<PAGE> 1
3,682,000 SHARES
LOGO
COMMON STOCK
Of the 3,682,000 shares of Common Stock being offered hereby, 400,000
shares are being sold by Doubletree Corporation, a Delaware corporation (the
"Company"), and 3,282,000 shares are being sold by certain stockholders of the
Company (the "Selling Stockholders"). See "Principal and Selling Stockholders."
The Company will not receive any proceeds from the sale of shares by the Selling
Stockholders. The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "TREE." On May 20, 1996, the last reported sale price of the
Company's Common Stock was $32 1/4 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
------------------------
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 PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED UPON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE UNDERWRITING PROCEEDS TO SELLING
TO PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share...................... $31.25 $1.41 $29.84 $29.84
Total(3)....................... $115,062,500 $5,191,620 $11,936,000 $97,934,880
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $650,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
552,300 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public will total $132,321,875, the Underwriting Discount will total
$5,970,363 and the Proceeds to Company will total $28,416,632. See
"Underwriting."
The shares of Common Stock are offered by the Underwriters named herein,
when, as and if delivered to and accepted by the Underwriters and subject to
their right to reject any order in whole or in part. It is expected that the
delivery of certificates representing the shares will be made against payment
therefor at the office of Montgomery Securities on or about May 24, 1996.
------------------------
MONTGOMERY SECURITIES
MORGAN STANLEY & CO.
Incorporated
SCHRODER WERTHEIM & CO.
May 20, 1996
<PAGE> 2
[LOGO]
DOUBLETREE
<TABLE>
<S> <C> <C>
[PHOTO] [PHOTO]
Doubletree Guest Suites Doubletree Hotel National Airport
New York, New York Washington, D.C.
[PHOTO] [PHOTO]
Double Hotel at Lincoln Centre Doubletree Guest Suites
Dallas, Texas Chicago, Illinois
[PHOTO]
Doubletree Hotel
Pittsburgh, Pennsylvania
</TABLE>
Information contained or incorporated by reference in this Prospectus
contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "will," "should," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The matters set forth under the
caption "Risk Factors" in the Prospectus constitute cautionary statements
identifying important factors with respect
to such forward-looking statements, including certain risks and uncertainties,
that could cause actual results to differ materially from those in
such forward-looking statements.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS
WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY
AT LEVELS
ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING,
IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND OTHER SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED (THE
"EXCHANGE ACT"). SEE "UNDERWRITING."
<PAGE> 3
<TABLE>
<S> <C>
[PHOTO] [PHOTO]
Doubletree Hotel
Doubletree Paradise Valley Resort Austin, Texas
Scottsdale, Arizona
[PHOTO] [MAP]
Antlers Doubletree Hotel - Doubletree Hotels
Colorado Springs, Colorado - Doubletree Guest Suites
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
[PHOTO]
Doubletree Islander Hotel
Newport, Rhode Island
[MAP] [PHOTO]
- Doubletree Club Hotels Doubletree Hotel at Plaza Las Fuentes
- Non-Doubletree Brand Hotels Pasadena, California
</TABLE>
<PAGE> 5
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed with the Securities and Exchange
Commission (the "Commission") by the Company are hereby incorporated by
reference in this Prospectus:
(1) Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
(2) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1996.
(3) Proxy Statement dated March 15, 1996 for the Company's 1996 Annual
Meeting of Stockholders.
(4) Current Report on Form 8-K dated February 27, 1996.
(5) The description of the Common Stock of the Company contained in its
Registration Statement on Form 8-A (File No. 0-24392) filed on June 18,
1994.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act (as defined on the inside cover of the Prospectus)
subsequent to the date of this Prospectus and prior to the termination of the
offering made hereby, shall be deemed incorporated by reference herein and to be
a part hereof from the date of filing such reports and documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein, or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of the Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents) will be provided without charge to
each person, including any beneficial owner, to whom this Prospectus is
delivered, upon written or oral request. Copies of this Prospectus, as amended
or supplemented from time to time, and any other documents (or parts of
documents) that constitute part of the Prospectus under Section 10(a) of the
Securities Act of 1933, as amended (the "Securities Act"), will also be provided
without charge to each such person, upon written or oral request. Requests
should be directed to Doubletree Corporation, 410 North 44th Street, Suite 700,
Phoenix, Arizona 85008, telephone number (602) 220-6666.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3 (of which this Prospectus is a part) under the Securities Act with respect
to the securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in the Prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. The Company will issue to its stockholders
annual reports and unaudited quarterly reports for the first three quarters of
each fiscal year. Annual reports will include audited consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States and a report of its independent public accountants with
respect to the examination of such financial statements. In addition, the
Company will issue to its stockholders such other interim reports as it deems
appropriate. The Registration Statement, the exhibits and schedules forming a
part thereof and the reports, proxy statements and other information filed by
the Company with the Commission in accordance with the Exchange Act can be
inspected and copied at the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: 7 World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Company's Common Stock is quoted on
the Nasdaq National Market, and reports and other information concerning the
Company may be inspected at the National Association of Securities Dealers, Inc.
at 1735 K Street, N.W., Washington, D.C. 20006.
3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and the notes thereto
appearing elsewhere in this Prospectus. Except as otherwise noted, all
information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option. References to the Company herein include the Company and
its subsidiaries, including Doubletree Hotels Corporation ("DHC") and RFS, Inc.
("RFS Management"), unless the context otherwise indicates. References to DHC
and RFS Management herein refer to the operations of those subsidiaries.
THE COMPANY
Doubletree Corporation (the "Company") is one of the nation's leading hotel
management companies. At March 31, 1996, the Company managed, leased, or
franchised 172 hotels with an aggregate of 39,039 rooms in 37 states, the
District of Columbia and Mexico. This represents a 58% and 38% increase in
managed, leased or franchised hotels and aggregate room count, respectively,
during the 12 month period ended March 31, 1996. Excluding the RFS Acquisition,
this growth was 12% and 14%, respectively. See "Business -- Recent
Developments." The Company provides hotel owners with management and franchise
services under its Doubletree Hotels(R), Doubletree Guest Suites(R) and
Doubletree Club Hotels(R) brand names, as well as management services for
non-Doubletree brand hotels. At March 31, 1996, the Company's hotels included 60
full-service Doubletree Hotels, 38 Doubletree Guest Suites, 13 Doubletree Club
Hotels, and 61 hotels operated by the Company under third party brand names or
as independent hotels.
Since the Company's initial public offering in July 1994, it has added 73
net new hotel contracts with 13,474 net new hotel rooms to its original base of
99 properties and 25,565 rooms, representing increases of 74% and 53%,
respectively. The Company has also taken the following steps to help implement
and further its business and growth strategies:
- Increased the number of rooms in its hotel portfolio (excluding the RFS
Acquisition (as defined below)) by 15% in 1995 as compared to 1994, and
by 10% in 1994 as compared to 1993.
- Established strategic alliances with three institutional hotel investors,
not including RFS Hotel Investors, Inc. (the "REIT"), that accounted for
36% of the Company's room additions in 1995.
- Acquired RFS Management, a privately held hotel operator that leases and
manages hotels owned primarily by RFS Partnership, L.P. (the "Landlord"),
in February 1996, which significantly expanded the Company's portfolio of
non-Doubletree brand hotels, increased the Company's experienced hotel
management personnel and added an established infrastructure, which will
allow the Company to pursue further non-Doubletree brand management
contract and lease opportunities.
- Entered into an arrangement with the REIT, a publicly held real estate
investment trust that owns substantially all of the Landlord, in February
1996, granting the Company the right (the "Right of First Refusal") to
lease and manage any hotels acquired or developed by the REIT or the
Landlord during the next 10 years, with limited exceptions. At March 31,
1996, the REIT had a public market capitalization of approximately $400
million.
- Entered into the mid-priced extended stay segment of the hotel market in
November 1995 with an investment in Candlewood Hotel Company, L.L.C.
("Candlewood"), a joint venture with entities controlled by Mr. Jack
DeBoer, the founder of Residence Inns, the largest extended stay hotel
chain in the United States.
- Introduced in January 1996 "Club Hotels by Doubletree(R)," a new hotel
brand created to meet the evolving needs of the mid-market, frequent
business traveler; each Club Hotel by Doubletree will offer office and
conference facilities designed by Steelcase, Inc. ("Steelcase"), an Au
Bon Pain Company, Inc. ("Au Bon Pain") bakery cafe and a Kinko's
self-service business center.
- Launched its multi-million-dollar "Sweet Dreams" marketing campaign in
February 1995 and achieved a 79% brand awareness of the Doubletree brand
name, an all-time Company high, in the business travel segment of the
hotel industry at December 31, 1995, according to Nationwide Surveys,
Inc.
4
<PAGE> 7
- Expanded its support services and preferred vendor programs resulting in
a $1.5 million, or 180%, increase in operating income from such
activities in 1995 over 1994.
- Established a professional franchise sales organization and support
infrastructure in 1995 to capitalize on growth opportunities for
franchising Doubletree brand hotels.
The Company's principal business strategy is to provide its hotel owners
with high quality, responsive hotel management and franchise services designed
to improve hotel profitability and to provide its hotel guests with a high level
of satisfaction. In executing this business strategy, the Company seeks to
implement policies and programs designed to increase revenues while minimizing
operating expenses at its managed, leased and franchised hotels. These policies
and programs include offering purchasing services at favorable prices to hotel
owners, offering management services and the Doubletree brand for one combined
fee, minimizing other costs associated with operating under the Doubletree brand
name, and promoting employee productivity and morale. The Company also seeks to
grow hotel revenues by continuing to strengthen the Doubletree brand and
implementing national, regional and local sales and marketing programs.
The Company believes that the successful implementation of its business
strategy has resulted in a high level of guest satisfaction as evidenced by a
recent survey of Doubletree guests that found that 95% of respondents intend to
stay at Doubletree hotels in the future. Net operating income for the 46 hotels
managed by the Company for the period from January 1, 1991 through December 31,
1995 has, the Company believes, increased on average by approximately 20% per
annum during such period.
The Company's growth strategy is focused on four areas: (i) improving the
revenue and operating performance of its existing hotels; (ii) growing the
number of rooms in its hotel portfolio; (iii) expanding the support services it
offers to hotel owners; and (iv) acquiring other hotel management companies and
entering into strategic partnerships.
The Company believes that it has several competitive strengths that will
enable it to implement its growth strategy and continue to obtain additional
management contracts, leases and franchise agreements, including: (i) a superior
track record of generating profits for hotel owners; (ii) the strength of the
Doubletree brand; (iii) the ability to offer capital and flexible management
structures to hotel owners; (iv) established relationships with institutional
hotel investors; (v) operation of multiple product lines and brands; and (vi)
room for growth in the Company's existing hotel portfolio.
Doubletree brand hotels currently compete in three segments of the lodging
industry: full-service hotels, all-suite hotels and limited-service hotels.
Doubletree full-service hotels are typically targeted toward business, group
meeting and leisure travelers. During 1994 and 1995, these full-service hotels
had average daily rates of $80.44 and $84.87 and occupancy rates of 70.2% and
70.8%. Doubletree all-suite hotels are typically targeted at business travelers
and families who have a need or desire for greater space than is available at
most traditional hotels. During 1994 and 1995, these all-suite hotels had
average daily rates of $94.43 and $98.84 and occupancy rates of 73.7% and 74.6%.
Doubletree limited-service hotels are aimed at individual business travelers.
During 1994 and 1995, these hotels had average daily rates of $63.10 and $66.42
and occupancy rates of 65.9% and 66.2%. The Company also manages or leases
hotels under non-Doubletree brand names which compete in the luxury,
full-service, limited-service and extended stay segments of the lodging
industry. During 1994 and 1995, these hotels had average daily room rates of
$70.18 and $73.56 and occupancy rates of 69.9% and 71.4%. The information in
this paragraph includes only properties managed by Doubletree and RFS Management
for the entire two-year period.
RECENT DEVELOPMENTS
Acquisition of RFS Management. In February 1996, the Company significantly
expanded its portfolio of non-Doubletree brand hotels with the acquisition of
RFS Management (the "RFS Acquisition"). At March 31, 1996, RFS Management
operated 50 hotels (the "RFS Hotels"), 44 of which were leased and managed, four
of which were leased only, and two of which were managed for owners other than
the Landlord. The RFS Hotels principally operate in the limited-service and the
extended stay segments of the lodging industry, comprise approximately 7,000
rooms and are operated under such franchise brands as Holiday Inn, Holiday Inn
Express, Residence Inn by Marriott, Hampton Inn and Comfort Inn. With the RFS
Acquisition, the Company acquired an independent hotel management company with
experienced hotel management
5
<PAGE> 8
personnel and an established infrastructure, which will allow the Company to
pursue further non-Doubletree brand management contract and lease opportunities.
The Right of First Refusal provides the Company with a new source for additions
to the Company's hotel portfolio. In addition to its ongoing efforts to acquire
hotels, the REIT currently has six hotels under development which are expected
to be completed in the third and fourth quarters of 1996 and which will be
subject to the Right of First Refusal. See "Business -- The RFS Acquisition."
Formation of Candlewood. In November 1995, the Company announced its
entrance into the mid-priced ($40-50 per night) extended stay segment of the
hotel industry with its investment in Candlewood, a joint venture with entities
controlled by Mr. Jack DeBoer, the founder of Residence Inns. Candlewood will
develop, own, manage and franchise hotels containing fully furnished studio
units designed to serve the value-oriented extended stay guest. The Company has
committed to invest substantially all of the initial equity capital of
Candlewood, of which $3.3 million was invested at March 31, 1996, and an
additional $11.7 million is to be invested over the next 12 months, for which it
will receive, after a preferred return of and on its capital, 50% of
Candlewood's profits and losses. Mr. DeBoer, whom the industry credits with
creating the extended stay concept, will be primarily responsible for the
development and day-to-day operations of Candlewood. The Company appoints two of
Candlewood's four delegates, and approval of at least a majority of the
delegates is required for all material transactions. Candlewood's first hotel
commenced operations in May 1996. The Company believes that the Candlewood joint
venture provides it with an opportunity to generate incremental revenues and
participate in a quickly expanding and high demand segment of the lodging
industry. The Candlewood joint venture is in the initial stages of development,
and there can be no assurance of its success. See "Business -- Investments and
Commitments."
Introduction of Club Hotels by Doubletree. In January 1996, the Company
introduced "Club Hotels by Doubletree," a new hotel brand specifically targeted
at the frequent business traveler, which was developed by the Company in concert
with Steelcase, Au Bon Pain and Kinko's. Each hotel will feature a multi-purpose
Business Club ranging from 2,000 to 5,000 square feet in size. One portion of
the Business Club will be dedicated to the Kinko's self-service business center
and will contain business equipment, such as computer printers, fax machines,
photocopiers and office and shipping supplies. Each Business Club will also
feature private mini offices and small conference rooms designed by Steelcase,
and will feature an Au Bon Pain bakery cafe, where guests may enjoy breakfast,
lunch or dinner. The Company plans to grow its new brand through the acquisition
of management contracts of underperforming hotels in target locations, a focused
franchising program and the conversion of certain existing Doubletree Club
Hotels.
The principal executive offices of the Company are located at 410 North
44th Street, Suite 700, Phoenix, Arizona 85008 and its telephone number is (602)
220-6666.
6
<PAGE> 9
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company(1)............... 400,000 shares
Common Stock offered by the Selling Stockholders..... 3,282,000 shares
Common Stock to be outstanding after the
offering(2)........................................ 22,509,686 shares
Use of proceeds...................................... For general corporate purposes, including
capital investments in Candlewood
Nasdaq National Market Symbol........................ TREE
</TABLE>
- ---------------
(1) Excludes 552,300 shares of Common Stock subject to the Underwriters'
over-allotment option.
(2) Does not include an aggregate of 1,780,500 shares of Common Stock subject to
issuance upon the exercise of options outstanding at March 31, 1996 under
the Company's 1994 Equity Participation Plan, as amended (the "Incentive
Plan").
CORPORATE ORGANIZATION
The Company was incorporated on May 19, 1994 to succeed to all the assets,
liabilities and business operations of Doubletree Partners, formerly Guest
Quarters Hotel Partnership ("GQHP"). On December 16, 1993, Doubletree Partners
and DHC were combined through the transfer of the ownership interests in DHC to
Doubletree Partners in exchange for cash and partnership interests in Doubletree
Partners (the "Combination Transaction"). On June 30, 1994 (immediately prior to
the Company's initial public offering of Common Stock), the partners of
Doubletree Partners, other than Samantha Hotel Corporation ("Samantha" or the
"Predecessor"), contributed their general partnership interests to the Company
and the Samantha owners contributed Samantha to the Company in consideration for
15,500,000 shares of Common Stock of the Company in proportion to their
respective ownership interests in Doubletree Partners prior to such transfers
(the "Reorganization").
Pursuant to a stockholders agreement entered into in connection with the
Reorganization (the "Stockholders Agreement") among the Company, GE Investment
Hotel Partners I, Limited Partnership ("GEHOP"), an affiliate of Canadian
Pacific Limited ("Canadian Pacific"), an affiliate of Metropolitan Life
Insurance Company ("Metropolitan") and entities controlled by the Company's two
Co-Chairmen, Richard Ferris and Peter Ueberroth (collectively, the "Original
Stockholders"), the Original Stockholders were entitled, among other things, to
nominate all candidates for election to the Board of Directors of the Company.
Upon consummation of the offering, assuming, as anticipated, that the Original
Stockholders own less than 50% of the outstanding shares of Common Stock, the
Stockholders Agreement will terminate.
7
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND HOTEL DATA)
The following tables present summary historical consolidated financial and
operating information, restated to give effect to the RFS Acquisition, for the
Company and the Predecessor, a subsidiary of GQ Owners, L.P. ("GQ Owners"), the
entity that owned GQHP prior to Combination Transaction. Prior to December 16,
1993, the historical financial information for the Predecessor included only the
operations of GQHP. The following table also presents summary 1993 pro forma
consolidated financial information for the Company giving effect to the
Combination Transaction and the Reorganization as if each had occurred on
January 1, 1993. The historical financial information subsequent to such date
and the pro forma information include the combined operations of GQHP, DHC, and
RFS Management. The information below should be read in conjunction with the
consolidated financial statements and notes thereto and "Management's Discussion
and Analysis of Results of Operations and Financial Condition." Pro forma
results of operations are not necessarily indicative of the results of
operations as they might have been had the Combination Transaction and the
Reorganization been consummated at the beginning of the period shown. Quarterly
results of operations are not necessarily indicative of the results expected for
the full year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- ---------------------
PRO
PREDECESSOR FORMA(1) COMPANY COMPANY
----------- -------- --------------------- ---------------------
1993 1993 1994 1995 1995 1996
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenues................. $ 48,207 $82,197 $140,783 $230,772 $ 48,590 $ 62,401
Total operating costs and
expenses..................... 43,035 67,819 121,213 204,513 43,223 54,897
Income before income taxes and
minority interest............ 5,172 14,378 19,570 26,259 5,367 7,504
Net income..................... 4,933 8,615 (2) 13,235(3) 17,791 3,645 4,878
Earnings per share............. $ 0.47 (2) $ 0.66(3) $ 0.80 $ 0.17 $ 0.22
Pro forma net income(4)........ $ 18,736 $ 3,490
Pro forma earnings per
share(4)..................... $ 0.84 $ 0.16
Weighted average common and
common equivalent shares
(5).......................... 18,228 20,071 22,219 21,910 22,584
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------
AS
ACTUAL ADJUSTED(6)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................................. $ 19,024 $ 30,310
Total assets.............................................................. 174,107 185,393
Long-term debt, net of current portion.................................... -- --
Stockholders' equity...................................................... 119,487 130,773
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------- -----------------
1994 1995 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
NUMBER OF HOTELS
Doubletree Full-Service Hotels............................................ 44 56 47 60
Doubletree Guest Suite Hotels............................................. 33 36 34 38
Doubletree Club Hotels.................................................... 14 13 14 13
------ ------ ------ ------
Total Doubletree Brand Hotels......................................... 91 105 95 111
Non-Doubletree Brand Hotels............................................... 13 11 14 61
------ ------ ------ ------
Total Company Hotel Portfolio......................................... 104 116 109 172
====== ====== ====== ======
Management Contracts...................................................... 77 81 80 86
Lease Agreements(7)....................................................... 4 5 5 53
Franchise Agreements...................................................... 23 30 24 33
------ ------ ------ ------
Total Company Hotel Portfolio......................................... 104 116 109 172
====== ====== ====== ======
NUMBER OF ROOMS
Doubletree Full-Service Hotels............................................ 14,207 18,422 15,266 19,324
Doubletree Guest Suite Hotels............................................. 7,138 7,693 7,378 8,082
Doubletree Club Hotels.................................................... 2,573 2,386 2,573 2,364
------ ------ ------ ------
Total Doubletree Brand Hotels......................................... 23,918 28,501 25,217 29,770
Non-Doubletree Brand Hotels............................................... 2,620 2,114 3,012 9,269
------ ------ ------ ------
Total Company Hotel Portfolio......................................... 26,538 30,615 28,229 39,039
====== ====== ====== ======
Management Contracts...................................................... 20,952 22,957 22,003 24,006
Lease Agreements(7)....................................................... 617 1,017 1,017 7,738
Franchise Agreements...................................................... 4,969 6,641 5,209 7,295
------ ------ ------ ------
Total Company Hotel Portfolio......................................... 26,538 30,615 28,229 39,039
====== ====== ====== ======
REVPAR ANALYSIS(8)(9)
Doubletree Full-Service Hotels............................................ $56.48 $60.08 $57.13 $62.23
Doubletree Guest Suite Hotels............................................. 69.57 73.74 72.56 78.19
Doubletree Club Hotels.................................................... 41.59 43.99 46.90 50.50
Total Doubletree Brand Hotels......................................... 60.22 63.96 62.20 67.44
Non-Doubletree Brand Hotels............................................... 49.02 52.51 47.16 50.36
Total Company Hotel Portfolio......................................... 58.38 62.03 57.96 62.61
</TABLE>
- ---------------
(1) Gives effect to the Combination Transaction and the Reorganization as if
each of these events had occurred on January 1, 1993.
(2) The pro forma effective tax rate is higher than the actual effective tax
rate due to fewer than expected restrictions on the Company's ability to
utilize net operating loss carryforwards.
(3) The Company's effective tax rate for the year ended December 31, 1994 was
32.4% due to the organizational structure of the Company prior to its
initial public offering. Had a 35% rate been incurred, 1994 net income and
earnings per share would have been $12,720,000 and $0.63, respectively.
(4) During the fourth quarter of 1995, the Company and RFS Management incurred
$2,565,000 of business combination expenses related to the RFS Acquisition
which closed in February 1996. RFS Management, as a Subchapter S Corporation
in 1995 for federal income tax purposes, was not generally liable for
federal income taxes. Accordingly, RFS Management did not provide for
federal income taxes in its 1995 financial statements. Pro forma adjustments
have been made for the year ended December 31, 1995 and the three months
ended March 31, 1995 to provide for income taxes on the earnings of RFS
Management at the Company's effective tax rate; also, for the year ended
December 31, 1995 pro forma adjustments have been made to exclude the
business combination expenses and provide for a related increase in income
tax expense.
(5) Assumes that the 15,500,000 shares issued in connection with the
Reorganization and the 2,727,811 shares issued to acquire RFS Management,
which was accounted for as a pooling of interests, were outstanding for all
periods presented.
(6) As adjusted to reflect the sale by the Company of 400,000 shares of Common
Stock offered hereby and the application of the net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
(7) Includes one owned hotel (239 rooms).
(8) REVPAR is occupancy percentage multiplied by average daily room rate.
(9) For the years ended 1994 and 1995, includes only information for hotels
managed by the Company (including RFS Management) for the entire two-year
period. For the first quarter of 1995 and 1996, includes only information
for hotels managed for the Company (including RFS Management) during both
periods.
9
<PAGE> 12
RISK FACTORS
In evaluating the Company's business, prospective investors should
carefully consider the following factors in addition to the other information
contained in this Prospectus.
COMPETITION FOR AND DEPENDENCE ON MANAGEMENT CONTRACTS AND FRANCHISE AGREEMENTS;
COMPETITION FOR GUESTS
Competition for management contracts and franchise agreements in the
lodging industry is intense. The Company competes with national and regional
brand franchisors and management companies, some of which have greater name
recognition and financial resources than the Company. In addition, smaller hotel
management companies compete against the Company. The Company believes that its
ability to secure a management contract or franchise agreement is based
principally upon the perceived value and quality of the Company's management
services, brand name and the potential economic advantages to the hotel owner of
retaining the Company's management services or brand name. The Company believes
that the perceived value of a brand name to a hotel owner is in part a function
of the success of the hotels currently under management. Competitive factors
also include relationships with hotel owners and investors, marketing support,
reservation system capacity and the willingness to make debt and equity
investments (collectively, "Investments") in connection with new management and
lease arrangements. No assurance can be given that the Company will be
successful in retaining current, or competing for additional, management
contracts or franchise agreements.
Competition for guests in the lodging industry is also intense. Competitive
factors in the industry include room rates, quality of accommodations, name
recognition, service levels and convenience of location. The Company's hotels
are located in areas that generally contain numerous other competitors. There
can be no assurance that demographic, geographic or other changes in markets
will not adversely affect the convenience or desirability of the locales in
which the Company's hotels are located. Further, there can be no assurance that
new or existing competitors will not significantly lower rates, offer greater
convenience, services or amenities, or significantly expand or improve
facilities in a market in which the Company's hotels compete, thereby adversely
affecting the Company's ability to attract guests.
RISK OF CONTRACT TURNOVER
Management contracts, leases and franchise agreements are acquired,
terminated and renegotiated in the ordinary course of the Company's business.
Many of the Company's management contracts and leases may be terminated by the
owner of the hotel property if the Company fails to meet certain performance
standards, or in the event of a change in control of the property through sale
or foreclosure, or otherwise. In the event of a termination other than for
performance, many contracts require the hotel owner to pay a termination fee,
which may be more or less than the book value, if any, of the contract asset. If
the Company loses a capitalized management contract or franchise agreement, the
Company will record a write-off of the remaining book value (less any
termination fee received) of such management contract or franchise agreement,
which could have a material adverse effect on the Company's results of
operations and financial condition.
Ownership of individual hotels and hotel portfolios change from time to
time, and management and hotel brands may be changed concurrently. Historically,
the Company has been successful in retaining management or franchise services in
the majority of cases, because of its competitive advantages. See "Business --
Competitive Strengths." During 1995, four hotels managed by the Company (all
operated under non-Doubletree hotel brands) and two franchised hotels were sold
to new owners who did not retain the Company's services. In the first quarter of
1996, one hotel managed by the Company and operated under a Doubletree brand was
sold to a new owner who did not retain the Company's services. None of these
terminations resulted in a material loss to the Company. In 1995 and the first
quarter of 1996, the Company was able to add 12 and 6 net new hotels, excluding
the RFS Acquisition, respectively, and achieved a net growth in rooms of 4,077
and 1,445, respectively. Currently, the Company is monitoring the acquisition or
potential acquisition by Starwood Lodging Trust ("Starwood"), or its affiliates,
of a total of eight Doubletree brand hotels and one non-Doubletree brand hotel,
all of which are managed by the Company. Starwood has acquired three of these
hotels to date. The Company continues to manage all of these hotels, and is
discussing its proposal with Starwood to enter into long-term management and/or
franchise agreements with respect to
10
<PAGE> 13
all nine hotels. There can be no assurance that the Company will be as
successful in the future as it has been in the past in retaining contracts,
avoiding a material loss on contract termination, replacing terminated contracts
with favorable new contracts and renegotiating and converting contracts.
DEPENDENCE ON CERTAIN HOTEL OWNERS
The Company manages hotels for, and franchises its brands to, certain
affiliates of its Original Stockholders and directors and other major hotel
investors. At March 31, 1996, affiliates of GEHOP and Metropolitan owned 12 and
10 hotels, respectively, that were managed or leased by the Company. On the same
date, the Company managed four hotels for affiliates of Norman B. Leventhal, a
director of the Company. In 1995 the Company received in the aggregate
(including reimbursements) $11.8 million, $10.3 million and $3.4 million,
respectively, under contracts with these parties. As a result of the RFS
Acquisition, at March 31, 1996, the Company also leased 48 hotels (44 of which
it manages) from the Landlord. In addition, there are five unrelated hotel
owners which each own between three and seven hotels which are managed by or
franchised from the Company. Although the Company believes that it has
satisfactory relationships with these hotel owners, no assurance can be given
that its relationships with these owners will remain satisfactory. In addition,
the Company's growth opportunities are dependent in part on its ability to
maintain satisfactory relationships with these and other institutional hotel
investors, and therefore the failure of the Company to maintain any of these
relationships could have a material adverse effect on the Company's results of
operation and financial condition or its ability to expand its portfolio of
hotels under management or franchise. See "Business -- Growth Strategy."
RISKS ASSOCIATED WITH EXPANSION
A major focus of the Company's growth strategy is to add significantly to
its portfolio of hotels through the acquisition of management contracts, leases
and franchise agreements, individually or in groups, including through the
acquisition of hotel management companies. There can be no assurance that the
Company will be able to obtain new contracts, leases and franchise agreements,
that such contracts, leases and franchise agreements will be profitable, that
expansion will be profitable or that the Company's systems, procedures and
controls and management, financial and other resources, will be adequate to
support such expansion. See "Business -- Growth Strategy."
In addition, there can be no assurance that the Company will be able to
integrate successfully new hotels, new hotel products or new hotel management
company acquisitions into its operations, that new hotels, new hotel products or
new hotel management company acquisitions will achieve revenue and profitability
levels comparable to the Company's existing hotels or that the combined business
will be profitable. Hotels being operated under newly acquired management
contracts or lease agreements may begin with lower occupancy and room rates.
Furthermore, the Company's expansion within its existing markets could adversely
affect the financial performance of the Company's existing hotels or its overall
results of operations. Expansion into new markets may present operating and
marketing challenges that are different from those currently encountered by the
Company in its existing markets. There can be no assurance that the Company will
anticipate all of the changing demands that expanding operations will impose on
its management or its management information and reservation systems, and the
failure to adapt its systems and procedures could have a material adverse effect
on the Company's business.
RISKS ASSOCIATED WITH LEASING REAL ESTATE
The Company leases 52 hotels and is subject to varying degrees of risk
generally related to leasing real estate. In addition to general risks related
to the lodging industry, these risks include, among others, liability for
long-term lease obligations, the potential for uninsured losses, the impact of
present or future environmental legislation and compliance with environmental
laws, and adverse changes in zoning laws and other regulations, many of which
are beyond the control of the Company. In addition, the Percentage Leases (as
defined in "Business -- Hotel Operations: Non-Doubletree Brand Hotels -- Lease
and Management Agreements") contain a cross-default provision for events of
default under any lease in place as of February 27, 1996 (the "RFS Closing
Date") between RFS Management and the Landlord. This cross default provision
could
11
<PAGE> 14
result in additional leverage in favor of the Landlord in the event of a dispute
between RFS Management and the Landlord concerning a particular lease. For a
discussion of events of default under the Percentage Leases as well as certain
termination rights, see "Business -- Hotel Operations: Non-Doubletree Brand
Hotels -- Lease and Management Agreements."
Historically, the Company has earned management fees based on a percentage
of specified hotel revenues and its risk has been limited to the extent of its
management fee. However, lease terms typically require the payment of a fixed
monthly base rent regardless of the performance of the hotel leased, in addition
to a variable rent based on a percentage of revenues. Other than real estate
taxes, property insurance and furniture, fixtures and equipment and other
capital improvements, the lessee is generally required to pay all costs and
expenses incurred in the operation of the hotels. If a hotel leased by RFS
Management pursuant to a Percentage Lease is substantially damaged or destroyed,
RFS Management is required to continue to make rental payments and to pay all
other charges required under its lease for up to six months while the hotel is
being repaired. The Company purchases business interruption insurance designed
to insure against this risk. Accordingly, the leases acquired as a result of the
RFS Acquisition, and any other leases pursuant to which the Company or a
subsidiary of the Company is the lessee, will expose the Company to the risk
that the hotels covered by such leases will not provide sufficient revenues to
meet the Company's lease and other obligations. If rent obligations are not met,
the lessor can terminate the lease. See Note 4 of Notes to Consolidated
Financial Statements for information concerning the Company's lease expense.
Unlike management contracts, where the hotel management company is
typically indemnified wholly or partially by the hotel owner for many
liabilities, leases often place relatively greater liabilities on the lessee.
For example, under each of the Percentage Leases, the Company has agreed to
indemnify the Landlord from and against a number of liabilities, costs and
expenses. See "Business -- Hotel Operations: Non-Doubletree Brand
Hotels -- Lease and Management Agreements."
INVESTMENT LOSSES; RISKS ASSOCIATED WITH JOINT VENTURES; CONTINGENT LIABILITIES
The Company makes selective Investments in hotels and hotel ventures in
connection with acquiring or maintaining management of hotels and to enhance the
value or position of the Company in the lodging industry. It also makes certain
financial commitments for the same purposes. See "Business -- Investments and
Commitments." These Investments and commitments may involve risks of loss
different in nature or amount from losses ordinarily associated with hotel
management alone, and losses arising from Investments or commitments could have
a material adverse effect on the Company's financial position or results of
operations. There can be no assurance that the Company will not sustain material
losses on its Investments and commitments.
The Company also may selectively use joint venture arrangements to acquire
or develop additional hotels. Therefore, such investments may, under certain
circumstances, involve risks such as the possibility that the co-venturer in an
investment might become bankrupt, or have economic or business interests or
goals that are inconsistent with the business interests or goals of the Company,
or be in a position to take action contrary to the instructions or requests of
the Company or contrary to the Company's policies or objectives. Consequently,
actions by a co-venturer might result in subjecting hotels owned by the joint
venture to additional risk. Although the Company will seek to maintain
sufficient control of any joint venture to permit the Company's objectives to be
achieved, it may be unable to take action without the approval of its joint
venture partners or its joint venture partners could take actions binding on the
joint venture without the Company's consent. Additionally, should a joint
venture partner become bankrupt, the Company could, in certain circumstances,
become liable for such partner's share of joint venture liabilities.
In addition, each corporate subsidiary of the Company which serves as a
general partner is liable for the obligations of the limited partnership it
manages. Although the Company believes that it is not responsible for the
liabilities of these subsidiaries, no assurance can be given that the Company
would not be found liable for its subsidiaries' obligations nor that it would
not be required to pay substantial sums to satisfy its subsidiaries'
obligations.
12
<PAGE> 15
RISKS ASSOCIATED WITH NEW CONSTRUCTION
The Company, through joint ventures and partnerships, is involved in the
construction of several new hotels. Any construction project entails significant
construction risks, including cost overruns, shortages of materials or skilled
labor, labor disputes, unforeseen environmental or engineering problems, work
stoppages, fire and other natural disasters, construction scheduling problems
and weather interferences, any of which, if they occurred could delay
construction or result in a substantial increase in costs of the construction of
the new hotels.
The opening of the new hotels will be contingent upon, among other things,
receipt of all required licenses, permits and authorizations. The scope of the
approvals required for a new hotel is extensive, including, without limitation,
state and local land-use permits, building and zoning permits, health and safety
permits and liquor licenses. In addition, unexpected changes or concessions
required by local, regulatory and state authorities could involve significant
additional costs and could delay or prevent the completion of construction or
the opening of a new hotel. There can be no assurance that the necessary
permits, licenses and approvals for the construction and operation of the new
hotels will be obtained, or that such permits, licenses and approvals will be
obtained within the anticipated time frame.
RISKS ASSOCIATED WITH THE LODGING INDUSTRY
The lodging industry may be adversely affected by changes in economic
conditions, changes in local market conditions, oversupply of hotel space, a
reduction in demand for hotel space in an area, changes in travel patterns,
changes in governmental regulations that influence or determine wages, prices or
construction costs, changes in interest rates, the availability of financing for
operating or capital needs, and changes in real estate tax rates and other
operating expenses. Room supply and demand historically have been sensitive to
shifts in GNP growth, which has resulted in cyclical changes in average daily
room and occupancy rates. Overbuilding in the industry in the mid and late
1980s, when approximately 500,000 rooms were added, resulted in an oversupply of
rooms. This oversupply and the general downturn in the economy led to depressed
industry performance and a lack of capital available to the industry in the late
1980s and early 1990s. 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. See "Business -- The Lodging Industry."
FLUCTUATIONS IN OPERATING RESULTS
The lodging industry is seasonal in nature with the second and third
quarters generally accounting for a greater proportion of annual revenues than
the first and fourth quarters. Quarterly earnings may be adversely affected by
events beyond the Company's control such as poor weather conditions, economic
factors and other considerations affecting travel. In addition, the loss of one
or several management contracts, leases or franchise agreements, the timing of
achieving incremental revenues from new contracts, leases or franchise
agreements and the realization of a gain or loss upon the sale of hotels in
which the Company has an equity interest may also adversely impact earnings
comparisons. If the Company loses a capitalized management contract or franchise
agreement, the Company will record a write-off of the remaining book value (less
any termination fees received) of such capitalized management contract or
franchise agreement, which could have a material adverse effect on the Company's
results of operations and financial condition.
DEPENDENCE ON KEY EMPLOYEES
The success of the Company is dependent in part upon its executive
officers, the loss of whose services could have a material adverse effect on the
Company's business and future operations. See "Management." The Company has
entered into an agreement with Mr. Richard M. Kelleher, President and Chief
Executive Officer of DHC providing for certain payments upon severance. The
Company has not entered into other employment agreements with its executive
officers.
13
<PAGE> 16
GOVERNMENT REGULATION
The hotel 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) and building and
zoning requirements. Also, the Company and its customers are subject to laws
governing their relationships with employees, including minimum wage
requirements, overtime, working conditions and work permit requirements. The
Company is also subject to federal regulations and certain state laws that
govern the offer and sale of franchises. Many state franchise laws impose
substantive requirements on franchise agreements, including limitations on
noncompetition provisions and termination or nonrenewal of a franchise. Some
states require that certain materials be approved before franchises can be
offered or sold in that state. The failure to obtain or retain liquor licenses
or approvals to sell franchises, or an increase in the minimum wage rate,
employee benefit costs or other costs associated with employees, could adversely
affect the Company. 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. If an adjustment in the minimum wage occurs, it would
especially impact food and beverage operations. However, the Company believes
that reasonable increases in the minimum wage can be absorbed and compensated
for by price increases and other operating efficiencies. 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. While the Company believes that the hotels it manages are
substantially in compliance with these requirements, a determination that the
Company is not in compliance with the ADA could result in the imposition of
fines, an award of damages to private litigants or significant expense to the
Company in bringing its hotels into compliance. These and other initiatives
could adversely affect the Company as well as the hotel industry in general.
ENVIRONMENTAL REGULATION
Under various federal, state, and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. Certain environmental laws and common law
principles could be used to impose liability for release of asbestos-containing
materials ("ACMs") into the air, and third parties may seek recovery from owners
or operators of real properties for 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 the ownership or operation of
hotels, including properties leased, managed or franchised by the Company, the
Company may be potentially liable for any such costs. 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.
In addition, there are certain offsite environmental contingencies relating
to two RFS Hotels. The former owner of the RFS Hotel in Columbia, South Carolina
received notice in October 1992 regarding potential liability under the federal
Comprehensive Environmental Response, Compensation and Liability Act
("Superfund") for cleanup of contamination at a site in Greer, South Carolina.
The Phase I ESA report for the Columbia hotel indicates that the hotel
contributed approximately 500 pounds of a hazardous substance to the site
compared to an estimated total of 42 million pounds of hazardous substance
disposed of at the site, contributed by more than 700 potentially responsible
parties ("PRPs") identified currently. Under Superfund, each PRP may be jointly
and severally liable for the entire cost of the site-cleanup. The Phase I ESA
for Hampton Inn -- Airport in Indianapolis, indicates that the Indianapolis
hotel may dispose a portion of its solid waste at a facility that is a state
Superfund site. Such a site may be subject to investigation and remediation
under federal and state Superfund laws, and persons that dispose of hazardous
substances at the site may be jointly and severally liable for the costs of that
work. The Landlord has indemnified RFS Management against undisclosed matters
and certain environmental liabilities, other than liabilities caused by RFS
Management's acts or grossly negligent failures to act, and the former
stockholders of RFS (the "RFS Stockholders") have, subject to certain
limitations and exceptions, indemnified the Company against any such acts or
grossly
14
<PAGE> 17
negligent failure to act by RFS Management prior to the RFS Closing Date.
Because of indemnities, expected sharing of costs by PRPs, the availability of
legal defenses, and the Company's preliminary assessment of expenses and actions
which may be required, the Company does not believe its liability (if any) with
respect to these matters, individually or in the aggregate, will be material to
its financial condition or results of operations. However, because of
uncertainties associated with environmental assessment, remediation and
liability proceedings, no assurance can be given that, as a result of the
foregoing, or other environmental matters, the Company will not incur material
environmental expense.
POTENTIAL CONFLICTS OF INTEREST
Affiliates of the Company's Original Stockholders are parties to management
contracts, leases and franchise agreements and other business arrangements with
the Company. These relationships, coupled with the Original Stockholders'
ownership of Common Stock and their representation on the Company's Board of
Directors, could give rise to conflicts of interest. See "Principal and Selling
Stockholders." The Company believes that its contracts with these persons are on
terms no less favorable to the Company than those that could have been obtained
from unaffiliated third parties. There can be no assurance that these parties
will continue to transact business with the Company or that they will not
attempt to utilize their ownership positions and contractual rights with the
Company to influence the terms on which they transact business with the Company
in the future. The Company has a policy requiring any material transaction or
agreement with a related party be approved by a majority of the directors not
interested in such transaction or agreement.
CONTROL BY ORIGINAL STOCKHOLDERS
Following completion of this offering, GEHOP will own approximately 26.9%
of the total outstanding shares of Common Stock and can be expected to have
substantial influence over the operations of the Company. In addition, the
Original Stockholders will own in the aggregate approximately 41.3% of the
outstanding shares of Common Stock. Accordingly, the Original Stockholders, if
they were to act together, will be able to effectively control substantially all
matters requiring approval by the stockholders of the Company (except as
otherwise provided by law or by the Company's Certificate of Incorporation or
By-Laws), including election of a majority of the members of the Board of
Directors of the Company, and otherwise to direct and control the operations of
the Company. See "Principal and Selling Stockholders" and "Management."
POTENTIAL ANTI-TAKEOVER EFFECT OF PREFERRED STOCK ISSUANCE
The Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of those shares, without any further vote or action by
the stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock could
have the effect of entrenching the Company's Board of Directors and making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company currently has no plans to issue shares of
preferred stock. See "Description of Capital Stock -- Preferred Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of the Company's Common Stock in the public market after this
offering could adversely affect the market price of the Company's Common Stock.
Upon completion of this offering, the Company will have 22,509,686 outstanding
shares of Common Stock (23,061,986 if the Underwriters' over-allotment option is
exercised). By August 1996, all shares of Common Stock outstanding, except for
the RFS Acquisition Shares (as herein defined) not offered hereby will be
available for resale in the public market without restriction or in accordance
with Rule 144 promulgated under the Securities Act. The Original Stockholders
and the holders of the RFS Aquisition Shares are entitled to certain demand and
"piggyback" registration rights with respect to registration of such shares for
offer or sale to the public. Except for the shares being sold in this offering,
each of these holders has waived its rights to include such shares of Common
Stock in this offering. The
15
<PAGE> 18
Original Stockholders, the Company's executive officers and directors, and the
RFS Stockholders have agreed, subject to certain limitations, not to offer or
sell their shares of Common Stock for a period of 90 days after the date of this
Prospectus.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 400,000 shares of
Common Stock being offered by the Company, after deducting the underwriting
discounts and commissions and estimated offering expenses payable by the Company
in connection with this offering, are approximately $11.3 million ($27.8 million
if the Underwriters' over-allotment option is exercised in full). The Company
will not receive any of the proceeds of the sale of the 3,282,000 shares of
Common Stock by the Selling Stockholders.
The Company intends to use the net proceeds for general corporate purposes,
including capital investments in Candlewood. See "Business -- Investments and
Commitments" and "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Liquidity and Capital Resources." Pending such uses,
the Company intends to invest the funds in short-term, interest-bearing
investment grade securities.
16
<PAGE> 19
PRICE RANGE OF COMMON STOCK
The Company's initial public offering of Common Stock occurred on July 1,
1994. The Common Stock is listed on the Nasdaq National Market under the symbol
"TREE." The closing sale price of the Common Stock on May 20, 1996 was $32.25.
The following table sets forth, for the calendar periods indicated, the range of
high and low sale prices for the Common Stock, as reported by the Nasdaq
National Market:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1994
Third Quarter.............................................. $20.00 $13.00
Fourth Quarter............................................. $22.25 $17.66
1995
First Quarter.............................................. $20.25 $16.25
Second Quarter............................................. $22.00 $18.75
Third Quarter.............................................. $24.75 $19.00
Fourth Quarter............................................. $26.38 $20.50
1996
First Quarter.............................................. $28.50 $22.75
Second Quarter (through May 20, 1996)...................... $32.38 $26.50
</TABLE>
DIVIDEND POLICY
The Company currently intends to retain any future earnings for
reinvestment in the development of its business and does not anticipate paying
any cash dividends on its Common Stock in the foreseeable future. The payment of
dividends in the future will be at the discretion of the Company's Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements and such other factors as the Company's
Board of Directors deems relevant. The Company is prohibited under the agreement
governing its $30.0 million senior secured revolving credit facility (the
"Credit Facility") with the Bank of Nova Scotia (the "Lender"), from paying cash
dividends or other distributions. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Liquidity and Capital
Resources."
17
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 and as adjusted to reflect the sale of 400,000 shares of Common Stock
offered by the Company and the application of the net proceeds therefrom. See
"Use of Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
the consolidated financial statements of the Company included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long Term Debt (excluding current portion)............................ $ 0 $ 0
Stockholders' equity(1):
Common Stock, $0.01 par value, 100,000,000 shares authorized;
22,109,686 shares issued and outstanding, actual; and 22,509,686
shares as adjusted(2)............................................ 221 225
Additional paid-in capital............................................ 100,598 111,880
Unearned employee compensation........................................ (194) (194)
Unrealized gain on marketable equity securities....................... 92 92
Retained earnings..................................................... 18,770 18,770
-------- -------
Total stockholders' equity....................................... 119,487 130,773
-------- -------
Total capitalization........................................ $119,487 $ 130,773
======== =======
</TABLE>
- ---------------
(1) The Company is authorized to issue 5,000,000 shares of preferred stock,
$0.01 par value, none of which is currently outstanding. See "Description of
Capital Stock -- Preferred Stock."
(2) Does not include an aggregate of 3,269,925 shares of Common Stock reserved
for issuance under the Incentive Plan. At March 31, 1996, options to
purchase 1,780,500 shares of Common Stock were outstanding, 234,250 of which
were exercisable.
18
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables present selected historical consolidated financial
information for the Company and its Predecessor, the entity which owned 92% of
GQHP prior to the Combination Transaction. Prior to January 1, 1993 the
historical financial information for the Predecessor includes only the
operations of GQHP. From January 1, 1993 to December 16, 1993, the historical
financial information for the Predecessor includes the operations of GQHP and
RFS Management and subsequent to such date, includes the combined operations of
GQHP, RFS Management and DHC. The following tables also present selected 1993
pro forma consolidated financial information for the Company, giving effect to
the Combination Transaction and the Reorganization as if each had occurred on
January 1, 1993. The selected historical consolidated financial information
presented below as of and for the years ended December 31, 1994 and 1995 has
been derived from the audited financial statements of the Company. The selected
historical consolidated financial information presented below as of and for the
fiscal years ended December 31, 1991, 1992 and 1993 has been derived from the
audited financial statements of the Predecessor. The selected historical
consolidated financial information as of and for the three months ended March
31, 1995 and 1996 has been derived from the unaudited consolidated financial
statements of the Company and include all adjustments consisting only of normal
recurring adjustments that management considers necessary for a fair
presentation of the financial information. Quarterly results of operations are
not necessarily indicative of the results expected for the full year.
The financial information set forth below is qualified in its entirety by,
and should be read in conjunction with, "Management's Discussion and Analysis of
Results of Operations and Financial Condition," the consolidated financial
statements, the notes thereto and other financial and statistical information
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------------------------- ---------------------
PREDECESSOR PRO FORMA(2) COMPANY COMPANY
------------------------------ ------------ --------------------- ---------------------
1991(1) 1992(1) 1993 1993 1994 1995 1995 1996
-------- ------- ------- ------------ -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Management and franchise
fees...................... $ 8,953 $8,556 $10,612 $ 24,659 $ 26,330 $ 30,082 $ 6,826 $ 8,294
Reimbursements.............. 9,286 8,235 9,828 32,990 36,853 45,816 10,700 10,679
Hotel revenues.............. 4,073 9,718 24,866 19,849 73,861 149,023 29,667 41,853
Other fees and income....... 6,511 578 2,901 4,699 3,739 5,851 1,397 1,575
-------- ------- ------- ------- -------- -------- -------- --------
Total revenues........ 28,823 27,087 48,207 82,197 140,783 230,772 48,590 62,401
-------- ------- ------- ------- -------- -------- -------- --------
Operating costs and expenses:
General and
administrative............ 5,587 5,681 7,878 12,421 12,666 15,566 3,860 4,643
Reimbursable expenses....... 9,747 8,686 10,492 32,415 36,006 43,447 10,249 10,064
Hotel expenses.............. 3,138 7,333 17,152 16,339 44,150 85,265 17,252 23,906
Lease expense............... -- -- 2,848 1,907 24,617 52,757 10,773 14,736
Depreciation and
amortization.............. 2,373 599 1,572 2,830 2,943 4,686 1,020 1,467
Interest expense............ 4,109 -- 1,228 1,907 831 227 69 81
Asset write-offs and
business combination
expenses.................. 17,065 -- 1,865 -- -- 2,565(5) -- --
-------- ------- ------- ------- -------- -------- -------- --------
Total operating costs
and expenses........ 42,019 22,299 43,035 67,819 121,213 204,513 43,223 54,897
-------- ------- ------- ------- -------- -------- -------- --------
Income (loss) before
income taxes and
minority interest... (13,196) 4,788 5,172 14,378 19,570 26,259 5,367 7,504
Provision for income taxes.... 27 65 414 5,763(3) 6,335(4) 8,468 1,722 2,626
-------- ------- ------- ------- -------- -------- -------- --------
Income (loss) before
minority interest... (13,223) 4,723 4,758 8,615 13,235 17,791 3,645 4,878
Minority interest share of net
(income) loss............... 6,923 (372 ) 175 -- -- -- -- --
-------- ------- ------- ------- -------- -------- -------- --------
Net income (loss)..... $ (6,300) $4,351 $ 4,933 $ 8,615 $ 13,235(4) $ 17,791 $ 3,645 $ 4,878
======== ======= ======= ======= ======== ======== ======== ========
Earnings per share............ $ 0.47 $ 0.66(4) $ 0.80 $ 0.17 $ 0.22
======= ======== ======== ======== ========
Pro forma net income(5)....... $ 18,736 $ 3,490
======== ========
Pro forma earnings per
share(5).................... $ 0.84 $ 0.16
======== ========
Weighted average common and
common equivalent shares
outstanding(6).............. 18,228 20,071 22,219 21,910 22,584
======= ======== ======== ======== ========
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------- MARCH 31,
1991(1) 1992(1) 1993(1) 1994 1995 1996
-------- ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................. $ 3,621 $5,741 $ 6,826 $ 23,169 $ 32,652 $ 19,024
Total assets.............................. 12,104 22,368 89,072 134,701 163,107 174,107
Long-term debt, net of current portion.... -- 5,736 25,000 -- -- --
Stockholders' equity...................... 3,542 9,773 13,645 91,587 114,386 119,487
</TABLE>
- ---------------
(1) Predecessor only.
(2) Gives effect to the Combination Transaction and the Reorganization as if
each of these events had occurred at January 1, 1993.
(3) The pro forma effective tax rate is higher than the actual effective tax
rate due to fewer than expected restrictions on the Company's ability to
utilize net operating loss carryforwards.
(4) The Company's effective tax rate for the year ended December 31, 1994 was
32.4% due to the organizational structure of the Company prior to its
initial public offering. Had a 35% rate been incurred, 1994 net income and
earnings per share would have been $12,720,000 and $0.63, respectively.
(5) During the fourth quarter of 1995, the Company and RFS Management incurred
$2,565,000 of business combination expenses related to the RFS Acquisition
which closed in February 1996. RFS Management, as a Subchapter S Corporation
in 1995 for federal income tax purposes, was not generally liable for income
taxes. Accordingly, RFS Management did not provide for federal income taxes
in its 1995 financial statements. Pro forma adjustments have been made for
the year ended December 31, 1995 and the three months ended March 31, 1995
to provide for income taxes on the earnings of RFS Management at the
Company's effective tax rate; also, for the year ended December 31, 1995 pro
forma adjustments have been made to exclude the business combination
expenses and provide for a related increase in income tax expense.
(6) Assumes that the 15,500,000 shares issued in connection with the
Reorganization and the 2,727,811 shares issued to acquire RFS Management,
which was accounted for as a pooling of interests, were outstanding for all
periods presented.
20
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The Company's revenues are derived from: (i) fees for hotel management and
franchising services pursuant to agreements between the Company and the owner of
each hotel, (ii) cost reimbursements (and in the case of purchasing services,
related markups) for sales and marketing, central reservations, accounting and
purchasing and other support services provided by the Company to hotels, (iii)
revenues from the Southfield hotel and hotels operated by the Company pursuant
to leases and (iv) other fees and income.
As of March 31, 1996, the Company leased and/or managed 139 hotels and had
33 franchise agreements consisting of contracts for 60 full-service Doubletree
Hotels, 38 Doubletree Guest Suites all-suite hotels, 13 limited-service
Doubletree Club Hotels and 61 non-Doubletree brand hotels. As a manager of
hotels, the Company is typically responsible for supervising or operating the
hotel in exchange for base fees tied to revenues. In addition, the Company may
also earn revenues through incentive fees based on the performance of the hotel
and income from debt and equity investments in the underlying hotel. As a
franchisor, the Company licenses its brand name to the hotel operator in
exchange for a franchise fee based on revenues.
Reimbursement revenues, with the exception of purchasing and other support
services for which the Company earns a profit, are intended primarily to match
corresponding expenses and serve to reimburse the Company for the expenses
associated with providing sales and marketing, centralized reservations and
accounting.
Hotel revenues consist of revenues from hotels owned or leased by the
Company. For these hotels, the Company includes as revenues the entire hotel's
revenues. As the lessee of hotels that the Company also manages, the Company
exercises similar control over the operation and supervision of the hotel as is
given to it as a manager; however, the Company recognizes all revenues and
substantially all expenses associated with the operation of the hotel.
Other fees and income primarily comprise (i) fees from technical services
provided to hotel owners in connection with the construction/renovation of
hotels, (ii) contract termination fees, (iii) equity in income/losses of hotel
partnerships and similar ventures, including gains/losses upon the sale of a
hotel, (iv) interest income on interest-bearing loans to hotel owners in
conjunction with obtaining management contracts and (v) interest earned on
invested cash balances.
RFS MANAGEMENT
The current operations of RFS Management commenced in August 1993 with the
acquisition of certain hotels by the REIT, which concurrently entered into
leases of such hotels with RFS Management. Prior to August 1993, RFS Management
was engaged in hotel management and industrial, retail, hotel and office real
estate development, construction, leasing and management.
THREE MONTHS ENDED MARCH 31, 1996 (ACTUAL) VS. THREE MONTHS ENDED MARCH 31,
1995 (ACTUAL)
Total revenues increased $13.8 million or 28% to $62.4 million for the
three months ended March 31, 1996 compared to $48.6 million for the three months
ended March 31, 1995.
Revenues from management and franchise fees increased $1.5 million or 22%
in 1996 due to fees from new contracts (net of contracts lost) of $0.7 million,
higher incentive fees of $0.7 million and increased fees from comparable hotels
of $0.4 million. Reduced fees from renegotiated contracts and management
contracts which converted to franchise contracts offset the management and
franchise fee revenue growth by $0.3 million.
Revenues from reimbursements decreased slightly in 1996 as compared to
1995. The margin from purchasing and other support services included in
reimbursable activity (reimbursable revenues less reimbursable expenses)
increased $0.2 million to $0.6 million, reflecting the continued implementation
of purchasing agreements that lower the price of products to the hotel owner
while concurrently providing the Company with a fee in return for negotiating
and managing the program.
21
<PAGE> 24
Hotel revenues increased $12.2 million in 1996 or 41% principally due to an
increase in the net number of owned and leased hotels in 1996 as compared to
1995. Hotel revenues for 1996 reflect the net addition of seven leased hotels
since the comparable period of 1995. The margin on hotel results (hotel revenues
less hotel expenses and lease expenses) increased from $1.6 million to $3.2
million reflecting the net addition of these properties since the prior year and
the improvement in operating margin from 5.5% to 7.7%.
Other fees and income increased $0.2 million in 1996 or 13% resulting
principally from an increase in interest income earned on loans to hotel owners
in conjunction with obtaining management contracts and an increase in franchise
application fees.
General and administrative expenses increased $0.8 million in 1996 or 20%
primarily due to the addition of employees resulting from the general growth of
the Company, the formation of the franchise development team and an increase in
legal costs. Depreciation and amortization increased $0.4 million primarily due
to increased amortization associated with investments in management contracts.
Interest expense increased nominally.
The provision for income taxes reflects a 35% effective tax rate for the
three months ended March 31, 1996 compared to a 32% effective tax rate for 1995.
The lower effective tax rate for 1995 reflects the election of RFS Management to
be taxed as a Subchapter S Corporation for income tax purposes and, therefore,
it was generally not subject to federal income taxes. Had RFS Management been
included in the 1995 consolidated income tax returns of the Company, the
provision for income taxes for the three months ended March 31, 1995 would have
increased by $0.2 million.
Net income and earnings per share for the three months ended March 31, 1996
were $4.9 million and $0.22, respectively, compared to $3.6 million and $0.17,
respectively, in 1995. With a normalized effective tax rate for RFS Management
in 1995 of 35%, net income would have increased from 1995 to 1996 by 40% from
$3.5 million and per share earnings would have increased 38% from $0.16.
YEAR ENDED DECEMBER 31, 1995 (ACTUAL) VS. YEAR ENDED DECEMBER 31, 1994
(ACTUAL)
Total revenues increased $90.0 million or 64% to $230.8 million for the
year ended December 31, 1995 compared to $140.8 million for the year ended
December 31, 1994.
Revenues from management and franchise fees increased $3.8 million or 14%
due to fees from new contracts (net of contracts lost) of $2.0 million,
increased fees from comparable hotels of $0.9 million and higher incentive fees
of $0.6 million. Fees from renegotiated contracts and fees from contracts which
converted from management to franchise contracts in connection with the sale of
the underlying hotels also increased $0.3 million.
Revenues from reimbursements increased $9.0 million or 24% primarily due to
increased purchasing volume and marketing fees attributable to the net addition
of new properties and increases in revenues from existing properties. The margin
from purchasing and other support services included in reimbursable activity
increased $1.5 million to $2.4 million reflecting the implementation of several
purchasing agreements that lower the price of products to the hotel owner while
concurrently providing the Company with a fee in return for negotiating and
managing the program.
Hotel revenues increased $75.2 million or 102% principally due to an
increase in the number of owned and leased hotels in 1995 as compared to 1994.
Hotel revenues for 1995 reflect the net addition of nine leased hotels since
December 31, 1994 plus the full year of revenues from the 31 hotels RFS
Management began leasing during 1994. The margin on hotel results increased $5.9
million to $11.0 million reflecting the net addition of these properties since
the prior year and the improvement in operating margin from 6.9% to 7.4%.
Other fees and income increased $2.1 million or 56% resulting principally
from an increase of $2.5 million in interest earned on loans to hotel owners in
conjunction with obtaining management contracts and higher interest income on
invested cash balances and an increase in franchise application fees of $0.3
million in 1995; 1994 results included $0.8 million of termination fees received
in connection with the termination of two management contracts. The Company
subsequently entered into management contracts with the new owners of these two
hotels.
22
<PAGE> 25
General and administrative expenses increased $2.9 million or 23%, $2.2
million of which was attributable to the growth of RFS Management, which added
31 hotels in 1994, and $0.7 million which was attributable to DHC's increased
legal costs and costs associated with the formation of the franchise development
team for the Company.
Depreciation and amortization increased $1.7 million in 1995 primarily due
to the acquisition of the Southfield, Michigan hotel in December 1994 and
increased amortization associated with investments in management contracts.
Interest expense decreased due to the repayment in July 1994 of all of the
outstanding indebtedness under the Company's $30 million Credit Facility with a
portion of the proceeds from the initial public offering.
Business combination expenses of $2.6 million in 1995 are attributable to
legal, professional and accounting fees, due diligence and certain other
expenses incurred by RFS Management and the Company in connection with the
business combination.
Income before income taxes in 1995 was $26.3 million, an increase of $6.7
million or 34% from 1994. Excluding the business combination expenses, income
before taxes would have increased $9.3 million or 47% from the prior period.
The provision for income taxes in 1994 reflects a 32.4% effective tax rate
principally due to the organizational structure of the Company prior to its
initial public offering in July 1994 offset by a slightly higher rate on the
earnings of RFS Management. The provision in 1995 reflects a combined 32.2%
effective tax rate which is lower than the Company's effective rate of 35% due
to the election by RFS Management to be taxed as a Subchapter S Corporation
effective January 1, 1995. Accordingly, the earnings of RFS Management for 1995
were generally not subject to federal income taxes.
Net income and earnings per share for the year ended December 31, 1995 were
$17.8 million and $0.80, respectively, compared to $13.2 million and $0.66,
respectively, in 1994. Excluding the business combination expenses in 1995 and
with a normalized effective tax rate for both 1994 and 1995 of 35%, net income
would have increased 47% to $18.7 million from $12.7 million and per share
earnings would have increased 33% to $0.84 from $0.63.
YEAR ENDED DECEMBER 31, 1994 (ACTUAL) VS. YEAR ENDED DECEMBER 31, 1993 (PRO
FORMA)
Actual revenues increased $58.6 million or 71% to $140.8 million for the
year ended December 31, 1994 compared to $82.2 million during the pro forma 1993
period.
Revenues from management and franchise fees increased $1.7 million or 7% in
1994 due to a $1.1 million increase in fees from comparable hotels, higher
incentive fees of $1.7 million and fees from new contracts (net of contracts
lost) of $0.2 million. These increases were partially offset by $1.1 million of
fee reductions on certain contracts that were either renegotiated or converted
from managed to franchised hotels in connection with the sale of the underlying
hotels; 1993 results included $0.2 million of fees received that had been
written off in prior years.
Revenues from reimbursements increased $3.9 million in 1994 or 12%
principally due to increased purchasing volume and the addition of new hotels
since December 31, 1993. The margin from purchasing and other support services
included in reimbursable activity increased $0.3 million to $0.8 million
reflecting the increased activity.
Hotel revenues increased $54.0 million in 1994 or 272% principally due to
an increase in the number of owned and leased hotels in 1994 as compared to
1993. Hotel revenues for 1994 reflect the net addition of 33 leased hotels since
December 31, 1993. The margin on hotel results increased $3.5 million to $5.1
million reflecting the net addition of these hotels since the prior year.
Other fees and income in the pro forma 1993 period included $3.9 million of
gains from the sale of hotels in which the Company and RFS Management had equity
interests. Excluding these items, other fees and income for 1994 would have
increased $3.0 million, due to an increase of $1.0 million in interest income
earned principally on the remaining proceeds (after repayment of indebtedness)
from the Company's July 1994 initial public offering, $0.8 million of fees
received in connection with the termination of two
23
<PAGE> 26
management contracts, and $0.6 million of increased technical service fees and
equity income. The Company subsequently entered into management contracts with
the new owners of these two hotels.
General and administrative expenses increased by $0.2 million or 2% in
1994. During 1993, the Company recognized as a reduction to general and
administrative expense $1.1 million resulting from an insurance refund.
Excluding the insurance refund, general and administrative expense would have
decreased $0.9 million. The decrease was attributable to $1.8 million in payroll
and other cost savings achieved from the consolidation of the formerly separate
operations of DHC and GQHP offset by $0.9 million of increased administrative
expenses associated with the growth in the number of hotels leased by RFS
Management.
Depreciation and amortization increased $0.1 million or 4% in 1994 due to
the amortization associated with investments in management contracts. Interest
expense decreased $1.1 million to $0.8 million due to the repayment in July 1994
of all of the outstanding indebtedness under the Company's $30 million Credit
Facility with a portion of the proceeds from the initial public offering.
The actual provision for income taxes in 1994 reflects a 32.4% effective
tax rate as compared to the 40% effective tax rate used in the 1993 pro forma
due to the organizational structure of the Company prior to its initial public
offering and fewer than expected restrictions on the Company's ability to
utilize net operating loss carryforwards offset by a slightly higher rate on the
earnings of RFS Management. The Company's effective tax rate subsequent to the
completion of the initial public offering was 35%.
Net income and earnings per share for the year ended December 31, 1994 were
$13.2 million and $0.66, respectively, compared to $8.6 million and $0.47,
respectively, in the prior year. Excluding the non-comparable items discussed
above and adjusting the effective tax rate to 35% for both 1993 and 1994, net
income would have increased 109% to $12.7 million from $6.1 million and per
share earnings would have increased 91% to $0.63 from $0.33.
YEAR ENDED DECEMBER 31, 1994 (ACTUAL) VS. YEAR ENDED DECEMBER 31, 1993
(ACTUAL)
Operating results for the year ended December 31, 1994 reflect the
inclusion of the operating results of DHC which was acquired on December 16,
1993, the addition of new contracts acquired subsequent to the acquisition and
the addition of 33 leased properties during the year. As a result, management
believes that the historical results of operations for the year ended December
31, 1994 are not comparable to the prior year period.
Revenues were $140.8 million, an increase of $92.6 million or 192% for the
year ended December 31, 1994 compared to the same period of 1993. Operating
expenses were $121.2 million, an increase of $78.2 million or 182%. Income
before taxes was $19.6 million, an increase of $14.4 million or 278%. The above
changes are primarily attributable to the inclusion of DHC's operations in the
1994 period and the increase in the number of hotels leased by RFS Management.
The provision for income taxes increased and the minority interest share of net
income decreased reflecting the Reorganization and the above increases.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company's balance sheet reflected $1.3 million of
working capital which represents a decrease of $19.3 million from December 31,
1995 principally attributable to the Company's $18.5 million investment in the
973,684 shares of the REIT's convertible preferred stock (the "REIT Preferred
Shares"). The Company generated cash from operating activities of $8.9 million
during the three months ended March 31, 1996 as compared to using $0.5 million
of cash for operations during the same period of 1995. The increase was due to
increases in earnings and expenses not requiring the use of cash, improved
timing of the collection of certain accounts receivable, namely incentive fees,
and an increase in accounts payable.
The Company requires capital primarily for making selective Investments in
the underlying hotels that it manages as a means of obtaining and enhancing the
profitability of management contracts. The Company used $27.0 million of cash
for investing activities in the 1996 quarter of which $18.5 million was
contributed to RFS Management and subsequently invested in the REIT Preferred
Shares. In connection with the acquisition of RFS Management, the Company also
paid $2.6 million in application fees to certain of the franchisors of the
hotels leased by RFS Management which will be amortized over the terms of the
respective
24
<PAGE> 27
franchise agreements. Additionally, during the quarter, the Company made loans
to owners of hotels in conjunction with obtaining new management contracts of
$2.4 million and invested $2.4 million in hotel partnerships and ventures, of
which $2.1 million was contributed to Candlewood. The Company has committed to
contribute up to $15 million to Candlewood, of which $3.3 million had been
funded as of March 31, 1996. The balance of $11.7 million is anticipated to be
contributed during the next twelve months. Such contributions will be used for
general corporate purposes as well as funding a portion of the
development/construction costs of certain hotels.
In connection with the RFS Acquisition, the Credit Facility was amended
allowing the Company to maintain borrowings outstanding under the Credit
Facility of up to $30.0 million through December 1997, and up to $12.5 million
from December 1997 until scheduled maturity in December 1998. All borrowings
outstanding under the Credit Facility are due in December 1998. Subsequent to
December 31, 1995, the Company borrowed $5.0 million under the Credit Facility,
of which $3.0 million was repaid in April 1996. Annually, the Company can
request an extension of the maturity date by one year. Accordingly, should the
Company request an extension in 1996 and the Lender agrees to such extension,
the initial reduction in the commitment would be extended to 1998 and the
maturity date would be December 1999. The Credit Facility provides for automatic
reductions in the amount of the facility by 100% of the net proceeds from the
sale or other disposition of certain types of loans or investments or the
issuance of certain debt obligations and by 50% of the net proceeds from the
issuance of certain equity securities. The Lender waived this required reduction
with respect to both the initial public offering and the offering in June 1995.
The agreement governing the Credit Facility contains numerous affirmative
and negative covenants with which the Company must comply and includes
restrictions on the types of business in which the Company may engage, the
payment of dividends, investments, the incurrence of debt and liens, mergers and
consolidations and the disposition of assets. Such agreement also contains
covenants which require the Company to maintain certain financial ratios and
meet other criteria. The obligations of the Company under the Credit Facility
are secured by all notes receivable and the stock of certain significant
subsidiaries. The Lenders waived any restrictions imposed by such covenants with
respect to the transactions with RFS Management and the REIT.
The Company has guaranteed certain mortgages, leases and construction bonds
up to $6.5 million ($2.9 million of which is collateralized by letters of
credit).
The Company has committed to lend up to $8.9 million, $7.7 million to the
owner of the Doubletree Hotel in Somerset, New Jersey, of which $1.4 million is
for renovations and $6.3 million is to provide bridge financing, if needed. The
remaining loan commitments are to three other hotels primarily for renovations.
The Company is committed, subject to certain conditions, to contributing an
additional $3.1 million to an investment partnership formed for the purposes of
acquiring hotels. The Company through its corporate subsidiaries serves as the
general partner of certain limited partnerships which own hotels. Debt of these
partnerships is typically secured by first mortgages on the properties and
generally is nonrecourse to the partners. However, such corporate subsidiaries
are liable, as a general partner, for the recourse obligations of the
partnerships they manage. No assurance can be given that the Company will not be
required to fund additional commitments.
Certain hotel management contracts provide that if a hotel does not achieve
agreed-upon performance levels, the Company may elect or may be required to fund
any performance shortfalls for a specified period of time. In general, if the
Company elects not to fund the shortfall, the hotel owner may elect to terminate
the management contract. If the Company elects to fund the shortfall, but
performance standards are not achieved at the expiration of the funding period,
the owner may elect to terminate the management contract at that time. The
Company has not been required to fund any shortfalls during the three year and
three month period ended March 31, 1996.
Management believes that a combination of its existing cash and cash
equivalents, net cash to be provided from operations, its borrowing ability
under the Credit Facility and the net proceeds of this offering will be
sufficient to fund its operations and capital outlays.
25
<PAGE> 28
BUSINESS
Doubletree Corporation is one of the nation's leading hotel management
companies. At March 31, 1996, the Company managed, leased, or franchised 172
hotels with an aggregate of 39,039 rooms in 37 states, the District of Columbia
and Mexico. This represents a 58% and 38% increase in managed, leased or
franchised hotels and aggregate room count, respectively, during the 12 month
period ended March 31, 1996. Excluding the RFS Acquisition, this growth was 12%
and 14%, respectively. See "-- Recent Developments." The Company provides hotel
owners with management and franchise services under its Doubletree Hotels,
Doubletree Guest Suites and Doubletree Club Hotels brand names, as well as
management services for non-Doubletree brand hotels. At March 31, 1996, the
Company's hotels included 60 Doubletree Hotels, 38 Doubletree Guest Suites, 13
Doubletree Club Hotels, and 61 hotels operated by the Company under third party
brand names or as independent hotels.
RECENT DEVELOPMENTS
The Company has recently taken the following steps to help implement and
further its business and growth strategies:
Acquisition of RFS Management. In February 1996, the Company significantly
expanded its portfolio of non-Doubletree brand hotels with the RFS Acquisition.
At March 31, 1996, RFS Management operated 50 hotels, 44 of which were leased
and managed, four of which were leased only, and two of which were managed for
owners other than the Landlord. The RFS Hotels principally operate in the
limited-service and the extended stay segments of the lodging industry, comprise
approximately 7,000 rooms and are operated under such franchise brands as
Holiday Inn, Holiday Inn Express, Residence Inn by Marriott, Hampton Inn and
Comfort Inn. With the RFS Acquisition, the Company acquired an independent hotel
management company with experienced hotel management personnel and an
established infrastructure, which will allow the Company to pursue further
non-Doubletree brand management contract and lease opportunities. The Right of
First Refusal provides the Company with a new source for additions to the
Company's hotel portfolio. In addition to its ongoing efforts to acquire hotels,
the REIT currently has six hotels under development which are expected to be
completed in the third and fourth quarter of 1996 and which will be subject to
the Right of First Refusal. See "-- The RFS Acquisition."
Formation of Candlewood. In November 1995, the Company announced its
entrance into the mid-priced ($40-50 per night) extended stay segment of the
hotel market with its investment in Candlewood, a joint venture with entities
controlled by Mr. Jack DeBoer, the founder of Residence Inns. Candlewood will
develop, own, manage and franchise hotels containing fully furnished studio
units designed to serve the value-oriented extended stay guest. The Company has
committed to invest substantially all of the initial equity capital of
Candlewood, of which $3.3 million was invested at March 31, 1996, and an
additional $11.7 million is to be invested over the next 12 months, for which it
will receive, after a preferred return of and on its capital, 50% of
Candlewood's profits and losses. Mr. DeBoer, whom the industry credits with
creating the extended stay concept, will be primarily responsible for the
development and day-to-day operations of Candlewood. The Company appoints two of
Candlewood's four delegates, and approval of at least a majority of the
delegates is required for all material transactions. Candlewood's first hotel
commenced operations in May 1996. The Company believes that the Candlewood joint
venture provides it with an opportunity to generate incremental revenues and
participate in a quickly expanding and high demand segment of the lodging
industry. The Candlewood joint venture is in the initial stages of development,
and there can be no assurance of its success. See "-- Investments and
Commitments."
Introduction of Club Hotels by Doubletree. In January 1996, the Company
introduced "Club Hotels by Doubletree," a new hotel brand specifically targeted
at the frequent business traveler, which was developed by the Company in concert
with Steelcase, Au Bon Pain and Kinko's. Each hotel will feature a multi-purpose
Business Club ranging from 2,000 to 5,000 square feet in size. One portion of
the Business Club will be dedicated to the Kinko's self-service business center
and will contain business equipment, such as computer printers, fax machines,
photocopiers and office and shipping supplies. Each Business Club will also
feature private mini offices and small conference rooms designed by Steelcase,
and will feature an Au Bon Pain
26
<PAGE> 29
bakery cafe, where guests may enjoy breakfast, lunch or dinner. The Company
plans to grow its new brand through the acquisition of management contracts of
underperforming hotels in target locations, a focused franchising program and
the conversion of certain existing Doubletree Club Hotels.
THE LODGING INDUSTRY
OVERVIEW
The Company believes that the lodging industry is benefiting from an
improved supply and demand balance which has led to overall profitability of the
lodging industry. According to Hospitality Directions, 1995 marked the lodging
industry's third consecutive year of profitability. The report estimates that
the lodging industry earned pretax profits of $7.6 billion in 1995, a 38%
increase over the prior year. Room supply growth in the lodging industry,
particularly in the principal segments in which the Company competes, has slowed
dramatically in recent years as the industry has absorbed some of the oversupply
of rooms that resulted from an average annual room supply growth of
approximately 4% from 1987 to 1990. According to industry reports, this growth
slowed to 1.3% in 1992, 1.4% in 1993, 1.5% in 1994 and 1.6% in 1995. Increases
in occupancy rates (measured by occupied rooms) increased 3.3% in 1992, 3.1% in
1993, 4.0% in 1994 and 2.9% in 1995. Average daily room rates increased 1.4%,
2.8%, 4.8% and 4.9%, respectively, during the same periods. Due to the cyclical
nature of supply and demand in the lodging industry, there can be no assurance
that such increases will continue. See "Risk Factors -- Risks Associated with
the Lodging Industry."
INDUSTRY SEGMENTS
Industry segments within the lodging industry are principally based on
levels of service, guest amenities, room size, room configuration and price. The
Company's Doubletree brand hotels currently compete in three segments of the
lodging industry: full-service hotels, all-suite hotels, and limited-service
hotels. Full-service hotels typically include swimming pools, meeting and
banquet facilities, gift shops, restaurants, cocktail lounges, room service,
parking facilities and other services. All-suite hotels provide the guest with a
two room suite, including a bedroom and a living room. This segment can also be
further divided depending on the level of food and beverage services provided at
the hotel. Limited-service hotels are moderately priced and typically do not
include services such as extensive meeting and banquet facilities or extensive
food and beverage facilities.
The Company's non-Doubletree brand hotels compete in most segments, but
primarily in the limited-service and extended stay segments of the lodging
industry. Extended stay hotels are designed to combine the convenience of a
hotel with many of the comforts of an apartment, and generally contain a
furnished kitchen area and may include living areas separate from sleeping
areas.
BUSINESS STRATEGY
The Company's principal business strategy is to provide its hotel owners
with high quality, responsive hotel management and franchise services designed
to improve hotel profitability and to provide its hotel guests with high levels
of satisfaction. The Company concentrates primarily on the following elements in
executing its business strategy:
Growing Hotel REVPAR. REVPAR of the Doubletree brand hotels managed by the
Company increased 6.2% in 1995 over 1994 and 8.4% in the first quarter of 1996
compared to the first quarter of 1995. REVPAR of the non-Doubletree brand hotels
managed during this period (including the RFS Hotels) increased 7.1% in 1995
over 1994 and 6.8% in the first quarter of 1996 compared to the first quarter of
1995. The Company believes that REVPAR improvements are a result of the
strengthening of the Doubletree brand, its focus on national, regional and local
sales and marketing programs and improvements in the general economic conditions
in the lodging industry. The information in this paragraph includes only hotels
managed by the Company and RFS Management for the comparable periods.
Building Awareness of the Doubletree Brand. In February 1995, the Company
launched its "Sweet Dreams" marketing campaign featuring the Doubletree brand
nationwide via television, radio and print
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<PAGE> 30
advertising. This campaign contributed to a 79% awareness of the Doubletree
Brand in the business travel segment of the hotel industry at December 31 1995,
according to Nationwide Surveys, Inc., compared to a 71% brand awareness in
1994. The Company believes that brand strength can be measured in part by the
utilization of the brand's central reservation system. In 1995, the Company's
call volume through its Doubletree central reservation system increased by
184,000 calls, a 9% increase over 1994 call volume, which resulted in a 23%
increase in reservations booked. Call volume increased by 35% in the first
quarter of 1996, over the first quarter of 1995, which resulted in a 38%
increase in reservations booked.
Combining Hotel Management Services with Doubletree Brand. The Company
believes its ability to offer hotel management services and a recognized brand
name for a combined fee gives it an advantage over its competitors without their
own brand. Hotel owners who contract with those competitors are often required
to pay a franchise fee in addition to a management fee which the Company
believes are, in most cases, in excess of the Company's single fee.
Offering Competitive Brand Costs. The Company currently does not require
its Doubletree brand hotels to participate in frequent flyer, frequent guest or
free breakfast programs since the Company believes that these programs are not
cost effective in today's economic environment. In addition, the Company
believes that its national sales and marketing fees are competitive with the
fees charged by its major branded competitors. As a result of such factors and
its sensitivity to brand costs, the Company believes that the overall cost of
operating under the Doubletree brand is highly competitive and results in lower
brand-related expenses for its hotel owners than brands provided by its major
competitors in comparable market segments.
Providing Purchasing Services. The Company offers purchasing services to
its managed and franchised hotels. The Company's goal is to use its purchasing
power, and, where appropriate, the purchasing power of its major stockholders,
to negotiate favorable contracts with third party vendors, on both a regional
and national level. The Company believes that it can offer high value goods and
services to its hotel owners on a favorable basis. The Company also believes
that its purchasing power will increase as its hotel portfolio grows, thus
improving hotel profitability.
Encouraging Employee Productivity. The Company believes that its employees
are a key factor in its success as a hotel management and franchise company. The
Company has implemented a number of programs which are designed to empower
employees, maintain high employee morale and improve employee productivity. The
Company believes that its employee-oriented operations have resulted in a high
level of employee satisfaction (a recent survey of employees found that 94% of
employees who responded liked their jobs) and a corresponding level of guest
satisfaction (a recent survey of Doubletree guests found that more than 95% of
guests who responded intended to stay at Doubletree hotels in the future).
GROWTH STRATEGY
The Company's growth strategy is focused on four areas: (i) improving the
revenue and operating performance of its existing hotels; (ii) growing the
number of rooms in its hotel portfolio; (iii) expanding the support services it
offers to hotel owners; and (iv) acquiring other hotel management companies and
entering into strategic partnerships.
Improved Revenue and Operating Performance at Existing Hotels. The Company
benefits directly or indirectly under its management agreements, leases,
franchises and Investments when hotel revenues and operating performance
improve. Management agreements provide for a base fee, typically tied to
revenues, and may provide for incentive fees. Performance based management
incentive fees increased from $2.2 million in 1994 to $4.7 million in 1995, or
an increase of 114%, and increased 69% in the first quarter of 1996 over the
comparable period in 1995. At March 31, 1996, the Company was earning
performance based management incentive fees for 35 hotels, up from 17 hotels in
1993. Franchise fees are also based on hotel revenues, while the Company's
returns from hotels leased by the Company depend primarily on the net income or
loss of the hotels after the payment of rent and other expenses by the Company
as lessee.
Growth in Number of Rooms in the Company's Hotel Portfolio. The Company's
goal is to increase the number of rooms in its hotel portfolio over the next
three to five years by 15-20% annually, exclusive of
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<PAGE> 31
acquisitions. During 1995 and the first quarter of 1996 the Company increased
the net number of rooms in its portfolio by a cumulative 26%, exclusive of the
RFS Acquisition. In order of priority, the Company intends to concentrate on the
growth of Doubletree full-service and Guest Suite hotels, Club Hotels by
Doubletree and hotels operated under third party brand names or as independent
hotels. Opportunities to obtain new management contracts, leases or franchise
agreements arise as a result of a wide variety of factors, including hotel
sales, financial restructurings and new construction. Opportunities also arise
when a hotel owner decides to seek improved operating results or obtain a
partner to reposition its hotel.
Increased Support Services. The Company provides support services to the
owners of its managed, leased and franchised hotels, including purchasing
arrangements and technical services. The Company's purchasing power enables it
to obtain goods and services at prices that are lower than hotel owners could
obtain individually, thus reducing hotel operating costs while earning a fee or
mark up for the Company. In 1993, 1994 and 1995, the Company earned operating
income from its support services of approximately $0, $0.8 million and $2.4
million, respectively.
Acquisitions and Strategic Partnerships. The Company is seeking
opportunities to acquire other hotel management companies and enter into
strategic partnerships to enhance its value and position in the lodging industry
and is continuously engaged in investigation or negotiation of such matters. Two
recent developments -- the RFS Acquisition and the Candlewood
Investment -- resulted from the successful implementation of this strategy. See
"-- Recent Developments."
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths will enable
it to continue to implement its business and growth strategies:
Proven Track Record. The Company believes that it has a superior track
record of improving hotel operating performance. Net operating income for the 46
hotels managed by the Company for the period from January 1, 1991 through
December 31, 1995 has, the Company believes, increased on average by
approximately 20% per annum during such period. These results have helped the
Company achieve a 26% growth in the number of rooms in its hotel portfolio,
exclusive of the RFS Acquisition, over the two years ended December 31, 1995 and
has led to a 114% increase in incentive fees over the two years ended December
31, 1995.
Strength of Doubletree Brand. The Company believes that the Doubletree
brand is associated with a high level of quality, service and value in the
lodging industry, and that the strength of the brand is growing.
Capital and Flexible Management Structures for Hotel Owners. The Company
is willing to vary structural elements of its management contracts and leases in
order to help satisfy hotel owner objectives. Additionally, the Company is
willing to make Investments on a selective basis in connection with entering
into management contracts and lease agreements. The Company believes that these
characteristics improve its ability to compete for hotel management
opportunities and more closely align the economic interests of the Company with
those of the hotel owner.
Relationships with Institutional Hotel Investors. The Company believes its
strong relationships with certain institutional hotel investors will facilitate
its growth by generating new management contracts, leases and franchising
opportunities within their existing hotel portfolios, as well as for hotels
newly acquired by such institutions. The Company currently has strategic
relationships with four important sources of capital, including the REIT, that
are actively pursuing hotel acquisitions. In 1995, not including the RFS Hotels,
36% of the Company's room additions were attributable to these strategic
alliances.
Operation of Multiple Product Lines and Brands. The Company's ability to
provide hotel management and franchising services under the Doubletree brand
name for full-service, all-suite and limited-service hotels (including the new
Club Hotels by Doubletree), coupled with the Company's ability to provide hotel
management services under non-Doubletree brand or unaffiliated third party brand
names, allows it to bid for a variety of management contracts, leases and
franchise agreements. This diversity enhances the Company's
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<PAGE> 32
ability to obtain new management agreements by offering hotel owners management
and franchise services best suited to a hotel's location, facilities and target
market in order to maximize the owner's return.
Room for Growth. Although the Company has significantly increased the size
of its hotel portfolio in the last three years, there are many geographic
markets that the Company has not penetrated. The ability of the Company to
manage multiple brands also allows it to grow within geographic areas in which
it presently operates. The Company believes that some of its larger competitors
are constrained in pursuing new hotel, franchising, leasing and management
opportunities in certain areas by the proximity of their own existing hotels.
HOTEL OPERATIONS: DOUBLETREE BRAND HOTELS
DOUBLETREE FULL-SERVICE HOTELS
The Company's full-service Doubletree hotels are targeted at business
travelers, group meetings and leisure travelers. The total guest room revenue
for the year ended December 31, 1995 for the Company's full-service hotels was
derived approximately 40% from business travelers, 41% from group meetings and
19% from leisure travelers. The Company believes these percentages are
consistent with other full-service hotel brands in the industry.
At March 31, 1996, the Company's full-service hotel segment included 60
Doubletree hotels in 22 states, the District of Columbia and Mexico, with a
total of 19,324 guest rooms. Of these hotels, 45 are operated by the Company
under management contracts and 15 are operated by franchisees licensed to use
the Doubletree brand name. Two of the managed hotels are also leased by the
Company.
Doubletree full-service hotels range in size from 120 to 720 rooms. Room
rates generally range from $45 to $280 per night depending upon location, time
of year and day of the week. Doubletree full-service hotels typically include a
swimming pool, gift shop, meeting and banquet facilities, at least one
restaurant and cocktail lounge, room service, parking facilities and other
services. Three of the Company's full-service hotels are considered resort
hotels, with additional recreational facilities such as tennis courts and two of
such hotels have golf courses.
The following table sets forth certain information regarding the Doubletree
full-service hotels managed or franchised by the Company at March 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF HOTELS NUMBER OF ROOMS
---------------- ---------------
<S> <C> <C>
Managed Hotels.............................. 45 15,018
Franchised Hotels........................... 15 4,306
--
------
Total............................. 60 19,324
== ======
</TABLE>
DOUBLETREE GUEST SUITES ALL-SUITE HOTELS
The Company's Doubletree Guest Suites all-suite hotels comprise one of the
largest all-suite hotel chains in the United States as measured by number of
suites and system revenues. All-suite hotels are targeted at business travelers
and families who have a need or desire for greater space than typically is
provided at most traditional hotels. The total guest room revenue for the year
ended December 31, 1995 for the Company's all-suite hotels was derived
approximately 50% from business travelers, 27% from group meetings and 23% from
leisure travelers.
At March 31, 1996, the Company's all-suite hotels included 38 Doubletree
Guest Suites hotels in 20 states and the District of Columbia, with a total of
8,082 guest rooms. Of these hotels, 30 are operated by the Company under
management contracts and eight are operated by franchisees licensed to use the
Doubletree Guest Suites brand name. One of the managed hotels is also owned by
the Company.
Doubletree Guest Suites range in size from 49 to 460 guest suites. Suite
rates generally range from $60 to $250 per night. Each guest suite has a
separate living room and dining/work area, with a color television, refrigerator
and wet bar.
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<PAGE> 33
The following table sets forth certain information regarding the Doubletree
Guest Suites all-suite hotels managed or franchised by the Company at March 31,
1996:
<TABLE>
<CAPTION>
NUMBER OF HOTELS NUMBER OF ROOMS
---------------- ---------------
<S> <C> <C>
Managed Hotels.............................. 30 6,945
Franchised Hotels........................... 8 1,137
--
-----
Total............................. 38 8,082
== =====
</TABLE>
LIMITED-SERVICE DOUBLETREE CLUB HOTELS
Doubletree Club Hotels, the Company's moderately-priced, limited-service
hotels, are primarily targeted at individual business travelers, the same
travelers that will be targeted by its new limited-service hotel brand, Club
Hotels by Doubletree. The total guest room revenue for the year ended December
31, 1995 for the Company's limited-service hotels was derived approximately 56%
from business travelers, 25% from group meetings and 19% from leisure travelers.
At March 31, 1996, the Doubletree Club Hotels included 13 hotels in nine
states, with a total of 2,364 guest rooms. Of these hotels, three are operated
by the Company under management contracts and 10 are operated by franchisees
licensed to use the Doubletree Club Hotels name.
Doubletree Club Hotels range in size from 158 to 215 rooms. Room rates
generally range from $50 to $135 per night. Doubletree Club Hotels typically
include a pool and a central lounge with open seating for serving meals and
evening cocktails.
The following table sets forth certain information regarding the Doubletree
Club Hotels managed or franchised by the Company at March 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF HOTELS NUMBER OF ROOMS
---------------- ---------------
<S> <C> <C>
Managed Hotels.............................. 3 512
Franchised Hotels........................... 10 1,852
--
-----
Total............................. 13 2,364
== =====
</TABLE>
The Company plans to grow its new limited-service hotel brand, Club Hotels
by Doubletree through the acquisition of management contracts of unaffiliated
underperforming hotels, a focused franchising program and the conversion of
certain existing Doubletree Club Hotels. Currently, one Doubletree Club Hotel is
being converted to a Club Hotel by Doubletree. See "-- Recent Developments."
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<PAGE> 34
MARKETING AND SALES
To enhance the Company's brand recognition and national presence, the
Company launched in February 1995 its multi-million dollar "Sweet Dreams"
marketing campaign. The "Sweet Dreams" campaign is intended to increase
awareness among business travelers of Doubletree's distinguishing
characteristics and features the Doubletree cookie -- a symbol of the Company's
commitment to provide warm and caring services to its guests. According to
Nationwide Surveys, Inc., at December 31, 1995, brand awareness of the
Doubletree brand name in the business travel segment was at 79%, an all-time
Company high.
Doubletree advertises nationally on network and cable TV and in major
newspapers and magazines. Doubletree has established marketing alliances with
major airlines, car rental and credit card companies to share customer lists and
build trade through joint promotions. Additionally, Doubletree is the official
hotel sponsor of the NFL and an official corporate partner of the NCAA. All
Doubletree brand hotels participate in national, regional and local advertising
and promotion programs designed by central marketing services.
Doubletree has a 24-hour central reservations office with an 800 number to
provide a simple and cost-effective means for making reservations and promotes
its branded hotels to reservation-makers, including all major airline
reservation systems and over 32,000 travel agencies in the United States. The
Company uses a centralized telemarketing group, is represented at major trade
shows in the U.S. and abroad, and specifically targets Fortune 500 companies and
large national associations. In 1995 the Company established a franchise sales
organization and support infrastructure in order to capitalize on the growth
opportunities in franchising.
MANAGEMENT CONTRACTS
Under the Company's management contracts, the Company operates or
supervises all aspects of the hotel's operations, including guest services,
hiring and training of hotel staff (who generally are employees of the Company),
sales and marketing, accounting functions, purchasing and budgeting. In exchange
for these services, the Company receives a base fee typically tied to revenues.
In addition, the Company may also receive revenues from incentives provided in
the Company's management contracts based on achieving specified operating
performance goals or may earn income through Investments in the underlying hotel
properties. The Company's management contracts have average terms of
approximately 14 years, and, with respect to most of the Company's managed
Doubletree hotels, there is an average of approximately 12 years remaining under
existing management contracts. Under the contracts, the Company also provides
certain centralized corporate services for which it is reimbursed at cost,
including reservations, sales and marketing, public relations, accounting,
management information systems, internal audit and specialized training. The
hotel owner may purchase hotel supplies from the Company, including
brand-specific products, for cost plus a mark-up. Additionally, the Company has
implemented several purchasing agreements that lower the cost of products to the
hotel owner while concurrently providing the Company with a fee in return for
negotiating and managing the program. The Company also provides design,
construction and other technical services for a fee. The hotel owner is
generally responsible for all costs, expenses and liabilities incurred in
connection with operating the hotel, including the expenses, salaries and
benefits of all hotel employees, and is generally required to provide a certain
percentage of hotel revenues for capital replacement. In addition, the Company
may be responsible for certain liabilities, such as workers compensation,
environmental and general tort liability, associated with a hotel's operations.
The Company carries general liability insurance to protect itself from most
potential liability claims.
Upon assumption of the management of a hotel, the Company concentrates on
improving the value of the hotel while minimizing the impact of the transition
on employees, guests and the local marketplace. In addition, upon conversion of
a hotel to Doubletree management, the Company often works with the hotel owner
to renovate the hotel to improve its marketability and value and to meet the
other financial objectives of the owner. To facilitate the conversion, the
Company offers certain technical services for a fee, including recommending and
selecting architects and interior designers, as well as controlling the budget
process and supervising construction.
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<PAGE> 35
Management of the Company's Doubletree hotels is coordinated from the
Company's headquarters in Phoenix, with a regional operations office in Boston,
regional sales offices in Chicago, Los Angeles and Philadelphia and an
accounting office in Cincinnati.
FRANCHISE OPERATIONS
The Company's franchised hotels are operated under the Doubletree,
Doubletree Guest Suites and Doubletree Club Hotels brands and include hotels in
the full-service, all-suite and limited-service segments of the hotel industry.
At March 31, 1996, the Company franchised 33 hotels with a total of 7,295 guest
rooms. Until 1995, the Company had franchised hotels primarily when a managed
hotel was sold to an owner/manager who chose to manage the hotel, while
maintaining the use of one of the Company's brand names. In 1995 the Company
created a franchise sales organization to capitalize on additional franchising
opportunities as the awareness of the Doubletree brand increased. The Company's
centralized corporate services for franchised hotels include centralized
reservations, sales and marketing, public relations and national media
advertising. While franchising remains secondary to hotel management contract
growth, the Company intends to take advantage of franchising opportunities on a
selective basis and expects that the percentage of franchised hotels in its
system will increase.
The Company's franchise agreements have varying terms and typically
require, among other things, franchisees to pay an initial application fee upon
acceptance of the property, annual franchise fees based upon revenues and
marketing/reservation fees for the costs associated with the use of the
Company's centralized corporate services. The Company's franchise agreements
have average terms of approximately 10 years, and there is an average of
approximately nine years remaining under existing franchise agreements. Many of
the Company's franchisees purchase hotel supplies from the Company, including
brand-specific products.
In addition to acting as a franchisor of the Doubletree hotel brands, the
Company operates the RFS Hotels as a franchisee under a variety of hotel brand
names. See "Hotel Operations: Non-Doubletree Brand Hotels -- Franchise
Agreements."
HOTEL OPERATIONS: NON-DOUBLETREE BRAND HOTELS
NON-DOUBLETREE BRAND HOTELS
At March 31, 1996, the Company managed or leased 61 hotels under
non-Doubletree brands with a total of 9,269 rooms in 26 states, including
luxury, full-service, limited-service and extended stay hotels. See "-- The RFS
Acquisition." These non-Doubletree brand hotels are operated under brand names
such as Hampton Inn, Residence Inn by Marriott, Holiday Inn, Holiday Inn
Express, Comfort Inn or as independent hotels.
MARKETING AND SALES
The Company's marketing and sales objective for its non-Doubletree brand
hotels is to increase the revenues and profitability of those hotels through a
direct sales program at each hotel. In addition to direct sales and marketing
efforts at each franchised hotel, each such hotel takes advantage of the
advertising and promotional strength of its particular franchise organization.
LEASE AND MANAGEMENT AGREEMENTS
At March 31, 1996, of the Company's non-Doubletree brand hotels, 46 were
leased and managed, 11 were managed only and four were leased only. Of the
leased and managed hotels, 44 were leased and managed by the Company pursuant to
lease agreements (the "Percentage Leases") with the Landlord under similar
terms.
Each Percentage Lease has an initial term of not less than 15 years from
the date of inception (with expiration dates ranging from 2008 to 2015), is
subject to early termination upon the occurrence of certain contingencies and
requires the monthly payment of base rent and the quarterly payment of
percentage rent. During 1995, the base rent component of the Percentage Lease
expense was approximately 47% of total Percentage Lease expense. Top percentage
rents ranged from 50% to 76.5% of incremental room revenue. For
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<PAGE> 36
the year ended December 31, 1995, room revenue for each of the RFS Hotels
exceeded the amount required to trigger the top tier of percentage rent. Other
than real estate taxes, casualty insurance, maintenance of underground utilities
and structural elements, and furniture, fixtures and equipment and other capital
improvements, which are obligations of the Landlord, the Percentage Leases
require the Company to pay rent, personal property taxes, all costs and expenses
and all utility and other charges incurred in the operation of the hotels. Under
each of the Percentage Leases, the Company has agreed to indemnify the Landlord
against certain liabilities including (i) any injury to persons or property at
the hotels; (ii) any environmental liability resulting from conditions caused by
the Company; (iii) liability resulting from the sale or consumption of alcoholic
beverages at the hotel; or (iv) costs related to employees at the RFS Hotels.
(In connection with the RFS Acquisition, RFS Stockholders have agreed to
indemnify the Company for undisclosed conditions existing prior to such
acquisition). If the Landlord enters into an agreement to sell a hotel, it may
terminate the Percentage Lease and either (i) pay the Company the fair market
value of the Company's leasehold interest or (ii) offer to lease to the Company
a substitute hotel on terms that would create an equivalent value. If the REIT
terminates its status, for federal tax purposes, as a real estate investment
trust, the Landlord may terminate the then Percentage Leases and the Right of
First Refusal by providing notice to the Company and causing the REIT to redeem
any REIT Preferred Shares then owned by the Company. If the termination occurs
within 10 years after the RFS Closing Date, the Landlord will pay to the Company
a varying amount of liquidated damages plus the fair value of the then existing
Percentage Leases. If the Landlord fails to cure a breach by it under a
Percentage Lease, the Company may purchase the relevant hotel from the Landlord
for a purchase price equal to the hotel's then fair market value. Events of
default under the Percentage Leases, in addition to customary events of default,
include (i) the occurrence of an event of default under any other lease between
the Landlord and the Company or an affiliate of the Company (with respect to
leases entered into prior to the RFS Acquisition), (ii) the failure of RFS
Management to maintain a minimum net worth of $15 million or a ratio of total
debt to consolidated net worth (as defined in the Percentage Leases) of 50% or
less, exclusive of capitalized leases, and (iii) the termination by the
franchisor, as a result of any action or failure to act by the Company, of the
franchise agreement with respect to any RFS Hotel. See "-- The RFS Acquisition."
If an event of default occurs and continues beyond any curative period, the
Landlord may terminate the Percentage Lease as well as the Right of First
Refusal.
Management of the RFS Hotels is coordinated from the Company's office in
Memphis, Tennessee. The Company uses a centralized accounting and data
processing system for its leased hotels which facilitates financial statement
and budget preparation, payroll management, internal auditing and other support
functions for the on-site hotel management team. The Company also provides
centralized control over purchasing and project management.
FRANCHISE AGREEMENTS
Of the 61 non-Doubletree brand hotels, 54 are licensed to operate under
franchise agreements, including 15 hotels licensed as Hampton Inn hotels, 12
hotels licensed as Residence Inn by Marriott hotels, six hotels licensed as
Comfort Inn hotels, seven hotels licensed as Holiday Inn Express hotels, nine
hotels licensed as Holiday Inn hotels and five hotels licensed under other
brands. Holiday Inn and Holiday Inn Express are registered trademarks of Holiday
Inn, Inc. Comfort Inn is a registered trademark of Choice Hotels International,
Inc. Residence Inn by Marriott is a registered trademark of Marriott
Corporation. Hampton Inn is a registered trademark of Promus Hotel Corporation.
The Company as lessee holds the franchise license for each hotel it operates and
is responsible for paying the franchise fees.
Each franchise license gives the Company the right to operate the
particular hotel under a franchise for a period of between 10 and 20 years. The
franchise agreements provide for termination at the franchisor's option upon the
occurrence of certain events. The Company is entitled to terminate the franchise
license by giving at least 12 months notice and paying a specified amount of
liquidated damages. The Company has no present intention to terminate any of
such franchises. The franchise agreements under which the Company is a
franchisee generally impose similar obligations on the Company as those the
Company imposes on its franchisees.
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<PAGE> 37
INVESTMENTS AND COMMITMENTS
The Company makes selective Investments in hotels and hotel ventures in
connection with acquiring or maintaining management of hotels and to enhance the
value or position of the Company in the lodging industry. It also makes certain
financial commitments for the same purposes. These Investments and commitments
may be material to the Company's financial position and results of operations,
and often are characterized, as compared to the Company's ordinary course
operations, by enhanced risk and by lack or attenuation of Company control.
The Company makes Investments in hotels in order to acquire or maintain
management of the hotels in a variety of circumstances. The Company may make or
guarantee loans to hotel owners for renovations, acquisitions, conversions, or
working capital, among other things. Such loans or loan guarantees are typically
nonrecourse to other than the hotel property and if secured are subordinate. The
Company may also make Investments in hotels in a variety of forms, including
through partnerships, corporations, and limited liability companies, which
typically are minority and illiquid positions. The Company believes that such
Investments better align its interests with those of the hotel owners and
provide a competitive advantage in acquiring and maintaining management of
hotels over management companies which do not make investments.
At March 31, 1996, the Company had general and/or limited partnership
interests in 15 limited partnerships, 10 of which own hotels while the others
own retail or industrial properties, which interests ranged from less than 1% to
49.9% of the respective partnerships and had an aggregate book value of $2.9
million. At such date, the Company also had loans outstanding to certain hotel
owners with an aggregate book value of $26.9 million, and had guaranteed certain
mortgages, leases and construction bonds for hotel owners up to $6.5 million
($2.9 million of which was collateralized by letters of credit). In addition, at
March 31, 1996 the Company had committed to lend up to $8.9 million; the Company
has committed $7.7 million to the owner of the Doubletree Hotel in Somerset, New
Jersey, of which $1.4 million is for renovations and $6.3 million of which is to
provide bridge financing, if needed. The remaining loan commitments are to three
other hotels, primarily for renovations. See Notes 7 and 16 of Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Liquidity and Capital
Resources."
In connection with obtaining hotel management, the Company may also make
guarantees of hotel performance to an owner, which guarantees normally are
limited in time or amount, and may make payments directly to the hotel owner,
normally in consideration of special financial or other accommodations to the
Company in management terms and conditions, which payments are capitalized and
amortized. In some circumstances, the Company will acquire a hotel in order to
manage it (the Company presently owns one hotel), or agree to hotel lease terms
which result in the Company assuming greater operating risks than are associated
with management contracts alone. See "Risk Factors -- Risks Associated with
Leasing Real Estate."
The Company's Investments in and commitments regarding hotels for the
purpose of acquiring or maintaining management normally do not extend beyond the
period of its management of the hotels. Such Investments and commitments
increase the potential risks, and in some cases the potential rewards, of the
management relationships.
The Company may also make Investments in institutional hotel owners rather
than in particular hotels, with varying levels of assurance that such
Investments will lead to management arrangements. At March 31, 1996, the Company
had invested $18.5 million in the REIT Preferred Shares, and had the Right of
First Refusal with respect to certain future hotel leases from the Landlord. See
"-- The RFS Acquisition." Additionally, the Company had investments in the
REIT's common stock and partnership units of the Landlord with a net book value
of $1.4 million. At such date, the Company had Investments with an aggregate
book value of $1.8 million, and commitments to invest, subject to certain
conditions, an additional $3.1 million, in Thayer Hotel Investors II ("Thayer"),
a limited partnership which invests in hotel properties and for which the
Company manages certain hotels. The terms of the Company's investment in Thayer
do not assure that the Company will be offered the opportunity to manage hotels
acquired by Thayer, but the Company anticipates that at least 50% of the
properties acquired by Thayer will either be managed or franchised by the
Company.
35
<PAGE> 38
The Company may also make Investments in other lodging industry companies
for strategic reasons and to enhance its value. At March 31, 1996, the Company
had invested $3.3 million in Candlewood, and had committed to invest up to an
additional $11.7 million over the next 12 months. See "-- Recent Developments"
and "Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources" and "Risk Factors -- Investment
Losses; Risks Associated with Joint Ventures; Contingent Liabilities."
HOTEL PROPERTIES
The following table presents certain comparative information with respect
to the Company's Doubletree brand hotels and non-Doubletree brand hotels:
<TABLE>
<CAPTION>
TOTAL
DOUBLETREE DOUBLETREE DOUBLETREE DOUBLETREE NON-DOUBLETREE
FULL- GUEST CLUB BRAND BRAND TOTAL
SERVICE SUITES HOTELS HOTELS HOTELS COMPANY
---------- ---------- ---------- ---------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Number of Hotels(1)............. 60 38 13 111 61 172
Total Number of Rooms(1)........ 19,324 8,082 2,364 29,770 9,269 39,039
Average Number of Rooms Per
Hotel(1)...................... 322 213 182 268 152 227
Percentage of all Company
Rooms......................... 49.5% 20.7% 6.1% 76.3% 23.7% 100.0 %
Occupancy Percentage(2)(3)
Year 1994..................... 70.2% 73.7% 65.9% 71.2% 69.9% 71.0 %
Year 1995..................... 70.8 74.6 66.2 71.9 71.4 71.8
First Quarter 1995............ 69.8 71.0 70.4 70.2 71.2 70.5
First Quarter 1996............ 70.9 72.9 71.2 71.6 72.1 71.7
Average Daily Rate(2)(3)
Year 1994..................... $80.44 $94.43 $63.10 $84.59 $70.18 $82.21
Year 1995..................... 84.87 98.84 66.42 88.99 73.56 86.41
First Quarter 1995............ 81.85 102.20 66.62 88.55 66.23 82.20
First Quarter 1996............ 87.79 107.18 70.97 94.18 69.85 87.27
REVPAR(2)
Year 1994..................... $56.48 $69.57 $41.59 $60.22 $49.02 $58.38
Year 1995..................... 60.08 73.74 43.99 63.96 52.51 62.03
First Quarter 1995............ 57.13 72.56 46.90 62.20 47.16 57.96
First Quarter 1996............ 62.23 78.19 50.50 67.44 50.36 62.61
</TABLE>
- ---------------
(1) Includes all managed and franchised properties as of March 31, 1996.
(2) For the years ended 1994 and 1995, includes only information for hotels
managed by the Company (including RFS Management) for the entire two-year
period. For the first quarter of 1995 and 1996, includes only information
for hotels managed by the Company (including RFS Management) during both
periods.
(3) Based upon rooms occupied, excluding complimentary rooms.
36
<PAGE> 39
The following table sets forth, at March 31, 1996, certain information with
respect to the Company's hotels:
<TABLE>
<CAPTION>
MANAGED (M),
LEASED(L) OR NUMBER OF
HOTEL LOCATION STATE FRANCHISED(F)(1) ROOMS
- -------------------------------------------------------------- ------------------ ---------------- ---------
<S> <C> <C> <C>
DOUBLETREE FULL-SERVICE HOTELS:
Paradise Valley............................................. Arizona M 387
Phoenix..................................................... Arizona F 242
Tucson...................................................... Arizona M 295
Little Rock................................................. Arkansas F 290
Anaheim (Orange)............................................ California M 454
Carmel Highland............................................. California M 172
Del Mar..................................................... California M 220
Los Angeles (Airport)....................................... California M 720
Monterey.................................................... California M 374
Palm Springs................................................ California F 289
Pasadena.................................................... California M 350
San Diego (Horton Plaza).................................... California M 450
San Francisco............................................... California M 291
San Pedro................................................... California M 226
Santa Rosa.................................................. California F 247
Ventura..................................................... California M 284
Westwood.................................................... California F 300
Colorado Springs............................................ Colorado M 290
Denver...................................................... Colorado F 224
Park Terrace................................................ Dist. Of Columbia M 219
Clearwater Beach............................................ Florida F 427
Ft. Lauderdale (Oceanfront)................................. Florida M 230
Miami (Coconut Grove)....................................... Florida L 192
Miami (Grand)............................................... Florida M 152
Tampa (Airport)............................................. Florida M 500
Atlanta..................................................... Georgia M 370
Kansas City (Overland Park)................................. Kansas M 357
Metairie (New Orleans North)................................ Louisiana M 210
New Orleans................................................. Louisiana M 363
Baltimore................................................... Maryland M 125
Rockville................................................... Maryland M 315
Ixtapa...................................................... Mexico F 120
Mazatlan.................................................... Mexico F 280
Detroit (Downtown).......................................... Michigan M 250
Bloomington (Mall Of America)............................... Minnesota M 321
Kansas City (Airport)....................................... Missouri F 348
St. Louis (Conference Center)............................... Missouri M 223
St. Louis (Mayfair Suites).................................. Missouri M 170
Somerset.................................................... New Jersey M 360
Albuquerque................................................. New Mexico F 294
Santa Fe.................................................... New Mexico F 210
Tulsa (Downtown)............................................ Oklahoma M 417
Tulsa (Warren Place)........................................ Oklahoma M 371
Philadelphia................................................ Pennsylvania M 425
Pittsburgh.................................................. Pennsylvania M 616
Newport..................................................... Rhode Island M 253
Nashville................................................... Tennessee M 337
Austin...................................................... Texas M 350
Dallas (Campbell Center).................................... Texas M 302
Dallas (Lincoln Centre)..................................... Texas M 500
Dallas (Park West).......................................... Texas F 339
Houston (Post Oak).......................................... Texas M 449
Houston (Allen Center)...................................... Texas M 341
Houston (Intercontinental Airport).......................... Texas F 315
Salt Lake City.............................................. Utah F 381
Arlington (National Airport)................................ Virginia M 632
Roanoke..................................................... Virginia M 332
Tysons Corner (Falls Church)................................ Virginia L 404
Seattle (Inn)............................................... Washington M 198
Seattle (Plaza)............................................. Washington M 221
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
MANAGED (M),
LEASED(L) OR NUMBER OF
HOTEL LOCATION STATE FRANCHISED(F)(1) ROOMS
- -------------------------------------------------------------- ------------------ ---------------- ---------
<S> <C> <C> <C>
DOUBLETREE GUEST SUITES:
Tucson...................................................... Arizona M 304
Santa Monica................................................ California M 253
Wilmington.................................................. Delaware F 49
Washington (New Hampshire Ave).............................. Dist. Of Columbia M 101
Washington (Pennsylvania Ave)............................... Dist. Of Columbia F 123
Boca Raton.................................................. Florida M 182
Ft Lauderdale (Cypress Creek)............................... Florida M 254
Ft Lauderdale (Galleria).................................... Florida M 229
Orlando (Airport)........................................... Florida F 150
Orlando (Disney)............................................ Florida M 229
Orlando (Maingate/Melia).................................... Florida M 150
Tampa Bay (Rocky Point)..................................... Florida M 203
Tampa (Busch Gardens)....................................... Florida M 129
Tampa (Westshore)........................................... Florida M 260
Vero Beach.................................................. Florida F 55
Atlanta..................................................... Georgia M 224
Chicago..................................................... Illinois M 345
Glenview.................................................... Illinois F 240
Indianapolis................................................ Indiana M 137
Lexington................................................... Kentucky F 166
Baltimore (BWI Airport)..................................... Maryland M 251
Boston (Cambridge).......................................... Massachusetts M 310
Boston (Waltham)............................................ Massachusetts M 275
Southfield.................................................. Michigan M(2) 239
Troy........................................................ Michigan M 251
Mount Laurel................................................ New Jersey F 129
New York (Times Square)..................................... New York M 460
Raleigh (Durham)............................................ North Carolina M 203
Cincinnati.................................................. Ohio M 151
Columbus.................................................... Ohio M 194
Dayton...................................................... Ohio M 138
Philadelphia (Airport)...................................... Pennsylvania M 251
Plymouth Meeting............................................ Pennsylvania M 252
Nashville................................................... Tennessee M 138
Austin...................................................... Texas M 189
Houston..................................................... Texas M 335
Irving (DFW Airport)........................................ Texas M 308
Alexandria.................................................. Virginia F 225
DOUBLETREE CLUB HOTELS:
El Segundo.................................................. California F 215
Ontario..................................................... California F 171
Rancho Bernardo............................................. California F 209
Santa Ana (Orange County Airport)........................... California F 170
Lakewood.................................................... Colorado F 170
Jacksonville................................................ Florida M 167
Boise....................................................... Idaho M 158
St. Louis (Riverport)....................................... Missouri F 181
Charlotte................................................... North Carolina M 187
Harrisburg.................................................. Pennsylvania F 176
Philadelphia (Northeast).................................... Pennsylvania F 188
McAllen..................................................... Texas F 164
Norfolk..................................................... Virginia F 208
NON-DOUBLETREE BRAND HOTELS:
COMFORT INN
Conyers..................................................... Georgia L 83
Marietta.................................................... Georgia L 185
Farmington Hills............................................ Michigan L 135
Grand Rapids................................................ Michigan L 109
Clemson..................................................... South Carolina L 122
Ft. Mill.................................................... South Carolina L 153
DAYS INN
Philadelphia (Airport)...................................... Pennsylvania M 177
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
MANAGED (M),
LEASED(L) OR NUMBER OF
HOTEL LOCATION STATE FRANCHISED(F)(1) ROOMS
- -------------------------------------------------------------- ------------------ ---------------- ---------
<S> <C> <C> <C>
HAMPTON INN
Denver...................................................... Colorado L 138
Lakewood.................................................... Colorado L 150
Ft. Lauderdale.............................................. Florida L 122
Indianapolis................................................ Indiana L 131
Lansing..................................................... Michigan L 109
Warren...................................................... Michigan L 124
Bloomington................................................. Minnesota L 135
Minnetonka.................................................. Minnesota L 127
Hattiesburg................................................. Mississippi L 155
Lincoln..................................................... Nebraska L 111
Omaha....................................................... Nebraska L 129
Oklahoma City............................................... Oklahoma L 134
Tulsa....................................................... Oklahoma L 148
Memphis..................................................... Tennessee L 120
Laredo...................................................... Texas L 120
HAWTHORNE SUITES
Atlanta..................................................... Georgia L 220
HOLIDAY INN
Windsor Locks (Bradley Airport)............................. Connecticut M 200
Crystal Lake................................................ Illinois L 196
Louisville.................................................. Kentucky L 169
Lafayette................................................... Louisianna L 242
Flint....................................................... Michigan L 171
Clayton..................................................... Missouri L 253
Burlington.................................................. North Carolina M 132
Anderson.................................................... South Carolina M 130
Columbia.................................................... South Carolina L 175
HOLIDAY INN EXPRESS
Arlington Heights........................................... Illinois L 125
Downers Grove............................................... Illinois L 123
Bloomington................................................. Minnesota L 142
Tupelo...................................................... Mississippi L 124
Franklin.................................................... Tennessee L 100
Austin...................................................... Texas L 125
Wauwatosa................................................... Wisconsin L 122
HOWARD JOHNSONS
Orlando (Fountain Park)..................................... Florida M 400
Orlando (Universal Towers).................................. Florida M 302
RAMADA INN
Harrisburg.................................................. Pennsylvania M 254
RESIDENCE INN BY MARRIOTT
Sacramento.................................................. California L 176
Torrance.................................................... California L 247
Wilmington.................................................. Delaware L(3) 120
Orlando..................................................... Florida L 176
Atlanta..................................................... Georgia L 128
Ann Arbor................................................... Michigan L 72
Kansas City................................................. Missouri L 96
Fishkill.................................................... New York L(3) 136
Charlotte................................................... North Carolina L(3) 80
Providence (Warwick)........................................ Rhode Island L(3) 96
Ft. Worth................................................... Texas L 120
Tyler....................................................... Texas L 128
INDEPENDENT HOTELS
Atlanta (Grand Hotel)....................................... Georgia M 244
Portland (Budget Inn)....................................... Maine M 112
Boston (Harbor Hotel)....................................... Massachusetts M 230
Cambridge (Harvard Square Hotel)............................ Massachusetts L 73
</TABLE>
39
<PAGE> 42
<TABLE>
<CAPTION>
MANAGED (M),
LEASED(L) OR NUMBER OF
HOTEL LOCATION STATE FRANCHISED(F)(1) ROOMS
- -------------------------------------------------------------- ------------------ ---------------- ---------
<S> <C> <C> <C>
Harvard).......MassachusettsL113Tupelo (Executive Inn)...... Mississippi L 115
Chapel Hill (Carolina Inn).................................. North Carolina M 185
</TABLE>
- ---------------
(1) All leased properties are also managed by the Company unless otherwise
noted.
(2) Owned and managed by the Company.
(3) Managed by an unaffiliated third party hotel management company.
The principal executive offices of the Company are located in Phoenix and
are occupied pursuant to a lease that is currently being renegotiated and is
expected to expire March 31, 1998. In addition to its executive offices, the
Company leases office space in Memphis, Boston, Chicago, Cincinnati, Los Angeles
and Philadelphia. Management believes that such properties are sufficient to
meet its present needs and does not anticipate any difficulty in securing
additional space, as needed, on terms acceptable to the Company. See Note 8 of
Notes to Consolidated Financial Statements.
Additionally, the Company leases 52 hotels which are located in 24
different states. Each lease expires between 1998 and 2015 and is subject to
early termination upon the occurrence of certain contingencies. See Note 4 of
Notes to Consolidated Financial Statements.
In addition to the leased hotels, the Company acquired on December 22, 1994
a 239-room all-suite hotel, subject to a 70 year ground lease, in Southfield,
Michigan for approximately $11 million. The Company's long-term objectives do
not provide for significant expansion of its owned hotel portfolio; however,
depending on the expected returns to the Company and availability of financing,
the Company may acquire other hotels in the future.
THE RFS ACQUISITION
On February 27, 1996 the Company acquired all of the outstanding stock of
RFS Management in exchange for 2,727,811 shares (the "RFS Acquisition Shares")
of the Company's Common Stock. At March 31, 1996, RFS Management leased 48
hotels (44 of which it also managed) from the Landlord and managed an additional
two hotels for third party owners. The sole general partner and approximately
98.7% owner of the Landlord is the REIT. The 50 hotels, principally operating in
the limited-service and extended stay segments of the market, comprise
approximately 7,000 rooms and are operated under such franchise brands as
Holiday Inn, Holiday Inn Express, Residence Inn by Marriott, Comfort Inn and
Hampton Inn.
In connection with the RFS Acquisition, the Company and the REIT entered
into agreements, pursuant to which the Company purchased the 973,684 REIT
Preferred Shares. There is no current market for the REIT Preferred Shares. The
REIT Preferred Shares pay an annual fixed dividend of $1.45 per share and are
convertible into shares of the REIT's common stock on a one for one basis at the
end of seven years. The REIT Preferred Shares are redeemable by the REIT after
seven years. The Company has also been granted the Right of First Refusal with
respect to the future lease and management of hotels to be acquired or developed
by the Landlord or the REIT during the 10 year period following the RFS
Acquisition. Pursuant to these rights RFS Management is entitled, for a minimum
of seven years, to written notice from the Landlord specifying the terms and
conditions upon which the Landlord would be willing to lease the hotel to the
Company. In the event that the Company does not initially agree to such terms or
declines to lease the hotel, the Company has the right to match the terms
proposed to an alternative lessee by the Landlord. In the event that the REIT
terminates its status, for federal tax purposes, as a real estate investment
trust, the Landlord may elect to terminate the then existing Percentage Leases
and the Right of First Refusal by providing notice to the Company and redeeming
any REIT Preferred Shares then owned by the Company; provided, however, if the
termination occurs within 10 years after the RFS Closing Date, the Landlord pays
to the Company an amount equal to $5,000,000 minus $41,667 for each calendar
month which has passed during such 10 year period and the Landlord pays to the
Company the fair market value of the then existing Percentage Leases, based upon
the remaining length of their terms.
40
<PAGE> 43
In addition to its ongoing effort to acquire hotels, the REIT currently has
six hotels under development which are expected to be completed in the third and
fourth quarters of 1996 and which will be subject to the Right of First Refusal.
Until the earlier of the expiration of 10 years following the RFS Closing
Date or the date of the redemption or conversion of the REIT Preferred Shares,
without the prior written approval of the Landlord, the Company may not permit
any merger or sale of RFS Management's stock or the transfer or conveyance of
all or substantially all of RFS Management's assets, if, as a result thereof,
RFS Management would cease to be controlled by the Company. The foregoing
restriction does not restrict any change in control or ownership of the Company.
COMPETITION
The Company's managed, leased and franchised hotels compete for guests
against a wide range of lodging facilities offering full-service,
limited-service, all-suite and extended stay lodging options to the public.
Competitive factors in the lodging industry include room rates, quality of
accommodations, name recognition, service levels and convenience of location.
These factors may impact the operations of Candlewood.
The Company competes for management contracts, leases, franchise contracts,
acquisition opportunities and other expansion opportunities. See "Risk
Factors -- Competition for and Dependence on Management Contracts and Franchise
Agreements; Competition for Guests" and "-- Risks Associated With Expansion" and
"Business -- Competitive Strengths."
GOVERNMENT REGULATION
The hotel industry in general, including the Company, is subject to
numerous federal, state and local government regulations. See "Risk
Factors -- Government Regulation."
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local environmental
laws, ordinances and regulations relating to the environment and the handling of
hazardous or toxic substances which may impose significant potential
environmental liabilities. See "Risk Factors -- Environmental Regulation."
INTELLECTUAL PROPERTY
The trademarks "Doubletree Hotels", "Doubletree Guest Suites", "Doubletree
Suites", "Doubletree Club Hotels", "Club Hotels by Doubletree", "Guest Quarters
Suite Hotels", "Guest Quarters Suites by Doubletree" and related marks and logos
are material to the Company's business. The Company, as well as its franchisees,
actively use these marks. All of the material marks are registered or are on
application for registration with the United States Patent and Trademark Office.
See "-- Legal Proceedings."
INSURANCE
The Company currently has the types and amounts of insurance coverage,
including comprehensive general liability insurance with a coverage limit of
$2.0 million and additional excess general liability insurance, that it believes
is appropriate for a company in the hotel management business. While management
believes that its insurance coverage is adequate, if the Company were held
liable for amounts exceeding the limits of its insurance coverage or for claims
outside of the scope of its insurance coverage, the Company's business, results
of operations and financial condition could be materially and adversely
affected.
EMPLOYEES
At March 31, 1996, the Company had approximately 14,724 full-time employees
and 3,886 part-time employees. Of these full-time employees, approximately 474
of these employees are employed at the corporate level and approximately 14,250
employees are employed at the hotel properties. The wages and salaries, health
insurance and other employee benefits of persons employed at the Company's
hotels are paid out of the
41
<PAGE> 44
operations of the hotel property. Corporate personnel are paid directly by the
Company. Employees at three of the Company's managed hotels are members of labor
unions. The Company has entered into formal negotiations regarding a collective
bargaining agreement at two of such hotels and an interim recognition agreement
was entered into at the third hotel.
LEGAL PROCEEDINGS
The Company is not party to any litigation, other than routine litigation
incidental to the business of the Company. The Company believes that such
litigation is not material to the business of the Company, either individually
or in the aggregate.
The Company has received a letter claiming that its Club Hotels by
Doubletree brand hotel name infringes on another hotel chain's brand name. Based
in part on the advice of outside counsel, the Company believes that the claim is
unfounded.
42
<PAGE> 45
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- -------------------------------------------
<S> <C> <C>
Richard J. Ferris 59 Co-Chairman of the Board
Peter V. Ueberroth 58 Co-Chairman of the Board
William R. Fatt 45 Director
Dale F. Frey 63 Director
Ronald K. Gamey 50 Director
Norman B. Leventhal 78 Director
John H. Myers 50 Director
Richard M. Kelleher 46 President and Chief Executive Officer of
DHC and Director of the Company
James P. Evans 49 Executive Vice President of Operations of
DHC
William L. Perocchi 38 Executive Vice President, Chief Financial
Officer and Treasurer of the Company and
DHC
Stephen D. Pletcher 51 Senior Vice President of DHC
Margaret Ann Rhoades 51 Executive Vice President of Human Resources
of DHC
David L. Stivers 35 Senior Vice President, General Counsel and
Secretary of the Company and DHC and Senior
Vice President of New Business of DHC
Thomas W. Storey 39 Executive Vice President of Sales and
Marketing of DHC
Raymond Terry 47 President of RFS Management
</TABLE>
Richard J. Ferris, 59, has served as Co-Chairman of the Board of the
Company and Doubletree Partners since December 1993. From June 1992 to December
1993, Mr. Ferris served as Co-Chairman of GQHP. From June 1987 to June 1992, Mr.
Ferris was a private investor. Mr. Ferris is the former Chairman and Chief
Executive Officer of UAL Corporation, a position he held from April 1976 to June
1987. Mr. Ferris serves as a director of The Procter & Gamble Company, Amoco
Corporation, Evanston Hospital Corporation and the PGA Tour Policy Board.
Peter V. Ueberroth, 58, has served as Co-Chairman of the Board of the
Company and Doubletree Partners since December 1993. From June 1992 to December
1993, Mr. Ueberroth served as Co-Chairman of GQHP. From April 1989 to the
present, Mr. Ueberroth has been Managing Director and a principal of The
Contrarian Group, a business management company. From March 1984 to March 1989,
Mr. Ueberroth served as the sixth Commissioner of Major League Baseball. Mr.
Ueberroth serves as a director of Ambassadors International Inc., The Coca Cola
Company and Transamerica Corporation.
William R. Fatt, 45, has served as a director of the Company and Doubletree
Partners since December 1993. Mr. Fatt is Executive Vice President and Chief
Financial Officer of Canadian Pacific Limited, a position he has held since
January 1994. From August 1990 to January 1994, Mr. Fatt was Vice President,
Finance and Accounting and Chief Financial Officer of Canadian Pacific Limited.
From August 1988 to August 1990, Mr. Fatt was its Vice President and Treasurer.
Mr. Fatt serves as a director of Canada Maritime Limited, Canadian Pacific
Hotels & Resorts Inc., Pan Canadian Petroleum Limited and various direct and
indirect subsidiaries of Canadian Pacific Limited.
Dale F. Frey, 63, has served as a director of the Company and Doubletree
Partners since December 1993. From July 1992 to December 1993, Mr. Frey served
as a director of GQHP. Mr. Frey is President, Chief Executive Officer and
Chairman of the Board of Directors of GE Investment Management Incorporated, a
43
<PAGE> 46
position he has held since February 1988. Mr. Frey is also President, Chief
Executive Officer and Chairman of General Electric Investment Corporation, a
position he has held since July 1984. Mr. Frey is also Vice President of General
Electric Company, a position he has held since June 1980. Mr. Frey serves as a
Trustee of General Electric Pension Trust ("GEPT"). Mr. Frey also serves on the
Board of Directors of GE Financial Services, Inc., GE Capital Corporation, USF&G
Corporation, Praxair, Inc. and the Damon Runyon-Walter Winchell Cancer Research
Fund and is a Trustee of Franklin and Marshall College.
Ronald K. Gamey, 50, has served as a director of the Company and Doubletree
Partners since December 1993. Mr. Gamey is Executive Vice President of Canadian
Pacific Limited, a position he has held since July 1988. Mr. Gamey also serves
as a director of Laidlaw Inc., Canada Maritime Limited, Canadian Pacific Hotels
& Resorts Inc. and various direct and indirect subsidiaries of Canadian Pacific
Limited.
Norman B. Leventhal, 78, has served as a director of the Company and
Doubletree Partners since December 1993. From September 1992 to December 1993,
Mr. Leventhal served as a director of GQHP. Mr. Leventhal is Chairman of The
Beacon Companies, a position he has held for more than ten years. Mr. Leventhal
co-founded The Beacon Companies, a major real estate developer, in 1946. Mr.
Leventhal serves as a director of Beacon Properties Corporation. Mr. Leventhal
is a Life Member Emeritus of The Corporation of The Massachusetts Institute of
Technology and a director of The Picower Institute for Medical Research and has
numerous community and civic involvements.
John H. Myers, 50, has served as a director of the Company and Doubletree
Partners since December 1993. From July 1992 to December 1993, Mr. Myers served
as a director of GQHP. Mr. Myers is a director and Executive Vice President of
GE Investment Management Incorporated, a position he has held since February
1988. Mr. Myers is also director and Executive Vice President of General
Electric Investment Corporation, a position he has held since June 1986. Mr.
Myers is a Trustee of GEPT and Wagner College and also serves on the Board of
Directors of Hispaland, S.A., the Butler Capital Advisory Board and Grimes
Aerospace Company.
Richard M. Kelleher, 46, has served as President and Chief Executive
Officer of DHC since December 1993 and as a director of the Company since July
28, 1995. From April 1993 to December 1993, Mr. Kelleher served as Chief
Executive Officer and President of GQHP. From December 1989 to April 1993, Mr.
Kelleher was President of Guest Quarters Suite Hotels. In 1983, Mr. Kelleher
co-founded Beacon Hotel Corporation, which merged with GQHP in 1986.
James P. Evans, 49, has served as Executive Vice President of Operations of
DHC since February 1996. From May 1993 through February 1996, Mr. Evans served
as the Senior Vice President Sales and Marketing with Hyatt Hotels Corporation.
From December 1987 through May 1993, Mr. Evans served as Senior Vice President
Sales with Hyatt Hotels Corporation. From May 1975 through December 1987, Mr.
Evans served in a variety of management positions with Hyatt Hotels Corporation.
From January 1972 through May 1975, Mr. Evans served in a variety of sales and
marketing management positions with ITT Sheraton Corporation.
William L. Perocchi, 38, has served as Executive Vice President, Chief
Financial Officer and Treasurer of the Company since its formation and DHC since
December 1993. From August 1992 to December 1993, Mr. Perocchi served as the
Executive Vice President and Chief Financial Officer of GQHP. From June 1989 to
July 1992, Mr. Perocchi served as the Vice President, Finance for AMETEK
Aerospace Products, Inc. From June 1979 to June 1989, Mr. Perocchi served in
various financial management capacities with The General Electric Company.
Stephen D. Pletcher, 51, has served as Senior Vice President of Technical
Services and Project Management of DHC since December 1993. From January 1988 to
December 1993, Mr. Pletcher served as Senior Vice President, Owner Relations,
Guest Quarters Suite Hotels.
Margaret Ann Rhoades, 51, has served as Executive Vice President of Human
Resources of DHC since February 1996. From January 1995 to February 1996, Ms.
Rhoades served as the Senior Vice President of Human Resources of DHC. From July
1989 through January 1995, Ms. Rhoades served as the Vice President, People
Department with Southwest Airlines. From March 1984 through June 1989, Ms.
Rhoades served as the Senior Vice President, Human Resources, Dallas Region for
Bank One.
44
<PAGE> 47
David L. Stivers, 35, has served as Senior Vice President New Business of
DHC since January 1, 1996. Since October 1994 Mr. Stivers has served as Senior
Vice President, General Counsel and Secretary of the Company and DHC. From May
1988 to October 1994, Mr. Stivers was a corporate lawyer with the law firm of
Latham & Watkins.
Thomas W. Storey, 39 has served as Executive Vice President of Sales and
Marketing of DHC since August 1994. From August 1989 to July 1994, Mr. Storey
served as Executive Vice President of Sales and Marketing of Radisson Hotels
International. From August 1986 to August 1989, Mr. Storey served in a variety
of senior management positions with Marriott Hotels Corporation.
Raymond Terry, 47, has served as President of RFS Management since June
1994. From September 1991 to June 1994, Mr. Terry served as Vice President of
Operations with RFS Management. From December 1984 to September 1991, Mr. Terry
served as Vice President of Operations of Dominion Hospitality Management, Inc.
45
<PAGE> 48
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock at March 31, 1996 and as adjusted to
reflect the sale of shares by the Company and the Selling Stockholders offered
hereby (i) by each person who is known by the Company to own beneficially more
than five percent of the Company's Common Stock, (ii) by each of the Company's
directors, (iii) by the Chief Executive Officer and each of the other four most
highly compensated executive officers of the Company whose annual salary and
bonuses exceeded $100,000 for the fiscal year ended December 31, 1995, (iv) by
all executive officers and directors as a group, and (v) by each of the Selling
Stockholders. Except as otherwise indicated, the persons named in the table have
sole voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1)(2) NUMBER OF OFFERING(1)(2)
NAME AND ADDRESS OF ------------------- SHARES BEING -------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- -------------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
GE Investment Management Incorporated(3).... 6,055,981 27.4% 0 6,055,981 26.9%
3003 Summer Street
P.O. Box 7900
Stamford, Connecticut 06905
RCM Capital Management(4)................... 1,597,300 7.2 0 1,597,300 7.1
Four Embarcadero Center
San Francisco, CA 94111
Ridge Partners, L.P.(5)..................... 1,532,432 6.9 0 1,532,432 6.8
1436 Ridge Road
Northbrook, Illinois 60062
Putnam Investments, Inc.(6)................. 1,356,416 6.1 0 1,356,416 6.0
One Post Office Square
Boston, MA 02109
The Ueberroth Trusts(7)..................... 1,292,432 5.8 212,000 1,080,432 4.8
P.O. Box 100
Laguna Beach, California 92652
Metropolitan Life Insurance Company(8)...... 1,240,000 5.6 620,000 620,000 2.8
One Madison Avenue
New York, New York 10010
H. Lance Forsdick, Sr....................... 1,108,178 5.0 595,713 512,465 2.3
889 Ridge Lake Blvd., Suite 100
Memphis, TN 38120
Robert M. Solmson(9)........................ 1,108,176 5.0 601,267 506,909 2.3
889 Ridge Lake Blvd., Suite 100
Memphis, TN 38120
Canadian Pacific Limited(10)................ 1,000,000 4.5 1,000,000 0 0
Suite 800, Place du Canada
P.O. Box 6042
Station Centre-ville
Montreal, Quebec H3C 3E4
Richard J. Ferris(5)(11)(12)................ 1,534,932 6.9 0 1,534,932 6.8
Peter V. Ueberroth(7)(11)(12)............... 1,294,932 5.9 212,000 1,082,932 4.8
William R. Fatt(11)(12)(13)................. 2,500 * 0 2,500 *
Dale F. Frey(11)(14)........................ 0 0 0 0 0
Ronald K. Gamey(11)(12)(13)................. 2,500 * 0 2,500 *
Norman B. Leventhal(11)(12)(15)............. 12,500 * 0 12,500 *
John H. Myers(11)(14)....................... 0 0 0 0 0
Richard M. Kelleher(11)..................... 68,847 * 0 68,847 *
William L. Perocchi(11)(16)................. 38,174 * 0 38,174 *
David L. Stivers(11)(16).................... 6,250 * 0 6,250 *
Thomas W. Storey(11)(16).................... 22,500 * 0 22,500 *
All current directors and executive officers
as a group (15 persons)(17)(18)........... 3,051,596 13.8 240,963 2,810,633 12.5
Other Selling Stockholders, as a group, each
of whom owns less than 1% of the
outstanding common stock (23 persons)(19). 663,678 3.0 311,442 352,236 1.6
</TABLE>
46
<PAGE> 49
- ---------------
* Less than 1%.
(1) Percentage ownership is based on 22,109,686 shares of Common Stock
outstanding before this offering and 22,509,686 shares of Common Stock
outstanding after this offering (assuming no exercise of the Underwriters
overallotment option).
(2) Beneficial ownership as of March 31, 1996 includes shares subject to
options which are exercisable within 60 days after such date. All
expressions of percent of class held assume that the options of the
particular person or group in question, and no others, have been exercised.
(3) Based on Schedule 13G filed jointly by GEHOP, GE Investment Management
Incorporated ("GEIM"), General Electric Company ("GE") and GEPT. Shares
indicated as beneficially owned by GEIM include 6,049,226 shares owned of
record by GEHOP and 1,755 shares owned of record by GEIM. GEIM is a
wholly-owned subsidiary of GE, and thus GE may be deemed to be the
beneficial owner of such 1,755 shares owned by GEIM. Shares indicated as
beneficially owned by GEIM excludes 137,134 shares owned beneficially and
of record by GEPT. GEHOP, GEIM and GEPT each disclaim beneficial ownership
of the shares owned by the others, and GE disclaims beneficial ownership of
the shares owned by GEHOP and GEPT. Also includes 5,000 shares reserved for
issuance upon exercise of the vested portion of an outstanding option to
purchase 20,000 shares granted to GEHOP, which is exercisable within 60
days at March 31, 1996. Each of Messrs. Frey and Myers disclaim beneficial
ownership of such shares.
(4) Based on Schedule 13G filed jointly by RCM Capital Management ("RCM
Capital"), RCM Limited L.P. ("RCM Limited") and RCM General Corporation
("RCM General"). RCM Capital is the beneficial owner of these shares. RCM
Limited is the general partner of RCM Capital and has beneficial ownership
of these shares only to the extent that RCM Limited may be deemed to have
beneficial ownership of securities managed by RCM Capital. RCM General is
the general partner of RCM Limited and has beneficial ownership of these
shares only to the extent that RCM General may be deemed to have beneficial
ownership of securities managed by RCM Capital.
(5) Based on Schedule 13D filed by Ridge Partners, L.P. ("Ridge"), Kelrick,
Inc. ("Kelrick") and Richard J. Ferris. Ridge is a limited partnership
whose sole general partner is Kelrick. Ridge is the record owner of the
shares. Kelrick has sole voting and dispositive power with respect to such
shares. Mr. Ferris is the President and holder of 51% of the shares of
Common Stock of Kelrick and may be deemed to have the right to receive or
the power to direct the receipt of dividends from, or the proceeds from the
sale of, the shares of Common Stock owned by Ridge. Mr. Ferris disclaims
beneficial ownership of the shares owned by Ridge, except to the extent of
his ownership of Kelrick.
(6) Based on Schedule 13G filed jointly by Putnam Investments, Inc. ("Putnam"),
Marsh & McClennan Companies, Inc. ("MMC"), Putnam Investment Management,
Inc. ("PIM") and The Putnam Advisory Company, Inc. ("TPAC"). Shares
indicated as beneficially owned by Putnam include 1,190,516 and 165,900
shares owned of record by PIM and TPAC, respectively, both wholly-owned
subsidiaries of Putnam. Putnam is a wholly-owned subsidiary of MMC, and MMC
may be deemed to beneficially own such shares. Putnam and MMC disclaim
beneficial ownership of such shares. Putnam, PIM and TPAC have shared
dispositive power with respect to the shares, and Putnam and TPAC have
shared voting power with respect to 105,400 shares owned of record by TPAC.
Neither Putnam, PIM nor TPAC have any voting power with respect to the
remainder of the shares.
(7) Shares of Outstanding Common Stock is based on Schedule 13D filed by Peter
V. and Virginia M. Ueberroth, as cotrustees of The Ueberroth Family Trust
(the "1986 Trust"), Alice J. Saviez, as trustee of the Ueberroth Investment
Trust (the "1994 Trust") and Peter V. Ueberroth (collectively, the 1986
Trust and the 1994 Trust may be referred to herein as the "Ueberroth
Trusts."). Includes 919,459 shares of Common Stock beneficially owned by
Peter V. and Virginia M. Ueberroth as co-trustees of the 1986 Trust, who
have shared voting and shares dispositive power with respect to such
shares. Also includes 372,973 shares of Common Stock beneficially owned by
Alice J. Saviez as trustee of the 1994 Trust (who has sole voting and
dispositive power with respect to such shares), 212,000 of which shares are
being offered hereby. Mr. Ueberroth may be deemed to have an interest in
the 1,292,432 shares of
47
<PAGE> 50
Common Stock of the Company as a trustee and beneficiary of the 1986
Trust and as a family member of the beneficiaries of the 1994 Trust.
Mr. Ueberroth disclaims beneficial ownership of such shares.
(8) Shares indicated as owned by Metropolitan are owned of record by MetPark
Funding, Inc. ("MetPark"), a wholly-owned subsidiary of Metropolitan.
(9) Includes an aggregate of 152,221 shares owned by Jacilyn Solmson, Mr.
Solmson's wife, and Kimberly A. Solmson and Robert Todd Solmson, Mr.
Solmson's children. Mr. Solmson disclaims beneficial ownership of such
shares. Of the shares being offered by Mr. Solmson, 87,385 are being
offered by Mr. Solmson's wife and children. (See footnote 19).
(10) Shares indicated as owned by Canadian Pacific are owned of record by
Canadian Pacific Hotels Holdings (U.S.) Inc. ("CPHHUS"), an indirect,
wholly-owned subsidiary of Canadian Pacific.
(11) The address of Messrs. Ferris, Ueberroth, Fatt, Frey, Gamey, Leventhal,
Myers, Kelleher, Perocchi, Stivers and Storey is c/o Doubletree
Corporation, 410 North 44th Street, Suite 700, Phoenix, Arizona 85008.
(12) Includes 2,500 shares reserved for issuance upon exercise of outstanding
options owned by Messrs. Ferris, Ueberroth, Fatt, Gamey and Leventhal and
37,500 shares reserved for issuance upon exercise of outstanding options
owned by Mr. Kelleher.
(13) Excludes 1,000,000 shares owned beneficially by Canadian Pacific and of
record by CPHHUS. While each of Messrs. Fatt and Gamey are executive
officers of Canadian Pacific and serve on the board of directors of various
direct and indirect subsidiaries of Canadian Pacific, neither person has
any voting or investment power with respect to such shares.
(14) Excludes 6,049,226 shares owned of record by GEHOP, 1,755 shares owned of
record by GEIM, which is GEHOP's sole general partner and a direct
wholly-owned subsidiary of GE, and 137,134 shares owned of record by GEPT.
Each of Messrs. Frey and Myers are executive officers and directors of GEIM
and Trustees of GEPT, and Mr. Frey is an executive officer of GE. Messrs.
Frey and Myers have voting and investment power with respect to such shares
and, therefore, may be deemed to be beneficial owners of such shares. Also
excludes 5,000 shares reserved for issuance upon exercise of the vested
portion of an outstanding option to purchase 20,000 shares granted to
GEHOP, which is exercisable within 60 days of March 31, 1996. Each of
Messrs. Frey and Myers disclaim beneficial ownership of such shares.
(15) Includes 10,000 shares beneficially owned by Muriel Leventhal, Mr.
Leventhal's wife. Mr. Leventhal disclaims beneficial ownership of such
shares.
(16) Messrs. Perocchi, Stivers and Storey are executive officers of the Company
but are not directors. Includes 22,500, 6,250 and 22,500 shares reserved
for issuance upon the exercise of outstanding options held by Messrs.
Perocchi, Stivers and Storey, respectively, exercisable within 60 days of
March 31, 1996.
(17) Includes shares of Common Stock held by Ridge, Peter V. and Virginia M.
Ueberroth, as co-trustees of the 1986 Trust, and Alice J. Saviez, as
trustee of the 1994 Trust (See footnotes 5 and 7 above).
(18) Number of shares being offered includes 28,963 shares of Common Stock
offered by Raymond Terry, President of RFS Management.
(19) Includes shares of Common Stock held by Jacilyn Solmson, Mr. Solmson's
wife, and Kimberly A. Solmson and Robert Todd Solmson, Mr. Solmson's
children (See footnote 9 above).
48
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Company's Certificate of Incorporation and By-Laws, copies
of which have been incorporated by reference as exhibits to the Registration
Statement of which this Prospectus is a part.
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $.01 per share, and 5,000,000 shares of Preferred
Stock, par value $.01 per share. Immediately following the completion of this
offering an aggregate of 22,509,686 shares of Common Stock will be issued and
outstanding, and no shares of Preferred Stock will be issued or outstanding.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Holders of Common Stock do not
have cumulative voting rights, and therefore holders of a majority of the shares
voting for the election of directors can elect all of the directors. In such
event, the holders of the remaining shares will not be able to elect any
directors. In addition, in the Stockholders Agreement, the Principal
Stockholders have agreed to certain matters relating to the election of persons
to the Company's Board of Directors. Upon the consummation of the offering,
assuming as anticipated that the Original Stockholders own less than 50% of the
outstanding shares of Common Stock, the Stockholders Agreement will terminate.
Holders of the Common Stock are entitled to receive such dividends as may
be declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of the Credit Facility. The Company
does not anticipate paying cash dividends in the foreseeable future. See
"Dividend Policy." In the event of the liquidation, dissolution or winding up
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities.
Holders of Common Stock have no preemptive, conversion or redemption rights
and are not subject to further calls or assessments by the Company. All of the
outstanding shares of Common Stock are, and the shares offered by the Company
hereby will be, validly issued, fully paid and nonassessable.
The Transfer Agent and Registrar for the Common Stock is First Interstate
Bank.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue from time to time,
without shareholder authorization, in one or more designated series, any or all
of the authorized but unissued shares of Preferred Stock with such dividend,
redemption, conversion and exchange provisions as may be provided in the
particular series. Any series of Preferred Stock may possess voting, dividend,
liquidation and redemption rights superior to that of the Common Stock. The
rights of the holders of Common Stock will be subject to and may be adversely
affected by the rights of the holders of any Preferred Stock that may be issued
in the future. Issuance of a new series of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of entrenching the Company's Board of
Directors and making it more difficult for a third party to acquire, or
discourage a third party from acquiring, a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue any series of
Preferred Stock.
REGISTRATION RIGHTS
In connection with the Combination Transaction, the Original Stockholders
entered into a registration rights agreement, as amended, (the "Registration
Rights Agreement") which gives each of the Original Stockholders certain
piggyback registration rights with respect to the registration under the
Securities Act of the shares issued to them in the Reorganization, including
rights (subject to certain limitations) to include such shares in any
registration under the Securities Act effected for the benefit of the Company or
at the request of another holder. In addition, GEHOP, Canadian Pacific and
Metropolitan have demand registration rights pursuant to which they may require
(subject to certain limitations) the Company to register their shares under the
Securities Act. According to the terms of the Registration Rights Agreement, the
Company is only
49
<PAGE> 52
required to effect two such demand registrations for each of GEHOP and Canadian
Pacific and one such demand registration for Metropolitan. Upon the exercise of
a demand registration right by Metropolitan, the Company may, at its option and
in lieu of effecting such registration, purchase from Metropolitan the shares
required to be registered as a result of such exercise. The Company is not
required to file a registration statement upon exercise of these demand
registration rights within 90 days following any underwritten public offering of
Common Stock. All expenses of any such registration relating to the subject
shares are to be borne by the Company. Canadian Pacific exercised one of its
demand registration rights and sold 3,960,000 shares of Common Stock in a public
offering which was completed in June 1995, and the 1994 Trust sold 240,000
shares of Common Stock pursuant to its piggyback registration rights in such
public offering. Canadian Pacific, Metropolitan and the 1994 Trust are
exercising their piggyback registration rights in connection with this offering.
In connection with the RFS Acquisition, pursuant to an amendment to the
Registration Rights Agreement, the RFS Stockholders were granted demand
registration rights pursuant to which, on two occasions, they may require
(subject to certain limitations) the Company to register the RFS Acquisition
Shares under the Securities Act. The exercise of such rights must be
communicated to the Company by Mr. Solmson as representative of the RFS
Stockholders (the "Representative"). The Original Stockholders have agreed that
if market conditions dictate, in connection with an initial registration demand
by the RFS Stockholders, any Original Stockholder that is entitled to include
shares in such registration shall reduce the number of subject shares that can
be so included, to the potential exclusion of all shares held by the Original
Stockholders from the registration. The second registration demand can occur no
earlier than twelve months after the RFS Closing Date and may include the
balance of the RFS Acquisition Shares. The RFS Stockholders used one of their
demand registration rights in connection with this offering.
If RFS Stockholders holding more than 75% of the previously unregistered
RFS Acquisition Shares (not including any RFS Acquisition Shares beneficially
owned by the Representative or Mr. Forsdick, Sr.) request the Representative to
make the second registration demand and the Representative does not desire to
include his RFS Acquisition Shares in such registration demand, then such RFS
Stockholders shall have the right to request that the Company file and maintain
a shelf registration statement on Form S-3 until the earlier of (a) two years
after the RFS Closing Date or (b) the commencement of the period during which
the sale of any such RFS Acquisition Shares could be made under Rule 144 under
the Securities Act. A request by such RFS Stockholders shall not affect the
ability of the Representative to make the second registration demand as
described above. The RFS Stockholders also have piggyback registration rights
with respect to any registration undertaken by the Company on its own behalf or
on behalf of the Original Stockholders, subject to limitations based on market
conditions at the time. The Company is not required to file a registration
statement upon exercise of the RFS Stockholders' demand registration rights
within 90 days following any underwritten public offering of Common Stock. All
expenses of any such registration relating to the RFS Acquisition Shares are to
be borne by the Company. For a further description of the RFS Acquisition, see
"Business -- The RFS Acquisition".
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law ("Delaware Law"). In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder unless (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting or stock of the corporation outstanding at the time the
transaction commenced (excluding shares owned by persons who are both officers
and directors of the corporation and shares held by certain employee stock
ownership plans); or (iii) following the transaction in which such person became
an interested stockholder, the business combination is approved by the board of
directors of the corporation and
50
<PAGE> 53
authorized at a meeting of stockholders by the affirmative vote of the holders
of at least two-thirds of the outstanding voting stock of the corporation not
owned by the interested stockholder.
LIMITATION OF LIABILITY AND INDEMNIFICATION AGREEMENTS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware Law, a director of the Company shall not be liable
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director. Under current Delaware Law, liability of a director may not
be limited (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases and
(iv) for any transaction from which the director derives an improper personal
benefit. The effect of such provision in the Company's Certificate of
Incorporation is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care as
a director (including breaches resulting from negligent or grossly negligent
behavior), except in the situations described in clauses (i) through (iv) above.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek nonmonetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. In addition, the Company's
Certificate of Incorporation provides that the Company shall indemnify its
directors, officers, employees and agents against losses incurred by any such
person by reason of the fact that such person was acting in such capacity.
The Company has entered into agreements (the "Indemnification Agreements")
with each of the directors and officers of the Company pursuant to which the
Company has agreed to indemnify such director or officer from claims,
liabilities, damages, expenses, losses, costs, penalties or amounts paid in
settlement incurred by such director or officer in or arising out of his or her
capacity as a director, officer, employee and/or agent of the Company or any
other corporation of which he or she is a director or officer at the request of
the Company to the maximum extent provided by applicable law. In addition, such
director or officer is entitled to an advance of expenses to the maximum extent
authorized or permitted by law.
To the extent that the Board of Directors or the stockholders of the
Company may in the future wish to limit or repeal the ability of the Company to
provide indemnification as set forth in the Company's Certificate of
Incorporation, such repeal or limitation may not be effective as to directors
and officers who are currently parties to the Indemnification Agreements,
because their rights to full protection would be contractually assured by the
Indemnification Agreements. It is anticipated that similar contracts may be
entered into, from time to time, with future directors of the Company.
51
<PAGE> 54
UNDERWRITING
The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions contained in the Underwriting Agreement, to
purchase from the Company and the Selling Stockholders the number of shares of
Common Stock indicated below opposite their respective names at the initial
public offering price less the underwriting discount set forth on the cover page
of this Prospectus. The Underwriting Agreement provides that the obligations of
the Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of the shares if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
------------------------------------------------------------- ----------------
<S> <C>
Montgomery Securities........................................ 1,227,334
Morgan Stanley & Co. Incorporated............................ 1,227,333
Schroder Wertheim & Co. Incorporated......................... 1,227,333
----------
Total.................................... 3,682,000
==========
</TABLE>
The Underwriters propose initially to offer the Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus. The
Underwriters may allow to selected dealers a concession of not more than $0.85
per share; and the Underwriters may allow, and such dealers may reallow, a
concession of not more than $0.10 per share to certain other dealers. After the
commencement of the offering, the public offering price, allowances, concessions
and other selling terms may be changed by the Underwriters. The Common Stock is
offered subject to receipt and acceptance by the Underwriters, and to certain
other conditions, including the right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 552,300 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise this option, the
Underwriters will be committed, subject to certain conditions, to purchase such
additional shares in approximately the same proportion as set forth in the above
table. The Underwriters may purchase such shares only to cover over-allotments
made in connection with this offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Company and its directors, executive officers, the Original
Stockholders and the RFS Stockholders have agreed that, except under certain
circumstances, for a period of 90 days after the date of this Prospectus, they
will not, without the consent of the Underwriters, issue, sell or dispose of any
shares of the Common Stock or any shares convertible or exchangeable into any
shares of Common Stock.
In connection with this offering, the Underwriters and certain selling
group members or their respective affiliates may engage in passive market-making
transactions in the Common Stock on the Nasdaq National Market immediately prior
to the commencement of sales in this offering, in accordance with Rule 10b-6A
under the Exchange Act. Passive market-making consists of displaying bids on the
Nasdaq National Market limited by the bid prices of independent market-makers
and purchases limited by such prices and effected in response to order flow. Net
purchases by a passive market-maker on each day are limited to a specified
percentage of the passive market-maker's average daily trading volume in the
Common Stock during a specified prior period and must be discontinued when such
limit is reached. Passive market-making may stabilize the market price of the
Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
52
<PAGE> 55
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Latham & Watkins. Certain legal matters relating to this
offering will be passed upon for the Underwriters by O'Melveny & Myers.
EXPERTS
The consolidated financial statements and schedule of Doubletree
Corporation and subsidiaries as of December 31, 1994 and 1995, and for each of
the years in the three-year period ended December 31, 1995, included herein and
elsewhere in the Registration Statement have been included herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
53
<PAGE> 56
DOUBLETREE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-1
Consolidated Financial Statements:
Balance Sheets as of December 31, 1995 and 1994 (audited) and March 31, 1996
(unaudited)...................................................................... F-2
Statements of Operations:........................................................... F-3
Doubletree Corporation and Subsidiaries (Company)
For the years ended December 31, 1995 and 1994 (audited)
For the three month periods ended March 31, 1995 and 1996 (unaudited)
Samantha Hotel Corporation and Subsidiaries (Predecessor)
For the year ended December 31, 1993 (audited)
Statements of Cash Flows:........................................................... F-4
Company for the years ended December 31, 1995 and 1994 (audited)
Company for the three month periods ended March 31, 1995 and 1996 (unaudited)
Predecessor for the year ended December 31, 1993 (audited)
Statements of Stockholders' Equity:................................................. F-5
Company for the years ended December 31, 1995 and 1994 (audited)
Company for the three month period ended March 31, 1996 (unaudited)
Predecessor for the year ended December 31, 1993 (audited)
Notes to Consolidated Financial Statements............................................ F-6
</TABLE>
54
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Doubletree Corporation:
We have audited the consolidated financial statements of Doubletree
Corporation and subsidiaries (Company) and of Samantha Hotel Corporation and
subsidiaries (Predecessor) as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned Company consolidated financial
statements present fairly, in all material respects, the financial position of
Doubletree Corporation and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for the Company period, in
conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned Predecessor consolidated financial statements
present fairly, in all material respects, the results of their operations and
their cash flows for the Predecessor period, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Orange County, California
February 27, 1996
F-1
<PAGE> 58
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 23,169 $ 32,652 $ 19,024
Restricted cash....................................... 535 -- --
Accounts receivable, net of allowance for doubtful
accounts of $393, $295 and $184, respectively....... 11,887 17,907 16,533
Current portion of notes and other receivables,
including amounts due from affiliates of $16 in
1994................................................ 16 390 390
Other................................................. 1,831 2,694 3,285
-------- -------- --------
Total current assets............................. 37,438 53,643 39,232
-------- -------- --------
Notes and other receivables, including amounts due
from affiliates of $10,674, $10,775 and $13,141,
respectively........................................ 17,312 24,185 26,500
Investments........................................... 2,606 5,070 25,910
Hotel properties, net................................. 11,143 10,572 10,429
Leasehold improvements and office equipment, net...... 2,253 3,968 3,923
Management contracts, net............................. 45,372 49,634 49,472
Goodwill, net......................................... 17,407 15,431 15,330
Deferred costs and other assets....................... 1,170 604 3,311
-------- -------- --------
$134,701 $163,107 $ 174,107
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses................. $ 22,505 $ 25,072 $ 22,587
Leases payable........................................ 4,283 6,744 8,295
Accrued interest payable.............................. 11 23 27
Current portion of notes payable...................... 65 672 5,000
Income taxes payable.................................. 124 585 2,070
-------- -------- --------
Total current liabilities........................ 26,988 33,096 37,979
-------- -------- --------
Deferred income taxes................................. 14,680 15,625 16,641
Notes payable......................................... 1,446 -- --
-------- -------- --------
43,114 48,721 54,620
-------- -------- --------
Commitments and contingencies (Notes 4,7,8 and 16)
Stockholders' equity:
Common stock, $.01 par value. Authorized 100,000,000
shares; issued and outstanding 21,677,811,
22,099,186 and 22,109,686 shares at December 31,
1994 and 1995 and March 31, 1996, respectively... 216 221 221
Additional paid-in capital.......................... 93,215 100,462 100,598
Unrealized gain on marketable equity securities..... -- 22 92
Unearned employee compensation...................... -- (211) (194)
Retained earnings (accumulated deficit)............. (1,844) 13,892 18,770
-------- -------- --------
91,587 114,386 119,487
-------- -------- --------
$134,701 $163,107 $ 174,107
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 59
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------- -------------------
PREDECESSOR COMPANY COMPANY COMPANY COMPANY
1993 1994 1995 1995 1996
----------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Management and franchise fees....... $ 10,612 $ 26,330 $ 30,082 $ 6,826 $ 8,294
Reimbursements...................... 9,828 36,853 45,816 10,700 10,679
Hotel revenues...................... 24,866 73,861 149,023 29,667 41,853
Other fees and income............... 2,901 3,739 5,851 1,397 1,575
------- -------- -------- ------- -------
Total revenues................... 48,207 140,783 230,772 48,590 62,401
------- -------- -------- ------- -------
Operating costs and expenses:
General and administrative.......... 7,878 12,666 15,566 3,860 4,643
Reimbursable expenses............... 10,492 36,006 43,447 10,249 10,064
Hotel expenses...................... 17,152 44,150 85,265 17,252 23,906
Lease expense....................... 2,848 24,617 52,757 10,773 14,736
Depreciation and amortization....... 1,572 2,943 4,686 1,020 1,467
Interest expense.................... 1,228 831 227 69 81
Business combination expenses (Note
2)............................... 1,865 -- 2,565 -- --
------- -------- -------- ------- -------
Total operating costs and
expenses....................... 43,035 121,213 204,513 43,223 54,897
------- -------- -------- ------- -------
Income before income taxes and
minority interest................ 5,172 19,570 26,259 5,367 7,504
Provision for income taxes............ 414 6,335 8,468 1,722 2,626
------- -------- -------- ------- -------
Income before minority
interest....................... 4,758 13,235 17,791 3,645 4,878
Minority interest share of net loss... 175 -- -- -- --
------- -------- -------- ------- -------
Net income....................... $ 4,933 $ 13,235 $ 17,791 $ 3,645 $ 4,878
======= ======== ======== ======= =======
Earnings per share (Note 12).......... $ 0.66 $ 0.80 $ 0.17 $ 0.22
======== ======== ======= =======
Weighted average common and common
equivalent shares outstanding....... 20,071 22,219 21,910 22,584
======== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 60
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------- ------------------
PREDECESSOR COMPANY COMPANY COMPANY COMPANY
1993 1994 1995 1995 1996
----------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Net income......................................... $ 4,933 $ 13,235 $ 17,791 $3,645 $ 4,878
Adjustments to reconcile net income to net cash
provided (used) by operations:
Provision for bad debts.......................... 56 189 211 12 97
Depreciation and amortization.................... 1,601 3,013 4,686 1,020 1,467
Equity in (earnings) loss of partnerships........ (992) (373) 91 (119 ) 36
Gain on termination of management contracts...... -- (500) -- -- --
Minority interest share of net loss.............. (175) -- -- -- --
Asset write-offs and other non-cash expenses..... 615 -- 70 70 17
Deferred income taxes............................ 42 3,394 3,375 753 1,016
Net (deposits to) withdrawals from restricted
cash........................................... (1,091) 1,179 535 515 --
(Increase) decrease in accounts receivable....... (873) (3,407) (6,187) (4,826 ) 1,317
(Increase) decrease in other assets.............. 25 (648) (1,234) 294 (486)
Increase (decrease) in accounts payable and
accrued expenses............................... 3,085 6,680 5,190 (1,832 ) 555
Other, net....................................... (313) -- -- -- --
-------- -------- -------- ------- --------
Net cash provided (used) by operations...... 6,913 22,762 24,528 (468 ) 8,897
-------- -------- -------- ------- --------
Cash flow from investing activities:
Cash acquired at purchase of Doubletree Hotels
Corporation...................................... 22,819 -- -- -- --
Purchase of Doubletree Hotels Corporation.......... (45,000) -- -- -- --
Purchases of furniture and equipment............... (66) (1,877) (2,708) (517 ) (287)
Investments in partnerships and ventures........... (255) (1,021) (2,531) (658 ) (20,919)
Distributions from partnerships and ventures....... 149 603 514 75 113
Investments in management contracts................ -- (6,607) (7,181) -- (665)
Proceeds from terminations of management
contracts........................................ -- 2,188 562 -- --
Acquisition of investment property................. (12,504) (11,129) -- -- --
Loans to owners of managed hotels.................. (7,309) (4,935) (7,367) (4,531 ) (2,355)
Deposits in hotels to obtain management
contracts........................................ -- (280) 250 250 (250)
Purchase of marketable securities.................. -- -- (516) (139 ) --
Increase in deferred costs......................... -- -- -- -- (2,626)
Other.............................................. 1,255 76 (43) -- --
-------- -------- -------- ------- --------
Net cash used in investing activities....... (40,911) (22,982) (19,020) (5,520 ) (26,989)
-------- -------- -------- ------- --------
Cash flow from financing activities:
Proceeds from issuance of common stock, net of
offering costs................................... -- 40,261 6,620 -- --
Proceeds from exercise of common stock options..... -- -- 249 -- 136
Capital contributions.............................. 135 -- -- -- --
Cash distributions to stockholders................. (943) (34) (2,055) (2 ) --
Minority interest share of Doubletree Partners
distributions.................................... (80) -- -- -- --
GQEL redemption, purchase of common and preferred
stock............................................ (261) -- -- -- --
Proceeds from borrowings........................... 39,640 -- -- -- 5,000
Issuance of redeemable preferred stock............. 540 -- -- -- --
Purchase of common and redeemable preferred
stock............................................ (231) (182) -- -- --
Principal payments on notes payable................ (3,358) (25,414) (839) (19 ) (672)
-------- -------- -------- ------- --------
Net cash provided (used) by financing
activities................................ 35,442 14,631 3,975 (21 ) 4,464
-------- -------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents........................................ 1,444 14,411 9,483 (6,009 ) (13,628)
Cash and cash equivalents at beginning of year....... 7,314 8,758 23,169 23,169 32,652
-------- -------- -------- ------- --------
Cash and cash equivalents at end of period........... $ 8,758 $ 23,169 $ 32,652 $17,160 $ 19,024
======== ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 61
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL UNEARNED EARNINGS
COMMON PAID-IN ESOP TREASURY EMPLOYEE UNREALIZED (ACCUMULATED
STOCK CAPITAL OBLIGATION STOCK COMPENSATION GAIN DEFICIT) TOTAL
------- ----------- ---------- --------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Predecessor:
Balances at December 31,
1992....................... $-- $ 28,459 $-- $-- $-- -$- $(18,686) $ 9,773
Issuance of 2,727,811
shares of common stock to
acquire RFS, Inc.,
accounted for as a
pooling of interests..... 27 (25) (592) -- -- -- (811) (1,401)
Distributions to
stockholders............. -- (926) -- -- -- -- -- (926)
Capital contribution....... -- 1,282 -- -- -- -- -- 1,282
Preferred stock
dividends................ -- -- -- -- -- -- (17) (17)
Termination of ESOP........ -- -- 592 (452) -- -- (371) (231)
Redemption of GQEL minority
interest................. -- (852) -- -- -- -- -- (852)
Net income................. -- -- -- -- -- -- 4,933 4,933
---- -------- ----- ----- ----- --- -------- --------
Company:
Balances at December 31,
1993....................... 27 27,938 -- (452) -- -- (14,952) 12,561
Issuance of 15,500,000
shares of common stock to
the partners of
Doubletree Partners in
exchange for their
interests in Doubletree
Partners and Samantha.... 155 25,051 -- -- -- -- -- 25,206
Proceeds from sale of
3,450,000 shares of
common stock to the
public, net of costs of
$4,589................... 35 40,226 -- -- -- -- -- 40,261
Preferred stock
dividends................ -- -- -- -- -- -- (34) (34)
Preferred stock
conversion............... -- 440 -- -- -- -- -- 440
Purchase of allocated ESOP
shares................... -- -- -- (82) -- -- -- (82)
Retirement of treasury
shares................... (1) (440) -- 534 -- -- (93) --
Net income................. -- -- -- -- -- -- 13,235 13,235
---- -------- ----- ----- ----- --- -------- --------
Balances at December 31,
1994....................... 216 93,215 -- -- -- -- (1,844) 91,587
Proceeds from sale of
400,000 shares of common
stock to the public, net
of offering costs of
$980..................... 4 6,616 -- -- -- -- -- 6,620
Exercise of common stock
options and other
grants................... -- 289 -- -- -- -- -- 289
Tax benefits attributable
to common stock options
exercised................ -- 62 -- -- -- -- -- 62
Common stock issued to
employees................ 1 280 -- -- (281) -- -- --
Amortization of unearned
employee compensation.... -- -- -- -- 70 -- -- 70
Marketable equity
securities unrealized
gain..................... -- -- -- -- -- 22 -- 22
Distributions to
stockholders............. -- -- -- -- -- -- (2,055) (2,055)
Net income................. -- -- -- -- -- -- 17,791 17,791
---- -------- ----- ----- ----- --- -------- --------
Balances at December 31,
1995....................... 221 100,462 -- -- (211) 22 13,892 114,386
Exercise of common stock
options (unaudited)...... -- 136 -- -- -- -- -- 136
Amortization of unearned
employee compensation
(unaudited).............. -- -- -- -- 17 -- -- 17
Marketable equity
securities unrealized
gain (unaudited)......... -- -- -- -- -- 70 -- 70
Net income (unaudited)..... -- -- -- -- -- -- 4,878 4,878
---- -------- ----- ----- ----- --- -------- --------
Balances at March 31, 1996
(unaudited)................ $ 221 $ 100,598 $-- $-- $ (194) $ 92 $ 18,770 $119,487
==== ======== ===== ===== ===== === ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 62
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(1) SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Doubletree Corporation was incorporated on May 19, 1994 as a Delaware
corporation to succeed to all the assets, liabilities and business operations of
Doubletree Partners, formerly Guest Quarters Hotel Partnership ("GQHP").
Doubletree Corporation and its majority-owned subsidiaries are collectively
referred to as the "Company." At March 31, 1996, the Company managed 86 hotels,
leased 52 hotels, owned one hotel and had franchise agreements with 33 hotels.
On December 16, 1993, Doubletree Partners and Doubletree Hotels Corporation
("DHC") were combined through the transfer of the ownership interests of DHC to
Doubletree Partners in exchange for cash and partnership interests in Doubletree
Partners. On June 30, 1994 (immediately prior to the Company's initial public
offering), the owners of Doubletree Partners (Samantha Hotel Corporation
("Samantha"), Canadian Pacific Hotels (U.S.) Inc. ("CPHUS") and MetPark Funding,
Inc. ("MET")) contributed their ownership interests to the Company and the
Samantha owners contributed Samantha to the Company. In consideration for such
transfer, each of the owners was issued shares of common stock (15,500,000
shares in the aggregate) of the Company in proportion to their direct or
indirect ownership interests in Doubletree Partners prior to such transfer. The
June 1994 transaction has been accounted for as if it were a pooling of
interests. Accordingly, the 1994 consolidated financial statements combine the
previously separate minority interests of CPHUS and MET with the financial
statements of Samantha as if the transaction occurred at the beginning of 1994.
The operating results and cash flows for the periods prior to December 16, 1993
are those of Samantha, the then 92% owner of Doubletree Partners.
On February 27, 1996, Doubletree Corporation acquired a 100% interest in
RFS, Inc. ("RFS Management") in a transaction accounted for as a pooling of
interests. Accordingly, the consolidated financial statements have been restated
to include RFS Management as if it had been acquired at the beginning of the
earliest period presented.
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. Certain financial statement
items from prior years have been reclassified to be consistent with the current
year financial statement presentation. The accounts of DHC and its subsidiaries
are included from the date of acquisition, December 16, 1993. All significant
inter-entity accounts and transactions have been eliminated.
(a) Revenue Recognition
Management fees, franchise fees, reimbursement revenues and hotel revenues
are recognized when earned.
(b) Hotel Properties
Buildings are carried at cost and depreciated over 30 -- 40 years using the
straight-line method. Furniture, fixtures and equipment are depreciated using
the straight-line method over 7 years. Leasehold improvements are amortized over
the shorter of the lives of the assets or the terms of the related leases.
Accumulated depreciation at December 31, 1994 and 1995 and March 31, 1996 was
$182,000, $601,000 and $752,000, respectively.
F-6
<PAGE> 63
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(c) Investments
Investments in partnerships and ventures are accounted for using the equity
method of accounting when the Company has a general partnership interest or its
limited partnership interest exceeds 5%. All other investments are accounted for
using the cost method with the exception of marketable equity securities which
are recorded at market.
(d) Leasehold Improvements and Office Equipment
Improvements to office leaseholds are amortized over the shorter of the
lives of the assets or the terms of the related leases. Office furniture and
equipment is depreciated using the straight-line method over 3 to 10 years.
Accumulated depreciation at December 31, 1994 and 1995 and March 31, 1996 was
$2,767,000, $2,730,000 and $3,054,000, respectively.
Repairs and maintenance are charged to operations as incurred; major
renewals and improvements at the leased hotels are the responsibility of the
owner.
(e) Management Contracts and Goodwill
Management contracts acquired in the acquisition of DHC represent the
estimated present value of net cash flows expected to be received over the
estimated lives of the contracts and is being amortized using the straight-line
method over the estimated weighted average contract life (25 years) from
December 16, 1993. Management contracts acquired subsequent to the acquisition
represent the cash paid to acquire the contract and are being amortized using
the straight-line method over the life of the respective contract. Management
contracts are carried net of accumulated amortization of $2,199,000, $4,554,000
and $5,381,000 at December 31, 1994 and 1995 and March 31, 1996, respectively.
Goodwill arose in connection with the acquisition of DHC by Doubletree
Partners in December 1993 and is amortized using the straight-line method over
40 years. Goodwill is carried net of accumulated amortization of $389,000,
$835,000 and $936,000 at December 31, 1994 and 1995 and March 31, 1996,
respectively.
(f) Deferred Costs and Other Assets
At March 31, 1996 deferred costs and other assets primarily consist of
franchise application fees paid in connection with the acquisition of RFS
Management which are amortized over the lives of the franchise agreements. The
initial cost of obtaining franchise licenses for hotels leased by RFS Management
are paid by the owner. Accumulated amortization at March 31, 1996 is $3,000.
(g) Statements of Cash Flows
All short-term, highly liquid investments purchased with an original
maturity of three months or less are considered to be cash equivalents for
purposes of the statement of cash flows.
Cash paid for interest amounted to $1,188,000, $892,000 and $215,000 for
the years ended December 31, 1993, 1994, and 1995, respectively and $63,000 and
$77,000 for the three months ended March 31, 1995 and 1996, respectively. Cash
paid for income taxes amounted to $456,000, $3,020,000 and $4,631,000 for the
years ended December 31, 1993, 1994 and 1995, respectively and $81,000 and
$125,000 for the three months ended March 31, 1995 and 1996, respectively.
F-7
<PAGE> 64
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(h) Income Taxes
Under the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets, including net operating loss carryforwards,
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(i) Earnings Per Share
Earnings per share is determined by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
year. Common equivalent shares include employee stock options which have been
deemed exercised for the purpose of computing earnings per share. The Company
has no other potentially dilutive securities.
(j) Notes Receivable
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosure, on January 1, 1995. There was no
financial statement impact as a result of such adoption. Management considers a
note to be impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the note. When a
loan is considered to be impaired, the amount of the impairment is measured
based on the present value of expected future cash flows discounted at the
note's effective interest rate. Impairment losses are charged to expense.
Generally, cash receipts will first be applied to reduce accrued interest and
then to reduce principal.
(k) Long-Lived Assets
The recoverability of management contract costs, goodwill, hotel
investments and franchise application fees are periodically evaluated to
determine whether such costs will be recovered from future operations.
Evaluations of goodwill are based on projected earnings, exclusive of goodwill
amortization, on an undiscounted basis. Management contracts are individually
evaluated based on the projected management fee stream on an undiscounted basis.
If the undiscounted earnings or fee streams are insufficient to recover the
recorded assets, then the projected earnings or fee stream is discounted to
determine the revised carrying value and a write down for the difference is
recorded.
(2) ACQUISITIONS
Acquisition of RFS, Inc.
On February 27, 1996, the Company issued 2,727,811 shares of its common
stock in exchange for all of the outstanding stock of RFS Management (a
privately held hotel operator) in a transaction accounted for as a pooling of
interests. RFS Management operates 50 hotels (44 hotels are leased and managed,
4 are leased only and 2 are managed). The REIT is the lessor for all leased
hotels.
F-8
<PAGE> 65
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
Effective January 1, 1995, RFS Management was a Subchapter S Corporation
for income tax purposes and, therefore, was not generally liable for income
taxes for the year ending December 31, 1995.
The following table presents total revenues and net income of the merged
companies. Additionally, the table includes unaudited 1995 pro forma net income
and earnings per share. The 1995 pro forma adjustments exclude business
combination expenses, provide for additional tax expense due to the exclusion of
the business combination expenses and increase the provision for taxes for RFS
Management to a 35% rate which is the Company's 1995 effective tax rate.
<TABLE>
<CAPTION>
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Total revenues
Doubletree................................................ $36,048 $ 78,173 $107,956
RFS Management............................................ 12,159 62,610 122,816
------- -------- --------
Total revenues, as reported................................. $48,207 $140,783 $230,772
======= ======== ========
Net income
Doubletree................................................ $ 4,368 $ 12,578 $ 15,662
RFS Management............................................ 565 657 2,129
------- -------- --------
Net income, as reported..................................... $ 4,933 $ 13,235 17,791
======= ========
Business combination expenses............................... 2,565
Pro forma additional income tax expense..................... (1,620)
--------
Pro forma net income........................................ $ 18,736
========
Pro forma earnings per share................................ $ 0.84
========
Weighted average shares outstanding......................... 22,219
========
</TABLE>
The Company incurred pre-tax expenses in the fourth quarter of 1995 related
to the business combination of approximately $2,565,000. The costs incurred
include legal, professional and accounting fees, due diligence and certain other
costs necessary to complete the transaction.
Certain of the franchisors required the payment of an application fee, as a
result of the merger, of approximately $2,600,000 which is being amortized over
the terms of the respective franchise agreements.
Acquisition of Doubletree Hotel Corporation
On December 16, 1993 Doubletree Partners purchased all of the outstanding
stock of DHC from CPHUS and MET for $72,000,000, including acquisition costs.
The purchase price was established by an assessment of the net assets acquired
and was paid by issuing partnership interests in the amount of $25,852,000
representing a 40% interest in Doubletree Partners and $45,000,000 in cash. The
cash portion of the purchase price was paid by causing DHC to borrow $25,000,000
and using $20,000,000 of DHC's cash. The purchase price of $72,000,000 is
comprised of the $45,000,000 of cash paid and the $27,000,000 of net assets
acquired. The transaction has been accounted for as a purchase. The purchase
price was allocated to the net assets acquired, including management contracts,
based upon their estimated fair market values. The excess of the purchase price
over the estimated fair value of the net assets acquired of $14,936,000 was
recorded as goodwill. During 1994, the Company concluded negotiations and
reached agreements with several key executives of DHC regarding severance and
related benefits. Primarily, as a result, goodwill and liabilities
F-9
<PAGE> 66
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
increased by $2,857,000. The consolidated statement of operations for 1993
includes the results of operations of DHC from December 16, 1993.
The following unaudited pro forma summary presents the consolidated results
of operations of Samantha as if DHC had been acquired at the beginning of 1993.
The pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations that would actually
have resulted had the combination been in effect on the date indicated (in
thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1993
----------------------------
<S> <C>
Total revenues...................... $ 82,197
=======
Net income.......................... $ 8,615
=======
</TABLE>
In 1993, business combination expenses represented the estimated costs to
close duplicate facilities, relocate certain equipment, make severance payments
to terminated employees and relocate certain other employees of GQHP as a result
of the acquisition of DHC. They also include the write-off of all costs related
to the Guest Quarters name as management determined that all Doubletree and
Guest Quarters hotels would be marketed under the Doubletree brand.
(3) REDEMPTION OF GQEL MINORITY INTEREST
Effective December 16, 1993 Doubletree Partners distributed its ownership
interest in two hotels, its leasehold interest in another hotel and certain
liabilities to its partner, GQ Equities Limited ("GQEL"), in complete redemption
of GQEL's interest in Doubletree Partners. The owners of GQEL were also the
owners of Samantha. On December 16, 1993 the carrying amount of the distributed
assets and the carrying amount of the liabilities, having an aggregate net book
value of $3,056,000, including cash of $261,000, approximated their fair market
value. Pursuant to the redemption agreement, Doubletree Partners and GQEL have
entered into management agreements for each of the hotels, which provide that
Doubletree Partners shall continue to receive base management fees at the
existing rate and an incentive fee, which, if earned, will not be less than 68%
of the hotels' net cash flow (as defined therein). The agreement will terminate
upon the sale of the hotels or the leasehold interests but, in any event, no
earlier than December 16, 1998.
(4) HOTEL PROPERTIES
Hotel revenues and expenses represent the operating results of hotels owned
or leased by the Company. Hotel properties consist of a 239-room hotel in
Southfield, Michigan which was acquired (from a subsidiary of General Electric
Capital Corporation) on December 22, 1994 for approximately $11,129,000 in cash,
of which $556,000 was allocated to land.
As of December 31, 1993, 1994 and 1995 the Company leased 12, 44 and 52
hotels, respectively. The Company leased 48 of these hotels from the REIT at
December 31, 1995 under leases ("Percentage Leases") which require the payment
of rent equal to the greater of fixed base rent or percentage rent based on a
percentage of gross room revenue, beverage revenue and food revenue (if the
hotel offers food and beverage service). The Percentage Leases are all cross
defaulted with one another. The remaining four leases require the payment of
base rent and additional rent based on the gross revenues of the hotels. All
hotel leases are operating leases. Percentage rents, included in total lease
expense, were $748,000, $10,961,000 and $25,254,000 for the years ended December
31, 1993, 1994 and 1995, respectively and $4,761,000 and
F-10
<PAGE> 67
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
$6,993,000 for the three months ended March 31, 1995 and 1996, respectively. The
Company leases two hotels from affiliates of the General Electric Pension Trust.
The following is a schedule, by year, of future minimum rental payments
required under non-cancelable hotel operating leases (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
--------------------------------------------------
<S> <C>
1996............................................ $ 29,651
1997............................................ 30,429
1998............................................ 28,468
1999............................................ 27,496
2000............................................ 24,403
Thereafter 209,676
--------
Total future minimum lease payments.......... $350,123
========
</TABLE>
The Company leased another hotel, which lease commenced in July 1991 and
required Doubletree Partners to pay all normal, recurring expenses of the hotel
including real estate taxes and interest in lieu of rent. All of these amounts
are included in hotel operating expenses. The lease term expired on December 31,
1994.
In December 1992 and July 1993, Doubletree Partners acquired hotels in
Cincinnati and Atlanta, respectively. The purchase price of the Cincinnati
property was $7,950,000 of which $5,168,000 was financed in the form of a
nonrecourse purchase money mortgage note and the balance was paid in cash. The
purchase price of the Atlanta property was $12,000,000, of which $9,000,000 was
financed in the form of a non-recourse mortgage, $2,000,000 was borrowed from an
affiliate and the balance was paid in cash. Those hotels and the Company's
leasehold interest in another hotel were distributed to GQEL on December 16,
1993 at which time GQEL assumed the related financing.
(5) RESTRICTED CASH
Restricted cash consisted of amounts in escrow for fixed asset replacement
at hotels under management.
F-11
<PAGE> 68
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(6) NOTES AND OTHER RECEIVABLES
Notes and other receivables, consisting primarily of loans to owners of
managed hotels, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH
INTEREST REPAYMENT TERMS --------------------- 31,
RATE INTEREST/PRINCIPAL MATURITY 1994 1995 1996
- ------------- --------------------------------------------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
SECURED:
12.0% Monthly/monthly to the extent of cash flow 2006 $ 4,000 $ 4,000 $ 4,500
10.0% Monthly/monthly to the extent of cash flow 2005 -- 2,850 2,850
8.0-10.0% Monthly/at maturity 2001 2,250 2,800 2,800
10.0% Quarterly/quarterly to the extent of cash
flow 2003 -- 2,600 2,600
9.0% Monthly/at maturity 2015 -- 1,625 2,491
Prime-1.5% Monthly/at maturity 2010 -- 1,300 1,300
6.5-9.0% Monthly/at maturity 2000 1,250 1,250 1,250
8.0% Monthly/monthly to the extent of cash flow 2014 1,000 1,000 1,000
Prime + 1.5% Monthly/at maturity 1999 1,000 1,000 1,000
8.0-10.0% Various Upon sale 1,273 1,153 1,112
Notes repaid in full 2,040 -- --
------- ------- ---------
12,813 19,578 20,903
------- ------- ---------
UNSECURED:
7.5% Monthly/at maturity 2000 3,000 3,500 3,500
8.0% Monthly/at maturity 2001 -- -- 1,000
10.0% Quarterly/quarterly 2002 720 720 684
5.75%-10.0% Various Upon sale 795 777 803
------- ------- ---------
4,515 4,997 5,987
------- ------- ---------
Total notes and other receivables 17,328 24,575 26,890
Less: current portion 16 390 390
------- ------- ---------
Non-current portion $17,312 $24,185 $26,500
======= ======= =========
</TABLE>
Repayment of notes receivable are generally due upon the earlier of
termination of the management contract or sale of the hotel. GEHOP refers to GE
Investment Hotel Partners I, Limited Partnership. At December 31, 1995 and March
31, 1996, the Company does not consider any of its notes receivable to be
impaired.
Included in other fees and income is interest income of $254,000,
$1,630,000 and $4,147,000 for the years ended December 31, 1993, 1994 and 1995,
respectively and $905,000 and $1,007,000 for the three months ended March 31,
1995 and 1996, respectively. The Company earns interest income on the notes
receivable and from cash equivalents.
(7) INVESTMENTS
As of March 31, 1996 the Company and its subsidiaries have general and/or
limited partnership interests in 16 partnerships. Eleven of the partnerships own
hotels while the others own retail or industrial properties. Six of the
partnership interests were acquired in the acquisition of DHC and six were
acquired in the acquisition of RFS Management. The Company's percentage of
ownership in such partnerships at March 31,
F-12
<PAGE> 69
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
1996 ranges from less than 1% to 49.9%. The partnership investments include an
investment in a partnership that is a majority owned subsidiary of the REIT.
These partnership interests are convertible into common stock of the REIT.
At December 31, 1995, unrecorded losses of approximately $381,000, related
to certain limited partnership investments have not been recorded because the
book value of these investments has been reduced to zero. The Company has no
obligation to further fund these investments.
The aggregate carrying value of the partnership interests is less than the
proportionate share of aggregate net assets of such partnerships by
approximately $1,685,000 at December 31, 1995. This difference is principally
the result of previous write-offs of the Company's investment, in excess of that
recorded by certain of the partnerships, offset by losses in excess of amounts
invested which are not reflected in the accompanying financial statements
because the Company has no obligation to further fund the investments.
In October 1995, the Company acquired a 50% interest in Candlewood Hotel
Company, L.L.C. ("Candlewood"). Candlewood will compete in the extended stay
market of the lodging industry and will design, develop and manage and/or
franchise hotels under the Candlewood brand. The Company committed to provide
$15,000,000 of capital to the venture, of which, $3,300,000 has been funded at
March 31, 1996 ($1,200,000 at December 31, 1995).
The Company, through RFS Management, purchased 973,684 shares of the REIT's
convertible preferred stock for $19 per share or approximately $18,500,000. This
investment is recorded at cost as there is no ready market for these securities.
The convertible preferred stock will pay a fixed annual dividend of $1.45 per
share and is convertible on a one-for-one share basis at the end of seven years.
Separately, the REIT granted the Company a 10-year right of first refusal to
manage and lease future hotels acquired or developed by the REIT. The Company
has committed to the REIT to maintain $15,000,000 of net worth in RFS
Management.
Investments also include 35,000 shares of REIT common stock recorded at
market value. The unrealized gain is reflected in stockholders' equity as these
securities are classified as available-for-sale..
Investments consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH
----------------- 31,
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
REIT convertible preferred stock................................ $ -- $ -- $18,500
REIT common shares.............................................. -- 538 608
Hotel partnerships.............................................. 2,989 3,746 4,050
Candlewood...................................................... -- 1,098 3,064
Other........................................................... (383) (312) (312)
------ ------ -------
$2,606 $5,070 $25,910
====== ====== =======
</TABLE>
(8) OPERATING LEASES
The Company occupies administrative offices under operating leases which
provide for minimum annual rental charges plus a share of maintenance expenses
and real estate taxes.
Total rent expense for operating leases of office space for the years ended
December 31, 1993, 1994 and 1995 amounted to approximately $816,000, $1,402,000
and $1,597,000, respectively and $325,000 and $334,000 for the three months
ended March 31, 1995 and 1996, respectively.
F-13
<PAGE> 70
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
The following is a schedule, by year, of future minimum rental payments
required under non-cancelable operating leases for administrative office space
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------------------------------------------------
<S> <C>
1996................................................. $1,392
1997................................................. 1,447
1998................................................. 874
1999................................................. 591
2000................................................. 596
Thereafter........................................... 1,856
------
Total future minimum lease payments............... $6,756
======
</TABLE>
(9) NOTES PAYABLE
Note payable due December 16, 1998 with interest payable monthly at LIBOR
plus a variable rate (between 0.675% and 1.50%) related to debt-to-equity and
interest coverage ratios. The note payable is a credit facility which allows
borrowings up to $30,000,000, all of which was available for borrowing at
December 31, 1995. Subsequent to December 31, 1995 the Company borrowed
$5,000,000 under this facility and repaid $3,000,000 after March 31, 1996. The
facility requires the payment of a quarterly commitment fee that ranges from
0.20% to 0.375% of the unused balance. The loan has various covenants which
prohibit the payment of distributions (including dividends) from DHC and
Doubletree Partners (which owns substantially all of the assets) to their
stockholders and partners, respectively, and restricts the payment of certain
expenditures based on the financial condition of the Company. Various notes
receivable and stock of certain significant subsidiaries have been pledged as
collateral. The loan is guaranteed by the Company, Samantha and Doubletree
Partners.
The maximum borrowing which may be outstanding under the facility declines
one year prior to the maturity date to $12,500,000 and is due in full one year
later. The facility provides that, at the election of the Company and approval
by the Lender, the maturity dates can both be extended by one year.
Other notes payable outstanding at December 31, 1994 and 1995 are as
follows:
<TABLE>
<CAPTION>
1994 1995
------ ----
<S> <C> <C>
8% note payable shareholder, repaid March 1996............... $ 902 672
10% note payable shareholders, repaid June 1995.............. 609 --
------ ---
$1,511 672
====== ===
</TABLE>
(10) STOCKHOLDERS' EQUITY
On July 8, 1994, the Company completed its initial public offering of
3,450,000 shares of its common stock at a price to the public of $13 per share.
The net proceeds to the Company, after expenses of the offering and giving
effect to the underwriter's discount, were $40,261,000. The proceeds of the
offering were primarily used for the repayment of debt outstanding under the
credit facility and for general corporate purposes.
In March 1995, the Company issued 2,000 shares of common stock with a fair
value at the date of issuance of $40,000 to certain non-executive employees.
F-14
<PAGE> 71
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
In June 1995, the Company completed an offering of 4,600,000 shares of its
common stock (of which 400,000 shares were newly issued shares of the Company)
at a price to the public of $19 per share. The net proceeds to the Company,
after expenses of the offering and giving effect to the underwriter's discount,
were $6,620,000.
In January 1995, RFS Management issued 12 restricted shares of RFS
Management common stock to certain of its employees. These shares vest ratably
over a four year period from the date of issuance. The estimated fair market
value of these shares at issuance was $281,000. The shares were exchanged for
approximately 36,500 Company common shares, subject to the same restrictions, in
connection with the acquisition of RFS Management.
In February, 1996 the Company issued 2,727,811 shares (including the 36,500
restricted shares) of its common stock to acquire all of the outstanding common
stock of RFS Management.
(11) STOCK OPTIONS
The Company has one stock option plan, the 1994 Equity Participation Plan
(the "Plan"), in which options may be granted to key personnel to purchase
shares of the Company's common stock at a price not less than the current market
price at the date of the grant. The options vest annually and ratably over the
four-year period from the date of grant and expire ten years after the grant
date. An aggregate of 2,000,000 shares have been authorized for issuance. The
Plan also provides for the issuance of stock appreciation rights, restrictive
stock or other awards, none of which have been granted. Activity in the stock
option plan is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, THREE MONTHS
----------------------- ENDED
PRICE RANGE 1994 1995 MARCH 31, 1996
---------------- --------- --------- --------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year.... $13.00 - $23.50 -- 967,500 1,103,500
Granted................................... $13.00 - $28.88 1,099,500 193,000 704,000
Exercised................................. $13.00 -- (19,375) (10,500)
Canceled.................................. $13.00 (132,000) (37,625) (16,500)
--------- --------- ---------
Options outstanding, end of period........ $13.00 - $28.88 967,500 1,103,500 1,780,500
========= ========= =========
Number of options exercisable............. $13.00 - $19.13 -- 243,750 234,250
Number of shares available for future
issuance................................ 1,032,500 877,125 189,625
</TABLE>
Subsequent to March 31, 1996 the Company's shareholders approved an
increase in the maximum number of shares available under the 1994 Equity
Participation Plan to 3,300,000. As a result, the number of shares available for
future issuance has increased to 1,489,625.
(12) EARNINGS PER SHARE
For the year ended December 31, 1994, earnings per share has been
calculated assuming the 15,500,000 shares issued immediately prior to the
initial public offering were outstanding since January 1, 1994. Additionally,
the 2,727,811 shares issued to acquire RFS Management are assumed to be
outstanding for the entire years of 1994 and 1995. Per share data for 1993 has
not been provided as the information is not comparable. The common equivalent
shares include employee stock options which have been deemed exercised using the
treasury stock method for the purpose of computing earnings per share. The
Company has no outstanding securities or agreements which would result in the
issuance of common shares other than common stock equivalents.
F-15
<PAGE> 72
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(13) TRANSACTIONS WITH RELATED PARTIES
Revenues include amounts derived from entities in which affiliates of the
Company own interests and, in general, exercise operational control. Revenues
derived from these entities were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -----------------
1993 1994 1995 1995 1996
------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
REVENUES
Management fees, franchise fees, technical
service fees, termination fees and
reimbursements......................... $9,505 $27,674 $26,456 $6,067 $7,195
Hotel revenues............................ -- -- 11,327 -- 4,178
Share of partnership income............... -- 243 388 315 98
Interest.................................. 30 847 1,674 326 428
Reimbursements for services provided to
CPHUS.................................. 96 2,934 1,819 589 --
Sales of equipment and hotel operating
supplies............................... 96 4,094 6,055 1,330 580
EXPENSES
MIS Services.............................. 50 17 -- -- --
Hotel expenses............................ -- -- 10,721 -- 3,972
Administrative office rent................ 334 312 73 17 18
</TABLE>
Amounts due from affiliates included in accounts receivable at December 31,
1994 and 1995 and March 31, 1996 are $3,877,000, $4,318,000 and $5,560,000,
respectively. Non-current amounts due from affiliates included in other assets
at December 31, 1994 and 1995 and March 31, 1996 are $114,000, $147,000 and
$321,000, respectively.
Amounts due to affiliates included in accounts payable at December 31, 1994
and 1995 and March 31, 1996 amounted to $123,000, $105,000 and $2,000,
respectively.
During 1995 RFS Management, under terms of a consulting agreement, made
payments of $780,000 to Hospitality Advisory Services, Inc. ("HAS") The
consulting agreement terminated on February 27, 1996 and $75,000 was paid prior
to termination. Subsequently, two of the former HAS shareholders entered into
new consulting agreements, that terminate February 27, 1997, with RFS Management
and were paid $17,500 in total.
(14) EMPLOYEE BENEFIT PLANS
The Company participates in 401(k) retirement savings plans. Generally,
employees who are over 21 years of age and have completed one year of service
are eligible to participate in the plans. The Company, except for RFS
Management, matches employee contributions up to 3% of an employee's salary. RFS
Management matches employee contributions up to 2% of an employee's salary. The
aggregate expense under all plans amounted to $135,000, $218,000 and $563,000
for the years ended December 31, 1993, 1994 and 1995, respectively.
The Company, except for RFS Management, maintains a self-insured group
health plan through a Voluntary Employee Benefit Association. This plan is
funded to the limits provided in the Internal Revenue Code. RFS Management
maintains a self-insured group health plan. Liabilities are recorded for
estimated incurred but unreported claims. Aggregate and stop loss insurance
exists at amounts which limit the exposure to the Company, including RFS
Management.
F-16
<PAGE> 73
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(15) INCOME TAXES
The components of income tax expense consist of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
---- ------ ------
<S> <C> <C> <C>
Federal:
Current.................................................. $257 $1,559 $3,561
Deferred................................................. 42 3,476 2,832
---- ------ ------
299 5,035 6,393
---- ------ ------
State:
Current.................................................. 115 1,382 1,532
Deferred................................................. -- (82) 543
---- ------ ------
115 1,300 2,075
---- ------ ------
$414 $6,335 $8,468
==== ====== ======
</TABLE>
The actual income tax expense differs from the expected tax expense
computed by applying the Federal statutory income tax rate as a result of the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1993 1994 1995
----- ---- ----
<S> <C> <C> <C>
Income tax expense at Federal statutory rate.................. 34.0% 34.0% 34.0%
Goodwill and other permanent differences...................... 0.2 1.1 0.7
State income taxes............................................ 0.8 4.3 5.5
RFS, Inc. S Corp. earnings not taxed.......................... -- -- (2.8)
Effect of net operating loss and other carryforwards.......... (29.2) -- --
Decrease in valuation allowance............................... -- (8.3) (5.2)
Other......................................................... 2.2 1.3 --
----- ---- ----
8.0% 32.4% 32.2%
===== ==== ====
</TABLE>
The income tax benefit attributable to the use of net operating loss
carryforwards ("NOL"s) in the year ended 1993 was $2,129,000 and $47,000 in
1994.
Deferred income taxes result principally from amortization of management
contracts, investments in partnerships and the utilization of NOLs and passive
activity loss carryforwards.
F-17
<PAGE> 74
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................. $ 17,596 $ 15,288
Passive activity loss carryforwards.......................... 2,206 834
Reserves..................................................... 3,540 3,335
Other........................................................ 2,867 3,979
Valuation allowance.......................................... (25,522) (22,605)
-------- --------
Total deferred tax assets............................ 687 831
-------- --------
Deferred tax liabilities:
Management contracts......................................... (13,457) (13,982)
Investments in partnerships.................................. (1,910) (2,474)
-------- --------
Total deferred tax liabilities....................... (15,367) (16,456)
-------- --------
Net deferred tax liability..................................... $(14,680) $(15,625)
======== ========
</TABLE>
The Company estimates that, more likely than not, it will not realize a
substantial portion of the benefits of its deferred tax assets. Accordingly, it
has established a valuation allowance to reflect this uncertainty. A portion of
the valuation allowance was established upon the combination of Doubletree
Partners and DHC. In accordance with purchase accounting methodology, to the
extent the tax benefits to which this allowance relates are recognized, the
reduction in the valuation allowance will be applied to reduce goodwill. As of
December 31, 1995, the amount of the valuation allowance subject to this
treatment is approximately $6,500,000. During 1995, $1,530,000 was used and
credited to goodwill. None of this NOL was recognized in 1994.
The Company's federal NOLs of $40,979,000 expire as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT OF
YEAR OF EXPIRATION FEDERAL NOLS
---------------------------------------- ------------
<S> <C>
2004............................... $ 4,320
2005............................... 9,860
2006............................... 1,230
2007............................... --
2008............................... 13,086
2009............................... 12,483
-------
40,979
Passive loss carryforwards -- no
stated expiration................ 2,166
-------
$ 43,145
=======
</TABLE>
Total NOLs for state purposes are less than the amounts stated above due
primarily to shorter carryforward periods.
F-18
<PAGE> 75
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
The Company also has passive loss carryforwards that do not have a stated
expiration term. The tax benefit attributable to these federal and state NOLs
and passive loss carryforwards has been calculated considering the reduced
amount available for state purposes.
(16) COMMITMENTS AND CONTINGENCIES
Certain hotel management contracts provide that if a hotel does not achieve
agreed-upon performance levels, the Company may elect or may be required to fund
any performance shortfalls for a specified period of time. In general, if the
Company elects not to fund the shortfall, the hotel owner may elect to terminate
the management contract. If the Company elects to fund the shortfall, but
performance standards are not achieved at the expiration of the funding period,
the owner may elect to terminate the management contract at that time. The
Company has not been required to fund any shortfalls during the three year and
three month period ended March 31, 1996.
The Company has guaranteed certain mortgages, leases and construction bonds
up to $6,460,000 ($2,860,000 of which are collateralized by letters of credit).
The Company has also committed to lend up to $8,868,000, $7,709,000 to the owner
of the Somerset hotel, of which $1,409,000 is for renovations and $6,300,000 is
to provide bridge financing, if needed. The remaining loan commitments are to
three other hotels primarily for renovations.
The Company has a commitment to contribute an additional $3,127,000 to an
investment partnership formed for the purpose of acquiring hotel properties. The
Company has a 4.35% limited partnership interest and it is anticipated that at
least 50% of the properties acquired will be either managed and/or franchised by
the Company.
The Company is a defendant in various litigation matters arising from the
normal course of its operations. While it is not feasible to predict or
determine the ultimate outcome of these matters, it is the opinion of management
that their ultimate outcome is not likely to have a material adverse effect on
the results of operations and the financial position of the Company.
Metropolitan Life has indemnified the Company against any litigation
matters which occurred prior to the date of acquisition of MetHotels by DHC
(December 6, 1990), and certain indemnification by Canadian Pacific exists for
events which transpired from December 6, 1990 to December 16, 1993.
Four of the hotels leased by the Company are managed by others under
agreements with terms of ten to twenty years. Management fees are based on a
percentage of each hotel's revenues.
F-19
<PAGE> 76
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(17) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1994 1995 1996
------- ------- ---------
<S> <C> <C> <C>
Accounts payable...................................... $ 6,342 $ 5,592 $ 4,506
Payroll and related costs............................. 3,395 4,805 3,756
Leased and owned hotel expenses....................... 1,609 3,290 3,346
Deferred compensation................................. 2,702 2,106 2,052
Marketing costs....................................... 2,449 2,038 2,035
Business combination expenses......................... 1,013 2,555 1,731
Insurance expense..................................... 1,237 1,055 1,428
Professional fees..................................... 1,209 679 781
Sales tax............................................. 760 1,102 1,431
Other................................................. 1,789 1,850 1,521
------- ------- -------
$22,505 $25,072 $22,587
======= ======= =======
</TABLE>
(18) REIMBURSABLE EXPENSES
The Company is reimbursed for costs associated with providing central
reservations, sales and marketing, accounting, data processing, internal audit
and employee training services to managed hotels. The Company is also reimbursed
for central reservations and marketing services provided to franchised hotels.
Such costs primarily consist of personnel and related fringe benefits,
advertising, promotional fees and reservation service costs. Additionally, costs
of products sold to hotels and expenses of providing the Company's various
preferred vendor programs are included in reimbursable expenses.
F-20
<PAGE> 77
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(19) MANAGEMENT CONTRACTS
An analysis of management contract activity follows (in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1992....................................... $ 423
Contracts acquired at acquisition of DHC........................... 42,000
Amortization....................................................... (135)
-------
Balance at December 31, 1993....................................... 42,288
Contracts acquired................................................. 6,607
Contract conversions and terminations.............................. (1,718)
Amortization....................................................... (1,805)
-------
Balance at December 31, 1994....................................... 45,372
Contracts acquired................................................. 7,181
Contract conversions and terminations.............................. (562)
Amortization....................................................... (2,357)
-------
Balance at December 31, 1995....................................... 49,634
Contracts acquired (unaudited)..................................... 665
Amortization (unaudited)........................................... (827)
-------
Balance at March 31, 1996 (unaudited).............................. $49,472
=======
</TABLE>
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, notes and other receivables, accounts payable
and accrued expenses, accrued interest payable and income taxes payable, each as
included in the consolidated balance sheets under such captions. With the
exception of notes and other receivables and the investment in RFS Partnership
L.P. units, the carrying amounts of all other classes of financial instruments
approximate fair value due to the short maturity of those instruments or, in the
case of marketable equity securities they are carried at their estimated fair
value. The Company has determined that the fair value of its notes receivable is
not significantly different from their carrying value based on interest rate and
payment terms the Company would currently offer on notes with similar security
to borrowers of similar creditworthiness. RFS Partnership L.P. units, which are
convertible into REIT common shares, have a carrying value of $841,000 and an
estimated fair value of $1,197,000 at December 31, 1995.
F-21
<PAGE> 78
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(21) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1994 and
1995, restated to reflect the acquisition of RFS Management, is presented below
(in thousands except per share data). The sum of the individual quarterly data
may not equal the annual data due to rounding.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
JUNE
MARCH 31, 30, SEPTEMBER 30, DECEMBER 31,
--------- ------- ------------- ------------
<S> <C> <C> <C> <C>
1994
Total revenues....................... $23,303 $30,921 $41,084 $ 45,475
Net income........................... 1,884(a) 3,821(a) 4,180 3,350
Earnings per share................... $ 0.10(a) $ 0.21(a) $ 0.19 $ 0.15
Weighted average common and common
equivalent shares outstanding...... 18,228 18,228 21,900 21,938
</TABLE>
(a) The Company's effective tax rate for the quarters ended March 31
and June 30 was 29% and 25%, respectively, due to the organizational
structure of the Company prior to its initial public offering. Had a
35% rate been incurred, net income and earnings per share would have
been $1,648 and $0.09 per share and $3,073 and $0.17 per share,
respectively.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
JUNE
MARCH 31, 30, SEPTEMBER 30, DECEMBER 31,
--------- ------- ------------- ------------
<S> <C> <C> <C> <C>
1995
Total revenues....................... $48,590 $59,771 $61,899 $ 60,512
Net income........................... 3,645 5,742 5,606 2,798(b)
Earnings per share................... $ 0.17 $ 0.26 $ 0.25 $ 0.12
Net income-pro forma(c).............. $ 3,490 $ 5,360 $ 5,311 $ 4,575(d)
Earnings per share -- pro forma(c)... $ 0.16 $ 0.24 $ 0.24 $ 0.20(d)
Weighted average common and common
equivalent shares outstanding...... 21,910 22,057 22,443 22,472
</TABLE>
(b) Includes $2,565,000 of business combination expenses.
(c) Effective January 1, 1995 RFS Management elected to be taxed as a
Subchapter S Corporation for federal income tax purposes. As a result,
it was generally not liable for income taxes and its financial
statements for the year ended December 31, 1995 did not include a
provision for federal income taxes. A pro forma adjustment to each
quarter increasing the provision for income taxes by approximately
$0.8 million in the aggregate has been reflected in the 1995 pro forma
results.
(d) Excludes $2,565,000 of business combination expenses and provides
for a related increase in income tax expense.
F-22
<PAGE> 79
<TABLE>
<S> <C>
[PHOTO] [PHOTO]
Residence Inn Boston Harbor Hotel
Atlanta, Georgia Boston, Massachusetts
[PHOTO] [PHOTO]
Holiday Inn Carolina Inn
Crystal Lake, Illinois Chapel Hill, North Carolina
</TABLE>
<PAGE> 80
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No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of any offer to buy any securities
other than the shares of Common Stock to which it relates or an offer to, or a
solicitation of, any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
there has been no change in the affairs of the Company or that information
contained herein is correct as of any times subsequent to the date hereof.
--------------------------
TABLE OF CONTENTS
--------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Incorporation of Certain Documents by
Reference.......................... 3
Available Information................ 3
Prospectus Summary................... 4
Risk Factors......................... 10
Use of Proceeds...................... 16
Price Range of Common Stock.......... 17
Dividend Policy...................... 17
Capitalization....................... 18
Selected Consolidated Financial
Data............................... 19
Management's Discussion and Analysis
of Results of Operations and
Financial Condition................ 21
Business............................. 26
Management........................... 43
Principal and Selling Stockholders... 46
Description of Capital Stock......... 49
Underwriting......................... 52
Legal Matters........................ 53
Experts.............................. 53
Index to Financial Statements........ 54
</TABLE>
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- ------------------------------------------------------
- ------------------------------------------------------
3,682,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
MORGANSTANLEY & CO.
Incorporated
SCHRODER WERTHEIM & CO.
May 20, 1996
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