiving
written notice thereof from Landlord; provided, however, that if such failure
cannot reasonably be cured within the thirty (30) day period, Tenant shall not
be deemed to be in default if Tenant shall commence such cure within the thirty
(30) day period and thereafter diligently prosecute the same to completion.
(c) Tenant or any guarantor of Tenant's obligations under this
Lease shall become insolvent, or shall make a transfer in fraud of creditors, or
shall make an assignment for the benefit of creditors.
(d) Tenant or any guarantor of Tenant's obligation under this
Lease shall file a petition under any section or chapter of the U.S. Bankruptcy
Code, as amended, or under any similar law or statute of the United States or
any State thereof; or Tenant or any guarantor of Tenant's obligations under this
Lease shall be adjudged bankrupt or insolvent in proceedings filed against
Tenant or any guarantor of Tenant's obligations under this Lease.
(e) A receiver or Trustee shall be appointed for all or
substantially all of the assets of the Tenant or any guarantor of Tenant's
obligations under this Lease.
(f) Tenant shall do or permit to be done anything which
creates a lien upon the Demised Premises.
18.2 Upon the occurrence of any such events of default, Landlord shall
have the option to pursue any one or more of the following remedies without any
notice or demand whatsoever:
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(a) Terminate this Lease in which event Tenant shall
immediately surrender the Demised Premises to Landlord, and if Tenant fails to
do so, Landlord may, without prejudice to any other remedy which he may have for
possession or arrearages in rental, enter upon and take possession of the
Demised Premises and expel or remove Tenant and any other person who may be
occupying said premises or any part thereof, by force if necessary, without
being liable for prosecution or any other claim of damages.
(b) Enter upon and take possession of the Demised Premises and
expel or remove Tenant and any other person who may be occupying said premises
or any part, by force if necessary, without being liable for prosecution or any
claim for damages with or without having terminated the Lease.
(c) Enter upon the Demised Premises by force, if necessary,
without being liable for prosecution or any claim for damages, and do whatever
Tenant is obligated to do under the terms of this Lease, and Tenant agrees to
reimburse Landlord on demand for any expenses which Landlord may incur in
effecting compliance with Tenant's obligations under this Lease, and Tenant
further agrees that Landlord shall not be liable for any damages resulting to
the Tenant from such action.
(d) Alter all locks and other security devices at the Demised
Premises without terminating this Lease and without notice to Tenant.
18.3 In the event Landlord elects to terminate the Lease by reason of
an event of default, then notwithstanding such termination, Tenant shall be
liable for, and shall pay to Landlord, at the address specified for notice to
Landlord, the sum of all rental and other indebtedness accrued to date of such
termination plus, as damage, an amount equal to the present value (using a
discount rate of five percent (5%)) of the difference between (I) the total
Annual Base Rent, as reasonably estimated by Landlord, for the remaining portion
of the Lease term (had such term not been terminated by Landlord prior to the
date of expiration stated in ARTICLE I); and (II) the fair rental value of the
Demised Premises for such period.
18.4 In the event that Landlord elects to repossess the Demised
Premises without terminating the Lease, then Tenant shall be liable for and
shall pay to Landlord, at the address specified for notice to Landlord, all
rental and other indebtedness accrued to the date of such repossession, plus, as
damage, an amount equal to the total Annual Base Rent, as reasonably estimated
by Landlord, for the remainder of the Lease term until the date of expiration of
the term as stated in ARTICLE I diminished by any net sums thereafter received
by Landlord through reletting the Demised Premises during said period (after
deducting expenses incurred by Landlord as provided in ARTICLE XVIII, SECTION
18.5 hereof). In no event shall Tenant be entitled to any excess of any rental
obtained by reletting over and above the rental herein reserved. Actions to
collect amounts due from Tenant to Landlord may be brought from time to time on
one or more occasions, without the necessity of Landlord's waiting until
expiration of the Lease term.
18.5 In case of any event of default or breach by Tenant, Tenant shall
also be liable for and shall pay to Landlord, at the address specified for
notice herein, in addition to any sum provided to be paid above, brokers fees
incurred by Landlord in connection with reletting the whole or part of the
Demised Premises; the costs of removing and storing Tenant's or other occupant's
property; the cost of repairing, altering, remodeling or otherwise putting the
Demised Premises into condition acceptable to a new Tenant or Tenants, and all
reasonable expenses incurred by Landlord in enforcing or defending Landlord's
rights and/or remedies, including reasonable attorneys' fees.
18.6 In the event of termination or repossession of the Demised
Premises for an event of default, Landlord shall not have any obligation to
relet or attempt to relet the Demised Premises, or any portion thereof, or to
collect rental after reletting; Landlord may relet the whole or any portion of
the Demised Premises for any period, to any tenant, and for any use and purpose.
18.7 If Tenant should fail to make any payment or cure any default
hereunder within the time herein permitted, Landlord, without being under any
obligations to do so and without waiving such default, may make such payment
and/or remedy such other default for the account of Tenant (and enter the
Demised Premises for such purpose), and thereupon Tenant shall be obligated to,
and
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agrees to, pay Landlord, as additional rent, upon demand, all costs, expenses
and disbursements (including reasonable attorneys' fees) incurred by the
Landlord in taking such remedial action.
18.8 In the event that Landlord shall have taken possession of the
Demised Premises pursuant to the authority herein granted, then Landlord shall
have the right to keep in place and use all of the furniture, fixtures, and
equipment at the Demised Premises, including that which is owned by or Leased to
Tenant, at all times prior to any foreclosure thereon by Landlord or
repossession thereof by any Landlord thereof or third party having a lien
thereon. Landlord shall also have the right to remove from the Demised Premises
(without the necessity of obtaining a distress warrant, writ of sequestration or
other legal process) all or any portion of such furniture, fixtures, equipment
and other property located thereon and place same in storage at any premises
within the County in which the Demised Premises is located; and in such event,
Tenant shall be liable to Landlord for costs incurred by Landlord in connection
with such removal and storage and shall indemnify and hold harmless Landlord
from all loss, damage, cost, expense and liability in connection with such
removal and storage. Landlord shall also have the right to relinquish possession
of all or any portion of such furniture, fixtures, equipment and other property
to any person ("Claimant") claiming to be entitled to possession thereof who
presents to Landlord a copy of any instrument represented to Landlord by
Claimant to have been executed by Tenant (or any predecessor of Tenant) granting
Claimant the right under various circumstances to take possession of such
furniture, fixtures, equipment or other property, without the necessity on the
part of Landlord to inquire into the authenticity of said instrument's copy of
Tenant's or Tenant's predecessor's signature thereon and without the necessity
of Landlord's making any nature of investigation or inquiry as to the validity
of the factual or legal basis upon which Claimant purports to act; and Tenant
agrees to indemnify and hold Landlord harmless from all costs, expense, loss,
damage, and liability incident to Landlord's relinquishment of possession of all
or any portion of such furniture, fixtures, equipment or other property by
Claimant. The rights of Landlord herein stated shall be in addition to any and
all other rights which Landlord has or may hereafter have at law or in equity;
and Tenant stipulates and agrees that the rights herein granted Landlord are
commercially reasonable.
ARTICLE XIX. HOLDING OVER.
19.1 In the event Tenant remains in possession of the Demised Premises
after the expiration of this Lease and without the execution of a new Lease, it
shall be deemed to be occupying said Demised Premises as a Tenant from month to
month at a rental equal to the rental herein provided, plus fifty percent (50%)
of such amount and otherwise subject to all the conditions, provisions and
obligations of this Lease insofar as the same are applicable to a month to month
tenancy.
ARTICLE XX. SUBORDINATION AND ATTORNMENT
20.1 Tenant accepts this Lease subject and subordinate to any mortgage,
deed of trust or other lien presently existing or hereafter created upon the
property and to any renewals and extensions thereof. Landlord is irrevocably
vested with full power and authority to subordinate this Lease to any mortgage,
deed of trust or other lien hereafter placed upon the property and Tenant agrees
upon demand to execute such further instrument subordinating this Lease as
Landlord may request, and if Tenant shall fail at any time to execute, seal and
deliver any such instrument to Landlord, in addition to any other remedies
available to it in consequence thereof, Landlord may execute, seal and deliver
the same as the attorney in fact of Tenant in Tenant's name, place and stead,
and Tenant irrevocably makes, constitutes and appoints Landlord, its successors
and assigns, as such attorney in fact for that purpose.
20.2 At the option of any transferee of the Landlord's interest in the
property pursuant to a foreclosure or similar proceeding under any mortgage,
deed of trust or other lien upon the property, whether now existing or hereafter
created, Tenant shall attorn to and be bound to any such transferee under the
terms, covenants and conditions of this Lease for the balance of the term hereof
remaining and any extensions or renewals hereof which may be affected in
accordance with any option therefore in this Lease, with the same force and
effect as if the transferee was the Landlord, and Tenant does hereby agree to
attorn to such transferee, at the transferee's option, the attornment to be
effective and self operative without the execution of any further instruments on
the part of Tenant, immediately upon the transferee succeeding to the interest
of the Landlord, provided said transferee provides written notice to the Tenant
of its election to accept such attornment within sixty (60) days of the subject
transfer.
14
<PAGE> 17
In the event any such transferee does elect to accept such attornment,
the Tenant hereby agrees that said transferee shall not be (a) liable for any
act or admission of Landlord under the Lease prior to the subject transfer or
(b) subject to any offsets or defenses which Tenant might have against Landlord
arising from events or circumstances existing prior to the subject transfer, or
(c) bound by any rent or additional rent which Tenant might have paid in advance
for more than the month of the subject transfer, or, (d) bound by any amendment
or modification of this Lease made without the foreclosing party's prior written
consent.
ARTICLE XXI. ESTOPPEL CERTIFICATES.
21.1 Tenant agrees to furnish from time to time, when requested by
Landlord, the holder of any deed of trust or mortgage or the Landlord under any
ground Lease covering all or any part of the property or any interest of
Landlord therein, an estoppel certificate signed by Tenant confirming and
containing such factual certifications and representations deemed appropriate by
Landlord. The holder of any such deed of trust or mortgage or the Landlord under
any such ground Lease and Tenant shall, within ten (10) days following receipt
of said proposed estoppel certificate from Landlord, return a fully-executed
copy of said certificate to Landlord. In the event Tenant fails to return a
fully-executed copy of such certificate to Landlord within the foregoing ten-day
period, then Tenant shall be deemed to have approved and confirmed all of the
terms, certifications and representations contained in such certificate.
ARTICLE XXII. NOTICES.
22.1 Wherever any notice is required or permitted hereunder, such
notice shall be in writing. Any notice or document required or permitted to be
delivered hereunder shall be deemed to be delivered, whether actually received
or not when deposited in the United States mail, postage prepaid, certified or
registered mail, return receipt requested, addressed to the parties hereto at
the respective addresses set out in ARTICLE I, SECTION 1.1b & 1.1d above or such
other address as they may have hereafter specified by written notice.
ARTICLE XXIII. BROKERS.
23.1 Landlord and Tenant represent and warrant to each other that it
has not employed a broker in carrying on the negotiations relating to this
Lease. Tenant further warrants and covenants that is has not relied and will not
rely upon any oral representation about the property, other tenants' occupancy,
uses or related matters made by any real estate agent, real estate broker, agent
or employee of Landlord, or any other party. Tenant shall indemnify and hold
Landlord harmless, from and against any cost, liability or expense (including
attorney's fees and disbursements) incurred as a result of the assertion(s) or
claim(s) by any person, firm or entity for brokerage or other commissions or
finder's fees based upon the claiming person's alleged dealings with Tenant or
any of its employees, agents or representatives.
ARTICLE XXIV. APPROVAL AND CHANGES REQUIRED BY LENDER.
24.1 Any mortgagee of the property, or of Landlord's interest therein,
may have the right to approve this Lease, and in the event such approval is not
granted, Landlord shall have the right to terminate this Lease as hereinafter
set forth. In the event that any mortgagee of the property, or of Landlord's
interest therein, requires, as a condition of such financing, modifications to
this Lease which (I) do not materially and adversely affect Tenant's use of the
Demised Premises as herein permitted; and (II) do not increase the rent or other
sums required to be paid by Tenant hereunder; then Landlord may submit to Tenant
a written amendment of this Lease incorporating such required changes. Tenant
shall execute such amendment within ten (10) days after the same has been
submitted to Tenant. If Tenant fails to so execute and deliver such amendment,
then Landlord shall thereafter have the right, at its sole option, to (A)
execute such amendment on Tenant's behalf, Tenant appointing Landlord its
irrevocable attorney-in-fact, said power being coupled with an interest to
execute such amendment; or (B) to cancel this Lease. Such cancellation option
shall be exercisable by Landlord's giving Tenant written notice of such
termination; immediately whereupon this Lease shall be canceled and terminated
and, upon relinquishment of possession of the Demised Premises by Tenant in the
condition required pursuant to the terms hereof, both Landlord and Tenant shall
thereupon be relieved from any and all further liability or obligation
hereunder.
15
<PAGE> 18
ARTICLE XXV. PARKING.
25.1 During the Term of this Lease, Tenant and its employees and guests
shall have use of all parking areas in the Complex, without charge, for parking
purposes only, on an unreserved, non-exclusive basis in common with others
entitled to use of said parking areas. Landlord shall have general possession,
management and control of the parking areas, and may from time to time adopt
reasonable rules and regulations pertaining to the use thereof. Landlord
reserves the right to designate reserved parking in the parking areas.
ARTICLE XXVI. WAIVER OF TRIAL BY JURY AND RIGHT TO REDEEM.
26.1 Landlord and Tenant each agree to and they waive trial by jury in
any action, proceeding or counterclaim brought by either of the parties hereto
against the other on any matters whatsoever arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant, Tenant's use
or occupancy of said premises and/or any claim of injury or damage, and
statutory remedy. Tenant also hereby agrees that the provisions of SECTION
8-401(e) OF THE MARYLAND REAL PROPERTY CODE shall not apply to this Lease and
Tenant hereby waives its rights thereunder.
ARTICLE XXVII. FURNISHING OF FINANCIAL STATEMENTS.
27.1 Within ten (10) days of the execution of this Lease, Tenant shall
furnish Landlord financial statements outlining Tenant's current financial
condition if applicable, as of the last annual audit or the last regularly
prepared report including tax returns. Over the term of this Lease and any
extensions, within ten (10) days of Landlord's written request, Tenant shall
furnish financial statements outlining Tenant's current financial condition. The
foregoing requirements shall not apply during any period of time in which
Tenant's stock is listed on a national stock exchange.
ARTICLE XXVIII. OCCUPATIONAL AND ENVIRONMENTAL COMPLIANCE.
28.1 Tenant shall not in any manner use, maintain or allow the use or
maintenance of the property in violation of any law, ordinance, statute,
regulation, rule or order (collectively "Laws") of any governmental authority,
including but not limited to Laws governing zoning, health, safety (including
fire safety), occupational hazards, and pollution and environmental control.
Tenant shall not use, maintain or allow the use or maintenance of the property
or any part thereof to treat, store, dispose of, transfer, release, convey or
recover hazardous materials nor shall Tenant otherwise, in any manner, possess
or allow the possession of any hazardous, materials on or about the property;
provided, however, any hazardous material lawfully permitted and generally
recognized as necessary and appropriate for general office use may be stored and
used in the Demised Premises, so long as (I) such storage and use is in the
ordinary course of Tenant's business permitted under this Lease; (II) such
storage and use is performed in compliance with all applicable laws and
regulations and in compliance with the highest standards prevailing in the
industry for the storage and use of such materials; and (III) Tenant delivers
prior written notice to Landlord of the identity of and information regarding
such materials as Landlord may require. Tenant shall immediately notify Landlord
of the presence or suspected presence of any hazardous material on or about the
property and shall deliver to Landlord any notice received by Tenant relating
thereto.
Landlord and its agents shall have the right, but not the duty, to
inspect the Demised Premises and conduct tests thereon at any time to determine
whether or the extent to which there is hazardous materials on the Demised
Premises. Landlord shall have the right to immediately enter upon the Demised
Premises to remedy any contamination found thereon. In exercising its rights
herein, Landlord shall use reasonable efforts to minimize interference with
Tenant's business but such entry shall not constitute an eviction of Tenant, in
whole or in part, and Landlord shall not be liable for any interference, loss,
or damage to Tenant's property or business caused thereby. If any lender or
governmental agency shall ever require testing to ascertain whether there has
been a release of hazardous materials, then the reasonable costs thereof shall
be reimbursed by Tenant to Landlord upon demand as additional rent if such
requirement arose in whole or in part because of Tenant's use of the Demised
Premises. Tenant shall execute affidavits, representations and the like from
time to time, at Landlord's request, concerning Tenant's best knowledge and
belief regarding the presence of any hazardous materials on the property or
Tenant's intent to store or use hazardous materials on the property. Tenant
shall indemnify and hold harmless Landlord from any and all claims, loss,
16
<PAGE> 19
liability, costs, expenses or damage, including attorneys' fees and costs of
remediation and compliance, incurred by Landlord in connection with any breach
by Tenant of its obligations under this section. The covenants and obligations
of Tenant hereunder shall survive the expiration or earlier termination of this
Lease.
28.2 For the purposes of this ARTICLE XXVIII, the term "hazardous
materials" shall mean (I) any and all hazardous waste, toxic chemicals,
materials or substances occurring in the air, water, soil or ground water at the
property by reason of which the Tenant or Landlord would be subject to an
injunction action and/or any damages, penalties, clean up costs or other
liability under the provisions of the COMPREHENSIVE ENVIRONMENTAL RESPONSE,
COMPENSATION AND LIABILITY ACT 42 U.S.C. SECTION 9601 ET SEQ., THE SUPERFUND
AMENDMENTS AND REAUTHORIZATION ACT OF 1986, 42 U.S.C. SECTION 9601 (20D), THE
RESOURCE CONSERVATION AND RECOVERY ACT (THE SOLID WASTE DISPOSAL ACT), 42 U.S.C.
SECTION 9601 ET SEQ., THE FEDERAL WATER POLLUTION CONTROL ACT, AS AMENDED BY THE
CLEAN WATER ACT OF 1977, 33 U.S.C. SECTION 1251 ET SEQ., THE CLEAN AIR ACT OF
1966, 42 U.S.C. SECTION 7401 ET SEQ., AND THE TOXIC SUBSTANCES CONTROL ACT, 15
U.S.C. SECTION 2601, ET SEQ.; (II) any "oil, petroleum proDuCTs and their
by-products" as defined by the MARYLAND ENVIRONMENTAL CODE ANNOTATED SECTION
4-411(A)(3); as amended from time to time and regulations promulgated
thereunder; (III) any "hazardous substance" as defined by the MARYLAND
ENVIRONMENTAL CODE ANNOTATED, TITLE 7, SUBTITLE 2, as amended from time to time
and regulations promulgated thereunder; and (iv) any substance the presence of
which is prohibited or controlled by any other federal, state or local laws,
regulations, statutes, or ordinances now in a force or hereafter enacted
relating to waste disposal or environmental protection with respect to
hazardous, toxic or other substances generated, produced, leaked, released,
spilled, stored or disposed of at or from the property. Hazardous material shall
also include any other substance which by law requires special handling in its
collection, storage, treatment or disposal, but not including small quantities
of materials present on the property in retail containers, which would not be
prohibited, regulated or controlled under applicable environmental laws.
ARTICLE XXIX MISCELLANEOUS.
29.1 Nothing herein contained shall be deemed or construed by the
parties hereto, nor by any third party, as creating the relationship of
principal and agent or of partnership or a joint venture between parties hereof,
it being understood and agreed that neither the method of computation of rental,
nor any other provisions contained herein, nor the acts of the parties hereto,
shall be deemed to create any relationship between the parties hereto other than
the relationship of Landlord and Tenant. Whenever herein the singular number is
used, the same shall include the plural, and words of gender shall include each
other gender.
29.2 The captions used herein are for convenience only and do not limit
or amplify the provisions hereof.
29.3 One or more waivers of any covenant, term or condition of this
Lease by Landlord shall not be construed as a waiver of a subsequent breach of
the same covenant, term or condition. The consent or approval by Landlord shall
not be construed as a waiver of a subsequent breach of the same covenant, term
or condition. The consent or approval by Landlord to or of any act by the Tenant
shall not be deemed to waive or render unnecessary consent to or approval of any
subsequent similar act.
29.4 Whenever a period of time is herein prescribed for action to be
taken by the Landlord, Landlord shall not be liable or responsible for, and
there shall be excluded from the computation of any such period of time, any
delays due to strikes, riots, acts of God, shortages of labor or materials, war,
government laws, regulations or restrictions or any other cause of any kind
whatsoever which is beyond the reasonable control of Landlord. At any time when
there is outstanding a mortgage, deed of trust or similar security instrument
covering Landlord's interest in the Demised Premises, Tenant may not exercise
any remedies for default by Landlord hereunder unless and until the holder of
the indebtedness secured by such mortgage, deed of trust or similar instrument
shall have received written notice of such default and a reasonable time for
such default shall thereafter have elapsed.
29.5 This Lease contains the entire agreement between the parties, and
no agreement shall be effective to change, modify or terminate this Lease in
whole or in part unless such agreement is in writing and duly signed by the
party against whom enforcement of such change, modification or termination is
sought.
17
<PAGE> 20
29.6 The laws of the State of Maryland, without reference to its
conflicts of laws principles, shall govern the interpretation, validity,
performance and enforcement of this Lease. If any provision of this Lease should
be held to be invalid or unenforceable, the validity and enforceability of the
remaining provisions of this Lease shall not be affected thereby.
29.7 The terms, provisions and covenants contained in this Lease shall
inure to the benefit of and be binding upon the parties hereto and their
respective heirs, successors in interest and legal representatives except as
otherwise herein expressly provided.
29.8 Tenant shall not record this Lease or any memorandum or other
document referring to this Lease without the express written permission of
Landlord. Landlord, however, may record this Lease or any related document
without the consent or jointer of Tenant.
29.9 Tenant shall pay before delinquency all costs for work done or
caused to be done by Tenant in the Demised Premises which could result in any
lien or encumbrance in respect of such work and shall indemnify, defend and hold
harmless Landlord against any claim, loss, cost, demand and legal or other
expenses, whether in respect of any lien or otherwise, arising out of the supply
of material, services or labor for such work. Tenant shall immediately notify
Landlord of any such lien, claim of lien or other action of which it has or
reasonably should have knowledge and which affect the title to the Complex or
any part thereof, and shall cause the same to be removed within fifteen (15)
days (or such additional time as Landlord may consent to in writing) after its
filing, creation or assertion, whichever shall first occur, failing which
Landlord may declare Tenant in default hereunder and take such action as
Landlord deems necessary to remove the same and the entire cost thereof shall be
immediately due and payable by Tenant to Landlord as additional rent hereunder.
29.10 The submission of this Lease for examination does not constitute
a reservation of or an option for the Demised Premises nor does it constitute an
offer to lease the Demised Premises until signed by Landlord and this Lease
becomes effective as a Lease only upon execution and delivery thereof by both
Landlord and Tenant.
29.11 Time shall be of the essence for this Lease.
29.12 If any term, covenant or condition of this Lease or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such term, covenant or condition to persons or circumstances other than those as
to which it is held invalid or unenforceable, shall not be affected thereby and
each term, covenant or condition of this Lease shall be valid and be enforced to
the fullest extent permitted by law.
29.13 It is agreed that, for the purpose of any suit brought or based
on this Lease, this Lease shall be construed to be a divisible contract, to the
end that successive actions may be maintained thereon as successive periodic
sums shall mature or be due hereunder, and it is further agreed that failure to
include in any suit or action any sum or sums then matured or due shall not be a
bar to the maintenance of any suit or action for the recovery of said sum or
sums so omitted; and Tenant agrees that it will not, in any suit or suits
brought or arising under this Lease for a matured sum for which judgment has not
previously been obtained or entered, plead, rely on or interpose the defenses of
res judicata, former recovery, extinguishment, merger, election or remedies or
other similar defense as a defense to said suit or suits.
ARTICLE XXX. ATTACHMENTS.
The Following Attachments are attached hereto and made a part hereof:
EXHIBIT A - PLAN OF THE COMPLEX
EXHIBIT B - DEMISING PLAN
EXHIBIT C - RULES AND REGULATIONS
IN WITNESS HEREOF, the parties hereunto signed their names, as their
free act and deed on the day and year first above written, and do hereby
acknowledge and accept this Lease agreement.
18
<PAGE> 21
ATTEST: LANDLORD: MANOR CARE, INC.
_____________________ BY:__________________________
TITLE: _______________________
ATTEST: TENANT: CHOICE HOTELS HOLDINGS, INC.
(TO BE RENAMED CHOICE HOTELS
INTERNATIONAL, INC.)
_______________________ BY: __________________________
TITLE: ________________________
19
<PAGE> 22
EXHIBIT A
[SITE PLAN/BUILDING LOCATION]
<PAGE> 23
EXHIBIT B (nine sheets)
[FLOOR PLAN - DEMISED PREMISES - 10720 BUILDING 1ST FLOOR]
<PAGE> 24
[FLOOR PLAN - DEMISED PREMISES - 10720 BUILDING 2ND FLOOR]
<PAGE> 25
[FLOOR PLAN - BUILDING 50 FIRST FLOOR]
<PAGE> 26
[FLOOR PLAN - BUILDING 50 SECOND FLOOR]
<PAGE> 27
[FLOOR PLAN - BUILDING 50 THIRD FLOOR]
<PAGE> 28
[FLOOR PLAN - BUILDING 50 FOURTH FLOOR]
<PAGE> 29
[FLOOR PLAN - BUILDING 50 FIFTH FLOOR]
<PAGE> 30
[FLOOR PLAN - BUILDING 50 SIXTH FLOOR]
<PAGE> 31
[FLOOR PLAN - BUILDING 50 SEVENTH FLOOR]
<PAGE> 32
EXHIBIT C
RULES AND REGULATIONS
1. The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, corridors or halls or other parts of the Building not occupied by any
Tenant shall not be obstructed or encumbered by any Tenant or used for any
purpose other than ingress and egress to and from the Demised Premises. Landlord
shall have the right to control and operate the public portions of the Building,
and the facilities furnished for the common use of the Tenants, in such manner
as Landlord deems best for the benefit of the Tenants generally. No Tenant shall
permit the visit to the Demised Premises of persons in such numbers or under
such conditions as to interfere with the use and enjoyment by other Tenants of
the entrances, corridors, elevators and other public portions or facilities of
the Building.
2. No awnings or other projections shall be attached to the outside
walls of the Building without the prior written consent of the Landlord. No
drapes, blinds, shades, or screens shall be attached to or hung in, or used in
connection with any window or door of the Demised Premises, without the prior
written consent of the Landlord. Such awnings, projections, curtains, blinds,
shades, screens, or other fixtures must be of a quality, type, design, and
color, and attached in the manner approved by Landlord. Landlord agrees that it
will not unreasonably withhold its consent to any such request by Tenant.
3. No sign, advertisement, notice or other lettering shall be
exhibited, inscribed, painted, or affixed by any Tenant on any part of the
outside or inside of the Demised Premises or building without the prior written
consent of the Landlord. In the event of the violation of the foregoing by any
Tenant, Landlord may remove same without any liability, and may charge expense
incurred by such removal to the Tenant or Tenants violating this rule. Interior
signs on doors and directory tablet shall be inscribed, painted or affixed for
each Tenant by the Landlord at the expense of such Tenant, and shall be of a
size, color and style acceptable to the Landlord.
4. No show cases or other articles shall be put in front of or affixed
to any part of the exterior of the Building, nor placed in the halls, corridors
or vestibules, without the prior written consent of the Landlord.
5. The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed, and no
sweepings, rubbish, rags, or other substances shall be thrown therein. All
damages resulting from any misuse of the fixtures shall be borne by the Tenant
who, or whose servants, employees, agents, visitors or licensees, shall have
caused the same.
6. There shall be no unnecessary marking, painting, drilling into or in
any way defacing any part of the Demised Premises or the Building. No boring,
cutting or stringing of wires shall be permitted. Tenant shall not construct,
maintain, use or operate within the Demised Premises or elsewhere within or on
the outside of the Building, any electric device, wiring or apparatus in
connection with a loud speaker system or other sound system.
7. No bicycles, vehicles or animals, birds or pets of any kind shall be
brought into or kept in or about the Demised Premises except seeing eye dogs. No
Tenant shall cause or permit any unusual or objectionable odors to be produced
upon or permeate from the Demised Premises, except as may be permitted in
accordance with the Use and Occupancy permit.
8. No space in the Building shall be used for manufacturing, for the
storage of merchandise, or for the sale of merchandise, goods or property of any
kind at auction.
9. No Tenant shall make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with occupants of this or neighboring
buildings or premises or those having business with them, whether by the use of
any musical instrument, radio, talking machine, unmusical noise, whistling,
singing, or in any other way. No Tenant shall throw anything out of the doors or
windows or down the corridors or stairs.
<PAGE> 33
10. No inflammable, combustible or explosive fluid, chemical or
substance as defined by the Environmental Protection Agency shall be brought or
kept upon the Demised Premises.
11. No additional locks or bolts of any kind shall be placed upon any
of the doors, or windows by any Tenant, nor shall any changes be made in
existing locks or the mechanism thereof, except as may be required by Tenant as
a financial institution. The doors leading to the corridors or main halls shall
be kept closed during business hours except as they may be used for ingress or
egress. Each Tenant shall, upon the termination of his tenancy, restore to
Landlord all keys of stores, offices, storage, and toilet rooms either furnished
to, or otherwise procured by, such Tenant, and in the event of the loss of any
keys, so furnished, such Tenant shall pay to the Landlord the cost thereof.
12. All removals, or the carrying in or out of any safes, freight,
furniture or bulky matter of any description must take place during the hours
which the Landlord or its Agent may determine from time-to-time. The Landlord
reserves the right to inspect all freight to be brought into the Building and to
exclude from the Building all freight which violates any of these Rules and
Regulations or the Lease of which these Rules and Regulations are a part.
13. Any person employed by any Tenant to do janitor work within the
Demised Premises must obtain Landlord's consent and such person shall, while in
the Building and outside of said Demised Premises, comply with all instructions
issued by the Superintendent of the Building. No Tenant shall engage or pay any
employees on the Demised Premises, except those actually working for such Tenant
on said premises.
14. Landlord shall have the right to prohibit any advertising by any
Tenant which, in Landlord's reasonable opinion, tends to impair the reputation
of the Building or its desirability as a building for offices, and upon written
notice from Landlord, Tenant shall refrain from or discontinue such advertising.
15. The premises shall not be used for lodging or sleeping or for any
immoral or illegal purpose.
16. Each Tenant, before closing and leaving the Demised Premises at any
time, shall see that all windows are closed.
17. The requirements of Tenants will be attended to only upon
application of the office of the Building. Employees shall not perform any work
or do anything outside of the regular duties, unless under special instruction
from the management of the Building.
18. Access plates to under floor conduits shall be left exposed. Where
carpet is installed, carpet shall be cut around access plates.
19. Mats, trash and other objects shall not be placed in the public
corridors.
20. The Landlord does not maintain suite finishes which are
non-standard, such as kitchens, bathrooms, wallpaper, special lights, etc.
However, should the need for repairs arise, the Landlord will arrange for the
work to be done at the Tenant's expense.
21. Violation of these rules and regulations, or any amendments
thereto, shall be sufficient cause for termination of this Lease at the option
of the Landlord.
22. Smoking in the Demised Premises or anywhere else in the Building is
prohibited.
<PAGE> 1
Exhibit 10.09
OFFICE LEASE
BY AND BETWEEN
CHOICE HOTELS HOLDINGS, INC.
A DELAWARE CORPORATION (TO BE RENAMED CHOICE HOTELS INTERNATIONAL, INC.)
"TENANT"
AND
MANOR CARE, INC., A DELAWARE CORPORATION
"LANDLORD"
AT
11555 DARNESTOWN ROAD
GAITHERSBURG, MARYLAND 20878-3200
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Title Page #
- ----- ------
<S> <C> <C>
Article I. Definitions and Certain Basic Provisions 1
Article II. Granting Clause 2
Article III. Rental 2
Article IV. Cafeteria and Fitness Center
Article V. Construction and Acceptance of the
Demised Premises 5
Article VI. Uses and Care of Demised Premises 6
Article VII. Landlord's Services 7
Article VIII. Alterations 9
Article IX. Landlord's Right of Access and Use 9
Article X. Signs 10
Article XI. Utilities 10
Article XII. Indemnity, Public Liability Insurance and
Fire and Extended Coverage Insurance 10
Article XIII. Tenant's Insurance 10
Article XIV. Non-Liability for Certain Damages 11
Article XV. Damage by Casualty 12
Article XVI. Eminent Domain 12
Article XVII. Assignment and Subletting 13
Article XVIII. Default by Tenant and Remedies 13
Article XIX. Holding Over 16
Article XX. Subordination and Attornment 16
Article XXI Estoppel Certificates 17
Article XXII. Notices 17
Article XXIII. Brokers 17
Article XXIV. Approval and Changes Required by Lender 17
Article XXV. Parking 17
Article XXVI. Waiver of Trial by Jury 18
Article XXVII. Furnishing of Financial Statements 18
Article XXVIII. Occupational and Environmental Compliance 18
Article XXIX. Miscellaneous 19
Article XXX. Attachments 21
Article XXXI. Status as Sublease
</TABLE>
<PAGE> 3
OFFICE LEASE
This Lease is entered into this ____ day of ______________ 1996, by and between
Manor Care, Inc., a Delaware corporation ("Landlord") and Choice Hotels
Holdings, Inc., a Delaware corporation (to be renamed Choice Hotels
International, Inc.) ("Tenant").
RECITALS:
A. Landlord is implementing a restructuring of itself in which,
among other things, it will distribute to its shareholders all
of the common stock of Tenant, pursuant to a Distribution
Agreement dated as of __________________, 1996, between
Landlord and Tenant (the "Distribution Agreement") as a result
of which Landlord and Tenant will become separate publicly
traded corporations.
B. Landlord has acquired an office building in Gaithersburg,
Maryland, as its new corporate headquarters. Landlord and
Tenant desire to provide in this Lease for the occupancy by
Tenant, after said stock distribution, of premises in said
office building.
C. Landlord and Tenant each have determined that the rental and
other terms and conditions of this Lease are commercially
reasonable, based upon market conditions in the Gaithersburg,
Maryland area.
ARTICLE I. DEFINITIONS AND CERTAIN BASIC PROVISIONS.
1.1
<TABLE>
<S> <C>
(a) "LANDLORD": Manor Care, Inc,
a Delaware corporation
(b) "LANDLORD'S ADDRESS": 11555 Darnestown Road
Gaithersburg, Maryland 20878-3200
Attn.: General Counsel
(Re: Real Estate)
(c) "TENANT": Choice Hotels Holdings, Inc., a
Delaware corporation (to be renamed Choice
Hotels International, Inc.)
(d) "TENANT'S ADDRESS": 10750 Columbia Pike
Silver Spring, Maryland 20910
Attn.: General Counsel
(Re: Real Estate)
</TABLE>
(e) "COMPLEX" shall refer to the complex of two buildings
having an address of 11555 Darnestown Road, Gaithersburg, Montgomery County,
Maryland, consisting of: (i) an office building with approximately 377,126 gross
square feet of space (hereinafter the "Office Building"); and (ii) a warehouse
and distribution building with approximately 200,000 gross square feet of space
(hereinafter the "Warehouse Building"). A plan of the Complex is attached hereto
as Exhibit A.
(f) "DEMISED PREMISES": approximately 100,000 gross square
feet of office space on the "lake level", ground floor, and/or second floor of
the Office Building, which three floors contain a total of 215,017 gross square
feet. The exact location of the Demised Premises within said larger block of
space shall be determined by mutual agreement of Landlord and Tenant. Landlord
and Tenant acknowledge that portions of the Demised Premises are currently
leased by Landlord to National Geographic Society, a District of Columbia
non-profit corporation ("National Geographic") under an Office Lease Agreement
dated August 30, 1995 (the "National Geographic Lease"). The term of the
National Geographic Leases expires on August 31, 1997 (the "National Geographic
Termination Date," as it may be changed by mutual agreement of Landlord and
National Geographic). However, pursuant to Article 41 of the National Geographic
Lease, National Geographic has the right
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to terminate the National Geographic Lease as to the entire premises leased
therein or portions thereof and surrender such space to Landlord. Accordingly,
Landlord and Tenant hereby agree that (i) prior to the National Geographic
Termination Date, the Demised Premises shall consist of those portions of the
Demised Premises so surrendered by National Geographic; and (ii) from and after
the National Geographic Termination Date, the Demised Premises shall consist of
the entire 100,000 gross square feet of space leased hereunder. Either party may
elect at its expense to have the rentable area of the Demised Premises measured
by Landlord's architect in accordance with the Washington Board of Realtors
Standard Floor Area Measure, and to have this Lease amended to state the
rentable area of the Demised Premises as so measured.
(g) "LEASE TERM": The period of time commencing from the
Commencement Date, as defined below, and terminating thirty (30) months after
such Commencement Date, unless such termination date is other than the last day
of a calendar month, in which event this Lease shall terminate on the last day
of the calendar month in which such date falls. Landlord shall give Tenant prior
written notice of the proposed sale of the Complex or any building therein.
Either party may elect to terminate this Lease effective as of the date of such
sale by written notice given to the other party within thirty (30) days after
Tenant's receipt of such notice of sale.
(h) "LEASE YEAR": In the case of the first Lease Year, that
period from the Commencement Date to May 31, 1997. Thereafter, "Lease Year"
shall mean each successive twelve (12) month period from June 1 to May 31
following the expiration of the first Lease Year, except that the last Lease
Year shall be the period from June 1 to the termination date of this Lease.
(i) "COMMENCEMENT DATE": the Distribution Date under the
Distribution Agreement. If the Commencement Date does not occur prior to May 31,
1997, either Landlord or Tenant may terminate this Lease by written notice to
the other party.
(j) "ANNUAL BASE RENT": See Section 3.1
(k) "PERMITTED USE": General Office Use.
ARTICLE II. GRANTING CLAUSE.
2.1. In consideration of the obligation of Tenant to pay rent and other
charges as provided in this Lease and in consideration of the other included
terms, covenants and conditions, Landlord Demises and Leases to Tenant, and
Tenant Leases from Landlord, the Demised Premises as described in ARTICLE I,
SECTION 1.1(f) TO HAVE AND TO HOLD said premises for the Lease Term specified in
ARTICLE I, SECTION 1.1(g), all upon the terms and conditions set forth in this
Lease. Landlord expressly reserves the right to name or change the name of the
Complex or any building therein without notice to the Tenant.
ARTICLE III. RENTAL
3.1 BASE RENT. Tenant shall pay to Landlord monthly rental installments
in an amount equal to 1/12th of the Annual Base Rent (as hereinafter defined) in
advance, without demand, deduction, counterclaim or offset, and without relief
from valuation and appraisement laws or any other deduction for any reason
whatsoever, on or before the first day of each and every calendar month during
the term of this Lease; provided, however, that if the Commencement Date shall
be on a day other than the first day of the calendar month or the expiration
date shall be a day other than the last day of the calendar month, the monthly
rental installment for such first or last fractional month shall be prorated on
the basis of the number of days during the month this Lease was in effect in
relation to the total number of days in such month.
Annual Base Rent for each Lease Year shall be calculated in accordance
with the following formula:
Annual Base Rent =
(1- Manor Care Occupancy Percentage) x (Operating Expenses
- - Third Party Rental Income)
Capitalized terms used in said formula shall have the meanings given to them in
Section 3.2 below.
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At Landlord's sole discretion, at any time and from time to time during
the term of this Lease upon written notice to Tenant, Landlord may elect that
instead of using the aforesaid formula to calculate Annual Base Rent, Annual
Base Rent shall be the number of square feet of space in the Demised Premises
times the "Alternate Rent" as hereinafter defined. The Alternate Rent shall be
the annual fair market rental value per square foot for the Demised Premises in
their "as is" condition for the remaining Lease Term as reasonably determined by
Landlord based on quoted rental rates at comparable office buildings in the
Gaithersburg, Maryland area. Should Landlord so elect, the parties will enter
into an amendment to this Lease establishing the new Annual Base Rent and
providing that Tenant shall pay its pro rata share (based on the ratio of the
number of square feet in the Demised Premises to the number of square feet of
office space in the Complex) of increases in real estate taxes and operating
expenses over a base year, with the terms "real estate taxes", "operating
expenses" and "base year" being defined consistent with the definitions of such
terms in leases of space in the Complex to tenants unrelated to Landlord.
3.2 DEFINITIONS. For the purpose of this Lease, the following
definitions shall apply:
(a) "MANOR CARE OCCUPANCY PERCENTAGE" shall mean the ratio of
(i) the number of gross square feet in the Complex occupied by Manor Care, Inc.,
a Delaware corporation, or any person or entity which directly or indirectly
controls, is controlled by, or is under common control with, Manor Care, Inc.,
as of the commencement of the Lease Year in question; to (ii) the total number
of gross square feet in the Complex, as the Complex may be altered or enlarged
in Landlord's discretion from time to time. The parties agree that as of the
Commencement Date the total number of gross square feet in the Complex is
577,126, consisting of 377,126 square feet in the Office Building, and 180,000
square feet of storage space plus an additional 20,000 square feet of office
space in the Warehouse Building. For purposes of the preceding sentence, (and
also for purposes of Sections 3.2(c) and 17.1 of this Lease) in order for an
entity to control another, it must have voting control of and own greater than
fifty percent (50%) of every class of stock entitled to vote and/or other voting
equity interest of the other entity, in the case that the other entity is a
corporation; it must own greater than fifty percent (50%) of the partnership
interests in the assets, liabilities, income, loss and distributions of the
other entity, in the case that the other entity is a partnership; it must be the
sole beneficiary of the other entity, in the case that the other entity is a
trust. The parties further agree that as of the Commencement Date, Manor Care,
Inc. occupies 162,111 gross square feet in the Complex.
(b) "OPERATING EXPENSES" shall mean any and all expenses
incurred by Landlord in connection with the servicing, operation, maintenance
and repair of the Complex and related appurtenances, including, but not limited
to: (1) wages and salaries of all employees engaged in operation, maintenance,
or security of the Complex including taxes, insurance and benefits relating
thereto; (2) all supplies and materials used in operation, maintenance or
security of the Complex; (3) cost of all maintenance and service agreements for
the Complex and the equipment therein, including but not limited to security and
energy management services, window cleaning and elevator maintenance; (4) cost
of all insurance relating to the Complex including the cost of casualty and
liability insurance applicable to the Complex and Landlord's personal property
used in connection therewith; (5) cost of repairs and general maintenance,
whether structural or non-structural, but excluding repairs and general
maintenance paid with proceeds of insurance or by Tenant or third parties; (6) a
management fee for the manager of the Complex, who may be Landlord or an
affiliate of Landlord; (7) the cost of any additional services provided to the
Complex by or on behalf of the Landlord in the prudent management of the
Complex; (8) the cost of any capital improvements or alterations made to the
Complex after the Commencement Date (and the entire cost of such capital
improvements shall be included in Operating Expenses in the Lease Year in which
such cost was paid or incurred), but excluding all costs of Landlord's initial
"build-out" to prepare portions of the Office Building for Landlord's occupancy
(except for the costs of installing building security equipment and a traffic
signal on Darnestown Road, which shall be included in Operating Expenses); (9)
leasing commissions, free rent, lease takeover obligations and other
inducements, costs, disbursements and expenses incurred in connection with
leasing space at the Complex; (10) costs incurred in constructing, improving,
renovating or decorating rented space or space for tenants; (11) costs of
environmental inspection, testing or cleanup; (12) payments of principal,
interest, and other costs relating to indebtedness secured by mortgages or deeds
of trust against the Complex or any portion thereof; (13) costs incurred in
leasing equipment, including air conditioning systems, elevators, or
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<PAGE> 6
other equipment ordinarily considered to be of a capital nature; (14)
depreciation and amortization of the buildings and improvements in the Complex,
in accordance with generally accepted accounting principles ;(15) security
services; (16) trash collection; (17) janitorial and cleaning services; (18) all
charges of utility companies or governmental entities for electricity, water,
sewer, gas or other utilities (excluding telephone) supplied to the Complex;
(19) taxes, assessments and governmental charges of any kind and nature
whatsoever (hereinafter collectively referred to as "Taxes") levied or assigned
against the Complex or any part thereof, and all expenses incurred by Landlord
in attempting to protest, reduce or minimize taxes; (20) ground rents, and
payments under any financing leases of the Complex or any portion thereof
(including Landlord's existing lease agreement with the Gaithersburg Realty
Trust); (21) any operating loss resulting from Landlord's operation of a
cafeteria or fitness center in the Complex; (22)costs of the "employee store"
and other services provided by the "Employee Service Center" at the Complex; and
(23) costs of mailroom/shipping and receiving services provided by Landlord.
(c) "THIRD PARTY RENTAL INCOME" shall mean all rental income
actually received by Landlord from tenants or occupants (excluding Tenant) of
space in the Complex during the Lease Year in question (including National
Geographic), other than any person or entity which controls, is controlled by,
or is under common control with, Manor Care, Inc.
3.3 As part of the rental arrangements between Landlord and Tenant,
Tenant has specifically reviewed, approved, and agreed to pay as herein
provided, each and every item in the foregoing definition of Operating Expenses.
3.4 PAYMENT OBLIGATION:
(a) Annual Base Rent shall be paid by Tenant to Landlord in
advance, in equal monthly installments, in an estimated amount reasonably
determined by Landlord prior to the commencement of the first Lease Year and
each subsequent Lease Year . (Landlord may revise its estimate at any time
during a Lease Year). Within a reasonable time following the end of each Lease
Year, Landlord shall submit to Tenant a statement which shall include a
comparison of (I) the Annual Base Rent therefore paid by Tenant for the Lease
Year in question on the basis of Landlord's estimate, and (II) Tenant's actual
obligation for Annual Base Rent for the Lease Year in question as determined by
Landlord. Any excess paid by Tenant, as disclosed by such comparison, shall be
credited against Tenant's next due installment(s) of Annual Base Rent, and any
additional sums disclosed by such comparison as being due to Landlord by Tenant
shall be paid to Landlord within thirty (30) days following delivery to Tenant
of such statement (including any statement delivered after the expiration or
termination of the Term). However, for the Lease Year during which the term of
this Lease ends, any excess paid by Tenant to Landlord and due to Tenant shall
be promptly refunded to Tenant.
(b) Tenant or its accountants shall have the right to inspect,
at reasonable times and in a reasonable manner and at the Landlord's offices or
such other place designated by Landlord, during the thirty (30) day period
following the delivery of Landlord's statement of the actual amount of Tenant's
Annual Base Rent for a particular Lease Year, such of Landlord's books of
account and records as pertain to and contain information concerning the
Operating Expenses, the Manor Care Occupancy Percentage and Third Party Rental
Income in order to verify the amounts thereof. In the event Tenant elects not to
inspect Landlord's books of account and records during said thirty (30) day
period, such election or failure to inspect shall constitute Tenant's
unconditional waiver of any and all rights to inspect Landlord's books of
account and records for the subject period and Tenant shall be forever estopped
from challenging or questioning the amount of its Annual Base Rent for said
period. In the event of any disagreement or dispute between Tenant and Landlord
concerning Landlord's statement, the decision of Landlord's Chief Financial
Officer shall be final and unreviewable.
3.5 Tenant shall be liable for all taxes levied against personal
property and trade fixtures placed by Tenant on the Complex. If any such taxes
are levied against Landlord or Landlord's property, and if Landlord elects to
pay the same or if the assessed value of Landlord's property is increased by
inclusion of personal property and trade fixtures placed by Tenant on the
property and Landlord elects to pay the taxes based on such increase, Tenant
shall pay to Landlord as additional rent hereunder, upon demand, the amount of
such taxes paid by Landlord.
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3.6 If at any time during the term of this Lease, the present method of
taxation shall be changed so that in lieu of the whole or any part of any taxes,
assessments, levies, or charges levied, assessed or imposed on the Complex there
shall be levied, assessed or imposed on Landlord a capital levy or other tax
directly on the rents received therefrom and/or a franchise tax assessment, levy
or charge measured by or based, in whole or in part, upon such rents on the
present or any future building or buildings in the Complex, then all such taxes,
assessments, levies or charges, or the part thereof so measured or based, shall
be deemed to be included within the term "Taxes" for the purposes hereof.
3.7 LATE CHARGE. In the event Tenant fails to pay to Landlord, when
due, any installment of rental or other sum to be paid to Landlord which may
become due in this Lease, Landlord will incur additional expenses in an amount
not readily ascertainable and which has not been elsewhere provided for between
Landlord and Tenant. If Tenant should fail to pay to Landlord, when due, any
installment of rental or other sum to be paid hereunder, such unpaid amount
shall bear interest from the due date thereof to the date of payment at an
annual rate equal to the lesser of twelve percent (12%) or the highest rate
permitted by law. Provision for such late charge shall be in addition to all
other rights and remedies available to Landlord within this Lease or at law or
in equity and shall not be construed as liquidated damages or limiting
Landlord's remedies in any manner.
3.8 All payments to be made by Tenant to Landlord pursuant to this
Lease shall be made by check payable to Landlord, and delivered to Landlord at
Landlord's Address or to such other person and place as may be designated by
notice in writing from Landlord to Tenant from time to time.
3.9 Unless otherwise agreed in writing between Landlord and Tenant, no
payment by Tenant or receipt by Landlord of a lesser amount than the monthly
installments of rent stipulated shall be deemed to be other than on account of
the above-stipulated rent, nor shall any endorsement or statement on any check
or any letter accompanying any check or payments as rent be deemed an accord
with satisfaction, and Landlord may accept such check for payment without
prejudice to Landlord's right to recover the balance of such rent or pursue any
other remedy in this Lease provided.
ARTICLE IV. CAFETERIA AND FITNESS CENTER
4.1 For as long as Landlord chooses to operate a cafeteria and/or
fitness center at the Complex, Tenant's officers and employees shall have the
right to use such facilities on a non-exclusive basis in common with Landlord's
officers and employees and others entitled thereto, upon payment of the current
fees and charges for such use. In Landlord's sole and unreviewable discretion
and without notice to Tenant, Landlord may discontinue operation of the
cafeteria and/or fitness center at any time.
ARTICLE V. ACCEPTANCE OF THE DEMISED PREMISES.
5.1 The Demised Premises are leased to Tenant in "AS IS" condition.
Landlord shall have no obligation to make any improvements or alterations to
prepare the Demised Premises for Tenant's use. By taking possession of the
Demised Premises, Tenant shall be deemed to have accepted the same and to have
acknowledged that the same fully comply with Landlord's covenants and
obligations under this Lease. Tenant further agrees that, if requested by
Landlord, Tenant will furnish Landlord with a written statement that Tenant has
accepted the Demised Premises and that Landlord has fully complied with
Landlord's covenants and obligations.
ARTICLE VI. USES AND CARE OF PREMISES.
6.1 The Demised Premises may be used only for the purpose or purposes
specified in ARTICLE I, SECTION 1.1(K) above, and for no other purpose or
purposes without the prior written consent of Landlord.
6.2 Tenant shall not use the Demised Premises for any unlawful purposes
or acts; shall not commit or permit any waste or damage to the Demised Premises;
shall use and maintain the Demised Premises in compliance with (I) all laws,
codes, ordinances, rules, regulations and orders (collectively "Laws") of any
governmental authority or agency, including, without limitation, those governing
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zoning, health, safety (including fire safety), and the occupational hazards,
pollution and environmental control, and handicapped accessibility (including
but not limited to any such laws imposing upon Landlord or Tenant any duty
respecting or triggered by any change in use or occupancy or any alteration or
improvement of, in or to the Demised Premises, and (II) all reasonable
directions of the Landlord, including the building rules and regulations,
attached hereto as EXHIBIT "B", as may be modified from time to time by Landlord
on reasonable notice to Tenant. Tenant shall use his best efforts to cause its
agents, employees, customers, invitees, licensees, and concessionaires to comply
with the building rules and regulations and with the covenants and agreements of
this Section.
6.3 Tenant shall not, without Landlord's prior written consent, keep
anything within the Demised Premises for any purpose which increases the
insurance premium costs or invalidates any insurance policy carried on the
Demised Premises or other part of the property. Tenant shall pay as additional
rent, upon demand of Landlord, any such increased premium cost due to Tenant's
use or occupation of the property. All property kept, stored or maintained
within the property by Tenant shall be at Tenant's sole risk.
6.4 Tenant shall not conduct within the Demised Premises any fire,
auction, going out of business, liquidation or bankruptcy sales or operate
within Demised Premises a "Wholesale" or "Factory Outlet" store, a cooperative
store, a "Second Hand" store, a "Surplus" store or a store commonly refereed to
as a "Discount House." Tenant shall not advertise that it sells products or
services at "discount," "cut-price" or "cut-rate" prices. Tenant shall not
permit any objectionable or unpleasant odors to emanate from the Demised
Premises, nor place or permit any radio, television, loud-speaker, or amplifier
on the roof or outside of the Demised Premises, or where the same can be seen or
heard from outside the Demised Premises, nor place an antenna, awning, or other
projection on the exterior of the Demised Premises; nor solicit business or
distribute leaflets or other advertising material on the property outside the
Demised Premises; nor take any other action which, in the exclusive judgment of
Landlord, would constitute a nuisance or would disturb or endanger other tenants
of the Building or unreasonably interfere with their use of their respective
premises, nor do anything which would tend to injure the reputation of the
Building.
6.5 Tenant shall take good care of the Demised Premises and keep the
same free from waste at all times. Tenant shall keep the Demised Premises and
sidewalks, service-ways, and loading areas adjacent to the Demised Premises
neat, clean and free from dirt, rubbish, insects and pests at all times, and
shall store all trash and garbage within the Demised Premises, arranging for the
regular pickup of such trash and garbage at Tenant's expense. Tenant will store
all trash and garbage within the area designated by Landlord for such trash
pickup and removal and only in receptacles of the size, design and color from
time to time prescribed by Landlord. Receiving and delivery of goods and
merchandise and removal of garbage and trash shall be made only in the manner
and areas from time to time prescribed by Landlord. Landlord may, at its sole
option, arrange for collection of all trash and garbage and, should Landlord
exercise such election, the costs thereof will be part of Operating Expenses.
Tenant shall not operate an incinerator or burn trash or garbage within the
property.
6.6 Tenant shall not move any furniture or equipment into or out of the
Demised Premises except at such times as Landlord may from time to time
designate in writing to all tenants.
6.7 Tenant shall include the address and identity of its business
activities in the Demised Premises in all advertisements made by Tenant in which
the address and identity of any similar local business activity of Tenant is
mentioned.
6.8 Tenant shall not allow any animals other than seeing eye dogs onto
the property whatsoever.
6.9 Tenant shall procure, at its sole expense, any permits and licenses
required for the transaction of business in the Demised Premises and otherwise
comply with all applicable laws, ordinances and governmental regulations.
Landlord makes no representation or warranty, expressed or implied, with regard
to the fitness of the Demised Premises or the property for the Tenant's intended
use or for any particular purpose. Tenant shall bear the cost of all alterations
or improvements to the property required by any applicable laws, ordinances or
governmental regulation based upon Tenant's use of the property.
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6.10 Tenant shall not use the public address system in the Office
Building.
ARTICLE VII. LANDLORD'S SERVICES.
7.1 Landlord covenants and agrees that it will provide the following
services, the cost of which shall be included in Operating Expenses:
(a) keep the foundation, the exterior walls and roof of the Demised
Premises in good repair;
(b) provide heat and air conditioning to maintain the Demised Premises
at a reasonably comfortable temperature between the hours of 8:00 a.m. and 6:00
p.m., Monday through Friday of each week, and 8:00 a.m. and 1:00 p.m. on
Saturday of each week, except holidays recognized by the United States
Government. Landlord shall endeavor to provide HVAC during hours other than the
hours of full operation of the Building, upon request by Tenant at least
twenty-four (24) hours prior to the time Tenant desires such service. Tenant
agrees to cooperate fully with Landlord and to abide by all the regulations and
requirements which Landlord may reasonably prescribe for the proper functioning
and protection of the HVAC equipment and to pay the cost of any damage resulting
from Tenant's failure to comply with the foregoing provisions;
(c) provide electricity for lighting purposes and operation of ordinary
office equipment, excluding, however, computers other than personal computers,
and other equipment requiring heavier than normal office use of electricity.
Within fifteen (15) days from the date of this Lease, Tenant shall submit to
Landlord its list of office equipment. Within fifteen (15) days from receipt of
such list, Landlord shall inform Tenant whether Landlord, in its reasonable
discretion, has determined that such equipment satisfies the requirements of
this SECTION 7.1(C).
(d) provide janitor services Monday through Friday of each week, except
holidays recognized by the United States Government, it being understood and
agreed, however, that Landlord shall not be liable in any way for any damage or
inconvenience caused by the cessation or interruption of such heating, air
conditioning, electricity, elevator, janitor services occasioned by fire,
accident, strikes, necessary maintenance, alterations, or repairs, or other
causes beyond Landlord's control. It is understood that employees of Landlord
are prohibited as such from receiving any packages or other articles delivered
to the Building for Tenant and that, should any such employee receive any such
packages or articles, he or she in so doing shall be the agent of Tenant and not
of Landlord.
(e) provide hot and cold water and lavatory supplies, it being
understood and agreed that hot and cold water shall be furnished by Landlord
only at those points of supply provided for general use of other tenants in the
Building as well as to Tenant's kitchen;
(f) provide automatically operated elevator service at all times;
(g) list the Tenant's trade name on the Building directory located in
the entrance lobby.
7.2 In the event any public utility company supplying energy, water,
sewer or other utility, or governmental law, regulation, executive or
administrative order requires that Landlord or Tenant reduce or maintain at a
certain level the consumption of a utility and such requirement affects the
HVAC, light, use of or hours of operation of the premises or Building, Landlord
and Tenant shall each adhere to and abide by said laws, regulations or executive
orders without any reduction in Rent.
7.3 Failure by Landlord to any extent to furnish the above described
services, or any cessation thereof, shall not render Landlord liable for damages
to either person or property, nor be construed as an eviction of Tenant, nor
give Tenant the right to an abatement of Rent, nor relieve Tenant from the
obligation to fulfill any covenant or agreement hereof, unless such failure to
provide services is a result of the gross negligence of Landlord or Landlord's
agents. Should any of the Building equipment or machinery break down, or for any
cause cease to function properly, Landlord shall use reasonable diligence to
repair the same promptly, and Tenant shall have no claim for an abatement of
rent or damages on account of any interruptions in service occasioned thereby or
resulting therefrom.
7.4 Landlord shall not be required to make any repairs occasioned by
the act or negligence of Tenant, its agents, employees, subtenants, licensees
and concessionaires, which repairs shall be
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made by Tenant. In the event that the Demised Premises should become in need of
repairs required to be made by Landlord hereunder, Tenant shall give immediate
written notice thereof to Landlord and Landlord shall not be responsible in any
way for failure to make such repairs until a reasonable time shall have elapsed
after delivery of such written notice. Landlord's obligation hereunder is
limited to repairs specified in this article only, and Landlord shall have no
liability for any damages or injury arising out of any condition or occurrence
causing a need for such repairs.
The cost of such repairs and maintenance shall be included in the
Operating Expenses. There shall be no abatement of rent and no liability of
Landlord by reason of any injury to or interference with Tenant's business
arising from the making of any repairs, alterations or improvements in or to any
portion of the property or in or to any fixtures, appurtenances and equipment
therein or thereon.
7.5 Tenant shall furnish, maintain and replace all Building
Non-Standard electric light bulbs, tubes and tube casings.
7.6 Tenant shall keep the Demised Premises in good clean condition and
shall, at its sole cost and expense, make all needed repairs and replacements
including replacement of cracked or broken glass, except for repairs and
replacements expressly required to be made by Landlord under the provisions of
ARTICLE VII, SECTION 7.1, ARTICLE XI, SECTION 11.1 and ARTICLE XV, SECTION 15.3.
If any repairs required to be made by Tenant hereunder are not made within three
(3) days after written notice delivered to Tenant by Landlord, Landlord may, at
its discretion, make such repairs without liability to Tenant for any loss or
damage which may result to its stock or business by reason of such repairs, and
Tenant shall pay to Landlord immediately upon demand as additional rental
hereunder the cost of such repairs plus ten percent (10%) of the amount thereof
and failure to do so shall constitute an event of default hereunder. At the
expiration of this Lease, Tenant shall surrender the Demised Premises in good
condition, reasonable wear and tear excepted, and shall surrender all keys for
the Demised Premises to Landlord and shall inform Landlord of all combinations
on locks, safes and vaults, if any, in the Demised Premises.
ARTICLE VIII. ALTERATIONS.
8.1 Tenant shall not make any alterations, additions, or improvements
to the Demised Premises without the prior written consent of Landlord, which
Landlord may grant or deny in its sole discretion with respect to structural
alterations, except for the installation of unattached, movable trade fixtures
which may be installed without drilling, cutting or otherwise defacing the
Demised Premises. Landlord shall not unreasonably withhold or delay its consent
with respect to non-structural alterations. All alterations, additions,
improvements and fixtures, except that any Alterations, fixtures or any other
property installed in the Demised Premises at the sole expense of Tenant and
which can be removed without causing material damage to the Building, shall
remain upon and be surrendered with the Demised Premises and become the property
of Landlord at the termination of this Lease, unless Landlord requests their
removal in which event Tenant shall remove the same and restore the Demised
Premises to their original condition at Tenant's expense. Any linoleum,
carpeting or other floor covering which may be cemented or otherwise affixed to
the floor of the Demised Premises is a permanent fixture and shall become the
property of the Landlord without credit or compensation to Tenant.
8.2 All construction work done by Tenant within the Demised Premises
shall be performed in a good and workmanlike manner, in compliance with all
governmental requirements, and the requirements of any contract or deed or trust
to which the Landlord may be a party and in such manner as to cause a minimum of
interference with other construction in progress and with the transaction of
business in the Building. Tenant agrees to indemnify Landlord and hold it
harmless against any loss, liability or damage resulting from such work, and
Tenant shall, if requested by Landlord, furnish bond or other security
satisfactory to Landlord against any loss, liability or damage.
ARTICLE IX. LANDLORD'S RIGHT OF ACCESS AND USE.
9.1 Landlord shall have the right to enter upon the Demised Premises at
any reasonable time for the purpose of inspecting the same, or of making repairs
to the Demised Premises, or of making repairs, alterations or additions to
adjacent premises, or of showing the Demised Premises to prospective purchasers,
Tenants or lenders.
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9.2 Landlord may, within one hundred twenty (120) days prior to the
expiration of the term, post and maintain notices, free from hindrance or
control of Tenant.
9.3 Use of the roof above the Demised Premises is reserved to Landlord.
9.4 In addition to the rights specified elsewhere in this Lease,
Landlord shall have the following rights regarding the use of the Demised
Premises or the property by Tenant, its employees, agents, customers and
invitees, each of which may be exercised without notice or liability to Tenant:
(a) Landlord may install such signs, advertisements or notices or
Tenant identification information on or in the Building, on the property or on
the directory board or Tenant access doors as it shall deem necessary or proper.
(b) Landlord shall approve or disapprove, prior to installation, all
types of drapes, shades and other window coverings used in the Demised Premises,
and may control all internal lighting and signage that may be visible from
outside the Demised Premises.
(c) Landlord may grant to any person the exclusive right to conduct
business or render any service in the Building, provided that such exclusive
right shall not operate to limit Tenant from using the Demised Premises for the
use permitted in ARTICLE I, SECTION 1.1(K).
(d) Landlord may control the use of the property in such manner as it
deems necessary or proper, including by way of illustration and not limitation:
requiring all persons entering or leaving any Building in the Complex to
identify themselves and their business in the Building to a security guard;
excluding or expelling any peddler, solicitor or loud or unruly person from the
Building; closing or limiting access to the Building or any part thereof,
including entrances, corridors, doors and elevators, during times of emergency,
repairs or after regular business hours.
ARTICLE X. SIGNS.
10.1 All signs, decorations and advertising media shall conform in all
respects to the sign criteria established by Landlord for the Complex from time
to time in the exercise of its sole discretion, and shall be subject to the
prior written approval of Landlord as to construction, method of attachment,
size, shape, height, lighting, color, location and general appearance. All signs
shall be kept in good condition and in proper operating order at all times.
Other than Building directory signage and front entrance signage to the Demised
Premises, and Tenant's signage at the Complex existing as of the Commencement
Date, no other signs, advertisements or notices shall be painted, affixed or
displayed: (I) within the Demised Premises which are visible from outside of the
Demised Premises, (II) outside of the Demised Premises, (III) in, about or
outside of the Building, or (IV) on the land associated with Building.
ARTICLE XI. UTILITIES.
11.1 Landlord agrees to cause to be provided and maintained the
necessary mains, conduits and other facilities necessary to supply water,
electricity, gas (if available), telephone service and sewerage service to the
Demised Premises, and the charges therefor shall be included in Operating
Expenses (except telephone service, which shall be paid directly by Tenant).
11.2 Landlord shall not be liable for any interruption or failure
whatsoever in utility services. Landlord does not represent or warrant the
uninterrupted availability of such utilities or building services, and any such
interruption shall not be deemed an eviction or disturbance of Tenant's right to
possession, or render Landlord liable to Tenant for damages by abatement of rent
or otherwise, or relieve Tenant from the obligation to fully and timely perform
its obligations and covenants under this Lease.
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ARTICLE XII. INDEMNITY, PUBLIC LIABILITY INSURANCE AND FIRE AND EXTENDED
COVERAGE INSURANCE.
12.1 Landlord shall not be liable to Tenant or to Tenant's employees,
agents or visitors, or to any other person or entity, whatsoever, for any injury
to person or damage to or loss of property on or about the Demised Premises or
the property caused by the negligence or misconduct of Tenant, its employees,
subtenants, licensees or concessionaires, or of any other person entering the
Building under the express or implied invitation of Tenant or arising out of the
use of the Demised Premises by Tenant and the conduct of its business therein,
or arising out of any breach or default by Tenant in the performance of its
obligations hereunder or resulting from any other cause except Landlord's gross
negligence, and Tenant agrees to indemnify Landlord and hold Landlord harmless
from any loss, expense or claims arising out of such damage or injury.
12.2 Landlord and Tenant agree and covenant that neither shall be
liable to the other for loss arising out of damage to or destruction of the
Demised Premises or contents thereof when such loss is caused by any perils
included within standard All Risk property insurance, including flood and
earthquake insurance policies, for buildings similar to the buildings in the
Complex, in Montgomery County, Maryland. This agreement shall be binding whether
or not such damage or destruction be caused by negligence of either party or
their agents, licensees, employees or visitors.
ARTICLE XIII. TENANT'S INSURANCE.
13.1 Tenant agrees, at its sole cost, to carry and keep in full force
and effect at all times during the term of this Lease, a comprehensive general
liability policy with a single limit of at least Ten Million Dollars
($10,000,000.00), including coverage for bodily injury, property damage,
contractual liability for this Lease and personal injury liability. Tenant's
comprehensive general liability insurance policy and certificates evidencing
such insurance shall name Landlord and its property manager of the Complex as
additional insureds and shall also contain a provision by which the insurer
agrees that such policy shall not be canceled except after sixty (60) days
written notice to Landlord. Any liability insurance carried or to be carried by
Tenant hereunder shall be primary over any policy that might be carried by
Landlord. If Tenant shall fail to obtain or maintain such insurance, Landlord
may obtain, after providing written notice to Tenant with a thirty (30) day
opportunity to cure, such insurance on Tenant's behalf and the cost shall be
deemed additional rent and shall be payable upon Landlord's demand.
13.2 Tenant shall obtain All Risk property insurance, including flood
and earthquake insurance, insuring against loss to the Demised Premises
(including any improvements thereon). Such insurance shall be in the form and
amount reasonably satisfactory to Landlord, and Tenant shall, when requested
from time to time by Landlord, provide Landlord with evidence of such insurance.
Such insurance shall contain waiver of subrogation provisions in favor of
Landlord and its agents.
13.3 Tenant agrees to carry and keep in full force and effect at all
times during the term of this Lease, at its sole cost, Worker's Compensation and
Employer's Liability insurance, with a minimum Employer's Liability limit of
$1,000,000 each occurrence.
13.4 At the request of Landlord, Tenant shall obtain business
interruption insurance naming Landlord as loss payee, which insurance shall be
in an amount sufficient to pay all rent due hereunder.
ARTICLE XIV. NON-LIABILITY FOR CERTAIN DAMAGES.
14.1 Landlord and Landlord's agents and employees shall not be liable
to Tenant or any other person or entity whomsoever for any injury to person or
damage to property caused by the Demised Premises or other portions of the
property becoming out of repair or by defect (including latent defects) in or
failure of any building equipment, pipes or wiring, or broken glass, or by the
backing up of drains, or by gas, water, steam, electricity or oil leaking,
escaping or flowing into the Demised Premises, nor shall Landlord be liable to
Tenant or any other person or entity whomsoever from any loss or damage that may
be occasioned by or through the acts or omissions of other tenants of the
Building or of any other persons or entity whomsoever. Tenant shall indemnify
and hold harmless Landlord from any loss, cost, expense or claims arising out of
such injury or damage referred to in this ARTICLE XIV, SECTION 14.1.
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14.2 In the event of any violation of this Lease by Landlord, Tenant's
exclusive remedy shall be an action for damages (Tenant waiving the benefit of
any laws granting it a lien upon the property of Landlord and/or upon rent due
the Landlord), but prior to any such action Tenant will give Landlord written
notice specifying such violation with particularity, and Landlord shall
thereupon have thirty (30) days in which to cure any such violation. Unless and
until Landlord fails to so cure any violation after such notice, Tenant shall
not have any remedy or cause of action by reason thereof. All obligations of
Landlord hereunder will be construed as covenants, not conditions; and all such
obligations will be binding upon Landlord only during the period of its
ownership of the property and not thereafter.
The term "Landlord" shall mean only the owner, for the time being, of
the property and in the event of the transfer by such owner of its
interest in the property such owner shall thereupon be released and
discharged from all covenants and obligations of the Landlord
thereafter accruing, but such covenants and obligations shall be
binding during the Lease term upon each new owner for the duration of
such owner's ownership.
Notwithstanding any other provision hereof, Landlord shall not have any
personal liability hereunder. In the event of any breach or default by
Landlord in any term or provision of this Lease, Tenant agrees to look
solely to the equity or interest then owned by Landlord in the land and
improvements which constitute the property; however, in no event shall
any deficiency judgment or any money judgment of any kind be sought or
obtained against Landlord or affiliated companies.
ARTICLE XV. DAMAGE BY CASUALTY.
15.1 Tenant shall give immediate written notice to Landlord of any
damage caused to the Demised Premises by fire or other casualty.
15.2 If the Office Building shall be destroyed or damaged in excess of
$100,000 by a casualty, then Landlord may elect either to terminate this Lease
as hereinafter provided, or to proceed to rebuild and repair the Demised
Premises. Should Landlord elect to terminate this Lease, it shall give written
notice of such election to Tenant within ninety (90) days after the occurrence
of such casualty. If Landlord should not elect to terminate this Lease, Landlord
shall proceed with reasonable diligence to rebuild and repair the Demised
Premises (and the cost of such repairs in excess of insurance proceeds shall be
included in Operating Expenses).
15.3 Landlord's obligation to rebuild and repair under this ARTICLE XV
shall in any event be limited to restoration to substantially the condition in
which the Demised Premises existed prior to the casualty, and shall be further
limited to the extent of the insurance proceeds available to Landlord for such
restoration, and Tenant agrees that promptly after the completion of such work
by Landlord, it will proceed with reasonable diligence and at its sole cost and
expense to rebuild, repair and restore its signs, fixtures, equipment and
furnishings.
15.4 During the period from the occurrence of the casualty until
Landlord's repairs are substantially completed, there shall be no reduction in
the Annual Base Rent.
15.5 All damage or injury to the Demised Premises or the Building
caused by the act or omission of Tenant, its employees, agents, invitees,
licensees or contractors, shall be promptly repaired by Tenant at Tenant's sole
cost and expense, to the satisfaction of Landlord except to the extent covered
by insurance carried by Landlord; provided, however, Tenant shall pay any
deductible under Landlord's policy required to be paid thereunder.
ARTICLE XVI. EMINENT DOMAIN.
16.1 If the entire Demised Premises or the Complex should be taken for
any public or quasi-public use under governmental law, ordinance or regulation,
or by right of eminent domain or by private purchase in lieu thereof, this Lease
shall terminate and the rent shall be abated during the unexpired portion of
this Lease, effective on the date physical possession is taken by the condemning
authority. If less than the entire Demised Premises or Complex should be taken
as aforesaid, this Lease shall continue in full force and effect and there shall
be no abatement in Annual Base Rent.
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16.2 All compensation awarded for any taking (or the proceeds of
private sales in lieu thereof) of the Demised Premises or the property shall be
the property of Landlord, and Tenant assigns its interest in any such award to
Landlord; provided, however, Landlord shall have no interest in any award made
to Tenant for loss of business or the taking of Tenant's fixtures and other
property if a separate award for such items is made to Tenant.
ARTICLE XVII. ASSIGNMENT AND SUBLETTING.
17.1 Tenant shall not assign or transfer all or any portion of its
interest in this Lease or in the Demised Premises, or sublet all or any portion
of the Demised Premises, without the prior written consent of Landlord, which
consent may be withheld at the sole and absolute discretion of the Landlord. Any
assignment or sublease without the Landlord's prior written consent shall be
voidable and, at Landlord's election, shall constitute a default of Tenant
hereunder. Consent by Landlord to one or more assignments or sublettings shall
not operate as a waiver of Landlord's rights with respect to any subsequent
assignment or subletting. The term "sublet" shall be deemed to include the
granting of licenses, concession, and any other rights of occupancy of any
portion of the Demised Premises. Notwithstanding the foregoing, Landlord's
consent shall not be required in the case of an assignment to a person or entity
which controls, is controlled by, or is under common control with, Tenant,
provided that Tenant remains primarily liable under this Lease.
17.2 In the event of the transfer and assignment by Landlord of its
interest in this Lease or in the property to a person expressly assuming
Landlord's obligations under this Lease, Landlord shall thereby be released from
any further obligations hereunder, and Tenant agrees to look solely to such
successor in interest of the Landlord for performance of such obligations. Any
such security given by Tenant to secure performance of Tenant's obligations
hereunder may be assigned and transferred to such successor in interest, and
Landlord shall thereby be discharged of any further obligations relating
thereto.
17.3 Tenant shall not mortgage, pledge or otherwise encumber its
interest in this Lease or in the Demised Premises.
17.4 In no case may Tenant assign any options granted to Tenant
hereunder, all such options being deemed personal to Tenant and exercisable by
Tenant only.
17.5 Any request by Tenant for approval to sell or sublet the Demised
Premises or to transfer or assign Tenant's interest in this Lease, shall be
accompanied by a processing charge in the amount of Five Hundred Dollars
($500.00) payable to Landlord.
17.6 In the event Landlord approves Tenant subletting this Lease and
the subtenant or assignee is paying to Tenant an amount in excess of that paid
by Tenant to Landlord under this Lease (which such amount shall be deemed the
aggregate sum of all payments by subtenants to Tenant), then fifty percent (50%)
of any such excess amounts shall be deemed rent under this Agreement and shall
be immediately paid by Tenant to Landlord. If any court of law should find this
provision invalid, then, in such event, Tenant shall be prohibited from
subletting or assigning this Lease for an amount in excess of the amounts paid
by Tenant to Landlord pursuant to the terms of this Lease.
ARTICLE XVIII. DEFAULT BY TENANT AND REMEDIES.
18.1 The following events shall be deemed to be events of default by
Tenant under this Lease:
(a) Tenant shall fail to pay any installment of rental or any
other expense required to be paid by Tenant hereunder when due, and such failure
continues for ten (10) days after Tenant receives written notice thereof from
Landlord.
(b) Tenant shall fail to comply with any term, provision or
covenant in this Lease, other than the payment of rental or expenses demanded by
Landlord and shall not cure such failure within thirty (30) days after receiving
written notice thereof from Landlord; provided, however, that if such failure
cannot reasonably be cured within the thirty (30) day period, Tenant shall not
be deemed to be in default if Tenant shall commence such cure within the thirty
(30) day period and thereafter diligently prosecute the same to completion.
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(c) Tenant or any guarantor of Tenant's obligations under this
Lease shall become insolvent, or shall make a transfer in fraud of creditors, or
shall make an assignment for the benefit of creditors.
(d) Tenant or any guarantor of Tenant's obligation under this
Lease shall file a petition under any section or chapter of the U.S. Bankruptcy
Code, as amended, or under any similar law or statute of the United States or
any State thereof; or Tenant or any guarantor of Tenant's obligations under this
Lease shall be adjudged bankrupt or insolvent in proceedings filed against
Tenant or any guarantor of Tenant's obligations under this Lease.
(e) A receiver or Trustee shall be appointed for all or
substantially all of the assets of the Tenant or any guarantor of Tenant's
obligations under this Lease.
(f) Tenant shall do or permit to be done anything which
creates a lien upon the Demised Premises.
18.2 Upon the occurrence of any such events of default, Landlord shall
have the option to pursue any one or more of the following remedies without any
notice or demand whatsoever:
(a) Terminate this Lease in which event Tenant shall
immediately surrender the Demised Premises to Landlord, and if Tenant fails to
do so, Landlord may, without prejudice to any other remedy which he may have for
possession or arrearages in rental, enter upon and take possession of the
Demised Premises and expel or remove Tenant and any other person who may be
occupying said premises or any part thereof, by force if necessary, without
being liable for prosecution or any other claim of damages.
(b) Enter upon and take possession of the Demised Premises and
expel or remove Tenant and any other person who may be occupying said premises
or any part, by force if necessary, without being liable for prosecution or any
claim for damages with or without having terminated the Lease.
(c) Enter upon the Demised Premises by force, if necessary,
without being liable for prosecution or any claim for damages, and do whatever
Tenant is obligated to do under the terms of this Lease, and Tenant agrees to
reimburse Landlord on demand for any expenses which Landlord may incur in
effecting compliance with Tenant's obligations under this Lease, and Tenant
further agrees that Landlord shall not be liable for any damages resulting to
the Tenant from such action.
(d) Alter all locks and other security devices at the Demised
Premises without terminating this Lease and without notice to Tenant.
18.3 In the event Landlord elects to terminate the Lease by reason of
an event of default, then notwithstanding such termination, Tenant shall be
liable for, and shall pay to Landlord, at the address specified for notice to
Landlord, the sum of all rental and other indebtedness accrued to date of such
termination plus, as damage, an amount equal to the present value (using a
discount rate of five percent (5%)) of the difference between (I) the total
Annual Base Rent, as reasonably estimated by Landlord, for the remaining portion
of the Lease term (had such term not been terminated by Landlord prior to the
date of expiration stated in ARTICLE I); and (II) the fair rental value of the
Demised Premises for such period.
18.4 In the event that Landlord elects to repossess the Demised
Premises without terminating the Lease, then Tenant shall be liable for and
shall pay to Landlord, at the address specified for notice to Landlord, all
rental and other indebtedness accrued to the date of such repossession, plus, as
damage, an amount equal to the total Annual Base Rent, as reasonably estimated
by Landlord, for the remainder of the Lease term until the date of expiration of
the term as stated in ARTICLE I diminished by any net sums thereafter received
by Landlord through reletting the Demised Premises during said period (after
deducting expenses incurred by Landlord as provided in ARTICLE XVIII, SECTION
18.5 hereof). In no event shall Tenant be entitled to any excess of any rental
obtained by reletting over and above the rental herein reserved. Actions to
collect amounts due from Tenant to Landlord may be brought from time to time on
one or more occasions, without the necessity of Landlord's waiting until
expiration of the Lease term.
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18.5 In case of any event of default or breach by Tenant, Tenant shall
also be liable for and shall pay to Landlord, at the address specified for
notice herein, in addition to any sum provided to be paid above, brokers fees
incurred by Landlord in connection with reletting the whole or part of the
Demised Premises; the costs of removing and storing Tenant's or other occupant's
property; the cost of repairing, altering, remodeling or otherwise putting the
Demised Premises into condition acceptable to a new Tenant or Tenants, and all
reasonable expenses incurred by Landlord in enforcing or defending Landlord's
rights and/or remedies, including reasonable attorneys' fees.
18.6 In the event of termination or repossession of the Demised
Premises for an event of default, Landlord shall not have any obligation to
relet or attempt to relet the Demised Premises, or any portion thereof, or to
collect rental after reletting; Landlord may relet the whole or any portion of
the Demised Premises for any period, to any tenant, and for any use and purpose.
18.7 If Tenant should fail to make any payment or cure any default
hereunder within the time herein permitted, Landlord, without being under any
obligations to do so and without waiving such default, may make such payment
and/or remedy such other default for the account of Tenant (and enter the
Demised Premises for such purpose), and thereupon Tenant shall be obligated to,
and agrees to, pay Landlord, as additional rent, upon demand, all costs,
expenses and disbursements (including reasonable attorneys' fees) incurred by
the Landlord in taking such remedial action.
18.8 In the event that Landlord shall have taken possession of the
Demised Premises pursuant to the authority herein granted, then Landlord shall
have the right to keep in place and use all of the furniture, fixtures, and
equipment at the Demised Premises, including that which is owned by or Leased to
Tenant, at all times prior to any foreclosure thereon by Landlord or
repossession thereof by any Landlord thereof or third party having a lien
thereon. Landlord shall also have the right to remove from the Demised Premises
(without the necessity of obtaining a distress warrant, writ of sequestration or
other legal process) all or any portion of such furniture, fixtures, equipment
and other property located thereon and place same in storage at any premises
within the County in which the Demised Premises is located; and in such event,
Tenant shall be liable to Landlord for costs incurred by Landlord in connection
with such removal and storage and shall indemnify and hold harmless Landlord
from all loss, damage, cost, expense and liability in connection with such
removal and storage. Landlord shall also have the right to relinquish possession
of all or any portion of such furniture, fixtures, equipment and other property
to any person ("Claimant") claiming to be entitled to possession thereof who
presents to Landlord a copy of any instrument represented to Landlord by
Claimant to have been executed by Tenant (or any predecessor of Tenant) granting
Claimant the right under various circumstances to take possession of such
furniture, fixtures, equipment or other property, without the necessity on the
part of Landlord to inquire into the authenticity of said instrument's copy of
Tenant's or Tenant's predecessor's signature thereon and without the necessity
of Landlord's making any nature of investigation or inquiry as to the validity
of the factual or legal basis upon which Claimant purports to act; and Tenant
agrees to indemnify and hold Landlord harmless from all costs, expense, loss,
damage, and liability incident to Landlord's relinquishment of possession of all
or any portion of such furniture, fixtures, equipment or other property by
Claimant. The rights of Landlord herein stated shall be in addition to any and
all other rights which Landlord has or may hereafter have at law or in equity;
and Tenant stipulates and agrees that the rights herein granted Landlord are
commercially reasonable.
ARTICLE XIX. HOLDING OVER.
19.1 In the event Tenant remains in possession of the Demised Premises
after the expiration of this Lease and without the execution of a new Lease, it
shall be deemed to be occupying said Demised Premises as a Tenant from month to
month at a rental equal to the rental herein provided, plus fifty percent (50%)
of such amount and otherwise subject to all the conditions, provisions and
obligations of this Lease insofar as the same are applicable to a month to month
tenancy.
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ARTICLE XX. SUBORDINATION AND ATTORNMENT
20.1 Tenant accepts this Lease subject and subordinate to any mortgage,
deed of trust or other lien presently existing or hereafter created upon the
property and to any renewals and extensions thereof. Landlord is irrevocably
vested with full power and authority to subordinate this Lease to any mortgage,
deed of trust or other lien hereafter placed upon the property and Tenant agrees
upon demand to execute such further instrument subordinating this Lease as
Landlord may request, and if Tenant shall fail at any time to execute, seal and
deliver any such instrument to Landlord, in addition to any other remedies
available to it in consequence thereof, Landlord may execute, seal and deliver
the same as the attorney in fact of Tenant in Tenant's name, place and stead,
and Tenant irrevocably makes, constitutes and appoints Landlord, its successors
and assigns, as such attorney in fact for that purpose.
20.2 At the option of any transferee of the Landlord's interest in the
property pursuant to a foreclosure or similar proceeding under any mortgage,
deed of trust or other lien upon the property, whether now existing or hereafter
created, Tenant shall attorn to and be bound to any such transferee under the
terms, covenants and conditions of this Lease for the balance of the term hereof
remaining and any extensions or renewals hereof which may be affected in
accordance with any option therefore in this Lease, with the same force and
effect as if the transferee was the Landlord, and Tenant does hereby agree to
attorn to such transferee, at the transferee's option, the attornment to be
effective and self operative without the execution of any further instruments on
the part of Tenant, immediately upon the transferee succeeding to the interest
of the Landlord, provided said transferee provides written notice to the Tenant
of its election to accept such attornment within sixty (60) days of the subject
transfer.
In the event any such transferee does elect to accept such attornment,
the Tenant hereby agrees that said transferee shall not be (A) liable for any
act or admission of Landlord under the Lease prior to the subject transfer or
(B) subject to any offsets or defenses which Tenant might have against Landlord
arising from events or circumstances existing prior to the subject transfer, or
(C) bound by any rent or additional rent which Tenant might have paid in advance
for more than the month of the subject transfer, or (D) bound by any amendment
or modification of this Lease made without the foreclosing party's prior written
consent.
ARTICLE XXI. ESTOPPEL CERTIFICATES.
21.1 Tenant agrees to furnish from time to time, when requested by
Landlord, the holder of any deed of trust or mortgage or the Landlord under any
ground Lease covering all or any part of the property or any interest of
Landlord therein, an estoppel certificate signed by Tenant confirming and
containing such factual certifications and representations deemed appropriate by
Landlord. The holder of any such deed of trust or mortgage or the Landlord under
any such ground Lease and Tenant shall, within ten (10) days following receipt
of said proposed estoppel certificate from Landlord, return a fully-executed
copy of said certificate to Landlord. In the event Tenant fails to return a
fully-executed copy of such certificate to Landlord within the foregoing ten-day
period, then Tenant shall be deemed to have approved and confirmed all of the
terms, certifications and representations contained in such certificate.
ARTICLE XXII. NOTICES.
22.1 Wherever any notice is required or permitted hereunder, such
notice shall be in writing. Any notice or document required or permitted to be
delivered hereunder shall be deemed to be delivered, whether actually received
or not when deposited in the United States mail, postage prepaid, certified or
registered mail, return receipt requested, addressed to the parties hereto at
the respective addresses set out in ARTICLE I, SECTION 1.1B & 1.1D above or such
other address as they may have hereafter specified by written notice.
ARTICLE XXIII. BROKERS.
23.1 Landlord and Tenant represent and warrant to each other that it
has not employed a broker in carrying on the negotiations relating to this
Lease. Tenant further warrants and covenants that is has not relied and will not
rely upon any oral representation about the property, other tenants'
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occupancy, uses or related matters made by any real estate agent, real estate
broker, agent or employee of Landlord, or any other party. Tenant shall
indemnify and hold Landlord harmless, from and against any cost, liability or
expense (including attorney's fees and disbursements) incurred as a result of
the assertion(s) or claim(s) by any person, firm or entity for brokerage or
other commissions or finder's fees based upon the claiming person's alleged
dealings with Tenant or any of its employees, agents or representatives.
ARTICLE XXIV. APPROVAL AND CHANGES REQUIRED BY LENDER.
24.1 Any mortgagee of the property, or of Landlord's interest therein,
may have the right to approve this Lease, and in the event such approval is not
granted, Landlord shall have the right to terminate this Lease as hereinafter
set forth. In the event that any mortgagee of the property, or of Landlord's
interest therein, requires, as a condition of such financing, modifications to
this Lease which (I) do not materially and adversely affect Tenant's use of the
Demised Premises as herein permitted; and (II) do not increase the rent or other
sums required to be paid by Tenant hereunder; then Landlord may submit to Tenant
a written amendment of this Lease incorporating such required changes. Tenant
shall execute such amendment within ten (10) days after the same has been
submitted to Tenant. If Tenant fails to so execute and deliver such amendment,
then Landlord shall thereafter have the right, at its sole option, to (A)
execute such amendment on Tenant's behalf, Tenant appointing Landlord its
irrevocable attorney-in-fact, said power being coupled with an interest to
execute such amendment; or (B) to cancel this Lease. Such cancellation option
shall be exercisable by Landlord's giving Tenant written notice of such
termination; immediately whereupon this Lease shall be canceled and terminated
and, upon relinquishment of possession of the Demised Premises by Tenant in the
condition required pursuant to the terms hereof, both Landlord and Tenant shall
thereupon be relieved from any and all further liability or obligation
hereunder.
ARTICLE XXV. PARKING.
25.1 During the Term of this Lease, Tenant and its employees and guests
shall have use of all parking areas in the Complex, without charge, for parking
purposes only, on an unreserved, non-exclusive basis in common with others
entitled to use of said parking areas. Landlord shall have general possession,
management and control of the parking areas, and may from time to time adopt
reasonable rules and regulations pertaining to the use thereof. Landlord
reserves the right to designate reserved parking in the parking areas.
ARTICLE XXVI. WAIVER OF TRIAL BY JURY AND RIGHT TO REDEEM.
26.1 Landlord and Tenant each agree to and they waive trial by jury in
any action, proceeding or counterclaim brought by either of the parties hereto
against the other on any matters whatsoever arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant, Tenant's use
or occupancy of said premises and/or any claim of injury or damage, and
statutory remedy. Tenant also hereby agrees that the provisions of SECTION
8-401(e) OF THE MARYLAND REAL PROPERTY CODE shall not apply to this Lease and
Tenant hereby waives its rights thereunder.
ARTICLE XXVII. FURNISHING OF FINANCIAL STATEMENTS.
27.1 Within ten (10) days of the execution of this Lease, Tenant shall
furnish Landlord financial statements outlining Tenant's current financial
condition if applicable, as of the last annual audit or the last regularly
prepared report including tax returns. Over the term of this Lease and any
extensions, within ten (10) days of Landlord's written request, Tenant shall
furnish financial statements outlining Tenant's current financial condition. The
foregoing requirements shall not apply during any period of time in which
Tenant's stock is listed on a national stock exchange.
ARTICLE XXVIII. OCCUPATIONAL AND ENVIRONMENTAL COMPLIANCE.
28.1 Tenant shall not in any manner use, maintain or allow the use or
maintenance of the property in violation of any law, ordinance, statute,
regulation, rule or order (collectively "Laws") of any governmental authority,
including but not limited to Laws governing zoning, health, safety (including
fire safety), occupational hazards, and pollution and environmental control.
Tenant shall not use, maintain or allow the use or maintenance of the property
or any part thereof to treat, store, dispose of, transfer, release, convey or
recover hazardous materials nor shall Tenant otherwise, in any
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manner, possess or allow the possession of any hazardous, materials on or about
the property; provided, however, any hazardous material lawfully permitted and
generally recognized as necessary and appropriate for general office use may be
stored and used in the Demised Premises, so long as (I) such storage and use is
in the ordinary course of Tenant's business permitted under this Lease; (II)
such storage and use is performed in compliance with all applicable laws and
regulations and in compliance with the highest standards prevailing in the
industry for the storage and use of such materials; and (III) Tenant delivers
prior written notice to Landlord of the identity of and information regarding
such materials as Landlord may require. Tenant shall immediately notify Landlord
of the presence or suspected presence of any hazardous material on or about the
property and shall deliver to Landlord any notice received by Tenant relating
thereto.
Landlord and its agents shall have the right, but not the duty, to
inspect the Demised Premises and conduct tests thereon at any time to determine
whether or the extent to which there is hazardous materials on the Demised
Premises. Landlord shall have the right to immediately enter upon the Demised
Premises to remedy any contamination found thereon. In exercising its rights
herein, Landlord shall use reasonable efforts to minimize interference with
Tenant's business but such entry shall not constitute an eviction of Tenant, in
whole or in part, and Landlord shall not be liable for any interference, loss,
or damage to Tenant's property or business caused thereby. If any lender or
governmental agency shall ever require testing to ascertain whether there has
been a release of hazardous materials, then the reasonable costs thereof shall
be reimbursed by Tenant to Landlord upon demand as additional rent if such
requirement arose in whole or in part because of Tenant's use of the Demised
Premises. Tenant shall execute affidavits, representations and the like from
time to time, at Landlord's request, concerning Tenant's best knowledge and
belief regarding the presence of any hazardous materials on the property or
Tenant's intent to store or use hazardous materials on the property. Tenant
shall indemnify and hold harmless Landlord from any and all claims, loss,
liability, costs, expenses or damage, including attorneys' fees and costs of
remediation and compliance, incurred by Landlord in connection with any breach
by Tenant of its obligations under this section. The covenants and obligations
of Tenant hereunder shall survive the expiration or earlier termination of this
Lease.
28.2 For the purposes of this ARTICLE XXVIII, the term "hazardous
materials" shall mean (I) any and all hazardous waste, toxic chemicals,
materials or substances occurring in the air, water, soil or ground water at the
property by reason of which the Tenant or Landlord would be subject to an
injunction action and/or any damages, penalties, clean up costs or other
liability under the provisions of the COMPREHENSIVE ENVIRONMENTAL RESPONSE,
COMPENSATION AND LIABILITY ACT 42 U.S.C. SECTION 9601 ET SEQ., THE SUPERFUND
AMENDMENTS AND REAUTHORIZATION ACT OF 1986, 42 U.S.C. SECTION 9601 (20D), THE
RESOURCE CONSERVATION AND RECOVERY ACT (THE SOLID WASTE DISPOSAL ACT), 42 U.S.C.
SECTION 9601 ET SEQ., THE FEDERAL WATER POLLUTION CONTROL ACT, AS AMENDED BY THE
CLEAN WATER ACT OF 1977, 33 U.S.C. SECTION 1251 ET SEQ., THE CLEAN AIR ACT OF
1966, 42 U.S.C. SECTION 7401 ET SEQ., AND THE TOXIC SUBSTANCES CONTROL ACT, 15
U.S.C. SECTION 2601, ET SEQ.; (II) any "oil, petroleum proDuCTs and their
by-products" as defined by the MARYLAND ENVIRONMENTAL CODE ANNOTATED SECTION
4-411(a)(3); as amended from time to time and regulations promulgated
thereunder; (III) any "hazardous substance" as defined by the MARYLAND
ENVIRONMENTAL CODE ANNOTATED, TITLE 7, SUBTITLE 2, as amended from time to time
and regulations promulgated thereunder; and (iv) any substance the presence of
which is prohibited or controlled by any other federal, state or local laws,
regulations, statutes, or ordinances now in a force or hereafter enacted
relating to waste disposal or environmental protection with respect to
hazardous, toxic or other substances generated, produced, leaked, released,
spilled, stored or disposed of at or from the property. Hazardous material shall
also include any other substance which by law requires special handling in its
collection, storage, treatment or disposal, but not including small quantities
of materials present on the property in retail containers, which would not be
prohibited, regulated or controlled under applicable environmental laws.
ARTICLE XXIX MISCELLANEOUS.
29.1 Nothing herein contained shall be deemed or construed by the
parties hereto, nor by any third party, as creating the relationship of
principal and agent or of partnership or a joint venture between parties hereof,
it being understood and agreed that neither the method of computation of rental,
nor any other provisions contained herein, nor the acts of the parties hereto,
shall be deemed to create any relationship between the parties hereto other than
the relationship of Landlord and Tenant. Whenever herein the singular number is
used, the same shall include the plural, and words of gender shall include each
other gender.
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29.2 The captions used herein are for convenience only and do not limit
or amplify the provisions hereof.
29.3 One or more waivers of any covenant, term or condition of this
Lease by Landlord shall not be construed as a waiver of a subsequent breach of
the same covenant, term or condition. The consent or approval by Landlord shall
not be construed as a waiver of a subsequent breach of the same covenant, term
or condition. The consent or approval by Landlord to or of any act by the Tenant
shall not be deemed to waive or render unnecessary consent to or approval of any
subsequent similar act.
29.4 Whenever a period of time is herein prescribed for action to be
taken by the Landlord, Landlord shall not be liable or responsible for, and
there shall be excluded from the computation of any such period of time, any
delays due to strikes, riots, acts of God, shortages of labor or materials, war,
government laws, regulations or restrictions or any other cause of any kind
whatsoever which is beyond the reasonable control of Landlord. At any time when
there is outstanding a mortgage, deed of trust or similar security instrument
covering Landlord's interest in the Demised Premises, Tenant may not exercise
any remedies for default by Landlord hereunder unless and until the holder of
the indebtedness secured by such mortgage, deed of trust or similar instrument
shall have received written notice of such default and a reasonable time for
such default shall thereafter have elapsed.
29.5 This Lease contains the entire agreement between the parties, and
no agreement shall be effective to change, modify or terminate this Lease in
whole or in part unless such agreement is in writing and duly signed by the
party against whom enforcement of such change, modification or termination is
sought.
29.6 The laws of the State of Maryland, without reference to its
conflicts of laws principles, shall govern the interpretation, validity,
performance and enforcement of this Lease. If any provision of this Lease should
be held to be invalid or unenforceable, the validity and enforceability of the
remaining provisions of this Lease shall not be affected thereby.
29.7 The terms, provisions and covenants contained in this Lease shall
inure to the benefit of and be binding upon the parties hereto and their
respective heirs, successors in interest and legal representatives except as
otherwise herein expressly provided.
29.8 Tenant shall not record this Lease or any memorandum or other
document referring to this Lease without the express written permission of
Landlord. Landlord, however, may record this Lease or any related document
without the consent or jointer of Tenant.
29.9 Tenant shall pay before delinquency all costs for work done or
caused to be done by Tenant in the Demised Premises which could result in any
lien or encumbrance in respect of such work and shall indemnify, defend and hold
harmless Landlord against any claim, loss, cost, demand and legal or other
expenses, whether in respect of any lien or otherwise, arising out of the supply
of material, services or labor for such work. Tenant shall immediately notify
Landlord of any such lien, claim of lien or other action of which it has or
reasonably should have knowledge and which affect the title to the Complex or
any part thereof, and shall cause the same to be removed within fifteen (15)
days (or such additional time as Landlord may consent to in writing) after its
filing, creation or assertion, whichever shall first occur, failing which
Landlord may declare Tenant in default hereunder and take such action as
Landlord deems necessary to remove the same and the entire cost thereof shall be
immediately due and payable by Tenant to Landlord as additional rent hereunder.
29.10 The submission of this Lease for examination does not constitute
a reservation of or an option for the Demised Premises nor does it constitute an
offer to lease the Demised Premises until signed by Landlord and this Lease
becomes effective as a Lease only upon execution and delivery thereof by both
Landlord and Tenant.
29.11 Time shall be of the essence for this Lease.
29.12 If any term, covenant or condition of this Lease or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such term, covenant or condition to persons or circumstances other than those
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as to which it is held invalid or unenforceable, shall not be affected thereby
and each term, covenant or condition of this Lease shall be valid and be
enforced to the fullest extent permitted by law.
29.13 It is agreed that, for the purpose of any suit brought or based
on this Lease, this Lease shall be construed to be a divisible contract, to the
end that successive actions may be maintained thereon as successive periodic
sums shall mature or be due hereunder, and it is further agreed that failure to
include in any suit or action any sum or sums then matured or due shall not be a
bar to the maintenance of any suit or action for the recovery of said sum or
sums so omitted; and Tenant agrees that it will not, in any suit or suits
brought or arising under this Lease for a matured sum for which judgment has not
previously been obtained or entered, plead, rely on or interpose the defenses of
res judicata, former recovery, extinguishment, merger, election or remedies or
other similar defense as a defense to said suit or suits.
ARTICLE XXX. ATTACHMENTS.
The Following Attachments are attached hereto and made a part hereof:
EXHIBIT A - PLAN OF THE COMPLEX
EXHIBIT B - RULES AND REGULATIONS
ARTICLE XXXI. STATUS AS SUBLEASE.
31.1 It is understood that this Lease is a sublease of a portion of the
Project leased to Landlord pursuant to a Lease dated August 30, 1995, between
the Gaithersburg Realty Trust, as Landlord, and Landlord, as Tenant (the "Master
Lease"). This Lease is fully subject and subordinate to all terms and conditions
of the Master Lease.
IN WITNESS HEREOF, the parties hereunto signed their names, as their
free act and deed on the day and year first above written, and do hereby
acknowledge and accept this Lease agreement.
ATTEST: LANDLORD: MANOR CARE, INC.
_____________________ BY:__________________________________
TITLE: ________________________________
ATTEST: TENANT: CHOICE HOTELS HOLDINGS, INC.
(TO BE RENAMED CHOICE HOTELS
INTERNATIONAL, INC.)
_____________________ BY: __________________________________
TITLE: ________________________________
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[MAP OF BOUNDARY SURVEY]
<PAGE> 23
EXHIBIT B
RULES AND REGULATIONS
1. The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, corridors or halls or other parts of the Building not occupied by any
Tenant shall not be obstructed or encumbered by any Tenant or used for any
purpose other than ingress and egress to and from the Demised Premises. Landlord
shall have the right to control and operate the public portions of the Building,
and the facilities furnished for the common use of the Tenants, in such manner
as Landlord deems best for the benefit of the Tenants generally. No Tenant shall
permit the visit to the Demised Premises of persons in such numbers or under
such conditions as to interfere with the use and enjoyment by other Tenants of
the entrances, corridors, elevators and other public portions or facilities of
the Building.
2. No awnings or other projections shall be attached to the outside
walls of the Building without the prior written consent of the Landlord. No
drapes, blinds, shades, or screens shall be attached to or hung in, or used in
connection with any window or door of the Demised Premises, without the prior
written consent of the Landlord. Such awnings, projections, curtains, blinds,
shades, screens, or other fixtures must be of a quality, type, design, and
color, and attached in the manner approved by Landlord. Landlord agrees that it
will not unreasonably withhold its consent to any such request by Tenant.
3. No sign, advertisement, notice or other lettering shall be
exhibited, inscribed, painted, or affixed by any Tenant on any part of the
outside or inside of the Demised Premises or building without the prior written
consent of the Landlord. In the event of the violation of the foregoing by any
Tenant, Landlord may remove same without any liability, and may charge expense
incurred by such removal to the Tenant or Tenants violating this rule. Interior
signs on doors and directory tablet shall be inscribed, painted or affixed for
each Tenant by the Landlord at the expense of such Tenant, and shall be of a
size, color and style acceptable to the Landlord.
4. No show cases or other articles shall be put in front of or affixed
to any part of the exterior of the Building, nor placed in the halls, corridors
or vestibules, without the prior written consent of the Landlord.
5. The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed, and no
sweepings, rubbish, rags, or other substances shall be thrown therein. All
damages resulting from any misuse of the fixtures shall be borne by the Tenant
who, or whose servants, employees, agents, visitors or licensees, shall have
caused the same.
6. There shall be no unnecessary marking, painting, drilling into or in
any way defacing any part of the Demised Premises or the Building. No boring,
cutting or stringing of wires shall be permitted. Tenant shall not construct,
maintain, use or operate within the Demised Premises or elsewhere within or on
the outside of the Building, any electric device, wiring or apparatus in
connection with a loud speaker system or other sound system.
7. No bicycles, vehicles or animals, birds or pets of any kind shall be
brought into or kept in or about the Demised Premises except seeing eye dogs. No
Tenant shall cause or permit any unusual or objectionable odors to be produced
upon or permeate from the Demised Premises, except as may be permitted in
accordance with the Use and Occupancy permit.
8. No space in the Building shall be used for manufacturing, for the
storage of merchandise, or for the sale of merchandise, goods or property of any
kind at auction.
9. No Tenant shall make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with occupants of this or neighboring
buildings or premises or those having business with them, whether by the use of
any musical instrument, radio, talking machine, unmusical noise, whistling,
singing, or in any other way. No Tenant shall throw anything out of the doors or
windows or down the corridors or stairs.
<PAGE> 24
10. No inflammable, combustible or explosive fluid, chemical or
substance as defined by the Environmental Protection Agency shall be brought or
kept upon the Demised Premises.
11. No additional locks or bolts of any kind shall be placed upon any
of the doors, or windows by any Tenant, nor shall any changes be made in
existing locks or the mechanism thereof, except as may be required by Tenant as
a financial institution. The doors leading to the corridors or main halls shall
be kept closed during business hours except as they may be used for ingress or
egress. Each Tenant shall, upon the termination of his tenancy, restore to
Landlord all keys of stores, offices, storage, and toilet rooms either furnished
to, or otherwise procured by, such Tenant, and in the event of the loss of any
keys, so furnished, such Tenant shall pay to the Landlord the cost thereof.
12. All removals, or the carrying in or out of any safes, freight,
furniture or bulky matter of any description must take place during the hours
which the Landlord or its Agent may determine from time-to-time. The Landlord
reserves the right to inspect all freight to be brought into the Building and to
exclude from the Building all freight which violates any of these Rules and
Regulations or the Lease of which these Rules and Regulations are a part.
13. Any person employed by any Tenant to do janitor work within the
Demised Premises must obtain Landlord's consent and such person shall, while in
the Building and outside of said Demised Premises, comply with all instructions
issued by the Superintendent of the Building. No Tenant shall engage or pay any
employees on the Demised Premises, except those actually working for such Tenant
on said premises.
14. Landlord shall have the right to prohibit any advertising by any
Tenant which, in Landlord's reasonable opinion, tends to impair the reputation
of the Building or its desirability as a building for offices, and upon written
notice from Landlord, Tenant shall refrain from or discontinue such advertising.
15. The premises shall not be used for lodging or sleeping or for any
immoral or illegal purpose.
16. Each Tenant, before closing and leaving the Demised Premises at any
time, shall see that all windows are closed.
17. The requirements of Tenants will be attended to only upon
application of the office of the Building. Employees shall not perform any work
or do anything outside of the regular duties, unless under special instruction
from the management of the Building.
18. Access plates to under floor conduits shall be left exposed. Where
carpet is installed, carpet shall be cut around access plates.
19. Mats, trash and other objects shall not be placed in the public
corridors.
20. The Landlord does not maintain suite finishes which are
non-standard, such as kitchens, bathrooms, wallpaper, special lights, etc.
However, should the need for repairs arise, the Landlord will arrange for the
work to be done at the Tenant's expense.
21. Violation of these rules and regulations, or any amendments
thereto, shall be sufficient cause for termination of this Lease at the option
of the Landlord.
22. Smoking in the Demised Premises or anywhere else in the Building is
prohibited.
<PAGE> 1
Exhibit 10.11
PROCUREMENT SERVICES AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of
___________, 1996, by and between MANOR CARE, INC., a Delaware corporation
("Manor"), and CHOICE HOTELS HOLDINGS, INC., (to be renamed Choice Hotels
International, Inc.) a Delaware corporation ("Choice").
R E C I T A L S
WHEREAS, Choice desires to have Manor provide certain procurement
services to Choice upon request;
WHEREAS, pursuant to a Distribution Agreement (the "Distribution
Agreement") dated as of ___________, 1996, Choice and Manor have agreed to enter
into procurement services agreement with the terms and conditions set forth
herein; and
WHEREAS, Manor shall retain the Corporate Procurement Department
personnel and systems formerly utilized in the administration of the services
described herein; and
WHEREAS, Choice desires to retain Manor as described herein, and Manor
desires to render such assistance on an equitable, arms length basis for a fee;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Choice and Manor agree as follows:
1. Definitions. As used in this Agreement, the following capitalized
terms shall have the meanings indicated unless the context requires otherwise:
"Confidential Information" shall have the meaning specified in
paragraph 6.
"Choice Locations" shall mean the facilities operated in
connection with the Lodging Business as of the Distribution Date, as such
facilities may be increased, decreased, or expanded during the term of this
Agreement by development of new or expansion or disposition of existing
facilities by Choice.
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"Distribution" means the distribution to the holders of Manor
Care Common Stock all the outstanding shares of Choice Common Stock.
"Distribution Date" means the date determined by the Board of
Directors of Manor as the date on which the Distribution shall be effected.
"Fee" shall have the meaning specified in paragraph 5.
"Fiscal Year" shall mean Choice's fiscal year.
"Lodging Business" shall mean any business or operation of
Choice or the Lodging Subsidiaries (as defined in the Distribution Agreement)
which is, pursuant to the Distribution Agreement, to be conducted, following the
Distribution.
"Products" shall mean goods within the categories of food,
beverages, and other supplies described on Exhibit A and such additional
categories of goods and such services (i.e., travel agency, car rental) as the
parties may agree in writing to add.
"Prime Rate" shall be the rate identified from time to time in
the New York edition of the Wall Street Journal as being the Prime Rate of
interest.
"Service Area" shall mean the areas throughout the world
within which Manor provides procurement services to Choice Locations on the
Distribution Date, and such additional areas within which Manor now or in the
future provides procurement services to Manor business operations.
Any capitalized terms defined in the Distribution Agreement and used herein
shall have the meanings ascribed to them in the Distribution Agreement unless
otherwise defined herein.
2. Procurement Services.
a. Upon the request of Choice, Manor shall provide Choice
within the Service Area, and Choice shall purchase from Manor, the following
services:
(i) Assisting Choice to develop Product
specifications;
(ii) Assisting Choice to select local and national
vendors and distributors for Proprietary Items, and contracting with such
vendors and distributors on Choice's behalf and in Choice's name; and
(iii) Assisting Choice to purchase Products from
local and national vendors and distributors with which Manor has agreements, on
terms and conditions negotiated by Manor on
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behalf of and subject to Choice approved requirements, to the extent permitted
under the terms of Manor's agreements with such vendors and distributors;
provided however, Manor shall not provide Choice any credit support in
connection therewith.
b. Standard of Care and Modifications. All services provided
hereunder shall be administered in accordance with Manor's standard policies,
procedures and practices in effect as of the date hereof and as may be changed,
and as more particularly described below, or as otherwise specified in
accordance with the terms thereof. In so doing, Manor shall follow commonly
accepted standards of care in the industry and exercise the same care and skill
as it exercises in performing like services for itself. Manor agrees to provide
such services only if it reasonably believes the service will not interfere with
the conduct of the business of Manor or pose an unreasonable burden.
c. Liaisons. Choice and Manor shall each appoint a managerial
level individual (hereinafter "Representative") to facilitate communications and
performance under this Agreement. Each party may treat an act of a
Representative of the other party as being authorized by such other party
without inquiring behind such act or ascertaining whether such Representative
had authority to so act. The initial Representatives are named on Exhibit B.
Each party shall have the right at any time and from time to time to replace its
Representative by giving notice in writing to the other party setting forth the
name of (i) the Representative to be replaced and (ii) the replacement, and
certifying that the replacement Representative is authorized to act for the
other party giving the notice in all matters relating to this Agreement.
Choice's Representative shall be responsible for authorizing Manor to enter into
arrangements on behalf of Choice, as hereinafter provided.
d. Limitation of Responsibility. Manor shall have no
obligation to train Choice employees to perform procurement functions or to
convey procurement know-how to Choice.
3. Contracting and Purchasing Procedures.
Upon the request of Choice, Manor shall provide the following services:
a. Manor shall advise Choice of arrangements in effect during
the term of this Agreement between Manor and its vendors and distributors, under
which Choice may purchase Products, provided that such purchases by Choice do
not result in an increased cost of goods for Manor and only for so long as
Choice complies with all the terms, conditions, and performance requirements for
such agreements.
b. Choice shall, at all times, have sole responsibility for
placing orders with vendors and distributors for Products required at Choice
Locations.
4. Relationships with Vendors and Distributors.
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a. Except as otherwise provided herein, Choice shall be
responsible to the appropriate vendor or distributor for payment for all
Products sold to it pursuant to this Agreement, it being understood that Manor
shall not be responsible for payment for such Products. Choice shall be
responsible for establishing its own creditworthiness with each vendor and
distributor, and Manor may so advise each vendor and distributor in a manner
acceptable to Manor and Choice.
b. Manor shall monitor, account for and pass on to Choice, all
discounts, allowances and other promotional payments or credits Manor receives
for purchases of Products for Choice, provided that with respect to Products for
which Choice made a commitment to purchase, Choice has satisfied such commitment
to the extent necessary to earn the applicable discount, allowance or other
promotional payment or credit. Manor shall provide Choice with its proportionate
share of tiered or bracketed volume incentive rebates and allowances based upon
the average value of the rebate or allowance received by Manor for the total
quantity to which the rebate or allowance was applicable. Choice agrees to be
responsible for any performance requirements associated with any rebates or
allowances it receives and to refund to Manor any rebates and allowances paid or
credited to Choice by Manor for which Choice does not purchase the requisite
Products.
5. Compensation for Services.
a. As compensation to Manor for services performed hereunder,
Choice shall pay Manor for each full Fiscal Year during the term of this
Agreement, an amount (hereinafter the "Fee") determined by multiplying the total
dollar amount of the Manor Care Procurement Department (#88) expenses by an
agreed upon percentage estimate of time spent each quarter by the Procurement
staff providing goods and consulting services to Choice. Choice shall furnish
Manor with such information as Manor may reasonably request for the purpose of
calculating the Fee. Choice shall be entitled to review Manor's calculations and
allocations. Any such review by Choice shall be subject to such reasonable
requirements to preserve the confidentiality of Manor's proprietary methods,
systems and data as Manor may require. Choice shall pay the Fee in four (4)
quarterly payments. Manor shall invoice Choice for each payment at least ten
(10) days prior to the end of each of Manor's quarterly Accounting Periods, and
Choice's payment shall be due on the last day of the accounting period for which
Choice is being invoiced. In the case of the first accounting period of each
Fiscal Year, Manor shall invoice Choice as soon as the required information is
available and Choice's payment shall be due within thirty (30) days after
receipt of the invoice. If this Agreement begins or ends on a day other than the
first or last day of one of Manor's quarterly Accounting Periods, the period
payment shall be prorated for the portion of the Accounting Period that this
Agreement was in effect.
b. Any payments not made by Choice to Manor when due shall
bear interest from the date due to the date of payment at the rate per annum
equal to the Prime Rate, as may vary from time to time.
c. Compensation to be paid to Manor for services performed for
Choice hereunder shall be paid by Choice, and not by any vendor.
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6. Confidentiality. The parties acknowledge that they will be
exchanging Confidential Information (as defined below) during the term of this
Agreement and each party shall retain the Confidential Information of the other
in strictest confidence, unless and until it becomes part of the public domain
or disclosure as required by law. "Confidential Information" is all information
which is not known by the party's competitors and which is communicated to the
other party, including, but not limited to, information regarding new product
introductions, source and price of Products, procurement systems and methods of
operation, quality assurance techniques, and cost and marketing data, which is
identified as "confidential". All confidential and proprietary information which
either party has obtained from the other shall be returned upon request, to the
extent practicable, upon the expiration or earlier termination of this
Agreement. The provisions of this paragraph shall survive expiration or earlier
termination of this Agreement.
7. Term. The term of this Agreement shall commence on the Distribution
Date and shall remain in effect through the end of the first full Fiscal Year
immediately following the Distribution Date. Unless terminated pursuant to the
terms hereof, the Agreement shall automatically renew each Fiscal Year
thereafter for the extended term of said Fiscal Year and shall not extend beyond
thirty (30) months from the Distribution Date; provided, however, that Choice
may terminate this Agreement or any services provided hereunder at any time for
any reason or no reason by sending written notice to Manor upon sixty (60) days'
prior notice to Manor. This Agreement may also be terminated in the event of a
default (past the expiration of any applicable cure period provided herein) in
accordance with the provisions of this Agreement.
8. Relationship of Parties. It is understood and agreed that nothing in
this Agreement shall be deemed or construed by the parties or any third party as
creating an employer-employee, partnership or joint venture relationship between
the parties. Manor shall have the right to enter into supply contracts,
commitments or arrangements in the name of, or on behalf of, Choice, as provided
in this Agreement. Except to the extent that Manor may enter into such
contracts, commitments or arrangements on behalf of Choice, neither party will
be deemed or construed to be an agent of the other for any purpose.
9. Disclaimers.
a. Manor does not guarantee performance of any vendor or
distributor recommended to Choice or contracted with on behalf of Choice. Manor
shall not be liable to Choice, or deemed to be in default of any obligation
arising from this Agreement, for any vendor or distributor delay or failure to
deliver Products for any cause whatsoever except a Manor default. Choice's
exclusive remedy in case of such a delay or failure of delivery shall be solely
against the vendor or distributor and Manor's only obligation shall be to assist
Choice in locating an alternative source of supply.
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b. MANOR DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO FOOD, BEVERAGES OR OTHER
SUPPLIES DELIVERED TO CHOICE BY A VENDOR OR DISTRIBUTOR PURSUANT TO THIS
AGREEMENT. Choice acknowledges that its exclusive
remedy in case of any defective Product delivered to it pursuant to this
Agreement lies solely against the vendor or distributor, and not against Manor.
Manor shall assign to Choice any express warranties or indemnifications covering
Products delivered to Choice, to the extent they are assignable by Manor
excluding claims or costs relating to Manor's bad faith, gross negligence or
fraud. Manor agrees to cooperate with Choice, at Choice's sole cost and expense,
in the enforcement of any such warranties or indemnifications against vendors or
distributors.
10. Default. If either party materially defaults hereunder, the
non-defaulting party may terminate this Agreement effective immediately (subject
to the cure periods set forth herein below) upon written notice to the
defaulting party. The non-defaulting party shall be entitled to all remedies
provided by law or equity (including reasonable attorney's fees and costs of
suit incurred). The following events shall be deemed to be material defaults
hereunder:
a. Failure by either party to make any payment required to be
made to the other hereunder, which failure is not remedied within five (5) days
after receipt of written notice thereof; or
b. Except as otherwise provided herein, failure by either
party substantially to perform in accordance with the terms and conditions of
this Agreement, which failure is not remedied within thirty (30) days after
receipt of written notice from the other party specifying the nature of such
default; or
c. (i) Filing of a voluntary bankruptcy petition by either
party; (ii) filing of an involuntary bankruptcy petition against either party
which is not withdrawn within sixty (60) days after filing; (iii) assignment for
the benefit of creditors made by either party; or (iv) appointment of a receiver
for either party.
11. Indemnification. Choice shall indemnify, defend and hold harmless
Manor and its directors, officers and employees from Losses (as defined below),
other than Losses directly and proximately caused solely by Manor's criminal
conduct, fraud, bad faith or gross negligence. The term "Losses" shall include
costs of any claim, lawsuit, settlement, judgment, penalty, or reasonable
attorneys' fees. Manor shall indemnify, defend and hold harmless Choice and its
directors, officers and employees from Losses directly and proximately caused
solely by Manor's criminal conduct, fraud, bad faith or gross negligence, unless
the actions (or inaction) causing the Losses were taken (or not taken) at the
specific direction of Choice, its subsidiaries, employees, or agents.
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12. Assignment. Neither party shall, without the prior written consent
of the other, assign any rights or delegate any obligations under this
Agreement, such consent not to be unreasonably withheld, conditioned or delayed.
13. Headings. The headings used in this Agreement are inserted only for
the purpose of convenience and reference, and in no way define or limit the
scope or intent of any provision of part hereof.
14. Severability of Provisions. Neither Manor nor Choice intends to
violate statutory or common law by executing this Agreement. If any section,
sentence, paragraph, clause or combination of provisions in this Agreement is in
violation of any law, such sections, sentences, paragraphs, clauses or
combinations shall be inoperative and the remainder of this Agreement shall
remain in full force and effect and shall be binding upon the parties except to
the extent it would result in an interpretation which would completely frustrate
the purpose of entering into the agreement.
15. Parties Bound. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective permitted successors and
assigns. Nothing herein, expressed or implied, shall be construed to give any
other person any legal or equitable rights hereunder.
16. Notices. All notices and other communications hereunder shall be in
writing and shall be delivered by hand or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other addresses for a party as shall be specified by like notice) and shall be
deemed given on the date on which such notice is received:
To Choice: Choice Hotels Holdings, Inc.
10750 Columbia Pike
Silver Spring, MD 20901
Attention: General Counsel
To Manor: Manor Care, Inc.
11555 Darnestown Road
Gaithersburg, MD 20878-3200
Attention: General Counsel
17. Further Action. Manor and Choice each shall cooperate in good faith
and take such steps and execute such papers as may be reasonably requested by
the other party to implement the terms and provisions of this Agreement.
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18. Waiver. Manor and Choice each agree that the waiver of any default
under any term or condition of this Agreement shall not constitute any waiver of
any subsequent default or nullify the effectiveness of that term or condition.
19. Governing Law. All controversies and disputes arising out of or
under this Agreement shall be determined pursuant to the laws of the State of
Maryland, United States of America, regardless of the laws that might be applied
under applicable principles of conflicts of laws.
20. Consent to Jurisdiction. The parties irrevocably submit to the
exclusive jurisdiction of (a) the Courts of the State of Maryland in Montgomery
County, and (b) the United States District Court for the State of Maryland for
the purposes of any suit, action or other proceeding arising out of this
Agreement.
21. Entire Agreement. This Agreement constitutes the entire
understanding between the parties hereto, and supersede all prior written or
oral communications, relating to the subject matter covered by said agreements.
No amendment, modification, extension or failure to enforce any condition of
this Agreement by either party shall be deemed a waiver of any of its rights
herein. This Agreement shall not be amended except by a writing executed by both
parties hereto.
22. Commercially Reasonable Terms and Conditions. Notwithstanding
anything in this Agreement to the contrary, the terms and provisions of this
Agreement reflect and shall reflect commercially reasonable terms and conditions
(including, but not limited to, pricing) that are at least as favorable and as
competitive to Choice as the terms and conditions Manor would grant third
parties for substantially similar goods and services.
23. Force Majeure. Manor and Choice shall incur no liability (except
for payments for Products actually delivered hereunder) to each other due to a
failure to perform under the terms and conditions of this Agreement resulting
from fire, flood, war, strike, lock-out, work-stoppage or slow- down, labor
disturbances, power failure, major equipment breakdowns, construction delays,
accident, riots, acts of God, acts of United States' enemies, laws, orders or at
the insistence or result of any governmental authority or any other delay beyond
each other's reasonable control.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CHOICE HOTELS HOLDINGS, INC.,
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a Delaware corporation
By:_____________________________
Name:__________________________
Title:___________________________
MANOR CARE, INC., a Delaware
corporation
By:____________________________
Name:_________________________
Title:___________________________
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<PAGE> 10
EXHIBIT A
PRODUCTS
- - Kitchen and Foodservice supplies and equipment
- - Office/Administration supplies and equipment
- - Housekeeping, laundry and maintenance supplies and equipment
- - Medical supplies and equipment
- - Furniture, furnishings, and design items.
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EXHIBIT B
REPRESENTATIVES
_______________ - Manor
_______________ - Choice
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EXHIBIT 10.12
RISK MANAGEMENT CONSULTING SERVICES AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of
____________, 1996 by and between MANOR CARE, INC., a Delaware corporation
("Manor", and CHOICE HOTELS HOLDINGS, INC., a Delaware corporation ("Choice").
In consideration of the mutual covenants contained herein, and other
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Choice and Manor agree as follows:
1. Definitions.As used in this Agreement, the following capitalized terms
shall have the meanings indicated unless the context requires otherwise:
"Distribution" means the distribution to the holders of Manor Care
Common Stock all the outstanding shares of Choice Common Stock.
"Distribution Date" means the date determined by the Board of
Directors of Manor as the date on which the Distribution shall be
effected.
"Prime Rate" shall be the rate identified from time to time in the
New York edition of the Wall Street Journal as being the Prime Rate of
interest.
2. Description of Services
Upon the request of Choice, Manor agrees to provide the following risk
management consulting services:
Insurance Renewals - Domestic and International: Negotiate the
renewal and placement of property and casualty insurance including property,
boiler, crime, auto liability, general liability, workers' compensation,
umbrella liability and directors and officers liability. This includes
assembling historical loss information and renewal information, calculation of
values, evaluation and negotiation of proposals, premiums and coverages with
brokers and underwriters on behalf of Choice.
Contract Review: Review insurance, indemnity and bond provisions of
proposed contracts as requested. Assist attorneys or others to negotiate
acceptable terms.
Surety Bond Procurement: Assist Choice managers with bond
applications and procedures, request bonds from broker, have bonds executed and
delivered to requesting party. Maintain bond log and schedule. Obtain renewals
or releases of expired bonds, review and approve accuracy of premium invoices.
Certificate Tracking: Monitor licensee certificate tracking program.
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Financial and Regulatory Support: Provide the following accounting
services:
- Annual/quarterly state compliance reports on outstanding
self-insurance liabilities incurred.
- Provide internal reporting associated with outstanding losses,
accounts receivable, LOC and Surety Bond requirements.
Premium and Claims Payment Processing and Reimbursement: Manor shall
process payments on behalf of Choice for Choice's financial obligations under
policies and self-insurance plans with an effective date on or after the
Distribution Date. Reimbursement for all such policies and self-insurance plans
shall be as follows:
(1) Invoices for premiums and services related to such policies and plans
shall be paid within five (5) days of receipt by Choice;
(2) An escrow account shall be established for the payment of claims. This
account will be structured to allow for three (3) months average claims
payments. The replenishment in whole or in part, shall be due to Manor on
the first day of each month, unless the account is in negative balance,
thereby requiring replenishment within forty-eight (48) hours.
Risk Management Resource: Provide research, advice and counsel to Choice
as requested on insurance and risk management related issues, both domestically
and internationally. Review insurance coverage, policies and provide risk
management services listed below:
Certificates of Insurance Review (contractors)
Certificates of Insurance Issuance
Administration of prior programs
Actuarial Review of liabilities
Self Administer Workers' Compensation claims in PA
Monitor Claims (Set reserves, settle claims)
Handle first party claims (Property, Crime, etc.)
Oversee Auto Claims against others
Oversee claims against contractors and/or subcontractors
Self Insurance Filings and Assessments
Oversee Franchise Property and Casualty and Group Insurance Programs
Contract Review and Development
Negotiate and contract with outside services as needed (Brokers, Claims
Adjusters, Managed Care)
Safety and Loss prevention
Budgeting and Allocation of premiums
IOC Policies (Crime and Directors and Officers) and contractual issues
Potential development of International Franchise insurance program
Review Franchise Agreements and recommend appropriate wording
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Determine loss estimates for future years
Any other Risk Management related duties as deemed applicable
All services provided hereunder shall be administered in accordance with
Manor's standard policies, procedures and practices in effect as of the
Distribution Date and as the same may be changed from time to time. In providing
such services, Manor shall follow commonly accepted standards of care in the
industry and exercise the same care and skill as it exercises in performing like
services for itself. Choice shall adopt reasonable measures to limit its
exposure with respect to any potential Losses (defined below).
Manor agrees to provide such services only if it reasonably believes the
service will not interfere with the conduct of the business of Manor or pose an
unreasonable burden.
3. Term. The term of this Agreement shall commence on the Distribution
Date and shall remain in effect through the end of the first full Fiscal Year
immediately following the Distribution Date. Unless terminated pursuant to the
terms hereof, the Agreement shall automatically renew each Fiscal Year
thereafter for the extended term of said Fiscal Year and shall not extend past
the last day of the thirtieth (30th) month following the Distribution; provided,
however, that Choice may terminate this agreement or any services provided
hereunder at any time for any reason or no reason by sending 60 days prior
written notice to Manor. This Agreement may also be terminated in the event of a
default (past the expiration of any applicable cure period provided herein) in
accordance with the provisions of this Agreement.
4. Fees; Premiums.
Fee will be $438,000 per year, payable in twelve (12) equal monthly
installments. Future years' fees will be determined within sixty (60) days prior
to renewal of contract.
Payment for all services hereunder shall be made by Choice to Manor within
30 days of receipt of invoice for payment (with appropriate supporting
documentation for any out-of-pocket expenses in excess of fees payable hereunder
and invoicing for insurance premiums, self-insurance and administrative costs,
if requested). Any payments not made by Choice to Manor when due shall bear
interest, computed daily, from the date due to the date of payment based on the
annual percentage rate equal to the Prime Rate, as same may vary from time to
time, plus two (2) percentage points.
The parties agree that the terms and provisions of this Agreement reflect
and shall reflect commercially reasonable terms and conditions (including, but
not limited to, pricing) that are at least as favorable and as competitive to
Choice as the terms and conditions Manor would grant or require of third parties
for substantially similar goods and services.
Payment for all policies and self insurance plans with an effective date
on or after Distribution Date shall be payable as follows:
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1) Invoices for premiums and services related to such policies and plans
shall be paid within 5 days of receipt by Choice.
2) An escrow account shall be established for the payment of claims. This
account will be structured to allow for three (3) months average claims
payments, and the replenishment, in whole or in part, shall be due to
Manor on the first of each month, unless the account is in negative
balance, requiring replenishment within 48 hours.
5. Termination.
If either party materially defaults hereunder, the non-defaulting party
may terminate this Agreement effective immediately (subject to the cure periods
set forth herein below) upon written notice to the defaulting party. The
non-defaulting party shall be entitled to all remedies provided by law or equity
(including reasonable attorneys' fees and costs of suit incurred). The following
events shall be deemed to be material defaults hereunder:
(a) Failure by either party to make any payment required to be made to the
other hereunder, which failure is not remedied within five (5) days after
receipt of written notice thereof; or
(b) Except as otherwise provided herein, failure by either party
substantially to perform in accordance with the terms and conditions of
this Agreement, which failure is not remedied within thirty (30) days
after receipt of written notice from the other party specifying the nature
of such default; or
(c) (i) Filing of a voluntary bankruptcy petition by either party; (ii)
filing of an involuntary bankruptcy petition against either party which is
not timely controverted and results in the entry of an order for relief;
(iii) assignment for the benefit of creditors made by either party; or
(iv) appointment of a receiver for either party.
6. Disclaimers; Limitation of Liability; Indemnification.
The following disclaimers, limitation of liability and indemnification
provisions shall apply during the term of this Agreement:
(a) MANOR DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT
LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE, WITH RESPECT TO THE SERVICES. Manor shall use
reasonable efforts to perform the services in a professional and
workmanlike manner and in accordance with the standard of care set forth
herein but the results of the services are furnished "as is."
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(b) With regard to Losses arising out of errors or omissions in the
provision of services which are caused by Manor, Manor's sole liability to
Choice for such Losses shall be to furnish correct information, payment
and/or adjustment in the services, at no additional cost or expense to
Choice; provided, Choice must promptly advise Manor of any such error or
omission of which it becomes aware after having used reasonable efforts to
detect any such errors or omissions in accordance with the standard of
care set forth herein. If it is determined that Manor is not guilty of any
errors or omissions, it will be the responsibility of Choice to reimburse
Manor for any costs and expenses incurred.
(c) With regard to Losses arising out of the unavailability, delay or
interruption of any services for any reason beyond Manor's reasonable
control, Manor's sole liability to Choice for such Losses shall be to use
reasonable efforts to make the services available and/or to resume
performing the services as promptly as reasonably practicable and at no
additional charge to Choice.
(d) EXCEPT FOR ITS OBLIGATION TO COMPLY WITH SUBPARAGRAPHS (a),
(b), and (c),
(i) MANOR SHALL NOT BE LIABLE FOR ANY ERRORS, OMISSIONS, DELAYS, OR
LOSSES UNLESS CAUSED SOLELY BY ITS CRIMINAL CONDUCT, FRAUD, BAD
FAITH OR GROSS NEGLIGENCE. CHOICE AGREES THAT IN NO EVENT WILL MANOR
BE LIABLE FOR INCIDENTAL, INDIRECT, SPECIAL, OR CONSEQUENTIAL
DAMAGES.
(ii) CHOICE FURTHER AGREES THAT IN NO EVENT WILL THE TOTAL AGGREGATE
LIABILITY OF MANOR FOR ANY AND ALL CLAIMS, LOSSES, OR DAMAGES
ARISING UNDER THIS AGREEMENT AND FOR THE SERVICES PERFORMED
HEREUNDER EXCEED THE VALUE OF CHOICE'S PAYMENT FOR SAID SPECIFIC
SERVICE OVER ONE FOUR-WEEK ACCOUNTING PERIOD'S TIME.
(e) CHOICE AGREES TO INDEMNIFY, DEFEND AND HOLD HARMLESS MANOR (ITS
DIRECTORS, OFFICERS, EMPLOYEES AND ATTORNEYS) FROM ALL LOSSES (AS DEFINED)
ASSERTED BY OR ON BEHALF OF THIRD PARTIES OR WHICH RESULT FROM
GOVERNMENTAL ACTION OTHER THAN ANY SUCH LOSSES CAUSED BY MANOR'S SOLE
CRIMINAL CONDUCT, FRAUD, BAD FAITH OR GROSS NEGLIGENCE. THE PROVISIONS OF
THIS INDEMNITY SHALL APPLY ONLY TO LOSSES (AS DEFINED) WHICH RELATE
DIRECTLY TO THE PROVISION OF THE SERVICES.
(f) With regard to either parties' indemnification, the party required to
indemnify pursuant to this Section (the "Indemnitor"), upon demand by the
other party ("Indemnitee"), at its sole cost and expense, shall resist or
defend such claim, action or proceeding (in the Indemnitee's
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<PAGE> 6
name, if necessary), using such attorneys as the Indemnitee shall approve,
which approval shall not be unreasonably withheld. If, in the Indemnitee's
reasonable opinion, there exists a conflict of interest which would make
it inadvisable to be represented by counsel for the Indemnitor, the
Indemnitor and the Indemnitee shall jointly select acceptable attorneys,
and the Indemnitor shall pay the reasonable fees and disbursements of such
attorneys.
(g) The foregoing provisions of this Section set forth the full extend of
the parties' liability (monetary or otherwise) under the Agreement for any
and all Losses.
For purposes of this Agreement, "Losses" shall mean any and all suits,
debts, causes of action, losses, liabilities, claims or demands (whether at law
or in equity), and any damages, settlement, judgment, penalty or other
disposition of the same, and all costs and expense of the same (including,
without limitation, attorneys' fees but in no situation whatsoever shall Manor
be liable to Choice for incidental, indirect, special or consequential damages),
which arise from or are related to the services of this Agreement.
7. Representatives.
Choice and Manor hereby appoint the two managerial level Representatives
to facilitate communications and performance hereunder. Each party may treat an
act of a Representative of the other party as being authorized by such other
party without inquiring behind such act or ascertaining whether such
Representative had authority to so act. The initial Representatives are named
below and either party may change its Representative by providing the other
party notice.
INITIAL REPRESENTATIVES
_________________________________________ - Manor
_________________________________________ - Choice
8. Governing Law.
This Agreement shall be governed by Maryland law, without reference to its
conflict of laws principles.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CHOICE HOTELS HOLDINGS, INC., a
Delaware corporation
By:______________________________________
Name:____________________________________
Title:____________________________________
MANOR CARE, INC., a
Delaware corporation
By:______________________________________
Name:____________________________________
Title:___________________________________
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EXHIBIT 10.13
TAX ADMINISTRATION AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of
_________________, 1996 by and between MANOR CARE, INC., a Delaware corporation
("Manor"), and CHOICE HOTELS HOLDINGS, INC. (to be renamed Choice Hotels
International, Inc.), a Delaware corporation ("Choice").
RECITALS
WHEREAS, pursuant to a Distribution agreement (the "Distribution
Agreement" dated as of ____________, 1996, Choice and Manor have agreed to enter
into an agreement relating to the administration of sales, use, hotel occupancy,
real estate, personal property and other taxes, miscellaneous licenses, permits,
and fees with the terms and conditions set forth herein; and
WHEREAS, Manor shall retain the personnel and systems formerly utilized
in the administration of the services described herein; and
WHEREAS, Choice desires to retain Manor as described herein, and Manor
desires to render such assistance on an equitable, arms length basis for a fee;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Choice and Manor agree as follows:
1. Definitions. As used in this Agreement, the terms indicated below shall have
the following meanings:
"Ancillary Agreement" shall have the meaning described in the
Distribution Agreement.
"Distribution" means the distribution to the holders of Manor Care
Common Stock all the outstanding shares of Choice Common Stock.
"Distribution Date" means the date determined by the Board of
Directors of Manor as the date on which the Distribution shall be
effected.
"Lodging Business" shall mean any business or operation of Choice
or the Lodging Subsidiaries (as defined in the Distribution Agreement) which is,
pursuant to the Distribution Agreement, to be conducted, following the
Distribution.
<PAGE> 2
"Prime Rate" shall be the rate identified from time to time in the
New York edition of the Wall Street Journal as being the Prime Rate of
interest.
"Tax Claim" means a claim by a Taxing Authority for sales, use,
occupancy, real estate, personal property and other taxes, miscellaneous
licenses, permits, and fees, interest and penalties (other than penalties
for the delinquent payment of assessments) which claims arise from or
relate to Choice's Retained Business and which under the Distribution
Agreement or any Related Agreement is charged to Choice.
"Taxing Authority" means any Country, State, County, Municipality,
City or other governmental entity legally empowered to tax Choice
properties or operations. Any capitalized terms defined in the
Distribution Agreement and used herein shall have the meanings ascribed to
them in the Distribution Agreement unless otherwise defined herein.
2.1 Tax Claim Administration Services. Upon request of Choice, Manor shall
provide the services described in Exhibit B. Manor will promptly notify Choice
in writing of any Tax Claims for which it receives notice. Choice shall have
full authority to defend and settle all Tax Claims. Manor will not protest,
settle, compromise or pay any Tax Claims (except under protest), without the
prior written consent of Choice. Manor agrees to provide such services only if
it reasonably believes the service will not interfere with the conduct of the
business of Manor or pose an unreasonable burden.
2.2 Standard of Care. All services provided hereunder shall be
administered in accordance with Manor's standard policies, procedures and
practices in effect as of the date hereof and as may be changed, and as more
particularly described below, or as otherwise specified in accordance with the
terms thereof. In so doing, Manor shall follow commonly accepted standards of
care in the industry and exercise the same care and skill as it exercises in
performing like services for itself.
3. Financial Provisions.
3.1 Reimbursement. Choice will reimburse Manor for any Tax Claims for
which Manor is ultimately held liable, other than Tax Claims for which Choice is
entitled to indemnification under Section 4(a) hereof, together with all
out-of-pocket expenses including legal fees incurred by Manor in protesting or
disputing any Tax Claim or endeavoring to obtain a refund at Choice's request.
3.2 Pricing and Payment for Services. Choice shall pay Manor for services
requested and rendered hereunder as follows:
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(a) The charging mechanisms for rates or charges for each service
shall include (i) activity-based charges where the per unit price
will be multiplied by the variable number of units; (ii) fixed fee
based charges, meaning a fixed amount per Accounting Period for
Manor to perform the service; (iii) usage based charges for which
Choice will pay according to actual use of the service; (iv) time
and materials charges; (v) any out-of-pocket expenses, including,
but not limited to, fees of consultants and attorneys; or (vi) a
variation or a combination of any of the foregoing methods as
agreed to by the parties.
(b) Except as provided in the Distribution Agreement or any
Related Agreement, Choice shall pay any and all additional costs
and expenses which Manor may incur for the express purpose of
providing services to Choice.
(c) Choice shall pay Manor for all services provided hereunder
within thirty (30) days after receipt of an invoice therefor.
Choice will remit the amount of any Tax Claims payable by Manor
before Manor is required to remit such amount to any Taxing
Authority. If Manor subsequently recovers any amounts paid by
Choice hereunder or if Manor recovers any Tax Claim previously
paid, it will remit such amounts to Choice within thirty (30) days
of receipt. Choice shall pay fixed charges in advance on the first
business day of the applicable Accounting Period. Any payments not
made by Choice to Manor, or not made by Manor to Choice, when due
shall bear interest, computed daily, from the date due to the date
of payment based on the annual percentage rate equal to the Prime
Rate plus two (2) percentage points, as same may vary from time to
time.
4. Indemnification.
(a) Manor will defend, indemnify and hold harmless Choice, its
subsidiaries, affiliates, directors, officers, employees and
agents from Tax Claims arising from (i) Manor's failure to file a
required tax return or (ii) Manor's failure to pay the tax shown
as due on any tax return applicable to Choice's Retained Business
unless in the case of (ii), such Tax Claim is being contested by
Manor or a Manor subsidiary in good faith on the date of this
Agreement.
(b) Choice will defend, indemnify and hold harmless Manor, its
subsidiaries, affiliates, directors, officers, employees and
agents from any Tax Claims which are not subject to
indemnification by Manor pursuant to Section 4(a) above, and any
out-of-pocket expenses incurred by Manor in protesting or
disputing any Tax Claims at Choice's request.
(c) Choice shall indemnify, defend and hold harmless Manor and its
subsidiaries, and Manor shall indemnify, defend and hold harmless
Choice and its subsidiaries from and
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against any liability, cost, or expense, including, without
limitation, any fine, penalty, interest charge (restricted to
interest in excess of the rate established under Section 6621 of
the Code and interest which is in respect of the penalty portion
of an assessment), or accountants' or attorney's fee, arising out
of fraudulent or negligently prepared information, workpapers,
documents, and other items used in the preparation of, or
presented in, any return, amended return, or claim or refund
filed, and which information, workpapers, documents, or other
items originated with and/or were prepared by such indemnifying
party.
5. Access to Information. Choice and its authorized agents will be given
reasonable access to and may take copies of all information relating to the Tax
Claims, Manor's time and expense charges for providing the services provided
hereunder, and Manor's out-of-pocket expenses. Choice and its authorized agents
may, upon fourteen (14) days written notice, annually audit Manor's claims,
administration policies, procedures and practices and the Tax Claims. The
parties will cooperate with one another to minimize the disruption caused by any
such audit. Manor will retain all information relating to Tax Claims in
accordance with the retention policies in the Distribution Agreement, with
Manor's internal record retention policy and in accordance with applicable laws.
6. Term. The term of this Agreement shall commence on the Distribution
Date and shall remain in effect through the end of the first full Fiscal Year
immediately following the Distribution Date. Unless terminated pursuant to the
terms hereof, the Agreement shall automatically renew each Fiscal Year
thereafter for the extended term of said Fiscal Year and shall not extend past
the last day of the 30th month following the Distribution; provided, however,
that Choice may terminate this agreement or any services provided hereunder at
any time for any reason or no reason by sending written notice to Manor upon
sixty (60) days' prior notice to Manor. This Agreement may also be terminated in
the event of a default (past the expiration of any applicable cure period
provided herein) in accordance with the provisions of this Agreement.
7. Default. If either party materially defaults hereunder, the
non-defaulting party may terminate this Agreement effective immediately (subject
to the cure periods set forth herein below) upon written notice to the
defaulting party. The non-defaulting party shall be entitled to all remedies
provided by law or equity (including reasonable attorneys' fees and costs of
suit incurred). The following events shall be deemed to be material defaults
hereunder:
(a) Failure by either party to make any payment required to be
made to the other hereunder, which failure is not remedied with
five (5) days after receipt of written notice thereof; or
(b) Except as otherwise provided herein, failure by either party
substantially to perform in accordance with the terms and
conditions of this Agreement, which failure is not
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remedied within thirty (30) days after receipt of written notice
from the other party specifying the nature of such default; or
(c) (i) Filing of a voluntary bankruptcy petition by either party;
(ii) filing of any involuntary bankruptcy petition against either
party which is not withdrawn within sixty (60) days after filing;
(iii) assignment for the benefit of creditors made by either
party; or (iv) appointment of a receiver for either party.
8. Force Majeure. Manor and Choice shall incur no liability to each other
due to a default under the terms and conditions of this Agreement resulting from
fire, flood, war, strike, lock-out, work stoppage or slow-down, labor
disturbances, power failure, major equipment breakdowns, construction delays,
accident, riots, acts of God, acts of United States' enemies, laws, orders or at
the insistence or result of any governmental authority or any other delay beyond
each other's reasonable control.
9. Relationship of Parties. Nothing in this Agreement shall be deemed or
construed by the parties or any third party as creating the relationship of
principal and agent, partnership or joint venture between the parties, it being
understood and agreed that no provision contained herein, and no act of the
parties, shall be deemed to create any relationship between the parties.
10. Assignment. Neither party shall, without the prior written consent of
the other, assign any rights or delegate any obligations under this Agreement,
such consent not to be unreasonably withheld, conditioned or delayed; provided,
however, such consent not to be required if the agreement is assigned to a
wholly-owned subsidiary of either party.
11. Headings. The headings used in this Agreement are inserted only for
the purpose of convenience and reference, and in no way define or limit the
scope or intent of any provision or part hereof.
12. Severability of Provisions. Neither Manor nor Choice intend to violate
statutory or common law by executing this Agreement. If any section, sentence,
paragraph, clause or combination of provisions in this Agreement is in violation
of any law, such sections, sentences, paragraphs, clauses or combinations shall
be inoperative and the remainder of this Agreement shall remain in full force
and effect and shall be binding upon the parties.
13. Parties Bound. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and permitted
assigns. Nothing herein, expressed or implied, shall be construed to give any
person any legal or equitable rights hereunder.
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14. Notices. All notices and other communications hereunder shall be in
writing and shall be delivered by hand or shall be deemed to have been properly
made and given one (1) business day after being deposited with a reputable
overnight courier service such as Federal Express, Airborne Express or UPS Next
Day Air for next business day delivery to the following addresses (or at such
other addresses for a party as shall be specified by like notice):
to Choice:
Choice Hotels International, Inc.
10750 Columbia Pike
Silver Spring, MD 20901
Attention: General Counsel
to Manor:
Manor Care, Inc.
11555 Darnestown Road
Gaithersburg, MD 20878-3200
Attention: General Counsel
15. Further Action. Manor and Choice each shall cooperate in good faith
and take such steps and execute such papers as may be reasonably requested by
the other party to implement the terms and provisions of this Agreement.
16. Waiver. Manor and Choice each agree that the waiver of any default
under any term or condition of this Agreement shall not constitute any waiver of
any subsequent default or nullify the effectiveness of that term or condition.
17. Governing Law. All controversies and disputes arising out of or under
this Agreement shall be determined pursuant to the laws of the State of
Maryland, United States of America, regardless of the laws that might be applied
under applicable principles of conflicts of laws.
18. Consent to Jurisdiction. The parties irrevocably submit to the
exclusive jurisdiction of (a) the Courts of the State of Maryland in Montgomery
County, and (b) the United States District Court for the State of Maryland for
the purposes of any suit, action or other proceeding arising out of this
Agreement.
19. Commercially Reasonable Terms and Conditions. Notwithstanding anything
in this Agreement to the contrary, the terms and provisions of this Agreement
are and shall reflect commercially reasonable terms and conditions (including,
but not limited to, pricing) that are at least
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as favorable and as competitive to Choice as the terms and conditions Manor
would grant or require of third parties for substantially similar goods and
services.
20. Liaisons. Choice and Manor shall each appoint a managerial level
individual (hereinafter "Representative") to facilitate communications and
performance under this Agreement. Each party may treat an act of a
Representative of the other party as being authorized by such other party
without inquiring behind such act or ascertaining whether such Representative
had authority to so act. The initial Representatives are named on Exhibit A.
Each party shall have the right at any time and from time to time to replace its
Representative by giving notice in writing to the other party setting forth the
name of (i) the Representative to be replaced and (ii) the replacement, and
certifying that the replacement Representative is authorized to act for the
party giving the notice in all matters relating to this Agreement.
21. Confidentiality. The parties agree that the terms of this Agreement
are confidential and further agree that this Agreement shall not be released to
third parties, excluding such parties' counsel, agents or leaders. However, one
party may release this Agreement to a third party upon the prior approval of the
other party (such approval not to be unreasonably withheld, conditioned or
delayed), upon court order, or as required by any rules, regulations or laws.
All confidential and proprietary information which either part has obtained from
the other shall be returned upon the expiration or earlier termination of this
Agreement. The provisions of this paragraph shall survive expiration or earlier
termination of this Agreement.
22. Management Agreement. Notwithstanding anything to the contrary
contained herein, Choice shall not be charged for any services which are
required to be performed under any management agreement, operating lease or
other agreement between Choice and Manor, or their respective subsidiaries.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CHOICE HOTELS HOLDINGS, INC., a
Delaware corporation
By:______________________________________
Name:______________________________
Title:_______________________________
MANOR CARE, INC., a
Delaware corporation
By:______________________________________
Name:______________________________
Title:_______________________________
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EXHIBIT A
REPRESENTATIVES
Darrell Carlisle - Manor Care, Inc.
Terry Ingalsbe - Choice Hotels International, Inc.
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EXHIBIT B
SERVICES
[ATTACHED]
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PERSONAL PROPERTY TAX RETURNS AND AUDITS
SCHEDULE OF SERVICES
1. Extract detailed Fixed Assets data from Global Fixed Asset System.
2. Review prior year return for audit settlements and special issues. For new
facilities (construction and/or acquisition) contact taxing authorities
for property information.
Maintain and update due date schedule.
3. Review return instructions for law changes; perform research as required.
4. Classify current year acquisitions as taxable or non-taxable and by type
of asset - i.e., computer, furniture or equipment.
5. Analyze total unit cost for reasonableness; identify unrecorded
dispositions.
6. Adjust asset basis for non-taxable costs.
7. Process return using available resources. Estimate assessed value and tax
due.
8. Mail return.
9. Compare assessed value per notice to return. File appeals as needed.
10. Pay bill and monitor accruals.
11. Prepare annual unit budgets.
12. Respond to audit requests; settle audit issues.
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SALES/USE AND OCCUPANCY TAX COMPLIANCE
SCHEDULE OF SERVICES
1. Extract sales and accruals for each unit from the general ledger; enter
data into worksheet.
2. Review exempt sales report and contact unit manager if necessary; make
appropriate adjustments.
3. Determine if accruals are in balance and make adjustments if necessary;
4. Reconcile unit accruals; determine that over/under are within guidelines.
5. Print worksheets, over/under accrual memo, and transmittal letter.
6. Print return.
7. Pay tax due; compare to transmittal letter, return, and accrual balance.
8. Present return for Choice review.
9. Copy and timely mail return.
10. Prepare reply to inquiries.
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SALES/USE AND OCCUPANCY TAX AUDITS
SCHEDULE OF SERVICES
1. Schedule audits with Taxing Authority's auditors;
2. Determine the scope of audits and the audit methods and procedures for
such auditors;
3. Prepare and transmit responses to auditor's Information Document Requests;
4. Research and prepare proposals for resolving audit issues;
5. Prepare summary reports on each audit covering audit issues,
recommendations for payment or protest and actions to be taken to correct
deficiencies;
6. Prepare written protests for deficiencies which cannot be settled;
7. Prepare quarterly state audit reports.
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MAINTENANCE OF FIXED ASSETS - TAX BOOKS 2, 5, 6
(FEDERAL, AMT & ACE)
SCHEDULE OF SERVICES
1. Review Federal regulations for law changes; perform research as required.
2. Extract monthly fixed asset data from Global F/A System. This includes
additions, adjustments and retirements.
3. Classify monthly additions by asset type and depreciation method. Submit
corrections to Fixed Asset department as needed.
4. Review new facility/renovation additions for Section 1245 classification.
Obtain construction cost report and analyze for details.
5. Review acquisition additions for accuracy and reasonableness. Obtain
copies of settlement sheets, purchase agreements, etc. for details to
fixed asset allocation.
6. Review monthly dispositions and retirements. Calculate tax gain or loss as
needed.
7. Obtain fixed asset information for separate companies (such as Choice
foreign operations). Review and submit entries for tax books to Fixed
Asset department.
8. Review Global F/A System for luxury auto limitations calculations. Submit
corrections as needed.
9. Extract reports from Global F/A System as needed for special projects or
projections.
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REAL ESTATE TAX - CONSULTING
SCHEDULE OF SERVICES
1. Review lease or management agreement. Perform real estate tax projections
on acquisitions.
2. Investigate local assessment ratios and procedures.
3. Collect current year financial data.
4. Input financial data and perform targeting analysis to determine if an
appeal should be filed. Hire consultant where necessary.
5. Contact assessor and set up initial meeting.
6. Inspect subject property and competitive properties.
7. Review assessor's worksheet and comps.
8. Prepare mini-appraisal of value based on the income approach, cost
approach and market sales comparison.
9. Prepare appeal documents.
10. Attend hearing with assessor.
11. Proceed to Administrative Board if necessary.
12. Contract an appraiser for an appraisal of the subject property where
necessary.
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EXHIBIT 10.14
TAX SHARING AGREEMENT
THIS AGREEMENT, executed this ____ day of ________________, 1996, is
entered into by and among Choice Hotels Holdings, Inc. (to be renamed Choice
Hotels International, Inc.), a Delaware corporation ("Choice"), Manor Care,
Inc., a Delaware corporation, ("Manor"), and all direct and indirect
subsidiaries of one or both of Choice and Manor.
RECITALS
A. Choice, Manor, and the subsidiaries of Choice and Manor have
heretofore joined in filing consolidated federal income tax returns under the
Internal Revenue Code of 1986, as amended (the "Code"), and the applicable
Treasury Regulations promulgated thereunder by the Treasury Department (the
"Regulations") and have heretofore joined in filing certain consolidated,
combined, and unitary state income tax returns.
B. Pursuant to the Distribution Agreement of even date herewith between
Choice and Manor, Manor will distribute all of its stock in Choice to the common
shareholders of Manor in a transaction intended to qualify for tax free
treatment under Section 355 of the Code, and Choice and its subsidiaries will
therefore leave the affiliated group (within the meaning of Section 1504(a) of
the Code) of corporations (the "Manor Group") of which Manor is the common
parent.
C. The parties hereto desire to allocate their respective federal,
state, and local income tax liabilities, assessed in connection with the filing
of returns, including but not limited to consolidated, unitary, combined, or
separate returns, among themselves for the following fiscal years: (a) the
fiscal year ending May 31, 1996 ("FY 1996"); (b) the fiscal year commencing on
June 1, 1996 and ending on May 31, 1997 ("FY 1997"); (c) where relevant, the
fiscal year ending on the Distribution Date ("Stub 97"); and (d) where relevant,
the fiscal year commencing on the day after the Distribution Date and ending on
May 31, 1997 ("Short 97").
D. The parties hereto desire to provide for the compensation and
reimbursement of each other for federal and state income tax deficiencies paid,
by one party hereto although allocated pursuant to this Agreement to the other,
(plus interest and penalties) or refunds received (plus interest) as a result of
audits by the Internal Revenue Service (the "Service") and other taxing
authorities and judicial determination, if any, involving consolidated federal
and state income tax returns ("Joint Return Deficiencies/Refunds").
E. The parties hereto desire to provide and fix the responsibilities
for: (1) the preparation and filing of tax returns along with the payments of
taxes shown to be due and payable thereon (as well as estimated or advance
payments required prior to the filing of said returns) for all periods prior and
subsequent to the Distribution Date; (2) the retention and maintenance of all
relevant records necessary to prepare and file appropriate tax returns, as well
as providing for appropriate access to those records for all parties to this
Agreement; (3) the conduct of audits, examinations, and
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proceedings by appropriate governmental authorities which could result in a
redetermination of tax liabilities (for all periods prior to or subsequent to
the Distribution Date) of any party to this Agreement; and (4) the cooperation
of all parties with one another in order to fulfill their duties and
responsibilities under this Agreement and under applicable law.
NOW THEREFORE, the parties agree as follows:
SECTION 1. DEFINITIONS.
As used herein, the following terms shall have the following meanings:
(a) "Affiliated Group" shall have the meaning attributed to that
term in Section 1504 of the Code, determined without regard to
Section 1504(b) of the Code.
(b) "Manor Group" shall mean the group of corporations at any given
time (either prior to, or subsequent to, the Distribution)
consisting of the Affiliated Group of which Manor is the Common
Parent.
(c) "Code" is defined in the preamble.
(d) "Common Parent" shall have the meaning attributed to that term
in the Consolidated Return Regulations (Treas. Reg. Section
1.1502-1 et seg.) promulgated pursuant to Section 1502 of the
Code.
(e) "Consolidated Return Regulations" is defined in section 4
hereof.
(f) "Distribution" shall mean the distribution by Manor of all its
stock in Choice to its shareholders.
(g) "Distribution Date" shall mean the date on which the
Distribution occurs.
(h) "Choice" is defined in the preamble.
(i) "Choice Group" shall mean the group of corporations immediately
after the Distribution Date consisting of the Affiliated Group
of which Choice is the Common Parent, as well as all other
corporations which would be included in such group subsequent to
the Distribution.
(j) "I.R.S." or "Service" shall mean the Internal Revenue Service.
(k) "Joint Contest" shall mean a Tax Contest seeking a
redetermination of Taxes involving one or more Members
(determined by reference to the time period for which such
return was filed) of the Manor Group and one or more Members of
the Choice Group,
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whether such corporations joined in the filing of returns on a
consolidated, combined, or unitary basis or otherwise.
(l) "Joint Return Deficiencies/Refunds" is defined in the preamble.
(m) "Member" shall have the meaning attributed to that term in
Section 1.1502-1(b) of the Regulations, but without regard to
whether a corporation qualifies to be a Member of an Affiliated
Group under Section 1504(b) of the Code.
(n) "Minimum Tax Credit" is defined in section 5 hereof.
(o) "Regulations" is defined in the preamble.
(p) "Separate Contest" shall mean a Tax Contest involving only
Members of either the Manor Group or the Choice Group.
(q) "Tax Attributes" shall mean any losses, credits and other tax
attributes that may be carried forward or back by any Member of
the Manor Group or the Choice Group on a separate return or
consolidated basis to a taxable year other than the taxable year
in which such attribute is recognized, including, but not
limited to, net operating losses, alternative minimum tax
credits, targeted jobs tax credits, investment tax credits,
foreign tax credits, research and development credits, and
similar credits under state or local law.
(r) "Taxes" shall mean (i) all federal income taxes and state,
local, and foreign income and franchise taxes (or taxes in lieu
thereof) plus (ii) any penalties, fines or additions to tax with
respect thereto, plus (iii) any interest with respect to the
items contained in (i) and (ii).
(s) "Tax Contest" shall mean an audit, review, examination or the
like, inclusive of litigation, with the purpose of redetermining
taxes of any corporation (without regard to whether such matter
was initiated by an appropriate taxing authority or in response
to a claim for refund by one or more corporations).
SECTION 2. COMPUTATION OF TAX; ALLOCATION OF CERTAIN YEARS' TAXES
(a) Computations & Elections. In determining the federal and state
income tax liabilities of the Manor Group and its Members for FY
1996, FY 1997, and where relevant, Stub 97 and Short 97, the
computations of the tax liabilities of the Manor Group and its
Members shall, to the extent permitted by law, be made in
accordance with the methods used in the consolidated returns
which include Manor and Choice for the fiscal years ending prior
to the beginning of FY 1996.
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(b) Allocation of Tax
(i) The taxes assessed pursuant to the returns described in the
preceding subsection will be allocated among the Members of the
Manor Group pursuant to the Manor Group's historic tax
allocation method, described in section 1552(a)(2) of the Code
and section 1502-33(d)(2)(ii) of the Regulations. (ii) With
respect to FY 1997, if the consolidated tax liability of the
Manor Group for FY 1997 (the "97 Manor Liability") is less than
the sum of the taxes allocated for FY 1997 to Choice and its
subsidiaries pursuant to section 2(b)(i) hereof (the "Choice
Separate Allocations"), the amounts allocated pursuant to
section 2(b)(i) to Choice and its subsidiaries will be reduced
by an amount equal to the excess of the Choice Separate
Allocations over the 97 Manor Liability. (iii) With respect to
the state and local taxes which are determined on a combined or
unitary basis, similar principles as those described in section
2(b)(i) and (ii) shall govern the allocation of such tax
liabilities among the parties hereto.
(c) Post-Distribution Date Allocations and Payments.
(i) The final allocations of FY 1996 Taxes and FY 1997 Taxes (to
be made by Manor for FY 1996 and FY 1997) will be made not later
than 90 days following the filing of the Federal consolidated
income tax return of the Manor Group for such period. With
respect to the final allocations of FY 1996 and FY 1997 Taxes,
Choice and/or its subsidiaries shall make payments to Manor
and/or its subsidiaries, or receive payments from Manor and/or
its subsidiaries based on the following principles:
(1) the payment shall equal the amount of the adjustments, if
any, to taxable income or loss of Members of the Choice
Group multiplied by the applicable highest marginal rate
of taxation in effect for the period for which the
adjustment is made; or
(2) in the case of adjustments to credits, the payments made
or received shall be in an amount equal to the
adjustments, if any, of the credit of Members of the
Choice Group.
SECTION 3. SEPARATE COMPANY LIABILITIES.
Notwithstanding the provisions of section 2 hereof, for all years
through and including FY 1997, Taxes (including income taxes imposed by state or
foreign jurisdictions or political subdivisions thereof) imposed upon Choice or
any of its direct and indirect subsidiaries and which are determined or assessed
on a separate company basis will be the separate liability of Choice or such
subsidiary and not subject to allocation or sharing among other Members of the
Manor Group.
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SECTION 4. ALLOCATION OF TAX ATTRIBUTES.
All Tax Attributes of the Manor Group will be allocated among Manor,
Choice, and their respective subsidiaries in accordance with the Regulations
promulgated pursuant to Section 1502 of the Code or analogous provisions of
state, local, or foreign law (the "Consolidated Return Regulations").
SECTION 5. CARRYBACKS OF TAX ATTRIBUTES.
(a) Choice Carrybacks. If for any taxable year beginning on or after
the Distribution Date, Choice or any Member of the Choice Group
recognizes a Tax Attribute which Choice or such Member of the
Choice Group, under the applicable provisions of the Code and
Treasury Regulations promulgated under Section 1502 thereof, is
permitted or required to carry back to a prior Taxable year of
the Manor Group or the prior Taxable year of a Member of the
Manor Group (either on a consolidated or separate return basis)
Manor (or a Member of the Manor Group) shall file appropriate
refund claims within a reasonable period after being requested
by Choice with the consent of Manor, which consent shall not be
unreasonably withheld. Manor (or the Member of the Manor Group
receiving such refund) shall promptly remit to Choice any refund
of Taxes it receives with respect to any Tax Attribute so
carried back.
(b) Manor Carrybacks. If for any taxable year Manor or a Member of
the Manor Group recognizes a Tax Attribute which Manor or the
Member of the Manor Group, under the applicable provision of the
Code and Consolidated Return Regulations is permitted or
required to carry back to one of its prior taxable years, Manor
or the Member of the Manor Group may file appropriate refund
claims and shall be entitled to any refund of Taxes resulting
from such claims with the consent of Choice, which consent shall
not be unreasonably withheld.
SECTION 6. CONDUCT OF TAX CONTESTS.
(a) "Joint Contests."
(i) The conduct of Joint Contests shall be the responsibility of
Manor. Choice, as the common parent of the Choice Group or
otherwise, agrees to take all such actions and to cause its
subsidiaries to take all such actions as may be necessary to
permit Manor to conduct such contests.
(ii) In the case of a Joint Contest of a consolidated federal or
state income tax return which included Choice and/or its
subsidiaries, Choice and/or its subsidiaries as appropriate,
shall be notified by Manor of such Tax Contest and shall be
entitled to
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participate, at their own expense, in contesting all relevant
items that affect the tax liability or tax attributes of such
entities with respect to such Tax Contest in administrative and
judicial proceedings. Choice and its subsidiaries agree to
notify Manor of any actual or proposed Tax Contest of a
consolidated federal or state income tax return of the Manor
Group for any period ending on or before May 31, 1997. Choice
will, and shall cause any of its subsidiaries to cooperate in
connection with any such Tax Contest. Manor and Choice shall
share jointly in any decisions involved in connection with
settlements of tax disputes to the extent that items are
involved that affect the tax, penalty, or interest liability or
tax attributes of Choice or its subsidiaries. Manor may not
agree to settle such a dispute without the consent of Choice
unless Manor releases Choice from its liability to pay its share
of the disputed amount hereunder. If both parties agree to
contest a tax matter, then the costs of contesting the matter
shall be borne equally by each party. If only one party requests
the contest of a tax matter, the party requesting the contest
shall bear its expenses associated with such contest; provided
however, that the other party will agree to cooperate with the
contesting party, and further provided that the non-contesting
party shall bear its own costs and expenses, if any, and shall
not be entitled to reimbursement for the fair cost of its own
employees related to its participation in, or cooperation with
the contesting party in such contest.
(b) Separate Contests. Any Separate Contests with respect to tax
returns filed by any Member of either the Choice Group or Manor
Group on a separate company basis shall be conducted by the
entity which filed such tax return (or the Common Parent of the
Affiliated Group of which such entity is a Member at the time of
such contest), and such entity shall have sole and compete
authority to conduct such contest, including the authority to
negotiate with and enter into settlements with any Taxing
authority. If at any point of the proceedings of a "Separate
Contest," it becomes a Joint Contest, then it shall thereafter
be conducted as a Joint Contest.
(c) Cooperation. Choice (and the Member of the Choice Group and
Manor (and the Members of the Manor Group) shall each provide
the assistance reasonably requested by other with respect to
conducting any Tax Contest, including providing access to books,
records, tax returns and supporting work papers and providing
any powers of attorney required to conduct any Tax Contest.
SECTION 7. REDETERMINED TAX LIABILITIES.
In the event of a redetermination of federal, state or local income tax
liabilities as a result of audits by the Service or other taxing authority
and/or judicial determinations, payments in connection therewith, if any, made
or received by or among Choice, Manor, and their respective subsidiaries, shall
be governed by the following principles:
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(a) Upon the redetermination of any tax liability upon audit,
examination, etc. the redetermined liability will be borne by
(that is, any increases in liability will be paid by, and any
decreases in liability will be received by) the applicable
entities in the case of matters arising out of Separate
Contests.
(b) In the case of liabilities redetermined with respect to
consolidated, combined, or unitary returns, which
redeterminations are Joint Contests, the increase to the
liabilities shall be paid to the relevant taxing authority by,
and the decreases received from the relevant taxing authority
shall be paid to, Manor and/or its subsidiaries. Whether or not
a payment is required to or from a relevant taxing jurisdiction
and subject to the provisions of section 7(c) hereof, Choice
and/or its subsidiaries shall make payments to Manor and/or its
subsidiaries, or receive payments from Manor and/or its
subsidiaries based on the following principles:
(1) the payment shall equal the amount of the adjustments, if
any, to taxable income or loss of Members of the Choice
Group multiplied by the applicable highest marginal rate
of taxation in effect for the period for which the
adjustment is made; or
(2) in the case of adjustments to credits, the payments made
or received shall be in an amount equal to the
adjustments, if any, of the credit of Members of the
Choice Group.
(c) If there is a redetermination of tax liabilities in connection
with either a Joint Contest or a Separate Contest, and as a
result thereof there is an adjustment to credits or attributes
allocated among the parties hereto pursuant to section 4 hereof,
Manor shall make a payment to Choice equal to the amount of any
resulting reduction in items allocated to Members of the Choice
Group to the extent such reduction is attributable to income
adjustments to Members of the Manor Group and Choice shall make
a payment to Manor equal to the amount of any resulting
reduction in items allocated to Members of the Manor Group to
the extent such reduction is attributable to income adjustments
to Members of the Choice Group.
(d) Any liability arising from adjustments to income made by (1)
treating the Distribution as a taxable distribution of property
or (2) recognizing "boot" in connection with the reorganization
of, and the transfer of assets and liabilities to, Choice
precedent to the Distribution shall be borne entirely by Choice.
SECTION 8. RETENTION OF RECORDS: ACCESS TO RECORDS; COOPERATION
AND ASSISTANCE.
(a) Retention of Records.
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(i) Duties of Choice. Choice shall retain all tax returns, tax
reports, related work papers and all schedules (along with all
documents that pertain to any such tax returns, reports or work
papers) which relate to a tax period ending on or before May 31,
1997. Choice shall make such documents available to Manor and/or
its subsidiaries at Manor's request. Choice shall not dispose of
such documents without the permission of Manor.
(ii) Duties of Manor. Manor shall retain all tax returns, tax
reports, related work papers and all schedules (along with all
documents that pertain to any such tax returns, reports or work
papers) which relate to a tax period ending on or before May 31,
1997. Manor shall make such documents available to Choice and/or
its subsidiaries at Choice's request. Manor shall not dispose of
such documents without the permission of Choice.
(b) Access to Records.
(i) Duties of Choice. Choice will permit Manor or its
subsidiaries, or their designated representative, to have access
at any reasonable time and from time to time, after the
Distribution Date, to all relevant tax returns and supporting
papers therefor of Choice and the other members of the Choice
Group (as they were constituted immediately prior to the
Distribution Date) in respect of periods ending on or before the
Distribution Date, wherever located, and furnish, and request
that the independent accountants of Choice or any of the member
of the Choice Group furnish, to Manor and its subsidiaries, as
the case may be, such additional tax and other information and
documents with respect to consolidated federal and state income
tax returns filed in respect of periods ending on or before May
31, 1997, as Manor or any of its subsidiaries may from time to
time reasonably request.
(ii) Duties of Manor. Manor will permit Choice or its
subsidiaries, or their designated representative, to have access
at any reasonable time and from time to time, after the
Distribution Date, to all relevant tax returns and supporting
papers therefor of Manor and the other members of the Manor
Group (as they were constituted immediately prior to the
Distribution Date) in respect of periods ending on or before the
Distribution Date, wherever located, and furnish, and request
that the independent accountants of Manor or any of the member
of the Manor Group furnish, to Choice and its subsidiaries, as
the case may be, such additional tax and other information and
documents with respect to consolidated federal and state income
tax returns filed in respect of periods ending on or before May
31, 1997, as Choice or any of its subsidiaries may from time to
time reasonably request.
(c) Assistance and Cooperation. Manor (and Members of the Manor
Group) and Choice (and Members of the Choice Group) will provide
each other with such cooperation, assistance and information as
either of them reasonably may request of the other with respect
to the filing of any tax return amended return, claim for refund
or other document with any taxing authority. With respect to the
federal consolidated tax return
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<PAGE> 9
or any combined state tax return filed by Manor for tax periods
which begin before the Distribution Date and end after the
Distribution Date, such assistance shall include the timely
submission by Choice to Manor of pro forma tax returns for
Choice and each Member of the Choice Group, prepared on the
basis that each such Member's tax period ended on the
Distribution Date.
SECTION 9. PREPARATION OF TAX RETURNS: ESTIMATED PAYMENTS.
(a) FY 1996. Manor and Choice shall work together to prepare the
consolidated, separate, and combined returns for FY 1996. It
shall be the responsibility of Manor to timely file such returns
and to make any payments required in connection with the
consolidated and combined returns to the applicable taxing
authorities.
(b) FY 1997. Manor shall prepare and timely file the consolidated
returns for FY 1997. In connection with the preceding sentence,
Choice and its subsidiaries will, on or prior to December 15,
1997 with respect to the Stub 97: (1) furnish to Manor all
information and documentation (with respect to Choice and its
subsidiaries) necessary or useful in the preparation of the
consolidated federal and state income tax returns for the Manor
Group for FY 1997; (2) permit Manor to have access at any
reasonable time and from time to time, after the Distribution
Date, to all tax returns and supporting papers therefor of
Choice and its subsidiaries, wherever located; and (3) furnish
to Manor such additional tax and other information and documents
in the possessions of such companies, with respect to
consolidated federal and state income tax returns filed in
respect of periods including or ending before the Distribution
Date, as Manor may from time to time reasonably request. Choice
will, and shall cause its subsidiaries to, cooperate in
connection with the preparation of the consolidated federal and
state income tax returns of the Manor Group for FY 1997. It
shall be the responsibility of Manor to make any payments
required in connection therewith to the applicable taxing
authorities. Choice and its subsidiaries shall file its own tax
returns which are filed on a separate or combined basis for FY
1997. Manor and its subsidiaries shall prepare and file its own
tax returns which are filed on a separate or combined basis for
FY 1997.
(c) Taxable Years Before FY 1996. All tax returns of the Manor Group
which are filed on a consolidated or combined basis for tax
periods ending before May 31, 1996 were prepared and filed by
Manor. Manor shall be solely responsible for the payment of all
Taxes for such periods. Manor shall not file or amend such
consolidated or combined tax returns without affording Choice
the opportunity to review and comment on such tax returns to the
extent that the tax liabilities relating to such returns are, or
could be allocated, assessed or charged to Choice and/or any of
its subsidiaries, whether such allocation, assessment, or charge
is by law or by contract or agreement.
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<PAGE> 10
(d) Post-Distribution Date Taxable Years.
(i) Choice's Separate Returns. All tax returns of the Choice
Group which are filed on a consolidated, separate or combined
basis for Choice and/or any of its subsidiaries for tax periods
beginning on or after the Distribution Date shall be prepared
and filed by Choice. Choice shall be solely responsible for the
payment of all Taxes due with respect to such tax returns for
such tax periods.
(ii) Manor's Separate Returns. All tax returns of the Manor
Group which are filed on a consolidated, separate, or combined
basis for Manor and/or any of its subsidiaries for tax periods
beginning on or after the Distribution Date shall be prepared
and filed by Manor. Manor shall be solely responsible for the
payment of all Taxes due with respect to such tax returns for
such tax periods.
(e) Estimated Payments. All payments (including estimated payments
or payments made in connection with requests for extensions of
time to file such returns) made subsequent to the date hereof
with respect to consolidated, combined, or unitary income tax
liabilities of the Manor Group and its Members for FY 1996 and
FY 1997 shall be made by Manor. Manor shall promptly thereafter
notify Choice of the portion, if any, of such payment which it
in good faith believes to be attributable to Choice's share of
the FY 1996 and FY 1997 liability, as determined under the
provisions of section 2 hereof. Choice shall thereafter promptly
pay such amount to Manor or advise Manor of the basis for its
disagreement. Choice must make estimated payments for its Group
for periods beginning on/after the Distribution Date.
SECTION 10. INDEMNIFICATION.
With respect to all consolidated federal and state income tax returns
filed by the Manor Group:
(a) Choice shall indemnify, defend and hold harmless Manor and its
subsidiaries, and Manor shall indemnify, defend and hold
harmless Choice and its subsidiaries from and against any
liability, cost, or expense, including, without limitation, and
fine, penalty, interest charge (restricted to interest in excess
of the rate established under Section 6621 of the Code and
interest which is in respect of the penalty portion of an
assessment), or accountants' or attorney's fee, arising out of
fraudulent or negligently prepared information, workpapers,
documents, and other items used in the preparation of, or
presented in, any return, amended return, or claim or refund
filed for the Manor Group for the FY 1996, Stub 97, Short 97, or
FY 1997, and which information, workpapers, documents, or other
items originated with and/or were prepared by such indemnifying
party.
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<PAGE> 11
(b) Choice shall indemnify, defend and hold harmless Manor from and
against any liability, cost, or expense incurred or paid by
Manor in excess of its share thereof as allocated pursuant to
section 7 hereof, including any amount paid by Manor in
connection with an assessment by the Service or other taxing
authority.
(c) Manor shall indemnify, defend and hold harmless Choice from and
against any liability, cost, or expense incurred or paid by
Choice in excess of its share thereof as allocated pursuant to
section 7 hereof, including any amount paid by Choice in
connection with an assessment by the Service or other taxing
authority.
SECTION 11. RESOLUTION OF DISPUTES.
Any disputes among the parties with respect to this Agreement shall be
resolved by a public accounting firm or a law firm reasonably satisfactory to
Manor and Choice. The fees and expenses of such firm shall be borne equally by
Choice and Manor. In the event that Choice and Manor are unable to appoint such
a firm, then all disputes arising under this Agreement shall be resolved under
the terms of the Distribution Agreement.
SECTION 12. SUBSIDIARIES.
Any reference herein to a subsidiary or subsidiaries does not include
any corporation that is or was, in the relevant tax year, not permitted to join
in the filing of a consolidated federal income tax return pursuant to Section
1504 of the Code. To the extent that the provisions of the Agreement pertain to
a subsidiary or subsidiaries of Manor or Choice, Manor and Choice respectively
agree that it will cause the respective subsidiary or subsidiaries to carry out
the terms of this Agreement.
SECTION 13. SURVIVABILITY.
This Agreement and each of its provisions shall be binding upon and
inure to the benefit of the parties and their respective heirs and successors.
This Agreement shall be effective only from and after the close of business on
the Distribution Date. Nothing in this Agreement is intended or shall be
construed to give any person or entity other than the parties and their
respective heirs or successors any rights or remedies under or by reason of the
Agreement.
SECTION 14. NOTICES.
All notices and other communications required or permitted under this
Agreement shall be in writing, shall be deemed delivered upon receipt by hand or
shall be deemed to have been properly made and given one (1) business day after
being deposited with a reputable overnight courier service
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<PAGE> 12
such as Federal Express, Airborne Express or UPS Next Day Air for next business
day delivery to the parties at their respective addresses set forth below, or as
to any party at such other address as shall be designated by such party in a
written notice to the other party complying as to delivery with the terms of
this paragraph:
To Choice: Choice Hotels Holdings, Inc.
10750 Columbia Pike
Silver Spring, MD 20901
Attn: General Counsel
To Manor: Manor Care, Inc.
11555 Darnestown Road
Gaithersburg, MD 20878-3200
Attn: General Counsel
SECTION 15. GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with,
the laws of the state of Maryland, without reference to its conflict of laws
principles.
SECTION 16. COSTS AND EXPENSES.
In any action brought to enforce or interpret this Agreement, each
party shall pay its own costs and expenses of maintaining or defending such
action.
SECTION 17. REMEDIES CUMULATIVE.
The remedies provided in this Agreement are cumulative and not
excluding of any remedies provided by law.
SECTION 18. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original and all of which taken together shall
constitute but one and the same Agreement.
SECTION 19. SEVERABILITY.
In the event that any portion of this Agreement shall be declared
invalid by order, decree or judgment of a court, or governmental agency having
jurisdiction, this Agreement shall be construed
12
<PAGE> 13
as if such portion had not been inserted herein, except when such construction
would operate as an undue hardship on any party to this Agreement or constitute
a substantial deviation from the general intent and purpose of said parties as
reflected in this Agreement
SECTION 20. AMENDMENTS; WAIVER.
This Agreement may be amended, and the observance of any term of this
Agreement may be waived, in a written document signed by Manor and Choice.
SECTION 21. EFFECTIVENESS OF AGREEMENT.
This Agreement shall become effective on the Distribution Date and
shall continue in effect until otherwise agreed in writing by Manor and Choice,
or their successors.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
CHOICE HOTELS HOLDINGS, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
MANOR CARE, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
13
<PAGE> 1
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
This Agreement ("Agreement") dated this 1st day of September, 1995
between Manor Care, Inc. ("Manor Care") and Choice Hotels International, Inc.
("Choice") (collectively, "Employer"), Delaware corporations with principal
offices at 10750 Columbia Pike, Silver Spring, Maryland 20901, and Donald J.
Landry ("Employee"), sets forth the terms and conditions governing the
employment relationship between Employee and Manor.
1. Employment. During the term of this Agreement, as hereinafter
defined, Manor Care hereby employs Employee as President-Manor Care Hotel
Division, and Choice hereby employs Employee as President. Employee hereby
accepts such employment upon the terms and conditions hereinafter set forth and
agrees to faithfully and to the best of his ability perform such duties as may
be from time to time assigned by Employer, its Board of Directors or its
designees, such duties to be rendered at the principal office of Employer or at
such other place or places as Employer shall require. Employee also agrees to
perform his duties in accordance with policies established by Employer's Board
of Directors, which may be changed from time to time.
2. Term. Subject to the provisions for termination hereinafter
provided, the term of this Agreement shall begin on December 1, 1994 and shall
terminate five (5) years thereafter. Upon expiration of said period, the parties
may extend the term if they mutually agree to do so.
3. Compensation. For all services rendered by Employee under this
Agreement during the term thereof, Employer shall pay Employee the following
compensation:
(a) Salary. A base salary of Three Hundred Fifty Thousand
Dollars ($350,000) per annum payable in accordance with Employer's
standard payroll practices from time to time in effect. Such salary
shall be reviewed after one year and may be increased at the discretion
of Employer.
(b) Incentive Bonus. Employee shall have the opportunity to
earn up to a maximum of Fifty-Five Percent (55%) per annum of the base
salary set forth in subparagraph 3(a) above in Employer's bonus plans
as adopted from time to time by Employer's Board of Directors.
<PAGE> 2
(c) Automobile. Employer shall provide Employee with the use
of a suitable automobile during the term of this Agreement, and shall
provide gas, oil, maintenance, insurance and other operating expenses
for such automobile, in accordance with Employer's standard practices.
In lieu of the above, Employee may elect to use his own automobile and
receive an allowance for automobile expenses of $850 per month.
(d) Club Membership. Employer shall provide Employee with an
appropriate corporate membership at a dining and/or recreational club
for the purpose of business entertainment.
(e) Stock Options. Employee shall be eligible to receive
options under the Manor Care, Inc. Key Executive Stock Option Plan, or
similar plan, to purchase common shares of Manor Care in accordance
with the policy of the Board of Directors as in effect from time to
time.
(f) Other Benefits. Employee shall, when eligible, be entitled
to participate in all other fringe benefits accorded headquarters
employees by Employer as are in effect from time to time.
4. Extent of Services. Employee shall devote his full time, attention,
and energies to the business of Employer, and shall not during the term of this
Agreement be engaged in any other business activity whether or not such business
activity is pursued for gain, profit, or other pecuniary advantage; but this
shall not be construed as preventing Employee from investing his assets in the
securities of public companies, or the securities of private companies or
limited partnerships outside the healthcare and lodging industries, if such
holdings are passive investments of One Percent (1%) or less of outstanding
securities and Employee does not hold positions of director, officer, employee
or general partner. Employee warrants and represents that he has no contracts or
obligations to others which would materially inhibit the performance of his
services under this Agreement.
5. Disclosure and Use of Information. Employee recognizes and
acknowledges that Employer's and affiliates' present and prospective clients,
franchises, management contracts, acquisitions and personnel, as they may exist
from time to time, are valuable, special and unique assets of Employer's
business. Throughout the term of this Agreement and for a period of two (2)
years after its termination or expiration for whatever cause or reason, Employee
shall not directly or indirectly, or cause others to: (1) make use of or
disclose to others any information relating to the business of Employer that has
not otherwise been made public, including but not limited to Employer's present
or prospective clients, franchises, management contracts or acquisitions; or (2)
without Employer's prior written consent, offer employment to or employ on
2
<PAGE> 3
behalf of Employee or any other person, any person who at any time is or has
been within the preceding one (1) year an employee of Employer or any affiliate
of Employer, or induce such person, directly or indirectly, to leave his or her
employment. In the event of an actual or threatened breach by Employee of the
provisions of this paragraph, Employer shall be entitled to injunctive relief
restraining Employee from committing such breach or threatened breach. Nothing
herein stated shall be construed as preventing Employer from pursuing any other
remedies available to Employer for such breach or threatened breach, including
the recovery of damages from Employee.
6. Notices. Any notice, request or demand required or permitted to be
given under this Agreement shall be in writing, and shall be delivered
personally to the recipient or sent by certified or registered mail to his
residence in the case of Employee, or to its principal office in the case of the
Employer.
7. Elective Positions. Nothing contained in this Agreement is intended
to nor shall be construed to abrogate, limit or affect the powers, rights and
privileges of the Board of Directors or stockholders to remove Employee from the
positions set forth in paragraph 1, with or without just cause, during the term
of this Agreement or to elect someone other than Employee to those positions, as
provided by law and the By-Laws of Employer; provided, however, that if Employee
is so removed without cause, it is expressly understood and agreed, in the event
any one or combination of the foregoing occurs, Employee's rights under this
Agreement shall in no way be prejudiced, and Employee shall be entitled to
receive compensation referred to in paragraph 3 above, except ungranted stock
options, provided that he is ready, willing and able to perform the duties and
responsibilities set forth above. Notwithstanding the foregoing, the election or
appointment of Employee to a different executive position shall not be
considered removal hereunder. Employee upon removal shall be entitled to pursue
other employment, and Employer shall be entitled to receive as offset and
thereby reduce its payment, the amount received by Employee from any other
active employment. As a condition to Employee receiving his compensation from
Employer, Employee agrees to furnish Employer annually with full information
regarding such other employment and to permit verification of his employment
records and Federal income tax returns by an independent attorney or accountant.
Employer shall receive credit for unemployment insurance benefits, social
security insurance or like amounts actually received by Employee. In the event
Employee is removed without cause, Employer shall relocate Employee to any city
in the continental United States to the extent relocation assistance is not
provided by a new employer.
8. Waiver of Breach. The waiver of either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
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<PAGE> 4
9. Assignment. The rights and obligations of Employer under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of Employer. The obligations of Employee hereunder may not be
assigned or delegated.
10. Termination of Agreement. This Agreement shall terminate upon the
following events and conditions:
(a) Upon expiration of its term.
(b) For just cause, including but not limited to refusal to
carry out duties and instructions relative to the position, dishonesty,
violation of this Agreement, and any willful acts or omissions inimical
to or contrary to policies of Employer not arbitrarily applied in the
case of Employee. Just cause shall also include solicitation by
Employee of offers of employment from others prior to the last year of
this Agreement, and the solicitation of the services by Employee or
material positive response by Employee to the solicitation of
professional search or executive recruitment organizations prior to the
last year of this Agreement. In the event of termination by Employer
for just cause, vested but unexercised options granted during the term
of this Agreement shall be forfeited as a result thereof, as of the
date of notice. In the event of a willful breach of this Agreement by
Employee, Employer shall have the right to purchase from Employee, at
the price paid by Employee, such of the Manor Care Common Stock as has
been acquired by Employee by exercise of a stock option granted during
the term of this Agreement if such exercise is within six (6) months
prior to termination of this Agreement as a result of such breach.
Employee shall be entitled to fourteen (14) days advance written notice
of termination, except where the basis for termination constitutes
conduct on the part of Employee involving dishonesty or bad faith, in
which case the termination shall be effective upon the sending of
notice.
(c) In the event that Employee is unable to perform the
services called for hereunder by reason of incapacity or disablement
for more than six (6) months (whether or not consecutive) in any period
of twenty-four (24) consecutive months, Employer shall have the right
to terminate this Agreement by written notice to Employee. In the event
of such termination, all non-vested obligations of Employer to Employee
pursuant to this Agreement shall terminate.
(d) In the event of Employee's death during the term of this
Agreement, the Agreement shall terminate as of the date thereof.
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<PAGE> 5
11. Entire Agreement. This instrument contains the entire agreement of
the parties and supersedes and replaces the Employment Agreement dated February
17, 1992. It may be changed only by an agreement in writing signed by the party
against whom enforcement of any waiver, change, modification, extension, or
discharge is sought. This Agreement shall be governed by the laws of the State
of Maryland, and any litigation shall be conducted in the State of Maryland.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first set forth above.
Employer:
MANOR CARE, INC.
By: /s/ Stewart Bainum, Jr.
-----------------------------------
Stewart Bainum, Jr.
Chairman, President & CEO
CHOICE HOTELS INTERNATIONAL, INC.
By: /s/ Stewart Bainum, Jr.
-----------------------------------
Stewart Bainum, Jr.
Vice Chairman
Employee:
/s/ Donald J. Landry
---------------------------------------
Donald J. Landry
5
<PAGE> 1
EXHIBIT 10.16
ASSIGNMENT OF EMPLOYMENT AGREEMENT
This Assignment of Employment Agreement ("Assignment") dated this _____
day of _________________, 1996 between Manor Care, Inc. ("Manor Care"), a
Delaware corporation with principal offices at 11555 Darnestown Road,
Gaithersburg, Maryland 20878 and Choice Hotels International, Inc. ("Choice"), a
Delaware corporation with principal offices at 10750 Columbia Pike, Silver
Spring, Maryland 20901, and Donald J. Landry ("Employee").
WHEREAS, Manor Care, Choice and Employee have entered in an Employment
Agreement (the "Agreement") dated as of September 1, 1995;
WHEREAS, Manor Care is in the process of spinning off its lodging
business and assets to shareholders in a tax-free transaction (the "Spinoff")
and as part of the Spinoff, Manor Care desires to assign all of its right, title
and interest in the Agreement to Choice;
NOW THEREFORE, FOR VALUE RECEIVED, THE PARTIES AGREE AS FOLLOWS:
1. Assignment. Manor Care hereby assigns to Choice all of its right,
title and interest in and to the Agreement.
2. Consent of Employee. Employee hereby consents to this Assignment,
effective upon consummation of the Spinoff
3. Binding Effect. Except as stated in this Assignment, all of the
terms and conditions of the Agreement shall remain in full force and effect as
if fully rewritten herein. This Assignment shall be binding upon and inure to
the benefit of all the parties to this Assignment and their successors and
assigns.
4. Entire Agreement. This instrument contains the entire agreement of
the parties . This Assignment shall be governed by, and construed in accordance
with, the laws of the State of Maryland , without regard to its conflict of laws
provisions and any litigation shall be conducted in the State of Maryland.
SIGNATURES ON NEXT PAGE
<PAGE> 2
IN WITNESS WHEREOF, the parties have executed this Assignment on the
date first set forth above.
MANOR CARE, INC.
By: ____________________________________
Stewart Bainum, Jr.
Chairman and Chief Executive Officer
CHOICE HOTELS INTERNATIONAL, INC.
By: ____________________________________
Stewart Bainum, Jr.
Chairman and Chief Executive Officer
Employee:
________________________________________
Donald J. Landry
2
<PAGE> 1
EXHIBIT 10.18
AGREEMENT
This Agreement (the "Agreement") is made and entered into as of June 1,
1996, (the "Effective Date") by and among Manor Care, Inc. ("Manor Care"),
Choice Hotels International, Inc. ("CHI" and, together with Manor Care, the
"Company") and Robert C. Hazard, Jr. ("Hazard").
RECITAL
A. The employment of Hazard as Co-Chairman of CHI terminated on May 31,
1996.
B. The Company and Hazard now desire to set forth their agreement with
respect to certain continuing relationships between the Company and Hazard.
AGREEMENT
The Company and Hazard, in consideration of the foregoing and the
mutual promises and covenants made herein, agree as follows:
1. EMPLOYMENT. For the period from the Effective Date through May 31,
1997 (the "Employment Period") Hazard shall remain as a full-time, temporary
employee of CHI. During the Employment Period, Hazard will receive no salary or
other compensation. Hazard shall provide such services during the Employment
Period as the parties shall mutually agree.
2. STOCK OPTIONS.
a. Hazard agrees to waive any rights he may have, now or in
the future, under the proposed Non-Employee Director Stock Option and Deferred
Compensation Plan (the "Non-Employee Director Plan") of Choice Hotels Holdings,
Inc. ("Holdings") to receive options to purchase 5,000 shares of common stock of
Holdings upon initial election to the Holdings Board of Directors, in connection
with the proposed spin-off of the lodging business of Manor Care (the
"Spin-off"). However, nothing in this Agreement shall affect his rights to
receive any other award under the Non-Employee Director Plan to which he may be
entitled.
b. The Company and Hazard acknowledge that Hazard has
outstanding Class B Options to purchase 4,500 shares of the common stock of
Manor Care ("Common Stock") at an exercise price of $9.46, exercisable on
November 2, 1996, and that this Agreement does not affect such options.
<PAGE> 2
c. The Company and Hazard acknowledge that Hazard has
outstanding Class B Options to purchase 15,000 shares of Common Stock at an
exercise price of $8.96 per share, exercisable on May 30, 1997 (the "$8.96 Class
B Options"). Hazard shall have the right to exercise the $8.96 Class B Options
with respect to 500 shares of Common Stock when the $8.96 Class B Options vest;
however, Hazard hereby agrees to terminate the $8.96 Class B Options with
respect to 14,500 shares of Common Stock.
d. Changes arising from the Spin-off which affect other
participants in the stock option plans under which the options described in
Subsections 2b and 2c, above, were granted shall also apply to Hazard. Any
consents necessary with respect to such changes shall deemed granted by Hazard
by his execution of this Agreement.
3. BENEFITS.
Hazard agrees to waive all rights to and forego any
participation in any and all benefits to which full-time or part-time employees
of the Company are entitled, including, but not limited to, participation in the
medical, dental and life insurance plans of the Company, the Retirement Savings
and Investment Plan ("401(K) Plan") of the Company, the Nonqualified Retirement
Savings and Investment Plan ("Nonqualified Savings Plan") of the Company, the
Cash Accumulation Retirement Plan ("CARP") of the Company, the Dependent Care
Reimbursement Account and the Healthcare Reimbursement Account.
4. MODIFICATION. No change or modification of this Agreement shall be
valid unless made in writing and signed by both the parties.
5. APPLICABLE LAW AND VENUE. This Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland. In the event of
any legal or equitable action arising under this Agreement, the parties agree
that the jurisdiction and venue of such action shall lie exclusively within
either the state courts of Maryland or the United States District Court for the
District of Maryland, and the parties do hereby waive any other jurisdiction and
venue.
6. ENTIRE AGREEMENT. This Agreement incorporates the entire agreement
between the parties with respect to the subject matter of the Agreement, and
supersedes all other prior or contemporaneous agreements, negotiations or
discussions between the parties with respect thereto.
- 2 -
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
MANOR CARE, INC.,
a Delaware corporation
By: ________________________________
CHOICE HOTELS INTERNATIONAL, INC.,
a Delaware corporation
By: ________________________________
____________________________________
Robert C. Hazard, Jr.
- 3 -
<PAGE> 1
EXHIBIT 10.19
AGREEMENT
This Agreement (the "Agreement") is made and entered into as of June 1,
1996, (the "Effective Date") by and among Manor Care, Inc. ("Manor Care"),
Choice Hotels International, Inc. ("CHI" and, together with Manor Care, the
"Company") and Gerald W. Petitt ("Petitt").
RECITAL
A. The employment of Petitt as Co-Chairman of CHI terminated on May 31,
1996.
B. The Company and Petitt now desire to set forth their agreement with
respect to certain continuing relationships between the Company and Petitt.
AGREEMENT
The Company and Petitt, in consideration of the foregoing and the
mutual promises and covenants made herein, agree as follows:
1. EMPLOYMENT. For the period from the Effective Date through May 31,
1997 (the "Employment Period") Petitt shall remain as a full-time, temporary
employee of CHI. During the Employment Period, Petitt will receive no salary or
other compensation. Petitt shall provide such services during the Employment
Period as the parties shall mutually agree.
2. STOCK OPTIONS.
a. Petitt agrees to waive any rights he may have, now or in
the future, under the proposed Non-Employee Director Stock Option and Deferred
Compensation Plan (the "Non-Employee Director Plan") of Choice Hotels Holdings,
Inc. ("Holdings") to receive options to purchase 5,000 shares of common stock of
Holdings upon initial election to the Holdings Board of Directors, in connection
with the proposed spin-off of the lodging business of Manor Care (the
"Spin-off"). However, nothing in this Agreement shall affect his rights to
receive any other award under the Non-Employee Director Plan to which he may be
entitled.
b. The Company and Petitt acknowledge that Petitt has
outstanding Class B Options to purchase 4,500 shares of the common stock of
Manor Care ("Common Stock") at an exercise price of $9.46, exercisable on
November 2, 1996, and that this Agreement does not affect such options.
c. The Company and Petitt acknowledge that Petitt has
outstanding Class B Options to purchase 15,000 shares of Common Stock at an
exercise price of $8.96 per share, exercisable on May 30, 1997 (the "$8.96 Class
B Options"). Petitt shall have the right to
<PAGE> 2
exercise the $8.96 Class B Options with respect to 500 shares of Common Stock
when the $8.96 Class B Options vest; however, Petitt hereby agrees to terminate
the $8.96 Class B Options with respect to 14,500 shares of Common Stock.
d. Changes arising from the Spin-off which affect other
participants in the stock option plans under which the options described in
Subsections 2b and 2c, above, were granted shall also apply to Petitt. Any
consents necessary with respect to such changes shall deemed granted by Petitt
by his execution of this Agreement.
3. BENEFITS.
Petitt agrees to waive all rights to and forego any
participation in any and all benefits to which full-time or part-time employees
of the Company are entitled, including, but not limited to, participation in the
medical, dental and life insurance plans of the Company, the Retirement Savings
and Investment Plan ("401(K) Plan") of the Company, the Nonqualified Retirement
Savings and Investment Plan ("Nonqualified Savings Plan") of the Company, the
Cash Accumulation Retirement Plan ("CARP") of the Company, the Dependent Care
Reimbursement Account and the Healthcare Reimbursement Account.
4. MODIFICATION. No change or modification of this Agreement shall be
valid unless made in writing and signed by both the parties.
5. APPLICABLE LAW AND VENUE. This Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland. In the event of
any legal or equitable action arising under this Agreement, the parties agree
that the jurisdiction and venue of such action shall lie exclusively within
either the state courts of Maryland or the United States District Court for the
District of Maryland, and the parties do hereby waive any other jurisdiction and
venue.
6. ENTIRE AGREEMENT. This Agreement incorporates the entire agreement
between the parties with respect to the subject matter of the Agreement, and
supersedes all other prior or contemporaneous agreements, negotiations or
discussions between the parties with respect thereto.
- 2 -
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
MANOR CARE, INC.,
a Delaware corporation
By: ________________________________
CHOICE HOTELS INTERNATIONAL, INC.,
a Delaware corporation
By: ________________________________
____________________________________
Gerald W. Petitt
- 3 -
<PAGE> 1
EXHIBIT 12.01
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS)
Income before income taxes.................................. $17,678 $29,955 $15,858
Fixed charges (net of capitalized interest)................. 14,749 20,076 23,105
------- ------- -------
Earnings.................................................... $32,427 $50,031 $38,963
======= ======= =======
Fixed charges
Interest expense and amortization of debt discount........ $14,505 $19,838 $22,816
Rent expense (interest portion)........................... 244 238 289
Capitalized interest...................................... 117 197 753
------- ------- -------
Total fixed charges............................... $14,866 $20,273 $23,858
======= ======= =======
Ratio of earnings to fixed charges.......................... 2.18x 2.47x 1.63x
======= ======= =======
</TABLE>
<PAGE> 1
Exhibit 21.01
SUBSIDIARIES OF CHOICE HOTELS HOLDINGS, INC.*
---------------------------------------------
BOULEVARD MOTEL CORP.
Bay Ridge Spirits Corp.
Biscayne Land Associates, Inc.
Biscayne Properties, Inc.
Bowling Green Inn -- Brandywine, Inc.
Cardinal Beverage Corp.
Everglades Beverage Corp.
Fairways Beverage Corp.
Fairways, Inc.
K & A Corp.
MCH Baltimore Corp.
MCH Hot Springs Corp.
MCH Lincoln Corp.
MCH Management, Inc.
MCH Roanoke Corp.
MCH Shady Grove Corp.
MCH Springfield Corp.
MCH Sturgis Corp.
MCH Wichita Corp.
MCHD Cypress Creek Corp.
MCHD Ft. Lauderdale Corp.
MCHD Hampton Corp.
Raleigh Hotel Holdings, Inc.
West Montgomery Hotel Holdings, Inc.
CACTUS HOTEL CORP.
CHOICE HOTELS INTERNATIONAL, INC. (Formerly Quality Inns International, Inc.)
("Choice Hotels")
CH Europe, Inc. (d)
Choice Capital Corp.
Choice Hotels Australia Pty. Ltd. (90%)
Choice Hotels Canada Inc. (50%)
Choice Hotels (Cayman) Ltd. (10%)
Choice Hotels International Asia Pacific Pty. Ltd.
Choice Hotels International Pty. Ltd. (Formerly Quality
Inn Pty. Ltd.) (d)
Choice Hotels (Ireland) Limited (d)
Choice Hotels Japan, Inc. (Formerly Quality Hotels Japan, Inc.)
Choice Hotels Limited
Choice Hotels of Brazil, Inc.
- ------------------
* Direct subsidiaries of the Registrant are set forth below in capital
letters with their subsidiaries immediately following. Entities are
wholly owned except were indicated.
<PAGE> 2
-2-
Choice Hotels Pacific Asia K.K. (Formerly Quality Hotels
Pacific Asia, Inc.) (d)
Choice Hotels Pty. Ltd. (Formerly Quality Hotels Pty.
Ltd.) (d)
Choice Hotels Systems, Inc.
Choice Hotels Venezuela, C.A. (20%)
Clarion Hotel Pty. Ltd. (Formerly Royale Hotels Pty.
Ltd.) (d)
Comfort Hotels Pty. Ltd. (d)
Comfort Inn Pty. Ltd. (d)
Comfort Inns New Zealand Limited (Formerly Quality Inns
New Zealand Limited) (d)
Hoteles Cono Sur S.A. (d)
QI Capital Corp. (d)
Quality Hotels Europe, Inc.
Quality Hotels (Ireland) Limited (d)
Quality Hotels Limited (Formerly Quality Hotels (China)
Limited) (50%; 50% Manor Care, Inc.) (d)
Quality Hotels and Resorts, Inc. (d)
Baltimore Hotel Management. Inc. (d)
Myrtle Beach Hotel Management, Inc. (d)
Quality Inns International, Inc. (Formerly Choice Hotels
International, Inc.)
Quality Inter-Americas, Inc. (d)
Sleep Inn Pty. Ltd. (d)
COMFORT CALIFORNIA, INC.
GULF HOTEL CORP.
HEFRU FOOD SERVICES, INC.
QCM BEVERAGES, INC. (49%; 51% Texas resident)
QCM CORPORATION (d)
QI ADVERTISING AGENCY, INC.
QUALITY ARIZONA, INC. (d)
QH Europe, Inc. (d)
QUALITY INNS WORLD MARKETING CORPORATION
QUALITY INSURANCE ASSOCIATES, INC. (d)
REVERE GROUP, INC. (THE) (d)
SUNBURST HOTEL CORP.
THICKET, INC. (THE) (Non-Profit; owned by members)
<PAGE> 3
-3-
PARTNERSHIPS
QH Europe Partnership (80% Quality Hotels Europe, Inc. ("QHE"),
20% Choice Hotels International, Inc.)
Choice Hotels (Deutschland) G.m.b.H. (99%; 1% Choice Hotels)
Choice Hotels (France) S.a.r.l. (99%; 1% Choice Hotels)
Choice Hotels Benelux S.A. (51%)
Manor Care Hotels (France) S.A.
Manor Care Hotels France No. 1 S.a.r.l.
Manor Care Hotels France No. 2 S.A.
Manor Care Hotels France No. 3 S.a.r.l.
Manor Care Hotels France No. 4 S.a.r.l.
Quality Hotels Limited (Formerly QI Hotels (U.K.) Limited)
(99%; 1% Choice Hotels)
Choice Hotels (UK) Limited
Quality Hotels Europe (Alsdorf) G.m.b.H. (99%; 1% QHE)(d)
Quality Hotels Europe (Herleshausen) G.m.b.H. (99%; 1% QHE)(d)
Quality Hotels Europe (Jena) G.m.b.H. (formerly Quality Hotels Europe
(Deutschland) G.m.b.H.)(99%; 1% QHE)
Quality Hotels Europe (Leipzig) G.m.b.H. (99%; 1% QHE)(d)
Quality Hotels Europe (Peine) G.m.b.H. (99%; 1% QHE)
Quality Hotels Europe (Troisdorf) G.m.b.H. (99%; 1% QHE)
(d) = dormant companies
<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>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 4,142
<SECURITIES> 0
<RECEIVABLES> 35,444
<ALLOWANCES> 4,825
<INVENTORY> 757
<CURRENT-ASSETS> 41,002
<PP&E> 362,907
<DEPRECIATION> 63,380
<TOTAL-ASSETS> 491,304
<CURRENT-LIABILITIES> 48,608
<BONDS> 294,861
0
0
<COMMON> 0
<OTHER-SE> 147,559
<TOTAL-LIABILITY-AND-EQUITY> 491,304
<SALES> 0
<TOTAL-REVENUES> 374,873
<CGS> 0
<TOTAL-COSTS> 334,083
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 974
<INTEREST-EXPENSE> 22,816
<INCOME-PRETAX> 15,858
<INCOME-TAX> 7,400
<INCOME-CONTINUING> 8,458
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,458
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.01
CHOICE HOTELS HOLDINGS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE AT
BEGINNING PROFIT END
DESCRIPTION OF PERIOD AND LOSS WRITE-OFFS OF PERIOD
- ------------------------------------------------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended May 31, 1996
Allowance for doubtful accounts..................... $4,202 $ 974 $ (351) $4,825
======== ======== ======== ========
Year ended May 31, 1995
Allowance for doubtful accounts..................... $8,950 $ 906 $ (5,654) $4,202
======== ======== ======== ========
Year ended May 31, 1994
Allowance for doubtful accounts..................... $6,982 $3,360 $ (1,392) $8,950
======== ======== ======== ========
</TABLE>
