SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant / X /
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/ X / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
RED LION HOTELS, INC.
- - - - --------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- - - - --------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ X / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A
/ / $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3)
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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/ / Fee paid previously with preliminary materials
* Set forth the amount on which the filing fee is calculated and state
how it was determined.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
RED LION HOTELS, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 15, 1996
TO THE SHAREHOLDERS OF RED LION HOTELS, INC.:
The annual meeting of the shareholders of Red Lion Hotels, Inc., a
Delaware corporation, will be held at 2:00 p.m., Pacific Time, on May 15,
1996, at the Red Lion Hotel, Jantzen Beach, 909 N. Hayden Island Drive,
Portland, Oregon, for the following purposes:
1. Electing two directors for a term of three years;
2. Ratifying the appointment of Deloitte & Touche LLP as independent
certified public accountants for the Company; and
3. Transacting such other business as may properly come before the
meeting.
Only shareholders of record at the close of business on March 29, 1996
will be entitled to vote at the annual meeting.
YOU ARE RESPECTFULLY REQUESTED TO DATE AND SIGN THE ENCLOSED PROXY AND
RETURN IT IN THE POSTAGE-PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE. You
may attend the meeting in person even though you have sent in your proxy,
since retention of the proxy is not necessary for admission to or
identification at the meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Beth A. Ugoretz
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
Vancouver, Washington
April 15, 1996
<PAGE>
RED LION HOTELS, INC.
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
----------
The mailing address of the principal executive offices of the Company
is 4001 Main Street, Vancouver, Washington 98663. The approximate date this
proxy statement and the accompanying proxy form are first being sent to
shareholders is April 15, 1996.
UPON WRITTEN REQUEST TO BETH A. UGORETZ, SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY, ANY PERSON WHOSE PROXY IS SOLICITED BY THIS
PROXY STATEMENT WILL BE PROVIDED, WITHOUT CHARGE, A COPY OF THE COMPANY'S
ANNUAL REPORT ON FORM 10-K.
SOLICITATION AND REVOCABILITY OF PROXY
The enclosed proxy is solicited on behalf of the Board of Directors of
Red Lion Hotels, Inc., a Delaware corporation, for use at the Annual
Meeting of Shareholders to be held on May 15, 1996 and at any adjournment
thereof. The Company will bear the cost of preparing and mailing the proxy,
proxy statement, and any other material furnished to shareholders by the
Company in connection with the annual meeting. Proxies will be solicited by
use of the mails, and officers and employees of the Company may also
solicit proxies by telephone or personal contact. Copies of solicitation
materials will be furnished to fiduciaries, custodians and brokerage houses
for forwarding to beneficial owners of the stock held in their names.
Any person giving a proxy in the form accompanying this proxy
statement has the power to revoke it at any time before its exercise. The
proxy may be revoked by filing with the Company, attention Beth A. Ugoretz,
Senior Vice President, General Counsel and Secretary, an instrument of
revocation or a duly executed proxy bearing a later date. The proxy may
also be revoked by affirmatively electing to vote in person while in
attendance at the meeting. However, a shareholder who attends the meeting
need not revoke the proxy and vote in person unless he or she wishes to do
so. All valid, unrevoked proxies will be voted at the annual meeting in
accordance with the instructions given.
1
<PAGE>
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
The Common Stock is the only outstanding authorized voting security of
the Company. The record date for determining holders of Common Stock
entitled to vote at the annual meeting is March 29, 1996. On that date
there were 31,312,500 shares of Common Stock outstanding, entitled to one
vote per share. The Common Stock does not have cumulative voting rights.
The following table sets forth certain information regarding the
beneficial ownership as of December 31, 1995 of the Common Stock by (i)
each person known by the Company to own beneficially more than 5% of the
Common Stock, (ii) each director of the Company, (iii) each executive
officer of the Company named in the Summary Compensation Table, and (iv)
all executive officers and directors as a group. Except as otherwise noted,
the persons listed below have sole investment and voting power with respect
to the Common Stock owned by them.
<TABLE>
<CAPTION>
Number of Shares Percentage
Beneficial Owner Beneficially Owned of Shares
- - - - ---------------- ------------------ ----------
<S> <C> <C>
Red Lion, a California Limited Partnership(1)
4001 Main Street
Vancouver, Washington 98663............................ 20,900,000 66.7%
David J. Johnson........................................... 696,667(2) 2.2%
Michael W. Michelson(1).................................... -- *
Edward A. Gilhuly(1)....................................... -- *
Todd A. Fisher............................................. 500 *
Thomas W. Henry............................................ 22,662 *
Beth A. Ugoretz............................................ 8,205 *
Steven L. Hubbard.......................................... 17,627 *
George H. Schweitzer....................................... 20,147 *
All directors and executive officers as a group
(18 persons)........................................... 828,919(2) 2.6%
- - - - ----------------
<FN>
* Less than 1%.
(1) RLA-GP, Inc., a Delaware corporation ("RLA"), is the general partner
of Red Lion, a California Limited Partnership (the "Partnership"), and
has sole voting and investment power with respect to the shares of
Common Stock owned of record by the Partnership. RLA has a 1% general
partnership interest in the Partnership. George R. Roberts is a
stockholder, director and president of RLA. Michael W. Michelson, a
director of the Company, is a stockholder, director and an executive
vice president of RLA. Edward A. Gilhuly, a director of the Company,
is a director and executive vice president of RLA. Messrs. Roberts and
Michelson are also general partners of KKR Associates (Delaware), a
Delaware limited partnership, which is a limited partner of the
Partnership. KKR Associates (Delaware) does not have the power to vote
or dispose of shares of Common Stock owned by the Partnership. Messrs.
Roberts, Michelson and Gilhuly each expressly disclaims beneficial
ownership of any shares of the Company. See "Certain Relationships and
Related Transactions."
(2) Includes 696,667 shares of Common Stock subject to stock options that
are currently exercisable.
</FN>
</TABLE>
2
<PAGE>
PROPOSAL 1: ELECTION OF DIRECTORS
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors is divided into three classes and the term of office of one class
expires each year. The terms of David J. Johnson and Todd A. Fisher expire
in 1996. Mr. Johnson and Mr. Fisher are nominees for re-election. If a
quorum of shareholders is present at the annual meeting, the two nominees
for election as directors who receive the greatest number of votes cast at
the meeting shall be elected directors. Abstentions and broker non-votes
will have no effect on the results of the vote. Unless otherwise
instructed, proxy holders will vote the proxies they receive for Mr.
Johnson and Mr. Fisher. If any of the nominees for director at the annual
meeting becomes unavailable for election for any reason (none being known),
the proxy holders will have discretionary authority to vote pursuant to the
proxy for a suitable substitute or substitutes. The following table briefly
describes the Company's nominees for directors and the directors whose
terms will continue.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS AGE SINCE(1) EXPIRES
- - - - -------------------------------------------------- --- -------- -------
NOMINEES
<S> <C> <C> <C>
DAVID J. JOHNSON. Mr. Johnson has been President, Chief 49 1994 1996
Executive Officer and a director of the Company or its predecessor
since September 1991. From 1989 to September 1991, Mr. Johnson
was a General Partner with Hellman & Friedman, a San
Francisco-based investment firm.
TODD A. FISHER. Mr. Fisher has been an executive of Kohlberg 30 1994 1996
Kravis Roberts & Co. ("KKR") since June 1993. From 1992 to June
1993, Mr. Fisher was an associate at Goldman, Sachs & Co. Prior
to 1992, Mr. Fisher attended the Wharton School of Business at the
University of Pennsylvania. Mr. Fisher is a director of Merit
Behavioral Care Corp.
DIRECTORS WHOSE TERMS CONTINUE
MICHAEL W. MICHELSON. Mr. Michelson has been a General Partner 44 1994 1997
of KKR and KKR Associates for more than five years.
Mr. Michelson is also a director of AutoZone, Inc.; Fred Meyer,
Inc.; Owens-Illinois, Inc.; Owens-Illinois Group, Inc.; Red Lion
Properties, Inc.; and Union Texas Petroleum Holdings, Inc.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS AGE SINCE(1) EXPIRES
- - - - -------------------------------------------------- --- -------- -------
<S> <C> <C> <C>
EDWARD A. GILHULY. Mr. Gilhuly has been a General Partner or an 36 1994 1998
executive with KKR for more than five years. Mr. Gilhuly is also
a director of Layne, Inc.; Owens-Illinois, Inc.; Owens-Illinois
Group, Inc.; Red Lion Properties, Inc.; Union Texas Petroleum
Holdings, Inc.; and Merit Behavioral Care Corp.
- - - - ---------------
<FN>
(1) Does not include prior service as a director of RLA, the general
partner of the Partnership, the predecessor of the Company.
</FN>
</TABLE>
BOARD MEETINGS AND COMMITTEES
The Board of Directors met three times during 1995 and took action on
numerous other occasions by unanimous consent. Mr. Michelson was absent
from one, and Mr. Fisher was absent from two, of the three formal Board
meetings held during 1995. No other director attended fewer than 75% of the
aggregate of all meetings of the Board of Directors and the committees of
which the director was a member during 1995. The standing committees of the
Board of Directors are the Executive Committee, the Audit Committee and the
Compensation Committee. The Company does not have a nominating committee.
The Executive Committee has been granted the full authority of the
Board, including the authority to acquire and dispose of real property and
the power to authorize, on behalf of the full Board of Directors, the
execution of certain contracts and agreements. The Executive Committee
consists of Mr. Johnson, Mr. Michelson and Mr. Gilhuly. The Audit Committee
makes recommendations concerning the engagement of the independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, approves professional services provided by
the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit
fees and reviews the adequacy of the Company's internal accounting
controls. The Audit Committee consists of Mr. Gilhuly and Mr. Fisher. The
Compensation Committee determines compensation for the Company's executive
officers and administers the Company's 1995 Equity Participation Plan. The
Compensation Committee consists of Mr. Michelson, Mr. Gilhuly and Mr.
Fisher.
COMPENSATION OF DIRECTORS
Directors who are not officers of the Company receive annual
compensation of $20,000.
4
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Prior to the Company's initial public offering in July 1995, the
executive officers were executive officers of the Partnership. The
following table sets forth all compensation paid by the Company and the
Partnership with respect to the last two years to the Chief Executive
Officer and the four other most
highly compensated executive officers.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Options LTIP All Other
Name and Principal Position Year Salary Bonus Granted Payouts(1) Compensation(2)
- - - - --------------------------- ---- ------ ----- ------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
David J. Johnson 1995 $406,138 $335,274 870,833 -- $81,500
President, Chief Executive 1994 $389,371 $340,542 -- -- $73,877
Officer and Chairman of
the Board
Thomas W. Henry 1995 $153,876 $ 74,140 45,000 $ 782,622 $22,908
Senior Vice 1994 $147,958 $ 74,872 -- $23,823
President/Design and
Construction
Beth A. Ugoretz 1995 $139,016 $ 69,367 50,000 $ 289,860 $12,044
Senior Vice President and 1994 $114,231 $ 61,717 -- -- $ 3,432
General Counsel
Steven L. Hubbard 1995 $132,590 $ 63,775 45,000 $ 608,706 $19,075
Senior Vice 1994 $127,490 $ 65,068 -- -- $17,753
President/Human
Resources
George H. Schweitzer 1995 $126,145 $ 63,545 45,000 $1,043,496 $17,018
Regional Vice President 1994 $121,251 $ 60,533 -- -- $ 8,251
(Washington Region)
- - - - ----------
<FN>
(1) Represents payouts of the value of incentive units previously granted
under the Incentive Unit Plan of the Partnership. After withholding
applicable taxes, the payouts were made partially in cash and
partially in the form of Common Stock valued at the initial public
offering price of $19.00 per share.
(2) The amounts under "All Other Compensation" for 1995 consist of
matching contributions by the Company under its 401(k) plan for
Messrs. Johnson, Henry, Hubbard, Schweitzer and Ms. Ugoretz of $6,000,
$9,000, $7,906, $7,467 and $8,117 and contributions by the Company
under its Supplemental Employee Retirement Plan for Messrs. Johnson,
Henry, Hubbard, Schweitzer and Ms. Ugoretz of $75,500, $13,908,
$11,169, $9,551 and $3,927.
</FN>
</TABLE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information regarding all stock options
granted in 1995 to the executive officers named in the Summary Compensation
Table.
5
<PAGE>
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
PERCENT OF ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SHARES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM (1)
OPTIONS IN FISCAL PRICE EXPIRATION -------------------------
NAME GRANTED YEAR PER SHARE DATE 5% 10%
- - - - ----------------- ---------- ----------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
David J. Johnson 870,833(2) 38.7% $19.00 8/1/05 $10,405,582 $26,369,787
Thomas W. Henry 45,000(3) 2.0% $19.00 8/1/05 $ 537,705 $ 1,362,650
Beth A. Ugoretz 50,000(3) 2.2% $19.00 8/1/05 $ 557,450 $ 1,514,055
Steven L. Hubbard 45,000(3) 2.0% $19.00 8/1/05 $ 537,705 $ 1,362,650
George H. Schweitzer 45,000(3) 2.0% $19.00 8/1/05 $ 537,705 $ 1,362,650
- - - - --------------------
<FN>
(1) In accordance with rules of the Securities and Exchange Commission,
these amounts are the hypothetical gains or "option spreads" that
would exist for the respective options based on assumed rates of
annual compound stock price appreciation of 5% and 10% from the date
the options were granted over the full option term.
(2) This option was exercisable for 60% of the shares immediately upon
grant, became exercisable for 20% of the shares on September 30, 1995
and becomes exercisable for the remaining 20% of the shares on
September 30, 1996.
(3) This option was granted on August 1, 1995 and becomes exercisable for
50% of the shares on each of the fourth and fifth anniversaries of the
grant date; provided that, after the first anniversary of the grant
date, if the market price of the Common Stock for a period of 20
consecutive trading days is 25%, 50%, 75% or 100% over the option
exercise price, the option shall immediately become exercisable to the
extent of 25%, 50%, 75% or 100% as the case may be, of the shares.
</FN>
</TABLE>
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table indicates for all executive officers named in the
Summary Compensation Table, (i) stock options exercised during 1995,
including the value realized on the date of exercise, (ii) the number of
shares subject to exercisable (vested) and unexercisable (unvested) stock
options as of December 31, 1995, and (iii) the value of "in-the-money"
options, which represents the positive spread between the exercise price of
existing stock options and the year-end price of the Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
SHARES SUBJECT VALUE OF
TO UNEXERCISED UNEXERCISED
NUMBER OF OPTIONS IN-THE-MONEY
SHARES AT FISCAL YEAR END AT FISCAL YEAR END(1)
ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C>
David J. Johnson -- -- 696,667 174,166 -- --
Thomas W. Henry -- -- -- 45,000 -- --
Beth A. Ugoretz -- -- -- 50,000 -- --
Steven L. Hubbard -- -- -- 45,000 -- --
George H. Schweitzer -- -- -- 45,000 -- --
- - - - --------------------
<FN>
(1) Calculated based on December 29, 1995 closing stock price of $17.50.
</FN>
</TABLE>
6
<PAGE>
EMPLOYMENT ARRANGEMENTS
The Company is a party to a non-qualified supplemental retirement
benefit agreement dated July 26, 1995 (the "SERP") with David J. Johnson.
The SERP provides for Mr. Johnson to be paid a supplemental retirement
benefit of approximately $166,000 for 22 years beginning on his 55th
birthday. Under the SERP, Mr. Johnson has elected to be paid the present
value of the SERP benefits upon the earlier of (i) 5 years after the date
of the SERP and (ii) the first date on which Historical Red Lion has
disposed of all or substantially all of its assets other than the stock of
the Company. Mr. Johnson's election to receive early payment of the SERP
benefits may be revoked or revised at any time prior to 90 days before the
early payment would otherwise occur.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee")
consists of three non-employee directors. The Committee is responsible for
establishing the levels of compensation paid to executive officers. In
addition, the Committee has the sole responsibility for the administration
of, and the grant of stock options and other awards under, the Company's
1995 Equity Participation Plan.
The objectives of the Company's executive compensation program are to
attract and retain highly qualified executives, and to motivate them to
maximize shareholder returns by achieving both short-term and long-term
strategic Company goals. The three basic components of the executive
compensation program are base salary, annual bonus dependent on corporate
performance, and stock options.
BASE SALARY
In establishing executive salaries, the Company considers data from
five different compensation surveys. The Company generally considers an
appropriate salary level to fall between the 50th and 75th percentiles for
comparable positions at comparable companies as reflected in the survey
data. As part of the Company's greater emphasis on the variable portion of
cash compensation, the Company generally sets salaries at approximately 95%
of the appropriate level from the survey data. On an ongoing basis, annual
salary increases of between 0% and 5% are approved each January based on a
subjective assessment of the executive's performance for the prior year.
ANNUAL BONUSES
The Compensation Committee annually approves an Executive Incentive
Plan to provide for the payment of cash bonuses to executive officers based
on corporate performance. Early each year the Compensation Committee
approves a target bonus amount for each executive officer ranging from 30
to 60 percent of base salary. In establishing bonus targets, the Company
considers compensation survey data regarding total cash compensation levels
paid for comparable positions at comparable companies. After determining an
appropriate total compensation level, the Company generally sets bonus
targets to provide a salary and bonus target slightly above the appropriate
total compensation level. Actual bonuses can range from 0% to 150% of
target based on Company and individual
7
<PAGE>
performance. For most officers in 1995, 60% of the officer's target bonus
was dependent on the Company's performance against plan for adjusted
operating income (operating income excluding corporate general and
administrative expense), 20% was dependent on the Company's performance
against plan for net income, and 20% was dependent upon performance against
individual objectives. The Company's adjusted operating income and net
income both exceeded plan in 1995 resulting in bonuses in excess of target
for all officers. In addition to the Executive Incentive Plan for 1995, an
additional pool of $85,500 was approved after year end for allocation among
officers based on a subjective evaluation of performance for the year.
STOCK OPTIONS
The stock option program is the Company's principal long-term
incentive plan for executive officers and other management employees. The
objectives of the stock option program are to align executive and
shareholder long-term interest by creating a strong and direct link between
executive compensation and shareholder return, and to create incentives for
executives to remain with the Company for the long term through option
vesting provisions. Options are awarded with an exercise price equal to the
market price of the Common Stock on the date of grant and have a term of 10
years. Although options generally become exercisable for 50% of the shares
on each of the fourth and fifth anniversaries of the grant date, to further
align executive interests with shareholder return, the options generally
provide that after the first anniversary of the grant date, if the market
price of the Common Stock for a period of 20 consecutive trading days is
25%, 50%, 75% or 100% over the option exercise price, the option shall
immediately become exercisable to the extent of 25%, 50%, 75% or 100% as
the case may be, of the shares.
The Company did not have a stock option program prior to its initial
public offering ("IPO"). Accordingly, significant option grants were made
to all officers at the time of the IPO to provide a meaningful equity stake
in the Company. In addition, the size of the IPO option grants was
influenced by the fact that the Company does not expect to implement annual
option grants. Based on these factors, the number of options granted to
officers was in the high range of typical IPO option grants based on survey
data provided by the Company's compensation consultant.
RETIREMENT PLANS MATCHING CONTRIBUTIONS
The Company maintains two retirement savings plans, the Employee
Retirement Savings Plan (the "401(k) Plan") and a non-qualified
Supplemental Employee Retirement Plan (the "SERP") under which all
executive officers and certain other key employees are eligible. Under the
401(k) Plan, eligible employees are permitted to defer up to 15% of their
annual compensation subject to certain statutory limitations. Any amount
that a SERP participant is precluded from deferring by the statutory
limitations on the 401(k) Plan may be deferred under the SERP. Currently,
Red Lion matches 100% of an employee's contributions under the 401(k) Plan
and SERP subject to a maximum contribution equal to 6% of such employee's
annual compensation. In addition, the Company annually contributes to the
SERP for each eligible SERP participant an amount equal to 6% of the
employee's compensation in excess of the Social Security contribution and
benefit base ($61,200 in 1995).
8
<PAGE>
DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986 limits to
$1,000,000 per person the amount that the Company may deduct for
compensation paid to any of its most highly compensated officers in any
year. The levels of salary and bonus generally paid by the Company do not
exceed this limit. Under IRS regulations, the $1,000,000 cap on
deductibility will not apply to compensation received through the exercise
of a nonqualified stock option that meets certain requirements. This option
exercise compensation is equal to the excess of the market price at the
time of exercise over the option price and, unless limited by Section
162(m), is generally deductible by the Company. It is the Company's current
policy generally to grant options that meet the requirements of the IRS
regulations.
CHIEF EXECUTIVE OFFICER COMPENSATION
Consistent with the methodology used to establish other executive
salaries as discussed above, Mr. Johnson's salary is approximately 95% of
an appropriate salary level determined from salary survey data considered
by the Company. Mr. Johnson's bonus target for 1995 was 60% of salary,
which was intended to provide a total cash compensation target consistent
with the approach for other executive officers. He received a bonus equal
to 130% of target based on the Company's operating performance as discussed
above and a determination by the Committee that he had exceeded
expectations regarding his individual objectives for the year. He also
received $20,000 from the discretionary year-end bonus pool discussed
above. Mr. Johnson received an option for 870,833 shares at the time of the
IPO. This option was considerably larger than the option he would have
received using guidelines similar to those used for other officers, and
represented a part of the negotiated restructuring of his prior incentive
compensation with the Partnership.
COMPENSATION COMMITTEE
Michael W. Michelson
Edward A. Gilhuly
Todd A. Fisher
9
<PAGE>
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total
stockholder return of the Company's Common Stock with the cumulative total
return of the Standard and Poor's 500 Stock Index ("S&P 500"), and the
Standard and Poor's Hotel-Motel Index ("S&P Hotel-Motel") for the period
commencing on July 26, 1995 (the date of the Company's initial public
offering) and ending on December 31, 1995. The graph assumes that $100 was
invested in the Company's Common Stock (at the initial public offering
price) and each index on July 26, 1995 and that all dividends were
reinvested.
[Graphic line chart showing:
<TABLE>
<CAPTION>
Comparison of Cumulative Total Return
7/26/95 8/31/95 9/29/95 10/31/95 11/30/95 12/29/95
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Red Lion Hotels $100.00 $121.74 $110.53 $103.95 $ 93.42 $ 92.11
S&P 500 100.00 100.36 104.60 104.22 108.80 110.89
S&P Hotel-Motel 100.00 100.37 98.95 95.51 95.01 97.36]
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Michelson, Gilhuly and
Fisher, none of whom has ever served as an officer of the Company. In 1995,
Mr. Johnson, who has been President and Chief Executive Officer of Red Lion
since September 1991, participated in deliberations of the Board of
Directors of RLA concerning compensation for Red Lion's executive officers.
Each of Mr. Michelson, Mr. Gilhuly and Mr. Johnson is an Executive Vice
President and Director of RLA, the general partner of the Partnership.
Transactions between the Company and the Partnership are discussed below
under "Certain Relationships and Related Transactions."
10
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership owns approximately 67% of the Company's Common Stock
and effectively controls the Company's operations, including decisions
related to the transactions described in the following paragraphs. The
general partner of the Partnership, RLA, is a Delaware corporation of which
Mr. Michelson is an Executive Vice President and a Director, Mr. Gilhuly is
an Executive Vice President and a Director and Mr. Johnson is an Executive
Vice President and a Director. In addition, the general and limited
partners of KKR Associates are the stockholders of RLA. KKR Associates is a
limited partner of the Partnership.
Pursuant to a separate incentive compensation agreement with the
Partnership (which continues to be an obligation of the Partnership), Mr.
Johnson is entitled to receive incentive compensation for services rendered
to the Partnership in an amount equal to 4% of all amounts distributable to
the Partnership's partners after the partners' return of capital, minus the
difference between the value of the shares of Common Stock subject to Mr
Johnson's stock option and the exercise price of the stock option, to the
extent that such amount exceeds a rate prescribed by the incentive
compensation agreement.
On August 1, 1995, immediately prior to the closing of the Company's
initial public offering, the Partnership contributed substantially all of
its assets (excluding 17 hotels (the "Leased Hotels") and certain minority
joint venture interests and cash) and certain liabilities to the Company in
exchange for 20,899,900 shares of Common Stock (the "Formation").
Concurrently with the Formation, the Partnership and the Company
entered into a lease (the "Lease") with respect to the Leased Hotels. The
initial term of the Lease is 15 years, subject to earlier termination by
the Partnership upon the occurrence of one or more Events of Default (as
defined in the Lease). Rental payments under the Lease consist of Base Rent
and Additional Rent. Base Rent for all of the Leased Hotels is $15 million
per year. Additional Rent for the Leased Hotels will be equal to 7.5% of
the amount, if any, by which the aggregate operating revenues for all of
the Leased Hotels for the given fiscal year exceeds the total operating
revenues at all such hotels for the base year. Actual rent paid for the
Leased Hotels was $6.25 million for the period from August 1, 1995 to
December 31, 1995. The Company has agreed to fully indemnify the
Partnership and its affiliates for any matter arising by reason of or in
connection with the leasing, use, non-use, occupancy, management or
operation of each of the Leased Hotels prior to or during the term of the
Lease, including violations of environmental laws, discharges, disposal or
releases of hazardous materials, presence of hazardous materials, including
any which are the result of off-site migration onto the Leased Hotels, and
certain exposures to hazardous materials (as such terms are defined in the
Lease) which exist at or are released from any of the Leased Hotels prior
to or during the term of the Lease. Such indemnities will survive the
termination of the Lease. While the Company believes the terms of the Lease
are fair to both parties, those terms were not negotiated on an arms-length
basis.
In connection with the Formation, the Company granted the Partnership
demand and incidental, or "piggyback," registration rights which allow the
Partnership to require that the Company register under the Securities Act
of 1933 all or part of the Common Stock held by the Partnership. The
Company has agreed to pay all expenses in connection with registrations of
Common Stock pursuant to the agreement.
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In connection with the Formation, the Company and the Partnership
entered into an agreement pursuant to which the Company agreed to provide
certain accounting, tax and other administrative services to the
Partnership for an annual fee, which was $350,000 in 1995, and which will
increase by 3% per year thereafter. Management believes that the terms for
these services are comparable to those which would have been reached with
an unaffiliated party.
The Company agreed, in connection with the Formation, to indemnify,
save and hold harmless the Partnership and its affiliates from and against
any and all liabilities, costs, losses and damages (including, without
limitation, interest, penalties, costs of mitigation and losses in
connection with any environmental law) incurred in connection with, arising
out of, resulting from or incident to, any event or condition, past,
present or future, relating to the assets, liabilities or businesses of the
Partnership or to its ownership of the Company's Common Stock. In addition,
the Company has agreed to use its reasonable efforts to eliminate the
Partnership's liability, direct or indirect, with respect to any obligation
transferred to or assumed by the Company.
The Company owns a 49.9% interest in seven joint ventures, each of
which owns a Red Lion hotel. When combined with the joint venture interest
retained by the Partnership, the Company and the Partnership own at least
50% of each of these joint ventures. Pursuant to an agreement between the
Partnership and the Company executed in connection with the Formation, the
Company generally has the power, in its sole discretion, to determine and
prescribe the Partnership's conduct with respect to any joint venture
interests held by the Partnership. The Company has agreed to advance the
Partnership any funds required to pay its obligations arising from the
joint venture interests to be held by the Partnership, which shall be
repaid out of the first funds distributed by the respective joint venture
to the Partnership. The Company and the Partnership have agreed that for a
period of 60 days commencing the day after the first anniversary of the
Formation, the Partnership will have the right to sell to the Company those
interests, excluding a 0.1% interest in one of the joint ventures, for an
aggregate of $1.3 million and cancellation of any advances made by the
Company to the Partnership with respect to such interests. If the
Partnership's joint venture interests are not sold pursuant to such right,
commencing 70 days after the first anniversary of the Formation, the
Company shall have the right for 60 days to purchase such joint venture
interest for the same consideration. The Partnership has agreed not to sell
or otherwise transfer such joint venture interest, other than pursuant to
the rights described above, until after the expiration of the Company's
right to purchase such interests.
Red Lion Properties, Inc., a wholly owned subsidiary of the Company
("Properties"), is the general partner of, and owns a 1.99% partnership
interest in, Red Lion Inns Limited Partnership, a publicly traded master
limited partnership (the "MLP"). Mr. Johnson is President and Chief
Executive Officer and a Director of Properties. Messrs. Michelson and
Gilhuly are also Directors of Properties. Pursuant to a management
agreement with the MLP assigned to the Company in the Formation, the
Company provides management services to the 10 Red Lion hotels owned by the
MLP. During the last five months of 1995 (the period after the Formation),
the Company charged the MLP a total of $12.1 million for management fees,
support services, supplies, furnishings and equipment. As of December 31,
1995, the MLP owed the Company $20.5 million primarily for capital
improvements funded by the Company and the Partnership. The Company also
has non-interest bearing long-term receivables from the MLP associated with
its formation and with stabilization of MLP distributions at the inception
of the MLP. As of December 31, 1995, these
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long-term receivables included $5.6 million of accrued incentive management
fees and $3.7 million outstanding under a credit facility.
DESCRIPTION OF THE 1995 EQUITY PARTICIPATION PLAN
In July 1995, the Company adopted the 1995 Equity Participation Plan
(the "Plan") for the benefit of its employees, independent directors and
consultants. The principal provisions of the Plan are summarized below.
ELIGIBILITY
All employees, officers and consultants of the Company and its
subsidiaries are eligible to participate in the Plan. Also eligible are
nonemployee directors who are not affiliated with the Partnership or RLA.
ADMINISTRATION
The Plan is administered by the Compensation Committee of the Board of
Directors (the "Committee"), which designates from time to time the
individuals to whom awards are made under the Plan, the amount of any such
award and the price and other terms and conditions of any such award.
Subject to the provisions of the Plan, the Committee may adopt and amend
rules and regulations relating to the administration of the Plan.
SHARES AVAILABLE
A total of 3,300,000 shares of Common Stock were reserved for issuance
under the Plan. As of December 31, 1995, options to purchase a total of
2,235,833 shares were outstanding under the Plan, leaving 1,064,167 shares
available for future grants. If an option, stock appreciation right or
performance award granted under the Plan expires, terminates or is
cancelled, or if shares sold or awarded are forfeited to the Company or
repurchased by the Company, the shares again become available for issuance
under the Plan.
TERM OF THE PLAN
The Plan will terminate on the date of the annual meeting of the Board
of Directors immediately following July 25, 2005. The Committee may suspend
or terminate the Plan at any time.
STOCK OPTIONS
The Committee determines the persons to whom options are granted, the
option price, the number of shares subject to each option, the period of
each option and the times at which options may be exercised and whether the
option is an Incentive Stock Option (an "ISO"), as defined in Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), or an option
other than an ISO (a "Non-Qualified Stock Option" or "NSO"). If the option
is an ISO, the option price cannot be less than the fair market value of
the Common Stock on the date of grant. If an optionee of an ISO at the time
of grant owns stock possessing more than 10% of the combined voting power
of the
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Company, the option price may not be less than 110% of the fair market
value of the Common Stock on the date of grant. If the option is an NSO,
the option price may be any price determined by the Committee. No ISO may
be granted on or after the tenth anniversary of the date the Plan was
adopted by the Board of Directors. The maximum number of shares of Common
Stock that may be subject to options and stock appreciation rights granted
to any individual in a calendar year shall not exceed 1,000,000 shares. The
aggregate fair market value, on the date of the grant, of the stock for
which ISOs are exercisable for the first time by an employee during any
calendar year may not exceed $100,000. No monetary consideration is paid to
the Company upon the granting of options.
Options granted under the Plan generally continue in effect for the
period fixed by the Committee, except that ISOs are not exercisable after
the expiration of 10 years from the date of grant or five years in the case
of 10% shareholders. Options are exercisable in accordance with the terms
of an option agreement entered into at the time of grant and are
nontransferable except on death of a holder or pursuant to a qualified
domestic relations order. Options may be exercised only while an optionee
is employed by or in the service of the Company or a subsidiary or within
one year following termination of employment by reason of death, disability
or retirement or three months following termination without cause. The
Compensation Committee has the right to accelerate, in whole or in part,
from time to time, including upon a change in control of the Company,
conditionally or unconditionally, the right to exercise any option granted
under the Plan. Payments for shares purchased upon the exercise of options
may be in cash or, if the terms of an option so provide, with shares of
Common Stock owned by the optionee (or issuable upon exercise of the
option) or with other lawful consideration, including services rendered.
Upon the exercise of an option, the number of shares subject to the option
and the number of shares available under the Plan for future option grants
are reduced by the number of shares with respect to which the option is
exercised.
STOCK APPRECIATION RIGHTS
Stock appreciation rights ("SARs") may be granted under the Plan. SARs
may, but need not, be granted in connection with an option grant or an
outstanding option previously granted under the Plan. A SAR gives the
holder the right to payment from the Company of an amount equal in value to
the excess of fair market value on the date of exercise of a share of
Common Stock of the Company over its fair market value on the date of
grant, or if granted in connection with an option, the option price per
share under the option to which the SAR relates.
A SAR is exercisable only at the time or times established by the
Committee. If a SAR is granted in connection with an option it is
exercisable only to the extent and on the same conditions that the related
option is exercisable. Payment by the Company upon exercise of a SAR may be
made in Common Stock of the Company valued at its fair market value, in
cash, or partly in stock and partly in cash, as determined by the
Committee. No SARs have been granted under the Plan.
RESTRICTED STOCK; DEFERRED STOCK
The Plan provides that the Company may issue restricted stock in such
amounts, for such consideration (but not less than par value), subject to
such restrictions and on such terms as the Committee may determine.
Deferred stock may be awarded to participants, typically without payment of
consideration, but subject to vesting conditions based on continued
employment or on
14
<PAGE>
performance criteria established by the Committee. Whereas purchasers of
restricted stock will have voting rights and will receive dividends prior
to the time when the restrictions lapse, recipients of deferred stock
generally will have no voting or dividend rights prior to the time when
vesting conditions are satisfied. No restricted stock or deferred stock has
been granted under the Plan.
PERFORMANCE AWARDS
The Committee may grant performance awards which may be earned in
whole or in part if the Company achieves goals established by the Committee
over a designated period of time. Payment of an award earned may be in cash
or stock or both, and may be made when earned, or vested and deferred, as
the Committee determines. No performance awards have been granted under the
Plan.
DIVIDEND EQUIVALENTS
Participants may receive dividend equivalents representing the value
of the dividends per share paid by the Company, calculated with reference
to the number of shares covered by stock options, SARs or other awards held
by the participant. No dividend equivalents have been granted under the
Plan.
CHANGES IN CAPITAL STRUCTURE
The Plan provides that if the outstanding Common Stock is increased or
decreased or changed into or exchanged for a different number or kind of
shares or other securities of the Company or of another corporation by
reason of any recapitalization, stock split or certain other transactions,
appropriate adjustment will be made by the Committee in the number and kind
of shares available for awards under the Plan. In addition, the Committee
will make appropriate adjustments in outstanding options and SARs. In the
event of dissolution of the Company, a merger, consolidation or sale of
substantially all of the assets of the Company, or the acquisition by any
corporation or person of more than 80% of the Common Stock, the Committee
may, in its sole discretion, provide a period prior to such event during
which optionees shall have the right to exercise options and SARs in whole
or in part without any limitation on exercisability, and may, in its sole
discretion, provide that all unexercised options and SARs shall immediately
terminate upon the occurrence of such event.
TAX CONSEQUENCES
Certain options authorized to be granted under the Plan are intended
to qualify as ISOs for federal income tax purposes. Under federal income
tax law currently in effect, the optionee will recognize no income upon
grant or upon a proper exercise of the ISO. If an employee exercises an ISO
and does not dispose of any of the option shares within two years following
the date of grant and within one year following the date of exercise, any
gain realized on subsequent disposition of the shares will be treated as
income from the sale or exchange of a capital asset. If an employee
disposes of shares acquired upon exercise of an ISO before the expiration
of either the one-year holding period or the two-year waiting period, any
amount realized will be taxable as ordinary compensation income in the year
of such disqualifying disposition to the extent that the lesser of the fair
market value of the shares on the exercise date or the fair market value of
the shares on the date of disposition exceeds the exercise price. The
Company will not be allowed any deduction for
15
<PAGE>
federal income tax purposes at either the time of the grant or exercise of
an ISO. Upon any disqualifying disposition by an employee, the Company will
generally be entitled to a deduction to the extent the employee realized
ordinary income.
Certain options authorized to be granted under the Plan will be
treated as NSOs for federal income tax purposes. Under federal income tax
law currently in effect, no income is realized by the grantee of an NSO
until the option is exercised. At the time of exercise of an NSO, the
optionee will realize ordinary compensation income, and the Company will
generally be entitled to a deduction, in the amount by which the market
value of the shares subject to the option at the time of exercise exceeds
the exercise price. The Company is required to withhold on the income
amount. Upon the sale of shares acquired upon exercise of an NSO, the
excess of the amount realized from the sale over the market value of the
shares on the date of exercise will be taxable.
An employee who receives stock in connection with the performance of
services will generally realize taxable income at the time of receipt
unless the shares are substantially nonvested for purposes of Section 83 of
the Code and no Section 83(b) election is made. If the shares are not
vested at the time of receipt, the employee will realize taxable income in
each year in which a portion of the shares substantially vest, unless the
employee elects under Section 83(b) within 30 days after the original
transfer. The Company will generally be entitled to a tax deduction in the
amount includable as income by the employee at the same time or times as
the employee recognizes income with respect to the shares. The Company is
required to withhold on the income amount.
Section 162(m) of the Code, as adopted in 1993, limits to $1,000,000
per person the amount that the Company may deduct for compensation paid to
any of its most highly compensated officers in any year. Under IRS
regulations, compensation received through the exercise of an option or a
SAR is not subject to the $1,000,000 limit if the option or SAR and the
Plan meet certain requirements. One requirement is that the Plan include
per-employee limits on the number of shares as to which options and SARs
may be granted. Other requirements are that the option or SAR be granted by
a committee of at least two outside directors and that the exercise price
of the option or SAR be not less than fair market value of the Common Stock
on the date of grant. Accordingly, the Company believes that compensation
received on exercise of options and SARs granted under the Plan in
compliance with the above requirements will not be subject to the
$1,000,000 deduction limit.
PROPOSAL 2: RATIFICATION OF SELECTION OF AUDITORS
The Board of Directors has selected Deloitte & Touche LLP as the
Company's independent auditors for the year ending December 31, 1996 and is
submitting the selection to shareholders for ratification. Proxies will be
voted in accordance with the instructions specified in the proxy form. If
no instructions are given, proxies will be voted for approval of Deloitte &
Touche LLP as independent auditors. Representatives of Deloitte & Touche
LLP are expected to be present at the annual meeting, will be given the
opportunity to make a statement if they desire to do so, and will be
available to respond to appropriate questions.
On December 21, 1995, the Board of Directors approved Deloitte &
Touche LLP as its certifying accountants for the years ending December 31,
1995 and 1996. On December 22, 1995, management informed the former
accountant, Arthur Andersen LLP, that it had been dismissed.
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<PAGE>
There have been no adverse opinions, disclaimers of opinion or
qualifications or modifications as to uncertainty, audit scope or
accounting principles regarding the reports of Arthur Andersen LLP on the
Company's financial statements within the two most recent fiscal years
prior to their dismissal. There were no reportable disagreements with the
former accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure leading to
their dismissal.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who own more than ten
percent of the Common Stock to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Executive
officers, directors and beneficial owners of more than ten percent of the
Common Stock are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on a review of
the copies of such forms received by the Company and on written
representations from certain reporting persons that they have complied with
the relevant filing requirements, the Company believes that all Section
16(a) filing requirements applicable to its executive officers and
directors have been complied with.
DISCRETIONARY AUTHORITY
While the Notice of Annual Meeting of Shareholders provides for
transaction of such other business as may properly come before the meeting,
the Board of Directors has no knowledge of any matters to be presented at
the meeting other than those referred to herein. However, the enclosed
proxy gives discretionary authority to the proxy holders to vote in
accordance with the recommendation of management if any other matters are
presented.
SHAREHOLDER PROPOSALS
Any shareholder proposals to be considered for inclusion in proxy
material for the Company's next annual meeting in May 1997 must be received
at the principal executive office of the Company no later than December 16,
1996.
BY ORDER OF THE BOARD OF DIRECTORS
Beth A. Ugoretz
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
Vancouver, Washington
April 15, 1996
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RED LION HOTELS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE COMPANY'S BOARD OF DIRECTORS
The undersigned holder of Common Stock of Red Lion Hotels, Inc., a
Delaware corporation (the "Company"), hereby appoints David J. Johnson, C.
Michael Vernon, and Beth A. Ugoretz, and each of them, as proxies for the
undersigned, each with full power of substitution, for and in the name of the
undersigned to act for the undersigned and to vote, as designated below, all
of the shares of stock of the Company that the undersigned is entitled to
vote at the Annual Meeting of Shareholders of the Company to be held May 15,
1996 or any adjournment thereof.
In addition to proposals 1 and 2 set forth on the opposite side, the
proxies are authorized, in their discretion, to vote upon such other business
as may properly come before the Annual Meeting, and any adjournments thereof.
(CONTINUED, AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)
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<PAGE>
<TABLE>
<CAPTION>
- - - - -------------------------------------------------------------------------------------------------------------
The Board of Directors unanimously recommends a vote FOR the election of all the Please mark / X /
director nominees listed in proposal 1 and a vote for proposal 2 below. your vote as
indicated in
this example.
FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C> <C>
1. Election of David J. Johnson 2. Ratification of appointment / / / / / /
and Todd A. Fisher as directors of Deloitte & Touche LLP as
of the Company for a term of independent accountants for
three years. the Company.
/ / FOR both of the nominees listed
above, except vote withheld from
the following nominee (if any).
---------------------------------
/ / WITHHELD from both nominees.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF
NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR"
PROPOSALS 1 AND 2.
IMPORTANT: Please sign exactly as your name appears hereon
and mail in promptly even though you may plan to attend
the meeting. When shares are held by joint tenants, both
should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title
as such. If a corporation, please sign in full corporate
name by president or other authorized officer. If a
partnership please sign in partnership name by authorized
persons.
Signature(s)________________________________________________________ Dated: _____________________, 1996
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</TABLE>
