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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-24392
DOUBLETREE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 86-0762415
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
410 NORTH 44TH STREET
SUITE 700
PHOENIX, ARIZONA 85008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (602) 220-6666
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 3, 1997: $1,002,251,685
The number of shares of the Registrant's Common Stock outstanding as of
March 3, 1997 was 39,559,658.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR ITS 1997 ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON MAY 2, 1997 ARE INCORPORATED BY REFERENCE INTO PART
III AS SET FORTH HEREIN.
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TOTAL PAGES 55
EXHIBIT INDEX ON PAGE 53
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
Doubletree Corporation (the "Company" or "Doubletree") is one of the
largest full service hotel operating companies in the United States. At December
31, 1996, the Company managed, leased, or franchised 241 hotels with an
aggregate of 56,037 rooms in 39 states, the District of Columbia, the U.S.
Virgin Islands and Mexico. This represents a 108% and 83% increase in number of
hotels and aggregate room count, respectively, for the fiscal year ended
December 31, 1996 as compared to fiscal year ended December 31, 1995. Excluding
the Red Lion Acquisition and the RFS Acquisition (each of which is defined
below), this growth was 21% and 18%, respectively. The Company provides hotel
owners with management and franchise services under its Doubletree Hotels,
Doubletree Guest Suites, Doubletree Club Hotels and Club Hotels by Doubletree
(collectively "Club Hotels") brand names, as well as management services for Red
Lion hotels and other non-Doubletree brand hotels. At December 31, 1996, the
Company's portfolio of hotels included 58 Doubletree Hotels, 36 Doubletree Guest
Suites, 16 Club Hotels, 56 Red Lion hotels and 75 hotels operated by Doubletree
under third party brand names or as independent hotels.
In late 1995 and 1996, the Company announced several strategic
developments -- the acquisitions of RFS, Inc. and Red Lion Hotels, Inc., the
formation of a joint venture in Candlewood Hotel Company, L.L.C. ("Candlewood"),
the formation of a strategic alliance with Patriot American Hospitality, Inc.
and the introduction of the Club Hotel by Doubletree concept, each of which is
discussed in more detail in the "Recent Developments" section below. Unless the
context indicates otherwise, the discussion herein addresses the Company as of
December 31, 1996.
HISTORY
The Company's current hotel management and franchise business was formed on
December 16, 1993 with the acquisition of Doubletree Hotels Corporation ("DHC")
by Guest Quarters Hotel Partnership ("GQHP"), a general partnership, which was
renamed Doubletree Partners upon such acquisition (the "Combination
Transaction"). The Company was incorporated in Delaware in May 1994 to succeed
to the business of Doubletree Partners. Unless the context indicates otherwise,
all references herein to the "Company" or "Doubletree" refer to Doubletree
Corporation and its consolidated subsidiaries.
On June 30, 1994 (immediately prior to the initial public offering of the
Company's common stock (the "Common Stock")) the partners of Doubletree
Partners, other than Samantha Hotel Corporation ('Samantha") contributed their
general partnership interests to the Company and the owners of Samantha
contributed Samantha to the Company in consideration for 15,500,000 shares of
Common Stock in proportion to their partnership interests in Doubletree Partners
prior to such transfer (the "Reorganization"). As a result of the
Reorganization, the Company succeeded to all the assets, liabilities and
business operations of Doubletree Partners.
The principal executive offices of the Company are located at 410 North
44th Street, Suite 700, Phoenix, Arizona 85008, telephone (602) 220-6666.
RECENT DEVELOPMENTS
Doubletree recently has taken the following steps to implement and further
its business and growth strategies:
Acquisition of Red Lion. On November 8, 1996, the Company, through the
merger of a wholly-owned subsidiary of the Company with and into Red Lion
Hotels, Inc. ("Red Lion"), acquired all of the outstanding stock of Red Lion in
a transaction valued at approximately $1.2 billion. The Company paid $695.0
million in cash, repaid $124.0 million of existing Red Lion indebtedness, issued
7,381,588 shares of Common Stock (the "Red Lion Acquisition Shares") with a fair
value of approximately $292.0 million and assumed net liabilities of $90.0
million (the "Red Lion Acquisition"). As a result of the Red Lion Acquisition,
Red Lion became a wholly-owned subsidiary of the Company. The Board of Directors
of the Company was expanded to
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include two additional members designated by Red Lion, a California Limited
Partnership (the "Partnership"), an entity affiliated with Kohlberg Kravis
Roberts & Co. References herein to the Partnership include its wholly-owned
subsidiaries. See "The Red Lion Acquisition."
At December 31, 1996, the Company operated 56 full-service Red Lion hotels,
17 of which were owned, eight of which were operated pursuant to joint venture
agreements and 17 of which were leased pursuant to a long-term lease with the
Partnership. The remaining 14 hotels were operated pursuant to management
contracts, with 10 of such managed hotels owned by Red Lion Inns Limited
Partnership (the "MLP"), the general partner of which is a wholly-owned
subsidiary of the Company.
As a result of the Red Lion Acquisition, the Company expanded its size and
geographic presence which the Company believes will enhance Doubletree's
national brand awareness. The consolidation of the Company and Red Lion is
progressing as planned. The Company has integrated its management team with Red
Lion's and is in the process of adopting the best practices of each
organization. The Company intends to convert 40 to 45 of the Red Lion hotels to
the Doubletree brand. Four Red Lion hotels were converted to the Doubletree
brand in the first quarter of 1997 and the remainder are anticipated to be
converted at a rate of approximately 15 hotels per quarter. The Company believes
that due to Doubletree's national brand recognition, marketing strength, and
higher average daily rate ("ADR") as compared to Red Lion's, the conversion of
the Red Lion hotels to the Doubletree brand presents opportunities for
improvement in both ADR and occupancy rates. Management believes that the Red
Lion Acquisition has created a combined entity with the resources to compete
more effectively on a national basis; however, the Company will continue to be
subject to the competitive and economic factors associated with the lodging
industry. For a more detailed discussion of the Red Lion hotels, see "Hotels --
Red Lion Hotels."
Acquisition of RFS Management. In February 1996, Doubletree significantly
expanded its portfolio of non-Doubletree brand hotels with the acquisition (the
"RFS Acquisition") of RFS, Inc., a privately held hotel operator ("RFS
Management"). As a result of the RFS Acquisition, RFS Management became a
wholly-owned subsidiary of the Company. With the RFS Acquisition, Doubletree
acquired an independent hotel management company with experienced hotel
management personnel and an established infrastructure, which has allowed
Doubletree to pursue further non-Doubletree brand management contract and lease
opportunities. At December 31, 1996, RFS Management operated 64 hotels (the "RFS
Hotels"), 52 of which were leased and operated by RFS Management, four of which
were leased by RFS Management and operated by third party management, and eight
of which were managed for owners other than RFS Partnership, L.P., a limited
partnership (the "Landlord"). The RFS Hotels principally operate in the
limited-service and the extended stay segments of the lodging industry, comprise
10,120 rooms and are operated under such franchise brands as Holiday Inn,
Holiday Inn Express, Residence Inn by Marriott, Hampton Inn, Sheraton, Ramada
and Comfort Inn. See "Hotel Operations -- Non-Doubletree Brand Franchise
Agents." In addition, in connection with the RFS Acquisition, Doubletree entered
into an arrangement with RFS Hotel Investors, Inc., a leading hotel real estate
investment trust (the "REIT"), granting Doubletree the right to lease and manage
any hotels acquired or developed by the REIT or the Landlord during the ten
years following the RFS Acquisition, with limited exceptions (the "Right of
First Refusal"). The Right of First Refusal provides Doubletree with an
additional source of additions to Doubletree's hotel portfolio. In 1996, eight
hotels joined the Doubletree portfolio as a result of the Right of First
Refusal. At December 31, 1996, the REIT had five hotels under development which
will be subject to the Right of First Refusal. See "The RFS Acquisition."
Formation of Candlewood. In November 1995, Doubletree announced its
entrance into the mid-priced ($40-50 per night) extended stay segment of the
hotel market with its investment in Candlewood Hotel Company, L.L.C. (the
"Candlewood LLC"). The Candlewood LLC was formed to develop, own, manage and
franchise hotels containing fully furnished studio units designed to serve the
value-oriented extended stay guest. Mr. Jack DeBoer, the founder of Residence
Inns and whom the industry credits with creating the extended stay concept, was
the President and Chief Executive Officer of the Candlewood LLC. In August 1996,
Candlewood Hotel Company, Inc. ("Candlewood") was formed to succeed to the
business of the Candlewood LLC. In November 1996, Candlewood completed an
initial public offering of its common stock. In connection with the offering,
Doubletree's interest in the Candlewood LLC was converted into an equivalent
interest in Candlewood. Doubletree currently is entitled to nominate two
directors out of a six
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person board of directors, and currently owns approximately 29% of the
outstanding common stock of Candlewood. Mr. DeBoer is the President and Chief
Executive Officer of Candlewood. At December 31, 1996, there was one Candlewood
hotel in operation, eight Candlewood hotels under construction and 29 sites
under contract or letter of intent to become Candlewood hotels. Doubletree
believes that Candlewood provides it with an opportunity to participate in a
quickly expanding and high demand segment of the lodging industry. Candlewood is
in the preliminary stages of development, and there can be no assurance of its
success. See "Investments and Commitments."
Formation of Joint Venture Strategic Alliance With Patriot American
Hospitality, Inc. In August 1996, Doubletree and Patriot American Hospitality,
Inc. ("Patriot") announced the formation of a joint venture strategic alliance.
Pursuant to the strategic alliance, Doubletree and Patriot will work together to
identify hotels potentially suitable for acquisition by Patriot, which will then
be operated as Doubletree brand hotels or luxury non-Doubletree brand hotels, in
each case to be leased and/or managed by Doubletree. Patriot and Doubletree have
committed to invest an aggregate of approximately $180.0 million and $20.0
million, respectively, into the purchase of hotels as part of the strategic
alliance. The joint venture strategic alliance provides Doubletree with another
source of long-term hotel management and/or lease opportunities. As of December
31, 1996, the joint venture had successfully completed the acquisition of six
hotels that are or will be Doubletree brand hotels and as of December 31, 1996,
the Company had funded approximately $10.7 million of the $20.0 million
commitment to the strategic alliance. In the first quarter of 1997, the joint
venture completed the acquisition of two more hotels. Patriot recently announced
that it is acquiring, and will be converting into, a "paired-share" REIT, which,
once completed, will allow it to manage properties on its own behalf. Patriot
and the Company have reached an agreement in principle in which (i) the six
existing leases will be converted into management contracts in connection with
the Patriot "paired-share" transaction and (ii) pending and future transactions
will be operated by Doubletree under management contracts rather than leases.
The two transactions in the first quarter of 1997 closed under this new
management arrangement. Despite these acquisitions, there can be no assurance of
the joint venture strategic alliance's success. There is no assurance that
Doubletree's equity investment in any hotel that is purchased as part of the
strategic alliance will be profitable.
Introduction of Club Hotels by Doubletree. In January 1996, Doubletree
introduced "Club Hotels by Doubletree," a new hotel brand specifically targeted
at the frequent business traveler, which was developed by Doubletree utilizing
an innovative co-branding approach with Steelcase, Au Bon Pain and Kinko's.
Subsequent to the brand launch, Doubletree and Kinko's decided to end Kinko's
involvement in the brand. Doubletree expects to announce the substitution of a
new nationally branded business product service and supply provider to replace
Kinko's. Each hotel features a multipurpose Business Club ranging from 3,000 to
5,000 square feet in size. One portion of the Business Club is dedicated to the
nationally branded state of the art business center and contains equipment, such
as computer printers, fax machines, photocopiers and office and shipping
supplies. Each Business Club features private mini offices and small conference
rooms designed by Steelcase, and features an Au Bon Pain bakery cafe, where
guests may enjoy breakfast, lunch or dinner. Doubletree plans to grow the Club
Hotels by Doubletree 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 first two
conversions of hotels to Club Hotels by Doubletree, containing fully operational
Business Clubs, opened in Jacksonville, Florida and San Antonio, Texas in August
1996 and September 1996, respectively. At December 31, 1996, there were nine
additional hotels in the process of converting, or under contract to become,
Club Hotels by Doubletree.
THE LODGING INDUSTRY
Overview
Doubletree believes that the lodging industry is benefiting from an
improved supply and demand balance, which has led to overall profitability of
the lodging industry. Room supply growth in the lodging industry, particularly
in the principal segments in which Doubletree 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 an
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estimated 1.4% in 1993, 1.5% in 1994, 1.6% in 1995 and 2.1% in 1996. Increases
in occupancy rates (measured by occupied rooms) increased an estimated 3.1% in
1993, 4.0% in 1994, 2.9% in 1995 and 2.9% in 1996. Average daily room rates
increased an estimated 2.8%, 4.8%, 4.9% and 4.5%, respectively, during the same
periods. Due to the cyclical nature supply and demand in the lodging industry,
there can be no assurance that such increases will continue.
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 mid-price 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. Mid-price hotels typically do not include services such as extensive
meeting and banquet facilities or extensive food and beverage facilities.
Red Lion hotels compete mostly in the full-service segment of the lodging
industry. The Company's other 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.
HOTELS
Doubletree Hotels
Doubletree's full-service hotels are targeted at business travelers, group
meetings and leisure travelers. The total guest room revenue for the year ended
December 31, 1996 for Doubletree's full-service hotels was derived approximately
41% from group meetings, 36% from business travelers, and 23% from leisure
travelers. Doubletree believes these percentages are consistent with other
full-service hotel brands in the industry.
At December 31, 1996, Doubletree's full-service hotels included 58 hotels
in 22 states, the District of Columbia, U.S. Virgin Islands and Mexico, with a
total of 17,590 guest rooms. The hotels range in size from 120 to 632 rooms.
Room rates generally range from $45 to $280 per night depending upon location,
time of year and day of the week. These 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.
The following table sets forth certain information regarding the Doubletree
full-service hotels at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
HOTELS ROOMS
--------- ---------
<S> <C> <C>
Managed Hotels(1).................................... 38 12,233
Franchised Hotels(2)................................. 15 4,117
Leased Hotels(3)..................................... 5 1,240
== ======
Total...................................... 58 17,590
</TABLE>
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(1) The Company owns a minority joint venture interest in nine of such hotels.
(2) The Company owns a minority joint venture interest in one of such hotels.
(3) The Company owns a minority joint venture interest in one of such hotels.
Doubletree Guest Suite Hotels
The Doubletree Guest Suite 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. Doubletree's all-suite hotels are targeted
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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, 1996 for Doubletree's all-suite hotels
was derived approximately 45% from business travelers, 29% from group meetings
and 26% from leisure travelers.
At December 31, 1996, Doubletree's all-suite hotels included 36 Doubletree
Guest Suite hotels in 18 states and the District of Columbia, with a total of
7,773 guest rooms. The hotels range in size from 55 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.
The following table sets forth certain information regarding the Doubletree
Guest Suite all-suite hotels at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
HOTELS ROOMS
--------- ---------
<S> <C> <C>
Managed Hotels(1)...................................... 24 5,495
Franchised Hotels...................................... 11 2,039
Owned Hotels........................................... 1 239
== =====
Total........................................ 36 7,773
</TABLE>
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(1) The Company owns a minority joint venture interest in one of such hotels.
Club Hotels
Club Hotels are moderately-priced hotels primarily targeted at individual
business travelers. The total guest room revenue for the year ended December 31,
1996 was derived approximately 53% from business travelers, 23% from group
meetings and 24% from leisure travelers.
At December 31, 1996, the portfolio of Club Hotels included 16 hotels (two
of which were Club Hotels by Doubletree) in 10 states, with a total of 3,333
guest rooms. These hotels range in size from 158 to 399 rooms with room rates
generally ranging from $50 to $135 per night.
The following table sets forth certain information regarding Doubletree's
Club Hotels at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
HOTELS ROOMS
--------- ---------
<S> <C> <C>
Managed Hotels(1)...................................... 3 512
Franchised Hotels...................................... 11 2,313
Leased Hotels(2)....................................... 2 508
== =====
Total........................................ 16 3,333
</TABLE>
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(1) The Company owns a minority joint venture interest in one of such hotels.
(2) The Company owns a minority joint venture interest in two of such hotels.
Doubletree plans to grow its Club Hotels by Doubletree brand through the
acquisition of management contracts of unaffiliated underperforming hotels, a
focused franchising program and the conversion of certain existing Doubletree
Club Hotels. See "Recent Developments -- Introduction of Club Hotels by
Doubletree."
Red Lion Hotels
The Company's Red Lion brand hotels are targeted at business travelers,
group meetings and leisure travelers. The total guest room revenue for the year
ended December 31, 1996 for Red Lion hotels was derived approximately 56% from
business travelers, 33% from group meetings and 11% from leisure travelers.
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At December 31, 1996, the Company's Red Lion hotels included 56 hotels in
10 states with a total of 14,859 guest rooms. These hotels range in size from 58
to 850 rooms. Room rates generally range from $45 to $200 per night depending
upon location, time of year and day of the week. Red Lion 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.
The following table sets forth certain information regarding the Red Lion
hotels at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
HOTELS ROOMS
--------- ---------
<S> <C> <C>
Managed Hotels......................................... 14 4,519
Owned Hotels........................................... 17 3,755
Leased Hotels.......................................... 17 3,989
Joint Venture Hotels................................... 8 2,596
== ======
Total........................................ 56 14,859
</TABLE>
The Company is in the process of converting most of the Red Lion hotels to
one of the Doubletree brands. See "Recent Developments -- Acquisition of Red
Lion."
Other Non-Doubletree Brand Hotels
At December 31, 1996, Doubletree managed or leased 75 hotels under
non-Doubletree brands with a total of 12,482 rooms in 26 states, including
luxury, full-service, limited-service and extended stay hotels. Many of these
hotels became a part of the Doubletree hotel portfolio as a result of the RFS
Acquisition. See "The RFS Acquisition." These non-Doubletree brand hotels are
operated under brand names such as Hampton Inn, Residence Inn by Marriott,
Sheraton, Ramada, Holiday Inn, Holiday Inn Express and Comfort Inn or as
independent hotels. See "Hotel Operations -- Non-Doubletree Brand Franchise
Agreements."
The following table sets forth certain information regarding the Company's
other non-Doubletree brand hotels at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
HOTELS ROOMS
--------- ---------
<S> <C> <C>
Managed Hotels(1)...................................... 17 4,314
Leased Hotels.......................................... 58 8,168
== ======
Total........................................ 75 12,482
</TABLE>
- ---------------
(1) The Company owns a minority joint venture interest in one of such hotels.
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All Hotel Properties
The following table presents as of December 31, 1996 certain comparative
information with respect to the Company's hotel properties:
<TABLE>
<CAPTION>
OTHER NON-
DOUBLETREE DOUBLETREE
---------------------------------------- RED LION BRAND
FULL-SERVICE GUEST SUITES CLUB HOTELS HOTELS HOTELS TOTAL
------------ ------------ ------------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Number of Hotels(1)................. 58 36 16 56 75 241
Total Number of Rooms(1)............ 17,590 7,773 3,333 14,859 12,482 56,037
Average Number of Rooms Per
Hotel(1).......................... 303 216 208 265 166 232
Percentage of all Doubletree
Rooms............................. 31 14 6 27 22 100
Occupancy Percentage(2)(3)
Year 1994......................... 70.5 % 73.7 % 65.9 % 72.1 % 69.8 % 71.6 %
Year 1995......................... 71.3 74.8 66.2 72.7 71.8 72.4
Year 1996......................... 73.2 76.1 65.9 71.8 72.7 72.8
Average Daily Rate(2)(3)
Year 1994......................... $ 78.59 $ 95.49 $ 63.10 $ 70.52 $ 71.90 $ 76.44
Year 1995......................... 82.96 99.79 66.42 75.17 75.46 80.86
Year 1996......................... 88.97 107.67 71.24 80.65 81.09 86.94
REVPAR(2)
Year 1994......................... $ 55.38 $ 70.38 $ 41.59 $ 50.85 $ 50.16 $ 54.74
Year 1995......................... 59.16 74.66 43.99 54.64 54.20 58.56
Year 1996......................... 65.12 81.93 46.94 57.87 58.96 63.26
</TABLE>
- ---------------
(1) Includes all owned, leased, managed, franchised and properties operated
pursuant to joint venture agreements as of December 31, 1996.
(2) For the years ended 1994, 1995 and 1996, includes only information for
hotels continuously managed by Doubletree, RFS Management and Red Lion since
January 1, 1994.
(3) Based upon rooms occupied, excluding complimentary rooms.
The principal executive offices of Doubletree are located in Phoenix and
are occupied pursuant to a lease that expires March 31, 1998. In addition to its
executive offices, at December 31, 1996, Doubletree leased office space in
Vancouver (Washington), Memphis, Washington, D.C., Chicago, San Francisco, Los
Angeles, Cincinnati 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 Doubletree.
MARKETING AND SALES
To enhance Doubletree's brand image, recognition and national presence, the
Company launched its multi-million dollar "Sweet Dreams" marketing campaign in
February 1995. The "Sweet Dreams" campaign continues to evolve and is intended
to increase awareness among business travelers of Doubletree's distinguishing
characteristics and features Doubletree's chocolate chip cookie -- a symbol of
Doubletree's commitment to provide warm and caring service to its guests.
According to Nationwide Surveys, Inc., 1996 brand awareness of the Doubletree
brand name in the business travel segment was at an all-time high of 82%.
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.
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Subject to the receipt of necessary third party approvals, Doubletree is in
the process of converting most of the Red Lion hotels to one of the Doubletree
brands by the end of 1997, thereby significantly increasing its market coverage
for Doubletree's full service product, particularly in the western United
States. Based on its examination of the Red Lion hotels, Doubletree believes
that such properties are generally in well maintained condition and of high
quality. The Company intends to convert 40 to 45 of the Red Lion hotels to the
Doubletree brand. Four Red Lion hotels were converted to the Doubletree brand in
the first quarter of 1997 and the remainder are anticipated to be converted at a
rate of approximately 15 hotels per quarter. Doubletree is currently assessing
the future of the Red Lion hotels which do not convert to the Doubletree brand
name as well as the future of the Red Lion brand name.
Doubletree provides a simple and cost effective means for making
reservations through its toll free telephone service. Doubletree operates
reservation centers in Vancouver (Washington) and Phoenix. Doubletree has
commenced the integration of Doubletree's reservation system into Red
Lion's -- capitalizing on its state of the art technology. Doubletree promotes
its hotels to reservation makers, including all major airline systems and over
115,000 travel agencies globally.
Doubletree's marketing and sales objective for 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 non-Doubletree brand franchised hotel, each such hotel takes advantage
of the advertising and promotional strength of its particular franchise
organization.
Doubletree's National Sales Organization includes offices in Chicago, Los
Angeles, Sacramento, San Francisco, Philadelphia, Washington, D.C., Phoenix,
Vancouver (Washington) and Mexico City. Additionally, Doubletree is represented
internationally through marketing alliances. Doubletree uses a centralized
telemarketing group, is represented at major trade shows in the United States
and abroad and specifically targets Fortune 500 companies and large national and
regional associations.
HOTEL OPERATIONS
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),
local sales and marketing, purchasing and budgeting. In exchange for these
services, the Company receives a base fee, typically tied to the hotel's
revenues. In addition, certain of the Company's management contracts provide for
the Company to receive an incentive fee based on achieving specified operating
performance goals. Pursuant to the management contracts, the Company also
typically provides certain centralized corporate services for which it is
reimbursed at cost, including reservations, national sales and marketing, public
relations, centralized accounting services, management information systems,
internal audit and specialized training. The hotel owner may purchase hotel
supplies from the Company, including brand-specific products, for which the
Company earns a profit. Additionally, the Company has capitalized on
opportunities which leverage its buying power by implementing several purchasing
agreements that lower the cost of products to the hotel owner while concurrently
providing the Company with a fee for administering the program. The Company also
provides design, construction and other technical services for a fee. The hotel
owner generally is 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 generally is required to provide a certain
percentage of hotel revenues for capital replacement. 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. See "Insurance."
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 its 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.
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At December 31, 1996 the Company operated 10 Red Lion brand hotels pursuant
to a management contract with Red Lion Inns Limited Partnership (the "MLP")
expiring in 2062, including all renewal options. A wholly-owned subsidiary of
the Company is the general partner of the MLP. The Company's compensation under
the management agreement with the MLP is comprised of an annual base management
fee equal to 3% of gross revenues of the hotels and an annual incentive
management fee. The annual incentive management fee is a percentage of adjusted
operating profit, subject to increase if certain operating profits targets are
met.
Beginning January 1, 1998, federal tax regulations mandate that the MLP
become subject to corporate taxes on its income. The MLP is not currently a
taxable entity. The payment of income taxes by the MLP will not reduce cash
available for payment of any fees, including the incentive management fee, due
to the Company under the MLP management contract. The payment of income taxes by
the MLP will, however, directly reduce cash available for distributions to the
partners in the MLP and cash available to repay advances owed to the Company.
Distributions to partners after December 31, 1997 will be considered taxable
dividends. The general partner of the MLP is currently assessing alternatives
relating to this change in tax status, but no assurance can be provided that any
actions taken will lessen the impact of such taxes.
The balance of the Company's management contracts are with a variety of
different owners, the largest portfolio of which is seven hotels managed on
behalf of one owner or its affiliates. The average remaining terms of the
Company's management contracts (excluding the MLP management contract) is
approximately 11 years.
Management of the Company's hotels is coordinated from Doubletree's
headquarters in Phoenix, with a regional operations office in Vancouver
(Washington) and an accounting office in Cincinnati.
Doubletree Franchise Agreements
Doubletree's franchised hotels are licensed under the Doubletree,
Doubletree Guest Suites and Club Hotels brands and include hotels in the
full-service, all-suite and mid-priced segments of the hotel industry. At
December 31, 1996, Doubletree franchised 37 hotels, representing 8,469 guest
rooms. Until 1995, Doubletree 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 Doubletree's brand names. In 1995, Doubletree
created a franchise sales organization to capitalize on additional franchising
opportunities as awareness of the Doubletree brand increased. Doubletree'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, Doubletree intends to take advantage of franchising opportunities on a
selective basis and expects that the percentage of franchised hotels in its
system will increase.
Doubletree'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 Doubletree's
centralized corporate services. Doubletree's franchise agreements have average
remaining terms of approximately 10 years. Many of Doubletree's franchisees
purchase hotel supplies from Doubletree, including brand-specific products.
Non-Doubletree Brand Franchise Agreements
Of the 75 non-Doubletree brand hotels, 69 are licensed to operate under
franchise agreements, including 17 hotels licensed as Hampton Inn hotels, 12
hotels licensed as Residence Inn by Marriott hotels, 11 hotels licensed as
Holiday Inn hotels, nine hotels licensed as Holiday Inn Express hotels, eight
hotels licensed under other brands, seven hotels licensed as Comfort Inn hotels,
and five hotels licensed as Sheraton hotels. 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. Sheraton is a
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registered trademark of ITT Corporation. The Company as lessee holds the
franchise license for each hotel it operates and is responsible for paying the
franchise fees.
Generally, each franchise agreement gives the Company and/or the hotel's
owner the right to operate the particular hotel under a franchise for an initial
term of between 10 and 20 years. The franchise agreements typically provide for
termination at the franchisor's option upon the occurrence of certain events.
With respect to most of the franchise agreements the Company and/or the hotel's
owner is entitled to terminate the franchise agreement by giving at least 12
months notice and paying a specified amount of liquidated damages. The franchise
agreements under which the Company is a franchisee generally impose similar
obligations on Doubletree as those the Company imposes on its franchisees.
Owned Hotels
At December 31, 1996, the Company owned and managed 18 hotels, 17 of which
were Red Lion brand hotels and one of which was a Doubletree Guest Suite hotel,
representing 3,994 rooms. The Company is responsible for all aspects of these
hotels, including, without limitation, all of the costs associated with their
operation. The Company also receives substantially all of the revenues generated
by its owned hotels.
The Company is subject to varying degrees of risk generally related to
owning real estate. In addition to general risks related to the lodging
industry, these risks include, among others, changes in national, regional and
local economic conditions, inflation and its effect on operating costs, local
real estate market conditions, changes in interest rates and in the
availability, cost and terms of financing, the potential for uninsured casualty
and other 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. Moreover, real
estate investments are relatively illiquid, which means that the ability of the
Company to vary its portfolio of hotels in response to changes in economic and
other conditions may be limited.
It is the Company's goal not to be the long-term owner of real estate. The
Company intends to improve the operating results of the Company's owned hotels
and realize their appreciated value through their sale over approximately the
next 18 months.
Leases
Under the Company's leases, the Company leases the hotel from its owner and
is responsible for all aspects of the hotel's operations, once again including
guest services, staffing at the hotel, sales and marketing, accounting
functions, purchasing and budgeting. As the lessee of a hotel, the Company
recognizes all revenues and substantially all expenses associated with the
hotel's operations. Typically, other than real estate taxes, casualty insurance
costs, maintenance of underground utilities and structural elements costs,
furniture, fixtures and equipment and other capital improvements costs, each of
which are the landlord's obligation, the Company is required to pay all of the
costs associated with operating the hotel, including rent, personal property
taxes, utility costs, employee liability costs, liability insurance costs and
the like. The Company is entitled to retain all revenues derived from the
operation of a leased hotel, subject to the payment of its obligations under the
lease, including rent. 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. There can be no assurance
that any particular lease will be profitable for the Company after the payment
of its obligations under the lease.
In addition, most of the Company's leases typically provide that the
Company indemnify its landlord against certain liabilities resulting from the
leasing, operation or use of the hotel. Examples of these liabilities may
include (i) injury to persons or property at the hotel, (ii) environmental
liability caused by the Company and (iii) liability resulting from the sale of,
consumption of alcoholic beverages at the hotel.
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The Percentage Leases
At December 31, 1996, the Company leased 56 hotels, representing 7,982
rooms, pursuant to substantially similar leases (the "Percentage Leases") with
the Landlord (see, "The RFS Acquisition"). Four of the hotels leased pursuant to
Percentage Leases are managed by third parties. Each of the Percentage Leases
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 1996, the base rent component of the Percentage Lease expense was
approximately 42% of total Percentage Lease expense. Top percentage rents ranged
from 50% to 76.5% of incremental room revenue. For the year ended December 31,
1996, room revenue for each of the hotels subject to the Percentage Leases
exceeded the amount required to trigger the top tier of percentage rent. If the
Landlord enters into an agreement to sell a hotel, it may terminate a Percentage
Lease and either (i) pay Doubletree the fair market value of Doubletree's
leasehold interest or (ii) offer to lease to Doubletree a substitute hotel on
terms that would create an equivalent 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
Doubletree or an affiliate of Doubletree (only with respect to those leases that
were in place at the time of the closing of the RFS Acquisition), (ii) the
failure of RFS Management to maintain a minimum net worth of $15.0 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
Doubletree, of the franchise agreement with respect to any hotel. See "The RFS
Acquisition." If an event of default occurs and continues beyond any cure
period, the Landlord may terminate the Percentage Leases as well as the Right of
First Refusal. The Landlord has indemnified RFS Management against undisclosed
matters and certain environmental liabilities, other than RFS Managements' acts
or grossly negligent failures to act.
The Partnership Lease
At December 31, 1996, the Company leased 17 Red Lion brand hotels,
representing 3,989 rooms, pursuant to a long-term lease with the Partnership
(the "Partnership Lease"), which was entered into on August 1, 1995. The initial
term of the Partnership Lease is 15 years from August 1995, subject to earlier
termination by the Partnership upon the occurrence of one or more Events of
Default (as defined in the Partnership Lease). In addition, the Company has the
option to extend the Partnership Lease on a hotel-by-hotel basis for five
additional five year periods on the same terms. Rental payments under the
Partnership Lease consist of base rent, payable quarterly, and additional rent
payable annually, if applicable. The base rent for all of the hotels is $15.0
million per year. The additional rent for the hotels will be equal to 7.5% of
the amount, if any, by which the aggregate Operating Revenues (as defined in the
Partnership Lease) for all of the hotels for the given year exceeds the
aggregate Operating Revenues at all such hotels for the twelve month period
ended September 30, 1996. This long-term arrangement allows the Company to
retain all of the benefit from any increase in operating income from these
properties during the term of the Partnership Lease, subject to the payment of
Additional Rent. The Partnership has the right to sell all of its hotels to one
or more third parties, subject to the terms of the Partnership Lease. Upon any
sale of a hotel by the Partnership, the hotel would be leased under a stand
alone lease which would be modified to provide, among other things, for a
calculation of additional rent based on the Gross Revenues (as defined in the
Partnership Lease) of that hotel alone. The Partnership has informed the Company
that it has entered into an agreement to sell all of the hotels subject to the
Partnership Lease to a third party buyer. The Partnership has acknowledged in
writing the Company's intention to change the name of each of the hotels to a
Doubletree brand name and confirmed that such action would not constitute a
breach of the Partnership Lease.
Other Leases
At December 31, 1996, the Company leased nine hotels, pursuant to leases
other than the Percentage Leases and the Partnership Lease. Such leases contain
varying terms, but are generally "triple net" leases, the terms of which are in
substantial conformity to the general description above in "Hotel
Operations -- Leases".
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Joint Ventures
At December 31, 1996, the Company owned at least a 50% interest in eight
joint ventures (five of which it controls), each of which owns a hotel,
representing 2,596 rooms. In addition, at December 31, 1996, the Company owned a
minority non-controlling interest in eight joint ventures which own, directly or
indirectly, 16 hotels, representing 4,424 rooms.
In addition to its ownership interest in the joint ventures, the Company is
responsible for the day-to-day operations of the hotels owned by the joint
ventures (with the exception of one franchised hotel with 374 rooms) and
receives management fees for operating the hotels. Under each joint venture
agreement or separate management contract with respect to a hotel, the Company's
compensation is comprised of either an annual base management fee, an annual
incentive management fee (based on a percentage of cash flow or operating
profit) or both. The Company has made significant advances to certain of the
joint ventures. Repayment of these advances receives priority distribution from
the cash flow distributable to the joint venture's partners.
INVESTMENTS AND COMMITMENTS
The Company makes selective debt and equity investments (collectively
"Investments") in the underlying hotels that it leases or manages as a means of
obtaining and enhancing the profitability of its leases or management contracts.
For many of these same purposes, 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
other than to the hotel property and if secured, are subordinate. The Company
may 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 may also make guarantees of hotel
performance to an owner, which guarantees normally are limited in time or
amount. The Company may also make payments directly to the hotel owner, normally
in consideration of special financial or other accommodations to the Company in
management contract terms and conditions, which payments are capitalized and
amortized. 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; however, such Investments and commitments often are characterized
by enhanced risk.
At December 31, 1996, the Company had minority/non-controlling interests in
16 partnerships, the majority of which own hotels and the remainder of which own
retail or industrial properties. The Company's percentage of ownership in such
partnerships ranges from less than 1% to 50% and at December 31, 1996, had an
aggregate book value of $58.2 million.
At such date, the Company also had loans outstanding to certain hotel
owners with an aggregate book value of $45.1 million, and had guaranteed certain
mortgages, leases and construction bonds for hotel owners up to $4.9 million
($1.0 million is collateralized by letters of credit). Additionally, the Company
has approximately $5.5 million of bonds outstanding as collateral for the
payment of claims arising out of workers' compensation claims at its leased or
managed hotels.
As a result of the Red Lion Acquisition the Company will now be required to
invest substantially in the renovation and general upkeep of its owned hotels
and the hotels in which it has a controlling joint venture interest.
Additionally, the Company anticipates spending $10.0 million to $15.0 million
during 1997 to convert the majority of the Red Lion hotels to the Doubletree
brand name. Accordingly, investments in property and equipment will increase
substantially in 1997 as compared to historical levels of capital expenditures
made when the Company principally managed or leased hotel properties. At
December 31, 1996, the Company had commitments relating to capital improvement
projects aggregating approximately $3.9 million.
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 December 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. Additionally, the Company had
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investments in the REIT's common stock and partnership units of the Landlord
with a net book value of $1.5 million. At such date, the Company had a
commitment to invest, subject to certain conditions, an additional $2.0 million
in Thayer Hotel Investors II ("Thayer"), a limited partnership which invests in
hotel properties and for which the Company manages certain hotels. The Company
has a 4.35% limited partnership interest in Thayer. 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.
The Company may also make Investments in other lodging industry companies
for strategic reasons and to enhance the Company's value. Commencing in November
1995 and continuing through November 1996, the Company made investments in the
Candlewood LLC. Prior to Candlewood's initial public offering in November 1996
the Company's investment in the Candlewood LLC was structured as an equity
contribution with the Company earning a preferred return. In connection with the
initial public offering, the Company's contributions in excess of $200,100 and
its preferred return were converted to an interest bearing note in the amount of
approximately $12.1 million plus interest (the "Candlewood Note"). In addition,
the Company agreed to extend to Candlewood a five-year, $15 million subordinated
credit facility of which amounts outstanding under the Candlewood Note
constitute a part. Amounts outstanding under the credit facility and the
Candlewood Note bear interest at rates of 7% per annum for the first 12 months
following contribution, 10% per annum for second 12 months following
contribution and 15% per annum thereafter. At December 31, 1996, the aggregate
amount outstanding under the credit facility (including the Candlewood Note) was
approximately $12.5 million. In addition, in August 1996 the Company committed
to provide credit support for a loan facility that will be utilized by
Candlewood to arrange to provide construction and permanent financing to
Candlewood franchisees on terms that, in most cases, are much more attractive
than those which the franchisees could obtain on their own. In providing such
credit support, the Company's maximum exposure on any one Candlewood franchise
will be approximately $1.0 million, with the aggregate amount of exposure for
all such credit support capped at between $20.0 million and $30.0 million. At
December 31, 1996, the loan facility had not been utilized.
Also in August 1996, the Company formed a joint venture strategic alliance
with Patriot, pursuant to which the Company and Patriot will seek to identify
hotels potentially suitable for acquisition by Patriot and to be operated as the
Company brand hotels or luxury non-Doubletree brand hotels, in each case to be
leased and/or managed by the Company. The Company has agreed to invest
approximately 10% of the equity in each hotel that is purchased as part of the
joint venture strategic alliance up to an aggregate of $20.0 million. As of
December 31, 1996, the Company had invested $10.7 million in the joint venture.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
THE RED LION ACQUISITION
On November 8, 1996, the Company consummated the Red Lion Acquisition. As a
result of the Red Lion Acquisition, Red Lion became a wholly-owned subsidiary of
the Company. The Red Lion Acquisition presented the Company with the opportunity
to augment its management team with individuals from Red Lion's management team.
As a result of the Red Lion Acquisition, the Board of Directors of the Company
was expanded to include Messrs. Edward A. Gilhuly and Michael W. Michelson, who
were designated by the Partnership.
At December 31, 1996, the Company operated 56 full-service Red Lion brand
hotels, 17 of which were owned, eight of which were operated pursuant to joint
venture agreements and 17 of which were leased pursuant to the Partnership
Lease. The remaining 14 hotels were operated pursuant to management contracts,
and 10 of such managed hotels are owned by the MLP, the general partner of which
is a wholly-owned subsidiary of the Company, and are managed by the Company
pursuant to a management agreement with the MLP. See "-- Management Contracts."
To raise the funds required to consummate the Red Lion Acquisition, the
Company (i) borrowed $493.2 million under a term loan and revolving credit
facility committed by Morgan Stanley Senior Funding, Inc. and the Bank of Nova
Scotia (the "New Credit Facility"); (ii) raised approximately $210.7 million
from an equity offering of 5,600,000 shares of the Company's Common Stock; (iii)
raised $100.0 million through an equity investment by the Trustees of General
Electric Pension Trust ("GEPT") whereby GEPT purchased
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2,627,533 shares of Common Stock and was issued warrants to purchase 262,753
shares of Common Stock in return for its $100.0 million investment (the "GEPT
Equity Investment"); and (iv) utilized $34.2 million of existing cash on hand.
Prior to the consummation of the Red Lion Acquisition, the Partnership
owned 66.7% of the then outstanding shares of common stock of Red Lion. As a
result of the Red Lion Acquisition, the Partnership received 4,836,260 shares of
the Company's Common Stock as well as approximately $445.2 million in cash, for
a total of approximately $636.5 million in aggregate consideration.
THE RFS ACQUISITION
On February 27, 1996, Doubletree acquired all of the outstanding stock of
RFS Management in exchange for 2,727,811 shares of Doubletree Common Stock. At
December 31, 1996, RFS Management operated 64 hotels 52 of which were leased and
operated by the Company, four of which were leased and operated by third party
management, and eight of which were managed for owners other than the Landlord.
The sole general partner and approximately 98.6% owner of the Landlord is the
REIT. The 64 hotels, principally operating in the limited-service and extended
stay segments of the market, comprise approximately 10,120 rooms and are
operated under such franchise brands as Holiday Inn, Holiday Inn Express,
Residence Inn by Marriott, Comfort Inn, Hampton Inn, Ramada and Sheraton.
In connection with the RFS Acquisition, Doubletree and the REIT entered
into agreements, pursuant to which Doubletree purchased the 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. Doubletree 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 ten 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
Doubletree. In the event that Doubletree does not initially agree to such terms
or declines to lease the hotel, Doubletree 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 Doubletree and redeeming
any REIT Preferred Shares then owned by Doubletree; provided, however, if the
termination occurs within ten years after the closing of the RFS Acquisition,
the Landlord must pay to Doubletree an amount equal to $5.0 million minus
$41,667 for each calendar month which has passed during such ten year period and
the Landlord pays to Doubletree the fair market value of the then existing
Percentage Leases, based upon the remaining length of their terms.
Until the earlier of the expiration of ten years following the closing of
the RFS Acquisition or the date of the redemption or conversion of the REIT
Preferred Shares, without the prior written approval of the Landlord, Doubletree
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 Doubletree. The
foregoing restriction does not restrict any change in control or ownership of
Doubletree.
In November 1996, the REIT engaged in a financing transaction
collateralized by the Landlord's interest in certain of the Percentage Leases.
In connection with such transaction, the Landlord transferred its lessor
interest in 15 of the Percentage Leases into a bankruptcy remote subsidiary, and
at the request of the REIT, the Company also transferred its lessee interest
under such Percentage Leases (as well as the management contracts relating to
such hotels) into a bankruptcy remote subsidiary of the Company.
THE RENAISSANCE TRANSACTION
On January 5, 1997, the Company entered into a Memorandum of Understanding
for the acquisition of Renaissance Hotel Group N.V. ("Renaissance") in a
transaction valued at $890.0 million including assumed debt of $70.0 million.
The Memorandum of Understanding provided that in the event Renaissance entered
into a merger or acquisition agreement with a party other that the Company
within four months, the Company
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was to receive a breakup fee of $15.0 million. In February 1997, Renaissance
pursued discussions with another party and on February 20, 1997, the Company
received the $15.0 million breakup fee. After payment of expenses associated
with the Company's acquisition efforts, the balance at the cash received will be
available for general corporate purposes.
COMPETITION
The Company's managed and franchised hotels are in competition for guests
with a wide range of lodging facilities offering full-service, limited-service
and all-suite 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. There can be no assurance that new
or existing competitors will not significantly expand or improve facilities in a
market in which the Company's hotels compete, thereby adversely affecting the
Company's operations.
The Company also competes for management contracts, leases and franchise
agreements with other hotel management companies and national brand franchisers.
Some of the larger hotel chains with which the Company competes include
Marriott, Sheraton, Hyatt, Hilton, Westin, Wyndham and Embassy Suites. In
addition, many of its competitors are hotel management companies that do not
have their own brand.
The Company believes its ability to offer both hotel management services
and a recognized brand name gives it an advantage over its competitors without
their own brand because hotel owners who contract with such competitors are
required to pay two separate fees, which the Company believes are, in most
cases, in excess of the Company's single fee. The Company also believes that
some of its larger competitors are constrained in pursuing new management
contract opportunities in certain areas by the proximity of their own existing
hotels. The Company is large enough to benefit from a nationally recognized
brand; however, there are still a significant number of available markets in
which the Company is not yet represented.
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 beverages (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. 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. The Company believes
that the hotels that it owns or that are under its management are substantially
in compliance with these requirements; however, a determination that such hotels
are 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 these hotels into compliance. These and other initiatives could
adversely affect the Company as well as the hotel industry in general.
ENVIRONMENTAL MATTERS
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. For example, liability may arise as a result of
the historical use of a site or from the migration of contamination from
adjacent or nearby properties. Any such contamination or liability may also
reduce the value of the property. In addition, 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
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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 managed, leased or franchised by the
Company, the Company may be potentially liable for any such costs; there can be
no assurance that there are no environmental liabilities or claims of which the
Company is unaware or that the current condition of the Company's properties
have not been or will not be affected by the historical or current uses of such
properties or the activities in the vicinity of such properties or that
liability resulting from non-compliance or other claims relating to
environmental matters will not have a material adverse effect on the Company.
Pursuant to the Partnership Lease, the Partnership and its affiliates are
indemnified for any matter arising by reason of or in connection with violations
of Environmental Laws, discharges, disposal or releases of Hazardous Materials,
presence of Hazardous Materials, including any which are the result of off-site
migration onto the Red Lion hotels subject to the Partnership Lease, and certain
exposures to Hazardous Materials (as such terms are defined in the Partnership
Lease) which exist at or are released from any of such hotels prior to or during
the term of the Partnership Lease. Such indemnities will survive the termination
of the Partnership Lease. In addition, the Partnership and its affiliates were
indemnified by Red Lion from and against any and all liabilities, costs, losses
and damages (including, without limitation, interest, penalties and costs of
mitigation) incurred in connection with any environmental laws arising out of
any event or condition relating to the assets, liabilities and businesses
contributed by it in the formation of Red Lion. Pursuant to a partnership
services agreement among Doubletree, Red Lion and certain affiliates at Red
Lion, Doubletree has agreed to guarantee Red Lion's indemnity obligation to the
Partnership following the effective time of the Red Lion Acquisition.
Some of the Red Lion hotels are on, adjacent to or near properties that
have contained in the past or currently contain underground storage tanks and/or
above-ground storage tanks used to store petroleum products or other hazardous
or toxic substances. Monitoring wells have been installed at some of these
sites. In addition, certain of the Red Lion hotels are on, adjacent to or near
properties upon which others have engaged or may in the future engage in
activities that may release petroleum products or other hazardous or toxic
substances into the soil or groundwater. One of the Red Lion hotels is located
on property that was used as a landfill. The state agency responsible for
oversight of potentially contaminated properties has determined the leachate
from the landfill has contaminated groundwater, and the state agency has placed
the landfill on the list of sites where a release of hazardous substances has
been confirmed. Although the state agency has not placed the landfill on the
list of sites requiring investigation or remediation, there can be no assurance
that the Company will not be required in the future to investigate or remediate
any contamination resulting from the landfill.
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," "Red Lion," "Red Lion
Inn," "Red Lion Hotel" 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 Company's material marks are registered, or are on application for
registration, with the United States Patent and Trademark Office. In connection
with the sale of Red Lion in 1985, the use of the Red Lion trademark and central
reservations system was licensed to one of the founders of Red Lion for the
operation of certain Red Lion hotels in Nevada. Under the terms of the current
license agreement, the Company licenses the Red Lion name and Red Lion central
reservation system to two hotels in Nevada and a hotel in Wyoming (which are not
included in the 56 Red Lion hotels) for which the Company receives an annual
license fee of $25,000 per hotel. The license agreement terminates with respect
to the hotel in Wyoming at such time as a Red Lion hotel is opened in the
Jackson Hole area of Wyoming and otherwise expires with respect to all of these
hotels, two years after the earlier of the death of the founder or transfer of
the founder's interests in the hotels.
The Company knows of approximately nine lodging and food service
establishments located in the United States that use "Red Lion" in their names
(some of which may have used the name before the Red Lion chain was
established), but which have no existing or historical relationship with Red
Lion.
16
<PAGE> 18
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 and property, earthquake
and business interruption insurance, that it believes is appropriate for a
company in the hotel 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 December 31, 1996, the Company had approximately 23,200 full-time
employees and 5,800 part-time employees. Of these full-time employees,
approximately 800 of these employees are employed at the corporate level and
approximately 22,400 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 operations of the hotel property.
Corporate personnel are paid directly by the Company. Employees at four of the
Company's managed hotels are members of labor unions. The Company believes its
ongoing labor relations are good.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's initial public offering of Common Stock was effected as of
July 1, 1994. The Company's Common Stock is listed on the Nasdaq National Market
under the symbol "TREE." The following table sets forth, for the calendar
periods indicated, the rage of high and low closing prices for the Common Stock,
as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
1995 1996
------------------ -----------------
HIGH LOW HIGH LOW
------ ------- ------ ------
<S> <C> <C> <C> <C>
1st Quarter.................................... $20.25 $ 16.25 $28.50 $22.75
2nd Quarter.................................... $22.00 $ 18.75 $35.75 $26.50
3rd Quarter.................................... $24.75 $18.938 $40.38 $30.75
4th Quarter.................................... $26.38 $ 20.50 $47.50 $39.25
</TABLE>
The closing sales price of the Company's Common Stock on March 3, 1997 was
$41.50. The approximate number of stockholders of record on March 3, 1997 was
500.
The Company has not declared or paid any dividends on its Common Stock
since its inception and does not currently plan to declare or pay any dividends.
The payment of dividends in the future will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements and such other factors as the Board of
Directors deems relevant. The Company is currently prohibited under the New
Credit Facility from paying cash dividends or other distributions.
17
<PAGE> 19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Not covered by Report of Independent Auditors)
The following tables present selected historical consolidated financial
information for the Company and its Predecessor (Samantha Hotel Corporation
("Samantha"), the entity which owned 92% of GQHP prior to the Combination
Transaction). The 1992 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 results of operations for Red
Lion have been included commencing November 8, 1996 through December 31, 1996.
The following tables also present pro forma information for the years ended
December 31, 1995 and 1996, giving effect to the Red Lion Acquisition as if it
had occurred on January 1, 1995. The selected consolidated financial data should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the "Unaudited Pro Forma Consolidated Statements of
Operations". The selected historical consolidated financial information
presented below as of and for the years ended December 31, 1994, 1995 and 1996
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, 1992 and 1993 has been derived from the
audited financial statements of Samantha.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
PREDECESSOR(1) DOUBLETREE
----------------- -------------------------------------------------------------
ACTUAL ACTUAL PRO FORMA(3)
----------------- ------------------------------------ ----------------------
1992 1993 1994 1995 1996(2) 1995 1996
------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Management and franchise fees.......... $ 8,556 $10,612 $ 26,330 $ 30,082 $ 38,621 $ 41,171 $ 49,341
Owned hotel revenues................... 3,786 9,943 92 7,081 38,350 219,569 228,362
Leased hotel revenues.................. 5,932 14,923 73,769 141,942 205,163 274,154 326,594
Purchasing and service fees............ -- 329 10,746 16,487 19,848 61,611 63,365
Other fees and income.................. 419 2,547 1,545 994 2,953 1,235 3,160
------- ------- -------- -------- -------- -------- --------
Total revenues.................. 18,693 38,354 112,482 196,586 304,935 597,740 670,822
------- ------- -------- -------- -------- -------- --------
Operating costs and expenses:
Corporate general and administrative
expenses............................. 5,683 7,485 11,879 14,901 18,079 25,811 24,882
Owned hotel expenses................... 2,810 6,400 101 6,049 27,889 148,500 150,376
Leased hotel expenses.................. 4,972 14,266 68,981 132,644 190,797 242,394 287,584
Purchasing and service expenses........ -- 620 9,807 13,437 14,796 56,081 56,066
Depreciation and amortization.......... 599 1,572 2,943 4,686 12,018 47,155 48,358
Business combination expenses.......... -- 1,865 -- 2,565 -- -- --
------- ------- -------- -------- -------- -------- --------
Total operating costs and
expenses...................... 14,064 32,208 93,711 174,282 263,579 519,941 567,266
------- ------- -------- -------- -------- -------- --------
Operating income......................... 4,629 6,146 18,771 22,304 41,356 77,799 103,556
Interest expense....................... -- (1,228) (831) (227) (6,648) (42,541) (42,290)
Interest income........................ 159 254 1,630 4,147 5,561 9,217 11,113
------- ------- -------- -------- -------- -------- --------
Income before income taxes and minority
interest............................... 4,788 5,172 19,570 26,224 40,269 44,475 72,379
Minority interest share of net (income)
loss................................. (372) 175 -- 35 (373) (724) (1,726)
------- ------- -------- -------- -------- -------- --------
Income before income taxes............... 4,416 5,347 19,570 26,259 39,896 43,751 70,653
Income tax expense..................... (65) (414) (6,335)(5) (8,468) (13,962) (19,426) (29,393)
------- ------- -------- -------- -------- -------- --------
Net income............................... $ 4,351 $ 4,933(4) $ 13,235(5) $ 17,791 $ 25,934 $ 24,325 $ 41,260
======= ======= ======== ======== ======== ======== ========
Earnings per share....................... $ 0.66(5) $ 0.80 $ 1.01 $ 0.63 $ 1.04
======== ======== ======== ======== ========
Weighted average shares outstanding...... 20,071 22,219 25,766 38,669(6) 39,834(6)
======== ======== ======== ======== ========
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1992(1) 1993(1) 1994 1995 1996
------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 5,741 $ 6,826 $ 23,169 $ 32,652 $ 25,588
Total assets............................... 22,368 89,072 134,701 163,107 1,730,949
Long-term debt, net of current portion..... 5,736 25,000 -- -- 506,235
Stockholders' equity....................... 9,773 13,645 91,587 114,386 801,530
</TABLE>
- ---------------
(1) Predecessor only.
(2) Includes the operating results of Red Lion Hotels, Inc. (Red Lion) for the
period commencing November 8, 1996 through December 31, 1996.
(3) Pro forma adjustments have been made to (a) give effect to the acquisition
of Red Lion and related transactions as if such transactions had occurred on
January 1, 1995, (b) exclude business combination expenses related to the
Red Lion and RFS Management transactions and (c) exclude Red Lion formation
expenses related to the 1995 restructuring and initial public offering of
Red Lion.
(4) On a pro forma basis, giving effect to the Combination Transaction and the
Reorganization as if each of these events had occurred on January 1, 1993
net income and earnings per share would have been $8.6 million and $0.47,
respectively.
(5) Doubletree's effective tax rate for the year ended December 31, 1994 was
32.4% due to the organizational structure of Doubletree prior to its initial
public offering. Had a 35% rate been incurred, 1994 net income and earnings
per share would have been $12.7 million and $0.63, respectively.
(6) Assumes that the 16.4 million shares issued in connection with the Red Lion
Acquisition, which was accounted for as a purchase, were outstanding for
both periods.
19
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
As of December 31, 1996, the Company had a portfolio of 241 properties, of
which 204 were managed and/or leased and 37 were franchised. Of the managed
properties, 18 are wholly-owned by the Company, eight are operated pursuant to
joint venture agreements (in which the Company owns 50% or more of the venture),
82 are leased and 96 are managed for third party owners. The Company derives its
revenues from five sources:
Management and franchise fees -- 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. As a franchisor,
the Company licenses its brand name to the hotel operator in exchange for a
franchise fee based on revenues.
Owned hotel revenues -- As the owner and manager of hotels, the Company
includes as revenues the entire property's revenues.
Leased hotel 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.
Purchasing and service fees -- Purchasing and service fees represent fees
from administering purchasing agreements with preferred vendors, sales of
furniture, supplies and other frequently used items to hotels for a profit, and
fees from technical services provided to hotel owners in connection with the
construction/renovation of hotels.
Other fees and income -- Other fees and income primarily comprise contract
termination fees and equity in income/losses of hotel partnerships and similar
ventures, including gains/losses upon sale of a hotel.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 vs. Year Ended December 31, 1995
The operating results for the year ended December 31, 1996 reflect the
inclusion of the operating results of Red Lion from the date of its acquisition
on November 8, 1996 through December 31, 1996. A summary of revenues and
operating expenses for 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
DOUBLETREE RED LION TOTAL
---------- -------- --------
<S> <C> <C> <C>
REVENUES
Management and franchise fees....................... $ 37,202 $ 1,419 $ 38,621
Owned hotel revenues................................ 7,927 30,423 38,350
Leased hotel revenues............................... 187,193 17,970 205,163
Purchasing and service fees......................... 16,029 3,819 19,848
Other fees and income............................... 3,139 (186) 2,953
-------- ------- --------
Total revenues................................. 251,490 53,445 304,935
-------- ------- --------
OPERATING COSTS AND EXPENSES
Corporate general and administrative expenses....... 16,613 1,466 18,079
Owned hotel expenses................................ 6,228 21,661 27,889
Leased hotel expenses............................... 173,918 16,879 190,797
Purchasing and service expenses..................... 11,253 3,543 14,796
Depreciation and amortization....................... 5,883 6,135 12,018
-------- ------- --------
Total operating costs and expenses............. 213,895 49,684 263,579
-------- ------- --------
Operating income.......................... $ 37,595 $ 3,761 $ 41,356
======== ======= ========
</TABLE>
20
<PAGE> 22
Total revenues increased $108.3 million or 55% to $304.9 million for the
year ended December 31, 1996 compared to $196.6 million for the year ended
December 31, 1995.
Revenues from management and franchise fees increased $8.5 million or 28%
due to fees from new contracts (net of contracts lost) of $3.7 million ($1.4
million of which is attributable to Red Lion Acquisition), higher incentive fees
of $3.5 million and increased fees from comparable hotels of $1.3 million. The
increase in incentive fees and 11% increase in fees from comparable hotels
resulted from the improved operating performance at certain hotels.
Owned hotel revenues increased $31.3 million and the margin increased $9.4
million in 1996 as compared to 1995 of which $30.4 million and $8.8 million,
respectively is attributable to the Red Lion Acquisition. Prior to the
acquisition of Red Lion, the Company owned one hotel in Southfield, Michigan.
Revenues from the Southfield property increased $0.9 million or 12% over the
1995 period due to a significantly improved occupancy rate.
Leased hotel revenues increased $63.2 million or 45% principally due to an
increase in the size of the Company's leased hotel portfolio in 1996 as compared
to 1995 and improved occupancy and average daily rates. The margin on leased
hotel operating results increased 55% to $14.4 million. Excluding the impact of
the Red Lion Acquisition, revenues increased $45.3 million or 32% and the margin
on leased hotels increased $4.0 million or 43% reflecting the net addition of
properties and an improvement in the operating margin from 6.6% to 7.1%.
Purchasing and service fees increased $3.4 million in 1996 or 20% to $19.8
million. Excluding the impact of the Red Lion Acquisition, revenues decreased
nominally while the margin increased from $3.1 million in 1995 to $4.8 million
in 1996 or 57% reflecting a shift in mix from high volume, low margin bulk
purchasing programs (whereby the Company purchases goods and resells such goods
to its hotel owners) to preferred vendor programs (whereby the Company earns
fees for administering the programs).
Other fees and income increased $2.0 million from $1.0 million in 1995 to
$3.0 million in 1996 due to a gain of $1.3 million realized on the sale of a
hotel in which the Company had an equity interest and $1.2 million of dividends
from the investment in the convertible preferred stock of the REIT. These
increases were offset by equity losses of $0.5 million principally attributable
to the Company's equity investment in Candlewood.
General and administrative expenses increased $3.2 million to $18.1 million
in 1996. Excluding the impact of the Red Lion Acquisition, expenses increased
$1.7 million or 11% primarily due to the addition of new employees and higher
travel and professional fees, all of which is attributable to the Company's
growth.
Depreciation and amortization increased $7.3 million from $4.7 million in
1995 to $12.0 million reflecting the additional depreciation of assets and
amortization of goodwill resulting from the Red Lion Acquisition.
Business combination expenses of $2.6 million in 1995 were attributable to
legal, professional and accounting fees, due diligence and certain other
expenses incurred in connection with the Company's acquisition of RFS
Management.
Operating income was $41.4 million, an increase of $19.1 million or 85%
from 1995. Excluding the charge for business combination expenses in 1995 and
the impact of the Red Lion Acquisition in 1996, operating income would have
increased $12.7 million or 51% from the prior period.
The Company incurred net interest expense of $1.1 million in 1996 compared
to generating $3.9 million of net interest income in 1995. The increase in net
interest expense resulted from interest expense on the debt incurred in the Red
Lion Acquisition.
The increase of $0.4 million in the minority interest share of net income
reflects the profits allocable to third party owners of certain consolidated
joint ventures of Red Lion.
The provision for income taxes reflects a 35% effective tax rate for 1996
compared to a 32.2% effective tax rate for 1995. The lower effective tax rate
for 1995 reflects the election by RFS Management to be taxed as a
21
<PAGE> 23
Subchapter S corporation effective January 1, 1995. Accordingly, the earnings of
RFS Management were generally not subject to federal income taxes.
Net income and earnings per share for the year ended December 31, 1996 were
$25.9 million and $1.01, respectively, compared to net income of $17.8 million
and $0.80, respectively, in 1995. On a pro forma basis, net income for the year
ended December 31, 1996 increased 70% from $24.3 million in 1995 to $41.3
million in 1996 and earnings per share was $1.04 in 1996 as compared to $0.63 in
1995, an increase of 65%.
Year Ended December 31, 1995 vs. Year Ended December 31, 1994
Total revenues increased $84.1 million or 75% to $196.6 million for the
year ended December 31, 1995 compared to $112.5 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.
Owned hotel revenues represent the revenues derived from the Southfield
hotel acquired in December 1994.
Leased hotel revenues increased $68.2 million or 92% principally due to an
increase in the number of leased hotels in 1995 compared to 1994. Leased 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 leased hotel results increased $4.5 million
to $9.3 million reflecting the net addition of these properties since the prior
year.
Purchasing and service fees increased $5.7 million or 53% primarily due to
increased purchasing volume, the net addition of new properties and increases in
revenues from existing properties. The margin from purchasing and service fees
increased $2.1 million to $3.1 million or 210% principally 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 administering the program.
Other fees and income decreased $0.6 million or 36% resulting principally
from $0.8 million of termination fees received in 1994 in connection with the
termination of two management contracts. The Company subsequently entered into
management contracts with the new owners of these two hotels.
General and administrative expenses increased $3.0 million or 25%, $2.2
million of which was attributable to the growth of RFS Management, which added
31 hotels in 1994, and $0.8 million which was attributable to DHC's increased
legal costs and costs associated with the formation of the franchise development
team.
Depreciation and amortization increased $1.7 million in 1995 primarily due
to the acquisition of the Southfield, Michigan property in December 1994 and
increased amortization associated with investments in management contracts.
Business combination expenses of $2.6 million in 1995 are attributable to
legal, professional and accounting fees, due diligence and certain other
expenses incurred in connection with the Company's acquisition of RFS
Management.
Interest income increased $2.5 million due to an increase in interest
earned on loans to hotel owners in conjunction with obtaining management
contracts and higher interest income on invested cash balances. Interest expense
decreased $0.6 million due to the repayment in July 1994 of all of the
outstanding indebtedness under the Company's then existing credit facility with
a portion of the proceeds from the initial public offering.
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
22
<PAGE> 24
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
tax 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's balance sheet reflected negative
working capital of $60.4 million, $39.2 million of which represents the current
maturity of a note payable related to one of the properties acquired from Red
Lion. The note matures in July 1997 and the Company is in the process of
refinancing the note. In the event the Company is unsuccessful in refinancing
the note, the Company's New Credit Facility makes available additional
borrowings of up to $40.0 million to refinance the existing note and extend the
repayment date beyond 1997. The commitment under the New Credit Facility expires
June 30, 1997.
In February 1997, the Company received $15.0 million in cash from
Renaissance Hotel Group N.V. (Renaissance) as a break-up fee in accordance with
the terms of a memorandum of understanding between Renaissance and the Company.
After payment of expenses associated with the Company's acquisition efforts, the
balance of the cash received will be available for general corporate uses.
Additionally, during 1996 the Company generated cash from operating activities
of $42.7 million as compared to $24.5 million in 1995. The increase was
principally due to increases in net income and expenses (depreciation and
amortization) not requiring the use of cash. Giving effect to the Red Lion
Acquisition, operating income, on a pro forma basis, before depreciation and
amortization was $151.9 million for the year ended December 31, 1996.
Accordingly, management does not believe that the negative working capital
position will adversely impact its results of operations or liquidity in the
future.
Historically, the Company required 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. Excluding the net cash of
$819.0 million used for the acquisition of Red Lion, the Company used $60.6
million of cash during 1996 for investing activities. In February 1996, the
Company contributed $18.5 million to RFS Management which subsequently invested
in 973,684 shares of convertible preferred stock in RFS Hotel Investors, Inc.
(the "REIT Preferred Shares"). In conjunction with obtaining management and/or
lease agreements for the underlying hotel property, the Company invested $13.2
million in hotel partnerships and ventures and loaned $8.9 million to owners of
hotels. The Company has committed to contribute up to $15.0 million to
Candlewood, of which $12.3 million has been funded as of December 31, 1996
($11.1 million during 1996). The balance of the commitment is anticipated to be
contributed during the next year and will be used for general corporate purposes
as well as funding a portion of the development/construction costs of certain
hotels.
In August 1996, the Company committed to provide credit support for a loan
facility that will be utilized by Candlewood to arrange to provide construction
and permanent financing to Candlewood franchisees on terms that, in most cases,
are much more attractive than those which the franchisees could obtain on their
own. The source of the loan facility is General Motors Acceptance Corporation
Mortgage Group. In providing such credit support, the Company's maximum exposure
on any one Candlewood franchise will be approximately $1.0 million, with the
aggregate amount of exposure for all such credit support capped at between $20.0
and $30.0 million, assuming that the aggregate amount of loans made under the
loan facility is between $100.0 and $150.0 million.
In August 1996, the Company and Patriot American Hospitality, Inc.
("Patriot") formed a joint venture wherein the Company will invest up to $20.0
million of capital ($10.7 million of which had been invested as of
23
<PAGE> 25
December 31, 1996) to be combined with up to $180.0 million of capital from
Patriot to be used for the acquisition of hotels. The Company has a 10% interest
in the venture.
The Company has guaranteed certain mortgages, leases and construction bonds
up to $4.9 million ($1.0 million of which is collateralized by a letter of
credit). Additionally, the Company has approximately $5.5 million of bonds
outstanding as collateral for payment of claims arising out of workers'
compensation claims and has committed to contribute an additional $2.0 million
to an investment partnership formed for the purpose of acquiring hotel
properties. The Company has a 4.35% limited partnership interest in the venture.
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 funded $0.5 million in June 1996 in connection with a shortfall at one
hotel. There were no shortfall funding payments in 1995 or 1994.
With the acquisition of the 17 Red Lion owned hotels, the Company will now
be required to invest substantially in the renovation and general upkeep of the
hotel properties. Additionally, the Company anticipates spending $10.0 to $15.0
million during 1997 to convert the majority of the Red Lion hotels to the
Doubletree brand name. Accordingly, investments in property and equipment will
increase substantially in 1997 as compared to historical levels of capital
expenditures made when the Company principally managed hotel properties. As of
December 31, 1996, the Company had commitments relating to capital improvement
projects aggregating approximately $3.9 million.
In connection with the Red Lion Acquisition, the Company terminated its
existing facility and entered into a new $633.2 million credit facility (New
Credit Facility). The New Credit Facility has three components: (1) a $100.0
million revolving credit facility, (2) a $362.2 million term loan (Term Loan A),
and (3) a $171.0 million term loan (Term Loan B). At the option of the Company,
interest rates may be based on either (a) the higher of the federal funds rate
plus 1/2% or the prime rate or (b) the Eurodollar rate plus an interest rate
margin which ranges from 1.125% to 2.000% with respect to the revolving line of
credit and Term Loan A and 2.25% to 2.50% with respect to Term Loan B. The
interest margins at any time are related to the financial condition and
performance of the Company.
The $100.0 million revolving credit facility can be used for general
corporate purposes, matures in 2002 and was undrawn as of December 31, 1996.
Term Loan A is a fully amortizing loan and makes available additional borrowings
of up to $40.0 million to refinance an existing hotel mortgage (the commitment
for which expires June 30, 1997). As of December 31, 1996, the principal balance
outstanding was $300.7 million and the interest margin was 1.375%. Principal
payments are due quarterly, increasing from approximately $1.0 million per
quarter in 1997 to $18.8 million quarterly in 2002, at which time the term loan
matures.
Term Loan B requires quarterly principal payments of approximately $376,000
through 2002 and then increases to approximately $25.3 million quarterly through
maturity in May 2004. As of December 31, 1996, the principal balance outstanding
was $160.9 million and the interest margin was 2.25%.
The Company entered into interest rate swap agreements in order to reduce
its exposure to interest rate fluctuations. As of December 31, 1996, the Company
had three agreements which have converted $250.0 million of debt from floating
rates (5.625% at December 31, 1996) to a fixed rate of 5.92% (prior to the
applicable margin). The agreements expire March 31, 1999.
The New Credit Facility contains numerous covenants which place
restrictions on additional indebtedness, mergers, acquisitions, the payment of
dividends and investments and requires the Company to maintain certain financial
ratios. Additionally, the Company is required to make mandatory principal
payments with the proceeds from excess cash flow from operations (as defined) or
equity offerings and the sale of assets or refinancing of certain indebtedness.
All obligations are guaranteed and secured by substantially all of the assets of
the Company and its significant subsidiaries.
Depending on the timing and magnitude of the Company's future investments
(either in the form of debt or equity), the working capital necessary to satisfy
current obligations is anticipated to be generated from
24
<PAGE> 26
operations. To the extent the Company identifies significant acquisition and/or
investment opportunities in excess of its available cash, the Company may borrow
under the credit facility or may seek additional sources of capital to fund such
investments. Management believes that a combination of its existing cash and
cash equivalents, net cash provided from operations, and its borrowing ability
under the New Credit Facility will be sufficient to fund its operations, capital
outlays and commitments.
SEASONALITY
The operating results of hotels are affected by seasonality. Though the
Company's hotels are distributed throughout the United States, revenues and
profitability are typically higher in summer periods than in winter periods.
IMPACT OF INFLATION
Operation of the Company can be impacted by inflation. Though operators of
hotels possess the ability to adjust room rates periodically, inflation can also
cause increases in operating costs and impact the travel patterns of guests.
ACCOUNTING STANDARDS NOT YET ADOPTED BY THE COMPANY
The Financial Accounting Standards Board has issued several Statements of
Financial Accounting Standards for which the required implementation date has
not yet become effective. None of these accounting standards will have a
material impact on the Company's consolidated financial statements.
25
<PAGE> 27
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following Unaudited Pro Forma Consolidated Statements of Operations for
the years ended December 31, 1995 and 1996 present the consolidated results of
operations of the Company (including RFS Management) as if Red Lion had been
acquired at the beginning of 1995. The following information is not necessarily
indicative of the results of operations of the Company as they may be in the
future or as they might have been had the Red Lion Acquisition been consummated
at the beginning of the period shown. The Unaudited Pro Forma Consolidated
Statements of Operations should be read in conjunction with the audited
historical Consolidated Financial Statements of the Company and notes thereto.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1996
------------------------------------------------- ----------------------------------------------------
DOUBLETREE, DOUBLETREE,
AS PRO FORMA AS PRO FORMA
REPORTED RED LION ADJUSTMENTS TOTAL REPORTED(1) RED LION(2) ADJUSTMENTS TOTAL
---------- -------- ----------- -------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Management and
franchise fees..... $ 30,082 $ 11,388 $ (299)(a) $ 41,171 $ 38,621 $ 10,910 $ (190)(a) $ 49,341
Owned hotel
revenues........... 7,081 185,414 27,074(a) 219,569 38,350 175,432 14,580(a) 228,362
Leased hotel
revenues........... 141,942 132,212 -- 274,154 205,163 121,431 -- 326,594
Purchasing and
service fees....... 16,487 45,124 -- 61,611 19,848 43,517 -- 63,365
Other fees and
income............. 994 241 -- 1,235 2,953 207 -- 3,160
-------- -------- -------- -------- -------- -------- -------- --------
Total
revenues.... 196,586 374,379 26,775 597,740 304,935 351,497 14,390 670,822
-------- -------- -------- -------- -------- -------- -------- --------
Operating costs and
expenses:
Corporate general and
administrative
expenses........... 14,901 10,910 -- 25,811 18,079 6,803 -- 24,882
Owned hotel
expenses........... 6,049 121,913 20,538(a) 148,500 27,889 111,033 11,454(a) 150,376
Leased hotel
expenses........... 132,644 109,750 -- 242,394 190,797 96,787 -- 287,584
Purchasing and
service expenses... 13,437 42,644 -- 56,081 14,796 41,270 -- 56,066
Depreciation and
amortization....... 4,686 19,328 23,141(b) 47,155 12,018 17,001 19,339(b) 48,358
Business combination
expenses........... 2,565 14,662 (17,227)(c) -- -- 8,369 (8,369)(f) --
-------- -------- -------- -------- -------- -------- -------- --------
Total
operating
costs and
expenses.... 174,282 319,207 26,452 519,941 263,579 281,263 22,424 567,266
-------- -------- -------- -------- -------- -------- -------- --------
Operating income....... 22,304 55,172 323 77,799 41,356 70,234 (8,034) 103,556
Interest expense..... (227) (19,408) (22,906)(d) (42,541) (6,648) (15,118) (20,524)(d) (42,290)
Interest income...... 4,147 5,070 -- 9,217 5,561 5,552 -- 11,113
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes and minority
interest............. 26,224 40,834 (22,583) 44,475 40,269 60,668 (28,558) 72,379
Minority interest
share of net
(income) loss...... 35 (759) -- (724) (373) (1,353) -- (1,726)
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes................ 26,259 40,075 (22,583) 43,751 39,896 59,315 (28,558) 70,653
Income tax expense... (8,468) (7,325) (3,633)(e) (19,426) (13,962) (23,087) 7,656(e) (29,393)
-------- -------- -------- -------- -------- -------- -------- --------
Net income............. $ 17,791 $ 32,750 $ (26,216) $ 24,325 $ 25,934 $ 36,228 $ (20,902) $ 41,260
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share..... $ 0.80 $ 0.63 $ 1.01 $ 1.04
======== ======== ======== ========
Weighted average shares
outstanding.......... 22,219 38,669 25,776 39,834
======== ======== ======== ========
</TABLE>
- ---------------
(1) Includes the results of operations of Red Lion for the period commencing
November 8, 1996 through December 31, 1996.
(2) Reflects the results of operations of Red Lion for the period January 1,
1996 through the date of acquisition by Doubletree on November 8, 1996.
26
<PAGE> 28
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
1. ASSUMPTIONS
On November 8, 1996, the Company acquired all of the outstanding common
stock of Red Lion in a transaction valued at approximately $1.2 billion. The
Company paid $695 million in cash, repaid $124 million of existing Red Lion
indebtedness, issued 7.4 million shares of common stock to the shareholders of
Red Lion with a fair value at the date of closing of $292 million and assumed
net liabilities of $90 million. The acquisition has been accounted for as a
purchase and the results of operations of Red Lion have been included in the
consolidated financial statements since November 8. The purchase price was
allocated to the net assets acquired based upon their estimated fair market
values. The excess of the purchase price over the estimated fair value of the
net assets acquired of $365 million was recorded as goodwill to be amortized
over a 40 year life.
2. RECLASSIFICATIONS
Reclassifications have been made to the previously issued financial
statements of Red Lion to conform with the financial statement presentation used
by Doubletree.
3. PRO FORMA ADJUSTMENTS
The following adjustments have been made to the Unaudited Pro Forma
Consolidated Statements of Operations:
(a) Red Lion acquired three hotels in April 1996, July 1996 and
September 1996. The pro forma results of operations include the operating
results of these hotels as if they were all acquired on January 1, 1995.
Hotel management fees from the hotel acquired in September 1996 (which was
previously managed) have been eliminated.
(b) To reflect the increase in depreciation and amortization resulting
from the application of purchase accounting.
(c) To exclude $2.6 million of business combination expenses incurred
by Doubletree related to the RFS Acquisition and $14.7 million of formation
expenses incurred by Red Lion related to the 1995 restructuring and initial
public offering of Red Lion.
(d) To reflect increased interest expense associated with the New
Credit Facility, including agency and commitment fees and the amortization
of loan fees. An interest rate of 7.05% was assumed for all periods on
borrowings under the New Credit Facility. The annual effect of a 1/8
percent change in the interest rate would be approximately $0.6 million.
(e) To reflect an effective tax rate of 40% on all pro forma
adjustments except for amortization of goodwill.
(f) To exclude $8.4 million of business combination expenses
(principally investment banking, accounting and legal fees) incurred by Red
Lion in connection with the acquisition by Doubletree.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is filed as a separate part of this Report (see
page 30).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE> 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated herein by reference the information appearing
under the caption "Proposal 1 Election of Directors" and under the caption
"Executive Officers of the Company" of the Registrant's definitive Proxy
Statement for its 1997 Annual Meeting to be filed with the Securities and
Exchange Commission on or before April 30, 1997.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated herein by reference the information appearing
under the caption "Executive Compensation" of the Registrant's definitive Proxy
Statement for its 1997 Annual Meeting to be filed with the Securities and
Exchange Commission on or before April 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated herein by reference the information appearing
under the caption "Voting Securities and Principal Holders Thereof" of the
Registrant's definitive Proxy Statement for its 1997 Annual Meeting to be filed
with the Securities and Exchange Commission on or before April 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated herein by reference the information appearing
under the caption "Certain Transactions" of the Registrant's definitive Proxy
Statement for its 1997 Annual Meeting to be filed with the Securities and
Exchange Commission on or before April 30, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. The financial statements contained in the accompanying Index to
Consolidated Financial Statements covered by the Independent Auditors'
Report are filed as part of this Report (see page 30).
2. Financial Statement Schedules
None.
3. Exhibits
The list of exhibits contained in the Index to Exhibits are filed as part
of this Report (see page 53).
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the
fourth quarter of 1996: (i) on October 16, 1996, the Company reported the
issuance of a press release regarding, among other things, the consolidated
financial conditions of the Company and its subsidiaries as of September 30,
1996 and the results of operations thereof for the period then ended; and (ii)
on November 21, 1996, the Company reported (A) the completion of its acquisition
of Red Lion Hotels, Inc., (B) the appointment of Richard M. Kelleher as
President and Chief Executive Officer of the Company, (C) the announcement of
the appointment of William L. Perocchi as a director of the Company and (D) on
November 21, 1996, the Company announced the appointment of Edward A. Gilhuly
and Michael W. Michelson as directors of the Company.
28
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunder duly authorized, on March 28, 1997.
DOUBLETREE CORPORATION
By /s/ RICHARD M. KELLEHER
------------------------------------
Richard M. Kelleher
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------- --------------------------------------- ---------------
<C> <S> <C>
* Co-Chairman of the Board and Director March 28, 1997
- --------------------------------- (Principal Executive Officer)
Richard J. Ferris
* Co-Chairman of the Board and Director March 28, 1997
- --------------------------------- (Principal Executive Officer)
Peter V. Ueberroth
/s/ RICHARD M. KELLEHER President and Chief Executive Officer March 28, 1997
- --------------------------------- and Director
Richard M. Kelleher (Principal Executive Officer)
/s/ WILLIAM L. PEROCCHI Executive Vice President and Chief March 28, 1997
- --------------------------------- Financial Officer and Director
William L. Perocchi (Principal Financial and Accounting
Officer)
* Director March 28, 1997
- ---------------------------------
William R. Fatt
* Director March 28, 1997
- ---------------------------------
Dale F. Frey
* Director March 28, 1997
- ---------------------------------
Ronald K. Gamey
* Director March 28, 1997
- ---------------------------------
Edward A. Gilhuly
* Director March 28, 1997
- ---------------------------------
Norman B. Leventhal
* Director March 28, 1997
- ---------------------------------
Michael W. Michelson
* Director March 28, 1997
- ---------------------------------
John H. Myers
*By /s/ DAVID L. STIVERS
- ---------------------------------
David L. Stivers
Attorney-in-Fact
</TABLE>
29
<PAGE> 31
DOUBLETREE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... 31
Consolidated Financial Statements:
Balance Sheets as of December 31, 1996 and 1995..................................... 32
Statements of Operations for the years ended December 31, 1994, 1995 and 1996....... 33
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996....... 34
Statements of Stockholders' Equity for the years ended December 31, 1994, 1995, and
1996............................................................................. 35
Notes to Consolidated Financial Statements............................................ 36
Financial Statement Schedules
All financial statement schedules have been omitted as the information is either
included in the consolidated financial statements and notes thereto, is not
applicable or is not required.
</TABLE>
30
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Doubletree Corporation:
We have audited the consolidated financial statements of Doubletree
Corporation and subsidiaries as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements
present fairly, in all material respects, the financial position of Doubletree
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Phoenix, Arizona
March 17, 1997
31
<PAGE> 33
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER
DECEMBER 31, 31,
1995 1996
------------ ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................... $ 32,652 $ 25,588
Accounts receivable, net of allowance for doubtful accounts of $295
and $557, respectively........................................... 17,907 46,845
Due from Red Lion MLP.............................................. -- 4,094
Current portion of notes receivable including amounts due from
affiliates of $500 in 1996....................................... 390 590
Other.............................................................. 2,694 10,545
------------ ----------
Total current assets.......................................... 53,643 87,662
------------ ----------
Notes receivable, including amounts due from affiliates of $10,775
and $25,935, respectively........................................ 24,185 44,499
Due from Red Lion MLP.............................................. -- 24,405
Investments........................................................ 5,070 77,676
Property and equipment, net........................................ 14,540 635,473
Management contracts, net.......................................... 49,634 459,325
Goodwill, net...................................................... 15,431 378,326
Deferred costs and other assets.................................... 604 23,583
------------ ----------
$163,107 $1,730,949
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses.............................. $ 29,710 $ 101,105
Accrued interest payable........................................... 23 2,213
Current portion of notes payable................................... 672 44,747
Income taxes payable............................................... 585 3
------------ ----------
Total current liabilities..................................... 30,990 148,068
------------ ----------
Deferred income taxes.............................................. 15,625 264,812
Other long-term obligations........................................ 2,106 10,304
Notes payable...................................................... -- 506,235
------------ ----------
48,721 929,419
------------ ----------
Commitments and contingencies (Notes 3, 5, 6, 7 and 14)
Stockholders' equity:
Common stock, $.01 par value. Authorized 100,000,000 shares;
issued and outstanding 22,099,186 and 39,565,058 shares,
respectively.................................................. 221 396
Additional paid-in capital....................................... 100,462 761,273
Unrealized gain on marketable equity securities.................. 22 176
Unearned employee compensation................................... (211) (141)
Retained earnings................................................ 13,892 39,826
------------ ----------
114,386 801,530
------------ ----------
$163,107 $1,730,949
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 34
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Management and franchise fees............................ $ 26,330 $ 30,082 $ 38,621
Owned hotel revenues..................................... 92 7,081 38,350
Leased hotel revenues.................................... 73,769 141,942 205,163
Purchasing and service fees.............................. 10,746 16,487 19,848
Other fees and income.................................... 1,545 994 2,953
-------- -------- --------
Total revenues........................................ 112,482 196,586 304,935
-------- -------- --------
Operating costs and expenses:
Corporate general and administrative expenses............ 11,879 14,901 18,079
Owned hotel expenses..................................... 101 6,049 27,889
Leased hotel expenses.................................... 68,981 132,644 190,797
Purchasing and service expenses.......................... 9,807 13,437 14,796
Depreciation and amortization............................ 2,943 4,686 12,018
Business combination expenses............................ -- 2,565 --
-------- -------- --------
Total operating costs and expenses.................... 93,711 174,282 263,579
-------- -------- --------
Operating income...................................... 18,771 22,304 41,356
-------- -------- --------
Interest expense......................................... (831) (227) (6,648)
Interest income.......................................... 1,630 4,147 5,561
-------- -------- --------
Income before income taxes and minority interest...... 19,570 26,224 40,269
Minority interest share of net (income) loss............... -- 35 (373)
-------- -------- --------
Income before income taxes................................. 19,570 26,259 39,896
Income tax expense....................................... (6,335) (8,468) (13,962)
-------- -------- --------
Net income....................................... $ 13,235 $ 17,791 $ 25,934
======== ======== ========
Earnings per share......................................... $ 0.66 $ 0.80 $ 1.01
======== ======== ========
Weighted average common and common equivalent shares
outstanding.............................................. 20,071 22,219 25,766
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 35
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income.............................................. $ 13,235 $ 17,791 $ 25,934
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization........................ 3,013 4,686 12,018
Equity in (earnings) loss of partnerships............ (373) 91 671
Gain on termination of management contracts.......... (500) -- --
Minority interest share of net loss.................. -- (35) (2)
Other non-cash expenses.............................. 189 281 607
Deferred income taxes................................ 3,394 3,375 6,337
Net withdrawals from restricted cash................. 1,179 535 --
Increase in accounts receivable...................... (3,407) (6,187) (5,499)
Increase in other current assets..................... (648) (1,234) (442)
Increase in accounts payable and accrued expenses.... 6,680 5,225 3,040
-------- -------- ---------
Net cash provided by operations................. 22,762 24,528 42,664
-------- -------- ---------
Cash flow from investing activities:
Cash acquired at purchase of Red Lion................... -- -- 17,126
Purchase of Red Lion and related costs.................. -- -- (836,151)
Purchases of property and equipment..................... (13,006) (2,708) (3,976)
Investments in partnerships and ventures................ (1,021) (2,531) (31,717)
Distributions from partnerships and ventures............ 603 514 1,576
Advances to Red Lion MLP................................ -- -- (2,471)
Investments in management contracts..................... (6,607) (7,181) (2,511)
Proceeds from terminations of management contracts...... 2,188 562 1,377
Loans to owners of managed hotels and Candlewood........ (4,935) (7,367) (20,054)
Deposits in hotels to obtain management contracts....... (280) 250 (150)
Purchase of marketable securities....................... -- (516) --
Increase in deferred costs and other assets............. 76 (43) (2,626)
-------- -------- ---------
Net cash used in investing activities........... (22,982) (19,020) (879,577)
-------- -------- ---------
Cash flow from financing activities:
Proceeds from issuance of common stock, net of costs.... 40,261 6,620 368,144
Proceeds from exercise of common stock options.......... -- 249 815
Cash distributions to stockholders...................... (34) (2,055) --
Purchase of common and redeemable preferred stock....... (182) -- --
Proceeds from borrowings................................ -- -- 498,200
Principal payments on notes payable..................... (25,414) (839) (37,310)
-------- -------- ---------
Net cash provided by financing activities....... 14,631 3,975 829,849
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents...... 14,411 9,483 (7,064)
Cash and cash equivalents at beginning of year............ 8,758 23,169 32,652
-------- -------- ---------
Cash and cash equivalents at end of year.................. $ 23,169 $ 32,652 $ 25,588
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 36
DOUBLETREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON RETAINED
ADDITIONAL UNEARNED MARKETABLE EARNINGS
COMMON PAID-IN TREASURY EMPLOYEE EQUITY (ACCUMULATED
STOCK CAPITAL STOCK COMPENSATION SECURITIES DEFICIT) TOTAL
------ ---------- -------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
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
offering 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
Proceeds from sale of 952,300 shares of
common stock to the public, net of
offering costs of $1,045............... 10 27,362 -- -- -- -- 27,372
Proceeds from sale of 9,067,534 shares of
common stock, net of offering costs of
$1,500................................. 91 340,681 -- -- -- -- 340,772
Issuance of 7,381,588 shares to the
shareholders of Red Lion............... 74 291,499 -- -- -- -- 291,573
Exercise of common stock options......... -- 815 -- -- -- -- 815
Tax benefits attributable to common stock
options exercised...................... -- 454 -- -- -- -- 454
Amortization of unearned employee
compensation........................... -- -- -- 70 -- -- 70
Marketable equity securities unrealized
gain................................... -- -- -- -- 154 -- 154
Net income............................... -- -- -- -- -- 25,934 25,934
---- -------- ---- ---- ---- -------- --------
Balances at December 31, 1996.............. $396 $761,273 $ -- $ (141) $176 $ 39,826 $801,530
==== ======== ==== ==== ==== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 37
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 December 31, 1996, the Company had a portfolio
of 241 properties, of which 204 were managed and/or leased and 37 were
franchised. Of the managed and/or leased properties, 18 are wholly-owned by the
Company, eight are operated pursuant to joint venture agreements (in which the
Company owns 50% or more of the venture), 82 are leased and 96 are managed for
third party owners.
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 were 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.
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.
On November 8, 1996, the Company acquired Red Lion Hotels, Inc. (Red Lion)
in a business combination accounted for as a purchase. Accordingly, the accounts
of Red Lion and its subsidiaries are only included from the date of the
acquisition, November 8, 1996.
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. While management endeavors to make accurate estimates,
actual results could differ from estimates. Certain financial statement items
from prior years have been reclassified to be consistent with the current year
financial statement presentation. All significant inter-entity accounts and
transactions have been eliminated.
(a) Revenue Recognition
Management fees, franchise fees, purchasing and service fees, and hotel
revenues are recognized when earned.
36
<PAGE> 38
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
------- --------
<S> <C> <C>
Land and improvements........................... $ 556 $ 91,163
Buildings and improvements...................... 7,791 460,407
Furnishings and equipment....................... 9,524 87,907
Construction in progress........................ -- 3,916
------- --------
17,871 643,393
Accumulated depreciation........................ (3,331) (7,920)
------- --------
$14,540 $635,473
======= ========
</TABLE>
Property and equipment are stated at cost. Buildings are being depreciated
over 39 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 (15
years) or the terms of the related leases. Office furniture and equipment is
depreciated over 3 to 10 years.
Repairs and maintenance are charged to operations as incurred.
(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% and the Company does not exercise
control over the venture. Profits and losses of these joint ventures are
allocated in accordance with the joint venture agreements. The Company's share
of the income or losses of the joint ventures is included in other fees and
income. All other investments are accounted for using the cost method with the
exception of five joint ventures which are consolidated as the Company exercises
control over the venture. If a joint venture experiences operating losses which
reduce the other joint venture partner's equity to a zero balance, the loss
which would otherwise be attributable to the other joint venturer is absorbed
within the Company's consolidated operating results.
(d) Management Contracts and Goodwill
Management contracts acquired in the acquisitions of DHC and Red Lion
represent the estimated present value of net cash flows expected to be received
over the estimated lives of the contracts and are being amortized using the
straight-line method over the estimated weighted average contract life which
ranges from 25 years to 41 years. Costs incurred to acquire individual
management contracts are being amortized using the straight-line method over the
life of the respective contract. Management contracts are carried net of
accumulated amortization of $4,554,000 and $7,655,000 at December 31, 1995 and
1996, respectively.
Goodwill arose in connection with the acquisitions of DHC and Red Lion and
is amortized using the straight-line method over 40 years. Goodwill is carried
net of accumulated amortization of $835,000 and $2,559,000 at December 31, 1995
and 1996, respectively.
(e) Deferred Costs and Other Assets
Deferred costs and other assets primarily consist of debt issuance costs
and franchise application fees paid. The costs related to the issuance of debt
are capitalized and amortized to interest expense using the effective interest
method over the lives of the related debt. Accumulated amortization at December
31, 1996 is $395,000. Franchise application fees paid in connection with the
acquisition of RFS Management are
37
<PAGE> 39
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 December 31, 1996 is $153,000.
(f) 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 $892,000, $215,000 and $4,063,000 for
the years ended December 31, 1994, 1995 and 1996, respectively. Cash paid for
income taxes amounted to $3,020,000, $4,631,000 and $12,163,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
(g) 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.
(h) 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 and warrants which
have been deemed exercised for the purpose of computing earnings per share. The
Company has no other potentially dilutive securities.
(i) 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.
(j) Long-Lived Assets
The recoverability of management contract costs, goodwill and hotel
investments 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.
38
<PAGE> 40
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(k) Other Long-Term Obligations
The Company provides for the uninsured portions of medical, property,
liability and workers' compensation claims. Such costs are estimated each year
based on historical claims data relating to operations. While actual results may
vary from estimates, the Company maintains stop-loss insurance to minimize the
effect of large claims on financial results. The long-term portion of accrued
claims costs relates primarily to general liability and workers' compensation
claims which are not expected to be paid within one year. Additionally, the
Company provides a non-qualified Supplemental Employee Retirement Plan ("SERP")
designed to supplement key employees whose benefits would otherwise be reduced
or lost due to the statutory limits of 401(k) plans. Both of these obligations
are reflected in long-term obligations.
(2) ACQUISITIONS
Acquisition of Red Lion Hotels, Inc.
On November 8, 1996, the Company acquired all of the outstanding common
stock of Red Lion in a transaction valued at approximately $1.2 billion. The
Company paid $695 million in cash, repaid $124 million of existing Red Lion
indebtedness, issued 7.4 million shares of common stock to the shareholders of
Red Lion with a fair value at the date of closing of $292 million and assumed
net liabilities of $90 million. The acquisition has been accounted for as a
purchase and the results of operations of Red Lion have been included in the
consolidated financial statements since November 8. The purchase price was
allocated to the net assets acquired based upon their estimated fair market
values. The excess of the purchase price over the estimated fair value of the
net assets acquired of $365 million was recorded as goodwill to be amortized
over a 40 year life.
Acquisition of RFS, Inc.
On February 27, 1996, the Company issued 2.7 million 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. 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. For the years ended
December 31, 1994, 1995 and 1996, total revenues and net income of RFS (included
in the Company's results) were $62.6 million and $0.7 million, $122.5 million
and $2.1 million and $151.0 million and $6.1 million, respectively. In addition,
as a result of the merger, certain of the franchisors required the payment of an
application fee of $2,626,000 which is being amortized over the terms of the
respective franchise agreements.
Pro Forma Results
The following unaudited pro forma summary presents the consolidated results
of operations of the Company (including RFS) as if Red Lion had been acquired at
the beginning of 1995 with pro forma adjustments to give effect to (a)
amortization of goodwill, (b) additional depreciation expense as a result of a
step-up in the basis of properties and equipment and investments in
unconsolidated joint ventures, (c) increased interest expense on acquisition
debt and (d) the operating results of three hotels acquired in 1996 and related
tax effects. Additionally, pro forma adjustments have been made to exclude $2.6
million of business combination expenses related to the RFS transaction and
business combination expenses incurred by Red Lion prior to its acquisition by
the Company and formation expenses related to the 1995 restructuring of Red
Lion. The pro forma results have been prepared for comparative purposes only and
do not purport to be
39
<PAGE> 41
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
YEARS ENDED
DECEMBER 31,
---------------------
1995 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
Total revenues......................................... $597,740 $670,822
Operating income....................................... 77,799 103,556
Interest, net.......................................... (33,324) (31,177)
Income before taxes.................................... 43,751 70,653
Net income............................................. 24,325 41,260
Net income per share................................... $ 0.63 $ 1.04
</TABLE>
(3) LEASED HOTEL PROPERTIES
As of December 31, 1994, 1995 and 1996, the Company leased 44, 52 and 82
hotels, respectively. As of December 31, 1996, 57 of these hotels are leased
from RFS Hotel Investors, Inc. ("REIT") and 17 are leased from RLH Partnership.
All of the Company's leases 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). Substantially all of the hotels leased from the REIT are cross
defaulted with one another. All hotel leases are operating leases. Base and
percentage rents were $24,617,000, $52,757,000 and $72,006,000 for the years
ended December 31, 1994, 1995 and 1996, respectively. Percentage rents included
in total rental expense amounted to $10,961,000, $25,254,000 and $38,134,000 for
the years ended December 31, 1994, 1995 and 1996, respectively.
The following is a schedule, by year, of future minimum rental payments
required under non-cancelable hotel operating leases (in thousands) as of
December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------------------------------------
<S> <C>
1997...................................... $ 43,134
1998...................................... 43,039
1999...................................... 43,001
2000...................................... 43,000
2001...................................... 42,963
Thereafter................................ 351,945
--------
Total future minimum lease
payments........................... $567,082
========
</TABLE>
40
<PAGE> 42
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) NOTES RECEIVABLE
Notes receivable, consisting primarily of loans to owners of managed
hotels, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
INTEREST REPAYMENT TERMS -----------------
RATE INTEREST/PRINCIPAL MATURITY 1995 1996
- ------------------ --------------------------------------------- ---------- ------- -------
<C> <S> <C> <C> <C>
SECURED:
12.0% Monthly/monthly to the extent of cash flow... 2006 $ 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 2,800 2,500
10.0% Quarterly/quarterly to the extent of cash
flow......................................... 2003 2,600 2,575
9.0% Monthly/at maturity.......................... 2015 1,625 2,000
Prime - 1.5% Monthly/at maturity.......................... 2010 1,300 1,300
8.0% Monthly/monthly to the extent of cash flow... 2014 1,000 1,000
8.0 - 10.0% Various...................................... Upon sale 1,153 2,213
Notes repaid in full......................... 1,000 --
------- -------
18,328 18,938
======= =======
UNSECURED:
7.0 - 10.0% Quarterly/at maturity........................ 2001 -- 12,065
7.5% Monthly/at maturity.......................... 2000 3,500 4,000
7.4% Monthly/at maturity.......................... 2000 1,250 3,000
10.0% Monthly/annually............................. 2000 -- 3,000
8.0% Monthly/at maturity.......................... 2001 -- 1,000
LIBOR + 2.65% Monthly/at maturity.......................... 2006 -- 1,000
10.0% Quarterly/quarterly.......................... 2002 720 625
5.75% - 10% Various...................................... Upon sale 777 1,461
------- -------
6,247 26,151
------- -------
Total notes and other receivables............ 24,575 45,089
Less: current portion........................ 390 590
------- -------
Non-current portion.......................... $24,185 $44,499
======= =======
</TABLE>
Repayment of notes receivable are generally due upon the earlier of
termination of the management contract or sale of the hotel. At December 31,
1996, the Company does not consider any of its notes receivable to be impaired.
(5) INVESTMENTS
Investments consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------ -------
<S> <C> <C>
Hotel partnerships........................................ $3,746 $58,538
REIT convertible preferred stock.......................... -- 18,500
REIT common shares........................................ 538 1,533
Candlewood................................................ 1,098 (581)
Other..................................................... (312) (314)
------ -------
$5,070 $77,676
====== =======
</TABLE>
41
<PAGE> 43
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1996, the Company and its subsidiaries have
non-controlling 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
RFS and three were acquired in the acquisition of Red Lion. The company's
percentage of ownership in such partnerships ranges from less than 1% to 50.0%.
The partnership investments include an investment in a partnership that is a
majority owned subsidiary of the REIT. This investment is convertible into
common stock of the REIT.
The aggregate carrying value of the partnership interests as of December
31, 1996 exceeds the proportionate share of aggregate net assets of such
partnerships by approximately $20.0 million reflecting the allocation of a
portion of the purchase price of Red Lion to the fair value of the partnership
interests acquired. The increase in the Company's investment is being amortized
over 30 years.
In October 1995, the Company acquired a 50% interest in Candlewood Hotel
Company, L.L.C. ("Candlewood"). Candlewood is competing 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, $12,265,000 has been funded as
of December 31, 1996 ($1,200,000 at December 31, 1995). Prior to Candlewood's
initial public offering, the investment was structured as an equity contribution
with the Company earning a preferred return. In connection with the initial
public offering of Candlewood in November 1996, the Company's contributions in
excess of $200,000 and its preferred return were converted to an interest
bearing note receivable in the amount of $12,065,000. The Company's remaining
investment consists of 2,587,500 shares of Candlewood's common stock, the fair
value of which (based on the quoted market price as of December 31, 1996) was
$24,905,000.
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.
The Company, through the acquisition of Red Lion, is the general partner of
Red Lion Inns Limited Partnership, a publicly-traded limited partnership (Red
Lion MLP). The Company manages 10 hotels under a long-term management agreement
with Red Lion MLP.
(6) 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, 1994, 1995 and 1996 amounted to approximately
$1,402,000, $1,597,000 and $1,803,000.
42
<PAGE> 44
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule, by year, of future minimum rental payments
required under non-cancelable operating leases for administrative office space
(in thousands) as of December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
--------------------------------------------
<S> <C>
1997........................................ $2,220
1998........................................ 1,390
1999........................................ 1,112
2000........................................ 1,115
2001........................................ 1,141
Thereafter.................................. 2,105
------
Total future minimum lease payments.... $9,083
======
</TABLE>
(7) NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
------- --------
<S> <C> <C>
Term Loan A with interest at variable rates payable quarterly (7.0% at
December 31, 1996), principal due quarterly in varying amounts through
maturity in November 2002............................................. $ -- $300,700
Term Loan B with interest at variable rates payable quarterly (7.875% at
December 31, 1996), principal due in equal quarterly amounts of
$376,374 through November 2002 and quarterly thereafter in equal
amounts to fully amortize the balance at maturity in May 2004......... -- 160,900
Mortgages with variable interest rates ranging from 6.56% to 7.18%
payable through 1998.................................................. -- 84,257
Note payable with an imputed rate of 8.69%, payable through 2022........ -- 5,125
Other notes............................................................. 672 --
-------- --------
672 550,982
Less: current portion................................................... (672) (44,747)
-------- --------
$ -- $506,235
======== ========
</TABLE>
Annual maturities of notes payable are as follows (in thousands):
<TABLE>
<S> <C> <C>
1997................................................. $ 44,747
1998................................................. 86,463
1999................................................. 53,092
2000................................................. 60,571
2001................................................. 73,031
Thereafter........................................... 233,078
--------
$550,982
========
</TABLE>
To finance a portion of the cost of the acquisition of Red Lion, the
Company executed a new senior credit agreement ("New Credit Facility") in
November 1996 and borrowed $493.2 million of which $31.6 million was repaid on
November 13 with certain of the proceeds from the Company's sale of common
stock.
The New Credit Facility consists of two term loans, provides for a $100.0
million revolving line of credit, and makes available additional borrowings of
up to $40.0 million under Term Loan A to refinance an existing
43
<PAGE> 45
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
hotel mortgage, the commitment for which expires June 30, 1997. At the option of
the Company, interest rates may be based on either (a) the higher of the federal
funds rate plus 1/2% or the prime rate or (b) the Eurodollar rate plus a margin
which ranges from 1.125% to 2.000% with respect to Term Loan A and the revolving
line of credit and 2.25% to 2.50% with respect to Term Loan B. The interest
margins applicable at any time are related to the financial condition and
performance of the Company.
The credit agreement requires the payment of a quarterly commitment fee of
0.375% of the unutilized commitments. The credit agreement has various covenants
which place restrictions on additional indebtedness, mergers and acquisitions,
the payment of dividends and investments based on the financial condition of the
Company. All obligations are guaranteed and secured by substantially all of the
assets of the Company and its significant subsidiaries.
The Company entered into interest rate swap agreements in order to reduce
its exposure to interest rate fluctuations. As of December 31, 1996, the Company
had three interest rate swap agreements outstanding which have converted $250.0
million of debt from floating rates (5.625% at December 31,1996) to a fixed rate
of 5.92% (prior to the applicable margin). The agreements expire March 31, 1999.
Additional interest expense for the year ended December 31, 1996 was
approximately $31,000. These agreements are with major commercial banks and
management does not anticipate a credit loss due to nonperformance.
(8) 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 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.
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 shares of Company common stock, 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.
In May 1996, the Company completed an offering of 4,234,300 shares of its
common stock (of which 952,300 shares were newly issued shares of the Company)
at a price to the public of $31.25 per share. The net proceeds to the Company,
after expenses of the offering and giving effect to the underwriter's discount,
were $27,372,000.
In connection with the acquisition of Red Lion, the Company issued
6,440,000 shares and 2,627,534 shares to the public and to a subsidiary of
General Electric Pension Trust (GEPT), respectively. Additionally, GEPT was
granted 262,753 warrants to acquire common stock of the Company at an exercise
price of $38.06, which approximated the fair value at the date of the agreement.
The net cash proceeds to the Company, after expenses and giving effect to the
underwriters discount, were $340,772,000. Additionally, the Company issued
7,381,588 shares to the shareholders of Red Lion as part of the consideration
paid for Red Lion.
44
<PAGE> 46
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) STOCK OPTIONS
At December 31, 1996, the Company had one stock based compensation plan
which is described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. No compensation cost has been
recognized for its stock based compensation plan (which is a fixed stock option
plan). Had compensation cost for the Company's stock based compensation plan
been determined consistent with FASB Statement No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1995 1996
------- -------
<S> <C> <C> <C>
Net income................................................. As reported $17,791 $25,934
Pro forma 17,719 25,076
Primary earnings per share................................. As reported $ 0.80 $ 1.01
Pro forma $ 0.80 $ 0.97
</TABLE>
The Company's stock based compensation plan is a fixed 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 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 3,300,000 shares have been
authorized for issuance. The Plan also provides for the issuance of stock
appreciation rights, restricted stock or other awards. Activity in the stock
option plan is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1994 1995 1996
---------------------- ---------------------- ----------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning
of year..................... -- -- 967,500 $ 13.69 1,103,500 $ 14.81
Granted....................... 1,099,500 $ 13.61 193,000 $ 19.89 1,590,000 $ 34.45
Exercised..................... -- -- (19,375) $ 13.00 (61,250) $ 13.90
Canceled...................... (132,000) $ 13.00 (37,625) $ 13.00 (67,500) $ 18.73
--------- ------ --------- ------ --------- ------
Options outstanding, end of
year........................ 967,500 $ 13.69 1,103,500 $ 14.81 2,564,750 $ 26.91
========= ====== ========= ====== ========= ======
Number of options
exercisable................. -- 243,750 445,500
Number of shares available for
future issuance............. 1,032,500 877,125 654,625
Weighted average fair value of
options granted............. $ 4.01 $ 5.89 $ 10.26
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions for
1994, 1995 and 1996, respectively: risk-free interest rates of 6 percent for all
years; dividend yield of 0 percent for all years, expected lives of four years
for all options prior to being exercised, and a 40 percent volatility factor for
all years.
45
<PAGE> 47
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$13.00-$18.75......... 921,900 7.55 $14.07 426,900 13.94
$19.13-$23.50......... 77,600 8.53 $21.56 18,600 21.65
$25.50-$37.88......... 690,250 9.18 $27.64 -- N/A
$40.31-$40.75......... 875,000 9.86 $40.33 -- N/A
--------- ---- ------ ------- -----
$13.00-$40.75......... 2,564,750 8.81 $26.91 445,500 14.27
========= ==== ====== ======= =====
</TABLE>
(10) 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, 1995 and 1996. Shares issued in
connection with the acquisition of Red Lion are outstanding from November 8,
1996. The common equivalent shares include employee stock options and warrants
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.
(11) TRANSACTIONS WITH RELATED PARTIES
Revenues and expenses include amounts derived from or paid to entities in
which affiliates of the Company own interests and, in general, exercise
operational control. A summary of these transactions is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
REVENUES
Management fees and franchise fees.......................... $15,051 $15,241 $20,617
Share of partnership income................................. 243 388 671
Interest income............................................. 847 1,674 1,987
Purchasing and service fees................................. 4,436 6,288 5,390
EXPENSES
Hotel rent.................................................. -- 2,031 7,975
Administrative office rent.................................. 312 73 64
</TABLE>
Additionally, the Company was reimbursed for costs incurred in providing
centralized services to its managed and/or franchised hotels related to
marketing, central reservations, accounting, data processing, internal audit and
training as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Marketing and central reservations............................ $11,129 $11,020 $10,861
Accounting, data processing, internal audit and training...... 2,084 1,781 2,706
------- ------- -------
$13,213 $12,801 $13,567
======= ======= =======
</TABLE>
46
<PAGE> 48
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts due from affiliates included in accounts receivable at December 31,
1995 and 1996 are $4,318,000 and $7,849,000, respectively. Non-current amounts
due from affiliates included in other assets at December 31, 1995 and 1996 are
$147,000 and $321,000, respectively.
Amounts due to affiliates included in accounts payable at December 31, 1995
and 1996 amounted to $105,000 and $24,000, 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 $175,000 in total through December 31, 1996.
(12) EMPLOYEE BENEFIT PLANS
The Company maintains three 401(k) retirement savings plans. Employees who
are over 21 years of age and have completed one year of service are eligible to
participate in the plans. Depending on the plan, the Company matches employee
contributions up to 6% of an employee's eligible compensation. The aggregate
expense under the plans amounted to $218,000, $563,000 and $855,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
The Company 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. Red Lion provides group health benefits
through a fully-insured medical plan.
The Company also has a non-qualified supplemental employee retirement plan
("SERP"). The SERP was designed to complement the 401(k) plan for employees of
Red Lion by restoring benefits otherwise lost by certain employees due to the
statutory limits in the 401(k) plan. Expense under the SERP amounted to $47,000
for the period from November 8, 1996 to December 31, 1996.
(13) INCOME TAXES
The components of income tax expense consist of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
FEDERAL:
Current............................................... $1,559 $3,561 $ 4,982
Deferred.............................................. 3,476 2,832 5,544
------ ------ -------
5,035 6,393 10,526
------ ------ -------
STATE:
Current............................................... 1,382 1,532 2,643
Deferred.............................................. (82) 543 793
------ ------ -------
1,300 2,075 3,436
------ ------ -------
$6,335 $8,468 $13,962
====== ====== =======
</TABLE>
47
<PAGE> 49
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Income tax expense at Federal statutory rate................... 34.0% 34.0% 35.0%
Goodwill and permanent differences............................. 1.1 0.7 2.0
State income taxes............................................. 4.3 5.5 4.7
RFS, Inc. S Corp. earnings not taxed........................... -- (2.8) --
Decrease in valuation allowance................................ (8.3) (5.2) (6.3)
Other.......................................................... 1.3 -- (0.4)
---- ---- ----
32.4% 32.2% 35.0%
==== ==== ====
</TABLE>
The income tax benefit attributable to the use of net operating loss
carryforwards ("NOLs") in the year ended 1994 was $47,000.
As a result of the acquisition of the common stock of Red Lion, the
allocation of the purchase price to the assets and liabilities for book purposes
significantly exceeds the tax basis carried over from Red Lion. Accordingly, the
acquisition created substantial temporary differences. 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,
----------------------
1995 1996
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $ 15,288 $ 7,551
Passive activity loss carryforwards......................... 834 --
Reserves.................................................... 3,335 1,560
Accruals and other liabilities.............................. 3,979 16,998
Valuation allowance......................................... (22,605) (19,647)
-------- ---------
Total deferred tax assets................................ 831 6,462
-------- ---------
Deferred tax liabilities:
Management contracts........................................ (13,982) (180,280)
Real estate................................................. -- (75,860)
Investments................................................. (2,474) (10,897)
Other....................................................... -- (4,237)
-------- ---------
Total deferred tax liabilities........................... (16,456) (271,274)
-------- ---------
Net deferred tax liability.................................... $(15,625) $(264,812)
======== =========
</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, 1996, the amount of the valuation allowance subject to this
treatment is approximately $6,000,000. During 1995 and 1996, $1,530,000 and
$458,000 was used and credited to goodwill, respectively. None of this NOL was
recognized in 1994.
48
<PAGE> 50
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's federal NOLs of $18,611,000 expire as follows (in thousands):
<TABLE>
<CAPTION>
YEAR OF AMOUNT OF
EXPIRATION FEDERAL NOLS
-------------------------------------------------------- ------------
<S> <C>
2008.................................................... $ 6,128
2009.................................................... 12,483
-------
$ 18,611
=======
</TABLE>
Total NOLs for state purposes are less than the amounts stated above due
primarily to shorter carryforward periods.
(14) COMMITMENTS AND CONTINGENCIES
On January 5, 1997, the Company entered into a memorandum of understanding
for the proposed acquisition of Renaissance Hotel Group N.V. (Renaissance) in a
transaction valued at approximately $890.0 million, including the assumption of
$70.0 million in debt. The memorandum of understanding contained a provision
that in the event Renaissance entered into a merger or acquisition agreement
with a party other than the Company within four months, Doubletree would receive
a break-up fee of $15.0 million. In February 1997, Renaissance pursued
discussions with another company and on February 20, 1997, Doubletree received
$15 million.
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 funded $487,000 in June 1996 in connection with a shortfall at one
hotel. There were no shortfall funding payments in 1995 or 1994.
The Company has guaranteed certain mortgages, leases and construction bonds
up to $4,900,000 ($1,000,000 of which is collateralized by a letter of credit).
Additionally, the Company has approximately $5,500,000 of bonds outstanding as
collateral for payment of claims arising out of workers' compensation claims.
The Company also had commitments relating to capital improvement projects
aggregating approximately $3,912,000 at December 31, 1996.
In August 1996, Doubletree committed to provide credit support for a loan
facility that will be utilized by Candlewood to arrange construction and
permanent financing for Candlewood franchisees on terms that, in most cases, are
much more attractive than that which the franchisees could obtain on their own.
The source of the loan facility is General Motors Acceptance Corporation
Mortgage Group. In providing such credit support, Doubletree's maximum exposure
on any one Candlewood franchise will be approximately $1.0 million, with the
aggregate amount of exposure for all such credit support capped at between $20.0
to $30.0 million. As of December 31, 1996, the facility has not been used.
In August 1996, Doubletree and Patriot American Hospitality, Inc. (Patriot)
formed a joint venture wherein Doubletree will invest up to $20.0 million of
capital ($10.7 million of which had been invested as of December 31, 1996) to be
combined with up to $180.0 million of capital from Patriot to be used for the
acquisition of hotels. Doubletree will have a 10% interest in the venture.
The Company has a commitment to contribute an additional $2.0 million 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.
49
<PAGE> 51
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
(15) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
------- --------
<S> <C> <C>
Payroll and related..................................... $ 5,544 $ 29,842
Business combination accruals........................... 2,756 21,791
Accounts payable........................................ 5,793 11,213
Lease payable........................................... 6,743 8,305
Insurance............................................... 1,401 5,555
Sales taxes............................................. 1,331 4,614
Advance deposits........................................ 208 3,382
Utilities............................................... 649 1,753
Property taxes.......................................... 521 1,716
Marketing costs......................................... 2,340 1,572
Other................................................... 2,424 11,362
------- --------
$29,710 $101,105
======= ========
</TABLE>
(16) REIMBURSABLE COSTS
The Company is reimbursed for costs associated with providing central
reservations, sales and marketing, advertising, 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.
50
<PAGE> 52
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) MANAGEMENT CONTRACTS
An analysis of management contract activity follows (in thousands):
<TABLE>
<S> <C>
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 at acquisition of Red Lion................... 418,000
Contracts acquired.............................................. 2,511
Contract conversions and terminations........................... (6,005)
Amortization.................................................... (4,815)
--------
Balance at December 31, 1996...................................... $459,325
========
</TABLE>
(18) 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 receivable, investments, accounts
payable and accrued expenses, accrued interest payable, notes payable and income
taxes payable, each as included in the consolidated balance sheets under such
captions. With the exception of notes receivable, notes payable, interest rate
swap agreements 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 and notes payable 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. The fair value of the Company's
interest rate swap agreements is approximately $315,000. 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 approximately $1.5 million at December
31, 1996.
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1995 and
1996, restated to reflect the acquisition of RFS Management, is presented below
(in thousands except per share data). Additionally, pro forma information is
presented to (a) give effect to the acquisition of Red Lion and related
transactions as if they had occurred on January 1, 1995, and (b) exclude $2.6
million of business combination expenses related to the RFS transaction in
December 1995, business combination expenses incurred by Red Lion prior to its
acquisition by the Company and formation expenses related to the 1995
restructuring of Red Lion. The sum of the individual quarterly data may not
equal the annual data due to rounding.
51
<PAGE> 53
DOUBLETREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- --------- ------------ -----------
<S> <C> <C> <C> <C>
ACTUAL
Total revenues.............................. $ 40,580 $ 50,771 $ 52,891 $ 52,344
Net income.................................. 3,645 5,742 5,606 2,798
Earnings per share.......................... $ 0.17 $ 0.26 $ 0.25 $ 0.12
Weighted average common and common
equivalent shares outstanding............. 21,910 22,057 22,443 22,472
PRO FORMA
Total revenues.............................. $130,100 $ 155,985 $157,835 $ 153,820
Net income.................................. 1,953 8,144 10,330 3,898
Earnings per share.......................... 0.05 $ 0.21 $ 0.27 $ 0.10
Weighted average common and common
equivalent shares outstanding............. 38,360 38,507 38,893 38,922
</TABLE>
1996
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- --------- ------------ -----------
<S> <C> <C> <C> <C>
ACTUAL
Total revenues.............................. $ 53,835 $ 63,546 $ 68,582 $ 118,972
Net income.................................. 4,878 7,549 8,021 5,486
Earnings per share.......................... $ 0.22 $ 0.33 $ 0.34 $ 0.16
Weighted average common and common
equivalent shares outstanding............. 22,584 23,173 23,879 33,516
PRO FORMA
Total revenues.............................. $153,158 $ 174,008 $178,786 $ 164,870
Net income.................................. 4,726 12,523 15,235 8,776
Earnings per share.......................... $ 0.12 $ 0.32 $ 0.38 $ 0.22
Weighted average common and common
equivalent shares outstanding............. 39,034 39,623 40,329 40,489
</TABLE>
52
<PAGE> 54
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
<S> <C>
2.1(4) Agreement and Plan of Merger, dated as of February 1, 1996, by and among
Doubletree Corporation, RFS, Inc., Seedling Merger Subsidiary, Inc., Robert M.
Solmson, H. Lance Forsdick, Sr., William Lovelace and Michael J. Pascal.
2.2(5) Agreement and Plan of Merger dated as of September 12, 1996, by and among
Doubletree Corporation, RLH Acquisition Corp. and Red Lion Hotels, Inc.
3.1(1) Certificate of Incorporation of Doubletree Corporation.
3.2(1) By-Laws of Doubletree Corporation.
3.3(3) First Amendment of By-Laws of Doubletree Corporation, dated as of June 30, 1994.
9.1(3) Stockholders Agreement dated as of June 30, 1994, among Doubletree Corporation, GQ
Owners, L.P., Canadian Pacific Hotels (U.S.) Inc., MetPark Funding, Inc., The
Ueberroth Family Trust, The Ueberroth Investment Trust, Ridge Partners, L.P. and
GEHOP.
10.1(1) Incorporation and Registration Rights Agreement, dated as of December 16, 1993,
among Doubletree Partners, GQ Owners, L.P., Canadian Pacific Hotels (U.S.) Inc.,
MetPark Funding, Inc., The Ueberroth Family Trust and Mr. Richard J. Ferris.
10.2(1) Tax Matters Agreement, dated as of December 16, 1993, among Canadian Pacific
Limited, Canadian Pacific Hotels (U.S.) Inc. and GQ Owners, L.P.
10.3(1) Acquisition Agreement, dated as of November 15, 1990, among Metropolitan Life
Insurance Company, MetHotels, Inc., Canadian Pacific Hotels Corporation and CP
Hotels Merger Co.
10.4(1) Assignment, Assumption and Modification Agreement, dated as of December 16, 1993,
among Metropolitan Life Insurance Company, Canadian Pacific Hotels Corporation,
Doubletree Hotels Corporation and Doubletree Partners.
10.5(3) Employment Agreement of Richard M. Kelleher, dated as of January 13, 1995.
10.6(2) 1994 Equity Participation Plan of Doubletree Corporation.
10.7(2) Hotel Chain Combination Agreement, dated as of December 8, 1993, among Canadian
Pacific Hotels (U.S.) Inc., MetPark Funding, Inc. and GQ Owners, L.P.
10.8(2) Amendment to the Hotel Chain Combination Agreement, dated as of June 30, 1994.
10.9(2) Amendment to the Incorporation and Registration Rights Agreement, dated as of June
30, 1994.
10.10(2) Amendment to the Tax Matters Agreement, dated as of June 30, 1994.
10.11(1) Form of Indemnification Agreement.
10.12(1) Form of Management Agreement between Metropolitan Life Insurance Company and the
Company.
10.13(1) Promissory Note, dated January 1, 1993, in principal amount of $4.0 million by
Boston HSR Limited Partnership in favor of Guest Quarters Hotels Partnership.
10.14 Modification of Promissory Note dated February 29, 1996.
10.15(3) Agreement Regarding Liquidation of GQ Owners, L.P., dated as of November 30, 1994,
among GEHOP, Ridge Partners, L.P., The Ueberroth Family Trust, The Ueberroth
Investment Trust and GQ Equities Limited.
10.16(3) Form of First Amendment to the 1994 Equity Participation Plan of Doubletree
Corporation.
10.17(3) Amended and Restated Agreement of Limited Partnership of Thayer Hotel Investors II
L.P., dated as of December 9, 1994, by and among Thayer Hotel Investments L.P.,
Doubletree Hotels Corporation and other Limited Partners.
</TABLE>
53
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
<S> <C>
10.18(3) First Amendment to Amended and Restated Agreement of Limited Partnership of Thayer
Hotel Investors II L.P., dated as of February 2, 1995, by and among Thayer Hotel
Investments L.P., Doubletree Hotels Corporation and other Limited Partners.
10.19(4) Master Agreement, dated as of February 1, 1996, by and among RFS Partnership,
L.P., Doubletree Corporation, RFS Hotel Investors, Inc., Seedling Merger
Subsidiary, Inc. and RFS, Inc.
10.20 First Amendment to Master Agreement dated November 21, 1996.
10.21(4) Preferred Stock Purchase Agreement, dated as of February 1, 1996, by and among RFS
Hotel Investors, Inc., Seedling Merger Subsidiary, Inc. and Doubletree
Corporation.
10.22(4) Second Amendment to Incorporation and Registration Rights Agreement, dated as of
February 27, 1996, by and among Doubletree Corporation, Robert M. Solmson,
individually and in his capacity as representative of others, H. Lance Forsdick,
Sr., William Lovelace and Michael J. Pascal.
10.23(4) Consolidated Lease Amendment, dated as of February 27, 1996, by and between RFS,
Inc. and RFS Partnership, L.P.
10.24(6) Securities Purchase Agreement dated as of October 31, 1996 by and between the
Company and the Trustees of General Electric Pension Trust.
10.25(6) Warrants to purchase 262,753 shares of Common Stock of Doubletree Corporation.
10.26(6) Credit Agreement dated as of November 8, 1996 by and among the Company, Morgan
Stanley Senior Funding, Inc., as syndication agent and arranger thereunder, The
Bank of Nova Scotia, as administrative agent thereunder, and the lenders
identified therein.
10.27(6) Amendment No. 3 to the Incorporation and Registration Rights Agreement dated as of
November 8, 1996 by and among Doubletree Corporation, GE Investment Hotel Partners
I, Limited Partnership, Metpark Funding Inc., The Ueberroth Family Trust,
Ueberroth Investment Trust, Richard J. Ferris, Ridge Partners, L.P., Robert M.
Solmson (for himself and as attorney-in-fact for the RFS Shareholders, as defined
therein), Canadian Pacific Hotel Holdings (U.S.) Inc. and Red Lion, a California
Limited Partnership.
10.28(6) Partnership Services Agreement dated as of November 8, 1996 by and among
Doubletree Corporation, Red Lion Hotels, Inc., Red Lion, a California Limited
Partnership and the affiliates thereof identified therein.
10.29(6) Guaranty of Lease Obligations dated as of November 8, 1996 by and among Doubletree
Corporation, Red Lion Hotels, Inc. and RLH Partnership, L.P.
10.30(6) Master Lease dated August 1, 1995 between RLH Partnership, L.P. and Red Lion
Hotels, Inc.
10.31(7) Note Purchase Agreement dated as of November 8, 1996 by and among the Company,
Morgan Stanley Group, Inc., The Bank of Nova Scotia, First Union Corporation and
Societe Generale Investment Corporation.
10.32 Management Agreement dated April 6, 1987 between Red Lion Inn Operating L.P. and
Red Lion, a California Limited Partnership.
10.33 Assignment and Assumption Agreement dated August 1, 1995 between Red Lion, a
California Limited Partnership and Red Lion Hotels, Inc.
10.34 Red Lion Supplemental Employee Retirement Plan.
10.35 Second Amendment to the 1994 Equity Participation Plan.
10.36 Stockholders Agreement dated as of September 30, 1996 between the Company, Jack
Deboer, the Alexander John DeBoer Trust dated March 14, 1995, the Christopher
Scott DeBoer Trust dated March 14, 1995 and the Warren D. Fix Family Partnership,
L.P.
10.37 Credit Facility Agreement dated November 11, 1996 between the Company and
Candlewood Hotel Company, Inc.
</TABLE>
54
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
<S> <C>
10.38 Subordinated Promissory Note dated November 11, 1996 by Candlewood Hotel Company,
Inc. in favor of the Company.
10.39 Guaranty Agreement, dated December 31, 1996, by Doubletree Corporation in favor of
GMAC Commercial Mortgage Corporation.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of Doubletree Corporation.
23.1 Consent of Independent Auditors.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
99.1 Agreement to Furnish Exhibits and Schedules.
</TABLE>
- ---------------
(1) Previously filed as exhibit to the Registrant's Registration Statement No.
33-79188 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K, dated February 27, 1996 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K dated September 12, 1996 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K dated November 21, 1996 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Registrant's Registration Statement on
Form S-4 (File No. 333-13159) and incorporated herein by reference.
55
<PAGE> 1
EXHIBIT 10.14
MODIFICATION OF PROMISSORY NOTE
DATE: February 29, 1996
PARTIES: Maker: BOSTON HSR LIMITED PARTNERSHIP,
a Massachusetts limited partnership
Payee: DOUBLETREE PARTNERS, a Delaware partnership, formerly
known as GUEST QUARTERS HOTELS
PARTNERSHIP, a Delaware partnership
RECITALS:
A. Payee has extended to Maker a loan in the principal amount of
$4,000,000.00, as evidenced by the Promissory Note dated as of January 1, 1993
("Note").
B. Maker has requested that Payee modify the Note as provided herein.
Payee is willing to so modify the Note subject to the terms and conditions
herein.
AGREEMENTS:
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Maker and Payee agree as follows:
1. Maker acknowledges the accuracy of the Recitals.
2. The Note is modified as follows:
The principal amount of the Note is $4,500,000.00 to evidence the
increase in the amount of the loan made by Payee to Maker.
3. Maker hereby accepts the modification and agreements herein
contained and hereby promises to pay the unpaid principal balance of the Note as
modified, together with interest thereon at the rate or rates per annum therein
provided, and to pay and perform all other obligations of Maker, all pursuant to
the terms of the Note as modified.
4. Maker hereby represents and warrants to Payee that: (a) each
representation of Maker in the Note or in any other agreement, document or
instrument evidencing, securing, or otherwise relating to Maker's indebtedness
to Payee (collectively referred to as the "Loan Documents") is true and correct
on the date hereof; (b) no default or event of default under the Note or any
other Loan Document, nor any event which, with the giving of notice or the
passage of time or both, would be a default thereunder, has
<PAGE> 2
occurred and is continuing; and (c) Maker has no claims, counterclaims,
defenses, or set-offs with respect to the indebtedness evidenced by the Note.
5. The Note and other Loan Documents are ratified and affirmed by Maker
and shall remain in full force and effect as modified herein.
IN WITNESS WHEREOF, Maker has executed and delivered this Modification
to Note on the day and year first above written.
BOSTON HSR LIMITED PARTNERSHIP,
a Massachusetts limited partnership
By: /s/ Edwin Sidman
--------------------------
Name:
A General Partner
2
<PAGE> 1
EXHIBIT 10.20
FIRST AMENDMENT TO MASTER AGREEMENT
THIS FIRST AMENDMENT TO MASTER AGREEMENT ("Agreement") is made as of
the 21st day of November 1996, among Doubletree Corporation, a Delaware
corporation ("Tree"), RFS, Inc., a Tennessee corporation (the "Lessee"), RFS
Hotel Investors, Inc., a Tennessee corporation ("RFSI"), RFS Partnership, L.P.,
a Tennessee limited partnership (the "Lessor"), RFS Leasing, Inc., a Tennessee
corporation and a wholly-owned subsidiary of the Lessee (the "Additional
Lessee"), RFS Financing Partnership, L.P., a Tennessee limited partnership (the
'Additional Lessor") and DTR RFS Lessee, Inc., a California corporation ("DTR
Lessee").
RECITALS
A. The Lessor and the Lessee are parties to that certain Consolidated
Lease Amendment dated as of February 27, 1996 (the "Existing Lease"), which
Existing Lease represents (as of the date hereof) forty-eight (48) separate
leases (the "Existing Leases").
B. The Lessor and DTR Lessee are parties to that certain Lease
Agreement dated as of May 30, 1996 (the "Existing DTR Lease").
C. The Lessor currently owns forty-eight (48) hotel properties
described in Exhibit A that are leased under the Existing Lease to the Lessee
and owns the hotel property described in Exhibit B (the "Del Mar Hotel") that is
leased under the Existing DTR Lease to DTR Lessee.
D. The Lessor is transferring to the Additional Lessor as of the date
hereof its fee interest in 15 of the hotel properties (the "Transfer Hotels"),
identified on Exhibit A and Exhibit B as Transfer Hotels, and in connection with
such transfer the Lessor desires to assign to the Additional Lessor all of its
rights under (1) the 14 leases represented by the Existing Lease
<PAGE> 2
relating to all of the Transfer Hotels other than the Del Mar Hotel (the "14
Existing Leases") and (2) the Existing DTR Lease relating to the Del Mar Hotel.
E. In connection with the transfer of the Transfer Hotels to the
Additional Lessor, at the request of the Lessor and the Additional Lessor, (1)
the Lessee has agreed to assign to the Additional Lessee all of its rights under
the 14 Existing Leases and (2) DTR Lessee has agreed to assign to the Additional
Lessee the Existing DTR Lease relating to the Del Mar Hotel.
F. The Additional Lessor and the Additional Lessee desire to amend
certain provisions of the 14 Existing Leases and the Existing DTR Lease.
G. The Lessor and the Lessee desire to amend certain provisions of the
Existing Lease relating to the 34 hotel properties (the "Remaining Hotels")
identified on Exhibit A as Remaining Hotels.
H. The parties hereto desire to amend the Master Agreement dated as of
February 1, 1996 (the "Original Master Agreement") among Tree, Seedling Merger
Subsidiary, Inc. (which was subsequently merged into the Lessee), the Lessee,
RFSI and the Lessor, to make certain amendments and other agreements with
respect to the foregoing and the Original Master Agreement.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Certain Definitions. Capitalized terms used but not defined herein
shall have the meanings assigned to them in the Original Master Agreement.
Unless the context otherwise
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<PAGE> 3
requires, (a) references to the singular shall include the plural and vice
versa, (b) references to gender shall include all genders, (c) references to
designated "Sections " or other subdivisions are references to the designated
Sections or other subdivisions of this Amendment or the Original Master
Agreement, as applicable, (d) all accounting terms not otherwise defined herein
shall have the meanings assigned to them in accordance with GAAP and, if
applicable, the Uniform System of Accounts (as defined in the Existing Lease)
and (e) the words 'herein," "hereof," and "hereunder" and other words of similar
import refer to this Amendment or the Original Master Agreement, as applicable,
as a whole and not to any particular Section or other subdivision.
2. Assignment and Assumption of the 14 Existing Leases and the Existing
DTR Lease.
a. By the Lessor and the Additional Lessor:
(i) The Lessor hereby (A) assigns to the Additional
Lessor all of its right, title and interest in and to the 14
Existing Leases and the Existing DTR Lease and (B) conveys,
transfers and assigns to the Additional Lessor all of its
interest in and to any fixtures, equipment and other personal
property used in connection with the Transfer Hotels.
(ii) The Additional Lessor hereby (A) accepts the
assignments, conveyances and transfers in paragraph (i) above
and (B) assumes all of the obligations of the Lessor under the
14 Existing Leases and the Existing DTR Lease accruing from
and after the date hereof.
(iii) The Lessor hereby agrees to hold the Additional
Lessor harmless from the obligations and liabilities of the
"Lessor" under the 14 Existing Leases
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<PAGE> 4
and the Existing DTR Lease arising from or relating to events or circumstances
occurring prior to the date hereof. The Additional Lessor hereby agrees to hold
the Lessor harmless from the obligations and liabilities of the "Lessor" under
the 14 Existing Leases and the Existing DTR Lease arising from or relating to
events or circumstances occurring on or after the date hereof.
b. By the Lessee, DTR Lessee and the Additional Lessee:
(i) The Lessee hereby (A) assigns to the Additional Lessee all
of its right, title and interest in and to the 14 Existing Leases and
(B) conveys, transfers and assigns to the Additional Lessee all of its
interest in and to any fixtures, equipment and other personal property
used in connection with the Transfer Hotels other than the Del Mar
Hotel.
(ii) DTR Lessee hereby (A) assigns to the Additional Lessee
all of its right, title and interest in and to the Existing DTR Lease
and (B) conveys, transfers and assigns to the Additional Lessee all of
its interest in and to any fixtures, equipment and other personal
property used in connection with the Del Mar Hotel.
(iii) The Additional Lessee hereby (A) accepts the
assignments, conveyances and transfers in paragraphs (i) and (ii) above
and (B) assumes all of the obligations of the Lessee under the 14
Existing Leases and of DTR Lessee under the Existing DTR Lease, in each
case accruing from and after the date hereof.
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<PAGE> 5
(iv) Each of the Lessee and DTR Lessee hereby agrees to hold
the Additional Lessee harmless from the obligations and liabilities of
the "Lessee" under the 14 Existing Leases and the Existing DTR Lease,
respectively, arising from or relating to events or circumstances
occurring prior to the date hereof. The Additional Lessee hereby agrees
to hold harmless the Lessee and the DTR Lessee from the obligations and
liabilities of the "Lessee" under the 14 Existing Leases and the
Existing DTR Lease, respectively, arising from or relating to events or
circumstances occurring on or after the date hereof.
c. The Lessor agrees to look solely to the Lessee with respect to the
obligations of the "Lessee" under the 14 Existing Leases accruing, or arising
from or relating to events or circumstances occurring, prior to the date hereof
and solely to the DTR Lessee with respect to the obligations of the "Lessee"
under the Existing DTR Lease accruing, or arising from or relating to events or
circumstances occurring, prior to the date hereof; and the Additional Lessor
agrees that it will have no rights or claims with respect thereto. The
Additional Lessor agrees to look solely to the Additional Lessee with respect to
the obligations of the "Lessee" under the 14 Existing Leases and the Existing
DTR Lease accruing, or arising from or relating to events or circumstances
occurring, from and after the date hereof; and the Lessor agrees that it will
have no rights or claims with respect thereto.
d. The Lessee and the DTR Lessee agree to look solely to the Lessor
with respect to the obligations of the "Lessor" under the 14 Existing Leases and
the Existing DTR Lease, respectively, accruing, or arising from or relating to
events or circumstances
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<PAGE> 6
occurring, prior to the date hereof; and the Additional Lessee agrees that it
will have no rights or claims with respect thereto. The Additional Lessee agrees
to look solely to the Additional Lessor with respect to the obligations of the
"Lessor" under the 14 Existing Leases and the Existing DTR Lease, respectively,
accruing, or arising from or relating to events or circumstances occurring, from
and after the date hereof; and the Lessee and the DTR Lessee each agrees that it
will have no rights or claims with respect thereto.
3. Modification and Amendment of the Existing Lease and the Existing
DTR Lease
a. Contemporaneously with the execution of this Agreement, the
Additional Lessor and the Additional Lessee shall execute the Second
Consolidated Lease Amendment pursuant to which the 14 Existing Leases
and the Existing DTR Lease shall be restated and amended, effective as
of the date hereof.
b. Contemporaneously with the execution of this Agreement, the
Lessor and the Lessee shall execute the Third Consolidated Lease
Amendment pursuant to which the 34 leases represented by the Existing
Lease relating to the Remaining Hotels shall be restated and amended,
effective as of the date hereof.
4. Amendments to the Original Master Agreement. The following
amendments to the Original Master Agreement shall be effective as of the date
hereof:
a. Section 1 of the Original Master Agreement shall be amended
hereby as follows:
(i) the definition of "Current Hotels" shall be
deleted in its entirety and the following substituted
therefor:
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<PAGE> 7
CURRENT HOTELS - shall mean the hotels leased by the Lessee from the
Lessor as of the Closing Date, plus the Del Mar Hotel.
(ii) the definition of "Default by the Lessee" shall be
deleted in its entirety and the following substituted therefor:
DEFAULT BY THE LESSEE - shall have the meaning set forth in
Section 15a.
(iii) the definition of "Percentage Lease" shall be deleted in
its entirety and the following substituted therefor:
PERCENTAGE LEASE - shall mean, (A) with respect to a Current
Hotel that is a Transfer Hotel, the percentage lease with
respect to such hotel represented by the Second Consolidated
Lease Amendment between the Additional Lessor and the
Additional Lessee, (B) with respect to a Current Hotel that is
not a Transfer Hotel, the percentage lease with respect to
such hotel represented by the Third Consolidated Lease
Amendment between the Lessor and the Lessee and (C) with
respect to each Additional Hotel, the percentage lease entered
into between the Lessor and the Lessee with respect to such
hotel.
(iv) the definition of "Percentage Rent" shall be amended
hereby by inserting the clause "or Additional Lessee's" after the word
"Lessee's."
b. Section 4(b) of the Original Master Agreement shall be amended by
inserting the following at the end of Section 4(b):
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<PAGE> 8
Notwithstanding any provisions of this Section 4(b) to the contrary,
the Additional Lessor and the Additional Lessee shall have the same rights and
obligations as the Lessor and the Lessee, respectively, under this Section 4(b),
provided, however, that such rights and obligations are and shall remain subject
to the terms of the Consolidated Lease Estoppel, Subordination, Attornment and
Non-Disturbance Agreement dated as of November 21, 1996 (the "SND Agreement")
among the Additional Lessor, the Additional Lessee and LaSalle National Bank for
so long as the SND Agreement remains in effect.
Section 5(a) of the Original Master Agreement shall be deleted in
its entirety and the following substituted therefor:
a. Net Worth. At all times during the terms of the Percentage
Leases relating to the Remaining Hotels and the Additional
Hotels, Tree shall cause the Lessee to maintain and the Lessee
shall maintain , a Net Worth in an amount at least equal to
$11,000,000. At all times during the terms of the Percentage
Leases relating to the Transfer Hotels, Tree and the Lessee
shall cause the Additional Lessee to maintain and the
Additional Lessee shall maintain, a Net Worth in an amount at
least equal to $4,000,000. The Lessee shall at all times
maintain an adequate amount of Working Capital to operate the
Remaining Hotels and the Additional Hotels. The
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<PAGE> 9
Additional Lessee shall at all times maintain an adequate
amount of Working Capital to operate the Transfer Hotels.
d. Section 7(a) of the Original Master Agreement shall be deleted in
its entirety and the following substituted therefor:
a. Changes in Structure. Tree represents that as of November
21, 1996, the Additional Lessee is a wholly-owned subsidiary
of the Lessee and the Lessee is a wholly-owned subsidiary of
Tree and Tree will have the sole economic and voting interest
in the Lessee. Until the earlier to occur of (i) the
expiration of ten years following the Closing Date or (ii) the
date of redemption or conversion of the Preferred Stock,
without the prior written consent following not less than 60
days prior written notice to the Lessor or the Additional
Lessor, as the case may be, which consent shall not be
unreasonably withheld, Tree, the Lessee and the Additional
Lessee shall not permit any merger, sale of its stock or sale,
transfer or conveyance of all or substantially all of the
assets of the Lessee or the Additional Lessee if, as a result
thereof, the Lessee or the Additional Lessee, or the surviving
entity, would cease to be controlled, directly or indirectly,
by Tree. After the date described in the preceding sentence,
any merger, sale of stock, transfer or conveyance of all or
substantially all of the assets of the Lessee or the
Additional Lessee which results in the Lessee
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<PAGE> 10
or the Additional Lessee ceasing to be controlled, directly or
indirectly, by Tree shall require the prior written consent of
the Lessor or the Additional Lessor, as the case may be, which
consent shall not be unreasonably withheld and which shall be
granted by the Lessor or the Additional Lessor, as the case
may be, if the party proposed to acquire control of the Lessee
or the Additional Lessee or its assets obtains the approval of
the Franchisors to serve as franchise licensee for the
affected Hotels and, if applicable, of liquor licensing
authorities for the affected Hotels, and either (x) has
substantial experience in the leasing and/or managing of
hotels of the type then owned by the Lessor or the Additional
Lessor, as the case may be, and in the operation of hotels
licensed by one or more of the Franchisors, or (y) provides
reasonable assurance to the Lessor or the Additional Lessor,
as the case may be, that such party will maintain the senior
management organization of the Lessee or the Additional
Lessee, as the case may be, materially intact, or (z) enters
into management arrangements for the operation of the affected
Hotels under terms satisfactory to the Lessor or the
Additional Lessor, as the case may be, during the remainder of
the terms of the Percentage Lease, by an entity that satisfies
either (x) or (y) above. Prior to any transaction otherwise
permissible under the preceding sentence,
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<PAGE> 11
Tree, the Lessee or the Additional Lessee, as the case may be,
and the proposed transferee shall acknowledge and agree in
writing with the Lessor or the Additional Lessor, as the case
may be, with respect to the restrictions on change in control
set forth herein and shall agree that no further transfer of
capital stock or assets may be made by such transferee except
pursuant to the provisions of this Section.
e. Section 7(c) of the Original Master Lease Agreement shall be amended
hereby by inserting the clause "and the Additional Lessee" after the word
"Lessee."
f. Sections 8, 9 and 10 of the Original Master Agreement shall be
deleted in their entirety and the following substituted therefor:
8. Financial Statements; Indemnification; Due Diligence;
Confidential.
a. Financial Disclosure. During the term of any
Percentage Lease, Tree, the Lessee and the Additional Lessee
agree:
(i) to make available to RFSI, the Lessor and the
Additional Lessor,
(A) not more than 30 days following the end
of the first three calendar quarters of each year,
quarterly unaudited financial statements, including
balance sheet, statement of operations, statement of
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<PAGE> 12
shareholders' equity, statement of cash flows and schedules for each of the
Lessee and the Additional Lessee for the most recently ended calendar quarter
and the comparable prior year period prepared in conformity with GAAP;
(B) not more than 60 days after the end of each calendar year, audited
annual financial statements and schedules for each of the Lessee and the
Additional Lessee for the most recently ended calendar year prepared in
accordance with GAAP, audited by a national accounting firm reasonably
acceptable to RFSI, the Lessor and the Additional Lessor;
(C) any historical financial information necessary to re-state
historical financial information to conform to the presentation of each of the
Lessee's and the Additional Lessee's audited and unaudited financial statements
at any future time; and
(D) on a timely basis, any other information reasonably requested by
RFSI, the Lessor or the Additional Lessor to permit RFSI, the
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<PAGE> 13
Lessor or the Additional Lessor to meet their filing and
reporting requirements under the 1934 Act and to file and have
declared effective registration statements under the 1933 Act,
including providing information necessary to complete the
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" section of RFSI's 1934 Act reports
and 1933 Act registration statements as it may relate to the
Lessee, the Additional Lessee or the Hotels.
(ii) to provide to RFSI, the Lessor and the Additional Lessor
operating and financial reports described on Exhibit E hereto.
(iii) that the Lessee and the Additional Lessee shall bear the
cost of obtaining, preparing and providing all information required to
be furnished to the Lessor, the Additional Lessor and RFSI under this
Section 8(a), including the cost and related expenses of the annual
audit of the financial statements of the Lessee and the Additional
Lessee, except as provided in Section 5 of the First Amendment to
Master Agreement.
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<PAGE> 14
b. Indemnification. RFSI and the Lessor agree, jointly and severally,
to indemnify, defend (with counsel acceptable to the Lessee), and hold harmless
the Lessee, the Additional Lessee and their respective officers, directors and
controlling persons from and against any losses, claims, damages, expenses or
liabilities (or actions in respect thereof) to which the Lessee, the Additional
Lessee and their respective officers, directors or controlling persons may
become subject under the 1933 Act, the 1934 Act or otherwise, insofar as such
losses, claims, damages, expenses or liabilities or actions in respect thereof
arise out of or are based upon the 1934 Act reports or 1933 Act registration
statements of RFSI or the Lessor, except to the extent any such claims,
liabilities, losses, damages, expenses, or liabilities (or actions in respect
thereof) result from any untrue statement of a material fact or omission of any
material fact in the information provided by the Lessee or the Additional Lessee
to RFSI, the Lessor or the Additional Lessor pursuant to subsections (i) and
(ii) of this Section 8(a). The Lessee and Tree agree, jointly and severally, to
indemnify, defend (with counsel acceptable to RFSI and the Lessor) and hold
harmless RFSI, the Lessor and the Additional Lessor, and their respective
officers, directors and controlling persons from and against any losses, claims,
damages, expenses or liabilities (or actions in respect thereof) to which RFSI,
the Lessor or the Additional Lessor or their respective officers, directors or
controlling
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<PAGE> 15
persons may become subject under the 1933 Act, the 1934 Act or otherwise,
insofar as such losses, claims, damages, expenses or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement of a
material fact or omissions of any material fact in any information furnished by
the Lessee or the Additional Lessee to RFSI, the Lessor or the Additional Lessor
pursuant to subsections (i)(A), (B) and (C) of this Section 8(a).
C. Due Diligence. During the term of any Percentage Lease,
Tree, the Lessee and the Additional Lessee agree:
(i) to permit the Lessor, the Additional Lessor and
RFSI, together with their independent public accountants,
counsel, financial advisors, underwriters, underwriters'
counsel, rating agencies, lenders and others having a
legitimate interest in the Lessee's, the Additional Lessee's
or the Hotels' financial condition and results of operations,
during regular business hours, upon reasonable notice and at
the sole cost of the Lessor, the Additional Lessor and RFSI
(provided there shall be no charge by the Lessee or the
Additional Lessee to the Lessor, the Additional Lessor or RFSI
for the time of the Lessee's or the Additional Lessee's
officers or employees), to interview
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officers and employees of the Lessee or the Additional Lessee and to
have access to and review:
(A) the general accounting records of the Lessee or
the Additional Lessee or any Hotel for purposes of performing
an audit of the Lessee or the Additional Lessee or any Hotel
in accordance with generally accepted auditing standards and
to conduct reasonable due diligence with respect to the Lessee
or the Additional Lessee and their respective business
activities and the Hotels; and
(B) the Lessee's or the Additional Lessee's corporate
records, minutebooks, contracts and other documents,
agreements or items relating to the operation of the Hotels
and the Lessee's or the Additional Lessee's financial
condition.
(ii) to cooperate promptly and fully with the Lessor, the
Additional Lessor and RFSI, upon request and at the cost of Lessor and
the Additional Lessor (except with respect to the cost of obtaining,
preparing and providing the information required to be furnished to
RFSI, the Lessor and the Additional Lessor under Section 8(a) above and
any costs relating to the time of employees or officers
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<PAGE> 17
of the Lessee, the Additional Lessee or Tree, other than as
provided in Section 5 of the First Amendment to Master
Agreement), in making available such information with respect
to the Lessee, the Additional Lessee or the Hotels as may be
required by any regulatory agency, including the Commission
and the National Association of Securities Dealers, Inc., the
Nasdaq Stock Market or any stock exchange on which RFSI's, the
Lessor's or the Additional Lessor's securities may be
registered, listed or traded.
(iii) to use their best efforts to cause the
independent public accountants preparing audits of the Lessee
or the Additional Lessee to provide RFSI, the Lessor or the
Additional Lessor, at the sole cost of the Lessor, the
Additional Lessor and RFSI with all consents of such
accountants required for RFSI's, the Lessor's or the
Additional Lessor's filings under the 1933 Act or the 1934 Act
or to have RFSI's, the Lessor's or the Additional Lessor's
registration statements be declared effective under the 1933
Act.
d. Confidentiality. To the extent Lessor, the Additional Lessor or RFSI
on the one hand, or the Lessee, the Additional Lessee or Tree on the other,
obtains information or
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becomes aware of material information concerning the other that is not
disclosed in a public announcement or filing under the 1933 Act or the
1934 Act by Tree or RFSI, each party agrees that it shall not
improperly disclose or unlawfully utilize such information or otherwise
act unlawfully with respect thereto.
9. REIT Requirements.
a. Tree, the Lessee and the Additional Lessee understand that, in order
for RFSI to qualify as a REIT, the following requirements (the "REIT
Requirements") must be satisfied:
(i) The average of the adjusted tax bases of the Lessor's or
the Additional Lessor's personal property that is leased to the Lessee
or the Additional Lessee under a lease at the beginning and end of a
calendar year cannot exceed 15% of the average of the aggregate
adjusted tax bases of all of the Lessor's or the Additional Lessor's
property that is leased to the Lessee or the Additional Lessee under
such lease at the beginning and end of such calendar year.
(ii) Neither the Lessee nor the Additional Lessee can sublet
the property that is leased to it by the Lessor or the Additional
Lessor, or enter into any similar arrangement, on any basis such that
the rental or other
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amounts paid by the sublessee thereunder would be based, in whole or
in part, on either (i) the net income or profits derived by the
business activities of the sublessee or (ii) any other formula such
that any portion of the rent paid by the Lessee or the Additional
Lessee to the Lessor or the Additional Lessor would fail to qualify as
"rents from real property" within the meaning of Section 856(d) of the
Code.
(iii) Neither the Lessee nor the Additional Lessee can
sublease the property leased to it by the Lessor or the Additional
Lessor to, or enter into any similar arrangement with, any person in
which RFSI owns, directly or indirectly, a 10% or more interest, within
the meaning of Section 856(d)(2)(B) of the Code.
(iv) RFSI cannot own, directly or indirectly, a 10% or more
interest in the Lessee or the Additional Lessee, within the meaning of
Section 856(d)(2)(B) of the Code.
(v) No person can own, directly or directly, capital stock of
RFSI that exceeds the "Limit" (as defined in RFSI's Charter, as amended
and restated).
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b. Tree, the Lessee and the Additional Lessee agree, and agree
to use reasonable efforts to cause their Affiliates, to use their best
efforts to permit the REIT Requirements to be satisfied. Tree, the
Lessee and the Additional Lessee agree, and agree to use reasonable
efforts to cause their Affiliates, to cooperate in good faith with
RFSI, the Lessor and the Additional Lessor to ensure that the REIT
Requirements are satisfied, including but not limited to, providing
RFSI with information about the ownership of Tree, the Lessee, the
Additional Lessee and their Affiliates to the extent that such
information is reasonably available. Tree, the Lessee and the
Additional Lessee agree, and agree to use reasonable efforts to cause
their Affiliates, upon request by RFSI, and, where appropriate, at
RFSI's expense, to take reasonable action necessary to ensure
compliance with the REIT Requirements. Immediately after becoming aware
that the REIT Requirements are not, or will not be, satisfied, Tree,
the Lessee or the Additional Lessee shall notify, or use reasonable
efforts to cause their Affiliates to notify, RFSI of such
noncompliance.
10. Termination of REIT Status. Notwithstanding anything herein or in
any Percentage Lease to the contrary, in the event RFSI terminates its status as
a real estate investment trust for federal income tax purposes, the Lessor and
the Additional Lessor may elect to terminate all then-existing Percentage Leases
and terminate the Right of First Refusal by providing the Lessee or the
Additional
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Lessee, as the case may be, at least 30 days prior written notice, or such
longer notice as may be required by statute or regulation to comply with the
WARN Act or other similar or successor federal or state laws, and by satisfying
the following requirements:
(i) if such terminations occur prior to sale, redemption or
conversion of all of the Preferred Stock, RFSI shall purchase from the
Lessee within twenty (20) business days after the date of such
terminations, all of the then-outstanding Preferred Stock then owned by
the Lessee at a price per share equal to the greater of (A) the Stated
Value plus all accrued and unpaid dividends at the date of such
redemption or (B) the product of (1) the weighted average of the sales
prices of RFSI's common stock for all transactions reported on the
Nasdaq Stock Market or principal exchange on which RFSI's common stock
is then traded during the ten (10) business days preceding the second
business day preceding the date of purchase of the Preferred Stock or,
if RFSI's common stock is no longer traded on the Nasdaq Stock Market
or a recognized exchange, the fair market value thereof as mutually
agreed by RFSI and the Lessee, or if RFSI and the Lessee cannot so
agree, by appraisal by an independent third party designated by RFSI
and the Lessee or by their respective designees multiplied by (2) the
number of shares of Common Stock into which a share of Preferred Stock
then held by the
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Lessee would be convertible, if converted on the business day preceding
the date of the redemption; and
(ii) if such terminations occur prior to the tenth (10th)
anniversary of the Closing Date, the Lessor shall pay to the Lessee an
amount equal to $5,000,000, which amount shall be reduced by $41,667
for each calendar month which has expired during the ten (10) year
period following the Closing Date; and
(iii) the Lessor or the Additional Lessor shall pay the Lessee
or the Additional Lessee, as the case may be, the fair market value of
the Percentage Leases based on the then-remaining terms of the
Percentage Leases determined in the manner set forth in Article XXXVII
of the Form Percentage Lease. The Lessor and the Additional Lessor must
elect to terminate both the Right of First Refusal and all then-
existing Percentage Leases in exercising their rights under this
Section 10.
g. The first sentence of Section 14 of the Original Master Agreement
shall be deleted in its entirety and the following substituted therefor:
From and after the date of the First Amendment to Master
Agreement, (i) an Event of Default (as defined in the Percentage
Leases) by the Additional Lessee under a Percentage Lease with respect
to a Transfer Hotel will continue to create an Event of Default under
the Percentage Leases with respect to all other Transfer Hotels and
(ii) an Event of Default by the Lessee under a Percentage Lease with
respect to
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<PAGE> 23
a Remaining Hotel will continue to create an Event of Default under the
Percentage Leases with respect to all other Remaining Hotels. From and
after the date of the First Amendment to Master Agreement, (i) a
default or an Event of Default under a Percentage Lease with respect to
a Transfer Hotel shall not constitute a default or an Event of Default
under a Percentage Lease with respect to any Remaining Hotel and (ii) a
default or an Event of Default with respect to a Remaining Hotel shall
not constitute a default or an Event of Default under a Percentage
Lease with respect to a Transfer Hotel.
h. Section 15a of the Original Master Agreement shall be deleted in its
entirety and the following substituted therefor:
Default.
a. A "Default by the Lessee" shall exist under this Agreement
if any of the following occur:
(i) Minimum Net Worth. During the term of any
Percentage Lease, (a) the Additional Lessee fails to maintain
a minimum Net Worth as set forth in Section 5 and does not
cure any deficiency within 30 days following written notice
thereof from the Additional Lessor or (b) the Lessee fails to
maintain a minimum Net Worth as set forth in Section 5
and does not cure any deficiency within 30 days following
written notice thereof from the Lessor.
23
<PAGE> 24
(ii) Default Under Percentage Leases. An Event of
Default occurs under any of the Percentage Leases.
(iii) Other Breaches. The Lessee or the Additional
Lessee fails to comply with any other provision of this
Agreement for a period of 30 days after being notified by the
Lessor or the Additional Lessor in writing of the provisions
of this Agreement with which the Lessee or the Additional
Lessee, as the case may be, has failed to comply; provided
that if such default (other than a failure to pay any rent
under any Percentage Lease when due (after any applicable cure
period), which shall be subject to the provisions set forth in
the Percentage Leases, and any failure to maintain the minimum
Net Worth, which shall be subject to the provisions of
subsection 15a(i) above) cannot with due diligence be cured
within a 30 day period, such period shall be extended for such
reasonable time as the Lessee or the Additional Lessee, as the
case may be, promptly and with due diligence commences and
continues the cure thereof but in no event for a period of
more than 90 days following the date of notice from the Lessor
or the Additional Lessor, as the case may be.
i. Section 16 of the Original Master Agreement shall
be amended such that notices made to the Additional
Lessee shall be made in the same manner in which
notices are required to be made to the Lessee and
notices made to the
24
<PAGE> 25
Additional Lessor shall be made in the same manner in which notices are required
to be made to the Lessor.
5. Certain Expenses Associated with the Additional Lessee.
a. The Additional Lessor and the Lessor jointly and severally agree
that they shall be responsible for the following costs and expenses related to
the organization and on-going maintenance of the Additional Lessee.
(i) the costs and expenses of incorporating and organizing the
Additional Lessee in Tennessee and qualifying the Additional Lessee to
do business in each of the states in which a Transfer Property is
located, including all filing fees, reasonable counsel fees and other
fees with respect thereto;
(ii) all costs and expenses incurred in connection with
transferring the 14 Existing Leases and the Existing DTR Lease to the
Additional Lessee, including (A) costs and expenses incurred in
connection with transferring the related franchise licenses and any
other licenses and permits from the Lessee or DTR Lessee to the
Additional Lessee, (B) the preparation, negotiation and execution of
the Second Consolidated Lease Amendment and Third Consolidated Lease
Amendment, the First Amendment to Master Agreement, the management
agreements between the Additional Lessee and affiliated managers, the
Consolidated Lease Estoppel, Subordination, Attornment and
Non-Disturbance Agreement relating to the Transfer Hotels and any other
25
<PAGE> 26
documents entered into by the Additional Lessee in connection with the transfer
of the Transfer Properties and (C) reasonable fees and costs of counsel relating
to the foregoing;
(iii) the ongoing fees, annual business taxes and similar amounts
required to be paid to governmental authorities by the Additional Lessee in
order to maintain its corporate existence and be qualified to do business and
remain in good standing in each of the states in which the Transfer Properties
are located (net of such amounts, if any, by which Lessee's or DTR Lessee's
obligations have been reduced as a result of the assignment of the 14 Existing
Leases and the DTR Lease to the Additional Lessee, taking into account the fact
that the Lessee will be required to maintain its qualification to do business in
all of the states in which the Transfer Hotels covered by the 14 Existing Leases
are located because, incident to the assignment of the 14 Existing Leases by the
Lessor to the Additional Lessor and by the Lessee to the Additional Lessee, at
the request of the Additional Lessor, the Lessee has been engaged to manage such
Hotels); and
(iv) The incremental cost with respect to the ongoing administration
and accounting of the Additional Lessee to the extent such cost, together with
the related costs of the Lessee, exceed the costs that the Lessee and DTR Lessee
would otherwise have incurred (A) if the 14 Existing Leases and the Existing DTR
Lease had not been transferred to
26
<PAGE> 27
the Additional Lessee and the Additional Lessee had not been formed,
and (B) if the Lessee had not been engaged to manage the Transfer
Hotels covered by the 14 Existing Leases.
(b) In the event the Lessee or the Additional Lessee pays any
of the costs or fees for which the Additional Lessor and the Lessor are
responsible pursuant to paragraph (a) above, the Lessor and/or the
Additional Lessor shall reimburse the Lessee or the Additional Lessee,
as applicable, for such costs or fees no later than 30 days following
receipt of satisfactory evidence that such amounts were paid.
(c) The Lessee and the Additional Lessee agree to cooperate
with the Additional Lessor in determining what amounts are payable by
the Lessor and the Additional Lessor to the Lessee or the Additional
Lessee pursuant to paragraph (a) above and agree that neither the
Lessor nor the Additional Lessor shall be responsible for any costs or
expenses with respect to the items listed in paragraph (a) above to the
extent the Lessee or DTR Lessee would otherwise have been responsible
for such costs and expenses (A) if the 14 Existing Leases and the
Existing DTR Lease had not been transferred to the Additional Lessee
and the Additional Lessee had not been formed, and (B) if the Lessee
had not been engaged to manage the Transfer Hotels covered by the 14
Existing Leases.
6. Transfer of Licenses and Permits. The parties acknowledge that in
order to meet the timing requirements of the Lessor and the Additional Lessor in
connection with the transfer of the Transfer Hotels by the Lessor to the
Additional Lessor and, incident thereto, the transfer
27
<PAGE> 28
to the Additional Lessee of the interest of the Lessee and the DTR Lessee in
the 14 Existing Leases and the Existing DTR Lease, respectively, there has not
been sufficient time in which to also effect the transfer of certain licenses
and other governmental authorizations (including, in the case of certain of the
Transfer Hotels, liquor licenses) with respect to the operation of the Transfer
Hotels from the Lessee and the DTR Lessee to the Additional Lessee and to obtain
all requisite governmental approvals with respect thereto (collectively, the
"Governmental Transfer Approvals"). Accordingly, the parties agree that (a)
notwithstanding anything to the contrary contained in the Second Consolidated
Lease Amendment (including, without limitation, Sections 8.1 and 8.2 thereof),
the absence of the Governmental Transfer Approvals until such time that such
Governmental Transfer Approvals initially are obtained shall not constitute a
default or an Event of Default under the Second Consolidated Lease Amendment or
a "Default by the Lessee" under the Original Master Agreement, as amended
hereby, except to the extent the Additional Lessee is in breach of its
obligations under paragraph (c) below which breach continues uncured beyond the
expiration of the notice and grace periods provided for in Section 16.1(d) of
the Second Consolidated Lease Amendment and in Section 15a of the Original
Master Agreement, as amended hereby; (b) the Lessor and the Additional Lessor
agree, jointly and severally, to indemnify, defend (with counsel reasonably
acceptable to the Additional Lessee), and hold harmless the Additional Lessee
and its officers, directors and controlling persons from and against any losses,
claims, damages, expenses or liabilities (or actions in respect thereof) to
which the Additional Lessee or its officers, directors or controlling persons
may become subject by reason of the absence of the Governmental Transfer
Approvals; and (c) at the expense of the Lessor and the Additional Lessor as set
forth in Section 5 above, the Additional Lessee shall
28
<PAGE> 29
promptly apply for and diligently seek the Governmental Transfer Approvals and
the Lessor, the Additional Lessor, the Lessee, the DTR Lessee and the Additional
Lessee shall cooperate with each other in order to expeditiously obtain the
Governmental Transfer Approvals.
7. Recording the SND Agreement. The parties acknowledge that the form
in which the SND Agreement has been executed was not appropriate to permit the
recording of the SND Agreement in all jurisdictions in which the Transfer Hotels
are located. Accordingly, contemporaneously with the execution of this
Amendment, counterparts of the SND Agreement are being recorded in some but not
all of the jurisdictions in which the Transfer Hotels are located. The Lessor
and the Additional Lessor agree that, promptly following the execution of this
Amendment, they will have counterparts of the SND Agreement re-executed by all
parties thereto in form sufficient to permit, and shall promptly thereafter
effect, the recording of the SND Agreement in each jurisdiction in which a
Transfer Hotel is located in which the SND Agreement has not previously been
recorded.
* * *
As amended hereby, the Original Master Agreement is ratified, confirmed and
approved.
29
<PAGE> 30
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
RFS HOTEL INVESTORS, INC.
By: /s/ Michael J. Pascal
--------------------------
Name: Michael J. Pascal
------------------------
Title: CEO\Secretary\Treasurer
-----------------------
RFS PARTNERSHIP, L.P.
By: RFS Hotel Investors, Inc.,
general partner
By: /s/ Michael J. Pascal
--------------------------
Name: Michael J. Pascal
------------------------
Title: CEO/Secretary/Treasurer
-----------------------
RFS FINANCING PARTNERSHIP
By: RFS Financing Corporation,
general partner
By: /s/ Michael J. Pascal
--------------------------
Name: Michael J. Pascal
------------------------
Title: V.P.
-----------------------
DOUBLETREE CORPORATION
By: /s/ David L. Stivers
--------------------------
Name: David L. Stivers
------------------------
Title: SR. V.P.
-----------------------
<PAGE> 31
RIFS, INC.
By: /s/ Larry Russell
--------------------------
Name: Larry Russell
------------------------
Title: Secretary
-----------------------
DTR RPS LESSEE, INC.
By: /s/ David A. Heuck
--------------------------
Name: David A. Heuck
------------------------
Title: V.P.
-----------------------
RFS LEASING, INC.
By: /s/ Larry Russell
--------------------------
Name: Larry Russell
------------------------
Title: Secretary
-----------------------
<PAGE> 1
Exhibit 10.32
MANAGEMENT AGREEMENT
DATED APRIL 6, 1987
BETWEEN
RED LION INNS OPERATING L.P.,
a Delaware limited partnership
AND
RL ACQUISITION COMPANY,
a California limited partnership
<PAGE> 2
MANAGEMENT AGREEMENT
DATED APRIL 6, 1987
BETWEEN
RED LION INNS OPERATING L.P.,
a Delaware limited partnership
AND
RL ACQUISITION COMPANY,
a California limited partnership
TABLE OF CONTENTS
SECTION
PAGE
RECITALS................................................................... 1
DEFINITIONS................................................................ 1
ARTICLE I - REPRESENTATIONS AND WARRANTIES........................... 5
1.1 Representations and Warranties of Manager............. 5
1.2 Representations and Warranties of Owner............... 6
ARTICLE II - GENERAL MANAGEMENT AND OPERATION......................... 6
2.1 General Management Services........................... 6
2.2 Operating Plan and Budget............................. 7
2.3 Maintenance, Repairs and Capital Improvements......... 8
2.4 Books and Records, Financial Statements and
Internal Audits....................................... 10
2.5 Personnel............................................. 11
2.6 Special Projects...................................... 12
2.7 Communications........................................ 12
2.8 Sales and Reservations................................ 14
2.9 Manager's Computer Software........................... 14
2.10 Manager's Charge Card................................. 15
2.11 Hotel Retail Space.................................... 15
2.12 Affiliated Companies.................................. 16
2.13 Costs and Expenses.................................... 16
ARTICLE III - MANAGEMENT FEES AND REIMBURSABLE EXPENSES................ 17
3.1 Definitions of Gross Revenue, Gross Operating Profit,
Adjusted Gross Operating Profit and Cash Flow
Available for Incentive Fee........................... 17
3.2 Management Fees....................................... 21
3.3 Place of Payment...................................... 22
(i)
<PAGE> 3
SECTION PAGE
3.4 Owner's Obligation to Provide Funds
to Pay Fees and Expenses; Financing
Program............................. 22
3.5 Hotel Bank Accounts................. 22
3.6 Withdrawals from Hotel Bank
Accounts............................ 23
3.7 Remittances to Owner................ 23
ARTICLE IV -- TERM AND TERMINATION.................... 23
4.1 Term of Agreement................... 23
4.2 Events of Termination............... 23
4.3 Replacement of Red Lion Properties,
Inc., as General Partner............ 25
4.4 Actions to be Taken on Termination.. 25
ARTICLE V -- INSURANCE............................... 26
5.1 Insurance by Manger................. 26
5.2 Parties Insured, Amount of
Coverage, Etc. ..................... 27
5.3 Evidence of Insurance, Etc. ........ 28
5.4 Reports by Manager.................. 28
5.5 Review of Limits.................... 29
5.6 Limitation on Scope of Services..... 29
ARTICLE VI -- SUBORDINATION; MORTGAGES................ 29
6.1 Authorization to Mortgage Hotels.... 29
6.2 Subordination....................... 30
6.3 Rights of Mortgages................. 30
6.4 Estoppel Certificates............... 31
ARTICLE VII -- DESTRUCTION............................. 32
7.1 Owner to Restore After Insured
Casualty............................ 32
7.2 Termination After Substantial
Insured Casualty.................... 32
7.3 Uninsured Casualty - Owner's Option
to Terminate or Restore............. 33
7.4 Commencement and Completion of
Casualty Restoration................ 33
7.5 Proceeds of Business Interruption
Insurance........................... 33
ARTICLE VIII -- CONDEMNATION............................ 34
8.1 Permanent Taking.................... 34
8.2 Taking for Temporary Use............ 34
(ii)
<PAGE> 4
SECTION PAGE
ARTICLE IX -- ASSIGNMENTS, ETC. ...................... 36
9.1 By Manager.......................... 36
9.2 By Owner............................ 37
9.3 Sale of Hotels...................... 37
ARTICLE X -- MISCELLANEOUS........................... 39
10.1 Complimentary/Discount Policies..... 39
10.2 Manager Identification, Names of
Hotels.............................. 39
10.3 Compliance with Law................. 40
10.4 Governing Law....................... 40
10.5 No Waiver of Breach................. 40
10.6 Notices............................. 40
10.7 Successors and Assigns.............. 41
10.8 Indemnification..................... 41
10.9 Limitation on Pledging Owner's
Credit.............................. 41
10.10 Entire Agreement.................... 42
10.11 Counterparts........................ 42
10.12 Captions, Etc. ..................... 42
10.13 No Partnership or Joint Venture..... 42
10.14 Amendment........................... 42
10.15 Limited Recourse.................... 42
10.16 Memorandum of Agreement............. 42
(iii)
<PAGE> 5
MANAGEMENT AGREEMENT
This Management Agreement ("Agreement") is entered into this 6th day of
April, 1987, by and between RED LION INNS OPERATING L.P., a Delaware limited
partnership ("Owner"), and RL ACQUISITION COMPANY, a California limited
partnership ("Manager") (hereinafter sometimes individually referred to as the
"Party" and collectively referred to as the "Parties").
RECITALS
A. Owner plans to acquire from Manager all of Manager's interest in
the hotels described in Exhibit A, attached hereto and incorporated herein by
this reference (the "Hotels").
B. Owner desires to have Manager manage and operate the Hotels and
Manager is willing to perform such services on the terms and conditions set
forth herein.
AGREEMENTS
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements herein contained, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the Parties agree as
follows:
DEFINITIONS
When used in this Agreement, the following terms shall have the
following meanings:
Acquisition Date shall have the meaning set forth in Section 4.1.
Adjusted Gross Operating Profit shall have the meaning set forth in
Section 3.1(d).
Applicable Operating Year shall have the meaning set forth in Section
2.2(a).
Approved Mortgage shall mean the Mortgage and any other lien or
encumbrance approved by Manager pursuant to Section 6.1.
Approved Mortgagee shall mean the lender making the loan secured by any
Approved Mortgage.
Base Fee shall mean the fee calculated as provided in Section 3.2(a).
<PAGE> 6
Capital Improvement shall mean those items (other than routine repairs
and maintenance) constructed or installed as part of a Hotel (including
Furniture, Fixtures and Equipment) the cost of which for accounting purposes
may not be expensed but must be capitalized according to generally accepted
accounting principles in effect as of the date hereof. All Capital Improvements
shall be owned by Owner.
Capital Improvement Plan shall mean the budget for Capital Improvements
(plus additions and replacements of Furniture, Furnishings and Equipment) for a
Hotel as provided in Section 2.3(c).
Cash Flow Available for Debt Service shall have the meaning set forth
in Section 3.1(e).
Cash flow Available for Incentive Fee shall have the meaning set forth
in Section 3.1(f).
Casualty Restoration shall have the meaning set forth in Section 7.1.
Closing Costs shall mean the total cost to Owner, including all closing
costs, of: (i) purchasing the Hotels, (ii) obtaining and consummating the loan
secured by the Mortgage, and (iii) entering into this Agreement.
Current Priority Amount during any month shall mean an amount equal to
the sum of (i) the actual interest plus amortization of principal (excluding
"balloon" payments, if any) due and payable by the Owner during such month on
(A) the loan secured by the Mortgage or (B) after the repayment of the loan
secured by the Mortgage, the scheduled monthly debt service on the loan secured
by the Mortgage during the last year of the original term thereof, (ii) interest
payable on the Working Capital Line, (iii) an amount equal to $27,083.33 for
Owner's administrative expenses for such month for the first thirty-six full
months of the term hereof and thereafter Owner's actual administrative expenses
for such month incurred for accounting and legal services and other similar
expenses, not to exceed three-eighths percent (0.375%) of Gross Revenues per
annum if a Manager Affiliate is not the general partner of Owner, and (iv) the
Priority Return.
If Manager's right to manage a Hotel pursuant to this Agreement is
terminated by reason of a Disposition of one or more Hotels (the "Excluded
Hotels"), the amounts described in clauses (i) and (iv) above shall each be
reduced by the product of (x) such amounts existing immediately before such
Disposition and (y) a fraction, the numerator of which is the Adjusted Gross
Operating Profit for the immediately preceding
2
<PAGE> 7
three calendar years (or such lesser period for which results of operation of
the Hotels hereunder are available) for the Excluded Hotels and the denominator
of which is the Adjusted Gross Operating Profit of all of the Hotels managed
under this Agreement immediately before such Disposition for such period.
DISPOSITION shall mean a Taking of a Hotel, an election by Owner not to
restore a Hotel following a casualty, a sale of a Hotel or any other event
which results in a Hotel no longer being managed by Manager pursuant to this
Agreement.
FURNITURE, FIXTURE and EQUIPMENT shall mean the furniture, furnishings,
fixtures and equipment installed and used in a Hotel, including without
limitation all necessary furniture and furnishings for guest rooms, public
areas and non-public areas (such as kitchen, laundry and cleaning facilities,
rooms for the use of employees, storage areas, front desk and administrative
offices), floor and window coverings, decorative light fixtures and equipment,
but excluding, however, a Hotel's major mechanical and electrical equipment and
systems (for example, the elevators). All Furniture, Fixtures and Equipment
shall be owned by Owner.
GROSS OPERATING PROFIT shall have the meaning set forth in Section
3.1(c).
GROSS REVENUE shall have the meaning set forth in Section 3.1(a).
HOTEL shall have the meaning set forth in Recital A.
HOTEL PERSONNEL shall have the meaning set forth in Section 2.5(a).
HOTEL RETAIL SPACE shall mean any space in the Hotels other than rooms
and associated space, convention facilities, restaurants and food and beverage
service facilities.
INCENTIVE FEE shall mean the fee calculated as provided in Section
3.2(b).
INVENTORIES shall mean the inventories of food, beverage and other
goods for operation of a Hotel, as defined in the Uniform System. All
Inventories shall be owned by Owner.
MANAGER AFFILIATES shall mean any corporation, partnership, joint
venture or other entity in which manager and any Manager Affiliates have a
majority ownership interest.
3
<PAGE> 8
MORTGAGE shall mean the mortgage, deed of trust, security agreement or
other encumbrance placed by Owner on the Hotels in connection with Owner's
acquisition of the Hotels.
MORTGAGEE shall mean the holder of the secured obligations under the
Mortgage.
NOTICE OF DEFAULT shall have the meaning set forth in Section 4.2(a).
NOTICE OF TERMINATION shall mean the notice described in Section 4.2 or
any other notice provided herein whereby a Party may terminate this Agreement.
OPERATING PLAN AND BUDGET shall mean a budget prepared under Section
2.2.
OPERATING PROFIT TARGET shall be as set forth on Schedule I attached
hereto and incorporated herein by this reference. Upon the Disposition of a
Hotel or Hotels, the Operating Profit Target shall be adjusted as follows: the
Operating Profit Target existing immediately before such Disposition of a Hotel
or Hotels shall be reduced by an amount equal to the product of (x) the
Operating Profit Target existing immediately before such Disposition and (y) a
fraction, the numerator of which is the Adjusted Gross Operating Profit for the
immediately preceding three calendar years (or such lesser period for which
results of operation of the Hotels hereunder are available) for the Hotel or
Hotels subject to the Disposition and the denominator of which is the Adjusted
Gross Operating Profit of the Hotels managed under this Agreement immediately
before such sale for such period.
OPERATING SUPPLIES shall mean all consumable or expendable items for
operation of a Hotel, including without limitation, supplies for laundry,
housekeeping, food and beverage service, engineering and accounting uses,
together with paper supplies and miscellaneous general supply items, as
defined in the Uniform System. All Operating Supplies shall be owned by Owner.
OPERATING YEAR shall mean each calendar year or portion thereof during
the term of this Agreement.
PARTIES shall mean, collectively, Owner and Manager.
PARTY shall mean, individually, Owner or Manager.
4
<PAGE> 9
Priority Return shall mean one-twelfth of the product of (A) the number
of Units issued on or about the Acquisition Date multiplied by (B) the
following amounts divided by .9801:
12 Month Period After
Effective Date Hereof Amount
-------------------- ------
1st full through 12th $2.00
13th through 24th 2.05
25th through 36th 2.10
37th through 48th 2.15
49th and thereafter 2.20
Red Lion Hotels shall mean the hotels managed by Manager or a Manager
Affiliate.
Taking shall mean a taking of either a fee or an easement as a result
of condemnation or eminent domain, or a conveyance by Owner in lieu thereof, of
or upon all or part of a Hotel.
Uniform System shall mean the "Uniform System of Accounts" as adopted
by the American Hotel and Motel Association, with such exceptions as may be
required by the provisions of this Agreement (including, without limitation,
the definitions of Gross Revenue, Gross Operating Profit, Adjusted Gross
Operating Profit, and Operating Expenses).
Units shall mean the ownership interests held by limited partners in
Red Lion Inns, L. P., a Delaware limited partnership, the sole limited partner
in Owner.
Working Capital shall mean capital requirements for operating expenses
of the Hotels for the day-to-day requirements of the Hotels as contemplated in
this Agreement. All Working Capital shall be owned by Owner.
Working Capital Line shall mean a bank line of credit obtained by Owner
for the purpose of enabling Owner to meet any funding requirements imposed on
it pursuant to this Agreement.
ARTICLE I
REPRESENTATIONS AND WARRANTIES
1.1 Representations and Warranties of Manager. Manager represents
and warrants to Owner as follows:
5
<PAGE> 10
a. Manager is a limited partnership duly organized and
validly existing under the laws of the State of California.
b. Manager has full power, authority and legal right to
perform and observe the provisions of this Agreement.
c. This Agreement constitutes a valid and binding
obligation of Manager enforceable in accordance with its terms, and does
not constitute a breach of or default under any other agreement to which
Manager is a party or by which any of its assets are bound or affected.
1.2 Representations and Warranties of Owner. Owner represents and
warrants to Manager as follows:
a. Owner is a partnership duly organized and validly
existing under the laws of the State of Delaware.
b. Owner has full power, authority and legal right to
perform and observe the provisions of this Agreement.
c. This Agreement constitutes a valid and binding
obligation of Owner enforceable in accordance with its terms, and does
not constitute a breach of or default under any other agreement to
which Owner is a party or by which any of its assets are bound or
affected.
ARTICLE II
GENERAL MANAGEMENT AND OPERATION
2.1 General Management Services. Subject to the provisions of this
Agreement, from and after the commencement of the term of this Agreement as
provided for in Section 4.1, Manager shall, on behalf of Owner, manage the
Hotels in a faithful and efficient manner, consistent with the standards
prevailing in and with the same degree of care as other Red Lion Hotels. In
furtherance thereof, Manager shall:
a. provided Owner has supplied Manager with complete copies
and all amendments of any Approved Mortgage and any ground leases
existing as of the date hereof, do everything reasonably within its
power to manage the Hotels in all material respects in accordance with
the terms and conditions of any Approved Mortgage, any such ground
leases and any material contracts entered into on behalf of Owner after
the date hereof,
6
<PAGE> 11
if, as a result thereof, Manager is not required to assume responsibilities in
addition to or different than those provided for herein;
b. subject to the terms of this Agreement, implement Manager's
standard administrative, accounting, budgeting, computer systems, marketing,
personnel and operational policies and practices relating to or affecting the
operation of Red Lion Hotels.
c. at Owner's cost and expense:
(i) arrange for the Hotels to be furnished with water, electricity,
gas, power, telephone, vermin extermination, trash removal, equipment
maintenance, security and such other services as are necessary for the
proper operation and maintenance of the Hotels as contemplated by this
Agreement; provided, however, that without Owner's approval, which
approval shall not be unreasonably withheld, Manager shall not cause any
Hotel to enter into any agreement for any such services which is not
incurred in the ordinary course of operating the Hotel;
(ii) to the extent that it is within Manager's power to do so,
obtain and keep in full force and effect all permits, licenses
(including, without limitation, liquor licenses, restaurant licenses and
business licenses) and authorizations required in connection with the
conduct of the business of each Hotel; and
(iii) make purchases of all Furniture, Fixtures and Equipment, all
Operating Supplies and Inventories and such services and other
merchandise as are necessary for the proper operation and maintenance of
each of the Hotels as contemplated by this Agreement.
d. review the operation and maintenance of the Hotels from time to
time in accordance with Manager's established management practices and policies.
2.2 Operating Plan and Budget. In accordance with Manager's standard
planning and budgeting processes Manager shall, on or about thirty (30) days
before the end of each Operating Year, prepare and deliver to Owner an
operating plan and budget for the next ensuing Operating Year ("Operating Plan
and Budget") setting forth in reasonable detail an estimate of the revenue and
expenses of each of the Hotels for the next ensuing Operating Year ("Applicable
7
<PAGE> 12
Operating Year"). In the preparation of each Operating Plan and Budget, Manager
shall take into account the operations and outlook for the advance bookings,
the competition, anticipated changes in the Hotel's expenses (including,
without limitation, pending union negotiations, anticipated increases in
property taxes, utility costs and insurance premiums) and anticipated changes
in general economic conditions. It is understood, however, that the Operating
Plan and Budget is an estimate only and that the actual results of operations
for any given Operating year will be determined by the actual sales, revenues,
costs and expenses of the Hotels during such Operating Year.
2.3 Maintenance, Repairs and Capital Improvements.
a. The Hotels shall be managed as a member of the Red Lion Hotels.
The Hotels (including but not limited to the Hotel buildings, adjacent grounds,
Furniture, Fixtures and Equipment, Operating Supplies and Inventories) will be
maintained, repaired and improved in order to continue operation of the Hotels
at a standard which will permit the Hotels to serve effectively as a member of
the Red Lion Hotels and not be a detriment thereto by reason of any deficient
condition thereof. In furtherance thereof, Manager shall, at Owner's cost and
expense, cause the Hotels (including but not limited to the Hotels buildings,
adjacent grounds, Furniture, Fixtures and Equipment, Operating Supplies and
Inventories) to be maintained in good operating condition and repair, and
shall, subject to the provisions of this Section 2.3, replace all such items of
Furniture, Fixtures and Equipment and Operating Supplies and Inventories as
Manager shall, from time to time, deem advisable, including but not limited to
those which may be deemed to constitute Capital Improvements.
b. Manager shall reserve funds equal to the following percentages of
Gross Revenue each corresponding twelve month period during the term hereof
(the "FFE Reserve") and deposit such funds in an interest bearing account to
pay the cost of additions to and replacements of Furniture, Fixtures and
Equipment:
Twelve Month Period Percentage of Gross Revenue
------------------- ---------------------------
1st full through 12th 1.0%
13th through 24th 2.5%
Thereafter 3.0%
All proceeds from the sale of Furniture, Fixtures and Equipment that are
replaced by Manager shall be added to
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the FFE Reserve and all interest that is earned on funds in the FFE Reserve
shall be added to the FFE Reserve. All funds in the FFE Reserve shall be owned
by Owner. Manager may waive the actual reserving of amounts to be added to the
FFE Reserve on an annual basis. Notwithstanding any such waiver (i) all fees
payable hereunder shall be calculated as if amounts to be added to the FFE
Reserve were in fact reserved and (ii) Manager shall be entitled to budget and
expend, and Owner shall be liable for the payment of, such amounts as if they
had been reserved.
c. Manager shall prepare an annual Capital Improvement Plan for all
Capital Improvements (including additions to and replacements of Furniture,
Fixtures and Equipment) to be made in each of the Hotels during the Applicable
Operating Year which shall be provided to Owner in accordance with the schedule
provided for in Section 2.2. If such Capital Improvement Plan provides for the
expenditure of funds in addition to all amounts in the FFE Reserve and all
amounts to be added to the FFE Reserve on a current basis, such Capital
Improvement Plan shall be subject to Owner's approval or disapproval within
thirty (30) days after delivery of the Capital Improvement Plan to Owner. If
Owner disapproves such Capital Improvement Plan, Manager shall nonetheless
have, and is hereby granted, the right and authority to make any expenditures
set forth of the disapproved Capital Improvement Plan and to pay the cost
thereof from (1) the FFE Reserve and (2) amounts to be added to the FFE Reserve
on a current basis.
d. All Capital Improvements undertaken by Manager shall be subject to
the following:
(i) all permits, licenses and authorizations required to be
procured in connection with any Capital Improvement shall be procured,
or caused to be procured, by Manager as the same are required;
(ii) any Capital Improvement shall be made in a good and
workmanlike manner and in compliance with all applicable laws and
insurance requirements; and
(iii) the cost of any Capital Improvement shall be promptly
paid, or caused to be paid, by Manager from the FFE Reserve or with
Owner supplied funds, if applicable.
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2.4 Books and Records, Financial Statements and Internal Audits.
a. In accordance with Manager's standard procedures as from
time-to-time in effect, Manager shall cause books of account and other
records relating to or reflecting the results of the operation of the
Hotels to be kept on an accrual basis in accordance with the Uniform
System of Accounts for Hotels. Except for the books and records which
may be kept in Manager's home office or other suitable location pursuant
to the adoption of a central billing system or other centralized
service, all such books of account and other records with respect to
each Hotel shall at all times during the term of this Agreement be kept
at each such Hotel and shall, together with any centrally maintained
books and records, be available to Owner, at all reasonable times, for
examination, audit, inspection and copying. Original records of sales
(guest checks, folios, etc.) shall be maintained for a reasonable
period of time consistent with Manager's normal policy or as prescribed
by law.
b. During each Operating Year, Manager shall cause to be
prepared and delivered to Owner on or before the thirtieth (30th) day
of the following month a reasonably detailed monthly operating report
and financial statements for each Hotel and on a consolidated basis,
including a profit and loss and cash flow statement, reflecting the
results of operations by department, together with a supplemental
schedule of revenues and expenses and a balance sheet showing cash
position and results of operations for the preceding calendar month
and cumulative for the Operating Year to date. The consolidated
statements shall include a computation of Gross Revenue, Gross Operating
Profit, Base Fee and Incentive Fee for such month and Operating Year to
date. Such reports and statements shall be prepared on an accrual basis
in accordance with the Uniform System of Accounts for Hotels
consistently applied and shall be in a format similar to the operating
reports and financial statements which are prepared for other Red Lion
Hotels.
c. Assuming all required information in Owner's possession is
made available to Manager on a timely basis, then no later than sixty
(60) days immediately following each Operating Year, Manager shall cause
to be prepared and delivered to Owner, as an operating expense of the
Hotels, reasonably detailed unaudited financial statements for the
preceding Operating Year ("Financial Statements"), which shall consist
of a balance sheet,
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statement of earnings and retained earnings, statement of changes in
financial position, and computation of Gross Revenue, Gross Operating
Profit, the Base Fee and the Incentive Fee for such Operating Year.
d. Manager shall perform internal audits of each Hotel
consistent with Manager's standard audit policy, as an operating
expense of the hotels. Such audit shall be conducted by Manager's
personnel. Manager acknowledges that Owner may also elect to conduct
internal audits of one or more Hotels from time to time at Owner's
expense and Manager shall cooperate with Owner in connection therewith.
e. Manager shall promptly deliver to Owner copies of any
documents relating to lawsuits and claims or notices received from the
holder of the Mortgage, and, to the extent they would appear to have a
material adverse effect on any of the Hotels or their operations,
claims or notices received from any governmental agency or any insurance
carrier.
2.5 Personnel.
a. Manager shall select a general manager and the department
heads for each Hotel, and they, or such person or persons to whom they
may delegate such authority, shall select all personnel which any of
them determine to be necessary for the operation of each Hotel
(collectively "Hotel Personnel").
b. All decisions with regard to the terms of employment,
including but not limited to compensation, bonuses, fringe benefits,
discharge and replacement of all Hotel Personnel, whether made directly
by Manager or through the general manager, department heads or any of
their designees, shall be at the sole discretion of Manager.
c. All Hotel Personnel shall be employed at Owner's cost and
expense, but all such personnel shall be employees of Manager and not
employees of Owner.
d. Manager shall provide all supervisory services of its
corporate non-Hotel Personnel employees necessary to enable Manager
to perform its obligations under this Agreement.
e. Manager shall administer all necessary employee benefit
programs, maintain all necessary records, file all reports, and pay all
taxes with respect to the Hotel Personnel; provided that the direct
costs of
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administration incurred under this Section 2.5(e) shall be operating
expenses of each Hotel and Manager shall be reimbursed for such payment
in accordance with Section 2.13.
2.6 Special Projects. With Owner's approval, Manager may undertake
special projects, including but not limited to work undertaken with
respect to Capital Improvements and any other matters which (i) are
not included within the scope of the general management services as
contemplated in this Article II and (ii) if not provided or caused to
be provided by Manager would involve Owner's engagement of a third
party to perform such services (for example, special sales or marketing
programs, special market reviews, assistance in opening new food and
beverage preparation facilities, and special projects performed by
Manager's legal, taxation, data processing, insurance, and engineering
personnel). Manager agrees that any such services shall be on terms
and conditions no less favorable to Owner than the terms on
which such services are provided by Manager to other Red Lion Hotels.
Owner shall reimburse Manager for the services of personnel assigned to
such special projects at a daily per diem rate equal to 2.5 times the
total costs of employment to Manager for such personnel.
2.7 Communications and Marketing.
a. Manager shall provide the Hotels with such advertising,
public relations and promotional services as are judged by it to be
reasonably necessary and appropriate in order to promote the name and
facilities of the Hotels and to maintain their identity as Red Lion
Hotels. Such services shall include but not be limited to assistance in:
(i) developing and implementing the Hotels'
communications plan following Manager's guidelines which include
planning, publicity and internal communications and organizing
and bugeting the Hotels' advertising and public relations
programs;
(ii) selecting and providing guidance as required for
the public relations personnel;
(iii) preparing and disseminating news releases for
trade and consumer publications;
(iv) selecting an advertising agency; and
(v) maintaining a coporate communications program,
including Manager's corporate identity program and its national
advertising programs,
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coordinating the Hotels' communications program with Manager's
corporate communications program, and including the Hotels in
Manager's corporate identity and national advertising programs, as
appropriate.
b. The following costs and expenses incurred
under Section 2.7(a) shall be operating expenses of the Hotels and shall
be in addition to the charges referred to in Section 2.13:
(i) those incurred in the implementation of the Hotels'
communications plan including, without limitation, the Hotels' pro
rata share of Manager's corporate communications program based on
the ratio of the number of rooms in the Hotels to the total number
of rooms in the Red Lion Hotels. Owner acknowledges that such
basis may change during the term of this Agreement if Manager
determines in its sole but good faith judgment that another basis
of allocation may more fairly distribute the costs of such
services, and Owner agrees to any such change provided it is
applied to all other Red Lion Hotels situated in the United States
and that the changes are not made on a basis which results in a
discriminatory effect on the Hotels;
(ii) those incurred in the production, distribution and
placement of other promotional materials relating to the Hotels,
including but not limited to materials for the promotion of
employee relations, generally paid for by other Red Lion Hotels
when materials of a similar nature are provided to them; and
(iii) those incurred as a result of the attendance of Hotel
Personnel at conventions, meetings, seminars, conferences and
travel congresses. The above listed costs and expenses shall not
include payroll costs and expenses associated with such activities
which shall only be reimbursed to Manager under Section 3.4.
c. Owner acknowledges that the Hotels' communications plan shall
be in accordance with Manager's sales, advertising and public relations
philosophies, and must adhere to Manager's corporate identity
requirements.
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2.8 Sales and Reservations
a. Manager shall secure bookings for the Hotels through the sales
and reservation offices of Manager and its affiliates, and shall
encourage the use of the Hotels by tourists, special groups, travel
congresses, travel agencies, airlines and other recognized sources of
hotel business. Manager shall develop a sales program including personal
visits by the sales staff of Manager and telephone and direct mail
contracts. Manager will represent the Hotels at appropriate conventions
and travel congresses, and will list the Hotels in printings of general
tariff bulletins.
b. Manager shall process reservations for the Hotels through
Manager's reservations system. Any charges payable in connection with
the securing of reservations for the Hotels shall be an operating
expense of the Hotels on the basis of the reservations obtained for the
Hotels. Owner acknowledges that such basis may change during the term of
this Agreement if Manager determines in its sole but good faith judgment
that another basis of allocation may more fairly distribute the costs of
such services, and Owner agrees to any such change provided it is
applied to all other Red Lion Hotels situated in the United States and
that the changes are not made on a basis which results in a
discriminatory effect on the Hotels. Owner agrees to honor all
reservations made by Manager in the ordinary course of business even
though reservations extend or are for a period of time subsequent to the
termination of this Agreement; provided, however, that Owner shall be
entitled to instruct Manager not to make reservations for all or some
portion of the time subsequent to the termination of this Agreement and
Manager shall thereafter adhere to such instruction.
2.9 Manager's Computer Software.
a. Manager has developed confidential computer software programs
("Confidential Software") for use at various hotels managed by Manager.
The Confidential Software is used in three of the Hotels currently and
it is contemplated that this Confidential Software will be installed and
utilized in the balance of the Hotels following the commencement hereof.
Manager shall make additional or newly developed Confidential Software
available to Owner for use at the Hotels using the Confidential Software
for a user fee based on the cost of development of the Confidential
Software programs which cost shall be allocated to the Hotels using the
Confidential Software based on the ratio of the number
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of rooms in the Hotels using the Confidential Software to the total
number of rooms in the Red Lion Hotels using the Confidential Software.
Owner acknowledges that such basis may change during the term of this
Agreement if Manager determines in its sole but good faith judgment that
another basis of allocation may more fairly distribute the costs of such
services, and Owner agrees to any such change provided it is applied to
all other Red Lion Hotels situated in the United States and that the
changes are not made on a basis which results in a discriminatory effect
on the Hotels.
b. Owner acknowledges Manager's proprietary interest in the
Confidential Software and neither Owner nor Owner's employees shall at
any time, directly or indirectly, disclose, disseminate, reproduce,
appropriate or otherwise make a claim of interest concerning such
Confidential Software. Owner shall not be permitted to use said
Confidential Software at any location other than the Hotels and in the
event this Agreement is terminated for any reason whatsoever, this
paragraph shall survive said termination. Following termination of this
Agreement, Owner and its successors in interest may continue to use at
the Hotels all Confidential Software in use at the Hotels immediately
prior thereto for a period not to exceed six (6) months during the
transition to new management.
2.10 MANAGER'S CHARGE CARD. Manager may, from time to time, at its
sole discretion, implement a charge card system for the convenience of guest
and for the promotion of the Red Lion Hotels. At any time when such a charge
card system is in effect, Manager shall make such system available to the
Hotels, and Owner hereby authorizes Manager to accept such charge card and all
other charge or credit cards designated by Manager for all Hotel charges
authorized in accordance with Manager's credit card billing policies, as
amended from time to time. Manager shall retain the right, at any time and from
time to time during the term of this Agreement, to discontinue utilization of
its charge card system.
2.11 HOTEL RETAIL SPACE. Manager shall either operate the Hotel Retail
Space or negotiate and sign on behalf of Owner leases, licenses and concession
agreements covering the Hotel Retail Space, and shall thereafter administer
said leases, licenses and concession agreements on behalf of Owner. Any Hotel
Retail Space may be leased to a Manager Affiliate provided that such lease is
on terms and conditions no less favorable to Owner than those which would
otherwise be available from third parties. Manager shall not lease any space in
the Hotels, other than Hotel Retail space, without Owner's prior written
consent.
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2.12 AFFILIATED COMPANIES. In providing the services required to be
performed by it under this Agreement, Manager may from time to time use the
services of Manager Affiliates; provided, however, that there shall be no
changes in the compensation or reimbursements owing by Owner hereunder and
Manager shall remain fully liable to Owner to fulfill the obligations
hereunder. Subject to the immediately preceding sentence, if rather than
arrange for a third party to provide goods or services for the Hotels, Manager
shall contract with a Manager Affiliate for such goods or services, then any
such contracts shall be on terms and conditions which are in the aggregate no
less favorable than those which would otherwise be available from third parties
for comparable quality.
2.13 COSTS AND EXPENSES. Owner shall pay Manager for all costs and
expenses incurred by Manager under the terms and provisions of this Article II,
including, but not limited to the following:
a. The salaries and wages, including costs of payroll
taxes, bonuses, retirement plan contributions, fringe benefits, and
related payroll items incurred with respect to the Hotel Personnel
assigned to the Hotels on a full-time basis and the moving and related
expenses (in accordance with Manager's standard policies, as amended
from time to time by Manager) incurred in connection with relocating any
salaried Hotel personnel assigned to the Hotels on a full-time basis.
Hotel Personnel shall be deemed to be assigned to the hotels on a
full-time basis even though they may have assumed supervisory
responsibilities at other hotels managed by Manager or participate in
other Manager related activities on a limited basis. In the event that
Hotel Personnel are assigned to work on a day-to-day basis at the Hotels
and another hotel managed by Manager in a shared employee program, then
the payments under this Section 2.13(a) shall be equitably prorated
among said hotels on the basis of the amount of time devoted to each
hotel;
b. The daily per diem rate for those personnel of Manager
assigned to special projects for the Hotels as provided in Section 2.6;
c. Travel and out-of-pocket expenses incurred directly in
connection with the management of the Hotels by Manager's operations
personnel, food and beverage division personnel, rooms division
personnel, marketing division personnel, systems division personnel,
financial services division personnel, design and construction division
personnel, insurance division
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personnel, other executive staff personnel, and those personnel assigned
to the special projects under Section 2.6, but only when a specific
event or circumstance at a Hotel directly dictates the need for such
attention, and excluding general supervision or oversight and corporate
or central office administration or overhead; and
d. Charges for the Hotels' pro rata cost of the standard and
customary Manager group services accepted by other Red Lion Hotels,
including but not limited to services provided by Manager's operations
personnel, food and beverage division personnel, rooms division
personnel, marketing division personnel, systems division personnel,
financial services division personnel, design and construction division
personnel, insurance division personnel and other executive staff
personnel, attendance at Manager's annual management and other
conferences, and operating handbooks, manuals and forms, but excluding
general supervision or oversight and corporate or central office
administration or overhead, which charges shall be allocated to the
Hotels on the basis of the ratio of the number of rooms in the Hotels to
the total number of rooms in the Red Lion Hotels. Owner acknowledges
that such basis may change during the term of this Agreement if Manager
determines in its sole but good faith judgment that another basis of
allocation may more fairly distribute the costs of such services, and
Owner agrees to any such change provided it is applied to all other Red
Lion Hotels situated in the United States and that the changes are not
made on a basis which results in a discriminatory effect on the Hotels.
ARTICLE III
MANAGEMENT FEES AND DISTRIBUTION OF CASH FLOW
3.1 Definitions of Gross Revenues, Gross Operating Profit, Adjusted
Gross Operating Profit and Cash Flow Available for Incentive Fee.
a. As used in this Agreement, the term "Gross Revenue" shall
mean, in accordance with the Uniform System, all income and proceeds
(whether in cash or on credit, and computed on an accrual basis)
received by Owner or Manager for the use, occupancy or enjoyment of the
Hotels, or any part thereof, or received by Owner or Manager for the
sale of any goods, services or other items sold on or provided from the
Hotels' premises in the ordinary course of the Hotels' operation,
including without limitation: (a) all income and proceeds received from
rental of rooms and commercial and other
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space within the Hotels including net parking revenue; (b) all income
and proceeds received from food and beverage operations and from
catering services conducted from the Hotels even though rendered outside
of the Hotels; (c) all income and proceeds from business interruption,
rental interruption and use and occupancy insurance with respect to the
operation of the Hotels (after deducting therefrom all necessary costs
and expenses incurred in the adjustment or collection thereof); (d) all
awards for condemnation for temporary use (after deducting therefrom all
costs incurred in the adjustment or collection thereof); and (e) all
income and proceeds from judgments, settlements and other resolutions of
disputes with respect to matters which would be includable in "Gross
Revenue" if received in the ordinary course of the Hotels' operation
(after deducting therefrom all necessary costs and expenses incurred in
the adjustment or collection thereof). Such term shall not include: (1)
gross receipts received by lessees, licensees or concessionaires of the
Hotels; (2) consideration received at the Hotels for hotel
accommodations, goods and services to be provided at other hotels,
although arranged by, for or on behalf of Manager; (3) income and
proceeds from the sale or other disposition of goods, capital assets and
other items not in the ordinary course of the Hotels' operation; (4)
federal, state and municipal excise, sales and use taxes collected
directly from patrons or guests of the Hotels as part of or based on the
sales receipts, room, admission, cabaret or equivalent taxes; (5)
condemnation awards (except to the extent provided in clause (d) of this
paragraph; (6) bad debt reserves, subject to adjustment; (7) gratuities
collected by Hotel employees; (8) the proceeds of any financing; (9)
other income or proceeds resulting other than from the use or occupancy
of the Hotels, or any part thereof, or other than from the sale of
goods, services or other items sold on or provided from the Hotels'
premises in the ordinary course of business; and (10) interest and
income on any funds standing from time to time in the Hotels' agency or
reserve accounts.
b. As used in this Agreement, the term "Operating Expenses" shall
mean all reasonable costs and expenses of maintaining, conducting and
supervising the operation of the Hotels (which costs and expenses do not
include (a) depreciation and amortization except as otherwise provided
in this Agreement, any rent payable by Owner either in respect of the
Hotels, the Furniture, Fixtures and Equipment, the Operating Supplies,
or any part of the foregoing, except as otherwise provided in this
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Agreement, and the costs of any other things specified herein to be
done or provided at Owner's or Manager's sole expense) incurred by
Owner or by Manager directly or at Owner's or Manager's request
pursuant to this Agreement or as otherwise specifically provided herein
which are properly attributable to the period under consideration under
Manager's system of accounting, including without limitation:
i. The cost of all food and beverage sold or consumed
and of all Inventories and Operating Supplies placed in use. For
purposes of this provision, Inventories and Operating Supplies shall be
considered to have been placed in use when they are transferred from
the storerooms of the Hotels to the appropriate operating departments.
ii. Salaries and wages of Hotel personnel, including
costs of payroll taxes and employee benefits (which benefits may
include, without limitation, a pension plan, medical insurance, life
insurance, travel accident insurance and an executive bonus program)
and the costs of moving executive personnel, their families and their
belongings to the area in which the Hotel is located at the
commencement of their employment at the Hotel and all other expenses
not otherwise specifically referred to in this section which are
referred to as "Administrative and General Expenses" in the Uniform
System. Except as herein otherwise expressly provided with respect to
employees regularly employed at the Hotels, the salaries or wages of
other employees or executives of Manager shall in no event be Operating
Expenses, but they shall be entitled to free room and board and the
free use of all Hotel facilities at such times as they visit the Hotels
exclusively in connection with the management of the Hotels.
iii. The cost of all other goods and services obtained by
Manager in connection with its operation of the Hotels, including,
without limitation, heat and utilities, office supplies and all
services performed by third parties, including leasing expenses in
connection with telephone and data processing equipment and such other
equipment as the parties hereto may agree upon in writing.
iv. The cost of repairs to and maintenance of the Hotels.
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v. Insurance premiums for insurance related to Hotel employees
and for insurance required to be maintained hereunder. Premiums on
policies for more than one year will be prorated over the period of
insurance and premiums under blanket policies will be allocated among
properties covered.
vi. All taxes, assessments and other charges (other than
federal, state or local income taxes and franchise taxes or the
equivalent) payable by or assessed against Operator with respect to the
operation of the Hotels, and water and sewer charges. Specifically
excluded from this item are all taxes levied or imposed against the
Hotels or their contents, such as real and personal property taxes.
vii. Legal and accounting fees for services directly related to
the operation of the Hotels.
viii. The costs and expenses of technical consultants and
specialized operational experts for specialized services in connection
with nonrecurring work on operational, functional, decorating, design
or construction problems and activities.
ix. All expenses for advertising the Hotels and all expenses
of sales promotion and public relation activities.
c. As used in this Agreement, the term "Gross Operating Profit" shall
mean the excess, if any, of Gross Revenue over Operating Expenses.
d. As used in this Agreement, the term "Adjusted Gross Operating
Profit" shall mean the excess, if any, of Gross Operating Profit over the Base
Fee.
e. As used in this Agreement, the term "Cash Flow Available for Debt
Service" shall mean the Adjusted Gross Operating Profit from operations of the
Hotels for the applicable Operating Year determined in accordance with the
provisions of this Agreement less the sum of the following:
(i) All taxes, including but not limited to ad valorem taxes
on real property, and personal property taxes but excluding taxes based
upon income of Owner;
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(ii) Insurance premiums relating to fire, extended
coverage and business interruption insurance policies;
(iii) Rentals under any leases of real property and
rentals under any leases of personal property; and
(iv) Amounts added to the FFE Reserve.
f. As used in this Agreement, the term "Cash Flow Available for
Incentive Fee" shall mean the excess, if any, of Cash Flow Available for Debt
Service over the Current Priority Amount.
3.2 Management Fees. In addition to charges and reimbursements as
provided for in Section 2.13, Manager shall retain out of Gross Revenues the
following fees for the services to be provided by Manager pursuant to Article
II:
a. An annual minimum management fee ("Base Fee") equal to
three percent (3%) of annual Gross Revenue. The Base Fee for each
Operating Year shall be paid monthly based upon the Gross Revenue for
the Operating Year to date less the Base Fee paid to date.
b. In addition to the annual Base Fee provided for in Section
3.2(a), an annual incentive management fee ("Incentive Fee") equal to
the lesser of (A) fifteen percent (15%) of the Adjusted Gross Operating
Profit up to the Operating Profit Target and twenty-five percent (25%)
of the Adjusted Gross Operating Profits in excess of the Operating
Profit Target or (B) subject to the accrual set forth in Section 3.2(c)
below, the Cash Flow Available for Incentive Fee. The Incentive Fee (i)
shall be paid on a cumulative basis for each Operating Year as set
forth in the monthly operating statement, (ii) shall be payable only
after payment of the Current Priority Amount on a cumulative basis for
each Operating Year, and (iii) shall be promptly repaid by Manager if
any monthly statement shows that Incentive Fee has been overpaid.
c. If Cash Flow Available for Incentive Fee is, from time to
time, insufficient to pay the entire Incentive Fee as calculated
pursuant to Section 3.2(b)(A), then, to the extent of such deficiency,
said Incentive Fee shall be accrued without interest up to a maximum
accrual of $6,000,000. Such accrued Incentive Fee shall be paid by
Owner to Manager from twenty-five
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(25%) of the Cash flow Available for Incentive Fee remaining after
payment of the current Incentive Fee.
d. Upon the sale or refinancing of one or more Hotels, up to
the first $6,000,000 of net proceeds of such sale or refinancing after
any amounts due under any loan secured by a lien or encumbrance on the
Hotel or Hotels sold or refinanced are paid ("Net Proceeds") shall be
applied to accrued Incentive Fees. After the first $6,000,000 of Net
Proceeds have been so applied to accrued Incentive Fees, all remaining
amounts shall be distributed to Owner.
3.3 Place of Payment. All fees and payment of expenses payable to
Manager under Article III shall be retained by Manager out of Gross Revenues
or, with respect to payments of accrued Incentive Fee out of Net Proceeds,
remitted to Manager by or on behalf of Owner as Manager shall designate in
writing to Owner.
3.4 Owner's Obligation to Provide Funds to Pay Fees and Expenses;
Financing Program. If, at any time during the term of this Agreement, the funds
available from the operation of the Hotels for the payment of all financial
requirements of the Hotels, including any of the fees and the costs and
expenses specified in Articles II or III (other than accrued Incentive Fee),
shall be insufficient to pay the same as they become due and payable, Owner
shall make deposits of sufficient funds into the Hotels' bank accounts
established under Section 3.5 in order to make such payments. If Owner fails to
make such deposits and there are fees earned and expenses outstanding for which
Manager and/or Manager Affiliates have not been paid, said fees and expenses
shall accrue interest at the annual rate of the lesser of Manager's actual cost
of funds, as such cost of funds changes from time to time, plus one percent
(1%) per annum computed on the first day of each month or the maximum annual
interest rate allowable under applicable law.
3.5 Hotel Bank Accounts. Manager shall select all banks with which each
Hotel shall conduct its various banking affairs. All funds received in the
operation of each Hotel shall be deposited into one or more special accounts
bearing the name of such Hotel in a bank so selected having a branch reasonably
convenient to such Hotel and having a capital and surplus of not less than Five
Million Dollars ($5,000,000). Each Hotel's operating expenses shall be paid out
of its special accounts or such other accounts as may be maintained for Owner,
as well as Manager's fees, payroll expenses and other expenses to be paid to or
reimbursed to Manager and Manager Affiliates for such Hotel in accordance with
the terms and provisions of this
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Agreement. Neither Manager nor Owner shall commingle any separate funds in such
accounts.
3.6. WITHDRAWALS FROM HOTEL BANK ACCOUNTS. Checks or other documents
of withdrawal from the Hotel bank accounts established pursuant to Section 3.5
may be made for any purpose authorized under this Agreement and shall be
signed by duly authorized representatives of Manager.
3.7 REMITTANCES TO OWNER. Concurrently with delivery of the monthly
statements required pursuant to Section 2.4(b), Manager shall remit to Owner
all sums in the Hotels' bank accounts established pursuant to Section 3.5 in
excess of the amounts required to maintain sufficient Working Capital for the
Hotels for the next month. All such amounts shall be transferred to Owner's
account maintained at the bank where the said account is maintained, or at such
other place as Owner may from time to time designate.
ARTICLE IV
TERM AND TERMINATION
4.1 TERM OF AGREEMENT; OPTION TO EXTEND. The services to be provided
by Manager under this Agreement shall commence on the date Owner acquires the
Hotels (the "Acquisition Date") and shall terminate, unless sooner terminated
as provided in this Agreement twenty-five (25) years from the Acquisition Date.
Manager shall have the right to extend the term of this Agreement by not less
than six (6) months' prior written notice to Owner during the then current term
for up to ten (10) consecutive extended terms of five (5) years each.
4.2 EVENTS OF TERMINATION. In addition to Articles VI, VII, VIII and
IX pertaining to the termination of this Agreement with respect to one or more
Hotels, if at any time during the term of this Agreement any of the following
events ("Event of Termination") shall occur, then the nondefaulting Party may,
at its option, terminate this Agreement by giving notice to the other party
("Notice of Termination") specifying a date, not earlier than thirty (30) days
after the giving of such notice, when this Agreement shall terminate:
a. if Manager or Owner shall breach any material
representation, warranty or covenant contained in this Agreement, or
shall default in the performance of any such obligation hereunder, and
such breach or default shall not be cured within thirty (30) days
following notice thereof ("Notice of Default"); provided, however, that
an Event of Termination shall not exist with regard thereto if such
breach or default is not attributable to
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a failure to pay any sums due under this Agreement and such Event is
curable but it is not possible to cure such breach or default within
said thirty (30) day period, so long as the defaulting party commences
to cure such breach or default within said period and thereafter
proceeds diligently and in good faith to complete the cure;
b. if a court of competent jurisdiction has entered a final,
non-appealable judgment finding Manager liable for actual fraud, gross
negligence or willful and wanton misconduct in its dealings with Owner
hereunder;
c. if Manager or Owner shall apply for or consent to the
appointment of a receiver, trustee or liquidator of all or a substantial
part of its assets or make a general assignment for the benefit of its
creditors, or file a voluntary petition in bankruptcy or a petition
seeking reorganization, composition, arrangement with creditors,
liquidation or similar relief under any present or future statute, law
or regulation, or file any answer admitting the material allegations of
a petition filed against it in any such preceding, or be adjudicated a
bankrupt or insolvent, or take any action looking toward dissolution;
d. if any final order, judgment or decree (that is, an order,
judgment or decree affirmed on appeal to a court of last resort or after
the expiration of any period to appeal) shall be entered without the
application, approval or consent of Manager or Owner by any court of
competent jurisdiction, approving a petition seeking reorganization,
composition, arrangement with creditors. liquidation or similar relief
under any present or future statute, law or regulation with respect to
Manger or Owner, or appointing a receiver, trustee or liquidator of all
or a substantial part of Manager's or Owner's assets and such order,
judgment or decree shall continue unstayed and in effect for an
aggregate of sixty (60) days (whether or not consecutive); or
e. if a final judgment (that is, a judgment affirmed on appeal
to a court of last resort or after the expiration of any period to
appeal) not fully covered by insurance shall be rendered against Manager
or Owner which, with other outstanding final judgments (defined as
aforesaid) against such party not fully covered by insurance exceed an
aggregate of One Hundred Thousand Dollars ($100,000.00), and such final
judgment of judgments shall continue undischarged and unsettled
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for an aggregate of sixty (60) days (whether or not consecutive).
4.3 REPLACEMENT OF GENERAL PARTNER OF OWNER. If Red Lion
Properties, Inc., a Delaware corporation (the "General Partner") is removed or
discharged as the sole general partner of Owner, Manager shall have the right,
for a period of six (6) months from the effective date of such removal or
discharge, at Manager's sole election, to terminate this Agreement upon thirty
(30) days written notice to Owner. For purposes of Section 4.4(a) there shall
be no defaulting party, and the costs described therein shall be borne equally
by Manager and Owner.
4.4 ACTIONS TO BE TAKEN ON TERMINATION. Upon any termination of
this Agreement pursuant to this Article IV, the following shall be applicable:
a. The Financial Statements required pursuant to Section 2.4(c)
shall be prepared as of the date of such termination, with all costs and
expenses thereof to be borne by the defaulting Party.
b. Within thirty (30) days after the delivery of the Financial
Statements referred to in Section 4.4(a), Owner shall pay Manager all
fees and other payments earned or due under the terms and provisions of
this Agreement.
c. Manager shall peacefully vacate and surrender the Hotels to
Owner.
d. Manager shall purchase from Owner, for a purchase price
equal to fair market value, but not exceeding cost, all unbroken cases
of Operating Supplies then on hand at the Hotels or ordered or purchased
and which bear the identification of Manager. Notwithstanding the
provisions of Section 10.2(b), Owner may continue to use in connection
with the Hotels any and all items of Operating Supplies or other
products or items then on hand bearing the identification of Manager
which are not repurchased by Manager from Owner, but shall not reorder
any such items.
e. Manager shall assign and transfer to Owner:
(i) all Owner's books and records respecting the Hotels in
the custody and control of Manager, including but not limited
to those provided for in Section 2.4; and
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(ii) all Manager's right, title and interest in and to all
liquor, restaurant and other licenses and permits, if any, used
by Manager in the operation of the Hotels; provided, however,
that if Manager has expended any of its own funds in the
acquisition of such licenses or permits, Owner shall reimburse
Manager therefore if Owner requests such assignment and transfer
of such licenses and permits.
f. Manager shall release and transfer to Owner any of Owner's
funds held or controlled by Manager, including any funds in any Hotel
bank accounts.
ARTICLE V
INSURANCE
5.1 INSURANCE BY MANAGER.
a. Subject to Section 5.1(b), Manager shall, at all times
during the term of this Agreement and at Owner's cost and expense
maintain insurance coverage on the Hotels and the business conducted
therein substantially similar to that maintained for other Red Lion
Hotels. Such insurance includes, as of the date hereof:
(i) comprehensive general liability insurance which has
been endorsed to include premises operations, elevators,
independent contractors, blanket contractual, products
liability, personal injury (including contractual), broad form
property damage, fire legal liability, host liquor liability
(including the loss of means of support), liquor liability,
innkeepers liability (including safety deposit box liability)
and comprehensive automobile liability including all owned,
hired, leased or substituted vehicles, and garagekeepers legal
liability, against the claims for personal and bodily injury or
death and property damage occurring upon, in or about the
Hotels, or any adjoining streets and passageways thereof, or
otherwise arising under this Agreement;
(ii) appropriate worker's compensation and employer's
liability insurance as shall be required by and be in
conformance with the laws of any state where a Hotel is located
for both Owner's and Manager's employees at the Hotels;
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(iii) insurance against "all risks" of loss or damage,
including, to the extent available at reasonable cost,
earthquake and flood, available under commercial property
insurance policies with licensed insurance companies in amounts
not less than the then current full insurable value of each
Hotel building and its contents. As used herein, the term "full
insurable value" shall mean the actual replacement cost of each
Hotel building and its contents;
(iv) boiler and machinery insurance on boilers,
pressure vessels and other machinery including power
interruption coverage in amounts equal to or greater than the
coverages maintained at other Red Lion Hotels or such other
amounts as shall be agreed to by Manager and Owner; and
(v) business interruption insurance covering risk of
loss due to an insured peril described in Sections 5.1(a)(iii)
and 5.2(a)(iv) hereof, including any loss or damage to a Hotel
structure, its contents, boiler, pressure vessels or machinery
and any resulting damage thereby rendering such Hotel premises
untenantable or the services to be provided by such Hotel
unmarketable causing a loss of business.
b. If the insurance referred to in Section 5.1(a) could be
obtained by Owner at lesser premiums and otherwise on terms and
conditions more advantageous to Owner, then Owner may, upon notice to
Manager, obtain such insurance for its own account. Such notice must be
received by Manager at least sixty (60) days prior to the Acquisition
Date if it is to become effective on the Acquisition Date, or six (6)
months prior to the effective date of said insurance following the
Acquisition Date, as the case may be; provided, however, that Manager
shall in all events, at Owner's cost and expense, maintain appropriate
worker's compensation and employer's liability insurance for Manager's
employees at the Hotels as described in Section 5.1(a)(ii) and provided,
further, that if Owner elects to provide the coverage under Section
5.1(a)(ii) for Owner's employees (if any) at the Hotels, Manager shall
nevertheless provide the said coverage for Manager's employees at the
Hotels.
5.2 Parties Insured, Amount of Coverage, Etc. All insurance
policies provided for in Section 5.1 shall include:
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a. Manager and Owner as parties insured thereunder, as
their interests may appear;
b. except as otherwise expressly stated herein, such amount
of coverage and deductibles as shall be in amounts established by
Manager for all Red Lion Hotels or in such greater amounts as Owner
shall require to protect Owner from material risk of being a co-insurer;
c. where appropriate, mortgage endorsements in favor of
Mortgage(s);
d. where appropriate (including but not limited to the
insurance provided for in Section 5.1(a)), the insurer's waiver of
subrogation rights against Manager for all insurance policies procured
by Owner and the insurer's waiver of subrogation rights against Owner
for all insurance policies procured by Manager; and
e. a requirement that the insurer provide at least ten (10)
days' notice of cancellation or material change in the terms and
provisions of the policies.
5.3 EVIDENCE OF INSURANCE, ETC.
a. Prior to the effective date of the applicable coverages
the party obtaining the insurance coverages under Section 5.1 shall
provide the other party with certified copies of policies for such
insurance or certificates of insurance. Prior to the expiration date of
all such policies, the party obtaining said insurance shall provide the
other party with a binder, certified copies of renewal policies, or
certificates of insurance. On the termination of this Agreement, there
shall be an apportionment of any prepaid insurance premiums in respect
of insurance policies obtained by Manager pursuant to Section 5.1(a).
b. On request, each party shall furnish the other with a
schedule of insurance obtained by them under Section 5.1, listing the
policy numbers of the insurance obtained, the names of the companies
issuing such policies, the names of the parties insured, the amounts and
expiration date or dates of such policies and the risks covered thereby.
5.4 REPORTS BY MANAGER. Manager shall promptly:
a. cause to be investigated all accidents and claims for
damage relating to the operation and maintenance of any Hotel as they
become known to Manager, and
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shall report to Owner any such incident which is material;
b. cause to be investigated all damage to or destruction of any
Hotel as it becomes known to Manager, and shall report to Owner any such
incident which is material together with the estimated cost of repair
thereof; and
c. prepare any and all reports required by any insurance company
as the result of an incident mentioned in Sections 5.5(a) and 5.5(b).
5.5 Review of Limits. All insurance policy limits provided pursuant to
this Article V shall be reviewed by the Parties each three (3) years following
the Acquisition Date, or sooner if reasonably requested by either Party, to
determine the suitability of such insurance limits in view of exposures
reasonably anticipated over the following three (3) years; provided, however,
that insurance policy limits may not be reduced to an amount lower than that in
effect for all Red Lion Hotels except by mutual consent of the Parties.
5.6 Limitation on Scope of Services. Owner acknowledges that in
arranging for insurance coverages under this Article V nothing contained herein
or therein shall be deemed to constitute a representation or warranty by
Manager or any insurance broker utilized by Manager with regard to the nature
or extent of the insurance coverages which should be considered by Owner for
the ownership and operation of the Hotels, and Owner is to rely exclusively on
its own insurance advisors with regard thereto.
ARTICLE VI
SUBORDINATION; MORTGAGES
6.1 Authorization to Mortgage Hotels. Owner shall have the right to
grant the Mortgage on all of the assets which comprise the Hotels, and to
assign to the Mortgage, as collateral security, of Owner's right, title
and interest in and to this Agreement (collectively the "Collateral"). Owner
shall have the right to grant to any subsequent lender lending funds to Owner,
a lien or encumbrance on all or any part of the Collateral; provided, however
that either (i) such loan is in a principal amount of the loan secured by the
Mortgage less any amortization of such amount through the date of closing of
such new loan, or (ii) such loan has been approved in writing by Manager, which
consent shall not be unreasonably withheld provided that the loan-to-value
ratio is no greater than the ratio for the loan secured by the Mortgage, the
Cash Flow Available for Debt
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Service for the most recent full Operating Year less the Incentive Fee (without
any accrual or limitation based on Cash Flow Available for Incentive Fee) is at
least equal to two hundred percent (200%) of the scheduled debt service on such
new loan, the new loan has a term of at least five years, and the new loan is
otherwise on ordinary and normal terms for the type of lender making such loan
(any mortgage, deed of trust or other encumbrance securing a loan meeting the
criteria set forth in (i) or (ii) above is herein referred to as an "Approved
Mortgage"). If Owner has not delivered to Manager a commitment for the
refinancing of the loan secured by the Mortgage or of any loan secured by an
Approved Mortgage within 60 days of the scheduled maturity of such loan,
Manager shall have the right, on behalf of Owner, to seek such a commitment and
to place such a loan, on arms length terms with an institutional lender
regularly making real property secured loans, in an amount equal to the then
outstanding principal balance of the existing loan together with reasonable
closing costs, including any commitment fee. Owner shall execute any and all
documents reasonably requested by Manager in connection with such placement of
a new loan. Any mortgage securing such a loan obtained by Manager on behalf of
Owner shall be an Approved Mortgage. Manager shall have no obligation to place
such a loan on behalf of Owner.
6.2 Subordination. Manager agrees that this Agreement shall be subject
and subordinate to any Approved Mortgage.
6.3 Rights of Mortgagee. If Owner or any Approved Mortgagee shall have
furnished to Manager the name and address of such Approved Mortgagee, then so
long as any Hotel, or any part thereof or any interest therein, shall be
subject to the Approved Mortgage, the following shall be applicable:
a. Manager shall, simultaneously with the giving to Owner of any
Notice of Default or Notice of Termination under this Agreement, send a
copy of such Notice to such Approved Mortgagee in the manner provided in
Section 10.6 for the giving of notices, and no Notice of Default or
Notice of Termination given by Manager to owner shall be effective
unless a copy of such Notice shall have been sent as herein provided.
b. If, under Section 4.2, a default by Owner shall have occurred
and be continuing so as to constitute an Event of Termination, Manager
shall not be entitled to terminate this Agreement so long as no other
default shall have occurred and be continuing (other than those which
are being cured as provided for in this Agreement), if within thirty
(30) days after Manager
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shall have given to Approved Mortgagee the Notice of Termination, such
Approved Mortgagee shall cure such default respecting the payment of
money, or for any other default, shall within such thirty (30) day
period, commence and thereafter proceed with diligence and good faith to
cure such other default.
c. Upon reasonable advance notice from such Approved
Mortgagee, Manager shall accord to it and its agents the right to enter
upon any part of the Hotels at any reasonable time during the term of
this Agreement for the purpose of examining, inspecting or making
extracts from the books and records of the Hotels.
d. If such Approved Mortgagee or any person or entity other
than a person or entity who competes with Manager as described in
Section 9.2(a) shall become the owner of any Hotel as a result of any
foreclosure of a bona-fide conveyance in lieu of foreclosure, Manager
shall have no right or power to terminate this Agreement, and shall
recognize such Approved Mortgages or such other person or entity as
Owner hereunder to the same extent as though it or they had been Owner
hereunder as of the execution of this Agrement; provided, however, that
such Approved Mortgage or such other person or entity shall agree in
writing with Manager to be bound by the terms and provisions of this
Agreement to the same extent as if such Approved Mortgagee or such other
person or entity had been an original Party hereto. If a person or
entity who competes with Manager as described in Section 9.2(a) shall
become the owner of any Hotel as the result of any foreclosure or
conveyance in lieu of foreclosure, then Manager's option to terminate as
set forth in Section 9.2(a) shall become operative.
6.4 ESTOPPEL CERTIFICATES. Manager agrees, at any time and from
time to time, upon not less than fifteen (15) days prior written notice by Owner
or an Approved Mortgagee, to execute, acknowledge and deliver to Owner or such
Approved Mortgagee a statement in writing certifying that this Agreement has not
been modified and is in full force and effect (or, if there have been
modifications, that the same is in full force and effect as modified and
specifying the modifications) and stating whether or not, to the best knowledge
of Manager, there exists any default by Owner under this Agreement, including
any Event of Termination, and if so, specifying each such default of which
Manager may have knowledge. Upon similar notice, Manager shall be entitled to a
similar certificate from Owner.
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ARTICLE VII
DESTRUCTION
7.1 OWNER TO RESTORE AFTER INSURED CASUALTY. Subject to Section
7.2, if all or any part of a Hotel shall be damaged or destroyed by a cause for
which insurance coverage was required by this Agreement to be maintained by
Owner, then Owner shall repair, restore, replace or rebuild such Hotel
("Casualty Restoration") to the extent insurance proceeds are made available to
Owner for restoration as nearly as is reasonably possible to the value,
condition and character of such Hotel immediately prior to the occurrence of
such damage or destruction. Manager shall cooperate with Owner in obtaining all
insurance proceeds payable on account of such damage or destruction so that the
same shall be available to owner (subject to the terms of any Approved
Mortgage) as the Casualty Restoration progresses.
7.2 TERMINATION AFTER SUBSTANTIAL INSURED CASUALTY.
a. If all or any part of a Hotel is damaged or destroyed to
such an extent that the estimated cost of the Casualty Restoration
exceeds fifty percent (50%) of the total replacement cost (without
deduction for depreciation) of such Hotel then, if Owner reasonably
concludes that on the basis of the factors existing at the time of such
casualty it would be uneconomic to repair and restore the Hotel, Owner
shall have the right to terminate this Agreement (other than the
provisions of Section 9.3(a)) with respect to such Hotel by written
notice to manager given within sixty (60) days of such casualty. If
Owner elects to terminate this Agreement with respect to such Hotel,
Owner shall pay to Manager a termination fee equal to five (5) times the
total Base Fee and Incentive Fee (without any accrual or limitation
based on Cash Flow Available for Incentive Fee) earned by Manager with
respect to the Hotel as to which Owner has elected to terminate this
Agreement for the most recent full Operating Year together with interest
on such amount at the rate of interest payable on the Working Capital
Line from the date of the casualty to the date of payment; provided,
however, if Owner determines in its sole discretion that the value of
the Hotel and all insurance proceeds payable with respect to such
casualty will be less than the amount of the termination fee, Owner may
deliver its duly executed, acknowledged and recordable deed to the Hotel
together with all insurance proceeds paid to Owner in respect of such
casualty (together with an assignment of any unpaid insurance proceeds
with respect to such casualty) in full satisfaction of Owner's
obligation to pay such
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termination fee to Manager. Notwithstanding such election by Owner to
terminate this Agreement with respect to such Hotel, such Hotel shall
remain subject to Manager's right of first refusal pursuant to Section
9.3(a) hereof.
b. Owner must notify Manager within thirty (30) days of the
occurrence of such damage or destruction if Owner elects to terminate
this Agreement under this Section 7.2.
7.3 Uninsured Casualty - Owner's Option to Terminate or Restore. If
all or any part of a Hotel shall be damaged or destroyed by any cause for which
insurance coverage was not required by this Agreement to be maintained by Owner,
and the estimated cost of the Casualty Restoration exceeds thirty (30%) percent
of the total replacement cost (without deduction for depreciation) of such Hotel
then Owner may terminate this Agreement with respect to such Hotel if it elects
to do so by written notice to Manager within thirty (30) days after the
occurrence of such damage or destruction.
7.4 Commencement and Completion of Casualty Restoration. Unless Owner
shall be entitled to terminate this Agreement under Sections 7.2 or 7.3, Owner
shall commence the Casualty Restoration promptly after the occurrence of such
damage or destruction and shall complete the same with diligence. If such a
right of termination does exist, then the obligation to commence the Casualty
Restoration shall be delayed until the earlier of the giving of the applicable
notice of termination (in which event the obligations shall not become
operative) or the expiration of the applicable notice period (in which event the
obligation to commence and complete as provided in this Section 7.4 shall become
operative immediately).
7.5 Proceeds of Business Interruption Insurance. The proceeds of any
business interruption insurance shall be allocated between Owner and Manager, it
being the intention of the parties that Manager share in such proceeds to the
extent that they specifically represent fees or reimbursements otherwise payable
by Owner to Manager under this Agreement.
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ARTICLE VIII
CONDEMNATION
8.1 PERMANENT TAKING.
a. In the event of a Taking of an entire Hotel, this
agreement shall terminate as of the date of Taking with respect to such
Hotel.
b. In the event of a Taking of less than the entire portion
of a Hotel, if Manager or Owner reasonably determines that the remaining
land and building or buildings, after necessary repairs, cannot
economically and feasibly be operated as a hotel as contemplated in this
Agreement, then either Owner or Manager may terminate this Agreement
with respect to such Hotel.
c. Upon any Taking of a Hotel, whether or not this
Agreement is terminated with respect to such Hotel, Manager shall, if
applicable law permits, undertake separate proceedings with respect to
the determination of its loss resulting from the Taking. If such
separate proceedings cannot be undertaken, Manager shall nonetheless be
entitled to a fair and equitable share of the award or other proceeds of
the Taking paid to Owner to the extent of Manager's loss; provided,
however, that Owner shall receive the entire proceeds attributable to
the Taking of all land, the Hotel, the Furniture, Fixtures and
Equipment, Operating Supplies, Inventories and Capital Improvements.
d. If this Agreement is not terminated with respect to a
Hotel following a partial Taking under this Section 8.1, then this
Agreement shall remain in full force and effect with respect to the
remainder of the Hotel so taken, and Owner shall repair, restore,
replace or rebuild the remainder of such Hotel to the extent
condemnation proceeds are made available to owner for such repair,
restoration, replacement or rebuilding as nearly as possible to its
value, condition and character immediately prior to the Taking. Owner
shall commence the work promptly after the date of the Taking and
shall complete the same with diligence.
8.2 Taking for Temporary Use. Subject to Section 8.2(b), in the
event of a Taking of all or part of a Hotel for temporary use, this Agreement
shall remain in full force and effect with respect to such Hotel, and the
following shall be applicable:
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a. If the Taking is for a period not extending beyond the
term of this Agreement, the awards or other proceeds on account of the
Taking (including any interest included or paid with respect to such
awards or proceeds) other than any portion of such awards or proceeds
specifically identified as compensation for alterations or damages to
such Hotel shall be included in Gross Revenue and Adjusted Gross
Operating Profit for the Operating Year or Years in which received. When
and if during the term of this Agreement, the period of temporary use
shall terminate, Owner shall, to the extent condemnation proceeds are
made available to Owner for restoration, repair and alterations, make
all such restoration, repairs and alterations as shall be necessary to
restore such Hotel to its condition prior to such Taking for temporary
use and shall complete the same with diligence.
b. If the Taking is for a period extending beyond the term
of this Agreement, the awards or other proceeds on account of the Taking
(including any interest included or paid with respect to such awards or
proceeds) other than any portion of such awards or proceeds specifically
identified as compensation for alterations or damages to such Hotel for
the period of the Taking up to the stated expiration of the term of this
Agreement shall be included in determining Gross Revenue and Adjusted
Gross Operating Profit for the Operating Year of Years in which
received, and the remainder of such awards or other proceeds (including
interest as aforesaid) shall be paid to Owner.
c. Notwithstanding the foregoing provisions of this Section
8.2, if during the last five (5) Operating Years of this Agreement as
the term hereof may be extended by Manager there should be a temporary
taking of all or a part of any Hotel which extends for a period of at
least thirty-six (36) months, and Owner concludes in good faith that it
would not be economically reasonable to operate such Hotel as
contemplated in this Agreement following the temporary taking, then
Owner may elect to terminate this Agreement with respect to such Hotel
as of the Date of Taking by giving written notice to Manager within
thirty (30) days thereof, in which event the provisions of Section
8.2(b) shall apply with regard to the proceeds.
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ARTICLE IX
ASSIGNMENTS, ETC.
9.1 BY MANAGER.
a. So long as no default attributable to Manager shall have
occurred and be continuing, including an Event of Termination and
subject to Section 9.1(b), Manager shall have the right, without Owner's
consent, to assign, transfer or convey all of its right, title and
interest under this Agreement:
(i) to a Manager Affiliate;
(ii) to any successor or assignee of Manager which
acquires all or substantially all of the business and assets of
Manager as the result of any merger, consolidation or
reorganization; or
(iii) to a person or entity which acquires all or
substantially all of the business and assets of Manager;
provided, however, that in the event of (ii) or (iii) above or in the event of
the sale of at least a majority interest in the Manager through one or more
transactions, if the Management Agreement constitutes substantially all of the
assets of the Manager at the time of such event, then such event shall be
subject to the prior written consent of Owner, which consent shall not be
unreasonably withheld.
b. Any assignment, transfer or conveyance under Section
9.1(a) shall be subject to the following:
(i) the assignee must assume and agree to be bound by
all of the terms and provisions of this Agreement; and
(ii) the delivery to Owner of an executed counterpart
of the instrument of assignment and assumption of rights and
obligations.
c. In the event that Manager shall assign, transfer or
convey its right, title and interest under this Agreement under Sections
9.1(a) and 9.1(b), then Manager shall not be liable for any obligations
arising under this Agreement after the date of such assignment, transfer
or conveyance.
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d. Except as provided in this Section 9.1, Manager shall
not assign, transfer or convey all or any of its right, title and
interest under this Agreement without Owner's approval.
9.2 BY OWNER.
a. Subject to Manager's rights pursuant to Section 9.3, so
long as no default attributable to Owner shall have occurred and be
continuing, including an Event of Termination and subject to Section
9.2(b), Owner shall have the right, without Manager's approval, to
assign, transfer or convey all or any part of its right, title and
interest in any Hotel or any interest therein (which assignment must
include this Agreement to the extent appropriate together with all
assets of Owner related to the operation of such Hotel, including,
without limitation, all of the issued and outstanding capital stock of
any liquor license holding corporation).
b. Any assignment, transfer or conveyance under Section
9.2(a) shall be subject to the following:
(i) the assignee must assume and agree to be bound by
all of the terms and provisions of this Agreement;
(ii) the delivery to Manager of an executed counterpart
of the instrument of assignment and assumption of rights and
obligations; and
(iii) the assignee shall be United States national
who is not involved or reputed to be involved in organized
crime, who does not have a generally recognized reputation for
unethical business dealings and is not a competitor of Manager
and does not have any material ownership interest in a
competitor of Manager.
c. In the event that Owner shall assign, transfer or convey
its right, title and interest in any Hotel and in this Agreement under
Sections 9.2(a) and 9.2(b), then Owner shall not be liable for any
obligation arising under this Agreement after the date of such
assignment, transfer or conveyance.
9.3 SALE OF HOTELS.
a. If at any time, or from time to time, during the term of
this Agreement, Owner receives and is willing to accept a bona fide
offer from a third party
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to purchase all or any portion of Owner's interest in one or more
Hotels, or if Owner offers to sell all or any portion of its interest in
one or more Hotels to any third party, in each case, other than an offer
or sale incidental to the exercise of any remedy by an Approved
Mortgagee and other than an offer or sale following Manager's delivery
of a Notice of Termination with respect to the affected Hotel or Hotels
(any such offer to or from a third party is herein called a Third Party
Offer), Owner shall promptly transmit to Manager its written offer to
sell its interest in the Hotel or Hotels described in the Third Party
Offer to Manager upon the terms and conditions set forth in the Third
Party Offer, together with a true copy of such offer, and shall give
Manager thirty (30) days to accept such offer. If Manager accepts such
offer by written notice to Owner within such time, Owner and manager
shall duly perform their obligations under such agreement. If Manager
fails to accept such offer in accordance with this paragraph, then Owner
shall be free, within 180 days of Manager's failure to accept such
offer, to sell its interest in the Hotel or Hotels described in the
Third Party Offer to such third party upon the terms and conditions
contained in such offer.
b. Upon, and as a condition to, any sale, assignment,
conveyance or other transfer of a Hotel or Hotels by Owner Manager and
the new owner of the Hotel or Hotels shall enter into a new Management
Agreement on all of the terms and conditions of this Agreement, except
that (A) the Current Priority Amount shall be equal to the Current
Priority Amount hereunder multiplied by a fraction, the numerator of
which is the Adjusted Gross Operating Profit for the immediately
preceding calendar year for the Hotel which has been sold and the
denominator of which is the Adjusted Gross Operating Profit of all of
the Hotels managed under this Agreement immediately before such sale for
such period, and (B) the Operating Profit Target under the new agreement
shall be equal to the Operating Profit Target existing under this
Agreement immediately before the sale of the Hotel or Hotels to be
managed under the new agreement multiplied by a fraction, the numerator
of which is the Adjusted Gross Operating Profit for the immediately
preceding calendar year of the Hotel or Hotels sold and the denominator
of which is the Adjusted Gross Operating Profit of all of the Hotels
managed under this Agreement immediately before such sale for such
period.
38
<PAGE> 43
ARTICLE X
MISCELLANEOUS
10.1 COMPLIMENTARY/DISCOUNT POLICIES. Owner will accept Manager's
complimentary and discount policies in effect from time to time at the Hotels
so long as they conform to general industry practices. Manager will accept
Owner's discount policies at the Hotels which are in effect on the date hereof.
10.2 MANAGER IDENTIFICATION, NAMES OF HOTELS.
a. The names of the Hotels are set forth in Exhibit __
attached hereto and incorporated herein by this reference. Owner
acknowledges that such names are the property of Manager, that such
names may not be changed without the approval of Manager and that such
names, or any variants thereof, may not be used by Owner in connection
with any premises other than the Hotels without the express prior
written consent of Manager. Manager acknowledges that if any Hotel
becomes known by any name(s) exclusive of any name incorporating the
term "Red Lion", such name(s) would be the property of Owner. Upon the
termination of this Agreement for any reason whatsoever, Owner shall
have no right to use, and shall refrain from using, any name
incorporating the term "Red Lion" and any other name or variant thereof
employed in connection with the name(s) of any Hotel.
b. Owner further acknowledges that the trade names "Maxis"
and "Red Lion" or cognates or successors thereof, and Manager's logotype
or cognates or successors thereof, are the property of Manager and that
upon termination of this Agreement for any reason whatsoever, Owner and
the Hotels shall discontinue using them in the conduct of their business
to the extent they are using them; provided, however, that if this
Agreement is terminated with respect to one or more Hotels by reason of
Manager's default, Owner may continue using such tradenames and
trademarks for a period of up to one hundred twenty (120) days following
such termination to permit an orderly transition to new management of
the Hotel or Hotels as to which this Agreement has been terminated.
Subject to the foregoing, upon such termination, Owner agrees that it
will not engage in a business or advertising practice which will lead
the public or pe Hotels' customers to believe there is any relationship,
affiliation or identity with Manager. Owner further agrees that during
the term of this Agreement it will not identify as a "Red Lion" hotel
any hotel which is not a Red Lion
39
<PAGE> 44
Hotel, as that group may exist from time to time, or identify the
Hotels with any hotel organization other than Manager.
10.3 COMPLIANCE WITH LAW.
a. Manager shall make all reasonable efforts, in the name
of and at the expense and with the cooperation of Owner, to comply with
and abide by all laws, rules, regulations, requirements, orders,
notices, determinations and ordinances of any federal, state or
municipal authority applicable to the Hotels, including, without
limiting the foregoing, the state and local liquor authorities, the
Board of Fire Underwriters and the requirements of any insurance
companies covering any of the risks against which the Hotels are
insured. If the cost of compliance exceeds, or appears reasonably likely
to exceed, Five Thousand Dollars ($5,000.00) per Hotel (subject to
inflationary increases from time to time) in any instance and is not
provided for in a current approved Operating Plan and Budget or Capital
Improvement Plan, Manager shall promptly notify Owner.
b. With respect to a violation of any such laws, rules,
regulations, requirements, orders, notices, determinations or
ordinances, Owner shall have the right to contest any of the foregoing
and postpone compliance pending the determination of such contest, if so
permitted by law and not detrimental to the operation of the Hotels.
10.4 GOVERNING LAW. The Parties agree that all disputes relating to
the performance and/or interpretation of any term or provision of this
Agreement shall be governed by the laws of California.
10.5 NO WAIVER OF BREACH. No failure by Manager or Owner to insist
upon the strict performance of any covenant, agreement, term or provision of
this Agreement, or to exercise any right or remedy consequent upon a breach
thereof, shall constitute a waiver of any such breach or any subsequent breach
of such covenant, agreement, term or provision. No waiver of any breach shall
affect or alter this Agreement, but each and every covenant, agreement, term
and provision of this Agreement shall continue in full force and effect with
respect to any other then existing or subsequent breach thereof.
10.6 NOTICES. All notices, requests, approvals, demands and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given and to be effective five
(5)
40
<PAGE> 45
business days after being deposited in the United States mail as registered or
certified matter, postage prepaid, return receipt requested, addressed as
follows:
a. If to Manager:
RL Acquisition Company
4001 Main Street
Vancouver, Washington 98663
Attention: James Rech
b. If to Owner:
Red Lion Inns Operating, L.P.
4001 Main Street
Vancouver, Washington 98663
Attention: H. Raymond Bingham
or at such other address as the party to whom the notice is sent shall have
been designated in accordance with the provisions of this Section 10.6.
10.7 SUCCESSORS AND ASSIGNS. Subject to the provisions of Article IX,
this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of the Parties hereto.
10.8 INDEMNIFICATION. Owner shall protect, defend, indemnify and save
harmless Manager and Manager Affiliates against and from all claims, damages,
losses and expenses, including but not limited to attorneys' fees and costs, by
reason of any suit, claim, demand, judgment or cause of action initiated by any
person, arising or alleged to have arisen out of any act or mission of
Manager in the performance of its obligations under this Agreement; provided,
however, that Manager shall protect, defend, indemnify and save harmless
Owner against and from all claims, damages, losses and expenses, including
but not limited to attorneys' fees and costs, arising out the gross
negligence, willful misconduct or breach of this Agreement by Manager or
Manager Affiliates.
10.9 LIMITATION ON PLEDGING OWNER'S CREDIT. Except as provided in
Section 6.1, Manager shall not borrow any money or execute any promissory note,
bill of exchange or other obligation, mortgage or encumbrance in the name and
on behalf of Owner or pledge the credit of Owner without Owner's approval except
for purchases made in the ordinary course of business in the management of the
Hotels within the scope of this Agreement. Manager hereby agrees to indemnify
Owner against any claims, suits, liabilities, costs and expenses,
41
<PAGE> 46
including attorneys' fees, which may be asserted against or incurred by Owner
by reason of any such unauthorized actions by Manager. To the extent Manager
uses or pledges its credit in making purchases on behalf of Owner in the
ordinary course of business in the management of the Hotels within the scope of
this Agreement, Owner agrees to pay for such purchases to the extent funds from
the Hotels' operations are insufficient, and agrees to indemnify Manager
against any claims, suits, liabilities, costs and expenses, including, but not
limited to attorneys' fees and costs which may be asserted against or incurred
by Manager by reason of the failure of Owner to pay for such purchases.
10.10 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the Parties with respect to the subject matter hereof.
10.11 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which shall
constitute but one and the same instrument.
10.12 CAPTIONS, ETC. The Index and captions to the Articles and
Sections of this Agreement are for convenience of reference only and in no way
define, limit or describe the pe o intent of this Agreement or any part hereof,
nor in any other way affect this Agreement or any part hereof.
10.13 NO PARTNERSHIP OR JOINT VENTURE. Nothing contained in this
Agreement shall constitute or be construed to be or create a partnership, joint
venture or similar relationship between the Parties.
10.14 AMENDMENT. This Agreement may be amended, modified and/or
supplemented only by written agreement of the parties hereto.
10.15 LIMITED RECOURSE. Notwithstanding anything to the contrary
contained herein or elsewhere, no general partner, limited partner, officer,
director, stockholder, employee, agent, servant or other representative of
Manger (each an "Individual") shall have any personal liability for the
performance of any obligations, or in respect of any liability, of Manager
under this Agreement, and no monetary or other judgment shall be sought or
enforced against any such Individuals or their assets.
10.16 MEMORANDUM OF AGREEMENT. At Manger's request, Owner shall
execute, acknowledge and deliver to Manager, in recordable form, multiple
original counterparts of a memorandum of this Agreement, which Manager is
hereby authorized to record in the property records of each county
42
<PAGE> 47
in which a Hotel is located for the purpose of putting subsequent transferees or
prospective transferees on notice concerning the existence of this Agreement.
IN WITNESS WHEREOF, Owner and Manager have executed this Management
Agreement on the day and year first above written.
"Owner" RED LION INNS OPERATING L.P.,
a Delaware limited partnership
By Red Lion Properties, Inc.,
a Delaware corporation,
Its General Partner
By /s/ H. Raymond Bingham
--------------------------------
H. Raymond Bingham
Its Executive Vice President
"Manager" RL ACQUISITION COMPANY,
a California limited partnership
By /s/ H. Raymond Bingham
--------------------------------
H. Raymond Bingham
Its Attorney-In-Fact
43
<PAGE> 1
EXHIBIT 10.33
ASSIGNMENT AND ASSUMPTION AGREEMENT
(Management Agreement and Assignment of Management Agreement)
This Assignment and Assumption Agreement, dated as of August 1,, 1995
(the "Agreement"), is by and between Red Lion, a California Limited Partnership
("Red Lion") and Red Lion Hotels, Inc., a Delaware corporation ("RLI").
Capitalized terms not defined herein shall have the meanings assigned to them in
the Assignment of Management Agreement (as defined below).
RECITALS
WHEREAS, Red Lion and Red Lion Inns Operating L.P., a Delaware Limited
Partnership ("Owner"), are parties to a Management Agreement, dated as of April
6, 1987, as amended (the "Management Agreement"). Red Lion was formerly known as
RL Acquisition Company, a California limited partnership, the name under which
it originally signed the Management Agreement and the Assignment of Management
Agreement.
WHEREAS, Red Lion is party to an Assignment of Management Agreement
dated as of April 6, 1987, by and among Owner (as assignor), United States
National Bank of Oregon, a national banking association ("USNB"), and Canadian
Imperial Bank of Commerce, an extranational banking association, as co-agents
(collectively, as assignee), and Red Lion (as manager), as amended (the
"Assignment of Management Agreement"). CIBC Inc. ("CIBC"), a Delaware
corporation, is successor with respect to the interest of Canadian Imperial Bank
of Commerce under the Assignment of Management Agreement.
WHEREAS, Red Lion intends to assign, transfer and convey to RLI all of
its interests, rights, duties and obligations under the Management Agreement and
the Assignment of Management Agreement and RLI intends to assume all of Red
Lion's interests, rights, duties and obligations under the Management Agreement
and the Assignment of Management Agreement, in each case, pursuant to this
Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
covenants and promises set forth herein, and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
1. Assignment.
--------------
Red Lion hereby assigns, grants, conveys and transfers to RLI all of
Red Lion's interests, rights, duties and obligations under the Management
Agreement and the Assignment of Management Agreement as if RLI originally were
named as manager in each thereof.
<PAGE> 2
2. Assumption.
--------------
RLI hereby assumes all of Red Lion's interests, rights, duties and
obligations under the Management Agreement and the Assignment of Management
Agreement as if RLI originally were named as manager in each thereof. RLI
affirms the Management Agreement and the Assignment of Management Agreement and
agrees to be bound by each. This assumption by RLI is made also for the benefit
of (i) Owner in satisfaction of the requirements of Section 9.1 of the
Management Agreement and (ii) USNB and CIBC, co-agents, as assignee under the
Assignment of Management Agreement, in satisfaction of the requirements of
Section 5.1 thereof.
3. Miscellaneous.
-----------------
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment
and Assumption Agreement as of the date first above written.
RED LION, a California Limited Partnership
By: RLA-GP, Inc., a Delaware corporation,
General Partner
By: /s/ David J. Johnson
-------------------------
David J. Johnson,
Executive Vice President
RED LION HOTELS, INC., a Delaware corporation
By: /s/ David J. Johnson
-------------------------------------
David J. Johnson, President and Chief
Executive Officer
<PAGE> 1
Exhibit 10.34
CONFORMED COPY
--------------
RED LION
SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN
July 1, 1989
(As Amended Through Amendment No. 3)
Red Lion Hotels, Inc.
a Delaware corporation
4001 Main Street
PO Box 1027
Vancouver, WA 98666
<PAGE> 2
TABLE OF CONTENTS
Page
1. Purposes; Administration; Plan Year ....................... 1
2. Eligibility; Participation ................................ 1
3. Contributions ............................................. 2
4. Participants' Accounts .................................... 4
5. Time and Manner of Payment ................................ 5
6. Vesting ................................................... 6
7. Withdrawals ............................................... 7
5. Amendment; Termination .................................... 7
9. Claims Procedure .......................................... 8
10. General Provisions ........................................ 9
11. Effective Date ............................................ 10
i
<PAGE> 3
RED LION
SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN
July 1, 1989
(As Amended Through Amendment No. 3)
Red Lion Hotels, Inc.
a Delaware corporation
4001 Main Street
PO Box 1027
Vancouver, WA 98666 Company
1. Purposes: Administration: Plan Year
-----------------------------------
1.1 The Company adopts this plan to provide retirement
benefits to eligible employees in addition to the benefits provided by the
Employee Retirement Savings Plan (the "Savings Plan"), the Company's tax
qualified profit sharing plan, which includes a qualified cash or deferred
arrangement under section 401(k) of the Internal Revenue Code. If the Company
sells substantially all of its assets and the buyer assumes all of the Company's
obligations under this plan, the Company shall be released from those
obligations.
1.2 The plan shall be administered by an Administrative
Committee (the "Committee") of one or more persons appointed by the managing
general partner of the Company. The Committee shall interpret the plan,
determine eligibility and the amount of benefits, maintain records, determine
earnings rates and generally be responsible for seeing that the purposes of the
plan are accomplished. The Committee may delegate all or part of its
administrative duties to others.
1.3 The plan year shall be the calendar year starting January
1 and ending December 31, except the period from July 1, 1989 to December 31,
1989 shall be an initial short plan year.
2. Eligibility; Participation
--------------------------
2.1 Subject to 2.2, an employee shall participate as follows:
(a) Participation in elective deferrals under 3.1 shall commence
with the first pay period after hire, subject to enrollment procedures
of the Committee.
<PAGE> 4
(b) Participation in Company contributions under 3.3 shall
commence on the entry date the employee becomes eligible for
participation in the Company's Employee Retirement Savings Plan. If the
entry date is not a January 1, the contribution in 3.3(a) shall be
based on compensation payable from the entry date to the end of the
plan year in excess of the contribution and benefit base for a full
year.
2.2 A management employee of the Company shall be eligible to
participate in the plan for any plan year for which the employee is a highly
compensated employee as defined for purposes of discrimination testing in the
Savings Plan. Upon first becoming eligible, an employee shall enroll for
participation by completing a Statement of Participation on a form provided by
the Committee.
2.3 A person having an Account under the plan shall be referred to as a
participant. A participant who loses eligibility for a plan year as a result of
not being a highly compensated employee for such year under the Savings Plan
shall continue to have an Account in the plan, but no contributions shall be
made under Section 3 for such year.
3. Contributions
-------------
3.1 Subject to 3.4, for each plan year, a portion of a participant's
salary and bonus for the year shall be deferred as follows. For the period after
hire before the participant is eligible to make elective contributions under the
Savings Plan, the amount deferred shall be a percentage of compensation elected
by the participant, up to the maximum percentage allowed by the Savings Plan.
For the period after the participant is eligible under the Savings Plan, the
amount deferred shall be the excess (if any) for the plan year of (a) over (b)
below:
(a) The participant's elective contributions under the
Savings Plan based on the percentage of compensation elected by
the participant up to the maximum percentage allowed by the
Savings Plan.
(b) The amount of elective contributions actually allowed
for the participant under the Savings Plan for the year after
application of the annual dollar limit on elective deferrals, the
$150,000 limit on qualified plan
2
<PAGE> 5
compensation, the actual deferral percentage test, and the limit on
annual additions.
3.2 Amounts deferred under 3. 1 shall be credited to the participant's
Deferral Account.
3.3 Subject to 3.4 and 3.5, for each plan year the Company shall
contribute the following amounts for each participant:
(a) 6 percent of the participant's compensation for the year
in excess of the contribution and benefit base determined under section
230 of the Social Security Act. "Compensation" means the compensation
from which elective contributions may be made under the Savings Plan,
before reduction for such elective contributions, deferrals under this
plan or amounts elected under a flexible benefits plan. Compensation in
excess of the $150,000 limit on qualified plan compensation shall be
counted for this purpose.
(b) The excess (if any) of (1) over (2) below:
(1) The participant's matching contributions under
the Savings Plan based on the participant's elective
contributions under 3.1(a) before reduction under 3.1(b) and
after any reduction in the rate of matching as a result of the
4-percent-of-eligible-payroll limit on matching contributions
provided under the Savings Plan.
(2) The amount of matching contributions actually
allowed for the participant under the Savings Plan for the
year after application of the annual dollar limit on elective
deferrals, the actual deferral percentage test, the
contribution percentage test and the limit on annual
additions.
3.4 If an excess deferral or excess matching contribution under the
Savings Plan is distributed to a participant under sections 4.04-6 or 4.04-7 of
the Savings Plan, or any successor provision, the participant shall repay the
amount received, including any earnings, to the Company. The
3
<PAGE> 6
Company shall treat such amount as a deferral contribution under this Plan and
shall reduce the taxable income reported to the participant by the same amount.
3.5 No contribution under 3.3 shall be made in any plan year in which
the participant does not elect any elective contribution under the Savings Plan.
3.6 Company contributions under 3.3 shall be credited to the
participant's Company Account.
4. Participants' Accounts
----------------------
4.1 The Committee shall keep the following Accounts for each
participant:
(a) A Deferral Account.
(b) A Company Account.
4.2 The Committee shall credit to a participant's Company Account the
contribution provided by 3.3(a) as of a date not later than the last day of the
plan year.
4.3 The Committee shall credit to a participant's Deferral Account the
deferrals under 3.1 at the time which, but for the limitations imposed by law,
the deferrals would have been credited to the participant's account under the
Savings Plan.
4.4 The Committee shall credit to a participant's Company Account the
contributions under 3.3 (b) at the time which, but for the limitations imposed
by law, the contribution would have been credited to the participant's account
under the Savings Plan.
4.5 As of each regular or special valuation date under the Savings
Plan, the Committee shall credit earnings or losses to each participant's
Accounts. The Committee shall establish within the trust described in 10.4 one
or more pooled investment funds (collectively, the "SERP Funds"), and the
following shall apply:
(a) The Committee shall define the objectives for the SERP
Funds, may establish new funds, combine two or more funds or change the
objectives of an existing fund.
(b) When there are two or more SERP Funds offered, allocation
of the Accounts of each participant among the funds shall be controlled
4
<PAGE> 7
by the participant in minimum increments established by the Committee.
If no allocation is made, the Committee shall determine the SERP Funds
into which contributions shall be deposited.
(c) The Committee shall inform all participants about the SERP
Funds and the objectives of each. The SERP Funds shall be valued as of
each valuation date under the Savings Plan.
(d) Except as provided above, the provisions 10.02 of the
Savings Plan relating to amounts, timing, and notice requirements for
allocations shall apply with respect to allocations by the participant
under this plan.
(e) The SERP Funds shall be valued as of each regular or
special valuation date under the Savings Plan.
5. Time and Manner of Payment
--------------------------
5.1 The vested amount of a participant's Accounts shall be paid in one
of the following ways as selected under 5.2:
(a) In a lump sum within 30 days after the Benefit Date.
(b) In substantially equal monthly installments over 5 years,
beginning within 30 days after the Benefit Date.
(c) In substantially equal monthly installments over 10 years,
beginning within 30 days after the Benefit Date.
5.2 The Benefit Date shall be the earliest of the following:
(a) The date the participant ceases to be employed by the
Company, other than in a direct transfer to employment with an entity
designated by the Committee as an affiliate of the Company.
(b) The date the participant dies.
5
<PAGE> 8
(c) The date the participant becomes disabled as determined
under the terms of the Savings Plan.
5.3 In the participant's Statement of Participation, the participant
shall select the form of payment under 5.1. A participant's selection shall be
irrevocable for deferrals and Company contributions credited to the
participant's Accounts while the selection is in effect and any earnings
credited thereto. A participant may change the form of payment by written notice
to the Committee. Such a change shall be effective on the first day of the plan
year beginning after the Committee receives notice of the change. A change of
payment form shall apply only to deferrals and Company contributions, and
earnings credited thereto, after the change becomes effective.
5.4 The Company shall withhold from any payments any income tax or
other amounts as required by law. If FICA tax is due on deferrals or Company
contributions, the participant's share of FICA shall be withheld from other
compensation payable to the participant.
5.5 On the death of a participant, payments under 5.1 shall be made to
the participant's beneficiary at the same time the payments would have been made
to the participant. The participant's beneficiary shall be determined under the
terms of the Savings Plan as in effect at the date of death, regardless of
whether the participant ceases to be a participant in the Savings Plan.
5.6 If a beneficiary is receiving payments under 5.5 and dies before
the payments are completed, the remaining payments shall be made to the
beneficiary's estate.
6. Vesting
-------
6.1 A participant's Deferral Account shall be fully vested at all
times.
6.2 A participant's Company Account shall be vested in the same
percentage as the participant's matching contributions under the Savings Plan,
except as follows. The Company Account shall be fully vested if a Change of
Control Event under 6.3 occurs.
6.3 A "Change of Control Event" means any one of the following, except
the corporate reorganization of July 1995 shall not be a Change of Control
Event:
6
<PAGE> 9
(a) The sale of all or substantially all of the assets of the
Company;
(b) The sale of 50% or more of the Partnership interests in
the Company, whether by sale, merger or other disposition;
(c) The liquidation or dissolution of the Company;
(d) Any other sale or disposition of the assets or Partnership
interests of the Company (whether any of such Partnership interests are
now outstanding) resulting in a change in control of the policies,
procedures and operation of the Company.
7. Withdrawals
-----------
7.1 A participant may withdraw vested amounts from the participant's
Accounts to the extent approved by the Committee because of financial hardship
as defined in the Savings Plan. The withdrawal shall be limited to the amount
reasonably necessary to meet the financial hardship. The vested amounts in the
participant's Accounts under this plan shall be exhausted first, before hardship
withdrawals are allowed under the Savings Plan.
7.2 The withdrawal date shall be fixed by the Committee after
application by the participant under procedures fixed by the Committee. The
application shall include a signed statement of the facts causing financial
hardship and any other facts required by the Committee. The Committee may
require a minimum advance notice, may limit the amount and frequency of
withdrawals, and may delay payment of an approved withdrawal to permit a special
valuation, to permit liquidation of necessary assets or for other pertinent
reasons. Accounts shall be adjusted as of the last regular or special valuation
date on or before the withdrawal.
8. Amendment: Termination
----------------------
8.1 The Company may amend the plan at any time by notice to the
participants. An amendment may be retroactive within the plan year in which
notice is given. An amendment may not reduce the balance in the participants'
Accounts as of the date notice of the amendment is given to participants. An
amendment may not change the terms in 4.5 under which earnings or losses are
determined. No amendment may accelerate the time of payment of
7
<PAGE> 10
benefits to persons participating in the plan at the time of the amendment.
8.2 If the Savings Plan is terminated, this plan shall terminate as of
the same date. If all the assets of the Savings Plan are then distributed to its
participants, all the Accounts under this plan shall be distributed in a lump
sum to the participants at the same time.
8.3 The Company may terminate this plan effective the first day of any
plan year after notice to the participants. On termination, all Accounts under
this plan shall be distributed in a lump sum to participants.
8.4 If the Internal Revenue Service issues a final ruling that the
amount of any participant's Account will be subject to current income tax to the
participant, all amounts to which the ruling is applicable shall be paid within
30 days to the participant.
9. Claims Procedure
----------------
9.1 Any person claiming a benefit, requesting an interpretation or
ruling under the plan, or requesting information under the plan shall present
the request in writing to the Committee, which shall respond in writing as soon
as practicable.
9.2 If the claim or request is denied, the written notice of denial
shall state:
(a) The reasons for denial, with specific reference to the
plan provisions on which the denial is based.
(b) A description of any additional material or information
required and an explanation of why it is necessary.
(c) An explanation of the plan's claim review procedure.
9.3 Any person whose claim or request is denied or who has not received
a response within 30 days may request review by notice in writing to the
Committee. The original decision shall be reviewed by the Committee which may,
but shall not be required to, grant the claimant a hearing. On review, whether
or not there is a hearing, the claimant may have representation, examine
pertinent documents and submit issues and comments in writing.
8
<PAGE> 11
9.4 The decision on review ordinarily shall be made within 60 days. If
an extension of time is required for a hearing or other special circumstances,
the claimant shall be so notified and the time limit shall be 120 days. The
decision shall be in writing and shall state the reasons and the relevant plan
provisions. All decisions on review shall be final and bind all parties
concerned.
10. General Provisions
------------------
10.1 Any notice under this plan shall be in writing and shall be
effective when actually delivered, or, if mailed, when deposited postage
prepaid. Mail shall be directed to the Company at the address stated in this
plan, to the participant at the address stated in the Statement of
Participation, or to such other address as a party may specify by notice to the
other parties. Notices to the Committee shall be sent to the Company's address.
10.2 The rights of a participant under this plan are personal. Except
for the limited provisions of 5.5, no interest of a participant or any
beneficiary or representative of a participant may be directly or indirectly
transferred, encumbered, seized by legal process or in any other way subjected
to the claims of any creditor.
10.3 Except as provided in 10.4, the rights of the participants and
beneficiaries under this plan shall be an unfunded, unsecured promise of the
Company to make future payments.
10.4 The Company shall establish a trust with a financial institution
for payment of benefits under the plan, which shall be a grantor trust for tax
purposes. The trust shall provide that any assets contributed to the Trustee
shall be used exclusively for payment of benefits under this plan except in the
event the Company becomes insolvent, in which case the trust fund shall be held
for payment of the Company's obligations to its general creditors.
10.5 Following termination of employment, a participant shall not be an
employee of the Company for any purpose and payments under section 5 shall not
constitute salary or wages. A participant shall receive such payments as
retirement benefits, not as compensation for performance of any substantial
services.
10.6 The plan shall not be a contract of employment between the Company
and any employee. No employee may object to amendment or termination of the
plan. The plan shall not prevent the Company from discharging any employee at
any time.
9
<PAGE> 12
10.7 The Committee may decide that because of the mental or physical
condition of a person entitled to payments, or because of other relevant
factors, it is in the person's best interest to make payments to others for the
benefit of the person entitled to payment. In that event the Committee may in
its discretion direct that payments be made as follows:
(a) To a parent or spouse or a child of legal age.
(b) To a legal guardian.
(c) To one furnishing maintenance, support, or
hospitalization.
10.8 This plan shall be construed according to the laws of Washington
except as preempted by federal law.
10.9 The Company may elect to pay any administrative fees or expenses
and may allocate the cost among adopting Employers. Otherwise the expenses and
fees shall be paid from the trust fund.
11. Effective Date
--------------
This plan shall be effective July 1, 1989.
RED LION
By J.H. BEST, JR.
------------------------
Executed: January 22, 1990
AMENDMENT NO, 1 EXECUTED AS FOLLOWS EFFECTIVE JANUARY 1, 1994:
RED LION
By BETH A. UGORETZ
------------------------
Executed: February 16, 1994
10
<PAGE> 13
AMENDMENT NO. 2 EXECUTED AS FOLLOWS EFFECTIVE IN PART JANUARY 1, 1995 AND IN
PART JANUARY 1, 1994:
- ----------------------------------------------------------------------------
RED LION
By BETH A. UGORETZ
-------------------------
Executed: July 26, 1995
AMENDMENT NO, 3 EXECUTED AS FOLLOWS EFFECTIVE OCTOBER 1, 1995:
- --------------------------------------------------------------
RED LION
By BETH A. UGORETZ
-------------------------
Executed: September l8, 1995
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EXHIBIT 10.35
SECOND AMENDMENT TO THE 1994 EQUITY PARTICIPATION PLAN
OF DOUBLETREE CORPORATION
This Second Amendment to the 1994 Equity Participation Plan of Doubletree
Corporation (the "Amendment") is adopted by Doubletree Corporation, a Delaware
corporation (the "Company"), effective as of April 22, 1996.
R E C I T A L S :
A. The Company's 1994 Equity Participation Plan (the "Incentive Plan") was
adopted by the Board of Directors (the "Board") on June 3, 1994, and approved by
the stockholders of the Company on June 30, 1994. On January 27, 1995, the Board
adopted, and on April 25, 1995, the stockholders of the Company approved the
First Amendment to the Incentive Plan.
B. The Incentive Plan currently states that shares of stock of the Company
subject to the Incentive Plan shall not exceed two million (2,000,000). This
second amendment increases the aggregate number of shares of stock subject to
the Incentive Plan from two million (2,000,000) to three million three hundred
thousand (3,300,000).
C. Section 10.2 of the Incentive Plan provides that the Board may amend
the Incentive Plan, subject in certain instances to receipt of approval of the
stockholders of the Company.
D. Effective February 13, 1996, the Board unanimously recommended and the
Board unanimously adopted this Second Amendment in the form given below ("Second
Amendment").
E. The Second Amendment was approved by the stockholders of the Company at
its Annual Meeting of Stockholders held on April 22, 1996.
SECOND AMENDMENT
1. Section 2.1(a) of the Incentive Plan is hereby amended to read in its
entirety as follows:
2.1 Shares Subject to the Plan.
(a) The shares of stock subject to Options, awards of
Restricted Stock, Performance Awards, Dividend Equivalents, awards
of Deferred Stock, Stock Payments or Stock Appreciation Rights shall
be Common Stock, initially shares of the Company's Common Stock, par
value $.01 per share. The aggregate number
<PAGE> 2
of such shares which may be issued upon exercise of such options or
rights or upon any such awards under the Plan shall not exceed three
million three hundred thousand (3,300,000). The shares of Common
Stock issuable upon exercise of such options or rights or upon any
such awards may be either previously authorized but unissued shares
or treasury shares.
The undersigned, David L. Stivers, Secretary of the Company, hereby
certifies that the Board and the stockholders of the Company adopted the
foregoing Second Amendment as stated above.
Executed at Phoenix, Arizona this 22nd day of April, 1996.
/s/ David L. Stivers
_________________________________________
David L. Stivers, Secretary
<PAGE> 1
EXHIBIT 10.36
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT (this "Agreement") dated as of
September 30, 1996 among Doubletree Corporation, a Delaware corporation
(together with its subsidiaries, "Doubletree"), Jack P. DeBoer ("DeBoer"), an
individual, the Alexander John DeBoer Trust dated March 14, 1995 (the "Alexander
Trust") and the Christopher Scott DeBoer Trust dated March 14, 1995 (the
"Christopher Trust") (collectively, the "Trusts")(DeBoer and the Trusts
constituting the shareholders of JPD Corporation, a Kansas corporation ("JPD
Corporation")) and the Warren D. Fix Family Partnership, L.P., a Kansas limited
partnership (the "Fix Partnership")(collectively, the "Initial Stockholders").
W I T N E S S E T H:
WHEREAS, the membership interests in Candlewood Hotel Company,
LLC, a Delaware limited liability Company ("Candlewood LLC") and certain
subsidiary limited liability companies and the stock of JPD Corporation are
proposed to be transferred and assumed by Candlewood Hotel Company, Inc., a
Delaware corporation ("Candlewood" or the "Company") (the "Initial
Reorganization");
WHEREAS, in connection with the Initial Reorganization,
Doubletree, JPD Corporation and the Fix Partnership entered into an
Incorporation and Registration Rights Agreement dated as of September 1, 1996
(the "Registration Rights Agreement") providing, among other things, the parties
with certain rights, including the right, under certain circumstances to
transfer their respective interests in Candlewood LLC and JPD Corporation to
Candlewood in exchange for shares of common stock of Candlewood and to register
their respective shares of common stock of Candlewood so acquired pursuant to
the Securities Act of 1933, as amended (the "Securities Act);
WHEREAS, pursuant to the Registration Rights Agreement, the
Members of Candlewood LLC have approved the Reorganization and the filing by the
Company of a registration statement under the Securities Act, as a result of
which (a) the Company has been incorporated having authorized capital stock
consisting of 100,000,000 shares of Common Stock, par value $.01 per share (the
"Candlewood Common Stock") , and 5,000,000 shares of Preferred Stock, par value
$.01 per share, (b) 5,175,000 shares of Candlewood Common Stock will be issued
and outstanding, of which 2,587,500 shares will be owned of record and
beneficially by Doubletree, 2,111,399 shares will be owned of record and
beneficially by DeBoer, 43,988 shares will be owned of record and beneficially
by the Alexander Trust, 43,988 shares will be owned of record and beneficially
by the Christopher Trust and 388,125 shares will be owned of record and
beneficially by the Fix Partnership;
WHEREAS, the Registration Rights Agreement, as amended,
requires that the Initial Stockholders execute and deliver a stockholders
agreement in the form hereof;
NOW, THEREFORE, in consideration of the premises and
undertakings hereinafter set forth, the parties hereto agree as follows:
<PAGE> 2
ARTICLE I. DEFINITIONS AND INTERPRETATION
Section 1.1. Definitions. As used in this Agreement:
"Affiliate" of a Holder means any Person, other than
Candlewood, controlling, controlled by or under common control with such Holder.
"Annual Election" means the annual election of Directors held
in accordance with the By-laws, including any such election by stockholders'
consent.
"Board" means the Board of Directors of Candlewood.
"By-laws" mean the By-laws of Candlewood.
"Candlewood Entity" means Candlewood and each of its
Subsidiaries.
"Certificate of Incorporation" means the Restated Certificate
of Incorporation of Candlewood in the form filed with the Delaware Secretary of
State on October 16, 1996.
"DeBoer/Fix Director" means each Initial DeBoer/Fix Director
and each Person nominated by the DeBoer/Fix Holders pursuant to Section 2 and
elected as a Director.
"DeBoer/Fix Holders" means DeBoer, the Trusts and the Fix
Partnership (so long as they are each a Holder) and each Permitted Transferee,
other than Candlewood, who becomes a Holder by acquiring any DeBoer/Fix Shares
in compliance with Section 4.8.
"DeBoer/Fix Shares" means the shares of Candlewood Common
Stock owned of record and beneficially by DeBoer, the Trusts and the Fix
Partnership on the Effective Date.
"DeBoer Holders" means DeBoer and the Trusts (so long as they
are each a Holder) and each Permitted Transferee of DeBoer, other than
Candlewood, who becomes a Holder by acquiring any DeBoer Shares in compliance
with Section 4.8.
"DeBoer Shares" means the shares of Candlewood Common Stock
owned of record and beneficially by DeBoer and the Trusts on the Effective Date.
"Director" means a director of Candlewood.
"Disposition" has the meaning given to such term in Section
3.1.
"Doubletree Director" means any Person nominated by the
Doubletree Holders and elected as a Director.
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<PAGE> 3
"Doubletree Holders" means Doubletree (so long as it is a
Holder) and each Permitted Transferee of Doubletree, other than Candlewood, who
becomes a Holder by acquiring any Doubletree Shares in compliance with Section
4.8.
"Doubletree Shares" means the Shares of Candlewood Common
Stock owned of record and beneficially by Candlewood on the Effective Date.
"Effective Date" means the date on which the Doubletree
Shares, the DeBoer Shares and the Fix Partnership Shares were issued to
Doubletree, DeBoer, the Trusts and the Fix Partnership.
"Fix Partnership Holders" means the Fix Partnership (so long
as it is a Holder) and each Permitted Transferee of the Fix Partnership, other
than Candlewood, who becomes a Holder by acquiring any Fix Partnership Shares in
compliance with Section 4.8.
"Fix Partnership Shares" means the shares of Candlewood Common
Stock owned of record and beneficially by the Fix Partnership on the Effective
Date.
"Holder" means a record and beneficial owner of any Subject
Shares.
"Initial Doubletree Directors" means Richard Ferris and Peter
Ueberroth.
"Initial DeBoer/Fix Directors" means Jack DeBoer and Warren
Fix.
"Permitted Transferee" of a Holder means (i) a successor to
such Holder by operation of law pursuant to a statutory merger, consolidation,
dissolution or liquidation (ii) a purchaser of all or substantially all of such
Holder's assets, or (iii) a Person owning, directly or indirectly, a majority of
the Voting securities or other comparable equity interests of such Holder, a
Person under common control with such Person (including, in the case of an
individual, a family member or a trust controlled by a family member) or a
Person of which such Holder owns, directly or indirectly, a majority of the
outstanding Voting Securities or other comparable equity interests, or (iv) or a
successor to such Holder by will or through the laws of descent, or through a
gift or other contribution made in anticipation of the death of such Holder;
provided, however, that in each case the successor, purchaser or Person referred
to in Clauses (i), (ii) or (iii) of this definition was an Affiliate of such
Holder prior to such merger, consolidation, dissolution, liquidation, purchase
of assets or acquisition of Voting Securities or other comparable equity
interests and, in each case referred to in clauses (i), (ii) or (iii) of this
definition, the Permitted Transferee has become a party to and bound by this
Agreement as to all Subject Shares then being transferred to it in compliance
with by Section 4.8. "Permitted Transferee" includes successive transferees in
transactions described in the preceding sentence.
"Person" means an individual, partnership, corporation,
unincorporated organization or association, trust, government or department,
unit or political subdivision of a government, or other entity.
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"Public Sale" means a sale of Candlewood Common Stock by
Candlewood and/or by one or more Holders of Subject Shares to one or more
underwriters for distribution pursuant to an effective registration statement
under the Securities Act in accordance with the Registration Rights Agreement.
"Reorganization" means any merger or consolidation of
Candlewood with or into any other Person, any recapitalization or
reclassification of capital stock or other equity interests of Candlewood or any
sale of all or substantially all of the assets of Candlewood in any one or
series of related transactions other than in connection with the Initial
Reorganization.
"Subject Shares" means the Doubletree Shares, the DeBoer
Shares and the Fix Partnership Shares; provided, however, that at all times,
such term shall include all Subject Shares that have been transferred by a
Holder to a Permitted Transferee of such Holder. Notwithstanding the foregoing,
upon (A) the Disposition of any Subject Shares pursuant to a Public Sale to any
Person or (B) the Disposition of any Subject Shares other than pursuant to a
Public Sale after the termination of Section 3.1 (as provided in Section 4.7(a))
to any Person other than a Permitted Transferee of the Holder thereof, the
shares so cancelled or disposed of shall cease to be Subject Shares and
thereafter shall not be subject to any of the terms and conditions of this
Agreement (other than Section 4.1(d)).
"Subsidiaries" means each corporation, partnership, joint
venture or other entity in which Candlewood owns, directly or indirectly, more
than 50% of the outstanding Voting Securities.
"Voting Securities" means shares of capital stock or equity
interests the holders of which are at the time entitled to elect a majority of
the issuer's board of directors or other comparable body.
Additional terms are defined where used in this Agreement.
Section 1.2. Interpretation. Each definition in this Agreement
includes the singular and the plural, and references to the neuter gender
include the masculine and feminine whenever appropriate. References to any
statute mean such statute as amended at the time and include any successor
legislation, and references to a business day mean any day other than Saturday,
Sunday or legal holiday where Candlewood's principal office is located. The
words "herein", "hereof" and "hereunder" refer to this Agreement as a whole. The
headings of the Articles and Sections are for convenience of reference only and
shall not affect the meaning or interpretation of this Agreement. Unless the
context otherwise requires, references to Articles, Sections and Subsections
mean the Articles, Sections and Subsections of this Agreement.
Section 1.3. Changes in Candlewood Common Stock. If during the
term of this Agreement the outstanding shares of Candlewood Common Stock shall
be changed into a different number of shares or a different class or classes of
shares by reason of any split-up, combination, reclassification or other
recapitalization, or if a stock dividend shall be declared on shares of
Candlewood Common Stock with a record date during such term, the terms of this
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Agreement (including its definitions) shall be appropriately modified to give
effect to such occurrence.
Section 1.4. Partial Invalidity. Each provision of this
Agreement shall be interpreted so as to render it valid and enforceable under
applicable law. A finding that any such provision is invalid or unenforceable in
any jurisdiction or in any particular circumstance shall not affect its validity
or enforceability under the laws of any other jurisdiction or in any other
circumstances.
Section 1.5. Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware applicable
to agreements made and to be performed entirely in such State.
ARTICLE II. VOTING OF SUBJECT SHARES AND GOVERNANCE
Section 2.1. Composition of Board. (a) On the Effective Date
and until the completion of a Public Sale, the number of Directors shall be
four, of which two shall be Doubletree Directors and two shall be DeBoer/Fix
Directors.
(b) From and after the initial Public Sale, the following
provisions shall be applicable:
(i) The number of Directors comprising the whole Board shall
initially be four, subject to increase as provided in Section
2.1(b)(ii). Commencing with the first Annual Election after the initial
Public Sale, the number of Directors comprising the whole Board shall
be determined as provided in the By-laws.
(ii) Not later than December 31, 1996, the number of Directors
comprising the whole Board shall be increased-to at least 6 Directors,
at least two of whom shall be individuals who are not nominated as
provided in Sections 2.3 through 2.4, inclusive, and are not otherwise
affiliated with any Holder (the "Unaffiliated Directors"). The initial
Unaffiliated Directors shall be elected by unanimous vote of the
Directors who are then in office; and each Holder shall use its
reasonable best efforts to recruit suitable candidates for election as
the initial Unaffiliated Directors as soon as practicable. Any
successor Unaffiliated Directors shall be recruited by the Holders in
the same manner, approved by unanimous vote of the Directors who are
then in office and elected at an Annual Election in accordance with
this Agreement or, if the election occurs at any time other than an
Annual Election, elected by unanimous vote of the Directors who are
then in office.
(iii) The number of Doubletree Directors shall be the product
of the number of Directors comprising the whole Board who are not
Unaffiliated Directors (the "Affiliated Directors") multiplied by
one-half.
(iv) The number of DeBoer/Fix Directors shall be the product
of the number of Affiliated Directors multiplied by one-half.
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(vi) Notwithstanding the immediately preceding clauses (iii)
and (iv) if there shall be a number of Affiliated Directors which is
not evenly divisible by two, the Doubletree Holders and the DeBoer/Fix
Holders shall agree upon and jointly nominate the additional director.
(c) Each of the Doubletree Holders, DeBoer Holders and Fix
Partnership Holders, agrees to vote its Subject Shares (or sign written consents
in lieu thereof) at each Annual Election, and at all other times when required
to fill a vacancy on the Board, however arising, and to take all such other
action as may be reasonably necessary (including, without limitation, causing
one or more of the Directors nominated by it to be removed or resign promptly
after any change in ownership of Subject Shares), so that the Board shall be
constituted as provided in Section 2.1(a) or (b), as applicable, and to the
extent herein provided shall consist of the appropriate numbers in accordance
with this Section 2.1 of Doubletree Directors and DeBoer/Fix Directors nominated
in accordance with Sections 2.3, and 2.4, as applicable, and (not later than
December 31, 1996) Unaffiliated Directors nominated in accordance with Section
2.1(b)(ii).
Section 2.2. Election of Initial Board. (a) Each of
Doubletree, the Fix Partnership, DeBoer and the Trusts hereby authorize, consent
to and approve the election of each of the Initial Directors and the DeBoer/Fix
Directors as Directors to serve until their respective successors have been duly
elected pursuant to this Agreement, the Certificate of Incorporation, the
By-laws and applicable law.
Section 2.3. Changes in Doubletree Directors. (a) The
Doubletree Holders may designate the individual to fill any vacancy on the Board
resulting from the death, resignation or removal of any Doubletree Director by
giving written notice to Candlewood (which shall promptly forward a copy of such
notice to each Holder). Within not more than 10 days after the notice described
in the preceding sentence is so forwarded, the Holders will use their best
efforts to cause the election to the Board of the nominee named in such notice.
(b) The Doubletree Holders may nominate the individual to
succeed any Doubletree Director who will not stand for re-election, and may
change any such nomination, at any Annual Election by giving written notice to
Candlewood of its nominees as Doubletree Directors not less than 45 days (or, in
the case of unforeseen circumstances, such shorter period as may be permitted by
law) prior to the date fixed for any Annual Election which is scheduled to occur
after the initial Public Sale. If the notice specified in the preceding sentence
is not given within the time required, the incumbent Doubletree Directors shall
be deemed to be the nominees for election as Doubletree Directors at such Annual
Election.
Section 2.4. Changes in DeBoer/Fix Directors. (a) The
DeBoer/Fix Holders may designate the individual to fill any vacancy on the Board
resulting from the death, resignation or removal of any DeBoer/Fix Director by
giving written notice to Candlewood (which shall promptly forward a copy of such
notice to each Holder). Within not more than 10 days after the notice described
in the preceding sentence is so forwarded, the Holders will use their best
efforts to cause the election to the Board of the nominee named in such notice.
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(b) The DeBoer/Fix Holders may nominate the individual to
succeed any DeBoer/Fix Director who will not stand for re-election, and may
change any such nomination, at any Annual Election by giving written notice to
Candlewood of its nominee as DeBoer/Fix Director not less than 45 days (or, in
the case of unforeseen circumstances, such shorter period as may be permitted by
law) prior to the date fixed for any Annual Election which is scheduled to occur
after the initial Public Sale. If the Notice specified in the preceding sentence
is not given within the time required, the incumbent DeBoer/Fix Directors shall
be deemed to be the nominee for election as DeBoer/Fix Directors at such Annual
Election.
Section 2.5. Removal of Directors. A Doubletree Director may
not be removed from the Board except by delivery to Candlewood and all Holders
of a written notice of such removal signed by the Doubletree Holders. A
DeBoer/Fix Director may not be removed from the Board except by delivery to
Candlewood and all Holders of a written notice of such removal signed by the
DeBoer/Fix Holders. Within not more than 10 days after such notice is given,
each of the Holders shall execute and deliver to Candlewood its written consent
to the removal specified in such notice or, if requested by whichever of the
Doubletree Holders or the DeBoer/Fix Holders, shall have given such notice in
accordance with this Section 2.5, shall vote its Subject Shares in favor of such
removal.
Section 2.6. Approvals Required for Certain Corporate Actions.
Subject to Section 4.5, the parties agree that without the written approval of
the Doubletree Holders and the DeBoer/Fix Holders:
(a) Neither the Certificate of Incorporation nor the By-laws
shall be amended;
(b) No Candlewood Entity shall acquire, directly or indirectly
(through a stock or asset purchase or otherwise), any assets, in one or
a series of related transactions with the same or related sellers, for
an aggregate purchase price in excess of $10,000,000;
(c) No Candlewood Entity shall sell, transfer or otherwise
dispose of, directly or indirectly (through a stock or asset sale or
otherwise), any assets outside the ordinary course of business, in one
or a series of related transactions, for an aggregate sale price in
excess of $10,000,000;
(d) No Candlewood Entity shall make any capital expenditure,
or any series of related capital expenditures, in excess of an
aggregate of $10,000,000;
(e) No Candlewood Entity shall purchase, redeem or repurchase
any Subject Shares, any shares of its capital stock or any of its
partnership interests or any shares of capital stock or partnership
interests of any other Candlewood Entity, except for (a) any redemption
or repurchase by a Subsidiary directly or indirectly wholly-owned by
Candlewood of shares of capital stock or partnership interests issued
by such Subsidiary, or (b) except for a repurchase of Subject Shares
pursuant to Section 2(d) of the Registration Rights Agreement.
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(f) Candlewood shall not declare or pay any dividend or
declare or make any other distribution in respect of its capital stock;
(g) No Candlewood Entity shall issue, sell or grant additional
shares of its capital stock or membership interests or options or
warrants exercisable for or securities or other rights convertible into
or exchangeable for shares of its capital stock or partnership
interests, or issue or agree to issue any phantom stock rights, or file
any registration statement (other than pursuant to the demand
registration rights provided in Section 2 of the Registration Rights
Agreement) with respect to the proposed sale of any of the foregoing;
(h) Neither Candlewood nor any Subsidiary not directly or
indirectly wholly-owned by Candlewood shall authorize or consummate any
stock dividend or stock split (except in accordance with the reasonable
recommendations of the managing underwriter for the initial Public Sale
pursuant to the Registration Rights Agreement);
(i) No Candlewood Entity shall incur or assume any
indebtedness for borrowed money, other than indebtedness incurred
solely to refund indebtedness existing on the Effective Date and other
than pursuant to Candlewood's line of credit with GMAC and borrowings
from Doubletree, in excess of $10,000,000 in the aggregate;
(j) No Candlewood Entity shall loan its funds to any other
Person or extend its credit to any other Person other than in the
ordinary course of business;
(k) No Candlewood Entity shall guarantee the obligations of
any other Person, other than guarantees not in excess of $10,000,000
executed in the ordinary course of business;
(l) No Candlewood Entity shall enter into any joint venture
that involves an aggregate investment or receipt of proceeds in excess
of $10,000,000;
(m) No Candlewood Entity shall engage in any business which is
not significantly related to the business that Candlewood is conducting
on the Effective Date;
(n) No Candlewood Entity shall enter into (A) any transaction
or other arrangement not in the ordinary and proper course of business
on an arm's length basis with Doubletree, Mr. Jack DeBoer, Mr. Warren
Fix, JPD Corporation, the Trusts or the Fix Partnership, or any entity
in which any of them or their respective Affiliates has a greater than
5% interest or has a control relationship or (B) any loan to or
management, employment or consulting agreement with any of the
foregoing, except for those arrangements described in the Company's
Registration Statement on Form S-1 relating to the Company's Common
Stock, including purchases and other relations with INNCO and the
guarantee by Doubletree of certain indebtedness incurred by the Company
and its franchisees;
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(o) No Candlewood Entity shall change its accounting
principles or practices (except as required by generally accepted
accounting principles) or hire a firm other than KPMG Peat Marwick to
act as its independent public accountants;
(p) No Candlewood Entity shall establish compensation payable
to any manager, officer, director, employee or other agent if such
compensation as to any one of the foregoing, in the aggregate, would
exceed $500,000 in any year, or establish compensation for Mr. Jack
DeBoer or Mr. Warren Fix if such compensation as to either of them, in
the aggregate, would exceed $300,000 in any year.
(q) No Candlewood Entity shall enter into any other
transaction or other arrangement not in the ordinary course of
business; and
(r) Candlewood shall not consolidate or amalgamate with, or
merge with or into, or acquire all or substantially all of the assets
or control of, any other business organization other than in the course
of the Initial Reorganization; provided, however, that, in the case of
a merger or other combination between Candlewood and Doubletree, such
approval shall not be unreasonably withheld;
(s) No Candlewood Entity shall dissolve, liquidate or wind up
its affairs;
(t) There shall be no increase in the number of members of the
Board, either by amendment to the Certificate of Incorporation, the
By-laws or otherwise, except as provided in Section 2.1.
(u) Candlewood shall not cause or permit any Subsidiary
holding assets representing all or substantially all the assets of
Candlewood and its Subsidiaries, on a consolidated basis (the "Group")
or any group of Subsidiaries holding all or substantially all of such
assets to (A) consolidate or amalgamate with, or merge into, any entity
that is not a member of the Group, (B) sell (in a single transaction or
a series of related transactions) all or substantially all of such
assets to an entity that is not a member of the Group or (C) dissolve,
liquidate or wind up its (or their) affairs; or
(v) No Candlewood Entity shall permit or obligate any
Candlewood Entity or otherwise agree, either individually or as a
consolidated group, to make any decision, or take any action, described
in items (a) through (q) above;
(w) Provided, however, that if at any time either Doubletree
Holders or the DeBoer/Fix Holders, as the case may be, shall own less
than 20% of the outstanding shares of Candlewood Common Stock, all
rights of the Doubletree Holders or the DeBoer/Fix Holders, as the case
may be, under this Section 2.6 shall terminate and be of no further
force or effect; provided further, however, that following the death of
Jack DeBoer, the rights of the Fix Partnership Holders under this
Section 2.6 shall terminate and be of no further force or effect.
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Section 2.7 Purchase Rights. In furtherance and not by way of
limitation of Section 2.6, additional shares of Common Stock of Candlewood, or
securities convertible into or exchangeable for such shares, if such shares or
securities are to be sold for cash, shall be first offered to the Holders of
then outstanding Subject Shares in proportion to the number of such Subject
Shares held by them, respectively, which offer shall be outstanding for a period
of not less than 30 days from receipt of written notice thereof; provided,
however, that Candlewood shall have the right to issue such additional shares or
such securities, without first offering them to such Holders, if such additional
shares or securities are to be sold for cash through an offering to its
employees or to the employees of any Subsidiary for such consideration and upon
such terms and conditions as shall be approved by the Doubletree Holders and the
DeBoer/Fix Holders pursuant to clause (g) of Section 2.6, so long as applicable,
and by the Board; and provided, further, that, except as aforesaid, no Holder
shall have any preemptive or other right to subscribe for or acquire any shares
of capital stock or other securities issued by Candlewood.
Section 2.8. Agent for Affiliated Holders. If a portion or all
of the Subject Shares held by Doubletree, DeBoer, the Trusts or the Fix
Partnership shall be transferred to one or more Permitted Transferees, resulting
in the Subject Shares which were theretofore held by such Holder being held by
more than one Holder, then Doubletree, DeBoer, the Trusts or the Fix
Partnership, as the case may be, shall: (i) act, or shall cause one of such
Holders to act, as agent and proxy for all purposes of this Agreement (including
without limitation the voting of Subject Shares, the nomination of Directors,
the giving of consents, the approval of amendments, the receipt of notices,
etc.) for all of the Doubletree Holders, DeBoer Holders or the Fix Partnership
Holders, as the case may be, and (ii) specify in writing to the other parties
that it (or such other Holder) is to act as such agent and proxy, and thereafter
the other parties shall be entitled to look solely to, and to deal solely with,
the person so specified for all purposes of this Agreement as if such Holder
held all the Subject Shares held by the party providing such notice and its
Permitted Transferees.
Section 2.9. Irrevocable Proxy. The Fix Partnership Holders
and the Trusts hereby appoint DeBoer as its and their proxy to exercise in
DeBoer's sole discretion all rights of the Fix Partnership Holders and the
Trusts to nominate and/or remove each DeBoer/Fix Director and to exercise all
rights pursuant to Section 2.6 hereof. This proxy is coupled with an interest in
Candlewood and shall be irrevocable. Except as set forth below in this
paragraph, this proxy may be invoked by DeBoer at any time by notice to the
other Holders but, unless and until invoked, such rights may be exercised by the
Fix Partnership Holders and the Trusts; provided, however, that upon the death
of Warren D. Fix all such rights shall automatically vest in DeBoer which shall
thereafter have the sole right to exercise all such rights of the Fix
Partnership Holders. Notwithstanding the foregoing, this proxy may not be
invoked or exercised after the death of Jack DeBoer.
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ARTICLE III. RESTRICTIONS ON TRANSFERS OF SUBJECT SHARES;
VOTING AGREEMENTS; AND LIQUIDATION AGREEMENT
Section 3.1. Dispositions Prior to Initial Public Sale. Until
the termination of the provisions of this Section 3.1, no Holder shall (a) sell,
assign, transfer by operation of law or otherwise, pledge, hypothecate, grant
any security interest or other lien in or otherwise dispose of any of its
Subject Shares, or make or permit any indirect transfer of such Subject Shares
through an issuance of such Holder's capital stock or other equity interests
resulting in a direct or indirect change in the beneficial ownership of a
majority of its Voting Securities or other equity interests (a "Disposition"),
or (b) agree or otherwise become obligated to take any action referred to in
clause (a) of this Section 3.1; provided, however, that, subject to Section 4.8,
the restrictions set forth in such clauses (a) and (b) shall not apply to a
Disposition of Subject Shares: (A) to a Permitted Transferee of such Holder,
whether pursuant to a Reorganization or otherwise, (B) in a Public Sale or (C)
sold by Doubletree pursuant to Section 2(d) of the Registration Rights
Agreement; provided, however, that the provisions of this Section 3.1 shall not
apply to Doubletree to the extent that they would limit a change of control of
Doubletree or preclude the hypothecation of the Doubletree Shares to a bank or
other financial institution.
ARTICLE IV. GENERAL PROVISIONS
Section 4.1. Legend on Share Certificates for Subject Shares.
(a) All certificates for Subject Shares which are subject to the terms and
provisions of Article II and/or Article III shall bear the following legend:
The shares represented by this certificate (the "Shares") have
not been registered under the Securities Act of 1933, as
amended, and no sale, transfer or other disposition may be
made of the Shares unless they have been so registered or
Candlewood Hotel Company, Inc. (the "Company") has been
furnished with a legal opinion from a nationally recognized
law firm satisfactory to it that such registration is not
required. The Shares are also subject to certain restrictions
on transfer and requirements as to voting contained in the
Stockholders Agreement dated as of September 30, 1996 among
the Company, the registered holder of the Shares and certain
other stockholders, a copy of which is on file with the
Secretary of the Company.
(b) Upon the termination of this Agreement pursuant to Section
4.5(a), each Holder shall be entitled to receive, in exchange for any
certificate for Candlewood Common Stock bearing the legend set forth in
subsection (a) of this Section 4.1, a certificate bearing a legend containing
only the first sentence of such legend, unless Candlewood shall have determined
(based upon the advice of legal counsel) that such legend is then no longer
required.
11
<PAGE> 12
(c) The restrictions on transfer of the Subject Shares
provided in this Agreement shall also be noted in the Candlewood stock register.
(d) If any shares of Candlewood Common Stock shall cease to be
Subject Shares in accordance with this Agreement, any Person acquiring such
shares shall be entitled to receive, in exchange for any certificate for such
shares bearing the legend set forth in subsection (a) of this Section 4.1, a
certificate bearing a legend containing only the first sentence of such legend,
unless Candlewood shall have determined (based upon the advice of legal counsel)
that such legend is then no longer required.
Section 4.2. Notices. All notices, requests or demands
required or permitted by this Agreement: (i) shall be in writing; (ii) shall be
deemed to have been given, forwarded, made or delivered: (x) if delivered in
person or by overnight courier service, when received, (y) if transmitted by
telefax, when so transmitted if evidence of completed transmission is received,
and (z) if sent by prepaid registered or certified mail, return receipt
requested, on the earlier of the date of receipt or the seventh day after it is
mailed; and (iii) shall be addressed: if to Candlewood, at Lakepoint Office
Park, 9342 East Central, Wichita, Kansas 67206, Attention: President (or to such
other address as Candlewood shall furnish by notice given to each Holder), and
if to any Holder, at such Holder's address appearing on the Holder List (as
hereinafter defined).
Section 4.3. Holder List. Candlewood shall maintain a list
(the "Holder List") of the name and address of each Holder and the number of
Subject Shares held by it. Each Holder shall give prompt notice to Candlewood of
any change in the information pertaining to it in the Holder List, but in the
absence of such notice Candlewood and each other Holder may treat the
information reflected in the current Holder List as correct. Candlewood shall
furnish a copy of the Holder List to any Holder upon request.
Section 4.4. Amendments, Waivers and Consents. This Agreement
may be amended only by a document executed (which may be in counterparts) by
Candlewood and all of the Holders. Any Holder may waive the benefit of any
provision of this Agreement, either in a specific instance or generally, by
delivering to Candlewood and each other Holder a consent to such waiver. All
consents required or permitted by this Agreement shall be in writing and signed
by the party to be charged therewith.
Section 4.5. Termination. (a) All provisions of this Agreement
shall terminate as to all Subject Shares on the close of business on the day
before the tenth anniversary of the Effective Date. In the event of a Public
Sale prior to such tenth anniversary, the provisions of Section 3.1 shall
terminate on the date on which such Public Sale is completed. All provisions of
this Agreement shall terminate (prior to such tenth anniversary) on the first
day on which the Subject Shares shall comprise less than a majority of the total
number of shares of Candlewood Common Stock then outstanding. This Agreement or
any provision hereof may be terminated by a document executed in the manner
provided in Section 4.4 for amendments to this Agreement with the same force and
effect as provided therein. Candlewood shall give prompt written notice of any
termination under this Section 4.5(a) to all Holders.
12
<PAGE> 13
(b) The termination of this Agreement or any provision hereof
shall not affect any action taken or agreement entered into prior to such
termination or any liability under any obligation previously incurred under this
Agreement, all of which shall survive such termination.
Section 4.6. Equitable Remedies; Submission to Arbitration.
(a) Each Holder, by becoming a party to this Agreement, acknowledges and agrees
that its breach or nonperformance of any provision of this Agreement in
accordance with the specific terms hereof would result in irreparable harm to
Candlewood and to each other Holder for which money damages would not provide an
adequate remedy. Accordingly, each Holder (i) agrees that Candlewood and each
other Holder shall be entitled to specific performance or injunctive or other
equitable relief against such Holder in the event of its breach or other
non-performance of any of the provisions of this Agreement; and (ii) waives any
requirement for the securing or posting of any bond in connection with such
remedy.
(b) EXCEPT AS OTHERWISE PROVIDED IN SECTION 4.6(a), EACH
HOLDER IRREVOCABLY AGREES THAT ALL DISPUTES IN ANY WAY, MANNER OR RESPECT
ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT OR ANY OTHER AGREEMENT
CONTEMPLATED HEREBY SHALL BE RESOLVED BY ARBITRATION IN THE CITY OF LOS ANGELES,
STATE OF CALIFORNIA, UNDER THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION.
The arbitrator to resolve any such dispute shall be selected by the Holders who
are involved in the dispute, shall have expertise and experience in the
resolution of disputes similar to the dispute to be resolved and shall not be an
Affiliate of any Holder. If such Holders are unable to agree on such selection,
each such Holder shall select one arbitrator and such arbitrators shall select
an arbitrator meeting the criteria set forth in the immediately preceding
sentence to resolve such dispute. The fees and expenses of any arbitrator
selected by any Holder shall be paid by such Holder; the fees and expenses of
any other arbitrators shall be shared equally by the Holders who are involved in
the dispute. All other expenses of such arbitration shall be paid by the Holder
incurring the same.
Section 4.7. Successors and Assigns. This Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of Candlewood and each Holder; provided, however, that Candlewood may not assign
this Agreement except by operation of law or to a purchaser of all or
substantially all of its business and assets; and provided further, that no
Holder may assign this Agreement except in connection with a transfer of Subject
Shares by such transferring Holder to another Person which thereupon becomes a
Holder with respect to such Subject Shares, all in accordance with Section 3.1
and Section 4.8. In addition, upon the death of Jack P. DeBoer, the rights of
the DeBoer Holders hereunder shall terminate and be of no further force or
effect.
Section 4.8. Counterparts; Additional Parties. This Agreement
(a) may be executed in counterparts, all of which together shall constitute a
single agreement, and (b) shall become effective on the Effective Date. Prior to
any Disposition of Subject Shares to a Permitted Transferee, without regard to
whether or not Section 3.1 is then in effect, the Holder effecting such
Disposition shall cause such Permitted Transferee to execute and deliver to
Candlewood and all of the Holders a supplemental agreement to this Agreement, in
form and substance reasonably
13
<PAGE> 14
satisfactory to each of them, whereby such Permitted Transferee shall agree to
become a party to and be bound by all of the terms and conditions of this
Agreement applicable to a Holder of Subject Shares and confirm that all of the
Subject Shares to be acquired by such Permitted Transferee in such shall
continue to be subject to this. As promptly as practicable, Candlewood shall
cause a fully executed counterpart of this Agreement or any supplemental
agreement referred to in this Section 4.8 to be delivered to each Holder.
14
<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
DOUBLETREE CORPORATION, CHRISTOPHER SCOTT DEBOER
a Delaware corporation TRUST DATED MARCH 14, 1995
By: /S/ DAVID L. STIVERS By: /S/ SKYLER SCOTT DEBOER
-------------------- -----------------------
David L. Stivers Skyler Scott DeBoer,
Senior Vice President, General as Co-Trustee
Counsel and Secretary
By: /S/ LYNN A. DEBOER
-----------------------
THE WARREN D. FIX FAMILY Lynn A. DeBoer,
PARTNERSHIP, a Kansas limited as Co-Trustee
partnership
By: /S/ WARREN D. FIX
------------------------------
Warren D. Fix, General Partner
/S/ JACK P. DEBOER
- ------------------
JACK P. DEBOER
ALEXANDER JOHN DEBOER TRUST
DATED MARCH 14, 1995
By: /S/ SKYLER SCOTT DEBOER
-----------------------
Skyler Scott DeBoer,
as Co-Trustee
By: /S/ LYNN A. DEBOER
-----------------------
Lynn A. DeBoer,
as Co-Trustee
15
<PAGE> 1
EXHIBIT 10.37
CREDIT FACILITY AGREEMENT
THIS CREDIT FACILITY AGREEMENT (this "Agreement") is entered
into as of this 11th day of November 1996, by and between Candlewood Hotel
Company, Inc., a Delaware corporation ("Candlewood Inc"), and Doubletree
Corporation, a Delaware
corporation ("Doubletree").
RECITALS
A. Doubletree, the Warren D. Fix Family Partnership, L.P. (the
"Fix Partnership"), and JPD Corporation, a Kansas corporation, formed Candlewood
Inc in August 1996 to succeed to the business of Candlewood Hotel Company,
L.L.C., a Delaware limited liability company ("Candlewood LLC").
B. The membership interests in Candlewood LLC were owned 50%
by Doubletree, 42.5% by JPD Corporation and 7.5% by the Fix Partnership.
C. Pursuant to the Limited Liability Company Agreement of
Candlewood Hotel Company, L.L.C. (the "Candlewood LLC Agreement"), Doubletree
agreed to contribute to Candlewood LLC up to $15 million as requested by the
members of Candlewood LLC. The Candlewood LLC Agreement provided that Doubletree
would receive a preferred return on each such contribution equal to seven
percent (7%) per annum for the first twelve months following its contribution,
ten percent (10%) per annum for the second twelve months and fifteen percent
(15%) per annum thereafter.
D. Prior to the proposed public offering (the "Offering") of
Common Stock of Candlewood Inc, the amount of capital in excess of $200,100
previously contributed to Candlewood LLC by Doubletree, together with a
preferred return on such amount (collectively, the "Excess Contribution
Amount"), will be distributed to Doubletree.
E. Candlewood Inc desires to obtain from Doubletree, prior to
the Offering, a $15 million subordinated credit facility.
F. Doubletree is willing to lend to Candlewood Inc an
aggregate of up to $15 million upon the terms and subject to the conditions set
forth herein.
NOW THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS:
1. Initial Loan Disbursement. Concurrently with the execution
of, and subject to the terms and conditions of, this Agreement, Doubletree shall
make a loan (the "Initial Loan") to Candlewood Inc in a principal amount equal
to the Excess Contribution Amount, to be evidenced by a promissory note (the
"First Note") in the form attached as Exhibit A. The terms of the Initial Loan
shall be governed by the First Note.
2. Additional Loan Disbursements. Subsequent to the date of
the Initial Loan, subject to the terms and conditions of this Agreement,
Doubletree shall make
<PAGE> 2
additional loans (the "Additional Loans") to Candlewood Inc, at such times as
requested by Candlewood Inc upon 30 days' written notice, in increments of not
less than $100,000, each such loan to be evidenced by a promissory note (an
"Additional Note") in the form attached as Exhibit B. The terms of each
Additional Loan shall be governed by the applicable Additional Note. The
aggregate principal amount of the Initial Loan and the Additional Loans shall
not exceed $15 million. Repayment of the Initial Loan or any of the Additional
Loans shall not affect this $15 million limit. For example, if the aggregate
principal amount of the Initial Loan and the Additional Loans were $13 million
(leaving $2 million available for borrowing hereunder) and Candlewood repaid $5
million of that principal amount, the total principal amount available for
borrowing hereunder would remain $2 million.
3. Conditions Precedent. Doubletree's obligation to make the
Initial Loan is subject to its receipt of the Initial Note, fully executed and
acknowledged. Doubletree's obligation to make an Additional Loan is subject to
its receipt of (i) a written request for such Additional Loan from Candlewood
Inc at least 5 days (or such shorter time as shall be agreed upon by the
parties) prior to the date on which Candlewood Inc. requests that the Additional
Loan be disbursed and (ii) an Additional Note, fully executed and acknowledged;
provided, however that if (a) any proceedings shall be commenced by or against
Candlewood Inc, as debtor, under any bankruptcy, reorganization, insolvency,
readjustment of debt, arrangement, receivership or liquidation law or statute of
the federal or any state government and such proceeding has not been dismissed
or an order for relief granted with respect thereto or (b) if an event which
would, or which with the giving of notice or passage of time would, permit any
of the Note or the Additional Notes to be accelerated and to become immediately
due at the option of the holder thereof, shall have occurred and be continuing
or would occur and exist after the funding of such Additional Loan, and such
event shall not have been waived or consented to by the holders of the Note or
the Additional Note, Doubletree shall be under no obligation to make an
Additional Loan.
4. Miscellaneous.
(a) All notices, requests and other communications
required or permitted to be made hereunder shall, except as otherwise
provided, be in writing and may be delivered personally or sent by
telegram, telecopy, telex or certified mail, postage prepaid, addressed
as follows:
To Doubletree: Doubletree Corporation
410 North 44th Street, Suite 700
Phoenix, Arizona 85008
Attention: David L. Stivers
Senior Vice President, General Counsel and
Secretary
Telecopy number: (602) 220-6602
2
<PAGE> 3
To Candlewood Inc: Candlewood Hotel Company, Inc.
Lakepoint Office Park
9342 East Central
Wichita, Kansas 67206-2555
Attention: Warren D. Fix
Executive Vice President, Chief Financial
Officer and Secretary
Telecopy number: (316) 631-1333
with a copy to: Latham & Watkins
650 Town Center Drive, Suite 2000
Costa Mesa, California 92626
Attention: Charles K. Ruck
Telecopy number: (714) 755-8290
Such notices, requests and other communications sent shall be effective
upon receipt, unless sent by (i) overnight courier, in which case they
shall be effective exactly one (1) business day after deposit with such
overnight courier, or (ii) mail, in which case they shall be effective
exactly three (3) business days after deposit in the United States
mail. Either party may change its address or other information by
giving notice thereof to the other party hereto in conformity with this
paragraph.
(b) This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
(c) This Agreement or any provision hereof may be
changed, waived, or terminated only by a statement in writing signed by
the party against which such change, waiver or termination is sought to
be enforced.
(d) All rights of Doubletree hereunder shall inure to
the benefit of its successor and assigns. Candlewood Inc shall not
assign any of its interest under this Agreement without the prior
written consent of Doubletree; provided that Candlewood Inc shall be
entitled to direct loans made pursuant hereto to be paid to any of its
directly or indirectly wholly owned subsidiaries. Any purported
assignment inconsistent with this provision shall, at the option of
Doubletree, be null and void.
(e) In any action or proceeding brought to enforce
any provision of this Agreement, or to seek damages for a breach of any
provision hereof, or where any provision hereof is validly asserted as
a defense, the successful party shall be entitled to recover reasonable
attorneys' fees in addition to any other available remedy.
(f) If any provision of this Agreement should be
found to be invalid or unenforceable, all of the other provisions shall
nonetheless remain in full force and effect to the maximum extent
permitted by law.
3
<PAGE> 4
(g) This Agreement, together with the Initial Note
and Additional Notes, is intended by the parties as a final expression
of their agreement and is intended as a complete and exclusive
statement of the terms and conditions thereof. Acceptance of or
acquiescence in a course of performance rendered under this Agreement
shall not be relevant to determine the meaning of this Agreement even
though the accepting or acquiescing party had knowledge of the nature
of the performance and opportunity for objection.
(h) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of
which shall together constitute one and the same agreement.
4
<PAGE> 5
IN WITNESS WHEREOF the parties hereto have executed this
Agreement as of the date set forth above.
DOUBLETREE CORPORATION, CANDLEWOOD HOTEL COMPANY, INC.,
a Delaware corporation a Delaware corporation
By: /s/ Richard M. Kelleher By: /s/ Warren D. Fix
----------------------------------- ----------------------------------
Name: Richard M. Kelleher Warren D. Fix
------------------------------ Executive Vice President, Chief
Title:President and Chief Financial Officer and Secretary
-----------------------------
Executive Officer
-----------------------------
5
<PAGE> 1
EXHIBIT 10.38
SUBORDINATED PROMISSORY NOTE
$12,457,109.04 November 11, 1996
FOR VALUE RECEIVED, Candlewood Hotel Company, Inc., a Delaware
corporation ("Candlewood Inc"), having its principal place of business at
Lakepoint Office Park, 9342 East Central, Wichita, Kansas 67206, hereby promises
to pay Doubletree Corporation, a Delaware corporation ("Doubletree"), a
principal sum of Twelve Million Four Hundred and Fifty Seven Thousand One
Hundred Nine Dollars and Four Cents ($12,457,109.04), which is equal to the sum
of (i) the amount of capital in excess of $200,100 previously contributed by
Doubletree to Candlewood Hotel Company, L.L.C. ("Candlewood LLC") under the
Limited Liability Company Agreement of Candlewood Hotel Company, L.L.C. and (ii)
the preferred return on such amount as of the date of this Note. Each portion of
the principal amount hereunder (a "Contributed Amount") will bear interest at
varying rates depending on the date upon which Doubletree contributed such
Contributed Amount to Candlewood LLC (the "Contribution Date"). Each Contributed
Amount will bear simple interest at rates of seven percent per annum for the
first 12 months following the Contribution Date for that Contributed Amount, 10%
per annum for the second 12 months following that Contribution Date and 15% per
annum thereafter. The Contribution Date and amount of each Contributed Amount
are set forth on Schedule A hereto. The interest on the entire principal amount
shall be payable quarterly on the last business day of each March, June,
September and December, commencing on December 31, 1996. Each payment by
Candlewood, Inc. under this Note shall first be applied to reduce the accrued
but unpaid interest on the entire principal amount and then the principal amount
of the Contributed Amounts in the inverse or order in which the Contributed
Amounts were contributed to Candlewood, Inc. The entire principal amount shall
become due on the fifth anniversary hereof.
This Note may be prepaid at the option of Candlewood Inc in
whole at any time or in part from time to time without penalty or premium. Each
such repayment shall be applied to accrued but unpaid interest and then to the
principal on the Contributed Amounts in the inverse order in which they were
contributed to Candlewood LLC.
This Note is issued pursuant to a credit facility agreement
(the "Agreement") between the parties.
If an Event of Default (as hereinafter defined) shall occur,
then, at the option of the holder hereof, and subject to the subordination
provisions below, this Note shall become immediately due and payable.
An "Event of Default" shall be deemed to have occurred
hereunder if (a) Candlewood Inc shall fail to make any payment under this Note
in full within five (5) days of the date upon which it is due; (b) any
proceedings shall be commenced by or against Candlewood Inc, as debtor, under
any bankruptcy, reorganization, insolvency, readjustment of debt, arrangement,
receivership or liquidation law or statute of the federal or any state
government, and, with respect to any such proceeding commenced against
Candlewood Inc, such proceeding is not dismissed within 60 days or an order for
relief is granted in such proceeding; or (c) Candlewood Inc is
<PAGE> 2
deemed to be in default in the payment of principal or interest under any
instrument evidencing the Senior Indebtedness (as defined below) as a result of
which holders of such Senior Indebtedness shall be entitled to accelerate its
maturity. If an Event of Default occurs and is continuing, the interest rate
upon this Note shall be increased to the lesser of (i) the then prevailing rate
plus 4% or (ii) the maximum rate permitted by law, running from the time payment
should have been made to the time that the Event of Default is cured or the Note
is paid in full.
The indebtedness represented by this Note (including the
interest thereon) shall be subordinate and junior in right of payment, to the
extent set forth herein, to all indebtedness of Candlewood Inc for money
borrowed from banks or other institutional lenders for the development of hotels
and any bank line of credit, including in either case any refinancings or
consolidations thereof (collectively "Senior Indebtedness"). Until all Senior
Indebtedness has been paid in full, no payment shall be due or made hereunder if
at the time of such payment (i) a default in the payment of principal or
interest on Senior Indebtedness occurs and is continuing or would occur as a
result of such payment, that in either case permits the holders of such Senior
Indebtedness to accelerate its maturity or the maturity of which has been
accelerated; or (ii) (x) Candlewood Inc receives a written notice of a default,
other than a payment default, under any Senior Indebtedness permitting an
acceleration thereof, (y) such default is continuing and has not been cured or
waived, and (z) one hundred and eighty days have not passed since the date of
receipt of such notice, but payments may and shall thereafter be resumed if the
maturity of such Senior Indebtedness has not been or does not remain
accelerated. Candlewood Inc may and shall resume payments on this Note when the
default is cured or waived or payment is otherwise permitted under clause (ii)
above; provided that such payments will again be subject to the limitations set
forth under clauses (i) and (ii) above if a subsequent default under the same
provisions of the instrument governing Senior Indebtedness occurs after a
similar default has been cured or waived, except that (I) in no event shall the
same set of facts give rise to more than a single one hundred and eighty (180)
day period under clause (ii) above and (II) no default existing on the date any
such notice is given may be used as the basis for any subsequent notice. If any
payment or distribution shall be received by any holder of this Note in
contravention of any of the terms hereof and before all Senior Indebtedness
shall be paid in full, such payment or distribution shall be held in trust for
the benefit of, and, if such Senior Indebtedness has been accelerated, shall be
paid over or delivered to, the holders of the Senior Indebtedness at the time
outstanding for application of the payment of all Senior Indebtedness remaining
unpaid, in accordance with the priorities of payment thereof, to the extent
necessary to pay all Senior Indebtedness in full. No act or failure to act on
the part of Candlewood Inc, and no default under or breach of any agreement of
Candlewood Inc, whether or not herein set forth, shall in any way prevent or
limit the holder of any Senior Indebtedness from enforcing fully the
subordination herein provided for, irrespective of any knowledge or notice which
such holder hereof may at any time have. So long as any Senior Indebtedness
shall be outstanding, Candlewood Inc shall not, without the prior written
consent of all holders thereof, alter or amend any of the terms of this Note in
any manner which might adversely affect the holders of Senior Indebtedness.
Nothing in this paragraph shall impair or qualify, as between Candlewood Inc and
the holder hereof, (i) the obligation of Candlewood Inc which is absolute and
unconditional to pay the holder hereof the principal of and interest on this
Note when and as due and set forth elsewhere herein, or (ii) the rights of the
holder hereof upon an Event of Default.
2
<PAGE> 3
Upon any distribution to creditors of Candlewood Inc in a
liquidation or dissolution of Candlewood Inc or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to Candlewood Inc or its
property: (i) holders of Senior Indebtedness shall be entitled to receive
payment in full in cash of the principal of and interest (including interest
accruing after the commencement of any such proceeding) to the date of payment
on the Senior Indebtedness before any payment of principal of or interest shall
be made hereunder and until the Senior Indebtedness is paid in full in cash, any
distribution which would have been made but for this provision shall be made to
holders of Senior Indebtedness as their interests may appear, except that the
holder of this Note may receive securities that are subordinated to Senior
Indebtedness to or at least the same extent as this Note.
Subject to the payment in full of all Senior Indebtedness, the
holder of this Note shall be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions applicable to the Senior
Indebtedness to the extent that payments or distributions otherwise payable on
this Note have been applied to the payment of Senior Indebtedness. For the
purposes of such subrogation, no payment or distribution to the holders of
Senior Indebtedness under the provisions hereof, to which the holder of this
Note would be entitled other than for the subordination provisions hereof, and
no payment pursuant to the provisions hereof to the holders of Senior
Indebtedness by the holder of this Note shall, as between Candlewood Inc and its
creditors (other than the holders of Senior Indebtedness and the holder of this
Note), be deemed to be a payment by Candlewood Inc on account of such Senior
Indebtedness, it being understood that the subordination provisions of this Note
are solely for the purpose of defining the relative rights of the holder of this
Note, on the one hand, and the holders of Senior Indebtedness, on the other
hand.
Candlewood Inc hereby waives all rights to offset against its
obligations hereunder with respect to claims which it may now or hereafter have
against the payee or subsequent holder hereof, except for claims arising under
the Agreement or any agreement or instruments entered into pursuant thereto.
Candlewood Inc and all guarantors and endorsers hereof, and their successors and
assigns, hereby waive presentment, demand, protest and notice thereof or of
dishonor.
If any action should be commenced to collect this Note or any
portion thereof, the prevailing party shall be entitled to recover its costs and
expenses, including, without limitation, reasonable attorneys' fees and
disbursements incurred in connection with such action, including any appeal of
such action.
In the event that any term, covenant, condition, provision or
agreement herein contained is held to be invalid, void or otherwise
unenforceable by any court of competent jurisdiction, the fact that such term,
covenant, condition, provision or agreement is invalid, void or otherwise
unenforceable shall in no way affect the validity or enforceability of any other
term, covenant, condition, provision or agreement herein contained.
3
<PAGE> 4
This Note shall be governed by and construed in accordance
with the internal laws of the State of California without regard to principles
of conflict of laws, and may not be amended, modified or canceled orally.
Candlewood Hotel Company, Inc.
By: /s/ Warren D. Fix
-------------------------------
Warren D. Fix
Executive Vice President,
Chief Financial Officer and
Secretary
4
<PAGE> 1
EXHIBIT 10.39
EXECUTION COUNTERPART
GUARANTY AGREEMENT
THIS GUARANTY AGREEMENT (this "Guaranty") is made as of the 31 day of
December, 1996, by Doubletree Corporation, a Delaware corporation (hereinafter
referred to as "Doubletree" or as the "Guarantor"), in favor of GMAC COMMERCIAL
MORTGAGE CORPORATION, a California corporation ("GMAC-CM"), and its successors
and assigns.
RECITALS
A. GMAC-CM has agreed to provide a Forward Commitment,
substantially in the form of Exhibit A attached hereto and made a part hereof
(as amended from time to time, the "Forward Commitment"), for the financing of
certain hotel properties with developers/borrowers approved by Guarantor or by
Candlewood Hotel Company, Inc., a Delaware corporation ("Candlewood"). Guarantor
or Candlewood will submit the approved projects to GMAC-CM for loan
underwriting. Such loans which are accepted by GMAC-CM and for which it issues a
Forward Commitment shall be hereinafter referred to as the "Mortgage Loans."
B. Doubletree owns a substantial equity interest in Candlewood and
will receive a substantial benefit from the projects to be financed by GMAC-CM.
C. Doubletree has agreed to certain guaranties and credit
enhancements in connection with the Mortgage Loans as more fully set forth
herein.
AGREEMENT
NOW, THEREFORE, in consideration of the matters described in the
foregoing Recitals, in order to induce GMAC-CM to enter into the Forward
Commitment and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Definitions. For purposes of this Guaranty, the following terms shall
have the meanings indicated:
(a) "AFFILIATE OF MORTGAGOR" means, with respect to Mortgagor,
another Person who: (i) directly or indirectly through one or more
intermediaries controls, is controlled by, or is under common control with the
Mortgagor; (ii) is a partner, director, officer or trustee of the Mortgagor or
of any Person covered by clause (i) above; (iii) is a partner of a partnership
or joint venture which owns, or is a beneficiary or trustee of a trust which
owns, or other owner of any stock or other evidences of beneficial ownership
in, the Mortgagor or any Person who directly or indirectly through one or more
intermediaries controls or is controlled by the Mortgagor; or (iv) is related
to the Mortgagor by blood (including grandparents of the Person specified and
of his or her spouse and all lineal descendants of such grandparents) or
marriage or close business association to the specified person or to any Person
covered by clause (i) above or of the spouse of any of the foregoing persons.
For purposes of this definition, the term "control" with respect to a
Mortgagor means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of the Mortgagor, whether
through the ownership of voting stock, by contract or otherwise.
(b) "ALLONGE" means an instrument to be executed and delivered by
the Mortgagee to assign to Guarantor each Mortgage Note being repurchased
pursuant to the Repurchase Option.
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(c) "APPROVED PROJECT COSTS" for a particular Mortgage Loan shall have
the meaning set forth in the Forward Commitment applicable to such Loan,
together with any increases thereto permitted pursuant to the terms and
provisions of the Building Loan Agreement for variances and cost overruns.
(d) "ASSIGNMENT OF RENTS AND LEASES" means, with respect to any
Mortgage Loan, the assignment of rents and leases executed by the Mortgagor
with respect to such Mortgage Loan.
(e) "BANKRUPTCY DEFAULT" shall mean any default under the Mortgage
Loan Documents caused by the Mortgagor filing or being the subject of a
bankruptcy, insolvency or reorganization proceeding under state or federal law.
(f) "BUILDING LOAN AGREEMENT" means, with respect to any Mortgage
Loan, the building loan agreement executed by the Mortgagor with respect to the
Construction Loan.
(g) "BUSINESS DAY" means any day other than a Saturday, a Sunday, a
federal holiday or another day on which commercial banks in the Commonwealth of
Pennsylvania are authorized or required to be closed for the conduct of their
regular banking operations.
(h) "CANDLEWOOD" shall refer to Candlewood Hotel Company, Inc., a
Delaware corporation and successor to Candlewood Hotel Company, LLC, a Delaware
limited liability company, together with the successors and permitted assigns
of such Delaware corporation.
(i) "CONFORMING LOAN CRITERIA" shall refer to a Mortgaged Property
which at the maturity of the Construction Loan or the Extended Construction
Loan, as the case may be, meets, in GMAC-CM's sole discretion, each of
GMAC-CM's then current conduit origination and underwriting standards,
including but not limited to (i) DSCR equal to or greater than 1.4 and (ii) the
LTV shall not be greater than 75%.
(j) "CONSTRUCTION LOAN" shall mean and refer to the construction loan
over its initial loan term (and excluding any extension or renewal terms or
time periods), closed and funded pursuant to the Forward Commitment.
(k) "DEBT" means Total Assets less Total Stockholders' Equity, as
reported with the U.S. Securities and Exchange Commission on any financial
statements on an annual or quarterly basis, whether such financial statements
are audited or are unaudited. If at any time Guarantor is not a corporation
whose stock is publicly traded. "Debt" shall mean the substantial equivalent of
the concept set forth in the preceding sentence, as reflected in those
financial statements to be provided by Guarantor pursuant to Section 23 below.
(l) "DELINQUENCY" AND "DELINQUENCIES" means any portion of the
Indebtedness which is due and owing to GMAC-CM prior to the Maturity Date of
the Mortgage Loan (whether by acceleration or otherwise) and which is not paid
as and when due (following applicable notice and grace periods, if any) in
accordance with the provisions of the applicable Mortgage Loan Documents.
(m) "DOUBLETREE" shall refer to Doubletree Corporation, a Delaware
corporation, its successors and permitted assigns.
(n) "DSCR" shall mean Debt Service Coverage Ratio which shall be
computed by dividing annual NOI by the annual debt service payments on the
subject Mortgage Loan, including interest computed at the greater of (1) the
actual average interest rate under the Mortgage Loan during the twelve month
period preceding such date of determination or (2) the interest rate in effect
on the last day of the month immediately preceding the date of determination.
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(o) "ENVIRONMENTAL INDEMNITY" means, with respect to any Mortgage
Loan, the environmental indemnity executed in connection with such Mortgage
Loan.
(p) "EXTENDED CONSTRUCTION LOAN" shall mean the Construction Loan,
to the extent the term of the same may be extended for one or both extension
terms or time periods, in accordance with the conditions, terms and provisions
set forth in the Forward Commitment.
(q) "EVENT OF DEFAULT" shall have the meaning set forth in Section
11 hereof.
(r) "EXPENSES" shall mean for any specified period, all ordinary,
necessary and reasonable operating and capital expenses actually paid on a cash
basis during such period and which are related to the Mortgagor's ownership
and operation of the Mortgaged Property during such period. Such Expenses
shall include, by way of example rather than of limitation: (1) principal,
interest and other debt service payments for the Mortgage Loan secured by such
Mortgaged Property; (2) property taxes and assessments; (3) utility charges;
(4) costs of providing elevator, janitorial, trash removal and maintenance
services; (5) costs of maintaining and repairing the Mortgaged Property; (6)
management fees, overhead and expenses (of no less than four percent (4%) of
gross annual revenues); (7) franchise fees of no less than five percent (5%) of
gross annual revenues; (8) an equipment and property reserve of no less than
four percent (4%) of gross annual revenues; and (9) any capital improvement
costs paid by Mortgagor and approved in advance in writing by GMAC-CM. Such
Expenses shall not include the following: (i) any overhead of Mortgagor
incurred in connection with the management of the Mortgaged Property; (ii) all
amounts paid to Mortgagor or an Affiliate of Mortgagor in excess of amounts
that would reasonably be paid in an arms-length transaction to a Person that is
not an Affiliate of Mortgagor; (iii) non-cash deductions of Mortgagor; (iv)
salaries or distributions paid or made to any employee, partner, officer,
director or shareholder of Mortgagor or an Affiliate of Mortgagor; (v) the cost
of capital improvements made to the Mortgaged Property not approved in advance
in writing by GMAC-CM: or (vi) the cost of Mortgagor's federal, state or local
income taxes, franchise taxes or other taxes (other than real property taxes
for the Mortgaged Property).
(s) "FORWARD COMMITMENT" shall have the definition set forth in the
Recitals hereto.
(t) "GMAC-CM" shall refer to GMAC Commercial Mortgage Corporation, a
California corporation, and its successors and assigns.
(u) "GROSS REVENUES" means for any specified period, all revenue
received on a cash basis during such period from all sources related to the
Mortgaged Property, including without limitation, all rents, issues, profits,
revenues, cash proceeds from accounts and accounts receivable, and other income
and proceeds from the use or occupancy of hotel rooms, conference rooms and
other public facilities at the Mortgaged Property, all parking revenue,
refunds, license, lease and concession fees and rentals, income from vending
machines, food and beverage sales, wholesale and retail sales of merchandise,
and service charges; provided, however, Gross Revenues for such specified period
shall also include on an accrual basis, prorated over such specified period, any
property or casualty insurance proceeds that are not used for restoration of the
Mortgaged Property, any condemnation awards from a temporary taking that are not
used for restoration of the Mortgaged Property or to replace such collateral
with its substantial equivalent, any proceeds of business interruption and
other loss of income insurance, and any health club membership fees; provided,
further, Gross Revenues shall not include the following: (i) gratuities to
employees, (ii) federal, state or municipal excise, sales, use or similar taxes
collected directly from patrons or guests or included as part of the sales
price of any goods or services, (iii) insurance proceeds (other than proceeds
from business interruption or other loss of income insurance or other than
property insurance not used for restoration), (iv) condemnation proceeds (other
than proceeds from a temporary taking that are not used for restoration), (v)
proceeds from any sale of the Mortgaged Property or from a refinancing of any
debt encumbering the Mortgaged Property, (vi) proceeds from any disposition of
furniture, fixtures and equipment no longer necessary for the operation of the
Mortgaged Property; (vii) or interest accruing on amounts deposited in any FF&E
or other reserve account.
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(v) "GUARANTEED OBLIGATIONS" shall have the meaning set forth in
Section 11 hereof.
(w) "GUARANTOR" shall mean Doubletree and its successors and permitted
assigns.
(x) "GUARANTY" means this Guaranty, including all Schedules and
Exhibits hereto, as the same may be amended, supplemented, corrected or
otherwise modified.
(y) "GUARANTY FEE" shall have the meaning set forth in Section 9
hereof.
(z) "GUARANTY INTEREST RATE" shall have the meaning set forth in
Section 9 hereof.
(aa) "INDEBTEDNESS" means all principal, interest, late fees,
indemnification indebtedness and other amounts outstanding, from time to time,
under the Mortgage Loan Documents for a particular Mortgage Loan.
(bb) "LETTER OF CREDIT" shall have the meaning set forth in Section 8
hereof.
(cc) "LIQUIDATION RECOVERIES" shall have the meaning set forth in
Section 6 hereof.
(dd) "LOAN AMOUNT" shall refer to the amount of financing that GMAC-CM
agrees to provide to any Mortgagor for any of the respective Mortgage Loans,
whether a Construction Loan or an Extended Construction Loan, pursuant to the
Forward Commitment. The respective Loan Amounts for the Construction Loan and
the Extended Construction Loan need not necessarily be the same amounts.
(ee) "LOAN GUARANTY" means, with respect to any Mortgage Loan, any and
all guaranties executed in connection therewith including, without limitation,
any completion guaranty.
(ff) "LOSS" shall have the meaning set forth in Section 6 hereof.
(gg) "LTV" means the ratio of the Loan Amount to the fair market value
of the Mortgaged Property, as such fair market value is established pursuant to
an appraisal dated within thirty (30) days of such determination and acceptable
in all respects to GMAC-CM, in its sole discretion.
(hh) "MATURITY DATE" shall refer to the date any referenced Mortgage
Loan then outstanding is due and payable in full.
(ii) "MAXIMUM AMOUNT" means, with respect to any Mortgage Loan, the
initial Maximum Amount for such Mortgage Loan, as said initial Maximum Amount
is set forth on the Mortgage Loan Schedule, as increased by (a) interest on the
Maximum Amount or the portion thereof then due, accruing from the date the same
is due by Guarantor hereunder until the date paid in full, at the annual rate
of three percent (3%) over the prime rate published from time to time by The
Wall Street Journal, and (b) all collection costs hereunder, and as decreased
by any amounts attributable to principal for such Mortgage Loan and which is
actually funded by Guarantor hereunder (other than pursuant to clause (ii) of
the first sentence of Section 7 below) and not reimbursed to Guarantor pursuant
to the provisions hereof. The initial Maximum Amount for a particular Mortgage
Loan is derived pursuant to a formula that ensures that the portion of the
Mortgage Loan held by GMAC-CM which is not guaranteed under this Guaranty, does
not exceed fifty-six and twenty-five hundredths percent (56.25%) of the
Approved Project Costs applicable to that Mortgage Loan and related Mortgaged
Property.
(jj) "MONETARY DEFAULT" shall mean a default under the Mortgage Loan
Documents which directly results from the nonpayment of a monetary sum as and
when due.
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<PAGE> 5
(kk) "MORTGAGE" means, with respect to any Mortgage Loan, the
mortgages, deeds of trust, deeds to secure debt or other real property security
instruments, together with each modification, amendment and supplement thereto,
creating a lien on the Mortgaged Property described therein to secure a
Mortgage Note.
(ll) "MORTGAGE/DEED OF TRUST ASSIGNMENT" means an instrument to be
delivered by the Mortgagee to transfer the related Mortgage. Assignment of
Rents and Leases, and all other recorded security agreements to Guarantor
pursuant to the Repurchase Option.
(mm) "MORTGAGE LOAN AND MORTGAGE LOANS" shall mean either a
Construction Loan or an Extended Construction Loan closed and funded pursuant
to a particular Forward Commitment as more fully set forth on the Mortgage Loan
Schedule.
(nn) "MORTGAGE LOAN DOCUMENTS" means with regard to each Mortgage
Loan, the Mortgage Note, Mortgage, Assignment of Rents and Leases,
Environmental Indemnity, Building Loan Agreement, Loan Guaranty, Security
Agreement and each other document or instrument further securing, evidencing,
indemnifying, guaranteeing or governing the Mortgage Loan or otherwise related
to the Mortgage Loan.
(oo) "MORTGAGE LOAN FILES" means the Mortgage Loan Documents and all
correspondence and other materials relating to the Mortgagor, the Mortgaged
Property or the Mortgage Loan, its origination or servicing.
(pp) "MORTGAGE LOAN SCHEDULE" means the schedule of Mortgage Loans
subject to executed Forward Commitments, attached hereto as Schedule 1, as the
same shall be supplemented after the closing of each Mortgage Loan and as the
same may be amended, corrected or otherwise modified by instrument executed or
initialed by GMAC-CM and Guarantor, which schedule includes, without
limitation, the initial Maximum Amount for each such loan and the Rebate
Interest Rate, if any, applicable to each such loan.
(qq) "MORTGAGE NOTE" means the promissory note or notes or other
documents, together with all amendments and modifications thereof, evidencing
the indebtedness of a Mortgagor under a Mortgage Loan.
(rr) "MORTGAGED PROPERTY" means, with respect to a Mortgage Note,
the land, improvements, fixtures, personal property, contract rights (including
rights under any management agreement or franchise agreement), leases, rents,
hotel revenues, profits, permits and licenses (including liquor licenses), and
other collateral (including any interest under a ground lease) directly
securing such Mortgage Note.
(ss) "MORTGAGEE" means, with respect to any Mortgage as of any date
of determination, the holder of the related Mortgage Note as of such date.
(tt) "MORTGAGOR" means the obligor or obligors identified as such
under a Mortgage Note or Mortgage.
(uu) "MULTIPLE DELINQUENCY" means, with respect to any Mortgage
Loan, either (i) the second Delinquency to occur in any continuous twelve (12)
month period or (ii) the fourth Delinquency to occur under such Mortgage Loan
over its term, as may be extended from time to time.
(vv) "NET WORTH" means, as of any date, the difference between the
assets shown on the financial statements of such Person (whether certified or
made in connection with a filing with the Securities and Exchange Commission)
less all liabilities of such Person, including, without limitation, all Debt.
(ww) "NOI" shall mean
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(a) for purposes of GMAC-CM determining whether a Mortgage
Loan and the related Mortgaged Property satisfy the
Conforming Loan Criteria. "NOI" shall mean Net Operating
Income as defined and determined by GMAC-CM in
accordance with its then-current underwriting standards
and practices for its conduit program for loans of that
type, which may include, without limitation:
1. An allowance of no less than 4% multiplied by
gross annual revenues for management fees:
2. An allowance of no less than 5% multiplied by
gross annual revenues for franchise fees payable
to Candlewood; and
3. An allowance of no less than 4% multiplied by
gross annual revenues for a property, plant,
furniture, fixture, and equipment replacement
reserve; and
(b) for all other purposes, "NOI" shall mean Gross Revenues
less Expenses, all to the extent confirmed by the
periodic financial and property reporting and audit
requirements set forth in the Mortgage Loan Documents.
(xx) "NON-MONETARY DEFAULT" shall mean any default under the
Mortgage Loan Documents beyond any applicable cure period, other than a
Monetary Default and a Bankruptcy Default.
(yy) "PARTICIPATION AGREEMENT" shall mean that agreement in the form
attached hereto as Exhibit B, governing the subordinate participation rights
Guarantor may obtain in a particular Mortgage Loan upon payment of Guaranteed
Obligations related thereto, together with all exhibits and schedules to such
agreement.
(zz) "PERIODIC RECOVERY" shall have the meaning set forth in Section
3 hereof.
(aaa) "PERSON" means an individual, corporation, limited liability
company, partnership, joint venture, association, joint stock company, trust,
bank, unincorporated organization or government or any agency or political
subdivision thereof.
(bbb) "REMEDIES NOTICE" shall have the meaning set forth in Section 4
hereof.
(ccc) "REPURCHASE OPTION" shall mean the option of Gurarantor to
purchase a Mortgage Loan pursuant to Section 5 hereof.
(ddd) "SECURITY AGREEMENT" means, with respect to any Mortgage Loan,
the financing statements and security agreements executed in connection
therewith.
2. GUARANTY OF PAYMENT. Guarantor hereby unconditionally and irrevocably
guarantees to GMAC-CM the punctual payment when due, and not merely the
collectability, of (a) all Delinquencies as set forth in Section 3 below and
(b) all Loss as set forth in Section 6 below, in the aggregate up to the Maximum
Amount for all Mortgage Loans. The Maximum Amount for any particular Mortgage
Loan shall be reduced by the amount of any Delinquency satisfied from time to
time by Guarantor in accordance with Section 3 below which is attributable to
principal under a particular Mortgage Loan, and shall be increased by the
cash amount, without interest, of any subsequent recoveries by GMAC-CM against
the Mortgagor for those Delinquencies which were previously satisfied by
Guarantor, which recoveries shall be promptly paid to Guarantor by GMAC-CM in
the ordinary course of GMAC-CM's servicing of Mortgage Loan payments. Sums paid
by Guarantor hereunder (other than interest and collection costs under Section
19 below), shall not be applied on account of the Indebtedness outstanding for
a particular Mortgage Loan, but rather, shall constitute the purchase by
Guarantor of
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a subordinated participation in such Mortgage Loan in the amount paid by
Guarantor, which participation shall be governed by the terms and provisions of
the Participation Agreement. Recoveries paid by GMAC-CM to Guarantor shall be
applied to reduce Guarantor's participation interest in such Mortgage Loan.
Interest and collection costs paid by Guarantor under Section 19 below, will
belong to GMAC-CM and will not be applied on account of the Indebtedness
outstanding under any Mortgage Loan or to the purchase by Guarantor of a
participation interest in any Mortgage Loan.
3. GUARANTY OF DELINQUENCIES. To the extent that for any month during a
Mortgage Loan term that GMAC-CM does not receive, for any reason, any portion
of the Indebtedness due for such month, following applicable notice and grace
periods, if any, GMAC-CM may give written notice to Guarantor of such
Delinquency. Guarantor hereby unconditionally and irrevocably guarantees to
GMAC-CM that Guarantor shall pay to GMAC-CM no later than seven (7) Business
Days after the date of such notice from GMAC-CM, the amount of such
Delinquency, up to the then Maximum Amount. To the extent that such guarantee
payment is not timely received by GMAC-CM, Guarantor shall be in default
hereunder and shall be liable for interest and collection costs as set forth in
Section 19 below. To the extent that GMAC-CM subsequently receives from
Mortgagor after payment of all current Indebtedness, any portion of the
Delinquencies previously satisfied by Guarantor pursuant to this Guaranty (a
"Periodic Recovery"), such cash Periodic Recovery amounts up to the amount of
the prior Delinquency, without interest, actually received from Mortgagor shall
be remitted promptly to Guarantor and shall be added to and shall increase the
Maximum Amount. As described more fully in Section 27 below but subject to the
provisions of Section 6(c) below, Guarantor shall have no subrogation rights
against Mortgagor and shall not demand or request repayment from Mortgagor or
an Affiliate of Mortgagor for any Delinquency which Guarantor has satisfied and
paid under this Guaranty. Satisfaction by Guarantor of any Delinquency shall
not cure or remedy Mortgagor's failure to properly pay such sums under the
Mortgage Loan Documents and the Mortgage Loan default resulting therefrom.
4. LOAN ADMINISTRATION. Guarantor acknowledges and agrees that GMAC-CM has
full and absolute control over administration of the Mortgage Loans, including
decisions regarding whether to modify the Mortgage Loan terms, extend the
Maturity Date, advance additional funds, release collateral, terminate
management, franchise or other pledged contractual rights, waive or relinquish
rights or remedies, or assign GMAC-CM's rights and interests, subject to the
terms and conditions of such agreements and Mortgage Loan Documents.
Notwithstanding the foregoing, GMAC-CM hereby agrees as follows:
(a) GMAC-CM shall provide Guarantor with copies of all written
notices of default sent to each Mortgagor by GMAC-CM;
(b) As to those Mortgage Loan defaults which directly result from
the occurrence of a Monetary Default, GMAC-CM shall only accelerate the
maturity of the Indebtedness and foreclose on the Mortgaged Property, obtain a
receiver therefor or accept a deed in lieu thereof if within a period of sixty
(60) days (inclusive of any applicable notice and/or grace periods set forth in
the Mortgage Loan Documents) from the occurrence of such Monetary Default, the
Monetary Default has not been cured by Mortgagor or satisfied by Guarantor in
accordance with Section 3 above (with the seven Business Day notice period
described in Section 3 being a part of such sixty-day forbearance period);
provided, however, (i) the foregoing restrictions shall in no way affect or
restrict GMAC-CM's rights to immediately proceed with its available remedies
upon the occurrence of any Mortgage Loan default that is caused by a Bankruptcy
Default or a Non-Monetary Default, and (ii) GMAC-CM shall have no obligation to
forbear from pursuing its lawful remedies for such sixty-day period if the
Monetary Default is a Multiple Delinquency;
(c) If the Mortgage Loan default is a Non-Monetary Default or if
the Monetary Default has not been cured within such sixty-day period or if the
Monetary Default is a Multiple Delinquency, GMAC-CM may, at its option, elect to
foreclose on all or a portion of the Mortgaged Property, appoint a receiver
therefor, accept a deed in lieu thereof or otherwise exercise its rights and
remedies as regards the Mortgaged Property and/or the Mortgagor, in which event
GMAC-CM shall give Guarantor written notice (the "Remedies Notice") of (i)
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<PAGE> 8
GMAC-CM's intention to pursue its available remedies and (ii) the aggregate
Indebtedness then outstanding, together with per diem interest and other
charges, under the applicable Mortgage Loan. Guarantor shall then have thirty
(30) days to avoid potential exposure for a Loss by instead, exercising
Guarantor's Repurchase Option; and
(d) GMAC-CM will not materially modify the Mortgaged Loan terms, extend
the Maturity Date, advance additional funds (except in an emergency) release
collateral, terminate management, franchise or other material pledged
contractual rights or waive or relinquish material rights or remedies, without
first (i) having determined in its business judgment, after considering all
facts and circumstances, that to do so is necessary or desirable to prevent a
default or to protect the value of the security for the Mortgage Loan, and (ii)
notifying Guarantor of GMAC-CM's intent to do so, which notice shall also
constitute a Remedies Notice hereunder.
5. REPURCHASE OPTION. At any time during the thirty (30) days following
GMAC-CM's Remedies Notice, Guarantor may, at its option (the "Repurchase
Option") purchase the defaulted Mortgage Loan by payment to the Mortgagee,
within such time period, of the aggregate Indebtedness then outstanding under
such Mortgage Loan less the amount, if any, of Guarantor's participation
interest in such Mortgage Loan. Upon receipt of such funds, GMAC-CM shall
execute and deliver, without representation, warranty or recourse, the Allonge,
the Mortgage/Deed of Trust Assignment and other assignments and transfers of the
applicable Mortgage Loan Documents, together with all assignable rights of
GMAC-CM in and to policies of insurance (property, title or other) and all
claims thereunder, all rights of GMAC-CM to condemnation awards and all other
rights of GMAC-CM related to such Mortgage Loan other than indemnification
rights for the benefit of GMAC-CM which survive the payoff of such loan;
provided, however, GMAC-CM shall represent and warrant that it has done nothing
during its ownership of the Mortgage Loan to affect the validity and
enforceability of such loan as a first mortgage lien on the Mortgaged Property,
and that it has not transferred, encumbered or assigned the Mortgage Loan; and
provided, further, GMAC-CM shall take such other actions as may be necessary,
after taking into account all facts and circumstances, to vest in Guarantor
unencumbered title to all of the foregoing, all at Guarantor's sole cost and
expense.
6. GUARANTY OF LOSS.
(a) If Guarantor does not timely exercise its Repurchase Option and if
the Mortgage Loan default is continuing, GMAC-CM may, at its option, proceed to
exercise its available remedies, including foreclosure. In such event, GMAC-CM
may suffer a "Loss" in an amount equal to the then outstanding Indebtedness
under the Loan minus all Liquidation Recoveries (as hereinafter defined)
actually received by GMAC-CM with respect to the Loan or Mortgaged Property. As
used herein, the term "Liquidation Recoveries" shall mean (i) if the Mortgaged
Property has been sold at foreclosure to a third party, the net cash proceeds
from such foreclosure sale actually received by GMAC-CM (it being understood and
agreed that Guarantor shall have the right to purchase the Mortgaged Property at
such foreclosure sale), (ii) if the Mortgaged Property is acquired by GMAC-CM or
its designee at a foreclosure sale (it being understood and agreed that
Guarantor shall have the right to purchase the Mortgaged Property at such
foreclosure sale), the successful GMAC-CM foreclosure bid less reasonable
foreclosure costs, (iii) if GMAC-CM has elected to accept a deed to the
Mortgaged Property in lieu of foreclosure, the value of such Mortgaged Property
as reasonably agreed to by GMAC-CM based upon an internal or other appraisal of
the Mortgaged Property, or (iv) if GMAC-CM has elected to pursue other available
remedies, the net cash proceeds to GMAC-CM from the exercise of such remedies.
GMAC-CM shall not give less than thirty (30) days prior notice to Guarantor of
any foreclosure sale of the Mortgaged Property (which notice period may be part
of the sixty (60) day and thirty (30) day notice periods set forth in Sections
4(b), 4(c) and 6(b) of this Agreement), which shall include the date, time and
place of the sale. There shall be added to Liquidation Recoveries, the net cash
amount of all sums recovered by GMAC-CM with respect to such Mortgage Loan
(other than under this Guaranty), including without limitation, the net amount
recovered under any policy of property, title or other insurance applicable to
such Mortgage Loan, under any assigned contract or from any other guarantor of
such Mortgage Loan; provided, however, GMAC-CM shall not be required to
institute or prosecute any proceedings or claims against any or all of such
collateral, insurance or other sources of payment (including without limitation,
proceedings under the Loan Guaranty to recover any deficiency or alleged breach
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of non-recourse covenants or conditions) as a condition of payment hereunder or
enforcement of the terms of this Guaranty; provided, however, GMAC-CM shall use
reasonable efforts, taking into accounts all facts and circumstances, to
recover any Loss satisfied by Guarantor and to remit the same to Guarantor.
(b) If the Mortgage Loan default is a Bankruptcy Default, the Loss
guaranteed by Guarantor hereunder shall be equal to the then Maximum Amount.
Within thirty (30) days of written notice from GMAC-CM of the occurrence of a
Bankruptcy Default, Guarantor may, at its option, exercise its Repurchase
Option as to such Mortgage Loan or shall pay to GMAC-CM the then Maximum
Amount. To the extent that the Repurchase Option is not consummated or the
Maximum Amount has not been received within such thirty-day period, Guarantor
shall be in default hereunder, with Guarantor liable for additional interest
and for collections costs, as described below.
(c) After completion of the foreclosure or other enforcement action
(except for remedies taken for a Bankruptcy Default, for which recovery against
Guarantor is governed by clause (b) above) and after GMAC-CM's determination of
the amount of its Loss, GMAC-CM shall provide written notice to Guarantor of the
amount of such Loss. Guarantor hereby unconditionally and irrevocably guarantees
to GMAC-CM that Guarantor shall pay to GMAC-CM, no later than seven (7) Business
Days after the date of such notice from GMAC-CM, the amount of such Loss, up to
the then Maximum Amount. To the extent that such guarantee payment is not timely
received by GMAC-CM, Guarantor shall be in default hereunder and shall be liable
for interest and collection costs. GMAC-CM shall not be required to seek a
personal judgement against Mortgagor and/or Mortgagor's principal equity owners
under the Loan Documents (for breaches of non-recourse covenants and conditions,
under the Environmental Indemnity or otherwise) prior to seeking payment from
Guarantor of any Loss; provided, however, GMAC-CM shall use reasonable efforts,
taking into account all facts and circumstances, to recover the Loss and remit
the same to Guarantor. Upon receipt by GMAC-CM of all Indebtedness owing to
GMAC-CM under the Mortgage Loan Documents (except in the case of a Bankruptcy
Default), GMAC-CM shall assign, without recourse, representation or warranty
(except as provided in Section 5 above), the Mortgage Loan Documents to
Guarantor, together with all other rights of GMAC-CM described in Section 5
above.
7. LOAN PAYDOWN. In addition to the guarantee of Delinquencies and the
guarantee of Loss, as described above, Guarantor hereby unconditionally and
irrevocably guarantees to GMAC-CM that, in the event that on or before sixty
(60) days prior to (a) the Maturity Date of each Construction Loan or (b) the
first Maturity Date of each Extended Construction Loan, as applicable, the
related Mortgaged Property has not achieved a minimum 1.10 DSCR, then, in such
event, Guarantor, not earlier than sixty (60) days but at least thirty (30)
days prior to each such Maturity Date shall have either (i) paid down, up to
the then Maximum Amount, the Loan Amount for such particular Mortgage Loan in
order to achieve a 1.10 DSCR or (ii) entered into an agreement, in the form
attached to and made a part of the Participation Agreement, whereby Guarantor
agrees to become fully liable for the payment of all principal, interest, net
cash flow, tax and insurance escrows, and other sums payable monthly on account
of such Mortgage Loan. Sums payable by Guarantor pursuant to clause (ii)of the
preceding sentence shall be applied to the purchase by Guarantor of a
subordinated participation in the Mortgage Loan, in accordance with the terms
and provisions of the Participation Agreement, but shall not reduce the Maximum
Amount. Guarantor may at any time revoke its agreement under such clause (ii)
above and terminate its obligations thereunder by paying the sum then owing, if
any, under clause (i) above, and such agreement will automatically terminate
when the Mortgage Loan achieves a 1.10 DSCR or when the Maximum Amount for such
loan equals zero (Guarantor acknowledging, however, that payments under clause
(ii) above shall not reduce the Maximum Amount). GMAC-CM will continue its
customary efforts to collect all interest and other sums coming due from the
Mortgagor and will promptly credit to Guarantor all sums so collected.
8. ACCELERATION/LETTER OF CREDIT.
(a) In addition to all other rights and remedies set forth herein, the
Maximum Amount for all Mortgage Loans then outstanding shall be immediately due
and payable if any of the representations and
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warranties in Section 22 are incorrect as of the date hereof or if, at any time
during the term of any Mortgage Loan (i) Guarantor files or has filed against
it a bankruptcy, insolvency or reorganization proceeding under federal or state
law (unless, in the case of an involuntary proceeding, such proceeding is
dismissed within sixty (60) days of the filing thereof), (ii) any
representation, warranty or covenant in Section 22(b), (d), (e), (g), (i), (j),
(k) or (l) is incorrect or breached, or (iii) Guarantor breaches any covenant
set forth in clauses (b) and (c) below.
(b) If, at any time, one or more of the covenants set forth in
Section 23 below is violated, within fifteen (15) Business Days of notice
thereof by GMAC-CM, Guarantor shall obtain and deliver to GMAC-CM at
Guarantor's sole expense, an unconditional, irrevocable letter of credit (the
"Letter of Credit") in an amount equal to twenty-five percent (25%) of the
aggregate Maximum Amount for all Mortgage Loans then outstanding. The Letter
of Credit shall be from a financial institution having at least $100 million
in assets, shall name GMAC-CM as the sole beneficiary and shall be in form and
content acceptable to GMAC-CM, in its sole discretion. GMAC-CM shall be
entitled to present the Letter of Credit and to make a draw against the same if
Guarantor fails to pay a Delinquency, Loss, or other sum required to be paid
under this Guaranty in accordance with the terms hereof. GMAC-CM shall promptly
return the Letter of Credit to Guarantor if and to the extent that the breach
of the financial covenants set forth herein is cured, without in any manner
limiting GMAC-CM's rights to require another Letter of Credit if one or more of
such covenants are violated at a subsequent date.
(c) If, after obtaining the Letter of Credit and prior to its
return to Guarantor, one of the covenants set forth in Section 23 below is
violated for a second time (when measured at least one hundred twenty (120)
days after the date of the first breach), GMAC-CM shall have the right to
require Guarantor, within fifteen (15) Business Days of notice thereof by
GMAC-CM, to obtain an additional letter of credit or an increase to or
supplement of the Letter of Credit so that the face amount of the aggregate
Letter of Credit equals fifty percent (50%) of the aggregate Maximum Amount for
all Mortgage Loans then outstanding.
9. REBATE TO GUARANTOR. GMAC-CM hereby agrees to pay to Guarantor,
commencing on the first day of the second month following the closing of each
Mortgage Loan, an amount (the "Guaranty Fee") equal to one-twelfth (1/12) of
the product of (i) that amount of interest, if any, as is set forth on the
Mortgage Loan Schedule opposite the particular Mortgage Loan to which it
applies (the "Guaranty Interest Rate") and (ii) the then-outstanding principal
balance of such Mortgage Loan, as and to the extent that (a) GMAC-CM has
received all principal, interest, net cash flow, tax and insurance escrows and
other sums owing by Mortgagor under such Mortgage Loan through the payment date
for the immediately preceding month and (b) GMAC-CM has made no claim against
Guarantor under this Guaranty which has not been satisfied in full. Guarantor
acknowledges and agrees that the Guaranty Interest Rate is in addition to the
interest rate which GMAC-CM would otherwise charge to the Mortgagor, shall be
disclosed to the Mortgagor in the Forward Commitment or other document, and the
Guaranty Fee represents reasonable consideration to Guarantor for its costs and
expenses in providing this Guaranty for the benefit of Mortgagor. Guarantor
further acknowledges and agrees that if a claim has been made under this
Guaranty but has not been fully satisfied for any reason, or if, for any
reason, GMAC-CM has not received from the Mortgagor, by the prior month's
payment date, all sums due and payable under such Mortgage Loan, the Guaranty
Fee for that Mortgage Loan for that month shall be applied to the Indebtedness
and shall not be due and payable to Guarantor unless and until GMAC-CM has
received all such delinquent sums from Guarantor and the Mortgagor.
Notwithstanding the foregoing, in those circumstances where Guarantor has
exercised its option under clause (ii) of Section 7 to become fully liable for
the payment of sums owing under a particular Mortgage Loan, to the extent that
a Guaranty Fee is received from the Mortgagor for that Mortgage Loan, it shall
be retained by GMAC-CM as consideration for GMAC-CM's increased costs of
servicing such loan.
10. TERMINATION OF GUARANTY.
(a) Except as set forth in clause (b) below, this Guaranty shall be
terminated as to a particular Mortgage Loan and Guarantor shall be released
from all liability with respect to a particular Mortgage Loan at
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such time as GMAC-CM has notified Guarantor in writing that the related
Mortgaged Property has satisfied the Conforming Loan Criteria. GMAC-CM agrees
to provide Guarantor with such notice promptly after confirming to GMAC-CM's
satisfaction, in its sole discretion, that the Conforming Loan Criteria have
been satisfied.
(b) This Guaranty shall continue in effect as to all Mortgage Loans
which have not satisfied the Conforming Loan Criteria. With respect to each
Mortgage Loan which has satisfied the Conforming Loan Criteria, this Guaranty
shall continue in effect (i) with respect to all obligations and liabilities of
Guarantor under Section 19, and (ii) as provided in Section 12(b).
11. PRIMARY LIABILITY OF GUARANTOR.
-------------------------------
(a) This Guaranty is an absolute, irrevocable and unconditional
guaranty of payment. Guarantor shall be liable, with respect to each Mortgage
Loan for the payment of all indebtedness described herein up to the Maximum
Amount applicable to such loan (up to such ceiling, in the aggregate for all
Mortgage Loans, the "Guaranteed Obligations"), as set forth in this Guaranty, as
a primary obligor. This Guaranty shall be effective as a waiver of, and
Guarantor hereby expressly waives, any and all rights to which Guarantor may
otherwise have been entitled under any suretyship laws in effect from time to
time, including any right or privilege, whether existing under statute, at law
or in equity, to require GMAC-CM to take prior recourse or proceedings against
any collateral, security or Person whatsoever.
(b) Guarantor hereby agrees that in the event of the occurrence of a
default of an obligation of Guarantor hereunder which continues beyond
applicable notice and grace periods, if any, (individually and collectively an
"Event of Default"), then upon the occurrence of such Event of Default, the
Guaranteed Obligations, for purposes of this Guaranty, shall be deemed
immediately due and payable at the election of GMAC-CM, and Guarantor shall, on
demand and without presentment, protest, notice of protest, further notice of
nonpayment or of dishonor or of default, or notice of acceleration or of intent
to, or any other notice whatsoever, without any notice having been given to
Guarantor or Mortgagor previous to such demand of the acceptance by GMAC-CM of
this Guaranty, and without any notice having been given to Guarantor or
Mortgagor previous to such demand of the creating or incurring of such
indebtedness, all such notices being hereby waived by Guarantor, pay all damages
and all costs and expenses, up to the then Maximum Amount, that may arise in
consequence of any such Event of Default (including any and all costs and
expenses incurred by GMAC-CM in connection with the collection and enforcement
of this Guaranty or any portion thereof including all reasonable attorneys' fees
and expenses, investigation costs, and all court costs, whether or not suit is
filed hereon, and it shall not be necessary for GMAC-CM, in order to enforce
such payment by Guarantor, first to institute suit or pursue or exhaust any
rights or remedies against Mortgagor or others liable on such indebtedness or to
institute suit or pursue or exhaust any rights or remedies against Mortgagor and
all other Guarantor or other sureties of the Guaranteed Obligations or to
enforce any rights against any security that shall ever have been given to
secure such indebtedness, or to joint Mortgagor or any others liable for the
payment of the Guaranteed Obligations or any part thereof in any action to
enforce this Guaranty, or to resort to any other means of obtaining payment of
the Guaranteed Obligations; provided, however, except as specifically set forth
above, nothing herein contained shall prevent GMAC-CM from suing on the Mortgage
Note or foreclosing the Mortgage or from exercising any other rights thereunder,
and if such foreclosure or other remedy is availed of, only the net proceeds
therefrom, after deduction of all charges and expenses of every kind and nature
whatsoever, shall be applied in reduction of the amount due on the Mortgage Note
and Mortgage, and GMAC-CM shall not be required to institute or prosecute
proceedings to recover any deficiency or alleged breach of non-recourse
covenants or conditions as a condition of payment hereunder or enforcement
hereof; provided, however, GMAC-CM shall use reasonable efforts, taking into
account all facts and circumstances, to recover any Loss amount and remit the
same to Guarantor. At any sale of the Mortgaged Property or other collateral
given for the Indebtedness or any part thereof, whether by foreclosure or
otherwise, GMAC-CM may at its discretion purchase all or any part of the
Mortgaged Property or collateral so sold or offered for sale for its own account
and may, in payment of the amount bid therefor, deduct such amount from the
balance due it pursuant to the terms of the Mortgage Note and Mortgage.
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(c) Suit may be brought or demand may be made against all parties who
have signed this Guaranty or any other guaranty covering all or any part of the
Guaranteed Obligations, or against any one or more of them, separately or
together, without impairing the rights of GMAC-CM against any party hereto. Any
time that GMAC-CM is entitled to exercise its rights or remedies hereunder, it
may in its discretion elect to demand payment.
12. CERTAIN AGREEMENTS AND WAIVERS BY GUARANTOR.
(a) Guarantor hereby agrees that neither GMAC-CM's rights or remedies
nor Guarantor's obligations under the terms of this Guaranty shall be released,
diminished, impaired, reduced or affected by any one or more of the following
events, actions, facts, or circumstances, and the liability of Guarantor under
this Guaranty shall be absolute and unconditional irrespective of:
(i) any limitation of liability or recourse in any other Loan
Document or arising under any law;
(ii) any claim or defense that this Guaranty was made without
consideration or is not supported by adequate consideration;
(iii) the taking or accepting of any other security or guaranty
for, or right of recourse with respect to, any or all of the Guaranteed
Obligations;
(iv) any homestead exemption or any other exemption under
applicable law;
(v) any release, surrender, abandonment, exchange, alteration,
sale or other disposition, subordination, deterioration, waste, failure
to protect or preserve, impairment, or loss of, or any failure to create
or perfect any lien or security interest with respect to, or any other
dealings with, any collateral or security at any time existing or
purported, believed or expected to exist in connection with any or all
of the Guaranteed Obligations, including any impairment of Guarantor's
recourse against any Person or collateral:
(vi) whether express or by operation of law, any partial release
of the liability of Guarantor hereunder, or if one or more other
guaranties are now or hereafter obtained by GMAC-CM covering all or any
part of the Guaranteed Obligations, any complete or partial release of
any one or more of such guarantors under any such other guaranty, or any
complete or partial release or settlement of Mortgagor or any other
party liable, directly or indirectly, for the payment of any or all of
the Guaranteed Obligations;
(vii) the death, insolvency, bankruptcy, disability,
dissolution, liquidation, termination, receivership, reorganization,
merger, consolidation, change of form, structure or ownership, sale of
all assets, or lack of corporate, partnership or other power of
Mortgagor or any other party at any time liable for the payment of any
or all of the Guaranteed Obligations;
(viii) either with or without notice to or consent of Guarantor,
except as required under Section 4(d) above: any renewal, extension,
modification or rearrangement of the terms of any or all of the
Guaranteed Obligations and/or any of the Loan Documents, including
material alterations of the terms of payment (including changes in
maturity date(s) and interest rate(s)) or performance (including changes
in the final plans and specifications and other terms or aspects of
construction of the improvements at the Mortgaged Property) or any other
terms thereof, or any waiver, termination, or release of, or consent to
departure from, any of the Loan Documents or any other guaranty of any
or all of the Guaranteed Obligations, or any adjustment, indulgence,
forbearance, or compromise that may be
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granted from time to time by GMAC-CM to Mortgagor, Guarantor, and/or any other
Person at any time liable for the payment of any or all of the Guaranteed
Obligations:
(ix) any neglect, lack of diligence, delay, omission, failure, or
refusal of GMAC-CM to take or prosecute (or in taking or prosecuting) any
action for the collection or enforcement of any of the Guaranteed Obligations,
or to foreclose or take or prosecute any action to foreclose (or in foreclosing
or taking or prosecuting any action to foreclose) upon any security therefor, or
to exercise (or in exercising) any other right or power with respect to any
security therefor, or to take or prosecute (or in taking or prosecuting) any
action in connection with any Loan Document, or any failure to sell or
otherwise dispose of in a commercially reasonable manner any collateral securing
any or all of the Guaranteed Obligations; provided, however, GMAC-CM shall use
reasonable efforts, taking into account all facts and circumstances, to recover
any Loss amount and to remit the same to Guarantor.
(x) any failure of GMAC-CM to notify Guarantor, to the extent
required under Section 4(d) above, of any creation, renewal, extension,
rearrangement, modification, supplement, subordination, or assignment of the
Guaranteed Obligations or any part thereof, or of any Loan Document, or of any
release of or change in any security, or of any other action taken or refrained
from being taken by GMAC-CM against Mortgagor or any security or other
recourse, or of any new agreement between GMAC-CM and Mortgagor, it being
understood that GMAC-CM shall not be required to give Guarantor any notice of
any kind under any circumstances with respect to or in connection with the
Guaranteed Obligations, any and all rights to notice Guarantor may have
otherwise had being hereby waived by Guarantor, and Guarantor shall be
responsible for obtaining for itself information regarding the Mortgagor,
including any changes in the business or financial condition of the Mortgagor,
and Guarantor acknowledges and agrees that GMAC-CM shall have no duty to notify
Guarantor of any information which the GMAC-CM may have concerning the
Mortgagor.
(xi) if any requirement for any reason that GMAC-CM is required to
refund any payment by Mortgagor to any other party liable for the payment of
any or all of the Guaranteed Obligations or pay the amount thereof to someone
else;
(xii) the making of advances by GMAC-CM to protect its interest in
the Mortgaged Property, preserve the value of the Mortgaged Property or for the
purpose of performing any term or covenant contained in any of the Loan
Documents;
(xiii) the existence of any claim, counterclaim, set-off, recoupment,
reduction or defense based upon any claim or other right that Guarantor may at
any time have against Mortgagor, GMAC-CM, or any other Person, whether or not
arising in connection with this Guaranty, the Mortgage Note, the Loan
Agreement, or any other Loan Document;
(xiv) the unenforceability of all or any part of the Guaranteed
Obligations against Mortgagor, whether because the Guaranteed Obligations exceed
the amount permitted by law or violate any usury law, or because the act of
creating the Guaranteed Obligations, or any part thereof, is ultra vires, or
because the officers or Persons creating same acted in excess of their
authority, or because of a lack of validity or enforceability of or defect or
deficiency in any of the Loan Documents, or because Mortgagor has any valid
defense, claim or offset with respect thereto, or because Mortgagor's obligation
ceases to exist by operation of law, or because of any other reason or
circumstance, it being agreed that Guarantor shall remain liable hereon
regardless of whether Mortgagor or any other Person be found not liable on the
Guaranteed Obligations, or any part thereof, for any reason (and regardless of
any joinder of Mortgagor or any other party in any action to obtain payment of
any or all of the Guaranteed Obligations); or
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(xv) any order, ruling or plan of reorganization emanating from
proceedings under Title 11 of the United States Code with respect to
Mortgagor or any other Person, including any extension, reduction,
composition, or other alteration of the Guaranteed Obligations, whether or
not consented to by GMAC-CM.
(b) In the event any payment by Mortgagor, Guarantor or any other Person
to GMAC-CM is held to constitute a preference, fraudulent transfer or other
voidable payment under any bankruptcy, insolvency or similar law, or if for any
other reason GMAC-CM is required to refund such payment or pay the amount
thereof to any other party, such payment by Mortgagor, Guarantor or any other
Person to GMAC-CM shall not constitute a release of Guarantor from any liability
hereunder, and this Guaranty shall continue to be effective or shall be
reinstated (notwithstanding any prior release, surrender or discharge by GMAC-CM
of this Guaranty or of Guarantor), as the case may be, with respect to, and this
Guaranty shall apply to, any and all amounts so refunded by GMAC-CM or paid by
GMAC-CM to Guarantor or another Person (which amounts shall constitute part of
the Guaranteed Obligations), and any interest paid by GMAC-CM and any attorneys'
fees, costs and expenses paid or incurred by GMAC-CM in connection with any such
event. It is the intent of Guarantor and GMAC-CM that the obligations and
liabilities of Guarantor hereunder are absolute and unconditional under any and
all circumstances and that until the Guaranteed Obligations are fully and
finally paid and performed, and not subject to refund or disgorgement, the
obligations and liabilities of Guarantor hereunder shall not be discharged or
released, in whole or in part, by any act or occurrence that might, but for the
provisions of this Guaranty, be deemed a legal or equitable discharge or release
of a guarantor. GMAC-CM shall be entitled to continue to hold this Guaranty in
its possession for so long as may be necessary (including any bankruptcy
"preference" periods following the satisfaction of all Guaranteed Obligations)
to enforce any obligation of Guarantor hereunder and/or to exercise any right or
remedy of GMAC-CM hereunder.
(c) If acceleration of the time for payment of any amount payable by
Mortgagor under the Mortgage Note, the Loan Agreement, or any other Loan
Document is stayed or delayed by any law or tribunal, all such amounts shall
nonetheless be payable by Guarantor on demand by GMAC-CM.
13. SUBORDINATION. If, for any reason whatsoever, Mortgagor and/or
Candlewood is now or hereafter becomes indebted to Guarantor for any payments
made under this Guaranty:
(a) such indebtedness and all interest thereon and all liens, security
interests and rights now or hereafter existing with respect to property of
Mortgagor and/or Candlewood securing same shall, at all times, be subordinate
in all respects to the Guaranteed Obligations and to all liens, security
interests and rights now or hereafter existing to secure the Guaranteed
Obligations;
(b) Guarantor shall not be entitled to enforce or receive payment,
directly or indirectly, of any such indebtedness of Mortgagor and/or Candlewood
to Guarantor until the Guaranteed Obligations have been fully and finally paid
and performed;
(c) Guarantor hereby assigns and grants to GMAC-CM a security interest in
all such indebtedness and security therefor, if any, of Mortgagor and/or
Candlewood to Guarantor now existing or hereafter arising, including any
dividends and payments pursuant to debtor relief or insolvency proceedings
referred to below. In the event of receivership, bankruptcy, reorganization,
arrangement or other debtor relief or insolvency proceedings involving Mortgagor
and/or Candlewood as debtor, GMAC-CM shall have the right to prove its claim in
any such proceeding so as to establish its rights hereunder and shall have the
right to receive directly from the receiver, trustee or other custodian (whether
or not a Default shall have occurred or be continuing under any of the Loan
Documents), dividends and payments that are payable upon any obligation of
Mortgagor and/or Candlewood to Guarantor now existing or hereafter arising, and
to have all benefits of any security therefor, until the Guaranteed Obligations
have been fully and finally paid and performed. If, notwithstanding the
foregoing provisions. Guarantor should receive any payment, claim or
distribution that is prohibited as provided above in this Section, Guarantor
shall pay the same to GMAC-CM immediately. Guarantor hereby agreeing that it
shall
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receive the payment, claim or distribution in trust for GMAC-CM and shall have
absolutely no dominion over the same except to pay it immediately to GMAC-CM;
and
(d) Guarantor shall promptly upon request of GMAC-CM from time to time
execute such documents and perform such acts as GMAC-CM may require to evidence
and perfect its interest and to permit or facilitate exercise of its rights
under this Section, including execution and delivery of financing statements,
proofs of claim, further assignments and security agreements, and delivery to
GMAC-CM of any promissory notes or other instruments evidencing indebtedness of
Mortgagor and/or Candlewood to Guarantor. All promissory notes, accounts
receivable ledgers or other evidences, now or hereafter held by Guarantor, of
obligations of Mortgagor and/or Candlewood to Guarantor shall contain a specific
written notice thereon that the indebtedness evidenced thereby is subordinated
under and is subject to the terms of this Guaranty.
14. OTHER LIABILITY OF GUARANTOR OR MORTGAGOR. GMAC-CM agrees that, without
the prior written consent of Guarantor, GMAC shall not extend to a particular
Mortgagor any debt ("Additional Debt") other than the Indebtedness outstanding
under the Indebtedness outstanding under the Mortgage Loan to such Mortgagor,
provided, however, to the extent that Guarantor has received a Forward
Commitment or other written notification regarding any such Additional Debt and
has not objected in writing to GMAC-CM prior to the closing of such Additional
Debt. Guarantor shall be deemed to have consented to the issuance of such
Additional Debt by GMAC-CM. If Guarantor is or becomes liable, by endorsement
or otherwise, for any indebtedness owing by Mortgagor to GMAC-CM other than
under this Guaranty, such liability shall not be in any manner impaired or
affected hereby, and the rights of GMAC-CM hereunder shall be cumulative of any
and all other rights that GMAC-CM may have against Guarantor. This Guaranty is
independent of (and shall not be limited by) any other guaranty now existing or
hereafter given.
15. GMAC-CM ASSIGNS. This Guaranty is for the benefit of GMAC-CM and GMAC-CM's
successors and assigns, and in the event of an assignment of the Guaranteed
Obligations, or any part thereof, the rights and benefits hereunder, to the
extent applicable to the Guaranteed Obligations so assigned, may be transferred
with such Guaranteed Obligations.
16. BINDING EFFECT. This Guaranty is binding not only on Guarantor, but also on
Guarantor's successors and assigns; provided, however, (a) Guarantor may not,
without the prior written consent of GMAC-CM, assign any of its rights, powers,
duties or obligations hereunder and (b) Guarantor shall provide prior written
notice to GMAC-CM if any of the obligations of Guarantor hereunder are to
become binding on a successor to Guarantor.
17. GOVERNING LAW; FORUM. This Guaranty is an agreement executed under seal,
and its validity, enforcement, and interpretation, shall for all purposes be
governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania and applicable United States federal law, and is intended to be
performed in accordance with, and only to the extent permitted by, such laws. If
any Guarantor is a corporation, the designation "(SEAL)" on this Guaranty shall
be effective as the affixing of such Guarantor's corporate seal physically to
this Guaranty. All obligations of Guarantor hereunder are payable and
performable at the place or places where the Guaranteed Obligations are payable
and performable. Guarantor hereby irrevocably submits generally and
unconditionally for Guarantor and in respect of Guarantor's property to the
jurisdiction of any state court, or any United States federal court, sitting in
the state specified in the first sentence of this Section and to the
jurisdiction of any state or United States federal court sitting in the state in
which any of the Mortgaged Property is located, over any suit, action or
proceeding arising out of or relating to this Guaranty or the Guaranteed
Obligations. Guarantor hereby irrevocably waives, to the fullest extent
permitted by law, any objection that Guarantor may now or hereafter have to the
laying of venue in any such court and any claim that any such court is an
inconvenient forum. Guarantor hereby agrees and consents that, in addition to
any methods of service of process provided for under applicable law, all
service of process in any such suit, action or proceeding in any state court, or
any United States federal court, sitting in the state specified in the first
sentence of this Section may be made by certified or registered mail, return
receipt requested, directed to Guarantor at the address set forth at the end of
this Guaranty, or at a subsequent address of which GMAC-CM received actual
notice from Guarantor in accordance with said Section, and service so made shall
be complete when received or
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when delivery is refused by Guarantor. Nothing herein shall affect the right of
GMAC-CM to serve process in any manner permitted by law or limit the right of
GMAC-CM to bring proceedings against Guarantor in any other court or
jurisdiction.
18. INVALIDITY OF CERTAIN PROVISIONS. If any provision of this Guaranty or the
application thereof to any Person or circumstance shall, for any reason and to
any extent, be declared to be invalid or unenforceable, neither the remaining
provisions of this Guaranty nor the application of such provision to any other
Person or circumstance shall be affected thereby, and the remaining provisions
of this Guaranty, or the applicability of such provision to other Persons or
circumstances, as applicable, shall remain in effect and be enforceable to the
maximum extent permitted by applicable law.
19. ATTORNEYS' FEES AND COSTS OF COLLECTION. Guarantor acknowledges that the
Maximum Amount of the Guaranteed Obligations shall be increased by all fees,
costs, interest and other sums described in this Section. Guarantor shall pay
on demand all attorneys' fees and all other costs and expenses incurred by
GMAC-CM in the enforcement of or preservation of GMAC-CM's rights under this
Guaranty including all reasonable attorneys' fees and expenses, investigation
costs, and all court costs, whether or not suit is filed herein, or whether at
maturity or by acceleration, or whether before or after maturity, or whether in
connection with bankruptcy, insolvency or appeal, or whether in connection with
the collection and enforcement of this Guaranty against any other Guarantor, if
there be more than one. Guarantor agrees to pay interest on (i) any Guaranteed
Obligations not paid when due in accordance with the provisions of this
Guaranty, and (ii) any expenses or other sums due to GMAC-CM under this Section
that are not paid when due, in each case at an annual rate equal to three
percent (3%) over the prime rate published from time to time by The Wall Street
Journal. Guarantor's obligations and liabilities under this Section shall
survive any payment or discharge in full of the Guaranteed Obligations.
Notwithstanding the foregoing, it is understood and agreed, in the event that
Guarantor is the prevailing party in any suit between GMAC-CM and Guarantor,
(a) GMAC-CM shall not be entitled to collect its attorneys' fees, expenses,
investigation costs or court costs from Guarantor and (b) GMAC-CM shall
reimburse Guarantor for its reasonable attorneys' fees, expenses, investigation
costs and court costs related to such suit.
20. PAYMENTS. All sums payable under this Guaranty shall be paid in lawful
money of the United States of America that at the time of payment is legal
tender for the payment of public and private debts.
21. CONTROLLING AGREEMENT. It is not the intention of GMAC-CM or Guarantor to
obligate Guarantor to pay interest in excess of that lawfully permitted to be
paid by Guarantor under applicable law. Should it be determined that any
portion of the Guaranteed Obligations or any other amount payable by Guarantor
under this Guaranty constitutes interest in excess of the maximum amount of
interest that Guarantor, in Guarantor's capacity as guarantor, may lawfully be
required to pay under applicable law, the obligation of Guarantor to pay such
interest shall automatically be limited to the payment thereof in the maximum
amount so permitted under applicable law. The provisions of this Section shall
override and control all other provisions of this Guaranty and of any other
agreement between Guarantor and GMAC-CM.
22. REPRESENTATIONS, WARRANTIES, AND GENERAL COVENANTS OF GUARANTOR. Guarantor
hereby represents, warrants, and covenants that (a) Guarantor owns a
substantial equity interest in Candlewood and Guarantor will derive a material
and substantial benefit, directly or indirectly, from the agreement of GMAC-CM
to issue the Forward Commitment; (b) this Guaranty is duly authorized and
valid, and is binding upon and enforceable against Guarantor; (c) Guarantor is
not, and the execution, delivery and performance by Guarantor of this Guaranty
will not cause Guarantor to be, in violation of or in default with respect to
any law or in default (or at risk of acceleration of indebtedness) under any
agreement or restriction by which Guarantor is bound or affected; (d) Guarantor
is duly organized, validly existing, and in good standing under the laws of the
state of its organization and has full power and authority to enter into and
perform this Guaranty; (e) Guarantor will indemnify GMAC-CM from any loss, cost
or expense as a result of any representation or warranty of Guarantor being
false, incorrect, incomplete or misleading in any material respect; (f) there
is no litigation pending or, to the knowledge of Guarantor, threatened before
or by any tribunal against or affecting Guarantor which would
-16-
<PAGE> 17
materially and adversely affect its ability to perform hereunder; (g) all
financial statements and information heretofore furnished to GMAC-CM by
Guarantor do, and all financial statements and information hereafter furnished
to GMAC-CM by Guarantor will, fairly present the condition (financial or
otherwise) of Guarantor as of their dates and the results of Guarantor's
operations for the periods therein specified; (h) after giving effect to this
Guaranty, Guarantor is solvent, is not engaged or about to engage in business
or a transaction for which the property of Guarantor is an unreasonably small
capital, and does not intend to incur or believe that it will incur debts that
will be beyond its ability to pay as such debts mature; (i) Guarantor
acknowledges that, except to the extent set forth in the Participation
Agreement, GMAC-CM has no duty at any time to investigate or inform Guarantor
of the financial or business condition or affairs of Mortgagor or any change
therein; (j) Guarantor acknowledges and agrees that Guarantor may be required
to pay and perform the Guaranteed Obligations in full without assistance or
support from the Mortgagor or any other Person; (k) Guarantor has read and
fully understands the provisions contained in the Forward Commitment (including
without limitation, the Approved Project Costs described therein) and in the
Mortgage Note, the Building Loan Agreement, the Mortgage, the Environmental
Indemnity, and the other Mortgage Loan Documents; and (l) unless Guarantor has
notified GMAC-CM in writing prior to the execution of any Forward Commitment
for a particular Mortgage Loan. Jack P. DeBoer has not been fired from and
remains a senior officer of Candlewood, with significant day to day
decision-making authority. Guarantor's representations, warranties and
covenants are a material inducement to GMAC-CM to enter into the Forward
Commitment and shall survive the execution hereof and any bankruptcy,
foreclosure, transfer of security or other event affecting Mortgagor,
Guarantor, any other party, or any security for all or any part of the
Guaranteed Obligations.
23. FINANCIAL COVENANTS. Guarantor hereby covenants and agrees that so
long as any of the Guaranteed Obligations remain unpaid:
(a) MINIMUM NET WORTH. Guarantor shall not permit its Net Worth to
be less than $154 million;
(b) DEBT TO NET WORTH. Guarantor shall not permit the ratio of its
Debt to Net Worth to exceed 2-1/2:1;
(c) CASH FLOW FROM OPERATIONS. Guarantor shall not permit its Net
Cash Provided By Operating Activities, as reflected in its financial statements,
whether audited or unaudited, reported from time to time with the U.S.
Securities and Exchange Commission, to be negative for any fiscal year or for
any two (2) successive calendar quarters; and
(d) MATERIAL ADVERSE CHANGE. Guarantor shall not permit a change
in its financial condition which could materially and adversely affect its
ability to satisfy any or all of the Guaranteed Obligations hereunder;
provided, however, this covenant shall not have been breached or violated
unless and until (i) within thirty (30) days after written notice by GMAC-CM
to Guarantor of a potential material adverse change, Guarantor has not provided
to GMAC-CM a reasonable written explanation regarding why such event should not
be considered a material adverse change, (ii) GMAC-CM has determined, and has
notified Guarantor, within thirty (30) days of receipt of Guarantor's
explanation, that such explanation is not satisfactory to allay GMAC-CM's
concerns regarding the material adverse change, and (iii) within sixty (60)
days of such second notice from GMAC-CM, Guarantor has not cured such adverse
event or provided alternative comfort satisfactory to GMAC-CM regarding the
same.
Breach of one or more of the foregoing covenants will not constitute an
Event of Default of Guarantor hereunder, provided Guarantor timely performs its
obligations under Section 8(b) and, when applicable, Section 8(c) above.
From and after such time, if any, as Guarantor is no longer a
corporation whose stock is publicly traded, Guarantor covenants and agrees to
promptly provide to GMAC-CM annual financial statements for Guarantor,
-17-
<PAGE> 18
audited by an independent public accounting firm reasonably acceptable to
GMAC-CM, together with such additional financial information and reports as
GMAC-CM may periodically request.
24. NOTICES. All notices, requests, consents, demands and other
communications required or which any party desires to give hereunder or under
any other Loan Document shall be in writing and, unless otherwise specifically
provided in such other Loan Document, shall be deemed sufficiently given or
furnished if delivered by personal delivery, by courier, or by registered or
certified United States mail, postage prepaid, addressed to the party to whom
directed at the addresses specified near the signature blocks of this Guaranty
(unless changed by similar notice in writing given by the particular party
whose address is to be changed) or by telegram, telex, or facsimile. Any such
notice or communication shall be deemed to have been given either at the time
of personal delivery or, in the case of courier or mail, as of the date of
first attempted delivery at the address and in the manner provided herein, or,
in the case of telegram, telex or facsimile, upon receipt, provided that,
service of a notice required by any applicable statute shall be considered
complete when the requirements of that statute are met. Notwithstanding the
foregoing, no notice of change of address shall be effective except upon actual
receipt. This section shall not be construed in any way to affect or impair any
waiver of notice or demand provided in this Guaranty or in any Loan Document or
to require giving of notice or demand to or upon any person in any situation or
for any reason.
25. CUMULATIVE RIGHTS. The exercise by GMAC-CM of any right or remedy
hereunder or under any other Loan Document, or at law or in equity, shall not
preclude the concurrent or subsequent exercise of any other right or remedy.
GMAC-CM shall have all rights, remedies and recourses afforded to GMAC-CM by
reason of this Guaranty or any other Loan Document or by law or equity or
otherwise; and the same (a) shall be cumulative and concurrent, (b) may be
pursued separately, successively or concurrently against Guarantor or others
obligated for the Guaranteed Obligations, or any part thereof, or against any
one or more of them, or against any security or otherwise, at the sole
discretion of GMAC-CM, (c) may be exercised as often as occasion therefor shall
arise, it being agreed by Guarantor that the exercise of, discontinuance of the
exercise of or failure to exercise any of such rights, remedies, or recourses
shall in no event be construed as a waiver or release thereof or of any other
right remedy, or recourse, and (d) are intended to be, and shall be,
nonexclusive. No waiver of any default on the part of Guarantor or of any
breach of any of the provisions of this Guaranty or of any other document shall
be considered a waiver of any other or subsequent default or breach, and no
delay or omission in exercising or enforcing the rights and powers granted
herein or in any other document shall be construed as a waiver of such rights
and powers, and no exercise or enforcement of any rights or powers hereunder or
under any other document shall be held to exhaust such rights and powers, and
every such right and power may be exercised from time to time. The granting of
any consent, approval or waiver by GMAC-CM shall be limited to the specific
instance and purpose therefor and shall not constitute consent or approval in
any other instance or for any other purpose. No notice to or demand on
Guarantor in any case shall of itself entitle Guarantor to any other or further
notice or demand in similar or other circumstances. No provision of this
Guaranty or any right, remedy or recourse of GMAC-CM with respect hereto, or
any default or breach, can be waived, nor can this Guaranty or Guarantor be
released or discharged in any way or to any extent, except specifically in each
case by a writing intended for that purpose (and which refers specifically to
this Guaranty) executed, and delivered to Guarantor, by GMAC-CM.
26. RIGHT OF SET-OFF. Upon the occurrence and during the continuance of
any default in the payment when due of any of the Guaranteed Obligations,
GMAC-CM is hereby authorized at any time and from time to time, to the fullest
extent permitted by applicable law, without notice to any Person (any such
notice being expressly waived by Guarantor to the fullest extent permitted by
applicable law), to set off and apply any and all deposits, funds, or assets at
any time held and other indebtedness at any time owing by GMAC-CM to or for
the credit or the account of Guarantor against any and all of the obligations
of Guarantor now or hereafter existing under this Guaranty, whether or not
GMAC-CM shall have made any demand under this Guaranty or exercised any other
right or remedy hereunder. GMAC-CM will promptly notify Guarantor after any
such set-off and application made by GMAC-CM, provided that the failure to give
such notice shall not affect the validity of such set-off and application. The
rights of GMAC-CM under this Section are in addition to the other rights and
remedies
-18-
<PAGE> 19
(including other rights of set-off) that GMAC-CM may have and every right of
setoff and lien shall continue in full force and effect until such right of
setoff or lien is specifically waived or released by an instrument in writing
executed by GMAC-CM. The foregoing rights shall not apply to any commercial
paper or publicly traded debt or securities of GMAC-CM held by Guarantor.
27. SUBROGATION. Notwithstanding anything to the contrary contained herein
but subject to the provisions of Section 6(c) hereof, (a) Guarantor shall not
have any right of subrogation in or under any of the Loan Documents or any
right, title or interest in and to any security or right of recourse for the
Indebtedness, until the Indebtedness has been fully and finally paid, and as
set forth in the Participation Agreement. Guarantor's participation in a
Mortgage Loan will be fully subordinate to GMAC-CM's interests therein, and (b)
if Guarantor is or becomes an "insider" (as defined in Section 101 of the
United States Bankruptcy Code) with respect to Mortgagor, then Guarantor hereby
irrevocably and absolutely waives any and all rights of contribution,
indemnification, reimbursement or any similar rights against Mortgagor with
respect to this Guaranty (including any right of subrogation, except to the
extent of collateral held by GMAC-CM), whether such rights arise under an
express or implied contract or by operation of law. It is the intention of the
parties that Guarantor shall not be deemed to be a "creditor" (as defined in
Section 101 of the United States Bankruptcy Code) of Mortgagor by reason of the
existence of this Guaranty in the event that Mortgagor or Guarantor becomes a
debtor in any proceeding under the United States Bankruptcy code. This waiver
is given to induce GMAC-CM to make the Loan as evidenced by the Mortgage Note
to the Mortgagor.
28. FURTHER ASSURANCES. Guarantor at Guarantor's expense will promptly
execute and deliver to GMAC-CM upon GMAC-CM's reasonable request all such other
and further documents, agreements, and instruments in compliance with or
accomplishment of the agreements of Guarantor under this Guaranty.
Notwithstanding the generality of the foregoing, Guarantor agrees to promptly
execute and deliver a written confirmation of this Guaranty at the request of
GMAC-CM from time to time, including at such times as GMAC-CM has extended,
renewed, supplemented, modified or assigned the Loan.
29. NO FIDUCIARY RELATIONSHIP. The relationship between Guarantor and
GMAC-CM is solely that of guarantor and beneficiary. GMAC-CM has no fiduciary
or other special relationship with or duty to Guarantor and none is created
hereby or may be inferred from any course of dealing or act or omission of
GMAC-CM.
30. INTERPRETATION. If this Guaranty is signed by more than one Person as
"Guarantor", then the term "Guarantor" as used in this Guaranty shall refer to
all such Persons jointly and severally, and all promises, agreements,
covenants, waivers, consents, representations, warranties and other provisions
in this Guaranty are made by and shall be binding upon each and every such
undersigned Person, jointly and severally and GMAC-CM may pursue any Guarantor
hereunder without being required (i) to pursue any other Guarantor hereunder or
(ii) pursue rights and remedies under the Mortgage and/or applicable law with
respect to the Mortgaged Property or any other Mortgage Loan Documents. The
term "GMAC-CM" shall be deemed to include any subsequent holder(s) of the
Mortgage Note. Whenever the context of any provisions hereof shall require it,
words in the singular shall include the plural, words in the plural shall
include the singular, and pronouns of any gender shall include the other
genders. Captions and headings in the Loan Documents are for convenience only
and shall not affect the construction of the Mortgage Loan Documents. All
references in this Guaranty to Schedules, Articles, Sections, Subsections,
paragraphs and subparagraphs refer to the respective subdivisions of this
Guaranty, unless such reference specifically identifies another document. The
terms "herein", "hereof", "hereto", "hereunder" and similar terms refer to this
Guaranty and not to any particular Section or subsection of this Guaranty. The
terms "include" and "including" shall be interpreted as if followed by the
words "without limitation". All references in this Guaranty to sums denominated
in dollars or with the symbol "$" refer to the lawful currency of the United
States of America, unless such reference specifically identifies another
currency. For purposes of this Guaranty, "Person" or "Persons" shall include
firms, associations, partnerships (including limited partnerships), joint
ventures, trusts, corporations, limited liability companies, and other legal
entities, including governmental bodies, agencies, or instrumentalities, as
well as natural persons.
-19-
<PAGE> 20
31. TIME OF ESSENCE. Time shall be of the essence in this Guaranty with
respect to all of Guarantor's obligations hereunder.
32. EXECUTION. This Guaranty may be executed in multiple counterparts, each
of which, for all purposes, shall be deemed an original, and all of which
together shall constitute one and the same agreement.
33. ENTIRE AGREEMENT. This Guaranty embodies the entire agreement between
GMAC-CM and Guarantor with respect to the guaranty by Guarantor of the
Guaranteed Obligations. This Guaranty supersedes all prior agreements and
understandings, if any, with respect to guaranty by Guarantor of the Guaranteed
Obligations. No condition or conditions precedent to the effectiveness of this
Guaranty exist. This Guaranty shall be effective upon execution by Guarantor
and delivery to GMAC-CM. This Guaranty may not be modified, amended or
superseded except in a writing signed by GMAC-CM and Guarantor referencing this
Guaranty by its date and specifically identifying the portions hereof that are
to be modified, amended or superseded.
34. WAIVER OF JURY TRIAL. GMAC-CM AND GUARANTOR HEREBY WAIVE TRIAL BY JURY IN
ANY ACTION OR PROCEEDING TO WHICH GUARANTOR AND GMAC-CM MAY BE PARTIES ARISING
OUT OF, IN CONNECTION WITH, OR IN ANY WAY PERTAINING TO, THIS GUARANTY. THIS
WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY GUARANTOR AND GMAC-CM,
AND GUARANTOR AND GMAC-CM HEREBY REPRESENT, EACH ON ITS RESPECTIVE BEHALF, THAT
NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO
INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS
EFFECT. GUARANTOR AND GMAC-CM FURTHER REPRESENT AND WARRANT, EACH ON ITS
RESPECTIVE BEHALF, THAT EACH HAS BEEN REPRESENTED IN THE SIGNING OF THIS
GUARANTY AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, OR HAS
HAD THE OPPORTUNITY TO BE REPRESENTED BY INDEPENDENT LEGAL COUNSEL SELECTED OF
EACH PARTY'S RESPECTIVE FREE WILL, AND THAT EACH HAS HAD THE OPPORTUNITY TO
DISCUSS THIS WAIVER WITH COUNSEL.
35. CONSENT TO JURISDICTION. GMAC and Guarantor each irrevocably submit
generally and unconditionally for itself and in respect of its property to the
nonexclusive jurisdiction of any state or federal court sitting in the
Commonwealth of Pennsylvania over any suit, action or proceeding arising out
of, or relating to, this Guaranty, and irrevocably agrees that all claims in
respect of such action or proceeding may be heard and determined in such state
or federal court. GMAC and Guarantor irrevocably waive, to the fullest extent
permitted by law, any objection that each may now or hereafter have to the
laying of venue of any such suit, action or proceeding brought in any such
court, and any claims that any such suit, action or proceeding is brought in an
inconvenient forum. Final judgment in any such suit, action or proceeding
brought in any such court shall be conclusive and binding upon GMAC and
Guarantor and may be enforced in any court in which GMAC and Guarantor are
subject to jurisdiction, by a suit upon such judgment provided that service of
process is effected upon Guarantor as permitted by applicable law.
THIS GUARANTY REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.
- 20 -
<PAGE> 21
IN WITNESS WHEREOF, Guarantor and GMAC-CM duly executed this Guaranty
under seal as of the date first written above.
Address of Guarantor DOUBLETREE CORPORATION, a Delaware corporation
410 N. 44th St. By: /s/ David L. Stivers
- --------------------------- --------------------------------------
Suite 700 Name: David L. Stivers
- --------------------------- --------------------------------
Phoenix, AZ 85008 Title: Senior Vice President
- --------------------------- --------------------------------
GMAC Commercial Mortgage GMAC-COMMERCIAL MORTGAGE CORPORATION, a
Corporation California corporation
8614 Westwood Center Drive
Suite 630
Vienna, Virginia 22182-2233
Attn: David B. Post
Fax No. (703) 749-4399 By: /s/ David B. Post
-----------------------------------------
Name: David B. Post
------------------------------------
Title: Senior Vice President
-----------------------------------
<PAGE> 1
EXHIBIT 11.1
DOUBLETREE CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands except per share data)
<TABLE>
<CAPTION>
1994 1995 1996
----------------- ----------------- -----------------
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Income $13,235 $13,235 $17,791 $17,791 $25,934 $25,934
======= ======= ======= ======= ======= =======
Weighted average shares
outstanding 19,953 19,953 21,901 21,901 25,088 25,088
Additional number of common share
equivalents assuming exercise of
options and warrants 118 123 318 480 678 911
------- ------- ------- ------- ------- -------
Weighted average common and
common equivalent shares
outstanding 20,071 20,076 22,219 22,381 25,766 25,999
------- ------- ------- ------- ------- -------
Effect of other contingent issuances
of common shares(1) -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Weighted average shares
outstanding assuming full
dilution 20,071 20,076 22,219 22,381 25,766 25,999
======= ======= ======= ======= ======= =======
Earnings per share $ 0.66 $ 0.66 $ 0.80 $ 0.79 $ 1.01 $ 1.00
======= ======= ======= ======= ======= =======
</TABLE>
(1) The Company has no outstanding securities or agreements which would result
in the issuance of common shares other than common share equivalents.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF DOUBLETREE CORPORATION
1. Samantha Hotel Corporation, a Delaware corporation
2. RFS, Inc., a Tennessee corporation
3. Doubletree Partners, a Delaware general partnership
4. Doubletree Hotels Corporation, an Arizona corporation
5. Doubletree of Phoenix, Inc., a Delaware corporation
6. INNCO Corporation, an Arizona corporation
7. HOSCO Corporation, an Arizona corporation
8. DT Management, Inc., an Arizona corporation
9. DT Real Estate, Inc., an Arizona corporation
10. Doubletree Hotel Systems, Inc., an Arizona corporation
11. Harbor Hotels Corporation, a Delaware corporation
12. DTM Burlingame, Inc., an Arizona corporation
13. Red Lion Hotels, Inc., a Delaware corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Doubletree Corporation:
We consent to incorporation by reference in the registration statement (no.
333-23619) on Form S-3 and registration statements (no. 333-18219) and (no.
33-92354) on Form S-8 of Doubletree Corporation and (no. 333-08237) of Red Lion
of our report dated March 17, 1997, relating to the consolidated balance sheets
of Doubletree Corporation and subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996, which report appears in the December 31, 1996 annual report on Form 10-K
of Doubletree Corporation.
KPMG Peat Marwick LLP
Phoenix, Arizona
March 28, 1997
<PAGE> 1
EXHIBIT 24.1
POWERS OF ATTORNEY FOR 10-K
DIRECTORS:
Fatt, William R.
Ferris, Richard J.
Frey, Dale F.
Gamey, Ronald K.
Gilhuly, Edward A.
Leventhal, Norman B.
Michelson, Michael W.
Myers, John H.
Ueberroth, Peter V.
<PAGE> 2
POWER OF ATTORNEY
William R. Fatt does hereby constitute and appoint David L. Stivers and
William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full
power of substitution, whether acting individually or together, to sign the Form
10-K Annual Report for the fiscal year ended December 31, 1996, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments
thereto, on his behalf, and to file the same, with any exhibits thereto and
other documents in connection therewith, granting to each of such
attorneys-in-fact and agents full power and authority to do and perform each and
every act requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his or her substitutes may do or cause to be done by virtue hereof.
Such Power of Attorney shall remain in effect until it is revoked in
writing by the undersigned.
/s/ William R. Fatt
---------------------------------
William R. Fatt
<PAGE> 3
POWER OF ATTORNEY
Richard J. Ferris does hereby constitute and appoint David L. Stivers and
William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full
power of substitution, whether acting individually or together, to sign the Form
10-K Annual Report for the fiscal year ended December 31, 1996, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments
thereto, on his behalf, and to file the same, with any exhibits thereto and
other documents in connection therewith, granting to each of such
attorneys-in-fact and agents full power and authority to do and perform each and
every act requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his or her substitutes may do or cause to be done by virtue hereof.
Such Power of Attorney shall remain in effect until it is revoked in
writing by the undersigned.
/s/ Richard J. Ferris
---------------------------------
Richard J. Ferris
<PAGE> 4
POWER OF ATTORNEY
Dale F. Frey does hereby constitute and appoint David L. Stivers and
William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full
power of substitution, whether acting individually or together, to sign the
Doubletree Corporation and Red Lion Inns Limited Partnership Form 10-K Annual
Reports for the fiscal year ended December 31, 1996, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 and any amendments thereto, on his
behalf, and to file the same, with any exhibits thereto and other documents in
connection therewith, granting to each of such attorneys-in-fact and agents full
power and authority to do and perform each and every act requisite and necessary
in connection with such matters and hereby ratifying and confirming all that
each of such attorneys-in-fact and agents or his or her substitutes may do or
cause to be done by virtue hereof.
Such Power of Attorney shall remain in effect until it is revoked in
writing by the undersigned.
/s/ Dale F. Frey
---------------------------
Dale F. Frey
<PAGE> 5
POWER OF ATTORNEY
Ronald K. Gamey does hereby constitute and appoint David L. Stivers and
William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full
power of substitution, whether acting individually or together, to sign the
Form 10-K Annual Report for the fiscal year ended December 31, 1996, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments
thereto, on his behalf, and to file the same, with any exhibits thereto and
other documents in connection therewith, granting to each of such
attorneys-in-fact and agents full power and authority to do and perform each and
every act requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his or her substitutes may do or cause to be done by virtue hereof.
Such Power of Attorney shall remain in effect until it is revoked in
writing by the undersigned.
/s/ Ronald K. Gamey
---------------------------
Ronald K. Gamey
<PAGE> 6
POWER OF ATTORNEY
Edward A. Gilhuly does hereby constitute and appoint David L. Stivers and
William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full
power of substitution, whether acting individually or together, to sign the Form
10-K Annual Report for the fiscal year ended December 31, 1996, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments
thereto, on his behalf, and to file the same, with any exhibits thereto and
other documents in connection therewith, granting to each of such
attorneys-in-fact and agents full power and authority to do and perform each and
every act requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his or her substitutes may do or cause to be done by virtue hereof.
Such Power of Attorney shall remain in effect until it is revoked in
writing by the undersigned.
/s/ Edward A. Gilhuly
--------------------------------
Edward A. Gilhuly
<PAGE> 7
POWER OF ATTORNEY
Norman B. Leventhal does hereby constitute and appoint David L. Stivers and
William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full
power of substitution, whether acting individually or together, to sign the
Doubletree Corporation and Red Lion Inns Limited Partnership Form 10-K Annual
Reports for the fiscal year ended December 31, 1996, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 and any amendments thereto, on his
behalf, and to file the same, with any exhibits thereto and other documents in
connection therewith, granting to each of such attorneys-in-fact and agents full
power and authority to do and perform each and every act requisite and necessary
in connection with such matters and hereby ratifying and confirming all that
each of such attorneys-in-fact and agents or his or her substitutes may do or
cause to be done by virtue hereof.
Such Power of Attorney shall remain in effect until it is revoked in
writing by the undersigned.
/s/ Norman B. Leventhal
-----------------------------------
Norman B. Leventhal
<PAGE> 8
POWER OF ATTORNEY
Michael W. Michelson does hereby constitute and appoint David L. Stivers
and William L. Perocchi, his true and lawful attorneys-in-fact and agents, with
full power of substitution, whether acting individually or together, to sign the
Form 10-K Annual Report for the fiscal year ended December 31, 1996, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments
thereto, on his behalf, and to file the same, with any exhibits thereto and
other documents in connection therewith, granting to each of such
attorneys-in-fact and agents full power and authority to do and perform each and
every act requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his or her substitutes may do or cause to be done by virtue hereof.
Such Power of Attorney shall remain in effect until it is revoked in
writing by the undersigned.
/s/ Michael W. Michelson
----------------------------------
Michael W. Michelson
<PAGE> 9
POWER OF ATTORNEY
John H. Myers does hereby constitute and appoint David L. Stivers and
William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full
power of substitution, whether acting individually or together, to sign the Form
10-K Annual Report for the fiscal year ended December 31, 1996, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments
thereto, on his behalf, and to file the same, with any exhibits thereto and
other documents in connection therewith, granting to each of such
attorneys-in-fact and agents full power and authority to do and perform each and
every act requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his or her substitutes may do or cause to be done by virtue hereof.
Such Power of Attorney shall remain in effect until it is revoked in
writing by the undersigned.
/s/ John H. Myers
----------------------------
John H. Myers
<PAGE> 10
POWER OF ATTORNEY
Peter V. Ueberroth does hereby constitute and appoint David L.
Stivers and William L. Perocchi, his true and lawful attorneys-in-fact and
agents, with full power of substitution, whether acting individually or
together, to sign the Form 10-K Annual Report for the fiscal year ended
December 31, 1996, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 and any amendments thereto, on his behalf, and to file the same,
with any exhibits thereto and other documents in connection therewith, granting
to each of such attorneys-in-fact and agents full power and authority to do and
perform each and every act requisite and necessary in connection with such
matters and hereby ratifying and confirming all that each of such
attorneys-in-fact and agents or his or her substitutes may do or cause to be
done by virtue hereof.
Such Power of Attorney shall remain in effect until it is revoked in
writing by the undersigned.
/s/ Peter V. Ueberroth
----------------------
Peter V. Ueberroth
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 25,588
<SECURITIES> 691
<RECEIVABLES> 120,759
<ALLOWANCES> (326)
<INVENTORY> 0
<CURRENT-ASSETS> 87,662
<PP&E> 643,393
<DEPRECIATION> (7,920)
<TOTAL-ASSETS> 1,730,949
<CURRENT-LIABILITIES> 148,068
<BONDS> 506,235
0
0
<COMMON> 396
<OTHER-SE> 801,134
<TOTAL-LIABILITY-AND-EQUITY> 1,730,949
<SALES> 13,756
<TOTAL-REVENUES> 310,496
<CGS> 13,042
<TOTAL-COSTS> 263,810
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 142
<INTEREST-EXPENSE> 6,648
<INCOME-PRETAX> 39,896
<INCOME-TAX> 13,962
<INCOME-CONTINUING> 25,934
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,934
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.01
</TABLE>
<PAGE> 1
EXHIBIT 99.1
AGREEMENT TO FURNISH EXHIBITS AND SCHEDULES
The Registrant hereby agrees to furnish supplementally to the Securities
and Exchange Commission, upon its request, a copy of any of the exhibits and
schedules to the Exhibits to the Form 10-K. Each of such Exhibits to the Form
10-K sets forth a brief description of each exhibit and schedule.
2
