<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
COMMISSION FILE NO. 1-11402
--------------
HFS INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3059335
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(Address of principal executive office) (Zip Code)
--------------
(201) 428-9700
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ---------------------------------------- ---------------------------
Common Stock, Par Value $.01 New York Stock Exchange
5 7/8% Senior Notes due 1998 New York Stock Exchange
4 1/2% Convertible Senior Notes due 1999 New York Stock Exchange
4 3/4% Convertible Senior Notes due 2003 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or 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 [ ]
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 this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock issued and outstanding and
held by nonaffiliates of the Registrant, based upon the closing price for the
Common Stock on the New York Stock Exchange on March 21, 1997, was
$8,313,021,101.
The number of shares outstanding of each of the Registrant's classes of
common stock was 127,628,756 shares of Common Stock outstanding as at March
21, 1997.
--------------
===============================================================================
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
HFS Incorporated (the "Registrant", which, together with its subsidiaries
is herein called collectively the "Company") is a global services provider.
The Company provides services to consumers through intermediaries in the
travel and real estate industries. In the travel industry, the Company,
through its subsidiaries, franchises hotels primarily in the mid-priced and
economy markets and is the world's largest hotel franchisor. Additionally,
the Company owns Avis, Inc. ("Avis"), currently the parent company of one of
the world's largest car rental systems and owns Resort Condominiums
International, Inc. ("RCI"), the world's largest timeshare exchange
organization.
In the residential real estate industry, the Company, through its
subsidiaries, franchises real estate brokerage offices and is the world's
largest real estate brokerage franchisor. Additionally, the Company provides
relocation services, offering relocation clients a variety of services in
connection with the transfer of a client's employees.
As a franchisor of hotels, residential real estate brokerage offices, and
car rental operations, the Company licenses the owners and operators of
independent businesses to use the Company's brand names. The Company does not
own or operate hotels or real estate brokerage offices. Instead, the Company
provides its franchisee customers with services designed to increase their
revenue and profitability. These services allow customers to retain
independence and local control while benefiting from the economies of scale
of widely promoted brand names and standards of service, national and
regional direct marketing and co-marketing arrangements and global
procurement. The most important of these services for hotel owners are access
to a national reservation system, national advertising and promotional
campaigns, co-marketing programs, and volume purchasing discounts. The most
significant services to real estate brokerages are national advertising and
promotional campaigns, referrals, and training. The most significant services
to car rental locations are national advertising and promotional campaigns,
co-marketing and public relations programs and access to an on-line real-time
data processing, reservations and information system which connects more than
2,000 Avis locations throughout the United States, Canada, Europe and a
number of other countries. The Company believes significant opportunities
exist to expand the co-marketing and volume purchasing benefits that it
currently provides to its franchisees.
THE TRAVEL INDUSTRY
Hotel Franchising. The Company operates eight national hotel franchise
systems: Days Inn(Registered Trademark) Ramada(Registered Trademark) (in the
United States), Howard Johnson(Registered Trademark), Super 8(Registered
Trademark), Travelodge(Registered Trademark) (in North America), Villager
Lodge(Registered Trademark), Knights Inn(Registered Trademark) and Wingate
Inn(Registered Trademark). In aggregate, these franchise systems consist of
approximately 5,400 properties and 495,000 hotel rooms worldwide.
Car Rental Operations. The Company owns Avis, Inc. ("Avis"), which it
acquired on October 17, 1996 (the "Date of Acquisition") for approximately
$800 million in cash and Company common stock. Avis, together with its
subsidiaries, licensees and affiliates, operates the "Avis System", which
consists of approximately 4,200 worldwide locations, including locations at
most major airports as well as downtown locations in major cities in the
United States and in approximately 160 countries and territories. Pursuant to
a plan developed by the Company prior to the Date of Acquisition, the Company
will cause the car rental operation subsidiary of Avis (the "Avis Operating
Company") to undertake an initial public offering within one
year of the Date of Acquisition, which will reduce the Company's equity
interest in the Avis Operating Company to 25%. The Company will continue to
own and operate the reservation system as well as the telecommunications and
computer processing systems which service the rental car operations for
reservations, rental agreement processing, accounting and vehicle control.
The Company charges a fee to the Avis Operating Company for such
services. In addition, the Company will retain the Avis trade name and charge
the rental car operations a franchise fee for the use of the Avis name.
1
<PAGE>
Timeshare Exchange. The Company operates Resort Condominiums
International, Inc. ("RCI"), which it acquired on November 12, 1996 for
approximately $412 million in cash, $75 million in the Company's common stock
("Company Common Stock") and up to $200 million in contingent cash payments.
RCI provides timeshare exchange programs for approximately 2.2 million
timeshare owners and approximately 3,100 resorts around the world and
furnishes travel-related services, integrated software systems and resort
management and consulting services to the timeshare industry.
THE REAL ESTATE INDUSTRY
Real Estate Brokerage Franchising. The Company operates the CENTURY
21(Registered Trademark), Coldwell Banker(Registered Trademark) and
Electronic Realty Associates(Registered Trademark) (ERA(Registered
Trademark)) real estate brokerage franchise systems, which it acquired on
August 1, 1995, May 31, 1996 and February 12, 1996, respectively. The CENTURY
21, Coldwell Banker and ERA franchise systems are the world's largest, third
largest and fourth largest residential real estate brokerage franchise
systems, with an aggregate of more than 11,300 independently owned and
operated franchised offices located worldwide.
Relocation Services. The Company operates the Coldwell Banker
corporate employee relocation business, which the Company estimates is the
second largest provider and, following the integration of the corporate
relocation business of PHH Corporation (discussed below) will be the largest
provider, of corporate relocation services in the United States based on the
number of transferred employees assisted. The Coldwell Banker corporate
employee relocation services business offers its relocation clients a variety
of services in connection with the transfer of its clients' employees. These
services include the selling of a transferee's home, appraisals, inspections,
assistance in finding a new home, property marketing advice, rental
assistance, equity advances, purchasing a transferee's home at the appraised
value when no higher bid is obtained, educational and school placement
counseling, career counseling, spouse/partner employment assistance and group
move services.
PROPOSED ACQUISITIONS
PHH Corporation -- General. In April 1997, the Company expects to complete
its acquisition of all of the outstanding shares of the common stock of PHH
Corporation ("PHH") for approximately $1.7 billion in Company Common Stock.
Based in Hunt Valley, Maryland, PHH provides a broad range of integrated
management services, expense management programs and mortgage services to
more than 3,000 major clients, including many of the world's largest
corporations, as well as government agencies and affinity groups. Its primary
business service segments consist of vehicle management, real estate and
mortgage services.
PHH Corporation -- Travel Industry. PHH is the second world's largest
provider in North America of comprehensive vehicle management services (which
include the management, purchase, leasing and resale of vehicles for corporate
clients and government agencies, including fuel and expense management programs
and other fee-based services) and is the market leader in the United Kingdom
among the four major nationwide providers of fuel card services and the six
major nationwide providers of vehicle management services.
PHH Corporation -- Real Estate Industry. PHH is the largest provider of
real estate relocation services (similar to those provided by Coldwell
Banker) to corporate and government clients and to members of affinity
groups. Through PHH Mortgage Services Corporation ("PHH Mortgage"), PHH
originates, sells and services residential mortgage loans in the United
States, marketing such services to consumers through relationships with
corporations, affinity groups, financial institutions, real estate brokerage
firms and other mortgage banks. PHH Mortgage is the twelfth largest
originator of residential first mortgage loans in the United States.
Value Rent-A-Car. On March 3, 1997, the Company announced that it had
reached an agreement in principle to acquire Value-Rent-A-Car, Inc. ("Value")
from Mitsubishi Motor Sales of America for $175 million in cash. Consummation
of the transaction is subject to the satisfaction of customary
2
<PAGE>
conditions, including without limitation, negotiation and execution of
definitive documentation and approval of the respective boards of directors.
There can be no assurance that any such transaction between Mitsubishi and
the Company will be consummated.
* * *
The Company continually explores and conducts discussions with regard to
acquisitions and other strategic corporate transactions in its industries and
in other franchise, franchisable or service businesses. As part of this
regular on-going evaluation of acquisition opportunities, the Company
currently is engaged in a number of separate, unrelated preliminary
discussions concerning possible acquisitions. The purchase price for the
possible acquisitions may be paid in cash, through the issuance of Company
Common Stock (which would increase the number of shares of Company Common
Stock outstanding) or other securities of the Company, borrowings, or a
combination thereof. Prior to consummating any such possible acquisitions,
the Company, among other things, will need to initiate and complete
satisfactorily its due diligence investigations; negotiate the financial and
other terms (including price) and conditions of such acquisitions; obtain
appropriate Board of Directors, regulatory and other necessary consents and
approvals; and secure financing. No assurance can be given with respect to
the timing, likelihood or business effect of any possible transaction. In the
past, the Company has been involved in both relatively small acquisitions and
acquisitions which have been significant, including the acquisition of PHH
for approximately $1.7 billion, the acquisition of RCI for approximately $487
million and the acquisition of Avis for approximately $800 million.
Financial information about the Company's industry segments may be found
in Notes 1A and 15 to the Company's consolidated financial statements
presented in Item 8 of this Annual Report on Form 10-K and is incorporated
herein by reference. Except where expressly noted, information herein does
not include information on or with respect to PHH, Value or their respective
businesses.
Certain statements in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance, or achievements of the Company to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. These forward-looking statements
were based on various factors and were derived utilizing numerous important
assumptions and other important factors that could cause actual results to
differ materially from those in the forward-looking statements. Important
assumptions and other important factors that could cause actual results to
differ materially from those in the forward-looking statements, include, but
are not limited to: uncertainty as to the Company's future profitability; the
Company's ability to develop and implement operational and financial systems
to manage rapidly growing operations; competition in the Company's existing
and potential future lines of business; the Company's ability to integrate
and operate successfully acquired businesses and the risks associated with
such businesses; the Company's ability to obtain financing on acceptable
terms to finance the Company's growth strategy and for the Company to operate
within the limitations imposed by financing arrangements; uncertainty as to
the future profitability of acquired businesses; and other factors. Other
factors and assumptions not identified above were also involved in the
derivation of these forward-looking statements, and the failure of such other
assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. The Company assumes no
obligation to update these forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements.
The Company's principal executive offices are located at 6 Sylvan Way,
Parsippany, New Jersey 07054 (telephone number: (201) 428-9700).
3
<PAGE>
THE TRAVEL INDUSTRY
THE LODGING FRANCHISE BUSINESS
GENERAL
The lodging industry can be divided into three broad segments based on
price and services: luxury or upscale, which typically charge room rates
above $78 per night; middle market, with room rates generally between $52 and
$77 per night; and economy, where rates generally are less than $52 per
night. Of the brand names franchised by the Company, Ramada, Howard Johnson
and Wingate Inn properties compete principally in the middle market segment
and Days Inn, Knights Inn, Super 8, Travelodge and Villager Lodge properties
compete primarily in the economy segment, which is currently the fastest
growing segment of the industry.
As franchisor of lodging facilities, the Company provides a number of
services designed to directly or indirectly increase hotel occupancy rates,
revenues and profitability, the most important of which is a centralized
brand-specific national reservations system. Similarly, brand awareness
derived from nationally recognized brand names, supported by national
advertising and marketing campaigns, can increase the desirability of a hotel
property to prospective guests. The Company believes that, in general,
national franchise brands with a greater number of hotels enjoy greater brand
awareness among potential hotel guests, and thus are perceived as more
valuable by existing and prospective franchisees than brands with a lesser
number of properties. Franchise brands can also increase franchisee property
occupancy through national direct sales programs to corporations,
associations and affinity groups.
In determining whether to affiliate with a national franchise brand, hotel
operators compare the costs of affiliation (including the capital
expenditures and operating costs required to meet a brand's quality and
operating standards, plus the ongoing payment of franchise royalties and
assessments for the reservations system and marketing programs) with the
increase in gross room revenue anticipated to be derived from brand
membership. Other benefits to brand affiliation include group purchasing
services, training programs, design and construction advice, and other
franchisee support services, all of which provide the benefits of a national
lodging services organization to operators of independently-owned hotels. The
Company believes that, in general, franchise affiliations are viewed as
enhancing the value of a hotel property by providing economic benefits to the
property.
Since the Company's organization in mid-1990, the Company has experienced
significant growth in revenue, net income and earnings per share. A
significant portion of these gains has been achieved through a series of
acquisitions of hotel franchise chains. The Company commenced operations in
July 1990 with the acquisition of the Howard Johnson franchise system and the
rights to operate the U.S. Ramada franchise system. The Company acquired the
Days Inn franchise system in 1992, the Super 8 franchise system and
substantially all of the assets of the Park Inn International(Registered
Trademark) franchise system in the U.S. and Canada in 1993 (and which the
Company recently sold--See "Recent Acquisitions and Divestitures"), the
Villager Lodge franchise system in 1994, the Knights Inn franchise system in
August 1995 and the Travelodge franchise system in January 1996. Each of
these acquisitions has increased the Company's earnings per share. The
Company continues actively to seek opportunities to acquire or license
additional hotel franchise systems, including established brands in the upper
end of the market, where the Company is not currently represented. See
"Lodging Franchise Growth" below.
The fee and cost structure of the Company's business provides significant
opportunities for the Company to increase earnings by increasing the number
of franchised properties. Hotel franchisors such as the Company derive
substantially all of their revenue from franchise fees. Franchise fees are
comprised of two components, a royalty portion and a marketing and reservations
portion, both of which are normally charged by the franchisor as a percentage
of the franchisee's gross room sales. The royalty portion of the franchise fee
is intended to cover the operating expenses of the franchisor, such as expenses
incurred in quality assurance, administrative support and other franchise
services and to provide the franchisor with operating profits. The marketing
and reservations portion of the franchise fee is intended to reimburse the
franchisor for the expenses associated with providing such franchise services
as a national reservations system, national media advertising and certain
training programs.
4
<PAGE>
The Company's franchisees are dispersed geographically which minimizes the
exposure to any one hotel owner or geographic region. Of the approximately
5,400 properties and 3,400 franchisees in the Company's systems, no
individual hotel owner accounts for more than 2% of the Company's lodging
revenue.
Recent Acquisitions and Divestitures. On January 23, 1996, the Company
purchased from Forte Hotels, Inc. ("FHI"), for a price of approximately $39
million, the assets comprising the Travelodge hotel franchise system in North
America, including the Travelodge and Thriftlodge(Registered Trademark)
service marks, franchise agreements covering 311 hotels having an aggregate
of approximately 27,800 rooms and a license agreement with FHI granting to
FHI the right to use the Travelodge service mark in the operation of 96
hotels (having an aggregate of 5,170 rooms) owned by joint ventures in which
FHI owns an interest. Concurrent with the Company's acquisition of the
Travelodge franchise system, Motels of America, Inc. ("MOA") purchased from
FHI 20 motels subject to Travelodge franchises for a price of $32.3 million,
and Chartwell Leisure Inc. (formerly known as National Gaming Corp. and
National Lodging Corp.) ("Chartwell") purchased from Forte USA, Inc. all of
the capital stock of FHI for a price of approximately $98.4 million. In
connection with such acquisition by Chartwell, the Company has guaranteed $75
million of borrowings by Chartwell under a $125 million revolving credit
facility entered into by Chartwell with certain banks for which the Company
is to be paid a guarantee fee of 2% per annum of the outstanding guarantee
commitment by the Company. The guarantee was made pursuant to an existing
financing agreement between the Company and Chartwell which was modified to
accommodate the FHI transaction. It is anticipated that such guarantee will
be terminated upon Chartwell's refinancing of the underlying bank facility.
Chartwell paid the Company an advisory fee of approximately $2 million for
services in connection with the FHI transaction. The Company also loaned $10
million to a subsidiary of MOA under a $10 million revolving credit
arrangement to finance the purchase from FHI of the motels described above.
The loan bears interest at a rate of 14% per annum, is guaranteed by a parent
of MOA and is secured by approximately 80% of the outstanding common stock of
MOA.
On October 28, 1996, the Company sold Park Inns International, Inc., which
franchises the 46-hotel, 6,053 rooms, Park Inn International franchise system
in the United States to Park Inn International Worldwide Hotel Group ("Park
Group") for $2.2 million, and recognized a pre-tax gain of approximately $0.6
million. Park Group had previously owned and operated this domestic lodging
chain prior to selling it to the Company in June 1993.
Preliminary Understanding with Hilton Hotels Corporation. On January 27,
1997, Hilton Hotels Corporation announced, in connection with its pending
tender offer for the outstanding common stock of ITT Corporation ("ITT"),
that it had reached a preliminary understanding with the Company under which,
subject to Hilton's acquisition of ITT, the Company would license, on a
long-term basis, the Sheraton trademark, franchise system and management
agreements. Any such transaction is subject to Hilton's acquisition of ITT,
as well as to the negotiation of definitive agreements relating to such
license. There can be no assurance that Hilton's attempt to acquire ITT will
be successful or that any transaction between Hilton and the Company will be
consummated.
LODGING FRANCHISE GROWTH
Growth of the franchise systems through the sale of long-term franchise
contracts to operators of existing and newly constructed hotels is the
leading source of revenue and earnings growth in the Company's lodging
franchise business. Franchises are terminated primarily for not paying the
required franchise fees and/or not maintaining compliance with brand quality
assurance standards required pursuant to the applicable franchise agreement.
The following table demonstrates the growth of the Company's combined
lodging franchise systems. Data reflects hotels in operation as of the end of
the specified fiscal period and does not reflect the backlog of executed
franchise agreements which represent properties preparing to join the
specified franchise system.
5
<PAGE>
HOTEL PROPERTIES IN THE FRANCHISE SYSTEMS
<TABLE>
<CAPTION>
PROPERTIES ROOMS
------------ ----------
<S> <C> <C>
Balances at December 31, 1991 1,059 151,704
Acquired--1992 ................ 1,220 133,127
Openings--1992 ................ 303 27,179
Terminations--1992 ............ (116) (15,437)
------------ ----------
Balances at December 31, 1992 2,466 296,573
% change from 1991 ............ 132.9% 95.5%
Acquired--1993 ................ 1,010 64,215
Openings--1993 ................ 495 49,569
Terminations--1993 ............ (188) (26,426)
------------ ----------
Balances at December 31, 1993 3,783 383,931
% change from 1992 ............ 53.4% 29.5%
Acquired--1994 ................ 10 1,173
Openings--1994 ................ 584 52,109
Terminations--1994 ............ (148) (20,928)
------------ ----------
Balances at December 31, 1994 4,229 416,285
% change from 1993 ............ 11.8% 8.4%
Acquired--1995 ................ 113 9,780
Openings--1995 ................ 575 53,500
Terminations--1995 ............ (314) (39,603)
------------ ----------
Balances at December 31, 1995 4,603 439,962
% change from 1994 ............ 8.8% 5.7%
Acquired--1996 ................ 364 30,274
Openings--1996 ................ 753 64,232
Sold--1996 .................... (46) (6,053)
Terminations--1996 ............ (277) (33,200)
------------ ----------
Balances at December 31, 1996 5,397 495,215
% change from 1995 ............ 17.2% 12.6%
</TABLE>
LODGING FRANCHISE SALES
The Company markets franchises principally to independent hotel and motel
owners, as well as to owners whose properties are affiliated with other hotel
brands. The Company believes that its existing franchisees also represent a
significant potential market because many own, or may own in the future,
other hotels which can be converted to the Company's brand names.
Accordingly, a significant factor in the Company's sales strategy is
maintaining the satisfaction of its existing franchisees by providing quality
services.
The Company employs a national franchise sales force consisting of
approximately 80 salespeople and sales management personnel, which is divided
into several brand-specific sales groups, with regional offices around the
country. The sales force is compensated primarily through commissions. In
order to provide broad marketing of the Company's brands, sales referrals are
made among the sales groups and a referring salesperson is entitled to a
commission for referrals which result in a franchise sale.
There are three major steps in the franchising process: (i) identifying
potential franchisees, (ii) executing the franchise contract and (iii)
opening the property. Identification of opportunities is the responsibility
of the franchise sales force. Executed agreements create the backlog that
results in property openings. The Company executed 1,166 and 983 lodging
franchise agreements in 1996 and 1995, respectively. As of December 31, 1996
and December 31, 1995, there were 786 and 682 executed contracts,
representing 61,325 and 55,864 rooms, respectively, in the backlog for the
Company's lodging franchise systems. Approximately 28% of the executed
contracts outstanding during 1996 were terminated before the related lodging
facility opened as a franchised facility.
6
<PAGE>
The Company seeks to expand its franchise systems and provide marketing
and other franchise services to franchisees on an international basis through
a series of master license agreements with internationally based developers
and franchisors. As of December 31, 1996, the Company's franchising
subsidiaries (other than Ramada) have entered into international master
licensing agreements for some or all of 46 countries on six continents. The
agreements typically include minimum development requirements and require an
initial license fee upon execution of the license agreements as well as
recurring franchise fees.
LODGING FRANCHISE SYSTEMS
The following is a summary description of the principal lodging franchise
systems operated by the Company. Information reflects properties which are
open and operating and is presented as of December 31, 1996.
<TABLE>
<CAPTION>
AVG.
PRIMARY MARKET ROOMS PER # OF # OF DOMESTIC/
BRAND SERVED PROPERTY PROPERTIES ROOMS INTERNATIONAL*
- -------------- -------------- ----------- ------------ --------- ----------------
<S> <C> <C> <C> <C> <C>
Days Inn....... Lower Economy 92 1,736 159,976 International(1)
Howard
Johnson....... Mid-market 109 506 55,297 International(1)
Knights Inn.... Lower Economy 88 190 16,720 International(2)
Ramada......... Mid-market 139 861 119,477 Domestic
Super 8........ Economy 61 1,500 92,174 International(2)
Travelodge..... Upper Economy 81 511 41,520 Domestic(1)(4)
Villager
Lodge......... Lower Economy 78 53 4,136 International(3)
Wingate........ Mid-market 96 5 482 International(3)
</TABLE>
- ------------
* Description of rights owned or licensed.
(1) Includes properties in Mexico and Canada.
(2) Includes properties in Canada.
(3) No international properties currently open and operating.
(4) Rights include all of North America.
OPERATIONS -- LODGING
The Company's organization is designed to provide a high level of service
to its franchisees while maintaining a controlled level of overhead expense.
In the lodging segment, expenses related to marketing and reservations
services are budgeted to match marketing and reservation fees each year.
National Reservations Systems. Unlike other franchise businesses (such as
restaurants), the lodging business is characterized by remote purchasing
through travel agencies and through use by consumers of toll-free telephone
numbers. Each of the Company's reservations systems is independently operated,
focusing on its specific brand and franchise system, and is comprised of one
or more nationally advertised toll-free telephone numbers, reservations
agents who accept inbound calls, a computer operation that processes
reservations, and automated links which accept reservations from travel
agents and other travel providers, such as airlines, and which report
reservations made through the system to each franchisee property. Each
reservations agent handles reservation requests and inquiries for only one of
the Company's franchise systems and there is no "cross selling" of franchise
systems. The Company maintains eight reservations centers that are located in
Knoxville and Elizabethton, Tennessee; Phoenix, Arizona; Oklahoma City,
Oklahoma; Winner and Aberdeen, South Dakota; El Cajon, California; and Saint
John, New Brunswick, Canada. Generally, reservations agents for each of the
franchise systems are located in at least two of the Company's eight
facilities, thereby ensuring continuous service in the event of a power
failure or telephone line interruption occurring at any one of the locations.
Brand Name Marketing Programs. The Company's brand name marketing programs
seek to increase the traveling public's awareness of the Company's franchise
systems and thereby increase
7
<PAGE>
franchisee property occupancy rates and revenues. To achieve this objective,
each of the franchise systems' programs is managed by its own staff, who
develop the marketing strategy for the system and report to the brand
president. A central corporate marketing services department implements the
strategy.
The marketing services department publishes hotel directories for each
franchise system, conducts market research and produces artwork for national
and regional advertising programs. In addition, the marketing services
department works with the independent advertising agencies that have been
retained for each franchise system. These advertising agencies produce
television, radio and print advertising and assist in placing advertisements
in the media.
Quality Assurance. The Company believes that franchisees have a high level
of interest in the degree to which the quality of fellow franchise operators
is monitored, both upon admission to the system and on an ongoing basis.
Franchise quality control occurs through inspections at the time of
application, upon entry into the system and on an ongoing basis through
quality assurance programs. Quality assurance programs promote uniformity
within the franchise system, an important marketing factor with respect to
increasing consumer demand for lodging facilities. These programs consist of
generally unannounced inspections of properties (two to four times a year) by
inspectors who are rotated through franchise system properties to promote
consistent grading standards. Properties proposed to be converted to one of
the Company's franchise systems are inspected by the Company's most
experienced inspectors, who are dedicated specifically to this function and
who prepare specific renovation schedules to which the potential franchisees
are required to adhere. These specialists report to the Senior Vice President
of Operations rather than to the sales personnel proposing the property. As
of December 31, 1996, the Company employed 74 persons in the quality
assurance department.
Various brand-specific quality assurance initiatives are designed to
encourage compliance. The Company has instituted certain financial incentive
programs to encourage franchisees to improve their properties. In general,
franchisees are given 30 days to correct the conditions that led to default
or implement a plan to correct the default. If the default is not cured in a
timely fashion, the Company has the right to terminate the defaulting
franchisee's franchise agreement.
Training. Each of the Company's franchise systems has a training
department which conducts both mandatory and optional training programs.
These departments are staffed by experienced Company employees who conduct
regularly scheduled regional educational seminars for both property level
non-management and management personnel. Training programs are designed to
teach franchisees how best to utilize the Company's reservations system and
marketing programs, as well as the fundamentals of hotel operations such as
recruiting, housekeeping and yield management. The Company also provides
special on-site training upon request. The Company has developed and
maintains a library of training videos, cassettes and tapes, as well as
printed training material, which are available to franchisees. The Company
also employs Property Opening Specialists who help the property staff become
acclimated when their property enters a franchise system.
Purchasing. Through its HFS Purchasing Services operation, the Company
provides its franchisees with volume purchasing discounts for products,
services, furnishings and equipment used in lodging operations. In addition
to the preferred alliance programs described hereinafter, HFS Purchasing
Services establishes relationships with lodging industry vendors and
negotiates discounts for purchases by its customers. The Company does not
maintain inventory, directly supply any of the products or, generally, extend
credit to franchisees for purchases. See "COMBINED OPERATIONS --Preferred
Alliance and Co-Marketing Arrangements" below.
Franchise Services. In all of its operations, the Company emphasizes
service to its franchisees. This emphasis is exemplified by the franchise
services department which is comprised of 51 persons with extensive
experience in the lodging industry, who are available to respond to inquiries
by franchisees. Each franchisee is assigned a franchise service manager who
is available via a toll-free telephone number. After each communication with
a franchisee, the franchise service manager prepares a contact report which
is circulated within the Company to the departments responsible for
responding to the inquiry.
8
<PAGE>
LODGING FRANCHISE AGREEMENTS
The Company's lodging franchise agreements grant the right to utilize one
of the brand names associated with the Company's lodging franchise systems to
lodging facility owners or operators under long-term franchise agreements. An
annual average of 3.3% of the Company's existing franchise agreements are
scheduled to expire from January 1, 1997 through December 31, 2006, with no
more than 4.4% (in 2002) scheduled to expire in any one of those years.
The current standard agreements generally are for 15-year terms for
converted properties and 20-year terms for newly constructed properties and
generally require, among other obligations, franchisees to pay a minimum
initial fee of between $15,000 and $35,000 based on property size and type,
as well as annual franchise fees comprised of royalty fees and
marketing/reservation fees based on gross room revenues.
Under the terms of the standard franchise agreements in effect at December
31, 1996, franchisees are typically required to pay recurring fees comprised
of a royalty portion and a reservation/marketing portion, calculated as a
percentage of annual gross room revenue that range from 7.0% to 8.8%. The
Company discounts fees from the standard rates from time to time and under
certain circumstances.
The Company's typical franchise agreement is terminable by the Company
upon the respective franchisee's failure to maintain certain quality
standards or to pay franchise fees or other charges. In the event of such
termination, the Company is typically entitled to be compensated for lost
revenues in an amount equal to the franchise fees accrued during periods
specified in the respective franchise agreements which are generally between
one and five years.
LODGING SERVICE MARKS AND OTHER INTELLECTUAL PROPERTY
General. The service marks "Days Inn," "Ramada," "Howard Johnson," "Super
8" and "Travelodge" and related logos are material to the Company's business.
The Company, through its franchisees, actively uses these marks. All of the
material marks in each franchise system are registered (or have applications
pending for registration) with the United States Patent and Trademark Office.
The marks relating to the Days Inn system, the Howard Johnson system, the
Knights Inn system, the Super 8 system, the Travelodge system (in North
America) and the Villager Lodge system are owned by the Company through its
subsidiaries.
Ramada License Agreement. The Company franchises the service mark "Ramada"
and related marks, Ramada brands and logos (the "Ramada Marks") to lodging
facility owners in the United States pursuant to two license agreements (the
"Ramada License Agreements") between an indirect subsidiary of New World
Development Co., Ltd. ("New World") and Ramada Franchise Systems, Inc.
("RFS"), a wholly-owned subsidiary of the Company. The Ramada License
Agreements limit RFS's use of the Ramada Marks to the U.S. market.
The Ramada License Agreements have initial terms terminating on March 31,
2024. At the end of the initial terms, RFS has the right either (i) to extend
the Ramada License Agreements, (ii) to purchase the Ramada Marks for their
fair market value at the date of purchase, subject to certain minimums after
the initial terms, or (iii) to terminate the Ramada License Agreements. The
Ramada License Agreements require that RFS pay royalties calculated on the
basis of percentages of annual gross room sales, subject to certain minimums
and maximums as specified in each Ramada License Agreement. Such royalties
approximate $18.2 million for 1996.
The Ramada License Agreements are subject to certain termination events
relating to, among other things, (i) the failure to maintain aggregate annual
gross room sales minimum amounts stated in the Ramada License Agreements,
(ii) the maintenance by the Company of a minimum net worth of $50 million
(however, this minimum net worth requirement may be satisfied by a guaranty
of an affiliate of the Company with a net worth of at least $50 million or by
an irrevocable letter of credit (or similar form of third-party credit
support)), (iii) non-payment of royalties, (iv) failure to maintain
registrations on the Ramada Marks and to take reasonable actions to stop
infringements, (v) failure to pay certain liabilities specified by the
Restructuring Agreement, dated July 15, 1991, by and among New World, Ramada
9
<PAGE>
International Hotels and Resorts, Inc., Ramada Inc., Franchise System
Holdings, Inc., the Company and RFS and (vi) failure to maintain appropriate
hotel standards of service and quality. A termination of the Ramada License
Agreements would result in the loss of the income stream from franchising the
Ramada brand names and could result in the payment by the Company of
liquidated damages equal to three years of license fees. The Company does not
believe that it will have difficulty complying with all of the material terms
of the Ramada License Agreements.
COMPETITION
Competition among the national lodging brand franchisors to grow their
franchise systems is intense. The Company's primary national lodging brand
competitors are the Holiday Inn(Registered Trademark) and Best
Western(Registered Trademark) brands and Choice Hotels, which franchises
seven brands, including the Comfort Inn(Registered Trademark), Quality
Inn(Registered Trademark) and Econo Lodge(Registered Trademark) brands. Days
Inn, Travelodge and Super 8 properties principally compete with Comfort Inn,
Hampton Inn(Registered Trademark) and Econo Lodge in the limited service
economy sector of the market. The chief competitor of Ramada, Howard Johnson
and Wingate Inn properties, which compete in the middle market segment of the
hotel industry, is Holiday Inn. In addition, a lodging facility owner may
choose not to affiliate with a franchisor but to remain independent.
The Company believes that competition for the sale of franchises in the
lodging industry is based principally upon the perceived value and quality of
the brand and services offered to franchisees, as well as the nature of those
services. The Company believes that prospective franchisees value a franchise
based upon their view of the relationship of conversion costs and future
charges to the potential for increased revenue and profitability. The
reputation of the franchisor among existing franchisees is also a factor
which may lead a property owner to select a particular affiliation. The
Company also believes that the perceived value of its brand names to
prospective franchisees is, to some extent, a function of the success of its
existing franchisees.
The ability of the Company's lodging franchisees to compete in the lodging
industry is important to the Company's prospects for growth, although,
because franchise fees are based on franchisee gross room revenue, the
Company's revenue is not directly dependent on franchisee profitability.
The ability of an individual franchisee to compete may be affected by the
location and quality of its property, the number of competing properties in
the vicinity, its affiliation with a recognized brand name, community
reputation and other factors. A franchisee's success may also be affected by
general, regional and local economic conditions. The effect of these
conditions on the Company's results of operations is substantially reduced by
virtue of the diverse geographical locations of the Company's franchises. At
December 31, 1996, the Company had franchised lodging properties in North
America (including all 50 states of the United States), Europe, Asia, Africa
and South America.
SEASONALITY
The principal source of lodging revenue for the Company is based upon the
annual gross room revenue of franchised properties. As a result, the
Company's revenue from the lodging franchise business experiences seasonal
lodging revenue patterns similar to those of the hotel industry wherein the
summer months, because of increases in leisure travel, produce higher
revenues than other periods during the year.
CAR RENTAL BUSINESS
GENERAL
On October 17, 1996 (the "Date of Acquisition"), the Company completed the
acquisition of all of the outstanding capital stock of Avis, which together
with its subsidiaries, licensees and affiliates, operates the Avis System,
which the Company believes to be the second largest car rental system in the
world. The Avis System consists of approximately 4,200 locations, including
locations at most major airports as well as downtown locations in major
cities in the United States and in approximately 160 countries and
territories. Approximately 77% of the Avis System rental revenues in the
United States are received from locations operated by Avis directly or under
agency arrangements, with the remainder being received from locations
operated by independent licensees. No individual Avis location accounts for
more than 4% of the Company's car rental operations.
10
<PAGE>
Avis's international business is conducted by a network of several wholly
owned subsidiaries and joint ventures along with a number of licensees and
sublicensees. Avis Europe Ltd. ("Avis Europe"), which currently operates the
Avis System in Europe, Africa and the Middle East, is a licensee of Avis for
such areas. Avis Europe has entered into a series of transactions with the
Company and Avis which are more fully described below under "Recent
Acquisitions and Divestitures". The Avis System in Canada, Central and South
America, the Caribbean and (prior to giving effect to the Avis Europe
transactions described below) Asia Pacific, comprising some 65 countries and
territories, is operated by Avis subsidiaries, joint ventures and licensees.
During the peak summer season, the Avis System fleet worldwide consists of
approximately 370,000 vehicles. Avis has more than 20,000 employees
worldwide, with approximately 20% represented by 65 various local unions
under contracts expiring on a variety of dates.
Pursuant to a plan developed by the Company prior to the Date of
Acquisition, the Company will cause the car rental operating subsidiary of
Avis (the "Avis Operating Company") to undertake an initial public offering
(the "Avis IPO") within one year of the Date of Acquisition, which will
reduce the Company's equity interest in the Avis Operating Company to 25%.
The Company will continue to own and operate the reservation system as well
as the telecommunications and computer processing systems which service the
rental car operations for reservations, rental agreement processing,
accounting and vehicle control. The Company will charge a fee to Avis for
such services. In addition, the Company will retain the Avis trade name and
charge the Avis Operating Company a franchise fee for the use of the Avis
name.
The car rental industry provides vehicle rentals to business and
individual customers worldwide. The industry has been composed of two
principal segments: general use (mainly at airport and downtown locations)
and local (mainly at downtown and suburban locations). The car rental
industry rents primarily from on-airport, near-airport, downtown and suburban
locations to business and leisure travelers and to individuals who have lost
the use of their vehicles through accident, theft or breakdown. In addition
to revenue from vehicle rentals, the industry derives significant revenue
from the sale of rental related products such as insurance, refueling
services and loss damage waivers (a waiver of Avis's right to make a renter
pay for damage to the rented car).
Car renters generally are (i) business travelers renting under negotiated
contractual arrangements between specified rental companies and the
travelers' employers, (ii) business travelers who do not rent under
negotiated contractual arrangements (but who may receive discounts through
travel, professional or other organizations), (iii) leisure travelers and
(iv) renters who have lost the use of their own vehicles through accident,
theft or breakdown. Contractual arrangements normally are the result of
negotiations between rental companies and large corporations, based upon
rates, billing and service arrangements, and influenced by reliability and
renter convenience. Business travelers who are not parties to negotiated
contractual arrangements and leisure travelers generally are influenced by
advertising, renter convenience and access to special rates because of
membership in travel, professional and other organizations.
Recent Acquisitions and Divestitures. In December 1996, the Company sold
the insurance replacement rental car business of Agency Rent A Car System,
Inc. ("Agency"), which it indirectly owned through Avis, to Enterprise
Rent-A-Car Company ("Enterprise"). The Company entered into an agreement with
Enterprise restricting its participation in the insurance replacement rental
car business within a fifty mile radius of an Agency location existing as of
the date of closing until June 13, 2000.
On February 7, 1997, the Company and Avis agreed to enter into a series of
agreements with Avis Europe and related parties (the "Avis Europe
Transactions"). Upon consummation of the Avis Europe Transactions, Avis will
have divested itself of its approximately 8.7% ownership interest in Avis
Europe and Avis Europe will become the licensee of Avis for Asia. The Avis
Europe Transactions are expected to be consummated in April 1997.
The Avis Europe licenses expire on November 30, 2036, unless earlier
termination is effected in accordance with the license terms. Avis Europe's
previously paid-up license for Europe, the Middle East and Africa is to be
modified to provide for a paid-up license only as to Europe and the Middle
East. Avis Europe will pay annual royalties to Avis for Africa and a defined
portion of Asia which covers the area between 60 (degrees) longitude and
150 (degrees) longitude, excluding Australia, New Zealand and Papua New Guinea.
11
<PAGE>
Avis Europe also will enter into a Preferred Alliance Agreement with the Company
under which Avis Europe will become a preferred alliance provider for car
rentals to RCI customers in Europe, Asia and Africa, and for car rentals to
PHH customers needing replacement vehicles for fleets managed by PHH in
Europe, Asia and Africa.
On March 3, 1997, the Company announced that it had reached an agreement
in principle to acquire Value-Rent-A-Car, Inc. ("Value") from Mitsubishi
Motor Sales of America for $175 million in cash. Value predominantly serves
leisure customers from 45 corporate-owned rental car locations. Value's fleet
totals approximately 22,000 vehicles, and during 1996 Value reported revenues
of approximately $180 million. Consummation of such transaction is subject to
the satisfaction of customary conditions, including without limitation,
negotiation and execution of definitive documentation and there can be no
assurance that any such transaction between Mitsubishi and the Company will
be consummated.
OPERATIONS -- AVIS
The Avis System. Avis provides the Avis System with: (i) national
promotion, advertising and public relations services; (ii) reservations and
information systems; (iii) data processing support; (iv) marketing programs
with hotels and airlines; (v) a sales staff for marketing to corporate
customers and the travel community; (vi) credit card services for commercial
customers; (vii) training in local marketing techniques; and (viii) operation
and training support. Avis's on-line real-time data processing and
information system, known as the Wizard System, connects more than 2,000 Avis
locations in the United States, Canada, Europe and a number of other
countries.
The Wizard System. The Wizard System is a telecommunications and computer
processing system which is used in association with the Avis System for
reservations, rental agreement processing, accounting, fleet control and a
variety of other purposes. It is owned and operated by WizCom International,
Ltd. ("WizCom"), a wholly owned subsidiary of the Company. Avis uses the
Wizard System as a marketing tool and benefits from the operating
efficiencies obtained through the Wizard System.
The Wizard System is linked to more than 12,000 terminals in more than
2,000 rental locations through telephone lines and satellite communications.
Among the features of the Wizard System which are not available on most
competitors' systems are (a) an advanced graphical interface reservation
system; (b) "Rapid Return," which permits customers who are returning cars to
obtain completed charge records from radio-connected "Roving Rapid Return"
agents who complete and deliver the charge record at the car as it is being
returned; (c) "Wizard on Wheels," which enables Avis locations to assign cars
and complete rental agreements while customers are being transported to the
car; (d) "Avis Link," which automatically identifies a customer using an
American Express or other major credit card who is entitled to special rental
rates and conditions, and therefore sharply reduces the number of instances
in which Avis inadvertently fails to honor the benefits of negotiated rate
arrangements to which such customers are entitled; (e) interactive interfaces
through the airline computerized reservation systems described under
"Marketing"; (f) sophisticated fleet control and revenue management programs
which, among other things, enable rental agents to ensure that a customer who
rents a particular type of vehicle will receive the available vehicle of that
type which has the lowest mileage (benefitting the customer and Avis by more
evenly dispersing utilization among cars of a particular type); and (g) a
comprehensive control and reporting system that enables Avis to adapt quickly
to changes in customer requirements. Avis also benefits from the low cost and
speed of billing available as a result of broad use of the Wizard System and
believes that the Wizard System keeps its clerical and communications costs
below those of its competitors.
Rental Operations. Avis rents a wide variety of automobiles and minivans,
most of which consist of the current and immediately preceding model years.
Car rentals are generally made on a daily, weekly or monthly basis. Rental
charges in the United States usually are computed on the basis of the length
of the rental or on the length of the rental plus a mileage charge.
Additional charges are made for refueling service, loss damage waivers,
personal accident insurance, personal effects protection and, in some
instances, additional liability insurance. Rates vary at different locations
depending on the type of vehicle, the local market and competitive and cost
factors. Most rentals are made utilizing rate plans under which the customer
is responsible for gasoline used during the rental. The Company also
generally offers
12
<PAGE>
customers the convenience of leaving a rented car at an Avis location in a
city other than the one in which it was rented under its "Rent it Here --
Leave it There" program, although, consistent with industry practices, a
drop-off charge or special intercity rate may be imposed.
U.S. Operations. Approximately 88% of Avis's United States rental revenue
is generated at 175 of the busiest airports in the United States. Avis's
rental revenue at those airports as a percentage of total rental revenues
generated at those airports for each of the past five full calendar years
beginning with 1992 approximated 23.9%; 24.0%; 22.3%; 23.1% and 24.9%,
respectively.
At December 31, 1996, the Company owned approximately 414 Avis car rental
facilities at airport, near-airport and downtown locations throughout the
United States. Of these facilities, approximately 175 primarily serve airport
business and approximately 239 are non-airport locations. By focusing on
travelers at the major airports, Avis has been able to operate more vehicles
from significantly fewer rental sites than its competitors, yielding
significant economies of scale. Avis's emphasis on airport traffic has
resulted in a strong competitive position at the major domestic
rental-revenue airports.
The Company has 75 independent Avis licensees which operate locations in
the United States. The two largest licensees operate the Avis System in the
Los Angeles and Dallas areas and account for approximately half of all United
States licensees' rentals. Certain licensees in the United States pay Avis a
fee equal to 5% of their total time and mileage charges, less all customer
discounts, of which Avis is required to utilize 40% for corporate
licensee-related programs, while six licensees pay 8% of their gross revenue.
Most of Avis's United States licensees currently pay 53 cents per rental
agreement for certain functions of the Wizard System, and they are charged
separately for other aspects of the Wizard System.
International Operations. Avis's subsidiaries, joint ventures and
licensees (other than Avis Europe, and prior to consummation of the Avis
Europe Transactions) operate the Avis System internationally in approximately
65 countries and territories, with wholly owned subsidiaries in Canada,
Argentina, Australia, New Zealand, Puerto Rico and the United States Virgin
Islands, and joint ventures in Jamaica, Singapore and Malaysia. The principal
business of Avis's foreign subsidiaries is car rentals.
Avis's international system (not including Avis Europe, and prior to
consummation of the Avis Europe Transactions) operates a combined peak rental
and leasing fleet of approximately 44,000 vehicles, of which approximately
23,000 are operated by subsidiaries, and the balance by joint ventures and
licensees. Revenue of the foreign subsidiaries for calendar year 1996
approximated $243 million, without taking into account revenue of joint
ventures or licensees.
Marketing. In the United States, approximately 80% of Avis's 1996 rentals
were generated by travelers who used the Avis System under contractual
arrangements negotiated by Avis with either the travelers' corporate
employers or organizations such as American Association of Retired Persons in
which the travelers have memberships. The remainder of the rental activity is
from business and leisure renters who are not affiliated with corporations or
organizations with which Avis has contractual arrangements. Avis's corporate
sales organization is the principal source of contractual arrangements with
corporate accounts. Unaffiliated business travelers are solicited by direct
mail, telemarketing and advertising campaigns.
The Company solicits contractual arrangements with corporate accounts by
emphasizing the Wizard System's advanced technology, customer service,
pricing and a worldwide rental network. The Wizard System plays a significant
part in securing business of this type because the Wizard System enables Avis
to offer a wide variety of pricing combinations, special reports and tracking
techniques tailored to the particular needs of each account, and to assure
adherence to agreed-upon rates.
Car renters can make Avis reservations through all four major United
States based global distribution systems and several international based
systems. Users of the United States based global distribution systems can
obtain access through these systems to the Avis reservations system
concerning among other things, rental locations, vehicle availability and
applicable rate structures. The Avis reservations system gives them the
ability to reserve and confirm Avis vehicles directly through these
13
<PAGE>
systems. Avis also maintains strong links to the hotel industry. Avis has
arrangements with the Hilton Corporation, the Hyatt Corporation and the
Sheraton Marketing Corporation frequent traveler programs, which provide
various incentives to all program participants.
Rental Vehicle Purchases and Dispositions. Avis participates in a variety
of vehicle purchase programs with major domestic and foreign manufacturers,
although actual purchases are made directly through local car dealers. The
average price for automobiles purchased by Avis in 1996 for its rental fleet
was approximately $16,200. On average during model year 1996, 84% of the
purchases were comprised of GM vehicles, 12% of Chrysler vehicles and 4% of
Nissan, Subaru, Hyundai, Ford, Toyota and Land Rover vehicles. These
percentages vary among the Avis operations and will most likely change from
year to year. The vehicle purchase programs sponsored by manufacturers
sometimes provide Avis with sales incentives for the purchase of certain
models, and most of these programs allow Avis to serve as a drop-ship
location for vehicles, thus enabling Avis to receive a fee from the
manufacturers for preparing newly purchased vehicles for use. There can be no
assurance that Avis will continue to be able to benefit from sales incentives
in the future.
Most of the Avis cars in the United States are purchased, owned and sold
by Prime Vehicles Trust, a grantor trust created by a subsidiary of Avis, or
by corporate nominees of Prime Vehicles Trust. All decisions regarding Prime
Vehicles Trust purchases and sales of cars are made by Avis, and Prime
Vehicles Trust is combined with Avis for both financial and tax accounting
purposes. The existence of Prime Vehicles Trust has no effect on Avis's
control of the cars in the Avis fleet. However, Avis believes the existence
of Prime Vehicles Trust has been useful in obtaining financing secured by its
cars.
Avis's current operating strategy is to hold vehicles not more than twelve
months. The average age of rental cars in Avis's fleet is approximately six
months. Approximately 90% of the vehicles purchased by the Company in model
year 1996 were eligible for participation in manufacturers' repurchase
programs ("Repurchase Programs"). These programs currently require that Avis
maintain Program vehicles in its fleet for a minimum of six months and impose
numerous return conditions, including those related to mileage and overall
condition. Approximately 2% of the Program vehicles purchased by Avis and
scheduled to be returned in 1996 were ineligible for return. At the time of
return to the manufacturer, Avis receives the price guaranteed at the time of
purchase, subject to adjustment for excess mileage and damage, and is thus
protected from fluctuations in the prices of previously-owned vehicles in the
wholesale market at the time of disposition. The future percentage of Program
vehicles in Avis' fleet will be dependent on the availability and
attractiveness of the manufacturers' Repurchase Programs, over which Avis has
no control.
In addition, Avis sells cars previously rented by Avis on a wholesale
basis to dealers in the United States through informal arrangements or at
auctions through standard consignment agreements.
Insurance. Avis generally assumes the risk of liability to third parties
in the United States for up to $1 million per occurrence. Avis has purchased
significant excess insurance coverage against risks which exceed $1 million
per occurrence. One of the benefits of Avis's retaining the risk up to $1
million per occurrence is that Avis maintains its own claims department,
which controls the disposition of most claims.
Under the standard Avis rental contract, persons renting vehicles receive
liability coverage up to the minimum financial responsibility limits required
by applicable law. Higher limits are provided by separate agreement to some
United States national corporate accounts, and Avis customers have the
option, for an additional daily charge, to participate in a group policy
underwritten by a major national insurer which increases the renter's
coverage to one million dollars. Avis renters also have the option to elect,
for additional daily charges, "Personal Accident Insurance," which pays
medical expenses and accidental death benefits for accidents during the
rental period, and "Personal Effects Protection," which ensures against loss
or damage to the renters' personal belongings during the rental period. Both
these coverages are underwritten by major national insurers.
Purchasing. Through its HFS Purchasing Services operations, the Company
provides its Avis licensees with volume purchasing discounts for products,
services, furnishings and equipment used in their
14
<PAGE>
car rental operations. In addition to the preferred alliance programs
described hereinafter, HFS Purchasing Services establishes relationships with
vendors and negotiates discounts for purchases by its customers. The Company
does not maintain inventory, directly supply any of the products or generally
extend credit to franchisees for purchases. See "OTHER BUSINESSES"
- --Preferred Alliance and Co-Marketing Arrangements" below.
AVIS LICENSED MARKS AND INTELLECTUAL PROPERTY
The service mark "Avis", related marks incorporating the word "Avis", and
related logos are material to the Company's business. Avis, through its
subsidiaries, joint ventures and licensees, actively uses these marks. All of
the material marks used in Avis's business are registered (or have
applications pending for registration) with the United States Patent and
Trademark Office. The marks used in Avis's business are owned by the Company
through its subsidiaries. Avis is authorized to use the marks in the car
rental and related businesses as well as in several other businesses,
including equipment rental and leasing, hotels, insurance and information
services.
COMPETITION
The domestic car rental industry includes eight major brands: Alamo
Rent-A-Car, Inc., Avis, Budget Rent-A-Car Corporation ("Budget"), Dollar Rent
A Car ("Dollar"), Enterprise, The Hertz Corporation ("Hertz"), National Car
Rental System Inc., and Thrifty Rent-A-Car System Inc. ("Thrifty"), and a large
number of smaller and regional or local firms, serving on-airport, near-airport
and other locations. Most of Avis's major competitors operate through a
combination of owned and franchised operations. Other smaller car rental
companies operate primarily through franchises.
Certain of Avis's major car rental competitors are owned by, or are
affiliated with, the major automobile manufacturers, and each of the major
domestic car rental companies maintains a close relationship with one or more
United States automobile manufacturers. At December 31, 1996, Ford owned
Hertz and had a long-term supply contract with Team Rental Group Inc., the
party which recently has agreed to purchase Budget from Ford; Chrysler had
equity interests in Dollar and Thrifty. Automobile manufacturers often
provide financing for the purchase of vehicles and provide payments to car
rental companies in consideration of advertising and promotional programs
that benefit the manufacturers. In addition, manufacturers provide fleet
assistance programs, including Repurchase Programs and similar arrangements,
which protect rental companies against loss on disposition of vehicles and
enable rental companies to adjust their fleet size to take account of
seasonal variations in demand. Avis could be at a competitive disadvantage if
manufacturers selectively restrict eligibility to participate in their
Repurchase Programs.
There have been occasions during the history of the car rental industry in
which the major car rental companies have been adversely affected by
industry-wide price pressures, and Avis has, on such occasions, priced its
product in response to such pressures. Moreover, at times when the car rental
industry has experienced vehicle oversupply, there has been intensified
competitive pressure. This oversupply has had a negative impact on the
industry's ability to raise rental rates. Avis has taken steps to address its
fixed cost structure to improve its overall competitive position; however,
future oversupply or other factors affecting competition could still
adversely affect Avis's financial condition and results of operations.
SEASONALITY
Avis's business is subject to seasonal variations in customer demand, with
the third quarter of the year, which covers the summer vacation period,
representing the peak season for vehicle rentals. Therefore, any occurrence
that disrupts travel patterns during the summer period could have a material
adverse effect on Avis's annual performance and adversely affect the
Company's overall annual financial performance. The fourth quarter is
generally the weakest financial quarter for Avis because there is limited
leisure travel and a greater potential for adverse weather conditions at such
time. Many of Avis's operating expenses, such as rent, general insurance and
administrative personnel, are fixed and cannot be reduced during periods of
decreased rental demand.
15
<PAGE>
ENVIRONMENTAL MATTERS
The principal environmental regulatory requirements applicable to Avis's
operations relate to the ownership or use of tanks for the storage of
petroleum products, such as gasoline, diesel fuel and waste oils; the
treatment or discharge of waste waters; and the generation, storage,
transportation and off-site treatment or disposal of solid or liquid wastes.
Avis operates 229 domestic and international locations at which petroleum
products are stored in underground or aboveground tanks. Avis has instituted
an environmental compliance program designed to ensure that these tanks are
in compliance with applicable technical and operational requirements,
including the replacement of underground steel tanks and periodic integrity
testing of underground storage tanks. The Company believes that the locations
where Avis currently operates are in compliance, in all material respects,
with such regulatory requirements.
Avis may also be subject to requirements related to the remediation of, or
the liability for remediation of, substances that have been released to the
environment at properties owned or operated by Avis or at properties to which
Avis sends substances for treatment or disposal. Such remediation
requirements may be imposed without regard to fault and liability for
environmental remediation can be substantial.
Avis may be eligible for reimbursement or payment of remediation costs
associated with future releases from its regulated underground storage tanks.
Certain of the states in which Avis maintains underground storage tanks have
established funds to assist in the payment of remediation costs for releases
from certain registered underground tanks. Subject to certain deductibles,
the availability of funds, compliance status of the tanks and the nature of
the release, these tank funds may be available to Avis for use in remediating
future releases from its tank systems.
THE TIMESHARE EXCHANGE BUSINESS
GENERAL
On November 12, 1996, the Company completed the acquisition of all the
outstanding capital stock of RCI and its affiliates for $412 million in cash
and $75 million in Company Common Stock, plus future contingency payments of
up to $200 million over the next five years. In contemplation of the
acquisition of RCI by HFS, the former sole shareholder received $149 million
of securities in the form of a dividend prior to consummation of the
transaction. RCI, based in Indianapolis, Indiana, is the world's largest
provider of timeshare vacation exchange opportunities for more than 2.2
million timeshare owners from more than 150 nations and more than 3,100
resorts in 80 countries around the world. RCI's business consists primarily
of the operation of an exchange program for owners of condominium timeshares
or whole units at affiliated resorts, the publication of magazines and other
periodicals related to the vacation and timeshare industry, travel related
services, resort management, integrated software systems and service and
consulting services. RCI has significant operations in North America, Europe,
Middle East, Latin America, Australia, and the Pacific Rim. RCI has more than
4,100 employees worldwide.
The "RCI Network" provides RCI members who own timeshares at
RCI-affiliated resorts the capability to exchange their timeshare vacation
accommodations in any given year for comparable value accommodations at other
RCI-affiliated resorts. Approximately 1.1 million members of the RCI Network
reside outside of the United States, which accounts for 51% of the total
members of the RCI Network. RCI's membership volume has grown at a compound
annual rate for the last five years of approximately 10%, while exchange
volumes have grown at a compound annual rate of approximately 12% for the
same time period.
RCI provides members of the RCI Network with access to both domestic and
international timeshare resorts, publications regarding timeshare exchange
opportunities and other travel-related services, including discounted
purchasing programs. In 1996, members in the United States paid an average
annual membership fee of $67 as well as an average exchange fee of $100 for
every exchange arranged by RCI. In 1996, membership and exchange fees totaled
approximately $260 million and RCI arranged nearly 1.7 million exchanges.
16
<PAGE>
The resort component of the leisure industry is primarily serviced by two
alternatives for overnight accommodations: commercial lodging establishments
and timeshare resorts. Commercial lodging consists principally of: a) hotels
and motels in which a room is rented on a nightly, weekly or monthly basis
for the duration of the visit and b) rentals of privately-owned condominium
units or homes. Oftentimes, this segment is designed to serve both the
leisure and business traveler. Timeshare resorts present an economical and
reliable alternative to commercial lodging for many vacationers who want to
experience the added benefits associated with ownership. Timeshare resorts
are purposely designed and operated for the needs and enjoyment of the
leisure traveler.
Developers of resorts affiliated with the RCI Network typically pay the
first year membership fee for new members upon the sale of the timeshare
interest. In the United States, more than 75% of such owners renew their
memberships in their second year and more than 90% of these owners renew each
year thereafter.
Resort timesharing -also referred to as vacation ownership -is the
shared ownership and/or periodic use of property by a number of users or
owners for a defined period of years or in perpetuity. An example of a simple
form of timeshare is a condominium unit that is owned by fifty-two persons,
with each person having the right to use the unit for one week of every year.
In the United States, industry sources estimate that the average price of
such a timeshare is about $7,500 to $10,000, plus a yearly maintenance fee of
approximately $350. Based upon information published about the industry, the
Company believes that 1996 sales of timeshares exceeded $6 billion worldwide.
Two principal segments make up the timeshare exchange industry: owners of
timeshare interests (consumers) and resort properties (developers/
operators). Industry sources have estimated that the total number of owners
of timeshare interests is more than 3.5 million, while the total number of
timeshare resorts worldwide has been estimated to be more than 4,500. The
timeshare exchange industry derives revenue from annual membership fees paid
by owners of timeshare interests, fees paid by such owners for each exchange
and fees paid by members and resort affiliates for various other products and
services.
TIMESHARE EXCHANGE BUSINESS GROWTH
The timeshare exchange industry has experienced significant growth over
the past decade. The Company believes that the factors driving this growth
include the demographic trend toward older, more affluent Americans who
travel more frequently; the entrance of major hospitality and entertainment
companies into timeshare development; a worldwide acceptance of the timeshare
concept; and an increasing focus on leisure activities, family travel and a
desire for value, variety and flexibility in a vacation experience. The
Company believes that future growth of the timeshare exchange industry will
be determined by general economic conditions both in the U.S. and worldwide,
the public image of the industry, improved approaches to marketing and sales,
a greater variety of products and price points, the broadening of the
timeshare market and a variety of other factors. Accordingly, the Company
cannot predict if future growth trends will continue at rates comparable to
those of the recent past.
OPERATIONS -- TIMESHARE EXCHANGE BUSINESS
The Company's timeshare exchange business is designed to provide
high-quality, leisure travel services to its members and cost-effective,
single-source support services to its affiliated timeshare resorts. Most
members are acquired from timeshare developers who purchase an initial RCI
membership for each buyer at the time the timeshare interval is sold. A small
percentage of members are acquired through direct solicitation activities of
RCI.
MEMBER SERVICES
International Exchange System. Members are served though a network of
call centers located in 26 countries throughout the world. These call centers
are staffed by approximately 2,200 people. Major regional call and
information support centers are located in Indianapolis, Kettering (England),
Mexico City and Singapore. All members receive a directory that lists resorts
available through the exchange system, a periodic magazine and other
information related to the exchange system and available travel services.
These materials are published in various languages.
17
<PAGE>
Travel Services. In addition to exchange services, RCI's call centers
also engage in telemarketing and cross-selling of other ancillary travel and
hospitality services. These services are offered to a majority of members
depending on their location. RCI provides travel services to U.S. members of
the RCI Network through its affiliate, RCI Travel, Inc. ("RCIT"). On a global
basis, RCI provides travel services through entities operating in local
jurisdictions (hereinafter, RCIT and its local entities are referred to as
"Travel Agencies"). Travel Agencies provide airline reservations and airline
ticket sales to members in conjunction with the arrangement of their
timeshare exchanges, as well as providing other types of travel services,
including hotel accommodations, car rentals, cruises and tours. Travel
Agencies also from time to time offer travel packages utilizing resort
developers' unsold inventory to generate both revenue and prospective
timeshare purchasers to affiliated resorts.
Quality Assurance. Members have a high level of interest in the quality
of their home resorts and other resorts within the exchange system. Quality
control of affiliated resorts occurs through inspections at the time of
application, unannounced inspections and visits by Company personnel, and
comment card feedback from members exchanging into each resort. Resorts
meeting certain quality measures are given special recognition through RCI's
Gold Crown Resort and Resorts of International Distinction award programs.
RESORT SERVICES
Resort Affiliations. Growth of the timeshare business is dependent on the
sale of timeshare units through affiliated resorts. RCI affiliates
international brand names and independent developers, owners' associations
and vacation clubs. The Company believes that national lodging and
hospitality companies are attracted to the vacation ownership concept because
of the industry's relatively low product cost and high profit margins, and
the recognition that vacation ownership resorts provide an attractive
alternative to the traditional hotel-based vacation and allow the hotel
companies to leverage their brands into additional resort markets where
demand exists for accommodations beyond traditional rental-based lodging
operations. Today, 7 of every 10 timeshare resorts worldwide are affiliated
with RCI. The Company also believes that RCI's existing affiliates represent
a significant potential market because many developers and resort managers
may become involved in additional resorts in the future which can be
affiliated with RCI. Accordingly, a significant factor in RCI's growth
strategy is maintaining the satisfaction of its existing affiliates by
providing quality support services.
Sales Support Services. Exchange services are considered to be an
essential component of timeshare ownership. In fact, exchange is one of the
primary reasons given for purchasing timeshare. RCI provides a wide variety
of sales and marketing materials to assist its affiliated resorts in selling
more efficiently and effectively. These include videos explaining the concept
of vacation ownership and exchange, interactive multi-media sales tools, wall
displays customized for the resort, a wide variety of promotional brochures,
travel services, purchasing discounts and the Endless Vacation Special Resort
Edition Directory which includes photos and/or summary information for all
RCI-affiliated resorts. In addition, RCI uses state-of-the-art database
marketing techniques to identify highly qualified sales prospects for its
resort affiliates.
Advertising. RCI provides many advertising opportunities in its member and
developer focused publications, as well as through its site on the Internet
World Wide Web at http://www.rci.com.
Timeshare Consulting. RCI provides worldwide timeshare consulting services
through its affiliate, RCI Consulting, Inc. ("RCIC"). These services include
comprehensive market research, site selection, strategic planning, community
economic impact studies, resort concept evaluation, financial feasibility
assessments, on-site studies of existing resort developments, and tailored
sales and marketing plans.
Resort Management Software. RCI provides computer software systems to
timeshare resorts and developers through its affiliate, Resort Computer
Corporation ("RCC"). RCC provides software that integrates resort functions
such as sales, accounting, inventory, maintenance, dues and reservations.
Property Management. RCI provides resort property management services
through its affiliate, RCI Management, Inc. ("RCIM"). RCIM is a single source
for any and all resort management services, and offers a menu including
hospitality services, a centralized reservations service center, advanced
reservations technology, human resources expertise and owners' association
administration.
18
<PAGE>
TIMESHARE PROPERTY AFFILIATION AGREEMENTS
More than 3,100 timeshare resorts are affiliated with the RCI Network, of
which approximately 1,300 resorts are located in the United States and
Canada, approximately 1,150 in Europe and Africa, approximately 400 in Mexico
and Latin America, and approximately 250 in the Asia-Pacific region. The
terms of RCI's affiliation agreements with its affiliates generally require
that the developer enroll each new timeshare purchaser at the resort as a
member of RCI, license the affiliated resort to use the RCI name and marks
for certain purposes, set forth the materials and services RCI will provide
to the affiliate, and generally describe RCI's expectations of the resort's
management. The affiliation agreement also includes stipulations for
representation of the exchange program, minimum enrollment requirements and
treatment of exchange guests. Affiliation agreements are typically for a term
of five or six years, and automatically renew thereafter for terms of one to
six years unless either party takes affirmative action to terminate the
relationship. RCI makes available a wide variety of goods and services to its
affiliated developers, including publications, advertising, sales and
marketing materials, timeshare consulting services, resort management
software, travel packaging and property management services.
RCI LICENSED MARKS AND INTELLECTUAL PROPERTY
The service marks "RCI", "Resort Condominiums International" and related
logos are material to RCI's business. RCI and its subsidiaries actively use
the marks. All of the material marks used in RCI's business are registered
(or have applications pending for registration) with the United States Patent
and Trademark Office as well as major countries worldwide where RCI or its
subsidiaries have significant operations. The marks used in RCI's business
are owned by the Company.
SEASONALITY
A principal source of timeshare revenue relates to exchange services to
members. Since members have historically shown a tendency to plan their
vacations in the first quarter of the year, revenues are generally slightly
higher in the first quarter in comparison to other quarters of the year. The
Company cannot predict whether this trend will continue in the future as the
timeshare business expands outside of the United States and Europe, and as
global travel patterns shift with the aging of the world population.
COMPETITION
The global timeshare exchange industry is comprised of a number of
entities, including resort developers and owners. RCI's largest competitor is
Interval International ("Interval"), a wholly-owned subsidiary of CUC
International Inc. Based upon industry sources, the Company believes that 95%
of the more than 4,500 timeshare resorts in the world are affiliated with
either RCI or Interval. Based upon 1995 published statistics and Company
information, RCI has more than 2 million timeshare owners who are members,
while Interval has approximately 660,000 timeshare owners who are members.
Also in 1995, RCI confirmed more than 1.5 million exchange transactions while
Interval confirmed approximately 327,000 transactions. As a result, based on
1995 business volume, RCI services approximately 76% of members and
approximately 83% of exchange transactions.
THE REAL ESTATE INDUSTRY
REAL ESTATE BROKERAGE FRANCHISE BUSINESS
GENERAL
In August 1995, the Company acquired Century 21 Real Estate Corporation
("Century 21"), the world's largest franchisor of residential real estate
brokerage offices with approximately 6,200 independently owned and operated
franchised offices with approximately 101,000 sales agents worldwide. In
February 1996, the Company acquired the ERA franchise system. The ERA system
is the fourth largest residential real estate brokerage franchise system with
over 2,500 independently owned and operated franchised offices and more than
27,000 sales agents worldwide. In May 1996, the Company acquired
19
<PAGE>
Coldwell Banker Corporation ("Coldwell Banker"), the owner of the world's
second largest residential real estate brokerage franchise system with
approximately 2,600 independently owned and operated franchised offices and
approximately 56,000 sales agents worldwide. Coldwell Banker also operates a
corporate relocation services business, which the Company estimates is the
second largest provider of such services in the United States based on the
number of transferred employees assisted.
The Company believes that application of its franchisee focused management
strategies and techniques can significantly increase the revenues produced by
its real estate brokerage franchise systems while also increasing the quality
and quantity of services provided to franchisees. The Company believes that
independent real estate brokerage offices currently affiliate with national
real estate franchisors principally in order to gain the consumer recognition
and credibility of a nationally known and promoted brand name. Brand
recognition is especially important to real estate brokers since home buyers
are generally infrequent users of brokerage services and have often recently
arrived in an area, resulting in little ability to benefit from word-of-mouth
recommendations.
During 1996, the Company implemented a preferred alliance program which
seeks to capitalize on the dollar volume of home sales brokered by CENTURY
21, Coldwell Banker and ERA agents and the valuable access point these
brokerage offices provide for service providers who wish to reach these home
buyers. Preferred alliance marketers include providers of property and
casualty insurance, moving and storage services, mortgage and title
insurance, environmental testing services, home improvement suppliers, and
sellers of furniture, fixtures and other household goods.
The Company's real estate brokerage franchisees are dispersed
geographically, which minimizes the exposure to any one broker or geographic
region. National Realty Trust (the "Trust"), an independent trust governed by
independent trustees, established to own and operate the Coldwell Banker
offices which were previously owned by a subsidiary of Coldwell Banker
Corporation, is the largest franchisee of the Coldwell Banker franchise
system, representing 12.6% of the franchised offices in the Coldwell Banker
franchise system. Of the more than 11,300 franchised offices in the Company's
real estate brokerage franchise systems, no individual broker, other than the
Trust, accounts for more than 1% of the Company's real estate brokerage
services.
As with the lodging franchise systems, the sale of long-term franchise
contracts is the leading source of revenue and earnings growth in the real
estate franchise business. The following table demonstrates the growth of the
Company's combined real estate systems:
REAL ESTATE OFFICES IN FRANCHISE SYSTEMS
<TABLE>
<CAPTION>
TOTAL OFFICES
---------------
<S> <C>
Balance at December 31, 1994 .......... 0
Acquired--1995 ........................ 5,965
Openings--1995 ........................ 147
Terminations--1995 .................... (122)
------
Balance at December 31, 1995 .......... 5,990
Acquired--1996 ........................ 5,118
Openings--1996 ........................ 683
Terminations--1996 .................... (442)
------
Balance at December 31, 1996 .......... 11,349
Percent Change from December 31, 1995 89.3%
</TABLE>
Recent Acquisitions. During 1996, the Company completed the purchase of
the six United States CENTURY 21 regions which were not owned by Century 21.
These six regions represent more than 1,000
20
<PAGE>
CENTURY 21 franchised real estate brokerage offices located in the Pacific
Northwest, the Southwest, Central California, Southern Florida, the
Mid-Atlantic States and Eastern Pennsylvania. The aggregate purchase price was
approximately $147 million, paid in a combination of cash, a note and Company
Common Stock.
On May 31, 1996 the Company completed its acquisition of Coldwell Banker
for approximately $740 million in cash and repayment of debt. Promptly
following this transaction, the Company conveyed 318 real estate brokerage
offices which prior to the acquisition had been owned by Coldwell Banker to
the Trust. Since May 31, 1996, the Trust has acquired additional real estate
brokerage offices, which are currently operating under Coldwell Banker,
CENTURY 21 or ERA franchise agreements. The Trust is the largest Coldwell
Banker franchisee and the largest privately owned residential real estate
brokerage company in the United States. The free cash flow of the Trust is
expended at the discretion of the trustees for advertising and promotion for
the benefit of the real estate offices represented by the franchises included
in the Trust. Each of the brokerage offices owned by the Trust is subject to
a standard Coldwell Banker, CENTURY 21 or ERA franchise agreement, as the
case may be, having a term of ten years.
In February 1997, the Company entered into an agreement to acquire the 50%
interest of its partner, PNC Mortgage ("PNC"), a subsidiary of PNC Bank
Corp., in The Home Mortgage Network ("HMN"), a neutral multi-lender mortgage
origination service operating out of approximately 200 Coldwell Banker
offices in nine states. The Company owned the other 50% interest in HMN
through its ownership of Coldwell Banker, an original founder with PNC
Mortgage of HMN in mid-1995. HMN ended 1996 with over $1.1 billion in
mortgage loan application volume. The transaction is expected to close in
April 1997.
THE COMPANY'S REAL ESTATE BROKERAGE FRANCHISE SYSTEMS
CENTURY 21. Century 21 is the world's largest residential real estate
brokerage franchisor, with approximately 6,200 independently owned and
operated franchise offices with more than 101,000 sales agents located in 19
countries and territories. In 1996, the Company signed master franchise
agreements providing for the development of Century 21 affiliated real estate
brokerage offices in the Caribbean, the United Kingdom, the Philippines,
Indonesia, Israel and Korea.
The primary component of Century 21's revenue is service fees on
commissions from real estate transactions. Service fees are 6% of gross
commission income, subject to annual rebates to franchisees who pay a certain
threshold level of service fees annually. CENTURY 21 franchisees who meet
certain levels of annual gross revenue (as defined in the franchise
agreements) are eligible for the Century 21 Incentive Bonus ("CIB") Program,
which results in a rebate payment to qualifying franchisees determined in
accordance with the applicable franchise agreement (up to 2% in current
agreements) of such annual gross revenue. For 1996, approximately 13% of
CENTURY 21 franchisees qualified for CIB payments and such payments
aggregated less than 1% of gross commissions.
CENTURY 21 franchisees generally contribute 2% (subject to specified
minimums and maximums) of their brokerage commissions each year to the
Century 21 National Advertising Fund (the "NAF") which in turn disburses them
for local, regional and national marketing campaigns. In 1996, the NAF spent
approximately $39 million on marketing campaigns.
Coldwell Banker. Coldwell Banker is the world's third largest residential
real estate brokerage franchise system, with approximately 2,600
independently owned and operated franchise offices in the United States,
Canada and Puerto Rico, with approximately 56,000 sales agents. The primary
revenue from the Coldwell Banker system is derived from various fees paid by
franchisees, including initial franchise fees and ongoing services. Coldwell
Banker franchisees pay annual fees to the Company consisting of ongoing
services and advertising fees, which are generally 6.0% and 2.5%,
respectively, of a franchisee's annual gross revenues (subject to annual
rebates to franchisees who pay a certain threshold level of service fees
annually, and to minimums and maximums on advertising fees).
Coldwell Banker franchisees who meet certain levels of annual gross
revenue (as defined in the franchise agreements) are eligible for the
Performance Premium Award ("PPA") Program, which results in a rebate payment
to qualifying franchisees determined in accordance with the applicable
franchise agreement (up to 4% in current agreements) of such annual gross
revenue. For 1996, approximately 24% of Coldwell Banker franchisees qualified
for PPA payments and such payments aggregated approximately 1% of gross
commissions.
21
<PAGE>
Advertising fees collected from Coldwell Banker franchisees are generally
expended on local, regional and national marketing activities, including
media purchases and production, direct mail and promotional activities and
other marketing efforts. In 1996, Coldwell Banker expended approximately
$18.3 million for such purposes.
ERA. The ERA franchise system is the fourth largest residential real
estate brokerage franchise system in the world, with more than 2,500
independently owned and operated franchise offices, with more than 27,000
sales agents located in 15 countries. The primary revenue from the ERA
franchise system results from franchisees' payments of fixed membership fees
ranging from $202 to $799 per month, based on volume, plus per transaction
fees of approximately $113.
In addition to membership fees and transaction fees, franchisees of the
ERA system pay a fixed amount per month, which ranges from $218 to $874,
based on volume, plus an additional $218 per month for each branch office,
into the ERA National Marketing Fund (the "ERA NMF"). The Company utilizes
the funds in the ERA NMF for local, regional and national marketing
activities, including media purchases and production, direct mail and
promotional activities and other marketing efforts. In 1996, the ERA NMF
spent approximately $8.7 million on marketing campaigns.
REAL ESTATE BROKERAGE FRANCHISE SALES
The Company markets real estate brokerage franchises primarily to
independent, unaffiliated owners of real estate brokerage companies as well
as individuals who are interested in establishing real estate brokerage
businesses. The Company believes that its existing franchisee base represents
another source of potential growth, as franchisees seek to expand their
existing business to additional markets. Therefore, the Company's sales
strategy focuses on maintaining satisfaction and enhancing the value of the
relationship between the franchisor and the franchisee.
The Company's real estate brokerage franchise systems employ a national
franchise sales force consisting of approximately 123 salespersons and sales
management personnel, which is divided into separate sales organizations for
the CENTURY 21, Coldwell Banker and ERA systems. These sales organizations
are compensated primarily through commissions on sales concluded. Members of
the sales forces are also encouraged to provide referrals to the other sales
forces when appropriate.
OPERATIONS -- REAL ESTATE BROKERAGE
Brand Name Marketing Programs. The Company's brand name marketing programs
for the real estate brokerage business focus on increasing brand awareness
generally, in order to increase the likelihood of potential home buyers and
home sellers engaging franchise brokers' services. Each brand has a dedicated
marketing staff in order to develop the brand's marketing strategy while
maintaining brand integrity. The corporate marketing services department
provides services related to production and implementation of the marketing
strategy developed by the broad marketing staff.
Training and Consulting. Each brand provides its franchisees and their
sales associates with training programs which have been developed by such
brand. The training programs include mandatory programs instructing the
franchisee and/or the sales associate on how to best utilize the methods of
the particular system and additional optional training programs which expand
upon such instruction. Each brand's training department is staffed with
instructors experienced in both real estate practice and instruction. In
addition, the Company has established regional support personnel who provide
consulting services to the franchisees in their respective regions.
Awards. Each system provides a series of awards to brokers and their sales
associates who are outstanding performers in each year. These awards signify
the highest levels of achievement within each system and provide a
significant incentive for franchisees to attract and retain the best sales
associates.
Referrals. Each system provides its franchisees with referrals of
potential customers, which referrals are developed from sources both within
and outside of the system.
Purchasing. Through its HFS Purchasing Services operations, the Company
provides its franchisees with volume purchasing discounts for products,
services, furnishings and equipment used in real estate
22
<PAGE>
brokerage operations. In addition to the preferred alliance programs
described hereinafter, HFS Purchasing Services establishes relationships with
vendors and negotiates discounts for purchases by its customers. The Company
does not maintain inventory, directly supply any of the products or,
generally, extend credit to franchisees for purchases. See "COMBINED
OPERATIONS --Preferred Alliance and Co-Marketing Arrangements" below.
REAL ESTATE BROKERAGE FRANCHISE AGREEMENTS
The Company's real estate brokerage franchise agreements grant the right
to utilize one of the brand names associated with the Company's real estate
brokerage franchise systems to real estate brokers under franchise
agreements.
CENTURY 21. The current standard franchise agreement for the CENTURY 21
system provides for a 10-year term (prior to October 1995, agreements
provided for five-year terms). Franchise agreements generally require, among
other obligations, that franchisees pay fees comprised of royalty fees
and marketing fees which are generally 6% and 2%, respectively, of gross
commissions on closed transactions. See "The Company's Real Estate Brokerage
Franchise Systems -- CENTURY 21" above. The marketing portion of the annual
franchise fee is intended to reimburse the Company for the expenses
associated with providing such franchise services as brand-specific national
media advertising and training. In addition, the CENTURY 21 agreements
provide for the payment of the CIB to qualified franchisees who meet certain
levels of annual gross revenue (as defined in the franchise agreements).
Coldwell Banker. Coldwell Banker franchise agreements generally have a
term of seven to ten years for which franchisees pay annual fees consisting
of ongoing service and advertising fees, which are generally 6.0% and 2.5%,
respectively, of a franchisee's annual gross revenues (subject to annual
rebates to franchisees who pay a certain threshold level of service fees
annually). See "The Company's Real Estate Brokerage Franchise Systems --
Coldwell Banker" above. In return for payment of the franchise fees, the
Company provides Coldwell Banker franchisees access to the Coldwell Banker
name and systems, referrals from the Company's corporate relocation business
and the combined market presence of all its franchised offices.
ERA. The current form of the franchise agreement for the ERA system
provides for a term expiring March 31, 2002. ERA franchisees pay membership
fees and marketing fees at fixed rates determined by gross annual volume of
real estate sales, and a per transaction charge of approximately $113. See
"The Company's Real Estate Brokerage Franchise Systems -- ERA" above.
The Company's typical franchise agreement for all real estate brokerage
brands is terminable by the Company for the franchisee's failure to pay
franchise fees or other charges or for other material default under the
franchise agreement. In the event of such termination, the agreement
generally provides that the Company is entitled to be compensated for lost
revenues in an amount equal to the average monthly franchise fees calculated
for the remaining term of the agreement.
REAL ESTATE BROKERAGE SERVICE MARKS AND OTHER INTELLECTUAL PROPERTY
General. The service marks "CENTURY 21," "Coldwell Banker," "Electronic
Realty Associates" and "ERA" and related logos are material to the Company's
business. The Company, through its franchisees, actively uses these marks.
All of the material marks in each franchise system are registered (or have
applications pending for registration) with the United States Patent and
Trademark Office. The marks used in the real estate brokerage systems are
owned by the Company through its subsidiaries.
Other Licensing. In addition to licensing the CENTURY 21 marks under the
franchise agreements, the Company has entered into certain licensing
arrangements for the CENTURY 21 marks. In particular, in December 1995 the
Company entered into a 20-year license agreement with AMRE, Inc. ("AMRE")
(subject to termination by AMRE in 2005), pursuant to which AMRE's affiliate,
American Remodeling, Inc., was permitted to market specific home improvement
products and services to residential consumers under the name "CENTURY 21
Home Improvements." Due to AMRE's poor business performance, in the fourth
quarter of 1996, the Company wrote off an $11 million accrued license fee
representing fees
23
<PAGE>
recognized as earned through the third quarter of 1996, a $3 million
investment in preferred stock and related accrued professional fees. On
January 21, 1997, AMRE sought protection under Chapter 11 of the United
States Bankruptcy Code, and on February 28, 1997, the Company terminated the
license agreement with AMRE. The Company is pursuing relicensing the CENTURY
21 Home Improvements name to other independent entities in the home
improvement industry.
COMPETITION
Competition among the national real estate brokerage brand franchisors to
grow their franchise systems is intense. The chief competitors of the
Company's real estate brokerage franchise systems are the RE/MAX, Better
Homes & Gardens and Prudential real estate brokerage brands. In addition, a
real estate broker may choose to affiliate with a regional chain or not to
affiliate with a franchisor but to remain independent.
The Company believes that competition for the sale of franchises in the
real estate brokerage industry is based principally upon the perceived value
and quality of the brand and services offered to franchisees, as well as the
nature of those services. The Company also believes that the perceived value
of its brand names to prospective franchisees is, to some extent, a function
of the success of its existing franchisees.
The ability of the Company's real estate brokerage franchisees to compete
in the industry is important to the Company's prospects for growth, although,
because franchise fees are based on franchisee gross commissions or volume,
the Company's revenue is not directly dependent on franchisee profitability.
The ability of an individual franchisee to compete may be affected by the
location and quality of its office, the number of competing offices in the
vicinity, its affiliation with a recognized brand name, community reputation
and other factors. A franchisee's success may also be affected by general,
regional and local economic conditions. The effect of these conditions on the
Company's results of operations is substantially reduced by virtue of the
diverse geographical locations of the Company's franchises. At December 31,
1996, the combined real estate franchise systems had 8,541 franchised
brokerage offices in the United States and 11,349 offices worldwide. The real
estate franchise systems have offices in 23 countries and territories in
North America, Europe, Asia, Africa and Australia.
SEASONALITY
The principal sources of real estate segment revenue for the Company are
based upon the timing of residential real estate sales, which are lower in
the first calendar quarter each year, and relatively level the other three
quarters of the year. As a result, the Company's revenue from the real estate
brokerage segment of its business is less in the first calendar quarter of
each year.
THE RELOCATION BUSINESS
The Company operates two subsidiaries engaged in the business of
providing employee relocation services to corporate clients. The Company
estimates that through Worldwide Relocation Management Company, Inc. ("WRMC",
acquired in connection with the Century 21 acquisition) and Coldwell Banker
Relocation Services, Inc., the Company is the second largest provider of
employee relocation services in the United States. These corporate employee
relocation businesses offer their relocation clients a variety of services
in connection with the transfer of its clients' employees. At December 31,
1996, Coldwell Banker employed 960 people in its relocation business at its
corporate office and three regional offices and WRMC employed 118 people.
Following its acquisition of PHH (with its employee relocation subsidiary),
the Company will be the largest provider of employee relocation services in
the United States.
The relocation services provided to customers of one or more of the
relocation subsidiaries include primarily appraisal, inspection and selling
of transferees' homes, equity advances (guaranteed by the corporate
customer), purchase of a home which is not sold for at least a price
determined on the appraised value within a specified time period, certain
home management services, assistance in locating a new home at the
transferee's destination, consulting services and other related services.
24
<PAGE>
All costs associated with such services are reimbursed by the corporate
client, including, if necessary, repayment of equity advances and
reimbursement of losses on the sale of homes purchased by one of the
Company's relocation subsidiaries. Corporate clients also pay a fee for the
services performed. Another source of revenue for the Company is interest on
the equity advances. As a result of the obligations of corporate clients to
pay the losses and guarantee repayment of equity advances, the exposure of
the Company on such items is limited to the credit risk of the corporate
clients of its relocation businesses and not on the potential changes in
value of residential real estate. The Company believes such risk is minimal,
due to the credit quality of the corporate clients of its relocation
subsidiaries.
OTHER BUSINESSES
PREFERRED ALLIANCE AND CO-MARKETING ARRANGEMENTS
The Company believes a significant portion of its revenue growth
opportunities will arise from its ability to capitalize on the significant
and increasing amount of aggregate purchasing power and marketing outlets
represented by the businesses in the Company's franchise systems. The Company
initially tapped the potential of these synergies within the Company in 1993
when it launched its Preferred Alliance Program, under which hotel industry
vendors provide significant discounts, commissions and co-marketing revenue
to hotel franchisees plus preferred alliance fees to the Company in exchange
for being designated as the preferred provider of goods or services to the
owners of the Company's franchised hotels or the preferred marketer of goods
and services to the millions of hotel guests who stay in the hotels and
customers of the real estate brokerage offices each year.
The Company currently participates in preferred alliance relationships
with more than 70 companies, including AT&T, ADT Security Systems, Pizza Hut,
Kodak, VISA U.S.A., Office Depot and Coca-Cola. Fees to the Company from
these contracts have increased from $6.5 million in 1993 to $20.8 million in
1995 and $46.1 million in 1996. The operating profit generated by most new
preferred alliance arrangements closely approximates the incremental revenue
produced by such arrangements since the costs of the existing infrastructure
required to negotiate and operate these programs are largely fixed. Revenue
received by the Company pursuant to the preferred alliance arrangements are
classified in Service Fees and are included in the business segment to which
they relate. Such fees have been a significant source of increases in
revenue and operating income in the Company's statement of operations for
1996 compared to 1995.
INFORMATION TECHNOLOGY SERVICES.
WizCom International, Ltd ("WizCom"), a wholly owned indirect subsidiary
of the Company, was formerly an indirect subsidiary of Avis, owns and
operates the Wizard System more fully described under "CAR RENTAL BUSINESS --
Operations -- Avis -- The Wizard System" above. In 1995, Budget Rent
A Car Corporation ("Budget") entered into a computer services agreement with
WizCom that provides Budget with certain reservation system computer services
that are substantially similar to computer services provided to the Avis
System. WizCom has also entered into agreements with hotel and other rental
car companies to provide travel related reservation and distribution system
services.
CREDIT INFORMATION BUSINESS.
In May 1995 the Company acquired Central Credit Inc. ("CCI"), a gambling
patron credit information business. CCI maintains a database of information
provided by casinos regarding the credit records of casino gaming patrons,
and provides, for a fee, such information and related services to its
customers, which primarily consist of casinos.
VEHICLE MANAGEMENT SERVICES.
Upon consummation of its acquisition of PHH, the Company will acquire
indirectly PHH Vehicle Management Services Corporation ("VMS"), which provide
fully integrated vehicle management services to corporate clients and
government agencies. These services include providing advisory services for
25
<PAGE>
automobile fleet management programs and managerial services. In addition,
VMS provides managerial services which include purchasing automobiles,
arranging for their delivery through new car dealers located throughout the
United States, Canada, the United Kingdom and the Republic of Ireland, as
well as capabilities in Mexico and throughout Europe, complying with various
local registration, title, tax and insurance requirements, pursuing warranty
claims with automobile manufacturers and selling used cars at replacement
time. VMS offers various leasing plans for its vehicle leasing programs,
financed primarily through the issuance of commercial paper and medium-term
notes and through unsecured borrowings under revolving credit agreements and
bank lines of credit. Also, VMS offers fuel and expense management programs
to corporations and government agencies for the control of automotive
business travel expenses in each of the United States, Canada, United
Kingdom, Republic of Ireland and Germany, with capabilities in Mexico and
throughout Europe. Through a service card and billing service, a client's
traveling representatives are able to purchase various products and services
such as gasoline, tires, batteries, glass and maintenance services at
numerous outlets.
MORTGAGE SERVICES.
Also through its proposed acquisition of PHH, the Company will acquire the
twelfth largest originator of residential first mortgage loans in the United
States, PHH Mortgage. PHH Mortgage offers services consisting of the
origination, sale and servicing of residential first mortgage loans. A
variety of first mortgage products are marketed to consumers through
relationships with corporations, affinity groups, financial institutions,
real estate brokerage firms and other mortgage banks. PHH Mortgage is a
centralized mortgage lender conducting its business primarily from its
location in Mount Laurel, New Jersey, servicing customers in all fifty
states. PHH Mortgage customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgage-backed securities or as participation
certificates issued or guaranteed by Fannie Mae Corp., the Federal Home Loan
Mortgage Corporation ("FHLMC") or the Government National Mortgage
Association ("GNMA") while generally retaining mortgage servicing rights.
REGULATION
Franchise Regulation. The sale of franchises is regulated by various state
laws as well as by the Federal Trade Commission (the "FTC"). The FTC requires
that franchisors make extensive disclosure to prospective franchisees but
does not require registration. A number of states require registration or
disclosure in connection with franchise offers and sales. In addition,
several states have "franchise relationship laws" or "business opportunity
laws" that limit the ability of the franchisor to terminate franchise
agreements or to withhold consent to the renewal or transfer of these
agreements. While the Company's franchising operations have not been
materially adversely affected by such existing regulation, the Company cannot
predict the effect of any future legislation or regulation.
Real Estate Brokerage Regulation. The federal Real Estate Settlement
Procedures Act and state real estate brokerage laws restrict payments which
real estate brokers may receive in connection with the sales of residences
and referral of settlement services (e.g., mortgages, homeowners insurance,
title insurance). Such laws may to some extent restrict preferred alliance
arrangements involving the Company's real estate brokerage franchisees.
Timeshare Exchange Regulation. The Company's timeshare exchange business
is subject to foreign, federal, state and local laws and regulations
including those relating to taxes, consumer credit, environmental protection
and labor matters. In addition, the Company is subject to state statutes in
those states regulating timeshare exchange services, and must prepare and
file annually, with regulators in states which require it, the "RCI
Disclosure Guide to Vacation Exchange". The Company is not subject to those
state statutes governing the development of timeshare condominium units and
the sale of timeshare interests, but such statutes directly affect the
members and resorts that participate in the RCI Network. Therefore, the
statutes indirectly impact the Company.
26
<PAGE>
Car Rental Regulation. The Company's car rental business is subject to
federal, state and local laws and regulations pertaining to, among other
things, taxing and licensing of vehicles, currency controls, consumer credit,
labor matters and retail vehicle sales. For the principal environmental
regulatory requirements applicable to such operations, see "CAR RENTAL
BUSINESS --Environmental Matters."
Gaming Credit Regulation. Under the Delaware General Corporation Law,
because the Company may be required to have licenses from state agencies or
other authorities to conduct its gaming credit information business and
because the licenses may be conditioned upon some or all of the stockholders
possessing certain prescribed qualifications, the Company's capital stock may
be made subject to redemption by the Company to the extent necessary to
prevent the loss of such licenses. As a result, the Company's Certificate of
Incorporation and By-Laws contain provisions which (i) make the right of
stockholders required to be qualified by relevant gaming authorities to vote
capital stock held by them depend upon their prompt qualification by the
relevant gaming authorities (or the prompt receipt of a waiver of such
qualification) and prevent stockholders found to be disqualified under
applicable gaming laws and regulations from voting any shares of stock
beneficially owned by them on any matter, (ii) provide for the disposition,
at the Company's option, of any publicly-traded securities held by any person
required to be qualified who has not been qualified (or obtained a waiver of
such qualification) or any person found to be disqualified and (iii) provide
for the redemption, at the Company's option, of any shares of capital stock
of the Company held by any person required to be qualified who has not been
qualified (or obtained a waiver of such qualification) or any person found to
be so disqualified. The purpose of these provisions is to provide a procedure
permitting the Company either (a) to require any person required to be
qualified who has not been qualified (or obtained a waiver of such
qualification) or any person found unsuitable or disqualified to hold capital
stock in the Company to dispose of his securities or (b) to redeem capital
stock held by any such person.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 30,900 persons
full time. Approximately 14,000 employees work in the Avis car rental
operations, 4,000 of whom are represented by 65 various local unions under
contracts expiring on a variety of dates. No local union represents more than
2.5% of the Company's employees. Management considers its employee relations
to be satisfactory.
ITEM 2. PROPERTIES
The principal executive offices of the Company are in a building owned by
the Company located at 6 Sylvan Way, Parsippany, New Jersey 07054. The
Company leases all other office facilities and seven lodging reservation
system offices in the United States, and one reservation center in Saint
John, New Brunswick, Canada. The Company leases space in Tulsa, Oklahoma for
its Avis car rental reservations system pursuant to a lease expiring in 2001,
and leases office space for Avis and WizCom in Garden City, New York pursuant
to a lease expiring in 2015. The Company also leases or has concessions
relating to space for its Avis business at 707 locations in the United States
and 97 locations outside the United States for all of its operations and owns
a 166,000 square foot building in Virginia Beach, Virginia which serves as a
satellite administrative and reservations facility for Avis. The Company owns
two office locations used in connection with RCI's business and leases 19
locations in the United States and 38 locations internationally. The Company
also leases sales offices and other ancillary office space in locations
around the country. Management believes that such properties are sufficient
to meet its present needs and does not anticipate any difficulty in securing
additional space, as needed, on terms acceptable to the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation, other than litigation
incidental to the business of the Company. None of such litigation, either
individually or in the aggregate, is material to the business of the Company.
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 1996.
27
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET PRICE ON COMMON STOCK
Since the initial public offering of the Company's Common Stock at $4 per
share, effective December 9, 1992, the Company's Common Stock has been listed
on the New York Stock Exchange ("NYSE") under the symbol "HFS". At March 21,
1997 the number of stockholders of record was approximately 514. The
following table sets forth the quarterly high and low sales prices per share
as reported by the NYSE for 1996 and 1995.
<TABLE>
<CAPTION>
1996 HIGH LOW
- --------------- --------- ---------
<S> <C> <C>
First Quarter . $51.500 $36.500
Second Quarter 75.500 45.500
Third Quarter . 72.000 49.125
Fourth Quarter 79.875 55.750
</TABLE>
<TABLE>
<CAPTION>
1995 HIGH LOW
- --------------- --------- ---------
<S> <C> <C>
First Quarter . $16.750 $12.500
Second Quarter 17.625 13.875
Third Quarter . 27.000 17.000
Fourth Quarter 40.875 25.375
</TABLE>
On March 21, 1997 the last sale price of the Company's Common Stock on the
NYSE was $65.75 per share.
All stock price information has been restated to reflect a two-for-one
stock split effected in the form of a dividend to stockholders of record on
January 30, 1996, payable on February 14, 1996.
DIVIDEND POLICY
The Company expects to retain its earnings for the development and
expansion of its business and the repayment of indebtedness and does not
anticipate paying dividends on Common Stock in the foreseeable future.
28
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
HFS INCORPORATED AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Total revenue .................... $ 799,040 $ 412,983 $312,547 $257,070 $202,954
Total expenses ................... 515,393 278,078 221,904 196,402 174,251
Income before extraordinary loss 169,584 79,730 53,489 34,323 19,857
Extraordinary loss ............... -- -- -- 12,845 1,622
----------- ----------- ----------- ----------- -----------
Net income ....................... $ 169,584 $ 79,730 $ 53,489 $ 21,478 $ 18,235
----------- ----------- ----------- ----------- -----------
PER SHARE INFORMATION
(PRIMARY)
Income before extraordinary loss $ 1.29 $ .74 $ .53 $ .35 $ .23
Extraordinary loss (net of tax) . -- -- -- .13 .02
----------- ----------- ----------- ----------- -----------
Net income ....................... $ 1.29 $ .74 $ .53 $ .22 $ .21
----------- ----------- ----------- ----------- -----------
(FULLY DILUTED)
Income before extraordinary loss $ 1.29 $ .73 $ .53 $ .34 $ .23
Extraordinary loss (net of tax) . -- -- -- .13 .02
----------- ----------- ----------- ----------- -----------
Net income ....................... $ 1.29 $ .73 $ .53 $ .21 $ .21
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA
Franchise agreements, net ........ $ 995,947 $ 517,218 $495,026 $504,572 $395,785
Total assets ..................... 4,288,921 1,165,808 774,097 735,821 545,330
Long-term debt ................... 748,421 300,778 347,416 347,712 236,088
Stockholders' equity ............. 2,476,501 560,191 280,569 267,409 226,559
</TABLE>
There were no dividends declared during the periods presented above.
All per share information presented has been retroactively adjusted to
reflect the stock splits discussed in Note 1 in the Notes to the Consolidated
Financial Statements.
On April 29, 1993, the Company purchased the outstanding stock of the
company which owns the Super 8 Motel franchise system ("Super 8"). On May 11,
1995, the Company acquired by merger Central Credit Inc. ("CCI"), a gambling
patron credit information business. On August 1, 1995, a majority owned
subsidiary of the Company acquired the Century 21 real estate brokerage
franchise system ("Century 21"). On January 23, 1996, the Company acquired the
assets comprising the Travelodge hotel franchise system in North America.
On February 12, 1996, the Company purchased substantially all the assets
comprising the Electronic Realty Associates residential real estate brokerage
franchise system. During the second quarter of 1996, the Company purchased
the six previously non-aimed regions of the CENTURY 21 franchise system.
On May 31, 1996, the Company acquired the Coldwell Banker real estate brokerage
franchise system and relocation business ("CB"). On October 17, 1996, the
Company acquired the common stock of Avis, Inc. ("Avis") which owns the world's
second largest car rental system. On November 12, 1996, the Company acquired
the common stock of Resorts Condominium International, Inc. ("RCI"), provider
of timeshare exchange programs. Consolidated results of the Company include
the operating results of Days Inn, Super 8, CCI, Century 21, CB and RCI since
the respective dates of acquisition (see Note 2 in the Notes to the
Consolidated Financial Statements).
On November 22, 1994, the Company distributed its business of financing,
developing and operating casino gaming facilities to shareholders in
accordance with a formal plan adopted by the Board of Directors on September
9, 1994.
29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
In 1996, HFS Incorporated (together with its subsidiaries, the "Company")
evolved from the world's largest franchisor of lodging properties and real
estate brokerage offices to a global service provider. Although the Company
provides fee-based services that primarily fall within the Travel and Real
Estate industries, the Company generally neither owns the assets nor shares
the risks associated with the underlying businesses of its customers. Within
the travel industry, the Company is the world's largest franchisor of lodging
facilities ("Lodging") and provider of vacation timeshare exchange services
("Timeshare"). The Company also owns Avis, Inc., the second largest car
rental system worldwide ("Car Rental"). The Company will undertake an initial
public offering of the Avis car rental operation in September 1997 that is
expected to dilute the Company's interest in such car rental operation to 25%
and replace car rental ownership earnings with revenue from franchise,
reservation and information technology agreements. Within the real estate
industry, the Company is the world's largest franchisor of real estate
brokerage offices ("Real Estate Franchise") and the second largest provider
of corporate relocation services ("Relocation").
In November 1996, the Company announced an agreement to acquire PHH
Corporation ("PHH") in a $1.7 billion transaction which will be accounted for
as a pooling of interests. PHH's business lines, which complement the
Company's travel and real estate industry segments, include the world's
largest corporate relocation business and the twelfth largest mortgage
service business in the United States. PHH also provides international fleet
management services.
All comparisons within the following discussion are to the previous year,
unless otherwise stated.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Consolidated net income increased 113% to $169.6 million in 1996 while
earnings per share ("EPS") increased 77% to $1.29. Operating income (revenue
less expenses excluding interest and income taxes) increased in the Company's
all of Lodging business, which was established in 1990, as well as in the
Company's other business segments which grew substantially by acquisitions
in 1996.
Consolidated revenue increased 93% to $799.0 million including a 15%
($48.9 million) increase in Lodging revenue and a 441% ($337.1 million)
revenue increase for the aggregate of the other segments, which include
significant 1996 acquisitions. Prior to 1996, historical Company operating
margins have exceeded 58% for all years presented based on the strength of
the Company's franchise businesses, especially Lodging, which continues to
yield operating margins in excess of 60%. Operating margins for recently
acquired business segments are substantial; however, they do not match the
franchise business results, as those businesses generate revenue from the
value of their intellectual property and because consolidated depreciation
and amortization of acquired assets has increased $38.4 million (124%) due to
the high level of 1996 acquisition activity.
Interest expense increased 50% ($11.0 million) primarily resulting from
the issuance of $240 million, 4 3/4% Convertible Senior Notes ("4 3/4%
Notes") in February 1996 while the weighted average effective interest rate
decreased from 5.94% to 5.67%.
The Company collects certain service fees from lodging and real estate
franchisees, which it disburses completely for marketing and reservation
activities on behalf of franchisees. Since the Company administers such funds
on a pass through basis, management analyzes business results for the Lodging
and Real Estate franchise segments in terms of revenue, net of marketing and
reservation expenses ("Net revenue") and operating expenses. Net revenue
consists of gross revenue of $799.0 million, $413.0 million and $312.5
million for 1996, 1995 and 1994, respectively, less $169.3 million, $144.0
million and $130.3 million of marketing and reservation expenses, for the
same respective periods.
30
<PAGE>
in gross and net revenue is approximately the same for all years presented.
Operating expenses include depreciation and amortization but exclude interest
expense and income taxes. Results for the combined segments are as follows
($000's):
<TABLE>
<CAPTION>
VARIANCE VARIANCE
OPERATING INCOME 1996 1995 96 V 95 1994 95 V 94
- ------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net revenue .............. $629,725 $269,019 134% $182,279 48%
Operating expenses ....... $313,324 $112,325 179% $ 72,951 54%
Operating income ......... $316,401 $156,694 102% $109,328 43%
Operating margin ......... 50.2% 58.2% (14)% 60.0% (3)%
Depreciation/amortization
included in above ....... $ 69,234 $ 30,857 124% $ 23,723 30%
</TABLE>
TRAVEL INDUSTRY
LODGING
The Company operates eight nationally recognized brands with approximately
5,400 lodging properties under franchise contracts of up to 20 years in
duration. The Company provides central reservation system services and
national marketing programs, which are completely funded by its franchisees
based on a designated portion of its franchise fee. The Company charges
royalty fees based on a percentage of franchisee gross room sales to fund all
expenses not covered by marketing and reservation fees, such as quality
assurance inspections and franchise sales and service functions. Accordingly,
the significant revenue drivers of the Company are the number of
royalty-paying franchise units and the average royalty rate at which they
pay. Relevant but less significant are the average daily rate and occupancy
percentage of the underlying lodging properties.
<TABLE>
<CAPTION>
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
- ------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Net revenue .............. $227,840 $196,704 16%
Operating expenses........ $ 87,667 $ 75,025 17%
Operating income.......... $140,173 $121,679 15%
Operating margin ......... 61.5% 61.9% (1%)
Depreciation/amortization
(included in above)...... $ 30,852 $ 26,058 18%
</TABLE>
Operating income increased 15% and net revenue increased 16% as a result
of a 13% increase in royalty and a 41% increase in revenue from preferred
alliance partners seeking access to the Company's franchisees and their
underlying consumer base. Results for 1996 demonstrated that room growth is
the most significant outcome driver for franchisee royalty, as the Company
added 55,253 net rooms in 1996, representing a 133% increase from 1995
results. The Company added 94,506 rooms in 1996 (including 30,274 rooms added
by the acquisition of Travelodge franchise contracts) and terminated 39,253
rooms in 1996 (including 6,053 Park Inn International rooms, comprising the
franchise system sold in September 1996 for $2.2 million). In 1995, the
Company added 63,280 rooms (including 9,780 rooms added by the acquisition of
Knights Inn franchise contracts) and terminated 39,603 rooms (including
22,151 related to a special year-end removal of properties as a result of the
repositioning and tightening of quality standards of the Company's brands).
Total U.S. system revenue per available room ("REVPAR") increased 1.3%
primarily due to a 1.9% increase in the average daily rates charged at
franchised lodging facilities ("ADR"), however, REVPAR for comparable
properties increased 3.3% as a result of increases in ADR.
The 17% ($12.6 million) increase in operating expenses included an 18%
increase ($4.8 million) in depreciation and amortization, primarily related
to the excess of cost over net assets acquired ("goodwill") associated with
the acquisitions of the Travelodge and Knights Inn franchise systems in
January 1996 and August 1995, respectively. Selling, general and
administrative expenses ("SG&A") increased 16% ($7.8 million), primarily as a
result of a $2.0 million of increase in franchise sales and $1.9 million of
scheduled Ramada license fee increases.
CAR RENTAL
The Company acquired Avis, Inc. on October 17, 1996 for approximately $800
million in cash and Company common stock. Prior to the acquisition date, the
Company announced its plan to undertake an initial public offering (the
"IPO") of Avis' car rental operating subsidiary ("ARAC") within one year of
31
<PAGE>
the acquisition date and dilute its interest in ARAC to approximately 25%.
The Company will retain assets that are consistent with the Company's service
provider business profile, including the trademarks, franchise agreements,
reservation system and information technology system assets. ARAC will pay
fees to the Company based on franchise agreements commencing in 1997 (as well
as fees associated with reservation and information technology agreements)
that are typical to a traditional franchise relationship. The Car Rental
segment generated $6.1 million of operating income which was comprised of
$9.5 million of revenue and $3.4 million of operating expenses for the period
October 17, 1996 to December 31, 1996. Net revenue consists primarily of
third party franchise fees and $2.3 million of equity in earnings of ARAC
from the October 17, 1996 acquisition date during the weakest calendar
quarter in the car rental business. Operating expenses primarily consisted of
depreciation and amortization expenses associated with the Avis trademark and
goodwill.
TIMESHARE
The Company acquired RCI on November 12, 1996 for $487 million plus up to
$200 million of contingent consideration. RCI sells subscription memberships
to owners of vacation timeshare resorts which allows the members to exchange
their timeshare accommodations for time share accomodations owned by other
members at participating affiliated resorts worldwide. In addition to
membership fees, RCI earns fees for exchanges processed by its call center.
The key timeshare revenue drivers include the number of fee paying members
and exchanges as well as each corresponding average fee. The operating income
summary for the period November 12, 1996 to December 31, 1996 is as follows
($000's):
<TABLE>
<CAPTION>
OPERATING INCOME
- -------------------------
<S> <C>
Net revenue .............. $30,723
Operating expenses........ $25,013
Operating income.......... $ 5,710
Operating margin ......... 18.6%
Depreciation/amortization
included in above........ $ 2,559
</TABLE>
Net revenue primarily consists of $11.3 million of membership fees and
$12.1 million of exchange fees. Assuming Company ownership of timeshare
operations since January 1, 1995, pro forma annual membership and exchange
fee revenue increased 12% to $102.0 million and 11% to $157.6 million,
respectively. Total members and exchanges for full year 1996 increased 8% to
2.2 million and 9% to 1.7 million compared to 1995, respectively. Operating
expenses consist primarily of $15.4 million and $2.5 million of staff and
communication costs associated with member services (call centers) and other
timeshare functions for the period November 12, 1996 to December 31, 1996.
REAL ESTATE INDUSTRY
REAL ESTATE FRANCHISE
The Company licenses brand names to independently owned brokerage offices
associated with three of the four largest franchise systems in the world. The
Company acquired the world's largest franchise system, the CENTURY 21
franchise system in August 1995, the ERA franchise system in February 1996
and the Coldwell Banker franchise system in May 1996. Similar to Lodging, the
most significant revenue driver for real estate franchise is unit growth and
the number of sales associates affiliated with the underlying franchise
brokerage offices. Royalties generally based on a percentage of franchisee
commission revenue fund the franchise sales, service and training efforts.
Marketing fee collections fund national advertising expenditures and other
marketing activities.
<TABLE>
<CAPTION>
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
- ------------------------- ----------- ---------- ----------
<S> <C> <C> <C>
Net revenue .............. $231,132 $43,771 428%
Operating expenses........ $127,421 $24,494 420%
Operating income.......... $103,711 $19,277 438%
Operating margin ......... 44.9% 44.0% 2%
Depreciation/amortization
included in above........ $ 27,317 $ 2,997 811%
</TABLE>
32
<PAGE>
Operating income and net revenue increased 438% and 428% respectively, as
a result of the CENTURY 21 franchise system's first full year contribution to
operating results and partial year contributions from the acquired Coldwell
Banker and ERA franchise systems. The three franchise systems license their
trademarks to approximately 11,300 brokerage offices with approximately
184,000 sales associates at December 31, 1996. The royalty portion of revenue
increased $162.8 million (361%) and revenue from preferred alliances grew from
$208,000 to $13.4 million, net of the Company's $11.0 million fourth quarter
write-off of revenue associated with the licensing of the CENTURY 21 trademark
to Amre, Inc., which filed for bankruptcy protection in February 1997. The
Company is currently negotiating with home improvement companies to license the
CENTURY 21 trademark.
Operating expenses increased 420% ($102.9 million) as a result of
incremental expenses associated with acquired franchise systems. Operating
expenses also included a $5.0 million restructuring charge associated with
the second quarter 1996 contribution of Coldwell Banker's former owned
brokerage business to National Realty Trust (the "Trust"), an independent
entity governed by independent trustees. The Company's operating income and
operating margin excluding the contribution to the Trust would have increased
from $103.7 million to $108.7 million and from 44.9% to 47.0%.
RELOCATION
Relocation segment services primarily consists of the purchase, management
and resale of homes for transferring employees of corporate clients and
members of affinity group clients. Although the Company acquires the home of
client employees, the client corporation reimburses the Company for carrying
costs until the home is sold and for home sale losses. Accordingly, the
Company earns a fee for services with no real estate risk. Operating expenses
primarily consist of sales and service staffing and related costs. Operating
results include contributions from Coldwell Banker Relocation Services, Inc.
("CBRS") from the May 31, 1996 acquisition date and from Worldwide Relocation
Management, Inc. ("WRM") since the August 1, 1995 acquisition date, as
summarized below ($000's):
<TABLE>
<CAPTION>
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
- ------------------------- ---------- --------- ----------
<S> <C> <C> <C>
Net revenue ............ $77,983 $8,204 851%
Operating expenses...... $49,521 $3,783 1,209%
Operating income........ $28,462 $4,421 544%
Operating margin ....... 36.5% 53.9% (32%)
</TABLE>
Net revenue in 1996 includes $59.2 million of revenue from CBRS since the
Company's May 31, 1996 acquisition date and $16.0 million of net revenue from
WRM. Net revenue in 1995 represents five months of results from WRM only.
Operating expenses increased 544% due to the acquisition of CBRS and a full
year's contribution from WRM. The operating margin decrease reflects service
costs associated with CBRS, a full service relocation company and the second
largest relocation services company worldwide.
1995 COMPARED TO 1994
Consolidated net income increased 49% to $79.7 million in 1995 while EPS
increased 38% to $.73. Company operations primarily consisted of Lodging
through August 1, 1995, the date the Company commenced Real Estate Franchise
segment operations by acquiring the CENTURY 21 franchise system for $275
million. Real Estate Franchise revenue and operating profits comprised 16%
and 12%, respectively, of corresponding consolidated 1995 totals compared to
none in 1994.
Interest expense increased $1.4 million representing incremental financing
costs associated with the CENTURY 21 transaction and a general rise in
interest rates in 1995 compared to 1994. Despite average LIBOR rate increases
approximating 84 basis points, the Company's average borrowing rate increased
only 40 basis points to 6.0%, principally as a result of favorable fixed rate
debt securities issued in 1994 and 1993.
33
<PAGE>
Results for the combined segments are as follows ($000's):
<TABLE>
<CAPTION>
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
- ------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Net revenue .............. $269,019 $182,279 48%
Operating expenses........ $112,325 $ 72,951 54%
Operating income.......... $156,694 $109,328 43%
Operating margin ......... 58.2% 60.0% (3%)
Depreciation/amortization
included in above........ $ 30,857 $ 23,723 30%
</TABLE>
Consolidated net revenue increased 48% to $269.0 million while operating
profits increased 43% to $156.7 million. Indicative of the Company's
operating leverage, the Company's operating margins including Real Estate
Franchise approximated 58.2% in 1995. The Company maintained significant
operating margins despite the development and integration of a Real Estate
Franchise infrastructure during the period following its August 1995
acquisition of the CENTURY 21 franchise system.
LODGING
<TABLE>
<CAPTION>
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
- ------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Net revenue .............. $196,704 $170,426 15%
Operating expenses........ $ 75,025 $ 67,939 10%
Operating income.......... $121,679 $102,487 19%
Operating margin ......... 61.9% 60.1% 3%
Depreciation/amortization
included in above........ $ 26,058 $ 21,921 19%
</TABLE>
Lodging net revenue increased 15% as a result of a $20.7 million (16%)
increase in royalty and a $6.8 million (49%) increase in revenue from
preferred alliances seeking access to franchisees and their customers. Room
growth represented the most significant revenue outcome driver contributing
to the revenue increase. The Company added 63,280 rooms during 1995,
representing an 18.8% increase, but also terminated 39,603 rooms including
22,151 rooms in a special year-end removal of properties as a result of the
repositioning and tightening of quality standards of the Company's brands.
Total REVPAR increased 3.0% primarily due to a 2.6% increase in the average
daily rates charged at franchisee hotels and the average royalty rate for
1995 increased 1.8% when compared to 1994.
Demonstrating the Company's ability to translate revenue into earnings,
operating income increased $19.2 million (19%) while operating expenses
increased only $7.1 million (10%). The increase in operating expenses
included $4.6 million of franchise sales and bad debt expenses associated
with system growth as well as $1.5 million of scheduled Ramada license fee
increases. Depreciation and amortization expense also increased $4.1 million
in part from a full year's expense in 1995 related to the newly developed
reservation system for the Days Inn franchise system which was implemented in
October 1994. The increase was also attributable to goodwill amortization
associated with the issuance of Company common stock in December 1994 and
September 1995, pursuant to an earnout agreement entered into with Bryanston
Group, Inc., an affiliate of the sellers of the Days Inn franchise system.
REAL ESTATE FRANCHISE
The CENTURY 21 franchise system contributed $43.8 million of net revenue
and $19.3 million of operating profit for the five months following the
Company's August 1, 1995 acquisition. Franchise fees paid by the approximately
6,000 CENTURY 21 franchised brokerage offices approximated $42.1 million and
comprised the significant portion of Real Estate Franchise net revenue.
Operating expenses included $21.5 million of SG&A, including franchise sales,
service and training expenses and $3.0 million of depreciation and amortization
associated with goodwill and franchise agreements acquired in the CENTURY 21
acquisition.
LIQUIDITY AND CAPITAL RESOURCES
ACQUISITIONS OVERVIEW
In 1996, the Company expanded and strengthened its leadership position in
its lodging and real estate brokerage franchise businesses with additional
franchise system acquisitions. The Company also extended
34
<PAGE>
the scope of its operations by acquiring other businesses that are leading
providers of services to the consumer travel and real estate markets. The
acquired businesses share similar characteristics, foremost of which is that
each was immediately accretive to Company earnings. Revenue is substantially
generated from service fees and not dependent on hard assets or the need for
capital expenditures other than technology investments which support and
historically have been substantially funded by the Company's customers. These
service businesses each generate significant cash flows which is enhanced by
the Company's operating leverage that provides acquired revenue streams
without corresponding increases in operating infrastructure expenses.
The Company is currently positioned to cross market within its existing
business segments and continues to pursue acquisitions and/or investments in
service businesses that fit the profile described above. A review of pending
and completed acquisitions in 1996 follows.
PENDING ACQUISITIONS
PHH -- On November 10, 1996, the Company entered into a definitive merger
agreement (the "Merger Agreement") pursuant to which the Company is expected to
issue $1.7 billion of Company common stock in exchange for all of the
outstanding common stock of PHH. PHH is the world's largest provider of
corporate relocation services and also provides mortgage services and fleet
management services. This transaction will be accounted for as a pooling of
interests. Pursuant to the terms of the Merger Agreement, the number of
Company shares to be issued may range from 21.3 million to 28.8 million (plus
approximately 1.9 million shares in connection with outstanding PHH stock
options), based upon the average share price of the Company's common stock
over a period of 20 trading days ending five trading days prior to the date
of the vote by PHH shareholders on approval of the transactions. Consummation
of the transaction is subject to the approval of PHH and Company shareholders
at special meetings to be held on April 30, 1997.
The Company anticipates that it will incur a one-time restructuring charge
in connection with the merger. The charge includes severance, facility
consolidation and other transaction related costs associated with the
integration of the Company and PHH businesses. The charge is estimated to
approximate $267 million before related income tax benefits and will be paid
with cash flow from operations and borrowings under the Company's revolving
credit facility. The Company estimates the charge to result in annual pre-tax
savings of approximately $100 million with the full benefit of cost
reductions beginning in 1998.
PHH reported $1.4 billion of revenue and $75.3 million of net income for
the nine month period ended January 31, 1997 and $1.8 billion of revenue and
$81.6 million of net income, for the year ended April 30, 1996. PHH reported
total assets of $6.1 billion at January 31, 1997 and debt, primarily under
fleet management and mortgage programs, of $4.7 billion. Although PHH's debt
to equity ratio approximates 7 to 1, such debt corresponds directly with
related net investments in leased vehicles and equity advances on homes.
Accordingly, Standard & Poor's Corporation ("S&P") and Moody's Investors
Service, Inc. ("Moody's") assigned investment grade ratings of A+ and A2,
respectively to PHH debt and A1 and P1, respectively to PHH commercial paper.
On a pro forma basis for the PHH transaction, total assets and stockholders'
equity of the Company as of September 30, 1996 approximated $10.3 billion and
$2.8 billion, respectively.
Value -- On March 3, 1997, the Company announced that it reached an
agreement in principle to acquire Value Rent-A-Car ("Value") for $175 million
in cash which will be financed with borrowings under the Revolving Credit
Facility. The Company anticipates that Value would be added to the Car Rental
Segment in the second quarter 1997, subject to execution of definitive
documentation and approval of the respective boards of directors. The Company
intends to expand Value, which predominately serves the leisure market in 45
corporate-owned locations, through franchising additional locations.
Sheraton -- On January 27, 1997, Hilton Hotels Corporation ("Hilton")
announced that it had reached a preliminary understanding to license certain
assets to the Company in connection with its pending tender offer for the
outstanding common stock of ITT Corporation ("ITT"). Pursuant to the
preliminary understanding, subject to Hilton's successful acquisition of ITT,
the Company would license the Sheraton trademark, franchise system and
management agreements worldwide under a long-term contract. The transaction
is subject to Hilton's acquisition of ITT as well as negotiation of
definitive
35
<PAGE>
agreements relating to the proposed license agreement. There can be no
assurance that Hilton's attempt to acquire ITT will be successful or that the
Company and Hilton will consummate the proposed transaction.
COMPLETED ACQUISITIONS
RCI -- On November 12, 1996, the Company completed the acquisition of all
the outstanding common stock of RCI for approximately $487 million comprised
of $412 million in cash and $75 million of Company common stock plus future
contingent payments of up to $200 million over the next five years. The cash
portion of the purchase price was funded with borrowings under a revolving
credit facility and excess proceeds from a second quarter public offering of
approximately 19.4 million shares which generated $1.2 billion of proceeds
(the "Offering").
RCI, based in Indianapolis, Indiana, is the world's largest provider of
timeshare exchange programs, providing services for approximately 2.2 million
timeshare owners and approximately 3,100 resorts around the world. RCI is
also engaged in publishing related to the timeshare industry and provides
other travel-related services, integrated software systems, resort management
and consulting services.
Avis -- On October 17, 1996, the Company completed the acquisition of all
of the outstanding capital stock of Avis, including payments under certain
employee stock plans of Avis and the redemption of certain series of
preferred stock of Avis for $806.5 million. The purchase price was comprised
of approximately $367.2 million in cash, $100.9 million in indebtedness and
$338.4 million (approximately 4.6 million shares) of Company common stock.
The cash portion of the purchase price was funded with excess proceeds from
the Offering.
Prior to the consummation of the acquisition, the Company announced its
plan to undertake an IPO of ARAC within one year of the acquisition date and
dilute its interest in ARAC to approximately 25%. ARAC will license the Avis
trademark from the Company in return for a license fee based on a percentage
of ARAC revenue. The Company also provides reservation and information
technology services to ARAC.
Coldwell Banker -- On May 31, 1996, the Company acquired by merger
Coldwell Banker (the "Merger") for $640 million of cash plus repayment of
approximately $105 million of indebtedness. At the effective date of the
Merger, Coldwell Banker had 2,164 franchised brokerage offices and owned 318
residential real estate brokerage offices ("Owned Brokerage Business") in the
United States, Canada and Puerto Rico, representing the third largest real
estate brokerage system in the United States.
The Company financed the Coldwell Banker transaction with a portion of the
approximately $1.2 billion of proceeds from the Offering. Immediately following
the closing of the Merger, the Company conveyed the Owned Brokerage Business to
the Trust and recorded a $5 million pre-tax restructuring charge.
CENTURY 21 Non-owned Regions -- During the second quarter of 1996, the
Company completed the acquisition of six U.S. CENTURY 21 regions which were
licensed to four independent master licensees. The aggregate purchase price
consisted of approximately $96 million of cash, $5 million of notes and $46
million (approximately 0.9 million shares) of the Company's common stock.
These acquisitions resulted in the Company receiving royalty fees of up to 6%
of the franchisee gross commissions generated by such offices compared to
less than 1% previously received under the master licensing agreements. The
cash portion of the aggregate purchase price was financed with proceeds from
the issuance of the 4 3/4% Notes.
ERA -- On February 12, 1996, the Company purchased substantially all of
the assets comprising the ERA residential real estate brokerage system for
approximately $40.5 million was financed by borrowings under the Company's
revolving credit facility.
CENTURY 21 -- On August 1, 1995, a majority-owned Company subsidiary, C21
Holding Corp. ("Holding"), acquired Century 21 from Metropolitan Life
Insurance Company ("MetLife") for an aggregate purchase price of $245 million
plus expenses. In February 1996, the Company paid the $30 million contingent
portion of the purchase price of Century 21 and redeemed $80 million of
Century 21 redeemable preferred stock issued by MetLife prior to the
acquisition. The Company financed these payments with proceeds from the
4 3/4% Notes.
36
<PAGE>
Effective October 29, 1996 (the "Effective Date"), the Company amended the
Subscription and Stockholders' Agreement dated as of August 1, 1995 among C21
Holding Corp., the Company and a group of former executives of Century 21
Real Estate Corporation (the "Former Management") pursuant to which the
Company owns 87.5% of C21 Holding Corp. and the Former Management owns 12.5%
of C21 Holding Corp. Such amendment provides for the acceleration of the
Company's option to purchase the 12.5% ownership from the Former Management
at fair market value, determined as of the Effective Date. The Company is in
the process of determining the fair market value of C21 Holding Corp. and
expects to complete such purchase in early 1997.
Travelodge -- On January 23, 1996, the Company purchased the assets
comprising the Travelodge hotel franchise system in North America, including
the Travelodge and Thriftlodge service marks and franchise agreements from
Forte Hotels, Inc. ("FHI") for $39.3 million. The Company financed the
acquisition with borrowings under its revolving credit facility and repaid
the borrowings with proceeds from the 4 3/4% Notes.
Concurrent with the Company's acquisition of the Travelodge franchise
system, Motels of America, Inc., through a wholly owned subsidiary,
(collectively, "MOA"), purchased 20 Travelodge motels from FHI for $32.3
million. Chartwell Leisure, Inc. ("CHRT") (formerly National Lodging Corp.),
a former wholly owned Company subsidiary which was distributed to the Company
shareholders in November 1994, purchased all of the capital stock of FHI for
$98.4 million. FHI owned or had an interest in 112 hotel and motel properties
at the acquisition date. MOA, a significant Company franchisee, entered into
twenty year Travelodge franchise agreements for the lodging properties it
acquired from FHI. The Company financed $10 million of MOA's purchase price
under a $10 million revolving credit facility, bearing interest at 14% per
annum. The loan is guaranteed by the parent company of MOA and secured by
approximately 80% of MOA's outstanding common stock.
In connection with CHRT's acquisition of FHI, the Company guaranteed $75
million of CHRT borrowings under a $125 million revolving credit facility
entered into by CHRT with certain banks. The Company is paid a guarantee fee of
2% per annum of the outstanding guarantee commitment by the Company pursuant to
a Financing Agreement. Such guarantee is expected to terminate upon CHRT's
refinancing of its revolving credit facility planned for the second quarter
of 1997.
Concurrent with the acquisition of the Travelodge franchise system and
CHRT's acquisition of FHI, the marketing and advisory agreements between the
Company and CHRT were terminated. The corporate services agreement was
modified to provide that the Company was to provide financial and other
corporate administrative support and advisory services through September 1996
and thereafter advisory services through January 2019 for a fee of $1.5
million per year. This agreement was terminated in November 1996 by mutual
agreement, with the Company receiving $9.5 million in consideration for
consenting to the early termination of such agreement. Additionally, CHRT
paid a $2.0 million advisory fee to the Company in connection with CHRT's
acquisition of FHI.
EQUITY TRANSACTIONS
Treasury Purchases -- On January 7, 1997, the Board of Directors
authorized the purchase of 2.6 million shares of Company common stock to
satisfy stock option exercises and conversions of convertible debt securities
and to fund future acquisitions. The Company acquired approximately 2.6
million treasury shares in January and February 1997 for $179.4 million with
revolving credit borrowings.
The Company completed the offering of 19.4 million shares of common stock
in the second quarter of 1996 which yielded net proceeds to the Company after
expenses of approximately $1.2 billion. Approximately $755 million of the
proceeds were used to finance the acquisition of Coldwell Banker and $75
million was used to repay outstanding borrowings under the Company's existing
credit facility. The remaining $331 million of proceeds were used as partial
consideration for the October 17, 1996 and November 12, 1996 acquisitions of
Avis and RCI, respectively.
The Company issued 0.9 million shares of common stock in May 1996 in
connection with the acquisition of the CENTURY 21 non-owned regions. Also,
the Company issued 4.6 million and 1.0 million shares in connection with the
October 17, 1996 and November 12, 1996 acquisitions of Avis and RCI,
respectively.
37
<PAGE>
FINANCING
The Company continues to believe that it has excellent liquidity and access
to liquidity through various sources. The Company has generated significant
positive cash flow from operations in every quarter since its initial public
offering in December 1992. The Company has also demonstrated its ability to
access equity and public debt markets and financial institutions to generate
capital for strategic acquisitions. Indicative of the Company's
creditworthiness, following the announcement of the PHH merger, S&P and Duff
& Phelps affirmed their A credit rating of the Company's $540 million of
publicly issued debt and Moody's affirmed their Baa1 rating and scheduled a
review of the Company for possible upgrade. The Company generated $184.4
million of cash flow from operations during the year ended December 31, 1996,
representing a $63.3 million (35%) increase from the year ended December 31,
1995. The Company reported a $110.7 million working capital deficiency at
December 31, 1996 primarily as a result of $150 million of third party
borrowings on behalf of ARAC which were acquired in the Avis acquisition. The
Company will repay such debt in September 1997 upon receipt of proceeds from a
corresponding intercompany loan due from ARAC.
Cash and cash equivalents increased $39.7 million from December 31, 1995
to December 31, 1996. Approximately $182.3 million and $1.51 billion of the
increase was attributable to net cash provided by operating activities and
financing activities, respectively. This increase was offset by $1.66 billion
of net cash used in investing activities. The increase from operating
activities was primarily attributable to $169.6 million of net income and
$71.3 million of depreciation and amortization net of $78.3 million increase
in trade payables. Investing activities required the use of $1.60 billion of
cash used to purchase the net assets of acquired businesss exclusive of
acquired cash, and $42.5 million of property and equipment additions including
company headquarters improvements (first occupied in September 1996), a new
reservation system for the Super 8 franchise system and computer equipment
following the Company's termination of a contract with an information
technology services provider. Approximately $1.2 billion and $447.1 million
of proceeds were received (and reported as net cash provided by financing
activities) in connection with the Offering, and borrowings under the
Revolving Credit Facilities.
On October 2, 1996, the Company replaced an existing $300 million
revolving credit facility with $1 billion of revolving credit facilities
consisting of (i) a $500 million, five year revolving credit facility and a
$500 million, 364 day credit facility (the "364 Day Revolving Credit facility")
(collectively the "Revolving Credit Facilities"). The Company may renew the
364 Day Revolving Credit Facility on an annual basis for an additional 364
days up to a maximum aggregate term of five years upon receiving lender
approval. The Revolving Credit Facilities, at the option of the Company, bear
interest at rates based on competitive bids of lenders participating in the
facilities, at the prime rate or at LIBOR plus a margin approximating 25
basis points. The Company may request $500 million of additional credit
availability under the Revolving Credit Agreement. Outstanding borrowings
under the Revolving Credit Facilities approximated $205 million at December
31, 1996.
The Company filed a shelf registration statement with the Securities and
Exchange Commission effective August 29, 1996, for the aggregate issuance of
up to $1 billion of debt and equity securities. These securities may be
offered from time to time, together or separately, based on terms to be
determined at the time of sale. The proceeds may be used for general
corporate purposes, which may include future acquisitions.
Long-term debt primarily consists of $540 million of publicly issued debt,
$205 million of borrowings under the Revolving Credit Facilities and $150
million of acquired Avis fleet financing, borrowed on behalf of the car
rental operating company subsidiary, ARAC, which will be repaid upon
settlement of the corresponding intercompany loan due from ARAC prior to the
IPO. Publicly issued debt includes the $240 million of 4 3/4% Notes
(convertible) due 2003, $150 million of 4 1/2% convertible senior notes due
1999 and $150 million of 4 7/8% senior notes due December 1998. Interest on the
publicly issued debt is paid semi-annually. Long-term debt increased from
$303.0 million at December 31, 1995 to $901.4 million at December 31, 1996,
due to the issuance of the 4 3/4% Notes, $205 million of borrowings under the
Revolving Credit Facilities which financed the November acquisition of RCI
and $150 million of acquired
38
<PAGE>
Avis debt which is expected to be repaid by ARAC in September 1997. The weighted
average stated interest rate on long-term debt at December 31, 1996 was 5.7%
compared to the weighted average stated interest rate of 5.2% at December 31,
1995 as the result of revolving credit borrowings in 1996.
The Company has investments in Europe and Asia in its timeshare business.
Therefore, changes in the value of foreign currencies, principally sterling,
affect the Company's balance sheet and cash flow statements when translated
into U.S. dollars. The Company will enter into forward exchange contracts to
reduce the impact of changes in foreign currency exchange rates with respect
to its investment in foreign operating companies prior to such exposure
becoming material.
IMPACT OF INFLATION
The primary source of revenue of the Company through December 31, 1996 is
based on a percentage of the franchised lodging facilities' gross room
revenue and franchised real estate brokerage offices' gross commission
revenue. As a result, the Company's revenue (excluding those changes
attributable to a change in the number of franchises) is expected to change
consistent with the trend of the consumer price index. The Company does not
believe that inflation would have an unfavorable impact on its operations.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which is
effective for the Company in financial statements issued after January 1,
1997. The Company does not expect the adoption of SFAS 125 to have a material
impact on the financial condition or results of operations.
In March 1997, FASB issued SFAS No. 128, "Earnings per Share" which is
effective for the Company in financial statements issued after December 15,
1997. SFAS 128 supercedes APB 15 and replaces the presentations of primary
EPS with a presentation of Basic EPS. It also requires presentation of Basic
and Diluted EPS on the income statement for all entities with complex capital
structures. Assuming SFAS 128 was applicable for 1996, the Company would have
reported the following:
<TABLE>
<CAPTION>
<S> <C>
Pro forma:
Basic EPS......... $1.46
Diluted EPS....... $1.29
As reported:
Primary EPS....... $1.29
Fully diluted
EPS............... $1.29
</TABLE>
SEASONALITY
The principal sources of revenue for the Company are fees for services
provided. Lodging and Car Rental franchise royalty fees share the same
pattern of revenue experienced by their respective underlying industries,
wherein summer months produce higher revenue due to increased leisure travel.
Although the Timeshare business services the leisure traveler, exchanges are
made and earned consistently throughout the year. Real Estate franchise fees
and Relocation service fees are earned when residential home sale closings
peak, which is generally in the summer months. On a weighted average basis,
pro forma for acquired companies, the aggregate principal sources of revenue
generate 22%, 26%, 28% and 24% of total annual revenue in the first, second,
third and fourth calendar quarters, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statement and Financial Statement Schedule Index commencing
on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
39
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following individuals serve as directors of the Company as of March
21, 1997:
<TABLE>
<CAPTION>
<S> <C>
Henry R. Silverman, Chairman Martin L. Edelman
John D. Snodgrass Robert E. Nederlander
Stephen P. Holmes Robert W. Pittman
Michael P. Monaco E. John Rosenwald, Jr.
James E. Buckman Leonard Schutzman
Christel DeHaan Robert F. Smith
</TABLE>
MR. SILVERMAN, age 56, has been a Director, Chairman of the Board,
Chairman of the Executive Committee and Chief Executive Officer of the
Company since May 1990. From November 1994 until February 1996, Mr. Silverman
also served as Chairman of the Board and Chief Executive Officer of Chartwell
Leisure Inc. ("Chartwell") formerly known as National Gaming Corp. and
National Lodging Corp., an independent publicly traded company and former
wholly owned subsidiary of the Company. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" for a description of the Company's relationships with
Chartwell. Mr. Silverman currently continues to serve as a member of the
Board of Directors of Chartwell.
MR. SNODGRASS, age 40, has been a Director, President and Chief Operating
Officer of the Company since February 1992 and was appointed Vice Chairman in
September 1996. Mr. Snodgrass also serves as a Director, Chairman of the
Board and Chief Executive Officer of several subsidiaries of the Company.
From November 1994 through January 1996, Mr. Snodgrass served as Vice
Chairman of the Board of Chartwell.
MR. HOLMES, age 40, was appointed Vice Chairman of the Company in
September 1996 and has served as a Director of the Company since June 1994.
From July 1990 through September 1996 Mr. Holmes served as Executive Vice
President, Treasurer and Chief Financial Officer of the Company. Mr. Holmes
also serves as a director and officer of several subsidiaries of the Company.
Mr. Holmes also serves as a Director and, from November 1994 to February 1996
was the Executive Vice President and Chief Financial Officer, of Chartwell.
Mr. Holmes also serves as a director of Avis Europe Ltd.
MR. MONACO, age 49, was appointed Vice Chairman and Chief Financial
Officer of the Company in October 1996 and was elected to the Board of
Directors effective January 27, 1997. Mr. Monaco also serves as a director
and officer of several subsidiaries of the Company. Mr. Monaco served as
Executive Vice President and Chief Financial Officer of the American Express
Company from September 1990 to June 1996.
MR. BUCKMAN, age 52, has been Executive Vice President, General Counsel
and Assistant Secretary of the Company since February 1992 and a Director of
the Company since June 1994. Mr. Buckman also serves as a director and
officer of several subsidiaries of the Company. From November 1994 to
February 1996, Mr. Buckman served as the Executive Vice President, General
Counsel and Secretary of Chartwell and until August 1996 he served as a
Director of Chartwell. He was a partner with Troutman, Sanders, Lockersman &
Ashmore, an Atlanta, Georgia law firm from January 1990 to February 1992.
MS. DEHAAN, age 54, was elected a Director of the Company effective in
November 1996. Ms. DeHaan founded RCI in 1974, until November 1996 served as
its Chairman and Chief Executive Officer and currently serves as the Chairman
of the Board of Directors of RCI. Ms. DeHaan also currently serves as
President and Chief Executive Officer of CD Enterprises, Inc.
MR. EDELMAN, age 55, was elected a Director of the Company in November
1993. Mr. Edelman also serves as President and a Director of Chartwell. He
has been a partner with Battle Fowler, a New York City law firm, from 1972
through 1993 and as of January 1, 1994 is Of Counsel to that firm. Battle
Fowler has represented the Company in a number of transactions during the
past fiscal year. Mr. Edelman is also a partner of Chartwell Hotels
Associates, Chartwell Leisure Associates L.P., Chartwell Leisure Associates
40
<PAGE>
L.P. II, and of certain of their respective affiliates. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" for a discussion of the Company's
transactions with Battle Fowler, transactions with the Chartwell entities.
Mr. Edelman also serves as a Director of Presidio Capital Corp., California
Real Estate Investment Trust and Networks, Inc.
MR. NEDERLANDER, age 63, has been a Director of the Company since July
1995. Mr. Nederlander has been President and Director since November 1981 of
the Nederlander Organization, Inc., owner and operator of one of the world's
largest chains of legitimate theaters. Mr. Nederlander has been Chairman of
the Board of Riddell Sports Inc. since April 1988 and was the Chief Executive
Officer of such corporation from 1988 through April 1, 1993. From February
until June 1992, Mr. Nederlander was also the Company's interim President and
Chief Operating Officer. He served as the Managing General Partner of the New
York Yankees from August 1990 until December 1991, and has been a limited
partner since 1973. Mr. Nederlander has been President since October 1985 of
Nederlander Television and Film Productions, Inc.; Chairman of the Board
since January 1988 of Mego Financial Corp. ("Mego") and Vice Chairman of the
Board since February 1988 to early 1993 of Vacation Spa Resorts, Inc., an
affiliate of Mego. Mr. Nederlander also served as Chairman of the Board of
Allis-Chalmers Corp. from May 1989 to 1993 and as Vice Chairman from 1993
through October 1996. In October 1996, Mr. Nederlander became a director of
News Communications, Inc., a publisher of community oriented free circulation
newspapers. See "EXECUTIVE COMPENSATION -- Compensation Committee Interlocks
and Insider Participation" for a discussion of certain transactions and
relationships between the Company and Mego.
MR. PITTMAN, age 43, has been a Director of the Company since July 1994.
Since October 1996 Mr. Pittman has been President and Chief Executive Officer
of AOL Networks, a unit of America Online, Inc. From September 1995 through
October 1996, Mr. Pittman served as the Chief Executive Officer and Managing
Partner of the Company's wholly owned subsidiary, Century 21 Real Estate
Corporation. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" for a
discussion of certain transactions and relationships between the Company and
Mr. Pittman. From 1990 until September 1995, Mr. Pittman served as President
and Chief Executive Officer of Time Warner Enterprises, a business
development unit of Time Warner Inc. and, from 1991 to September 1995,
additionally, as Chairman and Chief Executive Officer of Six Flags
Entertainment Corporation, the parent of Six Flags Theme Parks Inc. Mr.
Pittman serves as a director of America Online, Inc.
MR. ROSENWALD, age 66, was elected a Director of the Company effective in
September 1996. Mr. Rosenwald has been, since 1988, Vice Chairman of The Bear
Stearns Companies, Inc. Mr. Rosenwald also serves as a Director of The Bear
Stearns Companies, Inc., Hasbro, Inc. and Frequency Electronics, Inc.
MR. SCHUTZMAN, age 50, has been a Director of the Company since August
1993. Mr. Schutzman is currently Chairman of the Board and Chief Executive
Officer of Triad Capital Corporation of New York, a small business investment
company, and is a professor at the William E. Simon Graduate School of
Business at the University of Rochester in Rochester, New York. Mr. Schutzman
was Senior Vice President of PepsiCo Inc. from February 1987 to April 1995.
Mr. Schutzman also serves as a Director of RCSB Finance, Inc., the bank
holding company for Rochester Community Savings Bank.
MR. SMITH, age 64, has been a Director of the Company since February 1993.
From November 1994 until August 1996, Mr. Smith also served as a Director of
Chartwell. Mr. Smith is the retired Chairman and Chief Executive Officer of
American Express Bank, Ltd. ("AEBL"). He joined AEBL's parent company, the
American Express Company in 1981 as Corporate Treasurer before moving to AEBL
and serving as Vice Chairman and Co-Chief Operating Officer and then
President prior to becoming CEO. Mr. Smith is currently a Partner in Car
Component Technologies, Inc., an automobile parts remanufacturer, located in
Bedford, New Hampshire.
Messrs. Holmes and Pittman were Directors and Mr. Snodgrass was Chairman
of the Board of AMRE, Inc. ("AMRE") within two years prior to January 20,
1997, the date on which AMRE filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code. Although the Company had a minor investment in AMRE,
AMRE is not an affiliate of or otherwise related to the Company.
41
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME OFFICE OR POSITIONS HELD
- ------------------------- --------------------------------------------------------------------
<S> <C>
Henry R. Silverman ....... Chairman of the Board and Chief Executive Officer
John D. Snodgrass ........ Vice Chairman, President, Chief Operating Officer and Director
Stephen P. Holmes ........ Vice Chairman
Michael P. Monaco ........ Vice Chairman and Chief Financial Officer
James E. Buckman ......... Executive Vice President, General Counsel and Assistant Secretary
Scott W. Anderson ........ Executive Vice President of Marketing
David P. McNicholas ..... Executive Vice President and Chief Information Officer
John M. Osborne .......... Executive Vice President of Franchise Sales
John J. Russell, Jr. .... President, Hospitality Division
Richard A. Smith ......... President, Real Estate Division
</TABLE>
For biographical information concerning Messrs. Silverman, Snodgrass,
Holmes, Monaco and Buckman see "Directors" above.
MR. ANDERSON, age 46, has been Executive Vice President of Marketing for
the Company since September 1996. Mr. Anderson served as Managing Director --
Games Services for the Atlanta Committee for the 1996 Olympic Games from
January 1994 to September 1996. From September 1990 to January 1994 Mr.
Anderson was President and Chief Executive Officer of Callaway Gardens and
Resort in Georgia.
MR. MCNICHOLAS, age 56, was appointed Executive Vice President and Chief
Information Officer of the Company in November 1996. Mr. McNicholas also has
been, since May 1994, President and, since May 1987, a Director of WizCom
International, Ltd., a subsidiary of the Company. Prior to November 1996, Mr.
McNicholas served as Corporate Vice President of Information Systems of Avis,
Inc. Mr. McNicholas currently serves as a Director of Avis Europe Ltd.
MR. OSBORNE, age 46, has been Executive Vice President of Franchise Sales
for the Company's Hospitality Division since July 1993. In August 1996, Mr.
Osborne also assumed responsibility for the Company's Franchise Sales for the
Real Estate Division. Mr. Osborne was General Manager for the Central Region
of Wang Laboratories Inc. from July 1991 to June 1993. Prior to such time he
spent approximately 12 years at Unisys Corporation in various senior
management positions.
MR. RUSSELL, age 49, has been President of the Hospitality Division of the
Company since April 1996. Prior to such time, Mr. Russell served as Executive
Vice President of Franchise Sales for the Real Estate Division of the Company
from October 1995 through March 1996 and President of Days Inns of America,
Inc. from August 1992 to October 1995. Prior to joining Days Inns of America,
Inc., Mr. Russell was Vice President of Benchmark Hospitality Management
Company and general manager of its Resort at Squaw Creek in Olympic Valley,
California.
MR. SMITH, age 43, has been President of the Company's Real Estate
Division since October 1996. Prior to such time, Mr. Smith served as
Executive Vice President of Operations of the Company since February 1992.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires HFS's officers and directors,
and persons who own more than ten percent of a registered class of HFS's
equity securities, to file reports of ownership and changes in ownership on
Forms 3, 4 and 5 with the Securities and Exchange Commission and the New York
Stock Exchange. Officers, directors and greater than ten percent owners are
required to furnish HFS with copies of all Forms 3, 4 and 5 they file.
Based solely on HFS's review of the copies of such forms it has received
and written representations from certain reporting persons that they were not
required to file Forms 5 for a specified fiscal year, except as set forth
below, HFS believes that all its officers, directors, and greater than ten
percent beneficial owners complied with all filing requirements applicable to
them with respect to transactions during 1996.
42
<PAGE>
In February 1997, Mr. Silverman filed a Form 5, amending a Form 4 filed by
Mr. Silverman for the month of October 1996 which reported, inter alia, the
transactions related to the exercise of options to purchase 57,900 shares of
Company Common Stock. The Form 4 as filed in November 1996 reported such
transactions incorrectly as relating to 57,200 shares of Company Common Stock
as a result of a typographical error.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the 1994, 1995 and 1996 cash and noncash
compensation awarded to or earned by the Chief Executive Officer of the
Company, the four other most highly compensated executive officers of the
Company and one former officer of a subsidiary of the Company, for whom such
reporting is required:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------
NAME AND BONUS
PRINCIPAL POSITION YEAR SALARY($) ($)
- ----------------------- ------ -------------- -----------
<S> <C> <C> <C>
Henry R. Silverman
Chairman of the Board, 1996 1,501,930 2,250,000
Chief Executive 1995 1,000,000 434,000
Officer 1994 1,370,837(4) 0
John D. Snodgrass
Vice Chairman, 1996 571,539 557,728
President & Chief 1995 558,043 543,043
Operating Officer (5) 1994 543,509 529,584
Stephen P. Holmes 1996 417,305 215,621
Vice Chairman (5) 1995 356,406 150,000
1994 323,911 150,000
James E. Buckman 1996 417,305 215,621
Exec. Vice President, 1995 356,406 150,000
General Counsel, Asst. 1994 321,116 150,000
Secretary (5)
John J. Russell, Jr., 1996 363,222 132,423
President, Hospitality 1995 213,769 106,885
Division 1994 208,381 104,191
Robert W. Pittman 1996 834,615 0
(Former) Chairman and 1995 165,385 0
Managing Partner,
Century 21 Real Estate
Corporation(1)
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------------------------------------
AWARDS
--------------
SECURITIES ALL OTHER
OTHER ANNUAL UNDERLYING COMPEN-
NAME AND COMPENSATION OPTIONS/SARS SATION
PRINCIPAL POSITION ($)(3) (#) ($)(2)
- ----------------------- -------------- -------------- -----------
<S> <C> <C> <C>
Henry R. Silverman
Chairman of the Board, 19,986,936 2,000,000 39,804
Chief Executive 0 1,835,082 6,666
Officer 0 1,447,802 10,330
John D. Snodgrass
Vice Chairman, 0 320,000 1,455
President & Chief 0 558,142 2,397
Operating Officer (5) 0 454,840 32,873
Stephen P. Holmes 5,354,088 100,000 4,103
Vice Chairman (5) 0 231,720 3,173
0 160,156 4,280
James E. Buckman 0 100,000 3,940
Exec. Vice President, 816,513 220,076 3,173
General Counsel, Asst. 0 160,156 4,460
Secretary (5)
John J. Russell, Jr., 297,625 140,000 61,833
President, Hospitality 1,520,933 20,000 2,460
Division 86,706 21,354 2,294
Robert W. Pittman 1,102,708 200,000 10,038
(Former) Chairman and 41,833 244,662 0
Managing Partner,
Century 21 Real Estate
Corporation(1)
</TABLE>
- ------------
(1) Mr. Pittman served as Chairman and Managing Partner of Century 21 Real
Estate Corporation from September 1995 through October 1996. Mr.
Pittman also has served since 1994 and continues to serve as a Director
of the Company.
(2) Payments included in these amounts for the fiscal year ended December
31, 1996 consist of (1) Company contributions to the Employee Savings
Plan (the "401k Plan"), which is a defined contribution salary
reduction 401(k) plan qualified under Section 401(a) of the Internal
Revenue
43
<PAGE>
Code of 1986, as amended (the "Code") and under a non-qualified
deferred compensation plan established by the Company in 1996 ("Defined
Contribution Match"); and (2) insurance premiums paid by the Company
for supplemental life insurance coverage. In addition, in 1996 only,
payments of $150 for each of Messrs. Silverman, Snodgrass, Holmes,
Buckman and Russell were made under the medical examination
reimbursement program, and in 1994, Mr. Snodgrass received $29,677 in
reimbursement of relocation expenses. The payments with respect to the
Defined Contribution Match and life insurance premiums were as follows:
<TABLE>
<CAPTION>
DEFINED LIFE
CONTRIBUTION INSURANCE
YEAR MATCH PREMIUM
------ -------------- -----------
<S> <C> <C> <C>
Mr. Silverman 1996 $35,094 $4,410
1995 2,310 4,356
1994 2,310 8,020
Mr. Snodgrass 1996 0 1,305
1995 0 2,397
1994 0 3,206
Mr. Holmes .... 1996 2,648 1,305
1995 2,310 863
1994 2,310 1,970
Mr. Buckman .. 1996 2,375 1,415
1995 2,310 863
1994 2,310 2,150
Mr. Russell .. 1996 61,683 0
1995 2,640 0
1994 2,294 0
Mr. Pittman .. 1996 10,038 0
1995 0 0
</TABLE>
(3) Other Annual Compensation consists of income received as a result of
the exercise of stock options. In addition, as Mr. Pittman was a
non-employee director from 1994 through September 1995 and has again
become a non-employee director as of October 29, 1996, Other Annual
Income for Mr. Pittman includes the amount of $41,833 in 1995 and
$6,000 in 1996 representing compensation to Mr. Pittman in the capacity
of a non-employee director.
(4) Prior to the effective date of the distribution of Chartwell's stock to
the shareholders of the Company in November 1994 (the "Chartwell
Distribution"), Mr. Silverman's annual rate of compensation from the
Company was $1,400,000. As of such effective date, Mr. Silverman's
annual rate of compensation from the Company was reduced by $400,000,
and his annual rate of compensation from Chartwell was established at
$500,000. Effective February 1, 1996, Mr. Silverman resigned as
Chairman and Chief Executive Officer of Chartwell and, in accordance
with his employment contract with the Company, his annual base rate of
compensation was increased to $1,500,000.
(5) Although Messrs. Snodgrass, Holmes and Buckman served as executive
officers of Chartwell in 1995 and a short period in 1996, they received
their entire compensation (other than certain options to purchase
shares of Chartwell common stock which were cancelled) for serving in
such capacities from the Company. A portion of the Corporate Services
Fee paid to the Company by Chartwell pursuant to the Corporate Services
Agreement entered into between the Company and Chartwell in connection
with the Chartwell Distribution represents the payment to the Company
by Chartwell for the executive services performed by such persons on
behalf of Chartwell. No set allocations were established with respect
to the portion of time that such persons devoted to the affairs of the
Company and Chartwell, respectively, nor were allocations established
with respect to the portion of such persons' overall compensation from
the Company that was paid in respect of services performed on behalf of
Chartwell pursuant to the Corporate Services Agreement. Messrs.
Snodgrass, Holmes and Buckman are no longer officers of Chartwell. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Relationship with
Chartwell."
44
<PAGE>
OPTION GRANTS TABLE
The following tables summarize option grants during the last fiscal year
for the named executive officers. The Company's option plans do not provide
for stock appreciation rights.
OPTION/SAR GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- --------------------- -------------------------------------------------------- ---------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($)(2) 10% ($)(2)
- --------------------- -------------- -------------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Henry R. Silverman .. 2,000,000 18.27 40.3125 1/22/06 52,944,062 132,061,680
John D. Snodgrass ... 320,000 2.92 62.1250 5/31/06 12,632,664 31,891,050
Stephen P. Holmes ... 100,000 0.91 62.1250 5/31/06 3,947,707 9,965,953
James E. Buckman .... 100,000 0.91 62.1250 5/31/06 3,947,707 9,965,953
John J. Russell, Jr. 140,000 1.28 46.1250 3/1/06 4,061,063 10,291,575
Robert W. Pittman ... 200,000 1.83 73.0000 10/29/06 8,937,474 22,879,543
</TABLE>
- ------------
(1) In accordance with the terms of the 1993 Plan, an equitable adjustment
was made to the numbers of options granted and the exercise prices of
options granted under the 1993 Plan as a result of the Company's
two-for-one stock split, effected as a stock dividend as of February
14, 1996. The 1993 Plan option numbers and exercise prices included in
the Table above and elsewhere in this Proxy Statement reflect such
equitable adjustment.
(2) Based upon the exercise prices, the amounts shown in these columns are
the potential realizable value of options granted at assumed rates of
stock price appreciation (5% and 10%) set by the executive compensation
disclosure provisions of the proxy rules, and have not been discounted
to reflect the present value of such amounts. The assumed rates of
stock price appreciation are not intended to forecast the future
appreciation of the Common Stock.
Pursuant to the 1993 Plan, options for up to 24,541,600 shares of Common
Stock may be granted to directors, officers, employees and independent
contractors of the Company. In 1996, a total of 10,945,900 options were
granted under the 1993 Plan to a broad group of directors, officers,
employees and independent contractors of the Company. Except for the grants
made to Mr. Silverman and Mr. Snodgrass, which are, in accordance with each
of their employment agreements, fully vested, all such options were granted
as non-qualified options on the terms described below as generally applicable
to the 1993 Plan. In accordance with the formula grant provisions for
non-employee directors in the 1993 Plan, 50,000 options were granted to Mr.
Rosenwald as of September 24, 1996, on the standard terms of the 1993 Plan.
Options granted under the 1993 Plan may be "incentive stock options"
("ISOs") (within the meaning of Section 422 of the Code) or options not
subject to Section 422 of the Code ("NQSOs"). Each such option (ISO or NQSO),
when it becomes exercisable, entitles the holder thereof to purchase a share
of Common Stock for an amount equal to the exercise price of the option,
payable in cash, in shares of Common Stock with an aggregate value equal to
the exercise price of the option, or in a combination thereof. The exercise
price of each option under the 1993 Stock Option Plan may not be less than
the fair market value of a share of Common Stock on the date the option is
granted. Generally, options held by an optionee will become exercisable as to
20% of the shares covered by such options on the first anniversary of the
date of grant if the optionee continues to be employed by the Company on that
date, and with respect to an additional 20% of the shares covered by such
options on each of the four succeeding anniversaries of the date of grant if
the optionee continues to be employed by the Company on each such date. All
options held by an optionee will become fully exercisable (to the extent not
already exercisable)
45
<PAGE>
if a "change-of-control transaction" (as defined in the 1993 Plan) occurs.
Generally, options granted under the 1993 Plan, to the extent not exercised,
expire on the earliest of (i) the tenth anniversary of the date of grant,
(ii) two years following the optionee's termination of employment on account
of death, retirement or disability or (iii) one year following the optionee's
termination of employment for any other reason (other than Cause, as defined
in the 1993 Plan). Options granted to directors who are not employees of the
Company or a subsidiary are subject to pre-determined rules and procedures
such that neither the Board of Directors nor the Compensation Committee has
any discretion in connection with the granting of such options. The 1993 Plan
was amended in 1996 to (i) increase the number of shares of Common Stock
authorized for issuance under the 1993 Plan, (ii) to modify the annual
limitation on the number of options that may be granted to any individual,
(iii) to permit transferability of options under certain limited
circumstances, (iv) to provide for the delegation by the Compensation
Committee to the Stock Option Committee of the Board of Directors the
authority to grant options to optionees other than executive officers and
directors of the Company and (v) to permit the Board or the Compensation
Committee to approve the acceleration of the exercisability of options
granted to Non-Employee Directors.
OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE
The following table summarizes the exercise of options by the named
executive officers during the last fiscal year and the value of unexercised
options held by such named executives as of the end of such fiscal year. The
Company's option plans do not provide for stock appreciation rights.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT FY-END IN-THE-MONEY OPTIONS/SARS
(#) AT FY-END ($)(1)
SHARES ACQUIRED VALUE REALIZED
NAME ON EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------- --------------- ---------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Henry R. Silverman 300,000 $19,989,936 11,700,000/0 $544,283,955/$0
John D. Snodgrass 0 0 3,155,200/0 $146,717,200/$0
Stephen P. Holmes 96,000 5,354,088 494,406/509,594 $ 26,935,232/$18,956,167
James E. Buckman 0 0 373,063/635,337 $ 19,494,211/$25,822,005
John J. Russell, Jr. 0 0 49,490/229,252 $ 2,617,160/$6,446,248
Robert W. Pittman 30,000 1,054,875 81,067/338,933 $ 2,998,004/$5,305,083
</TABLE>
- ------------
(1) Based upon the closing price of the Common Stock on the New York Stock
Exchange on December 31, 1996 ($59.75), and applicable option exercise
prices.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As of January 1, 1996, the members of the Compensation Committee were Mr.
Robert Smith (Chair), Mr. Nederlander, Mr. Schutzman and Roger J. Stone, Jr.
As of July 24, 1996, the Board of Directors reappointed Mr. Smith as Chair of
the Compensation Committee and Messrs. Schutzman, Stone and Nederlander to
serve as members of the Compensation Committee. In September 1996 Mr. Stone
resigned from the Compensation Committee and the Board. None of the foregoing
individuals are or were, at the time so serving, officers or employees of the
Company.
In April 1995, the Company and Ramada Franchise Systems, Inc. ("RFS"), a
wholly-owned subsidiary of the Company ("RFS"), entered into a license
agreement with Preferred Equities Corporation ("PEC"), the owner, developer
and operator of interval ownership resort facilities, pursuant to which PEC
was licensed to use certain Ramada servicemarks in connection with its
facilities in the United States. PEC has paid RFS $1 million in initial fees
and will pay a percentage of Gross Sales (as defined) of interval ownership
interests during the term of the agreement. Mr. Nederlander is the Chairman
and a significant shareholder of MEGO Financial Corp., of which PEC is a
wholly-owned subsidiary.
47
<PAGE>
COMPENSATION OF DIRECTORS
Non-Employee Directors receive an annual retainer of $30,000, plus $4,000
for chairing a committee and $2,000 for serving as a member of a committee
other than Chair. Non-Employee Directors also are paid $1,000 for each Board
meeting attended and $500 ($1,000 for committee chair) for each Board
committee meeting if held on the same day as a Board meeting and $1,000
($2,000 for committee chair) for each Board committee meeting attended on a
day on which there is no Board meeting. Non-Employee Directors are reimbursed
for expenses incurred in attending meetings of the Board of Directors and
committees.
The Company provides $100,000 of term life insurance coverage for each
Non-Employee Director to the beneficiary designated by such Non-Employee
Director. In addition, the Company has purchased joint life insurance
contracts in the amount of $1 million for each Director. Upon the death of
such Director, the Company will donate an aggregate of $1 million to one or
more charitable organizations designated by such Director from the proceeds
of such insurance policy. With the exception of such joint life insurance
contracts, members of the Board of Directors who are officers or employees of
the Company or any of its subsidiaries do not receive compensation or
reimbursement of expenses for serving in such capacity.
Under the 1993 Plan, as of June 14, 1994, each Non-Employee Director was
granted options to purchase 5,338 shares of Common Stock on the date of his
or her appointment or election to the Board of Directors (or the date of the
1994 Annual Meeting of Stockholders for Non-Employee Directors elected or
serving as of such date). Such options have an exercise price of the fair
market value on the date of grant and vest over a five year period from the
date of grant at the rate of 20% per year, and otherwise have the same terms
as all other options granted under the 1993 Plan. As a result of the
amendments to the 1993 Plan which were approved by the stockholders of the
Company at the 1995 Annual Meeting of Stockholders, a single grant will be
made to each new Non-Employee Director, on the terms described above, of
options to purchase 50,000 shares of Common Stock on the date of such
director's initial appointment or election, and those Non-Employee Directors
who received grants of options to purchase shares of Common Stock pursuant to
the 1993 Plan prior to such amendment and who continued to serve as
Non-Employee Directors received an additional grant effective on the date of
the 1995 Annual Meeting of Stockholders of options to purchase 44,662 shares
of Common Stock, on the terms described above. In September 1996, the 1993
Plan was amended to permit the Board or the Compensation Committee to
accelerate the vesting of options granted to Non-Employee Directors.
EMPLOYMENT CONTRACTS AND TERMINATION, SEVERANCE AND CHANGE OF CONTROL
ARRANGEMENTS
With the exception of Mr. Russell, who does not currently have an
employment contract with the Company, each named executive officer is or was
employed by the Company pursuant to a written employment agreement. Mr.
Pittman was employed by the Company pursuant to an employment agreement as
described below prior to his resignation in October 1996.
Mr. Silverman serves as Chairman of the Board and Chief Executive Officer
of the Company pursuant to an employment agreement that was amended and
restated as of June 30, 1996 and further amended as of January 27, 1997 (such
agreement, as amended and restated, is referred to herein as the "Silverman
Agreement"). The following description of the Silverman Agreement is
qualified in its entirety by reference to the copy of such agreement filed
with the Securities and Exchange Commission as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996
and the amendment filed as Exhibit 10 The Silverman Agreement expires on
December 31, 2000. In connection with the Chartwell Distribution, as of the
effective date thereof (the "Effective Date") Mr. Silverman entered into an
employment agreement with Chartwell. Concurrently therewith, Mr. Silverman
and the Company entered into an amendment to the Silverman Agreement,
pursuant to which Mr. Silverman's annual rate of compensation was reduced to
$1,000,000 effective as of the Effective Date (subject to annual increases
after 1995 in accordance with the increases in the consumer price index), in
recognition of the fact that, from the Effective Date, Mr. Silverman served
as an executive officer of Chartwell on a concurrent basis with his
employment by the Company. Such amendment also provided that in the event Mr.
Silverman resigned or his employment by Chartwell was terminated during the
47
<PAGE>
period of his employment under the Silverman Agreement, his annual base
salary would be increased by the amount of his annual base salary payable by
Chartwell in effect at the time of such termination. Mr. Silverman resigned
as an employee of Chartwell as of January 24, 1996 at which time his base
salary was increased to $1,500,000. The Silverman Agreement provides for Mr.
Silverman to receive a bonus with respect to each of the Company's fiscal
years in the amount of 0.75% of the Company's "EBITDA" (as defined in the
Silverman Agreement) for such fiscal year, provided that such bonus does not
exceed 150% of Mr. Silverman's annual base salary in effect on the first day
of such fiscal year, and further provided that such bonus shall be pro-rated
for any partial year based upon the number of days in such year occurring
prior to the termination of the Silverman Agreement. The Silverman Agreement
also provides that the Committee may award additional compensation to Mr.
Silverman if the Committee, in its sole discretion, determines that such a
payment is warranted based upon Mr. Silverman's performance.
The Silverman Agreement also provides for the Company to grant to Mr.
Silverman, on or before July 1 of each calendar year commencing in 1996, a
stock option to purchase two million (2,000,000) shares of Common Stock under
the 1993 Plan. Each such stock option will be exercisable at an exercise
price per share equal to the Fair Market Value (as defined in the 1993 Plan)
of the Common Stock on the date of grant and will vest immediately upon
grant. Further, the options previously granted to Mr. Silverman under the
1993 Plan were immediately vested in connection with the execution of the
amended and restated Silverman Agreement. The Silverman Agreement further
provides that Mr. Silverman may not sell more than two million (2,000,000)
shares of Common Stock in any calendar year, provided, however, that the
foregoing limitation only applies with respect to shares of Common Stock
acquired by Mr. Silverman pursuant to the exercise of options granted under
any stock option or other plan of the Company. The number of shares of Common
Stock granted under each option referred to above and the number of shares of
Common Stock which the Executive may sell in a calendar year will be adjusted
to reflect any "Change in Capitalization" (as defined in the 1993 Plan).
Prior to the execution of the amended and restated Silverman Agreement, the
Silverman Agreement provided that, notwithstanding the foregoing restriction
on sale of stock, Mr. Silverman could sell more than two million (2,000,000)
shares of Common Stock in a calendar year provided that the total number of
shares sold in that calendar year and the prior calendar year did not exceed
four million (4,000,000) shares of Common Stock.
In addition, the Silverman Agreement provides that the Company will
guarantee certain loans that Mr. Silverman receives from a financial
institution reasonably acceptable to the Company with an aggregate principal
amount equal to not more than the lesser of (i) $100,000,000 or (ii) 25% of
the excess of the aggregate "Fair Market Value" (as defined in the 1993 Plan)
of the Common Stock (determined as of the date of such loan or loans) subject
to Mr. Silverman's then outstanding stock options (vested or unvested)
granted under any stock option or other plan of the Company over the
aggregate exercise price of all such stock options (such excess being
hereinafter referred to as the "Value"). The terms of any such loans shall
provide that if at any time the outstanding principal amount of such loans
exceeds 50% of the Value, Mr. Silverman will immediately repay an amount of
such loans so that the outstanding principal amount of such loans does not
exceed 50% of the Value.
The Silverman Agreement provides that in the event Mr. Silverman's
employment is terminated by the Company for any reason other than death,
disability or "cause" (as defined in the Silverman Agreement), Mr. Silverman
would receive, on the date of such termination, a severance payment in an
amount equal to (i) the aggregate annual base salary (as adjusted for
increases in the consumer price index through the date of termination)
through December 31, 2000, and (ii) 0.75% of the Company's "EBITDA" for the
twelve (12) calendar months preceding the termination date multiplied by the
number of years (including partial years) remaining through December 31,
2000, provided, that such payment shall not exceed 150% of the annual base
salary in effect on the termination date multiplied by the number of years
(including partial years) remaining through December 31, 2000. In addition,
the Company would continue to make available to Mr. Silverman the other
welfare benefits contained in the Silverman Agreement until December 31, 2000
provided Mr. Silverman did not receive substantially the same benefits from
another employer.
48
<PAGE>
If any Change-of-Control Transaction (as such term is defined in the 1993
Plan) occurs, Mr. Silverman will be entitled to receive a lump sum payment
equal to his aggregate annual salary as in effect on such date multiplied by
three (3), irrespective of whether he offers to continue his employment with
the Company, provided that such lump sum shall not be paid to Mr. Silverman
if after completion of the Change-of-Control Transaction he shall be employed
directly or indirectly by the Company or its successor pursuant to an
employment agreement in form and substance substantially identical to the
Silverman Agreement, but having a term of not less than three (3) years. This
provision survives the termination of the Silverman Agreement for any reason
other than for Cause or the voluntary resignation of Mr. Silverman. Further,
in the event a Change-of-Control Transaction occurs the Silverman Agreement
provides that the Company will pay Mr. Silverman a lump sum amount, in cash
or Common Stock at the Company's option, equal to the value of the options
remaining to be granted in accordance with the Silverman Agreement as
determined by an independent compensation consultant or investment banker,
selected by Mr. Silverman and reasonably acceptable to the Company.
Mr. Snodgrass serves as President, Chief Operating Officer and a director
of the Company pursuant to an employment agreement (the "Snodgrass
Agreement") that, as amended, expires on December 31, 1998. The Snodgrass
Agreement provides for a base salary of at least $515,000 per year and in the
event certain established levels of earnings before interest, taxes,
depreciation and amortization are achieved for the applicable year, an annual
bonus equal to $15,000 less than his then-current base salary. The Snodgrass
Agreement also provides for severance equal to a lump sum payment equal to
the greater of his aggregate base salary for one year or his base salary from
the date of his termination through January 31, 1998 in the event that
employment is terminated by the Company for any reason other than disability
or "just cause" or is terminated by Mr. Snodgrass for "good reason" (as
defined in the agreement). In the event employment is terminated in
connection with a change-of-control transaction prior to December 31, 1998,
Mr. Snodgrass would be entitled to a lump sum payment equal to his base
salary; provided, however, that any such lump sum payment would be reduced by
the amount of any other severance payment made to Mr. Snodgrass in connection
with termination of his employment. Mr. Snodgrass is also entitled to be
indemnified against federal excise tax in the event that any "excess
parachute payments" are deemed to result from the severance payment and the
acceleration of the vesting under any stock options granted to Mr. Snodgrass
due to a change-of-control transaction. The Compensation Committee has
approved offering loan guarantees to Mr. Snodgrass on the same terms as
described in the preceding paragraph for Mr. Silverman.
Under the Snodgrass Agreement a change-of-control transaction is generally
defined to mean any sale or other transfer of 50% of the Common Stock other
than as a result of a public offering of capital stock by the Company, to a
third party, other than to The Blackstone Group or its affiliates, whether by
sale or issuance of Common Stock, or the sale of more than 50% of the assets
or earning power of the Company and its subsidiaries (taken as a whole) other
than to The Blackstone Group or its affiliates or a merger or consolidation
in which designees of The Blackstone Group or its affiliates no longer
constitute a majority of the directors of the surviving corporation and each
committee thereof or control of 50% or more of the business of the Company is
sold, assigned or otherwise transferred to any third party, other than The
Blackstone Group or its affiliate. The Snodgrass Agreement also provides that
the payments related to a change-of-control transaction are not required if
Mr. Snodgrass is subsequently employed pursuant to an employment agreement in
form and substance substantially identical to his employment agreement in
effect immediately prior to such change-of-control transaction.
The Snodgrass Agreement also provides for the Company to grant to Mr.
Snodgrass, in May 1997 and May 1998, a stock option to purchase 250,000
shares of Common Stock under the 1993 Plan. Each such stock option will be
exercisable at an exercise price per share equal to the Fair Market Value (as
defined in the 1993 Plan) of the Common Stock on the date of grant and will
vest immediately upon grant. Further, the options previously granted to Mr.
Snodgrass under the 1993 Plan were immediately vested in connection with the
execution of the third amendment to the Snodgrass Agreement, executed in
October 1996. Also pursuant to such amendment, the Company agreed to arrange
to provide to Mr. Snodgrass transportation by charter aircraft for personal
and business use, the cost of which will be borne by Mr. Snodgrass or the
Company in accordance with currently existing Company policy.
49
<PAGE>
Mr. Holmes serves as Vice Chairman of the Company pursuant to an
employment agreement, amended as of October 1, 1994, that expires on October
1, 1997. Mr. Buckman is Executive Vice President and General Counsel of the
Company pursuant to an employment agreement, amended as of October 1, 1994,
that expires on January 15, 1998. Messrs. Holmes and Buckman each currently
receive base salary at the rate of $500,000 per annum. Each of Messrs. Holmes
and Buckman is to be paid an annual bonus in accordance with the then
effective cash incentive or cash bonus plan of the Company. Their base
salaries are subject to annual increases in accordance with increases in the
consumer price index. In the event that employment is terminated by the
Company during the term of the agreement, other than for death, disability or
"cause" (as defined in such agreements), Mr. Holmes or Mr. Buckman, as the
case may be, would receive a severance payment in an amount equal to the base
salary then payable under the agreement through the earlier of (i) the first
anniversary of such termination or (ii) the expiration of the term of such
employment agreement. The employment agreements also provide that if Mr.
Holmes or Mr. Buckman, as the case may be, is terminated prior to the
expiration of his employment agreement in connection with a change-of-control
transaction, Mr. Holmes or Mr. Buckman, as the case may be, would receive a
lump sum payment equal to the base salary which would have been payable from
the date of such termination to the expiration of his employment agreement,
but not less than one year's base salary. The Compensation Committee has
approved offering loan guarantees to Messrs. Holmes and Buckman on the same
terms as described above for Mr. Silverman.
Under the employment agreements for Messrs. Buckman and Holmes, a
change-of-control transaction is generally defined to mean any transaction or
series of transactions pursuant to or as a result of which (i) during any
period of not more than 24 months, individuals who at the beginning of such
period constitute the Board, and any new director (other than a director
designated by a third party who has entered into an agreement to effect a
transaction described in clause (ii), (iii) or (iv) below) whose election by
the Board or nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved (other than
approval given in connection with an actual or threatened proxy or election
contest), cease for any reason to constitute at least a majority of the
members of the Board, (ii) beneficial ownership of 50% or more of the common
stock (or other securities having generally the right to vote for election of
the Board) of the Company (the "Shares") shall be sold, assigned or otherwise
transferred, directly or indirectly, other than pursuant to a public
offering, to a third party, whether by sale or issuance of Shares or other
securities or otherwise, (iii) the Company or any Subsidiary shall sell,
assign or otherwise transfer, directly or indirectly, assets (including stock
or other securities of Subsidiaries) having a fair market or book value or
earning power of 50% or more of the assets or earning power of the Company
and its Subsidiaries (taken as a whole) to any third party, other than the
Company or a wholly-owned Subsidiary thereof, or (iv) control of 50% or more
of the business of the Company shall be sold, assigned or otherwise
transferred directly or indirectly to any third party. For purposes of this
paragraph, the term "Subsidiary" shall mean any corporation in an unbroken
chain of corporations, beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. Messrs. Buckman's and
Holmes' employment agreements also provide that the payments related to a
change-of-control transaction are not required if they are subsequently
employed pursuant to an employment agreement in form and substance
substantially identical to their existing employment agreement.
Mr. Russell was employed by the Company in August 1992 as President of
Days Inns of America, Inc., a wholly owned subsidiary of the Company,
pursuant to an employment agreement which expired by its terms in 1995. From
September 1995 through April 1996 Mr. Russell was Executive Vice President of
Franchise Sales of the Company's Real Estate Division, and from and after
April 1996, Mr. Russell has held his current position as President of the
Hospitality Division of the Company, with compensation at the annual rate of
$300,000.
50
<PAGE>
On August 1, 1995, the Company, Century 21 and Mr. Pittman entered into an
employment agreement (the "Pittman Agreement") whereby Mr. Pittman agreed to
serve as the Chief Executive Officer of Century 21, effective as of November
1, 1995. The following description of the Pittman Agreement is qualified in
its entirety by reference to the copy of such agreement filed with the
Securities and Exchange Commission as Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1995. The Pittman
Agreement provided that Century 21 would pay Mr. Pittman an annual base
salary of $1,000,000 and an annual bonus of the lesser of 2.7% of Century
21's EBITDA (as defined in such agreement) and $1,050,000, which bonus was
approved by the Company's stockholders on January 22, 1996; provided,
however, that such bonus for the period commencing on November 1, 1995
through December 31, 1995 was $178,356 and was not subject to the prior
approval of the Company's stockholders. Pursuant to the Pittman Agreement on
each of September 12, 1995 and October 29, 1996, the Company granted Mr.
Pittman stock options to purchase 200,000 shares of Common Stock. All such
options have an exercise price equal to the fair market value of the Common
Stock on the date of grant, vest, in the case of the 1995 grant 50% on each
of the first two anniversaries of the date of grant, and in the case of the
1996 grant, 100% on the first anniversary of the date of grant, and otherwise
have substantially the same terms as all other options granted under the 1993
Plan. Mr. Pittman resigned as Chief Executive Officer and Managing Partner of
Century 21 effective October 29, 1996, at which time the Pittman Agreement
was terminated.
The following table sets forth the payments to which each of the officers
indicated would have been entitled under their respective employment
agreements in the event his employment had been terminated by the Company
without cause or as a result of a change-of-control transaction as of
December 31, 1996.
<TABLE>
<CAPTION>
AMOUNT PAYABLE
AMOUNT PAYABLE FOR TERMINATION
FOR TERMINATION DUE TO CHANGE
WITHOUT CAUSE OF CONTROL
--------------- ---------------
<S> <C> <C>
Mr. Silverman $15,000,000 $4,500,000
Mr. Snodgrass 619,167 571,539
Mr. Holmes .... 375,000 500,000
Mr. Buckman .. 500,000 520,833
Mr. Russell .. 300,000 -0-
</TABLE>
51
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information set forth on the following table is furnished as of March
21, 1997 with respect to any person (including any "group" as that term is
used in Section 13(d) (3) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) who is known to the Company to be the beneficial owner
of more than 5% of any class of the Company's voting securities, and as to
those shares of the Company's equity securities beneficially owned by each of
its directors, certain of its executive officers, and all of its executive
officers and directors as a group. The number of shares of Common Stock
outstanding as of March 21, 1997 was 127,628,756.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------------- -------------------- ----------------
<S> <C> <C>
PRINCIPAL STOCKHOLDERS
FMR Corp.(1) ............................... 16,839,695 13.19%
82 Devonshire Street
Boston, MA 02109
Massachusetts Financial Services
Company(2)................................. 11,240,403 8.81%
500 Boylston Street
Boston, MA 02116-3741
Putnam Investments, Inc.(3)................. 10,033,558 7.86%
One Post Office Square
Boston, MA 02109
Provident Investment Counsel(4)............. 8,936,584 7.00%
300 North Lake Avenue
Pasadena, CA 91101-4022
Morgan Stanley Group, Inc.(5)............... 7,228,877 5.66%
1585 Broadway
New York, NY 10036
DIRECTORS AND EXECUTIVE OFFICERS
Henry R. Silverman (6) ..................... 11,673,440 8.39%
John D. Snodgrass (7) ...................... 3,050,675 2.34%
James E. Buckman (8) ....................... 420,863 *
Christel DeHaan ............................ 999,500 *
Martin L. Edelman (8) ...................... 11,067 *
Stephen P. Holmes (8) ...................... 497,806 *
Michael P. Monaco .......................... 0 *
Robert E. Nederlander (8) .................. 10,000 *
Robert W. Pittman (8) ...................... 81,067 *
E. John Rosenwald, Jr ...................... 10,000 *
Leonard Schutzman (8) ...................... 13,067 *
Robert F. Smith (9) ........................ 21,067 *
John J. Russell, Jr. (8) ................... 0 *
EXECUTIVE OFFICERS AND DIRECTORS
AS A GROUP (17 persons)(10)................ 17,220,716 11.99%
</TABLE>
- ------------
* Less than 1%
(1) Based upon information contained in a Schedule 13G/A dated February
14, 1997 by FMR Corp., a registered investment advisor, and the
other reporting persons named therein, FMR Corp. and such other
reporting persons beneficially own 16,839,695 shares of Common
Stock. According to the Schedule 13G/A, FMR Corp. and the other
reporting persons named in such filing have the sole power to vote
835,146 shares and have the sole power to dispose of all of such
shares.
(2) Based upon the information contained in a Schedule 13G/A dated
February 12, 1997 by Massachusetts Financial Services Company, a
registered investment adviser on behalf of itself and the other
reporting person
52
<PAGE>
named therein, such reporting persons beneficially own 11,240,403
shares of Common Stock. According to the Schedule 13G/A,
Massachusetts Financial Services Company and the other reporting
person named in such filing have sole power to vote 11,170,003 of
such shares, and have sole power to dispose of all of such shares.
(3) Based upon the information contained in a Schedule 13G dated January
27, 1997 by Putnam Investments, Inc., an affiliate of Marsh &
McLennan Companies, Inc., on behalf of itself and the other
reporting persons named therein, Putnam Investments, Inc.
beneficially owns 10,033,558 shares of Common Stock. According to
the Schedule 13G, neither Putnam Investments, Inc. nor the other
reporting persons named in such filing have sole voting or
investment power with respect to such shares of Common Stock. Putnam
Investments, Inc. and/or such reporting persons have shared power to
vote 689,760 shares of such stock and shared power to dispose of all
of such stock.
(4) Based upon the information contained in a Schedule 13G/A dated
February 10, 1997 by Provident Investment Counsel, a registered
investment adviser, on behalf of itself and the other reporting
persons named therein, Provident Investment Counsel and such
reporting persons beneficially own 8,936,584 shares of Common Stock.
According to the Schedule 13G/A, Provident Investment Counsel and
such reporting persons have the sole power to vote 6,659,320 shares
and have the sole power to dispose of all of such shares.
(5) Based upon the information contained in a Schedule 13G dated
February 11, 1997 by Morgan Stanley Group, Inc., a registered
investment adviser, Morgan Stanley Group, Inc. beneficially owns
7,228,877 shares of Common Stock. According to the Schedule 13G,
Morgan Stanley Group, Inc. has shared power to vote 5,218,382 shares
and has the shared power to dispose of all of such shares.
(6) Includes 11,550,000 shares of Common Stock purchasable pursuant to
options currently exercisable or exercisable within 60 days, 103,440
shares of Common Stock in two retirement plans whose sole
beneficiary is Mr. Silverman and 20,000 shares owned by Mr.
Silverman's wife. Mr. Silverman disclaims beneficial ownership of
the shares owned by his wife. For purposes of calculating percent of
class for Mr. Silverman, the number of shares subject to options
currently exercisable or exercisable by Mr. Silverman within 60 days
are deemed outstanding.
(7) Includes 3,005,200 shares of Common Stock purchasable pursuant to
options currently exercisable or exercisable within 60 days and
5,475 shares of Common Stock which are held by an irrevocable trust
for the benefit of Mr. Snodgrass' minor children. Mr. Snodgrass and
his wife have no interest in the trust and are not trustees of the
trust. Mr. Snodgrass disclaims beneficial ownership of such shares.
For purposes of calculating percent of class for Mr. Snodgrass, the
number of shares subject to options currently exercisable or
exercisable by Mr. Snodgrass within 60 days are deemed outstanding.
(8) Share number for the person named, includes shares subject to
options currently exercisable or exercisable within 60 days as
follows: with respect to (a) Mr. Buckman, 419,663 shares, (b) Mr.
Edelman, 11,067 shares (c) Mr. Holmes, 494,406 shares, (d) Mr.
Nederlander, 10,000 shares, (e) Mr. Pittman, 81,067 shares, (f) Mr.
Schutzman, 11,067 shares and (g) Mr. Osborne, 4,640 shares. For
purposes of calculating percent of class for the person named, the
number of shares subject to options currently exercisable or
exercisable by such person within 60 days are deemed outstanding. In
each case, share ownership is less than 1% of the Common Stock.
(9) Includes 11,067 shares subject to options currently exercisable or
exercisable within 60 days, 8,000 shares held in the name of Smith
Family Foundation of which Mr. Smith is President and 2,000 shares
owned by a Keough plan of which Mr. Smith is the sole beneficiary.
Mr. Smith disclaims beneficial ownership of the shares held by the
Smith Family Foundation. For purposes of calculating percent of
class for Mr. Smith, the number of shares subject to options
currently exercisable or exercisable by Mr. Smith within 60 days are
deemed outstanding. Share ownership is less than 1% of the Common
Stock.
(10) In addition to shares beneficially owned by executive officers and
directors, share number includes 16,023,088 shares of Common Stock
purchasable by executive officers or directors pursuant to options
currently exercisable or exercisable within 60 days. Shares subject
to options currently exercisable or exercisable within 60 days are
deemed outstanding for the purpose of computing percent of class.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "EXECUTIVE COMPENSATION -- Compensation Committee Interlocks and
Insider Participation" for a discussion of Mr. Nederlander's relationships
with the Company and various entities engaged in transactions with the
Company.
RELATIONSHIP WITH CHARTWELL
On November 22, 1994 (the "Effective Date"), the Company distributed to
its stockholders one (1) share of the common stock of Chartwell, then a
wholly owned subsidiary of the Company, for every ten
53
<PAGE>
(10) shares of Common Stock held of record as of November 14, 1994 (the
"Distribution"). On the Effective Date, the Company also transferred the
assets and liabilities of its business of financing and developing casino
gaming and entertainment facilities (the "Casino Development Business") to
Chartwell and made (and agreed to make) cash capital contributions to
Chartwell aggregating $50 million. As a result of the Distribution, Chartwell
became an independent publicly traded corporation and ceased to be a
subsidiary of the Company.
In connection with the Distribution and for purposes of (i) governing
certain of the ongoing relationships between the Company and Chartwell after
the Distribution, (ii) providing mechanisms for an orderly transition and
(iii) providing the Company with a means of participating in the economic
benefits of future gaming projects, the Company and Chartwell entered into
certain agreements, including the Distribution Agreement, the Financing
Agreement, the Marketing Services Agreement, the Advisory Agreement, the
Corporate Services Agreement, the Facility Lease and the Tax Sharing
Agreement on the Effective Date. Copies of such agreements were filed with
the Securities and Exchange Commission as exhibits to Chartwell's Current
Report on Form 8-K dated December 2, 1994. As indicated herein under the
captions "ELECTION OF DIRECTORS -- Information Regarding Nominees" and
"EXECUTIVE OFFICERS," certain of the Company's directors and executive
officers also currently serve, or served during 1995, as directors and
executive officers of Chartwell. Each of these directors and executive
officers also owned certain options to purchase shares of common stock of
Chartwell, which, except for the options which were granted to Mr. Edelman
and Mr. Robert Smith, have been cancelled on or before February 1, 1996.
On December 20, 1995, Chartwell Leisure Associates L.P. II, a general
partnership affiliated with the Fisher Brothers and Gordon Getty ("Chartwell
Leisure II") acquired approximately 17% of the outstanding common stock of
Chartwell. Mr. Edelman is a partner in Chartwell Leisure II, owning in the
aggregate a 4.8% beneficial interest in that partnership. On January 23,
1996, the Company acquired the Travelodge(Registered Trademark) and
Thriftlodge(Registered Trademark) lodging franchise system (the "Travelodge
System") and the related trademarks and trade names in North America from
Forte Hotels, Inc. and Forte Plc and immediately subsequent to such
acquisition, Chartwell acquired Forte Hotels, Inc., including in such
purchase approximately 16 hotels and joint venture interests in 96 hotels,
which are now licensed as part of the Travelodge System. As a result,
Chartwell is the largest franchisee of the Travelodge System. Under the
applicable franchise agreements, Chartwell is required to pay to Travelodge
Hotels, Inc. ("THI"), a wholly owned subsidiary of HFS, annual franchise fees
equal to four percent of gross room revenues for the owned hotel properties
plus four percent of gross room revenues of such properties as marketing and
reservation fees. In addition, the Company is required to pay to THI a
license fee equal to four percent of gross room revenues multiplied by
Chartwell's percentage interest in each of the hotel properties owned by
joint ventures in which Chartwell acquired an interest. In connection with
such acquisition, in accordance with the Financing Agreement, the Company
guaranteed $75 million of borrowings by Chartwell under a $125 million
revolving credit facility with certain banks. The Company receives an annual
guaranty fee of 2% of the $75 million credit extension. It is anticipated
that such guarantee will be terminated upon Chartwell's refinancing of the
underlying bank facility. In connection with the Travelodge acquisition, the
Advisory Agreement and the Marketing Services Agreement were terminated, and
the Corporate Services Agreement was modified to provide for a fixed fee of
$1.5 million per year, the provision of certain corporate services only
through September 1996 and the requirement of the Company to provide
corporate transaction advisory services. The Company and Chartwell agreed to
terminate the Advisory Agreement effective in December 1996, in consideration
of which Chartwell agreed to pay the Company $9.5 million, of which
approximately $2.5 million was paid in cash. The balance was paid by delivery
of a promissory note in the principal amount of $7 million, payable over seven
years commencing on January 1, 1999, bearing interest at the per annum rate of
6%, and payable in semi-annual installments commencing July 1, 1997. The
Company also received an advisory fee of approximately $2 million from
Chartwell for advisory services in connection with the acquisition by Chartwell
of Forte Hotels, Inc.
54
<PAGE>
In 1996, The Company and affiliates of Chartwell entered into master
licensing relationships with respect to the Travelodge brands in Canada and
Mexico under which such affiliates assumed responsibility for providing
services to the Canadian and Mexican franchisees other than reservation
services, which will continue to be provided by the Company. The Company will
receive royalties and fees for providing certain marketing and reservation
services under the master license agreements. Chartwell has guaranteed the
obligations of the affiliates under the master license agreements. The master
license in Canada replaced an agreement with Royco Hotels & Resorts Ltd.
acquired from FHI.
OTHER RELATIONSHIPS
Mr. Edelman is of counsel to Battle Fowler, a New York City law firm.
Battle Fowler represented the Company in certain transactions in 1995. It is
expected that Battle Fowler will continue to represent the Company in
connection with certain matters from time to time in the future.
Mr. Edelman is also a partner in Chartwell Hotels Associates ("Chartwell
Hotels"), a general partnership affiliated with the Fisher Brothers and
Gordon Getty, and its affiliate Chequers Investment Associates, which have
acquired certain hotels and mortgages secured by hotels from the Resolution
Trust Corporation. In two transactions with Chartwell Hotels, entered into in
November 1992 and May 1993, and each amended in December 1994, which have
resulted in and will result in the addition of properties to the Company's
franchise systems, the Company has advanced approximately $10 million, and
has agreed to advance up to an additional $4 million if certain additional
property conversions and other requirements are met, in return for Chartwell
Hotels agreeing to franchise the properties with one of the Company's brands.
All Chartwell Hotels properties will pay royalties once they become part of
the Company's franchise systems and these royalties will be credited toward
the recovery of the advance. Certain properties which cannot be converted to
Company brands will also pay a percentage of gross room sales in lieu of
royalties as specified in the agreements. Each advance is required to be
fully recovered over a maximum five year period following the advance. In
addition, as individual properties convert to Company brands, the Company
will make additional advances to the franchisee of such properties to fund
costs incurred in connection with such conversion. Such advances are required
to be repaid with interest by the franchisee over a three year period and
such repayment has been guaranteed by Chartwell Hotels.
Mr. Edelman is also a partner in Chartwell Leisure Associates L.P.
("Chartwell Leisure"). Chartwell Leisure has contracted with Funtricity
Vicksburg Family Entertainment Park, Inc., a wholly-owned subsidiary of Six
Flags Theme Parks, Inc., to develop a high quality family entertainment
center (the "Project") on land which is ground leased by Chartwell Leisure
from affiliates of Rainbow Casino Corporation (collectively, "Rainbow"). As
an inducement to Chartwell Leisure to provide the financing for the Project,
commencing May 1, 1995, the opening of the project, Chartwell shares
principal and interest payments on a loan to Rainbow with Chartwell Leisure
ranging from 14% to 27% of such payments adjusted annually in accordance with
a schedule to the agreement. The Company shares marketing fees from Rainbow
with Chartwell Leisure based on the same scheduled percentages. Chartwell
Leisure has agreed to share with the Company 50% of the net cash flow payable
to Chartwell Leisure in respect of the Project and the Company has agreed to
share such amounts pro-rata with Chartwell based on the relative amounts paid
by the Company and Chartwell, respectively, to Chartwell Leisure each year.
Mr. Pittman was the Chairman and Chief Executive Officer of Six Flags
Entertainment Corporation, the parent of Six Flags Theme Parks, Inc. until
September 12, 1995. During 1996, the Company paid Chartwell Leisure
approximately $887,000 and received from Chartwell Leisure (net of payments
to Chartwell) approximately $39,000 under this agreement.
In July 1995, the Company entered into agreements (the "Stock Purchase
Agreements") to acquire Century 21 and certain of its subsidiaries from
Metropolitan Life Insurance Company (together with certain of its
subsidiaries, "MetLife") for consideration of $245 million. On August 1,
1995, HFS assigned the Stock Purchase Agreements, other than certain rights
and obligations thereunder, to its subsidiary, C21 Holding Corp. ("Holding").
The acquisition of Century 21 by Holding was completed on August 1, 1995. In
connection with Holding's acquisition of Century 21, Holding purchased 2
million shares of Common Stock from the Company in exchange for $20,000 and a
Demand Note of Holding in the
55
<PAGE>
principal amount of $87,980,000 that bears interest at the rate of 13.0% per
annum. In addition, the Company purchased a second Demand Note of Holding in
the principal amount of $61,750,000 that bears interest at the rate of 13.0%
per annum, for $61,750,000 in cash. Holding used the 2 million shares of HFS
common stock and the proceeds from the sale of the second Demand Note to
satisfy, in part, its obligations to MetLife pursuant to the Stock Purchase
Agreements. In addition to the foregoing, in April 1996 the Company acquired
Century 21 Region V, Inc. and transferred the assets of such corporation to
Century 21 in May 1996.
The Company entered into a Subscription Agreement, dated August 1, 1995
(the "Subscription Agreement"), among the Company, Holding, Mr. Pittman and
the other Century 21 management stockholders named therein (the "Management
Stockholders", and together with Mr. Pittman, the "Managers") pursuant to
which the Company subscribed for 87.5% of the common stock of Holding (the
"Holding Common Stock") for consideration of $8.75 million, Mr. Pittman
subscribed for approximately 8.33% of the Holding Common Stock for
consideration of approximately $0.8 million and the Management Stockholders
subscribed for approximately 4.17% of the Holding Common Stock for
consideration of approximately $0.4 million. Pursuant to the Subscription
Agreement none of the Managers may transfer his Holding Common Stock without
the consent of the Company, other than pursuant to a Permitted Transfer (as
defined in the Subscription Agreement). In December 1995, with the consent of
the Company, Mr. Pittman transferred a portion of his ownership interest in
Holding equal to 0.5% of the outstanding Holding Common Stock to another
officer of Century 21 and the Management Stockholders transferred a portion
of their respective ownership interests in Holding equal to an aggregate of
0.25% of the outstanding Holding Common Stock to such other officer of
Century 21. Under the Subscription Agreement, the Company has a call option
to purchase all of the Holding Common Stock owned by the Managers from
January 1, 1998, or earlier in the event of certain terminations of the
Pittman Agreement, for the fair market value of such stock when the option is
exercised (the "Exercise Price"). The Managers each have a put option to
require the Company to purchase all of their Holding Common Stock from
January 1, 1998 or earlier in the event of certain terminations of the
applicable Manager's Employment Agreement at the Exercise Price. The Company
may use cash or, if agreed to by the Company and the Managers, Common Stock,
or, if so agreed, a combination of both, to pay for either option. The
Managers have also been granted tag-along rights in respect of a sale by the
Company of Holding Common Stock if, after giving effect to such sale, the
Company would own less than a majority of the Holding Common Stock. In a
tag-along situation the Managers would be permitted to sell their Holding
Common Stock to the purchaser for the same consideration as that received by
the Company. In addition, if the Company proposes to sell its Holding Common
Stock, and after giving effect to such sale the Company would own less than a
majority of the Holding Common Stock, then the Company has the right to
require the Managers to sell their Holding Common Stock, pro-rata with the
Company; provided, that the Managers receive their share of the consideration
for such Holding Common Stock in cash. Concurrently with Mr. Pittman's
resignation from Century 21, the Company, Mr. Pittman and the Management
Stockholders entered into a letter agreement providing, inter alia, that Mr.
Pittman's resignation constituted a "voluntary resignation" under his
employment agreement providing for the exercise by the Company of the call
option on the Holding Common Stock, which transaction is expected to be
settled in the second quarter of 1997.
On March 31, 1995 the Company acquired a 1% general partnership interest
in a limited partnership (the "Partnership") which develops, promotes and
franchises the recently established Wingate Inn franchise system, a new
construction hotel brand. Through December 31, 1995, an additional $15
million of capital was invested in the partnership through a private
placement of limited partnership unit interests, which units were sold for
$50,000 each. The Company has an option to acquire the limited partner
investment at a 30% compounded annual rate of return plus additional
outstanding capital loans and an additional call premium equal to
approximately 1.5 times annual royalty revenue, as defined. The limited
partners may require the Company to acquire the limited partner interest on
August 29, 2001. The Company also agreed to finance additional limited
partner capital contributions up to $60 million at the prime lending rate,
upon the occurrence of certain events, including the addition of open and
operating Wingate Inn properties. Certain executives of the Company purchased
limited partnership units in the partnership, as follows: Messrs. Silverman
and Snodgrass, 10 units each; Messrs. Buckman, Holmes and Osborne, 2 units
each; and Mr. Richard Smith, 1 unit.
56
<PAGE>
In addition, the Company has agreed to guarantee up to $36 million of
borrowings by a subsidiary of the Partnership, which borrowings will be used
to provide financing for franchisees to develop Wingate Inn facilities.
In November 1996, the Company acquired all of the stock of Resort
Condominiums International, Inc. from ms. DeHaan. Consideration for such
acquisition consisted of $412 million in cash and $75 million in Common
Stock, plus future contingent payments of up to $200 million over five years
commencing in November 1996.
In accordance with the terms of the Snodgrass Agreement, the Company has
arranged to make available to Mr. Snodgrass a one-quarter interest in a
Hawker 1000 aircraft. Further, as of December 31, 1998, the Company will have
the right to require Mr. Snodgrass to purchase such interest, and Mr.
Snodgrass shall have the right to require the Company to sell such interest
to him, in each case for the amount paid by the Company for such interest of
$2.8 million.
Mr. Rosenwald serves as Vice Chairman of The Bear Stearns Companies, Inc.,
an investment banking firm. During 1996, The Bear Stearns Companies, Inc.
provided underwriting and advisory services to the Company.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(a)(1) FINANCIAL STATEMENTS
See Financial Statement and Financial Statement Schedule Index commencing
on page F-1 hereof.
ITEM 14(a)(2) FINANCIAL STATEMENT SCHEDULES
See Financial Statement and Financial Statement Schedule Index commencing
on page F-1 hereof.
ITEM 14(a)(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------- ----------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement Among Purchasers dated as of January 22, 1996 among National Lodging Corp., Motels of
America, Inc. and Bear Acquisition Corp. (Incorporated by reference to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995, Exhibit 2.10)
2.2 Purchase and Sale Agreement dated February 9, 1996 among Electronic Realty Associates, L.P., the
Registrant and ERA Acquisition Co. (Incorporated by reference to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995, Exhibit 2.11)
2.3 Agreement dated February 9, 1996 among Heller Financial, Inc. the Registrant and ERA Acquisition
Co. (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, Exhibit 2.12).
2.4 Agreement and Plan of Merger and Reorganization, dated as of April 15, 1996, by and between HFS
Incorporated, Century 21 Region V, Inc. and Yeager Real Estate and Financial Services, Inc. (Incorporated
by reference to Registrant's Registration Statement on Form S-3 (Registration No. 333-03646), Exhibit
No. 2.1)
2.5 Stock Purchase Agreement dated as of July 12, 1995 between the Registrant and Metropolitan Life
Insurance Company (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1995, Exhibit 2.1)
2.6 Stock Purchase Agreement dated as of July 12, 1995 between the Registrant and C21 Acquisition Corp.
(Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1995, Exhibit 2.2)
2.7 Stock Purchase Agreement dated as of July 12, 1995 between the Registrant and Metropolitan Tower
Corp. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995, Exhibit 2.3)
57
<PAGE>
EXHIBIT NO. DESCRIPTION
- --------------- ----------------------------------------------------------------------------------------------
2.8 Stock Purchase Agreement dated as of October 17, 1995 between the Registrant and AMRE, Inc. (Incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1995).
2.9 Purchase Agreement dated as of December 19, 1995 among the Registrant, Forte Hotels, Inc. and Forte
USA, Inc. (Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, Exhibit 2.9)
2.10 Agreement and Plan of Merger dated as of April 3, 1996 among the Registrant, C-21 Holding Corp.,
Century 21 Real Estate of the Mid-Atlantic States, Inc. and George F. Kettle. (Incorporated by reference
to Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996, Exhibit
2.1)
2.11 Agreement and Plan of Merger dated as of April 3, 1996 among the Registrant, C21 Holding Corp.,
Century 21 of Eastern Pennsylvania, Inc., George F. Kettle and James O. Nelson. (Incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1996, Exhibit 2.2)
2.12 Agreement and Plan of Merger dated as of May 1, 1996 among the Registrant, CBC Acquisition Corp.,
Fremont Investors, Inc. and Coldwell Banker Corporation. (Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996, Exhibit 2.4)
2.13 Agreement and Plan of Merger, dated as of August 23, 1996, by and among HFS Incorporated, Avis Acquisition
Corp., U.S. Trust Company of California, N.A. as Trustee of the Trust forming a part of the Avis,
Inc. Employee Stock Ownership Plan and Avis, Inc. (Incorporated by reference to Registrant's Registration
Statement on Form S-3 (Registration No. 333-11029, Exhibit 2.1)
2.14 Stock Purchase Agreement, dated as of August 28, 1996, by and between HFS Incorporated and General
Motors Corporation. (Incorporated by reference to Registrant's Registration Statement on Form S-3
(Registration No. 333-11029, Exhibit 2.2)
2.15 Stock Purchase Agreement dated as of October 6, 1996 by and among the Company, Christel DeHaan and
Resort Condominiums International, Inc. (Incorporated by reference to Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1996, Exhibit 2.1)
2.16 Registration Rights Agreement, dated as of November 12, 1996, by and between HFS Incorporated and
Ms. Christel DeHaan (Incorporated by reference to Registrant's Registration Statement on Form S-3
(Registration No. 333-17371), Exhibit 2.2)
2.17 Agreement and Plan of Merger dated as of November 10, 1996, by and among HFS Incorporated, PHH Corporation
and Mercury Acquisition Corp. (Incorporated by reference to the Company's Current Report on Form
8-K dated November 14, 1996, Exhibit 2.1)
2.18 Asset Purchase Agreement dated as of April 2, 1996 among Century 21 Real Estate of Southern Florida,
Inc., the Registrant and Richard C. Ritchey (Incorporated by reference to Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1996, Exhibit 10.1)
2.19 Asset Purchase Agreement dated as of April 3, 1996 among Century 21 Real Estate Corporation, the
Registrant, Century 21 of the Southwest, Inc. and Larry E. Bryson. (Incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996, Exhibit
10.2)
3.1 Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 4
to the Registrant's Registration Statement on Form 8-A filed on February 21, 1996)
3.2 Amended and Restated By-laws of the Registrant (Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1996, Exhibit 3.1)
58
<PAGE>
EXHIBIT NO. DESCRIPTION
- --------------- ----------------------------------------------------------------------------------------------
4.1 Form of certificate for the Registrant's Common Stock, par value $0.1 per share (Incorporated by
reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-51422), Exhibit
No. 4.1)
4.2 Form of Indenture between the Registrant and Continental Bank, National Association, as trustee
(Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration
No. 33-71736), Exhibit No. 4.1)
4.3 Form of Indenture between the Registrant and Bank of America Illinois as trustee (the "Senior
Trustee")(Incorporated by reference to the Registrant's Current Report on Form 8-K dated September
28, 1994, Exhibit 2)
4.4 Form of Supplemental Indenture between the Registrant and the Senior Trustee (Incorporated by reference
to the Registrant's Current Report on Form 8-K dated September 28, 1994, Exhibit 3).
4.5 Indenture dated as of February 28, 1996 between the Registrant and First Trust of Illinois, National
Association, as trustee (Incorporated by reference to the Registrant's Current Report on Form 8-K
dated March 8, 1996, Exhibit 4.01)
4.6 Supplemental Indenture No. 1 dated as of February 28, 1996 between the Registrant and First Trust
of Illinois, National Association, as trustee (Incorporated by reference to the Registrant's Current
Report on Form 8-K dated March 8, 1996, Exhibit 4.02)
4.7 Form of Senior Indenture entered into by the Registrant and The Bank of Nova Scotia Trust Company
of New York, as Trustee. (Incorporated by reference to Registrant's Registration Statement on Form
S-3 (Registration No. 333-03276), Exhibit 4.2)
4.8 Form of Subordinated Indenture entered into by the Registrant and the Bank of Nova Scotia Trust
Company of New York, as Trustee (Incorporated by reference to Registrant's Registration Statement
on Form S-3 (Registration No. 333-03276), Exhibit 4.3)
10.1 364-Day Competitive Advance and Revolving Credit Agreement dated as of October 2, 1996 among HFS
Incorporated and The Lenders Referred to Therein and The Chase Manhattan Bank as Administrative
Agent (Incorporated by reference to Registrant's Current Report on Form 8-K dated October 15, 1996,
Exhibit 10.1)
10.2 Five Year Competitive Advance and Revolving Credit Agreement dated as of October 2, 1996 among HFS
Incorporated and The Lenders Referred to Therein and The Chase Manhattan Bank as Administrative
Agent (Incorporated by reference to Registrant's Current Report on Form 8-K dated October 15, 1996,
Exhibit 10.2)
10.3 License Agreement dated as of September 18, 1989 amended and restated as of July 15, 1991 between
Franchise System Holdings, Inc. and Ramada Franchise Systems, Inc. (Incorporated by reference to
the Registrant's Registration Statement on Form S-1 (Registration No. 33-51422), Exhibit No. 10.2)
10.4 Restructuring Agreement dated as of July 15, 1991 by and among New World Development Co., Ltd.,
Ramada International Hotels & Resorts, Inc. Ramada Inc., Franchise System Holdings, Inc., the Registrant
and Ramada Franchise Systems, Inc. (Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (Registration No. 33-51422), Exhibit No. 10.3)
10.5 License Agreement dated as of November 1, 1991 between Franchise Systems Holdings, Inc. and Ramada
Franchise Systems, Inc. (Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-51422), Exhibit No. 10.4)
10.6 Amendment to License Agreement, Restructuring Agreement and Certain Other Restructuring Documents
dated as of November 1, 1991 by and among New World Development Co., Ltd., Ramada International
Hotels & Resorts, Inc., Ramada Inc., Franchise System Holdings, Inc., the Registrant and Ramada
Franchise Systems, Inc. (Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-51422), Exhibit No. 10.5)
59
<PAGE>
EXHIBIT NO. DESCRIPTION
- --------------- ----------------------------------------------------------------------------------------------
10.7 The Registrant's 1992 Incentive Stock Option Plan and Form of Stock Option Agreement. (Incorporated
by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-51422),
Exhibit No. 10.6)
10.8 Form of Amended and Restated Employment Agreement dated as of June 30, 1996 between the Registrant
and Henry R. Silverman. (Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1996, Exhibit 10.1)
10.8(a )* Amendment dated January 27, 1997 to Amended and Restated Employment Agreement dated as of June 30,
1996 between the Registrant and Henry R. Silverman.
10.9 Employment Agreement dated as of January 31, 1992 between the Registrant and John D. Snodgrass,
as amended as of January 31, 1992. (Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (Registration No. 33-51422), Exhibit 10.23)
10.9(a ) Amendment to Employment Agreement dated as of October 30, 1996 between the Registrant and John D.
Snodgrass. (Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1996, Exhibit 10.1)
10.10 Employment Agreement dated October 14, 1996 between the Registrant and Michael P. Monaco. (Incorporated
by reference to Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1996, Exhibit 10.2)
10.11 Employment Agreement dated as of January 15, 1992 between the Registrant and James E. Buckman. (Incorporated
by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-51422),
Exhibit 10.24)
10.11(a) Amendment to Employment Agreement between Registrant and James E. Buckman dated as of October 1,
1994. (Incorporated by reference to the Registrant's Annual Report on Form 10-K filed March 31,
1994, Exhibit No. 10.12(a))
10.12 Employment Agreement dated as of October 1, 1991 between the Registrant and Stephen P. Holmes. (Incorporated
by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-51422 Exhibit
10.25)
10.12(a) Amendment to Employment Agreement between Registrant and Stephen P. Holmes dated as of October 1,
1994. (Incorporated by reference to the Registrant's Annual Report on Form 10-K filed March 31,
1994, Exhibit NO. 10.13(a))
10.13 Employment Agreement dated as of January 31, 1992 between the Registrant and Richard A. Smith. (Incorporated
by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-51422),
Exhibit 10.27)
10.13(a) Amendment to employment Agreement between Registrant and Richard A. Smith dated as of October 1,
1994. (Incorporated by reference to the Registrant's Annual Report on Form 10-K filed March 31,
1994, Exhibit No. 10.14(a))
10.14 Letter Agreement between the Registrant and John Osborne regarding employment. (Incorporated by
reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-70706), Exhibit
No. 10.28)
10.15 U.S. Bankruptcy Court for the District of Delaware Order Incorporating Additional Terms Relating
to the Relationship of Purchaser to Franchisees, dated December 20, 1991. (Incorporated by reference
to the Registrant's Registration Statement on Form S-1 (Registration No. 33-51422), Exhibit 10.31)
10.16 Conversion Agreement between Chartwell Hotels Associates and HFS Brands, Inc., dated as of November
17, 1992. (Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration
NO. 33-51422 Exhibit 10.33)
10.17 Conversion Agreement, dated as of may 9, 1993, between Chartwell Hotels II Associated and HFS Brands,
Inc. (Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration
No. 33-63398) Exhibit No. 10.35)
</TABLE>
- ------------
* Filed herewith
60
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------- -------------------------------------------------------------------------------------------
<S> <C>
10.18 Letter Agreement among the Registrant, Bryanston Group, Inc. and National Gaming Corp. dated
August 18, 1995. (Incorporated by reference to the Registrant's Registration Statement on Form
S-3 (Registration No. 33-96034), Exhibit 10.1)
10.19 Second Amendment of Casino Financing Agreement dated as of August 11, 1994 between the Registrant
and Rainbow Casino Corporation. (Incorporated by reference tot he Registrant's Annual Report
of Form 10-K filed March 31, 1994, Exhibit No. 10.30(b))
10.20 Marketing Services Agreement dated as of march 15, 1994 between Rainbow Casino Corporation and
HFS Gaming Corp. (Incorporated by reference to the Registrant's Form 10-K filed March 31, 1994,
Exhibit No. 10.32)
10.21 The Registrant's Amended and Restated 1993 Stock Option Plan (Incorporated by reference to the
Registrant's Registration Statement on Form S-8 (Registration No. 33-83956), Exhibit 4.1)
10.21(a) First Amendment to the Amended and Restated 1993 Stock Option Plan dated May 5, 1995. (Incorporated
by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33094756),
Exhibit 4.1)
10.21(b) Second Amendment to the Amended and Restated 1993 Stock Option Plan dated January 22, 1996. (Incorporated
by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1995, Exhibit 10.21(b))
10.21(c) Third Amendment to the Amended and Restated 1993 Stock Option Plan dated January 22, 1996. (Incorporated
by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1995, Exhibit 10.21(c))
10.21(d) Fourth Amendment to the Amended and Restated 1993 Stock Option Plan dated May 20, 1996. (Incorporated
by reference to Registrant's Registration Statement on Form S-8 (Registration No. 333-06733),
Exhibit 4.5)
10.21(e)* Fifth Amendment to the Amended and Restated 1993 Stock Option Plan dated July 24, 1996.
10.21(f)* Sixth Amendment to the Amended and Restated 1993 Stock Option Plan dated September 24, 1996.
10.22 Marketing Services Agreement dated as of April 27, 1994 by and between HFS Gaming Corp. and Boomtown,
Inc. (Incorporated by reference to the Registrant's Form 10-Q filed May 16, 1994, Exhibit 10.2)
10.23 Guarantee Letter, dated January 17, 1995, by and among Hospitality Franchise Systems, Inc., National
Gaming Corp. and Boomtown, Inc. (Incorporated by reference to the Registrant's Form 8-K filed
February 1, 1995, Exhibit 10.1)
10.24 Interim Financing Agreement dated as of November 22, 1994 between the Registrant and National
Gaming Corp. (Incorporated by reference to Exhibit Number 10.1 to the National Gaming Corp. Current
Report on Form 8-K dated December 2, 1994)
10.25 Form of Amended and Restated Corporate Services Agreement dated as of January 24, 1996 between
the Registrant and National Lodging Corp. (Incorporated by reference to Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1996, Exhibit 10.3)reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, Exhibit
10.30)
10.26 Form of Second Amended and Restated Financing Agreement dated as of July 24, 1996 between the
Registrant and National Lodging Corp. (Incorporated by reference to Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1996, Exhibit 10.2)
10.27* HFS Guaranty dated as of August 28, 1996 by the Registrant to The Chase Manhattan Bank, as Administrative
Agent (as defined in such agreement) for the benefit of National Lodging Corp.
</TABLE>
- ------------
* Filed herewith
61
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------- ------------------------------------------------------------------------------------------
<S> <C>
10.28 Tax Sharing and Indemnification Agreement dated as of November 22, 1994 between the Registrant
and National Gaming Corp. (Incorporated by reference to Exhibit Number 10.6 to the National
Gaming Corp. Current Report on Form 8-K dated December 2, 1994)
10.29* Second Amended and Restated Agreement of Limited Partnership of Hotel Franchising Limited Partnership
dated as of November 20, 1996.
10.30 Support Agreement between the Registrant, General Franchise Systems, Inc. and Hotel Franchising
Limited Partnership dated as of March 31, 1995 (Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995, Exhibit 10.2)
10.31 Loan and Security Agreement dated as of March 31, 1995 between the Registrant and Franchise
Investors L.L.C. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1995, Exhibit 10.3)
10.32 Guaranty Agreement dated as of March 31, 1995 between the Registrant and Franchise Investors
L.L.C. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1995, Exhibit 10.4)
10.33 Asset Purchase Agreement dated April 21, 1995 among Knights Lodging, Inc. and Economy Lodging
Systems, Inc., as Sellers, and KI Acquisition Corp., as Buyer (Incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995,
Exhibit 10.5)
10.34 Agreement dated as of March 31, 1995 between the Registrant and Motels of America, Inc. (Incorporated
by reference to the Registrant's Current Report on Form 8-K dated April 4, 1995, Exhibit 10.1)
10.35 Amended and Restated Warrant Agreement dated as of August 11, 1993, as amended and restated
as of May 15, 1995 between the Registrant and Chemical Mellon Shareholder Services (Incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1995, Exhibit 10.1)
10.36 Indemnification Agreement dated as of July 12, 1995 among the Registrant, Metropolitan Life
Insurance Company and Metropolitan Tower Corp. (Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995, Exhibit 10.2)
10.37 Subscription and Stockholders Agreement dated as of August 1, 1995 among C21 Holding Corp.,
the Registrant, Robert W. Pittman, Mark S. Mitzner and Mayo S. Stuntz, Jr. (Incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1995, Exhibit 10.3)
10.38 Employment Agreement dated as of August 1, 1995 among Century 21 Real Estate Corporation, the
Registrant and Robert W. Pittman (Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1995, Exhibit 10.4)
10.39 Employment Agreement dated as of August 1, 1995 among Century 21 Real Estate Corporation, the
Registrant and Mark S. Mitzner (Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1995, Exhibit 10.5)
10.40 Employment Agreement dated as of August 1, 1995 among Century 21 Real Estate Corporation, the
Registrant and Mayo S. Stuntz, Jr. (Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1995, Exhibit 10.6)
10.41 Services Agreement dated as of July 12, 1995 between the Registrant and Metropolitan Life Insurance
Company (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995, Exhibit 10.7)
</TABLE>
- ------------
* Filed herewith
62
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------- --------------------------------------------------------------------------------------------
<S> <C>
10.42 Assignment Agreement dated as of August 1, 1995 between the Registrant and C21 Holding Corp. (Incorporated
by reference to the Registrant's Current Report on Form 8-K dated August 16, 1995, Exhibit 10.1)
10.43 Credit Agreement dated as of October 17, 1995 between AMRE, Inc., as borrower, and the Registrant,
as lender (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995, Exhibit 10.1)
10.44 License Agreement among TM Acquisition Corp., Century 21 Real Estate Corporation and American
Remodelling, Inc. dated October 17, 1995 (Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1995, Exhibit 10.2)
10.45 Master License Agreement dated October 17, 1995 between Century 21 Real Estate Corporation and
TM Acquisition Corp. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1995, Exhibit 10.3)
10.46 Purchasing Services Agreement dated as of November 30, 1995 between the Registrant and Compleat
Resources Group, Inc. (Incorporated by reference to the Registrant's Current Report on Form 8-K
dated December 11, 1995, Exhibit 10.1)
10.46(a) First Amendment to Purchasing Services Agreement dated January 31, 1997 between the Registrant
and Compleat Resources Group, Inc.
10.47 Stock Purchase Agreement dated as of November 30, 1995 between the Registrant and Insignia Financial
Group, Inc. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated December
11, 1995, Exhibit 10.2)
10.48 Registration Rights Agreement dated as of November 30, 1995 between the Registrant and Insignia
Financial Group, Inc. (Incorporated by reference to the Registrant's Current Report on Form 8-K
dated December 11, 1995, Exhibit 10.3)
10.49* Credit Agreement dated as of November 20, 1996 among Wingate Financial LLC, the Lenders named
therein and The Chase Manhattan Bank, as administrative agent and collateral agent, Westdeutsche
Landesbank Girozentrale, as collateral agent, The Bank of Nova Scotia, as documentation agent
and Bankers Trust Company, as syndication agent.
10.50* Guaranty dated as of November 20, 1996 from the Registrant to The Chase Manhattan Bank, as agent
for the Lenders named in the Credit Agreement dated as of November 20, 1996.
11 * Statement re: Historical Computation of Per Share Earnings
11.1 * Statement re: Pro Forma Computation of Per Share Earnings
12 * Statement re: Computation of Ratio of Earnings to Fixed Charges
21 * Subsidiaries of the Registrant
23.1 * Consent of Deloitte & Touche LLP relating to the financial statements of HFS Incorporated.
23.2 * Consent of Deloitte & Touch LLP relating to the financial statements of Rental Car Operations
of Avis, Inc.
23.3 * Consent of Price Waterhouse LLP relating to the financial statements of Avis, Inc.
</TABLE>
- ------------
* Filed herewith
ITEM 14(b) REPORTS ON FORM 8-K
On October 15, 1996, the Company filed a Current Report on Form 8-K, which
report was amended on March 27, 1997, to report the execution on October 6,
1996 of a definitive agreement to acquire Resort Condominiums International,
Inc. ("RCI") and the execution on October 2, 1996 of credit agreements relating
to $1 billion in revolving credit financing. Such report included pro forma
financial information reflecting the RCI acquisition and other acquisitions
and transactions.
63
<PAGE>
On November 15, 1996, the Company filed a Current Report on Form 8-K to
report the execution on November 10, 1996 of an agreement and plan of merger
pursuant to which Mercury Acquisition Corp., a wholly owned subsidiary of the
Company, is expected to be merged with PHH Corporation (the "PHH Merger").
Such Current Report on Form 8-K was amended on December 4, 1996 by the filing
of an amendment on Form 8-K/A to include the following financial information:
1. Audited consolidated balance sheets of PHH Corporation and subsidiaries
as of April 30, 1996 and 1995 and the related consolidated statements
of income, stockholders' equity and cash flows for each of the years in
the three year period ended April 30, 1996.
2. Unaudited consolidated balance sheet of PHH Corporation and
subsidiaries as of October 31, 1996 and the related unaudited
consolidated statements of income for the three and six months ended
October 31, 1996 and 1995 and cash flows for the six months ended
October 31, 1996 and 1995.
3. Pro Forma financial information of the Company reflecting the PHH
Merger.
Such report was further amended on March 27, 1997.
On December 5, 1996, the Company filed an amendment on Form 8-K/A to the
Company's Current Report on Form 8-K which was filed on August 29, 1996. Such
amendment included the following financial information:
1. Audited consolidated balance sheets of Avis, Inc. and subsidiaries as
of February 29, 1996 and February 28, 1995 and the related consolidated
statements of income, changes in stockholders' equity, changes in
redeemable preferred stock and cash flows for each of the years in the
three year period ended February 29, 1996.
2. Unaudited consolidated financial statements of Avis, Inc. and
subsidiaries at May 31, 1996 and for the three months ended May 31,
1996 and 1995.
3. Unaudited consolidated financial statements of Avis, Inc. and
subsidiaries at August 31, 1996 and for the six months ended August 31,
1996 and 1995.
Such report was further amended on March 27, 1997.
On December 24, 1996, the Company filed a Current Report on Form 8-K to
report the consummation of the acquisition by the Company on October 17, 1996
of Avis, Inc. and on November 12, 1996 of RCI.
ITEM 14(d) ADDITIONAL FINANCIAL STATEMENTS
The audited consolidated balance sheets of Avis, Inc. and subsidiaries as
of February 29, 1996 and February 28, 1995 and the related consolidated
statements of income changes in stockholders' equity, changes in redeemable
preferred stock and cash flows for each of the years in the three year period
ended February 29, 1996 included in the Company's Current Report on Form 8-K
dated August 29, 1996, as amended December 5, 1996, as further amended March
27, 1997 are incorporated herein by reference.
64
<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.
HFS INCORPORATED
By: /s/ Henry R. Silverman
-------------------------
Henry R. Silverman
Chairman of the Board and
Chief Executive Officer
Date: March 31, 1997
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- --------------------------------------------- ------------------
<S> <C> <C>
/s/ Henry R. Silverman Chairman of the Board, Chief Executive March 31, 1997
- ----------------------------- Officer and Director (Principal Executive
Henry R. Silverman Officer)
/s/ Michael P. Monaco Vice Chairman and Chief Financial March 31, 1997
- ----------------------------- Officer (Principal Financial Officer and
Michael P. Monaco Principal Accounting Officer)
/s/ Stephen P. Holmes Vice Chairman and Director March 31, 1997
- -----------------------------
Stephen P. Holmes
/s/ John D. Snodgrass Vice Chairman, President, Chief March 31, 1997
- ----------------------------- Operating Officer and Director
John D. Snodgrass
/s/ James E. Buckman Executive Vice President and General March 31, 1997
- ----------------------------- Counsel and Director
James E. Buckman
/s/ Martin L. Edelman Director March 31, 1997
- -----------------------------
Martin L. Edelman
/s/ Robert E. Nederlander Director March 31, 1997
- -----------------------------
Robert E. Nederlander
/s/ E. John Rosenwald, Jr. Director March 31, 1997
- -----------------------------
E. John Rosenwald, Jr.
/s/ Robert W. Pittman Director March 31, 1997
- -----------------------------
Robert W. Pittman
/s/ Leonard Schutzman Director March 31, 1997
- -----------------------------
Leonard Schutzman
/s/ Robert F. Smith Director March 31, 1997
- -----------------------------
Robert F. Smith
/s/Christel DeHaan Director March 31, 1997
- -----------------------------
Christel DeHaam
</TABLE>
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements of the Company:
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at
December 31, 1996 and 1995............................................ F-3
Consolidated Statements of Income
for the years ended December 31,
1996, 1995 and 1994................................................... F-4
Consolidated Statements of Stockholders' Equity......................... F-5
Consolidated Statements of Cash Flows
for the years ended December 31,
1996, 1995 and 1994................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7 to F-30
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts of the Company .......... F-31
Combined Financial Statements of Rental Car Operations of Avis, Inc.:
Independent Auditors' Report ........................................... F-32
Combined Statement of Financial Position
for the year ended December 31, 1996 ................................. F-33
Combined Statement of Operations
for the Period October 17, 1996
(Date of Acquisition) to December 31, 1996 ........................... F-34
Combined Statement of Stockholder's Equity
for the Period October 17, 1996
(Date of Acquisition) to December 31, 1996 ........................... F-35
Combined Statement of Cash Flows
for the Period October 17, 1996
(Date of Acquisition) to December 31, 1996 ........................... F-36
Notes to the Combined Financial Statements
for the Period October 17, 1996
(Date of Acquisition) to December 31, 1996 ........................... F-37 to F-50
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts
of Rental Car Operations of Avis, Inc. ............................... F-51
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
HFS INCORPORATED:
We have audited the accompanying consolidated balance sheets of HFS
Incorporated and its subsidiaries (the "Company") as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. Our audit also includes the financial statement schedule of the Company
listed in the index at F-1. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
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, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles. Also, in our
opinion such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
Deloitte & Touche LLP
Parsippany, New Jersey
March 31, 1997
F-2
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................................. $ 55,762 $ 16,109
Investment in equity securities........................................... 22,500 --
Accounts and notes receivable, net of allowance for doubtful accounts of
$13,248 and $12,354, respectively ....................................... 119,942 37,326
Marketing and reservation receivables, net of allowance for doubtful
accounts of $7,698 and $6,858, respectively.............................. 27,396 22,297
Equity advances........................................................... 125,662 51,180
Other current assets...................................................... 45,820 21,304
Deferred income taxes .................................................... 72,200 20,200
------------ ------------
TOTAL CURRENT ASSETS...................................................... 469,282 168,416
Property and equipment--net of accumulated depreciation and amortization
of $35,135 and $19,567, respectively..................................... 236,383 67,892
Franchise agreements--net of accumulated amortization of $87,876
and $65,905, respectively................................................ 995,947 517,218
Excess of cost over fair value of net assets acquired-net of accumulated
amortization of $44,949 and $13,352, respectively ....................... 1,736,130 356,754
Other intangibles-net of accumulated amortization of $4,441............... 604,535 --
Investment in car rental operations of Avis Inc........................... 76,540 --
Other assets ............................................................. 170,104 55,528
------------ ------------
TOTAL ASSETS.............................................................. $4,288,921 $1,165,808
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other................................................ $ 322,577 $ 64,894
Deferred income........................................................... 160,619 19,106
Income taxes payable...................................................... 17,460 38,640
Short-term debt........................................................... 150,000 --
Due to car rental operations of Avis, Inc., net........................... 61,807 --
Current portion of long-term debt ........................................ 2,995 2,249
------------ ------------
TOTAL CURRENT LIABILITIES................................................. 715,458 124,889
Long-term debt............................................................ 748,421 300,778
Deferred income........................................................... 194,370 7,595
Other liabilities......................................................... 72,071 9,555
Deferred income taxes..................................................... 82,100 82,800
Commitments and contingencies (Note 9) ...................................
Series A adjustable rate Preferred Stock.................................. -- 80,000
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value--authorized 10,000,000 shares; none
issued and outstanding................................................... -- --
Common stock, $.01 par value--authorized 300,000,000 shares; issued and
outstanding, 129,888,682 and 102,538,756 shares respectively ........... 1,299 1,025
Additional paid-in capital................................................ 2,236,444 475,562
Retained earnings ........................................................ 253,188 83,604
------------ ------------
Net unrealized gain on investment......................................... 4,366 --
Currency translation adjustment........................................... 356 --
Treasury stock, at cost (322,500 shares).................................. (19,152) --
TOTAL STOCKHOLDERS' EQUITY ............................................... 2,476,501 560,191
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................ $4,288,921 $1,165,808
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES ............................................ $799,040 $412,983 $312,547
---------- ---------- ----------
EXPENSES
Marketing and reservation............................ 169,315 143,965 130,268
Selling, general and administrative.................. 244,089 81,467 49,228
Depreciation and amortization........................ 69,234 30,857 23,723
Interest............................................. 32,755 21,789 18,685
---------- ---------- ----------
TOTAL EXPENSES ...................................... 515,393 278,078 221,904
---------- ---------- ----------
Income before income taxes........................... 283,647 134,905 90,643
Provision for income taxes .......................... 114,063 55,175 37,154
---------- ---------- ----------
NET INCOME........................................... $169,584 $ 79,730 $ 53,489
========== ========== ==========
PER SHARE INFORMATION (PRIMARY)
Net income ......................................... $ 1.29 $ .74 $ .53
========== ========== ==========
Weighted average common and common equivalent
shares outstanding ................................ 135,173 113,817 100,874
========== ========== ==========
PER SHARE INFORMATION (FULLY DILUTED)
Net income......................................... $ 1.29 $ .73 $ .53
========== ========== ==========
Weighted average common and common equivalent
shares outstanding .............................. 135,310 115,654 100,874
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN RETAINED
SHARES AMOUNTS CAPITAL EARNINGS
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 1994 .... 88,220 $ 882 $ 236,367 $ 30,160
Issuance of common stock ... 4,140 42 55,900 --
Exercise of stock options ... 240 2 945 --
Tax benefit from exercise of
stock options............... -- -- 1,002 --
Distribution of Chartwell
Leisure Inc. ............... -- -- (18,445) (79,775)
Net income .................. -- -- -- 53,489
--------- --------- ------------ ----------
Balance, December 31, 1994 .. 92,600 926 275,769 3,874
Issuance of common stock ... 8,341 83 178,240 --
Exercise of stock options ... 605 6 3,415 --
Tax benefit from exercise of
stock options............... -- -- 3,237 --
Exercise of stock warrants .. 991 10 14,872 --
Conversion of 4 1/2% Senior
Notes....................... 2 -- 29 --
Net income .................. -- -- -- 79,730
--------- --------- ------------ ----------
Balance, December 31, 1995 .. 102,539 1,025 475,562 83,604
Issuance of common stock .... 25,706 257 1,712,015 --
Exercise of stock options ... 1,463 15 17,179 --
Tax benefit from exercise of
stock options............... -- -- 28,397 --
Conversion of 4 1/2% Senior
Notes....................... 181 2 3,291 --
Purchase of common stock .... -- -- -- --
Currency translation
adjustment.................. -- -- -- --
Net unrealized gain on
investment.................. -- -- -- --
Net income .................. -- -- -- 169,584
--------- --------- ------------ ----------
BALANCE, DECEMBER 31, 1996 . 129,889 $1,299 $2,236,444 $253,188
========= ========= ============ ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NET
UNREALIZED CURRENCY
GAIN ON TRANSLATION TREASURY
INVESTMENT ADJUSTMENT STOCK TOTAL
---------- ----------- -------- -----
<S> <C> <C> <C> <C>
Balance, January 1, 1994 .... $ -- $ -- $ -- $ 267,409
Issuance of common stock ... 55,942
Exercise of stock options ... -- -- -- 947
Tax benefit from exercise of
stock options............... -- -- -- 1,002
Distribution of Chartwell
Leisure Inc. ............... -- -- -- (98,220)
Net income .................. -- -- -- 53,489
------------ ------------- ----------- -----------
Balance, December 31, 1994 .. -- -- -- 280,569
Issuance of common stock ... -- -- -- 178,323
Exercise of stock options ... -- -- -- 3,421
Tax benefit from exercise of
stock options............... -- -- -- 3,237
Exercise of stock warrants .. -- -- -- 14,882
Conversion of 4 1/2% Senior
Notes....................... -- -- -- 29
Net income .................. 79,730
------------ ------------- ----------- -----------
Balance, December 31, 1995 .. -- -- -- 560,191
Issuance of common stock .... -- -- -- 1,712,272
Exercise of stock options ... -- -- -- 17,194
Tax benefit from exercise of
stock options............... -- -- -- 28,397
Conversion of 4 1/2% Senior
Notes....................... -- -- -- 3,293
Purchase of common stock .... -- -- (19,152) (19,152)
Currency translation
adjustment.................. -- 356 -- 356
Net unrealized gain on
investment.................. 4,366 -- -- 4,366
Net income .................. -- -- -- 169,584
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1996 . $4,366 $356 $(19,152) $2,476,501
============ ============= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .......................................................... $ 169,584 $ 79,730 $ 53,489
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, including amortization of deferred
financing costs................................................... 71,387 32,097 24,506
Provision for bad debt expense..................................... 8,103 12,013 6,262
Deferred income taxes.............................................. 43,351 9,100 8,300
Deferred rent ..................................................... (350) (348) (285)
Deferred financing costs .......................................... (6,569) (192) (3,322)
Proceeds from repayment of relocation receivables and equity
advances.......................................................... 1,240,909 24,869 --
Relocation receivables and equity advances generated............... (1,244,512) (30,853) --
Gain on sale of assets ............................................ (1,144) -- (1,044)
Equity in earnings of car rental operations of Avis Inc. .......... (1,221) -- --
Increase (decrease) from changes in:
Accounts and notes receivable .................................... (25,122) (5,373) (8,633)
Marketing and reservation receivables............................. (5,564) (7,970) (5,195)
Other assets...................................................... (504) (4,679) (5,301)
Accounts payable and other........................................ (78,304) (12,341) (521)
Deferred income................................................... 4,088 7,248 (1,721)
Income taxes payable.............................................. 3,943 17,471 23,541
Other liabilities................................................. 4,254 (1,397) (1,000)
------------- ----------- -----------
Net cash provided by operating activities ........................... 182,329 119,375 89,076
------------- ----------- -----------
INVESTING ACTIVITITES
Purchase of land and building........................................ -- (14,311) --
Other property and equipment additions............................... (41,211) (10,212) (11,377)
Proceeds from sale of assets......................................... 3,889 -- 4,697
Due to car rental operations of Avis Inc............................. (11,228) -- --
Loans and investments................................................ (12,721) (33,783) (42,524)
Principal payments received on loans................................. 1,600 -- 341
Net assets acquired, exclusive of cash acquired ..................... (1,597,231) (70,647) --
------------- ----------- -----------
Net cash used in investing activities ............................... (1,656,902) (128,953) (48,863)
------------- ----------- -----------
FINANCING ACTIVITIES ................................................
Principal payments--long-term debt................................... (3,161) (46,954) (152,131)
Issuance of common stock............................................. 1,169,117 51,808 933
Redemption of warrants............................................... -- 14,877 --
Cash distribution.................................................... -- -- (50,000)
Purchases of treasury stock.......................................... (19,152) -- --
Redemption of Series A Preferred Stock .............................. (80,000) -- --
Proceeds from borrowings ............................................ 447,066 -- 150,000
------------- ----------- -----------
Net cash provided by (used in) financing activities ................. 1,513,870 19,731 (51,198)
------------- ----------- -----------
Effect of changes in exchange rates on cash and cash equivalents .... 356 -- --
------------- ----------- -----------
Net increase (decrease) in cash and cash equivalents................. 39,653 10,153 (10,985)
Cash and cash equivalents, beginning of period ...................... 16,109 5,956 16,941
------------- ----------- -----------
Cash and cash equivalents, end of period............................. $ 55,762 $ 16,109 $ 5,956
============= =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest........................................................... $ 25,377 $ 19,161 $ 16,788
============= =========== ===========
Taxes.............................................................. $ 56,151 $ 28,139 $ 5,313
============= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS -- HFS Incorporated (together with its
subsidiaries, the "Company"), is a leading global provider of services to
various businesses in consumer industries. The Company engages in the
following businesses and related industry segments:
o Franchising (lodging and real estate franchise segments). The
Company franchises guest lodging facilities and residential real
estate brokerage offices and provides operational and
administrative services to its franchisees under the names CENTURY
21(Registered Trademark), Coldwell Banker(Registered Trademark),
Days Inn(Registered Trademark), Electronic Realty
Associates(Registered Trademark) ("ERA"), Howard Johnson(Registered
Trademark), Knights Inn(Registered Trademark), Ramada(Registered
Trademark), Super 8(Registered Trademark), Travelodge(Registered
Trademark) and Villager Lodge(Registered Trademark) ("Villager").
As a franchisor, the Company licenses the owners and operators of
independent businesses, principally hotels and real estate
brokerage offices, to use the Company's brand names. The Company
provides its customers with services designed to increase their
revenue and profitability. These services permit franchisees to
retain independence and local control while benefiting from the
economies of scale of widely promoted brand names and standards of
service, national and regional direct marketing and co-marketing
arrangements and global procurement. Services provided to the
lodging segment include access to a national reservation system,
national advertising and promotional campaigns, co-marketing
programs and volume purchasing discounts. Services provided to the
real estate segment include national and local advertising and
promotion, referrals and training and volume purchasing discounts.
o Relocation (relocation segment). The Company provides relocation
services to client corporations through its Coldwell Banker
Relocation Services, Inc. and Worldwide Relocation Management, Inc.
subsidiaries. These services include responsibility for the sale of
a transferee's residence, providing equity advances on transferee
residences for the purchase of a new home and home management
services.
o Timeshare (timeshare segment). The Company operates Resort
Condominiums International ("RCI"), a provider of timeshare
exchange programs, publications and other travel related services
to the timeshare industry. The "RCI Network" enables a member who
owns a timeshare interest in a resort property that is affiliated
with the RCI Network to exchange such timeshare interest for one of
equivalent value in another affiliated resort.
o Car Rental (car rental segment). The Company currently owns Avis,
Inc. ("Avis"), including the car rental operations of Avis, Inc.
("ARAC") which provides vehicle rentals to businesses and
individual customers worldwide as well as other rental related
products such as insurance, refueling services and loss damage
waivers. The Company intends to undertake an initial public
offering of ARAC the "IPO" which will dilute its interest to 25%.
The Company will retain the Avis trademark which is licensed to ARAC
under an agreement effective January 1, 1997 as well as the
reservation and information technology systems. (see Note 1B).
o Other (other segment). The Company operates a telecommunications
and computer processing system which is licensed to ARAC and other
independent car rental companies for reservations, rental agreement
processing, accounting, fleet control and other purposes and also
services businesses in other industries. The Company also provides
marketing and other services to casino gaming facilities.
B. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts and transactions of the Company together with its wholly
owned and majority owned subsidiaries except for the Company's ownership of
ARAC which is accounted for under the equity method (See Note 3). ARAC is not
consolidated because of the Company's plan to undertake an IPO which will
dilute the Company's interest to 25%. If the IPO is not consummated within one
year of the Company's acquisition of Avis, the Company will consolidate
ARAC. All
F-7
<PAGE>
material intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements of the Company include
the assets and liabilities of Ramada Franchise Systems, Inc., an entity
controlled by the Company by virtue of its ownership of 100% of the common
stock of such entity. The assets of Ramada Franchise Systems, Inc. are not
available to satisfy the claims of any creditors of the Company or any of its
other affiliates, except as otherwise specifically agreed by Ramada Franchise
Systems, Inc.
C. CASH AND CASH EQUIVALENTS -- The Company considers highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
D. INVESTMENT SECURITIES -- The Company determines the appropriate
classifications of its investment securities at the time of purchase and
periodically reevaluates such determinations. Unrestricted investment
securities for which the Company does not have the intent or ability to hold
to maturity are classified as "available for sale". Available for sale
securities are carried at fair value, with unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity.
E. PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is computed by the straight-line
method over the estimated useful life of the related asset or the lease term,
if shorter. Interest costs of $564,000, $82,000 and $246,000 in 1996, 1995 and
1994, respectively, for the construction of property and equipment were
capitalized and are being amortized over the estimated useful life of the
related asset. The Company periodically evaluates the recoverability of
property and equipment by comparing the carrying value to current and
expected cash flows separately for each business segment in which the
property and equipment is employed.
F. FRANCHISE AGREEMENTS -- Franchise agreements are recorded at their
estimated fair values at the date acquired and amortized over the estimated
period to be benefited ranging from 12 to 40 years using the straight-line
method. The Company periodically evaluates the recoverability of franchise
agreements by comparing the carrying value to current and expected future
cash flows on a separate basis for each franchise brand.
G. EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED -- The excess of
cost over fair value of net assets acquired is being amortized on a
straight-line basis over the estimated useful lives, ranging from 20 to 40
years. The Company periodically evaluates the recoverability of excess of
cost over fair value of net assets acquired by comparing the carrying value
to current and expected future cash flows on a separate basis for each
acquisition.
H. OTHER INTANGIBLES -- Other intangibles, consisting of trademarks,
customer lists and a reservation system are recorded at their estimated fair
values at the dates acquired and are amortized over the estimated periods to
be benefited ranging from 6.5 to 40 years on a straight-line basis. The
Company periodically evaluates the recoverability of other intangibles on an
individual basis by comparing the carrying values to current and expected
future cash flows.
I. FRANCHISE ACQUISITION COSTS -- The Company expenses direct costs
relating to franchise sales on the date the property opens.
J. DEFERRED FINANCING COSTS -- Deferred financing costs are amortized over
the life of the related debt using the interest method.
K. REVENUE RECOGNITION -- Revenue primarily consists of fees for providing
services to businesses in consumer industries.
Franchise Fees: Franchise revenue consists of royalty, marketing and
reservation fees which are based on a percentage of franchised lodging
properties' gross room sales ("Gross Room Sales") and franchised real
estate brokerage offices' gross commissions earned on sales of residential
real estate properties ("Gross Closed Commissions"). Royalty, marketing and
reservation fees are accrued as the underlying franchisee revenue is earned.
Initial fees included in franchise fees are recorded as revenue when the
lodging property or real estate brokerage office opens as a franchised unit.
F-8
<PAGE>
Relocation services revenue: The relocation services provided by the
Company include facilitating the purchase and resale of the
employee-transferee's residence, providing equity advances on the
employee-transferee's residence (for purchase of a new home), and home
management services.
The homes are purchased under a contract of sale at an appraised fair
market value. Although the Company purchases these homes under a contract of
sale and obtains deeds to the properties, it does not record the deed or
transfer of title. Under the terms of their agreements with various client
corporations, the final approval to accept an offer for the sale of the homes
must be obtained from a representative of the client corporation if the offer
deviates outside of a price range specified in the contract. If there is a
difference between the appraised purchase price and the price realized upon sale
of the property, this gain or loss is recognized by the client corporation.
In the opinion of management, the only event under which the Company would be
exposed to the risk of ownership, and any resultant losses, for a purchased
home would be if a client corporation were to become insolvent and the
purchased home were to be ultimately sold for a loss.
When called for in the client contract, the Company provides an equity
advance to the employee-transferee. The equity payment carries an interest
charge computed at a floating rate which is linked to a bank's prime rate.
These equity payments are repaid to the Company upon close of escrow or
transfer of title when the employee/transferee's home is resold. All equity
advances are guaranteed by the client corporation. The Company's management
believes that the fair value of these equity advances approximates carrying
value.
Funds are advanced by the client corporation to the Company for payment of
the home management costs for the employee-transferee's home. The resulting
liability is the net excess of billings over costs incurred on unsold homes.
After the home is resold, a settlement of actual costs and the advance
billings is made with the client corporation.
Revenues associated with the resale of a residence are recognized when the
residence is sold to a third party. Other service revenues are recognized
when the service is provided.
Timeshare revenue--Revenue generated from services provided to the
timeshare industry include subscription and exchange revenue. Subscription
income is received from subscribers on either an annual basis or for periods
covering more than one year. Such subscription income is deferred upon
receipt and recorded as income as the contractual services (delivery of
publications) are provided to subscribers. Exchange fees are recognized as
revenue when the exchange request has been confirmed to the subscriber.
Other revenue--Other principal sources of revenue primarily consist of
revenue from agreements that provide preferred alliance partners access to
the Company's customers and those customers' customers; telecommunications
and computer processing services provided to the car rental industry; and
marketing and other services provided to casino gaming facilities which are
recognized as services are provided.
Revenues consist of ($000's):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Service fees............... $754,754 $403,003 $305,654
Equity in earnings of
ARAC...................... 2,261 -- --
Interest income............ 21,055 2,116 466
Other...................... 20,970 7,864 6,427
---------- ---------- ----------
Total revenues............. $799,040 $412,983 $312,547
========== ========== ==========
</TABLE>
L. INCOME TAXES -- The Company uses the liability method of recording
deferred income taxes. Differences in financial and tax reporting result from
differences in the recognition of income and expenses for financial and
income tax purposes as well as differences between the fair value of assets
acquired in business combinations accounted for as purchases and their tax
bases. The Company and its subsidiaries file a consolidated federal income
tax return.
F-9
<PAGE>
M. SHARE INFORMATION -- Earnings per share are based upon the weighted
average number of common and common equivalent shares outstanding during the
respective periods. The $240 million 4 3/4% Convertible Senior Notes issued
in February 1996 are antidulitive, and accordingly are not included in the
computation of earnings per share. In addition, the $150 million 4 1/2%
Convertible Senior Notes issued in October 1994 are anti-dilutive for the
year ended December 31, 1994, and accordingly are not included in the
computation of earnings per share for 1994.
In both November 1995 and February 1994, the Company's Board of Directors
authorized a two-for-one stock split of the Company's common stock which was
effected in the form of a 100% stock dividend in February 1996 and April
1994, respectively. All share, per share, stock price and stock award plan
information presented herein has been retroactively adjusted to reflect the
stock splits.
N. USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts and related
disclosures. Actual results could differ from those estimates.
O. STOCK BASED COMPENSATION -- The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation" but applies Accounting Principle
Board Opinion ("APB") No. 25 and related interpretations in accounting for
its Option plans. Under APB No. 25, because the exercise prices of the
Company's employee stock options are equal to the market prices of the
underlying Company stock on the date of grant, no compensation expense is
recognized.
P. RECLASSIFICATIONS -- Certain reclassifications have been made to the
1995 and 1994 consolidated financial statements to conform with
classifications used in 1996.
2. ACQUISITIONS
PENDING MERGER WITH PHH CORPORATION ("PHH") -- On November 10, 1996, the
Company entered into a definitive merger agreement (the "Merger Agreement")
pursuant to which the Company will issue approximately $1.7 billion of
Company common stock in exchange for all of the outstanding common stock of
PHH. Pursuant to the terms of the Merger Agreement, the number of Company
shares to be issued may range from 21.3 to 28.8 million, based upon the
average share price of the Company's common stock over a period of 20 trading
days ending five days prior to the date of the vote by PHH shareholders on
approval of the transaction. PHH is the world's largest provider of corporate
relocation services and also provides mortgage services and vehicle
management services. Consummation of the transaction is subject to approval
of the shareholders of each company at special meetings of such shareholders
to be held on April 30, 1997. The merger will be accounted for as a
pooling-of-interests.
PENDING ACQUISITION OF VALUE RENT-A-CAR ("Value") -- On March 3, 1997, the
Company reached an agreement in principle to acquire value from Mitsubishi
Motor Sales of America for $175 million in cash. Value predominantly serves
leisure customers from corporate-owned rental car sites, primarily in Florida.
Closing is anticipated in the second quarter of 1997 and is subject to
customary conditions, including negotiation and execution of definitive
documentation and approval of the respective boards of directors.
COMPLETED ACQUISITIONS
The following acquisitions were accounted for using the purchase method of
accounting; accordingly, assets acquired and liabilities assumed were
recorded at their estimated fair values. The operating results of the
following acquired companies are reflected in the Company's consolidated
statements of income since the respective dates of acquisition.
A. RESORT CONDOMINIUMS INTERNATIONAL, INC. -- On November 12, 1996, the
Company completed the acquisition of all the outstanding capital stock of
Resort Condominiums International, Inc. and its affiliates ("RCI") for
approximately $487 million. The purchase price was comprised of $412 million
in cash and $75 million (approximately 1.0 million shares) of Company common
stock. The purchase agreement provides for contingent payments of up to $200
million over the next five
F-10
<PAGE>
years which are based on components which measure RCI's future performance,
including EBITDA, net revenue and number of members, as defined. Any
contingent payments made will be accounted for as additional excess of cost
over fair value of net assets acquired. RCI, based in Indianapolis, Indiana,
is the world's largest provider of timeshare exchange programs, providing
services for approximately 2.2 million timeshare owners and approximately
3,100 resorts around the world. RCI is also engaged in publishing related to
the timeshare industry and provides other travel-related services, integrated
software and resort management and consulting services.
B. AVIS, INC. -- On October 17, 1996, the Company completed the
acquisition of all of the outstanding capital stock of Avis, Inc. ("Avis"),
including payments under certain employee stock ownership plans of Avis and
the redemption of certain series of preferred stock of Avis for an aggregate
$806.5 million. The purchase price was comprised of approximately $367.2
million in cash, $100.9 million in indebtedness and $338.4 million
(approximately 4.6 million shares) in Company common stock. Avis, together
with its subsidiaries, licensees and affiliates, operates the Avis rental car
business, which the Company believes is the second largest car rental system
in the world. See Note 3 for a discussion of the Company's business plan and
related accounting treatment regarding Avis.
C. COLDWELL BANKER -- On May 31, 1996, the Company acquired by merger
Coldwell Banker Corporation ("Coldwell Banker"), the largest gross revenue
producing residential real estate company in North America and a leading
provider of corporate relocation services. The Company paid $640 million in
cash for all of the outstanding capital stock of Coldwell Banker and repaid
approximately $105 million of Coldwell Banker indebtedness. The aggregate
purchase price for the transaction was financed through the May 9, 1996 sale
of Company common stock in which the Company sold an aggregate 19.4 million
shares of Company common stock pursuant to a public offering. Subsequent to
the acquisition of Coldwell Banker, the Company acquired for $2.6 million a
relocation consulting firm which was merged into the Coldwell Banker
relocation business.
Immediately following the closing of the Coldwell Banker acquisition, the
Company conveyed Coldwell Banker's 318 owned real estate brokerage offices
("Owned Brokerage Business") to National Realty Trust (the "Trust"), an
independent trust in which the Company has no beneficial interest. The
Company recorded a $5.0 million charge (approximately $3.1 million or $.02
per share) in the second quarter of 1996 representing the fair value of
operations contributed to the Trust. The charge represents the fair value of
the Owned Brokerage Business based upon a valuation which considered
earnings, cash flow, assets and business prospects of the contributed
business.
D. CENTURY 21 NON-OWNED REGIONS -- During the second quarter of 1996, the
Company purchased from four independent master licensees, the six U.S.
previously non-owned Century 21 regions ("CENTURY 21 NORS") licensing of
more than 1,000 franchised real estate offices. The $147.4 million aggregate
purchase price for the CENTURY 21 NORS consisted of approximately $96.4
million in cash, $5 million in notes and $46.0 million (approximately 0.9
million shares) in Company common stock.
E. ERA -- On February 12, 1996, the Company purchased substantially all
the assets comprising the Electronic Realty Associates ("ERA") residential real
estate brokerage franchise system, the fourth largest franchise system in
terms of franchised brokerage offices, for approximately $39.4 million in
cash plus expenses.
F. TRAVELODGE -- On January 23, 1996, the Company purchased the assets
comprising the Travelodge hotel franchise system in North America, including
the Travelodge and Thriftlodge(Registered Trademark) service marks and
franchise agreements from Forte Hotels, Inc. ("FHI") for $39.3 million in
cash.
Concurrent with the Company's acquisition of the Travelodge franchise
system, Motels of America, Inc., through a wholly owned subsidiary,
(collectively "MOA"), purchased 20 Travelodge motels from FHI for $32.3
million. MOA, a significant Company franchisee, entered into twenty year
Travelodge and Ramada franchise agreements for nineteen acquired Travelodge
motels and one acquired Ramada motel.
In addition, Chartwell Leisure Inc. ("CHRT"), formerly National Lodging
Corp., a former wholly owned Company subsidiary which was distributed to the
Company shareholders in November 1994 (the
F-11
<PAGE>
"Distribution Date"), purchased all of the capital stock of FHI for $98.4
million. FHI owns or has an interest in 112 hotel and motel properties. In
connection with CHRT's acquisition, the Company guaranteed $75 million of
CHRT borrowings under a $125 million revolving credit facility entered into
by CHRT with certain banks. The Company is paid a guarantee fee of 2% per
annum of the outstanding guarantee commitment by the Company pursuant to a
financing agreement entered into between CHRT and the Company at the
Distribution Date (the "Financing Agreement"). The Financing Agreement was
modified to allow the Company to provide credit enhancements for hotel
industry investments. Such guarantee is expected to terminate upon CHRT's
refinancing of its revolving credit facilities in the second quarter of 1997.
In connection with the acquisition of the Travelodge franchise system and
CHRT's acquisition of FHI, the marketing and advisory agreements previously
entered into by the Company and CHRT at the Distribution Date were terminated.
The corporate services agreement entered into by the Company and CHRT at the
Distribution Date was modified to provide that the Company is to provide
financial and other corporate administrative support and advisory services
through September 1996 and thereafter advisory services through January 2019
for a fee of $1.5 million per year. This agreement was terminated in November
1996 by mutual agreement, and the Company received $9.5 million in
consideration for consenting to the early termination of such agreement which
was recorded as other revenue. Additionally, CHRT paid a $2.0 million advisory
fee to the Company in connection with CHRT's acquisition of FHI.
G. KNIGHTS INN -- In August 1995, the Company acquired the assets
comprising the Knights Inn hotel franchise system, an economy hotel franchise
system, for approximately $15 million plus expenses.
H. CENTURY 21 -- On August 1, 1995, a majority owned Company subsidiary,
C21 Holding Corp. ("Holding"), acquired Century 21 Real Estate Corporation
("Century 21"), the world's largest residential real estate brokerage
franchisor, from Metropolitan Life Insurance Company ("MetLife"). Aggregate
consideration for the acquisition consisted of $245 million plus expenses,
including an initial cash payment of $70.2 million, 4 million shares of the
Company's common stock valued at $65 million, the assumption of $80 million
of Century 21 redeemable preferred stock issued to MetLife prior to the
acquisition and subsequently redeemed in February 1996 and a $30 million
contingent payment made in February 1996. The excess of cost over fair value
of net assets acquired recorded in connection with the acquisition, includes
the contingent payment and purchase price adjustments subsequent to the
acquisition. In connection with the acquisition, the Company executed an
agreement, the Subscription and Stockholders' Agreement, with a management
group pursuant to which the ownership of Century 21 Holding Corp. common
stock was divided 87.5% to the Company and 12.5% to the management
group. In addition, the management group executives entered into renewable
employment agreements with the Company with initial terms that commenced on
November 1, 1995 and would expire on December 31, 1997. The Company has a
call option to purchase Holding common stock owned by the management group
after January 1, 1998 for the fair market value of such stock when and if the
option is exercised and the management group has a put option to require the
Company to purchase all their Holding common stock after January 1, 1998 at
fair market value. Effective October 29, 1996 (the "Effective Date"), the
Company amended the Subscription and Stockholders' Agreement to provide that
the Company's call option to purchase Holding common stock at fair
value from the management group was accelerated to the Effective Date with
the fair value determined as of the Effective Date. Pursuant to such
amendment, the employment agreements were terminated in October 1996 and the
put and call options have been exercised. The acquisition of the 12.5%
interest by the Company is expected to be completed in the second quarter of
1997.
The Company and certain stockholders sold approximately 6.4 million common
shares pursuant to a public offering on September 19, 1995 (the "Offering").
Included in the Offering were 4 million shares issued to MetLife (the
"MetLife Shares") as partial consideration for the acquisition of Century 21.
In accordance with Century 21 acquisition agreements, the Company received
$28.9 million representing proceeds from the sale of the MetLife Shares in
excess of $17.50 per share, net of certain expenses of the Offering. In
connection with the Offering, the Company also received $20.1 million of
proceeds, net of certain expenses of the Offering from the sale of 835,800
shares issued upon the exercise of an underwriter over-allotment option. Net
proceeds from the Offering received by the Company resulted in corresponding
increases in stockholders' equity.
F-12
<PAGE>
I. CENTRAL CREDIT, INC. -- On May 11, 1995, the Company acquired by
merger (the "CCI Merger") Casino & Credit Services, Inc.'s ("CACS") gambling
patron credit information business, Central Credit, Inc. ("CCI"). The Company
acquired all of the common stock of CACS for approximately $36.8 million by
issuing approximately 2.4 million shares of the Company's common stock and
warrants to acquire up to approximately 1.0 million additional shares of the
Company's common stock. The exercise prices for the warrants ranged from
$28.56 to $39.27 per share. The range of exercise prices is a result of the
various exercise prices of the underlying warrants which were issued at
various dates and prices. Prior to the acquisition, CACS distributed to its
shareholders all net assets not related to the gambling patron credit
information business.
The following tables reflect the fair values of assets acquired and
liabilities assumed in connection with the completed acquisitions described
above. The excess of cost over fair value of net assets acquired for each of
the acquisitions is being amortized on a straight-line basis over 40 years.
<TABLE>
<CAPTION>
ACQUIRED IN 1996
--------------------------------------------------------------------------
CENTURY 21
COLDWELL NON-OWNED
RCI, INC. AVIS, INC. BANKER REGIONS ERA TRAVELODGE
----------- ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash paid............................. $412.1 $367.2 $747.8 $ 96.4 $39.4 $ 39.3
Common stock issued................... 75.0 338.4 -- 46.0 -- --
Note issued .......................... -- 100.9 -- 5.0 -- --
----------- ------------ ---------- ------------ ------- ------------
Total consideration................... $487.1 $806.5 $747.8 $147.4 $39.4 $ 39.3
----------- ------------ ---------- ------------ ------- ------------
Cash and cash equivalents............. $144.9 $ 2.4 $(16.2) $ -- $ 3.9 $ --
Royalty and notes receivable.......... 37.9 12.0 88.4 -- 3.0 5.7
Investment in ARAC.................... -- 75.0 -- -- -- --
Property and equipment................ 55.7 61.8 21.7 .2 1.1 --
Intangibles........................... 100.0 509.0 437.2 11.0 20.0 30.0
Other assets.......................... 100.6 123.7 10.6 5.6 4.1 1.5
Accounts payable and other............ 221.3 223.5 113.3 9.4 25.3 6.9
Due to ARAC........................... -- 73.0 -- -- -- --
Other non-current liabilities ....... 208.4 14.9 30.2 3.5 2.2 --
----------- ------------ ---------- ------------ ------- ------------
Fair value of net assets acquired ... 9.4 472.5 393.2 3.9 4.6 30.3
----------- ------------ ---------- ------------ ------- ------------
Excess of cost over fair value of net
assets acquired...................... $477.7 $334.0 $354.6 $143.5 $34.8 $ 9.0
=========== ============ ========== ============ ======= ============
</TABLE>
<TABLE>
<CAPTION>
ACQUIRED IN 1995
------------------------------------
KNIGHTS
INN CENTURY 21 CCI, INC.
--------- ------------ -----------
$
<S> <C> <C> <C>
Cash paid............................................. $14.5 $100.2 --
Common stock issued................................... -- 64.8 36.8
Preferred stock issued................................ -- 80.0 --
--------- ------------ -----------
Total consideration................................... $14.5 $245.0 $36.8
--------- ------------ -----------
$
Cash and cash equivalents............................. $ -- $ 14.0 --
Royalty and notes receivable.......................... 57.4
Property and equipment................................ 4.6 8.5
Intangibles........................................... 5.2 33.5 --
Other assets.......................................... .4 11.1 1.5
Accounts payable and other............................ 1.0 58.9 5.9
Other non-current liabilities ........................ -- 16.4 3.8
--------- ------------ -----------
Fair value of net assets acquired .................... 4.6 45.3 .3
--------- ------------ -----------
Excess of cost over fair value of net assets
acquired............................................. $ 9.9 $199.7 $36.5
========= ============ ===========
</TABLE>
F-13
<PAGE>
In connection with the acquisitions of CENTURY 21, the Century 21 NORS,
ERA, Coldwell Banker and RCI, the Company developed related business plans to
restructure each of the respective companies. Acquisition liabilities were
recorded at the dates of consummation and are included in the respective
purchase price allocations. These liabilities include costs associated with
restructuring activities such as planned involuntary termination and relocation
of employees, the consolidation and closing of certain facilities and the
elimination of duplicative operating and overhead activities. Restructuring
costs recognized as accrued acquisition obligations related to each acquired
entity are summarized by type as follows ($000's):
<TABLE>
<CAPTION>
CENTURY COLDWELL
CENTURY 21 21 NORS ERA BANKER RCI
------------ --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Personnel related ... $12,647 $1,720 $3,822 $4,237 $ 9,845
Facility related .... 16,511 2,293 1,558 5,491 6,929
Other costs ......... 990 711 169 211 7,025
------------ --------- -------- ---------- ---------
Total................ $30,148 $4,724 $5,549 $9,939 $23,799
============ ========= ======== ========== =========
Terminated
employees........... 319 73 202 87 252
</TABLE>
Personnel related charges include termination benefits such as severance,
wage continuation, medical and other benefits. Facility related costs include
contract and lease terminations, temporary storage and relocation costs
associated with assets to be disposed of, and other charges incurred in the
consolidation and closure of excess space.
During 1995, approximately $14.3 million was paid and charged against the
acquisition liability for restructuring charges related to the Century 21
acquisition. During 1996, approximately $11.3 million, $2.6 million, $5.1
million, $3.9 million and $ 0.5 million was paid and charged against the
acquisition liabilities for restructuring charges related to the Century 21,
CENTURY 21 NORS, ERA, Coldwell Banker and RCI, respectively. Additional
restructuring charges were accrued during 1996 for Century 21 of $6.1 million.
The adjustment to the restructuring liability represented revised cost
estimates for activities contemplated in management's original restructuring
plans.
The Company has fully executed its business plans to restructure Century
21, the CENTURY 21 NORS, ERA and Coldwell Banker. Remaining accrued
acquisition obligations related to the restructuring of such acquired
companies pertain primarily to future lease commitments and other contractual
obligations that existed at the respective acquisition dates. The Company is
in the process of executing and completing its current business plan to
restructure RCI, which it expects to complete in the second half of 1997.
PRO FORMA INFORMATION
The following information reflects pro forma statements of income data for
the years ended December 31, 1996 and 1995 assuming the aforementioned
completed acquisitions were consummated on January 1, 1995. Accordingly, the
pro forma statements of income data excludes the PHH Merger which was not
consummated by December 31, 1996.
The acquisitions have been accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed have been
recorded at their estimated fair values, which are subject to further
refinement, based upon appraisals and other analyses with appropriate
recognition given to the effect of current interest rates and income taxes.
Management does not expect that the final allocation of the purchase price
for the above acquisitions will differ materially from the preliminary
allocations. The pro forma results are not necessarily indicative of the
operating results that would have occurred had the transactions been
consummated as indicated nor are they intended to indicate results that may
occur in the future. The underlying pro forma information includes the
amortization expense associated with the assets acquired, the reflection of
the Company's financing arrangements and the related income tax effects.
Certain other Company acquisitions were not material and therefore were not
reflected in the pro forma statements of income data.
F-14
<PAGE>
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net revenues......................................... $1,160,853 $1,061,202
Income before income taxes........................... 336,181 272,320
Net income........................................... 201,346 159,925
Net income per share:
Primary............................................. 1.37 1.15
Fully Diluted....................................... 1.37 1.14
Weighted average common and common equivalent shares
outstanding:
Primary............................................. 150,598 142,498
Fully Diluted....................................... 150,735 144,335
</TABLE>
3. INVESTMENT IN ARAC
As discussed in Note 2B, at the time the Company acquired Avis, it had
developed and announced a plan (the "Plan") to do the following:
1. Retain certain assets acquired, including the reservation system,
franchise agreements, trademarks and tradenames and certain
liabilities.
2. Segregate the assets used in the car rental operations in ARAC, a
separate subsidiary and dispose of an approximately 75% interest in
ARAC within one year through an initial public offering (the "IPO")
of ARAC.
3. Enter into a license agreement with ARAC for use of the trademarks
and tradename and other franchise services.
Based on the Plan, the purchase price for Avis has been allocated to the
assets acquired and liabilities assumed by the Company, including its
investment in ARAC, based on their respective estimated fair values. The amount
allocated to Car Rental Operating Company was based on the estimated valuation
of ARAC including the effect of royalty, reservation and information technology
agreements with the Company. Under the Plan, ARAC will sell approximately
a 75% interest at an assumed price of $225 million thereby diluting the
Company's interest to 25%. All of the proceeds from the IPO will be retained
by ARAC.
F-15
<PAGE>
The condensed balance sheet at December 31, 1996 and the condensed income
statement for the period October 17, 1996 through December 31, 1996 of ARAC
is as follows:
RENTAL CAR OPERATIONS OF AVIS, INC. (ARAC)
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash and cash equivalents............................... $ 50,886
Accounts receivable, net................................ 311,179
Due from affiliates, net................................ 61,807
Vehicles, net........................................... 2,243,492
Property and equipment.................................. 98,887
Cost in excess of net assets acquired net............... 196,765
Other................................................... 168,341
------------
$3,131,357
============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable on accrued liabilities................. 504,780
Income tax liabilities.................................. 40,778
Public liability, property damage and other
liabilities............................................ 213,785
Debt.................................................... 2,295,474
------------
Total liabilities...................................... 3,054,817
Stockholder's equity.................................... 76,540
------------
$3,131,357
============
</TABLE>
RENTAL CAR OPERATIONS OF AVIS, INC. (ARAC)
CONDENSED INCOME STATEMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Revenue.............................................. $362,844
----------
Costs and expenses
Direct operating.................................... 167,682
Vehicle depreciation and lease charges.............. 95,245
Selling general and administrative.................. 62,418
Interest, net....................................... 34,212
Amortization of cost in excess of net assets
acquired........................................... 1,026
----------
360,583
----------
Income before provision for income tax............... 2,261
Provision for income tax............................. 1,040
----------
Net income........................................... $ 1,221
==========
</TABLE>
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Vehicles
Vehicles are stated at cost net of accumulated depreciation. In accordance
with industry practice, when vehicles are sold, gains or losses are
reflected as an adjustment to depreciation. Vehicles are generally
depreciated at rates ranging from 10% to 25% per annum. Manufacturers
provide ARAC with incentives and allowances (such as rebates and
volume discounts) which are amortized to income over the holding period of
the vehicles.
F-16
<PAGE>
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired is amortized over a 40 year period
and is shown net of accumulated amortization of $1.0 million at December
31, 1996.
Public Liability, Property Damage and Other Insurance Liabilities
Insurance liabilities on the accompanying combined statement of financial
position include additional liability insurance, personal effects
protection insurance, public liability and property damage ("PLPD") and
personal accident insurance claims for which ARAC is self-insured.
ARAC is self-insured up to $1.0 million per claim under its auto
liability insurance program for PLPD and additional liability insurance.
Costs in excess of $1.0 million per claim are insured under various
contracts with commercial insurance carriers. The insurance liabilities
include a provision for both claims reported to ARAC as well as
claims incurred but not yet reported to ARAC.
Income Taxes
ARAC is included in the consolidated federal income tax return of the
Company. Pursuant to the regulations under the Internal Revenue Code,
ARAC's pro rata share of the consolidated federal income tax liability
of the Company is allocated to ARAC on a separate return basis. ARAC
files separate income tax returns in states where a consolidated return is
not permitted. In accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", deferred income tax
assets and liabilities are measured based upon the difference between the
financial accounting and tax basis of assets and liabilities.
NOTE B -- INTERCOMPANY TRANSACTIONS
Amount due from affiliates represents the net balance due to or from the
Company which will be settled upon or before consummation of the IPO.
Net amount of approximately $61.8 million consists of notes receivable due
to the Company from an indirect wholly owned subsidiary of the Company, long
term subordinated vehicle financing notes payable to the Vehicle Trust (see
note C) and miscellaneous non-interest bearing advances made by ARAC to the
Company. Expense items include charges from the Company and affiliates of the
Company totaling $31.8 million.
Reservations and data processing services are charged to the Company based
on actual cost plus a profit thereon of 20%. All other charges are based on
actual costs incurred. Effective January 1, 1997, the Company will charge ARAC
a franchise fee of 3.5% of revenue for the use of the Avis trade name. On an
unaudited pro forma basis, had the franchise fee been charged to ARAC
beginning on October 17, 1996, net income for the period October 17, 1996 to
December 31, 1996 would have been reduced by $7.5 million resulting in a pro
forma net loss of approximately $6.3 million.
F-17
<PAGE>
NOTE C -- FINANCING AND DEBT
Debt outstanding at December 31, 1996 is not guaranteed by the Company and
consists of the following (000's):
VEHICLE TRUST FINANCING
<TABLE>
<CAPTION>
<S> <C>
Short term vehicle trust financing-revolving credit
facilities................................................... $1,970,000
Long-term vehicle manufacturer's notes--payable through 2001 . 185,000
</TABLE>
OTHER FINANCING
<TABLE>
<CAPTION>
<S> <C>
Short-term debt including foreign short-term notes, capital leases
and current portion of other long-term debt.......................... 106,745
Floating rate notes--foreign subsidiaries due through August 1998 .... 30,813
Other debt--domestic.................................................. 2,916
-----------
$2,295,474
===========
</TABLE>
The primary source of funding for domestic vehicles is provided by the
Vehicle Trust (a grantor trust). Amounts drawn against this facility may be
used to purchase vehicles and pay certain expenses of the Vehicle Trust.
The security for the Vehicle Trust financing facility consists of a lien on
the vehicles acquired under the facility, which at December 31, 1996
totaled approximately $2.1 billion, exclusive of related valuation
reserves. The security for the Vehicle Trust financing facility also
consists of security interests in certain other assets of the Vehicle
Trust. Additionally, the Vehicle Trust and its security agreement require
that there be outstanding, at all times, subordinated debt in a specified
percentage range (10% -25%) of the net book value of the vehicles owned by
the Vehicle Trust. Pursuant to the agreement, the subordinated debt is to
be provided by vehicle manufacturer finance companies and by a Company
subsidiary. The Vehicle Trust consists of loans from banks, vehicle
manufacturer finance companies and a Company subsidiary. The short-term notes
are issued pursuant to a $2.5 billion revolving credit facility dated as of
October 17, 1996 which expires on October 16, 1997. On December 31, 1996,
the weighted average interest rate of borrowings under this facility was
6.00%. For the period from October 17, 1996 to December 31, 1996, the
average outstanding borrowings under this facility were $2.0 billion with a
weighted average interest rate of 5.98%. This facility requires a fee of
1/8 of 1% on the committed amount. Subordinated debt of $318 million was
required under the Vehicle Trust financing, of which $247.5 million is due
to a Company subsidiary. At December 31, 1996, the Vehicle Trust had financing
outstanding from vehicle manufacturer finance companies under terms of loan
agreements dated October 17, 1996. Under these agreements, the maximum
amount of borrowings allowed is $267 million, of which up to $260 million
may be issued as subordinated debt. On December 31, 1996, $185 million was
outstanding of which $70.5 million of the outstanding debt was deemed
subordinated. On December 31, 1996, the weighted average interest rate of
borrowings under this facility was 8.50%. For the period October 17, 1996
to December 31, 1996, the average outstanding borrowings under this
facility was $185 million with a weighted average interest rate of 8.41%.
In November 1992, the predecessor to ARAC entered into a five year
capital lease under which $96.7 million of vehicles were leased. The lease
is cancelable at ARAC's option, however, additional costs may be
incurred upon termination based upon the fair value of the vehicles at the
time the option is exercised. At the termination of the lease, ARAC
may purchase the vehicles at an agreed upon fair market value or return
them to the lessor.
The future minimum lease payments due under ARAC's capital lease
obligation, which terminates on November 30, 1997, are $41,500,000
(including interest of $1,331,000).
F-18
<PAGE>
Mandatory maturities of long-term obligations for each of the five years
ending December 31, and thereafter, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997......... $ 41,229
1998......... 98,950
1999......... 1,086
2000......... 209
2001......... 118,228
Thereafter .. 256
</TABLE>
Other Credit Facilities
At December 31, 1996, ARAC had letters of credit/working capital agreements
totaling $102.6 million, which may be renewed bi-annually at ARAC's option
and the banks' discretion. The collateral for certain of these agreements
consists of a lien on property and equipment and certain receivables with a
carrying value of $136.9 million. At December 31, 1996, ARAC has
outstanding letters of credit amounting to $55.1 million.
In addition, for certain of its international operations, ARAC has
available at December 31, 1996, unused lines of credit of $224.3 million.
The unused lines of credit agreements require a quarterly fee of 0.2% to
0.5% of the unused line.
Interest Rate Swap Agreements
ARAC has entered into interest rate swap agreements to reduce the impact of
changes in interest rates on certain outstanding debt obligations. These
agreements effectively change ARAC's interest rate exposure on $44.0
million of its outstanding debt from a weighted average variable interest
rate to a fixed rate of 7.1% at December 31, 1996. The variable interest
element with respect to these interest rate swap agreements is reset
quarterly. The interest rate swap agreements will terminate in March 1997,
July 1998 and November 1998. The differential to be paid or received is
recognized ratably as interest rates change over the life of the agreements
as an adjustment to interest expense.
The net interest differential charged to interest expense for the period
October 17, 1996 to December 31, 1996 was $285,000. ARAC is exposed to
credit risk in the event of nonperformance by counterparties to its
interest rate swap agreements. Credit risk is limited by entering into such
agreements with primary dealers only; therefore, ARAC does not anticipate
that nonperformance by counterparties will occur. Notwithstanding this,
ARAC's treasury department monitors counterparty credit ratings at least
quarterly through reviewing independent credit agency reports. Both current
and potential exposure are evaluated as necessary, by obtaining replacement
cost information from alternative dealers. Potential loss to ARAC from
credit risk on these agreements is limited to amounts receivable, if any.
NOTE D -- LITIGATION
Certain litigation has been initiated against ARAC which have arisen during
the normal course of operations, the outcome of which is not predictable
with any degree of certainty. On May 22, 1996, a complaint was filed in the
United States District Court for the Eastern District of North Carolina
against Avis Rent A Car System, Inc. and one of its licensees,
New Hanover Rent A Car, Inc. ("New Hanover") alleging discrimination by New
Hanover in the rental of automobiles based on race. Plaintiff seeks an
unspecified amount of compensatory and punitive damages and a permanent
injunction barring Avis Rent A Car System, Inc. and New Hanover from
continuing to engage in illegally discriminatory conduct. ARAC is not
currently involved in any legal proceeding which it believes would have a
material adverse effect upon its combined financial condition or results of
operations. ARAC maintains insurance policies that cover most of the actions
brought against ARAC.
* * *
F-19
<PAGE>
Accounting Treatment
The Company's investment in ARAC of $75 million at the October 17, 1996
acquisition date represents the estimated value of its 100% interest in ARAC
at the date of acquisition and is accounted for under the equity method since
the Company's control is temporary based on the planned IPO of ARAC. Upon
completion of the IPO, the value of ARAC is expected to increase to $300
million (with the $225 million of IPO proceeds retained by ARAC) with
the Company's interest at 25% equal to $75 million, its current investment
balance. If the results of the IPO do not confirm the preliminary purchase
price allocation for the investment in ARAC, then such investment will be
adjusted with a corresponding adjustment to excess of cost over fair value of
net assets acquired.
If the IPO is not consummated within one year of HFS' acquisition of Avis,
HFS will consolidate ARAC.
Following is a Pro Forma Condensed Consolidated Balance Sheet at December
31, 1996 and a Pro Forma Condensed Consolidated Income Statement for the year
ended December 31, 1996 assuming ARAC was consolidated.
HFS INCORPORATED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash and cash equivalents............................. $ 106,648
Receivables........................................... 458,517
Equity advances....................................... 125,662
Other current assets.................................. 140,520
------------
Total current assets................................ 831,347
Property and equipment, net........................... 335,270
Vehicles, net......................................... 2,243,492
Franchise agreements, net............................. 995,947
Other intangibles..................................... 604,535
Excess of cost over fair value of net assets
acquired............................................. 1,932,895
Other................................................. 338,445
------------
$7,281,931
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other............................ $ 827,357
Income tax liabilities................................ 58,238
Deferred income....................................... 160,619
Short-term debt....................................... 150,000
Current portion of long term debt .................... 2,995
------------
Total current liabilities........................... 1,199,209
Public liability, property damage and other ......... 213,785
Debt ................................................. 3,043,895
Income tax liabilities................................ 82,100
Other................................................. 266,441
Stockholders' equity.................................. 2,476,501
------------
$7,281,931
============
</TABLE>
F-20
<PAGE>
HFS INCORPORATED
PRO FORMA CONSOLIDATED INCOME STATEMENT
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C>
REVENUES............................................... $1,160,663
EXPENSES...............................................
Marketing and reservation.............................. 169,315
Direct operating expenses of ARAC...................... 167,682
Vehicle depreciation and lease charges ................ 95,245
Selling, general and administrative ................... 306,507
Depreciation and amortization.......................... 70,260
Interest............................................... 66,967
------------
Total expenses........................................ 875,976
Income before income taxes............................. 284,687
Provision for income taxes............................. 115,103
------------
Net income............................................. $ 169,584
============
</TABLE>
4. ACCOUNTS PAYABLE AND OTHER
Accounts payable and other consists of ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
---------- --------
<S> <C> <C>
Accounts payable................................... $ 99,156 $ 6,887
Marketing and reservation liabilities.............. 15,018 12,508
License restructuring and acquisition obligations 62,698 10,276
Accrued payroll and related ....................... 57,448 11,809
Other ............................................. 88,257 23,414
---------- --------
Accounts payable and other......................... $322,577 $64,894
========== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIVES ----------------------
IN YEARS 1996 1995
-------------- ---------- ----------
<S> <C> <C> <C>
Land....................................... $ 3,000 $ 3,000
Building................................... 30 31,634 11,311
Furniture and fixtures..................... 5 -7 3,723 2,341
Leasehold improvements..................... 5 -11 70,757 6,784
Information technology support systems .... 3 -10 154,111 55,730
Leased equipment under capital leases ..... 7 8,293 8,293
---------- ----------
271,518 87,459
Accumulated depreciation and amortization (35,135) (19,567)
---------- ----------
Property and equipment--net ............... $236,383 $ 67,892
========== ==========
</TABLE>
Depreciation and amortization expense approximated $15.6 million, $8.1
million and $5.2 million for the years ended December 31, 1996, 1995 and
1994, respectively.
F-21
<PAGE>
6. MARKETING AND RESERVATION ACTIVITIES
A. DAYS INN, HOWARD JOHNSON, SUPER 8, TRAVELODGE, KNIGHTS INN AND VILLAGER
- -- The Company receives marketing and reservation fees, in each case calculated
on the basis which is a specified percentage of revenue sales from its Days
Inn, Howard Johnson, Super 8, Travelodge, Knights Inn and Villager franchisee,
and Gross Closed Commissions from its Coldwell Banker and ERA franchisees. As
provided in the franchise agreements, at the Company's discretion, all of
these fees are to be expended for marketing purposes and the operation of a
centralized brand-specific reservation system for lodging franchisees and are
controlled by the Company until disbursement. Franchise revenue includes
marketing and reservation fees of approximately, $110.6 million, $93.4
million, $86.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
B. RAMADA -- Ramada Inns National Association ("RINA") is an
unincorporated association representing the owners of the hotels in the
Ramada system. RINA provides a worldwide reservation system and provides
advertising, promotional services and training to Ramada franchisees. The
Company receives a combined fee for marketing and reservation activities
based on a percentage of monthly gross room revenues from members of RINA
which are controlled by the Company until disbursement. As provided in the
franchise agreements, at the Company's discretion, all of these fees will be
expended for advertising, promotional services, training and the operation of
a worldwide reservation system. Included in the franchise fees are RINA fees
approximating $47.0 million, $46.7 million and $44.4 million for the periods
ended December 31, 1996, 1995 and 1994, respectively. Included in marketing
and reservation receivables is approximately $7.3 million and $5.8 million
due from RINA as of December 31, 1996 and 1995, respectively.
C. CENTURY 21 -- The CENTURY 21 National Advertising Fund ("NAF") is an
independent entity managed by the Company, the funds of which are used
exclusively for advertising and public relations purposes for the collective
benefit of the CENTURY 21 organization, including all CENTURY 21 franchisees.
The NAF receives fees from CENTURY 21 franchisees equal to 2% of their
respective gross closed commissions earned on sales of residential real
estate properties, subject to monthly minimum and maximum contributions. In
addition, the Company is required to contribute, 10% of royalty fees collected
from CENTURY 21 franchisees to the NAF. The contributions are expensed by
the Company when the corresponding royalty fee is recognized. Included in
marketing and reservation expense is approximately $11.7 million for 1996 and
$4.2 million, representing the Company's contribution to the NAF for the five
months period ended December 31, 1995. The NAF cash balance was $7.0 million
and $4.3 million at December 31, 1996 and 1995. Such amount is not included
in the Company's consolidated financial statements.
Advertising expense approximated $48.6 million, $42.8 million and $36.1
million for the years ended December 31, 1996, 1995 and 1994, respectively.
7. DEBT
Short-term debt
Short-term debt consists of acquired Avis fleet financing, borrowed on
behalf of ARAC, and is expected to be repaid upon settlement of the
corresponding intercompany loan due from ARAC prior to the IPO. The credit
facilities provide up to $150 million of financing and expire in September
1997. The outstanding borrowings under these facilities as of December 31,
1996 totaled $150 million and had a weighted average interest rate of 7.47%.
Long-term debt
Long-term debt consists of the following ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Revolving Credit Facilities (A)................... $205,000 $ --
5 7/8% Senior Notes (B)........................... 149,811 149,715
4 1/2% Convertible Senior Notes (C)............... 146,678 149,971
4 3/4 Convertible Senior Notes (D................. 240,000 --
Obligations under capital leases and other loans 9,927 3,341
---------- ---------
751,416 303,027
Less current portion ............................. 2,995 2,249
---------- ---------
Long-term debt.................................... $748,421 $300,778
========== =========
</TABLE>
F-22
<PAGE>
A. REVOLVING CREDIT FACILITIES -- On October 2, 1996, the Company
replaced an existing $300 million revolving credit facility with $1 billion
in revolving credit facilities consisting of (i) a $500 million, five year
revolving credit facility (the "Five Year Revolving Credit Facility") and
(ii) a $500 million, 364 day revolving credit facility (the "364 Day
Revolving Credit Facility" and collectively with the five year Revolving Credit
Facility the "Revolving Credit Facilities"). The Company may renew the 364 Day
Revolving Credit Facility on an annual basis for an additional 364 days up to
a maximum aggregate term of five years upon receiving lender approval. The
Five Year Revolving Credit Facility and the 364 Day Revolving Credit Facility,
at the option of the Company, bear interest based on competitive bids of
lenders participating in the facilities, at the prime rates or at LIBOR plus
a margin of 25 basis points.
The Company is required to pay a per annum facility fee of .09% and .07%
of the average daily availability of the Five Year Revolving Credit Facility
and 364 Revolving Credit Facility, respectively. The interest rates and
facility fees are subject to change based upon credit ratings on the
Company's senior unsecured long-term debt by nationally recognized
statistical rating companies. The Revolving Credit Facilities contain certain
restrictive covenants including restrictions on indebtedness, mergers,
liquidations and sale and leaseback transactions and requires the maintenance
of certain financial ratios, including a 3:1 minimum interest average ratio
and a 3.5:1 maximum leverage ratio, as defined. Amounts outstanding under the
Revolving Credit Facilities as of December 31, 1996 are classified as long-term
based on the Company's intent and ability to maintain these loans on a
long-term basis.
B. SENIOR NOTES -- In December 1993, the Company completed a public
offering of $150 million, unsecured 5 7/8% Senior Notes due December 15, 1998
(the "Senior Notes"). Interest is payable semi-annually. An original issue
discount approximating $478,000 was recorded at the date of issuance and is
being amortized over the life of the senior notes using the interest method.
The unamortized balance at December 31, 1996 and 1995 was $189,000 and $285,000,
respectively.
C. 4 1/2% CONVERTIBLE SENIOR NOTES -- In October 1994, the Company
completed a public offering of $150 million unsecured 4 1/2% Convertible
Senior Notes (the "4 1/2% Notes") due 1999, which are convertible at the option
of the holders at any time prior to maturity into shares of the Company's
common stock at a conversion price of $18.15 per $1,000 principal amount of
Notes. The 4 1/2% Notes are redeemable at the option of the Company, in whole
or in part, at any time on or after October 1, 1997 at a redemption price of
101.125% of principal if redeemed prior to September 30, 1998 or at 100% of
principal any time thereafter until maturity. Interest is payable
semi-annually commencing April 1995.
D. 4 3/4% CONVERTIBLE SENIOR NOTES -- On February 22, 1996, the Company
completed a public offering of $240 million unsecured 4 3/4% convertible
senior notes (the "4 3/4% Notes") due 2003, which are convertible at the
option of the holder at any time prior to maturity into 14.993 shares of the
Company's common stock per $1,000 principal amount of the 4 3/4% Notes,
representing a conversion price of $66.70 per share. The 4 3/4% Notes are
redeemable at the option of the Company, in whole or in part, at any time on
or after March 3, 1998 at redemption prices decreasing from 103.393% of
principal at March 3, 1998 to 100% of principal at March 3, 2003. However, on
or after March 3, 1998 and prior to March 3, 2000, the 4 3/4% Notes will not
be redeemable at the option of the Company unless the closing price of the
Company's common stock shall have exceeded $93.38 per share (subject to
adjustment upon the occurrence of certain events) for 20 trading days within
a period of 30 consecutive trading days ending within five days prior to
redemption. Interest on the 4 3/4% Notes is payable semi-annually commencing
September 1, 1996.
Long-term debt payments including obligations under capital leases at
December 31, 1996 are due as follows ($000's):
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------- ----------
<S> <C>
1997.......... $ 2,995
1998.......... 151,542
1999.......... 148,333
2000.......... 977
2001.......... 205,925
Thereafter .. 241,644
----------
TOTAL......... $751,416
==========
</TABLE>
F-23
<PAGE>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for material financial instruments for
which it is practicable to estimate that value. The fair values of the
financial instruments presented may not be indicative of their future values.
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Investment in securities: The Company has classified a certain equity
security as available-for-sale at December 31, 1996. In accordance with SFAS
115, the security is recorded at fair value with an unrealized holding gain
of $4.4 million, net of the related tax effect, reported as a component of
stockholders' equity. The fair value recorded is based on quoted market
prices.
Long and short-term debt: The carrying amount of the Company's borrowings
under its revolving credit facilities approximates fair value. The fair
values of the Company's Senior Notes and Convertible Senior Notes are
estimated based on quoted market prices.
The carrying amounts and fair values of the Company's financial
instruments at December 31, are as follows ($000's):
<TABLE>
<CAPTION>
CARRYING FAIR
1996 AMOUNT VALUE
- ------------------------- ---------- ----------
<S> <C> <C>
Cash and cash
equivalents.............. $ 55,762 $ 55,762
Investment in securities.. 22,500 22,500
Equity advances........... 125,662 125,662
Long and short-term debt . 901,416 1,329,359
</TABLE>
<TABLE>
<CAPTION>
CARRYING FAIR
1995 AMOUNT VALUE
- --------------------------------- ---------- ---------
<S> <C> <C>
Cash and cash equivalents......... $ 16,109 $ 16,109
Investment in securities (a)...... 15,353 19,200
Equity advances................... 51,180 51,180
Long and short-term debt.......... 303,027 403,341
</TABLE>
(a) At December 31, 1995, the sale of the Company's investment in equity
security was restricted by contractual requirement.
9. COMMITMENTS AND CONTINGENCIES
A. NEW WORLD LICENSE -- In 1990 the Company acquired the management of the
domestic U.S. Ramada franchise agreements and the rights to sub-license the
Ramada trademarks to U.S. lodging facilities under a 40-year, extendable
license agreement with the licensor of the trademarks, a special purpose
subsidiary of New World (USA) Inc. ("New World"), that governs the use of the
Ramada trademark domestically.
In September 1990, Prime Hospitality, Inc. ("Prime"), the seller of the
domestic Ramada franchise system filed for protection under Chapter 11 of
the United States Bankruptcy Code. In July 1991, the Company entered into a
restructuring agreement with New World to, among other things, obtain the
ability to assign the license and eliminate the existing minimum net worth
requirement. In connection with this restructuring, the Company paid to New
World $3.7 million, including $2.5 million relating to payments made prior to
the date of the agreement by New World on behalf of Prime. In addition, the
Company agreed to assume certain additional obligations owed by Prime to New
World, which have been recorded at an estimated value of $10.5 million. The
payment to New World and the value of the assumed obligations have been
reflected as excess of cost over fair value of the net assets acquired.
Effective August 4, 1992, New World and Prime reached a settlement which
resulted in a benefit available of $1.5 million per year through 2003 plus
$13.0 million in 2004 to reimburse the Company for advances made and to be
made by the Company pursuant to the restructuring agreement. At December 31,
1996 the Company had made advances of $14.9 million, which are repaid at the
rate of $375,000 per quarter and is included in other income. Any additional
advances, up to the aggregate benefit described above, will be repaid in the
same manner.
The license agreement, as modified, contains covenants, including
maintenance of quality standards, minimum system-wide room sales and minimum
net worth. Under the license agreement, royalty payments, subject to certain
minimums, are calculated based on a percentage of Ramada system-wide gross
room sales and are due quarterly in advance. Included in other current assets
as prepaid license fees is $4.6 million and $4.4 million as of December 31,
1996 and 1995, respectively.
B. LEASES -- The Company has noncancelable operating leases covering
various equipment and facilities, which expire through 2004. Rental expense
for the years ended December 31, 1996, 1995 and
F-24
<PAGE>
1994 approximated $16.1 million, $5.0 million and $3.8 million respectively,
excluding real estate taxes and other fees that are also the responsibility
of the Company.
Operating lease commitments over the next five years and thereafter are as
follows ($000's):
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31,
- --------------------------------
<S> <C>
1997............................. $ 32,665
1998............................. 28,315
1999............................. 20,717
2000............................. 15,972
2001............................. 10,626
Remaining years ................. 16,268
---------
Total minimum lease payments .... $124,563
=========
</TABLE>
The future minimum lease payments exclude future minimum sublease income
of approximately $1.0 million annually for each year presented.
The Company has been granted rent abatements for varying periods on
certain of its facilities. Deferred rent relating to those abatements is
being amortized on a straight-line basis over the applicable lease terms.
C. EMPLOYMENT AGREEMENTS -- The Company has employment agreements with
certain employees for terms of from one to four years. Annual commitments
under these agreements are as follows ($000's):
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31,
- --------------------------------
<S> <C>
1997............................. $3,447
1998............................. 2,089
1999............................. 1,500
2000 ............................ 1,500
--------
$8,536
========
</TABLE>
Most of these agreements provide for severance pay should the employee be
terminated without cause.
D. LITIGATION -- In the normal course of business, certain litigation is
initiated against the Company. Generally, these claims are insured and, in
the opinion of management, disposition of such litigation will not have a
material adverse effect on the Company's liquidity, consolidated financial
position or results of operation.
F-25
<PAGE>
10. INCOME TAXES
The income tax provision consists of ($000's):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Current
Federal.................... $ 22,943 $41,456 $23,747
State ..................... 4,184 4,619 5,107
---------- --------- ---------
$ 27,127 $46,075 $28,854
---------- --------- ---------
Deferred
Federal ................... $ 73,935 $ 8,054 $ 6,831
State ..................... 13,001 1,046 1,469
---------- --------- ---------
86,936 9,100 8,300
---------- --------- ---------
Provision for income taxes $114,063 $55,175 $37,154
========== ========= =========
</TABLE>
Net deferred income tax assets and liabilities are comprised of the following
($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
Provision for doubtful accounts ..... $ 8,100 $ 7,600
Deferred income....................... 46,400 7,800
Acquisition related reserves.......... 19,600 4,200
Franchise acquisition costs .......... (2,600) (2,400)
Other ................................ 700 3,000
------------ -----------
Current net deferred tax asset ...... $ 72,200 $ 20,200
============ ===========
Intangible asset amortization ....... $(166,800) $(73,600)
Deferred income....................... 23,100 --
Acquired net operating loss........... 85,900 --
Other ................................ (24,300) (9,200)
------------ -----------
Noncurrent net deferred tax
liability............................ $ (82,100) $(82,800)
============ ===========
</TABLE>
Net operating loss carryforwards at December 31, 1996 acquired in connection
with the acquisition of Avis, Inc. expire as follows: 2001, $14.8 million;
2002, $89.6 million; 2005, $7.2 million; 2009, $17.7 million; and 2010,
$116.0 million.
The Company's effective income tax rate differs from the statutory federal
rate as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING
DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Federal statutory rate.................... 35.0% 35.0% 35.0%
State income taxes net of federal
benefit.................................. 3.8 4.0 4.7
Other .................................... 1.4 1.9 1.3
------- ------- -------
Effective tax rate........................ 40.2% 40.9% 41.0%
======= ======= =======
</TABLE>
11. STOCKHOLDERS' EQUITY
A. STOCK WARRANTS -- On December 15, 1995, the Company redeemed all
outstanding warrants in accordance with the provisions of the warrant
agreement underlying warrant obligations assumed in the CCI Merger
transaction (See Note 2). The Company received aggregate proceeds
approximating $14.8 million from the exercise of such warrants, resulting in
the issuance of approximately 1.0 million shares of Company common stock.
F-26
<PAGE>
B. AUTHORIZED SHARES -- On January 22, 1996, the Company's shareholders
approved an amendment to the Company's Restated Certificate of Incorporation
to increase the number of authorized shares of common stock to 300 million.
On November 10, 1996, the Board of Directors of the Company authorized an
amendment to the Company's Restated Certificate of Incorporation, subject to
shareholder approval, to increase the number of authorized shares of common
stock to 600 million. Such amendment has been proposed to the Company's
shareholders for approval at a special meeting of shareholders to be held on
April 30, 1997.
C. DIVIDENDS -- The Company expects to retain its earnings for the
development and expansion of its business and the repayment of indebtedness
and does not anticipate paying dividends on common stock in the foreseeable
future.
12. STOCK OPTION PLANS
The Company has two stock option plans, the 1992 Stock Option Plan (the
"1992 Plan") and the amended and restated 1993 Stock Option Plan, as amended
(the "1993 Plan"). The 1993 Plan provides for the granting of options to
certain directors, officers, employees and independent contractors of the
Company's common stock at prices not less than the fair market value at the
date of grant. No further grants will be made under the 1992 Plan. Generally,
stock options have a ten-year term and vest within five years from the date
of grant. On November 10, 1996, the Board of Directors of the Company
authorized an amendment to the 1993 Plan, subject to shareholder approval, to
increase the number of authorized shares of common stock for which options
may be granted to 34,541,600. Such amendment has been proposed to the
Company's shareholders for approval as a special meeting of shareholders to
be held on April 30, 1997.
The Company adopted the disclosure-only provisions of SFAS No. 123 and
accordingly, no compensation cost was recognized in connection with its stock
option plans. Had the Company elected to recognize compensation cost for its
stock option plans based on the calculated fair value at the grant dates for
awards issued after January 1, 1995 under such plans, consistent with the
method prescribed by SFAS No. 123, net income and earnings per share would
reflect the pro forma amounts indicated below ($000's, except per share data):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Net income as reported....... $169,584 $79,730
pro forma . 93,902 77,593
- ---------------------------- ---------- ---------
Net income per share
Primary as reported.......... $ 1.29 $ .73
pro forma . .75 .73
Fully diluted as reported.... 1.29 .73
pro forma . .74 .71
- ---------------------------- ---------- ---------
</TABLE>
The fair values of the Company's stock options are estimated on the dates
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for options granted in 1996 and 1995: dividend
yield of 0%; expected volatility of 37.5%; a risk-free interest rate of 6.45%
and an expected holding period of 9.1 years. The effect of applying SFAS 123
on the pro forma net income and earnings per share disclosures are not
indicative of future amounts because it does not take into consideration
option grants made prior to 1995 or in future years.
F-27
<PAGE>
The table below summaries the annual activity of the Company's stock option
plans ($000's, except per share data):
<TABLE>
<CAPTION>
OPTIONS OPTION
OUTSTANDING PRICE RANGE
------------- ---------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1994.. 12,468 $ 2.87 -$11.17
Granted..................... 3,228 11.71 - 13.41
Canceled ................... (122) 3.74 - 7.94
Exercised .................. (240) 3.13 - 7.94
Distribution of CHRT........ 454 7.94 - 13.41
--------------------------- ------------- ---------------
BALANCE AT DECEMBER 31, 1994 15,788 2.87 - 13.41
Granted..................... 5,476 13.63 - 29.13 WEIGHTED
Canceled ................... (152) 4.08 - 23.44 AVERAGE EXERCISE
Exercised .................. (605) 3.31 - 12.53 PRICE
--------------------------- ------------- --------------- ----------------
BALANCE AT DECEMBER 31, 1995 20,507 2.87 - 29.13 9.81
Granted..................... 10,946 40.31 - 77.88 57.03
Canceled ................... (488) 7.94 - 76.75 56.64
Exercised .................. (1,462) 2.87 - 40.31 11.75
--------------------------- ------------- --------------- ----------------
BALANCE AT DECEMBER 31, 1996 29,503 2.87 - 77.88 26.46
--------------------------- ------------- --------------- ----------------
</TABLE>
The weighted average fair value of stock options granted during the years
ended December 31, 1996 and 1995 is $46.269 and $20.11 , respectively.
The table below summarizes information regarding stock options outstanding
and exercisable as of
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- ---------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- ------------------------ -------- --------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
$ 2.87 to $19.99 17,776 6.4 $ 8.68 14,792 $ 8.09
$20.00 to $39.99 1,262 8.6 24.11 226 24.21
$40.00 to $59.99 5,276 9.2 44.92 2,016 40.31
$60.00 to $77.88 5,189 9.6 69.16 320 62.13
-------- --------------- ---------- --------- ----------
Total 29,503 7.5 $26.46 17,354 $13.04
-------- --------------- ---------- --------- ----------
</TABLE>
Shares exercisable at December 31, 1996 ad 1995 were 17,353,899 and
7,078,886, respectively. Shares available for grant at December 31, 1996 and
1995 were 1,646,906 and 35,266, respectively.
13. EMPLOYEE SAVINGS PLANS
The Company has an employee savings plan in which any eligible employee
may participate. The plan is a defined contribution 401(k) plan qualified
under the Internal Revenue Code. The Company contributes an amount equal to
twenty-five to fifty percent, based on years of service, of the pre-tax
contributions made by participating employees with respect to the first six
percent of an employee's compensation. The Company has elected to pay the
administrative expenses of the plan. The total charges to income relative to
such expenses and Company matching were approximately $803,000, $405,000 and
$332,000, respectively in 1996, 1995 and 1994.
During 1996, the Company implemented a Deferred Compensation Plan
providing senior executives with the opportunity to participate in a funded,
deferred compensation program. The assets of the Deferred Compensation Plan
are held in an irrevocable rabbi trust. Under the program, participants may
defer up to 80% of their base compensation and up to 98% of bonuses earned.
The Company contributes $0.50 for each $1.00 contributed by a participant,
regardless of length of service, up to a maximum of six percent of the
employee's compensation. The program is not qualified under Section 401 of
the Internal Revenue Code. The Company's matching contribution to the Deferred
Compensation Plan in 1996 was approximately $111,000.
F-28
<PAGE>
14. FRANCHISING ACTIVITIES
Revenue from franchising activities consists of initial fees charged to
lodging properties and real estate brokerage offices upon execution of a
franchise contract based on the number of rooms at the lodging property and
estimated Gross Closed Commissions. Initial franchise fees approximated
$24,221,000, $15,735,000 and $13,816,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
Franchising activity for the years ended December 31, 1996, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
LODGING REAL ESTATE
------------------------- -----------------
1996 1995 1994 1996 1995
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
FRANCHISES IN OPERATION
Units at end of year ... 5,397 4,603 4,229 11,349 5,990
EXECUTED BUT NOT OPENED
Acquired................ 24 31 -- 110 104
New agreements.......... 1,142 983 870 829 248
Backlog, end of year ... 786 682 594 275 176
</TABLE>
15. INDUSTRY SEGMENT INFORMATION
The Company is a leading global provider of services to various businesses
in consumer industries. The Company's major business segments are reflective
of the industries which it serves. See Note 1A, "Summary of Significant
Accounting Policies -- Description of Business" for a more detailed
description of each of the Company's industry segments. The following table
presents certain financial information regarding the Company's industry
segments.
Operations by segment ($000's):
Year Ended December 31, 1996
<TABLE>
<CAPTION>
REAL
LODGING ESTATE RELOCATION TIMESHARE
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $385,410 $ 242,877 $ 77,983 $ 30,723
Operating income 140,174 103,711 28,462 5,710
Corporate expenses -- -- -- --
Identifiable assets 998,060 1,295,501 120,176 772,585
Depreciation and
amortization 30,852 27,317 247 2,559
Capital expenditures 19,302 9,932 3,586 1,473
---------- ----------- ------------ -----------
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CAR
RENTAL CORPORATE OTHER CONSOLIDATED
--------- ----------- --------- --------------
<S> <C> <C> <C> <C>
Revenues $ 9,517 -- $ 52,530 $ 799,040
Operating income 6,078 -- 37,210 321,345
Corporate expenses -- $(4,943) -- (4,943)
Identifiable assets 820,425 18,768 306,817 4,332,332
Depreciation and
amortization 3,439 566 4,254 69,234
Capital expenditures -- 6,710 208 41,211
--------- ----------- --------- --------------
</TABLE>
Year Ended December 31, 1995
<TABLE>
<CAPTION>
REAL
LODGING ESTATE RELOCATION CORPORATE OTHER CONSOLIDATED
---------- --------- ------------ ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $336,475 $ 47,965 $ 8,204 -- $ 20,339 $ 412,983
Operating income.............. 121,679 19,277 4,421 -- 15,779 161,156
Corporate expenses............ -- -- -- $(4,462) -- (4,462)
Identifiable assets........... 724,673 195,157 52,781 14,311 178,886 1,165,808
Depreciation and
amortization................. 26,058 2,997 -- 663 1,139 30,857
Capital expenditures.......... 33,384 1,658 -- 19,282 (37) 54,287
</TABLE>
F-29
<PAGE>
16. SELECTED QUARTERLY FINANCIAL DATA -- (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
TOTAL
1996 FIRST SECOND THIRD FOURTH YEAR
- --------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.............. $124,544 $179,665 $245,800 $249,031 $799,040
Income before income
taxes ............... 38,823 64,484 101,954 78,386 283,647
Net income ........... 22,818 38,744 61,070 46,952 169,584
========== ========== ========== ========== ==========
Net income per share:
Primary and
fully diluted ....... $ .20 $ .31 $ .44 $ .33 $ 1.29
========== ========== ========== ========== ==========
1995
- ---------------------
Revenues.............. $ 74,153 $ 96,329 $129,249 $113,252 $412,983
Income before income
taxes ............... 20,440 34,304 46,440 33,721 134,905
Net income ........... 12,062 20,183 27,119 20,366 79,730
========== ========== ========== ========== ==========
Net income per share:
Primary.............. $ .12 $ .19 $ .25 $ .18 $ .74
Fully diluted........ $ .12 $ .19 $ .24 $ .18 $ .73
</TABLE>
F-30
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COLUMN C
---------------------------------------------------------------------
COLUMN B-- -(1)- -(2)- COLUMN E--
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER COLUMN D END OF
COLUMN A--DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS (1) PERIOD
- ----------------------------------- ------------ ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts
Accounts and notes receivable ..... $ 9,440 $3,970 -- $3,582 $9,828
Marketing and reservation accounts
receivable......................... 4,797 2,292 -- 3,229 3,860
Year ended December 31, 1995
Allowance for doubtful accounts
Accounts and notes receivable ..... 9,828 6,352 -- 3,826 12,354
Marketing and reservation accounts
receivable......................... 3,860 3,825 -- 827 6,858
Year ended December 31, 1996
Allowance for doubtful accounts
Accounts and notes receivable ..... 12,354 5,016 -- 4,122 13,248
Marketing and reservation accounts
receivable........................ 6,858 3,087 -- 2,247 7,698
</TABLE>
- ------------
(1) Uncollectible accounts written off, net of recoveries.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder of
Avis, Inc.
Garden City, New York
We have audited the accompanying combined statement of financial position of
Rental Car System Holdings, Inc. and subsidiaries, Avis International, Ltd.
and subsidiaries, Avis Enterprises, Inc. and subsidiaries, Pathfinder
Insurance Company and Global Excess & Reinsurance Ltd. (collectively referred
to as the "Rental Car Operations of Avis, Inc." or the "Company") as of
December 31, 1996, and the related combined statements of operations,
stockholder's equity and cash flows for the period October 17, 1996 (Date of
Acquisition) to December 31, 1996. Our audit also includes the financial
statement schedule of Rental Car Operations of Avis, Inc. Listed in the index
at Item 14(a)(2). These combined financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these combined financial statements and financial statement schedule based on
our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, such combined financial statements presents fairly, in all
material respects, the combined financial position of the Company at
December 31, 1996, and the results of their operations and their cash flows
for the period October 17, 1996 to December 31, 1996 in conformity with
generally accepted accounting principles also, in our opinion such financial
statement schedule, when considered in relation to the basic combined
financial statement taken as a whole, present fairly, in all material respects,
the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
New York, New York
January 24, 1997
F-32
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
COMBINED STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash and cash equivalents ....................................... $ 50,886
Accounts receivable, net ........................................ 311,179
Due from affiliates, net ........................................ 61,807
Prepaid expenses................................................. 40,155
Vehicles, net ................................................... 2,243,492
Property and equipment, net ..................................... 98,887
Other assets..................................................... 14,526
Deferred income tax assets ...................................... 113,660
Cost in excess of net assets acquired, net ...................... 196,765
------------
Total assets .................................................. $3,131,357
============
LIABILITIES AND COMBINED STOCKHOLDER'S EQUITY
Accounts payable ................................................ $ 175,535
Accrued liabilities.............................................. 329,245
Current income tax liabilities................................... 4,790
Deferred income tax liabilities ................................. 35,988
Public liability, property damage and other insurance
liabilities..................................................... 213,785
Debt ............................................................ 2,295,474
------------
Total liabilities.............................................. 3,054,817
------------
Commitments and contingencies
Combined stockholder's equity:
Common stock ................................................... 3,902
Additional-paid-in capital...................................... 71,098
Retained earnings............................................... 1,184
Foreign currency translation adjustment ........................ 356
------------
Total combined stockholder's equity............................ 76,540
------------
Total liabilities and combined stockholder's equity ........... $3,131,357
============
</TABLE>
See accompanying notes to the combined financial statements.
F-33
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
COMBINED STATEMENT OF OPERATIONS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Revenue................................................ $362,844
----------
Cost and expenses:
Direct operating...................................... 167,682
Vehicle depreciation ................................. 72,587
Vehicle lease charges................................. 22,658
Selling, general and administrative................... 62,418
Interest, net ........................................ 34,212
Amortization of cost in excess of net assets acquired 1,026
----------
360,583
----------
Income before provision for income taxes .............. 2,261
Provision for income taxes............................. 1,040
----------
Net income............................................. $ 1,221
==========
</TABLE>
See accompanying notes to the combined financial statements.
F-34
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
COMMON PAID-IN- RETAINED TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
-------- ------------ ---------- ------------- --------
<S> <C> <C> <C> <C> <C>
Rental Car System Holdings, Inc.
($.01 par value, 1,000 shares
authorized; 100 shares outstanding at
October 17, 1996) ....................... $ -- $ 3,459 $ 3,459
Avis International, Ltd.
($1.00 par value, 1,000 shares
authorized and outstanding at October
17, 1996) ............................... 1 58,488 58,489
Avis Enterprises, Inc.
($1.00 par value, 1,000 shares
authorized and outstanding at October
17, 1996) ............................... 1 2,271 2,272
Pathfinder Insurance Company
($1.00 par value, 3,000,000 shares
authorized; 2,500,000 shares outstanding
at October 17, 1996) .................... 2,500 4,824 7,324
Global Excess & Reinsurance Ltd.
($1.00 par value, 1,400,000 shares
authorized and outstanding at
October 17, 1996)........................ 1,400 2,056 3,456
-------- ------------ ---------- ------------- --------
Balance, October 17, 1996 ................ 3,902 71,098 75,000
Net Income ............................... $1,221 1,221
Foreign Currency Equity Adjustment ...... $356 356
Additional Minimum Pension Liability .... (37) (37)
-------- ------------ ---------- ------------- --------
Balance, December 31, 1996 ............... $3,902 $71,098 $1,184 $356 $76,540
======== ============ ========== ============= ========
</TABLE>
See accompanying notes to the combined financial statements.
F-35
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income...................................................................... $ 1,221
Adjustments to reconcile net income to net cash provided by operating
activities:
Vehicle depreciation........................................................... 77,140
Depreciation and amortization of property and equipment ....................... 2,212
Amortization of cost in excess of net assets acquired ......................... 1,026
Deferred income tax provision.................................................. 33
Provision for losses on accounts receivable.................................... 227
Change in operating assets and liabilities:
Accounts receivable........................................................... 10,327
Prepaid expenses.............................................................. (2,664)
Other assets.................................................................. (3,459)
Accounts payable ............................................................. (18,712)
Accrued liabilities........................................................... (24,718)
Public liability, property damage and other insurance liabilities ............ 1,340
-----------
Net cash provided by operating activities..................................... 43,973
-----------
Cash flows from investing activities:
Payments for vehicle additions.................................................. (561,117)
Vehicle deletions............................................................... 560,099
Payments for additions to property and equipment................................ (3,484)
Sales of property and equipment................................................. 361
-----------
Net cash used in investing activities ........................................ (4,141)
-----------
Cash flows from financing activities:
Decrease in debt:
Proceeds....................................................................... 63,903
Repayments..................................................................... (133,457)
-----------
Net decrease in debt .......................................................... (69,554)
Payments on intercompany loans.................................................. (6,661)
-----------
Net cash used in financing activities ........................................ (76,215)
-----------
Effect of exchange rate changes on cash ......................................... 94
-----------
Net decrease in cash and cash equivalents........................................ (36,289)
Cash and cash equivalents at beginning of period ................................ 87,175
-----------
Cash and cash equivalents at end of period ...................................... $ 50,886
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest....................................................................... $ 28,170
===========
Income taxes .................................................................. $ 827
===========
</TABLE>
See accompanying notes to the combined financial statements.
F-36
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined financial statements include Rental Car System
Holdings, Inc. and subsidiaries (including the carved out corporate
operations of Avis, Inc. and Prime Vehicles Trust (the "Vehicle Trust")),
Avis International, Ltd. and subsidiaries, Avis Enterprises, Inc. and
subsidiaries, Pathfinder Insurance Company and Global Excess & Reinsurance
Ltd. (collectively referred to as the "Rental Car Operations of Avis, Inc."
or the "Company"). All of the foregoing companies are ultimately wholly owned
subsidiaries of Avis, Inc., which was acquired by HFS Incorporated ("HFS") on
October 17, 1996 (the "Date of Acquisition") for approximately $806.5
million. The purchase price was comprised of approximately $367.2 million in
cash, $100.9 million of indebtedness and $338.4 million of HFS common stock.
It is anticipated that Avis, Inc. will contribute, effective January 1, 1997,
the net assets of its corporate operations and all of its common stock
ownership in Avis International, Ltd., Avis Enterprises, Inc., Pathfinder
Insurance Company and Global Excess and Reinsurance, Ltd. to Rental Car
System Holdings, Inc. Pursuant to a plan developed by HFS prior to the Date
of Acquisition, HFS will cause the Company to undertake an initial public
offering ("IPO") within one year of the Date of Acquisition, which will
reduce HFS' equity interest in the Company to 25%. HFS owns and operates the
reservation system as well as the telecommunications and computer processing
systems which service the rental car operations for reservations, rental
agreement processing, accounting and vehicle control. HFS will charge a fee
for such services (Note 3). In addition, HFS will retain the Avis trade name
and charge the rental car operations a franchise fee for the use of the Avis
name.
The acquisition was accounted for under the purchase method and includes
the operations of the Company subsequent to the Date of Acquisition. A
portion of the purchase price has been allocated to the estimated fair value
of the Company. This estimate is calculated assuming that the Company is an
independent franchisee of Avis, Inc. and is required to pay certain fees for
use of the Avis trade name, reservation services and other franchise related
services. The estimated fair value of the Company is $75 million at the Date
of Acquisition. This amount has been allocated to individual assets and
liabilities based on their estimated fair value at the Date of Acquisition.
This allocation is preliminary and subject to adjustment when the asset and
liability valuations are finalized. The final asset and liability fair values
may differ from those set forth in the accompanying combined statement of
financial position on December 31, 1996; however, the changes are not
expected to have a material effect on the combined financial position of the
Company. The preliminary purchase cost allocation at the Date of Acquisition
has been allocated to the Company as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Allocated purchase cost........................... $ 75,000
-----------
Fair Value of:
Liabilities assumed............................... 3,145,395
Assets acquired................................... 3,022,712
-----------
Net Liabilities................................... 122,683
-----------
Excess of purchase price over net assets
acquired......................................... $ 197,683
===========
</TABLE>
Principles of Combination
All material intercompany transactions have been eliminated.
Accounting Estimates
Generally accepted accounting principles require the use of estimates,
which are subject to change, in the preparation of financial statements.
Significant accounting estimates used include estimates for determining
public liability, property damage and other insurance liabilities and the
realization of deferred income tax assets. Management has exercised
reasonableness at deriving these estimates. However, actual results may
differ.
F-37
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
The Company considers deposits and short-term investments with an original
maturity of three months or less to be cash equivalents.
Vehicles
Vehicles are stated at cost net of accumulated depreciation. In accordance
with industry practice, when vehicles are sold, gains or losses are reflected
as an adjustment to depreciation. Vehicles are generally depreciated at rates
ranging from 10% to 25% per annum. Manufacturers provide the Company with
incentives and allowances (such as rebates and volume discounts) which are
amortized to income over the holding period of the vehicles.
Property and Equipment
Property and equipment is stated at cost net of accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method
over the estimated useful life of the assets. Estimated useful lives range
from five to ten years for furniture and office equipment to thirty years for
buildings. Leasehold improvements are amortized over the shorter of twenty
years or the remaining life of the lease. Maintenance and repairs are
expensed; renewals and improvements are capitalized. When depreciable assets
are retired or sold, the cost and related accumulated depreciation are
removed from the accounts with any resulting gain or loss reflected in the
combined statement of operations.
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired is amortized over a 40 year period
and is shown net of accumulated amortization of $1.0 million at December 31,
1996.
Impairment Accounting
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The Company reviews the recoverability
of its long-lived assets, including cost in excess of net assets acquired,
when events or changes in circumstances occur that indicate that the carrying
value of the assets may not be recoverable. The measurement of possible
impairment is based on the Company's ability to recover the asset from the
expected future pre-tax undiscounted future cash flows generated. The
measurement of impairment requires management to use estimates of expected
future cash flows. It is at least reasonably possible that future events or
circumstances could cause these estimates to change.
Public Liability, Property Damage and Other Insurance Liabilities
Insurance liabilities on the accompanying combined statement of financial
position include additional liability insurance, personal effects protection
insurance, public liability and property damage ("PLPD") and personal
accident insurance claims for which the Company is self-insured. The Company
is self-insured up to $1.0 million per claim under its auto liability
insurance program for PLPD and additional liability insurance. Costs in
excess of $1.0 million per claim are insured under various contracts with
commercial insurance carriers. The liability for claims is estimated based on
the Company's historical loss and loss adjustment expense experience and
adjusted for current trends.
The insurance liabilities include a provision for both claims reported to
the Company as well as claims incurred but not yet reported to the Company.
This method is an actuarially accepted loss reserve method. Adjustments to
this estimate and differences between estimates and the amounts subsequently
paid are reflected in operations as they occur.
F-38
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign Currency Translation
The assets and liabilities of foreign companies are translated at the
year-end exchange rates. Results of operations are translated at the average
rates of exchange in effect during the year. The resultant translation
adjustment is included as a component of combined stockholder's equity.
Income Taxes
The Company is included in the consolidated federal income tax return of
HFS. Pursuant to the regulations under the Internal Revenue Code, the
Company's pro rata share of the consolidated federal income tax liability of
HFS is allocated to the Company on a separate return basis. The Company files
separate income tax returns in states where a consolidated return is not
permitted. In accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", deferred income tax assets and
liabilities are measured based upon the difference between the financial
accounting and tax basis of assets and liabilities.
Advertising
Advertising costs are expensed as incurred. Advertising costs are $10.3
million for the period October 17, 1996 to December 31, 1996. There are no
deferred advertising costs at December 31, 1996.
Environmental Costs
The Company's operations include the storage and dispensing of gasoline.
Expenses in connection with the remediation of accidental fuel discharges at
various locations are provided for when it is probable that obligations have
been incurred and amounts can be reasonably estimated.
NOTE 2 -- ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1996 consists of the following (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Vehicle rentals ...................... $ 94,480
Due from vehicle manufacturers ...... 183,304
Damage claims ........................ 10,697
Due from licensees ................... 3,903
Other ................................ 19,022
----------
311,406
Less allowance for doubtful accounts (227)
----------
$311,179
==========
</TABLE>
Amounts due from vehicle manufacturers include receivables for vehicles
sold under guaranteed repurchase contracts and amounts due for incentives and
allowances. Incentives and allowances are available based on the volume of
vehicles to be purchased for a model year or from the manufacturers'
willingness to encourage the Company to retain vehicles rather than return
the vehicles back to the manufacturer, or arise from the purchase of
particular models not subject to repurchase under "buyback" arrangements.
Incentives and allowances are amortized to income over the holding period of
the vehicles.
F-39
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(CONTINUED)
NOTE 3 -- DUE FROM AFFILIATES
Due from affiliates at December 31, 1996 consists of the following
balances due to or from HFS or its consolidated subsidiaries which will be
settled on or before the previously mentioned IPO (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Note receivable from Wizard Co., Inc. (a) $ 196,965
Subordinated vehicle financing notes (b) . (247,500)
Non-interest bearing advances (c) ........ 112,342
-----------
$ 61,807
===========
</TABLE>
NOTES:
(a) Consists of a $194.1 million note receivable from Wizard Co., Inc.,
an indirect wholly owned subsidiary of HFS, plus accrued interest.
The note bears interest at 7.13% and is due on October 1, 2006 and is
guaranteed by HFS.
(b) Represents loans from an HFS subsidiary to the Vehicle Trust, as
described in Note 7, to provide additional subordinated financing.
The amounts provided reduce, within certain limits, the amount of
subordinated financing required from other lenders. The loans are
made under terms of a credit agreement which terminates on October
29, 2003. As of December 31, 1996, the weighted average interest rate
under these loans was 10.75%.
(c) Primarily represents the transfer of assets from the Company to HFS
and subsidiaries, recorded in connection with the October 17, 1996
acquisition of Avis, Inc. by HFS, as well as intercompany
transactions relating to management, service and administrative fees
since the Date of Acquisition. The amounts due to or from HFS and
subsidiaries are interest free and guaranteed by HFS.
Expense items of the Company include the following charges from HFS and
affiliates of HFS for the period October 17, 1996 to December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Reservations................................. $13,080
Data processing ............................. 10,526
Management, service and administrative fees 4,634
Interest on intercompany debt, net .......... 2,561
Rent ........................................ 950
---------
$31,751
=========
</TABLE>
Reservations and data processing services are charged to the Company based
on actual cost plus a profit thereon of 20%. All other charges are based on
actual costs incurred. Effective January 1, 1997, HFS will charge the Company
a franchise fee of 3.5% of revenue for the use of the Avis trade name. On an
unaudited pro forma basis, had the franchise fee been charged to the Company
beginning on October 17, 1996, net income for the period October 17, 1996 to
December 31, 1996 would have been reduced by $7.5 million resulting in a pro
forma net loss of approximately $6.3 million.
F-40
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(CONTINUED)
NOTE 4 -- VEHICLES
Vehicles at December 31, 1996 consist of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Vehicles ................................................ $2,250,309
Vehicles acquired under long-term capital lease (Note 7) 19,324
Buses and support vehicles .............................. 45,868
Vehicles held for sale .................................. 36,378
------------
2,351,879
Less accumulated depreciation ........................... (108,387)
------------
$2,243,492
============
</TABLE>
For the period October 17, 1996 to December 31, 1996, depreciation expense
recorded for vehicles was $72.6 million. Depreciation expense reflects a net
gain on the disposal of vehicles of $4.5 million. It also reflects the
amortization of certain incentives and allowances from various vehicle
manufacturers of approximately $18 million.
In April 1990, the predecessor to the Company entered into a seven year
operating lease under which an original amount of $110 million of vehicles
were leased, with the ability to exchange such leased vehicles for newly
manufactured vehicles with the same value to the lessor. The lease is
cancelable at the Company's option, however, additional costs may be incurred
upon termination based upon the fair value of the vehicles at the time the
option is exercised. At the termination of the leases, the Company may
purchase the vehicles at the agreed upon fair market value or return them to
the lessor.
In December 1994, the predecessor to the Company entered into a financing
arrangement whereby it may lease up to $503 million of vehicles. This
arrangement was amended on October 17, 1996 to increase the amount to $650
million. Under this arrangement, at December 31, 1996, there were $322
million of vehicles under operating leases. The vehicles leased under this
arrangement may be leased for periods of up to 18 months. The lease cost
charged to the Company varies with the number of vehicles leased and the
repurchase agreement offered by the vehicle manufacturer to the lessor and
includes all expenses including the interest costs of the financing company.
The rental payments due in each of the years ending December 31 for the
operating leases as described above are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997.... $69,444
1998 ... 15,388
</TABLE>
Rental expense for those vehicles under operating leases as described
above was $16.1 million for the period October 17, 1996 to December 31, 1996.
F-41
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(CONTINUED)
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consists of the following (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Land ........................................... $ 19,523
Buildings ...................................... 11,862
Leasehold improvements ......................... 48,898
Furniture, fixtures and equipment .............. 10,997
Construction-in-progress ....................... 9,946
----------
101,226
Less accumulated depreciation and amortization (2,339)
----------
$ 98,887
==========
</TABLE>
NOTE 6 -- ACCRUED LIABILITIES
Accrued liabilities at December 31, 1996 consists of the following (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Payroll and related costs ..... $ 73,142
Taxes, other than income taxes 29,522
Rents and property related ..... 30,889
Interest ....................... 18,531
Sales and marketing ............ 20,395
Vehicle related ................ 18,784
Other various .................. 137,982
----------
$329,245
==========
</TABLE>
NOTE 7 -- FINANCING AND DEBT
Debt outstanding at December 31, 1996 is not guaranteed by HFS and
consists of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
VEHICLE TRUST FINANCING
Short-term vehicle trust financing--revolving credit facilities .......... $1,970,000
------------
Vehicle manufacturer's floating rate notes due September 1998 ($50,719
senior at 8.50% and $16,281 subordinated at 10.0%) ....................... 67,000
Vehicle manufacturer's floating rate notes due October 2001 ($63,731
senior at 7.16% and $54,269 subordinated at 8.91%)........................ 118,000
------------
Total long-term portion of vehicle trust financing......................... 185,000
------------
OTHER FINANCING
Short-term notes--foreign ................................................. 65,516
7.50% capital lease terminating November 1997 and current portion of
long-term debt ........................................................... 41,229
------------
Total current debt ........................................................ 106,745
------------
Other domestic ............................................................ 2,916
Debt of foreign subsidiaries:
Floating rate notes due February 1998 ..................................... 2,935
Floating rate notes due August 1998 ....................................... 27,878
------------
Total long-term debt ...................................................... 33,729
------------
$2,295,474
============
</TABLE>
F-42
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(CONTINUED)
NOTE 7 -- FINANCING AND DEBT (Continued)
The primary source of funding for domestic vehicles is provided by the
Vehicle Trust (a grantor trust). Amounts drawn against this facility may be
used to purchase vehicles and pay certain expenses of the Vehicle Trust. The
security for the Vehicle Trust financing facility consists of a lien on the
vehicles acquired under the facility, which at December 31, 1996 totaled
approximately $2.1 billion, exclusive of related valuation reserves. The
security for the Vehicle Trust financing facility also consists of security
interests in certain other assets of the Vehicle Trust. Additionally, the
Vehicle Trust and its security agreement require that there be outstanding,
at all times, subordinated debt in a specified percentage range (10% -25%) of
the net book value of the vehicles owned by the Vehicle Trust. Pursuant to
the agreement, the subordinated debt is to be provided by vehicle
manufacturer finance companies and by an HFS subsidiary. The Vehicle Trust
consists of loans from banks, vehicle manufacturer finance companies and an
HFS subsidiary. The short-term notes are issued pursuant to a $2.5 billion
revolving credit facility dated as of October 17, 1996 which expires on
October 16, 1997. On December 31, 1996, the weighted average interest rate of
borrowings under this facility was 6.00%. For the period from October 17,
1996 to December 31, 1996, the average outstanding borrowings under this
facility were $2.0 billion with a weighted average interest rate of 5.98%.
This facility requires a fee of 1/8 of 1% on the committed amount.
Subordinated debt of $318 million was required under the Vehicle Trust
financing, of which $247.5 million is due to an HFS subsidiary (Note 3). At
December 31, 1996, the Vehicle Trust had financing outstanding from vehicle
manufacturer finance companies under terms of loan agreements dated October
17, 1996. Under these agreements, the maximum amount of borrowings allowed is
$267 million, of which up to $260 million may be used as subordinated debt.
On December 31, 1996, $185 million was outstanding of which $70.5 million of
the outstanding debt was deemed subordinated. On December 31, 1996, the
weighted average interest rate of borrowings under this facility was 8.50%.
For the period October 17, 1996 to December 31, 1996, the average outstanding
borrowings under this facility was $185 million with a weighted average
interest rate of 8.41%.
In November 1992, the predecessor to the Company entered into a five year
capital lease under which $96.7 million of vehicles were leased. The lease is
cancelable at the Company's option, however, additional costs may be incurred
upon termination based upon the fair value of the vehicles at the time the
option is exercised. At the termination of the lease, the Company may
purchase the vehicles at an agreed upon fair market value or return them to
the lessor.
The future minimum lease payments due under the Company's capital lease
obligation, which terminates on November 30, 1997, are $41,500,000 (including
interest of $1,331,000).
Under the terms of the Company's loan agreements, the Company must
maintain a minimum net worth, minimum earnings and cash flow ratios.
Mandatory maturities of long-term obligations for each of the five years
ending December 31, and thereafter, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997......... $ 41,229
1998......... 98,950
1999......... 1,086
2000......... 209
2001......... 118,228
Thereafter .. 256
</TABLE>
F-43
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(CONTINUED)
NOTE 7 -- FINANCING AND DEBT (Continued)
Other Credit Facilities
At December 31, 1996, the Company has letters of credit/working capital
agreements totaling $102.6 million, which may be renewed bi-annually at the
Company's option and the banks' discretion. The collateral for certain of
these agreements consists of a lien on property and equipment and certain
receivables with a carrying value of $136.9 million. At December 31, 1996,
the Company has outstanding letters of credit amounting to $55.1 million.
In addition, for certain of its international operations, the Company has
available at December 31, 1996, unused lines of credit of $224.3 million. The
unused lines of credit agreements require a quarterly fee of 0.2% to 0.5% of
the unused line.
Interest Rate Swap Agreements
The Company has entered into interest rate swap agreements to reduce the
impact of changes in interest rates on certain outstanding debt obligations.
These agreements effectively change the Company's interest rate exposure on
$44.0 million of its outstanding debt from a weighted average variable
interest rate to a fixed rate of 7.1% at December 31, 1996. The variable
interest element with respect to these interest rate swap agreements is reset
quarterly. The interest rate swap agreements will terminate in March 1997,
July 1998 and November 1998. The differential to be paid or received is
recognized ratably as interest rates change over the life of the agreements
as an adjustment to interest expense.
The net interest differential charged to interest expense for the period
October 17, 1996 to December 31, 1996 was $285,000. The Company is exposed to
credit risk in the event of nonperformance by counterparties to its interest
rate swap agreements. Credit risk is limited by entering into such agreements
with primary dealers only; therefore, the Company does not anticipate that
nonperformance by counterparties will occur. Notwithstanding this, the
Company's treasury department monitors counterparty credit ratings at least
quarterly through reviewing independent credit agency reports. Both current
and potential exposure are evaluated as necessary, by obtaining replacement
cost information from alternative dealers. Potential loss to the Company from
credit risk on these agreements is limited to amounts receivable, if any.
NOTE 8 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and the estimated fair value of the Company's interest
rate swap agreements represent liabilities of approximately $578,000 and $1.4
million, respectively, at December 31, 1996.
For instruments including cash and cash equivalents, accounts receivable
and accounts payable, the carrying amount approximates fair value because of
the short maturity of these instruments. The fair value of floating-rate debt
approximates carrying value because these instruments re-price frequently at
current market prices.
The Company believes that it is not practicable to estimate the current
fair value of the amount due to an HFS subsidiary for subordinated vehicle
financing and the note receivable from Wizard Co., Inc. because of the
related party nature of the instruments (Note 3).
F-44
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(CONTINUED)
NOTE 9 -- INCOME TAXES
The provision for income taxes for the period October 17, 1996 to December
31, 1996 consists of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current:
State..................... $ 719
Foreign................... 288
-------
1,007
-------
Deferred:
Federal................... (85)
Foreign................... 118
-------
33
-------
Provision for income
taxes..................... $1,040
=======
</TABLE>
The effective income tax rate for the period October 17, 1996 to December
31, 1996 varies from the statutory U.S. federal income tax rate due to the
following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Statutory U.S. federal income tax rate..................................... $ 791 35.0%
Tax effect of foreign operations........................................... (1,073) (47.5)
Amortization of cost in excess of net assets acquired and other
intangibles............................................................... 359 15.9
State income taxes, net of federal tax benefit............................. 469 20.8
Other non-deductible business expenses..................................... 494 21.8
--------- --------
Effective income tax rate.................................................. $ 1,040 46.0%
========= ========
</TABLE>
In accordance with SFAS 109, deferred income tax assets at December 31,
1996 include the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Gross deferred income tax assets:
Accrued liabilities.................................................... $ 171,050
Net operating loss carryforwards....................................... 78,172
Alternative minimum income tax credit carryforwards.................... 3,025
-----------
252,247
-----------
Gross deferred income tax liabilities:
Tax depreciation in excess of book depreciation........................ (152,346)
Tax amortization in excess of book amortization of cost in excess of
net assets acquired and difference in book and tax basis of
intangibles........................................................... (13,547)
Prepaids and other..................................................... (8,682)
-----------
(174,575)
-----------
Net deferred income tax assets.......................................... $ 77,672
===========
</TABLE>
The Company, under its tax sharing agreement with HFS, has allocated
alternative minimum tax net operating loss carryforwards of $139.8 million.
The net operating loss carryforwards expire as follows: 2001, $4.3 million;
2002, $2.5 million; 2005, $32.6 million; 2008, $23.7 million; 2009, $15.1
million. The Company also has available unused investment tax credits of
approximately $5.8 million which expire on February 28, 2002.
F-45
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(CONTINUED
NOTE 10 - RETIREMENT BENEFITS
The Company, through its subsidiary, Avis Rent A Car System, Inc.
("ARACS"), sponsors non-contributory defined benefit plans covering U.S.
employees who are members of certain collective bargaining units and
non-union full-time employees hired prior to December 31, 1983 who were age
25 or above on January 1, 1985. ARACS also contributes to union sponsored
pension plans.
Through ARACS, the Company sponsors a Voluntary Investment Savings Plan
under a "qualified cash or deferred arrangement" under Section 401(k) of the
Internal Revenue Code. For the period October 17, 1996 to December 31, 1996,
the cost of this plan was approximately $352,000. Included in the Investment
Savings Plan, ARACS sponsors a defined contribution plan for substantially
all non-union full-time employees not otherwise covered. Costs for this plan
are determined at 2% of each covered employees compensation. Employer
contributions and costs of the plan for the period October 17, 1996 to
December 31, 1996 amounted to $394,000.
The defined benefit plans provide benefits based upon years of credited
service, highest average compensation and social security benefits. Annual
retirement benefits, at age 65, are equal to 1 1/2% of the participating
employee's final average compensation (average compensation during the
highest five consecutive years of employment in the ten years prior to
retirement) less 1 3/7% of the Social Security benefits for each year of
service up to a maximum of 35 years. In addition, the plan provides for
reduced benefits before age 65 and for a joint and survivor annuity option.
The status of the defined benefit plans at December 31, 1996 is as follows
(in thousands):
<TABLE>
<CAPTION>
SALARIED AND
HOURLY
EMPLOYEES
AS OF JUNE
30, 1985 BARGAINING
-------------- ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation............................ $(43,406) $(7,147)
============== ============
Accumulated benefit obligation....................... $(48,077) $(7,431)
============== ============
Projected benefit obligation......................... $(66,083) $(7,431)
Plan assets at fair value............................. 60,697 6,623
-------------- ------------
Projected benefit obligation in excess of plan
assets............................................... (5,386) (808)
Unrecognized net actuarial loss....................... 1,440 37
Unrecognized prior service cost....................... 878
Additional minimum liability.......................... (915)
-------------- ------------
Accrued pension liability............................. $ (3,946) $ (808)
============== ============
</TABLE>
At December 31, 1996, the measurement of the projected benefit obligation
was based on a discount rate of 7.75%, compensation increase of 5.0% per year
and a long-term rate of return on plan assets of 8.75%. The plan assets are
invested in corporate bonds, U.S. government securities and common stock
mutual funds.
F-46
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(CONTINUED)
NOTE 10 -RETIREMENT BENEFITS (Continued)
Net pension costs for the defined benefit plans for the period October
17, 1996 to December 31, 1996 include the following components (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Service cost .............................................. $ 302
Interest cost ............................................. 357
Actual return (gain) on plan assets ....................... (551)
Net amortization of actuarial gains and prior service cost 390
Contributions to union plans .............................. 697
Contributions to foreign plans ............................ 36
--------
Net pension cost .......................................... $1,231
========
</TABLE>
The Company also sponsors a non-qualified defined benefit pension plan.
The liability for this unfunded plan was $8.8 million at December 31, 1996.
The projected benefit obligation of the plan was $10.0 at December 31, 1996.
The Company also sponsors several foreign pension plans. The most significant
of these is the Canadian pension plan.
The status of the Canadian defined benefit plan at December 31, 1996 is as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation............................ $(3,389)
==========
Accumulated benefit obligation....................... $(3,389)
==========
Projected benefit obligation......................... $(3,703)
Plan assets at fair value............................. 8,323
----------
Plan assets in excess of projected benefit
obligation........................................... 4,620
Unrecognized net actuarial gain....................... (336)
Unrecognized net transition asset..................... (2,833)
----------
Deferred pension cost................................. $ 1,451
==========
</TABLE>
At December 31, 1996, the measurement of the projected benefit obligation
was based on a discount rate of 7.0%, compensation increase of 4.0% per year
and a long-term rate of return on plan assets of 7.0%. The plan assets are
held in mutual funds which are invested in Canadian stocks, bonds, real
estate and money market funds.
Net pension benefit for the Canadian defined benefit plan for the period
October 17, 1996 to December 31, 1996 (the latest information available)
includes the following components (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Service cost ......................................... $ 28
Interest cost ........................................ 54
Expected return on plan assets ....................... (115)
Amortization of unrecognized net asset at transition (28)
-------
Net pension benefit .................................. $ (61)
=======
</TABLE>
F-47
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(CONTINUED)
NOTE 11 -- LEASES, AIRPORT CONCESSION FEES AND COMMITMENTS
The Company is committed to make rental payments under noncancelable
operating leases relating principally to vehicle rental facilities and
equipment. Under certain leases, the Company is obligated to pay certain
additional costs, such as property taxes, insurance and maintenance. Airport
concession agreements usually require a guaranteed minimum amount plus
contingent fees which are generally based on a percentage of revenues.
Operating lease payments and airport concession fees charged to expense
for the period October 17, 1996 to December 31, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Minimum fees........... $23,576
Contingent fees ....... 13,220
----------
36,796
Less sublease rentals (1,000)
----------
$35,796
==========
</TABLE>
Future minimum rental commitments under noncancelable operating leases
amounted to approximately $338.0 million at December 31, 1996. The minimum
rental payments due in each of the five years ending December 31, and
thereafter, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997......... $86,264
1998......... 62,400
1999......... 43,179
2000......... 32,669
2001......... 20,805
Thereafter .. 92,709
</TABLE>
In addition to the Company's lease commitments, the Company has
outstanding purchase commitments of approximately $1.5 billion at December
31, 1996 which relate principally to vehicle purchases.
F-48
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(CONCLUDED)
NOTE 12 -- SEGMENT INFORMATION
The Company operates in the United States and in foreign countries. The
operations within major geographic areas for the period October 17, 1996 to
December 31, 1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Revenue
United States.................... $ 312,194
Australia/New Zealand............ 31,107
Canada........................... 13,467
Other foreign operations......... 6,076
------------
$ 362,844
============
Income (loss) before income taxes
United States.................... $ (2,346)
Australia/New Zealand............ 4,706
Canada........................... (1,752)
Other foreign operations......... 1,653
------------
$ 2,261
============
Total assets at end of year
United States.................... $2,750,119
Australia/New Zealand............ 120,216
Canada........................... 122,657
Other foreign operations......... 138,365
------------
$3,131,357
============
</TABLE>
F-49
<PAGE>
NOTE 13 -- LITIGATION
Certain litigation has been initiated against the Company which have
arisen during the normal course of operations. Since litigation is subject to
many uncertainties, the outcome of any individual matter is not predictable
with any degree of certainty, and it is reasonably possible that one or more
of these matters could be decided unfavorably against the Company. On May 22,
1996, a complaint was filed in the United States District Court for the
Eastern District of North Carolina against Avis Rent A Car System, Inc.
("ARACS") and one of its licensees, New Hanover Rent A Car, Inc. ("New
Hanover") alleging discrimination by New Hanover in the rental of automobiles
based on race. Plaintiff seeks an unspecified amount of compensatory and
punitive damages and a permanent injunction barring ARACS and New Hanover
from continuing to engage in illegally discriminatory conduct. ARACS has
asserted claims for indemnification against New Hanover and intends to
vigorously defend the complaint, ARACS believes that it has meritorious
defenses against the complaint. The Company maintains insurance policies that
cover most of the actions brought against the Company. The Company is
currently not involved in any legal proceeding which it believes would have a
material adverse effect upon its combined financial condition or results of
operations.
F-50
<PAGE>
RENTAL CAR OPERATIONS OF AVIS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND CHARGED TO END OF
DESCRIPTION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------------ -------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts--accounts
receivable ............................... -- $ 227 -- -- $ 227
Accumulated amortization--goodwill ........ -- $1,026 -- -- $1,026
</TABLE>
F-51
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- ------------
2.1 Agreement Among Purchasers dated as of January 22, 1996 among
National Lodging Corp., Motels of America, Inc. and Bear
Acquisition Corp. (Incorporated by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995, Exhibit 2.10)
2.2 Purchase and Sale Agreement dated February 9, 1996 among
Electronic Realty Associates, L.P., the Registrant and ERA
Acquisition Co. (Incorporated by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995, Exhibit 2.11)
2.3 Agreement dated February 9, 1996 among Heller Financial, Inc.
the Registrant and ERA Acquisition Co. (Incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, Exhibit 2.12).
2.4 Agreement and Plan of Merger and Reorganization, dated as of
April 15, 1996, by and between HFS Incorporated, Century 21
Region V, Inc. and Yeager Real Estate and Financial Services,
Inc. (Incorporated by reference to Registrant's Registration
Statement on Form S-3 (Registration No. 333- 03646), Exhibit No.
2.1)
2.5 Stock Purchase Agreement dated as of July 12, 1995 between the
Registrant and Metropolitan Life Insurance Company (Incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1995, Exhibit 2.1)
2.6 Stock Purchase Agreement dated as of July 12, 1995 between the
Registrant and C21 Acquisition Corp. (Incorporated by reference
to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995, Exhibit 2.2)
2.7 Stock Purchase Agreement dated as of July 12, 1995 between the
Registrant and Metropolitan Tower Corp. (Incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1995, Exhibit 2.3)
2.8 Stock Purchase Agreement dated as of October 17, 1995 between
the Registrant and AMRE, Inc. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995).
2.9 Purchase Agreement dated as of December 19, 1995 among the
Registrant, Forte Hotels, Inc. and Forte USA, Inc. (Incorporated
by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, Exhibit 2.9)
2.10 Agreement and Plan of Merger dated as of April 3, 1996 among the
Registrant, C-21 Holding Corp., Century 21 Real Estate of the
Mid-Atlantic States, Inc. and George F. Kettle. (Incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996, Exhibit 2.1)
2.11 Agreement and Plan of Merger dated as of April 3, 1996 among the
Registrant, C21 Holding Corp., Century 21 of Eastern
Pennsylvania, Inc., George F. Kettle and James O. Nelson.
(Incorporated by
- --------------
* Filed herewith
E-1
<PAGE>
Exhibit
No. Description
- ------- ------------
reference to Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996, Exhibit 2.2)
2.12 Agreement and Plan of Merger dated as of May 1, 1996 among the
Registrant, CBC Acquisition Corp., Fremont Investors, Inc. and
Coldwell Banker Corporation. (Incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1996, Exhibit 2.4)
2.13 Agreement and Plan of Merger, dated as of August 23, 1996, by
and among HFS Incorporated, Avis Acquisition Corp., U.S. Trust
Company of California, N.A. as Trustee of the Trust forming a
part of the Avis, Inc. Employee Stock Ownership Plan and Avis,
Inc. (Incorporated by reference to Registrant's Registration
Statement on Form S-3 (Registration No. 333-11029, Exhibit 2.1)
2.14 Stock Purchase Agreement, dated as of August 28, 1996, by and
between HFS Incorporated and General Motors Corporation.
(Incorporated by reference to Registrant's Registration
Statement on Form S-3 (Registration No. 333-11029, Exhibit 2.2)
2.15 Stock Purchase Agreement dated as of October 6, 1996 by and
among the Company, Christel DeHaan and Resort Condominiums
International, Inc. (Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996, Exhibit 2.1)
2.16 Registration Rights Agreement, dated as of November 12, 1996, by
and between HFS Incorporated and Ms. Christel DeHaan
(Incorporated by reference to Registrant's Registration
Statement on Form S-3 (Registration No. 333-17371), Exhibit 2.2)
2.17 Agreement and Plan of Merger dated as of November 10, 1996, by
and among HFS Incorporated, PHH Corporation and Mercury
Acquisition Corp. (Incorporated by reference to the Company's
Current Report on Form 8-K dated November 14, 1996, Exhibit 2.1)
2.18 Asset Purchase Agreement dated as of April 2, 1996 among Century
21 Real Estate of Southern Florida, Inc., the Registrant and
Richard C. Ritchey (Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1996, Exhibit 10.1)
2.19 Asset Purchase Agreement dated as of April 3, 1996 among Century
21 Real Estate Corporation, the Registrant, Century 21 of the
Southwest, Inc. and Larry E. Bryson. (Incorporated by reference
to Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1996, Exhibit 10.2)
3.1 Restated Certificate of Incorporation of the Registrant
(Incorporated by reference to Exhibit 4 to the Registrant's
Registration Statement on Form 8-A filed on February 21, 1996)
- --------------
* Filed herewith
E-2
<PAGE>
Exhibit
No. Description
- ------- ------------
3.2 Amended and Restated By-laws of the Registrant (Incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1996, Exhibit 3.1)
4.1 Form of certificate for the Registrant's Common Stock, par value
$0.1 per share (Incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration No. 33-51422),
Exhibit No. 4.1)
4.2 Form of Indenture between the Registrant and Continental Bank,
National Association, as trustee (Incorporated by reference to
the Registrant's Registration Statement on Form S-1
(Registration No.
33-71736), Exhibit No. 4.1)
4.3 Form of Indenture between the Registrant and Bank of America
Illinois as trustee (the "Senior Trustee") (Incorporated by
reference to the Registrant's Current Report on Form 8-K dated
September 28, 1994, Exhibit 2)
4.4 Form of Supplemental Indenture between the Registrant and the
Senior Trustee (Incorporated by reference to the Registrant's
Current Report on Form 8-K dated September 28, 1994, Exhibit 3).
4.5 Indenture dated as of February 28, 1996 between the Registrant
and First Trust of Illinois, National Association, as trustee
(Incorporated by reference to the Registrant's Current Report on
Form 8-K dated March 8, 1996, Exhibit 4.01)
4.6 Supplemental Indenture No. 1 dated as of February 28, 1996
between the Registrant and First Trust of Illinois, National
Association, as trustee (Incorporated by reference to the
Registrant's Current Report on Form 8-K dated March 8, 1996,
Exhibit 4.02)
4.7 Form of Senior Indenture entered into by the Registrant and The
Bank of Nova Scotia Trust Company of New York, as Trustee.
(Incorporated by reference to Registrant's Registration
Statement on Form S-3 (Registration No. 333-03276), Exhibit 4.2)
4.8 Form of Subordinated Indenture entered into by the Registrant
and the Bank of Nova Scotia Trust Company of New York, as
Trustee (Incorporated by reference to Registrant's Registration
Statement on Form S-3 (Registration No. 333-03276), Exhibit 4.3)
10.1 364-Day Competitive Advance and Revolving Credit Agreement dated
as of October 2, 1996 among HFS Incorporated and The Lenders
Referred to Therein and The Chase Manhattan Bank as
Administrative Agent (Incorporated by reference to Registrant's
Current Report on Form 8-K dated October 15, 1996, Exhibit 10.1)
10.2 Five Year Competitive Advance and Revolving Credit Agreement
dated as of October 2, 1996 among HFS Incorporated and The
Lenders Referred to Therein and The Chase Manhattan Bank as
Administrative Agent (Incorporated by reference to Registrant's
Current Report on Form 8-K dated October 15, 1996, Exhibit 10.2)
10.3 License Agreement dated as of September 18, 1989 amended and
restated as of July 15, 1991 between Franchise System Holdings,
Inc. and Ramada Franchise Systems, Inc. (Incorporated by
reference to the Registrant's Registration Statement on Form S-1
(Registration No. 33-51422), Exhibit No. 10.2)
10.4 Restructuring Agreement dated as of July 15, 1991 by and among
New World Development Co., Ltd., Ramada International Hotels &
Resorts, Inc. Ramada Inc., Franchise System Holdings, Inc., the
Registrant and Ramada Franchise Systems, Inc. (Incorporated by
reference to the Registrant's Registration Statement on Form S-1
(Registration No. 33-51422), Exhibit No. 10.3)
- --------------
* Filed herewith
E-3
<PAGE>
Exhibit
No. Description
- ------- ------------
10.5 License Agreement dated as of November 1, 1991 between Franchise
Systems Holdings, Inc. and Ramada Franchise Systems, Inc.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-51422), Exhibit No.
10.4)
10.6 Amendment to License Agreement, Restructuring Agreement and
Certain Other Restructuring Documents dated as of November 1,
1991 by and among New World Development Co., Ltd., Ramada
International Hotels & Resorts, Inc., Ramada Inc., Franchise
System Holdings, Inc., the Registrant and Ramada Franchise
Systems, Inc. (Incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration No. 33-51422),
Exhibit No. 10.5)
10.7 The Registrant's 1992 Incentive Stock Option Plan and Form of
Stock Option Agreement. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1 (Registration
No. 33-51422), Exhibit No. 10.6)
10.8 Form of Amended and Restated Employment Agreement dated as of
June 30, 1996 between the Registrant and Henry R. Silverman.
(Incorporated by reference to Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1996, Exhibit
10.1)
10.8(a)* Amendment dated January 27, 1997 to Amended and Restated
Employment Agreement dated as of June 30, 1996 between the
Registrant and Henry R. Silverman.
10.9 Employment Agreement dated as of January 31, 1992 between the
Registrant and John D. Snodgrass, as amended as of January 31,
1992. (Incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration No. 33-51422),
Exhibit 10.23)
10.9(a) Amendment to Employment Agreement dated as of October 30, 1996
between the Registrant and John D. Snodgrass. (Incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1996, Exhibit 10.1)
- --------------
* Filed herewith
E-4
<PAGE>
Exhibit
No. Description
- ------- ------------
10.10 Employment Agreement dated October 14, 1996 between the
Registrant and Michael P. Monaco. (Incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1996, Exhibit 10.2)
10.11 Employment Agreement dated as of January 15, 1992 between the
Registrant and James E. Buckman. (Incorporated by reference to
the Registrant's Registration Statement on Form S-1
(Registration No. 33-51422), Exhibit 10.24)
10.11(a) Amendment to Employment Agreement between Registrant and James
E. Buckman dated as of October 1, 1994. (Incorporated by
reference to the Registrant's Annual Report on Form 10-K filed
March 31, 1994, Exhibit No. 10.12(a))
10.12 Employment Agreement dated as of October 1, 1991 between the
Registrant and Stephen P. Holmes. (Incorporated by reference to
the Registrant's Registration Statement on Form S-1
(Registration No. 33-51422 Exhibit 10.25)
10.12(a) Amendment to Employment Agreement between Registrant and Stephen
P. Holmes dated as of October 1, 1994. (Incorporated by
reference to the Registrant's Annual Report on Form 10-K filed
March 31, 1994, Exhibit NO. 10.13(a))
10.13 Employment Agreement dated as of January 31, 1992 between the
Registrant and Richard A. Smith. (Incorporated by reference to
the Registrant's Registration Statement on Form S-1
(Registration No. 33-51422), Exhibit 10.27)
10.13(a) Amendment to employment Agreement between Registrant and Richard
A. Smith dated as of October 1, 1994. (Incorporated by reference
to the Registrant's Annual Report on Form 10-K filed March 31,
1994, Exhibit No. 10.14(a))
10.14 Letter Agreement between the Registrant and John Osborne
regarding employment. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1 (Registration
No. 33-70706), Exhibit No. 10.28)
10.15 U.S. Bankruptcy Court for the District of Delaware Order
Incorporating Additional Terms Relating to the Relationship of
Purchaser to Franchisees, dated December 20, 1991. (Incorporated
by reference to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-51422), Exhibit 10.31)
10.16 Conversion Agreement between Chartwell Hotels Associates and HFS
Brands, Inc., dated as of November 17, 1992. (Incorporated by
reference to the Registrant's Registration Statement on Form S-1
(Registration NO. 33-51422 Exhibit 10.33)
10.17 Conversion Agreement, dated as of may 9, 1993, between Chartwell
Hotels II Associated and HFS Brands, Inc. (Incorporated by
reference to the Registrant's Registration Statement on Form S-1
(Registration No. 33-63398) Exhibit No. 10.35)
- --------------
* Filed herewith
E-5
<PAGE>
Exhibit
No. Description
- ------- ------------
10.18 Letter Agreement among the Registrant, Bryanston Group, Inc. and
National Gaming Corp. dated August 18, 1995. (Incorporated by
reference to the Registrant's Registration Statement on Form S-3
(Registration No. 33-96034), Exhibit 10.1)
10.19 Second Amendment of Casino Financing Agreement dated as of
August 11, 1994 between the Registrant and Rainbow Casino
Corporation. (Incorporated by reference tot he Registrant's
Annual Report of Form 10-K filed March 31, 1994, Exhibit No.
10.30(b))
10.20 Marketing Services Agreement dated as of march 15, 1994 between
Rainbow Casino Corporation and HFS Gaming Corp. (Incorporated by
reference to the Registrant's Form 10-K filed March 31, 1994,
Exhibit No. 10.32)
10.21 The Registrant's Amended and Restated 1993 Stock Option Plan
(Incorporated by reference to the Registrant's Registration
Statement on Form S-8 (Registration No. 33-83956), Exhibit 4.1)
10.21(a) First Amendment to the Amended and Restated 1993 Stock Option
Plan dated May 5, 1995. (Incorporated by reference to the
Registrant's Registration Statement on Form S-8 (Registration
No. 33094756), Exhibit 4.1)
10.21(b) Second Amendment to the Amended and Restated 1993 Stock Option
Plan dated January 22, 1996. (Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, Exhibit 10.21(b))
10.21(c) Third Amendment to the Amended and Restated 1993 Stock Option
Plan dated January 22, 1996. (Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, Exhibit 10.21(c))
10.21(d) Fourth Amendment to the Amended and Restated 1993 Stock Option
Plan dated May 20, 1996. (Incorporated by reference to
Registrant's Registration Statement on Form S-8 (Registration
No. 333- 06733), Exhibit 4.5)
10.21(e)* Fifth Amendment to the Amended and Restated 1993 Stock Option
Plan dated July 24, 1996.
10.21(f)* Sixth Amendment to the Amended and Restated 1993 Stock Option
Plan dated September 24, 1996.
10.22 Marketing Services Agreement dated as of April 27, 1994 by and
between HFS Gaming Corp. and Boomtown, Inc. (Incorporated by
reference to the Registrant's Form 10-Q filed May 16, 1994,
Exhibit 10.2)
10.23 Guarantee Letter, dated January 17, 1995, by and among
Hospitality Franchise Systems, Inc., National Gaming Corp. and
Boomtown, Inc. (Incorporated by reference to the Registrant's
Form 8-K filed February 1, 1995, Exhibit 10.1)
10.24 Interim Financing Agreement dated as of November 22, 1994
between the Registrant and National Gaming Corp. (Incorporated
by reference to Exhibit Number 10.1 to the National Gaming Corp.
Current Report on Form 8-K dated December 2, 1994)
- --------------
* Filed herewith
E-6
<PAGE>
Exhibit
No. Description
- ------- ------------
10.25 Form of Amended and Restated Corporate Services Agreement dated
as of January 24, 1996 between the Registrant and National
Lodging Corp. (Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1996, Exhibit 10.3)reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, Exhibit 10.30)
10.26 Form of Second Amended and Restated Financing Agreement dated as
of July 24, 1996 between the Registrant and National Lodging
Corp. (Incorporated by reference to Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1996, Exhibit 10.2)
10.27* HFS Guaranty dated as of August 28, 1996 by the Registrant to
The Chase Manhattan Bank, as Administrative Agent (as defined in
such agreement) for the benefit of National Lodging Corp.
10.28 Tax Sharing and Indemnification Agreement dated as of November
22, 1994 between the Registrant and National Gaming Corp.
(Incorporated by reference to Exhibit Number 10.6 to the
National Gaming Corp. Current Report on Form 8-K dated December
2, 1994)
10.29* Second Amended and Restated Agreement of Limited Partnership of
Hotel Franchising Limited Partnership dated as of November 20,
1996.
10.30 Support Agreement between the Registrant, General Franchise
Systems, Inc. and Hotel Franchising Limited Partnership dated as
of March 31, 1995 (Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1995, Exhibit 10.2)
10.31 Loan and Security Agreement dated as of March 31, 1995 between
the Registrant and Franchise Investors L.L.C. (Incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1995, Exhibit 10.3)
10.32 Guaranty Agreement dated as of March 31, 1995 between the
Registrant and Franchise Investors L.L.C. (Incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1995, Exhibit 10.4)
10.33 Asset Purchase Agreement dated April 21, 1995 among Knights
Lodging, Inc. and Economy Lodging Systems, Inc., as Sellers, and
KI Acquisition Corp., as Buyer (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1995, Exhibit 10.5)
10.34 Agreement dated as of March 31, 1995 between the Registrant and
Motels of America, Inc. (Incorporated by reference to the
Registrant's Current Report on Form 8-K dated April 4, 1995,
Exhibit 10.1)
10.35 Amended and Restated Warrant Agreement dated as of August 11,
1993, as amended and restated as of May 15, 1995 between the
Registrant and Chemical Mellon Shareholder Services
(Incorporated by
- --------------
* Filed herewith
E-7
<PAGE>
Exhibit
No. Description
- ------- ------------
reference to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1995, Exhibit 10.1)
10.36 Indemnification Agreement dated as of July 12, 1995 among the
Registrant, Metropolitan Life Insurance Company and Metropolitan
Tower Corp. (Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1995, Exhibit 10.2)
10.37 Subscription and Stockholders Agreement dated as of August 1,
1995 among C21 Holding Corp., the Registrant, Robert W. Pittman,
Mark S. Mitzner and Mayo S. Stuntz, Jr. (Incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1995, Exhibit 10.3)
10.38 Employment Agreement dated as of August 1, 1995 among Century 21
Real Estate Corporation, the Registrant and Robert W. Pittman
(Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1995,
Exhibit 10.4)
10.39 Employment Agreement dated as of August 1, 1995 among Century 21
Real Estate Corporation, the Registrant and Mark S. Mitzner
(Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1995,
Exhibit 10.5)
10.40 Employment Agreement dated as of August 1, 1995 among Century 21
Real Estate Corporation, the Registrant and Mayo S. Stuntz, Jr.
(Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1995,
Exhibit 10.6)
10.41 Services Agreement dated as of July 12, 1995 between the
Registrant and Metropolitan Life Insurance Company (Incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1995, Exhibit 10.7)
10.42 Assignment Agreement dated as of August 1, 1995 between the
Registrant and C21 Holding Corp. (Incorporated by reference to
the Registrant's Current Report on Form 8-K dated August 16,
1995, Exhibit 10.1)
10.43 Credit Agreement dated as of October 17, 1995 between AMRE,
Inc., as borrower, and the Registrant, as lender (Incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1995, Exhibit 10.1)
10.44 License Agreement among TM Acquisition Corp., Century 21 Real
Estate Corporation and American Remodelling, Inc. dated October
17, 1995 (Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1995, Exhibit 10.2)
10.45 Master License Agreement dated October 17, 1995 between Century
21 Real Estate Corporation and TM Acquisition Corp.
(Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1995,
Exhibit 10.3)
- --------------
* Filed herewith
E-8
<PAGE>
Exhibit
No. Description
- ------- ------------
10.46 Purchasing Services Agreement dated as of November 30, 1995
between the Registrant and Compleat Resources Group, Inc.
(Incorporated by reference to the Registrant's Current Report on
Form 8-K dated December 11, 1995, Exhibit 10.1)
10.46(a) First Amendment to Purchasing Services Agreement dated January
31, 1997 between the Registrant and Compleat Resources Group,
Inc.
10.47 Stock Purchase Agreement dated as of November 30, 1995 between
the Registrant and Insignia Financial Group, Inc. (Incorporated
by reference to the Registrant's Current Report on Form 8-K
dated December 11, 1995, Exhibit 10.2)
10.48 Registration Rights Agreement dated as of November 30, 1995
between the Registrant and Insignia Financial Group, Inc.
(Incorporated by reference to the Registrant's Current Report on
Form 8-K dated December 11, 1995, Exhibit 10.3)
10.49* Credit Agreement dated as of November 20, 1996 among Wingate
Financial LLC, the Lenders named therein and The Chase Manhattan
Bank, as administrative agent and collateral agent, Westdeutsche
Landesbank Girozentrale, as collateral agent, The Bank of Nova
Scotia, as documentation agent and Bankers Trust Company, as
syndication agent.
10.50* Guaranty dated as of November 20, 1996 from the Registrant to
The Chase Manhattan Bank, as agent for the Lenders named in the
Credit Agreement dated as of November 20, 1996.
11* Statement re: Historical Computation of Per Share Earnings
11.1* Statement re: Pro Forma Computation of Per Share Earnings
12* Statement re: Computation of Ratio of Earnings to Fixed Charges
21* Subsidiaries of the Registrant
23.1* Consent of Deloitte & Touche LLP relating to the financial
statements of HFS Incorporated.
23.2* Consent of Deloitte & Touch LLP relating to the financial
statements of Rental Car Operations of Avis, Inc.
23.3* Consent of Price Waterhouse LLP relating to the financial
statements of Avis, Inc.
- --------------
* Filed herewith
E-9
<PAGE>
EXHIBIT 10.8(a)
January 27, 1997
Mr. Henry R. Silverman
HFS Incorporated
712 Fifth Avenue, 41st Floor
New York, New York 10019
Dear Henry:
Reference is hereby made to the agreement by and between HFS
Incorporated (the "Company") and you, as amended and restated as of June 30,
1996 (the "Agreement"). Capitalized terms used in this letter shall have the
meanings assigned to them in the Agreement unless otherwise defined herein.
Pursuant to and in accordance with the amendment provisions set forth in
Section 10 of the Agreement, the Company and you hereby agree that the
Agreement shall be amended, effective January 27, 1997, as follows.
1. Section 4(g)(iv) of the Agreement is here-
by amended and restated to read, in its entire-
ty, as follows:
"(iv) Notwithstanding the foregoing (A) in the event that a
Change-of-Control Transaction shall occur, then the Company
(or a Successor, if applicable) shall pay the Executive a
lump sum amount equal to the value (the "Option Value") of
all of the options that would have been granted to the
Executive under Section 4(g)(i) hereof if the Executive had
remained employed with the Company until December 31, 2000
(the "Remaining Options"), assuming that all such Remaining
Options are granted on the date of the Change-of-Control
Transaction at an exercise price equal to the Fair Market
Value of the Stock as of such date and in accordance with
Section 4(g)(i) and 4(g)(iii) hereof, and further assuming
that all such Remaining Op-
<PAGE>
Mr. Henry R. Silverman
January 27, 1997
Page 2
tions are fully and immediately exercisable and freely
transferable, and (B) Section 4(g)(ii) shall become
inapplicable from and after the date of such
Change-of-Control Transaction. For purposes of this Section
4(g), the Option Value of the Remaining Options (x) shall be
determined by an independent compensation consultant or
investment banker, selected by the Executive and reasonably
acceptable to the Company and (y) shall appropriately
reflect the ten-year term of the Remaining Options, the
volatility of the Stock, current interest rates and such
other factors as the independent compensation consultant or
investment banker deems relevant. Without limiting the
generality of the foregoing, the payment to the Executive of
the Option Value shall be made in cash no later than the day
of the consummation of the Change- of-Control Transaction;
provided, however, that if, in connection with the
applicable Change- of-Control Transaction, the stockholders
of the Company receive consideration substantially in the
form of stock or other equity securities of the Successor or
of any other entity ("Successor Stock"), then the Company
shall have the option to pay the Option Value by delivering
to the Executive, no later than the day of consummation of
the Change-of-Control Transaction, a number of shares of
Successor Stock with an aggregate fair market value (as of
the date of such delivery) equal to the Option Value;
further, provided, that the Company may deliver shares of
Successor Stock in accordance with the foregoing proviso
only if the Successor Stock so delivered is covered by an
effective registration statement, and is freely transferable
by the Executive without any restrictions or limitations.
The Company hereby agrees to take all actions necessary and
appropriate, including obtaining all requisite approvals, if
any, to effectuate the foregoing payment or delivery."
2
<PAGE>
Mr. Henry R. Silverman
January 27, 1997
Page 3
2. Section 6(c) of the Agreement is hereby
deleted in its entirety and of no further force
or effect.
This letter is intended to constitute an amendment to the
Agreement, and, as amended hereby, the Agreement shall remain in full force
and effect. In order to evidence your agreement with the provisions of this
letter, please sign the enclosed copy of this letter and return it to the
undersigned whereupon it will be the binding agreement between the Company and
you.
Very truly yours,
HFS INCORPORATED
By: /s/ James E. Buckman
----------------------------
Title: Executive Vice
President
AGREED TO:
Henry R. Silverman
/s/ Henry R. Silverman
- -----------------------------
3
<PAGE>
EXHIBIT 10.21(e)
FIFTH AMENDMENT TO
HFS INCORPORATED
AMENDED AND RESTATED 1993 STOCK OPTION PLAN
AMENDED AND RESTATED
AS OF JUNE 14, 1994
FURTHER AMENDED AS OF MAY 5, 1995
FURTHER AMENDED AS OF JANUARY 22, 1996
FURTHER AMENDED AS OF JANUARY 22, 1996
FURTHER AMENDED AS OF MAY 20, 1996
The HFS Incorporated Amended and Restated 1993 Stock Option Plan (the
"Restated Plan") is hereby further amended as follows:
1. Amendment. Section 3 of the Restated Plan is hereby
amended by adding a new subsection (c), to read as follows:
"(c) Notwithstanding anything contained herein to
the contrary, the Committee shall be authorized to delegate
to another committee of the Board the authority to grant
options in accordance with Section 3(b)(i) of this Plan,
provided that such other committee shall not have the
authority to make any such grants to Non- Employee Directors
or to Participants who are, as of the date of such grant,
required to report transactions in the Company's securities
under Section 16 of the Exchange Act."
2. Ratification. Except as expressly set forth in this
Fifth Amendment to the Restated Plan, the Restated Plan, as
previously amended, is hereby ratified and confirmed without
modification.
3. Effective Date. The effective date of this Fifth
Amendment to the Restated Plan shall be July 24, 1996.
<PAGE>
EXHIBIT 10.21(F)
SIXTH AMENDMENT TO
HFS INCORPORATED
AMENDED AND RESTATED 1993 STOCK OPTION PLAN
AMENDED AND RESTATED
AS OF JUNE 14, 1994
FURTHER AMENDED AS OF MAY 5, 1995, JANUARY 22, 1996, MAY 20, 1996, JULY
24, 1996 AND SEPTEMBER 24, 1996
The HFS Incorporated Amended and Restated 1993 Stock Option Plan (the
"Restated Plan") is hereby further amended as follows:
1. The proviso to subsection 3(b)(iv) of the Restated Plan is
hereby deleted.
2. The last sentence of the introductory paragraph of Section 7
(as added pursuant to First Amendment to the Restated Plan)
is hereby deleted.
3. Section 7(a) of the Restated Plan is hereby amended and
restated in its entirety to read as follows:
"General. Non-Employee Directors shall receive Nonqualified
Stock Options under the Plan. The exercise price per share of Stock
purchasable under Options granted to Non-Employee Directors shall be
the Fair Market Value of a Share on the date of grant. An Option
granted to a Non-Employee Director shall become FULLY vested and
exercisable upon a Change-of-Control Transaction as defined in
Section 2(f) hereof. The Board or the Committee shall have the
authority, in its sole discretion, to accelerate the exercisability
of any Option or portion thereof granted to a Non-Employee Director.
4. Ratification. Except as expressly set forth in this Sixth
Amendment to the Restated Plan, the Restated Plan is hereby
ratified and confirmed without modification.
5. Effective Date. The effective date of this Sixth Amendment
to the Restated Plan shall be September 24, 1996.
<PAGE>
EXHIBIT 10.27
HFS GUARANTY
GUARANTY, dated as of August 28, 1996 (as amended, modified or
supplemented from time to time, this "Guaranty"), made by HFS INCORPORATED, a
Delaware corporation (the "Guarantor"). Except as otherwise defined herein,
capitalized terms used herein and defined in the Credit Agreement (as defined
below) shall be used herein as therein defined.
WITNESSETH:
WHEREAS, Chartwell Leisure Inc. (the "Company"), Chartwell Canada
Corp. (the "Canadian Borrower" and, together with the Company, the
"Borrowers"), various lenders from time to time party thereto (the "Banks"),
The Bank of Nova Scotia, as Syndication Agent (the "Syndication Agent"), and
The Chase Manhattan Bank, as Administrative Agent (together with any successor
administrative agent, the "Administrative Agent"), have entered into the
Credit Agreement, dated as of August 28, 1996, providing for the making of
Loans and the issuance of, and participation in, Letters of Credit, as
contemplated therein (as used herein, the term "Credit Agreement" means the
Credit Agreement described above in this paragraph, as the same may be
amended, modified, extended, renewed, replaced or supplemented from time to
time, and including any agreement extending the maturity of, or restructuring
all or any portion of the Indebtedness under such agreement or any successor
agreement) (the Banks, the Syndication Agent, the Administrative Agent and the
Collateral Agent are herein called the "Creditors");
WHEREAS, it is a condition to the making of Loans and the issuance of
Letters of Credit under the Credit Agreement that the Guarantor shall have
executed and delivered this Guaranty; and
WHEREAS, the Guarantor will obtain benefits from the incurrence of
Loans by the Borrowers under the Credit Agreement and, accordingly, desires to
execute this Guaranty in order to satisfy the conditions described in the
preceding paragraph;
NOW, THEREFORE, in consideration of the foregoing and other benefits
accruing to the Guarantor, the receipt and sufficiency of which are hereby
acknowledged,
1. The Guarantor irrevocably and unconditionally guarantees to the
Creditors the full and prompt payment when due (whether at the stated
maturity, by acceleration or otherwise) of (x) the principal of and interest
on the Notes issued by, and the Loans made to, the Company under the Credit
Agreement and all reimbursement obligations and Unpaid Drawings with respect
to Letters of Credit issued under the Credit Agreement and (y) all other
obligations (including obligations which, but for the automatic stay under
Section 362(a) of the Bankruptcy Code, would become due) and liabilities owing
by the Company to the Creditors under the Credit Agreement or any other Credit
Document (including, without limitation, obligations of the Canadian Borrower
under the Credit Agreement and the other
<PAGE>
Credit Documents for which the Company is jointly and severally liable,
guarantee obligations, indemnities, Fees and interest thereon), whether now
existing or hereafter incurred under, arising out of or in connection with the
Credit Agreement or any such other Credit Document and the due performance and
compliance by the Company with all of the terms, conditions and agreements
contained in the Credit Documents (all such principal, interest, liabilities
and obligations being herein collectively called the "Guaranteed
Obligations"). The Guarantor and each Creditor understands, agrees and
confirms that (i) at any time when there is any default or failure to pay when
due any Guaranteed Obligations, the Creditors may enforce this Guaranty up to
the full amount of the Guaranteed Obligations (subject to the limits on the
aggregate liability of the Guarantor hereunder, as provided below) against the
Guarantor only after a written demand for payment has been made on the Company
and delivered to the Guarantor and such demand has not been fully complied
with (and all Guaranteed Obligations have not been paid in full) within 10
days after the date such demand for payment was made; provided that no such
demand need be made (and the Guaranteed Obligations hereunder shall
immediately be paid by the Guarantor, subject to the limits on the aggregate
liability of the Guarantor hereunder, as provided below) at any time when a
Default or an Event of Default exists with respect to either Borrower pursuant
to Section 11.05 of the Credit Agreement, a Guarantor Event of Default (or an
event which, with the passage of time, would be a Guarantor Event of Default)
exists with respect to the Guarantor pursuant to Section 14(d) hereof or the
maturity of the Loans has been accelerated pursuant to Section 11 of the
Credit Agreement and (ii) except as provided in the following sentence, the
maximum liability of the Guarantor under this Guaranty at any time shall not
exceed the Maximum Guaranteed Amount as then in effect. As used herein, the
"Maximum Guaranteed Amount" shall mean (w) $75,000,000 less each of (x) the
aggregate amount of cash actually loaned by the Guarantor to the Company after
the Effective Date pursuant to Section 10.04(vii) of the Credit Agreement so
long as all such cash proceeds were actually used to repay Loans pursuant to
the requirements of Section 4.02(a) of the Credit Agreement as a result of a
reduction to the Total-Revolving Loan Commitment pursuant to Sections 3.03(e)
and/or (f) of the Credit Agreement, (y) the aggregate amount of cash actually
invested (in return for HFS Redeemable Capital Stock) by the Guarantor in the
Company after the Effective Date pursuant to Section 10.04(viii) of the Credit
Agreement so long as all such cash proceeds were actually used to repay Loans
pursuant to the requirements of Section 4.02(a) of the Credit Agreement as a
result of a reduction to the Total Revolving Loan Commitment pursuant to
Sections 3.03(e) and/or (f) of the Credit Agreement and (z) any amounts
actually demanded by the Creditors hereunder (or payable upon a Default or an
Event of Default with respect to either Borrower as described in Section 11.05
of the Credit Agreement, a Guarantor Event of Default (or an event which, with
the passage of time, would be a Guarantor Event of Default) with respect to
the Guarantor pursuant to Section 14(d) hereof or upon an acceleration of
Loans under the Credit Agreement) and paid (subject to the provisions of
Section 21 hereof) to the Creditors pursuant to the provisions of this
Guaranty (excluding amounts payable in accordance with the following
sentence). In addition, and notwithstanding anything to the contrary contained
above in this Guaranty, (x) from and after the date any demand is made by the
Creditors for the payment of any amount hereunder or, if sooner, from and
after the date of the occurrence of any Default or Event of Default under
Section 11.05 of the Credit Agreement with respect to either Borrower, a
Guarantor Event of Default (or any event which, with the passage of time,
would be a
<PAGE>
Guarantor Event of Default) with respect to the Guarantor pursuant to Section
14(d) hereof or any acceleration of Loans pursuant to Section 11 of the Credit
Agreement, the Guarantor shall owe to the Creditors, in addition to the
Maximum Guaranteed Amount, interest on any amounts not immediately paid
hereunder at a rate per annum equal to the rate per annum applicable to past
due amounts owing pursuant to the Credit Agreement (as in effect on the date
hereof) and (y) any amounts owing pursuant to Section 15 of this Guaranty
shall be independently owing by the Guarantor, with any amounts paid pursuant
to clauses (x) and (y) of this sentence not to be counted in determining (and
same shall not reduce) the Maximum Guaranteed Amount. The Guarantor
understands, agrees and confirms that the Creditors may, subject to the two
preceding sentences, enforce this Guaranty up to the full amount of the
Guaranteed Obligations against the Guarantor without proceeding against either
Borrower, against any security for the Guaranteed Obligations, or against any
other guarantor under any other guaranty covering the Guaranteed Obligations.
This Guaranty shall constitute a guaranty of payment and performance, and not
of collection.
2. Additionally, but subject to the limitations on the aggregate
amount guaranteed as provided in preceding Section 1, the Guarantor
unconditionally and irrevocably guarantees the payment of any and all
Guaranteed Obligations to the Creditors, whether or not due or payable by the
Borrowers, upon the occurrence in respect of either Borrower of a Default or
an Event of Default specified in Section 11.05 of the Credit Agreement or the
occurrence in respect of the Guarantor of any of the events specified in
Section 14(d) of this Guaranty which constitute a Guarantor Event of Default
(or would, with the passage of time, constitute a Guarantor Event of Default),
and unconditionally and irrevocably promises to pay such Guaranteed
Obligations to the Creditors, or order, on demand, in lawful money of the
United States.
3. (a) The liability of the Guarantor hereunder is exclusive and
independent of any security for or other guaranty of the Guaranteed
Obligations whether executed by the Guarantor, any other guarantor or by any
other party, and the liability of the Guarantor hereunder shall not be
affected or impaired by any circumstance or occurrence whatsoever, including,
without limitation: (i) any direction as to application of payment by either
Borrower or by any other party, (ii) any other continuing or other guaranty,
undertaking or maximum liability of a guarantor or of any other party as to
the indebtedness of either Borrower, (iii) any payment on or in reduction of
any such other guaranty or undertaking except to the extent that any such
payment or reduction results in the actual permanent reduction of the
Guaranteed Obligations, (iv) any dissolution, termination or increase,
decrease or change in personnel by either Borrower, (v) any payment made to
the Administrative Agent or the other Creditors on the indebtedness which the
Administrative Agent or such other Creditor repays either Borrower pursuant to
court order in any bankruptcy, reorganization, arrangement, moratorium or
other debtor relief proceeding, and the Guarantor waives any right to the
deferral or modification of its obligations hereunder by reason of any such
proceeding, (vi) any action or inaction by the Creditors as contemplated in
Section 6 hereof, or (vii) any invalidity, irregularity or unenforceability of
all or part of the Guaranteed Obligations or of any security therefor.
(b) Without limiting the generality of the foregoing, the Guarantor
hereby, agrees that
<PAGE>
notwithstanding anything to the contrary contained in the Financing Agreement
or any other HFS Agreement or any other agreement, no occurrence of events
(including a breach by the Company of its obligations under the Financing
Agreement or respect to any loan made by the Guarantor to either Borrower)
shall have any effect whatsoever on this Guaranty, and so long as the Bank
Termination Date has not occurred in no event shall either Borrower be
required to deliver to the Guarantor (and the Guarantor shall not accept) any
cash that either Borrower might otherwise be required to deliver to the
Guarantor pursuant to Section 2.1(b) of the Financing Agreement.
4. The obligations of the Guarantor hereunder are independent of the
obligations of any other guarantor or the Borrowers, and a separate action or
actions may be brought and prosecuted against the Guarantor whether or not
action is brought against any other guarantor or either Borrower and whether
or not any other guarantor or either Borrower be joined in any such action or
actions. The Guarantor waives, to the fullest extent permitted by law, the
benefit of any statute of limitations affecting its liability hereunder or the
enforcement thereof. Any payment by either Borrower or other circumstance
which operates to toll any statute of limitations as to either Borrower shall
operate to toll the statute of limitations as to the Guarantor.
5. The Guarantor waives all presentments, demands for performance
protests and notices, including, without limitation, notices of
nonperformance, notices of protest, notices of dishonor, notices of acceptance
of this Guaranty, and notices of the existence, creation or incurring of new
or additional Guaranteed Obligations. The Guarantor assumes all responsibility
for being and keeping itself informed of either Borrower's financial condition
and assets, and of all other circumstances bearing upon the risk of nonpayment
of the Guaranteed Obligations and the nature, scope and extent of the risks
which the Guarantor assumes and incurs hereunder, and agrees that the
Creditors shall have no duty to advise the Guarantor of information known to
them regarding such circumstances or risks.
6. Any Creditor may at any time and from time to time without the
consent of, or notice to the Guarantor, without incurring responsibility to
the Guarantor, without impairing or releasing the obligations of the Guarantor
hereunder, upon or without any terms or conditions and in whole or in part:
(a) change the manner, place or terms of payment of, and/or change or
extend the time of payment of, renew or alter, any of the Guaranteed
Obligations (including any increase or decrease in the rate of interest
thereon), any security therefor, or any liability incurred directly or
indirectly in respect thereof, and the guaranty herein made shall apply to the
Guaranteed Obligations as so changed, extended, renewed or altered;
(b) take and hold security for the payment of the Guaranteed
Obligations and sell, exchange, release, surrender, realize upon or otherwise
deal with in any manner and in any order any property by whomsoever at any
time pledged or mortgaged to secure, or howsoever securing, the Guaranteed
Obligations or any liabilities (including any of those hereunder) incurred
directly or indirectly in respect thereof or hereof, and/or any offset there
against;
<PAGE>
(c) exercise or refrain from exercising any rights against the
Borrowers, any other Credit Party or any other Person or otherwise act or
refrain from acting;
(d) release or substitute any one or more endorsers, guarantors,
either Borrower or other obligors;
(e) settle or compromise any of the Guaranteed Obligations, any
security therefor or any liability (including any of those hereunder) incurred
directly or indirectly in respect thereof or hereof, and may subordinate the
payment of all or any part thereof to the payment of any liability (whether
due or not) of either Borrower to creditors of such Borrower other than the
Creditors;
(f) apply any sums by whomsoever paid or howsoever realized to any
liability or liabilities of either Borrower to the Creditors regardless of
what liabilities of such Borrower remain unpaid;
(g) consent to or waive any breach of, or any act, omission or
default under, any of the Credit Documents or any of the instruments or
agreements referred to therein, or otherwise amend, modify or supplement the
Credit Documents or any of such other instruments or agreements;
(h) act or fail to act in any manner referred to in this Guaranty
which may deprive the Guarantor of its right to subrogation against either
Borrower to recover full indemnity for any payments made pursuant to this
Guaranty; and/or
(i) take any other action which would, under otherwise applicable
principles of common law, give rise to a legal or equitable discharge of the
Guarantor from its liabilities under this Guaranty.
7. No invalidity, irregularity or unenforceability of all or any part
of the Guaranteed Obligations or of any security therefor shall affect, impair
or be a defense to this Guaranty, and this Guaranty shall be primary, absolute
and unconditional notwithstanding the occurrence of any event or the existence
of any other circumstances which might constitute a legal or equitable
discharge of a surety or guarantor except payment in full of the Guaranteed
Obligations.
8. This Guaranty is a continuing one and all liabilities to which it
applies or may apply under the terms hereof shall be conclusively presumed to
have been created in reliance hereon. No failure or delay on the part of any
Creditor in exercising any right, power or privilege hereunder shall operate
as a waiver thereof; nor shall any single or partial exercise of any right,
power or privilege hereunder preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The rights and remedies
herein expressly specified are cumulative and not exclusive of any rights or
remedies which any Creditor would otherwise have. No notice to or demand on
the Guarantor in any case shall entitle the Guarantor to any other further
notice or demand in similar or other circumstances or constitute a waiver of
the rights of any Creditor to any other or further action in any circumstances
without notice or demand. It is not necessary for any Creditor to inquire into
<PAGE>
the capacity or powers of the Borrower or the officers, directors, partners or
agents acting or purporting to act on its behalf, and any indebtedness made or
created in reliance upon the professed exercise of such powers shall be
guaranteed hereunder.
9. The Guarantor hereby agrees with the Creditors that it will not
exercise any right of subrogation (whether contractual, under Section 509 of
the Bankruptcy Code, or otherwise) which it may at any time otherwise have
either as a result of payments made by it under this Guaranty or otherwise,
until all Guaranteed Obligations (for purposes of this Section 9, determined
without regard to any limitations on the aggregate amount guaranteed as
provided in Section 1 hereof) have been paid in full in cash.
10. The Guarantor waives any right to require the Creditors to: (i)
proceed against the Borrowers, any other guarantor, or any other party; or
(ii) proceed against or exhaust any security held from the Borrowers, any
other guarantor or any other party; or (iii) pursue any other remedy in the
Creditors' power whatsoever. The Guarantor waives any defense based on or
arising out of any defense of either Borrower, any other guarantor or any
other party other than payment in full of the Guaranteed Obligations,
including, without limitation, any defense based on or arising out of the
disability of either Borrower, any other guarantor or any other party, or the
unenforceability of the Guaranteed Obligations or any part thereof from any
cause, or the cessation from any cause of the liability of either Borrower
other than payment in full of the Guaranteed Obligations. The Creditors may,
at their election, foreclose on any security held by the Administrative Agent,
the Collateral Agent, the Syndication Agent or the other Creditors by one or
more judicial or nonjudicial sales, or exercise any other right or remedy the
Creditors may have against either Borrower or any other party, or any
security, without affecting or impairing in any way the liability of the
Guarantor hereunder except to the extent the Guaranteed Obligations have been
paid. The Guarantor waives any defense arising out of any such election by the
Creditors, even though such election operates to impair or extinguish any
right of reimbursement or subrogation or other right or remedy of the
Guarantor against either Borrower or any other party or any security.
11. The Creditors agree that this Guaranty may be enforced only by
the action of the Administrative Agent or the Collateral Agent, in each case
acting upon the instructions of the Required Banks and that no other Creditors
shall have any right individually to seek to enforce or to enforce this
Guaranty, it being understood and agreed that such rights and remedies may be
exercised by the Administrative Agent or the Collateral Agent for the benefit
of the Creditors upon the terms of this Guaranty.
12. In order to induce the Creditors to enter into the Credit
Agreement and to make the Loans and issue or participate in Letters of Credit
pursuant to the Credit Agreement, the Guarantor makes the following
representations, warranties and agreements:
(a) Corporate Existence and Power. The Guarantor and its Subsidiaries
have been duly organized and are validly existing in good standing under the
laws of their respective jurisdictions of incorporation and are in good
standing or have applied for authority to operate as a foreign corporation in
all jurisdictions where the nature of their properties or business so requires
it and where a failure to be in good standing as a foreign corporation
<PAGE>
would have a material adverse effect on the business, assets or condition,
financial or otherwise, of the Guarantor and its Subsidiaries taken as a
whole. The Guarantor and each of its Subsidiaries have the corporate power to
own their respective properties and carry on their respective businesses as
now being conducted, and in the case of the Guarantor, to execute, deliver and
perform its obligations under this Guaranty and the other Credit Documents to
which the Guarantor is a party.
(b) Corporate Authority and No Violation. The execution, delivery and
performance by the Guarantor of this Guaranty and the other Credit Documents
to which it is a party (a) have been duly authorized by all necessary
corporate action on the part of the Guarantor, (b) will not violate any
provision of any Applicable Law (as defined in the HFS Credit Agreement (as
hereinafter defined) as in effect on the Effective Date) (including any laws
related to franchising) applicable to the Guarantor or any of its Subsidiaries
or any of their respective properties or assets, (c) will not violate any
provision of the Certificate of Incorporation or By-Laws of the Guarantor or
any of its Subsidiaries, or any indenture, any agreement for borrowed money,
any bond, note or other similar instrument or any other material agreement to
which the Guarantor or any of its Subsidiaries is a party or by which the
Guarantor or any of its Subsidiaries or any of their respective properties or
assets are bound, (d) will not be in conflict with, result in a breach of, or
constitute (with due notice or lapse of time or both) a default under, any
material indenture, agreement, bond, note or instrument and (e) will not
result in the creation or imposition of any Lien upon any property or assets
of the Guarantor or any of its Subsidiaries other than pursuant to this
Guaranty and the other Credit Documents to which the Guarantor is a party.
(c) Governmental and Other Approval and Consents. No action, consent
or approval of, or registration or filing with, or any other action by, any
governmental agency, bureau, commission or court is required in connection
with the execution, delivery and performance by the Guarantor of this Guaranty
and the other Credit Documents to which the Guarantor is a party.
(d) Litigation. There are no lawsuits or other proceedings pending
(including, but not limited to, matters relating to environmental liability),
or, to the knowledge of the Guarantor, threatened, against or affecting the
Guarantor or any of its Subsidiaries or any of their respective properties, by
or before any Governmental Authority (as defined in the ~S Credit Agreement as
in effect on the Effective Date) or arbitrator, which could reasonably be
expected to have a material adverse effect on the financial condition or the
business of the Guarantor and its Subsidiaries taken as a whole. Neither the
Guarantor nor any of its Subsidiaries is in default with respect to any order,
writ, injunction, decree, rule or regulation of any Governmental Authority,
which default would have a material adverse effect upon the financial
condition or the business of the Guarantor and its Subsidiaries taken as a
whole.
(e) Financial Statements; Financial Condition; Undisclosed
Liabilities.
(i) The consolidated statements of financial condition of
the Guarantor and its consolidated Subsidiaries at December 31, 1994 and
December 31, 1995 and the related
<PAGE>
consolidated statements of income, cash flow and shareholders' equity of the
Guarantor and its consolidated Subsidiaries for the fiscal year ended on such
date, as the case may be, and set forth in the Guarantor's Forms 10-K for such
periods and furnished to the Creditors prior to the Effective Date, present
fairly the consolidated financial condition of the Guarantor and its
consolidated Subsidiaries at the date of such consolidated statements of
financial condition and the consolidated results of the operations of the
Guarantor and its consolidated Subsidiaries for the respective fiscal year.
The unaudited consolidated statement of financial condition of the Guarantor
and its consolidated Subsidiaries at June 30, 1996 and the related unaudited
consolidated statements of income, cash flow and shareholders' equity of the
Guarantor and its consolidated Subsidiaries for the six-month period ended on
such date, and set forth in the Guarantor's Form 10-Q for such period and
furnished to the Creditors prior to the Effective Date present fairly the
consolidated financial condition of the Guarantor and its consolidated
Subsidiaries at the date of such consolidated statement of financial condition
and the consolidated results of the operations of the Guarantor and its
consolidated Subsidiaries for such six-month period. All such consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles consistently applied, subject, in the case of the
consolidated financial statements at June 30, 1996, to normal year end audit
adjustments. Since December 31, 1995, there has been no material adverse
change in the business, operations, property, assets, liabilities, condition
(financial or otherwise) or prospects of the Guarantor or of the Guarantor and
its Subsidiaries taken as a whole.
(ii) On and as of the Initial Borrowing Date, after giving
effect to all Indebtedness (including the Revolving Loans) being incurred or
assumed and Liens created in connection therewith, (x) the sum of the assets,
at a fair valuation, of the Guarantor will exceed its debts, (y) the Guarantor
has not incurred and does not intend to incur, and does not believe that it
will incur, debts beyond its ability to pay such debts as such debts mature
and (z) the Guarantor has sufficient capital with which to conduct its
business. For purposes of this clause (e)(ii) "debt" means any liability on a
claim, and "claim" means (i) right to payment whether or not such a right is
reduced to judgment, liquidated, unliquidated. fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured or unsecured or
(ii) right to an equitable remedy for breach of performance if such breach
gives rise to a payment, whether or not such right to an equitable remedy is
reduced to judgment, fixed, contingent, matured, unmatured, disputed,
undisputed, secured or unsecured.
(f) Taxes. The Guarantor and each of its Subsidiaries have filed or
caused to be filed all federal, state and local tax returns which are required
to be filed, and have paid or have caused to be paid all taxes as shown on
said returns or on any assessment received by them in writing, to the extent
that such taxes have become due.
(g) Investment Company Act. The Guarantor is not an "investment
company" or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
(h) Public Utility Holding Company Act. Neither the Guarantor nor any
of its Subsidiaries is a "holding company," or a "subsidiary company" of a
"holding company," or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company"
<PAGE>
within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
(i) HFS Credit Agreement. The Guarantor has delivered to the
Administrative Agent and the other Creditors, true and correct copies of the
HFS Credit Agreement as in effect on the Effective Date.
(j) Incorporation by Reference. The Guarantor hereby makes each of
the representations and warranties contained in Sections 3.06 through 3.09,
inclusive, 3.15, 3.16, 3.19 and 3.20 of the HFS Credit Agreement, which
Sections, together with all definitions in the HFS Credit Agreement applicable
to such Sections, are hereby incorporated by reference as if set forth herein
in their entirety, provided that, all references to "Borrower" therein shall
mean and be a reference to "the Guarantor" herein. No amendment, modification
or supplement to such representations or warranties or definitions made to the
HFS Credit Agreement shall be effective to amend such representations and
warranties or definitions as incorporated by reference herein except as
otherwise provided in Section 13(b) of this Guaranty.
13. The Guarantor covenants and agrees that on and after the Initial
Borrowing Date and until the Total Revolving Loan Commitment has terminated
and the Loans and Notes, together with interest, Fees and all Guaranteed
Obligations are paid in full:
(a) Preservation of Existence: Compliance with Statutes. etc. The
Guarantor will preserve and maintain its corporate existence and its material
rights, licenses, permits, franchises and privileges and comply, and cause
each of its Subsidiaries to comply, with all applicable statutes, regulations
and orders of, and all applicable restrictions imposed by, all governmental
bodies, domestic or foreign, in respect of the conduct of its business and the
ownership of its property (including applicable statutes, regulations, orders
and restrictions relating to environmental standards and controls), except
such noncompliances as could not, individually or in the aggregate, reasonably
be expected to have a material adverse effect on the business, operations,
property, assets, condition (financial or otherwise) or prospects of the
Guarantor or of the Guarantor and its Subsidiaries taken as a whole.
(b) Incorporation by Reference. The Guarantor will comply with each
of the covenants contained in Sections 5 and 6 of the HFS Credit Agreement,
which Sections, together with all definitions in the HFS Credit Agreement
applicable to such Sections, are hereby incorporated by reference as if set
forth herein in their entirety, provided that:
(i) all references to "Borrower" therein shall mean and be a
reference to the Guarantor" herein;
(ii) all references to "Lender" therein shall mean and be a reference
to "Creditors" herein;
(iii) all references to the "Agent" or "Administrative Agent" therein
shall mean and be a reference to "Administrative Agent" herein;
<PAGE>
(iv) all references to the "Required Lenders" therein shall mean and
be a reference to "Required Banks" herein;
(v) all references to "this Agreement", "herein", "hereunder" and
words of similar import therein shall mean and be a reference to this
Guaranty;
(vi) all references to "Exhibit D hereto" therein shall mean and be a
reference to "Exhibit D to the HFS Credit Agreement" herein;
(vii) all references to "Schedule 3.17 hereto" therein shall mean and
be a reference to "Schedule 3.17 to the HFS Credit Agreement" herein;
(viii) all references to "Schedule 6.05 hereto" therein shall mean
and be a reference to "Schedule 6.05 to the HFS Credit Agreement"
herein;
(ix) Section 6.01 of the HFS Credit Agreement as incorporated herein
by reference shall include Indebtedness created under the HFS Credit
Agreement or any refinancing thereof as permitted Indebtedness
hereunder, so long as the aggregate amount thereof is not increased
above the aggregate commitments under the ~S Credit Agreement as in
effect on the Effective Date;
(x) Section 6.05 of the HFS Credit Agreement as incorporated herein
by reference shall (a) be deemed to have the phrase "unless all
obligations of HFS under this Guaranty shall be secured equally and
ratably with the other obligations secured by any such Lien on terms
satisfactory to the Agent and the Required Banks," inserted in the
first line thereof immediately after the phrase "Lien on its
property," appearing therein and (b) not pursuant to clause (e)
thereof, permit any Liens securing the HFS Credit Agreement;
(xi) Section 6.12 of the HFS Credit Agreement as incorporated herein
by reference shall include the HFS Credit Agreement and any
refinancing thereof (provided that any such refinancing shall not
prohibit a negative pledge pursuant to this Guaranty);
(xii) all references to "Fundamental Documents" therein shall mean
and be a reference to "Credit Documents" herein; and
(xiii) Paragraph (a) of Section 6.12 of the HFS Credit Agreement
shall be deemed modified by inserting at the end thereof "provided,
that the obligations of HFS under this Guaranty and the other Credit
Documents shall be secured equally and ratably with the obligations
of HFS under the HFS Credit Agreement".
No amendment, modification or supplement to such covenants or definitions made
to the HFS Credit Agreement shall be effective to amend such covenants or
definitions as incorporated by reference herein without the prior consent of
the Administrative Agent and the Syndication Agent; provided, however, that
the Administrative Agent and the Syndication Agent will consider in good faith
suggested amendments, modifications or supplements to
<PAGE>
such covenants or definitions to the extent that such amendment, modification
or supplement is the result of a refinancing of the HFS Credit Agreement;
provided further, that if at the time of any such amendment, modification or
supplement in connection with a refinancing of the HFS Credit Agreement HFS'
long-term senior unsecured debt credit rating is at least BBB by S&P, then the
provisions of Section 12(i) hereof and this Section 13(b) will be deemed
modified (without the consent of any Person) to the extent necessary to
incorporate by reference the respective amendment, modification or supplement
to the HFS Credit Agreement. In connection with any amendment, modification or
supplement to the HFS Credit Agreement which will be incorporated herein by
reference, the Banks hereby authorize the Administrative Agent and the
Syndication Agent to enter into an appropriate amendment to this Guaranty to
reflect such amendment, modification or supplement.
As used in this Guaranty, the term "HFS Credit Agreement" shall mean
the Competitive Advance and Revolving Credit Agreement, dated as of December
16, 1993 among HFS, the lenders named therein and The Chase Manhattan Bank (as
successor to Chemical Bank), as Administrative Agent, as in effect on the
Effective Date and as amended, modified, supplemented or refinanced from time
to time in accordance with the provisions of this Guaranty.
14. The occurrence of any of the following specified events shall
constitute a "Guarantor Event of Default" hereunder:
(a) Payments. The Guarantor shall fail to pay when due any amounts
owing by it hereunder, or
(b) Representations, etc. Any representation, warranty or statement
made by the Guarantor herein or in any certificate delivered pursuant hereto
shall prove to be untrue or inaccurate in any material respect on the date as
of which made or' deemed made; or
(c) Covenant. Default shall be made by the Guarantor in the due
observance or performance of any other covenant, condition or agreement to be
observed or performed pursuant to the terms of this Guaranty, the HFS Credit
Agreement or any other Fundamental Document (as defined in the HFS Credit
Agreement) and such default shall continue unremedied for thirty (30) days
after the Guarantor obtains knowledge of such occurrence; or
(d) Bankruptcy, etc. The Guarantor or any of its Subsidiaries shall
commence a voluntary case concerning itself under the "Bankruptcy Code"; or an
involuntary case is commenced against the Guarantor or any of its Subsidiaries
and the petition is not controverted within 10 days, or is not dismissed
within 60 days, after commencement of the case; or a custodian (as defined in
the Bankruptcy Code) is appointed for, or takes charge of, all or
substantially all of the property of the Guarantor or any of its Subsidiaries,
or the Guarantor or any of its Subsidiaries commences any other proceeding
under any reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
whether now or hereafter in effect relating to the Guarantor or any of its
Subsidiaries, or there is commenced against the Guarantor or any of its
Subsidiaries any such proceeding which remains undismissed for a period of 60
days,
<PAGE>
or the Guarantor or any of its Subsidiaries is adjudicated insolvent or
bankrupt; or any order or relief or other order approving any such case or
proceeding is entered; or the Guarantor or any of its Subsidiaries suffers any
appointment of any custodian or the like for it or any substantial part of its
property to continue undischarged or unstayed for a period of 60 days; or the
Guarantor or any of its Subsidiaries makes a general assignment for the
benefit of creditors; or any partnership and/or corporate action is taken by
the Guarantor or any of its Subsidiaries for the purpose of effecting any of
the foregoing; or
(e) Judgments. One or more judgments or decrees shall be entered
against the Guarantor or any of its Subsidiaries involving in the aggregate
for the Guarantor and its Subsidiaries a liability (not paid or fully covered
by a reputable and solvent insurance company) and such judgments and decrees
either shall be final and non-appealable or shall not be vacated, discharged
or stayed or bonded pending appeal for any period of 30 consecutive days, and
the aggregate amount of all such judgments exceeds $1,000,000; or
(f) [INTENTIONALLY OMITTED]
15. The Guarantor hereby agrees to pay all out-of-pocket costs and
expenses of the Administrative Agent and the Syndication Agent in connection
with any amendment, waiver or consent relating hereto, and of each Creditor in
connection with the enforcement of this Guaranty (including in each case,
without limitation, the fees and disbursements of counsel employed by any
Agent or any of the other Creditors).
16. This Guaranty shall be binding upon the Guarantor and its
successors and assigns and shall inure to the benefit of the Creditors and
their successors and assigns.
17. Neither this Guaranty nor any provision hereof may be changed,
waived, discharged or terminated except with the written consent of the
Guarantor and with the written consent of the Required Banks (or to the extent
required by Section 14.12 of the Credit Agreement, with the written consent of
each Bank).
18. The Guarantor acknowledges that an executed (or conformed) copy
of each of the Credit Documents in existence on the date hereof has been made
available to the Guarantor and the Guarantor is familiar with the contents
thereof.
19. In addition to any rights now or hereafter granted under
applicable law (including, without limitation, Section 151 of the New York
Debtor and Creditor Law) and not by way of limitation of any such rights, upon
the occurrence and during the continuance of any Event of Default, each
Creditor is hereby authorized at any time or from time to time, without notice
to the Guarantor or to any other Person (provided that at least 10 days' prior
written notice shall have been given to the Company and the Guarantor of the
respective non-payment of Guaranteed Obligations, unless a Default or an Event
of Default exists with respect to either Borrower pursuant to Section 11.05 of
the Credit Agreement or a Guarantor Event of Default (or an event which, with
the passage of time, would be a Guarantor Event of Default) exists with
respect to the Guarantor pursuant to Section 14(d) hereof or the maturity of
the Loans has been accelerated pursuant to Section 11 of the Credit
Agreement),
<PAGE>
any such notice (except to the extent required pursuant to the immediately
preceding parenthetical) being expressly waived, to set off and to appropriate
and apply any and all deposits (general or special) and any other indebtedness
at any time held or owing by such Creditor to or for the credit or the account
of the Guarantor, against and on account of the obligations and liabilities of
the Guarantor to such Creditor under this Guaranty, irrespective of whether or
not such Creditor shall have made any demand hereunder and although said
obligations, liabilities, deposits or claims, or any of them, shall be
contingent or unmatured.
20. All notices, requests, demands or other communications pursuant
hereto shall be deemed to have been duly given or made when delivered to the
Person to which such notice, request, demand or other communication is
required or permitted to be given or made under this Guaranty, addressed to
such party at (i) in the case of any Creditor, as provided in the Credit
Agreement and (ii) in the case of the Guarantor, at its address set forth
opposite its signature below.
21. If claim is ever made upon any Creditor for repayment or recovery
of any amount or amounts received in payment or on account of any of the
Guaranteed Obligations and any of the aforesaid payees repays all or part of
said amount by reason of (i) any judgment, decree or order of any court or
administrative body having jurisdiction over such payee or any of its property
or (ii) any settlement or compromise of any such claim effected by such payee
with any such claimant (including either Borrower), then and in such event the
Guarantor agrees that any such judgment, decree, order, settlement or
compromise shall be binding upon the Guarantor, notwithstanding any revocation
hereof or other instrument evidencing any liability of either Borrower, and
the Guarantor shall be and remain liable to the aforesaid payees hereunder for
the amount so repaid or recovered to the same extent as if such amount had
never originally been received by any such payee.
22. (A) THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF THE CREDITORS
AND THE GUARANTOR SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAW OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to
this Guaranty or any other Credit Document to which the Guarantor is a party
may be brought in the courts of the State of New York or of the United States
of America for the Southern District of New York, and, by execution and
delivery of this Guaranty, the Guarantor hereby irrevocably accepts for itself
and in respect of its property, generally and unconditionally, the
jurisdiction of the aforesaid courts. The Guarantor hereby further irrevocably
waives any claim that any such courts lack jurisdiction over the Guarantor,
and agrees not to plead or claim, in any legal action or proceeding with
respect to this Guaranty or any other Credit Document to which the Guarantor
is a party brought in any of the aforesaid courts, that any such court lacks
jurisdiction over the Guarantor. The Guarantor further irrevocably consents to
the service of process out of any of the aforementioned courts in any such
action or proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to the Guarantor at its address set forth
opposite its signature below, such service to become effective 30 days after
such mailing. The Guarantor hereby irrevocably waives any objection to such
service of process and further irrevocably waives and agrees not to plead or
claim in any action or proceeding commenced hereunder that service of process
was in any way invalid or ineffective. Nothing
<PAGE>
herein shall affect the right of any of the Creditors to serve process in any
other manner permitted by law or to commence legal proceedings or otherwise
proceed against the Guarantor in any other jurisdiction.
(B) The Guarantor hereby irrevocably waives any objection which it
may now or hereafter have to the laying of venue of any of the aforesaid
actions or proceedings arising out of or in connection with this Guaranty
brought in the courts referred to in clause (a) above and hereby further
irrevocably waives and agrees not to plead or claim in any such court that
such action or proceeding brought in any such court has been brought in an
inconvenient form
(C) THE GUARANTOR AND EACH CREDITOR (BY ITS ACCEPTANCE OF THE
BENEFITS OF THIS GUARANTY) HEREBY IRREVOCABLY WAIVES ALL RIGHTS TO A TRIAL BY
JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO
THIS GUARANTY, THE OTHER CREDIT DOCUMENTS TO WHICH SUCH GUARANTOR IS A PARTY
OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
23. This Guaranty may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which when
so executed and delivered shall be an original, but all of which shall
together constitute one and the same instrument. A set of counterparts
executed by all the parties hereto shall be lodged with the Guarantor and the
Administrative Agent.
24. All payments made by the Guarantor hereunder will be made without
setoff, counterclaim, deduction or other defense.
25. Notwithstanding anything to the contrary contained above in this
Guaranty, it is understood and agreed by the parties hereto that, to the
extent (and only to the extent) expressly provided in Section 2.06 of the HFS
Subordination Agreement, certain amendments to the Credit Agreement shall, to
the extent provided in said Section 2.06, require the consent of the
Guarantor.
26. Payments by the Guarantor under this Guaranty shall be made in
Dollars, notwithstanding the Currency in which the Guaranteed Obligations are
denominated. To the extent that any such payment in Dollars is to be applied
to the payment of a Guaranteed Obligation denominated in Canadian Dollars,
Dollars paid under this Guaranty shall be converted by the Administrative
Agent into Canadian Dollars in accordance with the Credit Agreement.
<PAGE>
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be
executed and delivered as of the date first above written.
Address: HFS INCORPORATED
339 Jefferson Road
Parsippany, NJ 07054
Telephone No.: (201) 428-9700 By: /s/ James E. Buckman
Facsimile No.: (201) 428-5269 ---------------------------
Attention: James E. Buckman Name: James E. Buckman
Title: Executive Vice President
and General Counsel
Accepted and Agreed to:
THE CHASE MANHATTAN BANK,
as Administrative Agent and as
Collateral Agent
By: /s/ William J. Caggiano
-------------------------------
Name: William J. Caggiano
Title: Managing Director
<PAGE>
EXHIBIT 10.29
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
HOTEL FRANCHISING LIMITED PARTNERSHIP
A Delaware Limited Partnership
Dated as of
November 20, 1996
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS; ACCOUNTING TERMS..................................... 1
1.1. Definitions............................................. 1
1.2. Number; Gender.......................................... 22
1.3. Accounting Terms and Determinations..................... 22
2. ORGANIZATION...................................................... 22
2.1. Continuation of Limited Partnership. .................. 22
2.2. Name ............................................... 22
2.3. Purpose ............................................... 23
2.4. Places of Business...................................... 23
2.5. Registered Office and Agent............................. 23
2.6. Fiscal Year............................................. 23
2.7. Powers ............................................... 23
2.8. Limitations on Certain Activities....................... 23
3. PARTNERS.......................................................... 25
3.1. General and Limited Partner............................. 25
3.2. Liability of Related Persons............................ 26
3.3. Limited Liability of Limited Partners................... 27
3.4. Partnership Property; Partnership Interest.............. 27
4. CAPITAL CONTRIBUTIONS, CAPITAL ACCOUNTS........................... 27
4.1. Capital Contributions.................................... 28
4.2 Capital Accounts......................................... 31
4.3 Allocations of Net Income and Net
Losses......................................... 32
4.4 Special Allocations............................ 33
4.5 Binding Effect of Allocations.................. 36
4.6 Tax Allocations: Code Section 704(c).......... 36
4.7 Transfer or Change in Partnership
Interest....................................... 36
4.8 Characterization of Additional Capital
Loans and Additional LP Capital
Contributions for Income Tax Purposes.......... 37
4.9. General Partner......................................... 37
4.10 Future Capital Requirements............................. 38
5. DISTRIBUTIONS..................................................... 39
5.1. No Right to Withdraw.................................... 39
5.2. Minimum LP Distributions................................ 39
5.3 Investment Income Distributions......................... 42
5.4. Annual Distributions.................................... 42
i
<PAGE>
Page
5.5 Mechanics of Distributions............................ 42
5.6. Restrictions on Distributions......................... 43
5.7. Withholding........................................... 43
5.8 Certain Distributions to the Original
Limited Partner.............................. 44
6. MANAGEMENT...................................................... 44
6.1. Management by General Partner; Corporate
Services Fee; Third Parties.................. 44
6.2. Third Party Reliance.................................. 46
6.3. Other Activities of Related Persons................... 46
6.4. Certificates and Fictitious Name Filings.............. 48
6.5. Funds Management...................................... 48
6.6. Expenses ............................................. 48
6.7. Development Advances, Property Guaranties............. 49
6.8. Insurance............................................. 49
7. REPRESENTATIONS AND WARRANTIES.................................. 50
7.1. Representations and Warranties of the
General Partner.............................. 50
7.2. Representations and Warranties of Limited
Partners..................................... 50
8. GENERAL PARTNER'S TENDER RIGHT................................... 51
9. ORIGINAL LIMITED PARTNER'S PUT RIGHTS............................ 53
9.1. Sixth Year Put Right.................................. 53
9.2. Additional Put Right.................................. 55
10. GENERAL PARTNER'S CALL OPTION................................... 57
11. ACCOUNTING, BOOKS, RECORDS AND REPORTS......................... 58
11.1 Books of Account...................................... 58
11.2 Method of Accounting.................................. 58
11.3 Tax Elections......................................... 58
11.4 Preparation of Tax Returns............................ 58
11.5 Audited Financial Statements.......................... 59
11.6 Tax Matters Partner................................... 59
11.7 Banking ............................................. 59
12. TRANSFER OF PARTNERSHIP INTERESTS; SUBSTITUTE
AND ADDITIONAL PARTNERS..................................... 60
12.1. Assignments.......................................... 60
ii
<PAGE>
Page
12.3. Effect of Retirement, Withdrawal, Bank-
ruptcy, Dissolution, Death, Etc. of
Limited Partner.............................. 61
12.4. Substitute Limited Partners.......................... 61
13. INDEMNIFICATION OF GENERAL PARTNER............................. 62
13.1. In General........................................... 62
13.2. Not Liable for Return of Capital..................... 63
14. DURATION AND TERMINATION OF THE PARTNERSHIP.................... 64
14.1. Term ............................................. 64
14.2. Winding-Up........................................... 64
14.3. Distributions in Cash or in Kind..................... 65
14.4. Time for Liquidation................................. 65
14.5. Termination.......................................... 66
14.6. Compliance with Certain Requirements of
Treasury Regulations......................... 66
15. DISSOLUTION, ETC. OF GENERAL PARTNER........................... 66
15.1. Disabling Events..................................... 66
15.2. Effect of a Disabling Event.......................... 67
16. AMENDMENTS..................................................... 67
16.1. Consent to Amendments................................ 67
16.2. Amendments by General Partner........................ 68
17. MISCELLANEOUS.................................................. 69
17.1. Waiver of Partition.................................. 69
17.2. Entire Agreement..................................... 69
17.3. Choice of Law........................................ 69
17.4. Successors and Assigns............................... 69
17.5. Captions............................................. 69
17.6. Severability......................................... 69
17.7. Counterparts......................................... 69
17.8. Additional Documents................................. 70
17.9. Non-Waiver........................................... 70
17.10. Manner of Consent................................... 70
17.11. Notices............................................. 70
17.12. Grant of Power of Attorney.......................... 71
17.13. Irrevocable and Coupled with an Interest;
Copies to Be Transmitted..................... 72
17.14. Survival of Power of Attorney....................... 72
17.15. Limitation of Power of Attorney..................... 73
17.16. Exercise of Rights.................................. 73
17.17. Confidentiality..................................... 73
iii
<PAGE>
Page
17.18. Submission to Jurisdiction........................... 74
17.19. Waiver of Trial by Jury.............................. 74
iv
<PAGE>
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
This SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF HOTEL FRANCHISING LIMITED PARTNERSHIP (the "Partnership") is
made as of the 20th day of November, 1996, by and between GENERAL FRANCHISE
SYSTEMS, INC., as General Partner (the "General Partner"), and FRANCHISE
INVESTORS L.L.C., a Delaware limited liability company, as Limited Partner
(the "Original Limited Partner"), amending and restating the Amended and
Restated Agreement of Limited Partnership, dated as of the 31st day of March,
1995 (the "Original Partnership Agreement"), among the General Partner, the
Original Limited Partner and Joel R. Buckberg as the withdrawing initial
limited partner (the "Initial Limited Partner"), which amended and restated
the Agreement of Limited Partnership, dated as of the 20th day of March, 1995,
between the General Partner and the Initial Limited Partner.
WHEREAS, the parties hereto desire to amend
and restate the Original Partnership Agreement, and continue the Partnership
as a limited partnership under the Act and this Agreement;
NOW, THEREFORE, in consideration of the mutual
promises and obligations contained herein, the parties, intending to be
legally bound, hereby amend and restate the Original Partnership Agreement in
its entirety and hereby agree as follows:
1. DEFINITIONS; ACCOUNTING TERMS.
1.1. Definitions.
As used herein the following terms shall
have the following respective meanings:
Act -- as defined in Section 2.1.
Additional LP Capital Contributions -- as
defined in Section 4.1(c).
Additional Capital Loans -- as defined in
Section 4.1(d).
<PAGE>
Adjusted Capital Account -- at any time, the then
balance in the Capital Account of a Partner, after giving effect to the
following adjustments:
(i) credit to such Capital Account any amounts that
such Partner is deemed obligated to restore as described in the
penultimate sentences of Treasury Regulations Section 1.704-2(g)(1)
and Treasury Regulations Section 1.704-2(i)(5); and
(ii) debit to such Capital Account the items
described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4),
(5) and (6).
The foregoing definition of Adjusted Capital Account is intended to comply
with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and
shall be interpreted consistently therewith.
Adjusted Royalty Revenues -- the Gross Royalty
Revenues for each Eligible Hotel Property from time to time owing to the
Partnership under each Franchise Agreement, calculated as if each Eligible
Hotel Property in the System paid royalty fees at the average royalty
percentage provided for throughout the Initial Term of the Franchise Agreement
relating to such Eligible Hotel Property.
Adjusted Unamortized Development Advances -- the
lesser of (i) the unamortized Development Advances on the Partnership's
audited balance sheet as of the Put Reference Date and (ii) the Partnership's
unamortized Development Advances calculated as if all such Development
Advances were amortized over a period of 15 years.
Administrative Fee -- each annual administrative fee
in the amount of $100,000 payable by the Original Limited Partner to the
Designated Member not more than 90 days following the end of each Fiscal Year
of the Partnership (pro-rated for the Partnership's first Fiscal Year and for
the Partnership's last Fiscal Year, if such last Fiscal Year is less than a
full calendar year).
2
<PAGE>
Advisory Fee -- that certain non-refundable fee of
$500,000 payable by the Partnership to HFS on the Initial Closing Date.
Affiliate -- with reference to any Person, any other
Person of which such first Person is a member, director, officer, general
partner or employee or any other Person directly or indirectly controlling or
controlled by or under direct or indirect common control with such first
Person.
Agreement -- this Second Amended and Restated
Agreement of Limited Partnership, as the same may be amended, supplemented or
otherwise modified hereafter from time to time as provided herein.
Annual Distributions -- as defined in Section 5.4.
Assign -- to make an Assignment.
Assignee -- a Person who receives an Assignment of an
interest in the Partnership.
Assignment -- as defined in Section 12.1.
Authorized Representative -- as defined in Section
17.17.
Bankruptcy Code -- Title 11 of the United States Code
entitled "Bankruptcy," as amended from time to time, and any successor statute
or statutes thereto.
Big Six Accounting Firm -- any one of the nationally
recognized accounting firms of: (i) Arthur Andersen & Co.; (ii) Coopers &
Lybrand; (iii) Deloitte & Touche LLP; (iv) Ernst & Young; (v) KPMG Peat
Marwick; and (vi) Price Waterhouse, and any successor firm to any of the
foregoing.
Business Day -- any day excluding Saturday, Sunday and
any day which shall be in the City of New York a legal holiday or a day on
which banking institutions in New York are authorized or required by law or
other government actions to close.
3
<PAGE>
Call -- the General Partner's option to acquire the
Original Limited Partner's limited partnership interest in accordance with
Section 10 hereof.
Capital Accounts -- the capital account maintained by
the Partnership for each of the Partners as described in Section 4.2 hereof.
Capital Commitment -- the amount set forth opposite
each Partner's name on Schedule A hereto, as amended from time to time in
accordance with the provisions of this Agreement.
Capital Contributions -- as to any Partner, the amount
of cash and the initial Gross Asset Value of any property (other than money)
contributed to the capital of the Partnership by such Partner pursuant to
Section 4.1 or Section 4.10. As to the General Partner, the term Capital
Contributions shall also include the amount of organizational expenses of the
Partnership, up to One Million Dollars ($1,000,000), incurred, payable or paid
by the General Partner prior to the Initial Closing Date.
Capital Deficiency -- as to any Partner at any time,
the positive excess, if any, of such Partner's remaining Capital Commitment
over the balance in such Partner's Capital Account.
Cash Available for Distribution -- for any fiscal year
shall mean (i) the GAAP net income of the Partnership for such Fiscal Year,
plus (ii) the GAAP depreciation and amortization for such Fiscal Year of
capitalized Development Advances and organizational expenses and fixed assets
and other GAAP non-cash reserves less (iii) in each Fiscal Year Development
Advances disbursed, plus (iv) Property Guaranty Payments made in such Fiscal
Year, it being the intent of the parties hereto that neither Property Guaranty
Payments nor Property Guaranty Reimbursements shall affect this definition,
less (v) Property Guaranty Reimbursements received in such Fiscal Year, it
being the intent of the parties hereto that neither Property Guaranty Payments
nor Property Guaranty Reimbursements shall affect this definition, less (vi)
in the Partnership's first Fiscal Year, the Advisory Fee, the structuring and
placement fee of
4
<PAGE>
$400,000 payable by the Partnership to Merrill Lynch, and other organizational
expenses paid by the Partnership (excluding any such expenses referred to in
Section 4.1(a)), less (vii) Minimum LP Distributions and Investment Income
Distributions made in such Fiscal Year, plus (viii) the cash balance at the
beginning of such Fiscal Year reduced by Annual Distributions, if any, made in
such year and by the cash, up to $2,000,000, required to meet the current
operating needs of the Partnership, plus (or less) (ix) changes in other
assets and liabilities (such assets and liabilities resulting from the
ordinary course of business, of a class or sort not otherwise addressed in
this definition), less (x) the amount of any payment to HFS in respect of any
Shortfall Loan made by HFS to the Partnership, whether for principal or
interest thereon, provided, that if in any Fiscal Year ending prior to the Put
Date, GAAP net income of the Partnership is less than zero, Cash Available for
Distribution for such Fiscal Year shall be zero.
Chain Facilities -- the Hotel Properties
authorized by the Partnership to operate using the System
and identified by the Marks.
Code -- the Internal Revenue Code of 1986, as the same
may be amended hereafter from time to time.
Collateral -- as defined in the Loan Agreement.
Completion Fee -- the one-time fee, payable by the
Original Limited Partner to Merrill Lynch upon the acquisition by the General
Partner of all (but not less than all) of the then outstanding limited
partnership interest owned by the Original Limited Partner, or immediately
prior to the dissolution or liquidation of the Original Limited Partner, or
the consolidation of the Original Limited Partner into the General Partner or
HFS, in an amount (x) in the case of the Put, the Early Put, a Tender Offer,
dissolution or liquidation of the Original Limited Partner, or consolidation
of the Original Limited Partner into the General Partner or HFS, equal to the
greater of $200,000 or 30% of the Partnership's Adjusted Royalty Revenues in
excess of $9,000,000 (i) in the case of the Early Put or a Tender Offer, for
the 12-month
5
<PAGE>
period ending on the date which is 90 days prior to the date of consummation
of the Early Put or Tender Offer, as the case may be, (ii) for the 12-month
period immediately preceding dissolution, liquidation or consolidation of the
Original Limited Partner, if applicable, or (iii) for the 12-month period
immediately preceding the Put Reference Date, in the case of the Put, or (y)
in the case of the Call, equal to 50% of the Adjusted Royalty Revenues for the
12-month period immediately preceding the date the General Partner gives
notice to the Original Limited Partner of its election to Call, provided, that
in no event shall such fee exceed $1,500,000.
Confidential Matter -- as defined in Section 17.17.
Corporate Services Fee -- as defined in Section
6.1(a).
Damages -- any and all damages, disbursements, suits,
claims, liabilities, obligations, judgments, fines, penalties, charges,
amounts paid in settlement, costs and expenses (including, without limitation,
attorneys' fees and expenses) arising out of or relating to litigation and
interest on any of the foregoing, including, without limitation, Damages
incurred in investigating, preparing or defending any action, claim, suit,
inquiry, proceeding, investigation or appeal taken from any of the foregoing
(including reasonable fees and disbursements of counsel) by or before any
court or Governmental Authority, whether pending or threatened, and whether or
not any indemnitee thereof is or may be a party thereto.
Depreciation -- for any Fiscal Year or portion
thereof, an amount equal to the depreciation, amortization or other cost
recovery deduction allowable with respect to an asset for such period for
federal income tax purposes, except that if the Gross Asset Value of an asset
differs from its adjusted basis for federal income tax purposes at the
beginning of such period, Depreciation shall be an amount that bears the same
relationship to such beginning Gross Asset Value as the depreciation,
amortization or cost recovery deduction in such period for Federal income tax
purposes bears to the
6
<PAGE>
beginning adjusted tax basis; provided, however, that if the adjusted basis
for federal income tax purposes of an asset at the beginning of such period is
zero, Depreciation shall be determined with reference to such beginning Gross
Asset Value using any reasonable method selected by the General Partner.
Designated Member -- ML Leasing Partners, Inc., and
its permitted successors and assigns, initially owning at least 1% of the LLC
Interests.
Development Advances -- advances or remuneration made
by the Partnership in its discretion from time to time to Franchisees, as an
inducement to purchase a Franchise or for such other reasons as the General
Partner deems appropriate, including, without limitation, (i) the payment of
fees (whether in cash or otherwise) or the making of, or provision for, loans
to Franchisees or Affiliates thereof; (ii) the omission or reduction of fees
customarily charged to Franchisees; and (iii) the provision of other items or
services of value, whether or not specifically provided for by the relevant
Franchise Agreement between the Partnership and a Franchisee, provided, that
such advances and remuneration shall be paid only in respect of Eligible Hotel
Properties, and shall not exceed in the aggregate for any Eligible Hotel
Property $250,000.
Disabling Event -- as defined in Section 15.1.
Early Put -- the Original Limited Partner's right to
require the General Partner to purchase all or a portion of its limited
partnership interest in the Partnership pursuant to Section 9.2 hereof.
Early Put Date -- as defined in Section 9.2(a).
Eligible Hotel Property -- means each Hotel Property
in the System which has opened for business and which is authorized by the
Partnership to operate using the System and to be identified by the Marks.
7
<PAGE>
Event of Default -- as defined in the Loan Agreement.
Event of Termination -- as defined in Section 14.1.
Extension Fee -- as defined in the definition of
Franchise Fees.
Fair Market Value -- on any date, the fair market
value of property on such date as determined, in the case of Section 9.2 or
Section 14.3, by independent appraisal, and in all other cases as reasonably
determined by the General Partner by reference to an arm's- length transaction
or a recognized public market for such property.
First-round Offer -- as defined in Section 4.10(b).
Fiscal Year -- as defined in Section 2.6.
Franchise Agreements -- All such agreements as are
entered into between the Partnership as Franchisor, and each of its
Franchisees, providing for the sale of Franchises and the provision of
services to Franchisees, for which the Partnership will receive Franchise Fees
and other payments.
Franchise -- a non-exclusive license to operate a
specified Hotel Property using the System and the Marks.
Franchisee -- each Person purchasing a Franchise
pursuant to a Franchise Agreement.
Franchise Fees -- the aggregate amount of fee and
royalty payments payable to the Partnership under each Franchise Agreement,
generally consisting of (a) initial and application fees, (b) a relicense fee
payable upon a transfer of an Eligible Hotel Property, (c) a System Assessment
Fee and special marketing assessments, (d) an extension fee (payable in the
sole discretion of the Partnership) of a specified amount per day upon delays
in opening of a Hotel Property, and payable in
8
<PAGE>
lieu of Royalties (the "Extension Fee"), (e) liquidated damages, payable by
Franchisees upon Franchise termination under Franchise Agreements, and (f)
Royalties.
Franchisee Loan Documents -- the documents required by
the SPV or the SPV Credit Agreement in connection with the making of each
Franchisee Loan by the SPV, as same may from time to time be amended, modified
or supplemented in accordance with their terms and the terms of the SPV Loan
Documents.
Franchisee Loans -- the borrowings made by Franchisees
from the SPV in accordance with the terms and provisions of the SPV Credit
Agreement and the Franchisee Loan Documents.
GAAP -- as defined in Section 1.3.
General Partner -- as defined in the introduction to
this Agreement.
Governmental Authority -- any nation or government,
any state or other political subdivision thereof and any other Person
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
Gross Asset Value -- with respect to any Partnership
asset, the asset's adjusted basis for federal income tax purposes, except as
follows:
(i) The initial Gross Asset Value of any asset
contributed by a Partner to the Partnership shall be the Fair Market
Value of such asset on the date of contribution;
(ii) The Gross Asset Value of all Partnership
assets shall be adjusted to equal their respective Fair Market Values
as of the following times: (a) the acquisition of an additional
interest in the Partnership by any new or existing Partner in
exchange for more than a de minimis Capital Contribution; (b) the
distribution by the Partnership to a Partner of more than a de
minimis amount of Partnership property as consideration for an
9
<PAGE>
interest in the Partnership; and (c) the liquidation of the
Partnership within the meaning of Treasury Regulations Section
1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to
clauses (a) and (b) above shall be made only if the General Partner
reasonably determines that such adjustments are necessary or
appropriate to reflect the relative economic interests of the
Partners in the Partnership;
(iii) The Gross Asset Value of any Partnership
asset distributed to any Partner shall be adjusted to equal the Fair
Market Value of such asset on the date of distribution; and
(iv) The Gross Asset Values of Partnership assets
shall be increased (or decreased) to reflect any adjustments to the
adjusted basis of such assets pursuant to Code Section 734(b) or Code
Section 743(b), but only to the extent that such adjustments are
taken into account in determining Capital Accounts pursuant to
Treasury Regulations Section 1.704-1(b)(2)(iv)(m) and paragraph (vi)
of the definition of Net Income and Net Losses and Section 4.4(f);
provided, however, that Gross Asset Values shall not be adjusted
pursuant to this paragraph (iv) to the extent the General Partner
determines that an adjustment pursuant to paragraph (ii) above is
necessary or appropriate in connection with a transaction that would
otherwise result in an adjustment pursuant to this paragraph (iv).
If the Gross Asset Value of an asset has been determined or adjusted pursuant
to paragraphs (i), (ii) or (iv) above, such Gross Asset Value shall thereafter
be adjusted by the Depreciation taken into account with respect to such asset
for purposes of computing Net Income and Net Losses.
Gross Royalty Revenues -- the sum of Royalties and
Extension Fees payable to the Partnership and accruing during the relevant
time period.
Guaranty Agreement -- the guaranty agreement by HFS in
favor of the Original Limited Partner
10
<PAGE>
in substantially the form of Exhibit A hereto, as same may from time to time
be amended, waived or modified in accordance with its terms.
HFS -- HFS Incorporated, a Delaware corporation, and
its successors and assigns.
HFS SPV Guaranty -- the guaranty by HFS in favor of
the SPV Lenders, dated as of November 20, 1996, of not more than $36,000,000
of SPV Loans from time to time outstanding (subject to the terms thereof), as
same may from time to time be amended, modified or supplemented in accordance
with its terms, including modification to increase the amount of the guaranty.
Hotel Property -- land, together with improvements,
buildings, common areas, structures, appurtenances, fixtures, facilities and
the like, owned or leased by a Franchisee or potential Franchisee, which is
designed to be a hotel but which does not yet constitute an Eligible Hotel
Property.
Indebtedness -- as to any Person, (a) all obligations
of such Person for borrowed money, all obligations evidenced by bonds,
debentures, notes or other similar instruments and all obligations upon which
interest charges are customarily paid, (b) all obligations of such Person
under conditional sale or other title retention agreements and all obligations
issued or assumed as full or partial payment for property, whether or not any
such obligations represent obligations for borrowed money, (c) all
indebtedness secured by any Lien on property owned or acquired by such Person
subject to such Lien whether or not the obligations secured thereby shall have
been assumed, (d) all leases required to be capitalized in accordance with
GAAP and all operating leases, (e) all reimbursement obligations, whether
actual, contingent or otherwise, under any letter of credit, and (f) all of
the obligations specified in clauses (a) through (e) of another Person, but
without duplication thereof, guaranteed, directly or indirectly, in any
manner, by such first Person.
Indemnity Agreement -- that certain indemnity
agreement, dated as of the date hereof, among
11
<PAGE>
HFS, the General Partner, the Partnership, the Designated Member, the Manager
and Merrill Lynch, in substantially the form attached hereto as Exhibit B, as
same may from time to time be amended, waived or modified in accordance with
its terms.
Initial Closing Date -- March 31, 1995.
Initial Limited Partner -- as defined in the
introduction
Initial Term -- For each Franchise Agreement, the
stated initial term of such Agreement, which shall be for a period of twenty
years less one day, or such lesser period as may be specified in any Franchise
Agreement, but in no event less than ten years, commencing on the date that
the Hotel Property which is the subject of such Franchise Agreement becomes an
Eligible Hotel Property.
Investment Company Act -- the United States Investment
Company Act of 1940, as amended, and as the same may be amended from time to
time hereafter.
Investment Income -- The amount of income, if any, of
the Partnership in each Fiscal Year earned from amounts invested in accordance
with Section 6.5 hereof, which is properly treated as portfolio income (as
defined in Treasury Regulations Section 1.469- 2T(c)(3))(net of any losses or
expenses of the Partnership in such Fiscal Year that would be properly
deductible against such income by the General Partner and the Members if the
General Partner and all such Members were individuals that were not materially
participating in the activity within the meaning of Section 469 of the Code
and the Treasury Regulations promulgated thereun- der).
Investment Income Distribution -- as defined in
Section 5.3.
IRS -- The Internal Revenue Service or its successor.
12
<PAGE>
Lender -- HFS and its successors and assigns under the
Loan Agreement.
Lien -- any mortgage, pledge, lien, charge, security
interest, hypothecation or other encumbrance on any property, real, personal
or mixed.
Limited Partners -- collectively the Original Limited
Partner, any Subsequent Limited Partners admitted to the Partnership in
accordance with Section 4.10 hereof, and any Substitute Limited Partners
admitted to the Partnership in accordance with Section 12.4 hereof.
LLC Interests -- the issued and outstanding ownership
interests in the Original Limited Partner, initially consisting of up to 300
such interests, each such interest representing an initial investment of
$50,000.
Loan Agreement -- that certain loan and security
agreement, dated as of the Initial Closing Date between HFS, as Lender, and
the Original Limited Partner, as borrower, in substantially the form attached
hereto as Exhibit B, as same may from time to time be amended, waived or
modified in accordance with its terms.
Manager -- ML Fund Administrators, Inc.
Mandatory Payment Date -- as defined in Section
4.1(d).
Marks -- collectively, (i) the service marks
associated with the System published in the System Standards Manual from time
to time, including, but not limited to the name, design and logo for "Wingate
Inn" or such other brand name and service marks as the General Partner may
adopt, and other marks from time to time, and (ii) tradenames, trade dress,
logos and derivations and associated good will and related intellectual
property interests.
Members -- at any time those Persons who
are the record and beneficial owners of all of the issued
and outstanding LLC Interests of the Original Limited
13
<PAGE>
Partner including, without limitation, the Designated Member.
Merrill Lynch -- Merrill Lynch, Pierce, Fenner & Smith
Incorporated and its successors and assigns.
Minimum LP Distributions -- as defined in Section 5.2
hereof.
Minimum LP Distribution Shortfall -- the amount, if
any, which is the difference between the Minimum LP Distribution then due to
the Original Limited Partner and the cash balance of the Partnership in excess
of the amount determined in good faith by the General Partner to be necessary
for the funding of Development Advances and other Partnership obligations,
taking into account the cash available from Additional LP Capital
Contributions.
Net Income or Net Losses -- for each Fiscal Year or
portion thereof, an amount equal to the Partner- ship's items of taxable
income or loss for such year or period, determined in accordance with Section
703(a) of the Code (for this purpose, all items of income, gain, loss and
deduction required to be stated separately pursuant to Section 702 of the Code
shall be included in taxable income or loss) with the following adjustments:
(i) any income which is exempt from Federal income
tax and not otherwise taken into account in computing Net Income or
Net Losses shall be added to taxable income or loss;
(ii) any expenditures of the Partnership described
in Code Section 705(a)(2)(B) or treated as Section 705(a)(2)(B)
expenditures under Regulations Section 1.704-1(b)(2)(iv)(i) and not
otherwise taken into account in computing Net Income or Net Losses,
shall be subtracted from taxable income or loss;
(iii) in the event that the Gross Asset Value of
any Partnership asset is adjusted pursuant to the definition of Gross
Asset
14
<PAGE>
Value contained in this Section 1, the amount of such adjustment
shall be taken into account as gain or loss from the disposition of
such asset for purposes of computing Net Income and Net Losses;
(iv) gain or loss resulting from any disposition of
Partnership assets with respect to which gain or loss is recognized
for Federal income tax purposes shall be computed by reference to the
Gross Asset Value of the property disposed of, notwithstanding that
the adjusted tax basis of such property differs from its Gross Asset
Value;
(v) in lieu of the depreciation, amortization and
other cost recovery deductions taken into account in computing such
taxable income or loss, there shall be taken into account
Depreciation for such Fiscal Year or other period;
(vi) to the extent an adjustment to the adjusted
tax basis of any Partnership asset pursuant to Code Section 734(b) or
Code Section 743(b) is required pursuant to Treasury Regulations
Section 1.704-1(b)(2)(iv)(m)(4) to be taken into account in
determining Capital Accounts as a result of a distribution other than
in complete liquidation of a Partner's Partnership Interest, the
amount of such adjustment shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the
adjustment decreases the basis of the asset) from the disposition of
the asset and shall be taken into account for purposes of computing
Net Income or Net Losses; and
(vii) any items specially allocated pursuant to
Section 4.4 hereof shall not be considered in determining Net Income
or Net Losses.
Nonrecourse Deductions -- has the meaning set forth in
Treasury Regulations Section 1.704-2(c).
15
<PAGE>
Offer Price -- as defined in Section 8(a).
Operating Agreement -- that certain agreement, dated
as of the Initial Closing Date, among the Members of the Original Limited
Partner, relating to the formation and governance of the Original Limited
Partner, as same may (subject to the restrictions contained herein and in the
other Transaction Documents) from time to time be amended, waived or modified
in accordance with its terms as such terms relating to amendments, waivers and
modifications are in effect on the Initial Closing Date.
Original Limited Partner -- as defined in the
introduction.
Original Partnership Agreement -- as defined in the
introduction.
Other Expenses -- the annual audit, accounting and
any related legal fees of the Original Limited Partner, any other reasonably
necessary fees and expenses payable to third parties (including, without
limitation, legal fees) incurred by the Original Limited Partner with the
prior written consent of the General Partner (such consent not to be
unreasonably withheld), and, so long as the Original Limited Partner is
treated as a partnership for Federal income tax purposes, any franchise,
unincorporated business or other similar taxes payable from time to time by
the Original Limited Partner.
Partner Nonrecourse Debt -- has the meaning
set forth in Treasury Regulations Section 1.704-2(b)(4).
Partner Nonrecourse Debt Minimum Gain --
has the meaning set forth in Treasury Regulations Section
1.704-2(i).
Partner Nonrecourse Deductions -- has the
meaning set forth in Treasury Regulations Section 1.704-
2(i).
Partners -- the Original Limited Partner,
the General Partner, and such Subsequent Limited Partners
16
<PAGE>
and Substitute Partners as shall be admitted to the Partnership in accordance
with the terms of this Agreement.
Partnership -- as defined in the introduction.
Partnership Entities -- as defined in Section 3.2.
Partnership Expenses -- as defined in Section 6.6.
Partnership Minimum Gain -- has the meaning set forth
in Treasury Regulations Sections 1.704-2(b)(2) and 1.704-2(d).
Permitted Lien -- (a) Liens for taxes, assessments, or
governmental charges or claims for sums either not yet delinquent or being
contested in good faith and by adequate proceedings, if reserves or other
appropriate provisions, as required by GAAP, have been made therefor; (b)
statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen,
and other Liens imposed by law and incurred in the ordinary course of business
for sums either not yet delinquent or being contested in good faith by
adequate proceedings, if reserves or other appropriate provisions, as required
by GAAP, have been made therefor; (c) any attachment or judgment Lien in
existence less than thirty calendar days after the entry thereof, or with
respect to which execution has been stayed, or with respect to which payment
in full above any applicable deductible is covered by insurance (so long as no
reservation of rights has been made by the insurer in connection with such
coverage), and Liens incurred to secure any surety bonds, appeal bonds, or
other instruments serving a similar purpose in connection with the appeal of
any such judgment; (d) bankers' Liens in respect of deposit accounts in the
nature of rights of setoff; (e) purchase money Liens on assets acquired for
use in connection with Partnership business or intended in the good faith
judgment of the General Partner to advance the business of the Partnership as
described in Section 2.3; (f) Liens upon assets hereafter acquired by the
General Partner or the Partnership which are existing at the time of
acquisition thereof; (g)
17
<PAGE>
survey exceptions or encumbrances, easements or reservations, or rights of
others for rights-of-way, utilities and other similar purposes, or zoning or
other restrictions as to the use of real property, which are necessary for the
conduct of the business of the General Partner or the Partnership or which
customarily exist on real property of Persons engaged in similar activities
and similarly situated and which do not in any event in the aggregate
materially impair the conduct of the business of the General Partner or the
Partnership; (h) Liens, not arising in connection with the incurrence of debt,
that are incurred in the ordinary course of business of the General Partner or
the Partnership and that do not in the aggregate materially impair the use or
value of the assets of the General Partner or the Partnership or the conduct
of their respective business; and (i) Liens arising under or in connection
with the Pledge Agreement.
Person -- an individual, partnership, corporation,
limited liability company, trust or unincorporated organization, and a
government or agency or political subdivision thereof.
Pledge Agreement -- the pledge agreement, dated as of
November 20, 1996 made by each of the General Partner and the Partnership of
its respective interest in the SPV in favor of the SPV Lenders.
Prime Rate -- the rate publicly announced from time to
time by the main New York City office of The Chase Manhattan Bank (or its
successors and assigns), as its "prime rate", which rate shall change on the
effective date of each change in Chemical Bank's prime rate.
Property Guaranty -- as defined in Section 4.1(f).
Property Guaranty Commitment -- the total amount under
each Property Guaranty for which the Partnership might be liable upon a
default by the primary obligor under the financing for an Eligible Hotel
Property.
Property Guaranty Payment -- each amount from time to
time paid over by the Partnership under a
18
<PAGE>
Property Guaranty upon a default by the primary
obligor on the obligations guaranteed by such Property Guaranty.
Property Guaranty Reimbursement -- the amounts, if
any, from time to time received in reimbursement of a Property Guaranty
Payment made by the Partnership (unless such reimbursement is rescinded,
avoided, disregarded or required to be repaid in any bankruptcy or similar
proceeding or otherwise).
Put -- the Original Limited Partner's right
to require the General Partner to purchase all or a portion of its limited
partnership interest in the Partnership pursuant to Section 9.1 hereof.
Put Date -- August 29, 2001.
Put Response Date -- July 30, 2001.
Put Reference Date -- April 1, 2001.
Related Person -- as defined in Section 3.2.
Representative -- as defined in Section 14.2.
Reservation System -- any system operated and
maintained by HFS, or any subcontractor of HFS, for offering to interested
parties, booking and communicating guest room reservations for Chain
Facilities.
Royalties -- the amounts payable by Franchisees under
the Franchise Agreements for a license to use the Marks and the System, which
are expected to equal 4.5% of gross room revenues accruing during the calendar
month for each Eligible Hotel Property, but which may be any such lesser (or
greater) percentage as the General Partner, in its reasonable business
judgment, deems appropriate.
Second-round Offer -- as defined in Section 4.10(b).
19
<PAGE>
Securities Act -- the Securities Act of 1933, as
amended, and as the same may be hereafter amended from time to time.
Securities Exchange Act -- the Securities Exchange Act
of 1934, as amended, and as the same may be hereafter amended from time to
time.
Shortfall Loan -- a loan made by HFS in accordance
with Section 5 of the Support Agreement and as defined therein.
Software Contracts -- those certain contracts between
the General Partner, HFS or an Affiliate of the General Partner or HFS and
each Franchisee, providing for the licensing of computer software for hotel
reservation and property management systems to such Franchisee, pursuant to
which the General Partner, HFS or an Affiliate of the General Partner or HFS
will earn software fees.
SPV -- Wingate Financial, LLC, a Delaware limited
liability company.
SPV Commitment -- the amount available from time to
time for borrowing by the SPV under the SPV Credit Agreement, which initially
shall not exceed $60,000,000.
SPV Credit Agreement -- initially, that certain credit
agreement, dated as of November 20, 1996, by and among the SPV, as borrower
and the SPV Lenders, and, subsequently, any renewal or replacement credit
facility entered into by the SPV, whether with the initial SPV Lenders, or
subsequent SPV Lenders, as any of same may from time to time be amended,
modified or supplemented in accordance with their respective terms.
SPV Lenders -- initially, The Chase
Manhattan Bank and such other lenders as are from time to time party to the
SPV Credit Agreement, and subsequently, such lenders as are from time to time
party to the SPV Credit Agreement (including any renewal or replacement
thereof), whether the same or different from the initial
20
<PAGE>
SPV Lenders, and, in each case, their successors and permitted assigns.
SPV LLC Agreement -- the limited liability company
agreement, dated as of November 20, 1996, by and between the General Partner,
as SPV Manager and a member, and the Partnership, as a member, providing for
the formation of the SPV, as same may from time to time be amended, modified
or supplemented in accordance with its terms.
SPV Loan Documents -- the SPV Credit Agreement, the
SPV Notes, the HFS Guaranty and the SPV Security Documents.
SPV Loans -- the aggregate principal amount of the
loans made to the SPV pursuant to the SPV Commitment, from time to time
outstanding under the SPV Credit Agreement.
SPV Manager -- the General Partner, or such other
Person serving from time to time as manager and designated member of the SPV.
SPV Notes -- the promissory notes from time to time
outstanding and payable to the SPV Lenders under the SPV Credit Agreement, as
same may from time to time be amended, modified or supplemented in accordance
with the terms of the SPV Credit Agreement.
SPV Security Documents -- the Pledge Agreement, the
Collateral Assignment Documents (as defined in the SPV Credit Agreement), and
such other security documents as may be required from time to time by the SPV
Lenders pursuant to the SPV Credit Agreement, and any renewals or replacements
thereof, as each of same may from time to time be amended, modified or
supplemented in accordance with its terms.
Subsequent Closing Dates -- as defined in Section
4.1(b).
Subsequent Limited Partners -- as defined in Section
4.10.
21
<PAGE>
Substitute Limited Partner -- a Limited Partner who is
admitted to the Partnership as a Substitute Limited Partner pursuant to the
provisions of Section 12.4.
Substitute Partners -- any Substitute Limited Partner
and/or Successor General Partner.
Successor General Partner -- any Person admitted to
the Partnership as a successor general partner pursuant to Section 15.2.
Support Agreement -- that certain agreement among HFS,
the General Partner and the Partnership, dated as of the Initial Closing Date,
in substantially the form attached hereto as Exhibit D, as same may from time
to time be amended, waived or modified in accordance with its terms.
System -- the comprehensive system of providing to
Franchisees Hotel Property services under the Marks, including, without
limitation, (i) the Marks, (ii) other intellectual property, including any
Confidential Matter, System Standards Manual and know-how, (iii) marketing,
advertising, publicity and other promotional materials and programs, (iv)
training programs and materials, (v) quality assurance inspection and scoring
programs, and (vi) the Reservation System.
System Assessment Fee -- the fees charged by the
Partnership under Franchise Agreements for reservations, marketing,
advertising, promotion, public relations, training and other related services
and programs.
System Standards -- the standards of operation and
design for participation in and use of the System, published in the Systems
Standards Manual, including, without limitation, design standards, standards
for furniture, fixtures and equipment, Mark standards, operations standards,
technology and maintenance standards, and any other standards, policies, rules
and procedures promulgated by HFS regarding System operation and usage.
22
<PAGE>
System Standards Manual -- the standards of operation
and design manual, the planning and design standards manual, and any other
manual published or distributed by the Partnership relating to System
Standards, and all other standards, policies, rules and procedures promulgated
by the Partnership relating to System Standards.
Tax Matters Partner -- as defined in Section 11.6.
Tender Offer -- an offer by the General Partner to the
Original Limited Partner to purchase all or a part of its limited partnership
interest pursuant to Section 8 hereof.
Transaction Documents -- as defined in Section 3.2.
Treasury Regulations -- the Income Tax Regulations,
including Temporary Regulations, promulgated under the Code, as the same may
be amended hereafter from time to time (including corresponding provisions of
succeeding Income Tax Regulations).
U.S. Dollars and $ -- lawful money of the United
States of America.
Withdrawing Limited Partner -- the Initial Limited
Partner.
1.2. Number; Gender. Defined terms shall include in
the singular number the plural, and in the plural number the singular, and
pronouns in the masculine, feminine or neuter gender shall include the pro-
nouns of the other genders.
1.3. Accounting Terms and Determinations. All
accounting terms used in this Agreement and not otherwise defined shall have
the meaning accorded to them in accordance with generally accepted accounting
principles ("GAAP") in the United States of America as in effect from time to
time and, except as expressly provided herein, all accounting determinations
shall be made in accordance with GAAP, consistently applied.
23
<PAGE>
2. ORGANIZATION.
2.1. Continuation of Limited Partnership. The parties
to this Agreement hereby agree to continue the Partnership as a limited
partnership pursuant to the provisions of the Delaware Revised Uniform Limited
Partnership Act (6 Del. C. ss.17-101 et seq., as amended, the "Act"), and in
accordance with the terms and provisions of this Agreement.
2.2. Name. The name of the Partnership heretofore
formed and continued hereby shall be "Hotel Franchising Limited Partnership"
or such other name or names as may be selected by the General Partner from
time to time, and its business shall be carried on in such name with such
variations and changes as the General Partner deems necessary to comply with
requirements of the jurisdictions in which the Partnership's operations are
conducted.
2.3. Purpose. The Partnership is organized primarily
for the object and purpose of (a) developing and marketing the System,
creating goodwill for the Marks, selling Franchises, and executing, performing
under and enforcing the Franchise Agreements relating thereto and (b) engaging
in such related activities as the General Partner shall deem necessary or
advisable, all upon the terms and conditions set forth in this Agreement.
2.4. Places of Business. The Partnership shall have
its principal place of business at Six Sylvan Way, Parsippany, New Jersey
07054, or at such other place or places as the General Partner may, from time
to time, select. The Partnership may from time to time have such other place
or places of business in such other jurisdictions as the General Partner may
deem advisable.
2.5. Registered Office and Agent. The address of the
Partnership's registered office in the State of Delaware is 32 Loockermen
Square, Suite L-100, Dover, Delaware 19901. The name of the registered agent
at that address is The Prentice-Hall Corporation System, Inc.
24
<PAGE>
2.6. Fiscal Year. The fiscal year of the Partnership
(each, a "Fiscal Year") shall end on the 31st day of December in each year,
including the year during which the Partnership is organized, which Fiscal
Year shall also be the taxable year of the Partnership (so long as such
taxable year is not in contravention of any applicable provision of the Code
or Treasury Regulations).
2.7. Powers. Subject to the provisions of Section 2.8,
the Partnership, and the General Partner acting on behalf of the Partnership,
shall be empowered to do or cause to be done, or not to do, any and all acts
deemed by the General Partner in its sole discretion to be necessary or
appropriate in furtherance of the purposes of the Partnership. Without
limiting the foregoing, the Partnership is empowered to invest in the SPV and
carry out the transactions contemplated by the SPV LLC Agreement and the SPV
Loan Documents.
2.8. Limitations on Certain Activities. Neither the
Partnership, nor the General Partner acting on behalf of the Partnership,
will, unless the Original Limited Partner shall have consented thereto in
writing, or unless otherwise specifically permitted hereby:
(i) sell, or permit to be sold, any Franchise
Agreements, Marks or other intellectual property of the Partnership, provided,
that the General Partner may exercise its reasonable discretion to sell,
assign or dispose of, on behalf of the Partnership, any Franchise Agreement
which is the subject of a Franchisee default;
(ii) incur or assume any Indebtedness in excess of
$2,500,000 in the aggregate, except for (x) Indebtedness described in clause
(c) of the definition thereof, incurred under or in connection with the Pledge
Agreement, and (y) Indebtedness on account of Shortfall Loans, short-term
borrowings for working capital purposes, and, subject to Section 4.1(f),
Indebtedness represented by Property Guaranties, provided, that, for purposes
of determining permitted Indebtedness represented by Property Guaranties, the
aggregate amount of Property
25
<PAGE>
Guaranty Commitments at any one time outstanding, together with the
aggregate amount of Additional Capital Loans then made, shall not
exceed the lesser of $60,000,000 or $600,000 multiplied by the then
existing number of Eligible Hotel Properties, and provided further,
that, for purposes of determining permitted Indebtedness described in
clause (x) hereof, the aggregate amount of Property Guaranty
Commitments at any one time outstanding, together with the aggregate
amount of Additional Capital Loans then made and the amount
guaranteed by the HFS SPV Guaranty, shall not exceed $60,000,000;
(iii) purchase any assets other than assets
associated with the ordinary course of business of the Partnership as
described herein or intended in the good faith and reasonable
judgment of the General Partner to advance the business of the
Partnership as described in Section 2.3;
(iv) create or permit the creation of any Lien, other than
Permitted Liens, on any assets of the Partnership;
(v) own or operate hotels, except in connection
with a judgment or claim against any Person, in which event the
Partnership shall cease to own or operate any such hotel no later
than three years after the commencement of its ownership or operation
of same; or
(vi) enter into any SPV Loan Documents, unless such
documents shall specifically preclude recourse to the Partnership or
the General Partner for the obligations of the SPV, except to the
extent of the pledge of the equity interest of the General Partner or
of the Partnership in the SPV contained in the Pledge Agreement.
The consent of the Original Limited Partner
to any activity described above shall be given by the Original Limited
Partner, in accordance with Section 16.1, if Members holding more than 50% of
the then outstanding LLC Interests consent thereto.
26
<PAGE>
2.9. Withdrawal of Initial Limited Partner. On the
Initial Closing Date, the Original Limited Partner was admitted to the
Partnership as a limited partner of the Partnership. Upon such admission of
the Original Limited Partner to the Partnership, the Initial Limited Partner
withdrew from the Partnership and was entitled to receive his capital
contribution, without interest or deduction.
3. PARTNERS.
3.1. General and Limited Partner. The Partnership
shall initially consist of the General Partner and the Original Limited
Partner, and thereafter, the General Partner or any Successor General Partner
and such additional or substituted Limited Partners as shall be admitted to
the Partnership pursuant to Section 4.10 or 12.4. The General Partner shall
cause Schedule A to be amended from time to time to reflect any increase in
the Original Limited Partner's Capital Commitment by virtue of subsequent
additional initial Capital Contributions, the admission of any Partner, the
removal, expulsion, retirement or death of any Partner or the receipt by the
Partnership of notice of any change of name of a Partner.
3.2. Liability of Related Persons. Neither the General
Partner, HFS, the SPV or any of their respective Affiliates, nor any officer,
director, manager, member, stockholder, partner or employee of the General
Partner, HFS, or any of their respective Affiliates (collectively, the
"Related Persons"), shall be liable, responsible or accountable, whether
directly or indirectly, to the Partnership, any Partner, any Member, the
Manager or any Affiliate of any of the foregoing (collectively, "Partnership
Entities") for any Damages asserted against, suffered or incurred by any
Partnership Entity arising out of or relating to (a) the management or conduct
of the business and affairs (other than the Partnership) of any Related Person
in which any Partnership Entity has an interest (including, without
limitation, actions taken or not taken by any Related Person as a director of
any such Person), and (b) the management or conduct of the business and
affairs of any Related Person insofar as such business or affairs may relate
to any
27
<PAGE>
Partnership Entity, including, without limitation, all activities in the
conduct of other business engaged in by a Related Person which might involve a
conflict of interest with any Partnership Entity, or in which any Related
Person realizes a profit or has an interest, except for Damages resulting from
acts or omissions of such Related Person which constitute gross negligence or
willful misconduct. For purposes of this Agreement, no action or failure to
act on the part of any Related Person in a situation which involves a conflict
of interest with any Partnership Entity, or in which such Related Person
realizes a profit or has an interest shall constitute, per se, gross
negligence or willful misconduct. Any Related Person may consult with
independent counsel or a Big Six Accounting Firm and each Related Person shall
be deemed not to have engaged in gross negligence or willful misconduct with
respect to any action or failure to act and shall be fully protected and
justified in so acting or failing to act, if such action or failure to act is
in accordance with the advice or opinion of such independent counsel or Big
Six Accounting Firm that such action does not constitute gross negligence or
willful misconduct. Nothing contained in this Section 3.2 shall be deemed to
relieve any party of its contractual obligations under this Agreement, the
Loan Agreement, the Support Agreement, the Operating Agreement, the Indemnity
Agreement, the Guaranty Agreement, or any other agreement or instrument
referred to herein or therein (collectively, the "Transaction Documents").
3.3. Limited Liability of Limited Partners. The
liability of the Limited Partners is limited to their obligation to make
Capital Contributions to the Partnership in amounts and from time to time as
provided by this Agreement, and, in the case of the Original Limited Partner,
to repay the Additional Capital Loans in accordance with the terms of the Loan
Agreement and this Agreement, all of which obligations are intended to be
enforceable only by the Partnership and the General Partner, or the Lender, as
the case may be, and only against the Original Limited Partner and not the
Members, but not by creditors of the Partnership, and nothing elsewhere set
forth in this Agreement or in any other document, and nothing arising from any
other transaction whatsoever between or among any or all of the Partners or
the Part-
28
<PAGE>
nership, shall have the effect of removing, diminishing or otherwise affecting
such limitation. No officer, agent, director or employee of the General
Partner who is also a Member shall be deemed or construed to act as a general
partner by virtue of the performance of his or her duties or his or her
actions taken in such capacity as an officer, agent, director or employee of
the General Partner.
3.4. Partnership Property; Partnership Interest. No
real or other property of the Partnership shall be deemed to be owned by any
Partner individually, but shall be owned by and title shall be vested solely
in the Partnership. The interests of the Partners in the Partnership shall
constitute personal property.
3.5 Withdrawing Limited Partner. The execution of this
Agreement by the Withdrawing Limited Partner constitutes its withdrawal as a
limited partner of the Partnership. Because of such withdrawal, the
Withdrawing Limited Partner shall have no further right, interest or
obligation of any kind whatsoever as a limited partner of the Partnership. Any
capital contribution to the Partnership of the Withdrawing Limited Partner
shall be returned to such Withdrawing Limited Partner on the date of this
Agreement without interest or deduction.
4. CAPITAL CONTRIBUTIONS, CAPITAL ACCOUNTS
4.1. Capital Contributions. (a) On the Initial Closing
Date, each Partner shall make a Capital Contribution to the Partnership in the
amount set forth in Schedule A hereto opposite its name. The Capital
Contribution payable by the Original Limited Partner shall equal the aggregate
amount of proceeds received by it from the sale of LLC Interests by such date.
The Capital Contribution of the General Partner shall also include the amount
of organizational expenses of the Partnership, up to One Million Dollars
($l,000,000), incurred, paid or payable by the General Partner. Except to the
extent set forth in the prior sentence or in connection with a contribution of
assets other than cash, the Capital Contributions of each Partner (as set
forth in Schedule A hereto) shall be payable to the Partnership, in
immediately available funds, by wire transfer to
29
<PAGE>
such bank account as the General Partner may specify in writing.
(b) After the Original Limited Partner
receives payment for the sale of additional LLC Interests, the Original
Limited Partner shall make one or more additional initial Capital
Contributions to the Partnership in amounts equal to the amounts it receives
from the sale of such LLC Interests (the date of each such additional initial
Capital Contribution being a "Subsequent Closing Date"), and the General
Partner shall amend Schedule A accordingly. Each such additional initial
Capital Contribution shall be payable to the Partnership in the manner
specified in clause (a) above.
(c) In addition, at any time and from time to time
prior to the Put Reference Date, but subject to clause (d) below, the
Partnership may require the Original Limited Partner to make additional
Capital Contributions of up to $600,000 per Eligible Hotel Property in the
System, provided that such additional Capital Contributions together with
outstanding Property Guaranty Commitments shall not exceed at any time the
lesser of $60,000,000 or $600,000 multiplied by the then existing number of
Eligible Hotel Properties, and provided further, that such additional Capital
Contributions, together with outstanding Property Guaranty Commitments and the
amount guaranteed by the HFS SPV Guaranty, shall not exceed at any time,
$60,000,000 (collectively, the "Additional LP Capital Contributions"). The
General Partner will give the Original Limited Partner at least 5 Business
Days' written notice thereof, which notice will comport with the requirements
of Section 1.2(b) of the Loan Agreement.
(d) The General Partner will arrange,
with or through HFS, for loans (the "Additional Capital Loans") to the
Original Limited Partner in an amount equal to each Additional LP Capital
Contribution required by the Partnership. In the event that HFS fails to make
or arrange for any Additional Capital Loan, the Original Limited Partner shall
not be required to make such Additional LP Capital Contribution until such
Additional Capital Loan is made. The Additional Capital Loans will be made
pursuant to the terms of the Loan Agreement.
30
<PAGE>
Such Additional Capital Loans (or a portion thereof, if so specified in the
Loan Agreement) will become due and payable, together with accrued interest,
on the terms set forth in the Loan Agreement, upon the earliest of (i)
dissolution of the Original Limited Partner or the Partnership, (ii) the date
of consummation of the Call, (iii) the date of consummation of a Tender Offer,
(iv) the occurrence of an Event of Default, and the acceleration of the
Additional Capital Loans, (v) the Early Put Date or (vi) in the event that the
Partnership receives a Property Guaranty Reimbursement, within three Business
Days following receipt of such amount (each a "Mandatory Payment Date"). Any
portion of the Additional Capital Loans which remains outstanding on the Put
Date shall become due and payable on the Put Date. In the event that less than
the full limited partnership interest of the Original Limited Partner is
purchased by the General Partner in connection with a Tender Offer or a
partial Early Put, a pro rata portion of the Additional Capital Loans shall
become due and payable on the Early Put Date, or the date of consummation of
such Tender Offer, as the case may be, equal to the percentage of the limited
partnership interest being purchased by the General Partner. Any Minimum LP
Distribution payable on a due date for payment of interest on any Additional
Capital Loans shall be reduced by the interest then due, shall be paid over by
the General Partner to the Lender for the account of the Original Limited
Partner, and shall be applied directly in payment of such interest. Any other
distribution payable to the Original Limited Partner on a due date for payment
of the principal of any Additional Capital Loans shall be reduced by the
principal amount of such Additional Capital Loans then payable, shall be paid
over by the General Partner to the Lender for the account of the Original
Limited Partner and shall be applied directly in repayment thereof.
(e) The Additional Capital Loans shall bear interest
at an annual rate equal to the Prime Rate. Interest shall be payable quarterly
at the time that Minimum LP Distributions are paid, on any Mandatory Payment
Date and on the Put Date. Additional Capital Loans shall be non-recourse to
the Members of the Original Limited Partner, including, without limitation,
the Designated Member, but will be recourse to the assets of
31
<PAGE>
the Original Limited Partner (including, without limitation, the Capital
Contributions of the Members), and will be secured by its limited partnership
interest in the Partnership.
(f) Additional LP Capital Contributions shall be used,
among other things, for Development Advances and for guaranties given by the
Partnership in its discretion, and on a selective basis in respect of
Franchisees meeting such criteria as the General Partner may from time to time
establish, in favor of lenders (excluding the SPV Lenders under the SPV Credit
Agreement) providing financing for Eligible Hotel Properties. Each such
guaranty (each a "Property Guaranty") shall be on such terms as the General
Partner may approve, provided, that (i) the aggregate amount of all Property
Guaranties covering an Eligible Hotel Property shall not exceed the lesser of
20% of the principal amount of such financing or $600,000, (ii) each Property
Guaranty shall be for a maximum period of three years from the date the
relevant Hotel Property becomes an Eligible Hotel Property (without renewals
thereafter), (iii) the Partnership, as guarantor shall receive such collateral
security and other credit support as the General Partner deems appropriate,
but no Property Guaranty shall be issued by the Partnership in the absence of
any collateral security or other credit support, and (iv) in the event that
any Franchisee has multiple Eligible Hotel Properties, the Partnership may
issue a pooled Property Guaranty, covering 20% of the aggregate principal
amount of permanent financings for all such Eligible Hotel Properties,
provided, that the aggregate face amount of any such pooled Property Guaranty
shall not exceed an amount equal to $600,000 multiplied by the number of
Eligible Hotel Properties which are the subject of such pooled Property
Guaranty. Each issuance of a Property Guaranty shall reduce the amount
available under the commitment for Additional Capital Loans (other than an
Additional Capital Loan required to fund a Property Guaranty Payment in
respect of such Property Guaranty) described in the Loan Agreement by an
amount equal to the Property Guaranty Commitment of the Partnership under such
Property Guaranty. Any Property Guaranty Payment shall be made from the
proceeds of an Additional LP Capital Contribution, and any Property Guaranty
Reimbursement shall be used by the
32
<PAGE>
General Partner on behalf of the Original Limited Partner to repay, within 3
Business Days of receipt by the Partnership, a portion of the Additional
Capital Loans in the amount of such Property Guaranty Reimbursement. None of
the requirements relating to Property Guaranties contained in this clause (f),
except for any reduction of the SPV Commitment which may be required in
connection therewith, shall be construed to apply to or limit the ability of
the Partnership or the General Partner to execute, deliver or perform the SPV
Loan Documents in accordance with their terms.
(g) Except as set forth in this Section
4.1, no Limited Partner shall be required to make any
additional Capital Contributions.
4.2 Capital Accounts. A separate capital account (each
a "Capital Account") shall be maintained for each Partner in accordance with
the following provisions:
(a) To each Partner's Capital Account there shall be
credited such Partner's Capital Contributions, such Partner's distributive
share of Net Income and any items in the nature of income or gain which are
specially allocated pursuant to Section 4.4 hereof, and the amount of any
Partnership liabilities assumed by such Partner or which are secured by any
Partnership property distributed to such Partner.
(b) To each Partner's Capital Account there shall be
debited the amount of cash and the Gross Asset Value of any Partnership
property distributed to such Partner pursuant to any provision of this
Agreement, such Partner's distributive share of Net Losses and any items in
the nature of expenses or losses which are specially allocated pursuant to
Section 4.4 hereof, and the amount of any liabilities of such Partner assumed
by the Partnership or which are secured by any property contributed by such
Partner to the Partnership.
(c) In the event all or a portion of a Partnership
interest is transferred in accordance with the terms of this Agreement, the
transferee shall succeed
33
<PAGE>
to the Capital Account of the transferor to the extent
it relates to the transferred Partnership interest.
(d) In determining the amount of an liability for
purposes of Sections 4.2(a) and 4.2(b) hereof, there shall be taken into
account Code Section 752(c) and any other applicable provisions of the Code
and Treasury Regulations.
(e) This Section 4.2 and the other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended to
comply with Treasury Regulations Section 1.704-1(b), and shall be interpreted
and applied in a manner consistent with such Treasury Regulations. In the
event the General Partner shall determine that it is prudent to modify the
manner in which the Capital Accounts, or any debits or credits thereto are
computed, in order to comply with such Treasury Regulations, the General
Partner may make such modification, provided that it is not likely to have a
material effect on the amounts distributed to any Partner upon the dissolution
of the Partnership.
4.3 Allocations of Net Income and Net
Losses.
(a) Net Income. After giving effect to
the special allocations set forth in Section 4.4 hereof, Net Income shall be
allocated in the following order of priority:
(i) First, to the General Partner until
the cumulative Net Income allocated pursuant to this Section 4.3(a)(i) equals
the cumulative Net Losses previously allocated to the General Partner pursuant
to the last sentence of Section 4.3(b)(ii) hereof.
(ii) Thereafter, Net Income shall be
allocated 99% to the Original Limited Partner and 1% to
the General Partner.
(b) Net Losses.
(i) After giving effect to the special
allocations set forth in Section 4.4 hereof, Net Losses
34
<PAGE>
shall be allocated 99% to the Original Limited Partner
and 1% to the General Partner.
(ii) The Net Losses allocated pursuant to
Section 4.3(b)(i) hereof shall not exceed the maximum amount of Net Losses
that can be so allocated without causing the Original Limited Partner to have
a deficit Adjusted Capital Account balance as of the close of any taxable
year. All Net Losses exceeding the limitation set forth in this Section
4.3(b)(ii) shall be allocated to the General Partner.
4.4 Special Allocations. The following
special allocations shall be made in the following order:
(a) Items Relating to SPV. In the event
that the Partnership is allocated losses (including, but not limited to, any
bad debt deductions) and/or any income (including, but not limited to,
cancellation of indebtedness income) recognized by the SPV with respect to a
Franchisee Loan, such losses and/or income (i) recognized by the SPV and
allocated to the Partnership or (ii) recognized by the Partnership, on account
of HFS's or its Affiliates' satisfaction of the HFS SPV Guaranty shall be
allocated entirely to the General Partner to the extent of any amount payable
or paid by HFS or any of its Affiliates in connection with the HFS SPV
Guaranty of the SPV Loan related to such Franchisee Loan. This Section 4.4(a)
is intended to ensure that the Partner, if any, that economically bears the
loss (or whose Affiliate bears the loss) relating to a Franchisee Loan is
allocated such loss (and any associated income) and shall be interpreted and
applied in a manner consistent with such intention.
(b) Minimum Gain Chargeback. Except as
otherwise provided in Treasury Regulations Section 1.704- 2(f),
notwithstanding any other provision of this Agreement, if there is a net
decrease in Partnership Minimum Gain during any Fiscal Year, each Partner
shall be specially allocated items of Partnership income and gain for such
Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to
such Partner's share of the net decrease in Partnership Minimum Gain,
determined in accordance with Treasury Regulations Section 1.704-2(g).
35
<PAGE>
The items to be so allocated shall be determined in accordance with Treasury
Regulations Sections 1.704- 2(f)(6) and 1.704-2(j)(2). This Section 4.4(a) is
intended to comply with the minimum gain chargeback requirement in Treasury
Regulations Section 1.704-2(f) and shall be interpreted consistently
therewith.
(c) Partner Minimum Gain Chargeback.
Except as otherwise provided in Treasury Regulations Section 1.704-2(i)(4),
notwithstanding any other provision of this Agreement, if there is a net
decrease in Partner Nonrecourse Debt Minimum Gain attributable to Partner
Nonrecourse Debt during any Partnership Fiscal Year, each Partner who has a
share of the Partner Nonre- course Debt Minimum Gain attributable to such
Partner Nonrecourse Debt, determined in accordance with Treasury Regulations
Section 1.704-2(i)(5), shall be specially allocated items of Partnership
income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal
Years) in an amount equal to such Partner's share of the net decrease in
Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse
Debt, determined in accordance with Treasury Regulations Section 1.704-
2(i)(4). The items to be so allocated shall be determined in accordance with
Treasury Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2). This Section
4.4(b) is intended to comply with the minimum gain chargeback requirement in
Treasury Regulations Section 1.704-2(i)(4) and shall be interpreted
consistently therewith.
(d) Qualified Income Offset. In the event the Original
Limited Partner receives any adjustments, allocations, or distributions
described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5), or
(6), items of Partnership income and gain shall be specially allocated to such
Partner in an amount and manner sufficient to eliminate, to the extent
required by the Treasury Regulations, the deficit Adjusted Capital Account
balance of such Original Limited Partner as quickly as possible, provided that
an allocation pursuant to this Section 4.4(c) shall be made only if and to the
extent that such Original Limited Partner would have a deficit Adjusted
Capital Account balance after all other allocations provided for in this
Agreement have been tentative-
36
<PAGE>
ly made, as if this Section 4.4(c) were not in this Agreement.
(e) Gross Income Allocation. In the event the Original
Limited Partner has a deficit Capital Account balance at the end of any
Partnership Fiscal Year which is in excess of the amount such Original Limited
Partner is deemed to be obligated to restore pursuant to the penultimate
sentences of Treasury Regulations Section 1.704-2(g)(1) and Treasury
Regulations Section 1.704- 2(i)(5), such Original Limited Partner shall be
specially allocated items of Partnership income and gain in the amount of such
excess as quickly as possible, provided that an allocation pursuant to this
Section 4.4(d) shall be made only if and to the extent that such Original
Limited Partner would have a deficit Capital Account balance in excess of such
sum after all other allocations provided for in this Agreement have been made,
as if Section 4.4(c) hereof and this Section 4.4(d) were not in the Agreement.
(f) Nonrecourse Deductions. Nonrecourse
Deductions for any Fiscal Year shall be allocated 99% to the Original Limited
Partner and 1% to the General Partner.
(g) Partner Nonrecourse Deductions. Any
Partner Nonrecourse Deductions for any Fiscal Year shall be specially
allocated to the Partner who bears the economic risk of loss with respect to
the Partner Nonre- course Debt to which such Partner Nonrecourse Deductions
are attributable, in accordance with Treasury Regulations Section
1.704-2(i)(1).
(h) Section 754 Adjustments. To the
extent an adjustment to the adjusted tax basis of any Partnership asset
pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant
to Treasury Regulations Section 1.704-1(b)(2)(iv)(m)(2) or Treasury
Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in
determining Capital Accounts as the result of a distribution to a Partner in
complete liquidation of his interest in the Partnership, the amount of such
adjustment to Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of
37
<PAGE>
the asset) or loss (if the adjustment decreases such basis) and such gain or
loss shall be specially allocated to the Partners in a manner consistent with
the manner in which their Capital Accounts are required to be adjusted
pursuant to such Sections of the Treasury Regulations.
4.5 Binding Effect of Allocations. The
Partners are aware of the income tax consequences of the allocations set forth
in Sections 4.3, 4.4 and 4.6 hereof and hereby agree to be bound by the
provisions of this Agreement in reporting their shares of Partnership income,
gain, loss, deduction and credit for income tax purposes.
4.6 Tax Allocations: Code Section
704(c).
(a) Income, gain, loss and deduction with
respect to any property contributed to the capital of the Partnership shall,
solely for tax purposes, be allocated among the Partners so as to take account
of any variation between the adjusted tax basis of such property to the
Partnership and its initial Gross Asset Value. Such allocations shall be made
in accordance with any permissible method or methods under Section 704(c) of
the Code and the Treasury Regulations promulgated thereunder, as determined by
the General Partner in its sole discretion.
(b) In the event the Gross Asset Value of
any Partnership asset is adjusted pursuant to the definition of "Gross Asset
Value" set forth herein, subsequent allocations of income, gain, loss, and
deduction with respect to such asset shall take account of any variation
between the adjusted tax basis of such asset and its Gross Asset Value. Such
allocations shall be made in accordance with any permissible method or methods
under Section 704(c) of the Code and the Treasury Regulations promulgated
thereunder, as determined by the General Partner in its sole discretion.
(c) Allocations pursuant to this Section
4.6 are solely for Federal, state and local income tax purposes and shall not
affect, or in any way be taken into account in computing, any Partner's
Capital Account or share of Net Income, Net Losses or other items or
38
<PAGE>
distributions pursuant to any provision in this Agreement.
4.7 Transfer or Change in Partnership Interest. If the
respective interests of the existing Partners in the Partnership change or if
a Partnership interest is Assigned, in accordance with Section 12.1, to any
other person or entity, for the Fiscal Year of Assignment all income, gains,
losses, deductions, tax credits and other tax incidents resulting from the
operations of the Partnership shall be allocated, as between transferor and
transferee, by taking into account their varying interests in the Partnership
in accordance with Section 706 of the Code and the Treasury Regulations
promulgated thereunder.
4.8 Characterization of Additional Capital
Loans and Additional LP Capital Contributions for Income Tax Purposes.
Notwithstanding any other provision of this Agreement, the Partners hereby
agree to treat the Additional Capital Loans, the proceeds of which will be
used to make the Additional LP Capital Contributions, as Capital Contributions
by the General Partner for all income tax purposes including, but not limited
to, (a) the maintenance of Capital Accounts under Section 4.2 hereof, (b) the
determination of the Partners' tax bases in their partnership interests in the
Partnership and (c) the determination of the amount realized by the Limited
Partner as a result of the transfer of its partnership interests in the
Partnership to the General Partner pursuant to (x) the General Partner's
Tender Offer as described in Section 8 hereof, (y) its Early Put and Put
rights as described in Section 9 hereof and (z) the General Partner's Call
option as described in Section 10 hereof.
4.9. General Partner. The interest of the
General Partner as General Partner (without taking into account any Limited
Partner interest owned by or for the General Partner) in each material item of
Partnership income, gain, loss, deduction or credit shall be equal to at least
1% of each such item at all times during the existence of the Partnership,
subject to certain temporary allocations that may be required under Section
704(b) and (c) of the Code. The General Partner shall
39
<PAGE>
maintain a minimum Capital Account balance equal to the lesser of 1 percent of
the total positive Capital Account balances for the Partnership (if any) or
$500,000. Notwithstanding any other provision of this Agreement, whenever a
Limited Partner makes a Capital Contribution to the Partnership, the General
Partner is obligated to make a Capital Contribution equal to 1.01 percent of
the Limited Partners' Capital Contributions or a lesser amount (including
zero) that causes the General Partner's Capital Account balance to equal the
lesser of 1 percent of the total positive Capital Account balances for the
Partnership (if any) or $500,000.
4.10 Future Capital Requirements. (a) If
the General Partner elects to increase the capital of the Partnership over and
above the sum of (i) the initial Capital Contributions of the General Partner
and the Original Limited Partner (including, without limitation, additional
initial Capital Contributions made at Subsequent Closings) and (ii) the
Additional LP Capital Contributions (irrespective of whether all of the
Capital Contributions referred to in clauses (i) and (ii) are then paid in),
if any such Additional LP Capital Contributions are made, the General Partner
may do so through the issuance of additional limited partnership interests
provided, that no additional limited partnership interests may be offered on
terms which would, prior to the Put Date, (x) reduce or change the timing or
priority of, any distribution or payment otherwise receivable by the Original
Limited Partner in accordance with the terms of this Agreement, or (y) provide
for any puts, calls, tenders or the like on terms more favorable (whether in
price, timing or otherwise) to the holders of such additional limited
partnership interests (the "Subsequent Limited Partners") than the terms of
the Early Put, the Put, the Call and the Tender Offer provided for to the
Original Limited Partner.
(b) Such additional limited partnership interests
shall be offered first to the Original Limited Partner, at the price which the
General Partner proposes to offer the same to third parties and otherwise on
the same terms, which right of first refusal shall be exer- cisable by the
Original Limited Partner for a period of 35 days. The Original Limited Partner
shall, immediately
40
<PAGE>
upon receipt of any such offer from the General Partner, offer (a "First-round
Offer") to the Members of the Original Limited Partner, ratably in accordance
with the LLC Interests then outstanding, additional LLC Interests, on the same
terms, and for the same price, as have been offered to the Original Limited
Partner. Such First-round Offer from the Original Limited Partner shall be
exercis- able by the Members for a 22-day period, commencing on the date the
Original Limited Partner receives its offer from the General Partner; any
Member electing to accept such offer must pay the specified price in
immediately available funds to the Designated Member by the 23rd day. If no
Members accept a First-round Offer, there shall be no Second-round Offer. If
any, but less than all, Members elect to purchase their ratable portion of
additional LLC Interests corresponding to such additional limited partnership
interests, the Original Limited Partner shall offer (a "Second-round Offer")
the unpurchased additional LLC Interests to each purchasing Member ratably in
accordance with the following formula: the number of remaining unsold
additional LLC Interests shall be multiplied by a fraction, the numerator of
which shall be the number of additional LLC Interests purchased by such Member
in the First-round Offer, and the denominator of which shall be the total
number of additional LLC Interests purchased in the First-round Offer. Such
Second-round Offer shall be exercisable by the Members who accepted the
First-round Offer for a period of twelve days commencing on the 23rd day of
the First-round Offer. Any Member electing to accept a Second-round Offer must
pay the specified price in immediately available funds to the Designated
Member by the 35th day of the offer period.
(c) On the first Business Day following the 35th day
of the offer period, the Original Limited Partner shall purchase such
aggregate number of additional limited partnership interests as are
proportionate to the aggregate number of additional LLC Interests being
purchased by the Members pursuant to the First-round Offer and the
Second-round Offer. Subject to the foregoing provisions of this Section 4.10,
the General Partner shall be entitled to amend this Agreement without the
consent of the Original Limited Partner to admit any Subsequent Limited
Partners to the Partnership.
41
<PAGE>
5. DISTRIBUTIONS.
5.1. No Right to Withdraw. No Partner shall have the
right to withdraw or demand distributions of any amount in its Capital
Account, except as expressly provided in this Section 5.
5.2. Minimum LP Distributions. (a) The Partnership
will provide minimum distributions ("Minimum LP Distributions") to the
Original Limited Partner, on each date on which interest on the Additional
Capital Loans becomes due and payable (except as otherwise provided in the
Loan Agreement), and on each date for payment of the Administrative Fee and
Other Expenses, equal to the sum, as applicable, of (i) the interest, if any,
then accrued and payable on the Additional Capital Loans (except as otherwise
provided in the Loan Agreement), (ii) the Administrative Fee of the Designated
Member,and (iii) the Other Expenses then due and payable. The obligation of
the Partnership to make Minimum LP Distributions shall be non-recourse to the
assets of the General Partner as general partner (other than assets comprising
the capital of the Partnership). So long as no Additional Capital Loans are
outstanding, Minimum LP Distributions will not exceed the amount specified by
clauses (ii) and (iii) above and will be declared and paid on an annual basis
with respect to the Administrative Fee and as needed with respect to Other
Expenses. So long as any Additional Capital Loans are outstanding, Minimum LP
Distributions will be declared at the end of each fiscal quarter of the
Partnership and upon any Mandatory Payment Date (except as otherwise provided
herein or in the Loan Agreement), and on the Put Date, and with respect to
Other Expenses, as needed. Minimum LP Distributions which are payable
quarterly will be payable no later than 60 days after the close of the
relevant quarterly period, except for the last quarter of each Fiscal Year, in
which case Minimum LP Distributions will be payable 90 days after the end of
such quarter. In addition, Minimum LP Distributions payable in respect of
interest on Additional Capital Loans will be payable (except as otherwise
provided in the Loan Agreement) on each Mandatory Payment Date and on the Put
Date.
42
<PAGE>
(b) In the event that there exists a Minimum LP Distribution
Shortfall at the time any Minimum LP Distribution becomes payable to the
Original Limited Partner, the General Partner will arrange (on a non-recourse
basis to the General Partner) for a Shortfall Loan from HFS to the
Partnership, in accordance with the terms of the Support Agreement, in an
amount equal to such Minimum LP Distribution Shortfall. In addition, if at any
time an indemnity payment becomes due and owing by the Partnership under
Section 2 of the Indemnity Agreement, and in the reasonable judgment of the
General Partner, the Partnership lacks sufficient funds to make such indemnity
payment, then the General Partner will arrange for a Shortfall Loan from HFS
to the Partnership, in an amount equal to such indemnity payment Shortfall.
Each Shortfall Loan shall bear interest at the Prime Rate. Interest shall
accrue, and shall be payable annually 90 days after the end of each fiscal
year, before any Annual Distribution is made to the Original Limited Partner
or the General Partner, to the extent that, at the end of the Fiscal Year in
which such Shortfall Loan is made (and each subsequent Fiscal Year in which
such Shortfall Loan is outstanding), the Partnership has Cash Available for
Distribution (before taking into account clause (vii) of such definition) and
to the extent of such Cash Available for Distribution. After the payment of
interest as provided for in the preceding sentence, the principal of each
Shortfall Loan shall be repaid 90 days after the end of each Fiscal Year in
which any such Shortfall Loan is made, before any Annual Distribution is made
to the Original Limited Partner or the General Partner, to the extent the
Partnership has Cash Available for Distribution (before taking into account
clause (vii) of such definition except for interest payable on such Shortfall
Loan). If, at the end of any Fiscal Year in which a Shortfall Loan is made
(and any subsequent Fiscal Year in which such Shortfall Loan is outstanding)
the Partnership is unable to repay such Shortfall Loan in full, together with
interest thereon, the principal amount remaining unpaid shall continue to
accrue interest at the Prime Rate. Until the repayment in full of all
Shortfall Loans outstanding, together with interest accrued thereon, any Cash
Available for Distribution (before taking into account clause (vii) of such
definition) in each subsequent Fiscal Year shall be applied first to pay
interest
43
<PAGE>
accrued on such Shortfall Loans and then to repay the principal thereof before
any Annual Distribution is made to the Original Limited Partner or the General
Partner.
(c) Minimum LP Distributions, to the extent attributable to clause
(i) of Section 5.2(a) hereof, shall be treated for income tax purposes as
guaranteed payments (within the meaning of Section 707(c) of the Code and
Treasury Regulations Section 1.707-1(c)) to the General Partner. Minimum LP
Distributions, to the extent attributable to clauses (ii) and (iii) of Section
5.2(a) hereof, shall be treated for income tax purposes as cash distributions
to the Original Limited Partner which directly reduces its Capital Account
pursuant to Section 4.2(b) hereof.
5.3 Investment Income Distributions. The Partnership
shall, as of the end of each Fiscal Year, declare a distribution (each an
"Investment Income Distribution") equal to 50% of the Investment Income earned
in such Fiscal Year. Investment Income Distributions shall be distributed to
the General Partner and to the Original Limited Partner in proportion to the
amount of Investment Income allocated to each such Partner for such Fiscal
Year pursuant to Sections 4.3, 4.4 and 4.6 hereof. Investment Income
Distributions shall be payable annually, no later than 90 days after the close
of the relevant Fiscal Year. Investment Income Distributions shall be treated
for income tax purposes as cash distributions to the Original Limited Partner
and the General Partner, as the case may be, which directly reduce their
respective Capital Accounts pursuant to Section 4.2(b) hereof.
5.4. Annual Distributions. After payment
(in the following order) of Minimum LP Distributions as required by Section
5.2(a), Investment Income Distributions in accordance with Section 5.3,
payment of any Corporate Services Fee then due, as required by Section 6.1(a)
and payment of any Shortfall Loans with interest as required by Section
5.2(b), the Partnership shall as of the close of each Fiscal Year, declare a
distribution (each an "Annual Distribution") equal to the Cash Available for
Distribution. Cash Available for Distribution shall be distributed 1% to the
General Partner and 99% to the Limited Partner. Annual Distributions
44
<PAGE>
will be declared as at the end of each Fiscal Year and will be payable no
later than 90 days after the close of each Fiscal Year.
5.5 Mechanics of Distributions. At the option of the
General Partner, any distribution payable to the Original Limited Partner may
be paid directly to the bank account of each Member specified in the Operating
Agreement. If the General Partner elects to make any such distribution
directly to the Members, it shall give the Designated Member at least five
Business Days' telephonic or telefax notice thereof, and shall, on the payment
date for such distribution, pay same directly to each Member's bank account,
provided, that, if the Designated Member shall, within two Business Days prior
to any distribution payment date, give notice to the General Partner in
writing that all or a portion of the distribution payable to the Original
Limited Partner must be used to pay obligations of the Original Limited
Partner then due and owing, the General Partner shall pay such portion of such
distribution to the Designated Member for credit to the Original Limited
Partner as the Original Limited Partner shall have requested, and the General
Partner shall thereupon have discharged its obligation to make such payments
and shall have no further obligation or liability in respect of such
distribution to any Person.
5.6. Restrictions on Distributions. The foregoing
provisions of this Section 5 to the contrary notwithstanding, no distribution
shall be made (a) if such distribution would violate any contract or agreement
to which the Partnership is then a party or any law, rule, regulation, order
or directive of any Governmental Authority then applicable to the Partnership,
(b) to the extent that the General Partner reasonably determines that any
amount otherwise distributable should be retained by the Partnership to pay,
or to establish a reserve for the payment of, any liability or obligation of
the Partnership, whether liquidated, fixed, contingent or otherwise or (c) to
the extent that the General Partner reasonably determines that the cash
available to the Partnership is insufficient to permit such distribution after
taking into account the proceeds of any Shortfall Loans.
45
<PAGE>
5.7. Withholding. Notwithstanding any
other provision of this Agreement, the General Partner is authorized to take
any action that it determines to be necessary or appropriate to cause the
Partnership to comply with any foreign or United States Federal, state or
local withholding requirement with respect to any allocation, payment or
distribution by the Partnership to any Partner or other Person. All amounts so
withheld, and, in the manner determined by the General Partner, amounts
withheld with respect to any allocation, payment or distribution by any Person
to the Partnership, shall be treated as distributions to the applicable
Partners under Section 5.2, 5.4 or 14.2, as the case may be. If any such
withholding requirement with respect to any Partner exceeds the amount
distributable to such Partner under Section 5.2, 5.4 or 14.2, as the case may
be, or if any such withholding requirement was not satisfied with respect to
any amount previously allocated or distributed to such Partner, such Partner
and any successor or Assignee with respect to such Partner's interest in the
Partnership hereby indemnifies and agrees to hold harmless the General Partner
and the Partnership for such excess amount or such withholding requirement, as
the case may be.
5.8 Certain Distributions to the Original Limited
Partner. Notwithstanding any other provision of this Agreement, in the event
that the Original Limited Partner is allocated Net Income solely as a result
of (i) any allocation to the Partnership of net income of SPV or (ii) the
receipt of any payment by the Partnership from SPV pursuant to Section 2.6 of
the SPV LLC Agreement (net of any deduction of the Partnership resulting from
the payment of such amounts to HFS pursuant to Section 4.3 of the Support
Agreement), the Partnership shall distribute to the Original Limited Partner
an amount equal to the Net Income resulting solely from the events described
in clauses (i) and (ii) above.
6. MANAGEMENT.
6.1. Management by General Partner; Corporate Services Fee;
Third Parties. (a) The Part- nership shall, subject to clause (b) below, be
managed exclusively by the General Partner. The General Partner
46
<PAGE>
will be responsible for, among other things, management of Franchise sales,
Franchisee compliance, and execution and administration of Franchise
Agreements and other contracts. The General Partner will devote its time and
attention to the business and affairs of the Partnership and perform those
duties as it in its sole discretion deems reasonably necessary to manage
effectively the Partnership's business. The General Partner may also, in the
name of the Partnership, invest in the SPV, and pledge collateral in
accordance with the terms of the Pledge Agreement. The General Partner (or
HFS, pursuant to clause (b) below) will be entitled to reimbursement from, and
will be reimbursed by, the Partnership for certain salaries, benefits, costs
and expenses incurred in carrying out these services on the terms set forth in
the Support Agreement. In addition, the General Partner shall be entitled to
payment of an annual fee (each a "Corporate Services Fee") of $100,000 plus
$2,000 per Eligible Hotel Property (pro-rated in the year each such Eligible
Hotel Property opens). The $100,000 fixed portion of each annual Corporate
Services Fee shall be payable by the Partnership on the last Business Day of
each month in twelve equal monthly installments. The $2,000 portion of the
Corporate Services Fee will accrue and be paid by the Partnership on the last
Business Day of each fiscal quarter. Subject to the order of payments set
forth in Section 5.4, the Corporate Services Fee shall be paid in full before
any Annual Distribution is made. The Corporate Services Fee shall be treated
for income tax purposes as a guaranteed payment (within the meaning of Section
707(c) of the Code and Treasury Regulations Section 1.707-1(c)) to the General
Partner.
(b) The Partnership and the General Part-
ner shall contract with HFS for the provision of certain personnel, services
and facilities for which the General Partner is responsible in accordance with
the terms of the Support Agreement. The General Partner may pay to HFS all or
a portion of its Corporate Services Fee in connection therewith. In addition,
certain salaries, benefits, costs and expenses of HFS (without duplication of
salaries, benefits, costs and expenses reimbursed to the General Partner) will
be reimbursed by the Partnership, on the terms set forth in the Support
Agreement,
47
<PAGE>
and, among other things, the System Assessment Fee will be paid over to HFS in
its entirety.
(c) In addition to the services contracted for under
the Support Agreement, the General Partner may, from time to time, employ any
Person or engage third parties to render services to the Partnership
(including, without limitation, HFS) on such terms and for such compensation
as the General Partner may determine in its sole discretion including, without
limitation, attorneys, investment consultants, brokers or finders, independent
auditors and printers, provided, that unless ML Leasing Partners, Inc. shall
have been removed for cause as the Designated Member, or unless ML Fund
Administrators, Inc. shall have been removed for cause as the Manager, and
subject to applicable laws and Merrill Lynch's right to resign or withdraw,
Merrill Lynch will be the sole investment banker to the Partnership. Such
employees and third parties may include Related Persons, Partnership Entities,
any Franchisee or its Affiliates or any other Person having an interest in the
Partnership's business. Persons retained, engaged or employed by the
Partnership may also be engaged, retained or employed by and act on behalf of
Related Persons, Partnership Entities, any Franchisee or its Affiliates or any
other Person having an interest in the Partnership's business. Any fees or
compensation payable to HFS or an Affiliate of HFS (other than any sharing of
the Corporate Services Fee and reimbursement of expenses in accordance with
the terms of the Support Agreement) shall be charged consistently with the
method of allocation used by HFS for other similar purposes, and (where
applicable) on terms at least as favorable as would be available from a third
party.
(d) No Limited Partner shall take part in the control
of the business of the Partnership, nor shall any Limited Partner have any
right or authority to act for or bind the Partnership.
6.2. Third Party Reliance. Third parties dealing with
the Partnership are entitled to rely conclusively upon the authority of the
General Partner as set forth in this Agreement.
48
<PAGE>
6.3. Other Activities of Related Persons. (a) The
Partnership and each Limited Partner expressly agree that the Related Persons
(other than the Partnership and, except as permitted by Section 6.3(e), the
General Partner), may engage independently or with others, for their own
accounts and for the accounts of others, in other business ventures and
activities of every nature and description. No Partnership Entity shall have
any rights or obligations by virtue of this Agreement in and to such
independent ventures and activities or the income or profits derived
therefrom.
(b) In addition to transactions described or
contemplated in the Transaction Documents, the SPV LLC Agreement, the SPV Loan
Documents and the Franchisee Loan Documents, the Related Persons and
Partnership Entities may engage in transactions with or among each other, the
Franchisees and their Affiliates, and such transactions may involve conflicts
of interest with the Partnership or any of such Persons. Without limiting the
generality of the foregoing, all or some of the directors and officers of HFS
may serve as the directors of the General Partner and the SPV, certain
officers of HFS will also serve as officers of the General Partner and may be
officers of the General Partner and the SPV, certain officers and/or directors
of HFS (as well as Franchisees) may be Members of the Original Limited Partner
and/or the SPV, the General Partner may serve as SPV Manager, the General
Partner and the Partnership may be members of the SPV and may execute, deliver
and perform the SPV Security Documents to which each is a party, the SPV may
incur the SPV Loans in order to fund Franchisee Loans to Franchisees, HFS may
issue the HFS SPV Guaranty, and all or any of the foregoing relationships may
give rise to conflicts of interest with the Partnership. No Person shall have
any right, claim or remedy against any other Person under any of the
Transaction Documents arising from or relating to any such conflicts of
interest.
(c) Except as set forth in Sections 2.3,
2.8 and 6.3(a), no provision of this Agreement shall be deemed to prohibit or
restrict any Related Person from engaging in or pursuing, directly or
indirectly, any interest in other business ventures of any kind, nature or
description, independently or with others, whether
49
<PAGE>
such ventures are competitive with the business of the Partnership, or
otherwise, including, without limitation, the sale of franchises of different
brand hotels, regardless of whether or not any such franchises compete,
directly or indirectly, with the Partnership's Wingate Inn brand. No Related
Person shall be obligated to disclose or refer to any Partnership Entity any
business opportunity of any kind or nature. No Partnership Entity shall have
any right to participate in any manner in any such independent venture or
other partnership or account or in any profits or income earned or derived by,
or accruing to, any Related Person.
(d) The Partnership and the Limited Part-
ners understand and agree that the Related Persons (other than the Partnership
and General Partner, except, in the case of the Software Contracts, with
respect to the Software Contracts) may earn revenues, royalties, fees
(including director's fees or other similar compensation) and other
remuneration from other Persons in connection with any of their businesses, in
the form of cash, securities or otherwise, and that any such fees shall be for
the sole account of the Related Persons.
(e) Without limiting the generality of
the foregoing, the General Partner, HFS or an Affiliate will enter into
Software Contracts directly with each Franchisee. All licensing and other
fees, costs, expenses and remuneration payable under such Software Contracts,
and any other payment, or reimbursement of expenses thereunder shall be solely
for the account of the General Partner, HFS or such Affiliate, as the case may
be, and no Partnership Entity shall have any interest in or rights to any such
fees or other payments. In addition, HFS may contact Franchisees (i) to
solicit or promote the sale or lease of goods and services through its
purchasing and communications divisions or programs sponsored or promoted by
such divisions, (ii) to solicit their participation in the "preferred vendor"
programs of HFS for goods and services offered to Franchisees or to guests at
Chain Facilities, or (iii) to introduce financing sources to, and solicit
applications for financing of Franchisees on behalf of sources referred by
HFS. HFS may receive compensation from any party selling, arranging for or
providing such goods, services or financing
50
<PAGE>
arising from transactions with Franchisees and the Partnership shall have no
claim to all or any portion of such compensation.
6.4. Certificates and Fictitious Name Fil-
ings. The General Partner is hereby authorized to execute and file a
certificate of limited partnership pursuant to the Act and to execute or cause
to be executed all other instruments, certificates, notices and documents, and
to do or cause to be done all such filing, recording, publishing and other
acts as may be deemed by the General Partner in its sole discretion to be
necessary or appropriate from time to time to comply with all applicable
requirements for the formation or operation or, when appropriate, termination
of a limited partnership in the State of Delaware and all other jurisdictions
where the Partnership does or shall desire to conduct its business.
6.5. Funds Management. The General
Partner will be responsible for managing the funds of the Partnership. The
General Partner shall invest any available funds of the Partnership either (i)
in bank deposits, (ii) in short-term debt securities issued by the U.S.
government or agencies thereof or (iii) in corporate commercial paper rated
A-1 or better by Standard & Poor's Ratings Group and P-1 by Moody's Investors
Service, Inc.
6.6. Expenses. The Partnership will be
responsible for all expenses ("Partnership Expenses"), including, without
limitation, (i) all organizational costs and expenses of the Partnership
(subject to Section 4.1(a)), the General Partner, the Original Limited Partner
and the Designated Member, (ii) all expenses incurred in connection with
Partnership operations, including all third party out-of-pocket costs and
expenses of custodians, paying agent, registrar, counsel and independent
accountants, and any taxes, fees or other charges of any Governmental
Authority levied against or payable by the Partnership, (iii) all costs
incurred in connection with the preparation of or relating to reports made to
the Partners, (iv) all costs related to litigation involving the Partnership,
directly or indirectly, including, without limitation, attorneys' fees
incurred in connec-
51
<PAGE>
tion therewith, (v) all costs related to the Partnership's indemnification
obligations set forth in Section 13.1, (vi) all costs related to any offering
of Partnership interests, (vii) the expenses payable by the Partnership
referred to in Section 6.1, and (viii) interest on the Shortfall Loans.
6.7. Development Advances, Property Guar-
anties and Franchisee Loans. Subject to and in accordance with the terms and
provisions of this Agreement, the Partnership may, in its sole discretion,
provide Development Advances and Property Guaranties to Franchisees of an
Eligible Hotel Property from time to time, either as an inducement for the
sale of a Franchise or for other reasons deemed appropriate by the General
Partner. Property Guaranties shall be subject to the limitations established
in Section 4.1(f). In addition to the foregoing, the Partnership (as a member
of the SPV) may cause the SPV to borrow the SPV Loans (and, in connection
therewith, each of the SPV, the General Partner and the Partnership shall
execute and deliver the Pledge Agreement), and lend such funds to Franchisees
in the form of Franchisee Loans, provided, that the aggregate amount of the
amount guaranteed under the HFS SPV Guaranty, Development Advances and
Property Guaranty Commitments at any time outstanding shall not exceed
$60,000,000.
6.8. Insurance. The Partnership will, at its own cost
and expense, procure and maintain property and casualty insurance for its
physical assets, and commercial general liability insurance in a minimum
amount of $25,000,000, and will require that Franchisees carry commercial
general liability insurance, consistent with coverage required by comparable
Affiliates of HFS, at such Franchisees' expense. The Partnership's insurance
will name HFS, the General Partner and the Original Limited Partner as
additional insureds. The Partnership will require that insurance carried by
Franchisees will name the Partnership, HFS, the General Partner and the
Original Limited Partner as additional insureds.
52
<PAGE>
7. REPRESENTATIONS AND WARRANTIES
7.1. Representations and Warranties of the
General Partner. The General Partner represents and warrants that (i) the
General Partner has the necessary corporate power and authority to execute,
deliver and perform this Agreement, it has duly executed this Agreement and
this Agreement constitutes the legal, valid and binding obligation of the
General Partner, enforceable in accordance with its terms; and (ii) the
execution, delivery and performance by the General Partner of this Agreement
and its consummation of the transactions contemplated hereby do not and will
not conflict with or result in any breach of any of the provisions of,
constitute a default under, result in a violation of, or require any
authorization, consent, approval, exemption, or other action by or notice to
any Governmental Authority, under the provisions of the charter or by-laws of
the General Partner, any indenture, mortgage, lease, loan agreement, or other
agreement or instrument to which the General Partner or its properties are
subject, or any statute, law, judgment, decree, order, writ, injunction,
regulation, or rule applicable to the General Partner or its assets.
7.2. Representations and Warranties of Limited
Partners. Each Limited Partner represents and warrants to the General Partner,
as to itself only, the following (i) such Limited Partner has the necessary
corporate or individual power and authority to execute, deliver, and perform
this Agreement, it has duly executed this Agreement and this Agreement
constitutes the legal, valid and binding obligation of such Limited Partner
enforceable against it or him in accordance with its terms; and (ii) the
execution, delivery, and performance by such Limited Partner of this Agreement
and the consummation by such Limited Partner of the transactions contemplated
hereby do not and will not conflict with or result in any breach of any of the
provisions of, constitute a default under, result in a violation of, or
require any authorization, consent, approval, exemption, or other action by or
notice to any Governmental Authority, under the provisions of the charter,
by-laws or Operating Agreement of such Limited Partner, any indenture,
mortgage, lease, loan agreement, or other agreement or in-
53
<PAGE>
strument to which such Limited Partner or its properties are subject, or any
statute, law, judgment, decree, order, writ, injunction, regulation, or rule
applicable to such Limited Partner or its assets.
8. GENERAL PARTNER'S TENDER RIGHT.
(a) The General Partner shall have the right at any
time and from time to time, but no more than once in any twelve-month period
(provided, that any modification or amendment to the terms of any Tender Offer
made within 120 days of the initiation thereof shall not constitute a second
offer within any 12-month period) to make a Tender Offer in writing to the
Original Limited Partner to purchase all or part of the limited partnership
interest owned by the Original Limited Partner for a fixed price (the "Offer
Price"). Upon receipt of such Tender Offer, the Original Limited Partner shall
be obligated to, and shall offer in writing to, redeem all (in the case of a
full Tender Offer) or a proportionate amount (in the case of a partial Tender
Offer) of the outstanding LLC Interests for the Offer Price, and otherwise on
the same terms as were offered by the General Partner. In the event there is
an over-subscription by the Members of the Original Limited Partner's offer to
redeem a proportionate amount of the LLC Interests pursuant to a partial
Tender Offer, the Original Limited Partner shall be obligated to redeem LLC
Interests pro-rata from all Members accepting such offer. If, prior to the Put
Date, more than 75% of the then outstanding LLC Interests are submitted for
redemption by the Members (but not pursuant to any over-subscription by the
Members pursuant to a partial Tender Offer), then the Original Limited Partner
will be required to sell the whole limited partnership interest to the General
Partner. If, after the Put Date, more than 50% of the then outstanding LLC
Interests are submitted for redemption by the Members (but not pursuant to any
over-subscription by the Members pursuant to a partial Tender Offer), then the
Original Limited Partner will be required to sell the whole limited
partnership interest to the General Partner. In either case the General
Partner shall purchase the whole limited partnership interest of the Original
Limited Partner for the Offer Price. Upon purchase of the entire limited
partnership interest and the making of payment to
54
<PAGE>
the Original Limited Partner of any amount owing to it (after taking into
account the payments required to be made under clause (c) hereof) in
accordance with the terms of this Section 8, the Original Limited Partner
shall automatically cease to be a Partner in the Partnership. The other terms
and timing of any such Tender Offer shall be provided to the Original Limited
Partner in writing at the time of such Tender Offer. Without limiting the
generality of the foregoing, the General Partner shall have the right to make
Tender Offers contingent upon such percentage acceptance as the General
Partner may elect, including "all or nothing" Tender Offers for the limited
partnership interest.
(b) In the event that the General Partner
shall purchase less than the full limited partnership interest, the General
Partner shall (unless otherwise provided for in the General Partner's Tender
Offer) purchase a ratable portion of the outstanding limited partnership
interest from the Original Limited Partner for a ratable portion (except in
the case of a Tender Offer for less than the entire limited partnership
interest) of the Offer Price, determined by reference to the percentage that
the number of LLC Interests being redeemed by Members of the Original Limited
Partner bears to the total number of outstanding LLC Interests.
(c) The proceeds of any Tender Offer shall be used
first, to pay any Completion Fee then due and payable to Merrill Lynch by the
Original Limited Partner, and second, to repay all of the Additional Capital
Loans then outstanding in accordance with Section 4.1(d), in the event that
the General Partner purchases the full limited partnership interest of the
Original Limited Partner, or a proportionate share of the Additional Capital
Loans then outstanding, equal to the proportionate share of LLC Interests
redeemed, in the event that less than the whole of the Original Limited
Partner's limited partnership interest is purchased. After payment of the
foregoing, any remaining net proceeds of the Offer Price will be distributed
by the General Partner to the Limited Partner, or at the General Partner's
option, in accordance with Section 5.4 hereof. On the date of consummation of
any Tender Offer, accrued interest on the Additional Capital Loans being
prepaid on
55
<PAGE>
such date will be paid, subject to this clause (c), solely out of the proceeds
of a Minimum LP Distribution from the Partnership to the Original Limited
Partner.
9. ORIGINAL LIMITED PARTNER'S PUT RIGHTS.
9.1. Sixth Year Put Right. (a) Within 90
days after the Put Reference Date, the General Partner shall deliver to the
Designated Member, on behalf of the Original Limited Partner, audited
financial statements for the twelve-month period ended on the Put Reference
Date, and the Designated Member shall be obligated to deliver such audited
financial statements to each Member. Members of the Original Limited Partner
shall have the right to elect to put their LLC Interests to the Original
Limited Partner on or before the Put Response Date. If a Member elects to put
any of its LLC Interests to the Original Limited Partner, such Member must put
all (and not less than all) of its LLC Interests to the Original Limited
Partner. Upon receipt of any such put, the Original Limited Partner in turn
shall be required to and shall Put all of the limited partnership interest, in
the case of a put of all of the LLC Interests, or a proportionate amount of
its limited partnership interest, in the case of a put of less than all of the
LLC Interests, to the General Partner at a price calculated (ratably in the
case of a partial Put) as (i) a multiple of 6.8 times the Adjusted Royalty
Revenues for the twelve-month period ending on the Put Reference Date, plus
(ii) the difference, if positive, between (x) the cumulative Additional LP
Capital Contributions made by the Original Limited Partner to the Partnership
less the amount of any Development Advances repaid in cash (it being
understood that payment of Franchise Fees shall not be construed as repayment
of any Development Advances) and (y) 110% of the Partnership's Adjusted
Unamortized Development Advances plus all Property Guaranty Payments made less
all Property Guaranty Reimbursements received, plus (iii) the amount of any
Administrative Fee then payable by the Original Limited Partner to the
Designated Member, plus (iv) the amount of any Completion Fee payable by the
Original Limited Partner to Merrill Lynch. If more than 50% of the LLC
Interests are put to the Original Limited Partner (whether voluntarily in
accordance with this clause (a) or mandatorily in accordance with clause (b)
56
<PAGE>
below), the Original Limited Partner will be required to Put the entire
limited partnership interest to the General Partner. On the Put Date, if the
full limited partnership interest of the Original Limited Partner is Put, the
Original Limited Partner shall automatically cease to be a Partner in the
Partnership.
(b) All Additional Capital Loans shall become due and
payable on the Put Date, together with interest accrued thereon. The Original
Limited Partner shall require any Member which does not elect to put its LLC
Interests to the Original Limited Partner to pay, at least 15 days prior to
the Put Date, to the Original Limited Partner an amount equal to its pro rata
portion of the principal of the Additional Capital Loans, and on the Put Date,
the Original Limited Partner shall pay over such amounts to the Lender in
repayment of the relevant portion of the Additional Capital Loans.
(c) In the event that the Original Limited
Partner does not receive the amount owed by any non- putting Member under
Section 9.1(b) at least fifteen days prior to the Put Date, such Member shall
automatically be deemed to have elected to put all LLC Interests owned by it
to the Original Limited Partner, and the Original Limited Partner shall be
obligated to, and shall, Put a corresponding proportion of its limited
partnership interest to the General Partner on the Put Date. The Original
Limited Partner shall give notice to the General Partner on the fourteenth day
prior to the Put Date of any Member who has failed to make such payment, and
the percentage of its limited partnership interest which has become subject to
a mandatory Put.
(d) On the Put Date, the proceeds from the
exercise of a Put by the Original Limited Partner of the full outstanding
limited partnership interest shall be used first to pay any Completion Fee
then due and payable to Merrill Lynch by the Original Limited Partner and,
second, to repay, in accordance with Section 4.1(d), the principal of the
Additional Capital Loans in full. The proceeds from the exercise of a partial
Put of the outstanding limited partnership interests by the Original Limited
Partner shall be used first to repay, in accordance with Section 4.1(d), a pro
rata portion of the
57
<PAGE>
Additional Capital Loans. On the Put Date, accrued interest on the Additional
Capital Loans will be paid by the Original Limited Partner out of the proceeds
of a Minimum LP Distribution from the Partnership to the Original Limited
Partner. Following payment of the foregoing obligations, any remaining net
proceeds will be distributed to the Original Limited Partner, or at the
General Partner's option, in accordance with Section 5.4 hereof. If the
proceeds from the exercise of a Put are insufficient to pay any Completion Fee
and repay the Additional Capital Loans, the Original Limited Partner (and the
putting Members) will not receive any distribution in respect of the Put, but
the Original Limited Partner (and the Members) will not be liable for such
unpaid Additional Capital Loans coming due on the Put Date. In that event, the
limited partnership interests which are Put to the General Partner shall be
transferred subject to the unpaid portion of the Additional Capital Loans
attributable thereto, or in satisfaction of such amount as the case may be.
9.2. Additional Put Right. (a) If HFS shall enter into
any agreement (i) for the sale, transfer, or disposition of all or a
controlling portion of its interest in the General Partner, or (ii) for the
acquisition of HFS by any Person (whether through a merger or sale of all or
substantially all of HFS's assets or stock), then, in any such event, the
General Partner will give the Original Limited Partner at least 60 days prior
written notice of the scheduled date of consummation of the transaction, and
prior to, or contemporaneously with the consummation of the transactions
contemplated by such agreement (the date on which such transaction is closed
being the "Early Put Date"), HFS's transferee or successor in interest shall
assume HFS's obligations under the Loan Agreement, the Support Agreement, the
Guaranty Agreement, and the Indemnity Agreement. Upon consummation of the
Early Put, or expiry of the Early Put Right, HFS shall be released from its
obligations under the Transaction Documents to which it is a party.
(b) Members of the Original Limited Partner shall have
the right to elect to put all (but not less than all) of their respective LLC
Interests to the Origi-
58
<PAGE>
nal Limited Partner on or before the fifteenth day prior to the Early Put
Date. Upon receipt of any such put, the Original Limited Partner in turn shall
be required to and shall exercise the Early Put in respect of all of its
limited partnership interest, in the case of a put of all of the LLC
Interests, or a proportionate amount of its limited partnership interest, in
the case of a put of less than all of the LLC Interests. The price payable by
the General Partner for the limited partnership interest being purchased under
the Early Put shall be payable in cash on the Early Put Date, and shall equal
the Fair Market Value of the limited partnership interest (or the ratable
portion thereof) being purchased by the General Partner, as determined by an
independent appraisal conducted by a Big Six Accounting Firm selected by the
General Partner, including the Fair Market Value of the sixth year Put right,
plus the amount of the Completion Fee, if any, then due and owing. Such
appraisal shall occur at least 30 days prior to the Early Put Date, shall
constitute a fair market value appraisal as of the date on which notice is
given to the Original Limited Partner pursuant to clause (a) above, and shall
be an expense of the General Partner. The General Partner shall provide notice
of the results of the appraisal to the Members of the Original Limited Partner
at least 25 days prior to the Early Put Date. If at least 66.7% of the LLC
Interests are put to the Original Limited Partner under the circumstances
described in this Section 9.2, the Original Limited Partner will be required
to exercise the Early Put in respect of the entire limited partnership
interest.
(c) That percentage of Additional Capital Loans equal
to the percentage of LLC Interests being put to the Original Limited Partner
by the Members shall become due and payable on the Early Put Date, together
with interest accrued thereon. On the Early Put Date, the proceeds from the
exercise of the Early Put by the Original Limited Partner of all of the
outstanding limited partnership interests shall be used first to pay any
Completion Fee then due and payable to Merrill Lynch by the Original Limited
Partner and second, to repay, in accordance with Section 4.1(d), the principal
of the Additional Capital Loans in full. The proceeds from the exercise of a
partial Early Put of the outstanding limit-
59
<PAGE>
ed partnership interests by the Original Limited Partner (which shall occur if
Members put less than 66.7% of the aggregate LLC Interests to the Original
Limited Partner) shall be used first to repay a pro rata portion of the
Additional Capital Loans. On the Early Put Date, accrued interest on the
Additional Capital Loans will be paid by the Original Limited Partner out of
the proceeds of a Minimum LP Distribution from the Partnership to the Original
Limited Partner. Following payment of the foregoing obligations, any remaining
net proceeds will be distributed to the Original Limited Partner, or at the
General Partner's option, in accordance with Section 5.4 hereof. If the
proceeds from the exercise of an Early Put are insufficient to pay any
Completion Fee then due and owing and to repay the Additional Capital Loans
plus interest then due and owing, the Original Limited Partner (and the
putting Members) will not receive any distribution in respect of the Early
Put, but the Original Limited Partner (and the Members) will not be liable for
such unpaid Additional Capital Loans or interest. In that event, the limited
partnership interests which are Put to the General Partner shall be
transferred subject to the unpaid portion of the Additional Capital Loans
attributable thereto, or in satisfaction of such amount as the case may be.
10. GENERAL PARTNER'S CALL OPTION.
(a) The General Partner shall have the option, upon 15
days' written notice thereof, to Call the Original Limited Partner's limited
partnership interest in the Partnership. Such Call may be exercised at any
time after the third anniversary of the Initial Closing Date, but prior to the
fifth anniversary of the Initial Closing Date. The Call Price will equal the
sum of (i) Additional Capital Loans then outstanding, (ii) initial Capital
Contributions made by the Limited Partner plus a 30% annual compounded return
on such initial Capital Contributions, (iii) an additional call premium
payment calculated as 1.0 times the Adjusted Royalty Revenues for the
twelve-month period immediately preceding the date the General Partner gives
notice of the Call, and (iv) an additional call premium payment equal to the
lesser of (x) 0.5 times the Adjusted Royalty Revenues for the twelve-month
period immediately preceding the date the
60
<PAGE>
General Partner gives notice of the Call and (y) $1,500,000.
(b) The proceeds of the Call will be used first to pay
any Completion Fee then due and payable to Merrill Lynch by the Original
Limited Partner, and second, to repay, in accordance with Section 4.1(d), the
principal of the Additional Capital Loans in full. Following payment of such
obligations, any remaining net proceeds will be distributed to the Original
Limited Partner, or at the General Partner's option, in accordance with
Section 5.4 hereof. At the time the Call is exercised, accrued interest on the
Additional Capital Loans will be paid by the Original Limited Partner out of
the proceeds of a Minimum LP Distribution from the Partnership to the Original
Limited Partner.
On the date of consummation of the Call, the Original
Limited Partner shall automatically cease to be a Partner in the Partnership.
11. ACCOUNTING, BOOKS, RECORDS AND REPORTS.
11.1 Books of Account. The Partnership's books of
account shall be maintained at its principal place of business as designated
in Section 2.4 hereof or at such other locations and by such person or persons
as may be designated by the General Partner. The Partnership shall pay the
expense of maintaining its books of account. Each Partner shall have, during
reasonable business hours and upon reasonable prior notice, access to the
books of the Partnership and in addition, at its expense, shall have the right
to copy such books.
11.2 Method of Accounting. The Partnership books of
account shall be maintained and kept, and its income, gains, losses and
deductions shall be accounted for, in accordance with GAAP.
11.3 Tax Elections. The General Partner may in its
sole discretion determine whether to make any available elections under the
Code; provided that, the Partnership shall make the election referred to in
Section 754 of the Code in accordance with the Treasury Regulations
promulgated thereunder, effective for its
61
<PAGE>
first taxable year and each succeeding taxable year of the Partnership.
11.4 Preparation of Tax Returns. The General Partner
shall arrange for the preparation and timely filing of all income and other
tax returns of the Partnership. The General Partner shall furnish to each
Partner, within a reasonable period after the end of each Fiscal Year but in
all events not later than March 15 of each Fiscal Year, all information
(including an IRS Schedule K-1) concerning the Partnership and its operations
reasonably necessary for the preparation of each Partner's federal income tax
returns.
11.5 Audited Financial Statements. Within 90 days
after the end of each Fiscal Year of the Partnership, the General Partner
shall deliver to the Designated Member, on behalf of the Original Limited
Partner, audited financial statements for the Fiscal Year ended on such date,
and the Designated Member shall be obligated to deliver such audited financial
statements to each Member.
11.6 Tax Matters Partner. The General Partner is
hereby designated as the "Tax Matters Partner" (within the meaning of Section
6231 of the Code and any similar provisions of state or local tax law) and
shall have all of the rights and obligations consistent with such designation.
In such capacity, the General Partner is authorized and required to represent
the Partnership (at the Partnership's expense) in connection with all audits
and examinations of the Partnership by taxing authorities, including resulting
administrative and judicial proceedings and to expend Partnership funds for
costs associated therewith including, but not limited to, professional fees.
11.7 Banking. All funds of the Partnership shall be
deposited in such bank account or accounts as shall be designated by the
General Partner. All withdrawals therefrom shall be made with checks signed by
the General Partner. Each bank account shall be segregated from any other bank
accounts maintained by the General Partner.
62
<PAGE>
11.8 Election to be Treated as a Partnership for Tax
Purposes. If the proposed Treasury Regulations under Section 7701 of the Code
setting forth modified entity classification rules which would allow certain
entities to elect to be treated as either a partnership or an association
taxable as a corporation for federal income tax purposes are promulgated in
final form, the Tax Matters Partner shall, if necessary, promptly make an
election for the Partnership to be treated as a partnership for federal income
tax purposes. In addition, if a retroactive election for the Partnership to be
treated as a partnership for federal income tax purposes is permitted by such
Treasury Regulations, then the Tax Matters Partner shall, if necessary, make
such retroactive election effective as of the date of formation of the
Partnership. By executing this Agreement, each of the Partners hereby consents
to any election (including both retroactive and prospective elections) made by
the Tax Matters Partner for the Partnership to be treated as a partnership for
federal income tax purposes.
12. TRANSFER OF PARTNERSHIP INTERESTS; SUBSTITUTE AND
ADDITIONAL PARTNERS.
12.1. Assignments. No Limited Partner may
withdraw from the Partnership or make a demand for paid-in capital until the
termination of the Partnership. Except as otherwise provided in Section 12.2,
no Limited Partner may sell, transfer, assign, hypothecate, pledge or
otherwise dispose of or encumber (each, an "Assignment") all or any part of
such Partner's interest in the Partnership (whether voluntarily, involuntarily
or by operation of law) without the prior written consent of the General
Partner, the granting or denial of which shall be in the General Partner's
sole discretion, and any such purported Assignment without the consent of the
General Partner shall be null and void. Each Limited Partner and each Assignee
thereof hereby agree that it will not effect any Assignment of all or any part
of its interest in the Partnership (whether voluntarily, involuntarily or by
operation of law) in any manner contrary to the terms of this Agreement or the
Loan Agreement, in the case of the Original Limited Partner, or that violates
or causes the Partnership or the General Partner to
63
<PAGE>
violate the Securities Act, the Securities Exchange Act, the Investment
Company Act, or the laws, rules, regulations, orders and other directives of
any Governmental Authority. In addition, the Original Limited Partner
covenants and agrees that it will not sell or permit the sale of any LLC
Interests to, or admit any Person as a Member of the Original Limited Partner,
who has not represented to the Original Limited Partner that it is an
"accredited investor" as defined in Rule 501 of Regulation D of the Securities
Act, without the prior written consent of the General Partner.
12.2. Assignments by Original Limited Partner to
General Partner. On any date on which all or a portion of the limited
partnership interest of the Original Limited Partner is purchased by the
General Partner in connection with any Put, Early Put, Call or Tender Offer,
the Original Limited Partner shall assign all or such portion, as the case may
be, of such limited partnership interest to the General Partner or its
designee, without recourse, except for representations and warranties of the
Original Limited Partner as to its ownership of, and no Liens on, the limited
partnership interest. Such Assignment shall be in form and substance
reasonably satisfactory to the General Partner. In connection therewith, the
Original Limited Partner shall take such other actions, and execute and
deliver such other documents, certificates and the like to evidence such
transfer as the General Partner may reasonably request.
12.3. Effect of Retirement, Withdrawal, Bankruptcy,
Dissolution, Death, Etc. of Limited Partner. The retirement, withdrawal,
bankruptcy, dissolution, death, incapacity or adjudication of incompetency of
a Limited Partner shall not, in and of itself, dissolve the Partnership, and
the Partnership shall continue in a reconstituted form, if necessary, without
any action on the part of the remaining Partners. The trustee, executor,
administrator, committee or guardian of such affected Limited Partner or of
the Limited Partner's estate, as the case may be, shall have all the rights of
the Limited Partner for the purpose of settling or managing the estate and
such power as the bankrupt, deceased or incompetent Limited Partner possessed
to
64
<PAGE>
Assign all or part of the Limited Partner's interest in the Partnership,
provided that any such trustee, executor, administrator, committee or guardian
shall become a Substitute Limited Partner only upon compliance with the
provisions of Section 12.4.
12.4. Substitute Limited Partners. No Assignee of all
or any part of an interest of a Limited Partner in the Partnership shall be
admitted to the Partnership as a substitute Limited Partner (a "Substitute
Limited Partner") unless and until (a) the General Partner shall have
consented in writing to such admission (the granting or denial of which shall
be in the General Partner's sole discretion), (b) the Assignee has executed a
counterpart of this Agreement (as modified or amended from time to time) and
such other instruments as the General Partner may reasonably deem necessary or
appropriate to confirm the undertaking of the Assignee to be bound by all the
terms and provisions of this Agreement and (c) the Assignee has undertaken in
writing to pay all expenses incurred by the Partnership in connection with
such Assignment and substitution. Unless and until an Assignee of a
Partnership interest becomes a Substitute Limited Partner, such Assignee shall
not be entitled to exercise any vote, consent or any other right or entitle-
ment with respect to such interest in such Partnership interest.
13. INDEMNIFICATION OF GENERAL PARTNER.
13.1. In General. (a) The Partnership shall, to the
maximum extent permitted by applicable law, indemnify and hold harmless all
Related Persons from and against any and all Damages, including, without
limitation, Damages incurred in investigating, preparing or defending any
action, claim, suit, inquiry, proceeding, investigation or appeal taken from
any of the foregoing by or before any court or governmental, administrative or
other regulatory agency, body or commission, whether pending or threatened,
whether or not a Related Person is or may be a party thereto, which, in the
judgment of the General Partner, arises out of, relates to or is in connection
with this Agreement or the management or conduct of the business or affairs of
the General Partner, the Partnership or any of their respective Affili-
65
<PAGE>
ates (including, without limitation, actions taken or not taken by any Related
Person as a director of any of its Affiliates or activities with respect
thereto or activities of any Related Person which relate to the offering, sale
and administration of hotel franchises (including, without limitation,
Franchises)), except for any such Damages that are finally found by a court of
competent jurisdiction to have resulted from the gross negligence or willful
misconduct of the Person seeking indemnification, provided, that the
Partnership indemnity obligations hereunder shall not extend to any Related
Person for acts or omissions unrelated to the Partnership or the transactions
contemplated by the Transaction Documents. Such attorneys' fees and expenses
shall be paid by the Partnership as they are incurred upon receipt, in each
case, of an undertaking by or on behalf of the Related Person on whose behalf
such expenses are incurred to repay such amounts if it is ultimately
determined that such Related Person is not entitled to indemnification with
respect thereto.
The termination of any proceeding by settlement shall
not be deemed to create a presumption that the Related Person involved in such
settlement acted in a manner which constituted gross negligence or willful
misconduct. The indemnification provisions of this Section 13.1 may be
asserted and enforced by, and shall be for the benefit of, each Related
Person, and each Related Person is hereby specifically empowered to assert and
enforce such right; provided that any Related Person (other than the General
Partner) who enters into a settlement of any proceeding without the prior
approval of the Partnership (such approval to be given by the General Partner)
shall not be entitled to the indemnification provided in this Section 13.1.
The right of any Related Person to the indemnification provided herein shall
be cumulative of, and in addition to, any and all rights to which such Related
Person may otherwise be entitled by contract or as a matter of law or equity
and shall extend to his or its heirs, successors, assigns and legal
representatives.
All judgments against a Related Person wherein such Related
Person is entitled to indemnification must first be satisfied from Partnership
66
<PAGE>
assets before the General Partner is responsible for these obligations.
(b) If for any reason the indemnity
provided for in Section 13.1(a) and to which a Related Person is otherwise
entitled is unavailable to such Related Person in respect of any Damages, then
the Partnership, in lieu of indemnifying such Related Person, shall contribute
to the amount paid or payable by such Related Person as a result of such
Damages in the proportion the total capital of the Partnership (exclusive of
the balance in the Related Person's Capital Accounts (which, for purposes of
this Section 13.1(b) in the case of a Related Person which is not a Partner,
shall mean the General Partner's Capital Accounts if the Related Person is an
Affiliate thereof) bears to the total capital of the Partnership (including
the balance in the Related Person's Capital Accounts), which contribution
shall be treated as an expense of the Partnership.
(c) No Limited Partner or any Member thereof shall be
personally obligated with respect to the indemnification or contribution
provided for in this Section 13.1.
13.2. Not Liable for Return of Capital. Neither the
General Partner nor any other Related Person shall be personally liable for
the return of the Capital Contributions of any Limited Partner or any portion
thereof or interest thereon, and such return shall be made solely from
available Partnership assets, if any.
14. DURATION AND TERMINATION OF THE PARTNERSHIP.
14.1. Term. The existence of the Partnership commenced
on the date of the filing of a certificate of limited partnership described in
Section 17- 201 of the Act in the office of the Secretary of State of the
State of Delaware in accordance with the Act and shall continue until the
first to occur of the following events (each an "Event of Termination"):
(a) the failure to continue the business of the
Partnership as provided in Section 15.2 following a Disabling Event in respect
of the General Partner;
67
<PAGE>
(b) the exercise of the Put, the Early Put, the Call
or a Tender Offer, which results in the purchase by the General Partner of all
of the then outstanding limited partnership interest of the Original Limited
Partner; and
(c) December 31, 2045.
14.2. Winding-Up. Upon the occurrence of
an Event of Termination, the Partnership shall be dissolved and wound-up. In
connection with the dissolution and winding-up of the Partnership, the General
Partner or, if there is no General Partner, a liquidator or other
representative (the "Representative") appointed by the Original Limited
Partner in accordance with Section 16.1, shall use its reasonable efforts in
accordance with its reasonable discretion to proceed with the sale or
liquidation of such of the assets of the Partnership as the General Partner
may elect (including the conversion to cash or cash equivalents of its notes
or accounts receivable) and shall apply and distribute the proceeds of such
sale or liquidation in the following order of priority, unless otherwise
required by mandatory provisions of applicable law:
(a) first, to pay (or to make provision
for the payment of) all amounts owing to creditors of the Partnership
(including the Lender and Partners who are creditors of the Partnership) and
the expenses of liquidation, in the order of priority, if any, required by
applicable law, in satisfaction of all debts, liabilities or obligations of
the Partnership due such creditors and of such expenses of liquidation;
(b) second, to the establishment of any
reserve which the General Partner or the Representative, as the case may be,
may deem reasonably necessary for any contingent or unforeseen liabilities or
obligations of the Partnership (such reserve may be paid over by the General
Partner or the Representative to an escrow agent acceptable to the General
Partner or the Representative, to be held for disbursement in payment of any
of the aforementioned liabilities and, at the expiration of such period as
shall be deemed advisable by the General Partner or the Representative, for
distribution of the bal-
68
<PAGE>
ance in the manner hereinafter provided in this Section
14.2); and
(c) third, after the payment (or the
provision for payment) of all debts, liabilities and obligations of the
Partnership in accordance with clauses (a) and (b) above, to the Partners or
their legal representatives in proportion to the balances in their respective
positive Capital Accounts as adjusted pursuant to Section 4 for all
Partnership operations up to and including such liquidation, no later than 90
days after the date of liquidation of the Partnership.
14.3. Distributions in Cash or in Kind.
The General Partner or the Representative, as the case may be, shall hire an
independent appraiser, which shall be a Big Six Accounting Firm (the cost of
such appraisal to be considered a Partnership Expense), to appraise the Fair
Market Value of Partnership assets not sold or otherwise disposed of in
accordance with Section 14.2 hereof. The General Partner shall purchase such
assets from the Partnership for a price, payable in cash, equal to the
aggregate Fair Market Value of such assets. The proceeds of such purchase
shall be distributed in the manner set forth in Section 14.2 hereof. The
General Partner or the Representative shall in good faith attempt to liquidate
sufficient Partnership assets to satisfy in cash the debts and liabilities
described in Section 14.2 hereof.
14.4. Time for Liquidation. A reasonable amount of
time shall be allowed for the orderly liquidation of the assets of the
Partnership and the discharge of liabilities to creditors so as to enable the
General Partner or the Representative to minimize the losses attendant upon
such liquidation.
14.5. Termination. Upon compliance with
the foregoing distribution plan, the Partnership shall cease to be such, and
the General Partner or the Representative, as the case may be, shall execute,
acknowledge and cause to be filed with the Secretary of State of the State of
Delaware a certificate of cancellation of the Partnership pursuant to the
power of attorney contained in Section 17.12.
69
<PAGE>
14.6. Compliance with Certain Requirements of Treasury
Regulations. In the event the Partnership is "liquidated" within the meaning
of Treasury Regulations Section 1.704-1(b)(2)(ii)(g), (a) if the General
Partner's Capital Account has a deficit balance (after giving effect to all
contributions, distributions, and allocations for all taxable years, including
the year during which such liquidation occurs), such General Partner shall
contribute to the capital of the Partnership the amount necessary to restore
such deficit balance to zero in compliance with Treasury Regulations Section
1.704-1(b)(2)(ii)(b)(3) and (b) distributions shall be made pursuant to this
Section 14 to the Partners who have positive Capital Accounts in compliance
with Treasury Regulations Section 1.704-1(b)(2)(ii)(b)(2).
15. DISSOLUTION, ETC. OF GENERAL PARTNER.
15.1. Disabling Events. The occurrence of any of the
following (each a "Disabling Event") shall, subject to the grace periods
specified below, constitute grounds for the Limited Partners to remove the
General Partner:
(a) the General Partner shall breach Section 2.8;
(b) any representation or warranty made herein by the
General Partner proves to have been untrue or incorrect in any material
respect as of the date when made, and such untruth or incorrectness could have
a material adverse effect upon the Original Limited Partner's limited
partnership interest or on the business of the Partnership;
(c) the General Partner shall create or
permit the creation of any Lien (other than Permitted Liens) upon the assets
of the Partnership, or sell, Assign or otherwise dispose of, all or any part
of its general partnership interest in the Partnership, or the General Partner
shall withdraw or retire as the General Partner or voluntarily dissolve or
liquidate the Partnership (other than on the terms contemplated herein);
70
<PAGE>
(d) the General Partner shall commence or have
commenced against it any bankruptcy or insolvency proceedings, and such
proceedings are not dismissed within 60 days; or
(e) the General Partner shall have commenced a process
which would lead to its dissolution (whether voluntarily or by operation of
law).
15.2. Effect of a Disabling Event. Upon the occurrence
of a Disabling Event, the Original Limited Partner may, within 90 days
following such occurrence, upon the vote of Members holding at least 66 2/3%
of the LLC Interests then outstanding, remove the General Partner, and appoint
one or more Successor General Partners. In such event, any remaining General
Partner shall reconstitute and continue the Partnership. Any provisions in
this Agreement to the contrary notwithstanding, upon the occurrence of a
Disabling Event in respect of the last remaining General Partner, the
Partnership shall be dissolved and wound up as provided in Section 14, unless
within 90 days of such Disabling Event all of the Limited Partners consent in
writing to the reconstitution and continuation of the operations of the
Partnership and the election of one or more Successor General Partners.
16. AMENDMENTS.
16.1. Consent to Amendments. Subject to Sections 17.12
and 17.15, any provision of this Agreement may be modified, waived or amended
only with the written consent of the General Partner and the Original Limited
Partner. The consent of the Original Limited Partner to any such waiver,
modification or amendment shall be given on behalf of the Original Limited
Partner by the Designated Member if Members holding more than 50% of the LLC
Interests then outstanding vote affirmatively for such waiver, modification or
amendment, provided, that any waiver, modification or amendment of Section 4,
5.2, 5.3, 8, 9, 10, 14.1 or this Section 16.1 shall be consented to by the
Original Limited Partner only if Members holding at least 66.7% of the LLC
Interests then outstanding approve same (except that (a) a change in the
percentage of Members' consent required to make acceptance of an offer to
redeem by the Original Limited Partner under
71
<PAGE>
Section 8 mandatory upon all Members shall require the affirmative vote of
Members holding at least 75% of the LLC Interests then outstanding and (b) any
change requiring Members to contribute additional cash to the Original Limited
Partner shall not be binding upon any Member who does not consent to such
change in writing). In any such case, the General Partner shall transmit such
request for any waiver, modification or amendment to the Members on behalf of
the Designated Member and solicit their votes. The Members shall, unless
otherwise provided in such request, have ten Business Days in which to
respond, and, at the close of business on such tenth (or other as provided in
the request from the General Partner) Business Day, the Original Limited
Partner will cast a single vote to accept or reject the General Partner's
request in accordance with the votes of the Members.
16.2. Amendments by General Partner. Subject to the
provisions of Section 16.1, the General Partner shall have the authority to
amend or modify this Agreement without any vote or other action by the Limited
Partners, as expressly permitted by Section 17.12 or to satisfy any
requirements, conditions, guidelines, directives, orders, rulings or
regulations of any Governmental Authority, or as otherwise required by
applicable law. Subject to the provisions of Section 16.1, the General Partner
shall have the authority to amend or modify this Agreement without any vote or
other action by the Limited Partners (a) to reflect the admission of
Substitute, Additional or Subsequent Partners and transfers of interests of
Partners pursuant to Section 8, (b) to form, qualify or continue the
Partnership as a limited partnership in all jurisdictions in which the
Partnership conducts or plans to conduct business, (c) to change the name of
the Partnership, (d) to cure any ambiguity or correct or supplement any
provision herein contained which may be incomplete or inconsistent with any
other provision herein contained or (e) to correct any typographical errors
contained herein.
72
<PAGE>
17. MISCELLANEOUS.
17.1. Waiver of Partition. Each of the Partners hereby
irrevocably waives any and all rights that such Partner may have to maintain
any action for partition of any of the Partnership's property.
17.2. Entire Agreement. This Agreement together with
the documents expressly referred to herein, each as amended or supplemented,
constitutes the entire agreement among the parties with respect to the subject
matter herein or therein. They supersede any prior agreement or understanding
among the parties hereto.
17.3. Choice of Law. THIS AGREEMENT AND THE RIGHTS OF
THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF DELAWARE AND, WITHOUT LIMITATION THEREOF, THAT THE
ACT AS NOW ADOPTED OR AS MAY BE HEREAFTER AMENDED SHALL GOVERN THE PARTNERSHIP
ASPECTS OF THIS AGREEMENT.
17.4. Successors and Assigns. Except as
otherwise specifically provided herein, this Agreement shall be binding upon
and inure to the benefit of the parties and their legal representatives,
heirs, administrators, executors, successors and assigns.
17.5. Captions. Captions contained in this
Agreement are inserted only as a matter of convenience and in no way define,
limit or extend or otherwise affect the scope or intent of this Agreement or
any provision hereof.
17.6. Severability. If any provision of
this Agreement, or the application of such provision to any Person or
circumstance, shall be held invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
provisions of this Agreement, or the application of such provision in
jurisdictions or to Persons or circumstances other than those to which it is
held invalid, illegal or unen- forceable shall not be affected thereby.
17.7. Counterparts. This Agreement may be
executed in several counterparts, each of which shall be
73
<PAGE>
deemed an original but all of which shall constitute one and the same
instrument. It shall not be necessary for all Partners to execute the same
counterpart hereof.
17.8. Additional Documents. Subject to the
provisions of this Agreement, each party hereto agrees to execute, with
acknowledgment or affidavit, if required, any and all documents and writings
which may be necessary or expedient in connection with the creation of the
Partnership and the achievement of its purposes, specifically including (a)
any amendments to this Agreement and such certificates and other documents as
the General Partner deems necessary or appropriate to form, qualify or
continue the Partnership as a limited partnership (or a partnership in which
the Limited Partners have limited liability) in all jurisdictions in which the
Partnership conducts or plans to conduct business and (b) all such agreements,
certificates, tax statements, tax returns and other documents as may be
required of the Partnership or its Partners by the laws of the United States
of America or any jurisdiction in which the Partnership conducts or plans to
conduct business, or any political subdivision or agency thereof.
17.9. Non-Waiver. No provision of this Agreement shall
be deemed to have been waived unless such waiver is contained in writing given
to the party claiming such waiver has occurred, provided that no such waiver
shall be deemed to be a waiver of any other or further obligation or liability
of the party or parties in whose favor the waiver was given.
17.10. Manner of Consent. Any consent or
approval required by this Agreement may be given or ratified by a written
consent given by the consenting Partner at, prior to or following the taking
of the action for which the consent is solicited, or by the affirmative vote
of the consenting Partner to the taking of the action for which the consent is
solicited at any meeting duly called and held (prior to or after the taking of
such action) to consider the taking of such action.
17.11. Notices. To be effective, unless
otherwise specified in this Agreement, all notices,
74
<PAGE>
requests, offers (including the Early Put, the Put, the Tender Offer and the
Call), demands, consents and other communications under this Agreement must be
in writing and shall be deemed given (a) three days after depositing the same
in the United States mail, postage prepaid, certified or registered, return
receipt requested, provided that any notice to the General Partner shall be
effective only if and when received by the General Partner, (b) upon
delivering the same in person and receiving a signed receipt therefor, (c) one
day after sending the same by a recognized overnight delivery service or (d)
when sent by telecopy and confirmed. For purposes of all notices, requests,
demands, consents and other communications under this Agreement, the addresses
of the Partners shall be as set forth on Schedule A to this Agreement, as
amended from time to time, and the address of the Partnership shall be as set
forth in Section 2.4. Any Partner or its Assignee may designate a different
address to which notices or demands shall thereafter be directed and such
designation shall be made by written notice given in the manner hereinabove
required and, in the case of a Limited Partner or its Assignee, directed to
the Partnership at its offices as hereinabove set forth. Notices to any
Assignee of a Limited Partner shall be given to such Limited Partner unless
such Assignee has designated a different address therefor by written notice
given in the manner hereinabove required.
17.12. Grant of Power of Attorney. Each Limited
Partner hereby irrevocably constitutes and appoints the General Partner and
each member of the General Partner vested with management rights with respect
to the General Partner, as its true and lawful attorney and agent, in its
name, place and stead to make, execute, acknowledge and, if necessary, to file
and record:
(a) any certificates or other instruments or
amendments thereof which the Partnership may be required to file under the Act
or any other laws of the State of Delaware or pursuant to the requirements of
any Governmental Authority having jurisdiction over the Partnership or which
the General Partner shall deem it advisable to file, including, without
limitation, this Agreement, any amended Agreement and a certificate of
cancellation as provided in Section 14.5;
75
<PAGE>
(b) any certificates or other instruments (including
counterparts of this Agreement with such changes as may be required by the law
of other jurisdictions) and all amendments thereto which the General Partner
deems appropriate or necessary to qualify, or continue the qualification of,
the Partnership as a limited partnership (or a partnership in which the
Limited Partners have limited liability) and to preserve the limited liability
status of the Partnership in the jurisdictions in which the Partnership may
acquire investment interests;
(c) any certificates or other instruments
which may be required in order to effectuate any change in the membership of
the Partnership or to effectuate the dissolution and termination of the
Partnership pursuant to Section 14.5; and
(d) any amendments to any certificate or
to this Agreement necessary to reflect any other changes made pursuant to the
exercise of the powers of attorney contained in this Section 17.12 or pursuant
to this Agreement.
17.13. Irrevocable and Coupled with an
Interest; Copies to Be Transmitted. The powers of attorney granted under
Section 17.12 shall be deemed irrevocable and to be coupled with an interest.
A copy of each document executed by the General Partner pursuant to the powers
of attorney granted in Section 17.12 shall be transmitted to each Limited
Partner promptly after the date of the execution of any such document.
17.14. Survival of Power of Attorney. The
powers of attorney granted in Section 17.12 shall survive delivery of an
Assignment by any Limited Partner of the whole or any part of such Partner's
Partnership interest, provided that if such Assignment was of all of such
Limited Partner's Partnership interest and the substitution of the Assignee as
a Limited Partner has been consented to by the General Partner, the foregoing
powers of attorney shall survive the delivery of such Assignment for the
purpose of enabling the General Partner to execute, acknowledge and file any
and all certificates and other instruments necessary to effectuate the
substitu-
76
<PAGE>
tion of the Assignee as a Substitute Limited Partner. Such powers of attorney
shall survive the death, incapac- ity, dissolution, adjudication of
incompetency or termination of a Limited Partner and shall extend to such
Limited Partner's successors and assigns.
17.15. Limitation of Power of Attorney. The powers of
attorney granted under Section 17.12 cannot be utilized by the General Partner
for purposes which require the express consent of the Original Limited Partner
under Section 16.1.
17.16. Exercise of Rights. The Limited Partners shall
be permitted to exercise any of the voting rights set forth in this Agreement
unless, prior to the exercise by the Limited Partners of any specified voting
right or rights, the Partnership shall have obtained (and furnished a copy
thereof to each Limited Partner) an opinion of counsel for the Partnership to
the effect that the exercise of such specified right or rights will (a)
adversely affect the limited liability of the Limited Partners, or (b)
adversely affect the classification of the Partnership as a partnership for
federal income tax purposes.
17.17. Confidentiality. Each Limited Partner agrees,
as set forth below, with respect to any information pertaining to the
Partnership, HFS or their Affiliates or the business of any of them that is
provided to such Limited Partner pursuant to this Agreement or otherwise
(including, without limitation, any trade secrets owned or protected by HFS,
the Partnership or the General Partner, other proprietary information not
generally known to the lodging industry, including confidential portions of
the System Standards Manual, information otherwise imparted by HFS to the
General Partner, the Partnership or any Franchisee in confidence, the "Rules
of Operation Manual", all other System Standards manuals and documentation,
including those on the subjects of employee relations, finance and
administration, field operation, purchasing and marketing, and the Reservation
System software and applications software (collectively, "Confidential
Matters")) to treat as confidential all such information, together with any
analyses, studies or other documents or records prepared
77
<PAGE>
by such Partner, HFS or their Affiliates, or any representative or other
Person acting on behalf of such Limited Partner (collectively, its "Authorized
Representatives"), which contain or otherwise reflect or are generated from
Confidential Matters, and will not, and will not permit any of its Authorized
Representatives to, disclose any Confidential Matter, provided that any
Limited Partner (or its Authorized Representative) may disclose any such
information to any Governmental Authority having jurisdiction over such
Limited Partner (or its Authorized Representative), to its auditors, attorneys
and other professional advisors, as may be required or appropriate in response
to any summons or subpoena, or as to which the General Partner has consented
in writing.
17.18. Submission to Jurisdiction. EACH LIMITED
PARTNER IRREVOCABLY CONSENTS AND AGREES THAT ANY LEGAL ACTION OR PROCEEDING
WITH RESPECT TO THIS AGREEMENT AND ANY ACTION FOR ENFORCEMENT OF ANY JUDGMENT
IN RESPECT THEREOF MAY BE BROUGHT IN THE UNITED STATES FEDERAL COURTS FOR THE
SOUTHERN DISTRICT OF NEW YORK, OR ANY STATE COURT LOCATED IN NEW YORK CITY,
AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH LIMITED PARTNER HEREBY
SUBMITS TO AND ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY
AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND
APPELLATE COURTS FROM ANY APPEAL THEREOF. EACH LIMITED PARTNER FURTHER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE
AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF
COPIES THEREOF IN THE MANNER SET FORTH IN SECTION 17.11. EACH LIMITED PARTNER
HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO
THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT
OF OR IN CONNECTION WITH THIS AGREEMENT BROUGHT IN THE COURTS REFERRED TO
ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM
IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT
HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE
RIGHT OF THE GENERAL PARTNER OR THE PARTNERSHIP TO SERVE PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL ACTIONS OR PROCEEDINGS OR
OTHERWISE PROCEED AGAINST ANY OTHER PARTNER HEREUNDER IN ANY OTHER
JURISDICTION.
78
<PAGE>
17.19. Waiver of Trial by Jury. TO THE
EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HERETO HEREBY IRREVOCABLY
WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM,
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER ARISING
HEREUNDER.
IN WITNESS WHEREOF, the undersigned have
hereunto set their hands as of the date first set forth
above.
GENERAL FRANCHISE SYSTEMS, INC., FRANCHISE INVESTORS L.L.C.,
GENERAL PARTNER LIMITED PARTNER
By:/s/Joel R. Buckberg By: ML LEASING PARTNERS, INC.,
----------------------------------- Designated Member
Name: Joel R. Buckberg
Title: Senior Vice President-
Legal
By:/s/Robert F. Tully
--------------------------
Name: Robert F. Tully
Title: Vice President
THE PARTNERSHIP INTERESTS HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS OR THE LAWS OF ANY OTHER NATION OR JURISDICTION AND MAY NOT BE
SOLD OR OTHERWISE TRANSFERRED UNLESS THE SAME HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
SATISFACTORY TO THE GENERAL PARTNER HAS BEEN RENDERED TO THE PARTNERSHIP THAT
AN EXEMPTION FROM REGISTRATION UNDER APPLICABLE SECURITIES LAWS IS AVAILABLE.
IN ADDITION, TRANSFER OR OTHER DISPOSITION OF THE LIMITED PARTNERSHIP
INTERESTS IS RESTRICTED AS PROVIDED IN THIS AGREEMENT OF LIMITED PARTNERSHIP.
<PAGE>
Schedule A
Capital Contributions
Initial Capital
Contribution
General Partner: $3,000,000
General Franchise
Systems, Inc.
Six Sylvan Way
Parsippany, N.J. 07054-
0278
Attn: Executive Vice
President and
General Counsel
Telecopy: 201-428-5269
Original Limited Part-
ner:
FRANCHISE INVESTORS
L.L.C. $1,250,000
c/o ML Leasing Partners,
Inc.
World Financial Center
South Tower 14th floor
225 Liberty St.
New York NY 10080-6114
Attn: Martin McInerney
Telecopy: 212-449-3207
with a copy to:
ML Fund Administrators,
Inc.
World Financial Center
South Tower, 23d floor
225 Liberty St.
New York, NY 10080-6123
Attn: Robert F. Tully
Telecopy: 212-236-7360
<PAGE>
EXHIBIT 10.46(a)
FIRST AMENDMENT TO PURCHASING SERVICES AGREEMENT
This FIRST AMENDMENT TO PURCHASING SERVICES AGREEMENT
("Amendment") is made and entered into this day 31st of January, 1997, by and
between Compleat Resource Group, Inc. ("CRG"), a Delaware corporation having
an office at One Insignia Financial Plaza, Greenville, SC 29601, and HFS
Incorporated ("HFS"), a Delaware corporation having an office at 6 Sylvan Way,
Parsippany, NJ 07054.
WITNESSETH:
WHEREAS, CRG and HFS entered into that certain Purchasing Services
Agreement dated as of the 30th day of November 1995 (the "Agreement"), and
WHEREAS, CRG and HFS desire to amend the Agreement in certain
respects as hereinafter set forth.
NOW, THEREFORE, in consideration of the covenants and agreements
contained herein, and other good and valuable consideration, receipt of which
is acknowledged hereby, the parties agree as follows:
Section 1. Definitions. All capitalized terms used herein which are
not otherwise defined shall have the respective meanings attributed to them in
the Agreement.
Section 2. Preferred Vendors. Notwithstanding anything to the
contrary contained the Agreement, HFS hereby assigns to CRG, effective as of
the date hereof, all of HFS' right, title and interest (including its rights
to receive any compensation therefor) in and to the Preferred Vendor
Agreements listed on Exhibit A which is attached hereto and made a part
hereof. CRG agrees to notify the Preferred Vendors listed on Exhibit A of the
assignment by HFS to CRG of its right, title and interest in such Preferred
Vendor Agreements, and HFS shall, simultaneously with the execution and
delivery hereof, sign and deliver to CRG a letter containing the language set
forth in Exhibit B which is attached hereto and made a part hereo(pound) HFS
agrees to take all actions as it may be reasonably requested to take from time
to time provided no such action shall require the expenditure of money, in
order to effectuate such assignment and notice. With respect to any such
Preferred Vendor Agreement which requires consent of the Vendor thereunder to
any assignment, CRG shall be responsible for obtaining such consent and CRG
and HFS agree that no such assignment is intended to be effective unless and
until such consent is obtained. However, and notwithstanding the foregoing
assignment, the Preferred Vendor Agreements described on Exhibit "A" shall,
from and after the date hereof, constitute "CRG Selected Agreements (as
hereinafter defined) for purposes of Section 4(c) hereunder, and the parties
shall divide any "Gross Revenues" generated by any of the Preferred Vendor
Agreements described on Exhibit "A" for any period ending prior to the date
hereof in accordance with and as defined in Section 6 of the Agreement.
Section 3. Modification or Termination of Specific Provisions. HFS
and CRG agree that
<PAGE>
all obligations of either party under Sections 1, 3, 4, 5, 6, 7, 8 and 10 of
the Agreement (collectively the "Terminated Obligations") shall (except for
the limited continuing retrospective effect of Section 6 of the Agreement in
accordance with Section 2 hereof) be deemed terminated as of the date hereof,
and both parties agree and acknowledge that there are presently no unperformed
obligations or unsatisfied liabilities due to either parry as of the date
hereof with respect to the Terminated Obligations; provided, however, that the
parties do not intend hereby to terminate the Agreement; and provided,
further, that, inasmuch as the parties (without being obligated to do so)
intend to continue to communicate with each other concerning a variety of
matters of potential mutual interest, including without limitation matters
previously comprehended by the Terminated Obligations, no such communications
shall constitute a modification or waiver of the terms hereof, or a
reinstatement of the Terminated Obligations, except to the extent set forth in
a written agreement duly executed and delivered by authorized representatives
of HFS and CRG.
Section 4. Additional Agreements. The parties have also made the
following additional agreements with respect to their continuing relationship
pursuant to the Agreement:
(a) HFS shall use reasonable efforts to provide to CRG (and, at CRG's
request, to customers of CRG including, without limitation, members of any
tenants association associated with, or which has otherwise engaged the
services of, CRG, such customers and members being hereinafter collectively
referred to as "CRG Customers") access to any HFS Preferred Agreement as to
which CRG may request access in order to purchase, or resell to CRG Customers,
or arrange for the sale by such vendor to CRG Customers of, goods or services
under or pursuant thereto (a "CRG Selected Agreement"); in furtherance
thereof, HFS and CRG shall meet on a periodic basis, as agreed by the parties
from time to time, to exchange information concerning such HFS Preferred
Agreements from time to time in effect and the needs, and other matters
regarding the business prospects, of CRG;
(b) During the term of this Agreement, HFS shall not enter into any
agreement to provide any vendor products or services which are the subject of
a CRG Selected Agreement (as to which the vendor thereunder, CRG and HFS shall
have entered into an agreement providing, inter alia, for purchases thereunder
by CRG or CRG Customers) to any CRG Competitor;
(c) As to any CRG Selected Agreement under which CRG shall agree to
purchase or resell (directly or on behalf of CRG Customers) goods or services,
or with respect to which such purchases are made available to CRG or CRG
Customers, HFS shall receive, as compensation the therefor, fifty percent
(50%) of the Gross Revenues received by CRG from the sale of such products or
services (such percentage to be applied to Gross Revenues net of any amounts
required to be paid by CRG to property owners or management companies pursuant
to written agreements with respect to the sale of the relevant product(s) or
service(s)), and otherwise as may be agreed by the parties in connection with
particular CRG Selected Agreement;
(d) HFS shall have no obligation under the Agreement, as amended
hereby, to seek out or create a relationship with any provider of goods or
services for or on behalf of CRG or any of the CRG Customers; and
<PAGE>
(e) HFS shall not be entitled to any compensation with respect to any
relationship between CRG and any provider of products or services (including
without limitation with respect to any revenue generated by CRG as a result of
such relationship), irrespective of whether there is any relationship between
HFS and such provider, except in the event, and then only to the extent, that
CRG and HFS expressly provide for compensation to HFS in connection with the
provision of goods or services by any such provider pursuant to a separate,
subsequent written agreement executed by CRG and HFS.
Section 5. No Prior Amendment. The parties acknowledge and agree that
a form of proposed "First Amendment to Purchasing Services Agreement,"
discussed and negotiated in or about September, 1996 (the "Proposed
Amendment"), was executed but not delivered, nor has any subsequent action by
either patty constituted ratification or adoption of the Proposed Amendment,
and the Proposed Amendment is null and void, and of no force or effect.
Section 6. Further Assurances. The parties shall hereafter take such
actions, including without limitation the scheduling of conference calls and
meetings, and the creation of additional documents and agreements, as may be
reasonably necessary in order to carry out the agreements made herein.
Section 7. Continued Effect of Agreement. As amended herein, the
Agreement remains in full force and effect.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Amendment as of the date first above written.
HFS INCORPORATED COMPLEAT RESOURCE GROUP, INC.
By: /s/John Chidsey By: /s/ John K. Lines
------------------------- -------------------------
Name: John Chidsey Name: John K. Lines
Title: Senior Vice President Title: Vice President
Preferred Alliance
<PAGE>
EXHIBIT A
Assigned Preferred Vendors Agreements
1. Preferred Vendor Agreement among Secure Safes, Inc.; HFS
Incorporated; Compleat Resource Group, Inc.; and Residents Direct
Access Association, Inc. dated August 1996.
2. Preferred Vendor Agreement among Macke Services-Texas, Inc.; HFS
Incorporated; Compleat Resource Group, Inc.; and Residents Direct
Access Association, Inc. dated August 1996.
3. Preferred Vendor Agreement among Alamo Rent-A-Car, Inc.; HFS
Incorporated; Compleat Resource Group, Inc., and Residents Direct
Access Association, Inc. dated May 1996.
4. Preferred Vendor Agreement among Pre-Paid Legal Services, Inc.; HFS
Incorporated; Compleat Resource Group, Inc; and Residents Direct
Access Association, Inc. dated July 1996.
<PAGE>
EXHIBIT B
[HFS Letterhead]
January , 1997
To Whom it May Concern:
This letter (or a photocopy hereof) will confirm that HFS has, on or
prior to the date hereof, assigned to Compleat Resource Group, Inc. all right,
title and interest of HFS in and to the Assigned Preferred Vendors Agreements
described in Exhibit A hereto.
Very truly yours,
HFS, INCORPORATED
By:
--------------------------------------
Its Authorized Representative
<PAGE>
EXHIBIT 10.49
CREDIT AGREEMENT dated as of November 20,
1996, among WINGATE FINANCIAL, LLC, a Delaware
limited liability company (the "Borrower"), the
Lenders (as defined in Article I), THE CHASE
MANHATTAN BANK, a New York banking corporation, as
administrative agent (in such capacity, the
"Administrative Agent") and as collateral agent (in
such capacity, the "Collateral Agent") for the
Lenders, WESTDEUTSCHE LANDESBANK GIROZENTRALE as
collateral agent for the Lenders, THE BANK OF NOVA
SCOTIA, as documentation agent for the Lenders, and
BANKERS TRUST COMPANY, as syndication agent for the
Lenders.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I. DEFINITIONS........................................... 1
SECTION 1.01. Defined Terms............................. 1
SECTION 1.02. Terms Generally........................... 21
ARTICLE II. THE CREDITS.......................................... 21
SECTION 2.01. Commitments............................... 21
SECTION 2.02. Advances; Borrowings...................... 22
SECTION 2.03. Borrowing Procedure....................... 24
SECTION 2.04. Evidence of Debt; Repayment of Loans...... 24
SECTION 2.05. Fees...................................... 25
SECTION 2.06. Interest on the Loan...................... 26
SECTION 2.07. Default Interest; Late Payment Charge..... 26
SECTION 2.08. Mandatory Repayments of Principal......... 26
SECTION 2.09. Termination and Reduction of
Commitments.............................................. 28
SECTION 2.10. Optional Prepayment....................... 28
SECTION 2.11. Reserve Requirements; Change in
Circumstances............................................ 29
SECTION 2.12. Indemnity................................. 30
SECTION 2.13. Pro Rata Treatment........................ 31
SECTION 2.14. Sharing of Setoffs........................ 31
SECTION 2.15. Payments.................................. 32
SECTION 2.16. Taxes..................................... 32
SECTION 2.17. Assignment of Commitments Under Certain
Circumstances; Duty to Mitigate.......................... 35
ARTICLE III. REPRESENTATIONS AND WARRANTIES...................... 37
SECTION 3.01. Organization; Powers...................... 37
SECTION 3.02. Authorization............................. 37
SECTION 3.03. Enforceability............................ 38
SECTION 3.04. Governmental Approvals.................... 38
SECTION 3.05. Financial Statements...................... 38
SECTION 3.06. No Material Adverse Change................ 38
SECTION 3.07. Litigation; Compliance with Laws.......... 38
SECTION 3.08. Agreements................................ 38
SECTION 3.09. Federal Reserve Regulations............... 39
SECTION 3.10. Investment Company Act; Public Utility
Holding Company Act...................................... 39
SECTION 3.11. Use of Proceeds........................... 39
SECTION 3.12. No Material Misstatements................. 39
SECTION 3.13. Employee Benefit Plans.................... 39
SECTION 3.14. Security Documents........................ 40
SECTION 3.15. Solvency.................................. 40
ARTICLE IV. CONDITIONS OF LENDING................................ 41
SECTION 4.01. All Borrowings............................ 41
SECTION 4.02. First Borrowing........................... 42
SECTION 4.03. Initial Borrowings with Respect to
Approved Franchisee Loans................................ 46
i
<PAGE>
SECTION 4.04. Plan and Cost Review Items; Independent
Construction Loan Monitor.............................53
SECTION 4.05. Appraisals...............................55
SECTION 4.06. Servicer Fees............................55
SECTION 4.07. Waiver of Defenses.......................55
SECTION 4.08. General Provisions Regarding Approved
Franchisee Loans.........................55
SECTION 4.09. General Provisions Regarding the
Servicer................................................56
ARTICLE V. DEFAULTED FRANCHISEE LOANS...........................57
SECTION 5.01. Notice by the Borrower...................57
SECTION 5.02. No Further Loans.........................57
SECTION 5.03. Mandatory Payment of Loans...............57
SECTION 5.04. Option of the Borrower...................57
ARTICLE VI. AFFIRMATIVE COVENANTS...............................60
SECTION 6.01. Existence; Business and Capitalization...60
SECTION 6.02. Insurance................................62
SECTION 6.03. Obligations and Taxes....................62
SECTION 6.04. Financial Statements, Reports, etc.......62
SECTION 6.05. Default, Litigation and Other Notices....64
SECTION 6.06. Maintaining Records; Access to
Properties and Inspections...............64
SECTION 6.07. Use of Proceeds..........................64
SECTION 6.08. Compliance with Environmental Laws.......64
SECTION 6.09. Preparation of Environmental Reports.....65
SECTION 6.10. Approved Franchisee Loans................65
SECTION 6.11. Further Assurances.......................65
ARTICLE VII. NEGATIVE COVENANTS.................................66
SECTION 7.01. Indebtedness.............................66
SECTION 7.02. Liens....................................66
SECTION 7.03. Investments..............................66
SECTION 7.04. Mergers, Consolidations, Sales of Assets
and Acquisitions.........................67
SECTION 7.05. Dividends and Distributions..............67
SECTION 7.06. Transactions with Affiliates.............67
SECTION 7.07. Issuances of Capital Stock...............67
SECTION 7.08. Creation of Subsidiaries.................68
SECTION 7.09. Employee Benefits........................68
SECTION 7.10. Amendment of Approved Franchisee Loans
and Borrower Organizational Documents....68
SECTION 7.11. Waiver of Terms, Conditions and
Covenants of Approved Franchisee Loans..................68
SECTION 7.12. Waiver of Defaults Under Approved
Franchisee Loans........................................68
SECTION 7.13. Assignment of Approved Franchisee Loans..68
SECTION 7.14. Modification of Underlying Documents and
Support Agreement........................68
SECTION 7.15. Cost Review Items........................69
SECTION 7.16. Equipment Leases.........................69
SECTION 7.17. Servicing Agreement......................69
ii
<PAGE>
ARTICLE VIII. EVENTS OF DEFAULT................................. 69
ARTICLE IX. THE ADMINISTRATIVE AGENT AND THE COLLATERAL
AGENT................................................... 73
SECTION 9.01. Appointment and Authority................ 73
SECTION 9.02. Limitation on Liability.................. 73
SECTION 9.03. Discretionary Actions.................... 74
SECTION 9.04. Resignation; Successor Agents............ 74
SECTION 9.05. Rights of Agents......................... 75
SECTION 9.06. Expenses; Indemnity...................... 75
SECTION 9.07. No Reliance.............................. 76
ARTICLE X. MISCELLANEOUS........................................ 76
SECTION 10.01. Notices................................. 76
SECTION 10.02. Survival of Agreement................... 77
SECTION 10.03. Binding Effect.......................... 77
SECTION 10.04. Successors and Assigns.................. 77
SECTION 10.05. Expenses; Indemnity..................... 81
SECTION 10.06. Right of Setoff......................... 82
SECTION 10.07. Applicable Law.......................... 83
SECTION 10.08. Waivers; Amendment...................... 83
SECTION 10.09. Interest Rate Limitation................ 84
SECTION 10.10. Entire Agreement........................ 84
SECTION 10.11. WAIVER OF JURY TRIAL.................... 84
SECTION 10.12. Severability............................ 85
SECTION 10.13. Counterparts............................ 85
SECTION 10.14. Headings................................ 85
SECTION 10.15. Jurisdiction; Consent to Service of
Process................................. 85
SECTION 10.16. Confidentiality......................... 86
SECTION 10.17. Full Recourse Obligation of the
Borrower................................ 87
iii
<PAGE>
CREDIT AGREEMENT dated as of November 20,
1996, among WINGATE FINANCIAL, LLC, a Delaware
limited liability company (the "Borrower"), the
Lenders (as defined in Article I), THE CHASE
MANHATTAN BANK, a New York banking corporation, as
administrative agent (in such capacity, the
"Administrative Agent") and as collateral agent (in
such capacity, the "Collateral Agent") for the
Lenders, WESTDEUTSCHE LANDESBANK GIROZENTRALE as
collateral agent for the Lenders, THE BANK OF NOVA
SCOTIA, as documentation agent for the Lenders, and
BANKERS TRUST COMPANY, as syndication agent for the
Lenders.
The Borrower has requested the Lenders to extend credit in
the form of a Loan (the "Loan") to be advanced from time to time in accordance
with the provisions of this Agreement but in any event prior to the third
(3rd) anniversary of the Closing Date (such term and each other capitalized
term used but not otherwise defined herein shall have the meaning given it in
Article I), in an aggregate principal amount not in excess of $60,000,000. The
proceeds of the Loan are to be used by the Borrower solely to make funds
available for Development Costs for Wingate Inn Hotels covered by Approved
Franchisee Loans, subject to and in accordance with the terms and conditions
of this Agreement.
The Lenders are willing to extend such credit to the
Borrower on the terms and subject to the conditions set forth herein.
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:
"Accounts" shall mean the Collection Account, the Borrowing
Account, the Imposition Escrow Account, the FF&E Reserve Account, the Initial
Equity Escrow Account, the Net Proceeds Account, the Restoration Award
Account, and any other account set up under the Servicing Agreement.
"Administrative Agent Fees" shall have the meaning assigned
to such term in Section 2.05(b).
"Administrative Questionnaire" shall mean an Administrative
Questionnaire in the form of Exhibit K.
"Advances" shall mean the advances of the Loan made by the
Lenders pursuant to Sections 2.01 and 2.02.
<PAGE>
"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.
"Aggregate Credit Exposure" shall mean the aggregate amount
of the Lenders' Credit Exposures.
"Applicable Interest Rate" shall mean a rate equal to (a)
the Base Rate in effect from time to time plus 1/2 of 1%, or (b) the maximum
rate permitted by law, whichever is less.
"Appraisal" shall mean an appraisal of a Wingate Inn Hotel,
prepared in conformity with FIRREA requirements by an independent property
appraisal firm that is a member of the Appraisal Institute (each, an
"Appraiser").
"Appraised Value" shall mean, as to any Wingate Inn Hotel
covered or to be covered by an Approved Franchisee Loan, the value established
in an Appraisal.
"Approved Construction Budget" shall mean, with respect to a
Wingate Inn Hotel covered by an Approved Franchisee Loan, a Construction
Budget as approved by the Independent Construction Loan Monitor and the
Administrative Agent.
"Approved Construction Schedule" shall mean, with respect to
a Wingate Inn Hotel covered by an Approved Franchisee Loan, a Construction
Schedule as approved by the Independent Construction Loan Monitor and the
Administrative Agent.
"Approved Franchisee Loan" shall mean a Franchisee Loan, the
terms and conditions of which are set forth in Exhibit N, that has been
approved in writing by the Administrative Agent, on or before the first
anniversary of the Closing Date, and is evidenced and secured by the
documentation required by this Agreement.
"Approved Plans" shall mean, with respect to a Wingate Inn
Hotel covered by an Approved Franchisee Loan, the Plans as approved by the
Independent Construction Loan Monitor and the Administrative Agent.
"Architect" shall mean, with respect to the construction of
any Wingate Inn Hotel which is to be financed by an Approved Franchisee Loan,
a reputable architect licensed in the state in which the applicable Property
is located, engaged by the applicable Franchisee Loan Borrower, subject to the
provisions of this Agreement, for the overall design of such Wingate Inn Hotel
and supervision of such construction.
"Arranger" shall mean Chase Securities Inc.
2
<PAGE>
"Assignment and Acceptance" shall mean an assignment and
acceptance entered into by a Lender and an assignee, and accepted by the
Administrative Agent, in the form of Exhibit L or such other form as shall be
approved by the Administrative Agent.
"Assignment of Rents" shall have the meaning assigned to
such term in Section 4.03(e).
"Bank" shall mean The Chase Manhattan Bank.
"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 greater
of (a) the Prime Rate in effect on such day and (b) the Federal Funds
Effective Rate in effect on such day plus 1/2 of 1%. If for any reason the
Administrative Agent shall have determined (which determination shall be
conclusive absent manifest error) that it is unable to ascertain the Federal
Funds Effective Rate for any reason, including the inability or failure of the
Administrative Agent to obtain sufficient quotations in accordance with the
terms of the definition thereof, the Base Rate shall be determined without
regard to clause (b) of the preceding sentence, until the circumstances giving
rise to such inability no longer exist. Any change in the Base Rate due to a
change in the Prime Rate or the Federal Funds Effective Rate shall be
effective on the effective date of such change in the Prime Rate or the
Federal Funds Effective Rate, respectively. The term "Prime Rate" shall mean
the rate of interest per annum publicly announced from time to time by the
Administrative 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 being effective. The term "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 that is a Business Day, the average of the quotations
for the day for such transactions received by the Administrative Agent from
three Federal funds brokers of recognized standing selected by it.
"Board" shall mean the Board of Governors of the Federal
Reserve System of the United States of America.
"Borrowing" shall mean Advances of the Loan made by the
Lenders on a single date.
"Borrowing Account" shall mean the Borrowing Account,
as such term is defined in the Servicing Agreement. The
Borrowing Account shall be maintained at The Chase Manhattan
Bank.
3
<PAGE>
"Borrowing Request" shall mean a request by the Borrower in
accordance with the terms of Section 2.03, in the form of Exhibit M, which
shall have annexed to it, among other supporting documentation, Requests for
Advance (together with all supporting documentation) from the Franchisee Loan
Borrowers whose Approved Franchisee Loans are to be funded by the applicable
Borrowing.
"Business Day" shall mean any day other than a Saturday,
Sunday or day on which banks in New York City are authorized or required by
law to close.
"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,
and the amount of such obligations shall be the capitalized amount thereof as
determined in accordance with GAAP.
A "Change in Ownership" shall be deemed to have occurred if
there is any transfer of any equity interest in the Borrower or any equity
interest in the Borrower is issued, in each case other than as specifically
permitted in Section 7.07.
"Closing Date" shall mean the date of this Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and the regulations promulgated thereunder.
"Collateral Account Agreement" shall have the meaning
assigned to such term in Section 4.02(s).
"Collateral Assignment" shall have the meaning assigned to
such term in Section 4.03(ff).
"Collateral Assignment Documents" shall mean, collectively,
the documents referred to in Sections 4.03(ff) through (mm) (as to each of the
Approved Franchisee Loans) and any other documents assigning or transferring
rights of the Borrower in and to Approved Franchisee Loans and the Franchisee
Loan Documents.
"Collateral Assignment of Servicing Agreement" shall have
the meaning assigned to such term in Section 4.02(q).
"Collection Account" shall mean the Collection Account, as
such term is defined in the Servicing Agreement.
"Commitment" shall mean, with respect to each Lender,
the commitment of such Lender to make Advances hereunder in the
4
<PAGE>
maximum amount set forth in Exhibit A, or in the Assignment and Acceptance
pursuant to which such Lender assumed its Commitment, as applicable, as the
same may be reduced from time to time pursuant to assignments by or to such
Lender pursuant to Section 10.04.
"Completion" shall mean, with respect to a Wingate Inn
Hotel, the occurrence of all of the following events:
(a) the completion of the applicable Wingate Inn Hotel in
substantial accordance with the Approved Plans and the Approved Construction
Budget, and in accordance with all Legal Requirements and the provisions of
the Franchisee Loan Building Loan Agreement, and the acceptance thereof by the
Franchisee Loan Borrower;
(b) the obtaining of a certificate of completion and
certificate of occupancy (or local equivalent) from the Governmental
Authorities having jurisdiction over such Wingate Inn Hotel;
(c) the delivery to the Administrative Agent of certificates
from the Architect and the Independent Construction Loan Monitor to the effect
that all of the work required to be performed to complete the Wingate Inn
Hotel has been performed in substantial accordance with the Approved Plans and
all Legal Requirements and to the reasonable satisfaction of the Architect and
the Independent Construction Loan Monitor, subject only to a "punch list" of
minor items to be completed by contractors and vendors that do not materially
interfere with the operation of the Wingate Inn Hotel;
(d) the receipt of all other approvals of Governmental
Authorities having jurisdiction over such Wingate Inn Hotel to the extent that
any such approval is a condition for the lawful use and occupancy thereof, or
necessary or desirable for the operation thereof in accordance with the
Franchise Agreement;
(e) a final survey inspection and survey update, with a
certification of the surveyor indicating that no encroachments exist by the
Wingate Inn Hotel or on the Property and that all set-back requirements have
been complied with, and indicating the location of access to the Property and
utility, water and other easements affecting the Property;
(f) the payment in full of all costs relating to the
development and construction of the Wingate Inn Hotel then incurred and
invoiced or contracted, less an agreed retention for the minor "punch list"
items referred to in clause (c) above, and the delivery to the Borrower's
title insurance company of such instruments as may be required to cause all
liens of record and claims of mechanics and materialmen to be waived, bonded
or insured by such title insurance company; and
5
<PAGE>
(g) the satisfaction of the conditions set forth in
Section 3.3 of the Franchise Agreement.
"Completion Date" shall mean the date on which Completion of
a Wingate Inn Hotel occurs.
"Completion Guarantors" shall have the meaning assigned to
such term in Section 4.03(w).
"Completion Guaranty" shall have the meaning assigned to
such term in Section 4.03(w).
"Confirmation of Guaranty Agreement" shall mean an agreement
of the Guarantors in the form of Exhibit R.
"Construction Budget" shall have the meaning assigned to
such term in Section 4.04(d).
"Construction Period Interest" shall mean, with respect to a
Wingate Inn Hotel covered by an Approved Franchisee Loan, interest payable on
the Approved Franchisee Loan for the period prior to the Completion Date, as
itemized in the Approved Construction Budget.
"Construction Schedule" shall have the meaning assigned to
such term in Section 4.04(e).
"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.
"Credit Exposure" shall mean, with respect to any Lender at
any time, the aggregate principal amount at such time of all outstanding
Advances of such Lender.
"Default" shall mean any event or condition which upon
notice, lapse of time or both would constitute an Event of Default.
"Default Rate" shall have the meaning assigned to such term
in Section 2.07(a).
"Defaulted Franchisee Loan" shall mean an Approved
Franchisee Loan under which a default has occurred (whether or not notice
thereof has been given to the Franchisee Loan Borrower) and has continued for
a period in excess of ninety (90) days.
"Development Costs" shall mean all costs incurred or to be
incurred in connection with the development and construction of a Wingate Inn
Hotel, as set forth in an Approved Construction
6
<PAGE>
Budget. Development Costs shall include, Hard Costs, Soft Costs, Construction
Period Interest, and Monthly Operating Deficits. Development Costs for any
Wingate Inn Hotel may not exceed $7,500,000. Wingate Inn Hotels having
Development Costs in excess of $7,500,000 will be considered by the
Administrative Agent for eligibility for an Approved Franchisee Loan on an
exemption/case-by-case basis and must be so approved by the Administrative
Agent and Required Lenders in their sole discretion.
"Disbursement Account" shall have the meaning assigned to
such term in Section 2.02(b).
"dollars" or "$" shall mean lawful money of the United
States of America.
"environment" shall mean ambient air, surface water and
groundwater (including potable water, navigable water and wetlands), the land
surface or subsurface strata, or as otherwise defined in any Environmental
Law.
"Environmental Claim" shall mean any written accusation,
allegation, notice of violation, claim, demand, order, directive, cost
recovery action or other cause of action by, or on behalf of, any Governmental
Authority or any person for damages, injunctive or equitable relief, personal
injury (including sickness, disease or death), Remedial Action costs, tangible
or intangible property damage, natural resource damages, nuisance, pollution,
any adverse effect on the environment caused by any Hazardous Material, or for
fines, penalties or restrictions, resulting from or based upon: (a) the
existence, or the continuation of the existence, of a Release (including
sudden or nonsudden, accidental or non-accidental Releases); (b) exposure to
any Hazardous Material; (c) the presence, use, handling, transportation,
storage, treatment or disposal of any Hazardous Material; or (d) the violation
or alleged violation of any Environmental Law or Environmental Permit.
"Environmental Indemnity" shall have the meaning assigned to
such term in Section 4.03(x).
"Environmental Law" shall mean any and all applicable
present and future treaties, laws, rules, regulations, codes, ordinances,
orders, decrees, judgments, injunctions, notices or binding agreements issued,
promulgated or entered into by any Governmental Authority, relating in any way
to the environment, preservation or reclamation of natural resources, the
management, Release or threatened Release of any Hazardous Material or to
health and safety matters, including the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986, 42 U.S.C. ss.ss. 9601 et seq., the Solid
Waste Disposal Act, as amended by the Resource Conservation and Recovery Act
of 1976 and
7
<PAGE>
Hazardous and Solid Amendments of 1984, 42 U.S.C. ss.ss. 6901 et seq., the
Federal Water Pollution Control Act, as amended by the Clean Water Act of
1977, 33 U.S.C. ss.ss. 1251 et seq., the Clean Air Act of 1970, as amended 42
U.S.C. ss.ss. 7401 et seq., the Toxic Substances Control Act of 1976, 15
U.S.C. ss.ss. 2601 et seq., the Occupational Safety and Health Act of 1970, as
amended, 29 U.S.C. ss.ss. 651 et seq., the Emergency Planning and Community
Right-to- Know Act of 1986, 42 U.S.C. ss.ss. 11001 et seq., the Safe Drinking
Water Act of 1974, as amended, 42 U.S.C. ss.ss. 300(f) et seq., the Hazardous
Materials Transportation Act, 49 U.S.C. ss.ss. 5101 et seq., and any similar
or implementing state or local law, and all amendments or regulations
promulgated thereunder.
"Environmental Permit" shall mean any permit, approval,
authorization, certificate, 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, together with the Borrower, is treated as a single
employer under Section 414(b) or (c) of the Code, or solely for purposes of
Section 302 of ERISA and Section 412 of the Code, is treated as a single
employer under Section 414 of the Code.
"ERISA Event" shall mean (a) any "reportable event", as
defined in Section 4043 of ERISA or the regulations issued thereunder, with
respect to a Plan; (b) the adoption of any amendment to a Plan that would
require the provision of security pursuant to Section 401(a)(29) of the Code
or Section 307 of ERISA; (c) the existence with respect to any Plan of an
"accumulated funding deficiency" (as defined in Section 412 of the Code or
Section 302 of ERISA), whether or not waived; (d) the filing pursuant to
Section 412(d) of the Code or Section 303(d) of ERISA of an application for a
waiver of the minimum funding standard with respect to any Plan; (e) the
incurrence of any liability under Title IV of ERISA with respect to the
termination of any Plan or the withdrawal or partial withdrawal of the
Borrower, any Loan Party, or any ERISA Affiliate of any of them, from any Plan
or Multiemployer Plan; (f) the receipt by the Borrower, any Loan Party, or any
ERISA Affiliate of any of them, from the PBGC or a plan administrator of any
notice relating to the intention to terminate any Plan or Plans or to appoint
a trustee to administer any Plan; (g) the receipt by the Borrower, any Loan
Party, or any ERISA Affiliate of any of them, of any notice concerning the
imposition of Withdrawal Liability or a determination that a Multiemployer
Plan is, or is expected to be, insolvent or in reorganization, within the
meaning of Title IV of ERISA; (h) the occurrence of a "prohibited transaction"
with
8
<PAGE>
respect to which the Borrower, any Loan Party, or any ERISA Affiliate of any
of them is a "disqualified person" (within the meaning of Section 4975 of the
Code) or with respect to which the Borrower, any Loan Party, or any ERISA
Affiliate of any of them could otherwise be liable; and (i) any other event or
condition with respect to a Plan or Multiemployer Plan that could reasonably
be expected to result in material liability of the Borrower, any Loan Party,
or any ERISA Affiliate of any of them.
"Event of Default" shall have the meaning assigned to such
term in Article VIII.
"Fees" shall mean the Upfront Fee and the
Administrative Agent Fees.
"FF&E" shall mean the furniture, furnishings, fixtures and
equipment relating to a Wingate Inn Hotel.
"FF&E Reserve Account" shall mean the FF&E Reserve Account,
as such term is defined in the Servicing Agreement.
"Financial Officer" shall mean with respect to any
corporation or other entity, the chief financial officer, principal accounting
officer, treasurer or controller of such corporation or other entity.
"Formation" shall mean the formation of the Borrower.
"Franchise Agreement" shall mean an agreement between
Wingate and a Franchisee Loan Borrower, substantially in the form of Exhibit G
(subject to such changes as the Administrative Agent may, from time to time,
approve), pursuant to which the Franchisee Loan Borrower will construct and
operate a Wingate Inn Hotel.
"Franchisee Loan" shall mean a proposed construction/term
loan on the terms and conditions set forth in Exhibit N, made by the Borrower
to a Franchisee Loan Borrower.
"Franchisee Loan Borrower" shall mean a Single Purpose
Entity which shall be a franchisee of Wingate under a Franchise Agreement,
which has been approved by Required Lenders, and which is entering into an
Approved Franchisee Loan with the Borrower.
"Franchisee Loan Building Loan Agreements" shall mean
Building Loan Agreements with respect to each Approved Franchisee Loan, each
to be substantially in the form of Exhibit BB, with such modifications thereto
as may be necessary to reflect local law, and such other changes as may be
approved by the Administrative Agent to reflect the specific transaction.
9
<PAGE>
"Franchisee Loan Default Date" shall mean the date on which
an Approved Franchisee Loan first becomes a Defaulted Franchisee Loan.
"Franchisee Loan Documents" shall mean all documents
evidencing, securing and/or guaranteeing an Approved Franchisee Loan, or
otherwise delivered in connection therewith, including, without limitation,
the Franchisee Loan Building Loan Agreement, the Franchisee Loan Note, the
Mortgage, the Assignment of Rents, assignments of equipment leases, service
contracts, and other documents and property rights, the Security Agreement,
the Completion Guaranty, and the Environmental Indemnity.
"Franchisee Loan Note" shall have the meaning assigned to
such term in Section 4.03(c).
"GAAP" shall mean generally accepted accounting principles
applied on a consistent basis.
"General Contractor" shall mean, with respect to the
construction of any Wingate Inn Hotel which is to be financed by an Approved
Franchisee Loan, the general contractor or construction manager engaged by the
applicable Franchisee Loan Borrower, subject to the provisions of this
Agreement, for such construction.
"GFS" shall mean General Franchise Systems, Inc., the
general partner of Wingate.
"Governmental Authority" shall mean any Federal, state,
local or foreign court, governmental or quasi-governmental agency, authority,
instrumentality or regulatory body.
"Gross Revenues" shall have the meaning assigned to such
term in Exhibit O.
"Guarantee" shall mean with respect to any person, any
obligation, contingent or otherwise, of or by 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 the guaranteeing 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 or lease 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 any 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 the ordinary
course of business.
10
<PAGE>
"Guarantee Agreement" shall mean the Guarantee Agreement,
substantially in the form of Exhibit C, made by the Guarantor in favor of the
Collateral Agent for the benefit of the Secured Parties.
"Guaranteed Amount" shall mean the Applicable Principal
Liability (as such term is defined in the Guarantee Agreement) from time to
time in effect.
"Guarantor" shall mean HFS and each other person that
becomes party to a Guarantee Agreement as a Guarantor, and the permitted
successors and assigns of each such person.
"Hard Costs" shall mean the costs and expenses in respect of
supplying goods, services, materials and labor for the construction of a
Wingate Inn Hotel, all as itemized in the applicable Approved Construction
Budget.
"Hazardous Materials" shall mean all explosive or
radioactive substances or wastes, hazardous or toxic substances or wastes,
pollutants, solid, liquid or gaseous wastes, including petroleum or petroleum
distillates, asbestos or asbestos containing materials, polychlorinated
biphenyls ("PCBs") or PCB- containing materials or equipment, radon gas,
infectious or medical wastes and all other substances or wastes of any nature
regulated pursuant to any Environmental Law.
"HFS" shall mean HFS Incorporated.
"HFS Credit Agreement" shall mean, collectively, those two
bank credit agreements dated as of October 2, 1996 between HFS and The Chase
Manhattan Bank, as agent, as the same may, from time to time, have been, and
may, from time to time, hereafter be, modified, supplemented, renewed,
replaced or refinanced.
"Impositions" shall have the meaning assigned to such
term in Exhibit O.
"Imposition Escrow Account" shall mean the Imposition
Escrow Account, as defined in the Servicing Agreement.
"Indebtedness" of any person shall mean, without
duplication, (a) all obligations of such person for borrowed money or with
respect to deposits or advances of any kind, (b) all obligations of such
person evidenced by bonds, debentures, notes or similar instruments, (c) all
obligations of such person upon which interest charges are customarily paid,
except contracts that require interest on late payments only, (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 (excluding trade accounts payable and accrued obligations
incurred in the
11
<PAGE>
ordinary course of business) (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 and (i) all obligations of such person as an
account party in respect of letters of credit and bankers' acceptances. The
Indebtedness of any person shall include the Indebtedness of any partnership
in which such person is a general partner.
"Indemnity, Subrogation and Subordination Agreement" shall
mean the Indemnity, Subrogation and Subordination Agreement, substantially in
the form of Exhibit D, among the Borrower, Wingate, the Guarantor and the
Collateral Agent.
"Independent Construction Loan Monitor" shall have the
meaning assigned to such term in Section 4.04.
"Independent Construction Loan Monitor's Certification"
shall mean, with respect to a Wingate Inn Hotel covered by an Approved
Franchisee Loan, a certification by the applicable Independent Construction
Loan Monitor, in form acceptable to the Administrative Agent, containing the
information set forth in Paragraph 16(b) and, if applicable, Paragraph 19 of
the applicable Franchisee Loan Building Loan Agreement.
"Initial Approved Franchisee Loan Borrowing" shall have the
meaning assigned to such term in Section 4.03.
"Initial Equity Investment Account" shall mean the Initial
Equity Investment Account, as such term is defined in the Servicing Agreement.
"Investments" shall mean, with respect to any period, as to
any person, (a) amounts paid or agreed to be paid by such person by way of
investment and/or purchase of stock, securities, liabilities, properties or
assets of, or contributed to, any other person during such period and (b)
capital and development expenditures made during such period by such person in
its own assets and businesses.
"Legal Requirements" shall mean (i) statutes, laws, rules,
rulings, orders, regulations, ordinances, judgments, decrees and injunctions
of any Governmental Authority (including, without limitation, Environmental
Laws, fire, health, handicapped access, sanitation, ecological, historic,
zoning, environmental protection, wetlands and building laws) in any way
applicable to a specific Franchisee Loan Borrower, specific Property, or
specific Wingate Inn Hotel, or to the ownership, use, occupancy, possession,
operation or maintenance of a Property or Wingate Inn Hotel; (ii) all
requirements of the local Board of Fire Under-
12
<PAGE>
writers or other similar body acting in and for the locality in which a
Property or Wingate Inn Hotel is situated and all requirements of each
insurance policy covering or applicable to all or any part of a Property or
Wingate Inn Hotel or the use thereof and all requirements of the issuer of
each such policy, including any which may require repairs, modifications or
alterations (structural or otherwise) in or to such Property or Wingate Inn
Hotel or any part thereof; (iii) all requirements of each permit, license,
authorization and regulation relating to a Property or Wingate Inn Hotel, or
any portion thereof or to the ownership, use, occupancy, possession, operation
or maintenance thereof; and (iv) all covenants, agreements, regulations,
restrictions and other encumbrances contained in any instrument either of
record or known to a Franchisee Loan Borrower at any time in force affecting a
Franchisee Loan Borrower, Property, or Wingate Inn Hotel or any part thereof,
or the ownership, use, occupancy, possession, operation or maintenance
thereof, in each case, whether now or hereafter enacted or in force.
"Lenders" shall mean (a) the financial institutions listed
in Exhibit A (other than any such financial institution that has ceased to be
a party hereto pursuant to an Assignment and Acceptance) and (b) any financial
institution that has become a party hereto pursuant to an Assignment and
Acceptance.
"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 (or
any financing lease having substantially the same economic effect as any of
the foregoing) relating to such asset and (c) in the case of securities, any
purchase option, call or similar right of a third party with respect to such
securities.
"Loan Application" shall have the meaning assigned to such
term in Section 4.03(a).
"Loan Documents" shall mean this Agreement, the Note, the
Guarantee Agreement, the Indemnity, Subrogation and Contribution Agreement,
the Security Documents, the Collateral Assignment Documents, Support
Agreements, and all other documents executed and delivered by the Borrower in
favor of the Administrative Agent, the Collateral Agent, and/or the Lenders in
connection with the Loan.
"Loan Parties" shall mean the Borrower, each member of the
Borrower, the Guarantor, Wingate and GFS.
"Major Subcontractors" shall mean the contractor or
subcontractors engaged by a Franchisee Loan Borrower under Major Subcontracts.
13
<PAGE>
"Major Subcontracts" shall mean, with respect to the
construction of any Wingate Inn Hotel which is to be financed in part by an
Approved Franchisee Loan, any subcontract for electrical work, HVAC, plumbing,
concrete, masonry, dry wall/carpentry or any other subcontract having a
contract price, either initially or thereafter by virtue of change orders or
other amendments or modifications, equal to or in excess of $200,000,
including multiple contracts or subcontracts with a single contractor or
subcontractor.
"Managing Member" shall mean GFS, the managing member
of the Borrower.
"Margin Stock" shall have the meaning assigned to such term
in Regulation U.
"Material Adverse Effect" shall mean a materially adverse
effect on (a) the business, assets, operations, prospects or condition,
financial or otherwise, of the Borrower, (b) the ability of the Borrower or
any other Loan Party to perform any of its obligations under any Loan Document
to which it is a party or (c) the rights of or benefits available to the
Lenders under any Loan Document.
"Maturity Date" shall mean the sixth (6th) anniversary of
the Closing Date, or such earlier date to which the maturity of the Loans may
be accelerated upon an Event of Default or otherwise in accordance with the
provisions of the Loan Documents.
"Maximum Franchisee Loan Amount" shall mean, for any
Approved Franchisee Loan, an amount equal to the lesser of (a) $5,625,000, or
(b) 75% of the lesser of (i) the Development Costs of the Wingate Inn Hotel
covered by such Approved Franchisee Loan, as set forth in the Approved
Construction Budget, or (ii) the Appraised Value of such Wingate Inn Hotel,
provided that if the Appraised Value is less than the Development Costs, the
Wingate Inn Hotel will be ineligible for funding as an Approved Franchisee
Loan unless otherwise approved by the Administrative Agent.
"Minimum Up-Front Equity" shall have the meaning assigned to
such term in Section 4.03(ss).
"Monthly Operating Deficit" shall mean, with respect to a
Wingate Inn Hotel, the monthly Operating Deficits from the Completion Date to
the Stabilization Date, as itemized in the Approved Construction Budget.
"Mortgage" shall have the meaning assigned to such term
in Section 4.03(d).
14
<PAGE>
"Multiemployer Plan" shall mean a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
"Net Proceeds Account" shall mean the Net Proceeds Account,
as such term in defined in the Servicing Agreement.
"Note" shall have the meaning assigned to such term in
Section 2.01(c).
"Obligations" shall mean all obligations defined as
"Obligations" in the Guarantee Agreement and the Security Documents.
"Operating and Management Expenses" shall have the meaning
assigned to such term in Exhibit O.
"Operating Deficits" shall mean, for any given period with
respect to a Wingate Inn Hotel, the amount by which the sum of (without
duplication) (a) Operating and Management Expenses for the Wingate Inn Hotel,
(b) deposits or reserves for Impositions required under the applicable
Franchisee Loan Documents, (c) debt service payable under the applicable
Franchisee Loan Note, and (d) Required FF&E Deposits, exceeds Gross Revenues
for the Wingate Inn Hotel.
"PBGC" shall mean the Pension Benefit Guaranty Corporation
referred to and defined in ERISA.
"Permitted Investments" shall mean the investments
described in Exhibit S.
"person" shall mean any natural person, corporation,
business trust, limited liability company, joint venture, association,
company, partnership or government, or any agency or political subdivision
thereof.
"Phase I Environmental Site Assessment" shall have the
meaning assigned to such term in Section 4.03(y).
"Plan" shall mean any employee pension benefit plan (other
than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or
Section 412 of the Code or Section 307 of ERISA, and in respect of which the
Borrower, any Loan Party, or any ERISA Affiliate or any of them is (or, if
such plan were terminated, would under Section 4069 of ERISA be deemed to be)
an "employer" as defined in Section 3(5) of ERISA.
"Plan and Cost Review Items" shall have the meaning assigned
to such term in Section 4.04.
"Plans" shall have the meaning assigned to such term in
Section 4.04(f).
15
<PAGE>
"Pledge Agreement" shall mean the Pledge Agreement,
substantially in the form of Exhibit E, between Wingate and GFS and the
Collateral Agent, for the benefit of the Secured Parties.
"Property" shall have the meaning assigned to such term
in Section 4.03(d).
"Register" shall have the meaning given such term in
Section 10.04(d).
"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.
"Release" shall mean any spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
disposing or dumping into the environment.
"Request for Advance" shall have the meaning set forth in
the applicable Franchisee Loan Building Loan Agreement.
"Required FF&E Deposit" shall mean, with respect to a
Wingate Inn Hotel, a monthly deposit into the FF&E Reserve Account equal to
the product of (a) Gross Revenues for the preceding calendar month, and (b)
(i) 3% for the period commencing on the Completion Date of the Wingate Inn
Hotel and ending on the last day of the calendar month in which the second
(2nd) anniversary of the Completion Date occurs, (ii) 4% for the two (2) year
period next following the period described in clause (i), and (iii) 5%
thereafter.
"Required Lenders" shall mean, at any time, Lenders having
made Advances and having unused Commitments representing at least 51% of the
sum of the Loan outstanding and unused Commitments at such time.
"Reserve Accounts" shall mean, as to each Approved
Franchisee Loan, the FF&E Reserve Account and the Imposition
Escrow Account.
"Responsible Officer" shall mean with respect to any
corporation or other entity, any officer authorized to act as to a given
matter under a duly adopted resolution.
16
<PAGE>
"Restoration Award Account" shall mean the Restoration Award
Account, as such term in defined in the Servicing Agreement.
"S&P" shall mean Standard & Poor's Ratings Group.
"Scheduled Completion Date" shall mean, with respect to a
Wingate Inn Hotel funded by an Approved Franchisee Loan, the date of
completion set forth in the Approved Construction Schedule.
"Secured Parties" shall mean (a) the Lenders, (b) the
Administrative Agent, (c) the Collateral Agent and (d) the successors and
assigns of the foregoing.
"Security Agreement" shall have the meaning assigned to such
term in Section 4.03(h).
"Security Documents" shall mean the Pledge Agreement and the
Collateral Assignment Documents, and each of the other security agreements and
other instruments and documents executed and delivered pursuant to any of the
foregoing.
"Servicer" shall mean AMRESCO Management, Inc., or such
successor servicer as may, from time to time, be approved by Required Lenders,
in their sole discretion.
"Servicer Consent" shall have the meaning assigned to such
term in Section 4.02(r).
"Servicing Agreement" shall the Interim Servicing Agreement,
substantially in the form of Exhibit W, entered into between the Borrower and
the Servicer, and any agreement for the monitoring and administration of
Approved Franchisee Loans entered into by the Borrower and a successor
servicer and approved by Required Lenders in their sole discretion (which
approval shall be subject, in any event, to the execution and delivery by such
successor servicer of a Servicer Consent dealing with the matters set forth in
the Servicer Consent annexed hereto as Exhibit Y, and in form and substance
satisfactory to Required Lenders, in their sole discretion).
"Single Purpose Entity" shall mean a person, other than an
individual, which is formed or organized under the laws of the United States
of America, or any state or political subdivision thereof, and (a) if the
Borrower, solely for the purpose of making Approved Franchisee Loans (and
entering into Franchisee Loan Building Loan Agreements and applicable
Franchisee Loan Documents) and consummating the transactions described
therein, or (b) if a Franchisee Loan Borrower, solely for the purpose of
owning the applicable Property and constructing and operating the applicable
Wingate Inn Hotel, and entering into a Approved Franchisee Loan and the
applicable Franchisee Loan Documents, and
17
<PAGE>
in either case does not engage in any other business, does not have any other
assets other than (A) in the case of the Borrower, the Approved Franchisee
Loans and (B) in the case of a Franchisee Loan Borrower, the applicable
Property and Wingate Inn Hotel, and in either case, has its own separate books
and records and its own accounts, in each case which are separate and apart
from the books and records and accounts of any other person, and holds itself
out as being a person, separate and apart from any other person. If a Single
Purpose Entity is a limited partnership, (i) its partnership agreement must
provide that the partnership will dissolve upon the withdrawal or dissolution
of the last remaining general partner, unless the partners by majority vote
elect, within ninety (90) days, to continue the partnership and appoint a new
general partner, (ii) one general partner must own at least a one percent (1%)
interest in the partnership and must be a Single Purpose Entity (having, as
its sole business purpose, the ownership of the partnership interest), and
(iii) the partnership agreement must provide that the dissolution and winding
up or insolvency filing of such partnership requires the unanimous consent of
all partners. A Franchisee Loan Borrower may not own more than one Property or
Wingate Inn Hotel.
"Soft Costs" shall mean all costs relating to the
development and construction of a Wingate Inn Hotel, all as itemized in the
Approved Construction Budget, excluding Hard Costs, Construction Period
Interest, and Monthly Operating Deficits.
"Specified Franchisee Loan Defaults" shall mean, with
respect to an Approved Franchisee Loan, any of the defaults specified in
Exhibit O.
"Stabilization Date" shall mean, with respect to each
Wingate Inn Hotel financed with an Approved Franchisee Loan, the date defined
as such in the applicable Franchisee Loan Building Loan Agreement, as approved
by the Administrative Agent.
"subsidiary" shall mean, with respect to any person (herein
referred to as the "parent"), any corporation, partnership, association or
other business entity (a) of which securities or other ownership interests
representing more than 50% of the equity or more than 50% of the ordinary
voting power or more than 50% of the general partnership interests are, at the
time any determination is being made, owned, Controlled or held, directly or
indirectly or (b) that is, at the time any determination is made, otherwise
directly or indirectly Controlled, by the parent or one or more subsidiaries
of the parent or by the parent and one or more subsidiaries of the parent.
"Support Agreements" shall mean the agreements set
forth in Exhibit F, and all modifications, amendments,
18
<PAGE>
supplements or replacements thereto, and any other arrangements or agreements
between HFS and Wingate or HFS and franchisees of Wingate Inn Hotels.
"Total Commitment" shall mean, at any time, the aggregate
amount of the Commitments as in effect at such time.
"Transactions" shall have the meaning assigned to such
term in Section 3.02.
"Underlying Documents" shall have the meaning assigned to
such term in Section 7.14.
"Upfront Fee" shall have the meaning assigned to such term
in Section 2.05(a).
"Welfare Plan" shall mean an employee welfare benefit plan
as defined in Section 3(l) of ERISA.
"Wingate" shall mean Hotel Franchising Limited
Partnership, d/b/a Wingate Inns, L.P.
"Wingate Inn Chain" shall mean the chain of mid-market,
limited service hotels being developed by Wingate under the name "Wingate
Inn".
"Wingate Inn Hotel" shall mean a mid-market, limited service
hotel constructed and operated as a "Wingate Inn" as part of the Wingate Inn
Chain pursuant to a Franchise Agreement.
"Wingate Partnership Agreement" shall mean the Second
Amended and Restated Agreement of Limited Partnership of Wingate dated as of
November 20, 1996, a copy of which is annexed hereto as Exhibit J, as the same
may, from time to time, be modified,
amended, supplemented or replaced.
"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.
"Workout Process" shall mean, with respect to a Defaulted
Franchisee Loan, the workout or restructuring of such Defaulted Franchisee
Loan, and/or the pursuit of remedies with respect thereto.
SECTION 1.02. Terms Generally. The definitions in Section
1.01 shall apply equally to both the singular and plural forms of the terms
defined. Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. The words "include",
"includes" and "including" shall be deemed to be followed by the phrase
"without limitation". All references herein to Articles, Sections,
19
<PAGE>
Exhibits and Schedules shall be deemed references to Articles and Sections of,
and Exhibits and Schedules to, this Agreement unless the context shall
otherwise require. Except as otherwise expressly provided herein, (a) any
reference in this Agreement to any Loan Document shall mean such document as
amended, restated, supplemented or otherwise modified from time to time and
(b) all terms of an accounting or financial nature shall be construed in
accordance with GAAP, as in effect from time to time; provided, however, that
for purposes of determining compliance with the covenants contained in Article
VII, all accounting terms herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with GAAP as in effect on
the date of this Agreement and applied on a basis consistent with the
application used in the financial statements referred to in Section 3.05.
ARTICLE II. THE CREDITS
SECTION 2.01. Commitments. (a) 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 Advances of the
Loan to the Borrower, at any time and from time to time on or after the date
hereof, and until the earlier of (A) the third (3rd) anniversary of the
Closing Date and (B) the termination of the Commitment of such Lender in
accordance with the terms hereof, in an aggregate principal amount that will
not result in such Lender's Credit Exposure exceeding such Lender's Commitment
(taking into account all Advances theretofore made by such Lender). Portions
of the Loan that have been repaid or prepaid may not be reborrowed.
(b) The proceeds of each Advance shall be used by the
Borrower (after the Franchisee Loan Borrower has applied the Minimum Up-Front
Equity to Development Costs and evidence of the same wholly satisfactory to
the Administrative Agent has been delivered to the Administrative Agent)
solely to fund Development Costs for Wingate Inn Hotels covered by Approved
Franchisee Loans (it being understood that the proceeds of a single Borrowing
may be used to fund one or more Approved Franchisee Loans), subject to and in
accordance with the provisions of this Agreement and each Franchisee Loan
Building Loan Agreement.
(c) The Loan shall (i) be evidenced by a promissory note
(the "Note") in the original principal amount of $60,000,000 (or so much
thereof as may be advanced or outstanding at any given time), in the form
annexed hereto as Exhibit B, (ii) secured by, among other things, (A)
collateral assignments of and an exclusive first priority security interest in
and to the Approved Franchisee Loans, including, without limitation, the
collateral securing the Approved Franchisee Loans and all other Franchisee
Loan Documents, title and other applicable insurance, the Franchise Agreement,
management and other operating
20
<PAGE>
agreements and leases, rents and hotel receipts relating to the applicable
Wingate Inn Hotel, and guarantees of the Approved Franchisee Loans, (B) a
collateral assignment of the Servicing Agreement, (C) a pledge by Wingate and
the Managing Member of and an exclusive first priority interest in all of the
outstanding capital stock of or equity interests in the Borrower and the
Managing Member, and (D) the Collateral Account Agreement, and (iii)
guaranteed by the Guarantee Agreement.
SECTION 2.02. Advances; Borrowings. (a) Each Advance shall
be made as part of a Borrowing and shall represent each Lender's pro rata
share, in accordance with its Commitment, of such Borrowing; provided,
however, that the failure of any Lender to make any Advance 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 Advance required to be made by such other
Lender). The Advances comprising any Borrowing shall be (i) in an aggregate
principal amount that is not less than $250,000, unless otherwise approved by
the Administrative Agent, or (ii) equal to the remaining available balance of
the applicable Commitments, if the condition of clause (i) cannot be
satisfied.
(b) On not less than eighteen (18) hours' prior request
given by the Administrative Agent from time to time, which request may be
given in writing (including by facsimile transmission) or by telephone, each
Lender shall advance its pro rata share of a Borrowing on the proposed date
requested by the Administrative Agent, by wire transfer of immediately
available funds to such account in New York City as the Administrative Agent
may designate not later than 11:00 a.m., New York City time, and the
Administrative Agent shall by 12:00 (noon), New York City time, credit the
amounts so received to an account at the Bank in the name of the
Administrative Agent (the "Disbursement Account") or, if a Borrowing shall not
occur on such date (in whole or in part) because any condition precedent
herein specified shall not have been met, return the amounts so received (to
the extent not disbursed) to the respective Lenders, together with interest
thereon at the Federal Funds Effective Rate if not returned on such date.
(c) Unless the Administrative Agent shall have received
notice from a Lender prior to the date of any Borrowing that such Lender will
not make available to the Administrative Agent such Lender's portion of such
Borrowing, the Administrative Agent may assume that such Lender will make such
portion available to the Administrative Agent on the date of such Borrowing in
accordance with paragraph (b) above and the Administrative Agent may, in
reliance upon such assumption, make available to the Borrower on such date a
corresponding amount. If the Administrative Agent shall have so made funds
available then, to the extent that such Lender shall not have made such
21
<PAGE>
portion available to the Administrative Agent, such Lender and the Borrower
severally agree to repay to the Administrative 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 Administrative Agent at (i) in the case of the Borrower, the
Applicable Interest Rate in effect from time to time, and (ii) in the case of
such Lender, a rate determined by the Administrative 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 Administrative Agent
such corresponding amount, such amount shall constitute such Lender's pro-rata
share of such Borrowing for purposes of this Agreement.
(d) Notwithstanding any other provisions of this Agreement
(i) the Borrower shall not be entitled to request, and the Lenders shall not
be required to fund, more than four (4) Borrowings in any given calendar
month, one of which will be used solely to fund Construction Period Interest
under the applicable Approved Franchisee Loan Building Loan Agreements, and
the remaining three of which will be used solely to fund Development Costs
other than Construction Period Interest under the applicable Approved
Franchisee Loan Building Loan Agreements (and if no Borrowing is made in a
calendar month in respect of Construction Period Interest, the number of
Borrowings in such calendar month shall be limited to three (3)), (ii) no
Borrowings will be advanced at any time after the third (3rd) anniversary of
the Closing Date, and (iii) no Borrowing will be made in respect of any
Franchisee Loan (A) which has not been approved by the Administrative Agent,
as an Approved Franchise Loan, on or before the first anniversary of the
Closing Date, and (B) under which the Initial Approved Franchisee Loan
Borrowing has not been funded on or before the first anniversary of the
Closing Date.
(e) The Borrower shall, as part of its Borrowing Request,
direct the Administrative Agent or the Servicer to disburse the proceeds of
each Borrowing directly from the Disbursement Account to the Borrowing
Account, it being understood that the same, when so disbursed, shall
constitute advances by the Borrower under the applicable Approved Franchisee
Loans.
SECTION 2.03. Borrowing Procedure. In order to request a
Borrowing, the Borrower shall deliver by hand, overnight courier, or telecopy
to the Administrative Agent a duly completed Borrowing Request not later than
12:00 noon, New York City time, at least four (4) Business Days before a
proposed Borrowing. Each Borrowing Request shall be irrevocable, shall be
signed by a Responsible Officer of the Borrower, shall specify the following
information: (i) the amount of such Borrowing; (ii) the Approved Franchisee
Loan or Loans to be funded with the proceeds of the Borrowing; (iii) the name
of the Franchisee Loan Borrower or Borrowers; (iv) the name and location of
the Wingate
22
<PAGE>
Inn Hotel or Hotels covered by such Approved Franchisee Loans; (v) a schedule
setting forth the total amount of each such Approved Franchisee Loan and the
amounts previously funded; and (vi) the additional information required by the
form of Borrowing Request annexed hereto as Exhibit M, and shall be
accompanied by (A) the applicable Requests for Advance under the applicable
Approved Franchisee Loans; (B) the authorization and direction referred to in
Section 2.02(e); (C) the information specified in Article IV; and (D) an
Independent Construction Loan Monitor's Certification with respect to each
Approved Franchisee Loan to be funded with the proceeds of the Borrowing;
provided, however, that, notwithstanding any contrary specification in any
Borrowing Request, the amount of each requested Borrowing shall comply with
the requirements set forth in Section 2.02.
SECTION 2.04. Evidence of Debt; Repayment of Loans. (a) The
Borrower hereby unconditionally promises to pay to the Administrative Agent
for the account of each Lender the then unpaid principal amount of each
Borrowing on the Maturity Date, together with all accrued and unpaid interest
thereon and all other amounts due and owing under any of the Loan Documents.
(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 Advance made by such Lender from time to time,
including the amounts of principal and interest payable and paid to such
Lender from time to time under this Agreement.
(c) The Administrative Agent shall maintain accounts in
which it will record (i) the amount of each Advance made hereunder, (ii) the
amount of any principal or interest due and payable or to become due and
payable from the Borrower with regard to the Advances made by each Lender
hereunder and (iii) the amount of any sum received by the Administrative Agent
hereunder from the Borrower or any Guarantor and each Lender's share thereof.
(d) The entries made in the accounts maintained pursuant to
Sections 2.04(b) and (c) shall be prima facie evidence of the existence and
amounts of the obligations therein recorded; provided, however, that the
failure of any Lender or the Administrative Agent to maintain such accounts or
any error therein shall not in any manner affect the obligations of the
Borrower to repay the Loan in accordance with its terms.
(e) Notwithstanding any other provision of this Agreement,
in the event any Lender shall request and receive a promissory note payable to
such Lender and its registered assigns, the interests represented by such note
shall at all times (including after any assignment of all or part of such
interests pursuant to Section 10.4) be represented by one or more
23
<PAGE>
promissory notes payable to the payee named therein or its
registered assigns.
SECTION 2.05. Fees.
(a) The Borrower agrees to pay to the Administrative
Agent, for the ratable benefit of the Lenders, an upfront fee on
the Closing Date in the amount of $600,000 (the "Upfront Fee")
(b) The Borrower agrees to pay to the Administrative Agent,
for its own account, an administrative fee, payable in equal monthly
installments in advance commencing with the Closing Date, in the amount of
$120,000.00 for each of the first two years of this Agreement, and $60,000.00
for each subsequent year of this Agreement (collectively, the "Administrative
Agent Fees").
(c) All Fees shall be paid on the dates due, in immediately
available funds, to the Administrative Agent for distribution, if and as
appropriate, among the Lenders. Once paid, none of the Fees shall be
refundable under any circumstances.
SECTION 2.06. Interest on the Loan. (a) Subject to the
provisions of Section 2.07, each Borrowing shall bear interest (computed on
the basis of a 360 day year for the actual number of days elapsed) at a rate
per annum equal to the Applicable Interest Rate in effect from time to time.
(b) Accrued interest on the Loan at the Applicable Interest
Rate in effect from time to time shall be payable in arrears in respect of
each calendar month during the term of the Loan on the tenth (10th) day of the
next following calendar month, and on the Maturity Date.
(c) The Applicable Interest Rate, as the same may be
adjusted from time to time, shall be determined by the Administrative Agent,
and such determination shall be conclusive absent manifest error.
SECTION 2.07. Default Interest; Late Payment Charge. (a) If
the Borrower shall default in the payment of the principal of or interest on
the Loan or any other amount becoming due hereunder, by acceleration or
otherwise, or under any other Loan Document, the Borrower shall on demand from
time to time pay interest, to the extent permitted by law, on such defaulted
amount from the date such amount was due through and 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 sum of the Applicable Interest Rate in effect from time to
time plus 2.00%. Such rate of interest is referred to herein as the "Default
Rate".
24
<PAGE>
(b) Any payments not made when due shall bear a late charge
equal to 4% of the unpaid amount. It is hereby expressly agreed that such late
charge is to compensate the Lenders for costs incurred in connection with the
administration of such default, and does not constitute a penalty.
(c) Interest payable at the Default Rate and late charges
shall be payable on demand of the Administrative Agent.
SECTION 2.08. Mandatory Repayments of Principal. (a)
The Borrower shall pay to the Administrative Agent, in reduction
of the outstanding principal balance of the Loan, any and all
amounts paid in reduction of the outstanding principal balance of
any Approved Franchisee Loans (whether by scheduled payment,
prepayment, application of casualty proceeds or condemnation
awards, or otherwise), such amounts to be payable to the
Administrative Agent as and when such payments are paid by the
applicable Franchisee Loan Borrower.
(b) On the Franchisee Loan Default Date with respect to an
Approved Franchisee Loan, the Borrower shall pay to the Administrative Agent,
in reduction of the outstanding principal balance of the Loan, an amount equal
to the then outstanding principal balance of such Approved Franchisee Loan.
(c) On the first date on which the long term senior
unsecured debt credit rating of HFS shall have been reduced to a level equal
to BBB- by S&P, the Borrower shall pay to the Administrative Agent, in
reduction of the outstanding principal balance of the Loan an amount equal to
50% of the Guaranteed Amount (calculated as of such date) and the Lenders'
commitments shall be reduced by the amount so paid.
(d) On the first date on which the long term senior
unsecured debt credit rating of HFS shall have been reduced to a level below
BBB- by S&P, or on the thirtieth (30th) consecutive day on which the long term
senior unsecured debt of HFS shall have been unrated, the Borrower shall pay
to the Administrative Agent, in reduction of the outstanding principal balance
of the Loan, an amount equal to 100% of the Guaranteed Amount (calculated as
of the applicable date on which such payment is required), less any amount
theretofore paid pursuant to the provisions of Section 2.08(c) and the
Lenders' commitments shall be reduced by the amount so paid.
(e) In the event of the termination of all the Commitments
(except pursuant to Section 2.09), the Borrower shall repay or prepay all its
outstanding Borrowings on the date of such termination, together with all
accrued interest thereon and all other amounts due and owing under the Loan
Documents. In the event of any partial reduction of the Commitments, then (i)
at or prior to the effective date of such reduction or termination, the
Administrative Agent shall notify the Borrower and the Lenders of
25
<PAGE>
the Aggregate Credit Exposure after giving effect thereto and (ii) if the
Aggregate Credit Exposure would exceed the Total Commitment after giving
effect to such reduction or termination, then the Borrower shall, on the date
of such reduction or termination, repay or prepay Borrowings in an amount
sufficient to eliminate such excess.
(f) All payments under this Section 2.08 shall be
accompanied by payments of accrued interest on the principal amount being
paid, through and including the date of payment.
(g) The entire outstanding principal balance of the Loan,
together with all accrued interest thereon, and all other amounts due and
owing under the Loan Documents, shall be due and payable on the Maturity Date.
SECTION 2.09. Termination and Reduction of
Commitments. (a) The Commitments shall be automatically
terminated on the third (3rd) anniversary of the Closing Date.
(b) The Commitments shall be reduced, from time to time, by
the amounts of any Advances made by the Lenders under this Agreement.
(c) No further Advances shall be made at any time with
respect to a Defaulted Franchisee Loan, and the Commitments shall be reduced,
from time to time, in amounts equal to the difference between the maximum
principal amount of a Defaulted Franchisee Loan and the amount theretofore
advanced to the Borrower in respect of such Defaulted Franchisee Loan pursuant
to this Agreement.
(d) Each reduction in the Commitments hereunder shall be
made ratably among the Lenders in accordance with their respective
Commitments.
(e) If an Approved Franchisee Loan is repaid by the
Franchisee Loan Borrower, no further Borrowings will be made with respect to
such Approved Franchisee Loan.
SECTION 2.10. Optional Prepayment. (a) The Borrower shall
have the right at any time and from time to time to prepay any Borrowing, in
whole or in part, upon at least three (3) Business Days' prior written or
telecopy notice (or telephone notice promptly confirmed by written or telecopy
notice) to the Administrative Agent before 11:00 a.m., New York City time;
provided, however, that each partial prepayment shall be in an amount of at
least $100,000.
(b) 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 by the amount stated
26
<PAGE>
therein on the date stated therein. All prepayments under this Section 2.10
shall be subject to Section 2.12 but otherwise without premium or penalty. All
prepayments under this Section 2.10 shall be accompanied by payments of
accrued interest on the principal amount being prepaid through and including
the date of payment.
SECTION 2.11. Reserve Requirements; Change in Circumstances.
(a) Notwithstanding any other provision of this Agreement, 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 any Fees or other amounts
payable hereunder (other than changes in respect of taxes imposed on the
overall net income of such Lender by the jurisdiction in which such Lender has
its principal office or by any political subdivision or taxing authority
therein), 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 any Lender or shall impose on such Lender any
other condition affecting this Agreement, and the result of any of the
foregoing shall be to reduce the amount of any sum received or receivable by
such Lender hereunder (whether of principal, interest or otherwise) by an
amount deemed by such Lender to be material, then the Borrower will pay to
such Lender upon demand such additional amount or amounts as will compensate
such Lender for such additional costs incurred or reduction suffered.
(b) If any Lender shall have determined that the adoption
after the date hereof of any law, rule, regulation, agreement or guideline
regarding capital adequacy, or any change after the date hereof in any such
law, rule, regulation, agreement or guideline (whether such law, rule,
regulation, agreement or guideline has been adopted) or in the interpretation
or administration thereof 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 Lender's holding company with any
request or directive regarding capital adequacy (whether or not having the
force of law) of any Governmental Authority has or would have the effect of
reducing the rate of return on such Lender's capital or on the capital of such
Lender's holding company, if any, as a consequence of this Agreement or the
Advances made by such Lender pursuant hereto to a level below that which such
Lender or such Lender's holding company could have achieved but for such
applicability, adoption, change or compliance (taking into consideration such
Lender's policies and the policies of such Lender's holding company with
respect to capital adequacy) by an amount deemed by such Lender to be
material, then from time to time the Borrower shall pay to such Lender such
additional amount or amounts as will compensate
27
<PAGE>
such Lender or such Lender's holding company for any such
reduction suffered.
(c) A certificate of a Lender setting forth the amount or
amounts necessary to compensate such Lender or its holding company as
specified in paragraph (a) or (b) above shall be delivered to the Borrower
with a copy to the Administrative Agent, accompanied by a reasonable
explanation and accounting, and shall be conclusive absent manifest error. The
Borrower shall pay such Lender the amount shown as due on any such certificate
delivered by it within ten (10) days after its receipt of the same.
Notwithstanding the foregoing, no Lender shall have the right to collect
payments from the Borrower pursuant to this Section 2.11 unless it is the
policy of such Lender, at the time of such collection, to collect similar
payments from borrowers generally (if any) who are similarly situated as the
Borrower, including with respect to credit standing, in connection with credit
facilities similar to those made available pursuant to this Agreement, where
the documents governing such credit facilities either established the right of
such Lender to collect such payments or do not restrict or prevent such Lender
from demanding such payment.
(d) Failure or delay on the part of any Lender to demand
compensation for any increased costs or reduction in amounts received or
receivable or reduction in return on capital shall not constitute a waiver of
such Lender's right to demand such compensation. The protection of this
Section 2.11 shall be available to each Lender regardless of any possible
contention of the invalidity or inapplicability of the law, rule, regulation,
agreement, guideline or other change or condition that shall have occurred or
been imposed.
(e) If a Lender shall successfully challenge any such law,
rule, regulation, agreement or guideline, any amounts collected by such Lender
from the Borrower in respect of such law, rule, regulation, agreement or
guideline, less the costs to such Lender of such challenge (allocated, if
applicable, among other loans on an appropriate basis) shall be refunded to
the Borrower.
SECTION 2.12. Indemnity. The Borrower shall indemnify each
Lender against any loss or expense that such Lender sustains or incurs as a
consequence of any default in the making of any payment or prepayment required
to be made by the Borrower hereunder. A certificate of any Lender setting
forth any amount or amounts which such Lender is entitled to receive pursuant
to this Section 2.12 shall be delivered to the Borrower, with a copy to the
Administrative Agent, and shall be conclusive absent manifest error.
SECTION 2.13. Pro Rata Treatment. Each Borrowing,
each payment or prepayment of principal of any Borrowing, each
28
<PAGE>
payment of interest on the Loan, and each reduction of the Commitments shall
be allocated pro rata among the Lenders in accordance with their respective
applicable Commitments (or, if such Commitments shall have expired or been
terminated, in accordance with the respective principal amount of the Loan).
Each Lender agrees that in computing such Lender's portion of any Borrowing to
be made hereunder, the Administrative Agent may, in its discretion, round each
Lender's percentage of such Borrowing to the next higher or lower whole dollar
amount.
SECTION 2.14. Sharing of Setoffs. Each Lender agrees that if
it shall, through the exercise of a right of banker's lien, setoff or
counterclaim against the Borrower, or pursuant to a secured claim under
Section 506 of Title 11 of the United States Code or other security or
interest arising from, or in lieu of, such secured claim, received by such
Lender under any applicable bankruptcy, insolvency or other similar law or
otherwise, or by any other means, obtain payment (voluntary or involuntary) in
respect of the Loan as a result of which the unpaid principal portion of its
Advances shall be proportionately less than the unpaid principal portion of
the Advances 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 Advances of such
other Lender, so that the aggregate unpaid principal amount of the Advances
made by and participations in the Loan held by each Lender shall be in the
same proportion to the aggregate unpaid principal amount of the Loan then
outstanding as the principal amount of its Advances prior to such exercise of
banker's lien, setoff or counterclaim or other event was to the principal
amount of the Loan 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 2.14 and
the payment giving rise thereto shall thereafter be recovered, such purchase
or purchases or adjustment shall be rescinded to the extent of such recovery,
and the purchase price or prices or adjustment shall be restored without
interest. The Borrower expressly consents to the foregoing arrangements and
agrees that any Lender holding a participation in the Loan 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 an Advance
directly to the Borrower in the amount of such participation.
SECTION 2.15. Payments. (a) The Borrower shall make each
payment (including principal of or interest on any Borrowing or any Fees or
other amounts) hereunder and under any other Loan Document not later than
12:00 (noon), New York City time, on the date when due in immediately
available dollars, without setoff, defense or counterclaim. Each such payment
shall be made to the
29
<PAGE>
Administrative Agent at such place and in such manner as it may designate from
time to time.
(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, on a day that is not a Business Day, such
payment may 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 2.16. Taxes. (a) Any and all payments made by or on
behalf of the Borrower or any other Loan Party hereunder and under any other
Loan Document shall be made, in accordance with Section 2.15, free and clear
of and without deduction for any and all current or future taxes, levies,
imposts, deductions, charges or withholdings, and all liabilities with respect
thereto, excluding (i) income taxes imposed on the net income of the
Administrative Agent or any Lender (or any transferee or assignee thereof,
including a participation holder (any such entity, a "Transferee")) and (ii)
franchise taxes imposed on the net income of the Administrative Agent or any
Lender (or Transferee), in each case by the jurisdiction under the laws of
which the Administrative Agent or such Lender (or Transferee), is organized or
any political subdivision thereof (all such nonexcluded taxes, levies,
imposts, deductions, charges, withholdings and liabilities, collectively or
individually, being called "Taxes"). If the Borrower or any other Loan Party
shall be required to deduct any Taxes from or in respect of any sum payable
hereunder or under any other Loan Document to the Administrative Agent or any
Lender (or any Transferee), (i) the sum payable shall be increased by the
amount (an "additional amount") necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section 2.16) the Administrative Agent or such Lender (or Transferee), as
the case may be, shall receive an amount equal to the sum it would have
received had no such deductions been made, (ii) the Borrower or such other
Loan Party shall make such deductions and (iii) the Borrower or such other
Loan Party shall pay the full amount deducted to the relevant Governmental
Authority in accordance with applicable law.
(b) In addition, the Borrower agrees to pay to the relevant
Governmental Authority in accordance with applicable law any current or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies (including, without limitation, mortgage recording taxes and
similar fees) that arise from any payment made hereunder or under any other
Loan Document or from the execution, delivery or registration of, or otherwise
with respect to, this Agreement or any other Loan Document ("Other Taxes").
30
<PAGE>
(c) The Borrower will indemnify the Administrative Agent and
each Lender (or Transferee) for the full amount of Taxes and Other Taxes paid
by the Administrative Agent or such Lender (or Transferee), as the case may
be, and any liability (including penalties, interest and expenses (including
reasonable attorney's fees and expenses)) arising therefrom or with respect
thereto, whether or not such Taxes or Other Taxes were correctly or legally
asserted by the relevant Governmental Authority. A certificate as to the
amount of such payment or liability prepared by the Administrative Agent or a
Lender (or Transferee), or the Administrative Agent on its behalf, absent
manifest error, shall be final, conclusive and binding for all purposes. Such
indemnification shall be made within 30 days after the date the Administrative
Agent or any Lender (or Transferee), as the case may be, makes written demand
therefor. Notwithstanding the foregoing, no Lender shall have the right to
collect payments from the Borrower pursuant to this Section 2.16 unless it is
the policy of such Lender, at the time of such collection, to collect similar
payments from borrowers generally (if any) who are similarly situated as the
Borrower, including with respect to credit standing, in connection with credit
facilities similar to those made available pursuant to this Agreement, where
the documents governing such credit facilities established the right of such
Lender to collect such payments.
(d) If the Administrative Agent or a Lender (or Transferee)
receives a refund in respect of any Taxes or Other Taxes as to which it has
been indemnified by the Borrower or with respect to which the Borrower or any
other Loan Party has paid additional amounts pursuant to this Section 2.16, it
shall within 30 days from the date of such receipt pay over such refund to the
Borrower or such other Loan Party (but only to the extent of indemnity
payments made, or additional amounts paid, by the Borrower or such other Loan
Party under this Section 2.16 with respect to the Taxes or Other Taxes giving
rise to such refund), net of all out-of-pocket expenses of the Administrative
Agent or such Lender (or Transferee) and without interest (other than interest
paid by the relevant Governmental Authority with respect to such refund);
provided, however, that the Borrower or such other Loan Party, upon the
request of the Administrative Agent or such Lender (or Transferee), shall
repay the amount paid over to the Borrower or such other Loan Party (plus
penalties, interest or other charges, if any) to the Administrative Agent or
such Lender (or Transferee) in the event the Administrative Agent or such
Lender (or Transferee) is required to repay such refund to such Governmental
Authority.
(e) As soon as practicable after the date of any payment of
Taxes or Other Taxes by the Borrower or any other Loan Party to the relevant
Governmental Authority, the Borrower or such other Loan Party will deliver to
the Administrative Agent, at its address referred to in Section 10.01, the
original or a
31
<PAGE>
certified copy of a receipt issued by such Governmental Authority evidencing
payment thereof.
(f) Each Lender (or Transferee) that is organized under the
laws of a jurisdiction other than the United States, any State thereof or the
District of Columbia (a "Non-U.S. Lender") shall deliver to the Borrower and
the Administrative Agent two copies of either United States Internal Revenue
Service Form 1001 or Form 4224, as applicable, or, in the case of a Non- U.S.
Lender claiming exemption from U.S. Federal withholding tax under Section
871(h) or 881(c) of the Code with respect to payments of "portfolio interest",
a Form W-8, or any subsequent versions thereof or successors thereto (and, if
such Non-U.S. Lender delivers a Form W-8, a certificate representing that such
Non-U.S. Lender is not a bank for purposes of Section 881(c) of the Code, is
not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of
the Code) of the Borrower and is not a controlled foreign corporation related
to the Borrower (within the meaning of Section 864(d)(4) of the Code)),
properly completed and duly executed by such Non-U.S. Lender claiming complete
exemption from, or reduced rate of, U.S. Federal withholding tax on payments
made by the Borrower under this Agreement and the other Loan Documents. Such
forms shall be delivered by each Non-U.S. Lender on or before the date it
becomes a party to this Agreement (or, in the case of a Transferee that is a
participation holder, on or before the date such participation holder becomes
a Transferee hereunder) and on or before the date, if any, such Non-U.S.
Lender changes its applicable lending office by designating a different
lending office (a "New Lending Office"). In addition, each Non-U.S. Lender
shall deliver such forms promptly upon the obsolescence or invalidity of any
form previously delivered by such Non-U.S. Lender. Notwithstanding any other
provision of this Section 2.16(f), a Non-U.S. Lender shall not be required to
deliver any form pursuant to this Section 2.16(f) that such Non-U.S. Lender is
not legally able to deliver.
(g) The Borrower shall not be required to indemnify any
Non-U.S. Lender or to pay any additional amounts to any Non- U.S. Lender, in
respect of United States Federal withholding tax pursuant to paragraph (a) or
(c) above to the extent that (i) the obligation to withhold amounts with
respect to United States Federal withholding tax existed on the date such
Non-U.S. Lender became a party to this Agreement (or, in the case of a
Transferee that is a participation holder, on the date such participation
holder became a Transferee hereunder) or, with respect to payments to a New
Lending Office, the date such Non-U.S. Lender designated such New Lending
Office with respect to a Loan; provided, however, that this paragraph (g)
shall not apply (x) to any Transferee or New Lending Office that becomes a
Transferee or New Lending Office as a result of an assignment, participation,
transfer or designation made at the request of the Borrower and (y) to the
extent the indemnity payment or additional amounts any
32
<PAGE>
Transferee, or any Lender (or Transferee), acting through a New Lending
Office, would be entitled to receive (without regard to this paragraph (g)) do
not exceed the indemnity payment or additional amounts that the person making
the assignment, participation or transfer to such Transferee, or Lender (or
Transferee) making the designation of such New Lending Office, would have been
entitled to receive in the absence of such assignment, participation, transfer
or designation or (ii) the obligation to pay such additional amounts would not
have arisen but for a failure by such Non-U.S. Lender to comply with the
provisions of paragraph (g) above.
(h) Nothing contained in this Section 2.16 shall require any
Lender (or any Transferee) or the Administrative Agent to make available any
of its tax returns (or any other information that it deems to be confidential
or proprietary).
SECTION 2.17. Assignment of Commitments Under Certain
Circumstances; Duty to Mitigate. (a) In the event (i) any Lender delivers a
certificate requesting compensation pursuant to Section 2.11, or (ii) the
Borrower is required to pay any additional amount to any Lender or any
Governmental Authority on account of any Lender pursuant to Section 2.16, the
Borrower may, at its sole expense and effort (including with respect to the
processing and recordation fee referred to in Section 10.04(b)), upon notice
to such Lender and the Administrative Agent, require such Lender to transfer
and assign, without recourse (in accordance with and subject to the
restrictions contained in Section 10.04), all of its interests, rights and
obligations under this Agreement to an assignee that shall assume such
assigned obligations (which assignee may be another Lender, if a Lender
accepts such assignment); provided that (x) such assignment shall not conflict
with any law, rule or regulation or order of any court or other Governmental
Authority having jurisdiction, (y) the Borrower shall have received the prior
written consent of the Administrative Agent, which consent shall not
unreasonably be withheld, delayed or conditioned, and (z) the Borrower or such
assignee shall have paid to the affected Lender in immediately available funds
an amount equal to the sum of the principal of and interest accrued to the
date of such payment on the outstanding Advances made by such Lender plus all
Fees and other amounts accrued for the account of such Lender hereunder
(including any amounts under Section 2.11 and Section 2.12); provided further
that, if prior to any such transfer and assignment the circumstances or event
that resulted in such Lender's claim for compensation under Section 2.11 or
the amounts paid pursuant to Section 2.16, as the case may be, cease to cause
such Lender to suffer increased costs or reductions in amounts received or
receivable or reduction in return on capital, or cease to result in amounts
being payable under Section 2.16, as the case may be (including as a result of
any action taken by such Lender pursuant to paragraph (b) below), or if such
Lender shall waive its right to claim further compensation under Section
33
<PAGE>
2.11 in respect of such circumstances or event or shall waive its right to
further payments under Section 2.16 in respect of such circumstances or event,
as the case may be, then such Lender shall not thereafter be required to make
any such transfer and assignment hereunder.
(b) If (i) any Lender shall request compensation under
Section 2.11, or (ii) the Borrower is required to pay any additional amount to
any Lender or any Governmental Authority on account of any Lender, pursuant to
Section 2.16, then such Lender shall use reasonable efforts (which shall not
require such Lender to incur an unreimbursed loss or unreimbursed cost or
expense or otherwise take any action inconsistent with its internal policies
or legal or regulatory restrictions or suffer any disadvantage or burden
deemed by it to be significant) (x) to file any certificate or document
reasonably requested in writing by the Borrower in connection with such
request, or (y) to assign its rights and delegate and transfer its obligations
hereunder to another of its offices, branches or affiliates, if such filing or
assignment would reduce its claims for compensation under Section 2.11 or
would reduce amounts payable pursuant to Section 2.16, as the case may be, in
the future. The Borrower hereby agrees to pay all reasonable costs and
expenses incurred by any Lender in connection with any such filing or
assignment, delegation and transfer.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Administrative
Agent, the Collateral Agent and each of the Lenders that:
SECTION 3.01. Organization; Powers. The Borrower (a) is a
limited liability company 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, and is in good standing in, every jurisdiction
where such qualification is required, except where the failure so to qualify
could not reasonably be expected to result in a Material Adverse Effect, (d)
has the power and authority to execute, deliver and perform its obligations
under each of the Loan Documents and each other agreement or instrument
contemplated hereby to which it is or will be a party and to borrow hereunder,
(e) has no subsidiaries, (f) is a Single Purpose Entity, (g) has the
organizational structure, equity interest and holders set forth in Exhibit U,
(h) since its inception has not entered into any agreements or obligations
other than the Loan Documents, (i) has not engaged in any business other than
the Loan, (j) has no subsidiaries, (k) has no employees, (l) has incurred no
Indebtedness other than the Loan, and (m) is not subject to any
34
<PAGE>
United States federal income, unincorporated business, capital, franchise or
similar gross income or income based taxes.
SECTION 3.02. Authorization. The execution, delivery and
performance by each Loan Party of each of the Loan Documents and the
Borrowings hereunder (collectively, the "Transactions") (a) have been duly and
validly authorized by all requisite applicable corporate and, if required,
stockholder action 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 such Loan Party,
(B) any order of any Governmental Authority or (C) any provision of any
indenture, agreement or other instrument to which such Loan Party 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, or give rise to any right to
accelerate or to require the prepayment, repurchase or redemption of any
obligation under any such indenture, agreement or other instrument or (iii)
result in the creation or imposition of any Lien upon or with respect to any
property or assets now owned or hereafter acquired by any Loan Party (other
than any Lien created under the Security Documents).
SECTION 3.03. Enforceability. This Agreement has been duly
executed and delivered by the Borrower and constitutes, and each other Loan
Document when executed and delivered by the each Loan Party thereto will
constitute, a legal, valid and binding obligation of such Loan Party
enforceable against such Loan Party in accordance with its terms, except that
enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other similar laws affecting creditors rights
generally, and by general principles of equity (regardless of whether
enforcement is sought in equity or at law).
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 for (a) the filing of Uniform Commercial Code financing
statements (b) recordation of the Mortgages and the Collateral Assignment
Documents and (c) such as have been made or obtained and are in full force and
effect.
SECTION 3.05. Financial Statements. The financial statements
of the Borrower annexed hereto as Exhibit V are true and correct in all
respects and fairly present the financial condition of the Borrower as of the
respective dates thereof.
SECTION 3.06. No Material Adverse Change. There has
been no material adverse change in the business, assets,
operations, prospects, condition (financial or otherwise), or
material agreements of the Borrower, Wingate since the respective
35
<PAGE>
dates of the last financial statements submitted to the
Administrative Agent.
SECTION 3.07. Litigation; Compliance with Laws. Except as
set forth in Exhibit P, there are not any actions, suits or proceedings at law
or in equity or by or before any Governmental Authority now pending or, to the
knowledge of the Borrower, threatened against or affecting the Borrower or any
business, property or rights of any such person (i) that involve any Loan
Document or the Transactions or (ii) as to which there is a reasonable
possibility of an adverse determination and that, if adversely determined,
could reasonably be expected, individually or in the aggregate, to result in a
Material Adverse Effect.
SECTION 3.08. Agreements. (a) The Borrower is not a
party to any agreement or instrument or subject to any corporate
restriction that has resulted or could reasonably be expected to
result in a Material Adverse Effect.
(b) The Borrower is not a party to any indenture or other
agreement or instrument evidencing Indebtedness, and is not in default in any
manner under any provision of any other agreement or instrument to which it is
a party or by which it or any of its properties or assets are or may be bound,
where such default could reasonably be expected to result in a Material
Adverse Effect.
SECTION 3.09. Federal Reserve Regulations. (a) The
Borrower is not engaged principally, or as one of its important
activities, in the business of extending credit for the purpose
of buying or carrying Margin Stock.
(b) No part of the proceeds of any Loan will be used,
whether directly or indirectly, and whether immediately, incidentally or
ultimately, for any purpose that entails a violation of, or that is
inconsistent with, the provisions of the Regulations of the Board, including
Regulation G, U or X.
SECTION 3.10. Investment Company Act; Public Utility Holding
Company Act. The Borrower is not (a) an "investment company" as defined in, or
subject to regulation under, the Investment Company Act of 1940, as amended,
or (b) a "holding company" as defined in, or subject to regulation under, the
Public Utility Holding Company Act of 1935.
SECTION 3.11. Use of Proceeds. The Borrower will use
the proceeds of the Loan only for the purposes specified in the
preamble to and Section 2.01(b) of this Agreement.
SECTION 3.12. No Material Misstatements. No
information, report, financial statement, exhibit or schedule
furnished by or on behalf of the Borrower or any other Loan Party
36
<PAGE>
to the Administrative 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; provided that to the extent any such
information, report, financial statement, exhibit or schedule was based upon
or constitutes a forecast or projection, the Borrower represents only that it
or such other Loan Party acted in good faith and utilized reasonable
assumptions and due care in the preparation of such information, report,
financial statement, exhibit or schedule.
SECTION 3.13. Employee Benefit Plans. (a) Neither the
Borrower, any Loan Party, nor any ERISA Affiliate of any of them maintains,
sponsors, contributes to or is obligated to contribute to, or during the five
(5) years ending on the Closing Date has maintained, sponsored, contributed to
or was obligated to contribute to any Plan.
(b) The Borrower does not, and is not obligated to,
maintain, sponsor or contribute to any Welfare Plan.
(c) The assets of the Borrower are not nor are they deemed
"plan assets", whether by operation of law or under regulations promulgated
under ERISA.
SECTION 3.14. Security Documents. (a) 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 the pledgor thereunder in such Collateral, in
each case prior and superior in right to any other person.
(b) The Collateral Assignment Documents will, when executed
and delivered in connection with each Approved Franchisee Loan, be 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
respective agreements and documents described therein, and when the steps are
taken as are described in clause (ii) of the opinion of counsel delivered
pursuant to Section 4.03(dd) shall constitute a fully perfected first priority
Lien on, and security interest in, all right, title and interest of the
Borrower thereunder in such collateral, in each case prior and superior in
right to any other person.
37
<PAGE>
SECTION 3.15. Solvency. (a) Immediately after the
consummation of the Formation and the Transactions to occur on the Closing
Date and immediately following the making of any Borrowing made on the Closing
Date and after giving effect to the application of the proceeds of such
Borrowing, (i) the fair value of the assets of each Loan Party, at a fair
valuation, will exceed its debts and liabilities, subordinated, contingent or
otherwise; (ii) the present fair saleable value of the property of each Loan
Party will be greater than the amount that will be required to pay the
probable liability of its debts and other liabilities, subordinated,
contingent or otherwise, as such debts and other liabilities become absolute
and matured; (iii) each Loan Party will be able to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured; and (iv) no Loan Party will have
unreasonably small capital with which to conduct the business in which it is
engaged, as such business is now conducted and is proposed to be conducted
following the Closing Date.
ARTICLE IV. CONDITIONS OF LENDING
The obligations of the Lenders to make Advances hereunder
are subject to the satisfaction of the following conditions:
SECTION 4.01. All Borrowings. On the date of each
Borrowing:
(a) The Administrative Agent shall have timely
received a notice of such Borrowing and a Borrowing Request as
required by Section 2.03;
(b) The representations and warranties set forth in Article
III shall be true and correct in all material respects on and as of the date
of such Borrowings with the same effect as though made on and as of such date,
except (i) to the extent such representations and warranties expressly relate
to an earlier date and (ii) to the extent such representations and warranties
are no longer true as the result of a default under an Approved Franchisee
Loan, which default has occurred subsequent to the date of the date of the
immediately previous Borrowing, it being understood that (A) nothing contained
herein shall be deemed to affect the obligations of the Borrower under Article
V, and (B) no such Borrowing shall include any funds for the Approved
Franchisee Loan under which the default has occurred.
(c) The Borrower and each other Loan Party shall be in
compliance in all material respects 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
38
<PAGE>
immediately after such Borrowing, no Event of Default or Default
shall have occurred and be continuing;
(d) There shall be no default under any Approved Franchisee
Loan (including, without limitation, the Franchisee Loan Documents, the
Underlying Documents, and the applicable Servicing Agreement) which is to be
funded by all or a portion of the Borrowing, and the Franchisee Loan
Documents, Underlying Documents, and Servicing Agreement shall all be in full
force and effect;
(e) The Administrative Agent shall have received (i) an
Independent Construction Loan Monitor's Certification with respect to each
Approved Franchisee Loan being funded by the proceeds of such Borrowing from
the applicable Independent Construction Loan Monitor or Loan Monitors and (ii)
a statement from the Servicer that the Requests for Advance and supporting
documentation are in compliance with the requirements of the applicable
Franchisee Loan Building Loan Agreements (including, without limitation,
Paragraphs 14, 15, 16 and 19 thereof);
(f) The Administrative Agent shall have received, as to each
Approved Franchisee Loan being funded by the proceeds of such Borrowing, (i)
the title endorsements referred to in the applicable Franchisee Loan Building
Loan Agreement, and (ii) reasonable evidence of compliance by the Franchisee
Loan Borrower with all other conditions set forth in the applicable Franchisee
Loan Building Loan Agreement;
(g) The Administrative Agent shall have received an update
of the opinion of counsel provided for in Section 4.02(a)(i) to cover any new
Loan Documents not theretofore covered by such an opinion;
(h) The Borrower shall have paid or reimbursed to the
Administrative Agent, or caused the applicable Franchisee Loan Borrowers to
pay or reimburse to the Administrative Agent, all fees, costs and expenses
payable to the Administrative Agent by the Borrower or by the Franchisee Loan
Borrowers under this Agreement, the other Loan Documents, and the Franchisee
Loan Documents, including, without limitation, the fees, costs and expenses
referred to in Sections 4.04, 4.05, 4.06 and 10.05; and
(i) The Administrative Agent shall have received certified
copies of, and assignments of, all service contracts then in existence (and
not previously delivered the Administrative Agent and assigned to the
Collateral Agent), each such assignment to be substantially in the form of
Exhibit GG.
Each Borrowing shall be deemed to constitute a representation and warranty by
the Borrower on the date of such Borrowing as to the matters specified in
Section 4.01(b) (except as aforesaid), Section 4.01(c) and Section 4.01(d).
39
<PAGE>
SECTION 4.02. First Borrowing. As a condition to the
initial Borrowing hereunder:
(a) The Administrative Agent shall have received, on behalf
of itself and the Lenders, a favorable written opinion of (i) Skadden, Arps,
Slate, Meagher & Flom LLP, counsel for the Borrower and each of the other Loan
Parties as to the due authorization, execution and delivery, valid and binding
effect, and enforceability of the Loan Documents (to the extent then delivered
to the Administrative Agent or the Collateral Agent), and (ii) Skadden, Arps,
Slate, Meagher & Flom, satisfactory in form and substance to the
Administrative Agent, substantially to the effect that in the event a
proceeding under Title 11 of the United States Code shall be commenced by or
against a member of the Borrower, the general partner of such member, or any
entity owning an equity interest in such general partner, a court would not
substantively consolidate the assets and liabilities of the Borrower with the
bankruptcy estate of such member, general partner or entity owning an equity
interest in such general partner, and (iii) Skadden, Arps, Slate, Meagher &
Flom LLP, satisfactory in form and substance to the Administrative Agent, to
the effect that no Loan Party is an "investment company", as such term is
defined in Section 3(a) of, or subject to regulation under, the Investment
Company Act of 1940, as amended, in each case (A) dated the Closing Date, (B)
addressed to the Administrative Agent, the Collateral Agent, and the Lenders,
and (C) covering such other matters relating to the Loan Documents and the
Transactions as the Administrative Agent shall reasonably request, and the
Borrower hereby requests such counsel to deliver such opinions;
(b) The Administrative Agent shall have received the Note
and a fully-executed copy of this Agreement, and all legal matters incident to
this Agreement, the Borrowings and extensions of credit hereunder and the
other Loan Documents shall be satisfactory to the Lenders and to Rosenman &
Colin LLP, counsel for the Administrative Agent;
(c) The Administrative Agent shall have received (i) a copy
of the certificate or articles of incorporation, including all amendments
thereto (or other organizational documents), of each Loan Party, certified as
of a recent date by the Secretary of State of the state of its organization,
and a certificate as to the good standing of each Loan Party as of a recent
date, from such Secretary of State; (ii) a certificate of the Secretary or
Assistant Secretary or other Responsible Officer of each Loan Party dated the
Closing Date and certifying (A) that attached thereto is a true and complete
copy of the By-Laws, Operating Agreement, or Partnership Agreement of such
Loan Party as in effect on the Closing Date and at all times since a date
prior to the date of the resolutions described in clause (B) below, (B) that
attached thereto is a true and complete copy of resolutions duly adopted by
the Board of Directors (or other governing body)
40
<PAGE>
of such Loan Party authorizing the execution, delivery and performance of the
Loan Documents to which such person is a 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 other organizational documents of
such Loan Party have not been amended since the date of the last amendment
thereto shown on the certificate of good standing furnished pursuant to clause
(i) 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; (iii) a certificate of another officer
as to the incumbency and specimen signature of the Secretary or Assistant
Secretary or other Responsible Officer executing the certificate pursuant to
(ii) above; and (iv) such other documents as the Lenders or counsel for the
Administrative Agent, may reasonably request.
(d) The Administrative Agent shall have received a
certificate, dated the Closing Date and signed by a Responsible Officer of the
Borrower, confirming compliance with the conditions precedent set forth in
Sections 4.01(b), (c) and (d);
(e) The Administrative Agent shall have received all Fees
and other amounts due and payable on or prior to the Closing Date, including,
to the extent invoiced, reimbursement or payment of all out-of-pocket expenses
required to be reimbursed or paid by the Borrower hereunder or under any other
Loan Document;
(f) The Pledge Agreement shall have been duly executed by
the parties thereto and delivered to the Collateral Agent and shall be in full
force and effect, and all of the interests of the Borrower have been duly and
validly pledged thereunder to the Collateral Agent for the ratable benefit of
the Secured Parties, and Uniform Commercial Code Financing Statements in
respect thereof shall have been duly filed;
(g) The Administrative Agent shall have received complete
copies of all Support Agreements, certified by Responsible Officers of each
party thereto to be true, correct and complete;
(h) The parties to the Support Agreements (other than the
Borrower) shall have entered into an agreement substantially in the form of
Exhibit I, pursuant to which they (i) certify that the Support Agreements are
unmodified and in full force and effect, and that no defaults exist
thereunder, (ii) agree that such Support Agreements will not be modified or
terminated without the prior written consent of the Administrative Agent, and
(iii) agree that they will perform under such agreements;
(i) The Administrative Agent shall have received a written
agreement from GFS, to the effect that it will not permit
41
<PAGE>
the Wingate Partnership Agreement to be modified, amended,
supplemented or terminated without the prior written consent of
the Administrative Agent;
(j) The Administrative Agent shall have received a letter
from the Borrower, Wingate and HFS in the form annexed hereto as Exhibit T.
(k) The Administrative Agent shall have received the results
of a search of the Uniform Commercial Code filings (or equivalent filings)
made with respect to the Borrower in the states (or other jurisdictions) in
which the chief executive office of the Borrower is located, together with
copies of the financing statements (or similar documents) disclosed by such
search, and accompanied by evidence satisfactory to the Administrative Agent
that the Liens indicated in any such financing statement (or similar document)
have been released;
(l) The Guarantee Agreement shall have been duly executed by
the parties thereto, shall have been delivered to the Collateral Agent, and
shall be in full force and effect;
(m) The Indemnity, Subrogation and Subordination Agreement
shall have been duly executed by the parties thereto, shall have been
delivered to the Collateral Agent, and shall be in full force and effect;
(n) The Formation shall have occurred, and the
Administrative Agent shall have received such evidence thereof as
it shall reasonably require;
(o) The Borrower shall have outstanding no
Indebtedness other than the Loan;
(p) The Servicing Agreement shall have been duly executed
and delivered by the parties thereto, and shall be in full force and effect;
(q) The Borrower shall have executed and delivered to the
Collateral Agent an assignment by the Borrower of its rights under the
Servicing Agreement (the "Collateral Assignment of Servicing Agreement"), such
assignment to be substantially in the form of Exhibit X;
(r) The Servicer and the Borrower shall have executed and
delivered to the Collateral Agent a Servicer Consent (the "Servicer Consent"),
substantially in the form of Exhibit Y;
(s) The Collateral Agent and the Borrower shall have
executed and delivered a Collateral Account Agreement (the "Collateral Account
Agreement") substantially in the form of Exhibit Z, creating a first priority
security interest in the Accounts; and
42
<PAGE>
(t) The Accounts shall have been created, and a Collateral
Account Agreement with respect thereto in the form of Exhibit Z shall have
been entered into.
SECTION 4.03. Initial Borrowings with Respect to Approved
Franchisee Loans. Before any Borrowing shall be made, the proceeds of which
are to be used by the Borrower (in whole or in part) to fund an Approved
Franchisee Loan which has not theretofore been funded with the proceeds of a
Borrowing (each, an "Initial Approved Franchisee Borrowing"), the Borrower
shall provide, with respect to such Approved Franchisee Loan, the following
additional items, each in form and substance satisfactory to the
Administrative Agent:
(a) A Loan Application (each, a "Loan Application")
executed by the Franchisee Loan Borrower, each Loan Application
to be substantially in the form of Exhibit AA;
(b) A Franchisee Loan Building Loan Agreement between the
Borrower and the Franchisee Loan Borrower, each such Franchisee Loan Building
Loan Agreement to be substantially in the form of Exhibit BB;
(c) A promissory note from the Franchisee Loan Borrower to
the Borrower (each, a "Franchisee Loan Note"), each such Franchisee Loan Note
to be substantially in the form of Exhibit CC, with such modifications thereto
as may be necessary to reflect local law, and such changes as may be approved
by the Administrative Agent to reflect the specific transaction;
(d) A recorded, title insured first fee mortgage (or deed of
trust or security deed) on the real property (the "Property") securing such
Approved Franchisee Loan (each, a "Mortgage"), each such Mortgage to be
substantially in the form of Exhibit DD, with such modifications thereto as
may be necessary to reflect local law, and such changes as may be approved by
the Administrative Agent to reflect the specific transaction;
(e) A recorded assignment of rents and profits (each, an
"Assignment of Rents"), sufficient to provide the Borrower with, under local
law, a first priority security interest in the Borrower in all leases, rents,
income, profits and hotel receipts relating to the Property and the Wingate
Inn Hotel constructed thereon, each such Assignment of Rents to be
substantially in the form of Exhibit EE, with such modifications thereto as
may be necessary to reflect local law, and such changes as may be approved by
the Administrative Agent to reflect the specific transaction;
(f) Certified copies of, and assignments of, all equipment
leases relating to the Property and the Wingate Inn Hotel to be constructed
thereon (it being understood that, except
43
<PAGE>
for leases of telephones, reservation systems, and security systems that are
entered into on an arms length basis with entities that are not Affiliates of
the Franchisee Loan Borrower, no equipment may be leased, and the Franchisee
Building Loan Agreement shall so provide, unless approved by the
Administrative Agent, in its sole discretion), each such assignment to be
substantially in the form of Exhibit FF;
(g) Certified copies of, and assignments of, all service
contracts then in existence relating to the Property and the Wingate Inn Hotel
to be constructed thereon, each such assignment to be substantially in the
form of Exhibit GG;
(h) A security agreement (each, a "Security Agreement")
providing the Borrower, as secured party, a first priority security interest
in all personal property relating to the Property and the Wingate Inn Hotel to
be constructed thereon, including FF&E, receivables, operating accounts,
inventory, and Reserve Accounts, each such Security Agreement to be
substantially in the form of Exhibit II;
(i) The Franchise Agreement between Wingate and the
Franchisee Loan Borrower, each such Franchise Agreement to be substantially in
the form of Exhibit G, subject to such changes as the Administrative Agent
may, from time to time, approve;
(j) An assignment and subordination of the Franchise
Agreement among the Borrower, Wingate and the Franchisee Loan Borrower, each
such assignment and subordination to be substantially in the form of Exhibit
MM;
(k) The management agreement (if any) relating to the
Wingate Inn Hotel, which management agreement shall be subject to the approval
of the Administrative Agent;
(l) An assignment and subordination of any management
agreement referred to in Section 4.03(k) among the Borrower, the manager, and
the Franchisee Loan Borrower, each such assignment and subordination to be
substantially in the form of Exhibit LL;
(m) Letters from the Architect and General Contractor and
Major Subcontractors for the Wingate Inn Hotel covered by the Approved
Franchisee Loan, agreeing, among other things, to complete their services with
respect to the Wingate Inn Hotel notwithstanding a default under the Approved
Franchisee Loan, such letters to be substantially in the form of Exhibits NN
and OO;
(n) Certified copies of, and assignments of, all architect
agreements, construction contracts, plans and specifications, material
contracts, and all other agreements with third parties relating to the
construction and completion of the
44
<PAGE>
Wingate Inn Hotel, each such assignment to be substantially in the form of
Exhibit HH;
(o) [Intentionally omitted]
(p) [Intentionally omitted]
(q) Uniform Commercial Code Financing Statements necessary
to perfect security interests under the Mortgage, Assignment of Rents, the
assignments referred to in Sections 4.03(f), (g), (j), (l) and (n), and the
Security Agreement referred to in Section 4.03(h);
(r) Consents from all third parties to the documents
and agreements referred to in Sections 4.03(f), (g) and (n) to
the assignment thereof;
(s) Notices to any tenants under leases relating to
the Property to the extent the same are necessary or desirable
under local law;
(t) Certificates or binders of all insurance policies
covering the Property as required by the Franchisee Loan Documents (with
policies to be delivered as soon as possible thereafter), all as certified by
the applicable Franchisee Loan Borrower to be true, correct and complete;
(u) A certified copy of the title insurance policy
(and endorsements) and originals of the surveys required by the
Franchisee Loan Building Loan Agreement;
(v) Certified copies of all licenses, permits and
other documents required by the Franchisee Loan Building Loan
Agreement;
(w) A guaranty of completion of the Wingate Inn Hotel (each,
a "Completion Guaranty") from the principals of the Franchisee Loan Borrower
(collectively, the "Completion Guarantors"), each such Completion Guaranty to
be substantially
in the form of Exhibit JJ;
(x) An environmental guaranty and indemnity (each, an
"Environmental Indemnity") from the principals of the Franchisee Loan
Borrower, each such Environmental Indemnity to be substantially in the form of
Exhibit KK;
(y) A Phase I environmental site assessment of the Property
by a firm acceptable to and in accordance with the Administrative Agent's
environmental guidelines (together with any additional assessments or surveys
required by such Phase I environmental site assessment, the "Phase I
Environmental Site Assessment"), which Phase I Environmental Site Assessment
shall be addressed to the Borrower, the Lenders, and the Administrative
45
<PAGE>
Agent (the review and approval of the Phase I Environmental Site Assessment
will be at the sole cost and expense of the Borrower, it being understood that
the Borrower may seek reimbursement for these costs from the applicable
Franchise Loan Borrower);
(z) The Plan and Cost Review Items, as approved by the
Independent Construction Loan Monitor;
(aa) An Appraisal of the applicable Wingate Inn Hotel;
(bb) An Addendum to the Servicing Agreement adding to the
obligations of the Servicer thereunder the obligation to monitor and
administer the Approved Franchisee Loan;
(cc) Such organizational documentation with respect to
the Franchisee Loan Borrower as the Administrative Agent may
reasonably request;
(dd) A satisfactory opinion of counsel licensed to practice
in the state where the Property is located, addressed to the Borrower and to
the Administrative Agent and the Collateral Agent on behalf of the Lenders, as
to (i) the due authorization, execution and delivery, valid and binding
effect, and enforceability of the Franchisee Loan Documents and other
documents executed by the Franchisee Loan Borrower and the Completion Loan
Guarantors in connection with the Approved Franchisee Loan, (ii) the steps
that must be taken to perfect a lien on, and security interest in, the
collateral described in the Collateral Assignment Documents (such opinion to
be given by Skadden, Arps, Slate, Meagher & Flom LLP to the extent that the
Collateral Assignment Documents are governed by the laws of the State of New
York), (iii) the enforceability of the waiver referred to in Section 4.07 as
it relates to waivers of claims against the Borrower, Wingate, HFS or any
third party, and the enforceability of said waiver in all other respects, in
each case subject to such standard exclusions for bankruptcy and equitable
remedies as may be acceptable to the Administrative Agent, (iv) that the
making of the Loan and the assignment to the Collateral Agent, on behalf of
the Lenders, of collateral securing the Approved Franchisee Loan and the
pursuit of remedies with respect to the Loan (including, without limitation,
the pursuit of remedies under the collateral securing the Approved Franchisee
Loan), will not adversely impact the other collateral for the Loan or the
ability of the Collateral Agent or the Administrative Agent, on behalf of the
Lenders, to pursue its remedies against the Borrower, the Guarantor, or such
collateral, (v) the steps that must be taken by the Administrative Agent or
the Collateral Agent, on behalf of the Lenders, to successfully pursue its
remedies with respect to any collateral securing the Approved Franchisee Loan
(e.g. must the interest of the Borrower first be foreclosed), (vi) that any
"one action" rules will not prevent the Collateral Agent or the Administrative
Agent, on behalf of the Lenders, from realizing the material benefit of its
remedies
46
<PAGE>
against the Borrower, the Guarantor, or the collateral for the Loan, as
contemplated by the Loan Documents, or prevent the Borrower from realizing the
material benefit of its remedies against the Franchisee Loan Borrower, the
Guarantors (as defined in the applicable Franchisee Loan Building Loan
Agreement), or the collateral for the Approved Franchisee Loan, as
contemplated by the Franchisee Loan Documents, (vii) the non-applicability of
any mortgage recording tax laws to the collateral assignment of any collateral
securing the Approved Franchisee Loan to the Administrative Agent or the
Collateral Agent (unless such taxes can legally be and are paid by the
applicable Franchisee Loan Borrower), and (viii) such other matters as the
Administrative Agent may reasonably request;
(ee) If a Franchisee Loan Borrower which, together with its
Affiliates, is the borrower under three (3) or more Approved Franchisee Loans,
an opinion of counsel satisfactory to the Administrative Agent, which opinion
shall be satisfactory in form and substance to the Administrative Agent, that
in the event a preceding under Title 11 of the United States Code shall be
commenced by or against any Affiliate of the Franchisee Loan Borrower or any
member or general partner thereof, the general partner of such member, or any
entity owning an equity interest in any such Affiliate, or member or general
partner, a court would not substantively consolidate the assets and
liabilities of the Franchisee Loan Borrower with the bankruptcy estate of such
member, general partner or entity owning an equity interest in such member or
general partner , such opinion to be subject to customary assumptions,
qualifications and exceptions which would be acceptable to S&P under their
then current guidelines;
(ff) A collateral assignment (the "Collateral Assignment")
in favor of the Collateral Agent of all of the Borrowers right, title and
interest in and to the Franchisee Loan Documents, substantially in the form of
Exhibit QQ, with such modifications thereto as may be necessary to reflect
local law and to permit the recordation of such document;
(gg) A collateral assignment in favor of the Collateral
Agent of all of the Borrower's right, title and interest in and to the
Mortgage, in recordable form;
(hh) A collateral assignment in favor of the Collateral
Agent of all of the Borrower's right, title and interest in and to the
Assignment of Rents, in recordable form;
(ii) Assignments of the Uniform Commercial Code Financing
Statements referred to in this Section 4.03, in proper form for filing in the
applicable jurisdictions;
(jj) The original Franchisee Loan Note, with an allonge
affixed thereto assigning all of the Borrower's right, title and interest
therein to the Collateral Agent;
47
<PAGE>
(kk) The originals of the Mortgage, Assignment of Rents, and
other documents referred to in the Collateral Assignment;
(ll) A Loan Recognition Agreement, among the Collateral
Agent, the Borrower, the Franchisee Loan Borrower, and the parties to the
Completion Guaranty and the Environmental Indemnity, substantially in the form
of Exhibit PP;
(mm) A agreement signed by the Borrower, in form and
substance reasonably satisfactory to the Administrative Agent, to the effect
that the Collateral Assignment of Servicing Agreement is in full force and
effect and applies to the Servicing Agreement as modified by the Addendum
referred to in Section 4.03(bb).
(nn) A agreement signed by the Servicer and the Borrower, in
form and substance reasonably satisfactory to the Administrative Agent, to the
effect that the Servicer Consent is in full force and effect and applies to
the Servicing Agreement as modified by the Addendum referred to in Section
4.03(bb).
(oo) A consent by the Franchisee Loan Borrower to the
assignment referred to in Section 4.02(q);
(pp) An endorsement to the mortgagee title insurance policy
received by the Borrower in connection with the Approved Franchisee Loan
naming the Collateral Agent (on behalf of the Lenders) as an additional
insured;
(qq) Evidence of payment by the Franchisee Loan Borrower (to
the Borrower, the Administrative Agent, or third parties, as applicable) of
all fees, costs and expenses relating to the Approved Franchisee Loan and the
Franchisee Loan Documents (including, without limitation, the fees, costs and
expenses of the Administrative Agent and its counsel in reviewing the Loan
Application and the Franchisee Loan Documents and the collateral assignment of
the Franchisee Loan Documents and other documents to the Collateral Agent, and
the fees, costs and expenses referred to in Sections 4.04, 4.05 and 4.06;
(rr) The Plan and Cost Review Items, as approved by the
Independent Construction Loan Monitor and the Administrative Agent, and
certified copies of the bonds referred to in Section 4.04(g), naming the
Servicer and the Collateral Agent as additional obligees;
(ss) Evidence wholly satisfactory to the Administrative
Agent in its sole discretion that the Minimum Up- Front Equity (the "Minimum
Up-Front Equity") (as referred to in Exhibit N) has been invested by the
Franchisee Loan Borrower in Development Costs relating to the applicable
Wingate Inn Hotel (or alternatively, that all or a portion of the Minimum
Up-Front
48
<PAGE>
Equity has been deposited into the Initial Equity Escrow Account, and
theretofore applied by the Servicer to Development Costs relating to the
applicable Wingate Inn Hotel); and
(tt) Such other information or documentation as may be
reasonably requested by the Administrative Agent.
In addition, each Initial Approved Franchisee Borrowing shall be conditioned
upon the following:
(A) Approval of the Franchisee Loan Borrower by
Required Lenders and the Independent Construction Loan Monitor (including,
without limitation, the professional liability insurance coverage referred to
in Section 4.04) and the Servicer by the Administrative Agent;
(B) Satisfaction of the criteria set forth in
Exhibit N; and
(C) Approval of all Franchisee Loan Documents by
the Administrative Agent and its counsel.
The Franchisee Loan Borrower and the Franchisee Loan Documents must satisfy
the criteria set forth in this Agreement and Exhibit N. The Borrower
understands and agrees that the Lenders shall have no obligation to advance
funds with respect to an Approved Franchisee Loan, notwithstanding the
approval of the Loan Application by the Administrative Agent and the approval
of the Franchisee Loan Borrower by Required Lenders, unless and until all
conditions thereto, as set forth in this Agreement and the other Loan
Documents, have been satisfied.
SECTION 4.04. Plan and Cost Review Items; Independent
Construction Loan Monitor. In addition to the items referred to in Section
4.03, the Borrower shall, as a condition to the funding of an Initial Approved
Franchisee Loan Borrowing, submit to the Administrative Agent for its
approval, the following (collectively, the "Plan and Cost Review Items") with
respect to the development and construction of the applicable Wingate Inn
Hotel, each of which must be acceptable to the Administrative Agent, in its
reasonable discretion:
(a) The name of the proposed General Contractor and
Major Subcontractors;
(b) The name of the proposed Architect;
(c) The proposed forms of agreements with the
General Contractor, the Major Subcontractors, and the Architect;
(d) A proposed development and construction budget
(the "Construction Budget") setting forth all Development Costs
49
<PAGE>
for the Wingate Inn Hotel, which Construction Budget shall be in the form of
Exhibit VV;
(e) A proposed development and construction schedule (the
"Construction Schedule") setting forth the schedule for the completion of the
Wingate Inn Hotel, which Construction Schedule shall be in the form of a time
line or bar chart depicting by trade (e.g. carpentry, excavation, HVAC, etc.)
the construction time for the completion of the Wingate Inn Hotel;
(f) Plans and specifications, (which shall meet all of the
criteria specified in the Franchise Agreement and shall have been approved by
Wingate as provided in the Franchise Agreement), for the improvements to be
constructed on the Property (the "Plans");
(g) Proposed payment and performance bonds from the
General Contractor and the Major Subcontractors, substantially in
the form of Exhibit TT; and
(h) Such other information and documentation as the
Administrative Agent may request.
The Plan and Cost Review Items will be reviewed and must be approved by an
independent firm experienced in the review of real estate construction loans
(each, an "Independent Construction Loan Monitor") acceptable to the
Administrative Agent in its sole discretion, which Independent Construction
Loan Monitor must carry professional liability insurance in amounts and
coverage acceptable to the Administrative Agent. It is understood that there
may be different Independent Construction Loan Monitors for different Approved
Franchisee Loans. An Independent Construction Loan Monitor may, with the
approval of the Administrative Agent, be the applicable Servicer. The review
and approval of the Plan and Cost Review Items by the Independent Construction
Loan Monitor and the Administrative Agent will be at the sole cost and expense
of the Borrower, it being understood that the Borrower may seek reimbursement
for these costs from the applicable Franchisee Loan Borrower. In addition, the
Independent Construction Loan Monitor will review and approve monthly draw
requests (and make site visits in connection therewith) under the applicable
Franchisee Loan Building Loan Agreement, such review and site visits to be at
the sole cost and expense of the Borrower, it being understood that the
Borrower may seek reimbursement for these costs from the applicable Franchisee
Loan Borrower. The Borrower acknowledges that (i) each Independent
Construction Loan Monitor will be retained by the Borrower to act as a
consultant and only as a consultant to the Borrower in connection with the
construction of a Wingate Inn Hotel, (ii) no Independent Construction Loan
Monitor shall in any event or under any circumstance have any power or
authority to make any decision or to give any approval or consent or to do any
other act or thing which is binding upon the Administrative Agent or the
50
<PAGE>
Lenders and any such purported decision, approval, consent, act or thing by an
Independent Construction Loan Monitor on behalf of the Administrative Agent or
the Lenders shall be void and of no force or effect, (iii) the Administrative
Agent (or Required Lenders, as the case may be) reserve the right to make any
and all decisions required or permitted to be made by them respectively
pursuant to this Agreement or any other Loan Document and to give or refrain
from giving any and all consents or approvals required or permitted to be
given by them pursuant to this Agreement or any other Loan Document and to
approve or or permitted not approve any matter or thing required to be
approved by them pursuant to this Agreement or any other Loan Document, in
each instance in its or their sole and absolute discretion, and without in any
instance being bound or limited in any manner or under any circumstance
whatsoever by any opinion expressed or not expressed, or advice given or not
given, or information, certificate or report provided or not provided, by an
Independent Construction Loan Monitor to the Borrower, the Administrative
Agent, or the Lenders or any other person or party with respect thereto, (iv)
the Administrative Agent reserves the right in its sole and absolute
discretion to disregard or disagree, in whole or in part, with any opinion
expressed, advice given or information, certificate or report furnished or
provided by an Independent Construction Loan Monitor to the Borrower, the
Administrative Agent, the Lenders, or any other person or party, and (v) the
Administrative Agent reserves the right in its sole and absolute discretion to
require the Borrower to replace an Independent Construction Loan Monitor with
another construction consultant acceptable to the Administrative Agent, in its
sole discretion, at any time upon notice to the Borrower, if the Independent
Construction Loan Monitor is in default under its obligations.
SECTION 4.05. Appraisals. Each Appraisal will be
commissioned and reviewed by the Administrative Agent at the sole cost and
expense of the Borrower, and will be addressed to the Administrative Agent,
the Lenders and the Borrower. Each Appraiser must undertake to make such
modifications as may be required by the Administrative Agent to conform to
FIRREA requirements.
SECTION 4.06. Servicer Fees. The fees and expenses of
the Servicer shall be the sole cost and expense of the Borrower.
SECTION 4.07. Waiver of Defenses. Any and all collateral
securing an Approved Franchisee Loan must include a waiver by the Franchisee
Loan Borrower (and, in the case of the Completion Guaranty and the
Environmental Indemnity, the parties thereto) of all defenses (other than
payment) and counterclaims, but the same shall not be deemed a waiver of the
Franchisee Loan Borrower's right to assert any claim against the Borrower or
other third party in any separate action or proceeding..
51
<PAGE>
SECTION 4.08. General Provisions Regarding Approved
Franchisee Loans. Without limiting the above requirements of this Article IV
and the Exhibits referred to herein:
(a) Each Approved Franchisee Loan must be recourse to the
Franchisee Loan Borrower, but not to principals of the Franchisee Loan
Borrower (except for those matters specifically enumerated in the form of
Franchisee Loan Note annexed hereto as Exhibit CC).
(b) A Franchisee Loan Borrower must be a Single
Purpose Entity.
(c) A Franchisee Loan Borrower may not assign the Approved
Franchisee Loan, transfer or further encumber the Property, or permit a Change
in Ownership as to itself.
(d) The governing law of all documents evidencing and
securing each Approved Franchisee Loan will be governed by the internal laws
of the State of New York, except for the Mortgage and the Assignment of Rents,
which will be governed by the law of the state in which the Property is
located.
(e) All prospective Franchisee Loans are subject to review
and approval by the Administrative Agent for conformance with the requirements
of this Article IV prior to the funding of any Borrowing, the proceeds of
which are to be used (in whole or in part) to fund such Franchisee Loan.
SECTION 4.09. General Provisions Regarding the Servicer. The
Borrower acknowledges that (i) the Servicer will be retained by the Borrower
to act only in connection with the servicing of Approved Franchisee Loans,
pursuant to the Servicing Agreement, (ii) the Servicer shall not in any event
or under any circumstance have any power or authority to make any decision or
to give any approval or consent or to do any other act or thing which is
binding upon the Administrative Agent or the Lenders and any such purported
decision, approval, consent, act or thing by the Servicer on behalf of the
Administrative Agent or the Lenders shall be void and of no force or effect,
(iii) the Administrative Agent (or Required Lenders, as the case may be)
reserve the right to make any and all decisions required or permitted to be
made by them respectively pursuant to this Agreement or any other Loan
Document and to give or refrain from giving any and all consents or approvals
required or permitted to be given by them pursuant to this Agreement or any
other Loan Documents and to approve or not approve any matter or thing
required or permitted to be approved by them pursuant to this Agreement or any
other Loan Document, in each instance in its or their sole and absolute
discretion, and without in any instance being bound or limited in any manner
or under any circumstance whatsoever by any opinion expressed or not
expressed, or advice given or not given, or information, certificate or report
provided or not provided, by
52
<PAGE>
the Servicer to the Borrower, the Administrative Agent, or the Lenders or any
other person or party with respect thereto, (iv) the Administrative Agent
reserves the right in its sole and absolute discretion to disregard or
disagree, in whole or in part, with any opinion expressed, advice given or
information, certificate or report furnished or provided by the Servicer to
the Borrower, the Administrative Agent, the Lenders, or any other person or
party, and (v) the Administrative Agent reserves the right in its sole and
absolute discretion to require the Borrower to replace the Servicer with
another servicer approved by the Administrative Agent, if the Servicer is in
default under the Servicing Agreement.
ARTICLE V. DEFAULTED FRANCHISEE LOANS
SECTION 5.01. Notice by the Borrower. The Borrower shall
promptly notify the Administrative Agent in writing (a) of the occurrence of
any default under an Approved Franchisee Loan or any Franchisee Loan Documents
whether or not the Borrower has given notice of such default to the Franchisee
Loan Borrower, and (b) if any Approved Franchisee Loan has become a Defaulted
Franchisee Loan.
SECTION 5.02. No Further Loans. Once an Approved Franchisee
Loan has become a Defaulted Franchisee Loan, the Approved Franchise Loan shall
no longer be an Approved Franchisee Loan. The Lenders shall have no obligation
to make Advances, the proceeds of which would be used to fund an Approved
Franchisee Loan upon the occurrence of and during the continuance of a default
under such Approved Franchisee Loan, and no further obligations to make
Advances, the proceeds of which would be used to fund an Approved Franchisee
Loan once an Event of Default has occurred under such Approved Franchisee Loan
nor once such Approved Franchisee Loan has become a Defaulted Franchisee Loan.
SECTION 5.03. Mandatory Payment of Loans. On the Franchisee
Loan Default Date, the Borrower shall make the payments required by Sections
2.08(b) and (e) in respect of such Approved Franchisee Loan.
SECTION 5.04. Option of the Borrower. (a) Within ninety (90)
days after a Franchisee Loan Default Date, the Borrower shall, by written
notice to the Administrative Agent, advise the Administrative Agent that (i)
it wants to control the Workout Process with respect to the Defaulted
Franchisee Loan, or (ii) it wants to cede control of the Workout Process with
respect to such Defaulted Franchisee Loan to the Administrative Agent.
(b) Notwithstanding anything to the contrary contained in
Section 5.04(a), the Borrower shall not have the right to elect the option set
forth in clause (ii) thereof unless on or before the Franchisee Loan Default
Date (A) the Completion of the Wingate Inn Hotel to be constructed on the
Property covered by
53
<PAGE>
the applicable Defaulted Franchisee Loan has occurred, and (B) all licenses
and permits required for the operation of the Wingate Inn Hotel, and any other
licenses and permits required by the Franchise Agreement and any management
agreement relating to the Wingate Inn Hotel, have been obtained and are in
full force and effect. Should such conditions have not been satisfied on or
before the applicable Franchisee Loan Default Date, the Borrower shall not
have the right to elect the option set forth in clause (ii) of Section
5.04(a), and shall be deemed to have elected the option set forth in clause
(i) of Section 5.04(a).
(c) If the Borrower fails to elect the option set forth in
clauses (i) or (ii) of Section 5.04(a) on or before the applicable Franchisee
Loan Default Date, or if the Borrower elects the option set forth in clause
(ii) of Section 5.04(a) but fails, on the applicable Franchisee Loan Default
Date, to deliver the documents required by Section 5.04(e), it shall be deemed
to have elected the option set forth in clause (i) of Section 5.04(a).
(d) If the Borrower elects (or is deemed to have elected)
the option set forth in clause (i) of Section 5.04(a), then (i) on the
applicable Franchisee Loan Default Date, the Borrower shall make the payments
required by Sections 2.08(b) and (e) in respect of such applicable Franchisee
Loan; (ii) on the applicable Franchisee Loan Default Date, the Borrower shall
cause a Confirmation of Guaranty Agreement, in the form of Exhibit R, to be
delivered to the Collateral Agent by the Guarantor; (iii) on the applicable
Franchisee Loan Default Date the Borrower shall deliver a confirmation signed
by the Borrower and the Servicer, in form and substance reasonably
satisfactory to the Administrative Agent, to the effect that the Defaulted
Franchisee Loan is no longer covered by the Servicing Agreement, and that the
Collateral Assignment of Servicing Agreement and Servicer Consent are each in
full force and effect and apply to the Servicing Agreement as modified by its
termination as to the Defaulted Franchisee Loan; (iv) within thirty (30) days
following the Franchisee Loan Default Date and the receipt of the payments
required by Sections 2.08(b) and (e), the Collateral Agent and the Lenders
shall execute and deliver to the Borrower the documents referred to in
Sections 4.03(jj) and (kk) relating to such Defaulted Franchisee Loan,
together with such documents as may be reasonably necessary to release any and
all right, title and interest of the Lenders and the Collateral Agent in and
to such documents; and (v) upon satisfaction of the condition set forth in
clauses (i) and (ii) of this Section 5.04(d), the Borrower shall have the
right to control the Workout Process, and to retain any proceeds realized from
the Defaulted Franchisee Loan.
(e) If the Borrower elects the option set forth in clause
(ii) of Section 5.04(a), then on the applicable Franchisee Loan Default Date,
the Borrower shall (i) make the payments
54
<PAGE>
required by Sections 2.08(b) and (e) in respect of such Approved Franchisee
Loan; (ii) cause a Confirmation of Guaranty Agreement, in the form of Exhibit
R to be delivered to the Collateral Agent by the Guarantor (setting forth any
appropriate reduction in the Guaranteed Amount); and (iii) execute and deliver
to the Administrative Agent the following with respect to the Defaulted
Franchisee Loan:
(A) Evidence reasonably satisfactory to the
Administrative Agent and the Independent Construction Loan Monitor that the
conditions set forth in clauses (A) and (B) of Section 5.04(b) have been
satisfied;
(B) A confirmation of the allonge annexed to the
original Franchisee Loan Note and such other documentation as the Collateral
Agent may request to evidence that the Borrower has no further right, title or
interest in and to the Franchisee Loan Note;
(C) Assignments to the Collateral Agent of all
right, title and interest of the Borrower in and to the Mortgage
and Assignment of Rents, each in recordable form;
(D) An assignment to the Collateral Agent of all
right, title and interest of the Borrower in and to the
Franchisee Loan Building Loan Agreement;
(E) Assignments to the Collateral Agent of all
right, title and interest of the Borrower in and to the documents referred to
in Sections 4.03(f), (g), (h), (j), (l), (m), (n), (o), (t), (u), (v), (w),
(x) and (bb), and any Franchisee Loan Documents relating to the Defaulted
Franchisee Loan;
(F) Such further assignments to the Collateral
Agent of Uniform Commercial Code Financing Statements, in proper form for
filing in the applicable jurisdictions, as the Collateral Agent may reasonably
request;
(G) The original mortgagee title insurance policy
(and endorsements) with respect to the Defaulted Franchisee Loan, together
with an endorsement naming the Collateral Agent as the sole beneficiary of
such policy;
(H) A satisfactory opinion of counsel licensed to
practice in the state where the Property is located, addressed to the
Administrative Agent and the Collateral Agent on behalf of the Lenders, as to
the due authorization, execution and delivery, valid and binding effect, and
enforceability of the various documents executed and delivered by the Borrower
under this Section 5.04(e);
55
<PAGE>
(I) A confirmation signed by the Borrower and the
Servicer to the effect that the Defaulted Franchisee Loan is no
longer covered by the Servicing Agreement; and
(J) Such third party consents and other documents
as the Administrative Agent or the Collateral Agent may reasonably request in
order to transfer to the Collateral Agent all right, title and interest of the
Borrower in and to the Defaulted Franchisee Loan and the Franchisee Loan
Documents.
Upon satisfaction of the conditions set forth in this Section 5.04(e), the
Administrative Agent shall have the right to control the Workout Process, and
to retain any proceeds realized from the Defaulted Franchisee Loan and apply
the same to the repayment of the entire Loan and accrued interest thereon and
other charges relating thereto as provided for in this Agreement and the other
Loan Documents, all in such order of priority as the Administrative Agent may,
in its sole discretion, elect, and (provided no Event of Default shall have
occurred) after all such amounts and charges have been paid in full, any
balance remaining shall be remitted to the Borrower.
SECTION 5.05 Provided no Event of Default has occurred, the
Collateral Agent shall not exercise any remedies under the Franchisee Loan
Documents relating to a Defaulted Franchisee Loan until the earliest to occur
of (a) the exercise by the Borrower of the option set forth in clause (ii) of
Section 5.04(a), (b) the ninetieth (90th) day next following the applicable
Franchisee Loan Default Date (nor thereafter, if the Borrower timely elects
(or is deemed to have elected) the option set forth in clause (i) of Section
5.04(a)), or (c) the occurrence of an Event of Default.
SECTION 5.06 Upon the occurrence of an Event of Default, the
provisions of this Article V shall be of no further force or effect.
ARTICLE VI. AFFIRMATIVE COVENANTS
The Borrower covenants and agrees with each Lender that so
long as this Agreement shall remain in effect and until the Commitments have
been terminated and the principal of and interest on each Loan, all Fees and
all other expenses or amounts payable under any Loan Document shall have been
paid in full, unless the Required Lenders and the Administrative Agent shall
otherwise consent in writing, the Borrower will:
SECTION 6.01. Existence; Business and Capitalization.
(a) Do all things necessary to keep in full force and effect its
valid and legal existence as a limited liability company;
56
<PAGE>
(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; comply in all material respects with all applicable laws, rules,
regulations and decrees 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;
(c) Maintain itself at all times as a Single Purpose Entity
qualified to do business in each jurisdiction in which such qualification is
necessary to the conduct of its business or to protect the validity and
enforceability of the Loan Documents;
(d) Do all things necessary to enable it to comply
with all applicable legal, fiscal and accounting rules and
regulations;
(e) Take all reasonable actions necessary so that it is not
required to register as an investment company under the Investment Company Act
of 1940, as amended;
(f) Take all reasonable actions necessary so that it is not
required to register the Note under the Securities Act of 1933, as amended
from time to time (and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder) or under any applicable state
securities laws;
(g) Generally pay its debts as they become due;
(h) Pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, all taxes, assessments and
governmental charges levied or imposed upon it or upon its income, profits or
property; and
(i) (i) Keep its own separate books and records, maintain
its own separate bank accounts, keep its funds or other assets separate from
the funds or other assets of all other persons, (ii) fund from its own assets
all of its activities, expenses and liabilities, (iii) pay its own operating
expenses and liabilities from its own funds, (iv) maintain adequate capital
for the normal obligations reasonably foreseeable in light of its contemplated
business operations, (v) file its own tax returns and maintain separate
financial statements, (vi) observe all limited liability company formalities,
(vii) pay the
57
<PAGE>
salaries of its own employees, if any, (viii) not guarantee or become
obligated for the debts of any other person or hold out its credit as being
available to satisfy the obligations of others, (ix) allocate fairly and
reasonably any overhead for shared office space, (x) use separate stationery,
invoices, and checks, (xi) not pledge its assets for the benefit of any other
person and (xii) at all times identify itself, in all dealings with the
public, under its own name and as a separate and distinct entity and not
identify itself as being a division or a part of any other person.
SECTION 6.02. Insurance. Keep its insurable properties
adequately insured at all times by financially sound and reputable insurers;
maintain such other insurance, to such extent and against such risks,
including fire and other risks insured against by extended coverage, as is
customary with companies in the same or similar businesses operating in the
same or similar locations, including public liability insurance against claims
for personal injury or death or property damage occurring upon, in, about or
in connection with the use of any properties owned, occupied or controlled by
it; and maintain such other insurance as may be required by law.
SECTION 6.03. 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 claims for labor, materials and supplies or otherwise that, 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 shall have set aside on its books adequate
reserves with respect thereto in accordance with GAAP and such contest
operates to suspend collection of the contested obligation, tax, assessment or
charge and enforcement of a Lien.
SECTION 6.04. Financial Statements, Reports, etc.
Furnish to the Administrative Agent and each Lender with respect
to both the Borrower and Wingate:
(a) within 90 days after the end of each fiscal year,
consolidated balance sheets and related statements of operations,
stockholders' equity and cash flows showing the financial condition of the
Borrower and Wingate as of the close of such fiscal year and the results of
its operations during such year, all audited by a "Big Six" or other
nationally recognized accounting firm and accompanied by an opinion of such
accountants (which shall not be qualified in any material respect) to the
58
<PAGE>
effect that such consolidated financial statements fairly present the
financial condition and results of operations of the Borrower or Wingate, as
the case may be, in accordance with GAAP consistently applied;
(b) within 45 days after the end of each of the first three
fiscal quarters of each fiscal year, consolidated balance sheets and related
statements of operations, stockholders' equity and cash flows showing the
financial condition of the Borrower and Wingate as of the close of such fiscal
quarter and the results of its operations during such fiscal quarter and the
then elapsed portion of the fiscal year, all certified by one of its Financial
Officers as fairly presenting the financial condition and results of
operations of the Borrower and Wingate on a consolidated basis in accordance
with GAAP, subject to normal year-end audit adjustments;
(c) concurrently with any delivery of financial statements
under sub-paragraph (a) or (b) above, a certificate of the accounting firm or
Financial Officer 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) 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;
(d) promptly after the same become publicly available,
copies of all periodic and other reports, proxy statements and other materials
filed by the Borrower, Wingate and the other Loan Parties with the Securities
and Exchange Commission, or any Governmental Authority succeeding to any or
all of the functions of said Commission, or with any national securities
exchange, or distributed to its shareholders, as the case may be;
(e) promptly, from time to time, such other information
regarding the operations, business affairs and financial condition of the
Borrower, or compliance with the terms of any Loan Document, as the
Administrative Agent at the request of any Lender may reasonably request; and
(f) within 30 days after the commencement of each fiscal
year, operating projections of the Borrower or Wingate for such fiscal year;
and
(g) promptly upon receipt, copies of all financial reports
and operating reports received from each Franchisee Loan Borrower, including,
without limitation, those referred to in Paragraph 21(e) of the Building Loan
Agreement.
59
<PAGE>
SECTION 6.05. Default, Litigation and Other Notices. Furnish
to the Administrative Agent and the Lenders 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)
taken or proposed to be taken with respect thereto;
(b) the filing or commencement of, or any threat or notice
of intention of any person to file or commence, any action, suit or
proceeding, whether at law or in equity or by or before any Governmental
Authority, against the Borrower or any Affiliate thereof that could reasonably
be expected to result in a Material Adverse Effect; and
(c) any other development that has resulted in, or
could reasonably be expected to result in, a Material Adverse
Effect.
SECTION 6.06. Maintaining Records; Access to Properties and
Inspections. Keep proper books of record and account in which full, true and
correct entries in conformity with GAAP and all requirements of law are made
of all dealings and transactions in relation to its business and activities.
Subject to the requirements of Section 10.16, the Borrower will permit any
representatives designated by the Administrative Agent and any Lender to visit
and inspect the financial records and the properties of the Borrower at
reasonable times and as often as reasonably requested and to make extracts
from and copies of such financial records, and permit any representatives
designated by the Administrative Agent and any Lender to discuss the affairs,
finances and condition of the Borrower with the officers thereof and
independent accountants therefor.
SECTION 6.07. Use of Proceeds. Use the proceeds of
the Loan only for the purposes set forth in the preamble to this
Agreement and Section 2.01(b).
SECTION 6.08. Compliance with Environmental Laws. Use
commercially reasonable efforts to cause each Franchisee Loan Borrower to
comply in all material respects with all Environmental Laws and Environmental
Permits applicable to its operations and Property, and obtain and renew all
material Environmental Permits necessary for its operations and Property.
SECTION 6.09. Preparation of Environmental Reports. If a
Franchisee Loan Borrower shall default in its performance of the obligations
set forth in Section 6.08, at the written request of the Administrative Agent,
provide to the Lenders within forty-five (45) days after such request, at the
expense of the Borrower or the Franchisee Loan Borrower, an environmental site
assessment report for the applicable Property and Wingate Inn Hotel which are
the subject of such default prepared by an environmental
60
<PAGE>
consulting firm acceptable to the Administrative Agent and indicating the
presence or absence of Hazardous Materials and the estimated cost of any
compliance with Environmental Laws in connection with such Property and
Wingate Inn Hotel.
SECTION 6.10. Approved Franchisee Loans.
(a) Comply with and enforce all terms, conditions,
covenants and provisions of the Approved Franchisee Loans and the
Franchisee Loan Documents;
(b) Forward to the Administrative Agent copies of all
financial statements received from each Franchisee Loan Borrower and
Completion Guarantor as and when received by the Borrower;
(c) (i) Provide the Administrative Agent upon the Completion
of each Wingate Inn Hotel financed by an Approved Franchisee Loan with the
documentation described under clauses (b), (c), (d) and (e) under the
definition of "Completion" in Section 1.01, and (ii) advise the Administrative
Agent of the opening of each Wingate Inn Hotel financed by an Approved
Franchisee Loan to the general public promptly upon the occurrence of such
event; and
(d) Notify the Administrative Agent of any principal
payment or intended principal payment of an Approved Franchisee
Loan.
SECTION 6.11. Further Assurances. Execute and, if
applicable, file or record any and all further documents, financing
statements, agreements and instruments, and take all further action (including
filing Uniform Commercial Code and other financing statements, mortgages and
deeds of trust) that may be required under applicable law, or that the
Administrative Agent or the Collateral Agent may reasonably request, in order
to effectuate the transactions contemplated by the Loan Documents and in order
to grant, preserve, protect and perfect the validity and first priority of the
security interests created or intended to be created by the Security
Documents. The Borrower agrees to provide such evidence as the Collateral
Agent shall reasonably request as to the perfection and priority status of
each such security interest and Lien.
ARTICLE VII. NEGATIVE COVENANTS
The Borrower covenants and agrees with each Lender that, so
long as this Agreement shall remain in effect and until the Commitments have
been terminated and the principal of and interest on each Loan, all Fees and
all other expenses or amounts payable under any Loan Document have been paid
in full, unless the Required Lenders and the Administrative Agent (as to
Sections 7.01 through 7.14, and 7.17) or the Administrative Agent alone
61
<PAGE>
(as to Sections 7.15 through 7.16) shall otherwise consent in writing, the
Borrower will not:
SECTION 7.01. Indebtedness. Incur, create, assume or
permit to exist any Indebtedness, except:
(a) Indebtedness created under this Agreement; and
(b) Unsecured, fully subordinated loans from HFS (not to
exceed, in the aggregate, the difference between (A) the Guaranteed Amount
from time to time in effect, and (B) the capital invested in the Borrower by
HFS pursuant to Section 7.07), the entire proceeds of which are used by the
Borrower to make the payments of principal described in Sections 2.08(c) or
(d), and which loans (i) shall mature no earlier than one (1) year after the
Maturity Date, (ii) shall provide for no payments of principal or interest
prior to a date which shall be one (1) year after the Maturity Date, (iii)
shall provide for a rate of interest not to exceed the Base Rate plus 1/2 of
1%, (iv) shall not be guaranteed, and (v) shall otherwise be on terms
reasonably acceptable to the Administrative Agent.
SECTION 7.02. Liens. Create, incur, assume or permit to
exist any Lien on any property or assets (including stock or other securities
of any person), now owned or hereafter acquired by it or on any income or
revenues or rights in respect of any thereof, except for any Lien created
under the Loan Documents.
SECTION 7.03. Investments. Make any Investments, other than
temporary short-term investments of cash in Permitted Investments, or engage
in any business or undertake any activity other than in connection with the
Loan and Approved Franchisee Loans.
SECTION 7.04. Mergers, Consolidations, Sales of Assets and
Acquisitions. Dissolve, liquidate, 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 any substantial part of its assets (whether now
owned or hereafter acquired) or purchase, lease or otherwise acquire (in one
transaction or a series of transactions) all or any substantial part of the
assets of any other person, other than in connection with the foreclosure by
the Borrower of a Defaulted Franchisee Loan subject to and in accordance with
the provisions of Article V, or amend, supplement or otherwise modify its
governing instruments or permit its members to modify their governing
instruments in any way that would cause a breach of the covenants of the
Borrower contained in this Agreement.
SECTION 7.05. Dividends and Distributions. Declare or pay,
directly or indirectly, any dividend or make any other distribution (by
reduction of capital or otherwise) whether in
62
<PAGE>
cash, property, securities or a combination thereof, with respect to any
shares of its capital stock or directly or indirectly redeem, purchase, retire
or otherwise acquire for value any shares of any class of its capital stock or
set aside any amount for any such purpose.
SECTION 7.06. 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.
SECTION 7.07. Issuances of Capital Stock. Issue any capital
stock or other equity interests, except that the Borrower may issue shares of
its capital stock (or other equity interests) to HFS or Wingate in exchange
for capital contributions of HFS or Wingate to the Borrower (which capital
contributions shall not exceed, in the aggregate, the difference between (A)
the Guaranteed Amount from time to time in effect, and (B) loans made to the
Borrower by HFS pursuant to Section 7.01(b)) from HFS, and the entire proceeds
of which capital contributions are used by the Borrower to make the payments
of principal described in Sections 2.08(c) or (d)), which shares (i) shall
have no mandatory or optional redemptions or required offers to purchase by
the Borrower (or any of its Affiliates) whether through the lapse of time, the
occurrence of contingencies, or otherwise, until after payment in full of the
Loan and all accrued interest and other charges thereon, and (ii) shall
provide for no payment of dividends prior to one (1) year after the Maturity
Date, and which investment shall otherwise be on terms reasonably acceptable
to the Administrative Agent.
SECTION 7.08. Creation of Subsidiaries. Create any
subsidiaries.
SECTION 7.09. Employee Benefits. (a) Maintain, sponsor,
contribute to or become obligated to contribute to, or suffer or permit any
ERISA Affiliate of the Borrower to, maintain, sponsor, contribute to or become
obligated to contribute to, any Plan or any Welfare Plan, or (b) permit the
assets of the Borrower to become "plan assets", whether by operation of law or
under regulations promulgated under ERISA.
SECTION 7.10. Amendment of Approved Franchisee Loans and
Borrower Organizational Documents. Modify, amend or terminate any Approved
Franchisee Loan, the Franchisee Loan Documents, or any other documentation
evidencing or securing the same, or release any collateral relating thereto,
or modify, amend, supplement or terminate or agree to modify, amend,
supplement or terminate the Limited Liability Company Agreement of the
Borrower, the Certificate of Formation of the Borrower, or any other
origination document of the Borrower.
63
<PAGE>
SECTION 7.11. Waiver of Terms, Conditions and Covenants of
Approved Franchisee Loans. Waive any of the terms, conditions or covenants
contained in any Approved Franchisee Loan, or any of the documentation
evidencing or securing the same.
SECTION 7.12. Waiver of Defaults Under Approved Franchisee
Loans. Waive any default, or extend the time for payment or performance, under
any Approved Franchisee Loan, or any of the Franchisee Loan Documentation or
other documentation evidencing or securing the same.
SECTION 7.13. Assignment of Approved Franchisee Loans.
Assign all or any part of its interest in, or grant any
participation in, any Approved Franchisee Loan.
SECTION 7.14. Modification of Underlying Documents and
Support Agreement. Consent to the modification of (a) any documents assigned
(collaterally or otherwise) to the Borrower as security for an Approved
Franchisee Loan, including, without limitation, the Franchise Agreement, any
management agreement relating to a Wingate Inn Hotel, leases, equipment
leases, service contracts, and licenses and permits (collectively, the
"Underlying Documents"), and (b) the Support Agreements.
SECTION 7.15. Cost Review Items. Consent to the modification
of the Cost Review Items, as approved by the Independent Construction Loan
Monitor.
SECTION 7.16. Equipment Leases. Permit a Franchisee Loan
Borrower to enter into any equipment leases for personal property to be used
at or in connection with the operation of the applicable Wingate Inn Hotel,
except as otherwise provided in Section 4.03(f).
SECTION 7.17. Servicing Agreement. Modify, amend or
terminate the Servicing Agreement, waive any provisions of the Servicing
Agreement, grant any consent provided for under the Servicing Agreement, or
appoint any successor Servicer or enter into a Servicing Agreement with any
successor Servicer.
ARTICLE VIII. 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 in or
in connection with any Loan Document or the borrowings hereunder, or any
representation, warranty, statement or information contained in any report,
certificate, financial statement or other instrument furnished in connection
with or pursuant to any Loan Document, shall prove to have been false or
64
<PAGE>
misleading in any material respect when so made, deemed made or furnished;
(b) default shall be made in the payment of any principal of
the Loan when and as the same shall become due and payable, whether at the due
date thereof or at a date fixed for prepayment thereof or by acceleration
thereof or otherwise;
(c) default shall be made in the payment of any interest on
the Loan or any Fee or any other amount (other than an amount referred to in
(b) above) due under any Loan Document, when and as the same shall become due
and payable;
(d) default shall be made in the due observance or
performance by the Borrower of any covenant, condition or
agreement contained in Section 6.01, 6.05 or 6.07 or in Article
VII;
(e) default shall be made in the due observance or
performance by the Borrower of any covenant, condition or agreement contained
in any Loan Document (other than those specified in (b), (c) or (d) above) and
such default shall continue unremedied for a period of fifteen (15) days after
notice thereof from the Administrative Agent to the Borrower;
(f) the Borrower shall incur any Indebtedness other than as
specifically permitted under Section 7.01.
(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 other Loan Party, or of a
substantial part of the property or assets of the Borrower or other Loan
Party, 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 other Loan Party or for a substantial part of the property or
assets of the Borrower or other Loan Party or (iii) the winding-up or
liquidation of the Borrower or other Loan Party; and such proceeding or
petition shall continue undismissed for sixty (60) days or an order or decree
approving or ordering any of the foregoing shall be entered;
(h) the Borrower or any other Loan Party shall (i)
voluntarily commence any proceeding or file any petition seeking relief under
Title 11 of the United States Code, as now constituted or hereafter amended,
or any other Federal, state or foreign bankruptcy, insolvency, receivership or
similar law, (ii) consent to the institution of, or fail to contest in a
timely and appropriate manner, any proceeding or the filing of any petition
described in (g) above, (iii) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator,
65
<PAGE>
conservator or similar official for the Borrower or other Loan Party or for a
substantial part of the property or assets of the Borrower or other Loan
Party, other than the appointment of a receiver in respect of the workout
process for a Defaulted Franchisee Loan if the Borrower has properly exercised
the option set forth in Section 5.04(a)(i), (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 the
aggregate amount of $25,000 or more shall be rendered against the Borrower and
the same shall be final and non-appealable or shall not be vacated, stayed,
bonded or discharged within thirty (30) days after the same becomes final and
non-appealable;
(j) an ERISA Event shall have occurred;
(k) any security interest purported to be created by any
Security Document shall cease to be, or shall be asserted by the Borrower or
any other Loan Party not to be, a valid, perfected, first priority security
interest in the securities, assets or properties covered thereby;
(l) there shall have occurred a Change in Ownership as
to the Borrower or GFS;
(m) Specified Franchisee Loan Defaults shall have occurred
under Approved Franchisee Loans having, at any given time, an outstanding
principal balance in excess of 30% of the then outstanding principal balance
of the Loans (excluding, for purposes of this calculation, the outstanding
principal balance of any Defaulted Franchisee Loan if (i) the option set forth
in clause (i) Section 5.04(a) has been elected (or deemed to have been
elected) by the Borrower as to such Defaulted Franchisee Loan, and (ii) the
conditions set forth in clause (i) of Section 5.04(d) has been satisfied as to
said Defaulted Franchisee Loan));
(n) the Borrower shall have failed to satisfy the conditions
set forth in Section 5.04(d) or (e), as applicable, on or before the
applicable Franchisee Loan Default Date;
(o) HFS shall be in default, beyond any applicable
cure period, under the Guarantee Agreement or any of the Support
Agreements;
(p) HFS shall be in default, beyond any applicable cure
period, under the HFS Credit Agreement, provided that in the event Chemical
Bank or its successor(s) is no longer party to a bank credit agreement with
HFS, or if a bank credit agreement is
66
<PAGE>
no longer utilized by HFS, the reference in this clause (p) to a default by
HFS under the HFS Credit Agreement shall be deemed to mean acts or omissions
by HFS that would constitute a default by HFS under provisions contained in
the last HFS Credit Agreement to which Chemical Bank (or its successor(s)) was
a party.
(q) Wingate shall be in default, beyond any applicable
cure period, under the Wingate Partnership Agreement or any of
the Support Agreements;
(r) A Disabling Event (as such term is defined in the
Wingate Partnership Agreement) shall have occurred;
(s) the Borrower shall no longer be a Single Purpose
Entity;
(t) any Support Agreement or the Wingate Partnership
Agreement shall be modified, amended, supplemented or terminated without the
prior written consent of the Administrative Agent; or
(u) The Borrower's existence is terminated, pursuant
to Section 7.1 of the Limited Liability Company Agreement of the
Borrower or otherwise;
then, and in every such event (other than an event with respect to the
Borrower described in paragraph (g) or (h) above) and at any time thereafter
during the continuance of such event, subject to Section 9.01B, the
Administrative Agent may, and at the request of the Required Lenders shall, by
notice to the Borrower, take either or both of the following actions, at the
same or different times: (i) terminate forthwith the Commitments and (ii)
declare the Loan to be forthwith due and payable in whole or in part,
whereupon the principal of the Loan, together with accrued interest thereon
and any unpaid accrued Fees and all other amounts accrued hereunder and under
any other Loan Document, shall become forthwith due and payable, without
presentment, demand, protest or any other notice of any kind, all of which are
hereby expressly waived by the Borrower, anything contained herein or in any
other Loan Document to the contrary notwithstanding; and in any event with
respect to the Borrower described in paragraph (g) or (h) above, the
Commitments shall automatically terminate and the principal of the Loan 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, 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.
Without limiting the generality of the foregoing, following an Event of
Default, all interest payable by a Franchisee Loan
671
<PAGE>
Borrower under an Approved Franchisee Loan shall be paid directly to the
Administrative Agent and shall be applied by the Administrative Agent to
principal, interest, default interest, late charges, attorneys' fees,
collection charges, and all other amounts and charges payable under this
Agreement, the other Loan Documents, and the Loan in such order as the
Administrative Agent shall, in its sole discretion, elect, and after all such
amounts and charges have been paid in full, any balance remaining shall be
remitted to the Borrower.
No act or failure to act by the Servicer, whether or not in breach of the
Servicing Agreement, shall affect the obligations of the Borrower under this
Agreement or any of the other Loan Documents.
ARTICLE IX. THE ADMINISTRATIVE AGENT AND THE COLLATERAL AGENT
SECTION 9.01. Appointment and Authority. A. In order to
expedite the transactions contemplated by this Agreement, The Chase Manhattan
Bank is hereby appointed to act as Administrative Agent and Collateral Agent
on behalf of the Lenders (for purposes of this Article IX, the Administrative
Agent and the Collateral Agent are referred to collectively as the "Agents").
Each of the Lenders and each assignee of any such Lender, hereby irrevocably
authorizes the Agents to take such actions on behalf of such Lender or
assignee and to exercise such powers as are specifically delegated to the
Agents by the terms and provisions hereof and of the other Loan Documents,
together with such actions and powers as are reasonably incidental thereto.
The Administrative Agent is hereby expressly authorized by the Lenders,
without hereby limiting any implied authority, (a) to receive on behalf of the
Lenders all payments of principal of and interest on the Loans and all Fees
and other amounts due to the Lenders hereunder, and promptly to distribute to
each Lender 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 Administrative Agent has actual
knowledge acquired in connection with its agency hereunder; and (c) to
distribute to each Lender copies of all Borrowing Requests (but not the
supporting documentation attached thereto or the corresponding Requests for
Advances from Franchisee Loan Borrowers) promptly after a Borrowing. Without
limiting the generality of the foregoing, the Agents are hereby expressly
authorized to execute any and all documents (including releases) with respect
to all collateral for the Loan and the rights of the Secured Parties with
respect thereto, as contemplated by and in accordance with the provisions of
this Agreement and the Security Documents. All collateral for the Loan shall
be held in the name of The Chase Manhattan Bank, as Collateral Agent, on
behalf of the Lenders, and all actions and determinations with respect thereto
shall be taken by The Chase Manhattan Bank, as the Collateral Agent.
68
<PAGE>
B. Upon the occurrence of an Event of Default, the Agents shall
consult with the Lenders to determine a course of action which is acceptable
to Required Lenders. Subject to Section 10.08(b) hereof, the Agents shall
pursue any such course of action approved by the Required Lenders in respect
of any default or Event of Default, including, without limitation,
acceleration of the indebtedness, and commencement of any suit to foreclose
any security for the Loan and acquire title to the collateral for the Loan (or
any collateral securing such collateral) in connection with such foreclosure.
In the event that the Required Lenders cannot decide which remedies, if any,
are to be pursued, then, subject to Section 10.08(b), the Agents may take such
action as they deem advisable and in the best interests of the Lenders.
Notwithstanding anything to the contrary contained herein, without the prior
approval of all of the Lenders, none of the Agents or the Lenders shall become
the owner or holder of any Franchisee Loan Documents or take any other action
as a result of which any Lender would have any obligation, under Section 1 of
the related Mortgage Loan Recognition Agreement or otherwise, to make any
advance of any Franchisee Loan to any Franchisee Loan Borrower or to make any
advance to any person other than the Borrower pursuant to the terms and
conditions of this Agreement.
SECTION 9.02. Limitation on Liability. Neither the Agents
nor any of their respective directors, officers, employees or agents shall be
liable as such for any action taken or omitted by any of them except for its
or his own gross negligence or wilful misconduct, or be responsible for any
statement, warranty or representation herein or the contents of any document
delivered in connection herewith, or be required to ascertain or to make any
inquiry concerning the performance or observance by the Borrower or any other
Loan Party of any of the terms, conditions, covenants or agreements contained
in any Loan Document. The Agents shall not be responsible to the Lenders for
the due execution, genuineness, validity, enforceability or effectiveness of
this Agreement or any other Loan Documents, instruments or agreements. The
Agents shall in all cases be fully protected in acting, or refraining from
acting, in accordance with written instructions signed by the Required Lenders
and, except as otherwise specifically provided herein, such instructions and
any action or inaction pursuant thereto shall be binding on all the Lenders.
Each 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 Agents nor any of their respective directors, officers, employees
or agents shall have any responsibility to the Borrower or any other Loan
Party on account of the failure of or delay in performance or breach by any
Lender of any of its obligations hereunder or to any Lender on account of the
failure of or delay in performance or breach by any other Lender or the
Borrower or any other Loan Party of any of their respective obligations
hereunder or under any other Loan Document
69
<PAGE>
or in connection herewith or therewith. Each of the Agents may execute any and
all duties hereunder by or through agents or employees and shall be entitled
to rely upon the advice of legal counsel selected by it with respect to all
matters arising hereunder and shall not be liable for any action taken or
suffered in good faith by it in accordance with the advice of such counsel.
SECTION 9.03. Discretionary Actions. Each Lender hereby
acknowledges that neither Agent shall be under any duty to take any
discretionary action permitted to be taken by it pursuant to the provisions of
this Agreement unless it shall be requested in writing to do so by the
Required Lenders. Notwithstanding anything to the contrary in Section 9.02 or
any other provision of any other Loan document, each of the Agents shall
exercise its respective powers, discretion and authorities and perform its
obligations under this Agreement and the other Loan Documents with the same
degree of care that it would employ in regard to a similar facility in which
it is the only lender.
SECTION 9.04. Resignation; Successor Agents. Subject to the
appointment and acceptance of a successor Agent as provided below, either
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. 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
an office 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
appointment as Agent hereunder by a successor bank, such successor shall
succeed to and become vested with all the rights, powers, privileges and
duties of the retiring Agent and the retiring Agent shall be discharged from
its duties and obligations hereunder. After the Agent's resignation hereunder,
the provisions of this Article IX and Section 10.05 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.
SECTION 9.05. Rights of Agents. With respect to the Advances
made by it hereunder, each 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 an Agent, and the Agents and their Affiliates may
accept deposits from, lend money to and generally engage in any kind of
business with the Borrower or Affiliate thereof as if it were not an Agent.
SECTION 9.06. Expenses; Indemnity. Each Lender agrees (a) to
reimburse the Agents, on demand, in the amount of its pro rata share (based on
its Commitment hereunder) of any expenses
70
<PAGE>
incurred for the benefit of the Lenders by the Agents, including counsel fees
paid for services rendered on behalf of the Lenders, that shall not have been
reimbursed by the Borrower and (b) to indemnify and hold harmless each 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 that may be
imposed on, incurred by or asserted against it in its capacity as Agent or any
of them in any way relating to or arising out of 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 or any other Loan Party, provided that no
Lender shall be liable to an Agent or any such other indemnified person for
any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements are determined by
a court of competent jurisdiction by final and nonappealable judgment to have
resulted from the gross negligence or wilful misconduct of such Agent or any
of its directors, officers, employees or agents.
SECTION 9.07. No Reliance. Each Lender acknowledges that it
has, independently and without reliance upon the Agents or any other Lender
and based on such documents and information as it has deemed appropriate, made
its own credit analysis and decision to enter into this Agreement. Each Lender
also acknowledges that it will, independently and without reliance upon the
Agents or any other Lender and based on such documents and information as it
shall from time to time deem appropriate, continue to make its own decisions
in taking or not taking action under or based upon this Agreement or any other
Loan Document, any related agreement or any document furnished hereunder or
thereunder.
ARTICLE X. MISCELLANEOUS
SECTION 10.01. Notices. Notices and other communications
provided for herein shall be in writing and shall be delivered by hand or
overnight courier service, mailed by certified or registered mail, as follows:
(a) if to the Borrower, to it at Six Sylvan Way, Parsippany,
New Jersey 07054, Attention: Executive Vice President - General Counsel, with
a copy to Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New
York, New York 10022, Attention: James Douglas, Esq.
(b) if to the Administrative Agent, to The Chase Manhattan
Bank, 380 Madison Avenue, New York, New York 10017 Attention: Denise Williams,
Portfolio Management Officer, with a
71
<PAGE>
copy to The Chase Manhattan Bank, at 380 Madison Avenue, New York, New York
10017, Attention: William Viets, Real Estate Counsel, and a copy to Rosenman &
Colin LLP, 575 Madison Avenue, New York, New York 10022, Attention: Stephen R.
Senie, Esq.
(c) if to a Lender, to it at its address set forth in
Exhibit A or in the Assignment and Acceptance pursuant to which such Lender
shall have become a party hereto, with copies to such additional parties as
are set forth therein.
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 if delivered by hand or overnight courier service or sent
by telecopy or on the date five Business Days after dispatch by certified or
registered mail if mailed, in each case delivered, sent or mailed (properly
addressed) to such party as provided in this Section 10.01 or in accordance
with the latest unrevoked direction from such party given in accordance with
this Section 10.01.
SECTION 10.02. Survival of Agreement. All covenants,
agreements, representations and warranties made by the Borrower herein and in
the certificates or other instruments prepared or delivered in connection with
or pursuant to this Agreement or any other Loan Document shall be considered
to have been relied upon by the Lenders and shall survive the making by the
Lenders of Advances of the Loan, regardless of any investigation made by the
Lenders or on their behalf, and shall continue in full force and effect as
long as the principal of or any accrued interest on the Loan or any Fee or any
other amount payable under this Agreement or any other Loan Document is
outstanding and unpaid and so long as the Commitments have not been
terminated. The provisions of Sections 2.11, 2.12, 2.16 and 10.05 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 the Loan, the expiration of the Commitments, 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
Administrative Agent, the Collateral Agent or any Lender.
SECTION 10.03. Binding Effect. This Agreement shall become
effective when it shall have been executed by the Borrower and the
Administrative Agent and when the Administrative Agent shall have received
counterparts hereof which, when taken together, bear the signatures of each of
the other parties hereto, and thereafter shall be binding upon and inure to
the benefit of the parties hereto and their respective permitted successors
and assigns.
SECTION 10.04. Successors and Assigns. (a) Whenever in this
Agreement any of the parties hereto is referred to, such reference shall be
deemed to include the permitted successors and
72
<PAGE>
assigns of such party; and all covenants, promises and agreements by or on
behalf of the Borrower, the Administrative Agent or the Lenders that are
contained in this Agreement shall bind and inure to the benefit of their
respective successors and assigns.
(b) Each Lender may assign to one or more assignees all or a
portion of its interests, rights and obligations under this Agreement
(including all or a portion of its Commitment and the portion of the Loan at
the time owing to it); provided, however, that (i) except in the case of an
assignment to another Lender or an Affiliate of the assigning Lender (x) the
Administrative Agent must give its prior written consent (which consent shall
not be unreasonably withheld) and (y), the amount of the Commitment of the
assigning Lender subject to each such assignment (determined as of the date
the Assignment and Acceptance with respect to such assignment is delivered to
the Administrative Agent) shall not be less than $5,000,000 (or, if less, the
entire remaining amount of such Lender's Commitment), (ii) the parties to each
such assignment shall execute and deliver to the Administrative Agent an
Assignment and Acceptance, together with a processing and recordation fee of
$2,000.00 and (iii) the assignee, if it shall not be a Lender, shall deliver
to the Administrative Agent an Administrative Questionnaire. Upon acceptance
and recording pursuant to paragraph (e) of this Section 10.04, 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 2.11, 2.12, 2.16 and
10.05, as well as to any Fees accrued for its account and not yet paid).
(c) By executing and delivering an Assignment and
Acceptance, the assigning Lender thereunder and the assignee thereunder shall
be deemed to confirm to and agree with each other and the other parties hereto
as follows: (i) such assigning Lender warrants that it is the legal and
beneficial owner of the interest being assigned thereby free and clear of any
adverse claim and that its Commitment, and the outstanding balance of the Loan
owed to such Lender, 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
73
<PAGE>
connection with this Agreement, or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement, any other
Loan Document or any other instrument or document furnished pursuant hereto,
or the financial condition of the Borrower or the performance or observance by
the Borrower 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 referred to in Section 3.05 or delivered pursuant to
Section 6.04 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 Administrative Agent, the Collateral 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 Administrative Agent and the Collateral Agent to
take such action as agent on its behalf and to exercise such powers under this
Agreement as are delegated to the Administrative Agent and the Collateral
Agent, respectively, 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 Administrative Agent, acting for the purpose of this
Section 10.04(d) as an agent of the Borrower, shall maintain at one of its
offices in The City of New York a copy of each Assignment and Acceptance
delivered to it and a register for the recordation of the names and addresses
of the Lenders, and the Commitment of, and principal amount of the portion of
the Loan owing to, each Lender pursuant to the terms hereof from time to time
(the "Register"). The entries in the Register shall be conclusive and the
Borrower, the Administrative Agent, the Collateral Agent 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,
notwithstanding notice to the contrary. The Register shall be available for
inspection by the Borrower, the Administrative Agent, the Collateral Agent 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, an Administrative
Questionnaire completed in respect of the assignee (unless the assignee shall
already be a Lender hereunder), and the processing and recordation fee
referred to in Section 10.04(b) above and, if required, the written consent of
74
<PAGE>
the Administrative Agent to such assignment, the Administrative 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. No assignment shall be effective unless it has been recorded in the
Register as provided in this Section 10.04(e).
(f) Each Lender may without the consent of the Borrower or
the Administrative Agent sell participations to one or more banks or other
entities in all or a portion of its rights and obligations under this
Agreement (including all or a portion of its Commitment and the outstanding
balance of the portion of the Loan 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 2.11, 2.12 and 2.16 to the same extent as if they were
Lenders and (iv) the Borrower, the Administrative Agent and the Lenders shall
continue to deal solely and directly with such Lender 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 Loan and to approve any amendment, modification or waiver of any provision
of this Agreement (other than amendments, modifications or waivers (x)
decreasing any fees payable hereunder or the amount of principal of or the
rate at which interest is payable on the Loan, (y) extending any scheduled
principal payment date or date fixed for the payment of interest on the Loan
or increasing or extending the Commitments or (z) releasing any collateral for
the Loan or any Guarantor).
(g) Any Lender or participant may, in connection with any
assignment or participation or proposed assignment or participation pursuant
to this Section 10.04, disclose to the assignee or participant or proposed
assignee or participant any information relating to the Borrower furnished to
such Lender by or on behalf of the Borrower; provided 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 (subject to
customary exceptions) to preserve the confidentiality of such confidential
information on terms no less restrictive than those applicable to the Lenders
pursuant to Section 10.16.
(h) Any Lender may at any time assign all or any portion of
its rights under this Agreement to a Federal Reserve Bank to secure extensions
of credit by such Federal Reserve Bank to such Lender; provided that no such
assignment shall release a Lender from any of its obligations hereunder or
substitute any such Bank for such Lender as a party hereto. In order to
75
<PAGE>
facilitate such an assignment to a Federal Reserve Bank, the Borrower shall,
at the request of the assigning Lender, duly execute and deliver to the
assigning Lender a promissory note or notes evidencing the portion of the Loan
made to the Borrower by the assigning Lender hereunder.
(i) The Borrower shall not assign or delegate any of its
rights or duties hereunder without the prior written consent of the
Administrative Agent and each Lender, and any attempted assignment without
such consent shall be null and void.
SECTION 10.05. Expenses; Indemnity. (a) The Borrower agrees
to pay all out-of-pocket expenses incurred by the Administrative Agent and the
Collateral Agent in connection with the syndication of the credit facilities
provided for herein and the preparation and administration of this Agreement
and the other Loan Documents or in connection with any amendments,
modifications, waivers or restructuring of the provisions hereof or thereof
(whether or not the transactions hereby or thereby contemplated shall be
consummated), or incurred by the Administrative Agent or the Collateral Agent
in connection with the transactions described in this Agreement, including,
without limitation, all Borrowings, the review and approval of Franchisee
Loans (including, without limitation, the review of Plan and Cost Review
Items, Phase I Environmental Site Assessments, additional assessments or
surveys and Appraisals by the Administrative Agent) and the collateral
assignment of Approved Franchisee Loans to the Collateral Agent, and the
transactions described in Section 5.04, or incurred by the Administrative
Agent, the Collateral Agent or any Lender in connection with the enforcement
or protection of its rights in connection with this Agreement and the other
Loan Documents or in connection with the Loan made hereunder, including,
without limitation, the fees, charges and disbursements of Rosenman & Colin
LLP, counsel for the Administrative Agent and the Collateral Agent, and any
in-house counsel, and, in connection with any such enforcement or protection,
the fees, charges and disbursements of any other counsel for the
Administrative Agent, the Collateral Agent or any Lender, and the fees,
charges and disbursements of each Appraiser, Independent Construction Loan
Monitor and other third parties providing services under this Agreement, the
other Loan Documents, or any Franchisee Loan Documents.
(b) The Borrower agrees to indemnify the Administrative
Agent, the Collateral Agent and each Lender, each Affiliate of any of the
foregoing persons and each of their respective directors, officers, employees
and agents (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, charges
and disbursements, 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, or any ongoing
76
<PAGE>
matters arising out of, this Agreement or any other Loan Document or any
agreement or instrument contemplated thereby, the performance by the parties
thereto of their respective obligations thereunder or the consummation of the
Transactions and the other transactions contemplated thereby, (ii) the use of
the proceeds of the Loan, (iii) any claim, litigation, investigation or
proceeding relating to any of the foregoing, whether or not any Indemnitee is
a party thereto, (iv) any and all lawful action that may be taken by the
Indemnitees in connection with the enforcement of the provisions of this
Agreement or any other Loan Document, whether or not suit is filed in
connection with the same, or in connection with the Borrower, the Guarantor,
any partner, joint venturer or shareholder thereof becoming a subject of a
voluntary or involuntary federal or state bankruptcy, insolvency or similar
proceeding, (v) any liability to brokers, finders or similar persons and/or
under any applicable securities or blue sky laws, or (vi) any actual or
alleged presence or Release of Hazardous Materials on any property owned or
operated by the Borrower or any of the Franchisee Loan Borrowers, or any
Environmental Claim related in any way to the Borrower or any Franchisee Loan
Borrower; provided that such indemnity shall not, as to any Indemnitee, be
available to the extent that such losses, claims, damages, liabilities or
related expenses are determined by a court of competent jurisdiction by final
and nonappealable judgment to have resulted from the gross negligence or
wilful misconduct of such Indemnitee. All sums expended by the Indemnitees on
account of any of the foregoing shall be reimbursable on demand, and until
reimbursed by the Borrower pursuant hereto, shall be deemed additional
principal evidenced by the Note and shall bear interest at the Default Rate.
The obligations of the Borrower under this Section 10.05(b) shall be secured
by the Collateral.
(c) The provisions of this Section 10.05 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 the Loan, the expiration of the Commitments, 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
Administrative Agent, the Collateral Agent or any Lender. All amounts due
under this Section 10.05 shall be payable on written demand therefor together
with interest, at the Default Rate, from the date of demand to the date of
payment, both dates inclusive.
SECTION 10.06. Right of Setoff. If an Event of Default shall
have occurred and be continuing, each Lender is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by such
Lender to or for the credit or the account of the
77
<PAGE>
Borrower against any of and all the obligations of the Borrower now or
hereafter existing under this Agreement and other Loan Documents held by such
Lender, irrespective of whether or not such Lender shall have made any demand
under this Agreement or such other Loan Document and although such obligations
may be unmatured. The rights of each Lender under this Section 10.06 are in
addition to other rights and remedies (including other rights of setoff) which
such Lender may have.
SECTION 10.07. Applicable Law. THIS AGREEMENT AND THE OTHER
LOAN DOCUMENTS (OTHER THAN AS EXPRESSLY SET FORTH IN ANY OF THE OTHER LOAN
DOCUMENTS) SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL
LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW.
SECTION 10.08. Waivers; Amendment. (a) No failure or delay
of the Administrative Agent, the Collateral Agent or any Lender in exercising
any power or right hereunder or under any other Loan Document shall operate as
a waiver thereof, nor shall any single or partial exercise of any such right
or power, or any abandonment or discontinuance of steps to enforce such a
right or power, preclude any other or further exercise thereof or the exercise
of any other right or power. The rights and remedies of the Administrative
Agent, the Collateral Agent and the Lenders hereunder and under the other Loan
Documents are cumulative and are not exclusive of any rights or remedies that
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 or any other
Loan Party therefrom shall in any event be effective unless the same shall be
permitted by Section 10.08(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 provision hereof nor any
of the other Loan Documents may be waived, amended or modified except pursuant
to an agreement or agreements in writing entered into by the Borrower and the
Required Lenders; provided, however, that no such agreement shall (i) decrease
the principal amount of, or extend the maturity of or any scheduled principal
payment date or date for the payment of any interest on the Loan, or waive or
excuse any such payment or any part thereof, or decrease the rate of interest
on the Loan, without the prior written consent of each Lender affected
thereby, (ii) change or extend the Commitment or decrease the Fees of any
Lender without the prior written consent of such Lender, or (iii) amend or
modify the provisions of Section 2.13 or 10.04(i), the provisions of this
Section, the definition of the term "Required Lenders" or release any
Guarantor or all or any substantial part of any collateral for the Loan,
without the prior written consent of each Lender; provided further that no
such agreement shall amend,
78
<PAGE>
modify or otherwise affect the rights or duties of the Administrative Agent or
the Collateral Agent hereunder or under any other Loan Document without the
prior written consent of the Administrative Agent or the Collateral Agent.
Additionally, subsequent to the acquisition of one or more Franchisee Loans,
without the prior approval of Required Lenders, the respective obligations of
the Franchisee Loan Borrowers and any other person under any Franchisee Loan
Document may not be waived, amended or modified and collateral securing a
Franchisee Loan may not be released except as otherwise provided in the
Franchisee Loan Documents.
SECTION 10.09. Interest Rate Limitation. Notwithstanding
anything herein to the contrary, if at any time the interest rate applicable
to the Loan, together with all fees, charges and other amounts which are
treated as interest on the Loan under applicable law (collectively the
"Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") which
may be contracted for, charged, taken, received or reserved by the Lenders
with respect to the Loan in accordance with applicable law, the rate of
interest payable in respect of the Loan hereunder, together with all Charges
payable in respect thereof, shall be limited to the Maximum Rate.
SECTION 10.10. Entire Agreement. This Agreement and the
other Loan Documents constitute the entire contract between the parties
relative to the subject matter hereof. Any other 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 10.11. WAIVER OF JURY TRIAL. EACH PARTY HERETO
HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT
MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR
INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY
OF THE OTHER LOAN DOCUMENTS. EACH PARTY HERETO (A) 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 (B) 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 10.11.
SECTION 10.12. 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
79
<PAGE>
enforceability of the remaining provisions contained herein and therein shall
not in any way be affected or impaired thereby (it being understood that the
invalidity of a particular provision in a particular jurisdiction shall not in
and of itself affect the validity of such provision in any other
jurisdiction). The parties shall endeavor in good-faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid provisions
the economic or other substantive effect of which comes as close as possible
to that of the invalid, illegal or unenforceable provisions.
SECTION 10.13. Counterparts. This Agreement may be executed
in counterparts (and by different parties hereto on different counterparts)
each of which shall constitute an original but all of which when taken
together shall constitute a single contract, and shall become effective as
provided in Section 10.03. Delivery of an executed signature page to this
Agreement by facsimile transmission shall be as effective as delivery of a
manually signed counterpart of this Agreement.
SECTION 10.14. Headings. Article and Section headings and
the Table of Contents used herein are for convenience of reference only, are
not part of this Agreement and are not to affect the construction of, or to be
taken into consideration in interpreting, this Agreement.
SECTION 10.15. Jurisdiction; Consent to Service of Process.
(a) Each party to this Agreement hereby irrevocably and unconditionally
submits, for itself and its property, to the nonexclusive jurisdiction of any
New York State court or Federal court of the United States of America sitting
in New York County, 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 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 Administrative Agent, the Collateral
Agent 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) Each party to this Agreement hereby irrevocably and
unconditionally waives, to the fullest extent it may legally and effectively
do so, any objection which it may now or hereafter have to the laying of venue
of any suit, action or proceeding arising out of or relating to this Agreement
or the other Loan Documents in any New York State or Federal court.
80
<PAGE>
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) Each party to this Agreement irrevocably consents to
service of process in the manner provided for notices in Section 10.01.
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 10.16. Confidentiality. The Administrative Agent,
the Collateral Agent and each of the Lenders agrees to keep confidential (and
to use its best efforts to cause its respective agents and representatives to
keep confidential) the Information (as defined below) and all copies thereof,
extracts therefrom and analyses or other materials based thereon, except that
the Administrative Agent, the Collateral Agent or any Lender shall be
permitted to disclose Information (a) to such of its respective officers,
directors, employees, agents, affiliates and representatives as need to know
such Information, (b) to the extent requested by any regulatory authority, (c)
to the extent otherwise required by applicable laws and regulations or by any
subpoena or similar legal process, (d) in connection with any suit, action or
proceeding relating to the enforcement of its rights hereunder or under the
other Loan Documents or (e) to the extent such Information (i) becomes
publicly available other than as a result of a breach of this Section 10.16 or
(ii) becomes available to the Administrative Agent, any Lender or the
Collateral Agent on a nonconfidential basis from a source other than the
Borrower. For the purposes of this Section, "Information" shall mean all
financial statements, certificates, reports, agreements and information
(including all analyses, compilations and studies prepared by the
Administrative Agent, the Collateral Agent or any Lender based on any of the
foregoing) that are received from the Borrower and related to the Borrower,
any member of the Borrower or any employee, customer or supplier of the
Borrower, other than any of the foregoing that were available to the
Administrative Agent, the Collateral Agent or any Lender on a nonconfidential
basis prior to its disclosure thereto by the Borrower, and which are in the
case of Information provided after the date hereof, clearly identified at the
time of delivery as confidential. The provisions of this Section 10.16 shall
remain operative and in full force and effect regardless of the expiration and
term of this Agreement.
SECTION 10.17. Full Recourse Obligation of the Borrower.
Notwithstanding anything to the contrary contained herein or in any other Loan
Document, the Borrower (but not the members of the Borrower, or their
respective officers, directors, shareholders, employees, agents or affiliates
or partners) shall be personally liable to pay and perform all obligations of
the Borrower under the terms of this Agreement and any other Loan
81
<PAGE>
Document. Without limiting the foregoing, the personal liability of the
Borrower shall extend to any of its assets and to any amounts or claims or any
deficiency judgments based thereon or with respect thereto, and the Lenders
(or the Administrative Agent or Collateral Agent, on their behalf) shall not
be required to look first to any collateral security for the Loan before
making a claim against the Borrower.
82
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of
the day and year first above written.
WINGATE FINANCIAL, LLC
By: General Franchise
Systems, Inc., Managing
Member
By: /s/ Joel R. Buckberg
-----------------------------
Name: Joel R. Buckberg
Title: Senior Vice President
- Legal
THE CHASE MANHATTAN BANK, as
Administrative Agent and Collateral
Agent,
By: /s/ David A. Juge
-----------------------------
Name: David A. Juge
Title: Vice President
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, as collateral
agent
By: /s/ Mark A. Lanspa
-----------------------------
Name: Mark A. Lanspa
Title: Vice President
By: /s/ Salvatore Bottinelli
-----------------------------
Name: Salvatore Bottinelli
Title: Vice President
THE BANK OF NOVA SCOTIA, as
documentation agent
By: /s/ Brian Allen
-----------------------------
Name: Brian Allen
Title: Senior Relationship
Manager
83
<PAGE>
BANKERS TRUST COMPANY, as
syndication agent
By: /s/ Anthony LoGrippo
-----------------------------
Name: Anthony LoGrippo
Title: Vice President
THE CHASE MANHATTAN BANK, as
Lender
By: /s/ David A. Juge
-----------------------------
Name: David A. Juge
Title: Vice President
THE BANK OF NOVA SCOTIA, as
Lender
By: /s/ Brian Allen
-----------------------------
Name: Brian Allen
Title: Senior Relationship
Manager
BANKERS TRUST COMPANY, as
Lender
By: /s/ Anthony LoGrippo
-----------------------------
Name: Anthony LoGrippo
Title: Vice President
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, as Lender
By: /s/ Mark H. Lanspa
-----------------------------
Name: Mark H. Lanspa
Title: Vice President
By: /s/ Salvatore Bottinelli
-----------------------------
Name: Salvatore Bottinelli
Title: Vice President
84
<PAGE>
EXHIBITS
A - Lenders; Lender's Addresses; Attorneys Addresses; Maximum
Commitments
B - Note
C - Guarantee Agreement
D - Indemnity, Subrogation and Subordination Agreement
E - Pledge Agreement
F - Support Agreements
G - Wingate Inn Franchise Agreement (form)
H - [Intentionally omitted]
I - Agreement re: Support Agreements
J - Wingate Partnership Agreement
K - Administrative Questionnaire
L - Assignment and Acceptance
M - Borrowing Request
N - Criteria for Approved Franchisee Loans
O - Specified Franchisee Loan Defaults
P - Litigation
Q - [Intentionally omitted]
R - Confirmation of Guaranty Agreement (form)
S - Permitted Investments
T - Letter from the Borrower, Wingate and HFS (re: sharing of
information)
U - Organizational Structure of the Borrower
V - Financial Statements of Borrower
W - Servicing Agreement
X - Assignment of Servicing Agreement
1
<PAGE>
Y - Consent to Assignment of Servicing Agreement
Z - Collateral Account Agreement
AA - Franchisee Loan Application (form)
BB - Franchisee Building Loan Agreement (form)
CC - Franchisee Loan Note (form)
DD - Mortgage (form)
EE - Assignment of Rents (form)
FF- Assignment of Equipment Leases (form)
GG - Assignment of Service Contracts (form)
HH - Assignment of Documents
II - Security Agreement (form)
JJ - Completion Guaranty (form)
KK - Environmental Indemnity (form)
LL - Subordination, Estoppel, Assignment and Consent (Management
Agreement) (form)
MM - Subordination, Estoppel, Assignment and Consent (Franchise
Agreement) (form)
NN - Architect's Letter
OO - General Contractor's Letter
PP - Loan Recognition Agreement
QQ - Collateral Assignment of Loan Documents
RR - [Intentionally omitted]
SS - [Intentionally omitted]
TT - Payment and Performance Bonds
UU - [Intentionally omitted]
VV - Construction Budget
2
<PAGE>
EXHIBIT 10.50
GUARANTY OF PAYMENT
New York, New York
November 20, 1996
WHEREAS, Wingate Financial, LLC, a Delaware limited liability company
having an office at Six Sylvan Way, Parsippany, New Jersey 07054 (the
"BORROWER"), has applied to the lenders described in Exhibit A annexed hereto
(collectively, the "LENDERS"), for a loan in the aggregate principal sum of
$60,000,000.00 (the "LOAN"), which Loan will be evidenced by a Note, (the
"NOTE") in said amount, dated the date hereof, advanced pursuant to a Credit
Agreement (the "CREDIT AGREEMENT") dated the date hereof among the Borrower,
the Lenders, The Chase Manhattan Bank (the "AGENT") in its capacity as
Administrative Agent and Collateral Agent, and certain other parties, and
secured by the collateral and other Loan Documents (collectively, the
"COLLATERAL DOCUMENTS") described in the Credit Agreement;
WHEREAS the Lenders are willing to make advances of the Loan to the
Borrower only if the undersigned executes and delivers this Guaranty and
guarantees payment of the Debt (as herein defined) to the Agent, on behalf of
the Lenders, in the manner hereinafter provided;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and legal sufficiency of which are hereby
acknowledged, and in order to induce the Lenders to make advances of the Loan
to the Borrower, the undersigned hereby acknowledges, agrees and confirms that
all of the above recitals are true, correct and complete and hereby covenants
and agrees with the Lenders and the Agent as follows:
1. The undersigned guarantees, absolutely, irrevocably and
unconditionally, to the Agent, on behalf of the Lenders, the payment of the
Debt, notwithstanding that advances of the Loan have been, or may be, made in
the face of a default under the Loan Documents (hereinbelow defined) or
otherwise not in compliance with the lending criteria set forth in the Credit
Agreement, provided, however, that so long as an Event of Bankruptcy set forth
in paragraph 3 hereof shall not have occurred and be continuing, the
undersigned's maximum liability hereunder shall not exceed the Designated
Portion of the Debt (as such term is defined in PARAGRAPH 2 of this Guaranty).
The term "DEBT" as used in this Guaranty shall mean all principal, interest,
additional interest (including specifically all interest accruing from and
after the commencement of any case, proceeding or action under any existing or
future laws relating to bankruptcy, insolvency or similar matters with respect
to the Borrower ("POST-PETITION INTEREST")) and other sums of any nature
whatsoever which may or shall become due and payable pursuant to the
provisions of the Credit Agreement, the Collateral Documents or any other
document or instrument now or hereafter executed and/or delivered
<PAGE>
in connection therewith or otherwise with respect to the Loan (said Note,
Credit Agreement, Collateral Documents, and other documents and instruments,
collectively, the "LOAN DOCUMENTS") (all of the above unaffected by
modification thereof in any bankruptcy or insolvency proceeding), and even
though the Lenders (or the Agent on their behalf) may not have an allowed
claim for the same against the Borrower as a result of any bankruptcy or
insolvency proceeding. The undersigned and each Lender understands, agrees and
confirms that (i) at any time when there is any default or failure to pay when
due any Debt guaranteed hereunder, the Lenders may enforce this Guaranty
(subject to the limits on the aggregate liability of the undersigned
hereunder, as provided herein) against the undersigned only after a written
demand for payment has been made on the Borrower and a copy thereof delivered
to the undersigned, and such demand has not been paid in full (and any Debt so
guaranteed has not been paid in full) within ten (10) days after the date such
demand for payment was made; provided that no such demand need be made (and
the Debt so guaranteed by the undersigned shall immediately be paid by the
undersigned, subject to the limits on aggregate liability of the undersigned
hereunder, as provided herein) at any time when (x) an Event of Default exists
with respect to the Borrower pursuant to Article VIII, items (g) or (h) of the
Credit Agreement, (y) if any of the events listed in PARAGRAPH 11 of this
Guaranty exist with respect to the undersigned, or (z) the Loan has been
accelerated pursuant to Article VIII of the Credit Agreement.
2. The term "DESIGNATED PORTION OF THE DEBT" as used in this Guaranty
shall mean the aggregate of (A)(i) a portion of the aggregate outstanding
principal balance of the Loan equal to the Applicable Principal Liability (as
hereinafter defined) whenever the aggregate outstanding principal balance of
the Loan is in excess of the Applicable Principal Liability, or (ii) the
entire aggregate outstanding principal balance of the Loan whenever the
aggregate outstanding principal balance of the Loan is equal to or less than
the Applicable Principal Liability, (B) all interest and additional interest
(including specifically Post-Petition Interest) accrued and unpaid on the
portion of the outstanding principal balance of the Loan from time to time
constituting the Designated Portion of the Debt, as determined on a pro rata
basis (i.e., aggregate accrued and unpaid interest on the entire outstanding
principal balance of the Loan from time to time multiplied by a fraction, the
numerator of which shall be the portion of the outstanding principal balance
of the Loan from time to time constituting part of the Designated Portion of
the Debt, and the denominator of which shall be the entire outstanding
principal balance of the Loan from time to time), and (C) all other sums of
any nature whatsoever other than principal or interest from time to time
constituting part of the Debt, all of the above unaffected by modification
thereof in any bankruptcy or insolvency proceeding or by any determination, of
whatever nature, that the Lenders (or the Agent on their behalf) may not have
an allowed claim for the same against the Borrower as a result of any
bankruptcy or insolvency proceeding. The "APPLICABLE PRINCIPAL LIABILITY" with
respect to the Loan shall be equal to $36,000,000.00, less each of (a) any
amounts paid by the Borrower in reduction of the principal balance of the Loan
pursuant to Section 2.08(b) of the Credit Agreement, provided that (x) such
payments are made pursuant to a properly exercised option contained in clause
(ii) of Section 5.04(a) of the Credit Agreement, and (y) all of the conditions
set forth in Section 5.04(e) of the Credit Agreement have been satisfied with
respect to the exercise of said option, (b) the aggregate amount of cash
actually loaned
2
<PAGE>
by the undersigned to the Borrower after the Closing Date pursuant to Section
7.01(b) of the Credit Agreement so long as all such cash proceeds were
actually used to repay the Loan pursuant to the requirements of Sections
2.08(c) or (d) of the Credit Agreement, (c) the aggregate amount of cash
actually invested by the undersigned in the Borrower after the Closing Date
pursuant to Section 7.07 of the Credit Agreement so long as all such cash
proceeds were actually used to repay the Loan pursuant to the requirements of
Sections 2.08(c) or (d) of the Credit Agreement, and (d) amounts paid under
this Guaranty by the undersigned to the Agent to the extent the same are
applied by the Agent to the principal balance of the Loan. In the event that
on the first anniversary of the date hereof, the aggregate principal amount of
Approved Franchisee Loans (as such term is defined in the Credit Agreement),
approved in writing by the Agent, whether or not funded, is less than
$60,000,000.00, then the Applicable Principal Liability shall be reduced to an
amount equal to 60% of the aggregate principal amount of Approved Franchisee
Loans approved by the Agent, whether or not funded, less the amounts (if any)
referred to in clauses (a) through (d) of this PARAGRAPH 2.
3. The term "EVENT OF BANKRUPTCY" as used in this Guaranty shall mean
any one or more of the following:
(a) if the Borrower shall make an assignment for the benefit of
creditors;
(b) the filing of, or joinder in, a petition by any affiliate of the
Borrower seeking relief against the Borrower under Title 11 of the United
States Code; or
(c) if the Borrower files a petition or answer or consent seeking
relief under Title 11 of the United States Code as now constituted or
hereafter amended, or under any other applicable Federal or state bankruptcy
law or other similar law, or if the Borrower, consents to the institution of
proceedings thereunder or to the filing of any such petition or to the
appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian, sequestrator or other similar official of the Borrower, or
of any substantial part of its properties, or if the Borrower intentionally
fails generally to pay its debts as such debts become due in circumstances
where Borrower has sufficient funds to make such payments, or if the Borrower,
takes any action in furtherance of any action described in this subparagraph.
4. To the extent that at any applicable time the Designated Portion
of the Debt is less than the Debt, the undersigned agrees that no portion of
any sums applied, from time to time, in reduction of the Debt (other than sums
referred to in clauses (a) through (d) of PARAGRAPH 2 of this Guaranty) shall
be deemed to have been applied in reduction of the Designated Portion of the
Debt until such time as that portion of the Debt which is not the Designated
Portion of the Debt has been paid in full, it being the intention hereof that
the Designated Portion of the Debt shall be the last portion of the Debt to be
paid and that this Guaranty shall remain in full force and effect and shall
not be deemed discharged until the date upon which all of the obligations and
liabilities of the undersigned under this Guaranty shall have been performed
and discharged by the undersigned in accordance with the provisions of this
Guaranty.
3
<PAGE>
5. The undersigned hereby represents and warrants that it is not an
"investment company" as defined in, or subject to regulation under, the
Investment Company Act of 1940, as amended.
6. The undersigned hereby represents and warrants that all financial
statements of the undersigned heretofore delivered to the Lenders or the Agent
by or on behalf of the undersigned fairly present the financial condition of
the undersigned as of the respective dates thereof, and no material adverse
change has occurred in the financial conditions reflected therein since the
respective dates thereof. In addition, the undersigned covenants that so long
as any portion of the Debt remains outstanding and unpaid, the undersigned
will, unless otherwise consented to in writing by the Agent:
(a) furnish to the Agent, as soon as available, but in any
event within one hundred twenty (120) days next following the end of each
fiscal year of the undersigned, an audited balance sheet for such fiscal year,
and the related statements of income, shareholders equity, and cash flow for
such fiscal year, prepared in accordance with generally accepted accounting
principles and reviewed by Deloitte & Touche or such other independent
certified public accountant of recognized standing selected by the undersigned
and acceptable to the Agent, such statement to be accompanied by a certificate
signed by the chief financial officer or a vice president responsible for
financial administration of the undersigned certifying on the date thereof
that: (i) such financial statement fairly presents the financial condition of
the undersigned as of the date indicated and (ii) either that no default nor
event which upon notice or lapse of time or both would constitute a default
has occurred hereunder or, if such default exists, the nature thereof and the
period of time it has existed (a "CERTIFICATION");
(b) furnish to the Agent, within ten (10) days after
request, such further detailed financial and other information (including, but
not limited to, financial statements) as may be requested by the Agent with
respect to the undersigned, or any affiliate of, or entity controlled by the
undersigned, as of a date not earlier than that specified by the Agent in such
request, together with a Certification with respect thereto; and
(c) observe and perform, subject to the grace periods
provided therein, all of its obligations under each of the two credit
agreements (collectively, the "HFS CREDIT AGREEMENT") dated as of October, 2,
1996 between the undersigned and The Chase Manhattan Bank, as agent, as the
same may from time to time, have been, and may, from time to time, hereafter
be, modified, supplemented, renewed, replaced or refinanced, provided that in
the event The Chase Manhattan Bank or its successor(s) is no longer party to a
bank credit agreement with the undersigned, or if a bank credit agreement is
no longer utilized by the undersigned, the reference in this PARAGRAPH 6(C) to
the obligations of the undersigned under the HFS Credit Agreement shall be
deemed to mean obligations of the undersigned contained in the last HFS Credit
Agreement to which The Chase Manhattan Bank (or its successor(s)) was a party.
7. The Lenders, or the Agent on their behalf, in addition to any
right available to it under applicable law or any other agreement, shall have
the right, at their option, subject
4
<PAGE>
to the last sentence of PARAGRAPH 1 of this Guaranty, to set off against any
Liabilities (as hereinafter defined) all monies owed by the Lenders in any
capacity to the undersigned, whether or not due, and the Lenders shall, at
their option, be deemed to have exercised such right to set off and to have
made a charge against any such money immediately upon the occurrence of any
events of default set forth below, even though such charge is made or entered
on the books of the Lenders subsequent to those events. As used in this
Guaranty, the term "LIABILITIES" shall mean the payment of the Designated
Portion of the Debt and all other obligations of the undersigned under this
Guaranty, including fees, contracted with or acquired by the Lenders, whether
joint, several, absolute, contingent, secured, matured or unmatured.
8. All moneys available to the Agent on behalf of the Lenders for
application in payment or reduction of the Debt may be applied by the Agent in
such manner and in such amounts and at such time or times and in such order,
priority and proportions as the Agent may see fit to the payment or reduction
of such portion of the Debt as the Agent may elect.
9. The undersigned hereby expressly agrees that this Guaranty is
independent of, and in addition to, all collateral granted, pledged or
assigned under the Loan Documents, and the undersigned hereby consents that
from time to time, before or after any default by the Borrower, with or
without further notice to or assent from the undersigned:
(a) any security at any time held by or available to the
Lenders, or the Agent on their behalf, for any obligation of the Borrower, or
any security at any time held by or available to the Lenders, or the Agent on
their behalf, for any obligation of any other person or party primarily,
secondarily or otherwise liable for all or any portion of the Debt, any other
Liabilities and/or any other obligations of the Borrower or any other person
or party, other than the Lenders (or the Agent on their behalf), under any of
the Loan Documents ("OTHER OBLIGATIONS"), including any guarantor of the Debt
and/or of any of such Other Obligations, may be accelerated, settled,
exchanged, surrendered or released and the Lenders, or the Agent on their
behalf, may fail to set off and may release, in whole or in part, any balance
of any deposit account or credit on its books in favor of the Borrower, or of
any such other person or party;
(b) any obligation of the Borrower, or of any such other
person or party, may be changed, altered, renewed, extended, continued,
accelerated, surrendered, compromised, settled, waived or released in whole or
in part, or any default with respect thereto waived; and
(c) the Lenders, or the Agent on their behalf may extend
further credit in any manner whatsoever to the Borrower, and generally deal
with the Borrower or any of the abovementioned security, deposit account,
credit on its books or other person or party as the Lenders or the Agent may
see fit;
and the undersigned shall remain bound in all respects under this Guaranty,
without any loss of any rights by the Lenders, or the Agent on their behalf,
and without affecting the liability
5
<PAGE>
of the undersigned, notwithstanding any such exchange, surrender, release,
change, alteration, renewal, extension, continuance, compromise, waiver,
inaction, extension of further credit or other dealing. In addition, all
moneys available to the Lenders, or the Agent on their behalf, for application
in payment or reduction of the Debt and/or any Other Obligations may be
applied by the Agent in such manner and in such amounts and at such time or
times and in such order, priority and proportions as the Agent may see fit.
10. The undersigned hereby waives:
(a) notice of acceptance of this Guaranty and of the making
of the Loan or any advance thereof by the Lenders to the Borrower;
(b) except as set forth in the last sentence of PARAGRAPH 1
of this Guaranty, presentment and demand for payment of the Debt or any
portion thereof;
(c) protest and notice of dishonor or default to the
undersigned or to any other person or party with respect to the Debt or any
portion thereof; and
(d) except as set forth in the last sentence of PARAGRAPH 1
of this Guaranty, all other notices to which the undersigned might otherwise
be entitled.
11. If any of the following events should occur:
(a) default under any of the Loan Documents and its
continuance beyond any applicable notice and/or grace periods therein
contained;
(b) the undersigned violates any provision of this Guaranty;
(c) the undersigned commences any case, proceeding or other
action under any existing or future law of any jurisdiction, domestic or
foreign, relating to bankruptcy, insolvency, reorganization or relief of
debtors, or seeks to have an order for relief entered with respect to it, or
seeks to be adjudicated a bankrupt or insolvent, or seeks reorganization,
arrangement, adjustment, liquidation, dissolution, composition or other relief
with respect to it or its debts, or seeks the appointment of a receiver,
trustee, custodian or other similar official for it or for all or
substantially all of its property;
(d) the undersigned makes a general assignment for the
benefit of creditors;
(e) there is commenced against the undersigned, any case,
proceeding or other action of a nature referred to in subparagraph (c) above
or seeking the issuance of a warrant of attachment, execution, distraint or
similar process against all or any substantial part of its property, which
case, proceeding or other action results in the entry of an order for relief
or remains undismissed, undischarged or unbonded for a period of 60 days;
(f) the undersigned takes any action indicating its consent
to, approval of,
6
<PAGE>
or acquiescence in, or in furtherance of, any of the acts set forth in
subparagraphs (c) and (e) above;
(g) the undersigned admits in writing its inability to pay
its debts as they mature; or
(h) the undersigned terminates or dissolves or suspends its
usual business activities or conveys, sells, leases, transfers or otherwise
disposes of all or substantially all of its property, business or assets other
than in the ordinary course of business;
then, and in such event, the Lenders, or the Agent on their behalf, may
declare the Liabilities to be, and the same shall become, immediately due and
payable.
12. This is a guaranty of payment and not of collection and the
undersigned further waives any right to require that any action be brought
against the Borrower or any other person or party or to require that resort be
had to any security or to any balance of any deposit account or credit on the
books of the Lenders, or any of them, or the Agent in favor of the Borrower or
any other person or party. Any payment on account of or reacknowledgment of
the Debt by the Borrower, or any other party liable therefor, shall be deemed
to be made on behalf of the undersigned and shall serve to start anew the
statutory period of limitations applicable to the Debt.
13. Each reference herein to the Lenders and the Agent shall be
deemed to include their respective successors and assigns, in whose favor the
provisions of this Guaranty shall also inure. Each reference herein to the
undersigned shall be deemed to include the successors and assigns of the
undersigned, all of whom shall be bound by the provisions of this Guaranty,
provided, however, that the undersigned shall in no event nor under any
circumstance have the right, without obtaining the prior written consent of
the Agent, to assign or transfer the undersigned's obligations and liabilities
under this Guaranty, in whole or in part, to any other person, party or
entity.
14. If any party hereto shall be a corporation, the agreements and
obligations on the part of the undersigned herein contained shall remain in
force and application notwithstanding the merger, consolidation,
reorganization or absorption thereof, and the term "undersigned" shall include
such new entity, but the old entity shall not thereby be released from any
obligations or liabilities hereunder.
15. No delay on the part of the Lenders, or the Agent on their
behalf, in exercising any right or remedy under this Guaranty or failure to
exercise the same shall operate as a waiver in whole or in part of any such
right or remedy. No notice to or demand on the undersigned shall be deemed to
be a waiver of the obligations of the undersigned or of the right of the Agent
or the Lenders to take further action without notice or demand as provided in
this Guaranty. No course of dealing between the undersigned and the Agent or
the Lender shall change, modify or discharge, in whole or in part, this
Guaranty or any obligations of the undersigned hereunder.
7
<PAGE>
16. This Guaranty may only be modified, amended, changed or
terminated by an agreement in writing signed by the Agent, on behalf of the
Lenders, and the undersigned. No waiver of any term, covenant or provision of
this Guaranty shall be effective unless given in writing by the Agent (on
behalf of the Lenders) and if so given by the Agent shall only be effective in
the specific instance in which given. The execution and delivery hereafter to
the Agent, on behalf of the Lenders, by the undersigned of a new instrument of
guaranty or any reaffirmation of guaranty, of whatever nature, shall not
terminate, supersede or cancel this instrument, unless expressly so provided
therein, and all rights and remedies of the Agent and the Lenders hereunder or
under any instrument of guaranty hereafter executed and delivered to the Agent
by the undersigned shall be cumulative and may be exercised singly or
concurrently.
17. The undersigned acknowledges that this Guaranty and the
undersigned's obligations under this Guaranty are and shall at all times
continue to be absolute, irrevocable and unconditional in all respects, and
shall at all times be valid and enforceable irrespective of any other
agreements or circumstances of any nature whatsoever which might otherwise
constitute a defense to this Guaranty and the obligations of the undersigned
under this Guaranty or the obligations of any other person or party
(including, without limitation, the Borrower) relating to this Guaranty or the
obligations of the undersigned hereunder or otherwise with respect to the
Debt, including, but not limited to, the realization upon any collateral
given, pledged or assigned as security for all or any portion of the Debt, or
the filing of a petition under Title 11 of the United States Code with regard
to the Borrower or the undersigned, or the commencement of an action or
proceeding for the benefit of the creditors of the Borrower or the
undersigned, or the obtaining by the Agent, on behalf of the Lenders, of title
to any collateral given, pledged or assigned as security for the Debt by
reason of the foreclosure or enforcement of any Collateral Documents, the
acceptance of a deed or assignment in lieu of foreclosure or sale, or
otherwise. This Guaranty sets forth the entire agreement and understanding of
the Agent, on behalf of the Lenders, and the undersigned with respect to the
matters covered by this Guaranty and the undersigned acknowledges that no oral
or other agreements, understandings, representations or warranties exist with
respect to this Guaranty or with respect to the obligations of the undersigned
under this Guaranty, except those specifically set forth in this Guaranty.
18. This Guaranty has been validly authorized, executed and delivered
by the undersigned. The undersigned represents and warrants to the Agent and
the Lenders that it has the corporate power to do so and to perform its
obligations under this Guaranty and this Guaranty constitutes the legally
binding obligation of the undersigned fully enforceable against the
undersigned in accordance with the terms hereof, except that enforcement may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights generally and by general
principles of equity (regardless of whether enforcement is sought in equity or
at law). The undersigned further represents and warrants to the Agent and the
Lenders that:
(a) neither the execution and delivery of this Guaranty nor
the consummation of the transactions contemplated hereby nor compliance with
the terms and
8
<PAGE>
provisions hereof will violate any applicable provision of law or any
applicable regulation or other manifestation of governmental action; and
(b) all necessary approvals, consents, licenses,
registrations and validations of any governmental regulatory body, including,
without limitation, approvals required to permit the undersigned to execute
and carry out the provisions of this Guaranty, for the validity of the
obligations of the undersigned hereunder and for the making of any payment or
remittance of any funds required to be made by the undersigned under this
Guaranty, have been obtained and are in full force and effect.
19. The undersigned hereby agrees with the Agent and the Lenders that
it will not exercise any rights of subrogation (whether contractual, under
Section 509 of the Title 11 of the United States Code, or otherwise) which may
at any time otherwise have either as a result of payments made by it under
this Guaranty or otherwise, until all obligations of the undersigned under
this Guaranty (for purposes of this PARAGRAPH 19, determined without regard to
any limitations on the aggregate amount guaranteed) have been paid in full in
cash. In the event either a petition is filed under said Title 11 of the
United States Code with regard to the Borrower or the commencement of an
action or proceeding for the benefit of the creditors of the Borrower, this
Guaranty shall at all times thereafter remain effective in regard to any
payments or other transfers of assets to the Agent, on behalf of the Lenders,
received from or on behalf of the Borrower prior to notice of termination of
this Guaranty and which are or may be held voidable on the grounds of
preference or fraud, whether or not the Debt has been paid in full. The
provisions of this PARAGRAPH 19 shall survive the term of this Guaranty and
the payment in full of the Debt and all other Liabilities and the termination
of any commitment to make any further advances of proceeds of the Loan
pursuant to the Credit Agreement.
20. Any notice, request or demand given or made under this Guaranty
shall be in writing and shall be hand delivered or sent by Federal Express or
other reputable courier service or by postage prepaid registered or certified
mail, return receipt requested, and shall be deemed given (a) when received at
the following addresses if hand delivered or if sent by Federal Express or
other reputable courier service, and (b) three (3) business days after being
postmarked and addressed as follows if sent by registered or certified mail,
return receipt requested:
IF TO THE AGENT OR THE LENDERS:
The Chase Manhattan Bank
380 Madison Avenue
New York, New York 10017
Attention: Denise Williams, Portfolio Management Officer
9
<PAGE>
WITH A COPY TO:
The Chase Manhattan Bank
Legal Department
380 Madison Avenue
New York, New York 10017
Attention: William Viets, Esq.
and with a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Att: Stephen R. Senie, Esq.
IF TO THE UNDERSIGNED:
Six Sylvan Way
Parsippany, New Jersey 07054
Attention: James E. Buckman, Esq.
10
<PAGE>
WITH A COPY TO:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attention: James M. Douglas, Esq.
it being understood and agreed that each party will use reasonable efforts to
send copies of any notices to the addresses marked "WITH A COPY TO"
hereinabove set forth; provided, however, that failure to deliver such copy or
copies shall have no consequence whatsoever to the effectiveness of any notice
made to the undersigned, the Agent, or the Lenders. Each party to this
Guaranty may designate a change of address by notice given, as herein
provided, to the other party fifteen (15) days prior to the date such change
of address is to become effective.
21. This Guaranty is, and shall be deemed to be, a contract entered
into under and pursuant to the laws of the State of New York and shall be in
all respects governed, construed, applied and enforced in accordance with the
laws of the State of New York without regard to principles of conflicts of
laws. The undersigned acknowledges and agrees that this Guaranty is, and is
intended to be, an instrument for the payment of money only, as such phrase is
used in ss.3213 of the Civil Practice Law and Rules of the State of New York,
and the undersigned has been fully advised by its counsel of the rights and
remedies of the Agent (on behalf of the Lenders) pursuant to said ss.3213.
22. The undersigned agrees to submit to personal jurisdiction in the
State of New York in any action or proceeding arising out of this Guaranty. In
furtherance of such agreement, the undersigned hereby agrees and consents that
without limiting other methods of obtaining jurisdiction, personal
jurisdiction over the undersigned in any such action or proceeding may be
obtained within or without the jurisdiction of any court located in New York
and that any process or notice of motion or other application to any such
court in connection with any such action or proceeding may be served upon the
undersigned by registered or certified mail to, or by personal service at, the
last known address of the undersigned, whether such address be within or
without the jurisdiction of any such court. The undersigned hereby further
agrees that the venue of any litigation arising in connection with the Debt or
in respect of any of the obligations of the undersigned under this Guaranty,
shall, to the extent permitted by law, be in New York County.
23. The undersigned absolutely, unconditionally and irrevocably
waives any and all right to assert or interpose any defense (other than the
final and indefeasible payment in full of the Debt), setoff, counterclaim or
crossclaim of any nature whatsoever with respect to this Guaranty or the
obligations of the undersigned under this Guaranty, or the obligations of any
other person or party (including without limitation, the Borrower) relating to
this Guaranty, or the obligations of the undersigned hereunder or otherwise
with respect to the
11
<PAGE>
Loan in any action or proceeding brought by the Lenders, or the Agent on their
behalf, to collect the Debt, or any portion thereof, or to enforce the
obligations of the undersigned under this Guaranty (provided, however, that
the foregoing shall not be deemed a waiver of the right of the undersigned to
assert any compulsory counterclaim maintained in a court of the United States,
or of the State of New York if such counterclaim is compelled under local law
or rule of procedure, nor shall the foregoing be deemed a waiver of the right
of the undersigned to assert any claim which would constitute a defense,
setoff, counterclaim or crossclaim of any nature whatsoever against the
Lenders or the Agent in any separate action or proceeding). The undersigned
hereby undertakes and agrees that this Guaranty shall remain in full force and
effect for all of the obligations and liabilities of the undersigned
hereunder, notwithstanding the maturity of the Loan, whether by acceleration,
scheduled maturity or otherwise.
24. The obligations and liabilities of the undersigned under this
Guaranty are in addition to the obligations and liabilities of the undersigned
under the Other Guaranties (as hereinafter defined). The discharge of any or
all of the undersigned's obligations and liabilities under any one or more of
the Other Guaranties by the undersigned or by reason of operation of law or
otherwise shall in no event or under any circumstance constitute or be deemed
to constitute a discharge, in whole or in part, of the undersigned's
obligations and liabilities under this Guaranty. Conversely, the discharge of
any or all of the undersigned's obligations and liabilities under this
Guaranty by the undersigned or by reason of operation of law or otherwise
shall in no event or under any circumstance constitute or be deemed to
constitute a discharge, in whole or in part, of the undersigned's obligations
and liabilities under any of the Other Guaranties. The term "OTHER GUARANTIES"
as used herein shall mean any other guaranty of payment, guaranty of
performance, completion guaranty, indemnification agreement or other guaranty
or instrument creating any obligation or undertaking of any nature whatsoever
(other than this Guaranty) now or hereafter executed and delivered by the
undersigned to the Lenders, or the Agent on their behalf, in connection with
the Loan.
25. This Guaranty may be executed in one or more counterparts by some
or all of the parties hereto, each of which counterparts shall be an original
and all of which together shall constitute a single agreement of guaranty.
12
<PAGE>
26. THE UNDERSIGNED HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES,
AND THE AGENT (ON BEHALF OF THE LENDERS) BY ITS ACCEPTANCE OF THIS GUARANTY
IRREVOCABLY AND UNCONDITIONALLY WAIVES, ANY AND ALL RIGHT TO TRIAL BY JURY IN
ANY ACTION, SUIT OR COUNTERCLAIM ARISING IN CONNECTION WITH, OUT OF OR
OTHERWISE RELATING TO THIS GUARANTY.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Guaranty the day and year first above set forth.
HFS INCORPORATED
a Delaware corporation
By: /s/ Joel R. Buckberg
---------------------------------
Name: Joel R. Buckberg
Title: Senior Vice President -
Legal
THE CHASE MANHATTAN BANK, AS AGENT
for purposes of the last sentence
of paragraph 1
By: /s/ David A. Juge
------------------------------------------------
Name: David A. Juge
Title: Vice President
13
<PAGE>
EXHIBIT 11
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------------------------------
1996 1995 1994
---------------------- -------------------- --------------------
FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
---------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income............................... 169,584 169,584 79,730 79,730 53,489 53,489
Convertible debt interest and
amortization of deferred loan costs,
net of tax ............................. 4,500 4,500 4,505 4,505 -- --
---------- ---------- --------- --------- --------- ---------
Net income as adjusted................... $174,084 $174,084 $ 84,235 $ 84,235 $ 53,489 $ 53,489
========== ========== ========= ========= ========= =========
Weighted average common shares
outstanding............................. 116,123 116,123 97,698 97,698 90,334 90,334
Incremental shares for outstanding stock
options and warrants.................... 10,798 10,935 7,853 9,690 7,414 7,414
Contingent shares........................ -- -- -- -- 3,126 3,126
Convertible debt ........................ 8,252 8,252 8,266 8,266 -- --
---------- ---------- --------- --------- --------- ---------
Weighted average common and common
equivalent shares outstanding .......... 135,173 135,310 113,817 115,654 100,874 100,874
========== ========== ========= ========= ========= =========
Net income per share..................... $ 1.29 $ 1.29 $ .74 $ .73 $ .53 $ .53
========== ========== ========= ========= ========= =========
</TABLE>
<PAGE>
EXHIBIT 11.1
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
----------------------------------------------
1996 1995
---------------------- ----------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income ...................................... $201,346 $201,346 $104,144 $104,144
Convertible debt interest and amortization of
deferred loan costs, net of tax................. 4,500 4,500 4,505 4,505
---------- ---------- ---------- ----------
Net income as adjusted........................... $205,846 $205,846 $108,649 $108,649
========== ========== ========== ==========
Weighted average common shares outstanding ...... 131,548 131,548 101,480 101,480
Incremental shares for outstanding stock options
and warrants.................................... 10,798 10,935 7,853 9,690
Convertible debt................................. 8,252 8,252 8,266 8,266
---------- ---------- ---------- ----------
Weighted average common and common equivalent
shares outstanding.............................. 150,598 150,735 117,599 119,436
---------- ---------- ---------- ----------
Net income....................................... $ 1.37 $ 1.37 $ .92 $ .91
========== ========== ========== ==========
</TABLE>
NOTE: The pro forma computation of per share earnings reflects the following
transactions and the related dates of completion assuming all
transactions occurred on January 1, 1995: the distribution of National
Lodging Corp. (November 22, 1994), the acquisitions of the Century 21
franchise system (August 1, 1995), the CENTURY 21 non-owned regions
(completed in the second quarter of 1996), the Travelodge franchise
system (January 23, 1996) and the ERA franchise system (February 12,
1996), the acquisition by merger of Central Credit, Inc. (May 11, 1995)
and the financing of acquisitions provided by the issuance of $240
million 4 3/4% convertible senior notes (February 22, 1996), the
acquisition of the common stock of Coldwell Banker Corporation (May 31,
1996) and the related contribution of Coldwell Banker's owned real
estate brokerage offices to a newly created independent trust; the
receipt of proceeds from an offering of HFS' common stock to the extent
necessary to fund (a) the acquisition of Coldwell Banker and the
related repayment of indebtedness and acquisition expenses and (b) the
cash consideration portion in the Avis acquisition, the acquisition of
Avis, Inc. (October 17, 1996), and the issuance of HFS common stock as
partial consideration for Avis and; the acquisition of Resort
Condominiums International, Inc. and its affiliates (November 12,
1996), and the issuance of HFS common stock as partial consideration
for RCI.
<PAGE>
EXHIBIT 12
HFS INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
Income before income taxes,
minority interest, and
extraordinary loss................ $28,703 $60,668 $ 90,643 $136,570 $284,393
Plus: Fixed charges................ 26,077 21,730 20,182 23,456 40,731
Less: Capitalized interest ........ -- (440) (246) -- (560)
--------- --------- ---------- ---------- ----------
Earnings available to cover fixed
charges........................... $54,780 $81,958 $110,579 $160,026 $324,564
========= ========= ========== ========== ==========
Fixed charges (1):
Interest, including amortization
of deferred loan costs............ $25,117 $20,234 $ 18,685 $ 21,789 $ 34,812
Capitalized interest............... -- 440 246 -- 560
Interest portion of rental
payments ......................... 960 1,056 1,251 1,667 5,539
--------- --------- ---------- ---------- ----------
Total fixed charges................ $26,077 $21,730 $ 20,182 $ 23,456 $ 40,731
========= ========= ========== ========== ==========
Ratio of earnings to fixed
charges........................... 2.10x 3.77x 5.48x 6.82x 7.97x
========= ========= ========== ========== ==========
</TABLE>
- ------------
(1) Fixed charges consist of interest expense on all indebtedness
(including amortization of deferred financing costs) and the portion of
operating lease rental expense that is representative of the interest
factor (deemed to be one-third of operation lease rentals).
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of
Name Organization
- ---- ---------------
Affinity Systems Ltd. United Kingdom
Agency Rent A Car Canada, Inc. Canada
Agency Rent A Car Pty. Ltd. Australia
Agency Rent A Car Systems, Inc. Delaware
AIL Assurances Ltd. West Indies
Altra Auto Rental Limited New Zealand
Arbitra S.A. Argentina
Auto Accident Consultants Pty. Limited Australia
Avis Asia and Pacific, Limited Delaware
Avis Automoveis de Alguel Ltda. Brazil
Avis Caribbean, Limited Delaware
Avis Enterprises, Inc. Delaware
Avis, Inc. Delaware
Avis International, Ltd. Delaware
Avis Leasing Corporation Delaware
Avis Locacaeo de Veiculos Ltda. Brazil
Avis Lube, Inc. Delaware
Avis Management Pty. Limited Australia
Avis Management Services, Limited Delaware
Avis Rent a Car Limited New Zealand
Avis Rent A Car (Hong Kong) Ltd. Hong Kong
Avis Rent A Car de Puerto Rico, Inc. Puerto Rico
Avis Rent A Car Limited Fiji
Avis Rent A Car Limited Vanuaru
Avis Rent A Car Sdn. Bhd. Malaysia
Avis Rent A Car Sdn. Bhd. Singapore
Avis Rent A Car System, Inc. Delaware
Avis Rent A Carro, C.A. Venezuela
Avis Services, Inc. Delaware
Aviscar Inc. Canada
C21 Holding Corp. Delaware
Central Credit, Inc. Nevada
Century 21 Real Estate Corporation Delaware
Chaconne Pty. Limited Australia
Coldwell Banker Affiliates, Inc. Delaware
Coldwell Banker Canada Partners, Inc. Delaware
Coldwell Banker Commercial Affiliates, Inc. Delaware
Coldwell Banker Corporation Delaware
Coldwell Banker Escrow Service, Inc. California
Coldwell Banker Funding Corporation Delaware
Coldwell Banker Mortgage Partners, Inc. Delaware
Coldwell Banker Moving Services, Inc. California
-1-
<PAGE>
Jurisdiction of
Name Organization
- ---- ---------------
Coldwell Banker Real Estate Holdings, Inc. Delaware
Coldwell Banker Real Property Services Corporation Delaware
Coldwell Banker Relocation Services, Inc. New York
Coldwell Banker Relocation Services Limited United Kingdom
Coldwell Banker Residential Affiliates, Inc. California
Coldwell Banker Settlement and Title Services, Inc. Virginia
Coldwell Banker Settlement and Title Services of Maryland, Inc. Virginia
Constellation Reinsurance Company, Limited Barbados
CTM Holding Corp. Delaware
Days Inns of America, Inc. Delaware
Electronic Home Marketing Systems, Ltd. Delaware
Electronic Realty Associates of Canada, Inc. Canada
Electronic Realty Associates of Ohio, Inc. Ohio
Endless Vacation, Inc. Indiana
ERA France Holding Co., Inc. Delaware
ERA France, S.A. France
ERA Franchise Systems, Inc. Delaware
ERA General Agency Corporation Missouri
ERA Home Protection Co., Inc. California
ERA Home Protection of Virginia Virginia
ERA Home Protection Plans, Inc. Delaware
ERA of Florida, Inc. Florida
EVF FilmCorp Indiana
Executrans Canada Limited Canada
Executrans, Inc. New York
General Franchise Systems, Inc. Delaware
Global Excess and Reinsurance Ltd. Bermuda
Guardian Title Company California
HFS Asset Co., Inc. Delaware
HFS Canada, Inc. New Brunswick,
Can.
HFS Car Rental Holdings, Inc. Delaware
HFS Gaming Corp. Delaware
HFS Global Services, B.V. Netherlands
HFS Inv., Inc. New York
HFS Owned Brokerage Co., Inc. Delaware
Holiday Homes International Corp. Delaware
Home Protection Plans, Inc. Delaware
Hotel Franchising Limited Partnership d/b/a Wingate Inns, L.P. Delaware
Howard Johnson International, Inc. Delaware
Intercambios Endless Vacation, IEV, Inc. Venezuela
Knights Franchise Systems, Inc. Delaware
Neighborhood Brokerage Office Corporation California
Pathfinder Insurance Company Colorado
PF Claims Mgt. Ltd. Delaware
Preferred Holidays, Inc. Delaware
Previews Incorporated New York
Ramada Franchise Systems, Inc. Delaware
RCI (Deutschland) GMBH Germany
RCI Argentina, Inc. Indiana
RCI Asia-Pacific, Pte., Ltd. Indiana
RCI Australia, Inc. Indiana
RCI Australia Travel, Inc. Indiana
RCI Benelux S.A. Belgium
-2-
<PAGE>
Jurisdiction of
Name Organization
- ---- ---------------
RCI Brazil Ltda. Brazil
RCI Canada Inc. Indiana
RCI Chile, Inc. Indiana
RCI Colombia, Inc. Indiana
RCI Consulting, Inc. Indiana
RCI de Venezuela C.A. and Subsidiary Venezuela
RCI Egypt, Limited Egypt
RCI Espana S.A. Spain
RCI Europe, Ltd. United Kingdom
RCI Finland OY Finland
RCI France S.A.R.L. France
RCI Greece S.A. Greece
RCI Holdings One, Inc. Indiana
RCI Holdings Two, Inc. Delaware
RCI India Pvt. Ltd. India
RCI Israel, Inc. Indiana
RCI Italia SRL Italy
RCI Japan, Inc. Indiana
RCI Japan, K.K. Japan
RCI Korea, Inc. Indiana
RCI Ltd. New Zealand
RCI Malaysia, Inc. Indiana
RCI Management, Inc. Indiana
RCI Mexico S. de R.L. de C.V. Mexico
RCI New Zealand, Ltd. Indiana
RCI New Zealand Travel, Ltd. Indiana
RCI Resales Australia, Inc. Indiana
RCI Russia, Inc. Indiana
RCI Scandinavia A/S Denmark
RCI SDIT Ltda. Portugal
RCI Thailand, Inc. Indiana
RCI Tourism Development India United Kingdom
RCI Travel, Inc. Michigan
RCI Viagens e Turismo Ltda. Portugal
Relocation 1, Inc. Delaware
Rental Car System Holdings, Inc. Delaware
Reserve Claims Management Co. Delaware
Resort Capital Corporation Delaware
Resort Computer Corporation Colorado
Resort Condominiums International, Inc. Indiana
Resort Condominiums International, Ltd. New Zealand
Royal Home Protection Plan, Inc. Delaware
Servicios Avis S.A. Mexico
Super 8 Motels, Inc. South Dakota
TM Acquisition Corp. Delaware
Travel Club S.A. Spain
Travel Pleasure, Limited New Zealand
Travelodge Holding, Inc. Delaware
-3-
<PAGE>
Jurisdiction of
Name Organization
- ---- --------------
Travelodge Hotels, Inc. Delaware
Vacation Care Computing, Ltd. United Kingdom
Villager Franchise Systems, Inc. Delaware
Virgin Islands Enterprises, Inc. Virgin Islands
W.T.H. Pty. Limited Australia
We Try Harder Japan Co., Ltd. Japan
We Try Harder Pty. Limited Australia
West Indies Car Rental Limited Jamaica
Wingate Financial LLC Delaware
Wizard Co., Inc. Delaware
Wizcom International, Ltd. Delaware
Worldwide Relocation Management, Inc. California
WTH Canada, Inc. Canada
Zam, Inc. West Virginia
-4-
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 33-56354, 33-70632, 33-72752, 33-83956, 33-94756, 333-06733, and 333-06939
on Form S-8, Registration Statements No. 333-11029, 333-11031, and 333-17453
of the Company on Form S-3, and Registration Statement No. 333-34021 on
Form S-4 of HFS Incorporated (the "Company") of our report dated March 31, 1997,
appearing in the Annual Report on Form 10-K of the Company related to the
consolidated balance sheets of HFS Incorporated and subsidiaries as of
December 31, 1996 and 1995, and the related statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1996.
Deloitte & Touche LLP
Parsippany, New Jersey
March 31, 1997
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 33-56354, 33-70632, 33-72752, 33-83956, 33-94756, 333-06733, and 333-06939
on Form S-8, Registration Statements No. 333-11029, 333-11031, and 333-17453
on Form S-3, and Registration Statement No. 333-34021 on Form S-4 of
HFS Incorporated (the "Company") of our report dated January 24, 1997,
appearing in the Annual Report on Form 10-K of HFS Incorporated, related to the
combined financial position of Rental Car Operations of Avis, Inc. at
December 31, 1996 and results of their operations and their cash flows for
the period October 17, 1996 (Date of Acquisition) to December 31, 1996.
Deloitte & Touche LLP
New York, New York
March 31, 1997
<PAGE>
Exhibit 23.3
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of Registration Statements on Form S-3 (Nos. 333-11029,
333-11031, and 333-17453), Registration Statement No. 333-34021 on Form S-4
and Form S-8 (Nos. 33-56354, 33-70632, 33-72752, 33-83956, 333-06733,
33-94756, 333-03532 and 333-06939) of HFS, Inc. of our report dated April 25,
1996 relating to the consolidated financial statements of Avis, Inc., which
appears in the Current Report on Form 8-K as amended of HFS, Inc. dated
August 29, 1996.
Price Waterhouse LLP
New York, New York
March 31, 1997
