UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1995
Commission File Number 0-24794
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition Period from ______ to ______
------------------------
NATIONAL LODGING CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3326054
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
605 Third Avenue
23rd Floor
New York, New York 10158
(Address of principal executive offices, including zip code)
(212) 692-1400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on June 5, 1996, based on the closing price of these shares of $14.75
on that date, was $66,928,390.
As of June 5, 1996, there were 5,452,320 shares of the Registrant's Common Stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
<PAGE>
TABLE OF CONTENTS
PART I
ITEM 1. Business..................................................... 1
ITEM 2. Properties................................................... 13
ITEM 3. Legal Proceedings............................................ 14
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 14
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................... 15
ITEM 6. Selected Financial Data...................................... 16
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
ITEM 8. Financial Statements and Supplementary Data.................. 24
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 24
PART III
ITEM 10. Directors and Executive Officers of the Company.............. 25
ITEM 11. Executive Compensation....................................... 28
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 31
ITEM 13. Certain Relationships and Related Transactions............... 33
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................... 39
---------------------------------------------------
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER
THE SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information contained herein, this Annual Report on
Form 10-K contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 which involve certain risks and
uncertainties. The Company's actual results or outcomes may differ materially
from those anticipated. Important factors that the Company believes might cause
such differences are discussed in the cautionary statements accompanying the
forward-looking statements and under the caption "Business--Risk Factors" in
this Form 10-K. In assessing forward-looking statements contained herein,
readers are urged to carefully read those statements.
347035.16
<PAGE>
PART I
ITEM 1. Business
General Overview
National Lodging Corp., a Delaware corporation formerly known as
National Gaming Corp. (the "Company"), is a hotel and motel owner, operator and
developer. The Company concentrates on the limited-service segment of the
lodging industry.
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, par value $.01 per share (the "Common Stock"), to the
stockholders of HFS (the "Distribution"). From November 1994 until the third
quarter of 1995, the Company engaged in the acquisition, development, operation
and ownership of casino gaming facilities.
During the third quarter of 1995, the Company's Board of Directors
decided to explore alternatives to enhance stockholder value such as merger or
acquisition transactions and/or investments either in the gaming or non-gaming
businesses. On November 9, 1995, the Company announced a decision by its Board
of Directors to curtail future gaming investments and focus on investments and
acquisitions in nongaming industries. In December 1995, the Company's Board of
Directors decided that the Company should pursue a new strategic direction with
a focus on becoming a hotel and motel owner and operator.
In furtherance of the Company's new strategic direction, on January
23, 1996, the Company acquired all of the outstanding shares of common stock of
Forte Hotels, Inc. ("Forte Hotels"), the principal assets of which consisted of
Travelodge hotels and motels in the United States, and appointed a new
management team with substantial experience in the lodging and hospitality
industry.
The Company owns, operates or has an interest in approximately 8,000
Travelodge hotel and motel rooms throughout the United States, which represent
ownership in 17 properties (approximately 2,700 rooms) and joint venture
interests in 97 additional properties (approximately 5,300 rooms). Travelodge is
a leading economy-segment lodging brand targeted at the value-conscious leisure
and business traveler.
Although the Company's properties extend across the United States, a
large number of its properties and rooms are located in the states of
California, Washington, Oregon, Nevada, Arizona and Florida. Travelodge
properties are generally located near major traffic arteries or destination
areas.
In connection with the Company's new strategic direction, the
Company has agreed to sell 4 million newly-issued shares of Common Stock (the
"Proposed Chartwell/FSNL Investment") for an aggregate purchase price of $57
million, or $14.25 per share, to Chartwell Leisure Associates L.P. II, a
partnership consisting primarily of members of the Fisher family and a trust for
the benefit of Gordon Getty and members of his family ("Chartwell"), and FSNL
LLC, a limited liability company owned principally by a trust for the benefit of
Charles deGunzburg ("FSNL"). Chartwell currently owns approximately 16.6% of the
outstanding Common Stock. If the Proposed Chartwell/FSNL Investment is
consummated, Chartwell and FSNL will own approximately 52% of the outstanding
Common Stock. Closing of the Proposed Chartwell/FSNL Investment is subject to
approval of the Company's stockholders, among other conditions.
Although the Company intends to focus primarily on pursuing
investments in the lodging industry, it continues to hold several investments in
the gaming industry (see "Business--Gaming Business Strategy"). The Company does
not intend to make any further investments in the gaming industry.
The Company maintains its executive offices at 605 Third Avenue,
23rd Floor, New York, New York 10158, telephone (212) 692-1400. References
herein to the Company include both National Lodging Corp. and its subsidiaries.
References in this annual report to "hotels" include both hotels and motels.
347035.16
1
<PAGE>
Lodging Business
The Company's Strategy
The Company's strategy is to become a significant presence in the
limited-service segment of the lodging industry by offering convenient locations
and a superior lodging experience at attractive room rates. Limited-service
hotels generally do not provide management-intensive facilities and services,
such as in-house restaurants or cocktail lounges, banquet centers, conference
rooms, room service and recreational facilities. The Company believes that the
limited-service format of the economy segment of the lodging industry, requiring
limited on-site management expense, will allow the Company to offer the greatest
value to its customers. The Company also believes that limited-service
properties offer the potential for attractive growth rates and are the segment
of the lodging industry least vulnerable to economic downturns, because room
rates are at the low-end of the lodging scale.
The Company intends to initiate a corporate growth strategy that
consists of three parts: capital improvements, acquisitions and development.
o Capital Improvements - The Company intends to launch a capital
improvement program to increase room and occupancy rates at the
Company's portfolio of hotels. The capital improvement program will
help ensure that all the Company's properties are competitive in the
marketplace. As part of this program, the Company expects to upgrade
the interior and exterior of all properties that do not meet corporate
standards. For 1996, the Company has budgeted approximately $10
million for its capital improvements program. If the Company's
proposed Canadian acquisition is consummated, the Company expects to
increase its budget for capital improvements to those properties, but
has not yet determined the amount of such increase or any other
amounts to be budgeted for capital improvements in future years. See
"Business--Lodging Business--Proposed Canadian Acquisition."
o Acquisitions - The Company intends to acquire additional
limited-service properties domestically and internationally. The
Company will seek to acquire hotel properties that are well located.
Ability to generate cash flow will be the most important criterion
for evaluating potential acquisitions. The Company will actively
pursue opportunities in the hospitality industry that meet these
criteria, and would consider acquiring properties operating under
most limited-service franchise brands.
o In March 1996, the Company took a first step in implementing this part
of its corporate strategy when it reached an agreement in principle to
acquire 20 Travelodge hotels and a one-half interest in an additional
Travelodge hotel, all of which are located in Canada. This acquisition
is intended to give the Company a toehold in Canada and to position
the Company to take advantage of future development opportunities in
the Canadian marketplace. After closing, the Company will own or
operate approximately 11,400 rooms and 135 properties throughout the
United States and Canada. See "Business--Lodging Business--Proposed
Canadian Acquisition."
o Development - The Company intends to develop new hotel properties in
appropriate markets. The Company will seek development opportunities
throughout North America in healthy hotel markets with high overall
occupancy rates. These locations may be in city centers, near
airports or major traffic arteries.
The Company's ability to implement its strategy is subject to a number of
uncertainties. See "Business--Risk Factors."
Travelodge Acquisition
On January 23, 1996, the Company completed the acquisition (the
"Travelodge Acquisition") of all of the outstanding shares of Common Stock of
Forte Hotels from Forte USA, Inc. for approximately $98 million, net of working
capital adjustments and including expenses. The principal assets of Forte Hotels
347035.16
2
<PAGE>
consisted of fee and leasehold interests in 18 hotel properties (one of which
was subsequently disposed of) and joint venture interests in 97 additional hotel
properties (the "Acquired Forte Properties"). Substantially all of the Acquired
Forte Properties operate under the names "Travelodge" and "Thriftlodge" pursuant
to franchise agreements acquired by HFS or entered into with HFS in connection
with the Travelodge Acquisition. See "Business--Lodging Business--Franchise
Agreements." In connection with the Travelodge Acquisition, the Company also
acquired a 20,000 square foot retail arcade that adjoins the Company's
Travelodge Hotel located at Fisherman's Wharf, San Francisco, Forte Hotels'
corporate headquarters in El Cajon, California, and a 50% profits interest in
the hotel management operations of Royco Hotels and Resorts, Ltd., a hotel
management company based in Calgary, Canada which manages Canadian hotel
properties. In a related transaction prior to consummation of the Travelodge
Acquisition, HFS and Motels of America, Inc. acquired directly from Forte Hotels
the Travelodge franchise system and 19 hotel properties, respectively, for an
aggregate purchase price of $71.6 million.
Hotel Properties
The Company owns fee and leasehold interests in 17 hotel properties
(totalling approximately 2,700 rooms) and joint venture interests in 97
additional hotel properties (totalling approximately 5,300 rooms). Where the
properties are operated as a joint venture or partnership, the Company is, in
most instances, the 50% general partner. The Company's hotels operate in the
economy segment of the lodging industry and are located in 26 states and two
Canadian provinces, with a particular concentration in the states of California,
Washington, Oregon, Nevada, Arizona and Florida. The states in which those
hotels are located, nature of the Company's ownership interest in those hotels
and the number of rooms in each state are set forth in the following table:
347035.16
3
<PAGE>
<TABLE>
THE COMPANY'S HOTEL PROPERTIES
<CAPTION>
Number of Number Number of Number
Location Properties of Rooms Location Properties of Rooms
<S> <C> <C> <C> <C> <C>
United States
Alabama Montana
Wholly Owned -0- - Wholly Owned -0- -
Joint Venture 1 60 Joint Venture 2 98
Arizona Nebraska
Wholly Owned -0- - Wholly Owned -0- -
Joint Venture 4 177 Joint Venture 1 61
California Nevada
Wholly Owned 7 661 Wholly Owned 1 128
Joint Venture 43 2,122 Joint Venture 4 315
Colorado New Jersey
Wholly Owned -0- - Wholly Owned 1 229
Joint Venture 1 39 Joint Venture -0- -
Florida New Mexico
Wholly Owned 2 383 Wholly Owned -0- -
Joint Venture 4 174 Joint Venture 1 48
Georgia New York
Wholly Owned -0- - Wholly Owned 1 476
Joint Venture 2 151 Joint Venture 1 46
Idaho Ohio
Wholly Owned -0- - Wholly Owned -0- -
Joint Venture 1 48 Joint Venture 3 173
Illinois Oregon
Wholly Owned -0- - Wholly Owned 1 207
Joint Venture 2 163 Joint Venture 2 117
Indiana Pennsylvania
Wholly Owned -0- - Wholly Owned -0- -
Joint Venture 1 37 Joint Venture 2 109
Iowa Texas
Wholly Owned -0- - Wholly Owned 1 228
Joint Venture 1 47 Joint Venture 2 183
Kansas Utah
Wholly Owned -0- - Wholly Owned -0- -
Joint Venture 1 68 Joint Venture 3 199
Kentucky Washington
Wholly Owned -0- - Wholly Owned 1 59
Joint Venture 1 96 Joint Venture 9 478
Louisiana
Wholly Owned 1 70 Canada
------
Joint Venture 1 61 Ontario
Massachusetts Wholly Owned 1 236
Wholly Owned -0- - Joint Venture -0- -
Joint Venture 2 110 British Columbia
Wholly Owned -0- -
Joint Venture 2 110
</TABLE>
All but six of the Company's hotels operate under the "Travelodge"
or "Thriftlodge" brand names. The Company's hotels operated under the Travelodge
brand name are generally of higher quality and provide a higher level of service
than the Company's hotels operated under the Thriftlodge brand name. The
Travelodge branded properties generally contain between 50 and 150 rooms and
provide laundry services,
347035.16
4
<PAGE>
complimentary newspapers, cable television with a premium movie channel, and
in-room coffee service. The price per room for the Travelodge branded properties
generally ranges from $40 to $60 per night. The Thriftlodge branded properties
generally contain up to 75 rooms and provide fewer services than the Travelodge
branded properties. The price per room for the Thriftlodge branded properties
generally ranges from $25 to $45 per night. The six hotels which are not
operated as Travelodges or Thriftlodges are not operated as part of any lodging
chain. References in this annual report to "Travelodge" properties include both
Travelodge and Thriftlodge unless the context otherwise requires.
The Company's hotels are designed to attract the economy conscious
business and leisure traveler seeking room quality and hotel locations that are
generally comparable to those of mid-price hotels, but at lower average room
rates. The Travelodge and Thriftlodge branded properties generally do not
provide full service management-intensive facilities and services, such as
in-house restaurants or cocktail lounges, banquet centers, conference rooms,
room service, recreational facilities or other services and facilities that the
Company believes its targeted customers do not typically value. By omitting
these facilities and services, the Company believes that its Travelodge and
Thriftlodge properties are able to deliver a product that addresses both its
customers' needs and price expectations.
Approximately 86% of the Company's hotels are located on property
covered by ground leases with unaffiliated third parties. All of these leases
are net leases. Generally, the leases have fixed base rents of between $300 and
$1,000 per month. In addition, the Company or the joint venture, as the case may
be, is obligated to pay as rent a percentage, typically 7 1/2%, of its gross
receipts that are in excess of an annual threshold amount, typically between
$48,000 and $150,000. Gross receipts are typically defined as total revenue
received by the joint venture, excluding sales from vending machines,
newspapers, soda and telephone calls.
The ground leases have varying expiration dates, but most are
scheduled to expire between 1998 and 2015. Upon termination of a ground lease,
the hotel located on the leased property will become the property of the lessor.
The Company intends to attempt to negotiate renewals of the ground leases where
it considers it to be advantageous to do so, but there can be no assurance that
the Company will be able to do so.
Joint Venture Agreements
Ninety-seven of the Company's hotels are operated as joint
ventures. The Company's percentage interests in these joint ventures vary, but
in most the Company holds a 50% interest and shares in half of the profits and
losses of the joint venture.
Generally, the day-to-day business decisions of these joint
ventures are made by the Company's partner, while the significant business
decisions that fall outside the scope of day-to-day decisions are made by the
Company, either alone or with the consent of the Company's joint venture
partner. For approximately one-third of these hotel properties, the Company acts
as the day-to-day business manager of the property. In addition to profits and
losses under the joint venture, the day-to-day managerial partner typically
receives a distribution of partnership profits consisting of 10% of the gross
room revenues received from the operation of the hotel. The Company receives the
additional 10% of the gross room revenues for the properties for which it serves
as the managerial partner.
Franchise Agreements
The Company's Travelodge and Thriftlodge properties operate under
franchise agreements with HFS as the owner of the Travelodge and Thriftlodge
franchise systems. HFS acquired those franchise systems in connection with the
Travelodge Acquisition.
The franchise agreements covering the Travelodge and Thriftlodge
properties which are wholly-owned by the Company require monthly payment by the
Company of a royalty fee of 4% of the property's gross room revenues plus a
marketing fee also currently set at 4% of gross room revenues. The marketing fee
may be changed from time to time by the franchisor. These franchise agreements
have scheduled terms of twenty years but may be terminated by the Company prior
to their scheduled expiration upon the payment of liquidated damages by the
Company.
347035.16
5
<PAGE>
In connection with the Travelodge Acquisition, the Company entered
into a franchise agreement (the "Omnibus License Agreement") with an affiliate
of HFS as franchisor covering the Company's Travelodge and Thriftlodge
properties which are owned by joint ventures. Under the Omnibus License
Agreement, the Company is required to pay a license fee equal to 4% of gross
room revenues multiplied by the Company's percentage interest in each of the
hotel properties owned by joint ventures in which the Company acquired an
interest, plus an additional amount, generally equal to 4.5% of gross room
revenues, for national marketing and reservation services provided by HFS. The
Omnibus License Agreement has a term of twenty years but may be terminated by
the Company with respect to any particular joint venture prior to the scheduled
expiration. Also, if any particular joint venture is terminated, then the
franchisor may terminate the Omnibus License Agreement with respect to that
particular property. In either case, the Company is required to pay liquidated
damages upon the early termination of the Omnibus License Agreement with respect
to any individual joint venture.
The amount of liquidated damages payable by the Company upon
termination of the franchise agreements covering any property equals five times
the amount of the royalty fees payable in respect of that property during the
twelve months most recently preceding the termination if the termination occurs
before the end of the fourth year of the franchise agreement. If the termination
occurs thereafter, the amount of liquidated damages scales down annually,
reaching two times the amount of the royalty fees payable in respect of that
property during the twelve months most recently preceding the termination if the
termination occurs after the sixth year of the franchise agreement.
The Company's franchise agreements authorize the operation of a hotel
under the "Travelodge" or "Thriftlodge" name at the specific location where
the hotel is located and require that the hotel be operated in accordance with
standards specified by the franchisor. The franchise agreements grant the
franchisor a right of first refusal, exercisable for thirty days, if the Company
proposes to sell, lease or sublease the franchised hotel and require the
franchisor's consent to the transfer of the franchised hotel or of any interest
in the subsidiary or joint venture which is a direct party to the franchise
agreement.
The franchise agreements are subject to cancellation in the event
of a default, including the failure to operate the hotel in accordance with the
quality standards of the franchisor.
The loss of a license for a hotel would, in most instances, result
in the renaming of the hotel, which might cause a loss of established customer
good will and reduced revenues. The Company believes that the loss of a license
for any individual hotel would not have a material adverse effect on the
Company's financial condition and results of operations. The Company believes it
will be able to renew its current licenses or obtain replacements of a
comparable quality.
The Company's franchise agreements do not contain any territorial
protection and, therefore, do not prohibit the franchisor from franchising
competing properties in close proximity to the Company's property.
Fisherman's Wharf Retail Arcade
In connection with the Travelodge Acquisition, the Company also
acquired a retail arcade that adjoins its 250 room Travelodge hotel located at
Fisherman's Wharf, San Francisco. The retail arcade overlooks the San Francisco
Bay and consists of approximately 20,000 square feet of ground floor frontage
located on San Francisco's Jefferson Street. Currently, the arcade is
fully-leased to 17 shops and restaurants. The Company occupies the premises
under a 74-year master land lease expiring in February 2035 with an annual rent
fixed until termination at $80,000. In 1995, the arcade generated approximately
$2.0 million in net operating income.
347035.16
6
<PAGE>
Management Staff
Each of the Company's hotels has its own on-site management and
staff. On-site employees are supervised by regional managers and the Company's
senior management. The Company also has centralized corporate departments which
support the on-site management in the following areas: accounting and finance,
payroll, data processing and management information services, interior design,
purchasing, hotel operations, human resources, recruiting and training, legal,
advertising, insurance and telecommunications.
Marketing
The Company does not market its hotel properties on a company-wide
level. Instead, it relies on HFS as the franchisor of the Travelodge chain to
market the Travelodge and Thriftlodge names. The Company's hotels generally
advertise in their local markets and some of the Company's hotels employ small
marketing staffs to carry on their local advertising and marketing programs.
Competition
The Company's hotels compete with numerous other hotels, motels and
other lodging establishments in their market areas. Chains such as Days Inn and
Howard Johnson, both of which are franchised by HFS, Comfort Inns, Fairfield
Inns, Hampton Inns, La Quinta and Red Roof Inns are direct competitors of the
Company's hotels. There is no single competitor or group of competitors of the
Company's hotels that is dominant in the lodging industry. Competitive factors
in the industry include reasonableness of room rates, quality of accommodations,
degree of service and convenience of locations.
Demographic, economic and geographic changes in any of the
Company's markets could impact the convenience or desirability of the sites of
certain hotels in that market, which would adversely affect the operations of
the Company's hotels in that market. There can be no assurance that new or
existing competitors will not significantly lower rates or offer greater
convenience, services or amenities or significantly expand or improve facilities
in a market in which the Company's hotels compete, thereby adversely affecting
the Company's operations. Competition may generally reduce the number of
suitable hotel acquisition opportunities offered to the Company and increase the
bargaining power of property owners seeking to sell, which could adversely
affect the Company's financial performance.
Seasonality
Room occupancy rates at the Company's hotels are affected by
normally recurring seasonal patterns and, in most locations, are higher in the
late spring through early fall months than during the balance of the year, with
the lowest occupancy rates occurring in the first quarter of the year.
Regulation
Some of the Company's hotels are subject to state and local
regulations with respect to the sale of alcoholic beverages, and the Company
must maintain various alcoholic beverage licenses and permits. All of those
licenses and permits must be periodically renewed and may be revoked or
suspended for cause at any time. Loss of some of those licenses could have a
material adverse effect on the Company's financial condition and results of
operations. The Company is not aware of any reason why it should not be in a
position to maintain these licenses and permits. The Company is also subject to
dramshop statutes or equivalent common law in some jurisdictions which give an
injured person the right to recover damages from any establishment which
wrongfully served alcoholic beverages to an intoxicated person who causes the
injury. The Company believes that its insurance coverage with respect to any
such liquor liability is adequate. The Company has hotels that are subject to
alcohol sales regulations and/or dramshop statutes in Canada and the following
states:
California, Florida, New Jersey, New York, Pennsylvania and Texas.
Environmental Matters
The Company's hotels are subject to environmental regulations under
Federal, state and local laws. Certain of these laws may require a current or
previous owner or operator of real estate to clean up
347035.16
7
<PAGE>
designated hazardous or toxic substances affecting the property. In addition,
the owner or operator may be held liable to a government entity or to third
parties for damages or costs incurred by such parties in connection with such
contamination. Based upon a review of the environmental assessments of the
Acquired Forte Properties that were prepared in connection with the Travelodge
Acquisition, the Company does not believe that it is subject to any material
environmental liability with respect to its lodging business.
Proposed Canadian Acquisition
On March 12, 1996, the Company reached an agreement in principle
with Capital Properties Limited Partnership ("CPLP") to acquire from CPLP 20
hotels and a one-half interest in an additional hotel, all of which are located
throughout Canada. These hotels operate under the Travelodge brand name. The
Company intends to accomplish this acquisition (the "CPLP Acquisition") by
paying approximately C$94 million in order to purchase substantially all of
CPLP's existing bank debt and to pay certain specified closing costs (including
real estate taxes) and by assuming the liability for identified trade payables
and property specific bank debt, aggregating approximately another C$10 million.
In addition, the Company will be obligated to make certain contingent payments
to CPLP following a preferred return to the Company. See "Liquidity and Capital
Resources -- Lodging Acquisition." Of the C$94 million payment, approximately
half is expected to be financed with proceeds from the Proposed Chartwell/FSNL
Investment and half by bank borrowings under the credit facility the Company
proposes to enter into with Chemical Bank. See "Liquidity and Capital Resources
- -- Credit Facilities -- Proposed Credit Facility". The closing of the CPLP
Acquisition is subject to formal approval by the Company's Board of Directors
and approval by the limited partners of CPLP, among other conditions.
Proposed Mexican Joint Venture.
On June 8, 1996, the Company reached an agreement in principal with
Grupo Piasa, S.A. de C.V. ("Grupo Piasa") to form a joint venture for the
purpose of developing and operating, or franchising others to operate, lodging
facilities in Mexico under the Travelodge and Thriftlodge brand names. The
formation of the joint venture will be subject to certain conditions, including
documentation of a master franchise agreement with HFS, pursuant to which the
joint venture will be entitled to develop and operate, or to franchise others to
develop and operate, lodging facilities in Mexico under the Travelodge and
Thriftlodge brand names. Although the terms of the master franchise agreement
have not yet been finalized, the Company expects that they will require the
joint venture to pay to HFS or its affiliates certain fees, including
development fees, franchise fees, royalty fees based on gross room revenues, and
certain other customary fees, such as for travel agency, marketing and
consulting services. The closing of the transaction is subject to financing, the
execution of a definitive agreement between the Company and Grupo Piasa and
formal approval by the Company's Board of Directors and the board of directors
of Grupo Piasa.
Gaming Business Strategy
The Company intends to focus primarily on pursuing investments in
the lodging industry. However, because the Company was previously engaged in the
business of acquiring investments in the gaming industry, the Company continues
to hold several investments in various casino gaming facilities. The Company
does not intend to make any further investments in the gaming industry.
Summary of Casino Development Ventures
Boomtown Biloxi. In 1994, the Company acquired a barge and certain
improvements comprising a casino building located in Biloxi, Mississippi for
approximately $8.5 million, and leased the barge and improvements back to
Boomtown, Inc. ("Boomtown"), a Reno, Nevada-based operator of four casinos, for
a term of 25 years. Lease payments are approximately 20% of the Biloxi
facility's EBITDA (defined generally as earnings from the operations after all
expenses, other than income taxes, interest expense, lease costs, other than
rent payable under that lease, or depreciation and amortization) net of
marketing fees paid to HFS approximating four percent of the Biloxi facility's
net gaming revenue.
On November 6, 1995, the Company and HFS entered into agreements
with Boomtown to reduce the Company's profit participation in the Biloxi
facility by 25% and to reduce the marketing fee payable
347035.16
8
<PAGE>
to HFS for services provided to the facility by 25%. In return, the Company and
HFS received $1.8 million and $0.6 million, respectively, reducing the Company's
investment by $1.8 million. Furthermore, the Company recorded a $2.4 million
expense in the third quarter of 1995, representing a write-down of its Boomtown
investment to its estimated net realizable value. The Company's remaining
investment approximates $4.8 million at December 31, 1995.
The Boomtown Biloxi casino is located on a site on the back bay of
Biloxi. The site is four- tenths of a mile from Interstate I-110, which connects
the Biloxi resort area to Interstate I-10, and one mile from the Gulf beach
area. The casino floats on a 400 foot barge which extends into the back bay. The
casino commenced operations on July 18, 1994 and has approximately 1,000 slot
machines and 50 table games.
Terminated Boomtown Merger. In April 1995, the Company and Boomtown
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. 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.
Rainbow. In 1993, the Company entered into an agreement with
Rainbow Casino Corporation ("Rainbow") to finance a dockside casino located in
Vicksburg, Mississippi. Pursuant to that agreement, the Company has loaned
approximately $10 million to Rainbow for the licensing, construction and
start-up costs associated with the casino, which commenced operation in July,
1994. The loan bears interest at the stated annual interest rate of 7.5% and is
to be fully repaid in monthly installments of approximately $153,000 including
interest through August 2001. The loan is secured by a first mortgage on
existing real and tangible personal property excluding certain equipment. At the
inception of the loan, the Company imputed a 10% interest rate on the loan and
recorded a $0.8 million loan discount.
In March 1995, the Company agreed to loan up to an additional $2.0
million to the partnership that owns the Rainbow Casino in Vicksburg,
Mississippi. The proceeds of that loan, together with additional capital to be
contributed by the general partner of such partnership, are being used to
finance certain improvements to the casino project, the completion of related
facilities and to provide additional working capital. The loan is unsecured,
bears interest at 10% per annum and will be fully repaid in equal monthly
installments of principal and interest over its seven year term. The outstanding
balance for this additional loan at December 31, 1995 was approximately $1.2
million.
The Rainbow casino contains approximately 574 slot machines and 28
gaming tables. On an 80 acre tract along the Mississippi River adjacent to the
casino, a Days Inn hotel is operated by Amerihost Properties, Inc. and a family
entertainment center, developed and operated by a wholly owned subsidiary of Six
Flags Theme Parks, Inc., opened for business on May 1, 1995.
As an inducement to Chartwell Leisure Associates L.P. ("Chartwell
Leisure"), an affiliate of Chartwell, to provide the financing for the family
entertainment center, the Company has agreed to pay Chartwell Leisure a
percentage of the principal and interest payments collected on the initial $10
million loan to Rainbow, with Chartwell Leisure's share ranging from 14% to 27%
of such payouts adjusted annually in accordance with a schedule to the
agreement. HFS has agreed to share marketing fees from Rainbow with Chartwell
Leisure based on the same scheduled percentages. Chartwell Leisure has agreed to
share with HFS 50% of the net cash flow payable to Chartwell Leisure in respect
of the family entertainment center, 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.
Pittsburgh and Erie, Pennsylvania/URA Loan. The Company has agreed
in principle with its partners to dissolve its joint ventures which were
established to develop casino gaming facilities in Pittsburgh and Erie,
Pennsylvania. Upon dissolution, the Company's contingent obligation to acquire
land and to develop and finance the construction of the respective gaming
facilities will be terminated. In connection with the joint venture to develop a
gaming facility in Pittsburgh, the Company loaned the Urban Redevelopment
Authority of Pittsburgh, Pennsylvania ("URA") approximately $9.5 million in
September 1994. In September 1995, the URA exercised its option to extend the
maturity of its loan due the Company to September 30, 1996. As a result of the
Pennsylvania legislature's failure to propose a voter referendum to approve
casino gaming facilities
347035.16
9
<PAGE>
in that state, the Company notified the URA that it will not exercise its
option to purchase a portion of the site which is the collateral for that loan,
thus requiring the URA to pay interest currently at 4% per annum on a monthly
basis. Accordingly, the Company expects to seek collection of the loan in
September 1996. The outstanding balance of the URA loan at December 31, 1995
was approximately $9.5 million. In January 1996 and June 1996, the Company
received $3.8 million and $2.2 million, respectively, of principal and accrued
interest on the loan.
Prescott, Arizona and St. Joseph, Missouri. In December 1994, the
Company acquired a 19.9% limited partnership interest in Prescott Convention
Center Limited Partnership ("Prescott") for $4.5 million (subject to increase to
a maximum of $7.5 million if the net cash flow from Prescott's first year of
full gaming operations, which began on October 1, 1995, exceeds certain levels
and an affiliate of the general partner of Prescott grants the Company an option
to purchase a 13.5% equity interest in a riverboat casino located in St. Joseph,
Missouri for approximately $6 million). Prescott owns and operates a hotel and
convention center in Prescott, Arizona, which includes a casino facility that is
leased to and operated by a Native American tribe in exchange for 20% of the
casino's operating profit. The Prescott casino contains approximately 300 slot
machines. The St. Joseph riverboat casino contains approximately 350 video poker
machines and 24 gaming tables. If the St. Joseph option is not granted to the
Company before any increase in the purchase price of its limited partnership
interest in Prescott becomes due, then the potential increase in the purchase
price for such interest would no longer be effective, regardless of the first
year's net cash flow. With respect to Prescott, an affiliate of HFS was paid a
pre-opening marketing services fee of $500,000 and will be paid an annual
marketing services fee equal to the lesser of $500,000 or distributions in
respect of the Company's 19.9% limited partnership interest.
Odyssey. Pursuant to agreements entered into in 1993, the Company
acquired non-voting preferred stock convertible into common stock representing a
20% equity interest in Odyssey Gaming Corporation ("Odyssey") for approximately
$3.8 million plus an additional $1.5 million contingent upon the occurrence of
certain events which have not yet occurred and are, in the opinion of management
of the Company, unlikely to occur. The Company has also committed, under certain
circumstances, to make secured project financing loans of up to an aggregate of
$10 million to be used in connection with the development of Native American
casino gaming facilities to be managed by Odyssey. Such circumstances are, in
the opinion of management of the Company, unlikely to occur and include, among
others, execution of agreements between Odyssey and certain Native American
tribes relating to the development and management of certain gaming facilities
and the approval of such agreements by the Chairman of the National Indian
Gaming Commission, entering into a fixed price and bonded contract for the
construction of such gaming facilities, receipt of all other applicable
regulatory approvals and receipt of an opinion of counsel that Class II gaming
(e.g., bingo, pulltabs, punchboards and card games that are not played against
the house) can lawfully be conducted at such gaming facilities under the
management of Odyssey. Pursuant to a marketing services agreement retained by
HFS as part of its casino marketing business, HFS is entitled to receive a
marketing fee equal to 50% of any management fees to be paid to Odyssey under
its casino management contracts for projects financed by the Company. Presently,
Odyssey's principal assets are a five percent profits interest in a proposed
casino to be developed by the Wampanoag Tribe of Gay Head in New Bedford,
Massachusetts and a loan receivable from the Swinomish Indian Tribal Community
of La Conner, Washington.
Termination of Other Gaming Projects in 1995. In June 1995, the
State of Indiana determined not to award a gaming license to Century Casinos,
Inc. ("Century") for its proposed casino gaming operation in Switzerland County,
Indiana. Based on this decision, the Company determined that its investment in
Century common stock and a proposed joint venture with Century were permanently
impaired and recorded a $1.0 million loss in the second quarter of 1995.
On July 18, 1995, the Illinois Gaming Board determined not to
approve the Company's proposed acquisition of Par-A-Dice Gaming Corporation
("Par-A-Dice"), an operator of a riverboat casino in East Peoria, Illinois. The
Company expensed $1.9 million of costs associated with the proposed Par-A-Dice
acquisition, including professional fees and deferred loan costs, primarily in
the second quarter of 1995.
347035.16
10
<PAGE>
Competition
The casino gaming industry is highly competitive and includes
traditional Las Vegas and Atlantic City style land-based casinos, riverboat and
dockside casinos, Native American casinos, state sponsored video lottery
terminals, parimutuel betting (horse racing, harness racing, dog racing and
jai-alai), sports bookmaking and card rooms. Although the Company's gaming
investments include primarily riverboat, dockside and Native American gaming,
the Company's gaming ventures must compete with all forms of gaming (including
any new forms of gaming that may be legalized in the future) and with all other
forms of non-gaming related entertainment.
Gaming Regulation
The Company is subject to regulation by each state in which it
holds investments which conduct activities in the gaming business, and to a
certain extent under Federal law. In jurisdictions where gaming has recently
been legalized, gaming cannot begin until a licensing and regulatory framework
is promulgated and regulatory commissions are appointed, staffed and funded. The
regulatory framework adopted by any jurisdiction may impose restrictions or
costs that would materially impact the profitability of gaming operations in
that jurisdiction. Generally, the Company is required to obtain a gaming license
for each location where it will conduct gaming operations, and each of the
Company's officers, directors, managers and principal shareholders are subject
to strict scrutiny and approval by the gaming commission or other regulatory
body of each state or jurisdiction in which the Company may conduct gaming
operations.
Certain gaming authorities may investigate and make findings with
respect to the suitability or qualifications of securityholders of the Company
to continue to hold interests in the Company in light of such authorities'
policies with respect to the regulation of gaming businesses. Because of the
imposition of such qualifications by the various regulatory authorities, the
Company's Certificate of Incorporation contains provisions that (i) make the
right of securityholders who are required to be qualified by relevant gaming
authorities to vote capital stock held by them dependent upon their prompt
qualification by the relevant gaming authorities (or the prompt receipt of a
waiver of such qualification), (ii) prevent securityholders found to be
disqualified under applicable gaming laws and regulations from voting any shares
of capital stock beneficially owned by them, (iii) provide for the divestiture,
at the Company's option, of any publicly traded securities held by any person
required to be qualified who has not been qualified (or obtained a waiver of
such qualification) or any person found to be disqualified and (iv) provide for
the redemption, at the Company's option, of any securities of the Company held
by any person found to be disqualified. The purpose of these provisions is to
provide a procedure permitting the Company to either (x) require any person
required to be qualified who has not been qualified (or obtained a waiver of
such qualification) or any person found unsuitable or disqualified to hold
securities of the Company to dispose of such securities or (y) to redeem
securities of the Company held by any such person.
Because the Company now holds only a limited number of gaming
related assets, and the Company has decided to pursue investments in the lodging
industry rather than the gaming industry, the Company believes that the
imposition of gaming regulations by the various regulatory authorities will have
less impact on the Company's operations than such regulations did in the past
when the Company invested primarily in the gaming industry.
Environmental Matters
The properties owned in connection with the Company's gaming
business are subject to environmental regulations under Federal, state and local
laws. Certain of these laws may require a current or previous owner or operator
of real estate to clean up designated hazardous or toxic substances affecting
the property. In addition, the owner or operator may be held liable to a
government entity or to third parties for damages or costs incurred by such
third parties in connection with such contamination. The Company does not
believe that it is subject to any material environmental liability.
347035.16
11
<PAGE>
Employees
The Company employed approximately 1,075 persons on April 1, 1996.
Management considers its employee relations to be satisfactory.
Proposed Issuance to Chartwell and FSNL
In connection with the Company's new strategic direction, in
December 1995, the Company sold 904,930 newly issued shares of Common Stock to
Chartwell, resulting in Chartwell owning approximately 16.6% of the Company's
outstanding Common Stock. In February 1996, the Company agreed to sell to
Chartwell and FSNL an additional 4 million newly-issued shares of Common Stock
for an aggregate purchase price of $57 million, or of $14.25 per share (the
"Proposed Chartwell/FSNL Investment").
The partners in Chartwell are primarily members of the Fisher
family and a trust for the benefit of Gordon P. Getty and members of his family.
Richard Fisher, the Company's chief executive officer and a director of the
Company, Martin L. Edelman, the Company's president and a director of the
Company, and Marc E. Leland, a director of the Company, are each beneficial
owners in Chartwell. The majority beneficial owner of FSNL is a trust for the
benefit of Charles deGunzburg and members of his family.
If the sale of the Proposed Chartwell/FSNL Investment is
consummated, Chartwell and FSNL will own approximately 52% of the outstanding
Common Stock. Consummation of the Proposed Chartwell/FSNL Investment is subject,
among other conditions, to stockholder approval at the Company's annual meeting
of stockholders scheduled for the middle of 1996.
Risk Factors
Expansion Risks
The Company's strategy includes increasing the number of its hotels
through the acquisition of existing hotels and development of new hotels.
The Company's ability to expand depends on a number of factors,
including the selection and availability of suitable locations at acceptable
prices, the hiring and training of sufficiently skilled management and personnel
and the availability of financing. There can be no assurance that financing, or
desirable locations for acquisitions or new development, will be available, or,
if available, will be on terms acceptable to the Company.
Expansion by acquisition of hotels entails risks that investments
will fail to perform in accordance with expectations and that the anticipated
costs of renovation or conversion will prove inaccurate, as well as general
investment risks associated with any new real estate investment. In connection
with acquired properties, the Company will incur additional costs relating to
renovation and pre-opening activities and operating expenses, which could
adversely affect the Company's financial performance. Newly opened hotels
generally begin with lower occupancy and room rates and improve over time.
Expansion by development of hotels is subject to a number of risks
including site acquisition cost and availability, risks of construction delay or
cost overruns, risks that properties will not achieve anticipated occupancy
levels or sustain expected room rate levels and commencement risks such as
receipt of zoning, occupancy and other required governmental permits and
authorizations, which in each case could adversely affect the Company's
financial performance.
There can be no assurance that the Company's expansion plans will
be completed successfully. The Company's inability to successfully implement its
expansion plans would limit the Company's ability to grow its revenue base.
Lodging Industry Risks
347035.16
12
<PAGE>
The lodging industry, in general, may be adversely affected by such
factors as changes in national and regional economic conditions (particularly in
geographic areas in which the Company has a high concentration of hotels),
changes in local market conditions, oversupply of hotel space or a reduction in
local demand for rooms and related services, competition in the hotel industry,
changes in interest rates, the availability of financing and other factors
relating to the operation of economy hotels.
Operating factors affecting the Company and the lodging industry
generally include (i) competition from other hotels, motels and recreational
properties, (ii) demographic changes, (iii) the recurring need for renovations,
refurbishment and improvements of hotels and increased expenses related to inn
security, (iv) restrictive changes in zoning and similar land use laws and
regulations, or in health, safety, disability and environmental laws, rules and
regulations, (v) changes in government regulations that influence or determine
wages, prices or construction costs, (vi) changes in the characteristics of
hotel locations, (vii) the inability to secure property and liability insurance
to fully protect against all losses or to obtain such insurance at reasonable
costs, (viii) changes in real estate tax rates and other operating costs, (ix)
changes or cancellations in local tourist, athletic or cultural events, (x)
changes in travel patterns which may be affected by increases in transportation
costs or gasoline prices, changes in airline schedules and fares, strikes,
weather patterns or relocation or construction of highways, (xi) increases in
operating expenses and litigation as a result of on- premise assaults of guests
by third parties, and (xii) changes in brand identity and reputation. Unexpected
or adverse changes in any of the foregoing factors could have a material adverse
effect on the Company's business, assets, financial condition or results of
operations.
Substantially all of the Company's hotels are operated under the
Travelodge or Thriftlodge brand names pursuant to franchise agreements with HFS.
The Company expects that substantially all of the hotels that it acquires or
develops in the future will be operated under hotel brands franchised by HFS or
other third parties. While the Company believes that franchise arrangements
offer the Company competitive advantages over non-franchised lodging properties,
the value of a brand name under which the Company's hotels operate and, as a
result, the Company's business as a whole, could be adversely affected by a
number of factors relating to the franchisor of that brand over which the
Company has no control. These risks include the general reputation of the brand
and the success of the franchisor's marketing efforts.
Cyclicality
The hotel industry is subject to periods of cyclical growth and
downturn. In the past, the hotel industry has experienced cyclical downturns
resulting from, among other things, over-building in the industry and sluggish
general economic conditions in the United States. There can be no assurance that
downturns or prolonged adverse conditions in the hotel industry, in real estate
or capital markets or in national or local economics will not have a material
adverse impact on the Company. In addition, the Company's ownership of real
property is substantial. Real estate values are sensitive to changes in local
market and economic conditions and to fluctuations in the economy as a whole. A
decrease in the value of the Company's real estate could have an adverse effect
on the Company's financial position.
Relationship with HFS
In addition to the Company's relationship with HFS as the
franchisor of the Travelodge and Thriftlodge brand names under which
substantially all of the Company's hotels operate, the Company's principal
credit facility is guaranteed by HFS. The amount and availability of that credit
facility could be adversely affected by adverse changes in the financial
condition of HFS. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Credit Facilities."
ITEM 2. Properties
The executive offices of the Company are located at 605 Third
Avenue, New York, New York and are occupied pursuant to a lease (the "New York
Lease") entered into in March 1996 with an affiliate of Chartwell and an
unaffiliated third party, as landlords. Under the New York Lease, the Company
has leased approximately 18,700 square feet of space for a period of ten years.
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 New York Lease for the use of the office space.
347035.16
13
<PAGE>
The Company also leases office space located at 1973 Friendship
Drive, El Cajon, California, a suburb of San Diego, pursuant to a lease (the "El
Cajon Lease") entered into in November 1991 with an unaffiliated third party, as
landlord. Prior to January 1996, the office space served as the headquarters of
Forte Hotels and as its reservation center. Under the El Cajon Lease, the
Company is obligated to pay approximately $327,000 per year over a term of ten
years for the use of the office space. In the seventh year of the term of the El
Cajon Lease, the Company has an option to purchase at fair market value its
landlord's interest, which is that of a sublessor. The Company subleases
approximately half of the office space to HFS, which continues to operate the
Travelodge reservation system from that space. Rental costs charged to HFS for
the space used by it are allocated based upon the percentage of space occupied
and the related overhead expenses associated with that percentage.
See Item 1 under the caption "Business--Lodging Business" for a
description of the Company's ownership in various hotel properties and retail
space.
ITEM 3. Legal Proceedings
The Company is not party to any litigation which it believes will
have a material impact on the financial condition of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 1995.
347035.16
14
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock, par value $.01 per share ("Common
Stock"), commenced trading on the Nasdaq National Market on November 14, 1994
under the symbol "NAGC" and, since January 1996, has traded under the symbol
"NALC". The following table sets forth the range of high and low sale prices per
share of Common Stock, as reported on the Nasdaq National Market for the period
November 14, 1994 through December 31, 1995.
Year 1994 High Low
Fourth Quarter
(commencing November 14, 1994)..............$191/8 $9 1/2
Year 1995
First Quarter................................$14 1/4 $8 1/4
Second Quarter...............................$11 $8
Third Quarter................................$10 1/2 $71/8
Fourth Quarter...............................$12 1/2 $8 1/2
On June 5, 1996, the last reported sale price per share of Common
Stock was $14.75. As of June 5, 1996, there were approximately 135 holders of
record of Common Stock.
The Company has never paid any dividends on the Common Stock. The
Company expects to retain its earnings for the development and expansion of its
business and the repayment of indebtedness and does not anticipate paying
dividends on the Common Stock in the foreseeable future. Any future dividend
policy will be determined by the Company's Board of Directors, and the payment
of any dividend in the future will be based upon conditions then existing,
including the Company's earnings, financial condition and capital requirements,
as well as such economic and other factors as the Board may deem relevant at the
time. The Company's credit facility with Chemical Bank and Bankers Trust Company
prohibits the payment of dividends on the Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Credit
Facilities".
347035.16
15
<PAGE>
ITEM 6. Selected Financial Data
The following is a summary of selected historical financial data for the
Company and its subsidiaries. The data for the years ended December 31, 1995 and
1994 and the period August 1, 1993 (inception) to December 31, 1993, have been
derived from, and should be read in conjunction with, the audited consolidated
financial statements of the Company included in Item 8 of this Report. All
amounts are in thousands, except per share amounts.
Period from
August 1, 1993
(Inception)
Year Ended Year Ended to
December 31, December 31, December 31,
1995 1994 1993
OPERATING DATA
- ------------------------------------------------------------------------------
Total revenue $4,012 $ 2,391 $ 128
Total expenses 21,485 5,495 581
Loss before income tax
provision (benefi) (17,473) (3,104) (453)
Net loss (18,182) (1,831) (267)
Net loss per share (3.57) (0.37) (0.05)
BALANCE SHEET DATA
- ------------------------------------------------------------------------------
Cash and cash equivalents $51,470 $ 44,233 $ --
Investments 16,700 20,092 5,360
Loans receivable 7,166 15,375 6,518
Total assets 87,074 98,895 12,238
Stockholders' equity 86,522 96,979 12,041
There were no dividends declared during the periods presented above.
On November 22, 1994, HFS distributed to its stockholders one share of Common
Stock for every ten shares of HFS common stock held of record on November 14,
1994 (the record date for the Distribution). Prior to November 22, 1994, the
Company's operations were conducted by HFS and its subsidiaries.
The following presents the unaudited pro forma consolidated results of
operations for the year ended December 31, 1995 as if the Travelodge Acquisition
and related financing occurred on January 1, 1995:
(In Thousands Except
per Share Amounts)
(Unaudited)
Revenues $ 69,141
Net Loss (21,023)
Net Loss per share (4.12)
347035.16
16
<PAGE>
The pro forma results are not necessarily indicative of the actual results of
operations that would have occurred had the transactions been consummated as
indicated nor are they intended to indicate results that may occur in the
future. See "Business--Lodging Business--Proposed Canadian Acquisition" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Lodging Acquisition."
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL OVERVIEW
The Company became an independent public entity on November 22,
1994, when HFS distributed all of its wholly-owned common stock of the Company
to HFS stockholders. The Company engaged in the development of prospective
casino gaming facilities until the third quarter of 1995, when the Company
announced a decision by its Board of Directors to curtail future gaming
investments and focus on investments and acquisitions in non-gaming industries.
In December 1995, the Company's Board of Directors decided that the Company
should pursue a new strategic direction with a focus on becoming a hotel and
motel owner and operator.
On January 23, 1996, the Company entered the lodging industry with
its acquisition of Forte Hotels, which owned or had significant joint venture
interests in 115 hotels, for approximately $98 million, net of work capital
adjustments and including expenses. The Company has agreed to sell to Chartwell
Leisure Associates L.P. II ("Chartwell") and FSNL LLC ("FSNL") a majority
interest in the Company.
RESULTS OF OPERATION - FINANCIAL DATA
Pro Forma
The pro forma financial data includes the operations of Forte
Hotels, Inc. ("Forte Hotels") as if the acquisition occurred on January 1, 1995,
giving effect to depreciation and amortization associated with acquired hotel
properties, financing costs associated with the acquisition and related income
tax effects. Pro forma results of operations also include revenues and expenses
associated with the Company's gaming business which do not reflect net savings
which may be achieved as a result of the curtailment of future gaming
operations. Further, the pro forma financial data does not include potential
additional cost savings or revenue enhancements that management believes may be
realized following the acquisition of Forte Hotels.
1995 Versus 1994
The Company's operations from August 1, 1993 (date of inception)
through November 1995 consisted of the pursuit of gaming development
opportunities. Accordingly, the Company's operating results for 1995 and 1994
consist of modest investment revenue. In 1995, the Company's total revenue of
$4.0 million consisted entirely of interest income compared to $2.4 million of
total revenue in 1994, which consisted of $1.4 million of interest income and a
$1.0 million gain on the sale of Capital Gaming International, Inc. ("Capital")
common stock.
Development expenses for the year ended December 31, 1995 totaling
$15.5 million primarily consist of expenses associated with terminated
investments and transactions, compared to $2.4 million of development expenses
associated with the pursuit of equity and development investments in
unsuccessful gaming opportunities in 1994. In 1995, due to the failure of the
Pennsylvania legislature to adopt legislation contemplating a referendum on
authorization of gaming in the state, the Company agreed in principle with its
partners to dissolve its joint ventures to develop casino gaming facilities in
Pittsburgh and Erie, Pennsylvania. As a result, the Company recorded $6.7
million of losses in 1995, primarily in the third quarter, representing a
write-off of its Pittsburgh and Erie joint venture interests. In 1995, the
Company also recognized approximately $2.4 million of write-downs of its
investment in Boomtown, Inc.'s ("Boomtown") Biloxi, Mississippi casino to the
investment's estimated net realizable value. In the second quarter of 1995, the
Company recognized a $1.9 million expense for professional and loan commitment
fees associated with the termination of its proposed acquisition of all of the
outstanding common stock of Par-A-Dice Gaming Corporation ("Par-A-Dice")
following
347035.16
17
<PAGE>
the Illinois Gaming Board's determination not to approve the Company's
acquisition of Par-A-Dice. The Company also recorded a $1.0 million loss for the
permanent impairment of its investment in Century Casinos, Inc. ("Century")
common stock and investment in a proposed joint venture with Century following
the unfavorable decision of the State of Indiana in June 1995 towards Century's
proposed casino in Switzerland County, Indiana. The Company recognized
approximately $1.4 million of professional fee expenses, primarily in the first
quarter of 1995, incurred in connection with the Company's proposed merger with
Boomtown which was terminated in April 1995. Management believes, based upon
available evidence, that gaming related assets at December 31, 1995 are stated
at the lower of cost or estimated net realizable value; however, the continued
uncertainty surrounding the ability of these assets to generate positive cash
flow necessarily results in the potential for future write-downs to present
these assets at their estimated net realizable value in subsequent periods.
Included in general and administrative expenses-related party
("Related Party G&A) 1995 are approximately $3.2 million of fees paid to HFS in
consideration for providing both corporate services and up to $75 million of
available credit and/or guarantees on behalf of the Company (see "Liquidity and
Capital Resources"). Related Party G&A totaling $339,000 in 1994 consisted of
similar charges for only a 1 1/2 month period following the Distribution.
General and administrative expenses (G&A) for 1995 of $2.8 million approximated
1994 expenses. The Company also expensed the net deferred tax assets previously
recorded at December 31, 1994 which were expected to be realized from income
generated from Par-A-Dice operations, following the Illinois Gaming Board's
determination not to approve the Company's acquisition of Par-A-Dice.
1994 Versus 1993
The Company commenced operations in August 1993 and recognized
$128,000 of interest income, $581,000 of total expenses allocated to the Company
by HFS for corporate services and $186,000 of tax benefits contributed to the
HFS consolidated income tax return during 1993. Company gaming development
activities expanded in 1994 and total revenue, expenses and tax benefits
contributed to HFS consolidated income tax return increased accordingly. The
Company generated a $1.8 million net loss on $2.4 million of investment revenue
and $5.5 million of total expenses.
LIQUIDITY AND CAPITAL RESOURCES
Lodging Acquisition
On January 23, 1996, the Company acquired the outstanding common
stock of Forte Hotels for approximately $98 million, net of working capital
adjustments and including expenses (the "Travelodge Acquisition"). In a related
transaction prior to consummation of the Travelodge Acquisition, HFS and Motels
of America, Inc. acquired from Forte Hotels the Travelodge franchise system and
19 motel properties, respectively, for an aggregate purchase price of $71.6
million. The principal assets of Forte Hotels acquired by the Company consisted
of fee and leasehold interests in 18 wholly owned hotels (of which one was
subsequently disposed) and joint venture interests in 97 additional hotel
properties. The Company financed $60 million of the purchase price of the
Travelodge Acquisition with proceeds from the Company's credit facility with
Chemical Bank and Bankers Trust Company and $38 million with existing cash. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Credit Facilities." HFS provided advisory services in connection
with the acquisition for which the Company paid a $1,968,000 fee. The Company
had approximately $50 million available for borrowing under that credit facility
immediately following the acquisition of Forte Hotels.
Concurrently with the acquisition of Forte Hotels, the Company and
HFS terminated or modified certain agreements entered into in connection with
the 1994 distribution of the shares of the Company's Common Stock to HFS
stockholders. These agreements provided for HFS to provide casino marketing,
corporate and advisory services to the Company in consideration for fees. The
Company and HFS terminated the marketing and advisory services agreement
concurrently with the Forte Hotels acquisition.
The financing agreement was modified such that HFS is to provide up
to $75 million of credit enhancements to the Company's non-gaming industry
financings for a fee of 2% per annum. The corporate services agreement was
modified such that in exchange for payment of a fee of $1.5 million per year HFS
is to
347035.16
18
<PAGE>
provide advisory services through January 2019 in connection with business
acquisitions, financings and other transactions by the Company and, through
September 30, 1996, certain corporate and accounting services.
On January 23, 1996, the Company issued a $15.0 million standby
letter of credit in favor of Bank of America National Trust and Savings
Association to secure borrowings under Forte Hotel's loan agreement with that
bank.
The Company is also obligated under note obligations principally to
banks and other lenders approximating $3.1 million at December 31, 1995.
Interest rates on such indebtedness range from 6% to 12% and require future
aggregate principal payments approximating $3.1 million for the five years
following 1995, including $891,000 in 1996.
On January 24, 1996, the Company entered into an agreement in
principle with Chartwell and FSNL to sell approximately 4 million newly issued
shares of unregistered Company stock for $57 million. Upon shareholder approval
and completion of such sale, Chartwell and FSNL will own approximately 52% of
the outstanding stock of the Company. See "Business--Proposed Issuance to
Chartwell and FSNL".
The Company intends to accomplish its proposed Canadian acquisition
(see "Business--Lodging Business--Proposed Canadian Acquisition") by paying
approximately C$94 million in order to purchase substantially all of CPLP's
existing bank debt and to pay certain specified closing costs (including real
estate taxes) and by assuming the liability for identified trade payables and
property specific bank debt, aggregating approximately another C$10 million. Of
the C$94 million payment, approximately half is expected to be financed with
proceeds from the proposed stock sale to Chartwell and FSNL and half by bank
borrowings.
In connection with the CPLP Acquisition, the Company expects to be
obligated to make certain payments to CPLP in future years. Generally, the
Company expects to be obligated to pay to CPLP a percentage of net cash flow
("Remaining Cash Flow") generated by the hotels acquired from CPLP (the "CPLP
Hotels") remaining after all expenses have been paid and the Company has
received a cumulative, compounded, 13% per annum preferred return on its
investment in the CPLP Hotels (the "NLC Preferred Return"). The Company is
expected to be required to pay to CPLP 100% of Remaining Cash Flow up to
C$600,000 and approximately 25% of Remaining Cash Flow in excess of C$600,000.
The Company also expects to be required to pay an amount equal to 25% of the net
capital proceeds realized by the Company from any sales and refinancings of any
CPLP Hotel, after payment to the Company of its investment in the CPLP Hotels,
the NLC Preferred Return and transaction costs.
The Company expects to be able to terminate the Future Payments Agreement
after 2000, upon the payment of certain amounts. In any event, the Company
expects that the entitlements under the Future Payments Agreement shall cease
by not later than 2008. No payment from the Company to CPLP would have been
due on a pro forma basis for the fiscal year ended December 31, 1995 under
the expected terms of the Future Payments Agreement.
The Company intends to launch a capital improvement program to
increase room and occupancy rates at the Company's hotels. As part of this
program, the Company expects to upgrade the interior and exterior of all
properties that do not meet corporate standards. For 1996, the Company has
budgeted approximately $10 million for its capital improvements program. If the
Company's proposed Canadian acquisition is consummated, the Company expects to
increase its budget for capital improvements to those properties, but has not
yet determined the amount of such increase or any other amounts to be budgeted
for capital improvements in future years. The Company intends to finance this
capital expenditure program with borrowings under the Credit Facility and/or
excess cash on hand.
Gaming Business
The Company has agreed in principle with its partners to dissolve
its joint ventures which were established to develop casino gaming facilities in
Pittsburgh and Erie, Pennsylvania. Upon dissolution, the Company's contingent
obligation to acquire land and to develop and finance the construction of the
respective gaming facilities will be terminated. In connection with the joint
venture to develop a gaming facility in Pittsburgh, the Company loaned the Urban
Redevelopment Authority of Pittsburgh, Pennsylvania ("URA") approximately $9.5
million in September 1994. In September 1995, the URA exercised its option to
extend the maturity of the loan by one year to September 30, 1996. As a result
of the Pennsylvania legislature's failure to
347035.16
19
<PAGE>
propose a voter referendum to approve casino gaming facilities in that state,
the Company notified the URA that it will not exercise its option to purchase a
portion of the site which is the collateral for that loan, thus requiring the
URA to pay interest currently at 4% per annum on a monthly basis. The URA made a
$3.8 million payment of principal and interest in January 1996 and $2.2 million
payment of principal and interest in June 1996. The Company will seek
collection of the remaining $4.0 million balance of the URA loan in
September 1996. In December 1995, the Company sold for $0.9 million two parcels
of land in Erie, upon which a proposed casino was to be constructed.
In March 1995, the Company agreed to loan up to an additional $2.0
million to the partnership that owns the Rainbow Casino in Vicksburg,
Mississippi. The proceeds of such loan, together with additional capital to be
contributed by the general partner of such partnership, are being used to
finance certain improvements to the casino project, the completion of related
facilities and to provide additional working capital. The loan is unsecured,
bears interest at 10% per annum and will be repaid in equal monthly installments
of principal and interest over its seven year term. Cumulative advances were
$1.2 million at December 31, 1995. In 1994, the Company loaned Rainbow Casino
Corporation ("Rainbow") $10 million to finance the licensing, construction and
start-up costs associated with the Rainbow Casino, a dockside casino located in
Vicksburg, Mississippi, which commenced operations on July 12, 1994. In 1994,
the Company entered into an agreement with Chartwell Leisure Associates L.P., an
affiliate of Chartwell ("Chartwell Leisure"), to induce Chartwell Leisure to
finance a family entertainment center, which opened in May 1995. In connection
with the agreement, the Company agreed to pay Chartwell Leisure, upon opening of
the entertainment center, a percentage of principal and interest payments
collected on the $10 million loan to Rainbow, ranging from 14% to 27% of such
payouts adjusted annually in accordance with a schedule to the agreement. The
Company commenced payments to Chartwell Leisure in July 1995 and made
approximately $0.2 million of payments in 1995. HFS will also share marketing
fees from the Rainbow Casino with Chartwell Leisure based on the same scheduled
percentages. Chartwell Leisure has agreed to share 50% of the net cash flow
payable to Chartwell Leisure with respect to the family entertainment center
with HFS and HFS has agreed to share such amounts pro rata with the Company
based on relative amounts paid by HFS and the Company, respectively, to
Chartwell Leisure each year.
Credit Facilities
General. The Company is a party to a credit facility (the "Credit
Facility"), dated as of January 23, 1996, among the Company, Chemical Bank, as
Documentation Agent, Bankers Trust Company, as Administrative Agent, and the
Banks from time to time parties thereto. The Credit Facility provides that the
Company may borrow up to $125,000,000 under a revolving credit commitment, which
may be utilized for the incurrence of revolving credit loans or the issuance of
letters of credit. Revolving Loans under the Credit Facility may be borrowed as
Base Rate Loans or Eurodollar Loans. HFS has guaranteed $75,000,000 of the
Company's obligations under the Credit Facility.
Capitalized terms used in this section but not defined in herein are
defined in the relevant agreement. Forms of each of the agreements described
below have been filed with the Commission and are available as described under
"Available Information."
Revolving Loans may be used by the Company to finance the Travelodge
Acquisition, Permitted Hotel Acquisitions and for general corporate purposes,
including to finance working capital needs. As of March 31, 1996, approximately
$85,561,000 aggregate principal amount was outstanding under the Credit
Facility, of which approximately $70,000,000 constituted Revolving Loans and
approximately $15,561,000 constituted borrowings for letters of credit. On May
21, 1996, the Company repaid approximately $10,600,000 of the Revolving Loans,
thereby reducing the aggregate principal amount outstanding under the Credit
Facility as of that date to approximately $74,961,000. All outstanding
borrowings under the Credit Facility mature on January 23, 2002.
Interest on the outstanding principal amount of each Base Rate Loan
is payable at an annual rate equal to the highest of (A) the rate which is 1/2
of 1% in excess of the Adjusted Certificate of Deposit Rate, (B) 1/2 of 1% in
excess of the Federal Funds Rate or (C) the Prime Lending Rate of Bankers Trust
Company. Interest on the outstanding principal amount of each Eurodollar Loan is
payable at an annual rate equal to the sum of the Applicable Margin (which is
within a range of 0.40% to 0.75% based on the principal amount of Revolving
Loans and letters of credit outstanding) plus the Eurodollar Rate. The Company
is
347035.16
20
<PAGE>
obligated to pay a commitment fee at an annual rate equal to 0.2% of the amount
of the Unutilized Revolving Loan Commitment and an annual administration fee of
$150,000. The Company is also obligated to pay a fee in respect of each
outstanding letter of credit equal to the Applicable Margin on the stated amount
of the letter of credit, plus an additional fee equal to the higher of $500 per
year or an amount of 0.5% of the stated amount of the letter of credit.
The total revolving credit commitment amount will be reduced and, to
the extent outstanding borrowings would exceed the resulting commitment amount,
principal will be repaid, semi-annually on March 31 and December 31 each year,
commencing March 31, 1997. The commitment reductions will be in the amount of
$7,500,000 per year, except that the commitment will reduce by $50,000,000 to
zero in 2002. The revolving credit commitment amount also will be reduced in the
amounts specified in the Credit Facility and, to the extent outstanding
borrowings would exceed the resulting commitment amount, principal will be
repaid in such amounts, (i) in the event that the long-term senior unsecured
debt credit rating of HFS shall have been reduced to a level equal to or below
BBB- by S&P and/or is unrated by S&P (ii) from the proceeds of any capital
contribution or sale of equities by the Company or its Subsidiaries or Joint
Ventures, (iii) from the proceeds of any incurrence of Indebtedness for Borrowed
Money by the Company or its Subsidiaries or Joint Ventures, (iv) from the
proceeds of any Asset Sale by the Company or its Subsidiaries or Joint Ventures
or (v) in an amount equal to 50% of all Residual Excess Cash Flow in any fiscal
year.
Covenants. The Credit Facility contains covenants restricting the
Company and its Subsidiaries and Joint Ventures from: (i) creating, incurring or
assuming any Liens; (ii) merging or consolidating or disposing of its assets, or
acquiring assets from any other person; (iii) changing the nature of their
respective businesses; (iv) incurring indebtedness other than existing
indebtedness and indebtedness not to exceed $15,000,000 under the Company's
credit facility with Bank of America; (v) paying dividends or making Restricted
Payments; and (vi) modifying the agreements relating to the Company's
indebtedness and preferred stock or its corporate charter documents. The Credit
Facility prohibits the Company from paying dividends on its Common Stock.
In addition, the Credit Facility requires that the Company, in
certain cases on a stand alone basis and in other cases on a consolidated basis
with its subsidiaries and joint ventures, satisfy certain financial ratio
coverage tests, including maintenance of net worth, minimum interest coverage,
and minimum fixed charge and maximum leverage coverages. The Company's required
minimum Adjusted Consolidated Borrower EBITDA (generally defined as net income
of the Company and its subsidiaries before interest expense, taxes, depreciation
and amortization to the extent each reduces net income) is $1,527,000 for the
Company's fiscal quarter ended March 31, 1996 and increases each fiscal quarter
thereafter until the fiscal quarter ended December 31, 2001 in which the
Company's required minimum Adjusted Consolidated Borrower EBITDA is $13,943,000.
The minimum required Consolidated Interest Coverage Ratio (generally defined as
the ratio of Adjusted Consolidated Borrower EBITDA to the interest expense of
the Company and its subsidiaries) at the quarterly fiscal periods ending on or
prior to December 31, 1996 is 1.75:1.00, which ratio increases each year until
it reaches 3.00:1.00 for quarterly fiscal periods ending after March 31, 2000.
The maximum allowable Total Leverage Ratio (generally defined as the ratio of
all indebtedness of the Company and its subsidiaries to Adjusted Consolidated
Borrower EBITDA) for determination dates occurring on or prior to March 30, 1997
is 6.75:1.00, which ratio decreases each year until it reaches 4.00:1.00 for
determination dates occurring after March 30, 2001.
The Credit Facility also requires that the Company and its
subsidiaries, on a consolidated basis, satisfy a Consolidated Fixed Charge
Coverage Ratio (generally defined as the ratio of Adjusted Consolidated Borrower
EBITDA to the sum of all interest expense, taxes paid and capital expenditures
of the Company and its subsidiaries) at the end of each fiscal quarter. The
minimum required Consolidated Fixed Charge Coverage Ratio for all test periods
to and including December 31, 1996 is 1.75:1.00, which ratio increases until it
reaches 1.25:1.00 for the quarterly fiscal periods ending after September 30,
1997.
The Company is currently not in compliance with various covenants
contained in the Credit Facility. The Company has requested a waiver of
compliance with such covenants, and has been informed that the waiver has been
approved by the Banks which are parties to the Credit Facility and that the
Company will receive written confirmation shortly. The waiver requested by the
Company will become effective as of March 31, 1996 for the financial covenants
determined as of, or for the period ending on, that date. Pursuant to the
347035.16
21
<PAGE>
Credit Facility, those covenants will be determined again as of, and for the
period ending on, June 30, 1996. The Company intends to refinance its
indebtedness under the Credit Facility, although no commitment has been received
by the Company in respect of such a refinancing. There can be no assurance that
the Company will be able to accomplish such a refinancing. If the Company is
unable to refinance its indebtedness under the Credit Facility, the Company
expects that it will continue to require waivers of the financial covenants in
the Credit Facility in the future or will attempt to renegotiate those
covenants.
Proposed Credit Facility. The Company is currently negotiating a new
revolving credit facility (the "Proposed Credit Facility") with Chemical Bank
which the Company proposed to use to refinance the Credit Facility. The expected
terms of the Proposed Credit Facility are described below. There is no assurance
that the Company will enter into the Proposed Credit Facility or that a
definitive agreement, if entered into, will contain the terms described below.
The Proposed Credit Facility is expected to provide the Company with
an aggregate revolving credit commitment of up to $150 million to $175 million,
which the Company will be entitled to utilize for the incurrence of revolving
credit loans or the issuance of letters of credit. The Company expects that
$75,000,000 of the Company's obligations under the Proposed Credit Facility will
be guaranteed by HFS. All outstanding obligations under the Proposed Credit
Facility are expected to mature on the sixth anniversary of the date of the
initial borrowing under the facility.
Proceeds of borrowings under the Proposed Credit Facility will be
available to the Company (i) to refinance in full the Company's indebtedness
under the Existing Credit Facility, (ii) to finance the acquisition of hotel
properties and (iii) to finance the Company's working capital and general
corporate requirements. In addition, up to $55 million of the aggregate
commitment will be available as a subfacility in the form of Canadian Dollar
denominated loans to a newly-formed wholly-owned subsidiary of the Company to
finance the proposed CPLP Acquisition.
Revolving loans under the Proposed Credit Facility are expected to
be available as base rate loans or eurodollar loans. Interest on the outstanding
principal amount of each base rate loan is expected to be payable at an annual
rate equal to the highest of (A) the rate which is 1/2 of 1% in excess of the
Federal Reserve reported certificate of deposit rate, (B) 1/2 of 1% in excess of
the federal funds rate or (C) the prime lending rate of Chemical Bank. Interest
on the outstanding principal amount of each Eurodollar Loan is expected to be
payable at an annual rate equal to the sum of the applicable margin (which is
within a range of 0.40% to 1.00% based on the principal amount of revolving
loans and letters of credit outstanding) plus the eurodollar rate. The Company
is expected to be obligated to pay a commitment fee on the unutilized portion of
the facility at an annual rate of 0.200% to 0.375% depending on the principal
amount of revolving loans and letters of credit outstanding. The Company also
expects to be obligated to pay a fee in respect of each outstanding letter of
credit equal to the applicable margin on the stated amount of the letter of
credit, plus an additional fee equal of 0.15% of the stated amount of the letter
of credit.
The aggregate revolving credit commitment is expected to be subject
to annual reductions in the amounts to be specified in the Proposed Credit
Facility and, to the extent outstanding borrowings would exceed the resulting
commitment amount, principal would be required to be repaid. The revolving
credit commitment amount also would be reduced and, to the extent outstanding
borrowings would exceed the resulting commitment amount, principal would be
repaid upon the occurrence of certain events to be specified in the Proposed
Credit Facility.
The Proposed Credit Facility is expected to contain covenants
restricting the Company and its subsidiaries and joint ventures from: (i)
creating, incurring or assuming liens; (ii) merging or consolidating or
disposing of assets, or acquiring assets from other persons; (iii) changing the
nature of their respective businesses; (iv) incurring indebtedness; (v) paying
dividends or making restricted payments; and (vi) modifying the agreements
relating to the Company's indebtedness and preferred stock or its corporate
charter documents. The Proposed Credit Facility will prohibit the Company from
paying dividends on its Common Stock.
In addition, the Credit Facility will require that the Company, in
certain cases on a stand alone basis and in other cases on a consolidated basis
with its subsidiaries and joint ventures, satisfy certain financial
347035.16
22
<PAGE>
ratio coverage tests, including maintenance of net worth, minimum interest
coverage, and minimum fixed charge and maximum leverage coverages.
Forte Hotels Loan Agreement. Forte Hotels has a loan agreement with
Bank of America National Trust and Savings Association ("B of A") which was
amended and restated in connection with the Travelodge Acquisition (the "Forte
Loan Agreement"). The Forte Loan Agreement permits Forte Hotels and certain of
the joint ventures through which it owns hotels to make revolving credit
borrowings in an aggregate amount of up to $10 million and provides for an
uncommitted credit facility, which is available at the sole discretion of B of
A, in an aggregate amount of up to $5 million. Borrowings under the Forte Loan
Agreement may be made until December 31, 1996. Revolving credit borrowings under
the Forte Loan Agreement may be made, at the option of the Company, as short
term borrowings, which have a maximum maturity of six months, or medium term
borrowings, which have a maximum maturity of five years. Short term borrowings
bear interest, at the option of the Company, at the B of A prime rate, 1/2 of 1%
in excess of the B of A offshore rate or 3/4 of 1% in excess of the B of A CD
rate. Medium term borrowings bear interest at 1% in excess of the B of A prime
rate. The borrowings under the Forte Loan Agreement are secured by a $15.0
million standby letter of credit issued under the Credit Facility. Forte Hotels
is obligated to pay a commitment fee at an annual rate of 0.1875% on the
unutilized portion of the Forte Loan Agreement. Borrowings under the Forte Loan
Agreement were approximately $7.8 million at January 23, 1996.
CASH FLOWS
Cash used in operating activities was $6.5 million in 1995 compared
to $4.7 million in 1994. The increase in cash used relates primarily to the
increased development expense incurred by the Company in connection with its
casino development business.
Cash provided by investing activities totaled $5.5 million in 1995
compared to cash used in investing activities of $38 million in 1994. Investing
activities in both years are related to the Company's gaming development
activities. The net cash provided in 1995 is a result of the Company's
liquidation of certain gaming investments.
Capital contributions by HFS totaled $87.3 million in 1994, which
comprised amounts contributed to fund the Company's gaming investments and to
capitalize the Company in connection with the spin-off of the Company to HFS'
shareholders in November 1994. In December 1995 the Company sold, in a private
placement, 904,930 shares of its unregistered common stock to Chartwell,
resulting in cash generated from financing activities of $8.3 million in 1995.
WORKING CAPITAL
The Company had $62.2 million of available working capital including
$51.5 million of cash at December 31, 1995 of which $38 million was used to
finance the Travelodge Acquisition.
IMPACT ON INFLATION
The primary source of revenue of the Company will be on lodging
facilities' gross room revenue. As a result, the Company's revenue (excluding
those changes attributable to new property acquisition or disposals) is expected
to change consistent with the trend of the consumer price index. The Company
does not believe that inflation would have an unfavorable impact on its
operations.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", which became effective for the Company beginning
January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB Opinion
No. 25 to its stock based
347035.16
23
<PAGE>
compensation awards to employees and will disclose the required pro forma effect
on net income and earnings per share.
SEASONALITY
Room occupancy rates at its hotels are affected by normally
recurring seasonal patterns and, in most locations in the United States and
Canada, are higher in the late spring through early fall months than during the
balance of the year, with the lowest occupancy rates occurring in the first
quarter of the year. As a result, as a company which will be primarily engaged
in the lodging business in the future, the Company expects to experience
seasonal lodging revenue patterns similar to the hotel industry with the summer
months, due to the increase in leisure travel, producing a higher revenue than
other periods during the year.
ITEM 8. Financial Statements and Supplementary Data
See page F-1 of this Report, which includes an index to the
Company's consolidated financial statements. Financial statement schedules and
supplementary data are omitted for the reason that they are not applicable or
the required information is included in the consolidated financial statements or
notes thereto.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
347035.16
24
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Company
The Board of Directors of the Company is presently comprised of nine
members, divided into three classes with terms expiring at the Company's annual
meeting of stockholders for the years 1996, 1997 and 1998, as indicated below
after each director's name. Also set forth below is certain information
regarding the directors and executive officers of the Company, including each
individual's age and principal occupation, a brief account of business
experience during at least the last five years and other directorships currently
held.
The following table sets forth certain information regarding the executive
officers and directors of the Company currently in office:
Name Office or Positions Held
Richard L. Fisher Chairman of the Board and Chief Executive
Officer
Martin L. Edelman Director and President
Kenneth J. Weber Chief Financial Officer
Carl Winston Executive Vice President -- Operations
Douglas H. Verner Executive Vice President, General Counsel
and Secretary
James E. Buckman Director
Stephen P. Holmes Director
Michael J. Kennedy Director
Henry R. Silverman Director
Marc E. Leland Director
Robert F. Smith Director
Roger J. Stone, Jr. Director
On January 24, 1996: (i) Henry R. Silverman resigned as Chairman and Chief
Executive Officer of the Company, (ii) Robert S. Kingsley resigned as President
and Chief Operating Officer of the Company, (iii) Richard L. Fisher was elected
Chairman of the Board and Chief Executive Officer of the Company and (iv) Martin
L. Edelman was elected President of the Company. John D. Snodgrass resigned as
Vice Chairman of the Company's Board in December 1995, and resigned as a
director on January 23, 1996. Mr. Buckman resigned as Executive Vice President,
General Counsel and Secretary as of January 23, 1996, and Mr. Holmes resigned as
Executive Vice President, Chief Financial Officer and Treasurer as of March 1,
1996. Mr. Edelman resigned as Vice Chairman of the Board as of March 12, 1996,
and continues to serve as President and a Director of the Company.
James E. Buckman, term expiring in 1996, age 51, has been a Director of
the Company since November 22, 1994. Mr. Buckman 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.
347035.16
25
<PAGE>
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.
Stephen P. Holmes, term expiring in 1996, age 39, has been a Director of
the Company since September 1994. Mr. Holmes has been Executive Vice President
and Chief Financial Officer of HFS since July 1990, a Director of HFS since June
1994 and was Executive Vice President, Chief Financial Officer and Treasurer of
the Company from November 1994 until February 1996. Mr. Holmes is also currently
a director of AMRE, Inc., a home remodeling and improvement company. He was
employed by The Blackstone Group ("Blackstone"), a New York investment banking
firm, from February 1990 through September 1991 as a Vice President and a
Managing Director.
Michael J. Kennedy, term expiring in 1996, 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.
Henry R. Silverman, term expiring in 1997, 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.
Martin L. Edelman, term expiring in 1997, 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. 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.
Marc E. Leland, term expiring in 1997, 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 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.
Robert F. Smith, term expiring in 1998, 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.
Robert J. Stone, Jr., term expiring in 1998, 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
347035.16
26
<PAGE>
Services Board by President Ronald Reagan. Mr. Stone is a Director of the
Pietro Food Corporation of Buena, New Jersey.
Richard L. Fisher, term expiring in 1998, 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 affiliates of Chartwell. Mr. Fisher was appointed 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.
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.
Compensation of the Board of Directors
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 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.
347035.16
27
<PAGE>
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.
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 National Market. 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.
ITEM 11. Executive Compensation
Summary Compensation Table
The following table sets forth for 1995 and 1994 the cash and noncash
compensation awarded to or earned by the Chief Executive Officer of the Company
and the other most highly compensated executive officers (together, the "Named
Executive Officers") of the Company in 1995:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE (1)(2)
----------------------
Long-Term
Compensation
Annual Compensation
----------------------
Awards
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Name and Principal Other
Position Annual Securities All Other
Compen- Restricted Underlying Compensation
Salary Bonus sation Stock Options/ ($)
Year ($) ($) ($) Awards SARs(#)
- -------------------------------------------------------------------------------------------------
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.
347035.16
28
<PAGE>
(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.
(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.
(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
$6,692, and (iii) Company contributions to the Company's defined
contribution salary reduction 401(K) plan qualified under Section 401(a)
of the Code.
There are presently no pension or retirement plans of the Company that
will cover any of the Named Executive Officers.
None of the Named Executive Officers were granted options during the
Company's 1995 fiscal year. The Company's option plans do not provide for stock
appreciation rights.
347035.16
29
<PAGE>
Option Exercises and Year-End Option Value Table
The following table summarizes the exercise of options by the named
executive officers during the last fiscal year and the value of options held by
such named executives as of the end of such fiscal year. The Company's option
plans do not provide for stock appreciation rights.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
<S> <C> <C> <C> <C>
Number of Securities Value of Unexercised
Underlying Unexercise In-the-Money Options/SARs
Options/SARs at FY-Enat (FY-End ($)(2)
Shares Acquired
Name on Exercise (#) Value Realized Exercisable/Unexercis Exercisable/Unexercisable
($)
- ---------------------------------------------------------------------------------------
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 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.
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
347035.16
30
<PAGE>
connection with Mr. Kingsley's resignation from the Company, the Company
has agreed to pay Mr. Kingsley his base salary through December 31, 1996.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth in the following table is furnished as of June 1,
1996 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 Securities and Exchange Commission (the "Commission")
pursuant to Sections 13(d), 13(f), and 13(g) of the Exchange Act with respect to
the Company's Common Stock. As of June 1, 1996, there were 5,452,320 shares of
Common Stock outstanding.
Amount and
Nature of
Beneficial Percent of
Ownership Class
Principal Stockholders
Chartwell Leisure Associates L.P. II 904,930 16.60%
222 Purchase Street
Suite 303
Rye, New York 10580
Fir Tree Inc. d/b/a Fir Tree Partners (1) 397,100 7.28%
1211 Avenue of the Americas, 29th Floor
New York, New York 10036
The Kaufmann Fund, Inc.(2) 602,500 11.05%
140 East 45th Street, 43rd Floor
New York, New York 10017
Directors, Nominees and Executive Officers
Richard L. Fisher (3) 906,930 16.63%
Henry R. Silverman (4) 227,732 4.01%
Robert S. Kingsley (5) 0 *
Stephen P. Holmes (6) 19,400 *
Martin L. Edelman (7) 48,437 *
Michael J. Kennedy (8) 5,000 *
Robert F. Smith (9) 6,000 *
Roger J. Stone (10) 5,000 *
Marc E. Leland (11) 904,930 16.60%
James E. Buckman (12) 10,740 *
Executive Officers and Directors 1,180,802 20.63%
as a Group (13 persons) (13)
- ---------------
*less than 1%
(1) 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
347035.16
31
<PAGE>
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.
(2) 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.
(3) Includes all shares owned by Chartwell, 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 shares
representing 9.70% of the shares owned of record by Chartwell and 16% of
the shares owned by FBFDC. Mr. Fisher owns, in the aggregate, a 9.70%
beneficial interest in Chartwell and a 16% interest in FBFDC.
(4) Includes 222,560 shares of Common Stock issuable upon the exercise of
options granted under the 1992 Stock Option Plan of HFS, the former parent
of the Company, 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.
(5) 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.
(6) 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.
(7) 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 include 43,437
shares representing 4.8% of the shares owned of record by Chartwell. Mr.
Edelman owns, in the aggregate, a 4.8% beneficial interest in Chartwell.
(8) 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.
(9) 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.
(10) 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.
(11) 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 shares, representing approximately 3.17% of the shares owned of
record by Chartwell. Mr. Leland owns an 8% general partnership
interest in FGT L.P. which, in turn, owns a 39.6% limited partnership
interest in Chartwell.
(12) 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
347035.16
32
<PAGE>
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.
(13) 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.
ITEM 13. Certain Relationships and Related Transactions
Relationships with HFS
In connection with the Distribution, and for purposes of (i) governing
certain of the ongoing relationships between HFS and the Company after the
Distribution, (ii) providing mechanisms for an orderly transition and (iii)
providing HFS with a means of participating in the economic benefits of future
gaming projects, HFS and the Company entered into each of the agreements briefly
described below. The following descriptions of the original Distribution
Agreement, Financing Agreement, Corporate Services Agreement, Tax Sharing
Agreement, Marketing Services Agreement, Advisory Agreement and Facility
Sublease are qualified in their entirety by reference to the copies of such
agreements filed with the Commission as exhibits to the Company's Current Report
on Form 8-K dated December 2, 1994. As indicated herein under the caption
"Directors and Executive Officers of the Company," 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. 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") and the Financing
Agreement was amended as of January 23, 1996 to provide for the issuance of that
guarantee. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Lodging
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.
347035.16
33
<PAGE>
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 "Directors and
Executive Officers of the Company"), 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 date of the Distribution (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). The Company generally may not terminate the Corporate
Services Agreement without HFS's consent. The Corporate Services Agreement was
amended as of January 24, 1996, to provide that the services to be performed by
HFS under the Corporate Services Agreement will only include the following: (i)
advisory services in connection with business acquisitions, financings, and
other transactions by the Company, and (ii) through September 30, 1996, certain
corporate and accounting services that the Company requests HFS to perform and
HFS agrees to perform. As amended, under the Corporate Services Agreement the
Company is required to pay HFS a fixed annual fee of $1.5 million payable
quarterly in advance.
Tax Sharing Agreement. The Tax Sharing and Indemnification Agreement dated
as of November 22, 1994 (the "Tax Sharing Agreement"), provides for the
respective obligations of HFS and the Company concerning various tax
liabilities. The Tax Sharing Agreement provides that (i) HFS shall pay, and
indemnify the Company if necessary for, all federal, state, local and foreign
income taxes relating to the Casino Development Business for any taxable period
ending on or before the Distribution Date and (ii) the Company shall pay, and
indemnify HFS if necessary for, all federal, state and local income taxes
attributable to the Casino Development Business for any taxable period ending
after the Distribution Date or that arise as a result of or in connection with
the Distribution. Pursuant to the Tax Sharing Agreement, HFS is also required to
pay all other taxes attributable to periods prior to the Distribution Date. The
Tax Sharing Agreement further provides for cooperation with respect to certain
tax matters, the exchange of certain tax-related information and the retention
of records which may affect the income tax liability of either party.
Marketing Services Agreement. Pursuant to a Gaming Related Marketing
Services Agreement dated as of November 22, 1994 and terminated on January 24,
1996 (the "Marketing Services Agreement"), an affiliate of HFS was obligated to
provide certain marketing services to gaming facilities in which the Company had
an interest through HFS's network of hotel franchises, reservation centers,
frequent traveller programs and other marketing resources. During 1995, this
affiliate did not provide the Company with any such services and the Company did
not make any payments to this affiliate under the Marketing Services Agreement
in 1995.
Advisory Agreement. Pursuant to a Gaming Related Advisory Services
Agreement dated as of November 22, 1994 and terminated on January 22, 1996 (the
"Advisory Agreement"), the Company retained HFS as its advisor in connection
with all gaming related acquisition, financing or development projects or
transactions (including corporate or other acquisitions, mergers,
consolidations, joint ventures and similar transactions) considered by the
Company. During 1995, the Company paid HFS $337,000 for advisory services
rendered to the Company pursuant to the 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. Effective as of January
24, 1996, HFS has agreed to provide advisory services pursuant to the Corporate
Services Agreement.
Facility Sublease. Pursuant to a sublease which commenced on the
Distribution Date and was terminated on March 1, 1996, the Company subleased
approximately 7,500 square feet of office space located at 339 Jefferson Road,
Parsippany, New Jersey 07054 from HFS at an annual rental of $130,000. During
1995, the Company paid HFS $130,000 pursuant to the Facility Sublease.
Travelodge Acquisition. On January 23, 1996 the Company completed the
Travelodge Acquisition. In connection with the Travelodge Acquisition, the
Company paid approximately $2 million as an advisory fee to HFS for advisory
services rendered to the Company by HFS in connection with that transaction.
Such advisory fee was not paid in connection with the Advisory Agreement.
Concurrently with the purchase, HFS acquired from Forte Hotels, Inc. and Forte
Plc, the indirect parent of Forte USA, Inc., for $39.3 million, the "Travelodge"
and "Thriftlodge" franchise systems and the related trademarks and tradenames in
North America, which HFS and one of its affiliates have licensed to the Company
under separately negotiated franchise agreements. The franchise
347035.16
34
<PAGE>
agreements covering the Travelodge and Thriftlodge properties that are
wholly owned by the Company are between the Company and HFS, and require monthly
payment by the Company of a royalty fee of 4% of the property's gross room
revenues plus a marketing fee also currently set at 4% of gross room revenues.
The marketing fee may be changed from time to time by HFS. These franchise
agreements have scheduled terms of 20 years, but may be terminated by the
Company prior to their scheduled expiration upon the payment of liquidated
damages by the Company. The foregoing description of the franchise agreements
with HFS is qualified in its entirety by reference to the form of franchise
agreement that was included as Exhibit A to the Agreement Among Purchasers,
dated as of January 22, 1996, which was filed with the Commission as Exhibit
10.1 to the Company's Current Report on Form 8-K, dated January 23, 1996. The
Company has also entered into a license agreement (the "Omnibus License
Agreement") with an affiliate of HFS, as licensor, covering the Company's
Travelodge and Thriftlodge properties that are owned by joint ventures. Under
the Omnibus License Agreement, the Company is required to pay a license
fee equal to 4% of gross room revenues multiplied by the Company's percentage
interest in each of the hotel properties owned by joint ventures in which the
Company acquired an interest, plus an additional amount, generally equal to 4.5%
of gross room revenues, for national marketing and reservation services provided
by HFS. The Omnibus License Agreement has a term of twenty years but may be
terminated by the Company with respect to any particular joint venture prior to
the scheduled expiration. Also, if any particular joint venture is terminated,
then the franchisor may terminate the Omnibus License Agreement with respect to
the property owned by that joint venture. In either case, the Company is
required to pay liquidated damages upon the early termination of the Omnibus
License Agreement with respect to any individual joint venture. The amount of
liquidated damages payable by the Company upon termination of the franchise
agreement covering any wholly-owned or joint venture- owned property equals five
times the amount of the royalty fees payable in respect of that property during
the 12 months most recently preceding the termination, if the termination occurs
before the end of the fourth year of the franchise agreement. If the termination
occurs thereafter, the amount of liquidated damages scales down annually,
reaching two times the amount of the royalty fees payable in respect of that
property during the 12 months most recently preceding the termination if the
termination occurs after the sixth year of the franchise agreement. The
foregoing description of the Omnibus License Agreement is qualified in its
entirety by reference to the License Agreement, which was filed with the
Commission as Exhibit 10.49 to the Company's Annual Report on Form 10-K/A on May
28, 1996.
Proposed Mexican Joint Venture. On June 17, 1996, the Company announced
that it has entered into a Memorandum of Understanding with Grupo Piasa, a
Mexican hotel company, to form a joint venture for the purpose of developing and
operating, or franchising others to operate, lodging facilities in Mexico under
the "Travelodge" and "Thriftlodge" tradenames. The formation of the joint
venture will be subject to certain conditions, including documentation of a
master franchise agreement with HFS, pursuant to which the joint venture will be
entitled to develop and operate, or to franchise others to develop and operate,
lodging facilities in Mexico under the "Travelodge" and "Thriftlodge" names.
Although the terms of the master franchise agreement have not yet been
finalized, the Company expects that they will require the joint venture to pay
to HFS or its affiliates certain fees, including development fees, franchise
fees, royalty fees based on gross room revenues, and certain other customary
fees, such as for travel agency, marketing and consulting services.
Management Overlap and Conflicts of Interest. Messrs. Buckman, Edelman,
Holmes, Silverman, Smith and Stone are directors of HFS. 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 Proposed
Chartwell/FSNL Investment, the Company, Chartwell, FSNL and certain of their
affiliates have engaged in the transactions and have the relationships described
below.
347035.16
35
<PAGE>
Initial Stock Purchase Agreement. In connection with the Initial Chartwell
Investment, Chartwell and the Company entered into a stock purchase agreement
dated as of December 20, 1995 (the "Initial Stock Purchase Agreement"), pursuant
to which Chartwell acquired 904,930, or approximately 16.6%, of the outstanding
shares of Common Stock of the Company (the "16.6% Block"). The Initial Stock
Purchase Agreement provides that so long as Chartwell remains a holder of 15% or
more of the Company's shares of Common Stock (a "15% Holder"), the Company will
nominate as Directors two nominees selected by Chartwell, and so long as
Chartwell remains a holder of more than 10%, but less than 15%, of the Company's
shares of Common Stock (a "10% Holder"), the Company will nominate as a Director
one nominee selected by Chartwell. If Chartwell ceases to be either a 15% Holder
or a 10% Holder, then the Company will no longer be required to nominate as a
Director any nominees selected by Chartwell.
The Initial Stock Purchase Agreement also provides for certain
restrictions on the transfer of Chartwell's 16.6% Block, including prohibitions
on sales made other than pursuant to an effective registration statement under
the Securities Act or in "brokers' transactions" pursuant to Rule 144 of the
Securities Act. Chartwell is required to obtain the Company's consent prior to
the consummation of any proposed sale of its 16.6% Block, other than a sale made
pursuant to a registration statement or in a broker's transaction.
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 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 of the Proposed
Chartwell/FSNL Investment.
Vicksburg Facility. In addition to the Initial Chartwell Investment and
the Proposed Chartwell/FSNL Investment, 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 an HFS 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
347035.16
36
<PAGE>
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 Chartwell/FSNL
Investment, Chartwell and FSNL have entered into a stockholders' agreement which
will become effective only upon the closing of the Proposed Chartwell/FSNL
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 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 Proposed
Chrartwell/FSNL 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 of the Proposed Chartwell/FSNL Investment. 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. That agreement was amended to
provide for
347035.16
37
<PAGE>
a monthly fee of $10,000 plus expenses, commencing in February 1995. The
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.
347035.16
38
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements:
See Index to Financial Statements on page F-1 hereof.
2. Financial Statement Schedule:
Financial statement schedules and supplementary data are
omitted for the reason that they are not applicable or the
required information is included in the consolidated financial
statements or notes thereto.
3. Exhibits:
See Exhibit Index commencing on page E-1 hereof.
(b) Reports on Form 8-K
None.
(c) See response to Item 14(a)(3) above.
(d) None.
347035.16
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL LODGING CORP.
By: /s/ Martin L. Edelman
---------------------------
Martin L. Edelman
President
Date: July 3, 1996
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report on Form 10-K/A has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Title Date
* Chairman of the Board, July 3, 1996
- ----------------------- Chief Executive Officer
Richard L. Fisher
/s/ Martin L. Edelman Director and President July 3, 1996
- -----------------------
Martin L. Edelman
* Chief Financial Officer July 3, 1996
- ----------------------- (principal financial and
Kenneth J. Weber accounting officer)
* Director July 3, 1996
- -----------------------
Henry R. Silverman
* Director July 3, 1996
- -----------------------
Stephen P. Holmes
* Director July 3, 1996
- -----------------------
James E. Buckman
* Director July 3, 1996
- -----------------------
Marc E. Leland
* Director July 3, 1996
- -----------------------
Michael J. Kennedy
* Director July 3, 1996
- -----------------------
Robert F. Smith
* Director July 3, 1996
- -----------------------
Roger J. Stone
July 3, 1996
*By: /s/ Martin L. Edelman
-----------------------
Martin L. Edelman
Attorney-in-Fact
347035.16
40
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
2.1 Transfer and Distribution Agreement, dated as of November 2 2,
1994, between the Company and HFS. (Incorporated by reference
to the Company's Current Report on Form 8-K, dated December
2, 1994, Exhibit 2.1).
2.2 Agreement and Plan of Merger and Reorganization, dated as of
January 17, 1995, by and among Boomtown, Tweety Sub, Inc. and the
Company. (Incorporated by reference to the Company's Current
Report on Form 8-K, dated February 1, 1995, Exhibit 2.1).
2.3 Agreement and Plan of Merger by and among National Gaming Corp.,
NGC Acquisition Corp. and Par-A-Dice Gaming Corporation, dated
December 28, 1994. (Incorporated by reference to the Company's
Annual Report on Form 10-K, dated December 31, 1994, Exhibit 2.3).
2.4 Stock Purchase Agreement, dated as of December 19, 1995,
between Forte USA and the Company. (Incorporated by reference
to the Company's Current Report on Form 8-K, dated January
23, 1996, Exhibit 2.1).
2.5 Amendment No. 1 to Stock Purchase Agreement, dated as of January
1996, between Forte USA, Inc. and the Company. (Incorporated by
reference to the Company's Current Report on Form 8-K, dated
January 23, 1996, Exhibit 2.2).
2.6 Stock Purchase Agreement, dated as of December 20, 1995, by and
between Chartwell Leisure Associates L.P. II and the Company.**
2.7 Stock Purchase Agreement, dated as of February 14, 1996, by and
between Chartwell Leisure Associates L.P. II, FSNL LLC and the
Company.**
2.8 Form of Amended and Restated Stock Purchase Agreement, dated
as of March 14, 1996, by and among Chartwell Leisure
Associates L.P.
II, FSNL LLC and the Company.**
3.1 Restated Certificate of Incorporation of the Company. (Incorporated
by reference to the Company's Current Report on Form 8-K, dated
December 2, 1994, Exhibit 3.1).
3.2 Amended and Restated Bylaws of the Company. (Incorporated by
reference to the Company's Current Report on Form 8-K, dated
December 2, 1994, Exhibit 3.2).
4.1 Form of Common Stock Certificate. (Incorporated by reference to
Amendment No. 2 to the Company's Registration Statement on Form
10/A (File No. 0-024794), dated November 2, 1994, Exhibit 4.1).
10.1 Interim Financing Agreement, dated as of November 22, 1994,
between the Company and HFS. (Incorporated by reference to
the Company's Current Report on Form 8-K, dated December 2,
1994, Exhibit 10.1).
* Filed herewith.
** Previously filed.
1 Management contract or compensatory plan or arrangement.
347035.16
E-1
<PAGE>
10.2 Gaming Related Marketing Services Agreement, dated as of
November 22, 1994, between the Company and HFS. (Incorporated
by reference to the Company's Current Report on Form 8-K,
dated December 2, 1994, Exhibit 10.2).
10.3 Gaming Related Advisory Services Agreement, dated as of
November 22, 1994, between the Company and HFS. (Incorporated
by reference to the Company's Current Report on Form 8-K,
dated December 2, 1994, Exhibit 10.3).
10.4 Corporate Services Agreement, dated as of November 22, 1994,
between the Company and HFS. (Incorporated by reference to
the Company's Current Report on Form 8-K, dated December 2,
1994, Exhibit 10.4).
10.5 Facility Lease, dated as of November 22, 1994, between the
Company and HFS. (Incorporated by reference to the Company's
Current Report on Form 8-K, dated December 2, 1994, Exhibit
10.5).
10.6 Tax Sharing and Indemnification Agreement, dated as of
November 22, 1994, between the Company and HFS. (Incorporated
by reference to the Company's Current Report on Form 8-K,
dated December 2, 1994, Exhibit 10.6).
10.7 Employment Agreement, dated as of November 22, 1994, between the
Company and Henry R. Silverman. (Incorporated by reference to the
Company's Current Report on Form 8-K, dated December 2, 1994,
Exhibit 10.7).1
10.8 Employment Agreement, dated as of June 6, 1994, between Robert S.
Kingsley and HFS (Incorporated by reference to Amendment No. 1 to
the Company's Registration Statement on Form 10/A (File No. 0-
024794), dated October 21, 1994, Exhibit 10.8).1
10.9 1994 Stock Option Plan of the Company. (Incorporated by reference
to the Company's Current Report on Form 8-K, dated December 2,
1994, Exhibit 10.8).1
10.10 Lease Agreement between HFS Gaming Corp. as Landlord and
Mississippi-I Gaming, L.P. as Tenant, dated as of April 27, 1994.
(Incorporated by reference to HFS' Form 10-Q for the quarter ended
March 31, 1994, Exhibit 10.2).
10.11 Marketing Services Agreement, dated as of April 27, 1994, by and
among Boomtown, Inc. and HFS Gaming Corp. (Incorporated by
reference to HFS' Form 10-Q for the quarter ended March 31, 1994,
Exhibit 10.3).
10.12 Asset Purchase and Sale Agreement, dated as of April 27,
1994, by and between HFS Gaming Corp. and Mississippi-I
Gaming, L.P. (Incorporated by reference to HFS' Form 10-Q for
the quarter ended March 31, 1994, Exhibit 10.1).
10.13 Casino Financing Agreement, dated as of August 3, 1993, between
HFS and Rainbow Casino Corporation. (Incorporated by reference to
HFS' Form 10-K for the year ended December 31, 1993, Exhibit
10.31).
* Filed herewith.
** Previously filed.
1 Management contract or compensatory plan or arrangement.
347035.16
E-2
<PAGE>
10.13(a) Amendment of Casino Financing Agreement, dated as of February 25,
1994, between HFS and Rainbow Casino Corporation. (Incorporated
by reference to HFS' Form 10-K for the year ended December 31,
1993, Exhibit 10.31(a)).
10.13(b) Second Amendment of Casino Financing Agreement, dated as of
August 11, 1994, among HFS, Rainbow Casino Corporation,
Rainbow Development Corporation and Rainbow Casino -
Vicksburg Partnership, L.P. (Incorporated by reference to the
Company's Annual Report on Form 10-K, dated December 31,
1994, Exhibit 10.13(b)).
10.14 Marketing Services Agreement, dated as of March 15, 1994,
between Rainbow Casino Corporation and HFS Gaming Corp.
(Incorporated by reference to HFS' Form 10-K for the year
ended December 31, 1993, Exhibit 10.32).
10.15 Consolidation Agreement, dated as of March 29, 1995, among
Rainbow Casino Corporation, National Gaming Mississippi Inc.,
HFS Gaming Corp., Alliance Gaming Corp., United Gaming Corp.,
Rainbow Casino - Vicksburg Partnership, L.P., Mr. John A.
Barlett, Jr., Mr. Leigh Seipel, Rainbow Development
Corporation and the Company. (Incorporated by reference to
the Company's Annual Report on Form 10-K, dated December 31,
1994, Exhibit 10.15).
10.16 Agreement, dated as of March 29, 1995, between the Rainbow
Casino Corporation and National Gaming Mississippi, Inc.
(Incorporated by reference to the Company's Annual Report on
Form 10-K, dated December 31, 1994, Exhibit 10.16).
10.17 Loan Agreement, dated as of October 26, 1993, among Alpha
Hospitality Corporation, Alpha Gulf Coast, Inc., as Borrower, and
HFS Gaming Corp., as Lender. (Incorporated by reference to HFS'
Registration Statement on Form S-1 (Registration No. 33-70706,
Exhibit 10.40).
10.18 Marketing Services Agreement, dated as of October 26, 1993, among
Alpha Gulf Coast, Inc., HFS Gaming Corp. and HFS. (Incorporated
by reference to Amendment No. 1 to the Company's Registration
Statement on Form 10/A (File No. 0-024794), dated October 21, 1994,
Exhibit 10.17).
10.19 Subscription Agreement, dated March 4, 1994, between Century
Casinos Management, Inc. and HFS. (Incorporated by reference to
HFS' Form 10-K for the year ended December 31, 1993, Exhibit
10.36).
10.20 Marketing Services Agreement, dated as of March 4, 1994, between
Century Casinos Management, Inc. and HFS Gaming Corp.
(Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form 10/A (File No. 0-024794), dated
October 21, 1994, Exhibit 10.19).
* Filed herewith.
** Previously filed.
1 Management contract or compensatory plan or arrangement.
347035.16
E-3
<PAGE>
10.21 Assignment Agreement, dated as of April 14, 1994, by and among
Bennett Funding, Inc. and Gamma International, Ltd., as Assignors,
HFS as Assignee, and Alfred J. Luciani D/B/A Luciani & Associates
LLC. (Incorporated by reference to Amendment No. 1 to the
Company's Registration Statement on Form 10/A (File No.
0-024794), dated October 21, 1994, Exhibit 10.20).
10.22 Preliminary Development Agreement, dated February 28, 1994,
between HFS and the Urban Redevelopment Authority of the City of
Pittsburgh. (Incorporated by reference to HFS' Form 10-K for the
year ended December 31, 1993, Exhibit 10.35).
10.23 Letter of Intent, dated March 1, 1994, between the Urban
Redevelopment Authority of the City of Pittsburgh and HFS.
(Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form 10/A (File No. 0-024794), dated
October 21, 1994, Exhibit 10.22).
10.24 Memorandum of Understanding, dated April 14, 1994, between HFS
and The Erie Professional Associates. (Incorporated by reference to
Amendment No. 1 to the Company's Registration Statement on Form
10/A (File No. 0-024794), dated October 21, 1994, Exhibit 10.23).
10.25 Joint Venture Agreement of Erie Casino Associates, dated as of May
18, 1994, between The Erie Professional Associates and Keystone Erie
Gaming, Inc. (Incorporated by reference to Amendment No. 1 to the
Company's Registration Statement on Form 10/A (File No.
0-024794), dated October 21, 1994, Exhibit 10.24).
10.26 Letter of Intent, dated February 24, 1994, between Jumers of
St. Charles, Inc. and HFS. (Incorporated by reference to Amendment
No. 1 to the Company's Registration Statement on Form 10/A (File
No. 0-024794), dated October 21, 1994, Exhibit 10.25).
10.27 Joint Venture Agreement, dated as of October 1, 1994, between
Keystone Pittsburgh Gaming, Inc. and The Pittsburgh Professional
Associates. (Incorporated by reference to Amendment No. 1 to the
Company's Registration Statement on Form 10/A (File No. 0-024794),
dated October 21, 1994, Exhibit 10.26).
10.28 Amended and Restated Preferred Stock Purchase Agreement, dated as
of October 6, 1993, between HFS Gaming Corp. and Odyssey Gaming
Corporation. (Incorporated by reference to HFS' Registration
Statement on Form S-1 (Registration No. 33-70706, Exhibit 10.39).
10.29 Earnout Agreement, dated as of September 30, 1991, and amended
and restated as of December 20, 1991 among HFS and Messrs. Stanley
S. Tollman and Monty D. Hundley. (Incorporated by reference to
HFS' Registration Statement on Form S-1 (Registration No. 33-
51422), Exhibit 10.17).
10.29(a) Letter Agreement, dated as of May 26, 1993, among HFS and
Bryanston Group, Inc. relating to the modification of the Earnout
Agreement. (Incorporated by reference to HFS' Registration
Statement on Form S-1 (Registration No. 33-63398), Exhibit
10.18(a)).
* Filed herewith.
** Previously filed.
1 Management contract or compensatory plan or arrangement.
347035.16
E-4
<PAGE>
10.29(b) Amendment to Agreement, dated December 1993, between HFS and
Bryanston Group, Inc. (Incorporated by reference to HFS' Form 10-K
for the year ended December 31, 1993, Exhibit 10.9(b)).
10.30 Option Agreement, dated as of September 30, 1994, between HFS and
the Urban Redevelopment Authority of the City of Pittsburgh.
(Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form 10/A (File No. 0-024794), dated
October 21, 1994, Exhibit 10.29).
10.31 Memorandum of Understanding, dated October 1, 1994, between HFS
and The Pittsburgh Professional Associates. (Incorporated by
reference to Amendment No. 1 to the Company's Registration
Statement on Form 10/A (File No. 0-024794), dated October 21, 1994,
Exhibit 10.31).
10.32 Option Agreement, dated as of October 26, 1993, between HFS
Gaming Corp. and Alpha Hospitality Corporation. (Incorporated by
reference to Amendment No. 1 to the Company's Registration
Statement on Form 10/A (File No. 0-024794), dated October 21, 1994,
Exhibit 10.32).
10.33 Agreement, dated as of June 30, 1994, between HFS and Chartwell
Leisure Associates, L.P. (Incorporated by reference to Amendment No.
1 to the Company's Registration Statement on Form 10/A (File No. 0-
024794), dated October 21, 1994, Exhibit 10.33).
10.33(a) Sharing Agreement, dated November 22, 1994, among HFS,
Chartwell Leisure Associates, L.P. and the Company.
(Incorporated by reference to the Company's Annual Report on
Form 10-K, dated December 31, 1994, Exhibit 10.33(a)).
10.34 Letter Agreement, dated September 11, 1994, between HFS and
Century Casinos, Inc. (Incorporated by reference to Amendment No.
1 to the Company's Registration Statement on Form 10/A (File No. 0-
024794), dated October 21, 1994, Exhibit 10.34).
10.35 Letter Agreement, dated March 4, 1994, between HFS and Century
Casinos Management, Inc. (Incorporated by reference to Amendment
No. 1 to the Company's Registration Statement on Form 10/A (File
No. 0-024794), dated October 21, 1994, Exhibit 10.35).
10.36 Guarantee Letter, dated January 17, 1995, by and among HFS,
the Company and Boomtown. (Incorporated by reference to the
Company's Current Report on Form 8-K dated February 1, 1995,
Exhibit 10.1).
10.37 Form of Option Agreement, dated as of November 6, 1995,
between National Gaming Mississippi, Inc. and Mississippi - I
Gaming, L.P. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1995, Exhibit 10.1).
10.38 Form of Lease Amendment, dated as of November 6, 1995,
between National Gaming Mississippi, Inc. and Mississippi - I
Gaming, L.P. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1995, Exhibit 10.2).
* Filed herewith.
** Previously filed.
1 Management contract or compensatory plan or arrangement.
347035.16
E-5
<PAGE>
10.39 Letter Agreement, dated August 18, 1995, among the Company, HFS
Incorporated and Bryanston Group, Inc. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, Exhibit 10.3).
10.40 Registration Rights Agreement, dated as of December 20, 1995,
between Chartwell Leisure Associates L.P. II and the Company.**
10.41 Agreement Among Purchasers, dated as of January 22, 1996,
among HFS Incorporated, Motels of America, Inc. and the
Company. (Incorporated by reference to the Company's Current
Report on Form 8-K, dated January 23, 1996, Exhibit 10.1).
10.42 Credit Agreement, dated as of January 23, 1996, among
Chemical Bank, Bankers Trust Company, various banks named
therein and the Company. (Incorporated by reference to the
Company's Current Report on Form 8-K, dated January 23, 1996,
Exhibit 10.2).
10.43 Pledge Agreement, dated as of January 23, 1996, among the
Company, Forte Hotels, Inc. and the other parties named
therein, as Pledgors, and Bankers Trust Company, as Pledgee
and Collateral Agent. (Incorporated by reference to the
Company's Current Report on Form 8-K, dated January 23, 1996,
Exhibit 10.3).
10.44 Form of Agreement of Lease between Fisher 40th & 3rd Company
and Hawaiian Realty, Inc., as landlord, and the Company, as tenant.**
10.45 Employment and Noncompetition Agreement, dated as of March 1,
1996, by and between Kenneth J. Weber and the Company.** 1
10.46 Employment Letter Agreement, dated as of January 23, 1996, between
Douglas H. Verner and the Company.** 1
10.47 Letter Loan Agreement, dated January 22, 1996, between Bank of
America National Trust and Savings Association and Forte Hotels,
Inc.**
10.48 Employment Letter Agreement, dated as of January 23, 1996, by
and between Carl Winston and the Company. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996, Exhibit 10.1).1
10.49 License Agreement, dated as of January 23, 1996, between Bear
Acquisition Corp., as Licensor, and Forte Hotels, Inc., as Licensee.**
21.1 Subsidiaries of the Company.**
* Filed herewith.
** Previously filed.
1 Management contract or compensatory plan or arrangement.
347035.16
E-6
<PAGE>
NATIONAL LODGING CORP. AND
SUBSIDIARIES
Consolidated Financial Statements for the
Years Ended December 31, 1995 and 1994, and
Independent Auditors' Report
368431.3
<PAGE>
NATIONAL LODGING CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Page
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 1995 and 1994 F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1995 and 1994 and the Period
August 1, 1993 (date of inception) to December 31, 1993 F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1995 and 1994 and the Period
August 1, 1993 (date of inception) to December 31, 1993 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995 and 1994 and the Period
August 1, 1993 (date of inception) to December 31, 1993 F-6
Notes to Consolidated Financial Statements F-7 to F-17
368431.3
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
National Lodging Corp.
We have audited the accompanying consolidated balance sheets of National Lodging
Corp. (previously known as National Gaming Corp.) and its subsidiaries as of
December 31, 1995 and 1994 and the related consolidated statements of
stockholders' equity and cash flows for the years ended December 31,
1995 and 1994 and the period August 1, 1993 (date of inception) to December 31,
1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of National Lodging Corp.
and its subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for the years ended December 31, 1995 and 1994
and the period August 1, 1993 (date of inception) to December 31, 1993, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP /s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 11, 1996
368431.3
F-2
<PAGE>
<TABLE>
<CAPTION>
NATIONAL LODGING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(In Thousands, Except Share Amounts)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1995 1994
CURRENT ASSETS: $ 51,470 $ 44,233
Cash and cash equivalents 10,481 10,706
Loans receivable 837 901
------------ ------------
Prepaid and other current assets
Total current assets 62,788 55,840
INVESTMENTS 16,700 20,092
LOANS RECEIVABLE 7,166 15,375
JOINT VENTURE INTERESTS - 5,441
OTHER ASSETS 420 511
DEFERRED TAXES - 1,636
-------------- -----------
TOTAL ASSETS $ 87,074 $ 98,895
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 66 $ 384
Accrued expenses 486 943
Deferred taxes - 589
-------------- ------------
Total current liabilities 552 1,916
COMMITMENTS AND CONTINGENCIES (Notes 2, 4, 6, 7, 10)
STOCKHOLDERS' EQUITY:
Preferred stock $1.00 par value - 10,000,000 authorized;
none issued and outstanding - -
Common stock, $.01 par value - 100,000,000 authorized;
5,452,320 and 4,630,020 issued and outstanding, respectively 55 46
Paid-in capital 106,697 99,611
Accumulated deficit (20,280) (2,098)
Unrealized gain (loss) on securities available for sale 50 (580)
------------- ----------
Total stockholders' equity 86,522 96,979
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 87,074 $ 98,895
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
368431.3
F-3
<PAGE>
<TABLE>
<CAPTION>
NATIONAL LODGING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND THE PERIOD
AUGUST 1, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1993
(In Thousands, Except Share Amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
REVENUE:
Interest $ 4,012 $ 1,347 $ 128
Gain on sale of securities - 1,044 -
---------- -------- -------
Total revenue 4,012 2,391 128
EXPENSES:
Development 15,482 2,414 -
General and administrative 2,756 2,742 -
General and administrative - related party 3,247 339 581
-------- ------- ---------
Total expenses 21,485 5,495 581
-------- ------- ---------
Loss before income tax provision (benefit) (17,473) (3,104) (453)
Income tax provision (benefit) 709 (1,273) (186)
-------- ------- -------
Net loss $(18,182) $(1,831) $ (267)
======== ======= =======
PER SHARE INFORMATION:
Net loss $ (3.57) $ (0.37) $ (0.05)
========= ======== ========
Weighted average common
shares outstanding 5,099 5,003 5,001
</TABLE>
See accompanying notes to consolidated financial statements.
368431.3
F-4
<PAGE>
<TABLE>
<CAPTION>
NATIONAL LODGING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND THE PERIOD
AUGUST 1, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1993
(In Thousands, Except Share Amounts)
- ----------------------------------------------------------------------------------------------------------------------------------
Unrealized
Gain (Loss) On
Securities
Common Stock Paid-in Accumulated Available
Shares Amount Deficit For Sale Total
<S> <C> <C> <C> <C> <C> <C>
ISSUANCE OF CAPITAL STOCK,
AUGUST 1, 1993 100 $ - $ - $ - $ - $ -
Capital contribution from HFS - - 12,308 - - 12,308
Net loss - - - (267) - (267)
------------- ------ ----------- ---------- --------- ---------
BALANCE, DECEMBER 31, 1993 100 - 12,308 (267) - 12,041
Capital contribution from HFS - - 87,349 - - 87,349
Issuance of shares in connection
with the Distribution (Note 2) 4,529,520 45 (45) - - -
Issuance of common stock -
reserved for issuance 100,400 1 (1) - - -
Net loss - - - (1,831) - (1,831)
Unrealized loss on securities
available for sale - - - - (580) (580)
------------- ------ -------- ---------- ------- ---------
BALANCE, DECEMBER 31, 1994 4,630,020 46 99,611 (2,098) (580) 96,979
Issuance of shares (Note 9(C)) 904,930 9 8,302 - - 8,311
Issuance of common stock -
reserved for issuance 71,480 1 (1) - - -
Acquisition and cancellation
of treasury stock (Note 6(c)) (154,110) (1) (1,215) - - (1,216)
Net loss - - - (18,182) - (18,182)
Reversal of unrealized loss
related to securities sold - - - - 580 580
Unrealized gain on securities
available for sale - - - - 50 50
------------- ------ ----------- ----------- -------- ----------
BALANCE, DECEMBER 31, 1995 5,452,320 $ 55 $106,697 $(20,280) $ 50 $ 86,522
========== ===== ======== ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
368431.3
F-5
<PAGE>
<TABLE>
<CAPTION>
NATIONAL LODGING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND THE PERIOD
AUGUST 1, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1993
(In Thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(18,182) $ (1,831) $ (267)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of investment loan discounts and
deferred loan costs (45) (201) (42)
Write-off of joint venture interests and investments 10,485 - -
Deferred income taxes 644 (714) 70
Deferred financing costs (62) (863) (129)
Gain on sale of securities (1,004)
Loss on sale of land 520 - -
Increase (decrease) from changes in:
Other current assets (139) (895) (6)
Other assets 1,006 (395) (137)
Accounts payable and other accrued expenses (775) 1,200 127
--------- --------- --------
Net cash used in operating activities (6,548) (4,743) (384)
--------- --------- --------
INVESTING ACTIVITIES:
Loans to casino projects (1,189) (18,728) (10,580)
Investment in joint ventures and casino projects (4,322) (24,809) (5,360)
Proceeds from investments 2,360 - -
Proceeds from sale of securities 559 4,697 -
Proceeds from sale of land 846 - -
Principal payments received on loans 7,220 467 4,016
-------- -------- --------
Net cash provided by (used in) investing
activities 5,474 (38,373) (11,924)
-------- -------- --------
FINANCING ACTIVITIES:
Issuance of stock 8,311 - -
Capital contribution from HFS - 87,349 12,308
---------- -------- --------
Net cash provided by financing activities 8,311 87,349 12,308
-------- -------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 7,237 44,233 -
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 44,233 - -
-------- ----------- --------==
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 51,470 $ 44,233 $ -
======== ======== ===========
</TABLE>
See Note 6(a) for noncash investing activity. See accompanying notes to
consolidated financial statements.
368431.3
F-6
<PAGE>
NATIONAL LODGING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND
THE PERIOD AUGUST 1, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1993
- ------------------------------------------------------------------------------
1. BUSINESS
National Lodging Corp. (formerly known as National Gaming Corp.) and
subsidiaries (the "Company") became an independent publicly held entity
following the distribution of all of the outstanding capital stock of the
Company by HFS Incorporated ("HFS") to HFS stockholders on November 22,
1994. At the distribution date, the Company was engaged in the business of
developing and owning casino gaming facilities.
Due to a confluence of negative factors impacting the Company's gaming
investments and the gaming industry, on November 9, 1995, the Company
announced a decision by its Board of Directors to curtail future gaming
investments and focus on investments and acquisitions in nongaming
industries. On January 23, 1996, the Company acquired the outstanding
common stock of Forte Hotels, Inc. ("FHI") for approximately $98.4 million
subject to certain working capital adjustments and commenced engaging in
the business of hotel ownership, management and development (see Note 4).
2. DISTRIBUTION
On November 22, 1994 (the "Distribution Date"), HFS distributed to its
stockholders, one share of the Company Common Stock for every 10 shares
owned of HFS as of the November 14, 1994 record date. Subsequent to the
Distribution Date, HFS no longer has an equity interest in the Company.
The net assets contributed by HFS to the Company in connection with the
distribution were comprised of the following ($000's):
Cash $50,000
Loans receivable 25,999
Investments 16,861
Joint venture interests 5,203
Other - net 157
-------
Total net assets contributed $98,220
At the Distribution Date, the Company and HFS entered into agreements for
marketing, financing, advisory and corporate services and a facility
lease. The Company and HFS modified or terminated certain of these
arrangements upon the acquisition of FHI. The marketing services
agreement, which was canceled on January 24, 1996, allowed HFS the right
to provide marketing services to any gaming facility that the Company
affiliated with through November 2019. Pursuant to the financing
agreement, HFS committed to provide up to $75 million in guarantees or
loans at an interest rate of LIBOR plus 250 basis points to the Company,
for a fee equal to 2% of its annual commitment. The agreement was modified
on January 23, 1996 to extend the term to coincide with the term of the
revolving credit facility which was used to finance the acquisition of
FHI. Included in General and Administrative - Related Party expense is
$1.5 million and $162,500 for the years ended December 31, 1995 and 1994,
respectively, related to the
368431.3
F-7
<PAGE>
financing agreement. HFS provided investment advisory services to the
Company under a 25-year arrangement for a fee equal to 2% of the total
development or acquisition costs associated with completed transactions.
In December 1994, the Company incurred costs of approximately $90,000
relating to the Company's investment in Prescott (see Note 7(b)) pursuant
to the advisory agreement. The Company and HFS agreed to terminate the
advisory agreement on January 22, 1996. Accordingly, except for advisory
services provided by HFS in connection with the proposed sale of 4 million
shares to Chartwell Leisure Associates L.P. II ("Chartwell") and FSNL LLC
("FSNL") (see Note 4(B)) and the acquisition of FHI, the Company will no
longer be obligated to pay fees to HFS under the advisory agreement. Under
the corporate services agreement, HFS provides the Company with general
corporate support services through November 2019 for consideration equal
to the greater of $1.5 million or 2% of the Company's revenue up to a
maximum fee of $10 million annually. On January 24, 1996, the Company and
HFS modified the agreement to fix the annual fee at $1.5 million annually
and add advisory services in connection with business acquisitions,
financings and other transactions by the Company and to limit corporate
support services to certain corporate accounting services through
September 30, 1996. The Company subleases 7,500 square feet of office
space from HFS at $130,000 per year through March 1, 1996.
The Company's cash requirements prior to the Distribution Date were
supported by HFS. Significant requirements include the payment of
salaries, related benefits and development expenditures. Prior to the
Distribution Date, General and Administrative - Related Party expenses
include the allocation of certain HFS costs associated with corporate
administration and other overhead costs based upon actual expenses
incurred and an estimate of time spent by HFS employees for the benefit of
the Company. Management believes that the costs allocated to the Company
are reasonable. Expenditures made by HFS on behalf of the Company
represented permanent capital and, accordingly, are included in Paid-in
Capital through the Distribution Date.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation - The consolidated financial statements
include the accounts and transactions of the Company, together with
its wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
B. Investments and Joint Venture Interests - Costs directly associated
with the development and acquisition of investments and joint venture
interests in casino gaming ventures are included with the related
investment. Costs associated with unsuccessful efforts, lobbying
expenses and development costs not directly associated with an
investment or joint venture interest are expensed as incurred.
Investments in marketable equity securities are considered available
for sale and are reported at fair value. Unrealized gains and losses
are excluded from earnings and reported in a separate component of
stockholder's equity. Management periodically evaluates each
investment to determine whether a decline in fair value below the
amortized cost is other than temporary.
Investments which are nonmarketable equity securities and joint
venture interests are recorded at the lower of cost or net realizable
value. Management periodically evaluates such investments based upon
the present value of anticipated future cash flows, the likelihood of
favorable casino gaming legislation, evaluation of available financial
statements and management's judgment about the ability to recover such
costs over future operations. With respect to investments in which the
Company has less than a 20 per cent interest, those investments are
accounted for at cost.
368431.3
F-8
<PAGE>
C. Loan Origination Costs - Included in loans receivable are costs
directly associated with the issuance of loans to casino gaming
entities. These costs are amortized over the life of related loans
receivable using the interest method.
D. Allowance for Loan Losses - The Company evaluates the collectability
of loans receivable on a quarterly basis. The major factors considered
in evaluating potential losses are the current financial position of
the borrower, general economic considerations and the net realizable
value of any collateral received. As of December 31, 1995, the Company
has not provided for any loan losses.
E. Income Taxes - The Company uses the liability method of recording
deferred income taxes. Differences in financial and tax reporting
result from differences in the recognition of income and expenses for
financial and income tax purposes. Subsequent to the Distribution the
Company and its subsidiaries file a consolidated federal income tax
return.
F. Cash Flow Information - The Company considers highly liquid debt
instruments purchased with an original maturity of three months or
less to be cash equivalents.
G. Loss Per Share - Loss per share is computed based upon the number of
shares outstanding plus the shares issuable in connection with the
Distribution. Common stock equivalents are not included as they would
be antidilutive.
H. Significant Estimates, Risks and Uncertainties - The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
The Company was engaged in the business of developing and owning
casino gaming facilities. As such, all of the Company's loans and
investments are with casino operators, developers or investors. The
success of casino gaming investments is dependent on a difficult and
unpredictable regulatory environment, availability of third-party
financing, successful licensing efforts and the ability to withstand
competition in existing jurisdictions. During 1995, the Company
announced a decision by its Board of Directors to curtail future
gaming investments and focus on investments and acquisitions in
nongaming industries. As a result, during the third quarter of 1995,
the Company began to liquidate certain gaming investments and wrote
down other investments and joint ventures to their estimated net
realizable value.
Management believes, based upon available evidence, that gaming
related assets at December 31, 1995 are stated at the lower of cost or
estimated net realizable value, however, the continued uncertainty
surrounding the ability of these assets to generate positive cash flow
necessarily results in the potential for future write-downs to present
these assets at their estimated net realizable value in subsequent
periods.
4. SUBSEQUENT EVENTS
A. On January 23, 1996, the Company acquired the outstanding common stock
of FHI for approximately $98.4 million subject to certain working
capital adjustments. In related transactions on January 23, 1996 prior
to consummation of the FHI Acquisition, HFS and Motels of America,
Inc. acquired from FHI the Travelodge franchise system and 19 motel
properties, respectively for
368431.3
F-9
<PAGE>
an aggregate purchase price of $71.6 million. The principal assets of
FHI acquired by the Company include 15 wholly-owned hotels and motels
and a joint venture interest, ranging from 47% to 77% in 97 other
lodging facilities. The Company financed $60 million of the purchase
price with proceeds from a bank revolving credit facility ("Credit
Facility") and $38.4 million with existing cash. HFS provided advisory
services in connection with the acquisition for which the Company paid
a $1,968,000 fee.
The Credit Facility provides up to $125 million of unsecured
borrowings through January 23, 2002. Revolving loans under the Credit
Facility may be borrowed, at the Company's option, as Base Rate Loans
or Eurodollar Loans. Interest on the outstanding principal amount of
each Base Rate Loan is payable at an annual rate equal to the highest
of i) the administrative agent's Prime Lending Rate, ii) the Adjusted
Certificate of Deposit Rate plus 0.50%, or iii) the Federal Funds Rate
plus 0.50%. The interest on the outstanding principal amount of each
Eurodollar Loan is payable at an annual rate of the Eurodollar Rate
plus a margin not to exceed 0.75%. The Company incurred $1.1 million
of costs related to execution of the Credit Facility and is required
to pay an annual administration fee of $150,000. The Company is also
obligated to pay a commitment fee at an annual rate equal to 0.2% of
the amount of the Unutilized Revolving Loan Commitment. The Credit
Facility also contains covenants including restrictions on
indebtedness, maintenance of net worth, minimum interest coverage,
minimum fixed charge, maximum leverage coverages and others.
The acquisition described above will be accounted for by the purchase
method. The operating results of the acquired company will be included
in the consolidated statements of operations from its acquisition
date, January 23, 1996. The excess of cost over book value of the net
assets acquired will be allocated to the acquired hotel properties and
joint venture interests and will be amortized on a straight-line basis
over 25 years, which reflects the estimated useful lives of the
acquired properties.
The following presents the unaudited pro forma consolidated results of
operations for the year ended December 31, 1995 as if the transactions
described above occurred on January 1, 1995:
(In Thousands Except
per Share Amounts)
(Unaudited)
Revenues $69,141
Net loss (21,023)
Net loss per share (4.12)
The pro forma results are not necessarily indicative of the actual
results of operations that would have occurred had the transactions
been consummated as indicated nor are they intended to indicate
results that may occur in the future.
B. On February 14, 1996, the Company entered into an agreement with
Chartwell and FSNL to sell approximately 4 million newly issued shares
of unregistered Company stock for $57 million. Upon shareholder
approval and completion of such sale, Chartwell and FSNL will own
approximately 52% of the outstanding common stock of the Company. The
Company chairman and chief executive officer, who holds similar
positions at HFS, resigned effective January 24,
368431.3
F-10
<PAGE>
1996 and was replaced by a principal of Chartwell. HFS provided
advisory services in connection with the transaction for which the
Company will pay a $1,140,000 fee.
C. In March 1996, the Company entered into a letter of intent with
Capital Properties Limited Partnership ("CPLP") to acquire a majority
interest in CPLP, which owns 20 hotels and a one-half interest in an
additional hotel, which are limited service hotels, located throughout
Canada and franchised under the "Travelodge" brand name. The
acquisition is expected to be accomplished by the Company providing
debt/equity financing sufficient to retire CPLP's existing bank debt
of approximately 132.4 million Canadian dollars. The letter of intent
provides the Company with future rights to acquire the remaining
interest in CPLP.
D. During 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 for a period of 10 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 similar property.
5. INCOME TAXES
As of December 31, 1995, the Company had net tax operating loss
carryforwards of approximately $13,700,000 available for federal income
tax purposes, expiring through 2010. The net operating loss carryforward
available to offset future taxable income will be restricted over several
years as a result of future changes in ownership, pursuant to section 382
of the Internal Revenue Code of 1986 (see Note 4(B)). Prior to the
Distribution, the Company's taxable losses were included in the
consolidated tax return of HFS. Income taxes for the Company were
calculated based on an allocation of the consolidated income tax provision
of HFS, considering the Company's results of operations in relation to HFS
consolidated results of operations. Prior to the Distribution, the benefit
attributable to the losses also benefited HFS. Accordingly, through
November 22, 1994 a portion of income tax benefits ($813,000 in 1994 and
$256,000 in 1993) represent benefits which contributed to HFS'
consolidated income tax return. These amounts were netted with the
distribution from HFS, recorded as paid-in-capital.
The components of the income tax provision (benefit) for the years ended
December 31, 1995 and 1994 and the period August 1, 1993 (date of
inception) to December 31, 1993 are as follows ($000's):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $ - $(1,551) $(219)
State 65 (436) (37)
------ -------- ------
- (1,987) (256)
------- ------- ------
Deferred:
Federal 472 558 60
State 172 156 10
------ -------- -------
644 714 70
------ -------- -------
Total income tax provision (benefit) $ 709 $(1,273) $ (186)
====== ======= ======
</TABLE>
368431.3
F-11
<PAGE>
The components of the deferred income tax assets and liabilities
are as follows ($000's):
December 31,
1995 1994
Deferred tax assets:
Imputed interest on loans $ - $ 774
Unrealized loss on securities available for sale - 403
Losses not currently deductible 1,994 -
Net tax operating loss carryforward 5,629 459
7,623 1,636
Less: valuation allowance (7,623) -
Net deferred tax asset $ - $1,636
Deferred tax liabilities: common stock - warrants $ - $ 589
The Company's effective income tax rate of 41% for the year ended December
31, 1994 and the period August 1, 1993 (date of inception) to December 31,
1993 differs from the statutory federal rate of 35% due to the impact of
state income taxes. At December 31, 1995, the Company has provided a 100%
valuation allowance on its deferred tax assets. Management believes the
valuation allowance is required based upon the Company's history of
losses, thereby concluding that it is more likely than not that the
Company will not realize deferred tax assets. As such, the income tax
provision consists primarily of the write-off of prior year deferred tax
assets.
6. LOANS RECEIVABLE
Loans receivable consists of ($000's):
(a) Consists of a mortgage loan receivable from the Urban Redevelopment
Authority of the City of Pittsburgh ("URA") in connection with the
URA's purchase of a 100-acre tract on the Monongahela River in
Pittsburgh, Pennsylvania. The loan bears interest at 4% which is not
payable until maturity, and is secured by the entire tract of land. On
September 30, 1995 the URA exercised its option to extend the maturity
of its loan due the Company from September 30, 1995 to September 30,
1996. The option requires that interest payments be remitted during
the extension period. Such land was expected to be utilized by the
Company in connection with the development of a riverboat casino
facility; however, as a result of the URA's decision not to permit
gaming on the site, the Company has notified the URA that it will not
exercise its option to purchase a portion of such site and expects to
seek collection of the loan in September 1996. In January 1996 and
June 1996, the Company received $3.8 million and $2.2 million,
respectively, of principal and accrued interest on the
loan.
(b) Consists of a loan to Rainbow Casino Corporation ("Rainbow") to
finance the licensing, construction and start-up costs for a dockside
casino located in Vicksburg, Mississippi which commenced operations in
July 1994. Under the terms of the promissory note, Rainbow pays
$153,383 in monthly installments of principal and interest at 7-1/2%
through maturity in August 2001, before the allocation of loan
payments to Chartwell Leisure Associates L.P. ("Chartwell Leisure"),
an affiliate of Chartwell, in connection with the Company's interest
in a family entertainment center located on the Rainbow site (see Note
7(e)). The loan is secured by a first mortgage on existing real and
tangible personal property excluding certain equipment.
368431.3
F-12
<PAGE>
At the inception of the loan, the Company recorded the loan receivable
based upon an imputed interest rate of 10% which was determined to be
a fair market rate based upon comparable loans with similar risk.
Accordingly, a loan receivable discount approximating $0.8 million was
recorded and a corresponding amount was assigned to HFS' marketing
agreements prior to the Distribution. The loan receivable discount is
being amortized in accordance with the interest method over the life
of the loan. Accumulated amortization of the loan receivable discount
at December 31, 1995 was $222,652.
During 1995, the Company agreed to loan up to an additional $2.0
million to the partnership that owns the Rainbow casino. The proceeds
of such loan, together with additional capital to be contributed by
the general partner of such partnership, will be used to finance
certain improvements to the casino project, the completion of related
facilities and provide additional working capital. The loan is
unsecured and bears interest at 10% per annum and is to repaid in
equal monthly installments of principal and interest over a seven-year
term. The Company paid approximately $1.2 million in 1995 in
connection with the loan.
(c) During 1995, Bryanston Group, Inc. ("Bryanston"), an affiliate of
Alpha Hospitality, Inc. ("Alpha"), purchased various Company
investments in Alpha. The Company received $6.5 million cash and
153,600 shares of the Company's common stock in payment of a $7.1
million loan (net of discount and deferred loan costs) and
approximately $0.6 million of the Company's investment in Alpha common
stock. The Company reduced stockholders' equity by $1.2 million as a
result of the repurchase of its common stock which was subsequently
retired.
7. INVESTMENTS
Investments consists of the following ($000's):
December 31,
1995 1994
Investment in Boomtown Biloxi (a) $ 4,840 $ 9,058
Investment in Prescott (b) 4,767 4,760
Investment in common stock (c) 425 959
Investment in preferred stock (d) 3,752 3,845
Investment in Funtricity (e) 1,836 -
Warrants (f) 1,080 1,470
------- -------
Total $16,700 $20,092
======= =======
(a) During 1994, the Company acquired for approximately $8.5 million, plus
expenses, and leased back to Boomtown, a casino building and barge
located in Biloxi, Mississippi for a term of 25 years. Lease payments
are based upon a percentage of the casino's net income (as defined)
net of marketing fees paid to HFS and are not required to the extent
of cumulative net losses (as defined). Since the Company receives
consideration which has characteristics of an equity investment, the
Company has classified the purchase as an investment and records
related income based on the equity method of accounting. As of
December 31, 1995, the Company has a cumulative net loss, thus, the
Company has not recognized income related to its investment.
On November 6, 1995 the Company and HFS entered into agreements
with Boomtown Inc.("Boomtown") to reduce the Company's profit
participation in Boomtown's Biloxi, Mississippi casino by 25% and to
reduce the marketing fee payable to HFS for services provided to the
casino by 25%. In return, the Company and HFS received $1.8 million
and $0.6 million, respectively,
368431.3
F-13
<PAGE>
reducing their corresponding investments. Furthermore, the
company recorded a $2.4 million charge in the third quarter of 1995 to
reduce its investment in Boomtown's Biloxi casino to its estimated net
realizable value, based on the present value of the anticipated fair
market buyout at the end of the lease.
(b) The Company acquired a 19.9% limited partnership interest in Prescott
on November 30, 1994 for $4.5 million plus expenses. Prescott owns and
operates a hotel and convention center in Prescott, Arizona which
includes an operating casino facility.
(c) The Company acquired 200,000 shares of the common stock of Century
Casinos, Inc. ("Century") in 1994 for $1.3 million. During 1995, the
State of Indiana determined not to award a gaming license to Century
for its proposed casino gaming operation in Switzerland County,
Indiana. Based on this decision, the Company determined that its
investment in Century common stock was permanently impaired and
recorded a $1.0 million loss which is included in development
expenses. The Company also holds options, and may be required by
Century to purchase up to 230,000 shares of Century common stock at $3
per share if the closing price of Century's common stock exceeds
certain specified levels ($10 to $13 per share) for 10 consecutive
days prior to March 4, 1999. Based on the current trading price of
Century common stock and Century's historical results of operations,
the Company believes the options will not become exercisable and,
therefore, have no value.
The Company received 96,429 shares of Alpha common stock in
settlement of certain outstanding obligations amounting to $559,000 in
November 1994. During 1995, the Company sold its investment in Alpha
common stock to Bryanston (see Note 6(c)).
(d) Includes nonvoting preferred stock convertible into common stock
representing a 20% interest in Odyssey Gaming Corporation ("Odyssey")
acquired for approximately $3.8 million plus approximately $1.5
million contingent upon the occurrence of certain events which have
not occurred and are, in the opinion of management, unlikely to occur.
The Company has also committed, under certain circumstances which are,
in the opinion of management, unlikely to occur (including the
execution of agreements between Odyssey and certain Native American
tribes for the development and management of Class II (bingo, pulltabs
and nonbanking card games) or Class III (casino style) gaming
facilities) to make secured project financing loans of up to an
aggregate of $10 million to be used in connection with the development
of Native American casino gaming facilities to be managed by Odyssey.
(e) Consists of the Company's allocation of Rainbow loan payments (see
Note 6(b)) to Chartwell Leisure as an inducement to Chartwell Leisure
to provide financing for a family entertainment center ("Funtricity")
located on the Rainbow site. The Company agreed to pay a percentage of
principal and interest payments on the $10 million loan with Rainbow
to Chartwell Leisure ranging from 14% to 27% adjusted annually in
accordance with a schedule to the agreement. Additionally, HFS agreed
to share marketing fees from Rainbow with Chartwell Leisure based on
the same scheduled percentages. Chartwell Leisure agreed to share with
HFS 50% of the net cash flow payable to Chartwell Leisure in respect
to the family entertainment center and HFS agreed to share such
amounts pro rata with the Company based on relative amounts paid by
HFS and the Company, respectively, to Chartwell Leisure each year. The
entertainment center commenced operations on May 1, 1995. The Company
paid approximately $215,000 in 1995 in connection with the agreement.
(f) The Company holds warrants to acquire 600,000 shares of Alpha common
stock at $14 per share which expire in October 1998. The fair value of
the underlying common stock approximated $4
368431.3
F-14
<PAGE>
per share at December 31, 1995. The warrants were recorded at cost on
date of receipt of approximately $1.5 million. These options were
written down to fair value utilizing the Black-Scholes option
valuation model at December 31, 1995.
8. JOINT VENTURE INTERESTS
The Company is a participant in two joint ventures established to develop
casino gaming facilities in Pittsburgh and Erie, Pennsylvania. The Company
and its joint venture partners agreed in principle to dissolve both joint
ventures due to increasing uncertainty that the Pennsylvania legislature
would adopt legislation contemplating a referendum on authorization of
gaming in the state. As a result, the Company recorded a $6.8 million loss
representing a write-off of its joint venture interests. Upon dissolution,
the Company's contingent obligation to acquire land and to develop and
finance the construction of the respective gaming facilities will be
terminated (see Note 6(a)). Consequently, the Company has notified the URA
that it will not exercise its option to a acquire parcel of land from the
URA in Pittsburgh upon which the construction of a casino was planned.
Additionally, in November 1995, the Company sold for approximately $0.9
million two parcels of land in Erie, upon which a proposed casino was to
be constructed.
9. STOCKHOLDERS' EQUITY
A. Shares Reserved for Issuance - The Company reserved for
issuance up to 433,290 shares of common stock to certain persons
including directors and officers of HFS and the Company, in accordance
with a distribution agreement signed in connection with the
Distribution ("Distribution Agreement"). The shares correspond with
options to acquire HFS common stock granted pursuant to HFS's
incentive stock option plan which were unexercised at the Distribution
Date. The shares are stapled to the HFS options and have no exercise
price. As such, the Company will not receive any proceeds from
exercised options. As of December 31, 1995, options to acquire 294,830
shares were exercisable.
The Company also reserved for issuance up to 153,600 shares of
common stock to Bryanston in accordance with the Distribution
Agreement. The shares correspond with Bryanston's rights to
purchase HFS common stock at the distribution date. Following the
Distribution, the Company issued 153,600 shares pursuant to such
rights, which were subsequently reacquired.
B. Stock Options - Pursuant to the Company's 1994 Stock Option
Plan, options to purchase up to two million shares of common stock may
be granted to employees of the Company and certain other persons over
the 10-year term of the plan. Options granted became exercisable at
the rate of 33- 1/3% per year beginning one year after the date of
grant and generally expire 10 years from the date of grant. Options
for 675,000 shares of common stock were granted on November 22, 1994
at an exercise price of $16.75 representing fair market value on the
date of grant. Additional options for 90,000 shares of common stock
were granted during November and December 1995 at an exercise price of
$9.88, representing fair market value on the dates of grant. As of
December 31, 1995, there were 765,000 options outstanding of which
224,999 were exercisable. 615,000 of such options were canceled as of
February 1, 1996.
C. Sale of Common Stock - The Company sold 904,930 shares of its
unregistered common stock to Chartwell in December 1995, representing
approximately 17% ownership interest in the Company, for approximately
$8,484,000 ($8,311,000 net of expenses). Chartwell also designated two
directors to the Board in December 1995.
368431.3
F-15
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
A. Employment Agreements - At December 31, 1995, the Company had an
employment agreement with an employee who was subsequently terminated
in January 1996. Pursuant to such agreement, the Company is required
to provide severance payments to the employee of approximately
$256,000 over the term of one year.
B. Litigation - In the normal course of business, certain litigation is
initiated against the Company. Generally those claims are insured and
in the opinion of management, disposition of litigation will not have
a material adverse effect on the Company's liquidity, consolidated
financial position or consolidated results of operation.
11. OTHER RELATED PARTY TRANSACTIONS
Mr. Roger J. Stone, a director of the Company, was a partner in the
Washington, D.C. public-affairs firm of Black, Manafort, Stone & Kelly in
1993. 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 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.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirement of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments." The estimated fair value amounts have been
determined by the Company, using available market information and
appropriate valuation methodologies. However, considerable judgment is
required in interpreting market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on estimated fair
value.
1995
($000's)
Carrying Fair
Value Value
Cash and cash equivalents $ 51,470 $51,470
Loans 17,647 18,017
Investments in warrants, common stock
and Boomtown Casino 6,345 6,345
Investments in casino development enterprises,
casinos and entertainment facility 10,355 (See Below)
368431.3
F-16
<PAGE>
Cash and Cash Equivalents - The carrying value of cash and cash
equivalents approximates fair value because of their short-term
maturities.
Loans - The fair value is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit ratings.
Investments in Warrants, Common Stock and Boomtown Casino - Investment in
warrants and common stock are valued using the Black-Scholes Option
Pricing Model and the closing price of the common stock at December 31,
1995, respectively. The fair value of the investment in the Boomtown
Casino Lease is estimated based on the present value of the anticipated
market buyout at the end of the term.
Investments in Casino Development Enterprises, Casinos and Entertainment
Facility - The Company's investments in these projects generate no current
or determinable cash flow. As a result, management believes that a fair
value assessment is not practicable. The value of these investments are
impacted by the status of gaming legislation and the potential timing and
uncertainty of future cash flows.
******
368431.3
F-17
