<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].
For the fiscal year ended
----------------------------------------------
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
For the transition period from June 1, 1997 to December 31, 1997
------------ -----------------
Commission file number 001-11915
---------
SUNBURST HOSPITALITY CORPORATION
--------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1985619
---------------------------- --------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
10770 Columbia Pike, Silver Spring, Maryland 20901
- -------------------------------------------- --------------
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code (301) 979-6127
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, Par Value $.01 per share New York Stock Exchange
- -------------------------------------- -----------------------------------------
- -------------------------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
- --------------------------------------------------------------------------------
(Title of Class)
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed in Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months as for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
------ -----
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of voting stock of Sunburst Hospitality
Corporation held by non-affiliates was
$112,335,932 as of March 12, 1998 based upon a closing price of $8.5625 per
share.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
------ ------
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of Sunburst Hospitality Corporation's
common stock at March 12, 1998 was 19,947,042.
DOCUMENTS INCORPORATED BY REFERENCE.
PART III Proxy Statement dated March 30, 1998
2
<PAGE>
PART I
ITEM 1. BUSINESS
Sunburst Hospitality Corporation ("Sunburst" or the "Company") owns and
operates hotels in one of three principal segments of the lodging industry:
extended stay all-suites, full service and limited service.
Prior to October 15, 1997, Sunburst was named Choice Hotels International,
Inc. On October 15, 1997, Sunburst distributed to its stockholders its hotel
franchising business (which had previously been conducted primarily by a
subsidiary) and its European hotel ownership pursuant to a pro rata distribution
to its stockholders of all of the stock of its wholly-owned subsidiary, Choice
Hotels Franchising, Inc. (the "Spinoff"or "distribution"). At the time of the
Spinoff, the Company changed its name to "Sunburst Hospitality Corporation" and
Choice Hotels Franchising, Inc. changed its name to "Choice Hotels
International, Inc." ("New Choice").
Sunburst is a leading hotel owner and operator in the United States. As of
February 28, 1998, the Sunburst portfolio included 81 hotels open with 11,380
rooms in 28 States and 16 hotels under construction or in development. Thirty-
seven of the 81 hotels, with a net book value of $145.4 million serve as
collateral for the Company's multi-class mortgage pass-through certificates.
Each hotel is branded with one of the New Choice brands and Sunburst is New
Choice's largest franchisee.
Sunburst and its predecessors have a successful record of managing ahead of
industry cycles. Prior to the last industry downturn in the late 1980s, the
Company was able to liquidate a substantial portion of its existing hotel
portfolio. Then in 1992, the Company began to opportunistically acquire hotels
at prices well below their replacement cost. All of these hotels have benefited
from a significant investment of capital used to renovate and upgrade the
properties. The hotels have also benefited from the installation of
professional management and marketing systems. In the past two years the Company
has responded to changing industry cycles by shifting its development strategy
to the new construction of limited-service Sleep Inn hotels and mid-market,
all-suite extended stay MainStay Suites hotels.
Sunburst's strategy is to: (i) actively manage the Company's existing
portfolio to optimize performance by applying proven operating systems and
procedures, to increase EBITDA and operating margins at newly-acquired hotels,
to maintain the Company's competitive advantage through capital spending, and to
sell hotels projected to underperform by redeploying capital in higher yielding
assets; (ii) develop MainStay Suites hotels to capitalize on the positive
fundamentals of the mid-market, extended stay segment; and (iii) selectively
pursue opportunistic development, acquisition, renovation and repositioning
opportunities.
Historical Acquisition Strategy
The primary focus of Sunburst from 1992 through 1996 was the acquisition of
hotels. During this period many hotels were facing financial hardship, creating
an opportunity for Sunburst to acquire properties at prices well below
replacement cost. Sunburst's strategy was to acquire and renovate the hotels,
install professional management and marketing systems, and in some cases
reposition the hotels to a different brand or service level. Since June 1992,
Sunburst has acquired 55 hotels for an aggregate purchase price of $187.7
million. An additional approximately $95.6 million has been spent on capital
improvements to the same hotels. The total investment basis in the 55 hotels at
December 31, 1997 is $283.3 million, which is 60.2% of the estimated replacement
value of the hotels at their respective dates of acquisition..
The Company believes that there are currently limited opportunities to
acquire hotels at a substantial discount to replacement value. As a result,
only two hotels were acquired in fiscal year 1997 and no hotels were acquired
during the seven months ended December 31, 1997. In February 1997 Sunburst
acquired the beachfront Howard Johnson Hotel in Miami Beach, Florida. The hotel
has since undergone extensive renovation and has been re-branded as the Comfort
Inn Miami Beach. The Company believes that the property will benefit from
strong market fundamentals and high barriers to entry. On August 1, 1996,
Sunburst acquired the Springhouse Senior Assisted Living Center in Charlotte,
NC. The property underwent major renovation and was converted to a hotel. The
property reopened on August 27, 1997, as a Clarion Hotel and features Sunburst's
"Classic Sports Food, Drink
3
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and Memories Cafe." The hotel is strategically located at I-77 and Billy
Graham Parkway and benefits from proximity to Charlotte's airports, sports
arenas and growing suburban office concentration. The Company will continue
to evaluate acquisitions on an opportunistic basis when it is felt that
long-term value can be created.
The following chart summarizes acquisition activity in each of the last
five fiscal years.
<TABLE>
<CAPTION>
SUNBURST EXISTING HOTEL ACQUISITIONS
FISCAL YEAR
---------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Total acquisitions....................... 8 13 16 16 2
Total number of rooms acquired........... 1,429 1,780 2,336 1,940 324
Total cost of acquisitions (in millions)
(including initial improvements)........ $ 27.3 $ 41.9 $ 58.6 $ 49.2 $ 10.7
Average cost per room.................... $19,073 $23,570 $25,074 $25,375 $32,691
</TABLE>
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
----------------------------------------------------------------------------------------------
SEVEN MONTHS
FISCAL YEAR ENDED
------------------------------------------------------------------------- December 31,
1993 1994 1995 1996 1997 1997 (1)
------------- ------------- ------------- ------------- ------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Original Domestic Portfolio 62.27% 64.16% 67.19% 68.02% 71.63% 70.72%
Fiscal 1993 Acquisitions 56.17 64.28 73.94 76.00 74.96 70.92
Fiscal 1994 Acquisitions -- 63.99 70.88 73.69 73.61 70.24
Fiscal 1995 Acquisitions -- -- 48.96 58.49 66.27 66.18
Fiscal 1996 Acquisitions -- -- -- 53.23 61.16 68.83
Fiscal 1997 Acquisitions -- -- -- -- 54.65 38.82
</TABLE>
____________________________
(1) The information provided in the table above for the seven months ended
December 31, 1997 is not representative of a full fiscal year due to the
seasonality of the hotel industry.
Hotel Development
The Company's recent strategy to concentrate on the development of MainStay
Suites hotels is intended to capitalize on the demand/supply imbalance in the
extended stay, all-suite segment. Historically, these hotels have produced
higher than average returns on investment and management believes that demand
in this segment exceeds supply by approximately 4 to 1. The mid-market, extended
stay segment is particularly under-served.
Sunburst's focus on external development is geared to capitalize on the
under-served, high-growth, mid-priced extended stay all-suite segment, and the
development of other high-quality, consumer-focused hotels.
To implement its development strategies, Sunburst maintains a Real Estate
Development and Construction Department staff. This staff is responsible for
the identification of target markets, specific site identification, negotiation,
due diligence, planning, zoning and other approval requirements, design and
construction of new hotels. In addition, the group oversees the renovation and
refurbishment of existing hotels. The Real Estate Development and Construction
staff, with its dual capacity to effectively renovate older hotels or construct
new hotels, allows Sunburst to respond quickly to changing market conditions.
4
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The following is a list of new hotels developed by Sunburst since 1994 or
under development as of February 28, 1998.
<TABLE>
<CAPTION>
CALENDAR YEAR OF
MARKET BRAND OPENING
- --------------------------------------------------------------- ---------------------------- --------------------
<S> <C> <C>
Dallas/Plano, TX............................................... Sleep Inn 1994
San Antonio, TX................................................ Sleep Inn 1995
Baton Rouge, LA................................................ Sleep Inn 1996
Houston/Airport, TX............................................ Sleep Inn 1996
Austin/Round Rock, TX.......................................... Sleep Inn 1996
Dallas/Plano, TX............................................... MainStay Suites 1996
Raleigh, NC.................................................... Sleep Inn 1997
Dallas/Arlington, TX........................................... Sleep Inn 1997
Kansas City/Airport, MO........................................ Sleep Inn 1997
Charlotte, NC.................................................. Sleep Inn 1997
Rockville, MD.................................................. Sleep Inn 1997
Providence/Airport, RI......................................... MainStay Suites 1997
Cincinnati/Blue Ash, OH........................................ MainStay Suites 1997
Kansas City/Airport, MO........................................ MainStay Suites 1998
Indianapolis, IN............................................... MainStay Suites 1998
Louisville, KY................................................. MainStay Suites 1998
Greenville, SC................................................. MainStay Suites 1998
Denver/Airport, CO............................................. Sleep Inn 1998
Orlando/Lake Mary, FL (1)...................................... MainStay Suites 1998
Denver/Tech Center, CO (1)..................................... MainStay Suites 1998
Jacksonville, FL (1)........................................... MainStay Suites 1998
Nashville, Brentwood, TN (1)................................... MainStay Suites 1998
Miami/Airport, FL (1).......................................... MainStay Suites 1998
Miami/Airport, FL (1).......................................... Sleep Inn 1998
Pittsburgh/Airport, PA (1)..................................... MainStay Suites 1998
Fishkill/Poughkeepsie, NY (1).................................. MainStay Suites 1998
Tempe, AZ (1).................................................. MainStay Suites 1998
Denver/Tech Center, CO (1)..................................... Sleep Inn 1998
Annapolis, MD (2).............................................. MainStay Suites 1998
Orlando, FL (2)................................................ MainStay Suites 1998
Peabody, MA (2)................................................ MainStay Suites 1998
Raleigh, NC (2)................................................ MainStay Suites 1999
Mt. Laurel, NJ (2)............................................. MainStay Suites 1999
North Charleston, SC (2)....................................... MainStay Suites 1999
</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 developing the MainStay Suites all-suite, extended
stay product is based on statistics indicating the demand/supply imbalance.
According to various industry studies, demand in the all-suite, extended stay
market is strong, yet supply is limited, particularly in the mid-price segment.
Industry sources define the extended stay demand as stays of five or more
nights, consisting of 228 million room nights annually, or 27% of total U.S.
lodging industry demand. Only 1.5% of total room supply is dedicated to
extended stay rooms. By applying its hotel real estate development expertise,
Sunburst is targeting markets with ideal conditions for the extended stay
product and building MainStay Suites hotels.
The MainStay Suites brand, which was created by the Company in
conjunction with New Choice, has a unique product design and service package
which enhance property level appeal, productivity and profitability. Among the
MainStay Suites most unique features are the automatic check-in kiosk (which
allows guests to check in
5
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and out without assistance from an employee) and the optional daily light
touch housekeeping (full housekeeping just every five days). These features
enable MainStay Suites hotels to operate with fewer full time equivalent
employees than a similar limited service hotel that provides 24-hour front
desk coverage and full housekeeping daily.
Sunburst anticipates that its MainStay Suites projects will produce
stabilized, unleveraged pre-tax property level returns on investment of 15% or
higher. This belief is supported by the Company's experience at the first
MainStay Suites opened in Plano, Texas. The belief is further supported by
projections for the MainStay Suites recently opened and under development.
These projections are based on rate and occupancy generated internally by the
Company and by external feasibility consultants, as well as internal operating
guidelines, land cost and projected construction costs. However, there can be
no assurance that the projected return will be achieved or that actual results
will not differ materially. (See Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Forward Looking Statements,
below.)
Each of the Company's MainStay Suites hotels will average
approximately 100 suites and will be developed on 2.5 to 3.0 acres of land in
suburban office parks or locations in close proximity to major employers,
restaurants and retail amenities. MainStay Suites feature high quality,
interior corridor building construction with amenities and features provided in
direct response to consumer demand. The suites feature bedroom areas, a living
room area with a pull-out couch or recliner, private bathroom and fully
furnished kitchen. The kitchen includes a full-size refrigerator, dishwasher,
microwave, stove, coffee maker, toaster and all cooking utensils. Each suite
also features an over-sized counter serving as an eating area and work 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.
Operations
Each of Sunburst's owned and managed hotels operates under one of the New
Choice brand names. Sunburst's hotels take advantage of the same systems and
services available to New Choice 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 also 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 corporate-based financial controllers. 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
6
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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". This sports theme restaurant
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 hotels. "Classic Sports Food, Drink and
Memories" are currently open in four Sunburst hotels in Springfield,
Missouri, Charlotte, North Carolina, Richardson, Texas and Hot Springs,
Arkansas.
. Capital Reinvestment Program. Each of Sunburst's hotels completes a
detailed capital spending budget annually. The hotels spend on average
5%-7% of total revenues on capital improvements annually. This
reinvestment allows the hotels to maintain a competitive advantage in
the local markets.
. 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 annual plan serves
as a fundamental measurement of management's performance.
The Hotel Properties
Sunburst's hotel properties serve three primary segments of the lodging
industry; extended stay/all-suite, full service and limited service. Each hotel
is branded with one of the New Choice franchise flags.
All-Suite Hotels. Sunburst has 13 hotels in the all-suite segment open
and 14 hotels under construction or in the development process. Sunburst's all-
suite hotel properties compete in the mid-price and upscale price segments. The
table below identifies Sunburst's all-suite hotels by brand and price segment as
of February 28, 1998.
ALL SUITE HOTELS
<TABLE>
<CAPTION>
BRAND Number of Hotels NUMBER OF ROOMS PRICE SEGMENT
------ ------------------- ------------------- -------------------
<S> <C> <C> <C>
Quality Suites......................................... 3 345 upscale
Comfort Suites......................................... 3 397 mid-price
MainStay Suites........................................ 7 666 mid-price
</TABLE>
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>
BRAND Number of Hotels NUMBER OF ROOMS PRICE SEGMENT
------ ------------------- ------------------- -------------------
<S> <C> <C> <C>
Clarion Hotels & Inns.................................. 11 2,120 upper mid-price
Quality Hotel & Inns................................... 5 1,327 mid-price
</TABLE>
7
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Limited Service Hotels. Sunburst has 52 hotels in the limited service
segment open and two 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>
BRAND Number of Hotels NUMBER OF ROOMS PRICE SEGMENT
------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Comfort Inn............................................ 31 4,076 mid-price
Quality Inns........................................... 8 1,014 mid-price
Sleep Inns............................................. 11 1,214 mid-price
Econo Lodge............................................ 1 120 economy
Rodeway Inns........................................... 1 101 economy
</TABLE>
Franchise and Strategic Alliance Agreements
All of the Company's existing hotels are branded with one of New Choice's
franchise flags under various franchise agreements with New Choice. Each
Franchise Agreement has an initial term of twenty years, except the agreement
for Tempe, Arizona which is a year to year agreement. The Franchise Agreements
have varying original dates, from 1982 through 1997. Certain Franchise
Agreements allow for unilateral termination by either party on the 5th, 10th, or
15th anniversary of the Franchise Agreement.
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 New Choice's reservation system). The
marketing fee and the reservation fee are subject to reasonable increases during
the term of the franchise if New Choice 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.
At the time of the Spinoff, New Choice and the Company entered into a
Strategic Alliance Agreement pursuant to which: (i) the Company granted a right
of first refusal to New Choice to franchise any lodging property that the
Company develops or acquires and intends to operate under franchise; (ii) the
Company has also agreed, barring a material change in market conditions, to
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 by October 15,
2001 (48 months from the Distribution Date); (iii) New Choice has granted to the
Company an option, exercisable under certain circumstances, to purchase the
brand names, marks, franchise agreements and other assets of the MainStay Suites
hotel system; (iv) New Choice and the Company have agreed to continue to
cooperate with respect to matters of mutual interest, including new product and
concept testing for New Choice in hotels owned by the Company; and (v) the
Company has authorized New Choice to negotiate with third party vendors on the
Company'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.
8
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Competition
The Company is a leading owner and operator of hotels in the United States.
Competition in the United States lodging industry is generally based on
convenience of location, price, range of services and guest amenities offered,
plus the quality of customer service and overall product. Newer, recently
constructed hotels compete effectively against older hotels if such hotels are
not refurbished on a regular basis. The effect of local economic conditions on
the Company's results is reduced by the Company's geographic diversity of its
properties, which are located in 28 states, as well as its range of products and
room rates.
Seasonality
The Company's principal sources of revenue are revenues generated by its
properties. The Company experiences seasonal revenue patterns similar to those
of the lodging industry in general. This seasonality can be expected to cause
quarterly fluctuations in the Company's revenues, profit margins and net income.
Regulation and Environmental Matters
The Company's hotels are subject to numerous federal, state and local
government regulation, including those pertaining to the preparation and sale of
food and beverages (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. While the Company's operations have not been materially
adversely affected by such regulation, the Company cannot predict the effect of
future regulation or legislation.
The hotel properties are subject to environmental regulations under
Federal, state and local laws. Certain of these laws may require a current or
previous owner or operator of real estate to clean up designated hazardous or
toxic substances or petroleum product releases affecting the property. In
addition, the owner or operator may be held liable to a governmental entity or
to third parties for damages or costs incurred by such parties in connection
with the contamination. The Company does not believe that it is subject to any
material environmental liability.
Employees
At December 31, 1997, Sunburst employed approximately 3,332 employees.
Less than 5% of the Company's employees are represented by unions. All of the
Company's employees covered by unions are employed at Comfort Inn By the Bay,
San Francisco, California. The Company considers its relations with its
employees to be good.
ITEM 2. PROPERTIES
The following chart lists by market segment Sunburst's hotels at
February 28, 1998:
<TABLE>
<CAPTION>
Year
No. of Constructed/Last
HOTEL MARKET ROOMS MAJOR RENOVATION
- ----- ------
All Suite
Upscale
<S> <C> <C> <C>
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......................... Dallas, Texas 96 1996
MainStay Suites Warwick(4).................... Providence, Rhode Island 94 1997
MainStay Suites Blue Ash(4)................... Cincinnati, Ohio 100 1997
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Year
No. of Constructed/Last
HOTEL MARKET ROOMS MAJOR RENOVATION
- ----- ------
<S> <C> <C> <C>
MainStay Suites Airport(5).................... Kansas City, Missouri 88 1998
MainStay Suites Northwest(5).................. Indianapolis, Indiana 88 1997
MainStay Suites(5)............................ 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(5)............................ Greenville, South Carolina 100 1998
MainStay Suites Brentwood(1).................. Nashville, Tennessee 100 1998
MainStay Suites(1)............................ Orlando, FL 125 1998
MainStay Suites(1)........................... Miami Springs, Florida 100 1998
MainStay Suites(1)........................... Fishkill, New York 106 1998
MainStay Suites(1)........................... Annapolis, Maryland 88 1998
MainStay Suites(1)........................... Pittsburgh, Pennsylvania 100 1998
MainStay Suites(1)........................... Raleigh, North Carolina 100 1999
MainStay Suites(1)........................... Tempe, Arizona 94 1998
MainStay Suites(1)........................... Peabody, Massachusetts 97 1998
MainStay Suites(1)........................... Mt. Laurel, NJ 106 1999
MainStay Suites(1)........................... North Charleston, SC 100 1999
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................................. 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(2) 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
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(3)................ Baltimore, Maryland 186 1964/1994
Comfort Inn University........................ Baton Rouge, Louisiana 150 1972/1994
Comfort Inn Danvers........................... 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......................... Charlotte, North Carolina 150 1985/1996
Quality Inn & Suites--Crown Point............. Charlotte, North Carolina 100 1988/1996
Comfort Inn................................... Cincinnati, Ohio 117 1984/1996
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Year
No. of Constructed/Last
HOTEL MARKET ROOMS MAJOR RENOVATION
- ----- ------
<S> <C> <C> <C>
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
Comfort Inn Miami Beach(4) 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, DC 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.......................... Austin, Texas 107 1996
Sleep Inn Six Flags........................... 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
Sleep Inn Raleigh............................. Raleigh, North Carolina 107 1996
Sleep Inn San Antonio......................... San Antonio, Texas 107 1995
Sleep Inn University(4)....................... Charlotte, North Carolina 120 1997
Sleep Inn Airport(4).......................... Kansas City, Missouri 107 1997
Sleep Inn Rockville(4)........................ Washington, DC 107 1997
Sleep Inn Airport(5).......................... Denver, Colorado 119 1998
Sleep Inn Denver Tech(1)...................... Denver, Colorado 119 1998
Sleep Inn Miami Springs(1)..................... Miami Springs, Florida 119 1998
</TABLE>
(1) Hotel under construction or development
(2) Leased property
(3) Hotel on leased land
(4) Partial year results only
(5) Hotel under construction at December 31, 1997 but completed prior to
February 28, 1998
11
<PAGE>
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 31, 1997, and the seven months ended December 31, 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 64.18 31.54 51.28 67.10 34.40
</TABLE>
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED DECEMBER
FY 1996 FY 1997 31, 1997(1)
-------------------------- -------------------------- -------------------------------------
ADR OCCUPANCY REVPAR ADR OCCUPANCY REVPAR ADR OCCUPANCY REVPAR
------ ---------- ------ ------ ---------- ------ ------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
All Suite Hotels........... $64.70 69.00% $44.65 $69.48 72.73% $50.53 $66.65 70.52% $47.01
Full Service Hotels........ 58.85 65.41 38.49 63.25 67.05 42.41 65.60 65.48 42.96
Limited Service Hotels..... 53.36 67.11 35.81 56.38 69.25 39.04 59.11 68.01 40.20
All Hotels................. 55.97 66.61 37.28 59.62 68.70 40.96 61.81 67.41 41.67
</TABLE>
_______________________________________
(1) The information provided in the table above for the seven months ended
December 31, 1997 is not representative of a full fiscal year due to the
seasonality of the hotel industry.
<TABLE>
<CAPTION>
FISCAL YEAR Seven Months
---------------------------------------------------------------------------------- Ended
December 31
--------------
1993 1994 1995 1996 1997 1997 (1)
----------- -------------- -------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Number of properties, end of 19 32 48 65 71 76
period.........................
Number of rooms, end of period.. 3,686 5,605 7,941 9,713 10,330 10,885
Average occupancy percentage.... 61.36% 64.18% 67.10% 66.61% 68.70% 67.41%
Average daily room rate (ADR)... $49.53 $49.15 $51.28 $55.97 $ 59.62 $ 61.81
RevPAR.......................... $30.39 $31.54 $34.40 $37.28 $ 40.96 $ 41.67
</TABLE>
_____________________________________
(1) The information provided in the table above for the seven months ended
December 31,1997 is not representative of a full fiscal year due to the
seasonality of the hotel industry.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation, other than routine
litigation incidental to its 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 the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
12
<PAGE>
EXECUTIVE OFFICERS OF SUNBURST HOSPITALITY CORPORATION.
The name, age, title, present principal occupation, business address and
other material occupations, positions, offices and employment of each of the
executive officers of Sunburst are set forth below. The business address of
each executive officer is 10770 Columbia Pike, Silver Spring, Maryland 20901,
unless otherwise indicated.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- ------- ----------
<S> <C> <C>
Stewart Bainum, Jr................... 52 Chairman of the Board of Directors
Donald J. Landry..................... 49 Vice Chairman and Chief Executive Officer
James A. MacCutcheon................. 45 Executive Vice President, Chief Financial Officer and Treasurer
Antonio DiRico....................... 44 President and Chief Operating Officer
Kevin P. Hanley...................... 40 Senior Vice President, Real Estate and Development
Gregory D. Miller.................... 44 Senior Vice President, Human Resources
Charles M. Warczak, Jr............... 50 Vice President, Accounting and Hotel Systems
</TABLE>
Stewart Bainum, Jr., Chairman of the Board of the Company since November 1996;
Chairman of the Board of New Choice from March 1987 to November 1996 and since
October 1997; Chairman of the Board and Chief Executive Officer of Manor Care
and ManorCare 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 and of MCHS since 1976; President of MCHS 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.
Donald J Landry. Chief Executive Officer and Vice Chairman of the Company since
October 1997; President of the Company from January 1995 to October 1997;
President of Manor Care Hotel Division ("MCHD") from March 1992 to November
1996; various executive positions with Richfield Hotel Management, Inc. and its
predecessors for more than 20 years, including President of MHM Corporation.
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 from September 1993 to November
1996; 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 1996; Treasurer of
Vitalink from September 1992 to January 1997 and a Director since September
1994.
Antonio DiRico. President of the Company since October 1997; Senior Vice
President, Hotel Operations of the Company from November 1996 to October 1997;
Senior Vice President of MCHD from May 1992 to November 1996; Senior Vice
President of Richfield Hotel Management, Inc. and its predecessor, MHM
Corporation.
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.
Gregory D. Miller. Senior Vice President, Human Resources of the Company since
October 1997; Vice President, Marketing of MCHS from March 1995 to October 1997;
Vice President, Strategic Planning of Manor Care from May 1992 to September
1995.
Charles M. Warczak, Jr. Vice President, Accounting and Hotel Systems of the
Company since October 1997; Vice President, Hotel Accounting of the Company from
March 1997 to October 1997; Vice President, Finance and Controller of the
Company from November 1996 to March 1997; Vice President, Finance of Manor Care
from 1992 to November 1996.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The shares of Sunburst's Common Stock are listed and traded on the New York
Stock Exchange. The following table sets forth the high and low sales prices of
Sunburst's Common Stock since it began trading on November 4, 1996:
<TABLE>
<CAPTION>
QUARTERLY MARKET PRICE RANGE OF COMMON STOCK
(Unaudited)
Quarters Ended MARKET PRICE PER SHARE
-----------------------------------------------------------------------------
HIGH (1) LOW (1)
-----------------------------------------------------------------------------
<S> <C> <C>
FISCAL YEAR ENDED MAY 31, 1997
November 4 - $16 $13 3/4
November 30
February $17 5/8 $15
May $15 7/8 $12 3/4
FISCAL YEAR ENDED MAY 31, 1998 (2)
August $19 1/16 $15 3/8
November $20 1/4 $9 3/8
CALENDER 1997 (2)
December $20 1/4 $8 3/4
---------------------------
</TABLE>
(1) On October 16, 1997, the Company spun off its franchising
business through a special dividend to shareholders of all of the
stock of New Choice and effected a one-for-three reverse stock split.
The stock prices above for the periods prior to October 16, 1997,
including the high for the quarters ended November, 1997 and
December 31, 1997 have not been adjusted to give effect to the spinoff
of New Choice or the reverse stock split.
(2) On September 16, 1997, the Company changed its fiscal year
end from May 31 to December 31.
On October 15, 1997, the Company made a special dividend, consisting of the
distribution to holders of the Company's common stock, on a share-for-share
basis, of all of the outstanding shares of the common stock of Choice Hotels
Franchising, Inc. (now known as Choice Hotels International, Inc.). This was
the only dividend paid since November 4, 1996. The Company does not anticipate
the payment of any cash dividends on its common stock in the foreseeable future.
Payments of dividends on Company common stock may be subject to limitations as
may be imposed by the Company's credit facilities from time to time. The
declaration of dividends will be subject to the discretion of the Board of
Directors.
As of March 12, 1998, there were 5,875 record holders of Company common stock.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the seven
months ended For the year ended
December 31, May 31,
----------------------------------------------------------------
1997 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
REVENUES (unaudited)
Rooms $100,670 $165,239 $137,001 $101,381 $66,031 $32,835
Food and beverage 9,231 13,356 11,392 8,121 5,001 5,027
Other 4,652 7,158 6,232 5,012 3,152 3,499
------------ ------------ ------------ ------------ ------------ ------------
Total revenues 114,553 185,753 154,625 114,514 74,184 41,361
------------ ------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES
Departmental Expenses
Rooms 33,484 58,502 51,657 43,168 25,826 12,289
Food and beverage 7,319 10,887 9,792 6,866 4,335 4,059
Other 1,530 2,674 2,570 1,476 1,012 1,272
Undistributed Operating Expenses
Administrative and general 9,486 17,990 16,358 11,550 6,741 4,539
Marketing 8,862 14,545 12,152 9,008 5,507 3,574
Utility costs 5,697 8,816 7,712 5,670 3,583 2,251
Property operation and maintenance 5,746 9,428 8,118 5,891 3,813 2,583
Property taxes, rent and insurance 5,010 6,857 6,044 3,959 2,241 1,766
Depreciation and amortization 14,246 20,632 16,636 12,513 8,434 5,423
Corporate 8,244 7,691 8,026 6,038 2,864 3,065
Provision for asset impairment and
other non-recurring charges 5,119 - 24,595 - - -
------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses 104,743 158,022 163,660 106,139 64,356 40,821
------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) 9,810 27,731 (9,035) 8,375 9,828 540
------------ ------------ ------------ ------------ ------------ ------------
Interest Expense 10,138 15,891 12,839 9,155 3,214 2,032
------------ ------------ ------------ ------------ ------------ ------------
(Loss) income from continuing operations
before income taxes (328) 11,840 (21,874) (780) 6,614 (1,492)
Income taxes (44) 5,035 (8,523) (323) 3,000 (642)
------------ ------------ ------------ ------------ ------------ ------------
(Loss) income from continuing operations (284) 6,805 (13,351) (457) 3,614 (850)
Discontinued operations (1) 16,369 35,219 21,809 17,268 6,045 8,504
------------ ------------ ------------ ------------ ------------ ------------
Net income before extraordinary item 16,085 42,024 8,458 16,811 9,659 7,654
Extraordinary item -- loss from
early extinguishment of debt
(net of $747 tax benefit) - 1,144 - - - -
------------ ------------ ------------ ------------ ------------ ------------
Net income $16,085 $40,880 $8,458 $16,811 $9,659 $7,654
============ ============ ============ ============ ============ ============
Basic earnings per share data
From continuing operations ($0.01) $0.32 ($0.64) ($0.02) $0.18 ($0.04)
From discontinued operations 0.82 1.69 1.05 0.83 0.30 0.44
From extraordinary items - (0.05) - - - -
------------ ------------ ------------ ------------ ------------ ------------
Net income $0.81 $1.96 $0.41 $0.81 $0.48 $0.40
=========== =========== =========== =========== =========== ===========
Diluted earnings per share data
From continuing operations ($0.01) $0.32 ($0.64) ($0.02) $0.18 ($0.04)
From discontinued operations 0.82 1.66 1.05 0.83 0.30 0.44
From extraordinary items - (0.05) - - - -
------------ ------------ ------------ ------------ ------------ ------------
Net income $0.81 $1.93 $0.41 $0.81 $0.48 $0.40
=========== =========== =========== =========== =========== ===========
Weighted average common shares outstanding (2) 19,979 20,893 20,876 20,827 20,175 19,105
=========== =========== =========== =========== =========== ===========
</TABLE>
(1) Discontinued operations represents the income of the discontinued
franchising business less applicable income taxes of $11,825, $25,165,
$15,923, $13,467, $5,019, and $6,422, respectively)
(2) Weighted average common shares outstanding represents the weighted average
common shares outstanding of the Company's parent Manor Care, Inc. for
fiscal years 1993 through 1996. Fiscal year 1997 represents the weighted
average common shares of Manor Care, Inc. for the period through November
1, 1997. The period following November 1, 1997 represents the weighted
average common shares of the Company. Fiscal year 1993 through 1997 have
been adjusted for the one-for-three reverse stock split.
15
<PAGE>
<TABLE>
<CAPTION>
For the seven
months ended For the year ended
December 31, May 31,
----------------------------------------------------------------
1997 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets 400,983 426,429 328,311 254,229 178,652 105,389
Notes payable to Manor Care, Inc. - 37,022 147,023 119,823 68,361 -
Total debt 248,120 260,369 163,497 137,122 88,711 6,761
Total liabilities 311,676 301,942 180,752 188,400 123,444 14,642
Equity or investments and advances
from Parent 89,307 124,487 147,559 65,829 55,208 90,747
</TABLE>
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company owned and operated 76 hotels with 10,885 rooms in 26 states at
December 31, 1997. The hotels are under the brand names Comfort, Clarion,
Sleep, Quality, Mainstay, Rodeway and Econolodge. The Company's continuing
business consists primarily of guest room revenue, meeting room revenue, and
food and beverage revenue from owned and operated hotels.
On October 15, 1997, the Company distributed, through a special dividend, its
franchising business and European hotel operations ("New Choice") to
shareholders. On the date of distribution, Company shareholders of record on
October 7, 1997, received one share of New Choice (renamed Choice Hotels
International, Inc.) for each share of the Company held. In addition, the
Company, which was previously named Choice Hotels International, Inc., changed
its name to Sunburst Hospitality Corporation and effected a one-for-three
reverse stock split.
European hotel operations, which were distributed with New Choice, are
presented as part of continuing operations in the consolidated financial
statements in accordance with generally accepted accounting principles.
However, for purposes of analyzing the operations of the Company, management
focuses on domestic hotel operations. Therefore, the following discussion
focuses on the results of operations of the domestic hotels which constitute the
ongoing operations of the Company at December 31, 1997.
Comparison of Calendar Year 1997 and Calendar Year 1996 Domestic hotels
- ------------------------------------------------------------------------
In September 1997, the Company changed its year end from May 31 to December
31. This change in fiscal year end, combined with the seasonality of the
lodging industry, has a significant impact on the comparability of the seven
months ended December 31, 1997 with prior fiscal years. To assist in
comparisons, the following discusses the operating results of calendar year 1996
as compared to calendar year 1997.
The following tables present calendar quarter and full calendar year
information showing the results of operations of the Company's domestic hotels
for calendar years 1996 and 1997 (in thousands, unaudited).
<TABLE>
<CAPTION>
Quarter ending
----------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Domestic Revenue 41,258 46,982 49,052 42,760
Domestic EBITDA (1) 11,793 15,484 14,092 3,294
Year ended December 31, 1996
Domestic Revenue 34,656 40,987 43,615 37,683
Domestic EBITDA (1) 8,542 2,585 13,226 7,413
</TABLE>
________________________
(1) EBITDA consists of the sum of net income (loss), interest expense, income
taxes, and depreciation and amortization. EBITDA is presented because such
data is used by certain investors to determine the Company's ability to meet
debt service, fund capital expenditures and expand its business. The Company
considers EBITDA to be an indicative measure of operating performance
particularly due to the large amount of depreciation and 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.
17
<PAGE>
<TABLE>
<CAPTION>
Year ending
December 31,
----------------------------------------------
1997 1996
----------------------------------------------
<S> <C> <C>
Revenues
Rooms $157,380 $137,114
Food and beverage 14,991 12,950
Other 7,681 6,877
----------------------------------------------
Total revenues 180,052 156,941
----------------------------------------------
Operating Expenses
Departmental Expenses
Rooms 45,607 39,701
Food and beverage 11,972 10,835
Other 2,828 2,400
Undistributed Operating Expenses
Administrative and general 16,662 18,520
Marketing 14,975 13,895
Utility costs 9,399 8,423
Property operation and maintenance 9,815 8,922
Property taxes, rent and insurance 7,933 7,521
Depreciation and amortization 22,142 17,335
Corporate 11,079 6,383
Provision for asset impairment and other
non-recurring charges 5,119 8,575
----------------------------------------------
Total operating expenses 157,531 142,510
----------------------------------------------
Operating income 22,521 14,431
----------------------------------------------
Interest expense 16,461 12,726
----------------------------------------------
Income from continuing operations before
Income taxes 6,060 1,705
Income taxes 2,629 716
----------------------------------------------
Income from continuing operations 3,431 989
==============================================
Basic Earnings Per Share $0.17 $0.05
==============================================
</TABLE>
Domestic hotel revenues increased from $156.9 million in calendar year 1996
to $180.1 million in calendar year 1997, an increase of 14.7%. Domestic gross
operating margin (operating income before corporate expense, depreciation and
amortization, and non-recurring charges), increased from 29.8% in 1996 to 33.8%
in 1997. Increases in revenues were due to improved Revenue Per Available Room
("RevPAR") and an increase in the number of hotels from 69 at the end of 1996 to
76 at the end of 1997. The Company utilizes RevPAR, which is calculated by
multiplying the percentage of occupied rooms by the average daily room rate
realized, as a measure of the operating performance of its hotels. Overall,
RevPAR increased from $39.34 to $41.68, an increase of 6.0%. Increases in
RevPAR by service sector are consistent with industry trends and are caused
principally by aggressive rate increases. Average daily rates for the Company's
full-service hotels increased 6.9% to $65.68 in calendar year 1997. Limited-
service average daily rates of $58.25 in calendar year 1997 represented a 6.1%
increase over the prior year. Consistent with past experience, hotels recently
acquired and renovated enjoyed substantial RevPAR increases. For example,
hotels acquired in fiscal year 1995 experienced a 12.0% increase in RevPAR and
hotels acquired in 1996 had a 19.7% increase in RevPAR.
18
<PAGE>
Comparison of Seven Months Ended December 31, 1997 and Seven Months Ended
- -------------------------------------------------------------------------
December 31, 1996 Operating Results
- -----------------------------------
Hotel revenues increased from $106.5 million for the seven months ended
December 31, 1996, to $114.6 million for the same period of 1997. Domestic
hotel revenues during those seven month periods increased from $95.5 million to
$107.6 million, an increase of 12.7%. This increase in revenue was primarily a
result of additional rooms achieved through hotel acquisition and development
and overall RevPAR increases. At December 31, 1996, there were 69 domestic
hotels open and operating as compared to 76 hotels as of December 31, 1997. The
additional hotels contributed $3.6 million to the revenue increase. Domestic
RevPAR for the comparative periods by service level are as follows:
<TABLE>
<CAPTION>
1997 1996 % Increase
------------- ------------ ------------------
<S> <C> <C> <C>
Full Service $42.96 $40.51 6.0%
Limited Service $40.20 $39.19 2.6%
Suite $47.01 $48.39 (2.9%)
Combined $41.67 $40.38 3.2%
</TABLE>
The Company's full-service hotels enjoyed RevPAR increases higher than the
overall industry averages. The Company's limited service hotels,
notwithstanding a 5.6% increase in ADR to $59.11, saw the rate of RevPAR growth
slow as occupancies declined. The suite RevPAR comparison was impacted by the
opening and occupancy ramp-up of two MainStay Suite hotels opened late in the
calendar year.
Hotels recently acquired and renovated continue to lead in terms of RevPAR
growth as it typically takes several years to reach stabilized levels of
operating performance. For example, hotels acquired and renovated in fiscal
year 1996 realized a 20.0% RevPAR increase.
Domestic operating income before non-recurring provisions amounted to $14.5
million during the seven months ended December 31, 1997. This compares to $14.4
million during the same period in the preceding year. Increases in depreciation
and amortization due to the Company's development program and increases in
general corporate expenses relating to the Company's emergence as a separate,
stand-alone company, impact the year-over-year comparison of these stub periods.
Earnings before interest, taxes, depreciation and amortization (EBITDA) and
before non-recurring provisions was $29.2 million for the seven months ended
December 31, 1997. This compares to $26.4 million for the same period in the
preceding year. Property level gross operating profit, however, increased from
$31.2 million in the seven month period ended December 31, 1996 to $37.4 million
for the same period ended December 31, 1997, an increase of 19.9%. An increase
in general corporate expense from 4.5% of revenues in 1996 to 7.2% of revenues
in 1997 was due primarily to incremental costs associated with the Company's
emergence as a stand-alone, publicly traded company and other investments in
infrastructure to support a growing company.
Included in provision for asset impairment and other non-recurring charges
in 1997 are non-recurring loss provisions totaling $5.1 million (pre-tax). This
loss provision was recorded in December 1997 in order to reserve $2.1 million of
previously capitalized costs and future payment obligations related to a data
processing services agreement and computer system which will be replaced in
1998, to accrue the estimated cost of $1.0 million for future lease costs
associated with space the Company has vacated, and to reserve $2.0 million for
future obligations related to an agreement expiring in May, 1999, for services
which the Company will no longer utilize and, therefore, have no future
benefits. The service and lease agreements are with Manor Care and New Choice
and were entered into in conjunction with the distribution and the Manor Care
distribution. Recent corporate decisions, including a consolidation of leased
office space, resulted in the recognition of these costs currently.
Interest expense increased from $8.6 million for the seven months ended
December 31, 1996 to $10.1 million for the same period of 1997, an increase of
17.4%. The increase results from an increased amount of debt outstanding over
the respective periods. The Company's debt has increased over the period to
fund the acquisition and development of hotels.
19
<PAGE>
The Company had a loss from continuing operations of $284,000 for the seven
months ended December 31, 1997 as compared to income of $3.6 million for the
same period of 1996. The decrease in income from continuing operations results
primarily from the provision for asset impairment and other non-recurring
charges and the increase in interest expense for the period ended December 31,
1997.
Income from discontinued operations amounted to $16.4 million in the seven
months ended December 31, 1997 compared to $22.5 million in the same period in
the prior year as those amounts reflect the spun-off franchise business only
through the October 15, 1997 distribution date.
Included in continuing operations but also spun-off at October 16, 1997
were the Company's European hotel operations which contributed $7.0 million of
revenue and $0.4 million of operating income in 1997 compared to $11.0 million
of revenue and $0.4 million of operating income in the prior year.
Comparison of Fiscal Year 1997 and Fiscal Year 1996 Operating Results
- ---------------------------------------------------------------------
Sunburst's domestic revenues were $168.0 million for fiscal year 1997, an
increase of 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 3.1% 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 $2.0 million in fiscal year 1997 also contributed to
revenue growth.
Domestic operating expenses increased $12.7 million or 10.0% in fiscal year
1997 resulting primarily from the addition of six hotels during the year and to
a lesser extent a $1.1 million increase in food and beverage costs.
Depreciation expense increased 24.0% in fiscal year 1997 as a result of the
addition of new hotels and renovation of existing hotel properties during fiscal
years 1997 and 1996.
Hotel gross operating margins increased to 30.2% in fiscal year 1997 from
26.0% in fiscal year 1996 due primarily to RevPAR increases significantly in
excess of increases in operating costs.
General corporate expense was 4.1% of revenue in fiscal year 1997 as
compared to 5.2% of revenue in 1996. Operating income, before non-recurring
provisions, increased from $15.6 million in 1996 to $27.7 million in 1997.
Operating income margins, exclusive of non-recurring charges, increased from
10.1% in fiscal 1996 to 14.9% in fiscal 1997. Income from continuing operations
before income taxes and non-recurring charges amounted to $11.8 million in 1997,
an increase from $2.7 million in 1996.
During fiscal 1996, the Company recorded a provision for asset impairment
and other non-recurring charges amounting to $24.6 million (pre-tax). The
provision related primarily to the impairment of certain European hotel
operations subsequently spun-off with New Choice.
Interest expense for the Company increased $3.1 million or 23.8% in fiscal
year 1997 as a result of increased borrowings to support the development
program.
The discontinued franchise operations spun-off in October 1997 contributed
$35.2 million of the after-tax income in 1997, an increase of 61.5% from the
$21.8 million contributed in fiscal year 1996.
The Company incurred an extraordinary loss of $1.1 million (net of tax) in
fiscal year 1997 in connection with the prepayment of debt to Manor Care, Inc.
20
<PAGE>
Comparison of Fiscal Year 1996 and Fiscal Year 1995 Operating Results
- ---------------------------------------------------------------------
The Company's revenues increased 35.0% from $114.5 million in fiscal year
1995 to $154.6 million in fiscal year 1996. Domestic revenues increased 40.8%,
or $39.1 million, in fiscal year 1996 compared to fiscal year 1995. The
increase in domestic revenues is attributable primarily to the net addition of
17 hotels to the Company's portfolio and an 8.4% increase in RevPAR. In
addition, food and beverage revenues increased 40.3% in fiscal year 1996 as
compared to fiscal year 1995, also contributing to the increase in total
revenues.
Total operating expenses, excluding the provision for asset impairment of
$24.6 million, increased 31.0%, or $32.9 million. The increase in operating
expenses, which is consistent with the Company's revenue growth over the period,
is a result of the increase in the number of hotels owned and operated over the
period.
Overall, the Company had an operating loss for fiscal year 1996 as a result
of the provision for asset impairment and other non-recurring charges.
Excluding the impact of the provision for impairment, the Company`s operating
income increased $7.2 million to $15.6 million as compared to $8.4 million in
1995. The operating margins for fiscal year 1996, excluding the impairment
provision, increased from 7.3% in fiscal year 1995 to 10.1% in fiscal year 1996.
Interest expense increased 40.2% in fiscal year 1996 as compared to fiscal
year 1995. The $3.7 million increase results from additional funds borrowed
under the note payable to Manor Care, Inc. for the acquisition of hotels.
Income from discontinued operations, which contributed to the Company's net
income in fiscal years 1995 and 1996, increased 26.3% in fiscal year 1996, to
$21.8 million (net of taxes).
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities was $42.2 million for the seven
months ended December 31, 1997, as compared to $87.3 million, $55.4 million, and
$49.5 million for fiscal years 1997, 1996, and 1995, respectively.
The Company maintains an $80 million committed line of credit with a group
of four banks to support on-going operations and to fulfill capital
requirements. The credit facility expires in October 2000. At December 31,
1997, availability under that line of credit amounted to $69.0 million of which
$16.0 million was drawn. The facility's availability will expand to the full
$80 million level as the Company's cash flow increases. The Company intends to
aggressively develop MainStay Suites, a mid-priced extended stay hotel product.
At December 31, 1997, three MainStay Suites were open and operating with another
12 under construction. In addition to those under construction, there are
another 6 projects in development. The cost to develop a MainStay Suite
averages approximately $5.7 million. In order for the Company to continue on a
long-term basis the MainStay development program, additional capital will be
required. Subject to market conditions, the Company anticipates raising
additional equity and debt capital during calendar year 1998.
At the distribution date, the Company owed New Choice $115.0 million in the
form of a pay-in-kind subordinated note with a five year maturity. The note
provides additional financial flexibility due to the fact that accrued interest
is payable at maturity. The Company does, however, expect to refinance the New
Choice note with a longer-term and lower cost subordinated debt financing as
soon as practicable.
At the distribution date, Sunburst owed New Choice an additional
approximately $15.0 million relative to the final allocation of assets,
liabilities and equity between the two parties. Sunburst intends to repay this
to New Choice on or before December 31, 1998. In addition to the approximately
$15.0 million, the Company owes New Choice for the reimbursement of various
expenses subsequent to the date of distribution. These amounts are classified
as "Payable to Choice Hotels International, Inc." on the balance sheet.
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
21
<PAGE>
by 37 hotel properties with a net book value of $145.4 million owned by the
Company. The certificates bear a 7.8% blended weighted average interest rate
and have a final maturity of May 5, 2012. The 37 hotel properties so
collateralized reported EBITDA of $18.2 million for the seven months ended
December 31, 1997. The Company used the proceeds to repay debt payable to its
former parent, Manor Care, Inc.
At December 31, 1997, the Company's debt to book capitalization amounted to
73.5%, while debt to market capitalization was 55.7%. Debt to domestic hotel
EBITDA amounted to 5.6:1 and domestic hotel EBITDA to domestic hotel interest
was 2.7:1 for the calendar year 1997.
Notwithstanding the real estate intensive nature of the Company's business,
the Company's objective is to reduce its overall leverage while continuing to
grow through development. In addition to a planned equity offering, the Company
intends to strategically dispose of mature hotels and utilize the proceeds to
retire debt. The Company has identified six such properties which will be
marketed for sale in calendar 1998.
While cash flow along with the credit available under the Company's bank
facility and the proceeds from the sale of the six identified hotels is expected
to be adequate to fund operations and committed construction projects, accessing
additional capital is imperative in order for the Company to continue executing
its development and growth plans.
Excluding development, recurring capital expenditures required to maintain
operating assets in the appropriate condition are estimated to be approximately
$15 million per year. Planned capital expenditures for the development of
MainStay Suites and Sleep Inns in 1998 are projected to be approximately $83.6
million. Planned capital expenditures for the development of MainStay Suites in
calendar 1999 are projected to be $93.5 million. Sunburst may also pursue
additional acquisitions of significantly under valued properties.
Year 2000
- ----------
Many existing computer programs use two digits to identify a year. These
programs were designed and developed without considering the impact of the
upcoming change in the century. If the programs are not corrected, computer
applications could fail or create erroneous results at the turn of the century.
The Company is currently evaluating the impact the year 2000 will have on
its operations. While there is currently no estimate of the cost of addressing
the issue and the full implication of the problem on the Company's operations is
not yet known, it is not, at this time, believed to be significant.
Seasonality
- -----------
Demand at many of the hotels is affected by recurring seasonal patterns,
depending upon the location of the hotel. Accordingly, the Company's operations
are seasonal in nature, with lower revenue and operating profit in November
through February and higher revenue and operating profit in March through
October.
Inflation
- ---------
Inflation has not had a material effect on the revenues or operating
results of the Company during the seven months ended December 31, 1997 or the
three fiscal years ended May 31, 1997.
Forward Looking Statements
- --------------------------
Management's Discussion and Analysis, as well as other parts of this Annual
Report on Form 10-K, contain information based on management's beliefs and
forward-looking statements that involve a number of risks, uncertainties and
assumptions. There can be no assurances that actual results will not materially
differ from the forward-looking statements as a result of various factors,
including, but not limited to: the Company's substantial leverage and its plan
to realize cash proceeds through leveraging its remaining assets; its plans to
make selected strategic investments and acquisitions and develop new hotels; its
success in implementing its business strategy,
22
<PAGE>
including its success in arranging financing where required; competition;
government regulation; and general economic and business conditions. The
Company's intentions with respect to the development of MainStay Suites and
other new hotels is subject to: the Company's ability to access sufficient
capital to continue such development; the acceptance of and demand for such
products by the consumer and competition.
Item 8. Financial Statements and Supplementary Data.
Page
----
Report of Independent Public Accountants 24
Consolidated Balance Sheets 25
Consolidated Statements of Income 26
Consolidated Statements of Cash Flows 27
Consolidated Statements of Stockholders' Equity 28
Notes to Consolidated Financial Statements 29-44
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Sunburst Hospitality Corporation:
We have audited the accompanying consolidated balance sheets of Sunburst
Hospitality Corporation and subsidiaries (the "Company" formerly Choice Hotels
International, Inc., see Basis of Presentation) as of December 31, 1997 and May
31, 1997, the related consolidated statements of income and cash flows for the
seven months ended December 31, 1997, and each of the three fiscal years in the
period ended May 31, 1997, and stockholders' equity for the seven months ended
December 31, 1997 and May 31, 1997. These financial statements and schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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 financial position of Sunburst Hospitality
Corporation as of December 31, 1997, and May 31, 1997, and the results of its
operations and its cash flows for the seven months ended December 31, 1997 and
each of the three fiscal years in the period ended May 31, 1997, and the
stockholders' equity for the seven months ended December 31, 1997 and May 31,
1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index at Item
14(a)(2) are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
February 4, 1998
24
<PAGE>
SUNBURST HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
As of
-------------------------
December 31, May 31,
1997 1997
------------ ------------
<S> <C> <C>
ASSETS
Real estate, net $371,305 $338,419
Receivables (net of allowance for doubtful
accounts of $616 and $585, respectively) 6,261 7,659
Deferred income taxes ($0 and $7,205, respectively)
and other assets 17,509 20,982
Cash and cash equivalents 5,908 7,033
Net investment in discontinued operations - 52,336
------------ ------------
Total assets $400,983 $426,429
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt
Mortgages and other long term debt $133,648 $223,347
Note payable to Manor Care, Inc. - 37,022
Note payable to Choice Hotels International, Inc. 114,472 -
------------ ------------
248,120 260,369
Accounts payable 24,053 25,605
Payable to Choice Hotels International, Inc. 25,066 -
Accrued expenses 12,010 15,968
Deferred income taxes ($1,378 and $0, respectively) and
other liabilities 2,427 -
------------ ------------
Total liabilities 311,676 301,942
------------ ------------
STOCKHOLDERS' EQUITY
Common stock (60,000,000 and 160,000,000 authorized, at $0.01 par
value, 21,366,282 and 63,862,671 issued and 19,947,042 and
60,164,947 outstanding at December 31, 1997 and May 31, 1997,
respectively) 200 602
Additional paid-in-capital 105,653 113,828
Retained earnings (16,546) 17,075
Cumulative translation adjustment - (7,018)
------------ ------------
Total stockholders' equity 89,307 124,487
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $400,983 $426,429
=========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Balance
Sheets.
25
<PAGE>
SUNBURST HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the seven months
ended For the fiscal year ended
December 31, May 31,
------------ ------------ ------------ ------------
1997 1997 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Rooms $100,670 $165,239 $137,001 $101,381
Food and beverage 9,231 13,356 11,392 8,121
Other 4,652 7,158 6,232 5,012
------------ ------------ ------------ ------------
Total revenues 114,553 185,753 154,625 114,514
------------ ------------ ------------ ------------
OPERATING EXPENSES
Departmental Expenses
Rooms 33,484 58,502 51,657 43,168
Food and beverage 7,319 10,887 9,792 6,866
Other 1,530 2,674 2,570 1,476
Undistributed Operating Expenses
Administrative and general 9,486 17,990 16,358 11,550
Marketing 8,862 14,545 12,152 9,008
Utility costs 5,697 8,816 7,712 5,670
Property operation and maintenance 5,746 9,428 8,118 5,891
Property taxes, rent and insurance 5,010 6,857 6,044 3,959
Depreciation and amortization 14,246 20,632 16,636 12,513
Corporate 8,244 7,691 8,026 6,038
Provision for asset impairment and other
non-recurring charges 5,119 - 24,595 -
------------ ------------ ------------ ------------
Total operating expenses 104,743 158,022 163,660 106,139
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 9,810 27,731 (9,035) 8,375
------------ ------------ ------------ ------------
INTEREST EXPENSE 10,138 15,891 12,839 9,155
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (328) 11,840 (21,874) (780)
Income taxes (44) 5,035 (8,523) (323)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (284) 6,805 (13,351) (457)
DISCONTINUED OPERATIONS: Income from
operations of discontinued franchising business
(less applicable income taxes of $11,825, $25,165,
$15,923 and $13,467, respectively) 16,369 35,219 21,809 17,268
------------ ------------ ------------ ------------
NET INCOME BEFORE EXTRAORDINARY ITEM 16,085 42,024 8,458 16,811
EXTRAORDINARY ITEM -- LOSS FROM
EARLY EXTINGUISHMENT OF DEBT (NET
OF $747 TAX BENEFIT) - 1,144 - -
------------ ------------ ------------ ------------
NET INCOME $16,085 $40,880 $8,458 $16,811
============ ============ ============ ============
Basic earnings per share
------------------------
From continuing operations ($0.01) $0.32 ($0.64) ($0.02)
From discontinued operations 0.82 1.69 1.05 0.83
From extraordinary item - (0.05) - -
------------ ------------ ------------ ------------
Earnings per share $0.81 $1.96 $0.41 $0.81
============ ============ ============ ============
Diluted earnings per share
--------------------------
From continuing operations ($0.01) $0.32 ($0.64) ($0.02)
From discontinued operations 0.82 1.66 1.05 0.83
From extraordinary item - (0.05) - -
------------ ------------ ------------ ------------
Earnings per share $0.81 $1.93 $0.41 $0.81
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Statements of
Income.
26
<PAGE>
SUNBURST HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the seven
months ended For the fiscal year ended
December 31, May 31,
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1997 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations $ (284) $ 5,661 $ (13,351) $ (457)
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization 14,246 20,632 16,636 12,513
Amortization of deferred financing fees 248 - - -
Amortization of debt discount 528 29 34 171
Provision for bad debts, net 247 560 289 214
Decrease in deferred taxes 695 2,920 (7,726) 759
Loss on sale of operating hotel - 220 584 -
Provision for asset impairment and other non-recurring
charges 5,119 - 19,420 -
Change in assets and liabilities:
Change in receivables (152) (1,686) 468 (1,008)
Change in other assets (357) (3,963) (3,106) (1,786)
Change in accounts payable and accrued expenses (6,675) 17,391 7,722 1,952
Increase in payable to Choice Hotels International, Inc. 10,066 - - -
Change in current taxes receivable (2,310) (1,230) 1,441 476
Change in other liabilities - - 384 (4,790)
------------ ------------ ------------ ------------
Net cash provided by continuing operations 21,371 40,534 22,795 8,044
Net cash provided by discontinued operations 20,876 46,724 32,645 41,454
------------ ------------ ------------ ------------
Net cash provided by operating activities 42,247 87,258 55,440 49,498
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (61,460) (75,523) (46,966) (27,896)
Acquisition of operating hotels - (5,550) (49,617) (59,766)
Distribution of New Choice (4,166) - - -
Proceeds from sale of property and equipment 170 2,522 5,479 -
------------ ------------ ------------ ------------
NET CASH UTILIZED BY CONTINUING OPERATIONS (65,456) (78,551) (91,104) (87,662)
NET CASH UTILIZED BY DISCONTINUED OPERATIONS (118,474) (15,864) (78,844) (6,993)
------------ ------------ ------------ ------------
NET CASH UTILIZED BY INVESTING ACTIVITIES (183,930) (94,415) (169,948) (94,655)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and other long term debt 16,023 208,000 - -
Proceeds from note payable to Choice Hotels International, Inc. 115,000 - - -
Principal payments of debt (92,171) (1,157) (645) (2,890)
(Principal payments on) proceeds from notes payable to Manor
Care, Inc. (37,022) (110,000) 27,201 51,461
Payment of financing fees - (3,959) - -
Proceeds from issuance of common stock 1,153 3,410 - -
Purchases of treasury stock (10,554) (53,150) - -
Payable to Choice Hotels International, Inc. for net worth
guarantee 15,000 - - -
Advances (to) from Manor Care, Inc., net - (9,971) 73,272 (6,190)
------------ ------------ ------------ ------------
NET CASH PROVIDED BY CONTINUING OPERATIONS 7,429 33,173 99,828 42,381
NET CASH PROVIDED BY (UTILIZED BY) DISCONTINUED OPERATIONS 129,337 (19,730) 17,131 2,075
------------ ------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 136,766 13,443 116,959 44,456
------------ ------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,917) 6,286 2,451 (701)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,825 4,539 2,088 2,789
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,908 $ 10,825 $ 4,539 $ 2,088
============ ============ ============ ============
Cash and cash equivalents of continuing operations $ 5,908 $ 7,033 $ 1,436 $ 1,661
Cash and cash equivalents of discontinued operations $ - $ 3,792 $ 3,103 $ 427
</TABLE>
The accompanying notes are an integral part of these Consolidated Statements of
Cash Flows.
27
<PAGE>
SUNBURST HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
Common Stock Additional Translation Retained
-------------------------
Shares Amount Paid-in-Capital Adjustment Earnings
---------------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
DISTRIBUTION FROM
MANOR CARE INC.,
NOV. 1, 1996 63,081,129 $631 $162,512 $(1,750) $ -
Net income 40,880
Transfer of net income
to Manor Care, Inc. (23,805)
Exercise of stock
options/grants 781,542 8 4,651
Translation adjustment (5,268)
Treasury purchases (3,697,724) (37) (53,335)
-----------------------------------------------------------------
BALANCE, MAY 31, 1997 60,164,947 $602 $113,828 $(7,018) $17,075
-----------------------------------------------------------------
Net income 16,085
Adjustment to Nov. 1, 1996
distribution from Manor
Care Inc. (1,044)
Exercise of stock
options/grants 202,386 2 1,910
Stock grants issued
from Treasury shares 13,786 65
Treasury purchases (588,931) (6) (10,548)
Translation adjustment (1,644)
Distribution of Franchising 8,662 (48,662)
One-for-three reverse
stock split on October
15, 1997 (39,845,146) (398) 398
-----------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 19,947,042 $200 $105,653 $ - ($16,546)
=================================================================
</TABLE>
The accompanying notes are an integral part of these Consolidated Statements of
Stockholders' Equity.
28
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
On March 7, 1996, Manor Care, Inc. ("Manor Care") announced its intention to
proceed with the separation of its lodging business from its health care
business through a Spinoff 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
Choice Hotels International Inc. (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. At that time, the operations of the
Company consisted 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. ("New Choice").
On April 29, 1997, the Company's Board of Directors announced its intention to
separate the Company's franchising business from its owned hotel business. On
September 16, 1997 the Board of Directors and shareholders of the Company
approved the separation of the businesses through a Spinoff of the franchising
business, along with the Company's European hotel and franchising operations, to
its shareholders (the "distribution"). The Board of Directors set October 15,
1997 as the date of distribution and on that date, Company shareholders received
one share in New Choice (renamed "Choice Hotels International, Inc.") for every
share of Company stock held on October 7, 1997 (the date of record). Concurrent
with the October 15, 1997 distribution date, the Company changed its name to
Sunburst Hospitality Corporation and effected a one-for-three reverse stock
split of its common stock.
The consolidated financial statements present the financial position, results of
operations and cash flows of the Company for the period prior to November 1,
1996 as if it were formed as a separate entity of Manor Care. In connection
with the Spinoff of the franchising business, the Company has presented the
franchising business as a discontinued operation in the consolidated financial
statements. Although the Company's European hotel operations were distributed
to shareholders along with the franchising business, generally accepted
accounting principles do not permit presenting this operation as discontinued.
Therefore, the European hotel operations are included in continuing operations.
The following tables illustrate the impact of the European hotel operations on
the continuing operations of the Company (in thousands).
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED DOMESTIC HOTEL EUROPEAN HOTEL CONTINUING
DECEMBER 31, 1997 OPERATIONS OPERATIONS OPERATIONS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $107,574 $6,979 $114,553
Operating expenses 98,169 6,574 104,743
-------------------------------------------------------------
Operating income 9,405 405 9,810
-------------------------------------------------------------
Interest expense 9,800 338 10,138
-------------------------------------------------------------
Pretax income (loss) (395) 67 (328)
Income tax expense (benefit) (71) 27 (44)
-------------------------------------------------------------
Net income (loss) from
continuing operations $ (324) $ 40 $ (284)
=============================================================
</TABLE>
29
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DOMESTIC HOTEL EUROPEAN HOTEL CONTINUING
MAY 31, 1997 OPERATIONS OPERATIONS OPERATIONS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $168,016 $17,737 $185,753
Operating expenses 140,468 17,554 158,022
-------------------------------------------------------------
Operating income 27,548 183 27,731
-------------------------------------------------------------
Interest expense 14,899 992 15,891
-------------------------------------------------------------
Pretax income (loss) 12,649 (809) 11,840
Income tax expense (benefit) 5,355 (320) 5,035
-------------------------------------------------------------
Net income (loss) from
continuing operations $ 7,294 $ (489) $ 6,805
=============================================================
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DOMESTIC HOTEL EUROPEAN HOTEL CONTINUING
MAY 31, 1996 OPERATIONS OPERATIONS OPERATIONS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $135,022 $ 19,603 $154,625
Operating expenses 127,722 35,938 163,660
---------------------------------------------------------------
Operating income (loss) 7,300 (16,335) (9,035)
---------------------------------------------------------------
Interest expense 12,419 420 12,839
---------------------------------------------------------------
Pretax loss (5,119) (16,755) (21,874)
Income tax benefit (1,913) (6,610) (8,523)
---------------------------------------------------------------
Net loss from
continuing operations $ (3,206) $(10,145) $(13,351)
===============================================================
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DOMESTIC HOTEL EUROPEAN HOTEL CONTINUING
MAY 31, 1995 OPERATIONS OPERATIONS OPERATIONS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $95,876 $18,638 $114,514
Operating expenses 85,777 20,362 106,139
-------------------------------------------------------------
Operating income (loss) 10,099 (1,724) 8,375
-------------------------------------------------------------
Interest expense 9,155 - 9,155
-------------------------------------------------------------
Pretax income (loss) 944 (1,724) (780)
Income tax expense (benefit) 361 (684) (323)
-------------------------------------------------------------
Net income (loss) from
continuing operations $ 583 $(1,040) $ (457)
=============================================================
</TABLE>
<TABLE>
<CAPTION>
DOMESTIC HOTEL EUROPEAN HOTEL
AS OF MAY 31, 1997 OPERATIONS OPERATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate, net $326,867 $11,552 $338,419
Net investment in discontinued
operations 52,336 52,336
Other assets 25,312 10,362 35,674
--------------------------------------------------------------
Total assets $404,515 $21,914 $426,429
==============================================================
Debt $246,840 $13,529 $260,369
Other liabilities 38,907 2,666 41,573
--------------------------------------------------------------
Total liabilities 285,747 16,195 301,942
--------------------------------------------------------------
Stockholders' equity 118,768 5,719 124,487
--------------------------------------------------------------
Total liabilities and
stockholders' equity $404,515 $21,914 $426,429
==============================================================
</TABLE>
30
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An analysis of the activity in the "Advances (to) from Manor Care Inc., net"
account for the two years ended May 31, 1996 and the five months ended October
31, 1996 is as follows (in thousands):
<TABLE>
<S> <C>
Balance, May 31, 1994 $ 55,208
Cash transfers to Manor Care (6,190)
Net income 16,811
-------------------
Balance, May 31, 1995 65,829
Cash transfers from Manor Care 73,272
Net income 8,458
-------------------
Balance, May 31, 1996 147,559
Cash transfers to Manor Care (9,971)
Net income through October 31, 1996 23,805
-------------------
Balance, October 31, 1996 $161,393
===================
FISCAL Year
</TABLE>
In October 1997, the Company changed its fiscal year end from May 31 to December
31. Therefore, the period ending December 31, 1997 includes seven months of
operations. Information for the comparable seven month period of June 1, 1996
through December 31, 1996 is included in the table below (unaudited, in
thousands, except per share data).
<TABLE>
<CAPTION>
DOMESTIC HOTEL EUROPEAN HOTEL CONTINUING
(Unaudited) OPERATIONS OPERATIONS OPERATIONS
-------------------------------------------------------------
<S> <C> <C> <C>
Revenues $95,535 $10,975 $106,510
Operating expenses 70,364 9,746 80,110
Depreciation and amortization 10,772 813 11,585
-------------------------------------------------------------
Operating income 14,399 416 14,815
Interest expense 7,987 606 8,593
-------------------------------------------------------------
Pretax income (loss) from
continuing operations 6,412 (190) 6,222
Income tax expense (benefit) 2,697 (75) 2,622
-------------------------------------------------------------
Income (loss) from continuing
operations $ 3,715 $ (115) $ 3,600
=============================================================
Earnings per share:
Basic $0.18 $(0.01) $0.17
=============================================================
</TABLE>
The following table presents the Company's results of operations for the full
calendar year 1997 (unaudited, in thousands, except per share data).
<TABLE>
<CAPTION>
(Unaudited) DOMESTIC HOTEL EUROPEAN HOTEL CONTINUING
OPERATIONS OPERATIONS OPERATIONS
-------------------------------------------------------------
<S> <C> <C> <C>
Revenues $180,052 $13,741 $193,793
Operating expenses 135,388 12,401 147,789
Depreciation and amortization 22,142 1,399 23,541
-------------------------------------------------------------
Operating income 22,522 (59) 22,463
Interest expense 16,461 724 17,185
-------------------------------------------------------------
Pretax income (loss) from
continuing operations 6,061 (783) 5,278
Income tax expense (benefit) 2,629 (310) 2,319
-------------------------------------------------------------
Income (loss) from continuing
operations $ 3,432 $ (473) $ 2,959
=============================================================
Earnings per share:
Basic $0.17 $(0.02) $0.15
=============================================================
</TABLE>
31
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
PRE-OPENING COSTS
Pre-opening costs of an operating nature incurred prior to the opening of hotel
properties are deferred and amortized over two years for hotels opened prior to
November 1, 1996 and one year for hotels opened after that date. Such costs,
which are included in other assets, amounted to $1.2 million and $1.6 million,
net of accumulated amortization, at December 31, 1997 and May 31, 1997,
respectively.
REAL ESTATE
The components of real estate are as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, May 31,
1997 1997
---------------------------------------
<S> <C> <C>
Land $ 61,959 $ 56,009
Buildings 263,405 240,963
Furniture, fixtures and equipment 70,598 68,704
Hotels under construction 41,869 36,633
---------------------------------------
437,831 402,309
Less: accumulated depreciation (66,526) (63,890)
---------------------------------------
$371,305 $338,419
=======================================
</TABLE>
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows:
<TABLE>
<S> <C>
Building and improvements 10-40 years
Furniture, fixtures and equipment 3-20 years
</TABLE>
SELF-INSURANCE PROGRAM
Prior to the Manor Care Distribution, the Company participated in Manor Care's
self-insurance program for certain levels of general and professional liability,
automobile liability and workers' compensation coverage. The estimated costs of
these programs were accrued at present values based on actuarial projections for
known and anticipated claims. All self-insurance liabilities through November
1, 1996, were assumed by Manor Care.
Subsequent to the Manor Care distribution, the Company has maintained its own
insurance program, which includes certain levels of retained risk. Estimated
costs are accrued at present values based on actuarial projections for known and
anticipated claims.
IMPAIRMENT POLICY
The Company evaluates the recoverability of long-lived assets 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 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 fair value.
32
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITALIZATION POLICIES
The Company capitalizes interest costs and property taxes incurred during the
construction of capital assets. The Company capitalized $1.9 million and $0.8
million in interest costs for the seven months ending December 31, 1997 and the
fiscal year ending May 31, 1997, respectively. Major renovations and
replacements are capitalized to appropriate property and equipment accounts.
Maintenance, repairs and minor replacements are charged to expense.
RECLASSIFICATIONS
Certain amounts previously presented have been reclassified to conform to the
December 31, 1997 presentation. In addition, the Company's balance sheet was
changed from a classified balance sheet to an unclassified balance sheet
following the distribution of New Choice. This change was made in order to
conform with real estate industry practice.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
INCOME TAXES
The Company was included in the consolidated Federal income tax returns of Manor
Care prior to the Manor Care Distribution. Subsequent to November 1, 1996, the
Company is a separate taxpayer and files its own tax returns. The income tax
provision included in these consolidated statements reflects the historical
income tax provision and temporary differences attributable to the operations of
the Company on a separate return basis. Deferred taxes are recorded for the tax
effect of temporary differences between book and tax income.
Income before income taxes from continuing operations was derived from the
following (in thousands):
<TABLE>
<CAPTION>
For the seven
months ended For the fiscal year ended May 31,
December 31, ----------------------------------------------------
1997 1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) before income taxes
Domestic operations $(395) $12,649 $ (5,119) $ 944
Foreign operations 67 (809) (16,755) (1,724)
------------------- ----------------------------------------------------
Income (loss) before
income taxes $(328) $11,840 $(21,874) $ (780)
=================== ===================================================
</TABLE>
33
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes for continuing operations (in thousands):
<TABLE>
<CAPTION>
For the seven
months ended
December 31, For the fiscal year ended May 31,
-----------------------------------------------------
1997 1997 1996 1995
------------------- -----------------------------------------------------
<S> <C> <C> <C> <C>
Current tax (benefit) expense
Federal $ 621 $2,583 $ 94 $ (32)
Foreign operations 27 (320) (315) (684)
State 134 292 26 (126)
Deferred tax (benefit) expense
Federal (680) 2,048 (1,676) 427
Foreign operations - - (6,295) -
State (146) 432 (357) 92
------------------- -----------------------------------------------------
$ (44) $5,035 $(8,523) $(323)
=================== =====================================================
</TABLE>
Deferred tax asset (liabilities) were composed of the following (in thousands):
<TABLE>
<CAPTION>
December 31, May 31,
1997 1997
------------------- -----------------
<S> <C> <C>
Depreciation and amortization $(2,956) $5,672
Foreign operations - 1,565
Accrued expenses 2,702 626
Other (1,124) (658)
------------------- -----------------
Net deferred tax (liability) asset $(1,378) $7,205
=================== =================
</TABLE>
A reconciliation of income tax expense (benefit) at the statutory rate to income
tax expense included in the accompanying consolidated statements follows:
<TABLE>
<CAPTION>
For the seven
months ended For the fiscal year ended May 31,
December 31, -----------------------------------------------------
(In thousands, except Federal income tax rate) 1997 1997 1996 1995
------------------- -----------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35% 35% 35% 35%
Federal taxes at statutory rate $(115) $4,144 $(7,656) $(273)
State income taxes, net of Federal tax benefit (4) 573 (982) (22)
Other 75 318 115 (28)
------------------- -----------------------------------------------------
Income tax expense (benefit) $ (44) $5,035 $(8,523) $(323)
=================== =====================================================
</TABLE>
Cash paid for state income taxes was $486,000, $805,000, $165,000, and $86,000
for the seven months ending December 31, 1997 and the fiscal years ending May
31, 1997, 1996 and 1995, respectively. Federal income taxes were paid by Manor
Care for the period ending October 31, 1996 and the fiscal years ended May 31,
1996 and 1995. The Company paid Federal income taxes for the consolidated group
(including New Choice and its subsidiaries) of $5.8 million for the seven months
ending December 31, 1997 and $5.5 million for the period from November 1, 1996
through May 31, 1997. At December 31, 1997, and May 31, 1997, the Company had
an income tax receivable of $4.3 million and $1.2 million, respectively.
The Company and Manor Care entered into a tax-sharing agreement for purposes of
allocating pre-Manor Care Distribution tax liabilities among the Company and
Manor Care and their respective subsidiaries. In general, Manor Care is
responsible for (i) filing the consolidated Federal income tax return that
include the Company and its subsidiaries and (ii) paying the taxes relating to
such tax returns to the applicable taxing authorities. The Company
34
<PAGE>
will reimburse Manor Care for the portion of such taxes that relates to the
Company and its subsidiaries. In addition, the Company will assume liability for
all taxes payable by the Company or by Manor Care in the event the Manor Care
Distribution is determined not to be tax-free for Federal income tax purposes.
Manor Care and the Company have agreed to cooperate with each other and to share
information in preparing such tax returns and in dealing with other tax matters.
Following the distribution of New Choice, the Company and New Choice entered
into a tax-sharing agreement to allocate pre-distribution tax liabilities among
the Company and New Choice and their respective subsidiaries. In general, the
Company will be responsible for (i) filing the consolidated Federal income tax
return for the Company's affiliated group (including New Choice and its
subsidiaries through the date of the distribution) and (ii) paying the taxes
related to such returns to the applicable taxing authorities. New Choice will
reimburse the Company for the portion of such taxes that relates to New Choice
and its subsidiaries.
ACCRUED EXPENSES
Accrued expenses were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, May 31,
1997 1997
------------------- -----------------
<S> <C> <C>
Payroll $ 4,449 $ 8,479
Taxes, other than income 3,995 4,097
Other 3,566 3,392
------------------- -----------------
$12,010 $15,968
=================== =================
</TABLE>
LONG-TERM DEBT AND NOTES PAYABLE
Debt consisted of the following at December 31, 1997 and May 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
December 31, May 31,
1997 1997
------------------- -----------------
<S> <C> <C>
$80.0 million revolving credit facility with an
average rate of 8.27% at December 31, 1997 $ 16,000 $ -
$125 million competitive advance and multi-
currency revolving credit facility with an
average rate of 6.28% at May 31, 1997 - 90,500
Multi-class mortgage pass-through certificates
with a blended weighted average rate of 7.8% at
December 31, 1997 and May 31, 1997 115,816 117,294
Note payable to Choice with an effective rate of
8.80% at December 31, 1997 114,472 -
Note payable to Manor Care with a rate of 9% at
May 31, 1997 - 37,022
Capital lease obligations 1,832 15,553
------------------- -----------------
Total indebtedness $248,120 $260,369
=================== =================
</TABLE>
35
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of debt at December 31, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
Year
<S> <C>
1998 $ 3,013
1999 3,254
2000 19,513
2001 4,087
2002 118,079
Thereafter 100,174
-----------------
$248,120
=================
</TABLE>
On October 30, 1996, the Company entered into a $100.0 million competitive
advance and multi-currency revolving credit facility (the "October 1996 credit
facility") provided by a group of seven banks. This facility provided that up
to $75.0 million was available for borrowings in foreign currencies. Borrowings
under the October 1996 credit facility were, at the option of the borrower, at
one of several rates including LIBOR plus 30 basis points. In addition, the
Company had the option to request participation at lower rates than those
contractually provided by the October 1996 credit facility. This facility
required the Company to pay annual fees of 2/10 of 1% of the total loan
commitment. On May 5, 1997, the Company increased the size of the facility from
$100 million to $125 million through December 31, 1997, at which time the
incremental difference of $25 million was due. The October 1996 credit facility
was terminated on October 15, 1997 in conjunction with the distribution and the
outstanding balance was repaid with proceeds from the New Choice note.
On April 23, 1997 the Company, through its indirect subsidiary First Choice
Properties Corporation, completed an offering of $117.5 million multi-class
mortgage pass through certificates (collectively, "the mortgage securities").
The mortgage securities, which bear a blended, weighted average interest rate of
7.8% and have a final maturity of May 5, 2012, contain customary covenants with
respect to, among other things, limits on levels of indebtedness, liens, certain
investments, transactions with affiliates, asset sales, mergers, consolidations,
and transfers of cash to affiliates. Net assets restricted related to these
mortgage securities were $35.4 million and $34.8 million as of December 31, 1997
and May 31, 1997, respectively. The Company had $6.1 million and $3.9 million
in escrow at December 31, 1997 and May 31, 1997, respectively, related to the
mortgage securities. The escrow, which is included in other assets, is for
property taxes, insurance and capital expenditures of the properties
collateralizing the mortgage securities. The mortgage securities are
nonrecourse and collateralized by 37 hotels owned by the Company. The
offering's net proceeds of $110 million were used to prepay a portion of a loan
from Manor Care. The prepayment resulted in an extraordinary loss from early
debt redemption of $1.1 million, net of taxes.
In conjunction with the April 1997 issuance of the mortgage securities, the
Company entered into a series of interest rate swap agreements having a total
notional principal amount of $50.0 million. The agreements were terminated
concurrent with the pricing of the mortgage securities, resulting in a $862,000
gain. The gain has been deferred and is being amortized over the life of the
mortgage securities as an offset to interest expense.
The Company entered into two new debt facilities in October 1997 in connection
with the distribution: (i) a $80.0 million revolving credit facility (the
"October 1997 credit facility"); and (ii) a $115.0 million pay-in-kind note
payable to New Choice (the "New Choice Note"). Proceeds from the new debt were
used to repay the Company's remaining portion of the loan from Manor Care and
the October 1996 credit facility, and for advances previously made by New Choice
to the Company. The unused portion of the October 1997 credit facility will be
used by the Company for working capital, capital expenditures and acquisitions.
The October 1997 credit facility includes customary financial and other
covenants that will require the maintenance of certain ratios including maximum
leverage, minimum net worth and interest coverage, and will restrict the
Company's ability to make certain investments, repurchase stock, incur debt, and
dispose of assets. At December 31, 1997, the Company had $69.0 million of
availability under the October 1997 credit facility. At the Company's option,
the interest rate may be based on LIBOR, a certificate of deposit rate or an
alternate base rate (as defined), plus a facility fee. The rate is determined
based on the Company's consolidated leverage ratio at the time of borrowing.
36
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The New Choice Note has a maturity of five years, accrues simple interest at a
rate equal to 500 basis points above the interest rate on a five-year U.S.
Treasury Note, resulting in an effective rate of 8.8% through maturity. The
note contains restrictive covenants that restrict or limit the ability of the
Company to merge or consolidate with any other person or entity unless the
Company is the surviving entity, or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of the Company. At
December 31, 1997, the Company had a discount of $528,000 recorded relating to
the New Choice Note.
Cash paid for interest was $10.7 million, $14.8 million, $12.8 million and $9.1
million for the seven months ended December 31, 1997 and fiscal years 1997, 1996
and 1995, respectively. At December 31, 1997, real estate property with a net
book value of $ 145.4 million was pledged or mortgaged as collateral.
LEASES
The Company operates certain property and equipment under leases that expire at
various dates through 2014. Future minimum lease payments are as follows (in
thousands):
<TABLE>
<CAPTION>
Operating Capitalized Leases
Leases
<S> <C> <C>
1998 $ 5,205 $ 497
1999 5,605 497
2000 2,325 497
2001 685 819
2002 529 -
Thereafter 8,265 -
------------------------------------------
Total minimum lease payments $22,614 2,310
=====================
Less: interest (478)
---------------------
Present value of lease payments $1,832
-=====================
</TABLE>
Rental expense under non-cancelable operating leases was $1.9 million,
$329,000, $332,000, and $321,000 in the seven months ended December 31, 1997,
and fiscal years 1997, 1996 and 1995, respectively. For the seven months ended
December 31, 1997, the Company paid $2.9 million to Manor Care for office rent,
of which New Choice reimbursed the Company $1.0 million for its portion of the
total space occupied. In fiscal year 1997, the Company paid $4.5 million to
Manor Care for office rent, of which New Choice reimbursed the Company $4.0
million for its portion of total space occupied. The total minimum future lease
payments above have not been reduced by the non-cancelable sublease
reimbursements from New Choice.
ACQUISITIONS AND DIVESTITURES
During fiscal year 1997, the Company acquired two hotels containing 324
rooms for $10.7 million and disposed of one hotel containing 153 rooms for $2.5
million. During fiscal year 1996, the Company purchased 16 hotels containing
more than 1,900 rooms for $49.6 million. During fiscal year 1995, the Company
purchased 16 hotels containing more than 2,300 rooms for $59.8 million.
37
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DISCONTINUED OPERATIONS
The revenues, income from discontinued operations before income taxes, and net
income from discontinued operations were as follows (in thousands):
<TABLE>
<CAPTION>
Seven months
ended December
31, Fiscal year ended May 31,
----------------------------------------------
1997 1997 1996 1995
----------------- ----------------------------------------------
<S> <C> <C> <C> <C>
Revenue $112,286 $249,822 $227,277 $190,441
Expenses 84,092 189,438 189,545 159,706
----------------- ----------------------------------------------
Income from discontinued
operations before income taxes 28,194 60,384 37,732 30,735
Income taxes 11,825 25,165 15,923 13,467
----------------- ----------------------------------------------
Net income from discontinued
operations $ 16,369 $ 35,219 $ 21,809 $ 17,268
================= ==============================================
</TABLE>
Net income from discontinued operations for the seven months ended December 31,
1997 includes the results of operations of the franchising business through
October 15, 1997 and costs associated with the distribution of $1.9 million (net
of taxes).
Net investment in discontinued operations is composed of the following as of May
31, 1997 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Property and equipment, net $ 31,825
Goodwill, net 69,938
Franchising rights, net 50,504
Receivables, net 23,322
Other assets 31,880
-------------------
Total assets $207,469
===================
Debt $111,634
Other liabilities 43,499
-------------------
Total liabilities 155,133
-------------------
Net investment and advances from
parent 52,336
-------------------
Total liabilities and equity $207,469
===================
</TABLE>
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management, the ultimate outcome of such
litigation will not have a material adverse effect on the Company's business,
financial position, or results of operations.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
Bonuses accrued for key executives of the Company under incentive compensation
plans were $357,000, $200,000, $100,000, and $300,000 for the seven months ended
December 31, 1997 and in fiscal years 1997, 1996 and 1995, respectively.
38
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employees 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 the Company were based on the size
of its payroll relative to the sponsor's payroll. Costs allocated to the
Company for continuing operations were approximately $217,000, $800,000,
$583,000 and $424,000 for the seven months ended December 31, 1997 and in fiscal
1997, 1996 and 1995, respectively.
CAPITAL STOCK
During the seven months ending December 31, 1997, the Company repurchased
588,931 shares of its common stock at a total cost of $10.6 million. During
fiscal year 1997, the Company repurchased 3,697,724 shares of its common stock
at a total cost of $53.4 million.
At its February 1998 meeting, the Company's board of directors approved an
amendment authorizing an additional 1.2 million shares under the Company's stock
option plan. The authorization of additional shares under the plan requires
ratification by the Company's shareholders at the April 22, 1998 Annual Meeting
of Stockholders. Stock options may be granted to officers, key employees and
non-employee directors with an exercise price not less than the fair market
value of the common stock on the date of grant.
Options outstanding at November 1, 1996 represent options that resulted from the
Manor Care Distribution. Option activity under the above plans is as follows:
<TABLE>
<CAPTION>
Number of Shares Weighted
Option Price
-----------------------------------------
<S> <C> <C>
Outstanding at November 1, 1996 5,920,648 $2.83
Granted 397,693 4.93
Exercised (1,110,164) 4.20
Cancelled (259,145) 3.67
-----------------------------------------
Outstanding at May 31, 1997 4,949,032 3.02
Adjustment as a result of the distribution (2,704,294)
Granted 552,441 8.04
Exercised (202,386) 2.03
Cancelled (30,241) 4.94
-----------------------------------------
Outstanding at December 31, 1997 2,564,552 $5.67
=========================================
</TABLE>
In connection with the distribution, the outstanding options held by current and
former employees of the Company as of October 15, 1997 were redenominated in
both Company and New Choice stock, and the number and exercise prices of the
options were adjusted based on the relative trading prices of shares of the
common stock of the two companies to retain the intrinsic value of the options.
The option prices for the period prior to May 31, 1997 in the table above have
been adjusted for the reverse stock split.
The following table provides information on the exercise prices of options
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
Weighted Average Number of Options
Exercise Price Number of Options Weighted Average Contractual Life (in Currently
Range Outstanding Exercise Price years) Exercisable
----- ----------- -------------- ----- -----------
<S> <C> <C> <C> <C>
$ 1.34 to $ 2.00 241,314 $1.67 1.75 214,078
$ 2.01 to $ 3.50 333,745 $2.74 3.91 80,745
$ 3.51 to $ 5.50 426,461 $4.32 5.72 93,004
$ 5.51 to $ 8.50 1,489,381 $7.18 8.71 120,276
$ 8.51 to $ 9.79 73,651 $9.42 9.29 1,000
------------- ------------
2,564,552 509,103
============= ============
</TABLE>
39
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123"), requires companies to provide additional
disclosures about employee stock-based compensation plans based on a fair value
based method of accounting. As permitted by this accounting standard, the
Company continues to account for these plans under Accounting Principles Board
Opinion 25, under which no compensation cost has been recognized.
Compensation cost for the Company's stock option plan was determined based on
the fair value at the grant dates for awards under those plans consistent with
the method of SFAS No. 123. The fair value of each option grant has been
estimated on the date of grant using an option-pricing model. For the seven
months ended December 31, 1997 and fiscal year 1997 the Company assumed a risk
free interest rate of 5.7% and 6.4%, respectively, expected volatility of 25.7%
and 30.0%, respectively, a dividend yield of 0% and expected lives of ten years.
The weighted average fair value per option granted during the seven months ended
December 31, 1997 and fiscal year 1997 was $4.12 and $8.35, respectively. If
options had been reported as compensation expense based on their fair value pro
forma, net income and earnings per share would have been as follows for the
seven months ended December 31, 1997 and fiscal year 1997.
<TABLE>
<CAPTION>
For the seven months
ended For the year ended
December 31, 1997 May 31, 1997
------------------------------------------------
<S> <C> <C>
Net income:
As reported $16,085 $40,880
Pro forma $15,563 $40,296
Earnings per share:
Basic, as reported $ 0.81 $ 1.96
Basic, pro forma $ 0.78 $ 1.92
Diluted, as reported $ 0.81 $ 1.93
Diluted, pro forma $ 0.78 $ 1.90
</TABLE>
The Company has not presented information for the period prior to the Manor Care
Distribution since there were no options for the Company's stock granted until
after the Manor Care Distribution. Since this methodology has not been applied
to options granted prior to the Manor Care Distribution date, the resulting pro
forma compensation cost is not likely to be representative of that to be
expected in future years.
EARNINGS PER SHARE
The following table illustrates the reconciliation of income from continuing
operations and number of shares used in the basic and diluted earnings per share
calculation.
<TABLE>
<CAPTION>
(in thousands, except per share amounts) May 31,
1997
-----------------
Computation of basic earnings per share
<S> <C>
Income from continuing operations $ 6,805
Weighted average shares outstanding 20,893
-----------------
Basic Earnings Per Share $ 0.32
=================
40
<PAGE>
Computation of diluted earnings per share
Income from continuing operations $ 6,805
Weighted average share outstanding 20,893
Effect of dilutive securities:
Employee stock option plan 298
-----------------
Shares for diluted earnings per share 21,191
-----------------
Diluted earnings per share $ 0.32
=================
</TABLE>
The effect of dilutive securities is computed using the treasury stock method
and average market prices during the period.
Certain options to purchase common stock were not included in the computation of
diluted earnings per share because the exercise price of the options exceeded
the average market price of the common shares for the period. The following
tables summarizes such options.
<TABLE>
<CAPTION>
May 31,
1997
------------------
<S> <C>
Number of shares (in thousands) 60
Weighted average exercise price $5.20
</TABLE>
Earnings per common share is computed by dividing net income by the weighted
average number of common shares outstanding. The weighted average number of
common shares outstanding is after giving effect to the one for three reverse
stock split and is based on Manor Care's weighted average number of outstanding
common shares for the period prior to November 1, 1996 and the Company's own
shares and stock options outstanding subsequent to November 1, 1996. Because
the Company's continuing operations had a net loss for the seven months ending
December 31, 1997, diluted earnings per share was not calculated as any
potentially dilutive securities would have an anti-dilutive effect on earnings
per share from continuing operations. No diluted earnings per share is
presented for fiscal years 1996 and 1995 as the Company had no stock options or
other dilutive securities outstanding prior to the Manor Care Distribution.
RELATIONSHIP WITH MANOR CARE
The Company entered into various agreements in connection with the Manor Care
Distribution which provide, among other things, that (i) Manor Care is
responsible for filing and paying the related taxes on consolidated Federal tax
returns and consolidated or combined state tax returns for itself and any of its
affiliates (including the Company and New Choice) for the periods of time that
the affiliates were members of the consolidated group, (ii) the Company would
reimburse Manor Care for the portion of such taxes that relates to the Company
and its subsidiaries, (iii) Manor Care would lease office space to the Company
in Silver Spring and Gaithersburg, Maryland, (iv) the Company would enter into a
loan agreement with Manor Care for $225.7 million previously advanced at an
interest rate of 9% ($37.0 million of which is outstanding at May 31, 1997 as an
obligation of the Company following the distribution), and (v) Manor Care would
provide certain corporate services to the Company.
For the seven months ended December 31, 1997 and the fiscal year ended May 31,
1997, the Company incurred $1.9 million and $525,000, respectively, in rent
expense for office space leased from Manor Care, $1.2 million and $12.4 million,
respectively, in interest expense on the loan, and $1.4 million and $2.1
million, respectively, in corporate expense for corporate services provided by
Manor Care.
41
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RELATIONSHIP WITH CHOICE HOTELS INTERNATIONAL, INC.
For purposes of providing an orderly transition after the distribution, the
Company and New Choice entered into various agreements, including, among others,
a Distribution Agreement, a Tax Sharing Agreement, a Corporate Services
Agreement and an Employee Benefits Allocation Agreement. Effective as of
October 15, 1997, these agreements provide, among other things, that the Company
(i) would receive and/or provide certain corporate and support services, such as
accounting, tax and computer systems support, (ii) would adjust outstanding
options to purchase shares of Company common stock held by Company employees,
New Choice employees, and employees of Manor Care, (iii) is responsible for
filing and paying the related taxes on consolidated Federal tax returns and
consolidated or combined state tax returns for itself and any of its affiliates
(including New Choice) for the periods of time that the affiliates were members
of the consolidated group, (iv) would be reimbursed by New Choice for the
portion of income taxes paid that relate to New Choice and its subsidiaries, (v)
would enter into a loan agreement with New Choice for $115.0 million at an
interest rate of 500 basis points over the interest rate of a five-year U.S.
Treasury Note, and (vi) guarantees that New Choice would, at the date of
distribution, have a specified level of net worth. At December 31, 1997,
approximately $25 million of liabilities are due to New Choice. This liability
relates to the net worth guarantee and the reimbursement of various expenses
subsequent to the distribution date.
The Company and New Choice have entered into a strategic alliance agreement.
Among other things, the agreement will provide for (i) a right of first refusal
to New Choice to franchise 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, and (iv) continued cooperation with respect to third party vendor
arrangements and 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. The
Company and New Choice also entered into a financial consulting agreement which
provides for certain payments to the Company by New Choice.
During 1997, the Company operated substantially all of its hotels pursuant to
franchise agreements with New Choice. Total fees paid to New Choice included in
the accompanying financial statements for franchising marketing, reservation and
royalty fees are $6.2 million, $9.5 million, $7.5 million, and $5.3 million for
the seven months ended December 31, 1997 and the fiscal years ended May 31,
1997, 1996 and 1995, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The balance sheet carrying amount of cash and cash equivalents and receivables
approximate fair value due to the short term nature of these items. Mortgages
and other long term debt consist of bank loans and mortgages. The interest rate
on the October 1997 credit facility adjusts frequently based on market rates;
accordingly, the carrying amount of bank loans is equivalent to fair value. The
carrying amount for the notes payable to Choice and the mortgage securities
approximates fair value.
PROVISION FOR ASSET IMPAIRMENT AND OTHER NON-RECURRING CHARGES
Included in the provision for asset impairment and other non-recurring charges
in the seven months ended December 31, 1997 are non-recurring loss provisions
totaling $5.1 million (pretax). This loss provision was recorded in December
1997 in order to reserve $2.1 million of previously capitalized costs and future
payment obligations related to a data processing services agreement and computer
system which will be replaced in 1998, to accrue the estimated cost of $1.0
million of future lease costs associated with space the Company has vacated, and
to reserve $2.0 million for future obligations related to an agreement expiring
in May 1999, for services which the Company will no longer utilize and,
therefore, have no future benefits. The service and lease agreements are with
Manor Care and New Choice and were entered into in conjunction with the
distribution and the Manor Care Distribution. Recent corporate decisions,
including a consolidation of leased office space, resulted in the recognition of
these costs currently.
42
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal year 1996, the Company began restructuring its European
operations. This restructuring effort included the purchase of an equity
interest in Friendly Hotels PLC and a re-evaluation of key geographic markets in
Europe. In connection with this restructuring, the Company performed a review
of its European operations and in May 1996 recognized a $19.4 million non-cash
charge against earnings related primarily to the impairment of assets associated
with certain European hotel operations.
In addition, the Company recognized a restructuring charge of $5.2 million in
May 1996. Restructuring costs include severance and employee benefit plan
restructuring costs and other costs directly associated with the distribution.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company is required to adopt SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," in 1998. The adoption of these pronouncements will not materially
affect the continuing operations of the Company. The Company adopted SFAS No.
129, "Disclosure of Information about Capital Structure," which did not impact
the financial statements.
SUBSEQUENT EVENT (UNAUDITED)
On February 4, 1998, the Board of Directors of the Company approved a plan to
sell certain properties in the Company's portfolio. At December 31, 1997, the
net book value of the properties the Company intends to sell is $17.8 million.
The fair value of the properties is above the respective net book values, and
therefore, no impairment charges have been recognized as of December 31, 1997.
On February 23, 1998, the Board of Directors adopted a shareholder rights plan
under which a dividend of one preferred stock purchase right will be distributed
for each outstanding share of the Company's common stock to shareholders of
record on April 3, 1998. Each right will entitle the holder to buy 1/100th of a
share of a newly issued series of junior participating preferred stock of the
Company at an exercise price of $50 per share. The rights will be exercisable,
subject to certain exceptions, after a person or group acquires beneficial
ownership of 10% or more of the Company's common stock (such a person or group,
an "Acquiring Person"), or begins a tender or exchange offer that would result
in a person or group becoming an Acquiring Person. The rights will be non-
voting and will expire on January 31, 2008, unless exercised or previously
redeemed by the Company for $.001 each. If the Company is involved in a merger
or certain other business combinations not approved by the Board of Directors,
each right will entitle its holder, other than the acquiring person or group, to
purchase common stock of either the Company or the acquirer having a value of
twice the exercise price of the right.
43
<PAGE>
SUNBURST HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
Quarters ended (in
thousands, except per Operating NET INCOME BASIC EPS DILUTED EPS
share data) REVENUES (1) Income (2,3) (4) (4)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SEVEN MONTHS ENDED
DECEMBER 31, 1997
August 31, 1997 $54,098 $11,368 $16,115 $0.80 $0.80
November 30, 1997 48,169 5,510 5,503 0.28 0.27
Fiscal 1997
November 30, 1996 $44,950 $ 4,822 $10,615 $0.51 $0.50
February 28, 1997 39,703 2,263 3,448 0.16 0.16
May 31, 1997 51,447 9,920 11,420 0.56 0.55
</TABLE>
(1) Revenues reflect revenues from continuing operations.
(2) Operating income reflects income from continuing operations before interest
expense, income taxes and extraordinary items.
(3) Operating income for the quarter ending August 31, 1997 was adjusted to
reclassify certain expenses relating to European hotels from discontinued
operations to continuing operations. The adjustment has no impact on Net
Income for the quarter.
(4) Basic EPS and Diluted EPS for periods prior to October 15, 1997 have been
effected for the one-for-three reverse stock split.
44
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information on directors is included on pages 4-5 of the
Proxy Statement dated March 25, 1998 and is incorporated herein by reference.
The required information on executive officers is set forth in Part I of this
Form 10-K under an unnumbered item captioned "Executive Officers of Sunburst
Hospitality Corporation."
ITEM 11. EXECUTIVE COMPENSATION.
The required information is included on pages 13-19 of the Proxy
Statement dated March 25, 1998 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The required information is included on pages 7-9 of the Proxy
Statement dated March 25, 1998 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The required information is included on pages 20-27 of the Proxy
Statement dated March 25, 1998 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
1. Financial Statements
The Consolidated Financial Statements filed with this Form 10-K are
listed in Item 8 above.
2. FINANCIAL STATEMENT SCHEDULES
The following reports are filed herewith on the pages indicated:
Report of Independent Public Accountants on Schedule p. 24
Schedule I: Condensed Financial Information p. 49
Schedule III: Real Estate and Accumulated Depreciation p. 55
All other schedules are not applicable.
3. EXHIBITS
3.01 Restated Certificate of Incorporation of the Registrant*
3.02 Amendments to Restated Certificate of Incorporation
3.03 By-laws of the Registrant*
4.01 Common Stock certificate*
45
<PAGE>
4.02 Competitive Advance and Multi-Company Credit Facility Agreement between
the Registrant and Chase Manhattan Bank dated October 15, 1997
4.03 Subordinated Note due October 15, 2002 by the Registrant payable to
Choice Hotels International, Inc.***
4.05 Promissory Note dated April 22, 1997 by First Choice Properties Corp. in
favor of QI Capital Corp. in the principal amount of $117,500,000****
4.06 Loan Agreement dated as of April 22, 1997 by and between First Choice
Properties Corp. and QI Capital Corp.****
10.01 Distribution Agreement, dated October 31, 1996, between Manor Care,
Inc. and the Registrant*
10.02 Corporate Services Agreement between Manor Care, Inc. and the Registrant*
10.03 Office Lease between Manor Care, Inc. and the Registrant*
10.04 Office Lease between Manor Care, Inc. and the Registrant*
10.05 Strategic Alliance Agreement dated as of October 15, 1997 by and between
the Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels
International, Inc.)**
10.06 Non-Competition Agreement dated as of October 15, 1997 by and between the
Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels
International, Inc.)**
10.07 Amended and Restated Agreement dated as of October 15, 1997 by and
between the Registrant and Stewart Bainum, Jr.**
10.08 Employment Agreement between the Registrant and James A. MacCutcheon*
10.09 Supplemental Executive Retirement Plan*
10.10 Non-Employee Director Stock Option and Deferred Compensation Stock
Purchase Plan*
10.11 1996 Non-Employee Director Stock Compensation Plan*
10.12 1996 Long-Term Incentive Plan*
10.13 Pikesville Sublease between Manor Care, Inc. and the Registrant*
10.14 Employee Benefits and Other Employment Matters Allocation Agreement
between Manor Care, Inc. and the Registrant*
10.15 Distribution Agreement dated as of October 15, 1997 by and between
Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels
International, Inc.)**
10.16 Employee Benefits Allocation Agreement dated as of October 15, 1997 by
and between the Registrant and Choice Hotels Franchising, Inc. (renamed
Choice Hotels International, Inc.**
10.17 Employee Benefits Administration Agreement dated as of October 15, 1997
by and between the Registrant and Choice Hotels Franchising, Inc.
(renamed Choice Hotels International, Inc.)**
10.18 Tax Administration Agreement dated as of October 15, 1997 by and between
the Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels
International, Inc.)
10.19 Tax Sharing Agreement dated as of October 15, 1997 by and between the
Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels
International, Inc.)**
10.20 Office Sublease dated as of October 15, 1997 by and between the
Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels
International, Inc.)**
10.21 Corporate Services Agreement dated as of October 15, 1997 by and between
the Registrant and Choice Hotels Franchising, Inc. (renamed Choice Hotels
International, Inc.)**
10.22 Omnibus Agreement and Guaranty dated as of October 15, 1997 by and among
the Registrant, Choice Hotels Franchising, Inc. (renamed Choice Hotels
International, Inc.) and Manor Care, Inc.**
21.01 Subsidiaries of the Registrant
23.01 Consent of Independent Public Accountants
27.01 Financial Data Schedule
99.01 Proxy Statement dated March 23, 1998 (information incorporated by
reference)
- -------------------
* Incorporated by reference to the Company's Registration Statement on Form 10,
File No. 001-11915.
**Incorporated by reference to the Company's Form 8-K dated October 15, 1997,
filed October 29, 1997.
***Incorporated by reference to the Company's 8-K dated October 15, 1997, filed
December 17, 1997.
****Incorporated by reference to the Company's Registration Form 10-k for the
fiscal year ended May 31, 1997, filed August 15, 1997.
(b) Three reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1997:
46
<PAGE>
Form 8-k, dated September 16, 1997, and filed October 1, 1997, reported as
Item 5 that (1) the Registrant's Shareholders had approved the separation of the
franchising and owned hotel businesses and (2) the Registrant had checked its
fiscal year end from May 31 to October 31.
Form 8-K, dated October 15, 1997 and filed October 29, 1997, reported as Item
2 the consummation of the Company's spinoff of its wholly owned subsidiary,
Choice Hotels Franchising, Inc. Under Item 5, the Company reported its name
change to "Sunburst Hospitality Corporation" and that it effected a one-for-
three reverse stock split.
Form 8-K, dated October 15, 1997 and filed December 17, 1997, included under
Exhibits the Subordinated Note due October 15, 2002 by Sunburst Hospitality
Corporation payable to Choice Hotels International, Inc.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 1998 SUNBURST HOSPITALITY CORPORATION
By: /s/ James A. MacCutcheon
------------------------------------
Executive Vice President,
Chief Financial Officer
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Stewart Bainum, Jr. Chairman March 30, 1998
- -------------------------
Stewart Bainum, Jr.
/s/ Donald J. Landry Vice Chairman and March 30, 1998
- ------------------------- Chief Executive Officer
Donald J. Landry
/s/ Steward Bainum Director March 30, 1998
- -------------------------
Stewart Bainum
/s/ Paul A. Gould Director March 30, 1998
- -------------------------
Paul A. Gould
/s/ Frederic V. Malek Director March 30, 1998
- -------------------------
Frederic V. Malek
/s/ Keith B. Pitts Director March 30, 1998
- -------------------------
Keith B. Pitts
48
<PAGE>
/s/ Carole Y. Prest Director March 30, 1998
- ---------------------------
Carole Y. Prest
/s/ Charles M. Warczak, Jr. Vice President March 30, 1998
- --------------------------- Accounting and Hotel
Charles M. Warczak, Jr. Systems (Chief
Accounting Officer)
<PAGE>
Schedule I
SUNBURST HOSPITALITY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
As of
------------------------
December 31, May 31,
------------ -----------
1997 1997
------------ -----------
<S> <C> <C>
ASSETS
Real estate, net $225,893 $191,693
Receivables, net 3,896 4,693
Net investment in restricted subsidiaries 35,439 34,823
Other assets 6,664 12,965
Cash and cash equivalents 4,348 6,471
Net investment in discontinued operations - 52,336
---------- ----------
Total assets $276,240 $302,981
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Debt $132,304 $143,075
Accounts payable and accrued expenses 52,202 35,419
Other liabilities 2,427 -
---------- ----------
Total liabilities 186,933 178,494
---------- ----------
Stockholders' Equity
Common stock 200 602
Additional paid-in-capital 105,653 113,828
Retained earnings (16,546) 17,075
Cumulative translation adjustment - (7,018)
---------- ----------
Total stockholders' equity 89,307 124,487
---------- ----------
Total liabilities and stockholders' equity $276,240 $302,981
========== ==========
</TABLE>
<PAGE>
SUNBURST HOSPITALITY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the seven
months ended For the fiscal year ended
December 31, May 31,
------------ ------------ ------------ ------------
1997 1997 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $55,487 $87,262 $62,467 $41,744
Operating expenses 44,506 69,780 56,336 38,952
Provision for asset impairment and other
non-recurring charges 5,119 - 24,595 -
Depreciation and amortization 8,561 10,988 7,562 5,379
Interest expense 4,580 6,484 3,211 36
------------ ------------ ------------ ------------
Total expenses 62,766 87,252 91,704 44,367
------------ ------------ ------------ ------------
Income before income taxes and equity
in earnings of restricted subsidiaries (7,279) 10 (29,237) (2,623)
Equity in earnings of restricted subsdiaries 6,951 11,830 7,363 1,843
Income tax (benefit) expense (44) 5,035 (8,523) (323)
----------- ------------ ------------ ------------
Income (loss) from continuing operations (284) 6,805 (13,351) (457)
Income from discontinued operations, net of tax 16,369 35,219 21,809 17,268
----------- ------------ ------------ ------------
Net income before extraordinary item 16,085 42,024 8,458 16,811
Extraordinary item -- loss from early
extinguishment of debt (net of tax) - 1,144 - -
---------- ------------ ------------ ------------
Net income $16,085 $40,880 $8,458 $16,811
========== =========== =========== ===========
</TABLE>
<PAGE>
SUNBURST HOSPITALITY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the seven
months ended For the fiscal year ended
December 31, May 31,
------------ ------------ ------------ ------------
1997 1997 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net cash provided by (utilized by) continuing operations $2,316 $20,282 $10,474 ($3,908)
Net cash provided by discontinued operations 20,876 46,724 32,645 41,454
------------ ------------ ------------ ------------
Net cash provided from operating activities 23,192 67,006 43,119 37,546
------------ ------------ ------------ ------------
Cash flows from investing activities
Investment in property and equipment (51,383) (63,163) (34,214) (13,557)
Acquisition of operating hotels - (5,550) (49,617) (24,869)
Distribution of New Choice (4,166) - - -
Proceeds from sale of property and equipment 170 2,522 5,479 -
------------ ------------ ------------ ------------
Net cash utilized by continuing operations (55,379) (66,191) (78,352) (38,426)
Net cash utilized by discontinued operations (118,474) (15,864) (78,844) (6,993)
------------ ------------ ------------ ------------
Net cash utilized by investing activities (173,853) (82,055) (157,196) (45,419)
------------ ------------ ------------ ------------
Cash flows from financing activities
Proceeds from mortgages and other long term debt 16,023 90,500 - -
Principal payments of debt (90,694) (951) (645) (89)
(Repayment of) proceeds from notes payable to
Manor Care, Inc. (37,022) - 27,201 13,164
Proceeds from note payable to Choice Hotels
International 115,000 - - -
Proceeds from issuance of common stock 1,153 3,410 - -
Purchases of treasury stock (10,554) (53,150) - -
Payable to Choice Hotels International, Inc. for net worth
guarantee 15,000 - - -
Advances from (to) restricted subsidiaries 6,503 11,028 (73) (2,116)
Advances (from) to Manor Care, Inc., net - (9,971) 73,272 (6,190)
------------ ------------ ------------ ------------
Net cash provided by continuing operations 15,409 40,866 99,755 4,769
Net cash provided by (utilized by) discontinued operations 129,337 (19,730) 17,131 2,075
------------ ------------ ------------ ------------
Net cash utilized by financing activities 144,746 21,136 116,886 6,844
------------ ------------ ------------ ------------
Net change in cash and cash equivalents (5,915) 6,087 2,809 (1,029)
Cash and cash equivalents at beginning of period 10,263 4,176 1,367 2,396
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 4,348 $10,263 $4,176 $1,367
=========== =========== =========== ===========
Cash and cash equivalents of continuing operations $ 4,348 $6,471 $1,073 $940
Cash and cash equivalents of discontinued operations $ - $3,792 $3,103 $427
</TABLE>
<PAGE>
SUNBURST HOSPITALITY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying condensed financial information of Sunburst Hospitality
Corporation (the "Parent Company") presents the financial condition, results of
operations and cash flows of the Parent Company with the investment in and
operations of its restricted subsidiary, First Choice Properties Corporation
("First Choice") on the equity method of accounting. Pursuant to the rules and
regulations of the Securities and Exchange Commission, the condensed financial
statements of the registrant do not include all of the information and notes
normally included with financial statements prepared in accordance with
generally accepted accounting principles and the statements should therefore be
read in conjunction with the Consolidated Financial Statements and Notes thereto
included in this Form 10-K.
As more fully described in the notes to the Company's consolidated financial
statements, the Company distributed its franchising business to its shareholders
on October 15, 1997 (distribution date). The accompanying condensed financial
information has been stated to reflect the franchising business as discontinued
operations through the distribution date.
In April 1997, First Choice, an indirect, wholly-owned subsidiary of the Parent
Company, issued $117.5 million multi-class mortgage pass-through certificates
(collectively, "the mortgage securities"). The mortgage securities are non-
recourse and collateralized by 36 hotels owned by First Choice. The mortgage
securities bear a blended weighted average interest rate of 7.8% and have a
final maturity of May 5, 2012.
The mortgage securities contain customary covenants with respect to, among other
things, limits on the incurrence of debt, liens, certain investments,
transactions with affiliates, asset sales, mergers, and consolidations and
transfer of cash to affiliates.
The accompanying condensed financial statements present the debt of First Choice
as a component of Net investment in restricted subsidiaries. Prior to the April
1997 issuance of the mortgage securities, the financial statements include the
pushed down effect of $110 million in Manor Care notes payable, as the April
1997 proceeds of the mortgage securities were used to repay the Manor Care notes
payable.
B. DEBT
Aggregate debt maturities at December 31, 1997, are (in thousands):
<TABLE>
<S> <C>
1998 $ 329
1999 364
2000 16,402
2001 737
2002 114,472
Thereafter
-----------------
$132,304
=================
</TABLE>
53
<PAGE>
SUNBURST HOSPITALITY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C DIVIDENDS
First Choice did not pay cash dividends to the Parent Company in the seven
months ended December 31, 1997 and fiscal year 1997.
54
<PAGE>
Schedule III
SUNBURST HOSPITALITY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
31-Dec-97
(IN THOUSANDS)
<TABLE>
<CAPTION>
Initial cost to Company Gross Amount at December 31, 1997
----------------------- Subsequent -----------------------------------
Building and Capitalized Asset Buildings and Accumulated
Description Encumbrances Land improvements Costs Writedowns Land improvements Total Depreciation
- ------------ ------------- ----------------------- ------------ ----------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
All properties,
each less than
5% of total $133,648 $52,208 $191,182 $85,374 $3,400 $61,959 $263,405 $325,364 $43,911
<CAPTION>
Date of Depreciation
Description Construction Date Acquired Life
- ------------ ------------ ------------- ------------
<S> <S> <C> <C>
All properties, Various Various Various
each less than
5% of total
</TABLE>
<PAGE>
SUNBURST HOSPITALITY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
31-Dec-97
(IN THOUSANDS)
<TABLE>
<CAPTION>
Notes:
(A) The change in total cost of properties for the seven months ended
December 31, 1997 and fiscal years ended May 31, 1997, 1996 and 1995
is as follows:
<S> <C>
Balance at May 31, 1994 $127,760
Aditions:
Acquisitions 57,214
Capital expenditures 7,945
Deductions:
Dispositions and other -
------------
Balance at May 31, 1995 192,919
Additions:
Acquisitions 52,270
Capital expenditures 17,599
Deductions:
Dispositions and other (10,652)
Write-downs (3,400)
------------
Balane at May 31, 1996 248,736
Additions:
Acquisitions 21,278
Capital expenditures 16,363
Transfers from construction-in-progress 3,831
Deductions:
Dispositions and other (7,008)
------------
Balance at May 31, 1997 283,200
Additions:
Acquisitions -
Capital expenditures 22,562
Transfer from construction-in-progress 19,772
Deductions:
Dispositions and other (170)
------------
Balance at December 31, 1997 325,364
===========
<CAPTION>
(B) The change in accumulated depreciation and amortization for the seven
months ended December 31, 1997, and fiscal years ended May 31, 1997, 1996, and
1995 is as follows:
Balance at May 31, 1994 23,946
Depreciation and amortization 4,258
Disposals -
------------
Balance at May 31, 1995 28,204
------------
Depreciation and amortization 6,478
Disposals (4,865)
------------
Balance at May 31, 1996 29,817
------------
Depreciation and amortization 8,992
Disposals (2,145)
------------
Balance at May 31, 1997 36,664
------------
Depreciation and amortization 7,247
Disposals -
------------
Balance at December 31, 1997 43,911
===========
</TABLE>
(C) The write-down in fiscal year 1996 relates to impairment charges taken in
accordance with Statement of Financial Accounting Standards No. 121.
(D) The total cost of properties excludes construction-in-progress and
European hotels, which were distributed on October 15, 1997 with
Franchising.
(E) The aggregate cost of properties for Federal income tax purposes is
approximately $326.4 million at December 31, 1997.
<PAGE>
Exhibit 4.02
CONFORMED COPY
================================================================================
CREDIT AGREEMENT
Dated as of October 15, 1997
among
SUNBURST HOSPITALITY CORPORATION,
as Borrower,
THE LENDERS NAMED HEREIN,
and
THE CHASE MANHATTAN BANK, as Agent
================================================================================
[CS&M Ref. No. 6700-462]
<PAGE>
TABLE OF CONTENTS
ARTICLE I
Definitions
-----------
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 1.01. Defined Terms............................. 1
SECTION 1.02. Classification of Loans and Borrowings....25
SECTION 1.03. Terms Generally...........................25
ARTICLE II
The Credits
-----------
SECTION 2.01. Commitments...............................25
SECTION 2.02. Loans.....................................25
SECTION 2.03. Borrowing Procedures......................28
SECTION 2.04. Refinancings..............................28
SECTION 2.05. Fees......................................29
SECTION 2.06. Evidence of Indebtedness; Repayment
of Loans..........................30
SECTION 2.07. Interest on Loans.........................30
SECTION 2.08. Default Interest..........................31
SECTION 2.09. Alternate Rate of Interest................32
SECTION 2.10. Termination and Reduction of
Commitments.......................32
SECTION 2.11. Prepayment of Loans.......................33
SECTION 2.12. Reserve Requirements; Change in
Circumstances.....................34
SECTION 2.13. Change in Legality........................36
SECTION 2.14. Indemnity.................................37
SECTION 2.15. Pro Rata Treatment........................37
SECTION 2.16. Sharing of Setoffs........................38
SECTION 2.17. Payments..................................39
SECTION 2.18. Taxes.....................................39
SECTION 2.19. Letters of Credit.........................42
ARTICLE III
Representations and Warranties
------------------------------
SECTION 3.01. Organization; Powers......................47
SECTION 3.02. Authorization.............................47
SECTION 3.03. Enforceability............................48
SECTION 3.04. Governmental Approvals....................48
SECTION 3.05. Financial Statements......................48
SECTION 3.06. No Material Adverse Change................49
SECTION 3.07. Title to Properties; Possession
Under Leases......................49
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 3.08. Subsidiaries..............................50
SECTION 3.09. Litigation; Compliance with Laws..........50
SECTION 3.10. Agreements................................50
SECTION 3.11. Federal Reserve Regulations...............51
SECTION 3.12. Investment Company Act; Public Utility
Holding Company Act...............51
SECTION 3.13. Use of Proceeds...........................51
SECTION 3.14. Tax Returns...............................51
SECTION 3.15. No Material Misstatements.................51
SECTION 3.16. Employee Benefit Plans....................52
SECTION 3.17. Environmental Matters.....................52
SECTION 3.18. Solvency..................................53
SECTION 3.19. Spin-Off..................................53
SECTION 3.20. Pledge Agreement..........................53
ARTICLE IV
Conditions of Lending
---------------------
SECTION 4.01. All Credit Events......................... 54
SECTION 4.02. First Credit Event........................ 54
ARTICLE V
Affirmative Covenants
---------------------
SECTION 5.01. Existence; Businesses and Properties...... 60
SECTION 5.02. Insurance................................. 60
SECTION 5.03. Obligations and Taxes..................... 61
SECTION 5.04. Financial Statements, Reports, etc........ 61
SECTION 5.05. Litigation and Other Notices.............. 63
SECTION 5.06. ERISA..................................... 63
SECTION 5.07. Maintaining Records; Access to
Properties and Inspections.............. 64
SECTION 5.08. Use of Proceeds........................... 65
SECTION 5.09. Additional Subsidiaries................... 65
SECTION 5.10. Further Assurances......................... 65
ARTICLE VI
Negative Covenants
------------------
SECTION 6.01. Indebtedness............................... 66
SECTION 6.02. Liens...................................... 67
SECTION 6.03. Sale and Lease-Back Transactions........... 69
SECTION 6.04. Investments, Loans and Advances............ 69
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 6.05. Mergers and Consolidations..................70
SECTION 6.06. Asset Sales.................................71
SECTION 6.07. Transactions with Affiliates................71
SECTION 6.08. Business of Borrower and Subsidiaries.......71
SECTION 6.09. Subsidiary Indebtedness.....................71
SECTION 6.10. Agreements..................................72
SECTION 6.11. Fiscal Year and Accounting Practices........72
SECTION 6.12. No Further Negative Pledges.................72
SECTION 6.13. Minimum Consolidated Net Worth..............72
SECTION 6.14. Limitation on Consolidated Funded Debt......72
SECTION 6.15. Limitation on Consolidated Senior
Funded Indebtedness.......................73
SECTION 6.16. Fixed Charge Coverage Ratio.................73
SECTION 6.17. Borrowing Base Properties...................73
SECTION 6.18. Amendment or Prepayment of Approved
Subordinated Indebtedness.................74
ARTICLE VII
Events of Default
-----------------
ARTICLE VIII
The Agent
---------
ARTICLE IX
Miscellaneous
-------------
SECTION 9.01. Notices.....................................81
SECTION 9.02. Survival of Agreement.......................82
SECTION 9.03. Binding Effect..............................82
SECTION 9.04. Successors and Assigns......................82
SECTION 9.05. Expenses; Indemnity.........................86
SECTION 9.06. Right of Setoff.............................88
SECTION 9.07. Applicable Law..............................88
SECTION 9.08. Waivers; Amendment..........................88
SECTION 9.09. Interest Rate Limitation....................89
SECTION 9.10. Entire Agreement............................90
SECTION 9.11. Waiver of Jury Trial; Punitive
Damages.............................90
SECTION 9.12. Severability................................90
SECTION 9.13. Counterparts................................91
SECTION 9.14. Headings....................................91
SECTION 9.15. Jurisdiction; Consent to Service
of Process..........................91
SECTION 9.16. Confidentiality.............................92
</TABLE>
iii
<PAGE>
Exhibits
- --------
Exhibit A Form of Borrowing Request
Exhibit B Form of Administrative Questionnaire
Exhibit C Form of Assignment and Acceptance
Exhibit D Form of Borrowing Base Certificate
Exhibit E Form of Opinion of Counsel
Exhibit F Form of Issuing Bank Agreement
Exhibit G Form of Guarantee Agreement
Exhibit H Form of Pledge Agreement
Exhibit I Form of Indemnity, Subrogation and Contribution Agreement
Schedules
- ---------
Schedule 1.01(a) Approved Environmental Consultants
Schedule 1.01(b) Criteria for Approved Subordinated Indebtedness
Schedule 1.01(c) Hotel Properties
Schedule 2.01 Commitments
Schedule 3.07 Leased Hotel Properties
Schedule 3.08 Subsidiaries
Schedule 4.02(q) Leases
Schedule 6.01(a) Existing Indebtedness
Schedule 6.02 Existing Liens
Schedule 6.04 Existing Investments
iv
<PAGE>
CREDIT AGREEMENT dated as of October 15, 1997, among
SUNBURST HOSPITALITY CORPORATION, a Delaware corporation
(the "Borrower"), the Lenders referred to herein and THE
--------
CHASE MANHATTAN BANK, a New York banking corporation, as
agent for the Lenders (in such capacity, the "Agent").
-----
The Borrower has requested the Lenders to extend credit to the
Borrower in order to enable it to borrow on a revolving credit basis on and
after the Effective Date and at any time and from time to time prior to the
Revolving Maturity Date (as herein defined) a principal amount not in excess of
$80,000,000 at any time outstanding. The Borrower has requested the Issuing
Bank (as herein defined) to issue letters of credit, in an aggregate face amount
at any time outstanding not in excess of $5,000,000, to support payment
obligations incurred in the ordinary course of business by the Borrower and its
Subsidiaries (as herein defined). The proceeds of the borrowings hereunder
shall be used for the refinancing of existing Indebtedness and general corporate
purposes of the Borrower and the Subsidiaries, including working capital,
capital expenditures (including hotel construction) and certain acquisitions.
The Lenders are willing to extend such credit to the Borrower and the Issuing
Bank is willing to issue letters of credit for the account of the Borrower on
the terms and subject to the conditions herein set forth. Accordingly, the
parties hereto agree as follows:
ARTICLE I. DEFINITIONS
SECTION 1.01. Defined Terms. As used in this Agreement, the
--------------
following terms shall have the meanings specified below:
"ABR Borrowing" shall mean a Borrowing comprised of ABR Loans.
-------------
"ABR Loan" shall mean any Loan bearing interest at a rate determined
--------
by reference to the Alternate Base Rate in accordance with the provisions of
Article II.
"Adjusted CD Rate" shall mean, with respect to any CD Borrowing for
----------------
any Interest Period, an interest rate per annum (rounded upwards, if necessary,
to the next 1/100 of 1%) equal to the sum of (a) a rate per annum equal to the
<PAGE>
product of (i) the Fixed CD Rate in effect for such Interest Period and (ii)
Statutory Reserves, plus (b) the Assessment Rate. For purposes hereof, the term
"Fixed CD Rate" shall mean the arithmetic average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the prevailing rates per annum bid at or
about 10:00 a.m., New York City time, to the Agent on the first Business Day of
the Interest Period applicable to such CD Borrowing by three New York City
negotiable certificate of deposit dealers of recognized national standing
selected by the Agent for the purchase at face value of negotiable certificates
of deposit of major United States money center banks in a principal amount
approximately equal to the Reference Bank's portion of such CD Borrowing and
with a maturity comparable to such Interest Period.
"Adjusted Consolidated Leverage Ratio" shall mean the ratio of (a)
------------------------------------
Consolidated Funded Indebtedness (excluding up to $25,000,000 of Indebtedness
the proceeds of which were used to acquire, construct or improve (i) Hotel
Properties owned for less than four full fiscal quarters and (ii) Hotel
Properties with certificates of occupancy that (A) are open for business and (B)
were Construction Properties at some time during the preceding four fiscal
quarters) to (b) Consolidated EBITDA. In the event the Borrower shall complete,
directly or through a Subsidiary, an acquisition or divestiture of any Person or
business unit during any period, the Adjusted Consolidated Leverage Ratio as of
the end of and for such period shall thereafter be determined on a pro forma
basis as if such acquisition or divestiture had been completed on the first day
of such period.
"Adjusted NOI" shall mean, with respect to any Hotel Property for any
------------
period, Net Operating Income for such period minus the sum of (a) the FF&E
Reserve and (b) the amount (but not less than zero) by which 7% of Gross Revenue
exceeds Franchise and Marketing Expenses.
"Administrative Questionnaire" shall mean an Administrative
----------------------------
Questionnaire in the form of Exhibit B.
"Affiliate" shall mean, when used with respect to a specified person,
---------
another person that directly, or indirectly through one or more intermediaries,
Controls or is Controlled by or is under common Control with the person
specified. Following the Spin-Off, the Borrower and the Subsidiaries shall not
be deemed to be Affiliates of International or its subsidiaries merely by virtue
of such companies' having common shareholders or directors as a result of the
Spin-Off.
2
<PAGE>
"Agent and Administrative Fees" shall have the meaning assigned to
-----------------------------
such term in Section 2.05(b).
"Aggregate Adjusted NOI" shall mean the aggregate Adjusted NOI for all
----------------------
Hotel Properties; provided that Adjusted NOI shall be adjusted to exclude the
--------
effect of any Hotel Properties which are no longer owned by the Borrower or any
Subsidiary on the date of determination.
"Aggregate Revolving Exposure" shall mean the aggregate amount of the
----------------------------
Lenders' Revolving Exposures.
"Aggregate Value" shall mean, as of any date, the sum of (a) for each
---------------
Borrowing Base Property (other than the Exception Properties) owned for four
consecutive fiscal quarters or more, (i) the aggregate trailing four quarter
Adjusted NOI for such Borrowing Base Property for the most recent period of four
consecutive fiscal quarters for which information shall have been delivered
pursuant to Section 5.04(f) divided by (ii) 0.11, (b) for each Borrowing Base
Property owned for less than four consecutive fiscal quarters, the undepreciated
cost basis at acquisition for such Borrowing Base Property and (c) for each
Exception Property, (i) the aggregate trailing four quarter Adjusted NOI for
such property for the most recent period of four consecutive fiscal quarters for
which information shall have been delivered pursuant to Section 5.04(f) divided
by (ii) 0.19.
"Alternate Base Rate" shall mean, for any day, a rate per annum
-------------------
(rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of
(a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such
day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus
1/2 of 1%. For purposes hereof, "Prime Rate" shall mean the rate of interest
per annum publicly announced from time to time by the Agent as its prime rate in
effect at its principal office in New York City; each change in the Prime Rate
shall be effective on the date such change is publicly announced as effective.
"Base CD Rate" shall mean the sum of (a) the product of (i) the Three-Month
Secondary CD Rate and (ii) Statutory Reserves and (b) the Assessment Rate.
"Three-Month Secondary CD Rate" shall mean, for any day, the secondary market
rate for three-month certificates of deposit reported as being in effect on such
day (or, if such day shall not be a Business Day, the next preceding Business
Day) by the Board through the public information telephone line of the Federal
Reserve Bank of New York (which rate will, under the
3
<PAGE>
current practices of the Board, be published in Federal Reserve Statistical
Release H.15(519) during the week following such day), or, if such rate shall
not be so reported on such day or such next preceding Business Day, the average
of the secondary market quotations for three-month certificates of deposit of
major money center banks in New York City received at approximately 10:00 a.m.,
New York City time, on such day (or, if such day shall not be a Business Day, on
the next preceding Business Day) by the Agent from the New York City negotiable
certificate of deposit dealers of recognized national standing selected by it.
"Federal Funds Effective Rate" shall mean, for any day, the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day which is a Business Day, the average of the
quotations for the day of such transactions received by the Agent from three
Federal funds brokers of recognized national standing selected by it. If for any
reason the Agent shall have determined that it is unable to ascertain the Base
CD Rate or the Federal Funds Effective Rate or both for any reason, including
the inability or failure of the Agent to obtain sufficient quotations in
accordance with the terms thereof, the Alternate Base Rate shall be determined
without regard to clauses (b) or (c) of the first sentence of this definition,
as appropriate, until the circumstances giving rise to such inability no longer
exist. Any change in the Alternate Base Rate due to a change in the Prime Rate,
the Three Month Secondary CD Rate or the Federal Funds Effective Rate shall be
effective on the effective date of such change in the Prime Rate, the Three
Month Secondary CD Rate or the Federal Funds Effective Rate, respectively.
"Applicable Percentage" shall mean, with respect to any Eurodollar
---------------------
Loan, CD Loan or ABR Loan or with respect to the Facility Fees, as the case may
be, the applicable percentage set forth in the table below under the caption
"LIBOR Margin", "CD Margin", "ABR Margin" or "Facility Fee Percentage", as the
case may be, based upon the Adjusted Consolidated Leverage Ratio as of the end
of and for the most recent period of four consecutive fiscal quarters for which
financial statements of the Borrower are required to have been delivered under
Section 5.04(a) or (b), whether or not financial statements in respect of any
subsequent period shall have been delivered:
4
<PAGE>
<TABLE>
<CAPTION>
===============================================================================
Adjusted LIBOR CD Margin ABR Facility Fee
Consolidated Margin ---------- Margin Percentage
Leverage Ratio -------- -------- -------------
------------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Category 1 Less than 3.00 to 0%
1.00 1.625% 1.750% .150%
- --------------------------------------------------------------------------------
Category 2 Equal to or
greater than 3.00
to 1.00, but less
than 4.00 to 1.00 1.750% 1.875% 0% .200%
--------------------------------------------------------------------------------
Category 3 Equal to or
greater than 4.00
to 1.00, but less
than 5.00 to 1.00 2.000% 2.125% 0% .250%
- --------------------------------------------------------------------------------
Category 4 Equal to or
greater than 5.00
to 1.00, but less
than or equal to 2.375% .125% .300%
5.50 to 1.00 2.250%
- --------------------------------------------------------------------------------
Category 5 Greater than 5.50
to 1.00 4.250% 4.375% 2.125% .350%
================================================================================
</TABLE>
;provided that the Applicable Percentage for the period commencing on the date
--------
hereof and ending on the required delivery date pursuant to Section 5.04(a) or
(b) for the Borrower's consolidated financial statements for the Borrower's
second full fiscal quarter commencing after the Effective Date, shall be
determined by reference to Category 4; provided further that at any time when
----------------
financial statements required to have been delivered under Section 5.04(a) or
(b) have not been delivered, the Applicable Percentage shall be determined by
reference to Category 5.
"Approved Environmental Consultant" shall mean any environmental
---------------------------------
consultant set forth in Schedule 1.01(a) hereto and any other environmental
consultant that may be mutually agreed upon by the Borrower and the Agent;
provided, however, that the Agent shall have the right to remove any
- -------- -------
environmental consultant previously approved if it shall have a material basis
for doing so.
"Approved Subordinated Indebtedness" shall mean Indebtedness of the
----------------------------------
Borrower that satisfies the criteria set forth in Schedule 1.01(b) hereto.
"Assessment Rate" shall mean for any date the annual rate (rounded
---------------
upwards, if necessary, to the next 1/100 of 1%) identified by the Agent (or, if
need be, reasonably estimated by the Agent) as the then current net
5
<PAGE>
annual assessment rate that will be employed in determining amounts payable by
the Agent to the Federal Deposit Insurance Corporation (or any successor) for
insurance by such Corporation (or such successor) of time deposits made in
dollars at the Agent's domestic offices.
"Asset Sale" shall mean, with respect to the Borrower or any
----------
Subsidiary, any sale, transfer or other disposition of any assets or other
properties (including individual business assets, patents, trademarks and other
intangibles) of the Borrower or such Subsidiary, including the sale, transfer or
disposition of any capital stock of or any merger or consolidation involving any
Subsidiary and any issuance or sale by any Subsidiary of shares of its capital
stock, other than (i) sales of inventory and used equipment in the ordinary
course of business of the person (whether the Borrower or a Subsidiary) owning
and selling such inventory or used equipment; (ii) sales, transfers and other
dispositions of any tangible assets by the Borrower or any Subsidiary if the
Borrower or such Subsidiary enters into a purchase or construction agreement
with a third party to replace such assets with comparable assets as soon as
practicable (and in no event later than three months) after the disposition and,
pending such replacement, diligently pursues the replacement thereof, and the
fair market value of the replacement assets is substantially equivalent to or
exceeds that of the assets so disposed of; (iii) sales, transfers and other
dispositions of any assets to the Borrower or any Subsidiary; (iv) Sale and
Lease-Back Transactions; and (v) sales by the Borrower or Subsidiaries of assets
acquired from persons other than the Borrower or other Subsidiaries, which sales
occur not more than 12 months after the respective dates on which such assets
were acquired.
"Assignment and Acceptance" shall mean an assignment and acceptance
-------------------------
entered into by a Lender and an assignee, and accepted by the Agent, in the form
of Exhibit C.
"Baron Entities" shall mean the collective reference to Baron Capital
--------------
Group, Inc., Baron Capital, Inc., BAMCO, Inc., Baron Capital Management, Inc.,
Baron Asset Fund and Ronald Baron.
"Board" shall mean the Board of Governors of the Federal Reserve
-----
System of the United States.
"Borrower" shall mean Sunburst Hospitality Corporation (formerly
--------
Choice Hotels International, Inc.), a Delaware corporation, as renamed following
the Spin-Off.
6
<PAGE>
"Borrowing" shall mean a group of Loans of the same Type made by the
---------
Lenders on a single date and as to which a single Interest Period is in effect.
"Borrowing Base" shall mean, at any time, an amount equal to 50% of
--------------
the Aggregate Value of the Borrowing Base Properties.
"Borrowing Base Certificate" shall mean a certificate in the form of
--------------------------
Exhibit D or any other form approved by the Agent, together with all attachments
contemplated thereby.
"Borrowing Base Properties" shall mean Hotel Properties that satisfy
-------------------------
the following minimum criteria: (a) such properties shall be wholly owned
directly by a Wholly Owned Subsidiary that has no Indebtedness and all the
capital stock of which the Collateral Agent has a first priority security
interest in pursuant to the Pledge Agreement; (b) such properties shall not be
subject to any Lien, springing Lien or negative pledge agreement securing or
created under any document or instrument governing Indebtedness; (c) such
properties shall be free of all material structural and title defects (which
shall be determined by the Agent based on a review of documentation and
discussions with the Borrower, in each case satisfactory to the Agent) at the
time of the initial inclusion of any such property in the Borrowing Base; (d)
such properties shall be free from environmentally hazardous materials as
verified by an environmental assessment report in a form acceptable to the Agent
delivered to the Agent at the time of the initial inclusion of any such property
in the Borrowing Base; (e) such properties shall be fully operational with less
than 20% of keys out of service; (f) such properties shall be located in the
United States; and (g) to the extent such properties are subject to ground
leases, (i) the remaining terms of such ground leases shall be greater than 25
years and (ii) the other terms of such ground leases shall be acceptable to the
Agent; provided that the Exception Properties shall constitute Borrowing Base
--------
Properties for purposes of this Agreement despite their failure to satisfy the
criteria set forth in clause (g)(i) above.
"Borrowing Request" shall mean a request by the Borrower in accordance
-----------------
with the terms of Section 2.03.
"Business Day" shall mean any day (other than a day which is a
------------
7
<PAGE>
Saturday, Sunday or legal holiday in the State of New York) on which banks are
open for business in New York City; provided, however, that when used in
-------- -------
connection with a Eurodollar Loan, the term "Business Day" shall also exclude
any day on which banks are not open for dealings in dollar deposits in the
London interbank market.
"Capital Lease Obligations" of any person shall mean the obligations
-------------------------
of such person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such person under GAAP
applied on a consistent basis and, for the purposes of this Agreement, the
amount of such obligations at any time shall be the capitalized amount thereof
at such time determined in accordance with GAAP applied on a consistent basis.
"CD Borrowing" shall mean a Borrowing comprised of CD Loans.
------------
"CD Loan" shall mean any Loan bearing interest at a rate determined by
-------
reference to the Adjusted CD Rate in accordance with the provisions of Article
II.
A "Change in Control" shall be deemed to have occurred if (a) any
-----------------
person or group (within the meaning of Rule 13d-5 of the Securities and Exchange
Commission as in effect on the date hereof) other than Stewart Bainum and his
family shall own directly or indirectly, beneficially or of record, shares
representing more than 15% of the aggregate ordinary voting power represented by
the issued and outstanding capital stock of the Borrower, except that such a
person or group may own directly or indirectly, beneficially or of record,
shares representing not more than 20%, or 33% in the case of the Baron Entities,
of the aggregate voting power represented by the issued and outstanding capital
stock of the Borrower if and for so long as such person or group reports and
continues to report such ownership on Schedule 13G (filed pursuant to Rule 13d-
1(b), Rule 13d-1(c), or, in the case of amendments, Rule 13d-2(b), of the
Securities and Exchange Commission as in effect on the date hereof); (b) a
majority of the seats (other than vacant seats) on the board of directors of the
Borrower shall at any time have been occupied by persons who were neither (i)
nominated by the management of the Borrower or by the Nominating Committee of
the Borrower's board of directors in connection with an annual meeting of the
stockholders of the Borrower, nor (ii) appointed by
8
<PAGE>
directors so nominated; or (c) any person or group other than Stewart Bainum and
his family shall otherwise directly or indirectly Control the Borrower.
Notwithstanding the foregoing, if a trust or foundation or other entity
established by Stewart Bainum or his family holds shares representing in excess
of 15% of the aggregate ordinary voting power represented by the issued and
outstanding capital stock of the Borrower and Stewart Bainum or his family
Controls such trust or foundation or such other entity and the vote of such
shares held by such trust or foundation or such other entity and Stewart Bainum
and his family remain in Control of the Borrower, there shall be no Change in
Control for purposes of this Agreement; provided, however, that any transfer of
-------- -------
such shares by Stewart Bainum, such trust or such foundation or such other
entity shall stand on its own merits for purposes of this Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as the same may
----
be amended from time to time.
"Collateral Agent" shall mean The Chase Manhattan Bank and any
----------------
successor thereto.
"Consolidated EBITDA" shall mean, for any period, without duplication,
-------------------
the sum for such period of (a) Consolidated Net Income, (b) depreciation and
amortization expense, (c) Consolidated Interest Expense, (d) provisions for
income tax expense, (e) restructuring charges incurred in connection with the
Spin-Off and (f) non-cash charges related to the impairment of assets (pursuant
to FAS 121), all as determined in accordance with GAAP consistently applied.
"Consolidated Funded Indebtedness" shall mean, as of any date of
--------------------------------
determination, all obligations shown as liabilities on a consolidated balance
sheet of the Borrower on such date, in accordance with GAAP consistently
applied, whether such obligations are classified as long-term or short-term.
"Consolidated Interest Expense" shall mean, for any period, gross
-----------------------------
total expenses of the Borrower and its consolidated Subsidiaries accounted for
as interest expense (including capitalized interest determined in accordance
with GAAP consistently applied) for such period, including (i) the portion of
rental payments under Capital Lease Obligations deemed to represent interest in
accordance with GAAP consistently applied, (ii) the amortization of debt
discounts, (iii) the amortization of all fees (including fees with respect to
interest rate protection agreements)
9
<PAGE>
payable in connection with the incurrence of Indebtedness to the extent included
in interest expense, all as determined on a consolidated basis in accordance
with GAAP consistently applied. For purposes of the foregoing, gross interest
expense shall be determined after giving effect to any net payments made or
received with respect to interest rate protection agreements entered in to as a
hedge against interest rate exposure.
"Consolidated Net Income" shall mean, for any period, the net income
-----------------------
(or loss) of the Borrower and its consolidated Subsidiaries for such period, as
determined on a consolidated basis in accordance with GAAP consistently applied.
"Consolidated Net Worth" shall mean, as at any date of determination,
----------------------
the consolidated stockholders' equity of the Borrower and its consolidated
Subsidiaries, as determined on a consolidated basis in accordance with GAAP
consistently applied.
"Consolidated Senior Funded Indebtedness" shall mean, as of any date
---------------------------------------
of determination, all obligations (other than Approved Subordinated
Indebtedness) shown as liabilities on a consolidated balance sheet of the
Borrower on such date, in accordance with GAAP consistently applied, whether
such obligations are classified as long-term or short-term.
"Consolidated Total Assets" shall mean, as at any date of
-------------------------
determination, the total assets of the Borrower and its consolidated
Subsidiaries at such time, as determined on a consolidated basis in accordance
with GAAP consistently applied.
"Construction Properties" shall mean (a) Hotel Properties under
-----------------------
construction, (b) newly acquired Hotel Properties which require and are
undergoing substantial refurbishment and which are not open for business and (c)
vacant land.
"Control" shall mean the possession, directly or indirectly, of the
-------
power to direct or cause the direction of the management or policies of a
person, whether through the ownership of voting securities, by contract or
otherwise, and "Controlling" and "Controlled" shall have meanings correlative
thereto; provided, however, the existence of a management contract by the
-------- -------
Borrower or one of its Affiliates to manage another entity shall not be deemed
to be Control.
10
<PAGE>
"Credit Event" shall have the meaning assigned to such term in Section
------------
4.01.
"Default" shall mean any event or condition which upon notice, lapse
-------
of time or both would constitute an Event of Default.
"Distribution Agreement" shall mean the Distribution Agreement dated
----------------------
as of October 15, 1997, by and between International and the Borrower.
"dollars" or "$" shall mean lawful money of the United States of
------- -
America.
"Effective Date" shall mean the date on and as of which each of the
--------------
conditions set forth in Section 4.02 shall have been satisfied.
"Environmental Laws" shall have the meaning set forth in Section 3.17.
------------------
"Environmental Permit" means any permit, approval, authorization,
--------------------
certificate, registration, license, variance, filing or permission required by
or from any Governmental Authority pursuant to any Environmental Law.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as the same may be amended from time to time.
"ERISA Affiliate" shall mean any trade or business (whether or not
---------------
incorporated) that is a member of a group of which the Borrower is a member and
which is treated as a single employer under Section 414 of the Code.
"Eurodollar", when used in reference to any Loan or Borrowing shall
----------
refer to whether such Loan, or Loans comprising such Borrowing, are bearing
interest at a rate determined by reference to the LIBO Rate in accordance with
the provisions of Article II.
"Event of Default" shall have the meaning assigned to such term in
----------------
Article VII.
"Exception Properties" shall mean the Hotel Properties owned by a
--------------------
Wholly Owned Subsidiary of the Borrower on the Effective Date that are located
in Anaheim, California and San Francisco, California.
"Excluded Subsidiaries" shall mean First Choice
---------------------
11
<PAGE>
Properties Corp., First Choice Capital Corp. and QI Capital Corp.
"Existing Credit Agreements" shall mean (a) the US $100MM Competitive
--------------------------
Advance and Revolving Credit Facility Agreement dated as of October 30, 1996,
among Choice Hotels International, Inc. (formerly Choice Hotels Holdings, Inc.),
the lenders party thereto and the Agent, as agent thereunder and (b) the
Agreement dated as of May 5, 1997 between Choice Hotels International, Inc. and
The Chase Manhattan Bank, as lender, in each case as amended.
"FF&E Reserve" shall mean, with respect to any Hotel Property, a
------------
furniture, fixture and equipment reserve equal to 4% of Gross Revenue
attributable to such property.
"Facility Fee" shall have the meaning assigned to such term in Section
------------
2.05(a).
"Fees" shall mean the Facility Fee, the Agent and Administrative Fees,
----
the L/C Participation Fees and the Issuing Bank Fees.
"Financial Officer" of any corporation shall mean the chief financial
-----------------
officer, principal accounting officer, Treasurer or Controller of such
corporation.
"Fixed Charge Coverage Ratio" shall mean, for any period, the ratio of
---------------------------
(a) Consolidated EBITDA for such period minus the total FF&E Reserve for all
Hotel Properties for such period to (b) the sum of (i) Consolidated Interest
Expense for such period (excluding non-cash interest expense relating to the
Approved Subordinated Indebtedness), (ii) principal amounts that become payable
(whether or not paid and whether at stated maturity or otherwise, but excluding
any balloon payments) during such period and (iii) scheduled dividends on
preferred stock during such period.
"Foreign Subsidiary" shall mean any Subsidiary that is organized under
------------------
the laws of a jurisdiction other than the United States of America or any State
thereof or the District of Columbia.
"Form 10" shall mean the registration statement on Form 10 under the
-------
Securities Exchange Act of 1934 of the Borrower filed with the Securities and
Exchange Commission on September 10, 1997, as amended and distributed to the
Lenders prior to the date hereof.
"Franchise and Marketing Expense" shall mean, for
-------------------------------
12
<PAGE>
any Hotel Property, franchise (including royalty, reservation and national
advertising costs and fees) and marketing expenses (including in-house marketing
expenses) attributable to such property for the most recent period of four
fiscal quarters for which information shall have been delivered pursuant to
Section 5.04(a) or (b).
"GAAP" shall mean generally accepted accounting principles.
----
"Governmental Authority" shall mean any Federal, state, local or
----------------------
foreign court or governmental agency, authority, instrumentality or regulatory
body.
"Gross Revenue" shall mean, as to any Hotel Property, the gross
-------------
revenues attributable to such property for the most recent period of four fiscal
quarters for which information shall have been delivered pursuant to Section
5.04(a) or (b).
"Guarantee" of or by any person shall mean any obligation, contingent
---------
or otherwise, of such person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other person (the "primary obligor") in any
manner, whether directly or indirectly, and including any obligation of such
person, direct or indirect, (a) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Indebtedness or to purchase (or to advance
or supply funds for the purchase of) any security for the payment of such
Indebtedness, (b) to purchase property, securities or services for the purpose
of assuring the owner of such Indebtedness of the payment of such Indebtedness
or (c) to maintain working capital, equity capital or other financial statement
condition or liquidity of the primary obligor so as to enable the primary
obligor to pay such Indebtedness; provided, however, that the term Guarantee
-------- -------
shall not include endorsements for collection or deposit, in either case in the
ordinary course of business.
"Guarantee Agreement" shall mean the Guarantee Agreement,
-------------------
substantially in the form of Exhibit G, between the Subsidiary Loan Parties and
the Collateral Agent.
"Hotel Properties" shall mean the properties set forth on Schedule
----------------
1.01(c) and any hotel properties acquired or constructed after the date hereof,
including fixtures and personalty associated therewith.
"Indebtedness" of any person shall mean, without duplication, (a) all
------------
obligations of such person for borrowed
13
<PAGE>
money or with respect to deposits or advances of any kind, (b) all obligations
of such person evidenced by bonds, debentures, notes or similar instruments, (c)
all obligations of such person upon which interest charges are customarily paid,
(d) all obligations of such person under conditional sale or other title
retention agreements relating to property or assets purchased by such person,
(e) all obligations of such person issued or assumed as the deferred purchase
price of property or services, (f) all Indebtedness of others secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien on property owned or acquired by such
person, whether or not the obligations secured thereby have been assumed, (g)
all Guarantees by such person of Indebtedness of others, (h) all Capital Lease
Obligations of such person, (i) all obligations of such person in respect of
interest rate protection agreements, foreign currency exchange agreements or
other interest or exchange rate hedging arrangements and (j) all obligations of
such person as an account party in respect of letters of credit (other than (x)
documentary letters of credit (including commercial and trade letters of credit)
issued to secure payment obligations in respect of goods and services in the
ordinary course of business and (y) letters of credit and surety bonds with
respect to obligations of such person that are fully accounted for as
liabilities in the financial records of such person) and bankers' acceptances.
The Indebtedness of any person shall not include current accounts payable
incurred in the ordinary course of business. The Indebtedness of any person
shall include the Indebtedness of any partnership in which such person is a
general partner.
"Indemnity, Subrogation and Contribution Agreement" shall mean the
-------------------------------------------------
Indemnity, Subrogation and Contribution Agreement, substantially in the form of
Exhibit I, among the Borrower, the Subsidiary Loan Parties and the Collateral
Agent.
"Information Memorandum" shall mean the Confidential Information
----------------------
Memorandum dated September 1997 distributed by the Borrower to the Lenders.
"Interest Payment Date" shall mean, with respect to any Loan, the last
---------------------
day of the Interest Period applicable
thereto and, in the case of a Eurodollar Loan with an Interest Period of more
than three months' duration or a CD Loan with an Interest Period of more than 90
days' duration, each day that would have been an Interest Payment Date for such
Loan had successive Interest Periods of three months'
14
<PAGE>
duration or 90 days' duration, as the case may be, been applicable to such Loan
and, in addition, the date of any refinancing or conversion of such Loan with or
to a Loan of a different Type.
"Interest Period" shall mean (a) as to any Eurodollar Borrowing, the
---------------
period commencing on the date of such Borrowing and ending on the numerically
corresponding day (or, if there is no numerically corresponding day, on the last
day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the
applicable Borrower may elect; provided that the Interest Period for each
--------
Eurodollar Borrowing made prior to satisfaction of the covenant set forth in
Section 5.04(d) shall be one month, (b) as to any CD Borrowing, a period of 30,
60, 90 or 180 days' duration, as the Borrower may elect, commencing on the date
of such Borrowing and (c) as to any ABR Borrowing, the period commencing on the
date of such Borrowing and ending on the date 90 days thereafter or, if earlier,
on the Revolving Maturity Date or the date of prepayment of such Borrowing;
provided, however, that if any Interest Period would end on a day other than a
- -------- -------
Business Day, such Interest Period shall be extended to the next succeeding
Business Day unless, in the case of Eurodollar Loans only, such next succeeding
Business Day would fall in the next calendar month, in which case such Interest
Period shall end on the next preceding Business Day. Interest shall accrue from
and including the first day of an Interest Period to but excluding the last day
of such Interest Period.
"Interest Rate Determination Date" shall mean, with respect to a
--------------------------------
Eurodollar Borrowing, the date which is two Business Days prior to the
commencement of any Interest Period for such Borrowing.
"International" shall mean Choice Hotels International, Inc. (formerly
-------------
Choice Hotels Franchising, Inc.), a Delaware corporation, as renamed following
the Spin-Off.
"Issuing Bank" shall mean, as the context may require, (a) The Chase
------------
Manhattan Bank, or (b) any other Lender that may become an Issuing Bank pursuant
to Section 2.19(h), with respect to Letters of Credit issued by such Lender.
"Issuing Bank Agreement" shall mean an agreement in substantially the
----------------------
form of Exhibit F.
"Issuing Bank Fees" shall have the meaning assigned to such term in
-----------------
Section 2.05(c).
15
<PAGE>
"L/C Commitment" shall mean, with respect to any Issuing Bank, the
--------------
commitment of such Issuing Bank to issue Letters of Credit pursuant to Section
2.19.
"L/C Disbursement" shall mean a payment or disbursement made by an
----------------
Issuing Bank pursuant to a Letter of Credit.
"L/C Exposure" shall mean at any time the sum of (a) the aggregate
------------
undrawn amount of all outstanding Letters of Credit at such time, plus (b) the
aggregate principal amount of all L/C Disbursements that have not yet been
reimbursed at such time. The L/C Exposure of any Lender at any time shall mean
its Pro Rata Percentage (based upon its Revolving Commitment) of the aggregate
L/C Exposure at such time.
"L/C Participation Fee" shall have the meaning assigned to such term
---------------------
in Section 2.05(c)(i).
"Lease" shall mean the collective reference to all leases, licenses,
-----
concession agreements, franchises and other occupancy agreements and other
agreements demising, leasing or granting rights of possession or use or, to the
extent of the interest therein of the Borrower or any Subsidiary, any sublease,
sub-sublease, underletting or sublicense, which now or hereafter may affect any
Borrowing Base Property or any part thereof or interest therein.
"Lender" shall mean a person listed on Schedule 2.01 and any other
------
person that shall become a party hereto pursuant to an Assignment and
Acceptance, other than any such person that ceases to be a party hereto pursuant
to an Assignment and Acceptance.
"Letter of Credit" shall mean any letter of credit issued pursuant to
----------------
Section 2.19, as permitted hereby.
"LIBO Rate" means, with respect to any Eurodollar Borrowing for any
---------
Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on
any successor or substitute page of such Service, or any successor to or
substitute for such Service, providing rate quotations comparable to those
currently provided on such page of such Service, as determined by the Agent from
time to time for purposes of providing quotations of interest rates applicable
to dollar deposits in the London interbank
16
<PAGE>
market) at approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such Interest Period, as the rate for dollar deposits with a
maturity comparable to such Interest Period. In the event that such rate is not
available at such time for any reason, then the "LIBO Rate" with respect to such
---------
Eurodollar Borrowing for such Interest Period shall be the rate at which dollar
deposits of $5,000,000 and for a maturity comparable to such Interest Period are
offered by the principal London office of the Agent in immediately available
funds in the London interbank market at approximately 11:00 a.m., London time,
two Business Days prior to the commencement of such Interest Period.
"Lien" shall mean, with respect to any asset, (a) any mortgage, deed
----
of trust, lien, pledge, encumbrance, charge or security interest in or on such
asset, (b) the interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement relating to such asset and
(c) in the case of securities, any purchase option, call or similar right of a
third party (excluding rights of first refusal) with respect to such securities.
"Loans" shall mean the Loans made by the Lenders to the Borrower
-----
pursuant to Section 2.01 and Section 2.03. Each Loan shall be a Eurodollar Loan,
a CD Loan or an ABR Loan.
"Loan Documents" shall mean this Agreement, the Guarantee Agreement,
--------------
the Indemnity, Subrogation and Contribution Agreement, the Security Documents,
the Letters of Credit, each Issuing Bank Agreement and, if requested by a Lender
pursuant to Section 2.06(e), each Note.
"Loan Party" shall mean the Borrower and the Subsidiary Loan Parties.
----------
"Margin Stock" shall have the meaning given such term under Regulation
------------
U.
"Material Adverse Effect" shall mean a materially adverse effect on
-----------------------
the business, assets, property or condition, financial or otherwise, of the
Borrower and the Subsidiaries taken as a whole.
"Moody's" shall mean Moody's Investors Service, Inc.
-------
"Multiemployer Plan" shall mean a multiemployer
------------------
17
<PAGE>
plan as defined in Section 4001(a)(3) of ERISA to which the Borrower or any
ERISA Affiliate (other than one considered an ERISA Affiliate only pursuant to
subsection (m) or (o) of Section 414 of the Code) is making or accruing an
obligation to make contributions, or has within any of the preceding five plan
years made or accrued an obligation to make contributions.
"Net Operating Income" shall mean, with respect to any Hotel Property
--------------------
for any period, Operating Revenues less Operating Expenses.
"Obligations" shall mean (a) the Borrower's obligations in respect of
-----------
the due and punctual payment of principal of and interest on the Loans and
reimbursement of the L/C Disbursements, in each case when and as due whether at
maturity, by acceleration, upon one or more dates set for prepayment or
otherwise, (b) all Fees, expenses, indemnities, reimbursements and other
obligations, monetary or otherwise, of the Borrower under this Agreement or any
other Loan Document, (c) all obligations, monetary or otherwise, of each
Subsidiary under each Loan Document to which it is a party and (d) unless
otherwise agreed upon in writing by the applicable Lender party thereto, all
obligations of the Borrower, monetary or otherwise, under each interest rate
protection agreement entered into with a counterparty that was a Lender (or an
Affiliate thereof) at the time such interest rate protection agreement was
entered into.
"Operating Expenses" shall mean, with respect to any Hotel Property,
------------------
all fixed and variable operating expenses relating specifically to such Hotel
Property (including Franchise and Marketing Expenses) except for (i)
depreciation, amortization, or other noncash charges, (ii) principal or interest
payments on account of any Indebtedness related to such Hotel Property or rent
payable under any capital lease, (iii) income taxes, (iv) extraordinary losses
and (v) capital expenditures of any kind, in each case as determined in
accordance with GAAP.
"Operating Revenues" shall mean, with respect to any Hotel Property,
------------------
all cash revenues and receipts of every kind derived from operating such Hotel
Property and parts thereof, including, but not limited to: income (from both
cash and credit transactions), before commissions and discounts for prompt or
cash payments, from rental or sales of rooms, gift shops, meeting, exhibit,
conference center or sales space of every kind; retail operations; license,
lease
18
<PAGE>
and concession fees and rentals (not including gross receipts of licensees,
lessees and concessionaires); golf, club and spa operations; income from
telephone and facsimile charges; income from vending machines; food and beverage
sales, sales of merchandise (other than proceeds from the sale of FF&E no longer
necessary to the operation of such Hotel Property); service charges, to the
extent not distributed to the employees at such Hotel Property as, or in lieu
of, gratuities; and proceeds, if any, from business interruption or other loss
of income insurance; provided, however, that Operating Revenues shall not
-------- -------
include the following: gratuities to employees of such Hotel Property, federal,
state or municipal excise, sales, use or similar taxes collected directly from
patrons or guests or included as part of the sales price of any goods or
services; insurance proceeds (other than proceeds from business interruption or
other loss of income insurance); condemnation proceeds; or any proceeds from any
sale of other disposition of such Hotel Property.
"PBGC" shall mean the Pension Benefit Guaranty Corporation referred to
----
and defined in ERISA.
"Permitted Investments" shall mean:
---------------------
(a) direct obligations of, or obligations the principal of and interest on
which are unconditionally guaranteed by, the United States of America (or by any
agency thereof to the extent such obligations are backed by the full faith and
credit of the United States of America);
(b) investments in commercial paper having credit ratings of at least A-2
from S&P and P-2 from Moody's;
(c) investments in certificates of deposit, banker's acceptances and time
deposits issued or guaranteed by or placed with, and money market deposit
accounts issued or offered by, any domestic office of any commercial bank
organized under the laws of the United States of America or any State thereof
which has a combined capital and surplus and undivided profits of not less than
$200,000,000;
(d) investments in the ordinary course of business in customary repurchase
agreements with respect to freely marketable, short-term securities of the type
customarily subject to repurchase agreements; and
(e) other readily marketable debt and equity
19
<PAGE>
securities traded on national securities exchanges or on other nationally
recognized markets, including over-the-counter markets.
"person" shall mean any natural person, corporation, business trust,
------
joint venture, association, company, limited liability company, partnership or
government, or any agency or political subdivision thereof.
"Plan" shall mean any pension plan (other than a Multiemployer Plan)
----
subject to the provisions of Title IV of ERISA or Section 412 of the Code which
is maintained for employees of the Borrower or any ERISA Affiliate.
"Pledge Agreement" shall mean the Pledge Agreement, substantially in
----------------
the form of Exhibit H, among the Borrower, the Subsidiary Loan Parties and the
Collateral Agent for the benefit of the Secured Parties.
"Prepayment Event" shall mean:
----------------
(a) any sale, transfer or other disposition (including pursuant to a Sale
and Lease-Back Transaction) of any Borrowing Base Property; or
(b) any other sale, transfer or other disposition of property (including
pursuant to a Sale and Lease-Back Transaction) that results or would reasonably
be expected to result in the Borrower's failure to comply with any of the
covenants set forth in Sections 6.06, 6.13, 6.14, 6.15 or 6.16.
"Proceeds" shall mean, with respect to any Asset Sale or Prepayment
--------
Event, (a) the gross amount of consideration or other amounts payable to or
receivable by the Borrower or a Subsidiary in respect of such Asset Sale or
Prepayment Event, less (b) the amount, if any, of all estimated taxes payable
with respect to such Asset Sale or Prepayment Event, whether or not payable
during the taxable year in which such Asset Sale or Prepayment Event shall have
occurred, and less (c) reasonable and customary fees, commissions, costs and
other expenses (other than those payable to the Borrower or a Subsidiary or
Affiliate of the Borrower or to International or a subsidiary or Affiliate of
International (excluding any fees, costs or expenses arising out of a
termination of a franchise agreement or any ancillary agreement relating to such
franchise agreement)) which are incurred in connection with such Asset Sale or
Prepayment Event and are payable by the seller or the transferor of the assets
or property to which such Asset
20
<PAGE>
Sale or Prepayment Event relates, but only to
the extent not already deducted in arriving at the amount referred to in clause
(a) above. For purposes of determining Proceeds, the value of all noncash
consideration payable or receivable by the Borrower or any Subsidiary, as the
case may be, shall be the fair market value of such noncash consideration as
determined in good faith by the Borrower and the Borrower shall provide to the
Agent a certificate of a Financial Officer of the Borrower with respect to the
fair market value of such consideration, in form and substance reasonably
satisfactory to the Agent.
"Pro Rata Percentage" of any Lender at any time shall mean the
-------------------
percentage of the Total Revolving Commitment represented by such Lender's
Revolving Commitment. In the event the Revolving Commitments shall have expired
or been terminated, the Pro Rata Percentages shall be determined on the basis of
the Revolving Commitments most recently in effect (giving effect to any
assignments under Section 9.04).
"Reference Bank" shall mean the Agent or, if the Agent's Revolving
--------------
Commitment is not the largest of the Lenders' Revolving Commitments, the Lender
possessing the largest Revolving Commitment.
"Register" shall have the meaning given such term in Section 9.04(d).
--------
"Regulation D" shall mean Regulation D of the Board as from time to
------------
time in effect and all official rulings and interpretations thereunder or
thereof.
"Regulation G" shall mean Regulation G of the Board as from time to
------------
time in effect and all official rulings and interpretations thereunder or
thereof.
"Regulation U" shall mean Regulation U of the Board as from time to
------------
time in effect and all official rulings and interpretations thereunder or
thereof.
"Regulation X" shall mean Regulation X of the Board as from time to
------------
time in effect and all official rulings and interpretations thereunder or
thereof.
"Reportable Event" shall mean any reportable event as defined in
----------------
Section 4043(c) of ERISA or the regulations issued thereunder with respect to a
Plan (other than a Plan maintained by an ERISA Affiliate which is considered an
ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the
Code).
21
<PAGE>
"Required Lenders" shall mean, at any time, Lenders having Revolving
----------------
Commitments representing more than 50% of the Total Revolving Commitment or, if
the Revolving Commitments have been terminated, Lenders holding Loans and L/C
Exposures representing more than 50% of the sum of the aggregate amount of L/C
Exposures and aggregate principal amount of the Loans then outstanding.
"Responsible Officer" of any corporation shall mean any executive
-------------------
officer or Financial Officer of such corporation and any other officer or
similar official thereof responsible for the administration of the obligations
of such corporation in respect of this Agreement.
"Revolving Availability Period" shall mean the period from and
-----------------------------
including the Effective Date to but excluding the earlier of the Revolving
Maturity Date and the date of termination of the Revolving Commitments.
"Revolving Commitment" shall mean, with respect to each Lender, the
--------------------
commitment of such Lender to make Loans and to acquire participations in Letters
of Credit hereunder, expressed as an amount representing the maximum aggregate
amount of such Lender's Revolving Credit Exposure hereunder, as such commitment
may be (a) reduced from time to time pursuant to Section 2.10 and (b) reduced or
increased from time to time pursuant to assignments by or to such Lender
pursuant to Section 9.04. The initial amount of each Lender's Revolving
Commitment is set forth on Schedule 2.01, or in the Assignment and Acceptance
pursuant to which such Lender shall have assumed its Revolving Commitment, as
applicable. The initial aggregate amount of the Lenders' Revolving Commitments
is $80,000,000.
"Revolving Exposure" shall mean with respect to any Lender at any
------------------
time, the sum of the outstanding principal amount of such Lender's Loans and its
L/C Exposure at such time.
"Revolving Maturity Date" shall mean October 15, 2000.
-----------------------
"Sale and Lease-Back Transaction" shall mean any arrangement, directly
-------------------------------
or indirectly, with any person whereby such person shall sell or transfer any
property, real or personal, used or useful in its business, whether now owned or
hereafter acquired, and thereafter rent or lease such property or other property
which it intends to use for
22
<PAGE>
substantially the same purpose or purposes as the property being sold or
transferred.
"Security Documents" shall mean the Pledge Agreement and each other
------------------
instrument or document executed and delivered pursuant to Section 5.09 and 5.10
to secure the Obligations.
"Secured Parties" shall mean (a) the Lenders, (b) the Agent, (c) the
---------------
Collateral Agent, (d) the Issuing Bank, (e) each counterparty to an interest
rate protection agreement entered into with the Borrower if such counterparty
was a Lender at the time the interest rate protection agreement was entered into
and if the Borrower's obligations under such interest rate protection agreement
constitute Obligations, (f) the beneficiaries (other than any Loan Party) of
each indemnification obligation undertaken by any Loan Party under any Loan
Document and (g) the successors and assigns of each of the foregoing.
"Significant Subsidiary" shall mean at any time (a) any Subsidiary of
----------------------
the Borrower with revenues during the fiscal year of the Borrower most recently
ended greater than or equal to 5% of the total revenues of the Borrower and its
Subsidiaries during such year, computed and consolidated in accordance with GAAP
consistently applied ("Consolidated Revenues"), (b) any Subsidiary of the
---------------------
Borrower with assets as of the last day of the Borrower's most recently ended
fiscal year greater than or equal to 5% of the total assets of the Borrower and
its Subsidiaries at such date, computed and consolidated in accordance with GAAP
consistently applied ("Consolidated Assets"), (c) any Subsidiary with
-------------------
stockholder's equity as of the last day of the Borrower's most recently ended
fiscal year greater than or equal to 5% of the stockholder's equity of the
Borrower and the Subsidiaries at such date, computed and consolidated in
accordance with GAAP consistently applied ("Net Stockholders' Equity"), (d) any
------------------------
Subsidiary designated in writing by the Borrower as a Significant Subsidiary,
(e) any Subsidiary created or acquired by the Borrower after the date hereof
that falls within or that comes to meet one of clauses (a) through (d), (f) any
Subsidiary in existence on the date hereof which comes to meet one of clauses
(a) through (d) after the date hereof or (g) any Subsidiary that directly or
indirectly owns any capital stock of a Significant Subsidiary; provided,
--------
however, that if at any time (x) the aggregate revenues of all Subsidiaries that
- -------
are Significant Subsidiaries during any fiscal year of the Borrower shall not
equal or exceed 90% of Consolidated Revenues for such fiscal year, (y) the
aggregate assets of
23
<PAGE>
all Subsidiaries that are Significant Subsidiaries as of the last day of any
fiscal year of the Borrower shall not equal or exceed 90% of Consolidated Assets
at such date, or (z) the aggregate stockholders' equity of all Subsidiaries that
are Significant Subsidiaries as of the last day of any fiscal year of the
Borrower shall not equal or exceed 90% of Net Stockholders' Equity at such date,
then the term Significant Subsidiary shall be deemed to include such
Subsidiaries (as determined pursuant to the next following sentence) of the
Borrower as may be required so that none of clauses (x), (y) and (z) above shall
continue to be true. For purposes of the proviso to the next preceding sentence,
the Subsidiaries which shall be deemed to be Significant Subsidiaries shall be
determined based on the percentage that the assets of each such Subsidiary are
of Consolidated Assets, with the Subsidiary with the highest such percentage
being selected first, and each other Subsidiary required to satisfy the
requirements set forth in such proviso being selected in descending order of
such percentage.
"S&P" shall mean Standard & Poor's Ratings Group, a division of
---
McGraw-Hill, Inc.
"Spin-Off" shall mean the distribution by the Borrower to its
--------
shareholders of all the shares of capital stock of Choice Hotels International,
Inc. and the other related transactions contemplated by the Form 10 in the
manner, on the terms and with the results set forth in the Form 10.
"Statutory Reserves" shall mean a fraction (expressed as a decimal),
------------------
the numerator of which is the number one and the denominator of which is the
number one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Board and any other banking authority to which the Agent is
subject for new negotiable nonpersonal time deposits in dollars of over $100,000
with maturities approximately equal to the applicable Interest Period.
Statutory Reserves shall be adjusted automatically on and as of the effective
date of any change in any reserve percentage.
"subsidiary" shall mean, with respect to any person (herein referred
----------
to as the "parent"), any corporation, partnership, association or other business
entity (a) of which securities or other ownership interests representing more
than 50% of the equity or more than 50% of the ordinary voting power or more
than 50% of the general partnership interests are, at the time any determination
is
25
<PAGE>
being made, owned, controlled or held, or (b) which is, at the time any
determination is made, otherwise Controlled by the parent or one or more
subsidiaries of the parent or by the parent and one or more subsidiaries of the
parent.
"Subsidiary" shall mean any subsidiary of the Borrower.
----------
"Subsidiary Loan Party" shall mean any Subsidiary other than (a) an
---------------------
Excluded Subsidiary and (b) a Foreign Subsidiary.
"Supermajority Lenders" shall mean, at any time, Lenders having
---------------------
Revolving Commitments representing at least 662/3% of the Total Revolving
Commitment or, if the Revolving Commitments have been terminated, Lenders
holding Loans and L/C Exposures representing at least 662/3% of the sum of the
aggregate amount of L/C Exposures and aggregate principal amount of the Loans
then outstanding.
"Total Revolving Commitment" shall mean at any time the aggregate
--------------------------
amount of the Lenders' Revolving Commitments, as in effect at such time.
"Transactions" shall have the meaning assigned to such term in Section
------------
3.02.
"Type", when used in respect of any Loan or Borrowing, shall refer to
----
the Rate by reference to which interest on such Loan or on the Loans comprising
such Borrowing is determined. For purposes hereof, "Rate" shall include the
LIBO Rate, the Adjusted CD Rate and the Alternate Base Rate.
"Wholly Owned Subsidiary" shall mean a Subsidiary all the capital
-----------------------
stock or other ownership interest of which is owned by the Borrower or a Wholly
Owned Subsidiary of the Borrower (including any Subsidiary that would be wholly
owned but for directors' qualifying shares or similar matters).
"Withdrawal Liability" shall mean liability to a Multiemployer Plan as
--------------------
a result of a complete or partial withdrawal from such Multiemployer Plan, as
such terms are defined in Part I of Subtitle E of Title IV of ERISA.
SECTION 1.02. Classification of Loans and Borrowings. For purposes
---------------------------------------
of this Agreement, Loans and Borrowings may be classified and referred to by
Type (e.g., a "Eurodollar Loan" or a "Eurodollar Borrowing").
----
25
<PAGE>
SECTION 1.03. Terms Generally. The definitions herein shall apply
----------------
equally to both the singular and plural forms of the terms defined. Whenever
the context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include", "includes" and "including"
shall be deemed to be followed by the phrase "without limitation". All
references herein to Articles, Sections, Exhibits and Schedules shall be deemed
references to Articles and Sections of, and Exhibits and Schedules to, this
Agreement unless the context shall oth erwise require. Except as otherwise
expressly provided herein, all terms of an accounting or financial nature shall
be construed in accordance with GAAP consistently applied, as in effect from
time to time; provided, however, that, for purposes of determining the Borrowing
-------- -------
Base or compliance with any covenant set forth in Article VI, such terms shall
be construed in accordance with GAAP as in effect on the date of this Agreement
applied on a basis consistent with the application used in preparing the
Borrower's audited financial statements referred to in Section 3.05.
ARTICLE II. THE CREDITS
SECTION 2.01. Commitments. Subject to the terms and conditions and
------------
relying upon the representations and warranties herein set forth, each Lender
agrees, severally and not jointly, to make Loans to the Borrower, at any time
and from time to time during the Revolving Availability Period, in an aggregate
principal amount at any time outstanding that will not result in (i) such
Lender's Revolving Exposure exceeding such Lender's Revolving Commitment or (ii)
the sum of the Revolving Exposures exceeding the Borrowing Base then in effect.
Within the foregoing limits, the Borrower may borrow, prepay and reborrow Loans,
on and after the Effective Date and prior to the Revolving Maturity Date,
subject to the terms, conditions and limitations set forth herein.
SECTION 2.02. Loans. (a) Each Loan shall be made as part of a
------
Borrowing consisting of Loans of the same Type made by the Lenders ratably in
accordance with their respective Revolving Commitments; provided, however, that
-------- -------
the failure of any Lender to make any Loan shall not in itself relieve any other
Lender of its obligation to lend hereunder (it being understood, however, that
no Lender shall be responsible for the failure of any other Lender to make any
Loan required to be made by such other Lender). Except for Loans deemed made
pursuant to Section 2.02(e),
26
<PAGE>
the Loans comprising any Borrowing shall be in an aggregate principal amount
which is an integral multiple of $1,000,000 and not less than $1,000,000 (or an
aggregate principal amount equal to the remaining balance of the available
Revolving Commitments).
(b) Subject only to Section 2.09, each Borrowing shall be comprised
entirely of Eurodollar Loans, CD Loans or ABR Loans as the Borrower may request
pursuant to Section 2.03. Each Lender may at its option make any Eurodollar
Loan by causing any domestic or foreign branch or Affiliate of such Lender to
make such Loan; provided, however, that (i) any exercise of such option shall
-------- -------
not affect the obligation of the Borrower to repay such Loan in accordance with
the terms of this Agreement and (ii) in exercising such option, the Lender shall
use its reasonable efforts to minimize any increased costs to the Borrower
resulting therefrom (which obligation of the Lender shall not require it to
take, or refrain from taking, actions that it determines would result in
increased costs for which it will not be compensated hereunder or that it
determines would be otherwise disadvantageous to it and in the event of such
request for costs for which compensation is provided under this Agreement, the
provisions of Section 2.12(c) shall apply). Borrowings of more than one Type
may be outstanding at the same time; provided, however, that the Borrower shall
-------- -------
not be entitled to request any Borrowing which, if made, would result in an
aggregate of more than ten separate Loans of any Lender being outstanding
hereunder at any one time. For purposes of the foregoing, Loans having
different Interest Periods, regardless of whether they commence on the same
date, shall be considered separate Loans.
(c) Subject to Section 2.04 and except with respect to Loans made
pursuant to Section 2.02(e), each Lender shall make each Loan to be made by it
hereunder on the proposed date thereof by wire transfer of immediately available
funds to such account as the Agent may designate, not later than 12:00 noon, New
York City time, and the Agent shall by 3:00 p.m., New York City time, credit the
amounts so received to an account designated by the Borrower with the Agent or,
if a Borrowing shall not occur on such date because any condition precedent
herein specified shall not have been met, return the amounts so received to the
respective Lenders. Unless the Agent shall have received notice from a Lender
prior to (or, in the case of an ABR Borrowing, on) the date of any Borrowing
that such Lender shall not make available to the Agent such Lender's portion of
such Borrowing, the Agent may assume that such Lender has
27
<PAGE>
made such portion available to the Agent on the date of such Borrowing in
accordance with this Section 2.02(c) and the Agent may, in reliance upon such
assumption, make available to the Borrower on such date a corresponding amount.
If the Agent shall have so made funds available then, to the extent that such
Lender shall not have made such portion available to the Agent, such Lender and
the Borrower severally agree to repay to the Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
such amount is made available to the Borrower until the date such amount is
repaid to the Agent at (i) in the case of the Borrower, the interest rate
applicable at the time to the Loans comprising such Borrowing and (ii) in the
case of such Lender, a rate determined by the Agent to represent its cost of
overnight or short-term funds (which determination shall be conclusive absent
manifest error). If such Lender shall repay to the Agent such corresponding
amount, such amount shall constitute such Lender's Loan as part of such
Borrowing for purposes of this Agreement.
(d) Notwithstanding any other provision of this Agreement, the
Borrower shall not be entitled to request any Borrowing if the Interest Period
requested with respect thereto would end after the Revolving Maturity Date.
(e) If the Issuing Bank shall not have received from the Borrower the
payment required to be made by Section 2.19(e) in respect of any L/C
Disbursement within the time specified in such Section, the Issuing Bank will
promptly notify the Agent of the L/C Disbursement and the Agent will promptly
notify each Lender of such L/C Disbursement and its Pro Rata Percentage thereof.
Each Lender shall pay by wire transfer of immediately available funds to the
Agent not later than 2:00 p.m., New York City time, on such date (or, if such
Lender shall have received such notice later than 12:00 (noon), New York City
time, on any day, not later than 10:00 a.m., New York City time, on the
immediately following Business Day), an amount equal to such Lender's Pro Rata
Percentage of such L/C Disbursement (it being understood that such amount shall
be deemed to constitute an ABR Loan of such Lender and such payment shall be
deemed to have reduced the L/C Exposure), and the Agent will promptly pay to the
Issuing Bank amounts so received by it from the Lenders. The Agent will
promptly pay to the Issuing Bank any amounts received by it from the Borrower
pursuant to Section 2.19(e) prior to the time that any Lender makes any payment
pursuant to this paragraph (e); any such amounts received by the Agent
thereafter will be promptly remitted by the Agent to the Lenders that shall have
made such payments and to the Issuing Bank, as their
28
<PAGE>
interests may appear. If any Lender shall not have made its Pro Rata Percentage
of such L/C Disbursement available to the Agent as provided above, such Lender
and the Borrower severally agree to pay interest on such amount, for each day
from and including the date such amount is required to be paid in accordance
with this paragraph to but excluding the date such amount is paid, to the Agent
for the account of the Issuing Bank at (i) in the case of the Borrower, the
Alternate Base Rate plus the Applicable Percentage, and (ii) in the case of such
Lender, for the first such day, the Federal Funds Effective Rate, and for each
day thereafter, the Alternate Base Rate.
SECTION 2.03. Borrowing Procedures. In order to request a Borrowing
---------------------
(other than a deemed Borrowing pursuant to Section 2.02(e), as to which this
Section 2.03 shall not apply), the Borrower shall hand deliver or telecopy to
the Agent a duly completed Borrowing Request in the form of Exhibit A (a) in the
case of a Eurodollar Borrowing, not later than 10:30 a.m., New York City time,
three Business Days before a proposed borrowing, (b) in the case of a CD
Borrowing, not later than 10:30 a.m., New York City time, one Business Day
before a proposed borrowing and (c) in the case of an ABR Borrowing, not later
than 10:30 a.m., New York City time, on the day of a proposed borrowing. Such
notice shall be irrevocable and shall in each case specify (i) whether such
Borrowing is to be a Eurodollar Borrowing, a CD Borrowing or an ABR Borrowing;
(ii) the date of such Borrowing (which shall be a Business Day) and the amount
thereof; and (iii) if such Borrowing is to be a Eurodollar Borrowing or CD
Borrowing, the Interest Period with respect thereto. If no election as to the
Type of Borrowing is specified in any such notice, then the requested Borrowing
shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar
Borrowing or CD Borrowing is specified in any such notice, then the Borrower
shall be deemed to have selected an Interest Period of one month's duration, in
the case of a Eurodollar Borrowing, or 30 days' duration, in the case of a CD
Borrowing. If the Borrower shall not have given notice in accordance with this
Section of its election to refinance a Borrowing prior to the end of the
Interest Period in effect for such Borrowing, then the Borrower shall (unless
such Borrowing is repaid at the end of such Interest Period) be deemed to have
given notice of an election to refinance such Borrowing with an ABR Borrowing.
If the Borrower shall not have satisfied the covenant set forth in Section
5.04(d) in the time period set forth therein, each request for or election to
refinance a Borrowing from the date set forth therein for satisfaction of such
covenant until such covenant is satisfied shall be
29
<PAGE>
deemed a request for or election to refinance an ABR Borrowing. The Agent shall
promptly advise the Lenders of any notice given pursuant to this Section and of
each Lender's portion of the requested Borrowing.
SECTION 2.04. Refinancings. The Borrower may refinance all or any
-------------
part of any Borrowing with a Borrowing of the same or a different Type made
pursuant to Section 2.03, subject to the conditions and limitations set forth
herein and elsewhere in this Agreement. Any Borrowing or part thereof so
refinanced shall be deemed to be repaid in accordance with Section 2.06 with the
proceeds of a new Borrowing hereunder and the proceeds of the new Borrowing, to
the extent they do not exceed the principal amount of the Borrowing being
refinanced, shall not be paid by the Lenders to the Agent or by the Agent to the
Borrower pursuant to Section 2.02(c).
SECTION 2.05. Fees. (a) The Borrower agrees to pay to each Lender,
-----
through the Agent, on last day of March, June, September and December of each
year, on the date on which the Revolving Commitment of such Lender shall be
terminated as provided herein and on the Revolving Maturity Date, a facility fee
(a "Facility Fee") equal to the Applicable Percentage per annum in effect from
------------
time to time on the amount of the Revolving Commitment of such Lender, whether
used or unused, in effect from time to time during the preceding quarter (or
shorter period commencing with the date hereof or ending with the Revolving
Maturity Date or any date on which the Revolving Commitment of such Lender shall
be terminated). The Facility Fees shall be computed on the basis of the actual
number of days elapsed in a year of 360 days. The Facility Fee due to each
Lender shall commence to accrue on the date hereof and shall cease to accrue on
the earlier of (i) the termination of the Revolving Commitment of such Lender
and (ii) the Revolving Maturity Date.
(b) The Borrower shall pay to the Agent, for its own account, agent
and administrative fees (the "Agent and Administrative Fees") at the times and
-----------------------------
in the amounts agreed upon in the letter agreement dated August 26, 1997,
between the Borrower and the Agent.
(c) The Borrower agrees to pay (i) to each Lender, through the Agent,
on the last day of March, June, September and December of each year and on the
date on which the Revolving Commitment of such Lender shall be terminated as
provided herein, a fee (an "L/C Participation Fee") calculated on such Lender's
---------------------
Pro Rata Percentage of the
30
<PAGE>
average daily aggregate L/C Exposure (excluding the portion thereof attributable
to unreimbursed L/C Disbursements) during the preceding quarter (or shorter
period commencing with the date hereof or ending with the Revolving Maturity
Date or the date on which all Letters of Credit have been canceled or have
expired and the Revolving Commitments of all Lenders shall have been terminated)
at a rate equal to the Applicable Percentage from time to time used to determine
the interest rate on Borrowings comprised of Eurodollar Loans pursuant to
Section 2.07, and (ii) to the Issuing Bank with respect to each Letter of Credit
the fronting, issuance and drawing fees, specified in the Issuing Bank Agreement
(the "Issuing Bank Fees"). All L/C Participation Fees and Issuing Bank Fees
-----------------
shall be computed on the basis of the actual number of days elapsed in a year of
360 days.
(d) All Fees shall be paid on the dates due, in immediately available
funds, to the Agent for distribution, if and as appropriate, among the Lenders
except that the Issuing Bank Fees shall be paid directly to the Issuing Bank.
Once paid, none of the Fees shall be refundable under any circumstances unless
such Fees were paid in error.
SECTION 2.06. Evidence of Indebtedness; Repayment of Loans. (a) The
---------------------------------------------
Borrower hereby unconditionally promises to pay to the Agent for the account of
each Lender the then unpaid principal amount of each Loan on the last day of the
Interest Period applicable thereto.
(b) Each Lender shall maintain in accordance with its usual practice
an account or accounts evidencing the indebtedness of the Borrower to such
Lender resulting from each Loan made by such Lender, including the amounts of
principal and interest payable and paid to such Lender from time to time
hereunder.
(c) The Agent shall maintain accounts in which it shall record (i)
the amount of each Loan made hereunder, the Type thereof and the Interest Period
applicable thereto, (ii) the amount of any principal or interest due and payable
or to become due and payable from the Borrower to each Lender hereunder and
(iii) the amount of any sum received by the Agent hereunder for the account of
the Lenders and each Lender's share thereof.
(d) The entries made in the accounts maintained pursuant to
paragraphs (b) and (c) of this Section shall be prima facie evidence of the
----- -----
existence and amounts of the obligations recorded therein; provided that the
--------
failure of
31
<PAGE>
any Lender or the Agent to maintain such accounts or any error
therein shall not in any manner affect the obligation of the Borrower to
properly repay the Loans in accordance with the terms of this Agreement.
(e) Any Lender may request that Loans made by it be evidenced by a
promissory note. In such event, the Borrower shall prepare, execute and deliver
to such Lender a promissory note payable to the order of such Lender (or, if
requested by such Lender, to such Lender and its registered assigns) and in a
form approved by the Agent.
SECTION 2.07. Interest on Loans. (a) Subject to the provisions of
------------------
Section 2.08, the Loans comprising each Eurodollar Borrowing shall bear interest
(computed on the basis of the actual number of days elapsed over a year of 360
days) at a rate per annum equal to the LIBO Rate for the Interest Period in
effect for such Borrowing plus the Applicable Percentage. Interest on each
Eurodollar Borrowing shall be payable on each applicable Interest Payment Date.
The LIBO Rate for each Interest Period shall be determined by the Agent in
accordance with the definition of LIBO Rate herein. The Agent shall promptly
advise the Borrower and each Lender, as appropriate, of such determination.
(b) Subject to the provisions of Section 2.08, the Loans comprising
each CD Borrowing shall bear interest (computed on the basis of the actual
number of days elapsed over a year of 360 days) at a rate per annum equal to the
Adjusted CD Rate for the Interest Period in effect for such Borrowing plus the
Applicable Percentage. Interest on each CD Borrowing shall be payable on each
applicable Interest Payment Date. The Adjusted CD Rate for each Interest Period
shall be determined by the Agent in accordance with the definition of Adjusted
CD Rate herein. The Agent shall promptly advise the Borrower and each Lender of
such determination.
(c) Subject to the provisions of Section 2.08, the Loans comprising
each ABR Borrowing shall bear interest (computed on the basis of the actual
number of days elapsed over a year of (i) 365 or 366 days, as the case may be,
during any period in which the Alternate Base Rate is based on the Prime Rate,
and (ii) 360 days, during any period in which the Alternate Base Rate is based
on the Base CD Rate or the Federal Funds Effective Rate) at a rate per annum
equal to the Alternate Base Rate plus the Applicable Percentage. Interest on
each ABR Borrowing shall be payable on each applicable Interest Payment Date.
The Alternate
32
<PAGE>
Base Rate shall be determined by the Agent in accordance with the definition of
Alternate Base Rate herein.
SECTION 2.08. Default Interest. If the Borrower shall default in the
-----------------
payment of the principal of or interest on any Loan or any other amount becoming
due hereunder, whether by scheduled maturity, notice of prepayment, acceleration
or otherwise, the Borrower shall on demand from time to time from the Agent pay
interest, to the extent permitted by law, on such defaulted amount up to (but
not including) the date of actual payment (after as well as before judgment) at
a rate per annum (computed on the basis of the actual number of days elapsed
over a year of 360 days) equal to the Alternate Base Rate plus the Applicable
Percentage plus 2%.
SECTION 2.09. Alternate Rate of Interest. (a) In the event, and on
---------------------------
each occasion, that on the day two Business Days prior to the commencement of
any Interest Period for a Eurodollar Borrowing the Agent shall have determined
that deposits in the principal amounts of the Loans comprising such Borrowing
are not generally available in the London interbank market, or that the rates at
which such deposits are being offered will not adequately and fairly reflect the
cost to any Lender of making or main taining its Eurodollar Loan during such
Interest Period, or that reasonable means do not exist for ascertaining the LIBO
Rate, the Agent shall, as promptly as practicable, give written or telecopy
notice of such determination to the Borrower and the Lenders. In the event of
any such determination, until the Agent shall have advised the Borrower and the
Lenders that the circumstances giving rise to such notice no longer exist, any
request by the Borrower for a Eurodollar Borrowing pursuant to Section 2.03
shall be deemed to be a request for an ABR Borrowing.
(b) In the event, and on each occasion, that on or before the day on
which the Adjusted CD Rate for a CD Borrowing is to be determined the Agent
shall have determined that such Adjusted CD Rate cannot be determined for any
reason, including the inability of the Agent to obtain sufficient bids in
accordance with the terms of the definition of Fixed CD Rate, or the Agent shall
determine that the Adjusted CD Rate for such CD Borrowing will not adequately
and fairly reflect the cost to any Lender of making or maintaining its CD Loan
during such Interest Period, the Agent shall, in a timely manner, give written
or telecopy notice of such determination to the Borrower and the Lenders. In
the event of any such determination, any request by the Borrower for a CD
Borrowing pursuant to
33
<PAGE>
Section 2.03 shall, until the Agent shall have advised the
Borrower and the Lenders that the circumstances giving rise to such notice no
longer exist, be deemed to be a request for an ABR Borrowing.
SECTION 2.10. Termination and Reduction of Commitments. (a) Unless
-----------------------------------------
previously terminated, (i) the Revolving Commitments shall terminate on the
Revolving Maturity Date and (ii) the LC Commitment shall terminate on the date
30 days prior to the Revolving Maturity Date.
(b) Upon at least five Business Days' prior irrevocable written or
telecopy notice to the Agent, the Borrower may at any time in whole permanently
terminate, or from time to time in part permanently reduce, the Total Revolving
Commitments; provided, however, that (i) each partial reduction of the Total
-------- -------
Revolving Commitments shall be in an integral multiple of $1,000,000 and in a
minimum principal amount of $5,000,000 and (ii) no such termination or reduction
shall be made which would reduce the Total Revolving Commitments to an amount
less than the Aggregate Revolving Exposure.
(c) Each reduction in the Revolving Commitments hereunder shall be
made ratably among the Lenders in accordance with their respective Revolving
Commitments. The Borrower shall pay to the Agent for the accounts of the
Lenders, on the date of each termination or reduction, the Facility Fees on the
amount of the Revolving Commitments so terminated or reduced accrued through the
date of such termination or reduction.
SECTION 2.11. Prepayment of Loans. (a) The Borrower shall have the
--------------------
right at any time and from time to time to prepay any Borrowing, in whole or in
part.
(b) On the date of any termination or reduction of the Revolving
Commitments pursuant to Section 2.10, the Borrower shall pay or prepay so much
of the Borrowings as shall be necessary in order that the Aggregate Revolving
Exposure shall not exceed the Total Revolving Commitment after giving effect to
such termination or reduction.
(c) In the event and on such occasion that the Aggregate Revolving
Exposure exceed the Borrowing Base, the Borrower shall prepay Borrowings (or if
no such Borrowings are outstanding, deposit cash collateral in an account with
the Agent pursuant to Section 2.19(i)) in an aggregate amount equal to such
excess.
34
<PAGE>
(d) In the event and on each occasion that any Proceeds are received
by or on behalf of the Borrower or any Subsidiary in respect of any Prepayment
Event, the Borrower shall immediately after the Proceeds are received, prepay
Borrowings in (i) an aggregate amount equal to such Proceeds, in the case of a
Prepayment Event of a type set forth in clause (a) of the definition thereof and
(ii) in an amount equal to the lesser of (A) such Proceeds or (B) an amount
sufficient to bring the Borrower into compliance with the financial covenants
set forth in Sections 6.06, 6.13, 6.14, 6.15 and 6.16, in the case of a
Prepayment Event of a type set forth in clause (b) of the definition thereof.
(e) Prior to any optional or mandatory prepayment of Borrowings
hereunder, the Borrower shall select the Borrowing or Borrowings to be prepaid
and specify such selection in the notice of such prepayment delivered pursuant
to paragraph (f) of this Section.
(f) The Borrower shall notify the Agent by written or telecopy notice
(or telephone notice promptly confirmed by written or telecopy notice) to the
Agent before 10:00 a.m., New York City time, three Business Days prior to
prepayment. Each partial prepayment of any Borrowing shall be in an amount
which is an integral multiple of $1,000,000 and not less than $1,000,000, except
as necessary to apply fully the required amount of a mandatory repayment. Each
notice of prepayment shall specify the prepayment date and the principal amount
of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and
shall commit the Borrower to prepay such Borrowing (or portion thereof) by the
amount stated therein on the date stated therein. All prepayments under this
Section shall be subject to Section 2.14 but otherwise without premium or
penalty and shall be applied ratably to the Loans included in the prepaid
Borrowing. All prepayments under this Section shall be accompanied by accrued
interest on the principal amount being prepaid to the date of payment.
SECTION 2.12. Reserve Requirements; Change in Circumstances. (a)
----------------------------------------------
Notwithstanding any other provision herein, if after the date of this Agreement
any change in applicable law or regulation or in the interpretation or
administration thereof by any Governmental Authority charged with the
interpretation or administration thereof (whether or not having the force of
law) shall change the basis of taxation of payments to any Lender or Issuing
Bank of the principal of or interest on any Eurodollar Loan or CD Loan made by
such Lender or any Fees or other amounts payable hereunder (other than changes
in respect of taxes imposed on
35
<PAGE>
the overall net income of such Lender or Issuing Bank by any jurisdiction or any
political subdivision thereof) or shall impose, modify or deem applicable any
reserve, special deposit or similar requirement against assets of, deposits with
or for the account of or credit extended by such Lender or such Issuing Bank
(except any such reserve requirement which is already reflected in the
definition of the applicable Rate), or shall impose on such Lender or such
Issuing Bank or the London interbank market any other condition affecting this
Agreement or any Eurodollar Loan or CD Loan made by such Lender or any Letter of
Credit or participation therein, and the result of any of the foregoing shall be
to increase the cost to such Lender or Issuing Bank of making or maintaining any
Eurodollar Loan or CD Loan or increase the cost to any Lender of issuing or
maintaining any Letter of Credit or purchasing or maintaining a participation
therein or to reduce the amount of any sum received or receivable by such Lender
or such Issuing Bank hereunder (whether of principal, interest or otherwise) by
an amount deemed by such Lender or such Issuing Bank to be material, then the
Borrower shall pay to such Lender or such Issuing Bank, as the case may be, upon
demand such additional amount or amounts as will compensate such Lender or such
Issuing Bank, as the case may be, for such additional costs incurred or
reduction suffered.
(b) If any Lender or Issuing Bank shall have determined that the
adoption after the date hereof of any law, rule, regulation or guideline
regarding capital adequacy, or any change in any of the foregoing or in the
interpretation or administration of any of the foregoing by any Governmental
Authority charged with the interpretation or administration thereof, or
compliance by any Lender (or any lending office of such Lender) or any Issuing
Bank or any Lender's or Issuing Bank's holding company with any request or
directive regarding capital adequacy (whether or not having the force of law) of
any such Governmental Authority, has or would have the effect of reducing the
rate of return on such Lender's or Issuing Bank's capital or on the capital of
such Lender's or Issuing Bank's holding company, if any, as a consequence of
this Agreement or the Loans made or participations in Letters of Credit
purchased by such Lender pursuant hereto or the Letters of Credit issued by such
Issuing Bank pursuant hereto to a level below that which such Lender or Issuing
Bank or such Lender's or Issuing Bank's holding company could have achieved but
for such adoption, change or compliance (taking into consideration such Lender's
or Issuing Bank's policies and the policies of such Lender's or Issuing Bank's
holding company with respect to capital adequacy) by an amount deemed by such
Lender or Issuing Bank to be material, then
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from time to time the Borrower shall pay to such Lender or Issuing Bank, as the
case may be, such additional amount or amounts as will compensate such Lender or
Issuing Bank or such Lender's or Issuing Bank's holding company for any such
reduction suffered.
(c) A certificate of a Lender or Issuing Bank setting forth such
amount or amounts as shall be necessary to compensate such Lender or Issuing
Bank, as applicable, as specified in paragraph (a) or (b) above, as the case may
be, shall be delivered to the Borrower. The Borrower shall pay each Lender or
Issuing Bank the amount shown as due on any such certificate delivered by it
within 10 days after the receipt of the same. In the event any Lender delivers
such a certificate, the Borrower may, at its sole expense and effort, require
such Lender to transfer and assign, without recourse (in accordance with Section
9.04) all its interests, rights and obligations under this Agreement to an
assignee which shall assume such assigned obligations (which assignee may be
another Lender, if a Lender accepts such assignment); provided, however, that
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(i) such assignment shall not conflict with any law, rule or regulation or order
of any Governmental Authority, (ii) the Borrower shall have received a written
consent of the Agent in the case of an assignee that is not a Lender, which
consent shall not unreasonably be withheld, and (iii) the Borrower or such
assignee shall have paid to the assigning Lender in immediately available funds
the principal of and interest accrued to the date of such payment on the Loans
made by it hereunder and all other amounts owed to it hereunder.
(d) Failure on the part of any Lender or the Issuing Bank to demand
compensation for any increased costs or reduction in amounts received or
receivable or reduction in return on capital with respect to any period shall
not constitute a waiver of such Lender's or Issuing Bank's right to demand
compensation with respect to such period or any other period.
(e) Without prejudice to the survival of any other agreement
contained herein, the agreements and obligations contained in this Section shall
survive the payment in full of the principal of and interest on all Loans made
hereunder.
SECTION 2.13. Change in Legality. (a) Notwithstanding any other
-------------------
provision herein, if any change in any law or regulation or in the
interpretation thereof by any Governmental Authority charged with the
administration or interpretation thereof shall make it
37
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unlawful for any Lender to make or maintain any Eurodollar Loan or to give
effect to its obligations as contemplated hereby with respect to any Eurodollar
Loan, then, by written notice to the Borrower and to the Agent, such Lender may:
(i) declare that Eurodollar Loans shall not thereafter be made by such
Lender hereunder, whereupon any request by the Borrower for a Eurodollar
Borrowing shall, as to such Lender only, be deemed a request for an ABR Loan to
the Borrower unless such declaration shall be subsequently withdrawn; and
(ii) require that all outstanding Eurodollar Loans made by it be converted
to ABR Loans, in which event all such Eurodollar Loans shall be automatically
con verted to ABR Loans as of the effective date of such notice as provided in
paragraph (b) below.
In the event any Lender shall exercise its rights under (i) or (ii) above, all
payments and prepayments of principal which would otherwise have been applied to
repay the Eurodollar Loans that would have been made by such Lender or the
converted Eurodollar Loans of such Lender shall instead be applied to repay the
ABR Loans made by such Lender in lieu of, or resulting from the conversion of,
such Eurodollar Loans.
(b) For purposes of this Section, a notice to the Borrower by any
Lender shall be effective as to each Eurodollar Loan if lawful, on the last day
of the Interest Period then applicable to such Eurodollar Loan; in all other
cases such notice shall be effective on the date of receipt by the Borrower.
SECTION 2.14. Indemnity. The Borrower shall indemnify each Lender
----------
against any loss or expense which such Lender may sustain or incur as a
consequence of (a) any failure by the Borrower to fulfill on the date of any
borrowing hereunder the applicable conditions set forth in Article IV, (b) any
failure by the Borrower to borrow or to refinance any Loan hereunder after
irrevocable notice of such borrowing or refinancing has been given pursuant to
Section 2.03, (c) any payment, prepayment, assignment pursuant to Section
2.12(c), conversion of a Eurodollar Loan pursuant to Section 2.13(a) or
conversion of a Eurodollar Loan or CD Loan required by any other provision of
this Agreement or otherwise made or deemed made on a date other than the last
day of the Interest Period applicable thereto, (d) any default in payment or
prepayment of the principal amount of any Loan or any part thereof or interest
accrued
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thereon, as and when due and payable at the due date thereof (whether by
scheduled maturity, acceleration, irrevocable notice of prepayment or otherwise)
or (e) the occurrence of any Event of Default, including, in each such case, any
loss or reasonable expense sustained or incurred or to be sustained or incurred
in liquidating or employing deposits from third parties acquired to effect or
maintain such Loan or any part thereof as a Eurodollar Loan or CD Loan. Such
loss or reasonable expense shall include an amount equal to the excess, if any,
as reasonably determined by such Lender, of (i) its cost of obtaining the funds
for the Loan being paid, prepaid, assigned, converted or not borrowed (based on
the LIBO Rate or Adjusted CD Rate) for the period from the date of such payment,
prepayment, assignment, conversion or failure to borrow to the last day of the
Interest Period for such Loan (or, in the case of a failure to borrow, the
Interest Period for such Loan which would have commenced on the date of such
failure) over (ii) the amount of interest (as reasonably determined by such
Lender) that would be realized by such Lender in reemploying the funds so paid,
prepaid, assigned, converted or not borrowed for such period or Interest Period,
as the case may be. A certificate of any Lender setting forth any amount or
amounts which such Lender is entitled to receive pursuant to this Section and
evidencing a loss suffered by such Lender of such amount or amounts shall be
delivered to the Borrower.
SECTION 2.15. Pro Rata Treatment. Except as required under Section
-------------------
2.13, each Borrowing, each payment or prepayment of principal of any Borrowing,
each payment of interest on the Loans, each payment of the Facility Fees and L/C
Participation Fees, each reduction of the Revolving Commitments and each
refinancing of any Borrowing, shall be allocated pro rata among the Lenders in
accordance with their respective Revolving Commitments (or, if such Revolving
Commitments shall have expired or been terminated, in accordance with the
respective principal amounts of their outstanding Loans). Each Lender agrees
that in computing such Lender's portion of any Borrowing to be made hereunder,
the Agent may, in its discretion, round each Lender's percentage of such
Borrowing to the next higher or lower whole dollar amount.
SECTION 2.16. Sharing of Setoffs. Each Lender agrees that if it
-------------------
shall, through the exercise of a right of banker's lien, setoff or counterclaim
against the Borrower, or pursuant to a secured claim under Section 506 of Title
11 of the United States Code or other security or interest arising from, or in
lieu of, such secured claim, received by such Lender under any applicable
bankruptcy, insolvency or
39
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other similar law or otherwise, or by any other means
(other than an assignment pursuant to Section 2.12(c) or 9.04), obtain payment
(voluntary or involuntary) in respect of any Loan or L/C Disbursement as a
result of which the unpaid principal portion of its Loans and participations in
L/C Disbursements shall be proportionately less than the unpaid principal
portion of the Loans and participations in L/C Disbursements of any other
Lender, it shall be deemed simultaneously to have purchased from such other
Lender at face value, and shall promptly pay to such other Lender the purchase
price for, a participation in the Loans and L/C Exposure of such other Lender,
so that the aggregate unpaid principal amount of the Loans and L/C Exposure and
participations in the Loans and L/C Exposure held by each Lender shall be in the
same proportion to the aggregate unpaid principal amount of all Loans and L/C
Exposure then outstanding as the principal amount of its Loans and L/C Exposure
prior to such exercise of banker's lien, setoff or counterclaim or other event
was to the principal amount of all Loans or LC Exposure, as the case may be,
outstanding prior to such exercise of banker's lien, setoff or counterclaim or
other event; provided, however, that, if any such purchase or purchases or
-------- -------
adjustments shall be made pursuant to this Section and the payment giving rise
thereto shall thereafter be recovered, such purchase or purchases or adjustments
shall be rescinded to the extent of such recovery and the purchase price or
prices or adjustment restored without interest. The Borrower expressly consents
to the foregoing arrangements and agrees that any Lender holding a participation
in a Loan or L/C Disbursement deemed to have been so purchased may exercise any
and all rights of banker's lien, setoff or counterclaim with respect to any and
all moneys owing by the Borrower to such Lender by reason thereof as fully as if
such Lender had made a Loan directly to the Borrower in the amount of such
participation.
SECTION 2.17. Payments. (a) The Borrower shall make each payment
---------
(including principal of or interest on the Loans or any L/C Disbursement or any
Fees or other amounts) hereunder and under any other Loan Document not later
than 12:00 noon, New York time, on the date when due in dollars in immediately
available funds to the Agent at its address referred to in Section 9.01.
(b) Whenever any payment (including principal of or interest on any
Borrowing or any Fees or other amounts) hereunder or under any other Loan
Document shall become due, or otherwise would occur, on a day that is not a
Business Day, such payment may (except as otherwise provided in the
40
<PAGE>
definition of "Interest Period") be made on the next succeeding Business Day,
and such extension of time shall in such case be included in the computation of
interest or Fees, if applicable.
SECTION 2.18. Taxes. (a) Any and all payments by the Borrower
------
hereunder shall be made, in accordance with Section 2.17, free and clear of and
without deduction for any and all present or future taxes, imposts, deductions,
charges or withholdings, and all liabilities with respect thereto, excluding
---------
taxes imposed on the Agent's or any Lender's or any Issuing Bank's (or any
transferee's or assignee's, including a participation holder's (any such entity
a "Transferee")) net income and franchise taxes imposed on the Agent or any
----------
Lender or any Issuing Bank (or Transferee) by any jurisdiction or any political
subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions,
charges, withholdings and liabilities being hereinafter referred to as "Taxes").
-----
If the Borrower shall be required by law to deduct any Taxes from or in respect
of any sum payable hereunder to the Lenders or any Issuing Bank (or any
Transferee) or the Agent, (i) the sum payable shall be increased by the amount
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section) such Lender or such
Issuing Bank (or Transferee) or the Agent (as the case may be) shall receive an
amount equal to the sum it would have received had no such deductions been made,
(ii) the Borrower shall make such deductions and (iii) the Borrower shall pay
the full amount deducted to the relevant taxing authority or other Governmental
Authority in accordance with applicable law.
(b) In addition, the Borrower shall pay any present or future stamp
or documentary taxes or any other excise or property taxes, charges or similar
levies which arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement or any
other Loan Document (hereinafter referred to as "Other Taxes").
-----------
(c) The Borrower shall indemnify each Lender and Issuing Bank (or
Transferee) and the Agent for the full amount of Taxes and Other Taxes
(including any Taxes or Other Taxes imposed by any jurisdiction on amounts
payable under this Section) paid by such Lender or such Issuing Bank (or
Transferee) or the Agent, as the case may be, and any liability (including
penalties, interest and reasonable out-of-pocket expenses) arising therefrom or
with respect thereto, whether or not such Taxes or Other Taxes were correctly or
legally asserted by the relevant taxing
41
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authority or other Governmental Authority. Payments pursuant to such
indemnification shall be made within 30 days after the date any Lender or
Issuing Bank (or Transferee) or the Agent, as the case may be, makes written
demand therefor, which demand may be made notwithstanding the fact that such
Lender, Issuing Bank (or Transferee) or the Agent has determined to challenge or
contest such assertion of Taxes or Other Taxes. After the Borrower makes full
payment to the Lender, Issuing Bank (or Transferee) or the Agent with respect to
such indemnification for Taxes or Other Taxes asserted, if such Lender, Issuing
Bank (or Transferee) or the Agent believes in its sole discretion that
reasonable grounds exist to challenge or contest the Taxes or Other Taxes
imposed, then such Lender, Issuing Bank (or Transferee) or the Agent, as the
case may be, shall so contest or challenge in good faith the Taxes or Other
Taxes asserted, which contest or challenge shall be at the sole expense of the
Borrower. If a Lender, Issuing Bank (or Transferee) or the Agent shall become
aware that it is entitled to receive a refund in respect of Taxes or Other
Taxes, it shall promptly notify the Borrower of the availability of such refund
and shall, within 30 days after receipt of a request by the Borrower, apply for
such refund at the Borrower's reasonable out-of-pocket expense. If any Lender,
Issuing Bank (or Transferee) or the Agent receives a refund in respect of any
Taxes or Other Taxes for which such Lender, Issuing Bank (or Transferee) or the
Agent has received payment from the Borrower hereunder it shall promptly notify
the Borrower of such refund and shall promptly upon receipt repay such refund to
the Borrower, net of all out-of-pocket expenses of such Lender or Issuing Bank
and without interest; provided, however, that the Borrower, upon the request
-------- -------
of such Lender, Issuing Bank (or Transferee) or the Agent, agrees to return such
refund (plus penalties, interest or other charges) to such Lender, Issuing Bank
(or Transferee) or the Agent in the event such Lender, Issuing Bank (or
Transferee) or the Agent is required to repay such refund.
(d) Within 30 days after the date of any payment of Taxes or Other
Taxes withheld by the Borrower in respect of any payment to any Lender, Issuing
Bank (or Transferee) or the Agent, the Borrower will furnish to the Agent, at
its address referred to in Section 9.01, the original or a certified copy of a
receipt evidencing payment thereof.
(e) Without prejudice to the survival of any other agreement
contained herein, the agreements and obligations contained in this Section shall
survive the payment in full of the principal of and interest on all Loans made
hereunder.
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(f) On or before the date it becomes a party to this Agreement and
from time to time thereafter upon any change in status rendering any certificate
or documents previously delivered pursuant to this Section 2.18(f) invalid or
inaccurate, each Lender, Issuing Bank or Transferee that is organized outside
the United States shall (but (x) in the case of a Transferee or (y) in the case
of a Lender or Issuing Bank with respect to any change in status, only if
legally able to do so) upon written request of the Borrower, deliver to the
Borrower such certificates, documents or other evidence, as specified by the
Borrower and, as the case may be, required by, in the case of a non-United
States Lender or Issuing Bank, the Code or Treasury Regulations issued pursuant
thereto, properly completed and duly executed by such Lender (or Transferee)
establishing that such payment is, as the case may be, (i) not subject to
withholding under the Code because such payment is effectively connected with
the conduct by such Lender, Issuing Bank or Transferee of a trade or business in
the United States or (ii) totally exempt from United States tax under a
provision of an applicable tax treaty. Unless the Borrower and the Agent have
received forms or other docu ments satisfactory to them indicating that
payments here under are not subject to United States withholding tax, as the
case may be, or are subject to such tax at a rate reduced by an applicable tax
treaty, the Borrower or the Agent shall withhold taxes from such payments at the
appli cable statutory rate in the case of payments to or for any Lender,
Issuing Bank or Transferee or assignee organized under the laws of a
jurisdiction outside the United States or Germany, as the case may be.
(g) The Borrower shall not be required to pay any additional amounts
to any Lender, Issuing Bank or Transferee in respect of United States
withholding tax pursuant to Section 2.18(a) if the obligation to pay such
additional amounts would not have arisen but for a failure by such Lender,
Issuing Bank or Transferee to comply with the provisions of Section 2.18(f)
unless such failure results from (i) a change in applicable law, regulation or
official interpretation thereof or (ii) an amendment, modification or revocation
of any applicable tax treaty or a change in official position regarding the
application or interpretation thereof, in each case after the Effective Date
(and, in the case of a Transferee, after the date of assignment or transfer,
when as a result of such change, amendment, modification or revocation
withholding taxes were or would have been imposed on amounts payable to the
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transferor was entitled to any additional amounts); provided, however, that the
-------- -------
Borrower shall be required to pay those amounts to any Lender, Issuing Bank or
Transferee that it was required to pay hereunder prior to the failure of such
Lender, Issuing Bank or Transferee to comply with the provisions of Section
2.18(f).
(h) Any Lender, Issuing Bank or Transferee claiming any additional
amounts payable pursuant to this Section shall use reasonable efforts
(consistent with legal and regulatory restrictions) to file any certificate or
document in a timely manner requested by the Borrower or to change the
jurisdiction of its applicable lending office if the making of such a filing or
change would avoid the need for or reduce the amount of any such additional
amounts which may thereafter accrue and would not, in the sole and reasonable
determination of such Lender, Issuing Bank or Transferee be otherwise
disadvantageous to such Lender, Issuing Bank or Transferee.
SECTION 2.19. Letters of Credit. (a) General. The Borrower may
------------------ --------
request the issuance of a Letter of Credit for its own account, in a form
reasonably acceptable to the Agent and the Issuing Bank, at any time and from
time to time while the Revolving Commitments remain in effect. Each Letter of
Credit shall be denominated in dollars. This Section shall not be construed to
impose an obligation upon the Issuing Bank to issue any Letter of Credit that is
inconsistent with the terms and conditions of this Agreement.
(b) Notice of Issuance, Amendment, Renewal, Extension; Certain
----------------------------------------------------------
Conditions. In order to request the issuance of a Letter of Credit (or to
- -----------
amend, renew or extend an existing Letter of Credit), the Borrower shall hand
deliver or telecopy to the Issuing Bank and the Agent (reasonably in advance of
the requested date of issuance, amendment, renewal or extension) a notice
requesting the issuance of a Letter of Credit, or identifying the Letter of
Credit to be amended, renewed or extended, the date of issuance, amendment,
renewal or extension, the date on which such Letter of Credit is to expire
(which shall comply with paragraph (c) below), the amount of such Letter of
Credit, the name and address of the beneficiary thereof and such other
information as shall be necessary to prepare such Letter of Credit. Following
receipt of such notice and prior to the issuance of the requested Letter of
Credit or the applicable amendment, renewal or extension, the Agent shall notify
the Borrower and the Issuing Bank of the amount of the Aggregate Revolving
Exposure after giving effect to
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(i) the issuance, amendment, renewal or extension of such Letter of Credit, (ii)
the issuance or expiration of any other Letter of Credit that is to be issued or
will expire prior to the requested date of issuance of such Letter of Credit and
(iii) the borrowing or repayment of any Loans that (based upon notices delivered
to the Agent by the Borrower) are to be borrowed or repaid prior to the
requested date of issuance of such Letter of Credit. A Letter of Credit shall be
issued, amended, renewed or extended only if, and upon issuance, amendment,
renewal or extension of each Letter of Credit the Borrower shall be deemed to
represent and warrant that, after giving effect to such issuance, amendment,
renewal or extension (A) the L/C Exposure shall not exceed $5,000,000 less the
face amount of any letters of credit issued for the account of the Borrower or
any Subsidiary by financial institutions other than an Issuing Bank and
outstanding at such time and (B) the Aggregate Revolving Exposure shall not
exceed the lesser of the Total Revolving Commitment and the Borrowing Base then
in effect.
(c) Expiration Date. Each Letter of Credit shall expire at the close
----------------
of business on the earlier of the date one year after the date of the issuance
of such Letter of Credit and the date that is 30 days prior to the Revolving
Maturity Date, unless such Letter of Credit expires by its terms on an earlier
date.
(d) Participations. By the issuance of a Letter of Credit and
---------------
without any further action on the part of the Issuing Bank or the Lenders, the
Issuing Bank hereby grants to each Lender, and each such Lender hereby acquires
from the Issuing Bank, a participation in such Letter of Credit equal to such
Lender's Pro Rata Percentage of the aggregate amount available to be drawn under
such Letter of Credit, effective upon the issuance of such Letter of Credit. In
consideration and in furtherance of the foregoing, each Lender hereby absolutely
and unconditionally agrees to pay to the Agent, for the account of the Issuing
Bank, such Lender's Pro Rata Percentage of each L/C Disbursement made by such
Issuing Bank and not reimbursed by the Borrower forthwith on the date due as
provided in Section 2.02(e). Each Lender acknowledges and agrees that its
obligation to acquire participations pursuant to this paragraph in respect of
Letters of Credit is absolute and unconditional and shall not be affected by any
circumstance whatsoever, including the occurrence and continuance of a Default
or an Event of Default or the termination of the Revolving Commitments, and that
each such payment shall be made without any offset, abatement, withholding or
reduction whatsoever.
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(e) Reimbursement. If an Issuing Bank shall make any L/C
--------------
Disbursement in respect of a Letter of Credit, the Borrower shall pay to the
Agent an amount equal to such L/C Disbursement not later than two hours after
the Borrower shall have received notice from such Issuing Bank that payment of
such draft will be made, or, if the Borrower shall have received such notice
later than 10:00 a.m., New York City time, on any Business Day, not later than
10:00 a.m., New York City time, on the immediately following Business Day.
(f) Obligations Absolute. The Borrower's obligations to reimburse
---------------------
L/C Disbursements as provided in paragraph (e) above shall be absolute,
unconditional and irrevocable, and shall be performed strictly in accordance
with the terms of this Agreement, under any and all circumstances whatsoever,
and irrespective of:
(i) any lack of validity or enforceability of any Letter of Credit or
this Agreement, or any term or provision therein;
(ii) any amendment or waiver of or any consent to departure from all
or any of the provisions of any Letter of Credit or this Agreement;
(iii) the existence of any claim, setoff, defense or other right that
the Borrower, any other party guaranteeing, or otherwise obligated with,
the Borrower, any Subsidiary or other Affiliate thereof or any other
person may at any time have against the beneficiary under any Letter of
Credit, any Issuing Bank, the Agent or any Lender or any other person,
whether in connection with this Agreement or any other related or
unrelated agreement or transaction;
(iv) any draft or other document presented under a Letter of Credit
proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any
respect;
(v) payment by the Issuing Bank under a Letter of Credit against
presentation of a draft or other document that does not comply with
the terms of such Letter of Credit; and
(vi) any other act or omission to act or delay of any kind of any
Issuing Bank, the Lenders, the Agent or any other person or any other
event or circumstance
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whatsoever, whether or not similar to any of the
foregoing, that might, but for the provisions of this Section,
constitute a legal or equitable discharge of the Borrower's
obligations hereunder.
Without limiting the generality of the foregoing, it is expressly
understood and agreed that the absolute and unconditional obligation of the
Borrower hereunder to reimburse L/C Disbursements will not be excused by the
negligence or misconduct of any Issuing Bank. However, the foregoing shall not
be construed to excuse any Issuing Bank from liability to the Borrower to the
extent of any damages (as opposed to consequential damages, claims in respect of
which are hereby waived by the Borrower to the extent permitted by applicable
law) suffered by the Borrower that are caused by such Issuing Bank's negligence
or misconduct in determining whether drafts and other documents presented under
a Letter of Credit comply with the terms thereof; it is understood that each
Issuing Bank may accept documents that appear on their face to be in order,
without responsibility for further investigation, regardless of any notice or
information to the contrary and, in making any payment under any Letter of
Credit (i) an Issuing Bank's exclusive reliance on the documents presented to it
under such Letter of Credit as to any and all matters set forth therein,
including reliance on the amount of any draft presented under such Letter of
Credit, whether or not the amount due to the beneficiary thereunder equals the
amount of such draft and whether or not any document presented pursuant to such
Letter of Credit proves to be insufficient in any respect, if such document on
its face appears to be in order, and whether or not any other statement or any
other document presented pursuant to such Letter of Credit proves to be forged
or invalid or any statement therein proves to be inaccurate or untrue in any
respect whatsoever and (ii) any noncompliance in any immaterial respect of the
documents presented under such Letter of Credit with the terms thereof shall, in
each case, be deemed not to constitute misconduct or negligence of an Issuing
Bank.
(g) Disbursement Procedures. The Issuing Bank shall, promptly
------------------------
following its receipt thereof, examine all documents purporting to represent a
demand for payment under a Letter of Credit. Such Issuing Bank shall as
promptly as possible give telephonic notification, confirmed by telecopy, to the
Agent and the Borrower of such demand for payment and whether such Issuing Bank
has made or will make an L/C Disbursement thereunder; provided that any failure
--------
to give or delay in giving such notice shall not relieve the Borrower of its
obligation to reimburse the Issuing Bank and the Lenders with respect to any
such L/C Disbursement. The Agent shall promptly give each Lender notice thereof.
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(h) Resignation or Removal of an Issuing Bank. An Issuing Bank may
------------------------------------------
resign at any time by giving 180 days' prior written notice to the Agent, the
Lenders and the Borrower, and may be removed at any time by the Borrower by
notice to the Issuing Bank, the Agent and the Lenders. Subject to the next
succeeding paragraph, upon the acceptance of any appointment as an Issuing Bank
hereunder by a Lender that shall agree to serve as successor Issuing Bank, such
successor shall succeed to and become vested with all the interests, rights and
obligations of the retiring Issuing Bank and the retiring Issuing Bank shall be
discharged from its obligations to issue additional Letters of Credit hereunder.
At the time such removal or resignation shall become effective, the Borrower
shall pay all accrued and unpaid fees pursuant to Section 2.05(c)(ii). The
acceptance of any appointment as an Issuing Bank hereunder by a successor Lender
shall be evidenced by an agreement entered into by such successor, in a form
satisfactory to the Borrower and the Agent, and, from and after the effective
date of such agreement, (i) such successor Lender shall have all the rights and
obligations of the previous Issuing Bank under this Agreement and (ii)
references herein to the term "Issuing Bank" shall be deemed to refer to such
successor or to any previous Issuing Bank, or to such successor and all previous
Issuing Banks, as the context shall require. After the resignation or removal
of an Issuing Bank hereunder, the retiring Issuing Bank shall remain a party
hereto and shall continue to have all the rights and obligations of an Issuing
Bank under this Agreement with respect to Letters of Credit issued by it prior
to such resignation or removal, but shall not be required to issue additional
Letters of Credit.
(i) Cash Collateralization. If any Event of Default (other than an
-----------------------
Event of Default described in clause (g) or (h) of Article VII) shall occur and
be continuing, the Borrower shall, on the Business Day it receives notice from
the Agent or the Required Lenders (or, if the maturity of the Loans has been
accelerated, Lenders holding participations in outstanding Letters of Credit
representing greater than 50% of the aggregate undrawn amount of all outstanding
Letters of Credit) thereof and of the amount to be deposited, or, if an Event of
Default described in clause (g) or (h) of Article VII shall occur, on the
Business Day of such occurrence, deposit in an account with the Agent, for the
benefit of the Lenders, an amount in cash equal to the L/C Exposure as of such
date. The Borrower also shall deposit cash collateral pursuant to this
paragraph as and to the extent
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required by Section 2.11(c), and any such cash collateral so
deposited and held by the Agent hereunder shall constitute part of the Borrowing
Base for purposes of determining compliance with Section 2.11(c). Each such
deposit shall be held by the Agent as collateral for the payment and performance
of the obligations of the Borrower under this Agreement. The Agent shall have
exclusive dominion and control, including the exclusive right of withdrawal,
over such account. Other than any interest earned on the investment of such
deposits in Permitted Investments, which investments shall be made at the option
and sole discretion of the Agent, such deposits shall not bear interest.
Interest or profits, if any, on such investments shall accumulate in such
account. Moneys in such account shall (i) automatically be applied by the Agent
to reimburse the Issuing Bank for L/C Disbursements for which they have not been
reimbursed, (ii) be held for the satisfaction of the reimbursement obligations
of the Borrower for the L/C Exposure at such time and (iii) if the maturity of
the Loans has been accelerated (but subject to the consent of Lenders holding
participations in outstanding Letters of Credit representing greater than 50% of
the aggregate undrawn amount of all outstanding Letters of Credit), be applied
to satisfy other obligations of the Borrower under this Agreement. If the
Borrower is required to provide an amount of cash collateral hereunder as a
result of the occurrence of an Event of Default, such amount (to the extent not
applied as aforesaid) shall be returned to the Borrower within three Business
Days after all Events of Default have been cured or waived. If the Borrower is
required to provide an amount of cash collateral hereunder pursuant to Section
2.11(c), such amount (to the extent not applied as aforesaid) shall be returned
to the Borrower as and to the extent that, after giving effect to such return,
the Borrower would remain in compliance with Section 2.11(c) and no Default
shall have occurred and be continuing.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to each of the Lenders that:
SECTION 3.01. Organization; Powers. Each of the Borrower and the
---------------------
Subsidiaries (a) is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization, (b) has all requisite power
and authority to own its property and assets and to carry on its business as now
conducted and as proposed to be conducted, (c) is qualified to do business in
every jurisdiction
49
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where such qualification is required, except where the failure so to qualify
would not result in a Material Adverse Effect, and (d) in the case of each Loan
Party, has the power and authority to execute, deliver and perform its
obligations under each Loan Document to which it is party and each other
agreement or instrument contemplated thereby and in the case of the Borrower, to
borrow and incur other obligations hereunder.
SECTION 3.02. Authorization. The execution, delivery and performance
--------------
by each Loan Party of the Loan Documents to which it is to be a party and in the
case of the Borrower, the borrowings of the Loans, the use of proceeds thereof
and the Letters of Credit hereunder (collectively, the "Transactions") (a) have
------------
been duly authorized by all requisite action, including approval of such Loan
Party's Board of Directors and if required, stockholder action on the part of
such Loan Party, and (b) will not (i) violate (A) any provision of law, statute,
rule or regulation, or of the certificate or articles of incorporation or other
constitutive documents or by-laws of the Borrower or any Subsidiary, (B) any
order of any Govern mental Authority or (C) any provision of any indenture,
agreement or other instrument to which the Borrower or any Subsidiary is a party
or by which any of them or any of their property is or may be bound, (ii) be in
conflict with, result in a breach of or constitute (alone or with notice or
lapse of time or both) a default under any such indenture, agreement or other
instrument or (iii) result in the crea tion or imposition of any Lien upon or
with respect to any property or assets now owned or hereafter acquired by the
Borrower or any Subsidiary, except Liens created under the Loan Documents.
SECTION 3.03. Enforceability. This Agreement has been duly executed
---------------
and delivered by the Borrower and consti tutes, and each other Loan Document
when executed and deliv ered by the Loan Parties party thereto will constitute,
a legal, valid and binding obligation of the Borrower and the other Loan Parties
enforceable against the Borrower and the other Loan Parties in accordance with
its terms.
SECTION 3.04. Governmental Approvals. No action, consent or approval
-----------------------
of, registration or filing with or any other action by any Governmental
Authority is or will be required in connection with the Transactions, except
such as have been made or obtained and are in full force and effect.
SECTION 3.05. Financial Statements. (a) The Borrower has heretofore
---------------------
furnished to the Lenders (i) the
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combined balance sheets and statements of income and cash flow of the Borrower
and its combined Subsidiaries pre-Spin-Off as of and for the fiscal year ended
May 31, 1997, audited by and accompanied by the opinion of Arthur Andersen &
Co., independent public accountants, (ii) the unaudited pro-forma combined
balance sheets and statements of income and the cash flow of the Borrower and
its combined Subsidiaries post-Spin-Off as of and for the fiscal year ended May
31, 1997, each certified by a Responsible Officer of the Borrower, (iii) the
unaudited combined balance sheets and statements of income and cash flow of the
Borrower and its combined Subsidiaries pre-Spin-Off as of and for the fiscal
quarter ended August 31, 1997, each certified by a Responsible Officer of the
Borrower. Such financial state ments present fairly the financial condition and
results of operations of the Borrower and its combined Subsidiaries as of such
dates and for such periods. Such balance sheets and the notes thereto disclose
all material liabilities, direct or contingent, of the Borrower and its combined
Subsidiaries as of the dates thereof. Such financial statements and monthly
summaries of pretax income or loss were prepared in accordance with GAAP applied
on a consistent basis.
(b) The Borrower has heretofore furnished to the Lenders its pro
forma consolidated balance sheet as of October 15, 1997 prepared giving effect
to the Spin-Off as if the Spin-Off had occurred on such date. Such pro forma
consolidated balance sheet (i) has been prepared in good faith based on the same
assumptions used to prepare the pro forma financial statements included in the
Form 10 (which assumptions are believed by the Borrower and International to be
reasonable), (ii) is based on the best information available to the Borrower and
International after due inquiry, (iii) accurately reflects all adjustments
necessary to give effect to the Spin-Off, (iv) presents fairly, in all material
respects, the pro forma financial position of the Borrower and its consolidated
Subsidiaries as of the date of such balance sheet as if the Spin-Off had
occurred on such date and (v) is not materially inconsistent with the forecasts
previously provided to the Lenders by the Borrower.
SECTION 3.06. No Material Adverse Change. As of the date hereof,
---------------------------
there has been no material adverse change in the business, assets, operations,
property, condition, financial or otherwise, contingent liabilities or material
agreements of the Borrower and the Subsidiaries, taken as a whole, since May 31,
1997 (it being understood that changes in general economic conditions shall not
be deemed to constitute such a material adverse change).
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SECTION 3.07. Title to Properties; Possession Under Leases. (a)
---------------------------------------------
Each of the Borrower and the Subsidiar ies has good and marketable title to, or
valid leasehold interests in, all its material properties and assets, except for
minor defects in title that do not interfere with its ability to conduct its
business as currently conducted or to utilize such properties and assets for
their intended pur poses. All such material properties and assets are free and
clear of Liens, other than Liens expressly permitted by Sec tion 6.02.
(b) Each of the Borrower and the Subsidiaries has complied with all
material obligations under all material leases to which it is a party and all
such leases are in full force and effect. Each of the Borrower and the
Subsidiaries enjoys peaceful and undisturbed possession under all such material
leases.
(c) On and as of the date of the initial Credit Event under this
Agreement, the Borrower and the Subsidiaries will own, or have a valid leasehold
interest in, all of the assets, business and operations currently conducted by
that portion of the pre-Spin-Off operations that will be conducted by the
Borrower post-Spin-Off (as described in the Distribution Agreement), (other than
assets since disposed of prior to the date of such Borrowing in the ordinary
course of business and assets described on Schedule 3.07).
SECTION 3.08. Subsidiaries. Schedule 3.08 sets forth as of the date
-------------
hereof and as of the Effective Date a list of all Subsidiaries of the Borrower
and the percentage ownership interest of the Borrower therein.
SECTION 3.09. Litigation; Compliance with Laws. (a) There are not
---------------------------------
any actions, suits or proceedings at law or in equity or by or before any
Governmental Authority now pending or, to the knowledge of the Borrower,
threatened against or affecting the Borrower or any Subsidiary or any business,
property or rights of any such person (i) which involve any Loan Document, the
Transactions or the Spin-Off or (ii) as to which there is a reasonable
probability of an adverse determination and which, if such probable adverse
determination occurred, could, individually or in the aggregate, reasonably be
anticipated to result in a Material Adverse Effect.
(b) To the best knowledge of the Borrower, neither the Borrower nor
any of the Subsidiaries is in violation
52
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of any law, rule or regulation, or in default with respect to any judgment,
writ, injunction or decree of any Governmental Authority, where such violation
or default could reasonably be anticipated to result in a Material Adverse
Effect.
SECTION 3.10. Agreements. (a) Neither the Borrower nor any of the
-----------
Subsidiaries is a party to any agreement or instrument or subject to any
corporate or other restriction that has resulted or could reasonably be
anticipated to result in a Material Adverse Effect.
(b) Neither the Borrower nor any of its Subsidi aries is in default
in any manner under any provision of any indenture or other agreement or
instrument evidencing Indebtedness, or any other material agreement or
instrument to which it is a party or by which it or any of its proper ties or
assets are or may be bound, where such default could reasonably be anticipated
to result in a Material Adverse Effect.
SECTION 3.11. Federal Reserve Regulations. (a) Neither the Borrower
----------------------------
nor any of the Subsidiaries is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying Margin Stock.
(b) No part of the proceeds of any Loan or any Letter of Credit will
be used, whether directly or indirectly, and whether immediately, incidentally
or ultimately, (i) to purchase or carry Margin Stock or to extend credit to
others for the purpose of purchasing or carrying Margin Stock or to refund
indebtedness originally incurred for such purpose, or (ii) for any purpose which
entails a violation of, or which is inconsistent with, the provisions of the
Regulations of the Board, including Regulation G, U or X.
SECTION 3.12. Investment Company Act; Public Utility Holding Company
------------------------------------------------------
Act. Neither the Borrower nor any Subsidiary is (a) an "investment company" as
- ----
defined in, or subject to regulation under, the Investment Company Act of 1940
or (b) a "holding company" as defined in, or subject to regulation under, the
Public Utility Holding Company Act of 1935.
SECTION 3.13. Use of Proceeds. The Borrower will use the proceeds of
----------------
the Loans and will request the issuance of Letters of Credit only for the
purposes specified in the preamble to this Agreement; provided, that the
--------
53
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principal amount of outstanding Loans and Letters of Credit used to provide
working capital for the Borrower and its Subsidiaries shall at no time exceed
10% of the Borrowing Base.
SECTION 3.14. Tax Returns. Each of the Borrower and the Subsidiaries
------------
has filed or caused to be filed all Federal, state, local and foreign tax
returns required to have been filed by it and has paid or caused to be paid all
taxes shown to be due and payable on such returns or on any assessments received
by it, except taxes that are being contested in good faith by appropriate
proceedings and for which the Borrower or such Subsidiary shall have set aside
on its books adequate reserves.
SECTION 3.15. No Material Misstatements. None of the Information
--------------------------
Memorandum, information, reports, financial statements, exhibits or schedules
furnished by or on behalf of the Borrower to the Agent or any Lender in
connection with the negotiation of any Loan Document or included therein or
delivered pursuant thereto contained, contains or will contain any material
misstatement of fact or omitted, omits or will omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were, are or will be made, not misleading.
SECTION 3.16. Employee Benefit Plans. Each of the Plans, the
-----------------------
Borrower and its ERISA Affiliates is in compliance in all material respects with
the applicable provisions of ERISA and the regulations and published
interpretations thereunder. No Reportable Event has occurred as to which the
Borrower or any ERISA Affiliate was required to file a report with the PBGC, and
the present value of all benefit liabilities under each Plan (based on those
assumptions used to fund such Plan) did not, as of the last annual valuation
date applicable thereto, exceed by more than $5,000,000 the value of the assets
of such Plan. Neither the Borrower nor any ERISA Affiliate has incurred any
Withdrawal Liability or any other liability under Title IV of ERISA (other than
premiums not yet due) that remains unpaid and that could result in a Material
Adverse Effect. Neither the Borrower nor any ERISA Affiliate has received any
notification that any Multiemployer Plan is in reorganization or has been
terminated within the meaning of Title IV of ERISA, and to the best knowledge of
the Borrower, no Multiemployer Plan is reasonably expected to be in
reorganization or to be terminated, where such reorganization or termination has
resulted or could reason ably be expected to result, through increases in the
54
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contributions required to be made to such Plan or otherwise, in a Material
Adverse Effect. Neither the Borrower nor any ERISA Affiliate has received any
notice from the PBGC regarding the funded status of any Plan.
SECTION 3.17. Environmental Matters. The Borrower and each
----------------------
Subsidiary has complied in all material respects with all Federal, state, local
and other statutes, ordinances, orders, judgments, rulings and regulations
relating to environmental pollution or to environmental regulation or control or
to employee health or safety. Neither the Borrower nor any Subsidiary has
received notice of any failure so to comply. The Borrower's and the Subsid
iaries' facilities do not manage any hazardous wastes, hazardous substances,
hazardous materials, toxic substances, toxic pollutants or substances similarly
denominated, as those terms or similar terms are used in the Resource
Conservation and Recovery Act, the Comprehensive Environ mental Response
Compensation and Liability Act, the Hazard ous Materials Transportation Act,
the Toxic Substance Control Act, the Clean Air Act, the Clean Water Act or any
other applicable law (collectively, the "Environment Laws"), in material
----------------
violation of any such Environmental Law or any regulations promulgated pursuant
thereto.
SECTION 3.18. Solvency. As of the Effective Date and after
---------
giving effect to the Spin-Off:
(a) The fair salable value of the assets of the Borrower and each
Significant Subsidiary will exceed the amount that will be required to be
paid on or in respect of the existing debts and other liabilities of such
Borrower or Significant Subsidiary as such debts and liabilities become
absolute and mature.
(b) The assets of the Borrower and each Significant Subsidiary will
not constitute unreasonably small capital for the Borrower or Significant
Subsidiary to carry out its businesses as now conducted and as proposed to
be conducted including the capital needs of the Borrower or Significant
Subsidiary, taking into account the particular capital requirements of the
business conducted by the Borrower or Significant Subsidiary and projected
capital requirements and capi tal availability thereof.
(c) Neither the Borrower nor any Significant Subsidiaries intends to
incur debts or liabilities beyond its ability to pay such debts and
liabilities as they mature, taking into account the timing and amounts
55
<PAGE>
of cash to be received by it, and of amounts to be payable on or in respect
of its debts and liabilities. The cash flow of the Borrower and each
Significant Subsidiary, after taking into account all anticipated uses of
the cash of the Borrower or such Significant Subsidiary, will at all times
be sufficient to pay all such amounts on or in respect of debt and
liabilities of the Borrower or such Significant Subsidiary when such
amounts are required to be paid.
SECTION 3.19. Spin-Off. As of the Effective Date, the Spin-Off will
---------
have been effected in a manner that (a) is not materially different from the
description thereof in the Form 10 (including but not limited to the tax
consequences of the Spin-Off) and (b) will not materially adversely affect the
rights or interests of the Lenders or the creditworthiness of the Borrower.
SECTION 3.20. Pledge Agreement. The Pledge Agreement is effective to
----------------
create in favor of the Collateral Agent, for the ratable benefit of the Secured
Parties, a legal, valid and enforceable security interest in the Collateral (as
defined in the Pledge Agreement) and, when the Collateral is delivered to the
Collateral Agent, the Pledge Agreement shall constitute a fully perfected first
priority Lien on, and security interest in, all right, title and interest of
each pledgor thereunder in such Collateral, in each case prior and superior in
right to any other Person.
ARTICLE IV. CONDITIONS OF LENDING
The effectiveness of this Agreement and the obligations of the Lenders
to make Loans and of the Issuing Bank to issue, extend or renew Letters of
Credit hereunder are subject to the satisfaction of the following conditions:
SECTION 4.01. All Credit Events. On the date of each Borrowing or
------------------
issuance, extension or renewal of a Letter of Credit (each such event being
called a "Credit Event"):
------------
(a) The Agent shall have received a notice of such Credit Event as
required by Section 2.03 or Section 2.19, as the case may be, together with
a completed Borrowing Base Certificate dated the date of such Credit Event.
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(b) Except in the case of a refinancing of a Borrowing with a new
Borrowing that does not increase the aggregate principal amount of the
Loans of any Lender outstanding, the representations and warranties set
forth in Article III hereof shall be true and correct in all material
respects on and as of the date of such Credit Event with the same effect as
though made on and as of such date, except to the extent such
representations and warranties expressly relate to an earlier date.
(c) Each Loan Party shall be in compliance with all the terms and
provisions set forth herein and in each other Loan Document on its part to
be observed or performed, and at the time of and immediately after such
Credit Event, no Event of Default or Default shall have occurred and be
continuing.
Each Credit Event shall be deemed to constitute a representation and
warranty by the Borrower on the date of such Credit Event as to the matters
specified in paragraphs (b) and (c) of this Section 4.01.
SECTION 4.02. First Credit Event. On the Effective Date:
-------------------
(a) All legal matters incident to this Agreement and the borrowings
hereunder and the other Loan Documents shall be satisfactory to the Lenders
and their counsel and to the Issuing Bank and to Cravath, Swaine & Moore,
counsel for the Agent.
(b) The Agent shall have received (i) a copy of the certificate or
articles of incorporation (or analogous documents) and all amendments
thereto of each Loan Party, certified as of a recent date by the Secre
tary of State (or other appropriate Governmental Authority) of the state
(or country) of its organization or such other evidence as is reasonably
satisfactory to the Agent; (ii) a certificate as to the good standing (or
other analogous certification to the extent available) of each Loan Party
as of a recent date, from the appropriate Secretary of State (or other
appropriate Governmental Authority) or such other evidence as is reasonably
satisfactory to the Agent; (iii) a certificate of the Secretary or
Assistant Secretary of each Loan Party dated the Effective Date and
certifying (A) that attached thereto is a true and complete copy of the by-
laws (or such other analogous documents to the extent available) of such
Loan Party as in effect on the Effective Date and at all times
57
<PAGE>
since a date prior to the date of the resolutions described in clause (B)
below, (B) that attached thereto is a true and complete copy of resolutions
duly adopted by the Board of Directors of the such Loan Party authorizing
the execution, delivery and performance of the Loan Documents to which it
is party, and in the case of the Borrower, the borrowings hereunder, and
that such resolutions have not been modified, rescinded or amended and are
in full force and effect, (C) that the certificate or articles of
incorporation (or analogous documents) of the such Loan Party have not been
amended since the date of the last amendment thereto shown on the
certificate of good standing (or other analogous certification or such
other evidence reasonably satisfactory to the Agent) furnished pursuant to
clause (i) or (ii) above, and (D) as to the incumbency and specimen
signature of each officer executing any Loan Document or any other document
delivered in connection herewith on behalf of such Loan Party; (iv) a
certificate of another officer as to the incumbency and specimen signature
of the Secretary or Assistant Secretary executing the certif icate pursuant
to (iii) above; and (v) such other documents as the Lenders or their
counsel, the Issuing Bank or Cravath, Swaine & Moore, counsel for the
Agent, may reasonably request.
(c) The Agent shall have received a certificate of the Borrower,
dated the Effective Date and signed by a Responsible Officer of the
Borrower confirming compliance with the conditions precedent set forth in
paragraphs (b) and (c) of Section 4.01.
(d) The Agent shall have received all Fees and other amounts due and
payable on or prior to the Effective Date.
(e) The Agent shall have received a favorable written opinion of the
General Counsel of the Borrower, dated the Effective Date and addressed to
the Lenders and the Issuing Bank, to the effect set forth in Exhibit D, and
the Borrower hereby instructs such counsel to deliver such opinion to the
Agent.
(f) The Agent shall have received evidence of the receipt by the
Borrower of all governmental and third party approvals, if any, necessary
or advisable in connection with the Spin-Off and the other transactions
contemplated by this Agreement and of the expiry of any applicable waiting
or appeal periods, and there shall
58
<PAGE>
be no governmental or judicial action, actual or threatened, that could
reasonably be expected to restrain, prevent or impose burdensome conditions
on the Spin-Off or the other transactions contemplated hereby.
(g) The Lenders shall have received copies of the Form 10 and of the
Distribution Agreement and other agreements governing the post Spin-Off
relationship between the Borrower and International attached as exhibits
thereto, which agreements shall have been executed by the parties thereto
and shall be in full force and effect.
(h) The Spin-Off shall have been consummated in accordance with
applicable law and in a manner and with the consequences not materially
different from the description thereof in the Form 10, and, after giving
effect to the Spin-Off, the Lenders shall be satisfied with the corporate
and capital structure of the Borrower and the Subsidiaries, all legal, tax
and accounting matters relating to the Spin-Off, all arrangements and
agreements between the Borrower and International governing their post-
Spin-Off relationship and the sufficiency of amounts available hereunder to
meet the ongoing working capital requirements of the Borrower and the
Subsidiaries.
(i) After giving effect to the Spin-Off, neither the Borrower nor any
of its Subsidiaries shall have outstanding any shares of preferred stock or
any Indebtedness, other than (i) Indebtedness incurred under the Loan
Documents and (ii) other Indebtedness permitted under Section 6.01 and
outstanding on the Effective Date. The terms and conditions of all
Indebtedness to remain outstanding after the Effective Date shall be
satisfactory in all respects to the Lenders.
(j) (i) The Existing Credit Agreements and all commitments thereunder
to lend shall have been terminated, all letters of credit issued thereunder
shall have been terminated, all amounts outstanding thereunder shall have
been paid in full and all Liens, if any, securing any obligations
thereunder or under any related agreement shall have been permanently
released and (ii) the Agent shall have received evidence satisfactory in
form and substance to it demonstrating such termination, payment and
release.
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(k) The Agent shall have received counterparts of the Pledge
Agreement signed on behalf of the Borrower and each Subsidiary Loan Party
that owns any capital stock of any other Subsidiary, together with stock
certificates representing all the outstanding shares of capital stock of
each Subsidiary owned by or on behalf of the Borrower or any such
Subsidiary Loan Party as of the Effective Date after giving effect to the
Spin-Off (except that the pledge of stock certificates representing shares
of common stock of a Foreign Subsidiary may be limited to 65% of the
outstanding shares of common stock of such Foreign Subsidiary), promissory
notes evidencing all intercompany Indebtedness owed to the Borrower or any
such Subsidiary Loan Party by the Borrower or any Subsidiary as of the
Effective Date after giving effect to the Spin-Off, and undated stock
powers and instruments of transfer, endorsed in blank, with respect to such
stock certificates and promissory notes.
(l) The Agent shall have received (i) counterparts of the Guarantee
Agreement signed on behalf of each Subsidiary Loan Party and (ii)
counterparts of the Indemnity, Subrogation and Contribution Agreement
signed on behalf of the Borrower and each Subsidiary Loan Party.
(m) The Lenders shall be reasonably satisfied as to the amount and
nature of any environmental and employee health and safety exposures to
which the Borrower and the Subsidiaries may be subject after giving effect
to the Spin-Off and the other transactions contemplated hereby, and with
the plans of the Borrower with respect thereto.
(n) The Agent shall be reasonably satisfied with the sufficiency of
amounts available under this Agreement to meet the ongoing working capital
requirements of the Borrower and its Subsidiaries following the
consummation of the Spin-Off and the other transactions contemplated
hereby.
(o) After giving effect to the Spin-Off, the Borrower shall be in pro
forma compliance as of May 31, 1997 and for the period of four fiscal
quarters then ended with Sections 6.13, 6.14, 6.15 and 6.16 (assuming for
such purpose that the Spin-Off occurred on such date or at the beginning of
such period, as the case may be).
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(p) The Agent shall have received (i) a copy of the solvency opinion
from American Appraisal Associates in the form delivered to the Board of
Directors of the Borrower on the date of the Spin-Off and (ii) a
certificate from a Responsible Officer of the Borrower as to the solvency
of the Borrower and the Subsidiaries on a consolidated basis after giving
effect to the Spin-Off.
(q) The Agent shall have received executed or conformed, certified
copies of each Lease listed on Schedule 4.02(q), franchise agreement and
management agreement (each such agreement, a "Borrowing Base Agreement")
------------------------
relating to a proposed Borrowing Base Property and all amendments thereto
on or prior to the Effective Date; each such Borrowing Base Agreement, as
so amended and certified by a Responsible Officer of the Borrower, shall be
in full force and effect and no term or condition thereof shall have been
further amended or modified, or waived after the execution thereof, except
as previously disclosed in writing to the Agent, and no Person shall have
failed in any material respect to perform any material obligation or
covenant or satisfy any material condition required by any such Borrowing
Base Agreement to be performed or complied with on or before the Effective
Date, except as previously disclosed in writing to the Agent.
(r) The Agent shall have received with respect to each proposed
Borrowing Base Property, as of the Effective Date, (a) a comprehensive
environmental audit (which shall include a Phase I environmental audit and,
if recommended by such Phase I environmental audit, a Phase II
environmental audit) satisfactory in all respects to the Agent and prepared
by an Approved Environmental Consultant, (b) evidence that all
Environmental Permits have been obtained and (c) such other environmental
reports, inspections and investigations as the Agent shall require,
prepared, in each instance, by consultants satisfactory to the Agent. On
or before the Effective Date, the Borrower shall have delivered to the
Agent evidence satisfactory to the Agent that the Borrower has complied (or
has made arrangements satisfactory to the Agent to comply) with the
recommendations of all environmental consultant(s) referred to above and
that all hazardous materials (as defined under Environmental Laws) have
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been removed from any proposed Borrowing Base Property to the extent
required by Environmental Law.
(s) The Agent shall have received a certificate of insurance
demonstrating compliance with the requirements of Section 5.02 and
certifying that the insurance policies required by Section 5.02 with
respect to any proposed Borrowing Base Property are in full force and
effect on the Effective Date.
(t) The Agent shall have received evidence satisfactory to it that the
proposed Borrowing Base Properties, as of the Effective Date, are free of
all material structural and title defects.
(u) The Agent shall have received a completed Borrowing Base
Certificate dated the Effective Date and signed by a Responsible Officer of
the Borrower.
(v) The Lenders shall have received a pro forma consolidated balance
sheet of the Borrower as of the Effective Date, after giving effect to the
Spin-Off and the consummation of the other transactions contemplated
hereby, which shall not be materially inconsistent with the forecasts
previously provided to the Lenders.
The Agent shall notify the Borrower and the Lenders of the Effective
Date, and such notices shall be conclusive and binding. Notwithstanding the
foregoing, the obligations of the Lenders to make Loans and of the Issuing Bank
to issue Letters of Credit hereunder shall not become effective unless each of
the foregoing conditions is satisfied (or waived pursuant to Section 9.08) at or
prior to 3:00 p.m., New York City time, on October 15, 1997 (and, in the event
such conditions are not so satisfied or waived, the Revolving Commitments shall
terminate at such time).
ARTICLE V. AFFIRMATIVE COVENANTS
The Borrower covenants and agrees with each Lender that, so long as
this Agreement shall remain in effect or the principal of or interest on any
Loan, any Fees or any other expenses or amounts payable under any Loan Document
shall be unpaid, and until all Letters of Credit have been canceled or have
expired and all amounts drawn thereunder have been reimbursed in full, unless
the Required Lenders shall otherwise consent in writing, the Borrower shall, and
shall cause each of the Subsidiaries to:
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SECTION 5.01. Existence; Businesses and Properties. (a) Do or cause
-------------------------------------
to be done all things necessary to preserve, renew and keep in full force and
effect its legal existence, except as otherwise expressly permitted under
Section 6.05.
(b) Do or cause to be done all things necessary to obtain, preserve,
renew, extend and keep in full force and effect the rights, licenses, permits,
franchises, authorizations, patents, copyrights, trademarks and trade names
material to the conduct of its business; maintain and operate such business in
substantially the manner in which it is presently conducted and operated (except
for the Spin-Off); comply in all material respects with all applicable laws,
rules, regulations and orders of any Governmental Authority, whether now in
effect or hereafter enacted; and at all times maintain and preserve all property
material to the conduct of such business and keep such property in good repair,
working order and condition and from time to time make, or cause to be made, all
needful and proper repairs, renewals, additions, improvements and replacements
thereto necessary in order that the business carried on in connection therewith
may be properly conducted at all times.
SECTION 5.02. Insurance. (a) The Borrower will, and will cause
----------
each of its Subsidiaries to, maintain, with financially sound and reputable
insurance companies which are acceptable to the Agent:
(i) a full risk policy with fire, extended coverage, vandalism and
malicious vandalism insurance, on a full replacement cost basis, with
respect to the Hotel Properties, and such other extended coverage insurance
as the Agent may reasonably require, in each case in amounts satisfactory
to the Agent;
(ii) commercial general liability insurance against claims for bodily
injury, death or property damage occurring upon, about or in connection
with any properties owned, occupied or controlled by it, in amounts
satisfactory to the Agent;
(iii) business interruption insurance, insuring against loss of gross
earnings for a period of not less than six months; and
(iv) such other insurance as may be required by law.
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(b) If at any time the area in which any Borrowing Base Property is
located is designated (i) a "flood hazard area" in any Flood Insurance Rate Map
published by the Federal Emergency Management Agency (or any successor agency),
the Borrower shall obtain flood insurance in such total amount as the Agent or
the Required Lenders may from time to time require, and otherwise comply with
the National Flood Insurance Program as set forth in the Flood Disaster
Protection Act of 1973, as amended from time to time or (ii) a "Zone 1" area,
the Borrower shall obtain earthquake insurance in such total amount as the Agent
or the Required Lenders may from time to time require.
SECTION 5.03. Obligations and Taxes. Pay its Indebtedness and other
----------------------
obligations promptly and in accordance with their terms and pay and discharge
promptly when due all taxes, assessments and governmental charges or levies
imposed upon it or upon its income or profits or in respect of its property,
before the same shall become delinquent or in default, as well as all lawful and
valid claims for labor, materials and supplies or otherwise which, if unpaid,
might give rise to a Lien upon such properties or any part thereof; provided,
--------
however, that such payment and discharge shall not be required with respect to
- -------
any such tax, assessment, charge, levy or claim so long as the validity or
amount thereof shall be contested in good faith by appropriate proceedings and
the Borrower or such Subsidiary shall have set aside on its books adequate
reserves with respect thereto.
SECTION 5.04. Financial Statements, Reports, etc. In the case of
-----------------------------------
the Borrower, furnish to the Agent and each Lender:
(a) within 90 days after the end of each fiscal year, its audited
consolidated balance sheets and related statements of income and cash flow,
showing the financial condition of the Borrower and its consolidated
Subsidiaries as of the close of such fiscal year and the results of its
operations and the operations of such Subsidiaries during such year, all
audited by Arthur Andersen & Co. or other independent public accountants of
recognized national standing acceptable to the Required Lenders and
accompanied by an opinion of such accountants (which shall not be qualified
in any material respect) to the effect that such consolidated financial
statements fairly present the financial condition and results of operations
of the Borrower on a consolidated basis in accordance with GAAP
consistently applied;
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(b) within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, its unaudited consolidated balance sheets and
related statements of income and cash flow, showing the finan cial
condition of the Borrower and its consolidated Subsidiaries as of the close
of such fiscal quarter and the results of its operations and the operations
of such Subsidiaries during such fiscal quarter and the then elapsed
portion of the fiscal year, all certified by the Financial Officer of the
Borrower as fairly presenting the financial condition and results of
operations of the Borrower on a consolidated basis in accordance with GAAP
consistently applied, subject to normal year-end audit adjustments;
(c) concurrently with any delivery of financial statements under
clause (a) or (b) above, a certificate of the accounting firm or the
Financial Officer of the Borrower opining on or certifying such statements
(which certificate, when furnished by an accounting firm, may be limited to
accounting matters and disclaim responsibility for legal interpretations)
(i) certifying that no Event of Default or Default has occurred or, if such
an Event of Default or Default has occurred, specifying the nature and
extent thereof and any corrective action taken or proposed to be taken with
respect thereto and (ii) setting forth computations in reasonable detail
satisfactory to the Agent demonstrating compliance with the covenants
contained in Sections 6.06, 6.13, 6.14, 6.15 and 6.16;
(d) within 60 days after the Effective Date, the audited combined
balance sheets and related statements of income and cash flow of the
Borrower and its Subsidiaries post-Spin-Off as and for the fiscal year
ended May 31, 1997, audited by and accompanied by the opinion (which shall
not be qualified in any material respect) of Arthur Anderson & Co.,
independent public accountants;
(e) within 45 days after the end of each fiscal quarter, a completed
Borrowing Base Certificate calculating and certifying the Borrowing Base as
of the last day of such fiscal quarter, signed on behalf of the Borrower by
a Financial Officer;
(f) within 45 days after the end of each fiscal quarter, a certificate
as to the Net Operating Income for each Borrowing Base Property for such
fiscal quarter, signed on behalf of the Borrower by a Financial Officer;
65
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(g) promptly after the same become publicly available, copies of all
periodic and other reports, proxy statements and other materials filed by
it with the Securities and Exchange Commission, or any Governmental
Authority succeeding to any of or all the functions of said Commission, or
with any national securities exchange, or distributed to its shareholders,
as the case may be; and
(h) promptly, from time to time, such other information regarding the
operations, business affairs and financial condition (including any Leases
relating to a Borrowing Base Property) of the Borrower or any Subsidiary,
or compliance with the terms of any Loan Document, as the Agent or any
Lender may reasonably request.
SECTION 5.05. Litigation and Other Notices. Furnish to the Agent, the
-----------------------------
Issuing Bank and each Lender prompt written notice of the following:
(a) any Event of Default or Default, specifying the nature and extent
thereof and the corrective action (if any) proposed to be taken with
respect thereto;
(b) any contemplated sale, encumbrance or transfer of any Hotel
Property (or all or any portion of any partnership or other ownership
interest therein), together with a certificate of a Financial Officer
demonstrating pro forma compliance, after giving effect to such sale,
encumbrance or transfer, with the covenants set forth in Section 6.06,
6.13, 6.14, 6.15 and 6.16 as if such transaction had occurred on each
relevant date or at the beginning of each relevant period;
(c) the filing or commencement of, or any threat or notice of
intention of any person to file or commence, any action, suit or
proceeding, whether at law or in equity or by or before any Governmental
Authority, against the Borrower or any Affiliate thereof as to which there
is a reasonable probability of an adverse determination and which, if such
probable adverse determination occurred, could reasonably be anticipated to
result in a Material Adverse Effect; and
(d) any development that has resulted in, or could reasonably be
anticipated to result in, a Material Adverse Effect.
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SECTION 5.06. ERISA. (a) Comply in all material respects with the
------
applicable provisions of ERISA and (b) furnish to the Agent and each Lender (i)
as soon as possible, and in any event within 30 days after any Responsible
Officer of the Borrower or any ERISA Affiliate either knows or has reason to
know that any Reportable Event has occurred that alone or together with any
other Reportable Event could reasonably be expected to result in liability of
the Borrower or any ERISA Affiliate to the PBGC in an aggregate amount exceeding
$5,000,000, a statement of a Financial Officer of the Borrower setting forth
details as to such Reportable Event and the action proposed to be taken with
respect thereto, together with a copy of the notice, if any, of such Reportable
Event given to the PBGC, (ii) promptly after receipt thereof, a copy of any
notice the Borrower or any ERISA Affiliate may receive from the PBGC relating to
the funded status of any Plan or to the intention of the PBGC to terminate any
Plan or Plans (other than a Plan maintained by an ERISA Affiliate which is
considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section
414 of the Code) or to appoint a trustee to administer any Plan or Plans, (iii)
within 10 days after the due date for filing with the PBGC pursuant to Section
412(n) of the Code of a notice of failure to make a required installment or
other payment with respect to a Plan, a statement of a Financial Officer of the
Borrower setting forth details as to such failure and the action proposed to be
taken with respect thereto, together with a copy of such notice given to the
PBGC and (iv) promptly and in any event within 30 days after receipt thereof by
the Borrower or any ERISA Affiliate from the sponsor of a Multiemployer Plan, a
copy of each notice received by the Borrower or any ERISA Affiliate concerning
(A) the imposition of Withdrawal Liability in excess of $500,000 or (B) a
determination that a Multiemployer Plan is, or is expected to be, terminated or
in reorganization, in each case within the meaning of Title IV of ERISA.
SECTION 5.07. Maintaining Records; Access to Properties and
---------------------------------------------
Inspections. (a) Maintain all financial records in accordance with GAAP
- ------------
consistently applied and upon reasonable notice by any Lender permit any
representatives designated by such Lender, subject to Section 9.16 of this
Agreement, to visit and inspect the financial records and the properties of the
Borrower or any Subsidiary at reasonable times and as often as requested and to
make extracts from and copies of such financial records,
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and permit any representatives designated by any Lender to discuss the affairs,
finances and condition of the Borrower or any Subsidiary with the officers
thereof and independent accountants therefor.
(b) Permit any representatives designated by the Agent (including any
consultants, accountants and lawyers retained by the Agent) to conduct
evaluations of the Borrower's computation of the Borrowing Base and the assets
included in the Borrowing Base, and furnish to such representatives all such
information and documents as they shall request for such purpose, all at such
reasonable times and as often as reasonably requested. The Borrower shall pay
the reasonable fees and expenses of any representatives retained by the Agent to
conduct any such evaluation. The Borrower also agrees to modify or adjust the
Borrowing Base to the extent reasonably required by the Agent as a result of any
such evaluation.
SECTION 5.08. Use of Proceeds. Use the proceeds of the Loans and
----------------
request the issuance of Letters of Credit only for the purposes set forth in the
preamble to this Agreement; provided that the principal amount of outstanding
--------
Loans and Letters of Credit used to provide working capital for the Borrower and
its Subsidiaries shall at no time exceed 10% of the Borrowing Base.
SECTION 5.09. Additional Subsidiaries. If any additional Subsidiary
------------------------
is formed or acquired after the Effective Date, notify the Agent and the Lenders
thereof and (a) if such Subsidiary is not a Foreign Subsidiary, cause such
Subsidiary to become a party to the Guarantee Agreement, the Indemnity,
Subrogation and Contribution Agreement and the Pledge Agreement, in each case in
the manner provided therein within three Business Days after such Subsidiary is
formed or acquired and promptly take such actions as are required thereunder and
as may be reasonably requested by the Agent or the Required Lenders and (b) if
any shares of capital stock or Indebtedness of such Subsidiary are owned by or
on behalf of the Borrower or any Subsidiary Loan Party, cause such shares and
promissory notes evidencing such Indebtedness to be pledged pursuant to the
Pledge Agreement within three Business Days after such Subsidiary is formed or
acquired (except that if such Subsidiary is a Foreign Subsidiary, shares of
common stock of such Subsidiary to be pledged pursuant to the Pledge Agreement
may be limited to 65% of the outstanding shares of common stock of such
Subsidiary).
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SECTION 5.10. Further Assurances. Execute any and all further
-------------------
documents, financing statements, agreements and instruments, and take all
further actions (including the filing of financing statements and other
documents) that may be required under any applicable law, or that the Agent or
the Required Lenders may reasonably request, to effectuate the transactions
contemplated by the Loan Documents or to grant, preserve, protect or perfect the
Liens created by the Security Documents or the validity or priority of any such
Lien, all at the expense of the Loan Parties. The Borrower also agrees to
provide to the Agent from time to time upon request evidence reasonably
satisfactory to the Agent as to the perfection and priority of the Liens created
or intended to be created by the Security Documents.
ARTICLE VI. NEGATIVE COVENANTS
The Borrower covenants and agrees with each Lender, the Issuing Bank
and the Agent that, so long as this Agreement shall remain in effect or the
principal of or interest on any Loan, any Fees or any other expenses or amounts
payable under any Loan Document shall be unpaid, and until all Letters of Credit
have been canceled or have expired and all amounts drawn thereunder have been
reimbursed in full, unless the Required Lenders shall otherwise consent in
writing, the Borrower shall not, and shall not cause or permit any of the
Subsidiaries to:
SECTION 6.01. Indebtedness. Incur, create, assume or permit to exist
-------------
any Indebtedness, except (without duplication):
(a) Indebtedness of the Borrower existing on the date hereof and set
forth in Schedule 6.01(a) and any extensions, renewals or replacements of
existing mortgages and Capital Lease Obligations included in such
Indebtedness; provided, however, that (x) the principal amount of any such
-------- -------
extension, renewal or replacement shall not exceed the principal amount of
the mortgage or Capital Lease Obligation so extended, renewed or replaced,
(y) the mortgage or Capital Lease Obligation so extended, renewed or
replaced shall not be secured by any property or asset that was not already
pledged to secure or subject to the existing mortgage or Capital Lease
Obligation, and (z) such extension, renewal or replacement shall not be on
terms materially more restrictive to the Borrower or its Subsidiaries or
materially less favorable to the Lenders than the mortgage or Capital Lease
Obligation so extended, renewed or replaced;
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(b) Indebtedness outstanding under the Loan Documents;
(c) Approved Subordinated Indebtedness in an aggregate principal
amount not to exceed $115,000,000 plus accrued interest thereon;
(d) Indebtedness incurred upon the acquisition of any property or
asset after the Effective Date secured by Liens on such property or asset
not prohibited by Section 6.02; provided, however, that (i) the amount of
-------- -------
such Indebtedness shall not exceed the purchase price of any such property
or asset and (ii) such Indebtedness shall be without recourse to the
Borrower or any Subsidiary or any other property or assets of the Borrower
or any Subsidiary;
(e) unsecured Indebtedness of Subsidiaries existing at the time they
are acquired by the Borrower and not incurred in contemplation of such
acquisition in an amount not to exceed $1,000,000;
(f) Indebtedness of Subsidiaries not prohibited by Section 6.09;
(g) Indebtedness of (i) the Borrower to any Wholly Owned Subsidiary
(other than an Excluded Subsidiary or a Foreign Subsidiary); and (ii) any
Subsidiary to the Borrower or any Wholly Owned Subsidiary (other than an
Excluded Subsidiary or a Foreign Subsidiary);
(h) Indebtedness represented by notes or letters of credit issued for
the account of the Borrower or any Subsidiary in connection with insurance
policies and in a form substantially similar to the notes or letters of
credit previously issued for the account of the Borrower or any Subsidiary
issued in connection with insurance policies of the Borrower or such
Subsidiary;
(i) Indebtedness of the Borrower represented by letters of credit
issued by a financial institution other than an Issuing Bank in an amount
at any one time not to exceed $5,000,000 less the L/C Exposure;
(j) Indebtedness represented by utility bonds, performance bonds,
state self insurance bonds and miscellaneous other bonds other than those
existing on the date hereof and listed in Schedule 6.01(a) (including any
extensions, renewals and replacements), the aggregate principal amount of
such Indebtedness at any one time not to exceed $2,000,000;
(k) Indebtedness of the Borrower consisting of Guarantees in
connection with pension and deferred compensation arrangements arising in
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connection with the Spin-Off; provided, however, that the aggregate amount
-------- -------
of such Indebtedness shall not exceed $25,000,000;
(l) Indebtedness consisting of Sale and Lease-Back Transactions
permitted under Section 6.03; and
(m) other unsecured Indebtedness of the Borrower, in an aggregate
principal amount at any one time outstanding not to exceed $1,000,000.
SECTION 6.02. Liens. Create, incur, assume or permit to exist any
------
Lien on any property or assets (including stock or other securities of any
person, including any Subsidiary) now owned or hereafter acquired by it or on
any income or revenues or rights (excluding rights of first refusal) in respect
of any thereof, except (without duplication):
(a) Liens on property or assets of the Borrower and its Subsidiaries
existing on the date hereof and set forth in Schedule 6.02; provided,
--------
however, that such Liens shall secure only those obligations which they
-------
secure on the date hereof except as otherwise permitted hereunder;
(b) any Lien existing on any property or asset prior to the
acquisition thereof by the Borrower or any Subsidiary that secures
Indebtedness permitted by Section 6.01(d); provided, however, that (i) such
-------- -------
Lien is not created in contemplation of or in connection with such
acquisition and (ii) such Lien does not apply to any other property or
assets of the Borrower or any Subsidiary;
(c) Liens for taxes not yet due or which are being contested in
compliance with Section 5.03;
(d) carriers', warehousemen's, mechanic's, materialmen's, repairmen's
or other like Liens arising in the ordinary course of business and securing
obligations that are not due or which are being contested in compliance
with Section 5.03;
(e) statutory liens of landlords in respect of property leased by the
Borrower or any Subsidiary;
(f) pledges and deposits made in the ordinary course of business in
compliance with workmen's compensation, unemployment insurance and other
social security laws or regulations;
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(g) deposits to secure the performance of bids, trade contracts (other
than for Indebtedness), leases (other than Capital Lease Obligations),
statutory obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of business;
(h) zoning restrictions, easements, rights-of-way, restrictions on use
of real property and other similar encumbrances incurred in the ordinary
course of business which, in the aggregate, are not substantial in amount
and do not materially detract from the value of the property subject
thereto or interfere with the ordinary conduct of the business of the
Borrower or any of its Subsidiaries;
(i) mortgages on properties securing Indebtedness permitted by Section
6.01(d);
(j) Liens created under the Loan Documents; and
(k) other Liens to secure Indebtedness of the Borrower; provided,
--------
however, that the aggregate principal amount of the Indebtedness so secured
-------
at any time does not exceed $5,000,000.
SECTION 6.03. Sale and Lease-Back Transactions. Enter into any Sale
---------------------------------
and Lease-Back Transaction unless immediately thereafter the net book value
(determined as of the time of sale) of all property the subject of Sale and
Lease-Back Transactions at any one time does not exceed $20,000,000.
SECTION 6.04. Investments, Loans and Advances. Purchase, hold or
--------------------------------
acquire any capital stock, comparable ownership interests, evidences of
indebtedness or other securities of, make or permit to exist any loans or
advances to, or make or permit to exist any investment or any other interest in,
any other person, except:
(a) the investments and guarantees existing on the date hereof set
forth on Schedule 6.04 and investments by the Borrower or any Subsidiary in
the capital stock or other ownership interests of the Subsidiaries (other
than an Excluded Subsidiary or a Foreign Subsidiary), including by means of
contributions by any Subsidiary of Hotel Properties to the Borrower or a
Subsidiary (other than an Excluded Subsidiary or a Foreign Subsidiary);
72
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(b) investments by the Borrower or any Subsidiary in (i) the capital
stock or other ownership interests of Foreign Subsidiaries or (ii)
hospitality properties located in Canada, Mexico or the Caribbean; provided
--------
that the aggregate amount of investments permitted by clause (b)(i) and
(b)(ii) at any time shall not exceed 5% of Consolidated Total Assets as of
the preceding fiscal year;
(c) investments by the Borrower or any Subsidiary in the capital stock
or other ownership interests of Excluded Subsidiaries; provided that the
--------
aggregate amount of investments permitted by this clause (c) at any one
time shall not exceed $5,000,000;
(d) loans or advances by the Borrower to Subsidiaries or by Wholly-
Owned Subsidiaries to the Borrower or other Subsidiaries, in each case to
the extent permitted under Section 6.01;
(e) Guarantees permitted under Section 6.01(k);
(f) Permitted Investments; and
(g) other investments, capital contributions, loans and advances
not to exceed at any time $1,000,000.
SECTION 6.05. Mergers and Consolidations. Merge into or consolidate
---------------------------
with any other person, or permit any other person to merge into or consolidate
with it, or sell, transfer, lease or otherwise dispose of (in one transaction or
in a series of transactions) all or substantially all its assets whether now
owned or hereafter acquired, except that:
(a) (i) the Borrower may merge or consolidate with a Subsidiary (other
than a Subsidiary owning one or more Borrowing Base Properties) or (ii) a
Subsidiary (other than a Subsidiary owning one or more Borrowing Base
Properties) may merge or consolidate with the Borrower, in each case so
long as the Borrower is the surviving entity;
(b) any Subsidiary may merge or consolidate with any Subsidiary;
provided that if all or part of the capital stock of either such Subsidiary
--------
is pledged pursuant to the Pledge Agreement, at least the same percentage
of the capital stock of the surviving or resulting corporation shall be so
pledged; and
(c) the Borrower or any Subsidiary may merge or consolidate with
another person; provided, however, that:
-------- -------
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(i) the Borrower or such Subsidiary is the surviving entity;
(ii) no Event of Default or event which, with notice or the
passage of time or both, would constitute an Event of Default exists
after giving effect to such merger or consolidation; and
(iii) the Agent shall receive a certificate signed by a Financial
Officer of the Borrower confirming compliance with clause (ii) above.
SECTION 6.06. Asset Sales. Consummate any Asset Sale, other than (a)
------------
sales of receivables for collection (and not for financing or factoring
purposes) in the ordinary course of business and (b) Asset Sales resulting in
Proceeds which, when added to the Proceeds from all other Asset Sales previously
consummated in the same fiscal year, would not exceed 10% of Consolidated Total
Assets as of the end of the preceding fiscal year; provided that Sunburst may
--------
not sell any asset to International unless such sale is consummated on an arm's
length basis at fair market value.
SECTION 6.07. Transactions with Affiliates. Sell or transfer any
-----------------------------
property or assets to, or purchase or acquire any property or assets from, or
otherwise engage in any other transactions with, any of its Affiliates, except
that as long as no Default or Event of Default shall have occurred and be
continuing, the Borrower or any Subsidiary may (a) consummate the Spin-Off or
(b) engage in any of the foregoing transactions (i) in the ordinary course of
business at prices and on terms and conditions not less favorable to the
Borrower or such Subsidiary than could be obtained on an arm's-length basis from
unrelated third parties or (ii) between or among the Borrower and its Wholly
Owned Subsidiaries (other than the Excluded Subsidiaries and Foreign
Subsidiaries except to the extent expressly permitted by Section 6.04).
SECTION 6.08. Business of Borrower and Subsidiaries. Engage at any
--------------------------------------
time in any business or business activity other than (a) the ownership and
operation of hospitality properties in the United States or related or
collateral activities, (b) the ownership of hospitality properties in Canada,
Mexico or the Caribbean or related or collateral activities; provided that the
--------
aggregate amount of assets committed to such operations shall not at any one
time exceed 5% of Total Consolidated Assets and (c) the franchising activities
contemplated under the Strategic Alliance Agreement with International.
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SECTION 6.09. Subsidiary Indebtedness. Permit any Subsidiary to
-----------------------
create, incur, assume or permit to exist any Indebtedness except:
(a) any Indebtedness expressly permitted by Section 6.01 (other than
clause (f) thereof); and
(b) other unsecured Indebtedness of any Subsidiary; provided, however,
-------- -------
that the aggregate principal amount (the "Subsidiary Debt Amount")
----------------------
outstanding of all such other Indebtedness of all Subsidiaries (excluding
amounts permitted under clause (a) above) may not exceed $1,000,000 at any
one time.
SECTION 6.10. Agreements. Permit any Subsidiary to enter into any
-----------
agreement or incur any obligation the terms of which would impair the ability of
any Subsidiary to pay dividends, to make permitted intercompany loans or
advances or to make distributions (it being agreed that this Section shall not
be breached by any such agreement or obligation binding upon a Subsidiary at the
time it becomes a Subsidiary and not incurred in contemplation of its becoming a
Subsidiary).
SECTION 6.11. Fiscal Year and Accounting Practices. Change its
------------------------------------
fiscal year end or accounting practices from those in effect at May 31, 1996,
other than as required by GAAP; provided, however, the Borrower may change its
-------- -------
fiscal year end to December 31.
SECTION 6.12. No Further Negative Pledges. Except (a) pursuant to the
---------------------------
Loan Documents or (b) with respect to prohibitions against other encumbrances on
specific property encumbered to secure payment of particular Indebtedness (which
Indebtedness relates solely to such specific property, and improvements and
accretions thereto, and is otherwise permitted hereby), enter into any agreement
prohibiting the creation or assumption of any Lien upon the properties or assets
of the Borrower or any Subsidiary, whether now owned or hereafter acquired, or
requiring an obligation to be secured if some other obligation is secured.
SECTION 6.13. Minimum Consolidated Net Worth. In the case of the
------------------------------
Borrower, permit its Consolidated Net Worth at any time to be less than the sum
of (a) the amount that is equal to 75% of the Borrower's Consolidated Net Worth
as of the last day of the month in which the Spin-Off occurs, plus (b) 75% of
the Borrower's Consolidated Net Income accrued during the period (treated as one
accounting period) commencing on the last day of the month in which the Spin-Off
occurs and ending on the last day of the most
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recent fiscal quarter for which financial statements have been delivered
pursuant to Section 5.04 (which amount shall not include Consolidated Net Income
for any fiscal quarter in which the Borrower's Consolidated Net Income is
negative), plus (c) the aggregate net cash proceeds received by the Borrower
from the issuance or sale of its capital stock since the date hereof.
SECTION 6.14. Limitation on Consolidated Funded Debt. In the case of
---------------------------------------
the Borrower, permit Consolidated Funded Indebtedness as of the last day of any
period of four fiscal quarters ending during the period from and including the
date hereof through the Revolving Maturity Date to exceed the sum, without
duplication, of (a) 5.50X Consolidated EBITDA for such period, plus (b) the
lesser of (i) 70% of the undepreciated cost basis at acquisition of all Hotel
Properties owned for less than four fiscal quarters and (ii) 70% of the
aggregate trailing four quarter Aggregate Adjusted NOI for Hotel Properties
owned for less than four fiscal quarters, divided by 0.11, plus (c) 70% of the
cost of Hotel Properties with certificates of occupancy that (i) are open for
business and (ii) were Construction Properties at some time during the preceding
four fiscal quarters; provided that the aggregate of the amount allowed under
--------
(b) and (c) above shall in no event exceed $25,000,000 and provided, further,
-------- -------
that any amount included pursuant to clause (c) above may not be so included for
more than four fiscal quarters.
SECTION 6.15. Limitation on Consolidated Senior Funded Indebtedness.
-----------------------------------------------------
In the case of the Borrower, permit Consolidated Senior Funded Indebtedness as
of the last day of any fiscal quarter ending during the period from and
including the date hereof through the Revolving Maturity Date to exceed the sum,
without duplication, of (a) 4.00X Consolidated EBITDA for such period, plus (b)
the lesser of (i) 70% of the undepreciated cost basis at acquisition of all
Hotel Properties owned for than four fiscal quarters and (ii) 70% of the
aggregate trailing four quarter Adjusted NOI for all Hotel Properties owned for
less than four fiscal quarters, divided by 0.11, plus (c) 70% of the cost of
Hotel Properties with certificates of occupancy that (i) are open for business
and (ii) were Construction Properties at some time during the preceding four
fiscal quarters; provided that the aggregate amount allowed under (b) and (c)
--------
above shall in no event exceed $25,000,000 and provided, further, that any
-------- -------
amount included pursuant to clause (c) above may not be so included for more
than four fiscal quarters.
SECTION 6.16. Fixed Charge Coverage Ratio. In the case of the
----------------------------
Borrower, permit the Fixed Charge Coverage Ratio for any period of four fiscal
quarters ending during
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the period form and including the date hereof through the Revolving Maturity
Date to be less than 1.75 to 1.00.
SECTION 6.17. Borrowing Base Properties. (a) Permit the Borrowing
--------------------------
Base Properties at any time to include fewer than 25 separate properties.
(b) At any time permit (i) greater than 40% of the hotel rooms in the
Borrowing Base Properties to be under one brand name, (ii) greater than 25% of
the hotel rooms in the Borrowing Base Properties to be in one state or (iii)
greater than 15% of the hotel rooms in the Borrowing Base Properties to be in
one city.
SECTION 6.18. Amendment or Prepayment of Approved Subordinated
------------------------------------------------
Indebtedness. (a) Amend, modify, supplement or waive any of the terms or
- -------------
provisions of the Approved Subordinated Indebtedness or (b) prepay all or any
portion of the Approved Subordinated Indebtedness.
ARTICLE VII. EVENTS OF DEFAULT
In case of the happening of any of the following events ("Events
------
of Default"):
- ----------
(a) any representation or warranty made or deemed made (such
representation or warranty being deemed made as provided in Section 2.19(b)
and Section 4.01) in or in connection with any Loan Document or the
borrowings or issuances of Letters of Credit hereunder, or any
representation, warranty, statement or information contained in any report,
certificate, financial statement or other instrument furnished in
connection with or pursuant to any Loan Document, shall prove to have been
false or misleading in any material respect when so made, deemed made or
furnished;
(b) default shall be made in the payment of any principal of any Loan
or the reimbursement with respect to any L/C Disbursement when and as the
same shall become due and payable, whether at the due date thereof or at a
date fixed for prepayment thereof or by acceleration thereof or otherwise;
(c) default shall be made in the payment of any interest on any Loan
or any Fee or L/C Disbursement or any other amount (other than an amount
referred to in clause (b) above) due under any Loan Document, when and as
the same shall become due and payable, and such default shall continue
unremedied for a period of five Business Days;
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(d) default shall be made in the due observance or performance by the
Borrower of any covenant, condition or agreement contained in Section
5.01(a), 5.05 or 5.09 or in Article VI;
(e) default shall be made in the due observance or performance by any
Loan Party of any covenant, condition or agreement contained in any Loan
Document (other than those specified in clauses (b), (c) and (d) above) and
such default shall continue unremedied for a period of five Business Days
after notice thereof from the Agent or any Lender to the Borrower;
(f) the Borrower or any Subsidiary shall (i) fail to pay any principal
or interest, regardless of amount, due in respect of any Indebtedness in an
aggregate principal amount in excess of $5,000,000, when and as the same
shall become due and payable, or (ii) fail to observe or perform any other
term, covenant, condition or agreement contained in any agreement or
instrument evidencing or governing any Indebtedness in an aggregate
principal amount in excess of $5,000,000, or permit any other event to
occur, if the effect of any failure or event referred to in this clause
(ii) is to cause, or to permit the holder or holders of such Indebtedness
or a trustee on its or their behalf (with or without the giving of notice,
the lapse of time or both) to cause, such Indebtedness to become due prior
to its stated maturity;
(g) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (i)
relief in respect of the Borrower or any Subsidiary, or of a substantial
part of the property or assets of the Borrower or a Subsidiary, under Title
11 of the United States Code, as now constituted or hereafter amended, or
any other Federal, state or foreign bankruptcy, insolvency, receivership or
similar law, (ii) the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for the Borrower or any
Subsidiary or for a substantial part of the property or assets of the
Borrower or a Subsidiary or (iii) the winding-up or liquidation of the
Borrower or any Subsidiary; and such proceeding or petition shall continue
undismissed for 60 days or an order or decree approving or ordering any of
the foregoing shall be entered;
(h) the Borrower or any Subsidiary shall (i) voluntarily commence any
proceeding or file any petition seeking relief under Title 11 of the United
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States Code, as now constituted or hereafter amended, or any other Federal,
state or foreign bankruptcy, insolvency, receivership or similar law, (ii)
consent to the institution of, or fail to contest in a timely and
appropriate manner, any proceeding or the filing of any petition described
in clause (g) above, (iii) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator, conservator or similar official
for the Borrower or any Subsidiary or for a substantial part of the
property or assets of the Borrower or any Subsidiary, (iv) file an answer
admitting the material allegations of a petition filed against it in any
such proceeding, (v) make a general assignment for the benefit of
creditors, (vi) become unable, admit in writing its inability or fail
generally to pay its debts as they become due or (vii) take any action for
the purpose of effecting any of the foregoing;
(i) one or more judgments for the payment of money in an aggregate
amount in excess of $5,000,000 shall be rendered against the Borrower, any
Subsidiary or any combination thereof and the same shall remain
undischarged for a period of 60 consecutive days during which execution
shall not be effectively stayed, or any action shall be legally taken by a
judgment creditor to levy upon assets or properties of the Borrower or any
Subsidiary to enforce any such judgment;
(j) a Reportable Event or Reportable Events, or a failure to make a
required installment or other payment (within the meaning of Section
412(n)(l) of the Code), shall have occurred with respect to any Plan or
Plans that reasonably could be expected to result in liability of the
Borrower to the PBGC or to a Plan in an aggregate amount exceeding
$5,000,000 and, within 30 days after the reporting of any such Reportable
Event to the Agent or after the receipt by the Agent of the statement
required pursuant to Section 5.06, the Agent shall have notified the
Borrower in writing that (i) the Required Lenders have made a determination
that, on the basis of such Reportable Event or Reportable Events or the
failure to make a required payment, there are reasonable grounds (A) for
the termination of such Plan or Plans by the PBGC, (B) for the appointment
by the appropriate United States District Court of a trustee to administer
such Plan or Plans or (C) for the imposition of a lien in favor of a Plan
or the PBGC and (ii) as a result thereof an Event of Default exists
hereunder; or a trustee shall be appointed by a United States District
Court to administer any such Plan or Plans; or the PBGC shall institute
proceedings to terminate any Plan or Plans;
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(k) (i) the Borrower or any ERISA Affiliate shall have been notified
by the sponsor of a Multiemployer Plan that it has incurred Withdrawal
Liability to such Multiemployer Plan, (ii) the Borrower or such ERISA
Affiliate does not have reasonable grounds for contesting such Withdrawal
Liability or is not in fact contesting such Withdrawal Liability in a
timely and appropriate manner and (iii) the amount of the Withdrawal
Liability specified in such notice, when aggregated with all other amounts
required to be paid to Multiemployer Plans in connection with Withdrawal
Liabilities (determined as of the date or dates of such notification),
exceeds $5,000,000 or requires payments exceeding $1,000,000 in any year;
(l) the Borrower or any ERISA Affiliate shall have been notified by
the sponsor of a Multiemployer Plan that such Multiemployer Plan is in
reorganization or is being terminated, within the meaning of Title IV of
ERISA, if solely as a result of such reorganization or termination the
aggregate annual contributions of the Borrower and its ERISA Affiliates to
all Multiemployer Plans that are then in reorganization or have been or are
being terminated have been or will be increased over the amounts required
to be contributed to such Multiemployer Plans for their most recently
completed plan years by an amount exceeding $1,000,000;
(m) there shall have occurred a Change in Control; or
(n) any Lien purported to be created under any Security Document shall
cease to be, or shall be asserted by any Loan Party not to be, a valid and
perfected Lien on any Collateral, with the priority required by the
applicable Security Document, except (i) as a result of the sale or other
disposition of the applicable Collateral in a transaction permitted under
the Loan Documents or (ii) as a result of the Collateral Agent's failure to
maintain possession of any stock certificates, promissory notes or other
instruments delivered to it under the Pledge Agreement;
then, and in every such event (other than an event with respect to the Borrower
described in clause (g) or (h) above), and at any time thereafter during the
continuance of such event, the Agent, at the request of the Required Lenders,
shall, by notice to the Borrower, take any or all of the following actions, at
the same or different times: (i) terminate forthwith the Revolving Commitments
or L/C Commitments, (ii) declare the Loans then outstanding to be forthwith due
and payable in whole or in part, whereupon the principal of the Loans so
declared to be due and payable, together with accrued interest thereon and any
unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder
and under any other Loan Document, shall become forthwith due and payable,
without presentment, demand, protest or any other notice of any kind, all of
which are hereby expressly waived by the Borrower, anything contained herein or
in any other Loan Document to the contrary notwithstanding and (iii) require
cash collateral as contemplated by Section 2.19(i); and in any event with
respect to the Borrower described in clause (g) or (h) above, the Revolving
Commitments and L/C
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Commitments shall automatically terminate and the principal of the Loans then
outstanding, together with accrued interest thereon and any unpaid accrued Fees
and all other liabilities of the Borrower accrued hereunder and under any other
Loan Document, shall automatically become due and payable, and the Borrower
shall automatically be required to provide cash collateral in respect of
outstanding Letters of Credit, without presentment, demand, protest or any other
notice of any kind, all of which are hereby expressly waived by the Borrower,
anything contained herein or in any other Loan Document to the contrary
notwithstanding.
ARTICLE VIII. THE AGENT
In order to expedite the transactions contemplated by this Agreement,
The Chase Manhattan Bank is hereby appointed to act as Agent on behalf of the
Lenders and the Issuing Bank. Each of the Lenders hereby irrevocably authorizes
the Agent to take such actions on behalf of such Lender or Issuing Bank and to
exercise such powers as are specifically delegated to the Agent by the terms and
provi sions hereof, together with such actions and powers as are reasonably
incidental thereto. The Agent is hereby expressly authorized by the Lenders and
the Issuing Bank, without hereby limiting any implied authority, (a) to receive
on behalf of the Lenders and the Issuing Bank all payments of principal of and
interest on the Loans, all payments in respect of L/C Disbursements and all
other amounts due to the Lenders hereunder, and promptly to distribute to each
Lender or Issuing Bank its proper share of each payment so received; (b) to give
notice on behalf of each of the Lenders to the Borrower of any Event of Default
specified in this Agreement of which the Agent has actual knowledge acquired in
connection with its agency hereunder; and (c) to distribute to each Lender
copies of all notices, financial statements and other materials delivered
pursuant to this Agreement as received by the Agent.
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Neither the Agent nor any of its directors, offi cers, employees or
agents shall be liable to the Lenders as such for any action taken or omitted by
any of them except for its or his own gross negligence or wilful misconduct, or
be responsible for any statement, warranty or representation herein or the
contents of any document delivered in connec tion herewith (other than any
statement, representation or warranty relating to the Agent or relating to the
functions of the Agent hereunder), or be required to ascertain or to make any
inquiry concerning the performance or observance by the Borrower of any of the
terms, conditions, covenants or agreements contained in any Loan Document. The
Agent shall not be responsible to the Lenders for the due execution,
genuineness, validity, enforceability or effectiveness of this Agreement or any
other Loan Documents or other instruments or agreements. The Agent may deem and
treat the payee of any note referred to in Section 2.06 as the owner thereof for
all purposes hereof until it shall have received from the payee of such note
notice, given as provided herein, of the transfer thereof. The Agent shall in
all cases be fully protected in acting, or refraining from acting, in accordance
with written instructions signed by the Required Lenders and, except as
otherwise specifically provided herein, such instructions and any action or inac
tion pursuant thereto shall be binding on all the Lenders. The Agent shall, in
the absence of knowledge to the contrary, be entitled to rely on any instrument
or document believed by it in good faith to be genuine and correct and to have
been signed or sent by the proper person or persons. Neither the Agent nor any
of its directors, officers, employees or agents shall have any responsibility to
the Borrower on account of the failure of or delay in performance or breach by
any Lender or Issuing Bank of any of its obligations hereunder or to any Lender
or Issuing Bank on account of the failure of or delay in performance or breach
by any other Lender or Issuing Bank or the Borrower of any of their respective
obligations hereunder or under any other Loan Document or in connection herewith
or therewith. The Agent may execute any and all duties here under by or
through agents or employees and shall be enti tled to rely upon the advice of
legal counsel selected by it with respect to all matters arising hereunder,
subject to the first sentence of this paragraph, and shall not be liable for any
action taken or suffered in good faith by it in accordance with the advice of
such counsel.
The Lenders hereby acknowledge that the Agent shall be under no duty
to take any discretionary action per mitted to be taken by it pursuant to the
provisions of this Agreement unless it shall be requested in writing to do so by
the Required Lenders; provided that the Agent shall
--------
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promptly notify each Lender of any Event of Default that the Agent has knowledge
of.
Subject to the appointment and acceptance of a successor Agent as
provided below, the Agent may resign at any time by notifying the Lenders and
the Borrower. Upon any such resignation, the Required Lenders shall have the
right to appoint a successor subject to the written consent of the Borrower to
such successor (which consent will not be unreasonably withheld). If no
successor shall have been so appointed by the Required Lenders and shall have
accepted such appointment within 30 days after the retiring Agent gives notice
of its resignation, then the retiring Agent may, on behalf of the Lenders,
appoint a successor Agent which shall be a bank with offices in New York, New
York, having a combined capital and surplus of at least $500,000,000 or an
Affiliate of any such bank. Upon the acceptance of any appointment as Agent
hereunder by a suc cessor bank, such successor shall succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent
and the retiring Agent shall be dis charged from its duties and obligations
hereunder. After the Agent's resignation hereunder, the provisions of this
Article and Section 9.05 shall continue in effect for its benefit in respect of
any actions taken or omitted to be taken by it while it was acting as Agent.
With respect to the Loans made by it hereunder, the Agent in its
individual capacity and not as Agent shall have the same rights and powers as
any other Lender and may exercise the same as though it were not the Agent, and
the Agent and its Affiliates may accept deposits from, lend money to and
generally engage in any kind of business with the Borrower or any Subsidiary or
other Affiliate thereof as if it were not the Agent.
Each Lender agrees (i) to reimburse the Agent, on demand, in the
amount of its pro rata share (based on its Revolving Commitment hereunder or, if
the Revolving Commitments shall have been terminated, on its Revolving
Commitment most recently in effect) of any expenses incurred for the benefit of
the Lenders by the Agent, including counsel fees and compensation of agents and
employees paid for services rendered on behalf of the Lenders, which the
Borrower shall be obligated to reimburse under Section 9.05 but which shall not
have been reimbursed by the Borrower and (ii) to indemnify and hold harmless the
Agent and any of its directors, officers, employees or agents, on demand, in the
amount of such pro rata share, from and against any and all liabilities, taxes,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever which may be imposed
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on, incurred by or asserted against it in its capacity as the Agent or any of
them in any way relating to or arising out of the Agent's role under this
Agreement or any other Loan Document or any action taken or omitted by it or any
of them under this Agreement or any other Loan Document, to the extent the same
shall not have been reimbursed by the Borrower; provided, however, that no
-------- -------
Lender shall be liable to the Agent for any portion of such liabilities, obliga
tions, losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from the gross negligence or wilful misconduct of the
Agent or any of its directors, officers, employees or agents.
Each Lender acknowledges that it has, indepen dently and without
reliance upon the Agent or any other Lender and based on such documents and
information as it has deemed appropriate, made its own credit analysis and deci
sion to enter into this Agreement. Each Lender also acknow ledges that it
will, independently and without reliance upon the Agent or any other Lender and
based on such documents and information as it shall from time to time deem
appropri ate, continue to make its own decisions in taking or not taking action
under or based upon this Agreement or any other Loan Document, any related
agreement or any document furnished hereunder or thereunder.
ARTICLE IX. MISCELLANEOUS
SECTION 9.01. Notices. Notices and other commu nications provided
--------
for herein shall be in writing and shall be delivered by hand or overnight
courier service, mailed or sent by telex, graphic scanning or other telegraphic
commu nications equipment of the sending party, as follows:
(a) if to the Borrower, at 10770 Columbia Pike, Silver Spring, MD
20901, Attention of General Counsel, with a copy to the Chief Financial
Officer of the Borrower (Telecopy No. (301) 979-6127);
(b) if to the Agent, to it at The Chase Manhattan Bank, Agent Bank
Services Group, One Chase Manhattan Plaza, 8th Floor, New York, New York
10081. Attention of Christina Gould (Telecopy No. (212) 522-5700), with a
copy to (i) The Chase Manhattan Bank, 270 Park Avenue, New York, New York
10017, Attention of William Viets (Telecopy No. (212) 270-2873) and (ii)
The Chase Manhattan Bank, 380 Madison Avenue, New York, New York 10017,
Attention of Marc Costantino (Telecopy No. (212) 622-3395); and
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(c) if to a Lender, to it at its address (or telecopy number) set
forth in Schedule 2.01 or in the Assignment and Acceptance pursuant to
which such Lender became a party hereto.
Except as otherwise provided in Section 9.15(c), all notices and other
communications given to any party hereto in accordance with the provisions of
this Agreement shall be deemed to have been given on the date of receipt, in
each case delivered, sent or mailed (properly addressed) to such party as
provided in this Section 9.01 or in accordance with the latest unrevoked
direction from such party given in accordance with this Section 9.01.
SECTION 9.02. Survival of Agreement. All covenants, agreements,
----------------------
representations and warranties made by the Loan Parties herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the Lenders and the Issuing Bank and shall survive the
making by the Lenders of the Loans and the issuance of Letters of Credit by the
Issuing Bank, regardless of any investigation made by the Lenders or the Issuing
Bank or on their behalf, and shall continue in full force and effect as long as
the principal of or any accrued interest on any Loan or any Fee or any other
amount payable under this Agreement or any other Loan Document is outstanding
and unpaid or any Letter of Credit is outstanding and so long as the Revolving
Commitments have not been terminated.
SECTION 9.03. Binding Effect. This Agreement shall become effective
---------------
when it shall have been executed by the Borrower and the Agent and when the
Agent shall have received copies hereof which, when taken together, bear the
signatures of each Lender, and thereafter shall be binding upon and inure to the
benefit of the Borrower, the Agent and each Lender and their respective
successors and assigns, except that the Borrower may not assign or delegate its
rights or obligations hereunder or any interest herein without the prior consent
of all the Lenders.
SECTION 9.04. Successors and Assigns. (a) Whenever in this Agreement
-----------------------
any of the parties hereto is referred to, such reference shall be deemed to
include the successors and assigns of such party; and all covenants, promises
and agreements by or on behalf of the Borrower, the Agent, the Issuing Bank or
the Lenders that are contained in this Agreement shall bind and inure to the
benefit of their respective successors and assigns.
(b) Each Lender may assign to one or more assignees all or a portion
of its interests, rights and
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obligations under this Agreement (including all or a portion of its Revolving
Commitment and the Loans at the time owing to it); provided, however, that (i)
-------- -------
except in the case of an assignment to a Lender or an Affiliate of such Lender,
the Borrower and the Agent (and, in the case of any assignment of a Revolving
Commitment, the Issuing Bank) must give their prior written consent to such
assignment (which consent shall not be unreasonably withheld), (ii) the amount
of the Revolving Commitment of the assigning Lender subject to each such
assignment (determined as of the date the Assignment and Acceptance with respect
to such assignment is delivered to the Agent) shall not be less than $5,000,000
and the amount of the Revolving Commitment of such Lender remaining after such
assignment shall not be less than $5,000,000 or shall be zero, (iii) the parties
to each such assignment shall execute and deliver to the Agent an Assignment and
Acceptance, together with a processing and recordation fee of $2,000 and (iv)
the assignee, if it shall not be a Lender, shall deliver to the Agent an
Administrative Questionnaire. Upon acceptance and recording pursuant to Section
9.04(e), from and after the effective date specified in each Assignment and
Acceptance, which effective date shall be at least five Business Days after the
execution thereof, (A) the assignee thereunder shall be a party hereto and, to
the extent of the interest assigned by such Assignment and Acceptance, have the
rights and obligations of a Lender under this Agreement and (B) the assigning
Lender thereunder shall, to the extent of the interest assigned by such
Assignment and Acceptance, be released from its obligations under this Agreement
(and, in the case of an Assignment and Acceptance covering all or the remaining
portion of an assigning Lender's rights and obligations under this Agreement,
such Lender shall cease to be a party hereto (but shall continue to be entitled
to the benefits of Sections 2.12, 2.14, 2.18 and 9.05, as well as to any Fees
accrued for its account hereunder and not yet paid)).
(c) By executing and delivering an Assignment and Acceptance, the
assigning Lender thereunder and the assignee thereunder shall be deemed to
confirm to and agree with each other and the other parties hereto as follows:
(i) such assigning Lender warrants that it is the legal and beneficial owner of
the interest being assigned thereby free and clear of any adverse claim and that
its Revolving Commitment, and the outstanding balances of its Loans, in each
case without giving effect to assignments thereof which have not become
effective, are as set forth in such Assignment and Acceptance, (ii) except as
set forth in (i) above, such assigning Lender makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement, or
the execution, legality,
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validity, enforceability, genuineness, sufficiency or value of this Agreement,
any other Loan Document or any other instrument or document furnished pursuant
hereto or the financial condition of the Borrower or any Subsidiary or the
performance or observance by the Borrower or any Subsidiary of any of its
obligations under this Agreement, any other Loan Document or any other
instrument or document furnished pursuant hereto; (iii) such assignee represents
and warrants that it is legally authorized to enter into such Assignment and
Acceptance; (iv) such assignee confirms that it has received a copy of this
Agreement, together with copies of the most recent financial statements
delivered pursuant to Section 5.04 and such other documents and information as
it has deemed appropriate to make its own credit analysis and decision to enter
into such Assignment and Acceptance; (v) such assignee will independently and
without reliance upon the Agent, such assigning Lender or any other Lender and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under this Agreement; (vi) such assignee appoints and authorizes the Agent to
take such action as agent on its behalf and to exercise such powers under this
Agreement as are delegated to the Agent by the terms hereof, together with such
powers as are reasonably incidental thereto; and (vii) such assignee agrees that
it will perform in accordance with their terms all the obligations which by the
terms of this Agreement are required to be performed by it as a Lender.
(d) The Agent shall maintain at one of its offices in The City of New
York a copy of each Assignment and Acceptance delivered to it and a register for
the recordation of the names and addresses of the Lenders, and the Revolving
Commitment of, and principal amount of the Loans owing to, each Lender pursuant
to the terms hereof from time to time (the "Register"). The entries in the
--------
Register shall be conclusive in the absence of manifest error and the Borrower,
the Agent, the Issuing Bank and the Lenders may treat each person whose name is
recorded in the Register pursuant to the terms hereof as a Lender hereunder for
all purposes of this Agreement. The Register shall be available for inspection
by the Borrower, the Issuing Bank and any Lender, at any reasonable time and
from time to time upon reasonable prior notice.
(e) Upon its receipt of a duly completed Assignment and Acceptance
executed by an assigning Lender and an assignee together with an Administrative
Questionnaire completed in respect of the assignee (unless the assignee shall
already be a Lender hereunder), the processing and recordation fee referred to
in Section 9.04(b) and, if required, the written consent of the
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Borrower, the Issuing Bank and the Agent to such assignment, the Agent shall (i)
accept such Assignment and Acceptance, (ii) record the information contained
therein in the Register and (iii) give prompt notice thereof to the Lenders and
the Issuing Bank.
(f) Each Lender may without the consent of the Borrower, the Issuing
Bank or the Agent sell participations to one or more banks or other entities in
all or a portion of its rights and obligations under this Agreement (including
all or a portion of its Revolving Commitment and the Loans owing to it);
provided, however, that (i) such Lender's obligations under this Agreement shall
- -------- -------
remain unchanged, (ii) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, (iii) the participating
banks or other entities shall be entitled to the benefit of the cost protection
provisions contained in Sections 2.12, 2.14 and 2.18 to the same extent as if
they were Lenders but not in excess of those cost protections to which the
Lender from which it purchased its participation would be entitled to under
Sections 2.12, 2.14 and 2.18 and (iv) the Borrower, the Agent, the Issuing Bank
and the other Lenders shall continue to deal solely and directly with such
Lender (and shall not be required to deal with any participating bank or other
entity, notwithstanding any other provision contained herein) in connection with
such Lender's rights and obligations under this Agreement, and such Lender shall
retain the sole right to enforce the obligations of the Borrower relating to the
Loans or L/C Disbursements and to approve any amendment, modification or waiver
of any provision of this Agreement (other than amendments, modifications or
waivers decreasing any fees payable hereunder, increasing the Revolving
Commitment of such Lender or decreasing the amount of principal of or the rate
at which interest is payable on the Loans of such Lender, extending any
scheduled principal payment date or date fixed for the payment of interest on
the Loans of such Lender or releasing (i) any party to the Guarantee Agreement
or (ii) Collateral subject to the Pledge Agreement representing all or
substantially all of such Collateral).
(g) Any Lender or participant may, in connection with any assignment
or participation or proposed assignment or participation pursuant to this
Section 9.04, disclose to the assignee
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or participant or proposed assignee or participant any information relating to
the Borrower furnished to such Lender by or on behalf of the Borrower; provided,
--------
however, that, prior to any such disclosure of information designated by the
- -------
Borrower as confidential, each such assignee or participant or proposed assignee
or participant shall execute an agreement whereby such assignee or participant
shall agree to preserve the confidentiality of such confidential information
(subject to those exceptions set forth in Section 9.16).
(h) Any Lender may at any time assign all or any portion of its
rights under this Agreement to a Federal Reserve Bank; provided, however, that
-------- -------
no such assignment shall release a Lender from any of its obligations hereunder.
SECTION 9.05. Expenses; Indemnity. (a) The Borrower agrees to pay
--------------------
all reasonable out-of-pocket expenses incurred by each of the Agent and the
Issuing Bank and its Affiliates in connection with the preparation of this Agree
ment and the other Loan Documents and the syndication of the facilities provided
for herein or in connection with any amendments, modifications or waivers of the
provisions hereof or thereof (whether or not the transactions hereby
contemplated shall be consummated) or incurred by the Agent or any Lender in
connection with the enforcement or protec tion of their rights (as such rights
may relate to the Borrower or any Subsidiary) in connection with this Agree
ment and the other Loan Documents or in connection with the Loans made or
Letters of Credit issued hereunder and under the Issuing Bank Agreements, as
applicable, including the reasonable fees and disbursements of Cravath, Swaine &
Moore, counsel for the Agent, and, in connection with any "work-out" or any
enforcement or protection of the rights of the Lenders, the Agent or the
Collateral Agent hereunder, any other counsel for the Agent and counsel for any
Lender, including the allocated costs of in-house counsel.
(b) The Borrower agrees to indemnify the Agent, each Lender, and the
Issuing Bank, and their respective directors, officers, employees, agents and
Affiliates (each such person being called an "Indemnitee") against, and to hold
each Indemnitee harmless from, any and all losses, claims, damages, liabilities
and related expenses, including reasonable counsel fees and expenses, incurred
by or asserted against any Indemnitee arising out of, in any way connected with,
or as a result of (i) the execution or delivery of this Agreement or any other
Loan Document or any agreement or instrument contemplated thereby, the perform
ance by the parties thereto of their respective obligations thereunder or the
consummation of the Transactions, the Spin-Off and the other transactions
contemplated thereby, (ii) the use of the proceeds of the Loans or issuance of
Letters of Credit, or (iii) any claim, litigation, investi gation or proceeding
relating to any of the foregoing, whether or not any Indemnitee is a party
thereto; provided, however, that such indemnity shall not, as to any
-------- -------
Indemnitee, be available to the extent that such losses, claims,
89
<PAGE>
damages, liabilities
or related expenses are determined by a court of competent jurisdiction by final
and nonappealable judgment to have resulted from the negligence or misconduct of
such Indemnitee. Promptly after receipt by an Indemnitee of notice of any
complaint or the commencement of any action or proceeding with respect to which
indemnification is being sought hereunder, such person shall notify the Borrower
of such complaint or of the commencement of such action or pro ceeding, but
failure so to notify the Borrower will relieve the Borrower from any liability
which the Borrower may have hereunder only if and to the extent that such
failure results in the forfeiture by the Borrower of substantial rights and
defenses, and shall not in any event relieve the Borrower from any other
obligation or liability that the Borrower may have to any Indemnitee otherwise
than under this Agreement. If the Borrower so elects or is requested by such
Indemnitee, the Borrower shall assume the defense of such action or proceeding,
including the employment of counsel reasonably satisfactory to the Indemnitee
and the payment of the reasonable fees and disbursements of such counsel. In
the event, however, such Indemnitee reasonably determines in its judgment that
having common counsel would present such counsel with a conflict of interest or
if the defendant in, or targets of, any such action or proceeding include both
the Indemnitee and the Borrower, and such Indemnitee reasonably concludes that
there may be legal defenses available to it or other Indemnitees that are
different from or in addition to those available to the Borrower or if the
Borrower fails to assume the defense of the action or proceeding or to employ
counsel reasonably satisfactory to such Indemnitee, in either case in a timely
manner, then the Indemnitee may employ separate counsel to represent or defend
it in any such action or proceeding and the Borrower shall pay the reasonable
fees and disbursements of such counsel. In any action or proceeding the defense
of which the Borrower assumes, the Indemnitee shall have the right to
participate in such litigation and to retain its own counsel at the Indemnitee's
own expense. The Borrower further agrees that it shall not, without the prior
written consent of the Indemnitee, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action, suit or proceeding
in respect of which indemnification may be sought hereunder (whether or not an
Indemnitee is an actual or potential party to such claim, action, suit or
proceeding) unless such settlement, compro mise or consent includes (i) an
unconditional release of each Indemnitee hereunder from all liability arising
out of such claim, action, suit or proceeding or (ii) a covenant not to sue each
Indemnitee, or another similar alternative which is consented to by each
Indemnitee party to such claim, action, suit or proceeding, which covenant not
to sue or other approved alternative has the effect of an unconditional
90
<PAGE>
release of each Indemnitee hereunder from all liabil ity arising out of such
claim, action, suit or proceeding.
(c) The provisions of this Section shall remain operative and in full
force and effect regardless of the expiration of the term of this Agreement, the
consummation of the transactions contemplated hereby, the repayment of any of
the Loans, the expiration of any Letter of Credit, the invalidity or
unenforceability of any term or provision of this Agreement or any other Loan
Document, or any investigation made by or on behalf of the Agent or any Lender
or any Issuing Bank. All amounts due under this Section shall be payable on
written demand therefor.
SECTION 9.06. Right of Setoff. If an Event of Default shall have
----------------
occurred and be continuing, each Lender is hereby authorized at any time and
from time to time, to the fullest extent permitted by law, to set off and apply
any and all deposits (general or special, time or demand, provisional or final)
at any time held and other indebted ness at any time owing by such Lender to or
for the credit or the account of the Borrower against any of and all the
obligations of the Borrower now or hereafter existing under this Agreement held
by such Lender (subject to the last sentence of this Section), irrespective of
whether or not such Lender shall have made any demand under this Agreement and
although such obligations may be unmatured. The rights of each Lender under
this Section are in addition to other rights and remedies (including other
rights of setoff) which such Lender may have. The provisions of Section 2.16
shall apply to any such setoff.
SECTION 9.07. APPLICABLE LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
---------------
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT
REFERENCE TO ITS CONFLICTS OF LAWS PRINCIPLES OR PROVISIONS. EACH LETTER OF
CREDIT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS
OR RULES DESIGNATED IN SUCH LETTER OF CREDIT, OR IF NO SUCH LAWS OR RULES ARE
DESIGNATED, THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1993
REVISION), INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500 (THE "UNIFORM
CUSTOMS") AND, AS TO MATTERS NOT GOVERNED BY THE UNIFORM CUSTOMS, THE LAWS OF
THE STATE OF NEW YORK.
SECTION 9.08. Waivers; Amendment. (a) No fail ure or delay of the
-------------------
Agent or any Lender or any Issuing Bank in exercising any power or right
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or further exercise
thereof or the
91
<PAGE>
exercise of any other right or power. The rights and remedies of the Agent, the
Issuing Bank and the Lenders hereunder and under the other Loan Documents are
cumulative and are not exclusive of any rights or remedies which they would
otherwise have. No waiver of any provision of this Agreement or any other Loan
Document or consent to any departure by the Borrower therefrom shall in any
event be effective unless the same shall be permitted by Section 9.08(b), and
then such waiver or consent shall be effective only in the specific instance and
for the purpose for which given. No notice or demand on the Borrower in any case
shall entitle the Borrower to any other or further notice or demand in similar
or other circumstances.
(b) Neither this Agreement nor any other Loan Document nor any
provision hereof or thereof may be waived, amended or modified except, in the
case of this Agreement, pursuant to an agreement or agreements in writing
entered into by the Borrower and the Required Lenders or, in the case of any
other Loan Document, pursuant to an agreement or agreements in writing entered
into by the Agent and the Loan Party or Loan Parties that are parties thereto,
in each case with the consent of the Required Lenders; provided, however, that
-------- -------
no such agreement shall (i) decrease the principal amount of, or extend the
maturity of or any scheduled principal payment date or date for the payment of
any interest on any Loan or any date for reimbursement of an L/C Disbursement,
or Fees, or waive or excuse any such payment or any part thereof, or decrease
the rate of interest on any Loan or L/C Disbursement, without the prior written
consent of each Lender affected thereby, (ii) increase the Revolving Commitment
or change the Facility Fees of any Lender without the prior written consent of
such Lender, (iii) amend or modify the provisions of Section 2.15, the
provisions of this Section, the definition of the "Required Lenders" or the
provisions of Section 9.03, without the prior written consent of each affected
Lender, (iv) amend or modify the definition of "Aggregate Value", "Borrowing
Base" or "Borrowing Base Properties" without the prior written consent of the
Supermajority Lenders, (v) release any Subsidiary Loan Party from its Guarantee
under the Guarantee Agreement (except as expressly provided in the Guarantee
Agreement), or limit its liability in respect of such Guarantee, without the
written consent of each Lender, or (vi) except in strict accordance with the
express provisions thereof, release or replace all or any substantial part of
the Collateral (as defined in the Pledge Agreement) from the Liens of the
Security Documents, without the written consent of each Lender; provided further
----------------
that no such agreement shall amend, modify or otherwise affect the rights or
duties of the Agent or any Issuing Bank hereunder without the prior written
consent of the Agent or such Issuing Bank.
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<PAGE>
(c) Notwithstanding the foregoing, any Issuing Bank Agreement may be
waived, amended or modified by the parties thereto with the written approval of
the Agent if and to the extent that such waiver, amendment or modification would
be permitted in connection with the execution and delivery of a replacement of
such agreement.
SECTION 9.09. Interest Rate Limitation. Notwith standing anything
-------------------------
herein to the contrary, if at any time the applicable interest rate on any Loan
or participation in any L/C Disbursement, together with all fees and charges
which are treated as interest or such Loan or participation in any L/C
Disbursement under applicable law (collectively the "Charges"), as provided for
herein or in any other document executed in connection herewith, or otherwise
contracted for, charged, received, taken or reserved by any Lender, shall exceed
the maximum lawful rate (the "Maximum Rate") which may be contracted for,
------------
charged, taken, received or reserved by such Lender in accordance with
applicable law, together with all Charges payable to such Lender, shall be
limited to the Maximum Rate.
SECTION 9.10. Entire Agreement. This Agreement and the other Loan
-----------------
Documents and the letter agreement referred to in Section 2.05(b) constitute the
entire con tract between the parties relative to the subject matter hereof.
Any previous agreement among the parties with respect to the subject matter
hereof is superseded by this Agreement and the other Loan Documents. Nothing in
this Agreement or in the other Loan Documents, expressed or implied, is intended
to confer upon any party other than the parties hereto and thereto any rights,
remedies, obligations or liabilities under or by reason of this Agreement or the
other Loan Documents.
SECTION 9.11. Waiver of Jury Trial; Punitive Damages. Each party
---------------------------------------
hereto hereby waives, to the fullest extent permitted by applicable law, (a) any
right it may have to a trial by jury in respect of any litigation direct ly or
indirectly arising out of, under or in connection with this Agreement or any of
the other Loan Documents and (b) any claims for punitive damages. Each party
hereto (i) certifies that no representative, agent or attorney of any other
party has represented, expressly or otherwise, that such other party would not,
in the event of litigation, seek to enforce the foregoing waiver and (ii)
acknowledges that it and the other parties hereto have been induced to enter
into this Agreement and the other Loan Documents, as applicable, by, among other
things, the mutual waivers and certifications in this Section.
93
<PAGE>
SECTION 9.12. Severability. In the event any one or more of the
-------------
provisions contained in this Agreement or in any other Loan Document should be
held invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein and therein
shall not in any way be affected or impaired thereby. The parties shall
endeavor in good-faith negotia tions to replace the invalid, illegal or
unenforceable pro visions with valid provisions the economic effect of which
comes as close as possible to that of the invalid, illegal or unenforceable
provisions.
SECTION 9.13. Counterparts. This Agreement may be executed in two or
-------------
more counterparts, each of which shall constitute an original but all of which
when taken together shall constitute but one contract, and shall become effec
tive as provided in Section 9.03.
SECTION 9.14. Headings. Article and Section headings and the Table
---------
of Contents used herein are for con venience of reference only, are not part of
this Agreement and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.
SECTION 9.15. Jurisdiction; Consent to Service of Process. (a) The
--------------------------------------------
Borrower hereby irrevocably and uncondi tionally submits, for itself and its
property, to the nonex clusive jurisdiction of any New York State court or
Federal court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or the other Loan Documents, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such New York State court or, to the
extent permitted by law, in such Federal court. Each of the parties hereto
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Nothing in this Agreement shall affect any
right that the Agent, any Issuing Bank, or any Lender may otherwise have to
bring any action or proceeding relating to this Agreement or the other Loan
Documents against the Borrower or its properties in the courts of any
jurisdiction.
(b) The Borrower hereby irrevocably and uncondi tionally waives, to
the fullest extent it may legally and effectively do so, any objection which it
may now or hereafter have to the laying of venue of any suit, action or
94
<PAGE>
proceeding arising out of or relating to this agreement or the other Loan
Documents in any New York State or Federal court. Each of the parties hereto
hereby irrevocably waives, to the fullest extent permitted by law, the defense
of an inconvenient forum to the maintenance of such action or proceeding in any
such court.
(c) The Borrower and each other party hereto consents to service of
process in the manner provided for notices in Section 9.01. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.
SECTION 9.16. Confidentiality. Unless otherwise agreed to in writing
----------------
by the Borrower, the Issuing Bank, the Agent and each Lender, each of the
Borrower, the Issuing Bank, the Agent and the Lenders hereby agrees to keep all
Proprietary Information (as defined below) confidential and not to disclose or
reveal any Proprietary Information to any person other than the Agent's or such
Lender's directors, officers, employees, Affiliates and agents and to actual or
potential assignees and participants, and then only on a confidential basis;
provided, however, that the Agent, the Issuing Bank or any Lender may disclose
- -------- -------
Proprietary Information (a) as required by law, rule, regulation or judicial
process, (b) to its attorneys and accountants, (c) as requested or required by
any state or Federal or foreign authority or examiner regulating banks or
banking or (d) subject to appropriate confidentiality protections, in any legal
proceedings between the Agent, the Issuing Bank or such Lender and the Borrower
arising out of this Agreement. For purposes of this Agreement, the term
"Proprietary Information" shall include all information about the Borrower or
- ------------------------
any of their Affiliates which has been furnished by the Borrower or any of its
Affiliates, whether furnished before or after the date hereof, and regardless of
the man ner in which it is furnished; provided, however, that Proprietary
-------- -------
Information does not include information which (x) is or becomes generally
available to the public other than as a result of a disclosure by the Agent, the
Issuing Bank or any Lender not permitted by this Agreement, (y) was obtained or
otherwise became available to the Agent, the Issuing Bank or any Lender on a
nonconfidential basis prior to its disclosure to the Agent, the Issuing Bank or
such Lender by the Borrower or any of its Affiliates or (z) becomes available to
the Agent, the Issuing Bank or any Lender on a nonconfidential basis from a
person other than the Borrower or its Affiliates who, to the best knowledge of
the Agent, the Issuing Bank or such Lender, as the case may be, is not otherwise
bound by a confidentiality agreement with the Borrower or any of its Affiliates,
or is not otherwise prohibited from transmitting the information to the Agent,
the Issuing Bank or such Lender.
95
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Agent, the Issuing Bank and the
Lenders have caused this Agreement to be duly executed by their respective
authorized officers as of the day and year first above written.
SUNBURST HOSPITALITY CORPORATION
by
/s/ Edward A. Kubis
--------------------------
Name: Edward A. Kubis
Title:Senior Vice President
THE CHASE MANHATTAN BANK, individually and as
Issuing Bank and Agent,
by
/s/ Thomas H. Kozlark
-----------------------------
Name: Thomas H. Kozlark
Title: Vice President
CRESTAR BANK,
by
/s/ Michael E. Forry
----------------------------
Name: Michael E. Forry
Title: Vice President
WESTDEUTSCHE LANDESBANK GIROZENTRALE, New York
Branch,
by
/s/ Michael F. McWalters
----------------------------
Name: Michael F. McWalters
Title: Managing Director
by
/s/ Mark H. Lanspa
---------------------
Name: Mark H. Lanspa
Title: Vice President
96
<PAGE>
BHF-BANK AKTIENGESELLSCHAFT,
by
/s/ Nicholas Nouvel
------------------------------
Name: Nicholas Nouvel
Title: Vice President
by
/s/ Dana McDougall
-----------------------------
Name: Dana McDougall
Title: Vice President
97
<PAGE>
EXHIBIT 21.01
SUBSIDIARIES
BOULEVARD MOTEL CORP.
Arlington Spirits Corp.
Bay Ridge Spirits Corp.
Biscayne Land Associates, Inc.
Biscayne Properties, Inc.
Bowling Green Inn - Brandywine, Inc.
Cardinal Beverage Corp.
Everglades Beverage Corp.
Fairways Beverage Corp.
Fairways, Inc.
First Choice Properties Corp.
First Choice Capital Corp.
QI Capital Corp.
MCH Baltimore Corp.
MCH Hot Springs Corp.
MCH Lincoln Corp.
MCH Roanoke Corp.
MCH Springfield Corp.
MCH Sturgis Corp.
MCH Wichita Corp.
MCHD Cypress Creek Corp.
MCHD Ft. Lauderdale Corp.
MCHD Hampton Corp.
Pikesville Hotel Corp.
Raleigh Hotel Holding, Inc.
West Montgomery Hotel Holdings, Inc.
MCH Shady Grove Corp.
CACTUS HOTEL CORP.
CHOICE MANAGEMENT & REALTY SERVICES, INC.
Beltway Management Company
COMFORT CALIFORNIA, INC.
GULF HOTEL CORP.
HEFRU FOOD SERVICES, INC.
QCM BEVERAGES, INC. (49%; 51% Texas resident)
QCM CORPORATION
SUNBURST HOTEL CORP.
THICKET, INC. (THE) (Non-profit; owned by members)
Subsidiaries are wholly-owned except where indicated.
<PAGE>
Exhibit 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statements File No. 333-14203, No. 333-17577 and No. 333-17575.
Arthur Andersen LLP
Washington, D.C.
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,908
<SECURITIES> 0
<RECEIVABLES> 6,877
<ALLOWANCES> 616
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 437,831
<DEPRECIATION> 66,526
<TOTAL-ASSETS> 400,983
<CURRENT-LIABILITIES> 0
<BONDS> 248,120
0
0
<COMMON> 200
<OTHER-SE> 89,107
<TOTAL-LIABILITY-AND-EQUITY> 400,983
<SALES> 0
<TOTAL-REVENUES> 114,553
<CGS> 0
<TOTAL-COSTS> 99,624
<OTHER-EXPENSES> 5,119
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,138
<INCOME-PRETAX> (328)
<INCOME-TAX> (44)
<INCOME-CONTINUING> (284)
<DISCONTINUED> 16,369
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,085
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
</TABLE>
<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Sunburst Hospitality Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Sunburst Hospitality Corporation
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
Notes:
<PAGE>
SUNBURST HOSPITALITY CORPORATION
10770 COLUMBIA PIKE
SILVER SPRING, MARYLAND 20901
----------------
NOTICE OF ANNUAL MEETING
TO BE HELD APRIL 22, 1998
----------------
To the Stockholders of
SUNBURST HOSPITALITY CORPORATION
The 1998 Annual Meeting of Stockholders (the "Annual Meeting") of Sunburst
Hospitality Corporation, a Delaware corporation ("Sunburst" or the "Company"),
will be held at the Quality Suites Shady Grove, 3 Research Court, Rockville,
Maryland at 9:00 a.m. (E.S.T.) on Wednesday, April 22, 1998 for the following
purposes:
1. To elect two Class II directors to hold office for a three year term
ending at the 2001 Annual Meeting of Stockholders and until their
successors are elected and qualified;
2. To approve an increase of 1.2 million in the number of authorized shares
under the Sunburst Hospitality Corporation 1996 Long-Term Incentive Plan;
and
3. To transact such other business as may properly come before the Annual
Meeting.
Holders of record of Sunburst common stock at the close of business on March
12, 1998 will be entitled to notice of, and to vote at, the Annual Meeting or
any adjournment(s) or postponement(s) thereof. Stockholders are reminded that
your shares of Sunburst common stock cannot be voted unless you properly
execute and return the enclosed proxy card or make other arrangements to have
your shares represented at the meeting. 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
SUNBURST HOSPITALITY CORPORATION
/s/ Pamela M. Williams
Pamela M. Williams
Assistant Secretary
March 25, 1998
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>
SUNBURST HOSPITALITY CORPORATION
10770 COLUMBIA PIKE
SILVER SPRING, MARYLAND 20901
----------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
APRIL 22, 1998
----------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Sunburst Hospitality Corporation, a
Delaware corporation ("Sunburst" or the "Company"), for use at the 1998 Annual
Meeting of Stockholders of the Company to be held at 9:00 a.m. (E.S.T.) on
April 22, 1998, 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 and proxy will
first be mailed to the Company's stockholders on or about March 25, 1998.
The Company's Annual Report on Form 10-K (including certified financial
statements) for the seven month period ended December 31, 1997 is accompanying
this Proxy Statement. The Annual Report is not part of the proxy solicitation
material.
Background of Spinoffs; Change In Fiscal Year
Prior to October 15, 1997, the Company was named Choice Hotels
International, Inc. On October 15, 1997, the Company distributed to its
stockholders its hotel franchising business and its European hotel ownership
pursuant to a pro rata distribution to its stockholders of all of the stock of
its wholly-owned subsidiary, Choice Hotels Franchising, Inc. (the "Spinoff").
At the time of the Spinoff, the Company changed its name to "Sunburst
Hospitality Corporation" and Choice Hotels Franchising, Inc. changed its name
to "Choice Hotels International, Inc." ("New Choice").
Prior to November 1996, the Company was a subsidiary of Manor Care, Inc.
("Manor Care") which, directly and through its subsidiaries, engaged in the
ownership and management of hotels currently conducted by the Company as well
as the hotel franchising business currently conducted by New Choice (together,
the "Lodging Business") and the health care business. On November 1, 1996,
Manor Care separated the Lodging Business from its health care business
through a pro rata distribution to the holders of Manor Care's common stock of
all of the stock of the Company (the "Manor Care Spinoff").
In September 1997, the Company changed its fiscal year from May 31 to
December 31.
Voting of Proxies
Your vote is important. Shares can be voted at the Annual Meeting only if
you are present in person or represented by proxy. Even if you plan to attend
the meeting, you are urged to sign, date and return the accompanying proxy
card.
When the enclosed proxy card is properly signed, dated and returned, the
stock represented by the proxy will be voted in accordance with your
directions. You can specify your voting instructions by marking the
appropriate box on the proxy card. If your proxy card is signed and returned
without specific voting instructions, your shares of Sunburst common stock
will be voted as recommended by the directors: "FOR" the election of the two
nominees for director named on the proxy card and "FOR" the amendment to the
1996 Long-Term
1
<PAGE>
Incentive Plan (the "1996 Incentive Plan"). Abstentions marked on the proxy
card have the effect of being voted "against" the directors' proposals but are
counted in the determination of a quorum.
You may revoke your proxy at any time before it is voted at the meeting 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) executing a later-dated 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., Overpeck Centre, 85 Challenger Road,
Ridgefield Park, New Jersey 07660.
Votes Required
The close of business on March 12, 1998 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 19,963,190 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. Abstentions and broker no-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. A broker "non-vote" occurs when a
nominee holding shares of Sunburst common stock for a beneficial owner does
not vote on a particular item and has not received instructions from the
beneficial owner.
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. 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 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. "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.
Certain members of the Bainum family (including various trusts, partnerships
and corporations established by members of the Bainum family) in the aggregate
have the right to vote approximately 34.59% 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.
Solicitation of Proxies
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.
Relationship With Independent Public Accountants
Since 1996, Arthur Andersen LLP has served as the Company's independent
public accounting firm. It is expected that representatives of Arthur Andersen
will be present at the annual meeting. They will be given an
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<PAGE>
opportunity to make a statement if they desire to do so, and it is expected
that they will be available to respond to appropriate questions.
Procedures for Stockholder Proposals and Nominations
Under the Company's Bylaws, nominations for director may be made only by the
Board of Directors or a committee of the board, or by a stockholder entitled
to vote who has delivered notice to the Company not less than 60, nor more
than 90, days before the first anniversary of the preceding year's annual
meeting.
The Bylaws also provide that no business may be brought before an annual
meeting except as specified in the notice of meeting (which includes
stockholder proposals that the Company is required to set forth in its proxy
statement under SEC Rule 14a-8) or as otherwise brought before the meeting by
or at the direction of the board or by a stockholder entitled to vote who has
delivered notice to the Company (containing certain information specified in
the Bylaws) within the time limits described above for a nomination for the
election of a director. These requirements are separate and apart from, and in
addition to, the SEC's requirements that a stockholder must comply with in
order to have a stockholder proposal included in the Company's proxy statement
under SEC Rule 14a-8.
Stockholder Proposals for 1999 Annual Meeting
Stockholder proposals intended to be presented at the Company's 1999 Annual
Meeting of Stockholders must be received by the Company's Corporate Secretary
no later than February 21, 1999. Such proposals must meet the requirements set
forth in the rules and regulations of the SEC in order to be eligible for
inclusion in the Company's 1999 proxy materials.
Other Matters to Come Before the Meeting
The Board of Directors does not know of any matters which will be brought
before the 1998 annual meeting other than those specifically set forth in the
notice of meeting. If any other matters are properly introduced at the meeting
for consideration, including, among other things, consideration of a motion to
adjourn the meeting to another time or place, the individuals named on the
enclose proxy card will have discretion to vote in accordance with their best
judgment.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act") requires the Company's reporting officers and directors, and
persons who own more than ten percent of the Company's common stock, to file
reports of ownership and changes in ownership on Forms 3, 4 and 5 with the
Securities and Exchange Commission (the "Commission"), the New York Stock
Exchange and the Company. Because of the failure of the Commission to correct
EDGAR filing information for the Company after the Company's timely request,
the following Form 5's were timely filed electronically but rejected from the
EDGAR system: Stewart Bainum, Stewart Bainum, Jr., Federic V. Malek, Carole Y.
Prest, James A. MacCutcheon and Antonio DiRico. The Form 5's were subsequently
refiled and accepted. A Form 5 for Paul A. Gould was filed late. None of the
transactions covered in the late filings were subject to short swing liability
under Section 16(b) of the Exchange Act. Except as previously noted and based
on a review of the copies of such reports furnished to the Company and written
representations that no other reports were required, the Company believes that
all of its reporting officers, directors and greater than ten percent
beneficial owners complied with all filing requirements applicable to them
during the fiscal year ended December 31, 1997.
ELECTION OF CLASS II DIRECTORS
The Board of Directors currently consists of three classes of directors, as
nearly equal in number as possible. Directors hold office for staggered terms
of three years (or less if they are filling a vacancy) and until their
successors are elected and qualified. One of the three classes, comprising
approximately one third of the
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directors, is elected each year to succeed the directors whose terms are
expiring. The directors in Class II will be elected at the Annual Meeting to
serve for a term expiring at the Company's Annual Meeting in the year 2001.
The directors in Classes III and I are serving terms expiring at the Company's
Annual Meeting of Stockholders in 1999 and 2000, respectively.
In connection with the Spinoff, Barbara Bainum, Robert C. Hazard, Jr.,
Gerald W. Petitt, Jerry E. Robertson and William R. Floyd resigned from the
Board of Directors on October 15, 1997, and Donald J. Landry and Carole Y.
Prest were appointed to the Board of Directors. On November 13, 1997, Keith B.
Pitts was appointed to the Board of Directors.
The Company's Board of Directors has proposed the following nominees for
election as directors at the annual meeting:
NOMINEES FOR CLASS II DIRECTORS
WITH TERMS EXPIRING AT THE ANNUAL MEETING IN THE YEAR 2001:
STEWART BAINUM, JR.
PAUL A. GOULD
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE ABOVE-
NAMED NOMINEES AS DIRECTORS FOR A TERM OF THREE YEARS. Proxies solicited by
the Board of Directors will be voted "FOR" the election of the nominees,
unless otherwise instructed on the proxy card.
Information is provided below with respect to each nominee for election and
each director continuing in office. Should one or more of these nominees
become unavailable to accept nomination or election as a director, the
individuals named as proxies on the enclosed proxy card will vote the shares
that they represent for the election of such other persons as the board may
recommend, unless the board reduces the number of directors. The Board of
Directors knows of no reason why any of the nominees will be unavailable or
unable to serve.
NOMINEES FOR ELECTION AS DIRECTORS
Class II -- Nominees for Terms Expiring in 2001
STEWART BAINUM, JR., 51, Chairman of the Board of the Company since November
1996; Chairman of the Board of New Choice since October 1997 and from March
1987 to November 1996; Chairman of the Board and Chief Executive Officer of
Manor Care and ManorCare 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 the Company
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.
PAUL A. GOULD, 53, Managing Director of Allen & Company Incorporated
(investment banking firm) for more than five years and other positions at
Allen & Company Incorporated since 1973; Director of the Company since
November 1996. Director: Tele-Communications, Inc., Tele-Communications
International, Inc. and Ascent Entertainment Group.
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<PAGE>
DIRECTORS WHOSE TERM OF OFFICE CONTINUE
Class III -- Term Expires in 1999
DONALD J. LANDRY, 49, Chief Executive Officer and Vice Chairman of the
Company since October 1997; President of New Choice from January 1995 to
October 1997; President of Manor Care Hotel Division ("MCHD") from March 1992
to November 1996; various executive positions with Richfield Hotel Management,
Inc. and its predecessors for more than 16 years, including President of MHM
Corporation.
FREDERIC V MALEK, 61, 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 of the Company since November 1996. Director: Manor Care, New
Choice, 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.
Class I -- Terms Expire 2000
STEWART BAINUM, 78, 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; Director of the Company since November 1996; Chairman
of the Board of New Choice from 1972 to March 1987 and a Director since 1963;
Chairman of the Board of Realty Investment Company, Inc. since 1965.
CAROLE Y. PREST, 46, Senior Vice President, Strategy and Marketing of Manor
Care since September 1997; Vice President, Corporate Strategic Planning of
Manor Care from September 1995 to September 1997; Vice President and General
Manager and various other positions at Gen Rad, Inc. from May 1985 to 1994.
Director of the Company since October 1997.
KEITH B. PITTS, 40, Chairman, President and Chief Executive Officer of
Paragon Health Network, Inc. since November, 1997; Consultant to Apollo from
August 1997 to November 1997; Consultant to Tenet Healthcare Corp. ("Tenet")
from February 1997 to August 1997; Executive Vice President and Chief
Financial Officer of orNda HealthCorp from August 1992 until its merger with
Tenet in January, 1997. Director of the Company since November 1997.
THE BOARD OF DIRECTORS
The Board of Directors is responsible for overseeing the overall performance
of the Company. Members of the board are kept informed of the Company's
business through discussions with the Chairman, the Chief Executive Officer
and other members of the Company's management, by reviewing materials provided
to them and by participating in board and committee meetings. Prior to October
15, 1997, the Board of Directors consisted of nine member, five of whom
resigned upon the Spinoff. Donald J. Landry and Carole Y. Prest were appointed
to the Board of Directors upon the Spinoff and Keith B. Pitts was appointed on
November 13, 1997. Since November 13, 1997, the Board of Directors has
consisted of seven directors, four of who were not present or past officers of
the Company.
For the twelve months ended December 31, 1997, the Board of Directors held
five meetings. Each director attended all of the meetings of the Board of
Directors and of the committees of the Board of Directors on which such
director served since the time that such director joined the Board of
Directors.
COMMITTEES OF THE BOARD
The standing committees of the Board of Directors include the Audit, Ethics
and Compliance Committee, the Compensation/Key Executive Stock Option Plan
Committee and the Compensation/Key Executive Stock
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<PAGE>
Option Plan Committee No. 2. At the November 13, 1997 Board Meeting, the
Nominating Committee was abolished and the Nominating and Corporate Governance
Committee was established. The current members of the standing committees are
as follows:
COMPENSATION/KEY EXECUTIVE STOCK OPTION NOMINATING & CORPORATE
PLAN COMMITTEE GOVERNANCE COMMITTEE
Frederic V. Malek, Chair Carole Y. Prest, Chair
Stewart Bainum Paul A. Gould
Stewart Bainum, Jr. Frederic V. Malek
Keith B. Pitts
COMPENSATION/KEY EXECUTIVE STOCK OPTION AUDIT, ETHICS AND
PLAN COMMITTEE NO. 2 COMPLIANCE
Frederic V. Malek, Chair COMMITTEE
Keith B. Pitts Paul A. Gould, Chair
Keith B. Pitts
The Compensation/Key Executive Stock Option Plan Committees administer the
Company's stock option plans and grant stock options thereunder, review
compensation of officers and key management employees, recommend development
programs for employees such as training, bonus and incentive plans, pensions
and retirement, and review other employee fringe benefit programs. The
Compensation/Key Executive Stock Option Plan Committees each met twice during
the twelve months ended December 31, 1997.
The Nominating and Corporate Governance Committee is responsible for
administering the Sunburst Corporate Governance Guidelines, assessing the
functioning of the Board, determining size and composition of the Board,
recommending candidates to fill vacancies on the Board, determining actions to
be taken with respect to directors who are unable to perform their duties,
setting the company's policies regarding the conduct of business between the
company and any other entity affiliated with a director and determining the
compensation of non-employee directors. The Nominating and Corporate
Governance Committee was established in November, 1997 and held no meetings
during the twelve month period ended December 31, 1997.
The Audit, Ethics and Compliance 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 Audit Committee met three times during the twelve month
period ended December 31, 1997.
COMPENSATION OF DIRECTORS
The Company has adopted the Sunburst Hospitality Corporation Non-Employee
Director Stock Option and Deferred Compensation Stock Purchase Plan. Part A of
the Plan provides that eligible non-employee directors are granted options to
purchase 5,000 shares of the Company's common stock on their first date of
election and are granted options to purchase 1,000 shares on their date of
election in subsequent calendar years. Part B of the Plan provides that
eligible non-employee directors may elect, prior to May 31 of each year, to
defer a minimum of 25% of committee fees earned during the ensuing fiscal
year. The fees which are so deferred will be used to purchase the Company's
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.
Pursuant to the Non-Employee Director Stock Compensation Plan adopted by the
Company, eligible non-employee directors will receive annually, in lieu of
cash, restricted shares of the Company's common stock, the fair market value
of which at the time of grant will be equal to $30,000, which will represent
the Board of
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Directors retainer and meeting fees. In addition, all non-employee directors
receive $1,610 per diem for Committee meetings attended and are reimbursed for
travel expenses and other out-of-pocket expenses.
Directors who are employees of the Company receive no separate remuneration
for their services as directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the amount of the Company's common stock
beneficially owned by (i) each director of the Company, (ii) the Company's
chief executive officer and the other four most highly compensated executive
officers (the "Named Officers"), (iii) all officers and directors of the
Company as a group and (iv) all persons who are expected to own beneficially
more than 5% of the Company's common stock, as of March 12, 1998, the Record
Date. Unless otherwise specified, the address for each of them is 10770
Columbia Pike, Silver Spring, Maryland, 20901.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK PERCENT OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING(1)
------------------------ ------------------ -----------------
<S> <C> <C>
Stewart Bainum, Jr.......................................... 5,333,203(2) 26.72%
Stewart Bainum.............................................. 3,397,955(3) 17.02%
Antonio DiRico.............................................. 16,059(4) *
William R. Floyd............................................ 37,707(6) *
Paul A. Gould............................................... 980(7) *
Kevin P. Hanley............................................. 822(8) *
Edward A. Kubis(9).......................................... 7,973(10) *
Donald J. Landry............................................ 112,205(11) *
James A. MacCutcheon........................................ 73,998(12) *
Frederic V. Malek........................................... 2,464(13) *
Keith B. Pitts.............................................. 1,611(14) *
Carole Y. Prest............................................. 4,778(15) *
All Directors and Officers as a Group (12 persons).......... 7,126,943(16) 35.70%
Barbara Bainum.............................................. 1,840,585(17) 9.22%
Bruce Bainum................................................ 1,837,434(18) 9.20%
Ronald Baron................................................ 5,870,140(19) 29.40%
</TABLE>
- --------
* Less than 1% of class.
(1) Percentages are based on 19,963,190 shares outstanding on March 12, 1998
(the "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 183,051 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 1,805,920
shares owned by Bainum Associates Limited Partnership ("Bainum
Associates") and 1,471,750 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;
1,189,290 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; 593,209 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 3,533 shares
owned by the Foundation for Maryland's Future, in which Mr. Bainum, Jr. is
the sole director. Also includes 86,401 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 Record
Date, and 49 shares which Mr. Bainum, Jr. has the right to receive upon
termination of his employment with Sunburst pursuant to the terms of the
Non-Qualified Retirement Savings and Investment Plan ("Non- Qualified
Savings Plan").
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<PAGE>
(3) Includes 1,302,595 shares held directly by the Stewart Bainum Declaration
of Trust, of which Mr. Bainum is the sole trustee and beneficiary, his
joint interest in 259,848 shares owned by Bainum Associates and 345,284
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; 1,189,290 shares held directly by Realty, in which Mr. Bainum
and his wife have shared voting authority; and 23,435 shares held by the
Commonweal Foundation of which Mr. Bainum is Chairman of the Board of
Directors and has shared voting authority. Also includes 266,237 shares
held by the Jane L. Bainum Declaration of Trust, the sole trustee and
beneficiary of which is Mr. Bainum's wife, and 1,221 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
Record Date. Also includes 829 shares of restricted stock granted under
the Company's Non-Employee Director Stock Compensation Plan ("Non-Employee
Director Stock Compensation Plan") to Mr. Bainum which are not vested but
which Mr. Bainum has the right to vote.
(4) Includes 214 shares held directly by Mr. DiRico and 421 shares and 937
shares, respectively, which Mr. DiRico has the right to receive upon
termination of his employment pursuant to the terms of the Retirement
Savings and Investment Plan ("401(k) Plan") and Non-Qualified Savings and
Investment Plan ("Non-Qualified Plan"). Also includes 14,487 share which
Mr. DiRico has the right to acquire pursuant to stock options which are
currently exercisable or become exercisable upon 60 days of the Record
Date.
(5) In connection with the Spinoff, Mr. Floyd resigned from the Company on
October 15, 1997.
(6) Includes 9,597 shares held directly by Mr. Floyd and 18,993 shares of
restricted stock granted pursuant to Mr. Floyd's employment agreement
which are not yet vested, but which Mr. Floyd has the right to vote. Also
includes 9,117 shares Mr. Floyd has the right to acquire pursuant to stock
options which are presently exercisable or become exercisable within 60
days after the Record Date.
(7) Includes 228 shares held directly by Mr. Gould and 752 shares of
restricted stock granted under the Non-Employee Director Stock
Compensation Plan to Mr. Gould which are not vested but which Mr. Gould
has the right to vote.
(8) Includes 66 shares held directly by Mr. Hanley and 756 shares Mr. Hanley
has the right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after the Record
Date.
(9) Mr. Kubis resigned from the Company on December 31, 1997.
(10) Consists of 7,973 shares Mr. Kubis has the right to acquire pursuant to
stock options which are presently exercisable or which become exercisable
within 60 days after the Record Date.
(11) Includes 2,000 shares owned directly by Mr. Landry; and 88 shares and 336
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 Non-Qualified Savings Plan. Also includes 109,781 shares Mr. Landry
has the right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after the Record
Date.
(12) Includes 1,000 shares owned directly by Mr. MacCutcheon. Also includes 75
shares held by minor children. Beneficial ownership of such shares is
disclaimed. Also includes 72,923 shares Mr. MacCutcheon has the right to
acquire pursuant to stock options which are presently exercisable or
which become exercisable within 60 days after the Record Date.
(13) Includes 747 shares held directly by Mr. Malek; 1,221 shares which Mr.
Malek has the right to acquire pursuant to stock options which are
presently exercisable or become exercisable within 60 days of the Record
Date and 829 restricted shares granted under the Non-Employer Director
Stock Compensation Plan which are not vested, but which Mr. Malek has the
right to vote.
(14) Consists of 1,611 restricted shares granted under the Non-Employer
Director Stock Compensation Plan which are not vested, but which Mr.
Pitts has the right to vote.
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<PAGE>
(15) Includes 1,750 restricted shares granted under the Non-Employer Director
Stock Compensation Plan which are not vested, but which Ms. Prest has the
right to vote. Also includes 3,028 shares Ms. Prest has the right to
acquire pursuant to stock options which are presently exercisable or
which become exercisable within 60 days after the Record Date.
(16) Includes a total of 296,185 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
Record Date, and a total of 509 shares and 1,322 shares, respectively,
which such directors and officers have the right to receive upon
termination of their employment with Sunburst pursuant to the terms of
the 401(k) Plan and the Non-Qualified Savings Plan.
(17) Includes 33,899 shares held directly by Ms. Bainum and 752 restricted
shares granted under the Non-Employer Director Stock Compensation Plan
which are not vested, but which Ms. Bainum has the right to vote. Also
includes 593,209 shares owned by Mid Pines, in which Ms. Bainum is a
general partner and has shared voting authority, 1,189,290 shares owned
by Realty in which Ms. Bainum's trust has voting stock and shared voting
authority and 23,435 shares owned by Commonweal Foundation, in which Ms.
Bainum is a Director and has shared voting authority. Ms. Bainum's
address is 8738 Colesville Road, Suite 800, Silver Spring, Maryland,
20910.
(18) Includes 31,500 shares held directly by Mr. Bainum. Also includes 593,209
shares owned by Mid Pines, in which Ms. Bainum is a general partner and
has shared voting authority, 1,189,290 shares owned by Realty in which
Ms. Bainum's trust has voting stock and shared voting authority and
23,435 shares owned by Commonweal Foundation, in which Ms. Bainum is a
Director and has shared voting authority. Mr. Bainum's address is 8738
Colesville Road, Suite 800, Silver Spring, Maryland, 20910.
(19) As of October 16, 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.
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 Long-Term Incentive Plan to the Chief
Executive Officer and the executive officers, including the Named Officers
defined below. Of the current members of the Committee, Messrs. Malek
(Chairman) and Bainum (not a member of Committee No. 2), were appointed on
November 4, 1996. Mr. Bainum, Jr. (not a member of Committee No. 2) was
appointed upon the Spinoff and Mr. Pitts was appointed on November 13, 1997.
Prior to the Spinoff, the committees were comprised of Messrs. Malek and
Bainum (not a member of Committee No. 2) and Barbara Bainum and Jerry E.
Robertson. In connection with the Spinoff, Ms. Bainum and Mr. Robertson
resigned from the Board of Directors.
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;
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<PAGE>
. 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 operating cash flow and 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. Compensation for the
executive officers was set in June 1997, prior to the Spinoff, and from
January 1, 1997 until the Spinoff, the current Vice Chairman and Chief
Executive Officer ("CEO") was serving and President and Chief Operating
Officer. Because of this, one set of secondary comparison companies was used
for the executive officers as a group and a second set was used for
compensation to be paid to the Vice Chairman and CEO upon the Spinoff.
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 the twelves months ended December 31, 1997, compensation for
the Vice Chairman and CEO and for the Executive Vice President and Chief
Financial Officer was slightly above the primary survey data but was
consistent with the secondary comparison companies. The compensation for all
of the other executive officers, as a group, was approximately at the median.
One of the companies in the general secondary comparison, Marriott
International, Inc., and one of the companies in the CEO specific secondary
comparison, Starwood Hotels and Resorts Worldwide, Inc. were not included in
as part of the Peer Group Index (defined below) for the performance graph.
Marriott was included in the comparison because it is located in the
Washington, D.C. metropolitan area and, at the time, the Company was also
engaged in the franchising business. However, since the Spinoff, the Company
is no longer engaged in the franchising business. The Starwood comparison
compensation information was from 1996 and at that time, Starwood had a
profile similar to the expected profile of the Company after the Spinoff.
However, Starwood's growth in hotel portfolio and market capitalization since
that time no longer make it an appropriate comparison for performance
purposes.
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. The Committee intends to monitor the Company's
compensation programs with respect to such laws.
10
<PAGE>
Annual Compensation
The base salary pay practice is to target at the 55th percentile of the
market range among the comparison groups for a particular position and to
adjust as appropriate for experience and performance.
Awards under the annual cash bonus program for the twelve months ended
December 31, 1997 were based on certain performance measurements, which were
based 60% on achieving targeted gross operating profits, 20% on customer
satisfaction goals and 20% on RevPAR. For the twelve months ended December 31,
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
increased operating cash flow and 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
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
June 1997, the Compensation Committee approved a Stock Option Guide Chart for
the Company's executives. The Stock Option Guide Chart was reviewed and
revised in February 1998. It utilizes a market based salary multiple to
establish a competitive range of stock options from which executive awards can
be determined.
In accordance with common competitive practice, some of the stock option
grants to Company executive officers in the twelve months ended December 31,
1997 by the Compensation Committee prior to the Spinoff were larger than
competitive annual grants in contemplation of the Spinoff.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Donald J. Landry was appointed CEO upon consummation of the Spinoff on
October 15, 1997. Prior to that time, William R. Floyd was the Chief Executive
Officer of the Company and Mr. Landry served as the President and Chief
Operating Officer. The Compensation Committee approved an employment agreement
with Mr. Landry which became effective upon the Spinoff. The terms of the
agreement are described below under "Executive Compensation--Employment
Agreements." In setting the base compensation for Mr. Landry under the
Employment Agreement, the Board of Directors deliberations included
consideration of Mr. Floyd's base compensation as well as Mr. Landry's
compensation in his prior role of President and Chief Operating Officer.
THE COMPENSATION COMMITTEE
Frederic V. Malek, Chairman
Stewart Bainum
(not a member of Committee No. 2)
Stewart Bainum, Jr.
(not a member of Committee No. 2)
Keith B. Pitts
11
<PAGE>
PERFORMANCE GRAPH
The following graph compares the performance of Sunburst 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, (the first day of
regular way trading) plus assumed reinvested dividends. The Commission's rules
require that the Company 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, the Company 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 are in the hospitality
industry. The common stock of the following companies have been included in
the Peer Group Index: Bristol Hotel Company, LaQuinta Hotel Corporation, Prime
Hospitality Corp., Red Roof Inns, Inc., CapStar Hotel Company and Servico Inc.
The graph assumes that $100 was invested on November 4, 1996, in each of
Sunburst common stock, the NYSE Composite Index and the Peer Group Index, and
that all dividends were reinvested. In addition, the graph weighs the
constituent companies on the basis of their respective capitalization,
measured at the beginning of each relevant time period.
Comparison of Cumulative Return
Among Sunburst, NYSE Composite Index and Peer Group
[LINE GRAPH APPEARS HERE]
November 4, December 31, June 30, December 31,
1996 1996 1997 1997
----------- ------------ -------- ------------
Sunburst 100 108.5 104.2 122.6
NYSE Composite Index 100 105.3 124.9 139.9
Peer Group 100 100.0 121.2 119.4
12
<PAGE>
EXECUTIVE COMPENSATION
Compensation received by the Named Officers prior to consummation of the
Manor Care Spinoff was paid by Manor Care. Compensation received by the Named
Officers after the Manor Care Spinoff was paid by the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION
---------------------------------- --------------------------
RESTRICTED
FISCAL STOCK STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS OTHER AWARDS($) SHARES(#)(2) COMPENSATION(3)
- --------------------------- ------- -------- -------- -------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.
(4).................... 1997A $148,310 $ 47,683 (5) -- -- --
Chairman 1997B 656,357 388,520 (5) -- 60,000(6) --
1996 625,102 337,555 (5) -- 60,000(7) $ 33,543
Donald J. Landry (8).... 1997A 421,975 200,508 106,000(9) 6,035
Vice Chairman and 1997B 404,250 200,508 (5) -- 100,000(10) 6,035
Chief Executive Officer 1996 366,702 201,686 (5) -- -- 5,000
James A. MacCutcheon
(11)................... 1997A 312,900 52,263 46,500(12) 18,682
Executive Vice
President, 1997B 313,578 158,953 (5) -- 67,500(13) 18,682
Chief Financial Officer 1996 301,517 135,682 (5) -- 25,000(14) 13,176
& Treasurer
Antonio DiRico.......... 1997A 259,499 86,524 80,600(15) 3,043
President 1997B 196,200 86,584 (5) -- 25,000(16) 3,043
1996 179,904 71,961 (5) -- 80,000(17) 2,225
Kevin P. Hanley......... 1997A 174,999 84,452 (5) -- 51,200(18) --
1997B 144,890 51,776 (5) -- 2,727(19) --
1996 130,208 1,500 (5) -- -- --
William R. Floyd (20)... 1997A 371,875 267,233 $139,403(21) -- 65,000(22) --
1997 B 270,373 146,001 107,833(23) $250,000(24) 307,693(25) --
1996 -- -- -- -- -- --
Edward A. Kubis (26).... 1997A 139,539 55,890 (5) -- 18,000(27) 6,300
1997B 138,000 24,830 (5) -- 15,000(28) 6,300
1996 110,584 -- (5) -- 5,000(29) --
</TABLE>
(1) On September 16, 1997, the Company changed its fiscal year end from May
31 to December 31. Accordingly, the summary compensation information
presented is for the twelve months ended December 31, 1997 ("1997A"), the
fiscal year ended May 31, 1997 ("1997B") and the fiscal year ended May
31, 1996 ("1996"). Summary compensation data paid to the Named Officers
during the period between January 1, 1997 and May 31, 1997 are reflected
in each of the 1997A and 1997B periods.
(2) For all of the Named Officers, except for Messrs. MacCutcheon and Floyd,
the grants in 1997B and 1996 represent options to purchase shares of
Manor Care common stock. In connection with the Manor Care Spinoff, the
options to purchase Manor Care common stock were converted, in some cases
100%, to options to purchase Company common stock. For Messrs.
MacCutcheon and Floyd with respect to grants in 1997B and or all of the
Named Officers with respect to grants in 1997A, represents options to
acquire shares of Company common stock. In connection with the Spinoff,
the options to purchase Company common stock were converted to successor
options to purchase Company common stock and New Choice 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
Spinoff and the Spinoff.
(3) Represents amounts contributed by Manor Care for 1996 and the Company
1997A and 1997B under their respective 401(k) Plan and 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 for 1997A and 1997B under the 401(k)
Plan and Non-qualified Savings Plan, respectively, for
13
<PAGE>
the Named Offices were as follows: Mr. Landry, $2,375 and $3,660; Mr.
MacCutcheon, $6,240 and $12,443; Mr. DiRico, $966 and $2,077; and Mr.
Kubis, $2,520 and $3,780.
(4) For part of 1997B and all of 1996, 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 for 1997B and 1996 is the total compensation received for
services rendered to both Manor Care and Company. For 1997A, represents
the amount of compensation paid solely by the Company.
(5) The value of perquisites and other compensation does not exceed the
lesser of $50,000 or 10% of the amount of annual salary and bonus paid as
to any of the Named Officers.
(6) In connection with the Spinoff, these options were converted on a pro
rata basis into options to acquire 20,000 shares of Company common stock
at an exercise price of $7.1894 and 60,000 shares of New Choice at an
exercise price of $12.1130.
(7) In connection with the Spinoff, these options were converted on a pro
rata basis into options to acquire 20,000 shares of Company common stock
at an exercise price of $5.5083 and 60,000 shares of New Choice at an
exercise price of $9.2807.
(8) Mr. Landry was appointed Vice Chairman and Chief Executive Officer upon
the Spinoff. Prior to the Spinoff, he was President of the Company.
(9) In connection with the Spinoff, these options were converted into options
to purchase 124,631 shares of Company common stock at an exercise price
of $7.8815 and 53,000 shares of New Choice common stock at an exercise
price of $13.2791.
(10) In connection with the Spinoff, these options were converted into options
to purchase 291,795 shares of Company common stock at an exercise price
of $7.1894 and 153,497 shares of New Choice common stock at an exercise
price of $12.113.
(11) For 1996 and part of 1997B, 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 Manor Care and assumed
the position of Executive Vice President, Chief Financial Officer and
Treasurer of the Company. The compensation reflected for 1996 and 1997B
is total compensation received for services rendered to both Manor Care
and the Company. For the period of 1997B after the Manor Care Spinoff,
the amount of compensation paid solely by the Company was $209,052 for
salary and $103,690 for bonus. In connection with the Spinoff, the
Company and New Choice entered into a Consulting Agreement whereby New
Choice would reimburse the Company for 30% of Mr. MacCutcheon's base
salary and bonus from October 15, 1997 through November 1, 2001. See
"Certain Relationships and Related Transactions."
(12) In connection with the Spinoff, these options were converted into options
to purchase 54,673 shares of Company common stock at an exercise price of
$7.835 and 23,250 shares of New Choice common stock at an exercise price
of $13.2008.
(13) In connection with the Spinoff, these options were converted into options
to purchase 138,806 shares of Company common stock at an exercise price
of $6.884, 47,082 shares of Company common stock at an exercise price of
$7.1894, 30,308 shares of New Choice at an exercise price of $11.5986 and
15,642 shares of New Choice common stock at an exercise price of $12.113.
(14) In connection with the Spinoff, these options were converted into options
to purchase 59,035 shares of Company common stock at an exercise price of
$5.083 and 24,976 shares of New Choice common stock at an exercise price
of $9.2807.
(15) In connection with the Spinoff, these options were converted into options
to purchase 111,739 shares of Company common stock at an exercise price
of $7.835 and 30,225 shares of New Choice common stock at an exercise
price of $13.2008.
(16) In connection with the Spinoff, these options were converted into options
to purchase 82,498 shares of Company common stock at an exercise price of
$7.1894 and 32,706 shares of New Choice common stock at an exercise price
of $12.113.
(17) In connection with the Spinoff, these options were converted into options
to purchase 22,543 shares of Company common stock at an exercise price of
$5.5083 and 12,747 shares of New Choice common stock at an exercise price
of $9.2807.
14
<PAGE>
(18) In connection with the Spinoff, these options were converted into options
to purchase 70,981 shares of Company common stock at an exercise price of
$7.835 and 19,200 shares of New Choice common stock at an exercise price
of $13.2008.
(19) In connection with the Spinoff, these options were converted into options
to purchase 3,779 shares of Company common stock at an exercise price of
$7.1894 and 1,024 shares of New Choice common stock at an exercise price
of $12.113.
(20) Mr. Floyd was employed as Vice Chairman and Chief Executive Officer of
the Company from October 16, 1996 until the Spinoff. In connection with
the Spinoff, Mr. Floyd resigned from the Company and was appointed Chief
Executive Officer of New Choice.
(21) Consists of relocation expenses and $11,700 in automobile allowance.
Includes $107,831 in relocation expenses reported for 1997B.
(22) In connection with the Spinoff, these options were converted into options
to purchase 10,883 shares of Company common stock at an exercise price of
$9.786 and 71,631 shares of New Choice common stock at an exercise price
of $16.488.
(23) Consists of relocation expenses.
(24) Represents a grant of 85,470 shares of restricted shares of the Company
granted on November 4, 1996. The shares vest in three equal annual
installments beginning on November 4, 1997. The restricted shares are
entitled to dividends and in connection with the Spinoff, Mr. Floyd
received 85,470 shares of New Choice common stock as a dividend on such
shares of Company common stock, of which 56,980 shares remain unvested.
In connection with the one-for-three reverse stock split, the Company
shares were converted into 28,490 shares of Company common stock.
(25) In connection with the Spinoff, these options were converted into options
to purchase 45,584 shares of Company common stock at an exercise price of
$7.2466 and 341,515 shares of New Choice common stock at an exercise
price of $12.2095.
(26) Mr. Kubis resigned from the Company on December 31, 1997.
(27) In connection with the Spinoff, these options were converted into options
to purchase 24,954 shares of Company common stock at an exercise price of
$7.835 and 6,750 shares of New Choice common stock at an exercise price
of $13.2008.
(28) In connection with the Spinoff, these options were converted into options
to purchase 40,356 shares of Company common stock at an exercise price of
$7.1894 and 13,407 shares of New Choice common stock at an exercise price
of $12.113.
(29) In connection with the Spinoff, these options were converted into options
to purchase 11,806 shares of Company common stock at an exercise price of
$5.5083 and 4,669 shares of New Choice common stock at an exercise price
of $9.2887.
Stock Options. The following tables set forth certain information at
December 31, 1997 and for the twelve months then ended concerning options to
purchase Company common stock granted to Named Officers. All common stock
figures and exercise prices have been adjusted to reflect stock dividends and
stock splits effective in prior fiscal years. With the Spinoff, existing
Company stock options were subject to certain adjustments or conversions into
options to purchase shares of Company common stock and New Choice common
stock. The table below represents the options grants on a post-conversion
basis.
15
<PAGE>
STOCK OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE OF ASSUMED
RATE OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(2)
------------------------------------------------ ---------------------
PERCENTAGE OF
TOTAL OPTIONS
NUMBER OF GRANTED TO ALL EXERCISE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME COMPANY* GRANTED 1997 PER SHARE DATE 5%(3) 10%(4)
---- -------- --------- -------------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr...... SNB 0 -- -- -- -- --
CHH 0 -- -- -- -- --
-------
Total 0
Donald J. Landry(5)..... SNB 124,631 21.92%(6) $ 7.8815 6/25/07 $ 617,746 $ 1,565,502
CHH 53,000 (7) $13.2791 6/25/07 442,613 1,121,665
-------
Total 177,631
James A.
MacCutcheon(5)......... SNB 54,673 9.62%(6) $ 7.8350 6/24/07 269,395 682,701
CHH 23,250 (7) $13.2008 6/24/07 193,019 489,149
-------
Total 77,923
Antonio DiRico(5)....... SNB 111,739 19.65%(6) $ 7.835 6/24/07 551,253 1,395,284
CHH 30,225 (7) $13.2008 6/24/07 250,924 635,894
-------
Total 141,964
Kevin P. Hanley......... SNB 70,981 12.49%(6) $ 7.835 6/24/07 349,751 886,339
CHH 19,200 (7) $13.2008 6/24/07 159,396 403,943
-------
Total 90,181
William R. Floyd(5)..... SNB 10,833 1.91%(6) $ 9.786 9/16/07 168,955 66,670
CHH 71,431 (7) $ 16.488 9/16/07 740,682 1,114,066
-------
Total 82,264
Edward A. Kubis(5)...... SNB 24,954(8) 4.39%(6) $ 7.835 6/24/07 123,108 311,600
CHH 6,750(8) (7) $13.2008 6/24/07 56,037 142,011
-------
Total 31,704
</TABLE>
- --------
* References to SNB are to the Company and CHH are to New Choice.
(1) Options granted to the named officers were granted prior to the Spinoff.
In connection with the Spinoff, these options were converted to successor
options to purchase Company common stock and New Choice common stock. In
all cases, however, the number of options and the exercise prices were
adjusted to maintain the same financial value to the option holder before
and after the Spinoff. The number of options set forth in the table
represent the number Company and New Choice 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 $9.786 per share yields
$15.9404, from $16.488 per share yields $26.8572, from $7.8815 per share
yields $12.8381, from $13.2791 per share yields $21.6303, from $7.835 per
share yields $12.7684, and from $13.2008 per share yields $21.5027.
(4) A 10% per year appreciation in stock price from $9.786 per share yields
$25.3824, from $16.488 per share yields $42,7656, from $7.8815 per share
yields $20.4426, from $13.2791 per share yields $34.4426, from $7.835 per
share yields $20.322, and from $13.2008 per share yields $34.2395.
(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) The options presented in this table are presented post-Spinoff and,
therefore, the percentages relate to the total number of Company options
granted in 1997 on a post-Spinoff conversion basis. Since the actual
16
<PAGE>
option grants occurred prior to the Spinoff and related conversion, the
percentage presented is not equivalent to the percentage if calculated on a
pre-Spinoff basis.
(7) In the twelve months ended December 31, 1997, New Choice only granted
options to two individuals for a total of 120,000 options granted. All
other outstanding New Choice options (including those listed in this
table) were issued in connection with the conversion of Company options in
the Spinoff.
(8) These grants lapsed upon Mr. Kubis' resignation from the Company.
AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
OPTIONS AT
SHARES DECEMBER 31, 1997 VALUE OF UNEXERCISED
ACQUIRED VALUE ------------------------- IN-THE-MONEY OPTIONS
NAME COMPANY* ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE AT DECEMBER 31, 1997(1)
- ---- -------- ----------- ---------- ----------- ------------- -------------------------
# $ # # EXERCISABLE UNEXERCISABLE
----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. .... SNB 46,500(3) $3,705,452 101,000 52,334 $ 750,906 $ 254,990
CHH -- -- 303,000 157,000 3,602,207 1,188,693
Donald J. Landry........ SNB -- -- 42,462 789,105 192,559 3,348,905
CHH -- -- 251,197 313,105 2,221,843 2,098,091
James A. MacCutcheon.... SNB -- -- 72,923 369,076 470,259 1,445,011
CHH -- -- 256,699 133,252 2,861,047 814,798
Antonio DiRico.......... SNB -- -- 14,487 226,338 246,129 912,798
CHH -- -- 29,617 64,454 189,482 279,579
Kevin P. Hanley......... SNB -- -- 756 74,004 2,030 152,920
CHH -- -- 205 20,019 797 56,929
William R. Floyd........ SNB -- -- 9,117 47,300 23,963 96,815
CHH -- -- 68,303 334,643 258,902 1,000,752
Edward A. Kubis......... SNB -- -- 7,973 52,952 29,418 181,122
CHH -- -- 9,775 13,744 56,633 76,341
</TABLE>
- --------
* References to "SNB" are to the Company and "CHH" are to New Choice.
(1) Options granted to the named employees were granted prior to the Spinoff.
In connection with the Spinoff, these options were converted to options to
purchase Company common stock and New Choice 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 Spinoff. The number of
options set forth in the table represent the number Company and New Choice
options and the adjusted exercise prices after the conversion.
(2) The closing prices of Company common stock and New Choice's common stock
as reported by the New York Stock Exchange on December 31, 1997 were
$9.875 and $16.00, 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 New Choice's
common stock underlying the option.
(3) These exercises occurred prior to the Spinoff and therefore involved the
exercise of Company common stock before the distribution and the one-for-
three reverse stock split.
17
<PAGE>
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
On October 15, 1997, the Company amended and restated an employment
agreement with Stewart Bainum, Jr., providing for Mr. Bainum, Jr.'s employment
as Chairman of the Company's Board of Directors. The agreement has a term of
three years. Either the Company 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 provides that Mr. Bainum, Jr. devote 12.5% of his
professional time to the Company's affairs, 12.5% of his professional time to
the affairs of the Company, 12.5% to New Choice 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 the Company and a maximum
bonus of 60% of Mr. Bainum, Jr.'s base compensation based upon the performance
of the Company.
The Company entered into an Employment Agreement with Donald J. Landry on
June 25, 1997, effective upon the Spinoff on October 15, 1997. The agreement
has a term of three years from October 15, 1997 and provides for a base salary
of $424,462 per annum, subject to annual adjustments, and an annual bonus of
up to 60% of his base compensation, based upon the Company's performance. The
agreement also provides for an award of options to acquire 106,000 shares of
the Company's common stock, granted on June 25, 1997. The stock options vest
in five equal annual installments beginning on June 25, 1998. In connection
with the Spinoff, these options were converted into 124,631 options to acquire
Sunburst common stock and 53,000 options to acquire New Choice common stock.
The Company entered into an Employment Agreement with James A. MacCutcheon
on October 31, 1996, effective November 1, 1996. The agreement has a term of
five years and provides for a base salary of $313,578 per annum, subject to
annual adjustments, and an annual bonus of up to 55% of his base compensation,
based upon the Company's performance.
In February 1998, the Board of Directors approved an amendment to the 1996
Incentive Plan which provides for accelerated vesting of all outstanding
options and restricted stock grants if a participant is terminated as a result
of involuntary termination other than for Cause, or voluntary termination for
Good Reason (as such terms are defined in the 1996 Incentive Plan) within
twelve months of certain events defined in the 1996 Incentive Plan as a Change
in Control of the Company.
RETIREMENT PLANS
The Company has adopted the Sunburst Hospitality Corporation Supplemental
Executive Retirement Plan (the "SERP"). Participants are Senior Vice
Presidents and other officers who selected by the Board of Directors to
participate.
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 nominal 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 are participants are age 55
or younger, so that none of their compensation reported above would be
included in the final average salary calculation.
Assuming that the following officers continue to be employed by the Company
until they reach age 65, their credited years of service are as follows:
<TABLE>
<CAPTION>
CURRENT YEARS YEARS OF SERVICE AT
NAME OF INDIVIDUAL OF SERVICE AGE 65
------------------ ------------- -------------------
<S> <C> <C>
Donald J. Landry........................... 6 22
James A. MacCutcheon....................... 10 30
</TABLE>
18
<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>
REMUNERATION 25 OR
MORE/30% 15/15% 20/22.5%
- ------------ -------- --------
<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>
In November 1996, the Company established the Sunburst Hospitality
Corporation Retirement Savings and Investment Plan (the "401(k) Plan"). The
401(k) Plan is 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 includes a cash or deferred arrangement under
Section 401(k) of the Code. All employees age 21 or over and who have worked
for the Company for a twelve month period during which such employee completed
at least 1,000 hours will be eligible to participate. Subject to certain non-
discrimination requirements, each employee will be able to contribute an
amount to the 401(k) Plan on a pre-tax basis up to 15% of the employee's
salary, but not more than the current Federal limit of $10,000. The Company
will match contributions made by its employees subject to certain limitations.
The amount of the match will be equal to a percentage of the amount of salary
reduction contribution made on behalf of a participant during the plan year
based upon a formula that involves the profits of the Company for the year and
the number of years of service of the participant. Amounts contributed by the
Company pursuant to its 401(k) Plan for Named Officers are included in the
Summary Compensation Table under the column headed "All Other Compensation."
The Company also adopted the Sunburst Hospitality Corporation Non-Qualified
Retirement Savings and Investment Plan ("Non-Qualified Savings Plan"). Certain
select highly compensated members of management of the Company will be
eligible to participate in the Non-Qualified Savings Plan. The 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 Named Officers are
included in the Summary Compensation Table under the column headed "All Other
Compensation."
The Company match under the 401(k) Plan and the Non-Qualified Savings Plan
is 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.
PROPOSAL TO AMEND THE 1996 LONG-TERM INCENTIVE PLAN
(ITEM 2 ON PROXY CARD)
General
On October 11, 1996, the Board of Directors adopted the 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. Such shareholder approval was
received at the 1997 Annual Meeting of Shareholders. 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.
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The 1996 Incentive Plan originally authorized the awarding of a maximum of
7.1 million shares of Company common stock to eligible employees. Because of
the Company's one-for-three reverse stock split on October 15, 1997, the 7.1
million shares was converted to 2.36 million shares.
Effects of Spinoffs and Reverse Stock Split
The initial authorization of 7.1 million shares eligible under the 1996
Incentive Plan was intended to be a sufficient number of shares to cover
grants under the 1996 Incentive Plan for the next five to ten years. The grant
by the Company of 1,038,454 awards from November 1996 to the Spinoff in
October 1997 was consistent with this belief. However, this calculation did
not fully anticipate the impact of the Manor Care Spinoff and the Spinoff.
In the Manor Care Spinoff, existing Manor Care options held by employees of
the Company, as well as by a small number of Manor Care employees, were
converted into successor Manor Care and Company options. These successor
Company options were deemed to be issued out of the 7.1 million authorized
shares under the 1996 Incentive Plan. Likewise, in the Spinoff, Company
options were converted into successor New Choice options and Company options.
In many instances, the conversion required an increase in the number of an
optionee's grant of Company options in order to maintain the same financial
value of the options before and after the Spinoff. To the extent that the
number of successor Company options outstanding after the Spinoff was greater
than the number of Company options outstanding before the Spinoff, this
difference was also deemed to have been issued out of the original number of
authorized shares (which is now 2.36 million because of the one-for-three
reverse stock split).
These conversions of Company options in each of the spinoffs has resulted in
a depletion of the authorized shares under the 1996 Incentive Plan.
Proposed Amendment
On February 4, 1998, the Board of Directors approved an amendment to Section
5 of the 1996 Incentive Plan to increase the number of authorized share by 1.2
million shares. Pursuant to the requirements of the New York Stock Exchange,
the amendment is subject to shareholder approval.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO APPROVE THE
AMENDMENT TO SECTION 5 OF THE 1996 INCENTIVE PLAN TO INCREASE THE AUTHORIZED
NUMBER OF SHARES AVAILABLE UNDER THE 1996 INCENTIVE PLAN BY 1.2 MILLION
SHARES. Proxies solicited by the Board of Directors will be voted "FOR" this
proposal, unless otherwise instructed on the proxy card.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH MANOR CARE
Stewart Bainum, Jr. is the Chairman of the Company's Board of Directors and
is also the Chairman of the Board of Directors and Chief Executive Officer of
Manor Care. Additionally, Stewart Bainum is a Director of the Company and of
Manor Care. Additionally, Messrs. Bainum and Bainum Jr., as well as certain
other officers and directors of the Company and of Manor Care own shares
and/or options or other rights to acquire shares of each of the Company and
Manor Care.
Manor Care Lease Agreements
In connection with the Manor Care Spinoff, the Company and Manor Care
entered into a lease agreement with respect to the complex at 10750 and 10770
Columbia Pike, Silver Spring, Maryland (the "Silver Spring Complex") at which
the Company's principal executive offices were located (the "Silver Spring
Lease"). After the Spinoff, the Company remained obligated under the Silver
Spring Lease and has subleased the space at 10750 Columbia Pike to New Choice
pursuant to a sublease. The Company leases from Manor Care for a period of 30
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months certain office space (approximately 30% of the Silver Spring Complex
initially, including the space subleased to New Choice), 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 Silver Spring 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 Silver Spring Complex). At the beginning of each
fiscal year following November 1, 1996 (the date of the Manor Care Spinoff),
Manor Care's occupancy percentage is redetermined. Currently, Manor Care is
not occupying any space at the Silver Spring Complex. 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 Spinoff 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.
During the twelve month period ended December 31, 1997, the Company paid to
Manor Care under the Gaithersburg Lease and the Silver Spring Lease
approximately $4.7 million.
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. Prepayments made on or before November 1, 1997 resulted in a
prepayment 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. Prepayments made after November 1, 1997 do not result
in a penalty.
On April 23, 1997, the Company, through its wholly owned subsidiary First
Choice Properties, completed an offering of 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 was made to Manor
Care as a result of the prepayment. The Company repaid the remaining portion
of the loan at the time of the Spinoff with the proceeds from a Term Note with
New Choice (described below) and advances from the Company's credit facility.
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 use from time to time a
Cessna Citation III and a Cessna Conquest I owned by Manor Care. The agreement
has term of one year with automatic renewals unless otherwise terminated. In
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January 1998, Manor Care gave notice that it was terminating the Time Share
Agreement. During the twelve month period ended December 31, 1997 the Company
incurred a total of $176,948 for aircraft usage pursuant to the agreement.
RELATIONSHIP WITH NEW CHOICE
In connection with the Spinoff, the Company and New Choice entered into
certain agreements intended to govern the relationship between the parties
after the Spinoff. In addition, the Company is New Choice's largest
franchisee. The material terms of certain of these agreements and other
arrangements, entered into between the Company and New Choice, including the
franchise agreements with respect to the Company's hotels, are described
below.
Distribution Agreement
In connection with the Spinoff, the Company and New Choice entered into a
Distribution Agreement which provided for, among other things, the principal
corporate transactions required to effect the Spinoff, the assumption by New
Choice of all liabilities relating to its business and the allocation between
the Company and New Choice of certain other liabilities, certain
indemnification obligations of the Company and New Choice and certain other
agreements governing the relationship between the Company and New Choice with
respect to or in consequence of the Spinoff.
Subject to certain exceptions, New Choice 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 New Choice to perform or otherwise discharge liabilities
allocated to and assumed by New Choice under the Distribution Agreement, and
the Company has agreed to indemnify New Choice against any loss, liability or
expense incurred or suffered by New Choice 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.
To avoid adversely affecting the intended tax consequences of the Spinoff,
each of New Choice and the Company 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 New
Choice and the Company in connection with the Spinoff.
Under the Distribution Agreement, each of New Choice and the Company 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 New Choice and the Company
to obtain the consent of the other prior to waiving any shared privilege.
As of December 31, 1997, the Company owed New Choice approximately $25
million, of which approximately $15 million represents a net equity adjustment
payment required under the terms of the Distribution Agreement. The Company
and New Choice have agreed that the Company will pay this amount on or before
December 31, 1998. The remainder of the amount owed to New Choice represents
the reimbursement of various expenses incurred subsequent to the Spinoff. The
Company paid $7.5 million of this indebtedness in March 1998.
Strategic Alliance Agreement
At the time of the Spinoff, New Choice and the Company entered into a
Strategic Alliance Agreement pursuant to which: (i) the Company granted a
right of first refusal to New Choice to franchise any lodging property that
the Company develops or acquires and intends to operate under franchise; (ii)
the Company has
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also agreed, barring a material change in market conditions, to 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 by October 15, 2001 (48
months of the Distribution Date); (iii) New Choice has granted to the Company
an option, exercisable under certain circumstances, to purchase the brand
names, marks, franchise agreements and other assets of the MainStay Suites
hotel system; (iv) New Choice and the Company have agreed to continue to
cooperate with respect to matters of mutual interest, including new product
and concept testing for New Choice in hotels owned by the Company; and (v) the
Company has authorized New Choice to negotiate with third party vendors on the
Company'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.
Amendment and Guaranty
In connection with the Spinoff, New Choice entered into the Amendment and
Guaranty for the purpose of adding New Choice as a party to certain agreements
entered into between Former Choice and Manor Care in connection with the Manor
Care Spinoff and adding New Choice as a guarantor of certain payment
obligations of the Company to Manor Care pursuant to agreements between Former
Choice and Manor Care. For a discussion of the Amendment and Guaranty, see
"Certain Relationships and Related Transactions--Relationship with Manor Care"
and "--Lease Agreements."
Term Note
In connection with the Spinoff, New Choice loaned to the Company
approximately $115 million which, together with borrowings under a new bank
credit agreement, was used by the Company to repay approximately $96 million
outstanding under Former Choice's credit facility and to repay that portion of
the Former Choice indebtedness under the MNR Note allocated to the Company in
connection with the Spinoff (approximately $37 million).
This loan is represented by a Term Note in an aggregate principal amount of
$115 million (the "Term Note"). The Term Note has a maturity of five years and
accrues interest at a rate equal to 500 basis points above the interest rate
on a 5-year U.S. Treasury Note. The Term Note is subordinated to all senior
debt of the Company and contains certain restrictive covenants comparable to
those contained in the Company's senior credit facility (including
restrictions on the Company's ability to make certain investments, incur debt,
pay dividends, dispose of assets and create liens on its assets).
Consulting Agreement
The Company and New Choice entered into a Consulting Agreement in which the
Company will provide consulting and advisory services to New Choice related to
financial issues affecting New Choice. The term of the agreement commences
October 15, 1997 and terminated on November 1, 2001. The Company is entitled
to an annual retainer fee equal to 30% of the annual compensation (including
base salary, incentive bonus and fringe benefits) paid to James A. MacCutcheon
by the Company during such period. If Mr. MacCutcheon ceases to be employed by
the Company, the agreement can be terminated by either party, but if
terminated by New Choice, then New Choice shall pay the Company a termination
fee equal to 30% of any amount due by the Company to Mr. MacCutcheon under his
employment agreement as a result of his separation.
Tax Sharing Agreement
New Choice and the Company have entered into a Tax Sharing Agreement for
purposes of allocating tax liabilities of Former Choice from before the
Spinoff among New Choice and the Company and their respective subsidiaries. In
general, the Company will be responsible for (i) filing consolidated federal
income tax returns for the Company affiliated group and combined or
consolidated state tax returns for any group that includes a member of the
Company affiliated group, including in each case New Choice 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
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returns to the applicable taxing authorities (including any subsequent
adjustments resulting from the redetermination of such tax liabilities by the
applicable taxing authorities). New Choice will reimburse the Company for the
portion of such taxes that relates to New Choice and its subsidiaries, as
determined based on their hypothetical separate company income tax
liabilities. New Choice and the Company have agreed to cooperate with each
other, and to share information, in preparing such tax returns and in dealing
with other tax matters.
Employee Benefits Allocation Agreement
In connection with the Spinoff, New Choice and the Company entered 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 New Choice Spinoff of
employee benefits, as they relate to employees who remained employed by the
Company or its subsidiaries ("Sunburst Employees") after the Spinoff and
employees who are employed by New Choice or its subsidiaries after the Spinoff
("Choice Employees"). Pursuant to the Employee Benefits Allocation Agreement,
the Company will continue sponsorship of the various Sunburst profit sharing
plans, stock plans and health and welfare plans with respect to Sunburst
Employees. New Choice has established a number of plans which allow it to
provide to its employees substantially the same benefits currently provided to
them as employees of the Company. The Employee Benefits Allocation Agreement
provides for cross-guarantees between New Choice and the Company with respect
to the payment of benefits under certain plans and for cross-indemnification
with respect to employment-related claim relating to prior to the Spinoff.
The Employee Benefits Allocation Agreement also provided for the adjustment
of outstanding options to purchase shares of Sunburst common stock held by
Sunburst Employees, Choice Employees and employees of Manor Care who hold such
options as a result of the Manor Care Spinoff.
Lease Agreements
Pursuant to the Amendment and Guaranty, New Choice, the Company and Manor
Care have added New Choice as a guarantor of the Company's obligations under
the Gaithersburg Lease and the Silver Spring Lease. Additionally, the Company
and Choice have entered into a sublease agreement (the "Silver Spring
Sublease") with respect to the Silver Spring Lease for New Choice's principal
executive offices at 10750 Columbia Pike, Silver Spring, Maryland, 20901. New
Choice subleases 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. From the date of the
consummation of the Spinoff through December 31, 1997, New Choice has paid to
the Company approximately $375,000 under the Silver Spring Sublease.
Transitional Service Agreements
New Choice and the Company have entered into a number of agreements pursuant
to which New Choice provides, or will provide, certain continuing services to
the Company for a transitional period. Such services will be provided on
market terms and conditions. Subject to the termination provisions of the
specific agreements, the Company will be free to procure such services from
outside vendors or may develop an in-house capability in order to provide such
services internally. The primary transitional services agreements are
summarized below.
Pursuant to the Employee Benefits Administration Agreement, New Choice
provides 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, New Choice provides certain sales, use,
occupancy, real and personal property tax return administration, audit and
appeals services for the Company.
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Franchise Agreements
The Clarion, Comfort, Econo Lodge, Sleep Inn, Quality, MainStay Suites and
Rodeway marks are each owned by Choice. Each hotel property owned by the
Company is subject to a franchise agreement between New Choice and the
Company, as franchisee (the "Franchise Agreements"). (The material terms of
such agreements are described below.)
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.
The Company (except with respect to one property as described below) may
terminate a Franchise Agreement if New Choice 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 the Company to terminate such Franchise Agreement.
Termination by New Choice.
New Choice (except with respect to the Non-Standard Franchise Agreement) may
suspend or terminate a Franchise Agreement at any time, if, among other
things, the Company (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. New Choice (except with respect
to the Non-Standard Franchise Agreement) may terminate a Franchise Agreement
immediately upon notice to the Company if, among other things, (a) certain
bankruptcy events occur with respect to the Company; (b) the Company loses
possession or the right to possession of the Property; (c) the Company
breaches transfer restrictions in the related Franchise Agreement; (d) any
action is taken to dissolve or liquidate the Company; 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 New Choice for any of the
reasons discussed in the immediately preceding two sentences, the Company is
required to pay Special Interest equal to the product of (i) the average
monthly gross room revenue for the preceding 12 months, multiplied by (ii) the
royalty fee 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 between $21-$50 depending on the hotel brand multiplied
by the specified room count).
The Non-Standard Franchise Agreement has termination provisions similar to
those in the other Franchise Agreements. New Choice may terminate the Non-
Standard Franchise Agreement immediately upon notice to the Company if, among
other things, (a) certain bankruptcy events occur with respect to the Company;
(b) certain breaches of the related agreements are not remedied; (c) any
action is taken to dissolve or liquidate the Company; or (d) legal proceedings
against the Company are not dismissed within a certain period of time. Upon
termination, the Franchise Agreement for the Rodeway Inn-Phoenix (Tempe) calls
for Special Interest 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 New Choice's reservation
system). The marketing fee and the reservation fee are subject to reasonable
increases
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during the term of the franchise if New Choice 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 New
Choice including: (a) to lend the Franchisee 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
the Company including: (a) to participate in a specified reservation system;
(b) to keep and comply with the up-to-date version of New Choice'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 New Choice's rights thereto; and (e) to maintain certain specified
insurance policies.
Assignments.
The Company 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 New Choice except that, among other things, certain percentages of
ownership interests in the Company may be transferred without New Choice's
consent. New Choice'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 New Choice; (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.
New Choice 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 New
Choice to absolve itself from the obligations that it transfers under the
Franchise Agreement. Upon the assignment of New Choice's obligations under the
Non-Standard Franchise Agreement, New Choice will no longer be liable with
respect to the obligations it so transfers.
Noncompetition Agreement
New Choice and the Company have entered into a noncompetition agreement that
defines the rights and obligations with respect to certain businesses to be
operated by New Choice and the Company. Under the noncompetition agreement,
for a period of five years from the date of the Spinoff, subject to the
exceptions set forth below, the Company will be prohibited from conducting any
business that competes with the business operated by Former Choice transferred
to New Choice as part of the Spinoff ("the Choice Business"). The Company will
also be prohibited from acquiring any entity conducting a business that
competes with the Choice Business, with certain exceptions outlined below,
unless, prior to such acquisition, the Company offers to sell such competing
business to New Choice on substantially the same terms and conditions;
provided, however, that the Company will not be required to make such an offer
to New Choice where the competing business is not readily divisible from other
businesses permitted to be held or acquired by the Company 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 does not prohibit the Company from engaging in the following
activities: (i) the continued operation and development of any business
operated as of the date of the Spinoff by the Company and retained by the
Company; (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 New Choice's business; and (iv) the
ownership of equity interests of any entity that competes with New Choice's
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
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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, New Choice will be prohibited from conducting any business
that competes with the business operated by the Company and retained by
Company in the Spinoff (the "Hotel Business"). New Choice is also prohibited
from acquiring any entity conducting a business that competes with the Hotel
Business, with certain exceptions outlined below, unless, prior to such
acquisition, New Choice offers to sell such competing business to the Company
on substantially the same terms and conditions; provided, however, that New
Choice will not be required to make such an offer to the Company where the
competing business is not readily divisible from other business permitted to
be held or acquired by New Choice 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 New
Choice from the following activities: (i) continued operation and development
of any business operated as of the date of the Spinoff by New 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 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).
Potential Conflict
The ongoing relationship between New Choice and the Company resulting from
the agreements and arrangements described above may potentially give rise to
conflict of interest between New Choice and the Company. With respect to the
agreements between the parties, 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.
Appropriate policies and procedures are followed by the Board of Directors
of New Choice and the 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 New Choice or the Company on certain matters which present
a conflict between the two companies.
OTHER RELATIONSHIPS
During the twelve months ended December 31, 1997, the Company paid to Allen
& Company Incorporated a total of $110,523 in brokerage commissions in
connection with the repurchase of Company common stock by the Company. Paul A.
Gould, a director of the Company, is a Managing Director of Allen & Company.
27
<PAGE>
SUNBURST HOSPITALITY CORPORATION
107750 Columbia Pike, Silver Spring, Maryland 20901
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 22, 1998
The undersigned hereby appoints PAUL A. GOULD and FREDERIC V. MALEK, and each of
them, the true and lawful attorneys and proxies, with full power of
substitution, to attend the Annual Meeting of Stockholders of Sunburst
Hospitality Corporation (the "Company") to be held on April 22, 1998 at 9:00
a.m. in the Ballroom located at the Quality Suites Shady Grove, 3 Research
Court, Rockville, Maryland and at any adjournment thereof, and to vote all
shares of common stock held of record which the undersigned could vote, with all
the powers the undersigned would possess if personally present at such meeting,
as designated below.
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 herein. If no instructions are indicated for Items 1 or 2, such
proxies will be voted in accordance with the Board of Directors' recommendations
as set forth herein with respect to such proposal(s).
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR ITEM 1
AND ITEM 2.
(1) Election of two Directors: / / FOR all nominees listed below:
/ / WITHHOLD AUTHORITY to vote FOR all
nominees listed below:
STEWART BAINUM, JR. and PAUL A. GOULD
(Instructions: to withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.)
_________________________________________________________________
(2) Amendment of 1996 Long-Term Incentive Plan FOR AGAINST ABSTAIN
to increase the number of authorized shares: / / / / / /
If you plan to attend the Annual Meeting of Stockholders, please mark the
following box and promptly return this Proxy Card. / /
Dated , 1998
--------------------------------------------
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Signature
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Signature
(Signatures should correspond exactly with the
name or names appearing above. Attorneys,
trustees, executors, administrators, guardians
and others signing in a representative capacity
should designate their full titles. If the signer
is a corporation, please sign the full corporate
name by a duly authorized officer.)
