PRELIMINARY COPY
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant[X]
Filed by a Party other than the Registrant[ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
.............................NATIONAL LODGING CORP.............................
(Name of Registrant as Specified In Its Charter)
................................................................................
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
.......................................................................
2) Aggregate number of securities to which transaction applies:
.......................................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
..........................,,...........................................
4) Proposed maximum aggregate value of transaction:
.......................................................................
5) Total fee paid:
.......................................................................
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11-(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
.......................................................................
2) Form, Schedule or Registration Statement No.:
.......................................................................
3) Filing Party:
.......................................................................
4) Date Filed:
.......................................................................
C/M: 11752.0003 336816.26
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Preliminary Material - Filed with the SEC on June __, 1996
NATIONAL LODGING CORP.
605 Third Avenue
New York, New York 10158
Notice of Annual Meeting of Stockholders
July __, 1996
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of
National Lodging Corp., formerly known as National Gaming Corp. (the
"Company"), will be held on ______, July __, 1996 at 10:00 a.m. local time at
the Rockefeller Center Club, 30 Rockefeller Center Plaza, New York, New York
(the "Meeting"), for the following purposes:
1. To approve the issuance and sale to Chartwell Leisure
Associates L.P. II and FSNL LLC of an aggregate of 4 million
shares of the Company's Common Stock at a price per share of
$14.25;
2. To approve the filing of a Certificate of Amendment to the
Company's Certificate of Incorporation which will provide
for the change of the Company's name from National Lodging
Corp. to Chartwell Leisure Inc.;
3. To elect three Class II directors for a term expiring in
1999 or until their successors are duly elected and
qualified; and
4. To transact such other business as may properly come before
the Meeting or any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on June 14,
1996, as the record date for the Meeting. Only stockholders of record at that
time are entitled to notice of, and to vote at, the Meeting and any
adjournment or postponement thereof. A list of stockholders entitled to vote
at the Meeting will be available for examination 10 days before the Meeting
during ordinary business hours at the offices of the Company.
The enclosed proxy is solicited by the Board of Directors of the
Company. Reference is made to the attached Proxy Statement for further
information with respect to the business to be transacted at the Meeting. The
Board of Directors urges you to date, sign and return the enclosed proxy
promptly. A reply envelope is enclosed for your convenience. You are cordially
invited to attend the Meeting in person. The return of the enclosed proxy will
not affect your right to vote if you attend the Meeting in person.
By Order of the Board of Directors
DOUGLAS H. VERNER
Secretary
Dated: June __, 1996
C/M: 11752.0003 336816.26
<PAGE>
NATIONAL LODGING CORP.
605 Third Avenue
New York, New York 10158
-------------------
PROXY STATEMENT
-------------------
Annual Meeting of Stockholders to
be held on ________, July __, 1996
-------------------
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of National Lodging Corp., a Delaware
corporation formerly known as National Gaming Corp. (the "Company"), to be
used at the 1996 Annual Meeting of Stockholders, and any adjournment or
postponement thereof (the "Meeting"), to be held on the date, at the time and
place, and for the purposes set forth in the foregoing notice. This Proxy
Statement, the accompanying notice and the enclosed proxy card are first being
mailed to stockholders on or about June __, 1996.
The Board of Directors does not intend to bring any matter before the
Meeting except as specifically indicated in the notice, nor does the Board of
Directors know of any matters which anyone else proposes to present for action
at the Meeting. However, if any other matters properly come before the
Meeting, the persons named in the enclosed proxy, or their duly constituted
substitutes acting at the Meeting, will be authorized to vote or otherwise act
thereon in accordance with their judgment on such matters.
Shares of the Company's Common Stock, par value $.01 per share (the
"Common Stock"), represented by proxies received by the Company, where the
stockholder has specified his or her choice with respect to the proposals
described in this Proxy Statement (including the election of directors), will
be voted in accordance with the specifications so made. In the absence of such
specifications, the shares will be voted "For" the approval of the issuance
and sale to Chartwell Leisure Associates L.P. II ("Chartwell") and FSNL LLC
("FSNL") of an aggregate of 4 million shares of the Company's Common Stock at
a price of $14.25 per share (the "Investment"); "For" the approval of the
filing of a Certificate of Amendment to the Company's Certificate of
Incorporation which will provide for the change of the Company's name from
National Lodging Corp. to Chartwell Leisure Inc. (the "Certificate of
Amendment") and will be filed only if the closing of the Investment occurs;
and "For" the election of the three nominees for the Board of Directors.
Abstentions will be counted as present in determining whether a quorum exists,
but will have the same effect as a vote against a proposal (other than with
respect to the proposal relating to the election of Directors). Shares held by
nominees that are present but not voted on a proposal because the nominees did
not have discretionary voting power and were not instructed by the beneficial
owner ("broker non-votes") will be counted as present in determining whether a
quorum exists, but will be disregarded in determining whether the proposal
relating to the Investment has been approved. The proposal relating to the
filing of a Certificate of Amendment to the Company's Certificate of
Incorporation requires the approval of the holders of a majority of the total
shares of the Company's Common Stock outstanding as of the Record Date (as
hereinafter defined). Therefore, broker non-votes will have the same effect as
a vote against that proposal.
Any proxy may be revoked at any time prior to its exercise by
notifying the Secretary in writing, by delivering a duly executed proxy
bearing a later date or by attending the Meeting and voting in person.
C/M: 11752.0003 336816.26
<PAGE>
TABLE OF CONTENTS
Page
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF........................... 3
Voting and Solicitation.......................................... 3
Vote Required.................................................... 3
Security Ownership of Certain Beneficial Owners and Management... 3
APPROVAL OF THE INVESTMENT (Proposal 1)................................... 7
Overview......................................................... 7
Risk Factors..................................................... 7
Background of and Reasons for the Proposal; Board of Directors'
Recommendation. 9
Opinion of the Company's Financial Advisor.......................14
PROJECTED FINANCIAL INFORMATION...........................................21
Use of Proceeds..................................................22
Additional Information Concerning the Purchasers.................22
Stock Purchase Agreement.........................................23
Registration Rights Agreement....................................25
Interests of Certain Persons in the Investment...................26
APPROVAL OF THE CERTIFICATE OF AMENDMENT (Proposal 2).....................28
ELECTION OF DIRECTORS (Proposal 3)........................................28
Information Regarding the Nominees and Directors.................29
Committees, Meetings; Compensation of the Board of Directors;
Vote Required for Election of Directors........................31
EXECUTIVE OFFICERS........................................................33
EXECUTIVE COMPENSATION....................................................34
Summary Compensation Table.......................................34
Option Exercises and Year-End Option Value Table.................35
Compensation Committee Report on Executive Compensation in 1995..35
Compensation Committee Interlocks and Insider Participation......36
Performance Graph................................................37
Employment Contracts and Termination, Severance and Change of
Control Arrangements37
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................38
Relationships with HFS...........................................38
Relationships with Chartwell and FSNL............................41
Relationships with Mr. Edelman...................................43
Relationships with Mr. Stone.....................................43
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.........................44
ATTENDANCE OF AUDITORS AT THE MEETING.....................................44
STOCKHOLDER PROPOSALS.....................................................44
APPRAISAL RIGHTS..........................................................45
INCORPORATION OF DOCUMENTS BY REFERENCE...................................45
C/M: 11752.0003 336816.26
<PAGE>
Page
ADDITIONAL INFORMATION................................................... 45
EXHIBIT A AMENDED AND RESTATED STOCK PURCHASE
AGREEMENT, DATED AS OF MARCH 14, 1996, AMONG
NATIONAL LODGING CORP., CHARTWELL LEISURE
ASSOCIATES L.P. II AND FSNL LLC............................A-1
EXHIBIT B FORM OF REGISTRATION RIGHTS AGREEMENT AMONG
NATIONAL LODGING CORP., CHARTWELL LEISURE
ASSOCIATES L.P. II AND FSNL LLC............................B-1
EXHIBIT C OPINION OF MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED.......................................C-1
EXHIBIT D FORM OF CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF NATIONAL
LODGING CORP...............................................D-1
ENCLOSURES: National Lodging Corp. 1995 Annual Report
National Lodging Corp. Current Report on Form 8-K/A dated
January 23, 1996
National Lodging Corp. Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996
C/M: 11752.0003 336816.26
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<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Voting and Solicitation
Only holders of record of the Company's Common Stock at the close of
business on June 14, 1996 (the "Record Date") are entitled to notice of, and
to vote at, the Meeting. On that date, the Company had outstanding 5,452,320
shares of Common Stock.
The presence, in person or by proxy, of the holders of a majority of
the issued and outstanding shares of Common Stock entitled to vote at the
Meeting will constitute a quorum. Abstentions will be counted as present in
determining whether a quorum exists, but will have the same effect as a vote
against a proposal (other than with respect to the proposal relating to the
election of Directors). Shares held by nominees that are present but not voted
on a proposal because the nominees did not have discretionary voting power and
were not instructed by the beneficial owner ("broker non-votes") will be
counted as present in determining whether a quorum exists, but will be
disregarded in determining whether the proposal relating to the Investment has
been approved. The proposal relating to the filing of the Certificate of
Amendment to the Company's Certificate of Incorporation requires the approval
of the holders of a majority of the total shares of the Company's Common Stock
outstanding as of the Record Date. Therefore, broker non-votes will have the
same effect as a vote against that proposal. On all matters voted upon at the
Meeting and any adjournment or postponement thereof, the holders of the Common
Stock vote together as a single class, with each record holder of Common Stock
entitled to one vote per share.
The accompanying form of proxy is being solicited on behalf of the
Board of Directors of the Company. The expenses of solicitation of proxies for
the Meeting will be paid by the Company. In addition to the mailing of the
proxy material, such solicitation may be made in person or by telephone by
directors, officers and employees of the Company, who will receive no
additional compensation therefor. The Company has retained Chase Mellon
Shareholder Services to assist with the solicitation at an estimated cost of
$5,000 plus reimbursement of out-of-pocket expenses. Upon request, the Company
will reimburse brokers, dealers, banks and trustees, or their nominees, for
reasonable expenses incurred by them in forwarding material to beneficial
owners of shares of Common Stock of the Company.
Vote Required
Directors shall be elected by a plurality of the votes cast in the
election of directors. Approval of the proposal relating to the Investment
requires the affirmative vote of the holders of a majority of the shares of
Common Stock present at the Meeting, in person or by proxy, and entitled to
vote. Approval of the proposal relating to the Certificate of Amendment
requires the affirmative vote of the holders of a majority of the total shares
of Common Stock outstanding as of the Record Date.
Chartwell has agreed to vote the shares of Common Stock which it owns
in favor of and against the proposal to approve the Investment in the same
proportions as votes are cast in favor of and against that proposal by
stockholders of the Company other than Chartwell, FSNL and their affiliates.
Security Ownership of Certain Beneficial Owners and Management
The information set forth in the following table is furnished as of
June 1, 1996, and as adjusted as of that date to give effect to the
Investment, with respect to any person (including any "group," as that term is
used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) who is known to the Company to be the beneficial owner
of more than 5% of any class of the Company's voting securities, and as to
those shares of the Company's equity securities beneficially owned by each of
its directors and nominees for director, certain of its executive officers,
and all of its executive officers and directors as a group. Such information
(other than with respect to directors and officers of the Company) is based on
a review of statements filed with the
C/M: 11752.0003 336816.26
3
<PAGE>
Securities and Exchange Commission (the "Commission") pursuant to Sections
13(d), 13(f), and 13(g) of the Exchange Act with respect to the Company's
Common Stock. As of June 1, 1996, there were 5,452,320 shares of Common Stock
outstanding.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Ownership Class
Before After Before After
Investment Investment Investment Investment
Name
Principal Stockholders
<S> <C> <C> <C> <C>
Chartwell Leisure Associates L.P. II (1) 904,930 4,904,930 16.60% 51.89% (2)
222 Purchase Street, Suite 303
Rye, New York 10580
FSNL LLC (3) 0 1,052,631 * 11.14%
157 Church Street, 19th Floor
New Haven, Connecticut 06510
Fir Tree Inc. d/b/a Fir Tree Partners (4) 397,100 397,100 7.28% 4.20%
1211 Avenue of the Americas, 29th Floor
New York, New York 10036
The Kaufmann Fund, Inc.(5) 602,500 602,500 11.05% 6.37%
140 East 45th Street, 43rd Floor
New York, New York 10017
Directors, Nominees and Executive Officers
Richard L. Fisher (6) 906,930 4,906,930 16.63% 51.91%
Henry R. Silverman (7) 227,732 227,732 4.01% 2.35%
Robert S. Kingsley (8) 0 0 * *
Stephen P. Holmes (9) 19,400 19,400 * *
Martin L. Edelman (10) 48,437 189,910 * 2.01%
Michael J. Kennedy (11) 5,000 5,000 * *
Robert F. Smith (12) 6,000 31,000 * *
Roger J. Stone (13) 5,000 5,000 ** *
Marc E. Leland (14) 904,930 4,904,930 16.60% 51.89%
James E. Buckman (15) 10,740 10,740 * *
Rachel Robinson 0 0 * *
Dr. Guido Goldman (16) 0 1,052,631 * 11.14%
Executive Officers and Directors 1,180,802 5,205,802 20.63% 53.40%
as a Group (15 persons) (17)
- ---------------
*less than 1%
</TABLE>
C/M: 11752.0003 336816.26
4
<PAGE>
(1) Chartwell has sole power to vote and dispose of the 904,930 shares
reflected in the table as owned by it before consummation of the
Investment and will have the sole power to vote and dispose of the
3,852,299 shares owned by it after consummation of the Investment.
Pursuant to a stockholders agreement dated as of February 14, 1996,
between Chartwell and FSNL (the "Stockholders' Agreement"), which
will become effective upon the Closing (as hereinafter defined) of
the Investment, FSNL and Chartwell have agreed to elect certain
nominees as Directors and FSNL has agreed to vote its shares of
Common Stock at all meetings of stockholders of the Company and in
any written consent in the manner directed by Chartwell. Therefore,
Chartwell and FSNL will share voting and dispositive power with
respect to the 1,052,631 shares reflected in the table as owned by
FSNL after consummation of the Investment, and the number of shares
reflected in the table as owned by Chartwell after consummation of
the Investment includes both the shares to be owned of record by
Chartwell and the shares to be owned of record by FSNL after
consummation of the Investment. See "Certain Relationships and
Related Transactions -- Relationships with Chartwell and FSNL."
Messrs. Fisher, Leland and Edelman are beneficial owners of
Chartwell.
(2) The 3,852,299 shares to be owned of record by Chartwell after
consummation of the Investment will represent approximately 40.76% of
the outstanding shares of Common Stock.
(3) Pursuant to the Stockholders' Agreement, FSNL and Chartwell will
share voting and dispositive power with respect to these shares. Dr.
Goldman is a beneficial owner of FSNL.
(4) Based upon information contained in a Schedule 13D dated November 22,
1995, filed by Fir Tree Inc., doing business as Fir Tree Partners, on
behalf of itself and the other reporting persons named therein, such
persons beneficially own 397,100 shares of Common Stock. According to
the Schedule 13D, such persons have sole voting power and dispositive
power over such shares.
(5) Based upon information contained in a Schedule 13G dated February 15,
1996, filed by The Kaufmann Fund, Inc., a registered investment
company, such entity beneficially owns 602,500 shares of Common
Stock. The Kaufmann Fund, Inc. has sole voting and dispositive power
over such shares.
(6) Includes all shares owned by Chartwell and FSNL (see note 1 above),
and 2,000 shares owned by Fisher Brothers Financial and Development
Company ("FBFDC"). Mr. Fisher is the President and one of the two
directors of Chartwell Leisure Corp. II ("Chartwell Corp."), the
general partner of Chartwell, and, accordingly, may be deemed to own
beneficially all shares owned beneficially by Chartwell. Mr. Fisher
is also a limited partner of Chartwell. FBFDC is a New York limited
partnership of which Mr. Fisher is both a general and limited
partner. Mr. Fisher disclaims beneficial ownership of the shares of
Common Stock owned by Chartwell and FBFDC other than 88,098 and
373,993 shares representing 9.70% of the shares owned of record by
Chartwell and 16% of the shares owned by FBFDC before and after the
Investment, respectively. Mr. Fisher owns, in the aggregate, a 9.70%
beneficial interest in Chartwell and a 16% interest in FBFDC.
(7) Includes 222,560 shares of Common Stock issuable upon the exercise of
options granted under the 1992 Stock Option Plan of HFS Incorporated,
the former parent of the Company ("HFS"), which options are currently
exercisable, and 5,172 shares of Common Stock in two retirement plans
whose sole beneficiary is Mr. Silverman. Mr. Silverman was granted
options to purchase 300,000 shares of Common Stock on November 22,
1994 under the Company's 1994 Stock Option Plan. Such options were
cancelled as of February 1, 1996.
(8) Mr. Kingsley was granted options to purchase 100,000 shares of Common
Stock on November 22, 1994, under the Company's 1994 Stock Option
Plan. Such options were cancelled as of February 1, 1996.
(9) Includes 19,200 shares issuable upon the exercise of options granted
under HFS's 1992 Stock Option Plan, which options are currently
exercisable or exercisable within 60 days. Mr. Holmes was granted
options to purchase 60,000 shares on November 22, 1994 under the
Company's 1994 Stock Option Plan. Such options were cancelled as of
February 1, 1996.
(10) Includes 5,000 shares issuable upon the exercise of options granted
under the Company's 1994 Stock Option Plan, which options are
currently exercisable, or exercisable within 60 days. Amounts shown
before and after the
C/M: 11752.0003 336816.26
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<PAGE>
Investment include 43,437 shares, and 184,910 shares, respectively,
representing 4.8% of the shares owned of record by Chartwell. Mr.
Edelman owns, in the aggregate, a 4.8% beneficial interest in
Chartwell.
(11) Includes 5,000 shares issuable upon the exercise of options granted
under the Company's 1994 Stock Option Plan, which options are
currently exercisable or exercisable within 60 days.
(12) Includes (a) 5,000 shares issuable upon the exercise of options
granted under the Company's 1994 Stock Option Plan, which options are
currently exercisable or exercisable within 60 days, and (b) 500
shares held in the name of the Smith Family Foundation, of which Mr.
Smith is President. Mr. Smith disclaims beneficial ownership of the
500 shares held in the name of the Smith Family Foundation. Shares
reflected in the table as owned by Mr. Smith after consummation of
the Investment include 25,000 shares issuable upon the exercise of
options granted under the Company's 1994 Stock Option Plan, which
options are not currently exercisable or exercisable with 60 days,
but will become exercisable upon consummation of the Investment. See
"Approval of the Investment -- Interests of Certain Persons in the
Investment."
(13) Represents 5,000 shares issuable upon the exercise of options granted
under the Company's 1994 Stock Option Plan, which options are
currently exercisable or exercisable within 60 days.
(14) Represents the shares of Common Stock beneficially owned by
Chartwell. Mr. Leland is the Vice President and one of the two
directors of Chartwell Corp. and, accordingly, may be deemed to own
beneficially all shares owned beneficially by Chartwell. Mr. Leland
is also a beneficial owner of Chartwell. Mr. Leland disclaims
beneficial ownership of the shares of Common Stock owned by Chartwell
other than 28,668 and 122,040 shares, representing approximately
3.17% of the shares owned of record by Chartwell before and after the
Investment, respectively. Mr. Leland owns an 8% general partnership
interest in FGT L.P. which, in turn, owns a 39.6% limited partnership
interest in Chartwell.
(15) Includes 9,240 shares issuable upon the exercise of options granted
under HFS's 1992 Stock Option Plan, which options are currently
exercisable or exercisable within 60 days. Mr. Buckman was granted
options to purchase 60,000 shares on November 22, 1994 under the
Company's 1994 Stock Option Plan. Such options were cancelled as of
February 1, 1996.
(16) Represents the shares of Common Stock held by FSNL. Dr. Goldman is a
Manager and beneficial owner of FSNL and a beneficiary of a trust
which is a member in FSNL. Dr. Goldman disclaims beneficial ownership
of the shares of Common Stock owned by FSNL.
(17) Includes 271,000 shares, in the aggregate, of Common Stock
purchasable by officers and directors pursuant to options granted
under HFS's 1992 Stock Option Plan or the Company's 1994 Stock Option
Plan, which options are currently exercisable or exercisable within
60 days, and, upon consummation of the Investment, also includes the
25,000 shares issuable upon exercise of the options described above
in footnote 12, all of which will then become exercisable.
C/M: 11752.0003 336816.26
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<PAGE>
APPROVAL OF THE INVESTMENT
(Proposal 1)
CERTAIN ASPECTS OF THIS PROPOSAL ARE SUMMARIZED BELOW. THIS SUMMARY
DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE COMPLETE TEXT OF THE AMENDED AND RESTATED STOCK PURCHASE AGREEMENT AND
THE FORM OF REGISTRATION RIGHTS AGREEMENT, ATTACHED TO THIS PROXY STATEMENT AS
EXHIBITS A AND B. STOCKHOLDERS ARE URGED TO READ THE EXHIBITS TO THIS PROXY
STATEMENT IN THEIR ENTIRETY.
Overview
The stockholders are requested at the Meeting to approve the issuance
and sale of an aggregate of 4 million shares of Common Stock (the "Shares"),
of which 2,947,369 shares will be issued and sold to Chartwell, and 1,052,631
shares will be issued and sold to FSNL (Chartwell and FSNL are each referred
to as a "Purchaser," and collectively as the "Purchasers") for an aggregate
purchase price of $57 million, or $14.25 per share (the "Investment"). The
shares sold to Chartwell and FSNL will, upon issuance, represent approximately
31.2% and 11.1%, respectively (42.3% in the aggregate) of the outstanding
shares of Common Stock. When such shares are added to the shares of Common
Stock owned by Chartwell as of the date hereof, Chartwell and FSNL together
will hold approximately 52% of the outstanding shares of Common Stock. The
Investment will be governed by the Amended and Restated Stock Purchase
Agreement, dated as of March 14, 1996 (the "Stock Purchase Agreement"), by and
among the Company and the Purchasers, and will be subject to certain
conditions, including the stockholder approval requested herein. See "Stock
Purchase Agreement."
The Investment is intended to raise funds to finance the Company's
proposed acquisition of hotels in Canada operated under the "Travelodge"
franchise (the "Canadian Acquisition") and, if the Canadian Acquisition is not
consummated, to prepay its existing bank indebtedness, to facilitate the
Company's continuing expansion into the lodging industry and for other
purposes. The Company expects to accomplish the Canadian Acquisition by paying
approximately C$94 million to purchase substantially all of CPLP's existing
bank debt and to pay certain specified closing costs (including real estate
taxes), and by assuming liability for certain trade payables and property-
specific bank debt, aggregating approximately C$10 million. Of the C$94
million payment, approximately half is expected to be financed with proceeds
from the Investment, and half is expected to be financed by borrowings under a
line of credit which the Company expects to obtain from Chemical Bank. See
"Use of Proceeds." The Investment will increase the number of shares of
outstanding Common Stock by approximately 73% and significantly dilute the
ownership interests and proportionate voting power of the existing holders of
Common Stock. See "Risk Factors."
The Company is seeking stockholder approval of the Investment
pursuant to the designation criteria for continued inclusion of the Company's
Common Stock in the National Market System of the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ"). Specifically,
the NASDAQ rules require an issuer that has securities listed on NASDAQ to
seek stockholder approval of any issuance of securities that will result in a
change of control of the issuer. As of the date hereof, Chartwell owns of
record 904,930 shares of Common Stock, representing approximately 16.6% of the
outstanding shares of Common Stock. Upon consummation of the Investment,
Chartwell and FSNL (which presently does not own shares of Common Stock)
together will hold approximately 52% of the outstanding shares of Common
Stock.
Risk Factors
While the Board of Directors recommends approval of the Investment
and is of the opinion that the Investment proposal is fair to, and in the best
interests of, the Company and its stockholders, the Company's stockholders
should consider the following possible effects in evaluating the Investment.
C/M: 11752.0003 336816.26
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<PAGE>
Control by Purchasers. Upon completion of the Investment, the
Purchasers will beneficially own, in the aggregate, 4,904,930, or
approximately 52%, of the outstanding shares of the Company's Common Stock. As
a result, the Purchasers together will have obtained the ability to control,
subject to the terms of the Stock Purchase Agreement, the election of
Directors of the Company and most corporate actions, as well as the outcome of
any issue that is submitted to the Company's stockholders, other than
amendments to the Company's bylaws, which require the affirmative vote of at
least 80% of the Company's outstanding voting stock.
No Control Premium. The Investment will result in the aggregation of
control of the Company in the Purchasers. To the extent that the purchase
price paid by the Purchasers for the Shares includes value associated with the
transfer of control of the Company, the present stockholders of the Company
will not directly receive any portion of that control premium.
Impact of Control by Purchasers on Market Price. The shares of Common
Stock are currently publicly traded. The market price of the shares of Common
Stock may be affected by the Purchasers becoming the controlling stockholders
as a result of the consummation of the Investment.
Anti-Takeover Effect. The Purchasers' majority ownership of the
Company's outstanding shares of Common Stock upon completion of the Investment
will have the effect of precluding the acquisition of the Company by a third
party without the Purchasers' consent.
Potential Conflicts of Interest. Upon completion of the Investment,
the Purchasers will beneficially own approximately 52% of the outstanding
number of shares of Common Stock and accordingly, will have control of the
Board of Directors and the businesses and affairs of the Company. Such control
will continue as long as the Purchasers own a majority of the outstanding
shares of Common Stock, and effective control could persist even at somewhat
lower ownership levels. Certain conflicts of interest may arise between the
Purchasers and their affiliates (the "Purchaser Parties") and the Company.
Such conflicts could arise with respect to business dealings between the
Purchaser Parties and the Company and other corporate matters. However,
pursuant to the Stock Purchase Agreement, the Purchasers have agreed to
certain limitations on their activities and certain limits on the exercise of
their control over the Company after the Closing. See "Certain Relationships
and Related Transactions --Relationships with Chartwell and FSNL -- Stock
Purchase Agreement."
Dilution. The Investment will increase the number of shares of
outstanding Common Stock by approximately 73% and significantly dilute the
ownership interests and proportionate voting power of the existing holders of
Common Stock. The Investment would have changed the Company's 1995 loss per
share on a pro forma basis, after giving effect to the Investment and the
Travelodge Acquisition, from ($3.57) to ($2.34) per share, and on a pro forma
basis, giving effect to the Investment, the Travelodge Acquisition and the
Canadian Acquisition, from ($3.57) to ($1.79) per share.
Loss Carryforwards. The Investment is expected to result in a change
in ownership of the Company under Section 382 of the Internal Revenue Code of
1986, as amended (the "Code") for purposes of limitations on the use of the
Company's net operating loss and capital loss carryforwards ("Loss
Carryforwards"). As of December 31, 1995, the Company had approximately $17.5
million of Loss Carryforwards for Federal income tax purposes. As a result of
the ownership change, the amount of the Company's annual taxable income which
may be offset by Loss Carryforwards generally will be limited to an amount
determined by multiplying the value of the Company (not including the
Investment) by the "long-term tax exempt rate," published monthly by the
Treasury Department. For this purpose, the value of the Company, based on the
number of shares outstanding (5,452,320) and the closing price of the
Company's common stock ($14.75) on June 5, 1996, is approximately $80.4
million and the long-term tax exempt rate, as of June 1996, is 5.78%.
Accordingly, the change in control is expected to result in a limitation on
the amount of Loss Carryforwards that may be used to offset the taxable income
of the Company, if any, in an amount equal to approximately $4.6 million per
year. The actual amount of this limitation may vary, depending upon the actual
data used in the foregoing calculations, which will be made as of the
effective date of the change
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in the Company's ownership. In addition to this limitation, if the Company
does not continue its business enterprise at all times during the two-year
period beginning on the date of the Closing, the amount of Loss Carryforwards
that may be used to offset taxable income will be, subject to certain
exceptions, reduced to zero. Although the Company anticipates that it will
satisfy this requirement, there can be no assurance that it will be able to do
so. The Loss Carryforwards that consist of capital losses will be available to
be used only to the extent that the Company recognizes capital gains.
Background of and Reasons for the Proposal; Board of Directors' Recommendation
The Company was formed in September 1994 as a wholly owned subsidiary
of HFS Incorporated, a Delaware corporation ("HFS"), for the purpose of
acquiring the assets of, and assuming the liabilities associated with, HFS's
casino development business. In November 1994, the Company became an
independent public company when HFS distributed all of the outstanding shares
of the Company's Common Stock to the stockholders of HFS (the "Distribution").
From November 1994 through the third quarter of 1995, the Company engaged
exclusively in the acquisition, development, operation and ownership of casino
gaming facilities.
At the time of the Distribution, the Company held investments in
several gaming assets and intended to expand principally by making investments
in gaming facilities, using the financing commitment agreed to by HFS at the
time of the Distribution under the Financing Agreement (as described below
under the caption "Certain Relationships and Related Transactions --
Relationships with HFS -- Financing Agreement") (the "Financing Agreement") or
other borrowings. Beginning in the spring of 1995, the Company began to
encounter difficulties in accomplishing its expansion goals.
In April 1995, the Company and Boomtown, Inc. ("Boomtown"), a Reno,
Nevada-based operator of four casinos, terminated a proposed agreement and
plan of merger and reorganization pursuant to which the Company would have
been merged into Boomtown, with stockholders of the Company receiving shares
of Boomtown common stock. In connection with this merger, HFS proposed to
purchase approximately $100 million of preferred stock of Boomtown, the
proceeds of which would have been used by Boomtown to invest in additional
gaming facilities in Nevada, Iowa and Indiana. However, the Company was
advised that holders of a substantial portion of the outstanding shares of
Boomtown common stock expressed dissatisfaction with the proposed merger and
the issuance of this preferred stock to HFS, and HFS terminated the financing.
The Boomtown stockholders indicated their intentions to vote against (i) the
proposed issuance of the preferred stock to HFS because of the financial terms
of the issuance and their belief that Boomtown did not have a demonstrated
need for the financing, particularly in light of Boomtown's failure to obtain
a gaming license in Iowa and its decision to delay a development project in
Kansas City, and (ii) the merger with the Company because of their belief that
the issuance of Boomtown shares to the Company's stockholders would result in
too much dilution to Boomtown stockholders. For the six months ended June 30,
1995, the Company expensed approximately $1.4 million of professional fees and
other expenses incurred, primarily in the first quarter of 1995, in connection
with the proposed merger.
In connection with the Distribution, the Company acquired
approximately 2% of the stock of Century Casinos, Inc. ("Century") and became
obligated to make a further $15 million equity investment in, and arrange $55
million of financing for, a joint venture with Century to develop a riverboat
casino in Switzerland County, Indiana, in exchange for a 75% interest in that
joint venture. The State of Indiana had announced its intention to grant only
one license to operate a riverboat casino in that area, and in June 1995, the
State of Indiana selected one of the joint venture's competitors to receive
that gaming license. Century had experienced similar failures to obtain gaming
licenses in other jurisdictions, and its stock price had decreased
significantly since HFS's initial investment prior to the Distribution. For
the foregoing reasons, the Company determined that its investments in Century
and the joint venture were permanently impaired, and recorded a $1.0 million
loss on those investments in the second quarter of 1995.
In June 1995, the Company's proposed acquisition of Par-a-Dice Gaming
Corp. ("Par-a-Dice") was delayed because of requirements imposed by the
Illinois Gaming Board that certain proposed financial terms between the
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Company and HFS relating to the financing of the acquisition, be restructured.
To address the concerns of the Illinois Gaming Board, the Company and HFS
agreed to modify those terms. In July 1995, the Illinois Gaming Board denied
the Company's application to complete the acquisition of Par-a-Dice,
expressing concern over the leveraged capital structure proposed to be used to
finance the acquisition. In September 1995, the Pennsylvania legislature
declined to propose a voter referendum to approve casino gaming facilities in
that state. As a result, the Company's plans to develop casino gaming
facilities in Pittsburgh and Erie, Pennsylvania were halted, and the Company
expensed $1.9 million of costs associated with the Par-a-Dice investment,
including professional fees and deferred loan costs, primarily in the second
quarter of 1995.
As a result of the Company's inability to consummate the Boomtown,
Century, Par-a-Dice and Pennsylvania casino projects, the Company had
recognized aggregate write-downs of $13.4 million through September 30, 1995.
During the first nine months of 1995, state legislation permitting casino
facilities failed to be adopted at the rate anticipated by the Company's Board
at the time of the Distribution. In addition, the Company's experiences,
particularly in Indiana and Illinois, indicated to the Company's Board that
the Company's proposals to develop casino facilities were being met with
regulatory disfavor. During October 1995, the Company's Board of Directors
concluded that the gaming industry offered limited opportunities for future
growth of the Company. In particular, the Board concluded that the Company
would face difficulty in obtaining regulatory approvals required to pursue its
strategy of making highly leveraged acquisitions of gaming facilities, which
the Company had intended to implement using the financing commitment provided
by HFS under the Financing Agreement. On November 9, 1995, the Company
announced that its Board of Directors had determined that its future endeavors
would be outside of the gaming industry, and the Company's management and
Board of Directors began to consider the various alternatives to the gaming
industry discussed below, in order to enhance stockholder value.
The Company's Board of Directors considered liquidation of the
Company, recognizing that at September 30, 1995 the Company held approximately
$43 million in cash and cash equivalents. The Company's management recommended
against liquidation to the Board, and the Board determined not to liquidate
the Company, for the following reasons. First, due to what was perceived as a
general decline in the gaming industry at that time, the Company's management
believed, and its Board of Directors concurred, that any sales of the
Company's gaming assets would have to be made at significant discounts.
Second, management anticipated that the Company would, by the end of 1996,
have substantial Loss Carryforwards which could be used to shelter the
Company's future income from taxation, but which would be lost in a
liquidation. See "Risk Factors -- Loss Carryforwards." Third, the financing
commitment provided by HFS under the Financing Agreement would facilitate the
Company's ability to obtain financing for growth of the Company's business,
but would terminate in a liquidation. Fourth, the Company was obligated under
its Corporate Services Agreement with HFS to pay HFS a minimum fee of $1.5
million annually until the year 2019. See "Certain Relationships and Related
Transactions -- Relationships with HFS." The Company's management believed
that, if the Company were liquidated, HFS would have had a claim against the
Company for payment of these amounts, which would have significantly reduced
the assets available for distribution to shareholders. Finally, liquidation of
certain assets of the Company would have required consents from various third
parties with whom the Company had casino development ventures. The Company's
ability to obtain those consents was uncertain.
In November 1995, the Company's Chief Executive Officer, Henry R.
Silverman, and its Chief Financial Officer, Stephen P. Holmes, conducted
informal discussions with investment bankers regarding a potential sale of the
Company. The Company was advised that, based on its lack of operating assets,
potential buyers of the Company would view its sale as a liquidation and,
consequently, the probable sale price that could be realized would not include
any going-concern value for the Company's business. In addition, the Company
recognized that the financing commitment provided by HFS under the Financing
Agreement would terminate upon a sale of the Company. The Company's management
also believed that, if the Company were sold, a buyer would be unwilling to
assume the Company's obligations under the Corporate Services Agreement with
HFS described above, and HFS would have had a claim against the Company for
payments under that agreement. In order to retain the value of HFS's financing
commitment, to avoid any potential claim by HFS under the Corporate Services
Agreement, and to preserve for its stockholders the Company's value as a going
concern, the Company rejected any potential sale.
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During November 1995, the Company's Board of Directors considered
whether the Company should enter into certain aspects of the real estate
business, such as the provision of real estate management and advisory
services or the acquisition of portfolios of distressed real estate
properties. The Company was subsequently unable to reach agreement with
respect to any such transaction on terms that it deemed to be acceptable.
In November 1995, the Company's management, in consultation with
members of the Company's Board of Directors, began to explore whether the
lodging industry offered an appropriate opportunity for the Company to
redirect its business. Management began to explore this strategy because it
recognized that a number of the Company's Board members were also directors of
HFS, a leading lodging industry franchisor and the former parent of the
Company, which does not itself engage in the ownership and operation of
lodging industry properties. Because of their backgrounds with HFS, these
directors perceived that the ownership and operation of hotel and motel
properties offered an attractive opportunity for investment. Additionally, the
Company's management believed that the ownership and operation of lodging
industry properties was a business permitting ease of entry, in part because
acquisitions are not subject to regulatory approval, and was a business that
the Company could enter into quickly.
Also in November 1995, HFS was approached by Forte USA, Inc., the
indirect owner of the Travelodge hotel system in the United States, concerning
the possible purchase of the entire Travelodge hotel system, including both
the Travelodge franchise system and the Travelodge properties located in the
United States. Although HFS was interested in purchasing the Travelodge
franchise system, it was not interested in acquiring the Travelodge properties
because HFS is not in the business of owning lodging properties. In an attempt
to arrange a transaction that would allow Forte USA, Inc. to sell the entire
U.S. Travelodge hotel system, HFS approached Motels of America, Inc. ("MOA")
and affiliates of Chartwell (the "Chartwell Parties") to inquire whether MOA
or the Chartwell Parties would be interested in acquiring the Travelodge hotel
and motel properties in connection with a purchase by HFS of the Travelodge
franchise system. MOA and certain of the Chartwell Parties are among the
largest franchisees of HFS in terms of numbers of franchised properties. Both
MOA and the Chartwell Parties expressed interest in engaging in such a
transaction. The Chartwell Parties were, however, aware of the Company's
interest in entering the lodging business and informed Mr. Silverman, as the
chief executive officer of both HFS and the Company, that they would also be
interested in investing in the Company as a result of its new business focus.
During late November and early December, Richard L. Fisher, in his
capacity as the President of Chartwell Leisure Corp. II, the general partner
of Chartwell ("Chartwell Corp."), and Martin L. Edelman, in his capacity as a
stockholder of Chartwell Corp., held discussions with Henry R. Silverman, in
his capacity as the Chief Executive Officer of the Company, concerning the
possibility of a significant investment by the Chartwell Parties in the
Company's equity securities, debt securities, or both. The Company believed
that an investment by Chartwell would allow the Company access to the lodging
industry expertise and potential access to the capital resources of the
Chartwell Parties, although the Chartwell Parties are not obligated to make
any further investments in the Company. Chartwell has informed the Company
that as of January 1, 1996 the Chartwell Parties owned controlling interests
in and operated 67 hotels, and held mortgages on 55 other hotels. See
"Additional Information Concerning the Purchasers." In addition, the Board of
Directors believed that Chartwell's investment would significantly strengthen
the Company's liquidity, increase the Company's borrowing capacity and further
facilitate the Company's entry into the lodging business.
On December 15, 1995, the Company's Board approved management's
recommendation that the Company enter the lodging industry, and approved the
acquisition from Forte USA, Inc. of all of the outstanding shares of common
stock of Forte Hotels Inc. ("Forte Hotels"), the principal assets of which
consisted of fee and leasehold interests in 18 hotel and motel properties and
joint venture interests in 97 additional motels (the "Travelodge
Acquisition"). Also on December 15, 1995, the Board approved the sale to
Chartwell of 904,930 newly issued shares of the Company's Common Stock,
representing approximately 16.6% of the Company's Common Stock outstanding
after giving effect to the issuance, for a total purchase price of $8,483,719,
or $9.375 per share (the "Initial Chartwell Investment"). The purchase price
was equal to the closing price of the Company's Common Stock
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on December 15, 1995, and was arrived at through arms' length negotiations
between the Company and Chartwell. In connection with the Initial Chartwell
Investment, Mr. Fisher and Marc E. Leland, one of the directors of Chartwell
Corp., were elected to the Company's Board of Directors and Mr. Fisher was
elected Chairman of its executive committee. There was no agreement at that
time concerning any further investment by Chartwell in the Company. On
December 20, 1995, the Company closed the Initial Chartwell Investment and
announced its agreement to enter into the Travelodge acquisition.
In its decision to cause the Company to enter the lodging industry
and to consummate the Travelodge Acquisition, the Company's Board considered
that both decisions would benefit HFS to the extent that the Company's hotel
and motel properties became franchisees of HFS, and that the Board members and
officers of the Company who were also directors and officers of HFS may have
had a conflict of interest in recommending this change in the Company's
business direction. See "Certain Relationships and Related Transactions --
Relationships with HFS." However, because of this potential benefit to HFS and
its general familiarity with the lodging business, HFS agreed to expand the
purposes for which the Company could utilize the financing commitment provided
by HFS under the Financing Agreement from gaming acquisitions to lodging
industry acquisitions.
The Company completed the Travelodge Acquisition on January 23, 1996,
paying approximately $98 million, net of working capital adjustments and
including expenses. The acquired properties are located throughout the United
States, and substantially all of the hotels and motels operate under the names
"Travelodge" or "Thriftlodge." The Company financed $60 million of the
purchase price with proceeds from the Company's credit facility with Chemical
Bank and Bankers Trust Company (the "Bankers Trust Facility") and $38 million
with existing cash. The Company also paid approximately $2 million as an
advisory fee to HFS, the Company's former parent, for advisory services
rendered to the Company by HFS in connection with the transaction. See
"Certain Relationships and Related Transactions -- Relationships with HFS --
Travelodge Acquisition." Immediately prior to the Company's purchase of the
outstanding shares of common stock of Forte Hotels, MOA purchased directly
from Forte Hotels 19 Travelodge properties for approximately $32 million.
Concurrently with the Company's purchase of all of the outstanding
shares of common stock of Forte Hotels, HFS acquired for approximately $39
million from Forte Hotels and Forte USA, Inc., the indirect parent of Forte
USA, Inc., the "Travelodge" and "Thriftlodge" franchise systems and the
related trademarks and tradenames in North America, which HFS has licensed to
the Company under separately negotiated franchise agreements. These franchise
agreements have scheduled terms of 20 years, but may be terminated by the
Company prior to their scheduled expiration upon the payment of liquidated
damages by the Company. See "Certain Relationships and Related Transactions --
Relationships with HFS -- Travelodge Acquisition."
Following the Initial Chartwell Investment, in early January 1996,
the Company and Chartwell, together with FSNL, held discussions concerning the
possibility of a further investment by Chartwell and FSNL in the Company. The
Company's management determined that it would be prudent to raise additional
capital through the issuance of additional shares of Common Stock to
Chartwell, its largest shareholder at that time, and FSNL in order to further
facilitate the Company's expansion into the lodging industry. In particular,
the Company was considering the acquisition of certain additional hotel
properties and interests operating under the "Travelodge" franchise in Canada,
and the investment by Chartwell and FSNL would generate proceeds that,
together with other proposed financing, would enable the Company to consummate
that acquisition. Chartwell and FSNL expressed interest in acquiring
additional shares of the Company's Common Stock such that, together with the
shares acquired by Chartwell in the Initial Chartwell Investment, Chartwell
and FSNL together would own at least a majority of the outstanding shares of
the Company's Common Stock. The Board recognized that the acquisition of a
majority of the Company's Common Stock by Chartwell and FSNL would constitute
a change in control of the Company, and considered the interests of the
Company's minority stockholders. See "Risk Factors." The Board believed that
the acquisition of control by Chartwell and FSNL would be in the best
interests of the Company and its stockholders because of Chartwell's expertise
in the lodging industry as well as the financial strength of the owners of
Chartwell and FSNL. On January 24, 1996, the Company announced an agreement in
principle with Chartwell and FSNL to make the Investment, and on March 12,
1996, the Company announced that it had reached an agreement in
C/M: 11752.0003 336816.26
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principle to acquire a controlling interest in 20 hotels and a controlling
interest in a 50% joint venture interest in an additional hotel, all of which
are located in Canada and operate under the "Travelodge" franchise (the
"Canadian Acquisition"). The closing of the Canadian Acquisition is subject to
approval of the limited partners in CPLP, among other conditions.
In early January 1996, Mr. Silverman and Mr. Holmes, on behalf of the
Company, and Mr. Fisher and Mr. Edelman, on behalf of the Chartwell, conducted
initial negotiations regarding the purchase price per share to be paid by
Chartwell in the Investment. Messrs. Fisher and Edelman, on behalf of
Chartwell, initially proposed to pay $13.00 per share. After arms' length
negotiations between the parties, and after the Company's consultation with
its financial advisor, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), the parties agreed to the $14.25 purchase price per share.
While Merrill Lynch neither made any recommendations nor expressed any opinion
to the Company at such time regarding the proposed price to be received by the
Company in the Investment, Merrill Lynch subsequently delivered its written
opinion to the Board of Directors to the effect that the proposed Investment
is fair to the Company and its stockholders (other than the Purchasers) from a
financial point of view.
See "Opinion of the Company's Financial Advisor."
In addition to the Initial Chartwell Investment and the Investment,
the Company, HFS, Chartwell, FSNL and certain of their affiliates have certain
relationships and have engaged in transactions with one another, including the
following: HFS is a party to certain agreements with the Company pursuant to
which HFS receives various fees, including a $1.14 million fee if the closing
of the Investment occurs; HFS and an affiliate of Chartwell have various
interests in a family entertainment center located in Vicksburg, Mississippi;
an affiliate of Chartwell is a major franchisee of HFS; and the Company leases
its principal executive offices from an affiliate of Chartwell and an
unaffiliated third party. See "Additional Information Concerning the
Purchasers," "Interests of Certain Persons in the Investment" and "Certain
Relationships and Related Transactions."
The Board of Directors has reviewed and considered the terms and
conditions of the Investment, and voted to approve the Investment and
recommends that stockholders vote in favor of the Investment. Messrs. Edelman,
Leland and Fisher did not participate in the discussions of the Board of
Directors concerning the Investment or in that vote, and Mr. Kennedy abstained
from voting. In recommending stockholder approval of the Investment, the Board
of Directors considered a number of factors, including:
(a) the terms of the Stock Purchase Agreement, including:
(i) the fact that the Investment is conditioned upon its approval by
the Company's stockholders at the Meeting; (ii) Chartwell's agreement
to vote its shares of Common Stock in favor of and against the
Investment (and certain other asset sales, mergers, liquidations and
similar events) in the same proportions as votes are cast in favor of
and against the Investment (and such other transactions) by
stockholders of the Company other than Chartwell, FSNL and their
affiliates; (iii) the agreement by Chartwell to elect and maintain a
specified number of Independent Directors (as defined below under the
caption "Stock Purchase Agreement -- Independent Directors") on the
Company's Board of Directors; (iv) the fact that transfers of the
Company's securities by Chartwell or FSNL are subject to the
restrictions set forth therein; (v) the agreement by Chartwell and
FSNL not to cause the Company to enter into transactions with
affiliates that are not on arms' length terms and, in certain
circumstances, for which the Company has not received a favorable
fairness opinion; (vi) the fact that Chartwell, FSNL and their
affiliates are precluded from acquiring more than 55% of the Common
Stock of the Company outstanding at any time unless they offer to
acquire such stock from existing holders and the purchase is approved
by an Independent Board Committee (as defined below under the caption
"Stock Purchase Agreement -- Affiliate Transactions") that has
received a fairness opinion relating to the acquisition; (vii) the
agreement by Chartwell and FSNL not to compete with the Company in
the acquisition of certain hotel properties; and (viii) the Company's
ability to disclose information to third parties and terminate the
Stock Purchase Agreement if the Investment is not approved by its
stockholders, in each case without penalty (for a more detailed
description of the foregoing terms, see the discussion below under
the caption "Stock Purchase Agreement");
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(b) the fact that the $14.25 purchase price per share in the
Investment represented approximately a 25% premium over the market
price per share of the Company's Common Stock, based upon the average
closing stock prices during the 30-day period preceding the Company's
announcement of the Investment, and approximately a 34% premium over
the price per share at the close of business on the day before the
announcement;
(c) the positive effect on the market price of the Company's
Common Stock of the Company's announcement of its agreement in
principle with Chartwell and FSNL to make the Investment, despite the
dilutive effect of the Investment, the limitations that will result
on the Company's use of its Loss Carryforwards, and any potentially
adverse impact on the Company's stockholders resulting from the
acquisition by Chartwell and FSNL of a controlling interest in the
Company (see "Risk Factors");
(d) the fact that the Investment will increase stockholders
equity in the Company of $86.5 million as of December 31, 1995 by
approximately $57 million, or approximately 65.9%, facilitating the
Company's abilities to raise capital in the future and to continue to
pursue its new business strategy of engaging in further significant
acquisitions and investments, such as the Canadian Acquisition, and
making capital expenditures for the development and improvement of
acquired properties;
(e) the opinion of Merrill Lynch dated as of February 12,
1996, to the effect that the Investment is fair to the Company and
its stockholders (other than the Purchasers) from a financial point
of view (see "Opinion of the Company's Financial Advisor");
(f) the Board's familiarity with the expertise of
Chartwell's management in owning and operating hotels, based upon the
experiences of certain of the Company's directors, in their
capacities as directors of HFS, with various Chartwell Parties, in
their capacity as one of HFS's largest hotel franchisees,
notwithstanding the interests of certain officers, directors and
principals of the Company, HFS and Chartwell in the Investment (see
"Interests of Certain Persons in the Investment" and "Certain
Relationships and Related Transactions");
(g) the ability of Chartwell and FSNL to make a sizeable
cash investment in the Company that is not conditioned on the ability
of Chartwell or FSNL to borrow the funds to make that investment, and
the interest of Chartwell and FSNL in a strategic alliance with the
Company for the purpose of investing in lodging industry ventures;
and
(h) the fact that the change of control resulting from the
Investment would have entitled certain present and former officers
and directors of the Company to accelerated vesting of their stock
options, together with the fact that all of those officers and
directors (except Mr. Smith, who is expected to resign from the Board
at the time of the Closing, and whose options will be subject to
accelerated vesting) have agreed either to relinquish their options
or to waive their acceleration rights.
Based upon its consideration of all of the foregoing factors, the
Company's Board of Directors has determined that the Investment is consistent
with, and in furtherance of, the Company's long-term business strategy to
continue its expansion in the lodging industry, and that the Investment is
fair to, and in the best interests of, the Company's stockholders.
Opinion of the Company's Financial Advisor
On February 12, 1996, Merrill Lynch delivered its written opinion
(the "Merrill Lynch Opinion") to the Board of Directors to the effect that, as
of such date, and based upon the assumptions made, matters considered and
limits of review, as set forth in such opinion, the proposed Investment is
fair to the Company and its stockholders (other than the Purchasers) from a
financial point of view.
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A copy of the Merrill Lynch Opinion, which sets forth the assumptions
made, matters considered and certain limitations on the scope of review
undertaken by Merrill Lynch, is attached as Exhibit C to this Proxy Statement.
Company stockholders are urged to read such opinion in its entirety. The
Merrill Lynch Opinion is directed only to the fairness of the proposed
Investment to the Company and its stockholders (other than the Purchasers)
from a financial point of view and does not constitute a recommendation to any
Company stockholder as to how such stockholder should vote at the Meeting. The
summary of the Merrill Lynch Opinion set forth in this Proxy Statement is
qualified in its entirety by reference to the full text of the Merrill Lynch
Opinion attached as Exhibit C hereto.
In arriving at the Merrill Lynch Opinion, Merrill Lynch, among other
things, (i) reviewed the Company's Annual Report, Form 10-K and related
financial information for the fiscal year ended December 31, 1994, and the
Company's Forms 10-Q and the related unaudited financial information for the
quarterly periods ending March 31, 1995, June 30, 1995 and September 30, 1995;
(ii) reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets and prospects of the Company,
furnished to Merrill Lynch by the Company; (iii) conducted discussions with
members of senior management of the Company concerning its business and
prospects, including senior management's belief that proceeds received by the
Company from the proposed Investment can be productively employed by the
Company; (iv) conducted discussions with members of senior management of
Chartwell concerning its business, results of operations, strategic objectives
and possible opportunities in the hospitality industry that might be realized
by the Company following the proposed Investment; (v) with respect to the
Company's acquisition of all of the outstanding shares of common stock of
Forte Hotels, reviewed certain information, including financial statements and
financial forecasts furnished to Merrill Lynch by the Company, relating to the
business, earnings, cash flow, assets, acquisition and prospects of Forte
Hotels and conducted discussions with members of the senior management of
Forte Hotels concerning its business and prospects; (vi) reviewed the
historical market prices and trading activity for the Company's Common Stock
and compared them with those of certain publicly traded companies which
Merrill Lynch deemed to be reasonably similar to the Company; (vii) compared
the results of operations (as adjusted for the acquisition of Forte Hotels) of
the Company with those of certain companies which Merrill Lynch deemed to be
reasonably similar to the Company; (viii) compared the proposed financial
terms of the transactions contemplated by the Stock Purchase Agreement with
the financial terms of certain other transactions which Merrill Lynch deemed
to be relevant; (ix) reviewed the documents related to, and financial data set
forth in, Merrill Lynch's opinion letter to the Board of Directors dated
January 11, 1996 relating to the Travelodge Acquisition; (x) reviewed a draft
of the Stock Purchase Agreement, dated February 9, 1996, furnished to Merrill
Lynch by the Company; and (xi) reviewed such other financial studies and
analyses and performed such other investigations and took into account such
other matters as Merrill Lynch deemed necessary, including an assessment of
general economic, market and monetary conditions.
In preparing the Merrill Lynch Opinion, Merrill Lynch relied on the
accuracy and completeness of all information supplied or otherwise made
available to it by the Purchasers and the Company, and did not independently
verify such information or undertake an independent appraisal of the assets of
the Company. Merrill Lynch also assumed that the financial forecasts furnished
to it by the Company were reasonably prepared and reflected the best currently
available estimates and judgment of the Company's management as to the
expected future financial performance of the Company. The Merrill Lynch
Opinion is based upon general economic, market, financial and other conditions
as they existed and could be evaluated as of February 12, 1996.
In connection with the preparation of the Merrill Lynch Opinion,
Merrill Lynch was not authorized by the Company or its Board of Directors to
solicit, nor did it solicit, third-party indications of interest for the
acquisition of all or any part of the Company or any alternative financing
arrangements to the arrangements contemplated by the Stock Purchase Agreement.
In addition, the Board of Directors did not request that Merrill Lynch express
an opinion, and Merrill Lynch expressed no opinion, as to the Company's
decision to raise capital at this time.
The following is a summary of the material financial and comparative
analyses performed by Merrill Lynch in arriving at the Merrill Lynch Opinion.
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Stock Trading History. Merrill Lynch reviewed the performance of the
per share market price and trading volume of the Company's Common Stock from
November 28, 1994 (the date the Company was spun-off from HFS) until February
9, 1996 (the last trading day before Merrill Lynch's presentation to the
Company's Board of Directors). Merrill Lynch noted that the purchase price of
$14.25 per share pursuant to the Investment represented a 21% premium over the
$11.75 closing price per share of the Company's Common Stock on February 9,
1996, a 34% premium over the $10.63 closing price per share of the Company's
Common Stock on January 23, 1996 (the last trading day before the announcement
by the Company of its decision to pursue the Investment), and a 25% premium
over the $11.40 average closing price per share of the Company's Common Stock
for the 30-day period immediately prior to the announcement by the Company of
its decision to pursue the Investment.
Discounted Cash Flow Analysis. Merrill Lynch performed a discounted
cash flow analysis ("DCF") of the Company on a stand-alone basis without
giving effect to the Investment using the Company's management projections for
the years 1996-2000. The DCF was calculated assuming discount rates ranging
from 10% to 13%, and was comprised of the sum of the present value of (i) the
projected unlevered free cash flows for the years 1996- 2000, and (ii) the
year 2000 terminal values based upon a range of multiples from approximately
8.5x to 10.5x projected year 2000 earnings before interest, taxes,
depreciation and amortization ("EBITDA") less normalized expenditures for
furniture, fixtures and equipment ("FF&E") for the Company excluding the joint
venture properties, and a range of multiples from approximately 5.5x to 7.5x
projected year 2000 EBITDA less FF&E for the joint venture properties. For the
purposes of such analysis, a thirty percent (30%) discount was applied to the
valuation of the joint venture properties to reflect the Company's lack of a
control position in the majority of the joint ventures (the "JV Minority
Discount"). After subtracting from the results net debt, adding the estimated
present value of the Company's net operating loss carryforwards ("NOLs"), and
adding the face value of certain notes receivable from joint ventures,
franchisees, and other miscellaneous sources, the estimated present value of
non-operating assets and the estimated present value of loans to the
Pittsburgh Urban Redevelopment Authority and the Rainbow Casino Corporation
(collectively, the "Receivables and Other Assets"), Merrill Lynch arrived at
estimated ranges of value for the equity of the Company. The NOL value was
estimated by calculating the present value of the projected annual tax shields
related to the utilization of the NOL assuming a tax rate of 38.5% and
discount rates ranging from 12% to 15%. The value of the non-operating assets
was estimated assuming a liquidation value of $4.9 million in the year 2000
and discount rates ranging from 14% to 17%. At a 15% discount rate, such
non-operating assets were valued at $2.4 million. The value of the loan to the
Pittsburgh Urban Redevelopment Authority was estimated at $9.0 million
assuming an 8% discount rate and the value of the loan to the Rainbow Casino
Corporation was estimated at $5.5 million assuming a discount rate of 15%. The
face value of the notes receivable was $6.0 million. Utilizing this
methodology, the implied value of the Company's Common Stock was estimated at
between approximately $11.00 and $15.50 per share.
Publicly Traded Comparable Company Analysis. Using publicly available
information, Merrill Lynch compared certain financial and operating
information for the Company with the corresponding financial and operating
information for a group of publicly traded companies that Merrill Lynch deemed
to be similar in certain respects to the Company. The companies included in
the comparable company analysis (the "Comparable Companies") were Host
Marriott Corporation, John Q. Hammons Hotels, Inc. ("JQH"), La Quinta Inns,
Inc., Prime Hospitality Corporation, Red Lion Hotels, Inc., Servico, Inc. and
Studio Plus Hotels, Inc.
Merrill Lynch derived implied equity values of the Company's Common
Stock on a stand-alone basis without giving effect to the Investment by
selecting certain multiples from the Comparable Companies, including multiples
of firm value (defined as the equity value plus net debt) to research
analysts' 1996 estimated EBITDA and equity value to research analysts' 1996
estimated net income, and applied such multiples to the Company's projected
1996 EBITDA and net income, respectively. The relevant multiples for EBITDA
ranged from approximately 7.5x to 8.0x and for net income ranged from
approximately 12.0x to 16.5x. For purposes of such analysis, a JV Minority
Discount of thirty percent (30%) was applied and an adjustment of $4.0 million
was made for projected deferred capital expenditures. Multiples were adjusted
to reflect the short term nature of the ground leases for the Company's
properties relative to those of the Comparable Companies. After subtracting
from the results derived
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under the EBITDA approach the net debt, and in both the EBITDA and net income
approaches adding the estimated value of the Receivables and Other Assets
determined as described above, Merrill Lynch arrived at estimated ranges of
value for the equity of the Company. Utilizing this methodology, the implied
value of the Company's Common Stock was estimated at between approximately
$12.50 and $17.50 per share. However, the high end of this value range was
calculated based on the Company's projected 1996 net income, which reflected
no income tax expense as a result of the NOL. When the Company's projected
1996 net income was calculated to reflect an effective tax rate of 38.5%, and
the value of the NOL was calculated separately on a present value basis, the
implied value of the Company's Common Stock was estimated at between
approximately $13.50 and $14.00 per share. In this approach, JQH, which
currently has a low effective tax rate, was excluded from the group of
comparable companies.
Comparable Acquisition Transaction Analysis. Using publicly available
information, Merrill Lynch compared certain financial information for the
Company with corresponding financial information from six selected
transactions announced since 1989 involving the acquisition of or investment
in lodging companies (the "Acquisition Comparables"). The Acquisition
Comparables and the dates the transactions were announced were as follows: an
investor group's acquisition of Westin Hotel Co. (November 1994); Kingdom
Investments Inc.'s investment in Four Seasons Hotels Inc. (September 1994);
Morgan Stanley & Co.'s acquisition of Red Roof Inns Inc. (November 1993); HFS
Incorporated's acquisition of Super 8 Motels, Inc. (February 1993); HFS
Incorporated's acquisition of the franchise system of Days Inns of America
(May 1991); and Bass plc's acquisition of Holiday Inns Inc. (August 1989).
Merrill Lynch derived an implied value of the Company's Common Stock on a
stand-alone basis without giving effect to the Investment by selecting the
multiples of transaction value (defined as the aggregate consideration offered
for the equity plus liquidation value of preferred stock plus minority
interests and net debt) to trailing 12 month EBITDA from the Acquisition
Comparables and applying such multiples to the Company's 1995 EBITDA. The
relevant multiples for EBITDA ranged from approximately 6.5x to 8.5x. For
purposes of such analysis, a JV Minority Discount of thirty percent (30%) was
applied. For the purpose of such analysis, no adjustment was made for deferred
capital expenditures, as such methodology was based on trailing results which
did not reflect the expected benefits of such capital expenditures. Multiples
were adjusted to reflect the short term nature of the ground leases for the
Company's properties relative to those of the acquired lodging companies
comprising the Acquisition Comparables.
After subtracting from the results net debt and adding the estimated
value of the Receivables and Other Assets determined as described above,
Merrill Lynch arrived at estimated ranges of value for the equity of the
Company. Utilizing this methodology, the implied value of the Company's Common
Stock was estimated at between approximately $7.00 and $12.00 per share.
Pro Forma Accretion/Dilution Analysis. Merrill Lynch analyzed certain
pro forma effects resulting from the Investment, including the potential
accretive or dilutive impact to earnings per share of the Company's Common
Stock. Using projected forecasts for the years 1996 through 2000 provided by
the management of the Company, Merrill Lynch compared the projected earnings
per share of the Company's Common Stock on a stand-alone basis (assuming the
Investment does not occur) to the earnings per share of the Company's Common
Stock assuming that the Investment occurred January 1, 1996 and the Company
invested the proceeds at an assumed annual return on equity of 15%. Two other
scenarios were analyzed in which it was assumed that the Investment occurred
January 1, 1996 but the Company did not invest the proceeds and on January 1,
1997, (i) the Company uses the proceeds to repay its outstanding indebtedness
as at January 1, 1997, or (ii) the Company uses the proceeds to repurchase
outstanding Common Stock as at January 1, 1997 at an assumed price of $11.75
per share (the closing price per share of the Company's Common Stock on
February 9, 1996). Because of the impact of the Company's NOL on after-tax
earnings, the potential accretive or dilutive impact to earnings per share of
the Company's Common Stock was analyzed on both a pre-tax and an after-tax
basis.
Assuming that the Company invested proceeds from the Investment and
obtained a 15% annual return on equity, this analysis indicated that (i) on a
pre-tax basis, the Investment would be accretive to the projected earnings
C/M: 11752.0003 336816.26
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per share of the Company in the amounts of approximately 32% in 1996, 14% in
1997, 9% in 1998, 8% in 1999 and 7% in 2000, and (ii) on an after-tax basis,
the Investment would be dilutive to the projected earnings per share of the
Company in the amounts of approximately 5% in 1996 and 19% in 1997 and would
be accretive thereafter in the amounts of 10% in 1998, 23% in 1999 and 9% in
2000. Assuming that the proceeds from the Investment were used to repay the
Company's indebtedness as at January 1, 1997, this analysis indicated that the
Investment would be dilutive to the projected earnings per share of the
Company (i) on a pre-tax basis in the amounts of approximately 18% in 1996,
22% in 1997, 25% in 1998, 25% in 1999 and 25% in 2000, and (ii) on an
after-tax basis in the amounts of approximately 35% in 1996, 41% in 1997, 20%
in 1998, 11% in 1999 and 24% in 2000. Assuming that the proceeds from the
Investment were used to repurchase outstanding Common Stock of the Company as
at January 1, 1997 at an assumed price of $11.75 per share (which was the
closing price per share of the Company's Common Stock on February 9, 1996),
this analysis indicated that (i) on a pre-tax basis, the Investment would be
dilutive to the projected earnings per share of the Company in the amount of
approximately 18% in 1996 and would be accretive thereafter in the amounts of
approximately 15% in 1997, 14% in 1998, 15% in 1999 and 16% in 2000, and (ii)
on an after-tax basis, the Investment would be dilutive to the projected
earnings per share of the Company in the amounts of approximately 35% in 1996
and 8% in 1997 and would be accretive thereafter in the amounts of
approximately 28% in 1998, 44% in 1999 and 19% in 2000.
Merrill Lynch also performed a "necessary break-even" analysis to
estimate the annual return on equity that would be required from the proceeds
of the Investment in order that the Investment be neither accretive nor
dilutive to the pre-tax and after-tax earnings per share of the Company's
Common Stock projected by management. This analysis indicated that the return
on equity needed to "break even" after the Investment on a pre-tax basis would
be 8.6% in 1996, 11.4% in 1997, 12.4% in 1998, 12.5% in 1999 and 12.7% in
2000, and the return on equity needed to "break even" after the Investment on
an after-tax basis would be 16.5% in 1996, 23.4% in 1997, 11.7% in 1998, 8.3%
in 1999 and 12.4% in 2000.
The matters considered by Merrill Lynch in arriving at the Merrill
Lynch Opinion are based on numerous macroeconomic, operating and financial
assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
the Company, and involve the application of complex methodologies and educated
judgment. Any estimates incorporated in the analyses performed by Merrill
Lynch are not necessarily indicative of actual past or future results or
values, which may be significantly more or less favorable than such estimates.
Estimated values do not purport to be appraisals and do not necessarily
reflect the prices at which businesses or companies may be sold in the future,
and such estimates are inherently subject to uncertainty. The Merrill Lynch
Opinion does not present a discussion of the relative merits of the Investment
as compared to any other business plan or opportunity that might be presented
to the Company, or the effect of any other arrangement in which the Company
might engage.
The summary set forth above does not purport to be a complete
description of the analyses performed by Merrill Lynch in arriving at the
Merrill Lynch Opinion. The preparation of a fairness opinion is a complex
process not necessarily susceptible to partial or summary description. Merrill
Lynch believes that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it,
without considering all such factors and analyses, could create a misleading
view of the process underlying its analyses set forth in the Merrill Lynch
Opinion. No public company utilized as a comparison is identical to the
Company, and none of the acquisition comparables or other acquisitions
utilized as a comparison is identical to the Investment. Accordingly, an
analysis of publicly traded comparable companies and acquisition comparables
is not mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
comparable companies and other factors that could affect the public trading
value of the comparable companies or company to which they are being compared.
The Board of Directors selected Merrill Lynch to render a fairness
opinion because Merrill Lynch is an internationally recognized investment
banking firm with substantial expertise in the lodging industry and in
transactions similar to the proposed Investment and because it is familiar
with the Company and its business. Merrill Lynch has from time to time
rendered investment banking, financial advisory and other services to the
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Company (including without limitation financial advisory services in
connection with the Travelodge Acquisition) for which it has received
customary compensation. Merrill Lynch has also provided, and continues to
provide, financial advisory and financing services to HFS, from which the
Company was spun off in 1994, and has received fees for the rendering of such
services. As part of its investment banking business, Merrill Lynch is
continually engaged in the valuation of businesses and their securities.
Pursuant to the terms of an engagement letter dated January 21, 1996,
the Company has agreed to pay Merrill Lynch a fee of $400,000 for Merrill
Lynch's services in rendering the Merrill Lynch Opinion. The Company has also
agreed to reimburse Merrill Lynch for its reasonable out-of-pocket expenses
and to indemnify Merrill Lynch and certain related persons against certain
liabilities in connection with its engagement, including certain liabilities
under the federal securities laws.
In the ordinary course of Merrill Lynch's business, Merrill Lynch may
actively trade the securities of the Company for its own account and for the
account of its customers and, accordingly, may at any time hold a long or
short position in such securities.
Certain Projected Financial Information. The following projections
were prepared by the Company's management in January 1996, and were furnished
to Merrill Lynch in connection with Merrill Lynch's analysis of the proposed
Investment and the preparation of a fairness opinion to the Company's Board of
Directors as to whether or not the proposed Investment is fair to the Company
and its stockholders from a financial point of view. Only members of the
Company's management and Board of Directors at that time, excluding persons
affiliated with either of the Purchasers, and Merrill Lynch received the
projections; they were not made available to either of the Purchasers or any
members of the Company's management or Board of Directors affiliated with
either of the Purchasers. The Company's management believed that the
projections were prepared on a reasonable basis and reflected its best
estimates and judgment as to the Company's expected future performance in
light of the information available to it and its understanding of the
Company's business strategies and practices at the time the projections were
prepared. In voting to approve, and recommend shareholder approval of, the
Investment, the Company's Board of Directors relied on the judgment of the
Company's former management as to the reasonableness of the projections. In
preparing the Merrill Lynch Opinion, Merrill Lynch assumed that the financial
forecasts furnished to it by the Company were reasonably prepared and
reflected the best currently available estimates and judgment of the Company's
management as to the expected future financial performance of the Company.
Merrill Lynch relied on the accuracy and completeness of all information
supplied or otherwise made available to it, including but not limited to the
projections, and did not independently verify such information. The Company is
not aware of any forecasts of the Company's future performance prepared by
financial analysts.
These projections were prepared in January 1996, based upon a number
of estimates and assumptions made by the Company's management at that time.
All of the members of the Company's current senior management assumed their
positions during the first quarter of 1996, subsequent to the preparation of
the projections. See "Executive Officers." The Company's current management
was, accordingly, not involved in the preparation, analysis or evaluation of
the projections or any of the assumptions or estimates upon which the
projections were based and is not utilizing them as a measure of performance
in the management of the Company's business. Such estimates are inherently
subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond the Company's control, and upon
assumptions with respect to future business strategies and practices that are
subject to change. The projections and actual results will vary, and those
variations may be material. BASED UPON THE COMPANY'S PERFORMANCE SINCE JANUARY
1996, THE COMPANY'S CURRENT MANAGEMENT BELIEVES THAT THE PROJECTIONS WILL NOT
BE REALIZED DURING 1996, AND EXPRESSES NO OPINION AS TO THE ACCURACY OR
VALIDITY OF THE PROJECTIONS IN SUBSEQUENT YEARS OR THE ASSUMPTIONS UPON WHICH
THEY WERE BASED.
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The following material assumptions were used by the Company's former
management in preparing the projections:
1. Room revenue per average room growth rates of approximately
8% in 1996, 11% in 1997 and 3% annually thereafter for hotel
properties which are wholly-owned by the Company;
2. Room revenue per average room growth rates of approximately
3% annually during the five-year projected period for hotel
properties owned by joint ventures;
3. No change in the number of rooms during the five-year
projected period;
4. No change in food, beverage and other revenue as a
percentage of room revenue during the five- year projected
period;
5. Annual growth rate in retail arcade revenue of approximately
3%;
6. Net operating expenses, expressed as a percentage of total
revenue, of 90% in 1996, 89% in 1997, 90% in 1998 and 1999,
and 91% in 2000;
7. Net operating expenses, expressed as a percentage of total
revenue for joint venture hotel properties, of 79% in 1996
and 1997 and 78% thereafter;
8. Interest expense and related costs based on the terms of the
Bankers Trust Facility, and assuming the use of
substantially all excess cash flow to repay that
indebtedness;
9. The income tax provision was calculated based on statutory
income tax rates, less utilization of income tax loss
carryforwards;
10. Capital expenditures for hotel properties which are
wholly-owned by the Company of approximately $8.6 million in
1996, and between $1 and $3 million annually thereafter; and
11. Capital expenditures for joint venture hotel properties of
between approximately $4 million and $5 million annually
during the five-year projected period.
12. With respect to the Company's gaming business: (i) all
principal and interest amounts due to the Company under the
loans to the Pittsburgh Urban Redevelopment Authority and
the Rainbow Casino Corporation will be paid in full when
due; and (ii) no revenue will be received and no expenses
will be payable with respect to any of the Company's other
gaming investments.
The projections were not prepared with a view to public disclosure or
compliance with guidelines established by the Commission or the American
Institute of Certified Public Accountants. The Company did not engage any
independent auditors or accountants to examine, compile or otherwise become
involved with the preparation of the projections.
The projections are included in this Proxy Statement solely because
they were provided to Merrill Lynch in connection with the preparation of the
Merrill Lynch Opinion, and the projections should not be relied upon for any
purpose other than to assist in an understanding of the analysis on which that
opinion was based. The inclusion of the projections herein should not be
regarded as a representation by the Company or any other person that the
projections will be achieved. The Company does not intend to update or
otherwise revise the projections to reflect circumstances existing after the
date when made or to reflect the occurrence of future events, even in the
event that any or all of projections are shown to be inaccurate.
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Investors are cautioned not to place any reliance on the projections in making
investment decisions with respect to the Company's securities.
PROJECTED FINANCIAL INFORMATION
Projected Fiscal Year Ended December 31,
------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Total Revenues $61.0 $67.3 $69.6 $71.6 $73.6
EBITDA (1) 8.8 10.5 10.9 11.1 11.2
Joint Venture Income 5.6 5.9 6.2 6.4 6.6
Net Income 6.5 8.9 7.0 6.5 6.8
Earnings Per Share (2) $1.20 $1.63 $1.28 $1.19 $1.24
(1) Projected earnings before interest, taxes, depreciation and amortization.
(2) Based on 5.452 million shares outstanding.
The inclusion of the Company's projected EBITDA in the foregoing
table should not be construed as an alternative to net income or any other
measure of performance under generally accepted accounting principles as an
indicator of the Company's performance, or to cash flows generated by
operating, investing and financing activities as an indicator of cash flows or
a measure of liquidity. The Company's former management believed that
projected EBITDA was a measure of projected operating income before deducting
depreciation and amortization that was frequently used in valuing business
and, accordingly, included projected EBITDA in the projections delivered to
Merrill Lynch.
As indicated above, the Company's current management believes that
the projections will not be realized during 1996, and expresses no opinion as
to the accuracy or validity of the projections in subsequent years or the
assumptions upon which they were based. Among the important factors that the
Company believes are likely to cause the projections to differ materially from
the actual results are: (i) the consummation of the Canadian Acquisition,
which is contingent upon approval by the limited partners of CPLP, among other
conditions, and which was not anticipated at the time the projections were
prepared; and (ii) the consummation of the Mexican Joint Venture (as defined
below under the caption "Certain Relationships and Related Transactions --
Relationships with HFS -- Proposed Mexican Joint Venture"), which was not
anticipated at the time the projections were prepared. In addition, the
Company believes that the following events would be likely to cause the
projections to differ materially from the actual results, if such events were
to occur: (iii) unexpected or adverse changes that could have a material
adverse effect on the Company and the lodging industry generally, especially
the historically cyclical nature of the hotel industry and a renewed cyclical
downturn in the hotel industry resulting from, among other things,
over-building and sluggish national economic conditions; (iv) adverse changes
in the reputation or popularity of the brands under which the Company's hotels
are franchised; and (v) adverse effects on the Company's ability to carry out
its current business strategy of expansion through the acquisition and
development of additional hotel properties, which depends upon such factors as
the selection and availability of suitable locations at acceptable prices and
the suitability of local construction costs; the hiring and training of
sufficiently skilled management and personnel; the availability of financing;
risks that investments will fail to perform in accordance with expectations;
general investment risks associated with new real estate investments; and
lower occupancy and room rates generally associated with newly opened hotels;
risks that properties will not achieve anticipated occupancy levels or sustain
expected room rate levels and commencement risks such as receipt of zoning,
occupancy and other required governmental permits and authorizations, which in
each case could adversely affect the Company's financial performance. IN
ASSESSING THE PROJECTIONS, READERS ARE URGED TO READ CAREFULLY ALL OF THE
FOREGOING CAUTIONARY STATEMENTS.
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INVESTORS ARE CAUTIONED NOT TO PLACE ANY RELIANCE ON THE PROJECTIONS IN MAKING
INVESTMENT DECISIONS WITH RESPECT TO THE COMPANY'S SECURITIES.
Use of Proceeds
The Investment will generate $57 million of gross proceeds. The
Company expects to use the net proceeds of the Investment, together with
additional borrowings, to make the Canadian Acquisition. If the Canadian
Acquisition is not consummated, the Company expects to use the net proceeds of
the Investment to prepay its indebtedness under the Bankers Trust Facility, to
pursue additional acquisitions and investments in the lodging industry and for
working capital and general corporate purposes. The Company's indebtedness
under the Bankers Trust Facility was incurred on January 23, 1996 in
connection with the Travelodge Acquisition, matures in 2002 and, with respect
to revolving loans, bears interest at variable rates depending upon whether
the revolving loan is a Base Rate Loan or a Eurodollar Loan (as such terms are
defined in the Bankers Trust Facility). With respect to each Base Rate Loan,
the annual interest rate is equal to the highest of (A) 0.5% plus the Adjusted
Certificate of Deposit Rate, (B) 0.5% plus the Federal Funds Rate, or (C) the
Prime Lending Rate of Bankers Trust Company. With respect to Eurodollar Loans,
the annual interest rate is equal to the Applicable Margin (which is within a
range of 0.4% to 0.75% based on outstanding indebtedness) plus the Eurodollar
Rate. The Company cannot at this time determine the portion of the balance of
such net proceeds that will be used for each such purpose. The Company is
currently negotiating to obtain a line of credit from Chemical Bank which it
expects to use, in part, to refinance its indebtedness under the Bankers Trust
Facility. The Company expects to close that refinancing in connection with the
closing of the Canadian Acquisition.
Additional Information Concerning the Purchasers
Chartwell is a Delaware limited partnership that was formed on
December 13, 1995, and has not engaged in any business since its creation
other than that incident to its organization and its investment in the
Company. The general partner of Chartwell is Chartwell Corp., a Delaware
corporation, formed for the purpose of acting as the general partner of
Chartwell. The limited partners of Chartwell are Larry Fisher, M. Anthony
Fisher, Richard L. Fisher, Arnold Fisher, Emily Landau, Kenneth Fisher, Steven
Fisher and Zachary Fisher (collectively, the "Fisher Partners"), FGT, L.P. and
Martin L. Edelman. The stockholders of Chartwell Corp. are the Fisher
Partners, Martin L. Edelman and Gordon P. Getty. Messrs. Fisher and Edelman
own, directly and through Chartwell Corp., beneficial interests equal to 9.7%
and 4.8%, respectively, in Chartwell. FGT, L.P. is a Delaware limited
partnership of which Mr. Leland is a general partner. Mr. Leland owns,
indirectly through FGT, L.P., a 3.17% beneficial interest in Chartwell. See
"Interests of Certain Persons in the Investment" and "Certain Relationships
and Related Transactions -- Relationships with Chartwell and FSNL."
FSNL is a Connecticut limited liability company that was formed on
January 18, 1996 and has not engaged in any business since its creation other
than that incident to its organization and its proposed investment in the
Company. The Ruby Trust, a trust formed under the laws of Connecticut (the
"Ruby Trust"), owns a majority of the membership interests in FSNL; its
principal beneficiary is Charles de Gunzburg. See "Interests of Certain
Persons in the Investment" and "Certain Relationships and Related Transactions
- -- Relationships with Chartwell and FSNL."
Chartwell has informed the Company that it obtained the funds used to
acquire the 904,930 shares of Common Stock which it acquired in the Initial
Chartwell Investment from capital contributions by its partners. Chartwell and
FSNL have informed the Company that they expect to obtain the funds to be used
to purchase the Shares from capital contributions by their respective partners
and members.
Chartwell, FSNL, the Company, HFS and certain of their affiliates
have certain relationships and have engaged in transactions with one another.
HFS and an affiliate of Chartwell have various interests in a family
entertainment center located in Vicksburg, Mississippi, and an affiliate of
Chartwell is a major franchisee of HFS. The Company leases its principal
executive offices from an affiliate of Chartwell and an unaffiliated third
party.
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HFS is a party to certain agreements with the Company pursuant to which HFS
receives various fees, including a $1.14 million fee if the closing of the
Investment occurs. See "Certain Relationships and Related Transactions."
Stock Purchase Agreement
The Investment is proposed to be made pursuant to an Amended and
Restated Stock Purchase Agreement, dated as of March 14, 1996, among the
Company, Chartwell and FSNL (the "Stock Purchase Agreement") and a related
registration rights agreement (the "Registration Rights Agreement") to be
entered into among the Company, Chartwell and FSNL at the time of the closing
of the Investment (the "Closing"). Pursuant to the Stock Purchase Agreement,
the Company has agreed to issue and sell the Shares to the Purchasers at a
price per share equal to $14.25. Accordingly, the aggregate gross proceeds of
the sale will be $57 million. Of the 4,000,000 Shares proposed to be issued,
Chartwell will acquire 2,947,369 Shares for an aggregate purchase price of
$42,000,008 and FSNL will acquire 1,052,631 Shares for an aggregate purchase
price of $14,999,992. The Shares are of the same class of common stock as the
outstanding Common Stock and are not entitled to any preemptive rights.
The obligations of the Company and the Purchasers to close the
Investment are subject to the satisfaction or waiver of certain conditions,
including: (i) the approval of the Investment by the Company's stockholders at
the Meeting; (ii) the listing of the Shares on NASDAQ; and (iii) the
resignations of all of the members of the Company's Board of Directors other
than Messrs. Edelman, Fisher, Holmes, Kennedy, Leland, Silverman and Stone.
Chartwell has agreed to vote at the Meeting the shares of Common Stock which
it owns in favor of and against the proposal to approve the Investment in the
same proportions as votes are cast at the Meeting in favor of and against that
proposal by stockholders of the Company other than Chartwell, FSNL and their
affiliates.
The Company or either of the Purchasers may terminate the Stock
Purchase Agreement if the Closing does not occur prior to September 30, 1996,
unless the Closing has not occurred as a result of (i) the failure of the
party seeking to terminate to fulfill any of its obligations under the Stock
Purchase Agreement, or (ii) if the party seeking to terminate is Chartwell,
from the actions of Messrs. Fisher, Leland or Edelman, as Chartwell's nominees
on the Company's Board of Directors, whether such actions are taken in their
respective capacities as directors or as officers of the Company.
The Stock Purchase Agreement does not contain any provision that
would prevent the Company from disclosing any information to third parties,
including any information relating to the Company. In addition, in the event
that the Investment is not approved by the Company's stockholders, the Company
will have no continuing obligations under the Stock Purchase Agreement and the
Company may terminate the Stock Purchase Agreement at any time.
Pursuant to the Stock Purchase Agreement, the Purchasers have agreed
to certain restrictions on their activities after the Closing, as described
below. These restrictions will only become applicable if the Closing of the
Investment occurs. Chartwell is currently subject to different restrictions on
its ability to transfer the 904,930 shares of Common Stock which it acquired
in the Initial Chartwell Investment. See "Certain Relationships and Related
Transactions -- Relationships with Chartwell and FSNL."
Independent Directors. Each of the Purchasers has agreed to vote its
shares of Common Stock (including the Shares) and to use its best efforts to
elect and maintain as independent directors on the Company's Board of
Directors at least two individuals who are not employees, officers, directors
or affiliates of the Purchasers, do not have any beneficial ownership interest
in the Purchasers or any of their affiliates (other than the Company) and are
otherwise disinterested directors ("Independent Directors"). If as a result of
any sale or other transfer of shares of Common Stock by the Purchasers, the
aggregate number of shares of Common Stock held by the Purchasers is reduced
below 35% of the total number of shares of Common Stock then outstanding, the
Purchasers are required to cause a sufficient number of their representatives
on the Company's Board of Directors to resign so that the percentage of
directorships held by Independent Directors after that event is equal to the
percentage of shares of
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Common Stock owned by stockholders other than the Purchasers (the "Required
Percentage"); and the Purchasers are required to cause any of their remaining
representatives on the Board of Directors to vote in favor of filling the
resulting vacancies with Independent Directors. Thereafter, the Purchasers are
required to vote their shares of Common Stock to cause the percentage of
Independent Directors to be no less than the Required Percentage.
Restrictions on Transfers of the Shares. Each of the Purchasers has
agreed that none of the Shares will be sold, pledged or otherwise transferred,
directly or indirectly, by it except (A) in connection with a merger or
consolidation of the Company in which all holders of Common Stock receive the
same consideration and which is (i) approved by a majority of the Independent
Directors, and (ii) is subject to the voting requirements described below
under the caption "Voting On Mergers, Liquidations and Sales of Assets"; (B)
after three years from the Closing, in a bona fide underwritten public
offering pursuant to an effective registration under the Securities Act of
1933, as amended (the "Securities Act"); (C) in a sale, pledge or other
transfer (a "Transfer") by either Chartwell or FSNL after three years from the
Closing, if after giving effect to that Transfer the aggregate number of
shares of Common Stock held by the Purchaser Parties is equal to or greater
than 35% of the total number of shares of Common Stock then outstanding and
that Transfer is approved by a majority of the Independent Directors; (D) in a
Transfer by FSNL of any of the shares it acquires as part of the Investment
after six years from the Closing, if after giving effect to that Transfer the
aggregate number of shares of Common Stock held by the Purchaser Parties is
equal to or greater than 35% of the total number of shares of Common Stock
then outstanding, and that Transfer is made in a transaction satisfying the
manner of sale requirements for a "brokers' transaction" under Rule 144 under
the Securities Act, whether or not that sale is made pursuant to Rule 144 (a
"Brokers' Transaction"); (E) in a Transfer by FSNL of any of the shares it
acquires as part of the Investment after six years from the Closing at a time
when the aggregate number of shares of Common Stock held by the Purchaser
Parties is already less than 35% of the total number of shares of Common Stock
then outstanding, if that Transfer is approved by a majority of the
Independent Directors and is made in a Brokers' Transaction; (F) in a Transfer
by Chartwell after six years from the Closing at a time when Chartwell owns
less than 5% of the total number of shares of Common Stock then outstanding
and has no representatives serving on the Board of Directors of the Company,
if that Transfer is made in a Brokers' Transaction; and (G) sales or other
transfers between the Purchasers.
Affiliate Transactions. The Purchasers have agreed that, for so long
as the Purchaser Parties continue to own, in the aggregate, at least 20% of
the outstanding shares of Common Stock of the Company, the Purchasers will
not, and will not permit any Purchaser Party to, enter into any transaction or
series of related transactions, or grant or consent to, or otherwise permit,
any amendment to, supplement of or waiver under, any agreement or contract,
with the Company or any of its subsidiaries (any of the foregoing, an
"Affiliate Transaction") unless: (i) it has been determined by a committee of
the Company's Board of Directors comprised of one or more Independent
Directors (the "Independent Board Committee") that the Affiliate Transaction
is in the best interests of the Company and is on fair and reasonable terms,
no less favorable to the Company than terms that the Company and a
non-affiliated person in a similar situation would agree to in an arm's length
transaction; and (ii) if the Affiliate Transaction has a total value in excess
of $10,000, the Independent Board Committee has received a favorable fairness
opinion from an appropriate, independent party relating to the transaction.
These arrangements do not, however, limit the reasonable compensation the
Company may pay to its officers and directors, or restrict the existing
arrangement between the Company and Chartwell relating to the family
entertainment center located in Vicksburg, Mississippi, which predated the
Stock Purchase Agreement. See "Certain Relationships and Related Transactions
- -- Relationships with Chartwell and FSNL -- Vicksburg Facility."
Voting on Mergers, Liquidations and Sales of Assets. The Purchasers
have agreed that, if at any time within three years after the Closing, the
Company proposes to sell all or substantially all of its assets, to merge or
consolidate with any other entity, or to cause the liquidation or dissolution
of the Company (each, a "Triggering Event"), and the Company submits the
Triggering Event to a vote of its stockholders, then each of the Purchasers
will vote all of its respective shares of Common Stock entitled to vote on
that matter in favor of and against the Triggering Event in the same
proportion as the numbers of shares of Common Stock held by stockholders of
the Company other than the Purchasers and their affiliates ("Nonaffiliated
Shares") voted in favor of and against the
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Triggering Event bear to the total number of Nonaffiliated Shares voted on
such Triggering Event. If any party commences a proxy contest or tender offer
relating to the Triggering Event in any manner, however, these voting
requirements will not apply, and each of the Purchasers will be entitled to
vote all of its shares of Common Stock in favor of or against the Triggering
Event, in its sole discretion.
Purchasers' Purchase of Additional Shares. The Purchasers have agreed
that no Purchaser Party will purchase or otherwise acquire any additional
shares of Common Stock or any securities exercisable for or convertible into
Common Stock (other than options granted under a stock option plan of the
Company having customary terms and constituting reasonable compensation
("Excluded Stock Options") and shares of Common Stock issued on the exercise
of Excluded Stock Options) (the "Acquired Stock"), from any person or entity
(other than the Company or any other Purchaser Party) if the Acquired Stock
would, when aggregated with all of the other shares of Common Stock owned by
all Purchaser Parties (other than shares acquired, or subject to issuance, on
the exercise of Excluded Stock Options), and assuming the exercise or
conversion of the Acquired Stock into Common Stock, if applicable, result in
the ownership by all Purchaser Parties of shares of Common Stock representing
in excess of 55% of the then-outstanding shares of Common Stock of the Company
on a fully-diluted basis, assuming the exercise or conversion of all other
outstanding securities of the Company exercisable for or convertible into
Common Stock, unless: (i) the Purchaser Party offers to purchase the Acquired
Stock from all of the holders thereof in compliance with all applicable
securities and other laws, rules and regulations, (ii) the purchase is
approved by the Independent Board Committee, and (iii) the Independent Board
Committee has received a favorable fairness opinion from an appropriate,
independent party relating to the purchase. The Purchasers have also agreed
that no Purchaser Party will purchase or otherwise acquire any Acquired Stock
from the Company, unless: (i) the purchase is approved by the Independent
Board Committee, and (ii) the Independent Board Committee has received a
favorable fairness opinion from an appropriate, independent party with respect
to the purchase.
Restriction on Other Hotel Properties. The Purchasers have agreed
that, for so long as the Purchaser Parties continue to own, in the aggregate,
at least 20% of the outstanding shares of Common Stock of the Company or have
any representatives serving on the Company's Board of Directors, no Purchaser
Party shall acquire any interest in an existing hotel property or properties
(including by foreclosure on any mortgage acquired on or after January 1,
1996), or any interest in a hotel property or properties that are under
development or in any property which the Purchaser Party intends to develop as
a hotel property. These restrictions will not apply to acquisitions by any of
the Purchaser Parties of hotels under development by affiliates of Chartwell
on the date of the Stock Purchase Agreement, redevelopment of hotels owned by
affiliates of Chartwell on January 1, 1996, or acquisitions of hotels on which
affiliates of Chartwell had liens on January 1, 1996.
Registration Rights Agreement
Chartwell and the Company are currently parties to a registration
rights agreement entered into in connection with the Initial Chartwell
Investment. See "Certain Relationships and Related Transactions
- --Relationships With Chartwell and FSNL." If the Closing occurs, that
registration rights agreement will terminate and the Company and the
Purchasers will enter into the Registration Rights Agreement. Pursuant to the
Registration Rights Agreement, each Purchaser (or its assignee) (the
"Initiating Holder") will have the right at any time to make a written request
for registration (a "Demand Registration Statement") under the Securities Act,
for the resale by such Holder of all or part of such Holder's Registrable
Securities (defined below). Chartwell or its assignees will have the right to
request two Demand Registration Statements and FSNL or its assignees will have
the right to request one Demand Registration Statement, provided, however,
that neither Chartwell nor any of its assignees will have the right to request
a Demand Registration Statement with respect to less than 5% of the number of
shares of Common Stock outstanding at the time of the request. For purposes of
the Registration Rights Agreement, the term "Registrable Securities" means (i)
the Shares and the 904,930 shares purchased by Chartwell in the Initial
Chartwell Investment, and (ii) any other securities issued in exchange for,
upon conversion of, as a dividend on or otherwise in respect of any such
securities, and the term "Holder" means each Purchaser and any assignee of a
Purchaser who becomes a party to the Registration Rights Agreement. The
Company will pay all registration expenses in
C/M: 11752.0003 336816.26
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connection with a Demand Registration Statement, whether or not it becomes
effective. However, if a Demand Registration Statement could have become
effective but does not become effective as a result of any act or omission on
the part of one or more Holders, such Holders will be required to pay such
registration expenses. After the receipt of a request for a Demand
Registration Statement, the Company must give written notice of the request to
all other Holders of Registrable Securities and use its best efforts to
register for resale the Registrable Securities of the Initiating Holder and
any other Holder that provides the Company with a written request for
inclusion in such registration. The Company may postpone for a reasonable time
not to exceed 120 days the filing or effectiveness of any Demand Registration
Statement if the Board of Directors determines in good faith that the filing
of the Demand Registration Statement would be detrimental to the Company.
In addition, if the Company proposes to register any of its
securities for its own account or the account of any of its stockholders
(other than certain registrations including a registration relating solely to
an employee benefit plan and certain exchanges of securities with
stockholders), the Holders have the right (the "Incidental Registration
Right"), upon a timely request, to have the resale of their Registrable
Securities covered by the registration. If, in either a Demand Registration
Statement or a registration statement filed in connection with the exercise of
an Incidental Registration Right, the shares of Common Stock to be registered
are to be distributed by means of an underwritten offering, the underwriter
may limit the number of shares of Common Stock to be registered if in its
judgment marketing factors require such a cutback.
Interests of Certain Persons in the Investment
Certain of the Company's current directors and nominees for director
may be deemed to have an interest in the Investment. As a condition to the
Closing of the Investment, all of the Company's current directors other than
Messrs. Edelman, Fisher, Holmes, Kennedy, Leland, Silverman and Stone are
required to resign. Thereafter, the remaining members of the Board of
Directors are expected, subject to their fiduciary duties, to fill the
vacancies on the Board with Dr. Goldman and Rachel Robinson. Messrs. Fisher,
Edelman and Leland are all direct or indirect partners in Chartwell, and
Messrs. Fisher and Edelman are stockholders in Chartwell Corp. and have
interests in the Investment by virtue of their respective interests in
Chartwell. Dr. Goldman is a Manager of FSNL, a trustee of the Ruby Trust and a
beneficiary of a trust which is a member in FSNL. Accordingly, Dr. Goldman has
an interest in the Investment by virtue of his interest in FSNL. HFS will
receive an advisory fee of $1.14 million upon the closing of the Investment.
Upon consummation of the Investment, options to purchase 10,000 shares of the
Company's Common Stock at a purchase price of $16.75 per share and 15,000
shares at $9.875 per share, granted under the Company's 1994 Stock Option
Plan, all of which are held by Mr. Smith, will immediately vest pursuant to
the terms of the Plan. In addition, there are numerous relationships among the
Chartwell Parties, HFS and the Company. See "Certain Relationships and Related
Transactions" for a description of those relationships.
Mr. Fisher's business address is 299 Park Avenue, New York, New York
10171. For information concerning the number of shares of the Company's Common
Stock beneficially owned by Mr. Fisher, see "Voting Securities and Principal
Holders Thereof -- Security Ownership of Certain Beneficial Owners and
Management." Mr. Fisher has not sold any shares of the Company's Common Stock
within the past two years.
Mr. Edelman's business address is 75 East 55th Street, New York, New
York 10022. For information concerning the number of shares of the Company's
Common Stock beneficially owned by Mr. Edelman, see "Voting Securities and
Principal Holders Thereof -- Security Ownership of Certain Beneficial Owners
and Management." Mr. Edelman has not sold any shares of the Company's Common
Stock within the past two years. The Company currently retains and has in the
past retained Battle Fowler LLP, a law firm in which Mr. Edelman is of
counsel, for legal work. The Company expects to continue to utilize that firm
after the Closing. See "Certain Relationships and Related Transactions --
Relationships with Mr. Edelman."
Mr. Leland's business address is Suite 1700, 1001 19th Street North,
Arlington, Virginia 22209. For information concerning the number of shares of
the Company's Common Stock beneficially owned by Mr. Leland,
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see "Voting Securities and Principal Holders Thereof -- Security Ownership of
Certain Beneficial Owners and Management." Mr. Leland has not sold any shares
of the Company's Common Stock within the past two years.
Dr. Goldman's business address is c/o First Spring Corporation, 499
Park Avenue, 26th Floor, New York, New York 10022. For information concerning
the number of shares of the Company's Common Stock beneficially owned by Dr.
Goldman, see "Voting Securities and Principal Holders Thereof -- Security
Ownership of Certain Beneficial Owners and Management." Dr. Goldman has not
sold any shares of the Company's Common Stock within the past two years.
Ms. Robinson's business address is c/o Jackie Robinson Foundation, 3
West 35th Street, New York, New York 10001. For information concerning the
number of shares of the Company's Common Stock beneficially owned by Ms.
Robinson, see "Voting Securities and Principal Holders Thereof -- Security
Ownership of Certain Beneficial Owners and Management." Ms. Robinson has not
sold any shares of the Company's Common Stock within the past two years.
The Board of Directors was aware of these interests and considered
them, among other factors, in approving the Investment and making its
recommendation to stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR APPROVAL OF THE INVESTMENT.
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APPROVAL OF THE CERTIFICATE OF AMENDMENT
(Proposal 2)
The stockholders are requested at the Meeting to approve the
Certificate of Amendment, substantially in the form attached to this Proxy
Statement as Exhibit D. The Certificate of Amendment provides for the change
of the Company's name from National Lodging Corp. to Chartwell Leisure Inc.
The purpose of the proposed change of the Company's name is to provide the
Company with a more distinctive name so as to afford the Company greater name
recognition in the lodging industry. The proposed name change will require the
Company to make various filings and take other administrative actions to
reflect that change, none of which are expected to result in material expense
to the Company.
The Certificate of Amendment will be filed with the Secretary of
State of the State of Delaware only after the Closing of the Investment.
Therefore, unless Proposal 1 receives the minimum required number of votes in
favor of approval and the Closing occurs, this Proposal 2 will not be effected
or implemented.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE FOR APPROVAL OF THE
CERTIFICATE OF AMENDMENT
ELECTION OF DIRECTORS
(Proposal 3)
The Board of Directors has nominated Messrs. Holmes, Buckman and
Kennedy as the three candidates to be elected at the Meeting for a three-year
term ending in 1999.
Each nominee has consented to being named in the Proxy Statement and
to serve if elected. If prior to the Meeting any nominee should become
unavailable to serve, the shares of Common Stock represented by a properly
executed and returned proxy will be voted for such additional person as shall
be designated by the Board of Directors, unless the Board should determine to
reduce the number of directors pursuant to the Certificate of Incorporation of
the Company (the "Charter") and the Company's Bylaws (the "Bylaws").
At the time of the Initial Chartwell Investment, Messrs. Fisher and
Leland, as nominees of Chartwell, were appointed as Directors. See "Approval
of the Investment -- Background of and Reasons for the Proposal; Board of
Directors' Recommendations" and "Certain Relationships and Related
Transactions -- Relationships With Chartwell and FSNL -- Initial Stock
Purchase Agreement." In connection with the Company's announcement of its
agreement in principle relating to the Investment, Mr. Kingsley resigned as a
Director of the Company. Messrs. Buckman and Smith are expected to resign at
the time of the Closing. The Directors expect, subject to the exercise of
their fiduciary duty, that (i) Ms. Robinson will be appointed as a Class II
Director with a term ending in 1999 to fill the vacancy on the Board of
Directors resulting from Mr. Buckman's resignation, and (ii) Dr. Goldman will
be appointed as a Class I Director with a term ending in 1998 to fill the
vacancy on the Board of Directors resulting from Mr. Smith's resignation.
Certain information regarding each nominee and each director
continuing in office is set forth below, including such individual's age as of
May 1, 1996 and principal occupation, a brief description of his or her
business experience during the last five years and other directorships
currently held.
C/M: 11752.0003 336816.26
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Information Regarding the Nominees and Directors
Nominees for Election for a Term Expiring in 1999
James E. Buckman
Stephen P. Holmes
Michael J. Kennedy
Mr. Buckman, age 51, has been a Director of the Company since
November 22, 1994. Mr. Buckman is expected to resign at the time of the
Closing. He has been Executive Vice President, General Counsel and Assistant
Secretary of HFS since February 1992, a director of HFS since June 1994 and
was Executive Vice President, General Counsel and Secretary of the Company
from November 1994 until January 1996. Mr. Buckman was a partner with
Troutman, Sanders, Lockersman & Ashmore, an Atlanta, Georgia law firm, from
January 1990 to February 1992. He was Executive Vice President and General
Counsel of Buckhead America Corporation ("Buckhead"), the former owner of the
Days Inns hotel franchise system, from April 1985 to November 1989. Mr.
Buckman was an officer of Buckhead within two years of the time Buckhead filed
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Buckhead,
which was formerly known as Days Inns of America, Inc., is not affiliated with
or otherwise related to the Company.
Mr. Holmes, age 39, has been a Director of the Company since
September 1994. He has been Executive Vice President and Chief Financial
Officer of HFS since July 1990, a Director of HFS since June 1994 and was
Executive Vice President, Chief Financial Officer and Treasurer of the Company
from November 1994 until February 1996. Mr. Holmes is also currently a
director of AMRE, Inc., a home remodeling and improvement company. He was
employed by The Blackstone Group ("Blackstone"), a New York investment banking
firm, from February 1990 through September 1991 as a Vice President and a
Managing Director.
Mr. Kennedy, age 59, has been a Director of the Company since
November 22, 1994. Mr. Kennedy has been an attorney with his own law firm in
New York City since 1976. Mr. Kennedy was retained as an attorney by a
Chartwell Party in the past.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION
OF MESSRS. BUCKMAN, HOLMES AND KENNEDY AS CLASS II DIRECTORS.
Incumbent Directors Continuing in Office for a Term Expiring in 1997
Henry R. Silverman
Martin L. Edelman
Marc E. Leland
Mr. Silverman, age 55, has been a Director of the Company since
September 1994. He has been Chairman of the Board and Chief Executive Officer
of HFS since May 1990 and was the Chairman of the Board and Chief Executive
Officer of the Company from November 1994 until January 24, 1996. Mr.
Silverman is a former General Partner of Blackstone, having held such position
from February 1990 to December 1991. He was Senior Vice President, Business
Development of Reliance Group Holdings, Inc., an insurance, consulting and
information services company, from 1982 to 1990 and President and Chief
Executive Officer of Reliance Capital Group, Inc. from November 1983 until
February 1990. Mr. Silverman served as President and Chief Executive Officer
of Telemundo Group, Inc., a Spanish language television network, from 1986 to
1990. Mr. Silverman was Chairman and Chief Executive Officer of Buckhead from
September 1984 until November 1989. Mr. Silverman was an officer of Buckhead
within two years of the time Buckhead filed for reorganization under Chapter
11 of the U.S. Bankruptcy Code.
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Mr. Edelman, age 54, has been a Director of the Company since
November 22, 1994 and President of the Company since January 24, 1996. Mr.
Edelman was the Vice Chairman of the Board of Directors of the Company from
December 1995 until March 1996. He has also been a director of HFS since
November 1993. Mr. Edelman has been of counsel to Battle Fowler LLP, a New
York City law firm, since January 1994 and was a partner with that firm from
1972 through 1993. See "Certain Relationships and Related Transactions" for a
description of certain arrangements between the Company and Mr. Edelman. Mr.
Edelman also serves as a director of Presidio Capital Corp. Mr. Edelman is a
limited partner in Chartwell and a stockholder in Chartwell Corp. Mr.
Edelman is a consultant to and partner in various Chartwell Parties.
Mr. Leland, age 58, has been a Director of the Company since December
20, 1995. Mr. Leland has been President of Marc E. Leland & Associates,
engaged in financial consulting and private investment activities, since 1984.
Mr. Leland is a Vice President and director of Chartwell Corp. and a general
partner in FGT, L.P., which is a limited partner of Chartwell. Mr. Leland was
appointed as a Director as a nominee of Chartwell pursuant to the agreement
governing the Initial Chartwell Investment. Mr. Leland is a director of Noble
Drilling Corporation, a company that provides contract drilling services for
the oil and gas industry worldwide. He is also a partner in Chartwell and in
various Chartwell Parties. See "Certain Relationships and Related
Transactions."
Incumbent Directors Continuing in Office for a Term Expiring in 1998
Robert F. Smith
Roger J. Stone, Jr.
Richard L. Fisher
Mr. Smith, age 63, has been a Director of the Company since November
22, 1994. Mr. Smith is expected to resign at the time of the Closing. He has
been a Director of HFS since February 1993. Mr. Smith is the retired Chairman
and Chief Executive Officer of American Express Bank, Ltd. ("AEBL"). He joined
AEBL's parent, the American Express Company, in 1981 as Corporate Treasurer,
before moving to AEBL and serving as Vice Chairman and Co-Chief Operating
Officer and then President prior to becoming CEO. Mr. Smith is currently a
partner in Car Component Technologies, Inc., an automobile parts
remanufacturer located in Bedford, New Hampshire.
Mr. Stone, age 43, has been a Director of the Company since November
22, 1994. He has been a Director of HFS since June 1994. Mr. Stone is
currently a partner at Davis, Manafort and Stone, a Washington, D.C. public
affairs firm formed in 1995. From 1981 through 1995, Mr. Stone was a partner
at Black, Manafort, Stone & Kelly, a Washington, D.C. based public affairs
firm. Mr. Stone has served on the Executive Committee of the Republican
National Committee and was appointed to the Amtrak Commuter Services Board by
President Ronald Reagan. Mr. Stone is a Director of the Pietro Food
Corporation of Buena, New Jersey. See "Certain Relationships and Transactions"
for a description of certain arrangements between the Company and Mr. Stone.
Mr. Fisher, age 55, has been the Chairman of the Board and Chief
Executive Officer of the Company since January 24, 1996, and a Director of the
Company since December 20, 1995. Mr. Fisher has been self- employed, engaged
in private investment activities, financial management and real estate
ownership and development, among other businesses, since prior to 1990. Mr.
Fisher is a limited partner in Chartwell and is the President, a director and
a stockholder in Chartwell Corp. Mr. Fisher is also a partner in various
Chartwell Parties. Mr. Fisher was appointed as a Director as a nominee of
Chartwell pursuant to the agreement governing the Initial Chartwell
Investment. Mr. Fisher is also a member of the Board of Trustees of the
University of Pennsylvania and the Horace Mann School located in Riverdale,
New York. See "Certain Relationships and Related Transactions."
Additional Nominees
At the time of the Closing, the Company anticipates that Messrs.
Buckman and Smith will resign as Directors of the Company and that the
following individuals will be elected to the Company's Board of Directors:
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Dr. Guido Goldman, age 58, is currently a Manager of FSNL, a trustee
of the Ruby Trust and the beneficiary of a trust which is a member in FSNL.
Dr. Goldman has been Chairman of the Board and President of First Spring
Corporation, engaged in private asset management since 1985, and Director of
the Program for the Study of Germany and Europe at the Minda de Gunzburg
Center for European Studies of Harvard University since 1989 and the Director
of the Minda de Gunzburg Center for European Studies from 1969 to 1994. Dr.
Goldman is expected to be named as a Director with a term expiring in 1998.
Pursuant to Stockholders Agreement between Chartwell and FSNL, Dr. Goldman
will be the nominee of FSNL for election as a Director. See "Certain
Relationships and Related Transactions -- Relationships with Chartwell and
FSNL."
Rachel Robinson, age 73, has been the Chairperson of the Jackie
Robinson Foundation, a charitable foundation which creates and administers
scholarships for minority youth, since 1973. Ms. Robinson is expected to be
named as a Director with a term expiring in 1999.
Committees, Meetings; Compensation of the Board of Directors; Vote Required
for Election of Directors
The Company anticipates that the composition of the membership of all
or some of the Board Committees and the arrangements for the compensation of
the Company's Directors will change if the Closing occurs.
The Board of Directors held nine meetings during 1995. All incumbent
directors attended at least 75% of the aggregate number of meetings of the
Board and committees of the Board on which they served. The Board has three
committees of the Board: the Executive, Audit and Compensation Committees, as
described below.
The Executive Committee is currently comprised of Mr. Fisher as
Chairman and Messrs. Silverman, Leland, Holmes, Buckman and Edelman. The
Executive Committee is authorized to exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
Company except those powers reserved, by law or resolution, to the Board of
Directors. The Executive Committee did not meet in 1995.
The Audit Committee is currently comprised of Messrs. Smith and
Kennedy. The Audit Committee reviews and evaluates the Company's internal
accounting and auditing procedures; recommends to the Board of Directors the
firm to be appointed as independent accountants to audit the Company's
financial statements; reviews with management and the independent accountants
the Company's year-end operating results; reviews the scope and results of the
audit with the independent accountants; reviews with management the Company's
interim operating results; and reviews the non-audit services to be performed
by the firm of independent accountants and considers the effect of such
performance on the accountants' independence. The Audit Committee did not meet
in 1995.
The Compensation Committee is comprised of Messrs. Smith and Kennedy.
The Compensation Committee reviews compensation arrangements for executives,
reviews and makes recommendations to the Board of Directors regarding the
adoption or amendment of employee benefit plans, and administers the Company's
employee stock option plans. The Compensation Committee did not meet in 1995.
The Company has no standing nominating committee. Accordingly, the
Board of Directors nominates persons for election to the Board of Directors.
Stockholders may make nominations for the Board of Directors, provided that
such nominations are made in accordance with the provisions of the Bylaws. See
"Stockholder Proposals."
Currently, non-employee directors receive an annual retainer of
$20,000, plus $1,000 for chairing a committee and $500 for serving as a member
of a committee other than as chair. Non-employee directors are also paid
$1,000 for each Board of Directors meeting attended and $500 for each
committee meeting attended. During 1995, non-employee directors received an
annual retainer of $30,000, plus $4,000 for chairing a committee and $2,000
for serving as a member of a committee other than as chair. During that
period, non-employee directors were also paid $1,000 for each Board of
Directors meeting attended and $500 ($1,000 for committee chair) for each
committee meeting if held on the same day as a Board meeting and $1,000
($2,000 for committee chair) for each committee meeting attended on a day on
which there was no Board of Directors meeting. During 1995 and until
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March 12, 1996, non-employee directors who were also non-employee directors of
HFS were paid half of the amounts specified for that period. All non-employee
directors have been in the past, and continue to be, reimbursed for expenses
incurred in attending meetings of the Board of Directors and committees.
Members of the Board of Directors who are officers or employees of
the Company or any of its subsidiaries do not receive compensation or
reimbursement of expenses for serving in their capacity as directors. Because
Messrs. Buckman, Holmes and Silverman are no longer employees of the Company,
they are considered non-employee directors. However, Messrs. Buckman, Holmes
and Silverman have agreed to waive any compensation for their services as
directors of the Company for 1996.
During 1995, the Company (i) provided $100,000 of term life insurance
coverage for each non-employee director to the beneficiary designated by such
non-employee director and (ii) purchased joint life insurance contracts in the
amount of $1,000,000 for each director, and upon the death of such director,
the Company agreed to donate an aggregate of $1,000,000 to one or more
charitable organizations designated by such director from the proceeds of such
insurance policy. With the exception of such joint life insurance contracts,
members of the Board of Directors who were officers or employees of the
Company or any of its subsidiaries during 1995 did not receive compensation or
reimbursement of expenses for serving in such capacity.
Pursuant to the Company's 1994 Stock Option Plan, each non-employee
director is automatically granted certain stock options as follows: options
granted to directors who are not employees of the Company or a subsidiary of
the Company are subject to pre-determined rules and procedures such that
neither the Board of Directors nor the Compensation Committee has any
discretion in connection with the granting of such options. Options are
granted to non-employee directors based on a formula whereby current
non-employee directors have received an option to purchase 15,000 shares of
Common Stock; other non-employee directors, upon initial appointment or
election to the Board or Directors, will be granted an option to purchase
15,000 shares of Common Stock; and each non-employee director will receive an
additional option grant for 15,000 shares of Common Stock on the first
anniversary of the date of their initial grant of options. Such options have
an exercise price of not less than 100% of the fair market value on the date
of grant and vest over a three year period from the date of grant at the rate
of 33-1/3% per year, and otherwise have the same terms as all other options
granted under the 1994 Stock Option Plan.
Directors will be elected by a plurality of the votes cast in the
election of directors. Pursuant to applicable Delaware law, in tabulating the
vote for the election of directors, abstentions and broker non-votes will be
counted in determining the presence of a quorum, but will be disregarded and
will have no effect in determining the outcome of the vote if a quorum is
present.
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EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
executive officers of the Company currently in office:
Name Office or Positions Held
Richard L. Fisher Chairman of the Board and Chief Executive
Officer
Martin L. Edelman Director and President
Kenneth J. Weber Chief Financial Officer
Carl Winston Executive Vice President -- Operations
Douglas H. Verner Executive Vice President, General Counsel
and Secretary
On January 24, 1996: (i) Henry R. Silverman resigned as Chairman and
Chief Executive Officer of the Company, (ii) Robert S. Kingsley resigned as
President and Chief Operating Officer of the Company, (iii) Richard L. Fisher
was elected Chairman of the Board and Chief Executive Officer of the Company
and (iv) Martin L. Edelman was elected President of the Company. John D.
Snodgrass resigned as Vice Chairman of the Company's Board in December 1995,
and resigned as a director on January 23, 1996. Mr. Buckman resigned as
Executive Vice President, General Counsel and Secretary as of January 23,
1996, and Mr. Holmes resigned as Executive Vice President, Chief Financial
Officer and Treasurer as of March 1, 1996. Mr. Edelman resigned as Vice
Chairman of the Board as of March 12, 1996, and continues to serve as
President and a Director of the Company.
For biographical information about Messrs. Fisher and Edelman see
"Election of Directors."
Kenneth J. Weber, age 50, is currently the Chief Financial Officer of
the Company and has held such office since March 4, 1996. From September 1992
until February 1996, Mr. Weber was the Senior Vice President and Chief
Financial Officer of Omni Hotels, a company engaged in the ownership and
management of hotels. He was also the Senior Vice President and Chief
Accounting Officer of Red Lion Hotels, a company engaged in the ownership and
management of hotels, from January 1987 until September 1992. Mr. Weber
currently serves on the Advisory Board of the Protection Mutual Insurance
Company and on the Financial Officer Board of the American Hotel and Motel
Association.
Carl Winston, age 39, is currently the Executive Vice
President-Operations of the Company and has held such office since January 23,
1996. Mr. Winston was a Vice President of Forte Hotels from December 1990
until January 1996.
Douglas H. Verner, age 42, is currently the Executive Vice President,
General Counsel and Secretary of the Company and has held such office since
January 23, 1996. Mr. Verner was the Senior Vice President, General Counsel
and Secretary of Forte Hotels from November 1984 until January 1996. He is
also Chairman of the Copyright Committee of the American Hotel and Motel
Association.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth for 1995 and 1994 the cash and noncash
compensation awarded to or earned by the Chief Executive Officer of the
Company and the other most highly compensated executive officers (together,
the "Named Executive Officers") of the Company in 1995:
SUMMARY COMPENSATION TABLE (1)(2)
<TABLE>
<CAPTION>
---------------------------------
Long-Term
Compensation
Annual Compensation
---------------------------------
Awards
---------------------------------------------------------------------------------------------------------
Name and Principal Other
Position Annual Securities All Other
Compen- Restricted Underlying Compensation
Salary Bonus sation Stock Options/ ($)
Year ($) ($) ($) Awards SARs(#)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry R. Silverman (3) 1995 500,000 0 0 0
Chairman of the Board, 1994 41,667(4) 0 0 0 300,000(5) 299(6)
Chief Executive Officer
Robert S. Kingsley (3) 1995 260,430 125,000 0 0 172,072(7)
President, Chief 1994 27,083(4) 0 0 0 100,000(5) 80(6)
Operating Officer
</TABLE>
- ---------------
(1) Because the Company first became subject to reporting requirements of
the Exchange Act in 1994, the Company is not subject to the Summary
Compensation Table disclosure requirements for 1993.
(2) Messrs. Silverman and Kingsley were the only executive officers of
the Company who received salary or bonus from the Company in 1995.
John D. Snodgrass, Stephen P. Holmes and James E. Buckman served as
(i) Vice Chairman of the Board, (ii) Executive Vice President, Chief
Financial Officer and Treasurer, and (iii) Executive Vice President,
General Counsel and Secretary, respectively, of the Company during
1995. Mr. Snodgrass resigned in December 1995, Mr. Buckman resigned
in January 1996, and Mr. Holmes resigned in March 1996. Although
Messrs. Snodgrass, Holmes and Buckman received their entire
compensation as officers of HFS, a portion of the Corporate Services
Fee paid by the Company to HFS represented the Company's payment to
HFS for the executive services to be performed by such persons as
officers of the Company pursuant to the Corporate Services Agreement.
No set allocations were established with respect to the amount of
time that such persons were expected to devote to the affairs of the
Company and HFS, respectively, nor were set allocations established
with respect to the portion of such persons' overall compensation
from HFS that was expected to be paid in respect of services
performed for the Company pursuant to the Corporate Services
Agreement. It is not expected that any such allocation would have
resulted in annual compensation to any of the above individuals in
excess of $100,000 per year. See "Certain Relationships And Related
Transactions -- Relationships with HFS."
(3) On January 24, 1996, Mr. Silverman resigned as Chairman and Chief
Executive Officer of the Company and Mr. Kingsley resigned as
President and Chief Operating Officer of the Company.
(4) Represents salary paid to the named executive officer for the period
commencing on the Distribution Date (defined below) and ending on
December 31, 1995. Annualized salaries for Mr. Silverman and Mr.
Kingsley for 1994 were $500,000 and $250,000, respectively.
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<PAGE>
(5) On November 22, 1994, Messrs. Silverman and Kingsley were granted
options to purchase 300,000 and 100,000 shares, respectively, under
the Company's 1994 Stock Option Plan. Such options were cancelled as
of February 1, 1996.
(6) This compensation consists of life insurance premiums paid by the
Company.
(7) This compensation consists of (i) relocation expenses incurred by Mr.
Kingsley and paid by the Company in the amount of $164,940, (ii)
insurance premiums paid by the Company for life insurance coverage in
the amount of $6,692, and (iii) Company contributions to the
Company's defined contribution salary reduction 401(K) plan qualified
under Section 401(a) of the Code.
There are presently no pension or retirement plans of the Company
that will cover any of the Named Executive Officers.
None of the Named Executive Officers were granted options during the
Company's 1995 fiscal year. The Company's option plans do not provide for
stock appreciation rights.
Option Exercises and Year-End Option Value Table
The following table summarizes the exercise of options by the named
executive officers during the last fiscal year and the value of options held
by such named executives as of the end of such fiscal year. The Company's
option plans do not provide for stock appreciation rights.
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Options/SARs at FY-End (#) at FY-End ($)(2)
Shares Acquired
Name on Exercise (#) Value Realized Exercisable/Unexercisable (1) Exercisable/Unexercisable
($)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Henry R. Silverman 0 0 100,000/200,000 $0/$0
Robert S. Kingsley 0 0 33,333/66,667 $0/$0
</TABLE>
- ------------------------
(1) Messrs. Silverman and Kingsley were granted options to purchase
300,000 and 100,000 shares, respectively, under the Company's 1994
Stock Option Plan. Such options were cancelled as of February 1,
1996.
(2) Based upon the Common Stock's closing price in NASDAQ of $11.875 on
December 29, 1995 and the applicable exercise price.
Compensation Committee Report on Executive Compensation in 1995
Overall Policy. The Compensation Committee is responsible for
administering the Company's executive compensation policies and programs and
its aims have been to attract and retain the best possible executive talent,
to motivate these executives to achieve the goals inherent in the Company's
business strategy, and to link executive and stockholder interests through
equity-based compensation plans.
The key elements of the Company's executive compensation program
include base salary, annual bonus or commission, and stock options. Each
executive's compensation package is designed to condition a significant
portion of the executive's overall anticipated compensation on the Company's
success in achieving specified performance targets or on appreciation in the
value of the Common Stock or both.
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<PAGE>
The following discussion relates to the compensation paid to
executive officers of the Company during 1995. In connection with the change
in the composition of the Board of Directors and related changes in the
Compensation Committee that will result if the Closing of the Investment
occurs, the Compensation Committee expects that the Company's compensation
program for its executive officers will change if the Closing occurs, although
no new compensation program has been proposed.
Base Salaries. Base salaries paid to the Named Executive Officers in
1995 were set forth in their respective employment agreements. The employment
agreements with the Named Executive Officers are described more fully under
"Employment Contracts and Termination, Severance and Change of Control
Arrangements." Those employment agreements have been terminated. Officers and
employees of the Company other than the Named Executive Officers received
their entire compensation in 1995 as officers or employees, as the case may
be, of HFS. A portion of the Corporate Services Fee paid by the Company to HFS
represented the Company's payment to HFS for the executive services performed
by such persons as officers of the Company pursuant to the Corporate Services
Agreement. No set allocations were established with respect to the amount of
time that such persons devoted to the affairs of the Company and HFS,
respectively, nor were set allocations established with respect to the portion
of such persons' overall compensation from HFS that was paid in respect of
services performed for the Company pursuant to the Corporate Services
Agreement.
Annual Bonus. Mr. Kingsley's annual bonus in 1995 was based upon the
terms of his negotiated employment agreement. See "Employment Contracts and
Termination, Severance and Change of Control Arrangements". Pursuant to his
employment agreement, Mr. Silverman was not entitled to a bonus. As stated
above, the Company intends to adopt an executive compensation plan under which
cash bonuses will be paid in amounts to be determined based on the achievement
of performance objectives established by the Compensation Committee. The
allocation of bonuses among participants under that plan will be determined by
the Compensation Committee and will depend on each participant's position and
individual performance.
Stock Options. Stock options are designed to align the interests of
executives with those of the stockholders, as the value realized by the
executives from the options will be limited by the appreciation of the stock
price over a number of years. No stock options were granted to any person
serving as an executive officer of the Company in 1995.
Deductibility of Compensation. Due to recent changes in tax law, the
deductibility for corporate tax purposes of compensation paid to individual
executive officers of the Company in excess of $1 million may be restricted.
However, where it is deemed necessary and in the best interests of the Company
in order to continue to attract and retain the best possible executive talent,
and to motivate such executives to achieve the goals inherent in the Company's
business strategy, the Compensation Committee will recommend, and the Company
is expected to pay, compensation to executive officers which may exceed the
limits of deductibility.
The Compensation Committee
Robert F. Smith Michael J. Kennedy
Compensation Committee Interlocks and Insider Participation
During 1995, the Compensation Committee of the Board of Directors
consisted of Mr. Robert F. Smith and Mr. Michael J. Kennedy. Neither Mr. Smith
nor Mr. Kennedy is or has ever been an officer or employee of the Company or
any of its subsidiaries.
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<PAGE>
Performance Graph
Set forth below is a line graph comparing the percentage change in
the cumulative total return of the Common Stock, the Standard & Poor's
SmallCap 600 Index and the Dow Jones Entertainment and Leisure-Casino Index
for the period from November 29, 1994 through December 31, 1995.
- ------------
Assumes $100.00 invested on November 29, 1994 (the first day of trading in the
Common Stock) in the Common Stock, the Dow Jones Entertainment and
Leisure-Casino Index and the Standard & Poor's SmallCap 600 Index.
CUMULATIVE TOTAL RETURN
==============================================================================
11/94 12/94 12/95
- ------------------------------------------------------------------------------
NATIONAL LODGING CORP. $100 $ 70 $ 69
- ------------------------------------------------------------------------------
DOW JONES ENTERTAINMENT $100 $109 $145
& LEISURE - CASINO INDEX
- ------------------------------------------------------------------------------
STANDARD & POOR'S SMALLCAP $100 $ 99 $128
600 INDEX
==============================================================================
Employment Contracts and Termination, Severance and Change of Control
Arrangements
Each Named Executive Officer was employed by the Company pursuant to
a written employment agreement during 1995.
Mr. Silverman served as Chairman of the Board and Chief Executive
Officer of the Company until January 24, 1996 pursuant to a five-year
employment agreement which was terminated by mutual agreement as of January
24, 1996. The agreement provided for an annual base salary of at least
$500,000 (subject to annual increase based on the consumer price index). Mr.
Silverman has agreed to waive any and all payments to which he would otherwise
have been entitled in connection with that termination.
Mr. Kingsley served as President and Chief Operating Officer of the
Company pursuant to an employment agreement between Mr. Kingsley and HFS,
which HFS transferred to the Company and the Company assumed pursuant to the
Distribution Agreement. The agreement was terminated as of January 24, 1996.
The agreement provided for an annual base salary of $250,000. Pursuant to the
agreement, Mr. Kingsley was paid a bonus of $125,000, for the initial year of
his employment. Upon termination of Mr. Kingsley's employment by the Company
during the term of his employment agreement other than for death, disability
or "cause", the employment agreement entitled Mr. Kingsley to receive a
severance payment in an amount equal to 100% of the annual base salary to
which
C/M: 11752.0003 336816.26
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<PAGE>
Mr. Kingsley would be entitled under the agreement during the one year period
following the date of such termination. Generally, "cause" was defined in the
agreement as, among other things, (i) the willful failure by Mr. Kingsley
substantially to perform his duties under the agreement, (ii) any act of
fraud, misappropriation or similar conduct against the Company, (iii)
conviction of a felony, (iv) gross negligence by Mr. Kingsley in the
performance of his duties, (v) the determination by the Board that the
employment of Mr. Kingsley would preclude the granting of a gaming license or
(vi) the willful breach by Mr. Kingsley of a material provision of the
agreement. In connection with Mr. Kingsley's resignation from the Company, the
Company has agreed to pay Mr. Kingsley his base salary through December 31,
1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationships with HFS
Prior to November 22, 1994, the Company was a wholly-owned subsidiary
of HFS. On that date (the "Distribution Date"), HFS distributed all of the
Company's outstanding Common Stock to HFS's stockholders (the "Distribution").
In connection with the Distribution, HFS transferred the assets and
liabilities of its business of financing and developing casino gaming and
entertainment facilities (the "Casino Development Business") to the Company
and made cash capital contributions to the Company aggregating $50 million. As
a result of the Distribution, the Company became a publicly traded corporation
and ceased to be a subsidiary of HFS.
For purposes of (i) governing certain of the ongoing relationships
between HFS and the Company after the Distribution, (ii) providing mechanisms
for an orderly transition and (iii) providing HFS with a means of
participating in the economic benefits of future gaming projects, HFS and the
Company entered into each of the agreements described below. The following
descriptions of the original Distribution Agreement, Financing Agreement,
Corporate Services Agreement, Tax Sharing Agreement, Marketing Services
Agreement, Advisory Agreement and Facility Sublease are qualified in their
entirety by reference to the copies of such agreements filed with the
Commission as exhibits to the Company's Current Report on Form 8-K dated
December 2, 1994.
Distribution Agreement. The Company and HFS entered into a Transfer
and Distribution Agreement dated as of November 22, 1994 (the "Distribution
Agreement") to provide for, among other things, the principal corporate
transactions required to effect the Distribution, the transfer to the Company
of the Casino Development Business, the allocation between HFS and the Company
of certain liabilities, the capital contributions made by HFS to the Company
and certain other agreements governing the relationship between HFS and the
Company.
The Distribution Agreement also contains certain provisions relating
to employee compensation, benefits and labor matters and the treatment of
options to purchase HFS common stock held by employees of HFS that were
outstanding at the time of the Distribution. Among such provisions is an
agreement by the Company to reserve for future issuance and to issue up to
433,290 shares of Common Stock to certain persons (including certain current
and former directors and executive officers of the Company) in connection with
the exercise of then-outstanding options to purchase shares of HFS common
stock that were granted pursuant to HFS's 1992 Stock Option Plan (which
options were adjusted in connection with the Distribution so that the holders
of such options are entitled, upon exercise thereof, to receive one share of
Common Stock for every 20 shares of HFS common stock purchased upon such
exercise, subject to further adjustment in certain circumstances). As of March
1, 1996, the Company had issued 18,280 of these shares of Common Stock in
connection with the exercise of HFS options. At the request of HFS, the
Company will be obligated to register the shares of Common Stock issuable in
connection with HFS's 1992 Stock Option Plan under the Securities Act of 1933.
Similarly, the Distribution Agreement provided for the Company to reserve for
future issuance and to issue up to 153,600 shares of Common Stock to Bryanston
Group Inc. ("Bryanston") in connection with the exercise of certain rights to
purchase shares of HFS common stock under an Earnout Agreement between HFS and
Bryanston (the "Earnout Agreement"). As of September 22, 1995 all of the
shares of Common Stock to be issued in connection with the Earnout Agreement
were issued and repurchased by the Company.
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Financing Agreement. Pursuant to an Interim Financing Agreement dated
as of November 22, 1994 (the "Financing Agreement"), HFS agreed to extend up
to $75 million in credit enhancements (e.g., guarantees) on behalf of the
Company as security for future bank credit facilities. The Financing Agreement
was amended and restated as of January 23, 1996 to provide for the issuance of
the Travelodge Guarantee (defined below). Pursuant to the Financing Agreement,
HFS guaranteed $75 million of the Company's $125 million revolving credit
obligation to certain banks, which the Company entered into in connection with
the Travelodge Acquisition (the "Travelodge Guarantee"). See "Other
Transactions -- Travelodge Acquisition." The Financing Agreement currently
requires the Company to pay HFS an annual fee equal to 2% of the obligations
guaranteed pursuant to the Travelodge Guarantee. Prior to the January 1996
amendment, the Company was obligated to pay HFS a fee equal to 2% of the $75
million commitment from HFS under the Financing Agreement. In 1995 the Company
paid HFS a fee of $1.5 million pursuant to the Financing Agreement.
Corporate Services Agreement. Pursuant to a Corporate Services
Agreement dated as of November 22, 1994 (the "Corporate Services Agreement"),
HFS provided to the Company certain general corporate support services,
including executive services (such as the services of Messrs. Holmes and
Buckman; see "Executive Officers"), accounting services, legal services,
treasury services, financial reporting and internal audit services, insurance
and risk management services, management information systems ("MIS") services
and employee benefits administration, which HFS had historically provided to
its casino development business. During 1995, the Company paid HFS a fee of
$1.5 million under the Corporate Services Agreement. The Corporate Services
Agreement has a term ending 25 years after the Distribution Date and is
terminable by HFS without penalty upon 90 days' written notice to the Company
or immediately upon a Change in Control of the Company (as defined in the
agreement). HFS has waived its right to terminate the agreement as a result of
the Change in Control resulting from the Investment. The Company generally may
not terminate the Corporate Services Agreement without HFS's consent. The
Corporate Services Agreement was amended as of January 24, 1996, to provide
that the services to be performed by HFS under the Corporate Services
Agreement will only include the following: (i) advisory services in connection
with business acquisitions, financings, and other transactions by the Company,
and (ii) through September 30, 1996, certain corporate and accounting services
that the Company requests HFS to perform and HFS agrees to perform. As
amended, under the Corporate Services Agreement the Company is required to pay
HFS a fixed annual fee of $1.5 million payable quarterly in advance.
Tax Sharing Agreement. The Tax Sharing and Indemnification Agreement
dated as of November 22, 1994 (the "Tax Sharing Agreement"), provides for the
respective obligations of HFS and the Company concerning various tax
liabilities. The Tax Sharing Agreement provides that (i) HFS shall pay, and
indemnify the Company if necessary for, all federal, state, local and foreign
income taxes relating to the Casino Development Business for any taxable
period ending on or before the Distribution Date and (ii) the Company shall
pay, and indemnify HFS if necessary for, all federal, state and local income
taxes attributable to the Casino Development Business for any taxable period
ending after the Distribution Date or that arise as a result of or in
connection with the Distribution. Pursuant to the Tax Sharing Agreement, HFS
is also required to pay all other taxes attributable to periods prior to the
Distribution Date. The Tax Sharing Agreement further provides for cooperation
with respect to certain tax matters, the exchange of certain tax-related
information and the retention of records which may affect the income tax
liability of either party.
Marketing Services Agreement. Pursuant to a Gaming Related Marketing
Services Agreement dated as of November 22, 1994 and terminated on January 24,
1996 (the "Marketing Services Agreement"), an affiliate of HFS was obligated
to provide certain marketing services to gaming facilities in which the
Company had an interest through HFS's network of hotel franchises, reservation
centers, frequent traveller programs and other marketing resources. During
1995, this affiliate did not provide the Company with any such services and
the Company did not make any payments to this affiliate under the Marketing
Services Agreement in 1995.
Advisory Agreement. Pursuant to a Gaming Related Advisory Services
Agreement dated as of November 22, 1994 and terminated on January 22, 1996
(the "Advisory Agreement"), the Company retained HFS as its advisor in
connection with all gaming related acquisition, financing or development
projects or transactions (including corporate or other acquisitions, mergers,
consolidations, joint ventures and similar transactions) considered by the
Company. During 1995, the Company paid HFS $337,000 for advisory services
rendered to the Company pursuant to the
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<PAGE>
Advisory Services Agreement. In connection with the termination of the
Advisory Agreement, the Company has agreed to pay HFS $1.14 million if the
Closing occurs. Since January 24, 1996, HFS has agreed to provide advisory
services pursuant to the Corporate Services Agreement.
Facility Sublease. Pursuant to a sublease which commenced on the
Distribution Date and was terminated on March 1, 1996, the Company subleased
approximately 7,500 square feet of office space located at 339 Jefferson Road,
Parsippany, New Jersey 07054 from HFS at an annual rental of $130,000. During
1995, the Company paid HFS $130,000 pursuant to the Facility Sublease.
Travelodge Acquisition. On January 23, 1996 the Company completed the
Travelodge Acquisition. In connection with the Travelodge Acquisition, the
Company paid approximately $2 million as an advisory fee to HFS for advisory
services rendered to the Company by HFS in connection with that transaction.
Such advisory fee was not paid in connection with the Advisory Agreement.
Concurrently with the purchase, HFS acquired from Forte Hotels, Inc. and Forte
Plc, the indirect parent of Forte USA, Inc., for $39.3 million, the
"Travelodge" and "Thriftlodge" franchise systems and the related trademarks
and tradenames in North America, which HFS and one of its affiliates have
licensed to the Company under separately negotiated franchise agreements. The
franchise agreements covering the Travelodge and Thriftlodge properties that
are wholly owned by the Company are between the Company and HFS, and require
monthly payment by the Company of a royalty fee of 4% of the property's gross
room revenues plus a marketing fee also currently set at 4% of gross room
revenues. The marketing fee may be changed from time to time by HFS. These
franchise agreements have scheduled terms of 20 years, but may be terminated
by the Company prior to their scheduled expiration upon the payment of
liquidated damages by the Company. The foregoing description of the franchise
agreements with HFS is qualified in its entirety by reference to the form of
franchise agreement that was included as Exhibit A to the Agreement Among
Purchasers dated as of January 22, 1996, which was filed with the Commission
as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated January 23,
1996. The Company has also entered into a franchise agreement (the "License
Agreement") with an affiliate of HFS, as franchisor, covering the Company's
Travelodge and Thriftlodge properties that are owned by joint ventures. Under
the License Agreement, the Company is required to pay a license fee equal to
4% of gross room revenues multiplied by the Company's percentage interest in
each of the hotel properties owned by joint ventures in which the Company
acquired an interest, plus an additional amount, generally equal to 4.5% of
gross room revenues, for national marketing and reservation services provided
by HFS. The License Agreement has a term of twenty years but may be terminated
by the Company with respect to any particular joint venture prior to the
scheduled expiration. Also, if any particular joint venture is terminated,
then the franchisor may terminate the License Agreement with respect to the
property owned by that joint venture. In either case, the Company is required
to pay liquidated damages upon the early termination of the License Agreement
with respect to any individual joint venture. The amount of liquidated damages
payable by the Company upon termination of the franchise agreement covering
any wholly-owned or joint venture-owned property equals five times the amount
of the royalty fees payable in respect of that property during the 12 months
most recently preceding the termination, if the termination occurs before the
end of the fourth year of the franchise agreement. If the termination occurs
thereafter, the amount of liquidated damages scales down annually, reaching
two times the amount of the royalty fees payable in respect of that property
during the 12 months most recently preceding the termination if the
termination occurs after the sixth year of the franchise agreement. The
foregoing description of the License Agreement is qualified in its entirety by
reference to the License Agreement, which was filed with the Commission as
Exhibit 10.49 to the Company's Annual Report on Form 10-K/A on May 28, 1996.
Proposed Mexican Joint Venture. On June 17, 1996, the Company
announced that it has entered into a Memorandum of Understanding with Grupo
Piasa, a Mexican hotel company, to form a joint venture for the purpose of
developing and operating, or franchising others to operate, lodging facilities
in Mexico under the "Travelodge" and "Thriftlodge" tradenames (the "Mexican
Joint Venture"). The formation of the joint venture will be subject to certain
conditions, including documentation of a master franchise agreement with HFS,
pursuant to which the joint venture will be entitled to develop and operate,
or to franchise others to develop and operate, lodging facilities in Mexico
under the "Travelodge" and "Thriftlodge" names. Although the terms of the
master franchise agreement have not yet been finalized, the Company expects
that they will require the joint venture to pay to HFS or its affiliates
certain fees, including development fees, franchise fees, royalty fees based
on gross room revenues, and certain other customary fees, such as for travel
agency, marketing and consulting services.
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Management Overlap and Conflicts of Interest. As indicated herein
under the captions "Election Of Directors" and "Executive Officers," certain
of the persons who were executive officers and directors of the Company since
January 1, 1995 and certain of its current directors also serve as directors
and/or executive officers of HFS. Each of these directors and executive
officers also owns certain options to purchase shares of the common stock of
HFS. Messrs. Buckman, Edelman, Holmes, Silverman, Smith and Stone are
directors of HFS. Although Messrs. Smith and Buckman are expected to resign
from the Board of Directors at the time of the Closing, Messrs. Edelman,
Holmes, Stone and Silverman are expected to continue as Directors of the
Company and, if the Closing does not occur, Messrs. Smith and Buckman are also
expected to continue as Directors. As a result, there is substantial overlap
in the boards of directors of the Company and HFS. Due to such commonality of
management, certain conflicts of interest may arise with respect to the
administration of the ongoing relationships between HFS and the Company. In
particular, such conflicts may arise with respect to the Financing Agreement,
as amended, and the various franchise agreements between the Company and HFS.
It is anticipated that these conflicts of interest, to the extent that they
arise, will be resolved by consultation with independent financial and legal
advisors and determinations made by disinterested directors. The resolution of
such disagreements and/or conflicts of interests will, however, be more
difficult than would otherwise be the case due to the level of commonality
between the Company's and HFS's management. Moreover, such disagreements
and/or conflicts of interest may be resolved in a manner that may appear to be
more favorable to HFS or the Company, as the case may be.
Relationships with Chartwell and FSNL
In addition to the Initial Chartwell Investment and the Investment,
the Company, Chartwell, FSNL and certain of their affiliates have engaged in
the transactions and have the relationships described below.
The Stock Purchase Agreement will require consent of an independent
committee of the Board of Directors for any transaction after the Closing
between the Purchaser Parties and the Company or any of its subsidiaries and,
under certain circumstances, the receipt of a fairness opinion. See "Approval
of the Investment -- Stock Purchase Agreement."
Initial Stock Purchase Agreement. In connection with the Initial
Chartwell Investment, Chartwell and the Company entered into a stock purchase
agreement dated as of December 20, 1995 (the "Initial Stock Purchase
Agreement"), pursuant to which Chartwell acquired 904,930, or approximately
16.6%, of the outstanding shares of Common Stock of the Company (the "16.6%
Block"). The Initial Stock Purchase Agreement provides that so long as
Chartwell remains a holder of 15% or more of the Company's shares of Common
Stock (a "15% Holder"), the Company will nominate as Directors two nominees
selected by Chartwell, and so long as Chartwell remains a holder of more than
10%, but less than 15%, of the Company's shares of Common Stock (a "10%
Holder"), the Company will nominate as a Director one nominee selected by
Chartwell. If Chartwell ceases to be either a 15% Holder or a 10% Holder, then
the Company will no longer be required to nominate as a Director any nominees
selected by Chartwell.
The Initial Stock Purchase Agreement also provides for certain
restrictions on the transfer of Chartwell's 16.6% Block, including
prohibitions on sales made other than pursuant to an effective registration
statement under the Securities Act or in "brokers' transactions" pursuant to
Rule 144 of the Securities Act. Chartwell is required to obtain the Company's
consent prior to the consummation of any proposed sale of its 16.6% Block,
other than a sale made pursuant to a registration statement or in a broker's
transaction.
The terms of the Initial Stock Purchase Agreement remain in effect
and are not superseded by the Stock Purchase Agreement unless and until the
Closing occurs. Upon Closing, all of the covenants contained in the Initial
Stock Purchase Agreement will terminate.
Initial Registration Rights Agreement. Concurrently with entering
into the Initial Stock Purchase Agreement, Chartwell and the Company entered
into a registration rights agreement (the "Initial Registration Rights
Agreement"). Pursuant to that agreement, if the Company has withheld its
consent to a proposed sale of Chartwell's 16% Block as contemplated in the
Initial Stock Purchase Agreement, Chartwell (or its assignee) will have the
right to make a written request for a demand registration under the Securities
Act in order to register all, but not less than all, of its
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16% Block. In addition, under the Initial Registration Rights Agreement,
Chartwell has an incidental registration right to have its securities included
in registrations of securities made by the Company for its own account or for
the account of a stockholder. The Initial Registration Rights Agreement will
terminate upon the Closing.
Vicksburg Facility. In addition to the Initial Chartwell Investment
and the Investment proposed to be made by Chartwell and FSNL, Chartwell
Leisure Associates L.P., an affiliate of Chartwell and Messrs. Fisher, Edelman
and Leland ("Chartwell Leisure"), has entered into an agreement with
Funtricity Vicksburg Family Entertainment Park, Inc., a wholly-owned
subsidiary of Six Flags Theme Parks, Inc., to develop a family entertainment
center in Vicksburg, Mississippi (the "Vicksburg Facility") on land which is
ground leased by Chartwell Leisure from affiliates of Rainbow Casino
Corporation (collectively, "Rainbow"). As an inducement to Chartwell Leisure
to provide financing for the Vicksburg Facility, commencing May 1, 1995, the
opening date of the Vicksburg Facility, the Company and Chartwell Leisure
share principal and interest payments on a loan to Rainbow, with Chartwell
Leisure's share ranging from 14% to 27%, of such payments, adjusted annually.
Similarly, HFS and Chartwell Leisure share marketing fees from Rainbow with
Chartwell Leisure's share ranging from 20% to 27% of such payments, adjusted
annually. Chartwell Leisure has agreed to share with HFS 50% of the net cash
flow payable to Chartwell Leisure in respect of the Vicksburg Facility and HFS
has agreed to share such amounts pro rata with the Company based on the
relative amounts paid by HFS and the Company, respectively, to Chartwell
Leisure each year.
Chartwell Hotels. Chartwell Hotels Associates, a Delaware general
partnership, and Chartwell Hotels II Associates, a Delaware general
partnership, which are both affiliates of Chartwell and Messrs. Edelman,
Fisher and Leland (collectively, "Chartwell Hotels"), and their affiliate
Chequers Investment Associates, have acquired certain hotels and mortgages
secured by hotels from the Resolution Trust Corporation. In two transactions
with Chartwell Hotels, entered into in November 1992 and May 1993, and each
amended in December 1994, which have resulted in and will result in the
addition of hotels to HFS's franchise systems, HFS has advanced approximately
$10 million, and has agreed to advance up to an additional $4 million if
certain additional property conversions and other requirements are met, in
return for Chartwell Hotels' agreement to franchise the properties with one of
HFS's brands. Subject to the exceptions described below, all hotels owned by
Chartwell Hotels will pay royalties once they become part of HFS's franchise
systems, and a portion of these royalties will be credited toward the recovery
of HFS's $10 million advance. With the consent of HFS, Chartwell Hotels may
elect not to operate a hotel as a franchised hotel, provided that it pays HFS
a percentage of gross room sales in lieu of royalties (the "Non-Franchised
Property Fee"). In addition, in the event that the improvement costs required
to upgrade any Chartwell Hotels property so that such property meets HFS's
franchise requirements exceed a threshold amount, the property will not be
required to be operated under an HFS brand but Chartwell Hotels will be
required to pay HFS a certain fee in connection with such property (the
"Unimproved Property Fee"). The entire amount of any Unimproved Property Fees
and Non-Franchised Property Fees will be credited toward the recovery of HFS's
$10 million advance. Each advance is required to be fully recovered over a
maximum five-year period following the advance. In addition, as individual
properties convert to HFS brands, HFS will make additional advances to the
franchisee of such properties to fund costs incurred in connection with the
conversion. Those advances are required to be repaid with interest by the
franchisee over a three year period and that repayment has been guaranteed by
Chartwell Hotels.
Chartwell Hotels Associates and HFS are also parties to a letter
agreement dated January 1, 1994 terminating an agreement dated November 17,
1992 whereby HFS had agreed to provide certain consulting services to
Chartwell Hotels Associates. Under the termination letter dated January 1,
1994, Chartwell Hotels Associates agreed to pay HFS a fee of $2 million,
payable over five years, in full consideration of the termination of those
consulting arrangements.
Stockholders' Agreement. In connection with the proposed Investment,
Chartwell and FSNL have entered into a stockholders' agreement which will
become effective only upon the Closing of the Investment (the "Stockholders'
Agreement"). The Stockholders' Agreement provides that Chartwell and FSNL will
vote their shares of Common Stock to elect as a Director of the Company one
nominee selected by FSNL and any number of nominees selected by Chartwell, and
that FSNL will vote its shares of Common Stock at all meetings of stockholders
of the Company and in any written consent in the manner directed by Chartwell.
The Stockholders' Agreement also provides for certain restrictions on the
transfer of their shares of Common Stock and on future acquisitions of shares
of Common Stock by Chartwell and FSNL. Upon the Stockholders' Agreement
becoming effective, for a period
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of six years, FSNL will be prohibited from transferring its shares to persons
other than Chartwell and certain other permitted transferees identified in the
Stockholders' Agreement. Additionally, under the Stockholders' Agreement, FSNL
is afforded certain "tag-along" rights exercisable by it upon a sale of shares
by Chartwell or upon a request by Chartwell of a Demand Registration Statement
pursuant to the Registration Rights Agreement. Chartwell may sell its shares
to FSNL and certain other permitted transferees identified in the
Stockholders' Agreement and to third parties, provided that Chartwell allows
for FSNL to "tag-along" in the event of sale to any third party. Chartwell may
also require FSNL to sell its shares to a third party offering to purchase all
of Chartwell's and FSNL's shares of Common Stock.
Third Avenue Lease. In March 1996, the Company entered into a lease
with an affiliate of Chartwell and an unaffiliated third party, as landlords,
pursuant to which the Company has leased approximately 18,700 square feet of
office space located at 605 Third Avenue, New York, New York for a period of
ten years. Under this lease, the Company is obligated to pay approximately
$542,000 per year for each of the first five years, and approximately $600,000
per year for each of the last five years, of the term of the lease for the use
of such office space. The terms of this lease are, in the opinion of the
Company, substantially similar to the market terms that would be available
from a third party for a similar property.
Relationships with Mr. Edelman
Mr. Edelman is of counsel to Battle Fowler LLP, a New York City law
firm that is representing the Company in various matters relating to the
Investment and has represented the Company, HFS and certain Chartwell Parties
in the past with respect to various legal matters. That firm has represented
the Company in connection with two of its open and operating casino gaming
ventures. The Company expects to continue to utilize that firm after the
Closing. In addition, Mr. Edelman was retained as a consultant to the Company
in connection with the development of the Company's proposed casino projects
in Pittsburgh and Erie, Pennsylvania, for the period from March 1994 through
June 1995. During such period, Mr. Edelman was paid a fee of approximately
$5,000 per month for providing such consulting services. That consulting
agreement was terminated in January 1996.
Relationships with Mr. Stone
Mr. Stone is currently a director of the Company. In December 1993,
Mr. Stone was a partner in the Washington, D.C. public-affairs firm of Black,
Manafort, Stone & Kelly. At that time, HFS engaged that firm to pursue gaming
opportunities at the direction of the Company. The engagement letter was
assigned by HFS to the Company in connection with the Distribution. The
engagement agreement provided for payment by the Company of a monthly fee of
$20,000 plus reasonable and necessary expenses. Such agreement was amended to
provide for a monthly fee of $10,000 plus expenses, commencing in February
1995. This agreement expired by its terms in June 1995.
HFS also entered into an agreement dated March 22, 1994 with Mr.
Stone for consulting services relating to the identification and development
of opportunities for the Company to participate in gaming facilities. The
consulting agreement was assigned by HFS to the Company in connection with the
Distribution. Pursuant to the consulting agreement, Mr. Stone is to receive a
consulting fee of 0.5% of the total cost of development of a gaming facility
in respect of which Mr. Stone has rendered material services to the Company
and was instrumental in causing the completion of the facility, plus one
percent to five percent (to be mutually determined by the Company and Mr.
Stone through negotiations on a transaction-by-transaction basis) of the
proceeds to the Company from such facility after the Company receives a return
of its investment. This agreement with Mr. Stone does not have a stated
duration and is terminable by the Company upon notice to Mr. Stone. The
Company did not pay Mr. Stone any fees under this agreement during 1995.
Because the Company has decided to pursue investments in the lodging industry,
the Company does not expect to have any future payment obligations to Mr.
Stone under this agreement.
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COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities ("10% stockholders"), to file reports of ownership
and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange
Commission and NASDAQ. Officers, directors and 10% stockholders are required
to furnish the Company with copies of all Forms 3, 4 and 5 they file.
Based solely on the Company's review of the copies of such forms it
has received and written representations from certain reporting persons that
they were not required to file Forms 5 for a specified fiscal year, the
Company believes that all of its officers, directors and 10% Stockholders
complied with all filing requirements applicable to them with respect to
transactions during 1995.
ATTENDANCE OF AUDITORS AT THE MEETING.
Representatives of Deloitte & Touche LLP, the Company's auditors, are
expected to be present at the Meeting and will have the opportunity to make a
statement if they choose to do so and will be available to respond to
appropriate questions of stockholders.
If the Investment is approved, the Company expects that the
composition of the Board of Directors will change (see "Election of
Directors"). In light of the anticipated changes in the Board of Directors,
the Company believes that it is appropriate for the new Board of Directors to
choose the Company's auditors for the remaining portion of fiscal year 1996.
Therefore, the stockholders of the Company are not being asked to ratify the
appointment of auditors at the Meeting.
STOCKHOLDER PROPOSALS
Any proposal of a stockholder intended to be presented at the
Company's 1997 Annual Meeting of stockholders must be received by the Company
for inclusion in the proxy statement and form of proxy for that meeting no
later than March __, 1997.
The Company's Bylaws require that, for business, other than that
specified in the notice of the meeting or by the Board of Directors, to be
properly brought before an Annual Meeting by a stockholder, a stockholder's
notice to the Secretary must be delivered to or mailed and received at the
principal executive offices of the Company not less than 60 nor more than 90
days prior to the anniversary date of the previous Annual Meeting of
stockholders; provided, however, that if the Annual Meeting is called for a
date that is not within 30 days before or after the anniversary date, the
stockholder notice must be received by the Company not later than 10 days
after the day on which the notice for the Annual Meeting is mailed or public
disclosure of the date of the Annual Meeting, whichever occurs first. The
stockholder notice to the Secretary must set forth certain information
regarding the business proposed to be brought before the Annual Meeting, the
name and address of the stockholder proposing such business and certain other
required information. Stockholder notices of proposed business for the 1996
Annual Meeting must be received by the Company within 10 days after the date
of the Notice accompanying this Proxy Statement. Similarly, provisions of the
Company's Bylaws provide that stockholder nominations for the Board of
Directors require a notice to the Company within the same time periods
required for stockholder proposals. The notice must provide certain
information regarding the person nominated for election as a director, the
stockholder proposing the nomination and certain other required information.
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APPRAISAL RIGHTS
The Company's stockholders are not entitled to dissenters' rights of
appraisal in connection with the Proposals covered by this Proxy Statement,
including the Investment Proposal.
INCORPORATION OF DOCUMENTS BY REFERENCE
This Proxy Statement incorporates by reference the financial
statements, supplementary financial information and management's discussion
and analysis of financial condition and results of operations regarding the
Company included in the Company's 1995 Annual Report to Shareholders, which
includes the Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1995 (the "1995 Form 10-K") and contains financial statements and
other information concerning the operations of the Company. This Proxy
Statement also incorporates by reference the information and financial
statements included in the Company's Current Report on Form 8-K/A, dated
January 23, 1996 (the "January 1996 8-K"), and the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996 (the "First Quarter 10-Q").
Any statement contained in a document incorporated by reference in
this Proxy Statement will be deemed to be modified or superseded for purposes
of this Proxy Statement to the extent that a statement contained in this Proxy
Statement or in any other subsequently filed document which is also
incorporated by reference in this Proxy Statement modifies or supersedes such
statement. Any statements so modified or superseded will not be deemed, except
as modified or superseded, to constitute a part of this Proxy Statement.
ADDITIONAL INFORMATION
The Company's 1995 Annual Report to Shareholders, which includes the
1995 Form 10-K, the January 1996 8-K, which contains financial information for
the Travelodge Acquisition and the Canadian Acquisition, and the First Quarter
10-Q, are enclosed with this Proxy Statement, but are not to be regarded as
proxy soliciting materials. The exhibits to the 1995 Form 10-K, January 1996
8-K and First Quarter 10-Q have not been enclosed with this Proxy Statement.
Upon written or oral request, the Company will provide, without charge to each
shareholder of the Company, copies of such exhibits, as filed with the
Commission. Stockholders should address all such requests to: Secretary,
National Lodging Corp., 605 Third Avenue, 23rd Floor, New York, New York
10158.
By Order of the Board of Directors
DOUGLAS H. VERNER
Secretary
Dated: June [ ], 1996
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