-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NetMztBCnlsbOgo87SKewpLCDZwz8wHoOhED2NsSBwkSxaRbq8D6sZyC7Q8Di7Pg fVv/3JtEaPnqB8/hYssAhA== 0000950123-96-004808.txt : 19960903 0000950123-96-004808.hdr.sgml : 19960903 ACCESSION NUMBER: 0000950123-96-004808 CONFORMED SUBMISSION TYPE: 10-12B/A PUBLIC DOCUMENT COUNT: 23 FILED AS OF DATE: 19960830 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHOICE HOTELS HOLDINGS INC CENTRAL INDEX KEY: 0001018146 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-12B/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11915 FILM NUMBER: 96623951 BUSINESS ADDRESS: STREET 1: 10750 COLUMBIA PIKE CITY: SILVER SPRING STATE: MD ZIP: 20901 BUSINESS PHONE: 3015935600 10-12B/A 1 CHOICE HOTELS HOLDINGS, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10/A ------------------------ GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ CHOICE HOTELS HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 52-1985619 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 10750 COLUMBIA PIKE 20901 SILVER SPRING, MARYLAND (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (301) 979-5000 ------------------------ SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED - -------------------------------------------------------------------------------------------- COMMON STOCK, PAR NEW YORK STOCK EXCHANGE VALUE $.01 PER SHARE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 ITEM 1. BUSINESS The information required by this item is contained under the sections "Summary," "Introduction," "Risk Factors," "The Distribution," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" of the Information Statement dated , 1996 (the "Information Statement") attached hereto as Exhibit 2.01 and such sections are incorporated herein by reference. ITEM 2. FINANCIAL INFORMATION The information required by this item is contained under the sections "Summary," "Capitalization," "Selected Historical Financial Data," "Pro Forma Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Information Statement and such sections are incorporated herein by reference. ITEM 3. PROPERTIES The information required by this item is contained under the section "Business" of the Information Statement and such section is incorporated herein by reference. ITEM 4. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is contained under the section "Security Ownership of Principal Stockholders and Management" of the Information Statement and such section is incorporated herein by reference. ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS The information required by this item is contained under the sections "Management -- Executive Officers of the Company" and "The Board of Directors" of the Information Statement and such sections are incorporated herein by reference. ITEM 6. EXECUTIVE COMPENSATION The information required by this item is contained under the sections "Management -- Compensation of Executive Officers" and "The Board of Directors" of the Information Statement and such sections are incorporated herein by reference. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is contained under the sections "Relationship Between Manor Care and the Company After the Distribution" and "Certain Relationships and Related Transactions" of the Information Statement and such sections are incorporated herein by reference. ITEM 8. LEGAL PROCEEDINGS The information required by this item is contained under the sections "Business -- Legal Proceedings" and "Business -- Environmental Matters" and in the Notes to Combined Financial Statements of the Company under the heading "Commitments and Contingencies" which are included in the Information Statement and incorporated herein by reference. ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 3 The information required by this item is contained under the sections "The Distribution -- Listing and Trading of Shares of the Company's Common Stock," "Dividend Policy," "Security Ownership of Principal Stockholders and Management" and "Description of Capital Stock of the Company" of the Information Statement and such sections are incorporated herein by reference. ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES On 1996, the Registrant issued and sold 10 shares of its common stock to Manor Care, Inc. for $.10 in order to become a wholly-owned subsidiary of Manor Care, Inc. The sale was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED The information required by this item is contained under the sections "The Distribution -- Listing and Trading of Shares of the Company's Common Stock," "Description of Capital Stock of the Company" and "Purposes and Effects of Certain Charter Provisions" of the Information Statement and such sections are incorporated herein by reference. ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS The information required by this item is contained under the section "Liability and Indemnification of Officers and Directors" of the Information Statement and such section is incorporated herein by reference. ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is contained (i) under the sections "Summary," "Capitalization," "Selected Historical Financial Data," "Pro Forma Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Information Statement and such sections are incorporated herein by reference and (ii) in the Combined Financial Statements and Supplemental Schedules incorporated by reference in Item 15 hereof, all of which are incorporated herein by reference. ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements The following Financial Statements of the Company are included in Exhibit 2.01 hereto and incorporated herein by reference: (i) Combined Financial Statements -- Report of Arthur Andersen LLP, Independent Public Accountants, dated June 28, 1996; -- Combined Balance Sheets as of May 31, 1995 and May 31, 1996; -- Combined Statements of Income for each of the fiscal years in the three-year period ended May 31, 1996; -- Combined Statements of Cash Flows for each of the fiscal years in the three-year period ended May 31, 1996; -- Notes to Combined Financial Statements. 2 4 The following supplemental schedule of the Company is included in Exhibit 99.01 hereto and incorporated herein by reference. (ii) Supplemental Schedule -- Schedule II -- Valuation and Qualifying Accounts.
(b) Exhibits
EXHIBIT NUMBER DESCRIPTION ------- -------------------------------------------------------------------------- 2.01 Information Statement dated , 1996* 3.01 Form of Restated Certificate of Incorporation of the Registrant* (attached to Information Statement as Appendix A) 3.02 Form of Amended By-laws of the Registrant* 4.01 Form of Common Stock certificate** 10.01 Form of Distribution Agreement dated , 1996 between Manor Care, Inc. and the Registrant*** 10.02 Form of Trademark Agreement, dated , 1996, between Manor Care, Inc. and the Registrant* 10.03 Form of Assignment of Marks Agreement dated , 1996 between Manor Care Hotels International, Inc. and Choice Hotels France, S.A.* 10.04 Form of Time Sharing Agreement dated , 1996 between Manor Care, Inc. and the Registrant* 10.05 Form of Corporate Services Agreement, dated , 1996, between Manor Care, Inc. and the Registrant* 10.06 Form of Employee Benefits Administration Agreement, dated , 1996, between Manor Care, Inc. and the Registrant* 10.07 Form of Employee Benefits and Other Employment Matters Allocation Agreement, dated , 1996, between Manor Care, Inc. and the Registrant* 10.08 Form of Office Lease dated , 1996 between Manor Care, Inc. and the Registrant* 10.09 Form of Office Lease dated , 1996 between Manor Care, Inc. and the Registrant* 10.10 Form of Loan Agreement dated , 1996 between MNR Finance Corp. and the Registrant** 10.11 Form of Procurement Agreement, dated , 1996, between Manor Care, Inc. and the Registrant* 10.12 Form of Risk Management Consulting Services Agreement, dated , 1996, between Manor Care, Inc. and the Registrant* 10.13 Form of Tax Administration Agreement, dated , 1996, between Manor Care, Inc. and the Registrant* 10.14 Form of Tax Sharing Agreement, dated , 1996, between Manor Care, Inc. and the Registrant* 10.15 Employment Agreement, dated September 1, 1995, between Manor Care, Inc. and Donald Landry* 10.16 Form of Assignment Agreement, dated , 1996 among Manor Care, Inc., the Registrant and Donald Landry.* 10.17 Employment Agreement dated , 1996 between the Registrant and Stewart Bainum, Jr.** 10.18 Agreement, dated June 1, 1996 among the Registrant, Manor Care, Inc. and Robert C. Hazard, Jr.*
3 5
EXHIBIT NUMBER DESCRIPTION ------- -------------------------------------------------------------------------- 10.19 Agreement, dated June 1, 1996, among the Registrant, Manor Care Inc. and Gerald W. Petitt* 10.20 Form of Choice Hotels International, Inc. Supplemental Executive Retirement Plan** 10.21 Form of Choice Hotels International, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan** 10.22 Form of Choice Hotels International, Inc. 1996 Non-Employee Director Stock Compensation Plan** 10.23 Form of Choice Hotels International, Inc. 1996 Long-Term Incentive Plan** 12.01 Statement re: computation of ratio of earnings to fixed charges* 21.01 Subsidiaries of the Registrant* 24.01 Power of Attorney*** 27.01 Financial Data Schedule* 99.01 Schedule II -- Valuation and Qualifying Accounts*
- --------------- * Filed herewith. ** To be filed by amendment. *** Previously filed. 4 6 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. CHOICE HOTELS HOLDINGS, INC. Date: August 30, 1996 By: * -------------------------------------- Name: Stewart Bainum, Jr. Title: Chief Executive Officer * /s/ JAMES H. REMPE --------------------------------------------------- James H. Rempe Attorney-in-Fact 5 7 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------ ------------------------------------------------------------------------ 2.01 Information Statement dated , 1996*........................... 3.01 Form of Restated Certificate of Incorporation of the Registrant* (attached to Information Statement as Appendix A)....................... 3.02 Form of Amended By-laws of the Registrant*.............................. 4.01 Form of Common Stock certificate*....................................... 10.01 Form of Distribution Agreement dated , 1996 between Manor Care, Inc. and the Registrant*.......................................... 10.02 Form of Trademark Agreement, dated , 1996, between Manor Care, Inc. and the Registrant**............................................... 10.03 Form of Assignment of Marks Agreement dated , 1996 between Manor Care Hotels International, Inc. and Choice Hotels France, S.A.*... 10.04 Form of Time Sharing Agreement dated , 1996 between Manor Care, Inc. and the Registrant*.......................................... 10.05 Form of Corporate Services Agreement, dated , 1996, between Manor Care, Inc. and the Registrant*.................................... 10.06 Form of Employee Benefits Administration Agreement, dated , 1996, between Manor Care, Inc. and the Registrant*...................... 10.07 Form of Employee Benefits and Other Employment Matters Allocation Agreement, dated , 1996, between Manor Care, Inc. and the Registrant*............................................................. 10.08 Form of Office Lease dated , 1996 between Manor Care, Inc. and the Registrant*......................................................... 10.09 Form of Office Lease dated , 1996 between Manor Care, Inc. and the Registrant*............................................................. 10.10 Form of Loan Agreement dated , 1996 between MNR Finance Corp. and the Registrant**.................................................... 10.11 Form of Procurement Agreement, dated , 1996, between Manor Care, Inc. and the Registrant*.......................................... 10.12 Form of Risk Management Consulting Services Agreement, dated , 1996, between Manor Care, Inc. and the Registrant*...................... 10.13 Form of Tax Administration Agreement, dated , 1996, between Manor Care, Inc. and the Registrant*.................................... 10.14 Form of Tax Sharing Agreement, dated , 1996, between Manor Care, Inc. and the Registrant*.......................................... 10.15 Employment Agreement, dated September 1, 1995, between Manor Care, Inc. and Donald Landry*...................................................... 10.16 Form of Assignment Agreement, dated , 1996 among Manor Care, Inc., the Registrant and Donald Landry.*................................ 10.17 Employment Agreement dated , 1996 between the Registrant and Stewart Bainum, Jr.**................................................... 10.18 Agreement, dated June 1, 1996 among the Registrant, Manor Care, Inc. and Robert C. Hazard, Jr.*.................................................. 10.19 Agreement, dated June 1, 1996, among the Registrant, Manor Care Inc. and Gerald W. Petitt*.......................................................
8
EXHIBIT NUMBER DESCRIPTION - ------ ------------------------------------------------------------------------ 10.20 Form of Choice Hotels International, Inc. Supplemental Executive Retirement Plan**....................................................... 10.21 Form of Choice Hotels International, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan**.................. 10.22 Form of Choice Hotels International, Inc. 1996 Non-Employee Director Stock Compensation Plan**............................................... 10.23 Form of Choice Hotels International, Inc. 1996 Long-Term Incentive Plan**.................................................................. 12.01 Statement re: computation of ratio of earnings to fixed charges*........ 21.01 Subsidiaries of the Registrant*......................................... 24.01 Power of Attorney***.................................................... 27.01 Financial Data Schedule*................................................ 99.01 Schedule II -- Valuation and Qualifying Accounts*.......................
- --------------- * Filed herewith. ** To be filed by amendment. *** Previously filed. EX-2.01 2 INFORMATION STATEMENT 1 [MANOR CARE LETTERHEAD] , 1996 Dear Manor Care, Inc. Stockholder: I am pleased to inform you that the Board of Directors of Manor Care, Inc. ("Manor Care") has approved a distribution to our stockholders of all the outstanding shares of common stock of Choice Hotels Holdings, Inc. ("Choice"). The stock distribution will be made to holders of record of Manor Care common stock on , 1996. You will receive one share of Choice common stock for every share of Manor Care common stock you hold on the record date. As a result of the distribution of Choice common stock to Manor Care shareholders, you will own shares in two separate and very different companies. Manor Care will be a pure health care company focused on inpatient skilled nursing and rehabilitation, assisted living, institutional pharmacy and home health care. Choice will concentrate on franchising, managing and developing hotels and other travel-related businesses. Your Board of Directors and management believe that the separation of the lodging and health care businesses into two public corporations via the distribution of Choice common stock will improve capital-raising efficiency as both debt and equity investors will be better able to assess the different risk profiles and operating characteristics of both businesses. The distribution will give Choice direct access to capital markets and will permit it to raise funds on the basis of its own operating profile and credit fundamentals. Similarly, Manor Care's cost to obtain financing following the distribution will be representative of the operating profile and credit fundamentals of a health care company. In addition, the Board of Directors and management believe that the distribution will improve strategic freedom and focus at both Choice and Manor Care. The enclosed Information Statement explains the proposed distribution in detail and provides financial and other important information regarding Choice. We urge you to read it carefully. Holders of Manor Care common stock are not required to take any action to participate in the distribution as a stockholder vote is not required in connection with this matter. Sincerely, Stewart Bainum, Jr. Chairman of the Board and Chief Executive Officer 2 PRELIMINARY INFORMATION STATEMENT CHOICE HOTELS HOLDINGS, INC. (TO BE RENAMED CHOICE HOTELS INTERNATIONAL, INC.) COMMON STOCK (PAR VALUE $.01 PER SHARE) This Information Statement is being furnished by Manor Care, Inc. ("Manor Care") in connection with the distribution (the "Distribution") to holders of record of Manor Care common stock on , 1996 (the "Record Date") of one share of common stock, par value $.01 per share (the "Company Common Stock"), of Choice Hotels Holdings, Inc. (the "Company") for each share of Manor Care common stock. At the time of the Distribution, the Company will own all of the businesses and assets of, and be responsible for the liabilities associated with, the lodging and hotel franchise business operations conducted by Manor Care and certain of its subsidiaries. The distribution will result in 100% of the outstanding shares of Company Common Stock being distributed to holders of Manor Care common stock. The Distribution will be effective as of , 1996 (the "Distribution Date"). No consideration will be paid by Manor Care's stockholders for shares of Company Common Stock. Manor Care has received a ruling from the Internal Revenue Service to the effect that the Distribution is not taxable for federal income tax purposes to stockholders of the Company and Manor Care. See "The Distribution -- Federal Income Tax Aspects of the Distribution." There is no current trading market for the Company's Common Stock, although it is expected that a "when-issued" trading market will develop prior to the Distribution Date. Application has been made to list the Company's Common Stock on the New York Stock Exchange. Stockholders of Manor Care with inquiries related to the Distribution should contact the Investor Relations Department of Manor Care at (301) 905-4408. Stockholders of Manor Care with inquiries related to their holdings in Manor Care should contact Manor Care's stock transfer agent, Chase-Mellon Shareholder Services, L.L.C., at (212) 946-7200. IN REVIEWING THIS INFORMATION STATEMENT YOU SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS INFORMATION STATEMENT. ------------------------ NO STOCKHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. ANY SUCH OFFERING MAY ONLY BE MADE BY MEANS OF A SEPARATE PROSPECTUS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND OTHERWISE IN COMPLIANCE WITH APPLICABLE LAW. THE DATE OF THIS INFORMATION STATEMENT IS , 1996. 3 INFORMATION STATEMENT TABLE OF CONTENTS PAGE Summary............................................................................. 1 Introduction........................................................................ 6 The Distribution.................................................................... 6 Reasons for the Distribution...................................................... 6 Manner of Effecting the Distribution.............................................. 7 Federal Income Tax Aspects of the Distribution.................................... 7 Conditions; Termination........................................................... 8 Listing and Trading of Shares of the Company's Common Stock....................... 8 Risk Factors........................................................................ 9 Relationship Between Manor Care and the Company After the Distribution.............. 13 Financing........................................................................... 16 Capitalization...................................................................... 18 Dividend Policy..................................................................... 18 Selected Historical Financial Data.................................................. 19 Pro Forma Financial Data............................................................ 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................ 21 Business............................................................................ 25 General........................................................................... 25 The Lodging Industry.............................................................. 25 Franchise Business................................................................ 27 Owned and Managed Lodging Business................................................ 38 Competition....................................................................... 42 Service Marks and Other Intellectual Property..................................... 43 Non-Hotel Properties.............................................................. 43 Seasonality....................................................................... 43 Regulation........................................................................ 44 Insurance......................................................................... 44 Impact of Inflation and Other External Factors.................................... 44 Employees......................................................................... 45 Legal Proceedings................................................................. 45 Environmental Matters............................................................. 45 Management.......................................................................... 47 Executive Officers of the Company................................................. 47 Compensation of Executive Officers................................................ 48 Employment Agreements............................................................. 50 Retirement Plans.................................................................. 51 Option and Stock Purchase Plans................................................... 52 The Board of Directors.............................................................. 52 Directors of the Company.......................................................... 52 Certain Relationships and Related Transactions...................................... 55 Security Ownership of Principal Stockholders and Management......................... 56
i 4 Description of Capital Stock of the Company......................................... 59 Common Stock...................................................................... 59 Preferred Stock................................................................... 59 Preemptive Rights................................................................. 59 Purposes and Effects of Certain Charter and By-law Provisions....................... 59 General........................................................................... 59 Liability and Indemnification of Officers and Directors............................. 60 Elimination of Liability in Certain Circumstances................................. 60 Indemnification and Insurance..................................................... 60 Available Information............................................................... 61 Index to Combined Financial Statements.............................................. F-1 Appendix A -- Form of Restated Certificate of Incorporation of the Company.......... A-1
ii 5 SUMMARY The following summarizes certain information contained elsewhere in this Information Statement. Reference is made to, and this summary is qualified by, the more detailed information set forth in this Information Statement, which should be read in its entirety. Unless the context otherwise requires, all references herein to the Company and to Manor Care shall include their respective subsidiaries and all references herein to the Company prior to the Distribution Date shall refer to the Lodging Business (as defined herein) as operated by Manor Care. As used with respect to financial information, "Parent" refers to Manor Care. Unless otherwise indicated, all statistical information and data relating to the hotel industry in this Information Statement are derived from information provided by Smith Travel Research. Smith Travel Research has not provided any form of consultation, advice, or counsel regarding any aspects of, and is in no way whatsoever associated with, the proposed transaction. THE COMPANY The Company is a leading international hotel franchisor and a major owner and manager of hotel properties. Both franchise and owned and managed hotel properties principally operate under one of the Company's brand names: Comfort(R), Quality(R), Clarion(R), Sleep(R), Rodeway(R) and Econo Lodge(R). In addition, the Company recently introduced a new brand, MainStay Suites(SM). For the fiscal year ended May 31, 1996, hotel franchising contributed 58.5% of the Company's revenues and 73.0% of the Company's gross profits, while hotel ownership and management contributed the remaining 41.5% of revenues and 27.0% of gross profits. The Company's franchise operations and owned and managed hotel operations have experienced significant growth in revenues and profitability over the last few years. The Company's compound annual growth rate since fiscal year 1991 was 20.1% for revenues and 21.8% for net income before unusual items. For the fiscal year ended May 31, 1996, total revenues and net income were $374.9 million and $8.5 million, respectively. Excluding unusual items, net income for the period was $28.6 million. FRANCHISE OPERATIONS. The Company is one of the world's largest franchisors of hotels with 3,052 properties open and operating in 30 countries at May 31, 1996. As a franchisor, the Company licenses hotel operators to use the Company's brand names and provides to these hotel operators products and services designed to increase their revenues and profitability. Key products and services provided include nationally recognized marketing and advertising programs, access to a reservation system that delivers business to the franchisees' hotels, access to innovative products and services developed by the Company and other support services such as training programs, purchasing discounts, operating manuals, quality standards and inspections. In return for the use of the Company's brand names and access to the Company's products and services, franchisees pay to the Company fees that are generally based on a percentage of the franchise hotels' gross room revenues. Since fiscal year 1994, the Company has grown revenues from franchise operations at a compound annual rate of 15.1%, while direct franchise expenses have increased at a compound annual rate of 8.8%. During the same period, gross margins have improved from 56.5% for fiscal year 1994 to 61.1% for fiscal year 1996. Key components of the Company's franchise strategy include: - growth of the Company's domestic franchise system; - increases in average actual royalty rates; - strategic development of the international franchise system; - expansion of preferred vendor programs; and - pursuit of selected strategic investments and acquisitions. The Company's existing franchisees form a pool of potential buyers and builders of new hotels that may affiliate with one of the Company's brands. The Company believes that its focus on improving the performance of its franchisees through the provision of revenue- and profitability-enhancing systems and 1 6 services will enable it to retain these franchisees and attract new franchisees to its system. The Company is able to meet the needs of franchisees across a wide range of market segments by maintaining an array of distinct brands, each with its own marketing and operating strategy. The Company expects to continue to expand its brand offerings by developing new brands for high-growth segments of the hospitality industry. OWNED AND MANAGED OPERATIONS. In addition to acting as franchisor, the Company owns and manages hotels. At May 31, 1996, the Company owned and managed, under its six principal brand names, 79 hotels in 25 states, as well as in Germany, France and England. To take advantage of a recovering lodging industry, the Company has pursued, over the past few years, a strategy of acquiring domestic hotel properties at prices below their replacement cost and increasing their value through the investment of capital to improve the physical site and the installation of professional management and marketing teams to operate the renovated properties. Since June 1992, the Company has spent approximately $242.7 million to buy and renovate 52 hotel properties. Under the Company's management and consistent with overall industry improvements, the operating performance of hotels acquired pursuant to this strategy has improved substantially. Occupancies at domestic hotels acquired during fiscal year 1993 have improved from 56% in fiscal year 1993 to 76% in fiscal year 1996, while occupancies for fiscal year 1994 domestic acquisitions have improved from 66% in fiscal year 1994 to 74% in fiscal year 1996 and occupancies for fiscal year 1995 domestic acquisitions have improved from 49% in fiscal year 1995 to 58% in fiscal year 1996. Overall, revenues from owned and managed hotel operations have grown at a compound annual rate of 44.9% since fiscal year 1994, while hotel operations expenses have increased at a compound annual rate of 32.9%. As a result, gross margins of the owned and managed hotel operations have improved from 19.0% for fiscal year 1994 to 31.9% for fiscal year 1996. Because many of the recently acquired and developed hotels have not yet reached stabilized levels of operating performance, the Company believes that revenues and gross profit at these hotels will continue to grow. The Company's strategy for its owned and managed operations is to monetize its capital investment in Company-owned hotels at values that reflect their improved operating performance. The Company is exploring a variety of transactions, including, among others, asset securitization, sale/leasebacks, joint ventures with third parties, debt financing and asset divestitures. The Company intends to retain management and franchise agreements relating to these properties. The proceeds from these transactions will be used initially to repay outstanding indebtedness. The remaining proceeds will be used to launch or provide support to recently developed brands such as Sleep Inn and MainStay Suites, to develop additional new brands, to expand internationally by investing in selected international gateway cities and to invest in other targeted growth areas. 2 7 THE DISTRIBUTION Reasons for the Distribution.................. The Board of Directors and management of Manor Care believe that the separation of Manor Care's health care and lodging businesses into two public companies via the Distribution will improve capital-raising efficiency as both debt and equity investors will be better able to assess the different risk profiles and operating characteristics of both businesses. The Distribution will give the Company direct access to capital markets and will permit it to raise funds on the basis of its own operating profile and credit fundamentals. Similarly, Manor Care's cost to obtain financing following the Distribution will be representative of the operating profile and credit fundamentals of a health care company. In addition, the Board of Directors and management of Manor Care believe that the Distribution will improve strategic freedom and focus at both Choice and Manor Care. See "The Distribution -- Reasons for the Distribution." Distributed Company........... Choice Hotels Holdings, Inc. (the "Company"), a Delaware corporation (to be renamed Choice Hotels International, Inc.) and a wholly-owned subsidiary of Manor Care, will, on the Distribution Date, own all of the business and assets of, and be responsible for all of the liabilities associated with, the lodging and hotel franchise business operations conducted by Manor Care and certain of its subsidiaries (the "Lodging Business"). Distributing Company.......... Manor Care, Inc., a Delaware corporation ("Manor Care"). Securities to Be Distributed................... Approximately shares (the "Shares") of common stock, par value $.01 per share of the Company, based on shares of common stock, par value $.10 per share, of Manor Care ("Manor Care Common Stock") outstanding as of , 1996. Distribution Ratio............ One share of Company Common Stock for each share of Manor Care Common Stock. Tax Consequences.............. Manor Care has received a ruling from the Internal Revenue Service to the effect, among other things, that receipt of the Shares by stockholders of Manor Care is tax free for federal income tax purposes. See "The Distribution -- Federal Income Tax Aspects of the Distribution." Listing and Trading Market.... Application has been made to list the Shares on the New York Stock Exchange under the symbol "CHH." See "The Distribution -- Listing and Trading of Shares of the Company's Common Stock." Record Date................... Close of business on , 1996. Distribution Date............. As of , 1996. On the Distribution Date, Manor Care will deliver the Shares to the Distribution Agent. As soon as practicable thereafter, the Distribution Agent will mail certificates representing the appropriate number of Shares to the Manor Care stockholders entitled thereto. See "The Distribution -- Manner of Effecting the Distribution." Distribution Agent............ , the transfer agent for the Company. The Company's Dividend Policy After the Distribution........ It is currently contemplated that following the Distribution, the Company will not pay cash dividends on the Shares. 3 8 Certain Charter and By-law Provisions........... Certain provisions of the Restated Certificate of Incorporation (the "Restated Certificate") and the Amended By-laws ("the By-laws") of the Company have the effect of delaying or making more difficult an acquisition of control of the Company in a transaction not approved by its Board of Directors. These provisions have been designed to enable the Company, especially in its initial years, to develop its businesses and foster its long-term growth without disruptions caused by the threat of a takeover not deemed by its Board of Directors to be in the best interest of the Company. See "Purposes and Effects of Certain Charter and By-law Provisions." The Restated Certificate would eliminate certain liabilities of directors in connection with the performance of their duties. See "Liability and Indemnification of Officers and Directors -- Elimination of Liability in Certain Circumstances." Risk Factors.................. Stockholders should carefully consider all of the information contained in this Information Statement, including the matters described under "Risk Factors." Principal Office of the Company....................... 10750 Columbia Pike, Silver Spring, Maryland 20901. Its telephone number is (301) 979-5000. Relationship between Manor Care and the Company after the Distribution................ For purposes of governing the ongoing relationships between Manor Care and the Company after the Distribution Date and in order to provide for an orderly transfer of the Lodging Business to the Company and facilitate the transition to two separate publicly traded companies, Manor Care and the Company have entered into a distribution agreement and various other agreements with respect to, among other things, intercompany debt, tax matters, employee benefits, risk management and corporate and administrative services. See "Relationship Between Manor Care and the Company After the Distribution." The relationship between Manor Care and the Company may be subject to certain potential conflicts of interest. See "Risk Factors -- Potential Conflicts with Manor Care." 4 9 SUMMARY FINANCIAL INFORMATION The following table summarizes certain selected financial information with respect to the Company and is derived from the Combined Financial Statements of the Company. Historical financial information may not be indicative of the Company's future performance as an independent company. The information set forth below is qualified in its entirety by reference to, and should be read in conjunction with, "Selected Historical Financial Data," "Pro Forma Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Combined Financial Statements and related notes included elsewhere herein.
YEAR ENDED MAY 31, --------------------------------------------- 1994 1995 1996 PRO FORMA(A) -------- -------- -------- 1996 ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT RATIO DATA) STATEMENT OF INCOME DATA: Revenues........................................... $239,764 $302,535 $374,873 $387,819 Operating expenses................................. 206,722 250,476 334,083(b) 349,961(b) -------- -------- -------- ------------ Income before other expenses and income taxes...... 33,042 52,059 40,790 37,858 Interest expense on notes payable to Parent........ 10,665 15,492 19,673 20,339 Minority interest and other interest and other expenses, net.......................... 4,699 6,612 5,259 3,727 -------- -------- -------- ------------ Income before income taxes......................... 17,678 29,955 15,858 13,792 Income taxes....................................... 8,019 13,144 7,400 6,429 -------- -------- -------- ------------ Net income............................... $ 9,659 $ 16,811 $ 8,458 $ 7,363 ======== ======== ======== ==========
MAY 31, ------------------- 1995 1996 -------- -------- BALANCE SHEET DATA: Working capital.................................... $(34,663) $ (7,606) Total assets....................................... 391,475 491,304 Notes payable to Parent............................ 198,522 225,723 Total debt......................................... 251,191 294,861 Investments and advances from Parent............... 65,829 147,559 RATIO DATA: Ratio of earnings to fixed charges (c)............. 2.47x 1.63x ======== ========
- --------------- (a) The pro forma statement of operations data for the year ended May 31, 1996 gives effect to (i) the Distribution and related transactions and (ii) the acquisition by the Company of an aggregate of 16 hotels during fiscal year 1996, as if all such transactions had occurred on June 1, 1995. (b) Includes a provision of $33.3 million for impairment of certain long-lived assets associated primarily with the Company's European operations and certain restructuring costs, including severance and employee benefit plan restructuring costs, directly associated with the Distribution. (c) Earnings used in computing the ratio of earnings to fixed charges consist of income before income taxes, fixed charges and extraordinary items. Fixed charges consist of interest expense, including amounts capitalized and the amortization of deferred financing fees, and that portion of operating lease rental expense that is representative of interest (deemed to be one-third of operating lease rentals). 5 10 INTRODUCTION The Company is one of the world's largest franchisors of hotels with 3,052 properties and a total of 261,456 rooms open and operating in 30 countries at May 31, 1996. The properties principally operate under one of the Company's brand names: Comfort, Quality, Clarion, Sleep, Rodeway and Econo Lodge. In addition, the Company recently introduced a new brand, MainStay Suites. At May 31, 1996, another 716 franchise properties with a total of 63,785 rooms were under development. In addition to acting as franchisor, at May 31, 1996, the Company owned and managed, under its six principal brand names, 79 hotels in 25 states, as well as in Germany, France and England. On March 7, 1996, the Board of Directors of Manor Care announced its intention to distribute to holders of Manor Care Common Stock all of the outstanding Shares. On March 6, 1996, the high and low sales prices of the Manor Care Common Stock as reported on the New York Stock Exchange Composite Tape were $39 and $38 5/8, respectively. On , 1996, the Board of Directors of Manor Care declared a dividend to effect the Distribution and set the Record Date and Distribution Date. On , 1996, the high and low sales prices of the Manor Care Common Stock as reported on the New York Stock Exchange Composite Tape were $ and $ , respectively. Following the Distribution, Manor Care will not own any Shares or other capital stock of the Company, but will have certain contractual relationships with the Company. See "Relationship Between Manor Care and the Company After the Distribution." The Company, a Delaware corporation, was incorporated on June 27, 1996, and is currently a wholly-owned subsidiary of Manor Care with no operations. Prior to the Distribution, the Lodging Business has been conducted as a separate division and through certain subsidiaries of Manor Care, including Choice Hotels International, Inc., a wholly-owned subsidiary of Manor Care. On the Distribution Date, Manor Care will contribute to the Company the Lodging Business (including all of the stock of Choice Hotels International, Inc. and the other subsidiaries comprising the Lodging Business, together with certain assets relating to the Lodging Business held by Manor Care) and the Company will change its name to Choice Hotels International, Inc. The existing Choice Hotels International, Inc. will be renamed Choice Hotels Franchising, Inc. Stockholders of Manor Care with inquiries relating to the Distribution should contact the Investor Relations Department of Manor Care at (301) 979-4408. After the Distribution Date, stockholders of the Company should contact the Investor Relations Department of Choice at (301) 979-5000. THE DISTRIBUTION REASONS FOR THE DISTRIBUTION The Board of Directors and management of Manor Care have determined, for the reasons set forth below, among others, to separate the Lodging Business from Manor Care's other businesses. The Board of Directors and management of Manor Care believe that the separation of its health care and lodging businesses into two public corporations via the distribution of the Shares will improve capital-raising efficiency as both debt and equity investors will be better able to assess the different risk profiles and operating characteristics of both businesses. The Distribution will give the Company direct access to capital markets and will permit it to raise funds on the basis of its own operating profile and credit fundamentals. Similarly, Manor Care's cost to obtain financing following the Distribution will be representative of the operating profile and credit fundamentals of a health care company. In addition, the Board of Directors and management believe that the Distribution will improve strategic freedom and focus at both the Company and Manor Care. The Board of Directors and management of Manor Care also believe that the Distribution will (i) facilitate the expansion of each of Manor Care and the Company through future acquisitions by making the stock of each entity a more effective consideration with which to make any such acquisitions, (ii) enable Manor Care and the Company to motivate their respective key employees, and attract new employees, by offering incentives such as stock options whose value will be directly affected by the performance of Manor 6 11 Care or the Company, as the case may be, and (iii) simplify the process of allocating indirect corporate overhead costs in computing governmental reimbursements to the health care business. MANNER OF EFFECTING THE DISTRIBUTION The general terms and conditions of the Distribution are set forth in the distribution agreement (the "Distribution Agreement") to be entered into by the Company and Manor Care prior to the Distribution. Upon satisfaction of all the conditions contained in the Distribution Agreement, it is contemplated that the Distribution will be made as of , 1996 (the "Distribution Date") to stockholders of record of Manor Care at the close of business on , 1996 (the "Record Date"). On the Distribution Date, the Shares will be delivered to the Distribution Agent for distribution as soon as practicable thereafter to holders of record of Manor Care Common Stock as of the close of business on the Record Date on the basis of one share of Company Common Stock for each share of Manor Care Common Stock held on the Record Date. The actual total number of Shares to be distributed will depend on the number of shares of Manor Care Common Stock outstanding on the Record Date. All such Shares will be fully paid and non-assessable and the holders thereof will not be entitled to preemptive rights. See "Description of Capital Stock of the Company." Following the Distribution, the Company will operate as an independent public company. No holder of Manor Care Common Stock will be required to pay any cash or other consideration for the Shares received in the Distribution or to surrender or exchange shares of Manor Care Common Stock in order to receive Shares. FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION Manor Care has received a ruling from the Internal Revenue Service to the effect, among other things, that, for federal income tax purposes, the Distribution will qualify as a tax-free spin-off under Section 355 of the Internal Revenue Code of 1986, as amended, and that: (1) No gain or loss will be recognized to (and no amount will be included in the income of) holders of Manor Care Common Stock upon the receipt of the Shares in the Distribution; (2) Assuming that on the Distribution Date a holder of Manor Care Common Stock holds Manor Care Common Stock as a capital asset, the holding period for the Shares to be received in the Distribution will include the period during which the Manor Care Common Stock was held; (3) The tax basis of Manor Care Common Stock held by a Manor Care stockholder at the time of the Distribution will be allocated, based upon relative fair market values at the time of the Distribution, between such Manor Care Common Stock and the Shares received by the stockholder in the Distribution; and (4) No gain or loss will be recognized by Manor Care or the Company on the Distribution. Within 90 days after the Distribution, Manor Care will provide to Manor Care stockholders additional information regarding the allocation referred to in (3) above. Internal Revenue Service rulings, while generally binding on the Internal Revenue Service, are subject to certain factual representations and assumptions. Manor Care is not aware of any material facts or circumstances which would cause such representations or assumptions to be untrue but there can be no assurance that such representations and assumptions will continue to be true after the Distribution Date. THE FOREGOING IS ONLY A SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW AND IS INTENDED FOR GENERAL INFORMATION ONLY. EACH STOCKHOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS, AND THE EFFECT OF POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE. 7 12 CONDITIONS; TERMINATION The Distribution Agreement provides that the Distribution is subject to certain conditions, including final approval of the Manor Care Board of Directors. See "Relationship Between Manor Care and the Company After the Distribution -- Distribution Agreement." Even if all the conditions are satisfied, the Manor Care Board of Directors may, in its discretion, terminate, defer, modify or abandon the Distribution. LISTING AND TRADING OF SHARES OF THE COMPANY'S COMMON STOCK Application has been made for listing of the Shares on the New York Stock Exchange (the "NYSE") under the symbol "CHH." As of the Distribution Date, the Company is expected to have approximately holders of record of the Shares, based on the number of holders of record of Manor Care Common Stock on the Record Date. There is not currently a public market for the Shares. Prior to the Distribution, the Shares are expected to begin trading on a "when-issued" basis on a date to be determined by the NYSE. If the Distribution is not made, all such "when-issued" trading will be null and void. Prices at which the Shares may trade prior to the Distribution on a "when-issued" basis or after the Distribution cannot be predicted. The prices at which the Shares trade will be determined by the marketplace and may be influenced by many factors, including, among others, the depth and liquidity of the market for the Shares, investor perception of the Company and the industry in which its businesses participate, the Company's dividend policy and general economic and market conditions. See the description of the dividend policy of the Company under "Dividend Policy." The Shares distributed to Manor Care stockholders will be freely transferable, except for Shares received by persons who may be deemed to be "affiliates" of the Company under the Securities Act of 1933, as amended (the "Securities Act"). Persons who may be deemed to be affiliates of the Company after the Distribution generally include individuals or entities that control, are controlled by, or are under common control with the Company and may include certain officers and directors of the Company. Persons who are affiliates of the Company will be permitted to sell their Shares only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Section 4(1) of the Securities Act and Rule 144 promulgated thereunder. 8 13 RISK FACTORS RISKS OF THE LODGING INDUSTRY; COMPETITION General. Competition in the lodging business for hotel guests is based upon many factors, including rates, quality of accommodations, brand recognition, service levels, convenience and desirability of locations and general, regional and local economic conditions. During the 1980s, construction of lodging facilities in the United States resulted in an excess supply of available rooms. This oversupply had an adverse effect on occupancy levels and room rates, and therefore hotel values, in the industry in the early 1990s. Although the current outlook for the industry has improved, there can be no assurance that in the future the lodging industry, including the Company, its hotels and its franchisees, will not be adversely affected again by an oversupply of rooms or by (i) national and regional economic conditions, (ii) changes in travel patterns, gasoline prices and other costs of travel and demographics, (iii) natural disasters, (iv) seasonality of the hotel business, (v) taxes and government regulations that influence or determine wages, prices, interest rates, refurbishment or improvement plans, construction procedures and operating costs and (vi) the availability of credit. Due in part to the strong correlation between the lodging industry's performance and economic conditions, the lodging industry is subject to cyclical changes in revenues and profits. Risks of Franchise Business. As a franchisor, the Company's products are its brand names and the support services it provides to its franchisees. Competition among national brand franchisors in the lodging industry to grow their franchise systems is intense. In addition, smaller chains pose some degree of competitive pressure in selected markets. The Company believes that competition for the sale of lodging franchises is based principally upon the perceived value and quality of the brand and services as well as the nature of those services offered to franchisees. The Company believes that prospective franchisees value a franchise based upon their view of the relationship of the costs imposed to the potential for increased revenue and profitability. The Company's franchising revenues vary directly with franchisees' gross room revenues, but are not directly dependent upon franchisees' profitability. The Company believes, however, that the perceived value of its brand names to prospective franchisees is in part a function of the success of its existing franchisees. The ability of the Company's franchisees to compete in the lodging industry is important to the Company's prospects because franchise fees are primarily based on franchisees' gross room revenues. The Company's franchisees are generally in intense competition with franchisees of other systems, independent properties and owner-operated chains. Risks of Developing, Acquiring and Owning Hotels. As an owner of hotels, the Company is subject to the risks of construction and operation of lodging facilities generally. Developing new hotels and acquiring hotels with repositioning potential subjects the Company to pre-opening, pre-stabilization and repositioning costs. As the Company opens additional Company-owned hotels, such costs may adversely affect the Company's results of operations. Newly opened hotels historically begin with lower occupancy and room rates that improve over time. While the Company has in the past successfully opened or repositioned new hotels, there can be no assurance that it will be able to continue to do so. Construction, acquisition and repositioning of hotels involve certain risks, including the possibility of construction cost overruns and delays, site acquisition cost and availability, uncertainties as to market potential, market deterioration after the acquisition or repositioning, possible unavailability of financing on favorable terms and the emergence of market competition from unanticipated sources. Although the Company seeks to manage its construction, acquisition and repositioning activities so as to minimize such risks, there can be no assurance that any such projects will perform in accordance with the Company's expectations. Hotel investments are relatively illiquid. Such illiquidity will tend to limit the ability of the Company to respond to changes in economic or other conditions. The Company's ownership of real property is substantial. Real estate values are sensitive to changes in local market and economic conditions and to fluctuations in the economy as a whole. In addition, the Company is subject to the general risks of fluctuation in the hotel real estate transaction market, which is impacted by variable prices and the availability of financing. There can be no assurance that the Company's development, acquisition, repositioning or disposition plans will not be adversely affected by changes in the real estate market. 9 14 Risks of Hotel Management. The Company currently manages 85 hotel properties, including its 79 owned hotels and 6 properties managed under agreements with third parties. In connection with its monetization strategy, the Company expects to substantially increase the number of hotel properties managed pursuant to third party management agreements. Management agreements expire or are acquired, terminated or renegotiated in the ordinary course. There can be no assurance that such third party agreements will be on terms as favorable to the Company as existing intercompany agreements. RISK OF GEOGRAPHIC CONCENTRATION A substantial portion of the Company's franchise and owned hotels are located in the southeastern United States. Such geographic concentration exposes the Company's operating results to events or conditions that specifically affect that region, such as economic, weather and other conditions. Adverse developments that specifically affect the southeastern United States may have a material adverse effect on the business, financial condition or results of operations of the Company. ABILITY TO IMPLEMENT MONETIZATION STRATEGY The Company's strategy for its owned and managed operations is to monetize its capital investment in Company-owned hotels at values that reflect their improved operating performance. The Company is exploring a variety of transactions, including, among others, asset securitizations, sale/leasebacks, joint ventures with third parties, debt financings and asset divestitures. The Company intends to retain management and franchise agreements relating to these properties. The proceeds from these transactions will be used initially to repay amounts owed to Manor Care. See "Financing -- The Manor Care Loan Agreement." The Company currently intends to consummate any such transactions only if the Company is able to retain the management and franchise contracts for such hotels. Although transactions of the types being explored by the Company are common in the hotel industry, there can be no assurance that the Company will be able to successfully execute these plans. Furthermore, the Company's plan to retain management and franchise contracts for such hotels will make certain transactions more difficult to consummate. If the Company is not able to successfully implement its monetization strategy, the Company will be unable to reduce amounts owed to Manor Care as planned and will be required to obtain additional sources of financing to repay such amounts before they come due on , 1999. There can be no assurance that the Company will be able to obtain such financing on favorable terms or in a timely manner. UNAVAILABILITY OF MANOR CARE FINANCIAL RESOURCES Historically, adequate financial resources were available from Manor Care to meet operating and investment needs of the Company. Following the Distribution, the Company will no longer have access to Manor Care financial resources and will be required to obtain financing based on its own credit fundamentals as well as repay amounts owed to Manor Care. The Company will have access to its cash flow from operations, which previously was distributed up to Manor Care as part of Manor Care's internal cash management system. In addition, the Company expects to have access to a revolving credit facility and is currently negotiating the terms thereof with potential bank lenders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." There can be no assurance that the lack of access to Manor Care's financial resources will not adversely affect the Company's ability to obtain additional financing on favorable terms. MARKET ACCEPTANCE OF NEW BRANDS AND PRODUCTS As part of its growth strategy, the Company is developing new brands, such as MainStay Suites(SM), an extended-stay lodging product, and new products, such as Choice Picks(SM), a customized modular food service system for hotels and other institutions. The Company has no operating history in either the extended-stay lodging market or the food court service business and there can be no assurance that either Main Stay Suites or Choice Picks will experience market acceptance or that the Company will be successful in franchising these or other new brands or products. Further, there can be no assurance that the capital investments made by the Company to develop these and other new brands or products will be recovered, or that such new brands or 10 15 products will be profitable. As of May 31, 1996, the Company has invested approximately $4.3 million in developing and marketing MainStay Suites and Choice Picks, which includes $1.6 million to begin the construction of MainStay Suites. The failure to successfully franchise these and other new brands could have a material adverse effect on the business, financial condition and results of operations of the Company. RELIANCE ON KEY PERSONNEL The ability of the Company to operate successfully is dependent, in part, upon the continued services of certain of its employees, including Stewart Bainum, Jr., the Chairman and Chief Executive Officer of the Company and Manor Care, Inc. and Donald J. Landry, the President of the Company. Mr. Bainum, Jr.'s employment agreement with the Company will be for a term of years from the Distribution Date. Mr. Landry's employment agreement with Choice Hotels International, Inc. extends through November 30, 1999. There can be no assurance that a suitable replacement for either Mr. Bainum, Jr. or Mr. Landry could be found in the event of termination of either of their employment. Following the Distribution, Mr. Bainum, Jr. will devote approximately one-third of his professional time to the affairs of the Company. SIGNIFICANT BAINUM FAMILY INTEREST Upon completion of the Distribution, Stewart Bainum, Stewart Bainum, Jr., and Barbara Bainum are expected to beneficially own approximately 19.8%, 19.3% and 2.9%, respectively, of the Company Common Stock, in each case including shares with respect to which voting power is shared with other individuals or entities. See "Security Ownership of Principal Stockholders and Management." In addition, Mr. Bainum, Mr. Bainum, Jr., and Ms. Bainum will be directors of the Company. As a result, the Bainum family may be in a position to significantly influence the affairs of the Company, including the election of directors. POTENTIAL CONFLICTS WITH MANOR CARE The Company and Manor Care will share four common directors. Stewart Bainum serves as Vice Chairman and Stewart Bainum, Jr. serves as Chairman of the Board of Directors and Chief Executive Officer of both Manor Care and the Company. Mr. Bainum, Jr. will devote two-thirds of his time to Manor Care and one-third of his time to the Company. Mr. Bainum, Jr.'s employment by both companies and his consequent inability to devote 100% of his time to either company could create a conflict in the future. Certain officers and directors of Manor Care and the Company also own shares (and/or options or other rights to acquire shares) in both companies. In connection with the Distribution, the Company and Manor Care will enter into various contractual arrangements and the potential exists for disagreement in the future as to contract compliance. For a description of the Company's ongoing relationship with Manor Care, see "Relationship Between Manor Care and the Company After the Distribution." POTENTIAL INDEMNIFICATION OBLIGATIONS Pursuant to the Distribution Agreement, the Company will indemnify Manor Care and its subsidiaries and affiliates from liabilities of predecessor companies of Manor Care relating to waste disposal sites which allegedly are or may be subject to remedial action under federal and state environmental laws. The indemnity covers all losses arising from pending and future actions that are not covered by Manor Care's insurance. Manor Care and its insurers are vigorously contesting liability in the pending actions and it is not possible at the present time to estimate the Company's ultimate indemnification liability, if any. The Company believes that its indemnification obligations, if any, will not have a material adverse effect on its business, financial conditions or results of operations. See "Relationship Between Manor Care and the Company After the Distribution -- Distribution Agreement -- Certain Environmental and Other Claims Indemnification" and "Business -- Environmental Matters." FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY Certain statements contained in this Information Statement, including in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" contain 11 16 "forward-looking" information (as defined in the U.S. Private Securities Litigation Reform Act of 1995) that involves risk and uncertainties, including (i) the Company's plans to monetize its capital investment in owned hotels, (ii) the Company's plans to expand its international franchise operations, (iii) the Company's plans to market new brands and products and (iv) the Company's plans to make selected strategic investments and acquisitions. Actual future results and trends may differ materially depending on a variety of factors discussed in this "Risk Factors" section and elsewhere in this Information Statement, including (a) the Company's success in implementing its business strategy, including its success in arranging financing where required, (b) the nature and extent of future competition, and (c) political, economic and demographic developments in countries where the Company does business or in the future may do business. 12 17 RELATIONSHIP BETWEEN MANOR CARE AND THE COMPANY AFTER THE DISTRIBUTION For purposes of governing the ongoing relationships between Manor Care and the Company after the Distribution Date, and in order to provide for an orderly transfer of the Lodging Business to the Company and facilitate the transition to two separate publicly-traded companies, Manor Care and the Company have entered or will enter into various agreements setting forth the Company's and Manor Care's on-going responsibilities regarding various matters outlined below. The agreements summarized in this section are included as exhibits to the Company's Registration Statement on Form 10 of which this Information Statement is a part. The following summaries are qualified in their entirety by reference to such exhibits. DISTRIBUTION AGREEMENT On or prior to the Distribution Date, the Company and Manor Care will enter into the Distribution Agreement which provides for, among other things, the principal corporate transactions required to effect the Distribution, the assumption by the Company of all liabilities relating to the Lodging Business (to the extent not covered by Manor Care's insurance) and the allocation between the Company and Manor Care of certain other liabilities, certain indemnification obligations of the Company and Manor Care and certain other agreements governing the relationship between the Company and Manor Care with respect to or in consequence of the Distribution. The Distribution Agreement provides that the Distribution is subject to the prior satisfaction of certain conditions including, among other things, the transfer of the Lodging Business to the Company, the execution of all ancillary agreements, certain of which are described below, to the Distribution Agreement and the formal approval of the Distribution by the Board of Directors of Manor Care. CROSS-INDEMNIFICATION. Subject to certain exceptions, the Company has agreed to indemnify Manor Care and its subsidiaries against any loss, liability or expense incurred or suffered by Manor Care or its subsidiaries arising out of or related to the failure by the Company to perform or otherwise discharge liabilities allocated to and assumed by the Company under the Distribution Agreement, and Manor Care has agreed to indemnify the Company against any loss, liability or expense incurred or suffered by the Company arising out of or related to the failure by Manor Care to perform or otherwise discharge the liabilities retained by Manor Care under the Distribution Agreement. The foregoing cross-indemnities do not apply to indemnification for tax claims and liabilities, which are addressed in the Tax Sharing Agreement described below, and indemnification for environmental claims and liabilities specifically addressed by the provision described below. The Distribution Agreement also includes procedures for notice and payment of indemnification claims and provides that the indemnifying party may assume the defense of a claim or suit brought by a third party. CERTAIN ENVIRONMENTAL AND OTHER CLAIMS INDEMNIFICATION. In addition to the indemnification described above, the Company has agreed to indemnify Manor HealthCare Corp. ("HealthCare"), Manor Care, their affiliates, subsidiaries and their respective directors, employees and agents (collectively, the "Indemnitees") from any and all losses which may arise from (i) certain pending environmental claims; and (ii) currently unknown but potential or future environmental, third party personal injury and other claims arising out of the activities or operations of, or conditions affecting properties formerly or presently owned, leased, operated or used by, Cenco Incorporated a corporation that was merged into HealthCare in 1982, its subsidiary and affiliated companies, and any and all of Cenco Incorporated's predecessor corporations, subsidiaries and affiliates (together, "Cenco"). The losses to be indemnified by the Company include, among other things, all amounts required to be reimbursed to a third-party insurer for insurance proceeds previously paid by the insurer, all deductible amounts required to be paid under any insurance policy before coverage attaches to a claim, all amounts paid to third parties in excess of insurance coverage, all amounts not paid by insurers with respect to current, potential and future claims and, as to certain sites owned by affiliates of HealthCare, all sums necessary to comply with any and all federal, state and local regulatory and judicial consent decrees or orders or any settlements regarding environmental remediation of these properties in excess of the reserves reflected in the most recent monthly balance sheet of HealthCare available prior to the Distribution Date. The Company cannot predict the amount it may have to pay to Indemnitees in the future to satisfy this indemnity obligation. See "Business -- Environmental Matters" and "Risk Factors -- Potential Indemnification Obligations." 13 18 INTERCOMPANY ADVANCES AND ACCOUNTS. The Distribution Agreement provides that on or prior to the Distribution Date the Company and a subsidiary of Manor Care will enter into a loan agreement pursuant to which the Company will repay to Manor Care over a three year period approximately $225.7 million in advances made by Manor Care to the Company prior to the Distribution Date. See "Financing -- The Manor Care Loan Agreement." All other intercompany loans or advances have been or will be contributed to the capital of the Company. CREDIT FACILITIES. The Distribution Agreement provides that, as a condition to the Distribution, on or prior to the Distribution Date, Manor Care will amend and restate its existing credit facility so as to release the Company and any subsidiaries engaged in the Lodging Business from any liability or obligation with respect thereto, and the Company will enter into a separate revolving credit facility. See "Financing -- Credit Facility." NON-COMPETE. The Distribution Agreement provides that until five years after the Distribution Date, Manor Care and its subsidiaries shall not compete with the lodging business of the Company, provided that Manor Care may engage in any line of business in which the Company is not engaged, as of the Distribution Date, including the operation of assisted living facilities, independent living facilities or any business similar thereto, and the Company shall not compete with the health care business or any such other business of Manor Care. GUARANTEES. The Distribution Agreement provides that Manor Care will continue to guarantee certain mortgages and other long term debt of the Company outstanding on the Distribution Date. The Company will pay Manor Care a guarantee fee equal to 2.0% per annum of the aggregate principal amount of such guaranteed obligations and other long term debt subject to such guarantees. EXPENSES. The Distribution Agreement provides that except as otherwise specifically provided, all costs and expenses incurred in connection with the preparation, execution, delivery and implementation of the Distribution Agreement and with the consummation of the transactions contemplated by the Distribution Agreement (including transfer taxes and the fees and expenses of all counsel, accountants and financial and other advisors) shall be paid by the party incurring such cost or expense. Notwithstanding the foregoing, the Company shall be obligated to pay the legal, filing, accounting, printing and other accountable and out-of-pocket expenditures in connection with the preparation, printing and filing of the Registration Statement on Form 10 and obtaining financing. TAX SHARING AGREEMENT On or prior to the Distribution Date, the Company and Manor Care will enter into the Tax Sharing Agreement for purposes of allocating pre-Distribution tax liabilities among the Company and Manor Care and their respective subsidiaries. In general, Manor Care will be responsible for (i) filing consolidated federal income tax returns for the Manor Care affiliated group and combined or consolidated state tax returns for any group that includes a member of the Manor Care affiliated group, including in each case the Company and its subsidiaries for the periods of time that such companies were members of the applicable group and (ii) paying the taxes relating to such tax returns to the applicable taxing authorities. The Company will reimburse Manor Care for the portion of such taxes that relates to the Company and its subsidiaries, as determined based on their hypothetical separate company income tax liabilities. In addition, the Company will assume liability for all taxes payable by the Company or by Manor Care in the event the Distribution is determined not be tax free for federal income tax purposes. Manor Care and the Company have agreed to cooperate with each other, and to share information, in preparing such tax returns and in dealing with other tax matters. EMPLOYEE BENEFITS ALLOCATION AGREEMENT On or prior to the Distribution Date, the Company and Manor Care will enter into an Employee Benefits and Other Employment Matters Allocation Agreement (the "Employee Benefits Allocation Agreement"). The Employee Benefits Allocation Agreement provides for the allocation subsequent to the Distribution of employee benefits, as they relate to employees who remain employed by Manor Care or its subsidiaries 14 19 ("Manor Care Employees") after the Distribution and employees who are employed by the Company after the Distribution ("Company Employees"). During the period beginning on the Distribution Date and ending on December 31, 1996, the Company shall pay to Manor Care, on a monthly basis, a payment equal to 2.1% of the payroll for all Company Employees. In consideration therefor, during such period, Manor Care will assume responsibility for all funding obligations and current plan year matching contributions attributable to certain retirement and savings plans specified in the Employee Benefits Allocation Agreement. During the same period, the Company will also pay to Manor Care a monthly fee for each Company Employee receiving services and benefits under a Manor Care medical plan. Pursuant to the Employee Benefits Allocation Agreement, Manor Care will continue sponsorship of the various Manor Care profit sharing plans, retirement plans, stock plans and health and welfare plans with respect to Manor Care Employees. The Company will establish a number of plans which will allow the Company to provide to its employees substantially the same benefits currently provided to them as employees of Manor Care. With respect to each Manor Care profit sharing and retirement plan, Manor Care shall transfer to the Company, as soon as practicable after the Distribution Date, an amount representing the present value of the full accrued benefit of all Company Employees who had earned a benefit under any such Manor Care plan. The Employee Benefits Allocation Agreement provides for cross-guarantees between the Company and Manor Care with respect to the payment of benefits under certain plans and for cross-indemnification with respect to pre-Distribution employment-related claims. The Employee Benefits Allocation Agreement also provides for the adjustment of outstanding stock options. On the Distribution Date (i) each Manor Care Employee holding a nonqualified Manor Care stock option or an incentive stock option to purchase Manor Care Common Stock will receive for each such option a conversion award consisting of an option to purchase Manor Care Common Stock, with the number of shares that may be acquired and the option price adjusted pursuant to a formula designed to preserve the financial value of the options and (ii) each Company Employee holding a nonqualified Manor Care stock option or an incentive stock option to purchase Manor Care Common Stock will receive for each such option a conversion award consisting of an option to purchase Company Common Stock, with the number of shares that may be acquired and the option price adjusted pursuant to a formula designed to preserve the financial value of the options. Certain employees holding nonvested nonqualified options to acquire Manor Care Common Stock may make a one-time election with respect to such nonvested nonqualified options to (1) receive a conversion award that relates exclusively to nonvested nonqualified options to acquire the common stock of the company by which he or she will be employed after the Distribution Date or (2) receive a conversion award with respect to which one-half relates nonvested nonqualified options to acquire to the common stock of the company by which he or she will be employed after the Distribution Date and one-half is proportionately allocated between nonvested nonqualified options to acquire Manor Care Common Stock and nonvested nonqualified options to acquire Company Common Stock based upon the relative trading values of such common stocks on the Distribution Date. Certain employees holding vested nonqualified options to acquire Manor Care Common Stock may make a one-time election to specify the manner in which such vested nonqualified stock options shall be allocated between a conversion award relating to vested nonqualified stock options to acquire Manor Care Common Stock and vested nonqualified stock options to acquire Company Common Stock. LEASE AGREEMENTS On or prior to the Distribution Date, the Company and Manor Care will enter into a lease agreement with respect to the building complex (the "Complex") in Silver Spring, Maryland at which the Company's principal executive offices are located (the "Silver Spring Lease"). Pursuant to the Silver Spring Lease, the Company will lease from Manor Care for a period of 30 months certain office space (approximately 30% of the Complex initially, with provisions to allow the Company to use additional square footage as needed) at a monthly rental rate equal to one-twelfth of the operating expenses (as defined therein) of the Complex net of third party rental income paid to Manor Care by other tenants of the Complex, less a pro rata portion of the operating expenses attributable to the space occupied by Manor Care (initially approximately 29% of the Complex). At the beginning of each fiscal year following the Distribution Date, Manor Care's occupancy percentage will be redetermined. Operating expenses include all of the costs associated with operating and maintaining the Complex including, without limitation, supplies and materials used to maintain the Complex, 15 20 wages and salaries of employees who operate the Complex, insurance for the Complex, costs of repairs and capital improvements to the Complex, the fees of the property manager (which may be Manor Care), costs and expenses associated with leasing space at the Complex and renovating space rented to tenants, costs of environmental inspection, testing or cleanup, principal and interest payable on indebtedness secured by mortgages against the Complex, or any portion thereof, and charges for utilities, taxes and facilities services. On or prior to the Distribution Date, the Company and Manor Care will also enter into (i) a sublease agreement with respect to certain office space in Gaithersburg, Maryland pursuant to which the Company will be obligated to rent from Manor Care, on terms similar to the Silver Spring Lease, certain additional space as such space becomes available during the 30 month period following the Distribution Date and (ii) a sublease agreement with respect to a certain hotel property in Pikesville, Maryland, pursuant to which the Company will sublease the property from Manor Care on the same terms and conditions that govern Manor Care's rights and interests under the lease relating to such property. OTHER AGREEMENTS On or prior to the Distribution Date, the Company and Manor Care will enter into certain other agreements that will, as of 12:00 midnight on the Distribution Date, fix the respective responsibilities of Manor Care and the Company regarding the following: the provision by Manor Care of certain corporate services (including administrative, accounting, systems, and, for a fixed annual fee of $1.0 million, certain consulting services), the transfer to the Company of certain intellectual property rights, the availability to the Company of certain aircraft owned by Manor Care, the provision by Manor Care of certain risk management services, the procurement by Manor Care of certain products and supplies used in the Lodging Business, and other miscellaneous matters. None of these agreements extends for a period greater than 30 months from the Distribution Date and they are not, either alone or in the aggregate, expected to materially affect the Company or its results of operations. FINANCING THE MANOR CARE LOAN AGREEMENT It is expected that on or prior to the Distribution Date, the Company and a subsidiary of Manor Care will enter into a loan agreement (the "Loan Agreement"), which shall govern the repayment by the Company of an aggregate of $225.7 million previously advanced to the Company by Manor Care. The Loan Agreement will contain a number of covenants that will, among other things, restrict the ability of the Company and its subsidiaries to make certain investments, incur debt, change its line of business, dispose of assets, create liens, sell receivables, enter into transactions with affiliates and otherwise restrict certain corporate activities. The Loan Agreement will also restrict the Company's ability to pay dividends. In addition, the Loan Agreement will contain, among other financial covenants, requirements that the Company maintain specified financial ratios, including maximum leverage and minimum interest coverage. Interest on the amount of the loan will be payable semiannually at a rate of 9% per annum. The loan will mature on , 1999 and may be prepaid in whole or in part, together with accrued interest, without penalty, at the option of the Company. The Company will be required to prepay the loan with the proceeds from the monetization of Company-owned hotels. CREDIT FACILITY The Company currently is negotiating a commitment from a bank lender pursuant to which such lender, together with other financial institutions, will, from and after the Distribution Date, provide the Company with a revolving credit facility in an aggregate principal amount of $100 million (the "Credit Facility"). The Credit Facility will have a maturity of three years, subject to extension, at the request of the Company, for up to two additional periods of one year each. A portion of the Credit Facility not in excess of $25 million shall be available for the issuance of letters of credit. Upon consummation of the Distribution, approximately $50.0 million will be drawn by the Company and used to refinance an equivalent amount borrowed by the Lodging 16 21 Business under Manor Care's credit facility. The remaining availability under the Credit Facility will be used for working capital and general corporate purposes. The Credit Facility will contain a number of covenants that will, among other things, restrict the ability of the Company and its subsidiaries to make certain investments, incur debt, change its line of business, dispose of assets, create liens, sell receivables, enter into transactions with affiliates and otherwise restrict certain corporate activities. The Credit Facility will also restrict the Company's ability to pay dividends. In addition, the Credit Facility will contain, among other financial covenants, requirements that the Company maintain specified financial ratios, including maximum leverage and minimum interest coverage. 17 22 CAPITALIZATION The following table sets forth the unaudited combined capitalization of the Company as of May 31, 1996. This data should be read in conjunction with the Company's financial statements and the notes thereto that are included elsewhere in this Information Statement.
MAY 31, 1996 -------------- (IN THOUSANDS) Debt (including current portion) Mortgage loans and other long term debt.............................. $ 69,138 Notes payable to Parent.............................................. 225,723 -------- Total debt................................................... 294,861 Equity................................................................. 147,559 -------- Total capitalization......................................... $442,420 ========
DIVIDEND POLICY It is currently contemplated that following the Distribution, the Company will not pay cash dividends on the Shares. The payment of dividends, if any, in the future will be a business decision to be made at the discretion of the Board of Directors of the Company from time to time based on the Company's earnings and financial position and such other considerations as the Board of Directors of the Company considers relevant. In addition, the Loan Agreement and the Credit Facility will restrict the Company's ability to pay dividends. See "Financing." 18 23 SELECTED HISTORICAL FINANCIAL DATA The following selected combined financial data of the Company and its subsidiaries should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Combined Financial Statements and related notes included elsewhere herein. The income statement and balance sheet data for the fiscal years ended May 31, 1993, 1994, 1995 and 1996 are derived from the audited combined financial statements of the Company.
YEAR ENDED MAY 31, -------------------------------------------------------- 1993 1994 1995 1996 -------- -------- -------- -------- 1992 -------- (UNAUDITED) (IN THOUSANDS) STATEMENT OF INCOME DATA Revenues Franchise....................................... $125,347 $137,346 $165,581 $188,021 $219,164 Hotel operations................................ 34,878 41,361 74,183 114,514 155,709 -------- -------- -------- -------- -------- Total revenues........................... 160,225 178,707 239,764 302,535 374,873 -------- -------- -------- -------- -------- Operating expenses Franchise marketing............................. 33,772 37,567 45,373 45,510 49,658 Franchise reservations.......................... 23,261 22,941 26,685 28,738 35,677 Hotel operations................................ 20,432 35,255 60,062 84,711 106,120 Selling, general and administrative expenses.... 45,949 44,745 57,081 69,676 83,267 Depreciation and amortization................... 12,924 14,605 17,521 21,841 26,026 Provision for asset impairment and restructuring................................. -- -- -- -- 33,335(a) -------- -------- -------- -------- -------- Total operating expenses................. 136,338 155,113 206,722 250,476 334,083 -------- -------- -------- -------- -------- Income before other expenses and income taxes..... 23,887 23,594 33,042 52,059 40,790 -------- -------- -------- -------- -------- Other expenses Interest expense on notes payable to Parent..... -- 7,083 10,665 15,492 19,673 Minority interest............................... 1,004 900 1,476 2,200 1,532 Other interest and other expenses, net................................. 1,441 2,177 3,223 4,412 3,727 -------- -------- -------- -------- -------- Total other expenses..................... 2,445 10,160 15,364 22,104 24,932 -------- -------- -------- -------- -------- Income before income taxes........................ 21,442 13,434 17,678 29,955 15,858 Income taxes...................................... 8,660 5,780 8,019 13,144 7,400 -------- -------- -------- -------- -------- Net income........................................ $ 12,782 $ 7,654 $ 9,659 $ 16,811 $ 8,458 ======== ======== ======== ======== ======== BALANCE SHEET DATA Total assets...................................... $194,078 $250,371 $303,158 $391,475 $491,304 Notes payable to Parent........................... -- $ 78,700 $147,061 $198,522 $225,723 Total debt........................................ $ 20,902 $129,670 $200,875 $251,191 $294,861 Total liabilities................................. $ 50,313 $159,624 $247,950 $325,646 $343,745 Total investments and advances from Parent........ $143,765 $ 90,747 $ 55,208 $ 65,829 $147,559
- --------------- (a) The Company recorded a charge of $28.1 million for impairment of long-lived assets associated primarily with the Company's European operations. Additionally, the Company recorded a charge of $5.2 million related to certain restructuring costs, including severance and employee benefit plan restructuring costs, directly associated with the Distribution. 19 24 PRO FORMA FINANCIAL DATA The following unaudited pro forma combined statements of income of the Company give effect to (i) the Distribution and related transactions and (ii) the acquisition by the Company of an aggregate of 16 hotels during fiscal year 1996 (the "1996 Acquisitions"), as if the Distribution and related transactions and the 1996 Acquisitions had occurred on June 1, 1995. The pro forma financial data are provided for information purposes only and do not purport to be indicative of the results that actually would have been obtained if the Distribution and related transactions and the 1996 Acquisitions had been effected on the date indicated or of those results that may be obtained in the future. The pro forma combined statement of income is based on preliminary estimates. The actual recording of the transactions will be based on actual costs. Accordingly, the actual recording of the Distribution and related transactions and the 1996 Acquisitions can be expected to differ from these pro forma financial statements. No pro forma balance sheet is presented as there were no pro forma adjustments to the historical balance sheet. PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED MAY 31, 1996
DISTRIBUTION ACQUISITIONS HISTORICAL ADJUSTMENTS(A) ADJUSTMENTS(B) PRO FORMA ---------- -------------- -------------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues Franchise.................................. $ 219,164 $ 219,164 Hotel operations........................... 155,709 $ 12,946 168,655 -------- -------- -------- Total revenues..................... 374,873 12,946 387,819 -------- -------- -------- Operating expenses Franchise marketing........................ 49,658 49,658 Franchise reservations..................... 35,677 35,677 Hotel operations........................... 106,120 9,676 115,796 Selling, general and administrative expenses................................ 83,267 $ 4,100(c) 90(d) 324 87,781 Depreciation and amortization.............. 26,026 1,688 27,714 Provision for asset impairment and restructuring........................... 33,335 33,335 -------- ------- -------- -------- Total operating expenses........... 334,083 4,190 11,688 349,961 -------- ------- -------- -------- Income before other expenses and income taxes...................................... 40,790 (4,190) 1,258 37,858 -------- ------- -------- -------- Other expenses Interest expense on notes payable to Parent.................................. 19,673 666 20,339 Minority interest.......................... 1,532 (1,532)(e) -- Other interest and other expenses.......... 3,727 3,727 -------- ------- -------- -------- Total other expenses............... 24,932 (1,532) 666 24,066 -------- ------- -------- -------- Income before income taxes................... 15,858 (2,658) 592 13,792 Income taxes................................. 7,400 (1,249)(f) 278 6,429 -------- ------- -------- -------- Net income................................... $ 8,458 $ (1,409) $ 314 $ 7,363 ======== ======= ======== ======== Net income per share......................... $ 0.12(g) ========
- --------------- (a) Reflects the effect of the Distribution and related transactions. (b) Reflects the incremental impact of the 1996 Acquisitions. (c) Reflects the net additional costs associated with staffing of accounting, finance, cash management, risk management, human resources and legal personnel, directors' costs, incremental rental costs and the payment of certain consulting fees to Manor Care. (d) Reflects the estimated cost of the Manor Care Guarantee Fee. (e) Reflects the elimination of minority interest associated with the purchase of minority equity. (f) Reflects tax benefits at the Company's effective tax rate of 47% related to deduction of incremental costs per note (c). (g) Pro forma income per share is computed by dividing pro forma net income by the pro forma weighted average number of outstanding common shares, aggregating 62.6 million in 1996. The pro forma weighted average number of outstanding common shares is based on Manor Care's weighted average number of outstanding common shares at May 31, 1996. 20 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On March 7, 1996, Manor Care announced the Distribution. The Distribution will separate the lodging and healthcare businesses of Manor Care into two public corporations. As a result of the announced Distribution, Manor Care's historical financial statements have been restated to report the Lodging Business as discontinued operations. Included herein are the historical results of operations of the Lodging Business for the years ended May 31, 1996, 1995, and 1994 as if it had been a separate entity for all periods presented. Upon completion of the Distribution, the operations of the Company will consist principally of the hotel franchise operations and the owned and managed hotel operations formerly conducted by Manor Care directly or through Manor Care's subsidiaries. The Distribution will result in the division of certain of Manor Care's existing corporate functions between the two resulting entities. Historically, Manor Care allocated to its operating units all corporate overhead expenses specifically identified with such units' operations. These allocations will be discontinued after the Distribution and responsibility for these support functions will be assumed by the Company. The Company will establish its own accounting, finance, cash management, risk management, human resources and legal departments separate from Manor Care's. Accordingly, selling, general and administrative expenses in the historical financial statements may not be indicative of such costs in the future. In addition, the Lodging Business' historical operating results do not reflect any estimated incremental costs expected to be incurred by the Company to support its operations as a stand-alone entity after the Distribution. See "Pro Forma Financial Data." The principal factors that affect the Company's results are: growth in the number of hotels; occupancies and room rates achieved by the Company's brands; the number and relative mix of owned, managed and franchised hotels; and the Company's ability to manage costs. The number of rooms at franchised properties and occupancies and room rates significantly affect the Company's results because franchise royalty fees are based upon room revenues at franchised hotels. Increases in franchise and management fee revenues have a disproportionate impact on the Company's operating margin due to the lower incremental costs associated with these revenues. COMPARISON OF FISCAL YEAR RESULTS Net income was $8.5 million for fiscal year 1996, a decrease of $8.4 million, or 49.7%, compared to fiscal year 1995. In fiscal year 1995, net income increased $7.2 million, or 74.0%, compared to fiscal year 1994. Net income in fiscal year 1996 includes a charge of $33.3 million relating to asset impairment and restructuring charges. Revenues increased $72.3 million, or 23.9%, to $374.9 million in fiscal year 1996, while operating expenses increased $83.6 million, or 33.4%, to $334.1 million, resulting in an $11.3 million, or 21.7%, decrease in operating profits. This compares to an increase of $62.8 million, or 26.2%, in revenues for fiscal year 1995 and an increase of $43.8 million, or 21.2%, in expenses for fiscal year 1995. The Company's franchise revenues for fiscal years 1996, 1995 and 1994 increased $31.1 million, or 16.6%, $22.4 million, or 13.6%, and $28.2 million, or 20.5%, respectively. Franchise revenues include base royalty fees, marketing fund assessments and fees charged for utilization of the Company's centralized hotel reservation system. These fees and assessments are generally calculated based on a percentage of the franchised hotels total revenues and reservation call volume. The increases in franchise revenues were principally the result of fees generated from franchisees. In fiscal year 1996, increases in franchise fees were primarily attributable to increases in domestic royalties of $10.6 million, increases in reservation fees of $7.5 million and increases in marketing fees of $4.5 million. In fiscal year 1995, increases in franchise fees were primarily attributable to increases in domestic royalties of $9.1 million, reservation fees of $3.0 million and marketing fees of $1.1 million. In fiscal year 1994, increases in franchise fees were primarily attributable to increases in domestic royalties of $6.3 million, reservation fees of $4.6 million and marketing fees of $6.3 million. The remaining portion of the increase for each fiscal year relates to European operations and other international revenues. Revenues at franchise hotels increased as a result of increased average daily room rates and average actual royalty rates. Average daily room rates of domestic franchise hotels increased by 21 26 approximately 5.0% for fiscal year 1996 and 3.3% for fiscal year 1995. Average actual royalty rates of domestic franchise hotels were 3.5%, 3.2% and 3.1% in fiscal 1996, 1995 and 1994, respectively. Increased daily room rates of the domestic franchise hotels resulted from both general strengthening in lodging industry fundamentals and national and local marketing efforts provided by the Company to franchisees. Average occupancies remained constant at 63.8% in fiscal year 1996 and 1995. In fiscal year 1994, average occupancies were 62.2%. The Company's hotel operations revenues for fiscal years 1996, 1995 and 1994 increased $41.2 million, or 36.0%, $40.3 million, or 54.4%, and $32.8 million, or 79.2%, respectively. The increases in revenue were principally the result of additional room capacity achieved through hotel acquisitions completed during fiscal years 1993 through 1996. During this period, the Company purchased a total of 52 hotels containing over 7,485 rooms. Overall average occupancies were 64.8% in fiscal year 1996 compared to 64.1% in fiscal year 1995 and 60.4% in fiscal year 1994. Overall average daily room rates increased 8.0% from fiscal year 1995 to fiscal year 1996 and 5.0% from fiscal year 1994 to fiscal year 1995. These occupancy and rate increases were the result of marketing efforts in both new and existing markets as well as a general strengthening of lodging industry fundamentals. Increases in food and beverage sales of $3.2 million and $3.1 million in fiscal years 1996 and 1995, respectively, also contributed to revenue growth. Franchise marketing expenses increased 9.1% from fiscal year 1995 to fiscal year 1996 and remained flat from fiscal year 1994 to fiscal year 1995. These increases in expenses were offset by corresponding increases in marketing fees charged to the Company's franchise hotels. Franchise reservation expenses increased 24.2% and 7.7% in fiscal years 1996 and 1995 from the prior fiscal years, respectively. Increases in reservation expenses relate primarily to growth in labor costs (approximately 36% of the increase) and systems maintenance costs (approximately 36% of the increase) stemming from increased reservation services provided to the Company's franchisees and their customers. Call volume related to reservation sales for franchised hotels was 18.1 million, 16.6 million and 15.0 million for fiscal years 1996, 1995 and 1994, respectively. These increases in expenses were offset by corresponding increases in reservation fees charged to the Company's franchise hotels. Hotel operating expenses increased 25.3% and 41.0% for fiscal years 1996 and 1995, respectively, of which approximately 3.0%, and 4.0%, respectively, related to food and beverage costs. Increases in hotel operating expenses resulted, principally from the addition of hotels. Hotel operating margins increased to 31.9% in fiscal year 1996 from 26.0% in fiscal year 1995 and 19% in fiscal year 1994, as marketing efforts enhanced occupancies in the newly renovated and repositioned acquired hotels. Selling, general and administrative expenses increased $13.6 million, or 19.5%, for fiscal year 1996 and $12.6 million, or 22.1%, for fiscal year 1995 compared to the prior years. As a percent of total revenues, selling, general and administrative expenses declined to 22.2% in fiscal year 1996 from 23.0% in fiscal year 1995 and 23.8% in fiscal year 1994. Selling, general and administrative expenses include the cost of product sales to franchisees made through the Company's group purchasing program for franchisees. Increases in selling, general and administrative expenses principally resulted from higher cost of sales on increased product sales volume. Cost of product sales was $20.7 million, $13.9 million and $12.0 million for fiscal years 1996, 1995 and 1994, respectively. The remaining increases in selling, general and administrative expenses were due primarily to additional general and administrative costs associated with the Company's acquired domestic properties and growth in the Company's European lodging business. Management expects that, after the Distribution, selling, general and administrative expenses will increase due to additional costs associated with staffing of accounting, finance, cash management, risk management, human resources and legal personnel, directors' costs, incremental rental costs and the payment of certain consulting fees to Manor Care. Management currently estimates an increase of approximately $4.1 million. In fiscal year 1996, the Company recorded a charge against earnings of $33.3 million relating to impairment of certain long-lived assets and restructuring costs. The most significant components of the charge related to impairment of assets associated with the Company's European operations and certain restructuring costs, including severance and employee benefit plan restructuring costs, directly associated with the Distribution. During fiscal year 1996, in connection with the Company's equity investment in Friendly Hotels, PLC, the Company restructured its European operations to focus more specifically on selected geographic 22 27 markets. The Company performed a review of its European operations and determined that certain assets associated with these operations were impaired. These assets relate primarily to European properties opened or acquired in fiscal years 1993 and 1994. The Company's experience shows that newly opened or acquired properties require up to three years to reach stabilized operating levels. Operating results at the affected properties have not improved as expected over the three year period. The amount of the impairment charge was measured in accordance with the Company's policy. See the Combined Financial Statements and related notes included elsewhere herein. Depreciation and amortization expense increased 19.2% in fiscal year 1996 to $26.0 million. In fiscal year 1995, depreciation and amortization expense increased 24.7%. Increases were due to acquisitions and renovation of the 52 hotels acquired from fiscal years 1993 through 1996. Interest expense on notes payable to Parent increased 27.0% in fiscal year 1996 and 45.3% in fiscal year 1995. Other interest expense and other expenses decreased 15.5% in fiscal year 1996 and increased 36.9% in fiscal year 1995. The decrease in other interest expense in fiscal year 1996 related to the payoff of a third party financed mortgage on a hotel property, as well as regularly scheduled principal reductions on other third party financing. The increases from fiscal year 1994 to fiscal year 1995 were principally due to borrowings to finance the acquisition of the 36 acquired hotels and the acquisition of the Resthotel Primevere hotel chain. The majority of Resthotel Primevere's operations are franchise related and located within France. LIQUIDITY AND CAPITAL RESOURCES As of May 31, 1996 and May 31, 1995, notes payable to Parent by the Company totaling $225.7 million and $198.5 million, respectively, were outstanding. The notes are due three years from the Distribution Date. Interest is charged at an annual rate of 9% on the indebtedness. The notes payable to Parent are expected to be repaid with the proceeds from the planned monetization of the Company's owned hotels or third party financing. Historically, all cash received by the Company has been deposited in or combined with Manor Care's corporate funds as part of Manor Care's cash management system. Following the Distribution, the Company will maintain its own cash balances and will implement an internal cash management system. In addition, the Company expects to have access to a revolving credit facility and is currently negotiating the terms thereof with potential bank lenders. See "Financing -- Credit Facility." Management believes cash flows from operations, third party financing sources and the proceeds from the planned monetization of the Company's owned hotels will be adequate to support on-going operations and meet debt service requirements for the foreseeable future. If the Company is unable to successfully implement its monetization strategy with respect to Company-owned hotels, the Company will need to secure additional sources of financing to repay the Loan Agreement on , 1999. Net cash provided by operating activities for fiscal year 1996 was $54.7 million, an increase of 14.3% from the prior fiscal year. Net cash provided by operating activities for fiscal year 1995 was $47.9 million, an increase of 7% from the prior fiscal year. The Company's working capital ratio at May 31, 1996 and May 31, 1995 was 0.8 and 0.4, respectively. The Company attempts to minimize its investment in net current assets. Historically, the Company has been assured adequate financing through Manor Care to meet seasonal fluctuations in working capital requirements. Subsequent to the Distribution, the Company will utilize its revolving credit facility to meet seasonal fluctuations in working capital requirements. Investment in property and equipment includes routine capital expenditures for renovation and maintenance of the Company's owned hotels, as well as new developments and enhancements of reservations and finance systems relating to franchise operations. During the fiscal year ended May 31, 1996, the Company purchased 16 operating hotels for $49.6 million. During the fiscal year ended May 31, 1995, the Company purchased 16 operating hotels for $59.8 million. The Company plans capital expenditures for development of Sleep Inns and MainStay Suites of $34.0 million and $68.6 million in fiscal years 1997 and 1998, respectively. These amounts include expected capital expenditures for the construction of 10 Sleep Inns and 12 MainStay Suites over the next two fiscal years. Planned capital expenditures for routine renovation and maintenance of existing properties are $14.7 million and $16.3 million for fiscal years 1997 and 1998, respectively. Additionally, the Company plans capital 23 28 expenditures of approximately $8.0 million over the next two fiscal years for significant system enhancements. Future capital expenditures will be financed with cash flow from operations, proceeds from the monetization of the Company's owned hotels or third party financing. Long term debt and notes payable to Parent totaled $294.2 million at May 31, 1996 compared to $250.6 million at May 31, 1995. Notes payable to Parent totaling $225.7 million are to be repaid over a three year period from the Distribution Date. The increase in long term debt and notes payable to Parent is mainly attributable to the Company's acquisition of 16 operating hotels in fiscal year 1996. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS The Company is required to adopt SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," no later than fiscal year 1997. The Company's current policy is to regularly review the recoverability of the net carrying value of its long-lived assets and make adjustments accordingly. The adoption of SFAS No. 121 is not expected to have a material impact on the Company's financial statements. The Company is required to adopt SFAS No. 123, "Accounting for Stock-Based Compensation," no later than fiscal year 1997. Management expects to adopt SFAS No. 123 utilizing the method which provides for disclosure of the impact of stock-based compensation grants. 24 29 BUSINESS GENERAL The Company is a leading international hotel franchisor and a major owner and manager of hotel properties. Both franchise and owned and managed hotel properties principally operate under one of the Company's brand names: Comfort, Quality, Clarion, Sleep, Rodeway, and Econo Lodge. In addition, the Company recently introduced a new brand, MainStay Suites. For the nine months ended May 31, 1996, hotel franchising contributed 58.5% of the Company's revenues and 73.0% of the Company's gross profits, while hotel ownership and management contributed the remaining 41.5% of revenues and 27.0% of gross profits. The Company's franchise operations and owned and managed hotel operations have experienced significant growth in revenues and profitability over the last few years. The Company's compound annual growth rate since fiscal year 1991 was 20.1% for revenues and 21.8% for net income before unusual items. For the fiscal year ended May 31, 1996 total revenues and net income were $374.9 million and $8.5 million, respectively. Excluding unusual items net income for the period was $28.6 million. FRANCHISE OPERATIONS The Company is one of the world's largest franchisors of hotels with 3,052 properties open and operating in 30 countries at May 31, 1996. At May 31, 1996, another 716 franchise properties with a total of 63,785 rooms were under development. As a franchisor, the Company licences hotel operators to use the Company's brand names and provides to these hotel operators products and services designed to increase their revenues and profitability. Key products and services provided include nationally recognized marketing and advertising programs, access to a reservation system that delivers business to the franchisees' hotels, access to innovative products and services developed by the Company and other support services such as training programs, purchasing discounts, operating manuals, quality standards and inspections. In return for the use of the Company's brand names and access to the Company's products and services, franchisees pay to the Company fees that are generally based on a percentage of the franchise hotels' gross room revenues. OWNED AND MANAGED OPERATIONS In addition to acting as franchisor, the Company owns and manages hotels. At May 31, 1996, the Company owned and managed, under its six principal brand names, 79 hotels in 25 states, as well as in Germany, France and England. To take advantage of a recovering lodging industry, the Company over the past few years has pursued a strategy of acquiring domestic hotel properties at prices below their replacement cost and increasing their value through the investment of capital to improve the physical site and the installation of professional management and marketing teams to operate the renovated properties. Since June 1992, the Company has spent approximately $242.7 million to buy and renovate 52 hotel properties. The Company's strategy for its owned and managed operations is to monetize its capital investment in Company-owned hotels at values that reflect their improved operating performance. The Company is exploring a variety of transactions including, among others, asset securitization, sale/leasebacks, joint ventures with third parties, debt financing and asset divestitures. The Company intends to retain management and franchise agreements relating to these properties. THE LODGING INDUSTRY As of June 1996, there are approximately 3.3 million hotel rooms in the United States in hotels/motels containing twenty or more rooms. Of those rooms, approximately 1.2 million rooms are not affiliated with a national or regional brand, while the remaining approximately 2.1 million rooms are affiliated with a brand either through franchise or the ownership/management of a national or regional chain. During the late 1980s, the industry added approximately 500,000 hotel rooms to its inventory due largely to a favorable hotel lending environment, the ability of hotel operators to regularly increase room rates and the deductibility of passive tax losses, which encouraged hotel development. As a result, the lodging industry saw an oversupply of rooms and a decrease in industry performance. The lodging industry in recent years has demonstrated a recovery, based on year-to-year increases in room revenues, occupancy rates, revenue per available room ("RevPAR"), and lodging industry profitability. RevPAR is calculated by multiplying the percentage of occupied rooms by the average daily room rate charged. Since 1993, the lodging industry has been able to increase its average daily rate ("ADR") at a pace 25 30 faster than the increase in the Consumer Price Index ("CPI"), a common measure of inflation published by the US Department of Labor. Smith Travel Research's estimates indicate that occupancy rates in 1996 will increase to 66.4% from 65.5% in 1995, in part because of increases in room demand attributable to the 1996 Summer Olympics, the 1996 national political campaigns and conventions, and a continued improvement in the national economy. The following chart demonstrates the recent trends: THE US LODGING INDUSTRY'S GROWTH TRENDS SINCE 1991
INCREASE IN AVERAGE ROOM DAILY INCREASE INCREASE REVENUE PER REVENUE (ROOM) IN ADR IN CPI AVAILABLE NEW VERSUS OCCUPANCY RATES VERSUS VERSUS ROOM PROFITS ROOMS YEAR PRIOR YEAR RATES (ADR) PRIOR YEAR PRIOR YEAR (REVPAR) (IN BILLIONS) ADDED - -------------- ----------- --------- ------- ---------- ---------- ----------- ------------- -------- 1992.......... N/A 62.1% $59.65 N/A 2.9% $ 37.04 break-even 34,000 1993.......... 6.3% 63.1% $61.30 2.8% 2.7% $ 38.68 $2.4 38,000 1994.......... 8.6% 64.7% $64.24 4.8% 2.7% $ 41.56 $5.5 44,000 1995.......... 7.9% 65.5% $67.34 4.8% 2.9% $ 44.11 $8.5 56,000 1996*......... N/A 66.4% $71.00 5.4% 2.9% $ 46.68 N/A 60,000 - 70,000
- --------------- Source: Smith Travel Research * Estimated The Company believes the lodging industry can be divided into three categories: luxury or upscale, middle-market and economy. The Company believes the luxury category generally has room rates above $70 per night, the middle-market category generally has room rates between $46 and $70 per night and the economy category generally has room rates less than $46 per night. Service is a distinguishing characteristic in the lodging industry. Generally there are three levels of service: full-service hotels (which offer food and beverage services, meeting rooms, room service and similar guest services); limited-service hotels (which offer amenities such as swimming pools, continental breakfast, or similar services); and all-suites hotels (which usually have limited public areas, but offer guests two rooms or one room with distinct areas, and which may or may not offer food and beverage services). The Company's Econo Lodge, Rodeway and Sleep brands compete primarily in the limited-service economy market; the Company's Comfort and Quality brands compete primarily in the limited-service middle-market; the Company's Clarion brand competes primarily in the full-service upscale market; and the Company's MainStay Suites brand will compete primarily in the all-suites middle-market. New hotels opened in recent years typically have been limited service hotels, as limited-service hotels are less costly to develop, enjoy higher gross margins, and tend to have better access to financing. These hotels typically operate in the economy and middle-market categories and are located in suburban or highway locations. From 1993 to 1996, the average room count in new hotels declined from 123 to 80, primarily because hotel developers found it difficult to obtain financing of more than $3 million from their primary lending sources (local banks and Small Business Administration guaranteed loan programs). In recent years, operators of hotels not owned or managed by major lodging companies have increasingly joined national hotel franchise chains as a means of remaining competitive with hotels owned by or affiliated with national lodging companies. Because hotels typically operate with high fixed costs, increases in revenues generated by affiliation with a franchise lodging chain can improve a hotel's financial performance. Of approximately 933 hotel properties that changed their affiliation in 1995, 77% converted from independent status to affiliation with a chain or converted from one chain to another, while only 23% canceled or were required to cancel their chain affiliation. The share of US hotel rooms affiliated with a chain was approximately 63% in 1995. The shift to chain membership has been most pronounced among hotels in the same categories as the Company, i.e., the economy and middle-market categories. In 1995, 53% of all conversions to a chain from independent status or from another chain were in the economy category, 37% were in the middle-market 26 31 category, and 10% were in the upscale category. Often by affiliating with a middle-market or economy brand, a hotel operator can reposition the hotel property in the price category best suited to its market. The large franchise chains, including the Company, provide a number of services to hotel operators to improve the financial performance of their properties, including national reservation systems, marketing and advertising programs and direct sales programs. The Company believes that national franchise chains with a larger number of hotels enjoy greater brand awareness among potential guests than those with fewer numbers of hotels, and that greater brand awareness can increase the desirability of a hotel to its potential guests. The Company believes that hotel operators choose lodging franchisors based primarily on the perceived value and quality of each franchisor's brand and its services, and the extent to which affiliation with that franchisor may increase the franchisee's reservations and profits. FRANCHISE BUSINESS ECONOMICS OF FRANCHISE BUSINESS The fee and cost structure of the Company's franchise business provides significant opportunities for the Company to increase profits by increasing the number of franchised properties. Hotel franchisors such as the Company derive substantially all of their revenue from annual franchise fees. Franchise fees are comprised of an initial fee and ongoing royalty and marketing and reservation fees charged by the franchisor as a percentage of the franchisee's gross room revenues. The royalty portion of the franchise fee is intended to cover the operating expenses of the franchisor, such as expenses incurred in quality assurance, administrative support and other franchise services and to provide the franchisor with operating profits. The marketing and reservation portion of the franchise fee is intended to reimburse the franchisor for the expenses associated with providing such franchise services as the central reservation system and national marketing and media advertising. Much of the variable costs associated with the Company's activities are reimbursed by the franchisees through the marketing and reservation fees. The Company's existing base of franchises more than covers the fixed cost of the business at its current level so that the variable costs of overhead -- in such areas as quality assurance, franchise services and administration, finance and legal -- represent the bulk of incremental costs associated with the addition of franchisees. Because the variable overhead costs associated with incremental franchise system growth are substantially less than the incremental royalty fees, the Company is able to capture a significant portion of these incremental royalty fees as operating profit. STRATEGY The Company's franchise strategy is based on expanding its franchise system by providing hotel operators with products and services that increase their revenues and profitability, capitalizing on its franchising and marketing expertise through joint marketing programs with preferred vendors and engaging in strategic acquisitions in the lodging, travel-related and other franchise industries. Key components of the Company's franchise strategy include: - GROWTH OF THE COMPANY'S DOMESTIC FRANCHISE SYSTEM. The Company's existing franchisees form a pool of potential buyers and builders of new hotels that may affiliate with one of the Company's brands. Approximately 50% of new franchises sold by the Company in fiscal year 1996 were sold to existing franchisees. The Company believes that its focus on improving the revenues and profitability of its franchisees will allow it to retain these current franchisees and attract new franchisees. During the ten fiscal years ended May 31, 1996, the number of properties in the Company's domestic franchise system increased through acquisition and internal growth to 2,495 properties with 214,613 rooms, from 599 properties with 69,187 rooms. The Company believes that its operating structure and the services it provides to its franchisees will enable the Company to attract new hotels to its franchise system. The following are the principal components of the Company's franchising system and services: RESERVATION SYSTEM -- The Company maintains a reservations system that delivers customers to franchisees and produces incremental revenues for both franchisees and the Company. 27 32 ADVERTISING CAMPAIGNS -- The Company promotes its brand awareness through nationally recognized advertising campaigns including the long running "celebrity in a suitcase" campaign. PRODUCTS AND SERVICES -- The Company provides its franchisees with access to the Company's products and services. Many of these products and services are tested and developed by the Company in its owned hotels before being adapted to the franchise system. For example, the Company's franchised hotels may offer customized rooms designed to meet the needs of niche markets, such as senior citizens and business travelers. The Company also offers its franchisees innovative food delivery concepts such as Choice Picks food court and K-Minus(SM) Banqueting Kitchens. APPROACH TO FRANCHISING -- The Company's franchising system structure and internal performance measures have been developed to appeal to current and potential franchisees. -- Territorial Protection. Competition from same-brand franchisees within a specific geographic area is limited in order to protect the investments of current and potential franchisees. -- Brand Segmentation. The Company is able to meet the needs of current and potential franchisees across a wide range of market segments by maintaining an array of distinct brands, each with its own marketing and operating strategy. In addition, the Company plans to continue to develop new brands to target high-growth segments of the lodging industry. Brand segmentation enables the Company to franchise multiple properties -- each under a different franchise brand -- in a given geographic area. -- RevPAR Focus. Revenue per available room per day, or RevPAR, is calculated by multiplying the percentage of occupied rooms by the average daily room rate charged. The Company believes that franchisees view RevPAR as the single most important measure of the operational success of their properties. Accordingly, the Company has adopted overall systemwide RevPAR improvement as the key internal measure of performance for the Company and its management in order to better align the goals and objectives of the Company with those of its customers. - INCREASES IN AVERAGE ACTUAL ROYALTY RATES. The Company's average actual royalty rate is determined by analyzing the revenues and royalty rates of individual properties. Each property's royalty rates vary based upon the brand and the age of the contract (with newer contracts generally having higher royalty rates). The Company has increased its average actual royalty rate each year since 1992, and the Company expects to continue to increase its average actual royalty rate as franchise agreements with low royalty fees expire, terminate or are amended. - STRATEGIC DEVELOPMENT OF THE INTERNATIONAL FRANCHISE SYSTEM. During the ten fiscal years ended May 31, 1996, the number of properties in the Company's international franchise system increased to 557 properties with 46,843 rooms, from 46 properties with 4,505 rooms. The Company anticipates further development in its existing international markets in order to increase the number of Choice hotels and to allow for more efficient use of existing financial, marketing and human resources. In other parts of the world, the Company intends to expand in gateway cities which attract international travelers who are familiar with the Company's hotel brands. International development of the Company's brands may be structured in a variety of ways, including development by the Company directly, by master franchisees or by joint ventures. - EXPANSION OF PREFERRED VENDOR PROGRAMS. The Company believes there is significant opportunity to leverage its size and marketing expertise by entering into joint marketing arrangements with national and multinational companies that want to gain exposure to the millions of guests who patronize the Company's franchise hotels each year. In the past, these arrangements have added to the Company's and franchisees' revenues and profits by attracting business to its franchise hotels. The Company has also sought to structure these arrangements to include direct payments to the Company from preferred vendors who wish to capitalize on the Company's marketing reach. Firms that have entered into marketing arrangements with the Company on such terms include AT&T, Pizza Hut, Nortel (formerly Northern Telecom), Alamo Rent-A-Car and CUC Travel. 28 33 - PURSUIT OF SELECTED STRATEGIC INVESTMENTS AND ACQUISITIONS. The Company intends to pursue strategic investments and acquisitions, both in the United States and abroad, of lodging, travel-related and other franchise businesses. The Company believes that such opportunities are significant and that the Company has financial capability sufficient to pursue such opportunities. FRANCHISE SYSTEM The Company's franchise hotels principally operate under one of the Company's brand names: Comfort, Quality, Clarion, Sleep, Rodeway and Econo Lodge. The following table presents key statistics relative to the Company's domestic franchise system over the three fiscal years ended May 31, 1996. COMBINED DOMESTIC FRANCHISE SYSTEM
AS OF OR FOR THE YEAR ENDED MAY 31, ------------------------------- 1994 1995 1996 ------- ------- ------- Number of properties, end of period................. 2,283 2,311 2,495 Number of rooms, end of period...................... 203,019 200,792 214,613 Average royalty rate................................ 3.1% 3.2% 3.5% Average occupancy percentage........................ 62.2% 63.8% 63.8% Average daily (room) rate (ADR)..................... $ 45.63 $ 47.13 $ 49.49 RevPAR.............................................. $ 28.40 $ 30.08 $ 31.60 Royalty fees ($000s)................................ $62,590 $71,665 $82,239
29 34 No master franchisee or other franchisee accounted for 10% or more of the Company's total revenues or revenues related to franchise operations during the last three fiscal years. BRAND POSITIONING The Company's hotels are primarily limited-service hotels (offering amenities such as swimming pools and continental breakfast) or limited-to-full service (offering amenities such as food and beverage services, meeting rooms and room service). The following chart summarizes how the Company's brands are positioned in the marketplace. LOGO COMFORT. Comfort Inns and Comfort Suites hotels offer rooms in the limited-service, middle market category. Comfort Inns and Comfort Suites are targeted to traditional businesses and leisure travelers. Principal competitor brands include Days Inn, Fairfield Inn, Hampton Inn, Holiday Express and LaQuinta. At May 31, 1996, there were 1,340 Comfort Inn properties and 87 Comfort Suite properties with a total of 106,179 and 7,493 rooms, respectively, open and operating worldwide. An additional 198 Comfort Inn properties and 88 Comfort Suite properties with a total of 18,561 and 7,223 rooms, respectively, were under development. Comfort properties are located in the United States and in Australia, the Bahamas, Belgium, Canada, France, Germany, India, Indonesia, Ireland, Italy, Jamaica, Japan, Mexico, Norway, Portugal, Sweden, Switzerland, Thailand, the United Kingdom and Uruguay. The following chart summarizes the Comfort system in the United States: COMFORT DOMESTIC SYSTEM
AS OF OR FOR THE YEAR ENDED MAY 31, ------------------------------- 1994 1995 1996 ------- ------- ------- Number of properties, end of period................. 935 1,015 1,129 Number of rooms, end of period...................... 82,479 87,551 94,160 Royalty fees ($000s)................................ $31,187 $37,635 $44,657
30 35 QUALITY. Certain Quality Inns and Quality Suites hotels compete in the limited service, middle market category while others compete in the full service, middle market category. Quality Inns and Quality Suites are targeted to traditional business and leisure travelers. Principal competitor brands include Best Western, Holiday Inn, Howard Johnson, Ramada Inn and Days Inn. At May 31, 1996, there were 553 Quality Inn properties with a total of 65,693 rooms, and 22 Quality Suites properties with a total of 3,377 rooms open worldwide. An additional 110 Quality Inn properties and 5 Quality Suites properties with a total of 12,382 rooms and 324 rooms, respectively, were under development. Quality properties are located in the United States and in Argentina, Australia, Belgium, Canada, Chile, Denmark, France, Germany, India, Indonesia, Ireland, Italy, Jamaica, Japan, Mexico, New Zealand, Norway, Portugal, Puerto Rico, Russia, Spain, Thailand, the United Kingdom and the United Arab Emirates. The following chart summarizes the Quality system in the United States: QUALITY DOMESTIC SYSTEM
AS OF OR FOR THE YEAR ENDED MAY 31, ------------------------------- 1994 1995 1996 ------- ------- ------- Number of properties, end of period................... 358 341 362 Number of rooms, end of period........................ 45,032 43,281 45,967 Royalty fees ($000s).................................. $14,890 $15,632 $16,606
ECONO LODGE. Econo Lodge hotels operate in the limited-service, economy category of the lodging industry. Econo Lodges are targeted to the senior travel market and rely to a large extent on strong roadside name recognition. Principal competitor brands include Days Inn, Ho-Jo Inn, Motel 6, Ramada Limited, Red Carpet Inn, Red Roof Inn, Super 8 and Travelodge. At May 31, 1996, there were 658 Econo Lodge properties with a total of 43,545 rooms open and operating in the United States and Canada, and an additional 110 properties with a total of 7,863 rooms under development in those two countries. The following chart summarizes the Econo Lodge system in the United States: ECONO LODGE DOMESTIC SYSTEM
AS OF OR FOR THE YEAR ENDED MAY 31, ------------------------------- 1994 1995 1996 ------- ------- ------- Number of properties, end of period................... 677 633 641 Number of rooms, end of period........................ 46,570 42,801 42,726 Royalty fees ($000s).................................. $11,231 $12,021 $12,760
CLARION. Clarion Inns, Clarion Hotels, Clarion Resorts and Clarion Suites hotels are full-service properties which operate in the upscale category. Clarion hotels are targeted to traditional business and leisure travelers. Principal competitor brands include Holiday Inn, Holiday Select, Crowne Plaza, Four Points by Sheraton, Radisson, Courtyard by Marriott and Doubletree. At May 31, 1996, there were 94 Clarion properties with a total of 15,504 rooms open and operating worldwide and an additional 24 properties with a total of 3,783 rooms under development. The properties are located in the United States, and in Anguilla, the Bahamas, Canada, the Cayman Islands, Dominica, France, Germany, Guatemala, Honduras, Indonesia, Ireland, Japan, Mexico, Russia, Thailand and Uruguay. The following chart summarizes the Clarion system in the United States: CLARION DOMESTIC SYSTEM
AS OF OR FOR THE YEAR ENDED MAY 31, ----------------------------- 1994 1995 1996 ------ ------ ------- Number of properties, end of period..................... 65 63 75 Number of rooms, end of period.......................... 12,211 10,420 12,817 Royalty fees ($000s).................................... $2,735 $2,995 $3,602
31 36 RODEWAY. The Rodeway brand competes in the limited-service, economy category and is targeted to the senior travel market. Principal competitor brands include Ho-Jo Inn, Ramada Limited, Red Roof Inn, Budgetel, Shoney's Inn, Super 8 and Motel 6. At May 31, 1996, there were 209 Rodeway Inn properties with a total of 13,098 rooms, open and operating in the United States and Canada, and an additional 41 properties with a total of 2,955 rooms under development in those two countries. The following chart summarizes the Rodeway system in the United States: RODEWAY DOMESTIC SYSTEM(1)
AS OF OR FOR THE YEAR ENDED MAY 31, ------------------------------- 1994 1995 1996 ------ ------ ------- Number of properties, end of period................... 214 208 201 Number of rooms, end of period........................ 13,806 13,067 12,547 Royalty fees ($000s).................................. $1,941 $2,302 $2,506
-------------------- (1) Includes data pertaining to the Friendship Inn(R) system, which is being combined with the Rodeway Inn system. SLEEP. Established in 1988, Sleep Inn is a new-construction hotel brand in the limited-service, economy category. Sleep Inns are targeted to the traditional business and leisure traveler. Principal competitor brands include Days Inn, Fairfield Inn, Holiday Express, LaQuinta Inn, Ho-Jo Inn and Ramada Inn. At May 31, 1996, there were 89 Sleep Inn properties with a total of 6,567 rooms open and operating worldwide. An additional 139 properties with a total of 10,614 rooms were under development. The properties are located in the United States, Canada and the Cayman Islands. The following chart summarizes the Sleep system in the United States: SLEEP DOMESTIC SYSTEM
AS OF OR FOR THE YEAR ENDED MAY 31, ----------------------------- 1994 1995 1996 ------ ------ ------ Number of properties, end of period..................... 34 51 87 Number of rooms, end of period.......................... 2,921 3,672 6,396 Royalty fees ($000s).................................... $605 $1,080 $2,108
MAINSTAY SUITES. MainStay Suites, the Company's newest hotel brand, is a middle market, extended-stay lodging product targeted to travelers who book hotel rooms for five or more consecutive nights. The first MainStay Suites hotel, which the Company will own and manage, is scheduled to open in Plano, Texas, in October 1996. The MainStay Suites brand is designed to fill the gap between existing upscale and economy extended-stay lodging products. Principal competitors for the brand will include Doubletree's new Candlewood hotels, Marriott's new middle market extended stay concept, TownPlace Suites, as well as competition from all-suite hotel properties and traditional extended stay operators in both the upscale market (Residence Inn, Homewood Suites, Hawthorne Suites and Summerfield Suites) and the economy market (Extended Stay America, Studio Plus and Oakwood). INTERNATIONAL FRANCHISE OPERATIONS The Company's international franchise operations have traditionally been operated as a division separate from its domestic franchise operations. In some cases international master franchisees are not required to separately report royalty results by brand, making brand results on a worldwide basis unavailable. In the past fiscal year, the Company entered into arrangements to enter eight new international markets. At May 31, 1996, Choice had 557 franchise hotels open in 29 countries outside the United States. The following table 32 37 illustrates the growth of the Company's international franchise system over the three fiscal years ended May 31, 1996: COMBINED INTERNATIONAL FRANCHISE SYSTEM
AS OF OR FOR THE YEAR ENDED MAY 31, ---------------------------- 1994 1995 1996 -------- -------- -------- Number of properties, end of period....................... 430 524 557 Number of rooms, end of period............................ 36,725 44,877 46,843 Royalty fees ($000s)...................................... $ 1,201 $ 1,547 $ 945
EUROPE. Choice is the second-largest international franchised hotel chain in Europe, with 278 hotels open in 13 countries at May 31, 1996. In a move to realign and streamline its European operations, the Company, through its subsidiary, Manor Care Hotels (France) S.A., recently consummated a transaction with Friendly Hotels, PLC ("Friendly") whereby the Company purchased an equity interest for approximately $17 million in Friendly to finance the development of ten new Comfort Inn or Quality Inn hotels in the United Kingdom and Ireland. Additionally, Friendly purchased from the Company a master franchise for the United Kingdom and Ireland. The Company closed its London office as a result of the transaction. The Company's French and German operations are being consolidated into the Company's Paris, France office, which directly operates the Company's business in most of Europe. There are also master franchise arrangements in Scandinavia and Italy. THE MIDDLE EAST. In August 1995, the Company signed a master franchise for Israel. The Company opened its first franchised property in Dubai, United Arab Emirates, in December 1995. At May 31, 1996, this was the only property open in this region. ASIA/PACIFIC. During fiscal year 1996, Company franchisees opened seven hotels in Australia, two in New Zealand, two in India, two in Thailand and four in Indonesia, bringing the total number of properties open in the Asia/Pacific region at May 31, 1996 to 61. CARIBBEAN. The Company's master franchisee had 6 properties open in three Caribbean countries at May 31, 1996. CENTRAL AND SOUTH AMERICA. The Company recently signed master franchise agreements covering Brazil, Uruguay, Paraguay and Argentina. The Company also has master franchisees operating in Guatemala, Chile and Mexico. In total there were 19 open properties in this region at May 31, 1996. CANADA. Choice Hotels Canada (a joint venture with Journey's End Corporation of Belleville, Ontario, Canada ("Journey's End")) is Canada's largest lodging organization with 192 properties open at May 31, 1996. The joint venture, owned 50% by the Company and 50% by Journey's End, was formed in 1993 when Journey's End converted substantially all of its controlled hotels to the Company's brands and the Company contributed its operations in Canada to form Choice Hotels Canada. FRANCHISE SALES The Company markets franchises principally to: (i) developers of hotels, (ii) owners of independent hotels and motels, (iii) owners of hotels affiliated with other franchisors' brands, (iv) its own franchisees, who may own, buy or build other hotels which can be converted to the Company's brands, and (iv) contractors who construct any of the foregoing. In fiscal year 1996, existing franchisees accounted for approximately one-half of the Company's new franchise agreements. In considering hotels for conversion to one of the Company's brands, or sites for development of new hotels, the Company seeks properties in locations which are in close proximity to major highways, airports, tourist attractions and business centers that attract travelers. At May 31, 1996, the Company employed approximately 40 sales directors, each of whom is responsible for a particular region or geographic area. The Company intends to increase its number of regional sales directors in the current fiscal year. Sales directors contact potential franchisees directly and receive compensation based on sales generated. Franchise sales efforts emphasize the benefits of affiliating with one of 33 38 the Company's well-known brand names, the Company's commitment to improving RevPAR, the Company's "celebrity in a suitcase" television advertising campaign (formerly used for the entire Choice family of brands and now used principally for its three largest brands, Comfort, Quality and Econo Lodge), the Company's reservation system, the Company's training and support systems, and the Company's history of growth and profitability. Because it offers brands covering a broad spectrum of the lodging marketplace, the Company is able to offer each prospective franchisee a brand that fits its needs, lessening the chances that the prospective franchisee would need to consider a competing franchise system. During fiscal year 1996, the Company received 794 franchise applications, approved 681 applications, signed 413 franchise agreements and placed 282 new properties into operation in the United States under the Company's brands. Of those placed into operation, 123 were newly constructed hotels. By comparison, during fiscal year 1995, the Company received 741 franchise applications, approved 578 applications, signed 341 franchise agreements and had 212 new US properties come on line. Applications may not result in signed franchise agreements either because an applicant is unable to obtain financing or because the Company and the applicant are unable to agree on the financial terms of the franchise agreement. Because retention of existing franchisees is important to the Company's growth strategy, existing franchisees are offered the right to object to a same-brand property within 15 miles, and are protected from the opening of a same-brand property within a specific distance, generally two to five miles, depending upon the size of the property and the market size. The Company believes that it is the only major franchise company to routinely offer such territorial protection to its franchisees. FRANCHISE AGREEMENTS A franchise agreement grants a franchisee the right to non-exclusive use of the Company's franchise system in the operation of a single hotel at a specified location, typically for a period of twenty (20) years, with certain rights to the franchisee to terminate after 10 or 15 years. When the responsibility for development is sold to a master franchisee, that party has the responsibility to sell to local franchisees the Company's brands and the master franchisee generally must manage the delivery of necessary services (such as quality assurance, reservations and marketing) to support the franchised hotels in the master franchise area. The master franchisee collects the fees paid by the local franchisee and remits an agreed share to the Company. Master franchise agreements generally have a term of at least 10 years. Franchise agreements, other than master franchise agreements, can be terminated by either party prior to the conclusion of their term under certain circumstances, such as at certain anniversaries of the agreement or if a franchisee fails to bring properties into compliance with contractual quality standards within specified periods of time. Early termination options give the Company flexibility in eliminating or re-branding properties which become weak performers for reasons other than contractual failure by the franchisee. Master franchise agreements typically contain provisions permitting the Company to terminate the agreement for failure to meet a specified development schedule. Franchise fees vary among the Company's different brands, but generally are competitive with or slightly below the industry average within their market group. Franchise fees usually have four components: an initial, one-time affiliation fee; a royalty fee; a marketing fee; and a reservation fee. Proceeds from the marketing fee and reservation fee are used exclusively to fund marketing programs and the Company's central reservation system, respectively. Most marketing fees support brand-specific marketing programs, although the Company occasionally contributes a portion of such fees to marketing programs designed to support all of the Company's brands. Royalty fees and affiliation fees are the principal source of profits for the Company. 34 39 Under the terms of the standard franchise agreements, the Company's franchisees are typically required to pay the following initial fees and on-going fees as a percentage of gross room revenues: QUOTED FEES BY BRAND
INITIAL FEE ON-GOING FEES AS A PERCENTAGE OF GROSS ROOM REVENUES PER ROOM/ --------------------------------------------------------- BRAND MINIMUM ROYALTY FEES MARKETING FEES RESERVATION FEES ---------------------- ------------ ------------ ------------------- ---------------- Comfort Inn........... $300/$40,000 5.0% 1.3%, plus $.28 per 1.75% room per day Comfort Suites........ $300/$50,000 5.0% 1.3%, plus $.28 per 1.75% room per day Quality Inn........... $300/$40,000 4.0% 1.3%, plus $.28 per 1.75% room per day Quality Suites........ $300/$50,000 4.0% 1.3%, plus $.28 per 1.25% room per day Sleep................. $300/$40,000 4.0% 1.3%, plus $.28 per 1.75% room per day Clarion............... $300/$40,000 2.75% 1.0% 1.25% Econo Lodge........... $250/$25,000 4.0% 3.5%(1) -- MainStay Suites....... $300/$30,000 4.5% 2.5%(1) -- Rodeway Year 1.............. $250/$25,000 3.5% 1.25% 1.25% Year 2.............. -- 3.0% 1.25% 1.25% Year 3.............. -- 3.0% 1.00% 1.00%
- --------------- (1) Fee includes both Marketing and Reservations. The Company has increased its average actual royalty rate in each of the past three years, primarily by raising the royalty fee for Comfort franchisees to 5.0% of annual gross room revenues ("GRR") from 4.0% of GRR in 1993, and by raising the royalty rate for franchisees in the former Friendship franchise system to 3.0% of GRR from 2.0% of GRR in 1991. For the fiscal year ended May 31, 1996, the Company's average actual royalty rate was 3.5%, up from 3.2% for the fiscal year ended May 31, 1995, and up from 3.1% for the fiscal year ended May 31, 1994. The Company believes that its average actual royalty rate will continue to increase as older franchise agreements expire, terminate or are amended. At May 31, 1996, the Company had 2,495 franchise agreements in effect in the United States and 557 franchise agreements in effect in other countries. The average age of the franchise agreements was 5.1 years. Twenty-three of the franchise agreements are scheduled to expire during the five year period of June 1, 1996 through May 31, 2001; however, franchise agreements generally contain early termination provisions. FRANCHISE OPERATIONS The Company's operations are designed to improve RevPAR for the Company's franchisees, as this is the measure of performance that most directly impacts franchisee profitability. It is the Company's belief that by helping its franchisees to become more profitable it will enhance its ability to retain its existing franchisees and attract new franchisees. The key aspects of the Company's franchise operations are: CENTRAL RESERVATION SYSTEM. Approximately 25% of the room nights booked at franchisees' properties are reserved through the toll-free telephone reservation system operated by the Company. The Company's reservation system consists of a computer reservation system known as CHOICE 2001, five reservation centers in North America and several international reservation centers run by the Company or its master franchisees. The CHOICE 2001 system is designed to allow trained operators to match each caller with a Company-branded hotel meeting the caller's needs. It provides an instant data link to the Company's franchised properties as well as to the Amadeus, Galileo, SABRE and Worldspan airline reservation systems thereby facilitating the reservation process for travel agents. 35 40 To more sharply define the market and image for each of its brands, the Company began advertising separate toll-free reservation numbers for all of its brands in fiscal year 1995. The Company allows its reservation agents to cross-sell the Company's hotel brands. If a room in the Choice hotel brand requested by a customer is not available in the location or price range that the customer desires, the agent may offer the customer a room in another Choice brand hotel that meets the customer's needs. The Company believes that cross-selling enables the Company and its franchisees to capture additional business. On-line reports generated by the CHOICE 2001 system enable franchisees to analyze their reservation patterns over time. In addition, the Company provides and is currently improving a yield management product for its franchisees to allow them to improve the management of their mix of rates and occupancy based on current and forecasted demand on a property by property basis. The Company also markets to its franchisees a property management product. Such products are designed to manage the financial and operations information of an individual hotel and improve its efficiency. BRAND NAME MARKETING AND ADVERTISING. The Company's marketing and advertising programs are designed to heighten consumer awareness of the Company's brands. Marketing and advertising efforts are focused primarily in the United States and include national television and radio advertising, print advertising in consumer and trade media and promotional events, including joint marketing promotions with vendors and corporate partners. The Company is recognized for its "celebrity in a suitcase" television advertisements. In fiscal year 1996, the Company began using brand-specific marketing and largely discontinued the strategy of advertising its multiple brands under the Choice umbrella, although it continues to use its "suitcase" ads for its three largest brands, Comfort, Quality and Econo Lodge. The marketing fees generated by these brands are used, in part, to fund a national network television advertising campaign. The Company's smaller hotel brands conduct advertising campaigns that also include cable television, radio and print. The Company conducts numerous marketing programs targeting specific groups, including senior citizens, motorist club members, families, government and military employees, and meeting planners. Other marketing efforts include telemarketing and telesales campaigns, domestic and international trade show programs, publication of group and tour rate directories, direct-mail programs, discounts to holders of preferred credit cards, centralized commissions for travel agents, fly-drive programs in conjunction with major airlines, and twice yearly publication of a Travel and Vacation Directory. Marketing and advertising programs are directed by the Company's Marketing Department, which is headed by a senior vice president. The senior vice president of marketing is assisted by six vice presidents, including a vice president for marketing, promotions and communications. These officers direct an internal staff and also utilize the services of independent advertising agencies. In addition, the Company employs sales personnel at its Silver Spring, Maryland, headquarters and in its Phoenix, Arizona, office. These sales personnel use telemarketing to target specific customer groups, such as potential corporate clients in areas where the Company's franchised hotels are located, the motor coach market, and meeting planners. Most of these sales personnel sell reservations and services for all of the Company's brands, but four are responsible exclusively for the Clarion brand. The Company's regional sales directors work with franchisees to maximize RevPAR. These directors advise franchisees on topics such as how to market their hotels and how to maximize the benefits offered by the Company's reservations system. QUALITY ASSURANCE PROGRAMS. Consistent quality standards are critical to the success of a hotel franchise. The Company has established quality standards for all of its franchised brands which cover housekeeping, maintenance, brand identification and level of services offered. The Company inspects properties for compliance with its quality standards when application is made for admission to the franchise system. The compliance of existing franchisees with quality standards is monitored through scheduled and unannounced Quality Assurance Reviews conducted at least once per year at each 36 41 property. Properties which fail to maintain a minimum score are reinspected on a more frequent basis until deficiencies are cured, or until such properties are terminated. To encourage compliance with quality standards, the Company offers various brand-specific incentives to franchisees who maintain consistent quality standards. Franchisees who fail to meet minimum quality standards may be subject to consequences ranging from written warnings to termination of the franchisee's franchise agreement. The Company believes that a good measure of the quality of a hotel is the rating granted to it by the American Automobile Association ("AAA"). AAA rates hotels based on the quality and range of amenities and service on a scale of one to five diamonds, with five diamonds the highest rating. As of May 1996, AAA has rated 78.5%, 78.4% and 80.2% of the Company's Comfort, Quality and Clarion properties, respectively, located in the United States, Canada, Mexico and the Caribbean. Among such properties 66% of Comfort properties, 66% of Quality properties, and 80% of Clarion properties received three diamonds or better. TRAINING. The Company maintains a training department which conducts mandatory training programs for all franchisees and their employees. The Company also conducts regularly scheduled regional and national training meetings for both property-level staff and managers. Training programs teach franchisees how to take advantage of the Company's reservation system and marketing programs, and fundamental hotel operations such as housekeeping, maintenance, and inventory yield management. Training is conducted by a variety of methods, including group instruction seminars and video programs. The Company is developing an interactive computer-based training system that will train hotel employees at their own pace. Franchisees will be required to purchase hardware to operate the training system, and will use software developed by the Company. RESEARCH AND DEVELOPMENT. The Company seeks to enhance RevPAR by providing to franchisees systems and products that will reduce costs and/or improve their operations. Research and development activity resulted in the launch of three new franchise products in fiscal year 1996, Choice Picks food court, MainStay Suites hotels and K-Minus food service. In January 1996, the Company introduced its MainStay Suites franchise hotel brand, an extended-stay product targeted to travelers who book hotel rooms for five or more consecutive nights. See "-- MainStay Suites." In November 1995, the Company introduced Choice Picks food court, a customized, modular food-service system tailored to the needs of middle-market hotels. Choice Picks food courts offer hotel guests a "choice pick" of nationally known branded food items, such as Nathan's Famous(R) hot dogs, sandwiches made with Healthy Choice(R) deli meats, Pizzeria Uno(R) pizza and calzone, Nestle Toll House(R) cookies and muffins, I Can't Believe It's Yogurt(R) desserts, and Coca-Cola(R) beverages. The typical Choice Picks food court can be operated by as few as two employees, thus providing the properties with lower operating costs than properties with conventional restaurants. Franchisees pay the Company a one-time affiliation fee and monthly royalty fees equal to a percentage of gross revenues on Choice Picks food court sales. Franchisees must buy equipment and food service modules necessary to set up a Choice Picks food court. Beginning in fiscal 1997, the Company intends to market Choice Picks food court to larger hotel operators and other potential customers outside of the Company's franchise system. In November 1995, the Company also began to offer to its franchisees the K-Minus food service system, which eliminates expensive banquet kitchens by outsourcing food preparation and limiting on-site work to assembly and rethermalization. Compared with a traditional banquet operation, the K-Minus food service system saves labor costs and energy. Franchisees who wish to implement the K-Minus system are given design and technical assistance by the Company. The Company receives a one-time technical assistance fee for the provision of these services based on the scope of the project. PURCHASING. The Company's product services department negotiates volume purchases of various products needed by franchisees to run their hotels, including such items as furniture, fixtures, carpets and 37 42 bathroom amenities. The department also helps to ensure consistency in such products across its exclusively new-construction brands, Sleep Inn and MainStay Suites brands. Sales to franchisees by the Company were $20.7 million during fiscal year 1996, up from $13.9 million during fiscal year 1995. DESIGN AND CONSTRUCTION. The Company maintains a design and construction department to assist franchisees in refurbishing, renovating, or constructing their properties prior to or after joining the system. Department personnel assist franchisees in meeting the Company's brand specifications by providing technical expertise and cost-savings suggestions. FINANCIAL ASSISTANCE PROGRAMS. The Company has established programs, primarily with independent lenders, to provide financing assistance to its franchisees and prospective franchisees for hotel refinancing, acquisition, renovation and development. OWNED AND MANAGED LODGING BUSINESS HISTORICAL ACQUISITION STRATEGY To take advantage of a recovering lodging industry, the primary focus of the Company's owned and managed hotel operations (the "Hotel Division") over the past few years has been to acquire domestic hotel properties at prices below their replacement cost and increase their value through (1) the investment of capital to improve the physical site and (2) the installation of professional management and marketing teams to operate the renovated properties. Since June 1992, the Company has spent approximately $242 million to buy and renovate 52 hotel properties with 7,485 rooms. During fiscal year 1996, the Hotel Division acquired 16 hotels for a total planned investment, including initial improvements, of approximately $72 million. In addition to the 52 hotel properties acquired, the Company owned and managed as of May 31, 1996 14 European properties (four developed by the Company and ten acquired in connection with the Company's Resthotel Primevere acquisition in fiscal 1994), 9 seasoned domestic properties and four Sleep Inns developed by the Company. HOTEL DIVISION DOMESTIC ACQUISITIONS
FISCAL YEAR ------------------------------------------------------------ 1993 1994 1995 1996 ------------ ------------ ------------ ------------ Total acquisitions................. 7 13 16 16 Total number of rooms acquired..... 1,276 1,933 2,336 1,940 Total cost of acquisitions (in millions) (including initial improvements)................. $ 30.9 $ 55.8 $ 83.3 $ 71.8* Average cost per room.............. $ 24,216 $ 28,867 $ 35,659 $ 37,095
-------------------- * Includes $22.2 million planned for initial improvements. 38 43 Hotel acquisitions generally have been made pursuant to one of the following strategies: - Buy limited service economy hotels requiring limited rehabilitation efforts. - Buy distressed, limited service properties or portfolios requiring substantial renovations. - Buy full-service hotels below replacement cost and change operations to improve the profit models. - Buy well-located old and inefficient land use hotels, convert the existing property to suites or extended stay concepts, reduce room counts, eliminate restaurants and reduce parking requirements to allow the development of a new limited service hotel on the existing site, thereby having two Company-operated properties on the site. If such development is not feasible, the excess land is targeted for sale.. Net operating income for the seven hotels purchased in fiscal year 1993 increased from $6.6 million in fiscal 1995 to $8.0 million in fiscal 1996, a 22% improvement. For the 13 domestic hotels purchased in fiscal year 1994, net operating income increased 38% to $10.0 million in fiscal year 1996 from $7.2 million in fiscal year 1995. Net operating income for the 16 hotels acquired in fiscal year 1995 was $6.7 million in fiscal year 1996, a 268% increase over the $1.8 million achieved in fiscal year 1995. The following chart summarizes occupancy improvements for original domestic portfolio hotels, and fiscal 1993, 1994 and 1995 acquisitions. Occupancy rates for the year acquired reflect only the period during which the properties were owned by the Company. Because many of the recently acquired and developed hotels have not yet reached stabilized levels of operating performance, the Company believes that revenues and gross profit at these hotels will continue to grow. During fiscal year 1996, the Company began restructuring its European operations. This restructuring effort included the purchase of an equity interest in Friendly Hotels, PLC and a reevaluation of key geographic markets in Europe. In connection with this restructuring, the Company performed a review of its European operations and in May 1996 recognized a non-cash charge against earnings related primarily to the impairment of assets associated with certain European hotel operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." OWNED AND MANAGED DOMESTIC HOTELS OCCUPANCY
FISCAL YEAR ----------------------------------- 1993 1994 1995 1996 ----- ----- ----- ----- Original Domestic Portfolio......................... 62.27% 64.16% 67.19% 68.02% Fiscal 1993 Acquisitions............................ 56.17 63.20 73.68 76.17 Fiscal 1994 Acquisitions............................ -- 66.09 70.71 73.76 Fiscal 1995 Acquisitions............................ -- -- 48.96 58.49 Fiscal 1996 Acquisitions............................ -- -- -- 53.23
CURRENT BUSINESS STRATEGY The Hotel Division plans to monetize its capital investment in Company-owned hotels at values that reflect their improved operating performance. The Company is exploring a variety of transactions, including, among others, asset securitization, sale/leasebacks, joint ventures with third parties, debt financing and asset divestitures. The Company intends to retain management and franchise agreements relating to these properties. The proceeds from these transactions will be used initially to repay outstanding indebtedness. The remaining proceeds will be used to launch or provide support to recently developed brands, such as Sleep Inn and MainStay Suites, to develop additional new brands, to expand internationally by investing in selected international gateway cities and to invest in other targeted growth areas. The timing, proceeds and other terms of any such transaction involve risks and uncertainties which may be beyond the Company's control. No assurances can be made that the Company's strategy will be successful. 39 44 OPERATIONS Each of the Company's owned and managed hotels operates under one of the Company's brand names. The following table illustrates the growth of the Company's Hotel Division in the United States over the four fiscal years ended May 31, 1996. DOMESTIC OWNED AND MANAGED HOTELS
AS OF OR FOR THE YEAR ENDED MAY 31, ------------------------------------------ 1993 1994 1995 1996 ------ ------ ------ ------ Number of properties, end of period.......... 19 32 48 65 Number of rooms, end of period............... 3,686 5,605 7,941 9,713 Average occupancy percentage................. 61.36% 64.18% 67.10% 66.61% Average daily (room) rate (ADR).............. $49.53 $49.15 $51.28 $55.97 RevPAR....................................... $30.39 $31.54 $34.40 $37.28
OPERATING SYSTEMS AND PROCEDURES. The Company's owned and managed hotels take advantage of the same systems and services available to franchisees with respect to a particular brand. The hotels participate in the central reservation system, marketing and advertising efforts and volume purchasing discounts and are subject to the same quality assurance program. In addition, the following are systems the Hotel Division has instituted in each of the hotels it operates: - YIELD MANAGEMENT. An automated yield management program has been installed at the hotels which allows the local management to take advantage of the supply and demand conditions in their market place. The system is automated to the point that it performs calculations and suggests pricing strategies to the local hotel management. The program continues to update information based on the availability of room supply and reservation volume within each hotel. - TRAINING. The Hotel Division has developed a training system for all guest services representatives that teaches the basics of telephone sales techniques. A computerized guest comment system was developed to solicit the comments of guests and the experiences they had at the hotel while providing management with immediate guest feedback. - ACCOUNTING SYSTEMS. Each Company-operated hotel has a computerized front desk and accounting system. This system allows key financial indicators (such as daily occupancy and revenue) to be immediately gathered from each hotel and electronically transmitted to the key operating officers and managers of the Hotel Division. This instant access to information allows management to quickly spot trends and make corrections and changes where necessary. The system is completely computerized and allows for cost savings in the accounting and bookkeeping departments of each hotel. In addition, control over operational and capital expenditures is provided by a dedicated group of financial controllers in the home office. This group works with the hotel operations group to maintain expense standards as well as established operating procedures. - TIME AND ATTENDANCE SYSTEM. Each hotel maintains an automated time and attendance system that is tied into a central payroll system at the corporate headquarters. This computerized method of tracking time allows management to make quick decisions on controlling labor costs and provides immediate information on projected costs. - FOOD AND BEVERAGE. The food and beverage efforts are headed by a vice president of food and beverage. The department is responsible for the daily food and beverage activities of the various hotels, as well as the development of new food concepts. This group was responsible for the development, testing and implementation of the Choice Picks food court concept. DEVELOPMENT AND ACQUISITIONS. In order to facilitate the growth process of acquiring new hotels, the Hotel Division maintains an acquisitions department dedicated to the investigation and analysis of potential acquisitions. The department performs the initial evaluation of potential acquisitions along with the due diligence investigations that are required in this process. This department is also responsible for seeking land sites suitable for the construction of Sleep Inns and MainStay Suites which are to be operated by the Company. 40 45 PROPERTIES The following chart lists by brand the Company's owned and managed domestic hotels at May 31, 1996:
NUMBER OF HOTEL MARKET ROOMS ------------------------------------------------ --------------------------- ------ COMFORT Comfort Inn Albuquerque Albuquerque, NM 114 Comfort Inn Norcross Atlanta, GA 110 Comfort Inn N.W., Pikesville, MD** Baltimore, MD 186
Comfort Inn University Baton Rouge, LA 150 Comfort Inn, Danvers Boston, MA 136 Comfort Suites Haverhill Boston, MA 131 Comfort Inn Brooklyn Brooklyn, NY 67 Comfort Inn Canton Canton, OH 124 Comfort Inn Airport Charleston, SC 122 Comfort Inn Charlotte Charlotte, NC 151 Comfort Inn Cincinnati, OH 117 Comfort Inn Middleburg Hts. Cleveland, OH 136 Comfort Inn College Station College Station, TX 114 Comfort Inn Columbia Columbia, SC 98 Comfort Inn DFW Airport Dallas-Fort Worth, TX 152 Comfort Suites Deerfield Ft. Lauderdale, FL 101 Comfort Inn Deerfield East Ft. Lauderdale, FL 69 Comfort Inn Hershey Harrisburg, PA 125 Comfort Inn Hilton Head Hilton Head Island, SC 150 Comfort Inn Collierville Memphis, TN 94 Comfort Inn & Suites, Miami Springs Miami, FL 267 Comfort Inn Miami Springs Miami, FL 110 Comfort Inn -- Lee Road Orlando, FL 145 Comfort Inn -- Turf Paradise Phoenix, AZ 155 Comfort Inn -- North Phoenix, AZ 153 Comfort Inn Portland Portland, ME 126 Comfort Inn by the Bay* San Francisco, CA 135 Comfort Inn Westport St. Louis, MO 170 Comfort Inn Sturgis Sturgis, MI 83 Comfort Inn Traverse City Traverse City, MI 95 Comfort Inn Tyson's Washington, DC 250 Comfort Inn West Palm Beach West Palm Beach, FL 157 Comfort Inn Wichita Wichita, KS 114 QUALITY Quality Inn Anderson Anderson, SC 121 Quality Inn & Suites -- Crown Point Charlotte, NC 100 Quality Inn Plymouth Detroit, MI 123 Quality Suites Deerfield Ft. Lauderdale, FL 107 Quality Inn & Suites Indianapolis Indianapolis, IN 116 Quality Inn Southpoint Jacksonville, FL 184 Quality Inn Lincoln Lincoln, NE 108 Quality Hotel Airport Los Angeles, CA 278
41 46
NUMBER OF HOTEL MARKET ROOMS ------------------------------------------------ --------------------------- ------ Quality Hotel Maingate -- Anaheim* Los Angeles, CA 284 Quality Inn & Suites Lumberton Lumberton, NC 120 Quality Inn & Suites Hampton Norfolk-Virginia Beach, VA 190 Quality Suites Raleigh, NC 114 Quality Inn Richmond Richmond, VA 187 Quality Inn Midvalley Salt Lake City, UT 131 Quality Inn, College Park, MD** Washington, DC 153 Quality Suites Shady Grove Washington, DC 123 Quality Hotel, Arlington, VA Washington, DC 391 CLARION Clarion Hotel Baltimore Baltimore, MD 103 Clarion Hotel Columbus, OH 232 Clarion Hotel Richardson Dallas-Fort Worth, TX 295 Clarion on the Lake Hot Springs, AR 151 Clarion Hotel Hollywood Beach Miami-Ft. Lauderdale, FL 309 Clarion Hotel Mobile, AL 250 Clarion Hotel Virginia Beach Norfolk-Virginia Beach, VA 149 Clarion Hotel Roanoke Roanoke, VA 148 Clarion Hotel Springfield Springfield, MO 199 SLEEP Sleep Inn Baton Rouge Baton Rouge, LA 101 Sleep Inn Plano Dallas-Fort Worth, TX 104 Sleep Inn Houston Houston, TX 107 Sleep Inn San Antonio San Antonio, TX 107 ECONO LODGE Econo Lodge Tolleson Phoenix, AZ 120 RODEWAY INN Rodeway Inn Airport East Phoenix, AZ 100
- --------------- * Denotes leased property. ** Denotes hotel on leased land. The Company also owns and manages ten hotels in France, three in Germany and one in the United Kingdom. COMPETITION Competition among franchise lodging chains is intense, both in attracting potential franchisees to the system and in generating reservations for franchisees. In addition, hotel chains and independent hotels compete intensely for guests and for meeting and banquet business. The Company's principal competitor brands at the national and international level in the economy category of the lodging industry are LaQuinta, Ho-Jo Inn, Ramada Inn, Motel 6, Ramada Limited, Red Carpet Inn, Red Roof Inn, Budgetel, Hampton Inn, Fairfield Inn, Holiday Express, Shoney's Inn, Super 8, Days Inn, and Travelodge. The Company's principal competitor brands at the national and international level in the middle market category of the lodging industry are Days Inn, Fairfield Inn, Hampton Inn, Holiday Express, LaQuinta, Holiday Inn, Best Western, Howard Johnson and Ramada Inns. The Company's principal 42 47 competitor brands at the national and international level in the upscale category are Holiday Inn, Holiday Select, Crowne Plaza, Four Points by Sheraton, Radisson, Courtyard by Marriott and Doubletree. The Company believes that hotel operators choose lodging franchisors based primarily on the perceived value and quality of each franchisor's brand and services, and the extent to which affiliation with that franchisor may increase the franchisee's reservations and profits. Hotel operators may also select a franchisor in part based on the franchisor's reputation among other franchisees, and the success of its existing franchisees. The Company's prospects for growth are largely dependent upon the ability of its franchisees to compete in the lodging market, since the Company's franchise system revenues are based on franchisees' gross room revenues (but not directly on franchisees' profitability). The ability of a hotel (including the Company's owned and managed hotels and its franchisees) to compete may be affected by a number of factors, including the location and quality of its property, the number and quality of competing properties nearby, its affiliation with a recognized name brand, and general regional and local economic conditions. The effect of economic conditions on the Company's results is substantially reduced by the geographic diversity of the Company's franchised properties, which are located in all 50 states and in 30 countries, as well as its range of products and room rates. SERVICE MARKS AND OTHER INTELLECTUAL PROPERTY The service marks Quality Inn, Quality Suites, Comfort Inn, Comfort Suites, Clarion Hotel, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites and related logos are material to the Company's business. The Company, directly and through its franchisees, actively uses these marks. All of the material marks are registered with the United States Patent and Trademark Office, except for MainStay Suites and K-Minus, which are the subject of pending applications. In addition, the Company has registered certain of its marks with the appropriate governmental agencies in over 100 countries where it is doing business or anticipates doing business in the foreseeable future. The Company seeks to protect its brands and marks throughout the world, although the strength of legal protection available varies from country to country. NON-HOTEL PROPERTIES The principal executive offices of the Company are located at 10750 Columbia Pike, Silver Spring, Maryland, 20901. On the Distribution Date, the Company and Manor Care will execute leases relating to such offices and to certain other real estate being made available to the Company by Manor Care. See "Relationship Between Manor Care and the Company After the Distribution -- Lease Agreements." The Company owns its reservation system offices in Phoenix, AZ and Minot, ND. The Company leases two additional reservation system offices in Grand Junction, CO, pursuant to leases that expire in 1999 and 2000, and occupies additional space in Toronto, Canada, on a month-to-month basis. In addition, the Company leases 12 sales offices across the United States. The Company's European headquarters, which the Company leases pursuant to a lease that expires on December 31, 1997, is located in Paris, France. The Company also leases three international sales offices in France, Germany and England, pursuant to leases that terminate in June 1998, September 1996 and December 1997, respectively. Management believes that its executive, reservation systems and sales offices are sufficient to meet its present needs and does not anticipate any difficulty in securing additional or alternative space, as needed, on terms acceptable to the Company. SEASONALITY The Company's principal sources of revenues are franchise fees based on the gross room revenues of its franchise properties and revenues generated by its owned and managed hotels. The Company experiences seasonal revenue patterns similar to those of the lodging industry in general. Generally, the Company's revenues are greater in the first and second fiscal quarters than in the third and fourth fiscal quarters. This seasonality can be expected to cause quarterly fluctuations in the revenues, profit margins and net income of the Company. 43 48 REGULATION The Company's franchisees are responsible for compliance with all laws and government regulations applicable to the hotels they own or operate. The Company is responsible for such compliance at the hotels it owns. The lodging industry is subject to numerous federal, state and local government regulations, including those relating to the preparation and sale of food and beverage (such as health and liquor license laws), building and zoning requirements and laws governing a hotel owner's relationship with employees, including minimum wage requirements, overtime, working conditions and work permit requirements. The failure to obtain or retain liquor licenses or an increase in the minimum wage rate, employee benefit costs or other costs associated with employees could adversely affect the Company's owned hotels. Both at the federal and state level, there are proposals under consideration to increase the minimum wage and introduce a system of mandated health insurance. Under the Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. A determination that the Company is not in compliance with the ADA could result in the imposition of fines or an award of damages to private litigants. These and other initiatives could adversely affect the Company as well as the lodging industry in general. The Federal Trade Commission (the "FTC") and certain other jurisdictions (including France, Province of Alberta, Canada, and Mexico and various states) regulate the sale of franchises. The FTC requires franchisors to make extensive disclosure to prospective franchisees but does not require registration. A number of states require registration or disclosure in connection with franchise offers and sales. In addition, several states have "franchise relationship laws" or "business opportunity laws" that limit the ability of the franchisor to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. While the Company's franchising operations have not been materially adversely affected by such regulation, the Company cannot predict the effect of future regulation or legislation. INSURANCE The Company maintains property insurance on its owned and leased lodging facilities. The Company insures some of its liability exposures and self-insures, either directly or indirectly through insurance arrangements requiring it to reimburse insurance carriers, some of its liability risks other than catastrophic exposures. The Company insures its workers' compensation risks in some states and self-insures in others. IMPACT OF INFLATION AND OTHER EXTERNAL FACTORS The Company's principal sources of revenues are franchise fees and revenues generated from bookings of rooms at the Company's owned and managed hotels. Franchise fees and revenues from owned and managed hotels can be impacted by two external factors: the supply of hotel rooms within the lodging industry relative to the demand for rooms by travelers, and inflation. Although industry-wide supply and demand for hotel rooms is fairly balanced at present, any excess in supply that might develop in the future could have an unfavorable impact on room revenues at the Company's franchised hotels and at its owned and managed hotels, either by reducing the number of rooms reserved at the Company's properties or by restricting the rates hotel operators can charge for their rooms. In addition, an excess supply of hotel rooms may discourage potential franchisees from opening new hotels, unfavorably impacting the franchise fees received by the Company. Although the Company believes that increases in the rate of inflation will generally result in comparable increases in hotel room rates, severe inflation could contribute to a slowing of the national economy, which could result in reduced travel by both business and leisure travelers. That could lead to less demand for hotel rooms, which could result in a temporary reduction in room rates and fewer room reservations, negatively impacting revenues received by the Company. A weak economy could also reduce demand for new hotels, negatively impacting the franchise fees received by the Company. 44 49 EMPLOYEES The Company employed 4,851 people full-time at May 31, 1996. Less than 5% of the Company's employees are represented by unions. Such union contracts expire between August 1996 and December 1997. The Company considers its relations with its employees to be satisfactory. LEGAL PROCEEDINGS The Company is not a party to any litigation, other than routine litigation incidental to the business of the Company. None of such litigation, either individually or in the aggregate, is expected to be material to the business, financial condition or results of operations of the Company. ENVIRONMENTAL MATTERS Under various foreign, federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property, amongst others, may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Certain of such laws impose liability whether or not the owner or operator knew of, or was at fault for, the presence of such hazardous or toxic substances. Certain environmental laws and common law principles may be used to impose liability for release of asbestos-containing materials ("ACMs") into the environment, including but not limited to the air, and third parties may seek recovery from owners or operators of real properties for cleanup of, or personal injury associated with exposure to, released ACMs. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require expenditures. In connection with its ownership or operation of hotels, the Company may be potentially liable for such costs. Although the Company is currently not aware of any material environmental claims pending or threatened against it, no assurance can be given that a material environmental claim will not be asserted against the Company. The cost of defending against claims of liability or of remediating a contaminated property could have a material adverse effect on the results of operations of the Company. Pursuant to the Distribution Agreement, the Company has agreed to indemnify Manor Care, its affiliates and certain other persons for liabilities related to the Lodging Business which will be assumed by the Company and for certain other specified environmental, third party personal injury and other liabilities. See "Relationship Between Manor Care and the Company After the Distribution--Distribution Agreement." One or more subsidiaries or affiliates of Manor Care have been identified as defendants and/or potentially responsible parties ("PRPs") in a variety of actions (the "Actions") relating to approximately eleven waste disposal sites, which allegedly are subject to remedial action under the Comprehensive Environmental Response, Compensation & Liability Act, as amended, 42 U.S.C. sec.sec. 9601 et seq. ("CERCLA") and similar state laws. CERCLA imposes retroactive, strict, joint and several liability on PRPs for the costs of hazardous substance clean-up. The Actions arise out of the alleged activities of Cenco and allege that Cenco transported and/or generated hazardous substances that came to be located at the sites in question prior to Healthcare's acquisition of Cenco. Environmental proceedings such as the Actions may involve owners and/or operators of the hazardous waste site and multiple waste generators and waste transportation disposal companies. Such proceedings typically involve efforts of governmental entities and/or private parties to allocate or recover site investigation and cleanup costs, which costs may be substantial. Manor Care believes it has adequate insurance coverage for a substantial portion of the claims asserted in the Actions. Pursuant to the Distribution Agreement, the Company will indemnify Manor Care for any portion of the claims not covered by insurance. The most significant Action for Manor Care arises from the Kramer landfill, located in Mantua, New Jersey. On October 30, 1989, the New Jersey Department of Environmental Protection sued Manor Care and other defendants in U.S. District Court, District of New Jersey, seeking clean-up costs at the site where subsidiaries of Cenco allegedly transported waste. At about the same time, the United States filed a lawsuit against approximately 25 defendants in the same court seeking recovery of its expenses arising in connection with this site. Manor Care is a third party defendant in the latter suit. Based upon a recent court-approved final allocation plan, and also in view of its insurance coverage, Manor Care believes that the Kramer Action 45 50 will not have a material adverse effect on its financial condition or results of operations. The Company believes that any liability it may have for indemnification of Manor Care will not have a material adverse effect on the Company's business, financial condition or results of operations. This final allocation plan is not binding. If the matter is not resolved by settlement, a court would have to allocate responsibility and Manor Care's allocation could change. Although Manor Care, together with its insurers, is vigorously contesting its liability in the Actions, it is not possible at the present time to estimate the ultimate legal and financial liability of Manor Care with respect to the Actions or the ultimate indemnification liability, if any, of the Company. 46 51 MANAGEMENT EXECUTIVE OFFICERS OF THE COMPANY The name, age, proposed title upon consummation of the Distribution and business background of each of the persons who are expected to become on the Distribution Date the executive officers of the Company are set forth below. The business address of each prospective executive officer is 10750 Columbia Pike, Silver Spring, Maryland 20901, unless otherwise indicated.
NAME AGE POSITION - ------------------------------ ---- --------------------------------------------------------- Stewart Bainum, Jr............ 50 Chairman of the Board and Chief Executive Officer Donald J. Landry.............. 47 President Mark A. Caruso................ 43 Senior Vice President -- Human Resources Antonio DiRico................ 43 Senior Vice President -- Operations Richard P. Kaden.............. 50 Senior Vice President -- Brands and Acting Chief Financial Officer Edward A. Kubis............... 37 Senior Vice President, General Counsel and Secretary Barry L. Smith................ 54 Senior Vice President -- Marketing Charles G. Warczak, Jr........ 48 Vice President -- Finance and Controller
Stewart Bainum, Jr. Chairman of the Board and Chief Executive Officer of Manor Care and Manor Healthcare Corp. ("Healthcare") since March 1987; Chief Executive Officer of Manor Care since March 1987 and President since June 1989; Vice Chairman of the Board of Vitalink Pharmacy Services, Inc. ("Vitalink") since February 1995; Vice Chairman of the Board of Manor Care and subsidiaries from June 1982 to March 1987; Director of Manor Care since August 1981, of Vitalink since September 1991, of Healthcare since 1976 and of Choice Hotels International, Inc. and its predecessors ("Choice Hotels") since 1977; Chief Executive Officer of Healthcare since June 1989 and President from May 1990 to May 1991; Chairman of the Board and Chief Executive Officer of Vitalink from September 1991 to February 1995 and President and Chief Executive Officer from March 1987 to September 1991; Chairman of the Board of Choice from March 1987 to June 1990. Mark A. Caruso. Senior Vice President, Human Resources of Choice Hotels since October 1995; Vice President, Worldwide Human Resources Development, Holiday Inn Worldwide from March 1993 to October 1995; Director, Human Resources Development, Holiday Inn Worldwide from February 1990 to March 1993. Antonio DiRico. Senior Vice President, Hotel Operations of Manor Care Hotel Division ("MCHD") since May 1992; Senior Vice President of Richfield Hotel Management, Inc. and its predecessor, MHM Corporation, from May 1975 to May 1992. Richard P. Kaden. Senior Vice President - Brands and Acting Chief Financial Officer of Choice Hotels since April 1996; Senior Vice President-Finance of Choice from August 1993 to April 1996; Executive Director of Semmes, Bowen & Semmes from November 1987 to August 1993. Edward A. Kubis. Assistant General Counsel and Assistant Secretary, Manor Care since December 1993; Senior Attorney, Real Estate, from December 1990 to December 1993; Staff Attorney, Real Estate from June 1987 to December 1990. Donald J. Landry. President of Choice Hotels since January 1995; President of MCHD since March 1992; various executive positions with Richfield Hotel Management, Inc. and its predecessors for more than 15 years, including President of MHM Corporation. Barry L. Smith. Senior Vice President - Marketing of Choice Hotels since February 1989. 47 52 Charles G. Warczak, Jr. Vice President - Finance and Controller of Choice Hotels since March 1996; Vice President - Finance, MCHD from June 1992 to March 1996; Vice President - Finance, Richfield Hotel Management, Inc. from January 1991 to June 1992. COMPENSATION OF EXECUTIVE OFFICERS The following tables set forth certain information concerning the annual and long term compensation of those persons who, following the Distribution, will serve as chief executive officer and the four other most highly compensated executive officers of the Company (the "Named Officers"). In addition, information is presented with respect to certain persons who were officers of the Lodging Business at May 31, 1996 who are no longer executive officers of the Company. 48 53 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------------------------ FISCAL ----------------------------- STOCK OPTION ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER SHARES(#)(1) COMPENSATION(2) - -------------------------------- ------ -------- -------- ----- ------------ --------------- Stewart Bainum, Jr.(3).......... 1996 $625,102 $337,555 (5) 60,000 $33,543 Chairman and 1995 $572,308 $343,385 (5) -- $ 9,000 Chief Executive Officer 1994 457,867(4) 274,720 (5) 40,000 14,150 Antonio DiRico.................. 1996 179,904 71,962 (5) 8,000 2,225 Sr. Vice President, Operations 1995 159,678 50,813 (5) -- 2,153 1994 133,719 0 (5) 5,000 1,986 Richard P. Kaden................ 1996 196,603 88,471 (5) 8,000 2,925 Sr. Vice President, Brands & 1995 187,007 59,971 (5) -- 2,458 Acting Chief Financial Officer 1994 133,270 0 (5) 10,000 1,868 Donald L. Landry................ 1996 366,702 201,686 (5) -- 5,000 President 1995 311,635 171,399 (5) 40,000 2,250 1994 275,712 144,059 (5) 25,000 3,537 Barry L. Smith.................. 1996 233,640 116,820 (5) 5,000 10,427 Sr. Vice President, Marketing 1995 221,668 104,561 (5) -- 6,750 1994 209,151 98,642 (5) 5,000 3,072 Robert C. Hazard, Jr.(6)........ 1996 403,489 201,745 (5) -- 20,932 Co-Chairman 1995 373,709 186,855 (5) -- 9,000 Choice Hotels International, Inc. 1994 346,124 173,062 (5) -- 14,150 Gerald W. Petitt(6)............. 1996 330,129 165,065 (5) -- 18,770 Co-Chairman 1995 323,553 161,776 (5) -- 9,000 Choice Hotels International, Inc. 1994 283,193 141,596 (5) -- 14,150
- --------------- (1) Represents options to purchase shares of Manor Care Common Stock. For a discussion of the treatment of options in connection with the Distribution, see "Relationship Between Manor Care and the Company After the Distribution -- Employee Benefits Allocation Agreement." (2) Represents amounts contributed by Manor Care for fiscal years 1996, 1995 and 1994 under the 401(k) Plan and the Nonqualified Savings Plan, which provide retirement and other benefits to eligible employees, including the Named Officers. Amounts contributed in cash or stock by the Company during fiscal year 1996 under the 401(k) Plan for the Named Officers were as follows: Mr. Bainum, Jr., $9,000; Mr. Landry, $1,752; Mr. Kaden, $977; Mr. Smith, $3,489; and Mr. DiRico, $890. Amounts contributed in cash or stock by Manor Care during fiscal year 1995 under the Nonqualified Savings Plan for the Named Officers were as follows: Mr. Bainum, Jr., $24,543; Mr. Landry, $3,498; Mr. Kaden, $1,948; Mr. Smith, $6,938; and Mr. DiRico, $1,335. (3) Following the Distribution, Mr. Bainum, Jr. will be the chief executive officer of the Company and of Manor Care. It is expected that he will devote one-third of his time to the Company and two-thirds of his time to Manor Care. The compensation reflected here is total compensation received for services rendered to both the Lodging Business and Manor Care. (4) Mr. Bainum, Jr. took an unpaid leave of absence during April and May 1994. (5) The value of perquisites and other compensation does not exceed the lesser of $50,000 or 10% of the amount of annual salary and bonus paid as to any of the Named Officers. (6) Mr. Hazard and Mr. Petitt served as Co-Chairmen of Choice Hotels from January 1995 to May 31, 1996. Prior to January 1, 1995, Mr. Hazard served as Chairman and Chief Executive Officer of Choice Hotels and Mr. Petitt served as President and Chief Operating Officer of Choice Hotels. Neither Mr. Hazard nor Mr. Petitt will serve as an executive officer of the Company following the Distribution, however, each will continue as an unpaid employee of the Company until May 31, 1997. 49 54 The following tables set forth certain information at May 31, 1996 and for the fiscal year then ended concerning options to purchase Manor Care Common Stock granted to the Named Officers. All Common Stock figures and exercise prices have been adjusted to reflect stock dividends and stock splits effective in prior fiscal years. In connection with the Distribution, existing Manor Care stock options will be subject to certain adjustments or to conversion into options to purchase Company Common Stock. See "Relationship Between Manor Care and the Company After the Distribution -- Employee Benefits Allocation Agreement." MANOR CARE STOCK OPTION GRANTS IN FISCAL 1996
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ----------------------------------------- VALUE OF ASSUMED ANNUAL PERCENTAGE OF RATE OF STOCK PRICE TOTAL OPTIONS APPRECIATION FOR OPTION NUMBER OF GRANTED TO ALL EXERCISE TERM(1) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------- NAME GRANTED FISCAL YEAR 1996 PER SHARE DATE 5%(2) 10%(3) - -------------------------- --------- ---------------- ---------- ---------- ---------- ---------- Stewart Bainum, Jr.(4).... 60,000 10.5% $30.31 6/21/2005 $1,143,600 2,898,606 Antonio DiRico(4)......... 8,000 1.4% $30.31 6/21/2005 $ 152,480 386,480 Richard P. Kaden(4)....... 8,000 1.4% $30.31 6/21/2005 $ 152,480 386,480 Donald J. Landry.......... -- -- -- -- -- -- Barry Smith(4)............ 5,000 0.9% $30.31 6/21/2005 $ 95,300 241,550 Robert C. Hazard, Jr. .... -- -- -- -- -- -- Gerald W. Petitt.......... -- -- -- -- -- --
- --------------- (1) The dollar amounts under these columns are the result of calculations at the 5% and 10% rates set by the Securities and Exchange Commission and therefore are not intended to forecast future possible appreciation, if any, of the Company's stock price. Since options are granted at market price, a zero percent gain in the stock price will result in no realizable value to the optionees. (2) A 5% per year appreciation in stock price from $30.31 per share yields $49.37. (3) A 10% per year appreciation in stock price from $30.31 per share yields $78.62. (4) The options granted to the officers vest at the rate of 20% per year on the first through the fifth anniversary of the date of the stock option grant. AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED SHARES OPTIONS AT MAY 31, 1996 IN-THE-MONEY OPTIONS AT MAY ACQUIRED ON VALUE ---------------------------- 31, 1996(1) EXERCISE REALIZED EXERCISABLE UNEXERCISABLE ---------------------------- # $ # # EXERCISABLE UNEXERCISABLE ----------- -------- ----------- ------------- ----------- ------------- Stewart Bainum, Jr.... -- -- 635,500 229,500 $17,236,482 $ 4,684,465 Antonio DiRico........ -- -- 1,500 16,500 26,160 215,260 Richard P. Kaden...... -- -- 2,166 15,834 39,659 212,949 Donald J. Landry...... -- -- 37,000 148,000 810,190 2,668,922 Barry Smith........... 12,600 $334,880 -- 54,100 -- 1,334,179 Robert C. Hazard, Jr. ................ -- -- 78,000 34,500 2,281,721 1,034,130 Gerald W. Petitt...... 18,300 $536,119 39,500 34,500 1,184,330 1,034,130
- --------------- (1) The closing price of Manor Care's Common Stock as reported by the New York Stock Exchange on May 31, 1996 was $39.00. The value is calculated on the basis of the difference between the option exercise price and such closing price multiplied by the number of shares of Manor Care Common Stock underlying the option. EMPLOYMENT AGREEMENTS Under the terms of an employment agreement among Mr. Landry, Manor Care and Choice Hotels, Mr. Landry's annual salary is presently $404,250 with annual cost-of-living increases. The agreement extends 50 55 through November 30, 1999. Prior to the Distribution, it is expected that Manor Care will assign its rights and obligations under such contract to the Company. From February 17, 1992 to January 1, 1995, Mr. Landry served as President of the Manor Care Hotel Division. On January 1, 1995, Mr. Landry also became President of Choice. The agreement provides for an annual bonus of up to 55% of his base compensation based in part on performance of Manor Care and based in part on performance (including a customer satisfaction component) of the Lodging Business. The bonus provisions of the agreement will be amended in connection with the Distribution. It is contemplated that the Company will enter into an employment agreement with Mr. Stewart Bainum, Jr. The terms of such agreement have not yet been determined. RETIREMENT PLANS Prior to the Distribution, it is expected that the Company will adopt the Choice Hotels International, Inc. Supplemental Executive Retirement Plan (the "SERP"). Participants will be selected by the Board or any designated committee and will be at the level of Senior Vice President or above. Participants in the SERP will receive a monthly benefit for life based upon final average salary and years of service. Final average salary is the average of the monthly base salary, excluding bonuses or commissions, earned in a 60 month period out of the 120 months of employment which produces the highest average, prior to the first occurring of the early retirement date or the normal retirement date. The normal retirement age is 65, and participants must have a minimum of 15 years of service. Participants may retire at age 60 and may elect to receive reduced benefits commencing prior to age 65, subject to Board approval. All of the Named Officers who will be participants are age 55 or younger, so that none of their compensation reported above would be included in the final average salary calculation. Assuming that the following officers continue to be employed by the Company until they reach age 65, their credited years of service would be as follows:
CURRENT YEARS YEARS OF SERVICE NAME OF INDIVIDUAL OF SERVICE AT AGE 65 ------------------------------------------------- ------------- ---------------- [Stewart Bainum, Jr.............................. 22.5 38] Donald Landry.................................... 4 22
The table below sets forth estimated annual benefits payable upon retirement to persons in specified compensation and years of service classifications. These benefits are straight life annuity amounts, although participants have the option of selecting a joint and 50% survivor annuity or ten-year certain payments. The benefits are not subject to offset for social security and other amounts. YEARS OF SERVICE/BENEFIT AS PERCENTAGE OF FINAL AVERAGE SALARY
25 OR REMUNERATION 15/15% 20/22.5% MORE/30% -------------------------------------------- ------- -------- --------- $300,000.................................... $45,000 $ 67,500 $ 90,000 350,000.................................... 52,500 78,750 105,000 400,000.................................... 60,000 90,000 120,000 450,000.................................... 67,500 101,250 135,000 500,000.................................... 75,000 112,500 150,000 600,000.................................... 90,000 135,000 180,000
Prior to the Distribution, it is expected that the Company will establish the Choice Hotels International, Inc. Retirement Savings and Investment Plan (the "401(k) Plan"), a defined contribution retirement, savings and investment plan for its employees and the employees of its participating affiliated companies. The 401(k) Plan will be qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and will include a cash or deferred arrangement under Section 401(k) of the Code. All employees age 21 or 51 56 over and who have worked for the Company (or Manor Care) for a twelve month period during which such employee completed at least 1,000 hours will be eligible to participate. Subject to certain non-discrimination requirements, each employee will be able to contribute an amount to the 401(k) Plan on a pre-tax basis up to 15% of the employee's salary, but not more than the current federal limit of $9,500. The Company will match contributions made by its employees subject to certain limitations. The amount of the match will be equal to a percentage of the amount of salary reduction contribution made on behalf of a participant during the plan year based upon a formula that involves the profits of the Company for the year and the number of years of service of the participant. Amounts contributed by Manor Care pursuant to its 401(k) Plan for the Named Officers are included in the Summary Compensation Table under the column headed "All Other Compensation." Prior to the Distribution, it is expected that the Company will adopt the Choice Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan (the "Nonqualified Savings Plan"). Certain select highly compensated members of management of the Company will be eligible to participate in the Plan. The Nonqualified Savings Plan will mirror the provisions of the 401(k) Plan, to the extent feasible, and will be structured so as to provide the participants with a pre-tax savings vehicle to the extent that pre-tax savings are limited under the 401(k) Plan as a result of various governmental regulations, such as non-discrimination testing. Amounts contributed by Manor Care under the Manor Care Nonqualified Savings Plan for fiscal year 1996 for the Named Officers are included in the Summary Compensation Table under the column headed "All Other Compensation". The Company match under the 401(k) Plan and the Nonqualified Savings Plan will be limited to a maximum aggregate of 6% of the annual salary of a participant. Likewise, participant contributions under the two plans will not exceed the aggregate of 15% of the annual salary of a participant. OPTION AND STOCK PURCHASE PLANS Prior to the Distribution, it is expected that the Company will adopt the Choice Hotels International, Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan"). Under the Stock Purchase Plan, all employees who have completed [one year] of service are eligible to participate. Eligible employees may purchase stock of the Company in an amount of no less than 2% nor more than 10% of compensation (as defined in the Stock Purchase Plan), subject to an overall maximum purchase per employee per calendar year of $25,000. At the end of each quarterly offering period, the Company will contribute cash equal to 10% of the purchase price of the common stock so purchased. The Company will pay the administrative costs for the purchase of the Company common stock. Prior to the Distribution, it is expected that the Company will adopt the Choice Hotels International, Inc. 1996 Long-Term Incentive Plan (the "Incentive Plan"), pursuant to which key employees of the Company and its subsidiaries are eligible to be granted awards under the Incentive Plan. The types of awards that may be granted under the Incentive Plan are restricted shares, incentive stock options, nonqualified stock options, stock appreciation rights and performance shares. A total of up to shares of common stock will be reserved for issuance pursuant to the Incentive Plan. THE BOARD OF DIRECTORS DIRECTORS OF THE COMPANY The Company's Board of Directors will be classified into three classes, designated Class I, Class II and Class III, each class to be as nearly equal in number of directors as possible. The term of the initial Class I directors will terminate on the date of the 1997 annual meeting of the Company's stockholders; the term of the initial Class II directors will terminate on the date of the 1998 annual meeting of the Company's stockholders; and the term of the initial Class III directors will terminate on the date of the 1999 annual meeting of the Company's stockholders. At each annual meeting of the Company's stockholders, successors to the class of directors whose term expires at that annual meeting will be elected for a three-year term. Newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal or other cause will be filled 52 57 solely by the affirmative vote of a majority of the remaining directors then in office. Increases or decreases in the number of directors shall be apportioned among the classes as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. The name, age, proposed class of directorship upon consummation of the Distribution and business background (other than executive officers who are directors) of each of the persons who are expected to become on the Distribution Date the directors of the Company are set forth below.
NAME AGE POSITION - ----------------------------------- ------ Chairman of the Board; Class III Stewart Bainum, Jr................. 50 Director Stewart Bainum..................... 77 Vice Chairman; Class II Director Barbara Bainum..................... 52 Class I Director Robert C. Hazard, Jr............... 61 Class I Director Frederick V. Malek................. 59 Class I Director Gerald W. Petitt................... 50 Class II Director Jerry E. Robertson, Ph.D. ......... 63 Class III Director
Stewart Bainum. Vice Chairman of the Board of Manor Care and subsidiaries since March 1987; Chairman of the Board of Manor Care from August 1981 to March 1987, Chief Executive Officer from July 1985 to March 1987, President from May 1982 to July 1985; Chairman of the Board of Healthcare from 1968 to March 1987 and a Director since 1968; Director of Vitalink from September 1991 to September 1994; Chairman of the Board of Choice Hotels from 1972 to March 1987 and a Director since 1963; Chairman of the Board of Realty Investment Company, Inc. since 1965. Barbara Bainum. President, Secretary and Director of the Commonweal Foundation since December 1990, December 1984 and December 1984, respectively; Secretary and Director of Realty Investment Company, Inc. since July 1989 and March 1982, respectively; Family Services Agency, Gaithersburg, Maryland, Clinical Social Work since September 1994; Department of Social Services, Rockville, Maryland, Social Work Case Management from September 1992 to May 1993; member of the Boards of Trustees of Columbia Union College (September 1987 to May 1991) and Atlantic Union College (September 1985 to May 1987). Robert C. Hazard, Jr. Hotel Developer. Co-Chairman of Choice Hotels from January 1995 until May 1996 and a Director since December 1980; Chairman from June 1990 to January 1995 and Chief Executive Officer from December 1980 to January 1995; President from December 1980 to June 1990. Advisory Board Outrigger Hotels. Mr. Hazard will be an unpaid employee of the Company until May 31, 1997. Frederic V. Malek. Director of Manor Care since 1990; Co-Chairman of CB Commercial Real Estate Group, since April 1989; Chairman of Thayer Capital Partners since March 1993; Campaign Manager for Bush-Quayle '92 from January 1992 to November 1992; Vice Chairman of NWA, Inc. (airlines), July 1990 to December 1991; Director: American Management Systems, Inc., Automatic Data Processing Corp., FPL Group, Inc. (an affiliate of Florida Power and Light -- power company), ICF Kaiser International, Inc., Intrav, Inc. (travel and leisure services), National Education Corporation, Northwest Airlines and various Paine Webber mutual funds. Gerald W. Petitt. Hotel Developer. Co-Chairman of Choice Hotels from January 1995 until May 1996 and a Director since December 1980; President from June 1990 to January 1995 and Chief Operating Officer from December 1980 to January 1995. Mr. Pettit will be an unpaid employee of the Company until May 31, 1997. Jerry E. Robertson, Ph.D. Director of Manor Care since 1989; Retired; Executive Vice President, 3M Life Sciences Sector and Corporate Services from November 1986 to March 1994; Director: Allianz Life 53 58 Insurance Company of North America, Cardinal Health, Inc., Coherent, Inc., Haemonics Corporation, Life Technologies, Inc., Medwave, Inc., Project Hope and Steris Corporation. Prior to the Distribution Date, the directors of the Company are Stewart Bainum, Jr., James A. MacCutcheon, Senior Vice President, Chief Financial Officer and Treasurer of Manor Care and James H. Rempe, Senior Vice President, General Counsel and Secretary of Manor Care, and the only executive officer of the Company is Stewart Bainum, Jr. Following the Distribution, Stewart Bainum, Jr. will be the chief executive officer of both the Company and Manor Care. It is expected that he will devote one-third of his time to the Company and two-thirds of his time to Manor Care. Upon consummation of the Distribution, the Board of Directors is expected to consist of seven members. Following the Distribution Date, additional non-employee directors may be elected to the Board of Directors. The additional non-employee directors have not yet been determined. It is expected that the Board of Directors will hold five meetings during the fiscal year and that the standing committees of the Board will include the Audit Committee, the Finance Committee, the Compensation/Key Executive Stock Option Plan Committee and the Nominating Committee. The members of the committees have not yet been determined. The Compensation/Key Executive Stock Option Plan Committee will administer the Company's stock option plans and grant stock options thereunder, will review compensation of officers and key management employees, will recommend development programs for employees such as training, bonus and incentive plans, pensions and retirement, and will review other employee fringe benefit programs. The Finance Committee will review the financial affairs of the Company and will recommend financial objectives, goals and programs to the Board of Directors and to management. The Audit Committee will review the scope and results of the annual audit, will review and approve the services and related fees of the Company's independent public accountants, will review the Company's internal accounting controls and will review the Company's Internal Audit Department and its activities. The Nominating Committee will recommend to the Board of Directors the members to serve on the Board of Directors during the ensuing year. The Committee will not consider nominees recommended by stockholders. Prior to the Distribution, it is expected that the Company will adopt the Choice Hotels International, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan. Part A of the Plan provides that eligible non-employee directors will be granted options to purchase 5,000 shares of Common Stock on their date of election and will be granted options to purchase 1,000 shares on their date of election in subsequent calendar years. Part B of the Plan provides that eligible non-employee directors may elect, prior to May 31 of each year, to defer a minimum of 25% of committee fees earned during the ensuing fiscal year. The fees which are so deferred will be used to purchase Common Stock on the open market within 15 days after December 1, February 28 and May 31 of such fiscal year. Pending such purchases, the funds will be credited to an Interest Deferred Account, which will be interest bearing. Stock which is so purchased will be deposited in a Stock Deferred Account pending distribution in accordance with the Plan. Directors who will be employees of the Company will receive no separate remuneration for their services as directors. Pursuant to the Non-Employee Director Stock Compensation Plan to be adopted by the Company prior to the Distribution, eligible non-employee directors will receive annually, in lieu of cash, restricted stock of the Company, the fair market value of which at the time of grant will be equal to $30,000, which will represent the Board retainer and meeting fees. In addition, all non-employee directors will receive $1,610 per diem for Committee meetings attended, except where the Committee meeting is on the same day as a Board meeting, and will be reimbursed for travel expenses and other out-of-pocket costs incurred in attending meetings. 54 59 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As of May 31, 1995, Manor Care purchased from each of Mr. Hazard and Mr. Petitt 25 shares, representing one-half of their shares, of Choice Hotels common stock. In accordance with a formula contained in an agreement dated December 20, 1994, Manor Care paid to each of Messrs. Hazard and Petitt the sum of $13,683,704 for such shares. After the transaction, Messrs. Hazard and Petitt each owned 25 shares of Choice Hotels common stock and Manor Care owned 850 shares of Choice Hotels common stock. As of May 31, 1996, Manor Care purchased from each Mr. Hazard and Mr. Petitt his remaining 25 shares for a price of $15,197,946 to each of them. As of June 1, 1996, each of Mr. Hazard and Mr. Pettit has entered into an agreement with Manor Care and the Company, pursuant to which he will remain an unpaid employee of the Company until May 31, 1997 and options to purchase up to 5,000 shares of Manor Care Common Stock, which were previously granted and are presently outstanding, will vest ratably beginning June 1, 1996 and ending May 31, 1997. Pursuant to such agreements Mr. Hazard and Mr. Pettit have each waived the initial grants to non-employee directors under the Non-Employee Director Stock Compensation Plan. Upon consummation of the Distribution, certain management employees of the Lodging Business will hold options to purchase up to shares of Company Common Stock and certain management employees of Manor Care will have the right to convert options to purchase Manor Care Common Stock into options to purchase up to shares of Company Common Stock. See "Relationship Between Manor Care and the Company After the Distribution -- Employee Benefits Allocation Agreement." For a discussion of certain contracts to be executed between the Company and Manor Care as of the Distribution Date, see "Relationship Between Manor Care and the Company After the Distribution." For a discussion of the historical financial relationship between the Company and Manor Care, see "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Liquidity and Capital Resources." 55 60 SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT The following table sets forth the amount of Company Common Stock expected to be beneficially owned by (1) each director and director nominee of the Company, (2) the chief executive officer of the Company and the Named Officers, (3) all officers and directors of the Company as a group and (4) all persons who will own beneficially more than 5% of Company Common Stock, based on the Manor Care Common Stock beneficially owned by such persons on May 31, 1996. Unless otherwise specified, the address for each of them is 10750 Columbia Pike, Silver Spring, Maryland 20901. On the Distribution Date, the holders of Manor Care Common Stock as of the Record Date will be entitled to receive one share of Company Common Stock for each share of Manor Care Common Stock. For purposes of the following table, it is assumed that all options held by the persons specified will be converted into options to purchase Company Common Stock. For a discussion of the treatment of outstanding options to purchase Manor Care Common Stock in connection with the Distribution, see "Relationship Between Manor Care and the Company After the Distribution -- Employee Benefits Allocation Agreement."
TOTAL SHARES OF PERCENT OF SHARES COMPANY COMMON STOCK OUTSTANDING EXPECTED TO BE EXPECTED TO BE NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED ------------------------------------------- -------------------- ------------------ Stewart Bainum, Jr. ....................... 12,255,602(2) 19.3% Stewart Bainum............................. 12,393,855(3) 19.8% Barbara Bainum............................. 1,820,946(4) 2.9% Antonio DiRico............................. 3,305(5) * Robert C. Hazard, Jr. ..................... 79,884(6) * Richard B. Kaden........................... 3,894(7) * Donald J. Landry........................... 37,278(8) * Frederic V. Malek.......................... 1,002 * Gerald W. Petitt........................... 88,178(9) * Jerry E. Robertson, Ph.D. ................. 14,314(10) * Barry L. Smith............................. 1,251(11) * All Directors and Officers as a Group (14 persons)................................. 26,703,880(12) 42.0% Ronald Baron............................... 4,345,184(13) 6.9%
- --------------- * Less than 1% of class. (1) Percentages are based on 62,731,168 shares outstanding on May 31, 1996 plus for each person, the shares which would be issued assuming that such person exercises all options it holds which are exercisable within 60 days thereafter. (2) Includes 91,752 shares owned directly by Mr. Bainum, Jr. Also includes 5,417,761 shares owned by Bainum Associates Limited Partnership ("Bainum Associates") and 4,415,250 shares owned by MC Investments Limited Partnership ("MC Investments"), in both of which Mr. Bainum, Jr. is managing general partner with the sole right to dispose of the shares. Authority to vote such shares is held by the voting general partner, Mr. B. Houston McCeney. Also includes 1,679,628 shares owned by Mid Pines Associates Limited Partnership ("Mid Pines"), in which Mr. Bainum, Jr. is managing general partner and has shared voting authority and 1,500 shares owned by the Foundation for Maryland's Future, in which Mr. Bainum, Jr. is the sole director. Mr. Bainum, Jr. has a direct or indirect pecuniary interest in 1,186,739 shares, 844,400 shares and 348,777 shares owned respectively by Bainum Associates, MC Investments and Mid Pines. Of the shares owned by Bainum Associates, MC Investments and Mid Pines, 999,523, 1,271,541 and 1,679,628 shares, respectively, are also included in the above table as owned beneficially by Stewart Bainum and Barbara Bainum, Mr. Bainum, Jr.'s father and sister, respectively. Also includes 647,500 shares which Mr. Bainum, Jr. has the right to acquire pursuant to stock options which are presently exercisable or which become exercisable within 60 days after May 31, 1996, and 1,504 shares and 707 shares, respectively, which Mr. Bainum, Jr. has the right to receive upon termination of his employment with the Company pursuant to the terms of the Manor Care, Inc. 56 61 Retirement Savings and Investment Plan (the "Manor Care 401(k) Plan") and the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan (the "Manor Care Nonqualified Savings Plan"). Does not include shares owned by Realty Investment Company, Inc. and its subsidiaries ("Realty Investment"), a real estate investment and management company in which Mr. Bainum, Jr. owns, directly or indirectly, 25.0% of the outstanding common stock, which represents a pecuniary interest in 843,868 shares owned by Realty. (3) Includes 4,036,278 shares held directly by the Stewart Bainum Declaration of Trust, of which Mr. Bainum is the sole trustee and beneficiary; his joint interest in 999,523 shares owned by Bainum Associates and 1,271,541 shares owned by MC Investments, each of which is a limited partnership in which Mr. Bainum has joint ownership with his wife as a limited partner and as such has the right to acquire at any time a number of shares equal in value to the liquidation preference of their limited partnership interests; 3,567,869 shares held directly by Realty Investment, a real estate investment and management company controlled by Mr. Bainum and his wife; and 40,305 shares held by the Commonweal Foundation of which Mr. Bainum is Chairman of the Board of Directors and has shared voting authority. Also includes 798,711 shares held by the Jane L. Bainum Declaration of Trust, the sole trustee of which is Mr. Bainum's wife, and 1,679,628 shares owned by Mid Pines in which Mr. Bainum indirectly has shared voting authority. Does not include shares included in the table above as owned beneficially by Stewart Bainum, Jr., Mr. Bainum's son, or Ms. Barbara Bainum, Mr. Bainum's daughter, except those shares owned by Bainum Associates, MC Investments and the Commonweal Foundation in which Mr. Bainum has a beneficial interest. Also does not include 94,500 shares held by his other two adult children. (4) Includes 101,013 shares owned directly by Ms. Bainum. Also includes 40,305 shares owned by the Commonweal Foundation, of which Ms. Bainum is President, Secretary and a member of the board, and with respect to which she has shared voting authority and 1,679,628 shares owned by Mid Pines, in which Ms. Bainum is a general partner and has shared voting authority and in which she has a pecuniary interest equal to 285,370 shares of Manor Care Common Stock. Shares owned by the Commonweal Foundation and Mid Pines are also included in the above table as owned beneficially by Stewart Bainum and Stewart Bainum, Jr., respectively. Does not include (i) shares owned by Bainum Associates in which Ms. Bainum is a limited partner and in which she has a pecuniary interest equal to 1,076,283 shares of Manor Care Common Stock, (ii) shares owned by MC Investments, in which Ms. Bainum is a limited partner and in which she has a pecuniary interest equal to 765,807 shares of Manor Care Common Stock, (iii) shares owned by Realty Investment, in which Ms. Bainum owns 8.3% of the outstanding common stock, which represents a pecuniary interest in 283,249 shares of Manor Care Common Stock owned by Realty Investment, and (iv) shares owned directly or indirectly by Ms. Bainum's adult children or trusts for their benefit. Ms. Bainum is the daughter of Mr. Bainum and the sister of Mr. Bainum, Jr. (5) Includes 3,100 shares which Mr. DiRico has the right to acquire pursuant to stock options which are presently exercisable or which become exercisable within 60 days after May 31, 1996, 35 shares purchased by Mr. DiRico pursuant to the terms of the Manor Care 1995 Employee Stock Purchase Plan and 55 shares and 115 shares, respectively, which Mr. DiRico has the right to receive upon termination of his employment pursuant to the terms of the Manor Care 401(k) Plan and the Manor Care Nonqualified Savings Plan. (6) Includes 78,000 shares which Mr. Hazard has the right to acquire pursuant to stock options which are presently exercisable or which become exercisable within 60 days after May 31, 1996, and 113 shares and 415 shares, respectively, which Mr. Hazard has the right to receive upon termination of his employment pursuant to the terms of the Manor Care 401(k) Plan and the Manor Care Nonqualified Savings Plan. (7) Includes 3,767 shares which Mr. Kaden has the right to acquire pursuant to stock options which are presently exercisable or which become exercisable within 60 days after May 31, 1996, and 127 shares purchased by Mr. Kaden pursuant to the terms of the Manor Care Employee Stock Purchase Plan. 57 62 (8) Includes 37,000 shares which Mr. Landry has the right to acquire pursuant to stock options which are presently exercisable or which become exercisable within 60 days after May 31, 1996, and 108 shares and 170 shares, respectively, which Mr. Landry has the right to receive upon termination of his employment pursuant to the terms of the Manor Care 401(k) Plan and the Manor Care Nonqualified Savings Plan. (9) Includes 8,661 shares held in trust for minor children for which Mr. Petitt is trustee. Beneficial ownership of such shares is disclaimed. Also includes 39,500 shares which Mr. Petitt has the right to acquire pursuant to stock options which are presently exercisable or which become exercisable within 60 days after May 31, 1996 and 214 shares purchased by Mr. Petitt pursuant to the terms of the Manor Care, Inc. 1995 Employee Stock Purchase Plan (the "Manor Care Employee Stock Purchase Plan"). (10) Includes 814 shares acquired pursuant to the Manor Care, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan. (11) Includes 1,000 shares which Mr. Smith has the right to acquire pursuant to stock options which are presently exercisable or which become exercisable within 60 days after May 31, 1996, and 86 shares and 165 shares, respectively, which Mr. Smith has the right to receive upon termination of his employment with the Company pursuant to the terms of the Manor Care 401(k) Plan and the Manor Care Nonqualified Savings Plan. (12) Includes a total of 813,867 shares which the officers and directors included in the group have the right to acquire pursuant to stock options which are presently exercisable or which become exercisable within 60 days after May 31, 1996 and a total of 2,040 shares and 1,731 shares, respectively, which such directors and officers have the right to receive upon termination of their employment with the Company pursuant to the terms of the Manor Care 401(k) Plan and the Manor Care Nonqualified Savings Plan. (13) As of June 18, 1996, based on a Schedule 13-D, as amended, filed by Mr. Baron with the Securities and Exchange Commission (the "Commission"). Mr. Baron's address is 450 Park Avenue, Suite 2800, New York, New York 10022. 58 63 DESCRIPTION OF CAPITAL STOCK OF THE COMPANY Under the Restated Certificate of the Company, which is attached as Appendix A to this Information Statement, the total number of shares of capital stock that the Company has authority to issue is 165,000,000, consisting of 160,000,000 shares of common stock, par value $.01 per share, and 5,000,000 shares of preferred stock (the "Preferred Stock"), par value $.01 per share. Based on the number of shares of Manor Care Common Stock outstanding at the Record Date, it is expected that shares of the Company's Common Stock will be issued to stockholders of Manor Care in the Distribution. All the shares of the Company's Common Stock to be distributed to Manor Care stockholders in the Distribution will be fully paid and non-assessable. COMMON STOCK The Restated Certificate designates a series of common stock consisting of 75,000,000 shares of common stock. The Company Common Stock being distributed on the Distribution Date is part of such series. Holders of the Company's Common Stock are entitled to receive, subject to preferences that may be applicable from time to time with respect to any outstanding Preferred Stock, such dividends as are declared by the Board of Directors of the Company, one vote for each share at all meetings of stockholders, and, subject to preferences that may be applicable from time to time with respect to any outstanding Preferred Stock, the remaining assets of the Company upon liquidation, dissolution or winding up of the Company. The Company is authorized to issue additional shares of common stock without further stockholder approval (except as may be required by applicable law or stock exchange regulations). With respect to the issuance of common shares of any additional series, the Board of Directors of the Company is authorized to determine, without any further action by the holders of the Company's Common Stock, among other things, the dividend rights, dividend rate, conversion rights, voting rights and rights and terms of redemption, as well as the number of shares constituting such series and the designation thereof. Should the Board of Directors of the Company elect to exercise its authority, the rights and privileges of holders of the Company's Common Stock could be made subject to rights and privileges of any such other series of common stock. The Company has no present plans to issue any common stock of a series other than the Company's Common Stock. See "Dividend Policy" for a description of the dividend policy of the Company after the Distribution. PREFERRED STOCK The Company's Board of Directors is authorized to issue up to 5,000,000 shares of Preferred Stock without further stockholder approval (except as may be required by applicable law or stock exchange regulations) and to fix from time to time, by resolution or resolutions, the relative powers, preferences and rights and the qualifications, limitations or restrictions of any series of Preferred Stock, as well as the number of shares constituting such series and the designation thereof. PREEMPTIVE RIGHTS Holders of shares of Company Common Stock have no preemptive rights. PURPOSES AND EFFECTS OF CERTAIN CHARTER AND BY-LAW PROVISIONS GENERAL The provisions of the Restated Certificate and the By-Laws described in this section, and the ability to issue additional series of capital stock without a stockholder vote, may delay or make more difficult acquisitions of or changes of control of the Company not approved by the Company's Board of Directors. Such provisions enable the Company, particularly (but not exclusively) in the initial years of its existence as an independent, publicly owned company, to develop its business in a manner which will foster its long term 59 64 growth without disruption caused by the threat of a takeover not deemed by its Board of Directors to be in the best interest of the Company and its stockholders. Pursuant to the Restated Certificate the affirmative vote of the holders of shares representing not less than two-thirds of the voting power of the Company is required for the approval of any proposal to merge or consolidate with any other entity (other than an entity 90% owned by the Company) or sell, lease or exchange all or substantially all of the Company's assets. In addition, among other things, the Restated Certificate provides that (i) stockholder action can be taken only at an annual or special meeting of stockholders and not by written consent in lieu of a meeting and (ii) special meetings of the stockholders may be called only by the Chairman or the Vice Chairman of the Board or by the Secretary of the Company within 10 calendar days after receipt of the written request of a majority of the total number of directors of the Company (assuming no vacancies). The Company's By-Laws require that stockholders desiring to bring any business, including nominations for directors, before an annual meeting of stockholders deliver written notice thereof to the Secretary of the Company not later than 60 days in advance of the meeting of stockholders; provided, however, that in the event that the date of the meeting is not publicly announced by the Company by press release or inclusion in a report filed with the Commission or furnished to stockholders more than 75 days prior to the meeting, notice by the stockholder to be timely must be delivered to the secretary of the Company not later than the close of business on the tenth day following the day on which such announcement of the date of the meeting was so communicated. The By-Laws further require that the notice by the stockholder set forth a description of the business to be brought before the meeting and the reasons for conducting such business at the meeting and certain information concerning the stockholder proposing such business and the beneficial owner, if any, on whose behalf the proposal is made, including their names and addresses, the class and number of shares of the Company that are owned beneficially and of record by each of them, and any material interest of either of them in the business proposed to be brought before the meeting. The recipient of a revocable proxy is not deemed to be a beneficial owner of the shares underlying such proxy, and the foregoing provisions do not affect the granting or receipt of a revocable proxy. LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS ELIMINATION OF LIABILITY IN CERTAIN CIRCUMSTANCES Pursuant to authority conferred by Delaware General Corporation Law Section 102, the Restated Certificate provides that no director of the Company shall be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director except for liability for any breach of the director's duty of loyalty to the Company or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for unlawful payment of dividends, unlawful stock redemptions or repurchases and for any transaction from which the director derived an improper personal benefit. This provision is intended to eliminate the risk that a director might incur personal liability to the Company or its stockholders for breach of the duty of care. The Restated Certificate also provides that if Delaware law is amended to further limit the liability of directors, then the liability of a director of the Company shall be further limited to the fullest extent permitted by Delaware law, as so amended. INDEMNIFICATION AND INSURANCE Delaware General Corporation Law Section 145 contains provisions permitting and, in some situations, requiring Delaware corporations, such as the Company, to provide indemnification to their officers and directors for losses and litigation expense incurred in connection with their service to the corporation in those capacities. The Restated Certificate contains provisions requiring indemnification by the Company of its directors and officers to the fullest extent permitted by law. Among other things, the Restated Certificate provides indemnification for officers and directors against liabilities for judgments in and settlements of lawsuits and other proceedings and for the advance and payment of fees and expenses reasonably incurred by the director or officer in defense of any such lawsuit or proceeding. 60 65 AVAILABLE INFORMATION The Company has filed with the Commission a Form 10 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") with respect to the Company Common Stock described herein. This Information Statement does not contain all the information set forth in the Form 10 and exhibits thereto. For further information reference is made to the Form 10 and the exhibits thereto. When the Form 10 becomes effective, the Company will be subject to the informational requirements of the Exchange Act of 1934, as amended, and in accordance therewith will file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at its principal offices at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material may be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Application has been made to list the Company's Common Stock on the New York Stock Exchange and, if and when such shares commence trading on the New York Stock Exchange, such reports, proxy statements and other information concerning the Company will be available for inspection at the New York Stock Exchange, 20 Broad Street, New York, New York 10005. 61 66 INDEX TO COMBINED FINANCIAL STATEMENTS Report of Independent Public Accountants.............................................. F-2 Combined Balance Sheets as of May 31, 1995 and May 31, 1996........................... F-3 Combined Statements of Income for the fiscal years ended May 31, 1994, May 31, 1995 and May 31, 1996.................................................................... F-4 Combined Statements of Cash Flows for the fiscal years ended May 31, 1994, May 31, 1995 and May 31, 1996............................................................... F-5 Notes to Combined Financial Statements................................................ F-6
F-1 67 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Manor Care, Inc.: We have audited the accompanying combined balance sheets of Choice Hotels Holdings, Inc. (a Delaware corporation), as described under "Basis of Presentation" in the Notes to Combined Financial Statements, as of May 31, 1995 and 1996, and the related combined statements of income and cash flows for each of the three years in the period ended May 31, 1996. These combined financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Choice Hotels Holdings, Inc. as of May 31, 1996 and 1995, and the combined results of their operations and their combined cash flows for each of the three years in the period ended May 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic combined financial statements taken as a whole. The schedule attached to the Company's Registration Statement on Form 10 as Exhibit 99.01 is presented for the purpose of complying with the Securities and Exchange Commission rules and is not part of the basic combined financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic combined financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic combined financial statements taken as a whole. Arthur Andersen LLP Washington, D.C., June 28, 1996 F-2 68 CHOICE HOTELS HOLDINGS, INC. COMBINED BALANCE SHEETS (IN THOUSANDS)
MAY 31, --------------------- 1995 1996 -------- -------- ASSETS CURRENT ASSETS Cash and cash equivalents............................................ $ 2,088 $ 4,142 Receivables (net of allowance for doubtful accounts of $4,202, and $4,825, respectively)............................................. 21,946 30,619 Inventories.......................................................... 289 757 Current deferred income tax benefit.................................. -- 1,266 Prepaid expenses..................................................... 2,807 3,003 Other................................................................ 955 1,215 -------- -------- Total current assets......................................... 28,085 41,002 -------- -------- PROPERTY AND EQUIPMENT, AT COST, NET OF ACCUMULATED DEPRECIATION....... 257,156 299,527 -------- -------- LODGING FRANCHISE RIGHTS, NET OF ACCUMULATED AMORTIZATION.............. 61,565 58,676 -------- -------- GOODWILL, NET OF ACCUMULATED AMORTIZATION.............................. 32,128 59,839 -------- -------- OTHER ASSETS........................................................... 12,541 32,260 -------- -------- $391,475 $491,304 ======== ======== LIABILITIES AND EQUITY CURRENT LIABILITIES Current portion of mortgages and long term debt...................... $ 639 $ 669 Accounts payable..................................................... 46,109 24,473 Accrued expenses..................................................... 15,366 21,656 Income taxes payable................................................. 634 1,810 -------- -------- Total current liabilities.................................... 62,748 48,608 -------- -------- MORTGAGES AND OTHER LONG TERM DEBT..................................... 52,030 68,469 -------- -------- NOTES PAYABLE TO PARENT................................................ 198,522 225,723 -------- -------- DEFERRED INCOME TAXES ($11,620 AND $0, RESPECTIVELY) AND OTHER LIABILITIES.......................................................... 12,346 945 -------- -------- EQUITY Investments and advances from Parent................................. 65,829 147,559 -------- -------- $391,475 $491,304 ======== ========
The accompanying notes are an integral part of these combined balance sheets. F-3 69 CHOICE HOTELS HOLDINGS, INC. COMBINED STATEMENTS OF INCOME (IN THOUSANDS)
YEAR ENDED MAY 31, ------------------------------ 1994 1995 1996 -------- -------- -------- REVENUES Franchise.............................................................. $165,581 $188,021 $219,164 Hotel operations....................................................... 74,183 114,514 155,709 -------- -------- -------- Total revenues.................................................. 239,764 302,535 374,873 -------- -------- -------- OPERATING EXPENSES Franchise marketing.................................................... 45,373 45,510 49,658 Franchise reservations................................................. 26,685 28,738 35,677 Hotel operations....................................................... 60,062 84,711 106,120 Selling, general and administration expenses........................... 57,081 69,676 83,267 Depreciation and amortization.......................................... 17,521 21,841 26,026 Provision for asset impairment and restructuring....................... -- -- 33,335 -------- -------- -------- Total operating expenses........................................ 206,722 250,476 334,083 -------- -------- -------- INCOME BEFORE OTHER EXPENSES AND INCOME TAXES............................ 33,042 52,059 40,790 -------- -------- -------- OTHER EXPENSES Interest expense on notes payable to Parent............................ 10,665 15,492 19,673 Minority interest...................................................... 1,476 2,200 1,532 Other interest and other expenses, net................................. 3,223 4,412 3,727 -------- -------- -------- Total other expenses............................................ 15,364 22,104 24,932 -------- -------- -------- Income before income taxes............................................... 17,678 29,955 15,858 Income taxes............................................................. 8,019 13,144 7,400 -------- -------- -------- Net Income............................................................... $ 9,659 $ 16,811 $ 8,458 ========= ========= =========
The accompanying notes are an integral part of these combined statements of income. F-4 70 CHOICE HOTELS HOLDINGS, INC. COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED MAY 31, ----------------------------------- 1994 1995 1996 -------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.......................................................... $ 9,659 $ 16,811 $ 8,458 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization................................... 17,521 21,841 26,026 Amortization of debt discount................................... 74 171 34 Provision for bad debts......................................... 3,360 906 974 (Decrease) increase in deferred taxes........................... 3,328 827 (12,885) Gain on sale of operating hotel................................. -- -- 584 Provision for asset impairment.................................. -- -- 28,160 Change in assets and liabilities (excluding sold hotels and acquisitions): Change in receivables........................................... 1,063 (4,529) (9,647) Change in inventories and other current assets.................. (340) 3,748 (1,047) Change in current liabilities................................... 8,457 5,691 11,153 Change in income taxes payable.................................. -- 634 1,176 Change in other liabilities..................................... 1,454 1,803 1,750 -------- -------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 44,576 47,903 54,736 -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in property and equipment.............................. (17,939) (34,889) (47,443) Acquisition of operating hotels................................... (44,200) (59,766) (49,617) Acquisition of a hotel chain...................................... (10,400) -- -- Proceeds from sale of operating hotels............................ 7,200 -- 5,479 Purchase of minority interest..................................... -- -- (55,269) Investment in Friendly Hotels, PLC................................ -- -- (17,069) Other items, net.................................................. (3,788) 1,595 (5,722) -------- -------- --------- NET CASH UTILIZED BY INVESTING ACTIVITIES.................. (69,127) (93,060) (169,641) -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from mortgages and other long-term debt.................. 5,079 15,567 17,296 Principal payments of debt........................................ (1,993) (16,382) (810) Proceeds from notes payable to Parent............................. 68,361 51,461 27,201 Cash transfers (to) from Parent, net.............................. (45,198) (6,190) 73,272 -------- -------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES.................. 26,249 44,456 116,959 -------- -------- --------- Net change in cash and cash equivalents............................. 1,698 (701) 2,054 Cash and cash equivalents at beginning of period.................... 1,091 2,789 2,088 -------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................................ $ 2,789 $ 2,088 $ 4,142 ========= ========= ==========
The accompanying notes are an integral part of these combined statements of cash flows. F-5 71 NOTES TO COMBINED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION On March 7, 1996, Manor Care, Inc., ("Manor Care") announced its intention to proceed with the separation of its lodging business from its health care business via a spin-off of its lodging business (the "Distribution"). Manor Care's Board of Directors voted to approve, in principle, the Distribution subject to receipt of other approvals and consents and satisfactory implementation of the arrangements for the Distribution. Manor Care intends to consummate the Distribution in the second quarter of fiscal year 1997 through a special dividend to its shareholders of one share of common stock of Choice Hotels Holdings, Inc. (the "Company") for each share of Manor Care common stock. The Distribution is conditional upon certain matters, including declaration of the special dividend by Manor Care's board of directors. Manor Care has received a ruling from the Internal Revenue Service that the Distribution will be tax-free. The Company was formed on June 27, 1996 to facilitate the proposed Distribution of Manor Care's lodging operations. Upon consummation of the Distribution, the Company will change its name to Choice Hotels International, Inc. The operations of the Company will consist principally of the hotel franchise operations and the owned and managed hotel operations formerly conducted by Manor Care directly or through Manor Care's subsidiaries (the "Lodging Business"). As of May 31, 1996, the Company had franchise agreements with 3,052 hotels operating in 30 countries principally under the following brand names: Comfort, Clarion, Sleep, Quality, Rodeway and Econo Lodge. The Company also owns and manages, under its six principal brand names, 79 hotels in 25 states, as well as in Germany, France and England. The combined financial statements present the financial position, results of operations and cash flows of the Company as if it were formed as a separate entity of Manor Care which conducted the Lodging Business for all periods presented. Manor Care's historical basis in the assets and liabilities of the Company has been carried over to the combined financial statements. All material intercompany transactions and balances between the Company and its subsidiaries have been eliminated. Changes in the investments and advances from Parent represent the net income of the Company plus the net change in cash transferred between the Company and Manor Care. An analysis of the activity in the "Investments and advances from Parent" account for the three years ended May 31, 1996 is as follows:
(IN THOUSANDS) Balance, May 31, 1993.................................................. 90,747 Cash transfers to Parent, net.......................................... (45,198) Net income............................................................. 9,659 ------------ Balance, May 31, 1994.................................................. 55,208 Cash transfers to Parent, net.......................................... (6,190) Net income............................................................. 16,811 ------------ Balance, May 31, 1995.................................................. 65,829 Cash transfers from Parent, net........................................ 73,272 Net income............................................................. 8,458 ------------ Balance, May 31, 1996.................................................. $147,559 ============
The average balance of the investments and advances from Parent was $73.0 million, $60.5 million and $107.0 million for the fiscal years 1994, 1995 and 1996, respectively. F-6 72 NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) PRO FORMA INCOME PER SHARE (UNAUDITED) Per share data is not presented on a historical basis because the Company was not a publicly-held company during the periods presented. Pro forma income per share for 1996, after giving effect to the transactions described in the pro forma combined financial statements, would have been $0.12. The pro forma income per common share is computed by dividing pro forma net income by the pro forma weighted average number of outstanding common shares, aggregating 62.6 million in 1996. The pro forma weighted average number of outstanding common shares is based on Manor Care's weighted average number of outstanding common shares. PROPERTY AND EQUIPMENT The components of property and equipment at the respective dates presented in the combined balance sheets were:
MAY 31, ----------------------- 1995 1996 -------- -------- (IN THOUSANDS) Land......................................................... $ 35,676 $ 45,459 Building and improvements.................................... 206,510 227,611 Capitalized leases........................................... 6,244 6,244 Furniture, fixtures and equipment............................ 61,452 65,369 Hotels under construction.................................... 8,077 18,224 -------- -------- 317,959 362,907 Less: Accumulated depreciation............................... (60,803) (63,380) -------- -------- $257,156 $299,527 ======== ========
Depreciation has been computed for financial reporting purposes using the straight-line method. A summary of the ranges of estimated useful lives upon which depreciation rates have been based follows: Building and improvements............................................... 10-40 years Furniture, fixtures and equipment....................................... 3-20 years
Accumulated depreciation includes $3.3 million at May 31, 1995 and $3.5 million at May 31, 1996 relating to capitalized leases. Capitalized leases are amortized on a straight-line basis over the lesser of the lease term or the remaining useful lives of the leased properties. MINORITY INTEREST Prior to May 31, 1996, certain members of the Company's management had a minority ownership interest in Choice Hotels International, Inc., a majority owned subsidiary. Amounts reflected as minority interest represent the minority owners' share of income in Choice Hotels International, Inc. As of May 31, 1996, the Company had repurchased all of the outstanding minority ownership interest from management. GOODWILL Goodwill primarily represents an allocation of the excess purchase price of the stock of Choice Hotels International, Inc. over the recorded minority interest. Goodwill is being amortized over 40 years. Such amortization amounted to $343,000 in each of the years ended May 31, 1994 and 1995 and $854,000 in the year ended May 31, 1996. Goodwill is net of accumulated amortization of $1.9 million and $2.8 million at May 31, 1995 and 1996, respectively. F-7 73 NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) DEFERRED DEVELOPMENT COSTS Included in other assets are deferred costs of $934,000 and $172,000, net of accumulated amortization, as of May 31, 1995 and 1996, respectively, associated with the development of a computerized reservation system and other related systems. These costs are being amortized over five years. Such amortization amounted to approximately $1.0 million for the fiscal years ended May 31, 1994 and 1995, and $762,000 for the fiscal year ended May 31, 1996. Deferred development costs are net of accumulated amortization of $4.2 million and $372,000 at May 31, 1995 and 1996, respectively. FRANCHISE RIGHTS Franchise rights are an intangible asset and represent an allocation in purchase accounting for the value of long-term franchise contracts. The majority of the balance resulted from the Econo Lodge and Rodeway acquisitions made in fiscal year 1991. Franchise rights acquired are amortized over an average life of twenty-six years. Amortization expense amounted to $2.9 million for each of the years ended May 31, 1994, 1995 and 1996. Franchise rights are net of accumulated amortization of $8.5 million and $11.4 million at May 31, 1995 and 1996, respectively. The Company evaluates the recoverability of franchise rights no less than annually, based on net, undiscounted expected cash flows associated with these franchises. Such rights are considered to be impaired if the net, undiscounted expected cash flows are less than the carrying amount of the asset. Impairment charges are recorded based upon the difference between the carrying value of the asset and the expected net cash flows, discounted at an appropriate interest rate. SELF-INSURANCE PROGRAM Prior to the Distribution, the Company participated in Manor Care's self-insurance program for certain levels of general and professional liability, automobile liability and workers' compensation coverage. The estimated costs of these programs are accrued at present values based on actuarial projections for known and anticipated claims. All accrued self-insurance costs have been treated as paid to Manor Care, and as such, amounts paid to Manor Care have been charged directly to investments and advances from Parent. Subsequent to the Distribution, the Company will establish and maintain its own insurance program. FRANCHISE REVENUES The Company enters into numerous franchise agreements committing to provide licensees with various marketing services, a centralized reservation system and limited rights to utilize the Company's registered tradenames. These agreements are typically for a period of twenty years, with certain rights to the franchisee to terminate after 10 or 15 years. The Company has no significant financial commitments to its franchisees. Royalty fees, based on gross room revenues of each franchisee, are recorded when earned. Reserves for uncollectible accounts are charged to bad debt expense and included in selling, general and administrative expenses in the accompanying combined statements of income. The Company assesses franchisees monthly fees related to marketing and reservations which are expended for national advertising, marketing, and selling activities and the operation of a centralized reservation system. CAPITALIZATION POLICIES Major renovations and replacements are capitalized to appropriate property and equipment accounts. Upon sale or retirement of property, the cost and related accumulated depreciation are eliminated from the accounts and the related gain or loss is taken into income. Maintenance, repairs and minor replacements are charged to expense. F-8 74 NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Construction overhead and costs incurred to ready a project for its intended use are capitalized for major development projects and are amortized over the lives of the related assets. Personnel recruitment and training costs related to hotels under construction are deferred until construction is completed and then amortized over two years. Costs of approximately $359,000, $585,000 and $2.6 million were capitalized in each of the fiscal years ended May 31, 1994, 1995 and 1996, respectively. The Company capitalizes interest on borrowings applicable to hotels under construction. Capitalized interest for the years ended May 31, 1994, 1995 and 1996 amounted to $117,000, $197,000, and $753,000, respectively. FOREIGN OPERATIONS The Company accounts for foreign currency translation in accordance with SFAS No. 52, "Foreign Currency Translation." Revenues generated by foreign operations for the fiscal years ended May 31, 1994, 1995 and 1996 were $21.2 million, $29.2 million and $29.9 million, respectively. Losses were generated by foreign operations for the fiscal years ended May 31, 1994, 1995 and 1996 of $5.5 million, $5.7 million and $19.3 million, respectively. Losses generated by foreign operations for fiscal year 1996 include $15.0 million relating to a provision for asset impairment and restructuring. Translation gains and losses are recorded in the cumulative translation adjustment account included in Investments and advances from Parent in the accompanying combined balance sheets as follows:
(IN THOUSANDS) Balance, May 31, 1993......................................... $ 352 Net adjustments............................................... (383) ------- Balance, May 31, 1994......................................... (31) Net adjustments............................................... 740 ------- Balance, May 31, 1995......................................... 709 Net adjustments............................................... (2,459) ------- Balance, May 31, 1996......................................... $(1,750) =======
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. INCOME TAXES The Company is included in the consolidated federal income tax return of Manor Care. The income tax provision included in these combined financial statements reflects the historical income tax provision and temporary differences attributable to the operations of the Company on a separate return basis. Deferred taxes are recorded for the tax effect of temporary differences between book and tax income. F-9 75 NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Income before income taxes for the fiscal years ended May 31, 1994, 1995 and 1996 were derived from the following:
1994 1995 1996 -------- -------- -------- (IN THOUSANDS) Income before income taxes Domestic operations.................................. $ 26,812 $ 39,329 $ 47,682 Foreign operations................................... (9,134) (9,374) (31,824) -------- -------- -------- Combined income before income taxes............... $ 17,678 $ 29,955 $ 15,858 ======== ======== ========
Income before income taxes for domestic operations and foreign operations for fiscal year 1996 includes provisions of $8.5 million and $24.8 million, respectively, for asset impairment and restructuring. The income tax provisions for fiscal years 1994, 1995 and 1996 were accounted for under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The provisions for income taxes follows for the fiscal years ended May 31:
1994 1995 1996 ------- ------- -------- (IN THOUSANDS) Current tax (benefit) expense Federal................................................ $ 7,683 $13,756 $ 19,978 Foreign................................................ (3,608) (3,703) (2,792) State.................................................. 941 2,231 3,729 Deferred tax (benefit) expense Federal................................................ 2,537 745 (3,071) Foreign................................................ -- -- (9,778) State.................................................. 466 115 (666) ------ ------- -------- $ 8,019 $13,144 $ 7,400 ====== ======= ========
Included in the 1994 tax provision is a charge of $156,000 due to the impact of the change in the tax rates on prior periods. Deferred tax assets (liabilities) are comprised of the following at May 31:
1994 1995 1996 -------- -------- ------- (IN THOUSANDS) Depreciation and amortization........................... $(11,289) $(11,760) $ (236) Prepaid expenses........................................ (1,412) (1,386) (1,550) Foreign operations...................................... (710) -- -- Other................................................... (2,147) (2,202) (2,112) -------- -------- ------- Gross deferred tax liabilities.......................... (15,558) (15,348) (3,898) -------- -------- ------- Foreign operations...................................... -- 1,086 1,931 Accrued expenses........................................ 2,893 1,393 3,757 Net operating loss...................................... 1,242 1,031 820 Other................................................... 776 218 556 -------- -------- ------- Gross deferred tax assets............................... 4,911 3,728 7,064 -------- -------- ------- Net deferred (benefit) tax.................... $(10,647) $(11,620) $ 3,166 ======== ======== =======
F-10 76 NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of income tax expense at the statutory rate to income tax expense included in the accompanying combined statements of income follows:
1994 1995 1996 ------ ------- ------ (IN THOUSANDS EXCEPT FEDERAL INCOME TAX RATE) Federal income tax rate..................................... 35% 35% 35% Federal taxes at statutory rate............................. $6,187 $10,484 $5,552 State income taxes, net of Federal tax benefit.............. 914 1,525 860 Other....................................................... 918 1,135 988 ------ ------- ------ Income tax expense.......................................... $8,019 $13,144 $7,400 ====== ======= ======
Cash paid for state income taxes was $595,000, $571,000 and $1,586,000 for the years ended May 31, 1994, 1995 and 1996, respectively. Federal income taxes were paid by Manor Care. ACCRUED EXPENSES Accrued expenses at May 31, 1995 and 1996 were as follows:
1995 1996 ------- ------- (IN THOUSANDS) Payroll............................................................ $ 6,284 $ 8,670 Taxes, other than income........................................... 2,981 3,426 Other.............................................................. 6,101 9,560 ------- ------- $15,366 $21,656 ======= =======
MORTGAGES AND OTHER LONG TERM DEBT Maturities of mortgages and other long term debt at May 31, 1996 were as follows:
FISCAL YEAR (IN THOUSANDS) --------------------------------------------------------------- -------------- 1997........................................................... 669 1998........................................................... 414 1999........................................................... 442 2000........................................................... 599 2001........................................................... 646 2002 to 2009................................................... 66,368 -------------- $ 69,138 ===========
Long term debt, consisting of foreign currency borrowings under Manor Care's $250 million competitive advance and multi-currency revolving credit facility, mortgages and capital leases was net of discount of $146,000 and $112,000 at May 31, 1995 and 1996, respectively. Amortization of discount was $74,000 in 1994, $171,000 in 1995 and $34,000 in 1996. During fiscal year 1996, interest rates on mortgages and other long term debt ranged from 5.8% to 10.0%. The effective interest rate in fiscal year 1996 was 7.2%. The Company is a co-guarantor with Manor Care and other affiliates for the $250 million competitive advance and multi-currency revolving credit facility. The facility provides that up to $75.0 million is available in foreign currency borrowings under the foreign currency portion of the facility. The Company's borrowings under this facility amounted to $50.6 million at May 31, 1996. The Company is charged interest for amounts borrowed under the foreign currency portion of the facility at one of several interest rates, including LIBOR plus 26.25 basis points. In connection with the Distribution, the Company intends to secure financing to repay F-11 77 NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) the Company's portion of borrowings under Manor Care's foreign currency portion of the facility. Upon repayment, it is anticipated that the Company will be released from all liabilities and guarantees relating to the Manor Care credit facility. At May 31,1996, owned property with a net book value of $2.8 million was pledged or mortgaged as collateral. LEASES The Company operates certain property and equipment under leases, some with purchase options that expire at various dates through 2051. Future minimum lease payments are as follows:
OPERATING CAPITALIZED LEASES LEASES --------- ----------- (IN THOUSANDS) 1997............................................................. $ 545 $ 771 1998............................................................. 370 568 1999............................................................. 296 500 2000............................................................. 186 500 2001............................................................. 172 500 Thereafter....................................................... 6,477 613 --------- ----------- Total minimum lease payments........................... $ 8,046 $ 3,452 ======= Less: Amount representing interest............................... (817) ----------- Present value of lease payments.................................. 2,635 Less: Current portion............................................ (532) ----------- Lease obligations included in long-term debt..................... $ 2,103 ========
Rental expense under noncancellable operating leases was $738,000 in 1994, $721,000 in 1995 and $563,000 in 1996. ACQUISITIONS AND DIVESTITURES On May 31, 1995, Manor Care repurchased one-half of the 11% interest held by its management in Choice Hotels International Inc. Approximately $19.8 million was allocated to goodwill; the purchase cost of $27.4 million was paid in June and July 1995. On May 31, 1996, the Company repurchased the remaining 5.5% minority interest in Choice Hotels International, Inc. for $27.9 million. Approximately $26.4 million was allocated to goodwill. During fiscal year 1996, the Company purchased 16 operating hotels containing over 1,900 rooms for $49.6 million. The Company also sold two operating hotels for $6.5 million. In addition, the Company purchased an equity interest in Friendly Hotels, PLC, a U.K. hotel company, for approximately $17 million. During fiscal year 1995, the Company purchased 16 operating hotels containing over 2,300 rooms for $59.8 million. During fiscal year 1994, the Company purchased 13 operating hotels containing over 1,900 rooms for $44.2 million. An additional $10.4 million was spent to acquire a hotel chain (Resthotel Primevere) operating primarily in France. The Company also sold a hotel for $7.2 million. Unless otherwise noted, acquisitions are accounted for as a purchase. Approximately 70% of the total costs for hotel acquisitions are allocated to buildings, approximately 20% to land and the remainder to furniture, fixtures and equipment. F-12 78 NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Unaudited summary pro forma income statement data for the three fiscal years ended May 31, 1996 assuming the above purchases of operating hotels occurred at the beginning of the year immediately preceding the year each purchase occurred, are as follows:
1994 1995 1996 --------- --------- --------- (UNAUDITED) (IN THOUSANDS) Revenues............................................... $285,735 $347,401 $387,819 ======== ======== ======== Net income............................................. $8,339 $16,865 $8,772 ------ -------- ------ ------ -------- ------ Pro forma net income per share......................... $0.14 $0.27 $0.14 ----- ----- ----- ----- ----- -----
The pro forma net income per share is computed by dividing pro forma net income by the pro forma weighted average number of outstanding common shares, aggregating 60.5 million in 1994, 62.5 million in 1995 and 62.6 million in 1996. The pro forma weighted average number of outstanding common shares is based on Manor Care's weighted average number of outstanding common shares. TRANSACTIONS WITH MANOR CARE Indebtedness related to lodging acquisitions and renovations that is reflected as notes payable to Parent in the accompanying combined balance sheets totaling $198.5 million and $225.7 million at May 31, 1995 and 1996, respectively, is due three years from the date of the Distribution. Interest expense on these notes for the years ended May 31, 1994, 1995 and 1996 was $10.7 million, $15.5 million and $19.7 million, respectively. Interest is charged at an annual rate of 9% on the indebtedness. It is expected that on or prior to the Distribution Date, the Company and a subsidiary of Manor Care will enter into a loan agreement, which shall govern the repayment by the Company of an aggregate of $225.7 million previously advanced to the Company by Manor Care. The loan agreement will contain a number of covenants that will, among other things, restrict the ability of the Company and its subsidiaries to make certain investments, incur debt, change its line of business, dispose of assets, create liens, sell receivables, enter into transactions with affiliates and otherwise restrict certain corporate activities. The loan agreement will also restrict the Company's ability to pay dividends. In addition, the loan agreement will contain, among other financial covenants, requirements that the Company maintain specified financial ratios, including maximum leverage and minimum interest coverage. The loan may be prepaid in whole or in part, together with accrued interest, without penalty, at the option of the Company. The Company will be required to prepay the loan with the proceeds from the monetization of Company-owned hotels. The Company participates in a cash concentration system with Manor Care and as such maintains no significant cash balances or banking relationships. Substantially all cash received by the Company has been immediately deposited in and combined with Manor Care's corporate funds through its cash management system. Similarly, operating expenses, capital expenditures and other cash requirements of the Company have been paid by Manor Care and charged to the Company. The net result of all of these intercompany transactions, with the exception of amounts relating to the acquisition of Company operated hotels that are reflected in the combined balance sheets as notes payable to Parent, are included in investments and advances from Parent in the combined balance sheets. Manor Care provides various services to the Company including, among others, cash management, payroll and payables processing, employee benefit plans, insurance, legal, accounting, tax, information systems and certain administrative services, as required. Manor Care charges the Company fees for general management, staff support and rental of office space on the basis of such factors as employee time incurred and square footage. This is essentially the same basis Manor Care utilizes to charge its other operating entities F-13 79 NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) for such services. General corporate expenses of $5.5 million, $6.3 million and $7.4 million, respectively, were charged to operations for the years ended May 31, 1994, 1995 and 1996. Management believes that the foregoing charges are reasonable allocations of the costs incurred by Manor Care on the Company's behalf. The Company has estimated that general and administrative expenses incurred annually will increase by approximately $4.1 million after the Distribution. For purposes of providing an orderly transition after the Distribution, Manor Care and the Company will enter into various agreements, including, among others, a Distribution Agreement, Tax Sharing Agreement, Corporate Services Agreement and Employee Benefits Allocation Agreement. Effective at the Distribution, these agreements will provide, among other things, that the Company (i) will receive certain corporate and support services, such as accounting, tax and computer systems support, (ii) will establish pension, profit sharing and incentive plans similar to those in place at Manor Care and (iii) will receive certain risk management services and other miscellaneous administrative services. These agreements will extend for a period of 30 months from the Distribution date or until such time as the Company has arranged to provide such services in-house or through another unrelated provider of such services. COMMITMENTS AND CONTINGENCIES The Company is a defendant in a number of lawsuits arising in the ordinary course of business. In the opinion of management and general counsel to the Company, the ultimate outcome of such litigation will not have a material adverse effect on the Company's business, financial position or results of operations. Although the Company is currently not aware of any material environment claims pending against it, pursuant to the Distribution Agreement, the Company has agreed to indemnify Manor Care, its affiliates and certain other persons for liabilities related to the Lodging Business which will be assumed by the Company and for certain other specified environmental, third party personal injury and other liabilities. One or more subsidiaries or affiliates of Manor Care have been identified as defendants and/or potentially responsible parties ("PRPs") in a variety of actions (the "Actions") relating to approximately eleven waste disposal sites, which allegedly are subject to remedial action under the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. sec.sec. 9601 et seq. ("CERCLA") and similar state laws. CERCLA imposes retroactive, strict, joint and several liability on PRPs for the costs of hazardous substance clean-up. The Actions arise out of the alleged activities of Cenco and allege that Cenco transported and/or generated hazardous substances that came to be located the sites in question prior to Healthcare's acquisition of Cenco. Environmental proceedings such as the Actions may involve owners and/or operators of the hazardous waste site and multiple waste generators and waste transportation disposal companies. Such proceedings typically involve efforts of governmental entities and/or private parties to allocate or recover site investigation and cleanup costs, which costs may be substantial. Manor Care believes it has adequate insurance coverage for a substantial portion of the claims asserted in the Actions. Pursuant to the Distribution Agreement, the Company will indemnify Manor Care for any portion of the claims not covered by insurance. The most significant Action for Manor Care arises from the Kramer landfill, located in Mantua, New Jersey. On October 30, 1989, the New Jersey Department of Environmental Protection sued Manor Care and other defendants in U.S. District Court, District of New Jersey, seeking clean-up costs at the site where subsidiaries of Cenco allegedly transported waste. At about the same time, the United States filed a lawsuit against approximately 25 defendants in the same court seeking recovery of its expenses arising in connection with this site. Manor Care is a third party defendant in the latter suit. Based upon a recent court-approved final allocation plan, and also in view of its insurance coverage, Manor Care believes that the Kramer Action will not have a material adverse effect on its financial condition or results of operation. The Company believes that any liability it may have for indemnification of Manor Care will not have a material adverse effect on the Company's business, financial condition or results of operations. This final allocation plan is not binding. If the matter is not resolved by settlement, a court would have to allocate responsibility and Manor Care's allocation could change. F-14 80 NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Although Manor Care, together with its insurers, is vigorously contesting its liability in the Actions, it is not possible at the present time to estimate the ultimate legal and financial liability of Manor Care in respect to the Actions or the ultimate indemnification liability, if any, of the Company. As of May 31, 1996, the Company had contractual commitments of $15.1 million relating to its construction program. PENSION, PROFIT SHARING AND INCENTIVE PLANS Bonuses accrued for key executives of the Company under incentive compensation plans were $2.6 million in 1994, $1.7 million in 1995 and $1.2 million in 1996. Employees of the Company participate in retirement plans sponsored by the Parent. Costs allocated to the Company are based on the size of its payroll relative to the Parent's payroll. Costs allocated to the Company were approximately $1.0 million in 1994, $1.2 million in 1995 and $1.4 million in 1996. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company is required to disclose the fair value of its financial instruments in accordance with Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments". Fair values of material balances were determined by using market rates currently available. The balance sheet carrying amount of cash, cash equivalents and receivables approximate fair value due to the short term nature of these items. Mortgages and other long term debt consist of bank loans, mortgages and capital leases. Interest rates on bank loans adjust frequently based on current market rates; accordingly, the carrying amount of bank loans is equivalent to fair value. The carrying amounts for mortgages, capital leases and notes payable to Parent approximate fair market values. PROVISION FOR ASSET IMPAIRMENT AND RESTRUCTURING The Company regularly reviews the recoverability of the net carrying value of its long-lived assets (including goodwill related to franchise rights) and makes adjustments accordingly. The Company performs this review no less than annually and considers such factors as the current market value of assets, and the operating results and cash flows of business units. An asset is considered to be impaired if the expected net, undiscounted cash flows are less than the carrying amount of an asset. Impairment charges are recorded based on the fair value of the assets. During fiscal year 1996, the Company began restructuring its European operations. This restructuring effort included the purchase of an equity interest in Friendly Hotels, PLC and a reevaluation of key geographic markets in Europe. In connection with this restructuring, the Company performed a review of its European operations and in May 1996 recognized a $17.0 million non-cash charge (net of an $11.1 million income tax benefit) against earnings related primarily to the impairment of assets associated with certain European hotel operations. In addition, the Company recognized a restructuring charge of $3.1 million (net of a $2.1 million income tax benefit) in May 1996. Restructuring costs include severance and employee benefit plan restructuring costs and other costs directly associated with the Distribution. F-15 81 NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS The Company is required to adopt SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," no later than fiscal year 1997. The Company's current policy is to regularly review the recoverability of the net carrying value of its long-lived assets and make adjustments accordingly. The adoption of SFAS No. 121 is not expected to have a material impact on the Company's financial statements. The Company is required to adopt SFAS No. 123, "Accounting for Stock-Based Compensation," no later than fiscal year 1997. Management expects to adopt SFAS No. 123 utilizing the method which provides for disclosure of the impact of stock-based compensation grants. SUMMARY OF QUARTERLY RESULTS (IN THOUSANDS) (UNAUDITED)
INCOME (LOSS) NET BEFORE INCOME QUARTERS ENDED REVENUES INCOME TAXES (LOSS) - ---------------------------------------------------- -------- ------------- -------- FISCAL 1995 August............................................ $ 78,427 $ 10,942 $ 6,295 November.......................................... 77,127 10,354 5,962 February.......................................... 63,845 (279) (486) May............................................... 83,136 8,938 5,040 -------- ------------- -------- $302,535 $ 29,955 $ 16,811 ======== =========== ======== FISCAL 1996 August............................................ $ 99,380 $ 18,572 $ 10,914 November.......................................... 95,198 13,952 8,131 February.......................................... 79,326 2,878 1,391 May............................................... 100,969 (19,544)(a) (11,978) -------- ------------- -------- $374,873 $ 15,858 $ 8,458 ======== =========== ========
- --------------- (a) Includes a provision of $33.3 million for asset impairment and restructuring. F-16 82 APPENDIX A FORM OF RESTATED CERTIFICATE OF INCORPORATION OF CHOICE HOTELS HOLDINGS, INC. Choice Hotels Holdings, Inc. (the "Corporation"), a corporation incorporated on June 27, 1996 and existing under and by virtue of the General Corporation Law of the State of Delaware (the "GCL"), hereby certifies as follows: FIRST: The board of directors of the Corporation (the "Board of Directors") adopted a resolution proposing and declaring advisable the following amendments to and restatement of the Certificate of Incorporation of the Corporation. SECOND: This Restated Certificate of Incorporation was duly adopted by the sole stockholder of the Corporation in accordance with the provisions of Sections 228, 242 and 245 of the GCL. THIRD: The text of the Certificate of Incorporation is hereby amended and restated as herein set forth in full: 1. The name of the corporation is CHOICE HOTELS INTERNATIONAL, INC. (the "Corporation"). 2. The address of the Corporation's registered office in the State of Delaware is 100 West Tenth Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. 3. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the GCL. 4. The total number of shares of capital stock of all classifications which the Corporation shall have authority to issue is One Hundred Sixty-Five Million (165,000,000), of which One Hundred Sixty Million (160,000,000) shares having a par value of One Cent ($.01) per share shall be common stock, and Five Million (5,000,000) shares having a par value of One Cent ($.01) per share shall be preferred stock. Shares of common stock of the Corporation may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the Board of Directors prior to the issuance of any shares thereof. Each such class or series of common stock shall have such voting powers (full or limited) or no voting powers, such preferences and relative participating, optional or other special rights, relative ranking and such qualifications, limitations or restrictions, as shall be stated in such resolution or resolutions providing for the issue of such class or series of common stock as may be adopted from time to time by the Board of Directors prior to the issuance of any shares thereof pursuant to the authority hereby expressly vested in it, all in accordance with the laws of the State of Delaware. Without limiting the generality of the foregoing, shares of a series of common stock consisting of Seventy Five Million (75,000,000) shares, or such larger number of shares as the Board of Directors shall from time to time fix by resolution or resolutions, may be issued from time to time by the Board of Directors. Shares of this series shall be designated, and are hereinafter called "Common Stock." The holders of record of the Common Stock shall be entitled to the following rights: (a) subject to the rights of any holders of any class or series of capital stock as specified in the resolution providing for such class or series of capital stock, to vote at all meetings of stockholders of the Corporation, and at all such meetings such holders shall have one vote in respect of each share of Common Stock held of record by them; A-1 83 (b) subject to the rights of any holders of any class or series of capital stock having a preference with respect to dividends, to receive when, if and as declared by the Board of Directors out of the assets of the Corporation legally available therefor, such dividends as may be declared by the Corporation from time to time to holders of Common Stock; and (c) subject to the rights of any holders of any class or series of capital stock having a preference with respect to distribution of assets upon liquidation or dissolution, to receive the remaining assets of the Corporation upon liquidation, dissolution or winding-up. Shares of preferred stock of the Corporation may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the Board of Directors prior to the issuance of any shares thereof. Each such class or series of preferred stock shall have such voting powers (full or limited) or no voting powers, such preferences and relative participating, optional or other special rights, relative ranking and such qualifications, limitations or restrictions, as shall be stated in such resolution or resolutions providing for the issue of such class or series of preferred stock as may be adopted from time to time by the Board of Directors prior to the issuance of any shares thereof pursuant to the authority hereby expressly vested in it, all in accordance with the laws of the State of Delaware. Subject to the rights of any holders of any class or series of capital stock, as specified in the resolution providing for such class or series of capital stock, the holders of Common Stock are expressly denied the preemptive right to subscribe to any or all additional shares of capital stock of the Corporation or any or all classes or series thereof. Upon this Restated Certificate of Incorporation becoming effective pursuant to the GCL (the "Effective Time"), each share of the Corporation's common stock, par value $.01 per share (the "Old Common Stock"), issued and outstanding immediately prior to the Effective Time, will be automatically reclassified as and converted into one share of Common Stock. Any stock certificate that, immediately prior to the Effective Time, represents shares of the Old Common Stock will, from and after the Effective Time, automatically and without the necessity of presenting the same for exchange, represent the number of shares of Common Stock as equals the sum obtained by multiplying the number of shares of Old Common Stock represented by such certificate immediately prior to the Effective Time by one. 5. The Corporation expressly elects not to be governed by Section 203 of the GCL. 6. Subject to the rights of any holders of any class or series of capital stock as specified in the resolution providing for such class or series of capital stock, any action required to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing of such stockholders in lieu of a meeting. Special meetings of the stockholders of the Corporation may be called only by (i) the Chairman or Vice Chairman of the Board of Directors or (ii) the Secretary of the Corporation within 10 calendar days after receipt of the written request of a majority of the total number of directors which the Corporation would have if there were no vacancies (the "Whole Board"). Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws. 7. A. Subject to the rights of any holders of any class or series of capital stock as specified in the resolution providing for such class or series of capital stock, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors consisting of not less than 3 nor more than 12 directors, the exact number of directors to be determined from time to time solely by resolution adopted by the affirmative vote of a majority of the Whole Board. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each Class of directors shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the Whole Board. The initial term of the Class I directors shall expire upon the election and qualification of their successors at the 1997 annual meeting of stockholders; the initial term of the Class II directors shall expire upon the election and qualification of their successors at the A-2 84 1998 annual meeting of stockholders; and the initial term of the Class III directors shall expire upon the election and qualification of their successors at the 1999 annual meeting of stockholders. At each annual meeting of stockholders beginning with the 1997 annual meeting, successors to the Class of directors whose term expires at that annual meeting shall be elected for a three-year term and shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. B. Subject to the rights of any holders of any class or series of capital stock as specified in the resolution providing for such class or series of capital stock, newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal or other cause will be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Increases or decreases in the number of directors shall be apportioned among the Classes so as to maintain the number of directors in each Class as nearly equal as possible, and any additional director of any Class elected to fill a vacancy resulting from an increase in such Class shall hold office for a term that shall coincide with the remaining term of that Class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. C. The election of directors need not be by written ballot unless the Bylaws shall so provide. D. Notwithstanding the foregoing, whenever the holders of any one or more series of capital stock shall have the right, voting separately as a class or series, to elect directors, the election, removal, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Restated Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to Article 6, Section A, unless expressly provided by such terms. 8. The affirmative vote of the holders of the outstanding shares of capital stock representing not less than two-thirds of the Voting Power (as defined) of the Corporation shall be required for the approval of any proposal for the Corporation to dissolve, liquidate, merge, or consolidate with any other entity (other than an entity 90% of the Voting Power of which is owned by the Corporation), or sell, lease or exchange all or substantially all of its property and assets, including its goodwill and its corporate franchises. "Voting Power" means the total number of votes that may be cast by holders of capital stock in the election of directors. 9. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. Notwithstanding anything contained in this Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of the outstanding shares of capital stock representing not less than two-thirds of the Voting Power of the Corporation shall be required to amend, alter, change or repeal, or to adopt any provision inconsistent with, Article 8 of this Restated Certificate of Incorporation. The Board of Directors shall have the power to make, adopt, alter, amend, change or repeal the Bylaws by resolution adopted by the affirmative vote of a majority of the Whole Board. Stockholders may not make, adopt, alter, amend, change or repeal the Bylaws except upon the affirmative vote of the holders of the outstanding shares of capital stock representing not less than two-thirds of the Voting Power of the Corporation and no Bylaws hereafter adopted by the stockholders or otherwise shall invalidate any prior act of the directors which would have been valid if such Bylaws had not been adopted. 10. A. No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the GCL, or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article 10 shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. If the GCL is amended hereafter to further limit the liability of a director, then the liability of a director of the Corporation shall be further limited to the fullest extent permitted by the GCL, as so amended. A-3 85 B. The Corporation shall indemnify each person who is or was or has agreed to become a director or officer of the Corporation, and may indemnify other employees and agents of the Corporation, to the fullest extent permitted by Section 145 of the GCL, as the same may be amended or supplemented, against all expenses and liabilities (including, but not limited to, counsel fees) reasonably incurred by or imposed upon such person in connection with any proceeding to which he or she may be made a party, or in which he or she may become involved, by reason of his or her being or having been a director, officer, employee or agent of the Corporation, or any settlement thereof, whether or not he or she is a director, officer, employee or agent at the time such expenses are incurred or liability incurred, except in such cases where the director, officer, employee or agent is adjudged guilty of willful misfeasance or malfeasance in the performance of his or her duties; provided that in the event of a settlement the indemnification herein shall apply only when the Board of Directors approves such settlement and reimbursement as being for the best interests of the Corporation. Without limiting the generality or the effect of the foregoing, the Corporation may adopt Bylaws, or enter into one or more agreements with any person, which provide for indemnification greater or different than that provided in this Article 10 or the GCL and the foregoing right of indemnification shall be in addition to and not exclusive of all other rights to which such director, officer, employee or agent may be entitled. C. The Corporation may purchase insurance on behalf of any person who is a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted by him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power or the obligation to indemnify him or her against such liability under the provisions of this Article 10. 11. The Board of Directors, each committee of the Board of Directors and each individual director, in discharging their respective duties under applicable law and this Restated Certificate of Incorporation and in determining what they each believe to be in the best interests of the Corporation and its stockholders, may consider the effects, both short-term and long-term, of any action or proposed action taken or to be taken by the Corporation, the Board of Directors or any committee of the Board of Directors on the interests of (i) the employees, franchisees, licensees, customers, suppliers and/or creditors of the Corporation and its subsidiaries and (ii) the communities in which the Corporation and its subsidiaries own or lease property or conduct business, all to the extent that the Board of Directors, any committee of the Board of Directors or any individual director deems pertinent under the circumstances; provided, however, that the provisions of this Article 11 shall not limit in any way the right of the Board of Directors to consider any other lawful factors in making its determinations, including, without limitation, the effects, both short-term and long-term, or any action or proposed action on the Corporation or its stockholders directly; and provided further that this Article 11 shall be deemed solely to grant discretionary authority to the Board of Directors, each committee of the Board of Directors and each individual director and shall not be deemed to provide to any specific constituency any right to be considered. 12. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of the GCL or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of the GCL, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. A-4 86 IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of Incorporation to be duly executed in its corporate name. Dated: , 1996 -------------------------------------- Name: Stewart Bainum, Jr. Chairman and Chief Executive Officer A-5 EX-3.02 3 BY-LAWS 1 EXHIBIT 3.02 FORM OF BYLAWS OF CHOICE HOTELS HOLDINGS, INC. (Hereinafter called the "Corporation") As amended _______________ ARTICLE I OFFICES Section 1. Office. The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. Additional Offices. The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Time and Place. Meetings of stockholders for any purpose may be held at such time and place, within or without the State of Delaware, as the Board of Directors may fix from time to time and as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meeting. Annual meetings of stockholders shall be held on any date in the month of September or October in each year at 9:00 a.m. or at such other time and such date and time shall be designated, from time to time, by the Board of Directors and stated in the notice of the meeting. At such annual meeting, the stockholders shall elect a board of directors and transact such other business as may properly be brought before the meeting in accordance with Section 7 of this Article II. Section 3. Notice of Annual Meeting. Written notice of the annual meeting stating the place, date and time thereof shall be given to each stockholder entitled to vote at such meeting not less than 10 nor more than 60 days prior to the meeting. 2 -2- Section 4. List of Stockholders. The officer in charge of the stock ledger of the Corporation or the transfer agent shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held (other than the place of the meeting), which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Notice of Special Meeting. Written notice of a special meeting stating the place, date and time thereof and the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than 10 nor more than 60 days prior to the meeting. Section 6. Stockholder Proposals. To be properly brought before an annual meeting, business must be (1) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (2) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (3) otherwise properly brought before the meeting by a stockholder entitled to vote thereon. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be received not less than sixty days nor more than ninety days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than thirty days or delayed by more than sixty days from such anniversary, notice by the stockholder to be timely must be so received not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of (1) the sixtieth day prior to such annual meeting or (2) the tenth day following the date on which notice of the date of the annual meeting was mailed or public disclosure thereof was made, whichever first occurs. For purposes of calculating the first such notice period following adoption of this Restated Certificate of Incorporation, the first anniversary of the 1996 annual meeting shall be deemed to be , 1997. Each such notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business and the name and address of the beneficial owner on whose behalf the proposal is being made, (c) the class, series and number of shares of the Corporation which are beneficially owned by the stockholder or by the beneficial owner on whose behalf the proposal is 3 -3- being made, (d) any material interest of the stockholder, or the beneficial owner on whose behalf the proposal is being made, in such business, (e) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting, and (f) a description of all arrangements or understandings between the stockholder, the beneficial owner on whose behalf the proposal is being made, or any other person or persons (naming such person or persons) relating to the matter being proposed. To be properly brought before a special meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors or (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors. No business shall be conducted at any meeting of the stockholders except in accordance with the procedures set forth in this Article II, Section 6. The presiding officer of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Article II, Section 6 and if he or she should so determine, any such business not properly brought before the meeting shall not be transacted. Nothing herein shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Section 7. Presiding Officer (a) Meetings of stockholders shall be presided over by the Chairman of the Board, or, if he is not present, by the Vice Chairman, or, if he is not present, by the President or, if he is not present, by such person who may have been chosen by the Board of Directors or, if none of such persons is present, by a chairman to be chosen by the stockholders owning a majority of the shares of capital stock of the Corporation issued and outstanding and entitled to vote at the meeting and who are present in person or by proxy. The Secretary of the Corporation or, if he is not present, an Assistant Secretary or, if he is not present, such person who may have been chosen by the Board of Directors, shall act as secretary of meetings of stockholders, but if none of such persons is present the stockholders owning a majority of the Voting Power of the Corporation and who are present in person or by proxy shall choose any person present to act as secretary of the meeting. "Voting Power" means the total number of votes that may be cast by holders of capital stock in the election of directors. 4 -4- Section 8. Quorum. The holders of a majority of the Voting Power of the Corporation, present in person or by proxy, shall be necessary to, and shall constitute a quorum for, the transaction of business at all meetings of stockholders, except as otherwise provided by statute or by the Certificate of Incorporation. If, however, a quorum shall not be present in person or by proxy at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or by proxy, shall have the power to adjourn the meeting from time to time, without notice of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, until a quorum shall be present in person or by proxy. At any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or by proxy, shall have the power to adjourn the meeting from time to time for good cause, without notice of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, until a date which is not more than 30 days after the date of the original meeting. At such adjourned meeting, at which a quorum shall be present in person or by proxy, any business may be transacted which might have been transacted at the meeting as originally called. If the adjournment is for more than 30 days or, if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. Voting. (a) At any meeting of stockholders, every stockholder having the right to vote shall be entitled to vote in person or by proxy. Except as otherwise provided by law or the Certificate of Incorporation or a resolution of the Board of Directors creating a series or class of capital stock of the Corporation, each stockholder of record shall be entitled to one vote for each share of capital stock registered in his name on the books of the Corporation. (b) All elections shall be determined by a plurality vote, and except as otherwise provided by law or the Certificate of Incorporation, all other matters shall be determined by a vote of a majority of the Voting Power present in person or by proxy and voting on such other matters. 5 -5- ARTICLE III DIRECTORS Section 1. General Powers; Number; Tenure. The business of the Corporation shall be managed by or under its Board of Directors which may exercise all powers of the Corporation and perform all lawful acts and things as are not by law, the Certificate of Incorporation or these Bylaws directed or required to be exercised or performed by the stockholders. The number of directors constituting the whole Board of Directors shall be not less than 3 nor more than 12. The first Board of Directors shall consist of 7 directors. Thereafter, within the limits of above specified, the number of directors shall be determined by the Board of Directors. The directors shall be elected and shall hold office as specified in the Certificate of Incorporation. Directors need not be stockholders. Directors, other than the Chairman and Vice Chairman, shall retire from the Board of Directors as of the annual meeting of stockholders next following the date they attain the age of seventy-two (72) years. Section 2. Nomination of Directors. Any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at an annual meeting only pursuant to the Corporation's notice of such meeting or if written notice of such stockholder's intent to make such nomination or nominations has been received by the Secretary of the Corporation not less than sixty nor more than ninety days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than thirty days or delayed by more than sixty days from such anniversary, notice by the stockholder to be timely must be so received not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of (1) the sixtieth day prior to such annual meeting or (2) the tenth day following the day on which notice of the date of the annual meeting was mailed or public disclosure thereof was made by the Corporation, whichever first occurs. For purposes of calculating the first such notice period following adoption of this Restated Certificate of Incorporation, the first anniversary of the 1996 annual meeting shall be deemed to be , 1997. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and the name, age, business address, residence address and principal occupation of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) relating to the nomination or nominations; (d) the class and number of shares of the Corporation which are beneficially owned by such stockholder and the person to be nominated as of the date of such stockholder's notice and by any other stockholders 6 -6- known by such stockholder to be supporting such nominees as of the date of such stockholder's notice; (e) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (f) the consent of each nominee to serve as a director of the Corporation if so elected. In addition, in the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a special meeting only pursuant to the Corporation's notice of meeting or if written notice of such stockholder's intent to make such nomination or nominations, setting forth the information and complying with the form described in the immediately preceding paragraph, has been received by the Secretary of the Corporation not earlier than the ninetieth day prior to such special meeting and not later than the close of business on the later of (i) the sixtieth day prior to such special meeting or (ii) the tenth day following the day on which notice of the date of the special meeting was mailed or public disclosure thereof was made by the Corporation, whichever comes first. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Article III, Section 2. The presiding officer of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by this Article III, Section 2, and if he or she should so determine, the defective nomination shall be disregarded. Section 3. Vacancies; Resignations. (a) If any vacancies occur in the Board of Directors, or if any new directorships are created, they shall be filled solely by a majority of the directors then in office, although less than a quorum. Each director so chosen shall hold office until the expiration of the term of the class into which such director was elected and until his successor is duly elected and qualified. If there are no directors in office a special meeting of stockholders shall be called in accordance with the provisions of the Certificate of Incorporation or these Bylaws, at which meeting such vacancies shall be filled. (b) Any director may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board, the President or the Secretary of the Corporation. Unless otherwise specified in such written notice, a resignation shall take effect upon delivery thereof to the Board of Directors or the designated officer. It shall not be necessary for a resignation to be accepted before it becomes effective. Section 4. Place of Meeting. The Board of Directors may hold meetings, both regular and special, either within or without the State of Delaware. Section 5. First Meeting. The first regular meeting of each newly elected Board of Directors shall be held immediately following the annual meeting of stockholders and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. 7 -7- Section 6. Regular Meetings. Additional regular meetings of the Board of Directors may be held without notice, at such time and place as may from time to time be determined by the Board of Directors. Section 7. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors or President on 2 days' notice to each director in accordance with Article V. Special meetings shall be called by the Chairman of the Board, President or Secretary in like manner and on like notice on the written request of 4 directors or one-half (1/2) of the number of directors, whichever is less. Section 8. Quorum. At all meetings of the Board of Directors one-half (1/2) of the number of directors then in office, or such greater number as equals one-third (1/3) of the total number of directors, shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by law or the Certificate of Incorporation. If a quorum is not present at any meeting of the Board of Directors, the directors present may adjourn the meeting, from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Compensation. Directors shall be entitled to such compensation for their services as directors and to such reimbursement for any reasonable expenses incurred in attending directors' meetings as may from time to time be fixed by the Board of Directors. The compensation of directors may be on such basis as is determined by the Board of Directors. Any director may waive compensation for any meeting. Any director receiving compensation under these provisions shall not be barred from serving the Corporation in any other capacity and receiving reasonable compensation for other such services. Section 10. Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if a written consent to such action is signed by all members of the Board of Directors and such written consent is filed with the minutes of the proceedings. ARTICLE IV COMMITTEES Section 1. Executive Committee. The Board of Directors may appoint any Executive Committee consisting of not less than 3 directors, one of whom shall be designated as Chairman of the Executive Committee. Section 2. Powers. The Executive Committee shall have and may exercise those powers of the Board of Directors as may from time to time be granted to it by the Board of Directors. 8 -8- Section 3. Procedure; Meetings. The Executive Committee shall fix its own rules of procedure and shall meet at such times and at such place or places as may be provided by such rules. The Executive Committee shall keep regular minutes of its meetings and deliver such minutes to the Board of Directors. The Chairman of the Executive Committee, or, in his absence, a member of the Executive Committee chosen by a majority of the members present, shall preside at meetings of the Executive Committee and another member thereof chosen by the Executive Committee shall act as Secretary of the Executive Committee. Section 4. Quorum. A majority of the Executive Committee shall constitute a quorum for the transaction of business, and the affirmative vote of a majority of the members thereof shall be required for any action of the Executive Committee. Section 5. Other Committees. The Board of Directors may appoint such other committee or committees as it shall deem advisable and with such functions and duties as the Board of Directors shall prescribe. Section 6. Vacancies; Changes; Discharge. The Board of Directors shall have the power at any time to fill vacancies in, to change the membership of, and to discharge, any such committee. Section 7. Compensation. Members of any committee shall be entitled to such compensation for their services as members of any such committee and to such reimbursement for any reasonable expenses incurred in attending committee meetings as may from time to time be fixed by the Board of Directors. Any member may waive compensation for any meeting. Section 8. Action by Consent. Any action required or permitted to be taken at any meeting of any committee of the Board of Directors may be taken without a meeting if written consent to such action is signed by all members of the committee and such written consent is filed with the minutes of its proceedings. ARTICLE V NOTICES Section 1. Form; Delivery. Whenever, under the provisions of law, the Certificate of Incorporation or these Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice unless otherwise specifically provided, but such notice may be given by regular or overnight mail, addressed to such director or stockholder, at his or her address as it appears on the records of the Corporation, with postage thereon prepaid. Notices given by regular mail shall be deemed to be given at the time they are deposited in the United States mail. Notice to a director may also be given personally, by telegram sent to his address as it appears on the records of the Corporation, by facsimile (with a machine-generated confirmation) or by telephone. 9 -9- Section 2. Waiver. Whenever any notice is required to be given under the provisions of law, the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed to be equivalent to such notice. In addition, any stockholder who attends a meeting of stockholders in person, or is represented at such meeting by proxy, without protesting prior to the conclusion of the meeting the lack of notice thereof to him, or any director who attends a meeting of the Board of Directors without protesting, prior to the commencement of the meeting, such lack of notice, shall be conclusively deemed to have waived notice of such meeting. ARTICLE VI OFFICERS Section 1. Designations. The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chairman of the Board, Vice Chairman of the Board, a President, a Secretary and a Treasurer. The Board of Directors may also choose one or more Executive or Senior Vice Presidents, one or more additional vice presidents, one or more assistant secretaries and assistant treasurers, and such other officers and agents as it shall deem necessary. All officers of the Corporation shall hold their offices for such terms and shall exercise such power and perform such duties as shall from time to time be determined by the Board of Directors. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide. Section 2. Term of Office; Removal. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a Chairman, a Vice Chairman, a President, a Secretary and a Treasurer and such other officers as the Board of Directors shall deem appropriate. The officers of the Corporation shall hold office until their successors are chosen and shall qualify. Any officer elected or appointed by the Board of Directors may be removed, with or without cause, at any time by the affirmative vote of a majority of the directors then in office. Such removal shall not prejudice the contract rights, if any, of the person so removed. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors. Section 3. Compensation. The salaries of all officers of the Corporation shall be fixed by the Board of Directors. Section 4. The Chairman of the Board. The Chairman of the Board shall be the Chief Executive Officer of the Corporation and shall have general direction of the business affairs of the Corporation, subject to the control of the Board of Directors. The Chairman shall preside at all meetings of stockholders and the Board of Directors which he shall attend. Except where, by law, the signature of the President is required, the Chairman shall possess the same power as the President to execute all certificates, contracts, bonds, mortgages and other instruments of the Corporation. 10 -10- Section 5. Vice Chairman. The Vice Chairman shall, in the absence of the Chairman of the Board or in the event of his disability, preside at all meetings of the Board of Directors and Stockholders and perform the duties and exercise the powers of the Chairman of the Board and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board of Directors. Section 6. The President. (a) The President shall be the Chief Administrator and Operations Officer of the Corporation and shall have general direction of the administration and operation of the business affairs of the Corporation, subject to the direction of the Chairman of the Board and the Board of Directors. (b) Unless otherwise prescribed by the Board of Directors, the President shall have full power and authority on behalf of the Corporation to attend, act and vote at any meeting of security holders of other corporations in which the Corporation may hold securities. At such meeting, the President shall possess and may exercise any and all rights and powers incident to the ownership of such securities which the Corporation might have possessed and exercised if it had been present. The Board of Directors may from time to time confer like powers upon any other person or persons. Section 7. The Vice Presidents. The Vice President (or in the event there by more than one, the Vice Presidents in the order designated, or in the absence of any designation, then in order of their election) shall, in the absence of the President or in the event of his disability, perform the duties and exercise the powers of the President and shall generally assist the President and perform such other duties and have such other powers as may from time to time be prescribed by the Board of Directors. Section 8. The Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all votes and the proceedings of the meetings in a book to be kept for that purpose and shall perform like duties for the Executive Committee or other committees, if required. He shall give, or cause to be given, notice of all meetings of stockholders and special meetings of the Board of Directors, and shall perform such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board or the President, under whose supervision he shall act. He shall have custody of the seal of the Corporation and he, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it and, when so affixed, the seal may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing thereof by his signature. Section 9. The Assistant Secretary. The Assistant Secretary (or in the event there be more than one, the Assistant Secretaries in the order designated, or in the absence of any designation, then in the order of their election) shall, in the absence of the Secretary or in the event of his disability, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board of Directors. 11 -11- Section 10. The Treasurer. The Treasurer shall have the custody of the corporate funds and other valuable effects, including securities, and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may from time to time be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chairman of the Board or the President, and the Board of Directors, at regular meetings of the Board, or whenever they may require it, an account of all of his transactions as Treasurer and of the financial condition of the Corporation. Section 11. The Assistant Treasurer. The Assistant Treasurer (or in the event there be more than one, the Assistant Treasurers in the order designated, or in the absence of any designation, then in the order of their election) shall, in the absence of the Treasurer or in the event of his disability, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board of Directors. ARTICLE VII INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS Section 1. Action, Other Than by or in the Right of the Corporation. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding or investigation, whether civil, criminal or administrative, and whether external or internal to the Corporation (other than a judicial action or suit brought by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or that, being or having been such a director, officer, employee or agent, he is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (all such persons being referred to hereafter as an "Agent"), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding, or any appeal thereof, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding -- whether by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent -- shall not, of itself, create a presumption that the person did not act in good faith and in manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, that he or she had reasonable cause to believe that his or her conduct was unlawful. Section 2. Action, by or in the Right of the Corporation. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed judicial action or suit brought by or in the right of the Corporation to procure a judgment 12 -12- in its favor by reason of the fact that he or she is or was an Agent (as defined above) against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection with the defense, settlement or appeal of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for gross negligence or misconduct in the performance of his or her duty to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or other such court shall deem proper. Section 3. Determination of Right of Indemnification. No indemnification under Section 1 or 2 of this Article VII (unless ordered by a court) shall be made by the Corporation if a determination is reasonably and promptly made (i) by the Board of Directors by a majority vote consisting of directors who were not parties to such action, suit or proceedings, even though less than a quorum or (ii) if there are no such directors or if such directors so direct, by independent legal counsel in a written opinion, or (iii) by the stockholders, that such person did not act in good faith and in a manner that such person reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal proceeding, that such person believed or had reasonable cause to believe that his or her conduct was unlawful. Section 4. Indemnification Against Expenses of Successful Party. Notwithstanding the other provisions of this Article, to the extent that an Agent has been successful on the merits or otherwise, including the dismissal of an action without prejudice or the settlement of an action without admission of liability, in defense of any action, suit or proceeding or in defense of any claim, issue or matter therein, or on appeal from any such proceeding, action, claim or matter, such Agent shall be indemnified against all expenses actually and reasonably incurred in connection therewith. Section 5. Advances of Expenses. Except as limited by Section 6 of this Article, expenses incurred in defending any civil, criminal, administrative or investigative action, suit or proceeding or investigation or any appeal therein shall be paid by the Corporation in advance of the final disposition of such matter, if the Agent shall undertake to repay such amount in the event that it is ultimately determined, as provided herein, that such person is not entitled to indemnification. Notwithstanding the foregoing, no advance shall be made by the Corporation if a determination is reasonably and promptly made by the Board of Directors by a majority vote of disinterested directors, or (if there are no such directors or such directors so direct) by independent legal counsel in a written opinion, that, based upon the facts known to the Board or counsel at the time such determination is made, such person did not act in good faith and in a manner that such person believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal proceeding, that such person believed or had reasonable cause to believe his or her conduct was unlawful. In no event shall any advance be made in instances where the Board of Directors or independent legal counsel reasonably determines that such person deliberately breached his duty to the Corporation or its shareholders. 13 -13- Section 6. Right of Agent to Indemnification Upon Application; Procedure Upon Application. Any indemnification under Sections 1, 2, and 4, or advance under Section 5 of this Article, shall be made promptly, and in any event within ninety days, upon the written request of the Agent, unless with respect to applications under Sections 1, 2, or 5, a determination is reasonably and promptly be made by the Board of Directors by a majority vote of disinterested directors that such Agent acted in a manner set forth in such Sections as to justify the Corporation's not indemnifying or making an advance to the Agent. In the event there are no such disinterested directors, the Board of Directors shall promptly direct that independent legal counsel shall decide whether the Agent acted in the manner set forth in such Sections as to justify the Corporation's not indemnifying or making an advance to the Agent. The right to indemnification or advances as granted by this Article shall be enforceable by the Agent in any court of competent jurisdiction, if the Board or independent legal counsel denies the claim, in whole or in part, or if no disposition of such claim is made within ninety days. The Agent's expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. Section 7. Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in this Article is held by a court of competent jurisdiction to be unavailable to an indemnitee in whole or part, the Corporation, shall, in such an event, after taking into account, among other things, contributions by other directors and officers of the Corporation pursuant to indemnification agreements or otherwise, and in the absence of personal enrichment, acts of intentional fraud or dishonesty or criminal conduct on the part of the Agent, contribute to the payment of Agent's losses to the extent that, after other contributions are taken into account, such losses exceed: (i) in the case of a director of the Corporation or any of its subsidiaries who is not an officer of the Corporation or any of such subsidiaries, the amount of fees paid to him or her for serving as a director during the 12 months preceding the commencement of the suit, proceeding or investigation; or (ii) in the case of a director of the Corporation or any of its subsidiaries who is also an officer of the Corporation or any of such subsidiaries, the amount set forth in clause (i) plus 5% of the aggregate cash compensation paid to said director for such office(s) during the 12 months preceding the commencement of the suit, preceding, or investigation; or (ii) in the case of an officer of the Corporation or any of its subsidiaries, 5% of the aggregate cash compensation paid to such officer for service in such office(s) during the 12 months preceding the commencement of such suit, proceeding or investigation. Section 8. Other Rights and Remedies. The indemnification provided by this Article shall not be deemed exclusive of, and shall not affect, any other rights to which an Agent seeking indemnification may be entitled under any Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be an Agent and shall inure to the benefit of the heirs, executors and administrators of such a person. All rights to indemnification under this Article shall be deemed to be provided by a contract between the Corporation and the agent who serves in such capacity at any time while these bylaws and other relevant provisions of the general corporation law and other applicable law, if any, are in effect. Any repeal or modification thereof shall not affect any rights or obligations then existing. 14 -14- Section 9. Insurance. Upon resolution passed by the Board, the Corporation may purchase and maintain insurance on behalf of any person who is or was an Agent against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article. The Corporation may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. Section 10. Constituent Corporations. For the purposes of this Article, references to "the Corporation" include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation, so that any person who is or was a director, officer, employee, or trustee of such a constituent corporation or who, being or having been such a director, officer, employee or trustee, is or was serving at the request of such constituent corporation as a director, officer, employee, trustee of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as he would if he had served the resulting or surviving corporation in the same capacity. Section 11. Other Enterprises, Fines, and Serving at Corporation's Request. For purposes of this Article, references to "other enterprises" in Section 1 and 7 shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service by Agent as director, officer, employee, trustee or agent of the Corporation which imposes duties on, or involves services by, such Agent with respect to any employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article. Section 12. Savings Clause. If this Article or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Agent as to expenses (including attorneys' fees), judgements, fines and amounts paid in settlement with respect to any action, suit, appeal, proceeding or investigation, whether civil, criminal or administrative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article that shall not have been invalidated, or by any other applicable law. 15 -15- ARTICLE VIII STOCK CERTIFICATES Section 1. Form; Signatures. (a) Every holder of stock in the Corporation shall be entitled to have a certificate, signed by the Chairman of the Board or the President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, exhibiting the number, and class (and series, if any), of shares owned by him, and bearing the seal of the Corporation. Such seal may be a facsimile. Where a certificate is manually signed (i) by a transfer agent other than the Corporation or its employee or (ii) by a registrar other than the Corporation or its employee, the signature of any such officer may be a facsimile. In case any officer who has signed, or whose facsimile signature was placed on, a certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the Corporation with the same effect as if he were such officer at the date of its issue. (b) All stock certificates representing shares of capital stock which are subject to restrictions on transfer or to other restrictions, may have imprinted thereon a notation to such effect, as shall be determined by the Board of Directors. Section 2. Registration of Transfer. Upon surrender to the Corporation or any transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation or its transfer agent to issue a new certificate to the person entitled thereto, to cancel the old certificate and to record the transaction upon its books. Section 3. Registered Stockholders. (a) Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person who is registered on its books as the owner of shares of capital stock to receive dividends or other distributions, to vote as such owner, and to hold liable for calls and assessments a person who is registered on its books as the owner of shares of its capital stock. The Corporation shall not be bound to recognize any equitable or legal claim to or interest in such shares on the part of any other person. (b) Stockholders are responsible for giving written notice to the Corporation or the transfer agent and registrar, if any, of any change of name or address, and failure to do so shall relieve the Corporation, its directors, officers and agents, and its transfer agent and registrar, if any, of liability for failure to send notices or pay dividends or other distributions to a name or address other than the name or address appearing on the stock ledger maintained by the Corporation or by the transfer agent and registrar, if any. 16 -16- Section 4. Lost, Stolen or Destroyed Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation which is claimed to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate claimed to have been lost, stolen or destroyed. ARTICLE IX GENERAL PROVISIONS Section 1. Dividends. Subject to the provisions of the Certificate of Incorporation, dividends upon the outstanding capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting, pursuant to law, and may be paid in cash, in property, or in shares of the Corporation's capital stock. Section 2. Reserves. The Board of Directors shall have full power, subject to the provisions of law and the Certificate of Incorporation, to determine whether any, and, if so, what part, of the funds legally available for the payment of dividends shall be declared as dividends and paid to the stockholders of the Corporation. The Board of Directors may fix a sum which may be set aside or reserved over and above the paid-in capital of the Corporation for working capital or as a reserve for any proper purpose, and may, from time to time, increase, diminish or vary such fund in its absolute judgment and discretion. Section 3. Fiscal Year. The fiscal year of the Corporation shall begin on June 1 in each calendar year and end on May 31 in the following calendar year. Section 4. Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its incorporation and the words "Corporate Seal, Delaware". EX-10.2 4 FORM OF TRADEMARK AGREEMENT 1 Exhibit 10.02 TRADEMARK AGREEMENT THIS AGREEMENT is made and entered into as of this _____ day of _____, 1996 by and among MANOR CARE, INC., a Delaware corporation ("Manor Care"), and CHOICE HOTELS HOLDINGS, INC. (to be renamed CHOICE HOTELS INTERNATIONAL, INC.)("CHH"), a Delaware corporation. RECITALS Manor Care, directly and through certain subsidiaries ("Lodging Subsidiaries") develops, owns and conducts the business of operating lodging facilities (the "Lodging Business") and, directly and through its other subsidiaries, develops, owns and conducts the business of operating health care and senior living facilities; CHH, directly and through its subsidiaries, engages in the business of operating and franchising lodging facilities, resorts, food facilities, other products procurement and distribution and other contract services businesses pertaining to lodging; Manor Care and CHH have entered into a distribution agreement dated as of __________, 1996, whereby, inter alia, Manor Care and the Lodging Subsidiaries transfer to CHH the stock of the Lodging Subsidiaries and certain other assets relating principally to the Lodging Business, and whereby CHH will conduct the Lodging Business formerly conducted by the Lodging Subsidiaries; Manor Care and the Lodging Subsidiaries desire to assign and transfer to CHH, and CHH desires to acquire, all of the right, title and interest of Manor Care and the Lodging Subsidiaries in and to all the registered and pending trademarks and service marks that are owned by Manor Care, Inc., and that are used exclusively in the Lodging Business (marks in Schedule A, collectively "Assigned Marks"). 1 2 AGREEMENT NOW THEREFORE, in consideration of the foregoing, the mutual promises contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Manor Care and CHH agree as follows: 1. ASSIGNMENT. Without representation or warranty of any kind, express or implied, and subject to all existing licenses, Manor Care hereby grants and assign to CHH all of its right, title and interest in and to: a. The Assigned Marks; b. All federal, state and foreign registrations related to the Assigned Marks and all pending applications for the Assigned Marks; c. All statutory, common law, equitable and civil law rights (whether arising under federal, state or foreign law) related to the Assigned Marks; d. All of the goodwill of the Lodging Business connected with and symbolized by the Assigned Marks; e. All rights to income, royalties, license and franchise fees and any other payments now or hereafter due or payable with respect to the Assigned Marks, including without limitation, all damages and payments for past, present and future infringements of the Assigned Marks; f. All right to sue for, and all rights of recovery with respect to, all past, present and future infringements of the Assigned Marks; g. All rights of Manor Care under all license agreements with respect to the Assigned Marks; 2 3 and h. All other rights and privileges pertaining to or associated with the Assigned Marks throughout the world, the same to be held and enjoyed by CHH as fully as the same would have been held and enjoyed by Manor Care had this Agreement not been made. These rights in sections a. through h. above are collectively the Assigned Mark Rights. 2. ASSUMPTION. CHH agrees to assume all obligations of Manor Care and the Lodging Subsidiaries arising after the date of this Agreement under any license agreements to which Manor Care or any of the Lodging Subsidiaries is a party that are being assigned to CHH under this Agreement. 3. MANOR CARE OBLIGATIONS. Within a reasonable time of the execution of this Agreement, not to exceed 3 months, Manor Care and the Lodging Subsidiaries agree to: a. Cease all use of the Assigned Marks or any mark that is confusingly similar to, or a colorable imitation of, the Assigned Marks, and dispose of all current inventory and supplies marked with the Assigned Marks; b. Prepare and file with proper authorities all corporate resolutions and forms necessary to change the corporate name, and trademark registrant status of the marks listed in Schedule B, of the Lodging Subsidiary Manor Care Hotels France, S.A. to Choice Hotels France, S.A.; c. Prepare and file with proper authorities an assignment of rights, registrations and obligations associated with all trademarks, service marks and trade names, listed in Schedule C, of Manor Care Hotels International, Inc. to Choice Hotels France, S.A.; d. Prepare and file with proper authorities all forms necessary to effect a change in each Manor Care business and corporate, except as otherwise provided in this Agreement, name to a name which does not include the words "Hotels "; 3 4 e. Execute all internal resolutions or other forms necessary to change the business or company's name under the applicable corporations law or other corporations legislation, together with an appointment, by each party's officers and employees as the corporation's agent to complete and lodge the form; and f. Deliver to the CHH copies of the documents referenced above. 4. ACKNOWLEDGEMENT AND RECORDATION. a. Manor Care acknowledges, without representation, warranty or inquiry that, by virtue of the assignment made in this Agreement, CHH is the exclusive owner of the Assigned Mark Rights, and that Manor Care and the Lodging Subsidiaries do not have any right, title or interest in or to any of the Assigned Mark Rights from and after the date of this Agreement, except as otherwise provided in this Agreement. b. Manor Care and the Lodging Subsidiaries agree to cooperate fully with CHH in filing for the recordation of appropriate assignment and other documents in the appropriate foreign, state, and/or local jurisdictions evidencing CHH's acquisition and ownership of the Assigned Marks and the Assigned Mark Rights, and evidencing name changes and other assignments contemplated by this Agreement. Neither Manor Care nor the Lodging Subsidiaries will take action inconsistent with CHH's ownership of and interest in the Assigned Mark Rights. c. Manor Care and the Lodging Subsidiaries may not attack the validity of any of the Assigned Mark Rights, CHH's ownership of the Assigned Mark Rights, or any of the terms of this Agreement, or assist any third party in doing any of the same, and Manor Care and the Lodging Subsidiaries waive any right to contest the validity of the Assigned Mark Rights. 5. RELATIONSHIP OF THE PARTIES. Nothing in this Agreement shall be construed to create any relationship between the parties of agency, partnership or joint venturer or render any party liable for 4 5 any debts or obligations incurred by any other party to this Agreement. No party is authorized to enter into agreements for or on behalf of any other party to this Agreement, to collect any obligation due or owed to any such party, or to bind any other party in any manner whatsoever. 6. GENERAL. a. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement between Manor Care and the Lodging Subsidiaries and CHH regarding the subjects of this Agreement and supersedes all oral and written agreements, entered before or at the same time as this Agreement, concerning the subjects of this Agreement. This Agreement may be executed in one or more counterparts, each of which shall be deemed original, and all such counterparts together shall constitute but one and the same instrument. b. MODIFICATION. This Agreement may be modified only by written agreement signed by both parties to this Agreement. c. WAIVER. No waiver of any obligation under this Agreement will be effective unless in writing, and will then be effective only for the specific instance for which such waiver was given. d. ASSIGNMENT OF AGREEMENT. Neither party to this Agreement may transfer or assign its rights under this Agreement; provided, however, that this provision will not limit CHH from assigning rights to the Assigned Marks or the Assigned Mark Rights to any party. e. GOVERNING LAW. This Agreement will be governed by the laws of the State of Maryland, without regard to Maryland conflicts of laws principles. Parties to this Agreement consent to the exclusive personal jurisdiction of the federal and state courts sitting in Maryland with respect to any action concerning their respective obligations under this Agreement. f. SEVERABILITY. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable, then such provision may be rewritten by that court with the least 5 6 modification necessary to render the provision valid, and the remaining provisions of this Agreement will remain in full force and effect. g. HEADINGS. The headings in this Agreement are for convenience only and are not intended to affect the interpretation of this Agreement. h. BINDING EFFECT. This Agreement shall be binding on and inure to the benefit of the parties to this Agreement and their respective transferees and successors. i. GEOGRAPHIC SCOPE. This Agreement shall be effective within the United States and in any country in which the Lodging Subsidiaries do business or intend to do business, including, but not limited to, Belgium, France, Germany, Great Britain, Italy, Luxembourg, the Netherlands, Portugal, Spain, and Switzerland. IN WITNESS WHEREOF, a duly authorized representative of each party has executed this Agreement as of the date first above written. MANOR CARE, INC. By:_______________________________________ Title:____________________________________ Date: ____________________________________ CHOICE HOTELS HOLDINGS, INC. By:_______________________________________ Title ____________________________________ Date: ____________________________________ NOTARIZATION ON NEXT PAGE 6 7 STATE OF MARYLAND ) ) SS: COUNTY OF MONTGOMERY ) Before me, a Notary Public, in and for said County and State, on this day personally appeared _______________________________, the __________________________ of Manor Care, Inc., and _______________________________, the _________________________ of Choice Hotels Holdings, Inc., each known to me as those persons whose names are subscribed to the foregoing instrument. Given under my hand and seal this _______ day of ___________, 1996. ---------------------------------- Notary Public My Commission Expires: _____________________________ 7 8 SCHEDULE A MANOR CARE, INC. APPLICATIONS/REGISTRATIONS: PENDING AND REGISTERED
U.S. APPLICATION MARK APP.. NO. FREQUENT SLEEPER 75/028437 U.K. REGISTRATION MARK Reg. No. FOUR SEASONS 1493169
9 SCHEDULE B MANOR CARE HOTELS FRANCE, S.A. INTERNATIONAL APPLICATIONS/REGISTRATIONS: PENDING AND REGISTERED
WIPO REGISTRATIONS MARK APP./REG. NO. PRIMEVERE AND DESIGN 563843 RESTHOTEL PRIMEVERE AND DESIGN 545399 SAPHIR AND DESIGN 562038 RESTHOTEL SAPHIR AND DESIGN 546480 UK APPLICATIONS/REGISTRATIONS MARK App./Reg. No. PRIMEVERE 1538745 SAPHIR App. No. 1538744 RESTHOTEL SAPHIR App. No. 15387453 RESTHOTEL PRIMEVERE 1538742 RESTHOTEL PRIMEROSE B1538740 DORDINE HOTEL 1538741 OTHER EUROPEAN REGISTRATIONS MARK REG. NO. COUNTRY PRIMEVERE 555138 Benelux PRIMEVERE 94506010 France PRIMEVERE GE 94C 000242 Italy PRIMEVERE AND 302688 Portugal DESIGN PRIMEVERE 302688 Portugal PRIMEVERE 1918022 Spain PRIMEVERE 423869 Switzerland
10 SCHEDULE C MANOR CARE HOTELS INTERNATIONAL, INC. INTERNATIONAL APPLICATIONS/REGISTRATIONS
FRANCE REGISTRATIONS MARK REG. NO. PRIMA PIZZA 1688145 PRIMEVERE AND DESIGN 1354090 RESTHOTEL PRIMEVERE AND DESIGN 1426424 SAPHIR AND DESIGN 1593020 RESTHOTEL SAPHIR AND DESIGN 1456476 DORDINN HOTEL 1562819
EX-10.3 5 ASSIGNMENT OF MARKS AGREEMENT 1 EXHIBIT 10.03 ASSIGNMENT OF MARKS THIS AGREEMENT is made and entered into as of this _____ day of _____, 1996 by and among MANOR CARE HOTELS INTERNATIONAL, INC., a Delaware corporation ("MCHI"), and CHOICE HOTELS FRANCE S.A. ("CHF"), a French corporation. RECITALS MCHI owns and is the registrant of certain trademarks and service marks pertaining to hotel services; CHF engages in the business of operating and franchising lodging facilities and other services businesses pertaining to lodging; Pursuant to a distribution agreement dated as of __________, 1996 between MCHI's corporate parent, Manor Care, Inc. and CHF's corporate parent, Choice Hotels International, Inc., those parties agreed to assign and transfer to CHF certain registered trademarks and service marks (listed in Schedule A, "Assigned Marks") that are owned by MCHI. AGREEMENT NOW THEREFORE, in consideration of the foregoing, the mutual promises contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, MCHI and CHF agree as follows: 1. ASSIGNMENT. Without representation or warranty of any kind, express or implied, and subject to all existing licenses, MCHI grants and assigns to CHF all of its right, title and interest in and to: a. The Assigned Marks; 1 2 b. All French registrations related to the Assigned Marks; c. All statutory, common law, equitable and civil law rights (whether arising under French law) related to the Assigned Marks; d. All of the goodwill connected with and symbolized by the Assigned Marks; e. All rights to income, royalties, license and franchise fees and any other payments now or hereafter due or payable with respect to the Assigned Marks, including without limitation, all damages and payments for past, present and future infringements of the Assigned Marks; f. All right to sue for, and all rights of recovery with respect to, all past, present and future infringements of the Assigned Marks; g. All rights of MCHI under all license agreements with respect to the Assigned Marks; and h. All other rights and privileges pertaining to or associated with the Assigned Marks throughout the world, the same to be held and enjoyed by CHF as fully as the same would have been held and enjoyed by MCHI had this assignment not been made. These rights in sections a. through h. above are collectively the Assigned Mark Rights. 2. ASSUMPTION. CHF agrees to assume all obligations of MCHI and the Lodging Subsidiaries arising after the date of this Agreement under any license agreements to which MCHI or any of the Lodging Subsidiaries is a party that are being assigned to CHF under this Agreement. 3. MCHI OBLIGATIONS. Within a reasonable time of the execution of this Agreement, not to exceed 3 months, MCHI agrees to: a. Cease all use of the Assigned Marks or any mark that is confusingly similar to, or a 2 3 colorable imitation of, the Assigned Marks, and dispose of all current inventory and supplies marked with the Assigned Marks; b. Prepare and file with proper authorities all forms necessary to effect a change in each business and corporate name to a name which does not include the words "Hotels "; c. Execute all internal resolutions or other forms necessary to change the business or company's name under the applicable corporations law or other corporations legislation, together with an appointment, by each party's officers and employees as the corporation's agent to complete and lodge the form; and d. Deliver to the CHF copies of the documents referenced. 4. ACKNOWLEDGEMENT AND RECORDATION. a. MCHI acknowledges, without representation, warranty or inquiry that, by virtue of the assignment made in this Agreement, CHF is the exclusive owner of the Assigned Mark Rights, and that MCHI does not have any right, title or interest in or to any of the Assigned Mark Rights from and after the date of this Agreement, except as otherwise provided herein. b. MCHI agrees to cooperate fully with CHF in filing for the recordation of appropriate assignment and other documents in the appropriate foreign, state, and/or local jurisdictions evidencing CHF's acquisition and ownership of the Assigned Marks and the Assigned Mark Rights. Neither MCHI nor the Lodging Subsidiaries will take action inconsistent with CHF's ownership of and interest in the Assigned Mark Rights. c. MCHI may not attack the validity of any of the Assigned Mark Rights, CHF's ownership of the Assigned Mark Rights, or any of the terms of this Agreement, or assist any third party in doing any of the same, and MCHI waive any right to contest the validity of the Assigned Mark Rights. 3 4 5. RELATIONSHIP OF THE PARTIES. Nothing in this Agreement shall be construed to create any relationship between the parties of agency, partnership or joint venturer or render any party liable for any debts or obligations incurred by any other party to this Agreement. No party is authorized to enter into agreements for or on behalf of any other party to this Agreement, to collect any obligation due or owed to any such party, or to bind any other party in any manner whatsoever. 6. GENERAL. a. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement between MCHI and CHF regarding the Assigned Marks and supersedes all oral and written agreements, entered before or at the same time as this Agreement, concerning the Assigned Marks and/or the Assigned Mark Rights. This Agreement may be executed in one or more counterparts, each of which shall be deemed original, and all such counterparts together shall constitute but one and the same instrument. b. MODIFICATION. This Agreement may be modified only by written agreement signed by both parties to this Agreement. c. WAIVER. No waiver of any obligation under this Agreement will be effective unless in writing, and will then be effective only for the specific instance for which such waiver was given. d. ASSIGNMENT. Neither party to this Agreement may transfer or assign its rights under this Agreement; provided, however, that this provision will not limit CHF from assigning rights to the Assigned Marks or the Assigned Mark Rights to any party. e. GOVERNING LAW. This Agreement will be governed by the laws of the State of Maryland, without regard to Maryland conflicts of laws principles. Parties to this Agreement consent to the exclusive personal jurisdiction of the federal and state courts sitting in Maryland with respect to any action concerning their respective obligations under this Agreement. f. SEVERABILITY. If any provision of this Agreement is held by a court of competent 4 5 jurisdiction to be unenforceable, then such provision may be rewritten by that court with the least modification necessary to render the provision valid, and the remaining provisions of this Agreement will remain in full force and effect. g. HEADINGS. The headings in this Agreement are for convenience only and are not intended to affect the interpretation of this Agreement. h. BINDING EFFECT. This Agreement shall be binding on and inure to the benefit of the parties to this Agreement and their respective transferees and successors. i. GEOGRAPHIC SCOPE. This Agreement shall be effective within the United States and in any country in which the Lodging Subsidiaries do business or intend to do business, including, but not limited to, Belgium, France, Germany, Great Britain, Italy, Luxembourg, the Netherlands, Portugal, Spain, and Switzerland. SIGNATURES ON NEXT PAGE 5 6 IN WITNESS WHEREOF, a duly authorized representative of each party has executed this Agreement as of the date first above written. MANOR CARE HOTELS INTERNATIONAL, INC. By:_____________________________________ Title:____________________________________ Date: ____________________________________ CHOICE HOTELS FRANCE S.A. By:_____________________________________ Title ____________________________________ Date: ____________________________________ STATE OF MARYLAND ) ) SS: COUNTY OF MONTGOMERY ) Before me, a Notary Public, in and for said County and State, on this day personally appeared _______________________________, the __________________________ of Manor Care Hotels International, Inc., and _______________________________, the _________________________ of Choice Hotels France, S.A., each known to me as those persons whose names are subscribed to the foregoing instrument. Given under my hand and seal this _______ day of ___________, 1996. ---------------------------------- Notary Public My Commission Expires: _______________________________________ 6 7 SCHEDULE A MANOR CARE HOTELS INTERNATIONAL, INC. INTERNATIONAL APPLICATIONS/REGISTRATIONS FRANCE REGISTRATIONS MARK REG. NO. PRIMA PIZZA 1688145 PRIMEVERE AND DESIGN 1354090 RESTHOTEL PRIMEVERE AND DESIGN 1426424 SAPHIR AND DESIGN 1593020 RESTHOTEL SAPHIR AND DESIGN 1456476 DORDINN HOTEL 1562819 EX-10.4 6 TIME SHARING AGREEMENT 1 Exhibit 10.04 TIME SHARING AGREEMENT This agreement, made and entered into this ___ day of ______________, 19___, by and between Manor Care, Inc., a corporation incorporated under the laws of the State of Delaware, with principal offices at 10750 Columbia Pike, Silver Spring, MD 20901, (together with its successors and permitted assigns, "LESSOR"), and Choice Hotels Holdings, Inc., a corporation incorporated under the laws of the State of Delaware (to be renamed Choice Hotels International, Inc.), 10750 Columbia Pike, Silver Spring, Maryland 20910, (together with its successors and permitted assigns, "LESSEE"). W I T N E S S E T H WHEREAS, LESSOR leases two civil AIRCRAFT bearing the United States Registration Number N697MC, a Cessna Citation III, and United States Registration N6885P, a Cessna Conquest I (hereinafter collectively referred to as "AIRCRAFT"); and WHEREAS, LESSOR employs a fully qualified flight crew to operate the AIRCRAFT; and WHEREAS, LESSOR and LESSEE desire to lease said AIRCRAFT and flight crew on a TIME SHARING basis as defined in Section 91.501(c)(1) of the Federal Aviation Regulations (FAR); and WHEREAS, LESSOR is a member of the National Business Aircraft Association and is authorized to operate the AIRCRAFT under the provisions of Exemption 1637, as amended. NOW THEREFORE, LESSOR AND LESSEE, declaring their intention to enter into and be bound by this TIME SHARING AGREEMENT, and for the good and valuable consideration set forth below, hereby covenant and agree as follows: 1. LESSOR agrees to lease the AIRCRAFT to LESSEE from time to time as LESSEE shall require, pursuant to the provisions of FAR 91.501 9 (c)(1) and to provide a fully qualified flight crew for all operations, subject to the LESSOR maintaining its ownership of AIRCRAFT. The term of this Agreement shall commence on the date of execution hereof and shall terminate thirty (30) months thereafter. 2. For each flight conducted under this Agreement LESSEE shall pay LESSOR the actual expenses for each such flight as authorized by FAR Part 91.501 (d). These expenses are the following: (a) Fuel, oil, lubricants, and other additives. (b) Travel expenses of the crew, including food, lodging and ground transportation. (c) Hangar and tie down costs away from the AIRCRAFT's base of operation. (d) Insurance obtained for the specific flight. (e) Landing fees, airport taxes, and similar assessments. 2 (f) Customs, foreign permit, and similar fees directly related to the flight. (g) In-flight food and beverages. (h) Passenger ground transportation. (i) Flight planning and weather contract services. (j) An additional charge equal to 100% of the expenses listed in subparagraph (a) of this paragraph. 3. In addition to the flight expenses described above in paragraph 2, LESSEE shall be fully responsible for the payment of all IRC 4261 excise taxes. 4. LESSOR will pay all expenses related to the operation of the AIRCRAFT when incurred, and will provide an invoice and bill LESSEE for the expenses enumerated in paragraph 2 and the excise taxes referred to in paragraph 3 above on the last day of the month in which any flight or flights for the account of LESSEE occur LESSEE shall pay LESSOR for said expenses within 30 days of receipt of the invoice and bill thereof. 5. LESSEE will provide LESSOR with requests for flight time and proposed flight schedule as far in advance of any given flight as possible. Requests for flight time shall be in a form, whether oral or written, mutually convenient to, and agreed upon by the parties. In addition to proposed schedules and flight times LESSEE shall provide at least the following information for each proposed flight at some time prior to scheduled departure as required by the LESSOR's flight crew: a) proposed departure point; b) destination; c) date and time of flight; d) the names of anticipated passengers; e) the nature and extent of luggage and/or cargo to be carried; f) the date and time of return flight, if any; and g) any other information concerning the proposed flight that may be pertinent or required by LESSOR or LESSOR's flight crew. 6. LESSOR shall have final authority over the scheduling of the AIRCRAFT, provided however, that LESSOR will use its best efforts to accommodate LESSEE's needs to avoid conflicts in scheduling. 7. LESSOR shall be solely responsible for securing maintenance, preventative maintenance and required or otherwise necessary inspections on the AIRCRAFT, and shall take such requirements into account in scheduling the AIRCRAFT. No period of maintenance, preventive maintenance or inspection shall be delayed or postponed for the purpose of scheduling the AIRCRAFT, unless said maintenance or inspection can be safely conducted at a later time in compliance with all applicable laws and regulations, and within the sound discretion of the Pilot in Command. The Chief Pilot and Pilot in Command shall have final and complete authority to cancel any flight for any reason or condition which in his judgment would comprise the safety of the flight. 3 8. LESSOR shall employ, pay for and provide for LESSEE a qualified flight crew for each flight undertaken under this Agreement. 9. In accordance with applicable Federal Aviation Regulations, the qualified flight crew provided by LESSOR will exercise all of its duties and responsibilities in regard to the safety of each flight conducted hereunder. LESSEE specifically agrees that the flight crew, in its sole discretion, may terminate any flight, refuse to commence any flight, or take other action which in the considered judgment of the Pilot in Command is necessitated by considerations of safety. No such action of the Pilot in Command shall create or support any liability for loss, injury, damage or delay to LESSEE or any other person. The parties further agree that LESSOR shall not be liable for delay or failure to furnish the AIRCRAFT and crew pursuant to this Agreement when such failure is caused by government regulation or authority, mechanical difficulty, war, civil commotion, strikes or labor disputes, weather conditions, or acts of God. 10. LESSEE shall carry its own comprehensive general liability insurance at its expense, and shall cause LESSOR to be named as an additional insured on all such policies. LESSEE shall be fully responsible for any damage to the AIRCRAFT caused by LESSEE's passengers or cargo. LESSEE agrees that it shall indemnify and hold LESSOR harmless from and against any and all claims, liabilities, damages, costs or expenses (including reasonable attorney's fees) arising or resulting in any manner from the acts or omissions of LESSEE, its officers, employees, agents and passengers on the AIRCRAFT, in connection with this Agreement. 11. LESSEE warrants that: (a) It will use the AIRCRAFT for and on account of its own business only, and will not use the AIRCRAFT for the purposes of providing transportation of passengers or cargo in air commerce for compensation or hire. The AIRCRAFT shall carry for LESSEE only such passengers and cargo as may be legally carried under FAR Part 91. The number of passengers carried for LESSEE shall not exceed the number of seats legally available on the AIRCRAFT, and the AIRCRAFT shall not be loaded beyond its certified capacity. (b) It shall refrain from incurring any mechanics or other liens in connection with inspection, preventative maintenance, maintenance or storage of the AIRCRAFT, whether permissible or impermissible under this Agreement, nor shall there be any attempt by any party hereto to convey, mortgage, assign, lease or any way alienate the AIRCRAFT or create any kind of lien or security interest involving the AIRCRAFT or do anything to take any action that might mature into such lien. (c) During the term of this Agreement, it will abide by and conform to all such laws, governmental and airport orders, rules and regulations, as shall from time to time be in effect relating in any way to the operation and use of the AIRCRAFT by a TIME SHARING Lessee. LESSEE will not allow carriage of any contraband or illegal controlled substance. 4 (d) Smoking shall be prohibited in the Aircraft; the Pilot in command shall have authority to enforce this requirement. 12. For the purposes of this Agreement, the permanent base of operation of the AIRCRAFT shall be Baltimore Washington International Airport. Lessor shall have the right to change the permanent base of operation at its sole discretion. 13. Neither this Agreement nor any party's interest herein shall be assignable to any other party whatsoever. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their heirs, representatives and successors. 14. CONTROL OF AIRCRAFT. It is expressly agreed and understood by the parties that, for all flights for Lessee under this Agreement, Lessor shall have possession, command, and control of the Aircraft, and shall maintain and exercise operational control over the Aircraft, all pilots, all servicing and loading of the Aircraft, and all Maintenance performed on the Aircraft. For the purpose of this Agreement, operational control shall include, without limitation, exclusive control over: (a) all pilots; (b) determinations whether any particular flight may be safely operated; (c) initiation and termination of flights (d) directions to pilots to conduct flights; (e) dispatch or release of flights; (f) servicing the Aircraft; and (g) airworthiness and performance of maintenance. 15. The laws of the State of Maryland, without reference to its conflicts of laws, principles, shall govern the interpretation, validity, performance and enforcement of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused the signature of their authorized representatives to be affixed below on the day and year first above written. The persons signing below warrant their authority to sign. TRUTH IN LEASING STATEMENTS UNDER SECTION 91.23 (FORMERLY 91.54) OF THE FEDERAL AVIATION REGULATIONS. 5 (a) MANOR CARE, INC. (LESSOR), HEREBY CERTIFIES THAT THE AIRCRAFT HAS BEEN INSPECTED AND MAINTAINED WITHIN THE 12 MONTH PERIOD PRECEDING THE DATE OF THIS AGREEMENT IN ACCORDANCE WITH THE PROVISIONS OF FAR PART 91 AND ALL APPLICABLE REQUIREMENTS FOR THE MAINTENANCE AND INSPECTION THEREUNDER HAVE BEEN MET. (b) MANOR CARE, INC., (LESSOR), AGREES, CERTIFIES AND KNOWINGLY ACKNOWLEDGES THAT WHEN THE AIRCRAFT IS OPERATED UNDER THIS AGREEMENT, LESSOR SHALL BE KNOWN AS, CONSIDERED, AND SHALL IN FACT BE THE OPERATOR OF THE AIRCRAFT AND IS CONSIDERED RESPONSIBLE FOR THE OPERATIONAL CONTROL OF THE AIRCRAFT AND FURTHER CERTIFIES THAT LESSOR WILL OPERATE THE AIRCRAFT IN COMPLIANCE WITH ALL APPLICABLE FEDERAL AVIATION REGULATIONS. (c) THE PARTIES UNDERSTAND THAT AN EXPLANATION OF FACTORS AND PERTINENT FEDERAL AVIATION REGULATIONS BEARING ON OPERATIONAL CONTROL CAN BE OBTAINED FROM THE GLEN BURNIE/BWI FAA FLIGHT STANDARDS DISTRICT OFFICE OR FROM ANY OTHER FAA FLIGHT STANDARD DISTRICT OFFICE, GADO OR ACDO. LESSEE AND LESSOR ACKNOWLEDGE THAT A TRUE COPY OF THIS EXECUTED AGREEMENT MUST BE SENT TO: FLIGHT STANDARDS TECHNICAL DIVISION, P.O. BOX 25724, OKLAHOMA CITY, OKLAHOMA 73125, WITHIN 24 HOURS OF ITS EXECUTION, AS PROVIDED BY FAR 91.23(c)(1). WITNESS: LESSOR: MANOR CARE, INC. __________________________ BY: ____________________________ TITLE:___________________________ WITNESS: LESSEE: CHOICE HOTELS HOLDINGS, INC. __________________________ BY: ______________________________ A copy of this Agreement must be carried in the AIRCRAFT while being operated hereunder. EX-10.5 7 CORPORATE SERVICES AGREEMENT 1 Exhibit 10.05 CORPORATE SERVICES AGREEMENT THIS AGREEMENT (this "Agreement") is made and entered into as of _______________, 1996, by and between MANOR CARE, INC., a Delaware corporation ("Manor"), and CHOICE HOTELS HOLDINGS, INC. (to be renamed Choice Hotels International, Inc.), a Delaware corporation ("Choice"). RECITALS WHEREAS, pursuant to a Distribution Agreement (the "Distribution Agreement") dated as of ____________, 1996, Choice and Manor agreed to enter into a corporate services agreement with the terms and conditions set forth herein. WHEREAS, Manor shall retain the personnel and systems formerly utilized in the administration of the services described herein; and WHEREAS, Choice desires to retain Manor as described herein, and Manor desires to render such assistance on an equitable, arms length basis for a fee; NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Choice and Manor agree as follows: 1. Definitions. As used in this Agreement, the following capitalized terms shall have the meanings indicated unless the context requires otherwise: "Accounting Period" shall be a one month period. "Accounting Systems Support" shall mean data preparation and other related accounting procedures required to perform the Functions in a timely manner, consistent with current policies and procedures, and in accordance with generally accepted accounting principles. "Accounts Payable Services" shall have the meaning described in Exhibit A. "Additional Consulting Services" shall mean the additional services related to the Functions, or any other services which Manor may provide Choice from time to time (on a transitional basis and only where such services shall not unreasonably interfere with Manor's business operations and will not cause Manor to incur additional expense without reasonable compensation therefor). 1 2 "Ancillary Agreements" shall have the meaning described in the Distribution Agreement. "Construction Accounting Services" shall have the meaning described on Exhibit A. "Consulting Services" shall have the meaning described in Exhibit C. "Conversion Services" shall mean the initial conversion of Choice's business data from Manor to Choice and archiving Choice's business accounting records for certain periods prior to the Distribution Date to the extent not already performed prior to the execution of the Distribution Agreement. "Corporate Accounting Systems Support" shall have the meaning described on Exhibit A. "Corporate Services" shall mean Conversion Services; Support Services; Facilities Services, the Functions, the Consulting Services and the Additional Consulting Services. "Distribution" means the distribution to the holders of Manor Care Common Stock all the outstanding shares of Choice Common Stock. "Distribution Date" means the date determined by the Board of Directors of Manor as the date on which the Distribution shall be effected. "Facilities Services" shall mean the Silver Spring Computer Services, Telecommunication Services, Headquarters Telephone and Long Distance Services, Travel Management Services, the Model Room Services, and certain other services listed on Exhibit A. "Functions" shall mean Payroll Services, Accounts Payable Services, Corporate Accounting Systems Support, Property Accounting Services and Construction Accounting Services for Choice's Lodging Business as listed on Exhibit A. "Lodging Business" shall mean any business or operation of Choice or the Lodging Subsidiaries (as defined in the Distribution Agreement) which is, pursuant to the Distribution Agreement, to be conducted, following the Distribution, by Choice. "Model Room Services" shall mean the operation of the model rooms and the maintenance of the building of which they are a part at the Silver Spring location, which shall include providing space for such model rooms and the cost of normal building operating costs, but which does not include 2 3 costs of maintaining personal property of Choice used in connection with such motel rooms, nor the cost of constructing, maintaining or reconfiguring such Model rooms. "Payroll Services" shall have the meaning described on Exhibit A. "Prime Rate" shall be the rate identified from time to time in the New York edition of the Wall Street Journal as being the Prime Rate of interest; should such rate be shown as a spread of rates, then the highest such rate shall be utilized. "Property Accounting Services" shall have the meaning described on Exhibit A. "Support Services" shall mean the support services needed to perform the Functions and Facilities Services, including but not limited to Accounting Systems Support and Systems Support. "Systems Support" shall mean the computer hardware, computer software, and telecommunications, including data transmission, data distribution, report generation, and data entry capabilities needed to process Choice's information for each Function and Facilities Service. "Travel Management Services" shall have the meaning described on Exhibit D. Any capitalized terms defined in the Distribution Agreement and used herein shall have the meanings ascribed to them in the Distribution Agreement unless otherwise defined herein. 2. Services. Upon the request of Choice, Manor shall provide the Corporate Services provided herein: (a) Manor shall provide Choice with Support Services for the Functions and Facilities Services in substantially the same manner as such services are being provided to the Lodging Business on the Distribution Date. Manor reserves the right to change the manner in which it provides Accounting Support and Systems Support related to the Functions and Facilities Services described herein, provided such change is consistent with changes made for Manor's own business units and provided Manor give Choice notice of such change (the same notice Manor will provide its own businesses). (b) Manor shall also provide Choice with Conversion Services at the cost of Manor to provide such Services. 3 4 (c) Choice may request that Manor provide Consulting Services and Additional Consulting Services from time to time. Consulting Services shall be provided on the terms and conditions specified on Exhibit C. The parties will agree, at the time such services are requested, upon the scope and final pricing for any Additional Consulting Services. Whenever the parties deem necessary, Manor will draft an arrangement letter outlining the scope of Additional Consulting Services, deliverables, cost, and schedule for Choice's acceptance. (d) Manor agrees to provide such services only if it reasonably believes the service will not interfere with the conduct of the business of Manor or pose an unreasonable burden. 3. Term. The term of this Agreement shall commence on the Distribution Date and shall remain in effect through the end of the first full Fiscal Year immediately following the Distribution Date. Unless terminated pursuant to the terms hereof, the Agreement shall automatically renew each Fiscal Year thereafter for the extended term of said Fiscal Year and shall not extend past the last day of the thirtieth (30th) month following the Distribution; provided, however, that Choice may terminate this agreement or any services provided hereunder at any time for any reason or no reason by sending written notice to Manor upon sixty (60) days' prior notice to Manor. This Agreement may also be terminated in the event of a default (past the expiration of any applicable cure period provided herein) in accordance with the provisions of this Agreement. Notwithstanding the foregoing, the Consulting Services shall commence on the Distribution Date and shall be provided for a period of thirty (30) months. 4. Database Access. Choice will regularly enter all required information into the appropriate computer systems to enable Manor to provide the Corporate Services contracted for hereunder. Manor will provide access to these computer systems to enable Choice to maintain its employee, vendor, property and general ledger databases. Choice will provide access to information and employees necessary for Manor to provide such Corporate Services. 5. Price and Payment. Choice shall pay Manor for services requested and rendered hereunder as follows: (a) The charging mechanisms for rates or charges for each service shall include (i) activity-based charges where the per unit price will be multiplied by the variable number of units (for example, the number of employees times the employee charge will determine the per Accounting Period charge); (ii) fixed fee based charges, meaning a fixed amount per Accounting Period for Manor to perform the service; (iii) usage based charges for which Choice will pay according to actual use of the service; (iv) time and materials charges; or (v) a variation or a combination of any of the foregoing methods as agreed to by the parties. Charging mechanisms for each Corporate Service are identified on Exhibit B except with 4 5 respect to Consulting Services which shall be paid for in accordance with Exhibit C. If at any time during the term of the Agreement, Choice moves its office location from 10750 Columbia Pike, Silver Spring, Maryland, both the availability of certain services and their associated rates may be subject to change. (b) Except as provided in any Ancillary Agreement, Choice shall pay any and all additional costs and expenses which Manor may incur for the express purpose of providing services to Choice. (c) Choice shall pay Manor on a time and materials basis for all costs incurred by Manor in converting Choice business information and records from Manor's services systems to either a third party provider or to Choice. (d) Payment for all services hereunder (other than Consulting Services) shall be made by Choice to Manor within thirty (30) days of receipt of invoice for payment (with appropriate supporting documentation for any out-of-pocket expenses). Choice shall pay fixed charges in advance on the first business day of the applicable Accounting Period. Any payments not made by Choice to Manor when due shall bear interest, computed daily, from the date due to the date of payment based on the annual percentage rate equal to the Prime Rate, as same may vary from time to time, plus two (2) percentage points. 6. Duty of Care. (a) Manor's Obligations. All services provided hereunder shall be administered in accordance with Manor's standard policies, procedures and practices in effect as of the date hereof and as may be changed, and as more particularly described below, or as otherwise specified in accordance with the terms thereof. In so doing, Manor shall follow commonly accepted standards of care in the industry and exercise the same care and skill as it exercises in performing like services for itself. (b) Choice's Obligations. Choice shall adopt reasonable measures to limit its exposure with respect to any potential losses and damages, including, but not limited to, periodic examination and confirmation of results, provision for identification and correction of errors and omissions, preparation and storage of backup data, replacement of lost or mutilated documents, and reconstruction of data. 7. Liaison. Choice and Manor shall each appoint two managerial level individuals (hereinafter "Representatives") to facilitate communications and performance under this Agreement. Each party may treat an act of a Representative of the other party as being authorized by such other party without inquiring behind such act or ascertaining whether such Representative had authority 5 6 to so act. The initial Representatives are named on Exhibit E. Each party shall have the right at any time and from time to time to replace either or both of its Representatives by giving notice in writing to the other party setting forth the name of (i) each Representative to be replaced and (ii) the replacement, and certifying that the replacement Representative is authorized to act for the party giving the notice in all matters relating to this Agreement. 8. Confidentiality. (a) Manor and Choice agree that all information regarding the Corporate Services provided hereunder, including, but not limited to, price, methods of operation, and software, shall be maintained in confidence and not be released to any third party for any reason whatsoever, excluding such parties' counsel, agents, auditors or lenders. However, one party may release this Agreement or such information to a third party upon the prior approval of the other party (such approval not to be unreasonably withheld, conditioned or delayed), upon court order, or as required by any rules, regulations or laws. All confidential and proprietary information which either party has obtained from the other shall be returned upon the expiration or earlier termination of this Agreement. The provisions of this paragraph shall survive expiration or earlier termination of this Agreement. (b) Any Choice information or other information provided by Choice to Manor for use with the Corporate Services provided hereunder and identified in writing as confidential shall remain the exclusive and confidential property of Choice. Specifically, Choice's employee database and payroll information shall be deemed confidential. Manor shall treat such information as confidential and will not disclose or otherwise make available any Choice information to any person other than employees, consultants, or auditors of Manor with a need-to-know or except as required by law or court order. Manor will instruct its employees who have access to the Manor information to keep the same confidential by using the same care and discretion that Manor uses with respect to its own confidential property and trade secret. (c) Manor will provide reasonable security provisions to insure that third parties do not have access to Choice information. Manor reserves the right to issue and change regulations and procedures from time to time to improve file security. (d) Manor will take reasonable precautions to prevent the loss or alteration of Choice information. Choice will, to the extent it deems necessary, keep copies of all source documents delivered to Manor and will maintain a procedure external to Manor's systems for the reconstruction of lost or altered Choice data. 6 7 (e) Manor will, to the extent applicable, retain Choice's information in accordance with and to the extent provided by Manor's then prevailing records retention policies for similar activities. Manor will, in conformity with its then prevailing records retention policies, dispose of all Choice information in any manner deemed appropriate by Manor unless Choice, prior to such disposal, furnishes to Manor written instructions for the disposition of such Choice information, at Choice's expense. At Choice's request Manor will provide Choice, in a standard Manor format and at Manor's then standard rates for such format, any and all Choice information requested by Choice. (f) Manor's systems used to perform the Corporate Services provided hereunder, including but not limited to the payroll system, are confidential and proprietary to Manor or third parties. Choice shall treat these systems and all related procedures as confidential and proprietary to Manor or its third party vendors. Choice agrees that all software systems, procedures, and related materials provided to Choice are for Choice's internal use exclusively and only as related to the Corporate Services or any of the underlying systems used to provide Corporate Services hereunder. Choice may not sell, transfer, assign, or otherwise use the Corporate Services provided hereunder, in whole or in part, for the benefit of any other party. Choice shall not copy, modify, reverse engineer, or in any way alter these systems without Manor's express written consent. Title to all software systems used in performing the Corporate Services provided hereunder shall remain in Manor or its third party vendors. 9. Warranties and Limitations of Liability. (a) MANOR DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE CORPORATE SERVICES PROVIDED HEREUNDER. Manor will use reasonable efforts to perform the Corporate Services provided hereunder in a professional and workmanlike manner but the results of the Corporate Services are furnished "as is." (b) Manor's sole liability to Choice or any third party for claims, notwithstanding the form of such claims (e.g. contract, negligence or otherwise), arising out of errors or omissions in the Corporate Services provided or to be provided by Manor hereunder which are caused solely by Manor shall be to furnish correct information, payment, and/or adjustment in the Corporate Services provided hereunder provided that Choice promptly advises Manor thereof. (c) Manor's sole liability to Choice or any third party for claims, notwithstanding the form of such claims (e. g. contract, negligence or otherwise), arising out of the unavailability of the Corporate Services provided hereunder or the interruption in or delay in performing the Corporate 7 8 Services provided hereunder for any reason beyond Manor's reasonable control shall be to use all reasonable efforts to make such services available, and/or to resume performing the Corporate Services, as promptly as reasonably practicable. Manor will maintain the same back-up procedures for Choice's information that Manor has for its own information. (d) MANOR SHALL NOT BE LIABLE FOR ANY ERRORS, OMISSIONS, DELAYS, OR LOSSES UNLESS CAUSED SOLELY BY ITS CRIMINAL CONDUCT, FRAUD, BAD FAITH OR GROSS NEGLIGENCE. CHOICE AGREES THAT IN NO EVENT WILL MANOR BE LIABLE FOR INCIDENTAL, INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES. CHOICE FURTHER AGREES THAT IN NO EVENT WILL THE TOTAL AGGREGATE LIABILITY OF MANOR FOR ANY AND ALL CLAIMS, LOSSES, OR DAMAGES ARISING UNDER THIS AGREEMENT AND FOR THE CORPORATE SERVICES PERFORMED HEREUNDER EXCEED THE VALUE OF CHOICE'S PAYMENT FOR SAID SPECIFIC CORPORATE SERVICE IN DISPUTE OVER ONE FOUR-WEEK ACCOUNTING PERIOD'S TIME. (e) The forgoing provisions of this Section 9 set forth the full extent of Manor's liability hereunder (monetary or otherwise) for any claim or action, regardless of the form in which any such claim or action may be asserted against Manor (e.g. contract, negligence or otherwise). 10. Default. If either party materially defaults hereunder, the non-defaulting party may terminate this Agreement effective immediately (subject to the cure periods set forth herein below) upon written notice to the defaulting party. The non-defaulting party shall be entitled to all remedies provided by law or equity (including reasonable attorneys' fees and costs of suit incurred). The following events shall be deemed to be material defaults hereunder: (a) Failure by either party to make any payment required to be made to the other hereunder, which failure is not remedied within five (5) days after receipt of written notice thereof; or (b) Except as otherwise provided herein, failure by either party substantially to perform in accordance with the terms and conditions of this Agreement, which failure is not remedied within thirty (30) days after receipt of written notice from the other party specifying the nature of such default; or (c) (i) Filing of a voluntary bankruptcy petition by either party; (ii) filing of an involuntary bankruptcy petition against either party which is not withdrawn within sixty (60) days after 8 9 filing; (iii) assignment for the benefit of creditors made by either party; or (iv) appointment of a receiver for either party. 11. Modification of Procedures. Manor may make changes from time to time in its Functions and Facilities Services, standards and procedures for performing the Corporate Services provided hereunder, but Manor will not implement any substantial changes, unless required by law affecting Choice until it has furnished Choice notice (the same notice Manor will provide its own businesses) thereof and a reasonable opportunity to adapt its operations to accommodate such changes or to reject the change. Choice's decision whether or not to accept the proposed change must be made on or before the date Manor makes its decision. Otherwise, the default would be Choice's acceptance. Choice agrees to pay any charges (a) resulting from Manor's need to maintain different versions of the same systems, procedures, technologies, or services and (b) resulting from requirements of third party vendors. 12. Laws and Governmental Regulations. Choice shall be responsible for (a) compliance with all laws and governmental regulations affecting its business and (b) any use it may make of the Corporate Services to assist it in complying with such laws and governmental regulations. While Manor shall not have any responsibility for Choice's compliance with the laws and regulations referred to above, Manor agrees to use reasonable efforts to cause the Corporate Services to be designed in such manner that they will be able to assist Choice in complying with its applicable legal and regulatory responsibilities as related to the Corporate Services. For example, Manor's normal procedure is to monitor and keep current all federal, state, and local withholding information for its own payroll processing. Manor will implement these normal procedures for Choice's benefit. In no event, however, shall Choice rely solely on its use of the Corporate Services in complying with any laws and governmental regulations. 13. Indemnification. (a) Choice. Choice shall indemnify, defend and hold harmless Manor and its directors, officers and employees from Losses (as defined below), other than Losses directly and proximately caused solely by Manor's criminal conduct, fraud, bad faith, or gross negligence. The term "Losses" shall include costs of any claim, lawsuit, settlement, judgment, penalty, or reasonable attorneys' fees. (b) Manor. Manor shall indemnify, defend and hold harmless Choice and its directors, officers and employees from Losses directly and proximately caused solely by Manor's criminal conduct, fraud, bad faith, or gross negligence, unless the actions (or inaction) causing the Losses were taken (or not taken) at the specific direction of Choice, its subsidiaries, employees, or agents. 9 10 14. Force Majeure. Manor and Choice shall incur no liability to each other due to a failure to perform under the terms and conditions of this Agreement resulting from fire, flood, war, strike, lock-out work stoppage or slow-down, labor disturbances, power failure, major equipment breakdowns, construction delays, accident, riots, acts of God, acts of United States' enemies, laws, orders or at the insistence or result of any governmental authority or any other event beyond each other's reasonable control. In addition, Manor shall not be liable or deemed to be in default for any delay or failure to perform hereunder resulting, directly or indirectly, from any cause beyond Manor's reasonable control, including limitations upon the availability of communications facilities or failures of other communications equipment or failure of Choice to prepare data properly for input into the Corporate Systems. 15. Relationship of Parties. Nothing in this Agreement shall be deemed or construed by the parties or any third party as creating the relationship of principal and agent, partnership or joint venture between the parties, it being understood and agreed that no provision contained herein, and no act of the parties, shall be deemed to create any relationship between the parties other than the relationship of buyer and seller. 16. Assignment. Neither party shall, without the prior written consent of the other, assign any rights or delegate any obligations under this Agreement, such consent not to be unreasonably withheld, conditioned or delayed. 17. Headings. The headings used in this Agreement are inserted only for the purpose of convenience and reference, and in no way define or limit the scope or intent of any provision or part hereof. 18. Severability of Provisions: Neither Manor nor Choice intend to violate statutory or common law by executing this Agreement. If any section, sentence, paragraph, clause or combination of provisions in this Agreement is in violation of any law, such sections, sentences, paragraphs, clauses or combinations shall be inoperative and the remainder of this Agreement shall remain in full force and effect and shall be binding upon the parties. 19. Parties Bound. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing herein, expressed or implied, shall be construed to give any other person any legal or equitable rights hereunder. 20. Notices. All notices and other communications hereunder shall be in writing and shall be delivered by hand or shall be deemed to have been properly made and given one (1) business day after being deposited with a reputable overnight courier service such as Federal Express, Airborne Express or UPS Next Day Air for next business day delivery or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other addresses for a 10 11 party as shall be specified by like notice) and shall be deemed given on the date on which such notice is received: To Choice: Choice Hotels Holdings, Inc. 10750 Columbia Pike Silver Spring, MD 20901 Attention: General Counsel To Manor: Manor Care, Inc. 11555 Darnestown Road Gaithersburg, MD 20878-3200 Attention: General Counsel 21. Further Action. Manor and Choice each shall cooperate in good faith and take such steps and execute such papers as may be reasonably requested by the other party to implement the terms and provisions of this Agreement. 22. Waiver. Manor and Choice each agree that the waiver of any default under any term or condition of this Agreement shall not constitute any waiver of any subsequent default or rights herein or nullify the effectiveness of that term or condition. 23. Governing Law. All controversies and disputes arising out of or under this Agreement shall be determined pursuant to the laws of the State of Maryland, United States of America, regardless of the laws that might be applied under applicable principles of conflicts of laws. 24. Consent to Jurisdiction. The parties irrevocably submit to the exclusive jurisdiction of (a) the Courts of the State of Maryland in Montgomery County, and (b) the United States District Court for the State of Maryland for the purposes of any suit, action or other proceeding arising out of this Agreement. 25. Entire Agreement; Amendment. This Agreement and the Distribution Agreement constitute the entire understanding between the parties hereto and supersedes all prior written or oral communications, relating to the subject matter covered in this Agreement. This Agreement shall not be amended except by a writing executed by the parties hereto. 11 12 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CHOICE HOTELS HOLDINGS, INC., a Delaware corporation By:______________________________________ Name:_______________________________ Title:______________________________ MANOR CARE, INC., a Delaware corporation By:______________________________________ Name:_______________________________ Title:______________________________ 12 13 EXHIBIT A [ATTACHED] 13 14 PAYROLL SERVICES Payroll Service. Beginning as of the Distribution Date, Manor shall provide Payroll Service to Choice. Manor, as part of providing Payroll Service, shall provide access to the Payroll System to enable Choice to maintain its employee database (e.g., basic employee information, insurance data, retirement plan deduction data, collective bargaining agreement data, etc.) The scope of Payroll Services includes: Issue - Paychecks with authorized signature facsimile and alternatively the capability of ACH direct deposit bank for employees who elect that option. Paycheck stub statements and direct deposit statements. - Payroll check registers and other management reports currently available on Manor's payroll system. - Issue year-end form W-2s to all employees. Produce W-2C (corrections) and reissue W-2s as necessary. Payment and accrual features - Vacation and sick leave - Car allowance payments and imputed income for company car usage - Relocation data/through contract with Armslong - Employee payroll tax returns and deposits/through contract with Ceridian STS. - Standard systems interface capabilities which may be modified at Choice's expense and with Manor's consent. These interfaces include general ledger for accounting distribution, accounts payable for wage attachment disbursements, if appropriate on the new PeopleSoft system check reconciliation system interface, retirement savings, employee stock purchase plan, medical benefits administration, unemployment claims data, and ACH for direct bank deposits. SERVICES NOT INCLUDED IN THE BASELINE PAYROLL SERVICES CHARGE - Manor Payroll System for Choice's use; provided, however, that any such additional features and functions shall be deemed enhancements to the Payroll System and shall 14 15 remain the property of Manor. Any requested enhancements are subject to Manor's consent. Such enhancements would be provided for under a separate consulting arrangement and would be paid for by Choice under the terms stipulated in a separate consulting agreement. If Manor subsequently uses substantially all of such enhancement for its own payroll processing, Manor will reimburse Choice for the cost of such enhancement. - Choice will develop any computer software necessary to electronically transmit Choice's employee timeclock information in batch form into Payroll System. Manor will review and approve any electronic transmission prior to being implemented. - Manor will accept paper submission of source documents until Manor provides on-line or batch transmission features to Choice. - Other services which are billed directly to Choice, such as: - United States Postal Service, UPS, and other courier services to deliver payroll envelopes and packages. - Computer operations costs related to Payroll System usage. - Any training or support requirements outside Manor Headquarters or any support for Choice acquisitions and divestitures are outside the scope of the fixed price. These services will be charged on a time and materials basis. 15 16 ACCOUNTS PAYABLE SERVICES Accounts Payable Service. The scope of Accounts Payable Services includes: - - Choice will submit paper source documents in accordance with the established Company policies and Manor will process them on a timely basis. - - Manor will establish new vendors on the Vendor Master File and change basic vendor information such as remittance address and payment terms. - - Accounts payable check stubs and other forms of remittance advice, and accounts payable checks with authorized signature facsimile. - - A variety of management control and information reports in conventional paper format using laser and impact printing technologies, such as: 1. AP070 - weekly check register 2. AP055 - excess memo report weekly report which lists all vendors with credit balances by company and vendor number currently in the A/P system. 3. AP090 - schedule of bills - this weekly report is designed to list invoices paid or invoices to be paid in vendor alphabetical order (approximately 60 days of history). 4. AP810A - vendor list - lists all active lodging vendors by facility number. 5. AP810B - vendor list for facility 706 only. 6. AP810C - vendor list for facilities 700 - 799 7. AP211 - executive committee large check report - this report lists all payments greater than $5,000.00. 8. AP004 - daily vendor maintenance edit validation - records all vendor additions, changes and deletions to a vendor's name, address or tax ID number. 9. AP130 - purged vendor listing - lists all temporary vendors purged from the vendor file (90 days from entry date). 10. AP120 - duplicate report - highlights through several variations, all possible duplicate payments. 11. APM010 - manual check register - this is a list of all hand checks on a given day. 12. AP301 - keypunch report - tabulates the number of invoices and journal entries keyed during a day's time for each key punch operator. 13. AP302 - processor operators list - tabulates the total of invoices processed daily per A/P processor. 14. AAPV0 - void register - lists total of void/stop payment batches keyed. 15. APM030 - manual checks to be printed. 16 17 16. AP400 - daily report which shows deletions and changes of payable invoices. 17. APBC03 - batch status 18. AAPTRAIL - AAP dupe vendor maintenance 19. GL001 - online G/L entry 20. GL002 - worksheet log 21. GL003 - deletions on G/L 22. GL2000 - transaction log - lists all transactions daily, to be posted to the General Ledger. - - Standard system interface capabilities that may be modified at Choice's expense and with Manor's consent. These include general ledger for accounting distribution, drafts for check reconciliation, and fixed assets. SERVICES NOT INCLUDED IN THE BASELINE ACCOUNTS PAYABLE SERVICE CHARGE - - Manor Accounts Payable System features solely for Choice's use; provided, however, that any such additional features and functions shall be deemed enhancement to the Accounts Payable System and shall remain the property of Manor. Such enhancements would be provided for under a separate consulting arrangement and would be paid for by Choice under the terms stipulated in a separate consulting arrangement. If Manor subsequently uses substantially all of such enhancement for its own accounts payable processing Manor will reimburse Choice for the cost of such enhancement. - - Choice will develop any computer software necessary to electronically transmit invoice information from other Choice feeder systems into the Accounts Payable System for subsequent processing and payment. - - Other services which are billed directly to Choice, such as: - United States Postal Service, UPS, and other courier services to deliver accounts payable envelopes and packages from the Silver Spring Computer Center. - - Any training or support requirements outside Manor Headquarters or any support for Choice acquisitions and divestitures are outside the scope of the fixed price. These services will be charged on a time and materials basis. 17 18 PROPERTY ACCOUNTING SERVICES Property Accounting Services. Beginning as of the Distribution Date, Manor shall provide Property Accounting Services to Choice. These Property Accounting Services shall encompass functions to ensure system and accounting control over fixed assets belonging to Choice as may be agreed upon by the parties on a time and materials basis. CONSTRUCTION ACCOUNTING SERVICES Construction Accounting Services. Beginning as of the Distribution Date, Manor shall provide Construction Accounting Services to Choice. These Construction Accounting Services shall encompass functions to ensure system and accounting control over acquisition improvement construction projects and new building construction/development projects belonging to Choice as may be agreed upon by the parties on a time and materials basis. [FACILITIES SERVICES - NEED TO SPECIFY] [To be provided] CORPORATE ACCOUNTING SYSTEMS SUPPORT] [TO BE PROVIDED] 18 19 EXHIBIT B [ATTACHED] 19 20 CORPORATE SERVICES CHARGES Attachment B
- ------------------------------------------------------------------------------- SERVICE CHARGE BASIS - ------------------------------------------------------------------------------- Payroll Activity Based Charges Accounts Payable Activity Based Charges Property Accounting Activity Based Charged Construction Accounting Activity Based Charges Silver Spring Computer Services Activity Based Charges Telecommunications Services Activity Based Charges Headquarters Telephone, Local & Activity Based Charges Long Distance Services Model Room Services Fixed Fee Based Charge of $100,000 per year, payable in equal monthly installments of $8,333.33 each. Additional Consulting Services Additional Consulting Services Hourly Billing Rates - -------------------------------------------------------------------------------
[Conversion Services to be provided] 20 21 EXHIBIT C CONSULTING SERVICES A. Services to be Rendered. From and after the Distribution Date, Manor shall provide the following consulting and advisory services to Choice; (a) review and evaluate current operations and performance of Choice with reference to period, quarterly and annual operating, capital expenditure and other financial statements and reports, (b) inspect and evaluate Choice operating facilities, (c) review and evaluate Choice's organizational and personnel structure, (d) review and evaluate staffing needs and advise on performance of key Choice operating executives, (e) evaluate and review the compensation and benefit structure under which Choice employees are compensated, (f) review and evaluate Choice's proposed annual operating budget, capital expenditures budget and business strategic review, (g) review and evaluate new business opportunities (including renewals and extensions of existing contracts) for Choice , including proposed acquisitions or any capital expenditures or equity investments related (h) review and evaluate Choice's marketing programs and assist in their implementation, and (i) review and evaluate Choice's accounting controls and systems. Manor shall, upon the request of Choice, review and evaluate any other of the operating systems, procedures, or structures of Choice as both Manor and Choice mutually agree. In order to provide the foregoing services, Manor shall make available to Choice the services of the Senior Vice President, Chief Financial Officer and Treasurer; Vice President, Finance and Assistant Treasurer; and other management personnel as appropriate. 21 22 A policy of full cooperation shall prevail between the parties and their authorized representatives with respect to all matters relating to Consulting Services provided. Each party agrees in good faith to cooperate with the other party and keep each other (through the representatives) regularly and reasonably informed of the information, preparation and review of the matters upon which Choice desires Manor's consultation and advice. Timing. Any consulting services provided by Manor hereunder shall be rendered as promptly as practicable taking into account the particular circumstances of each request and the time reasonable necessary to provide a report or evaluation. Choice shall provide all pertinent information relating to each assignment as reasonably requested by Manor. Any and all recommendations, advise or evaluations shall, at the request of Choice, be embodied in a written report. Services Advisory Only. It is further understood and agreed between the parties that the services to be provided to Choice hereunder by Manor are consultative and advisory in nature only and that under no circumstances shall Manor be under any obligation to provide any day-to-day management services with respect to the operations of Choice. B. Compensation Annual Retainer. For and in consideration of the continued agreement of Manor to render consulting services to Choice as listed in Section l, Choice will be entitled to an annual retainer fee in the amount of $1,000,000 payable upon the Distribution Date and upon each annual anniversary thereof during the term of the Agreement. Out-of-Pocket Expenses. Choice will be responsible for the reimbursement to Manor of its reasonable out-of-pocket expenses incurred for travel, telephone, or like purposes. Reimbursement shall be made on a monthly basis upon receipt of an invoice describing the nature and amount of such expenses. Payment shall be made within ten (10) business days of receipt of an invoice. Limitation on Service. In no event will Manor be required to expend more than 1,000 employee-hours per year in providing consulting services hereunder. C. Choice's Responsibility; Agency, Best Efforts. Notwithstanding the consultation and advice to be rendered hereunder, it is understood that Manor will act in an advisory capacity only. Choice shall have no obligation to implement any recommendations or advice rendered by Manor. In performing its services hereunder, Manor shall be an independent contractor and neither party shall be an agent or representative of the other except as may be specifically authorized in advance in writing. Manor shall only be required to exert its reasonable best efforts to perform under this Agreement. In no event may any provision of this Agreement be construed as or otherwise constitute 22 23 a guarantee by Manor that following any advice rendered by Manor under this Agreement will attain the stated business objective, it being recognized by the parties that Choice shall be fully responsible for the business and operations of Choice and that, in any event, intervening events over which neither party has any control may preclude the realization in whole or in part of Choice's objectives. 23 24 EXHIBIT D TRAVEL MANAGEMENT SERVICES Travel Management Services. Manor shall provide Travel management services in accordance with Choice policy and procedures to the extent that they do not conflict with Manor procedures. Manor's preferred vendor programs shall be used unless otherwise stated below. Choice and Manor travel volumes shall be combined for the purpose of negotiating discounts and preferred services for air, car rental, corporate charge cards, and ground transportation. The scope of services includes: Travel Policy and Procedures. - - Assistance in developing, updating, and communicating Choice travel policy and procedures. Reservations and/or Ticketing. - - Reservations and/or ticketing for airline, rail, car rental and hotels. - - Availability of Manor negotiated rates and services for airlines and car rental (and hotel if so desired). - - Use of Choice preferred hotels and rates for Choice employees. Travel Payment. - - Central Billings for airline charges, including reconciliation and downloading to the general ledger. - - Administration of Corporate Charge Card program. Management Information Reports. - - Monthly Airfare Exception Report. - - Monthly Air Activity by Department. - - Reports on demand for air, car rental, and hotel. SERVICES NOT INCLUDED IN THE BASELINE TRAVEL MANAGEMENT SERVICES CHARGE - - Any services which are billed directly to Choice, such as, ground transportation and courier services. 24 25 - - Use and maintenance of Manor developed or new third party software, including, but not limited to, expense report processing, reservation processes, and management information reporting. Fees. A. Usage Fees - Pass through of all third party charges B. Activity Based Fees: percent (%) of transactions attributed to Choice times Net Expenses (defined as total travel services expenses minus revenue share/ rebates from preferred vendor contracts). 25 26 EXHIBIT E REPRESENTATIVES __________________________ - Manor __________________________ - Choice 26 EX-10.6 8 EMPLOYEE BENEFITS ADMINISTRATION AGREEMENT 1 Exhibit 10.06 EMPLOYEE BENEFITS ADMINISTRATION AGREEMENT THIS AGREEMENT (this "Agreement") is made and entered into as of _______________, 1996, by and between Manor Care, Inc., a Delaware corporation ("Manor") and Choice Hotels Holdings, Inc., a Delaware corporation ("Choice"). R E C I T A L S WHEREAS, pursuant to a Distribution Agreement (the "Distribution Agreement") dated as of _____________, 1996, Choice and Manor have agreed to enter into an employee benefits administration agreement with the terms and conditions set forth herein; and WHEREAS, in accordance with said Distribution Agreement, Choice and Manor also have entered into an Employee Benefits & Other Employment Matters Allocation Agreement (the Allocation Agreement") dated as of _________________, 1996, pursuant to which Choice and Manor each assumed certain liabilities and obligations, each generally with respect to its own employees, to adopt or continue certain employee benefit, stock and retirement plans and programs substantially equivalent to those provided by Manor on the Distribution Date; and WHEREAS, Manor shall retain the personnel and systems formerly utilized in the maintenance and administration of the aforesaid Manor employee plans and programs; and WHEREAS, Choice desires to retain Manor in the maintenance and administration of Choice's employee plans and programs, and Manor desires to render such assistance on an equitable, arms length basis for a fee; NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Choice and Manor agree as follows: 1. Definitions. As used in this Agreement, the following capitalized terms shall have the meanings indicated: "Accounting Services" means the services provided by Manor to or on behalf of Choice or any participant in any of the Plans, as provided under Section 2.1 and Exhibit B of this Agreement. 1 2 "Ancillary Agreement" shall have the meaning described in the Distribution Agreement. "Benefit and Compensation Additional Consulting Services" means the services provided by Manor to or on behalf of Choice or any participant in any of the Plans, as provided under Section 2.2 and Exhibit C of this Agreement. "Claims" means any claims reported on or after the Distribution Date by any employee of the Lodging Business (and/or covered dependents) for coverage or benefits under the Retirement Plans, Medical/Dental Plans, Welfare Plans, Deferred Compensation or the Stock Plans. "Claims" also includes any claims by any beneficiary of a deceased employee. For purposes of this definition, employee of the Lodging Business includes any active, disabled, former or retired employee (except a Retiree, Qualified Beneficiary or an active, former or retired employee whose account balance under the applicable Deferred Compensation Plan or the applicable Retirement Plan has been transferred to a Manor deferred compensation plan or a Manor retirement plan pursuant to the Distribution). "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. "COBRA Administration Services" means the services provided by Manor to or on behalf of Choice or any participant in any of the Medical/Dental Plans or Qualified Beneficiary, as provided under Section 2.4 and Exhibit E of this Agreement. "COBRA Claims" means any claims reported on or after the Distribution Date by any Qualified Beneficiary for coverage or benefits under any Medical/Dental Plan (or any predecessor thereto). "COBRA Continuation Coverage" means the coverage following a Qualifying Event provided by Choice to a Qualified Beneficiary as required by COBRA. "Compliance Services" means the services provided by Manor to or on behalf of Choice or any participant in any of the Plans, as provided under Section 2.5 and Exhibit F of this Agreement. "Deferred Compensation Plan(s)" means the deferred compensation plan(s) set forth in the attached Schedule A, as it may be amended from time to time with the written consent of both parties to this Agreement. 2 3 "Determination Period" means any 12 months during which the premium for COBRA Continuation Coverage with respect to a Qualified Beneficiary must remain fixed and may not be increased. "Distribution" means the distribution to the holders of Manor Care Common Stock all the outstanding shares of Choice Common Stock. "Distribution Agreement" mans the agreement described in the first recital of this Agreement. "Distribution Date" means the date determined by the Board of Directors of Manor as the date on which the Distribution shall be effected. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Fiduciary Services" means the services provided by Manor to or on behalf of Choice or any participant in any of the Plans, as provided under Section 2.6 of this Agreement. "Health and Welfare Plans" means those plans listed on Schedule A herein. "HMO(s)" means health maintenance organization(s). "Imprest Account(s)" means the account(s) established pursuant to Section 4.1 of this Agreement. "Lodging Business" means any business or operation of Choice or its subsidiaries which is, pursuant to the Distribution Agreement, to be conducted, following the Distribution, by Choice. "Medical/Dental Plan(s)" means the medical and dental plans as set forth in the attached Schedule A, as it may be amended from time to time with the written consent of both parties to this Agreement. "Plans" means the Choice Medical/Dental Plans, Welfare Plans, Retirement Plans, Deferred Compensation Plans, and Stock Plans set forth in the attached Schedule A, as it may be amended from time to time with the written consent of both parties to this agreement. 3 4 "Plan Administrator" means the administrator as defined in ERISA Section 3(16)(A). "Plan Administration Services" means the services provided by Manor to or on behalf of Choice or any participant in any of the Plans, as provided under Section 2.3 and Exhibit D of this Agreement. "Prime Rate" means the rate identified from time to time in the New York edition of the Wall Street Journal as being the prime rate of interest. "Qualified Beneficiary" means any former or part-time employee of the Lodging Business (or dependent thereof) who either experiences (or experienced) a Qualifying Event while a participant in any Medical/Dental Plan (or any predecessor thereto), or becomes (or became) a Qualified Beneficiary, as that term is defined in Internal Revenue Code Section 4980B(g)(a) and ERISA 607(3), under any Medical/Dental Plan (or any predecessor thereto). "Qualifying Event" means an event upon which a Qualified Beneficiary must be given the opportunity to elect COBRA Continuation Coverage as specified in Internal Revenue Code Section 4980B(f)(3) and ERISA Section 603. "Retirement Plans" means the retirement plans set forth in the attached Schedule A, as it may be amended from time to time with the written consent of both parties to this Agreement. "Services" means the Accounting Services, the Benefit and Compensation Additional Consulting Services, the COBRA Administration Services, the Plan Administration Services, the Compliance Services and the Fiduciary Services, all as described in Section 2 of this Agreement. "Stock Plans" means the stock plans set forth in the attached Schedule A, as it may be amended from time to time with the written consent of both parties to this Agreement. "Welfare Plans" means the welfare plans set forth in the attached Schedule A, as it may be amended from time to time with the written consent of both parties to this Agreement. Any capitalized terms defined in the Distribution Agreement and used herein shall have the meanings ascribed to them in the Distribution Agreement unless otherwise defined herein. 4 5 2.0 Duties of Manor. Upon the request of Choice, Manor shall: (a) Provide the Services to Choice with respect to the Plans; (b) Provide such other services in connection with the Plans as shall be mutually agreed upon by the parties to this Agreement (such other services and costs thereof to be set forth as an addendum to this Agreement); and (c) Arrange for the maintenance of all records used to perform the Services (and any other services), including Claims and COBRA Claims files and records, for six (6) calendar years following any year in which it performs Services (or any other services) hereunder. The Services (and any other services) shall be administered in accordance with Manor's standard policies, procedures and practices in effect as of the date hereof and as may be changed, and as more particularly described below; or as otherwise specified in accordance with the terms thereof. In so doing, Manor shall exercise the standards of care set forth in Section 5.0. It is expressly understood that in providing the Services (any other services) to Choice, Manor shall be a service provider and not a plan sponsor, as defined in ERISA 3(16)(B), of any of the Plans, and shall have the right to delegate its obligations hereunder to or contact with any other party to provide such Services (or any other services). Furthermore, it is the intent of the parties to this Agreement that Manor shall be an independent contractor in providing the Services (any other services) under this Agreement, and not as employee or agent of Choice. Manor agrees to provide such Services only if it reasonably believes the service will not interfere with the conduct of the business of Manor or pose an unreasonable burden. 2.1 Accounting Services. Upon the request of Choice, Manor shall provide the Accounting Services to Choice, as set forth in Exhibit B, to assist Choice in meeting its accounting and financial reporting obligations under the Plans. 2.2 Benefit and Compensation Additional Consulting Services. Upon the request of Choice, Manor shall provide Benefit and Compensation Consulting Services, as set forth in Exhibit C, to Choice to assist Choice in designing and updating employee benefit plans and establishing competitive compensation practices. 5 6 2.3 Plan Administration Services. Upon the request of Choice, Manor shall provide the Plan Administration Services, as set forth in Exhibit D, to assist in the administration of its Plans. 2.4 COBRA Administration Services. Upon the request of Choice, Manor shall provide the COBRA Administration Services, as set forth in Exhibit E, to assist Choice, the Plan Administrator and the Medical/Dental Plans in the performance of their responsibilities under COBRA. 2.5 Compliance Services. Upon the request of Choice, Manor or its contractors shall provide the Compliance Services, as set forth in Exhibit F, to assist Choice in fulfilling its disclosure and reporting obligations under ERISA, the Internal Revenue Code and any other applicable federal or state law. 2.6 Fiduciary Services. Upon the request of Choice, Manor shall provide the Fiduciary Services, as set forth in Exhibit G, in its administration of Claims for disability (including payment), retirement, stock and deferred compensation benefits (and appeals of denied or disputed Claims with respect thereto), and in its final review of appeals of denied or disputed Claims and COBRA Claims under the Medical/Dental Plans. Manor shall obtain and maintain customary such fiduciary insurance coverage. Other than the fiduciary services set forth in Exhibit G, Manor is vested only with ministerial authority and shall have no discretionary authority to make decisions as to policies, interpretations, practices and procedures under any of the Plans (except to the extent otherwise set forth in Exhibit G), but shall perform its duties and functions under this Agreement within the framework of the terms of each of the Plans and policies, interpretations, rules, practices and procedures made by Choice. Except as otherwise specified in this Section 2.6, Manor is not a fiduciary with respect to any of the Plans and shall not be considered the Plan Administrator, fiduciary, or named fiduciary under any of the Plans, within the meaning of those terms as defined in ERISA. 3.0 Duties of Choice. Except as provided in Section 2.6, Choice shall have the sole and primary responsibility as sponsor of the Plans for all discretionary decisions and actions with respect thereto, for all financial and other obligations arising therefrom, and for all funding and employer contribution requirements under the terms of the Plans. In addition, Choice shall, except to the extent expressly delegated to Manor: (a) Provide Manor with assistance or authorizations to third parties reasonably required for Manor to perform the Services and any other services under this Agreement; 6 7 (b) Obtain and maintain qualification for all tax-qualified, tax-exempt or otherwise tax-favored Plans; (c) Request from Choice shareholders share authorizations sufficient to meet awards under the Stock Plans; (d) For active employees participating in any of the Plans, collect payroll deductions for each pay period for the amount of employee contributions owed for the pay period and withhold applicable payroll taxes under Choice's payroll system with respect to the Plans; (e) Maintain all necessary records and documentation as required by law or as needed for efficient administration of the Plans; (f) Perform all necessary employee communications, including sending notices required by law, determining eligibility and conducting enrollment under the Plans; (g) Complete required Securities and Exchange Commission registrations and other filings required with respect to all Plans. (h) Furnish Manor with any and all information in its possession necessary to enable Manor to perform the Services under this Agreement. (i) At the request of Manor, maintain the Imprest Account(s) with sufficient funds to satisfy expenses of the Plans as they become due and payable. Manor is not responsible for funding the Plans with any contributions. (j) Timely pay the Service Fees as they become due and payable. 4.0 Financial Provisions. 4.1 Imprest Account(s). Choice will open and maintain an imprest account(s) against which Manor may write checks or initiate fund transfers to cover all Claims and COBRA Claims payments and out-of-pocket expenses for medical reports, "second opinions" obtained to evaluate claims, HMO premiums, insurance company premiums, costs incurred for separately tracking Claims and COBRA Claims, administrative contract fees paid to contractors for processing Claims and COBRA Claims, toll-free phone service charged separately by claims administrators, medical case management, hospital utilization review, claim audits, outside legal fees and fees of other outside service providers, claim 7 8 settlement charges and expenses, and all other similar expenses that are normally incurred in the administration of Claims and COBRA Claims. 4.2 Pricing and Payment for Services. Choice shall pay Manor for services requested and rendered hereunder as follows: (a) The charging mechanisms for rates or charges for each service shall include (i) activity-based charges where the per unit price will be multiplied by the variable number of units (for example, the number of active associates times the per associate charge will determine the per Accounting Period charge); (ii)fixed fee based charges, meaning a fixed amount per Accounting Period for Manor to perform the service; (iii) usage based charges for which Choice will pay according to actual use of the service; (iv) time and materials charges; or (v) a variation or a combination of any of the foregoing methods as agreed to by the parties. (b) Except as provided in the Distribution Agreement, the Allocation Agreement or any Ancillary Agreement, Choice shall pay any and all additional costs and expenses which Manor may incur for the express purpose of providing services to Choice. (c) Choice shall pay Manor on a time and materials basis for all costs incurred by Manor in converting Choice business information and records from Manor services systems to either a third party provider or to Choice. (d) Choice shall pay Manor for all services provided hereunder within thirty (30) days after receipt of an invoice therefor. Choice shall pay fixed charges in advance on the first business day of the applicable Accounting Period. Any payments not made by Choice to Manor when due shall bear interest, computed daily from the date due to the date of payment based on the annual percentage rate equal to the Prime Rate plus two (2) percentage points, as same may vary from time to time. 5.0 Warranties and Limitations of Liability. (a) MANOR DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE SERVICES PROVIDED HEREUNDER. Manor will use reasonable efforts to perform the Services provided hereunder in a professional and workmanlike manner but the results of the Services are furnished "as is." 8 9 (b) Manor's sole liability to Choice or any third party for claims, notwithstanding the form of such claims (e.g. contract, negligence or otherwise), arising out of errors or omissions in the Services provided or to be provided by Manor hereunder which are caused solely by Manor shall be to furnish correct information, payment, and/or adjustment in the Services provided hereunder provided that Choice promptly advises Manor thereof. (c) Manor's sole liability to Choice or any third party for claims, notwithstanding the form of such claims (e. g. contract, negligence or otherwise), arising out of the unavailability of the Services provided hereunder or the interruption in or delay in performing the Services provided hereunder for any reason beyond Manor's reasonable control shall be to use all reasonable efforts to make such services available, and/or to resume performing the Services, as promptly as reasonably practicable. Manor will maintain the same back-up procedures for Choice's information that Manor has for its own information. (d) MANOR SHALL NOT BE LIABLE FOR ANY ERRORS, OMISSIONS, DELAYS, OR LOSSES UNLESS CAUSED SOLELY BY ITS CRIMINAL CONDUCT, FRAUD, BAD FAITH OR GROSS NEGLIGENCE. CHOICE AGREES THAT IN NO EVENT WILL MANOR BE LIABLE FOR INCIDENTAL, INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES. CHOICE FURTHER AGREES THAT IN NO EVENT WILL THE TOTAL AGGREGATE LIABILITY OF MANOR FOR ANY AND ALL CLAIMS, LOSSES, OR DAMAGES ARISING UNDER THIS AGREEMENT AND FOR THE SERVICES PERFORMED HEREUNDER EXCEED THE VALUE OF CHOICE'S PAYMENT FOR SAID SPECIFIC SERVICE IN DISPUTE OVER ONE FOUR-WEEK ACCOUNTING PERIOD'S TIME. (e) The forgoing provisions of this Section 5 set forth the full extent of Manor's liability hereunder (monetary or otherwise) for any claim or action, regardless of the form in which any such claim or action may be asserted against Manor (e.g. contract, negligence or otherwise). 6.0 Indemnification: Standard of Care. Manor shall use the same care and skill in the performance of its duties under this Agreement as a similarly situated provider of like services would exercise following commonly accepted standards of prudence in the relevant industry engaged in the provision of such services. 6.1 Manor Held Harmless. Choice will indemnify, defend and hold harmless Manor and its directors, officers and employees from Losses (as defined below) resulting 9 10 from or arising out of or in connection with Manor's actions or failure to act where such action or failure to act is required by any Choice employment, compensation or benefits policy or practice, other than Losses for which Choice is indemnifiable by Manor under Section 6.2. The term "Losses" shall include costs of any claim, lawsuit, settlement, judgment, penalty, attorneys' fees, and other expenses in connection with the Plans. In addition, Choice will indemnify Manor against any premium taxes or any other fees or levies of any local, state or federal government (including sales, use or similar taxes) assessed in connection with any of the Plans, and against any income or payroll taxes, interest or penalties assessed against any participant or beneficiary of any Plan or against Choice as a result of such participant or beneficiary recognizing income from benefits payable under any Plan. 6.2 Choice Held Harmless. Manor will indemnify, defend and hold harmless Choice and its directors, officers and employees from Losses (other than benefits due and payable under the terms of any Plan) resulting from or arising out of or in connection with Manor's criminal conduct, fraud, bad faith or gross negligence, unless the actions (or inaction) causing the Losses were taken (or not taken) at the specific direction of Choice, its subsidiaries, employees, or agents. 6.3 Notice and Defense. The party seeking indemnification must notify the other party promptly in writing of any claim that may result in Losses, and give the indemnifying party the opportunity to assist in the defense of the case (at the indemnifying party's cost and expense), and must provide all necessary information and assistance for such defense. In addition, Manor will provide all necessary information and assistance to Choice (at Choice's cost and expense) in the defense of any Claims, COBRA Claims, or other actions brought under any of the Plans which could result in Losses for which Choice is primarily liable. 7.0 Access to Information: Cooperation. Subject to the requirements of Section 24.0, Choice and its authorized agents will be given reasonable access to and may take copies of all information relating to the Claims and COBRA Claims (to the extent permitted by federal and state confidentiality laws) in Manor's and/or its subcontractor's custody, as applicable. The parties will cooperate with one another to minimize the disruption caused by any such access. 8.0 Term. The term of this Agreement shall commence on the Distribution Date and shall remain in effect through the end of the first full Fiscal Year immediately following the Distribution Date. Unless terminated pursuant to the terms hereof, the Agreement shall automatically renew each Fiscal Year thereafter for the extended term of said Fiscal Year and shall not extend beyond 30 months from the Distribution Date unless otherwise extended by 10 11 the parties in writing; provided, however, that Choice may terminate this Agreement or any services provided hereunder at any time for any reason or no reason by sending written notice to Manor upon sixty (60) days' prior notice to Manor and provided, further, in the event any service herein is dependent upon any Function as defined in that certain Corporate Services Agreement between the parties and dated the date hereof, notice of termination shall be determined by reference to the Corporate Services Agreement. This Agreement may also be terminated in the event of a default (past the expiration of any applicable cure period provided herein) in accordance with the provisions of this Agreement or may be terminated by mutual agreement. In the event of any termination, Articles 4,5,6 and 15 shall survive and remain in effect. 9.0 Default. If either party materially defaults hereunder, the non-defaulting party may terminate this Agreement effective immediately (subject to the cure periods set forth herein below) upon written notice to the defaulting party. The non-defaulting party shall be entitled to all remedies provided by law or equity (including reasonable attorney's fees and costs of suit incurred). The following events shall be deemed to be material defaults hereunder: (a) Failure by either party to make any payment required to be made to the other hereunder, which failure is not remedied within five (5) days after receipt of written notice thereof; or (b) Except as otherwise provided herein, failure by either party substantially to perform in accordance with the terms and conditions of this Agreement, which failure is not remedied within thirty (30) days after receipt of written notice from the other party specifying the nature of such default; or (c) (i) Filing of a voluntary bankruptcy petition by either party; (ii) filing of an involuntary bankruptcy petition against either party which is not withdrawn within sixty (60) days after filing; (iii) assignment for the benefit of creditors made by either party; or (iv) appointment of a receiver for either party. Notwithstanding the foregoing, the correction period provided for in Sections 9.0(a) and 9.0(b) shall apply only if such failure is due to reasonable cause and not willful neglect. 10.0 Force Majeure. Manor and Choice shall incur no liability to each other due to a failure to perform under the terms and conditions of this Agreement resulting from fire, flood, war, strike, lock-out work stoppage or slow-down, labor disturbances, power failure, major equipment breakdowns, construction delays, accident, riots, acts of God, acts of 11 12 United States' enemies, laws, orders or at the insistence or result of any governmental authority or any other event beyond each other's reasonable control. In addition, Manor shall not be liable or deemed to be in default for any delay or failure to perform hereunder resulting, directly or indirectly, from any cause beyond Manor's reasonable control, including limitations upon the availability of communications facilities or failures of other communications equipment or failure of Choice to prepare data properly for input into the Corporate Systems. However, nothing in this provision shall relieve Choice of any liability for failure to make any payments required to be made under this Agreement because Choice Employees are on strike or engaged in a lock-out, work stoppage or slow-down, or labor disputes. 11.0. Relationship of Parties. Nothing in this Agreement shall be deemed or construed by the parties or any third party as creating the relationship of principal and agent, partnership or joint venture between the parties, it being understood and agreed that no provision contained herein, and no act of the parties, shall be deemed to create any relationship between the parties other than the relationship of independent contract administrator and client. 12.0. Assignment. Subject to the provisions of Section 2.0, Neither party shall, without the prior written consent of the other, assign any rights or delegate any obligations under this Agreement, such consent not to be unreasonably withheld, conditioned or delayed; provided, however, such consent not to be required if the agreement is assigned to a wholly-owned subsidiary of either party. 13.0 Headings. The headings used in this Agreement are inserted only for the purpose of convenience and reference, and in no way define or limit the scope or intent of any provision or part hereof. 14.0 Severability of Provisions: Neither Manor nor Choice intend to violate statutory or common law by executing this Agreement. If any section, sentence, paragraph, clause or combination of provisions in this Agreement is in violation of any law, such sections, sentences, paragraphs, clauses or combinations shall be inoperative and the remainder of this Agreement shall remain in full force and effect and shall be binding upon the parties. 15.0 Parties Bound. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing herein, expressed or implied, shall be construed to give any other person any legal or equitable rights hereunder. 12 13 16.0 Notices. All notices and other communications hereunder shall be in writing and shall be delivered by hand or shall be deemed to have been properly made and given one (1) business day after being deposited with a reputable overnight courier service such as Federal Express, Airborne Express or UPS Next Day Air for next business day delivery or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which such notice is received: To Choice: Choice Hotels International, Inc. 10750 Columbia Pike Silver Spring, MD 20901 Attention: General Counsel To Manor: Manor Care, Inc. 11555 Darnestown Road Gaithersburg, MD 20878-3200 Attention: General Counsel 17.0 Further Action. Manor and Choice each shall cooperate in good faith and take such steps and execute such papers as may be reasonably requested by the other party to implement the terms and provisions of this Agreement. 18.0 Waiver. Manor and Choice each agree that the waiver of any default under any term or condition of this Agreement shall not constitute any waiver of any subsequent default or nullify the effectiveness of that term or condition. 19.0 Governing Law. All controversies and disputes arising out of or under this Agreement shall be determined pursuant to the laws of the District of Maryland, regardless of the laws that might be applied under applicable principles of conflicts of laws, except to the extent preempted by ERISA or other applicable federal laws.. 20.0 Consent to Jurisdiction. The parties irrevocably submit to the exclusive jurisdiction of (a) the Courts of the State of Maryland in Montgomery County, and (b) the United States District Court for the State of Maryland for the purposes of any suit, action or other proceeding arising out of this Agreement. 13 14 21.0 Entire Agreement. This Agreement and the Distribution Agreement constitute the entire understanding between the parties hereto, and supersede all prior written or oral communications, relating to the subject matter covered by said agreements. No amendment, modification, extension or failure to enforce any condition of this Agreement by either party shall be deemed a waiver of any of its rights herein. this Agreement shall not be amended except by a writing executed by the parties. 22.0 Commercially Reasonable Terms and Conditions. Notwithstanding anything in this Agreement to the contrary, the terms and provisions of this Agreement reflect and shall reflect commercially reasonable terms and conditions (including, but not limited to, pricing) that in the reasonable judgment of Manor are at least as favorable and as competitive to Choice as the terms and conditions Manor would grant or require of third parties for substantially similar goods and services. 23.0 Representatives. Choice and Manor shall each appoint a managerial level individual (hereinafter "Representatives") to facilitate communications and performance hereunder. Each party may treat an act of the Representative of the other party as being authorized by such other party without inquiring behind such act or ascertaining whether such Representative had authority to so act. The initial Representatives are named on Exhibit A. Each party shall have the right at any time and from time to time to replace its Representative by giving notice in writing to the other party setting forth the name of (i) the Representative to be replaced and (ii) the replacement, and certifying that the replacement Representative is authorized to act for the party giving the notice in all matters relating to this Agreement. 24.0 Confidentiality. Manor and Choice agree that the terms of this Agreement are confidential and further agree that this Agreement shall not be released to any third parties, excluding such parties' counsel, agents or lenders. However, one party may release this Agreement or such information to a third party upon the prior approval of the other party (such approval not to be unreasonably withheld, conditioned or delayed) upon court order, or as required by any rules, regulations or laws. All confidential and proprietary information which either party has obtained from the other shall be returned upon the expiration or earlier termination of this Agreement. The provisions of this paragraph shall survive expiration or earlier termination of this Agreement. 25.0 Expenses. Except as otherwise set forth in this Agreement or any Ancillary Agreement (as defined in the Distribution Agreement), the parties shall bear their own costs and expenses in connection with the preparation, execution, delivery and implementation of this Agreement and the consummation of the transactions contemplated hereby. 14 15 15 16 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CHOICE HOTELS HOLDINGS, INC., a Delaware corporation By:_______________________________________ Name:_______________________________ Title:______________________________ MANOR CARE, INC., a Delaware corporation By:_______________________________________ Name:_______________________________ Title:______________________________ 16 17 EXHIBIT A REPRESENTATIVES _________________________________________ - Manor _________________________________________ - Choice 17 18 EXHIBIT B ACCOUNTING SERVICES B.0 General. The Accounting Services shall be limited to the following services: B.1 Accounting Services for Health and Welfare Plans. Manor shall: (a) Arrange for the calculation, collection and remittance of employee payroll deductions for each of the Health and Welfare Plans, where required; (b) Maintain financial records and prepare financial statements for each of the Health and Welfare Plans, where needed; (c) Arrange for the preparation of an independent certified public accountant's report for each of the Health and Welfare Plans, where needed; (d) Prepare for Choice's review, signature and filing the Form 5500 for each of the Health and Welfare Plans, where needed; (e) Review and reconcile bank and investment accounts for each of the Health and Welfare Plans, where required; (f) Reconcile billing statements and payments to HMOs and insurance carriers with participant records; (g) Reconcile claim reports; (h) Initiate fund transfers in connection with the Health and Welfare Plans; (i) Assist in developing premium rates for Choice self-insured Health and Welfare Plans; (j) Beginning January 1, 1997, develop, recommend, and maintain records showing employer contribution amounts under each of the 18 19 Health and Welfare Plans relating to the total cost of Health and Welfare Plans for Choice to accrue on its books; and B.2 Accounting Services for Retirement Plans. Manor shall: (a) Establish, maintain and update a roster of participants in each of the Retirement Plans; (b) Maintain records of participant account balances or accrued benefit, as applicable, for each of the Retirement Plans, including records as to vesting; (c) Coordinate the distribution of shares, cash and account contributions under each of the Retirement Plans; (d) Arrange for the calculation, collection and remittance of direct employee contributions and employee payroll deductions for each of the Retirement Plans, where required; (e) Maintain financial records and prepare financial statements for each of the Retirement Plans, where needed; (f) Arrange for the preparation of an independent certified public accountant's report for each of the Retirement Plans, where needed; (g) Prepare for Choice's review, signature, and filing of the Form 5500 for each of the Retirement Plans, where needed; (h) Review and reconcile bank and investment accounts for each of the Retirement Plans; (i) Develop, recommend, and maintain records showing employer contribution amounts under each of the Retirement Plans for Choice to accrue on its books; and (j) Manage the process of withholding applicable payroll taxes otherwise payable by Choice, where required. 19 20 B.3 Accounting Services for Stock Plans. Manor shall: (a) Establish, maintain and update a roster of participants in each of the Stock Plans; (b) Maintain records of participant account balances for each of the Stock Plans, including records as to vesting; (c) Coordinate the distribution of shares (and cash, where applicable) under each of the Stock Plans; (d) Arrange for the calculation, collection and remittance of stock purchase proceeds or employee payroll deductions for each of the Stock Plans where applicable; (e) Maintain financial records and prepare financial statements for each of the Stock Plans, where needed; (f) Develop, recommend and maintain records showing employee contribution amounts under each of the Stock Plans for Choice to accrue on its books; (g) Maintain for each of the Stock Plans share authorization, issuance, cancellation, and forfeiture records; and (h) Manage the process of withholding applicable payroll taxes otherwise payable by Choice, where required. 20 21 B.4 Accounting Services for Deferred Compensation Plans. Manor shall: (a) Establish, maintain and update a roster of participants in each of the Deferred Compensation Plans; (b) Maintain records of participant account balances for each of the Deferred Compensation Plans, including records as to vesting; (c) Coordinate the distribution of shares, cash and account contributions under each of the Deferred Compensation Plans; (d) Develop, recommend, and maintain records showing employer contribution amounts under each of the deferred Compensation Plans for Choice to accrue on its books; and (e) Manage the process of withholding applicable payroll taxes otherwise payable by Choice, where required. 21 22 EXHIBIT C BENEFIT AND COMPENSATION ADDITIONAL CONSULTING SERVICES C.0 General. the Benefit and Compensation Additional Consulting Services shall be limited to the following services: C.1 Benefit Additional Consulting Services for Health and Welfare Plans Manor shall: Assist Choice annually to identify desired Additional Consulting services and appropriate responsibility. C.2 Benefit Additional Consulting Services for Retirement Plans. Manor shall: Assist Choice annually to identify desired Additional Consulting services and appropriate responsibility. 22 23 C.3. Benefit Additional Consulting Services for Stock Plans. Manor shall: Assist Choice annually to identify desired additional consulting services and appropriate responsibility. 23 24 C.4 Benefit Additional Consulting Services for Deferred Compensation Plans. Manor shall: Assist Choice annually to identify desired additional consulting services and appropriate responsibility. 24 25 C.5 Compensation Additional Consulting Services for Choice. Manor shall: Assist Choice annually to identify desired additional consulting services and appropriate responsibility. 25 26 EXHIBIT D PLAN ADMINISTRATION SERVICES D.0 General. the Plan Administration Services shall be limited to the following services: D.1 Plan Administration Services for Health and Welfare Plans. Manor shall: (a) Assist in the preparation of enrollment and communication materials for each of the Health and Welfare Plans; (b) Coordinate the production, printing and distribution of enrollment and communication materials for each of the Health and Welfare Plans; (c) Assist Choice to negotiate contracts with insurance carriers and HMOs; (d) Assist Choice to negotiate contracts with insurance carriers and HMOs; (e) Assist Choice to negotiate fees for "administrative services only" contracts and premiums for insured Health and Welfare Plans; (f) Coordinate the competitive bidding process among prospective service providers and evaluate resulting bids for Choice. (g) Oversee Choice contracts with insurance carriers and HMOs; (h) Arrange for plan eligibility information to be provided to insurance carriers and HMOs; (i) Coordinate independent audits of medical and dental claim administrators; (j) Coordinate recovery of claims advances involving third party liability claims; 26 27 (k) Assist Choice in pursuing recovery of overpayments made by medical and dental claim administrators; (l) Coordinate the administration, review and evaluation of Health and Welfare Claims in accordance with the terms of the Health and Welfare Plans, standard policies, procedures and practices; (m) Investigate Claims under the Health and Welfare Plans to the extent deemed necessary in its best judgment; (n) Arrange for the payment of Claims in accordance with the terms of the Health and Welfare Plans, standard policies, procedures and practices; and (o) Obtain consents, approvals, and elections under the Health and Welfare Plans as provided under the terms thereof. 27 28 D.2 Plan Administration Services for Retirement Plans. Manor shall: (a) Assist in the preparation of enrollment and communication materials for each of the Retirement Plans; (b) Coordinate the production and printing of enrollment and communication materials for each of the Retirement Plans; (c) Coordinate the competitive bidding process among prospective service providers and evaluate resulting bids for Choice; (d) Coordinate the administration, review and evaluation of Claims in accordance with the terms of the Retirement Plans, standard policies, procedures and practices; (e) Investigate Claims under the Retirement Plans to the extend deemed necessary in its best judgment; (f) Arrange for the payment of Claims in accordance with the terms of the Retirement Plans, standard policies, procedures and practices; and (g) Obtain consents, approvals, and elections under the Retirement Plans as provided under the terms thereof. 28 29 D.3 Plan Administration Services for Stock Plans. Manor shall: (a) Assist in the preparation of enrollment (where applicable), nomination and communication materials for each of the Stock Plans; (b) Coordinate the production, printing and distribution of enrollment (where applicable), nomination and communication materials for each of the Stock Plans; (c) Coordinate the competitive bidding process among prospective service providers and evaluate resulting bids for Choice; (d) Arrange for plan eligibility information to be provided to awards administrators; (e) Coordinate the administration, review and evaluation of awards in accordance with the terms of the Stock Plans, standard policies, procedures and practices; (f) Investigate awards under the Stock Plans to the extent deemed necessary in its best judgment; (g) Arrange for the distribution of shares in accordance with the terms of the Stock Plans, standard policies, procedures and practices; (h) Coordinate the exercise of stock options and the distribution of shares and payments of dividends under the Stock Plans; and (i) Obtain consents, approvals, and elections under the Stock Plans as provided under the terms thereof. 29 30 D.4 Plan Administration Services for Deferred Compensation Plans. Manor shall: (a) Assist in the preparation of enrollment and communication materials for each of the Deferred Compensation Plans; (b) Coordinate the production, printing and distribution of enrollment and communication materials for each of the Deferred Compensation Plans; (c) Coordinate the competitive bidding process among prospective service providers and evaluate resulting bids for Choice. (d) Arrange for plan eligibility information to be provided to claim administrators; (e) Coordinate the administration, review and evaluation of Claims in accordance with the terms of the Deferred Compensation Plans, standard policies, procedures and practices; (f) Investigate Claims under the deferred Compensation Plans to the extent deemed necessary in its best judgment; (g) Arrange for the payment of Claims in accordance with the terms of the Deferred Compensation Plans, standard policies, procedures and practices; and (h) Obtain consents, approvals, and elections under the Deferred Compensation Plans as provided under the terms thereof. 30 31 EXHIBIT E COBRA ADMINISTRATION SERVICES E.0 General. The COBRA administration Services shall be limited to the following services: E.1 COBRA Administration Services for Medical/Dental Plans. Manor shall: (a) Send initial COBRA notices to Choice employees (and the dependents thereof), as identified by Choice, who are enrolled in the Medical/Dental Plans after the date of this Agreement; (b) Send COBRA notices and election forms to Qualified Beneficiaries who are identified by Choice or Manor, as appropriate, such COBRA notices to include, among other things: (1) Identification of the coverage on the date before the Qualifying Event; (2) The date the coverage ended; (3) The reason the coverage ended; (4) The right to elect COBRA Continuation Coverage; (5) The duration of the COBRA Continuation Coverage; (6) The duration of the grace period for payment of the initial premium payment for COBRA Continuation Coverage; and (7) The Determination Period; (c) Receive and process duly executed COBRA election forms received from Qualified Beneficiaries in accordance with the procedures established by Choice. 31 32 (d) Send payment coupons to Qualified Beneficiaries who have elected COBRA Continuation Coverage stating the amount of the monthly COBRA premium payment as established by Choice, where required; (e) Receive and process amounts received as monthly COBRA premium payments from Qualified Beneficiaries; (f) Notify Qualified Beneficiaries of the extension of COBRA Continuation Coverage from 18 months to 29 or 36 months or termination of their COBRA Continuation Coverage, as appropriate, under procedures established by Choice; (g) Respond to telephone and written inquiries concerning COBRA Continuation Coverage; (h) Notify Qualified Beneficiaries of their right to convert to other coverage, if applicable; (i) Maintain an accounting of the COBRA premium payments to be charged Qualified Beneficiaries; (j) Assist Choice in developing COBRA premium payments to be charged Qualified Beneficiaries; (k) Coordinate the administration, review and evaluation of COBRA Claims in accordance with the terms of the Medical/Dental Plan as applicable, and stand policies, procedures and practices; (l) Investigate the COBRA Claims to the extent deemed necessary in its best judgment; and (m) Arrange for the payment of COBRA Claims in accordance with the terms of the appropriate Medical/Dental Plan, standard policies, procedures and practices. 32 33 EXHIBIT F COMPLIANCE SERVICES F.0 General. the Compliance Services shall be limited to the following services: F.1 Compliance Services for Health and Welfare Plans. Manor shall: (a) Assist Choice in the preparation of compliance and disclosure documents pertaining to the Health and Welfare Plans, e.g., Plan documents, Plan amendments, summary Plan descriptions, summaries of material modifications, and summary annual reports; (b) Assist Choice in the preparation of forms and disclosures required by the Internal Revenue Service, the Department of Labor and other regulatory agencies; (c) Make recommendations and propose necessary amendments to Plan documents and procedures for compliance with the Plan documents, administrative procedures, ERISA and other applicable laws and regulations; and (d) Assist Choice to prepare for and respond to any government audit or enforcement action with respect to the Health and Welfare Plans. 33 34 F.2 Compliance Services for Retirement Plans. Manor shall: (a) Assist Choice in the preparation of compliance and disclosure documents pertaining to the Retirement Plans, e.g., Plan documents, Plan amendments, summary Plan descriptions, summaries of material modifications, and summary annual reports; (b) Assist Choice in the preparation of application for tax exempt status for its Retirement Plans; (c) Assist Choice in the preparation of forms and disclosures required by the Internal Revenue Service, the Department of Labor and other regulatory agencies; (d) Make recommendations and propose necessary amendments to Plan documents and procedures for compliance with the Plan documents, administrative procedures, ERISA and other applicable laws and regulations; and (e) Assist Choice to prepare for and respond to any government audit or enforcement action with respect to the Retirement Plans. 34 35 F.3 Compliance Services for Stock Plans. Manor shall: (a) Assist Choice in the preparation of compliance and disclosure documents pertaining to the Retirement Plans, e.g., Plan documents, Plan amendments, summary Plan descriptions, summaries of material modifications, and summary annual reports; (b) Assist Choice in the preparation of forms and disclosures required by the Internal Revenue Service, the Department of Labor and other regulatory agencies; (c) Make recommendations and propose necessary amendments to Plan documents and procedures for compliance with the Plan documents, administrative procedures, ERISA and other applicable laws and regulations; and (d) Assist Choice to prepare for and respond to any government audit or enforcement action with respect to the Retirement Plans. 35 36 F.4 Compliance Services for Deferred Compensation Plans. Manor shall: (a) Assist Choice in the preparation of compliance and disclosure documents pertaining to the Deferred Compensation Plans, e.g., Plan documents, Plan documents, Plan amendments, summary Plan descriptions, summaries of material modifications, and summary annual reports; (b) Assist Choice in the preparation of forms and disclosures required by the Internal Revenue Service, the Department of Labor and other regulatory agencies; (c) Make recommendations and propose necessary amendments to Plan documents and procedures for compliance with the Plan documents, administrative procedures, ERISA and other applicable laws and regulations; and (d) Assist Choice to prepare for and respond to any government audit or enforcement action with respect to the Deferred Compensation Plans. 36 37 EXHIBIT G FIDUCIARY SERVICES G.0 General. the Fiduciary Services shall be limited to the following services: G.1 Fiduciary Services for Health and Welfare Plans. Manor shall have the discretionary authority to: (a) Administer and pay claims for disability benefits; and (b) Review final appeals of denied or disputed Claims and COBRA Claims under the Health and Welfare Plans in accordance with the terms of the Health and Welfare Plans, standard policies, procedures and practices and make final decisions with respect thereto, subject to Choice's approval. 37 38 G.2 Fiduciary Services for Retirement Plans. Manor shall: (a) Develop investment guidelines and evaluate money managers for decision by the Retirement Committee; (b) Review performance of each money manager selected and discuss investment results and overall strategy with money manager; (c) Hold periodic meetings with Choice's Retirement Committee and prepare minutes of each meeting; (d) Collect and implement participant direction regarding investment selection; (e) Arrange for the maintenance of custodial accounts for all Retirement Plan assets; (f) Develop procedures for and monitor asset transfers among funds; (g) Reconcile plan assets to detailed participant accounts; (h) arrange for the allocation of monthly earnings to participant accounts; (i) Prepare financial statements in accordance with generally accepted accounting principles for Retirement Plans and obtain annual audit; (j) arrange for the performance of annual discrimination testing and adjustment of participant accounts as instructed by the Plan document; (k) Administer Qualified Domestic Relations Orders, as defined in Internal Revenue Code Section 414(p), plan loans, hardship withdrawals, and beneficiary accounts; (l) Have the discretionary authority to administer Claims for the Retirement Plans; and (m) Have the discretionary authority to review appeals of denied or disputed Claims under the Retirement Plan in accordance with the terms of the retirement plans, standard policies, procedures and 38 39 practices and make final decisions with respect thereto, subject to Choice's approval. 39 40 G.3 Fiduciary Services for Stock Plans. Manor shall: (a) Have the discretionary authority to administer awards for the Stock Plans; and (b) Have the discretionary authority to review appeals of denied or disputed Claims under the Stock Plans in accordance with the terms of the Stock Plans, standard policies, procedures and practices and make final decisions with respect thereto, subject to Choice's approval. 40 41 G.4 Fiduciary Services for Deferred Compensation Plans. Manor shall: (a) Have the discretionary authority to administer Claims for the Deferred Compensation Plans; and (b) Have the discretionary authority to review appeals of denied or disputed Claims under the Deferred Compensation Plans in accordance with the terms of the deferred compensation plans, standard policies, procedures and practices and make final decisions with respect thereto, subject to Choice's approval. 41 42 SCHEDULE A HEALTH AND WELFARE PLANS - - Medical plans - - Dental Plan - - Group-Term Life - - Pretax Spending Accounts - - Hyatt Legal Services - - Short-term Disability - - Long-term Disability - - Accidental Death & Dismemberment - - Vacation Benefit - - Sick Leave 42 43 RETIREMENT PLANS Choice Hotels International, Inc. Retirement Savings and Investment Plan Choice Hotels International, Inc. Non- Qualified Retirement Savings and Investment Plan Supplemental Executive Retirement Plan STOCK PLANS Choice Hotels International, Inc. Employee Stock Purchase Plan 43 44 DEFERRED COMPENSATION PLANS Deferred Compensation Plan 44 EX-10.7 9 EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS 1 EXHIBIT 10.07 EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS........................................ 1 Section 1.01 Definitions........................................ 1 Aggregate Spread............................................... 1 Choice Business................................................ 1 Choice Individual.............................................. 1 Code ......................................................... 2 Collective Bargaining Agreement................................ 2 Commission..................................................... 2 Common Stock................................................... 2 (i) Employer Common Stock........................ 2 (ii) Manor Care Common Stock...................... 2 (iii) Choice Common Stock.......................... 2 Company Matching Contribution.................................. 2 Conversion Award............................................... 2 Current Plan Year.............................................. 2 Cut-off Date................................................... 2 Distribution Agreement......................................... 2 Distribution Date.............................................. 2 Employee....................................................... 3 (i) Choice Employee.............................. 3 (ii) Terminee..................................... 3 (iii) Retained Employee............................ 3 ERISA ......................................................... 3 HMO ......................................................... 3 IRS ......................................................... 3 Manor Care..................................................... 3 Manor Care Closing Stock Price................................. 3 Manor Care Medical Plan........................................ 3 Manor Care Stock Option........................................ 3 Plan ......................................................... 4 Post-Conversion Stock Price.................................... 4 Prior Plan Year................................................ 4 Profit Sharing Plan............................................ 4 (i) Manor Care, Inc. Retirement Savings and Investment Plan.................................... 4 (ii) Choice Hotels International, Inc. Retirement Savings and Investment Plan............. 4 Qualified Beneficiary.......................................... 4 (i) Manor Care Qualified Beneficiary................... 4 (ii) Choice Qualified Beneficiary....................... 5 Retained Individual............................................ 5 Service Credit................................................. 5 Subsidiary..................................................... 5 (i) Choice Subsidiary.................................. 5 (ii) Retained Subsidiary................................ 5 Welfare Plans.................................................. 5 Section 1.02 Other Terms........................................ 5 (i) 3 Section 1.03 Certain Constructions.............................. 5 Section 1.04 Schedules, Sections ............................... 6 Section 1.05 Survival........................................... 6 ARTICLE II EMPLOYEE BENEFITS.................................. 6 Section 2.01 Employment......................................... 6 (a) Allocation of Responsibilities on Distribution Date........................................ 6 (b) Service Credits.......................................... 6 (c) Funding Payment by Choice to Manor Care.................. 7 Section 2.02 Profit Sharing Plans............................... 7 (a) Manor Care, Inc. Retirement Savings and Investment Plan.......................................... 7 (b) Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan.............................. 9 Section 2.03 Retirement Plans................................... 11 (a) Manor Care, Inc. Supplemental Executive Retirement Plan.......................................... 11 (b) Manor Care, Inc. Cash Accumulation Retirement Plan..................................................... 13 (c) Manor Care, Inc. Deferred Compensation Plan.............. 14 Section 2.04 Comprehensive Stock Plans.......................... 15 (a) Manor Care, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan............................................ 15 (b) Manor Care, Inc. 1996 Non-Employee Director Stock Compensation Plan.................................. 16 (c) Manor Care, Inc. Stock Grant Plans....................... 16 (d) Manor Care Stock Option Plans............................ 17 (e) Manor Care, Inc. 1995 Employee Stock Purchase Plan..................................................... 18 (f) Effect of the Distribution on Awards Made Prior to the Cut-off Date................................ 19 (g) Effect of Post-Distribution Transfer on Conversion Awards........................................ 21 Section 2.05 Existing Manor Care Stock Purchase Plan............ 22 Section 2.06 Manor Care Welfare Plans and Short-Term Disability Plan.................................... 22 (ii) 4 (a) Liability for Claims..................................... 22 (b) Continuation Coverage Administration..................... 23 (c) Continuation Coverage Claims............................. 23 (d) Continuation of Sponsorship of Manor Care Welfare Plans.................................................... 23 (e) Welfare Plan Payments by Choice to Manor Care............ 24 (f) Continuation of Sponsorship of Manor Care, Inc. Short-Term Disability Plan............................... 24 Section 2.07 Choice Welfare Plans and Short-Term Disability Plan.................................... 24 (a) Establishment of Choice Welfare Plans.................... 24 (b) Liability for Claims..................................... 24 (c) Continuation Coverage Administration..................... 25 (d) Continuation Coverage Claims............................. 25 (e) Establishment of Choice Hotels International, Inc. Short-Term Disability Plan............................... 25 Section 2.08 Vacation Pay and Sick Leave Liabilities............ 25 (a) Division of Liabilities.................................. 25 (b) Post-Distribution Transfers.............................. 26 Section 2.09 Employee Discounts................................. 26 Section 2.10 Preservation of Right To Amend or Terminate Plans.............................................. 27 Section 2.11 Reimbursement...................................... 27 Section 2.12 Payroll Reporting and Withholding.................. 27 (a) Form W-2 Reporting....................................... 27 (b) Forms W-4 and W-5........................................ 28 (c) Garnishments, Tax Levies, Child Support Orders, and Wage Assignments..................................... 28 (d) Authorizations for Payroll Deductions.................... 28 ARTICLE III LABOR AND EMPLOYMENT MATTERS....................... 28 Section 3.01......................................................... 28 Section 3.02 Employment Policies and Practices.................. 29 Section 3.03 Collective Bargaining Agreements................... 29 Section 3.04 Claims............................................. 29 (a) Scope.................................................... 29 (iii) 5 (b) Employment-Related Claims................................ 29 (c) Obligation to Indemnify.................................. 29 (d) Pre-Distribution Claims.................................. 30 (e) Distribution and Other Joint Liability Claims................................................... 30 (f) Post-Distribution Employment-Related Claims.............. 30 Section 3.05 Funding of Union Plans............................. 30 Section 3.06 Notice of Claims................................... 31 Section 3.07 Assumption of Unemployment Tax Rates............... 31 Section 3.08 Intercompany Service Charge........................ 31 Section 3.09 WARN Claims........................................ 31 Section 3.10 Employees on Leave of Absence...................... 32 Section 3.11 No Third Party Beneficiary Rights.................. 32 Section 3.12 Attorney-Client Privilege.......................... 32 ARTICLE IV DEFAULT............................................ 32 Section 4.01 Default............................................ 32 Section 4.02 Force Majeure...................................... 32 ARTICLE V MISCELLANEOUS...................................... 32 Section 5.01 Relationship of Parties............................ 32 Section 5.02 Access to Information; Cooperation................. 33 Section 5.03 Assignment......................................... 33 Section 5.04 Headings........................................... 33 Section 5.05 Severability of Provisions......................... 33 Section 5.06 Parties Bound...................................... 33 Section 5.07 Notices............................................ 33 Section 5.08 Further Action..................................... 34 Section 5.09 Waiver............................................. 34 Section 5.10 Governing Law...................................... 34 Section 5.11 Consent to Jurisdiction............................ 34 (iv) 6 Section 5.12 Entire Agreement................................... 34 (v) 7 EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT THIS EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT ("Agreement") is made and entered into as of___________________________, 1996, by and between CHOICE HOTELS HOLDINGS, INC., (to be renamed Choice Hotels International, Inc.) a Delaware corporation ("Choice"), and MANOR CARE, INC., a Delaware corporation ("Manor Care"). R E C I T A L S WHEREAS, pursuant to a Distribution Agreement (the "Distribution Agreement") dated as of ____________, 1996, as implemented in documents executed or delivered by Choice and Manor Care in connection with the closing thereunder, Choice and Manor Care have agreed to enter into an Employee Benefits & Other Employment Matters Allocation Agreement with the terms and conditions set forth herein pursuant to which Choice and Manor Care will each assume certain liabilities and obligations, each generally with respect to its own employees, to adopt or continue certain employee benefit, stock and retirement plans and programs substantially equivalent to those provided by Manor Care on the Distribution Date. NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Manor Care and Choice agree as follows: ARTICLE I DEFINITIONS Section 1.01 Definitions. As used in this Agreement, the following terms shall have the meanings indicated below: Aggregate Spread: the difference between the exercise price of a Manor Care Stock Option and the Manor Care Closing Stock Price, multiplied by the number of shares covered by such Manor Care Stock Option remaining unexercised on the Cut-off Date. Choice Business: any business or operation of Manor Care or its Subsidiaries which is, pursuant to the Distribution Agreement, to be conducted, following the Distribution Date, by Choice or any Choice Subsidiary. Choice Individual: any individual who (i) is a Choice Employee, or (ii) is a beneficiary of any individual specified in clause (i). 8 Code: the Internal Revenue Code of 1986, as amended, or any successor legislation. Collective Bargaining Agreement: any collective bargaining agreement or other labor agreement to which Manor Care or any of its subsidiaries or affiliates was a party on or before the Cut-off Date. Commission: the Securities and Exchange Commission. Common Stock: the common stock of Manor Care or Choice, as more specifically described below: (i) Employer Common Stock: Manor Care Common Stock in the case of Retained Employees and Choice Common Stock in the case of Choice Employees; or (ii) Manor Care Common Stock: the common stock, par value $0.10 per share, of Manor Care after the Distribution Date; or (iii) Choice Common Stock: the common stock, par value [$1] per share, of Choice after the Distribution Date. Company Matching Contribution: the Company Matching Contribution of Manor Care under the Manor Care, Inc. Retirement Savings and Investment Plan (as provided in the Manor Care Retirement Savings and Investment Plan document) and the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan, each as may be supplemented in the sole and absolute discretion of the Manor Care Board of Directors. Conversion Award: an award of Common Stock or of an option to acquire Common Stock made to a Choice Individual or a Retained Individual to reflect the effect of the Distribution on awards of Manor Care Common Stock or Manor Care Stock Options held on the Cut-off Date, in accordance with Section 2.04. Current Plan Year: the plan year or fiscal year, to the extent applicable with respect to any Plan, during which the Distribution occurs. Cut-off Date: the date immediately preceding the Distribution Date. Distribution Agreement: the agreement described in the first recital of this Agreement. Distribution Date: the date on which the Distribution occurs. - 2 - 9 Employee: an individual who on the Distribution Date, is identified as being in any of the following categories: (i) Choice Employee: any individual who is an Employee of Choice or any Choice Subsidiary on the Distribution Date; or (ii) Terminee: any individual formerly employed by Manor Care or any Subsidiary of Manor Care who terminated such employment prior to the Distribution Date, including but not limited to any Manor Care employee who has retired prior to the Distribution Date; or (iii) Retained Employee: any individual who remains an Employee of Manor Care or any Retained Subsidiary on the Distribution Date. ERISA: the Employee Retirement Income Security Act of 1974, as amended, or any successor legislation. HMO: any health maintenance organization organized under 42 U.S.C. Section 300a-9, or a state health maintenance organization statute that provides medical services for Retained Individuals or Choice Individuals under any Plan. IRS: the Internal Revenue Service. Manor Care: Manor Care, Inc., a Delaware corporation. Manor Care Closing Stock Price: the New York Stock Exchange closing price per share for Manor Care Common Stock on the Distribution Date, trading regular way, with a due bill for the special dividend of Choice Common Stock to be made in connection with the Distribution. Manor Care Medical Plan: any welfare plan maintained by Manor Care (or to which Manor Care makes contributions) which provides medical benefits, including medical benefits provided through an HMO, an indemnity program or a point of service program. Manor Care Stock Option: an option to purchase Manor Care Common Stock pursuant to an option granted under the Manor Care, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan, the Manor Care, Inc. 1995 Long Term Incentive Plan, the Manor Care, Inc. Key Executive Stock Option Plan, or the Manor Care, Inc. Key Executive Stock Option Plan of 1993. - 3 - 10 Plan: any plan, policy, arrangement, contract or agreement providing compensation benefits for any group of Employees or former employees or any individual Employee or former employee, or the dependents or beneficiaries of any such Employee or former Employee, whether formal or informal or written or unwritten, and including, without limitation, any means, whether or not legally required, pursuant to which any benefit is provided by an employer to any Employee or former employee or the beneficiaries of any such Employee or former employee. The term "Plan" as used in this Agreement does not include any contract, agreement or understanding entered into by Manor Care prior to the Distribution Date or by Manor Care or Choice after the Distribution Date by relating to settlement of actual or potential employee related litigation claims. Post-Conversion Stock Price: the per share price of Choice Common Stock or Manor Care Common Stock on the Distribution Date, based on the Manor Care Closing Stock Price and the when-issued closing price of Choice Common Stock on the New York Stock Exchange on the Distribution Date. Prior Plan Year: a plan year or fiscal year or portion thereof, to the extent applicable with respect to any Plan, ending on or prior to the Cut-off Date. Profit Sharing Plan: a salary reduction contribution plan maintained pursuant to Sections 401(a) and 401(k) of the Code for Employees and their beneficiaries, as specifically identified using one of the categories described below: (i) Manor Care, Inc. Retirement Savings and Investment Plan: the Manor Care, Inc. Retirement Savings and Investment Plan and Trust as in effect on the Distribution Date; or (ii) Choice Hotels International, Inc. Retirement Savings and Investment Plan: the Choice Hotels International, Inc. Retirement Savings and Investment Plan and Trust as in effect on the Distribution Date. Qualified Beneficiary: an individual (or dependent thereof) who either (1) experiences a "qualified event" (as that term is defined in Code Section 4980B(f)(3) and ERISA Section 603) while a participant in any Welfare Plan, or (2) becomes a "qualified beneficiary" (as that term is defined in Code Section 4980B(g)(1) and ERISA 607(3)) under any Welfare Plan, and who is included in any one of the following categories: (i) Manor Care Qualified Beneficiary: any Retained Employee (or dependent thereof) who becomes a Qualified Beneficiary on or after the Distribution Date under any Manor Care Welfare Plan; or any Retained Employee (or dependent - 4 - 11 thereof) who, on or before the Cut-off Date, was a Qualified Beneficiary under any Manor Care Welfare Plan. (ii) Choice Qualified Beneficiary: Any Choice Employee (or dependent thereof) who becomes a Qualified Beneficiary on or after the Distribution Date but before January 1, 1997 under any Manor Care Welfare Plan; or any individual (or dependent thereof) who, on or before the Cut-off Date, was a Qualified Beneficiary under any Manor Care Welfare Plan and who became a Choice Employee after the Distribution Date. Retained Business: any business or operation of Manor Care or its Subsidiaries which is, pursuant to the Distribution Agreement, to be conducted, following the Distribution Date, by Manor Care or any Retained Subsidiary. Retained Individual: any individual who (i) is a Retained Employee, or (ii) is a beneficiary of any individual described in clause (i). Service Credit: the period taken into account under any Plan for purposes of determining length of service to satisfy eligibility, vesting, benefit accrual and similar requirements under such Plan. Subsidiary: any corporation, a majority of whose capital stock with voting power, under ordinary circumstances, to elect directors is, at the date of determination, directly or indirectly owned by any person as to which a determination of subsidiary status is to be made, including each of the following categories: (i) Choice Subsidiary: all subsidiaries of Choice as of the Distribution Date; or (ii) Retained Subsidiary: any subsidiary of Manor Care, except Choice and the Choice Subsidiaries. Welfare Plans: any welfare plan providing medical, dental, life, pre-paid legal services, accidental death & dismemberment or long-term disability benefits as set forth in Exhibit A. The term "Welfare Plan" does not include any short-term disability program. Section 1.02 Other Terms. Any capitalized terms used herein but not defined herein shall have the meaning set forth in the Distribution Agreement. Section 1.03 Certain Constructions. References to the singular in this Agreement shall refer to the plural and vice-versa and references to the masculine shall refer to the feminine and vice-versa. - 5 - 12 Section 1.04 Schedules, Sections . References to a "Schedule" are, unless otherwise specified, to one of the Schedules attached to this Agreement, and references to a "Section " are, unless otherwise specified, to one of the Sections of this Agreement. Section 1.05 Survival. Obligations described in this Agreement shall remain in full force and effect and shall survive the Distribution Date. ARTICLE II EMPLOYEE BENEFITS Section 2.01 Employment. (a) Allocation of Responsibilities on Distribution Date. On the Distribution Date, except to the extent retained or assumed by Manor Care under this Agreement or any other agreement relating to the Distribution, Choice shall retain or assume, as the case may be, responsibility as employer for the Choice Employees. On the Distribution Date, except to the extent retained or assumed by Choice under this Agreement or any other agreement relating to the Distribution, Manor Care shall retain or assume, as the case may be, responsibility as employer for the Retained Employees. The assumption or retention of responsibility as employer by Manor Care or Choice described in this Section 2.01 shall not, of itself, constitute a severance or a termination of employment under any Plan of severance maintained by Manor Care. (b) Service Credits. (i) Distribution Date transfers. In connection with the Distribution and for purposes of determining Service Credits (but excluding accrual of benefits other than vacation leave and sick leave) under any Plans, Manor Care shall credit each Retained Employee and Choice shall credit each Choice Employee with such Employee's original hire date as reflected in the Manor Care payroll system records as of the Cutoff Date. Such hire date shall continue to be maintained as described herein for as long as the Employee does not terminate employment. (ii) Post-Distribution Date terminations. Subject to the provisions of ERISA and to Section 2.08(b) (governing post-Distribution transfers through May 31, 1998), Choice may, in the case of Choice Employees, and Manor Care may, in the case of Retained Employees, each in its sole discretion, make such decisions as it deems appropriate with respect to determining Service Credits and vacation and sick leave balances for such Employees who terminate employment from the other company after the Distribution Date. - 6 - 13 (c) Funding Payment by Choice to Manor Care. Choice shall make a payment to Manor Care in an amount equal to 2.1% of Choice's aggregate payroll for all Choice Employees with respect to the time period beginning on the Distribution Date and ending on December 31, 1996. Such payment shall be made to Manor Care on a monthly basis no more than ten (10) days after the end of each month ending after the Distribution Date through December 31, 1996. In consideration of receipt of such payments, Manor Care shall (i) assume responsibility for all funding obligations attributable to the Manor Care, Inc. Cash Accumulation Retirement Plan and (ii) assume responsibility for the Company Matching Contribution attributable to the Current Plan Year under the Manor Care, Inc. Retirement Savings and Investment Plan, the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan, the Choice Hotels International, Inc. Retirement Savings and Investment Plan, and the Choice Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan. It is also agreed that Choice will be responsible for any incremental costs associated with the establishment of the Choice Hotels International, Inc. Retirement Savings and Investment Plan and the Choice Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan. Section 2.02 Profit Sharing Plans. (a) Manor Care, Inc. Retirement Savings and Investment Plan. (i) Continuation of Sponsorship of Manor Care, Inc. Retirement Savings and Investment Plan. Effective as of the Distribution Date, Manor Care shall continue sponsorship of the Manor Care, Inc. Retirement Savings and Investment Plan for all Retained Employees and Terminees. Participants in such Plan who are Retained Employees or Terminees shall have a one-time election to convert Choice Common Stock credited to their accounts into cash or into Manor Care Common Stock. (ii) Establishment of Choice Hotels International, Inc. Retirement Savings and Investment Plan. Effective as of the Distribution Date, Choice shall take, or cause to be taken, all action necessary and appropriate to establish and administer a new Plan named the Choice Hotels International, Inc., Retirement Savings and Investment Plan and Trust and to provide benefits thereunder after the Distribution Date for all Choice Individuals who, immediately prior to the Distribution Date, were participants in or otherwise entitled to benefits under the Manor Care, Inc. Retirement Savings and Investment Sharing Plan. Manor Care will fund the Company Matching Contribution required with respect to the Current Plan Year in consideration for the payment by Choice of the Funding Payment described in Section 2.01(c), above. Participants in such Plan shall have a one-time election to convert transferred Manor Care Common Stock into cash or into - 7 - 14 Choice Common Stock. The Choice Hotels International, Inc. Retirement Savings and Investment Plan shall be intended to qualify for tax-favored treatment under Sections 401(a) and 401(k) of the Code and to be in compliance with the requirements of ERISA. (iii) Transfer and Acceptance of Account Balances. As soon as practicable after the Distribution Date, Manor Care shall cause the trustees of the Manor Care, Inc. Retirement Savings and Investment Plan to transfer to the trustee or other funding agent of the Choice Hotels International, Inc. Retirement Savings and Investment Plan the amounts (in cash, securities, other property or a combination thereof) representing the account balances of all Choice Individuals, said amounts to be established as account balances or accrued benefits of such individuals under the Choice Hotels International, Inc. Retirement Savings and Investment Plan. Each such transfer shall comply with Section 414(l) of the Code and the requirements of ERISA and the regulations promulgated thereunder. Choice agrees to cause the trustees or other funding agent of the Choice Hotels International, Inc. Retirement Savings and Investment Plan to accept the plan-to-plan transfer from the Manor Care, Inc. Retirement Savings and Investment Plan trustees, and to credit the accounts of such Choice Individuals under the Choice Hotels International, Inc. Retirement Savings and Investment Plan with amounts transferred on their behalf. Notwithstanding the foregoing, Manor Care and Choice agree that if, subsequent to such transfer of account balances to the Choice Hotels International, Inc. Retirement Savings and Investment Plan, a subsequent audit or other review establishes that additional funds should be transferred to the Choice Hotels International, Inc. Retirement Savings and Investment Plan from the Manor Care, Inc. Retirement Savings and Investment Plan or that funds should be returned from the Choice Hotels International, Inc. Retirement Savings and Investment Plan to the Manor Care, Inc. Retirement Savings and Investment Plan, both parties shall take all appropriate steps to effectuate the required transfer between the trusts maintained for such plans. (iv) Manor Care to Provide Information. Manor Care shall provide Choice, as soon as practicable after the Distribution Date (with the cooperation of Choice to the extent that relevant information is in the possession of Choice or a Choice Subsidiary, and in accordance with Section 5.02), with a list of Choice Individuals who, to the best knowledge of Manor Care, were participants in or otherwise entitled to benefits under the Manor Care, Inc. Retirement Savings and Investment Plan on the Cut-off Date, together with a listing of each participant's Service Credits under such Plan and a listing of each account balance thereunder. Manor Care shall, as soon as practicable after the Distribution Date and in accordance with Section 5.02, provide Choice with such additional information in - 8 - 15 the possession of Manor Care or a Retained Subsidiary (and not already in the possession of Choice or a Choice Subsidiary) as may be reasonably requested by Choice and necessary for Choice or the Choice Subsidiary to establish and administer effectively the Choice Hotels International, Inc. Retirement Savings and Investment Plan. (v) Regulatory Filings. Choice and Manor Care shall, in connection with the plan-to-plan transfer described in Section 2.02(a)(iii), cooperate in making any and all appropriate filings required by the Commission or the IRS, or required under the Code or ERISA or any applicable securities laws and the regulations thereunder, and take all such action as may be necessary and appropriate to cause such plan-to-plan transfer to take place as soon as practicable after the Distribution Date or otherwise when required by law. Further, Choice shall seek a favorable IRS determination letter that the Choice Hotels International, Inc. Retirement Savings and Investment Plan, as organized, satisfies all qualification requirements under Section 401(a) of the Code, and the transfers described in Section 2.02(a)(iii) shall take place as soon as practicable after the receipt of such favorable IRS determination letter. Notwithstanding the foregoing, such transfers may take place pending issuance of such favorable determination letter, upon receipt of an opinion of counsel for Choice reasonably satisfactory to Manor Care that the aforesaid Plan so qualifies, or that it can be made to so qualify by retroactive amendment, and that any such retroactive amendment shall not decrease the accrued benefit of any participant in such Plan. Manor Care agrees to provide to Choice's counsel such information in the possession of Manor Care or any Retained Subsidiary as may reasonably be requested by Choice's counsel in connection with the issuance of such opinion, in accordance with Section 5.02. Manor Care and Choice shall each make any necessary amendments on a retroactive basis to the Manor Care, Inc. Retirement Savings and Investment Plan or the Choice Hotels International, Inc. Retirement Savings and Investment Plan, respectively, as required by the IRS to issue the favorable determination letter described above. (b) Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan. (i) Continuation of Sponsorship of Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan. On the Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole responsibility for all liabilities and obligations under the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan, including the obligation to make a Company Matching Contribution for Retained Employees and Choice Employees with respect to the Current Plan Year, and Choice shall have no liability or - 9 - 16 obligation with respect thereto, except to pay to Manor Care the Funding Payment described in Section 2.01(c), above. Participants in such Plan who are Retained Employees or Terminees shall have a one-time election to convert Choice Common Stock credited to their accounts into cash or into Manor Care Common Stock. (ii) Establishment of Choice Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan. Effective as of the Distribution Date, Choice shall take, or cause to be taken, all action necessary and appropriate to establish and administer a new nonqualified retirement savings and investment plan named the Choice Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan and to provide benefits thereunder after the Distribution Date for all Choice Employees who immediately prior to the Distribution Date, were participants in or otherwise entitled to benefits under the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan. However, the obligation to make a Matching Company Contribution for Choice Employees with respect to the Current Plan Year shall be assumed by Manor Care in consideration of the payment by Choice of the Funding Payment described in Section 2.01(c) above. Participants in such Plan shall have a one-time election to convert transferred Manor Care Common Stock into cash or into Choice Common Stock. (iii) Transfer and Acceptance of Account Balances. As soon as practicable after the Distribution Date, Manor Care shall cause the trustee of the "rabbi" trust relating to the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan to transfer to a separate "rabbi" trust to be established by Choice with respect to the Choice Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan the amounts (in cash, securities, other property or a combination thereof) representing the account balances of all Choice Individuals who had account balances in the "rabbi" trust relating to the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan on the Cut-off Date, said amounts to be established as account balances or accrued benefits of such individuals in the "rabbi" trust established with respect to the Choice Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan. In addition, each Choice Individual for whom an account balance in the rabbi trust established on behalf of the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan is transferred to a rabbi trust established on behalf of the Choice Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan shall be required to execute a waiver which acknowledges that all liabilities for benefits accrued under the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan through the date immediately preceding the Distribution Date shall be assumed by Choice, except that Manor Care shall remain liable, for a period of thirty (30) months following the - 10 - 17 Distribution Date, for such benefits to the extent such amounts are not paid when due by Choice. (iv) Manor Care to Provide Information. Manor Care agrees to provide Choice (to the extent not already in Choice's possession), as soon as practicable after the Distribution Date, with a list of Choice Individuals who were, to the best knowledge of Choice, participants in or otherwise entitled to benefits under the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan on the Cut-off Date, together with a listing of each participant's Service Credits under such Plan and a listing of each account balance thereunder. Manor Care shall, as soon as practicable after the Distribution Date, in accordance with Section 5.02 provide Choice with such additional information in the possession of Manor Care or a Retained Subsidiary and not already in the possession of Choice or a Choice Subsidiary as may reasonably be requested by Choice and necessary in order for Choice or a Choice Subsidiary to administer effectively the Choice International Hotels, Inc. Nonqualified Retirement Savings and Investment Plan. (v) Benefit Guarantees. On and after the Distribution Date, a Retained Employee's and Terminee's right, if any, to receive benefits under the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan shall be the responsibility of Manor Care. However, the payment of any benefits due under the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan for the first thirty (30) months following the Distribution Date shall be guaranteed by Choice, to the extent not otherwise paid by Manor Care. On and after the Distribution Date, a Choice Individual's right to receive benefits under the Choice Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan shall be the responsibility of Choice. However, the payment of any benefits due under the Choice Hotels International, Inc. Nonqualified Retirement Savings and Investment Plan which are attributable to the transferred accrued benefits earned under the Manor Care, Inc. Deferred Compensation Plan shall be guaranteed by Manor Care for the first thirty (30) months following the Distribution Date, to the extent not otherwise paid by Choice. Section 2.03 Retirement Plans. (a) Manor Care, Inc. Supplemental Executive Retirement Plan. (i) Continuation of Sponsorship of Manor Care, Inc. Supplemental Executive Retirement Plan. On the Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole responsibility for all liabilities and obligations under the Manor Care, Inc. Supplemental Executive Retirement Plan, and Choice shall have no liability or obligation - 11 - 18 with respect thereto, except as defined in Section 2.03(a)(ii) below. Manor Care shall provide future benefits thereunder accruing after the Cut-off Date for Retained Employees and Terminees who, on the Cut-off Date, were participants in or otherwise entitled to benefits under the Manor Care, Inc. Supplemental Executive Retirement Plan. (ii) Establishment of Choice Hotels International, Inc. Supplemental Executive Retirement Plan. Effective as of the Distribution Date, Choice shall take, or cause to be taken, all action necessary and appropriate to establish and administer a new supplemental executive retirement plan named the Choice Hotels International, Inc. Supplemental Executive Retirement Plan and to provide benefits thereunder after the Distribution Date for all Choice Employees who immediately prior to the Distribution Date, were participants in or otherwise entitled to benefits under the Manor Care, Inc. Supplemental Executive Retirement Plan. (iii) Transfer and Acceptance of Account Balances. As soon as practicable after the Distribution Date, Manor Care shall transfer to Choice an amount (in cash, securities, other property or a combination thereof) representing the present value of the full accrued benefit of all Choice Employees who had earned a benefit in the Manor Care, Inc. Supplemental Executive Retirement Plan on the Cut-off Date, said amounts to be established as the initial accrued benefits of such individuals under the Choice Hotels International, Inc. Supplemental Executive Retirement Plan. Manor Care and Choice shall take such steps as may be necessary to obtain releases of Manor Care from Choice Employees whose accrued benefits are transferred from the Manor Care, Inc. Supplemental Executive Retirement to the Choice Hotels International, Inc. Supplemental Executive Retirement Plan in accordance with this Section . In addition, each Choice Individual for whom an accrued benefit under the Manor Care, Inc. Supplemental Executive Retirement Plan has been assumed by the Choice Hotels International, Inc. Supplemental Executive Retirement Plan shall be required to execute a waiver which acknowledges that all liabilities for benefits accrued under the Manor Care, Inc. Supplemental Executive Retirement Plan through the date immediately preceding the Distribution Date shall be assumed by Choice, except that Manor Care shall remain liable, for a period of thirty (30) months following the Distribution Date, for such benefits to the extent such amounts are not paid when due by Choice. (iv) Manor Care to Provide Information. Manor Care agrees to provide Choice (to the extent not already in Choice's possession), as soon as practicable after the Distribution Date, with a list of Choice Individuals who were, to the best knowledge of Choice, participants in or otherwise entitled to benefits under the Manor Care, Inc. Supplemental - 12 - 19 Executive Retirement Plan on the Cut-off Date, together with a listing of each participant's Service Credits under such Plan and a listing of such participant's accrued benefits thereunder. Manor Care shall, as soon as practicable after the Distribution Date, in accordance with Section 5.02 provide Choice with such additional information in the possession of Manor Care or a Retained Subsidiary and not already in the possession of Choice or a Choice Subsidiary as may reasonably be requested by Choice and necessary in order for Choice or a Choice Subsidiary to administer effectively the Choice International Hotels, Inc. Supplemental Executive Retirement Plan. (v) Benefit Guarantees. On and after the Distribution Date, a Retained Employee's or a Terminee's right, if any, to receive benefits under the Manor Care, Inc. Supplemental Executive Retirement Plan shall be the responsibility of Manor Care. However, the payment of any benefits due under the Manor Care, Inc. Supplemental Executive Retirement Plan for the first thirty (30) months following the Distribution Date shall be guaranteed by Choice, to the extent not otherwise paid by Manor Care. On and after the Distribution Date, a Choice Individual's right to receive benefits under the Choice Hotels International, Inc. Supplemental Executive Retirement Plan shall be the responsibility of Choice. However, the payment of any benefits due under the Choice Hotels International, Inc. Supplemental Executive Retirement Plan which are attributable to the transferred accrued benefits earned under the Manor Care, Inc. Deferred Compensation Plan shall be guaranteed by Manor Care for the first thirty (30) months following the Distribution Date, to the extent not otherwise paid by Choice. -13- 20 (b) Manor Care, Inc. Cash Accumulation Retirement Plan. As of the Distribution Date, Manor Care or a Retained Subsidiary shall assume or retain sponsorship of and shall be solely responsible for all liabilities and obligations in connection with the Manor Care, Inc. Cash Accumulation Retirement Plan, and Choice and the Choice Subsidiaries shall have no such liability or obligation, except for the payment to Manor Care of the Funding Payment described in Section 2.01(c), above. Subject to the approval of the Board of Directors of Manor Care, the Manor Care, Inc. Cash Accumulation Retirement Plan shall be frozen as to future participation effective as of August 15, 1996 and shall be frozen as to future benefit accruals as of December 31, 1996. Participants in the Manor Care, Inc. Cash Accumulation Retirement Plan shall continue to earn Service Credits for purposes of vesting. To the extent that additional contributions are required for individuals who are participants in the Manor Care, Inc. Cash Accumulation Retirement Plan on the Cut-off Date and who become Choice Employees, Manor Care shall be solely responsible for all liabilities and obligations in connection with such contributions. (c) Manor Care, Inc. Deferred Compensation Plan. (i) Continuation of Sponsorship of Manor Care, Inc. Deferred Compensation Plan. On the Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole responsibility for all liabilities and obligations under the Manor Care, Inc. Deferred Compensation Plan, and Choice shall have no liability or obligation with respect thereto, except as defined in Section 2.03(c)(ii) below. Manor Care shall provide future benefits thereunder accruing after the Cut-off Date for Retained Employees, individuals who are directors of Manor Care, and Terminees who, on the Cut-off Date, were participants in or otherwise entitled to benefits under the Manor Care, Inc. Deferred Compensation Plan. (ii) Establishment of Choice Hotels International, Inc. Deferred Compensation Plan. Effective as of the Distribution Date, Choice shall take, or cause to be taken, all action necessary and appropriate to establish and administer a new deferred compensation plan named the Choice Hotels International, Inc. Deferred Compensation Plan and to provide benefits thereunder after the Distribution Date for all Choice Employees who immediately prior to the Distribution Date, were participants in or otherwise entitled to benefits under the Manor Care, Inc. Deferred Compensation Plan, and for Choice directors. (iii) Transfer and Acceptance of Account Balances. As soon as practicable after the Distribution Date, Manor Care shall transfer to Choice the amounts (in cash, securities, other property or a combination thereof) representing the account balances of all Choice Employees who had account balances in the -14- 21 Manor Care, Inc. Deferred Compensation Plan on the Cut-off Date, said amounts to be established as account balances or accrued benefits of such individuals under the Choice Hotels International, Inc. Deferred Compensation Plan. Manor Care and Choice shall take such steps as may be necessary to obtain releases of Manor Care from Choice Employees whose account balances are transferred from the Manor Care, Inc. Deferred Compensation Plan to the Choice Hotels International, Inc. Deferred Compensation Plan in accordance with this Section . In addition, each Choice Individual whose account balance under the Manor Care, Inc. Deferred Compensation Plan has been transferred to the Choice Hotels International, Inc. Deferred Compensation Plan shall be required to execute a waiver which acknowledges that all liabilities for benefits accrued under the Manor Care, Inc. Deferred Compensation Plan through the date immediately preceding the Distribution Date shall be assumed by Choice, except that Manor Care shall remain liable, for a period of thirty (30) months following the Distribution Date, for such benefits to the extent such amounts are not paid when due by Choice. (iv) Manor Care to Provide Information. Manor Care agrees to provide Choice (to the extent not already in Choice's possession), as soon as practicable after the Distribution Date, with a list of Choice Employees who were, to the best knowledge of Manor Care, participants in or otherwise entitled to benefits under the Manor Care, Inc. Deferred Compensation Plan on the Cut-off Date. Manor Care shall, as soon as practicable after the Distribution Date, in accordance with Section 5.02 provide Choice with such additional information in the possession of Manor Care or a Retained Subsidiary and not already in the possession of Choice or a Choice Subsidiary as may reasonably be requested by Choice and necessary in order for Choice or a Choice Subsidiary to administer effectively the Choice Hotels International, Inc. Deferred Compensation Plans. (v) Benefit Guarantees. On and after the Distribution Date, a Retained Employee's, Terminee's or Manor Care director's right to receive benefits under the Manor Care, Inc. Deferred Compensation Plan shall be the responsibility of Manor Care. However, the payment of any benefits due under the Manor Care, Inc. Deferred Compensation Plan for the first thirty (30) months following the Distribution Date shall be guaranteed by Choice, to the extent not otherwise paid by Manor Care. On and after the Distribution Date, a Choice Individual's right to receive benefits under the Choice Hotels International, Inc. Deferred Compensation Plan shall be the responsibility of Choice. However, the payment of any benefits due under the Choice Hotels International, Inc. Deferred Compensation Plan which are attributable to the transferred accrued benefits earned under the Manor Care, Inc. Deferred Compensation Plan shall be guaranteed by Manor Care for the first thirty (30) months following the -15- 22 Distribution Date, to the extent not otherwise paid by Choice. Section 2.04 Comprehensive Stock Plans. (a) Manor Care, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan. (i) Continuation of Sponsorship of Manor Care, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan. On the Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole responsibility for all liabilities and obligations under the Manor Care, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan for all non-employee directors of Manor Care after the Distribution Date through the issuance of Conversion Awards, subject to the stock adjustment provisions described in Section 2.04(f) below, and Choice shall have no liability or obligation with respect thereto. (ii) Establishment of Choice Hotels International, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan. Effective as of the Distribution Date, Choice shall take, or cause to be taken, all action necessary and appropriate to establish and administer a new non-employee director stock option and deferred compensation stock purchase plan named the Choice Hotels International, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan and to provide benefits thereunder after the Distribution Date for all non-employee Choice directors. (b) Manor Care, Inc. 1996 Non-Employee Director Stock Compensation Plan. (i) Continuation of Sponsorship of Manor Care, Inc. 1996 Non-Employee Director Stock Compensation Plan. On the Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole responsibility for all liabilities and obligations under the Manor Care, Inc. 1996 Non- Employee Director Stock Compensation Plan for all non-employee directors of Manor Care after the Distribution Date through the issuance of Conversion Awards, subject to the stock adjustment provisions described in Section 2.04(f) below, and Choice shall have no liability or obligation with respect thereto. (ii) Establishment of Choice Hotels International, Inc. Non-Employee Director Stock Compensation Plan. Effective as of the Distribution Date, Choice shall take, or cause to be taken, all action necessary and appropriate to establish and administer a new non-employee director stock compensation plan named the Choice Hotels International, Inc. Non-Employee Director Stock Compensation Plan and to provide benefits thereunder after the Distribution Date for all non-employee Choice directors. -16- 23 (c) Manor Care, Inc. Stock Grant Plans. (i) Continuation of Sponsorship of Manor Care, Inc. Nursing Field Operations Stock Grant Plan for Key Management Employees. On the Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole responsibility for all liabilities and obligations under the Manor Care, Inc. Nursing Field Operations Stock Grant Plan for Key Management Employees for all eligible key management employees eligible thereunder after the Distribution Date, and Choice shall have no liability or obligation with respect thereto. (ii) Continuation of Sponsorship of Manor Care, Inc. Restricted Stock Plan. On the Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole responsibility for all liabilities and obligations under the Manor Care, Inc. Restricted Stock Plan for Key Management Employees for all eligible key management employees eligible thereunder after the Distribution Date, and Choice shall have no liability or obligation with respect thereto. At such time as Manor Care stock is released from restriction, Manor Care shall claim a compensation deduction for the then-current value of such stock and shall cause the unrestricted shares of Manor Care stock to be delivered directly to the Employee entitled to such shares whether such Employee is currently employed by Manor Care or Choice. (iii) Continuation of Sponsorship of Manor Care, Inc. Hotel Franchise Operations Stock Grant Plan for Choice Hotels International, Inc. Key Management Employees. On the Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole responsibility for all liabilities and obligations under the Manor Care, Inc. Hotel Franchise Operations Stock Grant Plan for Choice Hotels International, Inc. Key Management Employees for all eligible key management employees eligible thereunder after the Distribution Date, and Choice shall have no liability or obligation with respect thereto. At such time as Manor Care stock is released from restriction, Manor Care shall claim a compensation deduction for the then-current value of such stock and shall cause the unrestricted shares of Manor Care stock to be delivered directly to the Employee entitled to such shares, whether or not such Employee is employed by Manor Care or Choice. (d) Manor Care Stock Option Plans. (i) Continuation of Sponsorship of Manor Care, Inc. 1995 Long Term Incentive Plan and Establishment of Choice Hotels International, Inc. Long Term Incentive Plan. On the Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole responsibility for all liabilities and obligations under the Manor Care, Inc. 1995 Long -17- 24 Term Incentive Plan for all Retained Employees and Terminees who are participants in such Plan on the Distribution Date through the issuance of Conversion Awards, subject to the stock adjustment provisions described in Section 2.04(f) below, and Choice shall have no liability or obligation with respect thereto. In addition, Conversion Awards shall be issued to all Choice Employees who were participants in such Plan on the Cutoff Date in accordance with Section 2.04(f). Issuance of a Conversion Award shall be conditioned upon the execution of an appropriate release by the Choice Employee to whom the Conversion Award is conveyed, which release shall acknowledge that such Choice Employee's options to purchase Manor Care Common Stock are cancelled in consideration of receipt of the Conversion Award. Effective as of the Distribution Date, Choice shall take, or cause to be taken, all action necessary and appropriate to establish and administer a new long term incentive plan named the Choice Hotels International, Inc. Long Term Incentive Plan and to provide benefits thereunder after the Distribution Date for all Choice officers and key employees. (ii) Continuation of Sponsorship of Manor Care, Inc. Key Executive Stock Option Plan. On the Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole responsibility for all liabilities and obligations under the Manor Care, Inc. Key Executive Stock Option Plan for all Retained Employees and Terminees who are participants in such Plan on the Distribution Date through the issuance of Conversion Awards, subject to the stock adjustment provisions described in Section 2.04(f) below, and Choice shall have no liability or obligation with respect thereto. In addition, Conversion Awards shall be issued to all Choice Employees who were participants in such Plan on the Cut-off Date in accordance with Section 2.04(f). Issuance of a Conversion Award shall be conditioned upon the execution of an appropriate release by the Choice Employee to whom the Conversion Award is conveyed, which release shall acknowledge that such Choice Employee's options to purchase Manor Care Common Stock are cancelled in consideration of receipt of the Conversion Award. (iii) Continuation of Sponsorship of Manor Care, Inc. Key Executive Stock Option Plan of 1993. On the Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole responsibility for all liabilities and obligations under the Manor Care, Inc. Key Executive Stock Option Plan of 1993 for all Retained Employees and Terminees who are participants in such Plan on the Distribution Date through the issuance of Conversion Awards, subject to the stock adjustment provisions described in Section 2.04(f) below, and Choice shall have no liability or obligation with respect thereto. In addition, Conversion Awards shall be issued to all Choice Employees who were participants in such Plan on the Cut-off Date in accordance with Section -18- 25 2.04(f). Issuance of a Conversion Award shall be conditioned upon the execution of an appropriate release by the Choice Employee to whom the Conversion Award is conveyed, which release shall acknowledge that such Choice Employee's options to purchase Manor Care Common Stock are cancelled in consideration of receipt of the Conversion Award. (e) Manor Care, Inc. 1995 Employee Stock Purchase Plan. (i) Continuation of Sponsorship of Manor Care, Inc. 1995 Employee Stock Purchase Plan. On the Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole responsibility for all liabilities and obligations under the Manor Care, Inc. 1995 Employee Stock Purchase Plan for all Retained Employees and Terminees who are participants in such Plan on the Distribution Date, subject to the stock adjustment provisions described in Section 2.04(f) below, and Choice shall have no liability or obligation with respect thereto. (ii) Establishment of Choice Hotels International, Inc. Employee Stock Purchase Plan. Effective as of the Distribution Date, Choice shall take, or cause to be taken, all action necessary and appropriate to establish and administer a new stock purchase plan named the Choice Hotels International, Inc. Employee Stock Purchase Plan and to provide benefits thereunder after the Distribution Date for all Choice officers and key employees. (f) Effect of the Distribution on Awards Made Prior to the Cut-off Date. (i) Restricted Stock: After the Distribution Date, the grantee of each restricted share of Manor Care Common Stock awarded under the Manor Care, Inc. Nursing Field Operations Stock Grant Plan for Key Management Employees, the Manor Care, Inc. Restricted Stock Plan, the Manor Care, Inc. Hotel Franchise Operations Stock Grant Plan for Choice Hotels International, Inc. Key Management Employees, or the Manor Care, Inc. 1995 Long Term Incentive Plan as of the Cut-off Date shall retain such shares, and shall receive as part of the Distribution ____ restricted shares of Choice Common Stock. The restricted shares of Choice Common Stock received as part of the Distribution will be subject to restrictions identical to those applicable to the underlying restricted shares of Manor Care Common Stock. In the case of Choice Employees, future service for Choice will be treated as service for Manor Care for purposes of determining satisfaction of the restrictions attributable to the Manor Care Common Stock and Choice Common Stock. Restricted shares of Choice Common Stock awarded as part of the Distribution shall be released from restrictions at the same time and on the same schedule as the -19- 26 shares of Manor Care Common Stock retained, under the terms of the restrictions to which the grantee's initial award was subject. (ii) Substitution of Stock Options: Subject to the provisions of Section 2.04(f)(v) and (vi), below, on the Distribution Date, each grantee of a nonqualified award of a Manor Care Stock Option who is a Retained Employee or Terminee shall receive for each such award a Conversion Award, consisting of an option to purchase shares of Manor Care Common Stock equal in number to the number of shares covered by the Manor Care Stock Option, adjusted, however, pursuant to Section 2.04(f)(iv), below. On the Distribution Date, each grantee of a Manor Care Stock Option awarded as an incentive stock option who is a Retained Employee or Terminee shall automatically receive in its place a Conversion Award of an option to purchase shares of Manor Care Common Stock equal in number to the number of shares covered by the Manor Care Stock Option, adjusted, however, pursuant to Section 2.04(f)(iv) below. Subject to the provisions of Section 2.04(f)(v) and (vi), below, on the Distribution Date, each grantee of a nonqualified award of a Manor Care Stock Option who is a Choice Employee shall receive for each such award a Conversion Award, consisting of an option to purchase shares of Choice Common Stock equal in number to the number of shares covered by the Manor Care Stock Option, adjusted, however, pursuant to Section 2.04(f)(iv) below. On the Distribution Date, each grantee of a Manor Care Stock Option awarded as an incentive stock option who is a Choice Employee shall automatically receive in its place a Conversion Award of an option to purchase shares of Choice Common Stock equal in number to the number of shares covered by the Manor Care Stock Option, adjusted, however, pursuant to Section 2.04(f)(iv) below. (iii) Adjustment of Option Price: For purposes of determining the adjusted option price of a Conversion Award replacing a Manor Care Stock Option, the following formula shall be used to maintain the grantee's Aggregate Spread on each outstanding grant of Manor Care Stock Options. The Aggregate Spread on each such outstanding grant shall be maintained by setting the adjusted option price to ensure that the difference between (1) the aggregate total Post-Conversion Stock Price for each Conversion Award of an option to acquire Manor Care Common Stock or Choice Common Stock, as the case may be, and (2) the aggregate adjusted option exercise price for each such Conversion Award, is equal to (3) the Aggregate Spread. In addition, the adjusted option price of each Conversion Award of an option to acquire Manor Care Common Stock or Choice Common Stock, as the case may be, shall be set to maintain the ratio of the exercise price of each Manor Care Stock Option being converted to the Post-Conversion Stock Price of the Common Stock purchasable under the Conversion Award by ensuring that the aforesaid ratio shall -20- 27 equal the ratio of (1) such adjusted option price for the Conversion Award to (2) the Post-Conversion Stock Price of the Common Stock purchasable under the Conversion Award (Manor Care Common Stock or Choice Common Stock, respectively). (iv) Adjustment of Number of Shares Covered by Options: In the case of Conversion Awards of nonqualified stock options or incentive stock options to acquire shares of shares of Manor Care Common Stock or Choice Common Stock, the total number of shares that may be acquired with respect to each such company shall be adjusted as necessary to maintain the Aggregate Spread and ratio described in Section 2.04(f)(iii). (v) Special Election for Employees of Manor Care, Inc.: On or before the Cut-off Date, each holder of a nonvested nonqualified option to acquire Manor Care Common Stock who is a direct employee of Manor Care, Inc. shall make a one-time election with respect to such nonvested nonqualified options, (1) to receive a Conversion Award which relates exclusively to nonvested nonqualified options to acquire Common Stock of the entity (Manor Care or Choice) of which such individual shall be an Employee on the Distribution Date, or (2) to receive a Conversion Award with respect to which (a) one-half of the Aggregate Spread relates to nonvested nonqualified options to acquire Common Stock of the entity of which such individual shall be an employee on the Distribution Date and (b) one-half of the Aggregate Spread is proportionately allocated between nonvested nonqualified options to acquire Manor Care Common Stock and nonvested nonqualified options to acquire Choice Common Stock based upon the relative trading values of Manor Care and Choice on the Distribution Date. A failure to make a timely election shall be deemed to constitute an election to receive a Conversion Award of nonvested nonqualified options relating solely to the entity for which such individual shall become an Employee on the Distribution Date. (vi) Special Election Employees With Respect to Vested Nonqualified Stock Options: On or before the Cut-off Date, each Employee who is a holder of a vested nonqualified stock option to acquire Manor Care Common Stock may make a one-time election to specify the manner in which the Aggregate Spread attributable to such vested nonqualified stock options shall be allocated between a Conversion Award relating to vested nonqualified stock options to acquire Manor Care Common Stock and a Conversion Award relating to vested nonqualified stock options to acquire Choice Common Stock. A failure to make a timely election with respect to such vested nonqualified stock options shall be deemed to constitute an election to receive a single Conversion Award of vested nonqualified options relating solely -21- 28 to the entity for which such individual shall become an Employee on the Distribution Date. (g) Effect of Post-Distribution Transfer on Conversion Awards. Conversion Awards made pursuant to this Section 2.04 of shares of or options in Manor Care Common Stock or Choice Common Stock shall be administered with respect to any provisions relating to continuing employment requirements to give Service Credit for service with the party employing the grantee as of the Distribution Date (Manor Care in the case of Retained Employees and Choice in the case of Choice Employees). Solely with respect to such Conversion Awards (and not with respect to new awards made after the Cut-off Date), for purposes of determining whether a termination of employment has occurred under the terms of any provision requiring continued employment, termination of employment through May 31, 1998 shall not be deemed to occur if an Employee leaves the service of one party to immediately begin employment with the other party (i.e., leaving Manor Care employment to work for Choice, or leaving Choice employment to work for Manor Care); the business operation or business unit from which such Employee terminates employment shall promptly notify the administrator of the Comprehensive Stock Plan of each party of the occurrence of any termination subject to the provisions of this Section 2.04(g). Whichever party is the new employer shall inform the former employer of any termination of employment of such transferred Employee. Any termination of employment other than as described in the preceding sentence shall be treated by applying the applicable provisions of the Comprehensive Stock Plan relating to terminations of employment without the modifications described in this paragraph. Section 2.05 Existing Manor Care Stock Purchase Plan. The Manor Care Stock Purchase Plan shall continue in effect after the Distribution Date and payroll deductions for all eligible Plan participants who are Retained Employees shall continue at the same levels after the Pre-Distribution Purchase Date until the earlier to occur of: (i) final purchase of stock at the end of the Current Plan Year quarter in which the Distribution Date occurs (the "Post-Distribution Purchase") or (ii) the date the participant withdraws from said Plan. Choice shall assume all obligations under said Plan with respect to Post-Distribution Purchases by Choice Employees, who will have the right to acquire Choice Common Stock substituted for their right to acquire Manor Care Common Stock. Retained Employees will have the right to acquire Manor Care Common Stock in the Post-Distribution Purchase. As soon as practicable after the Distribution Date, Manor Care will transfer to the Choice Hotels International, Inc. Stock Purchase Plan a cash amount equal to all contributions made to the Manor Care Stock Purchase Plan by Choice Employees during the Current Plan Year quarter in which the Distribution Date occurs, and such amounts will be used to purchase Choice Common -22- 29 Stock on behalf of such Choice Employees after the end of the Current Plan Year quarter in which the Distribution Date occurs. Section 2.06 Manor Care Welfare Plans and Short-Term Disability Plan. (a) Liability for Claims. Except as otherwise provided herein, as of the Cut-off Date, Manor Care or a Retained Subsidiary shall assume or retain and shall be responsible for, or cause its insurance carriers or HMOs to be responsible for, all liabilities and obligations related to claims incurred through December 31, 1996 in respect of any Employee (whether such claims are asserted before or after December 31, 1996) under any Manor Care Welfare Plan and shall be responsible for claims incurred after December 31, 1996 in respect of any Retained Individual or Terminee under any Manor Care Welfare Plan, and Choice and the Choice Subsidiaries shall have no liability or obligation with respect thereto, except to make contributions to Manor Care in respect of such coverage of Choice Individuals as provided below. Notwithstanding the foregoing, with respect to the pre-tax medical and dependent care programs, Manor Care will retain any funds remaining on January 1, 1997 to pay for any claims incurred under such programs on or prior to December 31, 1996. After all such claims have been paid, Manor Care shall be entitled to retain any remaining funds attributable to the pre-tax medical and dependent care programs. (b) Continuation Coverage Administration. As of the Distribution Date, Manor Care or a Retained Subsidiary shall assume or retain and shall be solely responsible for, or cause its insurance carriers or HMOs to be responsible for, the administration of the continuation coverage requirements imposed by Code Section 4980B and ERISA Sections 601 through 608 as they relate to any Manor Care Qualified Beneficiary, and shall be responsible for the administration of continuation coverage requirements for Choice Individuals through December 31, 1996, and Choice and the Choice Subsidiaries shall have no liability or obligation with respect thereto. (c) Continuation Coverage Claims. As of the Distribution Date, Manor Care or a Retained Subsidiary shall assume or retain and shall be responsible for, or cause its insurance carriers or HMOs to be responsible for, all liabilities and obligations in connection with claims incurred or premiums owed through December 31, 1996, whether asserted before or after December 31, 1996, under any Manor Care Welfare Plan in respect of any Manor Care Qualified Beneficiary or Choice Qualified Beneficiary and shall be responsible for claims incurred or premiums owed after December 31, 1996 under any Manor Care Welfare Plan in respect of any Manor Care Qualified Beneficiary, and Choice and the Choice Subsidiaries shall have no liability or obligation with respect thereto. -23- 30 (d) Continuation of Sponsorship of Manor Care Welfare Plans. As soon as practicable after the date hereof and effective as of the Distribution Date, Manor Care shall take, or cause to be taken, all action necessary and appropriate to continue to administer the Manor Care Welfare Plans and to provide benefits thereunder for all Retained Individuals and Manor Care Qualified Beneficiaries who, immediately prior to the Distribution Date, were participants in or otherwise entitled to benefits under the Manor Care Welfare Plans and to provide benefits through December 31, 1996 to Choice Individuals. Manor Care will assess Choice a monthly amount, described in Section 2.06(e) below, to cover the projected costs of providing continued benefits to Choice Individuals through December 31, 1996 under the Manor Care Welfare Plans. Choice will provide Manor Care, as soon as practicable after the Distribution Date (with the cooperation of Manor Care to the extent that relevant information is in the possession of Manor Care or a Retained Subsidiary, and in accordance with Section 5.02), with a list of individuals (and dependents thereof) employed by Manor Care or any Retained Subsidiary who were, to the best knowledge of Choice, participants in or otherwise entitled to benefits under the existing Manor Care Welfare Plans immediately prior to the Distribution Date, together with a listing of each such individual's Service Credits under such existing Plans and a listing of each such individual's expenses incurred towards deductibles, out-of-pocket limits, maximum benefit payments, and any benefit usage towards plan limits thereunder. (e) Welfare Plan Payments by Choice to Manor Care. Choice shall make monthly payments to Manor Care in an amount equal to $216 multiplied by the number of Choice Employees who are participants in a Manor Care Medical Plan with respect to the time period beginning on the Distribution Date and ending on December 31, 1996. Such payments shall be made to Manor Care on a monthly basis no more than ten (10) days after the end of each month ending after the Distribution Date through December 31, 1996. In consideration of receipt of such payments, Manor Care shall provide the services and benefits described in Section 2.06. It is understood that Choice shall not make any changes in any of the benefit structures attributable to the Manor Care Welfare Plans and will not modify the procedures attributable to the administration and implementation of the Manor Care Welfare Plans. It is also agreed that Choice will be responsible for the funding of any costs attributable to the design, implementation, enrollment, and administration of any Welfare Plans established by Choice to provide coverage to Choice Employees subsequent to December 31, 1996. (f) Continuation of Sponsorship of Manor Care, Inc. Short-Term Disability Plan. On the Distribution Date, Manor Care shall retain (or shall cause a Retained Subsidiary to assume) sole responsibility for all benefit payments due under the Manor -24- 31 Care, Inc. Short-Term Disability Plan with respect to all Retained Employees and Terminees who are participants in such Plan on the Distribution Date and Choice shall have no liability or obligation with respect thereto. Section 2.07 Choice Welfare Plans and Short-Term Disability Plan. (a) Establishment of Choice Welfare Plans. As soon as practicable after the date hereof and effective January 1, 1997, Choice shall take, or cause to be taken, all action necessary and appropriate to establish the Choice Welfare Plans and to provide benefits thereunder for all Choice Individuals who, immediately prior to January 1, 1997, were participants in or otherwise entitled to benefits under the Manor Care Welfare Plans. Each such individual shall, to the extent applicable, for all purposes under the Plans established by Choice (i) have coverage comparable to that provided immediately prior to the Distribution Date and (ii) have no preexisting condition limitation imposed other than that which is or was already imposed under the existing applicable Manor Care Welfare Plans. (b) Liability for Claims. As of January 1, 1997, Choice or a Choice Subsidiary shall assume or retain and shall be responsible for, or cause its insurance carriers or HMOs to be responsible for, all liabilities and obligations in connection with claims incurred or premiums due on and after January 1, 1997 in respect of any Choice Individual, and Manor Care and the Retained Subsidiaries shall have no liability or obligation with respect thereto. (c) Continuation Coverage Administration. As of January 1, 1997, Choice or a Choice Subsidiary shall assume or retain, as the case may be, and shall be solely responsible for, or cause its insurance carriers or HMOs to be responsible for, the administration of the continuation coverage requirements imposed by Code Section 4980B and ERISA Sections 601 through 608 as they relate to any Choice Qualified Beneficiary after December 31, 1996, and Manor Care and the Retained Subsidiaries shall have no liability or obligation with respect thereto. (d) Continuation Coverage Claims. As of the January 1, 1997, Choice or a Choice Subsidiary shall be solely responsible for, or cause its insurance carriers or HMOs to be responsible for, all liabilities and obligations whatsoever in connection with claims incurred or premiums due on and after January 1, 1997 under any Choice Welfare Plans (or successor thereto) in respect of any Choice Qualified Beneficiary, and Manor Care and the Retained Subsidiaries shall have no liability or obligation with respect thereto. Each Choice Qualified Beneficiary shall, to the extent applicable, for all purposes under the Plans provided by Choice (i) have coverage comparable -25- 32 that provided to him or her immediately prior to the Distribution Date and (ii) have no preexisting condition limitation imposed other than that which is or was already imposed under the applicable existing Plan. (e) Establishment of Choice Hotels International, Inc. Short-Term Disability Plan. Effective as of the Distribution Date, Choice shall take, or cause to be taken, all action necessary and appropriate to establish and administer a new short-term disability plan named the Choice Hotels International, Inc. Short-Term Disability Plan and to provide benefits thereunder after the Distribution Date for all Choice Employees, including Choice Employees who had incurred a disability prior to the Distribution Date and who were receiving benefits prior to the Distribution Date under the Manor Care, Inc. Short-Term Disability Plan. Section 2.08 Vacation Pay and Sick Leave Liabilities. (a) Division of Liabilities. Effective on the Distribution Date, Choice shall assume, as to the Choice Employees, and Manor Care shall retain, as to the Retained Employees, all accrued liabilities (whether vested or unvested, and whether funded or unfunded) for vacation leave and sick leave in respect of employees of Manor Care as of the Cut-off Date. Choice shall be solely responsible for the payment of such vacation leave and sick leave to Choice Employees after the Cutoff Date, and Manor Care shall be solely responsible for the payment of such vacation leave and sick leave to Retained Employees after the Cut-off Date. Each party shall provide to its own Employees on the Distribution Date the same vested and unvested balances of vacation leave and sick leave as credited to such Employee on the Manor Care payroll system on the Cut-off Date, and shall continue to accrue vacation leave and sick leave in respect of each such Employee from the Distribution Date at the same rate of accrual as accrued in respect of such individual by Manor Care on the Cut-off Date. (b) Post-Distribution Transfers. Through May 31, 1998, an Employee who leaves the service of one party to immediately begin employment with the other party (i.e., leaving Manor Care employment to work for Choice, or leaving Choice employment to work for Manor Care) shall be provided by the new employer with the same balance of vested and unvested vacation leave and sick leave hours as had been accrued by the old employer through the termination date. The old employer shall promptly notify the new employer in writing of the occurrence of any termination subject to the provisions of this Section 2.08(b), and shall make a payment to such new employer within thirty (30) days of the aforesaid termination date in an amount equal to the value of the terminating Employee's vested balance of vacation leave and sick leave accrued by the old employer -26- 33 through such termination date, based on the Employee's final rate of pay with the old employer. No payment shall be made by the old employer to the new employer for any unvested leave balance. Section 2.09 Employee Discounts. Employees of Choice shall be granted discounts with Manor Care on the same terms and conditions as Manor Care employee discounts, and employees of Manor Care shall be granted discounts with Choice on the same terms and conditions as Choice employee discounts. Such discounts shall be intended to qualify as a fringe benefit excludible from the gross income of employees under Section 132(a) of the Code. This Agreement shall constitute a reciprocal agreement between the parties within the meaning of Section 132(h) of the Code, and the parties shall execute such further documentation as may be required for tax purposes or as otherwise necessary to effect such discounts. In accordance with Section 5.02, each party shall furnish the other with such information as is necessary for the administration of the aforesaid employee discount programs, including but not limited to information on the utilization of the discounts by the employees of such other party. Each party shall be solely responsible for any payroll taxes, excise taxes, corporate income taxes or penalties attributable to the availability of discounts to or utilization by its employees (whether or not such discounts qualify under Section 132(a) of the Code), and the other party shall have no liability or obligation with respect thereto. Section 2.10 Preservation of Right To Amend or Terminate Plans. Except as otherwise expressly provided in Article II, no provisions of this Agreement, including, without limitation, the agreement of Manor Care or Choice, or any Retained Subsidiary or Choice Subsidiary, to make a contribution or payment to or under any Plan herein referred to for any period, shall be construed as a limitation on the right of Manor Care or Choice or any Retained Subsidiary or Choice Subsidiary to amend such Plan or terminate its participation therein which Manor Care or Choice or any Retained Subsidiary or Choice Subsidiary would otherwise have under the terms of such Plan or otherwise, and no provision of this Agreement shall be construed to create a right in any employee or former employee, or dependent or beneficiary of such employee or former employee under a Plan which such person would not otherwise have under the terms of the Plan itself. Section 2.11 Reimbursement. Manor Care and Choice acknowledge that Manor Care and the Retained Subsidiaries, on the one hand, and Choice and the Choice Subsidiaries, on the other hand, may incur costs and expenses, including, but not limited to, contributions to Plans and the payment of insurance premiums arising from or related to any of the Plans which are, as set forth in this Agreement, the responsibility of the other party hereto. Accordingly, Manor Care (and any Retained Subsidiary -27- 34 responsible therefor) and Choice (and any Choice Subsidiary responsible therefor) shall reimburse each other, as soon as practicable, but in any event within thirty (30) days of receipt from the other party of appropriate verification, for all such costs and expenses. Section 2.12 Payroll Reporting and Withholding. (a) Form W-2 Reporting. Choice and Manor Care hereby adopt the "alternative procedure" for preparing and filing IRS Forms W-2 (Wage and Tax Statements), as described in Section 5 of Revenue Procedure 84-77, 1984-2 IRS Cumulative Bulletin 753 ("Rev. Proc. 84-77"). Under this procedure Choice as the successor employer shall provide all required Forms W-2 to all Choice Individuals reflecting all wages paid and taxes withheld by both Manor Care as the predecessor and Choice as the successor employer for the entire year during which the Distribution takes place. Manor Care shall provide all required Forms W-2 to all Retained Individuals reflecting all wages and taxes paid and withheld by Manor Care before, on and after the Distribution Date. In connection with the aforesaid agreement under Rev. Proc. 84-77, each business unit or business operation of Manor Care shall be assigned to either Manor Care or Choice, depending upon whether it is a Retained Business or Choice Business, and each Retained Individual or Choice Individual associated with such business unit or business operation shall be assigned for payroll reporting purposes to Manor Care or Choice, as the case may be. (b) Forms W-4 and W-5. Choice and Manor Care agree to adopt the alternative procedure of Rev. Proc. 84-77 for purposes of filing IRS Forms W-4 (Employee's Withholding Allowance Certificate) and W-5 (Earned Income Credit Advance Payment Certificate). Under this procedure Manor Care shall provide to Choice as the successor employer all IRS Forms W-4 and W-5 on file with respect to each Choice Individual, and Choice will honor these forms until such time, if any, that such Choice Individual submits a revised form. (c) Garnishments, Tax Levies, Child Support Orders, and Wage Assignments. With respect to Employees with garnishments, tax levies, child support orders, and wage assignments in effect with Manor Care on the Cut-off Date, Choice as the successor employer with respect to each Choice Individual shall honor such payroll deduction authorizations and will continue to make payroll deductions and payments to the authorized payee, as specified by the court or governmental order which was filed with Manor Care. (d) Authorizations for Payroll Deductions. Unless otherwise prohibited by this or another agreement entered into in -28- 35 connection with the Distribution, or by a Plan document, with respect to Employees with authorizations for payroll deductions in effect with Manor Care on the Cut-off Date, Choice as the successor employer will honor such payroll deduction authorizations relating to each Choice Individual, and shall not require that such Choice Individual submit a new authorization to the extent that the type of deduction by Choice does not differ from that made by Manor Care. Such deduction types include, without limitation, contributions to any Plan, U.S. Savings Bonds; scheduled loan repayments to the Profit Sharing Plan; and Direct Deposit of Payroll, bonus advances, union dues, employee relocation loans, and other types of authorized company receivables usually collectible through payroll deductions. ARTICLE III LABOR AND EMPLOYMENT MATTERS Notwithstanding any other provision of this Agreement or any other Agreement between Choice and Manor Care to the contrary, Choice and Manor Care understand and agree that: Section 3.01 Separate Employers. On and after the Distribution Date and the separation of Employees into their respective companies, Choice and Manor Care will be separate and independent employers. Section 3.02 Employment Policies and Practices. Subject to the provisions of ERISA and Sections 2.01(b) on Service Credits and 2.04(e) and 2.08(b) governing post-Distribution transfers through May 31, 1998, Choice and Manor Care may adopt, continue, modify or terminate such employment policies, compensation practices, retirement plans, welfare benefit plans, and other employee benefit plans of any kind or description, as each may determine, in its sole discretion, are necessary and appropriate. Section 3.03 Collective Bargaining Agreements. With regard to employees of Manor Care covered by a Collective Bargaining Agreement on the Cut-off Date who become Choice Employees or Retained Employees, Choice and Manor Care promise and covenant to each other not to take any action which disrupts or otherwise negatively impacts the labor relations of the other. Choice and Manor Care will diligently work to substitute the appropriate employer for Manor Care in Collective Bargaining Agreements. Section 3.04 Claims. (a) Scope. This Section is intended to allocate all liabilities for employment-related claims involving Manor Care or -29- 36 Choice including, but not limited to, claims against either or both Manor Care and Choice and their officers, directors, agents and employees, or against or by their various employee benefit plans and plan administrators and fiduciaries. In the event of any conflicting provision of any agreement including, but not limited to, management agreements for hotel properties, this Section 3.04 shall control the allocation of liabilities for employment-related claims. (b) Employment-Related Claims. An employment-related claim shall include any actual or threatened lawsuit, arbitration, ERISA claim, or federal, state, or local judicial or administrative proceeding of whatever kind involving a demand by or on behalf of or relating to Retained Individuals or Choice Individuals, or by or relating to a collective bargaining agent of Employees, or by or relating to any federal, state or local government agency alleging liability against Manor Care or Choice, or against any employee health, welfare, deferred compensation or other benefit plan and their respective officers, directors, agents, employees, administrators, trustees and fiduciaries. (c) Obligation to Indemnify. The duty of a party to indemnify, defend and hold harmless the other party under this Section 3.04 shall include the following obligations of the party having such duty: to provide a legal defense and incur all attorneys fees and litigation costs which may be associated with such a defense; to pay all costs of settlement or judgment where the indemnifying party has the full duty to do so or to pay the full percentage of the party's share when the duty is only a percentage of the full settlement or judgment; and to hold harmless from all claims and costs which may be asserted with or arising from the duty of the indemnifying party to defend and indemnify. (d) Pre-Distribution Claims. (i) Choice shall indemnify, defend and hold harmless Manor Care from any employment-related claims of a Choice Individual arising on or before the Cut-off Date. (ii) Manor Care shall indemnify, defend and hold harmless Choice from any employment-related claims of a Retained Individual arising on or before the Cut-off Date. (e) Distribution and Other Joint Liability Claims. Where employment-related claims alleging or involving joint and several liability asserted against Choice and Manor Care are not separately traceable to liabilities relating to Choice Individuals or Retained Individuals, any liability shall be apportioned between Choice and Manor Care in accordance with the percentage that each party's Employees represents of the combined -30- 37 total number of Employees of both parties, as described below. The percentage of the liability assumed by Choice shall equal the ratio of (i) the total number of Choice Employees on the Distribution Date, to (ii) the combined total number of Choice Employees and Retained Employees on such date. The percentage of the liability assumed by Manor Care shall equal the ratio of (i) the total number of Manor Care Employees on the Distribution Date, to (ii) the combined total number of Choice Employees and Retained Employees on such date. Each party will indemnify, defend, and hold harmless the other to the extent of the indemnifying party's apportioned percentage determined in accordance herewith. (f) Post-Distribution Employment-Related Claims. Employment-related claims arising after the Distribution and division of the Employees between the parties and not relating to, arising from, or in connection with the Distribution, will be the sole responsibility of Choice as to Choice Individuals and of Manor Care as to Retained Individuals. Each Company will indemnify, defend, and hold harmless the other from employment-related claims of the other company. Section 3.05 Funding of Union Plans. Without limitation to the scope and application of Section 3.04, any claims by or on behalf of employees or their collective bargaining agent or any federal, state or local governmental agency for alleged under-funding of, or failure to make payments to, union health, welfare and pension funds based on acts or omissions occurring on or before the Distribution Date or arising from or in connection with the Distribution, or resulting from actuarial recalculation by auditors of the union plans and funds, will be the sole responsibility of each party as to its own employees (i.e., Choice with respect to Choice Individuals, and Manor Care with respect to Retained Individuals), and the responsible party will indemnify, defend, and hold harmless the other from any such claims. Section 3.06 Notice of Claims. Without limitation to the scope and application to each party in the performance of its duties under Section 3.04 and 3.05 herein, each party will notify in writing and consult with the other party prior to making any settlement of an employee claim, for the purpose of avoiding any prejudice to such other party arising from the settlement. Section 3.07 Assumption of Unemployment Tax Rates. Changes in state unemployment tax experience from that of Manor Care as of the Cut-off Date shall be handled as follows. In the event an option exists to allocate state unemployment tax experience of Manor Care, the Manor Care experience shall be transferred to Choice if this results in the lowest aggregate unemployment tax costs for both Manor Care and Choice combined, and the Manor Care experience shall be retained by Manor Care if -31- 38 this results in the lowest aggregate unemployment tax costs for Manor Care and Choice combined. Section 3.08 Intercompany Service Charge. Legal, professional, managerial, administrative, clerical, consulting, and support or production services provided to one party by personnel of the other party, upon the request of the first party or when such services are otherwise required by this Agreement between Choice and Manor Care, shall be charged to the party receiving such services on commercially reasonable terms to be negotiated (or in accordance with the provisions of any applicable agreement between the parties). Section 3.09 WARN Claims. Before and after the Distribution Date, each party shall comply in all material respects with the Worker Adjustment and Retraining Act ("WARN"). Manor Care shall be responsible for WARN claims relating to Retained Individuals or the Employees who prior to the Distribution Date were employed in a Retained Business. Choice shall be responsible for WARN Claims relating to Choice Individuals or to Employees who prior to the Distribution Date were employed in a Choice Business. Each party shall indemnify, defend and hold harmless the other in connection with WARN Claims for which the indemnitor is responsible and which are brought against the indemnitees. Section 3.10 Employees on Leave of Absence. After the Distribution Date, Choice shall assume responsibility, if any, as employer for all Employees returning to Choice or a Choice Business from an approved leave of absence who prior to the Distribution Date were employed in a Choice Business. After the Distribution Date, Manor Care shall assume responsibility, if any, as employer for all Employees returning to Manor Care or a Retained Business from an approved leave of absence who prior to the Distribution Date were employed in a Retained Business. Section 3.11 No Third Party Beneficiary Rights. Neither this Agreement nor any other intercompany agreement between Choice and Manor Care is intended to nor does it create any third party contractual or other common law rights. No person shall be deemed a third-party beneficiary of the agreements between Choice and Manor Care. Section 3.12 Attorney-Client Privilege. The provisions herein requiring either party to this Agreement to cooperate shall not be deemed to be a waiver of the attorney/client privilege for either party nor shall it require either party to waive its attorney/client privilege. ARTICLE IV -32- 39 DEFAULT Section 4.01 Default. If either party materially defaults hereunder, the non-defaulting party shall be entitled to all remedies provided by law or equity (including reasonable attorneys' fees and costs of suit incurred). Section 4.02 Force Majeure. Choice and Manor Care shall incur no liability to each other due to a default under the terms and conditions of this Agreement resulting from fire, flood, war, strike, lock-out, work stoppage or slow-down, labor disturbances, power failure, major equipment breakdowns, construction delays, accident, riots, acts of God, acts of United States' enemies, laws, orders or at the insistence or result of any governmental authority or any other delay beyond each other's reasonable control. ARTICLE V MISCELLANEOUS Section 5.01 Relationship of Parties. Nothing in this Agreement shall be deemed or construed by the parties or any third party as creating the relationship of principal and agent, partnership or joint venture between the parties, it being understood and agreed that no provision contained herein, and no act of the parties, shall be deemed to create any relationship between the parties other than the relationship set forth herein. Section 5.02 Access to Information; Cooperation. Manor Care and Choice and their authorized agents will be given reasonable access to and may take copies of all information relating to the subjects of this Agreement (to the extent permitted by federal and state confidentiality laws) in the custody of the other party, including any agent, contractor, subcontractor, agent or any other person or entity under the contract of such party. The parties will provide one another with such information within the scope of this Agreement as is reasonably necessary to administer each party's Plans. The parties will cooperate with each other to minimize the disruption caused by any such access and providing of information. Section 5.03 Assignment. Neither party shall, without the prior written consent of the other, have the right to assign any rights or delegate any obligations under this Agreement. Section 5.04 Headings. The headings used in this Agreement are inserted only for the purpose of convenience and reference, and in no way define or limit the scope or intent of any provision or part hereof. -33- 40 Section 5.05 Severability of Provisions. Neither Manor Care nor Choice intend to violate statutory or common law by executing this Agreement. If any section, sentence, paragraph, clause or combination of provisions in this Agreement is in violation of any law, such sections, sentences, paragraphs, clauses or combinations shall be inoperative and the remainder of this Agreement shall remain in full force and effect and shall be binding upon the parties. Section 5.06 Parties Bound. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing herein, expressed or implied, shall be construed to give any other person any legal or equitable rights hereunder. Section 5.07 Notices. All notices, consents, approvals and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given when delivered personally or by overnight courier or three days after being mailed by registered or certified mail (postage prepaid, return receipt requested) to the named representatives of the parties at the following addresses (or at such other address for a party as shall be specified by like notice, except that notices of changes of address shall be effective upon receipt): (a) if to Manor Care MANOR CARE, INC. 11555 Darnestown Road Gaithersburg, MD 20878-3200 Attention: GENERAL COUNSEL (b) if to Choice CHOICE HOTELS INTERNATIONAL, INC. 10750 Columbia Pike Silver Spring, MD 20901 Attention: GENERAL COUNSEL Choice agrees that, upon the request of Manor Care, Choice will give copies of all of its notices, consents, approvals and other communications hereunder to any lender to Manor Care or other person specified by Manor Care. Section 5.08 Further Action. Choice and Manor Care each shall cooperate in good faith and take such steps and execute such papers as may be reasonably requested by the other party to implement the terms and provisions of this Agreement. Section 5.09 Waiver. Choice and Manor Care each agree that the waiver of any default under any term or condition of -34- 41 this Agreement shall not constitute a waiver of any subsequent default or nullify the effectiveness of that term or condition. Section 5.10 Governing Law. All controversies and disputes arising out of or under this Agreement shall be determined pursuant to the laws of the State of Maryland, regardless of the laws that might be applied under applicable principles of conflicts of laws. Section 5.11 Consent to Jurisdiction. The parties irrevocably submit to the exclusive jurisdiction of (a) the Courts of the State of Maryland, Montgomery County, or (b) any federal district court in the State of Maryland where there is federal jurisdiction for the purpose of any suit, action or other Court proceeding arising out of this Agreement. Section 5.12 Entire Agreement. This Agreement and the Distribution Agreement constitute the entire understanding between the parties hereto, and supersede all prior written or oral communications, relating to the subject matter covered by said agreements. No amendment, modification, extension or failure to enforce any condition of this Agreement by either party shall be deemed a waiver of any of its rights herein. This Agreement shall not be amended except by a writing executed by the parties. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. MANOR CARE, INC., a Delaware corporation By:_______________________________________________ Name:_____________________________________________ Title:____________________________________________ CHOICE HOTELS HOLDINGS, INC., a Delaware corporation By:_______________________________________________ Name:_____________________________________________ Title:____________________________________________ - 35 - 42 EXHIBIT A HEALTH AND WELFARE PLANS * Medical plans * Dental Plan * HMOs * Group-Term Life * Pretax Spending Accounts * Hyatt Legal Services * Long-term Disability * Accidental Death & Dismemberment EX-10.8 10 OFFICE LEASE 1 EXHIBIT 10.08 OFFICE LEASE BY AND BETWEEN CHOICE HOTELS HOLDINGS, INC. A DELAWARE CORPORATION (TO BE RENAMED CHOICE HOTELS INTERNATIONAL, INC.) "TENANT" AND MANOR CARE, INC., A DELAWARE CORPORATION "LANDLORD" AT 10720, 10750, AND 10770 COLUMBIA PIKE SILVER SPRING, MARYLAND 20901 2 INDEX
Title Page # Article I. Definitions and Certain Basic Provisions 1 Article II. Granting Clause 2 Article III. Rental 2 Article IV. Cafeteria and Fitness Center Article V. Construction and Acceptance of the Demised Premises 5 Article VI. Uses and Care of Demised Premises 6 Article VII. Landlord's Services 7 Article VIII. Alterations 9 Article IX. Landlord's Right of Access and Use 9 Article X. Signs 10 Article XI. Utilities 10 Article XII. Indemnity, Public Liability Insurance and Fire and Extended Coverage Insurance 10 Article XIII. Tenant's Insurance 10 Article XIV. Non-Liability for Certain Damages 11 Article XV. Damage by Casualty 12 Article XVI. Eminent Domain 12 Article XVII. Assignment and Subletting 13 Article XVIII. Default by Tenant and Remedies 13 Article XIX. Holding Over 16 Article XX. Subordination and Attornment; 16 Article XXI Estoppel Certificate Article XXII. Notices 17 Article XXIII. Brokers 17 Article XXIV. Approval and Changes Required by Lender 17 Article XXV. Parking 17 Article XXVI. Waiver of Trial by Jury 18 Article XXVII. Furnishing of Financial Statements 18 Article XXVIII. Occupational and Environmental Compliance 18 Article XXIX. Miscellaneous 19 Article XXX. Attachments 21
3 OFFICE LEASE This Lease is entered into this ____ day of ______________ 1996, by and between Manor Care, Inc. a Delaware corporation ("Landlord") and Choice Hotels Holdings, Inc., a Delaware corporation (to be renamed Choice Hotels International, Inc.) ("Tenant"). RECITALS: A. Landlord is implementing a restructuring of itself in which, among other things, it will distribute to its shareholders all of the common stock of Tenant, pursuant to a Distribution Agreement dated as of ____________________, 1996, between Landlord and Tenant (the "Distribution Agreement") as a result of which Landlord and Tenant will become separate publicly traded corporations. B. Landlord and Tenant occupy space together in an office complex in Silver Spring, Maryland, owned by Landlord, and desire to provide in this Lease for the continuing occupancy by Tenant, after said stock distribution, of premises in said office complex. C. Landlord and Tenant each have determined that the rental and other terms and conditions of this Lease are commercially reasonable, based upon market conditions in the Silver Spring, Maryland area. ARTICLE I. DEFINITIONS AND CERTAIN BASIC PROVISIONS. 1.1 (a) "LANDLORD": Manor Care, Inc, a Delaware corporation (b) "LANDLORD'S ADDRESS": 11555 Darnestown Road Gaithersburg, Maryland 20878-3200 Attn.: General Counsel (Re: Real Estate) (c) "TENANT": Choice Hotels Holdings, Inc., a Delaware corporation (to be renamed Choice Hotels International, Inc.) (d) "TENANT'S ADDRESS": 10750 Columbia Pike Silver Spring, Maryland 20910 Attn.: General Counsel (Re: Real Estate)
(e) "COMPLEX" shall refer to the complex of three office buildings on the western side of Columbia Pike, known as 10720 Columbia Pike (hereinafter the "10720 Building"), 10750 Columbia Pike (hereinafter the "10750 Building"), and 10770 Columbia Pike (hereinafter the ("10770 Building"). A plan of the Complex is attached hereto as Exhibit A. (f) "DEMISED PREMISES": (i) approximately 87,969 rentable square feet of office space, consisting of 13,895 rentable square feet on the first and second floors of the 10720 Building and the entire 10750 Building with 74,074 rentable square feet. The Demised Premises are more particularly shown in the plan attached hereto as Exhibit B. If Tenant desires to add to the Demised Premises any vacant space in the 10720 Building, Tenant shall notify Landlord and such space shall be added to the Demised Premises unless (i) Landlord requires such space or any part thereof for Landlord's own use, or (ii) Landlord has committed to lease such space or any portion thereof to a tenant unrelated to Landlord. (g) "LEASE TERM": The period of time commencing from the Commencement Date, as defined below, and terminating thirty (30) months after such Commencement Date, unless such 1 4 termination date is other than the last day of a calendar month, in which event this Lease shall terminate on the last day of the calendar month in which such date falls. Landlord shall give Tenant prior written notice of the proposed sale of the Complex or any building therein. Either party may elect to terminate this Lease effective as of the date of such sale by written notice given to the other party within thirty (30) days after Tenant's receipt of such notice of sale. (h) "LEASE YEAR": In the case of the first Lease Year, that period from the Commencement Date to May 31, 1997. Thereafter, "Lease Year" shall mean each successive twelve (12) month period from June 1 to May 31 following the expiration of the first Lease Year, except that the last Lease Year shall be the period from June 1 to the termination date of this Lease. (i) "COMMENCEMENT DATE": the Distribution Date under the Distribution Agreement. If the Commencement Date does not occur prior to May 31, 1997, either Landlord or Tenant may terminate this Lease by written notice to the other party. (j) "ANNUAL BASE RENT": See Section 3.1 (k) "PERMITTED USE": General Office Use. Warehouse and storage use shall be permitted in the Warehouse Building. ARTICLE II. GRANTING CLAUSE. 2.1. In consideration of the obligation of Tenant to pay rent and other charges as provided in this Lease and in consideration of the other included terms, covenants and conditions, Landlord Demises and Leases to Tenant, and Tenant Leases from Landlord, the Demised Premises as described in ARTICLE I, SECTION 1.1(F) TO HAVE AND TO HOLD said premises for the Lease Term specified in ARTICLE I, SECTION 1.1(G), all upon the terms and conditions set forth in this Lease. Landlord expressly reserves the right to name or change the name of the Complex or any building therein without notice to the Tenant. ARTICLE III. RENTAL 3.1 BASE RENT. Tenant shall pay to Landlord monthly rental installments in an amount equal to 1/12th of the Annual Base Rent (as hereinafter defined) in advance, without demand, deduction, counterclaim or offset, and without relief from valuation and appraisement laws or any other deduction for any reason whatsoever, on or before the first day of each and every calendar month during the term of this Lease; provided, however, that if the Commencement Date shall be on a day other than the first day of the calendar month or the expiration date shall be a day other than the last day of the calendar month, the monthly rental installment for such first or last fractional month shall be prorated on the basis of the number of days during the month this Lease was in effect in relation to the total number of days in such month. Annual Base Rent for each Lease Year shall be calculated in accordance with the following formula: Annual Base Rent = (1- Manor Care Occupancy Percentage) x (Operating Expenses - Third Party Rental Income) Capitalized terms used in said formula shall have the meanings given to them in Section 3.2 below. At Landlord's sole discretion, at any time and from time to time during the term of this Lease upon written notice to Tenant, Landlord may elect that instead of using the aforesaid formula to calculate Annual Base Rent, Annual Base Rent shall be the number of square feet of space in the Demised Premises times the "Alternate Rent" as hereinafter defined. The Alternate Rent shall be the annual fair market rental value per square foot for the Demised Premises in their "as is" condition for the remaining Lease Term, as reasonably determined by Landlord based on quoted rental rates at comparable office buildings in the Silver Spring, Maryland area. Should Landlord so elect, the parties will enter into an amendment to this Lease establishing the new Annual Base Rent and providing that Tenant shall pay its pro rata share (based on the ratio of the number of square feet in the Demised Premises to the number of square feet in the Complex) of increases in real estate taxes and operating 2 5 expenses over a base year, with the terms "real estate taxes", "operating expenses" and "base year" being defined consistent with the definitions of such terms in leases of space in the Complex to tenants unrelated to Landlord. 3.2 DEFINITIONS. For the purpose of this Lease, the following definitions shall apply: (a) "MANOR CARE OCCUPANCY PERCENTAGE" shall mean the ratio of (i) the number of rentable square feet in the Complex occupied by Manor Care, Inc., a Delaware corporation, or any person or entity which directly or indirectly controls, is controlled by, or is under common control with, Manor Care, Inc., as of the commencement of the Lease Year in question; to (ii) the total number of rentable square feet in the Complex, as the Complex may be altered or enlarged in Landlord's discretion from time to time. The parties agree that as of the Commencement Date the total number of rentable square feet in the Complex is 226,010, consisting of 66,855 square feet in the 10720 Building, 74,074 square feet in the 10750 Building, and 85,081 square feet in the 10770 Building. For the purposes of the preceding sentence (and also for purposes of Section 3.2(c) and 17.1 of this Lease), in order for an entity to control another, it must have voting control of and own greater than fifty percent (50%) of every class of stock entitled to vote and/or other voting equity interest of the other entity, in the case that the other entity is a corporation; it must own greater than fifty percent (50%) of the partnership interests in the assets, liabilities, income, loss and distributions of the other entity, in the case that the other entity is a partnership; it must be the sole beneficiary of the other entity, in the case that the other entity is a trust. The parties further agree that as of the Commencement Date, Manor Care, Inc. occupies 69,750 rentable square feet in the Complex. (b) "OPERATING EXPENSES" shall mean any and all expenses incurred by Landlord in connection with the servicing, operation, maintenance and repair of the Complex and related appurtenances, including, but not limited to: (1) wages and salaries of all employees engaged in operation, maintenance, or security of the Complex including taxes, insurance and benefits relating thereto; (2) all supplies and materials used in operation, maintenance or security of the Complex; (3) cost of all maintenance and service agreements for the Complex and the equipment therein, including but not limited to security and energy management services, window cleaning and elevator maintenance; (4) cost of all insurance relating to the Complex including the cost of casualty and liability insurance applicable to the Complex and Landlord's personal property used in connection therewith; (5) cost of repairs and general maintenance, whether structural or non-structural, but excluding repairs and general maintenance paid with proceeds of insurance or by Tenant or third parties; (6) a management fee for the manager of the Complex, who may be Landlord or an affiliate of Landlord; (7) the cost of any additional services provided to the Complex by or on behalf of the Landlord in the prudent management of the Complex; (8) the cost of any capital improvements or alterations made to the Complex after the Commencement Date (and the entire cost of such capital improvements shall be included in Operating Expenses in the Lease Year in which such cost was paid or incurred); (9) leasing commissions, free rent, lease takeover obligations and other inducements, costs, disbursements and expenses incurred in connection with leasing space at the Complex; (10) costs incurred in constructing, improving, renovating or decorating rented space or space for tenants; (11) costs of environmental inspection, testing or cleanup; (12) payments of principal, interest, and other costs relating to indebtedness secured by mortgages or deeds of trust against the Complex or any portion thereof; (13) costs incurred in leasing equipment, including air conditioning systems, elevators, or other equipment ordinarily considered to be of a capital nature; (14) depreciation and amortization of the buildings and improvements in the Complex, in accordance with generally accepted accounting principles (15) security services; (16) trash collection; (17) janitorial and cleaning services; (18) all charges of utility companies or governmental entities for electricity, water, sewer, gas or other utilities (excluding telephone) supplied to the Complex; (19) taxes, assessments and governmental charges of any kind and nature whatsoever (hereinafter collectively referred to as "Taxes") levied or assigned against the Complex or any part thereof, and all expenses incurred by Landlord in attempting to protest, reduce or minimize taxes; (20) ground rents, and payments under any financing leases of the Complex or any portion thereof; (21) any operating loss resulting from Landlord's operation of a cafeteria or fitness center in the Complex; (22) costs of the "employee store" and other services provided by the "Employee Service Center"at the Complex; and (23) costs of mailroom/shipping and receiving services provided by Landlord. (c) "THIRD PARTY RENTAL INCOME" shall mean all rental income actually received by Landlord from tenants or occupants (excluding Tenant) of space in the Complex during the Lease 3 6 Year in question, other than any person or entity which controls, is controlled by, or is under common control with, Manor Care, Inc. 3.3 As part of the rental arrangements between Landlord and Tenant, Tenant has specifically reviewed, approved, and agreed to pay as herein provided, each and every item in the foregoing definition of Operating Expenses. 3.4 PAYMENT OBLIGATION: (a) Annual Base Rent shall be paid by Tenant to Landlord in advance, in equal monthly installments, in an estimated amount reasonably determined by Landlord prior to the commencement of the first Lease Year and each subsequent Lease Year . (Landlord may revise its estimate at any time during a Lease Year). Within a reasonable time following the end of each Lease Year, Landlord shall submit to Tenant a statement which shall include a comparison of (I) the Annual Base Rent therefore paid by Tenant for the Lease Year in question on the basis of Landlord's estimate, and (II) Tenant's actual obligation for Annual Base Rent for the Lease Year in question as determined by Landlord. Any excess paid by Tenant, as disclosed by such comparison, shall be credited against Tenant's next due installment(s) of Annual Base Rent, and any additional sums disclosed by such comparison as being due to Landlord by Tenant shall be paid to Landlord within thirty (30) days following delivery to Tenant of such statement (including any statement delivered after the expiration or termination of the Term). However, for the Lease Year during which the term of this Lease ends, any excess paid by Tenant to Landlord and due to Tenant shall be promptly refunded to Tenant. (b) Tenant or its accountants shall have the right to inspect, at reasonable times and in a reasonable manner and at the Landlord's offices or such other place designated by Landlord, during the thirty (30) day period following the delivery of Landlord's statement of the actual amount of Tenant's Annual Base Rent for a particular Lease Year, such of Landlord's books of account and records as pertain to and contain information concerning the Operating Expenses, the Manor Care Occupancy Percentage and Third Party Rental Income in order to verify the amounts thereof. In the event Tenant elects not to inspect Landlord's books of account and records during said thirty (30) day period, such election or failure to inspect shall constitute Tenant's unconditional waiver of any and all rights to inspect Landlord's books of account and records for the subject period and Tenant shall be forever estopped from challenging or questioning the amount of its Annual Base Rent for said period. In the event of any disagreement or dispute between Tenant and Landlord concerning Landlord's statement, the decision of Landlord's Chief Financial Officer shall be final and unreviewable. 3.5 Tenant shall be liable for all taxes levied against personal property and trade fixtures placed by Tenant on the Complex. If any such taxes are levied against Landlord or Landlord's property, and if Landlord elects to pay the same or if the assessed value of Landlord's property is increased by inclusion of personal property and trade fixtures placed by Tenant on the property and Landlord elects to pay the taxes based on such increase, Tenant shall pay to Landlord as additional rent hereunder, upon demand, the amount of such taxes paid by Landlord. 3.6 If at any time during the term of this Lease, the present method of taxation shall be changed so that in lieu of the whole or any part of any taxes, assessments, levies, or charges levied, assessed or imposed on the Complex there shall be levied, assessed or imposed on Landlord a capital levy or other tax directly on the rents received therefrom and/or a franchise tax assessment, levy or charge measured by or based, in whole or in part, upon such rents on the present or any future building or buildings in the Complex, then all such taxes, assessments, levies or charges, or the part thereof so measured or based, shall be deemed to be included within the term "Taxes" for the purposes hereof. 3.7 LATE CHARGE. In the event Tenant fails to pay to Landlord, when due, any installment of rental or other sum to be paid to Landlord which may become due in this Lease, Landlord will incur additional expenses in an amount not readily ascertainable and which has not been elsewhere provided for between Landlord and Tenant. If Tenant should fail to pay to Landlord, when due, any installment of rental or other sum to be paid hereunder, such unpaid amount shall bear interest from the due date thereof to the date of payment at an annual rate equal to the lesser of twelve percent (12%) or the highest rate permitted by law. Provision for such late charge shall be in addition to all 4 7 other rights and remedies available to Landlord within this Lease or at law or in equity and shall not be construed as liquidated damages or limiting Landlord's remedies in any manner. 3.8 All payments to be made by Tenant to Landlord pursuant to this Lease shall be made by check payable to Landlord, and delivered to Landlord at Landlord's Address or to such other person and place as may be designated by notice in writing from Landlord to Tenant from time to time. 3.9 Unless otherwise agreed in writing between Landlord and Tenant, no payment by Tenant or receipt by Landlord of a lesser amount than the monthly installments of rent stipulated shall be deemed to be other than on account of the above-stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payments as rent be deemed an accord with satisfaction, and Landlord may accept such check for payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided. ARTICLE IV. CAFETERIA AND FITNESS CENTER 4.1 For as long as Landlord chooses to operate a cafeteria and/or fitness center at the Complex, Tenant's officers and employees shall have the right to use such facilities on a non-exclusive basis in common with Landlord's officers and employees and others entitled thereto, upon payment of the current fees and charges for such use. In Landlord's sole and unreviewable discretion and without notice to Tenant, Landlord may discontinue operation of the cafeteria and/or fitness center at any time. ARTICLE V. ACCEPTANCE OF THE DEMISED PREMISES. 5.1 The Demised Premises are leased to Tenant in "AS IS" condition. Landlord shall have no obligation to make any improvements or alterations to prepare the Demised Premises for Tenant's use. By taking possession of the Demised Premises, Tenant shall be deemed to have accepted the same and to have acknowledged that the same fully comply with Landlord's covenants and obligations under this Lease. Tenant further agrees that, if requested by Landlord, Tenant will furnish Landlord with a written statement that Tenant has accepted the Demised Premises and that Landlord has fully complied with Landlord's covenants and obligations. ARTICLE VI. USES AND CARE OF PREMISES. 6.1 The Demised Premises may be used only for the purpose or purposes specified in ARTICLE I, SECTION 1.1(K) above, and for no other purpose or purposes without the prior written consent of Landlord. 6.2 Tenant shall not use the Demised Premises for any unlawful purposes or acts; shall not commit or permit any waste or damage to the Demised Premises; shall use and maintain the Demised Premises in compliance with (I) all laws, codes, ordinances, rules, regulations and orders (collectively "Laws") of any governmental authority or agency, including, without limitation, those governing zoning, health, safety (including fire safety), and the occupational hazards, pollution and environmental control, and handicapped accessibility (including but not limited to any such laws imposing upon Landlord or Tenant any duty respecting or triggered by any change in use or occupancy or any alteration or improvement of, in or to the Demised Premises, and (II) all reasonable directions of the Landlord, including the building rules and regulations, attached hereto as EXHIBIT "C", as may be modified from time to time by Landlord on reasonable notice to Tenant. Tenant shall use his best efforts to cause its agents, employees, customers, invitees, licensees, and concessionaires to comply with the building rules and regulations and with the covenants and agreements of this Section . 6.3 Tenant shall not, without Landlord's prior written consent, keep anything within the Demised Premises for any purpose which increases the insurance premium costs or invalidates any insurance policy carried on the Demised Premises or other part of the property. Tenant shall pay as additional rent, upon demand of Landlord, any such increased premium cost due to Tenant's use or occupation of the property. All property kept, stored or maintained within the property by Tenant shall be at Tenant's sole risk. 5 8 6.4 Tenant shall not conduct within the Demised Premises any fire, auction, going out of business, liquidation or bankruptcy sales or operate within Demised Premises a "Wholesale" or "Factory Outlet" store, a cooperative store, a "Second Hand" store, a "Surplus" store or a store commonly refereed to as a "Discount House." Tenant shall not advertise that it sells products or services at "discount," "cut-price" or "cut-rate" prices. Tenant shall not permit any objectionable or unpleasant odors to emanate from the Demised Premises, nor place or permit any radio, television, loud-speaker, or amplifier on the roof or outside of the Demised Premises, or where the same can be seen or heard from outside the Demised Premises, nor place an antenna, awning, or other projection on the exterior of the Demised Premises; nor solicit business or distribute leaflets or other advertising material on the property outside the Demised Premises; nor take any other action which, in the exclusive judgment of Landlord, would constitute a nuisance or would disturb or endanger other tenants of the Building or unreasonably interfere with their use of their respective premises, nor do anything which would tend to injure the reputation of the Building. 6.5 Tenant shall take good care of the Demised Premises and keep the same free from waste at all times. Tenant shall keep the Demised Premises and sidewalks, service-ways, and loading areas adjacent to the Demised Premises neat, clean and free from dirt, rubbish, insects and pests at all times, and shall store all trash and garbage within the Demised Premises, arranging for the regular pickup of such trash and garbage at Tenant's expense. Tenant will store all trash and garbage within the area designated by Landlord for such trash pickup and removal and only in receptacles of the size, design and color from time to time prescribed by Landlord. Receiving and delivery of goods and merchandise and removal of garbage and trash shall be made only in the manner and areas from time to time prescribed by Landlord. Landlord may, at its sole option, arrange for collection of all trash and garbage and, should Landlord exercise such election, the costs thereof will be part of Operating Expenses. Tenant shall not operate an incinerator or burn trash or garbage within the property. 6.6 Tenant shall not move any furniture or equipment into or out of the Demised Premises except at such times as Landlord may from time to time designate in writing to all tenants. 6.7 Tenant shall include the address and identity of its business activities in the Demised Premises in all advertisements made by Tenant in which the address and identity of any similar local business activity of Tenant is mentioned. 6.8 Tenant shall not allow any animals other than seeing eye dogs onto the property whatsoever. 6.9 Tenant shall procure, at its sole expense, any permits and licenses required for the transaction of business in the Demised Premises and otherwise comply with all applicable laws, ordinances and governmental regulations. Landlord makes no representation or warranty, expressed or implied, with regard to the fitness of the Demised Premises or the property for the Tenant's intended use or for any particular purpose. Tenant shall bear the cost of all alterations or improvements to the property required by any applicable laws, ordinances or governmental regulation based upon Tenant's use of the property. ARTICLE VII. LANDLORD'S SERVICES. 7.1 Landlord covenants and agrees that it will provide the following services, the cost of which shall be included in Operating Expenses: (a) keep the foundation, the exterior walls and roof of the Demised Premises in good repair; (b) provide heat and air conditioning to maintain the Demised Premises at a reasonably comfortable temperature between the hours of 8:00 a.m. and 6:00 p.m., Monday through Friday of each week, and 8:00 a.m. and 1:00 p.m. on Saturday of each week, except holidays recognized by the United States Government. Landlord shall endeavor to provide HVAC during hours other than the hours of full operation of the Building, upon request by Tenant at least twenty-four (24) hours prior to the time Tenant desires such service. Tenant agrees to cooperate fully with Landlord and to abide by all the regulations and requirements which Landlord may reasonably prescribe for the proper functioning and protection of the HVAC equipment and to pay the cost of any damage resulting from Tenant's failure to comply with the foregoing provisions; 6 9 (c) provide electricity for lighting purposes and operation of ordinary office equipment, excluding, however, computers other than personal computers, and other equipment requiring heavier than normal office use of electricity. Within fifteen (15) days from the date of this Lease, Tenant shall submit to Landlord its list of office equipment. Within fifteen (15) days from receipt of such list, Landlord shall inform Tenant whether Landlord, in its reasonable discretion, has determined that such equipment satisfies the requirements of this SECTION 7.1(c). (d) provide janitor services Monday through Friday of each week, except holidays recognized by the United States Government, it being understood and agreed, however, that Landlord shall not be liable in any way for any damage or inconvenience caused by the cessation or interruption of such heating, air conditioning, electricity, elevator, janitor services occasioned by fire, accident, strikes, necessary maintenance, alterations, or repairs, or other causes beyond Landlord's control. It is understood that employees of Landlord are prohibited as such from receiving any packages or other articles delivered to the Building for Tenant and that, should any such employee receive any such packages or articles, he or she in so doing shall be the agent of Tenant and not of Landlord. (e) provide hot and cold water and lavatory supplies, it being understood and agreed that hot and cold water shall be furnished by Landlord only at those points of supply provided for general use of other tenants in the Building as well as to Tenant's kitchen; (f) provide automatically operated elevator service at all times; (g) list the Tenant's trade name on the Building directory located in the entrance lobby. 7.2 In the event any public utility company supplying energy, water, sewer or other utility, or governmental law, regulation, executive or administrative order requires that Landlord or Tenant reduce or maintain at a certain level the consumption of a utility and such requirement affects the HVAC, light, use of or hours of operation of the premises or Building, Landlord and Tenant shall each adhere to and abide by said laws, regulations or executive orders without any reduction in Rent. 7.3 Failure by Landlord to any extent to furnish the above described services, or any cessation thereof, shall not render Landlord liable for damages to either person or property, nor be construed as an eviction of Tenant, nor give Tenant the right to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement hereof, unless such failure to provide services is a result of the gross negligence of Landlord or Landlord's agents. Should any of the Building equipment or machinery break down, or for any cause cease to function properly, Landlord shall use reasonable diligence to repair the same promptly, and Tenant shall have no claim for an abatement of rent or damages on account of any interruptions in service occasioned thereby or resulting therefrom. 7.4 Landlord shall not be required to make any repairs occasioned by the act or negligence of Tenant, its agents, employees, subtenants, licensees and concessionaires, which repairs shall be made by Tenant. In the event that the Demised Premises should become in need of repairs required to be made by Landlord hereunder, Tenant shall give immediate written notice thereof to Landlord and Landlord shall not be responsible in any way for failure to make such repairs until a reasonable time shall have elapsed after delivery of such written notice. Landlord's obligation hereunder is limited to repairs specified in this article only, and Landlord shall have no liability for any damages or injury arising out of any condition or occurrence causing a need for such repairs. The cost of such repairs and maintenance shall be included in the Operating Expenses. There shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the property or in or to any fixtures, appurtenances and equipment therein or thereon. 7.5 Tenant shall furnish, maintain and replace all Building Non-Standard electric light bulbs, tubes and tube casings. 7.6 Tenant shall keep the Demised Premises in good clean condition and shall, at its sole cost and expense, make all needed repairs and replacements including replacement of cracked or broken glass, except for repairs and replacements expressly required to be made by Landlord under 7 10 the provisions of ARTICLE VII, SECTION 7.1, ARTICLE XI, SECTION 11.1 and ARTICLE XV, SECTION 15.3. If any repairs required to be made by Tenant hereunder are not made within three (3) days after written notice delivered to Tenant by Landlord, Landlord may, at its discretion, make such repairs without liability to Tenant for any loss or damage which may result to its stock or business by reason of such repairs, and Tenant shall pay to Landlord immediately upon demand as additional rental hereunder the cost of such repairs plus ten percent (10%) of the amount thereof and failure to do so shall constitute an event of default hereunder. At the expiration of this Lease, Tenant shall surrender the Demised Premises in good condition, reasonable wear and tear excepted, and shall surrender all keys for the Demised Premises to Landlord and shall inform Landlord of all combinations on locks, safes and vaults, if any, in the Demised Premises. ARTICLE VIII. ALTERATIONS. 8.1 Tenant shall not make any alterations, additions, or improvements to the Demised Premises without the prior written consent of Landlord, which Landlord may grant or deny in its sole discretion with respect to structural alterations, except for the installation of unattached, movable trade fixtures which may be installed without drilling, cutting or otherwise defacing the Demised Premises. Landlord shall not unreasonably withhold or delay its consent with respect to non-structural alterations. All alterations, additions, improvements and fixtures, except that any Alterations, fixtures or any other property installed in the Demised Premises at the sole expense of Tenant and which can be removed without causing material damage to the Building, shall remain upon and be surrendered with the Demised Premises and become the property of Landlord at the termination of this Lease, unless Landlord requests their removal in which event Tenant shall remove the same and restore the Demised Premises to their original condition at Tenant's expense. Any linoleum, carpeting or other floor covering which may be cemented or otherwise affixed to the floor of the Demised Premises is a permanent fixture and shall become the property of the Landlord without credit or compensation to Tenant. 8.2 All construction work done by Tenant within the Demised Premises shall be performed in a good and workmanlike manner, in compliance with all governmental requirements, and the requirements of any contract or deed or trust to which the Landlord may be a party and in such manner as to cause a minimum of interference with other construction in progress and with the transaction of business in the Building. Tenant agrees to indemnify Landlord and hold it harmless against any loss, liability or damage resulting from such work, and Tenant shall, if requested by Landlord, furnish bond or other security satisfactory to Landlord against any loss, liability or damage. ARTICLE IX. LANDLORD'S RIGHT OF ACCESS AND USE. 9.1 Landlord shall have the right to enter upon the Demised Premises at any reasonable time for the purpose of inspecting the same, or of making repairs to the Demised Premises, or of making repairs, alterations or additions to adjacent premises, or of showing the Demised Premises to prospective purchasers, Tenants or lenders. 9.2 Landlord may, within one hundred twenty (120) days prior to the expiration of the term, post and maintain notices, free from hindrance or control of Tenant. 9.3 Use of the roof above the Demised Premises is reserved to Landlord. 9.4 In addition to the rights specified elsewhere in this Lease, Landlord shall have the following rights regarding the use of the Demised Premises or the property by Tenant, its employees, agents, customers and invitees, each of which may be exercised without notice or liability to Tenant: (a) Landlord may install such signs, advertisements or notices or Tenant identification information on or in the Building, on the property or on the directory board or Tenant access doors as it shall deem necessary or proper. (b) Landlord shall approve or disapprove, prior to installation, all types of drapes, shades and other window coverings used in the Demised Premises, and may control all internal lighting and signage that may be visible from outside the Demised Premises. 8 11 (c) Landlord may grant to any person the exclusive right to conduct business or render any service in the Building, provided that such exclusive right shall not operate to limit Tenant from using the Demised Premises for the use permitted in ARTICLE I, SECTION 1.1(k). (d) Landlord may control the use of the property in such manner as it deems necessary or proper, including by way of illustration and not limitation: requiring all persons entering or leaving any Building in the Complex to identify themselves and their business in the Building to a security guard; excluding or expelling any peddler, solicitor or loud or unruly person from the Building; closing or limiting access to the Building or any part thereof, including entrances, corridors, doors and elevators, during times of emergency, repairs or after regular business hours. ARTICLE X. SIGNS. 10.1 All signs, decorations and advertising media shall conform in all respects to the sign criteria established by Landlord for the Complex from time to time in the exercise of its sole discretion, and shall be subject to the prior written approval of Landlord as to construction, method of attachment, size, shape, height, lighting, color, location and general appearance. All signs shall be kept in good condition and in proper operating order at all times. Other than Building directory signage and front entrance signage to the Demised Premises, and Tenant's signage at the Complex existing as of the Commencement Date, no other signs, advertisements or notices shall be painted, affixed or displayed: (I) within the Demised Premises which are visible from outside of the Demised Premises, (II) outside of the Demised Premises, (III) in, about or outside of the Building, or (IV) on the land associated with Building. ARTICLE XI. UTILITIES. 11.1 Landlord agrees to cause to be provided and maintained the necessary mains, conduits and other facilities necessary to supply water, electricity, gas (if available), telephone service and sewerage service to the Demised Premises, and the charges therefor shall be included in Operating Expenses (except telephone service, which shall be paid directly by Tenant). 11.2 Landlord shall not be liable for any interruption or failure whatsoever in utility services. Landlord does not represent or warrant the uninterrupted availability of such utilities or building services, and any such interruption shall not be deemed an eviction or disturbance of Tenant's right to possession, or render Landlord liable to Tenant for damages by abatement of rent or otherwise, or relieve Tenant from the obligation to fully and timely perform its obligations and covenants under this Lease. ARTICLE XII. INDEMNITY, PUBLIC LIABILITY INSURANCE AND FIRE AND EXTENDED COVERAGE INSURANCE. 12.1 Landlord shall not be liable to Tenant or to Tenant's employees, agents or visitors, or to any other person or entity, whatsoever, for any injury to person or damage to or loss of property on or about the Demised Premises or the property caused by the negligence or misconduct of Tenant, its employees, subtenants, licensees or concessionaires, or of any other person entering the Building under the express or implied invitation of Tenant or arising out of the use of the Demised Premises by Tenant and the conduct of its business therein, or arising out of any breach or default by Tenant in the performance of its obligations hereunder or resulting from any other cause except Landlord's gross negligence, and Tenant agrees to indemnify Landlord and hold Landlord harmless from any loss, expense or claims arising out of such damage or injury. 12.2 Landlord and Tenant agree and covenant that neither shall be liable to the other for loss arising out of damage to or destruction of the Demised Premises or contents thereof when such loss is caused by any perils included within standard All Risk property insurance, including flood and earthquake policies for buildings similar to the buildings in the Complex, in Montgomery County, Maryland. This agreement shall be binding whether or not such damage or destruction be caused by negligence of either party or their agents, licensees, employees or visitors. 9 12 ARTICLE XIII. TENANT'S INSURANCE. 13.1 Tenant agrees, at its sole cost, to carry and keep in full force and effect at all times during the term of this Lease, a comprehensive general liability policy with a single limit of at least Ten Million Dollars ($10,000,000.00), including coverage for bodily injury, property damage, contractual liability for this Lease and personal injury liability. Tenant's comprehensive general liability insurance policy and certificates evidencing such insurance shall name Landlord and its property manager of the Complex as additional insureds and shall also contain a provision by which the insurer agrees that such policy shall not be canceled except after sixty (60) days written notice to Landlord. Any liability insurance carried or to be carried by Tenant hereunder shall be primary over any policy that might be carried by Landlord. If Tenant shall fail to obtain or maintain such insurance, Landlord may obtain, after providing written notice to Tenant with a thirty (30) day opportunity to cure, such insurance on Tenant's behalf and the cost shall be deemed additional rent and shall be payable upon Landlord's demand. 13.2 Tenant shall obtain All Risk property insurance, including flood and earthquake insurance, insuring against loss to the Demised Premises (including any improvements thereon). Such insurance shall be in the form and amount reasonably satisfactory to Landlord, and Tenant shall, when requested from time to time by Landlord, provide Landlord with evidence of such insurance. Such insurance shall contain waiver of subrogation provisions in favor of Landlord and its agents. 13.3 Tenant agrees to carry and keep in full force and effect at all times during the term of this Lease, at its sole cost, Worker's Compensation and Employer's Liability insurance, with a minimum Employer's Liability limit of $1,000,000 each occurrence. 13.4 At the request of Landlord, Tenant shall obtain business interruption insurance naming Landlord as loss payee, which insurance shall be in an amount sufficient to pay all rent due hereunder. ARTICLE XIV. NON-LIABILITY FOR CERTAIN DAMAGES. 14.1 Landlord and Landlord's agents and employees shall not be liable to Tenant or any other person or entity whomsoever for any injury to person or damage to property caused by the Demised Premises or other portions of the property becoming out of repair or by defect (including latent defects) in or failure of any building equipment, pipes or wiring, or broken glass, or by the backing up of drains, or by gas, water, steam, electricity or oil leaking, escaping or flowing into the Demised Premises, nor shall Landlord be liable to Tenant or any other person or entity whomsoever from any loss or damage that may be occasioned by or through the acts or omissions of other tenants of the Building or of any other persons or entity whomsoever. Tenant shall indemnify and hold harmless Landlord from any loss, cost, expense or claims arising out of such injury or damage referred to in this ARTICLE XIV, SECTION 14.1. 14.2 In the event of any violation of this Lease by Landlord, Tenant's exclusive remedy shall be an action for damages (Tenant waiving the benefit of any laws granting it a lien upon the property of Landlord and/or upon rent due the Landlord), but prior to any such action Tenant will give Landlord written notice specifying such violation with particularity, and Landlord shall thereupon have thirty (30) days in which to cure any such violation. Unless and until Landlord fails to so cure any violation after such notice, Tenant shall not have any remedy or cause of action by reason thereof. All obligations of Landlord hereunder will be construed as covenants, not conditions; and all such obligations will be binding upon Landlord only during the period of its ownership of the property and not thereafter. The term "Landlord" shall mean only the owner, for the time being, of the property and in the event of the transfer by such owner of its interest in the property such owner shall thereupon be released and discharged from all covenants and obligations of the Landlord thereafter accruing, but such covenants and obligations shall be binding during the Lease term upon each new owner for the duration of such owner's ownership. Notwithstanding any other provision hereof, Landlord shall not have any personal liability hereunder. In the event of any breach or default by Landlord in any term or provision of this Lease, Tenant agrees to look solely to the equity or interest then owned by Landlord in the land and improvements which constitute the property; however, in no event shall any 10 13 deficiency judgment or any money judgment of any kind be sought or obtained against Landlord or affiliated companies. ARTICLE XV. DAMAGE BY CASUALTY. 15.1 Tenant shall give immediate written notice to Landlord of any damage caused to the Demised Premises by fire or other casualty. 15.2 If a Building shall be destroyed or damaged in excess of $100,000 by a casualty, then Landlord may elect either to terminate this Lease as hereinafter provided with respect to so much of the Demised Premises as may be located in said Building, or to proceed to rebuild and repair the Demised Premises. Should Landlord elect to terminate this Lease, it shall give written notice of such election to Tenant within ninety (90) days after the occurrence of such casualty. If Landlord should not elect to terminate this Lease, Landlord shall proceed with reasonable diligence to rebuild and repair the Demised Premises (and the cost of such repairs in excess of insurance proceeds shall be included in Operating Expenses). 15.3 Landlord's obligation to rebuild and repair under this ARTICLE XV shall in any event be limited to restoration to substantially the condition in which the Demised Premises existed prior to the casualty, and shall be further limited to the extent of the insurance proceeds available to Landlord for such restoration, and Tenant agrees that promptly after the completion of such work by Landlord, it will proceed with reasonable diligence and at its sole cost and expense to rebuild, repair and restore its signs, fixtures, equipment and furnishings. 15.4 During the period from the occurrence of the casualty until Landlord's repairs are substantially completed, there shall be no reduction in the Annual Base Rent. 15.5 All damage or injury to the Demised Premises or the Building caused by the act or omission of Tenant, its employees, agents, invitees, licensees or contractors, shall be promptly repaired by Tenant at Tenant's sole cost and expense, to the satisfaction of Landlord except to the extent covered by insurance carried by Landlord; provided, however, Tenant shall pay any deductible under Landlord's policy required to be paid thereunder. ARTICLE XVI. EMINENT DOMAIN. 16.1 If the entire Demised Premises or the Complex should be taken for any public or quasi-public use under governmental law, ordinance or regulation, or by right of eminent domain or by private purchase in lieu thereof, this Lease shall terminate and the rent shall be abated during the unexpired portion of this Lease, effective on the date physical possession is taken by the condemning authority. If less than the entire Demised Premises or Complex should be taken as aforesaid, this Lease shall continue in full force and effect and there shall be no abatement in Annual Base Rent. 16.2 All compensation awarded for any taking (or the proceeds of private sales in lieu thereof) of the Demised Premises or the property shall be the property of Landlord, and Tenant assigns its interest in any such award to Landlord; provided, however, Landlord shall have no interest in any award made to Tenant for loss of business or the taking of Tenant's fixtures and other property if a separate award for such items is made to Tenant. ARTICLE XVII. ASSIGNMENT AND SUBLETTING. 17.1 Tenant shall not assign or transfer all or any portion of its interest in this Lease or in the Demised Premises, or sublet all or any portion of the Demised Premises, without the prior written consent of Landlord, which consent may be withheld at the sole and absolute discretion of the Landlord. Any assignment or sublease without the Landlord's prior written consent shall be voidable and, at Landlord's election, shall constitute a default of Tenant hereunder. Consent by Landlord to one or more assignments or sublettings shall not operate as a waiver of Landlord's rights with respect to any subsequent assignment or subletting. The term "sublet" shall be deemed to include the granting of licenses, concession, and any other rights of occupancy of any portion of the Demised Premises. Notwithstanding the foregoing, Landlord's consent shall not be required in the case of an assignment to a person or entity which controls, is controlled by, or is under common control with, Tenant, provided that Tenant remains primarily liable under this Lease. 11 14 17.2 In the event of the transfer and assignment by Landlord of its interest in this Lease or in the property to a person expressly assuming Landlord's obligations under this Lease, Landlord shall thereby be released from any further obligations hereunder, and Tenant agrees to look solely to such successor in interest of the Landlord for performance of such obligations. Any such security given by Tenant to secure performance of Tenant's obligations hereunder may be assigned and transferred to such successor in interest, and Landlord shall thereby be discharged of any further obligations relating thereto. 17.3 Tenant shall not mortgage, pledge or otherwise encumber its interest in this Lease or in the Demised Premises. 17.4 In no case may Tenant assign any options granted to Tenant hereunder, all such options being deemed personal to Tenant and exercisable by Tenant only. 17.5 Any request by Tenant for approval to sell or sublet the Demised Premises or to transfer or assign Tenant's interest in this Lease, shall be accompanied by a processing charge in the amount of Five Hundred Dollars ($500.00) payable to Landlord. 17.6 In the event Landlord approves Tenant subletting this Lease and the subtenant or assignee is paying to Tenant an amount in excess of that paid by Tenant to Landlord under this Lease (which such amount shall be deemed the aggregate sum of all payments by subtenants to Tenant), then fifty percent (50%) of any such excess amounts shall be deemed rent under this Agreement and shall be immediately paid by Tenant to Landlord. If any court of law should find this provision invalid, then, in such event, Tenant shall be prohibited from subletting or assigning this Lease for an amount in excess of the amounts paid by Tenant to Landlord pursuant to the terms of this Lease. ARTICLE XVIII. DEFAULT BY TENANT AND REMEDIES. 18.1 The following events shall be deemed to be events of default by Tenant under this Lease: (a) Tenant shall fail to pay any installment of rental or any other expense required to be paid by Tenant hereunder when due, and such failure continues for ten (10) days after Tenant receives written notice thereof from Landlord. (b) Tenant shall fail to comply with any term, provision or covenant in this Lease, other than the payment of rental or expenses demanded by Landlord and shall not cure such failure within thirty (30) days after receiving written notice thereof from Landlord; provided, however, that if such failure cannot reasonably be cured within the thirty (30) day period, Tenant shall not be deemed to be in default if Tenant shall commence such cure within the thirty (30) day period and thereafter diligently prosecute the same to completion. (c) Tenant or any guarantor of Tenant's obligations under this Lease shall become insolvent, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors. (d) Tenant or any guarantor of Tenant's obligation under this Lease shall file a petition under any section or chapter of the U.S. Bankruptcy Code, as amended, or under any similar law or statute of the United States or any State thereof; or Tenant or any guarantor of Tenant's obligations under this Lease shall be adjudged bankrupt or insolvent in proceedings filed against Tenant or any guarantor of Tenant's obligations under this Lease. (e) A receiver or Trustee shall be appointed for all or substantially all of the assets of the Tenant or any guarantor of Tenant's obligations under this Lease. (f) Tenant shall do or permit to be done anything which creates a lien upon the Demised Premises. 18.2 Upon the occurrence of any such events of default, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever: 12 15 (a) Terminate this Lease in which event Tenant shall immediately surrender the Demised Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which he may have for possession or arrearages in rental, enter upon and take possession of the Demised Premises and expel or remove Tenant and any other person who may be occupying said premises or any part thereof, by force if necessary, without being liable for prosecution or any other claim of damages. (b) Enter upon and take possession of the Demised Premises and expel or remove Tenant and any other person who may be occupying said premises or any part, by force if necessary, without being liable for prosecution or any claim for damages with or without having terminated the Lease. (c) Enter upon the Demised Premises by force, if necessary, without being liable for prosecution or any claim for damages, and do whatever Tenant is obligated to do under the terms of this Lease, and Tenant agrees to reimburse Landlord on demand for any expenses which Landlord may incur in effecting compliance with Tenant's obligations under this Lease, and Tenant further agrees that Landlord shall not be liable for any damages resulting to the Tenant from such action. (d) Alter all locks and other security devices at the Demised Premises without terminating this Lease and without notice to Tenant. 18.3 In the event Landlord elects to terminate the Lease by reason of an event of default, then notwithstanding such termination, Tenant shall be liable for, and shall pay to Landlord, at the address specified for notice to Landlord, the sum of all rental and other indebtedness accrued to date of such termination plus, as damage, an amount equal to the present value (using a discount rate of five percent (5%)) of the difference between (I) the total Annual Base Rent, as reasonably estimated by Landlord, for the remaining portion of the Lease term (had such term not been terminated by Landlord prior to the date of expiration stated in ARTICLE I); and (II) the fair rental value of the Demised Premises for such period. 18.4 In the event that Landlord elects to repossess the Demised Premises without terminating the Lease, then Tenant shall be liable for and shall pay to Landlord, at the address specified for notice to Landlord, all rental and other indebtedness accrued to the date of such repossession, plus, as damage, an amount equal to the total Annual Base Rent, as reasonably estimated by Landlord, for the remainder of the Lease term until the date of expiration of the term as stated in ARTICLE I diminished by any net sums thereafter received by Landlord through reletting the Demised Premises during said period (after deducting expenses incurred by Landlord as provided in ARTICLE XVIII, SECTION 18.5 hereof). In no event shall Tenant be entitled to any excess of any rental obtained by reletting over and above the rental herein reserved. Actions to collect amounts due from Tenant to Landlord may be brought from time to time on one or more occasions, without the necessity of Landlord's waiting until expiration of the Lease term. 18.5 In case of any event of default or breach by Tenant, Tenant shall also be liable for and shall pay to Landlord, at the address specified for notice herein, in addition to any sum provided to be paid above, brokers fees incurred by Landlord in connection with reletting the whole or part of the Demised Premises; the costs of removing and storing Tenant's or other occupant's property; the cost of repairing, altering, remodeling or otherwise putting the Demised Premises into condition acceptable to a new Tenant or Tenants, and all reasonable expenses incurred by Landlord in enforcing or defending Landlord's rights and/or remedies, including reasonable attorneys' fees. 18.6 In the event of termination or repossession of the Demised Premises for an event of default, Landlord shall not have any obligation to relet or attempt to relet the Demised Premises, or any portion thereof, or to collect rental after reletting; Landlord may relet the whole or any portion of the Demised Premises for any period, to any tenant, and for any use and purpose. 18.7 If Tenant should fail to make any payment or cure any default hereunder within the time herein permitted, Landlord, without being under any obligations to do so and without waiving such default, may make such payment and/or remedy such other default for the account of Tenant (and enter the Demised Premises for such purpose), and thereupon Tenant shall be obligated to, and 13 16 agrees to, pay Landlord, as additional rent, upon demand, all costs, expenses and disbursements (including reasonable attorneys' fees) incurred by the Landlord in taking such remedial action. 18.8 In the event that Landlord shall have taken possession of the Demised Premises pursuant to the authority herein granted, then Landlord shall have the right to keep in place and use all of the furniture, fixtures, and equipment at the Demised Premises, including that which is owned by or Leased to Tenant, at all times prior to any foreclosure thereon by Landlord or repossession thereof by any Landlord thereof or third party having a lien thereon. Landlord shall also have the right to remove from the Demised Premises (without the necessity of obtaining a distress warrant, writ of sequestration or other legal process) all or any portion of such furniture, fixtures, equipment and other property located thereon and place same in storage at any premises within the County in which the Demised Premises is located; and in such event, Tenant shall be liable to Landlord for costs incurred by Landlord in connection with such removal and storage and shall indemnify and hold harmless Landlord from all loss, damage, cost, expense and liability in connection with such removal and storage. Landlord shall also have the right to relinquish possession of all or any portion of such furniture, fixtures, equipment and other property to any person ("Claimant") claiming to be entitled to possession thereof who presents to Landlord a copy of any instrument represented to Landlord by Claimant to have been executed by Tenant (or any predecessor of Tenant) granting Claimant the right under various circumstances to take possession of such furniture, fixtures, equipment or other property, without the necessity on the part of Landlord to inquire into the authenticity of said instrument's copy of Tenant's or Tenant's predecessor's signature thereon and without the necessity of Landlord's making any nature of investigation or inquiry as to the validity of the factual or legal basis upon which Claimant purports to act; and Tenant agrees to indemnify and hold Landlord harmless from all costs, expense, loss, damage, and liability incident to Landlord's relinquishment of possession of all or any portion of such furniture, fixtures, equipment or other property by Claimant. The rights of Landlord herein stated shall be in addition to any and all other rights which Landlord has or may hereafter have at law or in equity; and Tenant stipulates and agrees that the rights herein granted Landlord are commercially reasonable. ARTICLE XIX. HOLDING OVER. 19.1 In the event Tenant remains in possession of the Demised Premises after the expiration of this Lease and without the execution of a new Lease, it shall be deemed to be occupying said Demised Premises as a Tenant from month to month at a rental equal to the rental herein provided, plus fifty percent (50%) of such amount and otherwise subject to all the conditions, provisions and obligations of this Lease insofar as the same are applicable to a month to month tenancy. ARTICLE XX. SUBORDINATION AND ATTORNMENT 20.1 Tenant accepts this Lease subject and subordinate to any mortgage, deed of trust or other lien presently existing or hereafter created upon the property and to any renewals and extensions thereof. Landlord is irrevocably vested with full power and authority to subordinate this Lease to any mortgage, deed of trust or other lien hereafter placed upon the property and Tenant agrees upon demand to execute such further instrument subordinating this Lease as Landlord may request, and if Tenant shall fail at any time to execute, seal and deliver any such instrument to Landlord, in addition to any other remedies available to it in consequence thereof, Landlord may execute, seal and deliver the same as the attorney in fact of Tenant in Tenant's name, place and stead, and Tenant irrevocably makes, constitutes and appoints Landlord, its successors and assigns, as such attorney in fact for that purpose. 20.2 At the option of any transferee of the Landlord's interest in the property pursuant to a foreclosure or similar proceeding under any mortgage, deed of trust or other lien upon the property, whether now existing or hereafter created, Tenant shall attorn to and be bound to any such transferee under the terms, covenants and conditions of this Lease for the balance of the term hereof remaining and any extensions or renewals hereof which may be affected in accordance with any option therefore in this Lease, with the same force and effect as if the transferee was the Landlord, and Tenant does hereby agree to attorn to such transferee, at the transferee's option, the attornment to be effective and self operative without the execution of any further instruments on the part of Tenant, immediately upon the transferee succeeding to the interest of the Landlord, provided said transferee provides written notice to the Tenant of its election to accept such attornment within sixty (60) days of the subject transfer. 14 17 In the event any such transferee does elect to accept such attornment, the Tenant hereby agrees that said transferee shall not be (a) liable for any act or admission of Landlord under the Lease prior to the subject transfer or (b) subject to any offsets or defenses which Tenant might have against Landlord arising from events or circumstances existing prior to the subject transfer, or (c) bound by any rent or additional rent which Tenant might have paid in advance for more than the month of the subject transfer, or, (d) bound by any amendment or modification of this Lease made without the foreclosing party's prior written consent. ARTICLE XXI. ESTOPPEL CERTIFICATES. 21.1 Tenant agrees to furnish from time to time, when requested by Landlord, the holder of any deed of trust or mortgage or the Landlord under any ground Lease covering all or any part of the property or any interest of Landlord therein, an estoppel certificate signed by Tenant confirming and containing such factual certifications and representations deemed appropriate by Landlord. The holder of any such deed of trust or mortgage or the Landlord under any such ground Lease and Tenant shall, within ten (10) days following receipt of said proposed estoppel certificate from Landlord, return a fully-executed copy of said certificate to Landlord. In the event Tenant fails to return a fully-executed copy of such certificate to Landlord within the foregoing ten-day period, then Tenant shall be deemed to have approved and confirmed all of the terms, certifications and representations contained in such certificate. ARTICLE XXII. NOTICES. 22.1 Wherever any notice is required or permitted hereunder, such notice shall be in writing. Any notice or document required or permitted to be delivered hereunder shall be deemed to be delivered, whether actually received or not when deposited in the United States mail, postage prepaid, certified or registered mail, return receipt requested, addressed to the parties hereto at the respective addresses set out in ARTICLE I, SECTION 1.1b & 1.1d above or such other address as they may have hereafter specified by written notice. ARTICLE XXIII. BROKERS. 23.1 Landlord and Tenant represent and warrant to each other that it has not employed a broker in carrying on the negotiations relating to this Lease. Tenant further warrants and covenants that is has not relied and will not rely upon any oral representation about the property, other tenants' occupancy, uses or related matters made by any real estate agent, real estate broker, agent or employee of Landlord, or any other party. Tenant shall indemnify and hold Landlord harmless, from and against any cost, liability or expense (including attorney's fees and disbursements) incurred as a result of the assertion(s) or claim(s) by any person, firm or entity for brokerage or other commissions or finder's fees based upon the claiming person's alleged dealings with Tenant or any of its employees, agents or representatives. ARTICLE XXIV. APPROVAL AND CHANGES REQUIRED BY LENDER. 24.1 Any mortgagee of the property, or of Landlord's interest therein, may have the right to approve this Lease, and in the event such approval is not granted, Landlord shall have the right to terminate this Lease as hereinafter set forth. In the event that any mortgagee of the property, or of Landlord's interest therein, requires, as a condition of such financing, modifications to this Lease which (I) do not materially and adversely affect Tenant's use of the Demised Premises as herein permitted; and (II) do not increase the rent or other sums required to be paid by Tenant hereunder; then Landlord may submit to Tenant a written amendment of this Lease incorporating such required changes. Tenant shall execute such amendment within ten (10) days after the same has been submitted to Tenant. If Tenant fails to so execute and deliver such amendment, then Landlord shall thereafter have the right, at its sole option, to (A) execute such amendment on Tenant's behalf, Tenant appointing Landlord its irrevocable attorney-in-fact, said power being coupled with an interest to execute such amendment; or (B) to cancel this Lease. Such cancellation option shall be exercisable by Landlord's giving Tenant written notice of such termination; immediately whereupon this Lease shall be canceled and terminated and, upon relinquishment of possession of the Demised Premises by Tenant in the condition required pursuant to the terms hereof, both Landlord and Tenant shall thereupon be relieved from any and all further liability or obligation hereunder. 15 18 ARTICLE XXV. PARKING. 25.1 During the Term of this Lease, Tenant and its employees and guests shall have use of all parking areas in the Complex, without charge, for parking purposes only, on an unreserved, non-exclusive basis in common with others entitled to use of said parking areas. Landlord shall have general possession, management and control of the parking areas, and may from time to time adopt reasonable rules and regulations pertaining to the use thereof. Landlord reserves the right to designate reserved parking in the parking areas. ARTICLE XXVI. WAIVER OF TRIAL BY JURY AND RIGHT TO REDEEM. 26.1 Landlord and Tenant each agree to and they waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of said premises and/or any claim of injury or damage, and statutory remedy. Tenant also hereby agrees that the provisions of SECTION 8-401(e) OF THE MARYLAND REAL PROPERTY CODE shall not apply to this Lease and Tenant hereby waives its rights thereunder. ARTICLE XXVII. FURNISHING OF FINANCIAL STATEMENTS. 27.1 Within ten (10) days of the execution of this Lease, Tenant shall furnish Landlord financial statements outlining Tenant's current financial condition if applicable, as of the last annual audit or the last regularly prepared report including tax returns. Over the term of this Lease and any extensions, within ten (10) days of Landlord's written request, Tenant shall furnish financial statements outlining Tenant's current financial condition. The foregoing requirements shall not apply during any period of time in which Tenant's stock is listed on a national stock exchange. ARTICLE XXVIII. OCCUPATIONAL AND ENVIRONMENTAL COMPLIANCE. 28.1 Tenant shall not in any manner use, maintain or allow the use or maintenance of the property in violation of any law, ordinance, statute, regulation, rule or order (collectively "Laws") of any governmental authority, including but not limited to Laws governing zoning, health, safety (including fire safety), occupational hazards, and pollution and environmental control. Tenant shall not use, maintain or allow the use or maintenance of the property or any part thereof to treat, store, dispose of, transfer, release, convey or recover hazardous materials nor shall Tenant otherwise, in any manner, possess or allow the possession of any hazardous, materials on or about the property; provided, however, any hazardous material lawfully permitted and generally recognized as necessary and appropriate for general office use may be stored and used in the Demised Premises, so long as (I) such storage and use is in the ordinary course of Tenant's business permitted under this Lease; (II) such storage and use is performed in compliance with all applicable laws and regulations and in compliance with the highest standards prevailing in the industry for the storage and use of such materials; and (III) Tenant delivers prior written notice to Landlord of the identity of and information regarding such materials as Landlord may require. Tenant shall immediately notify Landlord of the presence or suspected presence of any hazardous material on or about the property and shall deliver to Landlord any notice received by Tenant relating thereto. Landlord and its agents shall have the right, but not the duty, to inspect the Demised Premises and conduct tests thereon at any time to determine whether or the extent to which there is hazardous materials on the Demised Premises. Landlord shall have the right to immediately enter upon the Demised Premises to remedy any contamination found thereon. In exercising its rights herein, Landlord shall use reasonable efforts to minimize interference with Tenant's business but such entry shall not constitute an eviction of Tenant, in whole or in part, and Landlord shall not be liable for any interference, loss, or damage to Tenant's property or business caused thereby. If any lender or governmental agency shall ever require testing to ascertain whether there has been a release of hazardous materials, then the reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand as additional rent if such requirement arose in whole or in part because of Tenant's use of the Demised Premises. Tenant shall execute affidavits, representations and the like from time to time, at Landlord's request, concerning Tenant's best knowledge and belief regarding the presence of any hazardous materials on the property or Tenant's intent to store or use hazardous materials on the property. Tenant shall indemnify and hold harmless Landlord from any and all claims, loss, 16 19 liability, costs, expenses or damage, including attorneys' fees and costs of remediation and compliance, incurred by Landlord in connection with any breach by Tenant of its obligations under this section. The covenants and obligations of Tenant hereunder shall survive the expiration or earlier termination of this Lease. 28.2 For the purposes of this ARTICLE XXVIII, the term "hazardous materials" shall mean (I) any and all hazardous waste, toxic chemicals, materials or substances occurring in the air, water, soil or ground water at the property by reason of which the Tenant or Landlord would be subject to an injunction action and/or any damages, penalties, clean up costs or other liability under the provisions of the COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT 42 U.S.C. SECTION 9601 ET SEQ., THE SUPERFUND AMENDMENTS AND REAUTHORIZATION ACT OF 1986, 42 U.S.C. SECTION 9601 (20D), THE RESOURCE CONSERVATION AND RECOVERY ACT (THE SOLID WASTE DISPOSAL ACT), 42 U.S.C. SECTION 9601 ET SEQ., THE FEDERAL WATER POLLUTION CONTROL ACT, AS AMENDED BY THE CLEAN WATER ACT OF 1977, 33 U.S.C. SECTION 1251 ET SEQ., THE CLEAN AIR ACT OF 1966, 42 U.S.C. SECTION 7401 ET SEQ., AND THE TOXIC SUBSTANCES CONTROL ACT, 15 U.S.C. SECTION 2601, ET SEQ.; (II) any "oil, petroleum proDuCTs and their by-products" as defined by the MARYLAND ENVIRONMENTAL CODE ANNOTATED SECTION 4-411(A)(3); as amended from time to time and regulations promulgated thereunder; (III) any "hazardous substance" as defined by the MARYLAND ENVIRONMENTAL CODE ANNOTATED, TITLE 7, SUBTITLE 2, as amended from time to time and regulations promulgated thereunder; and (iv) any substance the presence of which is prohibited or controlled by any other federal, state or local laws, regulations, statutes, or ordinances now in a force or hereafter enacted relating to waste disposal or environmental protection with respect to hazardous, toxic or other substances generated, produced, leaked, released, spilled, stored or disposed of at or from the property. Hazardous material shall also include any other substance which by law requires special handling in its collection, storage, treatment or disposal, but not including small quantities of materials present on the property in retail containers, which would not be prohibited, regulated or controlled under applicable environmental laws. ARTICLE XXIX MISCELLANEOUS. 29.1 Nothing herein contained shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership or a joint venture between parties hereof, it being understood and agreed that neither the method of computation of rental, nor any other provisions contained herein, nor the acts of the parties hereto, shall be deemed to create any relationship between the parties hereto other than the relationship of Landlord and Tenant. Whenever herein the singular number is used, the same shall include the plural, and words of gender shall include each other gender. 29.2 The captions used herein are for convenience only and do not limit or amplify the provisions hereof. 29.3 One or more waivers of any covenant, term or condition of this Lease by Landlord shall not be construed as a waiver of a subsequent breach of the same covenant, term or condition. The consent or approval by Landlord shall not be construed as a waiver of a subsequent breach of the same covenant, term or condition. The consent or approval by Landlord to or of any act by the Tenant shall not be deemed to waive or render unnecessary consent to or approval of any subsequent similar act. 29.4 Whenever a period of time is herein prescribed for action to be taken by the Landlord, Landlord shall not be liable or responsible for, and there shall be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, government laws, regulations or restrictions or any other cause of any kind whatsoever which is beyond the reasonable control of Landlord. At any time when there is outstanding a mortgage, deed of trust or similar security instrument covering Landlord's interest in the Demised Premises, Tenant may not exercise any remedies for default by Landlord hereunder unless and until the holder of the indebtedness secured by such mortgage, deed of trust or similar instrument shall have received written notice of such default and a reasonable time for such default shall thereafter have elapsed. 29.5 This Lease contains the entire agreement between the parties, and no agreement shall be effective to change, modify or terminate this Lease in whole or in part unless such agreement is in writing and duly signed by the party against whom enforcement of such change, modification or termination is sought. 17 20 29.6 The laws of the State of Maryland, without reference to its conflicts of laws principles, shall govern the interpretation, validity, performance and enforcement of this Lease. If any provision of this Lease should be held to be invalid or unenforceable, the validity and enforceability of the remaining provisions of this Lease shall not be affected thereby. 29.7 The terms, provisions and covenants contained in this Lease shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors in interest and legal representatives except as otherwise herein expressly provided. 29.8 Tenant shall not record this Lease or any memorandum or other document referring to this Lease without the express written permission of Landlord. Landlord, however, may record this Lease or any related document without the consent or jointer of Tenant. 29.9 Tenant shall pay before delinquency all costs for work done or caused to be done by Tenant in the Demised Premises which could result in any lien or encumbrance in respect of such work and shall indemnify, defend and hold harmless Landlord against any claim, loss, cost, demand and legal or other expenses, whether in respect of any lien or otherwise, arising out of the supply of material, services or labor for such work. Tenant shall immediately notify Landlord of any such lien, claim of lien or other action of which it has or reasonably should have knowledge and which affect the title to the Complex or any part thereof, and shall cause the same to be removed within fifteen (15) days (or such additional time as Landlord may consent to in writing) after its filing, creation or assertion, whichever shall first occur, failing which Landlord may declare Tenant in default hereunder and take such action as Landlord deems necessary to remove the same and the entire cost thereof shall be immediately due and payable by Tenant to Landlord as additional rent hereunder. 29.10 The submission of this Lease for examination does not constitute a reservation of or an option for the Demised Premises nor does it constitute an offer to lease the Demised Premises until signed by Landlord and this Lease becomes effective as a Lease only upon execution and delivery thereof by both Landlord and Tenant. 29.11 Time shall be of the essence for this Lease. 29.12 If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by law. 29.13 It is agreed that, for the purpose of any suit brought or based on this Lease, this Lease shall be construed to be a divisible contract, to the end that successive actions may be maintained thereon as successive periodic sums shall mature or be due hereunder, and it is further agreed that failure to include in any suit or action any sum or sums then matured or due shall not be a bar to the maintenance of any suit or action for the recovery of said sum or sums so omitted; and Tenant agrees that it will not, in any suit or suits brought or arising under this Lease for a matured sum for which judgment has not previously been obtained or entered, plead, rely on or interpose the defenses of res judicata, former recovery, extinguishment, merger, election or remedies or other similar defense as a defense to said suit or suits. ARTICLE XXX. ATTACHMENTS. The Following Attachments are attached hereto and made a part hereof: EXHIBIT A - PLAN OF THE COMPLEX EXHIBIT B - DEMISING PLAN EXHIBIT C - RULES AND REGULATIONS IN WITNESS HEREOF, the parties hereunto signed their names, as their free act and deed on the day and year first above written, and do hereby acknowledge and accept this Lease agreement. 18 21 ATTEST: LANDLORD: MANOR CARE, INC. _____________________ BY:__________________________ TITLE: _______________________ ATTEST: TENANT: CHOICE HOTELS HOLDINGS, INC. (TO BE RENAMED CHOICE HOTELS INTERNATIONAL, INC.) _______________________ BY: __________________________ TITLE: ________________________ 19 22 EXHIBIT A [SITE PLAN/BUILDING LOCATION] 23 EXHIBIT B (nine sheets) [FLOOR PLAN - DEMISED PREMISES - 10720 BUILDING 1ST FLOOR] 24 [FLOOR PLAN - DEMISED PREMISES - 10720 BUILDING 2ND FLOOR] 25 [FLOOR PLAN - BUILDING 50 FIRST FLOOR] 26 [FLOOR PLAN - BUILDING 50 SECOND FLOOR] 27 [FLOOR PLAN - BUILDING 50 THIRD FLOOR] 28 [FLOOR PLAN - BUILDING 50 FOURTH FLOOR] 29 [FLOOR PLAN - BUILDING 50 FIFTH FLOOR] 30 [FLOOR PLAN - BUILDING 50 SIXTH FLOOR] 31 [FLOOR PLAN - BUILDING 50 SEVENTH FLOOR] 32 EXHIBIT C RULES AND REGULATIONS 1. The sidewalks, entrances, passages, courts, elevators, vestibules, stairways, corridors or halls or other parts of the Building not occupied by any Tenant shall not be obstructed or encumbered by any Tenant or used for any purpose other than ingress and egress to and from the Demised Premises. Landlord shall have the right to control and operate the public portions of the Building, and the facilities furnished for the common use of the Tenants, in such manner as Landlord deems best for the benefit of the Tenants generally. No Tenant shall permit the visit to the Demised Premises of persons in such numbers or under such conditions as to interfere with the use and enjoyment by other Tenants of the entrances, corridors, elevators and other public portions or facilities of the Building. 2. No awnings or other projections shall be attached to the outside walls of the Building without the prior written consent of the Landlord. No drapes, blinds, shades, or screens shall be attached to or hung in, or used in connection with any window or door of the Demised Premises, without the prior written consent of the Landlord. Such awnings, projections, curtains, blinds, shades, screens, or other fixtures must be of a quality, type, design, and color, and attached in the manner approved by Landlord. Landlord agrees that it will not unreasonably withhold its consent to any such request by Tenant. 3. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted, or affixed by any Tenant on any part of the outside or inside of the Demised Premises or building without the prior written consent of the Landlord. In the event of the violation of the foregoing by any Tenant, Landlord may remove same without any liability, and may charge expense incurred by such removal to the Tenant or Tenants violating this rule. Interior signs on doors and directory tablet shall be inscribed, painted or affixed for each Tenant by the Landlord at the expense of such Tenant, and shall be of a size, color and style acceptable to the Landlord. 4. No show cases or other articles shall be put in front of or affixed to any part of the exterior of the Building, nor placed in the halls, corridors or vestibules, without the prior written consent of the Landlord. 5. The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags, or other substances shall be thrown therein. All damages resulting from any misuse of the fixtures shall be borne by the Tenant who, or whose servants, employees, agents, visitors or licensees, shall have caused the same. 6. There shall be no unnecessary marking, painting, drilling into or in any way defacing any part of the Demised Premises or the Building. No boring, cutting or stringing of wires shall be permitted. Tenant shall not construct, maintain, use or operate within the Demised Premises or elsewhere within or on the outside of the Building, any electric device, wiring or apparatus in connection with a loud speaker system or other sound system. 7. No bicycles, vehicles or animals, birds or pets of any kind shall be brought into or kept in or about the Demised Premises except seeing eye dogs. No Tenant shall cause or permit any unusual or objectionable odors to be produced upon or permeate from the Demised Premises, except as may be permitted in accordance with the Use and Occupancy permit. 8. No space in the Building shall be used for manufacturing, for the storage of merchandise, or for the sale of merchandise, goods or property of any kind at auction. 9. No Tenant shall make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of this or neighboring buildings or premises or those having business with them, whether by the use of any musical instrument, radio, talking machine, unmusical noise, whistling, singing, or in any other way. No Tenant shall throw anything out of the doors or windows or down the corridors or stairs. 33 10. No inflammable, combustible or explosive fluid, chemical or substance as defined by the Environmental Protection Agency shall be brought or kept upon the Demised Premises. 11. No additional locks or bolts of any kind shall be placed upon any of the doors, or windows by any Tenant, nor shall any changes be made in existing locks or the mechanism thereof, except as may be required by Tenant as a financial institution. The doors leading to the corridors or main halls shall be kept closed during business hours except as they may be used for ingress or egress. Each Tenant shall, upon the termination of his tenancy, restore to Landlord all keys of stores, offices, storage, and toilet rooms either furnished to, or otherwise procured by, such Tenant, and in the event of the loss of any keys, so furnished, such Tenant shall pay to the Landlord the cost thereof. 12. All removals, or the carrying in or out of any safes, freight, furniture or bulky matter of any description must take place during the hours which the Landlord or its Agent may determine from time-to-time. The Landlord reserves the right to inspect all freight to be brought into the Building and to exclude from the Building all freight which violates any of these Rules and Regulations or the Lease of which these Rules and Regulations are a part. 13. Any person employed by any Tenant to do janitor work within the Demised Premises must obtain Landlord's consent and such person shall, while in the Building and outside of said Demised Premises, comply with all instructions issued by the Superintendent of the Building. No Tenant shall engage or pay any employees on the Demised Premises, except those actually working for such Tenant on said premises. 14. Landlord shall have the right to prohibit any advertising by any Tenant which, in Landlord's reasonable opinion, tends to impair the reputation of the Building or its desirability as a building for offices, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 15. The premises shall not be used for lodging or sleeping or for any immoral or illegal purpose. 16. Each Tenant, before closing and leaving the Demised Premises at any time, shall see that all windows are closed. 17. The requirements of Tenants will be attended to only upon application of the office of the Building. Employees shall not perform any work or do anything outside of the regular duties, unless under special instruction from the management of the Building. 18. Access plates to under floor conduits shall be left exposed. Where carpet is installed, carpet shall be cut around access plates. 19. Mats, trash and other objects shall not be placed in the public corridors. 20. The Landlord does not maintain suite finishes which are non-standard, such as kitchens, bathrooms, wallpaper, special lights, etc. However, should the need for repairs arise, the Landlord will arrange for the work to be done at the Tenant's expense. 21. Violation of these rules and regulations, or any amendments thereto, shall be sufficient cause for termination of this Lease at the option of the Landlord. 22. Smoking in the Demised Premises or anywhere else in the Building is prohibited. EX-10.9 11 OFFICE LEASE 1 Exhibit 10.09 OFFICE LEASE BY AND BETWEEN CHOICE HOTELS HOLDINGS, INC. A DELAWARE CORPORATION (TO BE RENAMED CHOICE HOTELS INTERNATIONAL, INC.) "TENANT" AND MANOR CARE, INC., A DELAWARE CORPORATION "LANDLORD" AT 11555 DARNESTOWN ROAD GAITHERSBURG, MARYLAND 20878-3200 2 INDEX
Title Page # - ----- ------ Article I. Definitions and Certain Basic Provisions 1 Article II. Granting Clause 2 Article III. Rental 2 Article IV. Cafeteria and Fitness Center Article V. Construction and Acceptance of the Demised Premises 5 Article VI. Uses and Care of Demised Premises 6 Article VII. Landlord's Services 7 Article VIII. Alterations 9 Article IX. Landlord's Right of Access and Use 9 Article X. Signs 10 Article XI. Utilities 10 Article XII. Indemnity, Public Liability Insurance and Fire and Extended Coverage Insurance 10 Article XIII. Tenant's Insurance 10 Article XIV. Non-Liability for Certain Damages 11 Article XV. Damage by Casualty 12 Article XVI. Eminent Domain 12 Article XVII. Assignment and Subletting 13 Article XVIII. Default by Tenant and Remedies 13 Article XIX. Holding Over 16 Article XX. Subordination and Attornment 16 Article XXI Estoppel Certificates 17 Article XXII. Notices 17 Article XXIII. Brokers 17 Article XXIV. Approval and Changes Required by Lender 17 Article XXV. Parking 17 Article XXVI. Waiver of Trial by Jury 18 Article XXVII. Furnishing of Financial Statements 18 Article XXVIII. Occupational and Environmental Compliance 18 Article XXIX. Miscellaneous 19 Article XXX. Attachments 21 Article XXXI. Status as Sublease
3 OFFICE LEASE This Lease is entered into this ____ day of ______________ 1996, by and between Manor Care, Inc., a Delaware corporation ("Landlord") and Choice Hotels Holdings, Inc., a Delaware corporation (to be renamed Choice Hotels International, Inc.) ("Tenant"). RECITALS: A. Landlord is implementing a restructuring of itself in which, among other things, it will distribute to its shareholders all of the common stock of Tenant, pursuant to a Distribution Agreement dated as of __________________, 1996, between Landlord and Tenant (the "Distribution Agreement") as a result of which Landlord and Tenant will become separate publicly traded corporations. B. Landlord has acquired an office building in Gaithersburg, Maryland, as its new corporate headquarters. Landlord and Tenant desire to provide in this Lease for the occupancy by Tenant, after said stock distribution, of premises in said office building. C. Landlord and Tenant each have determined that the rental and other terms and conditions of this Lease are commercially reasonable, based upon market conditions in the Gaithersburg, Maryland area. ARTICLE I. DEFINITIONS AND CERTAIN BASIC PROVISIONS. 1.1 (a) "LANDLORD": Manor Care, Inc, a Delaware corporation (b) "LANDLORD'S ADDRESS": 11555 Darnestown Road Gaithersburg, Maryland 20878-3200 Attn.: General Counsel (Re: Real Estate) (c) "TENANT": Choice Hotels Holdings, Inc., a Delaware corporation (to be renamed Choice Hotels International, Inc.) (d) "TENANT'S ADDRESS": 10750 Columbia Pike Silver Spring, Maryland 20910 Attn.: General Counsel (Re: Real Estate)
(e) "COMPLEX" shall refer to the complex of two buildings having an address of 11555 Darnestown Road, Gaithersburg, Montgomery County, Maryland, consisting of: (i) an office building with approximately 377,126 gross square feet of space (hereinafter the "Office Building"); and (ii) a warehouse and distribution building with approximately 200,000 gross square feet of space (hereinafter the "Warehouse Building"). A plan of the Complex is attached hereto as Exhibit A. (f) "DEMISED PREMISES": approximately 100,000 gross square feet of office space on the "lake level", ground floor, and/or second floor of the Office Building, which three floors contain a total of 215,017 gross square feet. The exact location of the Demised Premises within said larger block of space shall be determined by mutual agreement of Landlord and Tenant. Landlord and Tenant acknowledge that portions of the Demised Premises are currently leased by Landlord to National Geographic Society, a District of Columbia non-profit corporation ("National Geographic") under an Office Lease Agreement dated August 30, 1995 (the "National Geographic Lease"). The term of the National Geographic Leases expires on August 31, 1997 (the "National Geographic Termination Date," as it may be changed by mutual agreement of Landlord and National Geographic). However, pursuant to Article 41 of the National Geographic Lease, National Geographic has the right 1 4 to terminate the National Geographic Lease as to the entire premises leased therein or portions thereof and surrender such space to Landlord. Accordingly, Landlord and Tenant hereby agree that (i) prior to the National Geographic Termination Date, the Demised Premises shall consist of those portions of the Demised Premises so surrendered by National Geographic; and (ii) from and after the National Geographic Termination Date, the Demised Premises shall consist of the entire 100,000 gross square feet of space leased hereunder. Either party may elect at its expense to have the rentable area of the Demised Premises measured by Landlord's architect in accordance with the Washington Board of Realtors Standard Floor Area Measure, and to have this Lease amended to state the rentable area of the Demised Premises as so measured. (g) "LEASE TERM": The period of time commencing from the Commencement Date, as defined below, and terminating thirty (30) months after such Commencement Date, unless such termination date is other than the last day of a calendar month, in which event this Lease shall terminate on the last day of the calendar month in which such date falls. Landlord shall give Tenant prior written notice of the proposed sale of the Complex or any building therein. Either party may elect to terminate this Lease effective as of the date of such sale by written notice given to the other party within thirty (30) days after Tenant's receipt of such notice of sale. (h) "LEASE YEAR": In the case of the first Lease Year, that period from the Commencement Date to May 31, 1997. Thereafter, "Lease Year" shall mean each successive twelve (12) month period from June 1 to May 31 following the expiration of the first Lease Year, except that the last Lease Year shall be the period from June 1 to the termination date of this Lease. (i) "COMMENCEMENT DATE": the Distribution Date under the Distribution Agreement. If the Commencement Date does not occur prior to May 31, 1997, either Landlord or Tenant may terminate this Lease by written notice to the other party. (j) "ANNUAL BASE RENT": See Section 3.1 (k) "PERMITTED USE": General Office Use. ARTICLE II. GRANTING CLAUSE. 2.1. In consideration of the obligation of Tenant to pay rent and other charges as provided in this Lease and in consideration of the other included terms, covenants and conditions, Landlord Demises and Leases to Tenant, and Tenant Leases from Landlord, the Demised Premises as described in ARTICLE I, SECTION 1.1(f) TO HAVE AND TO HOLD said premises for the Lease Term specified in ARTICLE I, SECTION 1.1(g), all upon the terms and conditions set forth in this Lease. Landlord expressly reserves the right to name or change the name of the Complex or any building therein without notice to the Tenant. ARTICLE III. RENTAL 3.1 BASE RENT. Tenant shall pay to Landlord monthly rental installments in an amount equal to 1/12th of the Annual Base Rent (as hereinafter defined) in advance, without demand, deduction, counterclaim or offset, and without relief from valuation and appraisement laws or any other deduction for any reason whatsoever, on or before the first day of each and every calendar month during the term of this Lease; provided, however, that if the Commencement Date shall be on a day other than the first day of the calendar month or the expiration date shall be a day other than the last day of the calendar month, the monthly rental installment for such first or last fractional month shall be prorated on the basis of the number of days during the month this Lease was in effect in relation to the total number of days in such month. Annual Base Rent for each Lease Year shall be calculated in accordance with the following formula: Annual Base Rent = (1- Manor Care Occupancy Percentage) x (Operating Expenses - - Third Party Rental Income) Capitalized terms used in said formula shall have the meanings given to them in Section 3.2 below. 2 5 At Landlord's sole discretion, at any time and from time to time during the term of this Lease upon written notice to Tenant, Landlord may elect that instead of using the aforesaid formula to calculate Annual Base Rent, Annual Base Rent shall be the number of square feet of space in the Demised Premises times the "Alternate Rent" as hereinafter defined. The Alternate Rent shall be the annual fair market rental value per square foot for the Demised Premises in their "as is" condition for the remaining Lease Term as reasonably determined by Landlord based on quoted rental rates at comparable office buildings in the Gaithersburg, Maryland area. Should Landlord so elect, the parties will enter into an amendment to this Lease establishing the new Annual Base Rent and providing that Tenant shall pay its pro rata share (based on the ratio of the number of square feet in the Demised Premises to the number of square feet of office space in the Complex) of increases in real estate taxes and operating expenses over a base year, with the terms "real estate taxes", "operating expenses" and "base year" being defined consistent with the definitions of such terms in leases of space in the Complex to tenants unrelated to Landlord. 3.2 DEFINITIONS. For the purpose of this Lease, the following definitions shall apply: (a) "MANOR CARE OCCUPANCY PERCENTAGE" shall mean the ratio of (i) the number of gross square feet in the Complex occupied by Manor Care, Inc., a Delaware corporation, or any person or entity which directly or indirectly controls, is controlled by, or is under common control with, Manor Care, Inc., as of the commencement of the Lease Year in question; to (ii) the total number of gross square feet in the Complex, as the Complex may be altered or enlarged in Landlord's discretion from time to time. The parties agree that as of the Commencement Date the total number of gross square feet in the Complex is 577,126, consisting of 377,126 square feet in the Office Building, and 180,000 square feet of storage space plus an additional 20,000 square feet of office space in the Warehouse Building. For purposes of the preceding sentence, (and also for purposes of Sections 3.2(c) and 17.1 of this Lease) in order for an entity to control another, it must have voting control of and own greater than fifty percent (50%) of every class of stock entitled to vote and/or other voting equity interest of the other entity, in the case that the other entity is a corporation; it must own greater than fifty percent (50%) of the partnership interests in the assets, liabilities, income, loss and distributions of the other entity, in the case that the other entity is a partnership; it must be the sole beneficiary of the other entity, in the case that the other entity is a trust. The parties further agree that as of the Commencement Date, Manor Care, Inc. occupies 162,111 gross square feet in the Complex. (b) "OPERATING EXPENSES" shall mean any and all expenses incurred by Landlord in connection with the servicing, operation, maintenance and repair of the Complex and related appurtenances, including, but not limited to: (1) wages and salaries of all employees engaged in operation, maintenance, or security of the Complex including taxes, insurance and benefits relating thereto; (2) all supplies and materials used in operation, maintenance or security of the Complex; (3) cost of all maintenance and service agreements for the Complex and the equipment therein, including but not limited to security and energy management services, window cleaning and elevator maintenance; (4) cost of all insurance relating to the Complex including the cost of casualty and liability insurance applicable to the Complex and Landlord's personal property used in connection therewith; (5) cost of repairs and general maintenance, whether structural or non-structural, but excluding repairs and general maintenance paid with proceeds of insurance or by Tenant or third parties; (6) a management fee for the manager of the Complex, who may be Landlord or an affiliate of Landlord; (7) the cost of any additional services provided to the Complex by or on behalf of the Landlord in the prudent management of the Complex; (8) the cost of any capital improvements or alterations made to the Complex after the Commencement Date (and the entire cost of such capital improvements shall be included in Operating Expenses in the Lease Year in which such cost was paid or incurred), but excluding all costs of Landlord's initial "build-out" to prepare portions of the Office Building for Landlord's occupancy (except for the costs of installing building security equipment and a traffic signal on Darnestown Road, which shall be included in Operating Expenses); (9) leasing commissions, free rent, lease takeover obligations and other inducements, costs, disbursements and expenses incurred in connection with leasing space at the Complex; (10) costs incurred in constructing, improving, renovating or decorating rented space or space for tenants; (11) costs of environmental inspection, testing or cleanup; (12) payments of principal, interest, and other costs relating to indebtedness secured by mortgages or deeds of trust against the Complex or any portion thereof; (13) costs incurred in leasing equipment, including air conditioning systems, elevators, or 3 6 other equipment ordinarily considered to be of a capital nature; (14) depreciation and amortization of the buildings and improvements in the Complex, in accordance with generally accepted accounting principles ;(15) security services; (16) trash collection; (17) janitorial and cleaning services; (18) all charges of utility companies or governmental entities for electricity, water, sewer, gas or other utilities (excluding telephone) supplied to the Complex; (19) taxes, assessments and governmental charges of any kind and nature whatsoever (hereinafter collectively referred to as "Taxes") levied or assigned against the Complex or any part thereof, and all expenses incurred by Landlord in attempting to protest, reduce or minimize taxes; (20) ground rents, and payments under any financing leases of the Complex or any portion thereof (including Landlord's existing lease agreement with the Gaithersburg Realty Trust); (21) any operating loss resulting from Landlord's operation of a cafeteria or fitness center in the Complex; (22)costs of the "employee store" and other services provided by the "Employee Service Center" at the Complex; and (23) costs of mailroom/shipping and receiving services provided by Landlord. (c) "THIRD PARTY RENTAL INCOME" shall mean all rental income actually received by Landlord from tenants or occupants (excluding Tenant) of space in the Complex during the Lease Year in question (including National Geographic), other than any person or entity which controls, is controlled by, or is under common control with, Manor Care, Inc. 3.3 As part of the rental arrangements between Landlord and Tenant, Tenant has specifically reviewed, approved, and agreed to pay as herein provided, each and every item in the foregoing definition of Operating Expenses. 3.4 PAYMENT OBLIGATION: (a) Annual Base Rent shall be paid by Tenant to Landlord in advance, in equal monthly installments, in an estimated amount reasonably determined by Landlord prior to the commencement of the first Lease Year and each subsequent Lease Year . (Landlord may revise its estimate at any time during a Lease Year). Within a reasonable time following the end of each Lease Year, Landlord shall submit to Tenant a statement which shall include a comparison of (I) the Annual Base Rent therefore paid by Tenant for the Lease Year in question on the basis of Landlord's estimate, and (II) Tenant's actual obligation for Annual Base Rent for the Lease Year in question as determined by Landlord. Any excess paid by Tenant, as disclosed by such comparison, shall be credited against Tenant's next due installment(s) of Annual Base Rent, and any additional sums disclosed by such comparison as being due to Landlord by Tenant shall be paid to Landlord within thirty (30) days following delivery to Tenant of such statement (including any statement delivered after the expiration or termination of the Term). However, for the Lease Year during which the term of this Lease ends, any excess paid by Tenant to Landlord and due to Tenant shall be promptly refunded to Tenant. (b) Tenant or its accountants shall have the right to inspect, at reasonable times and in a reasonable manner and at the Landlord's offices or such other place designated by Landlord, during the thirty (30) day period following the delivery of Landlord's statement of the actual amount of Tenant's Annual Base Rent for a particular Lease Year, such of Landlord's books of account and records as pertain to and contain information concerning the Operating Expenses, the Manor Care Occupancy Percentage and Third Party Rental Income in order to verify the amounts thereof. In the event Tenant elects not to inspect Landlord's books of account and records during said thirty (30) day period, such election or failure to inspect shall constitute Tenant's unconditional waiver of any and all rights to inspect Landlord's books of account and records for the subject period and Tenant shall be forever estopped from challenging or questioning the amount of its Annual Base Rent for said period. In the event of any disagreement or dispute between Tenant and Landlord concerning Landlord's statement, the decision of Landlord's Chief Financial Officer shall be final and unreviewable. 3.5 Tenant shall be liable for all taxes levied against personal property and trade fixtures placed by Tenant on the Complex. If any such taxes are levied against Landlord or Landlord's property, and if Landlord elects to pay the same or if the assessed value of Landlord's property is increased by inclusion of personal property and trade fixtures placed by Tenant on the property and Landlord elects to pay the taxes based on such increase, Tenant shall pay to Landlord as additional rent hereunder, upon demand, the amount of such taxes paid by Landlord. 4 7 3.6 If at any time during the term of this Lease, the present method of taxation shall be changed so that in lieu of the whole or any part of any taxes, assessments, levies, or charges levied, assessed or imposed on the Complex there shall be levied, assessed or imposed on Landlord a capital levy or other tax directly on the rents received therefrom and/or a franchise tax assessment, levy or charge measured by or based, in whole or in part, upon such rents on the present or any future building or buildings in the Complex, then all such taxes, assessments, levies or charges, or the part thereof so measured or based, shall be deemed to be included within the term "Taxes" for the purposes hereof. 3.7 LATE CHARGE. In the event Tenant fails to pay to Landlord, when due, any installment of rental or other sum to be paid to Landlord which may become due in this Lease, Landlord will incur additional expenses in an amount not readily ascertainable and which has not been elsewhere provided for between Landlord and Tenant. If Tenant should fail to pay to Landlord, when due, any installment of rental or other sum to be paid hereunder, such unpaid amount shall bear interest from the due date thereof to the date of payment at an annual rate equal to the lesser of twelve percent (12%) or the highest rate permitted by law. Provision for such late charge shall be in addition to all other rights and remedies available to Landlord within this Lease or at law or in equity and shall not be construed as liquidated damages or limiting Landlord's remedies in any manner. 3.8 All payments to be made by Tenant to Landlord pursuant to this Lease shall be made by check payable to Landlord, and delivered to Landlord at Landlord's Address or to such other person and place as may be designated by notice in writing from Landlord to Tenant from time to time. 3.9 Unless otherwise agreed in writing between Landlord and Tenant, no payment by Tenant or receipt by Landlord of a lesser amount than the monthly installments of rent stipulated shall be deemed to be other than on account of the above-stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payments as rent be deemed an accord with satisfaction, and Landlord may accept such check for payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided. ARTICLE IV. CAFETERIA AND FITNESS CENTER 4.1 For as long as Landlord chooses to operate a cafeteria and/or fitness center at the Complex, Tenant's officers and employees shall have the right to use such facilities on a non-exclusive basis in common with Landlord's officers and employees and others entitled thereto, upon payment of the current fees and charges for such use. In Landlord's sole and unreviewable discretion and without notice to Tenant, Landlord may discontinue operation of the cafeteria and/or fitness center at any time. ARTICLE V. ACCEPTANCE OF THE DEMISED PREMISES. 5.1 The Demised Premises are leased to Tenant in "AS IS" condition. Landlord shall have no obligation to make any improvements or alterations to prepare the Demised Premises for Tenant's use. By taking possession of the Demised Premises, Tenant shall be deemed to have accepted the same and to have acknowledged that the same fully comply with Landlord's covenants and obligations under this Lease. Tenant further agrees that, if requested by Landlord, Tenant will furnish Landlord with a written statement that Tenant has accepted the Demised Premises and that Landlord has fully complied with Landlord's covenants and obligations. ARTICLE VI. USES AND CARE OF PREMISES. 6.1 The Demised Premises may be used only for the purpose or purposes specified in ARTICLE I, SECTION 1.1(K) above, and for no other purpose or purposes without the prior written consent of Landlord. 6.2 Tenant shall not use the Demised Premises for any unlawful purposes or acts; shall not commit or permit any waste or damage to the Demised Premises; shall use and maintain the Demised Premises in compliance with (I) all laws, codes, ordinances, rules, regulations and orders (collectively "Laws") of any governmental authority or agency, including, without limitation, those governing 5 8 zoning, health, safety (including fire safety), and the occupational hazards, pollution and environmental control, and handicapped accessibility (including but not limited to any such laws imposing upon Landlord or Tenant any duty respecting or triggered by any change in use or occupancy or any alteration or improvement of, in or to the Demised Premises, and (II) all reasonable directions of the Landlord, including the building rules and regulations, attached hereto as EXHIBIT "B", as may be modified from time to time by Landlord on reasonable notice to Tenant. Tenant shall use his best efforts to cause its agents, employees, customers, invitees, licensees, and concessionaires to comply with the building rules and regulations and with the covenants and agreements of this Section. 6.3 Tenant shall not, without Landlord's prior written consent, keep anything within the Demised Premises for any purpose which increases the insurance premium costs or invalidates any insurance policy carried on the Demised Premises or other part of the property. Tenant shall pay as additional rent, upon demand of Landlord, any such increased premium cost due to Tenant's use or occupation of the property. All property kept, stored or maintained within the property by Tenant shall be at Tenant's sole risk. 6.4 Tenant shall not conduct within the Demised Premises any fire, auction, going out of business, liquidation or bankruptcy sales or operate within Demised Premises a "Wholesale" or "Factory Outlet" store, a cooperative store, a "Second Hand" store, a "Surplus" store or a store commonly refereed to as a "Discount House." Tenant shall not advertise that it sells products or services at "discount," "cut-price" or "cut-rate" prices. Tenant shall not permit any objectionable or unpleasant odors to emanate from the Demised Premises, nor place or permit any radio, television, loud-speaker, or amplifier on the roof or outside of the Demised Premises, or where the same can be seen or heard from outside the Demised Premises, nor place an antenna, awning, or other projection on the exterior of the Demised Premises; nor solicit business or distribute leaflets or other advertising material on the property outside the Demised Premises; nor take any other action which, in the exclusive judgment of Landlord, would constitute a nuisance or would disturb or endanger other tenants of the Building or unreasonably interfere with their use of their respective premises, nor do anything which would tend to injure the reputation of the Building. 6.5 Tenant shall take good care of the Demised Premises and keep the same free from waste at all times. Tenant shall keep the Demised Premises and sidewalks, service-ways, and loading areas adjacent to the Demised Premises neat, clean and free from dirt, rubbish, insects and pests at all times, and shall store all trash and garbage within the Demised Premises, arranging for the regular pickup of such trash and garbage at Tenant's expense. Tenant will store all trash and garbage within the area designated by Landlord for such trash pickup and removal and only in receptacles of the size, design and color from time to time prescribed by Landlord. Receiving and delivery of goods and merchandise and removal of garbage and trash shall be made only in the manner and areas from time to time prescribed by Landlord. Landlord may, at its sole option, arrange for collection of all trash and garbage and, should Landlord exercise such election, the costs thereof will be part of Operating Expenses. Tenant shall not operate an incinerator or burn trash or garbage within the property. 6.6 Tenant shall not move any furniture or equipment into or out of the Demised Premises except at such times as Landlord may from time to time designate in writing to all tenants. 6.7 Tenant shall include the address and identity of its business activities in the Demised Premises in all advertisements made by Tenant in which the address and identity of any similar local business activity of Tenant is mentioned. 6.8 Tenant shall not allow any animals other than seeing eye dogs onto the property whatsoever. 6.9 Tenant shall procure, at its sole expense, any permits and licenses required for the transaction of business in the Demised Premises and otherwise comply with all applicable laws, ordinances and governmental regulations. Landlord makes no representation or warranty, expressed or implied, with regard to the fitness of the Demised Premises or the property for the Tenant's intended use or for any particular purpose. Tenant shall bear the cost of all alterations or improvements to the property required by any applicable laws, ordinances or governmental regulation based upon Tenant's use of the property. 6 9 6.10 Tenant shall not use the public address system in the Office Building. ARTICLE VII. LANDLORD'S SERVICES. 7.1 Landlord covenants and agrees that it will provide the following services, the cost of which shall be included in Operating Expenses: (a) keep the foundation, the exterior walls and roof of the Demised Premises in good repair; (b) provide heat and air conditioning to maintain the Demised Premises at a reasonably comfortable temperature between the hours of 8:00 a.m. and 6:00 p.m., Monday through Friday of each week, and 8:00 a.m. and 1:00 p.m. on Saturday of each week, except holidays recognized by the United States Government. Landlord shall endeavor to provide HVAC during hours other than the hours of full operation of the Building, upon request by Tenant at least twenty-four (24) hours prior to the time Tenant desires such service. Tenant agrees to cooperate fully with Landlord and to abide by all the regulations and requirements which Landlord may reasonably prescribe for the proper functioning and protection of the HVAC equipment and to pay the cost of any damage resulting from Tenant's failure to comply with the foregoing provisions; (c) provide electricity for lighting purposes and operation of ordinary office equipment, excluding, however, computers other than personal computers, and other equipment requiring heavier than normal office use of electricity. Within fifteen (15) days from the date of this Lease, Tenant shall submit to Landlord its list of office equipment. Within fifteen (15) days from receipt of such list, Landlord shall inform Tenant whether Landlord, in its reasonable discretion, has determined that such equipment satisfies the requirements of this SECTION 7.1(C). (d) provide janitor services Monday through Friday of each week, except holidays recognized by the United States Government, it being understood and agreed, however, that Landlord shall not be liable in any way for any damage or inconvenience caused by the cessation or interruption of such heating, air conditioning, electricity, elevator, janitor services occasioned by fire, accident, strikes, necessary maintenance, alterations, or repairs, or other causes beyond Landlord's control. It is understood that employees of Landlord are prohibited as such from receiving any packages or other articles delivered to the Building for Tenant and that, should any such employee receive any such packages or articles, he or she in so doing shall be the agent of Tenant and not of Landlord. (e) provide hot and cold water and lavatory supplies, it being understood and agreed that hot and cold water shall be furnished by Landlord only at those points of supply provided for general use of other tenants in the Building as well as to Tenant's kitchen; (f) provide automatically operated elevator service at all times; (g) list the Tenant's trade name on the Building directory located in the entrance lobby. 7.2 In the event any public utility company supplying energy, water, sewer or other utility, or governmental law, regulation, executive or administrative order requires that Landlord or Tenant reduce or maintain at a certain level the consumption of a utility and such requirement affects the HVAC, light, use of or hours of operation of the premises or Building, Landlord and Tenant shall each adhere to and abide by said laws, regulations or executive orders without any reduction in Rent. 7.3 Failure by Landlord to any extent to furnish the above described services, or any cessation thereof, shall not render Landlord liable for damages to either person or property, nor be construed as an eviction of Tenant, nor give Tenant the right to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement hereof, unless such failure to provide services is a result of the gross negligence of Landlord or Landlord's agents. Should any of the Building equipment or machinery break down, or for any cause cease to function properly, Landlord shall use reasonable diligence to repair the same promptly, and Tenant shall have no claim for an abatement of rent or damages on account of any interruptions in service occasioned thereby or resulting therefrom. 7.4 Landlord shall not be required to make any repairs occasioned by the act or negligence of Tenant, its agents, employees, subtenants, licensees and concessionaires, which repairs shall be 7 10 made by Tenant. In the event that the Demised Premises should become in need of repairs required to be made by Landlord hereunder, Tenant shall give immediate written notice thereof to Landlord and Landlord shall not be responsible in any way for failure to make such repairs until a reasonable time shall have elapsed after delivery of such written notice. Landlord's obligation hereunder is limited to repairs specified in this article only, and Landlord shall have no liability for any damages or injury arising out of any condition or occurrence causing a need for such repairs. The cost of such repairs and maintenance shall be included in the Operating Expenses. There shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the property or in or to any fixtures, appurtenances and equipment therein or thereon. 7.5 Tenant shall furnish, maintain and replace all Building Non-Standard electric light bulbs, tubes and tube casings. 7.6 Tenant shall keep the Demised Premises in good clean condition and shall, at its sole cost and expense, make all needed repairs and replacements including replacement of cracked or broken glass, except for repairs and replacements expressly required to be made by Landlord under the provisions of ARTICLE VII, SECTION 7.1, ARTICLE XI, SECTION 11.1 and ARTICLE XV, SECTION 15.3. If any repairs required to be made by Tenant hereunder are not made within three (3) days after written notice delivered to Tenant by Landlord, Landlord may, at its discretion, make such repairs without liability to Tenant for any loss or damage which may result to its stock or business by reason of such repairs, and Tenant shall pay to Landlord immediately upon demand as additional rental hereunder the cost of such repairs plus ten percent (10%) of the amount thereof and failure to do so shall constitute an event of default hereunder. At the expiration of this Lease, Tenant shall surrender the Demised Premises in good condition, reasonable wear and tear excepted, and shall surrender all keys for the Demised Premises to Landlord and shall inform Landlord of all combinations on locks, safes and vaults, if any, in the Demised Premises. ARTICLE VIII. ALTERATIONS. 8.1 Tenant shall not make any alterations, additions, or improvements to the Demised Premises without the prior written consent of Landlord, which Landlord may grant or deny in its sole discretion with respect to structural alterations, except for the installation of unattached, movable trade fixtures which may be installed without drilling, cutting or otherwise defacing the Demised Premises. Landlord shall not unreasonably withhold or delay its consent with respect to non-structural alterations. All alterations, additions, improvements and fixtures, except that any Alterations, fixtures or any other property installed in the Demised Premises at the sole expense of Tenant and which can be removed without causing material damage to the Building, shall remain upon and be surrendered with the Demised Premises and become the property of Landlord at the termination of this Lease, unless Landlord requests their removal in which event Tenant shall remove the same and restore the Demised Premises to their original condition at Tenant's expense. Any linoleum, carpeting or other floor covering which may be cemented or otherwise affixed to the floor of the Demised Premises is a permanent fixture and shall become the property of the Landlord without credit or compensation to Tenant. 8.2 All construction work done by Tenant within the Demised Premises shall be performed in a good and workmanlike manner, in compliance with all governmental requirements, and the requirements of any contract or deed or trust to which the Landlord may be a party and in such manner as to cause a minimum of interference with other construction in progress and with the transaction of business in the Building. Tenant agrees to indemnify Landlord and hold it harmless against any loss, liability or damage resulting from such work, and Tenant shall, if requested by Landlord, furnish bond or other security satisfactory to Landlord against any loss, liability or damage. ARTICLE IX. LANDLORD'S RIGHT OF ACCESS AND USE. 9.1 Landlord shall have the right to enter upon the Demised Premises at any reasonable time for the purpose of inspecting the same, or of making repairs to the Demised Premises, or of making repairs, alterations or additions to adjacent premises, or of showing the Demised Premises to prospective purchasers, Tenants or lenders. 8 11 9.2 Landlord may, within one hundred twenty (120) days prior to the expiration of the term, post and maintain notices, free from hindrance or control of Tenant. 9.3 Use of the roof above the Demised Premises is reserved to Landlord. 9.4 In addition to the rights specified elsewhere in this Lease, Landlord shall have the following rights regarding the use of the Demised Premises or the property by Tenant, its employees, agents, customers and invitees, each of which may be exercised without notice or liability to Tenant: (a) Landlord may install such signs, advertisements or notices or Tenant identification information on or in the Building, on the property or on the directory board or Tenant access doors as it shall deem necessary or proper. (b) Landlord shall approve or disapprove, prior to installation, all types of drapes, shades and other window coverings used in the Demised Premises, and may control all internal lighting and signage that may be visible from outside the Demised Premises. (c) Landlord may grant to any person the exclusive right to conduct business or render any service in the Building, provided that such exclusive right shall not operate to limit Tenant from using the Demised Premises for the use permitted in ARTICLE I, SECTION 1.1(K). (d) Landlord may control the use of the property in such manner as it deems necessary or proper, including by way of illustration and not limitation: requiring all persons entering or leaving any Building in the Complex to identify themselves and their business in the Building to a security guard; excluding or expelling any peddler, solicitor or loud or unruly person from the Building; closing or limiting access to the Building or any part thereof, including entrances, corridors, doors and elevators, during times of emergency, repairs or after regular business hours. ARTICLE X. SIGNS. 10.1 All signs, decorations and advertising media shall conform in all respects to the sign criteria established by Landlord for the Complex from time to time in the exercise of its sole discretion, and shall be subject to the prior written approval of Landlord as to construction, method of attachment, size, shape, height, lighting, color, location and general appearance. All signs shall be kept in good condition and in proper operating order at all times. Other than Building directory signage and front entrance signage to the Demised Premises, and Tenant's signage at the Complex existing as of the Commencement Date, no other signs, advertisements or notices shall be painted, affixed or displayed: (I) within the Demised Premises which are visible from outside of the Demised Premises, (II) outside of the Demised Premises, (III) in, about or outside of the Building, or (IV) on the land associated with Building. ARTICLE XI. UTILITIES. 11.1 Landlord agrees to cause to be provided and maintained the necessary mains, conduits and other facilities necessary to supply water, electricity, gas (if available), telephone service and sewerage service to the Demised Premises, and the charges therefor shall be included in Operating Expenses (except telephone service, which shall be paid directly by Tenant). 11.2 Landlord shall not be liable for any interruption or failure whatsoever in utility services. Landlord does not represent or warrant the uninterrupted availability of such utilities or building services, and any such interruption shall not be deemed an eviction or disturbance of Tenant's right to possession, or render Landlord liable to Tenant for damages by abatement of rent or otherwise, or relieve Tenant from the obligation to fully and timely perform its obligations and covenants under this Lease. 9 12 ARTICLE XII. INDEMNITY, PUBLIC LIABILITY INSURANCE AND FIRE AND EXTENDED COVERAGE INSURANCE. 12.1 Landlord shall not be liable to Tenant or to Tenant's employees, agents or visitors, or to any other person or entity, whatsoever, for any injury to person or damage to or loss of property on or about the Demised Premises or the property caused by the negligence or misconduct of Tenant, its employees, subtenants, licensees or concessionaires, or of any other person entering the Building under the express or implied invitation of Tenant or arising out of the use of the Demised Premises by Tenant and the conduct of its business therein, or arising out of any breach or default by Tenant in the performance of its obligations hereunder or resulting from any other cause except Landlord's gross negligence, and Tenant agrees to indemnify Landlord and hold Landlord harmless from any loss, expense or claims arising out of such damage or injury. 12.2 Landlord and Tenant agree and covenant that neither shall be liable to the other for loss arising out of damage to or destruction of the Demised Premises or contents thereof when such loss is caused by any perils included within standard All Risk property insurance, including flood and earthquake insurance policies, for buildings similar to the buildings in the Complex, in Montgomery County, Maryland. This agreement shall be binding whether or not such damage or destruction be caused by negligence of either party or their agents, licensees, employees or visitors. ARTICLE XIII. TENANT'S INSURANCE. 13.1 Tenant agrees, at its sole cost, to carry and keep in full force and effect at all times during the term of this Lease, a comprehensive general liability policy with a single limit of at least Ten Million Dollars ($10,000,000.00), including coverage for bodily injury, property damage, contractual liability for this Lease and personal injury liability. Tenant's comprehensive general liability insurance policy and certificates evidencing such insurance shall name Landlord and its property manager of the Complex as additional insureds and shall also contain a provision by which the insurer agrees that such policy shall not be canceled except after sixty (60) days written notice to Landlord. Any liability insurance carried or to be carried by Tenant hereunder shall be primary over any policy that might be carried by Landlord. If Tenant shall fail to obtain or maintain such insurance, Landlord may obtain, after providing written notice to Tenant with a thirty (30) day opportunity to cure, such insurance on Tenant's behalf and the cost shall be deemed additional rent and shall be payable upon Landlord's demand. 13.2 Tenant shall obtain All Risk property insurance, including flood and earthquake insurance, insuring against loss to the Demised Premises (including any improvements thereon). Such insurance shall be in the form and amount reasonably satisfactory to Landlord, and Tenant shall, when requested from time to time by Landlord, provide Landlord with evidence of such insurance. Such insurance shall contain waiver of subrogation provisions in favor of Landlord and its agents. 13.3 Tenant agrees to carry and keep in full force and effect at all times during the term of this Lease, at its sole cost, Worker's Compensation and Employer's Liability insurance, with a minimum Employer's Liability limit of $1,000,000 each occurrence. 13.4 At the request of Landlord, Tenant shall obtain business interruption insurance naming Landlord as loss payee, which insurance shall be in an amount sufficient to pay all rent due hereunder. ARTICLE XIV. NON-LIABILITY FOR CERTAIN DAMAGES. 14.1 Landlord and Landlord's agents and employees shall not be liable to Tenant or any other person or entity whomsoever for any injury to person or damage to property caused by the Demised Premises or other portions of the property becoming out of repair or by defect (including latent defects) in or failure of any building equipment, pipes or wiring, or broken glass, or by the backing up of drains, or by gas, water, steam, electricity or oil leaking, escaping or flowing into the Demised Premises, nor shall Landlord be liable to Tenant or any other person or entity whomsoever from any loss or damage that may be occasioned by or through the acts or omissions of other tenants of the Building or of any other persons or entity whomsoever. Tenant shall indemnify and hold harmless Landlord from any loss, cost, expense or claims arising out of such injury or damage referred to in this ARTICLE XIV, SECTION 14.1. 10 13 14.2 In the event of any violation of this Lease by Landlord, Tenant's exclusive remedy shall be an action for damages (Tenant waiving the benefit of any laws granting it a lien upon the property of Landlord and/or upon rent due the Landlord), but prior to any such action Tenant will give Landlord written notice specifying such violation with particularity, and Landlord shall thereupon have thirty (30) days in which to cure any such violation. Unless and until Landlord fails to so cure any violation after such notice, Tenant shall not have any remedy or cause of action by reason thereof. All obligations of Landlord hereunder will be construed as covenants, not conditions; and all such obligations will be binding upon Landlord only during the period of its ownership of the property and not thereafter. The term "Landlord" shall mean only the owner, for the time being, of the property and in the event of the transfer by such owner of its interest in the property such owner shall thereupon be released and discharged from all covenants and obligations of the Landlord thereafter accruing, but such covenants and obligations shall be binding during the Lease term upon each new owner for the duration of such owner's ownership. Notwithstanding any other provision hereof, Landlord shall not have any personal liability hereunder. In the event of any breach or default by Landlord in any term or provision of this Lease, Tenant agrees to look solely to the equity or interest then owned by Landlord in the land and improvements which constitute the property; however, in no event shall any deficiency judgment or any money judgment of any kind be sought or obtained against Landlord or affiliated companies. ARTICLE XV. DAMAGE BY CASUALTY. 15.1 Tenant shall give immediate written notice to Landlord of any damage caused to the Demised Premises by fire or other casualty. 15.2 If the Office Building shall be destroyed or damaged in excess of $100,000 by a casualty, then Landlord may elect either to terminate this Lease as hereinafter provided, or to proceed to rebuild and repair the Demised Premises. Should Landlord elect to terminate this Lease, it shall give written notice of such election to Tenant within ninety (90) days after the occurrence of such casualty. If Landlord should not elect to terminate this Lease, Landlord shall proceed with reasonable diligence to rebuild and repair the Demised Premises (and the cost of such repairs in excess of insurance proceeds shall be included in Operating Expenses). 15.3 Landlord's obligation to rebuild and repair under this ARTICLE XV shall in any event be limited to restoration to substantially the condition in which the Demised Premises existed prior to the casualty, and shall be further limited to the extent of the insurance proceeds available to Landlord for such restoration, and Tenant agrees that promptly after the completion of such work by Landlord, it will proceed with reasonable diligence and at its sole cost and expense to rebuild, repair and restore its signs, fixtures, equipment and furnishings. 15.4 During the period from the occurrence of the casualty until Landlord's repairs are substantially completed, there shall be no reduction in the Annual Base Rent. 15.5 All damage or injury to the Demised Premises or the Building caused by the act or omission of Tenant, its employees, agents, invitees, licensees or contractors, shall be promptly repaired by Tenant at Tenant's sole cost and expense, to the satisfaction of Landlord except to the extent covered by insurance carried by Landlord; provided, however, Tenant shall pay any deductible under Landlord's policy required to be paid thereunder. ARTICLE XVI. EMINENT DOMAIN. 16.1 If the entire Demised Premises or the Complex should be taken for any public or quasi-public use under governmental law, ordinance or regulation, or by right of eminent domain or by private purchase in lieu thereof, this Lease shall terminate and the rent shall be abated during the unexpired portion of this Lease, effective on the date physical possession is taken by the condemning authority. If less than the entire Demised Premises or Complex should be taken as aforesaid, this Lease shall continue in full force and effect and there shall be no abatement in Annual Base Rent. 11 14 16.2 All compensation awarded for any taking (or the proceeds of private sales in lieu thereof) of the Demised Premises or the property shall be the property of Landlord, and Tenant assigns its interest in any such award to Landlord; provided, however, Landlord shall have no interest in any award made to Tenant for loss of business or the taking of Tenant's fixtures and other property if a separate award for such items is made to Tenant. ARTICLE XVII. ASSIGNMENT AND SUBLETTING. 17.1 Tenant shall not assign or transfer all or any portion of its interest in this Lease or in the Demised Premises, or sublet all or any portion of the Demised Premises, without the prior written consent of Landlord, which consent may be withheld at the sole and absolute discretion of the Landlord. Any assignment or sublease without the Landlord's prior written consent shall be voidable and, at Landlord's election, shall constitute a default of Tenant hereunder. Consent by Landlord to one or more assignments or sublettings shall not operate as a waiver of Landlord's rights with respect to any subsequent assignment or subletting. The term "sublet" shall be deemed to include the granting of licenses, concession, and any other rights of occupancy of any portion of the Demised Premises. Notwithstanding the foregoing, Landlord's consent shall not be required in the case of an assignment to a person or entity which controls, is controlled by, or is under common control with, Tenant, provided that Tenant remains primarily liable under this Lease. 17.2 In the event of the transfer and assignment by Landlord of its interest in this Lease or in the property to a person expressly assuming Landlord's obligations under this Lease, Landlord shall thereby be released from any further obligations hereunder, and Tenant agrees to look solely to such successor in interest of the Landlord for performance of such obligations. Any such security given by Tenant to secure performance of Tenant's obligations hereunder may be assigned and transferred to such successor in interest, and Landlord shall thereby be discharged of any further obligations relating thereto. 17.3 Tenant shall not mortgage, pledge or otherwise encumber its interest in this Lease or in the Demised Premises. 17.4 In no case may Tenant assign any options granted to Tenant hereunder, all such options being deemed personal to Tenant and exercisable by Tenant only. 17.5 Any request by Tenant for approval to sell or sublet the Demised Premises or to transfer or assign Tenant's interest in this Lease, shall be accompanied by a processing charge in the amount of Five Hundred Dollars ($500.00) payable to Landlord. 17.6 In the event Landlord approves Tenant subletting this Lease and the subtenant or assignee is paying to Tenant an amount in excess of that paid by Tenant to Landlord under this Lease (which such amount shall be deemed the aggregate sum of all payments by subtenants to Tenant), then fifty percent (50%) of any such excess amounts shall be deemed rent under this Agreement and shall be immediately paid by Tenant to Landlord. If any court of law should find this provision invalid, then, in such event, Tenant shall be prohibited from subletting or assigning this Lease for an amount in excess of the amounts paid by Tenant to Landlord pursuant to the terms of this Lease. ARTICLE XVIII. DEFAULT BY TENANT AND REMEDIES. 18.1 The following events shall be deemed to be events of default by Tenant under this Lease: (a) Tenant shall fail to pay any installment of rental or any other expense required to be paid by Tenant hereunder when due, and such failure continues for ten (10) days after Tenant receives written notice thereof from Landlord. (b) Tenant shall fail to comply with any term, provision or covenant in this Lease, other than the payment of rental or expenses demanded by Landlord and shall not cure such failure within thirty (30) days after receiving written notice thereof from Landlord; provided, however, that if such failure cannot reasonably be cured within the thirty (30) day period, Tenant shall not be deemed to be in default if Tenant shall commence such cure within the thirty (30) day period and thereafter diligently prosecute the same to completion. 12 15 (c) Tenant or any guarantor of Tenant's obligations under this Lease shall become insolvent, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors. (d) Tenant or any guarantor of Tenant's obligation under this Lease shall file a petition under any section or chapter of the U.S. Bankruptcy Code, as amended, or under any similar law or statute of the United States or any State thereof; or Tenant or any guarantor of Tenant's obligations under this Lease shall be adjudged bankrupt or insolvent in proceedings filed against Tenant or any guarantor of Tenant's obligations under this Lease. (e) A receiver or Trustee shall be appointed for all or substantially all of the assets of the Tenant or any guarantor of Tenant's obligations under this Lease. (f) Tenant shall do or permit to be done anything which creates a lien upon the Demised Premises. 18.2 Upon the occurrence of any such events of default, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever: (a) Terminate this Lease in which event Tenant shall immediately surrender the Demised Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which he may have for possession or arrearages in rental, enter upon and take possession of the Demised Premises and expel or remove Tenant and any other person who may be occupying said premises or any part thereof, by force if necessary, without being liable for prosecution or any other claim of damages. (b) Enter upon and take possession of the Demised Premises and expel or remove Tenant and any other person who may be occupying said premises or any part, by force if necessary, without being liable for prosecution or any claim for damages with or without having terminated the Lease. (c) Enter upon the Demised Premises by force, if necessary, without being liable for prosecution or any claim for damages, and do whatever Tenant is obligated to do under the terms of this Lease, and Tenant agrees to reimburse Landlord on demand for any expenses which Landlord may incur in effecting compliance with Tenant's obligations under this Lease, and Tenant further agrees that Landlord shall not be liable for any damages resulting to the Tenant from such action. (d) Alter all locks and other security devices at the Demised Premises without terminating this Lease and without notice to Tenant. 18.3 In the event Landlord elects to terminate the Lease by reason of an event of default, then notwithstanding such termination, Tenant shall be liable for, and shall pay to Landlord, at the address specified for notice to Landlord, the sum of all rental and other indebtedness accrued to date of such termination plus, as damage, an amount equal to the present value (using a discount rate of five percent (5%)) of the difference between (I) the total Annual Base Rent, as reasonably estimated by Landlord, for the remaining portion of the Lease term (had such term not been terminated by Landlord prior to the date of expiration stated in ARTICLE I); and (II) the fair rental value of the Demised Premises for such period. 18.4 In the event that Landlord elects to repossess the Demised Premises without terminating the Lease, then Tenant shall be liable for and shall pay to Landlord, at the address specified for notice to Landlord, all rental and other indebtedness accrued to the date of such repossession, plus, as damage, an amount equal to the total Annual Base Rent, as reasonably estimated by Landlord, for the remainder of the Lease term until the date of expiration of the term as stated in ARTICLE I diminished by any net sums thereafter received by Landlord through reletting the Demised Premises during said period (after deducting expenses incurred by Landlord as provided in ARTICLE XVIII, SECTION 18.5 hereof). In no event shall Tenant be entitled to any excess of any rental obtained by reletting over and above the rental herein reserved. Actions to collect amounts due from Tenant to Landlord may be brought from time to time on one or more occasions, without the necessity of Landlord's waiting until expiration of the Lease term. 13 16 18.5 In case of any event of default or breach by Tenant, Tenant shall also be liable for and shall pay to Landlord, at the address specified for notice herein, in addition to any sum provided to be paid above, brokers fees incurred by Landlord in connection with reletting the whole or part of the Demised Premises; the costs of removing and storing Tenant's or other occupant's property; the cost of repairing, altering, remodeling or otherwise putting the Demised Premises into condition acceptable to a new Tenant or Tenants, and all reasonable expenses incurred by Landlord in enforcing or defending Landlord's rights and/or remedies, including reasonable attorneys' fees. 18.6 In the event of termination or repossession of the Demised Premises for an event of default, Landlord shall not have any obligation to relet or attempt to relet the Demised Premises, or any portion thereof, or to collect rental after reletting; Landlord may relet the whole or any portion of the Demised Premises for any period, to any tenant, and for any use and purpose. 18.7 If Tenant should fail to make any payment or cure any default hereunder within the time herein permitted, Landlord, without being under any obligations to do so and without waiving such default, may make such payment and/or remedy such other default for the account of Tenant (and enter the Demised Premises for such purpose), and thereupon Tenant shall be obligated to, and agrees to, pay Landlord, as additional rent, upon demand, all costs, expenses and disbursements (including reasonable attorneys' fees) incurred by the Landlord in taking such remedial action. 18.8 In the event that Landlord shall have taken possession of the Demised Premises pursuant to the authority herein granted, then Landlord shall have the right to keep in place and use all of the furniture, fixtures, and equipment at the Demised Premises, including that which is owned by or Leased to Tenant, at all times prior to any foreclosure thereon by Landlord or repossession thereof by any Landlord thereof or third party having a lien thereon. Landlord shall also have the right to remove from the Demised Premises (without the necessity of obtaining a distress warrant, writ of sequestration or other legal process) all or any portion of such furniture, fixtures, equipment and other property located thereon and place same in storage at any premises within the County in which the Demised Premises is located; and in such event, Tenant shall be liable to Landlord for costs incurred by Landlord in connection with such removal and storage and shall indemnify and hold harmless Landlord from all loss, damage, cost, expense and liability in connection with such removal and storage. Landlord shall also have the right to relinquish possession of all or any portion of such furniture, fixtures, equipment and other property to any person ("Claimant") claiming to be entitled to possession thereof who presents to Landlord a copy of any instrument represented to Landlord by Claimant to have been executed by Tenant (or any predecessor of Tenant) granting Claimant the right under various circumstances to take possession of such furniture, fixtures, equipment or other property, without the necessity on the part of Landlord to inquire into the authenticity of said instrument's copy of Tenant's or Tenant's predecessor's signature thereon and without the necessity of Landlord's making any nature of investigation or inquiry as to the validity of the factual or legal basis upon which Claimant purports to act; and Tenant agrees to indemnify and hold Landlord harmless from all costs, expense, loss, damage, and liability incident to Landlord's relinquishment of possession of all or any portion of such furniture, fixtures, equipment or other property by Claimant. The rights of Landlord herein stated shall be in addition to any and all other rights which Landlord has or may hereafter have at law or in equity; and Tenant stipulates and agrees that the rights herein granted Landlord are commercially reasonable. ARTICLE XIX. HOLDING OVER. 19.1 In the event Tenant remains in possession of the Demised Premises after the expiration of this Lease and without the execution of a new Lease, it shall be deemed to be occupying said Demised Premises as a Tenant from month to month at a rental equal to the rental herein provided, plus fifty percent (50%) of such amount and otherwise subject to all the conditions, provisions and obligations of this Lease insofar as the same are applicable to a month to month tenancy. 14 17 ARTICLE XX. SUBORDINATION AND ATTORNMENT 20.1 Tenant accepts this Lease subject and subordinate to any mortgage, deed of trust or other lien presently existing or hereafter created upon the property and to any renewals and extensions thereof. Landlord is irrevocably vested with full power and authority to subordinate this Lease to any mortgage, deed of trust or other lien hereafter placed upon the property and Tenant agrees upon demand to execute such further instrument subordinating this Lease as Landlord may request, and if Tenant shall fail at any time to execute, seal and deliver any such instrument to Landlord, in addition to any other remedies available to it in consequence thereof, Landlord may execute, seal and deliver the same as the attorney in fact of Tenant in Tenant's name, place and stead, and Tenant irrevocably makes, constitutes and appoints Landlord, its successors and assigns, as such attorney in fact for that purpose. 20.2 At the option of any transferee of the Landlord's interest in the property pursuant to a foreclosure or similar proceeding under any mortgage, deed of trust or other lien upon the property, whether now existing or hereafter created, Tenant shall attorn to and be bound to any such transferee under the terms, covenants and conditions of this Lease for the balance of the term hereof remaining and any extensions or renewals hereof which may be affected in accordance with any option therefore in this Lease, with the same force and effect as if the transferee was the Landlord, and Tenant does hereby agree to attorn to such transferee, at the transferee's option, the attornment to be effective and self operative without the execution of any further instruments on the part of Tenant, immediately upon the transferee succeeding to the interest of the Landlord, provided said transferee provides written notice to the Tenant of its election to accept such attornment within sixty (60) days of the subject transfer. In the event any such transferee does elect to accept such attornment, the Tenant hereby agrees that said transferee shall not be (A) liable for any act or admission of Landlord under the Lease prior to the subject transfer or (B) subject to any offsets or defenses which Tenant might have against Landlord arising from events or circumstances existing prior to the subject transfer, or (C) bound by any rent or additional rent which Tenant might have paid in advance for more than the month of the subject transfer, or (D) bound by any amendment or modification of this Lease made without the foreclosing party's prior written consent. ARTICLE XXI. ESTOPPEL CERTIFICATES. 21.1 Tenant agrees to furnish from time to time, when requested by Landlord, the holder of any deed of trust or mortgage or the Landlord under any ground Lease covering all or any part of the property or any interest of Landlord therein, an estoppel certificate signed by Tenant confirming and containing such factual certifications and representations deemed appropriate by Landlord. The holder of any such deed of trust or mortgage or the Landlord under any such ground Lease and Tenant shall, within ten (10) days following receipt of said proposed estoppel certificate from Landlord, return a fully-executed copy of said certificate to Landlord. In the event Tenant fails to return a fully-executed copy of such certificate to Landlord within the foregoing ten-day period, then Tenant shall be deemed to have approved and confirmed all of the terms, certifications and representations contained in such certificate. ARTICLE XXII. NOTICES. 22.1 Wherever any notice is required or permitted hereunder, such notice shall be in writing. Any notice or document required or permitted to be delivered hereunder shall be deemed to be delivered, whether actually received or not when deposited in the United States mail, postage prepaid, certified or registered mail, return receipt requested, addressed to the parties hereto at the respective addresses set out in ARTICLE I, SECTION 1.1B & 1.1D above or such other address as they may have hereafter specified by written notice. ARTICLE XXIII. BROKERS. 23.1 Landlord and Tenant represent and warrant to each other that it has not employed a broker in carrying on the negotiations relating to this Lease. Tenant further warrants and covenants that is has not relied and will not rely upon any oral representation about the property, other tenants' 15 18 occupancy, uses or related matters made by any real estate agent, real estate broker, agent or employee of Landlord, or any other party. Tenant shall indemnify and hold Landlord harmless, from and against any cost, liability or expense (including attorney's fees and disbursements) incurred as a result of the assertion(s) or claim(s) by any person, firm or entity for brokerage or other commissions or finder's fees based upon the claiming person's alleged dealings with Tenant or any of its employees, agents or representatives. ARTICLE XXIV. APPROVAL AND CHANGES REQUIRED BY LENDER. 24.1 Any mortgagee of the property, or of Landlord's interest therein, may have the right to approve this Lease, and in the event such approval is not granted, Landlord shall have the right to terminate this Lease as hereinafter set forth. In the event that any mortgagee of the property, or of Landlord's interest therein, requires, as a condition of such financing, modifications to this Lease which (I) do not materially and adversely affect Tenant's use of the Demised Premises as herein permitted; and (II) do not increase the rent or other sums required to be paid by Tenant hereunder; then Landlord may submit to Tenant a written amendment of this Lease incorporating such required changes. Tenant shall execute such amendment within ten (10) days after the same has been submitted to Tenant. If Tenant fails to so execute and deliver such amendment, then Landlord shall thereafter have the right, at its sole option, to (A) execute such amendment on Tenant's behalf, Tenant appointing Landlord its irrevocable attorney-in-fact, said power being coupled with an interest to execute such amendment; or (B) to cancel this Lease. Such cancellation option shall be exercisable by Landlord's giving Tenant written notice of such termination; immediately whereupon this Lease shall be canceled and terminated and, upon relinquishment of possession of the Demised Premises by Tenant in the condition required pursuant to the terms hereof, both Landlord and Tenant shall thereupon be relieved from any and all further liability or obligation hereunder. ARTICLE XXV. PARKING. 25.1 During the Term of this Lease, Tenant and its employees and guests shall have use of all parking areas in the Complex, without charge, for parking purposes only, on an unreserved, non-exclusive basis in common with others entitled to use of said parking areas. Landlord shall have general possession, management and control of the parking areas, and may from time to time adopt reasonable rules and regulations pertaining to the use thereof. Landlord reserves the right to designate reserved parking in the parking areas. ARTICLE XXVI. WAIVER OF TRIAL BY JURY AND RIGHT TO REDEEM. 26.1 Landlord and Tenant each agree to and they waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of said premises and/or any claim of injury or damage, and statutory remedy. Tenant also hereby agrees that the provisions of SECTION 8-401(e) OF THE MARYLAND REAL PROPERTY CODE shall not apply to this Lease and Tenant hereby waives its rights thereunder. ARTICLE XXVII. FURNISHING OF FINANCIAL STATEMENTS. 27.1 Within ten (10) days of the execution of this Lease, Tenant shall furnish Landlord financial statements outlining Tenant's current financial condition if applicable, as of the last annual audit or the last regularly prepared report including tax returns. Over the term of this Lease and any extensions, within ten (10) days of Landlord's written request, Tenant shall furnish financial statements outlining Tenant's current financial condition. The foregoing requirements shall not apply during any period of time in which Tenant's stock is listed on a national stock exchange. ARTICLE XXVIII. OCCUPATIONAL AND ENVIRONMENTAL COMPLIANCE. 28.1 Tenant shall not in any manner use, maintain or allow the use or maintenance of the property in violation of any law, ordinance, statute, regulation, rule or order (collectively "Laws") of any governmental authority, including but not limited to Laws governing zoning, health, safety (including fire safety), occupational hazards, and pollution and environmental control. Tenant shall not use, maintain or allow the use or maintenance of the property or any part thereof to treat, store, dispose of, transfer, release, convey or recover hazardous materials nor shall Tenant otherwise, in any 16 19 manner, possess or allow the possession of any hazardous, materials on or about the property; provided, however, any hazardous material lawfully permitted and generally recognized as necessary and appropriate for general office use may be stored and used in the Demised Premises, so long as (I) such storage and use is in the ordinary course of Tenant's business permitted under this Lease; (II) such storage and use is performed in compliance with all applicable laws and regulations and in compliance with the highest standards prevailing in the industry for the storage and use of such materials; and (III) Tenant delivers prior written notice to Landlord of the identity of and information regarding such materials as Landlord may require. Tenant shall immediately notify Landlord of the presence or suspected presence of any hazardous material on or about the property and shall deliver to Landlord any notice received by Tenant relating thereto. Landlord and its agents shall have the right, but not the duty, to inspect the Demised Premises and conduct tests thereon at any time to determine whether or the extent to which there is hazardous materials on the Demised Premises. Landlord shall have the right to immediately enter upon the Demised Premises to remedy any contamination found thereon. In exercising its rights herein, Landlord shall use reasonable efforts to minimize interference with Tenant's business but such entry shall not constitute an eviction of Tenant, in whole or in part, and Landlord shall not be liable for any interference, loss, or damage to Tenant's property or business caused thereby. If any lender or governmental agency shall ever require testing to ascertain whether there has been a release of hazardous materials, then the reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand as additional rent if such requirement arose in whole or in part because of Tenant's use of the Demised Premises. Tenant shall execute affidavits, representations and the like from time to time, at Landlord's request, concerning Tenant's best knowledge and belief regarding the presence of any hazardous materials on the property or Tenant's intent to store or use hazardous materials on the property. Tenant shall indemnify and hold harmless Landlord from any and all claims, loss, liability, costs, expenses or damage, including attorneys' fees and costs of remediation and compliance, incurred by Landlord in connection with any breach by Tenant of its obligations under this section. The covenants and obligations of Tenant hereunder shall survive the expiration or earlier termination of this Lease. 28.2 For the purposes of this ARTICLE XXVIII, the term "hazardous materials" shall mean (I) any and all hazardous waste, toxic chemicals, materials or substances occurring in the air, water, soil or ground water at the property by reason of which the Tenant or Landlord would be subject to an injunction action and/or any damages, penalties, clean up costs or other liability under the provisions of the COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT 42 U.S.C. SECTION 9601 ET SEQ., THE SUPERFUND AMENDMENTS AND REAUTHORIZATION ACT OF 1986, 42 U.S.C. SECTION 9601 (20D), THE RESOURCE CONSERVATION AND RECOVERY ACT (THE SOLID WASTE DISPOSAL ACT), 42 U.S.C. SECTION 9601 ET SEQ., THE FEDERAL WATER POLLUTION CONTROL ACT, AS AMENDED BY THE CLEAN WATER ACT OF 1977, 33 U.S.C. SECTION 1251 ET SEQ., THE CLEAN AIR ACT OF 1966, 42 U.S.C. SECTION 7401 ET SEQ., AND THE TOXIC SUBSTANCES CONTROL ACT, 15 U.S.C. SECTION 2601, ET SEQ.; (II) any "oil, petroleum proDuCTs and their by-products" as defined by the MARYLAND ENVIRONMENTAL CODE ANNOTATED SECTION 4-411(a)(3); as amended from time to time and regulations promulgated thereunder; (III) any "hazardous substance" as defined by the MARYLAND ENVIRONMENTAL CODE ANNOTATED, TITLE 7, SUBTITLE 2, as amended from time to time and regulations promulgated thereunder; and (iv) any substance the presence of which is prohibited or controlled by any other federal, state or local laws, regulations, statutes, or ordinances now in a force or hereafter enacted relating to waste disposal or environmental protection with respect to hazardous, toxic or other substances generated, produced, leaked, released, spilled, stored or disposed of at or from the property. Hazardous material shall also include any other substance which by law requires special handling in its collection, storage, treatment or disposal, but not including small quantities of materials present on the property in retail containers, which would not be prohibited, regulated or controlled under applicable environmental laws. ARTICLE XXIX MISCELLANEOUS. 29.1 Nothing herein contained shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership or a joint venture between parties hereof, it being understood and agreed that neither the method of computation of rental, nor any other provisions contained herein, nor the acts of the parties hereto, shall be deemed to create any relationship between the parties hereto other than the relationship of Landlord and Tenant. Whenever herein the singular number is used, the same shall include the plural, and words of gender shall include each other gender. 17 20 29.2 The captions used herein are for convenience only and do not limit or amplify the provisions hereof. 29.3 One or more waivers of any covenant, term or condition of this Lease by Landlord shall not be construed as a waiver of a subsequent breach of the same covenant, term or condition. The consent or approval by Landlord shall not be construed as a waiver of a subsequent breach of the same covenant, term or condition. The consent or approval by Landlord to or of any act by the Tenant shall not be deemed to waive or render unnecessary consent to or approval of any subsequent similar act. 29.4 Whenever a period of time is herein prescribed for action to be taken by the Landlord, Landlord shall not be liable or responsible for, and there shall be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, government laws, regulations or restrictions or any other cause of any kind whatsoever which is beyond the reasonable control of Landlord. At any time when there is outstanding a mortgage, deed of trust or similar security instrument covering Landlord's interest in the Demised Premises, Tenant may not exercise any remedies for default by Landlord hereunder unless and until the holder of the indebtedness secured by such mortgage, deed of trust or similar instrument shall have received written notice of such default and a reasonable time for such default shall thereafter have elapsed. 29.5 This Lease contains the entire agreement between the parties, and no agreement shall be effective to change, modify or terminate this Lease in whole or in part unless such agreement is in writing and duly signed by the party against whom enforcement of such change, modification or termination is sought. 29.6 The laws of the State of Maryland, without reference to its conflicts of laws principles, shall govern the interpretation, validity, performance and enforcement of this Lease. If any provision of this Lease should be held to be invalid or unenforceable, the validity and enforceability of the remaining provisions of this Lease shall not be affected thereby. 29.7 The terms, provisions and covenants contained in this Lease shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors in interest and legal representatives except as otherwise herein expressly provided. 29.8 Tenant shall not record this Lease or any memorandum or other document referring to this Lease without the express written permission of Landlord. Landlord, however, may record this Lease or any related document without the consent or jointer of Tenant. 29.9 Tenant shall pay before delinquency all costs for work done or caused to be done by Tenant in the Demised Premises which could result in any lien or encumbrance in respect of such work and shall indemnify, defend and hold harmless Landlord against any claim, loss, cost, demand and legal or other expenses, whether in respect of any lien or otherwise, arising out of the supply of material, services or labor for such work. Tenant shall immediately notify Landlord of any such lien, claim of lien or other action of which it has or reasonably should have knowledge and which affect the title to the Complex or any part thereof, and shall cause the same to be removed within fifteen (15) days (or such additional time as Landlord may consent to in writing) after its filing, creation or assertion, whichever shall first occur, failing which Landlord may declare Tenant in default hereunder and take such action as Landlord deems necessary to remove the same and the entire cost thereof shall be immediately due and payable by Tenant to Landlord as additional rent hereunder. 29.10 The submission of this Lease for examination does not constitute a reservation of or an option for the Demised Premises nor does it constitute an offer to lease the Demised Premises until signed by Landlord and this Lease becomes effective as a Lease only upon execution and delivery thereof by both Landlord and Tenant. 29.11 Time shall be of the essence for this Lease. 29.12 If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons or circumstances other than those 18 21 as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by law. 29.13 It is agreed that, for the purpose of any suit brought or based on this Lease, this Lease shall be construed to be a divisible contract, to the end that successive actions may be maintained thereon as successive periodic sums shall mature or be due hereunder, and it is further agreed that failure to include in any suit or action any sum or sums then matured or due shall not be a bar to the maintenance of any suit or action for the recovery of said sum or sums so omitted; and Tenant agrees that it will not, in any suit or suits brought or arising under this Lease for a matured sum for which judgment has not previously been obtained or entered, plead, rely on or interpose the defenses of res judicata, former recovery, extinguishment, merger, election or remedies or other similar defense as a defense to said suit or suits. ARTICLE XXX. ATTACHMENTS. The Following Attachments are attached hereto and made a part hereof: EXHIBIT A - PLAN OF THE COMPLEX EXHIBIT B - RULES AND REGULATIONS ARTICLE XXXI. STATUS AS SUBLEASE. 31.1 It is understood that this Lease is a sublease of a portion of the Project leased to Landlord pursuant to a Lease dated August 30, 1995, between the Gaithersburg Realty Trust, as Landlord, and Landlord, as Tenant (the "Master Lease"). This Lease is fully subject and subordinate to all terms and conditions of the Master Lease. IN WITNESS HEREOF, the parties hereunto signed their names, as their free act and deed on the day and year first above written, and do hereby acknowledge and accept this Lease agreement. ATTEST: LANDLORD: MANOR CARE, INC. _____________________ BY:__________________________________ TITLE: ________________________________ ATTEST: TENANT: CHOICE HOTELS HOLDINGS, INC. (TO BE RENAMED CHOICE HOTELS INTERNATIONAL, INC.) _____________________ BY: __________________________________ TITLE: ________________________________ 19 22 [MAP OF BOUNDARY SURVEY] 23 EXHIBIT B RULES AND REGULATIONS 1. The sidewalks, entrances, passages, courts, elevators, vestibules, stairways, corridors or halls or other parts of the Building not occupied by any Tenant shall not be obstructed or encumbered by any Tenant or used for any purpose other than ingress and egress to and from the Demised Premises. Landlord shall have the right to control and operate the public portions of the Building, and the facilities furnished for the common use of the Tenants, in such manner as Landlord deems best for the benefit of the Tenants generally. No Tenant shall permit the visit to the Demised Premises of persons in such numbers or under such conditions as to interfere with the use and enjoyment by other Tenants of the entrances, corridors, elevators and other public portions or facilities of the Building. 2. No awnings or other projections shall be attached to the outside walls of the Building without the prior written consent of the Landlord. No drapes, blinds, shades, or screens shall be attached to or hung in, or used in connection with any window or door of the Demised Premises, without the prior written consent of the Landlord. Such awnings, projections, curtains, blinds, shades, screens, or other fixtures must be of a quality, type, design, and color, and attached in the manner approved by Landlord. Landlord agrees that it will not unreasonably withhold its consent to any such request by Tenant. 3. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted, or affixed by any Tenant on any part of the outside or inside of the Demised Premises or building without the prior written consent of the Landlord. In the event of the violation of the foregoing by any Tenant, Landlord may remove same without any liability, and may charge expense incurred by such removal to the Tenant or Tenants violating this rule. Interior signs on doors and directory tablet shall be inscribed, painted or affixed for each Tenant by the Landlord at the expense of such Tenant, and shall be of a size, color and style acceptable to the Landlord. 4. No show cases or other articles shall be put in front of or affixed to any part of the exterior of the Building, nor placed in the halls, corridors or vestibules, without the prior written consent of the Landlord. 5. The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags, or other substances shall be thrown therein. All damages resulting from any misuse of the fixtures shall be borne by the Tenant who, or whose servants, employees, agents, visitors or licensees, shall have caused the same. 6. There shall be no unnecessary marking, painting, drilling into or in any way defacing any part of the Demised Premises or the Building. No boring, cutting or stringing of wires shall be permitted. Tenant shall not construct, maintain, use or operate within the Demised Premises or elsewhere within or on the outside of the Building, any electric device, wiring or apparatus in connection with a loud speaker system or other sound system. 7. No bicycles, vehicles or animals, birds or pets of any kind shall be brought into or kept in or about the Demised Premises except seeing eye dogs. No Tenant shall cause or permit any unusual or objectionable odors to be produced upon or permeate from the Demised Premises, except as may be permitted in accordance with the Use and Occupancy permit. 8. No space in the Building shall be used for manufacturing, for the storage of merchandise, or for the sale of merchandise, goods or property of any kind at auction. 9. No Tenant shall make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of this or neighboring buildings or premises or those having business with them, whether by the use of any musical instrument, radio, talking machine, unmusical noise, whistling, singing, or in any other way. No Tenant shall throw anything out of the doors or windows or down the corridors or stairs. 24 10. No inflammable, combustible or explosive fluid, chemical or substance as defined by the Environmental Protection Agency shall be brought or kept upon the Demised Premises. 11. No additional locks or bolts of any kind shall be placed upon any of the doors, or windows by any Tenant, nor shall any changes be made in existing locks or the mechanism thereof, except as may be required by Tenant as a financial institution. The doors leading to the corridors or main halls shall be kept closed during business hours except as they may be used for ingress or egress. Each Tenant shall, upon the termination of his tenancy, restore to Landlord all keys of stores, offices, storage, and toilet rooms either furnished to, or otherwise procured by, such Tenant, and in the event of the loss of any keys, so furnished, such Tenant shall pay to the Landlord the cost thereof. 12. All removals, or the carrying in or out of any safes, freight, furniture or bulky matter of any description must take place during the hours which the Landlord or its Agent may determine from time-to-time. The Landlord reserves the right to inspect all freight to be brought into the Building and to exclude from the Building all freight which violates any of these Rules and Regulations or the Lease of which these Rules and Regulations are a part. 13. Any person employed by any Tenant to do janitor work within the Demised Premises must obtain Landlord's consent and such person shall, while in the Building and outside of said Demised Premises, comply with all instructions issued by the Superintendent of the Building. No Tenant shall engage or pay any employees on the Demised Premises, except those actually working for such Tenant on said premises. 14. Landlord shall have the right to prohibit any advertising by any Tenant which, in Landlord's reasonable opinion, tends to impair the reputation of the Building or its desirability as a building for offices, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 15. The premises shall not be used for lodging or sleeping or for any immoral or illegal purpose. 16. Each Tenant, before closing and leaving the Demised Premises at any time, shall see that all windows are closed. 17. The requirements of Tenants will be attended to only upon application of the office of the Building. Employees shall not perform any work or do anything outside of the regular duties, unless under special instruction from the management of the Building. 18. Access plates to under floor conduits shall be left exposed. Where carpet is installed, carpet shall be cut around access plates. 19. Mats, trash and other objects shall not be placed in the public corridors. 20. The Landlord does not maintain suite finishes which are non-standard, such as kitchens, bathrooms, wallpaper, special lights, etc. However, should the need for repairs arise, the Landlord will arrange for the work to be done at the Tenant's expense. 21. Violation of these rules and regulations, or any amendments thereto, shall be sufficient cause for termination of this Lease at the option of the Landlord. 22. Smoking in the Demised Premises or anywhere else in the Building is prohibited. EX-10.11 12 PROCUREMENT AGREEMENT 1 Exhibit 10.11 PROCUREMENT SERVICES AGREEMENT THIS AGREEMENT (this "Agreement") is made and entered into as of ___________, 1996, by and between MANOR CARE, INC., a Delaware corporation ("Manor"), and CHOICE HOTELS HOLDINGS, INC., (to be renamed Choice Hotels International, Inc.) a Delaware corporation ("Choice"). R E C I T A L S WHEREAS, Choice desires to have Manor provide certain procurement services to Choice upon request; WHEREAS, pursuant to a Distribution Agreement (the "Distribution Agreement") dated as of ___________, 1996, Choice and Manor have agreed to enter into procurement services agreement with the terms and conditions set forth herein; and WHEREAS, Manor shall retain the Corporate Procurement Department personnel and systems formerly utilized in the administration of the services described herein; and WHEREAS, Choice desires to retain Manor as described herein, and Manor desires to render such assistance on an equitable, arms length basis for a fee; NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Choice and Manor agree as follows: 1. Definitions. As used in this Agreement, the following capitalized terms shall have the meanings indicated unless the context requires otherwise: "Confidential Information" shall have the meaning specified in paragraph 6. "Choice Locations" shall mean the facilities operated in connection with the Lodging Business as of the Distribution Date, as such facilities may be increased, decreased, or expanded during the term of this Agreement by development of new or expansion or disposition of existing facilities by Choice. 1 2 "Distribution" means the distribution to the holders of Manor Care Common Stock all the outstanding shares of Choice Common Stock. "Distribution Date" means the date determined by the Board of Directors of Manor as the date on which the Distribution shall be effected. "Fee" shall have the meaning specified in paragraph 5. "Fiscal Year" shall mean Choice's fiscal year. "Lodging Business" shall mean any business or operation of Choice or the Lodging Subsidiaries (as defined in the Distribution Agreement) which is, pursuant to the Distribution Agreement, to be conducted, following the Distribution. "Products" shall mean goods within the categories of food, beverages, and other supplies described on Exhibit A and such additional categories of goods and such services (i.e., travel agency, car rental) as the parties may agree in writing to add. "Prime Rate" shall be the rate identified from time to time in the New York edition of the Wall Street Journal as being the Prime Rate of interest. "Service Area" shall mean the areas throughout the world within which Manor provides procurement services to Choice Locations on the Distribution Date, and such additional areas within which Manor now or in the future provides procurement services to Manor business operations. Any capitalized terms defined in the Distribution Agreement and used herein shall have the meanings ascribed to them in the Distribution Agreement unless otherwise defined herein. 2. Procurement Services. a. Upon the request of Choice, Manor shall provide Choice within the Service Area, and Choice shall purchase from Manor, the following services: (i) Assisting Choice to develop Product specifications; (ii) Assisting Choice to select local and national vendors and distributors for Proprietary Items, and contracting with such vendors and distributors on Choice's behalf and in Choice's name; and (iii) Assisting Choice to purchase Products from local and national vendors and distributors with which Manor has agreements, on terms and conditions negotiated by Manor on 2 3 behalf of and subject to Choice approved requirements, to the extent permitted under the terms of Manor's agreements with such vendors and distributors; provided however, Manor shall not provide Choice any credit support in connection therewith. b. Standard of Care and Modifications. All services provided hereunder shall be administered in accordance with Manor's standard policies, procedures and practices in effect as of the date hereof and as may be changed, and as more particularly described below, or as otherwise specified in accordance with the terms thereof. In so doing, Manor shall follow commonly accepted standards of care in the industry and exercise the same care and skill as it exercises in performing like services for itself. Manor agrees to provide such services only if it reasonably believes the service will not interfere with the conduct of the business of Manor or pose an unreasonable burden. c. Liaisons. Choice and Manor shall each appoint a managerial level individual (hereinafter "Representative") to facilitate communications and performance under this Agreement. Each party may treat an act of a Representative of the other party as being authorized by such other party without inquiring behind such act or ascertaining whether such Representative had authority to so act. The initial Representatives are named on Exhibit B. Each party shall have the right at any time and from time to time to replace its Representative by giving notice in writing to the other party setting forth the name of (i) the Representative to be replaced and (ii) the replacement, and certifying that the replacement Representative is authorized to act for the other party giving the notice in all matters relating to this Agreement. Choice's Representative shall be responsible for authorizing Manor to enter into arrangements on behalf of Choice, as hereinafter provided. d. Limitation of Responsibility. Manor shall have no obligation to train Choice employees to perform procurement functions or to convey procurement know-how to Choice. 3. Contracting and Purchasing Procedures. Upon the request of Choice, Manor shall provide the following services: a. Manor shall advise Choice of arrangements in effect during the term of this Agreement between Manor and its vendors and distributors, under which Choice may purchase Products, provided that such purchases by Choice do not result in an increased cost of goods for Manor and only for so long as Choice complies with all the terms, conditions, and performance requirements for such agreements. b. Choice shall, at all times, have sole responsibility for placing orders with vendors and distributors for Products required at Choice Locations. 4. Relationships with Vendors and Distributors. 3 4 a. Except as otherwise provided herein, Choice shall be responsible to the appropriate vendor or distributor for payment for all Products sold to it pursuant to this Agreement, it being understood that Manor shall not be responsible for payment for such Products. Choice shall be responsible for establishing its own creditworthiness with each vendor and distributor, and Manor may so advise each vendor and distributor in a manner acceptable to Manor and Choice. b. Manor shall monitor, account for and pass on to Choice, all discounts, allowances and other promotional payments or credits Manor receives for purchases of Products for Choice, provided that with respect to Products for which Choice made a commitment to purchase, Choice has satisfied such commitment to the extent necessary to earn the applicable discount, allowance or other promotional payment or credit. Manor shall provide Choice with its proportionate share of tiered or bracketed volume incentive rebates and allowances based upon the average value of the rebate or allowance received by Manor for the total quantity to which the rebate or allowance was applicable. Choice agrees to be responsible for any performance requirements associated with any rebates or allowances it receives and to refund to Manor any rebates and allowances paid or credited to Choice by Manor for which Choice does not purchase the requisite Products. 5. Compensation for Services. a. As compensation to Manor for services performed hereunder, Choice shall pay Manor for each full Fiscal Year during the term of this Agreement, an amount (hereinafter the "Fee") determined by multiplying the total dollar amount of the Manor Care Procurement Department (#88) expenses by an agreed upon percentage estimate of time spent each quarter by the Procurement staff providing goods and consulting services to Choice. Choice shall furnish Manor with such information as Manor may reasonably request for the purpose of calculating the Fee. Choice shall be entitled to review Manor's calculations and allocations. Any such review by Choice shall be subject to such reasonable requirements to preserve the confidentiality of Manor's proprietary methods, systems and data as Manor may require. Choice shall pay the Fee in four (4) quarterly payments. Manor shall invoice Choice for each payment at least ten (10) days prior to the end of each of Manor's quarterly Accounting Periods, and Choice's payment shall be due on the last day of the accounting period for which Choice is being invoiced. In the case of the first accounting period of each Fiscal Year, Manor shall invoice Choice as soon as the required information is available and Choice's payment shall be due within thirty (30) days after receipt of the invoice. If this Agreement begins or ends on a day other than the first or last day of one of Manor's quarterly Accounting Periods, the period payment shall be prorated for the portion of the Accounting Period that this Agreement was in effect. b. Any payments not made by Choice to Manor when due shall bear interest from the date due to the date of payment at the rate per annum equal to the Prime Rate, as may vary from time to time. c. Compensation to be paid to Manor for services performed for Choice hereunder shall be paid by Choice, and not by any vendor. 4 5 6. Confidentiality. The parties acknowledge that they will be exchanging Confidential Information (as defined below) during the term of this Agreement and each party shall retain the Confidential Information of the other in strictest confidence, unless and until it becomes part of the public domain or disclosure as required by law. "Confidential Information" is all information which is not known by the party's competitors and which is communicated to the other party, including, but not limited to, information regarding new product introductions, source and price of Products, procurement systems and methods of operation, quality assurance techniques, and cost and marketing data, which is identified as "confidential". All confidential and proprietary information which either party has obtained from the other shall be returned upon request, to the extent practicable, upon the expiration or earlier termination of this Agreement. The provisions of this paragraph shall survive expiration or earlier termination of this Agreement. 7. Term. The term of this Agreement shall commence on the Distribution Date and shall remain in effect through the end of the first full Fiscal Year immediately following the Distribution Date. Unless terminated pursuant to the terms hereof, the Agreement shall automatically renew each Fiscal Year thereafter for the extended term of said Fiscal Year and shall not extend beyond thirty (30) months from the Distribution Date; provided, however, that Choice may terminate this Agreement or any services provided hereunder at any time for any reason or no reason by sending written notice to Manor upon sixty (60) days' prior notice to Manor. This Agreement may also be terminated in the event of a default (past the expiration of any applicable cure period provided herein) in accordance with the provisions of this Agreement. 8. Relationship of Parties. It is understood and agreed that nothing in this Agreement shall be deemed or construed by the parties or any third party as creating an employer-employee, partnership or joint venture relationship between the parties. Manor shall have the right to enter into supply contracts, commitments or arrangements in the name of, or on behalf of, Choice, as provided in this Agreement. Except to the extent that Manor may enter into such contracts, commitments or arrangements on behalf of Choice, neither party will be deemed or construed to be an agent of the other for any purpose. 9. Disclaimers. a. Manor does not guarantee performance of any vendor or distributor recommended to Choice or contracted with on behalf of Choice. Manor shall not be liable to Choice, or deemed to be in default of any obligation arising from this Agreement, for any vendor or distributor delay or failure to deliver Products for any cause whatsoever except a Manor default. Choice's exclusive remedy in case of such a delay or failure of delivery shall be solely against the vendor or distributor and Manor's only obligation shall be to assist Choice in locating an alternative source of supply. 5 6 b. MANOR DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO FOOD, BEVERAGES OR OTHER SUPPLIES DELIVERED TO CHOICE BY A VENDOR OR DISTRIBUTOR PURSUANT TO THIS AGREEMENT. Choice acknowledges that its exclusive remedy in case of any defective Product delivered to it pursuant to this Agreement lies solely against the vendor or distributor, and not against Manor. Manor shall assign to Choice any express warranties or indemnifications covering Products delivered to Choice, to the extent they are assignable by Manor excluding claims or costs relating to Manor's bad faith, gross negligence or fraud. Manor agrees to cooperate with Choice, at Choice's sole cost and expense, in the enforcement of any such warranties or indemnifications against vendors or distributors. 10. Default. If either party materially defaults hereunder, the non-defaulting party may terminate this Agreement effective immediately (subject to the cure periods set forth herein below) upon written notice to the defaulting party. The non-defaulting party shall be entitled to all remedies provided by law or equity (including reasonable attorney's fees and costs of suit incurred). The following events shall be deemed to be material defaults hereunder: a. Failure by either party to make any payment required to be made to the other hereunder, which failure is not remedied within five (5) days after receipt of written notice thereof; or b. Except as otherwise provided herein, failure by either party substantially to perform in accordance with the terms and conditions of this Agreement, which failure is not remedied within thirty (30) days after receipt of written notice from the other party specifying the nature of such default; or c. (i) Filing of a voluntary bankruptcy petition by either party; (ii) filing of an involuntary bankruptcy petition against either party which is not withdrawn within sixty (60) days after filing; (iii) assignment for the benefit of creditors made by either party; or (iv) appointment of a receiver for either party. 11. Indemnification. Choice shall indemnify, defend and hold harmless Manor and its directors, officers and employees from Losses (as defined below), other than Losses directly and proximately caused solely by Manor's criminal conduct, fraud, bad faith or gross negligence. The term "Losses" shall include costs of any claim, lawsuit, settlement, judgment, penalty, or reasonable attorneys' fees. Manor shall indemnify, defend and hold harmless Choice and its directors, officers and employees from Losses directly and proximately caused solely by Manor's criminal conduct, fraud, bad faith or gross negligence, unless the actions (or inaction) causing the Losses were taken (or not taken) at the specific direction of Choice, its subsidiaries, employees, or agents. 6 7 12. Assignment. Neither party shall, without the prior written consent of the other, assign any rights or delegate any obligations under this Agreement, such consent not to be unreasonably withheld, conditioned or delayed. 13. Headings. The headings used in this Agreement are inserted only for the purpose of convenience and reference, and in no way define or limit the scope or intent of any provision of part hereof. 14. Severability of Provisions. Neither Manor nor Choice intends to violate statutory or common law by executing this Agreement. If any section, sentence, paragraph, clause or combination of provisions in this Agreement is in violation of any law, such sections, sentences, paragraphs, clauses or combinations shall be inoperative and the remainder of this Agreement shall remain in full force and effect and shall be binding upon the parties except to the extent it would result in an interpretation which would completely frustrate the purpose of entering into the agreement. 15. Parties Bound. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted successors and assigns. Nothing herein, expressed or implied, shall be construed to give any other person any legal or equitable rights hereunder. 16. Notices. All notices and other communications hereunder shall be in writing and shall be delivered by hand or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which such notice is received: To Choice: Choice Hotels Holdings, Inc. 10750 Columbia Pike Silver Spring, MD 20901 Attention: General Counsel To Manor: Manor Care, Inc. 11555 Darnestown Road Gaithersburg, MD 20878-3200 Attention: General Counsel 17. Further Action. Manor and Choice each shall cooperate in good faith and take such steps and execute such papers as may be reasonably requested by the other party to implement the terms and provisions of this Agreement. 7 8 18. Waiver. Manor and Choice each agree that the waiver of any default under any term or condition of this Agreement shall not constitute any waiver of any subsequent default or nullify the effectiveness of that term or condition. 19. Governing Law. All controversies and disputes arising out of or under this Agreement shall be determined pursuant to the laws of the State of Maryland, United States of America, regardless of the laws that might be applied under applicable principles of conflicts of laws. 20. Consent to Jurisdiction. The parties irrevocably submit to the exclusive jurisdiction of (a) the Courts of the State of Maryland in Montgomery County, and (b) the United States District Court for the State of Maryland for the purposes of any suit, action or other proceeding arising out of this Agreement. 21. Entire Agreement. This Agreement constitutes the entire understanding between the parties hereto, and supersede all prior written or oral communications, relating to the subject matter covered by said agreements. No amendment, modification, extension or failure to enforce any condition of this Agreement by either party shall be deemed a waiver of any of its rights herein. This Agreement shall not be amended except by a writing executed by both parties hereto. 22. Commercially Reasonable Terms and Conditions. Notwithstanding anything in this Agreement to the contrary, the terms and provisions of this Agreement reflect and shall reflect commercially reasonable terms and conditions (including, but not limited to, pricing) that are at least as favorable and as competitive to Choice as the terms and conditions Manor would grant third parties for substantially similar goods and services. 23. Force Majeure. Manor and Choice shall incur no liability (except for payments for Products actually delivered hereunder) to each other due to a failure to perform under the terms and conditions of this Agreement resulting from fire, flood, war, strike, lock-out, work-stoppage or slow- down, labor disturbances, power failure, major equipment breakdowns, construction delays, accident, riots, acts of God, acts of United States' enemies, laws, orders or at the insistence or result of any governmental authority or any other delay beyond each other's reasonable control. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CHOICE HOTELS HOLDINGS, INC., 8 9 a Delaware corporation By:_____________________________ Name:__________________________ Title:___________________________ MANOR CARE, INC., a Delaware corporation By:____________________________ Name:_________________________ Title:___________________________ 9 10 EXHIBIT A PRODUCTS - - Kitchen and Foodservice supplies and equipment - - Office/Administration supplies and equipment - - Housekeeping, laundry and maintenance supplies and equipment - - Medical supplies and equipment - - Furniture, furnishings, and design items. 10 11 EXHIBIT B REPRESENTATIVES _______________ - Manor _______________ - Choice 11 EX-10.12 13 RISK MANAGEMENT CONSULTING SERVICES AGREEMENT 1 EXHIBIT 10.12 RISK MANAGEMENT CONSULTING SERVICES AGREEMENT THIS AGREEMENT (this "Agreement") is made and entered into as of ____________, 1996 by and between MANOR CARE, INC., a Delaware corporation ("Manor", and CHOICE HOTELS HOLDINGS, INC., a Delaware corporation ("Choice"). In consideration of the mutual covenants contained herein, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Choice and Manor agree as follows: 1. Definitions.As used in this Agreement, the following capitalized terms shall have the meanings indicated unless the context requires otherwise: "Distribution" means the distribution to the holders of Manor Care Common Stock all the outstanding shares of Choice Common Stock. "Distribution Date" means the date determined by the Board of Directors of Manor as the date on which the Distribution shall be effected. "Prime Rate" shall be the rate identified from time to time in the New York edition of the Wall Street Journal as being the Prime Rate of interest. 2. Description of Services Upon the request of Choice, Manor agrees to provide the following risk management consulting services: Insurance Renewals - Domestic and International: Negotiate the renewal and placement of property and casualty insurance including property, boiler, crime, auto liability, general liability, workers' compensation, umbrella liability and directors and officers liability. This includes assembling historical loss information and renewal information, calculation of values, evaluation and negotiation of proposals, premiums and coverages with brokers and underwriters on behalf of Choice. Contract Review: Review insurance, indemnity and bond provisions of proposed contracts as requested. Assist attorneys or others to negotiate acceptable terms. Surety Bond Procurement: Assist Choice managers with bond applications and procedures, request bonds from broker, have bonds executed and delivered to requesting party. Maintain bond log and schedule. Obtain renewals or releases of expired bonds, review and approve accuracy of premium invoices. Certificate Tracking: Monitor licensee certificate tracking program. 1 2 Financial and Regulatory Support: Provide the following accounting services: - Annual/quarterly state compliance reports on outstanding self-insurance liabilities incurred. - Provide internal reporting associated with outstanding losses, accounts receivable, LOC and Surety Bond requirements. Premium and Claims Payment Processing and Reimbursement: Manor shall process payments on behalf of Choice for Choice's financial obligations under policies and self-insurance plans with an effective date on or after the Distribution Date. Reimbursement for all such policies and self-insurance plans shall be as follows: (1) Invoices for premiums and services related to such policies and plans shall be paid within five (5) days of receipt by Choice; (2) An escrow account shall be established for the payment of claims. This account will be structured to allow for three (3) months average claims payments. The replenishment in whole or in part, shall be due to Manor on the first day of each month, unless the account is in negative balance, thereby requiring replenishment within forty-eight (48) hours. Risk Management Resource: Provide research, advice and counsel to Choice as requested on insurance and risk management related issues, both domestically and internationally. Review insurance coverage, policies and provide risk management services listed below: Certificates of Insurance Review (contractors) Certificates of Insurance Issuance Administration of prior programs Actuarial Review of liabilities Self Administer Workers' Compensation claims in PA Monitor Claims (Set reserves, settle claims) Handle first party claims (Property, Crime, etc.) Oversee Auto Claims against others Oversee claims against contractors and/or subcontractors Self Insurance Filings and Assessments Oversee Franchise Property and Casualty and Group Insurance Programs Contract Review and Development Negotiate and contract with outside services as needed (Brokers, Claims Adjusters, Managed Care) Safety and Loss prevention Budgeting and Allocation of premiums IOC Policies (Crime and Directors and Officers) and contractual issues Potential development of International Franchise insurance program Review Franchise Agreements and recommend appropriate wording 2 3 Determine loss estimates for future years Any other Risk Management related duties as deemed applicable All services provided hereunder shall be administered in accordance with Manor's standard policies, procedures and practices in effect as of the Distribution Date and as the same may be changed from time to time. In providing such services, Manor shall follow commonly accepted standards of care in the industry and exercise the same care and skill as it exercises in performing like services for itself. Choice shall adopt reasonable measures to limit its exposure with respect to any potential Losses (defined below). Manor agrees to provide such services only if it reasonably believes the service will not interfere with the conduct of the business of Manor or pose an unreasonable burden. 3. Term. The term of this Agreement shall commence on the Distribution Date and shall remain in effect through the end of the first full Fiscal Year immediately following the Distribution Date. Unless terminated pursuant to the terms hereof, the Agreement shall automatically renew each Fiscal Year thereafter for the extended term of said Fiscal Year and shall not extend past the last day of the thirtieth (30th) month following the Distribution; provided, however, that Choice may terminate this agreement or any services provided hereunder at any time for any reason or no reason by sending 60 days prior written notice to Manor. This Agreement may also be terminated in the event of a default (past the expiration of any applicable cure period provided herein) in accordance with the provisions of this Agreement. 4. Fees; Premiums. Fee will be $438,000 per year, payable in twelve (12) equal monthly installments. Future years' fees will be determined within sixty (60) days prior to renewal of contract. Payment for all services hereunder shall be made by Choice to Manor within 30 days of receipt of invoice for payment (with appropriate supporting documentation for any out-of-pocket expenses in excess of fees payable hereunder and invoicing for insurance premiums, self-insurance and administrative costs, if requested). Any payments not made by Choice to Manor when due shall bear interest, computed daily, from the date due to the date of payment based on the annual percentage rate equal to the Prime Rate, as same may vary from time to time, plus two (2) percentage points. The parties agree that the terms and provisions of this Agreement reflect and shall reflect commercially reasonable terms and conditions (including, but not limited to, pricing) that are at least as favorable and as competitive to Choice as the terms and conditions Manor would grant or require of third parties for substantially similar goods and services. Payment for all policies and self insurance plans with an effective date on or after Distribution Date shall be payable as follows: 3 4 1) Invoices for premiums and services related to such policies and plans shall be paid within 5 days of receipt by Choice. 2) An escrow account shall be established for the payment of claims. This account will be structured to allow for three (3) months average claims payments, and the replenishment, in whole or in part, shall be due to Manor on the first of each month, unless the account is in negative balance, requiring replenishment within 48 hours. 5. Termination. If either party materially defaults hereunder, the non-defaulting party may terminate this Agreement effective immediately (subject to the cure periods set forth herein below) upon written notice to the defaulting party. The non-defaulting party shall be entitled to all remedies provided by law or equity (including reasonable attorneys' fees and costs of suit incurred). The following events shall be deemed to be material defaults hereunder: (a) Failure by either party to make any payment required to be made to the other hereunder, which failure is not remedied within five (5) days after receipt of written notice thereof; or (b) Except as otherwise provided herein, failure by either party substantially to perform in accordance with the terms and conditions of this Agreement, which failure is not remedied within thirty (30) days after receipt of written notice from the other party specifying the nature of such default; or (c) (i) Filing of a voluntary bankruptcy petition by either party; (ii) filing of an involuntary bankruptcy petition against either party which is not timely controverted and results in the entry of an order for relief; (iii) assignment for the benefit of creditors made by either party; or (iv) appointment of a receiver for either party. 6. Disclaimers; Limitation of Liability; Indemnification. The following disclaimers, limitation of liability and indemnification provisions shall apply during the term of this Agreement: (a) MANOR DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE SERVICES. Manor shall use reasonable efforts to perform the services in a professional and workmanlike manner and in accordance with the standard of care set forth herein but the results of the services are furnished "as is." 4 5 (b) With regard to Losses arising out of errors or omissions in the provision of services which are caused by Manor, Manor's sole liability to Choice for such Losses shall be to furnish correct information, payment and/or adjustment in the services, at no additional cost or expense to Choice; provided, Choice must promptly advise Manor of any such error or omission of which it becomes aware after having used reasonable efforts to detect any such errors or omissions in accordance with the standard of care set forth herein. If it is determined that Manor is not guilty of any errors or omissions, it will be the responsibility of Choice to reimburse Manor for any costs and expenses incurred. (c) With regard to Losses arising out of the unavailability, delay or interruption of any services for any reason beyond Manor's reasonable control, Manor's sole liability to Choice for such Losses shall be to use reasonable efforts to make the services available and/or to resume performing the services as promptly as reasonably practicable and at no additional charge to Choice. (d) EXCEPT FOR ITS OBLIGATION TO COMPLY WITH SUBPARAGRAPHS (a), (b), and (c), (i) MANOR SHALL NOT BE LIABLE FOR ANY ERRORS, OMISSIONS, DELAYS, OR LOSSES UNLESS CAUSED SOLELY BY ITS CRIMINAL CONDUCT, FRAUD, BAD FAITH OR GROSS NEGLIGENCE. CHOICE AGREES THAT IN NO EVENT WILL MANOR BE LIABLE FOR INCIDENTAL, INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES. (ii) CHOICE FURTHER AGREES THAT IN NO EVENT WILL THE TOTAL AGGREGATE LIABILITY OF MANOR FOR ANY AND ALL CLAIMS, LOSSES, OR DAMAGES ARISING UNDER THIS AGREEMENT AND FOR THE SERVICES PERFORMED HEREUNDER EXCEED THE VALUE OF CHOICE'S PAYMENT FOR SAID SPECIFIC SERVICE OVER ONE FOUR-WEEK ACCOUNTING PERIOD'S TIME. (e) CHOICE AGREES TO INDEMNIFY, DEFEND AND HOLD HARMLESS MANOR (ITS DIRECTORS, OFFICERS, EMPLOYEES AND ATTORNEYS) FROM ALL LOSSES (AS DEFINED) ASSERTED BY OR ON BEHALF OF THIRD PARTIES OR WHICH RESULT FROM GOVERNMENTAL ACTION OTHER THAN ANY SUCH LOSSES CAUSED BY MANOR'S SOLE CRIMINAL CONDUCT, FRAUD, BAD FAITH OR GROSS NEGLIGENCE. THE PROVISIONS OF THIS INDEMNITY SHALL APPLY ONLY TO LOSSES (AS DEFINED) WHICH RELATE DIRECTLY TO THE PROVISION OF THE SERVICES. (f) With regard to either parties' indemnification, the party required to indemnify pursuant to this Section (the "Indemnitor"), upon demand by the other party ("Indemnitee"), at its sole cost and expense, shall resist or defend such claim, action or proceeding (in the Indemnitee's 5 6 name, if necessary), using such attorneys as the Indemnitee shall approve, which approval shall not be unreasonably withheld. If, in the Indemnitee's reasonable opinion, there exists a conflict of interest which would make it inadvisable to be represented by counsel for the Indemnitor, the Indemnitor and the Indemnitee shall jointly select acceptable attorneys, and the Indemnitor shall pay the reasonable fees and disbursements of such attorneys. (g) The foregoing provisions of this Section set forth the full extend of the parties' liability (monetary or otherwise) under the Agreement for any and all Losses. For purposes of this Agreement, "Losses" shall mean any and all suits, debts, causes of action, losses, liabilities, claims or demands (whether at law or in equity), and any damages, settlement, judgment, penalty or other disposition of the same, and all costs and expense of the same (including, without limitation, attorneys' fees but in no situation whatsoever shall Manor be liable to Choice for incidental, indirect, special or consequential damages), which arise from or are related to the services of this Agreement. 7. Representatives. Choice and Manor hereby appoint the two managerial level Representatives to facilitate communications and performance hereunder. Each party may treat an act of a Representative of the other party as being authorized by such other party without inquiring behind such act or ascertaining whether such Representative had authority to so act. The initial Representatives are named below and either party may change its Representative by providing the other party notice. INITIAL REPRESENTATIVES _________________________________________ - Manor _________________________________________ - Choice 8. Governing Law. This Agreement shall be governed by Maryland law, without reference to its conflict of laws principles. 6 7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CHOICE HOTELS HOLDINGS, INC., a Delaware corporation By:______________________________________ Name:____________________________________ Title:____________________________________ MANOR CARE, INC., a Delaware corporation By:______________________________________ Name:____________________________________ Title:___________________________________ 7 EX-10.13 14 TAX ADMINISTRATION AGREEMENT 1 EXHIBIT 10.13 TAX ADMINISTRATION AGREEMENT THIS AGREEMENT (this "Agreement") is made and entered into as of _________________, 1996 by and between MANOR CARE, INC., a Delaware corporation ("Manor"), and CHOICE HOTELS HOLDINGS, INC. (to be renamed Choice Hotels International, Inc.), a Delaware corporation ("Choice"). RECITALS WHEREAS, pursuant to a Distribution agreement (the "Distribution Agreement" dated as of ____________, 1996, Choice and Manor have agreed to enter into an agreement relating to the administration of sales, use, hotel occupancy, real estate, personal property and other taxes, miscellaneous licenses, permits, and fees with the terms and conditions set forth herein; and WHEREAS, Manor shall retain the personnel and systems formerly utilized in the administration of the services described herein; and WHEREAS, Choice desires to retain Manor as described herein, and Manor desires to render such assistance on an equitable, arms length basis for a fee; NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Choice and Manor agree as follows: 1. Definitions. As used in this Agreement, the terms indicated below shall have the following meanings: "Ancillary Agreement" shall have the meaning described in the Distribution Agreement. "Distribution" means the distribution to the holders of Manor Care Common Stock all the outstanding shares of Choice Common Stock. "Distribution Date" means the date determined by the Board of Directors of Manor as the date on which the Distribution shall be effected. "Lodging Business" shall mean any business or operation of Choice or the Lodging Subsidiaries (as defined in the Distribution Agreement) which is, pursuant to the Distribution Agreement, to be conducted, following the Distribution. 2 "Prime Rate" shall be the rate identified from time to time in the New York edition of the Wall Street Journal as being the Prime Rate of interest. "Tax Claim" means a claim by a Taxing Authority for sales, use, occupancy, real estate, personal property and other taxes, miscellaneous licenses, permits, and fees, interest and penalties (other than penalties for the delinquent payment of assessments) which claims arise from or relate to Choice's Retained Business and which under the Distribution Agreement or any Related Agreement is charged to Choice. "Taxing Authority" means any Country, State, County, Municipality, City or other governmental entity legally empowered to tax Choice properties or operations. Any capitalized terms defined in the Distribution Agreement and used herein shall have the meanings ascribed to them in the Distribution Agreement unless otherwise defined herein. 2.1 Tax Claim Administration Services. Upon request of Choice, Manor shall provide the services described in Exhibit B. Manor will promptly notify Choice in writing of any Tax Claims for which it receives notice. Choice shall have full authority to defend and settle all Tax Claims. Manor will not protest, settle, compromise or pay any Tax Claims (except under protest), without the prior written consent of Choice. Manor agrees to provide such services only if it reasonably believes the service will not interfere with the conduct of the business of Manor or pose an unreasonable burden. 2.2 Standard of Care. All services provided hereunder shall be administered in accordance with Manor's standard policies, procedures and practices in effect as of the date hereof and as may be changed, and as more particularly described below, or as otherwise specified in accordance with the terms thereof. In so doing, Manor shall follow commonly accepted standards of care in the industry and exercise the same care and skill as it exercises in performing like services for itself. 3. Financial Provisions. 3.1 Reimbursement. Choice will reimburse Manor for any Tax Claims for which Manor is ultimately held liable, other than Tax Claims for which Choice is entitled to indemnification under Section 4(a) hereof, together with all out-of-pocket expenses including legal fees incurred by Manor in protesting or disputing any Tax Claim or endeavoring to obtain a refund at Choice's request. 3.2 Pricing and Payment for Services. Choice shall pay Manor for services requested and rendered hereunder as follows: 2 3 (a) The charging mechanisms for rates or charges for each service shall include (i) activity-based charges where the per unit price will be multiplied by the variable number of units; (ii) fixed fee based charges, meaning a fixed amount per Accounting Period for Manor to perform the service; (iii) usage based charges for which Choice will pay according to actual use of the service; (iv) time and materials charges; (v) any out-of-pocket expenses, including, but not limited to, fees of consultants and attorneys; or (vi) a variation or a combination of any of the foregoing methods as agreed to by the parties. (b) Except as provided in the Distribution Agreement or any Related Agreement, Choice shall pay any and all additional costs and expenses which Manor may incur for the express purpose of providing services to Choice. (c) Choice shall pay Manor for all services provided hereunder within thirty (30) days after receipt of an invoice therefor. Choice will remit the amount of any Tax Claims payable by Manor before Manor is required to remit such amount to any Taxing Authority. If Manor subsequently recovers any amounts paid by Choice hereunder or if Manor recovers any Tax Claim previously paid, it will remit such amounts to Choice within thirty (30) days of receipt. Choice shall pay fixed charges in advance on the first business day of the applicable Accounting Period. Any payments not made by Choice to Manor, or not made by Manor to Choice, when due shall bear interest, computed daily, from the date due to the date of payment based on the annual percentage rate equal to the Prime Rate plus two (2) percentage points, as same may vary from time to time. 4. Indemnification. (a) Manor will defend, indemnify and hold harmless Choice, its subsidiaries, affiliates, directors, officers, employees and agents from Tax Claims arising from (i) Manor's failure to file a required tax return or (ii) Manor's failure to pay the tax shown as due on any tax return applicable to Choice's Retained Business unless in the case of (ii), such Tax Claim is being contested by Manor or a Manor subsidiary in good faith on the date of this Agreement. (b) Choice will defend, indemnify and hold harmless Manor, its subsidiaries, affiliates, directors, officers, employees and agents from any Tax Claims which are not subject to indemnification by Manor pursuant to Section 4(a) above, and any out-of-pocket expenses incurred by Manor in protesting or disputing any Tax Claims at Choice's request. (c) Choice shall indemnify, defend and hold harmless Manor and its subsidiaries, and Manor shall indemnify, defend and hold harmless Choice and its subsidiaries from and 3 4 against any liability, cost, or expense, including, without limitation, any fine, penalty, interest charge (restricted to interest in excess of the rate established under Section 6621 of the Code and interest which is in respect of the penalty portion of an assessment), or accountants' or attorney's fee, arising out of fraudulent or negligently prepared information, workpapers, documents, and other items used in the preparation of, or presented in, any return, amended return, or claim or refund filed, and which information, workpapers, documents, or other items originated with and/or were prepared by such indemnifying party. 5. Access to Information. Choice and its authorized agents will be given reasonable access to and may take copies of all information relating to the Tax Claims, Manor's time and expense charges for providing the services provided hereunder, and Manor's out-of-pocket expenses. Choice and its authorized agents may, upon fourteen (14) days written notice, annually audit Manor's claims, administration policies, procedures and practices and the Tax Claims. The parties will cooperate with one another to minimize the disruption caused by any such audit. Manor will retain all information relating to Tax Claims in accordance with the retention policies in the Distribution Agreement, with Manor's internal record retention policy and in accordance with applicable laws. 6. Term. The term of this Agreement shall commence on the Distribution Date and shall remain in effect through the end of the first full Fiscal Year immediately following the Distribution Date. Unless terminated pursuant to the terms hereof, the Agreement shall automatically renew each Fiscal Year thereafter for the extended term of said Fiscal Year and shall not extend past the last day of the 30th month following the Distribution; provided, however, that Choice may terminate this agreement or any services provided hereunder at any time for any reason or no reason by sending written notice to Manor upon sixty (60) days' prior notice to Manor. This Agreement may also be terminated in the event of a default (past the expiration of any applicable cure period provided herein) in accordance with the provisions of this Agreement. 7. Default. If either party materially defaults hereunder, the non-defaulting party may terminate this Agreement effective immediately (subject to the cure periods set forth herein below) upon written notice to the defaulting party. The non-defaulting party shall be entitled to all remedies provided by law or equity (including reasonable attorneys' fees and costs of suit incurred). The following events shall be deemed to be material defaults hereunder: (a) Failure by either party to make any payment required to be made to the other hereunder, which failure is not remedied with five (5) days after receipt of written notice thereof; or (b) Except as otherwise provided herein, failure by either party substantially to perform in accordance with the terms and conditions of this Agreement, which failure is not 4 5 remedied within thirty (30) days after receipt of written notice from the other party specifying the nature of such default; or (c) (i) Filing of a voluntary bankruptcy petition by either party; (ii) filing of any involuntary bankruptcy petition against either party which is not withdrawn within sixty (60) days after filing; (iii) assignment for the benefit of creditors made by either party; or (iv) appointment of a receiver for either party. 8. Force Majeure. Manor and Choice shall incur no liability to each other due to a default under the terms and conditions of this Agreement resulting from fire, flood, war, strike, lock-out, work stoppage or slow-down, labor disturbances, power failure, major equipment breakdowns, construction delays, accident, riots, acts of God, acts of United States' enemies, laws, orders or at the insistence or result of any governmental authority or any other delay beyond each other's reasonable control. 9. Relationship of Parties. Nothing in this Agreement shall be deemed or construed by the parties or any third party as creating the relationship of principal and agent, partnership or joint venture between the parties, it being understood and agreed that no provision contained herein, and no act of the parties, shall be deemed to create any relationship between the parties. 10. Assignment. Neither party shall, without the prior written consent of the other, assign any rights or delegate any obligations under this Agreement, such consent not to be unreasonably withheld, conditioned or delayed; provided, however, such consent not to be required if the agreement is assigned to a wholly-owned subsidiary of either party. 11. Headings. The headings used in this Agreement are inserted only for the purpose of convenience and reference, and in no way define or limit the scope or intent of any provision or part hereof. 12. Severability of Provisions. Neither Manor nor Choice intend to violate statutory or common law by executing this Agreement. If any section, sentence, paragraph, clause or combination of provisions in this Agreement is in violation of any law, such sections, sentences, paragraphs, clauses or combinations shall be inoperative and the remainder of this Agreement shall remain in full force and effect and shall be binding upon the parties. 13. Parties Bound. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing herein, expressed or implied, shall be construed to give any person any legal or equitable rights hereunder. 5 6 14. Notices. All notices and other communications hereunder shall be in writing and shall be delivered by hand or shall be deemed to have been properly made and given one (1) business day after being deposited with a reputable overnight courier service such as Federal Express, Airborne Express or UPS Next Day Air for next business day delivery to the following addresses (or at such other addresses for a party as shall be specified by like notice): to Choice: Choice Hotels International, Inc. 10750 Columbia Pike Silver Spring, MD 20901 Attention: General Counsel to Manor: Manor Care, Inc. 11555 Darnestown Road Gaithersburg, MD 20878-3200 Attention: General Counsel 15. Further Action. Manor and Choice each shall cooperate in good faith and take such steps and execute such papers as may be reasonably requested by the other party to implement the terms and provisions of this Agreement. 16. Waiver. Manor and Choice each agree that the waiver of any default under any term or condition of this Agreement shall not constitute any waiver of any subsequent default or nullify the effectiveness of that term or condition. 17. Governing Law. All controversies and disputes arising out of or under this Agreement shall be determined pursuant to the laws of the State of Maryland, United States of America, regardless of the laws that might be applied under applicable principles of conflicts of laws. 18. Consent to Jurisdiction. The parties irrevocably submit to the exclusive jurisdiction of (a) the Courts of the State of Maryland in Montgomery County, and (b) the United States District Court for the State of Maryland for the purposes of any suit, action or other proceeding arising out of this Agreement. 19. Commercially Reasonable Terms and Conditions. Notwithstanding anything in this Agreement to the contrary, the terms and provisions of this Agreement are and shall reflect commercially reasonable terms and conditions (including, but not limited to, pricing) that are at least 6 7 as favorable and as competitive to Choice as the terms and conditions Manor would grant or require of third parties for substantially similar goods and services. 20. Liaisons. Choice and Manor shall each appoint a managerial level individual (hereinafter "Representative") to facilitate communications and performance under this Agreement. Each party may treat an act of a Representative of the other party as being authorized by such other party without inquiring behind such act or ascertaining whether such Representative had authority to so act. The initial Representatives are named on Exhibit A. Each party shall have the right at any time and from time to time to replace its Representative by giving notice in writing to the other party setting forth the name of (i) the Representative to be replaced and (ii) the replacement, and certifying that the replacement Representative is authorized to act for the party giving the notice in all matters relating to this Agreement. 21. Confidentiality. The parties agree that the terms of this Agreement are confidential and further agree that this Agreement shall not be released to third parties, excluding such parties' counsel, agents or leaders. However, one party may release this Agreement to a third party upon the prior approval of the other party (such approval not to be unreasonably withheld, conditioned or delayed), upon court order, or as required by any rules, regulations or laws. All confidential and proprietary information which either part has obtained from the other shall be returned upon the expiration or earlier termination of this Agreement. The provisions of this paragraph shall survive expiration or earlier termination of this Agreement. 22. Management Agreement. Notwithstanding anything to the contrary contained herein, Choice shall not be charged for any services which are required to be performed under any management agreement, operating lease or other agreement between Choice and Manor, or their respective subsidiaries. 7 8 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CHOICE HOTELS HOLDINGS, INC., a Delaware corporation By:______________________________________ Name:______________________________ Title:_______________________________ MANOR CARE, INC., a Delaware corporation By:______________________________________ Name:______________________________ Title:_______________________________ 8 9 EXHIBIT A REPRESENTATIVES Darrell Carlisle - Manor Care, Inc. Terry Ingalsbe - Choice Hotels International, Inc. 9 10 EXHIBIT B SERVICES [ATTACHED] 10 11 PERSONAL PROPERTY TAX RETURNS AND AUDITS SCHEDULE OF SERVICES 1. Extract detailed Fixed Assets data from Global Fixed Asset System. 2. Review prior year return for audit settlements and special issues. For new facilities (construction and/or acquisition) contact taxing authorities for property information. Maintain and update due date schedule. 3. Review return instructions for law changes; perform research as required. 4. Classify current year acquisitions as taxable or non-taxable and by type of asset - i.e., computer, furniture or equipment. 5. Analyze total unit cost for reasonableness; identify unrecorded dispositions. 6. Adjust asset basis for non-taxable costs. 7. Process return using available resources. Estimate assessed value and tax due. 8. Mail return. 9. Compare assessed value per notice to return. File appeals as needed. 10. Pay bill and monitor accruals. 11. Prepare annual unit budgets. 12. Respond to audit requests; settle audit issues. 11 12 SALES/USE AND OCCUPANCY TAX COMPLIANCE SCHEDULE OF SERVICES 1. Extract sales and accruals for each unit from the general ledger; enter data into worksheet. 2. Review exempt sales report and contact unit manager if necessary; make appropriate adjustments. 3. Determine if accruals are in balance and make adjustments if necessary; 4. Reconcile unit accruals; determine that over/under are within guidelines. 5. Print worksheets, over/under accrual memo, and transmittal letter. 6. Print return. 7. Pay tax due; compare to transmittal letter, return, and accrual balance. 8. Present return for Choice review. 9. Copy and timely mail return. 10. Prepare reply to inquiries. 12 13 SALES/USE AND OCCUPANCY TAX AUDITS SCHEDULE OF SERVICES 1. Schedule audits with Taxing Authority's auditors; 2. Determine the scope of audits and the audit methods and procedures for such auditors; 3. Prepare and transmit responses to auditor's Information Document Requests; 4. Research and prepare proposals for resolving audit issues; 5. Prepare summary reports on each audit covering audit issues, recommendations for payment or protest and actions to be taken to correct deficiencies; 6. Prepare written protests for deficiencies which cannot be settled; 7. Prepare quarterly state audit reports. 13 14 MAINTENANCE OF FIXED ASSETS - TAX BOOKS 2, 5, 6 (FEDERAL, AMT & ACE) SCHEDULE OF SERVICES 1. Review Federal regulations for law changes; perform research as required. 2. Extract monthly fixed asset data from Global F/A System. This includes additions, adjustments and retirements. 3. Classify monthly additions by asset type and depreciation method. Submit corrections to Fixed Asset department as needed. 4. Review new facility/renovation additions for Section 1245 classification. Obtain construction cost report and analyze for details. 5. Review acquisition additions for accuracy and reasonableness. Obtain copies of settlement sheets, purchase agreements, etc. for details to fixed asset allocation. 6. Review monthly dispositions and retirements. Calculate tax gain or loss as needed. 7. Obtain fixed asset information for separate companies (such as Choice foreign operations). Review and submit entries for tax books to Fixed Asset department. 8. Review Global F/A System for luxury auto limitations calculations. Submit corrections as needed. 9. Extract reports from Global F/A System as needed for special projects or projections. 14 15 REAL ESTATE TAX - CONSULTING SCHEDULE OF SERVICES 1. Review lease or management agreement. Perform real estate tax projections on acquisitions. 2. Investigate local assessment ratios and procedures. 3. Collect current year financial data. 4. Input financial data and perform targeting analysis to determine if an appeal should be filed. Hire consultant where necessary. 5. Contact assessor and set up initial meeting. 6. Inspect subject property and competitive properties. 7. Review assessor's worksheet and comps. 8. Prepare mini-appraisal of value based on the income approach, cost approach and market sales comparison. 9. Prepare appeal documents. 10. Attend hearing with assessor. 11. Proceed to Administrative Board if necessary. 12. Contract an appraiser for an appraisal of the subject property where necessary. 15 EX-10.14 15 FORM OF TAX SHARING AGREEMENT 1 EXHIBIT 10.14 TAX SHARING AGREEMENT THIS AGREEMENT, executed this ____ day of ________________, 1996, is entered into by and among Choice Hotels Holdings, Inc. (to be renamed Choice Hotels International, Inc.), a Delaware corporation ("Choice"), Manor Care, Inc., a Delaware corporation, ("Manor"), and all direct and indirect subsidiaries of one or both of Choice and Manor. RECITALS A. Choice, Manor, and the subsidiaries of Choice and Manor have heretofore joined in filing consolidated federal income tax returns under the Internal Revenue Code of 1986, as amended (the "Code"), and the applicable Treasury Regulations promulgated thereunder by the Treasury Department (the "Regulations") and have heretofore joined in filing certain consolidated, combined, and unitary state income tax returns. B. Pursuant to the Distribution Agreement of even date herewith between Choice and Manor, Manor will distribute all of its stock in Choice to the common shareholders of Manor in a transaction intended to qualify for tax free treatment under Section 355 of the Code, and Choice and its subsidiaries will therefore leave the affiliated group (within the meaning of Section 1504(a) of the Code) of corporations (the "Manor Group") of which Manor is the common parent. C. The parties hereto desire to allocate their respective federal, state, and local income tax liabilities, assessed in connection with the filing of returns, including but not limited to consolidated, unitary, combined, or separate returns, among themselves for the following fiscal years: (a) the fiscal year ending May 31, 1996 ("FY 1996"); (b) the fiscal year commencing on June 1, 1996 and ending on May 31, 1997 ("FY 1997"); (c) where relevant, the fiscal year ending on the Distribution Date ("Stub 97"); and (d) where relevant, the fiscal year commencing on the day after the Distribution Date and ending on May 31, 1997 ("Short 97"). D. The parties hereto desire to provide for the compensation and reimbursement of each other for federal and state income tax deficiencies paid, by one party hereto although allocated pursuant to this Agreement to the other, (plus interest and penalties) or refunds received (plus interest) as a result of audits by the Internal Revenue Service (the "Service") and other taxing authorities and judicial determination, if any, involving consolidated federal and state income tax returns ("Joint Return Deficiencies/Refunds"). E. The parties hereto desire to provide and fix the responsibilities for: (1) the preparation and filing of tax returns along with the payments of taxes shown to be due and payable thereon (as well as estimated or advance payments required prior to the filing of said returns) for all periods prior and subsequent to the Distribution Date; (2) the retention and maintenance of all relevant records necessary to prepare and file appropriate tax returns, as well as providing for appropriate access to those records for all parties to this Agreement; (3) the conduct of audits, examinations, and 1 2 proceedings by appropriate governmental authorities which could result in a redetermination of tax liabilities (for all periods prior to or subsequent to the Distribution Date) of any party to this Agreement; and (4) the cooperation of all parties with one another in order to fulfill their duties and responsibilities under this Agreement and under applicable law. NOW THEREFORE, the parties agree as follows: SECTION 1. DEFINITIONS. As used herein, the following terms shall have the following meanings: (a) "Affiliated Group" shall have the meaning attributed to that term in Section 1504 of the Code, determined without regard to Section 1504(b) of the Code. (b) "Manor Group" shall mean the group of corporations at any given time (either prior to, or subsequent to, the Distribution) consisting of the Affiliated Group of which Manor is the Common Parent. (c) "Code" is defined in the preamble. (d) "Common Parent" shall have the meaning attributed to that term in the Consolidated Return Regulations (Treas. Reg. Section 1.1502-1 et seg.) promulgated pursuant to Section 1502 of the Code. (e) "Consolidated Return Regulations" is defined in section 4 hereof. (f) "Distribution" shall mean the distribution by Manor of all its stock in Choice to its shareholders. (g) "Distribution Date" shall mean the date on which the Distribution occurs. (h) "Choice" is defined in the preamble. (i) "Choice Group" shall mean the group of corporations immediately after the Distribution Date consisting of the Affiliated Group of which Choice is the Common Parent, as well as all other corporations which would be included in such group subsequent to the Distribution. (j) "I.R.S." or "Service" shall mean the Internal Revenue Service. (k) "Joint Contest" shall mean a Tax Contest seeking a redetermination of Taxes involving one or more Members (determined by reference to the time period for which such return was filed) of the Manor Group and one or more Members of the Choice Group, 2 3 whether such corporations joined in the filing of returns on a consolidated, combined, or unitary basis or otherwise. (l) "Joint Return Deficiencies/Refunds" is defined in the preamble. (m) "Member" shall have the meaning attributed to that term in Section 1.1502-1(b) of the Regulations, but without regard to whether a corporation qualifies to be a Member of an Affiliated Group under Section 1504(b) of the Code. (n) "Minimum Tax Credit" is defined in section 5 hereof. (o) "Regulations" is defined in the preamble. (p) "Separate Contest" shall mean a Tax Contest involving only Members of either the Manor Group or the Choice Group. (q) "Tax Attributes" shall mean any losses, credits and other tax attributes that may be carried forward or back by any Member of the Manor Group or the Choice Group on a separate return or consolidated basis to a taxable year other than the taxable year in which such attribute is recognized, including, but not limited to, net operating losses, alternative minimum tax credits, targeted jobs tax credits, investment tax credits, foreign tax credits, research and development credits, and similar credits under state or local law. (r) "Taxes" shall mean (i) all federal income taxes and state, local, and foreign income and franchise taxes (or taxes in lieu thereof) plus (ii) any penalties, fines or additions to tax with respect thereto, plus (iii) any interest with respect to the items contained in (i) and (ii). (s) "Tax Contest" shall mean an audit, review, examination or the like, inclusive of litigation, with the purpose of redetermining taxes of any corporation (without regard to whether such matter was initiated by an appropriate taxing authority or in response to a claim for refund by one or more corporations). SECTION 2. COMPUTATION OF TAX; ALLOCATION OF CERTAIN YEARS' TAXES (a) Computations & Elections. In determining the federal and state income tax liabilities of the Manor Group and its Members for FY 1996, FY 1997, and where relevant, Stub 97 and Short 97, the computations of the tax liabilities of the Manor Group and its Members shall, to the extent permitted by law, be made in accordance with the methods used in the consolidated returns which include Manor and Choice for the fiscal years ending prior to the beginning of FY 1996. 3 4 (b) Allocation of Tax (i) The taxes assessed pursuant to the returns described in the preceding subsection will be allocated among the Members of the Manor Group pursuant to the Manor Group's historic tax allocation method, described in section 1552(a)(2) of the Code and section 1502-33(d)(2)(ii) of the Regulations. (ii) With respect to FY 1997, if the consolidated tax liability of the Manor Group for FY 1997 (the "97 Manor Liability") is less than the sum of the taxes allocated for FY 1997 to Choice and its subsidiaries pursuant to section 2(b)(i) hereof (the "Choice Separate Allocations"), the amounts allocated pursuant to section 2(b)(i) to Choice and its subsidiaries will be reduced by an amount equal to the excess of the Choice Separate Allocations over the 97 Manor Liability. (iii) With respect to the state and local taxes which are determined on a combined or unitary basis, similar principles as those described in section 2(b)(i) and (ii) shall govern the allocation of such tax liabilities among the parties hereto. (c) Post-Distribution Date Allocations and Payments. (i) The final allocations of FY 1996 Taxes and FY 1997 Taxes (to be made by Manor for FY 1996 and FY 1997) will be made not later than 90 days following the filing of the Federal consolidated income tax return of the Manor Group for such period. With respect to the final allocations of FY 1996 and FY 1997 Taxes, Choice and/or its subsidiaries shall make payments to Manor and/or its subsidiaries, or receive payments from Manor and/or its subsidiaries based on the following principles: (1) the payment shall equal the amount of the adjustments, if any, to taxable income or loss of Members of the Choice Group multiplied by the applicable highest marginal rate of taxation in effect for the period for which the adjustment is made; or (2) in the case of adjustments to credits, the payments made or received shall be in an amount equal to the adjustments, if any, of the credit of Members of the Choice Group. SECTION 3. SEPARATE COMPANY LIABILITIES. Notwithstanding the provisions of section 2 hereof, for all years through and including FY 1997, Taxes (including income taxes imposed by state or foreign jurisdictions or political subdivisions thereof) imposed upon Choice or any of its direct and indirect subsidiaries and which are determined or assessed on a separate company basis will be the separate liability of Choice or such subsidiary and not subject to allocation or sharing among other Members of the Manor Group. 4 5 SECTION 4. ALLOCATION OF TAX ATTRIBUTES. All Tax Attributes of the Manor Group will be allocated among Manor, Choice, and their respective subsidiaries in accordance with the Regulations promulgated pursuant to Section 1502 of the Code or analogous provisions of state, local, or foreign law (the "Consolidated Return Regulations"). SECTION 5. CARRYBACKS OF TAX ATTRIBUTES. (a) Choice Carrybacks. If for any taxable year beginning on or after the Distribution Date, Choice or any Member of the Choice Group recognizes a Tax Attribute which Choice or such Member of the Choice Group, under the applicable provisions of the Code and Treasury Regulations promulgated under Section 1502 thereof, is permitted or required to carry back to a prior Taxable year of the Manor Group or the prior Taxable year of a Member of the Manor Group (either on a consolidated or separate return basis) Manor (or a Member of the Manor Group) shall file appropriate refund claims within a reasonable period after being requested by Choice with the consent of Manor, which consent shall not be unreasonably withheld. Manor (or the Member of the Manor Group receiving such refund) shall promptly remit to Choice any refund of Taxes it receives with respect to any Tax Attribute so carried back. (b) Manor Carrybacks. If for any taxable year Manor or a Member of the Manor Group recognizes a Tax Attribute which Manor or the Member of the Manor Group, under the applicable provision of the Code and Consolidated Return Regulations is permitted or required to carry back to one of its prior taxable years, Manor or the Member of the Manor Group may file appropriate refund claims and shall be entitled to any refund of Taxes resulting from such claims with the consent of Choice, which consent shall not be unreasonably withheld. SECTION 6. CONDUCT OF TAX CONTESTS. (a) "Joint Contests." (i) The conduct of Joint Contests shall be the responsibility of Manor. Choice, as the common parent of the Choice Group or otherwise, agrees to take all such actions and to cause its subsidiaries to take all such actions as may be necessary to permit Manor to conduct such contests. (ii) In the case of a Joint Contest of a consolidated federal or state income tax return which included Choice and/or its subsidiaries, Choice and/or its subsidiaries as appropriate, shall be notified by Manor of such Tax Contest and shall be entitled to 5 6 participate, at their own expense, in contesting all relevant items that affect the tax liability or tax attributes of such entities with respect to such Tax Contest in administrative and judicial proceedings. Choice and its subsidiaries agree to notify Manor of any actual or proposed Tax Contest of a consolidated federal or state income tax return of the Manor Group for any period ending on or before May 31, 1997. Choice will, and shall cause any of its subsidiaries to cooperate in connection with any such Tax Contest. Manor and Choice shall share jointly in any decisions involved in connection with settlements of tax disputes to the extent that items are involved that affect the tax, penalty, or interest liability or tax attributes of Choice or its subsidiaries. Manor may not agree to settle such a dispute without the consent of Choice unless Manor releases Choice from its liability to pay its share of the disputed amount hereunder. If both parties agree to contest a tax matter, then the costs of contesting the matter shall be borne equally by each party. If only one party requests the contest of a tax matter, the party requesting the contest shall bear its expenses associated with such contest; provided however, that the other party will agree to cooperate with the contesting party, and further provided that the non-contesting party shall bear its own costs and expenses, if any, and shall not be entitled to reimbursement for the fair cost of its own employees related to its participation in, or cooperation with the contesting party in such contest. (b) Separate Contests. Any Separate Contests with respect to tax returns filed by any Member of either the Choice Group or Manor Group on a separate company basis shall be conducted by the entity which filed such tax return (or the Common Parent of the Affiliated Group of which such entity is a Member at the time of such contest), and such entity shall have sole and compete authority to conduct such contest, including the authority to negotiate with and enter into settlements with any Taxing authority. If at any point of the proceedings of a "Separate Contest," it becomes a Joint Contest, then it shall thereafter be conducted as a Joint Contest. (c) Cooperation. Choice (and the Member of the Choice Group and Manor (and the Members of the Manor Group) shall each provide the assistance reasonably requested by other with respect to conducting any Tax Contest, including providing access to books, records, tax returns and supporting work papers and providing any powers of attorney required to conduct any Tax Contest. SECTION 7. REDETERMINED TAX LIABILITIES. In the event of a redetermination of federal, state or local income tax liabilities as a result of audits by the Service or other taxing authority and/or judicial determinations, payments in connection therewith, if any, made or received by or among Choice, Manor, and their respective subsidiaries, shall be governed by the following principles: 6 7 (a) Upon the redetermination of any tax liability upon audit, examination, etc. the redetermined liability will be borne by (that is, any increases in liability will be paid by, and any decreases in liability will be received by) the applicable entities in the case of matters arising out of Separate Contests. (b) In the case of liabilities redetermined with respect to consolidated, combined, or unitary returns, which redeterminations are Joint Contests, the increase to the liabilities shall be paid to the relevant taxing authority by, and the decreases received from the relevant taxing authority shall be paid to, Manor and/or its subsidiaries. Whether or not a payment is required to or from a relevant taxing jurisdiction and subject to the provisions of section 7(c) hereof, Choice and/or its subsidiaries shall make payments to Manor and/or its subsidiaries, or receive payments from Manor and/or its subsidiaries based on the following principles: (1) the payment shall equal the amount of the adjustments, if any, to taxable income or loss of Members of the Choice Group multiplied by the applicable highest marginal rate of taxation in effect for the period for which the adjustment is made; or (2) in the case of adjustments to credits, the payments made or received shall be in an amount equal to the adjustments, if any, of the credit of Members of the Choice Group. (c) If there is a redetermination of tax liabilities in connection with either a Joint Contest or a Separate Contest, and as a result thereof there is an adjustment to credits or attributes allocated among the parties hereto pursuant to section 4 hereof, Manor shall make a payment to Choice equal to the amount of any resulting reduction in items allocated to Members of the Choice Group to the extent such reduction is attributable to income adjustments to Members of the Manor Group and Choice shall make a payment to Manor equal to the amount of any resulting reduction in items allocated to Members of the Manor Group to the extent such reduction is attributable to income adjustments to Members of the Choice Group. (d) Any liability arising from adjustments to income made by (1) treating the Distribution as a taxable distribution of property or (2) recognizing "boot" in connection with the reorganization of, and the transfer of assets and liabilities to, Choice precedent to the Distribution shall be borne entirely by Choice. SECTION 8. RETENTION OF RECORDS: ACCESS TO RECORDS; COOPERATION AND ASSISTANCE. (a) Retention of Records. 7 8 (i) Duties of Choice. Choice shall retain all tax returns, tax reports, related work papers and all schedules (along with all documents that pertain to any such tax returns, reports or work papers) which relate to a tax period ending on or before May 31, 1997. Choice shall make such documents available to Manor and/or its subsidiaries at Manor's request. Choice shall not dispose of such documents without the permission of Manor. (ii) Duties of Manor. Manor shall retain all tax returns, tax reports, related work papers and all schedules (along with all documents that pertain to any such tax returns, reports or work papers) which relate to a tax period ending on or before May 31, 1997. Manor shall make such documents available to Choice and/or its subsidiaries at Choice's request. Manor shall not dispose of such documents without the permission of Choice. (b) Access to Records. (i) Duties of Choice. Choice will permit Manor or its subsidiaries, or their designated representative, to have access at any reasonable time and from time to time, after the Distribution Date, to all relevant tax returns and supporting papers therefor of Choice and the other members of the Choice Group (as they were constituted immediately prior to the Distribution Date) in respect of periods ending on or before the Distribution Date, wherever located, and furnish, and request that the independent accountants of Choice or any of the member of the Choice Group furnish, to Manor and its subsidiaries, as the case may be, such additional tax and other information and documents with respect to consolidated federal and state income tax returns filed in respect of periods ending on or before May 31, 1997, as Manor or any of its subsidiaries may from time to time reasonably request. (ii) Duties of Manor. Manor will permit Choice or its subsidiaries, or their designated representative, to have access at any reasonable time and from time to time, after the Distribution Date, to all relevant tax returns and supporting papers therefor of Manor and the other members of the Manor Group (as they were constituted immediately prior to the Distribution Date) in respect of periods ending on or before the Distribution Date, wherever located, and furnish, and request that the independent accountants of Manor or any of the member of the Manor Group furnish, to Choice and its subsidiaries, as the case may be, such additional tax and other information and documents with respect to consolidated federal and state income tax returns filed in respect of periods ending on or before May 31, 1997, as Choice or any of its subsidiaries may from time to time reasonably request. (c) Assistance and Cooperation. Manor (and Members of the Manor Group) and Choice (and Members of the Choice Group) will provide each other with such cooperation, assistance and information as either of them reasonably may request of the other with respect to the filing of any tax return amended return, claim for refund or other document with any taxing authority. With respect to the federal consolidated tax return 8 9 or any combined state tax return filed by Manor for tax periods which begin before the Distribution Date and end after the Distribution Date, such assistance shall include the timely submission by Choice to Manor of pro forma tax returns for Choice and each Member of the Choice Group, prepared on the basis that each such Member's tax period ended on the Distribution Date. SECTION 9. PREPARATION OF TAX RETURNS: ESTIMATED PAYMENTS. (a) FY 1996. Manor and Choice shall work together to prepare the consolidated, separate, and combined returns for FY 1996. It shall be the responsibility of Manor to timely file such returns and to make any payments required in connection with the consolidated and combined returns to the applicable taxing authorities. (b) FY 1997. Manor shall prepare and timely file the consolidated returns for FY 1997. In connection with the preceding sentence, Choice and its subsidiaries will, on or prior to December 15, 1997 with respect to the Stub 97: (1) furnish to Manor all information and documentation (with respect to Choice and its subsidiaries) necessary or useful in the preparation of the consolidated federal and state income tax returns for the Manor Group for FY 1997; (2) permit Manor to have access at any reasonable time and from time to time, after the Distribution Date, to all tax returns and supporting papers therefor of Choice and its subsidiaries, wherever located; and (3) furnish to Manor such additional tax and other information and documents in the possessions of such companies, with respect to consolidated federal and state income tax returns filed in respect of periods including or ending before the Distribution Date, as Manor may from time to time reasonably request. Choice will, and shall cause its subsidiaries to, cooperate in connection with the preparation of the consolidated federal and state income tax returns of the Manor Group for FY 1997. It shall be the responsibility of Manor to make any payments required in connection therewith to the applicable taxing authorities. Choice and its subsidiaries shall file its own tax returns which are filed on a separate or combined basis for FY 1997. Manor and its subsidiaries shall prepare and file its own tax returns which are filed on a separate or combined basis for FY 1997. (c) Taxable Years Before FY 1996. All tax returns of the Manor Group which are filed on a consolidated or combined basis for tax periods ending before May 31, 1996 were prepared and filed by Manor. Manor shall be solely responsible for the payment of all Taxes for such periods. Manor shall not file or amend such consolidated or combined tax returns without affording Choice the opportunity to review and comment on such tax returns to the extent that the tax liabilities relating to such returns are, or could be allocated, assessed or charged to Choice and/or any of its subsidiaries, whether such allocation, assessment, or charge is by law or by contract or agreement. 9 10 (d) Post-Distribution Date Taxable Years. (i) Choice's Separate Returns. All tax returns of the Choice Group which are filed on a consolidated, separate or combined basis for Choice and/or any of its subsidiaries for tax periods beginning on or after the Distribution Date shall be prepared and filed by Choice. Choice shall be solely responsible for the payment of all Taxes due with respect to such tax returns for such tax periods. (ii) Manor's Separate Returns. All tax returns of the Manor Group which are filed on a consolidated, separate, or combined basis for Manor and/or any of its subsidiaries for tax periods beginning on or after the Distribution Date shall be prepared and filed by Manor. Manor shall be solely responsible for the payment of all Taxes due with respect to such tax returns for such tax periods. (e) Estimated Payments. All payments (including estimated payments or payments made in connection with requests for extensions of time to file such returns) made subsequent to the date hereof with respect to consolidated, combined, or unitary income tax liabilities of the Manor Group and its Members for FY 1996 and FY 1997 shall be made by Manor. Manor shall promptly thereafter notify Choice of the portion, if any, of such payment which it in good faith believes to be attributable to Choice's share of the FY 1996 and FY 1997 liability, as determined under the provisions of section 2 hereof. Choice shall thereafter promptly pay such amount to Manor or advise Manor of the basis for its disagreement. Choice must make estimated payments for its Group for periods beginning on/after the Distribution Date. SECTION 10. INDEMNIFICATION. With respect to all consolidated federal and state income tax returns filed by the Manor Group: (a) Choice shall indemnify, defend and hold harmless Manor and its subsidiaries, and Manor shall indemnify, defend and hold harmless Choice and its subsidiaries from and against any liability, cost, or expense, including, without limitation, and fine, penalty, interest charge (restricted to interest in excess of the rate established under Section 6621 of the Code and interest which is in respect of the penalty portion of an assessment), or accountants' or attorney's fee, arising out of fraudulent or negligently prepared information, workpapers, documents, and other items used in the preparation of, or presented in, any return, amended return, or claim or refund filed for the Manor Group for the FY 1996, Stub 97, Short 97, or FY 1997, and which information, workpapers, documents, or other items originated with and/or were prepared by such indemnifying party. 10 11 (b) Choice shall indemnify, defend and hold harmless Manor from and against any liability, cost, or expense incurred or paid by Manor in excess of its share thereof as allocated pursuant to section 7 hereof, including any amount paid by Manor in connection with an assessment by the Service or other taxing authority. (c) Manor shall indemnify, defend and hold harmless Choice from and against any liability, cost, or expense incurred or paid by Choice in excess of its share thereof as allocated pursuant to section 7 hereof, including any amount paid by Choice in connection with an assessment by the Service or other taxing authority. SECTION 11. RESOLUTION OF DISPUTES. Any disputes among the parties with respect to this Agreement shall be resolved by a public accounting firm or a law firm reasonably satisfactory to Manor and Choice. The fees and expenses of such firm shall be borne equally by Choice and Manor. In the event that Choice and Manor are unable to appoint such a firm, then all disputes arising under this Agreement shall be resolved under the terms of the Distribution Agreement. SECTION 12. SUBSIDIARIES. Any reference herein to a subsidiary or subsidiaries does not include any corporation that is or was, in the relevant tax year, not permitted to join in the filing of a consolidated federal income tax return pursuant to Section 1504 of the Code. To the extent that the provisions of the Agreement pertain to a subsidiary or subsidiaries of Manor or Choice, Manor and Choice respectively agree that it will cause the respective subsidiary or subsidiaries to carry out the terms of this Agreement. SECTION 13. SURVIVABILITY. This Agreement and each of its provisions shall be binding upon and inure to the benefit of the parties and their respective heirs and successors. This Agreement shall be effective only from and after the close of business on the Distribution Date. Nothing in this Agreement is intended or shall be construed to give any person or entity other than the parties and their respective heirs or successors any rights or remedies under or by reason of the Agreement. SECTION 14. NOTICES. All notices and other communications required or permitted under this Agreement shall be in writing, shall be deemed delivered upon receipt by hand or shall be deemed to have been properly made and given one (1) business day after being deposited with a reputable overnight courier service 11 12 such as Federal Express, Airborne Express or UPS Next Day Air for next business day delivery to the parties at their respective addresses set forth below, or as to any party at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this paragraph: To Choice: Choice Hotels Holdings, Inc. 10750 Columbia Pike Silver Spring, MD 20901 Attn: General Counsel To Manor: Manor Care, Inc. 11555 Darnestown Road Gaithersburg, MD 20878-3200 Attn: General Counsel SECTION 15. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the state of Maryland, without reference to its conflict of laws principles. SECTION 16. COSTS AND EXPENSES. In any action brought to enforce or interpret this Agreement, each party shall pay its own costs and expenses of maintaining or defending such action. SECTION 17. REMEDIES CUMULATIVE. The remedies provided in this Agreement are cumulative and not excluding of any remedies provided by law. SECTION 18. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which taken together shall constitute but one and the same Agreement. SECTION 19. SEVERABILITY. In the event that any portion of this Agreement shall be declared invalid by order, decree or judgment of a court, or governmental agency having jurisdiction, this Agreement shall be construed 12 13 as if such portion had not been inserted herein, except when such construction would operate as an undue hardship on any party to this Agreement or constitute a substantial deviation from the general intent and purpose of said parties as reflected in this Agreement SECTION 20. AMENDMENTS; WAIVER. This Agreement may be amended, and the observance of any term of this Agreement may be waived, in a written document signed by Manor and Choice. SECTION 21. EFFECTIVENESS OF AGREEMENT. This Agreement shall become effective on the Distribution Date and shall continue in effect until otherwise agreed in writing by Manor and Choice, or their successors. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first above written. CHOICE HOTELS HOLDINGS, INC. By:_________________________________ Name:_______________________________ Title:______________________________ MANOR CARE, INC. By:_________________________________ Name:_______________________________ Title:______________________________ 13 EX-10.15 16 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.15 EMPLOYMENT AGREEMENT This Agreement ("Agreement") dated this 1st day of September, 1995 between Manor Care, Inc. ("Manor Care") and Choice Hotels International, Inc. ("Choice") (collectively, "Employer"), Delaware corporations with principal offices at 10750 Columbia Pike, Silver Spring, Maryland 20901, and Donald J. Landry ("Employee"), sets forth the terms and conditions governing the employment relationship between Employee and Manor. 1. Employment. During the term of this Agreement, as hereinafter defined, Manor Care hereby employs Employee as President-Manor Care Hotel Division, and Choice hereby employs Employee as President. Employee hereby accepts such employment upon the terms and conditions hereinafter set forth and agrees to faithfully and to the best of his ability perform such duties as may be from time to time assigned by Employer, its Board of Directors or its designees, such duties to be rendered at the principal office of Employer or at such other place or places as Employer shall require. Employee also agrees to perform his duties in accordance with policies established by Employer's Board of Directors, which may be changed from time to time. 2. Term. Subject to the provisions for termination hereinafter provided, the term of this Agreement shall begin on December 1, 1994 and shall terminate five (5) years thereafter. Upon expiration of said period, the parties may extend the term if they mutually agree to do so. 3. Compensation. For all services rendered by Employee under this Agreement during the term thereof, Employer shall pay Employee the following compensation: (a) Salary. A base salary of Three Hundred Fifty Thousand Dollars ($350,000) per annum payable in accordance with Employer's standard payroll practices from time to time in effect. Such salary shall be reviewed after one year and may be increased at the discretion of Employer. (b) Incentive Bonus. Employee shall have the opportunity to earn up to a maximum of Fifty-Five Percent (55%) per annum of the base salary set forth in subparagraph 3(a) above in Employer's bonus plans as adopted from time to time by Employer's Board of Directors. 2 (c) Automobile. Employer shall provide Employee with the use of a suitable automobile during the term of this Agreement, and shall provide gas, oil, maintenance, insurance and other operating expenses for such automobile, in accordance with Employer's standard practices. In lieu of the above, Employee may elect to use his own automobile and receive an allowance for automobile expenses of $850 per month. (d) Club Membership. Employer shall provide Employee with an appropriate corporate membership at a dining and/or recreational club for the purpose of business entertainment. (e) Stock Options. Employee shall be eligible to receive options under the Manor Care, Inc. Key Executive Stock Option Plan, or similar plan, to purchase common shares of Manor Care in accordance with the policy of the Board of Directors as in effect from time to time. (f) Other Benefits. Employee shall, when eligible, be entitled to participate in all other fringe benefits accorded headquarters employees by Employer as are in effect from time to time. 4. Extent of Services. Employee shall devote his full time, attention, and energies to the business of Employer, and shall not during the term of this Agreement be engaged in any other business activity whether or not such business activity is pursued for gain, profit, or other pecuniary advantage; but this shall not be construed as preventing Employee from investing his assets in the securities of public companies, or the securities of private companies or limited partnerships outside the healthcare and lodging industries, if such holdings are passive investments of One Percent (1%) or less of outstanding securities and Employee does not hold positions of director, officer, employee or general partner. Employee warrants and represents that he has no contracts or obligations to others which would materially inhibit the performance of his services under this Agreement. 5. Disclosure and Use of Information. Employee recognizes and acknowledges that Employer's and affiliates' present and prospective clients, franchises, management contracts, acquisitions and personnel, as they may exist from time to time, are valuable, special and unique assets of Employer's business. Throughout the term of this Agreement and for a period of two (2) years after its termination or expiration for whatever cause or reason, Employee shall not directly or indirectly, or cause others to: (1) make use of or disclose to others any information relating to the business of Employer that has not otherwise been made public, including but not limited to Employer's present or prospective clients, franchises, management contracts or acquisitions; or (2) without Employer's prior written consent, offer employment to or employ on 2 3 behalf of Employee or any other person, any person who at any time is or has been within the preceding one (1) year an employee of Employer or any affiliate of Employer, or induce such person, directly or indirectly, to leave his or her employment. In the event of an actual or threatened breach by Employee of the provisions of this paragraph, Employer shall be entitled to injunctive relief restraining Employee from committing such breach or threatened breach. Nothing herein stated shall be construed as preventing Employer from pursuing any other remedies available to Employer for such breach or threatened breach, including the recovery of damages from Employee. 6. Notices. Any notice, request or demand required or permitted to be given under this Agreement shall be in writing, and shall be delivered personally to the recipient or sent by certified or registered mail to his residence in the case of Employee, or to its principal office in the case of the Employer. 7. Elective Positions. Nothing contained in this Agreement is intended to nor shall be construed to abrogate, limit or affect the powers, rights and privileges of the Board of Directors or stockholders to remove Employee from the positions set forth in paragraph 1, with or without just cause, during the term of this Agreement or to elect someone other than Employee to those positions, as provided by law and the By-Laws of Employer; provided, however, that if Employee is so removed without cause, it is expressly understood and agreed, in the event any one or combination of the foregoing occurs, Employee's rights under this Agreement shall in no way be prejudiced, and Employee shall be entitled to receive compensation referred to in paragraph 3 above, except ungranted stock options, provided that he is ready, willing and able to perform the duties and responsibilities set forth above. Notwithstanding the foregoing, the election or appointment of Employee to a different executive position shall not be considered removal hereunder. Employee upon removal shall be entitled to pursue other employment, and Employer shall be entitled to receive as offset and thereby reduce its payment, the amount received by Employee from any other active employment. As a condition to Employee receiving his compensation from Employer, Employee agrees to furnish Employer annually with full information regarding such other employment and to permit verification of his employment records and Federal income tax returns by an independent attorney or accountant. Employer shall receive credit for unemployment insurance benefits, social security insurance or like amounts actually received by Employee. In the event Employee is removed without cause, Employer shall relocate Employee to any city in the continental United States to the extent relocation assistance is not provided by a new employer. 8. Waiver of Breach. The waiver of either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. 3 4 9. Assignment. The rights and obligations of Employer under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Employer. The obligations of Employee hereunder may not be assigned or delegated. 10. Termination of Agreement. This Agreement shall terminate upon the following events and conditions: (a) Upon expiration of its term. (b) For just cause, including but not limited to refusal to carry out duties and instructions relative to the position, dishonesty, violation of this Agreement, and any willful acts or omissions inimical to or contrary to policies of Employer not arbitrarily applied in the case of Employee. Just cause shall also include solicitation by Employee of offers of employment from others prior to the last year of this Agreement, and the solicitation of the services by Employee or material positive response by Employee to the solicitation of professional search or executive recruitment organizations prior to the last year of this Agreement. In the event of termination by Employer for just cause, vested but unexercised options granted during the term of this Agreement shall be forfeited as a result thereof, as of the date of notice. In the event of a willful breach of this Agreement by Employee, Employer shall have the right to purchase from Employee, at the price paid by Employee, such of the Manor Care Common Stock as has been acquired by Employee by exercise of a stock option granted during the term of this Agreement if such exercise is within six (6) months prior to termination of this Agreement as a result of such breach. Employee shall be entitled to fourteen (14) days advance written notice of termination, except where the basis for termination constitutes conduct on the part of Employee involving dishonesty or bad faith, in which case the termination shall be effective upon the sending of notice. (c) In the event that Employee is unable to perform the services called for hereunder by reason of incapacity or disablement for more than six (6) months (whether or not consecutive) in any period of twenty-four (24) consecutive months, Employer shall have the right to terminate this Agreement by written notice to Employee. In the event of such termination, all non-vested obligations of Employer to Employee pursuant to this Agreement shall terminate. (d) In the event of Employee's death during the term of this Agreement, the Agreement shall terminate as of the date thereof. 4 5 11. Entire Agreement. This instrument contains the entire agreement of the parties and supersedes and replaces the Employment Agreement dated February 17, 1992. It may be changed only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension, or discharge is sought. This Agreement shall be governed by the laws of the State of Maryland, and any litigation shall be conducted in the State of Maryland. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first set forth above. Employer: MANOR CARE, INC. By: /s/ Stewart Bainum, Jr. ----------------------------------- Stewart Bainum, Jr. Chairman, President & CEO CHOICE HOTELS INTERNATIONAL, INC. By: /s/ Stewart Bainum, Jr. ----------------------------------- Stewart Bainum, Jr. Vice Chairman Employee: /s/ Donald J. Landry --------------------------------------- Donald J. Landry 5 EX-10.16 17 FORM OF ASSIGNMENT AGREEMENT 1 EXHIBIT 10.16 ASSIGNMENT OF EMPLOYMENT AGREEMENT This Assignment of Employment Agreement ("Assignment") dated this _____ day of _________________, 1996 between Manor Care, Inc. ("Manor Care"), a Delaware corporation with principal offices at 11555 Darnestown Road, Gaithersburg, Maryland 20878 and Choice Hotels International, Inc. ("Choice"), a Delaware corporation with principal offices at 10750 Columbia Pike, Silver Spring, Maryland 20901, and Donald J. Landry ("Employee"). WHEREAS, Manor Care, Choice and Employee have entered in an Employment Agreement (the "Agreement") dated as of September 1, 1995; WHEREAS, Manor Care is in the process of spinning off its lodging business and assets to shareholders in a tax-free transaction (the "Spinoff") and as part of the Spinoff, Manor Care desires to assign all of its right, title and interest in the Agreement to Choice; NOW THEREFORE, FOR VALUE RECEIVED, THE PARTIES AGREE AS FOLLOWS: 1. Assignment. Manor Care hereby assigns to Choice all of its right, title and interest in and to the Agreement. 2. Consent of Employee. Employee hereby consents to this Assignment, effective upon consummation of the Spinoff 3. Binding Effect. Except as stated in this Assignment, all of the terms and conditions of the Agreement shall remain in full force and effect as if fully rewritten herein. This Assignment shall be binding upon and inure to the benefit of all the parties to this Assignment and their successors and assigns. 4. Entire Agreement. This instrument contains the entire agreement of the parties . This Assignment shall be governed by, and construed in accordance with, the laws of the State of Maryland , without regard to its conflict of laws provisions and any litigation shall be conducted in the State of Maryland. SIGNATURES ON NEXT PAGE 2 IN WITNESS WHEREOF, the parties have executed this Assignment on the date first set forth above. MANOR CARE, INC. By: ____________________________________ Stewart Bainum, Jr. Chairman and Chief Executive Officer CHOICE HOTELS INTERNATIONAL, INC. By: ____________________________________ Stewart Bainum, Jr. Chairman and Chief Executive Officer Employee: ________________________________________ Donald J. Landry 2 EX-10.18 18 AGREEMENT 1 EXHIBIT 10.18 AGREEMENT This Agreement (the "Agreement") is made and entered into as of June 1, 1996, (the "Effective Date") by and among Manor Care, Inc. ("Manor Care"), Choice Hotels International, Inc. ("CHI" and, together with Manor Care, the "Company") and Robert C. Hazard, Jr. ("Hazard"). RECITAL A. The employment of Hazard as Co-Chairman of CHI terminated on May 31, 1996. B. The Company and Hazard now desire to set forth their agreement with respect to certain continuing relationships between the Company and Hazard. AGREEMENT The Company and Hazard, in consideration of the foregoing and the mutual promises and covenants made herein, agree as follows: 1. EMPLOYMENT. For the period from the Effective Date through May 31, 1997 (the "Employment Period") Hazard shall remain as a full-time, temporary employee of CHI. During the Employment Period, Hazard will receive no salary or other compensation. Hazard shall provide such services during the Employment Period as the parties shall mutually agree. 2. STOCK OPTIONS. a. Hazard agrees to waive any rights he may have, now or in the future, under the proposed Non-Employee Director Stock Option and Deferred Compensation Plan (the "Non-Employee Director Plan") of Choice Hotels Holdings, Inc. ("Holdings") to receive options to purchase 5,000 shares of common stock of Holdings upon initial election to the Holdings Board of Directors, in connection with the proposed spin-off of the lodging business of Manor Care (the "Spin-off"). However, nothing in this Agreement shall affect his rights to receive any other award under the Non-Employee Director Plan to which he may be entitled. b. The Company and Hazard acknowledge that Hazard has outstanding Class B Options to purchase 4,500 shares of the common stock of Manor Care ("Common Stock") at an exercise price of $9.46, exercisable on November 2, 1996, and that this Agreement does not affect such options. 2 c. The Company and Hazard acknowledge that Hazard has outstanding Class B Options to purchase 15,000 shares of Common Stock at an exercise price of $8.96 per share, exercisable on May 30, 1997 (the "$8.96 Class B Options"). Hazard shall have the right to exercise the $8.96 Class B Options with respect to 500 shares of Common Stock when the $8.96 Class B Options vest; however, Hazard hereby agrees to terminate the $8.96 Class B Options with respect to 14,500 shares of Common Stock. d. Changes arising from the Spin-off which affect other participants in the stock option plans under which the options described in Subsections 2b and 2c, above, were granted shall also apply to Hazard. Any consents necessary with respect to such changes shall deemed granted by Hazard by his execution of this Agreement. 3. BENEFITS. Hazard agrees to waive all rights to and forego any participation in any and all benefits to which full-time or part-time employees of the Company are entitled, including, but not limited to, participation in the medical, dental and life insurance plans of the Company, the Retirement Savings and Investment Plan ("401(K) Plan") of the Company, the Nonqualified Retirement Savings and Investment Plan ("Nonqualified Savings Plan") of the Company, the Cash Accumulation Retirement Plan ("CARP") of the Company, the Dependent Care Reimbursement Account and the Healthcare Reimbursement Account. 4. MODIFICATION. No change or modification of this Agreement shall be valid unless made in writing and signed by both the parties. 5. APPLICABLE LAW AND VENUE. This Agreement shall be governed by and construed in accordance with the laws of the State of Maryland. In the event of any legal or equitable action arising under this Agreement, the parties agree that the jurisdiction and venue of such action shall lie exclusively within either the state courts of Maryland or the United States District Court for the District of Maryland, and the parties do hereby waive any other jurisdiction and venue. 6. ENTIRE AGREEMENT. This Agreement incorporates the entire agreement between the parties with respect to the subject matter of the Agreement, and supersedes all other prior or contemporaneous agreements, negotiations or discussions between the parties with respect thereto. - 2 - 3 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. MANOR CARE, INC., a Delaware corporation By: ________________________________ CHOICE HOTELS INTERNATIONAL, INC., a Delaware corporation By: ________________________________ ____________________________________ Robert C. Hazard, Jr. - 3 - EX-10.19 19 AGREEMENT 1 EXHIBIT 10.19 AGREEMENT This Agreement (the "Agreement") is made and entered into as of June 1, 1996, (the "Effective Date") by and among Manor Care, Inc. ("Manor Care"), Choice Hotels International, Inc. ("CHI" and, together with Manor Care, the "Company") and Gerald W. Petitt ("Petitt"). RECITAL A. The employment of Petitt as Co-Chairman of CHI terminated on May 31, 1996. B. The Company and Petitt now desire to set forth their agreement with respect to certain continuing relationships between the Company and Petitt. AGREEMENT The Company and Petitt, in consideration of the foregoing and the mutual promises and covenants made herein, agree as follows: 1. EMPLOYMENT. For the period from the Effective Date through May 31, 1997 (the "Employment Period") Petitt shall remain as a full-time, temporary employee of CHI. During the Employment Period, Petitt will receive no salary or other compensation. Petitt shall provide such services during the Employment Period as the parties shall mutually agree. 2. STOCK OPTIONS. a. Petitt agrees to waive any rights he may have, now or in the future, under the proposed Non-Employee Director Stock Option and Deferred Compensation Plan (the "Non-Employee Director Plan") of Choice Hotels Holdings, Inc. ("Holdings") to receive options to purchase 5,000 shares of common stock of Holdings upon initial election to the Holdings Board of Directors, in connection with the proposed spin-off of the lodging business of Manor Care (the "Spin-off"). However, nothing in this Agreement shall affect his rights to receive any other award under the Non-Employee Director Plan to which he may be entitled. b. The Company and Petitt acknowledge that Petitt has outstanding Class B Options to purchase 4,500 shares of the common stock of Manor Care ("Common Stock") at an exercise price of $9.46, exercisable on November 2, 1996, and that this Agreement does not affect such options. c. The Company and Petitt acknowledge that Petitt has outstanding Class B Options to purchase 15,000 shares of Common Stock at an exercise price of $8.96 per share, exercisable on May 30, 1997 (the "$8.96 Class B Options"). Petitt shall have the right to 2 exercise the $8.96 Class B Options with respect to 500 shares of Common Stock when the $8.96 Class B Options vest; however, Petitt hereby agrees to terminate the $8.96 Class B Options with respect to 14,500 shares of Common Stock. d. Changes arising from the Spin-off which affect other participants in the stock option plans under which the options described in Subsections 2b and 2c, above, were granted shall also apply to Petitt. Any consents necessary with respect to such changes shall deemed granted by Petitt by his execution of this Agreement. 3. BENEFITS. Petitt agrees to waive all rights to and forego any participation in any and all benefits to which full-time or part-time employees of the Company are entitled, including, but not limited to, participation in the medical, dental and life insurance plans of the Company, the Retirement Savings and Investment Plan ("401(K) Plan") of the Company, the Nonqualified Retirement Savings and Investment Plan ("Nonqualified Savings Plan") of the Company, the Cash Accumulation Retirement Plan ("CARP") of the Company, the Dependent Care Reimbursement Account and the Healthcare Reimbursement Account. 4. MODIFICATION. No change or modification of this Agreement shall be valid unless made in writing and signed by both the parties. 5. APPLICABLE LAW AND VENUE. This Agreement shall be governed by and construed in accordance with the laws of the State of Maryland. In the event of any legal or equitable action arising under this Agreement, the parties agree that the jurisdiction and venue of such action shall lie exclusively within either the state courts of Maryland or the United States District Court for the District of Maryland, and the parties do hereby waive any other jurisdiction and venue. 6. ENTIRE AGREEMENT. This Agreement incorporates the entire agreement between the parties with respect to the subject matter of the Agreement, and supersedes all other prior or contemporaneous agreements, negotiations or discussions between the parties with respect thereto. - 2 - 3 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. MANOR CARE, INC., a Delaware corporation By: ________________________________ CHOICE HOTELS INTERNATIONAL, INC., a Delaware corporation By: ________________________________ ____________________________________ Gerald W. Petitt - 3 - EX-12.01 20 COMPUTATION OF RATIO OF EARNINGS 1 EXHIBIT 12.01 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES:
FISCAL YEAR ENDED MAY 31, ------------------------------- 1994 1995 1996 ------- ------- ------- (UNAUDITED) (IN THOUSANDS) Income before income taxes.................................. $17,678 $29,955 $15,858 Fixed charges (net of capitalized interest)................. 14,749 20,076 23,105 ------- ------- ------- Earnings.................................................... $32,427 $50,031 $38,963 ======= ======= ======= Fixed charges Interest expense and amortization of debt discount........ $14,505 $19,838 $22,816 Rent expense (interest portion)........................... 244 238 289 Capitalized interest...................................... 117 197 753 ------- ------- ------- Total fixed charges............................... $14,866 $20,273 $23,858 ======= ======= ======= Ratio of earnings to fixed charges.......................... 2.18x 2.47x 1.63x ======= ======= =======
EX-21.01 21 SUBSIDIARIES 1 Exhibit 21.01 SUBSIDIARIES OF CHOICE HOTELS HOLDINGS, INC.* --------------------------------------------- BOULEVARD MOTEL CORP. Bay Ridge Spirits Corp. Biscayne Land Associates, Inc. Biscayne Properties, Inc. Bowling Green Inn -- Brandywine, Inc. Cardinal Beverage Corp. Everglades Beverage Corp. Fairways Beverage Corp. Fairways, Inc. K & A Corp. MCH Baltimore Corp. MCH Hot Springs Corp. MCH Lincoln Corp. MCH Management, Inc. MCH Roanoke Corp. MCH Shady Grove Corp. MCH Springfield Corp. MCH Sturgis Corp. MCH Wichita Corp. MCHD Cypress Creek Corp. MCHD Ft. Lauderdale Corp. MCHD Hampton Corp. Raleigh Hotel Holdings, Inc. West Montgomery Hotel Holdings, Inc. CACTUS HOTEL CORP. CHOICE HOTELS INTERNATIONAL, INC. (Formerly Quality Inns International, Inc.) ("Choice Hotels") CH Europe, Inc. (d) Choice Capital Corp. Choice Hotels Australia Pty. Ltd. (90%) Choice Hotels Canada Inc. (50%) Choice Hotels (Cayman) Ltd. (10%) Choice Hotels International Asia Pacific Pty. Ltd. Choice Hotels International Pty. Ltd. (Formerly Quality Inn Pty. Ltd.) (d) Choice Hotels (Ireland) Limited (d) Choice Hotels Japan, Inc. (Formerly Quality Hotels Japan, Inc.) Choice Hotels Limited Choice Hotels of Brazil, Inc. - ------------------ * Direct subsidiaries of the Registrant are set forth below in capital letters with their subsidiaries immediately following. Entities are wholly owned except were indicated. 2 -2- Choice Hotels Pacific Asia K.K. (Formerly Quality Hotels Pacific Asia, Inc.) (d) Choice Hotels Pty. Ltd. (Formerly Quality Hotels Pty. Ltd.) (d) Choice Hotels Systems, Inc. Choice Hotels Venezuela, C.A. (20%) Clarion Hotel Pty. Ltd. (Formerly Royale Hotels Pty. Ltd.) (d) Comfort Hotels Pty. Ltd. (d) Comfort Inn Pty. Ltd. (d) Comfort Inns New Zealand Limited (Formerly Quality Inns New Zealand Limited) (d) Hoteles Cono Sur S.A. (d) QI Capital Corp. (d) Quality Hotels Europe, Inc. Quality Hotels (Ireland) Limited (d) Quality Hotels Limited (Formerly Quality Hotels (China) Limited) (50%; 50% Manor Care, Inc.) (d) Quality Hotels and Resorts, Inc. (d) Baltimore Hotel Management. Inc. (d) Myrtle Beach Hotel Management, Inc. (d) Quality Inns International, Inc. (Formerly Choice Hotels International, Inc.) Quality Inter-Americas, Inc. (d) Sleep Inn Pty. Ltd. (d) COMFORT CALIFORNIA, INC. GULF HOTEL CORP. HEFRU FOOD SERVICES, INC. QCM BEVERAGES, INC. (49%; 51% Texas resident) QCM CORPORATION (d) QI ADVERTISING AGENCY, INC. QUALITY ARIZONA, INC. (d) QH Europe, Inc. (d) QUALITY INNS WORLD MARKETING CORPORATION QUALITY INSURANCE ASSOCIATES, INC. (d) REVERE GROUP, INC. (THE) (d) SUNBURST HOTEL CORP. THICKET, INC. (THE) (Non-Profit; owned by members) 3 -3- PARTNERSHIPS QH Europe Partnership (80% Quality Hotels Europe, Inc. ("QHE"), 20% Choice Hotels International, Inc.) Choice Hotels (Deutschland) G.m.b.H. (99%; 1% Choice Hotels) Choice Hotels (France) S.a.r.l. (99%; 1% Choice Hotels) Choice Hotels Benelux S.A. (51%) Manor Care Hotels (France) S.A. Manor Care Hotels France No. 1 S.a.r.l. Manor Care Hotels France No. 2 S.A. Manor Care Hotels France No. 3 S.a.r.l. Manor Care Hotels France No. 4 S.a.r.l. Quality Hotels Limited (Formerly QI Hotels (U.K.) Limited) (99%; 1% Choice Hotels) Choice Hotels (UK) Limited Quality Hotels Europe (Alsdorf) G.m.b.H. (99%; 1% QHE)(d) Quality Hotels Europe (Herleshausen) G.m.b.H. (99%; 1% QHE)(d) Quality Hotels Europe (Jena) G.m.b.H. (formerly Quality Hotels Europe (Deutschland) G.m.b.H.)(99%; 1% QHE) Quality Hotels Europe (Leipzig) G.m.b.H. (99%; 1% QHE)(d) Quality Hotels Europe (Peine) G.m.b.H. (99%; 1% QHE) Quality Hotels Europe (Troisdorf) G.m.b.H. (99%; 1% QHE) (d) = dormant companies EX-27.01 22 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Combined Balance Sheets, the Combined Statements of Income and the Combined Statements of Cash Flows and is qualified in its entirety by reference to such financial statements. YEAR MAY-31-1996 MAY-31-1996 4,142 0 35,444 4,825 757 41,002 362,907 63,380 491,304 48,608 294,861 0 0 0 147,559 491,304 0 374,873 0 334,083 0 974 22,816 15,858 7,400 8,458 0 0 0 8,458 0 0
EX-99.01 23 SCHEDULE II 1 EXHIBIT 99.01 CHOICE HOTELS HOLDINGS, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGES TO BALANCE AT BEGINNING PROFIT END DESCRIPTION OF PERIOD AND LOSS WRITE-OFFS OF PERIOD - ------------------------------------------------------ ---------- ---------- ---------- ---------- Year ended May 31, 1996 Allowance for doubtful accounts..................... $4,202 $ 974 $ (351) $4,825 ======== ======== ======== ======== Year ended May 31, 1995 Allowance for doubtful accounts..................... $8,950 $ 906 $ (5,654) $4,202 ======== ======== ======== ======== Year ended May 31, 1994 Allowance for doubtful accounts..................... $6,982 $3,360 $ (1,392) $8,950 ======== ======== ======== ========
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