<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of
the Securities Exchange Act of 1934
----------------------
CHOICE HOTELS FRANCHISING, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1209792
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10750 Columbia Pike 20901
Silver Spring, Maryland (Zip Code)
(Address of principal executive
offices)
(301) 979-5000
(Registrant's telephone number, including area code)
----------------------
Securities to be registered pursuant to Section 12(b) of the Act:
Title of class to Name of each exchange on
be so registered which class is to be registered
---------------- -------------------------------
Common Stock New York Stock Exchange
(Par Value $.01 share)
Securities to be registered pursuant to Section 12(g) of the Act:
None
================================================================================
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
CROSS-REFERENCE SHEET BETWEEN PROXY STATEMENT
AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
Item
No. Item Caption Location in Proxy Statement
- ---- ------------ ---------------------------
<S> <C>
1. Business.................... "Proxy Statement Summary"; "Proposal One:
Ratification of the Distribution--Certain
Information Concerning Franchising--
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations"; and "Proposal One: Ratification
of the Distribution--Certain Information
Concerning Franchising--Business and
Properties."
2. Financial Information....... "Proxy Statement Summary"; "Proposal One:
Ratification of the Distribution--Certain
Information Concerning Franchising--Pro
Forma Financial Data"; "Proposal One:
Ratification of the Distribution--Certain
Information Concerning Franchising--Selected
Historical Financial Data"; and "Proposal
One: Ratification of the Distribution--
Certain Information Concerning Franchising--
Management's Discussion and Analysis of
Financial Condition and Results of
Operations."
3. Properties.................. "Proposal One: Ratification of the
Distribution--Business and Properties."
4. Security Ownership "Proposal One: Ratification of the
of Certain Beneficial Distribution--Certain Information
Owners and Management...... Concerning Franchising--Security Ownership."
5. Directors and Executive "Proposal One: Ratification of The
Officers................... Distribution--Certain Information Concerning
Franchising--Management."
6. Executive Compensation...... "Proposal One: Ratification of The
Distribution--Certain Information Concerning
Franchising--Management"; and "Proposal
One: Ratification of The Distribution--
Certain Information Concerning Franchising--
Liability and Indemnification of Officers
and Directors."
7. Certain Relationships and "Proposal One: Ratification of The
Related Transactions....... Distribution--Certain Information Concerning
Franchising--Certain Relationships and
Related Transactions."
8. Legal Proceedings........... "Proposal One: Ratification of The
Distribution--Certain Information Concerning
Franchising--Business and Properties."
9. Market Price of and "Proposal One: Ratification of the
Dividends on the Distribution--The Distribution--Listing and
Registrant's Common Trading of Franchising Common Stock."
Equity and Related
Stockholder Matters........
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Item
No. Item Caption Location in Proxy Statement
- ---- ------------ ---------------------------
<S> <C>
10. Recent Sales of Unregistered
Securities................ Not applicable.
11. Description of Registrant's "Proposal One: Ratification of the
Securities to be Distribution--Certain Information Concerning
Registered................ Franchising--Liability and Indemnification
of Officers and Directors."
12. Indemnification of "Proposal One: Ratification of the
Directors and Officers.... Distribution--Certain Information
Concerning Franchising--Liability and
Indemnification of Officers and Directors."
13. Financial Statements and "Proxy Statement Summary"; "Proposal One:
Supplementary Data........ Ratification of the Distribution--Certain
Information Concerning Franchising--Pro
Forma Financial Data"; "Proposal One:
Ratification of the Distribution--Certain
Information Concerning Franchising--Selected
Historical Financial Data of Franchising";
"Proposal One: Ratification of the
Distribution--Certain Information Concerning
Franchising--Management's Discussion and
Analysis of Financial Condition and Results
of Operations"; and "Financial Statements."
14. Changes in and Disagreements Not applicable.
with Accountants and
Accounting and Financial
Disclosure................
15. Financial Statements and "Financial Statements"; and "Exhibit
Exhibits.................. Index."
</TABLE>
2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Silver Spring, State of Maryland, on September 9, 1997.
CHOICE HOTELS FRANCHISING, INC.
By: /s/ William R. Floyd
------------------------------------------
Name: William R. Floyd
Title: Chairman, Chief Executive Officer
and Director
3
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<C> <S>
2.01 Form of Distribution Agreement between Choice Hotels
Franchising, Inc. and Choice Hotels International, Inc.
*3.01 Form of Restated Certificate of Incorporation of Choice Hotels
Franchising, Inc.
*3.02 Form of Amended and Restated Bylaws of Choice Hotels
International, Inc.
4.01 Form of Common Stock Certificate
10.01 Form of Strategic Alliance Agreement between Choice Hotels
Franchising, Inc. and Choice Hotels International, Inc.
10.02 Form of Employee Benefits and Other Employment Matters
Allocation Agreement by and between Choice Hotels Franchising,
Inc. and Choice Hotels International, Inc.
10.03 Form of Employee Benefits Administration Agreement by and
between Choice Hotels Franchising, Inc. and Choice Hotels
International, Inc.
10.04 Form of Tax Administration Agreement between Choice Hotels
Franchising, Inc. and Choice Hotels International, Inc.
10.05 Form of Tax Sharing Agreement between Choice Hotels Franchising,
Inc. and Choice Hotels International, Inc.
10.06 Form of Amendment to Corporate Services Agreement by and among Manor
Care, Inc., Choice Hotels Franchising, Inc. and Choice Hotels
International, Inc.
10.07 Form of Amendment to Risk Management Consulting Services
Agreement by and among Manor Care, Inc., Choice Hotels Franchising,
Inc. and Choice Hotels International, Inc.
10.08 Form of Office Sublease by and between Choice Hotels
Franchising, Inc. and Choice Hotels International, Inc.
10.09 Form of Noncompetition Agreement between Choice Hotels
Franchising, Inc. and Choice Hotels International, Inc.
10.10 Form of Guaranty by Choice Hotels Franchising, Inc. to Manor
Care, Inc.
10.11 Form of Intercompany Note from Choice Hotels International,
Inc. to Choice Hotels Franchising, Inc.
21.01 Subsidiaries of Choice Hotels Franchising, Inc.
23.01 Report of Independent Public Accountants
27.01 Financial Data Schedule
99.01 Schedule II -- Valuation and Qualiying Accounts
99.02 Proxy Statement
</TABLE>
- ------------------
* Filed as an exhibit to the Choice Hotel International, Inc. Proxy
Statement, which is included as Exhibit 99.1 hereto.
4
<PAGE>
Exhibit 2.01
FORM OF DISTRIBUTION AGREEMENT
between
CHOICE HOTELS INTERNATIONAL, INC.
(to be renamed Sunburst Hospitality Corporation)
and
CHOICE HOTELS FRANCHISING, INC.
(to be renamed Choice Hotels International, Inc.)
dated as of
___________, 1997
<PAGE>
DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT (this "Agreement") is made as of this ____
day of ________, 1997 between Choice Hotels International, Inc., a Delaware
corporation, to be renamed Sunburst Hospitality Corporation ("Choice") and
Choice Hotels Franchising, Inc., a Delaware corporation and wholly owned
subsidiary of Choice, to be renamed Choice Hotels International, Inc.
("Franchising").
RECITALS
--------
WHEREAS, Choice, directly and through subsidiaries, (i) acquires,
develops and owns hotels in the United States and engages in activities related
thereto (the "Real Estate Group Business"); (ii) owns and operates 14 hotels in
France, Germany and the United Kingdom and holds an equity ownership interest in
Friendly Hotel PLC, a corporation formed under the laws of ____________ (the
"European Hotel Business") and (iii) franchises hotels under the Clarion,
Quality, Comfort, Sleep Inn, Rodeway, Econo Lodge and Mainstay brands (the
"Choice Brands") and provides various services for its franchisees to strengthen
the Choice Brands, including the operation of a national reservations system for
the Choice Brands and the conducting of advertising and marketing activities on
behalf of franchisees of the Choice Brands (the "Franchising Business").
WHEREAS, Choice conducts the Franchising Business through Franchising
and its Subsidiaries;
WHEREAS, the Board of Directors of Choice has determined that it is in
the best interest of Choice and the stockholders of Choice to separate the
Franchising Business and the European Hotel Business from the Real Estate Group
Business through the distribution (the
<PAGE>
"Distribution") to the holders of Choice Common Stock (as defined herein) all of
the outstanding shares of Franchising Common Stock (as defined herein).
WHEREAS, in order to effect such separation, Choice will transfer to
Franchising prior to the Distribution, the capital stock of the European Hotel
Subsidiary and certain other assets and liabilities relating principally to the
Franchising Business and the European Hotel Business, the Franchising Group and
the European Hotel Subsidiary not currently held by Franchising or a Franchising
Group Subsidiary and Franchising will transfer to Choice any assets and
liabilities relating principally to the Real Estate Group Business or the Real
Estate Group Subsidiaries not currently held by Choice or a Real Estate Group
Subsidiary, if any, (the "Preliminary Transfers").
WHEREAS, in connection with the Distribution, Choice and Franchising
have determined that it is necessary and desirable to set forth the principal
corporate transactions required to effect the Distribution, and to set forth the
agreements that will govern certain matters following the Distribution.
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained in this Agreement, the parties hereby agree as follows:
I.
DEFINITIONS
Section 1.01. General.
-------
As used in this Agreement, the following terms shall have the
following meanings:
3
<PAGE>
Action: Any action, claim, suit, arbitration, inquiry, proceeding or
------
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.
Affiliate: With respect to any specified Person, any other Person
---------
directly or indirectly controlling or controlled by, or under direct or indirect
common control with, such specified Person. For purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" shall have meanings correlative to the foregoing.
Notwithstanding the foregoing, (i) the Affiliates of Choice shall not include
Franchising, the Franchising Group Subsidiaries or any other Person which
otherwise would be an Affiliate of Choice by reason of Choice's ownership of the
capital stock of Franchising prior to the Distribution or the fact that any
officer or director of Franchising or any of the Franchising Group Subsidiaries
shall also serve as an officer or director of Choice or any of the Real Estate
Group Subsidiaries, and (ii) the Affiliates of Franchising shall not include
Choice, the Real Estate Subsidiaries, or any other Person which otherwise would
be an Affiliate of Franchising by reason of Choice's ownership of the capital
stock of Franchising prior to the Distribution or the fact that any officer or
director of Franchising or any of the Franchising Group Subsidiaries shall also
serve as an officer or director of Choice or any of the Real Estate Group
Subsidiaries.
Agent: ChaseMellon Shareholder Services, L.L.C., as distribution
-----
agent appointed by Choice to distribute the Franchising Common Stock pursuant to
the Distribution.
4
<PAGE>
Amended Manor Care Agreements: The amendments to the Manor Care
-----------------------------
Agreements to be entered into among Manor Care, Choice and Franchising, as
applicable, in connection with the Distribution, substantially in the form
attached hereto as Exhibits A through E.
Assumed Financing Obligations: All Financing Obligations of Choice
-----------------------------
and its Subsidiaries set forth on the Franchising Pro Forma Balance Sheet.
Choice Amended Certificate: The Amendment to the Restated Certificate
--------------------------
of Incorporation of Choice for the purpose of, among other things, changing the
name of Choice to "Sunburst Hospitality Corporation."
Choice Board: The Board of Directors of Choice as it is constituted
------------
prior to the Distribution Date.
Choice Common Stock: The common stock, par value $.01 per share, of
-------------------
Choice.
Choice Pro Forma Balance Sheet: The Pro Forma Consolidated Balance
------------------------------
Sheet of Choice as of October __, 1997 attached hereto as Exhibit F.
Commission: The Securities and Exchange Commission.
----------
Conveyancing and Assumption Instruments: Collectively, the various
---------------------------------------
agreements, instruments and other documents to be entered into to effect the
Preliminary Transfers and the assignment of assets and the assumption of
Liabilities contemplated by this Agreement and the Related Agreements in the
manner contemplated herein and therein.
Distribution Date: The date determined by the Choice Board as the
-----------------
date on which the Distribution shall be effected, which Distribution Date is
contemplated by the Choice Board to occur on or about October __, 1997.
5
<PAGE>
Distribution Record Date: The date established by the Choice Board as
------------------------
the date for taking a record of the Holders of record of Choice Common Stock
entitled to participate in the Distribution, which Distribution Record Date has
been established as [ ], 1997, subject to the fulfillment on or before
[ ], 1997 of certain conditions to the Distribution as
provided in Section 4.02.
Employee Benefits Administration Agreement: The Employee Benefits
------------------------------------------
Administration Agreement between Franchising and Choice, which agreement shall
be entered into on or prior to the Distribution Date in substantially the form
attached hereto as Exhibit G.
Employee Benefits Allocation Agreement: The Employee Benefits and
--------------------------------------
Other Employment Matters Allocation Agreement between Franchising and Choice,
which agreement shall be entered into on or prior to the Distribution Date in
substantially the form attached hereto as Exhibit H.
Exchange Act: The Securities Exchange Act of 1934, as amended.
------------
European Hotel Subsidiary: Quality Hotels of Europe, Inc., a
-------------------------
[ ] corporation and direct, wholly owned subsidiary of Choice.
Financing Obligations: All (i) indebtedness for borrowed money, (ii)
---------------------
obligations evidenced by bonds, notes, debentures or similar instruments, (iii)
obligations under capitalized leases and deferred purchase arrangements, (iv)
reimbursement or other obligations relating to letters of credit or similar
arrangements, and (v) obligations to guarantee, directly or indirectly, any of
the foregoing types of obligations on behalf of others.
Form 10: The Registration Statement on Form 10 under the Exchange Act
-------
with respect to the Franchising Common Stock.
6
<PAGE>
Franchising Board: The Board of Directors of Franchising.
-----------------
Franchising Books and Records: The books and records (including
-----------------------------
computerized records) of Franchising and the Franchising Group Subsidiaries and
any other books and records of Choice's Subsidiaries which relate principally to
the Franchising Group, are necessary to conduct the Franchising Group Business,
or are required by law to be retained by Franchising or a Franchising Group
Subsidiary, including, without limitation, (i) all such books and records
relating to Franchising Group Employees, (ii) all files relating to any Action
being assumed by Franchising as part of the Franchising Group Liabilities, and
(iii) original corporate minute books, stock ledgers and certificates and
corporate seals, and all licenses, leases, agreements and filings, relating to
Franchising, the Franchising Group Subsidiaries or the Franchising Group
Business (but not including the Choice Books and Records, provided that
Franchising shall have access to, and have the right to obtain duplicate copies
of, the Choice Books and Records which pertain to the Franchising Group Business
in accordance with the provisions of Article VII).
Franchising Bylaws: The Restated Bylaws of Franchising, substantially
------------------
in the form of Exhibit I, to be in effect at the Distribution Date.
Franchising Certificate: The Restated Certificate of Incorporation of
-----------------------
Franchising, substantially in the form of Exhibit J, to be in effect at the
Distribution Date.
Franchising Common Stock: The common stock, $.01 par value per share,
------------------------
of Franchising.
Franchising Group: Franchising and the Franchising Group
-----------------
Subsidiaries, collectively.
7
<PAGE>
Franchising Group Assets: (i) All outstanding capital stock of the
------------------------
Franchising Group Subsidiaries; (ii) the Franchising Books and Records; (iii)
all of the assets expressly to be retained by, or assigned or allotted to,
Franchising or any of the Franchising Group Subsidiaries under this Agreement or
the Related Agreements; and (iv) any other assets of Choice and its Subsidiaries
used principally in the Franchising Group Business.
Franchising Group Business: The Franchising Business and the European
--------------------------
Hotel Business, each as referenced in the recitals to this Agreement.
Franchising Group Employees: The meaning specified in the Employee
---------------------------
Benefits Allocation Agreement.
Franchising Group Liabilities: (i) All of the Liabilities of the
-----------------------------
Franchising Group under, or to be retained or assumed by Franchising or any of
the Franchising Group Subsidiaries pursuant to, this Agreement or any of the
Related Agreements, including, without limitation, liabilities arising under the
securities or blue sky laws of the United States or of states or other political
subdivisions of the United States in connection with or related to, information
contained in or omitted from the Form 10 or the Proxy Statement; (ii) all
Liabilities for payment of outstanding drafts of Choice and its Subsidiaries
existing as of the Distribution Date; (iii) the Assumed Financing Obligations;
(iv) all Liabilities of Franchising and the Franchising Group Subsidiaries,
other than Liabilities transferred to Choice or to any Real Estate Group
Subsidiary in connection with the Distribution; and (v) all other Liabilities
arising out of, or in connection with, any of the Franchising Group Assets or
the Franchising Group Business; provided, however, that the Franchising Group
-------- -------
Liabilities shall not include (i) any Financing Obligations of Choice or the
Real Estate Group Subsidiaries other than the Assumed Financing Obligations; and
8
<PAGE>
(ii) all claims, losses, damages, demands, costs, expenses or Liabilities for
any Tax (which shall be governed by Sections 5.06, 6.05 and 9.02 hereof and by
the Tax Sharing Agreement).
Franchising Group Policies: The [ ] Program effective
--------------------------
[ ], 199_ and any other Policies, current or past, which are owned or
maintained by or on behalf of Choice or any of its Affiliates or predecessors,
which by mutual agreement of Choice and Franchising, are to be assigned to
Franchising or to any Franchising Group Subsidiary.
Franchising Group Subsidiaries: All Subsidiaries of Franchising and
------------------------------
the European Hotel Subsidiary.
Franchising Pro Forma Balance Sheet: The Pro Forma Consolidated
-----------------------------------
Balance Sheet of Franchising as of October __, 1997 attached hereto as Exhibit
K.
Holders: The holders of record of Choice Common Stock as of the
-------
Distribution Record Date.
Insurance Administration: With respect to each Policy (including Self
------------------------
Insurance Programs), the accounting for premiums, retrospectively rated
premiums, defense cost, adjuster's fees, indemnity payments, deductibles and
retentions as appropriate under the terms and conditions of each of the
Policies; and the reporting to excess insurance carriers of any losses or claims
in accordance with Policy provisions, and the distribution of Insurance Proceeds
as contemplated by this Agreement.
Insurance Proceeds: Those moneys (i) received by an insured from an
------------------
insurance carrier or (ii) paid by an insurance carrier on behalf of the insured,
in either case net of any applicable premium adjustment, retrospectively rated
premium, deductible, retention, cost or reserve paid or held by or for the
benefit of such insured.
9
<PAGE>
Insured Claims: Those Liabilities that, individually or in the
--------------
aggregate, are covered within the terms and conditions of any of the Policies
(including Self Insurance Programs), whether or not subject to deductibles, co-
insurance, uncollectability or retrospectively rated premium adjustments, but
only to the extent that such Liabilities are within applicable Policy limits,
including aggregates.
IRS: The Internal Revenue Service.
---
IRS Ruling: The letter ruling issued by the IRS in response to the
----------
Ruling Request.
Liabilities: Any and all debts, liabilities and obligations, absolute
-----------
or contingent, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever arising, including all costs and expenses
relating thereto, and including, without limitation, those debts, liabilities
and obligations arising under any law, rule, regulation, Action, threatened
Action, order or consent decree of any governmental entity or any award of any
arbitrator of any kind, and those arising under any contract, commitment or
undertaking.
Manor Care: Manor Care, Inc., a Delaware corporation.
----------
Manor Care Agreements: Collectively, (i) the Employee Benefits and
---------------------
Other Matters Allocation Agreement dated as of November 1, 1996 between Choice
and Manor Care; (ii) Employee Benefits Administration Agreement dated as of
November 1, 1996 between Choice and Manor Care; (iii) Corporate Services
Agreement dated as of November 1, 1996 between Choice and Manor Care; (iv) Risk
Management Services Agreement dated as of November 1, 1996 between Choice and
Manor Care; and (v) Gaithersburg Lease Agreement dated as of November 1, 1996
between Choice and Manor Care.
10
<PAGE>
Manor Care Distribution Agreement: The Distribution Agreement dated
---------------------------------
October 31, 1996, by and between Choice and Manor Care.
New Agreements: The Employee Benefits Allocation Agreement; Employee
--------------
Benefits Administration Agreement; Noncompetition Agreement; Strategic Alliance
Agreement; Tax Sharing Agreement; and Tax Administration Agreement.
Noncompetition Agreement: The Noncompetition Agreement between
------------------------
Franchising and Choice, which agreement shall be entered into on or prior to
the Distribution Date in substantially the form attached hereto as Exhibit L.
Person: Any individual, corporation, partnership, association, trust,
------
estate or other entity or organization, including any governmental entity or
authority.
Policies: Insurance policies and insurance contracts of any kind
--------
relating to the Franchising Group Business or the Real Estate Group Business as
conducted prior to the Distribution Date, including without limitation primary
and excess policies, comprehensive general liability policies, automobile,
aircraft and workers' compensation insurance policies, and self-insurance and
captive insurance company arrangements, including any "fronted policies" with
respect to Self Insurance Programs, together with the rights and benefits
thereunder.
Privileged Information: All information as to which Choice,
----------------------
Franchising or any of their Subsidiaries are entitled to assert the protection
of a Privilege.
Privileges: All privileges that may be asserted under applicable law
----------
including, without limitation, privileges arising under or relating to the
attorney-client relationship (including but not limited to the attorney-client
and work product privileges), the accountant-client privilege, and privileges
relating to internal evaluative processes.
11
<PAGE>
Proxy Statement: The Proxy Statement complying with Regulation 14A
---------------
under the Exchange Act dated August 15, 1997 circulated to the stockholders of
Choice for purposes of soliciting proxies approving the Distribution and certain
related matters.
Real Estate Books and Records: The books and records (including
-----------------------------
computerized records) of Choice and the Real Estate Group Subsidiaries and any
other books and records of Choice's Subsidiaries which relate principally to the
Real Estate Group, are necessary to conduct the Real Estate Group Business or
are required by law to be retained by Choice or a Real Estate Group Subsidiary,
including, without limitation, (i) all such books and records relating to Real
Estate Group Employees, (ii) all files relating to any Action being retained or
assumed by Choice as part of the Real Estate Group Liabilities, and (iii)
original corporate minute books, stock ledgers and certificates and corporate
seals, and all licenses, leases, agreements and filings, relating to Choice, the
Real Estate Group Subsidiaries or the Real Estate Group Business (but not
including the Franchising Books and Records, provided that Choice shall have
access to, and shall have the right to obtain duplicate copies of, the
Franchising Books and Records in accordance with the provisions of Article VII).
Real Estate Group: Choice and the Real Estate Group Subsidiaries,
-----------------
collectively.
Real Estate Group Assets: The assets of Choice and the Real Estate
------------------------
Group Subsidiaries including, without limitation, (i) the capital stock of the
Real Estate Group Subsidiaries; (ii) the Choice Books and Records; (iii) all of
the assets expressly to be retained by, or assigned or allocated to, Choice or
any of the Real Estate Group Subsidiaries under this Agreement or the Related
Agreements; and (iv) any other assets of Choice and its Subsidiaries not
composing Franchising Group Assets.
12
<PAGE>
Real Estate Group Business: The business conducted by the Real Estate
--------------------------
Group, as referenced in the recitals to this Agreement.
Real Estate Group Employees: The meaning specified in the Employee
---------------------------
Benefits Allocation Agreement.
Real Estate Group Liabilities: (i) All of the Liabilities of Choice
-----------------------------
and the Real Estate Group Subsidiaries under, or to be retained or assumed by
Choice or any of the Real Estate Group Subsidiaries pursuant to, this Agreement
or any of the Related Agreements; (ii) any Financing Obligations of Choice and
its Subsidiaries not constituting Franchising Group Liabilities; (iii) all
Liabilities transferred to Choice or the Real Estate Group Subsidiaries in
connection with the Distribution; (iv) all claims, losses, damages, demands,
costs, expenses or Liabilities for Tax (which shall be governed by Sections
5.06, 6.05 and 9.02 hereof and by the Tax Sharing Agreement; (v) all other
Liabilities arising out of, or in connection with, any of the Real Estate Group
Assets or the Real Estate Group Business; and (vi) to the extent not otherwise
provided for, all other Liabilities of Choice and its Subsidiaries not
constituting Franchising Group Liabilities.
Real Estate Group Self Insurance Liabilities: All Liabilities arising
--------------------------------------------
under the Self Insurance Programs retained by Choice under the Agreement not
constituting a Franchising Self Insurance Liability.
[Real Estate Group Policies: The [ ] policy
--------------------------
effective [ ] and any other policies current or past, which are
owned or maintained by or on behalf of Choice or any of its Affiliates or
predecessors, which, by mutual agreement of Choice and Franchising are to be
assigned to Choice or to any Real Estate Group Subsidiary.]
13
<PAGE>
Real Estate Group Subsidiaries: All Subsidiaries of Choice, except
------------------------------
Franchising and the Franchising Group Subsidiaries.
Related Agreements: All of the agreements, instruments,
------------------
understandings, assignments or other arrangements set forth in writing, which
are entered into in connection with the transactions contemplated hereby,
including, without limitation: the Conveyancing and Assumption Instruments, the
Amended Manor Care Agreements, and the New Agreements.
Retained Cash Accounts: The bank accounts set forth on Schedule 2.07
----------------------
hereto, which accounts are in the name of First Choice Properties Corporation.
Ruling Request: The private letter ruling request filed by Choice
--------------
with the Internal Revenue Service on March __, 1997, as supplemented and amended
from time to time, with respect to certain tax matters relating to the
Distribution.
Self Insurance Programs: Those self-insured programs administered by
-----------------------
Choice for the benefit of its employees, properties and Franchising businesses,
including without limitation such programs that utilize "fronted policies."
Shared Policies: All Policies, current or past, which are owned or
---------------
maintained by or on behalf of Choice or any of its Subsidiaries or their
respective predecessors which relate to both the Real Estate Group Business and
the Franchising Group Business, other than the Real Estate Group Policies and
the Franchising Group Policies.
Strategic Alliance Agreement: The Strategic Alliance Agreement to be
----------------------------
entered into between Choice and Franchising substantially in the form attached
hereto as Exhibit M.
Subsidiary: With respect to any Person, (a) any corporation of which
----------
at least a majority in interest of the outstanding voting stock (having by the
terms thereof voting power
14
<PAGE>
under ordinary circumstances to elect a majority of the directors of such
corporation, irrespective of whether or not at the time stock of any other class
or classes of such corporation shall have or might have voting power by reason
of the happening of any contingency) is at the time, directly or indirectly,
owned or controlled by such Person, by one or more Subsidiaries of such Person,
or by such Person and one or more of its Subsidiaries, or (b) any corporate or
non-corporate entity in which such Person, one or more Subsidiaries of such
Person, or such Person and one or more Subsidiaries of such Person, directly or
indirectly, at the date of determination thereof, has an ownership interest and
which is included in the consolidated financial reports of such Person
consistent with generally accepted accounting principles.
Tax: The meaning set forth in the Tax Sharing Agreement.
---
Tax Administration Agreement: The Tax Administration Agreement
----------------------------
between Choice and Franchising pursuant to which such parties will provide to
the other certain tax administration services after the consummation of the
Distribution, which agreement shall be entered into on or prior to the
Distribution Date in substantially the form attached hereto as Exhibit N.
Tax Sharing Agreement: The Tax Sharing Agreement between Choice and
---------------------
Franchising pursuant to which such parties will provide for the allocation of
certain tax liabilities after the consummation of the Distribution, which
agreement shall be entered into on or prior to the Distribution Date in
substantially in the form attached hereto as Exhibit O.
Section 1.02. Terms Defined Elsewhere in Agreement.
-------------------------------------
Each of the following terms is defined in the Section set forth
opposite such term:
15
<PAGE>
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Choice Recitals
Choice Indemnities 5.01
Committee 9.14
Consents 4.01
Distribution Recitals
Dispute 9.14
Franchising Recitals
Indemnifiable Loss 5.01
Indemnifying Party 5.03
Indemnified Person 5.03
Information 7.02
Preliminary Transfers Recitals
Real Estate Group Recitals
Third-Party Claim 5.04
</TABLE>
II.
TRANSFER OF ASSETS
------------------
Section 2.01. Transfer of Assets to Franchising.
---------------------------------
Prior to the Distribution Date, Choice shall take or cause to be taken
all actions necessary to cause the transfer, assignment, delivery and conveyance
to Franchising or the Franchising Group Subsidiary designated by Franchising, of
all of Choice's and its Subsidiaries' right, title and interest in any
Franchising Group Assets held, on or prior to the Distribution Date, by Choice
or any Real Estate Group Subsidiary.
Section 2.02. Transfers of Assets from Franchising Group Subsidiaries
-------------------------------------------------------
to Choice or Real Estate Group Subsidiaries.
- -------------------------------------------
Prior to the Distribution Date, Franchising shall take or cause to be
taken all action necessary to cause the transfer, assignment, delivery and
conveyance to Choice or the Real Estate Subsidiary designated by Choice, of all
of Franchising's and the Franchising Group
16
<PAGE>
Subsidiaries' right, title and interest in Real Estate Group Assets held, on or
prior to the Distribution Date by Franchising or one of the Franchising Group
Subsidiaries, if any.
Section 2.03. Transfers Not Effected Prior to the Distribution.
------------------------------------------------
To the extent that any transfers contemplated by this Article II shall
not have been fully effected on the Distribution Date, the parties shall
cooperate to effect such transfers as promptly as shall be practicable following
the Distribution Date. Nothing herein shall be deemed to require the transfer
of any assets or the assumption of any Liabilities which by their terms or
operation of law cannot be transferred or assumed; provided, however, that
-------- -------
Choice and Franchising and their respective Subsidiaries and Affiliates shall
cooperate in seeking to obtain any necessary consents or approvals for the
transfer of all assets and Liabilities contemplated to be transferred pursuant
to this Article II. In the event that any such transfer of assets or
Liabilities has not been consummated effective as of the Distribution Date, the
party retaining such asset or Liability shall thereafter hold such asset in
trust for the use and benefit of the party entitled thereto (at the expense of
the party entitled thereto) and retain such Liability for the account of the
party by whom such Liability is to be assumed pursuant hereto, and take such
other actions as may be reasonably required in order to place the parties,
insofar as reasonably possible, in the same position as would have existed had
such asset been transferred or such Liability been assumed as contemplated
hereby. As and when any such asset or Liability becomes transferable, such
transfer and assumption shall be effected forthwith. The parties agree that,
except as set forth in this Section 2.03, as of the Distribution Date, each
party hereto shall be deemed to have acquired complete and sole beneficial
ownership over all of the assets, together with all rights, powers and
privileges incidental thereto, and shall be deemed to have assumed in
17
<PAGE>
accordance with the terms of this Agreement all of the Liabilities, and all
duties, obligations and responsibilities incidental thereto, which such party is
entitled to acquire or required to assume pursuant to the terms of this
Agreement.
Section 2.04. Cooperation Re: Assets.
-----------------------
In the case that at any time after the Distribution Date, Franchising
reasonably determines that any of the Real Estate Group Assets are essential for
the conduct of the Franchising Group Business, or Choice reasonably determines
that any of the Franchising Group Assets are essential for the conduct of the
Real Estate Group Business, and the nature of such assets makes it impracticable
for Franchising or Choice, as the case may be, to obtain substitute assets or to
make alternative arrangements on commercially reasonable terms to conduct their
respective businesses, and reasonable provisions for the use thereof are not
already included in the Related Agreements, then Franchising (with respect to
the Franchising Group Assets) and Choice (with respect to the Real Estate Group
Assets) shall cooperate to make such assets available to the other party on
commercially reasonable terms, as may be reasonably required for such party to
maintain normal business operations. However, (i) the usage of such assets by
the other party shall not materially interfere with the use of such assets by
the party holding such assets, and (ii) such assets shall be required to be made
available only until such time as the other party may reasonably obtain
substitute assets or make alternative arrangements on commercially reasonable
terms to permit it to maintain normal business operations.
Section 2.05. No Representations or Warranties; Consents.
------------------------------------------
Each of the parties hereto understands and agrees that no party hereto
is, in this Agreement, in any Related Agreement, or otherwise, representing or
warranting in any way (i) as
18
<PAGE>
to the value or freedom from encumbrance of, or any other matter concerning, any
assets of such party or (ii) as to the legal sufficiency to convey title to any
asset transferred pursuant to this Agreement or any Related Agreement. It is
also agreed and understood that there are no warranties, express or implied, as
to the merchantability or fitness of any of the assets either transferred to or
retained by the parties, as the case may be, and all such assets shall be "as
is, where is" and "with all faults" provided, however, that the absence of
warranties shall have no effect upon the allocation of Liabilities under this
Agreement and provided further that Franchising represents and warrants that,
prior to the Distribution Date, Franchising and the Franchising Group have
maintained their accounts payable and accounts receivable in a manner consistent
with the customary practices of the Franchising Group Business. Each party
hereto understands and agrees that no party hereto is, in this Agreement, in any
Related Agreement or otherwise, representing or warranting in any way that the
obtaining of any consents or approvals, the execution and delivery of any
amendatory agreements and the making of any filings or applications contemplated
by this Agreement, any Related Agreement or otherwise will satisfy the
provisions of any or all applicable laws or judgments or other instruments or
agreements relating to such assets. Notwithstanding the foregoing, the parties
shall use their good faith efforts to obtain all consents and approvals, to
enter into all reasonable amendatory agreements and to make all filings and
applications which may be reasonably required for the consummation of the
transactions contemplated by this Agreement and the Related Agreements, and
shall take all such further reasonable actions as shall be reasonably necessary
to preserve for each of the Franchising Group and the Real Estate Group, to the
greatest extent feasible, the economic and operational benefits of the
allocation of assets and liabilities provided for in this Agreement. In
19
<PAGE>
case at any time after the Distribution Date any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers and
directors of each party to this Agreement shall take all such necessary or
desirable action.
Section 2.06. Conveyancing and Assumption Instruments.
---------------------------------------
In connection with the Preliminary Transfers described in Article II
and Article III hereof, and the assignment of assets and the assumption of
Liabilities contemplated by any Related Agreements, the parties shall execute,
or cause to be executed by the appropriate entities, the Conveyancing and
Assumption Instruments in such forms as the parties shall reasonably agree. The
transfer of capital stock shall be effected by means of delivery of stock
certificates and executed stock powers and notation on the stock record books of
the corporation or other legal entities involved and, to the extent required by
applicable law, by notation on public registries.
Section 2.07. Cash Allocation; Cash Management.
--------------------------------
(a) Cash Allocation on the Distribution Date.
----------------------------------------
The allocation between Choice and Franchising of all domestic and
international cash bank balances, short-term investments and outstanding checks
and drafts of Choice and its Subsidiaries recorded per the books of Choice and
its Subsidiaries shall be in accordance with the following:
(i) all cash received in, and deposits of cash, checks, drafts or
short-term investments made to, depository accounts, other than the
Retained Cash Accounts, as of the close of [business on] the
Distribution Date shall be remitted to Franchising; and
20
<PAGE>
(ii) all cash in, and deposits of cash, checks, drafts or short-
term investments made to the Retained Cash Accounts as of the close of
[business on] the Distribution Date shall remain with Choice and the
Real Estate Group Subsidiaries.
All Liabilities for payment of outstanding checks or drafts drawn on
or prior to the Distribution Date on accounts allocated to Franchising shall be
paid by Franchising.
(b) Cash Management After the Distribution Date. All petty cash,
-------------------------------------------
depository and disbursement accounts of Choice (other than the Retained Cash
Accounts) on the Distribution Date shall be transferred to Franchising after the
allocations are made pursuant to this Section 2.07. Choice shall retain the
Retained Cash Accounts and shall establish and maintain a separate cash
management system and accounting records with respect to the Real Estate Group
Business effective as of 12:01 a.m. New York time on the day following the
Distribution Date.
(c) For purposes of this Section 2.07, the parties contemplate that
the Franchising Group Business and the Real Estate Group Business, including,
but not limited to, the administration of accounts payable and accounts
receivable, will be conducted in the ordinary course of business and consistent
with past practice prior the Distribution Date.
(d) For purposes of this Section 2.07, any disagreement or dispute
shall be resolved by the Chief Financial Officer of Franchising, which
resolution shall be binding and final upon each of the parties hereto and not
subject to further review.
21
<PAGE>
Section 2.08. Agreements Between Choice and Franchising.
-----------------------------------------
On or prior to the Distribution Date, Choice and Franchising shall
enter into the New Agreements.
Section 2.09. Agreements Between Choice and/or Franchising and Manor
------------------------------------------------------
Care.
- ----
On or prior to the Distribution Date, Choice and/or Franchising and
Manor Care, as appropriate, shall enter into the Amended Manor Care Agreements.
III.
ASSUMPTION AND SATISFACTION OF LIABILITIES
------------------------------------------
Section 3.01. Assumption and Satisfaction of Liabilities.
------------------------------------------
Except as set forth in one or more of the Related Agreements,
effective as of and after the Distribution Date, (a) Franchising shall, and/or
shall cause the Franchising Group Subsidiaries to, assume, pay, perform and
discharge in due course all of the Franchising Group Liabilities, and (b) Choice
shall, and/or shall cause the Real Estate Group Subsidiaries to, assume, pay,
perform and discharge in due course all of the Real Estate Group Liabilities.
IV.
THE DISTRIBUTION
----------------
Section 4.01. Cooperation Prior to the Distribution.
-------------------------------------
(a) Franchising and Choice shall cooperate in preparing, filing with
the Commission and causing to become effective any registration statements or
amendments thereof which are appropriate to reflect the establishment of, or
amendments to, any employee benefit plans and other plans contemplated by the
Employee Benefits Allocation Agreement.
22
<PAGE>
(b) Franchising and Choice shall take all such action as may be
necessary or appropriate under the securities or blue sky laws of states or
other political subdivisions of the United States in connection with the
transactions contemplated by this Agreement and the Related Agreements.
(c) Franchising and Choice shall use all reasonable efforts to obtain
any third-party consents or approvals necessary or desirable in connection with
the transactions contemplated hereby ("Consents").
--------
(d) Franchising and Choice will use all reasonable efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary or desirable under applicable law, to consummate the transactions
contemplated under this Agreement and the Related Agreements.
Section 4.02. Choice Board Action; Conditions Precedent to the
------------------------------------------------
Distribution.
- ------------
The Choice Board shall, in its sole discretion, establish the Record
Date and the Distribution Date and any appropriate procedures in connection with
the Distribution. In no event shall the Distribution occur unless the following
conditions shall have been satisfied:
(i) the transactions contemplated in Article II and Article
III shall have been consummated in all material respects;
(ii) the Franchising Board, comprised as contemplated by
Section 6.01, shall have been elected by Choice, as sole stockholder
of Franchising, and the Franchising Certificate and Franchising Bylaws
shall have been adopted and shall be in effect;
23
<PAGE>
(iii) the Ruling Request shall have been granted in form and
substance satisfactory to the Choice Board, in its sole discretion and
the representations made to the IRS therein shall be true in all
material respects;
(iv) the Form 10 shall have been declared effective by the
Commission;
(v) Franchising and Choice shall have entered into the Related
Agreements to which they are a party and each of the transactions
contemplated by the Related Agreements to be consummated on or prior
to the Distribution Date shall have been consummated;
(vi) all necessary regulatory approvals and consents of third
parties shall have been received;
(vii) Franchising shall have obtained, or Choice shall have
obtained for Franchising, insurance (or binders therefor) providing
coverage to Franchising similar to the coverage provided by insurance
in place prior to the Distribution Date; and,
(viii) financing arrangements with respect to Choice and
Franchising satisfactory to the Choice Board in its sole discretion
shall be in place.
provided, however, that (x) any such condition may be waived by the Choice Board
- -------- -------
in its sole discretion, and (y) the satisfaction of such conditions shall not
create any obligation on the part of Choice or any other party hereto to effect
the Distribution or in any way limit Choice's power
24
<PAGE>
of termination set forth in Section 9.08 or alter the consequences of any such
termination from those specified in such Section.
Section 4.03. The Distribution.
----------------
On the Distribution Date, or as soon thereafter as practicable,
subject to the conditions and rights of termination set forth in this Agreement,
Choice shall deliver to the Agent a share certificate representing all of the
then outstanding shares of Franchising Common Stock owned by Choice, endorsed in
blank, and shall instruct the Agent to distribute to each Holder, on or as soon
as practicable following the Distribution Date, a certification, or if requested
by such Holder, a certificate, representing one share of Franchising Common
Stock for each share of Choice Common Stock so held. Franchising agrees to
provide all share certificates that the Agent shall require in order to effect
the Distribution.
V.
INDEMNIFICATION
---------------
Section 5.01. Indemnification by Choice.
-------------------------
Except as otherwise expressly set forth in a Related Agreement, Choice
shall indemnify, defend and hold harmless Franchising and each of the
Franchising Group Subsidiaries, and each of their respective directors,
officers, employees, agents and Affiliates and each of the heirs, executors,
successors and assigns of any of the foregoing (the "Franchising Indemnities")
-----------------------
from and against any and all losses, Liabilities, damages and expenses,
(including, without limitation, the reasonable costs and expenses of
investigation and reasonable attorney's fees and expenses in connection with any
or all such investigations or any and all Actions, or threatened Actions)
(collectively, "Indemnifiable Losses" and, individually, an "Indemnifiable
-------------------- -------------
25
<PAGE>
Loss") incurred or suffered by any of the Franchising Indemnities and arising
- ----
out of or due to the failure or alleged failure of Choice, any Real Estate Group
Subsidiary, or any of their Affiliates to pay, perform or otherwise discharge in
due course any of the Real Estate Group Liabilities, or comply with the
provisions of Section 6.04. To the extent that counsel is provided to
Franchising under this Indemnification, such counsel shall be selected by Choice
and such counsel may include its in-house corporate counsel.
Section 5.02. Indemnification by Franchising.
------------------------------
Except as otherwise expressly set forth in a Related Agreement,
Franchising shall indemnify, defend and hold harmless Choice and each of the
Real Estate Group Subsidiaries, and each of their respective directors,
officers, employees, agents and Affiliates and each of the heirs, executors,
successors and assigns of any of the foregoing (the "Choice Indemnities") from
------------------
and against any and all Indemnifiable Losses incurred or suffered by any of the
Choice Indemnities and arising out of or due to the failure or alleged failure
of Franchising, any Franchising Group Subsidiaries, or any of their Affiliates
to pay, perform or otherwise discharge in due course any of the Franchising
Group Liabilities or comply with the provisions of Section 6.04. To the extent
that counsel is provided to Choice under this Indemnification, such counsel
shall be selected by Franchising and such counsel may include its in-house
corporate counsel.
Section 5.03. Insurance Proceeds.
------------------
The amount which any party (an "Indemnifying Party") is or may be
------------------
required to pay to any other Person (an "Indemnified Person") pursuant to
------------------
Section 5.01 or Section 5.02 shall be reduced (including, without limitation,
retroactively) by any Insurance Proceeds or other amounts actually recovered by
or on behalf of such Indemnified Party in reduction of the related
26
<PAGE>
Indemnifiable Loss. If an Indemnified Party shall have received the payment
required by this Agreement from an Indemnifying Party in respect of an
Indemnifiable Loss and shall subsequently actually receive Insurance Proceeds,
or other amounts in respect of such Indemnifiable Loss as specified above, then
such Indemnified Party shall pay to such Indemnifying Party a sum equal to the
amount of such Insurance Proceeds or other amounts actually received.
Section 5.04. Procedure for Indemnification.
-----------------------------
(a) Except as may be set forth in a Related Agreement, if an
Indemnified Party shall receive notice or otherwise learn of the assertion by a
Person (including, without limitation, any governmental entity) who is not a
party to this Agreement or to any of the Related Agreements of any claim or of
the commencement by any such Person or its Affiliate of any Action with respect
to which an Indemnifying Party may be obligated to provide indemnification
pursuant to this Agreement (a "Third-Party Claim"), such Indemnified Party shall
-----------------
give such Indemnifying Party written notice thereof promptly after becoming
aware of such Third-Party Claim; provided, that the failure of any Indemnified
--------
Party to give notice as required by this Section 5.04 shall not relieve the
Indemnifying Party of its obligations under this Article V, except to the extent
that such Indemnifying Party is prejudiced by such failure to give notice. Such
notice shall describe the Third-Party Claim in reasonable detail, and shall
indicate the amount (estimated if necessary) of the Indemnifiable Loss that has
been or may be sustained by such Indemnified Party.
(b) An Indemnifying Party may elect to defend or to seek to settle
or compromise, at such Indemnifying Party's own expense and by such Indemnifying
Party's own
27
<PAGE>
counsel, any Third-Party Claim, provided that the Indemnifying Party must
confirm in writing that it agrees that the Indemnified Party is entitled to
indemnification hereunder in respect of such Third-Party Claim. Within 30 days
of the receipt of notice from an Indemnified Party in accordance with
Section 5.04(a) (or sooner, if the nature of such Third-Party Claim so
requires), the Indemnifying Party shall notify the Indemnified Party of its
election whether to assume responsibility for such Third-Party Claim (provided
that if the Indemnifying Party does not so notify the Indemnified Party of its
election within 30 days after receipt of such notice from the Indemnified Party,
the Indemnifying Party shall be deemed to have elected not to assume
responsibility for such Third-Party Claim), and such Indemnified Party shall
cooperate in the defense or settlement or compromise of such Third-Party Claim.
After notice from an Indemnifying Party to an Indemnified Party of its election
to assume responsibility for a Third-Party Claim, such Indemnifying Party shall
not be liable to such Indemnified Party under this Article V for any legal or
other expenses (except expenses approved in advance by the Indemnifying Party)
subsequently incurred by such Indemnified Party in connection with the defense
thereof; provided, that if the defendants in any such claim include both the
--------
Indemnifying Party and one or more Indemnified Parties and in such Indemnified
Parties' reasonable judgment a conflict of interest between such Indemnified
Parties and such Indemnifying Party exists in respect of such claim, such
Indemnified Parties shall have the right to employ separate counsel and in that
event the reasonable fees and expenses of such separate counsel (but not more
than one separate counsel reasonably satisfactory to the Indemnifying Party)
shall be paid by such Indemnifying Party. If an Indemnifying Party elects not to
assume responsibility for a Third-Party Claim (which election may be made only
in the event of a good faith dispute that a claim
28
<PAGE>
was inappropriately tendered under Section 5.01 or 5.02, as the case may be)
such Indemnified Party may defend or (subject to the following sentence) seek to
compromise or settle such Third-Party Claim. Notwithstanding the foregoing, an
Indemnified Party may not settle or compromise any claim without prior written
notice to the Indemnifying Party, which shall have the option within ten days
following the receipt of such notice (i) to disapprove the settlement and assume
all past and future responsibility for the claim, including reimbursing the
Indemnified Party for prior expenditures in connection with the claim, or
(ii) to disapprove the settlement and continue to refrain from participation in
the defense of the claim, in which event the Indemnifying Party shall have no
further right to contest the amount or reasonableness of the settlement if the
Indemnified Party elects to proceed therewith, or (iii) to approve the amount of
the settlement, reserving the Indemnifying Party's right to contest the
Indemnified Party's right to indemnity, or (iv) to approve and agree to pay the
settlement. In the event the Indemnifying Party makes no response to such
written notice from the Indemnity, the Indemnifying Party shall be deemed to
have elected option (ii).
(c) If an Indemnifying Party chooses to defend or to seek to
compromise any Third-Party Claim, the Indemnified Party shall make available to
such Indemnifying Party any personnel and any books, records or other documents
within its control or which it otherwise has the ability to make available that
are necessary or appropriate for such defense.
(d) Any claim on account of an Indemnifiable Loss which does not
result from a Third-Party Claim shall be asserted by written notice given by the
Indemnified Party to the applicable Indemnifying Party. Such Indemnifying Party
shall have a period of 15 days after the receipt of such notice within which to
respond thereto. If such Indemnifying Party does not
29
<PAGE>
respond within such 15-day period, such Indemnifying Party shall be deemed to
have refused to accept responsibility to make payment. If such Indemnifying
Party does not respond within such 15-day period or rejects such claim in whole
or in part, such Indemnified Party shall be free to pursue such remedies as may
be available to such party under applicable law or under this Agreement.
(e) In addition to any adjustments required pursuant to
Section 5.03, if the amount of any Indemnifiable Loss shall, at any time
subsequent to the payment required by this Agreement, be reduced by recovery,
settlement or otherwise, the amount of such reduction, less any expenses
incurred in connection therewith, shall promptly be repaid by the Indemnified
Party to the Indemnifying Party.
(f) In the event of payment by an Indemnifying Party to any
Indemnified Party in connection with any Third-Party Claim, such Indemnifying
Party shall be subrogated to and shall stand in the place of such Indemnified
Party as to any events or circumstances in respect of which such Indemnified
Party may have any right or claim relating to such Third-Party Claim against any
claimant or plaintiff asserting such Third-Party Claim. Such Indemnified Party
shall cooperate with such Indemnifying Party in a reasonable manner, and at the
cost and expense of such Indemnifying Party, in prosecuting any subrogated right
or claim.
Section 5.05. Remedies Cumulative.
-------------------
The remedies provided in this Article V shall be cumulative and shall
not preclude assertion by any Indemnified Party of any other rights or the
seeking of any and all other remedies against any Indemnifying Party.
30
<PAGE>
Section 5.06. After-Tax Indemnification Payments.
----------------------------------
Except as otherwise expressly provided herein or in a Related
Agreement, any indemnification payment made by any Indemnifying Party under this
Article V shall be computed by taking into account the value of any and all
applicable deductions, losses, credits, offsets or other items for Federal,
State or other Tax purposes attributable to the payment of the Indemnified
Losses by the Indemnified Party attributable to receipt of the indemnification
payment.
Section 5.07. Survival of Indemnities.
-----------------------
The obligations of each of Franchising and Choice under this Article V
shall survive the sale or other transfer by it of any assets or businesses or
the assignment by it of any Liabilities, with respect to any Indemnifiable Loss
of the other related to such assets, businesses or Liabilities.
VI.
CERTAIN ADDITIONAL MATTERS
--------------------------
Section 6.01. Franchising Board.
-----------------
Franchising and Choice shall take all actions which may be required to
appoint as officers and directors of Franchising those persons named in the
Form 10 (as may be altered or supplemented prior to the date hereof by the
Choice Board and the Franchising Board) to constitute, effective as of the
Distribution Date, the officers and the directors of Franchising.
Section 6.02. Resignations; Choice Board.
--------------------------
(a) Franchising shall cause all of its directors and Franchising
Group Employees to resign, effective as of the Distribution Date, from all
boards of directors or similar governing bodies of Choice or any of the Real
Estate Group Subsidiaries on which they serve,
31
<PAGE>
and from all positions as officers or employees of Choice or any of the Real
Estate Group Subsidiaries in which they serve, except that (i) Stewart Bainum,
Stewart Bainum Jr., and Frederick V. Malek each shall serve as a director of
both Franchising and Choice and (ii) Stewart Bainum, Jr. shall also serve as
Chairman of the board of directors of Franchising and of Choice. Choice shall
cause all of its directors and the Real Estate Group Employees to resign from
all boards of directors or similar governing bodies of Franchising or any of the
Franchising Group Subsidiaries on which they serve, and from all positions as
officers or employees of Franchising or any of the Franchising Group
Subsidiaries in which they serve, except to the extent specified in the
preceding sentence.
Section 6.03. Certificate and Bylaws.
----------------------
(a) On or prior to the Distribution Date, Franchising shall adopt
the Franchising Certificate and the Franchising Bylaws, and shall file the
Franchising Certificate with the Secretary of State of the State of Delaware.
Choice shall provide all necessary shareholder approvals for the Franchising
Certificate prior to the filing of the Franchising Certificate with the
Secretary of State of the State of Delaware.
(b) On or prior to the Distribution Date, Choice shall obtain all
necessary corporate approvals (including the approval by the holders of Choice
Common Stock) to the Choice Amended Certificate, and shall file the Choice
Amended Certificate with the Secretary of State of the State of Delaware.
Section 6.04. Certain Post-Distribution Transactions.
--------------------------------------
Each of Choice and Franchising shall, and shall cause each of their
respective Subsidiaries to, comply in all material respects with each
representation and statement made, or to be made, to any taxing authority in
32
<PAGE>
connection with the IRS Ruling or any other ruling obtained, or to be obtained,
by Choice and Franchising acting together, from any such taxing authority with
respect to any transaction contemplated by this Agreement.
Section 6.05. Sales and Transfer Taxes.
------------------------
Choice and Franchising agree to cooperate to determine the amount of
sales, transfer or other taxes or fees, including, without limitation, all real
estate, patent, trademark and transfer taxes and recording fees payable in
connection with the transactions contemplated by the Agreement (the "Transaction
Taxes"). Choice agrees to file promptly and timely the returns for such
Transaction Taxes and Franchising will join in the execution of any such tax
returns or other documentation. Payment of all such Transaction Taxes shall be
the responsibility of Choice.
VII.
ACCESS TO INFORMATION AND SERVICES
Section 7.01. Provision of Corporate Records.
------------------------------
(a) Except as may otherwise be provided in a Related Agreement,
Choice shall arrange as soon as practicable following the Distribution Date, to
the extent not previously delivered in connection with the transactions
contemplated in Article II, for the transportation (at Franchising's cost) to
Franchising of the Franchising Books and Records in its possession, except to
the extent such items are already in the possession of Franchising or a
Franchising Group Subsidiary. The Franchising Books and Records shall be the
property of Franchising, but shall be available to Choice for review and
duplication until Choice shall notify Franchising in writing that such records
are no longer of use to Choice.
33
<PAGE>
(b) Except as otherwise provided in a Related Agreement, Franchising
shall arrange as soon as practicable following the Distribution Date, to the
extent not previously delivered in connection with the transactions contemplated
in Article II, for the transportation (at Choice's cost) to Choice of the Choice
Books and Records in its possession, except to the extent such items are already
in the possession of Choice. The Choice Books and Records shall be the property
of Choice, but the Choice Books and Records that reasonably relate to the
Franchising Group Business shall be available to Franchising for review and
duplication until Franchising shall notify Choice in writing that such records
are no longer of use to Franchising.
Section 7.02. Access to Information.
---------------------
Except as otherwise provided in a Related Agreement, from and after
the Distribution Date, Choice shall afford to Franchising and its authorized
accountants, counsel and other designated representatives reasonable access
(including using reasonable efforts to give access to persons or firms
possessing information) and duplicating rights during normal business hours to
all records, books, contracts, instruments, computer data and other data and
information relating to pre-Distribution operations (collectively,
"Information") within Choice's possession insofar as such access is reasonably
-----------
required by Franchising for the conduct of its business, subject to appropriate
restrictions for classified or Privileged Information. Similarly, except as
otherwise provided in a Related Agreement, Franchising shall afford to Choice
and its authorized accountants, counsel and other designated representatives
reasonable access (including using reasonable efforts to give access to persons
or firms possessing information) and duplicating rights during normal business
hours to Information within Franchising's possession, insofar as such access is
reasonably required by Choice for the conduct of its business, subject to
34
<PAGE>
appropriate restrictions for classified or Privileged Information. Information
may be requested under this Article VII for the legitimate business purposes of
either party, including without limitation, audit, accounting, claims (including
claims for indemnification hereunder), litigation and tax purposes, as well as
for purposes of fulfilling disclosure and reporting obligations and for
performing this Agreement and the transactions contemplated hereby. The parties
hereby agree that Franchising shall also grant to Choice reasonable access to
the computer systems maintained by Franchising after the Distribution that
contain data and other information reasonably related to the Real Estate Group
Assets or the Real Estate Group Business, for purposes of review and retrieval
of such data (including the generation of reports containing such data).
Section 7.03. Production of Witnesses.
-----------------------
At all times from and after the Distribution Date, each of Franchising
and Choice shall use reasonable efforts to make available to the other, upon
written request, its and its Subsidiaries' officers, directors, employees and
agents as witnesses to the extent that such persons may reasonably be required
in connection with any Action.
Section 7.04. Reimbursement.
-------------
Except to the extent otherwise contemplated in any Related Agreement,
a party providing Information or witnesses to the other party under this
Article VII shall be entitled to receive from the recipient, upon the
presentation of invoices therefor, payments of such amounts, relating to
supplies, disbursements and other out-of-pocket expenses (at cost) and direct
and indirect expenses of employees who are witnesses or otherwise furnish
assistance (at cost), as may be reasonably incurred in providing such
Information or witnesses.
35
<PAGE>
Section 7.05. Retention of Records.
--------------------
Except as otherwise required by law or agreed to in a Related
Agreement or otherwise in writing, each of Franchising and Choice may destroy or
otherwise dispose of any of the Information, which is material Information and
is not contained in other Information retained by Choice or Franchising, as the
case may be, at any time after the tenth anniversary of this Agreement, provided
that, prior to such destruction or disposal, (a) it shall provide no less than
90 or more than 120 days prior written notice to the other, specifying in
reasonable detail the Information proposed to be destroyed or disposed of and
(b) if a recipient of such notice shall request in writing prior to the
scheduled date for such destruction or disposal that any of the Information
proposed to be destroyed or disposed of be delivered to such requesting party,
the party proposing the destruction or disposal shall promptly arrange for the
delivery of such of the Information as was requested at the expense of the party
requesting such Information.
Section 7.06. Confidentiality.
---------------
Each of Choice and its Subsidiaries on the one hand, and Franchising
and its Subsidiaries on the other hand, shall hold, and shall cause its
consultants and advisors to hold, in strict confidence, all Information
concerning the other in its possession or furnished by the other or the other's
representatives pursuant to this Agreement (except to the extent that such
Information has been (i) in the public domain through no fault of such party or
(ii) later lawfully acquired from other sources by such party), and each party
shall not release or disclose such Information to any other person, except its
auditors, attorneys, financial advisors, rating agencies, bankers and other
consultants and advisors, unless compelled to disclose by judicial or
administrative process or, as reasonably advised by its counsel, by other
requirements of law, or
36
<PAGE>
unless such Information is reasonably required to be disclosed in connection
with (x) any litigation with any third-parties or litigation between the Real
Estate Group and the Franchising Group, (y) any contractual agreement to which
the Real Estate Group or the Franchising Group are currently parties, or (z) in
exercise of either party's rights hereunder.
Section 7.07. Privileged Matters.
------------------
Franchising and Choice recognize that legal and other professional
services that have been and will be provided prior to the Distribution Date have
been and will be rendered for the benefit of both the Real Estate Group and the
Franchising Group and that both the Real Estate Group and the Franchising Group
should be deemed to be the client for the purposes of asserting all Privileges.
To allocate the interests of each party in the Privileged Information, the
parties agree as follows:
(a) Choice shall be entitled, in perpetuity, to control the
assertion or waiver of all Privileges in connection with Privileged Information
which relates solely to the Real Estate Group, whether or not the Privileged
Information is in the possession of or under the control of Choice or
Franchising. Choice shall also be entitled, in perpetuity, to control the
assertion or waiver of all Privileges in connection with Privileged Information
that relates solely to the subject matter of any claims constituting Real Estate
Group Liabilities, now pending or which may be asserted in the future, in any
lawsuits or other proceedings initiated against or by Choice, whether or not the
Privileged Information is in the possession of or under the control of Choice or
Franchising.
(b) Franchising shall be entitled, in perpetuity, to control the
assertion or waiver of all Privileges in connection with Privileged Information
which relates solely to the
37
<PAGE>
Franchising Group, whether or not the Privileged Information is in the
possession of or under the control of Choice or Franchising. Franchising shall
also be entitled, in perpetuity, to control the assertion or waiver of all
Privileges in connection with Privileged Information which relates solely to the
subject matter of any claims constituting Franchising Group Liabilities, now
pending or which may be asserted in the future, in any lawsuits or other
proceedings initiated against or by Franchising, whether or not the Privileged
Information is in the possession of or under the control of Choice or
Franchising.
(c) Franchising and Choice agree that they shall have a shared
Privilege, with equal right to assert or waive, subject to the restrictions in
this Section 7.07, with respect to all Privileges not allocated pursuant to the
terms of Sections 7.07(a) and (b). All Privileges relating to any claims,
proceedings, litigation, disputes, or other matters which involve both
Franchising and Choice or in respect of which both Franchising and Choice retain
any responsibility or liability under this Agreement, shall be subject to a
shared Privilege.
(d) No party may waive any Privilege which could be asserted under
any applicable law, and in which the other party has a shared Privilege, without
the consent of the other party, except to the extent reasonably required in
connection with any litigation with third-parties or as provided in subsection
(e) below. Consent shall be in writing, or shall be deemed to be granted unless
written objection is made within twenty (20) days after written notice upon the
other party requesting such consent.
(e) In the event of any litigation or dispute between a member of
the Real Estate Group and a member of the Franchising Group, either party may
waive a Privilege in which the other party has a shared Privilege, without
obtaining the consent of the other party,
38
<PAGE>
provided that such waiver of a shared Privilege shall be effective only as to
the use of Information with respect to the litigation or dispute between the
Real Estate Group and the Franchising Group, and shall not operate as a waiver
of the shared Privilege with respect to third-parties.
(f) If a dispute arises between the parties regarding whether a
Privilege should be waived to protect or advance the interest of either party,
each party agrees that it shall negotiate in good faith, shall endeavor to
minimize any prejudice to the rights of the other party, and shall not
unreasonably withhold consent to any request for waiver by the other party. Each
party specifically agrees that it will not withhold consent to waiver for any
purpose except to protect its own legitimate interests.
(g) Upon receipt by any party of any subpoena, discovery or other
request which arguably calls for the production or disclosure of Information
subject to a shared Privilege or as to which the other party has the sole right
hereunder to assert a Privilege, or if any party obtains knowledge that any of
its current or former directors, officers, agents or employees have received any
subpoena, discovery or other requests which arguably calls for the production or
disclosure of such Privileged Information, such party shall promptly notify the
other party of the existence of the request and shall provide the other party a
reasonable opportunity to review the Information and to assert any rights it may
have under this Section 7.07 or otherwise to prevent the production or
disclosure of such Privileged Information.
(h) The transfer of the Franchising Books and Records and the Choice
Books and Records and other Information between Choice and its Subsidiaries and
Franchising and its Subsidiaries is made in reliance on the agreement of
Franchising and Choice, as set forth in
39
<PAGE>
Sections 7.06 and 7.07, to maintain the confidentiality of Privileged
Information and to assert and maintain all applicable Privileges. The access to
information being granted pursuant to Sections 7.01 and 7.02 hereof, the
agreement to provide witnesses and individuals pursuant to Section 7.03 hereof
and the transfer of Privileged Information between Choice and its Subsidiaries
and Franchising and its Subsidiaries pursuant to this Agreement shall not be
deemed a waiver of any Privilege that has been or may be asserted under this
Agreement or otherwise.
VIII.
INSURANCE
---------
Section 8.01 Policies and Rights Included Within the Franchising
---------------------------------------------------
Group Assets.
- ------------
Without limiting the generality of the definition of the Franchising
Group Assets or the effect of Section 2.01, the Franchising Group Assets shall
include (a) any and all rights of an insured party under each of the Shared
Policies, specifically including rights of indemnity and the right to be
defended by or at the expense of the insurer, with respect to all injuries,
losses, liabilities, damages and expenses incurred or claimed to have been
incurred on or prior to the Distribution Date by any party in or in connection
with the conduct of the Franchising Group or, to the extent any claim is made
against Franchising, any of its Subsidiaries or the Franchising Group, and which
injuries, losses, liabilities, damages and expenses may arise out of insured or
insurable occurrences or events under one or more of the Shared Policies;
provided, however, that nothing in this clause shall be deemed to constitute (or
- -------- -------
to reflect) the assignment of the Shared Policies, or any of them, to
Franchising and (b) the Franchising Group Policies.
Section 8.02. Post-Distribution Date Claims.
-----------------------------
(a) If, subsequent to the Distribution Date, any person, corporation,
firm or entity shall assert a claim against Franchising or any of its
Subsidiaries with respect to any
40
<PAGE>
injury, loss, liability, damage or expense incurred or claimed to have been
incurred prior to the Distribution Date in, or in connection with, the conduct
of the Franchising Group Business or, to the extent any claim is made against
Franchising or any of its Subsidiaries, the Franchising Group Business, and
which injury, loss, liability, damage or expense may arise out of insured or
insurable occurrences or events under one or more of the Shared Policies, Choice
shall at the time such claim is asserted be deemed to assign, without need of
further documentation, to Franchising any and all rights of an insured party
under the applicable Shared Policy with respect to such asserted claim,
specifically including rights of indemnity and the right to be defended by or at
the expense of the insurer; provided, however, that nothing in this sentence
-------- -------
shall be deemed to constitute (or to reflect) the assignment of the Shared
Policies, or any of them, to Franchising.
(b) If, subsequent to the Distribution Date, any person, corporation,
firm or entity shall assert a claim against Choice or any of its Subsidiaries
with respect to any injury, loss, liability, damage or expense incurred or
claimed to have been incurred prior to the Distribution Date and which injury,
loss, liability, damage or expense may arise out of insured or insurable
occurrences or events under one or more of the Shared Policies, Franchising
shall at the time such claim is asserted be deemed to assign, without need of
further documentation, to Choice any and all rights of an insured party under
the applicable Shared Policy with respect to such asserted claim, specifically
including rights of indemnity and the right to be defended by or at the expense
of the insurer; provided, however, that nothing in this sentence shall be
-------- -------
deemed to constitute (or to reflect) the assignment of the Shared Policies, or
any of them, to Choice.
41
<PAGE>
Section 8.03. Administration and Reserves.
---------------------------
(a) Notwithstanding the provisions of Article III, but subject to any
contrary provisions of any Related Agreement, from and after the Distribution
Date:
(i) Manor Care shall be responsible for, and comply with the
terms and conditions of the Amended Risk Management Services Agreement
with respect to, (a) the insurance administration of the Shared
Policies and (b) claims administration with respect to the Franchising
Group Liabilities and Real Estate Group Liabilities; provided, that
--------
the administration of the Shared Policies by Manor Care is in no way
intended to limit, inhibit, or preclude any right to insurance
coverage for any Insured Claim of a named insured under the Shared
Policies including, but not limited to Franchising or any of its
Subsidiaries or Affiliates;
(ii) Franchising shall be entitled to any reserves established
by Choice or any of its Subsidiaries, or the benefit of reserves held
by any insurance carrier, with respect to the Franchising Group
Liabilities; and
(iii) Choice shall be entitled to any reserves established by
Franchising or any of its Subsidiaries, or the benefit of reserves
held by any insurance carrier, with respect to the Real Estate Group
Liabilities.
(b) Insurance Premiums. Franchising shall have the right but not the
------------------
obligation to pay the premiums, to the extent that Choice does not pay premiums
with respect to Real Estate Group Liabilities (retrospectively rated or
otherwise), with respect to Shared Policies and the Real Estate Group Policies,
as required under the terms and conditions of the respective
42
<PAGE>
Policies, whereupon Choice shall forthwith reimburse Franchising for that
portion of such premiums paid by Franchising as are attributable to the Real
Estate Group Liabilities. Choice shall provide continued coverage under its
director and officer liability insurance policy for a period of not less than
one year for acts which took place or were alleged to have taken place prior to
the Distribution Date covering persons who were directors and officers of Choice
prior to the Distribution Date. Fifty percent of the additional premiums, if
any, for such coverage shall be reimbursed by Franchising within 15 days of the
Distribution Date. Such coverage for director and officer liability insurance
shall not be discontinued by Choice without the consent of Franchising, which
consent shall not be unreasonably withheld.
(c) Allocation of Insurance Proceeds. Insurance Proceeds received
--------------------------------
with respect to claims, costs and expenses under the Policies shall be paid to
Franchising with respect to the Franchising Group Liabilities and to Choice with
respect to the Real Estate Group Liabilities. Payment of the allocable portions
of indemnity costs of Insurance Proceeds resulting from the liability policies
will be made to the appropriate party upon receipt from the insurance carrier.
In the event that the aggregate limits on any Policies are exceeded, the parties
agree to provide an equitable allocation of Insurance Proceeds received after
the Distribution Date based upon their respective bona fide claims. The parties
agree to use their best efforts to cooperate with respect to insurance matters.
Section 8.04. Agreement for Waiver of Conflict and Shared Defense.
---------------------------------------------------
In the event that Insured Claims of both Franchising and Choice exist relating
to the same occurrence, Franchising and Choice agree to jointly defend and to
waive any conflict of interest necessary to the conduct of that joint defense.
Nothing in this paragraph shall be construed to limit or
43
<PAGE>
otherwise alter in any way the indemnity obligations of the parties to this
Agreement, including those created by this Agreement, by operation of law or
otherwise.
IX.
MISCELLANEOUS
-------------
Section 9.01. Complete Agreement; Construction.
--------------------------------
This Agreement, including the Schedules and Exhibits and the Related
Agreements and other agreements and documents referred to herein, shall
constitute the entire agreement between the parties with respect to the subject
matter hereof and thereof and shall supersede all previous negotiations,
commitments and writings with respect to such subject matter. Notwithstanding
any other provisions in this Agreement to the contrary, in the event and to the
extent that there shall be a conflict between the provisions of this Agreement
and the provisions of the Related Agreements, then the Related Agreements shall
control.
Section 9.02. Tax Sharing Agreement; After-Tax Payments.
-----------------------------------------
(a) Other than as provided in this Section 9.02 and Sections 5.06 and
6.05, this Agreement shall not govern any Tax, and any and all claims, losses,
damages, demands, costs, expenses, liabilities, refunds, deductions, write-offs,
or benefits relating to Taxes shall be exclusively governed by the Tax Sharing
Agreement or the Tax Administration Agreement.
(b) If, at the time Franchising is required to make any payment to
Choice under this Agreement, Choice owes Franchising any amount under the Tax
Sharing Agreement, then such amounts shall be offset and the excess shall be
paid by the party liable for such excess. Similarly, if, at the time Choice is
required to make any payment to Franchising under this Agreement, Franchising
owes Choice any amount under the Tax Sharing Agreement, then such amounts shall
be offset and the excess shall be paid by the party liable for such excess.
44
<PAGE>
Section 9.03. Expenses.
--------
Except as specifically provided in this Agreement or in a Related
Agreement, all costs and expenses incurred in connection with the preparation,
execution, delivery and implementation of this Agreement and with the
consummation of the transactions contemplated by this Agreement shall be paid by
the party incurring the expense. The determination of who has incurred an
expense shall be made by the Chief Financial Officer of Franchising, which
determination shall be binding and final upon each of the parties hereto and not
subject to further review. In addition, it is understood and agreed that
[ ] shall pay the legal, filing, accounting, printing and other accountable
and out-of-pocket expenditures in connection with the preparation, printing and
filing of the Form 10 and the Proxy Statement.
Section 9.04. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of Maryland, without regard to the principles of conflicts
of laws thereof.
Section 9.05. 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 Franchising:
Choice Hotels Franchising, Inc.
10770 Columbia Pike
Silver Spring, Maryland 20901
Attention: General Counsel
45
<PAGE>
To Choice:
Choice Hotels International,. Inc.
10750 Columbia Pike
Silver Spring, Maryland 20901
Attention: General Counsel
Section 9.06. Amendments.
----------
This Agreement may not be modified or amended except by an agreement
in writing signed by the parties.
Section 9.07. Successors and Assigns.
----------------------
This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns.
Section 9.08. Termination.
-----------
This Agreement may be terminated and the Distribution abandoned at any
time prior to the Distribution Date by and in the sole discretion of the Choice
Board without the approval of Franchising's or of Choice's stockholders. In the
event of such termination, no party shall have any liability to any other party
pursuant to this Agreement.
Section 9.09. Subsidiaries.
------------
Each of the parties hereto shall cause to be performed, and hereby
guarantees the performance of, all actions, agreements and obligations set forth
herein to be performed by any Subsidiary of such party which is contemplated to
be a Subsidiary of such party on and after the Distribution Date.
46
<PAGE>
Section 9.10. No Third-Party Beneficiaries.
----------------------------
Except for the provisions of Article VI relating to Indemnities, this
Agreement is solely for the benefit of the parties hereto and their respective
Subsidiaries and Affiliates and should not be deemed to confer upon third-
parties any remedy, claim, claim of action or other right in excess of those
existing without reference to this Agreement.
Section 9.11. Titles and Headings.
-------------------
Titles and headings to sections herein are inserted for the
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.
Section 9.12. Exhibits and Schedules.
----------------------
The Exhibits and Schedules shall be construed with and as an integral
part of this Agreement to the same extent as if the same had been set forth
verbatim herein.
Section 9.13. Legal Enforceability.
--------------------
Any provision of this Agreement which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof. Any such prohibition or unenforceability in any jurisdiction
shall not invalidate or render unenforceable such provision in any other
jurisdiction. Without prejudice to any rights or remedies otherwise available
to any party hereto, each party hereto acknowledges that damages would be an
inadequate remedy for any breach of the provisions of this Agreement and agrees
that the obligations of the parties hereunder shall be specifically enforceable.
47
<PAGE>
Section 9.14. Arbitration of Disputes.
-----------------------
(a) Any dispute, controversy or disagreement ("Dispute") between the
Parties related to the obligations of the parties under this Agreement in
respect to which an amicable resolution cannot be reached shall be submitted for
mediation to a committee made up of an equal number of non-common members of
each company's Board of Directors ("Committee"). If the parties are unable to
reach an amicable resolution of a Dispute within thirty days after submission to
the Committee, then, to the maximum extent allowed by law, the Dispute shall be
submitted and resolved by final and binding arbitration in Baltimore, Maryland
administered by JAMS-Endispute in accordance with JAMS-Endispute's rules of
practice then in effect or such other procedures as the parties may agree upon;
provided, however, that any party may seek injunctive relief and enforcement of
any award rendered pursuant to the arbitration provisions of this Section 9.14
by bringing a suit in any court of competent jurisdiction. Any award issued as
a result of such arbitration shall be final and binding between the parties
thereto and shall be enforceable by any court having jurisdiction over the party
against whom enforcement was sought and application may be made to such court
for judicial acceptance of the award and order of enforcement. The fees and
expenses of arbitration (including reasonable attorneys' fees) shall be paid by
the party that does not prevail in such arbitration.
(b) Attorneys' Fees. If any party to this Agreement brings an action
---------------
to enforce its rights under this Agreement, the prevailing party shall be
entitled to recover its costs and expenses, including without limitation
reasonable attorneys' fees, incurred in connection with such action, including
any appeal of such action.
48
<PAGE>
(c) Nothing contained in this Section 9.14 shall limit or restrict in
any way the right or power of a party at any time to seek injunctive relief in
any court and to litigate the issues relevant to such request for injunctive
relief before such court (i) to restrain the other party from breaching this
Agreement or (ii) for specific enforcement of this Section 9.14. The parties
agree that any legal remedy available to a party with respect to a breach of
this Section 9.14 will not be adequate and that, in addition to all other legal
remedies, each party is entitled to an order specifically enforcing this Section
9.14.
(d) The Parties hereby consent to the jurisdiction of the federal
courts located in the State of Maryland for all purposes under this Agreement.
(e) Neither party nor the arbitrators may disclose the existence or
results of any arbitration under this Agreement or any evidence presented during
the course of the arbitration without the prior written consent of both parties,
except as required to fulfill applicable disclosure and reporting obligations,
or as otherwise required by law.
Section 9.15. Prompt Payment.
--------------
Where the terms of this Agreement require payment of an amount "as
promptly as possible," "as soon as practicable," or "as soon as possible,"
following a specified event, occurrences or date, such payment shall be made
within five (5) business days of such event, occurrence or date.
49
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
CHOICE HOTELS INTERNATIONAL, INC.
By:
----------------------------
Title:
-------------------------
CHOICE HOTELS FRANCHISING, INC.
By:
----------------------------
Title:
-------------------------
50
<PAGE>
INDEX OF EXHIBITS
Exhibit A Amended Employee Benefits Allocation Agreement
Exhibit B Amended Employee Benefits Administration Agreement
Exhibit C Amended Corporate Services Agreement
Exhibit D Amended Risk Management Services Agreement
Exhibit E Amended Gaithersburg Lease
Exhibit F Choice Pro Forma Balance Sheet
Exhibit G Employee Benefits Administration Agreement
Exhibit H Employee Benefits Allocation Agreement
Exhibit I Franchising Bylaws
Exhibit J Franchising Certificate
Exhibit K Franchising Pro Forma Balance Sheet
Exhibit L Noncompetition Agreement
Exhibit M Strategic Alliance Agreement
Exhibit N Tax Administration Agreement
Exhibit O Tax Sharing Agreement
51
<PAGE>
Schedule 2.07
Retained Cash Accounts
----------------------
[To be added]
52
<PAGE>
Exhibit 4.01
FORM OF COMMON STOCK CERTIFICATE OF CHOICE HOTELS FRANCHISING, INC.
(TO BE RENAMED CHOICE HOTELS INTERNATIONAL, INC.)
COMMON STOCK
PAR VALUE $.01 PER SHARE
THIS CERTIFICATE IS TRANSFERABLE
IN RIDGEFIELD PARK, MD
AND NEW YORK, NY
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 169905 10 6
CHOICE HOTELS INTERNATIONAL, INC.
--------------------------------------------------
---------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Choices Hotels International, Inc. transferable on the books of the Corporation
by the holder hereof in person or by duly authorized attorney upon the surrender
of this Certificate properly endorsed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signature of
its duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED
ChaseMallon Shareholder
Services, L.L.C.
TRANSFER AGENT
AND REGISTRAR
By
AUTHORIZED SIGNATURE
/s/ Michael J. DeSantis /s/ William R. Floyd
SECRETARY CHIEF EXECUTIFE OFFICER
<PAGE>
Exhibit 10.01
FORM OF STRATEGIC ALLIANCE AGREEMENT
This Strategic Alliance Agreement (this "Agreement") is entered into as of
the ____ day of ____, 1997 (the "Effective Date") by and between Choice Hotels
Franchising, Inc., which intends to change its name to Choice Hotels
International, Inc. ("Franchising") and Choice Hotels International, Inc., which
intends to change its name to Sunburst Hospitality Corp. ("Realco")
(collectively, the "Parties"), with respect to the following:
WHEREAS, Realco is the common parent of a consolidated group that includes
as one of its subsidiaries Franchising;
WHEREAS, Realco is engaged in the buying, developing and operating of hotel
properties;
WHEREAS, Franchising is engaged in franchising and managing hotels and in
providing various services for its franchisees to strengthen particular hotel
brands, including the operation of a national reservations system for
Franchising's brands and the conducting of advertising and marketing activities
on behalf of franchisees of Franchising's brands;
WHEREAS, the Parties are concurrently entering into a Distribution
Agreement, pursuant to which Realco will distribute all of its outstanding
common stock of Franchising pro rata to Realco's shareholders;
--- ----
WHEREAS, it is mutually beneficial to Realco and Franchising to establish a
relationship whereby Realco will develop or acquire certain hotels to be
franchised by Franchising and the Parties will continue to cooperate with
respect to matters of mutual interest, including new product/concept testing for
Franchising in Realco Hotels;
WHEREAS, Realco and Franchising desire to take advantage of Franchising's
purchasing power by authorizing Franchising in certain instances to negotiate
with third party vendors on Realco's behalf for the purchase of certain hotel
items;
NOW, THEREFORE, Realco and Franchising agree as follows:
1. Definitions
-----------
1.1 Terms defined in the Distribution Agreement shall have the same
meanings when used in this Agreement.
2. Term
----
2.1 This Agreement shall go into effect on the date hereof (the "Effective
Date") and shall continue in force for a period of twenty years. This
Agreement may, however, be terminated by either Party on the fifth, tenth or
fifteenth anniversary dates of the Effective Date
<PAGE>
upon at least three months prior written notice to the other Party and may be
renewed upon the mutual consent of the Parties.
3. Franchising of Realco Hotels
----------------------------
3.1 Realco currently operates approximately 71 hotels under franchise
agreements with Franchising. The terms of these agreements will remain
unchanged.
3.2 Realco hereby grants a right of first refusal to Franchising to
franchise any hotel or lodging property of any kind that Realco develops or
acquires and intends to franchise during the term of this Agreement (a "Lodging
Property"). Realco shall provide to Franchising written notice, in the form of
a completed application form, (the "Realco Notice") setting forth reasonable
detail regarding each Lodging Property that it intends to develop, acquire
and/or franchise, including information which shall include, among other things,
the name, address, number of rooms, planned physical improvements and other data
compiled by Realco with respect to its evaluation of the acquisition or
development of the Lodging Property. Once the Realco Notice is received by
Franchising, Franchising shall respond in writing within thirty days to Realco
indicating whether Franchising chooses to exercise its right of first refusal
and, if so, which brand or brands it believes would be appropriate for the
Lodging Property and the physical renovations, in the case of an existing
Lodging Property, that Realco would be required to effect, and any other
conditions beyond those set forth in Exhibit A attached hereto that Realco must
satisfy in order to obtain Franchising's approval of the Realco application (the
"Franchising Response"). If Franchising does not provide the Franchising
Response within thirty days of receipt of the Realco Notice, Franchising shall
be deemed to have elected not to exercise the right of first refusal.
3.3 If Franchising exercises the right of first refusal as set forth
above, Realco shall be obligated to brand the Lodging Property as designated by
Franchising unless it would not be feasible to do so because (a) the Lodging
Property is already under contract with another franchiser and rebranding would
be uneconomical, or (b) branding the Lodging Property as designated by
Franchising would be otherwise uneconomical. Branding pursuant to Franchising's
designation shall not be considered uneconomical if reasonable projections by
Realco demonstrate that the Lodging Property would provide a return on
investment to Realco over the term of the franchise agreement to be entered into
with Franchising that is equivalent to the hurdle rate of return established by
Realco for its investments in similar types of hotels or lodging properties.
3.4 If Realco wishes to object to a brand selected by Franchising for a
Lodging Property, it must do so in writing, providing the bases for its
objection within fifteen days after receipt of the Franchising Response.
Franchising shall within three days after receipt of such objection, provide a
written response to Realco. If the Parties are unable to reach agreement
regarding branding within three days thereafter, the branding of a Lodging
Property shall be resolved in accordance with Section 7 of this Agreement.
3.5 Prior to receiving the Franchise Response (or the expiration of thirty
days from Franchising's receipt of the Realco Notice, if a Franchising Response
has not been received by
2
<PAGE>
Realco within such time period), Realco shall not notify, correspond with, or
negotiate with, any other party, except the existing franchisor, with respect to
alternative branding of the Lodging Property.
3.6 In the event a Lodging Property is to be branded by Franchising
pursuant to this Section 3, the Parties shall enter into a franchise agreement
substantially in the form of Exhibit A attached hereto with respect to such
Lodging Property, providing for payment of fees as set forth in Schedule 1
thereto. In addition, with respect to any Lodging Property acquired by Realco
and branded by Franchising pursuant to this Section 3, Realco shall pay to
Franchising upon entering a franchise agreement a one time initial fee of
$10,000.00. No such initial fee, or initial fee associated with the selection
of any software license agreement between the Parties, shall be payable
respecting a Lodging Property newly constructed by Realco that is branded by
Franchising.
4. Development
-----------
4.1 Realco and Franchising are currently in the midst of a program under
which Realco will develop Sleep Inns and Mainstay Suite Hotels franchised by
Franchising. Realco agrees that absent (i) a material change in market
conditions that would render construction of further hotels pursuant to this
program uneconomical (meaning that reasonable projections by Realco demonstrate
that the hotel would provide a return on investment to Realco that is less than
the hurdle rate of return established by Realco for its investments in similar
types of Hotels), (ii) Realco's inability to finance construction or
acquisition of such hotels, or (iii) Franchising's discontinuance of efforts to
support the Mainstay Suite Hotel brand, Realco will continue to develop Sleep
Inns and Mainstay Suite Hotels so that it will have opened no fewer than a total
of fourteen Sleep Inns and fifteen Mainstay Suite Hotels no later than forty-
eight months from the Effective Date.
4.2 With respect to any Sleep Inn or Mainstay Suite Hotel that is not
completed within forty-eight months from the Effective Date, such Lodging
Property shall pay the normal "rack rate" franchise fee then in effect for a
Sleep Inn or Mainstay Suite Hotel rather than the fees set forth in Schedule 1
of Exhibit A attached hereto.
4.3 In the event that the Mainstay Suite Hotel system, including those
hotels owned by Realco, does not total at least one hundred hotels open or under
construction on or before January 1, 2000, Realco will have an option,
exercisable for a period of sixty days following January 1, 2000, to purchase
the brand name, marks, franchise agreements, and other assets of the Mainstay
Suite Hotels system from Franchising at a price equal to nine times
Franchising's revenues attributable to royalties from the Mainstay Suite Hotels
system during the calendar year 1999.
4.4 In the event Realco desires to exercise this option, then Realco shall
provide written notice to Franchising within the sixty day period following
January 1, 2000. The Parties will then negotiate in good faith and execute
definitive agreements within forty-five days of such written notice (with
commercially reasonable terms and conditions governing such purchase, which may
include a financing contingency lasting no more than ninety days), and will
close the
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purchase transaction within thirty days after the expiration of the financing
contingency. If the Parties acting in good faith do not execute a definitive
agreement or close the transaction within the prescribed time periods, then the
option provided by Section 4.3 shall be deemed to have expired.
5. New Product/Concept Testing
---------------------------
5.1 Realco and Franchising desire to continue their relationship, under
which certain new products/concepts are tested for Franchising at hotels owned
by Realco. The Parties agree to negotiate in good faith on a case by case basis
with respect to the terms of such participation by Realco in new product/concept
testing. In the event Franchising desires to test or research any new
product/concept in Realco hotels, Franchising shall deliver to Realco a written
description of the new product/concept and plans for its testing or research.
The Parties shall then evaluate appropriate compensation for Realco to receive,
which compensation shall include all direct and indirect costs associated with
the project and an opportunity cost factor, such that the capital invested by
Realco will receive a return on investment equivalent to Realco's incremental
cost of capital.
5.2 In the event Franchising franchises a new brand or concept,
Franchising agrees that no other franchisee shall receive more favorable terms
or conditions than those offered to Realco.
6. Realco Preferred Vendor Programs
--------------------------------
6.1 Except as set forth in this Section 6, Realco intends to make direct
purchases from third parties for products and services respecting its hotels.
Notwithstanding the foregoing, Realco agrees that Franchising may negotiate with
third party vendors of hotel services and products with respect to the provision
of such services and products to Realco. Once an opportunity to make a purchase
on behalf of Realco is identified by Franchising, Franchising will promptly
consult with Realco to ensure that the economic terms and services to be
provided are equal to or better than those available to Realco, and that
entering into such an agreement would not be inconsistent with any then existing
agreements to which Realco is a party. Realco shall then promptly advise
Franchising in writing whether it grants Franchising the authority to negotiate
the relevant purchase for execution by Realco.
6.2 No agreement negotiated by Franchising on behalf of Realco shall
contain a price commitment for a period greater than one year. In addition,
Realco will be entitled to receive the benefits of any other provisions
negotiated by Franchising on behalf of its other franchisees with such vendors.
7. Dispute Resolution
------------------
7.1 Any dispute, controversy or disagreement ("Dispute") between the
Parties related to the obligations of the Parties under this Agreement in
respect to which an amicable resolution cannot be reached shall be submitted for
mediation to a committee made up of an equal number of non-common members of
each company's Board of Directors ("Committee"). If the Parties
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are unable to reach an amicable resolution of a Dispute within thirty days after
submission to the Committee, then, to the maximum extent allowed by law, the
Dispute shall be submitted and resolved by final and binding arbitration in
Baltimore, Maryland administered by JAMS-Endispute in accordance with JAMS-
Endispute's rules of practice then in effect or such other procedures as the
Parties may agree upon: provided, however, that any Party may seek injunctive
relief and enforcement of any award rendered pursuant to the arbitration
provisions of this Section 7 by bringing a suit in any court of competent
jurisdiction. Any award issued as a result of such arbitration shall be final
and binding between the Parties thereto and shall be enforceable by any court
having jurisdiction over the Party against whom enforcement was sought and
application may be made to such court for judicial acceptance of the award and
order of enforcement. The fees and expenses of arbitration (including reasonable
attorneys' fees) shall be paid by the Party that does not prevail in such
arbitration.
7.2 Attorneys' Fees. If any Party to this Agreement brings an action to
----------------
enforce its rights under this Agreement, the prevailing Party shall be entitled
to recover its costs and expenses, including without limitation reasonable
attorneys' fees, incurred in connection with such action, including any appeal
of such action.
8. Modification
------------
8.1 This Agreement may only be amended, modified or supplemented in a
written agreement signed by both Parties.
9. Waiver
------
9.1 No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
hereof, except by written instrument of the party charged with such waiver or
estoppel.
10. Governing Law
--------------
10.1 This Agreement shall be construed in accordance with the laws of the
State of Maryland without giving effect to the principles of conflict of laws.
11. Construction
------------
11.1 In the event of a conflict between the terms of this Agreement, and
the terms of a franchise agreement executed by the Parties pursuant to this
Agreement, the terms of the franchise agreement shall control.
12. Headings
--------
12.1 The headings of the sections of this Agreement are for convenience
only and shall not affect the construction of this Agreement.
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13. Notices
-------
13.1 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:
Sunburst Hospitality Corporation
10770 Columbia Pike
Silver Spring, Maryland 20901
Attention: General Counsel
To Franchising:
Choice Hotels International, Inc.
10750 Columbia Pike
Silver Spring, Maryland 20901
Attention: General Counsel
14. Assignment
----------
14.1 Neither Party shall sell, assign, pledge or otherwise transfer its
interest in this Agreement or any part thereof without the prior written consent
of the other Party, except to an entity succeeding to substantially all of the
business and operations of such Party. The transferring Party shall remain
liable for liabilities and obligations existing at the time of such transfer.
Subject to the foregoing, this Agreement shall bind and inure to the benefit of
the Parties' respective successors and permitted assigns.
15. Counterparts
------------
15.1 This Agreement may be executed in two counterparts, each of which
shall be deemed an original, but which together shall constitute one and the
same instrument.
16. No Joint Venture Or Agency
--------------------------
16.1 This Agreement is not intended to create a joint venture, partnership
or any other similar arrangement between the Parties, and neither Party shall be
authorized to act as an agent of the other Party, except as expressly provided
herein. Notwithstanding the foregoing, each Party shall be free to designate
the other as its agent for appropriate purposes.
17. Severability
------------
17.1 If any provision of this Agreement shall to any extent be invalid or
unenforceable, the remainder of this Agreement shall not be affected thereby,
and each provision shall be valid and enforceable to the fullest extent
permitted by law.
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18. Entire Agreement
----------------
18.1 This Agreement contains the entire Agreement between the Parties
hereto. There are no representations, inducements, promises, arrangements,
agreements or undertakings, oral or written, between the Parties other than
those set forth herein respecting the matters addressed in this Agreement. In
entering this Agreement, each of the Parties agrees that it did not rely on any
promises, representations or agreements not expressly contained herein.
19. Consent to Jurisdiction
-----------------------
Subject to Section 7.1 hereof, 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. The parties hereby irrevocably designate, appoint and empower
Prentice Hall Corporation System, Inc. as its true and lawful agent and
attorney-in-fact in its name, place, and stead to receive on its behalf service
of process in any action, suit, or proceeding with respect to any matters as to
which it has submitted to jurisdiction as set forth in the immediately preceding
sentence.
IN WITNESS THEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CHOICE HOTELS FRANCHISING, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
CHOICE HOTELS INTERNATIONAL, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
7
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Exhibit A
---------
[Lodging Brand Name]*
FRANCHISE AGREEMENT
THIS AGREEMENT is made in Silver Spring, Maryland, effective on the
________ day of ____________, 199___, between Choice Hotels Franchising, Inc.,
a Delaware corporation ("we" or "us"), and Astra Hospitality, Inc.
INTRODUCTION
------------
We own a system ("System") for providing lodging accommodations with a
high standard of service, courtesy and cleanliness which uses distinctive
identification, trademarks and service marks, standards, and specifications; and
Our System includes our advance reservation system and our business
referral and credit card arrangements; and
You want to use our System at your hotel on the terms and conditions
in this Agreement; and
Our System's value and success, and the success of your hotel, depends
in large part on your operating and maintaining your hotel in accordance with
the System.
AGREEMENT
---------
We and you agree:
- ---------------------------
* This form of agreement shall be conformed, in any particular case, in
accordance with the provisions of Schedule 1 pertaining to the applicable
brand.
8
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I. 1. Definitions.
A. A. "HOTEL" IS THE PROPERTY AT PROPERTY ADDRESS ("LOCATION") AND
INCLUDES THE BUILDING, LAND AND ALL IMPROVEMENTS, STRUCTURES,
FIXTURES, AMENITIES, EQUIPMENT, FURNITURE AND RELATED RIGHTS,
PRIVILEGES AND PROPERTIES. THE HOTEL WILL BE OPERATED ONLY UNDER THE
NAME [LODGING BRAND NAME].
B. B. "RENTABLE ROOMS" MEANS THE TOTAL NUMBER OF RENTABLE SLEEPING ROOMS
IN THE HOTEL. THE RENTABLE ROOMS FOR THE HOTEL IS ROOM COUNT.
C. C. "DESIGNATED REPRESENTATIVE" IS YOUR REPRESENTATIVE FOR MATTERS
ABOUT THIS AGREEMENT. UNTIL YOU CHANGE THE DESIGNATED REPRESENTATIVE
UNDER SECTION 15 BELOW, YOUR DESIGNATED REPRESENTATIVE IS REP NAME
WHOSE ADDRESS IS REP ADDRESS.
D. D. "OPENING DATE" IS THE DATE ON WHICH YOU BEGIN TO RENT SLEEPING
ROOMS TO THE PUBLIC AT THE HOTEL UNDER THIS AGREEMENT.
E. E. "GROSS ROOM REVENUES" ARE REVENUES FROM THE RENTAL, SALE, USE OR
OCCUPANCY OF SLEEPING ROOMS AND MEETING ROOMS AT THE HOTEL, INCLUDING
CASH AND CREDIT TRANSACTIONS, WHETHER OR NOT COLLECTED BY YOU. GROSS
ROOM REVENUES DOES NOT INCLUDE TAXES REQUIRED BY LAW, REVENUES FROM
TELEPHONE CALLS, VENDING MACHINES, ROOM SERVICE OR FOOD AND BEVERAGES
SALES.
F. F. "HOTEL GOODS" ARE ALL FURNITURE, FIXTURES, EQUIPMENT, SIGNS AND
SUPPLIES USED IN THE HOTEL CONSTRUCTION AND OPERATION.
G. G. "MARKS" ARE THE TRADEMARKS, TRADE NAMES, SERVICE MARKS AND LOGOS
[____________________________________________________________________
_____________________________________________________________________
_______], AND THE RELATED LOGO, INCLUDING DESIGNS, STYLIZED LETTERS,
AND COLORS THAT WE PERMIT YOU TO USE AT THE HOTEL AND IN ADVERTISING
FOR THE HOTEL.
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H. H. "MANUALS" ARE OUR PUBLISHED MATERIALS CONTAINING, AMONG OTHER
THINGS, OUR STANDARDS, REQUIREMENTS AND RECOMMENDATIONS FOR
CONSTRUCTING,. EQUIPPING, FURNISHING, SUPPLYING, OPERATING,
MAINTAINING AND MARKETING THE HOTEL.
I. I. RULES AND REGULATIONS" ARE OUR PUBLISHED MATERIALS CONTAINING,
AMONG OTHER THINGS, OUR STANDARDS AND REQUIREMENTS FOR CONSTRUCTING,
EQUIPPING, FURNISHING, SUPPLYING, OPERATING, MAINTAINING AND MARKETING
THE HOTEL.
II. 2. Grant of License. We grant to you a non-exclusive license to use the
System and the marks [________] and [_____________] in operating the Hotel.
III. 3. Term. The term of this Agreement ("Term") is from the date this
Agreement is signed by both parties to the date [20] years after the Opening
Date.
IV. 4. Fees and Reports.
A. A. ROYALTY FEE. BEGINNING ON THE OPENING DATE, YOU WILL PAY US A
-----------
ROYALTY FEE OF [__%] OF YOUR GROSS ROOM REVENUES EACH MONTH DURING THE
TERM AS SET FORTH IN EXHIBIT [__] ATTACHED HERETO.
B. B. MARKETING FEE. BEGINNING ON THE OPENING DATE, YOU WILL PAY US A
-------------
MARKETING FEE OF [__%] OF YOUR GROSS ROOM REVENUES EACH MONTH DURING
THE TERM AS SET FORTH IN EXHIBIT [__] ATTACHED HERETO. [WE MAY
INCREASE THE MARKETING FEE FOR INCREASES IN INFLATION OR COSTS OF
ADVERTISING, PUBLICITY, PUBLIC RELATIONS, OR MARKETING SO LONG AS ANY
MARKETING FEE INCREASES APPLY TO ALL OR MOST OF THE U.S. HOTELS IN THE
SYSTEM UNLESS WE GET YOUR APPROVAL TO A GREATER AMOUNT.]
C. C. RESERVATION FEE. BEGINNING ON THE OPENING DATE, YOU WILL PAY US A
---------------
RESERVATION FEE OF [__%] OF YOUR GROSS ROOM REVENUES EACH MONTH DURING
THE TERM AS SET FORTH IN EXHIBIT [__] ATTACHED HERETO. [WE MAY
INCREASE THE RESERVATION FEE FOR INCREASES IN INFLATION OR OTHER COSTS
SO LONG AS ANY RESERVATION FEE INCREASES APPLY TO ALL OR MOST OF THE
U.S. HOTELS IN THE SYSTEM UNLESS WE GET YOUR APPROVAL TO A GREATER
AMOUNT.]
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D. D. PAYMENTS AND REPORTS. WITHIN 10 DAYS AFTER THE END OF EACH
--------------------
CALENDAR MONTH, YOU WILL SEND US A STATEMENT (IN A FORM THAT WE
REQUIRE) SHOWING THE HOTEL'S GROSS ROOM REVENUES, OCCUPANCY AND OTHER
RELATED-INFORMATION THAT WE REQUEST. YOU WILL CERTIFY THAT YOUR
REPORTS ARE TRUE AND ACCURATE. WE WILL BILL YOU FOR AMOUNTS DUE ON OR
ABOUT THE 15TH DAY OF EACH MONTH, AND YOU WILL PAY US THOSE AMOUNTS BY
THE FIRST DAY OF THE FOLLOWING MONTH. YOU WILL PARTICIPATE IN
COMPUTERIZED INFORMATION REPORTING PROGRAMS AND ELECTRONIC FUND
PAYMENT PROGRAMS THAT WE MAY ADOPT FOR USE BY HOTELS IN THE SYSTEM.
YOU MAY NEED TO BUY COMPUTER HARDWARE AND RELATED TELEPHONE SERVICES
TO PARTICIPATE IN SUCH PROGRAMS. IF YOU DO NOT TIMELY SEND US THE
REQUIRED REPORTS:
1. 1. WE WILL ESTIMATE YOUR GROSS ROOM REVENUES FOR INTERIM BILLING
PURPOSES; AND
2. 2. YOU WILL BE IN BREACH OF THE AGREEMENT AND MUST PAY US A LATE
CHARGE OF 1.5% OF YOUR PREVIOUS MONTH'S ROYALTY FEE, BUT NOT LESS
THAN $50.
We will consider interim bills accurate until we receive your late
monthly reports.
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E. E. ANNUAL REPORTS. IF WE REQUEST, YOU WILL SEND US A PROFIT AND LOSS
--------------
STATEMENT FOR THE HOTEL FOR THE PRIOR FISCAL YEAR IN A FORM MEETING
OUR RULES AND REGULATIONS. YOU WILL CERTIFY THAT THIS ANNUAL STATEMENT
IS ACCURATE, COMPLETE AND TRUE.
F. F. KEEPING RECORDS. YOU WILL KEEP AT THE HOTEL OR, IF YOU NOTIFY US
---------------
IN WRITING, YOUR PRINCIPAL PLACE OF BUSINESS, FOR AT LEAST 3 YEARS,
ACCURATE HOTEL ACCOUNTS, BOOKS, RECORDS AND DATA, INCLUDING
INFORMATION ON HOTEL ROOM RENTALS, GROSS ROOM REVENUES AND
PROFITABILITY ("HOTEL DATA"). YOU WILL ALLOW US TO EXAMINE, AUDIT, AND
COPY THE HOTEL DATA DURING YOUR NORMAL BUSINESS HOURS. IF WE REQUEST
IN WRITING, YOU WILL SEND US COPIES OF THE HOTEL DATA. IF WE FIND, BY
AN AUDIT OF THE HOTEL DATA, THAT YOU UNDERPAID ANY FEES DUE US UNDER
THIS AGREEMENT, YOU MUST PAY US ALL UNDERPAID AMOUNTS, PLUS INTEREST
AT THE RATE IN SECTION 4.G BELOW. IF YOU UNDERPAID US BY MORE THAN 5%
OF FEES PAYABLE DURING THE PERIOD OF THIS AUDIT, YOU MUST ALSO PAY THE
REASONABLE COSTS OF THE AUDIT.
G. G. INTEREST. YOU WILL PAY US INTEREST ON AMOUNTS NOT PAID ON TIME AT
--------
THE RATE OF 1.5% PER MONTH OR PORTION OF THAT MONTH, BUT NOT MORE THAN
THE MAXIMUM INTEREST RATE PERMITTED BY APPLICABLE LAWS.
V. 5. Our Duties. We will:
A. A. LOAN TO YOU ONE COPY OF THE CURRENT MANUALS AND OF THE RULES AND
REGULATIONS. THESE ARE OUR PROPERTY AND WE MAY CHANGE THEM
PERIODICALLY;
B. B. PROVIDE TO YOU AND UP TO TWO HOTEL EMPLOYEES AN INITIAL
ORIENTATION PROGRAM. YOU PAY THE COSTS OF TUITION, TRAVEL EXPENSES AND
LIVING EXPENSES FOR THIS PROGRAM;
C. C. PERIODICALLY INSPECT THE HOTEL, EVALUATE YOUR COMPLIANCE WITH THIS
AGREEMENT AND THE RULES AND REGULATIONS, AND ADVISE YOU ON CHANGES
NECESSARY TO BRING THE HOTEL INTO SYSTEM COMPLIANCE;
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D. D. USE THE MARKETING FEE RECEIVED FROM YOU AND OTHER FRANCHISEES
USING THE SAME BRAND, FOR ADVERTISING, PROMOTION, PUBLICITY, MARKETING
RESEARCH, SYSTEM PROGRAMS AND RELATED ACTIVITIES. WE WILL PUBLISH AND
DISTRIBUTE TO THE TRAVELING PUBLIC A DIRECTORY OF ALL SYSTEM HOTELS IN
GOOD STANDING;
E. E. USE THE RESERVATION FEE RECEIVED FROM YOU AND OTHER FRANCHISEES
USING THE SAME BRAND, FOR ADVANCE RESERVATION SERVICES FOR YOUR HOTEL
AND OTHER HOTELS WHICH BELONG TO THE SYSTEM (AND, IF WE CHOOSE TO DO
SO, FOR OTHER HOTEL SYSTEMS THAT WE OR OUR AFFILIATES OPERATE); AND
F. F. MAINTAIN IN CONFIDENCE ALL INFORMATION YOU PROVIDE US ABOUT THE
HOTEL'S OPERATIONS AND PROFITABILITY.
VI. 6. Your Duties. After the Opening Date, you will:
A. A. OPERATE THE HOTEL ACCORDING TO THE AGREEMENT AND THE RULES AND
REGULATIONS. YOU MUST KEEP CURRENT YOUR COPY OF THE MANUALS AND OF THE
RULES AND REGULATIONS AND COMPLY WITH ANY CHANGES THAT WE MAKE IN THE
RULES AND REGULATIONS. IF A DISPUTE ARISES, OUR COPY OF THE MANUALS OR
RULES AND REGULATIONS WILL CONTROL. YOU MAY NOT SHARE THE CONFIDENTIAL
INFORMATION IN THE MANUALS OR THE RULES AND REGULATIONS EXCEPT WITH
AUTHORIZED EMPLOYEES;
B. B. OPERATE THE HOTEL EXCLUSIVELY UNDER THE MARKS, AS NOTED IN SECTION
7 BELOW;
C. C. MAINTAIN THE HOTEL INTERIOR AND EXTERIOR, INCLUDING PARKING AREAS
OR FOOD AND BEVERAGE FACILITIES LOCATED AT THE LOCATION (WHETHER
OPERATED BY YOU OR BY A THIRD PARTY UNDER A LEASE OR OTHER AGREEMENT
WITH YOU), IN A CLEAN, SOUND, AND ATTRACTIVE CONDITION AND IN GOOD
REPAIR AT ALL TIMES, REPAIRING, CLEANING, REDECORATING, REPAINTING,
AND REPLACING OBSOLETE OR OUTDATED SIGNS, EQUIPMENT, FURNISHINGS, AND
FIXTURES AND TAKING CORRECTIVE ACTION NECESSARY TO COMPLY WITH THE
RULES AND REGULATIONS;
D. D. MAINTAIN AND ONLY USE HOTEL GOODS DESCRIBED IN THE RULES, AND
REGULATIONS AND WHICH MEET OUR SPECIFICATIONS;
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E. E. USE IN THE HOTEL STATIONERY, BUSINESS CARDS, MARKETING MATERIALS,
ADVERTISING MATERIALS, PRINTED MATERIALS AND FORMS DESCRIBED IN THE
RULES AND REGULATIONS AND WHICH MEET OUR SPECIFICATIONS;
F. F. NOT PERMIT THE HOTEL TO BE USED FOR ANY PURPOSE OR ACTIVITY NOT
CONTEMPLATED IN THIS AGREEMENT WITHOUT OUR WRITTEN CONSENT;
G. G. SEND THE HOTEL GENERAL MANAGER(S), AT YOUR EXPENSE, TO OUR
ORIENTATION AND TRAINING PROGRAMS;
H. H. OBTAIN AND DISPLAY PROMINENTLY AT THE HOTEL, OUR APPROVED
ILLUMINATED EXTERIOR SIGNS. YOU MUST MAINTAIN THESE EXTERIOR SIGNS IN
GOOD WORKING ORDER AT ALL TIMES. IN DISPLAYING THE SIGNS, YOU ARE
RESPONSIBLE FOR COMPLYING WITH ALL APPLICABLE LAWS OR REGULATIONS;
I. I. OBTAIN, INSTALL AND MAINTAIN AT THE HOTEL OUR RECOMMENDED PROPERTY
MANAGEMENT SYSTEM;
J. J. ALLOW US TO ENTER THE HOTEL AT ANY REASONABLE TIME TO EVALUATE
YOUR COMPLIANCE WITH THIS AGREEMENT. DURING OUR EVALUATION, YOU WILL
ASSIST US OR OUR AGENT AND, SUBJECT TO AVAILABILITY, PROVIDE US WITH
ONE FREE HOTEL SLEEPING ROOM FOR ONE NIGHT;
K. K. SEND US PERIODICALLY YOUR HOTEL DESCRIPTION AND RATES THAT WE MAY
INCLUDE IN DIRECTORIES THAT WE MAY PUBLISH. IF YOU DO NOT SEND US
CHANGES BY THE DEADLINES WHICH ARE INDICATED, YOU WILL HONOR THE RATES
AND DESCRIPTIVE INFORMATION ON RECORD;
L. L. HONOR THE TERMS OF ANY DISCOUNT OR PROMOTIONAL PROGRAM THAT WE
OFFER TO-THE PUBLIC ON YOUR BEHALF, AND ANY ROOM RATE QUOTED TO ANY
GUEST AT THE TIME THE GUEST MAKES AN ADVANCE RESERVATION;
M. M. PAY REASONABLE TRAVEL AGENT COMMISSIONS AS REQUIRED BY THE RULES
AND REGULATIONS;
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N. N. USE YOUR BEST EFFORTS TO MAXIMIZE AND INCREASE HOTEL AND SYSTEM
BUSINESS. IF YOU ARE UNABLE TO ACCOMMODATE A POTENTIAL GUEST, YOU WILL
REFER THE GUEST TO OTHER SYSTEM HOTELS NEAR THE HOTEL. IF YOU REFER A
GUEST TO A NON-SYSTEM HOTEL WHERE NEARBY SYSTEM HOTELS HAVE SPACE
AVAILABLE, YOU MUST PAY US LIQUIDATED DAMAGES EQUAL TO THE AVERAGE
ROOM RATE (GROSS ROOM REVENUES DIVIDED BY THE NUMBER OF ROOMS RENTED)
FOR THE MONTH DURING WHICH THE VIOLATION OCCURRED;
O. O. PARTICIPATE IN OUR ADVANCE RESERVATION SYSTEM, MAKING RESERVATIONS
AND ACCEPTING RESERVATIONS USING REQUIRED EQUIPMENT, SOFTWARE AND
PROCEDURES;
P. P. NOT CHANGE THE HOTEL'S RENTABLE ROOMS BY MORE THAN 5% FROM THE
ORIGINAL RENTABLE ROOM COUNT IN SECTION L.B OF THIS AGREEMENT WITHOUT
RECEIVING OUR PRIOR WRITTEN CONSENT AND OBEYING OTHER RESTRICTIONS OF
THIS AGREEMENT, AND NOTIFY US IN WRITING AND OBEY OTHER RESTRICTIONS
IN THIS AGREEMENT IF YOU CHANGE THE RENTABLE ROOM COUNT BY 5% OR LESS
FROM THE NUMBER STATED IN SECTION L.B; AND
Q. Q. ADVERTISE AND PROMOTE THE HOTEL IN A WAY THAT MEETS OUR STANDARDS
AND REQUIREMENTS.
VII. 7. Marks.
A. A. YOU WILL NOT CONTEST OUR RIGHTS TO THE CURRENT OR FUTURE SYSTEM
AND MARKS, OR OUR RIGHT TO GRANT TO OTHERS USE OF THE MARKS;
B. B. YOU MUST NOT INCLUDE THE MARKS OR ANY WORDS RESEMBLING THE MARKS
IN YOUR NAME OR THE NAME OF ANY OF YOUR AFFILIATES, WHETHER A
PARTNERSHIP, CORPORATION, JOINT VENTURE OR ANY OTHER TYPE OF BUSINESS
ORGANIZATION;
C. C. YOU UNDERSTAND THAT THE MARKS ARE AND WILL REMAIN OUR PROPERTY,
AND THAT YOUR USE OF THE MARKS INURES TO OUR BENEFIT. YOU WILL
IMMEDIATELY ASSIGN TO US ANY RIGHTS TO THE MARKS THAT YOU MAY GAIN
THROUGH YOUR USE OF THE MARKS;
D. D. IF YOU ARE REQUIRED BY LAW TO REGISTER THE MARKS, YOUR
REGISTRATION APPLICATION MUST SPECIFY THAT YOU USE THE MARKS:
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1. 1. ONLY AT THE HOTEL AND IN ADVERTISING FOR THE HOTEL;
2. 2. ONLY DURING THE TERM; AND
3. 3. WITHOUT CLAIMING ANY PROPERTY RIGHT IN THE MARKS DURING OR
AFTER THE TERM.
E. E. YOU WILL NOT INTERFERE WITH OUR USE OR REGISTRATION OF THE MARKS,
OR WITH USE OF THE MARKS BY OTHER HOTELS;
F. F. YOU MUST PROMPTLY NOTIFY US OF ANY SUIT FILED OR DEMAND MADE
AGAINST YOU CHALLENGING THE VALIDITY OF ANY OF THE MARKS ("MARK
CLAIM"). WE AGREE TO PROTECT AND DEFEND YOU AGAINST A MARK CLAIM, AND
TO DEFEND AND INDEMNIFY YOU AGAINST YOUR LOSS, COST OR EXPENSE
RELATED TO THE MARK CLAIM. YOU MAY NOT SETTLE OR COMPROMISE A MARK
CLAIM WITHOUT OUR PRIOR WRITTEN CONSENT. WE MAY DEFEND, COMPROMISE OR
SETTLE A MARK CLAIM AT OUR EXPENSE, USING OUR ATTORNEYS, AND YOU MUST
COOPERATE WITH US WITH THE DEFENSE. WE ARE NOT OBLIGATED TO DEFEND OR
INDEMNIFY YOU IF THE MARK CLAIM AROSE BECAUSE YOU USED THE MARKS IN
VIOLATION OF THIS AGREEMENT; AND
G. G. YOU HAVE NO RIGHT TO SUBLICENSE ANYONE ELSE TO USE THE MARKS OR
THE SYSTEM.
VIII. 8. Future Additions. You may not begin constructing additional sleeping
rooms or make substantial alterations to the Hotel without our prior written
consent, which we are under no obligation to give. In order to apply for our
consent, you must send us your construction plans and pay us an expansion fee
for each additional sleeping room equal to the per-room charge under new
franchises for this brand, but the expansion fee will be not less than $1,000.
We will add the additional sleeping rooms to the Rentable Rooms, and include
revenues from the additional sleeping rooms and any additional meeting rooms in
calculating the Gross Room Revenues for determining fees due under this
Agreement.
IX. 9. Assignment.
A. A. OUR ASSIGNMENT. WE MAY ASSIGN ALL OR PART OF OUR RIGHTS OR
--------------
OBLIGATIONS UNDER THIS AGREEMENT TO ANY PERSON OR LEGAL ENTITY. WE
ARE NOT RELIEVED OF OUR OBLIGATIONS UNDER THIS AGREEMENT BY ASSIGNING
THE AGREEMENT.
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B. B. YOUR ASSIGNMENT. YOUR RIGHTS AND DUTIES UNDER THIS AGREEMENT
---------------
ARE PERSONAL TO YOU. WE GRANTED THIS AGREEMENT TO YOU IN RELIANCE ON
YOUR BUSINESS SKILL, FINANCIAL CAPACITY AND PERSONAL CHARACTER. YOU
MAY NOT SELL, ASSIGN, TRANSFER, OR OTHERWISE ENCUMBER ANY DIRECT OR
INDIRECT INTEREST THAT YOU HAVE IN THE HOTEL, IN YOU, OR IN ANY
RIGHTS OR OBLIGATIONS CREATED BY THIS AGREEMENT WITHOUT GIVING US AT
LEAST 15 DAYS PRIOR WRITTEN NOTICE AND OBTAINING OUR PRIOR WRITTEN
CONSENT. OUR CONSENT WILL NOT BE REQUIRED FOR A MORTGAGE, FOR A
COLLATERAL ASSIGNMENT OF THE FRANCHISE AGREEMENT AS COLLATERAL FOR A
MORTGAGE, OR FOR THE SALE OR TRANSFER BY ANY PARTY OF SECURITIES IN A
PUBLICLY-TRADED CORPORATION OR ENTITY WHICH INDIVIDUALLY, OR IN THE
AGGREGATE WITH OTHER SALES OR TRANSFERS BY A PARTY, CONSTITUTE THE
SALE OR TRANSFER OF LESS THAN 5% OF THE OUTSTANDING CAPITAL STOCK OR
OTHER EQUITY INTERESTS IN THE CORPORATION OR ENTITY. IF YOU ASSIGN OR
TRANSFER THE HOTEL OR THIS AGREEMENT WITHOUT OUR WRITTEN CONSENT, YOU
BREACH THIS AGREEMENT AND WE MAY TERMINATE THIS AGREEMENT.
C. C. CONDITIONS FOR ASSIGNMENT: APPROVAL. IF YOU WISH TO TRANSFER
-------------------------
YOUR INTEREST IN THE HOTEL OR YOUR CONTROLLING INTEREST IN YOU, OR IN
THIS AGREEMENT, ALONE OR TOGETHER WITH OTHER PREVIOUS, SIMULTANEOUS,
OR PROPOSED TRANSFERS, YOU MUST FIRST:
1. 1. SATISFY ALL OF YOUR ACCRUED MONETARY OBLIGATIONS AND ALL
OTHER OUTSTANDING OBLIGATIONS TO US;
2. 2. CURE ANY DEFAULT OF THIS AGREEMENT (INCLUDING ANY
AMENDMENTS) OR OF ANY OTHER AGREEMENT BETWEEN YOU AND US;
3. 3. EXECUTE A GENERAL RELEASE, IN A FORM THAT WE APPROVE, OF
ANY AND ALL CLAIMS AGAINST US AND OUR OFFICERS, DIRECTORS,
SHAREHOLDERS, AND EMPLOYEES; AND
4. 4. ENSURE THAT THE SUCCESSOR:
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a. (A) EXECUTES (AND, IF THE SUCCESSOR IS A CORPORATION OR
PARTNERSHIP, THE BENEFICIAL OWNERS OF A CONTROLLING INTEREST IN
THE SUCCESSOR AS WE REQUEST) THE THEN-CURRENT FORM OF AGREEMENT,
FOR A TERM ENDING ON THE EXPIRATION DATE OF THIS AGREEMENT,
WHICH WILL REPLACE AND MAY DIFFER FROM THIS AGREEMENT, INCLUDING
A HIGHER ROYALTY FEE;
b. (B) [PAYS US THE THEN-CURRENT AFFILIATION FEE;]
c. (C) DEMONSTRATES, TO OUR SATISFACTION, THAT THE SUCCESSOR MEETS
OUR STANDARDS, POSSESSES A GOOD BUSINESS REPUTATION AND CREDIT
RATING, AND HAS THE ABILITY, FINANCIAL RESOURCES, AND CAPITAL TO
SUCCESSFULLY OPERATE THE HOTEL;
d. (D) AGREES IN WRITING TO UPGRADE THE HOTEL, AT SUCCESSOR'S
EXPENSE AND WITHIN A SPECIFIED TIME, TO CONFORM TO OUR THEN-
CURRENT STANDARDS AND SPECIFICATIONS;
e. (E) ATTENDS, ALONG WITH THE SUCCESSOR'S GENERAL MANAGER OF THE
HOTEL, OUR THEN CURRENT ORIENTATION PROGRAM; AND
f. (F) OWNS THE ENTIRE LEASEHOLD OR FEE INTEREST IN THE HOTEL.
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D. D. TRANSFER ON DEATH OR MENTAL INCOMPETENCE. IF YOU OR ANY NATURAL
----------------------------------------
PERSON IN YOUR ENTITY DIES OR BECOMES MENTALLY INCOMPETENT, THE
EXECUTOR, ADMINISTRATOR, OR PERSONAL REPRESENTATIVE OF THAT PERSON
MUST TRANSFER THAT PERSON'S HOTEL INTEREST (WITHIN 6 MONTHS AFTER
DEATH OR MENTAL INCOMPETENCE) TO ONE OR MORE OF THE REMAINING PERSONS
IN YOUR ENTITY (IF APPLICABLE) OR TO YOUR HEIRS THAT WE APPROVE. THIS
TRANSFER AND TRANSFERS BY DEVISE OR INHERITANCE ARE SUBJECT TO THE
SAME CONDITIONS APPLICABLE TO OTHER TRANSFERS. IN TRANSFERRING BY
DEVISE OR INHERITANCE, HOWEVER, THE REPRESENTATIVE OR EXECUTOR MUST
DISPOSE (WITHIN A REASONABLE TIME) OF THE INTEREST, SUBJECT TO THE
TERMS OF THIS AGREEMENT, IF THE HEIRS OR BENEFICIARIES ARE UNABLE TO
MEET THE CONDITIONS OF THIS AGREEMENT. EXCEPT AS OTHERWISE PROVIDED
IN THIS AGREEMENT, WE MAY TERMINATE THIS AGREEMENT IF THE INTEREST IS
NOT DISPOSED OF WITHIN 6 MONTHS OF DEATH OR MENTAL INCOMPETENCE.
E. E. NON-WAIVER OF CLAIMS. IF WE CONSENT TO YOUR TRANSFER OF ANY
--------------------
INTEREST GRANTED UNDER THIS AGREEMENT, WE DO NOT:
1. 1. WAIVE CLAIMS THAT WE MAY HAVE AGAINST YOU, INCLUDING CLAIMS
FOR INDEMNIFICATION; OR
2. 2. WAIVE OUR RIGHT TO DEMAND THAT YOU OR SUCCESSOR COMPLY WITH
ANY SECTION OF THIS AGREEMENT OR WITH ANY SUBSEQUENT TRANSFER.
F. F. CONTROLLING INTEREST. FOR PURPOSES OF THIS AGREEMENT,
--------------------
"CONTROLLING INTEREST" INCLUDES ANY GENERAL PARTNER'S INTEREST IN A
PARTNERSHIP ENTITY, THE OWNER(S) OF 50% OR MORE OF THE VOTING STOCK
OF A CORPORATE ENTITY, AND THE OWNER(S) OF 50% OR MORE OF THE
MEMBER'S INTERESTS IN A LIMITED LIABILITY COMPANY.
X. 10. Default and Termination.
A. A. TERMINATION BY YOU. IF WE DEFAULT IN OUR MATERIAL OBLIGATIONS
------------------
UNDER THIS AGREEMENT, YOU MAY TERMINATE THIS AGREEMENT ONLY IF WE DO
NOT CURE THOSE DEFAULTS WITHIN 30 DAYS FROM RECEIVING YOUR WRITTEN
NOTICE.
B. B. TERMINATION BY US.
-----------------
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1. 1. TERMINATION WITH NOTICE. WE MAY TERMINATE THIS AGREEMENT,
-----------------------
EFFECTIVE ON THE DATE SPECIFIED IN OUR NOTICE (OR THE EARLIEST DATE
PERMITTED BY LAW), IF YOU:
a. (A) DO NOT SEND US CONSTRUCTION PROGRESS REPORTS WHEN DUE OR
WITHIN 10 DAYS OF OUR NOTICE OF DEFAULT TO YOU;
b. (B) DO NOT PAY US FEES OR OTHER AMOUNTS DUE UNDER THIS
AGREEMENT WHEN DUE OR WITHIN 10 DAYS OF OUR NOTICE OF DEFAULT TO
YOU;
c. (C) DO NOT BEGIN CONSTRUCTION OF THE HOTEL ON TIME OR, ONCE
BEGUN, DO NOT CONTINUE WITHOUT INTERRUPTIONS THE CONSTRUCTION OF
THE HOTEL OR RENOVATIONS TO THE HOTEL;
d. (D) DO NOT SEND US MONTHLY REPORTS WHEN DUE OR WITHIN 1 0 DAYS
OF OUR NOTICE OF DEFAULT TO YOU;
e. (E) DO NOT CURE FULLY ANY OTHER BREACH OF YOUR OBLIGATIONS OR
WARRANTIES UNDER THIS AGREEMENT WITHIN 30 DAYS OF OUR NOTICE OF
DEFAULT TO YOU;
f. (F) MATERIALLY BREACH ANY OTHER AGREEMENT WITH US OR OUR
AFFILIATES, OR ANY MORTGAGE, DEED OF TRUST OR LEASE COVERING THE
HOTEL, UNLESS CURED WITHIN ANY APPLICABLE NOTICE OR GRACE
PERIODS CONTAINED IN THOSE DOCUMENTS; OR
g. (G) RECEIVE 2 OR MORE NOTICES OF DEFAULT UNDER THIS AGREEMENT
FOR THE SAME OR A SIMILAR CAUSE OR REASON IN ANY CONSECUTIVE 12
MONTH PERIOD, WHETHER OR NOT CURED.
If the validity of the termination of this Agreement is disputed, either
party may introduce evidence of a breach of this Agreement or evidence of any
claim associated with the Hotel, including any facilities that are managed by
others at the Hotel, even if not contained in the default notice.
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2. 2. IMMEDIATE TERMINATION EFFECTIVE ON NOTICE. WE MAY TERMINATE THIS
-----------------------------------------
AGREEMENT IMMEDIATELY, WITHOUT GIVING YOU AN OPPORTUNITY TO CURE
THE DEFAULT, IF:
a. (A) YOU STOP INDEFINITELY CONSTRUCTION OF THE HOTEL;
b. (B) THERE IS AN IMMINENT THREAT OR DANGER TO PUBLIC HEALTH OR
SAFETY RESULTING FROM HOTEL CONSTRUCTION, MAINTENANCE, OR
OPERATION;
c. (C) YOU STOP OPERATING THE HOTEL AS PART OF THE SYSTEM, YOU
ABANDON THE HOTEL OR THE LOCATION, YOU LOSE THE RIGHT TO POSSESS
THE HOTEL, OR YOU FORFEIT THE RIGHT TO DO OR TRANSACT BUSINESS
IN THE JURISDICTION IN WHICH THE HOTEL IS LOCATED;
d. (D) YOU (OR A BENEFICIAL OWNER OF YOU) ARE CONVICTED OF A
FELONY, A FRAUD, A CRIME INVOLVING MORAL TURPITUDE OR ANY OTHER
CRIME OR OFFENSE THAT WE BELIEVE IS LIKELY TO HAVE AN ADVERSE
EFFECT ON THE SYSTEM, THE MARKS, OUR GOODWILL, OR OUR INTEREST
IN THIS AGREEMENT;
e. (E) YOU (OR A BENEFICIAL OWNER OF YOU) TRANSFER OR PURPORTS TO
TRANSFER ANY RIGHTS OR OBLIGATIONS UNDER THIS AGREEMENT OR ANY
CONTROLLING INTEREST IN YOU WITHOUT OUR PRIOR WRITTEN CONSENT;
f. (F) YOU KNOWINGLY MAINTAIN FALSE BOOKS OR RECORDS, SEND US
FALSE REPORTS, OR MAKE ANY MATERIALLY FALSE STATEMENT IN YOUR
FRANCHISE APPLICATION;
g. (G) YOU DO NOT OPEN THE HOTEL TO THE PUBLIC AS PART OF THE
SYSTEM;
h. (H) YOU DO NOT BUY, MAINTAIN OR SEND US EVIDENCE OF INSURANCE
REQUIRED IN THIS AGREEMENT; OR
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i. (I) YOU BECOME INSOLVENT OR MAKE A GENERAL ASSIGNMENT FOR THE
BENEFIT OF CREDITORS; YOU FILE A PETITION IN BANKRUPTCY OR A
PETITION IS FILED AGAINST YOU AND YOU DO NOT OPPOSE IT; YOU ARE
JUDGED BANKRUPT OR INSOLVENT; YOU FILE OR CONSENT TO A BILL IN
EQUITY OR OTHER PROCEEDING FOR THE APPOINTMENT OF A RECEIVER OR
OTHER CUSTODIAN FOR YOUR BUSINESS OR ASSETS; A RECEIVER OR OTHER
CUSTODIAN (PERMANENT OR TEMPORARY) OF YOUR ASSETS OR PROPERTY IS
APPOINTED BY ANY COURT OF COMPETENT JURISDICTION; A FINAL
JUDGMENT REMAINS UNSATISFIED OR OF RECORD FOR 30 DAYS OR LONGER
(UNLESS A SUPERSEDEAS BOND IS FILED); OR THE HOTEL REAL OR
PERSONAL PROPERTY WILL BE SOLD AFTER LEVY BY ANY SHERIFF,
MARSHAL, OR CONSTABLE.
C. C. SUSPENSION OF FRANCHISE RIGHTS. WHEN YOU BREACH YOUR MATERIAL
------------------------------
OBLIGATIONS REQUIRED BY THIS AGREEMENT, WE MAY, WITHIN 10 DAYS OF OUR
WRITTEN NOTICE (OR LONGER TIME REQUIRED BY LAW):
1. 1. SUSPEND ANY OR ALL SERVICES TO YOU, OR
2. 2. SUSPEND YOUR RIGHT TO USE THE MARKS.
We will reinstate this Agreement, the suspended services or the right to
use the Marks if you cure your default before the Agreement terminates and if we
determine that reinstatement would not cause a substantial loss of goodwill. If
we suspend services or your right to use the Marks, we may use other remedies,
including termination of this Agreement after the appropriate time to cure has
lapsed.
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D. D. OUR REMEDIES.
------------
1. 1. WHENEVER THIS AGREEMENT IS TERMINATED, WE WILL REMOVE THE HOTEL
FROM DIRECTORIES AND ADVERTISING AND DISCONNECT THE HOTEL FROM THE
ADVANCE RESERVATIONS SYSTEM.
2. 2. IF WE TERMINATE THIS AGREEMENT BEFORE THE OPENING DATE DUE TO
YOUR DEFAULT, YOU WILL PAY US, AS LIQUIDATED DAMAGES FOR THE
PREMATURE TERMINATION AND NOT AS A PENALTY, THE PRODUCT OF THE
RENTABLE ROOMS MULTIPLIED BY $3,000.
3. 3. IF WE TERMINATE THIS AGREEMENT ON OR AFTER THE OPENING DATE DUE
TO YOUR DEFAULT, YOU WILL PAY US, WITHIN 30 DAYS AFTER TERMINATION,
AS LIQUIDATED DAMAGES AND NOT AS A PENALTY, THE PRODUCT OF:
(1) (I) THE AVERAGE MONTHLY GROSS ROOM REVENUES DURING THE
PRIOR 12 FULL CALENDAR MONTHS (OR THE SHORTER TIME THAT THE
HOTEL HAS BEEN IN THE SYSTEM), MULTIPLIED BY
(2) (II) THE ROYALTY FEE PAYABLE IN THE REMAINING
MONTHS, MULTIPLIED BY
(3) (III) THE NUMBER OF MONTHS UNTIL THE NEXT DATE ON WHICH
YOU COULD HAVE TERMINATED THIS AGREEMENT WITHOUT A PENALTY
("REMAINING MONTHS"), NOT TO EXCEED 60 MONTHS.
However, the product of (i) multiplied by (ii) will not be less than the
product of $40.00 multiplied by the Rentable Rooms. We may also seek equitable
relief to collect amounts accrued before termination, or to enforce survival of
indemnification by you. You understand that the injury to us caused by your
breach is difficult or impossible to accurately estimate, and that the above
method of computation of liquidated damages constitutes a reasonable estimate of
our probable loss from your breach.
You will also pay us any applicable taxes assessed on the payment of
liquidated damages.
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XI. 11. Obligations on Termination. On termination of this Agreement for any
reason, you must, at your expense:
A. A. IMMEDIATELY DISCONTINUE ANY AND ALL USE OF THE MARKS, OR ANY WORD
OR MARK SIMILAR TO THE MARKS, AND REFRAIN FROM IDENTIFYING THE HOTEL
AS A [LODGING BRAND NAME] HOTEL OR A FORMER [LODGING BRAND NAME]
HOTEL. IF YOU DO NOT DISCONTINUE USE OF THE MARKS, WE WILL SEEK
INJUNCTIVE AND EQUITABLE RELIEF FOR YOUR INFRINGEMENT. YOU AGREE THAT
YOU WILL WAIVE, TO THE MAXIMUM EXTENT, ANY BOND REQUIRED WITH THE
ISSUANCE OF ANY INJUNCTION, AND THAT IF A BOND IS REQUIRED, IT WILL
NOT EXCEED $1,000;
B. B. CANCEL ANY ASSUMED NAME OR SIMILAR REGISTRATION CONTAINING THE
MARKS OR ANY VARIATION OR PORTION OF THE MARKS, AND FURNISH US WITH
EVIDENCE SHOWING THAT YOU COMPLIED WITH THIS OBLIGATION WITHIN 30
DAYS AFTER TERMINATION OR EXPIRATION OF THE AGREEMENT;
C. C. PROMPTLY PAY ALL SUMS OWING TO US AND OUR SUBSIDIARIES OR
AFFILIATES, AND ALL DAMAGES, COSTS, AND EXPENSES, INCLUDING
REASONABLE ATTORNEY'S FEES, THAT WE INCUR AS A RESULT OF YOUR
DEFAULT, INCLUDING OUTSTANDING ROYALTY FEES, MARKETING FEES,
RESERVATIONS FEES AND ANY LIQUIDATED DAMAGES DUE UNDER THIS
AGREEMENT;
D. D. PAY US ALL DAMAGES, COSTS AND EXPENSES, INCLUDING REASONABLE
ATTORNEYS' FEES, THAT WE INCUR AFTER THE TERMINATION OR EXPIRATION OF
THE TERM IN OBTAINING INJUNCTIVE OR OTHER RELIEF FOR THE ENFORCEMENT
OF ANY SECTION OF THIS AGREEMENT;
E. E. IMMEDIATELY SEND US ALL ORIGINALS AND COPIES OF MANUALS, THE
RULES AND REGULATIONS, RECORDS, FILES, INSTRUCTIONS, CORRESPONDENCE
AND ALL OTHER MATERIALS THAT WE PROVIDED TO YOU. EXCEPT FOR YOUR COPY
OF THIS AGREEMENT AND OTHER DOCUMENTS WHICH YOU REASONABLY NEED TO
COMPLY WITH THE LAW, YOU MAY NOT RETAIN ANY MATERIAL THAT WE GAVE YOU
DURING THE TERM; AND
F. F. THE OBLIGATIONS IN THIS SECTION WILL SURVIVE THE TERMINATION OF
THIS AGREEMENT.
XII. 12. Insurance.
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A. A. BEGINNING ON THE OPENING DATE AND FOR THE REST OF THE TERM, YOU MUST
PURCHASE AND MAINTAIN, AT YOUR EXPENSE, THE FOLLOWING INSURANCE COVERAGES:
1. 1. ALL-RISK PHYSICAL DAMAGE COVERAGE, INSURING THE HOTEL FOR
AN AMOUNT NOT LESS THAN 80% OF ITS REPLACEMENT COST, AND FULL
COVERAGE FOR 12 MONTHS OF BUSINESS INTERRUPTION. IF THE HOTEL
IS DAMAGED OR DESTROYED, UNLESS A MORTGAGEE REQUIRES OTHERWISE,
THE PROCEEDS OF ANY INSURANCE WILL BE USED TO REPAIR OR RESTORE
THE HOTEL IN ACCORDANCE WITH YOUR PLANS THAT WE APPROVE. YOUR
INSURANCE MUST CONTAIN A WAIVER OF SUBROGATION IN OUR FAVOR AND
THE FAVOR OF THE ADDITIONAL INSUREDS;
2. 2. COMMERCIAL AUTOMOBILE AND COMPREHENSIVE GENERAL LIABILITY
INSURANCE POLICIES WRITTEN ON AN OCCURRENCE FORM PROTECTING YOU
AS THE NAMED INSURED AND NAMING US AND OUR AFFILIATES AND
SUBSIDIARIES THEIR RESPECTIVE OFFICERS, DIRECTORS, AGENTS AND
EMPLOYEES ("ADDITIONAL INSUREDS") AS ADDITIONAL INSUREDS FROM
AND AGAINST ALL TYPES OF LIABILITIES, INCLUDING PERSONAL INJURY
AND PROPERTY DAMAGE OF ANY NATURE, TOGETHER WITH THE COSTS AND
EXPENSES OF THE DEFENSE AND/OR ADJUSTMENT OF INJURY OR DAMAGE,
WITHOUT EXCEPTION, FROM OR IN ANY WAY RELATED TO ANY OPERATION
OR ACTIVITY CONDUCTED UNDER THIS AGREEMENT AND/OR OF THE HOTEL,
INCLUDING ADJACENT AREAS LIKE PARKING LOTS, RESTAURANTS, BARS.
YOUR AUTOMOBILE LIABILITY POLICY MUST COVER OWNED, HIRED AND
NON-OWNED VEHICLES. THE POLICIES DESCRIBED IN THIS SECTION AND
SECTION 12.A. 1 MUST APPLY TO LAWSUITS OR ACTIONS BROUGHT
ANYWHERE IN THE WORLD. THESE POLICIES MUST PROVIDE LIMITS PER
LOCATION OF NOT LESS THAN $5,000,000 ($10,000,000 IF THE HOTEL
HAS 6 OR MORE STORIES) PER OCCURRENCE AND MUST BE ACCOMPANIED
BY WAIVER OF SUBROGATION. YOU MAY MEET THE REQUIRED TOTAL
MINIMUM LIMITS THROUGH A COMBINATION OF PRIMARY AND UMBRELLA
POLICIES;
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3. 3. COMPREHENSIVE GENERAL LIABILITY WRITTEN ON AN OCCURRENCE
FORM WHICH IS PRIMARY TO ANY COVERAGE THAT WE MAINTAIN AND
WHICH INCLUDES, WITHOUT LIMITATION, BROAD FORM CONTRACTUAL,
PRODUCTS AND COMPLETED OPERATIONS, INDEPENDENT CONTRACTORS,
PERSONAL INJURY, BROAD FORM PROPERTY DAMAGE, EXTENDED BODILY
INJURY AND HOST LIQUOR LIABILITY. IN ADDITION, IF ALCOHOLIC
BEVERAGES ARE SOLD AT THE HOTEL, YOU MUST PURCHASE AND MAINTAIN
DRAM SHOP/LIQUOR LIABILITY INSURANCE WITH LIMITS OF NOT LESS
THAN $5,000,000 PER OCCURRENCE; AND
4. 4. STATUTORY WORKERS COMPENSATION AND EMPLOYERS LIABILITY
INSURANCE WITH MINIMUM EMPLOYERS LIABILITY LIMITS OF $100,000
BY ACCIDENT AND $100,000 BY DISEASE;
B. B. WE MAY CHANGE THE ABOVE INSURANCE COVERAGE REQUIREMENTS DURING
THE TERM BY GIVING YOU AT LEAST 30 DAYS NOTICE OF THE CHANGE. YOU
MUST COMPLY WITH OUR DIRECTIONS, AT YOUR EXPENSE, AND DELIVER US
EVIDENCE OF YOUR COMPLIANCE WITHIN 30 DAYS OF OUR NOTICE OF THE
CHANGE;
C. C. YOU MUST PLACE YOUR INSURANCE WITH AN INSURANCE COMPANY OR
COMPANIES REASONABLY ACCEPTABLE TO US. ALL INSURANCE REQUIRED WILL
BE SPECIFICALLY ENDORSED TO PROVIDE THAT THE COVERAGE WILL BE
PRIMARY AND THAT ANY INSURANCE CARRIED BY ADDITIONAL INSUREDS WILL
BE EXCESS AND NON-CONTRIBUTORY. IF WE REQUEST, YOU WILL SEND US
COMPLETE COPIES OF ALL OR ANY INSURANCE POLICIES;
D. D. YOU MUST SEND US, AT LEAST 10 DAYS BEFORE THE OPENING DATE (OR
THE CONSTRUCTION START IF APPLICABLE), CERTIFICATES OF INSURANCE
INDICATING YOUR UNIT NUMBER, THE HOTEL NAME AND ADDRESS, THE
ADDITIONAL INSUREDS, AND EVIDENCE THAT THE INSURANCE PREMIUMS HAVE
BEEN PAID. YOU MUST ALSO PROVIDE US WITH EVIDENCE OF RENEWAL BEFORE
THE EXPIRATION DATE OF INSURANCE. EACH POLICY AND CERTIFICATE OF
INSURANCE MUST INCLUDE A STATEMENT BY THE INSURER THAT THE POLICY
WILL NOT BE CANCELLED, REDUCED IN COVERAGE, OR OTHERWISE ALTERED
WITHOUT 30 DAYS ADVANCE WRITTEN NOTICE TO US;
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E. E. IF YOU DO NOT COMPLY WITH THIS SECTION, WE MAY, WITHOUT NOTICE,
IN ADDITION TO OTHER RIGHTS AND REMEDIES WHICH WE MAY HAVE,
IMMEDIATELY TERMINATE THIS AGREEMENT; AND
F. F. YOUR PURCHASE AND MAINTENANCE OF INSURANCE AND YOUR PERFORMANCE
OF YOUR OBLIGATIONS UNDER THIS AGREEMENT WILL NOT RELIEVE YOU OF
YOUR OBLIGATION TO INDEMNIFY US. WE DO NOT REPRESENT THAT THE ABOVE
INSURANCE COVERAGE WILL INSURE YOU AGAINST ANY OR ALL INSURABLE
RISKS FROM OR WITH THE HOTEL.
XIII. 13. Indemnification. You must defend, indemnify and hold harmless us,
our affiliates and subsidiaries, their respective officers, directors, agents
and employees from any loss, cost, damage, expense and liability, including
reasonable attorneys' fees and any court costs, by reason of damage or loss,
including personal injury, of any nature, from or connected with the Hotel
construction, or operation, or any facilities that are managed by others in the
Hotel, or out of, or as a result of, your (or your agent's or employee's) error,
omission, act or failure, even where our own negligence is alleged, except where
the loss, costs, damage, expense or liability is proximately caused by the gross
negligence of us or our officers, directors, agents or employees. You must
reimburse us for any amounts we reasonably spend, including attorneys' fees and
court costs, to protect us or our affiliates and subsidiaries, or our officers,
directors, agents and employees of each, from or to remedy, your defaults under
this Agreement or claims arising out of your operation of the Hotel.
XIV. 14. Casualty. If the Hotel is damaged by fire or other casualty, you
must promptly repair the damage. If the damage or repair requires closing the
Hotel, you must immediately notify us, begin reconstruction within 4 months
after closing and in accordance with the Rules and Regulations, and reopen the
Hotel for continuous business operations as soon as practicable (but in any
event within 12 months after the Hotel closing), sending us at least 30 days
prior written notice of the date of reopening. We will extend the Term of the
Franchise Agreement by the number of days between the date of closing and the
date of reopening. If your insurance proceeds are not available to repair or
rebuild the Hotel and if you notify us within 4 months after closing, we will
terminate this Agreement without penalty to either party.
XV. 15. Notices. All notices required or permitted under this Agreement must
be in writing and, until a different address has been designated by written
notice to the other party, must be personally delivered or mailed by registered
or certified mail, return receipt requested, or by a nationally recognized
courier service, to us at Choice Hotels Franchising, Inc., 10750 Columbia Pike,
Silver Spring, Maryland 20901, Attention General Counsel, and to you at the
Designated Representative's address above. The Designated Representative is
authorized to receive our written notices to you. Any notice by registered or
certified mail or by courier service is deemed given and received at the date
and time of mailing. You may change the Designated Representative by written
notice to us.
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XVI. 16. Business Relationship.
A. A. YOU AGREE THAT:
1. 1. THIS AGREEMENT DOES NOT CREATE A FIDUCIARY RELATIONSHIP
BETWEEN YOU AND US;
2. 2. YOU ARE AN INDEPENDENT CONTRACTOR. NOTHING IN THIS AGREEMENT
IS INTENDED TO MAKE EITHER PARTY AN AGENT, LEGAL REPRESENTATIVE,
SUBSIDIARY, JOINT VENTURER, PARTNER, EMPLOYEE, INDEPENDENT
CONTRACTOR OR SERVANT OF THE OTHER (EXCEPT THAT WE ARE ACTING AS
YOUR AGENT WHEN MAKING RESERVATIONS FOR YOUR HOTEL);
3. 3. YOU ARE NOT AUTHORIZED TO MAKE ANY CONTRACT, AGREEMENT,
WARRANTY, OR REPRESENTATION ON OUR BEHALF, OR TO INCUR ANY DEBT
OR OTHER OBLIGATION IN OUR NAME; AND
4. 4. YOU WILL NOT REPRESENT IN ANY PROPOSED FINANCING AGREEMENT
OR TO ANY PROPOSED LENDER OR PARTICIPANT IN A PUBLIC OR PRIVATE
INVESTMENT OFFERING THAT WE OR ANY OF OUR AFFILIATES IS, OR WILL
BECOME, RESPONSIBLE FOR YOUR OBLIGATION UNDER THE FINANCING
AGREEMENT, NOR THAT WE ARE, OR WILL BE, PARTICIPATING IN A
PRIVATE OR PUBLIC INVESTMENT OFFERING. BEFORE YOU DISTRIBUTE A
PROSPECTUS OF YOUR INTENDED PRIVATE OR PUBLIC OFFERING, YOU MUST
SEND US A COPY FOR OUR PRIOR WRITTEN APPROVAL, NOT TO BE
UNREASONABLY WITHHELD.
B. B. DURING THE TERM OF THIS AGREEMENT, YOU WILL HOLD YOURSELF OUT TO
THE PUBLIC AS AN INDEPENDENT CONTRACTOR CONSTRUCTING AND OPERATING
THE HOTEL UNDER AN AGREEMENT WITH US. YOU MAY NOT USE ALL OR A
PORTION OF THE MARKS IN YOUR CORPORATE OR PARTNERSHIP NAME.
C. C. NEITHER PARTY ASSUMES LIABILITY FOR, OR WILL BE DEEMED LIABLE AS
A RESULT OF ACTION OR OMISSION OF THE OTHER PARTY, OR ANY CLAIM OR
JUDGMENT ARISING FROM SUCH CONTRACT, AGREEMENT, WARRANTY OR
REPRESENTATION.
XVII. 17. Attorneys' Fees. The prevailing party in any action filed to enforce
the terms and conditions of this Agreement (as determined by the Court or
arbitrator) shall recover from the other party reasonable attorneys' fees and
court costs.
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XVIII. 18. Taxes, Permit; Compliance with Laws; Notice of Legal Actions.
A. A. YOU MUST PAY WHEN DUE ALL TAXES RELATED TO THE HOTEL WHICH MAY
BE LEVIED OR ASSESSED BY ANY FEDERAL, STATE, OR LOCAL TAX AUTHORITY,
AND ANY AND ALL OTHER INDEBTEDNESS RELATED TO THE HOTEL. YOU MUST
PAY SALES TAX, GROSS RECEIPTS TAX, OR SIMILAR TAX IMPOSED ON US (BUT
NOT INCLUDING OUR INCOME TAXES) ON ANY PAYMENTS THAT YOU MUST MAKE
TO US UNDER THIS AGREEMENT.
B. B. IF THERE IS A BONA FIDE DISPUTE AS TO LIABILITY FOR TAXES
ASSESSED OR OTHER INDEBTEDNESS, YOU MAY CONTEST THE VALIDITY OR THE
AMOUNT OF THE TAX OR INDEBTEDNESS UNDER THE PROCEDURES OF THE TAXING
AUTHORITY OR APPLICABLE LAW. YOU MAY NOT PERMIT A TAX SALE OR
SEIZURE BY LEVY OF EXECUTION OR SIMILAR WRIT OR WARRANT, OR
ATTACHMENT BY A CREDITOR TO OCCUR AGAINST THE HOTEL OR THE LOCATION.
C. C. YOU MUST COMPLY WITH ALL FEDERAL, STATE, AND LOCAL LAWS, RULES
AND REGULATIONS APPLICABLE TO YOU AND TO THE HOTEL. YOU MUST TIMELY
OBTAIN ANY AND ALL PERMITS, CERTIFICATES, OR LICENSES NECESSARY FOR
THE HOTEL, INCLUDING LICENSES TO DO BUSINESS, FICTITIOUS NAME
REGISTRATION AND SALES TAX PERMITS, HEALTH AND SANITATION PERMITS,
AND RATINGS AND FIRE CLEARANCES. YOU MUST SEND US, WITHIN 10 DAYS OF
RECEIPT, COPIES OF ALL SUBSEQUENT INSPECTION REPORTS, WARNINGS,
CERTIFICATES, AND RATINGS, RECEIVED FROM ANY GOVERNMENTAL ENTITY.
D. D. YOU MUST NOTIFY US IN WRITING, WITHIN 5 DAYS OF RECEIPT,
INFORMATION ABOUT ANY ACTION, SUIT, PROCEEDING, OR THE ISSUANCE OF
ANY ORDER, WRIT, INJUNCTION, AWARD, OR DECREE OF ANY COURT, AGENCY,
OR OTHER GOVERNMENTAL INSTRUMENTALITY, WHICH MAY ADVERSELY AFFECT
THE OPERATION OF THE HOTEL OR YOUR FINANCIAL CONDITION.
XIX. 19. Approvals and Waivers.
A. A. OUR APPROVALS AND CONSENTS WILL NOT BE EFFECTIVE UNLESS SIGNED
BY ONE OF OUR OFFICERS. WE MAY WITHHOLD OUR CONSENT IF YOU ARE IN
BREACH OF A MATERIAL OBLIGATION UNDER THIS AGREEMENT.
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B. B. EXCEPT AS OTHERWISE STATED IN WRITING IN THIS AGREEMENT
(INCLUDING ANY AMENDMENTS), WE MAKE NO WARRANTIES OR GUARANTEES ON
WHICH YOU MAY RELY. WE ASSUME NO LIABILITY OR OBLIGATION TO YOU BY
PROVIDING ANY WAIVER, APPROVAL, CONSENT, OR SUGGESTION TO YOU WITH
THIS AGREEMENT, OR BY REASON OF ANY DELAY OR DENIAL OF ANY REQUEST.
C. C. FAILURE TO EXERCISE ANY POWER OR TO INSIST ON STRICT COMPLIANCE
WITH ANY OBLIGATION OR CONDITION UNDER THIS AGREEMENT DOES NOT
CONSTITUTE A WAIVER OF ANY FUTURE RIGHT TO DEMAND EXACT COMPLIANCE
WITH ANY OF THE TERMS IN THIS AGREEMENT. WAIVER OF ANY PARTICULAR
DEFAULT WILL NOT AFFECT OR IMPAIR A PARTY'S RIGHT WITH RESPECT TO
ANY SUBSEQUENT DEFAULT OF THE SAME, SIMILAR, OR DIFFERENT NATURE. NO
DELAY, FORBEARANCE, OR OMISSION TO EXERCISE ANY POWER OR RIGHT FROM
ANY BREACH OR DEFAULT OF ANY OF THE TERMS, SECTIONS, OR COVENANTS
HEREOF, WILL AFFECT OR IMPAIR A PARTY'S RIGHT TO EXERCISE THE SAME.
XX. 20. Severability and Construction.
A. A. IF ANY SECTION OF THE AGREEMENT IS HELD TO BE ILLEGAL, INVALID,
OR UNENFORCEABLE, BOTH PARTIES AGREE THAT:
1. 1. THE SECTION WILL BE REMOVED;
2. 2. THIS AGREEMENT WILL BE UNDERSTOOD AND ENFORCED AS IF THE
ILLEGAL, INVALID, OR UNENFORCEABLE SECTION HAD NEVER BEEN IN
THIS AGREEMENT; AND
3. 3. THE REMAINING SECTIONS WILL REMAIN IN FULL FORCE AND EFFECT
AND WILL NOT BE AFFECTED BY THE ILLEGAL, INVALID, OR
UNENFORCEABLE SECTION OR BY ITS REMOVAL. A SIMILAR SECTION TO
THE REMOVED SECTION, TO THE MAXIMUM EXTENT ENFORCEABLE, WILL BE
AUTOMATICALLY ADDED AS A PART OF THIS AGREEMENT.
B. B. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT,
NOTHING IN THIS AGREEMENT IS INTENDED, NOR WILL ANYTHING IN THIS
AGREEMENT BE DEEMED, TO CONFER ON ANY PERSON OR LEGAL ENTITY OTHER
THAN US OR YOU, OR OUR RESPECTIVE SUCCESSORS AND ASSIGNS, ANY RIGHTS
OR REMEDIES UNDER OR BY REASON OF THIS AGREEMENT.
30
<PAGE>
C. C. ALL CAPTIONS IN THIS AGREEMENT ARE INTENDED SOLELY FOR THE
CONVENIENCE OF THE PARTIES AND DO NOT AFFECT THE MEANING OR
CONSTRUCTION OF ANY SECTION.
D. D. ALL REFERENCES TO THE MASCULINE, NEUTER, OR SINGULAR, INCLUDE
THE MASCULINE, FEMININE, NEUTER, OR PLURAL. [IF "YOU" CONSISTS OF
MORE THAN ONE PERSON OR ENTITY, YOUR ACKNOWLEDGMENTS, PROMISES,
COVENANTS, AGREEMENTS, AND OBLIGATIONS MADE OR UNDERTAKEN IN THIS
AGREEMENT ARE JOINTLY AND SEVERALLY UNDERTAKEN BY ALL OF YOU.]
E. E. IF THIS AGREEMENT IS EXECUTED IN MULTIPLE COUNTERPARTS, EACH
EXECUTED COPY IS AN ORIGINAL.
F. F. THIS AGREEMENT BECOMES VALID ONLY WHEN WE HAVE SIGNED IT, AND
IT WILL BE INTERPRETED UNDER THE SUBSTANTIVE LAWS OF MARYLAND, NOT
INCLUDING MARYLAND'S CONFLICT OF LAWS PROVISION, WHICH LAWS WILL
PREVAIL IF THERE IS ANY CONFLICT OF LAW.
G. G. NO RIGHT OR REMEDY IN THIS AGREEMENT IS INTENDED TO BE, NOR
WILL BE DEEMED, EXCLUSIVE OF ANY OTHER RIGHT OR REMEDY IN THIS
AGREEMENT OR BY LAW OR EQUITY PROVIDED OR PERMITTED, BUT EACH WILL
BE CUMULATIVE OF THE OTHER RIGHT OR REMEDY.
H. H. NOTHING CONTAINED IN THIS AGREEMENT WILL BAR EITHER PARTY'S
RIGHT TO OBTAIN INJUNCTIVE RELIEF AGAINST THREATENED CONDUCT THAT
WILL CAUSE IT LOSS OR DAMAGES, UNDER THE USUAL EQUITY RULES,
INCLUDING THE APPLICABLE RULES FOR OBTAINING RESTRAINING ORDERS AND
PRELIMINARY INJUNCTIONS.
I. I. THIS AGREEMENT CONTAINS THE COMPLETE UNDERSTANDING OF THE
PARTIES AND REPLACES ANY PREVIOUS WRITTEN OR ORAL AGREEMENT. NO
REPRESENTATION, INDUCEMENT, PROMISE OR AGREEMENT, ORAL OR OTHERWISE,
NOT IN THIS AGREEMENT, WILL BE OF ANY FORCE OR EFFECT.
J. J. THIS AGREEMENT MAY NOT BE AMENDED EXCEPT IN WRITING SIGNED BY
BOTH PARTIES.
31
<PAGE>
K. K. NEITHER PARTY MAY FILE A CLAIM (EXCEPT CLAIMS FOR
INDEMNIFICATION) ARISING OUT OF OR RELATED TO THIS AGREEMENT AFTER 3
YEARS FROM THE DATE ON WHICH THE CLAIM AROSE, UNLESS APPLICABLE LAW
SPECIFIES A SHORTER STATUTE OF LIMITATIONS.
XXI. 21. Acknowledgments
A. A. YOU HAVE CONDUCTED AN INDEPENDENT INVESTIGATION OF THIS
AGREEMENT, AND YOU UNDERSTAND THAT THE BUSINESS VENTURE CONTEMPLATED
BY THIS AGREEMENT INVOLVES BUSINESS RISKS, AND THAT ITS SUCCESS WILL
BE LARGELY DEPENDENT ON YOUR ABILITY AS AN INDEPENDENT BUSINESS
PERSON. WE HAVE NOT MADE, AND YOU ACKNOWLEDGE THAT YOU HAVE NOT
RECEIVED FROM US OR OUR AGENTS, ANY PROJECTION, WARRANTY OR
GUARANTEE, EXPRESS OR IMPLIED, AS TO THE POTENTIAL SUCCESS OF THE
BUSINESS VENTURE CONTEMPLATED BY THIS AGREEMENT. BY SIGNING THIS
AGREEMENT, YOU REPRESENT TO US THAT YOU HAVE NEITHER RECEIVED NOR
RELIED ON REPRESENTATIONS OF ANY KIND CONCERNING THE AGREEMENT
EXCEPT AS WRITTEN IN THIS AGREEMENT.
B. B. YOU AGREE THAT THIS AGREEMENT RELATES TO THE HOTEL AND THE
LOCATION. WE MAY OPERATE, FRANCHISE OR LICENSE OTHER [LODGING BRAND
NAME] HOTELS UNDER THE SYSTEM, AS WELL AS USE OUR OTHER BRANDS, AT
ANY OTHER LOCATION. WE OR OUR AFFILIATES MAY NOW OR IN THE FUTURE
ENGAGE IN TRANSIENT LODGING OR RELATED BUSINESS ACTIVITIES WHICH MAY
COMPETE WITH THE SYSTEM OR WITH THE HOTEL.
C. C. YOU AGREE THAT THE MARKS AND THIS AGREEMENT RELATE ONLY TO THE
SYSTEM, AND THAT WE MAY DECIDE TO PROVIDE SERVICES TO THE HOTEL
SIMULTANEOUSLY TO ONE OR MORE OF OUR OTHER BRANDS, EITHER SEPARATELY
OR COMBINED.
D. D. YOU ARE SOLELY RESPONSIBLE FOR EXERCISING ORDINARY BUSINESS
CONTROL OVER THE HOTEL.
E. E. YOU WARRANT THE TRUTH AND COMPLETENESS OF ALL YOUR STATEMENTS
IN YOUR APPLICATION AND THOSE IN ALL OTHER DOCUMENTS THAT YOU SEND
US AS PART OF THE APPLICATION PROCESS. THIS WARRANTY WILL SURVIVE
THE SIGNING AND THE TERMINATION OF THIS AGREEMENT.
32
<PAGE>
F. F. YOU ACKNOWLEDGE THAT YOU RECEIVED FROM US A DISCLOSURE DOCUMENT
REQUIRED BY THE FEDERAL TRADE COMMISSION AND BY THE STATE(S) IN
WHICH YOU LIVE AND WHERE THE HOTEL IS LOCATED, EITHER DURING YOUR
FIRST PERSONAL MEETING WITH OUR REPRESENTATIVE TO DISCUSS THE
FRANCHISE SALE, OR 10 BUSINESS DAYS BEFORE YOU SIGNED THIS AGREEMENT
OR PAID TO US ANY CONSIDERATION FOR THE FRANCHISE, WHICHEVER OF
THOSE FIRST OCCURRED. YOU ALSO ACKNOWLEDGE THAT WE GAVE TO YOU THE
COMPLETED COPIES OF THIS AGREEMENT FOR YOUR SIGNATURE AT LEAST 5
BUSINESS DAYS BEFORE YOU SIGNED THIS AGREEMENT.
G. G. YOU ARE THE TRUE OWNER OF, AND RECORD HOLDER OF TITLE TO, THE
HOTEL, UNLESS YOU HAVE TOLD US IN THE APPLICATION THAT YOU LEASE THE
HOTEL UNDER A LEASE WITH AT LEAST 20 YEARS REMAINING IN ITS TERM. IF
THE HOTEL IS SUBJECT TO A MORTGAGE, YOU ARE THE MORTGAGOR OF RECORD.
XXII. 22. Arbitration. Except for claims for indemnification, actions for
collection of fees owed us under this Agreement, or actions seeking to enjoin
you from using the Marks in violation of this Agreement, any controversy or
claim relating to this Agreement, or the breach of this Agreement, including any
claim that this Agreement or any part of this Agreement is invalid, illegal, or
otherwise voidable or void, will be sent to final and binding arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The arbitrator will apply the substantive laws of Maryland, without
reference to Maryland's conflict of laws provision. Judgment on the arbitration
award may be entered in any court having jurisdiction. If any party fails to
appear at any properly noticed arbitration proceeding, an award may be entered
against the party, notwithstanding its failure to appear. Any arbitration will
be conducted at our headquarters office in Maryland.
XXIII. 23. Special Provisions Applicable Only to Hotels to be Constructed or
Completely Renovated.
A. A. THE PHRASE "CONSTRUCTION START" MEANS THE DATE ON WHICH BONA
FIDE POURING OF FOOTINGS BEGINS AT THE LOCATION IN THE CASE OF A
HOTEL TO BE CONSTRUCTED OR THE DATE ON WHICH RENOVATIONS BEGIN IN
THE CASE OF AN EXISTING HOTEL WHICH IS TO BE COMPLETELY RENOVATED.
B. B. IN ADDITION TO THE OTHER PROVISIONS OF THIS AGREEMENT, YOU
AGREE THAT YOU WILL:
1. 1. PRESENT FOR OUR APPROVAL, BEFORE CONSTRUCTION START, YOUR
PRELIMINARY DRAWINGS AND FINAL WORKING DRAWINGS FOR HOTEL
CONSTRUCTION;
33
<PAGE>
2. 2. CAUSE THE CONSTRUCTION START TO OCCUR WITHIN 12 MONTHS OF
THE DATE OF THIS AGREEMENT. IF YOU DO NOT CAUSE THE
CONSTRUCTION START TO OCCUR WITHIN 12 MONTHS OF THE DATE OF
THIS AGREEMENT, YOU MAY REQUEST, BEFORE THE END OF THE 12
MONTHS, AN ADDITIONAL 3 MONTHS FOR CONSTRUCTION START. WE ARE
NOT OBLIGATED TO EXTEND THE TIME FOR CONSTRUCTION START. IF WE
AGREE TO EXTEND THE TIME FOR CONSTRUCTION START, YOU WILL PAY
US AN EXTENSION FEE OF $5,000 FOR EACH 3 MONTH EXTENSION;
3. 3. CONTINUE HOTEL CONSTRUCTION IN ACCORDANCE WITH THE PLANS,
AFTER CONSTRUCTION START, WITHOUT INTERRUPTION (EXCEPT BY
EVENTS CONSTITUTING FORCE MAJEURE), UNTIL THE HOTEL IS READY
FOR OUR INSPECTION. YOU MUST COMPLETE HOTEL CONSTRUCTION,
INCLUDING FURNISHING, EQUIPPING, AND PREPARING FOR OPENING,
WITHIN 12 MONTHS AFTER CONSTRUCTION START;
4. 4. SEND US, WHEN WE REQUEST DURING CONSTRUCTION, REPORTS
SHOWING THE PROGRESS MADE TOWARD COMPLETING HOTEL CONSTRUCTION;
5. 5. USE THE MARKS ONLY AS ALLOWED IN SECTION 23.D OF THE
AGREEMENT;
6. 6. COOPERATE WITH US, AND INSTRUCT YOUR ARCHITECT, ENGINEER,
CONTRACTORS AND SUBCONTRACTS TO COOPERATE WITH US, AND ALLOW US
TO INSPECT THE LOCATION AND THE HOTEL CONSTRUCTION TO DETERMINE
WHETHER CONSTRUCTION MEETS THE STANDARDS OUTLINED IN THE RULES
AND REGULATIONS AND THE PLANS;
7. 7. ORDER, PURCHASE AND/OR LEASE AND INSTALL ALL FIXTURES,
EQUIPMENT, FURNISHINGS, SIGNS, COMPUTER TERMINALS AND RELATED
EQUIPMENT, SUPPLIES AND OTHER REQUIRED ITEMS BEFORE THE OPENING
DATE;
8. 8. ADVERTISE THE HOTEL LOCALLY, AT YOUR EXPENSE AND IN A
MANNER MEETING OUR SPECIFICATIONS;
9. 9. CAUSE THE GENERAL MANAGER OF THE HOTEL TO ATTEND AND
COMPLETE OUR INITIAL ORIENTATION PROGRAM;
34
<PAGE>
10. 10. NOTIFY US AT LEAST 30 DAYS BEFORE THE OPENING DATE. WE WILL
INSPECT AND, IF APPROPRIATE, AUTHORIZE YOU TO BEGIN OPERATING
THE HOTEL UNDER THIS AGREEMENT.
C. C. BEFORE THE OPENING DATE, YOU MAY MAKE THE FOLLOWING LIMITED USE
OF THE MARKS:
1. 1. PLACE A SIGN AT THE LOCATION ADVISING THE GENERAL PUBLIC
THAT A [LODGING BRAND NAME] HOTEL IS UNDER CONSTRUCTION;
2. 2. PROMOTE THE HOTEL CONSTRUCTION AND OPENING IN THE MEDIA;
3. 3. PURCHASE OPERATING SUPPLIES AND EQUIPMENT BEARING THE MARKS
REQUIRED FOR HOTEL OPERATION; AND
4. 4. PURCHASE AND INSTALL THE PERMANENT HOTEL SIGN REQUIRED FOR
HOTEL OPERATION.
D. D. YOU MUST PURCHASE BY THE CONSTRUCTION START AND MAINTAIN UNTIL
THE OPENING DATE, DIRECTLY OR THROUGH YOUR GENERAL CONTRACTOR, THE
FOLLOWING INSURANCE COVERAGES:
1. 1. COMPREHENSIVE GENERAL LIABILITY INSURANCE (INCLUDING
AUTOMOBILE LIABILITY, PROPERTY DAMAGE) PROTECTING YOU AND
NAMING US AND OUR AFFILIATES AND SUBSIDIARIES, THEIR RESPECTIVE
OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES AS ADDITIONAL
INSUREDS ("ADDITIONAL INSUREDS") FROM AND AGAINST ALL TYPES OF
LIABILITIES, INCLUDING PERSONAL INJURY AND PROPERTY DAMAGE,
TOGETHER WITH THE COSTS OF DEFENSE AND/OR ADJUSTMENTS ARISING
OUT OF THE OPERATIONS TO CONSTRUCT THE HOTEL. THE COVERAGES
MUST PROVIDE FOR LIMITS OF NOT LESS THAT $5,000,000
($10,000,000 IF THE HOTEL HAS 6 OR MORE STORIES) PER OCCURRENCE
PER LOCATION AND INCLUDE COVERAGES FOR CONTRACTUAL LIABILITY,
EXPLOSION, COLLAPSE AND UNDERGROUND PROPERTY DAMAGE HAZARD
LIABILITY, PERSONAL INJURY LIABILITY, PRODUCTS AND COMPLETED
OPERATIONS LIABILITY, OWNER'S AND CONTRACTOR'S PROTECTIVE
LIABILITY, AND INDEPENDENT CONTRACTOR'S LIABILITY.
35
<PAGE>
2. 2. ALL-RISK BUILDER'S RISK COVERAGE TO INSURE THE HOTEL
BUILDINGS UNDER CONSTRUCTION TO 100% OF THEIR REPLACEMENT COST
VALUE, PROTECTING YOU, US AND THE ADDITIONAL INSUREDS, AND A
WORKERS' COMPENSATION POLICY AS REQUIRED BY STATUTE.
This Agreement is signed by you (and your principals, if a
partnership or corporation) and us, with our seals, on the date written above.
ATTEST: CHOICE HOTELS FRANCHISING, INC.
By
- -------------------------------- -------------------------------(Seal)
Everett F. Casey
Assistant Secretary
WITNESS/ATTEST: ASTRA HOSPITALITY, INC.
By
- -------------------------------- -------------------------------(Seal)
name
Date:
-------------------------
By
- -------------------------------- -------------------------------(Seal)
name
Date:
-------------------------
By
- -------------------------------- -------------------------------(Seal)
name
Date:
-------------------------
By
- ------------------------------- -------------------------------(Seal)
name
Date:
NOTE: The person or business organization which is the title owner of the
Location, as of the date of this Agreement, must be a named signatory. The
liability of all signatories will be joint and several.
36
<PAGE>
Exhibit 10.02
FORM OF EMPLOYEE BENEFITS & OTHER EMPLOYMENT
MATTERS ALLOCATION AGREEMENT
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS........................................................1
Section 1.01 Definitions..................................................1
Aggregate Spread......................................................1
Choice Business.......................................................2
Choice Individual.....................................................2
Code..................................................................2
Collective Bargaining Agreement.......................................2
Commission............................................................2
Common Stock..........................................................2
Company Matching Contribution.........................................2
Conversion Award......................................................2
Current Plan Year.....................................................2
Cut-off Date..........................................................3
Distribution Agreement................................................3
Distribution Date.....................................................3
Employee..............................................................3
ERISA.................................................................3
HMO...................................................................3
IRS...................................................................3
Plan..................................................................3
Post-Conversion Stock Price...........................................4
Prior Plan Year.......................................................4
Profit Sharing Plan...................................................4
Qualified Beneficiary.................................................4
Retained Individual...................................................5
Service Credit........................................................5
Subsidiary............................................................5
Sunburst .............................................................5
Sunburst Closing Stock Price..........................................5
Sunburst Medical Plan.................................................5
Sunburst Stock Option.................................................5
Welfare Plans.........................................................5
Section 1.02 Other Terms..................................................6
Section 1.03 Certain Constructions........................................6
Section 1.04 Schedules, Sections..........................................6
Section 1.05 Survival.....................................................6
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
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 Sunburst.............................7
Section 2.02 Profit Sharing Plans.........................................7
(a) Sunburst Hospitality Corporation Retirement
Savings and Investment Plan.......................................7
(b) Sunburst Hospitality Corporation Nonqualified
Retirement Savings and Investment Plan...........................10
Section 2.03 Retirement Plans............................................12
(a) Sunburst Hospitality Corporation Supplemental
Executive Retirement Plan........................................12
(b) Sunburst Hospitality Corporation Deferred
Compensation Plan................................................14
Section 2.04 Comprehensive Stock Plans...................................16
(a) Sunburst Hospitality Corporation Non-Employee
Director Stock Option and Deferred
Compensation Stock Purchase Plan.................................16
(b) Sunburst Hospitality Corporation Non-Employee
Director Stock Compensation Plan.................................16
(c) Sunburst Stock Option Plans......................................17
(d) Sunburst Hospitality Corporation Employee
Stock Purchase Plan..............................................17
(e) Effect of the Distribution on Awards Made
Prior to the Cut-off Date........................................18
(f) Effect of Post-Distribution Transfer on
Conversion Awards................................................21
Section 2.05 Existing Sunburst Stock Purchase Plan.......................21
Section 2.06 Sunburst Welfare Plans and Short-Term Disability Plan.......22
(a) Liability for Claims.............................................22
(b) Continuation Coverage Administration.............................22
(c) Continuation Coverage Claims.....................................22
(d) Continuation of Sponsorship of Sunburst Welfare Plans............23
(e) Welfare Plan Payments by Choice to Sunburst......................23
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
(f) Continuation of Sponsorship of Sunburst
Hospitality Corporation 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.............................24
(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......................................25
Section 2.09 Employee Discounts..........................................26
Section 2.10 Preservation of Right To Amend or Terminate Plans...........26
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................................................27
(c) Garnishments, Tax Levies, Child Support
Orders, and Wage Assignments.....................................27
(d) Authorizations for Payroll Deductions............................28
ARTICLE III LABOR AND EMPLOYMENT MATTERS..........................................28
Section 3.01 Separate Employers..........................................28
Section 3.02 Employment Policies and Practices...........................28
Section 3.03 Collective Bargaining Agreements............................28
Section 3.04 Claims......................................................29
(a) Scope............................................................29
(b) Employment-Related Claims........................................29
(c) Obligation to Indemnify..........................................29
(d) Pre-Distribution Claims..........................................29
(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............................................30
Section 3.07 Assumption of Unemployment Tax Rates........................31
Section 3.08 Intercompany Service Charge.................................31
Section 3.09 WARN Claims.................................................31
</TABLE>
(iii)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 3.10 Employees on Leave of Absence...............................31
Section 3.11 No Third Party Beneficiary Rights...........................31
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..........................32
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
Section 5.12 Entire Agreement............................................34
Section 5.13 Commercially Reasonable Terms and Conditions................34
</TABLE>
(iv)
<PAGE>
EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS
--------------------------------------------
ALLOCATION AGREEMENT
--------------------
THIS EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT
("Agreement") is made and entered into as of ______________________, 1997, by
and between CHOICE HOTELS FRANCHISING INC. (to be renamed Choice Hotels
International, Inc.), a Delaware corporation ("Choice"), and CHOICE HOTELS
INTERNATIONAL, INC. (to be renamed Sunburst Hospitality Corporation), a Delaware
corporation ("Sunburst").
R E C I T A L S
WHEREAS, pursuant to a Distribution Agreement (the "Distribution
Agreement") dated as of ____________, 1997, as implemented in documents executed
or delivered by Choice and Sunburst in connection with the closing thereunder,
Choice and Sunburst 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 Sunburst 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 Sunburst on the
Distribution Date.
WHEREAS, for purposes of convenience of description, the various employee
benefit and retirement plans and programs maintained by Sunburst will be
referenced herein under a new name, which identifies the program as being
sponsored by Sunburst Hospitality Corporation, rather than the original name of
Choice Hotels International, Inc., and any program to be established by Choice
after the spinoff will be identified by reference to the name Choice Hotels
International, Inc.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Sunburst 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
----------------
Sunburst Stock Option and the Sunburst Closing Stock Price, multiplied by the
number of shares covered by such Sunburst Stock Option remaining unexercised on
the Cut-off Date.
<PAGE>
Choice: Choice Hotels Franchising, Inc. (to be renamed Choice Hotels
------
International, Inc.), a Delaware corporation.
Choice Business: any business or operation of Sunburst 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).
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 Sunburst 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 Sunburst or Choice, as more
------------
specifically described below:
(i) Employer Common Stock: Sunburst Common Stock in the case
---------------------
of Retained Employees and Choice Common Stock in the case of Choice Employees;
or
(ii) Sunburst Common Stock: the common stock, par value $0.01
---------------------
per share, of Sunburst after the Distribution Date; or
(iii) Choice Common Stock: the common stock, par value $0.01
-------------------
per share, of Choice after the Distribution Date.
Company Matching Contribution: the Company Matching Contribution of
-----------------------------
Sunburst under the Sunburst Hospitality Corporation Retirement Savings and
Investment Plan (as provided in the Sunburst Retirement Savings and Investment
Plan document) and the Sunburst Hospitality Corporation Nonqualified Retirement
Savings and Investment Plan, each as may be supplemented in the sole and
absolute discretion of the Sunburst 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 Sunburst Common Stock or Sunburst 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.
- 2 -
<PAGE>
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.
-----------------
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 Sunburst or
--------
any Subsidiary of Sunburst who terminated such employment prior to the
Distribution Date, including but not limited to any Sunburst employee who has
retired prior to the Distribution Date; or
(iii) Retained Employee: any individual who remains an Employee
-----------------
of Sunburst 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.
---
(S)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.
----------
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 Sunburst prior to the
Distribution Date or by Sunburst or Choice after the Distribution Date relating
to settlement of actual or potential employee related litigation claims.
- 3 -
<PAGE>
Post-Conversion Stock Price: the per share price of Choice Common
---------------------------
Stock or Sunburst Common Stock on the Distribution Date, based on the Sunburst
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) Sunburst Hospitality Corporation Retirement Savings and
-------------------------------------------------------
Investment Plan: the Sunburst Hospitality Corporation 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) Sunburst Qualified Beneficiary: any Retained Employee (or
------------------------------
dependent thereof) who becomes a Qualified Beneficiary on or after the
Distribution Date under any Sunburst Welfare Plan; or any Retained Employee (or
dependent thereof) who, on or before the Cut-off Date, was a Qualified
Beneficiary under any Sunburst 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, 1998 under any Sunburst Welfare Plan; or
any individual (or dependent thereof) who, on or before the Cut-off Date, was a
Qualified Beneficiary under any Sunburst Welfare Plan and who became a Choice
Employee after the Distribution Date.
Retained Business: any business or operation of Sunburst or its
-----------------
Subsidiaries which is, pursuant to the Distribution Agreement, to be conducted,
following the Distribution Date, by Sunburst or any Retained Subsidiary.
- 4 -
<PAGE>
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 Sunburst, except
-------------------
Choice and the Choice Subsidiaries.
Sunburst: Choice Hotels International, Inc. (to be renamed Sunburst
--------
Hospitality Corporation), a Delaware corporation.
Sunburst Closing Stock Price: the New York Stock Exchange closing
----------------------------
price per share for Sunburst 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.
Sunburst Medical Plan: any welfare plan maintained by Sunburst (or
---------------------
to which Sunburst makes contributions) which provides medical benefits,
including medical benefits provided through an HMO, an indemnity program or a
point of service program.
Sunburst Stock Option: an option to purchase Sunburst Common Stock
---------------------
pursuant to an option granted under the Sunburst Hospitality Corporation Non-
Employee Director Stock Option and Deferred Compensation Stock Purchase Plan or
the Sunburst Hospitality Corporation Long Term Incentive Plan.
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.
- 5 -
<PAGE>
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.
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 Sunburst 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, Sunburst 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 Sunburst 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 Sunburst.
(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, Sunburst shall credit each Retained Employee and Choice shall
credit each Choice Employee with such Employee's original hire date as reflected
in the Sunburst payroll system records as of the Cut-off Date (including, if
applicable, the original hire date with Manor Care). Such hire date shall
continue to be maintained as described herein for as long as the Employee does
not terminate employment.
- 6 -
<PAGE>
(ii) Post-Distribution Date terminations. Subject to the
-----------------------------------
provisions of ERISA and to Section 2.08(b) (governing post-Distribution
transfers through May 31, 1999), Choice may, in the case of Choice Employees,
and Sunburst 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.
(c) Funding Payment by Choice to Sunburst. Choice shall make a
-------------------------------------
payment to Sunburst in an amount equal to 1.9% 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, 1997. Such payment shall be made
to Sunburst on a monthly basis no more than ten (10) days after the end of each
month ending after the Distribution Date through December 31, 1997. In
consideration of receipt of such payments, Sunburst shall assume responsibility
for the Company Matching Contribution attributable to the Current Plan Year
under the Sunburst Hospitality Corporation Retirement Savings and Investment
Plan, the Sunburst Hospitality Corporation 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) Sunburst Hospitality Corporation Retirement Savings and
-------------------------------------------------------
Investment Plan.
- ---------------
(i) Continuation of Sponsorship of Sunburst Hospitality
---------------------------------------------------
Corporation Retirement Savings and Investment Plan. Effective as of the
- --------------------------------------------------
Distribution Date, Sunburst shall continue sponsorship of the Sunburst
Hospitality Corporation 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 retain Choice Common Stock credited
to their accounts. Absent this election, the Choice Common Stock will be
converted into cash or into Sunburst Common Stock.
(ii) Establishment of Choice Hotels International, Inc.
--------------------------------------------------
Retirement Savings and Investment Plan. On or before January 1, 1998, 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
- 7 -
<PAGE>
Savings and Investment Plan and Trust and to provide benefits thereunder after
the date of the establishment of such Plan and Trust for all Choice Individuals
who, immediately prior to the Distribution Date, were participants in or
otherwise entitled to benefits under the Sunburst Hospitality Corporation
Retirement Savings and Investment Sharing Plan. Sunburst 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 retain transferred Sunburst Common Stock. Absent such election, the Sunburst
Common Stock shall be converted into cash or into Choice Common Stock. The
Choice Hotels International, Inc. Retirement Savings and Investment Plan shall
be intended to qualify for tax-favored treatment under Sections 401(a) and
401(k) of the Code and to be in compliance with the requirements of ERISA.
(iii) Transfer and Acceptance of Account Balances. As soon as
-------------------------------------------
practicable after the date of the establishment of the Choice Hotels
International, Inc. Retirement Savings and Investment Plan, Sunburst shall cause
the trustees of the Sunburst Hospitality Corporation 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 Sunburst
Hospitality Corporation 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, Sunburst 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 Sunburst Hospitality Corporation Retirement Savings and Investment Plan
or that funds should be returned from the Choice Hotels International, Inc.
Retirement Savings and Investment Plan to the Sunburst Hospitality Corporation
Retirement Savings and Investment Plan, both parties shall take all appropriate
steps to effectuate the required transfer between the trusts maintained for such
plans.
- 8 -
<PAGE>
(iv) Sunburst to Provide Information. Sunburst shall provide
-------------------------------
Choice, as soon as practicable after the date of the establishment of the Choice
Hotels International, Inc. Retirement Savings and Investment Plan (with the
cooperation of Choice to the extent that relevant information is in the
possession of Choice or a Choice Subsidiary, and in accordance with Section
5.02), with a list of Choice Individuals who, to the best knowledge of Sunburst,
were participants in or otherwise entitled to benefits under the Sunburst
Hospitality Corporation 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. Sunburst shall, as soon
as practicable after the Distribution Date and in accordance with Section 5.02,
provide Choice with such additional information in the possession of Sunburst 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 Sunburst shall, in
------------------
connection with the plan-to-plan transfer described in Section 2.02(a)(iii),
cooperate in making any and all appropriate filings required by the Commission
or the IRS, or required under the Code or ERISA or any applicable securities
laws and the regulations thereunder, and take all such action as may be
necessary and appropriate to cause such plan-to-plan transfer to take place as
soon as practicable after the date of the establishment of the Choice Hotels
International, Inc. Retirement Savings and Investment Plan or otherwise when
required by law. Further, Choice shall seek a favorable IRS determination letter
that the Choice Hotels International, Inc. Retirement Savings and Investment
Plan, as organized, satisfies all qualification requirements under Section
401(a) of the Code, and the transfers described in Section 2.02(a)(iii) shall
take place as soon as practicable after the receipt of such favorable IRS
determination letter. Notwithstanding the foregoing, such transfers may take
place pending issuance of such favorable determination letter, upon receipt of
an opinion of counsel for Choice reasonably satisfactory to Sunburst 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. Sunburst agrees to provide to
Choice's counsel such information in the possession of Sunburst 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. Sunburst and
Choice shall each make any necessary amendments on a retroactive basis to the
Sunburst Hospitality Corporation Retirement Savings and Investment Plan or the
Choice Hotels International, Inc. Retirement Savings and Investment Plan,
respectively, as required
- 9 -
<PAGE>
by the IRS to issue the favorable determination letter described above.
(b) Sunburst Hospitality Corporation Nonqualified Retirement Savings
----------------------------------------------------------------
and Investment Plan.
- -------------------
(i) Continuation of Sponsorship of Sunburst Hospitality
---------------------------------------------------
Corporation Nonqualified Retirement Savings and Investment Plan. On the
- ---------------------------------------------------------------
Distribution Date, Sunburst shall retain (or shall cause a Retained Subsidiary
to assume) sole responsibility for all liabilities and obligations under the
Sunburst Hospitality Corporation 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 obligation with respect thereto, except to
pay to Sunburst 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 retain Choice Common Stock credited to their accounts.
Absent such election, the Choice Common Stock shall be converted into cash or
into Sunburst Common Stock.
(ii) Establishment of Choice Hotels International, Inc.
--------------------------------------------------
Nonqualified Retirement Savings and Investment Plan. On or before January 1,
- ---------------------------------------------------
1998, Choice shall take, or cause to be taken, all action necessary and
appropriate to establish and administer a new nonqualified retirement savings
and investment plan named the Choice Hotels International, Inc. Nonqualified
Retirement Savings and Investment Plan and to provide benefits thereunder after
the date of the establishment of such Plan and Trust for all Choice Employees
who immediately prior to the Distribution Date, were participants in or
otherwise entitled to benefits under the Sunburst Hospitality Corporation.
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 Sunburst 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 retain transferred
Sunburst Common Stock. Absent such election, the Sunburst Common Stock shall be
converted into cash or into Choice Common Stock.
(iii) Transfer and Acceptance of Account Balances. As soon as
-------------------------------------------
practicable after the date of the establishment of the Choice Hotels
International, Inc. Nonqualified Retirement Savings and Investment Plan,
Sunburst shall cause the trustee of the "rabbi" trust relating to the Sunburst
Hospitality Corporation 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,
- 10 -
<PAGE>
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 Sunburst Hospitality Corporation 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 Sunburst
Hospitality Corporation 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 Sunburst Hospitality Corporation Nonqualified
Retirement Savings and Investment Plan through the date immediately preceding
the date of the establishment of the Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan shall be assumed by Choice,
except that Sunburst 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) Sunburst to Provide Information. Sunburst agrees to provide
-------------------------------
Choice (to the extent not already in Choice's possession), as soon as
practicable after the date of the establishment of the Choice Hotels
International, Inc. Nonqualified Retirement Savings and Investment Plan, with a
list of Choice Individuals who were, to the best knowledge of Choice,
participants in or otherwise entitled to benefits under the Sunburst Hospitality
Corporation 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. Sunburst 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 Sunburst 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. 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
Sunburst Hospitality Corporation Nonqualified Retirement Savings and Investment
Plan shall be the responsibility of Sunburst. However, the payment of any
benefits due under the Sunburst Hospitality Corporation Nonqualified Retirement
Savings and Investment Plan for the first
- 11 -
<PAGE>
thirty (30) months following the Distribution Date shall be guaranteed by
Choice, to the extent not otherwise paid by Sunburst. On and after the date of
the establishment of the Choice Hotels International, Inc. Nonqualified
Retirement Savings and Investment Plan, a Choice Individual's right to receive
benefits under the Choice Hotels International, Inc. Nonqualified Retirement
Savings and Investment Plan shall be the responsibility of Choice. However, the
payment of any benefits due under the Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan which are attributable to
the transferred accrued benefits earned under the Sunburst Hospitality
Corporation Deferred Compensation Plan shall be guaranteed by Sunburst for the
first thirty (30) months following the Distribution Date, to the extent not
otherwise paid by Choice.
Section 2.03 Retirement Plans.
----------------
(a) Sunburst Hospitality Corporation Supplemental Executive
-------------------------------------------------------
Retirement Plan.
- ---------------
(i) Continuation of Sponsorship of Sunburst Hospitality
---------------------------------------------------
Corporation Supplemental Executive Retirement Plan. On the Distribution Date,
- --------------------------------------------------
Sunburst shall retain (or shall cause a Retained Subsidiary to assume) sole
responsibility for all liabilities and obligations under the Sunburst
Hospitality Corporation Supplemental Executive Retirement Plan, and Choice shall
have no liability or obligation with respect thereto, except as defined in
Section 2.03(a)(ii) below. Sunburst 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
Sunburst Hospitality Corporation 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 Sunburst Hospitality Corporation
Supplemental Executive Retirement Plan.
(iii) Transfer and Acceptance of Account Balances. As soon as
-------------------------------------------
practicable after the Distribution Date, Sunburst 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
- 12 -
<PAGE>
earned a benefit in the Sunburst Hospitality Corporation 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. Sunburst and Choice
shall take such steps as may be necessary to obtain releases of Sunburst from
Choice Employees whose accrued benefits are transferred from the Sunburst
Hospitality Corporation 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 Sunburst Hospitality Corporation 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 Sunburst
Hospitality Corporation Supplemental Executive Retirement Plan through the date
immediately preceding the Distribution Date shall be assumed by Choice, except
that Sunburst 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) Sunburst to Provide Information. Sunburst 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 Sunburst Hospitality Corporation Supplemental 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. Sunburst 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 Sunburst 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. 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
Sunburst Hospitality Corporation Supplemental Executive Retirement Plan shall be
the responsibility of Sunburst. However, the payment of any benefits due under
the Sunburst Hospitality Corporation 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 Sunburst. On and after the
Distribution Date, a Choice Individual's right to receive
- 13 -
<PAGE>
benefits under the Choice S 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 Sunburst Hospitality Corporation Deferred Compensation
Plan shall be guaranteed by Sunburst for the first thirty (30) months following
the Distribution Date, to the extent not otherwise paid by Choice.
(b) Sunburst Hospitality Corporation Deferred Compensation Plan.
-----------------------------------------------------------
(i) Continuation of Sponsorship of Sunburst Hospitality Corporation
---------------------------------------------------------------
Deferred Compensation Plan. On the Distribution Date, Sunburst shall retain (or
- --------------------------
shall cause a Retained Subsidiary to assume) sole responsibility for all
liabilities and obligations under the Sunburst Hospitality Corporation Deferred
Compensation Plan, and Choice shall have no liability or obligation with respect
thereto, except as defined in Section 2.03(c)(ii) below. Sunburst shall provide
future benefits thereunder accruing after the Cut-off Date for Retained
Employees, individuals who are directors of Sunburst, and Terminees who, on the
Cut-off Date, were participants in or otherwise entitled to benefits under the
Sunburst Hospitality Corporation 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 Sunburst Hospitality Corporation Deferred Compensation Plan,
and for Choice directors.
(iii) Transfer and Acceptance of Account Balances. As soon as
-------------------------------------------
practicable after the Distribution Date, Sunburst 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 Sunburst Hospitality Corporation 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. Sunburst and Choice shall take such steps as may be
necessary to obtain releases of Sunburst from Choice Employees whose account
balances are transferred from the Sunburst Hospitality Corporation
- 14 -
<PAGE>
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 Sunburst Hospitality Corporation
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
Sunburst Hospitality Corporation Deferred Compensation Plan through the date
immediately preceding the Distribution Date shall be assumed by Choice, except
that Sunburst 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) Sunburst to Provide Information. Sunburst 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 Sunburst, participants in or otherwise entitled
to benefits under the Sunburst Hospitality Corporation Deferred Compensation
Plan on the Cut-off Date. Sunburst 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 Sunburst 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 Sunburst director's right to receive benefits
under the Sunburst Hospitality Corporation Deferred Compensation Plan shall be
the responsibility of Sunburst. However, the payment of any benefits due under
the Sunburst Hospitality Corporation 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 Sunburst. 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 Sunburst
Hospitality Corporation Deferred Compensation Plan shall be guaranteed by
Sunburst for the first thirty (30) months following the Distribution Date, to
the extent not otherwise paid by Choice.
- 15 -
<PAGE>
Section 2.04 Comprehensive Stock Plans.
-------------------------
(a) Sunburst Hospitality Corporation Non-Employee Director Stock
------------------------------------------------------------
Option and Deferred Compensation Stock Purchase Plan.
- ----------------------------------------------------
(i) Continuation of Sponsorship of Sunburst Hospitality Corporation
---------------------------------------------------------------
Non-Employee Director Stock Option and Deferred Compensation Stock Purchase
- ---------------------------------------------------------------------------
Plan. On the Distribution Date, Sunburst shall retain (or shall cause a
- ----
Retained Subsidiary to assume) sole responsibility for all liabilities and
obligations under the Sunburst Hospitality Corporation Non-Employee Director
Stock Option and Deferred Compensation Stock Purchase Plan for all non-employee
directors of Sunburst after the Distribution Date through the issuance of
Conversion Awards, subject to the stock adjustment provisions described in
Section 2.04(e)(iii) and Section 2.04(e)(iv) below and the election procedures
described in Section 2.04(e)(v) below, and Choice shall have no liability or
obligation with respect thereto. Notwithstanding the above, on the Distribution
Date, any continuing Director of Sunburst who becomes a member of the Board of
Directors of Choice as of the Distribution Date and who holds an option to
acquire Sunburst Common Stock under the Sunburst Hospitality Corporation Non-
Employee Director Stock Option and Deferred Compensation Stock Purchase Plan
will receive a Conversion Award in exchange for such Sunburst Stock Options (i)
with respect to which the Aggregate Spread shall equal the Aggregate Spread
attributable to such Sunburst Stock Options, and (ii) with respect to which the
Aggregate Spread shall be proportionately allocated between options to acquire
Sunburst Common Stock and options to acquire Choice Common Stock based upon the
relative trading values of Sunburst and Choice on the Distribution Date.
(ii) Establishment of Choice Hotels International, Inc. Non-Employee
---------------------------------------------------------------
Director Stock Option and Deferred Compensation Stock Purchase Plan. Effective
- -------------------------------------------------------------------
as of the Distribution Date, Choice shall take, or cause to be taken, all action
necessary and appropriate to establish and administer a new non-employee
director stock option and deferred compensation stock purchase plan named the
Choice Hotels International, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan and to provide benefits thereunder
after the Distribution Date for all non-employee Choice directors.
(b) Sunburst Hospitality Corporation Non-Employee Director Stock
------------------------------------------------------------
Compensation Plan.
- -----------------
(i) Continuation of Sponsorship of Sunburst Hospitality Corporation
---------------------------------------------------------------
Non-Employee Director Stock Compensation Plan. On the Distribution Date,
- ---------------------------------------------
Sunburst shall retain (or shall cause a Retained Subsidiary to assume) sole
responsibility for
- 16 -
<PAGE>
all liabilities and obligations under the Sunburst Hospitality Corporation 1997
Non-Employee Director Stock Compensation Plan for all non-employee directors of
Sunburst after the Distribution Date through the issuance of Conversion Awards,
subject to the stock adjustment provisions described in Section 2.04(e) 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.
(c) Sunburst Stock Option Plans.
---------------------------
Continuation of Sponsorship of Sunburst Hospitality Corporation Long
--------------------------------------------------------------------
Term Incentive Plan and Establishment of Choice Hotels International, Inc. Long
- -------------------------------------------------------------------------------
Term Incentive Plan. On the Distribution Date, Sunburst shall retain (or shall
- -------------------
cause a Retained Subsidiary to assume) sole responsibility for all liabilities
and obligations under the Sunburst Hospitality Corporation Long 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(e) 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(e). 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
Sunburst 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.
(d) Sunburst Hospitality Corporation Employee Stock Purchase Plan.
-------------------------------------------------------------
(i) Continuation of Sponsorship of Sunburst Hospitality Corporation
---------------------------------------------------------------
Employee Stock Purchase Plan. On the Distribution Date, Sunburst shall retain
- ----------------------------
(or shall cause a Retained Subsidiary to assume) sole responsibility for all
- 17 -
<PAGE>
liabilities and obligations under the Sunburst Hospitality Corporation 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(e) 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.
(e) 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 Sunburst Common Stock awarded under the Sunburst
Hospitality Corporation Long Term Incentive Plan or under any Manor Care
restricted stock plan as of the Cut-off Date shall retain such share, and shall
receive as part of the Distribution one restricted share of Choice Common Stock
for each such restricted share of Sunburst 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 Sunburst Common Stock. In the case of Choice Employees and Manor Care
employees, future service for Choice or Manor Care, respectively, will be
treated as service for Sunburst for purposes of determining satisfaction of the
restrictions attributable to the Sunburst 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 shares of Sunburst 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(e)(v), below, on the Distribution Date, each grantee of a
nonqualified award of a Sunburst Stock Option who is a Retained Employee, a
Terminee, or a non-Employee Director of Sunburst who does not become a member of
the Board of Directors of Choice on the Distribution Date shall receive for each
such award a Conversion Award, with respect to which (a) one-half of the
Aggregate Spread relates to nonvested, nonqualified options to acquire Common
Stock of Sunburst and (b) one-half of the Aggregate Spread is proportionately
allocated between nonvested, nonqualified options to acquire Sunburst Common
Stock and nonvested, nonqualified options to acquire
- 18 -
<PAGE>
Choice Common Stock based on the relative trading values of Sunburst and Choice
on the Distribution Date. On the Distribution Date, each grantee of a Sunburst
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 Sunburst Common Stock equal in number to the number
of shares covered by the Sunburst Stock Option, adjusted, however, pursuant to
Section 2.04(e)(iv) below. Subject to the provisions of Section 2.04(e)(v),
below, on the Distribution Date, each grantee of a nonqualified award of a
Sunburst Stock Option who is a Choice Employee or a non-Employee Director of
Sunburst who resigns as a Director of Sunburst and who becomes a member of the
Board of Directors of Choice on the Distribution Date shall receive for each
such award a Conversion Award with respect to which (a) one-half of the
Aggregate Spread relates to nonvested, nonqualified options to acquire Common
Stock of Choice and (b) one-half of the Aggregate Spread is proportionately
allocated between nonvested, nonqualified options to acquire Sunburst Common
Stock and Choice Common Stock based on the relative trading values of Sunburst
and Choice on the Distribution Date. On the Distribution Date, each grantee of
a Sunburst 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 Sunburst Stock Option, adjusted, however, pursuant to
Section 2.04(e)(iv) below. Any stock options to purchase Sunburst Common Stock
which are held by a Manor Care employee and were issued to the Manor Care
employee in accordance with Section 2.04(f) of the Employee Benefits and Other
Employment Matters Allocation Agreement entered into in 1996 between Manor Care
and Sunburst (the "1996 Agreement") shall be treated as follows:
(A) Vested Options. Each Manor Care employee with vested options to
--------------
purchase Sunburst Common Stock will be provided with an election, prior to the
distribution contemplated in the Distribution Agreement, to convert any or all
of the options to purchase Sunburst Common Stock into options to purchase Choice
Common Stock based upon the conversion methodologies generally described in
Section 2.04(f) of the 1996 Agreement.
(B) Nonvested Options. The nonvested options of each Manor Care
-----------------
employee to purchase Sunburst Common Stock will be converted on a pro rata basis
into options to purchase Sunburst Common Stock and options to purchase Choice
Common Stock based upon the respective trading values of Sunburst and Choice on
the Distribution Date contemplated in the Distribution Agreement.
Notwithstanding the above, on the Distribution Date, each Sunburst Stock Option
held by Stewart Bainum, Jr., or a
- 19 -
<PAGE>
continuing non-employee Director of Sunburst who becomes a member of the Board
of Directors of Choice, whether issued as an incentive stock option or as a
nonqualified stock option award, shall be exchanged for a Conversion Award (i)
with respect to which the Aggregate Spread shall equal the Aggregate Spread
attributable to such incentive stock option or nonqualified stock option award,
as the case may be, and (ii) with respect to which the Aggregate Spread shall be
proportionately allocated between options to acquire Sunburst Common Stock and
options to acquire Choice Common Stock based upon the relative trading values of
Sunburst and Choice on the Distribution Date.
(iii) Adjustment of Option Price: For purposes of determining the
--------------------------
adjusted option price of a Conversion Award replacing a Sunburst Stock Option,
the following formula shall be used to maintain the grantee's Aggregate Spread
on each outstanding grant of Sunburst 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
Sunburst 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 Sunburst Common Stock or Choice
Common Stock, as the case may be, shall be set to maintain the ratio of the
exercise price of each Sunburst 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 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 (Sunburst
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 Sunburst 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(e)(iii).
(v) Special Election for Employees With Respect to Vested
-----------------------------------------------------
Nonqualified Stock Options: On or before the Cut-off Date, each holder of a
- --------------------------
vested nonqualified stock option to acquire Sunburst Common Stock (including
Employees, Manor Care employees and non-Employee Directors) may make a one-time
election to specify the manner in which the Aggregate Spread attributable to
such vested nonqualified stock option shall be allocated between a Conversion
Award relating to vested nonqualified stock options to acquire Sunburst Common
Stock and a
- 20 -
<PAGE>
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 Conversion Award of vested nonqualified options with respect to which (i) one-
half of the Aggregate Spread relates to vested nonqualified stock options to
acquire Common Stock of the entity to which such individual does become an
Employee on the Distribution Date and (b) one-half of the Aggregate Spread is
proportionately allocated between vested nonqualified stock options to acquire
Sunburst Common Stock and vested nonqualified stock options to acquire Choice
Common Stock based on the relative trading values of Sunburst and Choice on the
Distribution Date.
(f) Effect of Post-Distribution Transfer on Conversion Awards.
---------------------------------------------------------
Conversion Awards made pursuant to this Section 2.04 of shares of or options in
Sunburst 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 (Sunburst 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, 1999 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
Sunburst employment to work for Choice, or leaving Choice employment to work for
Sunburst); 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 Sunburst Stock Purchase Plan. The Sunburst 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
- 21 -
<PAGE>
Purchases by Choice Employees, who will have the right to acquire Choice Common
Stock substituted for their right to acquire Sunburst Common Stock. Retained
Employees will have the right to acquire Sunburst Common Stock in the Post-
Distribution Purchase. As soon as practicable after the Distribution Date,
Sunburst will transfer to the Choice Hotels International, Inc. Stock Purchase
Plan a cash amount equal to all contributions made to the Sunburst 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 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 Sunburst Welfare Plans and Short-Term Disability Plan.
-----------------------------------------------------
(a) Liability for Claims. Except as otherwise provided herein, as of
--------------------
the Cut-off Date, Sunburst 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, 1997 in respect of any Employee (whether such claims are
asserted before or after December 31, 1997) under any Sunburst Welfare Plan and
shall be responsible for claims incurred after December 31, 1997 in respect of
any Retained Individual or Terminee under any Sunburst Welfare Plan, and Choice
and the Choice Subsidiaries shall have no liability or obligation with respect
thereto, except to make contributions to Sunburst 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, Sunburst will retain
any funds remaining on January 1, 1998 to pay for any claims incurred under such
programs on or prior to December 31, 1997. After all such claims have been
paid, Sunburst 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, Sunburst 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 Sunburst Qualified Beneficiary, and shall be responsible for the
administration of continuation coverage requirements for Choice Individuals
through December 31, 1997, and Choice and the Choice Subsidiaries shall have no
liability or obligation with respect thereto.
(c) Continuation Coverage Claims. As of the Distribution Date,
----------------------------
Sunburst or a Retained Subsidiary shall assume or retain and shall be
responsible for, or cause its insurance
- 22 -
<PAGE>
carriers or HMOs to be responsible for, all liabilities and obligations in
connection with claims incurred or premiums owed through December 31, 1997,
whether asserted before or after December 31, 1997, under any Sunburst Welfare
Plan in respect of any Sunburst Qualified Beneficiary or Choice Qualified
Beneficiary and shall be responsible for claims incurred or premiums owed after
December 31, 1997 under any Sunburst Welfare Plan in respect of any Sunburst
Qualified Beneficiary, and Choice and the Choice Subsidiaries shall have no
liability or obligation with respect thereto.
(d) Continuation of Sponsorship of Sunburst Welfare Plans. As soon as
-----------------------------------------------------
practicable after the date hereof and effective as of the Distribution Date,
Sunburst shall take, or cause to be taken, all action necessary and appropriate
to continue to administer the Sunburst Welfare Plans and to provide benefits
thereunder for all Retained Individuals and Sunburst Qualified Beneficiaries
who, immediately prior to the Distribution Date, were participants in or
otherwise entitled to benefits under the Sunburst Welfare Plans and to provide
benefits through December 31, 1997 to Choice Individuals. Sunburst 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, 1997 under the Sunburst Welfare Plans. Choice will provide
Sunburst, as soon as practicable after the Distribution Date (with the
cooperation of Sunburst to the extent that relevant information is in the
possession of Sunburst or a Retained Subsidiary, and in accordance with Section
5.02), with a list of individuals (and dependents thereof) employed by Sunburst
or any Retained Subsidiary who were, to the best knowledge of Choice,
participants in or otherwise entitled to benefits under the existing Sunburst
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 Sunburst. Choice shall make
-------------------------------------------
monthly payments to Sunburst in an amount equal to $216 multiplied by the number
of Choice Employees who are participants in a Sunburst Medical Plan with respect
to the time period beginning on the Distribution Date and ending on December 31,
1997. Such payments shall be made to Sunburst on a monthly basis no more than
ten (10) days after the end of each month ending after the Distribution Date
through December 31, 1997. In consideration of receipt of such payments,
Sunburst 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 Sunburst Welfare Plans and will not modify the
procedures attributable to the administration
- 23 -
<PAGE>
and implementation of the Sunburst 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,
1997.
(f) Continuation of Sponsorship of Sunburst Hospitality Corporation
---------------------------------------------------------------
Short-Term Disability Plan. On the Distribution Date, Sunburst shall retain (or
- --------------------------
shall cause a Retained Subsidiary to assume) sole responsibility for all benefit
payments due under the Sunburst Hospitality Corporation 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, 1998, 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, 1998, were participants in or otherwise entitled
to benefits under the Sunburst 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
Sunburst Welfare Plans.
(b) Liability for Claims. As of January 1, 1998, 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, 1998 in respect of any Choice Individual, and Sunburst and the
Retained Subsidiaries shall have no liability or obligation with respect
thereto.
(c) Continuation Coverage Administration. As of January 1, 1998,
------------------------------------
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, 1997, and Sunburst and
the Retained Subsidiaries shall have no liability or obligation with respect
thereto.
- 24 -
<PAGE>
(d) Continuation Coverage Claims. As of the January 1, 1998, 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, 1998 under any Choice Welfare Plans (or successor thereto) in respect
of any Choice Qualified Beneficiary, and Sunburst 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 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
Sunburst Hospitality Corporation 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 Sunburst 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 Sunburst 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 Cut-off Date, and Sunburst 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 Sunburst 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 Sunburst on the Cut-off Date.
(b) Post-Distribution Transfers. Through May 31, 1999, an Employee
---------------------------
who leaves the service of one party to
- 25 -
<PAGE>
immediately begin employment with the other party (i.e., leaving Sunburst
employment to work for Choice, or leaving Choice employment to work for
Sunburst) 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 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 Sunburst on the same terms and conditions as Sunburst employee
discounts, and employees of Sunburst 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 Sunburst 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 Sunburst or Choice or any Retained Subsidiary or
Choice Subsidiary to amend such Plan or terminate its participation therein
which Sunburst 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
- 26 -
<PAGE>
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. Sunburst and Choice acknowledge that
-------------
Sunburst 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, Sunburst
(and any Retained Subsidiary 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 Sunburst 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 Sunburst as the
predecessor and Choice as the successor employer for the entire year during
which the Distribution takes place. Sunburst shall provide all required Forms
W-2 to all Retained Individuals reflecting all wages and taxes paid and withheld
by Sunburst 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 Sunburst shall be assigned to either
Sunburst 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 Sunburst or Choice, as the case may be.
(b) Forms W-4 and W-5. Choice and Sunburst 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 Sunburst 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
- -----------
- 27 -
<PAGE>
garnishments, tax levies, child support orders, and wage assignments in effect
with Sunburst 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 Sunburst.
(d) Authorizations for Payroll Deductions. Unless otherwise
-------------------------------------
prohibited by this or another agreement entered into in connection with the
Distribution, or by a Plan document, with respect to Employees with
authorizations for payroll deductions in effect with Sunburst 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 Sunburst. 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 Sunburst to the contrary, Choice and Sunburst
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 Sunburst
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 2.08(b)
governing post-Distribution transfers through May 31, 1999, Choice and Sunburst
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 Sunburst covered by a Collective Bargaining Agreement on the Cut-off Date who
become Choice Employees or Retained Employees, Choice and Sunburst promise and
covenant to each other not to take any action which disrupts or
- 28 -
<PAGE>
otherwise negatively impacts the labor relations of the other. Choice and
Sunburst will diligently work to substitute the appropriate employer for
Sunburst in Collective Bargaining Agreements.
Section 3.04 Claims.
------
(a) Scope. This Section is intended to allocate all liabilities for
-----
employment-related claims involving Sunburst or Choice including, but not
limited to, claims against either or both Sunburst 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 Sunburst 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 Sunburst
from any employment-related claims of a Choice Individual arising on or before
the Cut-off Date.
(ii) Sunburst shall indemnify, defend and hold harmless Choice
from any employment-related claims of a Retained Individual arising on or before
the Cut-off Date.
- 29 -
<PAGE>
(e) Distribution and Other Joint Liability Claims. Where employment-
---------------------------------------------
related claims alleging or involving joint and several liability asserted
against Choice and Sunburst are not separately traceable to liabilities relating
to Choice Individuals or Retained Individuals, any liability shall be
apportioned between Choice and Sunburst in accordance with the percentage that
each party's Employees represents of the combined 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
Sunburst shall equal the ratio of (i) the total number of Sunburst 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 Sunburst 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 Sunburst 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.
- 30 -
<PAGE>
Section 3.07 Assumption of Unemployment Tax Rates. Changes in state
------------------------------------
unemployment tax experience from that of Sunburst as of the Cut-off Date shall
be handled as follows. In the event an option exists to allocate state
unemployment tax experience of Sunburst, the Sunburst experience shall be
transferred to Choice if this results in the lowest aggregate unemployment tax
costs for both Sunburst and Choice combined, and the Sunburst experience shall
be retained by Sunburst if this results in the lowest aggregate unemployment tax
costs for Sunburst 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 Sunburst, 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"). Sunburst 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, Sunburst shall assume responsibility, if any, as employer for
all Employees returning to Sunburst 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 Sunburst 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 Sunburst.
- 31 -
<PAGE>
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
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 Sunburst 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. Sunburst 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.
- 32 -
<PAGE>
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.
Section 5.05 Severability of Provisions. Neither Sunburst 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 Sunburst
Sunburst Hospitality Corporation
10770 Columbia Pike
Silver Spring, MD 20901
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 Sunburst, Choice will give copies of all
of its notices, consents, approvals and other communications hereunder to any
lender to Sunburst or other person specified by Sunburst.
- 33 -
<PAGE>
Section 5.08 Further Action. Choice and Sunburst 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 Sunburst each agree that the waiver of
------
any default under any term or condition of this Agreement shall not constitute a
waiver of any subsequent default or nullify the effectiveness of that term or
condition.
Section 5.10 Governing Law. All controversies and disputes arising out
-------------
of or under this Agreement shall be determined pursuant to the laws of the State
of Maryland, regardless of the laws that might be applied under applicable
principles of conflicts of laws.
Section 5.11 Consent to Jurisdiction. The parties irrevocably submit to
-----------------------
the exclusive jurisdiction of (a) the Courts of the State of Maryland,
Montgomery County, or (b) any federal district court in the State of Maryland
where there is federal jurisdiction for the purpose of any suit, action or other
Court proceeding arising out of this Agreement.
Section 5.12 Entire Agreement. This Agreement and the Distribution
----------------
Agreement constitute the entire understanding between the parties hereto, and
supersede all prior written or oral communications, relating to the subject
matter covered by said agreements. No amendment, modification, extension or
failure to enforce any condition of this Agreement by either party shall be
deemed a waiver of any of its rights herein. This Agreement shall not be
amended except by a writing executed by the parties.
Section 5.13 Commercially Reasonable Terms and Conditions. The terms and
--------------------------------------------
provisions of this Agreement are intended to reflect commercially reasonable
terms and conditions (including, but not limited to, pricing) that are at least
as favorable and as competitive to Choice as the terms and conditions Sunburst
would grant or require of third parties for substantially similar goods and
services.
- 34 -
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Choice Hotels International, Inc. (to be
renamed "Sunburst Hospitality
Corporation"), a Delaware corporation
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
Choice Hotels Franchising, Inc. (to be
renamed "Choice Hotels International,
Inc."), a Delaware corporation
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
- 35 -
<PAGE>
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>
Exhibit 10.03
FORM OF EMPLOYEE BENEFITS ADMINISTRATION AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of
_______________, 1997, by and between Choice Hotels Franchising, Inc. (to be
renamed Choice Hotels International, Inc.) a Delaware corporation ("Choice") and
Choice Hotels International, Inc. (to be renamed Sunburst Hospitality Corp.) a
Delaware corporation ("Sunburst").
R E C I T A L S
WHEREAS, pursuant to a Distribution Agreement (the "Distribution
Agreement") dated as of _____________, 1997, Sunburst and Choice 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, Sunburst and
Choice also have entered into an Employee Benefits & Other Employment Matters
Allocation Agreement (the Allocation Agreement") dated as of _________________,
1997, pursuant to which Sunburst and Choice 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 Sunburst on the Distribution Date;
and
WHEREAS, the personnel and systems formerly utilized in the maintenance and
administration of the aforesaid Sunburst employee plans and programs shall be
transferred to Choice; and
WHEREAS, Sunburst desires to retain Choice in the maintenance and
administration of Sunburst's employee plans and programs, and Choice 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, Sunburst and Choice agree as follows:
1. Definitions. As used in this Agreement, the following capitalized
-----------
terms shall have the meanings indicated:
1
<PAGE>
"Accounting Services" means the services provided by Choice to or on behalf
-------------------
of Sunburst or any participant in any of the Plans, as provided under Section
2.1 and Exhibit B of this Agreement.
"Ancillary Agreement" shall have the meaning described in the Distribution
-------------------
Agreement.
"Benefit and Compensation Additional Consulting Services" means the services
-------------------------------------------------------
provided by Choice to or on behalf of Sunburst 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 Hotel Operation 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 Hotel Operation 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 Choice deferred compensation plan or a Choice 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 Choice to or on
-----------------------------
behalf of Sunburst 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 Sunburst to a Qualified Beneficiary as required by COBRA.
"Compliance Services" means the services provided by Choice to or on behalf of
-------------------
Sunburst or any participant in any of the Plans, as provided under Section 2.5
and Exhibit F of this Agreement.
2
<PAGE>
"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.
"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 Choice Care Common Stock
------------
all the outstanding shares of Sunburst 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
-----------------
Choice 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 Choice to or on behalf of
------------------
Sunburst 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).
------
"Hotel Operation Business" means any business or operation of Sunburst or its
------------------------
subsidiaries which is, pursuant to the Distribution Agreement, to be conducted,
following the Distribution, by Sunburst.
"Imprest Account(s)" means the account(s) established pursuant to Section 4.1 of
------------------
this Agreement.
"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 Sunburst Medical/Dental Plans, Welfare Plans, Retirement
-----
Plans, Deferred Compensation Plans, and Stock Plans set forth in the attached
Schedule A, as it
3
<PAGE>
may be amended from time to time with the written consent of both parties to
this agreement.
"Plan Administrator" means the administrator as defined in ERISA Section
------------------
3(16)(A).
"Plan Administration Services" means the services provided by Choice to or on
----------------------------
behalf of Sunburst 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 Hotel
---------------------
Operation 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.
4
<PAGE>
2.0 Duties of Choice. Upon the request of Sunburst, Choice shall:
----------------
(a) Provide the Services to Sunburst 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
Choice'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, Choice
shall exercise the standards of care set forth in Section 6.0.
It is expressly understood that in providing the Services (any other services)
to Sunburst, Choice 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 Choice shall be an independent contractor in
providing the Services (any other services) under this Agreement, and not as
employee or agent of Sunburst. Choice agrees to provide such Services only if
it reasonably believes the service will not interfere with the conduct of the
business of Choice or pose an unreasonable burden.
2.1 Accounting Services. Upon the request of Sunburst, Choice shall
-------------------
provide the Accounting Services to Sunburst, as set forth in Exhibit B, to
assist Sunburst in meeting its accounting and financial reporting obligations
under the Plans.
2.2 Benefit and Compensation Additional Consulting Services. Upon the
-------------------------------------------------------
request of Sunburst, Choice shall provide Benefit and Compensation Consulting
Services, as set forth in Exhibit C, to Sunburst to assist Sunburst in updating
employee benefit plans and establishing competitive compensation practices.
2.3 Plan Administration Services. Upon the request of Sunburst, Choice
----------------------------
shall provide the Plan Administration Services, as set forth in Exhibit D, to
assist in the administration of its Plans.
5
<PAGE>
2.4 COBRA Administration Services. Upon the request of Sunburst, Choice
-----------------------------
shall provide the COBRA Administration Services, as set forth in Exhibit E, to
assist Sunburst, the Plan Administrator and the Medical/Dental Plans in the
performance of their responsibilities under COBRA.
2.5 Compliance Services. Upon the request of Sunburst, Choice or its
-------------------
contractors shall provide the Compliance Services, as set forth in Exhibit F, to
assist Sunburst 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 Sunburst, Choice 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. Choice shall obtain and maintain
customary such fiduciary insurance coverage. Other than the fiduciary services
set forth in Exhibit G, Choice 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
Sunburst. Except as otherwise specified in this Section 2.6, Choice 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 Sunburst. Except as provided in Section 2.6, Sunburst 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, Sunburst
shall, except to the extent expressly delegated to Choice:
(a) Provide Choice with assistance or authorizations to third parties
reasonably required for Choice to perform the Services and any other
services under this Agreement;
(b) Obtain and maintain qualification for all tax-qualified, tax-
exempt or otherwise tax-favored Plans;
(c) Request from Sunburst shareholders share authorizations
sufficient to meet awards under the Stock Plans;
6
<PAGE>
(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 Sunburst'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 Choice with any and all information in its possession
necessary to enable Choice to perform the Services under this
Agreement.
(i) At the request of Choice, maintain the Imprest Account(s) with
sufficient funds to satisfy expenses of the Plans as they become due
and payable. Choice 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). Sunburst will open and maintain an imprest
------------------
account(s) against which Choice 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
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. Sunburst shall pay Choice for
--------------------------------
services requested and rendered hereunder as follows:
7
<PAGE>
(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 Choice to perform the service; (iii) usage
based charges for which Sunburst 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, Sunburst shall pay any and all
additional costs and expenses which Choice may incur for the express
purpose of providing services to Sunburst.
(c) Sunburst shall pay Choice on a time and materials basis for all costs
incurred by Choice in converting Sunburst business information and records
from Choice services systems to either a third party provider or to
Sunburst.
(d) Sunburst shall pay Choice for all services provided hereunder within
thirty (30) days after receipt of an invoice therefor. Sunburst shall pay
fixed charges in advance on the first business day of the applicable
Accounting Period. Any payments not made by Sunburst 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.
5.0 Warranties and Limitations of Liability.
---------------------------------------
(a) CHOICE 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. Choice 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."
(b) Choice's sole liability to Sunburst 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 Choice hereunder which are caused solely by Choice shall be to
furnish correct information, payment, and/or adjustment in the Services provided
hereunder provided that Sunburst promptly advises Choice thereof.
8
<PAGE>
(c) Choice's sole liability to Sunburst 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 Choice'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. Choice will maintain the same
back-up procedures for Sunburst's information that Choice has for its own
information.
(d) CHOICE SHALL NOT BE LIABLE FOR ANY ERRORS, OMISSIONS, DELAYS, OR
LOSSES UNLESS CAUSED SOLELY BY ITS CRIMINAL CONDUCT, FRAUD, BAD FAITH OR GROSS
NEGLIGENCE. SUNBURST AGREES THAT IN NO EVENT WILL CHOICE BE LIABLE FOR
INCIDENTAL, INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES. SUNBURST FURTHER
AGREES THAT IN NO EVENT WILL THE TOTAL AGGREGATE LIABILITY OF CHOICE FOR ANY AND
ALL CLAIMS, LOSSES, OR DAMAGES ARISING UNDER THIS AGREEMENT AND FOR THE SERVICES
PERFORMED HEREUNDER EXCEED THE VALUE OF SUNBURST'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 Choice'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 Choice (e.g. contract, negligence or otherwise).
6.0 Indemnification: Standard of Care. Choice 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 Choice Held Harmless. Sunburst will indemnify, defend and hold
--------------------
harmless Choice and its directors, officers and employees from Losses (as
defined below) resulting from or arising out of or in connection with Choice's
actions or failure to act where such action or failure to act is required by any
Sunburst employment, compensation or benefits policy or practice, other than
Losses for which Sunburst is indemnifiable by Choice 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, Sunburst will indemnify Choice 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 Sunburst as a
9
<PAGE>
result of such participant or beneficiary recognizing income from benefits
payable under any Plan.
6.2 Sunburst Held Harmless. Choice will indemnify, defend and hold
----------------------
harmless Sunburst 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 Choice'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 Sunburst, 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, Choice will provide
all necessary information and assistance to Sunburst (at Sunburst'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 Sunburst is
primarily liable.
7.0 Access to Information: Cooperation. Subject to the requirements of
-----------------------------------
Section 24.0, Sunburst 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
Choice'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 the parties in
writing; provided, however, that Sunburst may terminate this Agreement or any
-------- -------
services provided hereunder at any time for any reason or no reason by sending
written notice to Choice upon sixty (60) days' prior notice to Choice 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
10
<PAGE>
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. Choice and Sunburst 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, Choice 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 Choice's reasonable control, including limitations upon the availability
of communications facilities or failures of other communications equipment or
failure of Sunburst to prepare data properly for input into the Corporate
Systems. However, nothing in this provision shall relieve Sunburst of any
liability for failure to make any payments required to be made under this
Agreement because Sunburst Employees are on strike or engaged in a lock-out,
work stoppage or slow-down, or labor disputes.
11
<PAGE>
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 Choice nor Sunburst 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.
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:
12
<PAGE>
To Choice:
Choice Hotels International, Inc.
10750 Columbia Pike
Silver Spring, MD 20901
Attention: General Counsel
To Sunburst:
Sunburst Hospitality Corp.
10750 Columbia Pike
Silver Spring, MD 20901
Attention: General Counsel
17.0 Further Action. Choice and Sunburst 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. Choice and Sunburst 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.
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
13
<PAGE>
reflect commercially reasonable terms and conditions (including, but not limited
to, pricing) that in the reasonable judgment of Choice are at least as favorable
and as competitive to Sunburst as the terms and conditions Choice would grant or
require of third parties for substantially similar goods and services.
23.0 Representatives. Sunburst and Choice 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. Choice and Sunburst 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.
14
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
Choice Hotels International, Inc., a
Delaware corporation
By:
------------------------------------
Name:
-----------------------------
Title:
----------------------------
Choice Hotels Franchising, Inc., a
Delaware corporation
By:
------------------------------------
Name:
-----------------------------
Title:
----------------------------
15
<PAGE>
EXHIBIT A
REPRESENTATIVES
- Sunburst
-----------------------------------------
- Choice
-----------------------------------------
16
<PAGE>
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. Choice 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 Sunburst'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 Sunburst self-insured Health and
Welfare Plans;
(j) Beginning January 1, 1998, develop, recommend, and maintain records
showing employer contribution amounts under each of the Health and
Welfare Plans relating to the total cost of Health and Welfare Plans
for Sunburst to accrue on its books; and
17
<PAGE>
B.2 Accounting Services for Retirement Plans. Choice 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 Sunburst'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 Sunburst to accrue on
its books; and
(j) Manage the process of withholding applicable payroll taxes otherwise
payable by Sunburst, where required.
18
<PAGE>
B.3 Accounting Services for Stock Plans. Choice 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 Sunburst 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 Sunburst, where required.
19
<PAGE>
B.4 Accounting Services for Deferred Compensation Plans. Choice 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 Sunburst to
accrue on its books; and
(e) Manage the process of withholding applicable payroll taxes otherwise
payable by Sunburst, where required.
20
<PAGE>
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
-------------------------------------------------------------------
Choice shall:
Assist Sunburst annually to identify desired Additional Consulting
services and appropriate responsibility.
C.2 Benefit Additional Consulting Services for Retirement Plans. Choice
-----------------------------------------------------------
shall:
Assist Sunburst annually to identify desired Additional Consulting
services and appropriate responsibility.
C.3 Benefit Additional Consulting Services for Stock Plans. Choice
------------------------------------------------------
shall:
Assist Sunburst annually to identify desired additional consulting
services and appropriate responsibility.
C.4 Benefit Additional Consulting Services for Deferred Compensation
----------------------------------------------------------------
Plans. Choice shall:
- -----
Assist Sunburst annually to identify desired additional consulting
services and appropriate responsibility.
C.5 Compensation Additional Consulting Services for Sunburst. Choice
--------------------------------------------------------
shall:
Assist Sunburst annually to identify desired additional consulting
services and appropriate responsibility.
21
<PAGE>
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. Choice
---------------------------------------------------------
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 Sunburst to negotiate contracts with insurance carriers
and HMOs;
(d) Assist Sunburst to negotiate contracts with insurance carriers
and HMOs;
(e) Assist Sunburst 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 Sunburst.
(g) Oversee Sunburst 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;
(k) Assist Sunburst in pursuing recovery of overpayments made by
medical and dental claim administrators;
22
<PAGE>
(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.
23
<PAGE>
D.2 Plan Administration Services for Retirement Plans. Choice 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 Sunburst;
(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.
24
<PAGE>
D.3 Plan Administration Services for Stock Plans. Choice 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 Sunburst;
(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.
25
<PAGE>
D.4 Plan Administration Services for Deferred Compensation Plans. Choice
------------------------------------------------------------
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 Sunburst.
(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.
26
<PAGE>
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. Choice
------------------------------------------------------
shall:
(a) Send initial COBRA notices to Sunburst employees (and the
dependents thereof), as identified by Sunburst, 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 Sunburst or Choice, 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 Sunburst.
(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 Sunburst, where
required;
27
<PAGE>
(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 Sunburst;
(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 Sunburst 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.
28
<PAGE>
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. Choice shall:
------------------------------------------------
(a) Assist Sunburst 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 Sunburst 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 Sunburst to prepare for and respond to any government
audit or enforcement action with respect to the Health and
Welfare Plan.
29
<PAGE>
F.2 Compliance Services for Retirement Plans. Choice shall:
----------------------------------------
(a) Assist Sunburst 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 Sunburst in the preparation of application for tax
exempt status for its Retirement Plans;
(c) Assist Sunburst 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 Sunburst to prepare for and respond to any government
audit or enforcement action with respect to the Retirement
Plans.
30
<PAGE>
F.3 Compliance Services for Stock Plans. Choice shall:
-----------------------------------
(a) Assist Sunburst 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 Sunburst 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 Sunburst to prepare for and respond to any government
audit or enforcement action with respect to the Retirement
Plans.
31
<PAGE>
F.4 Compliance Services for Deferred Compensation Plans. Choice shall:
---------------------------------------------------
(a) Assist Sunburst 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 Sunburst 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 Sunburst to prepare for and respond to any government
audit or enforcement action with respect to the Deferred
Compensation Plans.
32
<PAGE>
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. Choice 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 Sunburst's approval.
33
<PAGE>
G.2 Fiduciary Services for Retirement Plans. Choice 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 Sunburst'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
practices and make final decisions with respect thereto, subject
to Sunburst's approval.
34
<PAGE>
G.3 Fiduciary Services for Stock Plans. Choice 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 Sunburst's approval.
35
<PAGE>
G.4 Fiduciary Services for Deferred Compensation Plans. Choice 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 Sunburst's approval.
36
<PAGE>
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
37
<PAGE>
<TABLE>
<CAPTION>
RETIREMENT PLANS STOCK PLANS
---------------- -----------
<S> <C>
Sunburst Hospitality Corp. Retirement Sunburst Hospitality Corp. Employee
Savings and Investment Plan Stock Purchase Plan
Sunburst Hospitality Corp. Non-Qualified
Retirement Savings and Investment Plan
Sunburst Hospitality Corp. Supplemental
Executive Retirement Plan
</TABLE>
38
<PAGE>
DEFERRED COMPENSATION PLAN
- --------------------------
Sunburst Hospitality Corp.
Deferred Compensation Plan
39
<PAGE>
Exhibit 10.04
FORM OF TAX ADMINISTRATION AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of
_________________, 1997 by and between CHOICE HOTELS INTERNATIONAL, INC. (to be
renamed Sunburst Hospitality Corporation, a Delaware corporation ("Sunburst"),
and CHOICE HOTELS FRANCHISING, 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 ____________, 1997, Choice and Sunburst have agreed to
enter into this agreement relating to certain tax administration matters on the
terms and conditions set forth herein; and
WHEREAS, Choice shall retain the personnel and systems formerly utilized in
the administration of the services described herein; and
WHEREAS, Sunburst desires to retain Choice as described herein, and Choice
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, Sunburst and Choice agree as follows:
1. Definitions. As used in this Agreement, the terms indicated below shall have
-----------
the following meanings:
"Distribution" means the distribution to the holders of Choice Hotels
------------
International, Inc. Common Stock of all the outstanding shares of Choice
Hotels Franchising, Inc. Common Stock.
"Distribution Date" means the date on which the Distribution shall be
-----------------
effected.
"Hotel Business" shall mean any business or operation of Sunburst and its
--------------
subsidiaries (as defined in the Distribution Agreement) which is to be
conducted following the Distribution.
"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
in the United States.
"Related Agreement" shall have the meaning described in the Distribution
-----------------
Agreement.
<PAGE>
"Tax Claim" means a claim by a Taxing Authority for sales, use,
---------
occupancy, or any other taxes (other than any income 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
the Hotel Business and which under the Distribution Agreement or any Related
Agreement is charged to Sunburst.
"Taxing Authority" means any Country, State, County, Municipality, City
----------------
or other governmental entity legally empowered to tax Sunburst properties or
operations.
2.1 Tax Claim Administration Services. Upon request of Sunburst, Choice
---------------------------------
shall provide the services described in Exhibit B specifically requested by
Sunburst. Choice will promptly notify Sunburst in writing of any Tax Claims for
which it receives notice. Sunburst shall have full authority to defend and
settle all Tax Claims. Choice will not protest, settle, compromise or pay any
Tax Claims (except under protest), without the prior written consent of
Sunburst. Choice agrees to provide such services only if it reasonably believes
the service will not interfere with the conduct of the business of Choice or
pose an unreasonable burden.
2.2 Standard of Care. All services provided hereunder shall be administered
----------------
in accordance with Choice's standard policies, procedures and practices in
effect as of the date hereof and as may be changed hereafter in the normal
course and as more particularly described below, or as otherwise specified in
accordance with the terms thereof. In so doing, Choice 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. Sunburst will reimburse Choice for any Tax Claims for
-------------
which Choice is ultimately held liable, other than Tax Claims for which Sunburst
is entitled to indemnification under Section 4(a) hereof, together with all
reasonable out-of-pocket expenses including legal fees incurred by Choice in
protesting or disputing any Tax Claim or endeavoring to obtain a refund at
Sunburst's request.
3.2 Pricing and Payment for Services. Sunburst shall pay Choice 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; (ii) fixed fee based charges,
meaning a fixed amount per accounting period for Choice to perform the
service; (iii) usage based charges for which Sunburst will pay
2
<PAGE>
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) Sunburst shall pay any and all reasonable additional costs and
expenses which Choice may incur for the express purpose of providing
services to Sunburst hereunder.
(c) Sunburst shall pay Choice for all services provided hereunder within
thirty (30) days after receipt of an invoice therefor. Sunburst will
remit to Choice the amount of any Tax Claims payable by Choice before
Choice is required to remit such amount to any Taxing Authority, provided
that Sunburst has received prompt notification of such. If Choice
subsequently recovers any amounts paid by Sunburst hereunder or if Choice
recovers any Tax Claim previously paid, it will remit such amounts to
Sunburst within thirty (30) days of receipt. Sunburst shall pay fixed
charges in advance on the first business day of the applicable Accounting
Period. Any payments not made by Sunburst to Choice or not made by Choice
to Sunburst, when due shall bear interest, computed daily, from the date
due to the date of payment at a rate equal to the Prime Rate plus two (2)
percentage points, as same may vary from time to time.
4. Indemnification.
---------------
(a) Choice will defend, indemnify and hold harmless Sunburst, its
subsidiaries, affiliates, directors, officers, employees and agents from
Tax Claims arising from (i) Choice's failure to file a tax return
required hereunder when due or (ii) Choice's failure to pay the tax shown
as due on any tax return applicable to the Hotel Business unless in the
case of (ii), such Tax Claim is being contested by Choice or a Choice
subsidiary in good faith on the date of this Agreement.
(b) Sunburst will defend, indemnify and hold harmless Choice, its
subsidiaries, affiliates, directors, officers, employees and agents from
any Tax Claims which are not subject to indemnification by Choice
pursuant to Section 4(a) above, and any out-of-pocket expenses incurred
by Choice in protesting or disputing any Tax Claims at Sunburst's
request.
(c) Sunburst shall indemnify, defend and hold harmless Choice and its
subsidiaries, and Choice shall indemnify, defend and hold harmless
Sunburst and its subsidiaries from and 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 Internal Revenue Code and interest which is in
respect of the penalty portion of an assessment), or accountants' or
attorney fees, arising out of fraudulent or negligently
3
<PAGE>
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. Sunburst and its authorized agents will be given
---------------------
reasonable access to and may make copies of all information relating to Tax
Claims, Choice's time and expense charges for providing the services provided
hereunder, and Choice's out-of-pocket expenses. Sunburst and its authorized
agents may, upon fourteen (14) days written notice, annually audit Choice'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. Choice will retain all information relating to Tax Claims in
accordance with the retention policies in the Distribution Agreement, with
Choice'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, this Agreement shall automatically renew each Fiscal Year
thereafter for the extended term of said Fiscal Year, but shall not extend past
the last day of the 30th month following the Distribution Date; provided,
--------
however, that Sunburst may terminate this agreement or any services provided
- -------
hereunder at any time for any reason or no reason upon sixty (60) days' prior
written notice to Choice. 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)
relating to any such material default. 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
4
<PAGE>
(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. Choice and Sunburst 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, accidents, riots, acts of God, acts of United States' enemies, laws,
orders or at the insistence or result of any governmental authority or resulting
from any actions of a governmental authority, or any other event beyond each
other's reasonable control.
9. Relationship of Parties. Nothing in this Agreement shall be deemed or
-----------------------
construed by the parties or any third party as creating the relationship of
principal and agent, partnership or joint venture between the parties, it being
understood and agreed that no provision contained herein, and no act of the
parties, shall be deemed to create any relationship between the parties.
10. Assignment. Neither party shall, without the prior written consent of
----------
the other, assign any rights or delegate any obligations under this Agreement,
such consent not to be unreasonably withheld, conditioned or delayed.
11. Headings. The headings used in this Agreement are inserted only for
--------
the purpose of convenience and reference, and in no way define or limit the
scope or intent of any provision or part hereof.
12. Severability of Provisions. Neither Choice nor Sunburst 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.
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):
5
<PAGE>
to Choice:
Choice Hotels International, Inc.
10750 Columbia Pike
Silver Spring, MD 20901
Attention: General Counsel
to Sunburst
Sunburst Hospitality Corporation
10770 Columbia Pike
Silver Spring, MD 20901
Attention: General Counsel
15. Further Action. Choice and Sunburst 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. Choice and Sunburst each agree that the waiver of any default
------
under any term or condition of this Agreement shall not constitute any waiver of
any subsequent default or nullify the effectiveness of that term or condition.
17. Governing Law. All controversies and disputes arising out of or under
-------------
this Agreement shall be determined pursuant to the laws of the State of
Maryland, United States of America, regardless of the laws that might be applied
under applicable principles of conflicts of laws.
18. Consent to Jurisdiction. The parties irrevocably submit to the
-----------------------
exclusive jurisdiction of (a) the Courts of the State of Maryland in Montgomery
County, and (b) the United States District Court for the State of Maryland for
the purposes of any suit, action or other proceeding arising out of this
Agreement.
19. Commercially Reasonable Terms and Conditions. The terms and provisions
--------------------------------------------
of this Agreement are and shall reflect commercially reasonable terms and
conditions (including, but not limited to, pricing) that are at least as
favorable and as competitive to Sunburst as the terms and conditions Choice
would grant or require of third parties for substantially similar goods and
services.
20. Liaisons. Sunburst and Choice 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
6
<PAGE>
to so act. The initial Representatives are named on Exhibit A. Each party shall
have the right at any time and from time to time to replace its Representative
by giving notice in writing to the other party setting forth the name of (i) the
Representative to be replaced and (ii) the replacement, and certifying that the
replacement Representative is authorized to act for the party giving the notice
in all matters relating to this Agreement.
21. Other Agreements. Notwithstanding anything to the contrary contained
----------------
herein, Sunburst shall not be charged under this Agreement for any services
which are required to be performed under any operating lease or other agreement
between Sunburst and Choice or their respective subsidiaries.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
CHOICE HOTELS FRANCHISING, INC., a
Delaware corporation
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
CHOICE HOTELS INTERNATIONAL, INC., a
Delaware corporation
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
7
<PAGE>
EXHIBIT A
REPRESENTATIVES
[TBO] Choice Hotels International, Inc.
Terry Ingalsbe - Choice Hotels Franchising, Inc.
8
<PAGE>
EXHIBIT B
SERVICES
[ATTACHED]
9
<PAGE>
MAINTENANCE OF FIXED ASSETS
(FEDERAL, AMT & ACE)
SCHEDULE OF SERVICES
1. Review Federal status and regulations for law changes; perform research as
required.
2. Extract monthly fixed asset data from PeopleSoft Asset Management System.
This includes additions, adjustments and retirements.
3. Classify monthly additions by asset type and depreciation method. Submit
corrections to Asset Management 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 Asset Management
department.
8. Review PeopleSoft Asset Management System for luxury auto limitations
calculations. Submit corrections as needed.
9. Extract reports from PeopleSoft Asset Management System as needed for special
projects or projections.
10
<PAGE>
EXHIBIT 10.05
FORM OF TAX SHARING AGREEMENT
THIS AGREEMENT, executed this __ day of ________________, 1997, is entered
into by and among Choice Hotels Franchising, Inc. (to be renamed Choice Hotels
International, Inc.), a Delaware corporation ("Choice"), Choice Hotels
International, Inc. (to be renamed [Sunburst Hospitality Corporation ) a
Delaware corporation ("Sunburst"), and all direct and indirect subsidiaries of
one or both of Choice and Sunburst.
RECITALS
A. Choice, Sunburst, and the subsidiaries of Choice and Sunburst 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 Sunburst, Sunburst will distribute all of its stock in Choice to the
common shareholders of Sunburst 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 "Sunburst Group") of which Sunburst is the
common parent.
C. The parties hereto desire to allocate their respective federal, state,
and local income tax liabilities, assess 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 short
period commencing November 1, 1996 and ending May 31, 1997 ("Short 97"); (b)the
period commencing June 1, 1997 and ending December 31, 1997; (i) (" Second Short
97") the period commencing June 1, 1997 and ending on the Distribution Date
("Stub 97"); and (c) where relevant, the short period commencing on the date
after the Distribution Date and ending on December 31, 1997 ("Second Stub 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, among other things, audits by the Internal Revenue Service (the "Service")
and other taxing authorities and judicial determinations, 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 certain periods as provided
herein (2) the retention and maintenance of all relevant records necessary
1
<PAGE>
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 proceedings with appropriate governmental
authorities which could result in a redetermination of tax liabilities (for
certain periods as provided herein) 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)
(1)-(8) of the Code.
(b) "Choice" is defined in the preamble.
(c) "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.
(d) "Code" is defined in the preamble.
(e) "Common Parent" shall have the meaning attributed to that term in the
Consolidated Return Regulations
(f) "Consolidated Return Regulations" is defined in section 4 hereof.
(g) "Distribution" shall mean the distribution by Sunburst of all its stock
in Choice to its shareholders.
(h) "Distribution Date" shall mean the date on which the Distribution
occurs.
"Fiscal Year 1997" shall mean the period of time between June 1, 1996 and
May 31, 1997.
(i) "Service" shall mean the Internal Revenue Service.
(j) "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 Sunburst Group and
one or more Members of the Choice Group, whether such corporations
joined in the filing of returns on a consolidated, combined, or unitary
basis or otherwise.
2
<PAGE>
(k) "Joint Return Deficiencies/Refunds" is defined in the preamble.
(l) "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.
(m) "Minimum Tax Credit" is defined in section 5 hereof.
(n) "Regulations" is defined in the preamble.
(o) "Separate Contest" shall mean a Tax Contest involving only Members of
either the Choice Group or the Sunburst Group.
(p) "Short Calendar Year 1997" shall mean the period of time between
June 1, 1997 till December 31, 1997.
(q) "Sunburst 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 Sunburst is the Common Parent.
(r) "Tax Attributes" shall mean any losses, credits and other tax
attributes relating to taxes that may be carried forward or back by any
Member of the Sunburst 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.
(s) "Taxes" shall mean (i) all federal income taxes and state, local, and
foreign income and franchise (to the extent based upon or measured by
net income) 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).
(t) "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 liabilities for taxes,
------------------------
etc. of the Sunburst Group and its Members for Fiscal Year 1997, Short
Calendar Year 1997 and where relevant, Stub 97, Short 97, Second Stub
97, Second Short 97, the computations of the
3
<PAGE>
tax liabilities of the Sunburst 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 Sunburst and Choice for the
fiscal years ending prior to the beginning of Fiscal Year 1997.
(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
Sunburst Group pursuant to the Sunburst Group's historic tax allocation
method, described in section 1552(a)(2) of the Code.
(ii) With respect to Short Calendar Year 1997 if the consolidated
liability for Taxes of the Sunburst Group for Fiscal Year 1998 (the "97
Calendar Sunburst Liability") is less than the sum of the Taxes
allocated for Short Calendar Year 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 Calendar Sunburst 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 Stub 97 Taxes, Short 97 Taxes, Second Stub
97 Taxes and Second Short 97 Taxes (to be made by Sunburst for Short
Calendar Year 1997) will be made not later than 90 days following the
filing of the Federal consolidated income tax return of the Sunburst
Group for such period. With respect to the final allocations of Stub 97
Taxes, Short 97 Taxes, Second Stub 97 Taxes, and Second Short 97 Taxes,
Choice and/or its subsidiaries shall make payments to Sunburst and/or
its subsidiaries, or receive payments from Sunburst and/or its
subsidiaries based on the following principles:
(1) the payment shall equal the amount of the net adjustments, if any,
to taxable income or loss of Members of the Choice Group multiplied
by the applicable highest federal marginal rate of income taxation
on corporations in effect for the period for which the net
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 net adjustments, if
any, of the credits of Members of the Choice Group.
4
<PAGE>
(d) Manor Care Tax Sharing Agreement.
---------------------------------
Any additional amounts required to be paid by (or amounts owing to)
any of the parties hereto pursuant to the Tax Sharing Agreement, by
and among Manor Care, Inc. and Sunburst (and their subsidiaries),
dated November 1, 1996, shall be paid by (or paid to) the appropriate
party hereto in accordance with the provisions of this section as if
such provisions applied to such payments.
(e) Characterization of Payments.
-----------------------------
Any payment (other than interest thereon) between the parties made
hereunder shall be treated by all parties for all purposes as a
nontaxable intercompany settlement of liabilities existing immediately
before the Distribution or, to the extent appropriate, as a nontaxable
distribution or capital contribution.
SECTION 3. SEPARATE COMPANY LIABILITIES.
----------------------------
Notwithstanding the provisions of section 2 hereof, for all periods through
and including Short Calendar Year 1997, Taxes 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
Sunburst Group.
SECTION 4. ALLOCATION OF TAX ATTRIBUTES.
----------------------------
All Tax Attributes of the Sunburst Group will be allocated among Sunburst,
Choice, and their respective subsidiaries in accordance with the Regulations
promulgated pursuant to Section 1502 of the Code (the "Consolidated Return
Regulations") and, to the extent applicable, other provisions of the Code and
Regulations (and analogous provisions of state, local, or foreign law).
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 realizes a
Tax Attribute which Choice or such Member of the Choice Group, is
permitted or required to carry back to a prior taxable year of the
Sunburst Group or the prior taxable year of a Member of the Sunburst
Group (either on a consolidated or separate return basis), Sunburst (or
a Member of the Sunburst Group) shall file appropriate refund claims
within a reasonable period after being requested by Choice to do so in
writing provided that Sunburst has consented to such filing ( which
consent shall not be unreasonably withheld). Sunburst (or the Member of
the Sunburst Group receiving such refund) shall promptly remit to
Choice any refund of Taxes it receives with respect to any Tax
Attribute so carried back.
5
<PAGE>
(b) Sunburst Carrybacks. If for any taxable year Sunburst or a Member of
-------------------
the Sunburst Group realizes a Tax Attribute which Sunburst or such
Member of the Sunburst Group, is permitted or required to carry back to
one of its prior taxable years, Sunburst or the Member of the Sunburst
Group may file appropriate refund claims and shall be entitled to any
refund of Taxes resulting from such claims.
SECTION 6. CONDUCT OF TAX CONTESTS.
-----------------------
(a) "Joint Contests."
--------------
(i) The conduct of Joint Contests shall be the responsibility of
Sunburst. 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
Sunburst 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
shall be notified by Sunburst of such Joint Contest and Choice and/or
its subsidiaries, as appropriate, shall be entitled to 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 Joint
Contest in administrative and judicial proceedings. Choice and its
subsidiaries agree to notify Sunburst of any actual or proposed Tax
Contest of a consolidated federal or state income tax return of the
Sunburst 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. Sunburst 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. Sunburst may not agree to settle such a dispute without
the consent of Choice unless Sunburst 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 the Sunburst 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 complete authority to conduct such
6
<PAGE>
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 each Member of the Choice Group) and
-----------
Sunburst (and each Member of the Sunburst Group) shall provide the
assistance reasonably requested by the other party 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 by the Service or other taxing authority and/or judicial
determinations, payments in connection therewith, if any, made or received by or
among Choice, Sunburst, and their respective subsidiaries, shall be governed by
the following principles:
(a) Upon such redetermination, 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 pursuant to
Joint Contests, any increase in liabilities shall be paid to the
relevant taxing authority by, and any decrease in liabilities received
from the relevant taxing authority shall be paid to, Sunburst 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
Sunburst and/or its subsidiaries, or receive payments from Sunburst
and/or its subsidiaries based on the following principles:
(1) the payment shall equal the amount of the net adjustments, if any,
to taxable income or loss of Members of the Choice Group multiplied
by the applicable highest federal marginal rate of income taxation
on corporations in effect for the period for which the net
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 net adjustments, if
any, of the credits 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, Sunburst shall make a
payment to Choice equal to the amount of any resulting reduction in
items
7
<PAGE>
allocated to Members of the Choice Group to the extent such reduction
is attributable to income adjustments to Members of the Sunburst Group
and Choice shall make a payment to Sunburst equal to the amount of any
resulting reduction in items allocated to Members of the Sunburst 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 Distribution and any
transactions related thereto shall be borne entirely by Choice.
SECTION 8. RETENTION OF RECORDS: ACCESS TO RECORDS; COOPERATION AND ASSISTANCE.
-------------------------------------------------------------------
(a) Retention of Records.
--------------------
(i) Duties of Choice. Choice shall retain all tax returns, tax
----------------
reports, related work papers and schedules (along with all documents
that pertain to any such tax returns, reports or work papers) of it
and/or any of its subsidiaries which relate to a tax period ending on
or before May 31, 1998. Choice shall make such documents available to
Sunburst and/or its subsidiaries at Sunburst's request. Choice shall
not dispose of such documents without the permission of Sunburst.
(ii) Duties of Sunburst. Sunburst shall retain all tax returns, tax
------------------
reports, related work papers and schedules (along with all documents
that pertain to any such tax returns, reports or work papers) of it
and/or any of its subsidiaries which relate to a tax period ending on
or before May 31, 1998. Sunburst shall make such documents available to
Choice and/or its subsidiaries at Choice's request. Sunburst shall not
dispose of such documents without the permission of Choice.
(b) Access to Records.
-----------------
(i) Duties of Choice. Choice will permit Sunburst 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 members of the Choice
Group furnish, to Sunburst and its subsidiaries, as the case may be,
such additional information and documents with respect to consolidated
federal and state income tax returns filed in respect of periods ending
on or before May 31, 1998, as Sunburst or any of its subsidiaries may
from time to time reasonably request.
8
<PAGE>
(ii) Duties of Sunburst. Sunburst 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 Sunburst and
the other members of the Sunburst 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 Sunburst or
any of the members of the Sunburst Group furnish, to Choice and its
subsidiaries, as the case may be, such additional information and
documents with respect to consolidated federal and state income tax
returns filed in respect of periods ending on or before May 31, 1998,
as Choice or any of its subsidiaries may from time to time reasonably
request.
(c) Assistance and Cooperation. Sunburst (and Members of the Sunburst
--------------------------
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 or any combined state tax return filed by Sunburst 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 Sunburst 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.
(d) Confidentiality. Except as required by law or with the prior written
----------------
consent of the other party, all tax returns and related information
which are written in the scope of this Agreement shall be kept
confidential by the parties hereto and their representatives shall not
be declined to any other person or entity and shall be used only for
the purposes provided herein.
SECTION 9. PREPARATION OF TAX RETURNS: ESTIMATED PAYMENTS.
-----------------------------------------------
(a) FY 1997. Sunburst and Choice shall work together to prepare the
-------
consolidated, separate, and combined returns for Fiscal Year 1997 and
Short 97 Second Short 97. It shall be the responsibility of Choice 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) Short Calendar Year 1997. Choice shall prepare and timely file the
------------------------
consolidated returns for Second Short 97 In connection with the
preceding sentence, Sunburst and its subsidiaries will, on or prior to
June 15, 1998 with respect to Short Calendar Year 1997 (1) furnish to
Choice all information and documentation (with respect to Sunburst and
its subsidiaries) necessary or useful in the preparation of the
consolidated federal and state income tax returns for the Sunburst
Group for Short Calendar Year 1997 (2)
9
<PAGE>
permit Choice 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 Sunburst and its subsidiaries, wherever located; and
(3) furnish to Choice such additional information and documents in the
possession 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 Choice 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 Sunburst Group for Short
Calendar Year 1997. It shall be the responsibility of Sunburst to make
any payments required in connection therewith to the applicable taxing
authorities. Sunburst and its subsidiaries shall file its own tax
returns which are filed on a separate or combined basis for Short
Calendar Year 1997. Choice and its subsidiaries shall prepare and file
its own tax returns which are filed on a separate or combined basis for
Short Calendar Year 1997.
(c) Taxable Period Before FY 1997. All tax returns of the Sunburst Group
-----------------------------
which are filed on a consolidated or combined basis for tax periods
ending before May 31, 1997 were prepared and filed by Sunburst.
Sunburst shall be solely responsible for the payment of all Taxes for
such periods. Sunburst 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.
(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) Sunburst's Separate Returns. All tax returns of the Sunburst
---------------------------
Group which are filed on a consolidated, separate, or combined basis
for Sunburst and/or any of its subsidiaries for tax periods beginning
on or after the Distribution Date shall be prepared and filed by
Sunburst. Sunburst 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
Sunburst Group and its Members for FY 1997 and Short
10
<PAGE>
Calendar year 1997 shall be made by Sunburst. Sunburst 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 1997 and FY 1998 liability, as determined under the provisions of
section 2 hereof. Choice shall thereafter promptly pay such amount to
Sunburst or advise Sunburst of the basis for its disagreement. Choice
must make estimated payments for the Choice Group for periods beginning
on/after the Distribution Date.
SECTION 10. PAYROLL TAX REPORTING AND WITHHOLDING IN STOCK OPTIONS.
------------------------------------------------------
(a) Upon the exercise of any nonqualified stock option covered by Employee
Benefits and Other Employment Matters Allocation Agreement, by and
between Choice and Sunburst, dated as of ___________, 1997 the employer
of the employee exercising such option shall be responsible for
collecting from the employee and timely remitting to the applicable
taxing authority any required income, employment, payroll, or other tax
withholding with respect to the income to be recognized by such
employee as a result of such exercise, and shall include on such
employee's annual wage statement or other payroll tax reporting form
for the calendar year in which the option is exercised, the amount of
such income and withholdings. In addition, upon the exercise of any
nonqualified stock option covered by the Employee Benefits and Other
Employee Matters Allocation Agreement, the employer of the employee
exercising such option shall be responsible for paying to any
applicable taxing authority any taxes imposed on an employer in
connection with such exercise. If an employee exercises an option with
respect to stock other than his or her employer's stock, then the
issuer of that stock shall be required to provide the employer with
information sufficient to allow the employer to satisfy its withholding
and reporting obligations, including, without limitation, the number of
option shares exercised, the fair market value of the issuer's stock on
the date of exercise and the option price paid for the stock. The
issuer of such stock shall retain the stock to be issued upon the
exercise of an option by a person who is not an employee of such issuer
until such time as both the exercise price for the stock has been paid
and any required withholding with respect to the income to be
recognized by such person has been remitted to his or her employer, and
such employer, shall promptly notify the issuer when such required
withholding has been remitted. The employer of an employee exercising a
stock option covered by the Employee Benefits and Other Employee
Matters Allocation Agreement shall be entitled to claim any and all tax
deductions, to the extent permitted by law the income recognized by
such employee as a result of such exercise.
(b) If an employee is employed by both Sunburst and Choice, for the purpose
of this Section 10, such employee shall be treated as an employee of
Sunburst with respect to his or her Sunburst stock options and as an
employee of Choice with respect to his or her Choice stock options.
11
<PAGE>
(c) For purposes of this Section 10, the term "employee" shall include
Directors of Sunburst or Choice, whether or not employed.
SECTION 11. INDEMNIFICATION.
---------------
With respect to all consolidated federal and state income tax returns filed
by the Sunburst Group:
(a) Choice shall indemnify, defend and hold harmless Sunburst and its
subsidiaries, and Sunburst shall indemnify, defend and hold harmless
Choice and its subsidiaries from and 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 attorneys' fees,
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 Sunburst Group for Fiscal Year 1997, Short Calendar Year 1997 Stub
97, Short 97, Second Stub 97, or Second Short 97 and which information,
workpapers, documents, or other items originated with and/or were
prepared by such indemnifying party.
(b) Choice shall indemnify, defend and hold harmless Sunburst from and
against any liability, cost, or expense incurred or paid by Sunburst in
excess of its share thereof as allocated pursuant to this Agreement
hereof, including any amount paid by Sunburst in connection with an
assessment by the Service or other taxing authority.
(c) Sunburst 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 this Agreement
hereof, including any amount paid by Choice in connection with an
assessment by the Service or other taxing authority.
SECTION 12. RESOLUTION OF DISPUTES.
----------------------
Any disputes among the parties with respect to this Agreement shall be
resolved by a public accounting firm or a law firm reasonably satisfactory to
Sunburst and Choice. The fees and expenses of such firm shall be borne equally
by Choice and Sunburst. In the event that Choice and Sunburst are unable to
appoint such a firm, then all disputes arising under this Agreement shall be
resolved under the terms of the Distribution Agreement.
SECTION 13. SUBSIDIARIES.
------------
Any reference herein to a subsidiary or subsidiaries does not include any
corporation that is or was, in the relevant tax year, not permitted to join in
the filing of a consolidated federal income tax return pursuant to Section 1504
of the Code. To the extent that the provisions of the Agreement
12
<PAGE>
pertain to a subsidiary or subsidiaries of Sunburst or Choice, Sunburst and
Choice respectively agree that it will cause the respective subsidiary or
subsidiaries to carry out the terms of this Agreement.
SECTION 14. SURVIVABILITY.
-------------
This Agreement and each of its provisions shall be binding upon and inure
to the benefit of the parties and their respective heirs and successors. This
Agreement shall be effective only from and after the close of business on the
Distribution Date. Nothing in this Agreement is intended or shall be construed
to give any person or entity other than the parties and their respective heirs
or successors any rights or remedies under or by reason of the Agreement.
SECTION 15. NOTICES.
-------
All notices and other communications required or permitted under this
Agreement shall be in writing, shall be deemed delivered upon receipt by hand or
shall be deemed to have been properly made and given one (1) business day after
being deposited with a reputable overnight courier service 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 Franchising, Inc.
10750 Columbia Pike
Silver Spring, MD 20901
Attn: General Counsel
To Sunburst: Choice Hotels International, Inc.
10770 Columbia Pike
Silver Spring, MD 20901
Attn: General Counsel
SECTION 16. GOVERNING LAW.
-------------
This Agreement shall be governed by, and construed in accordance with, the
laws of the state of Maryland, without reference to its conflict of laws
principles.
SECTION 17. COSTS AND EXPENSES.
------------------
In any action brought to enforce or interpret this Agreement, each party
shall pay its own costs and expenses of maintaining or defending such action.
13
<PAGE>
SECTION 18. REMEDIES CUMULATIVE.
-------------------
The remedies provided in this Agreement are cumulative and not exclusive of
any remedies provided by law.
SECTION 19. COUNTERPARTS.
------------
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original and all of which taken together shall constitute but
one and the same Agreement.
SECTION 20. SEVERABILITY.
------------
In the event that any portion of this Agreement shall be declared invalid
by order, decree or judgment of a court, or governmental agency having
jurisdiction, this Agreement shall be construed as if such portion had not been
inserted herein, except when such construction would operate as an undue
hardship on any party to this Agreement or constitute a substantial deviation
from the general intent and purpose of said parties as reflected in this
Agreement.
SECTION 21. AMENDMENTS; WAIVER.
------------------
This Agreement may be amended, and the observance of any term of this
Agreement may be waived, in a written document signed by duly authorized
officers of Sunburst and Choice.
SECTION 22. EFFECTIVENESS OF AGREEMENT.
--------------------------
This Agreement shall become effective from and after the close of business
on the Distribution Date and shall continue in effect until otherwise agreed in
writing by Sunburst 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 FRANCHISING, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
CHOICE HOTELS INTERNATIONAL, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
14
<PAGE>
Exhibit 10.06
FORM OF AMENDMENT TO CORPORATE SERVICES AGREEMENT
THIS AMENDMENT (the "Amendment") to the Corporate Services Agreement
dated as of November 1, 1996 (the "Agreement") between Manor Care, Inc., a
Delaware corporation ("Manor Care") and Choice Hotels International, Inc., a
Delaware corporation ("Choice") is made and entered into as of October __, 1997
by and among Manor Care, Choice and Choice Hotels Franchising, Inc., a Delaware
corporation ("Franchising").
RECITALS
WHEREAS, pursuant to a Distribution Agreement dated as of November 1,
1996 (the "Manor Care Distribution Agreement"), Manor Care and Choice entered
into the Agreement.
WHEREAS, Manor Care and Choice now desire to amend the Agreement,
among other things, to add Franchising as a party.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the receipt and sufficiency of which are hereby acknowledged, Manor
Care, Choice and Franchising agree as follows:
1. Definitions
-----------
All capitalized terms used herein and not otherwise defined herein
shall have the meaning ascribed to such term in the Agreement.
2. Addition of Franchising as a Party
----------------------------------
Franchising is hereby added as a party to the Agreement under the same
terms and conditions and with the same rights and liabilities as Choice, except
as may be further modified in this Amendment. Franchising hereby assumes all
obligations and liabilities under the Agreement, except as may be further
modified in this Agreement.
3. Payment for Services
--------------------
(a) Choice and Franchising shall each pay Manor Care only for services
requested by and rendered to such party in accordance with the price and payment
provisions of Section 5 of the Agreement.
(b) Except as set forth in Section 4 of this Agreement, Franchising
shall have no liability with respect to the payment to Manor Care of the Annual
Retainer Fee, set forth in Exhibit C of the Agreement, with respect to the
Consulting Services.
4. Guaranty of Annual Retainer Fee
-------------------------------
(a) Franchising hereby irrevocably and unconditionally guarantees to
Manor Care the full and prompt payment of the Annual Retainer Fee, set forth in
Exhibit C to the
<PAGE>
Agreement, with respect to the Consulting Services. The obligations of this
Section 4 shall be continuing and shall be binding upon Franchising until and
any and all obligations under this Section 4 have been performed and paid in
full.
(b) The obligations of this Section 4 shall be binding upon
Franchising and its successors and permitted assigns; provided that the
obligation sunder this Section 4 shall not be assigned without the prior written
consent of Manor Care.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment as of the date first written above.
MANOR CARE, INC.
By:
---------------------------------
Name:
Title:
CHOICE HOTELS INTERNATIONAL, INC.
By:
---------------------------------
Name:
Title:
CHOICE HOTELS FRANCHISING, INC.
By:
---------------------------------
Name:
Title:
2
<PAGE>
Exhibit 10.07
FORM OF AMENDMENT TO RISK MANAGEMENT CONSULTING SERVICES AGREEMENT
THIS AMENDMENT (the "Amendment") to the Risk Management Consulting
Services Agreement dated as of November 1, 1996 (the "Agreement") between Manor
Care, Inc., a Delaware corporation ("Manor Care") and Choice Hotels
International, Inc., a Delaware corporation ("Choice") is made and entered into
as of October __, 1997 by and among Manor Care, Choice and Choice Hotels
Franchising, Inc., a Delaware corporation ("Franchising").
RECITALS
WHEREAS, pursuant to a Distribution Agreement dated as of November 1,
1996 (the "Manor Care Distribution Agreement"), Manor Care and Choice entered
into the Agreement.
WHEREAS, Manor Care and Choice now desire to amend the Agreement,
among other things, to add Franchising as a party.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the receipt and sufficiency of which are hereby acknowledged, Manor
Care, Choice and Franchising agree as follows:
1. Definitions
-----------
All capitalized terms used herein and not otherwise defined herein
shall have the meaning ascribed to such term in the Agreement.
2. Addition of Franchising as a Party
----------------------------------
Franchising is hereby added as a party to the Agreement under the same
terms and conditions and with the same rights and liabilities as Choice, except
as may be further modified in this Amendment. Franchising hereby assumes all
obligations and liabilities under the Agreement, except as may be further
modified in this Agreement.
3. Amendment and Restatement of the First Paragraph of Section 4
-------------------------------------------------------------
of the Agreement. The first paragraph of Section 4 of the Agreement is hereby
- -----------------
amended and restated to read in its entirety as follows:
(a) Fees payable by Choice to Manor will be $394,200 (annualized)
prorated through May 31, 1998, payable in equal monthly installments.
(b) Fees payable by Franchising to Manor will be $43,800 (annualized)
prorated through May 31, 1998, payable in equal monthly installments.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment as of the date first written above.
MANOR CARE, INC.
By:
---------------------------------
Name:
Title:
CHOICE HOTELS INTERNATIONAL, INC.
By:
---------------------------------
Name:
Title:
CHOICE HOTELS FRANCHISING, INC.
By:
---------------------------------
Name:
Title:
2
<PAGE>
Exhibit 10.08
FORM OF OFFICE SUBLEASE
by and between
Choice Hotels Franchising, Inc.
a Delaware corporation (to be
renamed Choice Hotels International, Inc.)
"Subtenant"
and
Choice Hotels International, Inc.
a Delaware corporation (to be
renamed Sunburst Hospitality Corporation)
"Sublessor"
at
10720, 10750, and 10770 Columbia Pike
Silver Spring, MD 20901
<PAGE>
OFFICE SUBLEASE
This Sublease is entered into this ___ day of ___________________, 1997, by and
between Choice Hotels International, Inc., a Delaware corporation (to be renamed
Suburst Hospitality Corporation) ("Sublessor") and Choice Hotels Franchising
Inc., a Delaware corporation (to be renamed Choice Hotels International, Inc.)
("Subtenant").
RECITALS
--------
WHEREAS, Sublessor entered into a lease agreement with Manor Care, Inc.
("Manor Care") for certain office space located at 10720, 10750 and 10770
Columbia Pike, Silver Spring, Maryland 20901 (the "Property") a copy which is
attached hereto and made a part of this Sublease as Exhibit "A", and referred to
as the Master Lease.
WHEREAS, Sublessor is implementing a restructuring of itself in which,
among other things, it will is distribute to its shareholders all of the common
stock of Subtenant, pursuant to a Distribution Agreement dated as of
______________, 1997, between Sublessor and Subtenant as a result of which
Sublessor and Subtenant will be separate publicly traded corporations.
WHEREAS, Sublessor and Subtenant occupy office space together in the
Property, pursuant to the Master Lease, and desire to provide in this Sublease
for the continuing occupancy by Subtenant, after said stock distribution, of
certain office premises.
WHEREAS, Sublessor and Subtenant each have determined that the rental and
other terms and conditions of this Sublease are commercially reasonable, based
upon market conditions in the Silver Spring, Maryland area.
WHEREAS, Sublessor desires to sublease to Subtenant and Subtenant desires
to sublease from Sublessor a portion of the Property consisting of 74,074
rentable square feet in 10750 Columbia Pike and _______ rentable square feet in
10770 Columbia Pike (the "Demised Premises").
WHEREAS, the parties desire to enter into this Sublease defining their
respective rights, duties, and liabilities relating to the Demised Premises.
NOW, THEREFORE, WITNESSETH, in consideration of the mutual promises and
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and SUBJECT ENTIRELY
TO THE TERMS, DEFINITIONS, AND CONDITIONS OF THE MASTER LEASE, unless
hereinafter specifically altered, Sublandlord and Subtenant hereby agree as
follows:
1. LEASE OF PREMISES: Sublessor hereby leases to Subtenant and Subtenant
------------------
hereby leases from Sublessor the Demised Premises subject to terms and
<PAGE>
conditions of this Sublease.
2. PROVISIONS CONSTITUTING SUBLEASE: This Sublease is subject to all the
---------------------------------
terms and conditions of the Master Lease, except as set forth in this
Sublease. Subtenant shall assume and perform the non-monetary
obligations of Sublessor as lessee in the Master Lease, to the extent
the terms and conditions are applicable to the Demised Premises, and pay
rent as set forth in Section Four of this Sublease. All defined terms in
this Sublease shall have the same meaning as set forth in the Master
Lease, except as set forth therein. Neither Sublessor or Subtenant shall
commit or permit to be committed on the Demised Premises any act or
omission that shall violate any term or condition of the Master Lease or
breach the terms of the Master Lease or cause the Master Lease to be
terminated.
3. LEASE TERM AND POSSESSION: The term of the Sublease shall commence on
--------------------------
______________ and shall terminate on April 30, 1999. Subtenant shall be
given possession of the Demised Premises immediately upon execution of
this Sublease.
4. RENT: Subtenant shall pay to Manor Care under the Master Lease for the
-----
Demised Premises 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 terms of this Sublease;
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 Sublease 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 = (Sublessor and Manor Care Occupancy Percentage) x
(Operating Expenses-Third Party Rental Income)
Capitalized terms shall have the meanings given to them in the Master
Lease.
At Manor Care's sole discretion, at any time and from time to time
during the term of this Sublease upon written notice to Subtenant, Manor
Care 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 premises in their "as is" condition for the
remaining Lease Term, as reasonably determined by lessor based
<PAGE>
on quoted rental rates at comparable office buildings in the Silver
Spring, Maryland area. Should Manor Care so elect, the parties will
enter into an amendment to this Sublease establishing the new Annual
Base Rent and providing that Subtenant 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 Property) 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 (as defined in the Master Lease) to tenants unrelated to the
Manor Care.
5. USE: The Premises shall be used for general office uses and for no other
---
purposes without the prior, express, written consent of Sublessor and
Manor Care.
6. ASSIGNMENT AND SUBLETTING: Subtenant will not assign this Sublease or
--------------------------
further sublet all or any part of the Demised Premises without the prior
written consent of Sublessor (and the consent of the Manor Care, if
required under the terms of the Master Lease), which consent may be
withheld in Sublessor's sole and unfettered discretion.
7. INDEMNIFICATION: Subtenant agrees to defend, indemnify, and hold
----------------
Sublessor harmless from and against any and all claims arising or
alleged to arise as a result of the occupancy or use of the Demised
Premises, including common areas and other areas appurtenant to the
Demised Premises, by Subtenant, its employees, agents, contractors or
subcontractors.
Sublessor agrees to defend, indemnify, and hold Subtenant harmless from
and against any and all claims arising or alleged to arise from any act
or omission of sublessor, its employees, agents, contractors, or
subcontractors.
8. ADDITIONAL RENT: Subtenant shall pay to Manor Care all charges for
----------------
additional rent or operating expenses attributable to the Demises
Premises as specified in the Master Lease. Payment shall be made in
advance on the first day of each calendar month of the term of this
Sublease without deduction, offset, prior notice, or demand in lawful
money of the United States.
9. ATTORNMENT: If the Master Lease terminates Subtenant will, if requested,
-----------
attorn to Manor Care and recognize Manor Care as Sublessor under this
Sublease.
10. NOTICES: All notices, demands, or other writings in this Sublease
--------
provided to be given or made or sent, or which may be given or made or
sent, by either party to the other, shall be deemed to have been fully
given or made or sent when made in writing and hand delivered or
deposited in the United States mail, registered and postage prepaid,
and addressed as follows:
<PAGE>
TO SUBLESSOR: 10770 Columbia Pike
2nd Floor
Silver Spring, MD 20901
Attn: General Counsel
TO SUBTENANT: 10750 Columbia Pike
Silver Spring, MD 20901
Attn: General Counsel
TO LESSOR UNDER MASTER LEASE AGREEMENT:
Manor Care, Inc.
11555 Darnestown Road
Gaithersburg, MD 20878
Attn: General Counsel (Re: Real Estate)
The address to which any notice, demand, other writing may be given or
made or sent to any party as above-provided may be changed by written
notice given by the party as above-provided.
11. GOVERNING LAWS: It is agreed that this Sublease shall be governed by,
---------------
construed, and enforced in accordance with the laws of the State of
Maryland.
12. ENTIRE AGREEMENT: This Sublease shall constitute the entire agreement
-----------------
between the parties. Any prior understanding or representation of any
kind preceding the date of this Sublease shall not be binding upon
either party except to the extent incorporated in this Sublease.
13. ATTACHMENTS: The following Attachments are attached hereto and made a
------------
part hereof.
Exhibit A: Master Lease
Exhibit B: Rules and Regulations
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
properly executed and sealed the day and year first above written.
ATTEST: SUBLESSOR
CHOICE HOTELS INTERNATIONAL, INC.
(To be renamed SUNBURST HOSPITALITY
CORPORATION)
By:
- ---------------------------- ---------------------------------------
Title:
------------------------------------
<PAGE>
ATTEST: SUBTENANT:
CHOICE HOTELS INTERNATIONAL, INC.
(To be renamed SUNBURST HOSPITALITY
CORPORATION)
By:
- ---------------------------- ---------------------------------------
Title:
------------------------------------
Manor Care, Inc., lessor of the above Demised Premises held by tenant under the
Master Lease executed on November 1, 1996, hereby consents to the above
Sublease.
ATTEST: MANOR CARE, INC.
By:
- ---------------------------- ---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Dated:
---------------------
<PAGE>
EXHIBIT 10.09
FORM OF NONCOMPETITION AGREEMENT
THIS NONCOMPETITION AGREEMENT ("Agreement") is made and entered into
as of __________, 1997, by and between Choice Hotels International, Inc., a
Delaware corporation which is to be renamed Sunburst Hospitality Corporation
("Choice"), and Choice Hotels Franchising, Inc., a Delaware corporation which is
to be renamed Choice Hotels International, Inc. ("Franchising"). As used in
this Agreement, the terms "Choice" and "Franchising" shall mean Choice and
Franchising, as the case may be, and their respective Subsidiaries and
Affiliates, other than any Subsidiaries and Affiliates in which the respective
direct or indirect ownership interest of Choice or Franchising is less than
fifty percent (50%).
WHEREAS, prior to the Distribution Date (as defined below),
Franchising was a wholly owned subsidiary of Choice; and the Franchising
Business (as defined herein) and the Hospitality Business (as defined herein)
were operated by Choice, its divisions, subsidiaries or affiliates;
WHEREAS, on ___________, 1997 (the "Distribution Date"), the common
stock of Franchising was distributed (the "Distribution") on a pro rata basis,
--- ----
to the stockholders of Choice;
WHEREAS, from the Distribution Date, Franchising is to continue the
Franchising Business formerly operated by Choice through Franchising, its
divisions, subsidiaries or affiliates;
WHEREAS, from the Distribution Date, Choice is to continue the
Hospitality Business; and,
WHEREAS, in order to effect the Distribution, Choice and Franchising
entered into a Distribution Agreement (the "Distribution Agreement") dated as of
__________, 1997, which provides, in part, that Choice and Franchising enter
into this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and in the Distribution Agreement and in the Related
Agreements entered into pursuant to or in connection with the Distribution, and
for other valuable consideration, the receipt and sufficiency of which are
hereby mutually acknowledged, Choice and Franchising agree as follows:
ARTICLE 1.
DEFINITIONS
1.1. Definitions. The following terms when used herein shall have
-----------
the meaning set forth below:
"Affiliates" shall mean any Person directly or indirectly controlling
----------
or controlled by, or under direct or indirect common control with, Choice or
Franchising, as the case may be. For purposes of this definition "control",
when used with respect to any Person, means the power to direct the management
and policies of such Person, directly or indirectly, through the ownership of
voting securities, by contract, or otherwise. Notwithstanding the foregoing,
Choice's Affiliates shall not include Franchising or its Subsidiaries or
Affiliates, and Franchising's Affiliates shall not include Choice or its
Subsidiaries or Affiliates.
"Choice" shall have the meaning set forth in the first paragraph of
------
this Agreement.
<PAGE>
"Classic Sports Business" shall mean the business of owning and
-----------------------
operating a bar/restaurant with a sports theme in a hotel property under the
brand name Classic Sports-Food, Drink & Memories.
"Compete" shall mean (i) to conduct or participate or engage in, or
-------
bid for or otherwise pursue a business, whether as a principal, sole proprietor,
partner, stockholder, or agent of, or consultant to, any Person or in any other
capacity, or (ii) have any ownership interest in any Person or business which
conducts, participates or engages in, or bids for or otherwise pursues a
business, whether as a principal, sole proprietor, partner, stockholder, or
agent of, or consultant to, any Person or in any other capacity.
"Competing Franchising Activity" shall mean a business activity that
------------------------------
Competes with or is substantially similar to, the Franchising Business,
provided, however, that the Classic Sports business shall not be deemed a
Competing Franchising Activity.
"Competing Franchising Business" shall mean a business that Competes
------------------------------
in any Competing Franchising Activity .
"Competing Hospitality Activity" shall mean a business activity that
------------------------------
competes with, or is substantially similar to, the Hospitality Business;
provided, however, that the European Hotel Business shall not be deemed a
Competing Hospitality Activity.
"Competing Hospitality Business" shall mean a business that Competes
------------------------------
with, or is substantially similar to, the Hospitality Business.
"Effective Period" shall have the meaning set forth in Section 2.1.
----------------
"European Hotel Business" shall mean (i) the business of owning and
-----------------------
operating the fourteen hotels set forth on Schedule A hereto, which hotels are,
on the Distribution Date, owned and operated by Franchising and (ii) any
ownership interest by Franchising in Friendly Hotels, PLC, a corporation formed
under the laws of [ ].
"Franchising Business" shall mean the business of franchising hotels
--------------------
under the Clarion, Quality, Comfort, Sleep Inn, Rodeway, Econo Lodge and
Mainstay Suites brands.
"Franchising" shall have the meaning set forth in the first paragraph
-----------
of this Agreement.
"Hospitality Business" shall mean the business of owning and operating
--------------------
hotel properties.
"Person" shall mean any person, firm, corporation, general or limited
------
partnership, association, or other entity.
"Preceding Period" shall mean, with respect to any acquisition or
----------------
potential acquisition, the three hundred sixty-five (365) days preceding the
date on which the acquisition is consummated.
"Strategic Alliance Agreement" shall mean the Strategic Alliance
----------------------------
Agreement dated of even date herewith by and between Choice and Franchising, as
may be amended from time to time.
2
<PAGE>
"Subsidiaries" shall mean corporations or other entities which are
------------
more than fifty percent (50%) owned, directly or indirectly, by Choice or
Franchising, as the case may be, and partnerships in which Choice or
Franchising, as the case may be, or a subsidiary corporation, is a general
partner.
"Transfer" shall mean the sale, conveyance, disposal of or other
--------
transfer of ownership, title or other interest.
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.
ARTICLE 2.
TERM
2.1. Term. This Agreement shall remain in effect for a period
----
commencing on the date hereof and automatically terminate without further
documentation on the fifth anniversary date of the Distribution Date; provided,
however, that, in the event that, on the fifth anniversary date of the
Distribution Date, the Strategic Alliance Agreement remains in effect, then this
Agreement shall, without further documentation, remain in effect and shall not
terminate until the date on which the Strategic Alliance Agreement ceases to be
in effect.
ARTICLE 3.
NONCOMPETITION WITH RESPECT TO THE FRANCHISING BUSINESS
3.1. Certain Restrictions on Choice.
------------------------------
A. Except as provided in Section 3.1.(B) herein, during the
Effective Period, Choice shall not Compete in the Franchising Business anywhere
in the world.
B. Notwithstanding anything herein to the contrary, but
subject to the limitation set forth in Section 3.1.C., Section 3.1.A shall not
prohibit Choice from conducting the following activities:
(i) the continued operation of any business operated
as of the Distribution Date by Choice (including, without limitation, the
Classic Sports Business); or
(ii) activities that Choice is permitted or required
to conduct under the Strategic Alliance Agreement; or
(iii) the ownership of capital stock of a corporation
which conducts, participates or engages in competition with, or owns or has
an interest in a business similar to, the Franchising Business (including,
without limitation, a Competing Franchising Business), if (a) such capital
stock is traded on a national or regional stock exchange in the United
States or Canada or is traded on the National Association of Securities
Dealers, Inc., Automated Quotation System, and (b) Choice, directly or
indirectly, is the beneficial owner of not more than five percent (5%) of
such corporation's outstanding capital stock; or
(iv) the acquisition of any Person which Competes in a
Competing Franchising Business, except for such a Person whose primary
business is a Competing Franchising Business. If (x) the gross sales of
such Person (including its Subsidiaries and
3
<PAGE>
Affiliates) from the Competing Franchising Activities for the Preceding
Period, do not constitute more than twenty percent (20%) of the gross sales
(including sales from the Competing Franchising Activities) of such Person
(including its Subsidiaries and Affiliates), or (y) neither the fair market
value of, nor the value, if any, attributed to the Competing Franchising
Activities in the acquisition agreement is in excess of Five Million
Dollars ($5,000,000), as increased by the percentage increase, if any, in
the Consumer Price Index, All Urban Consumers, United States during the
term hereof (using 1996 as the base year), then such Competing Franchising
Activity shall not constitute such Person's primary business.
C. During the Effective Period, Choice shall not, directly
or indirectly:
(i) acquire from any Person (other than Franchising)
any interest in a Competing Franchising Business unless, prior to such
acquisition, Choice offers to sell the Competing Franchising Activities to
Franchising at a price equal to the lesser of (a) the fair market value of
such Competing Franchising Activities, and (b) the value, if any,
attributed to the Competing Franchising Activities in the acquisition
agreement, and otherwise on the same terms and conditions on which the
Competing Franchising Business is being acquired by Choice. Franchising
shall have thirty (30) days after receiving notice of the acquisition of
the Competing Franchising Business to elect, by notice to Choice, to
purchase the Competing Franchising Activities on the terms and conditions
set forth in the notice. If Franchising does not elect to purchase the
Competing Franchising Activities within the 30-day period, Choice shall be
entitled to own and operate such Competing Franchising Activities, subject
to the restrictions on Transfer set forth in Section 3.1.C.(ii).
Notwithstanding the foregoing, Choice shall not have to offer to sell, or
sell, to Franchising any such Competing Franchising Activities which, in
the good faith judgment of Choice, are not readily divisible from other
activities permitted to Choice, provided that the gross sales from such
non-divisible Competing Franchising Activities for the Preceding Period do
not exceed the greater of One Million Dollars ($1,000,000) per year or five
percent (5%) of the gross sales for the Preceding Period of the Competing
Franchising Business. Thereafter, in the event that the gross sales from
such non-divisible Competing Franchising Activities for any calendar year
exceed the greater of One Million Dollars ($1,000,000) per year or five
percent (5%) of the gross sales of the Competing Franchising Business, then
all non-divisible Competing Franchising Activities shall be subject to
Choice's obligation to offer them for sale to Franchising, as set forth
above, to the maximum extent that Choice and Franchising, using their best
efforts and negotiating in good faith, can make such Competing Franchising
Activities divisible and transferable to Franchising. The amount of One
Million Dollars ($1,000,000) referenced in this Section shall be increased
by the percentage increase, if any, in the Consumer Price Index, All Urban
Consumers, United States during the term hereof (using 1996 as the base
year).
(ii) Transfer to any Person (other than Franchising)
any Competing Franchising Activities unless it first offers to sell such
Competing Franchising Activities to Franchising upon substantially the same
terms and conditions offered by a bona fide prospective purchaser not an
affiliate of Choice. Franchising shall have thirty (30) days after
receiving notice of the proposed Transfer to elect, by notice to Choice, to
purchase the Competing Franchising Activities on the terms and conditions
set forth in the notice. If Franchising does not elect to purchase the
Competing Franchising Activities from Choice within the 30-day period,
Choice shall be entitled to Transfer such Competing Franchising Activities
to any Person not an affiliate of Choice on substantially the same terms
and conditions as set forth in the notice to Franchising. However, if no
definitive agreement to Transfer is executed within ninety (90) days
4
<PAGE>
after the expiration of the 30-day period, Choice shall not thereafter
Transfer such Competing Franchising Activities to any Person (other than
Franchising) without first offering to sell it to Franchising as provided
above. Notwithstanding the foregoing, Choice shall not have to offer to
sell, or sell, to Franchising any such Competing Franchising Activities
which, in the good faith judgment of Choice, are not readily divisible from
the other activities otherwise permitted to be transferred by Choice
without compliance with this Section 3.1.C.(ii), provided that the gross
sales from such non-divisible Competing Franchising Activities for the
Preceding Period do not exceed the greater of One Million Dollars
($1,000,000) per year or five percent (5%) of the gross sales for the
Preceding Period of the Competing Franchising Business. The amount of One
Million Dollars ($1,000,000) referenced in this Section shall be increased
by the percentage increase, if any, in the Consumer Price Index, All Urban
Consumers, United States during the term hereof (using 1996 as the base
year).
ARTICLE 4.
NONCOMPETITION WITH RESPECT TO THE CHOICE BUSINESS
4.1. Certain Restrictions on Franchising.
------------------------------------
A. Except as provided in Section 4.1.B herein, during the
Effective Period, Franchising shall not Compete in the Hospitality Business
anywhere in the world.
B. Notwithstanding anything herein to the contrary, but
subject to the limitations set forth in Section 4.1.C., Section 4.1.A shall not
prohibit Franchising from conducting the following activities:
(i) the continued operation and development of any
business operated as of the Distribution Date by Franchising (including,
without limitation, the European Hotel Business); or
(ii) activities that Franchising is permitted or
required to conduct under the Strategic Alliance Agreement; or
(iii) the ownership of capital stock of a corporation
which conducts, participates or engages in competition with, or owns or has
an interest in a business similar to, the Hospitality Business (including,
without limitation, a Competing Hospitality Business), if (a) such capital
stock is traded on a national or regional stock exchange in the United
States or Canada or is traded on the National Association of Securities
Dealers, Inc., Automated Quotation System, and (b) Franchising, directly or
indirectly, is the beneficial owner of not more than five percent (5 %) of
such corporation's outstanding capital stock; or
(iv) the acquisition of any Person which Competes in a
Competing Hospitality Business, except for such a Person whose primary
business is a Competing Hospitality Business. If (x) the gross sales of
such Person (including its Subsidiaries and Affiliates) from the Competing
Hospitality Activities for the Preceding Period do not constitute more than
twenty percent (20%) of the gross sales (including sales from the Competing
Hospitality Activities) of such Person (including its Subsidiaries and
Affiliates), or (y) neither the fair market value of, nor the value, if
any, attributed to the Competing Hospitality Activities in the acquisition
agreement is in excess of Five Million Dollars ($5,000,000), as increased
by the percentage increase, if any, in the Consumer Price Index, All Urban
Consumers, United
5
<PAGE>
States during the term hereof (using 1996 as the base year), then such
Competing Hospitality Activity shall not constitute such Person's primary
business.
C. During the Effective Period, Franchising shall not,
directly or indirectly:
(i) acquire from any Person (other than Choice) any
interest in a Competing Hospitality Business unless, prior to such
acquisition, Franchising offers to sell the Competing Hospitality
Activities to Choice at a price equal to the lesser of (a) the fair market
value of such Competing Hospitality Activities, and (b) the value, if any,
attributed to the Competing Hospitality Activities in the acquisition
agreement, and otherwise on the same terms and conditions on which the
Competing Hospitality Business is being acquired by Franchising. Choice
shall have thirty (30) days after receiving notice of the acquisition of
the Competing Hospitality Business to elect, by notice to Franchising, to
purchase the competing Hospitality Activities on the terms and conditions
set forth in the notice. If Choice does not elect to purchase the Competing
Hospitality Activities within the 30-day period, Franchising shall be
entitled to own and operate such Competing Hospitality Activities, subject
to the restrictions on Transfer set forth in Section 4.1.C.(ii).
Notwithstanding the foregoing, Franchising shall not have to offer to sell,
or sell, to Choice any such Competing Hospitality Activities which, in the
good faith judgment of Choice, are not readily divisible from other
activities permitted to Franchising, provided that the gross sales of such
non-divisible Competing Hospitality Activities for the Preceding Period, do
not exceed the greater of One Million Dollars ($1,000,000) per year or
five percent (5%) of the gross sales for the Preceding Period of the
Competing Hospitality Business. Thereafter, in the event that the gross
sales from such non-divisible Competing Hospitality Activities for any
calendar year exceed the greater of One Million Dollars ($1,000,000) per
year or five percent (5%) of the gross sales of the Competing Hospitality
Business, then all non-divisible Competing Hospitality Activities shall be
subject to Franchising's obligation to offer them for sale to Choice, as
set forth above, to the maximum extent that Hospitality and Franchising,
using their best efforts and negotiating in good faith, can make such
Competing Hospitality Activities divisible and transferable to Hospitality.
The amount of One Million Dollars ($1,000,000) referenced in this Section
shall be increased by the percentage increase, if any, in the Consumer
Price Index, All Urban Consumers, United States during the term hereof
(using 1996 as the base year).
(ii) Transfer to any Person (other than Choice) any
Competing Hospitality Activities unless it first offers to sell such
Competing Hospitality Activities to Hospitality upon substantially the same
terms and conditions offered by a bona fide prospective purchaser not an
affiliate of Franchising. Hospitality shall have thirty (30) days after
receiving notice of the proposed Transfer to elect, by notice to
Franchising, to purchase the Competing Hospitality Activities on the terms
and conditions set forth in the notice. If Hospitality does not elect to
purchase the Competing Hospitality Activities from Franchising within the
30-day period, Franchising shall be entitled to Transfer such Competing
Hospitality Activities to any Person not an affiliate of Franchising on
substantially the same terms and conditions as set forth in the notice to
Hospitality. However, if no definitive agreement to Transfer is executed
within ninety (90) days after the expiration of the 30-day period,
Franchising shall not thereafter Transfer such Competing Hospitality
Activities to any Person (other than Choice) without first offering to sell
it to Choice as provided above. Notwithstanding the foregoing, Choice shall
not have to offer to sell, or sell, to Franchising any such Competing
Franchising Activities which, in the good faith judgment of Choice, are not
readily divisible from the other activities otherwise permitted to be
transferred by Choice without compliance with this Section 4.1.C.(ii)
provided
6
<PAGE>
that the gross sales from such non-divisible Competing Franchising
Activities for the Preceding Period do not exceed the greater of One
Million Dollars ($1,000,000) per year or five percent (5%) of the gross
sales for the Preceding Period of the Competing Franchising Business. The
amount of One Million Dollars ($1,000,000) referenced in this Section shall
be increased by the percentage increase, if any, in the Consumer Price
Index, All Urban Consumers, United States during the term hereof (using
1996 as the base year).
ARTICLE 5.
MISCELLANEOUS
5.1. Dispute Resolution. Any dispute, controversy or disagreement
------------------
("Dispute") between the Parties related to the obligations of the Parties under
this Agreement in respect to which an amicable resolution cannot be reached
shall be submitted for mediation to a committee made up of an equal number of
non-common members of each company's Board of Directors ("Committee"). If the
Parties are unable to reach an amicable resolution of a Dispute within thirty
days after submission to the Committee, then, to the maximum extent allowed by
law, the Dispute shall be submitted and resolved by final and binding
arbitration in Baltimore, Maryland administered by JAMS-Endispute in accordance
with JAMS-Endispute's rules of practice then in effect or such other procedures
as the Parties may agree upon; provided, however, that any Party may seek
injunctive relief and enforcement of any award rendered pursuant to the
arbitration provisions of this Section 5.1 by bringing a suit in any court of
competent jurisdiction. Any award issued as a result of such arbitration shall
be final and binding between the Parties thereto and shall be enforceable by any
court having jurisdiction over the Party against whom enforcement was sought and
application may be made to such court for judicial acceptance of the award and
order of enforcement. The fees and expenses of arbitration (including
reasonable attorneys' fees) shall be paid by the Party that does not prevail in
such arbitration.
5.2. Modification. This Agreement may only be amended, modified or
------------
supplemented in a written agreement signed by both parties hereto.
5.3. Waiver. No term or condition of this Agreement shall be
------
deemed to have been waived, nor shall there be any estoppel against the
enforcement of any provision hereof, except by written instrument of the party
charged with such waiver or estoppel.
5.4. Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of Maryland, regardless of
the laws that might be applied under applicable principles of conflicts of laws.
5.5. Headings. The headings of the sections of this Agreement are
--------
for convenience only and shall not affect the construction of this Agreement.
5.6. 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:
Sunburst Hospitality Corporation
10770 Columbia Pike
7
<PAGE>
Silver Spring, Maryland 20901
Attention: General Counsel
To Franchising:
Choice Hotels International, Inc.
10750 Columbia Pike
Silver Spring, Maryland 20901
Attention: General Counsel
5.7. Assignment. Neither Party shall sell, assign, pledge or
----------
otherwise transfer its interest in this Agreement or any part thereof without
the prior written consent of the other Party, except to an entity succeeding to
substantially all of the business and operations of such Party. The
transferring Party shall remain liable for liabilities and obligations existing
at the time of such transfer. Subject to the foregoing, this Agreement shall
bind and inure to the benefit of the Parties' respective successors and
permitted assigns.
5.8. Counterparts. This Agreement may be executed in two
------------
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.
5.9. Severability. Choice and Franchising agree that the period of
------------
restriction and the geographical area of restriction imposed upon the parties
are fair and reasonable and are reasonably required for the protection of each
of the parties hereto. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect as though the invalid portions were not a part
hereof. If the provisions of this Agreement relating to the area of restriction
or the period of restriction shall be deemed to exceed the maximum area or
period which a court having jurisdiction over the matter would deem enforceable,
such area or period shall, for purposes of this Agreement, be deemed to be the
maximum area or period which such court would deem valid and enforceable.
5.10. Entire Agreement. This Agreement, the Distribution
----------------
Agreement, the Strategic Alliance Agreement, certain hotel franchising
agreements, and other agreements executed pursuant thereto, constitute the
entire agreement of the parties concerning the subject matter hereof.
5.11. Remedies. Choice and Franchising agree that irreparable
--------
damage would occur in the event any of the provisions of this Agreement were not
to be performed in accordance with the terms hereof, and that their remedy at
law for any breach of the other party's obligations hereunder would be
inadequate. Choice and Franchising agree and consent that temporary and
permanent injunctive relief may be granted in any proceeding which may be
brought to enforce any provision hereof without the necessity of proof of actual
damage.
5.12. Enforceability. The terms, conditions and promises contained
--------------
in this Agreement shall be binding upon and shall inure to the benefit of each
of the parties hereto, their heirs, personal representatives, or successors and
assigns. Each of the parties hereto shall cause its subsidiaries to comply with
such party's obligations hereunder. Nothing herein, expressed or implied, shall
be construed to give any other Person any legal or equitable rights hereunder.
8
<PAGE>
5.13. Consent to Jurisdiction. Subject to Section 4.1 hereof, 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. The parties hereby irrevocably
designate, appoint and empower Prentice Hall Corporation System, Inc. as its
true and lawful agent and attorney-in-fact in its name, place, and stead to
receive on its behalf service of process in any action, suit, or proceeding with
respect to any matters as to which it has submitted to jurisdiction as set forth
in the immediately preceding sentence.
5.14. No Joint Venture Or Agency. This Agreement is not intended
--------------------------
to create a joint venture, partnership or any other similar arrangement between
the Parties, and neither Party shall be authorized to act as an agent of the
other Party, except as expressly provided herein. Notwithstanding the
foregoing, each Party shall be free to designate the other as its agent for
appropriate purposes.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered, all as of the day and year first above written.
CHOICE HOTELS INTERNATIONAL, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
CHOICE HOTELS FRANCHISING, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
9
<PAGE>
Schedule A
----------
European Hotels
---------------
[List to be added]
10
<PAGE>
Exhibit 10.10
FORM OF GUARANTY
This is a Guaranty, dated as of October __, 1997, by Choice Hotels
Franchising, Inc., a Delaware corporation ("Franchising") to Manor Care, Inc., a
Delaware corporation ("Manor Care"). Capitalized terms not otherwise defined
herein shall have the meanings assigned in the Office Lease, dated as of
November 1, 1996, by and between Choice Hotels Holdings, Inc., a Delaware
corporation ("Choice")(subsequently renamed Choice Hotels International, Inc.)
and Manor Care (the "Gaithersburg Lease").
RECITALS
A. Choice is implementing a restructuring which, among other things, will
distribute to its shareholders all of the common stock of Franchising, pursuant
to a Distribution Agreement dated as of October __, 1997, between Choice and
Franchising (the "Distribution Agreement") as a result of which, Choice and
Franchising will become separate publicly traded corporations.
B. Pursuant to the Distribution Agreement, Franchising shall enter into
this Guaranty in consideration of the benefits that shall accrue to it by
virtue of the transactions contemplated by the Distribution Agreement.
NOW THEREFORE, Franchising, intending to be legally bound, agrees as
follows:
1. Guaranty. Franchising hereby irrevocably and unconditionally
--------
guarantees to Manor Care the full and prompt payment and performance of all
Obligations (as defined below). As used herein, "Obligations" means all
obligations and liabilities of Choice to Manor Care under the Gaithersburg Lease
and any other documents and undertakings entered into by Choice pursuant
thereto, including but not limited to any modification or renewal thereof.
2. Nature of Guaranty. This Guaranty is a guaranty of payment and
------------------
performance and not merely a guaranty of collection. If any Obligation is not
satisfied when due, Franchising shall forthwith satisfy such Obligation upon
demand, and no such satisfaction shall discharge the obligations of Franchising
hereunder until all Obligations have been satisfied in full. This Guaranty shall
be a continuing guaranty and shall be binding upon Franchising until any and all
Obligations have been performed and paid in full.
3. Binding Nature: Enforceability. This Guaranty shall be binding upon
------------------------------
Franchising and its successors and permitted assigns; provided that this
Guaranty shall not be assigned by Franchising or amended in any respect without
the prior written consent of Manor Care. If any term or provision of this
Guaranty or the Obligations shall be invalid or unenforceable to any extent, the
remainder of this Guaranty shall not be affected thereby.
<PAGE>
4. Governing Law. This Guaranty shall be governed by and construed in
-------------
accordance with the laws of the State of Maryland.
IN WITNESS WHEREOF, the undersigned has duly executed this Guaranty as
of the date first written above.
CHOICE HOTELS FRANCHISING, INC.
By:
-----------------------------
Name:
Title:
2
<PAGE>
Exhibit 10.11
FORM OF NOTE
$115,000.00 _______________, MARYLAND
_____________ __, 1997
FOR VALUE RECEIVED, the undersigned CHOICE HOTELS INTERNATIONAL, INC.
a Delaware corporation to be renamed Sunburst Hospitality Corporation
("Borrower"), hereby unconditionally promises to pay to the order of CHOICE
HOTELS FRANCHISING, INC., a Delaware corporation to be renamed Choice Hotels
International, Inc. (the "Lender"), the principal amount of One Hundred Fifteen
Thousand Dollars ($115,000.00) on the Maturity Date pursuant to the terms of the
Loan Agreement referred to below. The undersigned further promises to pay
interest on the unpaid principal amount hereof a rate of [ ___%] per annum on
the date set forth in the Loan Agreement.
This Note is the Note referred to in the Loan Agreement dated as of
___________ ____, 1997 between the Borrower and the Lender (as the same may be
amended from time to time, the "Loan Agreement"). Terms used herein and not
defined shall have the meaning ascribed to such terms in the Loan Agreement.
Reference is made to the Loan Agreement for provisions for the prepayment hereof
and the acceleration of the maturity hereof.
This Note shall be governed by and construed and interpreted in
accordance with Maryland law.
CHOICE HOTELS INTERNATIONAL, INC.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
<PAGE>
Exhibit 21.01
SUBSIDIARIES OF CHOICE HOTELS FRANCHISING, INC.
Choice Capital Corp., a Delaware corporation
Choice Hotels Australia Pty. Ltd., an Australian corporation
Choice Hotels International Asia Pacific Pty. Ltd., an Australian corporation
Choice Hotels Japan, Inc. (Formerly Quality Hotels Japan, Inc.) a Delaware
Corporation
Choice Hotels Systems, Inc., an Ontario, Canadian Corporation
--Choice Hotels Canada Inc., an Ontario, Canadian corporation
Choice Hotels Thailand (Del.) Inc., a Delaware corporation
<PAGE>
Exhibit 23.01
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Choice Hotels Franchising, Inc.:
We have audited in accordance with generally accepted auditing standards, the
combined financial statements of Choice Hotels Franchising, Inc. included in
this Form 10, and have issued our opinion thereon dated June 24, 1997. Our audit
was made for the purpose of forming an opinion on the basic combined financial
statements taken as a whole. The schedule in Exhibit 99.01 is presented for the
purpose of complying with the Securities and Exchange Commission's 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 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5 EXHIBIT 27.01
<LEGEND>
This schedule contains summary financial information extracted from the
combined balance sheet, the combined statements of income and the
combined statements of cash flows and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 4,167
<SECURITIES> 0
<RECEIVABLES> 30,631
<ALLOWANCES> 6,159
<INVENTORY> 0
<CURRENT-ASSETS> 34,315
<PP&E> 60,968
<DEPRECIATION> 17,591
<TOTAL-ASSETS> 221,473
<CURRENT-LIABILITIES> 34,731
<BONDS> 125,127
0
0
<COMMON> 0
<OTHER-SE> 57,193
<TOTAL-LIABILITY-AND-EQUITY> 221,473
<SALES> 0
<TOTAL-REVENUES> 272,255
<CGS> 0
<TOTAL-COSTS> 199,655
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,238
<INTEREST-EXPENSE> 10,787
<INCOME-PRETAX> 59,575
<INCOME-TAX> 24,845
<INCOME-CONTINUING> 34,730
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,730
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99.01
CHOICE HOTELS FRANCHISING, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
<TABLE>
<CAPTION>
Balance at Charges to Balance at
Beginning of Profit End
Description Period and Loss Other Write-offs of Period
- --------------------------------- ----------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1997
Allowance for doubtful accounts 4,515 2,238 - (594) 6,159
===== ===== ===== ====== =====
Year ended May 31, 1996
Allowance for doubtful accounts 3,976 685 - (146) 4,515
===== ===== ===== ====== =====
Year ended May 31, 1995
Allowance for doubtful accounts 8,743 692 - (5,459) 3,976
===== ===== ===== ====== =====
</TABLE>
<PAGE>
Exhibit 99.02
[LOGO OF CHOICE HOTELS INTERNATIONAL APPEARS HERE]
August 15, 1997
Dear Stockholder:
You are cordially invited to attend the 1997 Annual Meeting of Stockholders
(the "Annual Meeting") of Choice Hotels International, Inc. ("Choice" or the
"Company") to be held on September 16, 1997 at 9:00 a.m. (E.S.T.) at the
Quality Suites Shady Grove, 3 Research Court, Rockville, Maryland. I urge you
to be present in person or represented by proxy at this important Annual
Meeting at which stockholders will be asked to ratify a major transaction that
will separate Choice into two publicly-traded companies.
You are being asked to consider and vote upon a group of related proposals
(the "Distribution Proposals") which will provide for the distribution (the
"Distribution") to stockholders, on a share-for-share basis, of all
outstanding shares of common stock of a wholly owned subsidiary of the
Company, Choice Hotels Franchising, Inc. ("Franchising"). The Distribution
will separate the Company's hotel franchising business from its hotel
ownership and management business. Upon the Distribution, the Company will
change its corporate name to Sunburst Hospitality Corporation (as renamed
after the Distribution, "Sunburst") and will continue to own and operate hotel
properties in the United States (the "Hotel Business"). Upon the Distribution,
Franchising will change its name to Choice Hotels International, Inc. and will
engage in the business of franchising hotels under the Clarion, Quality,
Comfort, Sleep Inn, Rodeway, Econo Lodge and MainStay brands and will own and
operate 14 hotel properties in France, Germany and the United Kingdom
(together, the "Franchising Business").
The Board of Directors believes that the proposed Distribution will reduce
or eliminate the substantial recurring conflicts between the Hotel Business
and the Franchising Business, which are impediments to the growth of the
Company's Hotel Business. The Distribution will also enable the Hotel Business
to attract, retain and effectively incentivize skilled real estate
professionals and will facilitate a better understanding by the investment
community of the Company's two distinct businesses.
Details of the Distribution Proposals and the other proposals to be
considered at the Annual Meeting, as well as important information relating to
the Distribution, including a description of the business, directors and
management of Sunburst and Franchising, are set forth in the accompanying
Proxy Statement and should be considered carefully.
I am excited about the future prospects for both Sunburst and Franchising as
separate public companies. The Board of Directors believes that the
Distribution is in the best interests of stockholders and unanimously
recommends that stockholders vote to approve the Distribution Proposals.
Whether or not you expect to attend the Annual Meeting, it is important that
your shares be represented. Please complete, sign and date the enclosed proxy
card and return it promptly in the accompanying envelope. If you attend the
Annual Meeting, you may vote in person if you wish even though you previously
have returned your proxy card.
Sincerely,
/s/ William R. Floyd
William R. Floyd
Vice Chairman and Chief Executive
Officer
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MARYLAND 20901
----------------
NOTICE OF ANNUAL MEETING
TO BE HELD SEPTEMBER 16, 1997
----------------
To the Stockholders of
CHOICE HOTELS INTERNATIONAL, INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Annual
Meeting") of Choice Hotels International, Inc., a Delaware corporation (the
"Company"), will be held at the Quality Suites Shady Grove, 3 Research Court,
Rockville, Maryland at 9:00 a.m. (E.S.T.) for the following purposes:
1. To consider and to vote upon four related proposals (collectively, the
"Distribution Proposals") described in the accompanying Proxy Statement,
which provide for:
(i) Proposal One: Ratification of a special dividend, consisting of
the distribution (the "Distribution") to the holders of the Company's
outstanding shares of common stock, par value $.01 per share ("Company
Common Stock"), on a share-for-share basis, of all outstanding shares
of common stock, par value $.01 per share ("Franchising Common Stock"),
of the Company's wholly owned subsidiary, Choice Hotels Franchising,
Inc., a Delaware corporation ("Franchising") and the related
arrangements between the Company and Franchising, and the policies to
be adopted by such companies, in connection therewith;
(ii) Proposal Two: Approval of the amendment of the Restated
Certificate of Incorporation of the Company to (a) change the name of
the Company to Sunburst Hospitality Corporation; (b) decrease the
number of authorized shares of Company Common Stock from 160,000,000 to
60,000,000; and (c) effect a one-for-three reverse stock split of
Company Common Stock whereby every three shares of Company Common Stock
would be aggregated into one share of Company Common Stock (the
"Reverse Stock Split") following the Distribution;
(iii) Proposal Three: Ratification of the election by the Company, as
sole stockholder of Franchising, of nine directors of Franchising
specified in the Proxy Statement, who will be divided into three
classes, the initial terms of which will expire in 1998, 1999 and 2000;
and
(iv) Proposal Four: Ratification of the adoption by Franchising of
the Choice Hotels Franchising, Inc. 1997 Long-Term Incentive Plan and
the Choice Hotels Franchising, Inc. Employee Stock Purchase Plan.
2. To consider and to vote upon the following additional proposals (the
"Additional Proposals") described in the accompanying Proxy Statement,
which provide for:
(i) Proposal Five: Election of three directors to hold office until
the 2000 Annual Meeting of Stockholders and until their successors are
elected and qualified;
(ii) Proposal Six: Ratification of the Choice Hotels International,
Inc. 1996 Long-Term Incentive Plan; and
(iii) Proposal Seven: Ratification of the Choice Hotels
International, Inc. Employee Stock Purchase Plan.
3. To transact such other business as may properly come before the Annual
Meeting.
<PAGE>
The Board of Directors of the Company has fixed the close of business on
August 5, 1997 as the record date (the "Record Date") for the determination of
stockholders entitled to notice of, and to vote at, the Annual Meeting or any
adjournment(s) or postponement(s) thereof. Only stockholders of record at the
close of business on the Record Date are entitled to notice of, and to vote
at, the Annual Meeting and any adjournment(s) or postponement(s) thereof. A
list of stockholders will be available for inspection at the office of the
Company located at the address above, at least 10 days prior to the Annual
Meeting.
By Order of the Board of Directors
CHOICE HOTELS INTERNATIONAL, INC.
LOGO
Michael J. DeSantis
Secretary
August 15, 1997
Silver Spring, Maryland
TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND
MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF MATTERS TO BE CONSIDERED....................................... 1
VOTING AT THE MEETING..................................................... 2
PROXY STATEMENT SUMMARY................................................... 4
PROPOSAL ONE: RATIFICATION OF THE DISTRIBUTION............................ 12
The Distribution........................................................ 12
Background and Reasons for the Distribution........................... 12
Solvency Opinion...................................................... 13
Manner of Effecting the Distribution.................................. 14
Federal Income Tax Aspects of the Distribution........................ 14
Listing and Trading of Franchising Common Stock....................... 15
Listing and Trading of Sunburst Common Stock.......................... 15
Conditions; Termination............................................... 16
Interest of Certain Persons in the Distribution....................... 16
Risk Factors............................................................ 18
Relationship Between the Company and Franchising after the Distribu-
tion................................................................... 23
Financing............................................................... 28
Accounting Treatment.................................................... 30
Post-distribution Dividend Policy....................................... 30
Certain Information Concerning Franchising.............................. 30
Pro Forma Financial Data.............................................. 30
Selected Historical Financial Data.................................... 32
Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations.................................................. 34
Business And Properties............................................... 37
Management............................................................ 53
Employee Agreements................................................... 58
Retirement Plans...................................................... 59
Certain Relationships and Related Transactions........................ 60
Security Ownership.................................................... 61
Description of Franchising Capital Stock.............................. 63
Purposes and Antitakeover Effects of Certain Provisions of the
Franchising Certificate and Bylaws................................... 64
Liability and Indemnification of Officers and Directors............... 67
Certain Information Concerning Sunburst................................. 69
Pro Forma Financial Data.............................................. 69
Management's Discussion and Analysis of Sunburst Pro Forma Financial
Condition
and Results of Operations............................................ 71
Business and Properties............................................... 73
Employees............................................................. 80
Management............................................................ 80
PROPOSAL TWO: AMENDMENTS TO THE RESTATED CERTIFICATE OF INCORPORATION OF
THE COMPANY.............................................................. 83
PROPOSAL THREE: RATIFICATION OF THE FRANCHISING BOARD OF DIRECTORS........ 85
PROPOSAL FOUR: RATIFICATION OF CERTAIN FRANCHISING BENEFIT PLANS.......... 85
PROPOSAL FIVE: ELECTION OF DIRECTORS...................................... 89
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROPOSAL SIX: APPROVAL OF CHOICE HOTELS INTERNATIONAL, INC. 1996 LONG-
TERM INCENTIVE PLAN..................................................... 106
PROPOSAL SEVEN: APPROVAL OF CHOICE HOTELS INTERNATIONAL, INC. 1996
EMPLOYEE STOCK PURCHASE PLAN............................................ 109
</TABLE>
<TABLE>
<S> <C>
STOCKHOLDERS PROPOSALS FOR 1998........................................ 110
GENERAL................................................................ 110
INDEX TO FINANCIAL STATEMENTS.......................................... F-1
ANNEX A: FORM OF RESTATED CERTIFICATE OF INCORPORATION OF CHOICE HOTELS
FRANCHISING, INC............................................. A-1
ANNEX B: FORM OF AMENDED AND RESTATED BYLAWS OF CHOICE HOTELS
INTERNATIONAL, INC........................................... B-1
ANNEX C: CHOICE HOTELS FRANCHISING, INC. 1997 LONG-TERM INCENTIVE
PLAN.................................................................. C-I-1
CHOICE HOTELS FRANCHISING, INC. EMPLOYEE STOCK PURCHASE PLAN..... C-II-1
ANNEX D: AMENDMENTS TO CHOICE HOTELS INTERNATIONAL, INC. RESTATED
CERTIFICATE OF INCORPORATION................................. D-1
ANNEX E: CHOICE HOTELS INTERNATIONAL, INC. 1996 LONG TERM
INCENTIVE PLAN............................................... E-I-1
CHOICE HOTELS INTERNATIONAL, INC. EMPLOYEE STOCK PURCHASE PLAN... E-II-1
</TABLE>
ii
<PAGE>
CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MARYLAND 20901
----------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER 16, 1997
----------------
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Choice Hotels International, Inc. a
Delaware corporation (the "Company"), for use at the 1997 Annual Meeting of
Stockholders of the Company to be held at 9:00 a.m. (E.S.T.) on September 16,
1997, at the Quality Suites Shady Grove, 3 Research Court, Rockville, Maryland
and at any adjournment(s) or postponement(s) thereof (the "Annual Meeting").
It is anticipated that this Proxy Statement, together with the proxy and the
1997 Annual Report to Stockholders, will first be mailed to the Company's
stockholders on or about August 15, 1997.
SUMMARY OF MATTERS TO BE CONSIDERED
At the Annual Meeting, holders of the Company's outstanding common stock,
par value $.01 per share, will be asked to consider and to vote upon the
following related proposals, denominated Proposals One through Four
(collectively, the "Distribution Proposals"):
(i) Proposal One: Ratification of a special dividend, consisting of the
distribution (the "Distribution") to the holders of the Company's
outstanding shares of common stock, par value $.01 per share ("Company
Common Stock"), on a share-for-share basis, of all outstanding shares
of common stock, par value $.01 per share ("Franchising Common Stock"),
of the Company's wholly owned subsidiary, Choice Hotels Franchising,
Inc., a Delaware corporation ("Franchising") and the related
arrangements between the Company and Franchising, and the policies to
be adopted by such companies, in connection therewith;
(ii) Proposal Two: Approval of the amendment of the Restated Certificate of
Incorporation of the Company to (a) change the name of the Company to
Sunburst Hospitality Corporation; (b) decrease the number of
authorized shares of Company Common Stock from 160,000,000 to
60,000,000; and (c) effect a one-for-three reverse stock split of
Company Common Stock whereby every three shares of Company Common
Stock would be aggregated into one share of Company Common Stock (the
"Reverse Stock Split") following the Distribution;
(iii) Proposal Three: Ratification of the election by the Company, as sole
stockholder of Franchising, of nine directors of Franchising
specified in the Proxy Statement, who will be divided into three
classes, the initial terms of which will expire in 1998, 1999 and
2000; and
(iv) Proposal Four: Ratification of the adoption by Franchising of the
Choice Hotels Franchising, Inc. 1997 Long-Term Incentive Plan and the
Choice Hotels Franchising, Inc. Employee Stock Purchase Plan.
The effectiveness of each of the Distribution Proposals is conditioned upon
the approval of all of the Distribution Proposals. Accordingly, failure of the
stockholders to approve any one or more of the Distribution Proposals will
result in the ineffectiveness of all of the Distribution Proposals.
The Board of Directors unanimously recommends that the stockholders vote FOR
all of the Distribution Proposals.
Although the Company does not believe that stockholder approval of the
Distribution is required under applicable law, the Board of Directors has made
stockholder ratification of the Distribution (along with
1
<PAGE>
stockholder ratification or approval, as the case may be, of each of the other
Distribution Proposals, as set forth above) a condition to the Distribution
because of the importance of the Distribution to the Company and its
stockholders. For a description of the reasons for the Distribution, see
"Proposal One: Ratification of the Distribution--The Distribution." The Board
of Directors has retained discretion, even if stockholder approval of the
Distribution Proposals is obtained, to abandon, defer or modify the
Distribution or any other element contained in the Distribution Proposals. In
the event that, prior to the Annual Meeting, the Board of Directors makes any
material changes in the terms of the Distribution or the other elements of the
Distribution Proposals, the Company will so notify stockholders by means of a
supplement to the Proxy Statement. Following stockholder approval, the Board
of Directors will not make any changes in the terms of the Distribution or the
other elements of the Distribution Proposals unless the Board of Directors
determines that such changes would not be materially adverse to the Company's
stockholders.
In addition, holders of shares of Company Common Stock will also be asked to
consider and to vote upon the following proposals (the "Additional
Proposals"):
(i) Proposal Five: Election of three directors to hold office until the
2000 Annual Meeting of Stockholders and until their successors are
elected and qualified;
(ii) Proposal Six: Ratification of the Choice Hotels International, Inc.
1996 Long-Term Incentive Plan; and
(iii) Proposal Seven: Ratification of the Choice Hotels International, Inc.
Employee Stock Purchase Plan.
The effectiveness of the Additional Proposals is not conditioned on the
approval of any Distribution Proposal.
The Board of Directors unanimously recommends that the stockholders vote FOR
the Additional Proposals.
VOTING AT THE MEETING
The close of business on August 5, 1997 has been fixed as the record date
for determination of holders of Company Common Stock entitled to notice of and
to vote at the Annual Meeting. On that date, there were outstanding and
entitled to vote 60,200,784 shares of Company Common Stock. The presence,
either in person or by proxy, of persons entitled to cast a majority of such
votes constitutes a quorum for the transaction of business at the Annual
Meeting.
Stockholders are entitled to one vote per share on all matters submitted for
consideration at the Annual Meeting. With regard to the election of directors,
votes may be cast in favor of or withheld from nominees. Votes that are
withheld will be excluded entirely from the vote and will have no effect.
Abstentions may be specified on all proposals other than the election of
directors. Abstentions and broker non-votes on returned proxies are counted as
shares present in the determination of whether the shares of stock represented
at the Annual Meeting constitute a quorum. Each proposal is tabulated
separately. Abstentions are counted in tabulations of the votes cast on
proposals presented to the stockholders, whereas broker non-votes are not
counted for purposes of determining whether a proposal has been approved.
The affirmative vote of the holders of at least a majority of the
outstanding shares of Company Common Stock is required to approve each
Distribution Proposal. The affirmative vote of a plurality of shares of
Company Common Stock present in person or represented by proxy at the Annual
Meeting is required to elect the directors nominated pursuant to Proposal
Five. "Plurality" means that the individuals who receive the largest number of
votes cast are elected as directors up to the maximum number of directors to
be chosen at the meeting. A vote of at least a majority of the shares present
and voting at the Annual Meeting, in person or by proxy, is required to
approve Proposals Six and Seven.
Certain members of the Bainum family (including various trusts established
by members of the Bainum family) in the aggregate have the right to vote
approximately 34.43% of the number of outstanding shares of Company Common
Stock and have indicated an intention to vote in accordance with the
recommendations of
2
<PAGE>
the Board of Directors with respect to the Distribution Proposals and the
Additional Proposals. See "Proposal Five: Election of Directors--Security
Ownership of Principal Stockholders and Management."
All shares of Company Common Stock that are represented at the Annual
Meeting by properly executed proxies received prior to or at the Annual
Meeting, and not revoked, will be voted at the Annual Meeting in accordance
with the instructions indicated in such proxies. If no instructions are
indicated for a Distribution Proposal or Additional Proposal, such proxies
will be voted in accordance with the Board of Directors' recommendations as
set forth herein with respect to such proposal(s).
In the event that a quorum is not present at the time the Annual Meeting is
convened, or if, for any other reason (including for the purpose of allowing
additional time for the solicitation of proxies) the Company determines that
an adjournment is necessary or appropriate, the Company may adjourn the Annual
Meeting with or without a vote of the stockholders. If the Company proposes to
adjourn the Annual Meeting by a vote of the stockholders, the persons named in
the enclosed form of proxy will vote all shares of Company Common Stock for
which they have voting authority in favor of such adjournment; provided,
however, that if the purpose for such adjournment is to permit the Company to
continue soliciting votes in favor of the Distribution Proposals, proxies
voting against the Distribution Proposals will not be voted by such persons in
favor of adjournment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with ChaseMellon Shareholder Services, L.L.C. in its capacity as transfer
agent for the Company (the "Transfer Agent"), at or before the Annual Meeting,
a written notice of revocation bearing a later date than the proxy, (ii) duly
executing a subsequent proxy relating to the same shares of Company Common
Stock and delivering it to the Transfer Agent at or before the Annual Meeting,
or (iii) attending the Annual Meeting and voting in person (although
attendance at the Annual Meeting will not, in and of itself, constitute a
revocation of a proxy). Any written notice revoking a proxy should be sent to
ChaseMellon Shareholder Services, L.L.C., 450 W. 33rd Street, New York, New
York 10001.
The Company will bear the cost of the solicitation. In addition to
solicitation by mail, the Company will request banks, brokers and other
custodian nominees and fiduciaries to supply proxy material to the beneficial
owners of Company Common Stock of whom they have knowledge, and will reimburse
them for their expenses in so doing; and certain directors, officers and other
employees of the Company, not specially employed for the purpose, may solicit
proxies, without additional remuneration therefor, by personal interview,
mail, telephone or telegraph. In addition, the Company has retained
ChaseMellon Shareholder Services, L.L.C. to assist in the solicitation for a
fee of $7,500 plus expenses.
Stockholders of the Company will not be entitled to appraisal rights under
Delaware law in connection with the Distribution Proposals or the Additional
Proposals.
3
<PAGE>
PROXY STATEMENT SUMMARY
The following summarizes certain information contained elsewhere in this
Proxy Statement, including the appendices hereto (the "Proxy Statement").
Reference is made to, and this summary is qualified in its entirety by, the
more detailed information set forth in this Proxy Statement, which should be
read in its entirety. Unless the context otherwise requires, all references
herein to the Company and to Franchising shall include their respective
subsidiaries and all references herein to Franchising prior to the Distribution
Date shall refer to the Franchising Business (as defined herein) as operated by
the Company. Unless otherwise indicated, all statistical information and data
relating to the hotel industry in this Proxy Statement are derived from
information provided by Smith Travel Research. Smith Travel Research has not
consented to the use of the hotel industry data presented herein or provided
any form of consultation, advice, or counsel regarding any aspects of, and is
in no way whatsoever associated with, the proposed transaction.
THE ANNUAL MEETING
Date, Time and Place of The Annual Meeting of Stockholders (the "Annual
Annual Meeting............... Meeting") of Choice Hotels International, Inc.,
a Delaware corporation (the "Company") will be
held 9:00 a.m. (E.S.T.) at the Quality Suites
Shady Grove, 3 Research Court, Rockville,
Maryland on September 16, 1997.
Matters for Consideration at
the Annual Meeting...........
At the Annual Meeting, holders of shares of
Company Common Stock will be asked to consider
and to vote upon the following related
proposals, denominated Proposals One through
Four (collectively, the "Distribution
Proposals"): (i) Proposal One: Ratification of
a special dividend, consisting of the
distribution (the "Distribution") to the
holders of the Company's outstanding shares of
common stock, par value $.01 per share
("Company Common Stock"), on a share-for-share
basis, of all outstanding shares of common
stock, par value $.01 per share ("Franchising
Common Stock"), of the Company's wholly owned
subsidiary, Choice Hotels Franchising, Inc., a
Delaware corporation ("Franchising") and the
related arrangements between the Company and
Franchising, and the policies to be adopted by
such companies, in connection therewith; (ii)
Proposal Two: Approval of the amendment of the
Restated Certificate of Incorporation of the
Company to (a) change the name of the Company
to Sunburst Hospitality Corporation, (b)
decrease the number of authorized shares of
Company Common Stock from 160,000,000 to
60,000,000, and (c) effect a one-for-three
reverse stock split of Company Common Stock
whereby every three shares of Company Common
Stock would be aggregated into one share of
Company Common Stock (the "Reverse Stock
Split") following the Distribution; (iii)
Proposal Three: Ratification of the election by
the Company, as sole stockholder of
Franchising, of nine directors of Franchising
specified herein, who will be divided into
three classes, the initial terms of which will
expire in 1998, 1999 and 2000; and (iv)
Proposal Four: Ratification of adoption by
4
<PAGE>
Franchising of the Choice Hotels Franchising,
Inc. 1997 Long-Term Incentive Plan
("Franchising Incentive Plan") and the Choice
Hotels Franchising, Inc. Employee Stock
Purchase Plan ("Franchising Stock Purchase
Plan").
The effectiveness of each of the Distribution
Proposals is conditioned upon the approval of
all of the Distribution Proposals. Accordingly,
failure of the stockholders to approve any one
or more of the Distribution Proposals will
result in the ineffectiveness of all of the
Distribution Proposals.
The Board of Directors unanimously recommends
that the stockholders vote FOR all of the
Distribution Proposals. In addition, holders of
shares of Company Common Stock will also be
asked to consider and to vote upon the
following proposals (the "Additional
Proposals"): (i) Proposal Five: The election of
three directors to hold office until the 2000
Annual Meeting of Stockholders and until their
successors are elected and qualified; (ii)
Proposal Six: Ratification of the Choice Hotels
International, Inc. 1996 Long-Term Incentive
Plan ("1996 Incentive Plan"); and (iii)
Proposal Seven: Ratification of the Choice
Hotels International, Inc. Employee Stock
Purchase Plan.
The effectiveness of the Additional Proposals
is not conditioned on the approval of any
Distribution Proposal. The Board of Directors
unanimously recommends that stockholders vote
FOR Proposals Five through Seven.
Annual Meeting Record Date.... August 5, 1997 ("Annual Meeting Record Date").
Voting........................ Each stockholder of record as of the Annual
Meeting Record Date is entitled at the Annual
Meeting to one vote for each share held. The
affirmative vote of the holders of at least a
majority of the outstanding shares of Company
Common Stock is required to approve each of the
Distribution Proposals. The affirmative vote of
a plurality of shares of Company Common Stock
present in person or represented by proxy at
the Annual Meeting is required to elect the
directors nominated pursuant to Proposal Five.
The vote of at least a majority of the shares
of Company Common Stock present in person or
represented by proxy at the Annual Meeting is
required to approve Proposal Six and Proposal
Seven. As of the Annual Meeting Record Date,
there were 60,200,784 shares of Company Common
Stock outstanding and entitled to vote at the
Annual Meeting. Certain members of the Bainum
family (including various trusts established by
members of the Bainum family) in the aggregate
have the right to vote approximately 34.43% of
the number of outstanding shares of Company
Common Stock and have indicated an intention to
vote in accordance with the recommendations of
the Board of Directors with respect to the
Distribution Proposals and the Additional
Proposals.
5
<PAGE>
THE DISTRIBUTION
Distributed Company........... Choice Hotels Franchising, Inc.
("Franchising"), a Delaware corporation and a
wholly owned subsidiary of the Company, will,
on the Distribution Date, own all of the
business and assets of, and be responsible for
all of the liabilities associated with, the
business of franchising hotels under the
Clarion(R), Quality(R), Comfort(R), Sleep
Inn(R), Rodeway(R), Econo Lodge(R) and MainStay
SuitesSM brands currently conducted by
Franchising and certain of its subsidiaries as
well as all European real estate assets
currently held by the Company (the "Franchising
Business"). Upon the Distribution, Franchising
will change its corporate name to Choice Hotels
International, Inc.
Distributing Company.......... Choice Hotels International, Inc., a Delaware
corporation (the "Company"). Upon the
Distribution, the Company will continue to own
and operate hotel properties in the U.S. (the
"Hotel Business") and will change its corporate
name upon the Distribution to Sunburst
Hospitality Corporation (as renamed after the
Distribution, "Sunburst").
Securities to Be
Distributed.................. Approximately 60,200,784 shares of Franchising
Common Stock based on 60,200,784 shares of
Company Common outstanding as of the Annual
Meeting Record Date.
Reasons for the
Distribution................. The Company's Board of Directors and management
believe that the separation of the Company's
Franchising Business and Hotel Business into
two public companies via the Distribution will
reduce or eliminate substantial recurring
conflicts between the Hotel Business and the
Franchising Business which are impediments to
the growth of the Company's Hotel Business. The
Distribution will also enable the Hotel
Business to attract, retain and effectively
incentivize skilled real estate professionals
and will facilitate a better understanding by
the investment community of the Company's
distinct businesses. See "Proposal One:
Ratification of the Distribution--The
Distribution--Background and Reasons for the
Distribution."
Conditions to the
Distribution................. The Distribution is conditioned upon, among
other things, stockholder approval of the
Distribution Proposals at the Annual Meeting.
Even if all conditions are satisfied, the Board
of Directors has reserved the right to abandon,
defer or modify the Distribution or the other
elements of the Distribution Proposals at any
time prior to the Distribution Date. In the
event that, prior to the Annual Meeting, the
Board of Directors makes any material changes
in the terms of the Distribution or other
elements of the Distribution Proposals, the
Company will notify stockholders by means of a
supplement to the Proxy Statement. Following
stockholder approval, the Board of Directors
will not waive any of the conditions to the
Distribution or make any
6
<PAGE>
changes in the terms of the Distribution or the
other elements of the Distribution Proposals
unless the Board of Directors determines that
such changes would not be materially adverse to
the Company's stockholders. In determining
whether any such changes would be materially
adverse to the Company's stockholders, the
Board of Directors will consider, as
appropriate, advice from its outside advisors
as well as the recommendation of management as
to the potential impact of such changes on the
Company and the Company's Stockholders. See
"Proposal One: Ratification of the
Distribution--The Distribution--Conditions;
Termination."
Distribution Ratio............ One share of Franchising Common Stock for each
share of Company Common Stock.
Tax Consequences.............. The Company has conditioned the Distribution on
receipt of a ruling from the Internal Revenue
Service to the effect that, among other things,
for federal income tax purposes, receipt of
shares of Franchising Common Stock by the
Company stockholders will be tax free. However,
the Board of Directors has reserved the right
to waive the receipt of such ruling as a
condition to consummation of the Distribution
(which could occur in anticipation of a
negative outcome of such ruling). The Board of
Directors may not provide stockholders with
notice if receipt of the tax ruling is waived
as a condition to consummation of the
Distribution; however, (i) the Board of
Directors will waive such condition only if the
Board of Directors believes that the receipt of
the Franchising Shares will be tax free and an
opinion of counsel is received to that effect
and (ii) the Company will notify stockholders
if the Company either receives an unfavorable
ruling from the Internal Revenue Service, or
withdraws its request for such ruling prior to
the Annual Meeting. See "Proposal One:
Ratification of the Distribution--The
Distribution--Federal Income Tax Aspects of the
Distribution."
For a discussion of the effects on the Company
and Franchising if the Distribution were not to
qualify as tax free for federal income tax
purposes, see "Proposal One: Ratification of
the Distribution--Risk Factors--Certain Tax
Considerations."
Risk Factors.................. Stockholders should carefully consider all of
the information contained in this Proxy
Statement, including the matters described
under "Risk Factors."
Relationship between the
Company and Franchising
after the Distribution....... For purposes of governing the ongoing
relationships between the Company and
Franchising after the Distribution Date and in
order to provide for an orderly transfer of the
Franchising Business to Franchising and
facilitate the transition to two separate
publicly traded companies, the Company and
Franchising have entered into a Distribution
Agreement, a Strategic Alliance Agreement,
Franchising Agreements and
7
<PAGE>
various other agreements with respect to, among
other things, intercompany debt, tax matters,
employee benefits, risk management and
corporate and administrative services. See
"Proposal One: Ratification of the
Distribution--Relationship Between the Company
and Franchising After the Distribution." The
relationship between the Company and
Franchising may be subject to certain potential
conflicts of interest. See "Proposal One:
Ratification of the Distribution--Risk
Factors--Potential Conflicts."
Accounting Treatment.......... The historical combined financial statements of
Franchising present its financial position,
results of operations and cash flows as if it
were a separate entity for all periods
presented. The Company's historical basis in
the assets and liabilities of Franchising has
been carried over. See "Proposal One:
Ratification of the Distribution--Accounting
Treatment," and the combined financial
statements of Choice Hotels Franchising, Inc.,
contained elsewhere herein.
Listing and Trading Market.... There is currently no public market for
Franchising Common Stock. The Company intends
to list the Franchising Common Stock on the New
York Stock Exchange. However, there can be no
assurance that the Franchising Common Stock
will be accepted for listing on the New York
Stock Exchange or any other national stock
exchange or market. The Company expects that no
"when issued" trading market will exist prior
to the time that Franchising's Registration
Statement on Form 10 is declared effective by
the Commission. See "Proposal One: Ratification
of the Distribution--Risk Factors--No Current
Market for Franchising Common Stock; and --The
Distribution--Listing and Trading of
Franchising Common Stock."
Record Date................... The Board of Directors will set the record date
for the Distribution referred to herein as (the
"Distribution Record Date").
Distribution Date............. The Board of Directors will set the
Distribution Date. On the Distribution Date,
the Company will deliver all outstanding shares
of Franchising Common Stock to the Distribution
Agent. As soon as practicable thereafter, the
Distribution Agent will mail certificates
representing the appropriate number of shares
of Franchising Common Stock to the Company's
stockholders entitled thereto. See "Proposal
One: Ratification of the Distribution--The
Distribution--Manner of Effecting the
Distribution."
Distribution Agent............ ChaseMellon Shareholder Services, L.L.C., the
transfer agent for the Company.
Reverse Stock Split........... The Company shall effect a one-for-three
reverse stock split of the Company Common Stock
whereby every three shares of Company Common
Stock will be aggregated into one share of
Company Common Stock. See "Proposal Two:
Amendments to the Restated Certification of
Incorporation of the Company--Reverse Stock
Split."
8
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
Business...................... Franchising is presently a wholly owned
subsidiary of the Company. Following the
Distribution, Franchising will conduct the
Franchising Business as now conducted by
Franchising, the Company and certain other
subsidiaries of the Company. Franchising will
be one of the world's largest franchisors of
hotels with 3,344 properties open and operating
in 33 countries at May 31, 1997. As a
franchisor, Franchising will license hotel
operators to use Franchising's brand names:
Comfort(R), Quality(R), Clarion(R), Sleep(R),
Rodeway(R), Econo Lodge(R) and MainStay
Suites(SM) (collectively, the "Choice Brands"),
and will provide to these hotel operators
products and services designed to increase
their revenues and profitability. Following the
Distribution, Franchising will also conduct the
Company's European hotel operations, including
the Company's indirect investment in Friendly
Hotels, PLC.
Board of Directors............ Effective as of the Distribution Date, the
Board of Directors of Franchising is expected
to consist of nine persons: Stewart Bainum,
Jr., Stewart Bainum, Barbara Bainum, William R.
Floyd, James H. Rempe, Robert C. Hazard, Jr.,
Gerald W. Petitt, Jerry E. Robertson, Ph.D and
Frederic V. Malek.
Post-Distribution Dividend
Policy....................... The dividend policy of Franchising will be
determined by Franchising's Board of Directors
following the Distribution. It is expected that
the Franchising Credit Facility (as defined
below) will restrict Franchising's ability to
pay dividends. See "Proposal One: Ratification
of the Distribution--Financing."
Certain Restated Certificate
of Incorporation and Bylaw
Provisions................... The Restated Certificate of Incorporation (the
"Franchising Certificate") and the Bylaws (the
"Franchising Bylaws") of Franchising are
substantially identical to, and contain no
material differences from, the Company's
Restated Certificate of Incorporation and
Bylaws. Certain provisions of the Franchising
Certificate and the Franchising Bylaws have the
effect of delaying or making more difficult an
acquisition of control of Franchising in a
transaction not approved by its Board of
Directors. These provisions have been designed
to enable Franchising, 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
interests of Franchising. Such provisions
could, however, deter an offer for Franchising
Common Stock at a substantial premium to the
then current market price or hinder a potential
transaction that may be attractive to
stockholders. See "Proposal One: Ratification
of the Distribution--Certain Information
Concerning Franchising--Purposes and Effects of
Certain Provisions of the Franchising
Certificate and Bylaws." The Franchising
Certificate would
9
<PAGE>
eliminate certain liabilities of directors in
connection with the performance of their
duties. See "Proposal One: Ratification of the
Distribution--Certain Information Concerning
Franchising--Liability and Indemnification of
Officers and Directors--Elimination of
Liability in Certain Circumstances."
Principal Office.............. 10750 Columbia Pike, Silver Spring, Maryland
20901. Its telephone number is (301) 979-5000.
SUNBURST HOSPITALITY CORPORATION
Business...................... Following the Distribution, Sunburst will
retain the Company's Hotel Business and will
own and manage 71 hotels in 25 states,
primarily under Franchising's brands, and will
be Franchising's largest franchisee.
Board of Directors............ Effective as of the Distribution Date, the
Board of Directors of Sunburst is expected to
consist of seven persons; Stewart Bainum, Jr.,
Stewart Bainum, Donald J. Landry, Frederic V.
Malek, Paul R. Gould, Carole Y. Prest and one
additional director to be selected by the
Company's Board of Directors prior to the
Distribution. The remaining vacancy will be
filled by a person who is not a Sunburst
employee or employee or director of
Franchising.
Post-Distribution Dividend
Policy....................... The dividend policy of Sunburst will be
determined by Sunburst's Board of Directors
following the Distribution. The Company
currently is prohibited from paying dividends
pursuant to the terms of its loan agreement
with MNR Finance Corp. It is expected that the
Sunburst Credit Facility will restrict
Sunburst's ability to pay dividends. See
"Proposal One: Ratification of the
Distribution--Financing."
Listing and Trading Market.... The Sunburst Common Stock (formerly Company
Common Stock) is expected to continue to be
listed on the New York Stock Exchange following
the Distribution. Following the Distribution,
Sunburst's financial results will no longer be
consolidated with those of the Company's
Franchising Business, and Sunburst's revenues,
income and other results of operations will be
substantially below those of the Company prior
to the Distribution. Accordingly, as a result
of the Distribution, the trading price range of
Sunburst Common Stock immediately after the
Distribution (prior to the effect of the
Reverse Stock Split) is expected to be
significantly lower than the trading range of
Company Common Stock. See "Proposal One:
Ratification of The Distribution--The
Distribution--Listing and Trading of Sunburst
Common Stock; and --Risk Factors--Changes in
Trading Prices of Sunburst Common Stock."
Principal Office.............. 10750 Columbia Pike, Silver Spring, Maryland
20901. Its telephone number is (301) 979-3800.
10
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
SUMMARY FINANCIAL INFORMATION
The following table summarizes certain selected historical financial data of
Franchising for the three fiscal years ended May 31, 1997. The information set
forth below should be read in conjunction with "Proposal One: Ratification of
the Distribution--Certain Information Concerning Franchising--Selected
Historical Financial Data; and --Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Combined Financial
Statements of Franchising contained elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Statement of Income Data
Revenues....................................... $272,255 $250,654 $212,672
Operating expense.............................. 201,893 216,271 170,706
Operating income............................... 70,362 34,383 41,966
Net income..................................... 34,730 11,664 16,228
Pro forma earnings per share(4)................ $ 0.55 $ 0.19 $ 0.26
Other Data
EBITDA(2)(3)................................... $ 80,800 $ 69,450 $ 51,534
Cash flows from operating activities........... 46,448 32,742 37,851
Cash flows from investing activities........... (17,871) (78,499) (7,733)
Cash flows from financing activities........... (28,222) 48,513 (31,261)
Number of franchised properties (unaudited).... 3,344 3,052 2,835
Number of rooms (unaudited).................... 335,127 261,456 245,669
Average royalty rate (unaudited)............... 3.4% 3.3% 3.2%
Balance Sheet Data
Working capital (unaudited).................... $ (1,359) $ (3,927) $(29,423)
Total assets................................... 221,473 212,803 189,087
Notes payable to Parent........................ 78,700 78,700 78,700
Total debt..................................... 125,163 145,315 128,205
Total investment and advances from (to)
Parent........................................ 57,193 30,532 (12,699)
</TABLE>
- --------
(1) 1996 includes a pre-tax charge of $24.8 million for impairment of certain
long lived assets associated with Franchising's European operations.
(2) EBITDA consists of the sum of net income (loss), interest expense, income
taxes, depreciation and amortization and non-cash asset writedowns. EBITDA
is presented because such data is used by certain investors to determine
Franchising's ability to meet debt service, fund capital expenditures and
expand its business. Franchising considers EBITDA to be an indicative
measure of operating performance particularly due to the large amount of
goodwill and franchise rights amortization. Such information should not be
considered an alternative to net income, operating income, cash flow from
operations or any other operating or liquidity performance measure
prescribed by GAAP. Cash expenditures (including nondiscretionary
expenditures) for various long-term assets, interest expense and income
taxes have been, and will be, incurred which are not reflected in the
EBITDA presentation and therefore EBITDA does not represent funds available
for management's discretionary use. EBITDA presented by Franchising may not
be comparable to EBITDA defined and presented by other companies.
(3) 1996 EBITDA excludes a pre-tax charge of $24.8 million for impairment of
certain long lived assets associated with Franchising's European
operations.
(4) Pro forma earnings per share has been calculated based on the weighted
average shares outstanding of its parent Manor Care, Inc. for fiscal year
1995 and fiscal year 1996 of 62,480,000 and 62,628,000, respectively, and
its parent Choice Hotels International, Inc. for fiscal year 1997 of
62,680,000.
11
<PAGE>
PROPOSAL ONE: RATIFICATION OF THE DISTRIBUTION
THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
The Company's Board of Directors and management have determined, for the
reasons set forth below, among others, to separate the Company's Franchising
Business from its Hotel Business. On April 28, 1997, the Company's Board of
Directors announced its intention to distribute to holders of Company Common
Stock all of the outstanding shares of Franchising Common Stock. On April 28,
1997, the high and low sales prices of Company Common Stock as reported on the
New York Stock Exchange Composite Tape were $12 3/4 and $12 1/4, respectively.
Following the Distribution, the Company will not own any shares of Franchising
Common Stock or other capital stock of Franchising, but will have certain
contractual relationships with Franchising. See "--Certain Information
Concerning Franchising--Relationship Between the Company and Franchising After
the Distribution."
Prior to November 1, 1996, the Company and Franchising were wholly owned
subsidiaries of Manor Care, Inc., a Delaware corporation ("Manor Care"). On
November 1, 1996, Manor Care contributed all of the stock of Franchising to
the Company and then distributed to Manor Care stockholders, on a pro rata
basis, all of the stock of the Company (the "Manor Care Spin-off"). Prior to
the Manor Care Spin-off, Manor Care was generally engaged, directly and
through subsidiaries, in the Franchising Business, the Hotel Business and the
health care business. Thus, the Manor Care Spin-off effected the separation of
Manor Care's Franchising Business and Hotel Business from its health care
business.
The Board of Directors believes that the proposed Distribution will reduce
or eliminate substantial recurring conflicts between the Hotel Business and
the Franchising Business which create impediments to the growth of the
Company's Hotel Business. The Company currently owns and operates hotels for
its account and also enters into franchise relationships with unrelated
franchisees who own and operate hotels for their account. As a result,
business conflicts between the Hotel Business and the Franchising Business are
inevitable, as are franchisee perceptions that the Hotel Business "competes"
with the Company's franchisees. Moreover, the potential for conflict is
exacerbated due to the large size of the Company's franchise system, and the
territorial protections provided by the Company to its franchisees. As a
result of these conflicts, the Hotel Business has been forced, on numerous
occasions, to relinquish attractive hotel acquisition and development
opportunities because of franchisee complaints to Company management that a
proposed site and brand posed a competitive threat. Numerous other
transactions have not been pursued by the Hotel Business because of concerns
raised by management of the Franchising Business regarding potential adverse
franchisee reaction. The Company believes that the Distribution will resolve
such conflicts.
The Distribution, by separating the Company's two distinct businesses--hotel
franchising and hotel ownership and management--should also facilitate better
understanding of these business by the investment community. The Company
believes that the consolidation of its service-oriented Franchise Business and
capital intensive, ownership-oriented Hotel Business has resulted in confusion
and misperception in the investor community about the nature and growth
opportunities of the Company's various operations.
Additionally, the Board of Directors believes that, as part of an
independent company with enhanced growth opportunities, the Hotel Business
will be better able to attract, retain and effectively motivate skilled
professionals in the real estate development area who are compensated in large
part based on successfully completing real estate development and acquisition
transactions. As an independent company freed of the conflicts which have
hindered its growth, the Hotel Business will be able to provide meaningful
incentive compensation arrangements to attract, motivate and retain key
personnel in the real estate development area.
These factors led the Board of Directors to initiate consideration in
November 1996, in connection with efforts to monetize the Company's owned real
estate, of a possible separation of the Franchising Business and the Hotel
Business. In developing its recommendation for separating the Hotel Business
from the Franchising
12
<PAGE>
Business, management considered and rejected certain alternatives such as
asset divestitures, sale leasebacks and joint ventures with third parties
because the low tax basis in the Company's hotel properties would cause
adverse tax consequences to the Company. Moreover, such alternatives (other
than a sale of all of the Company's hotel properties) did not fully accomplish
the Board of Directors' objective of fully separating the Hotel Business and
the Franchising Business. With regard to such alternatives, there were no
contacts or negotiations with the Board of Directors or management from or by
third parties. Based on these considerations, management concluded that the
Distribution was the only tax-free way to fully separate the Hotel Business
and the Franchising Business. In reaching its determination, neither the Board
of Directors nor management consulted with any financial advisors or conducted
financial analysis with respect to the various strategic alternatives. In
February 1997, the Board of Directors considered management's analysis,
including management's determination that the alternatives considered and
rejected by management would have adverse tax consequences to the Company and
would not completely satisfy the Board of Directors' objective of fully
separating the Hotel Business and the Franchising Business. Based on these
considerations, the Board of Directors directed management to prepare for its
consideration a recommendation concerning the possible separation of the
Franchising Business and the Hotel Business through a spin-off distribution to
the Company's stockholders. In April 1997, management presented to the Board
of Directors a recommendation to approve the Distribution and the Board of
Directors unanimously approved managements's recommendation to effect the
Distribution.
The Distribution Proposals are separately presented in accordance with
applicable Securities and Exchange Commission rules and regulations, however,
the Board of Directors regards the matters presented in Proposals Two through
Four as matters integrally related to the Distribution. As a result, the Board
of Directors has determined that the effectiveness of each Distribution
Proposal is conditional upon the approval of all of the Distribution
Proposals.
Based on the foregoing, the Company's Board of Directors unanimously
recommends that the stockholders vote for all of the Distribution Proposals.
Stockholders of the Company with inquiries relating to the Distribution
should contact the Company's Investor Relations Department at (301) 979-3800.
After the Distribution Date, stockholders of Franchising should contact the
Franchising Investor Relations Department at (301) 979-5000.
SOLVENCY OPINION
The Distribution is conditioned upon, among other things, the receipt by the
Board of Directors of an opinion of a reputable appraisal or financial
advisory firm, in a form satisfactory to the Board of Directors, to the effect
that, assuming the Distribution is consummated as proposed: (i) with respect
to each of the Company and Franchising, immediately after giving effect to the
Distribution (a) the fair value of such company's aggregate assets would
exceed such company's total liabilities (including contingent liabilities);
(b) the present fair saleable value of such company's aggregate assets would
be greater than such company's probable liabilities on its debts as such debts
become absolute and mature; (c) such company would be able to pay its debts
and other liabilities (including contingent liabilities) as they mature; and
(d) the capital remaining in such company after the Distribution would not be
unreasonably small for the business in which such company is engaged, as
management has indicated it is now conducted and is proposed to be conducted
following consummation of the Distribution; and (ii) the excess of the value
of the aggregate assets of the Company, before consummation of the
Distribution, over the total identified liabilities (including contingent
liabilities) of the Company would equal or exceed the value of the
Distribution to stockholders plus the stated capital of the Company (the
"Solvency Opinion"). See "--Conditions; Termination." The Board of Directors
has reserved the right to waive the receipt of the Solvency Opinion as a
condition to consummation of the Distribution. The Board of Directors may not
provide stockholders with notice if receipt of the Solvency Opinion is waived
as a condition to consummation of the Distribution; however, the Board of
Directors will waive such condition only if the Board of Directors is
satisfied as to the solvency of the Company and Franchising and as to the
permissibility of the Distribution under Section 170 of the DGCL. In the event
that the Board of Directors waives the receipt of the Solvency Opinion as a
condition to consummation of the Distribution, the Board of Directors will
obtain an opinion of counsel that, based on the Board of Directors'
determination as to the amount of the Company's surplus (as defined
13
<PAGE>
under the DGCL) and the value of the shares of Franchising Common Stock to be
distributed, the requirements of Section 170 of the DGCL have been satisfied
with respect to the Distribution.
The Company has engaged American Appraisal Associates, Inc., to provide such
an opinion and has agreed to pay American Appraisal a fee of $70,000 for its
services (which fee will not be contingent on consummation of the
Distribution).
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions of the Distribution will be set forth in a
Distribution Agreement (the "Distribution Agreement") to be entered into by
the Company and Franchising prior to the Distribution.
If the Company's stockholders approve the Distribution Proposals and all
other conditions thereto are satisfied (or waived by the Board of Directors),
the Distribution will be made on a date to be established by the Board of
Directors following the Annual Meeting (the "Distribution Date") to
stockholders of record of the Company as of the record date established by the
Board of Directors for the Distribution (such date, the "Distribution Record
Date"). The Distribution Record Date will be established by the Board of
Directors following the Annual Meeting. On the Distribution Date, the Shares
will be delivered by the Company to ChaseMellon Shareholder Services, L.L.C.,
as the distribution agent (the "Distribution Agent"). As soon thereafter as
practicable, account statements reflecting ownership of shares of Company
Common Stock and Franchising Common Stock will be mailed by the Distribution
Agent to holders of Company Common Stock as of the Distribution Record Date to
reflect the distribution of one share of Franchising Common Stock for every
share of Company Common Stock held on such date. All shares will be fully paid
and non-assessable and the holders thereof will not be entitled to preemptive
rights.
No holder of Company Common Stock will be required to pay any cash or other
consideration for the shares of Franchising Common Stock received in the
Distribution or to surrender or exchange shares of Company Common Stock in
order to receive Franchising Common Stock.
FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION
The Company has conditioned the Distribution on the receipt of a ruling from
the Internal Revenue Service to the effect that, among other things, 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 (the "Code"), as
amended, and that:
(1) No gain or loss will be recognized by (and no amount will be included
in the income of) holders of Company Common Stock upon the receipt of
shares of Franchising Common Stock in the Distribution;
(2) Provided that on the Distribution Date a holder of Company Common
Stock holds such stock as a capital asset, the holding period for the
shares of Franchising Common Stock to be received in the Distribution will
include the holding period of Company Common Stock with respect to which
the Distribution was made;
(3) A holder's basis in Company Common Stock held immediately before the
Distribution will be allocated, based upon relative fair market values at
the time of the Distribution, between such Company Common Stock and the
shares of Franchising Common Stock received by the stockholder in the
Distribution; and
(4) No gain or loss will be recognized by the Company or Franchising upon
the Distribution.
Application has been made to the Internal Revenue Service for a ruling to
the foregoing effect. As of the date hereof, the Internal Revenue Service has
not yet issued the ruling requested. The Company believes and has been advised
by its outside tax advisors that the positions asserted by the Company in
requesting the ruling are consistent with the Code and the rules and
regulations promulgated thereunder. However, there is no certainty that the
Internal Revenue Service will issue a favorable ruling. If such ruling is not
obtained, the Board of Directors' present intention is not to proceed with the
Distribution. However, the Board of Directors has reserved
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the right to waive the receipt of such a ruling as a condition to consummation
of the Distribution. The Board of Directors may not provide stockholders with
notice if receipt of the tax ruling is waived as a condition to consummation
of the Distribution; however, (i) the Board of Directors will waive such
condition only if the Board of Directors believes that the receipt of shares
of Franchising Common Stock will be tax free and an opinion of counsel is
received to that effect and (ii) the Company will notify stockholders if the
Company either receives an unfavorable ruling from the Internal Revenue
Service or withdraws its request for such ruling prior to the Annual Meeting.
See "--Conditions; Termination." For a description of the consequences to the
Company, Franchising and the stockholders if the Distribution were not to
qualify as tax free, see "--Risk Factors--Certain Tax Considerations."
The foregoing summary of material federal income tax consequences of the
Distribution does not purport to cover all federal income tax consequences
that may apply to all categories of stockholders. Each stockholder should
consult its own 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.
LISTING AND TRADING OF FRANCHISING COMMON STOCK
Currently, there is no public market for Franchising Common Stock. It is the
Company's intention that no "when-issued" trading market for Franchising
Common Stock will exist prior to the time Franchising's Registration Statement
on Form 10 with respect to the Franchising Common Stock (the "Franchising Form
10") is declared effective by the Commission. Prices at which Franchising
Common Stock may trade prior to the Distribution (on a "when-issued" basis) or
after the Distribution cannot be predicted. Until the Franchising Common Stock
is fully distributed and an orderly market develops, the prices at which
trading in such stock occurs may fluctuate significantly. The prices at which
Franchising Common Stock trades will be determined by the marketplace and may
be influenced by many factors, including, among others, the depth and
liquidity of the market for Franchising Common Stock, investor perception of
Franchising and the industry in which Franchising participates, Franchising's
dividend policy and general economic and market conditions. Such prices may
also be affected by certain provisions of the Franchising Certificate and
Franchising Bylaws, as each will be in effect following the Distribution,
which may have an antitakeover effect. See "--Risk Factors--Dividend Policies;
and--Certain Information Concerning Franchising--Purposes and Antitakeover
Effects of Certain Provisions of the Franchising Certificate and Bylaws."
Franchising intends to list the Franchising Common Stock on the New York
Stock Exchange. However, there can be no assurance that the Franchising Common
Stock will be accepted for listing on the New York Stock Exchange or any other
national stock exchange or market. Franchising initially will have
approximately 4,550 stockholders of record based upon the number of
stockholders of record of the Company as of July 8, 1997. For certain
information regarding options to purchase Franchising Common Stock that will
be outstanding after the Distribution, see "--Relationship Between the Company
and Franchising After the Distribution--Employee Benefits Allocation
Agreement."
The distribution of the Franchising Common Stock need not be registered
under the Securities Act of 1933, as amended (the "Securities Act") and shares
of Franchising Common Stock distributed to the Company's stockholders in the
Distribution will be freely transferable, except for securities received by
persons who may be deemed to be "affiliates" of the Company within the meaning
of Rule 144 under the Securities Act. Persons who are affiliates of
Franchising within the meaning of Rule 144 may not publicly offer or sell the
Franchising Common Stock received in connection with the Distribution except
pursuant to a registration statement under the Securities Act or pursuant to
Rule 144.
LISTING AND TRADING OF SUNBURST COMMON STOCK
It is expected that the Sunburst Common Stock (formerly Company Common
Stock) will continue to be listed and traded on the New York Stock Exchange
after the Distribution. Following the Distribution, Sunburst's financial
results will no longer be consolidated with those of the Company's Franchising
Business, and
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Sunburst's revenues, income and other results of operations will be
substantially below those of the Company prior to the Distribution.
Accordingly, as a result of the Distribution, the trading price range of
Sunburst Common Stock immediately after the Distribution (prior to the effect
of the Reverse Stock Split) is expected to be significantly lower than the
trading price range of Company Common Stock, and the combined trading prices
of Sunburst Common Stock and Franchising Common Stock held by stockholders
after the Distribution may be less than, equal to or greater than the trading
price of Company Common Stock, prior to the Distribution. The prices at which
Sunburst Common Stock trades after the Distribution will be determined by the
marketplace and may be influenced by many factors, including, among others,
the continuing depth and liquidity of the market for Sunburst Common Stock,
investor perception of the Hotel Business, Sunburst's dividend policy and
general economic and market conditions.
CONDITIONS; TERMINATION
The Board of Directors has conditioned the Distribution upon, among other
things, (i) the Internal Revenue Service having issued a ruling in response to
the Company's request in form and substance satisfactory to the Board of
Directors; (ii) approval of each of the Distribution Proposals by the
Company's stockholders; (iii) the Franchising Common Stock having been
approved for listing on the New York Stock Exchange subject to official notice
of issuance; (iv) the taking of all actions with respect to the Distribution
required or advisable under the Securities Act and the Exchange Act and the
rules and regulations promulgated thereto, including the Franchising Form 10
having become effective under the Exchange Act; (v) any third-party consents
to the transactions contemplated by the Distribution Proposals having been
obtained, except for those the failure of which to obtain would not have a
material adverse effect on the Company or Franchising; and (vi) the Board of
Directors' receipt of the Solvency Opinion, dated as of the Declaration Date
(see "--Solvency Opinion"). Any of these conditions, except for approval of
the Distribution Proposals by the Company's stockholders, may be waived in the
discretion of the Board of Directors. Even if all the above conditions are
satisfied, the Board of Directors has reserved the right to abandon, defer or
modify the Distribution or the other elements of the Distribution Proposals at
any time prior to the Distribution Date. In the event that, prior to the
Annual Meeting, the Board of Directors makes any material changes in the terms
of the Distribution or other elements of the Distribution Proposals, the
Company will notify stockholders by means of a supplement to this Proxy
Statement. Following stockholder approval, the Board of Directors will not
waive any of the conditions to the Distribution or make any changes in the
terms of the Distribution or the other elements of the Distribution Proposals
unless the Board of Directors determines that such changes would not be
materially adverse to the Company's stockholders. In determining whether any
such changes would be materially adverse to the Company's stockholders, the
Board of Directors will consider, as appropriate, advice from its outside
advisors as well as the recommendation of management as to the potential
impact of such changes on the Company and the Company's stockholders. See "--
Relationship Between the Company and Franchising after the Distribution--
Distribution Agreement."
INTEREST OF CERTAIN PERSONS IN THE DISTRIBUTION
Franchising
It is anticipated that upon the Distribution, all of the current members of
the Company's Board of Directors except for Paul R. Gould will be appointed to
the Board of Directors of Franchising. Additionally, Stewart Bainum, Jr. will
serve as Chairman of the Boards of Directors of the Company and Franchising
and Stewart Bainum and Frederic V. Malek will be members of the Boards of
Directors of the Company and Franchising. Messrs. Bainum and Bainum, Jr., Ms.
Bainum and Messrs. Hazard, Jr., Malek, Petitt and Robertson will each receive
from Franchising compensation for serving as a director of Franchising that is
substantially the same as the compensation currently received by such persons
as directors of the Company. See "--Certain Information Concerning
Franchising--Management--Compensation of Directors; and Proposal Five--
Election of Directors--Compensation of Directors."
It is further anticipated that upon the Distribution, William R. Floyd will
become Vice Chairman and Chief Executive Officer of Franchising; James A.
MacCutcheon will become Executive Vice President, Chief Financial Officer and
Treasurer of Franchising; Thomas Mirgon will become Senior Vice President,
Human Resources of
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Franchising; Barry L. Smith will become Senior Vice President--Marketing of
Franchising; Michael J. DeSantis will become Senior Vice President, General
Counsel and Secretary of Franchising; and Joseph M. Squeri will become Vice
President--Finance and Controller of Franchising.
Effective upon the Distribution Date, Franchising is expected to enter into
a series of employment agreements with current members of the Company's
management as follows. It is expected that Franchising will enter into an
employment agreement with Stewart Bainum, Jr., providing for Mr. Bainum, Jr.'s
employment as Chairman of the Board of Franchising. Either Franchising or Mr.
Bainum may terminate the agreement upon 30 days' prior written notice on the
first and second anniversary dates of the agreement. The agreement will
provide that Mr. Bainum, Jr. will devote 12.5% of his professional time to the
affairs of Franchising, 12.5% of his professional time to the affairs of the
Company and the remaining 75% of his professional time to the affairs of Manor
Care. The agreement provides for a base salary of $82,044 per annum for
services to Franchising and a maximum bonus of 60% of Mr. Bainum, Jr.'s base
compensation based upon the performance of Franchising.
Effective upon the Distribution Date, Franchising is expected to assume
employment agreements between the Company and William R. Floyd, James A.
MacCutcheon and Thomas Mirgon, respectively. For additional discussion of
employment agreements between Franchising and its management, see "--Certain
Information Concerning Franchising--Employment Agreements."
Sunburst
Sunburst has entered into an employment agreement with Donald J. Landry,
which will become effective upon the Distribution Date, providing for Mr.
Landry's employment as Chief Executive Officer of Sunburst. For additional
discussion of the employment agreement between Sunburst and Mr. Landry, see
"Proposal Five: Election of Directors--Employment Agreements."
Outstanding Stock Options
In connection with the Distribution, directors and officers of the Company
will have the opportunity to receive options to purchase Franchising Common
Stock and/or to retain Company Common Stock as an adjustment to preserve the
financial value of their outstanding options to purchase Company Common Stock.
For a discussion of the treatment of outstanding options to purchase Company
Common Stock in connection with the Distribution, see "--Relationship Between
the Company and Franchising After the Distribution--Employee Benefits
Allocations Agreement."
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RISK FACTORS
CERTAIN FINANCIAL AND OPERATING CONDITIONS
While the Hotel Business and the Franchising Business have substantial
operating histories, Sunburst and Franchising do not have operating histories
as separate stand-alone companies. Prior to the Distribution, each of the two
businesses had access to the cash flow generated by the other and the
Company's credit, which was based on the combined assets of the Hotel Business
and the Franchising Business. Subsequent to the Distribution, Sunburst will
not have the benefit of either the cash flow generated by, or the assets of,
the Franchising Business, and Franchising will not have the benefit of either
the cash flow generated by, or the assets of, the Hotel Business.
Subsequent to the Distribution, each of Sunburst and Franchising will be a
smaller and less diversified company than the Company prior to the
Distribution. In addition, the division of the Company may result in some
temporary dislocation and inefficiencies to the business operations, as well
as the organization and personnel structure, of each company. Nevertheless,
the Company's Board of Directors believes that separation of the two companies
will also result in long-term operating efficiencies by allowing the companies
to focus on their respective businesses.
SUBSTANTIAL LEVERAGE AT SUNBURST
After the Distribution, Sunburst will be a highly leveraged corporation.
Assuming that the Distribution had been consummated on May 31, 1997, Sunburst
would have had, on a pro forma basis, total long-term indebtedness of
approximately $246.8 million (representing approximately 78.6% of its total
capitalization) and total stockholders' equity of $67.3 million, compared with
the Company's actual long-term indebtedness as of May 31, 1997, before
allocation of indebtedness to Franchising of $372.0 million (representing
approximately 74.9% of its total capitalization) and total stockholder's
equity of $124.5 million.
Sunburst's Hotel Business is a capital-intensive business and Sunburst will
continue to have significant capital requirements in the future. As a highly
leveraged corporation, any new financing and refinancing by Sunburst of its
existing indebtedness may be at higher interest rates and on less advantageous
terms than may have been the case had the Distribution not taken place. For a
discussion of the financing for Sunburst expected to be implemented in
connection with the Distribution, see "--Financing." This significant degree
of leverage could have a potential negative impact on the ability of Sunburst
to incur additional debt to fund future expansion. While Sunburst's operating
cash flow is expected to be sufficient to cover its expenses, including
interest costs, Sunburst may be required to supplement operating cash flow
with asset sales, refinancing proceeds, equity offerings or capital spending
reductions to meet principal repayment obligations in later years. There can
be no assurance that any refinancing or equity offering could be successfully
concluded. Any resort to alternative sources of funds may impair Sunburst's
competitive position and reduce its cash flow.
The ability of Sunburst to satisfy its obligations, to reduce its debt and
to increase equity will also be dependent upon its future performance, which
will be subject to prevailing economic conditions and to financial, business
and other factors, including factors beyond the control of Sunburst, affecting
the business operations of Sunburst.
CERTAIN TAX CONSIDERATIONS
The Company has conditioned the Distribution on the receipt of a favorable
ruling from the Internal Revenue Service (although the Board of Directors has
reserved the right to waive receipt of the ruling as a condition to
consummation of the Distribution). The Board of Directors may not provide
stockholders with notice if receipt of the tax ruling is waived as a condition
to consummation of the Distribution; however, (i) the Board of Directors will
waive such condition only if the Board of Directors believes that the receipt
of shares of Franchising Common Stock will be tax free and an opinion of
counsel is received to that effect, and (ii) the Company will notify
stockholders if the Company either receives an unfavorable ruling from the
Internal Revenue Service or withdraws its request for such ruling prior to the
Annual Meeting. See "--The Distribution--Federal Income Tax Aspects of the
Distribution." Such rulings, while generally binding upon the Internal
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Revenue Service, are subject to certain factual representations and
assumptions. If such factual representations and assumptions were incorrect in
a material respect, such ruling would be jeopardized. The Company is not aware
of any facts or circumstances which would cause such representations and
assumptions to be untrue. The Company and Franchising will agree to comply in
all material respects with each representation and statement made to a taxing
authority in connection with the Distribution to provide further assurances
that the Distribution will qualify as tax free. See "--Relationship Between
The Company and Franchising After the Distribution--Distribution Agreement."
If the Distribution were not to qualify under Section 355 of the Code, then
in general a corporate tax would be payable by the consolidated group of which
the Company is the common parent based upon the difference between (x) the
fair market value of the Franchising Common Stock and (y) the adjusted basis
of the Franchising Common Stock immediately prior to the Distribution. The
corporate level tax would be payable by the Company and could be substantial.
Under the consolidated return rules, each member of the consolidated group
(including Franchising) is severally liable for such tax liability.
Furthermore, each holder of Company Common Stock who receives shares of
Franchising Common Stock in the Distribution would be treated as if such
stockholder received a taxable distribution in an amount equal to the fair
market value of the Franchising Common Stock received, which would result in
(x) a dividend to the extent of such stockholder's pro rata share of the
Company's current and accumulated earnings and profits, (y) a reduction in
such stockholder's basis in Company Common Stock to the extent the amount
received exceeds such stockholder's share of earnings and profits and (z) gain
from the exchange of Company Common Stock to the extent the amount received
exceeds both such stockholder's share of earnings and profits and such
stockholder's basis in Company Common Stock.
NO CURRENT PUBLIC MARKET FOR FRANCHISING COMMON STOCK
Currently, there is no public market for Franchising Common Stock and there
can be no assurances as to the prices at which trading in Franchising Common
Stock will occur after the Distribution. Until Franchising Common Stock is
fully distributed and an orderly market develops, the prices at which trading
in such stock occurs may fluctuate significantly. The prices at which
Franchising Common Stock trades will be determined by the marketplace and may
be influenced by many factors, including, among others, the depth and
liquidity of the market for Franchising Common Stock, investor perception of
Franchising and the industry in which Franchising participates, Franchising's
dividend policy and general economic and market conditions. Franchising
intends to list the Franchising Common Stock on the New York Stock Exchange.
However, there can be no assurance that the Franchising Common Stock will be
accepted for listing on the New York Stock Exchange or any other national
stock exchange or market. See "--The Distribution--Listing and Trading of
Franchising Common Stock."
CHANGES IN TRADING PRICES OF SUNBURST COMMON STOCK
It is expected that Sunburst Common Stock (formerly Company Common Stock)
will continue to be listed and traded on the New York Stock Exchange after the
Distribution. Following the Distribution, Sunburst's financial results will no
longer be consolidated with those of the Company's Franchising Business, and
Sunburst's revenues, income and other results of operations will be
substantially below those of the Company prior to the Distribution.
Accordingly, as a result of the Distribution, the trading price range of
Sunburst Common Stock immediately after the Distribution (prior to giving
effect to the Reverse Stock Split) is expected to be significantly lower than
the trading price range of Company Common Stock. Additionally, the combined
trading prices of Sunburst Common Stock and Franchising Common Stock held by
stockholders after the Distribution may be less than, equal to or greater than
the trading price of Company Common Stock prior to the Distribution. See "--
The Distribution--Listing and Trading of Sunburst Common Stock."
For a description of the Reverse Stock Split to be undertaken by the Company
as part of the Distribution and its anticipated impact on the trading price
range of Sunburst Common Stock, see "Proposal Two: Amendments to the Restated
Certificate of Incorporation of the Company."
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CERTAIN ANTITAKEOVER FEATURES
If the Distribution Proposals are approved and the Distribution is
consummated, the Franchising Certificate and Franchising Bylaws will contain
several provisions, which are now in effect with respect to the Company and
will continue to be in effect with respect to Sunburst, that may make the
acquisition of control of Franchising difficult or expensive, or increase the
likelihood that incumbent management will retain their positions or hinder a
transaction that may be attractive to stockholders. See "--The Distribution--
Certain Information Concerning Franchising--Purposes and Antitakeover Effects
of Certain Provisions of the Franchising Certificate and Bylaws."
POTENTIAL CONFLICTS
Subsequent to the Distribution, the ongoing relationship between Sunburst
and Franchising may potentially give rise to conflicts of interests. In
connection with the Distribution, (i) Sunburst and Franchising will enter into
a Strategic Alliance Agreement pursuant to which Sunburst will grant to
Franchising a right of first refusal to franchise lodging properties developed
or acquired by Sunburst that Sunburst intends to operate under franchise;
Franchising will grant to Sunburst a conditional option to purchase the
MainStay Suites hotel system; each of the parties will continue to cooperate
with respect to matters of mutual interest, including new product and concept
testing for Franchising in hotels owned by Sunburst, and Sunburst will
authorize Franchising, in certain circumstances, to negotiate with third party
vendors on Sunburst's behalf; (ii) Sunburst and Franchising will be parties to
agreements pursuant to which Franchising will provide to Sunburst certain
administrative services after the Distribution and (iii) Sunburst, pursuant to
certain franchising agreements, will be the largest franchisee of Franchising.
See "--Relationship Between the Company and Franchising After the
Distribution." With respect to these matters, the potential exists for
disagreements as to the quality of the services provided by the parties and as
to contract compliance. Nevertheless, the Company believes that there will be
sufficient mutuality of interest between the two companies to result in a
mutually productive relationship. In addition, Stewart Bainum, Jr. will serve
as Chairman of the Board of Directors of both Sunburst and Franchising.
Stewart Bainum and Frederick V. Malek will each serve as a director of each of
Sunburst and Franchising. Messrs. Bainum, Jr., Bainum and Malek as well as
certain other officers and directors of Sunburst and Franchising will also own
shares (and/or options or other rights to acquire shares) in both companies
following the Distribution. Appropriate policies and procedures will be
followed by the boards of directors of each company to limit the involvement
of the overlapping directors (and if appropriate, relevant officers of such
companies) in conflict situations, including requiring them to abstain from
voting as directors of either Sunburst or Franchising on certain matters which
present a conflict between the two companies.
FRAUDULENT TRANSFER CONSIDERATIONS; LEGAL DIVIDEND REQUIREMENTS
It is a condition to the consummation of the Distribution that the Board of
Directors of the Company shall have received a satisfactory opinion regarding
the solvency of the Company and the sufficiency under the requirements of
Section 170 of the Delaware General Corporation Law of the Company's net
assets following the Distribution. See "The Distribution--Solvency Opinion."
The solvency opinion will address certain factual matters relevant to an
assessment of the legality of the Distribution under Delaware law, but will
not constitute a legal opinion and will not be delivered by a firm qualified
to practice law in Delaware. In certain circumstances, the Board of Directors
will obtain a legal opinion as to the legality of the Distribution under
Delaware law. See "--The Distribution--Solvency Opinion." The Company's Board
of Directors does not intend to consummate the Distribution unless it is
satisfied regarding the solvency of the Company, Franchising and the
permissibility of the Distribution under Section 170 of the (DGCL). There is
no certainty, however, that a court would reach the same conclusion. If a
court (for example, in a lawsuit by an unpaid creditor or representatives of
creditors) were to find that, at the time the Company effected the
Distribution of Franchising, the Company or Franchising, as the case may be,
(i) was insolvent, (ii) was rendered insolvent by reason of the Distribution,
(iii) was engaged in a business or transaction for which the Company's or
Franchising's remaining assets, as the case may be, constituted unreasonably
small capital, or (iv) intended to incur, or believed it would incur, debts
beyond its ability to pay as such debts matured, such court may be asked to
void the Distribution (in whole or in part) as a fraudulent conveyance and
require that the stockholders return the special dividend (in whole or in
part) to the
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Company, or require the Company or Franchising, as the case may be, to fund
certain liabilities of the other company for the benefit of creditors. The
measure of insolvency for purposes of the foregoing will vary depending upon
the jurisdiction whose law is being applied. Generally, however, the Company,
Franchising, as the case may be, would be considered insolvent if the fair
value of their respective assets were less than the amount of their respective
liabilities or if they incurred debt beyond their ability to repay such debt
as it matures. In addition, under Section 170 of the DGCL (which is applicable
to the Company in the Distribution) a corporation generally may make
distributions to its stockholders only out of its surplus (net assets minus
capital) and not out of capital.
SIGNIFICANT BAINUM FAMILY INTEREST
Upon completion of the Distribution, certain members of the Bainum family
(including various trusts established by members of the Bainum family) in the
aggregate will have the right to vote approximately 34.43% of the outstanding
shares of Franchising Common Stock and Sunburst Common Stock. See "--Security
Ownership." In addition, Mr. Bainum and Mr. Bainum, Jr. each will be a
director of Sunburst and Mr. Bainum, Mr. Bainum, Jr. and Ms. Bainum each will
be a director of Franchising. As a result, the Bainum family may be in a
position to significantly influence the affairs of each of Sunburst and
Franchising, including the election of directors.
DIVIDEND POLICIES
The dividend policies of Sunburst and Franchising will be determined by
their respective Boards of Directors following the Distribution. The
declaration and payment of dividends by Sunburst will be at the discretion of
the Sunburst Board of Directors. The declaration and payment of dividends by
Franchising will be at the discretion of the Franchising Board of Directors.
The Sunburst Board of Directors and the Franchising Board of Directors intend
to re-evaluate their respective dividend policies from time to time in light
of their respective companies' results of operations, financial condition,
cash requirements, future prospects and other factors deemed relevant. There
can be no assurance that any dividends will be paid by either company in the
future. The Company currently is prohibited from paying dividends pursuant to
the terms of its loan agreement with MNR Finance Corp. It is expected that the
Franchising Credit Facility (defined below) and the Sunburst Credit Facility
(defined below) will restrict Franchising and Sunburst's ability to pay
dividends. See "Financing."
IMPACT OF INFLATION AND OTHER EXTERNAL FACTORS
Franchising's principal sources of revenues are franchise fees. 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 recently has been
fairly balanced, any excess in supply that might develop in the future could
have an unfavorable impact on room revenues at Franchising's franchised hotels
either by reducing the number of rooms reserved at Franchising'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
Franchising.
Although Franchising 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
Franchising. A weak economy could also reduce demand for new hotels,
negatively impacting the franchise fees received by Franchising.
Among the other unpredictable external factors which may affect
Franchising's fee revenue stream are wars, airline strikes and severe weather.
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FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements contained in this Proxy Statement under the captions
"Proxy Statement Summary; --Risks Factors;--Certain Information Concerning
Franchising--Management's Discussion and Analysis of Financial Condition and
Results of Operations; --Business and Properties; --Certain Information
Concerning Sunburst--Management's Discussion and Analysis of Sunburst Pro
Forma Financial Condition and Results of Operations; and --Business and
Properties" and elsewhere constitute estimates of future performance or other
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company or Franchising for
industry results to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
risks, uncertainties and other important factors include, among other things:
Sunburst's substantial leverage after the Distribution, and its plans to
realize cash proceeds through leveraging its remaining assets; Sunburst's
plans to make selected strategic investments and acquisitions and develop new
hotels; Franchising's plans to expand its international franchise operations;
Franchising's plans to market new brands and products; Sunburst's and
Franchising's success in implementing their respective business strategies,
including their success in arranging financing where required; competition;
government regulation; general economic and business conditions; and other
factors referenced in this Proxy Statement. These forward-looking statements
speak only as of the date of this Proxy Statement. The Company and Franchising
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein to reflect any
change in the Company's or Franchising's expectations with regard thereto or
any change in events, conditions or circumstances on which any such statement
is based.
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RELATIONSHIP BETWEEN THE COMPANY
AND FRANCHISING AFTER THE DISTRIBUTION
For purposes of governing the ongoing relationships between the Company and
Franchising after the Distribution Date, and in order to facilitate the
transition to two separate publicly-traded companies, the Company and
Franchising will enter into agreements setting forth the Company's and
Franchising's on-going responsibilities regarding the matters outlined below.
The material terms of such agreements are described below and the agreements
summarized in this section are included as exhibits to Franchising's
Registration Statement on Form 10.
DISTRIBUTION AGREEMENT
On or prior to the Distribution Date, the Company and Franchising will enter
into a Distribution Agreement which provides for, among other things, the
principal corporate transactions required to effect the Distribution, the
assumption by Franchising of all liabilities relating to the Franchising
Business and the allocation between the Company and Franchising of certain
other liabilities, certain indemnification obligations of the Company and
Franchising and certain other agreements governing the relationship between
the Company and Franchising 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 execution of all ancillary agreements to the Distribution
Agreement, certain of which are described below, and the declaration of the
Distribution by the Company Board of Directors.
Subject to certain exceptions, Franchising has agreed to indemnify the
Company and its subsidiaries against any loss, liability or expense incurred
or suffered by the Company or its subsidiaries arising out of or related to
the failure by Franchising to perform or otherwise discharge liabilities
allocated to and assumed by Franchising under the Distribution Agreement, and
the Company has agreed to indemnify Franchising against any loss, liability or
expense incurred or suffered by Franchising arising out of or related to the
failure by the Company to perform or otherwise discharge the liabilities
retained by the Company under the Distribution Agreement. The foregoing cross-
indemnities do not apply to indemnification for tax claims and liabilities,
which are addressed in the Tax Sharing Agreement described below. The
Distribution Agreement also includes procedures for notice and payment of
indemnification claims and provides that the indemnifying party may assume the
defense of a claim or suit brought by a third party.
To avoid adversely affecting the intended tax consequences of the
Distribution, the Distribution Agreement provides that each of the Company and
Franchising will agree to comply in all material respects with each
representation and statement made to any taxing authority in connection with
the IRS tax ruling or any other tax ruling obtained by the Company and
Franchising in connection with the Distribution.
The Distribution Agreement also provides that by the Distribution Date,
Franchising's Amended and Restated Certificate of Incorporation and Bylaws
shall be in the forms attached hereto as Annexes A and B, respectively, and
that Franchising and the Company will take all actions which may be required
to elect or otherwise appoint, as directors of Franchising, the nine persons
indicated herein. See "--Certain Information Concerning Franchising--
Description of Franchising Capital Stock; --Purposes and Antitakeover Effects
of Certain Provisions of the Franchising Certificate and Bylaws; and --
Management."
The Distribution Agreement also provides that each of the Company and
Franchising will be granted access to certain records and information in the
possession of the other, and requires the retention of such information in its
possession for specified periods and thereafter requires that each party give
the other prior notice of its intention to dispose of such information. In
addition, the Distribution Agreement provides for the allocation of shared
privileges with respect to certain information and requires each of the
Company and Franchising to obtain the consent of the other prior to waiving
any shared privilege.
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
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<PAGE>
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 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
out-of-pocket expenditures in connection with the preparation, printing and
filing of the Franchising Form 10 Registration Statement.
STRATEGIC ALLIANCE AGREEMENT
On or prior to the Distribution Date, the Company and Franchising will enter
into a Strategic Alliance Agreement pursuant to which: (i) the Company will
grant a right of first refusal to Franchising to franchise any lodging
property that Sunburst develops or acquires and intends to operate under
franchise; (ii) Sunburst will, barring a material change in market conditions,
continue to develop Sleep Inns and MainStay Suites hotels so that it will have
opened a total of 14 Sleep Inns and 15 MainStay Suites hotels within 48 months
of the Distribution Date; (iii) Franchising will grant to Sunburst an option,
exercisable under certain circumstances, to purchase the brand names, marks,
franchise agreements and other assets of the MainStay Suites hotel system;
(iv) Sunburst and Franchising will continue to cooperate with respect to
matters of mutual interest, including new product and concept testing for
Franchising in hotels owned by Sunburst; and (v) Sunburst will authorize
Franchising to negotiate with third party vendors on Sunburst's behalf for the
purchase of certain items. The Strategic Alliance Agreement extends for a term
of 20 years with rights of mutual termination on the fifth, tenth and
fifteenth anniversaries.
TAX SHARING AGREEMENT
The Company and Franchising will enter into the Tax Sharing Agreement for
purposes of allocating pre-Distribution tax liabilities among Sunburst and
Franchising and their respective subsidiaries. In general, Sunburst will be
responsible for (i) filing consolidated federal income tax returns for the
Sunburst affiliated group and combined or consolidated state tax returns for
any group that includes a member of the Sunburst affiliated group, including
in each case Franchising 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 (including
any subsequent adjustments resulting from the redetermination of such tax
liabilities by the applicable taxing authorities). Franchising will reimburse
Sunburst for the portion of such taxes that relates to Franchising and its
subsidiaries, as determined based on their hypothetical separate company
income tax liabilities. Sunburst and Franchising 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 Franchising 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 Sunburst or its subsidiaries ("Sunburst Employees") after the
Distribution and employees who are employed by Franchising or its subsidiaries
after the Distribution ("Franchising Employees"). During the period beginning
on the Distribution Date and ending on December 31, 1997, Franchising shall
pay to Sunburst, on a monthly basis, a payment equal to 1.9% of the payroll
for all Franchising Employees. In consideration thereof, during such period,
Sunburst will assume all 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, Franchising will also pay to Sunburst a monthly fee of
$216 for each Franchising Employee receiving services and benefits under a
Sunburst medical plan. Sunburst shall be responsible for all liabilities and
obligations related to claims incurred through December 31, 1997 in respect of
Sunburst Employees and Franchising Employees (whether such claims are assessed
before or after December 31, 1997) under any Sunburst welfare plan and, with
respect to pre-tax medical and dependent care programs, will retain any funds
remaining on January 1, 1998. Pursuant to the Employee Benefits Allocation
Agreement, Sunburst will continue sponsorship of the various
24
<PAGE>
Company profit sharing plans, stock plans and health and welfare plans with
respect to Sunburst Employees. Franchising will establish a number of plans
which will allow Franchising to provide to its employees substantially the
same benefits currently provided to them as employees of the Company. With
respect to each Company profit sharing and retirement plan, Sunburst shall
transfer to Franchising on or before January 1, 1998, an amount representing
the present value of the full accrued benefit of all Franchising Employees who
had earned a benefit under any such Company plan. The Employee Benefits
Allocation Agreement provides for cross-guarantees between Sunburst and
Franchising 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 options to purchase shares of Company Common Stock held by
Company Employees, Franchising Employees and employees of Manor Care who hold
such options as a result of the Manor Care Spin-off. On the Distribution Date,
each Company Employee and Franchising Employee holding an incentive stock
option to purchase Company Common Stock will receive, for each such option, a
conversion award consisting of an incentive stock option to purchase the
common stock of such employee's employer after the Distribution (i.e.,
Franchising Common Stock for Franchising Employees and Sunburst Common Stock
for Sunburst Employees), 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. Each Sunburst Employee and Franchising
Employee holding a non-qualified option to purchase Company Common Stock that
has vested on or prior to the Distribution Date may make a one-time election
to choose a conversion award consisting of an option to acquire any percentage
combination of Sunburst Common Stock and Franchising Common Stock with the
number of shares and the exercise price adjusted so as to preserve the
financial value of the outstanding option. Each Sunburst Employee and
Franchising Employee holding a non-qualified option to purchase Company Common
Stock that has not vested on or prior to such date will receive a conversion
award of which one-half of the financial value of which will comprise an
option to acquire shares of common stock of such employee's employer after the
Distribution, and one-half of the financial value of which will comprise an
option to acquire a pro rata combination of shares of Sunburst Common Stock
and Franchising Common Stock.
On the Distribution Date, each employee of Manor Care holding vested
nonqualified options to purchase shares of Company Common Stock may make a
one-time election to choose a conversion award consisting of an option to
acquire any percentage combination of Sunburst Common Stock and Franchising
Common Stock with the number of shares and the exercise price adjusted so as
to preserve the financial value of the outstanding options. Manor Care
employees holding unvested non-qualified options to purchase shares of Company
Common Stock will receive a conversion award consisting of an option to
purchase shares of Sunburst Common Stock and an option to purchase shares of
Franchising Common Stock, with the number of shares that may be acquired
under, and the option price of, each option set pursuant to a formula designed
to allocate the financial value of the outstanding option based on the
relative stock values immediately following the Distribution.
LEASE AGREEMENTS
On or prior to the Distribution Date, the Company and Franchising will enter
into a agreement with Manor Care amending the terms of the Gaithersburg Lease
to add Franchising as a guarantor of Sunburst's obligations under the
Gaithersburg Lease. Also on or prior to the Distribution Date, the Company and
Franchising will enter into a sublease agreement with respect to the Silver
Spring Lease. It is currently expected that Franchising will sublease
approximately 54.3% of the office space available under the Silver Spring
Lease with financial terms approximately equal (on a square foot basis) to the
terms of the Silver Spring Lease.
TRANSITIONAL SERVICE AGREEMENTS
On or prior to the Distribution Date, the Company and Franchising will enter
into a number of agreements pursuant to which Franchising will provide certain
continuing services to Sunburst for a transitional period. Such services will
be provided on market terms and conditions. Subject to the termination
provisions of the specific agreements, Sunburst will be free to procure such
services from outside vendors or may develop an in-house
25
<PAGE>
capability in order to provide such services internally. Management believes
that these agreements are based on commercially reasonable terms including
pricing and payment terms. The primary transitional services agreements are
summarized below.
Pursuant to the Employee Benefits Administration Agreement, Franchising will
provide certain benefits, compensation and other services. Such other services
may include benefit plan administration and accounting, COBRA administration,
regulatory compliance and certain fiduciary services. Pursuant to the Tax
Administration Agreement, Franchising will provide certain sales, use,
occupancy, real and personal property tax return administration, audit and
appeals services for Sunburst. Pursuant to the Vehicle Lease Agreement,
Franchising will provide the use of certain vehicles to Sunburst.
AMENDMENT TO AGREEMENTS WITH MANOR CARE
Prior to November 1, 1996, the Company and Franchising were wholly owned
subsidiaries of Manor Care. On November 1, 1996, Manor Care effected the Manor
Care Spin-off. In connection with the Manor Care Spin-off the Company and
Manor Care entered into various agreements setting forth the Company's and
Manor Care's on-going responsibilities regarding various matters. See
"Proposal Five: Election of Directors--Certain Relationships and
Transactions." In connection with the Distribution, certain of these
agreements will be amended to allocate certain of the Company's rights and
responsibilities thereunder between Franchising and Sunburst.
FRANCHISE AGREEMENTS
The Clarion, Comfort, Econo Lodge, Sleep Inn, Quality, MainStay Suites and
Rodeway marks are each owned by Franchising. Each property currently owned by
the Company is subject to a franchise agreement between Franchising and the
Company, as franchisee (the "Franchise Agreements"). Such agreements (the
material terms of which are described below) will remain in place between
Sunburst and Franchising after the Distribution.
Term. Each Franchise Agreement has an initial term of 20 years, except the
agreement for Tempe, Arizona which is a year to year agreement. The Franchise
Agreements have varying original dates, from 1982 through 1996. Certain
Franchise Agreements allow for unilateral termination by either party on the
5th, 10th, or 15th anniversary of the Franchise Agreement.
Termination by Sunburst. Sunburst (except with respect to one property as
described below) may terminate a Franchise Agreement if Franchising defaults
on its material obligations under such Franchise Agreement and fails to cure
such defaults within 30 days following written notice. The Franchise Agreement
with respect to the Quality Hotel--Arlington (the "Non-Standard Franchise
Agreement") does not allow Sunburst to terminate such Franchise Agreement.
Termination by Franchising. Franchising (except with respect to the Non-
Standard Franchise Agreement) may suspend or terminate a Franchise Agreement
at any time, if, among other things, Sunburst (a) fails to submit reports when
due; (b) fails to pay amounts due under such Franchise Agreement; (c) fails to
pay its debts generally as they become due; or (d) receives two or more
notices of default for similar reasons for any 12 month period. Franchising
(except with respect to the Non-Standard Franchise Agreement) may terminate a
Franchise Agreement immediately upon notice to Sunburst if, among other
things, (a) certain bankruptcy events occur with respect to Sunburst; (b)
Sunburst loses possession or the right to possession of the Property; (c)
Sunburst breaches transfer restrictions in the related Franchise Agreement;
(d) any action is taken to dissolve or liquidate Sunburst; or (e) there is a
threat or danger to the public health and safety in the continued operation of
the Property. If a Franchise Agreement is terminated by Franchising for any of
the reasons discussed in the immediately preceding two sentences, Sunburst is
required to pay liquidated damages equal to the product of (i) the average
monthly gross room revenue for the preceding 12 months, multiplied by (ii) the
royalty fee
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<PAGE>
percentage (more fully described below), multiplied by (iii) the number of
months unexpired under the term of the related Franchise Agreement (in no
event less than $21-$50 multiplied by the specified room count).
The Non-Standard Franchise Agreement has termination provisions similar to
those in the other Franchise Agreements. Franchising may terminate the Non-
Standard Franchise Agreement immediately upon notice to Sunburst if, among
other things, (a) certain bankruptcy events occur with respect to Sunburst;
(b) certain breaches of the related agreements are not remedied; (c) any
action is taken to dissolve or liquidate Sunburst; or (d) legal proceedings
against Sunburst are not dismissed within a certain period of time. Upon
termination, the Franchise Agreement for the Rodeway Inn-Phoenix (Tempe) calls
for liquidated damages of the greater of (i) $50,000 and (ii) the sum of the
previous two years of fees paid by the licensee.
Fees. The Franchise Agreements require the payment of certain fees and
charges, including the following: (a) a royalty fee of between 1.93% to 5.0%
of monthly gross room revenues; (b) a marketing fee of between 0.7% and 2.5%
plus $0.28 per day multiplied by the specified room count; and (c) a
reservation fee of 0.88% to 1.75% of monthly gross room revenues (or 1% of
monthly gross room revenues plus $1.00 per room confirmed through Choice's
reservation system). The marketing fee and the reservation fee are subject to
reasonable increases during the term of the franchise if Franchising raises
such fees uniformly among all its franchisees, generally. Late payments (i)
will be a breach of the Franchise Agreement and (ii) will accrue interest from
the date of delinquency at a rate of 1.5% per month or portion thereof.
Certain Covenants. The Franchise Agreements impose certain affirmative
obligations upon Franchising including: (a) to lend the Franchisor an
operations manual; (b) to utilize money collected from marketing and
reservation fees to promote those aspects of the franchise business; and (c)
to periodically inspect the Property. The Franchise Agreements also impose
affirmative obligations upon Sunburst including: (a) to participate in a
specified reservation system; (b) to keep and comply with the up-to-date
version of Franchising's rules and regulations for properly running the
specified franchise; (c) to prepare monthly financial and other records; (d)
to not interfere with the franchised mark(s) and Franchising's rights thereto;
and (e) to maintain certain specified insurance policies.
Assignments. Sunburst is prohibited from directly or indirectly selling,
assigning, transferring, conveying, pledging or mortgaging its interest in the
Franchise Agreement, or any equity interest in such franchise interests
without the consent of Franchising except that, among other things, certain
percentages of ownership interests in Sunburst may be transferred without
Franchising's consent. Franchising's consent to such transfers, will not be
given unless, among other things: (a) all monetary obligations due under the
Franchise Agreement are paid to Franchising; (b) no defaults under the
Franchise Agreement remain uncured; (c) the transferee agrees in writing to
upgrade the related Property to the then-current standards; and (d) the
transferee agrees to remain liable for all obligations under the Franchise
Agreement so transferred.
Franchising is permitted to assign all or any part of its rights or
obligations under the Franchise Agreements. However, the Franchise Agreements
(with the exception of the Non-Standard Franchise Agreement) do not permit
Franchising to absolve itself from the obligations that it transfers under the
Franchise Agreement. Upon the assignment of Franchising's obligations under
the Non-Standard Franchise Agreement, Franchising will no longer be liable
with respect to the obligations it so transfers.
NONCOMPETITION AGREEMENT
The Company and Franchising will enter into a noncompetition agreement that
defines the rights and obligations with respect to certain businesses to be
operated by Sunburst and Franchising. Under the noncompetition agreement, for
a period of five years from the Distribution, subject to the exceptions set
forth below, Sunburst will be prohibited from conducting any business that
competes with the Franchising Business. Sunburst will also be prohibited from
acquiring any entity conducting a business that competes with the Franchising
Business, with certain exceptions outlined below, unless, prior to such
acquisition, Sunburst offers to sell such competing business to Franchising on
substantially the same terms and conditions; provided,
27
<PAGE>
however, that Sunburst will not be required to make such an offer to
Franchising where the competing business is not readily divisible from other
businesses permitted to be held or acquired by Sunburst and the gross sales
from such competing business for the 12 months prior to such acquisition do
not exceed the greater of $1,000,000 (as adjusted for increases to the
Consumer Price Index during the term) or 5% of gross sales of the businesses
to be acquired. Subject to the foregoing, however, the noncompetition
agreement will not prohibit Sunburst from engaging in the following
activities: (i) the continued operation and development of any business
operated as of the Distribution Date by Choice; (ii) any activities otherwise
permitted under the Strategic Alliance Agreement; (iii) the ownership of up to
5% of the equity interests of a publicly-traded entity that competes with the
Franchising Business; and (iv) the ownership of equity interests of any entity
that competes with the Franchising Business, if (A) the competing business
does not comprise such entity's primary business, (B) the gross sales of such
entity for the prior 12 months attributable to such competing business does
not exceed 20% of such entity's consolidated gross sales, and (C) neither the
fair market value of, nor the value, if any, attributed by the acquisition
agreement to, the competing business is in excess of $5,000,000 (as adjusted
for increases to the Consumer Price Index during the term).
During the term of the noncompetition agreement, subject to the exceptions
set forth below, Franchising will be prohibited from conducting any business
that competes with the Hotel Business. Franchising will also be prohibited
from acquiring any entity conducting a business that competes with the Hotel
Business, with certain exceptions outlined below, unless, prior to such
acquisition, Franchising offers to sell such competing business to Sunburst on
substantially the same terms and conditions; provided, however, that
Franchising will not be required to make such an offer to Sunburst where the
competing business is not readily divisible from other business permitted to
be held or acquired by Franchising and the gross revenues from such competing
business for the 12 months prior to such acquisition do not exceed the greater
of $1,000,000 (as adjusted for increases to the Consumer Price Index during
the term) or 5% of gross sales of the businesses to be acquired. Subject to
the foregoing, however, the noncompetition agreement will not prohibit
Franchising from the following activities: (i) continued operation and
development of any business operated as of the Distribution Date by
Franchising, (ii) any activities otherwise permitted under the Strategic
Alliance Agreement, (iii) the ownership of up to 5% of the equity interests of
a publicly-traded entity that competes with the Hotel Business, (iv) the
ownership of equity interests of any entity that competes with the Hotel
Business, if (A) the competing business does not comprise such entity's
primary business, (B) the gross revenue of such entity for the prior 12 months
attributable to such competing business does not exceed 20% of such entity's
consolidated gross sales, and (C) neither the fair market value of, nor the
value, if any, attributed by the acquisition agreement to, the competing
business is in excess of $5,000,000 (as adjusted for increases to the Consumer
Price Index during the term).
FINANCING
SUNBURST
As part of the Distribution, it is estimated that Sunburst will be allocated
approximately $250.0 million of long-term indebtedness, including (i)
approximately $117.0 million of commercial mortgage backed securities, with
respect to which an affiliate of Sunburst is the obligor and (ii) a
Subordinated Term Note in the amount of $115.0 million to Franchising (the
"Term Note"). The Term Note will not have any prepayment penalties. It is also
expected that on or prior to the Distribution Date, Sunburst will enter into a
revolving credit facility (the "Sunburst Credit Facility").
Sunburst 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 Sunburst with a senior secured
revolving credit facility in an aggregate principal amount of up to $75.0
million with availability subject to a borrowing base formula. The Sunburst
Credit Facility will have a maturity of three years. Depending on the type of
loan requested by Sunburst and upon certain specified financial ratios,
interest on the loans will accrue at a rate based on LIBOR, certificate of
deposit rates, prime rates or federal funds rates. A portion of the Sunburst
Credit Facility not in excess of a specified percentage of the maximum
borrowing base shall be available for the
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<PAGE>
issuance of letters of credit. The Sunburst Credit Facility will be secured by
a first priority pledge of certain of the capital stock held by Sunburst
and/or any of its subsidiaries. Upon consummation of the Distribution,
approximately $18.0 million will be drawn by Sunburst under such facility, and
together with the $115.0 million of proceeds realized under the Term Note,
will be used to repay $96.0 millionin bank debt andthe $37.0 million of
Sunburst's allocable portion of the debt outstanding to an affiliate of Manor
Care (the "Manor Care Note"). The remaining availability under the Sunburst
Credit Facility will be used for working capital, including capital
expenditures and acquisitions.
The Sunburst Credit Facility is expected to contain customary covenants that
will, among other things, restrict the ability of Sunburst and its
subsidiaries to make certain investments, incur debt, change its line of
business, dispose of assets, create liens, enter into transactions with
affiliates and otherwise restrict certain corporate activities. In addition,
the Sunburst Credit Facility will contain, among other financial covenants,
requirements that Sunburst maintain specified financial ratios, including
minimum net worth, maximum leverage and minimum interest coverage. The
Sunburst Credit Facility is also expected to contain representations and
warranties of Sunburst and its subsidiaries and contain conditions to funding
customary in credit facilities of this type.
It is expected that the Term Note will have a maturity of five years, and
will accrue interest at a rate equal to 500 basis points above the interest
rate on a 5-year U.S. Treasury Note. The Term Note will contain restrictive
covenants substantially equivalent to those contained in the Sunburst Credit
Facility and will also contain subordination provisions.
FRANCHISING
As part of the Distribution, Franchising will be allocated $125.0 million of
the Company's long-term indebtedness, including approximately (i) $78.7
million of indebtedness under the Manor Care Note and (ii) $32.9 million
related to foreign borrowings and other bank debt. It is expected that
Franchising will repay this indebtedness, as of the Distribution, with
proceeds available under a credit facility which Franchising intends to enter
into on or prior to the Distribution Date (the "Franchising Credit Facility").
Franchising 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 Franchising with a senior
term loan and a senior competitive advance and multicurrency revolving credit
facility in an aggregate principal amount of up to $300.0 million. The
Franchising Credit Facility will have a maturity of five years. The term loan
portion of the Franchising Credit Facility will amortize on a quarterly basis
in specified annual amounts until maturity. Depending on the type of loan
requested by Franchising and on certain specified financial ratios, interest
on the loans will accrue at a rate based on LIBOR, certificate of deposit
rates, prime rates or federal fund rates. A portion of the revolving credit
facility not in excess of $10.0 million shall be available for the issuance of
letters of credit. Upon consummation of the Distribution, approximately $226.6
million will be drawn under the Franchising Credit Facility, representing
$115.0 million disbursed to Sunburst under the Term Note plus $111.6 million
to refinance obligations allocated to Franchising. The remaining availability
under the Credit Facility will be used for working capital and general
corporate purposes.
The Franchising Credit Facility is expected to contain customary covenants
that will, among other things, restrict the ability of Franchising and its
subsidiaries to make certain investments, incur debt, change its line of
business, dispose of assets, create liens, enter into transactions with
affiliates and otherwise restrict certain corporate activities. In addition,
the Franchising Credit Facility will contain, among other financial covenants,
requirements that Franchising maintain specified financial ratios, including
minimum net worth, maximum leverage and minimum interest coverage. The
Franchising Credit Facility is also expected to contain representations and
warranties of Franchising and its subsidiaries and contain conditions to
funding customary in credit facilities of this type.
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ACCOUNTING TREATMENT
The historical combined financial statements of Franchising present its
financial position, results of operations and cash flows as if it were a
separate entity owning and operating the Franchising Business for all periods
presented. The Company's historical basis in the assets and liabilities of
Franchising has been carried over.
POST-DISTRIBUTION DIVIDEND POLICY
The dividend policies of Sunburst and Franchising will be determined by
their respective Boards of Directors following the Distribution. The Company
currently is prohibited from paying dividends pursuant to the terms of its
loan agreement with MNR Finance Corp. It is expected that the Sunburst Credit
Facility and the Franchising Credit Facility will restrict the ability of
Sunburst and Franchising, respectively, to pay dividends. See "--Financing."
CERTAIN INFORMATION CONCERNING FRANCHISING
PRO FORMA FINANCIAL DATA
The following unaudited Pro Forma Combined Statement of Income of
Franchising gives effect to (i) the Manor Care Distribution and related
transactions and (ii) the Distribution and related transactions as if the
foregoing had occurred on June 1, 1996. The pro forma financial data is
provided for information purposes only and does not purport to be indicative
of the results that actually would have been obtained if the Manor Care
Distribution and related transactions and the Distribution and related
transactions had been effected on the date indicated or of those results that
may be obtained in the future. There were no adjustments required to the Pro
Forma Combined Statements as of May 31, 1997 as a result of the Distribution.
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PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED MAY 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MANOR CARE
DISTRIBUTION
HISTORICAL ADJUSTMENTS(A) PRO FORMA
---------- -------------- ---------
<S> <C> <C> <C>
Revenues
Royalty fees.......................... $95,157 $95,157
Marketing and reservation fees........ 104,216 104,216
Product sales......................... 23,643 23,643
European hotel operations............. 17,737 17,737
Initial franchise fees................ 14,250 14,250
Other................................. 17,252 17,252
------- ------- -------
Total revenues...................... 272,255 272,255
------- ------- -------
Operating Expenses
Marketing and reservation............. 101,421 101,421
Selling, general and administrative... 51,102 51,102
Product cost of sales................. 22,766 22,766
European hotel operations............. 16,166 16,166
Depreciation and amortization......... 10,438 10,438
------- ------- -------
Total operating expenses............ 201,893 $ 3,400 (b) 205,293
------- ------- -------
Operating income.................... 70,362 (3,400) 66,962
------- ------- -------
OTHER
Interest on notes payable to Manor
Care................................. 7,083 7,083
Interest and other, net............... 3,704 3,704
------- ------- -------
Total other expenses................ 10,787 10,787
------- ------- -------
Income before income taxes............ 59,575 (3,400) 56,175
Income taxes.......................... (24,845) 1,343 (c) (23,502)
------- ------- -------
Net income............................ $34,730 $(2,057) $32,673
======= ======= =======
Net income per share.................. $ 0.52 (d)
=======
</TABLE>
- --------
(a) Reflects the effect of the Manor Care Distribution and related
transactions.
(b) Reflects the net additional costs associated with staffing of accounting,
finance, cash management, risk management, human resources and legal
personnel, incremental rental costs and the payment of certain consulting
fees to Manor Care.
(c) Represents the income tax impact of pro forma adjustments at statutory
rates.
(d) Pro forma income per share is computed by dividing pro forma net income by
the pro forma weighted average number of outstanding common shares,
aggregating 62.7 million in fiscal year 1997. The pro forma weighted
average number of outstanding common shares is based on Manor Care's
weighted average number of outstanding common shares for the period June
1, 1996 through October 31, 1996 and the Company's weighted average number
of shares for the period November 1, 1996 through May 31, 1997.
31
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical combined financial data of
Franchising for the five fiscal years ended May 31, 1997.
The combined financial statements of Franchising include the assets and
liabilities, revenues and expenses of the Franchising Business, including the
ownership and operation of 14 hotel properties in France, Germany and the
United Kingdom. The Franchising combined financial statements include certain
allocations of overhead expenses incurred by the Company, and prior to
November 1, 1996 incurred by Manor Care, that support the Franchising
Business. In management's opinion, these allocations were made on a reasonable
basis, however, such allocations may not be indicative of the level of
expenses which will be incurred by Franchising after the Distribution. The
expenses were generally allocated based upon specific identification and
estimates of the relative time devoted to supporting Franchising.
The combined income statement data for 1993 and the balance sheet data for
1993 and 1994 have been derived from unaudited combined financial statements
of Franchising which, in the opinion of management, include all material
adjustments necessary for those periods and were prepared as if Franchising
were a separate entity for all periods presented. The historical combined
financial data is not necessarily indicative of Franchising's future results
of operations or financial condition. The data set forth below should be read
in conjunction with the unaudited Pro Forma Financial Data and the notes
thereto of Franchising; the audited Combined Financial Statements of
Franchising and the notes thereto; and Management's Discussion and Analysis of
Financial Condition and Results of Operations of Franchising included
elsewhere in this Proxy Statement. For a discussion of the basis of
presentation of the Franchising Combined Financial Statements, see the "Basis
of Presentation" in the Notes to the Franchising Combined Financial
Statements.
32
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statement of Income Data
Revenues................ $272,255 $250,654 $212,672 $184,866 $143,054
Operating expenses:
Marketing and
reservation........... 101,421 96,246 81,545 74,149 57,631
Selling, general and
administrative........ 51,102 45,196 45,589 49,529 46,187
Product cost of sales.. 22,766 20,709 13,882 11,977 6,999
European hotel
operations............ 16,166 17,521 17,922 10,263 --
Depreciation and
amortization.......... 10,438 11,839 11,768 10,825 9,182
Provision for asset
impairment............ -- 24,760(1) -- -- --
-------- -------- -------- -------- --------
Total operating
expenses............. 201,893 216,271 170,706 156,743 119,999
-------- -------- -------- -------- --------
Operating income........ 70,362 34,383 41,966 28,123 23,055
-------- -------- -------- -------- --------
Other
Interest expense on
notes payable to Manor
Care................... 7,083 7,083 7,083 7,083 7,083
Minority interest
expense................ -- 1,532 2,200 1,476 900
Interest and other,
net.................... 3,704 4,791 3,672 3,591 145
-------- -------- -------- -------- --------
Total other expenses.. 10,787 13,406 12,955 12,150 8,128
-------- -------- -------- -------- --------
Income before income
taxes................... 59,575 20,977 29,011 15,973 14,927
Income taxes............. (24,845) (9,313) (12,783) (7,372) (6,422)
-------- -------- -------- -------- --------
Net Income............... $ 34,730 $ 11,664 $ 16,228 $ 8,601 $ 8,505
======== ======== ======== ======== ========
Pro forma earnings per
share................... $ 0.55 $ 0.19 $ 0.26 $ 0.14 $ 0.15
======== ======== ======== ======== ========
Balance Sheet Data
Total assets............ $221,473 $212,803 $189,087 $173,646 $170,815
Notes payable to Manor
Care................... $ 78,700 $ 78,700 $ 78,700 $ 78,700 $ 78,700
Total debt.............. $125,163 $145,315 $128,205 $126,294 $122,909
Total liabilities....... $164,280 $182,271 $201,786 $169,237 $144,982
Total investments and
advances from (to)
Parent................. $ 57,193 $ 30,532 $(12,699) $ 4,409 $ 25,833
</TABLE>
- --------
(1) In 1996 Franchising recorded a pre-tax charge of $24.8 million for
impairment of long lived assets associated with Franchising's European
operations.
(2) Pro forma earnings per share has been calculated based on the weighted
average shares outstanding of its parent Choice Hotels International, Inc.
for fiscal year 1997 of 62,680,000 and its parent Manor Care, Inc. for
fiscal years 1996, 1995, 1994 and 1993 of 62,628,000, 62,480,000,
60,524,000 and 57,316,000, respectively.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Franchising is one of the largest hotel franchisors in the world with 3,344
hotels open and 820 under development representing 355,127 rooms in 33
countries. Franchising franchises hotels under the Comfort, Quality, Econo
Lodge, Sleep, Clarion, Rodeway and MainStay Suites brand names.
The principal factors that affect Franchising's results are: growth in the
number of hotels under franchise; occupancies and room rates achieved by
Franchising's brands; the number and relative mix of franchised hotels; and
Franchising's ability to manage costs. The number of rooms at franchised
properties and occupancies and room rates at those properties significantly
affect Franchising's results because franchise royalty fees are based upon
room revenues at franchised hotels. Increases in franchise fee revenues have a
disproportionate impact on Franchising's operating margin due to the lower
incremental costs associated with these revenues.
Comparison of Fiscal Year 1997 Operating Results and Fiscal Year 1996
Operating Results
Franchising recorded net income of $34.7 million for the year ended May 31,
1997 ("fiscal 1997"), an increase of $23.0 million, compared to net income of
$11.7 million for the year ended May 31, 1996 ("fiscal 1996"). Fiscal 1996
results include a $24.8 million asset impairment charge related to
Franchising's European hotel operations. Exclusive of this charge, fiscal 1996
net income was $26.7 million. The increase in net income for fiscal 1997 was
primarily attributable to an increase in franchise revenue as a direct result
of the addition of new licensees to the franchise system and improvements in
the operating performance of franchised hotels.
Combined revenues increased $21.6 million (or 8.6%) to $272.3 million in
fiscal 1997 from $250.7 million in fiscal 1996.
Franchise Operating Revenues. In operating the franchise business,
Franchising collects marketing and reservation fees and assessments from its
franchisees. Franchising is contractually obligated to disburse these fees for
marketing and reservation activities to be provided on behalf of its
franchisees. Management, therefore, analyzes its franchise business based on
revenues net of marketing and reservation fees ("net franchise revenue") and
expenses net of marketing and reservation expenses ("net franchise expenses").
Net franchise revenues include base royalty fees, initial fees earned on
contracts signed and other revenues, including strategic vendor fees. Net
franchise revenues are dependent upon growth in the number of franchised
properties as well as the underlying performance of franchised hotels for
continued growth. The key industry standard for measuring hotel operating
performance is RevPAR, which is calculated by multiplying the percentage of
occupied rooms by the average daily room rate realized.
Net franchise revenues were $126.7 million for fiscal 1997 and $110.6
million for fiscal 1996. Royalties increased $9.0 million to $95.2 million
from $86.2 million in fiscal 1996, an increase of 10.4%. The increase in
royalties is attributable to a net increase of 292 franchisees during the
period representing an additional 21,578 rooms added to the system, an
improvement in domestic RevPAR of 2.9% and an increase in the effective
royalty rate of the domestic hotel system to 3.43% from 3.34%. Domestic
initial fee revenue generated from franchise contracts signed increased 14.8%
to $14.0 million from $12.2 million in fiscal 1996. Total franchise agreements
signed in fiscal 1997 were 495, up 13.5% from the total contracts signed in
fiscal 1996 of 436. Revenues generated from strategic vendor relationships
increased to $6.1 million from $1.8 million in fiscal 1996. This revenue
relates to agreements that provide preferred vendors access to Franchising's
licensees.
Franchise Operating Expenses. The cost to operate the franchising business
is reflected in selling, general and administrative expenses. Combined
selling, general and administrative expenses were $51.1 million in fiscal
1997, an increase of $5.9 million from the fiscal 1996 total of $45.2 million.
$4.8 million of the increase was directly attributable to additional costs of
operating as an independent company apart from Manor Care. These additional
costs are primarily additional staffing, incremental rental expenses, and
consulting fees as Franchising assumed certain administrative tasks previously
provided by Manor Care. The remaining increases in selling, general and
administrative expenses were primarily due to additional personnel to support
company growth and new company initiatives. Exclusive of the $4.8 million
increase resulting from the Manor Care Distribution, as a
34
<PAGE>
percentage of net franchise revenues, selling, general and administrative
expenses declined to 36.5% in fiscal 1997 from 40.9% in fiscal 1996. The
improvement in the franchising margins relates to the economies of scale
generated from operating a larger franchisee base and improvements in
franchised hotel performance.
Product Sales. Sales made to franchisees through Franchising's group
purchasing program increased $2.1 million to $23.6 million in fiscal 1997 from
$21.6 million in fiscal 1996. The group purchasing program utilizes bulk
purchases to obtain favorable pricing from third party vendors for franchisees
ordering similar products. Franchising acts as a "clearing-house" between the
franchisee and the vendor, and orders are shipped directly to the franchisee.
Similarly, product cost of sales increased $2.1 million (or 9.9%) in fiscal
1997. The product services margins decreased in fiscal 1997 to 3.7% from 4.0%
in fiscal 1996. This purchasing program is provided to the franchisees as a
service and is not expected to be a major component of Franchising's
profitability.
European Hotel Operations. Franchising owns or operates 14 hotels in
Germany, France and Great Britain. Total revenues at Franchising's owned hotel
operations in Europe declined to $17.7 million in fiscal 1997 from $19.6
million in fiscal 1996. Operating margins at the hotels declined to 8.9% in
fiscal 1997 from 10.6% in fiscal 1996. The decline in revenue and operating
performance reflects the difficult economic and competitive climates in which
a number of the European hotels operate. Franchising is pursuing strategies
with the objective of improving the profitability of the hotels including,
among others, divestiture, strategic alliances and joint ventures.
Other Expenses. Depreciation and amortization decreased $1.4 million (or
11.9%) to $10.4 million in fiscal 1997 from $11.8 million in fiscal 1996. The
decrease was primarily due to an asset impairment charge against European
fixed assets which reduced the asset base upon which depreciation is
determined.
In fiscal 1996, Franchising recorded a charge against earnings of $24.8
million relating to impairment of certain long-lived assets related to
Franchising's European hotel operations.
In fiscal 1997, Franchising recognized $943,000 in dividend income from its
investment in Friendly Hotels, PLC.
Comparison of Fiscal Year 1996 Operating Results and Fiscal Year 1995
Operating Results
Net income for the fiscal year ended May 31, 1996 was $11.7 million, a
decrease of $4.5 million (or 27.8%) compared to net income of $16.2 million
for the fiscal year ended May 31, 1995 ("fiscal 1995"). Net income in fiscal
1996 includes a one time charge of $24.8 million relating to asset impairment.
Exclusive of the $24.8 million charge, net income increased to $26.7 million
in fiscal 1996, a 64.8% increase over fiscal 1995.
Combined revenues increased $38.0 million (or 17.9%) to $250.7 million in
fiscal 1996 from $212.7 million in fiscal 1995.
Franchise Operating Revenues. Net franchise revenues were $110.6 million for
fiscal 1996 and $95.9 million for fiscal 1995. Royalties increased $10.8
million to $86.2 million from $75.4 million in fiscal 1996, an increase of
14.3%. The increase in royalties is attributable to a net increase of 217
domestic franchisees during the period, representing an additional 15,787
rooms added to the system, an improvement in RevPAR of 5.1% and an increase in
the effective royalty rate of the domestic hotel system to 3.34% from 3.20%.
Initial fee revenue generated from franchising contracts signed increased
37.8% to $13.5 million from $9.8 million in fiscal 1996. Total franchise
agreements signed in fiscal 1996 were 436, up 21.4% from the total contracts
signed in fiscal 1995 of 359.
Franchise Operating Expenses. The cost to operate the franchising business
is reflected in selling, general and administrative expenses. Combined
selling, general and administrative costs declined to $45.2 million in fiscal
1996 from $45.6 million in fiscal 1995.
35
<PAGE>
Selling, general and administrative expenses as a percentage of net
franchise revenues declined to 40.9% in fiscal 1996 from 47.7% in fiscal 1995.
The improvement in the franchising margins relates to the economies of scale
generated from operating a larger franchisee base and improved operating
performance of the franchised hotels.
Product Sales. Sales made to franchisees through Franchising's group
purchasing program increased $7.1 million to $21.6 million in fiscal 1996 from
$14.5 million in fiscal 1995.
Similarly, product cost of sales increased $6.8 million (or 49.2%) in fiscal
1996. The product services margins were 4.0% in fiscal 1996 and fiscal 1995.
This purchasing program is provided to the franchisees as a service and is not
expected to be a major component of Franchising's profitability.
European Hotel Operations. Revenues from hotel operations increased 5.2% in
fiscal 1996. Operating margins increased to 10.6% in fiscal 1996 from 3.8% in
fiscal 1995. The increase in fiscal 1996 is primarily due to improved
performance of newly completed owned and managed hotels.
Other Expenses. In fiscal 1996, Franchising recorded a charge against
earnings of $24.8 million relating to impairment of certain long-lived assets
associated with Franchising's European hotel operations.
Liquidity and Capital Resources
Historically, cash received by Franchising has been deposited in or combined
with its parent's corporate funds as part of its parent's cash management
system. Subsequent to the Distribution, Franchising will maintain its own cash
balances and implement its own internal cash management system.
The Company had $225.7 million of indebtedness payable to Manor Care as of
May 31, 1996, assumed as part of the Manor Care Spin-off. The portion of this
indebtedness related to acquisitions made by Franchising has been pushed down
to Franchising. As of May 31, 1997 and May 31, 1996, notes payable to Manor
Care by Franchising totaling $78.7 million were outstanding. Interest on the
amount of the loan is payable quarterly at a rate of 9% per annum. The loan
will mature on November 1, 1999 and may be prepaid in whole or in part,
together with accrued interest, at Franchising's option. If the loan is repaid
prior to November, 1, 1997, Franchising will be required to reimburse Manor
Care on demand for any actual loss incurred or to be incurred by Manor Care
(for the period up to and including November 1, 1997) in the redeployment of
the funds released by any prepayment of the loan. The notes payable to Manor
Care are expected to be repaid from operating cash flow or from third party
financing.
During fiscal 1996 and through November 1, 1996, the Company was a co-
guarantor with Manor Care and other affiliates for a $250 million competitive
advance and multi-currency revolving credit facility. On October 30, 1996 the
Company entered into a $100.0 million competitive advance and multi-currency
revolving credit facility provided by a group of seven banks (the "Credit
Facility"). During November 1996 the Company repaid its portion of the Manor
Care multi-currency credit facility, $50.1 million, with an advance from the
Company's newly acquired Credit Facility. On May 5, 1997, the Company
increased the size of the Credit Facility to $125 million. As of May 31, 1997,
Franchising had $31.1 million in advances against the multi-currency portion
of the Credit Facility outstanding. Franchising expects to obtain a new
revolving credit facility prior to the Distribution to repay its portion of
borrowings under the Company's Credit Facility. See "--Financing."
Management believes cash flows from operations and third party financing
sources will be adequate to support on-going operations, capital expenditures
and meet debt service requirements for the foreseeable future. Franchising
expects to secure a revolving credit facility prior to the Distribution
sufficient to refinance its existing obligations, loan amounts to Sunburst
sufficient to support its refinancing requirements and meet working capital
and business development needs.
36
<PAGE>
Net cash provided by operating activities for the fiscal year ended May 31,
1997 was $46.4 million compared to $32.7 million for the same period of the
prior fiscal year. Improved cash flow resulted primarily from improved net
income.
Franchising's working capital ratio at May 31, 1997 and May 31, 1996 was .99
and .89, respectively. Franchising attempts to minimize its investments in net
current assets, utilizing the Credit Facility to meet seasonal fluctuations in
working capital requirements.
Cash used in investing activities was $17.9 million, $78.5 million, and $7.7
million in fiscal years 1997, 1996 and 1995, respectively. During fiscal 1995,
Franchising repurchased one-half of the 11% interest held by its management in
Choice Hotels Franchising, 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, Franchising repurchased the remaining 5.5% minority interest
in Choice Hotels Franchising, Inc. for $27.9 million. Approximately $26.4
million was allocated to goodwill. During fiscal 1996, Franchising purchased a
5% common stock interest and a preferred stock interest in Friendly Hotels,
PLC, a U.K. hotel company, for approximately $17 million.
Investment in property and equipment includes computer hardware as well as
new developments and enhancements of reservation and finance systems. During
the fiscal year ended May 31, 1997, capital expenditures totaled $10.6 million
and related primarily to the development of a new property management system
and the installation of new financial systems. Capital expenditures in prior
years include amounts for computer hardware, reservation systems and European
hotel capital improvements.
Impact of Recently Issued Accounting Standards
Franchising has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The adoption
of SFAS No. 121 did not have a material impact on Franchising's financial
statements.
Franchising plans to utilize the method under SFAS No. 123, "Accounting for
Stock-Based Compensation," which provides for disclosure of the impact of
stock-based compensation grants.
Franchising is required to adopt SFAS No. 128, "Earnings Per Share," and
SFAS No. 129, "Disclosure of Information about Capital Structure," no later
than fiscal year 1998. The adoption of these pronouncements will not
materially affect Franchising's financial statements.
Franchising is required to adopt SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," no later than fiscal 1999. Management is still
evaluating the impact that these pronouncements will have on Franchising's
financial statements.
BUSINESS AND PROPERTIES
General
Franchising is a wholly owned subsidiary of the Company and currently
conducts a significant portion of the Franchising Business. Immediately prior
to the Distribution, Franchising will succeed to that portion of the
Franchising Business currently conducted directly by the Company and certain
other subsidiaries of the Company. The following description summarizes the
current business of Franchising, as well as the business to be transferred to
Franchising prior to the Distribution.
Franchising is one of the world's largest franchisors of hotels with 3,344
properties open and operating in 33 countries at May 31, 1997. These
properties principally operate under one of Franchising's brand names:
Comfort(R), Quality(R), Clarion(R), Sleep(R), Rodeway(R), Econo Lodge(R) and
MainStay SuitesSM. At May 31, 1997, another 820 franchise properties with a
total of 72,093 rooms were under development. As a franchisor, Franchising
licenses hotel operators to use Franchising's brand names and provides to
these hotel operators
37
<PAGE>
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 Franchising and other support services such as training programs,
purchasing discounts, operating manuals, quality standards and inspections. In
return for the use of Franchising's brand names and access to Franchising's
products and services, franchisees pay to Franchising fees that are generally
based on a percentage of the franchise hotels' gross room revenues.
Franchising's franchise operations have experienced significant growth in
revenues and profitability over the last few years. Franchising's compound
annual growth rate from fiscal year 1993 to fiscal year 1997 was 17.5% for
revenues and 42.2% for net income.
The Lodging Industry
As of December 1996, there were approximately 3.4 million hotel rooms in the
United States in hotels/motels containing twenty or more rooms. Of those
rooms, approximately 1.2 million rooms were not affiliated with a national or
regional brand, while the remaining approximately 2.2 million rooms were
affiliated with a brand either through franchise or the ownership/management
of a national or regional chain.
During the late 1980s, the industry added approximately 500,000 hotel rooms
to its inventory due largely to a favorable hotel lending environment, the
ability of hotel operators to regularly increase room rates and the
deductibility of passive tax losses, which encouraged hotel development. As a
result, the lodging industry saw an oversupply of rooms and a decrease in
industry performance.
The lodging industry in recent years has demonstrated a recovery, based on
year-to-year increases in room revenues, occupancy rates, revenue per
available room ("RevPAR"), and lodging industry profitability. RevPAR is
calculated by multiplying the percentage of occupied rooms by the average
daily room rate charged. Since 1993, the lodging industry has been able to
increase its average daily rate ("ADR") at a pace faster than the increase in
the Consumer Price Index ("CPI"), a common measure of inflation published by
the US Department of Labor. Smith Travel Research's estimates indicate that
occupancy rates in 1996 increased to 65.2% from 65.1% 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 62.6% $58.91 1.4% 2.9% $36.87 break-even 36,000
1993.................... 6.3% 63.5% $60.53 2.7% 2.7% $38.42 $ 2.4 40,000
1994.................... 8.6% 64.7% $62.86 3.8% 2.7% $40.70 $ 5.5 45,000
1995.................... 7.0% 65.1% $65.81 4.7% 2.9% $42.83 $ 8.5 64,000
1996.................... N/A 65.2% $69.66 5.9% 2.9% $45.47 $11.5 91,000
</TABLE>
- --------
Source: Smith Travel Research
Franchising believes the lodging industry can be divided into three
categories: luxury or upscale, middle-market and economy. Franchising 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
38
<PAGE>
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).
Franchising's Econo Lodge, Rodeway and Sleep brands compete primarily in the
limited-service economy market; Franchising's Comfort and Quality brands
compete primarily in the limited-service middle-market; Franchising's Clarion
brand competes primarily in the full-service upscale market; and Franchising's
MainStay Suites brand competes 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 1991 to 1996, the average room count in
new hotels declined from 122 to 87, 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 Franchising, i.e., the economy and middle-market
categories. In 1995, 53% of all conversions to a chain from independent status
or from another chain were in the economy category, 37% were in the middle-
market category, and 10% were in the upscale category. Often by affiliating
with a middle-market or economy brand, a hotel operator can reposition the
hotel property in the price category best suited to its market.
The large franchise chains, including Franchising, 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. Franchising 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.
Franchising 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 Franchising's
franchise business provides significant opportunities for Franchising to
increase profits by increasing the number of franchised properties. Hotel
franchisors such as Franchising derive substantially all of their revenue from
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.
39
<PAGE>
Much of the variable costs associated with Franchising's activities are
reimbursed by the franchisees through the marketing and reservation fees.
Franchising'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 development, 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, Franchising is able to capture a
significant portion of these incremental royalty fees as operating profit.
Strategy. Franchising's strategy is based on creating an organization that
is focused on consumer and franchisee needs, optimizing the portfolio of
brands, strategically growing the franchise system, improving its and its
franchisees' margins, growing profitability internationally, and leveraging
its separation from Choice. Key components of Franchising's strategy include:
. Organize for Success. Franchising has created an organizational
structure to focus on consumers, serve franchisees and leverage the
franchise system.
Consumer Focus--Brand management, new product development and
traditional marketing and advertising are all combined under
Franchising's Marketing Department to create consumer focus and to
drive demand for Franchising's brand products. New product development
will be based on consumer needs determined through consumer research.
Franchising believes that a consumer focus will lead to greater demand
for Franchising's products, which in turn will result in higher revenue
from Franchising's franchise system.
Franchisee Service--Franchise service and sales are consolidated under
a regional structure made up of five regional operating teams. This
structure provides each licensee one primary contact who is responsible
for assessing and responding to each hotel's specialized needs.
Franchising believes that its regional operating structure and the
services it provides to franchisees will allow it to attract new hotels
to the franchising system.
Leveraging the Franchise System--Strategic partnerships, purchasing and
other functions that leverage the scale of the franchise system are
combined under the Partner Services Group. Franchising believes there
is significant opportunity to leverage its size by entering into joint
marketing arrangements with national and multi-national companies that
want to gain exposure to the millions of guests who patronize
Franchising's franchise hotels each year. In the past, these
arrangements have added to Franchising's and its franchisees' revenues
and profits by attracting business to its franchise hotels.
. Optimize the Brand Portfolio. Franchising believes that each of its
brands has particular attributes and strengths. Franchising's strategy
is to leverage the strengths of each brand for profit growth and for
identifying new niches into which the company may expand.
. Increase Market Penetration on a Strategic Basis. Franchising will take
advantage of its regional structure to analyze key markets in the U.S.
and, in conjunction with its franchisees, identify the best
opportunities for new development or conversion to one of Franchising's
brands.
. Improve Margins Through Increased Productivity. Franchising addresses
the competitiveness of its own and its franchisees' profitability by
initiating revenue generating programs and improving cost productivity.
A key component of this strategy is the roll out of Franchising's
proprietary property and yield management system "Profit Manager by
Choice", which Franchising believes will improve the RevPAR of its
franchisees.
. Profitably Grow Internationally. During the ten fiscal years ended May
31, 1997, the number of properties in Franchising's international
franchise system increased to 563 properties with 47,603 rooms, from 81
properties with 8,330 rooms. Franchising's international franchise
system includes hotels in 32 countries outside the United States.
Franchising plans to continue to profitably grow its brands
internationally through a strategic pursuit of joint ventures, master
franchising agreements and brand specific area development agreements.
40
<PAGE>
. Leverage Spin-Off From Sunburst. The separation of Franchising from
Sunburst will allow a pure focus on franchising, including the potential
pursuit of acquisition opportunities complementary to Franchising's core
business.
Franchise System
Franchising's franchise hotels principally operate under one of
Franchising's brand names: Comfort, Quality, Clarion, Sleep, Rodeway, Econo
Lodge and MainStay Suites. The following table presents key statistics
relative to Franchising's domestic franchise system over the four fiscal years
ended May 31, 1997.
COMBINED DOMESTIC FRANCHISE SYSTEM
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED MAY 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of
period........................... 2,283 2,311 2,495 2,781
Number of rooms, end of period.... 203,019 200,792 214,613 235,431
Average Royalty Rate.............. 3.1% 3.2% 3.3% 3.4%
Average occupancy percentage...... 62.2% 63.8% 63.8% 62.6%
Average daily room rate (ADR)..... $ 45.63 $ 47.13 $ 49.49 $ 51.92
RevPAR............................ *$ 28.40 $ 30.08 $ 31.60 $ 32.52
Royalty fees ($000s).............. $ 62,590 $ 71,665 $ 82,239 $ 91,724
</TABLE>
- --------
* Franchising's RevPAR figure for each fiscal year is an average of the
RevPAR calculated for each month in the fiscal year. Franchising calculates
RevPAR each month based on information actually reported by franchisees on
a timely basis to Franchising.
No master franchisee or other franchisee accounted for 10% or more of
Franchising's total revenues or revenues related to franchise operations
during the last three fiscal years. Following the Distribution, Sunburst will
be Franchising's largest franchisee.
Brand Positioning
Franchising'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).
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 business and leisure travelers. Principal competitor brands
include Days Inn, Fairfield Inn, Hampton Inn, Holiday Express and LaQuinta. At
May 31, 1997, there were 1,441 Comfort Inn properties and 120 Comfort Suite
properties with a total of 113,729 and 9,935 rooms, respectively, open and
operating worldwide. An additional 193 Comfort Inn properties and 119 Comfort
Suite properties with a total of 17,550 and 9,671 rooms, respectively, were
under development.
41
<PAGE>
Comfort properties are located in the United States and in Australia, the
Bahamas, Belgium, Canada, France, Germany, India, Indonesia, Ireland, Italy,
Jamaica, Mexico, Norway, Portugal, Puerto Rico, Sweden, Switzerland, Thailand,
the United Kingdom and the United Arab Emirates. The following chart
summarizes the Comfort system in the United States:
COMFORT DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED MAY 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of
period........................... 935 1,015 1,129 1,255
Number of rooms, end of period.... 82,479 87,551 94,160 102,722
Royalty fees ($000s).............. $ 31,187 $ 37,635 $ 44,657 $ 50,758
Average occupancy percentage...... 68.0% 69.5% 68.7% 67.2%
Average daily room rate (ADR)..... $ 46.46 $ 48.24 $ 51.13 $ 54.17
RevPAR............................ $ 31.57 $ 33.54 $ 35.11 $ 36.39
</TABLE>
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, 1997, there were 583 Quality Inn properties with a total of 67,995
rooms, and 36 Quality Suites properties with a total of 4,999 rooms open
worldwide. An additional 105 Quality Inn properties and 34 Quality Suites
properties with a total of 11,173 rooms and 3,315 rooms, respectively, were
under development.
Quality properties are located in the United States and in Argentina,
Australia, Canada, Chile, Costa Rica, the Czech Republic, Denmark, France,
Germany, India, Indonesia, Ireland, Italy, Jamaica, Mexico, New Zealand,
Norway, Portugal, 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 AND FOR THE YEAR ENDED MAY 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of
period........................... 358 341 362 409
Number of rooms, end of period.... 45,032 43,281 45,967 50,487
Royalty fees ($000s).............. $ 14,890 $ 15,632 $ 16,606 $ 17,623
Average occupancy percentage...... 61.6% 63.1% 62.5% 61.3%
Average daily room rate (ADR)..... $ 50.07 $ 50.94 $ 52.90 $ 54.61
RevPAR............................ $ 30.83 $ 32.16 $ 33.08 $ 33.46
</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.
42
<PAGE>
At May 31, 1997, there were 704 Econo Lodge properties with a total of
45,718 rooms open and operating in the United States and Canada, and an
additional 116 properties with a total of 8,330 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 AND FOR THE YEAR ENDED MAY 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of
period........................... 677 633 641 682
Number of rooms, end of period.... 46,570 42,801 42,726 44,636
Royalty fees ($000s).............. $ 11,231 $ 12,021 $ 12,760 $ 13,288
Average occupancy percentage...... 56.7% 57.5% 58.0% 56.4%
Average daily room rate (ADR)..... $ 37.27 $ 38.31 $ 39.97 $ 41.33
RevPAR............................ $ 21.14 $ 22.04 $ 23.17 $ 23.30
</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, 1997, there were 110 Clarion properties with a total of 17,249
rooms open and operating worldwide and an additional 32 properties with a
total of 5,022 rooms under development. The properties are located in the
United States, the Bahamas, Canada, France, Guatemala, Indonesia, Ireland,
Japan, Mexico, Norway, Russia, Thailand and Uruguay. The following chart
summarizes the Clarion system in the United States:
CLARION DOMESTIC SYSTEM
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED MAY 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of
period........................... 65 63 75 92
Number of rooms, end of period.... 12,211 10,420 12,817 14,721
Royalty fees ($000s).............. $ 2,735 $ 2,995 $ 3,602 $ 4,081
Average occupancy percentage...... 62.0% 63.7% 63.3% 63.3%
Average daily room rate (ADR)..... $ 62.47 $ 63.71 $ 64.36 $ 67.76
RevPAR............................ $ 38.75 $ 40.58 $ 40.74 $ 42.86
</TABLE>
43
<PAGE>
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, 1997, there were 216 Rodeway Inn properties with a
total of 13,509 rooms, open and operating in the United States and Canada, and
an additional 50 properties with a total of 3,481 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 AND FOR THE YEAR ENDED MAY 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of
period........................... 214 208 201 216
Number of rooms, end of period.... 13,806 13,067 12,547 13,509
Royalty fees ($000s).............. $ 1,941 $ 2,302 $ 2,506 $ 2,631
Average occupancy percentage...... 51.4% 50.5% 52.7% 52.7%
Average daily room rate (ADR)..... $ 36.89 $ 38.93 $ 40.66 $ 41.15
RevPAR............................ $ 19.00 $ 19.64 $ 21.48 $ 21.68
</TABLE>
- --------
(1) Includes data pertaining to the Friendship Inn system, which is being
combined with the Rodeway Inn system.
Sleep Inn. 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, 1997, there were 133 Sleep Inn properties with a total of 9,806
rooms open and operating worldwide. An additional 150 properties with a total
of 11,497 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 AND FOR THE YEAR ENDED MAY 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of
period........................... 34 51 87 131
Number of rooms, end of period.... 2,921 3,672 6,396 9,635
Royalty fees ($000s).............. $ 605 $ 1,080 $ 2,108 $ 3,343
Average occupancy percentage...... 64.6% 65.3% 65.5% 63.9%
Average daily room rate (ADR)..... $ 39.11 $ 41.89 $ 45.11 $ 48.11
RevPAR............................ $ 25.28 $ 27.37 $ 29.56 $ 30.75
</TABLE>
MainStay Suites. MainStay Suites, Franchising'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 Sunburst owns and manages, opened in Plano, Texas, in November
1996. An additional 21 properties with 2,054 rooms were under development as
of May 31, 1997.
The MainStay Suites brand is designed to fill the gap between existing
upscale and economy extended-stay lodging products. Principal competitors for
the brand include Candlewood hotels, 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).
44
<PAGE>
International Franchise Operations
Franchising'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, Franchising entered into arrangements to
enter four new international markets. At May 31, 1997, Choice had 563
franchise hotels open in 32 countries outside the United States. The following
table illustrates the growth of Franchising's international franchise system
over the four fiscal years ended May 31, 1997. The Company does not track ADR,
RevPAR or occupancy rates for international properties.
COMBINED INTERNATIONAL FRANCHISE SYSTEM
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED MAY 31,
---------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of properties, end of period.... 430 524 557 563
Number of rooms, end of period......... 36,725 44,877 46,843 47,603
Royalty fees ($000s)................... $ 1,667 $ 1,998 $ 1,586 $ 1,672
</TABLE>
Europe. Choice is the second-largest international franchised hotel chain in
Europe, with 270 hotels open in 14 countries at May 31, 1997. In a move to
realign and streamline its European operations, in May 1996 Franchising,
through its subsidiary, Manor Care Hotels (France) S.A., consummated a
transaction with Friendly Hotels, PLC ("Friendly") whereby Franchising
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 Franchising
a master franchise for the United Kingdom and Ireland. Franchising closed its
London office as a result of the transaction. Franchising's French and German
operations were consolidated into Franchising's Paris, France office, which
directly operates Franchising's business in most of Europe. There is also a
master franchise arrangement in Scandinavia.
The Middle East. In August 1995, Franchising signed a master franchise for
Israel. Franchising opened its first franchised property in Dubai, United Arab
Emirates, in December 1995. At May 31, 1997, there were two properties open in
this region.
Asia/Pacific. During fiscal year 1997, Company franchisees opened four
hotels in Australia, four in New Zealand, three in India, one in Thailand and
two in Indonesia, bringing the total number of properties open in the
Asia/Pacific region at May 31, 1997 to 61.
Caribbean. Franchising's master franchisee had 6 properties open in 4
Caribbean countries at May 31, 1997.
Central and South America. Franchising recently signed master franchise
agreements covering Brazil, Uruguay, Paraguay and Argentina. Franchising also
has master franchisees operating in Guatemala, Costa Rica, Chile and Mexico.
In total there were 19 open properties in this region at May 31, 1997.
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 205 properties open at May 31, 1997. The joint venture,
owned 50% by Franchising and 50% by Journey's End, was formed in 1993 when
Journey's End converted substantially all of its controlled hotels to
Franchising's brands and Franchising contributed its operations in Canada to
form Choice Hotels Canada.
Owned and Operated International Hotels
After the Distribution, Franchising, through its wholly-owned subsidiary,
Quality Hotels Europe, Inc. and its affiliates, will own and operate hotels in
the United Kingdom, France and Germany. These hotels are located
45
<PAGE>
in: Kensington, England; Troisdorf, Peine and Jena, Germany; and Moulins,
Perpignan, Lormont, Montlucon, Paris, Ponte-a-Mousson, Vierzon, St. Catherine,
Reims and Cherbourg, France.
Franchise Sales
Franchising 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 Franchising's brands,
and (iv) contractors who construct any of the foregoing. In fiscal year 1996,
existing franchisees accounted for approximately one-half of Franchising's new
franchise agreements. In considering hotels for conversion to one of
Franchising's brands, or sites for development of new hotels, Franchising
seeks properties in locations which are in close proximity to major highways,
airports, tourist attractions and business centers that attract travelers.
At May 31, 1997, Franchising employed approximately 40 sales directors, each
of whom is responsible for a particular region or geographic area. Sales
directors contact potential franchisees directly and receive compensation
based on sales generated. Franchise sales efforts emphasize the benefits of
affiliating with one of Franchising's well-known brand names, Franchising's
commitment to improving RevPAR, Franchising'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), Franchising's reservation system, Franchising's training and
support systems, and Franchising's history of growth and profitability.
Because it offers brands covering a broad spectrum of the lodging marketplace,
Franchising 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.
Because retention of existing franchisees is important to Franchising'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. Franchising
believes that it is the only major franchise company to routinely offer such
territorial protection to its franchisees.
During the fiscal year ended May 31, 1997, Franchising received 1,078
franchise applications, approved 874 applications, signed 715 franchise
agreements and placed 390 new properties into operation in the United States
under Franchising's brands. Of those placed into operation, 203 were newly
constructed hotels. By comparison, during the fiscal year ended May 31, 1996,
Franchising received 993 franchise applications, approved 862 applications,
signed 665 franchise agreements and had 284 new U.S. properties come on line.
Applications may not result in signed franchise agreements either because an
applicant is unable to obtain financing or because Franchising and the
applicant are unable to agree on the financial terms of the franchise
agreement.
Franchise Agreements
A franchise agreement grants a franchisee the right to non-exclusive use of
Franchising's franchise system in the operation of a single hotel at a
specified location, typically for a period of 20 years, with certain rights to
each of the franchisor and franchisee to terminate before the twentieth year.
When the responsibility for development is sold to a master franchisee, that
party has the responsibility to sell to local franchisees Franchising'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
Franchising. 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
46
<PAGE>
time. Early termination options give Franchising 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 Franchising to terminate the agreement for
failure to meet a specified development schedule.
Franchise fees vary among Franchising's different brands, but generally are
competitive with 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 Franchising's central reservation system, respectively. Most
marketing fees support brand-specific marketing programs, although Franchising
occasionally contributes a portion of such fees to marketing programs designed
to support all of Franchising's brands. Royalty fees and affiliation fees are
the principal source of profits for Franchising.
Under the terms of the standard franchise agreements, Franchising'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/$45,000 5.25% 2.1% 1.75%
Comfort Suites.......... $300/$50,000 5.0% 2.1% 1.75%
Quality Inn............. $300/$35,000 4.0% 2.1% 1.75%
Quality Suites.......... $300/$50,000 4.0% 2.1% 1.25%
Sleep Inn............... $300/$40,000 4.5% 2.1% 1.75%
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
For a description of the Franchising Agreements between the Company and
Franchising which will remain in effect after the Distribution between
Sunburst and Franchising, see "--Relationship Between the Company and
Franchising After the Distribution--Franchise Agreements."
Franchising has increased its actual royalty rate since FY 93, primarily by
raising the royalty fee for Comfort franchisees to 5.25% 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, 1997, Franchising's average
actual royalty rate was 3.4%. Franchising believes that its average actual
royalty rate will continue to increase as older franchise agreements expire,
terminate or are amended.
At May 31, 1997, Franchising had 2,781 franchise agreements in effect in the
United States and 563 franchise agreements in effect in other countries. The
average age of the franchise agreements was 4 years. One hundred nineteen of
the franchise agreements are scheduled to expire during the five year period
beginning May 31, 1997; however, franchise agreements generally contain early
termination provisions.
47
<PAGE>
Franchise Operations
Franchising's operations are designed to improve RevPAR for Franchising's
franchisees, as this is the measure of performance that most directly impacts
franchisee profitability. It is Franchising'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
Franchising's franchise operations are:
Central Reservation System. On average, approximately 22% of the room nights
booked at franchisees' properties are reserved through the toll-free telephone
reservation system operated by Franchising. Franchising'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 Franchising or its master franchisees. The CHOICE 2001 system
is designed to allow trained operators to match each caller with a the
Company-branded hotel meeting the caller's needs. It provides an instant data
link to Franchising's franchised properties as well as to the Amadeus,
Galileo, SABRE and Worldspan airline reservation systems thereby facilitating
the reservation process for travel agents.
To more sharply define the market and image for each of its brands,
Franchising began advertising separate toll-free reservation numbers for all
of its brands in fiscal year 1995. Franchising allows its reservation agents
to cross-sell Franchising'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. Franchising believes that
cross-selling enables Franchising 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, Franchising
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. Franchising 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. Franchising's marketing and
advertising programs are designed to heighten consumer awareness of
Franchising'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.
Franchising is recognized for its "celebrity in a suitcase" television
advertisements. In fiscal year 1996, Franchising 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. Franchising's smaller hotel brands
conduct advertising campaigns that also include cable television, radio and
print.
Franchising 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 Franchising's Marketing
Department, which utilize the services of independent advertising agencies.
Franchising also 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 Franchising's franchised hotels are
48
<PAGE>
located, the motor coach market, and meeting planners. Most of these sales
personnel sell reservations and services for all of Franchising's brands, but
four are responsible exclusively for the Clarion brand.
Franchising'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 Franchising's
reservations system.
Quality Assurance Programs. Consistent quality standards are critical to the
success of a hotel franchise. Franchising has established quality standards
for all of its franchised brands which cover housekeeping, maintenance, brand
identification and level of services offered. Franchising inspects properties
for compliance with its quality standards when application is made for
admission to the franchise system. The compliance of existing franchisees with
quality standards is monitored through scheduled and unannounced Quality
Assurance Reviews conducted at least once per year at each property.
Properties which fail to maintain a minimum score are reinspected on a more
frequent basis until deficiencies are cured, or until such properties are
terminated.
To encourage compliance with quality standards, Franchising 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. During fiscal year 1997, Franchising
terminated forty-nine properties for failure to maintain minimum quality
assurance scores.
Training. Franchising maintains a training department which conducts
mandatory training programs for all franchisees and their employees.
Franchising 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 Franchising'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. Franchising 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 Franchising.
Research and Development. Franchising 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, Franchising 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, Franchising 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 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 Franchising 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. Franchising intends to market
Choice Picks food court to larger hotel operators and other potential
customers outside of Franchising's franchise system.
In November 1995, Franchising 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
49
<PAGE>
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 Franchising. Franchising receives a one-time technical assistance fee for
the provision of these services based on the scope of the project.
Purchasing. Franchising's product services department negotiates volume
purchases of various products needed by franchisees to run their hotels,
including such items as furniture, fixtures, carpets and bathroom amenities.
The department also helps to ensure consistency in such products across its
exclusively new-construction brands, Sleep Inn and MainStay Suites brands.
Sales to franchisees by Franchising were $18.1 million during the nine months
ended February 28, 1997, up from $14.3 million for the same period the prior
year.
Design and Construction. Franchising 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 Franchising's brand specifications by providing
technical expertise and cost-savings suggestions.
Financial Assistance Programs. Franchising has established programs or
helped franchisees obtain financing through (i) a wholly owned subsidiary;
(ii) strategic partnerships with hotel lenders and/or (iii) by referral to
hotel lenders for hotel refinancing, acquisition, renovation and development.
Some of the specific programs include:
(a) Second mortgage financing for the development and construction of
Quality Inn, Quality Suites, Quality Inn & Suites, MainStay Suites and
Sleep Inns. The terms of the financing will depend on each franchisee's
credit worthiness, the amount of the proposed loan and the current economic
conditions. Generally not more than 25% of the project will be financed.
Total debt cannot exceed 75% of the fair market value.
(b) Econo Lodge exterior renovation program. Loans up to an amount of
$17,500 per property are given to qualified franchisees for standardized
exterior renovation. Franchisee participation requires, among other things,
extension of the franchise agreement. The loan is forgiven at the
expiration of the extended franchise agreement, assuming no defaults have
occurred thereunder.
(c) Salomon Brothers in conjunction with Suburban Capital Markets Inc. is
offering a $100 million construction to permanent financing program to
qualified franchisees. All Choice brands are included in this program. The
construction loan will be issued for a term up to three years at a floating
rate of 355 basis points over the 30-day LIBOR. The loan amount will not
exceed 75% of cost. The franchisee will be responsible for cost of all
third party reports and fees in the amount of 2.75% of the loan amount. A
stabilized debt service coverage ratio of at least 1.4:1 is required for
the permanent loans, which are issued for a 10 year term with amortization
up to 25 years and a fixed interest rate of 260 basis points over the 10
year U.S. Treasury interest rate on the day of closing. The permanent loan
will require a fee of 1% of the loan amount.
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.
Franchising'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. Franchising'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. Franchising's principal
competitor brands at the national and
50
<PAGE>
international level in the upscale category are Holiday Inn, Holiday Select,
Crowne Plaza, Four Points by Sheraton, Radisson, Courtyard by Marriott and
Doubletree.
Franchising 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.
Choice is the second largest hotel franchiser in the world. The largest,
HFS, Inc., has over 4,600 franchised hotels. Holiday Inn Worldwide has 1,240,
Promus Hotel Corp. has 597, Marriott International has 394 and Carlson
Hospitality Worldwide has 248.*
Franchising's prospects for growth are largely dependent upon the ability of
its franchisees to compete in the lodging market, since Franchising's
franchise system revenues are based on franchisees' gross room revenues (but
not directly on franchisees' profitability).
The ability of a hotel 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 Franchising's results is substantially reduced by the geographic
diversity of Franchising's franchised properties, which are located in all 50
states and in 33 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 Franchising Business. Franchising, 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, Franchising 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.
Franchising 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 Franchising are located at 10750 Columbia
Pike, Silver Spring, Maryland, 20901. These offices are leased from Manor Care
pursuant to the Silver Spring Lease. For a description of the Silver Spring
Lease and the effect of the Distribution on the Silver Spring Lease, see "--
Relationship Between the Company of Franchising after the Distribution," and
"Proposal Five: Election of Directors--Certain Relationships and
Transactions." Franchising owns its reservation system offices in Phoenix, AZ
and Minot, ND. Franchising 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, Franchising leases 12 sales offices across the United States.
Franchising's European headquarters, which Franchising leases pursuant to a
lease that expires on December 31, 1997, is located in Paris, France.
Franchising also leases one international sales offices in France pursuant to
a lease that terminates in June 1998. 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 Franchising.
- --------
* The figures in this paragraph are with respect to U.S. hotel properties as
indicated in the August 1996 issue of Lodging Hospitality.
51
<PAGE>
Seasonality
Franchising'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. Franchising experiences seasonal revenue patterns
similar to those of the lodging industry in general. This seasonality can be
expected to cause quarterly fluctuations in the revenues, profit margins and
net income of Franchising.
Regulation
Franchising's franchisees are responsible for compliance with all laws and
government regulations applicable to the hotels they own or operate. 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 Franchising's owned hotels.
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 Franchising 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 Franchising 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 Franchising's
franchising operations have not been materially adversely affected by such
regulation, Franchising cannot predict the effect of future regulation or
legislation.
Impact of Inflation and Other External Factors
Franchising's principal sources of revenues are franchise fees. 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 recently has been
fairly balanced, any excess in supply that might develop in the future could
have an unfavorable impact on room revenues at Franchising's franchised hotels
either by reducing the number of rooms reserved at Franchising'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
Franchising.
Although Franchising 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
Franchising. A weak economy could also reduce demand for new hotels,
negatively impacting the franchise fees received by Franchising.
Among the other unpredictable external factors which may affect
Franchising's fee stream are wars, airline strikes, gasoline shortages and
severe weather.
52
<PAGE>
Legal Proceedings
Neither the Company nor Franchising is a party to any litigation, other than
routine litigation incidental to the Franchising Business. 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
Franchising.
Employees
Franchising employed 2,070 people as of June 30, 1997. None of Franchising's
employees are represented by unions or covered by collective bargaining
agreements. Franchising considers its relations with its employees to be
satisfactory.
MANAGEMENT
Board of Directors
The current directors of Franchising are William R. Floyd, Donald J. Landry
and James A MacCutcheon. In connection with the Distribution, it is expected
that Messrs. Landry and MacCutcheon will resign as directors of Franchising
and that, prior to the Distribution Date, the Company, as sole stockholder of
Franchising, will expand the Franchising board of directors to a total of nine
persons and appoint seven persons to the resulting vacancies so that the
persons listed below will constitute the entire Franchising Board of Directors
effective as of the Distribution Date. From and after the Distribution Date,
Franchising'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 1998 annual meeting of Franchising's
stockholders; the term of the initial Class II directors will terminate on the
date of the 1999 annual meeting of Franchising's stockholders; and the term of
the initial Class III directors will terminate on the date of the 2000 annual
meeting of Franchising's stockholders. At each annual meeting of Franchising's
stockholders, successors to the class of directors whose term expires at that
annual meeting will be elected for a three-year term.
The name, age and proposed class of directorship upon consummation of the
Distribution of the nine persons who are expected to be the directors of
Franchising from and after the Distribution Date are set forth below.
<TABLE>
<CAPTION>
NAME AGE CLASS OF DIRECTOR
---- --- -----------------
<S> <C> <C>
Stewart Bainum, Jr. ................................... 51 Class II
Stewart Bainum......................................... 78 Class I
Barbara Bainum......................................... 53 Class III
William R. Floyd....................................... 52 Class II
James H. Rempe......................................... 67 Class II
Robert C. Hazard, Jr. ................................. 62 Class III
Frederic V. Malek...................................... 60 Class III
Gerald W. Petitt....................................... 51 Class I
Jerry E. Robertson, Ph.D............................... 64 Class I
</TABLE>
Background of Directors
James H. Rempe. Senior Vice President, General Counsel and Secretary of
Manor Care since August 1981 and of Franchising from February 1981 to November
1996. Director, In Home Health Inc. and Vitalink Pharmacy Services, Inc.
For biographical information with respect to the other persons listed above,
see "Proposal Five: Election of Directors."
53
<PAGE>
The Board of Directors and Committees of the Board
Upon consummation of the Distribution, the Franchising Board of Directors is
expected to consist of nine members. It is expected that the Board of
Directors will hold five meetings during the fiscal year and that the standing
committees of the Board of Directors 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 are expected to be
the same members of the Company's current Committees. See "Proposal Five:
Election of Directors--Board of Directors and Committees of the Board."
The Compensation/Key Executive Stock Option Plan Committee will administer
the Franchising 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 Franchising 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 Franchising's
independent public accountants, will review Franchising's internal accounting
controls and will review Franchising'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.
Compensation of Directors
Prior to the Distribution, it is expected that Franchising will adopt the
Choice Hotels Franchising, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan. Part A of the Plan will provide
that eligible non-employee directors will be granted options to purchase 5,000
shares of Franchise Common Stock on their first 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 will provide 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 Franchise 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 Franchising will receive no separate
remuneration for their services as directors. Pursuant to the Non-Employee
Director Stock Compensation Plan to be adopted by Franchising prior to the
Distribution, eligible non-employee directors will receive annually, in lieu
of cash, restricted stock of Franchising, the fair market value of which at
the time of grant will be equal to $30,000, which will represent the Board of
Directors 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.
54
<PAGE>
Executive Officers
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 Franchising 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...... 51 Chairman of the Board of Directors
William R. Floyd........ 52 Vice Chairman and Chief Executive Officer
James A. MacCutcheon.... 45 Executive Vice President, Chief Financial Officer and Treasurer
Thomas Mirgon........... 41 Senior Vice President, Human Resources
Barry L. Smith.......... 55 Senior Vice President, Marketing
Michael J. DeSantis..... 38 Senior Vice President, General Counsel and Secretary
Joseph M. Squeri........ 32 Vice President, Finance and Controller
Rodney Sibley........... 48 Senior Vice President, Franchise Operations
</TABLE>
Rodney Sibley. Senior Vice President, Franchise Operations of the Company
since June 1997; Senior Vice President, Development for the Company from June
1996 to June 1997; Regional Vice President of the Company from 1992 to June
1996.
For biographical information with respect to the other persons listed above,
see "Proposal Five: Election of Directors."
Compensation of Executive Officers
Summary Compensation. The following tables set forth certain information
concerning the annual and long term compensation of those persons who,
following the Distribution, will serve as the chairman of the board, the chief
executive officer and the four other most highly compensated executive
officers of Franchising (the "Franchising Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM COMPENSATION
COMPENSATION RESTRICTED
----------------- -----------------------
FISCAL STOCK STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER AWARDS($) SHARES(#)(1) COMPENSATION(2)
- --------------------------- ------ -------- -------- -------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(3).. 1997 $656,357 $388,520 (4) -- 60,000(5) --
Chairman 1996 625,102 337,555 (4) -- 60,000(5) $33,543
1995 572,308 343,385 (4) -- -- 9,000
William R. Floyd(6)..... 1997 270,373 146,001 $107,831(7) $1,250,000 307,693 --
Vice Chairman and 1996 -- -- -- -- -- --
Chief Executive Officer 1995 -- -- -- -- -- --
James A.
MacCutcheon(8)......... 1997 313,578 155,953 (4) -- 67,500(9) 18,682
Executive Vice
President, 1996 301,517 135,682 (4) -- 25,000(10) 13,176
Chief Financial Officer
and Treasurer 1995 273,199 136,600 (4) -- -- 13,176
Barry L. Smith.......... 1997 240,000 108,000 (4) -- 25,000(11) 11,086
Sr. Vice President,
Marketing 1996 233,640 116,820 (4) -- 5,000(12) 10,427
1995 221,668 104,561 (4) -- -- 6,750
Thomas Mirgon(13)....... 1997 58,477 26,315 (4) -- 40,000 --
Senior Vice President, 1996 -- -- -- -- --
Human Resources 1995 -- -- -- -- --
Rodney Sibley(14)....... 1997 309,123 139,105 (4) -- 30,000(15) 27,329
Senior Vice President, 1996 423,858 -- (4) -- -- 27,329
Franchise Operations 1995 478,355 -- (4) -- -- 21,349
</TABLE>
55
<PAGE>
- --------
(1) For Messrs. Bainum, Jr., MacCutcheon, Smith and Sibley, represents
options to purchase shares of Manor Care Common Stock granted in fiscal
years 1997, 1996 and 1995. In connection with the Manor Care Spin-off,
the options to purchase Manor Care Common Stock were converted, in some
cases 100%, to options to purchase Company Common Stock. In all cases,
however, the exercise prices were adjusted to maintain the same financial
value to the option holder before and after the Manor Care Spin-off.
(2) Represents amounts contributed by Manor Care for fiscal years 1996 and
1995 and the Company for fiscal year 1997 under their respective 401(k)
Plan and Non-Qualified Savings Plan, which provide retirement and other
benefits to eligible employees, including the Franchising Named Officers.
The value of the amounts contributed in stock by the Company during
fiscal year 1997 under the 401(k) Plan for the Franchising Named Offices
were as follows: Mr. MacCutcheon, $6,240; Mr. Smith, $3,696 and Mr.
Sibley, $9,000. The value of the amounts contributed in stock of the
Company during fiscal year 1997 under the Non-Qualified Saving Plan for
the Franchising Named Officers were as follows: Mr. MacCutcheon, $12,443;
Mr. Smith $7,390 and Mr. Sibley $18,329.
(3) For part of fiscal year 1997 and all of fiscal years 1996 and 1995, Mr.
Bainum, Jr. was the Chairman and Chief Executive Officer of Manor Care
and the Company. In November, 1996, he resigned as Chief Executive
Officer of the Company. The compensation reflected here is the total
compensation received for services rendered to both Manor Care and the
Company. For the period of fiscal year 1997 after the Manor Care Spin-
off, the amount of compensation paid solely by Company was $88,302 for
base salary and $47,683 for bonus.
(4) The value of perquisites and other compensation does not exceed the
lesser of $50,000 or 10% of the amount of annual salary and bonus paid as
to any of the Franchising Named Officers.
(5) In connection with the Manor Care Spin-off, these options were converted
on a pro rata basis into options to purchase Manor Care Common Stock and
options to purchase Company Common Stock.
(6) Mr. Floyd's employment as Chief Executive Officer of the Company
commenced October 16, 1996.
(7) Consists of relocation expenses.
(8) For fiscal years 1996 and 1995 and part of fiscal year 1997, Mr.
MacCutcheon was Senior Vice President, Chief Financial Officer and
Treasurer of Manor Care and the Company. On November 1, 1996,
Mr. MacCutcheon resigned from his position at Manor Care and assumed the
position of Executive Vice President and Chief Financial Officer of the
Company. The compensation reflected here is total compensation received
for services rendered to both Manor Care and the Company. For the period
of fiscal year 1997 after the Manor Care Spin-off, the amount of
compensation paid solely by the Company was $209,052 for base salary and
$103,690 for bonus.
(9) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 6,563 shares of Manor Care Common Stock at an
adjusted exercise price of $25.0505, 36,387 options and 136,326 options
to purchase Company Common Stock at adjusted exercise prices of $14.5095
and $13.8933, respectively.
(10) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 50,102 shares of Company Common Stock at an
adjusted exercise price of $11.1168 and 10,462 shares of Manor Care
Common Stock at an adjusted exercise price of $19.1932.
(11) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 68,182 shares of Company Common Stock at an
adjusted exercise price of $14.5095.
(12) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 13,633 shares of Company Common Stock at an
adjusted exercise price of $11.1168.
(13) Mr. Mirgon's employment with the Company commenced March 3, 1997.
(14) Prior to fiscal year 1997, Mr. Sibley's compensation was based on
commissions.
(15) In connection with the Manor Care Spin-off, such options were converted
into options to purchase 81,818 shares of Company Common Stock at an
adjusted exercise price of $14.5095.
Stock Options. The following tables set forth certain information at May 31,
1997 and for the fiscal year then ended concerning options to purchase Company
Common Stock granted to the Franchising 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 Manor
Care Spin-off, existing Manor Care stock options were subject to certain
adjustments or conversion into options to purchase Company Common Stock.
56
<PAGE>
STOCK OPTION GRANTS IN FISCAL 1997
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
PERCENTAGE OF POTENTIAL REALIZABLE
TOTAL OPTIONS VALUE OF ASSUMED RATE OF
GRANTED TO ALL STOCK PRICE APPRECIATION
NUMBER OF EMPLOYEES IN EXERCISE BASE FOR OPTION TERM(2)
OPTIONS FISCAL YEAR PRICE EXPIRATION ------------------------
NAME COMPANY* GRANTED(1) 1997 PER SHARE DATE 5%(3) 10%(4)
---- -------- ---------- -------------- ------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(5)... CHI 60,000 (6) $14.5095 07/01/06 $ 547,494 $ 1,387,464
MNR 60,000 (6) $25.0505 07/01/06 945,246 2,395,440
------- ----------- ------------
Total 120,000 1,492,740 3,782,904
William R. Floyd(5)...... CHI 307,693 (6) $ 14.625 11/04/06 2,830,037 7,171,862
MNR 0 -- -- -- -- --
------- ----------- ------------
Total 307,693 2,830,087 7,171,862
James A. MacCutcheon(5).. CHI 36,387 (6) $14.5095 07/01/06 332,028 841,428
CHI 136,326 (6) $13.8933 09/30/06 1,191,135 3,018,571
MNR 6,563 (6) $25.0505 07/01/06 103,394 262,021
------- ----------- ------------
Total 179,276 1,626,557 4,122,020
Barry L. Smith(5)........ CHI 68,182 (6) $14.5095 07/01/06 622,154 1,576,668
MNR 0 -- -- -- -- --
------- ----------- ------------
Total 68,182 622,154 1,576,668
Thomas Mirgon(5)......... CHI 40,000 (6) $ 15.625 02/25/07 393,060 996,088
MNR 0 -- -- -- -- --
------- ----------- ------------
Total 40,000 393,060 996,088
Rodney Sibley(5)......... CHI 81,818 (6) $14.5095 07/01/06 746,581 1,891,992
MNR 0 -- -- -- -- --
------- ----------- ------------
Total 81,818 746,581 1,891,992
</TABLE>
- --------
* References to "CHI" are to the Company and "MNR" are to Manor Care.
(1) Options granted to Messrs. Bainum, Jr., MacCutcheon, Smith and Sibley were
granted prior to the Manor Care Spin-off and were thus granted as options
to purchase Manor Care Common Stock. In connection with the Manor Care
Spin-off, these options to purchase Manor Care Common Stock were
converted, in some cases 100%, and in some cases partially to options to
purchase Company Common Stock. In all cases, however, the exercise prices
were adjusted to maintain the same financial value to the option holder
before and after the Manor Care Spin-off. The number of options set forth
in the table represent the number of Company and Manor Care options and
the adjusted exercise prices after the conversion.
(2) 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 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.
(3) A 5% per year appreciation in stock price from $13.8933 per share yields
$22.6307, from $14.5095 per share yields $23.6344, from $14.625 per share
yields $23.8226, from $25.0505 per share yields $40.8046, and from $15.625
per share yields $25.4515.
(4) A 10% per year appreciation in stock price from $13.8933 per share yields
$36.0356, from $14.5095 per share yields $37.6339, from $14.625 per share
yields $37.9335, from $25.0505 per share yields $64.9745, and from $15.625
per share yields $40.5272.
(5) The options granted to the officers vest at the rate of 20% per year on
the first through the fifth anniversaries of the date of the stock option
grant.
(6) Information with respect to the total options granted to all Manor Care
employees is unavailable. With respect to the Company, the only options
granted by the Company during the fiscal year were the grants to Messrs.
Floyd and Mirgon as identified in the table and grants aggregating 25,000
options to purchase Company Common Stock to two additional new employees.
All other options to purchase Company Common Stock issued to employees
were issued as a result of the conversion of Manor Care options in the
Manor Care Spin-off.
57
<PAGE>
AGGREGATE OPTION EXERCISES IN FISCAL 1997
AND YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AS MAY 31, 1997 OPTIONS AT MAY 31, 1997(2)
ACQUIRED ON VALUE ------------------------- -----------------------------
NAME COMPANY* EXERCISE# REALIZED$ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ----------- ---------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr...... CHI 465,000 $3,105,452 239,000 221,000 $2,758,324 $1,334,863
MNR 293,791 2,318,180 174,000 221,000 3,633,404 2,749,771
William R. Floyd........ CHI -- -- 0 307,693 -- 346,154
MNR -- -- 0 0 -- --
James A. MacCutcheon.... CHI -- -- 162,639 335,408 1,858,096 1,708,638
MNR -- -- 91,362 46,563 1,962,041 704,946
117,676 1,000,544
Barry L. Smith.......... CHI 39,537 156,324 9,815 166,336
MNR -- -- 0 0 -- --
Thomas Mirgon........... CHI -- -- 0 40,000 -- 5,000
MNR -- -- 0 0
Rodney Sibley........... CHI -- -- 13,633 81,818 108,466 101,495
MNR -- -- 0 0 -- --
</TABLE>
- --------
* References to "CHI" are to the Company and "MNR" are to Manor Care.
(1) Options granted to Messrs. Bainum, Jr., MacCutcheon, Smith and Sibley were
granted prior to the Manor Care Spin-off and were thus granted as options
to purchase Manor Care Common Stock. In connection with the Manor Care
Spin-off, these options to purchase Manor Care Common Stock, were
converted, in some cases 100%, to options to purchase Company Common
Stock. In all cases, however, the exercise prices were adjusted to
maintain the same financial value to the option holder before and after
the Manor Care Spin-off. The number of options set forth in the table
represent the number of Company and Manor Care options and the adjusted
exercise prices after the conversion.
(2) The closing prices of Company Common Stock and Manor Care Common Stock as
reported by the New York Stock Exchange on May 30, 1997 were $15.75, and
$28.625, respectively. 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 Company Common Stock or Manor Care
Common Stock underlying the option.
EMPLOYMENT AGREEMENTS
Effective upon the Distribution Date, Franchising is expected to enter into
an employment agreement with Stewart Bainum, Jr., providing for Mr. Bainum,
Jr.'s employment as Chairman of the Board of Franchising. The agreement will
have a term of three years. Either Franchising or Mr. Bainum may terminate the
agreement upon 30 days' prior written notice on the first and second
anniversary dates of the agreement. The agreement will provide that Mr.
Bainum, Jr. will devote 12.5% of his professional time to the affairs of
Franchising, 12.5% of his professional time to the affairs of the Company and
the remaining 75% of his professional time to the affairs of Manor Care. The
agreement provides for a base salary of $82,044 per annum for services to
Franchising and a maximum bonus of 60% of Mr. Bainum, Jr.'s base compensation
based upon the performance of Franchising.
Effective upon the Distribution Date, Franchising is expected to assume an
employment agreement between the Company and William R. Floyd. The agreement
has a term of five years from October 21, 1996 and provides for a base salary
of $425,000 per annum, subject to annual adjustments and an annual bonus of up
to 60% of his base compensation, based on performance (including a customer
satisfaction component). Pursuant to the employment agreement, the Company
granted to Mr. Floyd 85,470 shares of restricted Company Common Stock and
options to purchase 307,693 shares of Company Common Stock, of which 34,188 of
the options are incentive stock options granted under the Company 1997 Long
Term Incentive Plan. The remainder of the options are non-qualified stock
options. Upon assumption of the Employment Agreements by Franchising, such
restricted stock and options will be adjusted and converted into Franchising
Common Stock and options. See
58
<PAGE>
"--Relationship Between the Company and Franchising after the Distribution--
Employee Benefits Allocation Agreement." Mr. Floyd's employment agreement
further provides that, with respect to Mr. Floyd's participation in the Choice
Hotels International, Inc. Supplemental Executive Retirement Plan (the
"SERP"), (i) Mr. Floyd's normal retirement age will be 62 and (ii) no minimum
years of services for benefit eligibility will be applicable.
Effective upon the Distribution Date, Franchising is expected to assume an
employment agreement between the Company and Mr. MacCutcheon. The agreement
has a term of five years from November 1, 1996 and provides for a base salary
of $313,576 per annum, subject to annual adjustments and an annual bonus of up
to 55% of his base compensation, based on the Company's performance (including
a customer satisfaction component).
Effective upon the Distribution Date, Franchising is expected to assume an
employment agreement between the Company and Thomas Mirgon. The agreement has
a term of five years from March 3,1997 and provides for a base salary of
$230,000 per annum, subject to annual adjustments and an annual bonus of up to
50% of his base compensation, based on the Franchising's performance. The
agreement also provides for (i) a one-time cash payment of $50,000, payable in
two equal installments: the first within 30 days of March 3, 1997 and the
second within 30 days of March 3, 1998; and (ii) a grant of 30,000 non-
qualified options and 10,000 incentive stock options.
RETIREMENT PLANS
Franchising will adopt the SERP. Participants are selected by the Board of
Directors or any designated committee and must be at the level of Senior Vice
President or above.
Participants in the SERP 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 which produces the highest average out of the 120 months of
employment, 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. See "--Employment
Agreements" for a discussion of the terms applicable to Mr. Floyd's
participation in the SERP.
Assuming that the following officers continue to be employed by Franchising
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
James A. MacCutcheon.......................... 9 30
Thomas Mirgon................................. 0 24
Barry L. Smith................................ 7 18
</TABLE>
59
<PAGE>
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>
It is expected that upon the Distribution, Franchising will establish the
Choice Hotels Franchising, Inc. Retirement Savings and Investment Plan (the
"Franchising 401(k) Plan"). The Franchising 401(k) Plan will be a defined
contribution retirement, savings and investment plan qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and will
include a cash or deferred arrangement under Section 401(k) of the Code. All
employees age 21 or over and who have worked for Franchising (or the Company)
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
Franchising 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. Franchising 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 Franchising (or, prior to the
Distribution, the Company) for the year and the number of years of service of
the participant. Amounts contributed by the Company pursuant to its 401(k)
Plan for the Franchising Named Officers are included in the Summary
Compensation Table under the column headed "All Other Compensation."
It is expected that upon the Distribution, Franchising will adopt the Choice
Hotels Franchising, Inc. Non-Qualified Retirement Savings and Investment Plan
("Franchising Non-Qualified Savings Plan"). Certain select highly compensated
members of management of Franchising will be eligible to participate in the
Franchising Non-Qualified Savings Plan. The Franchising Non-Qualified Savings
Plan is 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 the Company under its Non-Qualified Savings
Plan for fiscal year 1997 for the Franchising Named Officers are included in
the Summary Compensation Table under the column headed "All Other
Compensation."
The Franchising match under the Franchising 401(k) Plan and the Franchising
Non-Qualified 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.
For a discussion of the Franchising Incentive Plan and Franchising Stock
Purchase Plans, see "Proposal Four: Ratification of Adoption by Franchising of
Certain Franchising Benefit Plans."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Upon consummation of the Distribution, certain management employees of
Franchising and of the Company will hold options to purchase shares of Company
Common Stock. See "--Relationship Between the Company and Franchising After
the Distribution--Employee Benefits Allocation Agreement."
60
<PAGE>
For a discussion of certain contracts to be executed between the Company and
Franchising as of the Distribution Date, see "--Relationship Between the
Company and Franchising After the Distribution." For a discussion of the
historical financial relationship between the Company and Franchising, see "--
Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
SECURITY OWNERSHIP
The following table sets forth the amount of Franchising Common Stock
expected to be beneficially owned by (i) each director and director nominee of
Franchising, (ii) the chief executive officer of Franchising and the other
Franchising Named Officers, (iii) all officers and directors of Franchising as
a group and (iv) all persons who are expected to own beneficially more than 5%
of Franchising Common Stock, based on Company Common Stock beneficially owned
by such persons on the Annual Meeting Record Date. Unless otherwise specified,
the address for each of them is 10750 Columbia Pike, Silver Spring, Maryland
20901. On the Distribution Date, the holders of Company Common Stock as of the
Distribution Record Date will be entitled to receive one share of Franchising
Common Stock for each share of Company Common Stock. For purposes of the
following table, it is assumed that all options to purchase shares of Company
Common Stock held by the persons specified will be converted into options to
purchase Franchising Common Stock. For a discussion of the treatment of
outstanding options to purchase Company Common Stock in connection with the
Distribution, see "--Relationship Between the Company and Franchising 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 (1)
------------------------ -------------------- ----------------------
<S> <C> <C>
Stewart Bainum, Jr............. 16,003,408(2) 26.58%
Stewart Bainum................. 10,325,997(3) 17.15%
Barbara Bainum................. 5,520,867(4) 9.17%
William R. Floyd............... 85,570(5) *
Robert C. Hazard, Jr........... 40,756(6) *
James A. MacCutcheon........... 181,910(7) *
Frederic V. Malek.............. 5,510(8) *
Thomas Mirgon.................. 0 *
Gerald W. Petitt............... 86,281(9) *
James H. Rempe................. 67,527(10) *
Jerry E. Robertson, Ph.D....... 20,824(11) *
Barry L. Smith................. 244,292(12) *
Rodney Sibley.................. 38,234(13) *
All Directors and Officers as a
Group (15 persons)............ 21,592,499(14) 35.87%
Bruce Bainum................... 5,512,302(15) 9.16%
Ronald Baron................... 15,790,713(16) 26.23%
</TABLE>
- --------
* Less than 1% of class.
(1) Percentages are based on 60,200,784 shares outstanding on the Annual
Meeting Record Date plus, for each person, the shares which would be
issued assuming that such person exercises all options it holds which are
exercisable on such date or become exercisable within 60 days thereafter.
(2) Includes 549,152 shares owned directly by the Stewart Bainum, Jr.
Declaration of Trust dated March 13, 1996, the sole trustee and
beneficiary of which is the reporting person. 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;
3,567,869 shares held directly by Realty Investment Company, Inc.
("Realty"), a real estate management and investment company in which Mr.
Bainum, Jr. has shared voting authority; 1,779,628 shares owned by Mid
Pines Associates Limited Partnership ("Mid Pines"), in which Mr. Bainum,
Jr. is managing general partner and has shared voting
61
<PAGE>
authority and 10,600 shares owned by the Foundation for Maryland's Future,
in which Mr. Bainum, Jr. is the sole director. Also includes 263,000
shares which Mr. Bainum, Jr. has the right to acquire pursuant to stock
options which are presently exercisable or which become exercisable within
60 days after the Annual Meeting Record Date, and 148 shares which Mr.
Bainum, Jr. has the right to receive upon termination of his employment
with the Company pursuant to the terms of the Choice Hotels International,
Inc. Non-Qualified Retirement Savings and Investment Plan ("Non- Qualified
Savings Plan").
(3) Includes 3,906,278 shares held directly by the Stewart Bainum Declaration
of Trust, of which Mr. Bainum is the sole trustee and beneficiary, his
joint interest in 895,466 shares owned by Bainum Associates and 1,082,857
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, in which Mr. Bainum
and his wife have shared voting authority; and 70,305 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 and
beneficiary of which is Mr. Bainum's wife, and 1,667 shares which Mr.
Bainum has the right to acquire pursuant to stock options which are
presently exercisable or which become exercisable within 60 days after
the Annual Meeting Record Date. Also includes 2,844 shares of restricted
stock granted by the issuer to Mr. Bainum which are not vested but which
Mr. Bainum has the right to vote.
(4) Includes 101,013 shares owned directly by Ms. Bainum. Also includes
1,779,628 shares owned by Mid Pines, in which Ms. Bainum's trust is a
general partner and has shared voting authority, 3,567,869 shares owned
by Realty, in which Ms. Bainum's trust has voting stock and shares voting
authority and 70,305 shares owned by the Commonweal Foundation, in which
Ms. Bainum is President and Director and has shared voting authority.
Also includes 2,052 shares of restricted stock issued to Ms. Bainum under
the Choice Hotels International, Inc. Non-Employee Director Stock
Compensation Plan (the "Non-Employee Director Stock Compensation Plan")
which shares are not vested, but which Ms. Bainum has the right to vote.
(5) Consists of restricted shares granted pursuant to Mr. Floyd's employment
agreement which are not yet vested, but which Mr. Floyd has the right to
vote.
(6) Includes 37,304 shares owned directly by Mr. Hazard; 2,844 restricted
shares granted under the Non-Employee Director Stock Compensation Plan,
which are not yet vested, but which Mr. Hazard has the right to vote, 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 Choice Hotels International, Inc. Retirement Savings and Investment
Plan ("401(k) Plan") and Non-Qualified Savings Plan.
(7) Includes 180,311 shares which Mr. MacCutcheon has the right to acquire
pursuant to stock options which are presently exercisable or exercisable
within 60 days of the Annual Meeting Record Date and 664 and 935 shares,
respectively, which Mr. MacCutcheon has the right to receive upon
termination of his employment with the Company pursuant to the terms of
the 401(k) Plan and Non-Qualified Savings Plan.
(8) Includes 1,666 shares which Mr. Malek has the right to acquire pursuant
to stock options which are presently exercisable and 2,844 restricted
shares granted under the Non-Employer Director Stock Compensation Plan
which are not vested, but which Mr. Malek has the right to vote.
(9) Includes 74,776 shares held directly by Mr. Petitt and 8,661 shares held
in trust for minor children for which Mr. Petitt is trustee. Beneficial
ownership of such shares is disclaimed. Also includes 2,844 restricted
shares granted under the Non-Employee Director Stock Compensation Plan
which are not yet vested, but which Mr. Petitt has the right to vote.
(10) Includes 59,624 shares which Mr. Rempe has the right to acquire pursuant
to stock options which are presently exercisable or exercisable within 60
days of the Annual Meeting Record Date.
(11) Includes 15,500 shares owned by the JJ Robertson Limited Partnership, of
which Mr. Robertson and his wife are the general partners with shared
voting authority and 2,844 restricted shares granted under the Non-
Employee Director Stock Compensation Plan which are not yet vested, but
which Mr. Robertson has the right to vote. Also includes 1,666 shares
which Mr. Robertson has the right to acquire pursuant to stock options
which are presently exercisable and 814 shares acquired pursuant to the
Choice Hotels International, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan.
62
<PAGE>
(12) Includes 243,483 shares which Mr. Smith has the right to acquire pursuant
to stock options which are presently exercisable or exercisable within 60
days of the Annual Meeting Record Date and 254 shares and 555 shares,
respectively, which Mr. Smith has the right to receive upon termination
of his employment pursuant to the terms of the 401(k) Plan and the Non-
Qualified Savings Plan.
(13) Includes 5,800 shares held directly by Mr. Sibley, 29,996 shares which
Mr. Sibley has the right to acquire pursuant to stock options which are
presently exercisable or exercisable within 60 days of the Annual Meeting
Record Date, and 963 and 1,475 shares, respectively, which Mr. Sibley has
the right to receive upon termination of his employment pursuant to the
terms of the 401(k) Plan and Nonqualified Savings Plan.
(14) Includes a total of 721,789 shares which the officers and directors
included in the group have the right to acquire pursuant to stock options
which are presently exercisable, or exercisable within 60 days of the
Annual Meeting Record Date, and a total of 1,994 shares and 3,528 shares,
respectively, which such directors and officers have the right to receive
upon termination of their employment with the Company pursuant to the
terms of the 401(k) Plan and the Non-Qualified Savings Plan.
(15) Includes 94,500 shares owned directly by Mr. Bainum. Also includes
1,779,628 shares owned by Mid Pines, in which Mr. Bainum is a general
partner and has shared voting authority, 3,568,869 shares owned by Realty
in which Mr. Bainum's trust has voting stock and shares voting authority
and 70,305 shares owned by the Commonwealth Foundation, in which Mr.
Bainum is a Director and has shared voting authority. Mr. Bainum's
address is 8737 Colesville Road, Suite 800, Silver Spring, Maryland,
20910.
(16) As of July 31, 1997 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.
DESCRIPTION OF FRANCHISING CAPITAL STOCK
Under the Restated Certificate of Incorporation of Franchising (the
"Franchising Certificate"), which is attached as Annex A to this Proxy
Statement, the total number of shares of capital stock that Franchising 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 Company Common Stock outstanding on the
Annual Meeting Record Date, it is expected that approximately 60,200,784
shares of Franchising Common Stock will be issued to stockholders of the
Company in the Distribution. All of the shares Franchising Common Stock to be
distributed to the Company stockholders in the Distribution will be fully paid
and non-assessable.
Common Stock
The Franchising Certificate authorizes common stock consisting of
160,000,000 shares. Holders of Franchising 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 Franchising, 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 Franchising upon liquidation, dissolution or winding up of Franchising.
Franchising may issue additional shares of common stock without further
stockholder approval, up to the maximum authorized number of shares, except as
may be otherwise required by applicable law or stock exchange regulations.
Shares of common stock may be issued from time to time in one or more
classes or series. With respect to the issuance of common shares of any class
or series, the Board of Directors of Franchising is authorized to determine,
without any further action by the holders of Franchising'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 class or series. Should the Board of Directors of
Franchising elect to exercise its authority, the rights and privileges of
holders of Franchising's Common Stock could be made subject to rights
63
<PAGE>
and privileges of any such other series of common stock. The Company has no
present plans to issue any common stock of a class or series other than
Franchising's Common Stock.
See "--Post-Distribution Dividend Policy" for a description of the dividend
policy of Franchising after the Distribution.
Preferred Stock
Franchising'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 class or
series of Preferred Stock, as well as the number of shares constituting such
class or series and the designation thereof.
Preemptive Rights
Holders of shares of Company Common Stock have no preemptive rights.
PURPOSES AND ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE FRANCHISING
CERTIFICATE AND BYLAWS
Prior to the Distribution Date, the Franchising Certificate and the Bylaws
of Franchising (the "Franchising Bylaws") will be amended by the Company as
sole stockholder of Franchising to make the Franchising Certificate and the
Franchising Bylaws substantially similar to the Company Certificate and the
Company Bylaws as currently in effect. Such amendment to the Franchising
Certificate and Franchising Bylaws may have an antitakeover effect with
respect to Franchising, deter an offer with a substantial premium to the then-
current trading price of Franchising Common Stock or hinder a potential
transaction that may be attractive to stockholders.
Franchising Certificate and Bylaws
The Franchising Certificate contains several provisions that will make
difficult an acquisition of control of Franchising, by means of a tender
offer, open market purchase, a proxy fight or otherwise, that is not approved
by the Franchising Board of Directors. The Franchising Bylaws also contain
provisions that could have an antitakeover effect.
The purposes of the relevant provisions of the Franchising Certificate and
the Franchising Bylaws are to discourage certain types of transactions,
described below, which may involve an actual or threatened change of control
of Franchising and to encourage persons seeking to acquire control of
Franchising to consult first with the Board of Directors to negotiate the
terms of any proposed business combination or offer. The provisions are
designed to reduce the vulnerability of Franchising to an unsolicited proposal
for a takeover that does not contemplate the acquisition of all outstanding
shares or is otherwise unfair to stockholders of Franchising or an unsolicited
proposal for the restructuring or sale of all or part of Franchising. The
Company and Franchising believe that, as a general rule, such proposals would
not be in the best interests of Franchising and its stockholders.
There has been a history of the accumulation of substantial stock positions
in public companies by third parties as a prelude to proposing a takeover or a
restructuring or sale of all or part of the company or another similar
extraordinary corporate action. Such actions are often undertaken by the
third-party without advance notice to, or consultation with, the management or
board of directors of the target company. In many cases, the purchaser seeks
representation on the company's board of directors in order to increase the
likelihood that its proposal will be implemented by the target company. If the
company resists the efforts of the purchaser to obtain representation on the
company's board, the purchaser may commence a proxy contest to have its
nominees elected to the board in place of certain directors or the entire
board. In some cases, the purchaser may not truly
64
<PAGE>
be interested in taking over the company, but may use the threat of a proxy
fight and/or a bid to take over the company as a means of forcing the company
to repurchase its equity position at a substantial premium over market price.
The Company and Franchising believe that the imminent threat of removal of
Franchising's management or Board of Directors in such situations would
severely curtail the ability of management or the board of directors to
negotiate effectively with such purchasers. The management or the Franchising
Board of Directors would be deprived of the time and information necessary to
evaluate the takeover proposal, to study alternative proposals and to help
ensure that the best price is obtained in any transaction involving
Franchising which may ultimately be undertaken. If the real purpose of a
takeover bid were to force Franchising to repurchase an accumulated stock
interest at a premium price, management or the Board of Directors would face
the risk that, if it did not repurchase the purchaser's stock interest,
Franchising's business and Franchising's management would be disrupted,
perhaps irreparably.
Certain provisions of the Franchising Certificate and Bylaws, in the view of
the Company and Franchising, will help ensure that the Franchising Board of
Directors, if confronted by a surprise proposal from a third-party which has
acquired a block of stock, will have sufficient time to review the proposal
and appropriate alternatives to the proposal and to act in what it believes to
be the best interests of the stockholders. In addition, certain other
provisions of the Franchising Certificate are designed to prevent a purchaser
from utilizing two-tier pricing and similar inequitable tactics in the event
of an attempt to take over Franchising.
These provisions, individually and collectively, will make difficult and may
discourage a merger, tender offer or proxy fight, even if such transaction or
occurrence may be favorable to the interests of the stockholders, and may
delay or frustrate the assumption of control by a holder of a large block of
Franchising Common Stock and the removal of incumbent management, even if such
removal might be beneficial to the stockholders. Furthermore, these provisions
may deter or could be utilized to frustrate a future takeover attempt which is
not approved by the incumbent Board of Directors, but which the holders of a
majority of the Franchising Common Stock may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
stock over prevailing market prices of such stock. By discouraging takeover
attempts, these provisions may have the incidental effect of inhibiting
certain changes in management (some or all of the members of which might be
replaced in the course of a change of control) and also the temporary
fluctuations in the market price of the stock which often result from actual
or rumored takeover attempts.
Set forth below is a description of all such material provisions in the
Franchising Certificate and Bylaws. Such description is intended as a summary
only and is qualified in its entirety by reference to the Franchising
Certificate and Bylaws, the forms of which are attached to this Proxy
Statement as Annexes A and B, respectively.
Classified Board of Directors. The Franchising Certificate provides for the
Franchising Board of Directors to be divided into three classes serving
staggered terms so that directors' initial terms will expire either at the
1998, 1999 or 2000 annual meeting of stockholders. Starting with the 1998
annual meeting of Franchising stockholders, one class of directors will be
elected each year for three-year terms. See "--Management--Board of
Directors."
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Franchising Board
of Directors in a relatively short period of time. At least two annual
meetings of stockholders, instead of one, will generally be required to effect
a change in a majority of the Franchising Board of Directors. Such a delay may
help ensure that the Franchising Board of Directors, if confronted by a holder
attempting to force a stock repurchase at a premium above market prices, a
proxy contest or an extraordinary corporate transaction, will have sufficient
time to review the proposal and appropriate alternatives to the proposal and
to act in what it believes are the best interests of the stockholders.
65
<PAGE>
The classified board provision could have the effect of discouraging a
third-party from making a tender offer or otherwise attempting to obtain
control of Franchising, even though such an attempt might be beneficial to
Franchising and its stockholders. The classified board provision could thus
increase the likelihood that incumbent directors will retain their positions.
In addition, since the classified board provision is designed to discourage
accumulations of large blocks of Franchising stock by purchasers whose
objective is to have such stock repurchased by Franchising at a premium, the
classified board provision could tend to reduce the temporary fluctuations in
the market price of Franchising's stock that could be caused by accumulations
of large blocks of such stock. Accordingly, stockholders could be deprived of
certain opportunities to sell their stock at a temporarily higher market
price.
The Company and Franchising believe that a classified board of directors
will help to assure the continuity and stability of the Franchising Board of
Directors and Franchising's business strategies and policies as determined by
the Board of Directors, because generally a majority of the directors at any
given time will have had prior experience as directors of Franchising. The
classified board provision will also help assure that the Franchising Board of
Directors, if confronted with an unsolicited proposal from a third-party that
has acquired a block of the voting stock of Franchising, will have sufficient
time to review the proposal and appropriate alternatives and to seek the best
available result for all stockholders.
Removal; Filling Vacancies. The Franchising Certificate provides that only a
majority of the Board of Directors then in office shall have the authority to
fill any vacancies on the Board of Directors, including vacancies created by
an increase in the number of directors. In addition, the Franchising
Certificate provides that a new director elected to fill a vacancy on the
Board of Directors will serve for the remainder of the full term of his or her
class and that no decrease in the number of directors shall shorten the term
of an incumbent. These provisions relating to removal and filling of vacancies
on the Board of Directors will preclude stockholders from enlarging the Board
of Directors or removing incumbent directors and filling the vacancies with
their own nominees.
Limitations on Stockholder Action By Written Consent; Special Meetings. The
Franchising Certificate and Bylaws provide that stockholder action can be
taken only at an annual or special meeting of stockholders and prohibit
stockholder action by written consent in lieu of a meeting. The Franchising
Certificate and Bylaws provide that special meetings of stockholders can be
called only by the Chairman or Vice Chairman of Franchising's Board of
Directors or by the Secretary of Franchising within 10 calendar days after
receipt of the written request of a majority of the total number of directors
Franchising would have if there were no vacancies. Stockholders are not
permitted to call a special meeting or to require that the Board of Directors
call a special meeting of stockholders. Moreover, the business permitted to be
conducted at any special meeting of stockholders is limited to the business
brought before the meeting by or at the direction of the Board of Directors.
The provisions of the Franchising Certificate and Bylaws restricting
stockholder action by written consent may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting unless a
special meeting is called by a majority of the entire Board of Directors.
These provisions would also prevent the holders of a majority of the voting
power of the voting stock from using the written consent procedure to take
stockholder action and from taking action by consent without giving all the
stockholders of Franchising entitled to vote on a proposed action the
opportunity to participate in determining such proposed action. Moreover, a
stockholder could not force stockholder consideration of a proposal over the
opposition of the Franchising Board of Directors by calling a special meeting
of stockholders prior to the time the Board of Directors believed such
consideration to be appropriate.
The Company and Franchising believe that such limitations on stockholder
action will help to assure the continuity and stability of the Franchising
Board of Directors and Franchising's business strategies and policies as
determined by the Board of Directors, to the benefit of all of Franchising's
stockholders. If confronted with an unsolicited proposal from stockholders of
Franchising, the Board of Directors will have sufficient time to
66
<PAGE>
review such proposal and to seek the best available result for all
stockholders, before such proposal is approved by such stockholders by written
consent in lieu of a meeting or through a special meeting of stockholders.
Nominations of Directors and Stockholder Proposals. The Franchising Bylaws
establish an advance notice procedure with regard to the nomination other than
by or at the direction of the Board of Directors of candidates for election as
directors and with regard to stockholder proposals to be brought before an
annual meeting of stockholders. Specifically, Franchising's Bylaws require
that stockholders desiring to bring any business, including nominations for
directors, before an annual meeting of stockholders deliver advance written
notice thereof to the Secretary of Franchising. The Bylaws further require
that the notice by the stockholder set forth a description of the business to
be brought before the meeting and 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 Franchising 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 purpose of the advance notice provision is to provide the Franchising
Board of Directors the opportunity to inform stockholders, prior to an annual
meeting of stockholders, of any business propose to be conducted at such
meeting (including any recommendation as to the Board's position with respect
to any action to be taken). In the case of the advance notice nomination
procedures, the Franchising Board of Directors is afforded a meaningful
opportunity to consider and inform directors and stockholders of the
qualifications of the proposed nominees.
Although the Franchising Bylaws do not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of directors
or any other proposal submitted by stockholders, the Franchising Bylaws may
have the effect of precluding a nomination for the election of directors or
precluding the conducting of business at a particular stockholder meeting if
the proper procedures are not followed, and may discourage or deter a third-
party from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of Franchising, even if
the conduct of such solicitation or such attempt might be beneficial to
Franchising and its stockholders.
Supermajority Vote for Business Combinations. The affirmative vote of
holders of shares representing not less than two-thirds of the voting power of
the Franchising is required for the approval of any proposal to merge or
consolidate with any other entity (other than an entity 90% owned by
Franchising) or sell, lease or exchange all or substantially all of
Franchising's assets. Likewise, the Franchising Certificate and Bylaws provide
that any change or repeal of this provision requires the same vote of shares
representing two-thirds of the voting power of Franchising. Although an
effective impediment to unwanted takeovers, these provisions may also make
desired alliances with other business more difficult and time consuming to
implement.
Issuance of Preferred Stock. The Franchising Board of Directors is
authorized to issue up to 5,000,000 shares of preferred stock without
stockholder approval and to fix by resolution the relative powers, preferences
and rights and the qualifications, limitations or restrictions of any class or
series of preferred stock. Such action by the Franchising Board of Directors
could effectively dilute the voting power of any potential suitor of
Franchising, making a takeover substantially more difficult.
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 Franchising
Certificate provides that no director of Franchising shall be liable to
Franchising or its stockholders for monetary damages for breach of fiduciary
duty as a director except for breach of the director's duty of loyalty to
Franchising or the stockholders, for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, for
unlawful payment of dividends, unlawful stock redemptions or repurchases and
for any transaction from which the director derived an improper personal
benefit. This provision is intended to eliminate the risk that a director
might incur personal liability to
67
<PAGE>
Franchising or its stockholders for breach of the duty of care. The
Franchising 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 Franchising, 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
Franchising of its directors and officers to the fullest extent permitted by
law. Among other things, the Franchising Certificate provides indemnification
for officers and directors against liabilities for judgments in and
settlements of lawsuits and other proceedings and for the advancement and
payment of fees and expenses reasonably incurred by the director or officer in
defense of any such lawsuit or proceeding.
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<PAGE>
CERTAIN INFORMATION CONCERNING SUNBURST
PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined statement of income illustrates
the estimated effects on Sunburst of the Distribution and related
transactions. The pro forma balance sheet is based on the May 31, 1997 balance
sheet of the Company and assumes that the Distribution was consummated on that
date. The pro forma income statement is based on the income statement of the
Company for the fiscal year ended May 31, 1997, and assumes that the
Distribution was consummated on June 1, 1996. The pro forma financial data are
provided for informational purposes only and do not purport to be indicative
of the results that actually would have been obtained if the Distribution and
related transactions had been effected on the dates indicated or of those
results that may be obtained in the future.
SUNBURST HOSPITALITY CORPORATION
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MAY 31, 1997
<TABLE>
<CAPTION>
CHOICE HOTELS DISTRIBUTION PRO FORMA
INTERNATIONAL, INC. ADJUSTMENTS(A) SUNBURST
------------------- -------------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents...... $ 10,825 $ (4,167) $ 6,658
Receivables (net of allowance
for doubtful accounts)........ 31,981 (24,472) 7,509
Deferred taxes receivable...... 1,219 -- 1,219
Other current assets........... 10,579 (5,676) 4,903
--------- ---------- ---------
Total current assets......... 54,604 (34,315) 20,289
Property and equipment, at cost,
net of accumulated
depreciation.................... 370,244 (43,377) 326,867
Lodging franchise rights, net of
accumulated amortization........ 50,503 (50,503) --
Goodwill, net of accumulated
amortization.................... 69,939 (69,939) --
Other long term assets......... 29,044 (23,339) 5,705
--------- ---------- ---------
$ 574,334 $ (221,473) $ 352,861
========= ========== =========
LIABILITIES AND EQUITY
Current liabilities
Current portion of mortgages
and long-term debt............ $ 27,955 $ (36) $ 27,919
Accounts payable............... 42,489 (20,412) 22,077
Accrued expenses............... 26,932 (10,965) 15,967
Income tax payable............. 3,318 (3,318) --
--------- ---------- ---------
Total current liabilities.... 100,694 (34,731) 65,963
--------- ---------- ---------
Mortgages and other long-term
debt............................ 228,325 (46,427) 181,898
Notes payable to Manor Care...... 115,723 (78,700) 37,023
Deferred income taxes and other
liabilities..................... 5,105 (4,422) 683
Equity........................... 124,487 (57,193) 67,294
--------- ---------- ---------
$ 574,334 $ (221,473) $ 352,861
========= ========== =========
</TABLE>
69
<PAGE>
SUNBURST HOSPITALITY CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED MAY 31, 1997
<TABLE>
<CAPTION>
CHOICE HOTELS DISTRIBUTION OTHER PRO FORMA
INTERNATIONAL, INC. ADJUSTMENTS(A) ADJUSTMENTS SUNBURST
------------------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES
Franchise............. $244,176 $(254,518) $ 10,342 (B) $ --
Hotel operations...... 185,753 (17,737) -- 168,016
-------- --------- -------- --------
Total revenues...... 429,929 (272,255) 10,342 168,016
-------- --------- -------- --------
OPERATING EXPENSES
Franchise............. 183,769 (183,769) -- --
Hotel operations...... 148,250 (18,124) 10,342 (B) 140,468
-- -- 3,955 (C) 3,955
-------- --------- -------- --------
Total operating
expenses........... 332,019 (201,893) 14,297 144,423
-------- --------- -------- --------
INCOME BEFORE OTHER
EXPENSES AND INCOME
TAXES.................. 97,910 (70,362) (3,955)(C) 23,593
OTHER EXPENSES
Interest expense on
Notes payable to
Manor Care........... 18,568 (7,083) (8,815)(D) 2,670
Other interest and
other expenses, net.. 7,118 (3,704) 8,309 (D) 11,723
-------- --------- -------- --------
Total other
expenses........... 25,686 (10,787) (506) 14,393
-------- --------- -------- --------
Income before income
taxes.................. 72,224 (59,575) (3,449) 9,200
-------- --------- -------- --------
Income taxes............ (30,200) 24,845 1,380 (E) (3,975)
-------- --------- -------- --------
Net income before
extraordinary item..... $ 42,024 $ (34,730) $ (2,069) $ 5,225
======== ========= ======== ========
Pro forma earnings per
share.................. .25(F)
========
</TABLE>
SUNBURST
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS
A. Represents adjustment to reflect the Distribution.
B. Represents the adjustment to record franchise fee revenue, franchise fee
expense, and intercompany product sales on Sunburst-owned hotels previously
eliminated in consolidation.
C. Represents the net additional costs associated with staffing of accounting,
finance, cash management, risk management, human resources and legal
personnel and directors' costs to operate Sunburst on a stand alone basis.
D. Represents incremental interest expense in deferred financing amortization
relating to Sunburst's refinancing of $110 million of notes payable to
Manor Care with $117.5 million of commercial backed mortgage securities in
April 1997.
E. Represents the income tax impact of pro forma adjustments at statutory
rates.
F. Represents pro forma earnings per share based on pro forma Sunburst Net
Income divided by the pro forma weighted average share of the Company of
62,680 adjusted for the proposed one-for-three stock split.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUNBURST PRO FORMA FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Sunburst is a leading national hotel company with a portfolio of 71 hotels
containing 10,330 rooms located in 25 states as of May 31, 1997. Each hotel is
branded with one of the Choice franchise brands.
Sunburst's strategy is to (i) optimize the operating performance and value
of its existing portfolio of hotels through the consistent application of high
quality sales, marketing and operating programs; (ii) capitalize on the under-
served, high growth, mid-priced, extended-stay all-suite segment with the
development of 20 MainStay Suite hotels; (iii) develop other high quality,
consumer focused hotels such as Sleep Inns; and (iv) pursue the opportunistic
acquisition of existing hotels whereby substantial value can be created.
The following discussion should be read in conjunction with the preceding
Pro Forma Condensed Combined Balance Sheet and the Pro Forma Condensed
Combined Statement of Income.
Comparison of Fiscal Year 1997 Pro Forma Operating Results and Pro Forma
Fiscal Year 1996 Operating Results
Sunburst's hotel operations revenue consists principally of guest room
revenue, meeting room revenue and food-and-beverage revenue from owned and
operated hotels. The pro forma revenues for Sunburst are derived from the
Company's audited financial statements as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FISCAL YEAR 1996
---------------- ----------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C>
Company reported hotel operations
revenue................................. $185,753 $154,625
Less: European hotel operations revenue.. (17,737) (19,609)
-------- --------
Total Sunburst pro-forma hotel operations
revenue................................. $168,016 $135,016
======== ========
</TABLE>
Sunburst's revenues were $168.0 million for fiscal year 1997, up 24.4% from
$135.0 million for fiscal year 1996. The increases in revenue were primarily
the result of additional rooms achieved through hotel acquisitions and the
construction of new hotels. Overall average daily room rates increased 6.5%
from fiscal year 1996 to fiscal year 1997, and occupancy increased 3.2% over
the corresponding period. Revenue per available room, or RevPAR, increased to
$40.96 from $37.28, an improvement of 9.9%. Increases in food-and-beverage
sales of $2.2 million in fiscal year 1997 also contributed to revenue growth.
Sunburst's hotel operating expenses are derived from the Company's audited
financial statements as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FISCAL YEAR 1996
---------------- ----------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C>
Company reported hotel operations
expense................................. $127,599 $116,481
Less: European hotel operations expense.. (16,166) (17,521)
Add: Franchise fees paid to Franchising.. 10,342 7,500
Pro-forma "spin-off" costs............. 3,955 3,955
Allocable depreciation and
amortization.......................... 18,693 14,223
-------- --------
Total Sunburst pro-forma hotel operations
expense................................. $144,423 $124,638
======== ========
</TABLE>
Hotel operations expenses increased $19.8 million or 15.9% in fiscal year
1997 resulting primarily from the addition of six hotels during the year and
to a lesser extent a $1.3 million increase in food-and-beverage costs. Pro
forma fiscal year 1996 expense excludes an $8.6 million one time charge for
restructuring costs associated with the Manor Care Spin-off. The increase in
franchise fees paid to Franchising results from the increase in hotel
operations revenue. Franchise fees paid are determined based on total revenues
multiplied by franchise fee rates. These rates vary based on the type of hotel
franchised. Depreciation expense increased 31.4% in fiscal
71
<PAGE>
year 1997 as a result of the addition of new hotels and renovations of
existing hotel properties during fiscal years 1997 and 1996.
Hotel operating margins (before depreciation and amortization) increased to
25.2% in fiscal year 1997 from 18.2% in fiscal year 1996 due primarily to a
9.9% increase in RevPAR.
Other Expenses
Interest expense for the Company increased $2.3 million or 9.6% in fiscal
year 1997 as a result of increased borrowings to support the stock repurchase
program. Pro forma interest expense for Sunburst was $15.3 million in fiscal
year 1997, an increase of $2.9 million from pro forma interest expense of
$12.4 million in fiscal year 1996. The increase in interest expense relates to
additional borrowings under the Company's credit facility for stock
repurchases. Certain amounts related to the incremental borrowings incurred to
finance the stock repurchase program have been allocated to Sunburst. See "--
Liquidity and Capital Resources."
Liquidity and Capital Resources
Sunburst is currently considering options, including entering into a new
credit facility, to secure long-term financing to meet the debt requirements
in fiscal 1998 as well as working capital and business development needs. See
"--Financing." Management expects to have adequate financing secured prior to
the distribution date to finance the Company's near-term financing
requirements and development objectives.
On a pro-forma basis, Sunburst has $246.8 million of long-term debt, $27.9
million of which is payable in fiscal year 1998. Pro-forma earnings before
interest, taxes, depreciation and amortization and non-cash asset writedowns
("EBITDA") was $43.2 million in fiscal year 1997. This represents an increase
of 75.6% from the $24.6 million of pro-forma EBITDA in fiscal year 1996.
EBITDA, while not a term defined by generally accepted accounting principles,
is often used by investors and other users of financial statements, to
determine Sunburst's ability to meet debt service, fund capital expenditures
and expand its business. Cash expenditures (including nondiscretionary
expenditures) for various long-term assets, interest expense and income taxes
have been and will be incurred which are not reflected in EBITDA and therefore
EBITDA does not represent funds available for Sunburst's discretionary use.
On April 23, 1997, the Company, through its indirect subsidiary, First
Choice Properties, completed an offering of $117.5 million multi-class
mortgage pass-through certificates, which are non-recourse and collateralized
by 36 hotel properties with a net book value of $146.7 million owned by the
Company. The certificates bear a 7.8% interest rate, and have a final maturity
of May 5, 2012. The Company used the proceeds to repay $110.0 million of the
$225.7 million 9% long-term note payable to Manor Care. The mortgage pass-
through certificates have been allocated to Sunburst and are reflected on the
accompanying pro-forma balance sheet of Sunburst.
On October 30, 1996, the Company entered into a $100.0 million competitive
advance and multi-currency revolving credit facility provided by a group of
seven banks. This facility provides that up to $75.0 million is available for
borrowings in foreign currencies. On May 5, 1997, the Company increased the
size of this facility from $100.0 million to $125.0 million. Borrowings under
the additional $25.0 million are due on December 31, 1997, and accordingly $25
million is classified as current on the Company's consolidated balance sheet.
The Company has $121.6 million drawn at May 31, 1997 under the facility.
Sunburst has been allocated $90.5 million of this bank debt.
Total pro-forma capital expenditures for Sunburst were $79.7 million in
fiscal year 1997 versus $96.6 million in fiscal year 1996. The number of hotel
properties brought on-line in fiscal year 1997 was six versus 17 in fiscal
year 1996. The Company plans capital expenditures for development of Sleep Inn
and MainStay Suites hotels of $69.0 million and $32.0 million in fiscal years
1998 and 1999, respectively. These amounts include expected capital
expenditures relating to the construction of seven Sleep Inn hotels and 19
MainStay Suites hotels over the next two fiscal years. Planned capital
expenditures for routine maintenance and renovation of existing properties are
$13.5 million and $14.4 million for fiscal years 1998 and 1999, respectively.
Sunburst's management will also pursue additional acquisitions of
significantly under-valued hotel properties.
72
<PAGE>
BUSINESS AND PROPERTIES
Sunburst will operate the Hotel Business as previously operated by the
Company.
Sunburst will be a leading national hotel company with a portfolio of 71
hotels containing 10,330 rooms located in 25 States as of May 31, 1997. Each
hotel is branded with one of the Choice franchise brands and Sunburst will be
Franchising's largest franchisee. Sunburst's hotels operate in one of three
principal segments of the lodging industry: all-suite, full service and
limited service. The majority of Sunburst's hotels have been acquired by the
Company since 1992 at prices below their replacement cost. All of these hotels
have benefited from the investment of capital to improve the renovated hotels.
Since June 1992, the Company has spent $260.4 million to buy and renovate 54
hotel properties. More recently, the Company shifted its development efforts
to the construction of Sleep Inn hotels and MainStay Suite hotels.
Sunburst's strategy is to: (i) optimize the operating performance and value
of its existing portfolio of hotels through the consistent application of high
quality sales, marketing and operating programs; (ii) capitalize on the under-
served, high growth, mid-priced, extended-stay all-suite segment with the
development of 20 MainStay Suite hotels; (iii) develop other high quality,
consumer focused hotels such as Sleep Inns; and (iv) pursue the opportunistic
acquisition of existing hotels whereby substantial value can be created.
The Company's performance is a beneficiary of the operating leverage
inherent in the lodging industry and is further supported by the substantial
discount to replacement cost of its existing portfolio. The 54 hotels acquired
since 1992 have an investment basis of approximately 55.3% of current
estimated replacement cost. In addition to the initial renovation of acquired
hotels, Sunburst has spent approximately 5% of revenue for ongoing
improvements to the hotels, thereby maintaining the physical assets to
optimize competitive advantages in each local market.
Sunburst's strategy to build 20 MainStay Suites hotels is intended to
provide it with hotels positioned to benefit from the demand/supply imbalance
in the mid-priced, extended stay all-suite segment which should produce higher
than average return on investment.
Sunburst's historical existing hotel acquisition program and the current
MainStay Suite hotel development program are illustrative of management's
capabilities to timely ascertain market trends, conceive of strategies and to
implement those strategies.
Historical Acquisition Strategy
The primary focus of Sunburst from 1992 through 1995 was the acquisition of
existing hotels at prices below their replacement cost with the intent to
increase their value through (i) the investment of capital to improve the
hotels and (ii) the installation of professional management and marketing
teams to operate the renovated hotels. Since June 1992, Sunburst has spent
$260.4 million to buy and renovate 54 hotels containing 7,809 rooms. In fiscal
year 1997, Sunburst acquired two hotels and is in the process of renovating
them, one of which (located in Charlotte, NC) Sunburst is in the process of
converting to a Clarion Hotel from a senior assisted living facility.
In addition to the acquired hotels, Sunburst owns and operates 8 hotels
developed or acquired prior to 1992, 7 Sleep Inn hotels and 1 MainStay Suites
hotel developed by Sunburst since 1994.
<TABLE>
<CAPTION>
SUNBURST EXISTING HOTEL ACQUISITIONS
---------------------------------------
FISCAL YEAR
---------------------------------------
1993 1994 1995 1996 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total acquisitions.................... 7 13 16 16 2
Total number of rooms acquired........ 1,276 1,933 2,336 1,940 324
Total cost of acquisitions (in
millions) (including initial
improvements)........................ $ 30.9 $ 55.8 $ 83.3 $ 71.8 $ 17.9
Average cost per room................. $24,216 $28,867 $35,659 $37,010 $55,246
</TABLE>
73
<PAGE>
Net operating income for the seven hotels purchased in fiscal year 1993
increased from $8.0 million in fiscal 1996 to $9.4 million in fiscal 1997, a
17% improvement. For the 13 hotels purchased in fiscal year 1994, net
operating income increased 14.4% to $11.5 million in fiscal year 1997 from
$10.0 million in fiscal year 1996. Net operating income for the 16 hotels
acquired in fiscal year 1995 was $12.8 million in fiscal year 1996, a 91%
increase over the $6.7 million achieved in fiscal year 1996. The following
chart summarizes occupancy improvements for original portfolio hotels, and
fiscal 1993, 1994, 1995, 1996 and 1997 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.
<TABLE>
<CAPTION>
SUNBURST HOTELS OCCUPANCY
---------------------------------
FISCAL YEAR
---------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Original Domestic Portfolio.................. 62.27% 64.16% 67.19% 68.02% 71.63%
Fiscal 1993 Acquisitions..................... 56.17 63.20 73.68 76.17 75.02
Fiscal 1994 Acquisitions..................... -- 66.09 70.71 73.76 73.68
Fiscal 1995 Acquisitions..................... -- -- 48.96 58.49 66.27
Fiscal 1996 Acquisitions..................... -- -- -- 53.23 61.16
Fiscal 1997 Acquisitions..................... -- -- -- -- 54.65
</TABLE>
The Hotel Properties
Sunburst's hotel properties serve three primary segments of the lodging
industry; all-suites, full service and limited service. Each hotel, except for
one hotel in Miami Beach which is under physical renovation, is branded with
one of the Choice franchise flags.
All-Suites Hotels. Sunburst has 6 hotels in the all-suite segment open and
13 hotels under construction or in the development process. Sunburst's all-
suite hotel properties compete in the moderate and upscale price segments. The
table below identifies Sunburst's all-suite hotels by brand and price segment.
ALL-SUITE HOTELS
<TABLE>
<CAPTION>
NUMBER NUMBER PRICE
BRAND OF HOTELS OF ROOMS SEGMENT
- ----- --------- -------- ---------
<S> <C> <C> <C>
Quality Suites..................................... 3 345 upscale
Comfort Suites..................................... 2 232 mid-price
MainStay Suites.................................... 1 96 mid-price
</TABLE>
As of May 31, 1997, Sunburst had an additional 10 MainStay Suites hotels
under construction with 970 rooms.
Full-Service Hotels. Sunburst has 16 hotels in the full service segment.
Sunburst's full service hotels compete in the mid-price and upscale price
segments. The table below identifies Sunburst's full service hotels by brand
and price segment.
FULL SERVICE HOTELS
<TABLE>
<CAPTION>
NUMBER NUMBER PRICE
BRAND OF HOTELS OF ROOMS SEGMENT
----- --------- -------- ---------------
<S> <C> <C> <C>
Clarion Hotels & Inns........................ 11 2,114 upper mid-price
Quality Hotel & Inns......................... 5 1,327 mid-price
</TABLE>
74
<PAGE>
Limited Service Hotels. Sunburst has 49 hotels in the limited service
segment open and six hotels under construction or in the development process.
Sunburst's limited service hotel properties compete in the mid-price and
economy price segments. The table below identifies Sunburst's limited service
hotels by brand and price segment.
LIMITED SERVICE HOTELS
<TABLE>
<CAPTION>
NUMBER NUMBER PRICE
BRAND OF HOTELS OF ROOMS SEGMENT
----- --------- -------- ---------
<S> <C> <C> <C>
Comfort Inn........................................ 31 4,074 mid-price
Quality Inns....................................... 8 1,014 mid-price
Sleep Inns......................................... 7 757 mid-price
Econo Lodge........................................ 1 120 economy
Rodeway Inns....................................... 1 101 economy
Independent........................................ 1 150 economy
</TABLE>
As of May 31, 1997, Sunburst had an additional 4 Sleep Inns under
construction with 453 rooms.
External Development
Sunburst's focus on external development is geared to (i) capitalize on the
under-served, high-growth, mid-priced extended stay all-suite segment, and
(ii) the development of other high-quality, consumer-focused hotels.
To effect these strategies, Sunburst maintains a Real Estate Development and
Construction Department staff. This staff effects the identification of target
markets, specific site identification, negotiation, due diligence, planning,
zoning and other approval requirements, design and construction of new hotels.
The Real Estate Development staff have served in the past as the focal point
to effect Sunburst's historical acquisition strategy. This dual capacity to
acquire existing hotels or build new hotels allows Sunburst to be responsive
to changing market conditions.
The following is a list of the new hotels developed by Sunburst since 1994
or currently under development:
<TABLE>
<CAPTION>
CALENDAR
MARKET HOTEL YEAR OF OPENING
------ -------- ---------------
<S> <C> <C>
Dallas/Plano, TX....................................... Sleep 1994
San Antonio, TX........................................ Sleep 1995
Baton Rouge, LA........................................ Sleep 1996
Houston/Airport, TX.................................... Sleep 1996
Austin/Round Rock, TX.................................. Sleep 1996
Dallas/Plano, TX....................................... MainStay 1996
Raleigh, NC............................................ Sleep 1997
Dallas/Arlington, TX................................... Sleep 1997
Kansas City/Airport, MO(1)............................. Sleep 1997
Charlotte, NC(1)....................................... Sleep 1997
Rockville, MD(1)....................................... Sleep 1997
Providence/Airport, RI(1).............................. MainStay 1997
Cincinnati/Blue Ash, OH(1)............................. MainStay 1997
Kansas City/Airport, MO(1)............................. MainStay 1997
Indianapolis, IN(1).................................... MainStay 1997
Louisville, KY(1)...................................... MainStay 1997
Denver/Tech Center, CO(1).............................. MainStay 1998
Orlando/Lake Mary, FL(1)............................... MainStay 1998
Jacksonville, FL(1).................................... MainStay 1998
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
CALENDAR
MARKET HOTEL YEAR OF OPENING
------ -------- ---------------
<S> <C> <C>
Greenville, SC(1)...................................... MainStay 1998
Nashville/Brentwood, TN(1)............................. MainStay 1998
Miami/Airport, FL(2)................................... MainStay 1998
Denver/Airport, CO(1).................................. Sleep 1998
Miami/Airport, FL(2)................................... Sleep 1998
Ft. Lauderdale/Cypress Creek, FL(2).................... MainStay 1998
Pittsburgh/Airport, PA(2).............................. MainStay 1998
Fishkill/Poughkeepsie, NY(2)........................... MainStay 1998
</TABLE>
- --------
(1) Hotel under construction
(2) Sunburst has acquired the land and is in final planning stages prior to
start of construction.
Sunburst's focus on the development of MainStay Suites is based on the
sector-wide demand/supply imbalance as evidenced by numerous industry studies.
According to various industry studies, demand for extended stay lodging far
exceeds supply. Demand in the mid-price market is very high, yet supply
additions have been minimal. The extended stay, all-suite segment, defined as
stays of five or more nights, consists of 228 million room nights annually, or
27% of total U.S. industry demand, according to industry sources. Only 1.5% of
total room supply is dedicated extended stay rooms. Sunburst believes that it
can utilize its real estate development expertise to locate attractive markets
for and build MainStay extended stay hotels. Sunburst also believes that it
can successfully operate these hotels based on its experience operating other
limited services hotels.
MainStay Suites has been created by the Company with a unique product design
and service package which enhances property level appeal, productivity and
profitability. Two of these unique features of the MainStay product are the
use of an automatic check-in kiosk (which allows guests to check in without
assistance) and optional daily light touch housekeeping with full housekeeping
every five days. These features allow a MainStay Suites hotel to operate with
fewer full time equivalent employees than a similar size limited service hotel
that has 24-hour front desk coverage and provides full housekeeping daily.
Sunburst believes that MainStay Suites projects will produce a stabilized
unleveraged pre-tax property level return on investment of 15% or higher. This
return is supported by the experiences at the first MainStay Suites opened by
Sunburst in Plano, Texas and by projections for the MainStay Suites under
development which are based on rate and occupancy generated internally by
Sunburst and by external feasibility consultants, internal operating
guidelines, land cost and projected construction cost. However, there can be
no assurance that the projected return will be achieved or that actual results
will not differ materially. See "--Risk Factors--Forward Looking Information
is Subject to Risk and Uncertainty."
Sunburst's initial development of 20 MainStay Suites combined with
Franchising's efforts to franchise MainStay Suites is intended to result in a
brand with national recognition.
Sunburst's MainStay Suites hotel properties will average approximately 100
suites and be developed on 2.5 to 3.0 acres of land in suburban office parks
or locations proximate to major employers, restaurants and retail amenities.
MainStay Suites feature high quality, interior corridor building construction
with amenities and features demanded by consumers. All suites feature a
bedroom area, living room area with a pull-out couch or recliner, private
bathroom and fully furnished kitchen. The kitchen area includes a full-size
refrigerator, dishwasher, microwave, stove, coffee maker, toaster and all
cooking and serving utensils. Each suite features an over-sized counter
serving as an eating or working center, along with two ergonomic chairs. Suite
alternatives include a studio suite or one-bedroom suite. Each suite includes
two direct dial phone lines, voice mail and other automated phone services.
Sunburst and Franchising have developed a state-of-the-art automated check-
in/out property management system which enables guests with reservations to
obtain their key from the kiosk unassisted. This feature allows transaction
time to be shortened and provides operating efficiencies while enhancing guest
satisfaction.
76
<PAGE>
Based on experience from the first MainStay Suites opened by Sunburst in
Plano, Texas, guest satisfaction is very high. Financial results to-date have
met or exceeded Sunburst's expectations.
Operations
Each of Sunburst's owned and managed hotels operates under one of the Choice
brand names. The following table illustrates the growth of Sunburst over the
four fiscal years ended May 31, 1997.
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of properties, end of period.... 19 32 48 65 71
Number of rooms, end of period......... 3,686 5,605 7,941 9,713 10,330
Average occupancy percentage........... 61.36% 64.18% 67.10% 66.61% 68.70%
Average daily room rate (ADR).......... $49.53 $49.15 $51.28 $55.97 $59.62
RevPAR................................. $30.39 $31.54 $34.40 $37.28 $40.96
</TABLE>
Operating Systems and Procedures. Sunburst's 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, Sunburst has
instituted the following systems in each of the hotels it operates.
. Yield Management. An automated yield management program has been
installed at hotels which allows the local management to take advantage
of the supply and demand conditions in their marketplace. 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. Sunburst has developed a training system for all guest
services representatives that teaches the basic 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 of the Sunburst-operated hotels 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 Sunburst. 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 corporate 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. Recently, Sunburst opened a new food and beverage concept
called "Classic Sports Food, Drink and Memories" in its Richardson,
Texas hotel. A sports theme restaurant, this concept has been developed
jointly with the Classic Sports Network, a national cable television
service. This agreement allows for the use of certain trademarks at
Sunburst's locations. Additional "Classic Sports Food, Drink and
Memories" are planned for three other Sunburst hotels.
77
<PAGE>
. Annual Business Planning Process. Each hotel prepares a zero-based
annual business plan which incorporates historical performance and
market conditions. The plan, which is reviewed and approved by senior
management, provides detailed strategies in the key operating areas of
marketing, guest services and food and beverage. The plan also includes
a comprehensive capital expenditures process which serves to maintain
the physical plant in optimal condition based on market conditions and
operating strategies. The annual plan serves as a fundamental
measurement of management's performance.
Properties
The following chart lists by market segment Sunburst's hotels at May 31,
1997:
<TABLE>
<CAPTION>
YEAR
CONSTRUCTED/
NO. OF LAST MAJOR
HOTEL MARKET ROOMS RENOVATION
----- ------ ------ ------------
<S> <C> <C> <C>
ALL SUITE
Upscale
Quality Suites
Deerfield.............. Fort Lauderdale, Florida 107 1991/1995
Quality Suites.......... Raleigh, North Carolina 114 1988/1994
Quality Suites Shady
Grove.................. Rockville, Maryland 124 1978/1996
Mid-Price
Comfort Suites
Haverhill.............. Boston, Massachusetts 131 1989/1997
Comfort Suites
Deerfield.............. Fort Lauderdale, Florida 101 1991/1995
MainStay Suites
Plano(6)............... Dallas, Texas 96 1996
MainStay Suites
Warwick(1)............. Providence, Rhode Island 94 1997
MainStay Suites Blue
Ash(1)................. Cincinnati, Ohio 100 1997
MainStay Suites
Airport(1)............. Kansas City, Missouri 88 1998
MainStay Suites
Northwest(1)........... Indianapolis, Indiana 88 1997
MainStay Suites(1)...... Louisville, Kentucky 100 1998
MainStay Suites Tech
Center(1).............. Denver, Colorado 100 1998
MainStay Suites Lake
Mary(1)................ Orlando, Florida 100 1998
MainStay Suites South
Pointe(1).............. Jacksonville, Florida 100 1998
MainStay Suites(1)...... Greenville, South Carolina 100 1998
MainStay Suites
Brentwood(1)........... Nashville, Tennessee 100 1998
FULL SERVICE
Upscale
Clarion Hotel
Baltimore.............. Baltimore, Maryland 103 1927/1996
Clarion Hotel
Worthington............ Columbus, Ohio 232 1975/1996
Clarion Hotel
Richardson............. Dallas, Texas 296 1982/1995
Clarion on the Lake..... Hot Springs, Arkansas 151 1965/1997
Clarion Hotel Miami
Airport................ Miami, Florida 103 1970/1996
Clarion Hotel Hollywood
Beach.................. Miami-Ft. Lauderdale, Florida 309 1972/1996
Clarion Hotel........... Mobile, Alabama 250 1979/1994
Clarion Hotel Virginia
Beach.................. Norfolk-Virginia Beach, Virginia 149 1985/1995
Clarion Hotel Roanoke... Roanoke, Virginia 148 1981/1997
Clarion Hotel
Springfield............ Springfield, Missouri 199 1974/1997
Clarion Hotel(2)........ Charlotte, North Carolina 174 1974/1997
Mid-Price
Quality Inn South
Point.................. Jacksonville, Florida 184 1988/1994
Quality Hotel Airport... Los Angeles, California 278 1971/1994
Quality Hotel Maingate
Anaheim(4)............. Los Angeles, California 284 1970/1995
Quality Inn & Suites
Hampton................ Norfolk-Virginia Beach, Virginia 190 1972/1995
Quality Hotel
Arlington.............. Washington, DC 391 1962/1997
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
YEAR
CONSTRUCTED/
NO. OF LAST MAJOR
HOTEL MARKET ROOMS RENOVATION
----- ------ ------ ------------
<S> <C> <C> <C>
LIMITED SERVICE
Mid-Price
Comfort Inn Albuquerque...... Albuquerque, New Mexico 114 1985/1996
Quality Inn Anderson......... Anderson, South Carolina 121 1988/1995
Comfort Inn Norcross......... Atlanta, Georgia 110 1987/1996
Comfort Inn N.W.
Pikesville(5)............... Baltimore, Maryland 186 1964/1994
Comfort Inn University....... Baton Rouge, Louisiana 150 1972/1994
Comfort Inn Danvers(6)....... Boston, Massachusetts 136 1972/1997
Comfort Inn Brooklyn......... Brooklyn, New York 67 1926/1997
Comfort Inn Canton........... Canton, Ohio 124 1989/1994
Comfort Inn Airport.......... Charleston, South Carolina 122 1986/1994
Comfort Inn Charlotte(6)..... Charlotte, North Carolina 150 1985/1996
Quality Inn & Suites--Crown
Point....................... Charlotte, North Carolina 100 1988/1996
Comfort Inn.................. Cincinnati, Ohio 117 1984/1996
Comfort Inn Middleburg
Heights..................... Cleveland, Ohio 136 1989
Comfort Inn College Station.. College Station, Texas 114 1984/1995
Comfort Inn Columbia......... Columbia, South Carolina 98 1987/1996
Comfort Inn DFW Airport...... Dallas-Fort Worth, Texas 152 1986/1995
Quality Inn Plymouth......... Detroit, Michigan 123 1989/1996
Comfort Inn Deerfield Beach.. Fort Lauderdale, Florida 69 1975/1997
Comfort Inn Hershey.......... Hershey, Pennsylvania 125 1990/1997
Comfort Inn Hilton Head...... Hilton Head, South Carolina 150 1988/1996
Quality Inn & Suites
Indianapolis................ Indianapolis, Indiana 116 1982/1996
Quality Inn Lincoln.......... Lincoln, Nebraska 108 1969/1996
Quality Inn & Suites
Lumberton................... Lumberton, North Carolina 120 1974/1996
Comfort Inn Collierville..... Memphis, Tennessee 94 1984/1996
Comfort Inn & Suites, Miami
Springs..................... Miami, Florida 165 1970/1996
Comfort Inn Miami Springs.... Miami, Florida 110 1986/1996
Miami Beach Hotel(3)(6)...... Miami, Florida 150 1952/1997
Comfort Inn--Lee Road........ Orlando, Florida 145 1985/1994
Comfort Inn--Turf Paradise... Phoenix, Arizona 155 1981/1995
Comfort Inn--North........... Phoenix, Arizona 153 1986/1997
Comfort Inn Portland......... Portland, Maine 126 1984/1996
Quality Inn Richmond......... Richmond, Virginia 194 1985/1997
Quality Inn Midvalley........ Salt Lake City, Utah 132 1972/1995
Comfort Inn by the Bay....... San Francisco, California 135 1971/1996
Comfort Inn Westport......... St. Louis, Missouri 170 1971/1995
Comfort Inn Sturgis.......... Sturgis, Michigan 83 1965/1997
Comfort Inn Traverse City.... Traverse City, Michigan 96 1989/1996
Comfort Inn Tyson's.......... Washington, D.C 250 1982/1995
Comfort Inn West Palm Beach.. West Palm Beach, Florida 158 1974/1995
Comfort Inn Wichita.......... Wichita, Kansas 114 1985/1997
Sleep Inn Round Rock(6)...... Austin, Texas 107 1996
Sleep Inn Six Flags(6)....... Dallas-Fort Worth, Texas 124 1997
Sleep Inn Baton Rouge........ Baton Rouge, Louisiana 101 1996
Sleep Inn Plano.............. Dallas, Texas 104 1994
Sleep Inn Intercontinental... Houston, Texas 107 1996
Econo Lodge Tolleson......... Phoenix, Arizona 120 1988/1997
Rodeway Inn Tempe............ Phoenix, Arizona 101 1989
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
YEAR
CONSTRUCTED/
NO. OF LAST MAJOR
HOTEL MARKET ROOMS RENOVATION
----- ------ ------ ------------
<S> <C> <C> <C>
Sleep Inn Raleigh(6)............ Raleigh, North Carolina 107 1996
Sleep Inn San Antonio........... San Antonio, Texas 107 1995
Sleep Inn University(1)......... Charlotte, North Carolina 120 1997
Sleep Inn Airport(1)............ Denver, Colorado 119 1997
Sleep Inn Airport(1)............ Kansas City, Missouri 107 1998
Sleep Inn Rockville(1).......... Washington, D.C. 107 1997
</TABLE>
- --------
(1) Hotel under construction
(2) Hotel closed for renovation
(3) Hotel under renovation
(4) Leased property
(5) Hotel on leased land
(6) Partial year results only
The following chart shows operating statistics for all of Sunburst's owned
and managed hotels presented by market segment for the five fiscal years ended
May 30, 1997.
<TABLE>
<CAPTION>
FY 1993 FY 1994 FY 1995
----------------------- ----------------------- -----------------------
ADR OCCUPANCY REVPAR ADR OCCUPANCY REVPAR ADR OCCUPANCY REVPAR
------ --------- ------ ------ --------- ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
All Suite Hotels........ $ -- --% $ -- $60.62 71.58% $43.39 $58.74 61.34% $36.03
Full Service Hotels..... 54.06 61.42 33.20 54.37 60.74 33.02 54.04 65.43 35.36
Limited Service Hotels.. 44.59 61.30 27.34 45.09 66.71 30.08 48.39 69.15 33.46
All Hotels.............. 49.53 61.36 30.39 49.15 64.16 31.54 51.28 67.10 34.40
</TABLE>
<TABLE>
<CAPTION>
FY 1996 FY 1997
----------------------- -----------------------
ADR OCCUPANCY REVPAR ADR OCCUPANCY REVPAR
------ --------- ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
All Suite Hotels............... $64.70 69.00% $44.65 $69.48 72.73% $50.53
Full Service Hotels............ 58.85 65.41 38.49 63.25 67.05 42.41
Limited Service Hotels......... 53.36 67.11 35.81 56.38 69.25 39.04
All Hotels..................... 55.97 66.61 37.28 59.60 68.70 40.94
</TABLE>
EMPLOYEES
Assuming the Distribution had occurred on June 30, 1997, Sunburst employed
approximately 3,380 people full-time. Less than 5% of Sunburst's employees are
represented by unions. All of Sunburst's employees covered by collective
bargaining agreements are employed at Comfort Inn By the Bay, San Francisco,
California which has four collective bargaining agreements covering laundry
workers, front desk workers, housekeeping and food service and maintenance
workers. Such agreements expire between August 1997 and December 1997.
Sunburst considers its relations with its employee to be satisfactory.
MANAGEMENT
Board of Directors
Immediately prior to the Distribution, five of the nine current members of
the Company's Board of Directors will resign and Donald J. Landry, the Chief
Executive Officer of Sunburst, and Carole Y. Prest are expected to be
appointed to fill two vacancies on the Sunburst Board of Directors.
80
<PAGE>
At the time of the Distribution, the Sunburst Board of Directors will
consist of up to seven directors. The name, age and proposed class of six of
the persons who are expected to be directors of Sunburst as of the
Distribution Date are set forth below. The Company's Board of Directors will
select a candidate to fill the remaining vacancy on the Sunburst Board of
Directors. The remaining vacancy will be filled by a person who is not a
Sunburst employee or a director or employee of Franchising.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ---------
<S> <C> <C>
Stewart Bainum, Jr.......................................... 50 Class II
Stewart Bainum.............................................. 78 Class I
Donald J. Landry............................................ 48 Class III
Frederic V. Malek........................................... 60 Class III
Paul A. Gould............................................... 50 Class II
Carole Y. Prest............................................. 46 Class I
</TABLE>
Donald J. Landry. President of Choice since January 1995; President of Manor
Care Hotel Division ("MCHD") since March 1992; various executive positions
with Richfield Hotel Management, Inc. and its predecessors for more than 20
years, including President of MHM Corporation; Director, Friendly Hotels PLC,
since 1996.
Carole Y. Prest. Vice President, Corporate Strategic Planning of Manor Care
since September 1995; Vice President and General Manager and various other
positions at Gen Rad, Inc. from May 1985 to 1994.
For biographical information with respect to the other persons listed above,
see "Proposal Five: Election of Directors."
The Board of Directors and Committees of the Board
It is expected that the Sunburst Board of Directors will hold five meetings
during the fiscal year and will retain the standing committees of the
Company's Board of Directors which will include the Audit Committee, the
Finance Committee, the Compensation/Key Executive Stock Option Plan Committee
and the Nominating Committee.
The Compensation/Key Executive Stock Option Plan Committee administers
Sunburst's stock option plans and grants stock options thereunder, reviews
compensation of officers and key management employees, recommends development
programs for employees such as training, bonus and incentive plans, pensions
and retirement, and reviews other employee fringe benefit programs.
The Finance Committee reviews the financial affairs of Sunburst and
recommends financial objectives, goals and programs to the Board of Directors
and to management.
The Audit Committee reviews the scope and results of the annual audit, will
review and approve the services and related fees of Sunburst's independent
public accountants, review Sunburst's internal accounting controls and review
Sunburst's Internal Audit Department and its activities.
The Nominating Committee recommends to the Board of Directors the members to
serve on the Board of Directors during the ensuing year. The Committee does
not consider nominees recommended by stockholders.
Compensation of Directors
The Company has previously adopted 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 Sunburst Common Stock on their
first date of election and will be granted options to purchase 1,000 shares on
their date of election in subsequent calendar
81
<PAGE>
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 Sunburst 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 Sunburst will receive no separate
remuneration for their services as directors. Pursuant to the Non-Employee
Director Stock Compensation Plan to be adopted by Sunburst prior to the
Distribution, eligible non-employee directors will receive annually, in lieu
of cash, restricted stock of Sunburst, the fair market value of which at the
time of grant will be equal to $30,000, which will represent the Board of
Directors 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 of Directors meeting, and will
be reimbursed for travel expenses and other out-of-pocket costs incurred in
attending meetings.
Executive Officers
The name, age, proposed title upon consummation of the Distribution and
business background of each of the persons who are expected on the
Distribution Date to be the executive officers of Sunburst are set forth
below. The Company is currently seeking candidates for the positions of Senior
Vice President, Chief Financial Officer and Treasurer and Vice President-
Finance and Controller. 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.... 51 Chairman of the Board of Directors
Donald J. Landry...... 48 Vice Chairman and Chief Executive Officer
Antonio DiRico........ 44 President and Chief Operating Officer
Kevin P. Hanley....... 39 Senior Vice President, Real Estate and Development
Edward A. Kubis....... 38 Senior Vice President, General Counsel and Secretary
</TABLE>
Kevin P. Hanley. Vice President, Real Estate and Development of the Company
since December 1994; Vice President, Real Estate and Development of MCHD from
December 1994 to November 1996; Executive Vice President of Hospitality
Investment Trust from September 1994 to November 1994; Senior Vice President,
Development and Acquisitions of Motel 6, L.P. from May 1992 to September 1994;
various other positions with Motel 6, L.P. since January 1987.
Edward A. Kubis. Senior Vice President and General Counsel of Choice
Management and Realty Services, a division of the Company, since June 1997;
Senior Vice President, General Counsel and Secretary of Choice from November
1996 to June 1997; Assistant General Counsel and Assistant Secretary, Manor
Care from December 1993 to November 1996; Senior Attorney, Real Estate, from
December 1990 to December 1993; Staff Attorney, Real Estate from June 1987 to
December 1990.
For biographical information with respect to the other persons listed above,
see "Proposal Five: Election of Directors."
82
<PAGE>
PROPOSAL TWO: AMENDMENTS TO THE RESTATED CERTIFICATE
OF INCORPORATION OF THE COMPANY
In connection with the Distribution, Company stockholders are being asked,
as part of the Distribution Proposals, and pursuant to the DGCL, to consider
and vote upon amendments to the Restated Certificate of Incorporation of the
Company to (i) change the name of the Company to Sunburst Hospitality
Corporation, (ii) decrease the number of authorized shares of Company Common
Stock from 160,000,000 to 60,000,000 and (iii) effect a one-for-three reverse
stock split of Company Common Stock whereby every three shares of Company
Common Stock would be aggregated into one share of Sunburst Common Stock.
Under the DGCL, the amendments to the Company's Restated Certificate of
Incorporation described herein require the approval of a majority of the
outstanding Company Common Stock.
Proposal Two is one of the Distribution Proposals and, therefore, the
effectiveness of Proposal Two is conditioned upon the approval of all of the
Distribution Proposals. Accordingly, failure of Company stockholders to
approve Proposal Two will result in the ineffectiveness of all the
Distribution Proposals.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
ALL OF THE DISTRIBUTION PROPOSALS.
NAME CHANGE
The purpose and principal effect of the proposed amendment to the Restated
Certificate of Incorporation of the Company to change the name of the Company
to Sunburst Hospitality Corporation is to permit Franchising to adopt the name
Choice Hotels International, Inc. after the Distribution, to minimize
confusion to the public and to investors and to reflect that the principal
business of the Company after the Distribution will emphasize the ownership of
hotels and other lodging-related properties. This amendment should not have
any adverse effect on the Company shareholders.
REVERSE STOCK SPLIT AND REDUCTION IN NUMBER OF AUTHORIZED SHARES
Purposes of the Reverse Stock Split. In order to enable Sunburst to maintain
an acceptable trading range for Sunburst Common Stock after the Distribution
while also retaining sufficient liquidity for Sunburst Common Stock, the
Company has proposed that, following the Distribution, the Company's Restated
Certificate of Incorporation be amended to effect a one-for-three reverse
stock split pursuant to which each three shares of Company Common Stock will
be exchanged for one share of Sunburst Common Stock (i.e. common stock of the
Company following the Distribution). As of the Annual Meeting Record Date, the
Company had outstanding 60,200,784 shares of Company Common Stock (not
including shares issuable upon exercise of options to purchase Company Common
Stock) and had reserved for issuance under the 1996 Incentive Plan 6,732,307
shares of Company Common Stock. After giving effect to the Reverse Stock
Split, such numbers would be 20,054,432 and 2,244,102 respectively.
Purposes of the Reverse Stock Split. The Board of Directors, after
considering the effects of the Distribution on the price per share of the
Company Common Stock, believes that the Reverse Stock Split is advisable and
in the best interests of the Company and its stockholders as a means of
enhancing the liquidity and marketability of Company Common Stock. The
reduction in the number of issued and outstanding shares of the Company Common
Stock as a result of the Reverse Stock Split is expected to increase the
market price of the Company Common Stock, thereby reducing any negative
attributes traditionally associated with a low per share market price.
A low per share market price often adversely effects the marketability of a
stock. Certain institutional investors have internal policies preventing the
purchase of low-priced stocks and many brokerage houses do not permit low-
priced stock to be used as collateral for margin accounts or to be purchased
on margin. Further, certain brokerage houses have adopted time-consuming
practices and procedures which act to discourage
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individual brokers from dealing in low-priced stocks because such practices
and procedures make the handling of low-priced stocks economically
unattractive. A low stock price also has the effect of increasing the amount
and percentage of transaction costs paid by individual investors. Because
brokers' commission on low-priced stocks generally represent a higher
percentage of the stock price than commissions on higher priced stocks, a low
stock price can result in individual stockholders paying transaction costs
(commissions, markups or markdowns) which are a higher percentage of their
total share value than would be the case with stock with a higher share price.
The Board of Directors believes that the expected increase in the share price
of the Company Common Stock resulting from the Reverse Stock Split should
reduce the effect of these negative attributes traditionally associated with a
low per share price, thereby enhancing the acceptability of the Company Common
Stock with the financial community and investing public and resulting in a
broader market for the Company Common Stock than currently exists.
There can be no assurance that the Reverse Stock Split will increase the
current market price per share, or that any increase in market price of the
Company Common Stock after the Reverse Stock Split will be maintained. The
Reverse Stock Split could result in an increase in the market price for
Company Common Stock which is proportionately less than the decease in the
number of shares outstanding. Additionally, there can be no assurances that
any of the effects described above will be achieved.
Certain Effects of the Reverse Stock Split. A holder of Company Common Stock
will be entitled to receive a whole number of shares plus a fraction of a
share if the number of shares of Company Common Stock held by him prior to the
Reverse Stock Split is not evenly divisable by three. However, no certificate
or scrip representing fractional shares of Company Common Stock will be
issued. In lieu of fractional shares, the Transfer Agent of the Common Stock
on behalf of all persons otherwise entitled to receive fractional shares
(including individual beneficial owners of shares held by a nominee holder)
will, promptly following the effective time of the Reverse Stock Split,
aggregate such fractional shares and sell the resulting whole shares of
Company Common Stock for the accounts of those persons in open market
transactions on the NYSE. Those persons will thereafter be entitled to receive
their allocable portion of the net proceeds of the sale thereof upon surrender
of their Company Common Stock certificates as described below.
If approved, the Reverse Stock Split may result in some stockholders owning
"odd-lots" of less than 100 shares of Company Common Stock. Brokerage
commissions and other costs of transactions in odd-lots are generally higher
than the costs of transactions in "round-lots" of even multiples of 100
shares.
Stockholders have no right under Delaware law or the Company's Amended and
Restated Certificate of Incorporation or By-Laws to dissent from the Reverse
Stock Split.
The Company Common Stock is currently registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and as a result, the
Company is subject to the periodic reporting and other requirements of the
Exchange Act. The proposed Reverse Stock Split will not affect the
registration of the Company Common Stock under the Exchange Act.
Exchange of Stock Certificates. If the Reverse Stock Split is approved as
part of the Distribution Proposals, the Company will, after consummation of
the Distribution, file an amendment to the Company's Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware. The
Company will notify holders of Company Common Stock of the effectiveness of
the Reverse Stock Split and will furnish the holders of record of shares of
Company Common Stock at the close of business on such effective date with a
letter of transmittal for use in exchanging certificates. The holders of
Company Common Stock will be required to promptly mail their certificates
representing shares of Company Common Stock to the transfer agent, in order
that new certificates giving effect to the Reverse Stock Split may be issued
and the proceeds of any fractional shares may be distributed. Commencing with
the effective date of the Reverse Stock Split, previously outstanding
certificates representing shares of Company Common Stock will be deemed for
all purposes to represent one-third of the number of shares previously
represented thereby.
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Decreased Number of Authorized Shares. The Company has authorized
160,000,000 shares of Company Common Stock, of which approximately 60,200,784
are issued and outstanding as of the Annual Meeting Record Date. In connection
with the Reverse Stock Split, the outstanding shares of Company Common Stock
will be reduced to approximately 20,066,928. To reflect this reduction in the
number of shares outstanding, it is proposed to amend the Company's Restated
Certificate of Incorporation to decrease the total number of shares of Company
Common Stock authorized by the Company from 160,000,000 to 60,000,000.
PROPOSAL THREE: RATIFICATION OF THE FRANCHISING BOARD OF DIRECTORS
In connection with the Distribution, Company stockholders are being asked as
part of the Distribution Proposals to consider and vote upon the ratification
of the election by the Company, as sole stockholder of Franchising, of Stewart
Bainum, Jr., Stewart Bainum, Barbara Bainum, William R. Floyd, Robert C.
Hazard, Jr., Frederic V. Malek, Gerald W. Petitt, James H. Rempe and Jerry E.
Robertson, Ph.D (collectively the "Franchising Directors") as directors of
Franchising who will be divided into three classes, the initial terms of which
will expire in 1998, 1999 and 2000.
Certain information with respect to the Franchising Board of Directors and
the Franchisors Directors is set forth in "Proposal One: Ratification of the
Distribution--Certain Information Concerning Franchising--Management; and --
Certain Relationships and Related Transactions."
Each Franchising Director will be elected to the Franchising Board of
Directors by the Company prior to the Distribution and will hold office as a
director for the term indicated for such person in "Proposal One: Ratification
of the Distribution--Certain Information Concerning Franchising--Management."
Proposal Three is one of the Distribution Proposals and, therefore, the
effectiveness of Proposal Three is conditioned upon the approval of all of the
Distribution Proposals. Accordingly, failure of Company stockholders to
approve Proposal Three will result in the ineffectiveness of all of the
Distribution Proposals.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
ALL OF THE DISTRIBUTION PROPOSALS.
PROPOSAL FOUR: RATIFICATION OF CERTAIN FRANCHISING BENEFIT PLANS
In connection with the Distribution, Company stockholders are being asked,
as part of the Distribution Proposals, to ratify the adoption by Franchising
of the Choice Hotels Franchising, Inc. 1997 Long-Term Incentive Plan (the
"Franchising Incentive Plan") and the Choice Hotels Franchising, Inc. Employee
Stock Purchase Plan (the "Franchising Stock Purchase Plan").
Proposal Four is one of the Distribution Proposals and, therefore, the
effectiveness of Proposal Four is conditioned upon the approval of all of the
Distribution Proposals. Accordingly, failure of Company stockholders to
approve Proposal Four will result in the ineffectiveness of all of the
Distribution Proposals.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
ALL OF THE DISTRIBUTION PROPOSALS.
FRANCHISING INCENTIVE PLAN
General. The continuing growth and development and financial success of
Franchising and its subsidiaries are dependent upon ensuring the best possible
management. The Franchising Board of Directors believes the Franchising
Incentive Plan will be an important aid to Franchising in attracting and
retaining individuals of
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outstanding abilities and in rewarding them for the continued profitable
performance of Franchising and its subsidiaries.
The types of awards that may be granted under the Franchising Incentive Plan
are restricted shares, incentive stock options, nonqualified stock options,
stock appreciation rights and performance shares. The Franchising Incentive
Plan provides that over the next ten years restricted shares, incentive stock
options, nonqualified stock options, stock appreciation rights, and/or
performance shares involving up to six million shares (subject to adjustment
for stock splits and similar capital changes) of Franchising Common Stock may
be granted. Franchising Common Stock issued under the Franchising Incentive
Plan may be authorized and unissued stock, treasury stock or stock purchased
on the open market (including in private transactions). To the extent that an
award lapses or the rights of a participant to whom it was granted terminate,
any shares of Franchising Common Stock subject to the award will again be
available for awards under the Franchising Incentive Plan. The following
description of the Franchising Incentive Plan is qualified in its entirety by
reference to the Choice Hotels Franchising, Inc. Long-Term Incentive Plan, a
copy of which is attached as Exhibit D-1 to this Proxy Statement. The amount
of compensation that will accrue to the participants pursuant to the
Franchising Incentive Plan, if ratified by the stockholders at the Annual
Meeting, is not currently determinable.
Administration. The Franchising Incentive Plan provides that it will be
administered by one or more Key Executive Stock Option Plan Committee(s) of
the Board of Directors (the "Committee"), which establishes the conditions of
each grant made under the Franchising Incentive Plan and determines which key
employees will receive awards as well as the type and amount of each award.
Eligibility. Key employees of Franchising and its subsidiaries (including
employees who are members of the Franchising Board of Directors, but excluding
directors who are not employees) who, in the opinion of the Committee, are
mainly responsible for the continued growth and development and financial
success of the business of Franchising or one of its subsidiaries are eligible
to be granted awards under the Franchising Incentive Plan. Subject to the
provisions of the Franchising Incentive Plan, the Committee shall from time to
time select from such eligible persons those to whom awards shall be granted
and determine the number of shares to be granted. Because eligibility is
determined by these subjective criteria, it is not possible at this time to
determine either the number of employees eligible to participate in the
Franchising Incentive Plan or the amount of awards which will be made.
In connection with the Distribution, options to purchase Company Common
Stock held by Company employees will be converted into options to purchase
Franchising Common Stock and Sunburst Common Stock. Such converted options to
purchase Franchising Common Stock will be deemed to be governed by the
Franchising Incentive Plan but are not deemed to be issued under the
Franchising Incentive Plan. All of such awards will vest at the rate of twenty
percent per year for the first five years, and expire ten years after the date
of the award.
Restricted Shares. Restricted share awards are shares of Franchising Common
Stock bearing restrictive legends prohibiting their sale, transfer, pledge or
hypothecation until the expiration of a restriction period of not more than
ten years set at the time of grant. In addition or in lieu of a restriction
period, the Committee may establish a performance goal which must be achieved
as a condition to retention of the award. The recipient of an award is
entitled to receive dividends and vote the restricted shares, unless
forfeited.
Stock Options. Options granted under the Franchising Incentive Plan may be
either Incentive Stock Options, as defined in the Internal Revenue Code, as
amended, or options which do not so qualify ("nonqualified options"). At the
time an option is granted, the Committee determines the number of shares of
Franchising Common Stock subject to each stock option, the manner and time of
exercise, and the vesting schedule. No options granted under the Franchising
Incentive Plan may be exercised more than 10 years after date of grant;
however, Incentive Stock Options granted to a Ten Percent Shareholder (as
defined) may not be exercised more than 5 years after the date of grant. The
option price per share for stock options will be set in the grant, but will be
equal to or greater than the fair market value of a share of Franchising
Common Stock on the date of grant,
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except with respect to an Incentive Stock Option granted to a Ten Percent
Shareholder (as defined) shall be at least 110% of the fair market value on
the date of grant. The option exercise price may be paid with cash and/or
shares of Franchising Common Stock. Options will be evidenced by stock option
agreements in a form approved by the Committee and are not transferable except
by will or the laws of descent and distribution. Under the Franchising
Incentive Plan, no Covered Employee (as defined in Section 162(m)(3) of the
Internal Revenue Code) may be granted stock options for more than 100,000
shares during any calendar year. With respect to Incentive Stock Options
granted to any employee, the aggregate fair market value determined on the
date of grant with respect to which any Incentive Stock Option is first
exercisable shall not exceed $100,000.
The granting of an option does not entitle the participant to any dividends,
voting or other rights of a stockholder, unless and until the participant
receives stock upon exercise of the option. The Committee may limit an option
by restricting its exercise in whole or in part for specified periods.
Stock Appreciation Rights. An SAR is the right to receive payment for the
appreciation in value of one share of Franchising Common Stock over a
specified price. An SAR may be granted either in tandem with a stock option
award or independently. If the SAR is granted in tandem with a stock option
award, the payment is measured by the excess of the fair market value of
Franchising Common Stock at the time of exercise over the option price (which
cannot be less than the fair market value of the stock at the time of grant).
If the SAR is granted independent of a stock option, the Committee will
specify whether the award is a "regular" SAR or whether the award is a "book
value" SAR. If the award is a "regular" SAR, the payment is measured by the
excess of the fair market value of the stock at the time of exercise over the
fair market value at the time of grant. If the award is a "book value" SAR,
the payment is measured by the excess of the book value of Franchising Common
Stock at the time of exercise over the book value of Franchising Common Stock
at the time of grant.
Stock appreciation payments, at the election of the participant, may be made
in cash or Franchising Common Stock or a combination of both. The Committee
must approve any election to receive cash.
An SAR issued pursuant to an option cannot be exercised less than six months
after the grant; an SAR issued independently is subject to the terms and
conditions established on grant. SARs are deemed to be exercised on the last
day of the Exercise Period, if not previously exercised, which may not extend
more than ten years beyond the date of grant. The Committee may impose such
restrictions on transferability of SARs as it may determine.
The granting of an SAR does not entitle the participant to any dividend,
voting or other rights of a stockholder, unless and until the participant
receives stock upon the exercise of an SAR. SARs which are not exercisable
immediately upon being granted may be made immediately exercisable upon the
occurrence of retirement or disability, as determined by the Committee in its
sole discretion. Under the Franchising Incentive Plan, no Covered Employee (as
defined in Section 162(m)(3) of the Internal Revenue Code) may be granted more
than 100,000 SARs during any calendar year.
Performance Shares. A performance share award involves the grant of a right
to receive a specified number of shares of Franchising Common Stock upon
satisfaction of certain performance-related objectives specified in the
granting instrument. The performance-related objectives may relate to the
individual, Franchising, a department or a division of Franchising and/or a
group or class of participants. The measuring period used to establish the
performance criteria will be specified by the Committee at the time of grant
and may be subsequently waived or reduced, or the performance criteria may be
adjusted, upon the occurrence of events determined by the Committee in its
sole discretion to justify such waiver, reduction or adjustment. Under the
Franchising Incentive Plan, no Covered Employee (as defined in Section
162(m)(3) of the Internal Revenue Code) may be granted more than 100,000
Performance Shares during any calendar year.
Retirement or Disability. The Committee may, in its discretion, waive the
forfeiture, termination or lapse of an award in the event of retirement or
disability of the participant.
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Income Tax Consequences. The Federal income tax consequences of an award
under the Franchising Incentive Plan depend on the type of award, as discussed
below. The grant of a restricted share award or a performance share award does
not immediately produce taxable income to a recipient or a tax deduction to
Franchising. However, at the time the restrictions expire or the performance
objectives have been achieved, as the case may be, a recipient will recognize
taxable ordinary income in an amount equal to the fair market value of the
stock on the date the restrictions expire or the performance criteria are
achieved and Franchising will be entitled to a corresponding income tax
deduction. In the case of a restricted share award, during the restriction
period, a recipient will be taxed on the dividends received from the
restricted shares as additional compensation, and Franchising will be entitled
to a corresponding compensation deduction.
Generally, a recipient of an incentive stock option will not recognize
taxable income at the time of grant or exercise and Franchising will not be
entitled to an income tax deduction. Provided the minimum holding periods are
satisfied, any gain on a disposition of stock acquired through an incentive
stock option will be taxable to a recipient as long-term capital gain. If the
minimum holding periods are not satisfied, a recipient will recognize ordinary
income in the amount of the excess of the fair market value of the stock on
the date the option is exercised over the option price, and Franchising will
be entitled to a corresponding income tax deduction.
The grant of a nonqualified stock option does not result in taxable income
to a recipient or a tax deduction for Franchising. Upon exercise, a recipient
will recognize taxable ordinary income in an amount equal to the excess of the
fair market value of the stock on the date of exercise over the option price,
and Franchising will be entitled to a corresponding income tax deduction.
A recipient of a stock appreciation right will not recognize taxable income
at the time the right is granted, and Franchising will not be entitled to a
tax deduction. However, ordinary taxable income will be recognized by a
recipient and a corresponding deduction will be taken by Franchising, at the
time of exercise, in an amount equal to the cash and the fair market value of
the stock received.
Amendment and Termination. The Franchising Board of Directors may at any
time and from time to time alter, amend, suspend or terminate the Franchising
Incentive Plan in whole or in part, except (i) any such action affecting
options granted or to be granted under the Franchising Incentive Plan which
are intended to qualify as Incentive Stock Options shall be subject to
stockholder approval to the extent such stockholder approval is required
pursuant to Section 422 of the Internal Revenue Code and (ii) without the
consent of the participant to whom any award has been granted, no such action
may be taken which adversely affects the rights of such participant concerning
such award, except as such termination or amendment of the Franchising
Incentive Plan is required by statute, or rules and regulations promulgated
thereunder.
The Franchising Incentive Plan terminates in October, 2007. Awards may be
granted under the Franchising Incentive Plan at any time and from time to time
prior to the termination of the Franchising Incentive Plan. Any award
outstanding at the time the Franchising Incentive Plan is terminated shall
remain in effect until said award is exercised or expires.
FRANCHISING STOCK PURCHASE PLAN
General. The purposes of the Franchising Stock Purchase Plan are to build a
proprietary interest among employees of Franchising and to assist Franchising
in its goal of recruiting and retaining highly qualified employees at all
levels of the organization.
The following description of the Franchising Stock Purchase Plan is
qualified in its entirety by reference to the Choice Hotels International,
Inc. 1997 Employee Stock Purchase Plan, a copy of which is attached as
Annex C-II to this Proxy Statement. The amount of compensation that will
accrue to the employees pursuant to the Franchising Stock Purchase Plan, if
approved by the stockholders, is not currently determinable.
The Franchising Stock Purchase Plan authorizes the purchase of a maximum of
1,000,000 shares (subject to adjustment for stock splits and similar capital
changes) of Franchising Common Stock by eligible employees.
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Eligibility. Each employee of Franchising and its subsidiaries having at
least one year of continuous service on the first day of each January, April,
July and October (an "Offering Date"), beginning January 1, 1998, is eligible
to participate in the Franchising Stock Purchase Plan. All employees will be
eligible to participate after completing one year of employment. Any employee
who immediately after the grant of a right owns 5% or more of the Franchising
Common Stock, however, would not be eligible to participate.
Administration. The Franchising Stock Purchase Plan will be administered by
the Franchising Board of Directors.
Rights will be granted quarterly on each Offering Date, and are exercisable
effective on the succeeding last trading day of March, June, September and
December, respectively. Eligible employees may purchase shares of Franchising
Common Stock through accumulation of payroll deductions (of not less than 2%
nor more than 10% of compensation, as defined in the Franchising Stock
Purchase Plan). No Participant shall have the right to purchase shares of
Franchising Common Stock under the Plan at a rate of more than $25,000 in
value in any calendar year, such value to be based on the fair market value of
the Franchising Common Stock as of the Offering Date on which the Participant
becomes eligible to purchase Franchising Common Stock in such year under the
terms of the Plan. At the end of each three month Offering Period, Franchising
will contribute cash equal to one-ninth of the employee payroll deductions to
the Franchising Stock Purchase Plan, and the aggregate employee payroll
deductions and Franchising contribution will be used either by Franchising to
sell Franchising Common Stock to the participants or by Franchising's
designated agent to purchase Franchising Common Stock in the open market. The
agent will allocate the purchased Franchising Common Stock among the employee
accounts in proportion to their payroll deductions. Franchising will pay the
administrative expenses for the purchase of the Franchising Common Stock,
including broker's commissions, transfer fees and similar costs.
Amendment and Termination. The Franchising Board of Directors may at any
time amend or terminate the Franchising Stock Purchase Plan except that no
action may be made without the approval of stockholders to the extent such
approval is required pursuant to Section 423 of the Internal Revenue Code.
Federal Income Tax Consequences. Generally, a recipient of stock acquired
through the Franchising Stock Purchase Plan will not recognize taxable income
(and Franchising will not be entitled to an income tax deduction) until such
recipient disposes of the stock. Provided the minimum holding periods are
satisfied, upon disposition of stock acquired through the Franchising Stock
Purchase Plan, the lesser of (1) the excess of the fair market value of the
stock on the date of purchase over the price paid, or (2) the excess of the
fair market value of the stock at the time of disposition over the price paid,
will be taxable to a recipient as ordinary income (compensation), and
Franchising will not be entitled to a corresponding income tax deduction. Any
additional gain will be taxable to such recipient as long-term capital gain.
If the minimum holding periods are not satisfied, a recipient will recognize
ordinary income (compensation) in the amount of the excess of the fair market
value of the stock on the date of purchase over the price paid, and
Franchising will be entitled to a corresponding income tax deduction. Any
additional gain will be taxable to such recipient as long-term capital gain.
PROPOSAL FIVE: ELECTION OF DIRECTORS
Election of Directors at the Annual Meeting
At the Annual Meeting, stockholders will elect three directors to hold
office until the 2000 Annual Meeting of stockholders and until their
successors are elected and qualified.
The names of the nominees for election as directors at the Annual Meeting
and the present directors whose terms of office do not expire in 1997 are set
forth in the following table. The Company has no reason to believe that any
nominee for election will not be able to serve as a director. However, should
any nominee become unavailable to serve, the proxies solicited hereby may be
voted for election of such other person as may be nominated by the Board of
Directors.
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It is expected that in connection with the consummation of the Distribution,
Barbara Bainum, William R. Floyd, Robert C. Hazard, Jr., Gerald W. Petitt, and
Jerry E. Robertson, Ph.D. will each resign as director of the Company
effective as of the Distribution Date and become directors of Franchising. For
a discussion of the Board of Directors of the Company after the Distribution,
see "Proposal One: Ratification of the Distribution--The Distribution--Certain
Information Concerning Sunburst--Management." For a discussion of the Board of
Directors of Franchising after the Distribution, see "Proposal One:
Ratification of the Distribution--Certain Information Concerning Franchising--
Management."
PRESENT BOARD OF DIRECTORS INCLUDING NOMINEES FOR RE-ELECTION:
<TABLE>
<CAPTION>
TERM TO
NAME AGE POSITION EXPIRE
---- --- -------- -------
<S> <C> <C> <C>
Nominees for terms expiring in 2000:
Barbara Bainum*........................... 53 Director 2000
Robert C. Hazard, Jr...................... 62 Director 2000
Frederic V. Malek......................... 60 Director 2000
Directors whose terms expire after 1997 and
who are not currently nominees for re-
election:
Stewart Bainum*........................... 78 Director 1998
Gerald W. Petitt.......................... 51 Director 1998
Jerry E. Robertson, Ph.D.................. 64 Director 1998
Stewart Bainum, Jr.*...................... 51 Chairman of the Board 1999
and Director
William R. Floyd.......................... 52 Director 1999
Paul A. Gould............................. 50 Director 1999
</TABLE>
- --------
* Mr. Bainum is the father of Mr. Bainum, Jr. and Ms. Bainum, who are
siblings.
Stewart Bainum, Jr. Chairman of the Board of the Company since November
1996; Chairman of the Board of Choice Hotels from March 1987 to June 1990;
Chairman of the Board and Chief Executive Officer of Manor Care and Manor Care
Health Services, Inc. ("MCHS") 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 December
1994; 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 MCHS since 1976 and of Choice Hotels since 1977; Chief
Executive Officer of MCHS 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.
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 MCHS 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 1994, 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).
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William R. Floyd. Chief Executive Officer of the Company since October 1996;
Chief Operating Officer of Taco Bell Corp. (a subsidiary of PepsiCo) from July
1995 to October 1996, Chief Operating Officer of KFC (a subsidiary of PepsiCo)
from August 1994 to July 1995; National Vice President of Taco Bell Company
Operations from July 1992 to August 1994, Vice President of Taco Bell Eastern
Operations from December 1990 to January 1992; Director, Friendly Hotels PLC
since 1996.
Paul A. Gould. Managing Director of Allen & Company Incorporated (investment
banking firm) for more than five years and other positions at Allen & Company
Incorporated since 1973. Director: Telecommunications International, Inc.,
United Video Satellite Group, Inc. and National Patent Development
Corporation; Board of Trustees: The New School, The Hackley School and The
Holderness School.
Robert C. Hazard, Jr. Hotel Developer. Co-Chairman of Choice Hotels from
January 1995 to November 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.
Frederic V. Malek. Chairman of Thayer Capital Partners since March 1993; Co-
Chairman of CB Commercial Real Estate Group, Inc. from April 1989 to October
1996; Campaign Manager for Bush-Quayle '92 from January 1992 to November 1992;
Vice Chairman of NWA, Inc. (airlines), July 1990 to December 1991; Director:
Manor Care, Inc., American Management Systems, Inc., Automatic Data Processing
Corp., CB Commercial Real Estate Group, Inc., FPL Group, Inc. (an affiliate of
Florida Power and Light--power company), Northwest Airlines and various Paine
Webber mutual funds.
Gerald W. Petitt. Hotel Developer, Co-Chairman of Choice Hotels from January
1995 to November 1996 and a Director since December 1980; President from June
1990 to January 1995 and Chief Operating Officer from December 1980 to January
1995.
Jerry E. Robertson, Ph.D. Retired; Executive Vice President, 3M Life
Sciences Sector and Corporate Services from November 1986 to March 1994;
Director: Manor Care, Inc., Allianz Life Insurance Company of North America,
Cardinal, Inc., Coherent, Inc., Haemonetics Corporation, Medwave, Inc.,
Project Hope and Steris Corporation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ALL THE
NOMINEES NAMED HEREIN.
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<PAGE>
Board of Directors and Committees of the Board
From November 1, 1996 (the date the Manor Care Spin-off was consummated),
the Board of Directors has consisted of nine directors, four whom were not
officers or employees of the Company. For the fiscal year ended May 31, 1997,
each of the directors attended at least 75% of the aggregate number of
meetings of the Board of Directors and all committees of the Board of
Directors on which such director served.
The standing committees of the Board of Directors include the Audit
Committee, the Finance Committee, the Compensation/Key Executive Stock Option
Plan Committee, the Compensation/Key Executive Stock Option Plan Committee No.
2, and the Nominating Committee, the current members of which are as follows:
Compensation/Key Executive Stock Finance Committee
Option Plan Committee Stewart Bainum, Chairman
Jerry E. Robertson, Chairman Stewart Bainum, Jr.
Stewart Bainum Paul A. Gould
Frederic V. Malek Frederic V. Malek
Barbara Bainum William R. Floyd
Compensation/Key Executive Stock Audit Committee
Option Plan Committee No. 2 Jerry E. Robertson, Chairman
Jerry E. Robertson, Chairman Paul A. Gould
Frederic V. Malek Gerald W. Pettit
Barbara Bainum
Nominating Committee
Gerald W. Pettit
Robert C. Hazard, Jr.
The Compensation/Key Executive Stock Option Plan Committees administer the
Company's stock option plans and grant stock options thereunder, reviews
compensation of officers and key management employees, recommends development
programs for employees such as training, bonus and incentive plans, pensions
and retirement, and reviews other employee fringe benefit programs.
The Finance Committee reviews the financial affairs of the Company and
recommends financial objectives, goals and programs to the Board of Directors
and to management.
The Audit Committee reviews the scope and results of the annual audit,
reviews and approves the services and related fees of the Company's
independent public accountants, reviews the Company's internal accounting
controls and reviews the Company's Internal Audit Department and its
activities.
The Nominating Committee recommends 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.
Compensation of Directors
In connection with the Manor Care Spin-off, the Company adopted 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 first date of election and will be granted options to
purchase 1,000 shares on their date of re-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.
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<PAGE>
Directors who are employees of the Company will receive no separate
remuneration for their services as directors. Pursuant to the Non-Employee
Director Stock Compensation Plan, 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 of Directors 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 of
Directors meeting, and will be reimbursed for travel expenses and other out-
of-pocket costs incurred in attending meetings.
Executive Officers
The name, age, title and business background of each executive officer of
the Company are set forth below. The business address of each executive
officer of the Company is 10750 Columbia Pike, Silver Spring, Maryland 20901,
unless otherwise indicated.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr....... 51 Chairman of the Board of Directors
William R. Floyd......... 52 Vice Chairman and Chief Executive Officer
Donald J. Landry......... 48 President and Chief Operating Officer
James A. MacCutcheon..... 45 Executive Vice President, Chief Financial Officer
and Treasurer
Antonio DiRico........... 44 Senior Vice President--Hotel Operations
Thomas Mirgon............ 41 Senior Vice President, Human Resources
Barry L. Smith........... 55 Senior Vice President--Marketing
Michael J. DeSantis...... 38 Senior Vice President, General Counsel
and Secretary
Joseph M. Squeri......... 32 Vice President, Finance and Controller
</TABLE>
Donald J. Landry. President of Choice since January 1995; President of MCHD
since March 1992; various executive positions with Richfield Hotel Management,
Inc. and its predecessors for more than 20 years, including President of MHM
Corporation; Director, Friendly Hotels PLC, since 1996.
James A. MacCutcheon. Executive Vice President, Chief Financial Officer and
Treasurer of the Company since November 1996; Senior Vice President, Chief
Financial Officer and Treasurer of the Company's predecessor (together with
the Company, "Choice Hotels") since September 1993; Senior Vice President,
Chief Financial Officer and Treasurer of Manor Care from September 1993 to
November 1996; Senior Vice President--Finance and Treasurer of Manor Care from
October 1987 to September 1993; Treasurer of Vitalink from September 1992 to
January 1997 and a Director since September 1994.
Thomas Mirgon. Senior Vice President, Human Resources of the Company since
March 1997; Vice President, Administration of Interim Services from August
1993 to February 1997; employed by Taco Bell Corp. from January 1986 to August
1993, last serving as Senior Director, Field Human Resources from February
1992 to August 1993.
Antonio DiRico. Senior Vice President, Hotel Operations of the Company since
November 1996; Senior Vice President, Hotel Operations of MCHD from May 1992
to November 1996; Senior Vice President of Richfield Hotel Management, Inc.,
and its predecessor, MHM Corporation; Director, Friendly Hotels PLC, since
1996.
Barry L. Smith. Senior Vice President--Marketing of Choice Hotels since
February 1989.
Michael J. DeSantis. Senior Vice President, General Counsel and Secretary of
the Company since June 1997; Senior Attorney for the Company from November
1996 to June 1997; Senior Attorney for Manor Care
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<PAGE>
from January 1996 to October 1996; Vice President, Associate General Counsel
and Assistant Secretary for Caterair International Corporation from April 1994
to December 1995; Assistant General Counsel of Caterair International from May
1990 to March 1994.
Joseph M. Squeri. Vice President, Finance and Controller of the Company
since March 1997; Director of Investment Funds, The Carlyle Group, from
November 1994 to February 1997; various positions with Arthur Andersen LLP
from July 1987 to November 1994, most recently as Manager.
Compensation of Executive Officers
Summary Compensation. The following tables set forth certain information
concerning the annual and long term compensation of the chairman of the board
and the four other most highly compensated executive officers of the Company
(the "Named Officers") who were employed by the Company at May 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------- -----------------------
RESTRICTED
FISCAL STOCK STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER AWARDS($) SHARES(#)(1) COMPENSATION(2)
- --------------------------- ------ -------- -------- -------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(3).. 1997 $656,357 $388,520 (4) -- 60,000(5) --
Chairman 1996 625,102 337,555 (4) -- 60,000(5) $33,543
1995 572,308 343,385 (4) -- -- 9,000
William R. Floyd(6)..... 1997 270,373 146,001 $107,831(7) $1,250,000 307,693 --
Vice Chairman and 1996 -- -- -- -- -- --
Chief Executive Officer 1995 -- -- -- -- -- --
Donald J. Landry........ 1997 404,250 200,508 (4) -- 100,000(8) 6,035
President 1996 366,702 201,686 (4) -- -- 5,000
1995 311,635 171,399 (4) -- 40,000(9) 2,250
James A. MacCutcheon
(10)................... 1997 313,578 155,953 (4) -- 67,500(11) 18,682
Senior Vice President, 1996 301,517 135,682 (4) -- 25,000(12) 13,176
Chief Financial Officer 1995 273,199 136,600 (4) -- -- 13,176
and Treasurer
Barry L. Smith.......... 1997 240,000 108,000 (4) -- 25,000(13) 11,086
Sr. Vice President,
Marketing 1996 233,640 116,820 (4) -- 5,000(14) 10,427
1995 221,668 104,561 (4) -- -- 6,750
Antonio DiRico.......... 1997 196,200 86,524 (4) -- 25,000(13) 3,043
Senior Vice President 1996 179,904 71,961 (4) -- 8,000(14) 2,225
Hotel Operations 1995 133,719 50,813 (4) -- -- 2,163
</TABLE>
- --------
(1) For Messrs. Bainum, Jr., MacCutcheon, Smith, Landry and DiRico,
represents options to purchase shares of Manor Care Common Stock granted
in fiscal years 1997, 1996 and 1995. In connection with the Manor Care
Spin-off, the options to purchase Manor Care Common Stock were converted,
in some cases 100%, and in some cases partially, to options to purchase
Company Common Stock. In all cases, however, the exercise prices were
adjusted to maintain the same financial value to the option holder before
and after the Manor Care Spin-off.
(2) Represents amounts contributed by Manor Care for fiscal years 1996 and
1995 and the Company for fiscal year 1997 under their respective 401(k)
Plan and the Non-Qualified Savings Plan, which provide retirement and
other benefits to eligible employees, including the Named Officers. The
value of the amounts contributed in stock by the Company during fiscal
year 1997 under the 401(k) Plan for the Named Offices were as follows:
Mr. MacCutcheon, $6,240; Mr. Landry, $2,375; Mr. Smith, $3,696 and Mr.
DiRico, $966. The value of the amounts contributed in stock of the
Company during fiscal year 1997 under the Non-Qualified Saving Plan for
the Named Officers were as follows: Mr. MacCutcheon, $12,443; Mr. Landry,
$3,660; Mr. Smith $7,390 and Mr. DiRico, $2,077.
94
<PAGE>
(3) For part of fiscal year 1997 and all of fiscal years 1996 and 1995, Mr.
Bainum, Jr. was the Chairman and Chief Executive Officer of Manor Care
and the Company. In November, 1996, he resigned as Chief Executive
Officer of the Company. The compensation reflected here is the total
compensation received for services rendered to both Manor Care and the
Company. For the period of fiscal year 1997 after the Manor Care Spin-
off, the amount of compensation paid solely by Company was $88,302 for
base salary and $47,683 for bonus.
(4) The value of perquisites and other compensation does not exceed the
lesser of $50,000 or 10% of the amount of annual salary and bonus paid as
to any of the Named Officers.
(5) In connection with the Manor Care Spin-off, these options were converted
on a pro rata basis into options to purchase Manor Care Common Stock and
options to purchase Company Common Stock.
(6) Mr. Floyd's employment as Chief Executive Officer of the Company
commenced October 16, 1996.
(7) Consists of relocation expenses.
(8) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 272,727 shares of Company Common Stock at an
adjusted exercise price of $14.5095.
(9) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 109,061 shares of Company Common Stock at an
adjusted exercise price of $10.5007.
(10) For fiscal years 1996 and 1995 and part of fiscal year 1997, Mr.
MacCutcheon was Senior Vice President, Chief Financial Officer and
Treasurer of Manor Care and the Company. On November 1, 1996, Mr.
MacCutcheon resigned from his position at Manor Care and assumed the
position of Executive Vice President and Chief Financial Officer of the
Company. The compensation reflected here is total compensation received
for services rendered to both Manor Care and the Company. For the period
of fiscal year 1997 after the Manor Care Spin-off, the amount of
compensation paid solely by the Company was $209,052 for base salary and
$103,690 for bonus.
(11) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 6,563 shares of Manor Care Common Stock at an
adjusted exercise price of $25.0505, 36,387 options and 136,326 options
to purchase Company Common Stock at adjusted exercise prices of $14.5095
and $13.8933, respectively.
(12) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 50,102 shares of Company Common Stock at an
adjusted exercise price of $11.1168 and 10,462 shares of Manor Care
Common Stock at an adjusted exercise price of $19.1932.
(13) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 68,182 shares of Company Common stock at an
adjusted exercise price of $14.5095.
(14) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 13,633 shares of Company Common Stock at an
adjusted exercise price of $11.1168.
(15) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 68,182 shares of Company Common Stock at an
adjusted exercise price of $14.5095.
(16) In connection with the Manor Care Spin-off, these options were converted
into options to purchase 21,811 shares of Company Common Stock at an
adjusted exercise price of $11.1168.
95
<PAGE>
Stock Options. The following tables set forth certain information at May 31,
1997 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 Manor Care Spin-off,
existing Manor Care stock options, which are shown here, were converted, in
some cases 100%, to options to purchase Company Common Stock.
STOCK OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE OF ASSUMED
RATE OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(2)
------------------------------------------------ ---------------------
PERCENTAGE OF
TOTAL OPTIONS
GRANTED TO ALL
NUMBER OF EMPLOYEES IN EXERCISE BASE
OPTIONS FISCAL YEAR PRICE EXPIRATION
NAME COMPANY* GRANTED(1) 1997 PER SHARE DATE 5%(3) 10%(4)
---- -------- ---------- -------------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(5).. CHI 60,000 (6) $14.5095 07/01/06 547,494 1,307,464
MNR 60,000 (6) $25.0505 07/01/06 945,246 2,395,440
------- ---------- ----------
Total 120,000 1,492,740 3,782,904
William R. Floyd(5)..... CHI 307,693 (6) $14.6250 11/04/06 2,830,037 7,171,862
MNR 0 -- -- -- -- --
------- -------- ---------- ----------
Total 307,693 2,830,037 7,171,862
Donald J. Landry(5)..... CHI 272,727 (6) $14.5095 07/01/06 2,488,607 6,306,648
MNR 0 -- -- -- -- --
------- -------- ---------- ----------
Total 272,727 2,488,607 6,306,648
James A.
MacCutcheon(5)......... CHI 36,387 (6) $14.5095 07/01/06 332,028 841,428
CHI 136,326 (6) $13.8933 09/30/06 1,191,135 3,018,571
MNR 6,563 (6) $25.0505 07/01/06 103,394 262,021
------- ---------- ----------
Total 179,276 1,626,557 4,122,020
Barry L. Smith(5)....... CHI 68,182 (6) $14.5095 07/01/06 622,154 1,576,668
MNR 0 -- -- -- -- --
------- ---------- ----------
Total 68,182 622,154 1,576,668
Antonio DiRico(5)....... CHI 68,182 (6) $14.5095 07/01/06 622,154 1,576,668
MNR 0 -- -- -- -- --
------- ---------- ----------
Total 68,182 622,154 1,576,688
</TABLE>
- --------
* References to "CHI" are to the Company and "MNR" are to Manor Care.
(1) Options granted to Messrs. Bainum, Jr., Landry, MacCutcheon, Smith, and
DiRico were granted prior to the Manor Care Spin-off and were thus granted
as options to purchase Manor Care Common Stock. In connection with the
Manor Care Spin-off, these options to purchase Manor Care Common Stock
were converted, in some cases 100%, and in some cases partially, to
options to purchase Company Common Stock. In all cases, however, the
exercise prices were adjusted to maintain the same financial value to the
option holder before and after the Manor Care Spin-off. The number of
options set forth in the table represent the number Company and Manor Care
options and the adjusted exercise prices after the conversion. In the
Distribution, the options will be further adjusted.
(2) 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 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.
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<PAGE>
(3) A 5% per year appreciation in stock price from $13.8933 per share yields
$22.6307, from $14.5095 per share yields $23.6344, from $14.625 per share
yields $23.8226, from $25.0505 per share yields $40.8046, and from $15.625
per share yields $25.4515.
(4) A 10% per year appreciation in stock price from $13,8933 per share yields
$36.0356, from $14.5095 per share yields $37.6339, from $14.625 per share
yields $37.9335, from $25.0505 per share yields $64.9745, and from $15.625
per share yields $40.5272.
(5) The options granted to the officers vest at the rate of 20% per year on
the first through the fifth anniversaries of the date of the stock option
grant.
(6) Information with respect to the total options granted to all Manor Care
employees is unavailable. With respect to the Company, the only options
granted by the Company during the fiscal year were the grants to Messrs.
Floyd and Mirgon as identified in the table and grants aggregating 25,000
options to purchase Company Common Stock to two additional new employees.
All other options to purchase Company Common Stock issued to employees
were issued as a result of the conversion of Manor Care options in the
Manor Care Spin-off.
AGGREGATE OPTION EXERCISES IN FISCAL 1997
AND YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT MAY 31, 1997 OPTIONS AT MAY 31, 1997(2)
ACQUIRED ON VALUE ------------------------- ----------------------------
NAME COMPANY* EXERCISE# REALIZED$ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ----------- ---------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr...... CHI 465,000 $3,105,452 239,000 221,000 $ 2,758,324 $ 1,334,863
MNR 293,791 2,318,180 174,000 221,000 3,633,404 2,749,771
William R. Floyd........ CHI -- -- 0 307,693 -- 346,154
MNR -- -- 0 0 -- --
Donald J. Landry........ CHI -- -- 151,321 625,810 1,376,894 2,897,138
MNR -- -- 0 0 -- --
James A. MacCutcheon.... CHI -- -- 162,639 335,408 1,858,096 1,708,638
MNR -- -- 91,362 46,563 1,962,041 704,946
Barry L. Smith.......... CHI 39,537 156,324 9,815 166,336 117,676 1,000,544
MNR -- -- 0 0 -- --
Antonio DiRico.......... CHI -- -- 11,179 106,080 73,421 255,362
MNR -- -- 0 0 -- --
</TABLE>
- --------
(1) Options granted to Messrs. Bainum, Jr., Landry, MacCutcheon, Smith and
DiRico were granted prior to the Manor Care Spin-off and were thus granted
as options to purchase Manor Care Common Stock. In connection with the
Manor Care Spin-off, these options to purchase Manor Care Common Stock,
were converted, in some cases 100%, to options to purchase Company Common
Stock. In all cases, however, the exercise prices were adjusted to
maintain the same financial value to the option holder before and after
the Manor Care Spin-off. The number of options set forth in the table
represent the number Company and Manor Care options and the adjusted
exercise prices after the conversion. In the Distribution, the options
will be adjusted.
(2) The closing prices of Company Common Stock and Manor Care's Common Stock
as reported by the New York Stock Exchange on May 30, 1997 were $15.75 and
$28.625, respectively. 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 Company Common Stock or Manor Care
Common Stock underlying- the option.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Stewart Bainum,
Jr., effective November 1, 1996, providing for Mr. Bainum, Jr.'s employment as
Chairman of the Board of Directors of the Company. The agreement has a term of
three years. Either the Company or Mr. Bainum may terminate the agreement upon
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<PAGE>
thirty days' prior written notice on the first and second anniversary dates of
the agreement. The agreement provides that Mr. Bainum, Jr. will devote 25% of
his professional time to the affairs of the Company, and the remaining 75% of
his professional time to the affairs of Manor Care. The agreement provides for
a base salary of $164,088 per annum for services to the Company and a maximum
bonus of 60% of Mr. Bainum, Jr.'s base compensation based upon the performance
of the Company.
Under the terms of the current agreement for Mr. Landry, Mr. Landry's annual
salary is presently $424,462 with annual cost-of-living increases. The
agreement extends through November 30, 1999. The agreement provides for an
annual bonus of up to 55% of his base compensation based in part on the
performance of the Company. Effective upon the Distribution Date, a new
employment agreement between the Company and Mr. Landry will become effective.
The new agreement provides for his employment as Chief Executive Officer for a
term of three years, with automatic successive one-year renewals unless one
year prior written notice to terminate is given by either party. It also
provides for an annual base salary of $424,462, an annual bonus of up to 60%
of his base compensation and a grant of options to purchase shares of Company
Common Stock, of which options to purchase shares shall terminate if the
Distribution does not occur on or before May 31, 1998.
For a description of employment agreements for Messrs. Floyd, MacCutcheon
and Mirgon, see "Proposal One: Ratification of the Distribution--Certain
Information Concerning Franchising--Management--Employment Agreements."
CERTAIN RELATIONSHIPS AND TRANSACTIONS
In connection with the Manor Care Spin-off, the Company entered into certain
agreements with Manor Care, of which Mr. Bainum is a director and Mr. Bainum,
Jr. is Chairman of the Board and Chief Executive Officer and each beneficially
owns approximately 15.20% and 22.89% respectively, of the outstanding Manor
Care Common Stock.
Manor Care Lease Agreements
The Company and Manor Care entered into a lease agreement with respect to
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 leases 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 November 1, 1996 (the date of the Manor Care Spin-off), Manor
Care's occupancy percentage is redetermined. Operating expenses include all of
the costs associated with operating and maintaining the complex including,
without limitation, supplies and materials used to maintain the complex, wages
and salaries of employees who operate the complex, insurance for the complex,
costs of repairs and capital improvements to the complex, the fees of the
property manager (which may be Manor Care), costs and expenses associated with
leasing space at the complex and renovating space rented to tenants, costs of
environmental inspection, testing or cleanup, principal and interest payable
on indebtedness secured by mortgages against the complex, or any portion
thereof, and charges for utilities, taxes and facilities services. The Company
and Manor Care also entered into (i) a sublease agreement with respect to
certain office space in Gaithersburg, Maryland (the "Gaithersburg Lease")
pursuant to which the Company is 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 date of the Manor
Care Spin-off and (ii) a sublease agreement with respect to the Comfort Inn
N.W., Pikesville, Maryland, pursuant to which the Company subleases 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.
98
<PAGE>
For a description of the modifications to the Silver Spring Lease and the
Gaithersburg Lease contemplated in connection with the Distribution, see
"Proposal One: Ratification of the Distribution--Certain Information
Concerning Franchising--Management--Employment Agreements."
The Manor Care Loan Agreement
On November 1, 1996, the Company and a subsidiary of Manor Care entered into
a loan agreement (the "Loan Agreement"), governing the repayment by the
Company of an aggregate of $225.7 million previously advanced to the Company
by Manor Care. The Loan Agreement contains a number of covenants that, 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 and enter into transactions with affiliates, and which
otherwise restrict certain corporate activities. The Loan Agreement also
restricts the Company's ability to pay dividends. In addition, the Loan
Agreement contains, among other financial covenants, requirements that the
Company maintain specified financial ratios, including minimum net worth,
maximum leverage and minimum interest coverage. Interest on the amount of the
loan is payable semiannually at a rate of 9% per annum. The loan will mature
on November 1, 1999 and may be prepaid in whole or in part, together with
accrued interest, at the option of the Company. If prepayment is made on or
before November 1, 1997, the Company will pay a penalty equal to the
difference between the stated interest rate and the annualized interest rate
on a U.S. Treasury Note for a relevant period until November 1, 1997. If
prepayment is made after November 1, 1997, there is no penalty.
On April 23, 1997, the Company, through its wholly owned subsidiary First
Choice Properties, completed an offering of the Mortgage Securities. The net
proceeds of $110 million from the offering were used to prepay a portion of
the loan. A total yield maintenance payment of $1.9 million will be made to
Manor Care as a result of the prepayment.
At or prior to the Distribution, the Company will repay the remaining
portion of the loan with the proceeds from the Term Note and the Credit
Agreement.
Corporate Services Agreement
The Company and Manor Care entered into the Corporate Services Agreement
(the "Corporate Services Agreement") which provides for 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 term of the Consulting Services Agreement is 30
months from November 1, 1996.
Time Sharing Agreement
On October 10, 1996, the Company entered into a Time Sharing Agreement with
Manor Care under which the Company has the right to lease from time to time a
Cessna Citation VI owned by Wilderness Investment Company, Inc., a corporation
which is solely owned by Stewart Bainum, at the rate of $1,150 per flight
hour. During the 1997 fiscal year, the Company incurred a total of $155,615
for aircraft usage pursuant to the Lease.
In the opinion of management, the foregoing transactions were on terms at
least as advantageous to the Company as could have been obtained from non-
affiliated persons.
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<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the amount of Company Common Stock
beneficially owned as of the Annual Meeting Record Date by (i) each director
of the Company, (ii) the chief executive officer of the Company and the Named
Officers, (iii) all officers and directors of the Company as a group and (iv)
all persons who own beneficially more than 5% of the Company Common Stock.
Unless otherwise specified, the address for each of them is 10750 Columbia
Pike, Silver Spring, Maryland 20901. On the Distribution Date, the holders of
Company Common Stock as of the Distribution Record Date will be entitled to
receive one share of Franchising Common Stock for each share of Company Common
Stock.
<TABLE>
<CAPTION>
TOTAL SHARES OF PERCENT OF SHARES
COMPANY COMMON STOCK OUTSTANDING
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
- ------------------------ -------------------- ------------------
<S> <C> <C>
Stewart Bainum, Jr. .................. 16,003,408(2) 26.58%
Stewart Bainum........................ 10,325,997(3) 17.15%
Barbara Bainum........................ 5,520,867(4) 9.17%
William R. Floyd...................... 85,570(5) *
Paul A. Gould......................... 2,844(6) *
Robert C. Hazard, Jr. ................ 40,756(7) *
Donald J. Landry...................... 208,752(8) *
James A. MacCutcheon.................. 181,910(9) *
Frederic V. Malek..................... 5,510(10) *
Gerald W. Petitt...................... 86,281(11) *
Jerry E. Robertson, Ph.D. ............ 20,824(12) *
Barry L. Smith........................ 244,292(13) *
Antonio DiRico........................ 33,519(14) *
All Directors and Officers as a Group
(17 persons)......................... 21,592,499(15) 35.46%
Bruce Bainum.......................... 5,512,302(16) 9.16%
Ronald Baron.......................... 15,790,713(17) 26.23%
</TABLE>
- --------
* Less than 1% of class.
(1) Percentages are based on 60,200,784 shares outstanding on the Annual
Meeting Record Date plus, for each person, the shares which would be
issued assuming that such person exercises all options it holds which are
exercisable on such date or become exercisable within 60 days thereafter.
(2) Includes 549,152 shares owned directly by the Stewart Bainum, Jr.
Declaration of Trust dated March 13, 1996, the sole trustee and
beneficiary of which is the reporting person. 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;
3,567,869 shares held directly by Realty Investment Company, Inc.
("Realty"), a real estate management and investment company in which Mr.
Bainum, Jr. has shared voting authority; 1,779,628 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
10,600 shares owned by the Foundation for Maryland's Future, in which Mr.
Bainum, Jr. is the sole director. Also includes 263,000 shares which Mr.
Bainum, Jr. has the right to acquire pursuant to stock options which are
presently exercisable or which become exercisable within 60 days after
the Annual Meeting Record Date, and 148 shares which Mr. Bainum, Jr. has
the right to receive upon termination of his employment with the Company
pursuant to the terms of the Choice Hotels International, Inc. Non-
Qualified Retirement Savings and Investment Plan ("Non-Qualified Savings
Plan").
(3) Includes 3,906,278 shares held directly by the Stewart Bainum Declaration
of Trust, of which Mr. Bainum is the sole trustee and beneficiary, his
joint interest in 895,466 shares owned by Bainum Associates and 1,082,857
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;
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3,567,869 shares held directly by Realty, in which Mr. Bainum and his wife
have shared voting authority; and 70,305 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 and beneficiary of which
is Mr. Bainum's wife, and 1,667 shares which Mr. Bainum has the right to
acquire pursuant to stock options which are presently exercisable or which
become exercisable within 60 days after the Annual Meeting Record Date.
Also includes 2,844 shares of restricted stock granted by the issuer to
Mr. Bainum which are not vested but which Mr. Bainum has the right to
vote.
(4) Includes 101,013 shares owned directly by Ms. Bainum. Also includes
1,779,628 shares owned by Mid Pines, in which Ms. Bainum's trust is a
general partner and has shared voting authority, 3,567,869 shares owned
by Realty, in which Ms. Bainum's trust has voting stock and shares voting
authority and 70,305 shares owned by the Commonweal Foundation, in which
Ms. Bainum is President and Director and has shared voting authority.
Also includes 2,052 shares of restricted stock issued to Ms. Bainum under
the Choice Hotels International, Inc. Non-Employee Director Stock
Compensation Plan ("Non-Employee Director Stock Compensation Plan") which
shares are not vested, but which Ms. Bainum has the right to vote.
(5) Consists of restricted shares granted pursuant to Mr. Floyd's employment
agreement which are not vested, but which Mr. Floyd has the right to
vote.
(6) Consists of restricted shares granted pursuant to the Non-Employee
Director Stock Compensation Plan, which are not yet vested, but which Mr.
Gould has the right to vote.
(7) Includes 37,304 shares owned directly by Mr. Hazard, 2,844 restricted
shares granted under the Company Non-Employee Director Stock Compensation
Plan which are not yet vested, but which Mr. Hazard has the right to
vote; 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 Choice Hotels International, Inc. Retirement Savings and
Investment Plan ("401(k) Plan") and the Non-Qualified Savings Plan.
(8) Includes 1,612 shares owned directly by Mr. Landry, 205,866 shares which
Mr. Landry has the right to acquire pursuant to stock options which are
presently exercisable or become exercisable within 60 days of the Annual
Meeting Record Date and 264 shares and 1,010 shares, respectively, which
Mr. Landry has the right to receive upon termination of his employment
pursuant to the terms of the 401(k) Plan and the Non-Qualified Savings
Plan.
(9) Includes 180,311 shares which Mr. MacCutcheon has the right to acquire
pursuant to stock options which are presently exercisable or become
exercisable within 60 days of the Annual Meeting Record Date and 664 and
935 shares, respectively, which Mr. MacCutcheon has the right to receive
upon termination of his employment with the Company pursuant to the terms
of the 401(k) Plan and the Non-qualified Savings Plan.
(10) Includes 1,666 shares which Mr. Malek has the right to acquire pursuant
to stock options which are presently exercisable and 2,844 restricted
shares granted under the Non-Employee Director Stock Compensation Plan
which are not yet vested, but which Mr. Malek has the right to vote.
(11) Includes 74,776 shares held directly by Mr. Petitt and 8,661 shares held
in trust for minor children for which Mr. Petitt is trustee. Beneficial
ownership of such shares is disclaimed. Also includes 2,844 restricted
shares granted under the Non-Employee Director Stock Compensation Plan
which are not yet vested, but which Mr. Petitt has the right to vote.
(12) Includes 15,500 shares owned by the JJ Robertson Limited Partnership, of
which Mr. Robertson and his wife are general partners with shared voting
authority, 2,844 restricted shares granted under the Non-Employee
Director Stock Plan, 1,666 shares which Mr. Robertson has the right to
acquire pursuant to stock options which are presently exercisable and 814
shares acquired pursuant to the Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan.
(13) Includes 243,483 shares which Mr. Smith has the right to acquire pursuant
to stock options which are presently exercisable or become exercisable
within 60 days of the Annual Meeting Record Date and 254 shares and 555
shares, respectively, which Mr. Smith has the right to receive upon
termination of his employment with the Company pursuant to the terms of
the 401(k) Plan and the Non-Qualified Savings Plan.
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(14) Includes 214 shares owned directly by Mr. DiRico, 29,227 shares which Mr.
DiRico has the right to acquire pursuant to stock options which are
presently exercisable or which become exercisable within 60 days of the
Annual Meeting Record Date, and 1,265 and 2,813 shares, respectively,
which Mr. DiRico has the right to receive upon termination of his
employment with the Company pursuant to the terms of the 401(k) Plan and
Nonqualified Savings Plan.
(15) Includes a total of 939,180 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 of July 8, 1997 and a total of 1,896 shares and 5,876 shares,
respectively, which such directors and officers have the right to receive
upon termination of their employment with the Company pursuant to the
terms of the 401(k) Plan and the Non-Qualified Savings Plan.
(16) Includes 94,500 shares owned directly by Mr. Bainum. Also includes
1,779,628 shares owned by Mid Pines, in which Mr. Bainum is a general
partner and has shared voting authority, 3,568,869 shares owned by Realty
in which Mr. Bainum's trust has voting stock and shares voting authority
and 70,305 shares owned by the Commonweal Foundation, in which Mr. Bainum
is a Director and has shared voting authority. Mr. Bainum's address is
8737 Colesville Road, Suite 800, Silver Spring, Maryland, 20910.
(17) As of July 31, 1997, 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.
APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of Choice has appointed the firm of Arthur Andersen
LLP to serve as independent auditors of the Company for the Company's fiscal
year ending May 31, 1998. Arthur Andersen LLP is considered by the management
of the Company to be well qualified. Representatives of Arthur Andersen LLP
are expected to be present at the Annual Meeting and will have the
opportunity, if they so desire, to make a statement and will be available to
respond to questions.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and holders of more than 10% of the Company's Common Stock
to file with the Commission initial reports of ownership and reports of
changes in ownership of any equity securities of the Company. The Company
believes that during the year ended May 31, 1997, its executive officers and
directors and holders of more than 10% of the Company's Common Stock complied
with all Section 16(a) filing requirements.
THE FOLLOWING COMPENSATION COMMITTEE REPORT AND THE PERFORMANCE GRAPH THAT
APPEARS IMMEDIATELY AFTER SUCH REPORT SHALL NOT BE DEEMED TO BE SOLICITING
MATERIAL OR TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 OR INCORPORATED
BY REFERENCE IN ANY DOCUMENT SO FILED.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
There are currently two compensation committees for the Company, the
Compensation/Key Executive Stock Option Plan Committee and the
Compensation/Key Executive Stock Option Plan Committee No. 2 ("Committee No.
2") (collectively, the "Committee"). The role of Committee No. 2, which is
comprised of "outside directors" as defined in Section 162(m)(3) of the Code,
is to approve awards under the 1996 Incentive Plan to the Chief Executive
Officer and the Named Officers. The current members of the Committee, Messrs.
Robertson (Chairman), Bainum (not a member of Committee No. 2), Malek and Ms.
Bainum, were appointed effective November 25, 1996.
As a wholly-owned subsidiary of Manor Care prior to the Manor Care Spin-off,
most of the decisions and actions pertaining to the executive officers of the
Company for fiscal year 1997 were either approved by the Compensation
Committee of the board of Manor Care or by an executive officer of Manor Care.
However, the
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<PAGE>
current members of the Company's Compensation Committee, except for Barbara
Bainum, were also members of Manor Care's Compensation Committee during fiscal
year 1997.
As a newly public company, the Committee recognizes that a transition period
is necessary to establish fully its long-range compensation philosophy and
objectives. Nevertheless, the following philosophy and principles have been
set forth as a framework within which the Committee will operate.
COMPENSATION COMMITTEE PHILOSOPHY AND GUIDING PRINCIPLES
. Attract and retain talented management;
. Closely align management's interests and actions with those of shareholders
through the establishment of appropriate award vehicles;
. Reward employees for enhancing shareholder value through sustained
improvement in earnings per share;
. Position base pay at market so that the Company can vary total compensation
costs with financial results by means of variable pay; and
. Recognize the concept that executive officers individually, and as a group,
should have a significant ownership stake in the Company.
EXECUTIVE COMPENSATION POLICIES
Compensation Levels
The Committee relates total compensation levels for the Company's executive
officers to the total compensation paid to similarly situated executives based
on various independently published compensation surveys, primarily conducted
and evaluated by independent consultants. Summary data on companies of similar
size in the service sector are used as the primary comparison and companies in
the hotel industry are used as a secondary comparison. Total compensation is
targeted to approximate the median of the competitive market data and
comparison companies. However, because of the performance-oriented nature of
the incentive programs, total compensation may exceed market norms when the
Company's targeted performance goals are exceeded. Similarly, total
compensation may lag the market when performance goals are not achieved. For
fiscal year 1997, compensation for the Vice Chairman and Chief Executive
Officer was slightly below the median while compensation for all of the other
executive officers, as a group, was at or above the median.
One of the comparison companies, Marriott International, Inc., was not
included as part of the Peer Group Index (defined below) for the performance
graph, see "--Performance Graph", because most of Marriott International's
hotel brands are not in the same market category as the Company's brands.
However, it was included as a comparison company for compensation purposes
because it is also located in the Washington, D.C. metropolitan area.
Policy with Respect to Qualifying Compensation for Deductibility
The Company's policy with respect to the deductibility limit of Section
162(m) of the Internal Revenue Code generally is to preserve the federal
income tax deductibility of compensation paid when it is appropriate and is in
the best interests of the Company and its stockholders. However, the Company
reserves the right to authorize the payment of nondeductible compensation if
it deems that is appropriate. In connection with William R. Floyd's employment
agreement, Mr. Floyd was granted 85,470 non-performance based restricted
shares of Company Common Stock which vest in three equal annual installments
beginning November 4, 1997. Additionally, the employment agreement provides
for options to purchase 207,693 shares of Company Common Stock which were
granted outside of the 1996 Incentive Plan and which vest in five equal
monthly installments beginning November 4, 1997. Upon the exercise of such
options by Mr. Floyd during any fiscal year, his gain (the difference between
the fair market value on the date of exercise and the exercise price) will be
included in calculating the compensation for that fiscal year for which the
federal income tax deduction is disallowed. The Committee intends to monitor
the Company's compensation programs with respect to such laws.
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Annual Compensation
With the exception of Messrs. Mirgon and Squeri, base salaries and annual
cash compensation for the executive officers in fiscal year 1997 were
established while the Company was a controlled subsidiary of Manor Care.
Accordingly, decisions were approved either by the Manor Care Compensation
Committee or an executive officer of Manor Care.
The base salary pay practice as previously adopted by the Manor Care
Compensation Committee was to pay at the 55th percentile of the market range
among the comparison groups for a particular position.
Awards under the annual cash bonus program for fiscal year 1997 were based
on certain performance measurements, which were based 60% on achieving
targeted gross operating profits, 20% on licensee/customer satisfaction goals
and 20% on RevPAR. For fiscal year 1997, actual performance exceeded the
measurement goals for each component. For fiscal year 1998, the Committee has
proposed revising the performance measurements to focus heavily on
management's responsibility to deliver earnings per share based on earnings
per share from continuing operations at established annual targets. For
executive officers other than the Chief Executive Officer, the proposal also
includes specific performance measurements directly accountable to the
executive officer. These performance measurements, where applicable, would
include licensee/customer satisfaction and RevPAR and would incorporate each
executive officer's accountability for the successful execution of key
initiatives tied to achievement of the Company's strategic plan.
Long-Term Incentives
The Company will award long-term incentives under the 1996 Incentive Plan.
The plan gives the Compensation Committee the latitude of awarding Incentive
Stock Options, non-qualified stock options, restricted stock, and other types
of long-term incentive awards. The recommended awards were developed by
analyzing peer group average market data and the Company's past practice. In
July 1996, the Manor Care Compensation Committee reviewed and approved a Stock
Option Guide Chart for both Manor Care and the Company's executives. The Stock
Option Guide Chart utilized a market based salary multiple to establish a
competitive range of stock options from which executive awards could be
determined.
In accordance with common competitive practice, many of the stock option
grants to Company executive officers in fiscal year 1997 by the Manor Care
Compensation Committee prior to the Manor Care Spin-off were larger than
competitive annual grants in contemplation of the spin-off.
Compensation of the Vice Chairman and Chief Executive Officer
The actions taken with respect to Mr. Floyd's fiscal year 1997 total
compensation and the employment agreement entered into with him were approved
by the Manor Care Board of Directors. The employment agreement provided that,
upon the Manor Care Spin-off, Mr. Floyd would receive a grant of restricted
stock, a significant grant of stock options and a one-time bonus. These grants
were intended in part to make Mr. Floyd whole for certain incentive and bonus
compensation which he forfeited from his previous employer when he commenced
employment at the Company as well as to significantly align him with
shareholder interests. The terms of the employment agreement are discussed in
more detail under the caption "The Distribution Proposals--Certain Information
Concerning Franchising--Management."
THE COMPENSATION COMMITTEE
JERRY E. ROBERTSON, CHAIRMAN
STEWART BAINUM (NOT A MEMBER OF COMMITTEE NO. 2)
FREDERIC V. MALEK
BARBARA BAINUM
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PERFORMANCE GRAPH
The following graph compares the performance of Choice Common Stock with the
performance of the New York Stock Exchange Composite Index ("NYSE Composite
Index") and a peer group index (the "Peer Group Index") by measuring the
changes in common stock prices from November 4, 1996, plus assumed reinvested
dividends. The Commission's rules require that Choice select a peer group in
good faith with which to compare its stock performance by selecting a group of
companies in lines of business similar to its own. Accordingly, Choice has
selected a peer group that includes companies which are actively traded on the
New York Stock Exchange and the NASDAQ Stock Market and which own and operate
hotels similar to those owned and operated by Choice. The common stock of the
following companies have been included in the Peer Group Index: Doubletree
Corporation, LaQuinta Hotel Corporation, Promus Hotel Corporation, Red Lion
Inns Limited Partnership and HFS, Inc.
The graph assumes that $100 was invested on November 4, 1996, in each of
Choice Common Stock, the NYSE Composite Index and the Peer Group Index, and
that all dividends were reinvested. In addition, the graph weighs the
constituent companies on the basis of their respective capitalization,
measured at the beginning of each relevant time period.
COMPANY, NYSE COMPOSITE INDEX, PEER GROUP INDEX
COMPARISON OF CUMULATIVE TOTAL RETURNS
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
CHOICE PEER NYSE
COMMON GROUP COMPOSITE
STOCK INDEX INDEX
----------- --------- ----------
<S> <C> <C> <C>
11/04/1996 $100.00 $100.00 $100.00
02/28/1997 $105.1 $96.0 $111.6
05/30/1997 $107.7 $86.0 $119.1
</TABLE>
105
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PROPOSAL SIX: APPROVAL OF CHOICE HOTELS INTERNATIONAL, INC.
1996 LONG-TERM INCENTIVE PLAN
General. On October 11, 1996, the Board of Directors adopted the Choice
Hotels International, Inc. 1996 Long-Term Incentive Plan (the "1996 Incentive
Plan") for key employees (including officers) of the Company and its
subsidiaries subject to approval of the 1996 Incentive Plan by the affirmative
vote of the holders of a majority of the number of shares of Company Common
Stock present in person or by proxy at the Annual Meeting. The 1996 Incentive
Plan authorizes the awarding of a maximum of 7.1 million shares (subject to
adjustment for stock splits and similar capital changes) of Company Common
Stock to eligible employees as described in greater detail below. As of August
5, 1997, 6,083,230 shares of Company Common Stock remain for issuance under
the 1996 Incentive Plan.
The continuing growth and development and financial success of the Company
and its subsidiaries are dependent upon ensuring the best possible management.
The Board of Directors believes the 1996 Incentive Plan will be an important
aid to the Company in attracting and retaining individuals of outstanding
abilities and in rewarding them for the continued profitable performance of
the Company and its subsidiaries.
The types of awards that may be granted under the 1996 Incentive Plan are
restricted shares, incentive stock options, nonqualified stock options, stock
appreciation rights and performance shares. The 1996 Incentive Plan provides
that over the next ten years restricted shares, incentive stock options,
nonqualified stock options, stock appreciation rights, and/or performance
shares involving up to 7.1 million shares (subject to adjustment for stock and
similar capital changes) of Company Common Stock may be granted. Company
Common Stock issued under the 1996 Incentive Plan may be authorized and
unissued stock, treasury stock or stock purchased on the open market
(including in private transactions). To the extent that an award lapses or the
rights of a participant to whom it was granted terminate, any shares of
Company Common Stock subject to the award will again be available for awards
under the 1996 Incentive Plan. The following description of the 1996 Incentive
Plan is qualified in its entirety by reference to the Choice Hotels
International, Inc. 1996 Long-Term Incentive Plan, a copy of which is attached
as Exhibit E-1 to this Proxy Statement. The amount of compensation that will
accrue to the participants pursuant to the 1996 Incentive Plan, if approved by
the stockholders at the Annual Meeting, is not currently determinable.
The 1996 Incentive Plan was drafted to obtain the benefits of the exemption
from Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act")
provided by Rule 16b-3. Section 16(b) of the Exchange Act provides, among
other things, that an officer who purchases and sells the stock of the
corporation which employs him within a six month period is liable to the
corporation for the amount by which the sales price exceeds the purchase
price. Rule 16b-3 promulgated under the Exchange Act provides that the
acquisition of stock by an officer of the corporation under an 1996 Incentive
Plan, pursuant to certain requirements, does not constitute a "transaction"
subject to Section 16(b) of the Exchange Act.
Administration. The 1996 Incentive Plan provides that it will be
administered by one or more Key Executive Stock Option Plan Committee(s) of
the Board of Directors (the "Committee"), which establishes the conditions of
each grant made under the 1996 Incentive Plan and determines which key
employees will receive awards as well as the type and amount of each award.
Members of at least one of the Committees shall be non-employee directors as
defined in Rule 16b-3 and are not eligible to receive awards under the 1996
Incentive Plan.
Eligibility. Key employees of the Company and its subsidiaries (including
employees who are members of the Board of Directors, but excluding directors
who are not employees) who, in the opinion of the Committee, are mainly
responsible for the continued growth and development and financial success of
the business of the Company or one of its subsidiaries are eligible to be
granted awards under the 1996 Incentive Plan. Subject to the provisions of the
1996 Incentive Plan, the Committee shall from time to time select from such
eligible persons those to whom awards shall be granted and determine the
number of shares to be granted. Because eligibility is determined by these
subjective criteria, it is not possible at this time to determine either the
number of employees eligible to participate in the 1996 Incentive Plan or the
amount of awards which will be made.
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In connection with the Manor Care Spin-off, Manor Care options held by
Company employees and some Manor Care employees were converted into options to
purchase Company Common Stock. Such converted options are deemed to be
governed by the 1996 Incentive Plan but are not deemed to be issued under the
1996 Incentive Plan. On March 4, 1996, the Company granted to William R. Floyd
under the 1996 Incentive Plan 85,470 shares of restricted Company Common
Stock, including 34,188 shares pursuant to Incentive Stock Options. On
February 25, 1997, the Company granted to Thomas Mirgon under the 1996
Incentive Plan options to purchase 40,000 shares of Company Common Stock,
including 10,000 shares pursuant to Incentive Stock Options, and to Joseph
Squeri, options to purchase 20,000 shares of Company Common Stock, including
5,000 shares pursuant to Incentive Stock Options. All of such awards will vest
at the rate of twenty percent per year for the first five years, and expire
ten years after the date of the award.
Restricted Shares. Restricted share awards are shares of Company Common
Stock bearing restrictive legends prohibiting their sale, transfer, pledge or
hypothecation until the expiration of a restriction period of not more than
ten years set at the time of grant. In addition or in lieu of a restriction
period, the Committee may establish a performance goal which must be achieved
as a condition to retention of the award. The recipient of an award is
entitled to receive dividends and vote the restricted shares, unless
forfeited.
Stock Options. Options granted under the 1996 Incentive Plan may be either
Incentive Stock Options, as defined in the Internal Revenue Code, as amended,
or options which do not so qualify ("nonqualified options"). At the time an
option is granted, the Committee determines the number of shares of Company
Common Stock subject to each stock option, the manner and time of exercise,
and the vesting schedule. No options granted under the 1996 Incentive Plan may
be exercised more than 10 years after date of grant; however, Incentive Stock
Options granted to a Ten Percent Shareholder (as defined) may not be exercised
more than 5 years after the date of grant. The option price per share for
stock options will be set in the grant, but will be equal to or greater than
the fair market value of a share of Company Common Stock on the date of grant,
except with respect to an Incentive Stock Option granted to a Ten Percent
Shareholder (as defined) shall be at least 110% of the fair market value on
the date of grant. The option exercise price may be paid with cash and/or
shares of Company Common Stock. Options will be evidenced by stock option
agreements in a form approved by the Committee and are not transferable except
by will or the laws of descent and distribution. Under the 1996 Incentive
Plan, no Covered Employee (as defined in Section 162(m)(3) of the Internal
Revenue Code) may be granted more than 100,000 shares during any calendar
year. With respect to Incentive Stock Options granted stock options for any
employee, the aggregate fair market value determined on the date of grant with
respect to which any Incentive Stock Option is first exercisable shall not
exceed $100,000.
The granting of an option does not entitle the participant to any dividends,
voting or other rights of a stockholder, unless and until the participant
receives stock upon exercise of the option. The Committee may limit an option
by restricting its exercise in whole or in part for specified periods.
Stock Appreciation Rights. An SAR is the right to receive payment for the
appreciation in value of one share of Company Common Stock over a specified
price. An SAR may be granted either in tandem with a stock option award or
independently. If the SAR is granted in tandem with a stock option award, the
payment is measured by the excess of the fair market value of the Company
Common Stock at the time of exercise over the option price (which cannot be
less than the fair market value of the stock at the time of grant). If the SAR
is granted independent of a stock option, the Committee will specify whether
the award is a "regular" SAR or whether the award is a "book value" SAR. If
the award is a "regular" SAR, the payment is measured by the excess of the
fair market value of the stock at the time of exercise over the fair market
value at the time of grant. If the award is a "book value" SAR, the payment is
measured by the excess of the book value of the Company Common Stock at the
time of exercise over the book value of the Company Common Stock at the time
of grant.
Stock appreciation payments, at the election of the participant, may be made
in cash or Company Common Stock or a combination of both. The Committee must
approve any election to receive cash.
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An SAR issued pursuant to an option cannot be exercised less than six months
after the grant; an SAR issued independently is subject to the terms and
conditions established on grant. SARs are deemed to be exercised on the last
day of the Exercise Period, if not previously exercised, which may not extend
more than ten years beyond the date of grant. The Committee may impose such
restrictions on transferability of SARs as it may determine.
The granting of an SAR does not entitle the participant to any dividend,
voting or other rights of a stockholder, unless and until the participant
receives stock upon the exercise of an SAR. SARs which are not exercisable
immediately upon being granted may be made immediately exercisable upon the
occurrence of retirement or disability, as determined by the Committee in its
sole discretion. Under the 1996 Incentive Plan, no Covered Employee (as
defined in Section 162(m)(3) of the Internal Revenue Code) may be granted more
than 100,000 SARs during any calendar year.
Performance Shares. A performance share award involves the grant of a right
to receive a specified number of shares of the Company Common Stock upon
satisfaction of certain performance-related objectives specified in the
granting instrument. The performance-related objectives may relate to the
individual, the Company, a department or a division of the Company and/or a
group or class of participants. The measuring period used to establish the
performance criteria will be specified by the Committee at the time of grant
and may be subsequently waived or reduced, or the performance criteria may be
adjusted, upon the occurrence of events determined by the Committee in its
sole discretion to justify such waiver, reduction or adjustment. Under the
1996 Incentive Plan, no Covered Employee (as defined in Section 162(m)(3) of
the Internal Revenue Code) may be granted more than 100,000 Performance Shares
during any calendar year.
Retirement or Disability. The Committee may, in its discretion, waive the
forfeiture, termination or lapse of an award in the event of retirement or
disability of the participant.
Income Tax Consequences. The Federal income tax consequences of an award
under the 1996 Incentive Plan depend on the type of award, as discussed below.
The grant of a restricted share award or a performance share award does not
immediately produce taxable income to a recipient or a tax deduction to the
Company. However, at the time the restrictions expire or the performance
objectives have been achieved, as the case may be, a recipient will recognize
taxable ordinary income in an amount equal to the fair market value of the
stock on the date the restrictions expire or the performance criteria are
achieved and the Company will be entitled to a corresponding income tax
deduction. In the case of a restricted share award, during the restriction
period, a recipient will be taxed on the dividends received from the
restricted shares as additional compensation, and the Company will be entitled
to a corresponding compensation deduction.
Generally, a recipient of an incentive stock option will not recognize
taxable income at the time of grant or exercise and the Company will not be
entitled to an income tax deduction. Provided the minimum holding periods are
satisfied, any gain on a disposition of stock acquired through an incentive
stock option will be taxable to a recipient as long-term capital gain. If the
minimum holding periods are not satisfied, a recipient will recognize ordinary
income in the amount of the excess of the fair market value of the stock on
the date the option is exercised over the option price, and the Company will
be entitled to a corresponding income tax deduction.
The grant of a nonqualified stock option does not result in taxable income
to a recipient or a tax deduction for the Company. Upon exercise, a recipient
will recognize taxable ordinary income in an amount equal to the excess of the
fair market value of the stock on the date of exercise over the option price,
and the Company will be entitled to a corresponding income tax deduction.
A recipient of a stock appreciation right will not recognize taxable income
at the time the right is granted, and the Company will not be entitled to a
tax deduction. However, ordinary taxable income will be recognized by a
recipient and a corresponding deduction will be taken by the Company, at the
time of exercise, in an amount equal to the cash and the fair market value of
the stock received.
108
<PAGE>
Amendment and Termination. The Board of Directors may at any time and from
time to time alter, amend, suspend or terminate the 1996 Incentive Plan in
whole or in part, except (i) any such action affecting options granted or to
be granted under the 1996 Incentive Plan which are intended to qualify as
Incentive Stock Options shall be subject to stockholder approval to the extent
such stockholder approval is required pursuant to Section 422 of the Internal
Revenue Code and (ii) without the consent of the participant to whom any award
has been granted, no such action may be taken which adversely affects the
rights of such participant concerning such award, except as such termination
or amendment of the 1996 Incentive Plan is required by statute, or rules and
regulations promulgated thereunder.
The 1996 Incentive Plan terminates on October 11, 2006. Awards may be
granted under the 1996 Incentive Plan at any time and from time to time prior
to the termination of the 1996 Incentive Plan. Any award outstanding at the
time the 1996 Incentive Plan is terminated shall remain in effect until said
award is exercised or expires.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
PROPOSAL SIX.
PROPOSAL SEVEN: APPROVAL OF CHOICE HOTELS INTERNATIONAL, INC.1996 EMPLOYEE
STOCK PURCHASE PLAN
General. On October 11, 1997, the Board of Directors unanimously approved
the Choice Hotels International, Inc. 1997 Employee Stock Purchase Plan (the
"Stock Purchase Plan") subject to approval of the Stock Purchase Plan by a
majority of the shares of Company Common Stock present in person or by proxy
at the Annual Meeting.
The purposes of the Stock Purchase Plan are to build a proprietary interest
among employees of the Company and to assist the Company in its goal of
recruiting and retaining highly qualified employees at all levels of the
organization.
The following description of the Stock Purchase Plan is qualified in its
entirety by reference to the Choice Hotels International, Inc. 1997 Employee
Stock Purchase Plan, a copy of which is attached as Exhibit E-2 to this Proxy
Statement. The amount of compensation that will accrue to the employees
pursuant to the Stock Purchase Plan, if approved by the stockholders, is not
currently determinable.
The Stock Purchase Plan authorizes the purchase of a maximum of 1,000,000
shares (subject to adjustment for stock splits and similar capital changes) of
Company Common Stock by eligible employees.
Eligibility. Each employee of the Company and its subsidiaries having at
least one year of continuous service on the first day of each January, April,
July and October (an "Offering Date"), beginning January 1, 1997, is eligible
to participate in the Stock Purchase Plan. All employees will be eligible to
participate after completing one year of employment. Any employee who
immediately after the grant of a right owns 5% or more of the Company Common
Stock, however, would not be eligible to participate. At June 30, 1997, the
Company employed approximately 5,450 persons, of whom approximately 2,970 meet
the eligibility requirements set forth above.
Administration. The Stock Purchase Plan is administered by the Board of
Directors.
Rights will be granted quarterly on each Offering Date, and are exercisable
effective on the succeeding last trading day of March, June, September and
December, respectively. Eligible employees may purchase shares of Company
Common Stock through accumulation of payroll deductions (of not less than 2%
nor more than 10% of compensation, as defined in the Stock Purchase Plan). No
Participant shall have the right to purchase shares of Company Common Stock
under the Plan at a rate of more than $25,000 in value in any calendar year,
such value to be based on the fair market value of the Company Common Stock as
of the Offering Date on which the Participant becomes eligible to purchase
Company Common Stock in such year under the terms of the Plan. At
109
<PAGE>
the end of each three month Offering Period, the Company will contribute cash
equal to one-ninth of the employee payroll deductions to the Stock Purchase
Plan, and the aggregate employee payroll deductions and the Company
contribution will be used either by the Company to sell Company Common Stock
to the participants or by the Company's designated agent to purchase Company
Common Stock in the open market. The agent will allocate the purchased Company
Common Stock among the employee accounts in proportion to their payroll
deductions. The Company will pay the administrative expenses for the purchase
of the Company Common Stock, including broker's commissions, transfer fees and
similar costs.
Amendment and Termination. The Board of Directors may at any time amend or
terminate the Stock Purchase Plan except that no action may be made without
the approval of stockholders to the extent such approval is required pursuant
to Section 423 of the Internal Revenue Code.
Federal Income Tax Consequences. Generally, a recipient of stock acquired
through the Stock Purchase Plan will not recognize taxable income (and the
Company will not be entitled to an income tax deduction) until such recipient
disposes of the stock. Provided the minimum holding periods are satisfied,
upon disposition of stock acquired through the Stock Purchase Plan, the lesser
of (1) the excess of the fair market value of the stock on the date of
purchase over the price paid, or (2) the excess of the fair market value of
the stock at the time of disposition over the price paid, will be taxable to a
recipient as ordinary income (compensation), and the Company will not be
entitled to a corresponding income tax deduction. Any additional gain will be
taxable to such recipient as long-term capital gain. If the minimum holding
periods are not satisfied, a recipient will recognize ordinary income
(compensation) in the amount of the excess of the fair market value of the
stock on the date of purchase over the price paid, and the Company will be
entitled to a corresponding income tax deduction. Any additional gain will be
taxable to such recipient as long-term capital gain.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
PROPOSAL SEVEN.
STOCKHOLDERS PROPOSALS FOR 1998
Under the rules of the Commission, any stockholder proposal intended for
inclusion in the proxy material for the annual meeting of stockholders to be
held in 1998 must be received by the Company by April 18, 1998 to be eligible
for inclusion in such proxy material. Proposals should be addressed to Michael
J. DeSantis, Secretary, Choice Hotels International, Inc., 10750 Columbia
Pike, Silver Spring, Maryland 20901. Proposals must comply with the proxy
rules of the Commission relating to stockholder proposals in order to be
included in the proxy materials.
GENERAL
The Company's Annual Report for 1997, including consolidated financial
statements and other information (the "Company 1997 Annual Report"),
accompanies copies of this Proxy Statement being mailed to the Company
stockholders but does not form a part of the proxy soliciting materials. A
complete list of the stockholders entitled to vote at the Company Annual
Meeting will be open and available for examination by any stockholder, for any
purpose germane to the Company Annual Meeting, between 9:00 a.m. and 5:00 p.m.
at the Company's offices at 10750 Columbia Pike, Silver Spring, Maryland 20901
from September 5, 1997 through September 15, 1997 and at the time and the
place of the Company annual meeting.
The Company will provide each of the stockholders, without charge, upon the
written request of any such person, a copy of the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1997 (the "Company 1997 10-K"),
including the financial statements and the financial statement schedules
required to be filed with the Commission pursuant to the rules promulgated
under the Exchange Act. Exhibits to the Company 1997 10-K will not be supplied
unless specifically requested, for which there may be a reasonable charge.
Those
110
<PAGE>
stockholders wishing to obtain a copy of the Company 1997 Form 10-K should
submit a written request to Michael J. DeSantis, Secretary, Choice Hotels
International, Inc., 10750 Columbia Pike, Silver Spring, Maryland 20901.
In addition to solicitation by mail, proxies may be solicited in person, or
by telephone or telegraph, by directors and by officers and other regular
employees of the Company. The Company has also retained ChaseMellon
Shareholder Services, L.L.C. to act as solicitation agent on behalf of the
Company for a fee not to exceed $7,500. All expenses in connection with the
preparation of proxy material and the solicitation of proxies will be borne by
the Company.
111
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Choice Hotels Franchising, Inc.
<TABLE>
<S> <C>
Report of Independent Public Accountants................................... F-2
Combined Balance Sheets as of May 31, 1997 and May 31, 1996................ F-3
Combined Statements of Income for the fiscal years ended May 31, 1997, May
31, 1996 and
May 31, 1995.............................................................. F-4
Combined Statements of Cash Flows for the fiscal years ended May 31, 1997,
May 31, 1996 and
May 31, 1995.............................................................. F-5
Notes to Combined Financial Statements..................................... F-6
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Choice Hotels Franchising, Inc.:
We have audited the accompanying combined balance sheets of Choice Hotels
Franchising, Inc., as defined under "Basis of Presentation" in the Notes to
Combined Financial Statements, as of May 31, 1997 and 1996, and the related
combined statements of income and cash flows for each of the three years in
the period ended May 31, 1997. These combined financial statements are the
responsibility of Franchising's management. Our responsibility is to express
an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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
Franchising, Inc. as of May 31, 1997 and 1996, and the combined results of
their operations and their combined cash flows for each of the three years in
the period ended May 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Washington, D.C.,
June 24, 1997
F-2
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
(SEE BASIS OF PRESENTATION)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................. $ 4,167 $ 3,812
Receivables (net of allowance for doubtful accounts of
$6,159 and $4,515, respectively).......................... 24,472 21,875
Prepaid expenses........................................... 599 2,793
Other...................................................... 5,077 3,429
-------- --------
Total current assets..................................... 34,315 31,909
-------- --------
PROPERTY AND EQUIPMENT, AT COST, NET OF ACCUMULATED
DEPRECIATION................................................ 43,377 38,305
-------- --------
GOODWILL, NET OF ACCUMULATED AMORTIZATION.................... 69,939 65,377
-------- --------
FRANCHISE RIGHTS, NET OF ACCUMULATED AMORTIZATION............ 50,503 53,138
-------- --------
INVESTMENT IN FRIENDLY HOTELS, PLC........................... 17,161 17,069
-------- --------
OTHER ASSETS................................................. 6,178 7,005
-------- --------
$221,473 $212,803
======== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current portion of long term debt.......................... $ 36 $ 57
Accounts payable........................................... 20,412 18,338
Accrued expenses........................................... 10,965 15,184
Income taxes payable....................................... 3,318 2,257
-------- --------
Total current liabilities................................ 34,731 35,836
-------- --------
LONG TERM DEBT............................................... 46,427 66,558
-------- --------
NOTES PAYABLE TO MANOR CARE.................................. 78,700 78,700
-------- --------
DEFERRED INCOME TAXES ($3,498 AND $427, RESPECTIVELY) AND
OTHER LIABILITIES........................................... 4,422 1,177
-------- --------
INVESTMENTS AND ADVANCES FROM PARENT......................... 57,193 30,532
-------- --------
$221,473 $212,803
======== ========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-3
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
(SEE BASIS OF PRESENTATION)
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Royalty fees................................... $ 95,157 $ 86,173 $ 75,402
Marketing and reservation fees................. 104,216 98,906 83,645
Product sales.................................. 23,643 21,570 14,461
European hotel operations...................... 17,737 19,609 18,638
Initial franchise fees......................... 14,250 13,520 9,837
Other.......................................... 17,252 10,876 10,689
-------- -------- --------
Total revenues............................... 272,255 250,654 212,672
-------- -------- --------
OPERATING EXPENSES
Marketing and reservation...................... 101,421 96,246 81,545
Selling, general and administrative............ 51,102 45,196 45,589
Product cost of sales.......................... 22,766 20,709 13,882
European hotel operations...................... 16,166 17,521 17,922
Depreciation and amortization.................. 10,438 11,839 11,768
Provision for asset impairment................. -- 24,760 --
-------- -------- --------
Total operating expenses..................... 201,893 216,271 170,706
-------- -------- --------
Operating income............................. 70,362 34,383 41,966
-------- -------- --------
OTHER
Minority interest expense...................... -- 1,532 2,200
Interest on notes payable to Manor Care........ 7,083 7,083 7,083
Interest and other, net........................ 3,704 4,791 3,672
-------- -------- --------
Total other expenses......................... 10,787 13,406 12,955
-------- -------- --------
Income before income taxes....................... 59,575 20,977 29,011
Income taxes..................................... (24,845) (9,313) (12,783)
-------- -------- --------
NET INCOME....................................... $ 34,730 $ 11,664 $ 16,228
======== ======== ========
Pro forma weighted average shares outstanding.... 62,680 62,628 62,480
======== ======== ========
Pro forma earnings per share..................... $ 0.55 $ 0.19 $ 0.26
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements of
income.
F-4
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
(SEE BASIS OF PRESENTATION)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 34,730 $ 11,664 $ 16,228
Reconciliation of net income to net cash pro-
vided by operating activities:
Depreciation and amortization................ 10,438 11,839 11,768
Provision for bad debts...................... 2,238 685 692
Increase (decrease) in deferred taxes........ 3,171 (13,527) 68
Provision for asset impairment............... -- 24,760 --
Change in assets and liabilities:
Change in receivables...................... (4,835) (7,533) (3,000)
Change in prepaid expenses and other cur-
rent assets............................... 1,615 (990) 1,524
Change in current liabilities.............. (2,145) 4,050 3,694
Change in income taxes payable............. 1,061 (265) 158
Change in other liabilities................ 175 2,059 6,719
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.. 46,448 32,742 37,851
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment........... (10,630) (6,506) (13,611)
Purchase of minority interest.................. (2,494) (55,269) --
Investment in Friendly Hotels, PLC............. -- (17,069) --
Other items, net............................... (4,747) 345 5,878
-------- -------- --------
NET CASH UTILIZED IN INVESTING ACTIVITIES........ (17,871) (78,499) (7,733)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and other long-term
debt.......................................... 31,107 17,296 15,567
Principal payments of debt..................... (51,260) (350) (13,492)
Cash transfers (to) from Parent, net........... (8,069) 31,567 (33,336)
-------- -------- --------
NET CASH (UTILIZED IN) PROVIDED BY
FINANCING ACTIVITIES...................... (28,222) 48,513 (31,261)
-------- -------- --------
Net change in cash and cash equivalents.......... 355 2,756 (1,143)
Cash and cash equivalents at beginning of peri-
od.............................................. 3,812 1,056 2,199
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....... $ 4,167 $ 3,812 $ 1,056
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements of
cash flows.
F-5
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
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 ("Choice Hotels
International, Inc." or the "Company") from its health care business through a
spin-off of its lodging business (the "Manor Care Distribution"). On September
30, 1996 the Board of Directors of Manor Care declared a special dividend to
its shareholders of one share of common stock of the Company for each share of
Manor Care stock, and the Board of Directors set the Record Date and the
Distribution Date. The Manor Care Distribution was made on November 1, 1996 to
holders of record of Manor Care's Common Stock on October 10, 1996.
The Manor Care Distribution separated the lodging and health care businesses
of Manor Care into two public corporations. The operations of the Company
consist principally of the hotel franchise operations and the owned and
managed hotel operations formerly conducted by Manor Care directly or through
its subsidiaries (the "Lodging Business").
On November 1, 1996, concurrent with the Manor Care Distribution, the
Company changed its name from Choice Hotels Holdings, Inc. to Choice Hotels
International, Inc., and the Company's franchising subsidiary, formerly named
Choice Hotels International, Inc., changed its name to Choice Hotels
Franchising, Inc.
On April 29, 1997, Choice Hotels International, Inc. announced its intention
to proceed with the separation of its domestic lodging business from its
franchising and European hotel business through a spin-off of its franchising
business (the "Distribution"). The Company'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. The Company intends to consummate the Distribution in the second
quarter of fiscal year 1998 through a special dividend to its stockholders of
one share of common stock of Choice Hotels Franchising, Inc. ("Franchising")
for each share of Company common stock. The Distribution is conditional upon
certain matters, including declaration of the special dividend by the
Company's Board of Directors, receipt of a ruling from the Internal Revenue
Service that the Distribution will be tax-free and approval by the Company's
shareholders of the special dividend and of the proposed reverse stock split
of the Company post-Distribution. It is anticipated that upon the
Distribution, the Company will change its corporate name to Sunburst
Hospitality Corporation ("Sunburst") and Choice Hotels Franchising, Inc. will
change its name to Choice Hotels International, Inc.
As of May 31, 1997, Franchising had franchise agreements with 3,344 hotels
operating in 33 countries under the following brand names: Comfort, Clarion,
Sleep, Quality, Rodeway, Econo Lodge and MainStay Suites. Franchising also
owns or manages 14 hotels in Germany, France and England. The operations of
Franchising will consist principally of the hotel franchise operations and the
hotel operations in Europe formerly conducted by the Company.
The combined financial statements present the financial position, results of
operations and cash flows of Franchising as if it were formed as a separate
entity of Manor Care which conducted the hotel franchising business and
European hotel operations of Manor Care through November 1, 1996 and as if
Franchising were a separate company for all periods presented. Manor Care's
and the Company's historical basis in the assets and liabilities of
Franchising has been carried over to the combined financial statements. All
material intercompany transactions and balances between Franchising and its
subsidiaries have been eliminated. Changes in the Investments and advances
from Parent represent the net income of Franchising plus the net change in
cash transferred between Franchising and Manor Care through November 1, 1996
and the Company through May 31, 1997.
F-6
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
An analysis of the activity in the "Investments and advances from Parent"
account for the three years ended May 31, 1997 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Balance, May 31, 1994......................................... $ 4,409
Cash transfers to Parent, net................................. (33,336)
Net income.................................................... 16,228
--------
Balance, May 31, 1995......................................... (12,699)
Cash transfers from Parent, net............................... 31,567
Net income.................................................... 11,664
--------
Balance, May 31, 1996......................................... 30,532
Cash transfers to Parent, net................................. (8,069)
Net income.................................................... 34,730
--------
Balance, May 31, 1997......................................... $ 57,193
========
</TABLE>
The average balance of the Investments and advances from Parent was $43.9
million, $8.9 million and ($4.1) million for fiscal years 1997, 1996 and 1995,
respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year combined
financial statements to conform to the current year presentation.
PRO FORMA INCOME PER SHARE (UNAUDITED)
The pro forma income per common share is computed by dividing net income by
the pro forma weighted average number of outstanding common shares,
aggregating 62.7 million, 62.6 million and 62.5 million in fiscal years 1997,
1996 and 1995, respectively. The pro forma weighted average number of
outstanding common shares is based on the Company's weighted average number of
outstanding common shares for the period November 1, 1996 through May 31, 1997
and Manor Care's weighted average number of outstanding common shares for the
period June 1, 1996 through October 31, 1996 and for fiscal years 1996 and
1995.
CASH AND CASH EQUIVALENTS
Franchising considers all highly liquid investments purchased with a
maturity of three months or less at the date of purchase to be cash
equivalents.
PROPERTY AND EQUIPMENT
The components of property and equipment in the combined balance sheets
were:
<TABLE>
<CAPTION>
MAY 31,
-----------------
1997 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Land...................................................... $ 3,033 $ 3,124
Building and improvements................................. 27,409 29,274
Furniture, fixtures and equipment......................... 30,526 25,181
------- --------
60,968 57,579
Less: Accumulated depreciation............................ (17,591) (19,274)
------- --------
$43,377 $ 38,305
======= ========
</TABLE>
F-7
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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>
MINORITY INTEREST
Prior to May 31, 1996, certain former members of the Company's management
had a minority ownership interest in Choice Hotels Franchising, Inc., a
majority owned subsidiary. Amounts reflected as minority interest represent
the minority owners' share of income in Choice Hotels Franchising, Inc. As of
May 31, 1997, the Company had repurchased all of the outstanding minority
ownership interest.
GOODWILL
Goodwill primarily represents an allocation of the excess purchase price of
the stock of Choice Hotels Franchising, Inc. over the recorded minority
interest. Goodwill is being amortized on a straight-line basis over 40 years.
Such amortization amounted to $1.9 million in the year ended May 31, 1997,
$1.1 million in the year ended May 31, 1996, and $598,000 in the year ended
May 31, 1995. Goodwill is net of accumulated amortization of $5.0 million and
$3.1 million at May 31, 1997 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 for the fiscal years
ended May 31, 1997, 1996 and 1995 amounted to $2.9 million, $2.6 million and
$2.6 million, respectively. Franchise rights are net of accumulated
amortization of $14.0 million and $11.1 million at May 31, 1997 and 1996,
respectively.
SELF-INSURANCE PROGRAM
Subsequent to the Manor Care Distribution, Franchising maintained its own
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.
Prior to the Manor Care Distribution, Franchising 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 through November 1, 1996 were assumed by Manor Care and have
been treated as paid to Manor Care, and as such, amounts paid to Manor Care up
to November 1, 1996 have been charged directly to Investments and advances
from Parent.
REVENUE RECOGNITION
Franchising enters into numerous franchise agreements committing to provide
licensees with various marketing services, a centralized reservation system
and limited rights to utilize Franchising's registered tradenames. These
agreements are typically for a period of twenty years, with certain rights to
the franchisee to terminate after 5, 10 or 15 years.
Initial franchise fees are recognized upon sale, because the initial
franchise fee is non-refundable and Franchising has no continuing obligations
related to the franchisee.
F-8
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Royalty fees, primarily 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.
Franchising 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.
IMPAIRMENT POLICY
Franchising evaluates the recoverability of long lived assets, including
franchise rights and goodwill, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability is measured based on net, undiscounted expected cash flows.
Assets are considered to be impaired if the net, undiscounted expected cash
flows are less than the carrying amount of the assets. 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.
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.
FOREIGN OPERATIONS
Franchising 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, 1997, 1996 and 1995 were $27.5
million, $29.9 million and $29.2 million, respectively. Losses were generated
by foreign operations for the fiscal years ended May 31, 1997, 1996 and 1995
of $1.8 million, $19.4 million and $5.7 million, respectively. Losses
generated by foreign operations for fiscal year 1996 include a $15.0 million
net of tax charge relating to a provision for asset impairment. The majority
of the revenues and losses of foreign operations relate to Franchising's
European business operations. Total assets relating to foreign operations were
$48.8 million and $56.8 million at May 31, 1997 and 1996, respectively.
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, 1994........................................ $ (31)
Net adjustments.............................................. 740
--------
Balance, May 31, 1995........................................ 709
Net adjustments.............................................. (2,459)
--------
Balance, May 31, 1996........................................ (1,750)
Net adjustments.............................................. (5,268)
--------
Balance, May 31, 1997........................................ $ (7,018)
========
</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.
F-9
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
Franchising is included in the consolidated federal income tax returns of
Manor Care and the Company. The income tax provision included in these
combined financial statements reflects the historical income tax provision and
temporary differences attributable to the operations of Franchising on a
separate return basis. Deferred taxes are recorded for the tax effect of
temporary differences between book and tax income.
Income before income taxes for the fiscal years ended May 31, 1997, 1996 and
1995 were derived from the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes
Domestic operations............................. $62,641 $52,801 $38,385
Foreign operations.............................. (3,066) (31,824) (9,374)
------- ------- -------
Combined income before income taxes............... $59,575 $20,977 $29,011
======= ======= =======
</TABLE>
Income before income taxes for domestic operations and foreign operations
for fiscal year 1996 includes a pretax provision of $24.8 million for asset
impairment.
The provisions for income taxes follows for the fiscal years ended May 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax (benefit) expense
Federal......................................... $19,421 $20,097 $14,169
Federal benefit of foreign operations........... (1,213) (2,792) (3,703)
State........................................... 3,950 3,754 2,292
Deferred tax (benefit) expense
Federal......................................... 2,293 125 58
Federal benefit of foreign operations........... -- (9,778) --
State........................................... 394 (2,093) (33)
------- ------- -------
$24,845 $ 9,313 $12,783
======= ======= =======
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at May 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and amortization.................... $(5,145) $(1,637) $(12,755)
Prepaid expenses................................. (856) (1,550) (1,386)
Other............................................ (2,799) (1,542) (2,165)
------- ------- --------
Gross deferred tax liabilities................... (8,800) (4,729) (16,306)
------- ------- --------
Foreign operations............................... 2,271 1,931 1,086
Accrued expenses................................. 3,181 2,065 1,343
Net operating loss............................... 609 820 1,031
Other............................................ 310 655 61
------- ------- --------
Gross deferred tax assets........................ 6,371 5,471 3,521
------- ------- --------
Net deferred tax (liability) asset............... $(2,429) $ 742 $(12,785)
======= ======= ========
</TABLE>
F-10
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
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>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT
FEDERAL INCOME TAX RATE)
<S> <C> <C> <C>
Federal income tax rate....................... 35% 35% 35%
Federal taxes at statutory rate............... $20,853 $7,345 $10,154
State income taxes, net of Federal tax bene-
fit.......................................... 2,824 1,080 1,468
Minority interest............................. -- 536 770
Other......................................... 1,168 352 391
-------- ------- --------
Income tax expense............................ $ 24,845 $ 9,313 $ 12,783
======== ======= ========
</TABLE>
Cash paid for state income taxes was $1.3 million, $1.4 million and $549,000
for the years ended May 31, 1997, 1996 and 1995, respectively. Federal income
taxes were paid by Manor Care for the years ended May 31, 1995 and May 31,
1996 and the period from June 1, 1996 through October 31, 1996. Federal income
taxes were paid by the Company for the short period beginning November 1, 1996
and ending May 31, 1997.
Consistent with the existing Company tax sharing policy, all current Federal
provision amounts have been treated as paid to, or received from, the Company,
and as such, there are no current tax provision balances due to the Company at
May 31, 1997 or to Manor Care at May 31, 1996. Differences between amounts
paid to or received from Manor Care and the Company have been charged or
credited directly to Investments and advances from Parent.
ACCRUED EXPENSES
Accrued expenses at May 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Payroll.................................................. $ 7,950 $ 7,041
Other.................................................... 3,015 8,143
------- -------
$10,965 $15,184
======= =======
</TABLE>
LONG TERM DEBT AND NOTES PAYABLE
Debt consisted of the following at May 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
$250 million competitive advance and multi-currency
revolving credit facility with an average rate of 5.69%
at May 31, 1996.......................................... $ -- $ 50,557
$125 million competitive advance and multi-currency
revolving credit facility with an average rate of 6.28%
at May 31, 1997.......................................... 31,107 --
Notes payable to Manor Care, Inc. with a rate of 9% at May
31, 1997 and 1996, respectively.......................... 78,700 78,700
Capital lease obligations................................. 13,531 13,951
Other notes with an average rate of 5.94% and 6.33% at May
31, 1997 and 1996, respectively.......................... 1,825 2,107
-------- --------
Total indebtedness........................................ $125,163 $145,315
======== ========
</TABLE>
F-11
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of debt at May 31, 1997 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
----------- --------------
<S> <C>
1998.......................................................... $ 36
1999.......................................................... 87
2000.......................................................... 110,012
2001.......................................................... 210
2002.......................................................... 215
Thereafter.................................................... 14,603
--------
$125,163
========
</TABLE>
During fiscal year 1996 and through November 1, 1996, the Company was a co-
guarantor with Manor Care and other affiliates for a $250 million competitive
advance and multi-currency revolving credit facility. The facility provided
that up to $75.0 million was available in foreign currency borrowings under
the foreign currency portion of the facility. Franchising's borrowings under
this facility amounted to $50.6 million at May 31, 1996. Franchising was
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. Subsequent to the Manor Care Distribution, the Company utilized
its new credit facility, as described below, to repay Franchising's portion of
borrowings under Manor Care's foreign currency portion of the facility, and
the Company was released from all liabilities and guarantees relating to the
Manor Care credit facility.
On October 30, 1996, the Company entered into a $100.0 million competitive
advance and multi-currency revolving credit facility provided by a group of
seven banks. As a subsidiary of the Company, Franchising's cash requirements
and related borrowings were provided by the Company. This facility provides
that up to $75.0 million is available for borrowings in foreign currencies.
Borrowings under the facility are, at the option of the borrower, at one of
several rates including LIBOR plus from 20.0 to 62.5 basis points, based upon
a defined financial ratio and the loan type. In addition, the Company has the
option to request participating banks to bid on loan participation at lower
rates than those contractually provided by the facility. The facility
presently requires the Company to pay annual fees of 1/10 of 1% to 1/4 of 1%,
based upon a defined financial ratio, of the total loan commitment. The
facility will terminate on October 30, 1999. On May 5, 1997, the Company
increased the size of the facility from $100 million to $125 million. The
Company has $121.6 million outstanding under the facility at May 31, 1997 of
which $31.1 million has been allocated to Franchising. In connection with the
Distribution, Franchising intends to secure financing to repay its portion of
borrowings under the Company's foreign currency portion of the facility as
well as to provide for seasonal cash requirements.
The Company has $115.7 million payable to Manor Care as of May 31, 1997
assumed as part of the Manor Care Distribution. The portion of this
indebtedness related to Franchising acquisitions has been pushed down to
Franchising and is reflected as Notes payable to Manor Care in the
accompanying combined balance sheets totaling $78.7 million at May 31, 1997
and 1996, respectively. The loan will mature on November 1, 1999 and may be
prepaid in whole or in part, together with accrued interest, at the Company's
option. If the loan is prepaid prior to November 1, 1997, the Company will be
required to reimburse Manor Care on demand for any actual loss incurred or to
be incurred by Manor Care (for the period up to and including November 1,
1997) in the redeployment of the funds released by a prepayment of the loan.
The Notes payable to Manor Care are expected to be repaid with the proceeds
from operating cash flow or with third-party financing. Interest expense on
those notes for each of the years ended May 31, 1997, 1996 and 1995 was $7.1
million. Interest on the amount of the loan is payable quarterly at an annual
rate of 9%.
Cash paid for interest was $11.6 million, $11.8 million and $10.8 million
for fiscal years 1997, 1996 and 1995, respectively.
F-12
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
LEASES
Franchising operates certain property and equipment under operating leases
that expire at various dates through 2001. Future minimum lease payments total
approximately $280,000. Rental expense under non-cancellable operating leases
was $171,000 in 1997, $231,000 in 1996 and $400,000 in 1995. No amounts have
been included in minimum lease payments for office rent because Franchising is
not subject to a rental agreement. Franchising paid office rent of $4.0
million to the Company in 1997 based on the portion of total space occupied by
Franchising. Subsequent to the Distribution, Franchising will sublease office
space from Sunburst.
ACQUISITIONS AND DIVESTITURES
On May 31, 1995, Franchising repurchased one-half of the 11% interest held
by its management in Choice Hotels Franchising, 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, Franchising repurchased the remaining
5.5% minority interest in Choice Hotels Franchising, Inc. for $27.9 million.
Approximately $26.4 million was allocated to goodwill.
On May 31, 1996, Franchising invested approximately $17.1 million in the
capital stock of Friendly Hotels, PLC ("Friendly"). In exchange for the $17.1
million investment, Franchising received 750,000 shares of common stock and
10,000,000 newly issued immediately convertible preferred shares. In addition,
Franchising granted to Friendly a Master Franchise Agreement for the United
Kingdom and Ireland in exchange for 333,333 additional shares of common stock.
At May 31, 1997, Franchising owned approximately 5% of the outstanding shares
of Friendly which would increase to approximately 27% if Franchising's
preferred stock were converted. The preferred shares carry a 5.75% dividend
payable in cash or in stock, at the Company's option. The dividend accrues
annually with the first dividend paid on the earlier of the third anniversary
of completion or on a conversion date. The proceeds of the investment received
by Friendly are to be used to support the construction of 10 Quality or
Comfort hotels. As a condition to the investment, Franchising has the right to
appoint two directors to the board of Friendly. Franchising is accounting for
the common stock investment under the equity method.
Franchising recognized $943,000 in preferred dividend income from the
Friendly investment during 1997.
TRANSACTIONS WITH SUNBURST
Franchising participates in a cash concentration system with the Company and
as such maintains no significant cash balances or banking relationships.
Substantially all cash received by Franchising has been immediately deposited
in and combined with the Company's corporate funds through its cash management
system. Similarly, operating expenses, capital expenditures and other cash
requirements of Franchising have been paid by the Company and charged to
Franchising. The net result of all of these intercompany transactions are
reflected in Investments and advances from Parent.
Since the Manor Care Distribution, Franchising has provided certain services
to the Company including, among others, executive management, human resources,
legal, accounting, tax, information systems and certain administrative
services, as required. Also since the Manor Care Distribution, the Company has
provided services to Franchising, either directly or through the Corporate
Services Agreement with Manor Care, including, among others, cash management,
payroll and payables processing, employee benefits plans, insurance,
accounting and certain administrative services, as required. Costs associated
with the Manor Care Corporate Services Agreement as well as costs of services
provided by the Company to Franchising or provided by Franchising to the
Company
F-13
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
have been allocated between the entity providing the services and the entity
receiving the services in the accompanying financial statements. As a result,
future administrative and corporate expenses are expected to vary from
historical results. However, Franchising has estimated that general and
administrative expenses incurred annually will not materially change after the
Distribution.
For purposes of providing an orderly transition after the Distribution, the
Company and Franchising 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
Franchising (i) will receive and/or provide 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 the Company, (iii) will receive certain risk management services and
other miscellaneous administrative services and (iv) will adjust outstanding
options to purchase shares of Company Common Stock held by Company employees,
Franchising employees and employees of Manor Care. These agreements will
extend for a maximum period of 30 months from the Distribution date or until
such time as Franchising and the Company have arranged to provide such
services in-house or through another unrelated provider of such services.
On or prior to the Distribution date, the Company and Franchising will enter
into a strategic alliance agreement. Among other things, the agreement will
provide for (i) a right of first refusal to Franchising to franchise lodging
properties to be acquired or developed by the Company, (ii) certain
commitments by the Company for the development of Sleep Inns and MainStay
Suites hotels, (iii) continued cooperation of both parties with respect to
matters of mutual interest, such as new product and concept testing, (iv)
continued cooperation with respect to third party vendor arrangements and (v)
certain limitations on competition in each others' line of business. The
strategic alliance agreement extends for a term of 20 years with mutual rights
of termination on the 5th, 10th and 15th anniversaries.
During the periods presented, Sunburst operated substantially all of its
hotels pursuant to franchise agreements with Franchising. Total fees paid to
Franchising included in the accompanying financial statements for franchising
royalty, marketing and reservation fees were $9.5 million, $7.5 million, and
$5.3 million for the years ended May 31, 1997, 1996 and 1995, respectively.
COMMITMENTS AND CONTINGENCIES
Franchising is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and general counsel to
Franchising, the ultimate outcome of such litigation will not have a material
adverse effect on Franchising's business, financial position or results of
operations.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
Bonuses accrued for key executives of Franchising under incentive
compensation plans were $1.4 million in 1997, $1.1 million in 1996 and $1.4
million in 1995.
Employees of Franchising participate in retirement plans sponsored by the
Company, and prior to the Manor Care Distribution employees participated in
retirement plans sponsored by Manor Care. Costs allocated to Franchising are
based on the size of its payroll relative to the sponsor's payroll. Costs
allocated to Franchising were approximately $1.4 million in 1997, $817,000 in
1996 and $776,000 in 1995.
F-14
<PAGE>
CHOICE HOTELS FRANCHISING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Franchising 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. Long term
debt consist of bank loans and Notes payable to Manor Care. 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 long-term debt approximate fair market values.
PROVISION FOR ASSET IMPAIRMENT
During fiscal year 1996, Franchising 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, Franchising performed a
review of its European operations and in May 1996 recognized a $15.0 million
non-cash charge (net of a $9.8 million income tax benefit) against earnings
related to the impairment of assets associated with certain European hotel
operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Franchising has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption
of SFAS No. 121 did not have a material impact on Franchising's financial
statements.
Franchising plans to utilize the method under SFAS No. 123, "Accounting for
Stock-Based Compensation," which provides for disclosure of the impact of
stock-based compensation grants.
Franchising is required to adopt SFAS No. 128, "Earnings Per Share," and
SFAS No. 129, "Disclosure of Information about Capital Structure," no later
than fiscal year 1998. The adoption of these pronouncements will not
materially affect Franchising's financial statements. Franchising is required
to adopt SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," no
later than fiscal 1999. Management is still evaluating the impact that these
pronouncements will have on Franchising's financial statements.
F-15
<PAGE>
ANNEX A
FORM OF
RESTATED CERTIFICATE OF INCORPORATION
OF
CHOICE HOTELS FRANCHISING, INC.
Choice Hotels Franchising, Inc. (the "Corporation"), a corporation
incorporated on December 12, 1980 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
A-1
<PAGE>
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;
(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.
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 1998 annual meeting of
stockholders; the initial term of the Class II directors shall expire upon
the election and qualification of their successors at the 1999 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
2000 annual meeting of stockholders. At each annual meeting of stockholders
beginning with the 1998 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
A-2
<PAGE>
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
class or 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.
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
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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.
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IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of
Incorporation to be duly executed in its corporate name.
Dated: , 1997
-------------------------------------
Name: Stewart Bainum, Jr.
Chairman
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ANNEX B
FORM OF
AMENDED AND RESTATED
BYLAWS OF
CHOICE HOTELS INTERNATIONAL, INC.
(FORMERLY KNOWN AS "CHOICE HOTELS FRANCHISING, INC."
AND HEREINAFTER REFERRED TO AS THE "CORPORATION")
AS AMENDED AND RESTATED, 1997
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 as 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 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.
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 any 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.
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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 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 1997 annual meeting
shall be deemed to be , 1998. 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 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 (1)
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. Meetings of stockholders shall be presided
over by the Chairman of the Board, or, if he is not present, by the Vice
Chairman, or, if he is not present, by the Chief Executive Officer, or if he
is not present, by the President or, if he is not present, by such person who
may have been chosen by the Board of Directors or, if none of such persons is
present, by a chairman to be chosen by the stockholders owning a majority of
the shares of capital stock of the Corporation issued and outstanding and
entitled to vote at the meeting and who are present in person or by proxy. The
Secretary of the Corporation or, if he is not present, an Assistant Secretary
or, if he is not present, such person who may have been chosen by the Board of
Directors, shall act as secretary of meetings of stockholders, but if none of
such persons is present the stockholders owning a majority of the Voting Power
of the Corporation and who are present in person or by proxy shall choose any
person present to act as secretary of the meeting. "Voting Power" means the
total number of votes that may be cast by holders of capital stock in the
election of directors.
Section 8. Quorum. The holders of a majority of the Voting Power of the
Corporation, present in person or represented by proxy, shall be necessary to,
and shall constitute a quorum for, the transaction of business at
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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 represented 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 represented 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.
ARTICLE III
DIRECTORS
Section 1. General Powers: Number: Tenure. The business of the Corporation
shall be managed by its Board of Directors, which may exercise all powers of
the Corporation and perform all lawful acts and things as are not by law, the
Certificate of Incorporation or these Bylaws directed or required to be
exercised or performed by the stockholders. The number of directors
constituting the whole Board of Directors shall be not less than 3 nor more
than 12. The first Board of Directors shall consist of 9 directors.
Thereafter, within the limits above specified, the number of directors shall
be determined by the Board of Directors. The directors shall be elected and
shall hold office as specified in the Certificate of Incorporation. Directors
need not be stockholders. Directors, other than Stewart Bainum, Sr., shall
retire from the Board of Directors as of the annual meeting of stockholders
next following the date they attain the age of seventy (70) years.
Section 2. Nomination of Directors. Any stockholder entitled to vote in the
election of directors generally may nominate one or more persons for election
as directors at an annual meeting only pursuant to the Corporation's notice of
such meeting or if written notice of such stockholder's intent to make such
nomination or nominations has been received by the Secretary of the
Corporation not less than sixty nor more than ninety days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than thirty
days or delayed by more than sixty days from such anniversary, notice by the
stockholder to be timely must be so received not earlier than the ninetieth
day prior to such annual meeting and not later than the close of business on
the later of (1) the sixtieth day prior to such annual meeting or (2) the
tenth day following the day on which notice of the date of the annual meeting
was mailed or public disclosure thereof was made by the Corporation, whichever
first occurs. For purposes of calculating the first such notice period
following adoption of this Restated Certificate of Incorporation, the first
anniversary of the 1997 annual meeting, shall be deemed to be 1998. 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
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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 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, whether or not less than a quorum. Each director
so chosen shall hold office until the expiration of the term of the class
into which such director was elected and until his successor is duly
elected and qualified. If there are no directors in office a special
meeting of stockholders shall be called in accordance with the provisions
of the Certificate of Incorporation or these Bylaws, at which meeting such
vacancies shall be filled.
(b) Any director may resign at any time by giving written notice to the
Board of Directors, the Chairman of the Board, the Chief Executive Officer,
the President or the Secretary of the Corporation. Unless otherwise
specified in such written notice, a resignation shall take effect upon
delivery thereof to the Board of Directors or the designated officer. It
shall not be necessary for a resignation to be accepted before it becomes
effective.
Section 4. Place of Meeting. The Board of Directors may hold meetings, both
regular and special, either within or without the State of Delaware.
Section 5. First Meeting. The first regular meeting of each newly elected
Board of Directors shall be held immediately following the annual meeting of
stockholders and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a
quorum shall be present.
Section 6. Regular Meetings. Additional regular meetings of the Board of
Directors may be held without notice, at such time and place as may from time
to time be determined by the Board of Directors.
Section 7. Special Meetings. Special meetings of the Board of Directors may
be called by the Chairman of the Board of Directors or, in the event of his
disability, by the Vice Chairman, on 2 days' notice to each
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director in accordance with Article V. Special meetings shall be called by the
Chairman of the Board, Vice Chairman, Chief Executive Officer, President or
Secretary in like manner and on like notice on the written request of 4
directors or one-half ( 1/2) of the number of directors. whichever is less.
Section 8. Quorum. At all meetings of the Board of Directors one-half ( 1/2)
of the number of directors then in office, or such greater number as equals
one-third ( 1/3) of the total number of directors shall constitute a quorum
for the transaction of business and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the
Board of Directors, except as may be otherwise specifically provided by law or
the Certificate of Incorporation. If a quorum is not present at any meeting of
the Board of Directors, the directors present may adjourn the meeting, from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
Section 9. Compensation. Directors shall be entitled to such compensation
for their services as directors and to such reimbursement for any reasonable
expenses incurred in attending directors' meetings as may from time to time be
fixed by the Board of Directors. The compensation of directors may be on such
basis as is determined by the Board of Directors. Any director may waive
compensation for any meeting. Any director receiving compensation under these
provisions shall not be barred from serving the Corporation in any other
capacity and receiving reasonable compensation for such other 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 its
proceedings.
ARTICLE IV
COMMITTEES
Section 1. Executive Committee. The Board of Directors may appoint Executive
Committee consisting of not less than 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.
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.
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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.
Section 2. Waiver. Whenever any notice is required to be given under the
provisions of law, the Certificate of Incorporation or these Bylaws, a written
waiver thereof signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed to be
equivalent to such notice. In addition, any stockholder who attends a meeting
of stockholders in person, or is represented at such meeting by proxy, without
protesting prior to the conclusion of the meeting the lack of notice thereof
to him, or any director who attends a meeting of the Board of Directors
without protesting, prior to the commencement of the meeting such lack of
notice, shall be conclusively deemed to have waived notice of such meeting.
ARTICLE VI
OFFICERS
Section 1. Designations. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a Chairman of the Board, Vice Chairman of
the Board, a Chief Executive Officer, a President, a Secretary and a
Treasurer. The Board of Directors may also choose one or more Executive or
Senior Vice Presidents, one or more additional vice presidents, one or more
assistant secretaries and assistant treasurers, and such other officers and
agents as it shall deem necessary. All officers of the Corporation shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall from time to time be determined by the Board of Directors. Any
number of offices may be held by the same person, unless the Certificate of
Incorporation or these Bylaws otherwise provide.
Section 2. Term of Office, Removal. The Board of Directors at its first
meeting after each annual meeting of stockholders shall choose a Chairman, a
Vice Chairman, a Chief Executive Officer, a President, a Secretary and a
Treasurer and such other officers as the Board of Directors shall deem
appropriate. The officers of the Corporation shall hold office until their
successors are chosen and shall qualify. Any officer elected or appointed by
the Board of Directors may be removed, with or without cause, at any time by
the affirmative vote of a majority of the directors then in office. Such
removal shall not prejudice the contract rights, if any, of the person so
removed. Any vacancy occurring in any office of the Corporation may be filled
by the Board of Directors.
Section 3. Compensation. The salaries of all officers of the Corporation
shall be fixed by the Board of Directors.
Section 4. The Chairman of the Board.
(a) The Chairman of the Board shall have general direction of the
business affairs of the Corporation, subject to the control of the Board of
Directors. The Chairman shall preside at all meetings of stockholders
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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.
(b) Unless otherwise prescribed by the Board of Directors, the Chairman
shall have full power and authority on behalf of the Corporation to attend,
act and vote at any meeting of security holders of other corporations in
which the Corporation may hold securities. At such meeting, the Chairman
shall possess and may exercise any and all rights and powers incident to
the ownership of such securities which the Corporation might have possessed
and exercised if it had been present. The Board of Directors may from time
to time confer like powers upon any other person or persons.
Section 5. Vice Chairman. The Vice Chairman shall, in the absence of the
Chairman of the Board or in the event of his disability, preside at all
meetings of the Board of Directors and stockholders and perform the duties and
exercise the powers of the Chairman of the Board and shall perform such other
duties and have such other powers as may from time to time be prescribed by
the Board of Directors.
Section 6. Chief Executive Officer. The Chief Executive Officer shall be the
chief administrator of the Corporation and shall have general direction of
administration of the business affairs of the Corporation, subject to the
direction of the Board of Directors, and shall perform such other duties and
have such other powers as may from time to time be prescribed by the Board of
Directors.
Section 7. The President. The President shall be the chief operations
officer of the Corporation and shall have general direction of the operation
of the Corporation, subject to the direction of the Chief Executive Officer
and the Board of Directors, and shall perform such other duties and shall have
such other powers as may from time to time be prescribed by the Board of
Directors.
Section 8. The Vice Presidents. The Vice President (or in the event there by
more than one, the Vice Presidents in the order designated, or in the absence
of any designation, then in order of their election) shall, in the absence of
the President or in the event of his disability, perform the duties and
exercise the powers of the President and shall generally assist the President
and perform such other duties and have such other powers as may from time to
time be prescribed by the Board of Directors.
Section 9. The Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all votes and
the proceedings of the meetings in a book to be kept for that purpose and
shall perform like duties for the Executive Committee or other committees, if
required. He shall give, or cause to be given, notice of all meetings of
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may from time to time be prescribed by the Board of
Directors, the Chairman of the Board or the President, under whose supervision
he shall act. He shall have custody of the seal of the Corporation and he, or
an Assistant Secretary, shall have authority to affix the same to any
instrument requiring it and, when so affixed, the seal may be attested by his
signature or by the signature of such Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing thereof by his signature.
Section 10. The Assistant Secretary. The Assistant Secretary (or in the
event there be more than one, the Assistant Secretaries in the order
designated, or in the absence of any designation, then in the order of their
election) shall, in the absence of the Secretary or in the event of his
disability, perform the duties and exercise the powers of the Secretary and
shall perform such other duties and have such other powers as may from time to
time be prescribed by the Board of Directors.
Section 11. The Treasurer. The Treasurer shall have the custody of the
corporate funds and other valuable effects, including securities, and shall
keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories
as may from time to time be designated by the Board of Directors. He shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking
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proper vouchers for such disbursements, and shall render to the Chairman of
the Board or the President, and the Board of Directors at regular meetings of
the Board, or whenever they may require it, an account of all of his
transactions as Treasurer and of the financial condition of the Corporation.
Section 12. The Assistant Treasurer. The Assistant Treasurer (or in the
event there be more than one, the Assistant Treasurers in the order
designated, or in the absence of any designation, then in the order of their
election) shall, in the absence of the Treasurer or in the event of his
disability, perform the duties and exercise the powers of the Treasurer and
shall perform such other duties and have such other powers as may from time to
time be prescribed by the Board of Directors.
ARTICLE VII
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
Section 1. Action Other Than by or in the Right of the Corporation. The
Corporation shall indemnify any person who was or is a party or is threatened
to be made a party, to any threatened, pending or completed action, suit or
proceeding or investigation, whether civil, criminal or administrative, and
whether external or internal to the Corporation (other than a judicial action
or suit brought by or in the right of the Corporation) by reason of the fact
that he is or was a director, officer, employee or agent of the Corporation,
or that, being or having been such a director, officer, employee or agent, he
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise (all such persons being referred to hereafter as an "Agent"),
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding, or any appeal thereof, if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his
or her conduct was unlawful. The termination of any action, suit or
proceeding--whether by judgment, order, settlement, conviction, or upon a plea
of nolo contendere or its equivalent -- shall not, of itself, create a
presumption that the person did not act in good faith and in manner which he
or she reasonably believed to be in or not opposed to the best interests of
the Corporation, or, 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 juridical action or suit brought
by or in the right of the Corporation to procure a judgment 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 extent that the Court of Chancery
or the court in which such action or suit was brought shall have determined
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 proceeding, 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.
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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.
Section 6. Right of Agent to Indemnification Upon Application; Procedure
Upon Application. Any indemnification under Sections 1, 2, or 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, proceeding, or investigation; or (iii) 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
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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.
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. References to "other enterprises" in Sections 1, 7 and 10 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), judgments, 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.
ARTICLE VIII
STOCK CERTIFICATES
Section 1. Form: Signatures.
(a) Every holder of stock in the Corporation shall be entitled to have a
certificate, signed by the Chairman of the Board or the Chief Executive
Officer and the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the Corporation, exhibiting the number, and class
(and series, if any), of shares owned by him, and bearing the seal of the
Corporation. Such seal may be a facsimile. Where a certificate is manually
signed (i) by a transfer agent other than the Corporation or its employee
or (ii) by a registrar other than the Corporation or its employee, the
signature of any such officer may be a facsimile. In case any officer who
has signed, or whose facsimile signature was placed on, a certificate shall
have ceased to be such officer before such certificate is issued, it may
nevertheless be issued by the Corporation with the same effect as if he
were such officer at the date of its issue.
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(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 and 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.
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 or diminish any such fund in its absolute
judgment and discretion.
Section 3. Fiscal Year. The fiscal year of the Corporation shall begin on
January 1 in each calendar year and end on December 31 in that 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."
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ANNEX C-I
CHOICE HOTELS FRANCHISING, INC.
1997 LONG-TERM INCENTIVE PLAN
SECTION ONE
Designation and Purpose of Plan
The purpose of the Choice Hotels Franchising, Inc. 1997 Long-Term Incentive
Plan (the "Plan") is to increase the ownership of Company Stock by those
officers, professional staff and other key employees who are mainly
responsible for the continued growth and development and financial success of
the Company and its subsidiaries. Such stock ownership gives such employees a
proprietary interest in the Company which induces them to continue in its
employ. The Plan also enables the Company to attract and retain such employees
and reward them for the continued profitable performance of Choice Hotels
Franchising, Inc.
SECTION TWO
Definitions
The following definitions are applicable herein:
A. "Award"--Individually or collectively, Options, Stock Appreciation
Rights, Performance Shares or Restricted Stock granted hereunder.
B. "Award Period"--the period of time during which a Stock Appreciation
Right which has not been granted pursuant to an Option may be exercised. The
Award Period shall be set forth in the document issuing the Stock Appreciation
Right to the selected Eligible Employee.
C. "Board"--the Board of Directors of the Company.
D. "Book Value"--the book value of a share of Stock determined in accordance
with the Company's regular accounting practices as of the last business day of
the month immediately preceding the month in which a Stock Appreciation Right
is exercised as provided in Section Nine D.
E. "Code"--the Internal Revenue Code of 1986, as amended. Reference in the
Plan to any section of the Code shall be deemed to include any amendments or
successor provisions to such section and any regulations promulgated
thereunder.
F. "Committee"--the Key Executive Stock Option Plan Committee appointed to
administer the Plan pursuant to Section Four. "If two or more Key Executive
Stock Option Plan Committees are appointed with the power to grant Awards to
different classes of employees, references in this Plan to the "Committee'
shall refer to the Key Executive Stock Option Plan Committee administering the
portion of the Plan pertaining to Awards to the applicable class of
employees."
G. "Company"--Choice Hotels Franchising, Inc., including any present or
future "subsidiary corporation" as such term is defined in Section 424(f) of
the 1986 Internal Revenue Code, as amended.
H. "Covered Employee"--an individual described in Section 162(m)(3) of the
Code.
I. "Date of Grant"--the date on which the granting of an Award is authorized
by the Committee or such later date as may be specified by the Committee in
such authorization.
J. "Eligible Employee"--any person employed by the Company or a Subsidiary
on a regularly scheduled basis who satisfies all of the requirements of
Section Six.
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K. "Exercise Period"--the period or periods during which a Stock
Appreciation Right is exercisable as described in Section Nine B.
L. "Fair Market Value"--the fair market value of the Stock as determined in
accordance with Section Eight D.
M. "Incentive Stock Option"--an incentive stock option within the meaning of
Section 422 of the Code.
N. "Option" or "Stock Option"--either a nonqualified stock option or an
Incentive Stock Option granted under Section Eight. It also means any Option
which remains after a Participant has exercised his Option with respect to
part of the shares covered by a Stock Option Agreement as described in Section
Eight B.
O. "Option Period" or "Option Periods"--the period or periods during which
an Option is exercisable as described in Section Eight E.
P. "Option Price"--the price, expressed on a per share basis, for which the
Company Stock can be acquired by the holder of an Option pursuant to the
exercise of such Option.
Q. "Participant"--an Eligible Employee of the Company or a Subsidiary who
has been granted an Option, a Stock Appreciation Right, a Performance Share
Award or a Restricted Stock Award under this Plan.
R. "Performance Share"--an Award granted under Section Ten.
S. "Restricted Stock"--an Award granted under Section Seven.
T. "Stock" and "Company Stock"--the common stock of the Company.
U. "Stock Appreciation Right"--an Award granted under Section Nine.
V. "Subsidiary"--any corporation of which fifty percent (50%) or more of its
outstanding voting stock or voting power is beneficially owned, directly or
indirectly, by the Company.
W. "Ten Percent Shareholder"--a Participant who, at the Date of Grant, owns
directly or indirectly (within the meaning of Section 424(d) of the Internal
Revenue Code) stock possessing more then ten percent (10%) of the total
combined voting power of all classes of stock of the Company or a subsidiary
thereof.
X. Wherever appropriate, words used in this Plan in the singular may mean
the plural, the plural may mean the singular and the masculine may mean the
feminine.
SECTION THREE
Effective Date, Duration and Stockholder Approval
A. Effective Date and Stockholder Approval. Subject to the approval of the
Plan by a majority of the outstanding shares of Stock, the Plan shall be
effective as of [ ], 1997.
B. Period for Grant of Awards. Awards may be made as provided herein for a
period of ten (10) years after [ ],1997.
SECTION FOUR
Administration
A. Appointment of Committee. The Board of Directors shall appoint one or
more Key Executive Stock Option Plan Committees which shall consist of not
less than two (2) members of such Board of Directors and
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which members shall be Non-Employee Directors as defined in Rule 16b-3 under
the Securities Exchange Act of 1934, as amended (or such greater number of
members which may be required by said Rule 16b-3). In addition, such Board of
Directors shall designate a member of the Committee to act as Chairman of the
Committee, and such Board of Directors may remove any member of the Committee
at any time and appoint any director to fill any vacancy on the Committee.
B. Committee Meetings. The Committee shall hold its meetings at such times
and places as specified by the Committee Chairman. A majority of the Committee
shall constitute a quorum. All actions of the Committee shall be taken by all
of the members of the meeting duly called by its Chairman; provided, however,
any action taken by a written document signed by a majority of the members of
the Committee shall be as effective as action taken by the Committee at a
meeting duly called and held.
C. Committee Powers. Subject to the provisions of this Plan, the Committee
shall have full authority in its discretion to (i) designate the Participants
to whom Awards shall be granted, (ii) determine the number of shares to be
made available under each such Award, (iii) determine the period or periods in
which the Participant may exercise such Award, (iv) determine the date when
such Award expires, (v) determine the price for Stock under such Award, and
(vi) determine the grounds of forfeiture of an Award. The Committee shall have
all powers necessary to administer the Plan in accordance with its terms,
including the power to interpret this Plan and resolve all questions arising
thereunder. The Committee may prescribe such rules and regulations for
administering this Plan as the Committee deems appropriate.
SECTION FIVE
Grant of Awards and
Limitation of Number of Shares Subject to Award
The Committee may, from time to time, grant Awards to one or more Eligible
Employees, provided that (i) subject to any adjustment pursuant to Section
Eleven, the aggregate number of shares of Stock subject to Stock Options,
Stock Appreciation Rights, Performance Share Awards or Restricted Stock Awards
under this Plan may not exceed 7,100,000 shares; (ii) to the extent that a
Stock Option, Stock Appreciation Right, Performance Share Award or Restricted
Stock Award lapses or the rights of the Participant to whom it was granted
terminate, expire or are cancelled for any other reason, in whole or in part,
shares of Stock (or remaining shares) subject to such Award shall again be
available for the grant of an Award under the Plan; and (iii) Shares delivered
by the Company under the Plan may be authorized and unissued Stock, Stock held
in the treasury of the Company or Stock purchased on the open market
(including private purchases) in accordance with applicable securities laws.
In determining the size of Awards, the Committee shall take into account the
responsibility level, performance, potential, and cash compensation level of a
Participant, and the Fair Market Value of the Stock at the time of Awards, as
well as such other considerations it deems appropriate.
SECTION SIX
Eligibility
Key employees of the Company and its Subsidiaries (including employees who
are members of the Board, but excluding directors who are not employees) who,
in the opinion of the Committee, are mainly responsible for the continued
growth and development and financial success of the business of the Company or
one or more of its Subsidiaries shall be eligible to be granted Awards under
the Plan. Subject to the provisions of the Plan, the Committee may from time
to time select from such eligible persons those to whom Awards shall be
granted and determine the nature and amount of each Award. No employee of the
Company or its Subsidiaries shall have any right to be granted an Award under
this Plan. A member of the Committee shall not be eligible for any Award
hereunder.
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Notwithstanding any provision to the contrary contained herein, Options
shall be granted under this Plan to persons, including without limitation,
employees of Manor Care, Inc., its subsidiaries, and affiliated companies in
substitution for prior Options under plans of Manor Care, Inc. in accordance
with the terms of the Employee Benefits and other Employee Matters Allocation
Agreement between Manor Care, Inc. and the Company.
SECTION SEVEN
Restricted Stock Awards
A. Grants of Shares of Restricted Stock. An Award made pursuant to this
Section Seven shall be granted in the form of shares of Stock, restricted as
provided in this Section Seven. Shares of the Restricted Stock shall be issued
to the Participant without the payment of consideration by the Participant.
The shares of Restricted Stock shall be issued in the name of the Participant
and shall bear a restrictive legend prohibiting sale, transfer, pledge or
hypothecation of the shares of Restricted Stock until the expiration of the
restriction period.
The Committee may also impose such other restrictions and conditions on the
shares of Restricted Stock as it deems appropriate.
B. Restriction Period. At the time a Restricted Stock Award is made, the
Committee may establish a restriction period applicable to such Award which
shall not be more than ten (10) years. Each Restricted Stock Award may have a
different restriction period, at the discretion of the Committee. In addition
to or in lieu of a restriction period, the Committee may establish a
performance goal which must be achieved as a condition to the retention of the
Restricted Stock. The performance goal may be based on the attainment of
specified types of performance measurement criteria, which may differ as to
various Participants or classes or categories of Participants. Such criteria
may include, without limitation, the attainment of certain performance levels
by the individual Participant, the Company, a department or division of the
Company and/or a group or class of participants. Any such performance goals,
together with the ranges of Restricted Stock Awards for which the Participants
may be eligible shall be set from time to time by the Committee and shall be
timely communicated to the Eligible Employees in advance of the commencement
of the performance of services to which such performance goals relate. The
total number of shares of Restricted Stock which may be granted to any single
Covered Employee under this Plan during any calendar year shall be limited to
100,000.
C. Forfeiture or Payout of Award. In the event a Participant ceases
employment during a restriction period, or in the event performance goals
attributable to a Restricted Stock Award are not achieved, subject to the
terms of each particular Restricted Stock Award, and subject to discretionary
action by the Committee as set forth below in Section Thirteen, a Restricted
Stock Award is subject to forfeiture of the shares of stock which had not
previously been removed from restriction under the terms of the Award.
Any shares of Restricted Stock which are forfeited will be transferred to
the Company.
Upon completion of the restriction period and satisfaction of any
performance-goal criteria, all restrictions upon the Award will expire and new
certificates representing the Award will be issued without the restrictive
legend described in Section Seven A. As a condition precedent to receipt of
the new certificates, the Participant (or the designated beneficiary or
personal representative of the Participant) will agree to make payment to the
Company in the amount of any taxes, payable by the Participant, which are
required to be withheld with respect to such shares of Stock.
SECTION EIGHT
Stock Options
A. Grant of Option. One or more Options may be granted to any Eligible
Employee. Upon the grant of an Option to an Employee, the Committee shall
specify whether the Option is intended to constitute a non-
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qualified stock option or an Incentive Stock Option. The total number of
shares of Stock subject to Options which may be granted to any single Covered
Employee under this Plan during any calendar year shall be limited to 100,000.
B. Stock Option Agreement. Each Option granted under the Plan shall be
evidenced by a written "Stock Option Agreement" between the Company and the
Participant containing such terms and conditions as the Committee determines,
including, without limitation, provisions to qualify Incentive Stock Options
as such under Section 422 of the Code. Such agreements shall incorporate the
provisions of this Plan by reference. The date of granting an Option is the
date specified in the written Stock Option Agreement which is signed by the
Participant and the Company.
C. Determination of Option Price. The Option price for Stock shall be not
less than 100% of the fair market value of the Stock on the date of grant.
Notwithstanding the foregoing, in the case of an Option which is designed to
qualify as an Incentive Stock Option (as defined in Section 422 of the Code)
which is granted to a Ten Percent Shareholder, the Option Price shall not be
less than 110% of such fair market value.
D. Determination of Fair Market Value. The fair market value of the Stock on
the date of granting an Option shall be the mean of the high and low prices at
which the Stock was sold on the market on such date. In the event no such
sales of Stock occurred on such date, the fair market value of the Stock shall
be determined by the Committee in accordance with applicable Regulations of
the Internal Revenue Service.
E. Term of Option. The term of an Option may vary within the Committee's
discretion; provided, however, that the term of an Option shall not exceed ten
(10) years from the date of granting the Option to the Participant, and, to
this end, all Options granted pursuant to this Plan must provide that each
such Option cannot be exercised after the expiration of ten (10) years from
the date each such Option is granted. Notwithstanding the foregoing, in the
case of any Option which is designed to qualify as an Incentive Stock Option
(as defined in Section 422 of the Code) which is granted to a Ten Percent
Shareholder, the term of such Option may not exceed five (5) years from the
date of grant of such Option.
F. Limitation on Exercise of Option. The Committee may limit an Option by
restricting its exercise in whole or in part for specified periods.
G. Method of Exercising an Option. Subject to the terms of a particular
Option, a Participant may exercise it in whole or in part by written notice to
the Secretary of the Company stating in such written notice the number of
shares of Stock such Participant elects to purchase under his Option.
H. No Obligation to Exercise Option. A Participant is under no obligation to
exercise an Option or any part thereof.
I. Payment for Option Stock. Stock purchased pursuant to an Option shall be
paid in full at the time of purchase. Payment may be made (a) in cash, (b)
with the approval of the Committee, by delivery to the Company of shares of
Stock having an aggregate fair market value equal to the exercise price, or
(c) a combination of (a) and (b). Payment may also be made, in the discretion
of the Committee, by delivery (including by facsimile transmission) to the
Company or its designated agent of an executed irrevocable Option exercise
form together with irrevocable instructions to a broker-dealer to sell (or
margin) a sufficient portion of the shares and deliver the sale (or margin
loan) proceeds directly to the Company to pay for the exercise price. Upon
receipt of payment and subject to paragraph J of this Section Eight, the
Company shall, without transfer or issue tax to the Participant or other
person entitled to exercise the Option, deliver to the Participant (or other
person entitled to exercise the Option) a certificate or certificates for such
shares.
J. Delivery of Stock to Participant. The Company shall undertake and follow
all necessary procedures to make prompt delivery of the number of shares of
Stock which the Participant elects to purchase upon exercise of an Option
granted under this Plan. Such delivery, however, may be postponed, at the sole
discretion of the Company, to enable the Company to comply with any applicable
procedures, regulations or listing requirements of any government agency,
stock exchange or regulatory authority.
C-I-5
<PAGE>
K. Failure to Accept Delivery of Stock. If a Participant refuses to pay for
Stock which he has elected to purchase under his Option, in accordance with
the terms of payment, which had previously been agreed upon, his Option shall
thereupon, at the sole discretion of the Committee, terminate, and such funds
previously paid for unissued Stock shall be refunded. Stock which has been
previously issued to the Participant and been fully paid for shall remain the
property of the Participant and shall be unaffected by such termination.
L. Non-Transferability of Options. During the lifetime of a Participant, an
Incentive Stock Option granted to him may be exercised only by him. It may not
be sold, assigned, pledged or otherwise transferred except by will or by the
laws of descent and distribution. In the case of Options which are not
Incentive Stock Options, the Committee may impose such restrictions on
transferability, if any, as it may in its sole discretion determine.
M. Purchase for Investment
(a) Written Agreement by Participants. Unless a registration statement
under the Securities Act of 1933 is then in effect with respect to the
Stock a Participant receives upon exercise of his Option, a Participant
shall acquire the Stock he receives upon exercise of his Option for
investment and not for resale or distribution and he shall furnish the
Company with a written statement to that effect when he exercises his
Option and a reference to such investment warranty shall be inscribed on
the Stock certificate(s).
(b) Registration Requirement. Each Option shall be subject to the
requirement that, if at any time the Board determines that the listing,
registration or qualification of the shares subject to the Option upon any
securities exchange or under any state or Federal law is necessary or
desirable as a condition of, or in connection with, the issuance of shares
thereunder, the Option may not be exercised in whole or in part unless such
listing, registration or qualification shall have been effected or obtained
(and the same shall have been free of any conditions not acceptable to the
Board).
N. Special Limitations on Exercise of Incentive Stock Options. The aggregate
fair market value (determined at the time the Incentive Stock Option is
granted) of the Stock with respect to which any Incentive Stock Option is
first exercisable during any calendar year shall not exceed $100,000.
SECTION NINE
Stock Appreciation Rights
A. Grant of Stock Appreciation Rights. Stock Appreciation Rights may be
granted under the Plan in conjunction with an Option either at the time of
grant or by amendment or may be separately awarded. Stock Appreciation Rights
shall be subject to such terms and conditions not inconsistent with the Plan
as the Committee shall impose. However, the total number of Stock Appreciation
Rights which may be granted to a single Covered Employee under this Plan
during any calendar year shall be limited to 100,000.
B. Right to Exercise; Exercise Period. A Stock Appreciation Right issued
pursuant to an Option shall be exercisable to the extent the Option is
exercisable. A Stock Appreciation Right issued independent of an Option shall
be exercisable pursuant to such terms and conditions established in the grant.
C. Automatic Redemption of Unexercised Stock Appreciation Rights. If on the
last day of the Option Period, in the case of a Stock Appreciation Right
granted pursuant to an Option, or the specified Award Period, in the case of a
Stock Appreciation Right issued independent of an Option, the Participant has
not exercised such Stock Appreciation Right, then such Stock Appreciation
Right shall be automatically redeemed by the Company for an amount equal to
the payment that would otherwise have been made to the Participant if the
Participant had chosen to exercise the Stock Appreciation Right on the last
day of the Option Period or the specified Award Period, as the case may be.
C-I-6
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D. Rights Upon Exercise. An exercisable Stock Appreciation Right granted
pursuant to an Option shall entitle the Participant to surrender unexercised
the Option or any portion thereof to which the Stock Appreciation Right is
attached, and to receive in exchange for the Stock Appreciation Right a
payment (in cash or Stock or a combination thereof as described below) equal
to the Fair Market Value of one share of Stock at the date of exercise minus
the Option Price times the number of shares called for by the Stock
Appreciation Right (or portion thereof) which is so exercised. With respect to
the issuance of Stock Appreciation Rights which are not granted pursuant to an
Option, the Committee shall specify upon the Date of the Grant of the Stock
Appreciation Right whether the Stock Appreciation Right is a "regular" Stock
Appreciation Right or a "book value" Stock Appreciation Right. Upon the
exercise of a regular Stock Appreciation Right, the Participant will receive a
payment equal to the Fair Market Value of one share of Stock at the date of
exercise minus the Fair Market Value of one share of Stock as of the Date of
Grant of the Stock Appreciation Right times the number of shares called for by
the Stock Appreciation Right (or portion thereof) which is so exercised. Upon
the exercise of a book value Stock Appreciation Right, the Participant will
receive a payment equal to the Book Value of one share of Stock at the date of
exercise minus the Book Value of one share of Stock as of the Date of the
Grant of the Stock Appreciation Right times the number of shares called for by
the Stock Appreciation Right (or portion thereof) which is so exercised.
The value of any Stock to be received upon exercise of a Stock Appreciation
Right shall be the Fair Market Value of the Stock on such date of exercise. To
the extent that a Stock Appreciation Right issued pursuant to an Option is
exercised, such Option shall be deemed to have been exercised, and shall not
be deemed to have lapsed.
E. Transferability. The Committee may impose such restrictions on
transferability of Stock Appreciation Rights, if any, as it may in its sole
discretion determine.
SECTION TEN
Performance Shares
A. Grant of Performance Share Units. Awards made pursuant to this Section
Ten shall be granted in the form of Performance Shares, subject to such terms
and conditions not inconsistent with the Plan as the Committee shall impose.
Performance Shares shall be issued to the Participant without the payment of
consideration by the Participant. Awards shall be based on the attainment of
specified types and combination of performance measurement criteria, which may
differ as to various Participants or classes or categories of Participants.
Such criteria may include, without limitation, the attainment of certain
performance levels by the individual Participant, the Company, a department or
division of the Company and/or a group or class of Participants. Such
criteria, together with the ranges of Performance Shares from which employees
may be eligible shall be set from time to time by the Committee and shall be
communicated to the Eligible Employees. The total number of Performance Shares
which may be granted to any single Covered Employee under this Plan during any
calendar year shall be limited to 100,000.
B. Performance Period. The measuring period to establish the performance
criteria set forth in a Performance Share Award shall be determined by the
Committee. A Performance Share Award may initially provide, or the Committee
may at any time thereafter, but no more frequently than once in any six (6)
month period, amend it to provide, for waiver or reduction of the measuring
period and, if appropriate, for adjustment of the performance criteria set
forth in the Performance Share Award, upon the occurrence of events determined
by the Committee in its sole discretion to justify such waiver, reduction or
adjustment.
C. Form of Payment. Upon the completion of the applicable measuring period,
a determination shall be made by the Committee in accordance with the Award as
to the number of shares of Stock to be awarded to the Participant. The
appropriate number of shares of Stock shall thereupon be issued to the
Participant in accordance with the Award in satisfaction of such Performance
Share Award.
C-I-7
<PAGE>
SECTION ELEVEN
Changes in Capital Structure or Shares
In the event any reorganization, merger, consolidation, recapitalization,
liquidation, reclassification, stock dividend, stock split, combination of
shares, rights offering, or extraordinary dividend or divestiture (including a
spin-off), or any other change in the capital structure or shares of the
Company, the Committee shall make adjustments, determined by the Committee in
its discretion to be appropriate, as to the number and kind of securities
subject to this Plan and specified in Section Five of this Plan and as to the
number and kind of securities covered by each outstanding Award and, where
applicable, the price per share thereunder; provided, however, that with
respect to Incentive Stock Options, such adjustments shall be made in
accordance with Section 424(h) of the Code unless the Committee determines
otherwise.
SECTION TWELVE
Corporate Reorganization or Dissolution
A. Discontinuation of the Plan. The Plan shall be discontinued in the event
of the dissolution or liquidation of the Company or in the event of a
Reorganization (as hereinafter defined) in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization and no plan or agreement respecting the Reorganization is
established which specifically provides for the continuation of the Plan and
the change, conversion, or exchange of the stock relating to existing Awards
under this Plan for securities of another corporation. Upon the dissolution of
the Plan in connection with an event described in this Paragraph A, all Awards
shall become fully vested and all outstanding Options and Stock Appreciation
Rights shall become immediately exercisable by the holder thereof. Any Options
or Stock Appreciation Rights granted under the Plan may be terminated as of a
date fixed by the Committee, provided that no less than fifteen (15) days
written notice of the date so fixed shall be given to each Participant and
each such Participant shall have the right during such period to exercise all
or any portion of such Options or Stock Appreciation Rights. Any Stock
Appreciation Rights not so exercised shall be redeemed.
B. Continuation of the Plan Upon a Reorganization. In the event of a
Reorganization (as hereinafter defined) (i) in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization, and (ii) with respect to which there is a reorganization
agreement which undertakes to continue the Plan and to provide for the change,
conversion or exchange of the Stock attributable to outstanding Awards for
securities of another corporation, then the Plan shall continue and the
Committee shall adjust the shares under such outstanding Awards (and shall
adjust the shares remaining under the Plan which are then to be available for
the grant of additional Awards under the Plan, if the reorganization agreement
makes specific provisions therefor), in a manner not inconsistent with the
provisions of the reorganization agreement and this Plan for the adjustment,
change, conversion or exchange of such Awards.
The term "Reorganization" as used in this Section Twelve shall mean any
statutory merger, statutory consolidation, sale of all or substantially all of
the assets of the Company, or sale, pursuant to an agreement with the Company,
of securities of the Company pursuant to which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization.
C. Adjustments and Determinations. Adjustments and determinations under this
Section Twelve shall be made by the Committee, whose decisions as to what
adjustments or determinations shall be made, and the extent thereof, shall be
final, binding, and conclusive.
C-I-8
<PAGE>
SECTION THIRTEEN
Retirement and Disability
The Committee may, in its discretion, waive the forfeiture, termination, or
lapse of an Award in the event of retirement or disability of a Participant
(each as determined by the Committee, in its discretion). Exercise of such
discretion by the Committee in any individual case, however, shall not be
deemed to require, or to establish a precedent suggesting such exercise in any
other case.
SECTION FOURTEEN
Miscellaneous Provisions
A. Nontransferability. The Committee may impose such restrictions on the
transferability of an Award, if any, as it may in its sole discretion
determine.
B. No Employment Right. Neither this Plan nor any action taken hereunder
shall be construed as giving any right to be retained as an officer or
employee of the Company or any of its Subsidiaries.
C. Tax Withholding. Either the Company or a Subsidiary, as appropriate,
shall have the right to deduct from all Awards paid in cash any federal, state
or local taxes as it deems to be required by law to be withheld with respect
to such cash payments. In the case of Awards paid in Stock, the employee or
other person entitled to receiving such Stock shall be required to satisfy any
tax withholding obligations in connection with such Awards in any of the
following ways, as elected by such employee or other person: (i) by paying in
cash to the Company or a Subsidiary, as appropriate, the amount of any
federal, state or local taxes required to be withheld (as determined by the
Company or a Subsidiary, as appropriate), (ii) by having the Company retain a
sufficient number of shares of Stock otherwise payable under the Award to
cover any federal, state or local taxes required to be withheld (as determined
by the Company or a Subsidiary, as appropriate), provided, however, that
management shall assure that the amount of such stock withholding does not
cause the Company to incur additional compensation expense, or (iii) by a
combination of (i) and (ii). The number of shares of Stock to be retained for
this purpose shall be determined on the basis of the Fair Market Value of the
Stock on the date of exercise.
D. Fractional Shares. Any fractional shares concerning Awards shall be
eliminated at the time of payment by rounding down for fractions of less than
one-half and rounding up for fractions of equal to or more than one-half. No
cash settlements shall be made with respect to fractional shares eliminated by
rounding.
E. Government and Other Regulations. The obligation of the Company to make
payment of Awards in Stock or otherwise shall be subject to all applicable
laws, rules, and regulations, and to such approvals by any government agencies
as may be required. The Company shall be under no obligation to register under
the Securities Act of 1933, as amended ("Act"), any of the shares of Stock
issued, delivered or paid in settlement under the Plan. If Stock awarded under
the Plan may in certain circumstances be exempt from registration under the
Act, the Company may restrict its transfer in such manner as it deems
advisable to ensure such exempt status.
F. Severance. Subject to the provision of Paragraph B of this Section
Fourteen, in the event a Participant's employment with the Company terminates,
his rights under any Award which constitutes an Option or a Stock Appreciation
Right terminate one (1) month from the date of such termination of employment.
Such rights shall be exercisable only to the extent the Participant was
entitled to exercise such rights under the Award on the date of such
termination of employment.
G. Death. If a Participant dies prior to the full exercise of his Option
and/or Stock Appreciation Right, his Option to purchase Stock under such
Option and/or Stock Appreciation Right may be exercised to the extent, if any,
that Participant would be entitled to exercise it at the date of the death of
the Participant by the person to whom the Option and/or Stock Appreciation
Right shall pass by will or by the laws of descent and distribution within
twelve (12) months of the death of the Participant or the expiration of the
term of the Option and/or Stock Appreciation Right whichever date is sooner.
H. Limitation. In no event may an Option be exercised by anyone after the
expiration date provided for in Section Eight of the Plan.
C-I-9
<PAGE>
I. Limits on Discretion. Anything in this Plan to the contrary
notwithstanding, if the Award so provides, the Committee shall not have any
discretion to increase the amount of compensation payable under the Award to
the extent such discretion would cause the Award to lose its qualification as
performance-based compensation for purposes of Section 162(m)(4)(C) of the
Code and the regulations thereunder.
J. Governing Law. All matters relating to the Plan or to Awards granted
hereunder shall be governed by the laws of the State of Maryland, without
regard to its principles of conflict of laws.
K. Titles and Headings. The titles and headings of the sections in the Plan
are for convenience of reference only, and in the event of any conflict, the
text of the Plan, rather than such titles and headings, shall control.
SECTION FIFTEEN
Amendment of Plan
A. Discretion of the Board. The Board may at any time and from time to time
alter, amend, suspend or terminate the Plan in whole or in part, except (i)
any such action affecting Options granted or to be granted under this Plan
which are intended to qualify as Incentive Stock Options shall be subject to
stockholder approval to the extent such stockholder approval is required
pursuant to Section 422 of the Internal Revenue Code and (ii) no such action
may be taken without the consent of the Participant to whom any Award shall
theretofore have been granted, which adversely affects the rights of such
Participant concerning such Award, except as such termination or amendment of
the Plan is required by statute, or rules and regulations promulgated
thereunder.
B. Automatic Termination. This Plan shall terminate on [ ], 2007. Awards
may be granted under this Plan at any time and from time to time prior to the
termination of the Plan. Any Award outstanding at the time the Plan is
terminated shall remain in effect until said Award is exercised or expires.
C-I-10
<PAGE>
ANNEX C-II
CHOICE HOTELS FRANCHISING, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
SECTION ONE. PURPOSES.
The 1997 Employee Stock Purchase Plan of Choice Hotels Franchising, Inc.
(the "Plan") is intended to provide a method whereby employees of Choice
Hotels Franchising, Inc. and its Subsidiaries (hereinafter referred to, unless
the context otherwise requires, as the "Company") will have an opportunity to
acquire a proprietary interest in the Company through the purchase of shares
of Common Stock. Such stock ownership induces such employees to continue in
the employ of the Company. The Plan also enables the Company to attract and
retain such employees. It is the intention of the Company to have the Plan
qualify as an "employee stock purchase plan" under Section 423 of the Code.
The provisions of the Plan shall, accordingly, be construed as to extend and
limit participation in a manner consistent with the requirements of that
section of the Code.
SECTION TWO. DEFINITIONS.
(a) AGENT. The term "Agent" shall have the meaning set forth in Section 13
hereof.
(b) BOARD OF DIRECTORS. The term "Board of Directors" shall mean the Board
of Directors of the Company or any individual or committee to which the Board
of Directors has delegated authority to act with respect to a specific
activity.
(c) CODE. The term "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(d) COMMON STOCK. The term "Common Stock" shall mean the $1.00 par value
Common Stock of the Company.
(e) COMPANY. The term "Company" shall mean Choice Hotels Franchising, Inc.,
a Delaware corporation.
(f) COMPENSATION. The term "Compensation" shall mean basic cash
compensation, before any payroll deductions for taxes or any other purposes,
including regular commissions paid by the Company or a Subsidiary to a
Participant in respect of the service of such Participant to the Company or a
Subsidiary during an Offering Period increased by any amounts with respect to
which the Participant has elected to defer or reduce remuneration for federal
income tax purposes (i) under the Choice Hotels Franchising, Inc. Retirement
Savings and Investment Plan, (ii) under the Choice Hotels Franchising, Inc.
Nonqualified Retirement Savings and Investment Plan, or (iii) under any
"cafeteria plan" (as described in Section 125 of the Code) maintained by the
Company or a Subsidiary. Compensation shall not include any amounts paid to
the Participant as (i) bonuses, (ii) overtime pay, (iii) any amounts paid
during that Offering Period on account of the Participant under any other
employee pension benefit plan (as defined in Section 3(2) of ERISA), and (iv)
except as otherwise provided in the preceding sentence, any amounts which are
not includible in the income of the Participant for federal income tax
purposes.
(g) CONTINUOUS SERVICE. The term "Continuous Service" as of any date shall
mean the period determined by the Company, on a uniform basis for employees
similarly situated, to represent the then unbroken period of service of an
employee as an employee of the Company or of a Subsidiary designed by the
Board of Directors to participate in the Plan; provided, however, that in the
case of such a Subsidiary, Continuous Service shall not include service prior
to the date of its affiliation with the Company, unless the Board of Directors
otherwise provides for recognition of such service. A break in Continuous
Service shall be deemed to have occurred whenever an employee voluntarily or
involuntarily ceases to be an employee. The transfer by an employee from one
corporation to another corporation participating in the Plan shall not affect
the Continuous Service of the employee.
C-II-1
<PAGE>
(h) DESIGNATED SUBSIDIARY. The term "Designated Subsidiary" shall mean a
Subsidiary designated by the Board of Directors to participate in the Plan.
(i) ERISA. The term "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
(j) MARKET PRICE. The term "Market Price" shall mean the price at which the
Agent purchases Common Stock in accordance with Section 13 hereof.
(k) NOMINEE. The term "Nominee" shall have the meaning as set forth in
Section 7 hereof.
(l) OFFERING DATE. The term "Offering Date" shall mean the first day of each
January, April, July and October, commencing [ ], 1997.
(m) OFFERING PERIOD. The term "Offering Period" shall mean a three-month
period commencing with an Offering Date and ending with the following Purchase
Date.
(n) OPTION. The term "Option" shall mean the right of a Participant to
acquire Common Stock pursuant to the provisions of the Plan.
(o) PARTICIPANT. The term "Participant" shall mean an eligible employee who
has authorized payroll deductions for the purchase of Common Stock under the
Plan in accordance with Section 4 hereof.
(p) PURCHASE DATE. The term "Purchase Date" shall mean the last trading day
of each March, June, September, and December, commencing [ ], 1997 or if a
pay period ends on the last day of a calendar quarter, the next trading day.
(q) RETIREMENT. The term "Retirement" shall mean termination of employment
of a Participant on or after the sixty-fifth birthday of the Participant.
(r) SUBSIDIARY. The term "Subsidiary" shall mean a Subsidiary corporation of
the Company as defined by Section 424(f) of the Code.
(s) Wherever appropriate, words used in this Plan in the singular may mean
the plural, the plural may mean the singular and the masculine may mean the
feminine.
SECTION THREE. ELIGIBILITY.
All employees of the Company, or Designated Subsidiaries of the Company, who
shall have completed one year of Continuous Service as of any Offering Date,
shall be eligible to participate in the Plan, provided that (i) no employee
shall be eligible who, immediately after any Option is granted, owns stock
possessing 5% or more of the total combined voting power or value of all
classes of stock of the Company or of any Subsidiary of the Company (applying
the rules of Section 424(d) of the Code in determining stock ownership), (ii)
no Director of the Company or of any Subsidiary, who is not an officer or
other employee of any thereof, shall participate in the Plan and (iii) no
employee shall be eligible whose customary employment is 20 hours or less per
week or whose customary employment is for not more than five months in any
calendar year.
SECTION FOUR. METHOD OF PURCHASE.
(a) On each Offering Date, each Participant shall be deemed to have been
granted the right to purchase such number of shares of Common Stock as may be
purchased, as provided herein, by a sum equal to (i) the amount of the
Compensation of the Participant determined in accordance with the following
Section during an Offering Period and (ii) the amount of the Participant's
share of the contribution of the Company during such Offering Period.
C-II-2
<PAGE>
An eligible employee shall become a Participant in the Plan by authorizing
payroll deductions for the purchase of Common Stock under the Plan prior to an
Offering Date with instructions for the purchase of Common Stock under the
Plan. At the time a Participant files his or her authorization, the
Participant shall elect to have deductions made from his or her pay on each
payday during the time he or she is a Participant at a rate not less than 2%
and not in excess of 10% in whole percentages of his or her Compensation. All
payroll deductions made for a Participant shall be credited to his or her
account under the Plan. A Participant may not make any separate cash payment
into such account. No interest will be paid on funds in the account of a
Participant.
A Participant shall be deemed to have continued his or her most recent
election to participate in the Plan for the next Offering Period unless he or
she notifies the Company on or before the twentieth day of the month preceding
the beginning of the next Offering Period that he or she elects not to
participate in the Plan for the next Offering Period. Such notice may not be
revoked. Similarly, a Participant may elect to increase or decrease the amount
of his or her payroll deduction on or before the twentieth day of the month
preceding the beginning of the next Offering Period, such increase or decrease
to be effective at the beginning of the next Offering Period.
On or before each Purchase Date, the Company shall contribute to the Agent
an amount equal to ten-ninths (10/9ths) of all contributions of the
Participants for such Offering Period (so as to have the effect of the Company
contributing ten percent (10%) of the purchase price of the Common Stock). The
Agent shall cause all the proceeds received from contributions of the
Participant and the contribution of the Company to be applied to the open
market purchase of Common Stock. The account of each Participant shall be
credited with the number of shares of Common Stock equal to the sum of the
contributions of the Participant and the share of the Participant of the
contribution of the Company applied by the Agent to the purchase of Common
Stock divided by the average price per share of Common Stock purchased by the
Agent. Unless the Company otherwise directs, the Agent may, but shall not be
obligated to allocate fractional shares of Common Stock for any Participant or
purchase shares of Common Stock in odd lots. Upon termination of an account,
any fractional shares in the Participant's account will be sold, and the
proceeds therefrom shall be delivered to such Participant. In the event
fractional shares are not allocated to the accounts of Participants under the
Plan, any accumulated payroll deductions which would have been used to
purchase fractional shares shall remain in the accounts of Participants. No
interest will be paid on such funds in accounts of Participants and shall be
deemed to be a payroll deduction of the next Offering Period.
(b) No Participant shall have the right to purchase Common Stock under the
Plan at a rate of more than $25,000 in value thereof in any calendar year,
such value to be based on the fair market value per share of the Common Stock
as of the Offering Date on which a Participant becomes eligible to purchase
Common Stock in such year under the terms of the Plan.
(c) A Participant may not increase or reduce the amount of his or her
payroll deduction during an Offering Period, provided, however, that a
Participant may reduce the amount of his or her payroll deduction to zero at
any time during the Offering Period in which case the employee may not
participate again in the Plan until the following Offering Period. A
Participant shall be deemed to have elected to purchase all of the shares
which his or her authorized payroll deductions and share of the contribution
of the Company would purchase on a Purchase Date.
(d) If at any time the number of shares as to which Options have been
granted shall exceed the remaining number of shares authorized for purchase
under the Plan, the number of shares which may be purchased by each
Participant shall be reduced proportionately.
(e) At any time prior to a Purchase Date the Board of Directors may
terminate the Plan without any obligation whatsoever to the Participants,
other than to refund to each Participant, without interest, any sum
accumulated for him or her by payroll deductions.
C-II-3
<PAGE>
SECTION FIVE. WITHDRAWALS.
A Participant may withdraw funds in his or her account under the Plan only
by withdrawal from the Plan; in the event of the withdrawal of the
Participant, he or she shall not be eligible to participate in the Plan until
the next Offering Date.
SECTION SIX. TERMINATION OF EMPLOYMENT.
Upon termination of the employment of a Participant for any reason,
excluding death while in the employ of the Company or a Designated Subsidiary
or Retirement, the Common Stock and/or cash credited to his or her account and
not used to purchase shares will be returned to the Participant within 60 days
after the end of the then current Offering Period or as soon as
administratively practicable thereafter. As an alternative to a distribution
of Common Stock, a Participant may request that the Agent sell the Common
Stock in the account of a Participant and forward the net proceeds to such
person or persons.
Upon termination of the employment of a Participant because of (i) death, or
(ii) Retirement, his or her beneficiary (as defined in Section 9), or the
Participant, as the case may be, shall have the right to elect, by written
notice given to the Secretary of the Company prior to the expiration of the
period of 30 days commencing with the date of the death of the Participant, or
Retirement of the Participant, as the case may be, either
(i) to withdraw all of the payroll deductions credited to the account of
the Participant under the Plan or
(ii) to exercise the Option of the Participant on the Purchase Date next
following the date of the death of the Participant or Retirement of the
Participant, as the case may be, for the purchase of the number of full
shares of Common Stock which the accumulated payroll deductions in the
account of the Participant at the date of the death of the Participant or
Retirement of the Participant, as the case may be, and the proportionate
share of the contribution of the Company, will purchase at the applicable
Purchase Price, and any excess in such account will be returned to said
beneficiary or Participant, as the case may be.
In the event that no such written notice of election shall be duly received
by the office of the Secretary of the Company, the beneficiary or Participant,
as the case may be, shall automatically be deemed to have elected to withdraw
the payroll deductions credited to the account of the Participant at the date
of the death or Retirement of the Participant, as the case may be, and the
same will be paid promptly to the said beneficiary or Participant after the
end of the current Offering Period.
In addition, upon termination of the employment of a Participant because of
(i) death, or (ii) Retirement, the Common Stock and/or cash (except as
otherwise provided in this Section Six) shall be distributed to the
Participant or to the person or persons entitled thereto under Section Nine
within sixty (60) days after the end of the current Offering Period or as soon
as administratively practicable thereafter. As an alternative to a
distribution of Common Stock, a Participant or such person or persons entitled
to receive the account of a Participant under Section Nine may request that
the Agent sell the Common Stock in the account of a Participant and forward
the net proceeds to the Participant or such person or persons.
SECTION SEVEN. STOCK
Subject to adjustment upon changes in capitalization of the Company as
provided in Section 10, the maximum number of shares of Common Stock which
shall be made available for purchase under the Plan is 1,000,000 shares.
Shares purchased pursuant to an Option will initially be registered in the
name of a Nominee designated by the Company, as custodian for the account of
the Participant entitled thereto. Stock certificates will not be issued to
Participants for shares held in the name of the Nominee, but all rights
accruing to an owner of record of such shares (including voting rights) will
belong to the Participant for whose account such shares are held.
Notwithstanding the foregoing, each Participant may elect to have some or all
of the full shares of Common Stock previously purchased and registered in the
name of the Nominee on his or her behalf registered in the name of such
Participant. Written notice of such an election must be given by the
Participant to the Nominee,
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<PAGE>
specifying the number of full shares of Common Stock to be registered in the
name of such Participant. The specified number of shares of Common Stock will
be transferred to and registered in the name of the notifying Participant as
soon as administratively practicable.
The Board of Directors may, in its discretion, require as a condition to the
grant of the right to purchase hereunder that the shares of Common Stock
reserved for issuance upon the exercise of the Option shall have been duly
authorized for trading on a national securities exchange and that either
(i) a Registration Statement under the Securities Act of 1933, as amended,
with respect to said shares shall be effective; or
(ii) the Participant shall have represented in form and substance
satisfactory to the Company that it is the intention of the Participant to
purchase such shares for investment.
SECTION EIGHT. NONASSIGNABILITY.
Neither payroll deductions credited to the account of a Participant nor any
rights with regard to the exercise of an Option or to receive Common Stock
under the Plan may be assigned, transferred, pledged or otherwise disposed of
in any way by the Participant other than by will or the laws of descent and
distribution. Any such attempted assignment, transfer, pledge, or other
disposition shall be without effect, except that the Company may treat such
act as an election to withdraw funds in accordance with Section 5.
SECTION NINE. DESIGNATION OF BENEFICIARY.
A Participant may file a written designation of a beneficiary who is to
receive any shares of Common Stock and/or cash in the event of the death of
the Participant prior to the delivery of such shares or cash to Participant.
Such designation of beneficiary may be changed by the Participant at any time
by written notice to the Secretary of the Company. Within 30 days after the
death of the Participant, the beneficiary may, as provided in Section 6, elect
to exercise the Option of the Participant when it becomes exercisable on the
Purchase Date next following the date of the death of the Participant. Upon
the death of a Participant and upon receipt by the Company of proof of the
identity and survivorship of a beneficiary validly designated by the
Participant under the Plan, and notice of election of the beneficiary to
exercise the Option, the Company shall deliver such Common Stock and/or cash
to such beneficiary. In the event of the death of a Participant and in the
absence of a beneficiary validly designated under the Plan who is living at
the time of such death of a Participant, the Company shall deliver such Common
Stock and/or cash to the executor or administrator of the estate of the
Participant within 60 days after the end of the current Offering Period, or as
soon as administratively practicable thereafter, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the
Company, in its discretion, may deliver such Common Stock and/or cash to the
spouse or to any one or more dependents of the Participant as the Company may
designate. No beneficiary shall, prior to the death of the Participant by whom
he or she has been designated, acquire any interest in the Common Stock or
cash credited to the Participant under the Plan.
SECTION TEN. RECAPITALIZATION.
In the event any reorganization, merger, consolidation, recapitalization,
liquidation, reclassification, stock split, stock dividend, combination of
shares, rights offering, or extraordinary dividend or divestiture (including a
spin-off), or any other change in the capital structure or shares of stock of
the Company, the Board of Directors shall make adjustments, determine by the
Board of Directors in its discretion to be appropriate, as to the number and
kind of securities subject to this Plan and specified in Section Seven of this
Plan and as to the number and kind of securities covered by each outstanding
option, and, where applicable, the price per share thereunder.
SECTION ELEVEN. RIGHTS AS A STOCKHOLDER.
An employee shall have no rights as a stockholder with respect to any shares
offered hereunder until completion of payment therefor. Participants will not
be issued stock certificates unless requested. All Common Stock purchased
under the Plan during an Offering Period will be held by the Nominee for at
least two years
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<PAGE>
from the Offering Date of the Offering Period. Common Stock may be sold during
this two-year period, but may not be transferred to another agent or nominee.
Notwithstanding the foregoing, a Participant must sell a minimum of 50 shares
of Common Stock each time he or she elects to sell Common Stock or such fewer
whole shares of Common Stock in the account of the Participant upon
termination of employment.
SECTION TWELVE. STATUS OF PLAN FUNDS.
All amounts held by the Company under the Plan shall be added to the general
funds of the Company and shall be used for such purposes as the Company shall
from time to time determine. The Company shall not be obligated to segregate
such payroll deductions.
SECTION THIRTEEN. ADMINISTRATION.
The Plan shall be administered by the Board of Directors. The interpretation
and construction of any provision of the Plan and the adoption of rules and
regulations for administering the Plan shall be made by the Board of
Directors. Determinations made by the Board of Directors with respect to any
matter or provision contained in the Plan shall be final, conclusive and
binding upon the Company and upon all Participants, their heirs or legal
representatives. Any rule or regulation adopted by the Board of Directors
shall remain in full force and effect unless and until altered, amended, or
repealed by the Board of Directors.
The Board of Directors may delegate to a committee any authority of the
Board of Directors under this Plan.
An Agent may be appointed by the Board of Directors to perform the functions
and have the responsibilities assigned to the Agent in this Section 13 with
respect to the purchase of Common Stock. The Board of Directors shall have the
right to change the Agent at any time.
Notwithstanding any other provision to the contrary contained herein, the
Agent shall have all authority to determine the times of such purchases, the
prices at which such purchases are made, the manner of such purchases and the
selection of brokers or dealers (which may include the Agent) to make such
purchases. If Common Stock is purchased at varying Market Prices, an average
price will be allocated to the account of each Participant.
All costs and expenses incurred in administering the Plan shall be paid by
the Company, excluding (i) costs associated with requests for the issuing of
stock certificates to Participants or to the person or persons entitled to
receive the same under Section 9 hereof, (ii) the costs of the sale of Common
Stock and (iii) the costs associated with a Participant terminating or
withdrawing from the Plan.
SECTION FOURTEEN. AMENDMENT OR TERMINATION.
Subject to Section 4(e), the Board of Directors may at any time terminate or
amend the Plan, except any such action shall be subject to stockholder
approval to the extent such stockholder approval is required pursuant to
Section 423 of the Internal Revenue Code.
SECTION FIFTEEN. NOTICES.
All notices or other communications by a Participant to the Company under or
in connection with the Plan shall be deemed to have been given when received
by the Secretary of the Company.
SECTION SIXTEEN. APPROVAL OF STOCKHOLDERS
The effectiveness of this Plan is subject to its approval by the
stockholders of the Company within 12 months after the date it is adopted by
the Board of Directors.
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SECTION SEVENTEEN. REGISTRATION AND QUALIFICATION OF THE PLAN UNDER APPLICABLE
SECURITIES LAWS.
No Option shall be granted under the Plan until such time as the Company has
qualified or registered the shares which are subject to the Option under the
applicable state and federal securities laws to the extent required by such
laws.
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<PAGE>
ANNEX D
AMENDMENTS TO
RESTATED CERTIFICATE OF INCORPORATION
OF
CHOICE HOTELS INTERNATIONAL, INC.
Paragraph 1 of Article THIRD of the Certificate of Incorporation shall be
amended to read as follows:
1. The name of the corporation is SUNBURST HOSPITALITY CORPORATION (the
"Corporation").
Paragraph 4 of Article Third of the Certificate of Incorporation shall be
amended to read as follows:
4. The total number of shares of capital stock of all classifications
which the Corporation shall have authority to issue is Sixty-Five Million
(65,000,000), of which Sixty Million (60,000,000) 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. Upon the date of the effectiveness of the amendment of
this Article, (the "Effective Date"), each three (3) shares of Common Stock
issued and outstanding and held in the treasury of the Corporation shall be
converted into one (1) share of Common Stock. No fractional shares shall be
issued pursuant to such conversion, and as of the effective date of these
Amendments, stockholders otherwise entitled to receive fractions of shares
shall have no further interest as a stockholder in respect of such
fractions of shares. The Corporation will pay in cash the fair value, as
determined by the Board of Directors, of fractions of shares which
otherwise would result from such conversion. Each certificate for Common
Stock shall thereupon and thereafter evidence such number of shares of
Common Stock, and/or the right to receive cash into which such shares have
been converted, and may be surrendered to the Corporation for cancellation
in exchange for new certificates representing such number of shares and/or
cash.
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 Twenty- Five Million (25,000,000) 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;
(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
D-1
<PAGE>
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.
D-2
<PAGE>
ANNEX E-I
CHOICE HOTELS INTERNATIONAL, INC.
1996 LONG-TERM INCENTIVE PLAN
SECTION ONE
Designation and Purpose of Plan
The purpose of the Choice Hotels International, Inc. 1996 Long-Term
Incentive Plan (the "Plan") is to increase the ownership of Company Stock by
those officers, professional staff and other key employees who are mainly
responsible for the continued growth and development and financial success of
the Company and its subsidiaries. Such stock ownership gives such employees a
proprietary interest in the Company which induces them to continue in its
employ. The Plan also enables the Company to attract and retain such employees
and reward them for the continued profitable performance of Choice Hotels
International, Inc.
SECTION TWO
Definitions
The following definitions are applicable herein:
A. "Award"--Individually or collectively, Options, Stock Appreciation
Rights, Performance Shares or Restricted Stock granted hereunder.
B. "Award Period"--the period of time during which a Stock Appreciation
Right which has not been granted pursuant to an Option may be exercised. The
Award Period shall be set forth in the document issuing the Stock Appreciation
Right to the selected Eligible Employee.
C. "Board"--the Board of Directors of the Company.
D. "Book Value"--the book value of a share of Stock determined in accordance
with the Company's regular accounting practices as of the last business day of
the month immediately preceding the month in which a Stock Appreciation Right
is exercised as provided in Section Nine D.
E. "Code"--the Internal Revenue Code of 1986, as amended. Reference in the
Plan to any section of the Code shall be deemed to include any amendments or
successor provisions to such section and any regulations promulgated
thereunder.
F. "Committee"--the Key Executive Stock Option Plan Committee appointed to
administer the Plan pursuant to Section Four. "If two or more Key Executive
Stock Option Plan Committees are appointed with the power to grant Awards to
different classes of employees, references in this Plan to the "Committee'
shall refer to the Key Executive Stock Option Plan Committee administering the
portion of the Plan pertaining to Awards to the applicable class of
employees."
G. "Company"--Choice Hotels International, Inc., including any present or
future "subsidiary corporation" as such term is defined in Section 424(f) of
the 1986 Internal Revenue Code, as amended.
H. "Covered Employee"--an individual described in Section 162(m)(3) of the
Code.
I. "Date of Grant"--the date on which the granting of an Award is authorized
by the Committee or such later date as may be specified by the Committee in
such authorization.
J. "Eligible Employee"--any person employed by the Company or a Subsidiary
on a regularly scheduled basis who satisfies all of the requirements of
Section Six.
E-I-1
<PAGE>
K. "Exercise Period"--the period or periods during which a Stock
Appreciation Right is exercisable as described in Section Nine B.
L. "Fair Market Value"--the fair market value of the Stock as determined in
accordance with Section Eight D.
M. "Incentive Stock Option"--an incentive stock option within the meaning of
Section 422 of the Code.
N. "Option" or "Stock Option"--either a nonqualified stock option or an
Incentive Stock Option granted under Section Eight. It also means any Option
which remains after a Participant has exercised his Option with respect to
part of the shares covered by a Stock Option Agreement as described in Section
Eight B.
O. "Option Period" or "Option Periods"--the period or periods during which
an Option is exercisable as described in Section Eight E.
P. "Option Price"--the price, expressed on a per share basis, for which the
Company Stock can be acquired by the holder of an Option pursuant to the
exercise of such Option.
Q. "Participant"--an Eligible Employee of the Company or a Subsidiary who
has been granted an Option, a Stock Appreciation Right, a Performance Share
Award or a Restricted Stock Award under this Plan.
R. "Performance Share"--an Award granted under Section Ten.
S. "Restricted Stock"--an Award granted under Section Seven.
T. "Stock" and "Company Stock"--the common stock of the Company.
U. "Stock Appreciation Right"--an Award granted under Section Nine.
V. "Subsidiary"--any corporation of which fifty percent (50%) or more of its
outstanding voting stock or voting power is beneficially owned, directly or
indirectly, by the Company.
W. "Ten Percent Shareholder"--a Participant who, at the Date of Grant, owns
directly or indirectly (within the meaning of Section 424(d) of the Internal
Revenue Code) stock possessing more then ten percent (10%) of the total
combined voting power of all classes of stock of the Company or a subsidiary
thereof.
X. Wherever appropriate, words used in this Plan in the singular may mean
the plural, the plural may mean the singular and the masculine may mean the
feminine.
SECTION THREE
Effective Date, Duration and Stockholder Approval
A. Effective Date and Stockholder Approval. Subject to the approval of the
Plan by a majority of the outstanding shares of Stock, the Plan shall be
effective as of November 1, 1996.
B. Period for Grant of Awards. Awards may be made as provided herein for a
period of ten (10) years after November 1, 1996.
E-I-2
<PAGE>
SECTION FOUR
Administration
A. Appointment of Committee. The Board of Directors shall appoint one or
more Key Executive Stock Option Plan Committees which shall consist of not
less than two (2) members of such Board of Directors and which members shall
be Non-Employee Directors as defined in Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (or such greater number of members which may
be required by said Rule 16b-3). In addition, such Board of Directors shall
designate a member of the Committee to act as Chairman of the Committee, and
such Board of Directors may remove any member of the Committee at any time and
appoint any director to fill any vacancy on the Committee.
B. Committee Meetings. The Committee shall hold its meetings at such times
and places as specified by the Committee Chairman. A majority of the Committee
shall constitute a quorum. All actions of the Committee shall be taken by all
of the members of the meeting duly called by its Chairman; provided, however,
any action taken by a written document signed by a majority of the members of
the Committee shall be as effective as action taken by the Committee at a
meeting duly called and held.
C. Committee Powers. Subject to the provisions of this Plan, the Committee
shall have full authority in its discretion to (i) designate the Participants
to whom Awards shall be granted, (ii) determine the number of shares to be
made available under each such Award, (iii) determine the period or periods in
which the Participant may exercise such Award, (iv) determine the date when
such Award expires, (v) determine the price for Stock under such Award, and
(vi) determine the grounds of forfeiture of an Award. The Committee shall have
all powers necessary to administer the Plan in accordance with its terms,
including the power to interpret this Plan and resolve all questions arising
thereunder. The Committee may prescribe such rules and regulations for
administering this Plan as the Committee deems appropriate.
SECTION FIVE
Grant of Awards
Limitation of Number of Shares Subject to Award
The Committee may, from time to time, grant Awards to one or more Eligible
Employees, provided that (i) subject to any adjustment pursuant to Section
Eleven, the aggregate number of shares of Stock subject to Stock Options,
Stock Appreciation Rights, Performance Share Awards or Restricted Stock Awards
under this Plan may not exceed 7,100,000 shares; (ii) to the extent that a
Stock Option, Stock Appreciation Right, Performance Share Award or Restricted
Stock Award lapses or the rights of the Participant to whom it was granted
terminate, expire or are cancelled for any other reason, in whole or in part,
shares of Stock (or remaining shares) subject to such Award shall again be
available for the grant of an Award under the Plan; and (iii) Shares delivered
by the Company under the Plan may be authorized and unissued Stock, Stock held
in the treasury of the Company or Stock purchased on the open market
(including private purchases) in accordance with applicable securities laws.
In determining the size of Awards, the Committee shall take into account the
responsibility level, performance, potential, and cash compensation level of a
Participant, and the Fair Market Value of the Stock at the time of Awards, as
well as such other considerations it deems appropriate.
SECTION SIX
Eligibility
Key employees of the Company and its Subsidiaries (including employees who
are members of the Board, but excluding directors who are not employees) who,
in the opinion of the Committee, are mainly responsible
E-I-3
<PAGE>
for the continued growth and development and financial success of the business
of the Company or one or more of its Subsidiaries shall be eligible to be
granted Awards under the Plan. Subject to the provisions of the Plan, the
Committee may from time to time select from such eligible persons those to
whom Awards shall be granted and determine the nature and amount of each
Award. No employee of the Company or its Subsidiaries shall have any right to
be granted an Award under this Plan. A member of the Committee shall not be
eligible for any Award hereunder.
Notwithstanding any provision to the contrary contained herein, Options
shall be granted under this Plan to persons, including without limitation,
employees of Manor Care, Inc., its subsidiaries, and affiliated companies in
substitution for prior Options under plans of Manor Care, Inc. in accordance
with the terms of the Employee Benefits and other Employee Matters Allocation
Agreement between Manor Care, Inc. and the Company.
SECTION SEVEN
Restricted Stock Awards
A. Grants of Shares of Restricted Stock. An Award made pursuant to this
Section Seven shall be granted in the form of shares of Stock, restricted as
provided in this Section Seven. Shares of the Restricted Stock shall be issued
to the Participant without the payment of consideration by the Participant.
The shares of Restricted Stock shall be issued in the name of the Participant
and shall bear a restrictive legend prohibiting sale, transfer, pledge or
hypothecation of the shares of Restricted Stock until the expiration of the
restriction period.
The Committee may also impose such other restrictions and conditions on the
shares of Restricted Stock as it deems appropriate.
B. Restriction Period. At the time a Restricted Stock Award is made, the
Committee may establish a restriction period applicable to such Award which
shall not be more than ten (10) years. Each Restricted Stock Award may have a
different restriction period, at the discretion of the Committee. In addition
to or in lieu of a restriction period, the Committee may establish a
performance goal which must be achieved as a condition to the retention of the
Restricted Stock. The performance goal may be based on the attainment of
specified types of performance measurement criteria, which may differ as to
various Participants or classes or categories of Participants. Such criteria
may include, without limitation, the attainment of certain performance levels
by the individual Participant, the Company, a department or division of the
Company and/or a group or class of participants. Any such performance goals,
together with the ranges of Restricted Stock Awards for which the Participants
may be eligible shall be set from time to time by the Committee and shall be
timely communicated to the Eligible Employees in advance of the commencement
of the performance of services to which such performance goals relate. The
total number of shares of Restricted Stock which may be granted to any single
Covered Employee under this Plan during any calendar year shall be limited to
100,000.
C. Forfeiture or Payout of Award. In the event a Participant ceases
employment during a restriction period, or in the event performance goals
attributable to a Restricted Stock Award are not achieved, subject to the
terms of each particular Restricted Stock Award, and subject to discretionary
action by the Committee as set forth below in Section Thirteen, a Restricted
Stock Award is subject to forfeiture of the shares of stock which had not
previously been removed from restriction under the terms of the Award.
Any shares of Restricted Stock which are forfeited will be transferred to
the Company.
Upon completion of the restriction period and satisfaction of any
performance-goal criteria, all restrictions upon the Award will expire and new
certificates representing the Award will be issued without the restrictive
legend described in Section Seven A. As a condition precedent to receipt of
the new certificates, the Participant (or the designated beneficiary or
personal representative of the Participant) will agree to make payment to the
Company in the amount of any taxes, payable by the Participant, which are
required to be withheld with respect to such shares of Stock.
E-I-4
<PAGE>
SECTION EIGHT
Stock Options
A. Grant of Option. One or more Options may be granted to any Eligible
Employee. Upon the grant of an Option to an Employee, the Committee shall
specify whether the Option is intended to constitute a non-qualified stock
option or an Incentive Stock Option. The total number of shares of Stock
subject to Options which may be granted to any single Covered Employee under
this Plan during any calendar year shall be limited to 100,000.
B. Stock Option Agreement. Each Option granted under the Plan shall be
evidenced by a written "Stock Option Agreement" between the Company and the
Participant containing such terms and conditions as the Committee determines,
including, without limitation, provisions to qualify Incentive Stock Options
as such under Section 422 of the Code. Such agreements shall incorporate the
provisions of this Plan by reference. The date of granting an Option is the
date specified in the written Stock Option Agreement which is signed by the
Participant and the Company.
C. Determination of Option Price. The Option price for Stock shall be not
less than 100% of the fair market value of the Stock on the date of grant.
Notwithstanding the foregoing, in the case of an Option which is designed to
qualify as an Incentive Stock Option (as defined in Section 422 of the Code)
which is granted to a Ten Percent Shareholder, the Option Price shall not be
less than 110% of such fair market value.
D. Determination of Fair Market Value. The fair market value of the Stock on
the date of granting an Option shall be the mean of the high and low prices at
which the Stock was sold on the market on such date. In the event no such
sales of Stock occurred on such date, the fair market value of the Stock shall
be determined by the Committee in accordance with applicable Regulations of
the Internal Revenue Service.
E. Term of Option. The term of an Option may vary within the Committee's
discretion; provided, however, that the term of an Option shall not exceed ten
(10) years from the date of granting the Option to the Participant, and, to
this end, all Options granted pursuant to this Plan must provide that each
such Option cannot be exercised after the expiration of ten (10) years from
the date each such Option is granted. Notwithstanding the foregoing, in the
case of any Option which is designed to qualify as an Incentive Stock Option
(as defined in Section 422 of the Code) which is granted to a Ten Percent
Shareholder, the term of such Option may not exceed five (5) years from the
date of grant of such Option.
F. Limitation on Exercise of Option. The Committee may limit an Option by
restricting its exercise in whole or in part for specified periods.
G. Method of Exercising an Option. Subject to the terms of a particular
Option, a Participant may exercise it in whole or in part by written notice to
the Secretary of the Company stating in such written notice the number of
shares of Stock such Participant elects to purchase under his Option.
H. No Obligation to Exercise Option. A Participant is under no obligation to
exercise an Option or any part thereof.
I. Payment for Option Stock. Stock purchased pursuant to an Option shall be
paid in full at the time of purchase. Payment may be made (a) in cash, (b)
with the approval of the Committee, by delivery to the Company of shares of
Stock having an aggregate fair market value equal to the exercise price, or
(c) a combination of (a) and (b). Payment may also be made, in the discretion
of the Committee, by delivery (including by facsimile transmission) to the
Company or its designated agent of an executed irrevocable Option exercise
form together with irrevocable instructions to a broker-dealer to sell (or
margin) a sufficient portion of the shares and deliver the sale (or margin
loan) proceeds directly to the Company to pay for the exercise price. Upon
receipt of payment and subject to paragraph J of this Section Eight, the
Company shall, without transfer or issue tax to the Participant or other
person entitled to exercise the Option, deliver to the Participant (or other
person entitled to exercise the Option) a certificate or certificates for such
shares.
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J. Delivery of Stock to Participant. The Company shall undertake and follow
all necessary procedures to make prompt delivery of the number of shares of
Stock which the Participant elects to purchase upon exercise of an Option
granted under this Plan. Such delivery, however, may be postponed, at the sole
discretion of the Company, to enable the Company to comply with any applicable
procedures, regulations or listing requirements of any government agency,
stock exchange or regulatory authority.
K. Failure to Accept Delivery of Stock. If a Participant refuses to pay for
Stock which he has elected to purchase under his Option, in accordance with
the terms of payment, which had previously been agreed upon, his Option shall
thereupon, at the sole discretion of the Committee, terminate, and such funds
previously paid for unissued Stock shall be refunded. Stock which has been
previously issued to the Participant and been fully paid for shall remain the
property of the Participant and shall be unaffected by such termination.
L. Non-Transferability of Options. During the lifetime of a Participant, an
Incentive Stock Option granted to him may be exercised only by him. It may not
be sold, assigned, pledged or otherwise transferred except by will or by the
laws of descent and distribution. In the case of Options which are not
Incentive Stock Options, the Committee may impose such restrictions on
transferability, if any, as it may in its sole discretion determine.
M. Purchase for Investment
(a) Written Agreement by Participants. Unless a registration statement
under the Securities Act of 1933 is then in effect with respect to the
Stock a Participant receives upon exercise of his Option, a Participant
shall acquire the Stock he receives upon exercise of his Option for
investment and not for resale or distribution and he shall furnish the
Company with a written statement to that effect when he exercises his
Option and a reference to such investment warranty shall be inscribed on
the Stock certificate(s).
(b) Registration Requirement. Each Option shall be subject to the
requirement that, if at any time the Board determines that the listing,
registration or qualification of the shares subject to the Option upon any
securities exchange or under any state or Federal law is necessary or
desirable as a condition of, or in connection with, the issuance of shares
thereunder, the Option may not be exercised in whole or in part unless such
listing, registration or qualification shall have been effected or obtained
(and the same shall have been free of any conditions not acceptable to the
Board).
N. Special Limitations on Exercise of Incentive Stock Options. The aggregate
fair market value (determined at the time the Incentive Stock Option is
granted) of the Stock with respect to which any Incentive Stock Option is
first exercisable during any calendar year shall not exceed $100,000.
SECTION NINE
Stock Appreciation Rights
A. Grant of Stock Appreciation Rights. Stock Appreciation Rights may be
granted under the Plan in conjunction with an Option either at the time of
grant or by amendment or may be separately awarded. Stock Appreciation Rights
shall be subject to such terms and conditions not inconsistent with the Plan
as the Committee shall impose. However, the total number of Stock Appreciation
Rights which may be granted to a single Covered Employee under this Plan
during any calendar year shall be limited to 100,000.
B. Right to Exercise; Exercise Period. A Stock Appreciation Right issued
pursuant to an Option shall be exercisable to the extent the Option is
exercisable. A Stock Appreciation Right issued independent of an Option shall
be exercisable pursuant to such terms and conditions established in the grant.
C. Automatic Redemption of Unexercised Stock Appreciation Rights. If on the
last day of the Option Period, in the case of a Stock Appreciation Right
granted pursuant to an Option, or the specified Award Period, in the case of a
Stock Appreciation Right issued independent of an Option, the Participant has
not exercised
E-I-6
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such Stock Appreciation Right, then such Stock Appreciation Right shall be
automatically redeemed by the Company for an amount equal to the payment that
would otherwise have been made to the Participant if the Participant had
chosen to exercise the Stock Appreciation Right on the last day of the Option
Period or the specified Award Period, as the case may be.
D. Rights Upon Exercise. An exercisable Stock Appreciation Right granted
pursuant to an Option shall entitle the Participant to surrender unexercised
the Option or any portion thereof to which the Stock Appreciation Right is
attached, and to receive in exchange for the Stock Appreciation Right a
payment (in cash or Stock or a combination thereof as described below) equal
to the Fair Market Value of one share of Stock at the date of exercise minus
the Option Price times the number of shares called for by the Stock
Appreciation Right (or portion thereof) which is so exercised. With respect to
the issuance of Stock Appreciation Rights which are not granted pursuant to an
Option, the Committee shall specify upon the Date of the Grant of the Stock
Appreciation Right whether the Stock Appreciation Right is a "regular" Stock
Appreciation Right or a "book value" Stock Appreciation Right. Upon the
exercise of a regular Stock Appreciation Right, the Participant will receive a
payment equal to the Fair Market Value of one share of Stock at the date of
exercise minus the Fair Market Value of one share of Stock as of the Date of
Grant of the Stock Appreciation Right times the number of shares called for by
the Stock Appreciation Right (or portion thereof) which is so exercised. Upon
the exercise of a book value Stock Appreciation Right, the Participant will
receive a payment equal to the Book Value of one share of Stock at the date of
exercise minus the Book Value of one share of Stock as of the Date of the
Grant of the Stock Appreciation Right times the number of shares called for by
the Stock Appreciation Right (or portion thereof) which is so exercised.
The value of any Stock to be received upon exercise of a Stock Appreciation
Right shall be the Fair Market Value of the Stock on such date of exercise. To
the extent that a Stock Appreciation Right issued pursuant to an Option is
exercised, such Option shall be deemed to have been exercised, and shall not
be deemed to have lapsed.
E. Transferability. The Committee may impose such restrictions on
transferability of Stock Appreciation Rights, if any, as it may in its sole
discretion determine.
SECTION TEN
Performance Shares
A. Grant of Performance Share Units. Awards made pursuant to this Section
Ten shall be granted in the form of Performance Shares, subject to such terms
and conditions not inconsistent with the Plan as the Committee shall impose.
Performance Shares shall be issued to the Participant without the payment of
consideration by the Participant. Awards shall be based on the attainment of
specified types and combination of performance measurement criteria, which may
differ as to various Participants or classes or categories of Participants.
Such criteria may include, without limitation, the attainment of certain
performance levels by the individual Participant, the Company, a department or
division of the Company and/or a group or class of Participants. Such
criteria, together with the ranges of Performance Shares from which employees
may be eligible shall be set from time to time by the Committee and shall be
communicated to the Eligible Employees. The total number of Performance Shares
which may be granted to any single Covered Employee under this Plan during any
calendar year shall be limited to 100,000.
B. Performance Period. The measuring period to establish the performance
criteria set forth in a Performance Share Award shall be determined by the
Committee. A Performance Share Award may initially provide, or the Committee
may at any time thereafter, but no more frequently than once in any six (6)
month period, amend it to provide, for waiver or reduction of the measuring
period and, if appropriate, for adjustment of the performance criteria set
forth in the Performance Share Award, upon the occurrence of events determined
by the Committee in its sole discretion to justify such waiver, reduction or
adjustment.
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C. Form of Payment. Upon the completion of the applicable measuring period,
a determination shall be made by the Committee in accordance with the Award as
to the number of shares of Stock to be awarded to the Participant. The
appropriate number of shares of Stock shall thereupon be issued to the
Participant in accordance with the Award in satisfaction of such Performance
Share Award.
SECTION ELEVEN
Changes in Capital Structure or Shares
In the event any reorganization, merger, consolidation, recapitalization,
liquidation, reclassification, stock dividend, stock split, combination of
shares, rights offering, or extraordinary dividend or divestiture (including a
spin-off), or any other change in the capital structure or shares of the
Company, the Committee shall make adjustments, determined by the Committee in
its discretion to be appropriate, as to the number and kind of securities
subject to this Plan and specified in Section Five of this Plan and as to the
number and kind of securities covered by each outstanding Award and, where
applicable, the price per share thereunder; provided, however, that with
respect to Incentive Stock Options, such adjustments shall be made in
accordance with Section 424(h) of the Code unless the Committee determines
otherwise.
SECTION TWELVE
Corporate Reorganization or Dissolution
A. Discontinuation of the Plan. The Plan shall be discontinued in the event
of the dissolution or liquidation of the Company or in the event of a
Reorganization (as hereinafter defined) in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization and no plan or agreement respecting the Reorganization is
established which specifically provides for the continuation of the Plan and
the change, conversion, or exchange of the stock relating to existing Awards
under this Plan for securities of another corporation. Upon the dissolution of
the Plan in connection with an event described in this Paragraph A, all Awards
shall become fully vested and all outstanding Options and Stock Appreciation
Rights shall become immediately exercisable by the holder thereof. Any Options
or Stock Appreciation Rights granted under the Plan may be terminated as of a
date fixed by the Committee, provided that no less than fifteen (15) days
written notice of the date so fixed shall be given to each Participant and
each such Participant shall have the right during such period to exercise all
or any portion of such Options or Stock Appreciation Rights. Any Stock
Appreciation Rights not so exercised shall be redeemed.
B. Continuation of the Plan Upon a Reorganization. In the event of a
Reorganization (as hereinafter defined) (i) in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization, and (ii) with respect to which there is a reorganization
agreement which undertakes to continue the Plan and to provide for the change,
conversion or exchange of the Stock attributable to outstanding Awards for
securities of another corporation, then the Plan shall continue and the
Committee shall adjust the shares under such outstanding Awards (and shall
adjust the shares remaining under the Plan which are then to be available for
the grant of additional Awards under the Plan, if the reorganization agreement
makes specific provisions therefor), in a manner not inconsistent with the
provisions of the reorganization agreement and this Plan for the adjustment,
change, conversion or exchange of such Awards.
The term "Reorganization" as used in this Section Twelve shall mean any
statutory merger, statutory consolidation, sale of all or substantially all of
the assets of the Company, or sale, pursuant to an agreement with
E-I-8
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the Company, of securities of the Company pursuant to which the Company is or
becomes a wholly-owned subsidiary of another company after the effective date
of the Reorganization.
C. Adjustments and Determinations. Adjustments and determinations under this
Section Twelve shall be made by the Committee, whose decisions as to what
adjustments or determinations shall be made, and the extent thereof, shall be
final, binding, and conclusive.
SECTION THIRTEEN
Retirement and Disability
The Committee may, in its discretion, waive the forfeiture, termination, or
lapse of an Award in the event of retirement or disability of a Participant
(each as determined by the Committee, in its discretion). Exercise of such
discretion by the Committee in any individual case, however, shall not be
deemed to require, or to establish a precedent suggesting such exercise in any
other case.
SECTION FOURTEEN
Miscellaneous Provisions
A. Nontransferability. The Committee may impose such restrictions on the
transferability of an Award, if any, as it may in its sole discretion
determine.
B. No Employment Right. Neither this Plan nor any action taken hereunder
shall be construed as giving any right to be retained as an officer or
employee of the Company or any of its Subsidiaries.
C. Tax Withholding. Either the Company or a Subsidiary, as appropriate,
shall have the right to deduct from all Awards paid in cash any federal, state
or local taxes as it deems to be required by law to be withheld with respect
to such cash payments. In the case of Awards paid in Stock, the employee or
other person entitled to receiving such Stock shall be required to satisfy any
tax withholding obligations in connection with such Awards in any of the
following ways, as elected by such employee or other person: (i) by paying in
cash to the Company or a Subsidiary, as appropriate, the amount of any
federal, state or local taxes required to be withheld (as determined by the
Company or a Subsidiary, as appropriate), (ii) by having the Company retain a
sufficient number of shares of Stock otherwise payable under the Award to
cover any federal, state or local taxes required to be withheld (as determined
by the Company or a Subsidiary, as appropriate), provided, however, that
management shall assure that the amount of such stock withholding does not
cause the Company to incur additional compensation expense, or (iii) by a
combination of (i) and (ii). The number of shares of Stock to be retained for
this purpose shall be determined on the basis of the Fair Market Value of the
Stock on the date of exercise.
D. Fractional Shares. Any fractional shares concerning Awards shall be
eliminated at the time of payment by rounding down for fractions of less than
one-half and rounding up for fractions of equal to or more than one-half. No
cash settlements shall be made with respect to fractional shares eliminated by
rounding.
E. Government and Other Regulations. The obligation of the Company to make
payment of Awards in Stock or otherwise shall be subject to all applicable
laws, rules, and regulations, and to such approvals by any government agencies
as may be required. The Company shall be under no obligation to register under
the Securities Act of 1933, as amended ("Act"), any of the shares of Stock
issued, delivered or paid in settlement under the Plan. If Stock awarded under
the Plan may in certain circumstances be exempt from registration under the
Act, the Company may restrict its transfer in such manner as it deems
advisable to ensure such exempt status.
F. Severance. Subject to the provision of Paragraph B of this Section
Fourteen, in the event a Participant's employment with the Company terminates,
his rights under any Award which constitutes an Option or a Stock Appreciation
Right terminate one (1) month from the date of such termination of employment.
Such rights shall be exercisable only to the extent the Participant was
entitled to exercise such rights under the Award on the date of such
termination of employment.
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<PAGE>
G. Death. If a Participant dies prior to the full exercise of his Option
and/or Stock Appreciation Right, his Option to purchase Stock under such
Option and/or Stock Appreciation Right may be exercised to the extent, if any,
that Participant would be entitled to exercise it at the date of the death of
the Participant by the person to whom the Option and/or Stock Appreciation
Right shall pass by will or by the laws of descent and distribution within
twelve (12) months of the death of the Participant or the expiration of the
term of the Option and/or Stock Appreciation Right whichever date is sooner.
H. Limitation. In no event may an Option be exercised by anyone after the
expiration date provided for in Section Eight of the Plan.
I. Limits on Discretion. Anything in this Plan to the contrary
notwithstanding, if the Award so provides, the Committee shall not have any
discretion to increase the amount of compensation payable under the Award to
the extent such discretion would cause the Award to lose its qualification as
performance-based compensation for purposes of Section 162(m)(4)(C) of the
Code and the regulations thereunder.
J. Governing Law. All matters relating to the Plan or to Awards granted
hereunder shall be governed by the laws of the State of Maryland, without
regard to its principles of conflict of laws.
K. Titles and Headings. The titles and headings of the sections in the Plan
are for convenience of reference only, and in the event of any conflict, the
text of the Plan, rather than such titles and headings, shall control.
SECTION FIFTEEN
Amendment of Plan
A. Discretion of the Board. The Board may at any time and from time to time
alter, amend, suspend or terminate the Plan in whole or in part, except (i)
any such action affecting Options granted or to be granted under this Plan
which are intended to qualify as Incentive Stock Options shall be subject to
stockholder approval to the extent such stockholder approval is required
pursuant to Section 422 of the Internal Revenue Code and (ii) no such action
may be taken without the consent of the Participant to whom any Award shall
theretofore have been granted, which adversely affects the rights of such
Participant concerning such Award, except as such termination or amendment of
the Plan is required by statute, or rules and regulations promulgated
thereunder.
B. Automatic Termination. This Plan shall terminate on November 1, 2006.
Awards may be granted under this Plan at any time and from time to time prior
to the termination of the Plan. Any Award outstanding at the time the Plan is
terminated shall remain in effect until said Award is exercised or expires.
E-I-10
<PAGE>
ANNEX E-II
CHOICE HOTELS INTERNATIONAL, INC.
EMPLOYEE STOCK PURCHASE PLAN
SECTION ONE. PURPOSES.
The 1997 Employee Stock Purchase Plan of Choice Hotels International, Inc.
(the "Plan") is intended to provide a method whereby employees of Choice
Hotels International, Inc. and its Subsidiaries (hereinafter referred to,
unless the context otherwise requires, as the "Company") will have an
opportunity to acquire a proprietary interest in the Company through the
purchase of shares of Common Stock. Such stock ownership induces such
employees to continue in the employ of the Company. The Plan also enables the
Company to attract and retain such employees. It is the intention of the
Company to have the Plan qualify as an "employee stock purchase plan" under
Section 423 of the Code. The provisions of the Plan shall, accordingly, be
construed as to extend and limit participation in a manner consistent with the
requirements of that section of the Code.
SECTION TWO. DEFINITIONS.
(a) AGENT. The term "Agent" shall have the meaning set forth in Section 13
hereof.
(b) BOARD OF DIRECTORS. The term "Board of Directors" shall mean the Board
of Directors of the Company or any individual or committee to which the Board
of Directors has delegated authority to act with respect to a specific
activity.
(c) CODE. The term "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(d) COMMON STOCK. The term "Common Stock" shall mean the $1.00 par value
Common Stock of the Company.
(e) COMPANY. The term "Company" shall mean Choice Hotels International,
Inc., a Delaware corporation.
(f) COMPENSATION. The term "Compensation" shall mean basic cash
compensation, before any payroll deductions for taxes or any other purposes,
including regular commissions paid by the Company or a Subsidiary to a
Participant in respect of the service of such Participant to the Company or a
Subsidiary during an Offering Period increased by any amounts with respect to
which the Participant has elected to defer or reduce remuneration for federal
income tax purposes (i) under the Choice Hotels International, Inc. Retirement
Savings and Investment Plan, (ii) under the Choice Hotels International, Inc.
Nonqualified Retirement Savings and Investment Plan, or (iii) under any
"cafeteria plan" (as described in Section 125 of the Code) maintained by the
Company or a Subsidiary. Compensation shall not include any amounts paid to
the Participant as (i) bonuses, (ii) overtime pay, (iii) any amounts paid
during that Offering Period on account of the Participant under any other
employee pension benefit plan (as defined in Section 3(2) of ERISA), and (iv)
except as otherwise provided in the preceding sentence, any amounts which are
not includible in the income of the Participant for federal income tax
purposes.
(g) CONTINUOUS SERVICE. The term "Continuous Service" as of any date shall
mean the period determined by the Company, on a uniform basis for employees
similarly situated, to represent the then unbroken period of service of an
employee as an employee of the Company or of a Subsidiary designed by the
Board of Directors to participate in the Plan; provided, however, that in the
case of such a Subsidiary, Continuous Service shall not include service prior
to the date of its affiliation with the Company, unless the Board of Directors
otherwise provides for recognition of such service. A break in Continuous
Service shall be deemed to have occurred whenever an employee voluntarily or
involuntarily ceases to be an employee. The transfer by an employee from one
corporation to another corporation participating in the Plan shall not affect
the Continuous Service of the employee.
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<PAGE>
(h) DESIGNATED SUBSIDIARY. The term "Designated Subsidiary" shall mean a
Subsidiary designated by the Board of Directors to participate in the Plan.
(i) ERISA. The term "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
(j) MARKET PRICE. The term "Market Price" shall mean the price at which the
Agent purchases Common Stock in accordance with Section 13 hereof.
(k) NOMINEE. The term "Nominee" shall have the meaning as set forth in
Section 7 hereof.
(l) OFFERING DATE. The term "Offering Date" shall mean the first day of each
January, April, July and October, commencing January 1, 1997.
(m) OFFERING PERIOD. The term "Offering Period" shall mean a three-month
period commencing with an Offering Date and ending with the following Purchase
Date.
(n) OPTION. The term "Option" shall mean the right of a Participant to
acquire Common Stock pursuant to the provisions of the Plan.
(o) PARTICIPANT. The term "Participant" shall mean an eligible employee who
has authorized payroll deductions for the purchase of Common Stock under the
Plan in accordance with Section 4 hereof.
(p) PURCHASE DATE. The term "Purchase Date" shall mean the last trading day
of each March, June, September, and December, commencing November 1, 1996 or
if a pay period ends on the last day of a calendar quarter, the next trading
day.
(q) RETIREMENT. The term "Retirement" shall mean termination of employment
of a Participant on or after the sixty-fifth birthday of the Participant.
(r) SUBSIDIARY. The term "Subsidiary" shall mean a Subsidiary corporation of
the Company as defined by Section 424(f) of the Code.
(s) Wherever appropriate, words used in this Plan in the singular may mean
the plural, the plural may mean the singular and the masculine may mean the
feminine.
SECTION THREE. ELIGIBILITY.
All employees of the Company, or Designated Subsidiaries of the Company, who
shall have completed one year of Continuous Service as of any Offering Date,
shall be eligible to participate in the Plan, provided that (i) no employee
shall be eligible who, immediately after any Option is granted, owns stock
possessing 5% or more of the total combined voting power or value of all
classes of stock of the Company or of any Subsidiary of the Company (applying
the rules of Section 424(d) of the Code in determining stock ownership), (ii)
no Director of the Company or of any Subsidiary, who is not an officer or
other employee of any thereof, shall participate in the Plan and (iii) no
employee shall be eligible whose customary employment is 20 hours or less per
week or whose customary employment is for not more than five months in any
calendar year.
SECTION FOUR. METHOD OF PURCHASE.
(a) On each Offering Date, each Participant shall be deemed to have been
granted the right to purchase such number of shares of Common Stock as may be
purchased, as provided herein, by a sum equal to (i) the amount of the
Compensation of the Participant determined in accordance with the following
Section during an Offering Period and (ii) the amount of the Participant's
share of the contribution of the Company during such Offering Period.
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<PAGE>
An eligible employee shall become a Participant in the Plan by authorizing
payroll deductions for the purchase of Common Stock under the Plan prior to an
Offering Date with instructions for the purchase of Common Stock under the
Plan. At the time a Participant files his or her authorization, the
Participant shall elect to have deductions made from his or her pay on each
payday during the time he or she is a Participant at a rate not less than 2%
and not in excess of 10% in whole percentages of his or her Compensation. All
payroll deductions made for a Participant shall be credited to his or her
account under the Plan. A Participant may not make any separate cash payment
into such account. No interest will be paid on funds in the account of a
Participant.
A Participant shall be deemed to have continued his or her most recent
election to participate in the Plan for the next Offering Period unless he or
she notifies the Company on or before the twentieth day of the month preceding
the beginning of the next Offering Period that he or she elects not to
participate in the Plan for the next Offering Period. Such notice may not be
revoked. Similarly, a Participant may elect to increase or decrease the amount
of his or her payroll deduction on or before the twentieth day of the month
preceding the beginning of the next Offering Period, such increase or decrease
to be effective at the beginning of the next Offering Period.
On or before each Purchase Date, the Company shall contribute to the Agent
an amount equal to ten-ninths (10/9ths) of all contributions of the
Participants for such Offering Period (so as to have the effect of the Company
contributing ten percent (10%) of the purchase price of the Common Stock). The
Agent shall cause all the proceeds received from contributions of the
Participant and the contribution of the Company to be applied to the open
market purchase of Common Stock. The account of each Participant shall be
credited with the number of shares of Common Stock equal to the sum of the
contributions of the Participant and the share of the Participant of the
contribution of the Company applied by the Agent to the purchase of Common
Stock divided by the average price per share of Common Stock purchased by the
Agent. Unless the Company otherwise directs, the Agent may, but shall not be
obligated to allocate fractional shares of Common Stock for any Participant or
purchase shares of Common Stock in odd lots. Upon termination of an account,
any fractional shares in the Participant's account will be sold, and the
proceeds therefrom shall be delivered to such Participant. In the event
fractional shares are not allocated to the accounts of Participants under the
Plan, any accumulated payroll deductions which would have been used to
purchase fractional shares shall remain in the accounts of Participants. No
interest will be paid on such funds in accounts of Participants and shall be
deemed to be a payroll deduction of the next Offering Period.
(b) No Participant shall have the right to purchase Common Stock under the
Plan at a rate of more than $25,000 in value thereof in any calendar year,
such value to be based on the fair market value per share of the Common Stock
as of the Offering Date on which a Participant becomes eligible to purchase
Common Stock in such year under the terms of the Plan.
(c) A Participant may not increase or reduce the amount of his or her
payroll deduction during an Offering Period, provided, however, that a
Participant may reduce the amount of his or her payroll deduction to zero at
any time during the Offering Period in which case the employee may not
participate again in the Plan until the following Offering Period. A
Participant shall be deemed to have elected to purchase all of the shares
which his or her authorized payroll deductions and share of the contribution
of the Company would purchase on a Purchase Date.
(d) If at any time the number of shares as to which Options have been
granted shall exceed the remaining number of shares authorized for purchase
under the Plan, the number of shares which may be purchased by each
Participant shall be reduced proportionately.
(e) At any time prior to a Purchase Date the Board of Directors may
terminate the Plan without any obligation whatsoever to the Participants,
other than to refund to each Participant, without interest, any sum
accumulated for him or her by payroll deductions.
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<PAGE>
SECTION FIVE. WITHDRAWALS.
A Participant may withdraw funds in his or her account under the Plan only
by withdrawal from the Plan; in the event of the withdrawal of the
Participant, he or she shall not be eligible to participate in the Plan until
the next Offering Date.
SECTION SIX. TERMINATION OF EMPLOYMENT.
Upon termination of the employment of a Participant for any reason,
excluding death while in the employ of the Company or a Designated Subsidiary
or Retirement, the Common Stock and/or cash credited to his or her account and
not used to purchase shares will be returned to the Participant within 60 days
after the end of the then current Offering Period or as soon as
administratively practicable thereafter. As an alternative to a distribution
of Common Stock, a Participant may request that the Agent sell the Common
Stock in the account of a Participant and forward the net proceeds to such
person or persons.
Upon termination of the employment of a Participant because of (i) death, or
(ii) Retirement, his or her beneficiary (as defined in Section 9), or the
Participant, as the case may be, shall have the right to elect, by written
notice given to the Secretary of the Company prior to the expiration of the
period of 30 days commencing with the date of the death of the Participant, or
Retirement of the Participant, as the case may be, either
(i) to withdraw all of the payroll deductions credited to the account of
the Participant under the Plan or
(ii) to exercise the Option of the Participant on the Purchase Date next
following the date of the death of the Participant or Retirement of the
Participant, as the case may be, for the purchase of the number of full
shares of Common Stock which the accumulated payroll deductions in the
account of the Participant at the date of the death of the Participant or
Retirement of the Participant, as the case may be, and the proportionate
share of the contribution of the Company, will purchase at the applicable
Purchase Price, and any excess in such account will be returned to said
beneficiary or Participant, as the case may be.
In the event that no such written notice of election shall be duly received
by the office of the Secretary of the Company, the beneficiary or Participant,
as the case may be, shall automatically be deemed to have elected to withdraw
the payroll deductions credited to the account of the Participant at the date
of the death or Retirement of the Participant, as the case may be, and the
same will be paid promptly to the said beneficiary or Participant after the
end of the current Offering Period.
In addition, upon termination of the employment of a Participant because of
(i) death, or (ii) Retirement, the Common Stock and/or cash (except as
otherwise provided in this Section Six) shall be distributed to the
Participant or to the person or persons entitled thereto under Section Nine
within sixty (60) days after the end of the current Offering Period or as soon
as administratively practicable thereafter. As an alternative to a
distribution of Common Stock, a Participant or such person or persons entitled
to receive the account of a Participant under Section Nine may request that
the Agent sell the Common Stock in the account of a Participant and forward
the net proceeds to the Participant or such person or persons.
SECTION SEVEN. STOCK
Subject to adjustment upon changes in capitalization of the Company as
provided in Section 10, the maximum number of shares of Common Stock which
shall be made available for purchase under the Plan is 1,000,000 shares.
Shares purchased pursuant to an Option will initially be registered in the
name of a Nominee designated by the Company, as custodian for the account of
the Participant entitled thereto. Stock certificates will not be issued to
Participants for shares held in the name of the Nominee, but all rights
accruing to an owner of record of such shares (including voting rights) will
belong to the Participant for whose account such shares are held.
Notwithstanding the foregoing, each Participant may elect to have some or all
of the full shares of Common
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Stock previously purchased and registered in the name of the Nominee on his or
her behalf registered in the name of such Participant. Written notice of such
an election must be given by the Participant to the Nominee, specifying the
number of full shares of Common Stock to be registered in the name of such
Participant. The specified number of shares of Common Stock will be
transferred to and registered in the name of the notifying Participant as soon
as administratively practicable.
The Board of Directors may, in its discretion, require as a condition to the
grant of the right to purchase hereunder that the shares of Common Stock
reserved for issuance upon the exercise of the Option shall have been duly
authorized for trading on a national securities exchange and that either
(i) a Registration Statement under the Securities Act of 1933, as
amended, with respect to said shares shall be effective; or
(ii) the Participant shall have represented in form and substance
satisfactory to the Company that it is the intention of the Participant to
purchase such shares for investment.
SECTION EIGHT. NONASSIGNABILITY.
Neither payroll deductions credited to the account of a Participant nor any
rights with regard to the exercise of an Option or to receive Common Stock
under the Plan may be assigned, transferred, pledged or otherwise disposed of
in any way by the Participant other than by will or the laws of descent and
distribution. Any such attempted assignment, transfer, pledge, or other
disposition shall be without effect, except that the Company may treat such
act as an election to withdraw funds in accordance with Section 5.
SECTION NINE. DESIGNATION OF BENEFICIARY.
A Participant may file a written designation of a beneficiary who is to
receive any shares of Common Stock and/or cash in the event of the death of
the Participant prior to the delivery of such shares or cash to Participant.
Such designation of beneficiary may be changed by the Participant at any time
by written notice to the Secretary of the Company. Within 30 days after the
death of the Participant, the beneficiary may, as provided in Section 6, elect
to exercise the Option of the Participant when it becomes exercisable on the
Purchase Date next following the date of the death of the Participant. Upon
the death of a Participant and upon receipt by the Company of proof of the
identity and survivorship of a beneficiary validly designated by the
Participant under the Plan, and notice of election of the beneficiary to
exercise the Option, the Company shall deliver such Common Stock and/or cash
to such beneficiary. In the event of the death of a Participant and in the
absence of a beneficiary validly designated under the Plan who is living at
the time of such death of a Participant, the Company shall deliver such Common
Stock and/or cash to the executor or administrator of the estate of the
Participant within 60 days after the end of the current Offering Period, or as
soon as administratively practicable thereafter, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the
Company, in its discretion, may deliver such Common Stock and/or cash to the
spouse or to any one or more dependents of the Participant as the Company may
designate. No beneficiary shall, prior to the death of the Participant by whom
he or she has been designated, acquire any interest in the Common Stock or
cash credited to the Participant under the Plan.
SECTION TEN. RECAPITALIZATION.
In the event any reorganization, merger, consolidation, recapitalization,
liquidation, reclassification, stock split, stock dividend, combination of
shares, rights offering, or extraordinary dividend or divestiture (including a
spin-off), or any other change in the capital structure or shares of stock of
the Company, the Board of Directors shall make adjustments, determine by the
Board of Directors in its discretion to be appropriate, as to the number and
kind of securities subject to this Plan and specified in Section Seven of this
Plan and as to the number and kind of securities covered by each outstanding
option, and, where applicable, the price per share thereunder.
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SECTION ELEVEN. RIGHTS AS A STOCKHOLDER.
An employee shall have no rights as a stockholder with respect to any shares
offered hereunder until completion of payment therefor. Participants will not
be issued stock certificates unless requested. All Common Stock purchased
under the Plan during an Offering Period will be held by the Nominee for at
least two years from the Offering Date of the Offering Period. Common Stock
may be sold during this two-year period, but may not be transferred to another
agent or nominee. Notwithstanding the foregoing, a Participant must sell a
minimum of 50 shares of Common Stock each time he or she elects to sell Common
Stock or such fewer whole shares of Common Stock in the account of the
Participant upon termination of employment.
SECTION TWELVE. STATUS OF PLAN FUNDS.
All amounts held by the Company under the Plan shall be added to the general
funds of the Company and shall be used for such purposes as the Company shall
from time to time determine. The Company shall not be obligated to segregate
such payroll deductions.
SECTION THIRTEEN. ADMINISTRATION.
The Plan shall be administered by the Board of Directors. The interpretation
and construction of any provision of the Plan and the adoption of rules and
regulations for administering the Plan shall be made by the Board of
Directors. Determinations made by the Board of Directors with respect to any
matter or provision contained in the Plan shall be final, conclusive and
binding upon the Company and upon all Participants, their heirs or legal
representatives. Any rule or regulation adopted by the Board of Directors
shall remain in full force and effect unless and until altered, amended, or
repealed by the Board of Directors.
The Board of Directors may delegate to a committee any authority of the
Board of Directors under this Plan.
An Agent may be appointed by the Board of Directors to perform the functions
and have the responsibilities assigned to the Agent in this Section 13 with
respect to the purchase of Common Stock. The Board of Directors shall have the
right to change the Agent at any time.
Notwithstanding any other provision to the contrary contained herein, the
Agent shall have all authority to determine the times of such purchases, the
prices at which such purchases are made, the manner of such purchases and the
selection of brokers or dealers (which may include the Agent) to make such
purchases. If Common Stock is purchased at varying Market Prices, an average
price will be allocated to the account of each Participant.
All costs and expenses incurred in administering the Plan shall be paid by
the Company, excluding (i) costs associated with requests for the issuing of
stock certificates to Participants or to the person or persons entitled to
receive the same under Section 9 hereof, (ii) the costs of the sale of Common
Stock and (iii) the costs associated with a Participant terminating or
withdrawing from the Plan.
SECTION FOURTEEN. AMENDMENT OR TERMINATION.
Subject to Section 4(e), the Board of Directors may at any time terminate or
amend the Plan, except any such action shall be subject to stockholder
approval to the extent such stockholder approval is required pursuant to
Section 423 of the Internal Revenue Code.
SECTION FIFTEEN. NOTICES.
All notices or other communications by a Participant to the Company under or
in connection with the Plan shall be deemed to have been given when received
by the Secretary of the Company.
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SECTION SIXTEEN. APPROVAL OF STOCKHOLDERS
The effectiveness of this Plan is subject to its approval by the
stockholders of the Company within 12 months after the date it is adopted by
the Board of Directors.
SECTION SEVENTEEN. REGISTRATION AND QUALIFICATION OF THE PLAN UNDER APPLICABLE
SECURITIES LAWS.
No Option shall be granted under the Plan until such time as the Company has
qualified or registered the shares which are subject to the Option under the
applicable state and federal securities laws to the extent required by such
laws.
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