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 336816.22
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Preliminary Material - Filed with the SEC on May __, 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 [to be determined]
(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 May 17, 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 336816.22
<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 336816.22
<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
Background of and Reasons for the Proposal; Board of Directors'
Recommendation 7
Opinion of the Company's Financial Advisor............................ 13
Use of Proceeds....................................................... 17
Additional Information Concerning the Purchasers...................... 17
Stock Purchase Agreement.............................................. 18
Registration Rights Agreement......................................... 20
Interests of Certain Persons in the Investment........................ 21
Risk Factors.......................................................... 22
APPROVAL OF THE CERTIFICATE OF AMENDMENT (Proposal 2)...................... 24
ELECTION OF DIRECTORS (Proposal 3)......................................... 24
Information Regarding the Nominees and Directors...................... 25
Committees, Meetings; Compensation of the Board of Directors; Vote
Required for Election of Directors.................................... 27
EXECUTIVE OFFICERS......................................................... 29
EXECUTIVE COMPENSATION..................................................... 30
Summary Compensation Table............................................ 30
Option Exercises and Year-End Option Value Table...................... 31
Compensation Committee Report on Executive Compensation in 1995....... 31
Compensation Committee Interlocks and Insider Participation........... 32
Performance Graph..................................................... 33
Employment Contracts and Termination, Severance and Change of
Control Arrangements 34
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 34
Relationships with HFS................................................ 34
Relationships with Chartwell and FSNL................................. 37
Relationships with Mr. Edelman........................................ 39
Relationships with Mr. Stone.......................................... 39
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.......................... 40
ATTENDANCE OF AUDITORS AT THE MEETING...................................... 40
STOCKHOLDER PROPOSALS...................................................... 40
APPRAISAL RIGHTS........................................................... 41
INCORPORATION OF DOCUMENTS BY REFERENCE.................................... 41
ADDITIONAL INFORMATION..................................................... 41
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
EXHIBIT B FORM OF REGISTRATION RIGHTS AGREEMENT AMONG NATIONAL LODGING
CORP., CHARTWELL LEISURE ASSOCIATES L.P. II AND FSNL LLC
EXHIBIT C OPINION OF MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
EXHIBIT D FORM OF CERTIFICATE OF AMENDMENT OF CERTIFICATE OF
INCORPORATION OF NATIONAL LODGING CORP.
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.
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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 May 17, 1996 (the "Record Date") are entitled to notice of, and to
vote at, the Meeting. On that date, the Company had outstanding __________
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 Chemical 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 May 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 336816.22
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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 May 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)
P.O. Box ____
Rye, New York _____
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 336816.22
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<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 336816.22
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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 336816.22
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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 and, if that transaction is not consummated, to facilitate the
Company's continuing expansion into the lodging industry and for other purposes.
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.
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.
C/M: 11752.0003 336816.22
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<PAGE>
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 $1.3 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 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 recorded a $1.8 million loss on those
investments 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
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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 net
operating losses which could be used to shelter the Company's future income from
taxation, but which would be lost in a liquidation. See "Risk Factors -- Net
Operating 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, Messrs. Silverman and 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.
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.
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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, Mr. Fisher and Mr. Edelman (on
behalf of the Chartwell Parties) held discussions with Mr. Silverman (on behalf
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 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 the general partner of Chartwell, 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
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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. This franchise agreement has a
scheduled term of 20 years but may be terminated by the Company prior to its
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 signed a letter of intent 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 certain conditions, including financing.
The $14.25 price per share of Common Stock to be received by the Company
in the Investment was arrived at through arms' length negotiation between Mr.
Fisher and Mr. Edelman, representing Chartwell, and Messrs. Silverman and
Holmes, representing the Company, after consultation with Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), 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."
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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) 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) 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");
(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 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 net operating losses, 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,
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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.
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
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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 certain financial and comparative analyses
performed by Merrill Lynch in arriving at the Merrill Lynch Opinion.
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 closing
price per share of the Company's Common Stock on February 9, 1996, a 34% premium
over the 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 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
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 and
adding the estimated present value of the Company's net operating loss
carryforwards ("NOL"), and the face value of certain notes receivable, the
estimated present value of non-operating assets and 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
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for the equity of the Company. 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., 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 was applied and an
adjustment 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 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, 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.
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 Comparable Transactions 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 was applied. 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, 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.
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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 throughout the period, and (ii)
on an after-tax basis, the Investment would be dilutive to the projected
earnings per share in 1996 and 1997, and would be accretive thereafter. 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 throughout the period on
both a pre-tax and after-tax basis. 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, this analysis indicated
that (i) on a pre-tax basis, the Investment would be dilutive to the projected
earnings per share in 1996 and would be accretive thereafter, and (ii) on an
after-tax basis, the Investment would be dilutive to the projected earnings per
share in 1996 and 1997 and would be accretive thereafter.
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.
In arriving at the Merrill Lynch Opinion, Merrill Lynch performed a
variety of financial analyses, certain portions of which are summarized above.
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.
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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 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.
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.
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 Leisure Corp. II, 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
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Company. The Comet Trust, a trust formed under the laws of Connecticut
("Comet"), owns a majority of the membership interests in FSNL; its sole
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. 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
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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 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
Purchasers and their affiliates (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
C/M: 11752.0003 336816.22
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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
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.
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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 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 Comet 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.
C/M: 11752.0003 336816.22
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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, 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.
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.
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.
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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 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 ($2.24) 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.
Net Operating 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 carryforwards ("NOLs"). As of December 31,
1995, the Company had approximately $13.7 million of NOLs 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 NOLs 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 May 1, 1996, is approximately $80.4 million and the
long-term tax exempt rate, as of May 1996, is 5.68%. Accordingly, the change in
control is expected to result in a limitation on the amount of NOLs 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 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 NOLs 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 BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR APPROVAL OF THE INVESTMENT.
C/M: 11752.0003 336816.22
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<PAGE>
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 336816.22
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<PAGE>
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 ("AMRE"). 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.
C/M: 11752.0003 336816.22
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<PAGE>
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:
C/M: 11752.0003 336816.22
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<PAGE>
Dr. Guido Goldman, age 58, is currently a Manager of FSNL, a trustee of
Comet 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
C/M: 11752.0003 336816.22
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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.
C/M: 11752.0003 336816.22
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<PAGE>
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, President and Vice Chairman of the
Board
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 24, 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.
C/M: 11752.0003 336816.22
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth for 1995 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 for 1995:
SUMMARY COMPENSATION TABLE (1)(2)
----------------------
Long-Term
Compensation
Annual Compensation
----------------------
----------------------
Awards
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
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.
C/M: 11752.0003 336816.22
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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
$6,692, and (iii) Company contributions to the Company's defined
contribution salary reduction 401(K) plan qualified under Section 401(a)
of the Code.
There are presently no pension or retirement plans of the Company that
will cover any of the Named Executive Officers.
None of the Named Executive Officers were granted options during the
Company's 1995 fiscal year. The Company's option plans do not provide for stock
appreciation rights.
Option Exercises and Year-End Option Value Table
The following table summarizes the exercise of options by the named
executive officers during the last fiscal year and the value of options held by
such named executives as of the end of such fiscal year. The Company's option
plans do not provide for stock appreciation rights.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercise In-the-Money Options/SARs
Options/SARs (#) at FY-Enat(FY-End ($)(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.
C/M: 11752.0003 336816.22
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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.
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.
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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.
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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 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
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agreements briefly described below. The following descriptions 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. 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.
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.
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
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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 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 has licensed to the Company under a separately
negotiated franchise agreement. Under this franchise agreement, the Company is
required to pay to HFS annual franchise fees equal to 4% of gross room revenues
for the hotel properties acquired by the Company plus 4% of gross room revenues
for national marketing and reservation services provided by HFS. In addition,
the Company is required to pay HFS 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 franchise
agreement has a scheduled terms of
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20 years but may be terminated by the Company prior to its scheduled expiration
upon the payment of liquidated damages by the Company.
Management Overlap and Conflicts of Interest. 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 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
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 _______________.
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 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, dated January 23, 1996 and filed with the Commission
on February 7, 1996, the Company's Current Report on Form 8-K/A, dated January
23, 1996 and filed with the Commission on April 2, 1996 (together, 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 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 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
C/M: 11752.0003 336816.22
41
